unit 10 financial accounting assignment

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10.7: Exercises- Unit 10

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SHORT-Answer QUESTIONS, EXERCISES, AND PROBLEMS

➢ In view of the difficulty in estimating future events, would you recommend that accountants wait until collections are made from customers before recording sales revenue? Should they wait until known accounts prove to be uncollectible before charging an expense account?

➢ The credit manager of a company has established a policy of seeking to completely eliminate all losses from uncollectible accounts. Is this policy a desirable objective for a company? Explain.

➢ What are the two major purposes of establishing an allowance for uncollectible accounts?

➢ In view of the fact that it is impossible to estimate the exact amount of uncollectible accounts receivable for any one year in advance, what exactly does the Allowance for Uncollectible Accounts account contain after a number of years?

➢ What must be considered before adjusting the allowance for uncollectible accounts under the percentage-of-receivables method?

➢ How might information in an aging schedule prove useful to management for purposes other than estimating the size of the required allowance for uncollectible accounts?

➢ For a company using the allowance method of accounting for uncollectible accounts, which of the following directly affects its reported net income: (1) the establishment of the allowance, (2) the writing off of a specific account, or (3) the recovery of an account previously written off as uncollectible?

➢ Why might a retailer agree to sell by credit card when such a substantial discount is taken by the credit card agency in paying the retailer?

➢ Define liabilities, current liabilities, and long-term liabilities.

➢ What is an operating cycle? Which type of company is likely to have the shortest operating cycle, and which is likely to have the longest operating cycle? Why?

➢ Describe the differences between clearly determinable, estimated, and contingent liabilities. Give one or more examples of each type.

➢ In what instances might a company acquire notes receivable?

➢ How is the maturity value of a note calculated?

➢ What is a dishonored note receivable and how is it reported in the balance sheet?

➢ Under what circumstances does the account Discount on Notes Payable arise? How is it reported in the financial statements? Explain why.

➢ Real world question Refer to “A Broader Perspective: GECS allowance for losses on financing receivables”. What factors are taken into account by the General Electric Company in determining the adjusting entry to establish the desired balance in the Allowance for Losses?

➢ Real world question Refer to “A Broader Perspective: GECS allowance for losses on financing receivables”. Explain how the General Electric Company writes off uncollectibles.

Exercise A The accounts of Stackhouse Company as of 2010 December 31, show Accounts Receivable, $ 190,000; Allowance for Uncollectible Accounts, $ 950 (credit balance); Sales, $ 920,000; and Sales Returns and Allowances, $ 12,000. Prepare journal entries to adjust for possible uncollectible accounts under each of the following assumptions:

• Uncollectible accounts are estimated at 1 per cent of net sales.
• The allowance is to be increased to 3 per cent of accounts receivable.

Exercise B Compute the required balance of the Allowance for Uncollectible Accounts for the following receivables:

Exercise C On 2009 April 1, Kelley Company, which uses the allowance method of accounting for uncollectible accounts, wrote off Bob Dyer’s $ 400 account. On 2009 December 14, the company received a check in that amount from Dyer marked “in full payment of account”. Prepare the necessary entries.

Exercise D Jamestown Furniture Mart, Inc., sold $ 80,000 of furniture in May to customers who used their American Express credit cards. Such sales are subject to a 3 per cent discount by American Express (a nonbank credit card),

• Prepare journal entries to record the sales and the subsequent receipt of cash from the credit card company.
• Do the same as requirement (a), but assume the credit cards used were VISA cards (a bank credit card).

Exercise E Dunwoody Discount Toys, Inc., sells merchandise in a state that has a 5 per cent sales tax. Rather than record sales taxes collected in a separate account, the company records both the sales revenue and the sales taxes in the Sales account. At the end of the first quarter of operations, when it is time to remit the sales taxes to the state taxing agency, the company has $ 420,000 in the Sales account. Determine the correct amount of sales revenue and the amount of sales tax payable.

Exercise F Assume the following note appeared in the annual report of a company:

In 2009, two small retail customers filed separate suits against the company alleging misrepresentation, breach of contract, conspiracy to violate federal laws, and state antitrust violations arising out of their purchase of retail grocery stores through the company from a third party. Damages sought range up to $ 10 million in each suit for actual and treble damages and punitive damages of $ 2 million in one suit and $ 10 million in the other. The company is vigorously defending the actions and management believes there will be no adverse financial effect.

What kind of liability is being reported? Why is it classified this way? Do you think it is possible to calculate a dollar amount for this obligation? How much would the company have to pay if it lost the suit and had to pay the full amount?

Exercise G Determine the maturity date for each of the following notes:

Exercise H Crawford, Inc., gave a $ 20,000, 120-day, 12 per cent note to Dunston, Inc., in exchange for merchandise. Crawford uses periodic inventory procedure. Prepare journal entries to record the issuance of the note and the entries needed at maturity for both parties, assuming payment is made.

Exercise I Based on the facts in the previous exercise, prepare the entries that Crawford, Inc., and Dunston, Inc., would make at the maturity date, assuming Crawford defaults.

Exercise J John Wood is negotiating a bank loan for his company, Wood, Inc., of $ 16,000 for 90 days. The bank’s current interest rate is 10 per cent. Prepare Wood’s entries to record the loan under each of the following assumptions:

• Wood signs a note for $ 16,000. Interest is deducted in calculating the proceeds turned over to him.
• Wood signs a note for $ 16,000 and receives that amount. Interest is to be paid at maturity.

Exercise K Based on the previous exercise, prepare the entry or entries that would be made at the maturity date for each alternative, assuming the loan is paid before the end of the accounting period.

Exercise L Pistol Pete provides communication services and products, as well as network equipment and computer systems, to businesses, consumers, communications services providers, and government agencies. The following amounts were included in its 2010 annual report:

Calculate the accounts receivable turnover and the number of days’ sales in accounts receivable. Use net sales instead of net credit sales in the calculation. Comment on the results.

