Solution Manual For Accounting An Introduction 6th Edition by Atrill

Solution Manual for Accounting An Introduction 6th Edition by Atrill
Complete downloadable file at:

https://testbanku.eu/Solution-Manual-for-Accounting-An-Introduction-6th-
Edition-by-Atrill
Chapter 1 – Introduction to finance and accounting
Discussion Questions – Easy

1.1 LO1 What is the purpose of producing accounting information?
The objective of providing accounting information is to enable users to make more informed
decisions and judgements about the organisation concerned.
1.2. LO2 Why is it important to have a partnership agreement specifying the arrangement for allocating
(dividing) profits between the partners?
Without a formal partnership agreement operating and administrative difficulties will
inevitably arise. The resolution of such difficulties without an agreement may well be costly
in time, financial performance and particularly inter-partnership relationships.
1.3 LO3 What type of accounting information is produced more frequently? Why?
Management accounting information is provided on an ‘as needed’ basis for managers.
Financial accounting reports, on the other hand, are prepared at less frequent, scheduled dates
(e.g. year-end, quarterly, monthly).
1.4. LO4 List three reasons for starting a business. Explain which reason is most important and why.
A business may be started for any number of reasons. To make a profit is probably the
primary goal for most. Other reasons may include to provide employment, to provide services
or materials to a parent company or to provide community services. Which goal is most
important will vary depending on the objectives of the business owner.
1.5 LO5 Which of the three major external financial reports might be best understood by a non-
accountant? Why did you select that report?
The statement of cash flows might be best understood by non-accountants as your average
person knows what is meant by cash inflow and outflow while they probably have lower
knowledge of the elements of the statement of financial position and the statement of
financial performance.
1.6. LO6 Distinguish between ‘accounting entities’ and ‘legal entities’ as business structures.
For accounting purposes it is assumed that the business is separate from the owner(s). The
business may be in the form of a sole proprietorship, partnership, company or other operating
structure. This assumption is essential to facilitate transaction recording and reporting in
relation to the business or operating activities of that entity.
Copyright ©2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd)– 9781486008797
/Atrill/Accounting: An Introduction/6th edition Page 1
Full file at https://testbanku.eu/
From the perspective of the law, most entity structures other than the company do not
represent separate legal entities. That is, from the perspective of the law, there is no
distinction between the business and the owners of the business. However, with the company
entity structure, the business is granted the status of a ‘legal person’ and the rights and
responsibilities that go with that status.
1.7 LO7 As business changes, accounting must change. Do you agree?

Given its goal of providing useful information it is crucial for accounting to change as
business changes. Financial accounting will change more slowly than management
accounting due to its regulated nature and the need for consistency and comparability.
1.8 LO8 ‘Understandability’ is identified in the text as a key characteristic of accounting information.
By whom should the financial reports be readily understood?
The Accounting Framework suggests the report users need to be both competent and diligent.
Therefore, it is not assumed that financial reports will be readily read and understood by the
lay readers, but rather that the readers will be proficient in accounting and finance (aptitude
and application).
1.9 LO3,4,6 Distinguish between ‘planning’ and ‘control’.
Planning is concerned with providing direction for future activity.

Control can be defined as compelling events to conform to the plan.
1.10. LO3,4,6 Within the business, how can accounting facilitate control?
One simple way that accounting can facilitate control is through a comparison of planned or
budgeted outcomes with actual results. Where variances occur managers can take actions to
get the business back on track.
1.11 LO3,4,6 How are annual budgets linked to the long-term plans of an organisation?
To achieve the long-term plans of an organisation, the management strategy would normally
be to break down that plan into incremental targets or achievement hurdles. These
incremental targets will normally be aligned with, or be labelled as the annual budget.
Budgets are normally expressed in quantitative terms, including monetary amounts (e.g. sales
dollars) and non-monetary measures (e.g. production efficiency percentage or the number of
units produced).
Discussion Questions – Intermediate

