Frank Woods Business Accounting - Assignment Example

Financial Accounting 1. What is a manufacturing account?  Select one:  A) A manufacturing account shows the cost of goods sold in a manufacturing business.  B) A manufacturing account is an account that serves to calculate the cost of finished goods produced in a manufacturing business.  C) A manufacturing account is the personal account of a manufacturing business in the payables ledger.  D) A manufacturing account serves to calculate the direct manufacturing costs during the year, the amount of which is then transferred to the trading account.  Answer: Option B (A manufacturing account is an account that serves to calculate the cost of finished goods produced in a manufacturing business). Though option D is also the correct answer but manufacturing accounts include direct as well as indirect manufacturing costs incurred during the year and these costs are further summed up together and transferred to the trading account. Hence it can easily be said that manufacturing accounts serves to calculate the costs of finished goods produced in a manufacturing business. 2. The following figures relate to the payables of a business.  Opening balance: £133,000  Closing balance: £166,000  Cash paid to suppliers: £1,200,000  Returns outwards: £2,000  Discounts received: £11,000  what was the purchases amount for the period?  Select one:  A) £1,246,000  B) £1,242,000  C) £1,224,000  D) £1,076,000 Answer: Option A (£1,246,000 ) £ Payable at the end of the period 133,000 Add: Discount Received 11,000 Add: Return Outwards 2,000 Add: Cash Paid to Suppliers 1,200,000 Less: Payable Balance at Start (133,000) 1,246,000 3. Jill carried out a reconciliation between the payables control account and the total of the list of balances on the personal accounts in the payables ledger. She found the following errors.  • Error 1: a balance of £1,350 should have been offset against a balance on the receivables control account, but no entry had been made.  • Error 2: the total of the purchase day book had been overstated by £500.  • Error 3: an invoice of £2,350 had been recorded as £2,300 in the supplier’s account, but it had been correctly posted to the control account.  • Error 4: a credit note from a supplier had been incorrectly recorded as an invoice.  Which of these four errors require a correction to the payables control account?  Select one:  A) Errors 1 and 3  B) Errors 3 and 4  C) Errors 1, 2 and 3  D) Errors 1, 2 and 4  Answer: Option D (Errors 1, 2 and 4 ) This option would be the most suitable answer s the Error 3 needs a correction within the individual suppliers’ account rather than the control account, all the other errors require n amendment within the payables control account. 4. When performing a Bank reconciliation statement starting from the unadjusted closing balance as per the cash book, which of the following items requires an entry in the cash book? (Select two options only.)  Select one or more:  Item 1: bank charges.  Item 2: an outstanding lodgment related to a payment received from a credit customer. Item 3: an Un-presented cheque related to a payment to a credit supplier. Item 4: a direct debit on the bank statement only.  Answer: Item 2 and Item 3 Both of these Items would require a correction within the cash book to make a proper bank reconciliation statement. 5. A cash book at 31 December 20X1 shows a balance at the bank of £155,230. When comparing the balance with the bank statement, an accountant finds the following differences with the cash book.  • Bank charges: £80  • Receipts not yet credited by the bank: £12,500  • Un-presented cheques: £3,000  • A direct debit not yet in the cash book: £1,300  • Interest received on a short-term deposit account: £50  Calculate the adjusted closing balance as per the cash book, and the balance as per the bank statement.  What are the correct balances as per cash book and the bank statement?  Select one:  A) Cash book balance: £153,900 Bank statement balance: £163,400  B) Cash book balance: £156,560 Bank statement balance: £144,400  C) Cash book balance: £153,900 Bank statement balance: £144,400  D) Cash book balance: £156,400 Bank statement balance: £146,900 Answer: Option A (Cash book balance: £153,900 Bank statement balance: £163,400) Cash book balance £155,230 Ending Cash Book Balance £153,900 Add: Interest Income £50 Add: Un-credited cheques £12,500 Less: Direct Debit £1,300 Less: Un-presented cheques £3,000 Less: Bank Charges £80 Bank Statement Balance £163,400 Ending Cash Book balance £153,900  6. The monthly telephone bill of a business has been debited to the insurance expense account.  What type of error is this known as?  Select one:  A) A compensating error  B) An error of commission  C) A posting error  D) An error of principle  Answer: Option A (Compensation error) This error is a compensating error and this happens when errors effectively cancel each other out. The telephone bill and the insurance bill are both expenses. 7. The trial balance of Knights & Knaves showed sales revenue of £700,000 and cost of goods sold of £400,000 for 20X7. However, subsequently, the following errors were discovered.  • An irrecoverable receivable of £20,000 had been deducted from sales revenue.  • A return outwards of £5,000 had been wrongly posted to the sales returns account, but had been correctly entered into the supplier’s personal account.  What would be the gross margin after correction of these errors?  