Financial Accounting and Analysis | TU Model Question Solutions | Set A
Arjun EP
Financial Accounting and Analysis | BBS I | Complete TU Solution | Set A
Financial Accounting and Analysis
Course No.: MGT 211
Nature of the Course: Core
Full Marks: 100
Pass Marks: 35
Candidates are required to give their answer in their own words as far as practicable. The figures in the margin indicate full marks.
Group A: Brief Answer Questions
Attempt ALL questions (10 x 2 marks = 20 marks)
Q: 1. What is business entity concept of accounting?
According to business entity concept of accounting, the business and the business owner are two distinct identities.
They should be treated as separate legal entities.
Expenses related to business are recorded in income statement.
Expenses related to business owner are recorded in drawing account.
Q: 2. Write about the cash basis of accounting.
In cash basis of accounting, only cash inflows and cash outflows are recorded.
Under this method, incomes are recorded when they are received and expenses are recorded when they are paid.
In simple words outstanding, payable or due are NOT recorded in cash basis of accounting.
Q: 3. What are the importance of internal control to a business?
The main problems in the business is handling and recording of cash and cash equivalents.
Internal control is a systematic arrangement of the safeguard of the assets within an organization.
If internal controls are designed well, it can prevent theft and fraud.
They also help to accurate financial statements.
Q: 4. Write down the meaning of contingent liabilities.
Here, contingent means possible but NOT certain.
Contingent liabilities may come into existence when financial loss happens.
A contingent liability should be presented in the liabilities side of the balance sheet
The examples of contingent liabilities are product warranty, Shareholders guarantee, cases regarding any financial dispute etc.
Q: 5. What is long-lived assets?
The assets which help to generate benefits to the business over a long period of time are called long-lived assets.
Expenditures on assets need more investment.
They are capital expenditures in nature.
Land, building, plant, machinery, equipment, furniture etc are the examples of long-lived assets.
Q: 6. On January 1, Simran Company borrowed $100,000 from bank by signing a 3-month, 12% notes payable. It paid the principal and interest at due date.
Required: Journal entries for issue and retirement of note
[Answer: interest (100,000 x 12% x 3/12) = $3,000]
SOLUTION
Journal Entries
In the book of Simran Company
|
Date |
Particulars |
|
LF |
Amount $ |
Amount $ |
|
Jan 1 |
Loan borrowed |
|
|
|
|
|
|
Bank account |
Dr |
|
100,000 |
|
|
|
To 12% Notes payable |
|
|
|
100,000 |
|
|
(Being: cash received by singing a 3-month notes payable) |
|
|
|
|
|
|
|
|
|
|
|
|
Mar 31 |
Loan paid with interest |
|
|
|
|
|
|
12% Notes payable account |
Dr |
|
100,000 |
|
|
|
Interest paid account |
Dr |
|
3,000 |
|
|
|
To Bank account |
|
|
|
103,000 |
|
|
(Being: loan paid with interest 100,000 x 12% x 3/12) |
|
|
|
|
|
|
|
|
|
|
|
Q: 7. You are provided the following extracted information by ABC Company:
|
|
Amount |
|
|
Amount |
|
Sales revenue |
300,000 |
|
Wages to workers |
50,000 |
|
Interest received |
10,000 |
|
Income tax paid |
5,000 |
|
Cost of bought in-materials and services |
180,000 |
|
Closing stock |
30,000 |
|
Opening stock |
20,000 |
|
|
|
Required: Amount of value added
[Answer: VA = $140,000]
SOLUTION
Amount of value added
= Sales revenue + Interest received + Closing stock – Opening stock – Cost of bought in material
= 300,000 + 10,000 + 30,000 –20,000 – 180,000
= $ 140,000
Q: 8. The following extracted data are given by ABC Traders:
(a) Started business with cash of $80,000
(b) Paid rent $13,000 including advance rent of $1,000
(c) Salary paid $16,000 and outstanding salary was $2,000
Required: Accounting equation
Accounting Equation
|
Particulars |
Assets |
= |
Owner’s equity |
+ |
Liabilities |
||||
|
a. |
Business started with cash |
80,000 |
cash |
= |
80,000 |
|
+ |
0 |
|
|
|
First equation |
80,000 |
|
= |
80,000 |
|
+ |
0 |
|
|
b. |
Rent paid with advance |
(13,000) |
cash |
|
(12,000) |
expense |
|
0 |
|
|
|
|
1,000 |
advance |
|
|
|
|
|
|
|
|
New equation |
68,000 |
|
= |
68,000 |
|
+ |
0 |
|
|
c. |
Salary paid and outstanding salary |
(16,000) |
cash |
|
(18,000) |
expense |
|
2,000 |
O/s |
|
|
Final equation |
52,000 |
|
= |
50,000 |
|
+ |
2,000 |
|
Q: 9. The following transactions of the Lights Company are given below:
|
Jan 5: |
Returned by Rama Lights: |
|
|
20 fans @ $1,500 each |
|
|
2 dozen lamps @ $900 each |
|
|
Carriage charge $1,000 |
|
|
Less: Trade discount 10% |
|
|
|
|
Jan 17: |
Returned 8 Heaters from KK Lights for $20,000 |
|
Jan 29: |
Returned 300 LED lights to Divya Lights $30,000 |
Required: Return inward book
[Answer: $67,440]
SOLUTION
Return Inward Book
In the book of Lights Company
|
Date |
Particulars |
LF |
Credit Note |
Amount |
Amount |
|
Jan 3 |
Returned by Rama Lights: |
|
|
|
|
|
|
20 fans @ $1,500 each |
|
|
30,000 |
|
|
|
2 dozen lamps @ $900 each (24 x $900) |
|
|
21,600 |
|
|
|
|
|
|
51,600 |
|
|
|
Less: Trade discount ($51,600 @ 10%) |
|
|
(5,160) |
|
|
|
|
|
|
46,440 |
|
|
|
Add: Carriage charge |
|
|
1,000 |
47,440 |
|
|
|
|
|
|
|
|
Jan 17 |
Returned from KK Lights: |
|
|
|
|
|
|
8 heaters @ $2,500 |
|
|
|
20,000 |
|
|
Total credit note |
|
|
|
67,440 |
Note: No entry of returned to Divya Lights coz it is purchase return or return outward.
