flash

What is the purpose of management accounting?

Answer:

To help management run the business in a way that achieves the objectives of the business.

What are the attributes of good information?

Answer:

Good information should be:

• Accurate
• Complete
• Cost-effective
• Understandable
• Relevant
• Accessible
• Timely
• Easy to use

What is the difference between data and information?

Data consists of facts that have been gathered.

Information is data that has been processed in a way that is meaningful to the person who receives it.

What are the purposes of costing (i.e. calculating the cost of producing a product or service)?

Answer:

To enable a selling price to be set
To calculate a profit per unit
To value inventory

When sampling, what is meant by a ‘sampling frame’?
Answer:

A sampling frame is a numbered list of all items in a population

What is meant by ‘random sampling’?

Answer:

Each item in the population has an equal chance of being selected.

What is meant by ‘systematic sampling’?

Every n’th item is selected, after a random starting item

What is meant by ‘quota sampling’?

Answer:

The population is stratified and a sample of each strata is restricted to a fixed number.

What is meant by a ‘line of best fit’?

Answer:

The line that most nearly goes through all the points when the data is plotted on a graph.

Describe a ‘pie chart’?
Answer:

A pie chart is a circle that is divided into segments representing each type of observation. The size of each segment is proportional to the proportion of the total that are within each type of observation.

What are ‘direct costs’?

Direct costs are those that can be specifically measured in each unit of production.

What is the ‘prime cost’ of a unit of production?

Answer:

The prime cost is the total of the direct costs of a unit.

What is meant by ‘indirect costs (or overheads)’?
Answer:

Indirect costs are those costs which cannot be specifically identified with a specific cost unit or cost centre.

What is a ‘variable cost’?

A variable cost is one which varies in total with the level of activity.

What is a ‘fixed cost’?

Answer:

A fixed cost is one which remains constant in total over certain levels of activity.

What is a ‘stepped fixed cost’?

Answer:

A stepped fixed cost is one that is fixed in total within a certain level of activity, but where once an upper limit of activity is reached then a new higher level of fixed cost occurs.

What is a ‘semi-variable cost’?

A semi-variable cost is a combination of variable and fixed costs.

If we have an equation relating the total sales revenue to the total advertising spend, which would be the dependent variable?

Answer:

The dependent variable would be the sales revenue (it depends on the amount of advertising expenditure.)

In the linear equation  y = a + bx, which is the dependent variable?

Answer:

The dependent variable is y

In the linear equation y = a + bx, where y is the total cost and x is the total production, what is the fixed cost?

Answer:

The fixed cost is ‘a’ in the equation

In the linear equation y = a + bx, where y is the total cost and x is the total production, what is the variable cost per unit?

Answer:

The variable cost per unit is ‘b’ in the equation

If the linear equation y = a + bx, were to be drawn on a graph, what would be the gradient of the line?

Answer:

The gradient of the line would be ‘b’.

What is meant by a ‘cost unit’?

Answer:

A cost unit is a unit of product or service for which the cost is calculated.

What is meant by a ‘cost centre’?

Answer:

A cost centre is a production or service location, activity, function or item of equipment for which the total cost can be calculated.

What is a ‘purchase requisition form’?

Answer:

A purchase requisition form is prepared by the department that requires the material and is sent to the purchasing department.

What is a ‘delivery note’?

Answer:

A delivery note is included by the supplier with the goods, and lists the quantity of goods that are being delivered.

What is meant by the FIFO method of valuing inventory?

Answer:
FIFO means first-in-first-out and means that we assume that items are issued out of inventory in the order in which they were received into inventory. Therefore, any closing inventory is assumed to be made up of the most recent items received into inventory.

Which of the following methods of inventory valuation are acceptable under IAS 2 for financial accounting:

FIFO; LIFO; Weighted Average Cost ?

Answer:

FIFO and Weighted Average Cost are allowed by IAS 2. LIFO is not allowed.

In the formula on the formula sheet for the Economic Order Quantity, what does the symbol C
_o
represent?

Answer:

C
_o
represents the cost of placing one order.

In the formula on the formula sheet for the Economic Order Quantity, what does the symbol D represent?

Answer:

D represents the total demand per year.

In the formula on the formula sheet for the Economic Order Quantity, what does the symbol C
_h
represent?

Answer:

C
_h
represents the cost of holding one unit for one year.

In inventory control, what is the difference between the ‘re-order quantity’ and the ‘re-order level’?

Answer:

The re-order quantity is the quantity actually ordered each time. The re-order level is the level of inventory that triggers the placing of an order.

In which circumstance do we use the formula for the Economic Batch Quantity instead of the formula for the Economic Order Quantity?

Answer:

When we are producing our own inventory and therefore deliveries arrive over a period instead of all at once.

What is the difference between direct and indirect labour costs?

Answer:
 Direct labour costs are directly involved in the making of products – the basic pay plus overtime premium on specific jobs

Indirect labour costs are all other labour costs – general overtime premiums, bonus payments, and the cost of indirect workers (e.g. canteen, maintenance)

What is meant by a piecework system of remuneration?

Answer:

Employees are paid a fixed amount for each unit produced.

Define the labour turnover ratio.

Answer:

Labour turnover ratio =

number of leavers who require replacing / average number of employees x 100%

Define the labour efficiency ratio

Answer:

Labour efficiency ratio =  expected hours to produce actual output / actual hours to produce actual output x 100%

Define the labour idle time ratio

Answer:

Idle time ratio = idle hours / total hours x 100%

Define the labour capacity ratio

Labour capacity ratio = Number of hours spent working / total hours available x 100%

Define the labour production volume ratio (activity ratio)

Answer:

The labour production volume ratio = expected hours to produce actual output / total hours available (budgeted) x 100%

What is the difference between the allocation of overheads and the apportionment of overheads? 

Allocation – whole cost items are charged to the relevant cost centre

Apportionment – cost items are shared/divided between several cost centres

If there is an over-absorption of overheads, does it mean that the actual total overheads a more or less than the total overheads absorbed?

Answer:

The actual overheads are less than the total overheads absorbed.

What is meant by the word ‘contribution’?

The contribution is the profit before fixed costs (or the revenue less all variable costs).

What is meant by the ‘marginal cost of production’?

Answer:

The marginal cost of production is the total of all variable production costs.

What is the reason for a difference between the profit calculated under marginal costing principles and the profit calculated under absorption costing principles?

Answer:

The difference is because of the difference in the way opening and closing inventories are valued. Under marginal costing they are valued at the marginal (variable) cost of production; under absorption costing they are valued at the full cost of production (variable plus fixed).

Under what circumstances will the profit using marginal costing and the profit using absorption costing be the same?

The profits will be the same if there is no change in the level of inventory over the period (i.e. when the closing inventory is the same level as the opening inventory).

 What is the difference between a profit mark-up and a profit margin?

Answer:
A mark-up is when the profit is calculated as a percentage of cost; a margin is when the profit is calculated as a percentage of selling price.

In process costing, what is meant by a normal loss?

A normal loss is the loss that is expected to occur.

In process costing, what is meant by an abnormal loss?

Answer:

An abnormal loss is the excess of the actual loss over the normal (or expected) loss.

In process costing, what is meant by an abnormal gain?

Answer:
An abnormal gain is the amount by which the actual loss is less than the normal (or expected) loss.

In process costing, how are abnormal losses or gains valued?

Abnormal gains and losses are valued at full cost per unit.

What is meant by the term ‘by-product’?

A by-product is output from a process which has a low value relative to the main product(s) being produced in the process.

What are the four main differences between the output of service and manufacturing businesses?

* Intangibility – the output of a service industry is performance rather than tangible goods.
* Perishability – a service cannot be stored
* Simultaneity – a service is received by the customer at the same time as it is delivered – it cannot be checked first.
* Heterogeneity – every service is likely to be different.

In Activity Based Costing, what is meant by the term ‘cost driver’?

A cost driver is whatever activity is causing the cost to occur.

What is meant by the term ‘target cost’?

The target cost is the maximum cost we can allow in order to achieve the target level of profitability based on a pre-determined selling price.

What is meant by the ‘cost gap’ in the context of target costing?

The cost gap is the excess of the estimated actual cost over the target cost.

What are the basic principles involved in Total Quality Management?

Answer:

‘Get it right first time’ – i.e. good quality production – no re-working, no rejects

Continuous improvement

Customer focus

What are the four types of cost relating to quality?

Answer:

Prevention costs (the costs of improving the quality of the production process)

Appraisal costs (the costs of quality control checks)

Internal failure costs (the costs of re-working; the costs of rejects)

External failure costs ( the costs of delivering poor quality to the customer – e.g. replacements, repair work)

In the formulae for regression analysis on the formulae sheet, what does the symbol n represent?

Answer:

n is the number of pairs of observations

What is the symbol for the coefficient of correlation on the formulae sheet?

Answer:

r is the coefficient of correlation

What is meant by the expression ‘perfect positive linear correlation’?

Perfect positive linear correlation means when the observations are plotted on a graph they all lie exactly on a straight line pointing upwards (i.e. both variables increase together)

How is the coefficient of determination calculated?

The coefficient of determination is the square of the coefficient of correlation.

What does a coefficient of determination of 0.75 mean?

It means that 75% of the changes in y are explained by changes in x.

 If there is perfect negative correlation between two variables, what will be the value of the coefficient of correlation?

If there is perfect negative correlation, then r will equal -1.

A Laspeyre price index number uses base year or current year quantities. Which?

A Laspeyre price index number uses base year quantities.

A Paasche price index number uses base year or current year quantities. Which?

A Paasche index number uses current year quantities.

What are the purposes of budgeting?

Answer:

Planning
Control
Co-ordination
Authorisation
Communication
Motivation
Evaluation

What is a flexed budget?

Answer:

A flexed budget is a budget re-written for the actual level of activity.

What is meant by the ‘principal budget factor’?

The principal budget factor is the factor that limits the level of activity of the organisation (usually sales).

What is the difference between capital expenditure and revenue expenditure?

Answer:

Capital expenditure is the acquisition of non-current assets (which appear on the Statement of Financial Position)

Revenue expenditure is the payment of running expenses (which appear on the Income Statement)

What is a ‘sunk cost’?

Answer:

A sunk cost is a cost already incurred (and is not relevant for investment decisions)

What is meant by the ‘payback period’?

The payback period is the number of years it takes to get back the original investment, in cash terms.

What is the definition of the Internal Rate of Return (IRR)?

The IRR is the rate of interest at which the Net Present Value of the project is zero.

What is top-down budgeting?

Answer:
Top-down budgeting is where the budgets are prepared by high-level management and then communicated to lower levels.

Lower level management do not participate in the budget process.

What is bottom-up budgeting?

Answer:
Bottom-up budgeting is where lower level managers are involved in the budget process – they prepare budgets for their departments which are then checked and co-ordinated by higher level management.

What does the sales volume variance measure?

The sales volume variance measures the effect on the budgeted profit of the difference between the actual sales volume and the budgeted sales volume.

What is the purpose of an operating statement (as part of variance analysis)?

Answer:
The operating statement shows why the actual profit differs from the budgeted profit.

Give possible reasons for an adverse material expenditure variance.

Answer:
Possible reasons for an adverse material expenditure variance include:
– paying more than the budgeted price per unit of materials due to errors in purchasing
– a price increase in materials
– purchasing better quality materials
– incorrect budgeting of the standard cost of materials

What are the four main elements that one would expect to appear in a Mission Statement?

Answer:
The four main elements are:

• Purpose
• Strategy
• Culture
• Values

What is the Current Ratio?

The current ratio = current assets / current liabilities

What is the Quick Ratio (or Acid-test Ratio)?

The quick ratio = (current assets – inventory) / current liabilities

How is the Interest Cover calculated?

The interest cover = profit before interest and tax / interest

How is the Dividend Cover calculated?

The dividend cover = profit after tax / dividends

How is the Return on Investment (ROI) calculated?

ROI = profit / capital invested

How is the Residual Income (RI) calculated?

RI = profit less notional interest on the capital invested

 What are the four perspectives covered by the Balanced Scorecard?

Answer:
The four perspectives are:

• Financial
• Customer
• Internal
• Innovation and learning

What is meant by the term ‘benchmarking’?

Answer:
Benchmarking is the comparison with best practice.

In assessing ‘Value for Money’, what are the three ‘E’s’?

Answer:
The three ‘E’s’ are:

• Economy
• Efficiency
• Effectiveness

What is meant by an ‘incremental cost’?

Answer:
An incremental cost is an extra cost (and is relevant for investment decisions).

What are the five fundamental principles of professional ethics?
Answer:

• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour

What are the five elements of an assurance engagement?
Answer:

• A three-party relationship involving a practitioner, a responsible party and intended users
• Appropriate subject matter
• Suitable criteria
• Sufficient appropriate evidence
• A written assurance report

What assurance does a reasonable assurance engagement provide?

Answer:

Positive assurance (also known as reasonable assurance)

What assurance does a limited assurance engagement provide?
Answer:

Negative
assurance (also known as limited assurance)

When would a practitioner NOT be able to express an unmodified conclusion on an assurance engagement?
Answer:

There is a limitation on the scope of the practitioner’s work.
The assertion is not fairly stated or the subject matter information is materially misstated.

Who sets International Standards on Auditing?

Answer:
International Standards on Auditing are set by the International Auditing and Assurance Standards Board (IAASB) – a board of the International Federation of Accountants (IFAC).

What is a “statement of circumstances”?

Answer:
A statement of circumstances is a statement that auditors are required to make upon resignation or removal as auditors. It will state whether there are any untoward reasons for their removal or resignation – such as non-cooperation by the directors.

What TWO provisions support this principle?
Answer:
Every company should be headed by an
effective board
which is collectively responsible for the
long-term success
of the company.
All directors must act with
integrity
,
lead
by example and promote the desired
culture
.

In relation to corporate governance, what does “comply or explain” mean?

Answer:
Listed companies are expected to comply with the corporate governance code and state that they have done so or, if they have not, to explain why not.

What are the main roles of an audit committee? (Give THREE)
Answer:

? Monitor the integrity of the financial statements
? Review internal financial controls and risk management systems
? Monitor and review the effectiveness of internal audit
? Make recommendations concerning the external auditor (appointment, remuneration, etc)
? Implement policy for engaging the external auditor to supply non-audit services
(Only three asked for)

What are the FIVE main principles of the UK Corporate Governance Code?

Answer:

Board Leadership and Company Purpose
Division of Responsibilities
Composition, Succession and Evaluation
Audit, Risk and Internal Control
Remuneration

What committee of the board of directors is responsible for determining directors’ pay?

Remuneration committee

What committee of the board of directors should lead appointments to the board?

Answer:

Nomination committee

To comply with this, what roles should be separated?

Answer:
The roles of Chief Executive Officer and Chairman should be separated.

Define an audit

Answer:

An audit is the independent examination of, and expression of opinion on, the financial statements of an entity
.

Define corporate governance

Answer:

Corporate governance: the system by which companies are directed and controlled

In relation to corporate governance, what is the ‘agency problem’?

Shareholders own the company and are its
principles. 
Directors run the company and are the
agents
of the shareholders. The agency problem arises if directors do not act in the best interests of the shareholders, but for themselves (e.g. excessive executive remuneration).

What are the FIVE categories of threats to the fundamental principles of professional ethics?

Answer:

* Self-interest
* Self-review
* Familiarity
* Advocacy
* Intimidation

The ACCA Code of Ethics and Conduct requires that a key auditor partner cannot serve a PIE client for more than how many years?

Answer:
Seven
years

What is a familiarity threat?

Answer:
The threat that due to a long or close relationship with a client, the auditor will be too sympathetic to their interests or too accepting of their work.

What is the restriction on percentage fees from a public interest entity (PIE) client?

Answer:
The total fees from a PIE client should not exceed
15%
of the firm’s
total
fees for
two consecutive years
.

If the client refuses permission for communication to take place, what should the proposed new auditor do?

Answer:
Decline the appointment

What are the three components of audit risk, according to the audit risk model?

Answer:
Inherent risk
Control risk
Detection risk

What are the two components of the risk of material misstatement in financial statements?

Answer:
Inherent risk

Control risk

What are the two components of detection risk?

Answer:
Sampling risk and non-sampling risk.

What is sampling risk?

Answer:
This risk that arises when audit procedures are applied to samples rather than entire populations.

The auditor may conclude, based on only a sample, that controls are more effective than they actually are or that there is no material misstatement when, in fact, there is.