Select one:  A) 54.7%  B) 57.7%  C) 46.5%  D) 45.5%  Answer: Option D (45.5%) Sales Revenue would increase by £25,000 and the Cost of goods sold would reduce by £5,000 because of return outwards. Hence Gross Profit would be (£725,000 - £395,000 = £330,000). Gross Margin would be £330,000 ÷ 725,000 * 100 = 45.5% 8. When a trial balance did not balance, an accountant opened a suspense account. The accountant then discovered the following errors:  • Error 1: rent expense of £4,300 had wrongly been entered in the accounts as £3,400.  • Error 2: discounts received totaling £1,200 had not been posted to the nominal ledger account.  • Error 3: a £500 discount allowed to a customer had been posted to the wrong side of the discounts allowed account.  Drag and drop two options from the list below to fill the blank spaces and correctly answer the following questions:  1. How much was the original balance on the suspense account?  2. Is that balance a debit or credit?  £700 £900 £1,000 £1,200  Debit Credit  £700  £900  £1,000  £1,200  Debit  Credit  Answer: £700 (Credit balance) Rent expense - £900 Credit side heavy Discount Received - £1,200 Debit side heavy Discount Allowed - £1,000 Credit side heavy – double effect 9. At the end of the accounting period, a business needs to write off an irrecoverable receivable of £3,000. The trial balance shows an allowance for receivables of £4,000. The accountant decides that an allowance for receivables of £3,500 is to be maintained. What would be the possible double entries to record the above? (Select two options only.)  Select one or more:  A) DEBIT: Allowance for receivables £500 CREDIT: Irrecoverable receivables £500 and DEBIT: Receivables control account £3,000 CREDIT: Allowance for receivables £3,000  B) DEBIT: Irrecoverable receivables £3,000 CREDIT: Allowance for receivables £3,000 and DEBIT: Allowance for receivables £4,000 CREDIT: Receivables control account £4,000  C) DEBIT: Irrecoverable receivables £3,000 CREDIT: Receivables control account £3,000 and DEBIT: Allowance for receivables £500 CREDIT: Irrecoverable receivables £500  D) DEBIT: Allowance for receivables £3,000 CREDIT: Receivables control account £3,000 and DEBIT: Irrecoverable receivables £2,500 CREDIT: Allowance for receivables £2,500  Answer: Option A DEBIT: Allowance for receivables £500 CREDIT: Irrecoverable receivables £500 and DEBIT: Receivables control account £3,000 CREDIT: Allowance for receivables £3,000  10. In a sole trader’s business, if net profit for an accounting period is £30,500, which of the options below is the double entry to close off the income and expense nominal ledger account?  Select one:  A) DEBIT: I&E account £30,500 CREDIT: Drawings £30,500  B) DEBIT: Capital £30,500 CREDIT: I&E account £30,500  C) DEBIT: I&E account £30,500 CREDIT: Capital £30,500  D) DEBIT: Drawings £30,500 CREDIT: I&E account £30,500  Answer: Option C DEBIT: I&E account £30,500 CREDIT: Capital £30,500  11. On the morning of 31 January, 20X2, Josie found that her shop window was broken and her till was empty. Someone had broken in overnight and stolen the cash that was in the till. Suppose you know the following:  • cash at the beginning of the period was £750  • receivables at the beginning of the period were £7,700  • receivables at the end of the period were £7,300  • total cash received from credit customers was £48,800  • expenses paid from cash on hand amounted to £1,250  • cash receipts banked during the period amounted to £8,500  • total sales during the period amounted to £64,650.  How much cash had been stolen? (Start by calculating credit sales first.)  Answer the question by providing the appropriate number in the box below. Do not enter commas, spaces or symbols [such as £].  Answer: £56,050 Credit Sales = {(Closing receivables 7300 + Cash received from receivables 48800) – opening receivables 7700} = 48400 Cash Sales = Total Sales (64650) – Credit sales (48400) = 16250 Cash Stolen = Opening Cash (750) + Cash received from receivables (48800) + Cash sales (16250) – Expenses paid (1250) – Cash receipts banked (8500) = 56050 12. Zbigniew and Jerzy own a shop selling Polish delicacies. Their financial year ends on 31 March 20X6. On 29 March there was fire destroying part of their inventory. Zbigniew and Jerzy did not have insurance. They provide the following information:  • on 1 April 20X5 the inventory was £17,950  • purchases during the year were £85,340  • sales during the year were £125,500. Zbigniew and Jerzy apply a gross margin on sales of 35 per cent  • inventory that remained intact and can still be sold amounts to £12,690.  How much of the inventory was lost during the fire?  Answer the question by providing the appropriate number in the box below. Do not enter commas, spaces or symbols [such as £].  Answer: £727 Cost price of the sold inventory= 135/100 * 125500 = 92963 Inventory lost during fire = opening inventory (17950) + Purchases during the year (85340) – Cost price of sold inventory (92963) – Inventory intact (12690 * 100/135 = 9600 ) = 727 13. Which of the options below is not one of the reasons to calculate goodwill in a partnership?  Select one:  A) A partnership is very profitable. Goodwill is calculated in order to see what share in the existing goodwill partners can withdraw from the partnership.  B) An existing partner dies. Goodwill is calculated in order to pay out that partner’s share in the existing goodwill to the partner’s estate on death.  C) A new partner joins the partnership. Goodwill is calculated in order to see how much the partner must pay for a share in the existing goodwill.  