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Section A (Answer any two questions)

1. Explain the accruals concept and the matching principle giving one example of the application of the latter in financial statements.

(10 marks)

2. You have recently overheard the following statements:

(a) "When a company's shares are traded on the Stock Exchange and the current market price is above the nominal value of the shares, this excess is recorded by the company in the share premium account."

(b) "A 'reserve', in the context of company accounts, is an amount of cash which can legally be used to a pay a dividend to shareholders."

(c) "Companies may set out their P and L account and balance sheet in any form that they wish, provided that these statements contain only the information specified in company law."

(d) "UK company law imposes an overriding requirement on company directors that they produce financial statements that show a 'correct and accurate view' ".

(e) "A public limited company is one that is owned by the government, whereas a private limited company is one that is owned by the Stock Exchange".

Required: Comment critically on each of these statements.

(10 marks)

3. Does social and environmental reporting really fall within the scope of accounting? Are accountants really the best people to prepare and audit such reports?

(10 marks)

4. The owner of a business is confused and comes to you for help. The financial statements for his business, prepared by an accountant, for the last accounting period reveal an increase in profit of Ј50,000. However, during the accounting period the bank balance declined by Ј30,000. What reasons might explain this apparent discrepancy? Discuss.

(10 marks)

Section B (Answer all questions in this section)

5. Steps Stationers plc operates a chain of stationery shops that sell goods to traders on credit and to the public for cash.

The following is its trial balance at 31 March 2002:

Debit Credit

Ј'000 Ј'000

Freehold premises at cost 18,000

Motor vehicles at cost 6,050

Provision for depreciation on motor vehicles 3,500

Purchases/sales 9,200 16,200

Stock 1,900

Trade debtors/creditors 2,200 1,600

Selling and distribution expenses 1,365

Administrative expenses 1,415

Cash and bank 20 530

Interim preference dividend 200

Loan stock interest 75

Provision for bad debts 95

Share premium account 1,500

5% loan stock 3,000

Retained profit 2,500

10% preference shares of Ј1 each 4,000

Ordinary share capital account 7,500

40,425 40,425

The following additional information should be taken into consideration:

i. The balance on the ordinary share capital account comprises the following fully paid shares:

Ј'000

5 million ordinary shares of Ј1 each at 1 April 2001 5,000

Proceeds of issue of 2 million ordinary shares of Ј1 each

at a price of Ј1.25 each on 1 January 2002

2,500

7,500

ii. The preference shares are fully paid.

iii. The directors have proposed a final ordinary dividend of 15 pence per share, and the outstanding dividend on the preference shares.

iv. The directors have decided to revalue the freehold premises on 31 March 2002 at a value of Ј23 million.

v. The stock at 31 March 2002 cost Ј1,850,000. This includes goods that cost Ј30,000 that are damaged. It is estimated that these could be sold for Ј27,000 after repairing them at a cost of Ј2,000.

vi. The motor vehicles are depreciated at 25% p.a. using the straight line method. The company has a policy of not amortizing freehold premises.

vii. Included in the cost of motor vehicles is a truck that was purchased on 1 October 2001.The amount that has been included comprises the following:

Ј

Basic price 47,000

Painting the company name and logo on the sides 800

Registration plates 200

Road tax for one year from 1 Oct. 2001 2,000

50,000

viii. The provision for bad debts should be maintained at 5% of the trade debtors at the 31 March 2002.

ix. At the 31 March 2002 there were administrative expenses accrued of Ј6,000.

x. Ignore taxation.

You are required to prepare a profit and loss account for the year ended 31 March 2002 and a balance sheet as at that date in the prescribed format.

(25 marks)

6. The balance sheets of R. Martin plc at 31 March 2001 and 31 March 2002 were as follows:

Notes Year