Multiple Choice Questions (20 x 1 = 20 marks)

Question 1

A sole trader is a business entity that is:

the simplest form of business organisation and is owned by multiple persons as a separate legal entity, an example is a shoe shop
a complex structure that is owned by multiple shareholders as a separate legal entity, an example is WalMart

c. the simplest form of business entity, owned and bound to one person, an example is a cabinet maker contractor

a separate legal entity owned by a single proprietor, an example is a cabinet maker contractor

Question 2

With regard to companies, select a statement that best describes their form:

where a business requires large amounts of capital, it may combine ownership and control with an unrestricted number of shareholders

b. a company is a separate legal entity from its owners, and it is required to comply with various regulations

a company is a not separate legal entity, but it is required to comply with various regulations
companies are evil; they suck resources out of the greater good of humanity

Question 3

The most widely accepted definition of accounting emphasizes:

The importance of recording and storing accounting data.
The need to produce General Purpose Financial Statements.

c. The analysis and communication of economic information to assist users make informed decisions regarding the allocation of scarce resources.

The objective of becoming a member of a professional association.

Question 4

Accounting is mainly divided into:

fiscal accounting and control
cost accounting and management accounting

c. financial accounting and management accounting

environmental accounting and ethical accounting

Question 5

Which of the following represents the balance sheet equation:

a. assets = liabilities + equity

liabilities = equity – assets
assets = liabilities – equity
equity = liabilities – assets

Question 6

From the following select the correct statement:

assets may comprise short-term liabilities and long-term liabilities
assets may comprise current liabilities and non-current liabilities

c. assets may comprise cash at bank and inventory

assets may comprise amounts owed to creditors

Question 7

Choose the best statement on the recording of transactions:

a transaction is a record of exchange of value between two parties and do not necessarily need to be recorded

b. a transaction is a record of exchange of value between two parties and ought to be recorded by the firm

accounting records, comprising transaction records are never used by the firm
transactions are first recorded in ledgers and then posted to journal..

Question 8

The second step of accounting process is

communicating.
identifying.
processing.
recording.

Question 9

Inventory is a current asset and can comprise:

raw materials, consumables and stock

b. raw materials, work-in-progress and finished goods

accounts receivable
current liabilities

Question 10

Which of the following is not a current liability?

GST Payable

b. Accounts payable

GST Receivable
PAYG Withholding Payable

Question 11

The accounting equation:

Is also called the Income statement equation
Is changed by expenses of the organisation

c. Holds true the concept of duality

Helps to determine the cash balance of the organisation

Question 12

The best description of a journal entry is:

The details of an accounting manager’s meetings for a daily period

b. An accounting record including the transaction date, the name of the accounts affected by the transaction and the amounts

Records business transactions
is the third step in the accounting process

Question 13

Consider the following transactions.

Borrowed from ANZ Bank $250 000
Received $80 000 from accounts receivable
Paid $30 000 to accounts payable
Purchased new equipment for $150 000 on credit

How much did total assets increase by?

$220,000
1. $330,000
1. $370,000
1. $480,000

Question 14

What is the best statement regarding Accounting Entities:

a. Monetary transactions of an accounting entity must be kept separate from those of its owners

An accounting entity is automatically considered a reporting entity
Accounting entities have external users who require general-purpose financial reports
An accounting entity is a Company structure, for which financial transactions occur and accounting records are maintained

Question 15

What is the best statement regarding accounting errors:

An accounting error is a fraudulent discrepancy in financial documentation
Accounting errors will cause the trial balance to be incomplete
Common practice is to correct accounting errors within 90 days of identifying the error

d. The most common error are clerical errors, transposition errors and balancing errors.

Question 16

Under accrual accounting, which of the following is not correct?

Expenses are recorded when an invoice is paid

b. Expenses are matched with the related revenues

Income is recorded when cash is received.
Adjusting entries are not necessary.

Question 17

What is the best statement regarding Accounting Entities:

e. Monetary transactions of an accounting entity must be kept separate from those of its owners

An accounting entity is automatically considered a reporting entity
Accounting entities have external users who require general-purpose financial reports
An accounting entity is a Company structure, for which financial transactions occur and accounting records are maintained

Question 18

Choose the best statement concerning balance sheets

a. the balance sheet can be referred to as the statement of financial position and is based on the accounting equation, assets = liabilities + equity

the balance sheet can be referred to as the statement of financial performance and is based on the accounting equation, assets = liabilities + equity
the balance sheet can be referred to as the statement of financial performance and is based on the profit equation, profit = revenue – expenses
the balance sheet can be referred to as the statement of financial position and is based on the profit equation, profit = revenue – expenses

Question 19

The income statement:

can be referred to as the statement of financial position and is based on the accounting equation, assets = liabilities + equity
can be referred to as the statement of financial position and is based on the profit equation, profit = revenue – expenses

c. can be referred to as the statement of financial performance and is based on the profit equation, profit = revenue – expenses

can be referred to as the statement of financial performance and is based on the accounting equation, assets = liabilities + equity

Question 20

IASB stands for:

International Auditing Standards Board

b. International Accounting Standards Board

c. International Assurance Standards Board

Ireland Accounting Standard Board

Answers To Multiple Choice Questions

Question	Answer	Question	Answer	Question	Answer	Question	Answer
Q1	c	Q6	c	Q11	c	Q16	c
Q2	b	Q7	B	Q12	B	Q17	a
Q3	c	Q8	d	Q13	d	Q18	a
Q4	c	Q9	b	Q14	a	Q19	b
Q5	a	Q10	d	Q15	d	Q20	b

Part B (Marks 42)

Question 1 (Marks: 2 +2 = 4)

Give the accounting definition of an asset. Explain whether the asset should be owned by the business to show in the balance sheet.

