Topics: Net present value, Generally Accepted Accounting Principles, Discounted cash flow Pages: 5 (1410 words) Published: October 13, 2014


1. If capital expenditure (on depreciable assets) is incorrectly treated as revenue expenditure, the total expenses in the year the error is made will be overstated√. This will mean that profit will be understated by the difference between the cost of the asset(s) purchased and the amount of depreciation which should have been charged√.

This will lead to net assets being understated√ by the same amount as profit. In the following year, profit will be overstated√ as the charge which should be made for depreciation will not be made, leading to an understatement of expenses. If the capital expenditure was in relation to assets which do not require being depreciated (e.g. land), the profit and net assets in the year the error is made will be understated by the cost of the asset(s). In the following year, the profit is unaffected as there will be no depreciation charge. (4 marks)

2. Three benefits of a budgeting system: (other reasonable benefits are acceptable)

Able to set targets, to give direction to operations, to anticipate problems and to be ready for changes Able to transmit information about plans to all affected by them and to receive feedback from subordinates Able to co-ordinate between different operations, departments, and individual plans so that the objectives of the company can be achieved (2 marks x 3 benefits= 6 marks)

3. Capital budgeting is a decision-making process of selecting and evaluating long term investment√. Non-discounted cash flow method means that the cash flows will not be discounted, that is, the present value concept is not applied√. Timing of the cash flows does not make any difference to the evaluation√. Discounted cash flow means that cash inflows and cash outflows will be discounted according to the time value of money concept√. Different timing of returns will give different values. Two examples: Non-discounted cash flow; Payback period and ARR√√

Discounted cash flows; NPV, IRR discounted payback and ROI√√. (8 marks)

4. Matching concept means that costs (expenses) incurred during the accounting period can be identified with its corresponding revenues. If an enterprise earns revenue in year 2010, all the costs incurred in year 2010 to generate revenue in that year will be matched. .(√√√) Accrual concept means that revenues are reported in any accounting period when they are earned and expenses are reported in any accounting period when they are incurred. They are not reported at the time the money is being received or the money is being paid. .(√√√) (6 marks)

5. The objective of general purpose financial statements is to provide information about the financial position, financial performance and the cash flows of an entity that is useful to a wide range of users in making economic decision. Financial statements are also show the results of management’s stewardship of the resources entrusted to it. (Other reasonable objectives are acceptable)

(4 marks)
6. Any THREE types of audit reports:
Type 1 – unqualified opinion – that the financial statements give a true and fair view in accordance with the applicable financial reporting framework. Type 2 – unqualified with emphasis of matters – by adding a paragraph to highlight a material matter regarding a going concern problem and a significant uncertainty

Type 3/4/5 -
Material but not pervasive
Material and pervasive
Limitation of scope
Qualified opinion
Disclaimer opinion
Disagreement with management
Qualified opinion
Adverse opinion
(Students are required to explain in further detail).
(2 marks x 3 types = 6 marks)

7. Balancing adjustments arise when a qualifying asset is disposed. Where the sale proceeds exceed the residual expenditure, the excess is balancing charge.(√√ ) In the event the sale proceeds is lower than the residual expenditure, the difference is a balancing allowance. (√√)

Example: (any reasonable example is acceptable)

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