1.12. LO1 ‘Relevance’ and ‘reliability’ represent two key qualitative characteristics of accounting
information. What do these two terms mean in an accounting context? Are they in conflict?
Relevance relates fundamentally to ‘bearing upon’ the decision at hand in either a
confirmation or prediction capacity.
Reliability relates to ‘faithfully representing’ what it purports to represent, and is a link to the
dual ideas of objectively and neutrality.
The possible conflict relates to obtaining the appropriate balance between the two as
relevance is often inversely related to the passage of time, while reliability is positively
related to the passage of time.
1.13 LO2 As an owner of a small business, what are three key financial attributes of the business you
wish to assess when you review financial reports?
Liquidity, solvency and profitability.
1.14 LO3 Reconcile financial accounting with management accounting. Your textbook clearly
distinguishes between them. What are the similarities?
The link between management and financial accounting is in the actual statement of financial
performance and statement of financial position.
For management accounting the actuals are required to compare with budgets and standards
as part of the control function. For financial accounting the actuals are the substance of the
financial reports.
1.15 LO4 What is meant by the ‘risk–return relationship’? Provide a non-accounting example of the
trade-off between risk and return.
Projects or ventures that are less likely to succeed should provide higher returns. It is
acceptable for safe (likely to succeed) ventures to earn lower returns. A long shot bet at the
racetrack is unlikely to win but will pay off handsomely if you get lucky as compared to
betting on the favourite that has a good chance of winning but won’t pay back a great deal.
1.16 LO6 Describe two advantages for each type of business organisation.
Sole trader – easy and inexpensive to create
– owner maintains control of the business
Partnership – easy and inexpensive to create
– greater access to financing and skills
Limited company – limited liability
– unlimited life
1.17 LO7 In relation to recent corporate crashes, what have been the main lessons in relation to the
accounting process (recording and reporting procedures)?
Possible lessons from corporate crashes. A review of corporate crashes from the perspective
of accounting recording and reporting processes invariably highlights a similar list of issues:
Asset values are overstated. They should have been expensed in earlier years through
depreciation, amortisation, impairment, bad debts or other write-downs. More recently, it has
been the intangibles that have featured prominently in the overstated assets (e.g. goodwill,
rights, licences, development costs, patents, franchises, copyrights).
Liabilities understated. The use of off-balance sheet financing arrangements.
Liabilities misclassified as equity or as non-current when in fact they are current (e.g. leases
and preference shares).
Expenses understated or deferred. This is closely aligned with overstated assets and
understated liabilities.
Revenues are overstated or recognised too early (brought forward). Subsequently, the
revenues are not realised.
A cash crisis. Businesses are undercapitalised with too little equity and too much short-term
debt. They grow too quickly and the working capital management is at best ineffective.
1.18 LO8 What economic principle should determine what accounting information should be produced?
Should economics be the only issue here? (Consider who the users of accounting information
are.)
In order to be justified in producing a particular piece of accounting information, the person
authorising its production should be satisfied that the economic cost of providing it is less
than the economic benefit which will be derived from its production. This is to say that there
should be a net economic benefit of producing it. Otherwise it should not be produced.
1.19. LO5,6 Accounting is said to perform a ‘decision-usefulness role’ as well as an ‘accountability
(stewardship) role’. Distinguish between these two roles and provide an example of each.
Stewardship or accountability is traditionally identified with objectively tracking transactions

and events to ensure that they have been fully and appropriately accounted for. It would
include the use of historical cost and objectivity as underlying rationale, and focuses on asset
security and past transactions and events.
Decision-usefulness identifies the decision-making process and the relevance of financial

information to the decision. It would therefore tolerate greater use of estimates and future
projections.
1.20 LO6 Control in accounting is linked to timely comparison between actual and budget figures.
What are the implications of this relationship for:
(a) the budgeting process, and
(b) the financial reporting process?
The implications of ‘control in accounting being linked to timely comparison between actual
and budget figures’:
(a) For the budget process:

It is important to link control with responsibility. Someone in the organisation should be held
responsible for cost overruns and commended for cost reductions. Responsibility without
authority leads only to frustration and underperformance.
Also, the budget should be regularly updated to ensure that it is based on current data related
to production methods, cost structures, and regulatory requirements.
(b) For financial reporting:

Similarly, the financial reporting magnitude for comparison should only include those items
over which respective management have control.
The report should be prepared as soon as possible after the end of that period.
The reporting periods should be frequent.
The comparison should be made promptly and action seen to be taken immediately.
Discussion Questions – Challenging
1.21 LO1 Financial accounting statements tend to reflect past events. In view of this, how can they help
a user make a decision when decisions, by their very nature, can only be made about future
actions?
Since we can never be sure what is going to happen in the future, the best that we can do is to
make judgements on the basis of past experience. Thus information concerning flows of cash
and wealth in the recent past is likely to be a useful source on which to base judgements
about possible future outcomes.
1.22 LO 2,6 However a business is organised, it must meet the needs or demands of various stakeholders.
• What are the different types of business structure?
• What is meant by the term ‘stakeholder’?
• Who are the stakeholders for each type of business?
• What are their needs or demands, and why should they be met?
• Will stakeholder demands affect the choice of business structure?
• What are the different types of business structure?