What are the TWO types of substantive procedures for obtaining audit evidence?

Answer:
Tests of details
(of classes of transactions, account balances and disclosures)
Substantive analytical procedures

Against what may these ratios be compared?

* Previous years’ ratios

* Budget ratios

* Industry standard ratios

Answer:
The overall audit strategy sets the
scope, timing and direction
of the audit. It helps guide the development of the more detailed audit plan.

An interim audit takes places during the reporting period,
before
the date of the financial statements; the final audit starts around or
after
the reporting date (typically a year end).

What is ‘materiality’?

Answer:

Misstatements, including omissions, are consider material if, individually or in aggregate, they could reasonably be expected influence the economic decisions users taken on the basis of the financial statements.

What is performance materiality?

Answer:

Materiality relates to financial statements as a whole. Additionally, a lesser amount is set when designing audit procedures to reduce the risk that misstatements in aggregate exceed financial statement materiality. This is performance materiality.

What is the auditors’ primary responsibility with respect to fraud?

Answer:

Managers, not auditors, are responsible for the prevention or detection of fraud.

However, auditors are expected (with reasonable assurance) to find
material misstatements,
whether due to fraud or error.

What are the two types of audit file?

Answer:
Current audit file
(detail’s this year’s work) and
permanent audit file
(holds more permanent information such as organisation charts, letters of engagement etc).

Existence
Rights and obligations
Completeness
Accuracy, valuation and allocation
Classification
Presentation

Recalculation
is a check of
mathematical accuracy
of documents or records – i.e. a substantive procedure.

Reperformance
is the auditor’s independent execution of
procedures
or
controls
that were originally performed as part of the entity’s internal controls – i.e. a test of control.

What are the FIVE procedures for obtaining of audit evidence?

Answer:

Analytical procedures
Enquiry and confirmation
Inspection
Observation
Recalculation and reperformance

Name SIX sample selection methods.

Answer:

* Random selection
* Systematic (interval) selection
* Haphazard selection,
* Block selection
* Stratification
* Value weighted selection (e.g. as used in monetary unit sampling)

Does sampling risk increase or decrease as the sample size increases?

Answer:

As more items are examined in the sample, sampling risk decreases.

Does non-sampling risk increase or decrease as the sample size increases?

Answer:

Non-sampling risk does not depend on sample size. This risk is affected by the experience and ability of the auditor, supervision and planning.

What is “audit software”?

Answer:

Audit software (also called audit program) is a computer-assisted audit technique (CAAT) used to examine and interrogate clients’ accounting data.

What is “test data”?

Answer:

Test data is a computer-assisted audit technique (CAAT) used to investigate the operations of client programs.

What is the difference between management’s expert and the auditor’s expert?

Answer:

An expert has expertise in
a field other than accounting or auditing
:
* Management’s expert – assists management in
preparing the financial statements
.
* Auditor’s expert – assists the auditor in
obtaining sufficient appropriate audit evidence
. May be internal or external to the audit firm.

What THREE criteria must be met for an external auditor to use the work of internal audit?

Answer:

Internal audit must be
objective, competent
and apply a
systematic and disciplined approach
to planning, performing and documenting its
activities, including quality control.

What aspects of an expert’s audit work should an auditor evaluate?

Answer:

The auditor must evaluate the adequacy of the expert’s work with respect to:

* Consistency with other evidence
* Assumptions made
* Use and accuracy of source data.

In what TWO circumstances would tests of control NOT be carried out?

Answer:
Tests of control would not be carried out if:

Controls do not exist or are not expected to operate effectively, or
There are relatively few transactions such that substantive procedures alone is the more efficient audit approach.

What are the five components of internal control?

Answer:
* The control environment
* Risk assessment process
* Control activities
* Information system
* Monitoring controls

What are the two general classes of control activities in information processing?

Answer:
General controls
– over the development, prevention of unauthorised changes etc, backup.

Application controls
– over the initiation, recording, processing and recording transactions.

What is ‘standing data’?

Answer:

Standing data (also known as reference data) does not change often.
For example, wage rates or customer addresses.
However, this data is often accessed and used, so an error in standing data can cause many other errors.

What are the main inherent limitations of internal controls?

Answer:
* Cost v benefit
* Human error
* Collusion
* Management override (bypass)
* Non-routine transactions

What three headings (or columns) will usually be used to structure such letters?

Answer:
The nature of the weakness/what the problem is

The implications or possible consequences of the weakness

Recommendations how to fix the weakness.

What three methods can be used to record accounting and internal control systems?

Answer:

* Narrative notes
* Flowcharts
* Questionnaires (ICQs and ICEQs)

What are “control activities”?

Answer:

Control activities are the
policies and procedures
which help ensure that:
? management directives are carried out
? actions are taken to address risks that threaten the achievement of the entity’s objectives

What is meant by the “control environment”?

Answer:

The control
environment
includes:

* governance and management
functions

* the
attitude
,
awareness
and
actions
of management

In an accounting system, all credit notes issues are authorised by the chief accountant.

Is this a control objective, a control procedure or a control test?

Answer:
This is an example of a control procedure.
The control objective is that credit notes are issued only for legitimate reasons; the test of control would be inspecting the credit notes for the manager’s signature.

What evidence gathering procedures can be used to test the operating effectiveness of controls?

Answer:
Inspection
e.g. of initials/signatures on documents
Observation
e.g. watching goods received being counted
Re-performance
e.g. reperforming a bank reconciliation to ensure that it was properly carried out.

Remember:
Enquiry
alone is not sufficient to test operating effectiveness

Answer:
(a) To those charged with governance. By definition “significant deficiencies” are those that merit the attention of TCWG

(b) To appropriate level of management.

Answer:

Cut-off means that
transactions
and
events
have been recorded in the
correct accounting period
to which they relate.

What is meant by the term “financial statement assertions”?
Answer:

Financial statement assertions are the
implicit
and
explicit
claims and representations made by management about the
elements
of financial statements and related disclosures.

What are the financial statement assertions about account balances and related disclosures?
Answer:

These assertions relate to year-end balances:
* Existence
* Rights and obligations
* Completeness
* Accuracy, valuation and allocation
* Classification
* Presentation

What are the financial statements assertions about classes of transactions and events and related disclosures?
Answer:

These assertions relate to the period under audit:
* Occurrence
* Completeness
* Accuracy
* Cut-off
* Classification
* Presentation

What are the two types of external confirmation request?

Answer:
Positive
– everyone is asked to respond.
Negative
– respond only in the event of disagreement (i.e. with the given balance).

What is the correct accounting treatment?

Answer:

Goods must be included in inventory and the liability recognised (i.e. Dr Purchases/Cr “Goods received not invoiced” accrual.

A supplier’s invoice was received and processed on 31 December which was also the date of the physical inventory count. The goods were received on 1 January 20X1.

Is purchases cut-off correct?Answer:

Cut-off is
incorrect
. There is no liability until the goods are received. The invoice amount should not be included in purchases for the year/trade payables at the reporting date.

A sales invoice is raised on 2 January 20X1 in respect of goods despatched on 1 January. The goods are included in the year-end inventory valuation.

Is sales cut-off correct? Answer:
Yes

Define a contingent liability

Answer:
A contingent liability is a possible liability arising from past events…. existence confirmed by future events

What is the correct accounting treatment of a contingent liability where settlement is less than probable?

Answer:
Disclose unless likelihood is “remote”.

What is the correct treatment of a contingent asset where the inflow of economic benefits is not probable?

Answer:
No disclosure; no provision.

Define an adjusting event

Answer:
An adjusting event is one which provided evidence of conditions that existed at the date of the statement of financial position.

Define a non-adjusting event.

Answer:
A non-adjusting event is one that relates to conditions that arose after the date of the statement of financial position.

For how long after the date of the statement of financial position should going concern be assessed?

Answer:

12 months (minimum)

What audit opinion should be expressed if doubts about going concern are fully disclosed in the financial statements?

Answer:
The audit opinion will be UNmodified.

(The report should contain a Material Uncertainty Relating to Going Concern section drawing users’ attention to the accounting policy note relating to going concern.)

What audit opinion should be expressed if doubts about going concern are not fully disclosed in the financial statements?

Answer:
The audit opinion will be modified with a qualified opinion “except for” the omission of the disclosure (i.e. misstatement in the financial statements).

What written representations must be obtained concerning management’s responsibilities?

Answer:

That management and those charged with governance have:

• Properly prepared and presented the financial statements
• Provided complete information to the auditor and all recorded transactions have been reflected in the financial statements.

What do financial statements consist of?

Answer:
* Statement of financial position (“balance sheet”)
* Statement of profit or loss and other comprehensive income (“income statement”)
* Statement of changes in equity
* Cash flow statement
* Notes to the above, including significant accounting policies

In what circumstances would an auditor refer to the directors’ report in an auditor’s report?

Answer:
An auditor would refer to the directors’ report in the auditor’s report if, for example, it contradicted the financial statements.  Assuming the misstatement is in the directors’s report (not the financial statements), the matter will be drawn to the reader’s attention in an “other information” paragraph.

Our objectives are to obtain XXXXXXXXXXXX about whether the financial statements XXXXXXXXXXXX are free from XXXXXXXXXXXX .
Answer:

Auditor’s Responsibility for the Audit of the Financial Statements

Our objectives are to obtain
reasonable assurance
about whether the financial statements
as a whole
are free from
material misstatement.

What two circumstances require the audit opinion to be modified?

Answer:

1 The financial statements are not free from material misstatement.
2 The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free from material misstatement.

What paragraph would be included in an auditor’s report to draw users’ attention to a matter that is fundamental to their understanding of the financial statements?

Answer:

An emphasis of matter paragraph

Is this statement true or false?

Answer:

True. The inclusion of an EoM in the auditor’s report does not affect the audit opinion.

What type of audit opinion is given if the financial statements contain misstatements that are material and pervasive?

Answer:

Adverse opinion

What type of audit opinion is given if the auditor is unable to obtain sufficient appropriate audit evidence and undetected misstatements could be pervasive?

Answer:

Disclaimer of opinion

What type of audit opinion is given if the financial statements contain a non-material misstatement?

Answer:

An unmodified opinion. An audit opinion can only be modified in respect of a matter that is material to the financial statements.

Is this statement true or false?
Answer:

False. Internal audit is encouraged and the need for it has to be kept under review, but it is not mandatory.

In a listed company, to whom should internal audit report?

Answer:

To Those Charged with Governance – i.e. the audit committee.

What are the three elements of the ACCA’s conceptual framework approach to independence?

Answer:

Identify threats to compliance with the fundamental principles.

Evaluated the significance of the threats identified.

Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.

What category of ethical threat may be created if fees from an audit client remain overdue?

Answer:

A self-interest threat because overdue fees may be regarded as equivalent to a loan (i.e. a direct financial interest).

What category of threat arises if the auditor prepares the financial statements for an audit client?

Answer:

A self-review threat.

What category of threat arises if the auditor owns shares in a client company?

Answer:

A self-interest threat because the auditor would have a direct financial interest.

What category of threat arises if the auditor is a close friend of the financial director of the client company?

Answer:

A familiarity threat

What categories of threat may be created if a firm assumes management responsibility for an audit client?

Answer:

Self-review threat – for example, in taking responsibility for the financial statements or the design of internal controls.

Self-interest threat – for example, in the fees for providing non-audit services.

Familiarity threat – because the firm becomes too closely aligned with management’s views and interest.

Note: “Management threat” is not a classification in the Code.

What is ‘audit risk’?

Answer:

Audit risk is the risk that an inappropriate audit opinion is given.

Analytical procedures MUST be used at which stages of an audit?

Answer:
Analytical procedures
must
be used at the
planning
and
final review
stages.

Substantive analytical procedures to obtain audit evidence are
not
a requirement.

What percentage benchmarks are often applied as a starting point in determining materiality?

Answer:
< ½% is not material – > 1% of revenue is material
< 1% is not material  –  > 2% of total assets is material
< 5% is not material – > 10% of profit before tax is material

Between these thresholds requires the exercise of professional judgment.

Why is it important that audits are properly documented? (Four reasons)

Answer:
To show that the audit work has been done properly
To enable senior staff to review the work of junior staff
To help the audit team in future years
To encourage a methodical, high-quality approach.

Answer:

The
reliability
of audit evidence is influenced by its source and nature.  Generally, reliability is increased when audit evidence is:

• Obtained from a
  third
  party,
  rather than an internal source
• Obtained
  directly
  by the auditor
• Documented,
  rather than oral
  ?
  Original
  , rather than a copy

Define what is meant by an ‘organisation’

Answer:

An organisation is a social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment.

What separates an organisation from its environment?

Answer:

A boundary

What is the name of a system which receives no inputs from, or sends no outputs to, its environment?

Answer:

A closed system

What is the name of a system which receives inputs from and sends outputs to its environment?

Answer:

An open system

Are not-for-profit organisations public sector organisations?

Answer:

Not necessarily. Most public sector organisations (government owned) are not-for-profit, but the not-for –profit sector also includes organisations such as charities.

What is an entrepreneurial business structure?

Answer:

A simple organisation with essentially just the boss and the workers.

What is a functional business structure?

Answer:

The business is organised by function: sales, manufacturing, accounting, IT etc. Each function is a separate department with a departmental head.

What is a matrix structure?

Answer:

A structure that can, for example, be organised by project and function. Thus a person can report to his/her functional manager and project manager.

What are the five parts of Mintzberg’s diagrams of organisational structures?

Answer:

Strategic apex, middle line, technostructure, support, operating core.

Organisations are often divided into three layers, each layer having different responsibilities and planning horizons. What are these three layers?

Answer:

Strategic, tactical, operational.

Describe a tall narrow structure in terms of management layers and span of control.

Answer:
Many management layers and small spans of control.

Describe a wide flat structure in terms of management layers and span of control.

Answer:

Relatively few management layers each with relatively wide spans of control.

Name five advantages to decentralisation.

Answer:
Motivation, spreading decision-making load and leaving more time ofr top managers to make the important decisions, faster decisions, local decisions, greater expertise of the decision maker, training and assessment.

What is the ‘formal organisation’?

Answer:
It is the part of the organisation that has been designed by management and which management knows about: organisation charts, procedures manuals, mission statements, plans, staff appraisals.

What is the ‘informal organisation’?

Answer:
It is the part of the organisation that has not been designed by management and which management might not know about: friendships, likes/dislikes, personal ambitions, alliances, short-cuts, cover-ups.

It is sometimes said that information should comply with the acronym ‘ACCURATE’.
What, typically, do these letters stand for?

Answer:
*
A
ccurate
*
C
omplete
*
C
ost-beneficial
*
U
nderstandable/user-targeted
*
R
elevant
*
A
daptable/authoritative
*
T
imely,
*
E
asy to use.

What is a transaction processing system (TPS)?

Answer:
A TPS processes transactions such as sales, wages and salaries. It is essentially just automation of what had been done by armies of accountants.
There is nothing very clever about a TPS, but it removes a lot of repetitive manual calculation and processing, speeds up processing, increases accuracy and saves costs.

What is a management information system (MIS)?

Answer:
A MIS produces information which is useful for management for making decisions. For example, aged receivables listings and slow-moving inventory reports.

What is a decision support system (DSS)?

Answer:
A DSS helps and supports people making decisions. For example there is no right or wrong way of deciding what next year’s budget should be: it’s a process which depends on judgment and experience. However, a spreadsheet where you set up a budget is going to be extremely useful in helping you reach a conclusion about what next year’s budget should be.

What is an executive information system (EIS)?

Answer:
These provide information to top management. Typically and EIS has access to external information, will allow ‘drilling down’ to more detail, will be flexible and will make use of graphics, such as bar charts.

Describe a LAN.

Answer:
A LAN is a local area network using specially installed cables to join computers together and with peripheral devices such as printers.

Describe a WAN

Answer:
A WAN is a wide area network making use of telecommunication systems to network individual computers and local area networks over a wide geographical area.

What is an extranet?

Answer:
An extranet is where one organisation’s computer network has access to another organisation’s network.

What is an intranet?

Answer:
An intranet is an internal internet. Similar to a LAN, but access is through an internet browser.

What management level would you expect to deal with information that is often forward-looking, often external and often highly summarised?

Answer:
This information would typically be used by the strategic level of management

What organisational level would you expect to deal with information that is historical, internal and detailed?

Answer:

This information is typically used at the operational level.

What does PESTEL stand for?

Answer:
Environmental influences:

* Political
* Economic
* Social
* Technological
* Ecological
* Legal

What are Porter’s five forces?