Q: 10. The following information are given by ABC Traders:
Extracted Trial Balance
|
Particulars |
Debit $ |
Credit $ |
|
Sundry debtors |
220,000 |
|
|
Bad debts |
20,000 |
|
|
Provision for doubtful debts |
|
30,000 |
Adjustments:
Additional bad debts to be written off $10,000
New provision for doubtful debts @ 10% on debtor
Required: Provision for doubtful debt account
[Answer: P&L account (b/f) = $21,000]
SOLUTION
Provision for Doubtful Debt Account
|
Particulars |
Amount |
Particulars |
Amount |
|
To Bad debts (old) |
20,000 |
By Balance b/d |
30,000 |
|
To Bad debts (new) |
10,000 |
By P&L account (b/f) |
21,000 |
|
To Balance c/d |
21,000 |
|
|
|
(220,000 – 10,000) x 10% |
|
|
|
|
|
51,000 |
|
51,000 |
###########
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Click on the link for YouTube videos |
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Accounting Equation |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Click on the link for YouTube videos chapter wise |
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Financial Accounting and Analysis (All videos) |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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Click on the photo for FREE eBooks
Group B: Short Answer Questions
Attempt any FIVE questions (5 x 10 marks = 50 marks)
Q: 11. The following information is provided by XYZ Company:
|
Net working capital $600,000 that represents $300,000 inventory value |
||
|
Current liabilities |
$200,000 |
|
|
Capital employed |
$10,00,000 |
|
|
Debentures |
$400,000 |
|
|
Account receivable |
$200,000 |
|
|
Operating profit of the year $100,000 being 10% of Sales. |
||
|
Income tax |
25% |
|
Required: (a) Net profit after tax; (b) Liquid ratio; (c) Debt equity ratio; (d) Stock turnover ratio;
(e) Average receivable period; (f) Return on shareholders’ equity; (g) Net profit margin [1+ 6×1.5 =10]
[Answer: (a) NPAT = $57,000; (b) LR = 2.5:1; (c) DER = 66.67%;
(d) STR = 3.33 times; (e) ARP = 73 days; (f) ROSE = 12.5%; (g) NPM = 7.5%
SOLUTION
Given and working note:
|
Working capital |
= Current assets – Current liabilities |
|
$600,000 |
= Current assets – $200,000 |
|
Current assets |
= $800,000 |
|
Liquid assets |
= Current assets – Inventories – Prepaid expenses |
|
|
= 800,000 – 300,000 – Nil |
|
|
= $500,000 |
|
Capital employed |
= Shareholders’ equity + Long-term debt |
|
$10,00,000 |
= Shareholders’ equity + $400,000 |
|
Shareholders’ equity |
= $6,00,000 |
|
Operating profit |
= Operating profit ÷ Sales revenue |
|
10% |
= $1,00,000 ÷ Sales revenue |
|
Sales revenue |
= $10,00,000 |
(a) Net profit after tax
|
Net profit before tax (given) |
100,000 |
|
|
Less: Tax (1,00,000 x 25%) |
(25,000) |
|
|
Net profit after tax |
$75,000 |
|
(b) Liquid ratio
= Liquid assets ÷ Current liabilities
= $5,00,000 ÷ $2,00,000
= 2.5:1
(c) Debt equity ratio (DER)
= (Long-term debt ÷ Shareholders’ equity) x 100
= ($4,00,000 ÷ $6,00,000) x 100
= 0.6667 x 100
= 66.67%
(d) Stock turnover ratio (STR)
= Sales revenue ÷ Ending inventories
= $10,00,000 ÷ $3,00,000
= 3.33 times
(e) Average receivable period (ARP)
= (Account receivable x Days in a year) ÷ Credit sales
= ($2,00,000 x 365 days) ÷ $10,00,000
= 73 days
(f) Return on shareholders’ equity (ROSE)
= (Net profit after tax ÷ Shareholders’ equity) ÷ 100
= ($75,000 ÷ $6,00,000) x 100
= 0.125 x 100
= 12.5%
(g) Net profit margin (NPM)
= (Net profit after tax ÷ Sales revenue) x 100
= ($75,000 ÷ $10,00,000) x 100
= 0.075 x 100
= 7.5%
Q: 12. The ABC Company sells a single product for $2 per unit and uses a periodic inventory system. The following data are available for the year:
|
Date |
Transactions |
Number units |
Unit cost in $ |
Total cost in $ |
|
Jan 11 |
Beginning inventories |
1,000 |
1.00 |
1,000 |
|
Feb 15 |
Purchase |
700 |
1.10 |
770 |
|
Apr 22 |
Sales |
(1,100) |
|
|
|
Jul 27 |
Sales |
(400) |
|
|
|
Sep 13 |
Purchase |
800 |
1.30 |
1,040 |
|
Nov 15 |
Sales |
(600) |
|
|
Required: (a) Cost of goods sold, ending inventory and gross profit under weighted average costing method
(b) Cost of goods sold, ending inventory and gross profit under FIFO method [5+5=10]
[Answer: (a) COGS = $2,360.40; EVC = $449.60; GP = $1,839.60