Problem A As of 2009 December 31, Fargo Company’s accounts prior to adjustment show:

Allowance for uncollectible accounts (credit balance)

Fargo Company estimates uncollectible accounts at 1 per cent of sales.

On 2010 February 23, the account of Dan Hall in the amount of $ 300 was considered uncollectible and written off. On 2010 August 12, Hall remitted $ 200 and indicated that he intends to pay the balance due as soon as possible. By 2010 December 31, no further remittance had been received from Hall and no further remittance was expected.

• Prepare journal entries to record all of these transactions and adjusting entries.
• Give the entry necessary as of 2009 December 31, if Fargo Company estimated its uncollectible accounts at 8 per cent of outstanding receivables rather than at 1 per cent of sales.

Problem B At the close of business, Jim’s Restaurant had credit card sales of $ 12,000. Of this amount, $ 4,000 were VISA (bank credit card) sales invoices, which can be deposited in a bank for immediate credit, less a discount of 3 per cent. The balance of $ 8,000 consisted of American Express (nonbank credit card) charges, subject to a 5 per cent service charge. These invoices were mailed to American Express. Shortly thereafter, a check was received.

Prepare journal entries for all these transactions.

Problem C Ruiz Company sells merchandise in a state that has a 5 per cent sales tax. On 2010 January 2, Ruiz sold goods with a sales price of $ 80,000 on credit. Sales taxes collected are recorded in a separate account. Assume that sales for the entire month were $ 900,000. On 2010 January 31, the company remitted the sales taxes collected to the state taxing agency.

• Prepare the general journal entries to record the January 2 sales revenue. Also prepare the entry to show the remittance of the taxes on January 31.
• Now assume that the merchandise sold on January 2 also is subject to federal excise taxes of 12 per cent. The federal excise taxes collected are remitted to the proper agency on January 31. Show the entries on January 2 and January 31.

Problem D Honest Tim’s Auto Company sells used cars and warrants all parts for one year. The average price per car is $ 10,000, and the company sold 900 in 2009. The company expects 30 per cent of the cars to develop defective parts within one year of sale. The estimated average cost of warranty repairs per defective car is $ 600. By the end of the year, 80 cars sold that year had been returned and repaired under warranty. On 2010 January 4, a customer returned a car purchased in 2009 for repairs under warranty. The repairs were made on January 8. The cost of the repairs included parts, $ 400, and labor, $ 210.

• Calculate the amount of the estimated product warranty payable.
• Prepare the entry to record the estimated product warranty payable on 2009 December 31.
• Prepare the entry to record the repairs made on 2010 January 8.

Problem E Celoron Power Boat Company is in the power boat manufacturing business. As of 2010 September 1, the balance in its Notes Receivable account is $ 256,000. The balance in Dishonored Notes Receivable is $ 60,660 (includes the interest of $ 600 and the protest fee of $ 60). A schedule of the notes (including the dishonored note) is as follows:

• Prepare journal entries to record all of these transactions and the uncollectible accounts expense for the period. Assume the estimated expense is 2 per cent of net sales.
• Give the entry to record the estimated expense for the period if the allowance account is to be adjusted to 5 per cent of outstanding receivables instead of as in (a).

Alternate problem B The cash register at Frank’s Restaurant at the close of business showed cash sales of $ 7,500 and credit card sales of $ 10,000 ($ 6,000 VISA and $ 4,000 American Express). The VISA (bank credit card) invoices were discounted 5 per cent when they were deposited. The American Express (nonbank credit card) charges were mailed to the company and were subject to a 5 per cent service charge. A few days later, Frank received a check for the net amount of the American Express credit card charges.

Prepare journal entries for all of these transactions.

Alternate problem C Beacham Hardware, Inc., sells merchandise in a state that has a 6 per cent sales tax. On 2010 July 1, it sold goods with a sales price of $ 20,000 on credit. Sales taxes collected are recorded in a separate account. Assume that sales for the entire month were $ 400,000. On 2010 July 31, the company remitted the sales taxes collected to the state taxing agency.

• Prepare the general journal entries to record the July 1 sales revenue and sales tax payable. Also prepare the entry to show the remittance of the taxes on July 31.
• Now assume that the merchandise sold also is subject to federal excise taxes of 10 per cent in addition to the 6 per cent sales tax. The company remitted the federal excise taxes collected to the proper agency on July 31. Show the entries on July 1 and July 31.

Alternate problem D Quick Wheels, Inc., sells racing bicycles and warrants all parts for one year. The average price per bicycle is $ 560, and the company sold 4,000 in 2009. The company expects 20 per cent of the bicycles to develop defective parts within one year of sale. The estimated average cost of warranty repairs per defective bicycle is $ 40. By the end of the year, 500 bicycles sold that year had been returned and repaired under warranty. On 2010 January 2, a customer returned a bicycle purchased in 2009 for repairs under warranty. The repairs were made on January 3. The cost of the repairs included parts, $ 25, and labor, $ 15.

• Prepare the entry to record the repairs made on 2010 January 3.

Alternate problem E Vance Commercial Properties, Inc., has an accounting period of one year, ending on July 31. On 2009 July 1, the balances of certain ledger accounts are Notes Receivable, $ 654,000; and Notes Payable, $ 900,000. A schedule of the notes receivable is as follows:

The note payable is a 60-day bank loan dated 2009 May 20. Notes Payable—Discount was debited for the discount of $ 6,000. Following are the company’s transactions during July:

July 1 Vance Commercial Properties, Inc., discounted its own $ 90,000, 60-day, non interest-bearing note at Key Bank. The discount rate is 10 per cent, and the note was dated today.

3 Received a 20-day, 12 per cent note, dated today, from Sox Company in settlement of an account receivable of $ 36,000.

6 Purchased merchandise from Link Company, $ 288,000, and issued a 60-day, 12 per cent note, dated today, for the purchase.