Answer:
* Rivalry/competition,
* Threat of new entrants,
* Supplier pressure,
* Buyer pressure,
* Threat of substitutes.

Should Porter’s five forces theory be applied to all companies in the country, an industry, an individual company?

Answer:

Porter’s five forces should be applied to an industry to judge industry attractiveness.

What are the seven elements of the cultural web?

Answer:

Symbols and titles,
Power relations,
Organisational structure,
Control systems,
Rituals and routines,
Myths and stories,
Organisational assumption (paradigm).

What are Charles Handy’s four cultural types?

Answer:

* Power (Zeus)
* Role (Apollo)
* Task (Athena)
* Person (Dionysus)

What are Schein’s three levels of culture?

Answer:

* Artifacts (visual, structure, processes)
* Espoused values (strategies goals philosophies)
* Basic underlying assumptions

What are Hofstede’s four dimensions of national culture?

Answer:

* Power distance
* Uncertainty avoidance
* Individualism-collectivism
* Masculinity

What is a stakeholder?

Answer:

Any person or other organisation affected by an organisation.

Into what three categories can stakeholders be divided (not Mendelow’s classification)

Answer:

Internal (such as employees), connected (such as customers,) external such as local people.

What is meant by the ‘agency problem’ in corporate governance?

Answer:

Shareholders (the principals) own the company; directors (the agents) run the company on a day-to-day basis, and should run it for the benefit of the shareholders. But they might not, so checks need to be performed (like audits).

In Corporate Governance, what is a ‘NED’?

Answer:

NED = Non-executive director.

Under Corporate Governance rules, which two roles should be split?

Answer:

The roles of chief executive officer and chairman should be split.

Which board committee is responsible for suggesting new directors for appointment?

Answer:

The Nomination Committee

Which board committee is responsible for advising on directors’ pay and bonuses etc

Answer:

The Remuneration Committee

In Corporate Governance, what is meant by ‘comply or explain’?

Answer:
The UK Corporate Governance Code has no force in law and is enforced on listed companies through the Stock Exchange. Listed companies are expected comply with the code or explain to shareholders why they haven’t.

What is the name of the United States act that deals with Corporate Governance.

Answer:

The Sarbanes Oxley Act.

What is corporate social responsibility?

Answer:
Corporate social responsibility considers the extent to which the interests of stakeholders (other than shareholders) should be taken into account over and above what the law demands.

List five influences on ethical behaviour.

Answer:

* National and cultural beliefs
* Education and employment
* Psychological factors
* Personal integrity
* Moral imagination

What are the four ethical stances of Johnston and Scholes?

Answer:

* Short-term shareholder interest
* Long-term shareholder interest
* Multiple stakeholder obligations
* Shaper of society

What is IFAC?

Answer:

IFAC = The International Federation of Accountants. IFAC is the global organisation of the accountancy profession.

What is the purpose of IFAC?

Answer:
IFAC aims to protect the public interest by encouraging high-quality practices by the world’s accountants. Through its independent standard-setting boards, IFAC develops international standards on ethics, auditing and assurance, education and public sector accounting standards. It issues guidance to support professional accountants in business, small and medium practices and developing nations.

What are the fundamental principals of the ACCA’s Code of Ethics and Conduct?

Answer:

* Integrity
* Objectivity
* Professional competence and due care
* Confidentiality
* Professional behaviour

What are five differences between financial accounts and management accounts?

Answer:

What is the UITF and what is its function?

Answer:
(Accountancy regulation)
UITF = Urgent Issue Task Force. This is part of the Accounting Standards Board and tackles urgent issues not yet covered by accounting standards.

What is the FRRP and what is its function?

Answer:
(Accountancy regulation)
The Financial Reporting Review Panel (FRRP) is concerned with the examination and questioning of departures from accounting standards by large companies.

What body issues financial reporting standards?

Answer:

The Accounting Standards Board issues financial reporting standards.

What is GAAP?

Answer:

GAAP stands for Generally Accepted Accounting Principles. This is a common set of accounting principles, standards and procedures that companies use to compile their financial statements.

Who are responsible for preventing and detecting fraud?

Answer:
The directors are responsible for preventing and detecting fraud. Auditors should detect fraud if it is large enough to cause a material misstatement in the financial statements.

What are the two parts of an internal control system?

Answer:

Control environment and detailed control processes.

What is meant by the internal control environment?

Answer:
The control environment essentially refers to the culture within the organisation. Some organisations put a very high priority on having a good system of internal control in place whereas others see these as a nuisance.

Who are responsible for setting up the system of internal control?

Answer:

The directors are responsible for setting up and maintaining the system of internal control

Who are responsible for preparing the financial statements?

Answer:

The directors are responsible for preparing the financial statements

What is ‘trait theory’?

Answer:

The idea that management ability can be forecast through personal traits such as intelligence, initiative and self-assurance.

What are Henri Fayol’s five functions of management (Classical Theory)?

Answer:

* Planning,
* Organising,
* Commanding,
* Coordinating
* Controlling.

Who is associated with scientific management?

Answer:

Frederick Taylor

What is the essence of scientific management?

Answer:

It is management’s function to study work and to develop a science of wotk so that jobs can be carried out efficiently.

What are the benefits and the main problem with scientific management?

Answer:
Benefits: increased productivity, wage allocation based on output, workforce care programmes.

However, often dehumanises work.

Who was first associated with the Human Relations School of management?

Answer:

Elton Mayo

What is the name of Mayo’s studies and what did these suggest?

Answer:

The Hawthorne studies: there is more to motivation than pay; people like groups; groups influence behaviour.

According to Drucker’s style theory, what are the three functions of management?

Answer:

* Managing a business;

* Managing managers;

* Managing workers and work.

Drucker’s style theory proposed three functions of management (managing a business; managing managers; managing workers and work). What five further categories are these broken down into?

Answer:
* Setting objectives,
* Organising the group,
* Motivating and communicating,
* Measuring performance,
* Developing people.

What are Mintzberg’s three managerial roles?

Answer:

Interpersonal role; information processing role; decisional role.

Monitor, disseminator and spokesman are terms associated with which of Mintzberg’s managerial roles?

Answer:

Information processing role

Improver/changer, disturbance handler negotiator and resource allocator are terms associated with which of Mintzberg’s managerial roles?

Answer:

Decisional role

Define ‘power’

Answer:

Power is the ability to influence events or people

Define ‘authority’

Answer:

Authority is the right to exercise power.

Define ‘delegation’

Answer:

Delegation is the transfer of authority. It is NOT the transfer of responsibility or accountability.

What are the four types of leadership style suggested by Ashridge Management College in descending order of autocracy.

Answer:

Tells, sells, consults, joins.

Figurehead, liaison and leader are terms associated with which of Mintzberg’s managerial roles?

Answer:

Interpersonal role

What are the two axes of Blake and Mouton’s managerial grid?

Answer:

1 Concern for the task
2 Concern for people

Describe the ‘country club’ style of management in terms of Blake and Mouton’s grid.

Answer:

High concern for people; low concern for the task.

What are the three matters of concern in Adair’s action-centred leadership theory?

Answer:

Concern for individuals, concern for the group, concern for the task.

What are the four variables in Handy’s best fit theory?

Answer:

The leader, the task, the subordinates and the environment.

What is meant by a ‘contingency theory’ of management / leadership?

Answer:
There is no single best way to lead or manage; there is no set of golden rules.

The best approach depends on the situation.

What is Handy’s best fit theory of leadership / management?

Answer:

The variables of: the leader, the task, the subordinates and the environment all have to match. For example an authoritative manager in charge of subservient staff, doing a repetitive task to a strict timetable.

What is meant by the terms ‘transformational’ and ‘transactional’ leader?

Answer:
Transactional:
do things right; administer, maintains and a short-term view.
Transformational:
do the right things; inspire, long-term view, develops organisations.

Who talked about adaptive leadership and ‘moving between the balcony and the battlefield’?

Answer:

Heifetz

Describe Fiedler’s approach to leadership

Answer:

Effectiveness depends on the leadership style (psychologically close or distant) and situational favourableness ie the degree to which the situation gives the leader control and influence.

What is Handy’s definition of a group and what did he suggest are a group’s four characteristics?

Answer:

A group is any collection of people who perceive themselves to be a group. Groups exhibit a sense of purpose or aim, identity, group norms and communication.

What are the eight (or nine) team roles identified by Meredith Belbin?

Answer:

Chairman,
Shaper,
Monitor/evaluator,
Company worker,
Resource investigator,
Team worker,
Plant,
Completer/finisher
and, sometimes, specialist.

What are Tuckman’s four (or five) stages of team development in time-order?

Answer:

Forming, storming, norming, performing and (perhaps) dorming.

What are the two classes of motivation theory?

Answer:

Content theory and process theory.

What are the five levels of need in Maslow’s hierarchy (ascending order)?

Answer:

Physiological, safety, social, esteem (or ego), self-actualisation (or self-fulfilment) needs.

What are the two classes of factor in Herzberg’s theory of motivation?

Answer:

Hygiene factors and motivating factors.

What is the consequent of poor hygiene factors in Herzberg’s theory of motivation?

Answer:

Poor hygiene = job dissatisfaction. No motivation can occur in this state.

Describe Vroom’s expectancy theory

Answer:
Motivating force
= Valence x Expectation

Valence
is how much someone wants something (like a bonus or promotion).
Expectation
is an assessment of the likelihood of success.

What is McGregor’s theory of motivation

Answer:

Theory X and Theory Y. A theory X manager is autocratic and this might motivate subservient workers. A theory Y manager is participative and this might motivate workers with better training and knowledge.

Describe ‘intrinsic’ and ‘extrinsic’ rewards.

Answer:

An intrinsic reward comes from within; for example, a feeling of achievement or personal advancement. Extrinsic rewards come from outside; for example additional pay or praise.

What are the three methods of job design?

Answer:

Job enlargement, job rotation, job enrichment.

Describe job enlargement, job rotation and job enrichment.

Answer:
Job enlargement means more of almost exactly the same. It is certainly what will be called a horizontal change; there is no more challenge or responsibility in the job.
Job rotation is also a horizontal change with no real increase in challenge.
Job enrichment is a vertical change. It’s giving people more responsibility and more challenge in their job.

What are coaching mentoring and counselling?

Answer:
Coaching
= being guided by a more experienced employee.
Mentor
= a long term relationship who can give impartial advice (not your manager),
Counselling
= non-directive exploration of issues and concerns.

What are the typical steps in a communication process?

Answer:

Form the thought, encode, transmit, receive decode and give feedback.

What are the three directions in which communication can take place?

Answer:

Horizontal, vertical and diagonal.

Name seven potential barriers to communication.

Answer:

Any seven from:

* Inappropriate language/terminology,
* Status,
* Emotion,
* Wrong medium,
* Not wanting to transmit,
* Not wanting to receive,
* Information overload,
* Noise/interference.

What are the four patterns of communication identified by Leavitt?

Answer:

Y, wheel, circle, chain.

Which of the chain or wheel provides faster communication?

Answer:

The wheel is faster because it provides a central node through which communication can be quickly routed.

What are the elements of Rogers seven-point selection plan (person specification/BADPIGS)

Answer:

Background, achievements, disposition, physical, interests, general intelligence, special aptitudes.

Name five selection methods

Answer:
* Interviews
* Selection tests,
* References,
* Work-sampling,
* Group-selection methods.

Name four types of selection test.

Answer:

* Psychometric,
* Proficiency,
* Intelligence,
* Aptitude.

Describe training, development and education

Answer:
Training
is very specific and is needed for your current role.
Development
is much less specific; it’s needed at some time in the future.
Education
is knowledge acquired gradually through learning and instruction. It might or might not be work-related.

What are Honey and Mumford’s four learner types?

Answer:
Theorists:
like to understand.
Reflectors:
observe and consider.
Activists:
hands-on learners.
Pragmatists:
motivated to learn if they perceive a practical use.

What are the four steps of Kolb’s experiential learning theory?

Answer:
Experience, then reflect, then form a theory, then try the theory. Hence back round to experience and the cycle is repeated.

What three elements or purposes are present in most reviews?

Answer:

Assess past performance. Plan future potential and roles. Fix rewards.

In the EU, what is the difference between a regulation and a directive?

Answer:
Regulations are directly applicable to all member states.
Directives have to be implemented by changing each country’s national laws.

What are the employee’s duties under health and safety legislation?

Answer:
They have to take reasonable care of themselves and others; They must allow the employer to carry out the duties in relation to safety; They mustn’t interfere intentionally or recklessly with machinery; They must inform the employer of any situation which they think is a danger; They have to use equipment properly, making use of all safety features.

What are the three classes of termination of employment?

Answer:

Retirement, resignation and dismissal.

What are the three types of dismissal?

Answer:
* Termination,
* Non-renewal of a fixed-term contract,
* Constructive dismissal.

List five reasons that might lead to fair dismissal.

Answer:
* Redundancy
* Legal impediment
* Non-capability
* Misconduct
* Other substantial reason

What three types of illegal behaviour does equal opportunity legislation recognise?

Answer:
Direct discrimination:
eg salesman required.
Indirect discrimination:
eg sales person over 2m tall with a black beard required.
Victimisation:
This is where someone has complained about discrimination and then later on within the workplace they are blamed or discriminated against because they complained.

What are the five causes of inflation?

Answer:

* Demand pull
* Cost push
* Import cast factors
* Expectations
* Increase in the money supply

What are six types of unemployment?

Answer:
* Real wage
* Frictional
* Seasonal
* Structural
* Technological
* Cyclical

What is frictional unemployment?

Answer:

People who are temporarily unemployed as they move jobs.

What is structural unemployment?

Answer:

Changes in an industry’s structure.
For example if manufacturing jobs move overseas, unemployment is caused by a change in the structure of the economy.

What are the three elements of a government’s fiscal policy?

Answer:

* Expenditure,
* Income
* Borrowing.

What causes a deficit?

Answer:

Government expenditure is higher than income receipts (usually tax receipts) so that the government has to borrow.

What are the four ways in which monetary policy can be managed?

Answer:

Interest rates, money supply, reserve requirements, exchange rates.

Describe regressive tax.

Answer:
A regressive tax takes a higher proportion of a poor person’s salary than it does for a rich person.
A simple example is VAT. If the VAT rate is 20% proportionally more taken from a poor person’s pay than from a rich person’s.

Describe proportional tax.

Answer:

A proportional tax takes exactly the same proportion of income tax from all levels of income.

Describe what is meant by a direct and an indirect tax.

Answer:
A
direct tax
is paid direct by a person to the revenue authority (eg income tax).
An
indirect tax
is paid to the revenue authority by an intermediary (for example, a supplier charges VAT and pays this over).

What is the difference between the balance of trade and the current account.

Answer:
The
balance of trade
is the inflows and outflows from the trade in goods.
The
current account
includes the balance of trade but also income from overseas investments and transfers such as those to and from the EU.

Describe progressive tax.

Answer:
A progressive tax takes a higher proportion of income as income rises.
So maybe for the first $1,000 of income the tax rate is zero, for the next $4,000 of income the tax rate is 20%, and anything beyond that is taxed at say 40%.

Draw and annotate Mendelow’s Matrix

Answer:

What are the three main steps in the rational planning model?

Answer:
Strategic position,

Strategic choice,

Implementation (or strategy into action)

What is meant by logical incrementalism?

Answer:
The idea that planning is best done as a series of relatively small adjustments to past strategies rather than trying to plan radical leaps forward.

Why do advocates of logical incrementalism think that is a better approach than more radical planning?

Answer:
Bounded rationality:
we do not know (and cannot know) everything that is important to future plans so what is the point in making ambitious plans that rest on guesswork?
Additionally, managers do not have time to carefully evaluate all possible combinations of events.

What is freewheeling opportunism?

Answer:
The idea that planning can be inhibiting and that you are better grabbing opportunities as they arise.

List five advantages of strategic planning

Answer:
Any five of:
* It forces you to look ahead
* Better coordination
* Better use of resources
* Targets to which all can work
* An opportunity to influence the future
* Holds out the promise of better times in the future after initial hard work

What are two potential advantages of freewheeling opportunism?

Answer:
Any two of:
* fast decisions;
* no time or money spent on planning;
* not committed to one course of action (flexibility).

What is a PESTEL analysis?

Answer:
An environmental analysis considering the influences of: politics, economics, social trends, technological changes, ecological (environmental) concerns, laws.