Proprietorship, partnership, company
• What is meant by the term ‘stakeholder’?
The stakeholders of an organisation represent those individuals or groups that are affected by
the decisions of the organisation, or can have an influence on those decisions.
• Who are the stakeholders for each type of business?
The stakeholders involve a diverse group including owners, employees, suppliers, customers,
lenders, regulators, environmental activists, social welfare groups and other community
groups.
• What are their needs or demands and why should they be met?
– Demands for more effective and efficient management.
– Demands for more timely and transparent financial disclosures.
– Demands for better treatment of employees (remuneration, training,
working conditions, career path etc).
– Demands for enhanced contributions to the community in which they operate.
– Demands for compliance with existing regulations.
– Demands for improved environmental performance.
– Demands for improved products and services.
– Demands for lower costs and prices.
• Will stakeholder demands affect the choice of business structure?
Consideration of future stakeholder demands should be a fundamental issue in the choice of
business structure. The protection provided by the limited liability of the corporate form of
organisation is just one example. The loss of control is one of the downsides of a company
that should be taken into account before this type of structure is selected.
1.23 LO3 You have just graduated from university with an accounting degree and are about to start job-
hunting. You want to have a job that will allow you to use your creative streak. Discuss how
creativity will enhance or inhibit your performance as a financial accountant and as a
management accountant.
While there is some scope for ‘creative financial accounting’ you will find yourself restricted
to a large degree by the necessity to comply with financial accounting standards.
Management accounting provides a considerably larger scope for creativity by its future
oriented, unregulated nature.
1.24 LO4 The global financial crisis showed us that risk is bad. Do you agree?
The GFC showed us what can happen when risks are taken but it does not show that risk is
bad. It’s always necessary to consider the risk versus return trade-off and recognise that any
degree of risk has some potential for an unsatisfactory outcome.
Companies that are highly leveraged either from a borrowing or a fixed cost standpoint are in
a good position to take advantage of good economic times. The GFC showed us what
happens to such organisations when an economic downturn occurs.
1.25 LO5 ‘The statement of financial performance reflects the financial performance for the period and
explains the changes in the statement of financial position.’ Do you agree or disagree with
this statement? Why?
The statement of financial performance aims to communicate the financial performance or

financial progress of an entity for a given period of time (e.g. one year).
However, the extent to which it reflects financial performance will be determined by how
well the accounting rules for the recognition and measurement of income and expenses
facilitate this process, and also how effectively and faithfully they have been applied by the
entity.
The statement of financial performance will explain partially the change in the statement of
financial position for the period. That is, if there is undistributed profit for the period then we
would expect that the owners’ equity retained account (e.g. Retained Profits), will have
increased, and also that net assets (assets minus liabilities), will have increased.
However, the statement of financial performance will not explain all changes in the net assets
and owners’ equity of the entity for the period, and it will not explain the structure of those
changes.
There will be other transactions outside of the statement of financial performance that will
impact on the owners’ equity accounts and the net asset changes for the year.
Examples of such transactions would include:
– Contributions from, and distributions to, owners.
– Transfers to and from reserve accounts.
– Adjustments directly against retained profits rather than through the statement of
financial performance. These might relate to the introduction of a new accounting
standard with retrospective adjustment, and prior period error corrections.
1.26 LO7 It has been suggested that the global financial crisis might have been avoided if we used cash-
based accounting. Discuss.
While this suggestion has some merit it is unlikely that cash-based accounting would have
prevented the GFC. There is considerably more scope for the overstatement of assets and
understatement of liabilities with accrual accounting than there is with cash-based
accounting. However, the general consensus is that accrual accounting provides a better view
of the financial position and performance than that provided by cash accounting. The
statement of cash flows is provided to supply the information not provided by accrual
accounting.
1.27 LO8 Which financial information would be useful if you were running the sales department of a
large business? Can you think of any non-financial information that you might want to have?
As the sales department manager I will be interested in a wide range of financial information
such as current and past amounts of sales revenues, sales returns, sales discounts and
allowances, cost of sales (by products) as well as advertising and other marketing costs.
Non-financial information of interest would include customer complaints, employee
complaints and suggestions, employee absenteeism, repeat customer information and new
customer information.
Application Exercises – Easy
AE1.1 LO5 Identify the similarities and differences between the three major
external financial reports (statement of financial performance,
statement of financial position, statement of cash flows) by
completing the table below.
Financial report / Statement of Statement of

