Solutions Exercises Financial Accounting

10- You are the accountant for a consulting company. The company has the following
Balance Sheet at the end of 2013.

CURRENT ASSETS CURRENT LIABILITIES

Cash 600 Income tax payable 500

Debtors 2,000 Creditors 3,400

NON-CURRENT ASSETS NON-CURRENT LIABILITIES

Land 400 Long-term loan 1,000

Building 4,000
Less: Accumulated (500) OWNERS’EQUITY
depreciation
Tools and Equipment 3,500 Capital stock 3,000
Less: Accumulated (1,000) Retained earnings 500
depreciation Net income 600(*)

9,000 9,000
(*) 2/3 will be paid as dividend.

For the first quarter of 2014, transactions are expected to be as follows:

1- A new land is purchased at a cost of 200. The full price is paid from the bank account.
2- The long-term loan is repaid: 400 (interest expense of 100 included).
3- Merlin borrows 500 from a finance business. The loan is to be repaid in five years’
time.
4- The Capital stock is increased by 500.
5- Invoices are sent to some clients. The total of the invoiced amount is 11,500. Clients
have to pay immediately.
6- Invoices are sent to some clients. The total of the invoiced amount is 4,500, on
account.
7- Salaries are paid: 9,000.
8- Depreciation expense: building: 200; tools and equipment: 300.
9- Payment is made to the Insurance Company for 1,000.
10- Bill is received for utilities expense: 3,000.

Income tax rate: 33.1/3%.

Prepare the Cash-Flows Statement, the Income Statement and the Balance Sheet for the first
quarter of 2014.

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CASH-FLOWS STATEMENT 1/1 to 3/31 (transactions during the 3 months)
BALANCE January 1st 2006 600
(1) Investing Activity (200)
(2) Financial Activity (long term loan) (400)
(3) Financial Activity (long term loan) 500
(4) Financial Activity (Share Capital) 500 (Shareolders increase capital)
(5) Operating Activity 11,500 (paid immediatly)
(6)
(7) Operating Activity (salary) (9,000)
(8)
(9) Operating Activity (Insurance) (1,000)
(10)

From BS:
Debtors 2,000
Creditors (3,400)
Income Tax Payable (500)
Dividend paid (600x2/3) (400) (2/3 will be paid as dividend 600x2/3)
CASH FLOW 3/31 : 200
INCOME STATEMENT 1/1 to 3/31
REVENUE: 11,500+4,500 16,000

EXPENSES:
SALARY 9,000
DEPRECIATION 200 + 300 500
INSURANCE 1,000
UTILITIES 3,000
INTEREST 100
TOTAL: 13,600
NET INCOME BEFORE TAXES : 16000 - 13,600 = 2,400
INCOME TAXES 2,400 x 33.1/3%= 800
NET INCOME 1,600

BALANCE SHEET 3/31

Current ASSETS CURENT LIABILITIES
Cash 200 Income tax payable 800
Debtors 4,500 Creditors 3,000
Non Current ASSETS NON CURRENT LIABILITIES
Land 600 Long term loan (1,000-300+500) 1,200
Building 4,000
Less Acc Dep (700)
3,300 OWNER’S EQUITIES
Capital Stock : 3,500
Tools & equipment 3,500 Retained earnings : 500 + 1/3 x 600 =700
Less: Acc Dep (1,300)
2,200 NET INCOME 1,600
TOTAL: 10,800 TOTAL : 10,800

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11-

Trial Balance 2006 DR (K€) CR (K€)

Share Capital 6,000
Land and Buildings 4,000
Plant and Machinery 3,000
Debtors 5,000
Creditors 4,000
Purchases 6,000
Sales 17,000
Investment Income 100
Distribution Expenses 1,000
Advertising 2,000
Bank Overdraft Interest 1,000
Salaries 2,000
Cash on hand 1,000
Bank Overdraft 1,000
Stock (at January 1st) 2,000
Rent and Rates 2,000
Administration Expenses 3,000
Stock Exchange Investments 2,000
Long-term Loan 5,900

TOTAL 34,000 34,000

Closing stock was valued at €3,000.

