Tutorial Questions: Topic 1: Introduction To Accounting
Tutorial Questions: Topic 1: Introduction To Accounting
Tutorial Questions: Topic 1: Introduction To Accounting
1. Identify the main users of accounting information for a university. Do these users, or
the way in which they use accounting information, differ very much from the users of
accounting information for private-sector businesses?
3. Financial accounting statements tend to reflect past events. In view of this, how can
they be of assistance to a user in making a decision when decisions, by their very
nature, can only be made about future actions?
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TOPIC 2: PREPARATION OF STATEMENT OF FINANCIAL POSITION
1. An accountant prepared a balance sheet for a business. In the balance sheet, the
capital of the owner was shown next to the liabilities. This confused the owner, who
argued: ‘My capital is my major asset and so should be shown as an asset on the
balance sheet.’ How would you explain this misunderstanding to the owner?
2. In recent years there have been attempts to place a value on the ‘human assets’ of a
business in order to derive a figure that can be included on the balance sheet. Do you
think humans should be treated as assets? Would ‘human assets’ meet the
conventional definition of an asset for inclusion on the balance sheet?
GHS
Inventories 45,000
Property 72,000
Required:
Prepare a balance sheet for the business
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4. On 1 March, Joe started a new business. During March he carried out the following
transactions:
1 March Deposited GHS20,000 in a bank account
2 March Bought fixtures and fittings for GHS6,000 cash, and inventories
GHS8,000 on credit
3 March Borrowed GHS5,000 from a relative and deposited it in the bank
4 March Bought a motor car for GHS7,000 cash and withdrew GHS200 in cash
for his own use
5 March A further motor car costing GHS9,000 was bought. The motor car
bought on 4 March was given in part exchange at a value of
GHS6,500. The balance of the purchase price for the new car was paid
in cash.
6 March Joe won GHS2,000 in a lottery and paid the amount into the business
bank account. He also repaid GHS1,000 of the loan.
Required:
Draw up the balance sheet for the business at the end of each day.
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5. The balance sheet of a business at the start of the week is as follows:
Assets GHS Claims GHS
Property 145,000 Capital 203,000
Furniture and fittings 63,000 Bank overdraft 43,000
Inventories 28,000 Trade payables 23,000
Trade receivables 33,000
269,000 269,000
During the week the following transactions take place:
a. Inventories sold for GHS11,000 cash; these inventories had cost GHS8,000.
b. Sold inventories for GHS23,000 on credit; these inventories had cost GHS17,000.
c. Received cash from trade receivables totalling GHS18,000.
d. The owners of the business introduced GHS100,000 of their own money, which
was placed in the business bank account.
e. The owners brought a motor van at GHS10,000 into the business.
f. Bought inventories on credit for GHS14,000.
g. Paid trade payables GHS13,000.
Required:
Show the balance sheet after all of these transactions have been reflected. Practice
Work
6. You have been talking to someone who has read a few chapters of an accounting text
some years ago. During your conversation the person made the following statements:
a. The income statement shows how much cash has come into and left the
business during the accounting period and the resulting balance at the end of
the period.
b. In order to be included in the balance sheet as an asset, an item needs to be
worth something in the market – that is all.
c. The balance sheet equation is: Assets + Capital = Liabilities
d. Non-current assets are things that cannot be moved.
e. Goodwill has an indefinite life and so should not be amortised.
Required:
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Comment critically on each of the above statements, going into as much details as you
can.
Q1. Maame Nyarko commenced business with GH¢20, 000,000 in her bank account (with Ecobank
Ghana Limited) and cash of GH¢ 40,000,000 on Jan 1, 2014. During her first month of operation, the
following transactions took place:
2014
Jan. 1 Bought a shop for GH¢ 4,000,000 and paid with a cheque.
Jan 16 Paid 3 assistants their wage of GHS 200,000 each with cash.
Jan 21 Cash sales GH¢ 25,000. Paid electricity bill of GHS 200,000 with cash.
Jan. 23 Paid half of amount owed to Kofi Atobora Manu with a cheque.
Jan. 25 Withdrew cash of GH¢ 2,000,000 from bank for business use.
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Jan 31. Withdrew GH¢ 4,000,000 cash and GH¢ 2,000,000 from the bank for personal
use. Paid all cash into bank except a balance of GH¢ 2,000,000.
Required:
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At the end of the year it was clear that a credit customer (trade receivable) who owed £400
would not be able to pay any part of the debt. All of the other trade payables were expected to
settle in full.