8 Sold merchandise to Fan Company, $ 360,000. A 30-day, 12 per cent note, dated today, is received to cover the sale.

14 Received payment on the Parker Company note dated 2009 June 15.

15 Fixx Company sent a $ 120,000, 30-day, 12 per cent note, dated today, and a check to cover the part of the old note not covered by the new note, plus all interest expense incurred on the prior note.

19 The note payable dated 2009 May 20, was paid in full.

23 Sox Company dishonored its note of July 3 and sent a check for the interest on the dishonored note and a new 30-day, 12 per cent note dated 2009 July 23.

30 The Dot Company note dated 2009 May 31, was paid with interest in full.

Prepare dated journal entries for these transactions and necessary July 31 adjusting entries.

Alternate problem F On 2010 November 1, Grand Strand Property Management, Inc., discounted its own $ 50,000, 180-day, non interest-bearing note at its bank at 18 per cent. The note was paid on its maturity date. The company uses a calendar-year accounting period.

Prepare dated journal entries to record (a) the discounting of the note, (b) the year-end adjustment, and (c) the payment of the note.

Beyond the numbers—Critical thinking

Business decision case A Sally Stillwagon owns a hardware store; she sells items for cash and on account. During 2009, which seemed to be a typical year, some of her company’s operating data and other data were as follows:

A national credit card agency has tried to convince Stillwagon that instead of carrying her own accounts receivable, she should accept only the agency’s credit card for sales on credit. The agency would pay her two days after she submits sales charges, deducting 6 per cent from the amount and paying her 94 per cent.

• Using the data given, prepare an analysis showing whether or not Stillwagon would benefit from switching to the credit card method of selling on credit.
• What other factors should she take into consideration?

Business decision case B Jim Perry operates a large fruit and vegetable stand on the outskirts of a city. In a typical year he sells $ 600,000 of goods to regular customers. His sales are 40 per cent for cash and 60 per cent on credit. He carries all of the credit himself. Only after a customer has a $ 300 unpaid balance on which no payments have been made for two months does he refuse that customer credit for future purchases. His income before taxes is approximately $ 95,000. The total of uncollectible accounts for a given year is $ 48,000.

You are one of Perry’s regular customers. He knows that you are taking a college course in accounting and has asked you to tell him your opinion of several alternatives recommended to him to reduce or eliminate the $ 48,000 per year uncollectible accounts expense. The alternatives are as follows:

• Do not sell on credit.
• Sell on credit by national credit card only.
• Allow customers to charge only until their account balances reach $ 50.
• Allow a bill collector to go after uncollectible accounts and keep half of the amount collected.

Write a report for Perry about the advisability of following any of these alternatives.

Annual report analysis C Visit the Internet site:

http://www.cocacola.com

Locate the most recent annual reports of The Coca-Cola Company. Calculate accounts receivable turnover and the number of days’ sales in accounts receivable and prepare a written comment on the results.

Group project D In groups of two or three students, write a two-page, double-spaced paper on one of the following topics:

Which is better—the percentage-of-sales method or the percentage-of-receivables method?

Why not eliminate bad debts by selling only for cash?

Why allow customers to use credit cards when credit card expense is so high?

Should banks be required to use 365 days instead of 360 days in interest calculations?

Present your analysis in a convincing manner, without spelling or grammatical errors. Include a cover page with the title and authors’ names.

Group project E “Lapping” of accounts receivable has been used to conceal the fact that payments received on accounts receivable have been “borrowed” and used by an employee for personal use. With one or two other students, research this topic in the library. Write a paper to your instructor describing how this technique works and the steps that can be taken to detect it once it occurs and to prevent it in the future.

Group project F In a group of two or three students, visit a fairly large company in your community to investigate the effectiveness of its management of accounts receivable. Inquire about its credit and sales discount policies, collection policies, and how it establishes the amount for the adjusting entry for uncollectible accounts at year-end. Also ask about how it decides to write off accounts as uncollectible. Calculate its accounts receivable turnover and average collection period for each of the last two years. In view of its credit policies, does its collection period seem reasonable?

Using the Internet—A view of the real world

Visit one of the following Internet sites:

http://www.federatedinvestors.com

http://www.dreyfus.com

http://www.invesco.com

Follow some of the other options available at the site. Write a report to your instructor on your experience, describing some of the things you learned at this site. You may want to pretend that you invested in one or more of these funds for the duration of the quarter or semester and see how your investment would have fared during that period. Many investors with a limited amount to invest can have a diversified portfolio by investing in mutual funds. Thus, they spread their risk by investing in a mutual fund that, in turn, invests in many different companies.

Visit Procter & Gamble’s site at:

http://www.pg.com

Procter & Gamble markets more than 250 brands to nearly five billion consumers in over 140 countries. Click on any items that deal with financial news, annual report summary, stock quote, and anything else that looks interesting. Write a memo to your instructor summarizing your findings. Include in your memo some of the financial highlights contained in the annual report summary.

• [1] FASB, Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (Stamford, Conn., 1975). Copyright © by Financial Accounting Standards Board, High Ridge Park, Stamford, Connecticut 06905, USA.
• [2] AICPA, Accounting Trends & Technique s (New York, 2000), p. 100.

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Unit 10: Financial Accounting

Balancing the books is at the heart of all business management. The overall aim of this unit is to introduce students to essential financial accounting principles and techniques which will enable them to record and prepare basic final accounts. Students will learn how to prepare accounts for sole traders and partnerships as well as limited companies.

Learning Outcomes:

By the end of this unit a student will be able to:

 Record business transactions using double entry book-keeping, and be able to extract a trial balance.

 Prepare final accounts for sole-traders, partnerships and limited companies in accordance with appropriate principles, conventions and standards.

 Perform bank reconciliations to ensure company and bank records are correct.

 Reconcile control accounts and shift recorded transactions from the suspense accounts to the right accounts.

