FR111

Fundamentals of Financial Accounting

Question 1
(a) Explain in short, the role of the International Federation of Accountants (IFAC) in shaping the
accounting environment.
(b) Explain the concept of integrated report.

Question 2
BC Fruits Ltd, a fruit bottling and canning company, is planning to expand its operations. The directors
are hoping to increase the range of preserved fruit products and in doing so will need to invest in new
equipment. They are also hoping to open a new facility in the northern part of the country. The CFO has
been asked to prepare a report on the following issues of conceptual framework. You are the Finance
Controller of the company, and your CFO wants to address all issues in his report and has asked for your
assistance.

Prepare brief notes for the CFO, addressing each of the following and using the Conceptual Framework as
a source of reference:
(a) Identify potential providers of finance for BC Fruits Ltd and their information requirements in
respect of financial statements.
(b) Explain the terms 'performance' and 'position' and identify which of the financial statements will
assist the user in evaluating performance and position.
(c) Indicate why, for decision-making purposes, the financial statements alone are insufficient.

Question 3
Consider the following transactions in answering the required questions.
(a) Journalize the following transactions using special journals for sales, purchases, cash receipts, and
cash payments. Also prepare the general journal whenever necessary.
(b) Prepare general and subsidiary ledgers for the following transactions considering opening balance of
cash Tk. 30,000.

List of transactions
April 1 Purchased merchandise on account from X Co. Tk. 20,000.
2 Paid one-year rent Tk. 20,000 for a storage space
3 Transfer Tk. 2,000 cash to the petty cashier.
4 Sold merchandise on account Tk. 8,000 to Y Co.
5 Purchase supplies on account from Z Co. Tk. 3,500.
6 Return merchandise to X Co. worth Tk. 3,000 that found damaged during shipment.
7 Total cash sales of merchandise for the week Tk. 9,000.
8 The owner withdraws Tk. 5,000 for personal use.
9 Collected cash from Y Co. in full settlement against transaction dated April 4 less 2%
discount.
10 Incurred advertisement on account in the Daily Star, Tk. 3,000.
11 Purchased merchandise on account from A Co. Tk. 12,000.
12 Sold merchandise on account Tk. 25,000 to B Co.
13 Received Tk. 8,000 advance from Y Co. for goods that will be delivered in the next
month.
14 Total cash sales of merchandise for the week Tk. 15,000.
15 Sold merchandise on account Tk. 30,000 to P Co.
16 Received Tk. 20,000 from DBBL, money borrowed against a note payable.
17 Purchased merchandise on account from X Co. Tk. 25,000.
 18 Purchased equipment for cash Tk. 18,000.
19 Received return of damaged merchandise from P Co. worth Tk. 2,000.
20 Paid X Co. in full less 2% discount. Discount is available only for transaction made in
previous 7-days.
21 Total cash sales of merchandise for the week Tk. 9,500.
22 Purchased merchandise for cash Tk. 4,000.
23 Sold merchandise on account Tk. 13,000 to Q Co.
24 Owner invested Tk. 80,000 cash in the business along with a motor vehicle worth Tk.
500,000.
25 Purchase merchandise from R Co. for cash Tk. 8,000.
26 Received payment in full less 2% discount from Q Co.

Question 4
The trial balance of Techno Edge Corporation after completing second quarter of operation as of June 30,
2020, is given below. Consider the following additional information to complete the required questions.

Techno Edge Corporation

Trial Balance
As on June 30, 2020
Debit Credit
Cash $7,700 -
Accounts Receivable 4,000 -
Supplies 1,500 -
Equipment 12,000 -
Accumulated depreciation – equipment - $1,000
Mortgage Payable 2,000
Accounts Payable - 500
Unearned Revenue - 3,000
Capital - 19,100
Insurance expense 2,400 -
Service Revenue - 6,000
Salaries expenses 4,000 -

$31,600 $31,600

Other data:
 A physical count reveals only $880 of supplies used during the quarter.
 Annual depreciation is $2,400.
 Unearned revenue remains unearned $200 on June 30.
 Accrued salaries are $400.
 Service provided but unbilled on June 30 total $750.
 The balance in insurance expense is the premium on a one-year policy, dated May 1, 2020.
 The mortgage payable was issued on February 1, 2020; it is a 12% interest payable mortgage.