(b) COGS = $2,290; EVC = $520; GP = $1,910
SOLUTION
(a) Cost of goods sold, ending inventory and gross profit under weighted average costing method
Given and working note for WAC:
|
Months |
|
Units |
Rate |
Amount |
|
Again, |
|
Beginning inventory |
Jan 11 |
1,000 |
1.00 |
1,000 |
|
Weighted average cost (WAC) |
|
Purchased: |
Feb 15 |
700 |
1.10 |
770 |
|
= $2,810 ÷ 2,500 units |
|
|
Jul 27 |
800 |
1.30 |
1,040 |
|
= Rs 1.124 |
|
Total |
2,500 |
|
$2,810 |
|
|
|
Alternatively,
Weighted average cost (WAC)
= Cost of goods available for sales ÷ Units available for sales
= ($1,000 + $770 + $1,040) ÷ (1,000 + 700 + 800 units)
= $2,810 ÷ 2,500 units
= $1.124
Sold units = 1,100 + 400 +600 = 2,100 units
Sales revenue = 2,100 units x $2 = $4,200
Now,
|
Cost of goods sold |
= Sold units x WAC |
|
|
= 2,100 units x $1.124 |
|
|
= $2,360.40 |
|
|
|
|
Ending inventory cost |
= Cost of goods available for sales – Cost of goods sold |
|
|
= $2,810 – $2,360.40 |
|
|
= $449.60 |
|
|
|
|
Gross profit |
= Sales revenue – Cost of goods sold |
|
|
= $4,200 – $2,360.40 |
|
|
= $1,839.60 |
(b) Cost of goods sold, ending inventory and gross profit under FIFO method
Given and working note for FIFO:
|
Months |
|
Units |
Rate |
Amount |
|
|
|
Beginning inventory |
Jan 11 |
1,000 |
1.00 |
1,000 |
|
|
|
Purchased: |
Feb 15 |
700 |
1.10 |
770 |
|
|
|
|
Jul 27 |
400* |
1.30 |
520 |
|
|
|
Total COGS |
2,100 |
|
$2,290 |
|
|
|
Now,
|
Ending inventory cost |
= Cost of goods available for sales – Cost of goods sold |
|
|
= $2,810 – $2,290 |
|
|
= $520 |
|
|
|
|
Gross profit |
= Sales revenue – Cost of goods sold |
|
|
= $4,200 – $2,290 |
|
|
= $1,910 |
Keep in Mind
|
Sold units are 2,100 units |
|
Therefore, 400* units are taken out of 800 units from Jul 27 to make equal 2,100 units. |
Q: 13 a. ABC Firm purchased a machine costing $200,000 on 1st January 2019. The useful life of the machine is 3 years with expected salvage value of $40,000. The firm decided to invest the depreciation amount to earn interest at 5% per annum. The sinking fund table shows that $0.317208 invested at 5% p.a. will give $1 at the end of 3 years. At the end of 3rd year, the investments were sold for $100,000. Accounts are closed on 31st December each year.
Required: Depreciation fund investment account
[Answer: Loss in 2021 = $1,044]
SOLUTION
Annual depreciation
= (Purchase value – Salvage value) x Annuity value
= ($ 200,000 — $40,000) x 0.317208
= $50,753
Depreciation Fund Investment Account
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
2019 |
|
|
2019 |
|
|
|
31 Dec |
To Bank (investment) |
50,753 |
31 Dec |
By Balance c/d |
50,753 |
|
|
|
50,753 |
|
|
50,753 |
|
2020 |
|
|
2020 |
|
|
|
1 Jan |
To Balance b/d |
50,753 |
31 Dec |
By Balance c/d |
104,044 |
|
31 Dec |
To Bank (investment) |
53,291 |
|
|
|
|
|
|
104,044 |
|
|
104,044 |
|
2021 |
|
|
2021 |
|
|
|
1 Jan |
To Balance b/d |
104,044 |
31 Dec |
By Bank (sold) |
100,000 |
|
|
|
|
31 Dec |
By Depn fund account (loss) |
4,044 |
|
|
|
104,044 |
|
|
104,044 |
Keep in Mind
|
Depreciation is charged on 31st December and invested this depreciation amount; so, NO interest in first year. |
|
At the end of second year, interest is received on investment; here interest = $53,753 x 5% = $2,538 |
|
Investment in year 2020 = Depreciation amount $50,753 + $2,538 interest = $53,291 |
|
Investment is sold at the end of 2021; therefore NO interest in the third year. |
Q: 13b. Explain the concept of accounting standard. Why is it needed? [2+3 = 5]
Accounting standards are common set of principles, standards and procedures.
They are issued by the accounting institutions.
By following accounting standards, financial statements can be prepared in uniform.
They improve the transparency of financial reporting in all countries.
Need of accounting standard
To eliminate doubt
As an accountant, there may be confusion while recording financial transactions.
What accounting treatment is to be used for a particular transaction?
Accounting standards eliminate these doubts.
To facilitate comparison
As an entrepreneur, the business person surely wants to compare financial statements with competitors.
If there were NO accounting standards, comparison would be difficult.