Income statement
aspect financial position cash flows
Nature
Basis of transaction
recognition
Related elements
(account types)
Focus
Financial Report / Statement of Statement of

Income Statement
Aspect financial position cash flows
Nature Flow report (for the Static report ( at the Flow report (for the
period) end of the period) period)
Basis of transaction Accrual Accrual Cash
recognition
Related elements Income and expenses Assets, liabilities and All elements
(Account types) owners’ equity
Focus The increment in The financial position The change in cash or
owners’ equity for or wealth at a point in cash equivalents for
the period from non-ownership time the period
transactions
Application Exercises – Intermediate

AE1.2 LO6 Complete the table below by providing two advantages for each of the three main types of
business organisation.
Type of business Advantage #1 Advantage #2

organisation
Sole trader
Partnership
Limited company
Type of business
Advantage #1 Advantage #2
organisation
Sole trader Easy and inexpensive to Owner maintains control of
create the business
Partnership Easy and inexpensive to Greater access to financing
create and skills
Limited company Limited liability Unlimited life
Case Study 1.1

Given below is an article which illustrates the importance of collecting and using good financial numbers.
Read the article and answer the questions that follow.
If you have the numbers, use them

A reluctance to do the necessary financial analysis leaves many businesses flying blind.
There is a great challenge facing business owners today—whatever they’re selling can usually be found
cheaper online. That’s the rule for the internet age. And while you offer something of value, your
prospective customers may be willing to pay shipping and handling if they can shave 20–30% off the asking
price. Just ask Harvey Norman, Dick Smith or Borders.
Business models are hard to change—and the tendency is to cut prices and costs to cope with this new
rule. And that raises another challenge. How do you take such action and avoid going under? This is a real
problem when many business owners don’t truly know how their operation is travelling day-to-day.
US author Michael Gerber, of The E-Myth fame, talks about ‘entrepreneurial seizure’, in which a business
owner falls victim to the ‘most disastrous assumption anyone can make’ about going into business, an
assumption made by all people who have some skills and who go into business for themselves. That ‘fatal
assumption’ (Gerber’s words) is that ‘if you understand the technical work of a business, you understand a
business that does that technical work. And the reason it’s fatal is that it just isn’t true.’
In fact, it’s the root of most small business failures. Most people aren’t highly literate in financial
management. Do you know the difference between cash and profit? Or direct and fixed costs? Or how to
manage your accountant? Surprisingly, many business owners say no to these questions. But without
financial management, they’re driving without a dashboard.
Wayne Burgan, founder and chief executive of Cashflow-manager.com.au. believes that in today’s
competitive climate many small and medium-sized businesses fail to scrutinise their financial statements and
reports. ‘They get the statements from their accountant and focus only on what they need to pay the tax
office,’ he says. ‘Few do any financial analysis. Most don’t particularly like or understand financial
management. They leave it to others.’ Burgan, a Certified Practising Accountant and a 20-year veteran of
helping business owners become better financial managers, says that getting SMBs to do any real financial
analysis, such as a debtor analysis, cashflow forecast or accounts receivable, is crucial.
Setting prices in a competitive framework requires analysis. Matching competitors’ prices may be
necessary, but discounting can be dangerous to an SMB’s financial health. ‘Some business owners discount
without fully appreciating the effect on profits,’ Burgan says. ‘For the average business a 10 per cent
discount would need something like a 30 per cent increase in volume to maintain profit levels.’
Pricing is very much a strategic financial issue. Exactly how much profit you want to make, and by when,
should show up in your overall strategic objectives. The message is to start looking at the numbers. If you
have a system that can produce timely and accurate financial statements, use them. The key reports are the
balance sheet, which delivers a picture of how well your investment in the business is performing; income
statements, which tell you the cost of doing business; gross margin and profits; and cashflow statements,
which forecast cash-crunch times.
Financial management is about looking at the history of actual sales, so you can accurately estimate
output and assess the differing sales of products and services. It’s about determining how much profit you’ll
make by selling X product at Y dollars.
Discounting may be one way to meet the competition, but if you can’t increase volumes, you might
consider trimming some fat, either in fixed costs, inventory or less profitable lines. ‘With financial analysis
you may find that some products or services are costing more to provide than you can ever recoup,’ Burgan
says.
Business owners will want to run different scenarios to determine the outcome of various price points for
a product or service. Not everyone will opt for a discounting solution. When a customer feels that the value
they’re receiving is worth more than the money they are exchanging for it, there’s no real competition.