Assets are considered important to all the business as it helps in generating income or revenue and also forms an important component of the balance sheet. The disclosure of the amount or the value of assets owned by the business in their balance sheet helps in monitoring and maintaining the financial position. When the company or business maintains records of assets accurately on the balance sheet, it facilitates the creation of loss and profit reporting, attracts and assures investors and helps in developing positive attitude towards the company.

Question 2 (Marks: 2 +3 = 5)

Give the accounting definition of a liability. Show the difference between a current liability and a non-current liability. Also give an example of each type of liability.

Current liabilities are the payment or the obligations which is payable and due in the short term that is it is expected to be paid by the business in less than a year. Example of current liability includes trade payables and provisions. Noncurrent liabilities on other hand are the obligations that falls due in the long term that is they are not payable in the short term. Example of non-current liability includes long term borrowings and loans.

Question 3 (Marks: 2 +2 = 4)

What is a business transaction? Explain whether you think the receipt of an order from a customer would be regarded as an accounting transaction.

Business transaction is an event or activity involving with the third party that is measured in terms of money and affects the financial position. Any receipts received from the customer should be recorded as an accounting transaction in the accounting system of the company.

Question 4 (Marks: 2 +2 = 4)

Define income. What is the difference between income and revenue?

Income represents the total amount of earnings made by the company, that is, it is the net profit which is arrived upon the deduction of all the expenses from the total revenue generated. There exist a significant difference between revenue and income and it is important to differentiate between these two terms. It is because most of the times, these terms are mistakenly used. Income includes the revenue earned and revenue specifically implies the amount earned on selling goods. Revenue can be defined as the earnings by the company by selling off the goods and services. It is the flow of money into the business and income earned is disclosed in the income statement of any business organization. Income can be identified as gross income and net income. Revenue on other hand include revenue generated by selling services or goods.

Question 5 (Marks: 5)

Explain why income and expenses are recorded net of GST in the income statement.

In several areas of bookkeeping and accounting, clarity is introduced by incorporating GST (Goods and service tax). Tax is regarded as an expense and hence in order to arrive at net income, it is important to deduct GST from the total income earned. The computation of GST also incorporates the amount of income tax which the business is required to pay on the income earned.

Question 6 (Marks: 2 +3 = 5)

Define a trial balance. Identify three errors that would not be detected by a trial balance.

Trial balance is the first step towards financial statements preparation and involves a list of closing balance of ledger accounts with the respective credit and debit balance. Some of the errors which the trail balance fails to disclose include error of commission which implies that transaction is wrongly credit to other account, error of complete omission which implies that there is not complete recording of the transaction and duplication error implying recording the transaction more than once.

Question 6 [Marks: 3 + (2 x 3) = 9]

To be judged useful financial information should possess the fundamentals qualitative characteristics of financial reporting. (a) Identify these qualitative characteristics and (b) explain two fundamental characteristics.

(a)Qualitative characteristics of the purpose of financial reporting refers to the most useful information in the decision making of the users. Financial information is considered to be useful by the users when it faithfully represents which is purports to and is pertinent. The fundamental qualitative characteristics of the financial reporting includes verifiability, understandability, timeliness and comparability. These qualitative characteristic are referred to as the enhanced characteristics and the basic qualitative characterized includes faithful representation and relevance. (b)The two fundamental characteristics to be explained is faithful representation and relevance.Relevance is the feature of the financial information that creates difference in the decision which the user of the information makes. There can be a difference in the decision using the financial information if such information has both confirmatory and predictive value and there is an interrelationship between predictive and confirmatory value. On other hand, some of the underlying characteristic of the financial information such as neutrality, completeness and free from error is maximized under the feature of faithful representation. Financial information is not only required to be relevant in order to be useful, for the usefulness of the information, there is a need for the information to represent the phenomenon faithfully which is significances to represent. The usefulness of the faithful representation and relevance of the financial information is enhanced using the qualitative characteristics.

Question 6 (Marks: 2 x 3 = 6)

Claire has just graduated with a master degree in accounting and found a job as a financial accountant in ADL Ltd. Claire’s responsibility include preparing monthly income statements and presenting the statements to the board of directors.