The business uses the straight-line method for depreciating non-current assets.
Required:
Prepare a statement of financial position as at 31 December 2009 and an income statement
for the year to that date.
QUESTION TWO
The following is the statement of financial position of TT and Co. (see question one) at the
end of its first year of trading:
Statement of financial position as at 31 December 2009
£
ASSETS
Non-current assets
Property, plant and equipment
Delivery van at cost 12,000
Depreciation (2,500)
Net Book Value 9,500
Current assets
Inventories 65,000
Trade receivables 19,600
Prepaid expenses* 5,300
Cash 750
90,650
Total assets 100,150
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Required:
Prepare a statement of financial position as at 31 December 2010 and an income statement
for the year to that date.
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QUESTION THREE
The following is the statement of financial position of WW Associates as at 31 December
2008:
Statement of financial position as at 31 December 2008
£
ASSETS
Non-current assets
Machinery 25,300
Current assets
Inventories 12,200
Trade receivables 21,300
Prepaid expenses (rates) 400
Cash 8,300
42,200
Total assets 67,500
EQUITY AND LIABILITIES
Equity
Original 25,000
Retained earnings 23,900
48,900
Current liabilities
Trade payables 16,900
Accrued expenses (wages) 1,700
18,600
Total equity and liabilities 67,500
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5. Wages totalling £23,800 were paid during the year. At the end of the year, the
business owed £860 of wages.
6. Electricity bills for the four quarters of the year were paid totalling £2,700.
7. Inventories totalling £143,000 were bought on credit.
8. Inventories totalling £12,000 were bought for cash.
9. Sales revenue on credit totalled £211,000 (cost £127,000).
10. Cash sales revenue totalled £42,000 (cost £25,000).
11. Receipts from trade receivables totalled £198,000.
12. Payments to trade payables totalled £156,000.
13. Van running expenses paid totalled £17,500.
The business uses the reducing-balance method of depreciation for non-current assets at the
rate of 30 per cent each year.
2
Required:
Prepare a statement of financial position as at 31 December 2009 and an income statement
for the year to that date.
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1. How does the liability of a limited company differ from the liability of a real person,
in respect of amounts owed to others?
2. Some people are about to form a company, as a vehicle through which to run a new
business.
What are the advantages to them of forming a private limited company rather than a
public one?
3. What is a reserve? Distinguish between a revenue reserve and a capital reserve.
4. What is a preference share? Compare the main features of a preference share with
those of
a) an ordinary share; and
b) loan notes
Q5.
Chips Limited
Income statement for the year ended 30 June 2010
£000
Revenue 1,850
Cost of sales (1,040)
Gross profit 810
Depreciation (220)
Other operating costs (375)
Operating profit 215
Interest payable (35)
Profit before taxation 180
Taxation (60)
Profit for the year 120
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Current assets
Inventories 950
Trade receivables 420
Cash at bank 16
1,386
Total assets 2,406
Required:
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Prepare a revised set of financial statements incorporating the additional information in 1 to 6
above. (Work to the nearest £1,000.)
Q6.
Rose Limited operates a small chain of retail shops that sell high-quality teas and coffees.
Approximately half of sales are on credit. Abbreviated and unaudited financial statements are
given below.
Rose Limited
Income statement for the year ended 31 March 2010
£000
Revenue 12,080
Cost of sales (6,282)
Gross profit 5,798
Labour costs (2,658)
Depreciation (625)
Other operating costs (1,003)
Operating profit 1,512
Interest payable (66)
Profit before taxation 1,446
Taxation (434)
Profit for the year 1,012
Current assets
Inventories 1,583
Trade receivables 996
Cash 26
2,605
Total assets 5,333
EQUITY AND LIABILITIES
Equity
Share capital (50p shares, fully paid) 750
Share premium 250
Retained earnings 1,468
2,468
Non-current liabilities
Borrowings – secured loan notes (2014) 300
Current liabilities
Trade payables 1,118
Other payables 417
Tax 434
Borrowings – overdraft 596
2,565
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Total equity and liabilities 5,333
Since the unaudited financial statements for Rose Limited were prepared, the following
information has become available:
Required:
Prepare revised financial statements for Rose Limited for the year ended 31 March 2010,
incorporating the information in 1 to 7 above. (Work to the nearest £1,000.)
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Required:
Prepare a statement of cash flows for the business for 2010.