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Unit 10 financial accounting assignment

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Unit 10 Financial Accounting and Reporting Assignment

1.1. Legal and regulatory influence on financial statements

Issues of finance and economics of all countries in the world in itself is a one joint structure thought we may be divided by boundaries, borders, factors like sex, creed, language etc but the real fact is that all of it is bound in one common structure and that is ‘need’. For example, a professor needs stationery for teaching his various students. Now this stationery shall be procured from several suppliers. These suppliers would procure them from manufacturers national or international, the essence of this example is that need of the professor and his students is indeed the inception of this hierarchy of inter dependence for satisfying there need. This has led to national and international financial transactions. The concept of globalisation has further fuelled this need based orientation of financial and economical transactions intra country (Hussain 1989). Seeing the rise in transactions and the sectors of the society, which are the ultimate receivers of benefits have came in several statutory and regulatory bodies which are concerned with safeguarding of the interest of the bona fide end stakeholders and the society at large. The society expects transparency in operations because they allow business to use their resources i.e. either in form of investments or inputs. The regulatory bodies thus, enact towards ensuring the same.

The best medium of communicating or dissipating information about any organisations operational activity is its financial statements. The financial statements depict the overview of the organisations activity and the impacts of the same in monetary terms. Thus, there are several statutory guidelines which monitor the preparation of these financial statements so as to ensure that interests of stakeholders are never ever compromised. An organisation operating in UK needs to adhere to regulations for preparation and representation of financial statements set out by,

• The companies act 2006,
• UK Accounting standards, issued by accounting standards board, and
• International accounting standards and International financial reporting standards issued by IASB.

This further needs to be stated that the regulations as set out by the monitoring and issuing agencies varies upon the size and nature of the business organisation like, a sole proprietorship firm, a partnership firm and companies (listed and non listed) formed under the companies act, 2006. To further understand the impact and extent of these regulations we shall take an insight into the guidelines set out by the regulatory bodies.

Regulatory guidelines issued by Companies act, 2006:

For Sole Proprietorship firm:  The companies act, 2006 does not sets out any specific regulation with regards to preparation of financial statements by the sole proprietorship firms.  The companies act gives leverage to the owners and managers of such entities to choose and keep whatever accounting records suiting them. Howsoever, if a sole proprietor firm is registered for Value Added Tax they will need to keep adequate records that satisfy the requirements of the same. They in that case would also need to maintain proper financial statements as they would have to file tax returns and should also be able to furnish the details of the same to HMRC. (Rice 2011) Sole proprietors would be required to include any profit due to them (from their business) on their own personal income tax return.  Thus most businesses have to keep some basic accounting records and to compile a profit and loss account once a year. The choice of format and content of such records remains at their disposal.

For Partnership firms:  Partnership firms are also not strictly regulated under any specific norms set by the companies act, 2006. Howsoever, they are also required to maintain same records as sole proprietorship firms in cases where they are registered with VAT and are required to file individual tax returns. In case of the limited liability partnership, the scenario is quite different and the preparation of accounts for such organisations is somewhat similar to companies registered under companies act, 2006.

For Companies:  Companies registered under companies act, 2006 are required to maintain accounts and records as specified in part 15 of the act. The act classifies companies into ‘small’, ‘medium’ and ‘large’ categories. This classification is based on a requirement to satisfy two out of three criteria: turnover, balance sheet totals and number of employees. The actual figures are also prescribed in the act but they are subject to amendments from time to time.

The act for the purpose of setting out the specific guidelines for preparation of accounts, classifies guidelines on the basis of,

• Publicly traded companies – Public limited companies are the ones whose stocks are traded on a stock exchange, must prepare their books of accounts in accordance with International accounting standards (IAS’s) In case of companies which are operating in all of the European Union, are required to prepare consolidated accounts complying with IAS’s.  
• Non Publicly traded companies - While companies which are non-listed and non-publicly traded are having an option in regards to prepare their accounts complying with either the accounting guidelines set out by companies act, 2006 and UK accounting standards or International accounting standards (IAS’s).

Role and regulations set out by the UK accounting standards:  The UK accounting standards are issued by the Accounting standards board of the Institute of Chartered Accountants in England and Wales.  The accounting standards board was established to develop regulations and guidelines that could enable preparation of accounts which keeps into accordance the benefit of users, prepares and auditors of financial information. The accounting standards board operates under the monitoring and funding of the financial reporting council. The accounting standards issued by the ASB are called financial reporting standards and ASB has issued 30 financial reporting standards till date. These are designed to facilitate adequate and proper reporting of financial information by the organisation which is expected to prepare the financial statements (Fraser and Orminston 2010).

Role of International accounting standards board:  Globalisation has given a wing to the way organisations work throughout the globe. It has created a sort of network amongst the nations trading and thus has created a new pool of stakeholders internationally as well. Thus, it becomes important to ensure that their expectations too are properly taken heed of. To ensure uniformity in arena of financial reporting, was established the International accounting standards board, which aims at developing uniform and unilateral accounting standards that could ensure uniformity of financial information’s amongst organisations operating anywhere around the globe.

The financial standards issues by the IASB are known as International financial reporting standards (IFRS) and since 2005 the EU in approach towards international harmonisation in matter pertaining to transparency and uniformity of financial statements has mandated the usage of IFRS for listed and publicly traded organisations operating in the EU howsoever these regulations are only statutorily applicable while preparing group financial statements, they are free at their will to choose the adequate standards while preparing individual standalone reports. While in case of non public trading organisations, these organisations are not compulsorily bound to adhere to IFRS in any scenario howsoever they are permitted to use the same.

Differences between the UK accounting standards and IFRS:

Since, we have already discussed about the applicability of the financial accounting standards and the IFRS in applicable scenarios, it still is a matter of discussion to understand the fundamental differences between UK accounting standards and the IFRS,

• Both of the standards did not always deal with the same problem though they may appear same in outlook but at times there details and purpose is not identical.
• In case UK ASB and IASB issue a standard in similar reference it is observed that the guidelines of IASB are more generalised and not problem specific.