During her first week, Claire noticed that the cashier, Christina secretly taking several $100 notes from the cash till drawer and giving them to Peter, the Finance Director. When confronted by Claire, Christina said that Peter’s son has been suffering from late stage cancer and Peter’s salary can no longer afford the hospital fees. She also mentioned that she has been helping Peter with the till money for 6 months and that if anyone finds out, then both of them will lose their jobs. Christina begged Claire to record the missing amount as a general office expense so that Peter’s son can continue to receive medical treatments.

Required

Discuss Claire’s appropriate response to the situation above with reference to two fundamental principles of ethical behaviour in the accounting profession.

Answer

The appropriate response of Claire to the situation faced can be explained with the help of fundamental principles of ethical behaviour in the accounting profession. Two fundamental principles relevant to the situation faced by Claire is objectivity, integrity and professional behaviour. The integrity fundamental principle of ethical behaviour requires the professional accountant to be honest and straight forward in all the business and professional relationship. Claire is supposed to act honestly and any secret identified in her due course of work as an accountant should be highlighted. Withdrawal of money secretly from the drawer for whatever purpose, is an act of misconduct. It is the duty of accountant to disclose and raise his voice on such act.The case study identifies some facts that implies the biasness of Claire towards the financial director to help him aid with money required for his personal expenses. If the accountant keeps quiet on discovering such act, this would violate the principle of objectivity. Objectivity fundamental principle of ethical behaviour requires the professional accountant that would not for conflict of interest, biasness and others undue influence. Since, Christina is biased towards her finance director in meeting his personal expenses, Claire should not entertain her biasness towards the higher level management and should take appropriate measures to addresses the misconduct acts and highlight the matter. Therefore, the appropriate response of Claire in the above mentioned situation would be highlight the misconduct and take measures so that the issues can be resolved and the integrity and objectivity of the accountants can be maintained.

Part C (Marks: 88)

Problem 1 (Marks: 3 + 3 = 6)

Diana Taylor is a self-employed caterer operating her business from home. She keeps her accounting records for business activities completely separate from her records for personal activities. At 30 June 2019, Sarah had business assets and liabilities worth $62 500 and $41 000 respectively. At 30 June 2020, Sarah had business assets and liabilities worth $66 000 and $49 000 respectively.

Required

A. Assuming Diana did not contribute to or withdraw from the business during the financial year, determine the profit/loss for the year.

Answer

	$
Opening owners’ equity (a)	21500
Total Assets	62500
Total Liabilities	41000

Closing owners’ equity	17000
Total Assets	66000
Total Liabilities(b)	49000
Profit(a-b)	4500

B. Assuming Diana had withdrawn $15 000 during the year, determine the profit/loss for the year.

Answer

	$
Opening owners’ equity	21500
Less: Drawings(a)	-15000

Closing owners’ equity (b)	17000


Loss (a-b)	10500

Problem 2 (Marks: 3 +4+2 =9)

Cash versus Accrual Basis of Accounting

At the end of the first year of operations, Jeremy Pereira, owner of Jubilee Designs, engaged you to prepare yearly financial statements for the year ended 30 June 2020, on both the cash basis and the accrual basis. The following data are a summary of selected transactions that occurred during the year. Ignore GST.

Fees of $325,000 were collected for services provided during the year.
There were $8,000 in accounts receivable at 30 June 2019 for services performed during June on credit.
Cash paid for salaries, rent, insurance and other expenses $195,000 during the year.
Salaries accrued for last fortnight of June $10,000, but not yet paid.
On 25 June 2020, a client paid $3,000 in advance for services to be rendered during July 2020.
Expenses of $9,000 were paid in advance for next financial year (not included in the above $195,000) at 30 June.

Required

Calculate profit under the cash basis accounting.

Jubilee Design
Income Statement
For the year ended 30 June 2020
	$ (inc)	$(expenses)
Fees collected	325000
Cash paid for expenses		1,95000
Client advance	3000
Expenses in advance		9000
Profit		124000
	328000	328000

Calculate profit under the accrual accounting.

Jubilee Design
Income Statement
For the year ended 30 June 2020
	$	$
Accounts receivable	8000
Salary to be paid		10000
Loss	2000

	10000	10000

Explain how the following items would be reported in the business’s balance sheet (either current assets or current liabilities) under the accrual basis:
the $8,000 accounts receivable
the unpaid salaries of $10,000
The $3,000 advance received on 25 June 2020.
The cash payment of $9,000 for prepaid expenses.

Answer: Current assetsCurrent liabilitiesCurrent assetsCurrent liabilities

Problem 3 (Marks: 14.5 + 16.5 = 30)

The following transactions were undertaken by Mia’s Cleaning Services during the month of Aug 2020. The business is registered for GST.

Aug 1 Invoiced a client $1,000 plus GST for the service provided, the client is expected to pay within 10 days.

Aug 5 the business owner Mia further invested $8, 000 capital into the business to ensure it has sufficient cash for operations.

Aug 10 Purchased office supplies for $220 (including GST) on credit.

Aug 10 received the payment from the client invoiced on August 1

Aug 30 Paid employee salary for the month, $1,500.

Required

Journalize the transactions above. Narrations are required.
Post the journal entries in A to the provided ledger accounts.