What are Porter’s five forces?

Answer:
* Rivalry/competition,
* Threat of new entrants,
* Supplier pressure,
* Buyer pressure,
* Threat of substitutes.

Should Porter’s five forces theory be applied to all companies in the country, an industry, an individual company?

Answer:
Porter’s five forces should be applied to an industry to judge industry attractiveness.

An organisation’s capabilities arise from two sources. What are these?

Answer:
Resources and competences (how resources are used).

What is a threshold capability?

Answer:
The capability that just allows you to survive. It implies threshold resources and threshold competences.

What is needed for capabilities that give sustained competitive advantage?

Answer:
Unique resources and/or core competences. These allow you to continually out-perform your rivals.

What is meant by the terms ‘position-based’ and ‘resource-based’ strategic planning?

Answer:
Position-based:
alter your position to match the environment.
Resource-based:
look at your resources and competences and see if they can be redeployed in ways that will give competitive advantage.

‘M words’ are often used to describe resources. List nine.

Answer:
Any nine of:
material,
machinery/manufacturing,
money,
markets,
marketing,
management,
men and women,
MIS (IT),
methods (knowhow),
make (brand).

What is a mission statement and what are its main elements?

Answer:
The prime purpose of a mission statement is to set out the reason for the organisation’s existence.
The main sections are often taken to be: purpose, position (in the market), culture, ethics and values.

What is a stakeholder?

Answer:
Any person or other organisation affected by an organisation.

Into what three categories can stakeholders be divided (not Mendelow’s classification)

Answer:
* Internal (such as employees),
* Connected (such as customers,)
* External (such as local people).

Why is stakeholder analysis important in strategic planning?

Answer:
Key player stakeholders can prevent strategies of which they do not approve. The hope is that any strategic plan keeps most of the people happy most of the time (and the key players happy all the time!)

What are the two axes on a Boston Consulting Grid?

Answer:
Market growth rate and relative market share (market share/share of market leader)

What are the four quadrants of a BCG matrix and what market share and growth rates do they have?

Answer:
Problem child
(or question mark): high market growth rate, low market share.
Star:
high market growth rate, high market share.
Cash cow:
low market growth rate, high market share.
Dog:
low market growth rate, low market share.

What is the problem with a problem child product or division?

Answer:
BCG suggests that only companies with large market shares can survive in the long term so the company has to decide whether to withdraw or to invest to achieve a large market share. Note that niche or focus companies can survive with what looks like a small market share.

In BCG terms, what is meant by a balanced portfolio of products?

Answer:
Some cash cows to generate lots of cash (but cash cows are heading towards market decline), and some problem children needing investment.
The cash generated by the cash cows can be used to build the problem children into star products that will become the cash cows of the future.

What are the primary activities of the value chain?

Answer:
Inbound logistics,
Operations,
Outbound logistics,
Sales and marketing,
Service.

What are the support activities of the value chain?

Answer:
Firm infrastructure,
Human resource management,
Technology development,
Procurement

What are Porter’s three generic strategies?

Answer:
Cost leadership,
Differentiation,
Focus.

What are the axes of Ansoff’s matrix?

Answer:
Products (existing and current); markets (existing and current)

What can a company do to increase its profits if it stays with existing products and existing markets?

Answer:
Market penetration,
Efficiency gains,
Withdrawal,
Consolidation.

In Ansoff’s matrix, what is moving to a new market with an existing product known as?

Answer:
Market development

In Ansoff’s matrix, what is selling a new product to an existing market known as?

Answer:
Product development

What are the two classes of diversification?

Answer:
Related and unrelated diversification.

What is meant by the terms ‘backward integration’ and ‘forward integration’?

Answer:
Backward integration
is taking over (or setting up) a supplier;
Forward integration
is taking over (or setting up) a customer or supply chain.

What is the name of the business structure which is organised as accounting, manufacturing, sales, IT etc?

Answer:
This is a functional structure as it organises the business by function (or department).

What are the main ways in which a business can be divisionalised?

Answer:
By market and by product

Describe what is meant by the term ‘matrix structure’?

Answer:
In a matrix structure, each employee has responsibilities to more than one superior. Eg, in project management an engineer could be responsible to the project manager and to the engineering manager.

What are the five elements of Mintzberg’s organisation forms?

Answer:
Strategic apex,
Middle line,
Operating core,
Support
Technostructure.

What are the characteristics of a professional bureaucracy in terms of Mintzberg’s structures?

Answer:
Relatively short middle line and a small technostructure.
Because each job is different in a professional firm, there has to be close liaison between the strategic apex and the operating core and the technostructure has limited opportunity to enforce a standard approach.

What is a span of control and how does it differ between tall narrow and wide flat structures.

Answer:
The span of control (SoC)l is the number of people directly reporting to a manager. In a tall narrow structure the SoC is low; in a wide flat structure the SoC is large.

What are the three levels or categories of business process change?

Answer:
* Automation,
* Rationalisation
* Business process engineering.

What are the four descriptions of change in terms of scope of change and nature of change?

Answer:
Adaptation
(nature = incremental and scope = realignment)
Evolution
(nature = incremental and scope = transformation)
Reconstruction
(nature = big bang and scope = realignment)
Revolution
(nature = big bang and scope = transformation)

What are four business process redesign patterns?

Answer:
Re-engineering
– zero-based
Simplification
– eliminate duplication and redundant steps
Value-added analysis
– remove non-value adding activities
Gaps and disconnects
– check flows between departments

What are the two axes of Harmon’s process–strategy matrix?

Answer:
The process’s strategic importance and its complexity/dynamism

In terms of a process’s strategic importance and complexity/dynamism how, should a process be carried out according to Harmon’s process strategy matrix?

Answer:
High strategic importance, highly complex/dynamic: BPR and improvement
High strategic importance, low complexity/stable: automate
Low strategic importance, low complexity/stable: automate, outsource
Low strategic importance, high complexity/dynamic: outsource

What are the contextual features in Balogun and Hope Hailey’s theory of change management?

Answer:
Power,
Time,
Scope,
Diversity,
Capability,
Capacity,
Readiness,
Preservation

What are the design choices in Balogun and Hope Hailey’s theory of change management?

Answer:
Change path
Change start point
Change style
Change interventions
Change roles

What is Lewin’s force field analysis of change management?

Answer:
Forces for change are likely to be opposed by forces resisting change.
Better to weaken the resistance than to confront it head-on.

What are the steps in Lewin’s three step approach to change management?

Answer:
* Unfreeze
* Effect the changes
* Refreeze

A change agent is often a consultant. What are the advantages of hiring such a consultant?

Answer:
* Often a change agent is a consultant because:
* Skilled in the change process
* Knowledge/expertise in the types of change needed
* Perceived as independent and fair
* Someone for management to transfer risk to.

What are the original 4Ps of the marketing mix?

Answer:
* Product,
* Price,
* Promotion,
* Place

What additional 3Ps were added to the original 4P marketing mix to cover the marketing of services?

Answer:
* People
* Physical evidence
* Process

Name four types of activity that come under the heading of promotion?

Answer:
* Advertising
* Sales promotion
* Personal selling
* Public relations

What is market targeting?

Answer:

Deciding which segments of a market to address with products or services.

What are the three types of market targeting?

Answer:
* Undifferentiated,
* Differentiated,
* Concentrated.

What are the 6Is of e-business?

Answer:
* Intelligence
* Individualisation
* Interactivity
* Integration
* Industry (structure)
* Independence (of location)

What are the potential barriers to e-business?

Answer:
Set-up costs
Type of business
Running costs
Time to set up system
No in-house skills
Suppliers/customers not interested
Security worries

What are the seven elements of the cultural web?

Answer:
* Symbols and titles
* Power relations
* Organisational structure
* Control systems
* Rituals and routines
* Myths and stories
* Organisational assumptions (paradigm)

What are Handy’s four cultural types?

Answer:
* Power
* Role
* Task
* Person

What are four potential benefits of decentralisation?

Answer:
– Top managers have more time for strategic decisions.
– Better decisions: fast, functional experts, geographical experts.
– Motivation of staff.
– Training and assessment of staff

What are transactional and transformational leadership?

Answer:
Transactional:
focus on short term, control, maintain/improve current situation, plan, organise, control, defend existing culture, positional power exercised
Transformational:
long-term vision, climate of trust, empowerment, change culture, power from relationships.

What are the typical characteristics of a project?

Answer:
A start/end, non-routine
Novel, unique challenges
Team members from different backgrounds so different: priorities, terminology and outlooks
No benefit until finished

What are the typical stages of a project?

Answer:
* Initiation/initial screening
* Risk assessment
* Business case
* Project plan
* Executing
* Monitoring and controlling/project milestones
* Closing: delivery/review

What tools can be used on a project cost/benefit analysis?

Answer:
* Net present value/payback/ROCE
* Sensitivity analysis and risk analysis
* Forecasting techniques
* Expected values
* Decision trees

What are the three classes of benefit that can be identified when appraising projects?

Answer:
* Observable
* Measurable
* Quantifiable
* Financial

What are the typical purposes of a project initiation document?

Answer:
* Defines the project, its scope and its deliverables.
* Justifies the project: cost/benefit analysis; risk analysis.
* Secures funding for the project.
* Defines the roles and responsibilities of project participants.
* Gives people the information they need to be productive and effective right from the start.
What? Who? How? How much? Why? When?

What are the typical qualities of a project manager?

Answer:
* Leadership abilities, including the ability to motivate
* Technical ability in running projects and in the subject matter
* Ability to negotiate with project sponsors, project team members and suppliers.
* Reporting on progress and difficulties
* The ability to stay calm in a crisis
* Excellent communication
* Ability to delegate to team members.

What are the project management variables?

Answer:
* Cost
* Time
* Quality
* Scope

What are three determinants of risk in a project?

Answer:
How well is the project scope defined?
How large is the project?
How complex is the project?

What is meant by ‘benefits realisation’?

Answer:
Benefits arising from projects are not automatic even in a technically successful project.
Therefore, the project manager should carry out tasks such as: demonstrations and presentations, training, managing and championing change.

What are the two types of review that should form part of a project completion report?

Answer:
* Post-project review – This is about how well the project was conducted
* Post implementation review – This is about what the project achieved eg costs v benefits

What is a “professional bureaucracy” in Mintzberg’s classification?

Answer:
An organisation such as a firm of lawyers of accountants.
Characterised by a short middle line so that there is good vertical communication and a small technostructure because every job is different and therefore standardisation is limited.

What is ‘transactions marketing’ and ‘relationship marketing’?

Answer:
Transactions marketing:
Focuses on the product and develops marketing mixes for it according to the needs customers satisfy when they buy it.
Relationship marketing:
Seeks to attract, maintain and enhance customer relationships by focusing on the whole satisfaction experienced by the customer when dealing with the firm.

What is price skimming?

Answer:
Initially a very high price (as some customers will pay that). Then the price is lowered to attract other customers and to sale greater numbers o goods.

What is penetration pricing?

Answer:
A very low initial price to gain a large market share. A very large market share might allow the low price to be sustained and can act as a barrier to entry.

What is non-price competition?

Answer:
When customers consider more than the price when buying. For example, a strong brand can stimulate sales.

What is a data warehouse and data mining?

Answer:
A data warehouse is a vast collection of historic transaction data (eg, sales by a supermarket).
Data mining is searching though that looking for patterns and associations that might be helpful in increasing profits.

What would by included as product features?

Answer:
* Quality
* Design
* Brand
* Packaging

What is meant by marketing?

Answer:

Establish needs (market research) and develop the appropriate product or service (R&D).

What is the expected profit arising from the following and what are the problems using expected values in project appraisals?

Outcome I p = 0.3 Profit = 3000
Outcome II p = 0.7 Profit = 5000
Answer:

0.3 x 3000 + 0.7 x 5000 = 4400

Problems:

How are probabilities estimated
The expected value is usually not ‘expected’
Risk is not captured (eg a poor outcome of 3000 is quite possible in the above case)

What are the two parts of a time series analysis that are analysed using moving averages?

Answer:
The trend (the underlying increase/decrease);
The seasonal variations

What are the potential problems when relying on linear regression results?

Answer:
The fit must be tested using the coefficient of correlation (r), or the coefficient of determination (r2).
If only a few points are used the results are not reliable
Extrapolation (predicting outside the range) is dangerous
Other known influences (such as inflation) should be removed first.
Even good correlation does no prove cause and effect.

Draw and annotate Mendelow’s Matrix

What are Johnson and Scholes’s criteria for judging the suitability of a strategy

Answer:

Suitability
Acceptability
Feasibility

If you are the defendant in a civil law court case, what title is given to the other party?

Answer:
The plaintiff

Name the three divisions of the High Court

Answer:
Queen’s Bench Division, Chancery Division and Family Division

ICC is the abbreviation for:

Answer:
International Criminal Court or International Chamber of Commerce

The “Boots case” illustrates what principle of law

Answer:
That goods on a supermarket shelf are invitations to treat and are not therefore offers capable of acceptance

In a situation where the Court is faced with having to interpret statute, which rule will the Court look to first?

Answer:

The Literal Rule

In a situation where the Court is faced with having to interpret statute, the Court will apply the Golden Rule if the application of the Literal Rule would lead to *****.

What is *****?

Answer:
An absurdity

What principle could be described as “The cornerstone of English Law”?

Answer:
The principle of “Stare Decisis” or “judicial precedence”

The decision of a Court can be broken down into two elements.
One element is binding on subsequent judges.  Name the other (non-binding) element

Answer:

Obiter Dicta

What is the meaning and effect of “ratio decidendi”?

Answer:
It means “the rationale for the decision” and the effect is that it is binding on subsequent judges hearing similar cases in courts of same standing or inferior courts

What is the highest court in the English legal system?

Answer:
The Supreme Court

“Overruling” an earlier decision means what

Answer:
A higher court disagrees with a lower court’s decision.  It does not alter the earlier decision. It simply deprives it of its authority

What word is used to describe what has happened to the original decision when a case goes to appeal and the appeal is won?

Answer:
Reversing

What is “distinguishing” in the context of judicial precedence

Answer:
Where, in a later case, a court distinguishes the facts of the current case from those of an earlier case in the situation that that earlier case decision would have been binding

What case would you cite as an illustration of the principle that says
“An offer can be made to the World at large”

Answer:

Carlill v Carbolic Smokeball Company

In the definition of a contract, the word “agreement” can be divided into two distinct elements.
What are those elements?

Answer:
Offer and acceptance

There are three essential elements of a contract. Two of them are “agreement” and “intention”. What’s the third element

Answer:
Consideration

There are three essential elements of a contract. Two of them are “consideration” and “intention”.
What’s the third element?

Answer:
Agreement

There are three essential elements of a contract. Two of them are “agreement” and “consideration”.
What’s the third element?

Answer:
Intention

“As a general rule, an advert is taken to be an offer capable of acceptance”.
Is that statement true?

Answer:
No, as a general rule, an advert is taken to be an invitation to treat.

The case Williams v Carwardine is a case involving an advert of a reward offered for information.
This type of case is an exception to which principle?

Answer:
A reward case is an exception to the general principle that an advert is an invitation to treat and not an offer .

Is it true that death of the offeror has the effect that the offer is no longer capable of acceptance?

Answer:
No! If the offer does not involve the personality of the offeror, then it’s the notification of the death which makes the offer no longer capable of acceptance (not the death itself)

In the context of consideration, what characterises “executed consideration”

Answer:
Where consideration is paid at the same time that the goods are delivered

Complete the following: “Past consideration is ********”

Answer:

Past consideration is no consideration

What is being discussed in the sentence:
“It must be sufficient but need not be adequate”

Answer:
Consideration – must be sufficient to merit the title “consideration” ie it must have some value

What principle did the case Chappell v Nestle establish?

Answer:
Consideration must have some value

Performance of an existing contractual duty is not sufficient to be classed as consideration for a different contract.
Which case established that principle?

Answer:
Stilk v Myrick

Which case established the principle that acts over and above an existing natural duty already owed are sufficient to merit the title “consideration”?

Answer:
Ward v Byham

With reference to “intention” what is the normal attitude of the Court to a contract between husband and wife?

Answer:
The Court will presume that there is NO intention to create legal relations

What doctrine in law is illustrated by the case Central London Property Trust v High Trees House?

Answer:
The doctrine of promissory estoppel

With reference to the doctrine of promissory estoppel, complete the following: “When a promise is given and acted upon, then **********”

Answer:

When a promise is given and acted upon, then “the promissor cannot subsequently go back on that promise to the detriment of the promissee”

What is “executory consideration”?