There may be different accounting treatments.
Thus, comparison becomes difficult.
Disclosure requirements
As a company, it has a responsibility to present financial statements to shareholders.
All the shareholders are NOT familiar with financial statements.
Therefore, some notes should be disclosed which helps to understand the financial statements.
Q: 14 a. Shareholders’ equity section of the Balance Sheet of MG Group appeared as follows on 1st Jan 2020:
|
|
Amount |
|
|
Shareholders’ Equity: |
|
|
|
|
8% Preferred stocks of $500 at par value; 1,000 stocks issued and outstanding |
5,00,000 |
|
|
Common stock of $100 at par value; 15,000 stocks issued and outstanding |
15,00,000 |
|
|
Additional paid in capital-preferred |
3,00,000 |
|
|
Additional paid in capital-equity |
4,00,000 |
|
|
Total contributed capital |
27,00,000 |
|
|
Retained earnings |
20,00,000 |
|
|
Total shareholders’ equity |
47,00,000 |
The preferred stock is non-cumulative and non-participating.
During 2020 the following transaction occurred:
|
a. |
On 15th June, declared a cash dividend of $80,000 on preferred stock. Dividend paid on 1st July. |
|
b. |
On 1st August, declared a 10% stock dividend on common stock. The current market price of the common stock was $180. The stock was issued in September end. |
|
c. |
On 1st October, declared a cash dividend of $60 per share on the common stock; the dividend paid on 30th October |
|
d. |
On 1st December issued a 2-for-1 stock split of common stock, when the stock was selling for $200 per share. |
Required: Develop the Stockholders Equity category of the 31st December 2020 balance sheet. Assume the net income for the year was $300,000 [5]
[Answer: Total shareholders’ equity = $39,30,000]
SOLUTION
Given and working note:
(a) On 15th June, declared a cash dividend of $80,000 on preferred stock. Dividend paid on 1st July.
Journal Entries
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Jun 15 |
Declaration of cash dividend to preferred stocks |
|
|
|
|
|
|
Retained earnings account |
Dr |
|
80,000 |
|
|
|
To Dividend payable account |
|
|
|
80,000 |
|
|
(Being: BOD declared dividend on preferred stocks) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid |
|
|
|
|
|
Jul 1 |
Dividend payable account |
Dr |
|
80,000 |
|
|
|
To Bank account |
|
|
|
80,000 |
|
|
(Being: dividend paid in cash) |
|
|
|
|
|
|
|
|
|
|
|
(b) On 1st August, declared a 10% stock dividend on common stock. The current market price of the common stock was $180. The stock was issued in September end.
Given and working note:
|
Stock dividend distributable |
= 15,000 stocks x $180 MVPS x 10% |
= $270,000 |
Retained earnings Dr |
|
Stock dividend declared |
= 15,000 stocks x $100 par value x 10% |
= $150,000 |
Common stock Cr |
|
Retained earnings |
= 270,000 – 150,000 |
= $120,000 |
Additional paid in capital Cr |
Journal Entries
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
|
Distributable of small stock dividend |
|
|
|
|
|
|
Retained earnings account |
Dr |
|
270,000 |
|
|
|
To Stock dividend distributable account |
|
|
|
270,000 |
|
|
(Being: small stock dividend distributable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration of small stock dividend |
|
|
|
|
|
|
Stock dividend distributable account |
Dr |
|
270,000 |
|
|
|
To Common stock account |
|
|
|
150,000 |
|
|
To Additional paid in capital account |
|
|
|
120,000 |
|
|
(Being: 1,500 stocks of $100 issued for dividend) |
|
|
|
|
|
|
|
|
|
|
|
(c) On 1st October, declared a cash dividend of $60 per share on the common stock; the dividend paid on 30th October
Journal Entries
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Jun 15 |
Declaration of cash dividend to common stocks |
|
|
|
|
|
|
Retained earnings account |
Dr |
|
990,000 |
|
|
|
To Dividend payable account |
|
|
|
990,000 |
|
|
[Being: BOD declared dividend on common stocks; |
|
|
|
|
|
|
(15,000 old + 1,500 new) @ $60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid |
|
|
|
|
|
Jul 1 |
Dividend payable account |
Dr |
|
990,000 |
|
|
|
To Bank account |
|
|
|
990,000 |
|
|
(Being: dividend paid in cash) |
|
|
|
|
|
|
|
|
|
|
|
(d) On 1st December issued a 2-for-1 stock split of common stock, when the stock was selling for $200 per share.
There is the 2-for-1 common stock split.
|
New price of common stocks |
= $100 x 1/2 |
= $50 |
|
No. of new common stocks |
= (15,000 old + 1,500 new) x 2 |
= 33,000 |
Now,
Partial Balance Sheet of MG Group as on 31st December 2020
|
Liabilities |
Amount |
|
|
Shareholders’ Equity: |
|
|
|
|
8% Preferred stocks of $500 at par value; 1,000 stocks issued and outstanding |
5,00,000 |
|
|
Common stock of $50 at par value; 33,000 stocks issued and outstanding |
16,50,000 |
|
|
Additional paid in capital-preferred |
3,00,000 |
|
|
Additional paid in capital-equity ($400,000 old + $120,000 new) |
5,20,000 |
|
|
Total contributed capital |
29,70,000 |
|
|
Retained earnings |
9,60,000 |
|
|
Total shareholders’ equity |
39,30,000 |
Q: 14 b. Explain the concept of bonds and write down the main characteristics of bond. [5]
When a limited company issues bonds, they are known corporate bonds.