General Journal

*Date*	*Particulars*	*Reference*	*Debit $*	*Credit $*

*Aug 1*	*Service A/C*		*1100*
	*TO Accounts receivable A/C*			*1000*
	*To GST A/C at 10%*			*100*
	*(Being service provided to client on credit)*

*Aug 5*	*Cash a/c*		*8000*
	*To Capital a/c*			*8000*
	*(Being cash invested in business by owner MIA)*

*Aug 10*	*Accounts Payable a/c*		*200*
	*GST A/C*		20
	*To office supplies*			*220*
	*(Being supplies purchased on credit)*

*Aug 10*	*Cash a/c*		*1000*
	*GST A/C*		*100*
	*To client a/c*			*1100*
	*(Being service fees received from client)*

*Aug 30*	*Salary a/c*		*1500*
	*To cash a/c*			*1500*
	*(Being salary paid for the month)*

	*Total*		*11920*	*11920*

Ledger Accounts

5/08Cash at Bank 102

01/8	Balance b/d	$500	10/8	To service	$1000
05/8	To capital	$8000	30/8	To salary	$1500
			30/8	To balance c/f	$6000



		$8500			$8500

Accounts Receivable 102
01/8	Balance b/d	$100	1/8	Accounts receivable	$1000
30/8	Balance c/f		$900

			$1000			$1000

Office Supplies 103
01/8	Balance b/d	$575	30/8	By balance c/f	$795
10/8	Accounts payable	$200
10/8	GST	$20
30/8		$795			$795

GST Receivable 105
01/8	Balance b/d	$200	1/8	By service ac		$100
10/8	Service		$100	30/8	By balance b/d		$200

			$300				$300

Accounts Payable 201
30/8	Balance c/f	$370	01/8	Balance b/d	$150
			05/8	Office supplies	$200
			05/08	To GST	$20
		$370			$370

GST Payable 202
30/8	Balance c/f	$550	01/8	Balance b/d	$550


		$550			$550

Mia, Capital 301
30/8	Balance c/f	$10000	01/8	Balance b/d	$2,000
			04/8	Cash a/c	$8000

		$10000			$10000

Service Revenue 401
1/8	To Accounts receivable	$1000	30/8	Balance c/f	$1100
1/8	To GST	$100
		$1100			$1100

Salary Expense 501
30/8	Balance c/f	$1500	30/08	By cash	$1500

		$1500			$1500

Problem 4 (Marks: 3 x 5 = 15)

Adjusting Entries and Justifications

Miranda’s Motor Mechanics analyzed the accounting records and other data for the business. The following information is made available for the year ended 30 June 2020.

Prepare the end-of-period adjusting entries required on 30 June 2020. Ignore GST. Also mention what effects will be on assets or liabilities and Equity if adjusting entries were not recorded.

Salaries and wages owing to employees at the end of the financial year amounted to $2,480.

Salary expenses—-DR 2480 To salaries payable—CR 2480(Being salary owed to employees) If this entry was not made then, the profit figure would have been higher than the actual and incorrect. (Effect on liabilities and assets both)

Included in the Prepaid Rent account is an amount of $1,600 paid in June for the month of July 2020. The Prepaid Rent account has a debit balance of $4,800.

Rent a/c $1600To prepaid rent $1600(Being rent for July paid in June) If adjustment was not done, assets would increase

A business hold a 90 day note receivable of $10,000 from a customer. The note bears an interest rate of 12% p. a. and was issued on May 1 2020

Interest receivable a/c $200To interest income a/c $200(Being interest due till June) The income will be affected if this transaction is not recorded.

The balance of Unearned Revenue Account $8 400 on 30^th June 2020. Included in unearned revenue $1,650 for which services was performed on during the last of June.

Unearned revenue a/c $1650To income a/c $1650(Being service done in June) The income will be affected if this transaction is not recorded.

Depreciation expense on equipment $4,200.

Depreciation expenses $4200 To Accumulated depreciation $4200(Being depreciation accrued on equipment) The liabilities would extend if the amount is not deduced)

Problem 4 (Marks: 13 +4 +10 +1 = 28)

The adjusted trial balance of Raymond Ray – Financial Consultant is shown below:

Raymond Ray – Financial Consultant

Adjusted Trial Balance

As at 30 June 2020

Account Title	Debit $	Credit $
Cash at Bank	$2,360
Accounts Receivable	$5,670
Office Supplies	$200
Prepaid Insurance	$100
Office Equipment	$26,000
Accumulated Depreciation – Off. Equipment		$13,500
Investments	$5,400
Accounts Payable		$3,560
Unearned Fees		$100
Raymond Ray, Capital		$18,380
Raymond Ray, Drawings	$2,450
Consulting Fees		$32,220
Interest Income		$840
Advertising Expense	$1,050
Rent Expense	$5,300
Salary Expense	$16,400
Telephone Expense	$260
Travel Expense	$1,500
Supplies Expense	$400
Insurance Expense	$100
Salaries Payable		$1,400
Depreciation Expense	$2,000
Interest Receivable	$810

Total	$70,000	$70,000

Required

Prepare the income statement for the business for the year ended 30 June 2020.
Prepare a statement of changes in equity for the year ended 30 June 2020.
Prepare a balance sheet as at 30 June 2020.