Answer:
It’s consideration which is still to be delivered

How may terms be implied into a contract?

Answer:
By statute, by the Courts or by custom

What’s the main difference between a term which is a condition and a term which is a warranty?

Answer:
A condition, when breached, means the contract can be treated as ended.
A breach of warranty, means the contract still exists

What’s an innominate term?

Answer:
It’s a term which could be a condition or it could be a warranty. But we don’t know until it’s broken

What’s an “onerous term” in a contract?

Answer:
It’s a term which involves one party in an unfair position in the event of breach

What are exclusion clauses used for?

Answer:
They are an attempt to restrict or completely eliminate one party’s liability for breach of contract

What is anticipatory breach?

Answer:
Anticipatory breach is where one party gives notice in advance that they will not go ahead with the contract

In any answer to an exam question concerning damages, two cases are always mentioned.  What are they?

Answer:
Hadley v Baxendale (remoteness) and Victoria Laundry v Newman Industries (measurement)

What is the main common law remedy for the innocent party in the event of breach of contract?

Answer:

Damages

Complete the following: “ ***** will always be awarded if ***** is sufficient”

Answer:
Damages will always be awarded if damages is sufficient

What are liquidated damages?

Answer:
Liquidated damages
are a genuine pre-contractual estimate of damages
which would be suffered in the event of a breach and the amount is written as a term of the contract

What is the translation of “quantum meruit”?

Answer:
“For as much as it’s worth”

What sort of remedy is “specific performance”?

Answer:
Specific performance is an equitable remedy

What sort of remedy is “damages”?

Answer:
Damages is a common law remedy

What sort of remedy is “quantum meruit”?

Answer:
Quantum meruit is a common law remedy

What sort of remedy is “action of price”?

Answer:
Action for price is a common law remedy

What sort of remedy is “injunction”?

Answer:
Injunction is an equitable remedy

What sort of remedy is “rescission”?

Answer:
Rescission is an equitable remedy

What sort of remedy is “rectification”?

Answer:
Rectification is an equitable remedy

Which remedy is the Court granting when the Court says (effectively!) “Just do it”?

Answer:

A Specific performance

What is a “Mareva injunction”

Answer:
Mareva injunction is a freezing order applied to the assets of a suspected wrong-doer

“Tort is an example of breach of contract”
Is this statement true?

Answer:
It’s false – tort is NOT a breach of contract

Assault, battery and false imprisonment are all examples of which “wrong”?

Answer:
All three are examples of tort

So far as auditors are concerned, which tort is (unfortunately) most likely to affect them?

Answer:
The tort of negligence

In tort, to whom does a person owe a duty of care?

Answer:
A person owes a duty of care to one’s legal neighbours

In tort, who are your legal neighbours?

Answer:
Your legal neighbours are those people who are so directly affected by your acts that you should have had them in mind as likely to be affected when you committed those acts

What is the closest translation of “res ipsa loquitur”?

Answer:
“The thing speaks for itself”

What does the case Mahon v Osborne illustrate?

Answer:
A surgeon who leaves equipment inside the body of a patient is liable in negligence (res ipsa loquitur) unless they can prove non-negligence

What is the effect, in an action alleging tort, of novus actus interveniens?

Answer:
It is likely that the action would fail – the loss suffered was not entirely due to the original acts – something new intervened

“To he who is willing, there can be no harm”. How does that translate in the context of tort?

Answer:
Volenti non fit injuria

What principle is confirmed by the case Caparo v Dickman?

Answer:
A duty of care is owed to one’s neighbours

How would you briefly describe the defence of volenti non fit injuria?

Answer:
To he who is willing there can be no harm

“In a tort case the defence volenti non fit injuria merely requires knowledge of the risk”.
True Or false?

Answer:
It’s false.  For the defence to be successful it’s necessary to show that the injured party was a willing participant in the risky activity

“The duty of care owed by accountants is greater when advising on take-overs than when auditing”.
Is this statement true?

Answer:
It’s true as illustrated by the case Morgan Crucible v Hill Samuel Bank

In a “contract of service” is the contracted person an employee or is he an independent contractor

Answer:
the contracted person is an employee

In a “contract for services” is the contracted person an employee or is he an independent contractor?

Answer:
The contracted person is an independent contractor

To be classed as an independent contractor much depends on three tests. What are they?

Answer:
* control test
* integration test
* economic reality test

What is “constructive dismissal”?

Answer:
Constructive dismissal is where an employer changes the terms of employment of an employee to such a degree that the employee feels that they cannot continue in employment

What is summary dismissal?

Answer:
Summary dismissal is where an employer dismisses an employee without giving any notice

“Summary dismissal incurs the employer in no liability if ******” Complete the sentence

Answer:
A Summary dismissal incurs the employer in no liability if the employee has committed a serious breach of contract”

When an employee is dismissed in breach of contract and, as a result, they have suffered loss, this is classified as what type of dismissal?

Answer:
Wrongful dismissal

When an employee is dismissed not for a statutory reason nor for a fair reason, this would be classified as what type of dismissal?

Answer:
Unfair dismissal

Is summary dismissal ever justified?

Answer:
Yes, in cases of serious breach of contract by the employee

If an employee is a threat to national security, would their dismissal be classed as automatically fair?

Answer:
Yes

“Participation in an unofficial industrial action is not an automatically fair reason for dismissal”.
Is that statement true?

Answer:
No, participation in an unofficial industrial action IS an automatically fair reason for dismissal

Which is the most common remedy awarded for unfair dismissal?

Answer:
Compensation, because in most cases the working relationship would have been irrevocably damaged

Is it true that an agency arrangement may be deemed by the Court to exist, even though the supposed principal and the supposed agent have never met nor know of each other’s existence

Answer:
Yes, for example where a person acts and is deemed to be an agent of necessity

Where a person has, historically, been allowed to act as though they were a Chief Executive Officer, the other directors would be ****** from denying that title.  Complete the gap

Answer:
“estopped”

Where a person has, historically, been allowed to act as though they were a Chief Executive Officer, the other directors would be estopped from denying that title.
Is this true?

Answer:
Yes, it is true

What’s another word commonly used to express “apparent” as in “apparent authority”?

Answer:
Ostensible

The case Watteau v Fenwick illustrates what point in agency law?

Answer:
The principle of apparent authority

“In some circumstances a principal may ratify the acts of an agent retrospectively”.
Is this statement true?

Answer:
Yes, it is true

In company law, when the Chief Executive Officer dies, the company ceases to exist until a replacement CEO is appointed.
Is this statement true?

Answer:
No!

“When a partner in a traditional partnership dies, the partnership is automatically ended”.
Is this statement always true?

Answer:
Yes, it is always true.
The surviving partners can start a new partnership with immediate effect but the original partnership ceases on the death of a partner.

“Under the Limited Partnerships Act of 1907, the death of a limited partner does not bring about the end of the partnership”
Is this statement true?

Answer:
Yes.  Neither notice, death nor bankruptcy of the limited partner has the effect of dissolving the partnership.

Is it possible that a partnership may be deemed by the Court to exist even though the two people involved have never spoken to each other?

Answer:
Yes, the Court may deem that a partnership by conduct exists where two people carry on a business in common and satisfy the definition of a partnership

Complete the following: “A partnership is the ***** which subsists between **** or more people ******  *** business in common with a view to *****”

Answer:
“A partnership is the relationship which subsists between two or more people carrying on business in common with a view to profit”

Is a joint venture arrangement classed as a partnership?

Answer:
Yes, a joint venture is defined as “a partnership formed for a specific purpose, course of trade or voyage”

Is that statement true?

Answer:
No. The acts of a partner done in the course of the firm’s business bind the firm and the partners

Is it necessary for a firm registered under the Limited Liability Partnerships Act 2000 to have an annual audit?

Answer:
Yes, it’s part of the “price payable” for the benefit of limited liability

“Insanity of a partner is an automatic ground for the dissolution of a partnership”. Is this statement true?

Answer:
No.  Insanity as a ground for dissolution is a matter for the Court to decide. It’s not automatic

Is it always true that a company exists from the date which is shown on the certificate of incorporation?

Answer:
Yes, the date on the certificate is conclusive proof that the company exists from that date – Jubilee Cotton Mills v Lewes

Is it always true that once a company has been incorporated it has a separate legal identity?

Answer:
Yes, it is always true

Is it always true that as soon as a company has been incorporated it may commence trading?

Answer:
No. Following incorporation, a public company must obtain a trading certificate before it may commence trading

“Where a public company enters a trading contract before it has obtained a trading certificate, the contract is void”.
Is that statement true?

Answer:
No, it is not true.  An “innocent” third party can enforce the contract against the company.

What does the abbreviation “plc” stand for?

Answer:
“plc” is the abbreviation for “public limited company”

What does the abbreviation “ltd” stand for?

Answer:
“ltd” is the abbreviation for “limited” and indicates that the company is a private company

What does the abbreviation “llp” stand for?

Answer:
“llp” is the abbreviation for “limited liability partnership”

There are three ways of incorporating a company. By “Royal charter” and by “statute” are two.
What is the third way?

Answer:
By registration

There are three ways of incorporating a company. By “registration” and by “statute” are two.
What is the third way?

Answer:
By Royal charter

There are three ways of incorporating a company. By “Royal charter” and by “registration” are two.
What is the third way?

Answer:
By statute

In which two ways may a member’s liability be limited?

Answer:
By guarantee and by shares

What is the limit of a member’s liability in a company limited by shares?

Answer:
A member’s liability in a company limited by shares is limited to the amount, if any, as yet unpaid on shares held by the member

“One of the limited uses of the share premium account is to finance the issue of partly paid bonus shares to existing members”.
Is that statement true?

Answer:
No. One of the uses is to finance the issue of FULLY PAID bonus shares to existing members

Is there such a beast as an unlimited company?

Answer:
Yes – but Heaven knows why!

The case Salomon v Salomon & Co Ltd confirmed conclusively a basic principle of company law.
What was that principle?

Answer:
The concept that a company is a separate legal entity, distinct from its owners and from those who manage its affairs

In very rare cases the Courts are prepared to look to see who are the actual beneficial owners of a company.  This is called “Lifting *** ****”
Complete the sentence

Answer:
Lifting the veil

The case Gilford Motor Company v Horne is a case illustrating which principle?

Answer:
In a situation where the strict application of the concept of the veil of incorporation would lead to an injustice, the Court is prepared to lift the veil

The case DHN v Tower Hamlets is a case illustrating which principle?

Answer:
In a situation where the strict application of the concept of the veil of incorporation would lead to an injustice, the Court is prepared to lift the veil

In a case where the plaintiff is referred to as “R”, who is “R”? (eg R v Clark)

Answer:
“R” is the Monarch of the United Kingdom

Is it possible for a member to have their liability increased even in a limited liability company?

Answer:
Yes, in a number of situations including if they give their written consent.

Define “promoter”

Answer:
A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose

“The duties owed by a promoter are collectively known as ***** duties”
Complete the sentence

Answer:
The duties owed by a promoter are collectively known as fiduciary duties

The duty to act with reasonable skill and care is an example of what type of duty?

Answer:
The duty to act with reasonable skill and care is an example of a fiduciary duty

If a promoter enters into a contract on behalf of company which has not yet received its certificate of incorporation, is the company liable or, in fact, is anyone liable?

Answer:
The promoter is liable personally – the company doesn’t exist and therefore has no liability

What matters must be disclosed in an “Application for registration” of a new company?

Answer:
Proposed name, country of domicile of registered office, liability of members, company status (plc or ltd) , postal address of registered office

“The date on the certificate of incorporation is ***** proof that that was the date the company was created”.
Complete the sentence

Answer:
The date on the certificate of incorporation is conclusive proof that that was the date the company was created

“A company’s Register of Members must be kept at the company’s registered office”
Is this statement always true?

Answer:
No, not true.  A company may keep its register of members at the offices of the company’s registrars

A Register of Directors shall contain what information relating to the directors?

Answer:
Present and former names, address (ideally home address), nationality, business occupation, date of birth

The constitution of a company is the combination of three elements.
What are those elements?

Answer:
The articles of association,  resolutions which affect the articles and any agreements which affect the articles

What is meant by the term “Articles of Association” of a company?

Answer:
The Articles of Association consist of the internal rules that relate to the management and administration of the company

What sort of resolution  is required to alter the Articles?

Answer:
A special resolution is required to effect an alteration to the Articles of a company

What majority voting in favour is required to pass a special resolution?

Answer:
A majority of not less than 75% of votes in favour is required to pass a special resolution

In a company with 1,000 members, what is the MINIMUM number of members who must vote in favour in order to pass a special resolution?

Answer:
No! Just one! I didn’t say that everyone voted!

In a company with 1,000 members, what is the MINIMUM number of members who must vote in favour in order to pass a special resolution and all members vote?

Answer:
No! Just one! I didn’t say that everyone had the same number of votes!

In a company with 1,000 members, what is the MINIMUM number of members who must vote in favour in order to pass a special resolution, everyone votes and all members have the same number of votes?

Answer:
750 members must vote in favour

There is a limitation on the alterability of a company’s articles. They may only be altered if the alteration can be shown to be for the ***** of the company as a *****. Complete the sentence

Answer:
They may only be altered if the alteration can be shown to be for the benefit of the company as a whole

“An alteration to the Articles allowing a majority to acquire compulsorily the shares of a minority has been shown not to be for the benefit of the company as a whole”. Is this statement true?

Answer:
Yes, as illustrated by the case Dafen Tinplate v Llanelli Steel

“At the time someone becomes a member of a company, it is as though they have entered a contract with **** and with ****”. Complete the sentence

Answer:
“At the time someone becomes a member of a company, it is as though they have entered a contract with the company and with all the other members individually”

What sort of resolution is required if a company wishes to change the company name?

Answer:
A special resolution is required if a company wishes to change the company name

What is meant by the expression “passing off” in the context of company law?

Answer:
“passing off” is where a company is established with a name similar to an existing company name and in a similar business such that confusion is likely to result.

Within how many days must a copy of a special resolution be filed with the Registrar of Companies after being passed at a general meeting of a company?

Answer:
Within 15 days

“A person becomes a member of a company when their name appears in the Register of Members”
Is this statement true?

Answer:
Yes, a person becomes a member of a company when their name appears in the Register of Members

“A person becomes a member of a company when they have successfully bought shares in the company”
Is that statement true?

Answer:
No, a person becomes a member of a company when their name appears in the Register of Members

“If a person’s name appears in a Register of Members, this indicates that they are a shareholder of the company”
Is this statement true?

Answer:
No, if a person’s name appears in a Register of Members, this indicates that they are a member of the company, but not necessarily a shareholder

What is a quorum?

Answer:
A quorum is the minimum number of members necessary to be present at a general meeting of a company if resolutions are to be validly passed

Where is the detail of quorum size specified?

Answer:
 The detail of quorum size is specified in a company’s Articles

What does the word “proxy” mean in the expression “present in person or by proxy”?

Answer:
A proxy is appointed by a member to represent the member at a general meeting where the member is unable to attend

“A proxy appointed by a member of a company to represent the member’s wishes must be also a member of the company”
It this statement true?

Answer:
No, it is not necessary that a proxy be a member of the company

What is the minimum number of members required in a public company?

Answer:
1 is the minimum number of members required in a public company

What is the minimum number of members required in a private company?

Answer:
1 is the minimum number of members required in a private company

What is the minimum number of directors required in a public company?

Answer:
2 is the minimum number of directors required in a public company

What is the minimum number of directors required in a private company?

Answer:
1 is the minimum number of directors required in a private company

“A public company must have an appropriately qualified company secretary”
Is this statement true?

Answer:
Yes, a public company must have an appropriately qualified company secretary

“If a private company wishes to have a company secretary, the person appointed must be appropriately qualified”
Is this statement true?

Answer:
No, it is not true, no qualifications are necessary for a person to be appointed as a private company secretary

“Called-up capital and paid-up capital are two ways of saying the same thing”
Is this statement true?

Answer:
No, called-up capital and paid-up capital are not the same thing

A preference share has that name because of its preferential entitlements over equity shares.
One preference is that it shall receive its dividend before any equity dividend is paid.
What is the other?

Answer:
In the event of a liquidation, preference shareholders shall be repaid their capital, in full, before the equity shareholders receive a single cent in repayment of their capital

If pre-tax profit is $40,000, post-tax profit is $36,000, and there are 10,000 50 cent 6% preference shares in issue, how much is the preference share dividend for the year?