Instructions:
(a) Provide necessary adjusting entries.
(b) Prepare a ten-column worksheet for the quarter.
(c) Prepare income statement, owner’s equity statement and balance sheet.
(d) Provide necessary closing entries.
(e) Prepare a post-closing trial balance.
(f) Provide necessary reversing entries.

Question 5
(a) Which cash balance should be reported in the balance sheet, cash book balance or the bank statement
balance? Why?
(b) ABC Company does business of fertilizers. On May 31, 2010, the company’s cash account per its
general ledger showed the following balance.

CASH NO. 101

Date Explanation Ref. Debit Credit Balance
May 31 Balance $13,287
Company’s bank statement from SCB Bank, on the same date showed the following balance.
SCB Bank
Checks and Debits Deposits and Credits Balance
XXX XXX $ 13,332

A comparison of the details on the bank statement with the cash account revealed the following facts.
1. The statement included a debit memo of $35 for the printing of additional company checks.
2. Cash sales of $1,720 on May 12 were deposited in the bank. The cash receipts journal entry and
the deposit slip were incorrectly made for $1,820. The bank credited ABC Company for the
correct amount.
3. Outstanding checks at May 31 totaled $1,225, and deposits in transit were $2,100.
4. On May 18, the company issued check for $911 to GetSmart Company, on account. The check,
which cleared the bank in May, was incorrectly journalized and posted by ABC Company for
$119.
5. A $4,000 note receivable was collected by the bank for ABC Company on May 31 plus $80
interest. The bank charged a collection fee of $25. No interest has been accrued on the note.
6. Included with the cancelled checks was a check issued by Café World to Henry Ford for $900
that was incorrectly charged to ABC Company by the bank.
7. On May 31, the bank statement showed an NSF charge of $1,308 for a check issued by Michael
Schumacher, a customer, to ABC Company on account.

Instruction: Prepare the Bank Reconciliation at May 31, 2008.

Question 6
Mark the following list of statements about depreciation as true or false.
1. Depreciation is a process of cost allocation, not asset valuation.
2. Depreciation does not result in the proper matching of expenses with revenues.
3. The book value of a plant asset may be quite different from its market value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to land because its usefulness and revenue-producing ability generally
remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear and to
obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.
8. The balance in accumulated depreciation represents the total cash that has been accumulated to
replace the equipment.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Three factors affect the computation of depreciation: cost, useful life, and residual value.
Question 7
A machine costing $210,000 with a four-year life and an estimated $20,000 salvage value is installed in
Calhoon Company’s factory on January 1. The factory manager estimates the machine will produce
475,000 units of product during its life. It actually produces the following units: year 1, 121,400; year 2,
122,400; year 3, 119,600; and year 4, 118,200. The total number of units produced by the end of year 4
exceeds the original estimate—this difference was not predicted. (The machine must not be depreciated
below its estimated salvage value.)

Required: Prepare a table to present comparative depreciation figures for each year under the SLM,
UAM, and DBM. Use double declining rate for DBM.

Question 8
Gabriela Sabatini, a former professional tennis star operates her own tennis shop, ‘Sabatini Tennis Shop’.
At the beginning of the current season her business holds the following inventory balances.

No. of units Cost price per unit Selling price per unit
Racquets 30 $40 $60
Tennis shoes 20 $25 $40
Shirts and Shorts 35 $30 $45

The following transactions were completed during June.

June 04 Purchase 11 racquets from Reeve Co. @ $45 each; FOB shipping point, terms 2/10, n/30. The
: appropriate party paid freight of $20.
05 Incurred advertisement on account $2,500.
:
  06 Received credit of $45 from Reeve Co. for a damaged racquet that was returned.
:
  08 Sold tennis shoes of 5 units to members; FOB shipping point, terms 1/10, n/60. The appropriate
: party paid freight of $10.
  12 Purchase Shirts & Shorts from Lee Enterprise $250; FOB Destination, terms 3/10, n/40. The
: appropriate party paid freight of $15.
  13 Paid Reeve Co. in full.
:
  16 Sold racquets of 15 units to DD Enterprise for cash; FOB Destination. The appropriate party paid
: freight of $30.
  17 Receive cash payment from members for the merchandise sold on June 8.
:
  20 Purchase supplies on account $50 from Lesner Supply Co.
:
  22 Made refund of $120 to DD Enterprise for merchandise returned by them.
:
23 Sabatini withdraw $1,200 cash for her personal use.
:
  25 Paid Lee enterprise in full.
:
Journalize the above transactions assuming the entity is following perpetual inventory system and use
LIFO cost flow method in valuing inventory.