Answer

Requirement A: Income Statement

*Raymond Ray – Financial Consultant*
*Income Statement*
*For the year ended 20^{^th}* June 2020**
Income	$	$
Consulting Fees	$32,220
Interest income	$840
Total Income		$33060
Expenses:
Advertising Expense	$1,050
Rent Expense	$5,300
Salary Expense	$16,400
Telephone Expense	$260
Travel Expense	$1,500
Supplies Expense	$400
Insurance Expense	$100
Depreciation Expense	$2,000
Total Expenses		$27010
Profit		=$6050

Requirement B: Statement of Changes in Equity

*Raymond Ray – Financial Consultant*
*Statement of Changes in Equity*
*For the year ended 20^{^th}* June 2020**
	$
Owners capital	$18,380
Add: Net income	$6050
Less: Drawings	$2,450
Owners capital closing	$21980

Requirement C: Balance Sheet

Multiple Choice Questions (20 x 1 = 20 marks)

Question 1

A sole trader is a business entity that is:

the simplest form of business organisation and is owned by multiple persons as a separate legal entity, an example is a shoe shop
a complex structure that is owned by multiple shareholders as a separate legal entity, an example is WalMart

c. the simplest form of business entity, owned and bound to one person, an example is a cabinet maker contractor

a separate legal entity owned by a single proprietor, an example is a cabinet maker contractor

Question 2

With regard to companies, select a statement that best describes their form:

where a business requires large amounts of capital, it may combine ownership and control with an unrestricted number of shareholders

b. a company is a separate legal entity from its owners, and it is required to comply with various regulations

a company is a not separate legal entity, but it is required to comply with various regulations
companies are evil; they suck resources out of the greater good of humanity

Question 3

The most widely accepted definition of accounting emphasizes:

The importance of recording and storing accounting data.
The need to produce General Purpose Financial Statements.

c. The analysis and communication of economic information to assist users make informed decisions regarding the allocation of scarce resources.

The objective of becoming a member of a professional association.

Question 4

Accounting is mainly divided into:

fiscal accounting and control
cost accounting and management accounting

c. financial accounting and management accounting

environmental accounting and ethical accounting

Question 5

Which of the following represents the balance sheet equation:

a. assets = liabilities + equity

liabilities = equity – assets
assets = liabilities – equity
equity = liabilities – assets

Question 6

From the following select the correct statement:

assets may comprise short-term liabilities and long-term liabilities
assets may comprise current liabilities and non-current liabilities

c. assets may comprise cash at bank and inventory

assets may comprise amounts owed to creditors

Question 7

Choose the best statement on the recording of transactions:

a transaction is a record of exchange of value between two parties and do not necessarily need to be recorded

b. a transaction is a record of exchange of value between two parties and ought to be recorded by the firm

accounting records, comprising transaction records are never used by the firm
transactions are first recorded in ledgers and then posted to journal..

Question 8

The second step of accounting process is

communicating.
identifying.
processing.
recording.

Question 9

Inventory is a current asset and can comprise:

raw materials, consumables and stock

b. raw materials, work-in-progress and finished goods

accounts receivable
current liabilities

Question 10

Which of the following is not a current liability?

GST Payable

b. Accounts payable

GST Receivable
PAYG Withholding Payable

Question 11

The accounting equation:

Is also called the Income statement equation
Is changed by expenses of the organisation

c. Holds true the concept of duality

Helps to determine the cash balance of the organisation

Question 12

The best description of a journal entry is:

The details of an accounting manager’s meetings for a daily period

b. An accounting record including the transaction date, the name of the accounts affected by the transaction and the amounts

Records business transactions
is the third step in the accounting process

Question 13

Consider the following transactions.

Borrowed from ANZ Bank $250 000
Received $80 000 from accounts receivable
Paid $30 000 to accounts payable
Purchased new equipment for $150 000 on credit

How much did total assets increase by?

$220,000
1. $330,000
1. $370,000
1. $480,000

Question 14

What is the best statement regarding Accounting Entities:

a. Monetary transactions of an accounting entity must be kept separate from those of its owners

An accounting entity is automatically considered a reporting entity
Accounting entities have external users who require general-purpose financial reports
An accounting entity is a Company structure, for which financial transactions occur and accounting records are maintained

Question 15

What is the best statement regarding accounting errors:

An accounting error is a fraudulent discrepancy in financial documentation
Accounting errors will cause the trial balance to be incomplete
Common practice is to correct accounting errors within 90 days of identifying the error

d. The most common error are clerical errors, transposition errors and balancing errors.

Question 16

Under accrual accounting, which of the following is not correct?

Expenses are recorded when an invoice is paid

b. Expenses are matched with the related revenues

Income is recorded when cash is received.
Adjusting entries are not necessary.