The government also issues bonds; they are known government bonds or municipality bonds.
Bonds are secured with the fixed assets of the company.
These bonds are issued by the companies for their expenses and future expansions.
The borrower pays interest at regular intervals.
The principal amount will be returned on maturity period; it is known as redemption of bonds.
In Nepal, debentures are more popular than bonds.
Usually the par value of a debenture is Rs 1,000 in Nepal.
The characteristics of bonds (write any for short answer question)
Principal
Principal is the amount of a bond.
It is also called the par value or face value of the bond.
In Nepal, generally par value of a bond is Rs 1,000.
Bonds can be issued at par, at discount or at premium.
Coupon rate means interest rate of a bond.
Interest rate of a bond is prefixed.
It is paid always on face value.
It is payable annually, half yearly or quarterly.
Maturity period
Maturity period means to be complete of time.
It is the date on which the borrower has agreed to repay the principal amount to lender.
Term-to-maturity refers to the number of years remaining for the bonds to mature.
The term-to-maturity changes every day from date of issue of the bond until its maturity.
Convertible
Convertible bonds are converted into new bonds, common stocks or preferred stocks.
This conversation may be at par, discount or premium.
Collateral
When a limited company takes large loan from financial institute after deposing bonds as security, it is called collateral bonds.
The value of bond is more than loan amount.
Registration
Bonds can be either registered or bearer for interest and principal payments.
The issuer company maintains the records on the ownership of registered bonds.
For bearer bond, the holder of the bond is the owner.
Call provision
Call provision gives the right to redeem the bonds prior to maturity to the issuing company.
Usually, the call provision is at a higher price than the maturity value.
The difference amount is a call premium.
Q: 15 a. Differentiate between horizontal and vertical analysis.
Horizontal analysis is also known as dynamic analysis.
It becomes more useful when the company compare results with previous financial years.
Vertical analysis is also known as static analysis.
It is the analysis of the financial statements of the company for one accounting year.
It is more useful when the company compares results with other similar companies.
Differentiate between Horizontal and Vertical Analysis
|
Bases |
Horizontal analysis (dynamic analysis) |
Vertical analysis (static analysis) |
|
Purpose |
The main purpose of horizontal analysis is to determine the change of the items during multiple years; sometime decade. |
The main purpose of vertical analysis is to determine the proportion of the items during same accounting period. |
|
Benefit |
It indicates the growth or decline of the item. |
It helps to predict futures proportion of items. |
|
Expression |
It shows changes in figure or percentage or both. |
It shows changes in ratios or percentage. |
|
Formula |
= Balance sheet item ÷ Total assets or Liabilities or Equity |
= Change in amount ÷ Amount of base year x 100 |
Q: 15 b. Differentiate between account receivable and note receivable [5]
Account receivable is based on sales of goods or services on credit.
Accounts receivable is an informal and short-term payment without interest.
Notes receivable is a written promissory note extending a line of credit to the other party.
Note receivable has a specified future payment date along with interest.
Differences between Accounts Receivable and Notes Receivable
|
Bases |
Accounts Receivable |
Notes Receivable |
|
Parties |
It has three parties; drawer, drawee and payee. |
It has two parties; promisor and payee. |
|
Drawer |
Creditor is the drawer of account receivable |
Debtor is the drawer of note receivable |
|
Acceptance |
It needs acceptance by the drawee. |
It does not need acceptance by the drawee. |
|
Order or promise |
It is an order to pay |
It is a promise to pay |
|
Liability |
Liability of the drawer arises only if the acceptor does not pay. |
Promisor has the primary liability to pay |
|
Time period |
It is only short-term |
It may be short-term or long-term. |
|
Transferability |
It cannot be transferred to other party. |
It can be transferred to other party. |
Q: 16. Discuss in brief about the disclosures required for financial statement under Nepal Financial Reporting Standard (NFRS) [10]
Nepal Financial Reporting Standards (NFRS)
NFRS is a common set of accounting standards and reporting language.
Nepal Accounting Standard Board issued NFRS in 2013.
NFRS is prepared in the line of IFRS.
NASB published NFRS subjecting the diversity of business scenario and accounting complexity.
There are 40 standards issued by Accounting Standard Board and implemented by Institute of Chartered Accountant of Nepal (ICAN).
Here, disclosures mean additional information or important notes along with the financial statement.
Accountants of the company include disclosures or important notes relating to assets, liabilities and equity of the company in financial statement.
They make clear understanding to the users of the financial statements.
They communicate the relevant information which is not possible to include in the financial statements.
Here relevant means impact on financial statement’s reliability.
Major financial statements are income statement, statement of changes in equity, balance sheet and cash flow statement.
Each of these statements should be prepared with disclosures footnotes which provide explanatory details about the information presented on the statements.