The role of accounting and reporting standards in dealing with laws and regulations:  In our analysis so far, we have been able to understand the implications of regulatory and legal influences upon financial statements. Now it is worth mentioning that, the influences in it have helped in creation of standards that satisfy the legal and regulatory requirements. For an instance, as stated above in the case of companies, the Companies act 2006 requires preparation of accounts in accordance to section 15. Citing the same the regulatory bodies designed Conceptual framework standards which guide principles of preparation of accounts. It needs to be understood that all the accounting standard framing bodies discussed above are into existence only because they need to ensure that organisations are reporting in a form which helps in dealing with laws and regulations. They achieve this by framing appropriate standards. 

Conclusion : After having an in depth analysis of regulatory and legal influences upon financial reporting. It may be said that the regulations set out in this regard are a better source of ensuring transparency and stakeholder accountability. Legal provision like that set out in FRS 1 which requires organisation to prepare a cash flow statement is a perfect example to explain how these regulations impact financial reporting, obviously for the good reasons.  

1.2. Users of financial statements and there needs

As already discusses about the inter dependency of different bodies in order to satisfy their ‘needs’ it remains to be stated that there does exists ‘need’ for all the parties involved in a business transaction howsoever their nature and way differs in a large extent. The same logic applies to the financial statements as well wherein the financial statements which are prepared by an organisation under strict guidelines for ensuring better transparency and intimation of relevant and meaningful information to the stakeholders of the organisation. Howsoever the type of information needed by the various stakeholders differs to a great extent and the same is being analysed underneath,

• Customers:  Customers are the ones which are the most crucial point in a business cycle. Customer are usually interested in information that is capable of influencing there buying decisions or their outlook regarding the market like, their belief in the brand and there association towards the same. This usually involves assessment of organisations ability to exist in the business and meeting its needs.  (Adams 1977)
• Competitors:  Competitors are the lot which are majorly concerned about the issues influencing there market existence, so as to reinforce their strategies in order to compete with us. This usually involves the comparison of their performance with the benchmark performance of the best player in the industry. Assessment of financial strength of our organisation is also one way out for them to understand our strategies regarding the conduct of business operations.  
• Employees:  Employees are a part of internal bodies of the organisation and they are majorly concerned with matters related to their job security or payments. They seek information for analysing issues like whether to continue working for us and, if so, whether to demand higher rewards for doing the same (Atrill 2011). The basis of their decision making is evidently from the organisations future plans, profit status and the overall financial stability which are derived from organisations financial statements.
• Government:  Government seeks information’s for a much wider purpose.  It looks to adjudge the overall market situation, ensuring welfare of one and of all.  Government looks for looking information that helps them in assessing factors like whether we should pay tax and, if so, how much, whether it complies with agreed pricing policies, whether financial support is needed. For deriving this information government looks at the organisations profit status, sales revenues and the overall financial strength.
• Community:  Community or the society is another indispensible lot that should be taken due care of to ensure sustainable market existence. Community at large seeks for information like the capability of the organisation to continue to provide employment opportunities for the community, the extent to which it is likely to use the resources of the community and its likely willingness to help fund for CSR initiatives (Drysdale 2010).
• Suppliers:  Suppliers seek information that helps them to form decisions regarding, whether to continue to maintain the supply of raw materials/utilities to the organisation, Should there be any change in the existing or demanded credit line. Usually suppliers derive these information’s from the financial strength and the short term liquidity position of the organisation.
• Lenders:  Lenders look for information that helps them in deriving a decision as to whether to lend money to the organisation, or not. This decision is usually made by checking the organisations capability to pay the debts as and when they would have arisen in short and long term.
• Managers:  Managers lookout for information that helps them analyse, the status of the business operations and whether is required any improvement in the same. This is usually made by analysing current financial performance and status with the past performances of the organisation. Managers also look out for developing a basis for decision making in order to design the strategies of the organisation.
• Owners:  Owners are the decision making nodes in the organisational hierarchy hence, all information whether financially influencing or non-influencing have an impact on the modus operandi of the organisation. Howsoever owners make decisions like whether to invest more or dispose of the investment currently held. This usually involves assessment of risk and return factors with the stake ownership of the organisation.

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A. Ella’s income statement for the year ended 30 th June, 2011

B. Ella’s financial statement for the year ended 30 th June, 2011

Statement of Owner Equity:

A. Income Statement for the year 31 January 2011:

A. Statement of Comprehensive Income for the year ended on 31 January 2011

C. Statement of financial position and Statement of changes in Equity

D. Impact of issuance of 10 million shares at £ 1.5 each, upon:

• The bank account –  Upon issuance of shares Atlas would receive an amount of 15 million in cash. This would increase the balance at bank by £15 million. This would help the organisation to overcome the bank overdraft and the balance at bank would be shown on the assets side of the statement of financial position. Upon the issuance the balance of bank would be standing at £13.153 million.
• The ordinary share capital -  With a fresh issuance of stocks the balance of Ordinary Share of Atlas Plc in the owner’s equity portion of the balance sheet would increase by 10million. The issue price is £1.5 per share howsoever the face value of shares is £1 per share and the remaining portion £0.5 is the share premium.
• The share premium –  The face value of the ordinary share of Atlas Plc is £1 per share but in the scenario where 10 million shares are issued at premium of £1.5 per share, the balance of share premium account would increase by £ 5 million. This would be reflected with an increase in the Owner’s equity by £ 5 millions.