Question 17

What is the best statement regarding Accounting Entities:

e. Monetary transactions of an accounting entity must be kept separate from those of its owners

An accounting entity is automatically considered a reporting entity
Accounting entities have external users who require general-purpose financial reports
An accounting entity is a Company structure, for which financial transactions occur and accounting records are maintained

Question 18

Choose the best statement concerning balance sheets

a. the balance sheet can be referred to as the statement of financial position and is based on the accounting equation, assets = liabilities + equity

the balance sheet can be referred to as the statement of financial performance and is based on the accounting equation, assets = liabilities + equity
the balance sheet can be referred to as the statement of financial performance and is based on the profit equation, profit = revenue – expenses
the balance sheet can be referred to as the statement of financial position and is based on the profit equation, profit = revenue – expenses

Question 19

The income statement:

can be referred to as the statement of financial position and is based on the accounting equation, assets = liabilities + equity
can be referred to as the statement of financial position and is based on the profit equation, profit = revenue – expenses

c. can be referred to as the statement of financial performance and is based on the profit equation, profit = revenue – expenses

can be referred to as the statement of financial performance and is based on the accounting equation, assets = liabilities + equity

Question 20

IASB stands for:

International Auditing Standards Board

b. International Accounting Standards Board

c. International Assurance Standards Board

Ireland Accounting Standard Board

Answers To Multiple Choice Questions

Question	Answer	Question	Answer	Question	Answer	Question	Answer
Q1	c	Q6	c	Q11	c	Q16	c
Q2	b	Q7	B	Q12	B	Q17	a
Q3	c	Q8	d	Q13	d	Q18	a
Q4	c	Q9	b	Q14	a	Q19	b
Q5	a	Q10	d	Q15	d	Q20	b

Part B (Marks 42)

Question 1 (Marks: 2 +2 = 4)

Give the accounting definition of an asset. Explain whether the asset should be owned by the business to show in the balance sheet.

Question 2 (Marks: 2 +3 = 5)

Give the accounting definition of a liability. Show the difference between a current liability and a non-current liability. Also give an example of each type of liability.

Question 3 (Marks: 2 +2 = 4)

What is a business transaction? Explain whether you think the receipt of an order from a customer would be regarded as an accounting transaction.

Question 4 (Marks: 2 +2 = 4)

Define income. What is the difference between income and revenue?

Question 5 (Marks: 5)

Explain why income and expenses are recorded net of GST in the income statement.

Question 6 (Marks: 2 +3 = 5)

Define a trial balance. Identify three errors that would not be detected by a trial balance.

Question 6 [Marks: 3 + (2 x 3) = 9]

Question 6 (Marks: 2 x 3 = 6)

Required

Discuss Claire’s appropriate response to the situation above with reference to two fundamental principles of ethical behaviour in the accounting profession.

Answer

Part C (Marks: 88)

Problem 1 (Marks: 3 + 3 = 6)

Required

A. Assuming Diana did not contribute to or withdraw from the business during the financial year, determine the profit/loss for the year.

Answer

	$
Opening owners’ equity (a)	21500
Total Assets	62500
Total Liabilities	41000

Closing owners’ equity	17000
Total Assets	66000
Total Liabilities(b)	49000
Profit(a-b)	4500

B. Assuming Diana had withdrawn $15 000 during the year, determine the profit/loss for the year.

Answer

	$
Opening owners’ equity	21500
Less: Drawings(a)	-15000

Closing owners’ equity (b)	17000


Loss (a-b)	10500

Problem 2 (Marks: 3 +4+2 =9)

Cash versus Accrual Basis of Accounting

Fees of $325,000 were collected for services provided during the year.
There were $8,000 in accounts receivable at 30 June 2019 for services performed during June on credit.
Cash paid for salaries, rent, insurance and other expenses $195,000 during the year.
Salaries accrued for last fortnight of June $10,000, but not yet paid.
On 25 June 2020, a client paid $3,000 in advance for services to be rendered during July 2020.
Expenses of $9,000 were paid in advance for next financial year (not included in the above $195,000) at 30 June.

Required

Calculate profit under the cash basis accounting.

Jubilee Design
Income Statement
For the year ended 30 June 2020
	$ (inc)	$(expenses)
Fees collected	325000
Cash paid for expenses		1,95000
Client advance	3000
Expenses in advance		9000
Profit		124000
	328000	328000

Calculate profit under the accrual accounting.

Jubilee Design
Income Statement
For the year ended 30 June 2020
	$	$
Accounts receivable	8000
Salary to be paid		10000
Loss	2000

	10000	10000

Explain how the following items would be reported in the business’s balance sheet (either current assets or current liabilities) under the accrual basis:
the $8,000 accounts receivable
the unpaid salaries of $10,000
The $3,000 advance received on 25 June 2020.
The cash payment of $9,000 for prepaid expenses.

Answer: Current assetsCurrent liabilitiesCurrent assetsCurrent liabilities

Problem 3 (Marks: 14.5 + 16.5 = 30)

The following transactions were undertaken by Mia’s Cleaning Services during the month of Aug 2020. The business is registered for GST.

Aug 1 Invoiced a client $1,000 plus GST for the service provided, the client is expected to pay within 10 days.

