Cape Work sheet

Accounting concepts
1. Listed below (a) - (g) are several information characteristics, accounting principles
and assumptions. Match the letter of each with the appropriate phrase in Table I
below, which states its application. (Each characteristic, accounting principle and
assumption may be used ONCE, MORETHAN ONCE, or NOT AT ALL).
A. Historical cost principle
B. Revenue recognition principle
C. Matching principle
D. Full disclosure principle
E. Economic entity assumption
F. Relevance characteristic
G. Consistency principle

TABLE I

Accruals and deferrals in adjusting and closing process

Affairs of the business distinguished from those of its owners
Valuing assets at amounts originally paid for them
Presentation of timely information with predictive and feedback value
Note s as part of necessary information to a fair presentation
Earning process completed and realized or realizable

The table below presents a number of accounting procedures and practices in Chavez Corporation.
Each item listed violates an accounting assumption, principle, information characteristic or modifying
convention.

Item Item Description

Number
1 An officer of Chavez Corporation purchases a new home computer for
personal use with the company's money, charging it to miscellaneous
expenses.
2 A machine, which cost $60 000, is reported at its current market value of
$90 000.
3 Chavez Corporation decides to establish a large loss and related liability
this year because of the possibility that it may lose a pending patent
infringement lawsuit. Its attorneys consider the possibility of the loss
remote.
4 Because the company's income is low this year, a switch from accelerated
depreciation to straight-line depreciation is made this year.
5 The president of Chavez Corporation believes that it is foolish to report
financial information on a yearly basis. Instead, the president believes that
financial information should be disclosed only when significant new
information, related to the company's operations, is available.
6 Chavez Corporation recognizes all sales revenues on a cash basis.
For EACH item, identify the assumption, principle, information characteristic, or modifying
convention that is being violated and state the purpose of that assumption, principle, information
characteristic, or modifying convention. [17 marks]

The following accounting terms used in the conceptual framework are coded A, B, C, D, E,
F.
A. Conservatism
B. Materiality
C. Relevance
D. Recognition
E. Consistency
F. Verifiability

Below are examples of business activities. In the space to the left of EACH activity, enter the
code letter from the list above which represents the accounting term that best describes the
activity. You may use any letter more than once, once or not at all. The first one is completed
as an example.
A 1. Charging all the research and development costs as an expense, as it is
incurred
----------- 2. The report of cash in the bank is essential to determine how much money to
borrow
----------- 3. The use of a different inventory method every year is NOT an example of
this
----------- 4. An error of $100 of revenue on a small business versus $100 of revenue for
an extremely large business
----------- 5. Applying the lower-of-cost-or-market methods to assets valuation
----------- 6. Three auditors count the same amount of cash
----------- 7. This term requires revenues to be earned and realized

Internal controls
Internal controls promote accurate information, help an organization ensure compliance with
applicable laws and regulations and safeguard organizational assets. As a result, internal controls are
important even in small businesses.
List and briefly describe FIVE internal control practices relating to cash, which would be carried out
even in a small business having little opportunity for the separation of duties. [10 marks]

Explain why a business should have an internal control system. Include FIVE reasons
in your response. [ 5 marks]

(c) Balandra Clothing Store retails ladies' garments. Management uses the following
control procedures for cash disbursements:
1. Each week, the owner leaves 100 blank company cheques in an unmarked
envelope on a shelf behind the cash register.
2. The store manager personally approves all payments before signing and issuing
cheques.
3. The company's cheques are not numbered.
4. After payment, bills are filed in a folder marked "Paid invoices".
5. The company's accountant prepares the bank reconciliation and reports any
discrepancies to the owner.
6. The store maintains a petty cash fund to pay for small purchases. The fund is
kept in the top drawer of a desk and can be accessed by the owner, the store
manager and the treasurer.
For EACH procedure above:
(i) Identify the weakness in internal control. [ 6 marks]
(ii) Suggest a change in the procedure that will result in good internal control.
[ 6 marks]
You may provide the responses to (c) (i) and (ii) above in tabular format as shown below:
Control Weakness in Suggested change
procedure internal control in control procedure
-
(iii) Identify FOUR internal control principles that have been violated by the
procedures that are currently in place at Balandra Clothing Store.
[ 8 marks]
Total 35 mar

Accounting standards
While listening to the evening news recently your friend Jack heard a report about a decision taken by
the local accountancy profession to implement accounting standards in your country. Jack firmly
believes in the free market system and thinks that the decision to introduce accounting standards is a
useless and undesirable infringement on the right of firms to choose the accounting policies that are
most appropriate to their individual circumstances.
Briefly describe THREE ways in which accounting standards benefit the following persons.
(i) Those who prepare financial statements for publication
(ii) The users of published financial statements [ 9 marks]

Adjusting entries
(a)
-3-
Under accruals-basis accounting, accountants frequently make the following FIVE categories of
adjusting journal entries at the end of each accounting period: Deferred expenses (prepaid expenses);
Deferred revenues (unearned revenue); Accrued expenses (accrued liabilities); Accrued revenues
(accrued assets); Estimated expenses (e.g., depreciation, allowance for uncollectible accounts)
(i) Write short notes on the process involved in recording adjusting journal entries for any THREE of
the five categories of items listed above. [ 9 marks]
(ii) Explain how the adjusting journal entries listed above are related to the accruals and matching
concepts. [7 marks]
Accounting cycle
Accounting framework
Journal entries – investment
Prepare the necessary journal entry in each of the following independent cases. No narrative is
required.

(a) The supplies inventory on August 1, 2003, was $7 460. Supplies costing $14 520 were acquired
during the year and charged to the supplies inventory. A count on July 31, 2004, indicated supplies on
hand of $6 810. Prepare the journal entry to record the adjustment that would be made on July 31,
2004, the end of the fiscal year.
[1 mark]
(b) On May 4, 2004, Company X purchased 600 shares of BLP at $113 per share plus an
$820 brokerage fee as a short-term investment. Prepare the journal entry to record the
purchase of the shares as an investment.
[1 mark]
(c) On July 1, Company X received a $2.50 per share dividend on the BLP shares. Prepare
the journal entry to record the receipt of dividends.
[1 mark]
(d) On September 15, Company X sold 400 of the shares of BLP purchased on May 4, for
$120 per share less a brokerage fee of $500. Prepare the journal entry to record this
transaction.