A. Determination of ratios for Ager Limited for the year ended 30 th September 2013

• Current Ratio:

=   (71,000/596,000)*365 =    43.48 Days Where, Cost of Sales = Purchases + Opening Stock – Closing Stock = 612,000+ 82,000- 98,000 =596,000   

• Current Ratio:  Current ratio is a relationship between the current assets and current liabilities held by the organisation for a period under consideration. This ratio is a determinant of the short term solvency position and the capability of the organisation to pay its debt as and when they become due (Dowd 2002). It may be seen in the table above that Ager Ltd’s Current ratio has slightly to 1.56 reduced over the position in 2012 i.e.1.6. The ideal standard for this ratio is suggested to be 2, though the ratio of Ager is less than 2 still it cannot be said to be bad and in fact the fall over the year is not radical that it can be said to be a matter of concern for the organisation. Still, if Ager could take some initiative to sort away its short term trade liabilities in the quickest possible time it shall certainly be advisable in lieu of a better liquidity risk management and corresponded by a higher current ratio.
• Acid Test Ratio:  Acid test ratio is another important determinant of short term solvency position of an organisation. Acid test ratio depicts the organisation capability to pay off its short term debts as and when they become due. The ideal acid test ratio is expected to be around 1. In case of Ager ltd it can be seen that the ratio for Ager has fallen over 1.2 in 2012 to 0.98 in 2013 which is near to the ideal ratio and hence is a good signage for the liquidity risk management norms of the organisation.
• Trade Receivable Days:  Trade receivable days depicts the time duration taken by trade debtors to settle their bills. This ratio denotes the fact that whether or not the debtors are allowed excessive credit and is usually analysed in sight with industry standards/figures (Hussain 1989). In case of Ager it has been seen that the Trade receivable day’s period has risen sporadically over the year 2012. This certainly is not good sign at first instance comparatively because organisation is taking approximately 2 months to receive its payments that 1.5 months it used to take previously.  Howsoever a better verdict can only be given if the figures for industry standards are also available.
• Trade Payable Days:  Trade payable days depicts the time duration taken by the organisation to settle its creditors bills. This ratio denotes the fact that whether or not the organisation is taking full advantage of the credit facility available to it. In the purview of Ager it may be seen that the duration taken by the organisation to repay its debts has relatively remained unchanged over the year 2013 and 2012, it is usually advisable for the organisation to take the maximum possible time to repay the debts so as to maximise its cash flows. But, there remains some risk associated to the same. One is the loss of goodwill and the other is the contingent legal threat due to the delays caused.
• Inventory Days:  Inventory days represents the ability of the organisation to fully sell its stock. It represents the number of days an organisation takes to sell its stock fully. Lesser is always better in this regards. Howsoever it is worth mentioning that industry average Inventory days varies from one industry to other. In case of Ager it may be seen that the organisation takes more days to sell its inventory that it used to take in 2012. This is certainly not a good signage and efforts to expedite the process of sales planning should be taken.
• Memorandum Report:  Cash and bank balance are one of the most liquid assets that the organisation has. These assets are the ones which are capable of helping the organisation in priority to sail through any stages of liquidity crunches. Hence, measures to ensure adequate balances of the same are extremely necessary for an organisation. As, stage of cash crisis may force an organisation to the stage of bankruptcy as well. While evaluating the financial statements of Ager Limited it has been seen that the organisation has a bank overdraft of £ 17,000. Ager should certainly try to come over such states of negative cash balance so as to ensure a better short term liquidity risk management and ensure adequate management of working capital.

The major ways which Ager can adopt to sort this state of negative bank balance may be,

• Debtor’s management – Ager should take initiative to reschedule its terms of agreements with its trade debtors because it appears that the organisation is having a lot of funds locked in with its debtors which are received by the organisation in periods as much as 2 months. An expedited process of collection from debtors will certainly make available to the organisation the necessary funds. This would certainly help to reduce the bank overdraft. 
• Creditors management – Ager should also try to extend its credit terms with suppliers so that it could get some more time for repayment of debts which as of now is less than the period in which it receives the payments i.e. 50.84 days for receipt of payments against 43.48 days for the payment to creditors. The availability of funds in this form will also be helpful in managing the bank overdraft situation.

Thus, if organisation is able to properly manage the activities, it shall certainly be able to manage its counterfeits and manage the problems concerned with liquidity risk management.

Computation and analysis of Ratios:

Dividend Yield Ratio:   Dividend yield ratio depicts that how much an organisation pays out as dividend in relation to its share prices. It is computed as follows,

=  (Annual Dividends Per Share)/(Price Per Share)

= 0.02 or 2%

The dividend yield represents how much yield is being generated out of every pound invested on the equity position.

Dividend Cover Ratio: Dividend cover ratio depicts the relationship between company’s earning over the dividend paid to shareholders. It is computed as follows,

=(Earnings Per Share)/(Dividend Paid to Ordinary Shareholders)

= 0.14/0.07

Dividend cover ratio depicts that a healthy company will have a high coverage ratio, indicating its ability to pay off its dividends. In this case where dividend cover ratio is21, it depicts that Hedge limited has sufficient earning to pay dividend equivalent to twice the present dividend declared.

Earnings per Share:   Earnings per share represent the profit of the company allocated to each outstanding share of a common stock. It is an indicator of organisation’s profitability. It is computed as,

=(Net Income-Dividends on Preffered Stock)/(Average Outstanding Shares)

=   70,000- (Nil) / 500,000

=     0.14 or 14p

EPS serves to be one of the most crucial variables in deciding the price of a share. Hedge limited’s EPS is determined to be 14p.   

Price Earnings Ratio:

Price earnings ratio is the most tried and tested methodology for organisation’s valuation. A price earnings ratio depicts the relationship between the current share price and the per share earnings. It is computed as,

=(Market Value Per Share)/(Earnings Per Share)

=£ 3.5/ 0.14p

P/E is one of the most popular stock analysis metrics (Watson and Head 2013).

The P/E ratio for Hedge Limited is observed to be 25. This suggests that, investors in the stock of Hedge limited are willing to contribute £ 25 for every £ 1 of the income generated by the stock.