Question 9
Superior Company has the following cost and expense data for the year ending December 31, 2017.
Raw materials, 1/1/17 $ 30,000 Insurance, factory $ 14,000 Raw materials, 12/31/17 20,000 Property
taxes, factory building 6,000 Raw materials purchases 205,000 Sales revenue 1,500,000 Indirect materials
15,000 Delivery expenses 100,000 Work in process, 1/1/17 80,000 Sales commissions 150,000 Work in
process, 12/31/17 50,000 Indirect labor 90,000 Finished goods, 1/1/17 110,000 Factory machinery rent
40,000 Finished goods, 12/31/17 120,000 Factory utilities 65,000 Direct labor 350,000 Depreciation,
factory building 24,000 Factory manager’s salary 35,000 Administrative expenses 300,000

Instructions
(a) Prepare a cost of goods manufactured schedule for Superior Company for 2017.
(b) Prepare an income statement for Superior Company for 2017.

Question 10
The comparative balance sheets for Hinckley Corporation show the following information.

December, 31
2020 2019
Cash $ 33,500 $ 13,000
Accounts receivable 12,250 10,000
Inventories 12,000 9,000
Investments –0– 3,000
Building –0– 29,750
Equipment 45,000 20,000
Patent 5,000 6,250
Total $107,750 $91,000
Allowance for doubtful accounts $ 3,000 $ 4,500
Accumulated depreciation on $2,000 4,500
equipment
Accumulated depreciation on building –0– 6,000
Accounts payable 5,000 3,000
Dividends payable –0– 5,000
Notes payable, short-term (nontrade) 3,000 4,000
Long-term notes payable 31,000 25,000
Common stock 43,000 33,000
Retained earnings 20,750 6,000
Total $107,750 $91,000

Additional data related to 2020 are as follows.

1. Equipment that had cost $11,000 and was 40% depreciated at the time of disposal was sold for
$2,500.
2. $10,000 of the long-term note payable was paid by issuing common stock.
3. Cash dividends paid were $5,000.
4. On January 1, 2010, the building was destroyed by a flood. Insurance proceeds on the building were
$30,000 (net of $2,000 taxes).
5. Investments (available-for-sale) were sold at $1,700 above their cost. The company has made
similar sales and investments in the past.
6. Cash was paid for the acquisition of equipment.
7. A long-term note for $16,000 was issued for the acquisition of equipment.
8. The interest of $2,000 and the income taxes of $6,500 were paid in cash.
Required
Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in
that part of the country.

Question 11
The condensed financial statements of the Estee Lauder Companies, Inc. for the years ended June 30,
2020, and 2019 are presented below.

Estee Lauder Companies, Inc.

Balance Sheet
June 30
(BDT in millions)
2020 2019
Assets
Current assets
Cash and cash equivalents 546.90 346.70
Accounts receivable (net) 624.80 580.60
Inventories 544.50 630.30
Prepaid expenses and other current 211.40 181.30
assets
Total Current Assets 1,927.60 1,738.90
Property, plant, and equipment (net) 580.70 528.70
Investments 30.30 51.00
Intangibles and other assets 877.90 910.20
Total Assets 3,416.50 3,218.80

Liabilities and Shareholders’ Equity

Current liabilities 959.60 856.70
Long term liabilities 635.00 650.00
Total stockholders’ equity 1,821.90 1,712.10
Total liabilities and stockholders’ equity 3,416.50 3,218.80

Estee Lauder Companies, Inc.