Aug 5 the business owner Mia further invested $8, 000 capital into the business to ensure it has sufficient cash for operations.

Aug 10 Purchased office supplies for $220 (including GST) on credit.

Aug 10 received the payment from the client invoiced on August 1

Aug 30 Paid employee salary for the month, $1,500.

Required

Journalize the transactions above. Narrations are required.
Post the journal entries in A to the provided ledger accounts.

General Journal

*Date*	*Particulars*	*Reference*	*Debit $*	*Credit $*

*Aug 1*	*Service A/C*		*1100*
	*TO Accounts receivable A/C*			*1000*
	*To GST A/C at 10%*			*100*
	*(Being service provided to client on credit)*

*Aug 5*	*Cash a/c*		*8000*
	*To Capital a/c*			*8000*
	*(Being cash invested in business by owner MIA)*

*Aug 10*	*Accounts Payable a/c*		*200*
	*GST A/C*		20
	*To office supplies*			*220*
	*(Being supplies purchased on credit)*

*Aug 10*	*Cash a/c*		*1000*
	*GST A/C*		*100*
	*To client a/c*			*1100*
	*(Being service fees received from client)*

*Aug 30*	*Salary a/c*		*1500*
	*To cash a/c*			*1500*
	*(Being salary paid for the month)*

	*Total*		*11920*	*11920*

Ledger Accounts

5/08Cash at Bank 102

01/8	Balance b/d	$500	10/8	To service	$1000
05/8	To capital	$8000	30/8	To salary	$1500
			30/8	To balance c/f	$6000



		$8500			$8500

Accounts Receivable 102
01/8	Balance b/d	$100	1/8	Accounts receivable	$1000
30/8	Balance c/f		$900

			$1000			$1000

Office Supplies 103
01/8	Balance b/d	$575	30/8	By balance c/f	$795
10/8	Accounts payable	$200
10/8	GST	$20
30/8		$795			$795

GST Receivable 105
01/8	Balance b/d	$200	1/8	By service ac		$100
10/8	Service		$100	30/8	By balance b/d		$200

			$300				$300

Accounts Payable 201
30/8	Balance c/f	$370	01/8	Balance b/d	$150
			05/8	Office supplies	$200
			05/08	To GST	$20
		$370			$370

GST Payable 202
30/8	Balance c/f	$550	01/8	Balance b/d	$550


		$550			$550

Mia, Capital 301
30/8	Balance c/f	$10000	01/8	Balance b/d	$2,000
			04/8	Cash a/c	$8000

		$10000			$10000

Service Revenue 401
1/8	To Accounts receivable	$1000	30/8	Balance c/f	$1100
1/8	To GST	$100
		$1100			$1100

Salary Expense 501
30/8	Balance c/f	$1500	30/08	By cash	$1500

		$1500			$1500

Problem 4 (Marks: 3 x 5 = 15)

Adjusting Entries and Justifications

Miranda’s Motor Mechanics analyzed the accounting records and other data for the business. The following information is made available for the year ended 30 June 2020.

Prepare the end-of-period adjusting entries required on 30 June 2020. Ignore GST. Also mention what effects will be on assets or liabilities and Equity if adjusting entries were not recorded.

Salaries and wages owing to employees at the end of the financial year amounted to $2,480.

Included in the Prepaid Rent account is an amount of $1,600 paid in June for the month of July 2020. The Prepaid Rent account has a debit balance of $4,800.

Rent a/c $1600To prepaid rent $1600(Being rent for July paid in June) If adjustment was not done, assets would increase

A business hold a 90 day note receivable of $10,000 from a customer. The note bears an interest rate of 12% p. a. and was issued on May 1 2020

Interest receivable a/c $200To interest income a/c $200(Being interest due till June) The income will be affected if this transaction is not recorded.

The balance of Unearned Revenue Account $8 400 on 30^th June 2020. Included in unearned revenue $1,650 for which services was performed on during the last of June.

Unearned revenue a/c $1650To income a/c $1650(Being service done in June) The income will be affected if this transaction is not recorded.

Depreciation expense on equipment $4,200.

Depreciation expenses $4200 To Accumulated depreciation $4200(Being depreciation accrued on equipment) The liabilities would extend if the amount is not deduced)

Problem 4 (Marks: 13 +4 +10 +1 = 28)

The adjusted trial balance of Raymond Ray – Financial Consultant is shown below:

Raymond Ray – Financial Consultant

Adjusted Trial Balance

As at 30 June 2020

Account Title	Debit $	Credit $
Cash at Bank	$2,360
Accounts Receivable	$5,670
Office Supplies	$200
Prepaid Insurance	$100
Office Equipment	$26,000
Accumulated Depreciation – Off. Equipment		$13,500
Investments	$5,400
Accounts Payable		$3,560
Unearned Fees		$100
Raymond Ray, Capital		$18,380
Raymond Ray, Drawings	$2,450
Consulting Fees		$32,220
Interest Income		$840
Advertising Expense	$1,050
Rent Expense	$5,300
Salary Expense	$16,400
Telephone Expense	$260
Travel Expense	$1,500
Supplies Expense	$400
Insurance Expense	$100
Salaries Payable		$1,400
Depreciation Expense	$2,000
Interest Receivable	$810

Total	$70,000	$70,000

Required

Prepare the income statement for the business for the year ended 30 June 2020.
Prepare a statement of changes in equity for the year ended 30 June 2020.
Prepare a balance sheet as at 30 June 2020.