The major financial disclosures are:
Accounting changes
Accounting errors
Asset retirement
Insurance contract modifications
Noteworthy events and transactions
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Group C: Long Answer Questions
Attempt any TWO questions: [2×15 marks =30 marks]
Q: 17. Following are the transaction of ABC Computer Service Agency during the month of January:
|
Jan 2, |
Received cash $300,000 to start business from the owners of the company and converted into common stocks of $10. |
|
Jan 8, |
Deposited into bank $100,000 |
|
Jan 10, |
Signed a two year promissory note at the bank and received cash of $50,000. Interest 10% – along with $50,000 will be repaid at the end of two years. |
|
Jan 11, |
Purchase of supplies for $30,000 on account. The company has 45 days to pay for the supplies. |
|
Jan 19, |
Billed a client $100,000 for service rendered by expert in helping to install a new computer system. The client is to pay 25% of the bill upon its receipt and the remaining balance within 60 days. |
|
Jan 21, |
Paid $10,000 to the advertising company. |
|
Jan 22, |
Received $45,000 after deduction of 10% discount from the client billed on Jan 19. |
|
Jan 26, |
Received cash of $30,000 for service provided in selecting software for its computer. |
|
Jan 28 |
Purchased a computer system for $50,000 in cash. |
|
Jan 31 |
Paid $50,000 salaries for January and $30,000 rent for February. |
Required: (a) Journal entries; (b) T accounts (ledger) for income, account receivable and account payable;
(c) Triple column cash book; (d) Trial balance [5+3+4+3 = 15]
[Answer: (b) SR = $130,000; AR = $25,000; AP = $30,000;
(c) Cash = $210,000; Bank = $100,000; Discount = $5,000;
(d) TB = $510,000]
SOLUTION
Journal Entries
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Jan 2 |
Business started |
|
|
|
|
|
|
Cash account |
Dr |
|
300,000 |
|
|
|
To Common stocks account |
|
|
|
300,000 |
|
|
[Being: the owners introduced cash and converted into |
|
|
|
|
|
|
30,000 common stocks of $10 at par) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash deposited into bank |
|
|
|
|
|
Jan 8 |
Bank account |
Dr |
|
100,000 |
|
|
|
To Cash account |
|
|
|
100,000 |
|
|
(Being: dividend paid in cash) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 10 |
Loan taken |
|
|
|
|
|
|
Cash account |
Dr |
|
50,000 |
|
|
|
To 10% Notes payable account |
|
|
|
50,000 |
|
|
(Being: signed a two year promissory note at the bank) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 11 |
Office supplies purchase on credit |
|
|
|
|
|
|
Office supplies account |
Dr |
|
30,000 |
|
|
|
To Account payable account |
|
|
|
30,000 |
|
|
(Being: office supplies purchased on account/credit) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 19 |
Service rendered |
|
|
|
|
|
|
Cash account |
Dr |
|
25,000 |
|
|
|
Account receivable account |
Dr |
|
75,000 |
|
|
|
To Service revenue |
|
|
|
100,000 |
|
|
(Being: service provided to clients of $100,000 and |
|
|
|
|
|
|
Received 25% in cash and balance on account) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 21 |
Advertisement expenses |
|
|
|
|
|
|
Advertisement expenses account |
Dr |
|
10,000 |
|
|
|
To Cash account |
|
|
|
10,000 |
|
|
(Being: advertisement expenses paid) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 22 |
Received from client partially |
|
|
|
|
|
|
Cash account |
Dr |
|
45,000 |
|
|
|
Discount allowed account |
Dr |
|
5,000 |
|
|
|
To Account receivable account |
|
|
|
50,000 |
|
|
(Being: cash received and discount allowed) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 26 |
Service provided in cash |
|
|
|
|
|
|
Cash account |
Dr |
|
30,000 |
|
|
|
To Service revenue |
|
|
|
30,000 |
|
|
(Being: service provided in cash) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 28 |
Computer purchased |
|
|
|
|
|
|
Equipment account |
Dr |
|
50,000 |
|
|
|
To Cash account |
|
|
|
50,000 |
|
|
(Being: computer set purchased for cash) |
|
|
|
|
|
|
|
|
|
|
|
|
Jan 31 |
Expenses paid |
|
|
|
|
|
a. |
Salaries account |
Dr |
|
50,000 |
|
|
|
To Cash account |
|
|
|
50,000 |
|
|
(Being: salaries paid in cash) |
|
|
|
|
|
|
|
|
|
|
|
|
b. |
Advance expenses |
|
|
|
|
|
|
Advance rent account |
Dr |
|
30,000 |
|
|
|
To Cash account |
|
|
|
30,000 |
|
|
(Being: rent paid for February) |
|
|
|
|
|
|
|
|
|
|
|
Service Revenue Account
|
Jan 31 |
To Balance c/d |
130,000 |
Jan 19 |
By Cash |
25,000 |
|
|
|
|
Jan 19 |
By Account receivable |
75,000 |
|
|
|
|
Jan 26 |
By Cash |
30,000 |
|
|
|
130,000 |
|
|
130,000 |
|
|
|
|
Feb 1 |
By Balance b/d |
130,000 |
Account Receivable Account
|
Jan 19 |
To Service revenue |
75,000 |
Jan 22 |
By Cash |
45,000 |
|
|
|
|
Jan 22 |
By Discount allowed |
5,000 |
|
|
|
|
Jan 31 |
By Balance c/d |
25,000 |
|
|
|
75,000 |
|
|
75,000 |
|
Feb 1 |
To Balance b/d |
25,000 |
|
|
|
Account Payable Account
|
Jan 31 |
To Balance c/d |
30,000 |
Jan 11 |
By Office supplies |
30,000 |
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
30,000 |
|
|
|
|