Income Statement
For the year ended June 30
(BDT in millions)
2020 2019
Revenues 4,751.50 4,682.10
Costs and expenses
Cost of goods sold 1,273.40 1,226.40
Selling and administrative expenses 3,133.60 2,947.60
 Interest expense 17.60 26.70
Total cost and expenses 4,424.60 4,200.70
EBIT 326.90 481.40
Income tax expense 114.40 174.00
Net Income 212.50 307.40

Compute and interpret the following ratios for 2020 and 2019.
(a) Current ratio
(b) Quick ratio
(c) Inventory Turnover (Inventory on 6/30/2018 was TK 546.3)
(d) Receivable Turnover (Receivable on 6/30/2018 was TK 525.25)
(e) Gross Profit Margin
(f) Net Profit margin
(g) Return on assets (Assets on 6/30/2018 was TK 3043.3)
(h) Times interest earned.

Question 12
The following balances were taken from the books of Expectancy Corp. on December 31, 2020.

Sales revenue BDT 55,500,000

Inventory (01-01-2020) 500,000
Purchase during the year 35,000,000
Purchase return and allowances 100,000
Freight in 200,000
Sales discounts 1,000,000
Purchase discounts 100,000
Sales returns and allowances 1,500,000
Sales commissions 725,000
Freight-out 1,275,000
Interest revenue 160,000
Interest expense 40,000
Depreciation expense on sales equipment 431,000
Maintenance and repairs expense (sales) 350,000
Office expense 1,400,000
Maintenance and repairs expense (administration) 19,000
Telephone and Internet expense (administration) 150,000
Rent Expense 1,200,000
Insurance Expense 1,800,000
Depreciation on office equipment 600,000
Write-off of goodwill 2,100,000
Loss on the sale of investments (normal recurring) 53,000
Loss due to hurricane damage—extraordinary item 1,760,000
(gross)
Gain on the disposition of the retail division (net of tax) 23,000
Dividends declared on common stock 3,500,000
 Dividends declared on preferred stock 1,250,000

Additional information:
1. During 2017, there were 1,000,000 shares of common stock outstanding all year.
2. The tax rate is 27.5%.
3. The ending inventory is BDT. 650,000

Required
Prepare a multiple-step income statement

Question 13
Prepare necessary adjusting entries based on the following findings for X&Y.
1. Purchase of furniture Tk. 150,000 passed through the purchase book.
2. The equipment was purchased for Tk. 12,500. Cash has been correctly credited, but the equipment
account has been debited by Tk. 15,200.
3. Interest on bank deposits Tk. 600 had been debited in cash account but had been not credited to the
interest account.
4. The balance in the Account Receivable (Alpha Enterprise) Tk. 2,500 had been written off as
uncollectible but no other account had been debited.
5. Tk. 15,000 paid as wages for making an office desk had been charged to wages account.
6. Bill Payable Book overcast Tk. 800.
7. Goods purchased for proprietor’s use for Tk. 7,000 was debited to purchase account.

Question 14
PQS reported equipment Tk. 50,000 and Tk. 35,000 respectively as on December 31, 2020, and
December 31, 2019. The corresponding accumulated depreciation was Tk. 12,000 and Tk. 8,000. During
2020, PQS sold a piece of equipment for Tk. 5,000 (associated accumulated depreciation was Tk. 3,000)
resulting in a loss of Tk. 2,000. Determine the following amounts for 2020.
(a) Depreciation expense.
(b) Equipment purchase.

Question 15
(a) Compare percentage of sales method with percentage of account receivable method in identifying
allowance for doubtful debts.
(b) Journalize the following transactions assuming the allowance method is used to account for
uncollectible receivables.
July 10 Received 75% of the $40,000 balance owed by Pearl Co., a bankrupt business. Wrote off
remainder as uncollectible.
Aug 15 Reinstated the account of Haider Co., which had been written off in the preceding year as
uncollectible. Received $4,600 cash as full payment of Haider’s account.
Sep 20 Wrote off the $3,200 balance owed by SLP Inc. which had no assets.
Dec 31 Based on an analysis of Accounts Receivable, it is determined that $15,000 will become
uncollectible. The balance in Allowance for Doubtful Accounts on December 31 prior to
adjustment is $500 credit.

Determine the following:

(a) The balance in Allowance for Doubtful Accounts after adjustment.
(b) The Net Realizable Value of Accounts Receivable if the balance of receivable is $62,000.
(c) Redo the entry for Dec 31 and questions a) and b) if the percent of sales method had been used to
estimate uncollectible accounts expense at the rate of ½ of 1% of net sales of $2,000,000.