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2. Chen Plc’s income statements for the years ended 31 December 2009 and 2010 and
the statements of financial position as at 31 December 2009 and 2010 are as follows:
Income statements for the years ended 31 December 2009 and 2010
2009 2010
£m £m
Revenue 207 153
Cost of sales (101) (76)
Gross profit 106 77
Distribution expenses (22) (20)
Administrative expenses (20) (28)
Operating profit 64 29
Interest payable (4) (4)
Profit before taxation 60 25
Taxation (16) (6)
Profit for the year 44 19
Required:
Prepare a statement of cash flows for the business for 2010.
INTRODUCTION TO ACCOUNTING
QUESTION ONE
The main users of financial information for a university and the way in which they are likely
to use this information may be summed up as follows:
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Other universities: How best to compete against the university. This might involve using and
colleges the university’s performance in various aspects as a ‘benchmark’ when evaluating
their own performance.
Government/funding: How efficient and effective the university is in undertaking its various
authority activities. Possible funding needs that the university may have.
Suppliers: Whether to continue to supply the university at all; also whether to supply on
credit. This would involve an assessment of the university’s ability to pay for any goods and
services supplied.
Lenders: Whether to lend money to the university and/or whether to require repayment of any
existing loans. To assess this, the university’s ability to meet its obligations to pay interest
and to repay the principal would be considered.
Board of governors: Whether the performance of the university requires improvement and
managers Performance to date would be compared with earlier plans or some other (faculty
deans and ‘benchmark’ to decide whether action needs to be taken. Whether there so on)
should be a change in the university’s future direction. In making such decisions,
management will need to look at the university’s ability to perform and at the opportunities
available to it.
We can see that the users of accounting information and their needs are similar to those of a
private-sector business.
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QUESTION TWO
In order to be justified in producing a particular piece of accounting information, strictly 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 having that information available.
This is to say that there should be a net economic benefit of producing it. Otherwise it should
not be produced.
There are obvious problems in determining what the value of the benefit is. There are also
likely to be difficulties in determining the amount of the cost. Thus, the judgement is not easy
to make.
Economics is not the only issue, particularly in the context of financial accounting.
Social and other factors may well be involved. It can be argued that society has a right to
certain information about a large business, even though the information may not have an
economic value to society.
QUESTION THREE
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 of wealth in the recent past is likely to be a useful source on which to base judgments
about possible future outcomes.
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a claim that the owner has on the business. In the standard layout of the statement of financial
position, this claim will be shown alongside other claims on the business from outsiders.
QUESTION TWO
Some object to the idea of humans being treated as assets for inclusion on the statement of
financial position. However, others argue that humans are often the most valuable resource of
a business and that placing a value on this resource will help bring to the attention of
managers the importance of nurturing and developing this ‘asset’. As the value of the ‘human
assets’ is not stated in the financial statements, there is a danger that managers will treat these
‘assets’ less favourably than other assets that are on the statement of financial position.
Humans are likely to meet the first criterion of an asset, that is, that a probable future benefit
exists. There would be little point in employing people if this were not the case. The second
criterion concerning exclusive right of control is more problematic.
Clearly a business cannot control humans in the same way as most other assets. However, a
business can have the exclusive right to the employment services that a person provides. This
distinction between control over the services provided and control over the person makes it
possible to argue that the second criterion can be met.
Humans normally sign a contract of employment with the business, and so the third criterion
is normally met. The difficulty, however, is with the fourth criterion, that is, whether the
value of humans (or their services) can be measured with any degree of reliability. To date,
none of the measurement methods proposed enjoy widespread acceptance.
Question One
It does not differ. In both cases they are required to meet their debts to the full extent that
there are assets available. This means that they both have a liability that is limited to the
extent of their assets. This is a particularly important fact for the shareholders of a limited
company because they know that those owed money by the company cannot demand that the
shareholders contribute additional funds to help meet debts. Thus the liability of the
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shareholders is limited to the amount that they have paid for their shares, or have agreed to
pay in the case of partially unpaid shares. This contrasts with the position of the owner or part
owner of an unincorporated (non-company) business. Here all of the individual’s assets could
be required to meet the unsatisfied liabilities of the business.
Thus, while there is a difference between the position of a shareholder (in a limited company)
and that of a sole proprietor or partner, there is no difference between the position of the
company itself and a sole proprietor or partner.
Question Two
A private limited company may place restrictions on the transfer of its shares, that is, the
directors can veto an attempt by a shareholder to sell his or her shares to another person to
whom the directors object. Thus, in effect, the majority can avoid having as a shareholder
someone that they would prefer not to have. A public company cannot do this.