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Adams,C. 1977, Appraising information needs of decision makers , 1st ed. San Francisco: Jossey-Bass. Atrill, P. 2011, Financial Management for Decision Makers, 6 th ed. Financial Times/Prentice Hall. Dowd, K. 2002, An introduction to market risk measurement , Wiley Publishers. Drysdale, A. 2010, The financial Controller , Management Books 2000 Limited. Fraser, L. and Ormiston,A. 2010, Understanding financial statements , Pearson Education. Hussain, A. 1989, A textbook of business finance , East African Publishers. Rice, A 2011, Accounts demystified: The astonishingly simple guide to accounting , 6th Ed, Prentice Hall Watson,D & Head,A, 2013, Corporate finance Principals and Practice , 6 th Ed, Pearso

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Module 2: Accounting Principles

Assignment: accounting principles.

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Unit 10 Financial Accounting Assignment Sample – BTEC-HND-LEVEL 4

This assignment explains the steps involved in budgeting and planning the business. This study revolves around the accounting principles, regulations, and rules followed by business organizations.

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Accounting principle includes the rules and regulations followed by the business organizations should follow when preparing financial data. Common sets of accounting principle include the following:

• Conservatism Principle
• Consistency Principle
• Cost Principle
• Matching principle
• Matching and accrual principle
• Principles of an economic entity

Assignment solutions of HND Financial accounting

Introduction: Balancing the accounts lays at the core of the business management principles. This unit aims at giving a basic understanding of accounting techniques and principles. Students learn the methods of preparing accounts for sole partnerships, enterprises, and private business organizations.

On completing this unit successfully, learners will be able to contribute towards the accounting function of an organization, understand how to prepare and record financial accounts for businesses. They will gain the knowledge, and skills needed to progress to a higher level of education.

Responsible accounting is the branch of accounting that relates to budgeting the organization. The goal of responsible accounting is to provide help to the Planning and Control OF THE responsible responsibility center of a business organization. It also helps in the preparation of the yearly and monthly budget of an organization.

P1. Apply the double-entry bookkeeping principle

Brief Idea about double entry system

Double entry is an underlying accounting principle that states that all bank transactions exhibit opposite and equal effects in a couple of accounts.

Liabilities + Equity = Assets

In simple terms, in a double-entry system transactions get recorded in terms of liabilities and assets. The debit account creates a credit in another. The sum of all credits equals the sum of all debits. The double-entry Bookkeeping principle normalizes the accounting process and eases the preparation of financial statements, improvising detection of errors.

Types of Accounts

Accounting and bookkeeping are methods of communicating, measuring, and recording the financial information of a firm. Business transactions get recorded in the form of economic events for bookkeeping or accounting purposes. In general, it is an interaction between two financial entities like consumers and businesses or businesses and vendors.

System accounting principles classify transactions into accounts. Following are the classifications of accounts in a business transaction.

• Liabilities

Credit and debit

Credit and debit are important entities in Double-entry Accounting Principles. Debit refers to the entity present on the left side of an account ledger. Balanced accounting equals the number of debits and credits.

Debits can increase in one account and decrease in another. For instance, debit can decrease liabilities and equity in one account, and increase assets in another, supporting the general Accounting equation. The sum of assets and liabilities equals the equity in an account.

Debits decrease the balance between loss and expense amount. The credit increases the balance of a normal income account.

Double-entry accounting system developed in the mercantile period that helped bankers and merchants to understand the Profit and cost

Philosophers believe that the double-entry system gave birth to capitalism. Nevertheless, the accounting Equation forms the Basis of the double-entry accounting principle. It develops the concept that expands to a complex, multi-term expression in the form of a balance sheet. The double-entry accounting principle forms the foundation of a balance sheet, where the sum of assets of an enterprise equals the liabilities and equity of stockholders.

The double-entry accounting principle relates sources of capital to the utilities of capital. All financial transactions get reflected in a couple of accounts. As businesses take loans from banks, the borrowed money will increase the company’s assets; the loan liability will increase by a proportionate amount.

When proprietors buy raw material by paying cash, it leads to an increase in inventory while reducing the cash capital of a business. As every transaction executed by a business affects two or more accounts, this accounting principle is termed double-entry accounting.

Since the accounting equation maintains a balanced nature, the right-side value of the equation equals the left-hand side value. The Financial Accounting Standards Board mandates private business organizations to follow this rule.

Small-scale businesses with more than one employee or planning to apply for loans need to follow the double-entry accounting principle. It’s more concise and enables companies to keep track of the financial condition, whether it’s deteriorating or improving.

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P2: Produce a trial balance using the balance of rule

The implication of trial balance

In the double-entry accounting principle, Trial balance is the incomplete statement of the credit and debits. As mentioned before, each financial transaction takes place, so that credit equals debt. Quality should be maintained in the accounting ledger and Trial balance. If the total number of credits does not equal debit, there is a sign of error and it should get corrected.

Businesses prepare a trial account before the reporting period so that Entries listed in accounting are intact and mathematically correct.

Even if the bookkeeper finds that the trial account is mathematically balanced, it doesn’t mean that there is no accounting error.

The accountant might have forgotten to list a transaction or interpreted an inefficient transaction. Some errors would not show up on the trial account.

Step involved in preparing a trial account

• Before you start working with the trial account make sure that every ledger account is balanced. The difference between the sum of debit accounts and the sum of the Credit entries produces the balance.
• Prepare a balance sheet with 8 columns. The column headings include Account number, account name, and Respective columns for Credit and debit balances.
• Transfer the account number, account name with the corresponding credit and debit column to the trial account for every ledger account.
• Find the sum of the credit and debit accounts. The summation of credit and debit accounts should be equal to a trial account. If the summations are equal, you can close the trial balance.
• If the summation isn’t the same, you need to re-evaluate and get the error corrected.

