Inventoriable Costs, Bank Reconciliation Statement - Assignment Example

Question 1: Part A 1. The accrual principles require that expenses should be realized as soon as they are met. Since, the telephone expenses expense belongs to the previous year it needs to be accounted then otherwise it will overestimate the profits of the previous year and go against the basic principles of accounting. 2. Accrual basis of accounting is a method of accounting which states that revenues need to be recorded when they are earned irrespective whether they are received or not and expenses need to be recorded in the year they are made irrespective of the flow of cash. (Ward, 2011) The other method of accounting is cash basis accounting where revenue and expenses are realized on the basis of flow of cash. (Ward, 2011) 3. Personal withdrawal needs to be treated as a deduction from equity and not expenses as it is not a business expenses. Withdrawing money results in deduction in the contributed equity by the proprietor which thereby needs it to be treated in changes in equity. 4. Owner’s equity is the equity contributed by the owner of the business. It is the money the proprietor lends to the business to start operations. Owner’s equity changes due to change in profits. An increase in profits increases owner’s equity and vice versa 5. Current assets or liabilities means assets which will be converted into cash within a period of one year and is short term. (Little, 2011) Non-current are held for a period longer than one year Part B 1. The manufacturing overhead were allocated to the different product on the basis of direct labour hours as it is difficult to differentiate the cost attributable to the different product. Having a standard like labour hours helps to determine the product cost and helps to keep uniformity in the process. 2. Inventoriable costs are the costs which are cost of assets which are not sold and include the inventories in hand. (Cost, 2011) It is very much similar to the product cost but product cost includes direct labour, direct material and manufacturing overhead whereas inventories are the raw materials. (Cost, 2011) Period costs are the non manufacturing costs which are not directly attributed to a product. (Cost, 2011) 3. Inventories which are recorded in the Balance Sheet are raw materials, work in progress and finished goods. This includes all materials which need to be processed or are processed but not sold. 4. Selling expense and sales commission are not recorded in the goods manufactured expenses because these expenses are not directly attributable to a product. They are the indirect cost associated with the product and the cost cannot be directly ascertained to any product. Selling expense and sales commission appears on the income statement as is treated as an expense as it is made out of the pocket. 5. Manufacturing overheads are the expenses attributed to a product are directly attributed to a product. It is also an indirect expense as it doesn’t get reflected in the final product but needs to be incurred to manufacture the product and hence are allocated to the product. Question 2 a. Bank Reconciliation Statement Balance as per bank statement on 31st January 2009   $7,527.22 Add:     EFT Payments for insurance   $750 EFT Payments for utility   $290 Bank Service Charge   $10 Money deposited into bank but not reflected   $316.15 Cheque dishonored due to insufficient funds     Mary Express $395   Lakeland Supplies $147.17 $542.17 Less:     Cheque Issued but not yet presented for payment     Cheque No 1520 $187.10   Cheque No 1522 $589.92   Cheque No 1525 $720.02 $1,497.04 Deposit wrongly credited to business bank account   $300 EFT Collection made   $1,191 Business Interest Earned   $38.19 Adjusted Correct Balance as per books   $6,409.31 Question 3 a. Journal Entries Journal DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT August 3 Inventory A/C Dr 1650 ABC Suppliers Cr 1650 August 5 Freight Charges Dr 220 Cash A/C Cr 220 August 10 Defective Goods A/C Dr 550 Inventory A/C Cr 550 August 10 ABC Suppliers Dr 550 Defective Goods A/C Cr 550 August 12 Brown A/C Dr 1320 Inventory A/C Cr 800 Profit & Loss A/C Cr 520 August 17 ABC Suppliers A/C Dr 1100 Discount Received A/C Cr 33 Cash A/C Cr 1067 August 19 Defective Goods A/C Dr 220 Brown A/c Cr 220 August 19 Profit & Loss A/C Dr 220 Defective Goods A/C Cr 220 August 20 Cash A/C Dr 22 Discount Allowed A/C Dr 1078 Brown A/C Cr 1100 b. Solution 1. Total Sales revenue = 1,000,000 Units Sold = 10,000 Selling Price per Unit = Sales Revenue / Units Sold = 1,000,000 / 10,000 = 100 Total Expenses = Fixed Expense + Variable Expenses = 550,000 + 150,000 = 700,000 Break even sales in unit = Total expenses / Selling price per unit = 700,000 / 100 = 7,000 units Sales Revenue from 7500 units = 7500 * 100 = 750000 Sales Revenue from 7000 units = 7000 * 100 = 700000 Margin of safety = 750000 – 700000 = $50,000 2. To achieve a target profit of $240000 total sales should be as follows Total revenue to earn $240000 = Fixed Expense + Variable Expenses + Profits = 550,000 + 150,000 + 240, 000 = 940,000 No of