Prepare an Income Statement for the year and a Balance Sheet.

INCOME STATEMENT
REVENUE : EXPENSES:
Sales 17,000
COGS (5,000) Bank overdraft Int. 1,000
Gross Margin 12,000 Distribution Expenses 1,000
Investment Income 100 Advertising 2,000
Admin. Expenses 3,000
Rent and Rate 2,000
Salaries 2,000

TOTAL : 12,100 TOTAL: 11,000

NET INCOME : 12,100-11,000= 1,100

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 BALANCE SHEET
ASSETS LIABILITIES AND OWNER’S EQUITIES
Cash 1,000 LIABILITIES
Stock 3,000 Bank Overdraft 1,000
Long term loan 5,900
Debtors 5,000
Stock Exch.Invest 2,000 Creditors 4,000
Plant and Machinery 3,000
Land and Building 4,000 OWNER’S EQUITY
Share Capital 6,000
NET INCOME 1,100
TOTAL : 18,000 TOTAL: 18,000

12-
Merlin Company
Balance Sheet
December 31, 2005
CURRENT ASSETS CURRENT LIABILITIES

Cash 600 Income tax payable 500

Debtors 2,000 Creditors 3,400
Stock 7,000
NON CURRENT LIABILITIES
NON-CURRENT ASSETS
Long-term loan 2,000
Land 400
Building 4,000 OWNERS’EQUITY
Less: Accumulated depreciation (500)
Tools and Equipment 3,500 Capital stock 8,000
Less: Accumulated depreciation (1,000) Retained earnings 1,500
Net income 600(*)

16,000 16,000
(*) 2/3 will be paid as dividend.

For the first quarter of 2006, transactions are expected to be as follows:

1- A new land is purchased at a cost of 200. The full price is paid from the bank account.
2- The long-term loan is repaid: 400 (interest expense of 100 included).
3- Merlin borrows 500 from a finance business. The loan is to be repaid in five years’
time.
4- The Capital stock is increased by 500.
5- Invoices are sent to some clients. The total of the invoiced amount is 9,100. Clients
have to pay immediately.
6- Invoices are sent to some clients. The total of the invoiced amount is 12,000. Clients
are allowed up to 120 days to pay.
7- Salaries are paid: 4,000.

4
 8- Depreciation expense: building: 200; tools and equipment: 300.
9- Payment is made to the Insurance Company for 1,000.
10- Utilities are paid 2,000.
11- Goods are purchased at a cost of 8,000. The full price is to be paid within 120 days.
12- The closing stock is valued at 9,000.

Income tax rate: 33.1/3%.

Prepare the Cash-Flows Statement, the Income Statement and the Balance Sheet for the
first quarter of 2006.

CASH-FLOWS STATEMENT 1/1 to 3/31 (transactions during the 3 months)

BALANCE January 1st 2006 600
(1) Investing Activity (200)
(2) Financial Activity (long term loan) (400)
(3) Financial Activity (long term loan) 500
(4) Financial Activity (Share Capital) 500 (Shareholders increase capital)
(5) Operation Activity 9,100 (paid immediatly)
(6)
(7) Operating Activity (salary) (4,000)
(8)
(9) Operating Activity (Insurance) (1,000)
(10) Operating Activities (Utilities) (2,000)
(11)
(12)
From BS:
Debtors 2,000
Creditors (3,400)
Income Tax Payable (500) (Income Tax payable - 2005)
Dividend paid (600x2/3) (400) (2/3 will be paid as dividend 600x2/3)
CASH FLOW 3/31 : 800
INCOME STATEMENT 1/1 to 3/31
REVENUE: 12,000+9,100 21,100
COST OF GOODS SOLD OPENING STOCK 7,000
PURCHASES 8,000
CLOSING STOCK (9,000) 6,000
GROSS PROFIT 15,100
EXPENSES:SALARY : 4000
DEPRECIATION : 200 + 300 500
INSURANCE 1,000
UTILITIES 2,000
INTEREST 100
TOTAL 7,600
INCOME BEFORE TAX 15,100- 7,600 = 7,500
INCOME TAX 7500 x 33.1/3%= 2500
NET INCOME 7500 – 2500 = 5000