Answer

Requirement A: Income Statement

*Raymond Ray – Financial Consultant*
*Income Statement*
*For the year ended 20^{^th}* June 2020**
Income	$	$
Consulting Fees	$32,220
Interest income	$840
Total Income		$33060
Expenses:
Advertising Expense	$1,050
Rent Expense	$5,300
Salary Expense	$16,400
Telephone Expense	$260
Travel Expense	$1,500
Supplies Expense	$400
Insurance Expense	$100
Depreciation Expense	$2,000
Total Expenses		$27010
Profit		=$6050

Requirement B: Statement of Changes in Equity

*Raymond Ray – Financial Consultant*
*Statement of Changes in Equity*
*For the year ended 20^{^th}* June 2020**
	$
Owners capital	$18,380
Add: Net income	$6050
Less: Drawings	$2,450
Owners capital closing	$21980

Requirement C: Balance Sheet

*Raymond Ray – Financial Consultant*
*Balance Sheet*
As at 30 June 2020
	$	$	$
ASSETS
*Current Assets*
Cash at Bank	$2,360
Accounts Receivable	$5,670
Interest Receivable	$810
Office Supplies	$200
Prepaid Insurance	$100
*Total Current Assets*		$9140
*Non-current Assets*
Investment	$5400
Office Equipment	$26,000
Less: Accumulated Depreciation – Office Equipment	($13500)	$17900
*Total Non-current Assets*			$27040
TOTAL ASSETS
LIABILITIES
*Current Liabilities*
Accounts Payable	$3,560
Unearned Consulting Fees	$100
Salaries Payable	$1,400
*Total Current Liabilities*
Total Liabilities		$5060	$5060
Net Asset
Equity
Raymond Ray, Capital		$21980
Total Equity			$21980

c. the simplest form of business entity, owned and bound to one person, an example is a cabinet maker contractor

b. a company is a separate legal entity from its owners, and it is required to comply with various regulations

c. The analysis and communication of economic information to assist users make informed decisions regarding the allocation of scarce resources.

c. financial accounting and management accounting

a. assets = liabilities + equity

c. assets may comprise cash at bank and inventory

b. a transaction is a record of exchange of value between two parties and ought to be recorded by the firm

b. raw materials, work-in-progress and finished goods

b. Accounts payable

c. Holds true the concept of duality

b. An accounting record including the transaction date, the name of the accounts affected by the transaction and the amounts

a. Monetary transactions of an accounting entity must be kept separate from those of its owners

d. The most common error are clerical errors, transposition errors and balancing errors.

b. Expenses are matched with the related revenues

e. Monetary transactions of an accounting entity must be kept separate from those of its owners

a. the balance sheet can be referred to as the statement of financial position and is based on the accounting equation, assets = liabilities + equity

c. can be referred to as the statement of financial performance and is based on the profit equation, profit = revenue – expenses

b. International Accounting Standards Board

c. International Assurance Standards Board

Cash versus Accrual Basis of Accounting

Required

Adjusting Entries and Justifications

Miranda’s Motor Mechanics analyzed the accounting records and other data for the business. The following information is made available for the year ended 30 June 2020.

Raymond Ray – Financial Consultant

Adjusted Trial Balance

Required

c. the simplest form of business entity, owned and bound to one person, an example is a cabinet maker contractor

b. a company is a separate legal entity from its owners, and it is required to comply with various regulations

c. The analysis and communication of economic information to assist users make informed decisions regarding the allocation of scarce resources.

c. financial accounting and management accounting

a. assets = liabilities + equity

c. assets may comprise cash at bank and inventory

b. a transaction is a record of exchange of value between two parties and ought to be recorded by the firm

b. raw materials, work-in-progress and finished goods

b. Accounts payable

c. Holds true the concept of duality

b. An accounting record including the transaction date, the name of the accounts affected by the transaction and the amounts

a. Monetary transactions of an accounting entity must be kept separate from those of its owners

d. The most common error are clerical errors, transposition errors and balancing errors.

b. Expenses are matched with the related revenues

e. Monetary transactions of an accounting entity must be kept separate from those of its owners

a. the balance sheet can be referred to as the statement of financial position and is based on the accounting equation, assets = liabilities + equity

c. can be referred to as the statement of financial performance and is based on the profit equation, profit = revenue – expenses

b. International Accounting Standards Board

c. International Assurance Standards Board

Cash versus Accrual Basis of Accounting

Required

Adjusting Entries and Justifications

Miranda’s Motor Mechanics analyzed the accounting records and other data for the business. The following information is made available for the year ended 30 June 2020.

Raymond Ray – Financial Consultant

Adjusted Trial Balance

Required

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