M1: Assess transactions and show the progression of trial account using double-entry bookkeeping

The accounting process involves a series of steps that describe how small-scale organizations record collect and process financial statements. The accounting process may vary from one organization to the other, and the steps involved in the process may vary too. Nevertheless, the general steps involved in the process remain the same.

Step 1: analyze and characterize the transactions

In general, the Accounting cycle starts with identifying the transactions related to business. Note that business is a separate entity to the owner, only the business transactions should be taken into account.

After identifying the transactions, the bookkeeper examines the accounts that get affected. Each transaction gets recorded and supported by source documents like sales and invoices, Petty cash prizes, debit and credit reports, and payroll expenses.

Step 2: Record the journal entries for a transaction

Account entries get recorded in a document known as a daybook. Journals get referred to as copies of the original entry, as it is the first copy of the transactions that get entered and recorded to the accounting system.

Journals get converted to the general and subsidiary ledger. The general ledger has a copy of the transaction in the form of account receivables, rentals, fixed assets, and more. The general ledger relies on the private ledger for liabilities and assets, and the nominal ledger for income and expenses.

Accounts get transferred to the ledger in the form of balanced double entries, wherein each debit expense has equal and opposite credit careers.

Step 4: Prepare an imbalance trial account

Balances on the accounts of the general ledger get listed to form the trial balance at the end of a transaction. By this time, total debits equal total credits.

The accountant uses the unadjusted account to validate or verify the credit and debit entries. Check whether the balance and calculation of the record are correct or not. If the trial account doesn’t balance, the accountant makes changes to the entries until it balances.

Step 5: Prepare a 4-column worksheet

After step 4 is over, the accountant prepares a 4-column worksheet and transfers the unadjusted trial account to the first two columns of the sheets. He adjusts entries including prepayments, accruals, and depreciation. The accountant ensures that the records get completed as per the accrual principle, following the matching principle. Adjusted entries get transferred to the first two columns of the worksheet.

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P3: Steps to prepare final accounts from a trial account

The final Account is the result of the accounting process. Final account or Annual accounts include the following documents

• Balance sheet
• Profit and loss and trading account

If it is a manufacturing organization, the final account includes the following entity:

• Manufacturing a/c
• Profit loss and trading a/c
• The accountant needs the Trial balance and additional information to form the final account information(s).

Profit and loss a/c

It implies the result of the operation or indicates the transaction results in a profit and loss. Thus, accountants identify expenses in terms of services received and incomes as profits earned by the organization. It’s known as the mercantile accounting system or accrual accounting principle. It adjusts outstanding expenses, closing stock, or advanced incomes.

The balance sheet indicates the liabilities and assets of an organization on a specific date. Keep in mind it does not represent annual or monthly data. A balance sheet shows the financial condition of an entity on a particular date.

Manufacturing Account indicates the pricing of the product manufacture of a particular date. The accountant transfers the cost to the trading account.

Significance of the vital components of a final account

A) Trading account

• Trading Account shows the profit or loss made on a gross basis and includes the direct cost of goods.
• In a trading account, income gets credited as sales and debits the pricing of products sold by the company.
• In simple terms, opening stock and purchases forms debit and credit include the closing stock in an organization.
• It deducts or adjusts the sales and purchase returns from the sales and purchases respectively.
• The accountant transfers the balance (aka gross profit/loss) to the loss and profit account.

B) Implication of the profit and loss account

• A profit and loss account demonstrates the performance of individual entities.
• Accountant transfers the gross profit and loss account to the P&L account.
• Incomes like discounts and offers get credited
• The net Profit and loss account gets transferred to the P&L appropriation a/c.
• Bank charges interest on loan withdrawal, and that amount gets credited
• Interest credited on the Commission or salary of the business proprietor and transferred to the reserves gets debited.
• Accountant transfers the net balance to the capital Account.

C) Manufacturing account

• Raw materials consumed in production (stock + purchases – opening stock), depreciation of building or factory, machinery, and related manufacturing expenses get debited.
• Opening WIP stock gets debited, and closing WIP stock gets credited
• Accountant balance is the cost of goods and transfers to the Trading account.
• Students should know that a manufacturing account is also a periodic statement.

D) Additional Information

• When the balance sheet gets prepared, the accountant will likely have some accounts that are yet to get finalized. He/she might need to make some modifications or changes to the entities.
• In general, an accountant gets such information from the trial accountant. It is known as adjustments.
• It is a simple transaction that gets transferred to the account record. It may include information that needs to get rectified and necessitates a double-entry effect.
• It may include indirect information in the form of trial balance interpreted as adjustments to the results.

M3: Apply account reconciliation process demonstrating the use of transit deposits

Bank reconciliation is one of the commonly-used cash control procedures needed to identify error Irregularities or adjustments in accounts. With an in-house team handling the reconciliations process, likelihood of fraud and saves time Invested into managing the statement.

Our bank reconciliation process may have different statements but all serve the same purpose. The reconciliation process compares the bank statement with cash reported in the general ledger.

Bank reconciliation ought to get completed for all accounts, as it ensures the accuracy of bank records. It may find that bank balances are lower than expected, leading to overdraft fees or bounced checks. As mentioned earlier, bank reconciliation detects fraud in the activities; this information enables better control of receipts or payments in cash.

Bank reconciliation terminology

Some of the terms associated with bank reconciliation are s follows:

Transit account: it refers to the checks that got received and recorded by an entity, that are yet to be recorded. If it happens at the month-end, it is less likely to get noted in the then statement and get recorded as reconciliation in a bank statement. Deposit in transit occurs when the deposit comes too late to be recorded. It occurs when the entity moth’s delay in mailing the depositor doesn’t mail the deposit at all.

Control account finds its application in recording the subsidiary account and cross-checks them. Suspense balance gets recorded to the account before getting transferred to the final account. Bank reconciliation is the process that manages subsidiary and final accounts. An accountant is to make sure that the amount invested equals the amount deducted from the final account.

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