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BALANCE SHEET 3/31
CURRENT ASSETS CURRENT LIABILITIES
Cash 800 Income tax payable 2,500
Debtors 12,000 Creditors 8000
Stock 9,000
FIXED ASSETS NON CURRENT LIABILITIES
Land 600 Long term loan (2,000-300+500) 2,200
Building 4,000
Less Acc Dep (700)
3,300 OWNER’S EQUITIES
Capital Stock 8,500
Tools & equipment 3,500 Retained earning 1500 + 1/3 x 600 =1700
Less: Acc.dep (1,300)
2,200 NET INCOME 5,000
TOTAL : 27,900 TOTAL : 27,900

13-

(a) Transactions analysed to show the two aspects of the transaction:

No £ Effects
1 10,000 Increase asset of cash Increase ownership interest
2 6,500 Decrease asset of cash Increase asset of vehicles
3 125 Increase liability of trade creditors Decrease ownership interest (expenses)
4 250 Decrease asset of cash Decrease ownership interest (expenses)
5 125 Decrease asset of cash Decrease liability of trade creditors
6 240 Decrease asset of cash Decrease ownership interest (expenses)
7 150 Increase asset of stock of spare Decrease asset of cash
parts
8 3,750 Increase asset of stock of spare Increase liability of trade creditors
parts
9 360 Decrease asset of cash Decrease ownership interest (expenses)
10 85 Increase liability of trade creditors Decrease ownership interest (expenses)
11 4,060 Increase asset of cash Increase ownership interest (revenue)
12 1,605 Increase asset of trade debtors Increase ownership interest (revenue)
13 850 Decrease asset of cash Decrease ownership interest (expenses)
14 1,350 Decrease asset of cash Decrease ownership interest (withdrawal)
15 *2,300 Decrease asset of stock of spare Decrease ownership interest (expenses)
parts
* Stock of spare parts acquired £(3,750 + 150) = £3,900, less amount remaining £1,600. This leaves
£2,300 as the amount of the asset used in period.

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(b) Spreadsheet
Assets Liabilities Ownership Interest
Date Cash and Trade Stock of Vehicles Trade Capital Revenue Expenses
bank debtors spare parts creditors contrib. or + −
withdrawn
July £ £ £ £ £ £ £ £
1 Owner puts cash into the business 10,000 10,000
2 Buy a vehicle for cash (6,500) 6,500
3 Receive a bill for electricity consumed 125 125
4 Purchase stationery for office use, paying cash (250) 250
5 Pay the electricity bill in cash (125) (125)
6 Pay monthly rental for a computer, used to keep (240) 240
customer records
7 Buy spare parts for cash, to use in repairs (150) 150
8 Buy spare parts on credit terms 3,750 3,750
9 Pay garage service bills for van, using cash (360) 360
10 Fill van with petrol, using credit account at local
garage, to be paid at the start of next month 85 85
11 Carry out repairs for cash 4,060 4,060
12 Carry out repairs on credit terms 1,605 1,605
13 Pay wages to an employee (850) 850
14 Owner takes cash for personal use (1,350) (1,350)
15 The owner checks the stock of spare parts at the
end of the month and estimates it to be worth (2,300) 2,300
£1,600 measured at cost price (i.e. £2,300
consumed)
Column totals 4,235 1,605 1,600 6,500 3,835 8,650 5,665 4,210
Totals of Assets, Liabilities and Ownership Interest £13,940 £3,835 £10,105

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(c) It can be seen from the last line of the spreadsheet solution that 13,940 – £3,835 =
£10,105 and so the accounting equation is satisfied.