Answer:
$300 ie 6% * 10,000 * .50

For the purposes of the F4 examination, it is important to know the difference between “loan stock” and  “debentures”.
Is this statement true?

Answer:
No, it is NOT necessary to be able to differentiate between loan stock and debentures in the F4 examination

A debenture may be secured by way of a fixed charge.
What characterises a fixed charge as compared with a floating charge?

Answer:
A fixed charge attaches to an individual asset whereby the borrower is not able freely to deal with that asset

A debenture may be secured by way of a floating charge.
What characterises a floating charge as compared with a fixed charge?

Answer:
A floating charge does not attach to an individual asset but rather to a class of assets including current assets. The borrower is able freely to deal with the assets subject to the charge

“At a general meeting of the company, the debenture holders’ votes are counted before those of the equity shareholders”
Is this statement true?

Answer:
No, this is not true. At a general meeting of the company, the debenture holders have no votes – they are creditors, not members

“On a liquidation, the floating charge debenture holders are paid in priority to all others. Their claim “floats” to the top of those people who are owed by the company”
Is this statement true?

Answer:
No, on a liquidation, the FIXED charge debenture holders are paid in priority to all others.

“On a liquidation, all debenture holders are paid in priority to the members.”
Is this statement true?

Answer:
Yes, on a liquidation, all debenture holders are paid in priority to all the members

“In the event that there are two similar charges on the same asset, the charge which is registered first has priority over the one registered second”
Is this statement true?

Answer:
No, the statement is not true.  The one with priority is the charge which was created first, not necessarily the one which was registered first

To be valid, a charge must be registered with the Registrar of Companies within how many days of its creation?

Answer:
 To be valid, a charge must be registered with the Registrar of Companies within 21 days of its creation

In order that a company may reduce its share capital, it requires three authorities.  What are they?

Answer:
 In order that a company may reduce its share capital, it requires permission within the Articles, a special resolution and permission of the Court

In order that a company may reduce its share capital it requires permission within the Articles and permission from the Court.  It also needs a third authority.
What is it?

Answer:
 In order that a company may reduce its share capital, it requires not only permission within the Articles and permission of the Court. It also requires a special resolution to be passed

In order that a company may reduce its share capital it requires permission within the Articles and a special resolution.  It also needs a third authority.
What is it?

Answer:
 In order that a company may reduce its share capital it requires permission within the Articles, a special resolution and also permission of the Court

“In every situation when a public company issues shares for an amount lower than their face value, the company shall first of all get the permission of the Court”
Is this statement true?

Answer:
No!  In no situation is a public company allowed to issue shares for an amount less than their face value

“In the context of shares in a company, the expressions “face value”, “par value” and “nominal value” mean the same.”
Is this statement true?

Answer:
Yes, “face value”, “par value” and “nominal value” do have the same meaning

“The entry to balance the cash received on the event of a bonus issue of shares is to a combination of the share capital account and the share premium account”
Is this statement true?

Answer:
No, it is not true!  There is no cash received on the event of a bonus issue!

“The entry to balance the cash received on the event of a rights issue of shares is to a combination of the share capital account and the share premium account”
Is this statement true?

Answer:
Yes, the share capital account will be credited with the nominal value of the new issue and the share premium account with the excess proceeds over nominal value

“To write off preliminary and formation expenses” is one of the few allowable uses of the share premium account.
Is this statement true?

Answer:
Yes, “to write off preliminary and formation expenses”  is one of the few allowable uses of the share premium account.

“To finance the issue of fully paid bonus shares to existing members” is one of the few allowable uses of the share premium account.
Is this statement true?

Answer:
Yes, “to finance the issue of fully paid bonus shares to existing members” is one of the few allowable uses of the share premium account.

“To provide for the dividend payable on the 6% redeemable preference shares is one of the few allowable uses of the share premium account.”
Is this statement true?

Answer:
No, the statement is not true.  Providing the finance for a dividend is NOT an allowable use of the share premium account

“A company may only make distributions out of ***   ***.  ***  *** are calculated as “***  ***  ***” less “***  ***  ***”
Complete the sentences

Answer:
A company may only make distributions out of

distributable profits

.

Distributable profits

are calculated as “

accumulated realised profits

” less “

accumulated realised losses

”

There are two statutory capital undistributable reserves.
What are they?

Answer:
The Share Premium Account and the Capital Redemption Reserve

What are Neds?

Answer:

Non-executive directors

How is “corporate governance” defined?

Answer:
“Corporate governance” is a system whereby companies are directed and controlled

In a company which complies with the UK Corporate Governance Code, what is the minimum number of non-executive directors for a large public company?

Answer:
The minimum number of non-executive directors for a large UK public company complying with the UK Corporate Governance Code is “at least as many non-executives as executive and ideally not less than 3″

“In a company which complies with the UK Corporate Governance Code, it is in compliance when the role of Chair and that of Chief Executive are held by the same person”
Is this statement true?

Answer:
No, the UK Corporate Governance Code requires that the roles of Chair and Chief Executive be split between two individuals of comparably equal strength and charisma

What sort of resolution is required to be passed by a company in the event that a director should be removed from office?

Answer:
An ordinary resolution

An ordinary resolution requires what size of majority voting in favour?

Answer:
A simple majority – ie one more vote in favour than votes against

Special notice is sometimes required for what type of resolution in a company’s general meeting?

Answer:
An ordinary resolution sometimes requires special notice

“Special notice is required of an ordinary resolution in the event that a director is to be removed from office”
Is this statement true?

Answer:
Yes, special notice is required of an ordinary resolution to remove a director from office

“Special notice is required of an ordinary resolution in the event that an auditor is to be removed from office during their year of office”
Is this statement true?

Answer:
Yes, special notice is required of an ordinary resolution to remove an auditor from office during their year of office

“Whenever a company wishes to change auditors, they must pass an ordinary resolution with special notice”
Is this statement true?

Answer:
Yes, in every circumstance when a company wishes to change auditors the company must pass an ordinary resolution with special notice

If a firm of auditors wishes to resign, or not seek re-election, they must deliver to the company’s registered office a “statement of circumstances”
Is this statement true?

Answer:
No. If a firm of auditors wishes to resign, or not seek re-election, they must deliver to the company’s registered office either a “statement of circumstances” or a “statement of no circumstances”

When a director is proposed to be removed from office, the director has the right to prepare “written **** of *****  *****”
Complete the sentence

Answer:
When a director is proposed to be removed from office, the director has the right to prepare “written representations of reasonable length and not defamatory in nature”

At the first annual general meeting of a public company, what proportion of the directors must retire and (may) seek re-election

Answer:
 At the first annual general meeting of a public company, all the directors must retire and (may) seek re-election

A public company must hold its first annual general meeting no later than how many months after incorporation

Answer:
A public company must hold its first annual general meeting no later than 6 months after its first year end ie a maximum of 18 months after incorporation

Within how many months after incorporation must a private company hold its first annual general meeting?

Answer:
It is not a statutory requirement that private companies should have an annual general meeting

Is it allowable for a director who has recently declared herself to be bankrupt to continue in office as a director of a company?

Answer:
No, it is not allowable for a director who has recently declared herself to be bankrupt to continue in office as a director of a company

In company law, what does the abbreviation CDDA mean?

Answer:
In company law, the abbreviation CDDA stands for the Company Directors Disqualification Act

Is it true that directors have a statutory duty to avoid a conflict of interest?

Answer:
Yes, it is true that directors have a statutory duty to avoid a conflict of interest

“Directors should act with such degree of skill, care and diligence as could reasonably be expected from a person of that age, experience and qualification”
Is this statement true?

Answer:
Yes, directors should act with such degree of skill, care and diligence as could reasonably be expected from a person of that age, experience and qualification

In company law what is the literal translation of “ultra vires” in the context of directors’ actions

Answer:
“Ultra vires” literally translates as “beyond the powers”

Is it reasonable for a director to claim that she could not be expected to promote the interests of the company?

Answer:
No, it is a statutory duty of directors to promote the interests of the company

“Full disclosure of interests in contracts and transactions of a company should be made by directors to a sub-committee of the board at the earliest opportunity”
Is this statement true?

Answer:
No, full disclosure of interests in contracts and transactions of a company should be made by directors to the full board.  It is not enough to disclose only to a sub-committee

A public company must hold an annual general meeting every calendar year.
What other type of general meeting may a public company hold?

Answer:
A public company MAY hold general meetings which are not annual general meetings.  These are called “other general meetings”

“Where a private company wishes to appoint a company secretary, that appointee should, by law, be appropriately qualified”
Is this statement true?

Answer:
No, where a private company wishes to appoint a company secretary, it is not statutorily necessary that that appointee should have any qualifications. It could be your grand-mother!

“Anybody may be appointed as the auditor of a private company”
Is this statement true?

Answer:
No, if a private company wishes to have an auditor, that appointee shall be appropriately qualified

“It is the members’ right in a general meeting to determine the level of the auditors’ remuneration”
Is this statement true?

Answer:
Yes, but it is normal that the members will authorise the board to negotiate the level of the auditors’ remuneration

“In a private company, any resolution may be passed as a written resolution”
Is this statement true?

Answer:
No, a resolution to remove a director or an auditor cannot be passed as a written resolution but any other resolution may be.

Where a private company chooses to appoint a company secretary, is it possible for the sole director also to be the company secretary?

Answer:
No, where a private company chooses to appoint a company secretary, it is not possible for the sole director also to be the company secretary

What, by statutory definition, is a “shadow director”?

Answer:
A shadow director is defined as “a person in accordance with whose instructions the directors are accustomed to act”

Where the directors of a company always act upon the advice of their auditor, is it the case that the auditor would be classed as a shadow director?

Answer:
No, a person acting in a professional capacity (auditor, legal advisor, banker) shall not be classed as a shadow director

An annual general meeting requires a notice period of how many days?

Answer:
 An annual general meeting requires a notice period of 14 days

Is it possible to hold an annual general meeting of a public company with only 2 days’ notice?

Answer:
Yes, it is possible to hold an annual general meeting of a public company with only 2 days’ notice provided short notice has been approved by the holders of 100% of the votes

A special resolution requires how many days’ notice if it is to be validly passed?

Answer:
A special resolution requires 14 days’ notice if it is to be validly passed

Whose responsibility is it to call / convene a general meeting of the members of a company?

Answer:
It is the directors’  responsibility to call / convene a general meeting of the members of a company, but they normally delegate that duty to the company secretary

“A director who has reached the age of 70 is disqualified from continuing to hold office as a director of a public company”
Is this statement true?

Answer:
No, but the director must seek re-election every year after attaining the age of 70

“A director who has reached the age of 70 is disqualified from continuing to hold office as a director of a company”
Is this statement true?

Answer:
No, a director who has reached the age of 70 may continue to serve as a director of a company but, in the case of a public company, the director must seek re-election every year

“A director who has reached the age of 70 is disqualified from continuing to hold office as a director of a private company”
Is this statement true?

Answer:
No, there is no upper age limit applied to directors of private companies

In the case of A Large Company plc, how many members represent a quorum at a general meeting?

Answer:
 It’s whatever it says in the Articles

There are two types of voluntary liquidation.
What are the two types?

Answer:
A members’ voluntary liquidation and a creditors’ voluntary liquidation

If a members’ voluntary liquidation is a voluntary action of the members, a creditors’ voluntary liquidation is a voluntary act of which group of people

Answer:
The members! It’s called a creditors’ voluntary liquidation because the creditors are not likely going to be paid their debts in full

What is the essential and fundamental difference between a members’ voluntary liquidation and a creditors’ voluntary liquidation?

Answer:
In one word, SOLVENCY

Is it true that the Court may, on application, direct that a public company be liquidated where the company has failed to obtain a trading certificate within 12 months of incorporation?

Answer:
Yes, it is true.  It’s one of the six grounds for which the Court may make that compulsory liquidation order

What sort of resolution is required to be passed by the members to put their company into liquidation?

Answer:
A special resolution requiring a 75% majority voting in favour

Is it possible for the members of a private company to pass a written resolution to place their company into liquidation?

Answer:
Yes, provided a majority of 75% vote in favour, a private company can be put into liquidation by passing a written resolution

Which type of liquidation requires the directors to prepare a declaration of solvency?

Answer:
A members’ voluntary liquidation requires the directors to prepare a declaration of solvency

There are two main grounds under which the Court may grant a liquidation order. What are they?

Answer:
The Court may grant a liquidation order:

* on the grounds that it would be just and equitable
* on the grounds that the company is unable to pay its debts as they fall due

Re German Date Coffee Company is a case where the Court granted a liquidation order.
Why did the Court make that order?

Answer:
The Court made the order on the grounds that it was just and equitable – the sub-stratum of the company no longer existed

What was the case when the Court granted a liquidation order on the grounds that there was deadlock on the board?

Answer:
The case when the Court granted a liquidation order on the grounds that there was deadlock on the board was re Yenidji Tobacco

In a relatively recent case, the Court granted a compulsory liquidation order on the grounds that the company was a “quasi-partnership”
What was that case?

Answer:
The case where the Court determined that the company was a “quasi-partnership” was Ebrahimi v Westbourne Galleries

Where does the Official Receiver fit into company law on liquidations?

Answer:
The Official Receiver will be appointed by the Court as Provisional Liquidator in the event of the Court granting a compulsory liquidation order

What is a Special Manager?

Answer:
Special Manager is a person appointed on application to the Court by the Official Receiver to take control of the company’s property during the liquidation process

Where a company is in financial difficulties, there may be a way other than liquidation by which a company could be rescued.
What is that process called?

Answer:
 A way other than liquidation by which a company could be rescued is called an Administration

A person who is to be appointed as liquidator must hold a specific qualification.
What is that qualification?

Answer:
A person who is to be appointed as liquidator must be a “qualified insolvency practitioner”

A person who is to be appointed as administrator must hold a specific qualification.
What is that qualification?

Answer:
A person who is to be appointed as administrator must be a “qualified insolvency practitioner”

“It is a requirement of the UK Corporate Governance Code that directors should be remunerated in part based on their performance”
Is this statement true?

Answer:
Yes,  it is a requirement of the UK Corporate Governance Code that part of the directors’  remuneration should be performance related

To which body of people does a whistle-blower turn in the event that the whistle-blower has concerns over alleged breaches of regulation / internal controls?

Answer:
A whistle-blower would refer their concerns over alleged breaches of regulation / internal controls to the Audit Committee

To what does the expression “comply or explain” refer within the UK Corporate Governance Code?

Answer:
 The expression “comply or explain” refers to public quoted companies which must state within the financial statements that they have complied with the Code or, if not, why not.

In an FTSE 350 company, for what period of time are directors appointed before they must seek re-election (if they wish to be re-elected!)?

Answer:
In an FTSE 350 company, all directors must retire each year and seek re-election (if they wish to be re-elected)

“Insider dealing is a civil offence and is punishable by a fine”
Is this statement true?

Answer:
No, insider dealing is a criminal offence and is punishable by a term in prison and / or fine

“It is an offence for a person who is an “insider” to use inside knowledge about a company and avoid buying shares in the company where they fear the price of the company’s shares will fall.”
Is this statement true?

Answer:
No, the offence of insider dealing refers to deals. It does not refer to non-dealing

“A person who receives inside knowledge about a company from a director and who deals and makes a profit is guilty of the criminal offence of insider dealing”
Is this statement true?

Answer:
It is true if the person knew (or should have known) that the informer was an insider.  If they didn’t know (or suspect) , then the person is not guilty of the offence

If an insider in possession of unpublished price-sensitive information sells shares and avoids a loss but claims that the sale was to raise money to repay a private debt, is he guilty?

Answer:
Probably not, if he can persuade the Court that the sale was for reasons other than the avoidance of a loss

What constitutes “unpublished price-sensitive information”?

Answer:
Unpublished price-sensitive information is information about a company which is not in the public domain but which, when published, is likely to have a material affect on the market price of the company’s securities

Is unpublished price-sensitive information which is greater than 6 months old really price-sensitive?

Answer:
No, the information should be less than 6 months old

If you were given investment advice by a director to “Get out of equities and invest in Government bonds”, would that qualify as passing on unpublished price- sensitive information?

Answer:
No, to be an offence, the information needs to be specific and not just general investment advice

Money laundering is a three step process. What are they?

Answer:

* Placement
* Integration
* Layering

There are three offences involved in the criminal offence of Money Laundering.
What are the three offences?