‘You should be able to find a price that will work for both you and your customers. You need timely
information and a system to produce reports. Today, business needs to invoice quickly and have an efficient
collection method. You need to follow up.’
Source: Morris Kaplan, published in The Deal—the Australian business magazine, February 2012, Vol. 5,
No. 1, p. 32.
Questions
1. What is the main issue in running a business in the internet age?
2. What is likely to be the impact on profits of a business cutting prices to meet the competition?
3. Explain what is meant by ‘the most disastrous assumption anyone can make’.
4. Casual observation suggests that the life span of many cafés or similar businesses is very short. Yet
many are run by very good cooks and make good cups of coffee. Suggest why this phenomenon
might occur.
5. Do you know the difference between profit and cash? Explain.
6. Why might you choose to use an accountant to maintain a sound system of financial reporting if you
were to run a small business?
7. What kind of financial information might be useful to you in running a small business?
8. Explain what you understand by a debtors or accounts receivable analysis.
9. What kind of information would you need before you set a price for a product that you wish to sell?
10. Why does the article suggest that discounting can be dangerous to an SMB’s health?
11. Assume that you plan to sell a product for $10 that costs you $6. At that price you expect to be able
to sell 1,000 units. You are being pressurised to discount the price by 10%. How many units will you
need to be able to sell to obtain the same amount of profit (ignoring other costs)?
12. What is the main message of the article?
13. What ways were identified for ‘trimming the fat’?
14. What do you think might be meant by the term ‘scenario analysis’?
1. Competition, particularly in pricing.
2. Reduction.
3. The assumption is that ‘if you understand the technical work of a business, you understand a business that
does technical work’. This assumes that you understand what makes a business work, and how it needs to
be run. Technical knowledge will not provide this underlying ability and business knowledge.
4. Cafes are businesses that are easily entered into and easily left. Someone with limited knowledge can come
and go very easily. Even good cooks and coffee makers still require a basic understanding of business,
competition and numbers in order to survive and prosper. Many people enter this area because they can,
without much knowledge or financial capital, but without a sound understanding of the way business
operates the chances of survival are limited.
5. Profit represents the increase in wealth that has occurred over a particular period as a result of operating
and other activities. Wealth can be measured in a variety of ways, one form of which is cash. Cash
represents the actual amounts of cash held at a particular time. Flows of profits can be quite different to
flows of cash.
6. Because an accountant is a professional when it comes to account keeping. He or she is likely to be far
more efficient in recording and interpreting financial information than an ordinary business person.
7. Information relating to profitability, wealth and cash flows. Also general financial information relating to
the business and related businesses e.g. competitors.
8. An analysis of those records that relate to customers who have purchased items from you on credit. The
amounts outstanding, the age of the debts, the size and type of debts, are all things that you would probably
want to understand and analyse.
9. You would need to know what the product had cost you, the nature of the costs incurred, and the prices set
by competing businesses.
10. The costs of discounting can be very high, especially if it is not associated with considerable increases in
sales volume.
11. There is a profit per unit of $4. This will lead to a profit of $4,000. If price is dropped by 10%, to $9, profit
per unit drops to $3. In order to make a profit of $4,000 it is necessary to increase sales to $4,000/3 = 1,333
units, an increase of 33%.
12. The main message of the article is that understanding and using the numbers relating to your business is
vital to having a successful business.
13. Reducing fixed costs, reducing inventory levels and eliminating less profitable lines.
14. Scenario analysis is a technique used for planning whereby you analyse the possible future results using
different assumptions or scenarios.

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Discussion Questions – Easy

1.7 LO7 As business changes, accounting must change. Do you agree?

Planning is concerned with providing direction for future activity.

Discussion Questions – Intermediate

Stewardship or accountability is traditionally identified with objectively tracking transactions

Decision-usefulness identifies the decision-making process and the relevance of financial

(a) For the budget process:

(b) For financial reporting:

Discussion Questions – Challenging

• What are the different types of business structure?

The statement of financial performance aims to communicate the financial performance or

Financial report / Statement of Statement of

Financial Report / Statement of Statement of

Application Exercises – Intermediate

Type of business Advantage #1 Advantage #2

Limited company Limited liability Unlimited life

Case Study 1.1

If you have the numbers, use them

1. Competition, particularly in pricing.

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