(d))
Peter (Television) Company
(i) Cash flow statement for the month of July Year xx
OPERATING ACTIVITIES £
Inflow from fees 4,060
Outflow: stationery (250)
electricity (125)
computer rental (240)
spare parts (150)
van service (360)
wages (850)
Net inflow from operations 2,085

INVESTING ACTIVITIES
Payment for vehicles (6,500)
Net outflow for investing activities (6,500)

FINANCING ACTIVITIES
Capital contributed by owner 10,000
Capital withdrawn as drawings (1,350)
Net inflow from financing activities 8,650

Increase in cash at bank over period 4,235

Peter (Television) Company

(ii) Profit and loss account for the month of July Year xx
£ £
Fees charged 5,665
Expenses:
Spare parts used (2,300)
Electricity (125)
Stationery (250)
Computer rental (240)
Van service (360)
Petrol (85)
Wages (850)
(4,210)
Profit 1,455
 Peter (Television) Company
(iii) Balance sheet at 31 July Year xx
£ £
Fixed assets
Motor vehicles 6,500
Current assets
Stock of spare parts 1,600
Trade debtors 1,605
Cash at bank 4,235
7,440
Current liabilities
Trade creditors (3,835)
Current assets less current liabilities 3,605

Net assets 10,105

Capital at start 10,000

Add profit for month 1,455
Less drawings during month (1,350)
Total ownership interest 10,105

14-
Stage Transaction or event Assets Ownership
interest
Cash at Deb- Raw W-in-P Fin/d Rev- Expen-
bank tors Mat. goods enue ses
stock + -
1 Purchased raw materials for cash. 500 (1,500) 1,500
kg at £3 per kg.
2 300 kg of the raw materials is put into (900) 900
production.
3 300 items of the finished products
completed. The cost of labour and (600) 600
expenses is £2 per item of the finished
products.
4 300 items of the finished products are
transferred to the finished goods store.
Item cost (3 + 2 =) £5 to produce.
Total cost £5  300 = £1,500. (1,500) 1,500
5 220 items of the finished products are
delivered to customers. Total cost 220 (1,100) 1,100
 £5 = £1,100.
6 Finished products are sold for £8 per
item on two-month credit terms. Total 1,760 1,760
sales 220  £8 = £1760
Totals at the end of the period (2,100) 1,760 600 − 400 1,760 1,100
660 660

Sales are £1,760.

Cost of goods sold is £1,100.
Closing raw materials stock is £600.
 Closing work in progress is Nil.
Closing stock of finished goods is £400.
Total profit is £660.
Packing and delivering goods to customers is a distribution expense.

15-

Calculation of profit on sale:

£
Sales of 300 computers at £400 each 120,000
Component cost 3  300  £50 (45,000)
Labour cost 300  £75 (22,500)
Profit 52,500

Analysis of transactions using the accounting equation:

Assets minus Liabilities = Ownership Interest

£000
May 1 100 Increase asset: stock of raw materials Increase liability: trade creditors
” 3 75 Decrease asset: stock of raw materials Increase asset: work-in-progress
” 5 37.5 Decrease asset: cash Increase asset: work-in-progress.
” 6 112.5 Decrease asset: work-in-progress Increase asset: finished goods
” 11 67.5 Decrease asset: finished goods stock Decrease ownership interest: expense of
cost of goods sold
” 11 120 Increase asset: trade debtors Increase ownership interest: revenue of
selling price of finished goods
 Spreadsheet analysing transactions and events into elements of the accounting equation for Computer Assembler Company

Date Transaction or event Assets Liabilities Ownership Interest

Cash at Trade Raw Work-in- Finished Trade Revenue Expenses
bank debtors materials progress goods creditors + −
stock
May £000 £000 £000 £000 £000 £000 £000 £000
1 Purchase computer components from supplier, 2,000
items at £50 each, on credit, and place in raw materials 100 100
store.

3 Remove 1,500 components from raw materials store to

meet production department’s request (cost £50 each).
Each computer requires 3 components. (75) 75

5 Carry out labour work and use production facilities to

convert components into finished goods. Additional
costs incurred for labour and use of facilities were £75 (37.5) 37.5
per computer assembled.
6 Finished goods are transferred to finished goods store.
Each computer has cost £225 in total (500 computers  (112.5) 112.5
£225 = £112,500).

11 300 computers, which cost £225 each to manufacture, are

delivered to a customer. (67.5) 67.5

11 The customer buys on credit terms at a price of £400 for

each computer delivered. 120 120

Totals (37.5) 120 25 nil 45 100 120 67.5