Answer:
The three offences in money laundering are:

* laundering
* failure to report
* tipping off

“The punishment for money laundering is a prison sentence of up to 14 years and / or a fine”
Is this statement true?

Answer:
Yes, the punishment for money laundering is a prison sentence of up to 14 years and / or a fine

What is meant by the expression “wrongful trading”?

Answer:
“Wrongful trading” is when directors allow the company to continue trading without there being a realistic prospect that it will be able to avoid an insolvent liquidation in the foreseeable future

What is meant by “fraudulent trading”?

Answer:
“Fraudulent trading” involves establishing a company with the intention of defrauding creditors

How much time should I spend planning each answer in the F4 law examination?

Answer:
Six and a half minutes to try and think of 10 correct, relevant, markable points

What happens if I fail properly to plan my answers in the exam?

Answer:
My answers will be disjointed and lack professionalism

What are the three main steps in the rational planning model?

Answer:
Strategic position
Strategic choice
Implementation (or strategy into action)

What is meant by logical incrementalism?

Answer:
The idea that planning is best done as a series of relatively small adjustments to past strategies rather than trying to plan radical leaps forward.

What is the performance hierarchy?

Answer:
The performance hierarchy:
* The organisation’s mission
* Strategic plans and objectives
* Tactical plans and objectives
* Operational plans and objectives

What are the differences between strategic control and operational control?

Answer:
Strategic control:
monitors the implementation of the organisation’s strategic plans
Operational control:
monitors the use of existing resources and progress towards existing plans. Will not alter strategic direction

Why do advocates of logical incrementalism think that is a better approach than more radical planning?

Answer:
Bounded rationality: we do not know (and cannot know) everything that is important to future plans so what is the point in making ambitious plans that rest on guesswork?
Additionally, managers do not have time to carefully evaluate all possible combinations of events.

What is freewheeling opportunism?

Answer:
The idea that planning can be inhibiting and that you are better grabbing opportunities as they arise.

List five advantages of strategic planning

Any five of:

* It forces you to look ahead
* Better coordination
* Better use of resources
* Targets to which all can work
* An opportunity to influence the future
* Holds out the promise of better times in the future after initial hard work

What are critical success factors?

Answer:
Critical success factors (CSFs):

Johnson, Scholes & Whittington:
‘Those product features that are particularly valued by a group of customers, and, therefore, where the organisation must excel to outperform the competition‘
or:
Where an organisation must perform well if it is to succeed.

What are four classifications of critical success factors?

Answer:
* Internal
* External
* Monitoring
* Building

What are monitoring and building critical success factors?

Answer:
Monitoring:
used to monitor current performance
Building:
concentrate on what must be achieved in the future

What is usually meant by SMART objectives?

Answer:
S = specific/stated
M = measurable
A = achievable, agreed, accepted
R = relevant (or realistic)
T = time-limited

What is gap analysis?

Answer:
Gap analysis is the difference between what the organisation’s current plans will achieve and what the organisation is required to achieve.

With regards to performance management, what are the special features of multinational companies?

Answer:
Process specialisation:
 eg concentrate labour in countries with low wage rates
Product specialisation:
 eg different national requirements and ‘tastes’
International trade issues: 
eg exchange rate fluctuations
Political sensitivities:
 eg particular countries may have particular political risks
Administrative issues:
 the transfer of profits

What are two potential advantages of freewheeling opportunism?

Answer:
Any two of:
* fast decisions;
* no time or money spent on planning;
* not committed to one course of action (flexibility).

What is a PESTEL analysis?

Answer:
An environmental analysis considering the influences of:

*
P
olitics,
*
E
conomics,
*
S
ocial trends,
*
T
echnological changes,
*
E
cological (environmental) concerns,
*
L
aws.

What are Porter’s five forces?

Answer:

* Rivalry/competition,
* Threat of new entrants,
* Supplier pressure,
* Buyer pressure,
* Threat of substitutes

Should Porter’s five forces theory be applied to all companies in the country, an industry, an individual company?

Answer:
Porter’s five forces should be applied to an industry to judge industry attractiveness

What is a mission statement and what are its main elements?

Answer:
The prime purpose of a mission statement is to set out the reason for the organisation’s existence.
The main sections are often taken to be: purpose, position (in the market), culture, ethics and values.

Draw and annotate Mendelow’s Matrix

What is a stakeholder?

Answer:
Any person or other organisation affected by an organisation.

Into what three categories can stakeholders be divided (not Mendelow’s classification)

Internal (such as employees),
Connected (such as customers,)
External (such as local people).

Why is stakeholder analysis important in strategic planning and performance management?

Answer:
Key player stakeholders can prevent strategies of which they do not approve. The hope is that any strategic plan keeps most of the people happy most of the time (and the key players happy all the time!)

What are the four stages of a typical product life cycle?

Answer:
* Development,
* Growth,
* Maturity,
* Decline.

What are the characteristics of the market that you would expect to see at the mature stage of a product life cycle?

Answer:
Fierce competition because the market is not growing. This leads to price pressure and the need to improve specifications to sell to an experienced set of customers. Weaker competitors often drop out and many combine (consolidation) to achieve the economies of scale needed. High profits should be possible for efficient producers (great scale, efficiency and well down the learning curve).

What are the two axes on a Boston Consulting Grid?

Answer:
Market growth rate and relative market share (market share/share of market leader)

What are four types of benchmarking?

Answer:
Internal
: for example, to previous periods or between different branches.
External
: to similar businesses or organisations. Can be competitive or non-competitive.
Functional
: to specific functions in other businesses such as cost per help-line call
Generic
: to different businesses and organisations.

What are the four quadrants of a BCG matrix and what market share and growth rates do they have?

Answer:
Problem child
(or question mark): high market growth rate, low market share.
Star
: high market growth rate, high market share.
Cash cow
: low market growth rate, high market share.
Dog
: low market growth rate, low market share.

What is the problem with a problem child product or division?

Answer:
BCG suggests that only companies with large market shares can survive in the long term so the company has to decide whether to withdraw or to invest to achieve a large market share.
Note that niche or focus companies can survive with what looks like a small market share.

In BCG terms, what is meant by a balanced portfolio of products?

Answer:
Some cash cows to generate lots of cash (but cash cows are heading towards market decline), and some problem children needing investment. The cash generated by the cash cows can be used to build the problem children into star products that will become the cash cows of the future.

What are the primary activities of the value chain?

Answer:
Inbound logistics,
Operations,
Outbound logistics,
Sales and marketing,
Service.

What are the support activities of the value chain?

Answer:
Firm infrastructure,
Human resource management,
Technology development,
Procurement

What are Porter’s three generic strategies?

Answer:
* Cost leadership
* Differentiation
* Focus.

What are the S’s in McKinsey’s 7S model?

Answer:
* Structure
* Systems
* Strategy
* Style
* Staff
* Skills
* Shared values

What are the potential benefits of budgeting?

Answer:
* Planning
* Co-ordination
* Control
* Authorising and delegating
* Evaluation of performance
* Communicating and motivating

What are the axes of Ansoff’s matrix?

Answer:
Products (existing and current);
Markets (existing and current)

What can a company do to increase its profits if it stays with existing products and existing markets?

Answer:
Market penetration,
Efficiency gains,
Withdrawal, consolidation.

In Ansoff’s matrix, what is moving to a new market with an existing product known as?

Answer:
Market development

In Ansoff’s matrix, what is selling a new product to an existing market known as?

Answer:
Product development

What are the two classes of diversification?

Answer:
Related and unrelated diversification.

What is meant by the terms ‘backward integration’ and ‘forward integration’?

Answer:
Backward integration is taking over (or setting up) a supplier;
Forward integration is taking over (or setting up) a customer or supply chain.

What is meant by the term ‘principal budget factor’?

Answer:
The principal budget factor limits the activity for the budget period. Normally this is the level of sales and therefore the sales budget is usually the first budget to be prepared – this then leads to the others. However, it could be (for example) a limit on the availability of raw materials that limits activity. In this case raw materials would be the principal budget factor, and this would be the first budget to be prepared.

What are fixed, flexed, flexible and rolling budgets?

Answer:
Fixed:
prepared at the expected level of activity
Flexed:
adjusted or scaled to that level of activity achieved.
Flexible:
prepared in advance at several levels of activity
Rolling:
always looking a set period ahead – typically one year.

What are incremental and zero based budgeting?

Answer:
Incremental
: last year’s budget updated for inflation and any other known changes.
ZBB
: critically consider each activity on its own merits and draw up the costs and benefits of the different ways of performing it (and indeed whether or not the activity should continue). Then decide on the most effective way of performing each activity.

What is activity based budgeting’?

Answer:
This is the application of the idea of Activity Based Costing to the process of budgeting, and as such has particular relevance to budgeting for fixed overheads. At the planning stage, attempts are made to identify which activities drive various overheads. Costs are spread over these cost drivers using whatever basis appears to be appropriate in the circumstances.

How difficult should it be to achieve budget targets?

Answer:
Targets can assist motivation and appraisal if they are set at the right level.
If they are too difficult then they will demotivate
If they are too easy then managers are less likely to strive for optimal performance
Ideally they should be slightly above the anticipated performance level

What are some of the characteristics of budgeting in a not-for-profit organisation?

Answer:

* the organisation may be prevented from borrowing funds or from budgeting for a deficit
* the organisation may not be allowed to transfer funds from one budget head to another
* the budgeting tends to be just for one financial year (i.e. short-term rather than long-term)
* incremental budgeting is the method most widely used

What are three criticisms of traditional budgeting?

Answer:
* It takes up a lot of management time
* However well the budget is prepared, it rapidly becomes out of date and therefore of less use
* It provides a framework for managers to work to and they are therefore less keen to consider innovations (that may mean overspending the budget in the short-term even if good for the long-term).

What are the necessary conditions for the learning effect to occur?

Answer:
* There’s a significant manual element in the task being considered.
* The task must be repetitive and fairly complex.
* Production must be at an early stage so that there is room for improvement.
* There must be consistency in the workforce.
* There must not be extensive breaks in production, or workers will ‘forget’ the skill.
* Workforce is motivated and want to improve.

What is the rule governing the operation of learning curves (Wright’s Law)?

Answer:
As cumulative output doubles, the cumulative average time per unit falls to a given percentage of the previous average time per unit.

What limits further learning in the learning curve effect?

Answer:
Practical reasons for the learning effect to cease are:

* When machine efficiency restricts any further improvement.
* A process cannot be speeded up (eg material solidifying)
* The workforce reaches its physical limits.
* If there is a ‘go-slow’ agreement among the workforce.
* Staff turnover

What is a span of control and how does it differ between tall narrow and wide flat structures?

Answer:
The span of control (SoC) is the number of people directly reporting to a manager.
In a tall narrow structure the SoC is low;
In a wide flat structure the SoC is large.

What is the name of the business structure which is organised as accounting, manufacturing, sales, IT etc?

Answer:
This is a functional structure as it organises the business by function (or department).

What are the main ways in which a business can be divisionalised?

Answer:
By market and by product

Describe what is meant by the term ‘matrix structure’?

Answer:
In a matrix structure, each employee has responsibilities to more than one superior.
Eg, in project management an engineer could be responsible to the project manager and to the engineering manager.

What is business process re-engineering?

Answer:
Business process reengineering involves re-thinking and radically re-designing of the way an Organisation’s processes operate. It is not simply attempting to improve the existing way of doing things, but starting almost with a blank piece of paper and designing how best to operate the business.

What are the three levels or categories of business process change?

Answer:
Automation, rationalisation and business process engineering.

What are five specific characteristics of service industries?

Answer:
* perishability
* intangibility
* simulaneity
* heterogeneity
* no transfer of ownership

It is sometimes said that information should comply with the acronym ‘ACCURATE’.

What, typically, do these letters stand for?

Answer:
A
ccurate,
C
omplete,
C
ost-beneficial,
U
nderstandable/user-targeted,
R
elevant,
A
daptable/authoritative,
T
imely,
E
asy to use.

In information systems what do MIS, DSS, EIS, ERP and ES refer to?

Answer:
MIS
= management information system
DSS
= decision support system
EIS
= executive information system
ERP
= enterprise resource planning
ES
= expert system

What is RFID?

Answer:
Radio frequency identification (RFID) is the use of a wireless non-contact system that uses radio-frequency communication to transfer data from a tag attached to an object, for the purposes of identification and tracking.

What is value analysis?

Answer:
Value analysis tries to reduce costs whilst still delivering the required standard of quality and reliability. The main distinction is between value added and non-value added activities. Value added activities add value to the customer’s perception of a product; non-value added activities do not add value in the eyes of the customer. Costs that do not add value to the product should be targeted for elimination.

What is the contingency approach to management?

Answer:
The contingency approach to management accounting is based on the idea that there is no universally appropriate accounting system applicable to all organisations in all circumstances.

What is the difference between ‘risk’ and ‘uncertainty’?

Answer:
Risk
exists where a decision maker has knowledge that several possible outcomes are possible – usually due to past experience. This past experience enables the decision maker to estimate the probability or the likely occurrence of each potential future outcome.
Uncertainty
exists where the future is unknown and where the decision maker has no past experience on which to base predictions.

What is meant by ‘risk preference’?

Answer:
Risk preference relates to attitude to risk.
A risk seeker will be interested in the best possible outcome, no matter how small the change that they may occur.
Someone who is risk neutral will be concerned with the most likely or ‘average’ outcome.
A risk avoider makes decisions on the basis of the worst possible outcomes that may occur.

Explain maximax, maximin and minimax regret

Answer:
These are attitudes to uncertainty.
Maximax
: an optimist who expects to get the best possible outcome.
Maximin
: a pessimist who expects poor outcomes and seeks to limit those.
Minimax regret
: someone who looks backwards and often wishes a different choice had been made. Decisions are made to so as to minimise possible regrets.

Explain feedback control

Feedback control is where the outputs of a process are measured and information is then provided regarding corrective action, after the outputs have been produced.

Explain feedforward control

Feedforward control is where a problem is identified and corrective action taken, before the problem occurs.

Explain negative and positive feedback

Answer:
Negative feedback
is where the control mechanism reduces any deviation from plans.
Positive feedback
seeks to increase a deviation form plan. Eg to ensure that sales increases are repeated

What are the four main categories for financial performance management?

Answer:
Profitability
– how well a company performs, given its asset base
Liquidity
– the short term financial position of the company
Gearing
– the long-term financial position of the company
Investors ratios
– how well investors will appraise the company

Financial performance measurement depends on comparison.
What are the main bases for comparison?

Answer:
* With previous years for the same company
* With other similar companies
* With industry averages
* Also, possibly, between branches or divisions of the same company

What is EBITDA?

Answer:
EBITDA stands for ‘earnings before interest, taxes, depreciation and amortisation’.

What are EBITDA’s strengths and weaknesses?

Answer:
Earnings before interest and tax: before interest to measure the profitability before any distributions to providers and capital, and before tax because tax is not under direct control of management. EBITDA additionally considers profit before depreciation and amortisation to approximate to cash flow, as depreciation and amortisation are non-cash expenses. A major criticism of EBITDA is that it fails to consider the amounts required for fixed asset replacement.

What is divisionalisation?

Answer:
Divisionalisation is where managers of business areas are given a degree of autonomy over decision making i.e. they are given the authority to make decision without reference to senior management. In effect they are allowed to run their part of the business almost as though it were their own company.

What is a cost centre, a profit centre and an investment centre?

Answer:
Cost centre:
manager is responsible for only costs
Profit centre:
manager is responsible for costs and revenues
Investment centre:
manager is responsible for costs, revenues and investmenr in non-current assets.

Define ‘return on investment’

Answer:
Return on investment (ROI) is defined as: controllable divisional profit expressed as a percentage of divisional investment.

Define ‘residual income’?

Answer:
Residual income (RI) is defined as: controllable divisional profit with a deduction of notional (or imputed) interest based on capital employed times cost of capital.

What are the main advantages and disadvantages of using ROI as a measure of divisional performance?

Answer:
Advantages:

* Can be used to compare divisions of different sizes.
* Acceptable/understandable
* Uses readily available accounting figures

Disadvantages:

* Can lead to dysfunctional decisions
* Profits can be manipulated

What are the main advantages and disadvantages of using RI as a measure of divisional performance?

Answer:
Advantages:

* Gives decisions goal congruent with group wishes
* Different rates of interest for divisions of different risks
* Uses readily available accounting figures
Disadvantages:

* Poor for comparing divisions of different sizes
* Profits can be manipulated
* Less intuitive to ROI

In the Economic Value Added approach, if profits after interest and tax are $10 million, interest is $2 million and the tax rate is 25%, what is NOPAT?