units to be sold to achieve a sale of 940000 = 940000 / 100 = 9400 units 3. Contribution Margin = 300,000 Sales Revenue = 1,000,000 Contribution Margin Ratio = (Contribution Margin / Sales Revenue) * 100 = (300000 / 1000000) * 100 = 30% Break Even point in sales dollars = Fixed expenses / Contribution margin ratio = 300000 / .30 = $300,000 Question 4 1. The final figure in the unadjusted trial balance is calculated at the end of the accounting year by transferring all the ledger balances to the trial balance. (Patton, 1999) This is done to check the efficiency of the accounting system and to ensure that all the transaction are recorded. Businesses encounter numerous transactions which are recorded through journal entries and posted in the ledger. This work is carried out throughout the year to ascertain the value of the final ledger balances. On the day of closure of the books of accounts the individual balances are posted to the trial balance which helps to judge the arithmetical accuracy. (Patton, 1999) Businesses makes some mistakes while posting entries which is found at this stage and fixing those business prepare their financial statement and gauge the performance based on those. If there are mistakes steps are takes to correct is so that the final adjusted trial balance is free from error. This helps to ensure that the financial statement is free of errors. 2. The adjustments done by David Martin to ensure that the trial balance is mostly correct except some errors. The errors which are still present in the adjusted trial balance are as follows Cash: it should be posted in the credit side as purchasing art supplies for 3400 will reduce the cash in hand. This will make the cash decrease and should be posted in the credit side which will result in the final cash to decrease. Advertising revenue of 1400 should be posted in the credit side as interest receivable as it is revenue and revenues have credit balance. Posting it on the credit side will treat it as revenue and help to improve the adjusted trial balance. Further it is not an advertising revenue so it needs to be posted under the head interest receivable on the credit side of the trial balance Interest Revenue will be posted on the credit side as it is revenue and revenues have credit balance. Posting it on the debt side is treating it as an expense which goes against the concept of revenue so it should be posted on the credit side. Art Supplies expense should be treated as a expense and should be posted on the debit side instead of the credit side. Posting on the debit side will treat it as an expense and help to gauge the efficiency as the posting with respect to expense will be correct. 3. Journal entries for adjusting entries Journal DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT Art Supplies Equipment Dr 3400 Art Supplies Expenses Cr 3400 (Being year ending adjusting entry made to reflect art supplies equipment purchased) Art Supplies Expenses Dr 3400 Cash Cr 3400 (Being year ending adjusting entry made to reflect art supplies expenses paid in cash) Cash Dr 1500 Advertising Revenue Cr 1500 (Being year ending adjusting entry made to reflect advertising revenues earned in cash) Interest Expense Dr 850 Cash Cr 850 (Being year ending adjusting entry made to reflect interest expenses paid in cash) Prepaid Insurance Dr 850 Cash Cr 850 (Being year ending adjusting entry made to reflect prepaid insurance paid in advance in cash) Depreciation Expenses Dr 7000 Accumulated Depreciation Cr 7000 (Being year ending adjusting entry made to reflect depreciation expenses accounted for and transferred to accumulated depreciation account) Unearned Revenue Dr 1400 Revenue Cr 1400 (Being year ending adjusting entry made to reflect unearned revenue) Interest Receivable Dr 500 Interest Cr 500 (Being year ending adjusting entry made to reflect interest revenue receivable but still due) Question 5 Journal DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT 1 Merchandise Inventory Dr 140000 Accounts Payable Cr 140000 2 Cost of Goods Sold Dr 164000 Merchandise Inventory Cr 160000 Indirect Inventory Cr 4000 3 Cost of Goods Sold Dr 240000 Direct Labour Cr 200000 Indirect Labour Cr 40000 3 Direct Labour Dr 200000 Indirect Labour Dr 40000 Cash Cr 240000 4 Cost of Goods Sold Dr 140000 Manufacturing Overhead Cr 140000 5 Manufacturing Overhead Dr 122000 Cash Cr 122000 6 No entry 7 Accounts Receivable Dr 240000 Sales Revenue Cr 240000 7 Cost of Goods Sold Dr 160000 Merchandise Inventory Cr 160000 8 Manufacturing Overhead Dr 18000 Cost of Goods Sold Cr 18000 References Cost, 2011, “Product cost versus period cost”, retrieved on January 31, 2011 from http://www.accountingformanagemnt.com Little K, 2011, “Current and non-current assets and liabilities”, about.com guide, The New York Times Company Perpetual Inventory, 2011, “Perpetual Inventory System”, Accounting Study Guide, retrieved on January 31, 2011 from http://accountinginfo.com/study/inventory/inventory-110.htm Patton R, 1999, “Post trial balance adjustments”, ACCA Ward S, 2011, “Accrual Basis Accounting”, about.com guide, The New York Times Company Read More