Feb 1 |
By Balance b/d |
30,000 |
Triple Column Cash Book
|
Date |
Particulars |
LF |
Cash |
Bank |
Dis |
Date |
Particulars |
LF |
Cash |
Bank |
Dis |
|
Jan 2 |
To Common stocks |
|
300,000 |
|
|
Jan 8 |
By Bank |
C |
100,000 |
|
|
|
8 |
To Cash |
C |
|
100,000 |
|
21 |
To Advertisement |
|
10,000 |
|
|
|
10 |
To 10% Notes payable |
|
50,000 |
|
|
28 |
By Equipment |
|
50,000 |
|
|
|
19 |
To Service revenue |
|
25,000 |
|
|
31 |
By Salaries |
|
50,000 |
|
|
|
22 |
To Account receivable |
|
45,000 |
|
5,000 |
31 |
By Advance rent |
|
30,000 |
|
|
|
26 |
To Service revenue |
|
30,000 |
|
|
31 |
By Balance c/d |
|
210,000 |
100,000 |
|
|
|
|
|
450,000 |
100,000 |
5,000 |
|
|
|
450,000 |
100,000 |
Nil |
Trial Balance
|
Balance of ledgers |
Amount Dr |
Balance of ledgers |
Amount Cr |
|
Cash |
210,000 |
Common stocks |
300,000 |
|
Bank |
100,000 |
Service revenue |
130,000 |
|
Discount allowed |
5,000 |
Account payable |
30,000 |
|
Account receivable |
25,000 |
10% Notes payable |
50,000 |
|
Office supplies |
30,000 |
|
|
|
Advertisement |
10,000 |
|
|
|
Equipment |
50,000 |
|
|
|
Salaries |
50,000 |
|
|
|
Advance rent |
30,000 |
|
|
|
|
510,000 |
|
510,000 |
Q: 18. The Comparative balance sheet and income statement of ABC Company Ltd are given below:
|
Liabilities |
Year 1 |
Year 2 |
Assets |
Year 1 |
Year 2 |
|
Equity share |
10,00,000 |
12,00,000 |
Fixed assets |
10,00,000 |
12,00,000 |
|
Share premium |
1,00,000 |
1,20,000 |
Inventories |
2,00,000 |
3,50,000 |
|
10% Debenture |
1,20,000 |
70,000 |
Account receivable |
2,50,000 |
3,40,000 |
|
Provision for tax |
20,000 |
40,000 |
Prepaid expenses |
20,000 |
10,000 |
|
Provision for dividend |
10,000 |
20,000 |
Cash |
1,20,000 |
1,50,000 |
|
Account payable |
60,000 |
|
|
|
|
|
Accumulated depn |
2,50,000 |
|
|
|
|
|
Profit and loss account |
30,000 |
|
|
|
|
|
|
15,90,000 |
20,50,000 |
|
15,90,000 |
20,50,000 |
Income Statement for the Year 2
|
Particulars |
Amount |
Amount |
|
|
Sales revenue |
|
10,00,000 |
|
|
Less: |
Cost of goods sold |
|
(600,000) |
|
|
Gross profit |
|
400,000 |
|
Less: |
Operating expenses: |
|
|
|
|
Administrative expenses |
150,000 |
|
|
|
Depreciation |
50,000 |
|
|
|
Provision for tax |
40,000 |
|
|
|
Provision for dividend |
20,000 |
|
|
|
Interest paid |
12,000 |
|
|
|
Premium on redemption of debenture |
5,000 |
(277,000) |
|
|
Net income |
|
123,000 |
|
Add: |
Gain on sale of fixed assets |
|
17,000 |
|
|
Retained earnings |
|
140,000 |
Additional information:
(i) A part of fixed assets costing S50,000 with an accumulated depreciation of $20,000 has been sold for $47,000.
(ii) Dividend paid in year 2 $10,000.
Required: Cash flow statement direct method by showing operating, investing and financing activities
[Answer: NCOA = $78,000; NCIA = ($203,000); NCFA = $155,000;
*Asset purchased = ($250,000); Dividend paid given = $10,000
SOLUTION
Given and working note:
|
A. |
Operating Activities: |
|
3. |
Cash paid to operating expenses |
|
|
1. |
Cash collection form sales and customers |
|
Administrative expenses |
(150,000) |
|
|
|
Sales revenue |
10,00,000 |
|
Less: Decrease in prepaid expenses |
10,000 |
|
|
Less: Increase in account receivable |
(90,000) |
|
|
(140,000) |
|
|
|
910,000 |
|
|
|
|
|
|
|
4. |
Interest and insurance |
|
|
2. |
Cash paid to suppliers |
|
Interest on debenture |
(12,000) |
|
|
|
Cost of goods sold (COGS) |
(600,000) |
|
|
|
|
|
Add: Increase in inventories |
(150,000) |
|
|
|
|
|
Less: increase in account payable |
90,000 |
5. |
Tax paid |
(20,000) |
|
|
|
(660,000) |
|
|
|
|
|
|
|
|
|
|
Provision for Tax Account
|
To Bank (tax paid, b/f) |
20,000 |
By Balance b/d |
20,000 |
|
To Balance c/d |
40,000 |
By P&L or Income statement |
40,000 |
|
|
60,000 |
|
60,000 |
Accumulated Depreciation Account
|
To Depreciation on sales (b/f) |
20,000 |
By Balance b/d |
250,000 |
|
To Balance c/d |
280,000 |
By Depreciation for the year |
50,000 |
|
|
300,000 |
|
300,000 |
Fixed Account
|
To Balance b/d |
10,00,000 |
By Bank (Sold, CSV, given) |
47,000 |
|
To P&L or IS (gain) |
17,000 |
By Depreciation for the year |
20,000 |
|
To Bank (purchase, b/f) |
2,50,000 |
By P&L or IS (loss) |
Nil |
|
|
|
By Balance c/d |
12,00,000 |
|
|
12,67,000 |
|
12,67,000 |
|
Accumulated depreciation |
= |
Original cost – Book salvage value |
|
20,000 |
= |
50,000 – BSV |
|
BSV |
= |
30,000 |
|
|
|
|
|
Gain |
= |
CSV – BSV |
|
17,000 |
= |
CSV – 30,000 |
|
CSV |
= |
47,000 |
Statement of Cash Flow under NFRS
ABC Company Ltd
|
Particulars |
Notes |
Amount |
|
|
Cash from operating activities: |
|
|
|
|
|
Cash collection from sales and customers |
1 |
910,000 |
|
|
Cash paid to suppliers |
2 |
(660,000) |
|
|
Cash paid for operating expenses |
3 |
(140,000) |
|
|
Interest and insurance paid |
4 |
(12,000) |
|
|
Income tax paid |
5 |
(20,000) |
|
|
Net cash from operating activities [A] |
|
78,000 |
|
Cash from investing activities: |
|
|
|
|
|
Proceeds from sales of fixed assets |
|
47,000 |
|
|
Interest received |
|
Nil |
|
|
Dividend received |
|
Nil |
|
|