Answer:
Add back the interest after tax ie $1.5 million so NOPAT is $11.5 million

In the Economic Value Added approach, list five adjustments that are added back to profit after tax to give NOPAT?

Answer:
* Non-cash expenses
* Expenses such as R&D, training and advertising
* Provisions
* Book depreciation (replaced by economic depreciation)
* Goodwill written-off/amortised
* Interest on debt capital (after adjusting for tax relief)

What is deducted from NOPAT to give EVA?

Answer:
Capital employed x WACC. This is a notional charge for the use of capital

In respect of assessing performance, what did Fitzgerald and Moon suggest are the six dimensions that should be measured?

Answer:
* Financial performance
* Competitive performance
* Quality
* Flexibility
* Resource utilisation
* Innovation

In respect of assessing performance, what did Fitzgerald and Moon suggest are the three building blocks?

Answer:
* Dimensions
* Standards
* Rewards

In respect of assessing performance, what did Fitzgerald and Moon suggest are the components of the building blocks of standards and rewards?

Answer:
Standards:
ownership, achievability, equity

Rewards:
clarity, motivation, controllability

What are the four perspectives of Kaplan and Norton’s balanced scorecard?

Answer:
(Present in the proper hierarchy.)
* Financial perspective
* Customer perspective
* Internal business perspective
* Innovation and learning perspective

What are the typical problems with performance measurement in the not-for profit sector?

Answer:
* Multiple objectives
* The difficulty of measuring outputs
* Financial constraints
* Political, social and legal considerations
* Little market competition and no profit motive.

What are the 3Es used in performance measurement in not-for profit organisations?

Answer:
* Effectiveness
* Efficiency
* Economy

What factors should be taken into account when comparing divisional performance?

Answer:
Many factors could be relevant. Here are some:

* Transfer prices
* Age of assets
* Types of business
* Location of business
* Ability of managers
* Controllability of costs, revenues and investment
* Allocation of head office charges

What are the three groups of variables that are used in Argenti’s A score for predicting corporate failure?

Answer:
* Defects
* Mistakes
* Symptoms

What factors are included under the heading of ‘Defects’ in Argenti’s A score?

Answer:
* Chief Executive is an autocrat
* Chief Executive is also the chairman
* Passive board of directors
* Lack of skills balance in the board
* Lack of management depth
* No budgets or budgetary controls
* No cash flow plans
* No costing system
* Poor response to change

What factors are included under the heading of ‘Mistakes’ in Argenti’s A score?

Answer:
* High gearing
* Overtrading
* Too much reliance on one big project

What factors are included under the heading of ‘Symptoms’ in Argenti’s A score?

Answer:
* Financial signs (such as the Z score)
* Creative Accounting
* Non-financial signs (e.g. low morale)
* Terminal signs

Name a quantitative and a qualitative model for predicting corporate failure

Quantitative:
Altman’s Z score
Qualitative:
Argenti’s A score

What are six potential problems with performance measurement systems?

Answer:
* Tunnel vision
* Sub-optimisation
* Myopia
* Measure fixation
* Misrepresentation
* Gaming
* Ossification

What are the costs associated with quality?

Answer:
Costs of conformance:

* Prevention
* Appraisal

Costs of non-conformance

* Internal failure costs
* External failure costs

In performance measurement systems what is the potential problem with “tunnel vision”

Tunnel vision:
Undue focus on performance measures to the detriment of other areas

Define total quality management

Answer:
Total quality management:
“the continuous improvement in quality, productivity and effectiveness obtained by establishing management responsibility for processes as well as outputs.
In this every process has an identified process owner and every person in an entity operates within a process and contributes to its improvement.”

In performance measurement systems what is the potential problem with “Sub-optimisation”

Sub-optimisation:
Undue focus on some objectives resulting in other objectives not being achieved

In performance measurement systems what is the potential problem with “Myopia”

Myopia
: Focussing on the short-term resulting in the ignoring of the long-term

In performance measurement systems what is the potential problem with “Measure fixation”

Measure fixation
: Behaviour and activities in order to achieve specific performance measures, that may not be effective

In performance measurement systems what is the potential problem with “Misrepresentation”?

Misrepresentation:
Using creative reporting to suggest that performance measures have been achieved

In performance measurement systems what is the potential problem with “Gaming”

Gaming
: Deliberate distortion of the measure in order to achieve some strategic advantage.

In performance measurement systems what is the potential problem with “Ossification”

Ossification
: The unwillingness to change a performance measure scheme once it has been set up.

What methodology is suggested by the six sigma approach for improving quality?

Answer:
DMAIC:
define, measure, analyse, implement, control

What are four potential approaches to environmental accounting?

Answer:
*
input / output analysis:
record material flows to discover what happens to the material
*
flow cost accounting:
concentrates more on where material losses are occurring within the business
*
environmental activity based costing:
to determine what drives/causes costs
*
life cycle costing:
all costs are taken into account over the product’s life- including costs such as waste disposal.

What is the target costing approach?

Answer:
* Identify what a product can be sold at (eg by comparing to competitors’ prices).
* Determine the margin required
* Work back to the maximum allowable cost
* Seek to reduce actual production costs to the maximum allowable cost

What additional factors need to be taken into account when international intra-company transfers are taking place?

Answer:
* Taxation in the different countries
* Import tariffs
* Exchange controls
* Exchange rates
* Anti-dumping legislation
* Competitive pressures
* Repatriation of funds

What is the ‘rule’ for sensible transfer pricing? For intra-group transfers to occur:

Answer:
Transferring out company:
transfer price must be no lower than marginal cost plus lost contribution of transferring internally
Transferring in company:
transfer price must be the lower of net marginal revenue and the outside buy in price.

What are three aims of a good transfer price?

Answer:
* Goal congruence
* Profit for each division (motivation)
* Autonomy for each division (head office specifies only the transfer price and then lets divisions make their own decisions.

What are three practical ways of setting a transfer price?

Answer:
Cost plus
Marginal cost
Market prices

List eight sources of external information for an organisation

Answer:
* Competitors’ and suppliers’ catalogues and web sites
* The internet (eg search engines such as Google)
* Newspapers, journals, television, radio
* Published accounts
* The stock exchange
* National and market surveys
* Government and industry statistics
* Discussion with customers
* Government publications
* Employees
* Banks

Describe what is meant by ‘annuity depreciation’?

Answer:
The sum of the annual interest charge on the book value of the asset and the annual depreciation is constant throughout the life of the asset. The total annual charge is calculated y dividing the cost of the asset by the appropriate cumulative discount rate.

What are the main differences between information for strategic decisions and information for operational decisions?

Answer:
Strategic:
often forward looking, highly summarised, often non-routine, estimates, external.
Operational:
historical, detailed and very accurate, routine, internal.

What is a data warehouse and data mining?

Answer:
A
data warehouse
is a vast collection of historic transaction data (eg, sales by a supermarket).
Data mining
is searching though that looking for patterns and associations that might be helpful in increasing profits.

Outcome I p = 0.3 Profit = 3000
Outcome II p = 0.7 Profit = 5000
Answer:

0.3 x 3000 + 0.7 x 5000 = 4400

Problems:

How are probabilities estimated
The expected value is usually not ‘expected’
Risk is not captured (eg a poor outcome of 3000 is quite possible in the above case)

Draw a single loop feedback system

Answer:

Draw Lynch and Cross’s performance pyramid

Answer:

Draw the performance prism

Answer:

What is product benchmarking?

Product benchmarking:
comparing specific products with those produced by competitors.

What is financial benchmarking?

Answer:
Financial benchmarking:
comparing financial performance with that of competitors.

What is strategic benchmarking?

Strategic benchmarking:
comparing with how other companies compete (not usually industry specific).

What is a sole trader?

Answer:

A sole trader is a business owned and operated by one person

What user groups are interested in a company’s financial statements?

Answer:

* Management
* Investors and potential investors
* Employees
* Lenders
* Government agencies
* Suppliers
* Customers
* Competitors
* The public

What does the Statement of Financial Position show?

Answer:

The assets, liabilities and capital of the business – the financial position of the business at one point in time.

What does the Statement of Profit or Loss show?

Answer:

The revenues, expenses and profit or loss of the business – the financial performance of the business over a period of time.

What is the definition of an asset?

Answer:

An asset is an item owned by the business.

What is the definition of a liability?

Answer:

A liability is an item owed by the business.

What is the definition of gross profit?

Answer:

The gross profit is the sales revenue less the cost of goods sold.

What is the separate entity concept?

Answer:

The business is treated as separate from its owners.

What is the definition of capital?

Answer:

Capital is the amount due to the owner(s) of the business.

What is the definition of drawings (or withdrawals)?

Answer:

Drawings is anything taken from the business by a sole trader, whatever he/she chooses to call it.

What are non-current liabilities?

Answer:

Non-current liabilities are liabilities payable more than 12 months after the reporting date.

What are current liabilities?

Answer:

Current liabilities are liabilities payable within 12 months of the reporting date.

What are current assets?

Answer:

Current assets are assets which are expected to be realised in the normal course of trading.

What are non-current assets?

Answer:

Non-current assets are assets acquired on a long-term basis, not held for resale in the normal course of trading.

What is the accounting equation?

Answer:

The increase in net assets = capital introduced + profit – drawings

What is meant by net assets?

Answer:

Net assets = total assets – total liabilities

Will an increase in an expense be a debit or a credit in the ledger account for the expense?

Answer:

An increase in an expense is a debit entry in the expense account.

Will an increase in an asset be a debit or a credit in the ledger account for the asset?

Answer:

An increase in an asset is a debit entry in the asset account.

Will drawings be a debit or a credit entry in the drawings account?

Answer:

Drawings will be a debit entry in the drawings account.

Will an increase in a liability be a debit of a credit in the ledger account for the liability?

Answer:

An increase in a liability will be a credit entry in the liability account.

Will an increase in income be a debit or a credit entry in the ledger account for the income?

Answer:

An increase in income will be a credit entry in the income account.

Will an increase in capital be a debit or a credit entry in the ledger account for capital?

Answer:

An increase in capital will be a credit entry in the capital account.

What is the double entry for the purchase of goods for resale on credit?

Answer:

Debit purchases
Credit payables

What is the double entry for the sale of goods on credit?

Answer:

Debit receivables
Credit sales

What is meant by an early settlement discount?

Answer:

An early settlement is a discount given if payment is made quickly.

What is the main purpose of a trial balance?

Answer:

A trial balance checks that for every debit entry made, there has been an equal credit entry.

Inventory is valued at the lower of ___ and ___?

Answer:

Inventory is valued at the lower of
cost
and
net realisable value (NRV)
.

In the context of inventory valuation, what is meant by net realisable value?

Answer:

Net realisable value is the expected selling price less any expected future costs there will be before sale.

What methods of calculating the cost of inventory are allowed by the accounting standard?

Answer:

FIFO (first in first out)
AVCO (average cost_
Unit cost (actual cost)

Is sales tax a form of direct or indirect taxation?

Answer:

Sales tax is a form of indirect taxation.

Is input sales tax the tax charged on purchases or the tax charged on sales?

Answer:

Input tax is the tax charged on purchases.

Is output sales tax the tax charged on purchases or the tax charged on sales?

Answer:

Output tax is the tax charged on sales.

Is the gross selling price the selling price including or excluding sales tax?

Answer:

The gross selling price is the selling price including sales tax.

Is the net selling price the selling price including or excluding sales tax?

Answer:

The net selling price is the selling price excluding sales tax.

What is meant by a prepaid expense?

Answer:

A prepaid expense occurs when some of the next years expense has been paid in the current year.

What is meant by accrued income?

Answer:

Accrued income is income for this year that has not been received by the year end.

What is meant by prepaid income?

Answer:

Prepaid income is income for the next year that has been received in the current year.

What is meant by an irrecoverable debt?

Answer:

An irrecoverable debt is an amount owing to the business that will not be received.

What is the purpose of the allowance for receivables?

Answer:

The allowance for receivables is made to recognise the possibility that some of the receivables might not be received (because they are doubtful).

What is an aged receivables analysis?

Answer:

An aged receivables analysis is a list showing how much each customer owes and how old their debts are.

What is the purpose of an aged receivables analysis?

Answer:

To help keep track of outstanding debts and follow up on any that are overdue.

What is meant by a credit limit?

Answer:

A credit limit is the maximum amount of credit that the business is prepared to allow to the customer.

What is meant by capital expenditure?

Answer:

Capital expenditure refers to the purchase of non-current assets and expenditure that enhances the asset (will appear on the Statement of Financial Position).

What is meant by revenue expenditure?

Answer:

Revenue expenditure refers to expenses of running the business (will appear on the Income Statement).

What is the difference between tangible and intangible non-current assets?

Answer:

Tangible assets can be touched (have a physical substance) e.g. machines, buildings, motor vehicles.
Intangible assets cannot be touched (do not have a physical substance) e.g. goodwill, development expenditure.

What is the non-current asset register?

Answer:

The non-current asset register is a record of the non-current assets held by the business. It is for internal control purposes and is not part of the double entry bookkeeping.

Do we depreciate the Land and Buildings category?

Answer:

Buildings will be depreciated because they have a limited useful life.
Land will not normally be depreciated because it has an unlimited life.

What is the straight-line method of depreciation?

Answer:

The depreciation charge is the same each year – the cost is spread over the expected useful life.

What is the purpose of depreciation?

Answer:

Depreciation is used to reflect the cost of using a non-current asset. It matches the cost of using the assets to the revenues generated by the asset over its useful life.

What is the reducing balance method of depreciation?

Answer:

A reducing amount of depreciation is charged each year (a fixed percentage of the net book value).

When using the straight-line method of depreciation, what is meant by the term residual value?

Answer:

The residual value of an asset is the estimated disposal value at the end of its useful life.

What is meant by a part-exchange agreement when a non-current asset is disposed of?

Answer:

A part-exchange agreement is where an old asset is provided in part payment for a new asset, the balance of the cost of the new asset being paid in cash.

What is a goods delivery note?

Answer:

A delivery note is provided by the supplier and lists the quantity and description of the goods being supplied.

What is a goods received note?

Answer:

A goods received note is prepared by the company receiving the goods, and lists the quantity and description of the goods being received.

What is the difference between a purchase invoice and a sales invoice?

Answer:

Both are prepared by the supplier of the goods or services and detail the amount of payment being requested. The supplier calls it a sales invoice, the customer calls it a purchase invoice.

What is a statement?

Answer:

A statement is prepared by the supplier and summarises the amount owing by the customer.

What is a credit note?

Answer:

A credit note is a ‚negative invoice‘ and is prepared by the supplier to cancel a previous invoice (or part of an invoice) because of goods having been returned or because of an overcharge on the invoice.

What is meant by a refund?

Answer:

A refund is a repayment of cash previously paid. It can occur for various reasons – e.g. the customer overpaid by mistake; the customer returned goods for which they had already paid.

What is recorded in the purchase day book (or purchases journal)?

Answer:

The purchase day book records all purchases made on credit.

What is recorded in the sales day book (or sales journal)?

Answer:

The sales day book records all sales made on credit.

What is recorded in the accounts receivable ledger (receivables ledger)?

Answer:

The accounts receivables ledger records the amounts owing by each individual customer.

What is recorded in the accounts payable ledger (payables ledger)?

Answer:

The accounts payables ledger records the amounts owing to each individual supplier.

What is the general (or nominal) ledger?

Answer:

The general ledger contains all the accounts necessary to produce the financial statements. The double entry is made between these accounts.

What is the receivables ledger control account?

Answer:

The receivables ledger account is an account in the general (nominal) ledger recording the total amount owing from customer.

What is the payables ledger control account?

Answer:

The payables ledger control account is an account in the general (nominal) ledger recording the total amount owing to suppliers.

What are we trying to achieve when we reconcile the receivables ledger control accounts with the receivables ledger?

Answer:

The balance on the receivables ledger control account should be the same as the total of all the balances on the individual accounts in the accounts receivables ledger. If they are not the same then there must be an error.

What is the purpose of a bank reconciliation?

Answer:

The bank reconciliation is done to check the accuracy of the entries in the cash book (and the accuracy of the bank statement).

What is an outstanding (unpresented) cheque?

Answer:

An outstanding cheque is one that has been entered in the cash book but has not yet appeared on the bank statement.