D) After several years, two partners decide to change the profit sharing ratio. Goodwill is calculated in order to allocate the partners’ share in the existing goodwill in the old profit-sharing ratio. Answer: Option C (A new partner joins the partnership. Goodwill is calculated in order to see how much the partner must pay for a share in the existing goodwill). 14 Colin, Fareed and Naomi have established a partnership. The partnership agreement states that:  • the partners share residual profits in the ratio of 3:4:5 respectively  • interest on capital is five per cent  • interest on drawings is ten per cent  • Fareed receives a salary of £20,000 per annum.  The balances on the partners’ capital accounts during 20X8 were as follows:  Colin £35,000, Fareed £40,000 and Naomi £45,000.  Drawings during 20X8 were as follows:  Colin £10,000, Fareed £10,000 and Naomi £20,000.  Profit for the year ended 31 December 20X8 was £330,000.  What are the partners’ shares in the residual profits for 20X8? Answer: Colin £77,750, Fareed £123,667 and Naomi £128,583  15. When asking students to list some consequences of the fact that Peony Ltd is a legal entity is separate from its owners, a teacher obtained the following four answers. Which one of the following answers is not correct?  Select one:  A) Peony’s company directors propose the amount of profit to be distributed to the common shareholders in the form of dividends.  B) The shareholders of Peony Ltd cannot enter into legally binding contracts on behalf of the company (unless they are also the company’s managers and enter into the contract in their managerial capacity).  C) The shareholders do not own the assets of Peony Ltd. They only have a claim to the net assets of the company in case Peony Ltd goes into liquidation.  D) The shareholders of Peony Ltd are liable for the company’s debts and obligations.  Answer: Option D (The shareholders of Peony Ltd are liable for the company’s debts and obligations). 16. At 31 December 20X2 the capital section of Monkey Business plc’s balance sheet showed an ordinary capital of 1,000,000 equity shares of 25p each, and a share premium account of £250,000.  In the year ended 31 December 20X3, Monkey Business plc made the following share issues.  On 1 January 20X3: a 1 for 5 bonus issue, using the share premium account.  On 30 June 20X3: a 1 for 10 rights issue at £1 per share  What would be the balances on the share capital and share premium accounts of Monkey Business plc as at 31 December 20X3?  Select one:  A) Share capital: £300,000 and Share premium: £320,000  B) Share capital: £250,000 and Share premium: £250,000  C) Share capital: £330,000 and Share premium: £290,000  D) Share capital: £500,000 and Share premium: £200,000  Answer: Option C (Share capital: £330,000 and Share premium: £290,000) 17. An accountant is making end of year adjustments in order to prepare the financial statements for Donkey Business plc. During 20X2, a machine which had cost £300,000 and which had an accumulated depreciation of £270,000, was sold for £18,000. This was the only machine disposed of in 20X2, and there were no additions. At the end of 20X2, Donkey Business plc’s trial balance shows a total machinery cost of £1,150,000 with a total accumulated depreciation on machinery of £525,000. This is before any adjustments to account for the disposal or annual depreciation. Donkey Business plc depreciates its machines using the straight-line method over ten years with no residual value. No depreciation is charged for the year in which a machine is sold.  What is the gain or loss on the disposal of the machine, and what is the annual depreciation on machinery for 20X2?  Select one:  A) Loss: (£18,000) Annual depreciation: £115,000  B) Gain: £18,000 Annual depreciation: £115,000  C) Gain: £12,000 Annual depreciation: £85,000  D) Loss: (£12,000) Annual depreciation: £85,000  Answer: Option D (Loss: (£12,000) Annual depreciation: £85,000) 18. Which of the following statements about cash flow statements is not true?  Select one:  A) A cash flow statement is used in combination with the balance sheet and the income statement in order to understand how the business has financed its operations and assets.  B) Cash flows generated from operating activities are cash flows that derive from the primary revenue-producing activities of a business entity  C) A cash flow statement is used to determine the profitability of a business over a period D) The cash flow statement articulates with the opening and closing balance sheets by showing how the net increase or decrease in cash came about.  Answer: Option C (A cash flow statement is used to determine the profitability of a business over a period) 19. At the start of 1 February 20X3 a company’s net working capital was £15,500. During the day, the following transactions occurred. A credit customer paid £5,500, an irrecoverable receivable amounting to £1,200 was written off, and inventory that had cost £2,500 was sold for £5,000 on credit.  At the end of 1 February 20X3, what was the company’s net working capital?  Select one:  A) £16,800  B) £19,300  C) £22,300  D) £24,800 Answer: Option A (£16,800) 20. The income statement of Big Business Ltd shows that during the year ended 31 March 20X9, Big Business Ltd had sales of £100,000 and made a gross profit of £25,000. Closing inventory was £15,000.  What was Big Business Ltd’s inventory turnover period?  Select one:  A) 50 days  B) 73 days  C) 219 days  D) 55 days Answer: Option B (73 days) Source: (Wood et al, 2007) Bibliography Top of Form Wood, F., & Sangster, A. (2007). Frank Wood's business accounting. Harlow: FT Prentice Hall. Bottom of Form Read More