Acquisition of fixed assets |
|
(250,000) |
|
|
Acquisition of investment |
|
Nil |
|
|
Net cash from investing activities [B] |
|
(203,000) |
|
Cash from financing activities: |
|
|
|
|
|
Proceeds from issue of common stocks (capital) |
|
200,000 |
|
|
|
|
|
|
|
Increase in additional paid in capital (share premium) |
|
20,000 |
|
|
Repaid or Redemption of debenture |
|
(50,000) |
|
|
Premium on redemption of debenture |
|
(5,000) |
|
|
Dividend paid (given) |
|
(10,000) |
|
|
Net cash from financing activities [C] |
|
155,000 |
|
Net change in cash and cash equivalent [A+B+C] |
|
30,000 |
|
|
Add: Beginning cash and cash equivalent |
|
120,000 |
|
|
Exchange gain or loss |
|
Nil |
|
|
Ending cash and cash equivalent |
|
150,000 |
|
Q: 19. “Financial accounting is based on generally accepted accounting principles, which is enabled the preparation and presentation of financial statement uniformly.” Discuss. [15]
Generally Accepted Accounting Principles (GAAP)
GAAP is a collection of commonly followed accounting principles, rules and standards for financial reporting.
The American Institute of Accountants (AIA) first used GAAP terminologies in 1936.
GAAP include definitions, concepts, principles as well as industry-specific rules.
The purpose of GAAP is to ensure that financial reporting is transparent and consistent (similar) from one organization to another.
GAAP represents a set of broad concepts and detailed practices.
It represents best accounting practices as it is accepted at a given time..
FASB (Financial Accounting Standards Board) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
IFRS (International Financial Reporting Standards) also uses GAAP.
Because, all the basic rules and principles of accounting are based on GAAP.
Assumption about GAAP
There are four major assumptions about GAAP; while recording financial transaction, bookkeeper and accountant must follow these assumptions:
First assumption
The first assumption of GAAP is that the business entity and business owner is separate and distinct from each other.
Business records all its expenses in income statement as per business expenses.
Business owner record his expenses as drawing in his personal account.
It means all of the figures shown in the organization’s financial reports are specific only to that organization; there is not any expense related to business owner.
Second assumption
The second assumption is that the business is a going concern and it will not die (close).
But time is separated for every 12 months to prepare financial statements.
Third assumption
The third assumption is that amounts shown in the organization’s financial statements are stated in terms of a one currency.
All amounts are recorded in the same currency; it means an international company cannot report in a combination of rupees, dollars, euros, dinars, sterling or any currencies used in the countries in which the company operates.
Fourth assumption
The fourth assumption of GAAP is that the time period stated in financial reporting is accurate.
If the time period is identified as including 1 January to 31 December 31, then GAAP dictates that all transactions included in the report did indeed occur within the identified time period.
Preparation of Financial Statements
The financial statements of all the private limited and limited companies are presented in specific formats.
They are income statement, balance sheet and cash flow statement.
Other financial statements can be prepared as per the requirement of the business.
A financial period may be any period of 12 months.
There are two types of financial year for financial statements.
They are calendar year and fiscal year.
Calendar years starts from 1st January and ends on 31st December each year.
Financial year starts from 1st April this year and ends on 31st March next year.
Nepal Financial Reporting Standards (NFRS)
NFRS is a common set of accounting standards and reporting language.
Nepal Accounting Standard Board issued NFRS in 2013.
NFRS is prepared in the line of IFRS.
NABS published NFRS subjecting the diversity of business scenario and accounting complexity.
There are 40 standards issued by Accounting Standard Board and implemented by Institute of Chartered Accountant of Nepal (ICAN).
In Nepal, a financial year begins from 1st Shrawan to 31st Ashadd.
Calendar years starts from 1st Baishakh to 31st Chaitra each year
At the end of the period, the organizations will present its financial statements.
Therefore, financial accounting is based on generally accepted accounting principles, which is enabled the preparation and presentation of financial’ statement uniformly.
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Swar | Vyanjak | A Aa I Ee | Ka Kha Ga Gha | Ka Kaa Ki Kee | Barahkhadi | Kra Khra Gra
ABCD | British Phonetic ABCD | American Phonetic ABCD | ABCD in Devanagari
The Half-closed Eyes of the Buddha and the Slowly Sinking Sun | All Solution | NEB English Class 12 | Short Story Q&A
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