Module 2: Financial Statements

ACCT Financial:
pg 15-18 Exercises 2, 15, 16 (chapter 1)
Question 2
2 Calculate equity LO3
A company reports assets of $10 000 and liabilities of $6000.
Assets = Liabilities + Equity

10 000 = 6000 + equity

Equity = 4000

Question 3
3 Identify accounting principles LO2, 3
Each of the following statements is an application of the revenue recognition
principle, the matching principle, or the cost principle.
a. A company records Equipment for the purchase price of $10 000 although
the suggested retail price was $13 000.
Cost principle

b A company receives $2000 for a service to be performed but records only

$1000 as Service Revenue because it
earned only half in the current period.
Matching principle

c A company pays $6000 for insurance but uses only $4000 during the
period. Therefore, it records only $4000 as
revenue recognition principle

Question 15
The following qualitative characteristics of accounting were discussed in the chapter:
Consistency
Relevance
Understandability
Comparability
Conservatism
Materiality
Reliability

d The ability to compare and contrast the financial activities of the same company over a period of time.
e The threshold over which an item begins to affect decision making.
f The way in which accountants deal with uncertainty.

1. Consistency- The dependability of accounting information

2. Relevance- The capacity to affect business decisions
 3. Understandability- The ability of accounting information to be comprehensible to those who
have a reasonable knowledge of business and are willing to study the information with
reasonable diligence.
4. Comparability- The ability to compare and contrast the financial activities of the same company
over a period of time.
5. Conservatism- the way in which accountants deal with uncertainty
6. Materiality- The threshold over which an item begins to affect decision making
7. Reliability- Accuracy

Question 16

The Harbour Group had the following situations during the year:

a Inventory with a cost of $186 400 is reported at its market value of $235 600.

b Harbour added four additional weeks to its fiscal year so that it could make its income look stronger.
Past years were 52 weeks.

c Harbour's CEO purchased a yacht for personal use and charged it to the company.

d Revenues of $25 000 earned in the prior year were recorded in the current year.

In each situation, identify the assumption or principle that has been violated and discuss how Harbour
should have handled the situation.

pg 37 Exercises 1, 5, 8 (chapter 2)
Question 1
1. Sole Proprietorship- The most common form of business
2. Managements discussion and analysis- A report that attests to the fair presentation of a
companys financial statements
3. Notes to the financial statements- Information following the financial statements that provides
additional information and disclosures
4. Partnership- A form of business in which multiple entities join together
5. Auditors report- A form of business that is established by filing proper forms with ASIC
6. Company or corporation- Analysis of a companys financial activities that focuses on results of
operations, ability to pay debts and expansion plans.

Question 5
Horizontal analysis is a method of analyzing a companys account balences over time and is useful in
identifying trends in a company over time.

- Percentage change in account balance = (current year balance prior year balance) / Prior year
balance

Vertical analysis is a method of comparing a companys account balences within one year. This tells us
how significant certain accounts are.
 - For I/S = Account Balance / Net Sales or Revenue
- For B/S = Account Balance / Total assets

Question 8

1. Mortgage payable, due in 15 years- noncurrent liability

2. Short term investments- current asset
3. Cash- Current asset
4. Prepaid rent- contributed capital
5. Patents- noncurrent asset
6. Contributed capital- retained earnings
7. Accounts payable- current liability
8. Buildings- noncurrent asset
9. Notes payable, due in six months.- Current liability

current asset, noncurrent asset, intangible asset, current liability, contributed capital, or retained
earnings.

pg 40-41 Problems 21, 23 (chapter 2)

Question 21

Question 23

ACCT Financial:
pg 59-60 Exercises 9, 15 (chapter 3)
pg 61-62 Problems 21, 22 (chapter 3)

9 Transaction analysis LO2

The following is a list of independent economic events:
i Purchased inventory on account.
ii Paid dividends at the end of the year.
iii Received cash in payment for services.
iv Issued shares (contributed equity) for cash.
v Paid rent in cash.

vi Received a bill for electricity used.

vii Bought equipment for cash.
viii Billed customers for services.
Required
to make consistent with other answer formats change to:
a Indicate the accounts that would be affected by each transaction.
b Indicate whether each transaction increases, decreases, or has no effect on assets, liabilities and shareholders
equity.

15 Recording transactions LO3, 4, 5

In the month of March, Peter Wells Consulting entered into the following transactions:
2 Bought a new building for $135 000.
3 Paid February utility bill of $860.
11 Issued shares to investors in return for $5000 cash.
13 Hired a new administrative assistant for an annual salary of $85 000 salary.
19 Received payment in the amount of $750 for service billed in February.
31 Paid dividends of $1000.
Required
Prepare all necessary journal entries for March (omitting explanations).