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Solution for the first problem set for the financial accounting course : - Definition of the Accounting principles, transaction analysis, how to create a balance sheet and a profit and loss account.
Typology: Exercises
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Part 1 – Accounting Principles
Accounting Conservatism – When there are two ways to measure an asset or an expense, select the one that yields lower shareholders’ equity or lower reported income, respectively. Another way to express conservatism is - recognize expected losses immediately but not expected gains. The Matching principle – At the same time revenue is recognised, all related expenses must be matched and recognised as well. This rule ensures that income is unbiased and less volatile. The Balance Sheet Equation – Assets are equal to Liabilities plus Owners' Equity. That is, each asset is owned by creditors or shareholders. Accounting Consistency – The reporting entity should make all effort to use consistent methods and estimates over time in preparing financial statements. Changing accounting methods and estimates is allowed but only when economic conditions are changed. Accrual Accounting – The method of recording transactions in financial accounting. A transaction is recorded when it occurs and not necessarily when cash is exchanged. Verifiability – This is one of the underlying qualities of accounting information. Transactions are recorded when there is sufficient information to support it and when it is possible to objectively verify the accounting measures.
Part 2 - Transaction Analysis
Effect on net income
Reason
Part 3 - Transaction Analysis – Tal Corporation
Ignore the effect of taxes
Net Income Total Assets
Total Liabilities
Part 4 – MIF Co.
Reminder:
Cash Receivables O.B 10,000 1,000 Dividends O.B 20, (f) 280,000 60,000 (a) 280,000 (f) (e) 16,000 90,000 (b) (f) 283, 80,000 (c) C.B 23, 30,000 (e) 10,000 (i) 20,000 (j) C.B 15,
Raw material Inv. Work in Progress O.B 15,000 O.B 25, (a) 65,000 (a) 63, 63,000 (a) (b) 95, C.B 17,000 (h) 7,000 160,000 (b) C.B 30,
Finished Goods Inventory Fixed Assets- Cost O.B 30,000 O.B 60, (h) 160,000 20,000 (e) 155,000 (b)COGS 30, C.B 35,000 C.B 70,
Accumulating Depr. Factory Wages Payable 20,000 O.B 20,000 O.B (e) 4,000 (b) 90,000 95,000 (b) 9,000 (h)** 25,000 C.B 25,000 C.B
** 2,000 Sand A ; 7,000 Factory overhead
Part 5 - Electric Mousetrap Plc.
Profit and Loss Account
Sales 160, Cost of Sales (60,000)
Gross Profit 100, Distribution Costs (10,000) Administrative Expenses (20,000) Profit before Interest and Tax 70, Interest (5,000) Profit Before Tax 65, Tax (23,000) Profit After Tax 42,
Workings:
Sales = 8,000 x £20 = £160, Cost of Sales = £18,000 + (3 x £14,000) = £60, Interest = 10% x £50,000 = £5, Tax = 35% x £65,000 =£22,750 (£23,000 to nearest £’000) Dividend = 50% x £42,000 = £21,
Part 6 - Rocket Trading Ltd.
Workings:
£100,000 = Ordinary share capital = 2/3 x shareholders’ funds ⇒ Shareholders’ funds = £150,000 ⇒ Retained profits = Shareholders’ funds - ordinary share capital = £(150,000 - 100,000) = £50,000 ⇒ Trade payables = Retained profits = £50,000 ⇒ Fixed assets = 2 x Trade payables = 2 x £50,000 = £100,000 ⇒ Current assets = 3/2 x Fixed assets = 3/2 x £100,000 = £150, Inventory = £70,000 ⇒ Receivables = 1/2 x Inventory = 1/2 x £70,000 = £35,000 ⇒ Cash = Current assets - Inventory - Receivables = £150,000 - £70,000 - £35,000 = £45,
Bank loan = 1/3 x Current assets = 1/3 x £150,000 = £50,000 (£10,000 < 1 year, £40,000 > 1 year)
Balance Sheet
Plant and Machinery 100,
100,
CURRENT ASSETS Inventory 70, Receivables 35, Cash 45,
150,
CURRENT LIABILITIES Bank Loan 10, Trade payables 50,
60,
Bank Loan 40,
Ordinary Share Capital 100, Retained Profits 50,