Week 2 - Tutorial 1

Question 1

1. What are the three main financial statements?

Answer 1

• The statement of financial position
• The income statement
• The cash flow statement

Question 2

2. What are the two main components of the statement of financial position?

Answer 2

• Assets (consisting of non-current and current assets)

* Liabilities (consisting of owners’ equity, non-current liabilities and current liabilities)

Question 3

3. What is the main difference between financial and

management accounting?

Answer 3

• Financial accounting mainly deals with the provision of external information
• Management accounting mainly deals with the provision of internal information (e.g. budgeting and cost allocation)

Question 4

4. Name three types of business entity.

Answer 4

• Sole trader (both manages and owns the company)
• Partnership (an arrangement consisting of at least 2 people who both manage and own the company)
• Company (either a plc or Ltd. company)

Question 5

5. What is meant by limited liability?

Answer 5

• Limited liability means that the liability of the shareholder is only the amount they have paid for their shares
• They might not get this back if the company they have invested in gets into financial difficulties, but they will not have to pay anything else
• If a partnership or sole trader gets into financial difficulty, the people they owe money to can claim upon their personal assets
• There are some limited liability partnerships (e.g. the
big four accountancy firms)

Question 6

6. What is a major difference between a plc and a Ltd.

company?

Answer 6

• A plc offers shares to the general public, often following an IPO
• A Ltd. company only sells shares to people such as family and friends
• There are far more Ltd. companies (private limited companies) than plcs (public limited companies)

Question 7

7. Name some of the users of accounts and what accounting information they will be looking for.

Answer 7

• The users of accounts would include the following:
• Shareholders – financial performance (profit) and financial position (long-term outlook); i.e. looking to see how their investment has performed and see if it is worth holding onto it
• Managers – will use internal information and assess how different products/divisions/geographical regions are performing
• Financial advisers/analysts – looking at all
aspects of a company’s performance and
position in order to advise their clients
• Employees – is the company able to afford a
pay rise, what are the long-term prospects for
the company?
• Lenders – is the company able to pay back any
loans and interest? What other liabilities do
they have?
• Suppliers or trade creditors – can the company
pay for any supplies that have been purchased
on credit?
• Customers or trade debtors – will the company
be able to continue to supply us with products
or services?
• Competitors – benchmark against a rival
company’s performance or position. Does a
rival have any good ideas?
• Governments and their agencies – planning,
statistics, taxation and regulation. Will also
look at long-term prospects of company for
taxation and employment purposes
• General public – the company’s impact on the
local economy or on the environment. Do they
do anything for the local community (e.g.
sponsorship of events)?

Question 8

8. Who are classed as the owners of a company?

Answer 8

• The owners of a company are its shareholders.
• They do not get involved in the day to day running of the company unless they are a director/manager/employee who is also a shareholder
• They have certain rights, however voting is becoming increasingly rare – particularly in technology companies

Question 9

9. What are these owners looking for?

Answer 9

• The owners will be looking for a return on their
investment in two forms:
• A dividend (generally paid annually)
• The capital growth of their share (i.e. an increase
in the price of their share on the stock market)

Question 10

10. How do the UK and US differ in terms of the roles of the CEO and Chair in a listed company?

Answer 10

• In the UK the roles of the CEO and Chair should be
kept separate
• The CEO runs the company whilst the Chair runs
the board
• In the US the roles are often combined

Question 11

11. Name some of the features of an ideal board in a UK listed company.

Answer 11

• There should be a majority of non-executive
directors (NEDs)
• There should be diversity in terms of social aspects
(e.g. gender and ethnicity) and skills
• NEDs should not remain on a board for too long, as
they become less independent the longer they remain