A public limited company must have authorised share capital of at least £50,000. There is no
minimum for a private limited company.
Question Three
A reserve is that part of the equity (owners’ claim) of a company that is not share capital.
Reserves represent gains or surpluses that enhance the claim of the shareholders above the
nominal value of their shares. For example, the share premium account is a reserve that
represents the excess over the nominal value of shares that is paid for them on a share issue.
The retained earnings balance is a reserve that arises from ploughed-back profits earned by
the company.
Revenue reserves arise from realised profits and gains. Capital reserves arise from unrealised
profits and gains (for example, the upward revaluation of a non-current asset) or from issuing
shares at a premium (share premium).
Question Four
A preference share represents part of the ownership of a company. Preference shares entitle
their owners to the first part of any dividend paid by the company, up to a maximum amount.
The maximum is usually expressed as a percentage of the nominal or par value of the
preference shares.
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a. They differ from ordinary shares to the extent that they only entitle their holders to
dividends to a predetermined maximum value. Dividends to ordinary shareholders
have no predetermined maximum. Were the company to be liquidated, the preference
shareholders would normally receive a maximum of the nominal value of their shares,
whereas the ordinary shareholders receive the residue after all other claimants,
including the preference shareholders.
b. They differ from loan notes in that these represent borrowings for the company, where
normally holders have a contract with the company that specifies the rate of interest,
interest payment dates and redemption date. They are often secured on the company’s
assets. Preference shareholders have no such contract.
Question Five
CHIPS LIMITED
Explanations of the additional information
To revise a financial statement, identify two key items:
1. Unrecorded items
2. Committed errors
In revising financial statements, an unrecorded item must simply be recorded as a matter of
revision. However, an error committed must be corrected to revise the financial statement.
Now let’s go through the additional information.
1. Additional information one simply means that an item of purchase invoice has not
been recorded. Therefore to revise the financial statements, we have to record the
item; as simple as that!
2. A disposal of a motor vehicle has not been recorded. Revision is by recording as well.
3. Depreciation on motor vehicle has not been recorded.
4. An error has been committed in respect of a sale made. Revision is by correction of
the error.
5. Part of the interest has not been recorded.
6. Tax has not been charged eventually.
Chips Limited
Income statement for the year ended 30 June 2010
£000
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TUTORIAL QUESTIONS
Revenue (1,850 − 16) 1,834
Cost of sales (1,040 + 23) (1,063)
Gross profit 771
Depreciation ((220 − 2 − 5 + 8) + (94 × 20%)) (240)
Other operating costs (375)
Operating profit 156
Interest payable (35 + 35) (70)
Profit before taxation 86
Taxation (86 × 30%) (26)
Profit for the year 60
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Total equity and liabilities 2,370
Notes:
1. This is simply taken from the income statement for the year.
2. Interest payable expense must be taken out, by adding it back to the profit before
taxation figure. We subsequently deduct the cash paid for interest payable during the
year. In this case the two figures are identical.
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3. Companies pay 50% of their tax during their accounting year and the other 50% in the
following year. Thus the 2010 payment would have been half the tax on the 2009
profit (that is, the figure that would have appeared in the current liabilities at the end
of 2009), plus half of the 2010 tax charge (that is, 4 + (1/2 × 16) = 12).
4. Since there were no disposals, the depreciation charges must be the difference
between the start and end of the year’s non-current asset values, adjusted by the cost
of any additions:
£m
Carrying amount at 1 January 2010 147
Additions (balancing figure) 41
188
Depreciation (6 + 10) (16)
Carrying amount at 31 December 2010 172
Q2.
Chen Plc
Statement of Cash Flow for the year ended 31 December, 2010
£m
Operating Activities
Operating Profit 29
Adjustments:
Depreciation (10+12) 22
51
Increase in Trade Receivables (26 – 25) 1
Increase in Inventories (25 – 24) (1)
Decrease in Payables (37 – 34) (3)
Cash generated from operations 48
Interest paid (4)
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Tax paid (8+6-3) (11)
Dividend paid (18)
Net Cash from operations 15
Investing Activities
Purchase of Land and Building (130+10-110) (30)
Purchase of Plant and Machinery (56+12-62) (6)
Net Cash from Investment (36)
Financing Activities
No item ---
Net cash and cash equivalent (15-36+0) (21)
Cash and cash equivalent at start 19
Cash and cash equivalent at close (2)
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