Financial Accounting
Solution
to FINAL
EXAMINATION
1st semester
Write your answers in
the blank space below each question. (Each question worth 5 points.)
Question 1: A flower shop, named F, sold for
150€ of euros of flowers to a customer who paid cash. Post this transaction in
F accounting system.
Sales account: credited 150€
Cash account: debited 150€
Question 2: The flowers sold in question 1
were bought by F, from a wholesaler, for 60€. What is the “income statement”
corresponding to the unique transaction of question 1? And what is the impact
of this transaction on the balance sheet of F? (explain changes in assets and
in liabilities)
Income Statement:
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debit
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credit
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sales |
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150 |
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open stocks |
x |
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purchases |
0 |
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closing stocks |
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x-60 |
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gross margin |
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90 |
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P&L |
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90 |
You may be surprised that the purchases are zero. Explanation: the flowers just sold in this transaction were purchased in the past, in another transaction. Just before the present transaction they were in the stocks (the total value of which is x), and after the transaction the final value of the stocks has become x-60.
Balance Sheet:
On the asset side:
the stocks go down by 60
the cash goes up by 150
On the liability side:
the cumulated P&L goes up by 90
Question 3: The flower shop F buys a computer
from a computer dealer G. The price for F of the computer is 2000€, and F pays
G on credit.
Post this transaction in F accounting system.
Computer equipment: debited 2000
Suppliers: credited 2000
Post this transaction in G accounting system.
Sales: credited 2000
Debtors: debited 2000
Question 4: Why single-entry accounting, like
we do in the booklet of our checkbook, is insufficient to account for the
operations of a firm?
Single-entry accounting records only
movements of cash.
We need to record also movements of
value, like when we receive an IOU.
Question 5: Why, in accounting, value coming in our firm is
recorded as a debit somewhere in its
accounts, and yet when we, as private individuals, put money into our bank
account at our bank, the bank credits
us?
The bank gives us its view of the
account bearing our name in its
accounting system.
Question 6: Here are the transactions of a
cycle for Joe’s business.
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Joe's business journal |
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Date |
Transaction |
Amount (€) |
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1 |
01-janv |
Joe puts initial cash into his business |
10 000 |
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2 |
03-janv |
Takes
cash to bank |
8 000 |
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3 |
06-janv |
Buys a delivery van on credit from Jules |
3 000 |
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4 |
09-janv |
Rents
premises. Pays one quarter by cheque |
1 000 |
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5 |
12-janv |
Purchases goods on credit from Deirdre |
4 000 |
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6 |
15-janv |
Pays shop expenses by cheque |
1 500 |
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7 |
18-janv |
Sells goods to Sally on credit |
3 000 |
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8 |
21-janv |
Settles Jules account by cheque |
3 000 |
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9 |
23-janv |
Receives partial payment from Sally (cash) |
2 000 |
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10 |
24-janv |
Takes Sally's cash to bank |
2 000 |
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11 |
25-janv |
Sent
cheque to Deirdre |
1 500 |
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12 |
26-janv |
Purchases goods on credit from Deirdre |
3 000 |
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13 |
26-janv |
Cash
sales |
3 000 |
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14 |
27-janv |
Cash
sales |
1 000 |
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15 |
27-janv |
Purchase of machinery from James on credit |
5 000 |
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16 |
28-janv |
Joe gets a long term loan from its bank |
2 000 |
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17 |
28-janv |
Pays
James by cheque |
5 000 |
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18 |
29-janv |
Take cash
to bank |
5 000 |
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19 |
31-janv |
Pays
salaries |
2 500 |
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Post all the transactions and prepare the trial
balance.
See mini_accounting.xls
for the answer.
Question 7: What are “revenue accounts” and
“capital accounts”?
Revenue accounts are the sales and
the consumptions of the year accounts. They form the IS.
Capital accounts are the other
accounts. They record what the firm owns and what the firm owes. They form the
BS.
Question 8: Explain why a trial balance needs
to be adjusted to compute an income statement?
Since we want to include in the IS
all the consumptions of the year, we need, among other things, to make
adjustments for the loss of value of the fixed assets (called amortization).
Question 9: During the accounting cycle
treated in question 6, we purchased altogether 175 items (at 40€ apiece), and
we sold 70 items (at 100€ apiece). What
are the adjustments for inventory? (explain the accounts involved and give the
figures in debit and in credit)
The purchases were 175 x 40 = 7000 €
But the COGS were only 70 x 40 =
2800 €
The difference goes into the Closing
stocks.
Closing stocks IS: credited 4200 €
Closing stocks BS: debited 4200 €
Question 10: In the income statement of a shop,
what do we call the “trading account”?
It is the top part of the income
statement, made of sales, opening stocks, purchases and closing stocks, and, as
a bottom line, the gross margin.
Question 11: In this balance sheet
For are the Net Fixed Assets? (explain and give
the figure)
Gross fixed assets = 50 + 50 + 100 +
100 + 50 + 50 = 400 (it is the top part of the assets above)
Net fixed assets = Gross fixed
assets – cumulated depreciation = 400 – 200 = 200
What are the Current Assets?
They are the other assets (stocks +
clients + short term financial assets + cash + bank) = 450
Question 12: In the balance sheet of question
11, what is the Capital Employed?
CE = capital + cumulated retained
earnings + bonds + bank loans = 520
What is the Working Capital?
WC = CE
- Net fixed assets = 520 – 200 = 320
Question 13: What do we mean by “liquid assets”
and “illiquid assets”?
“Liquid assets” are assets easy to
sell quickly with no substantial loss of value.
“Illiquid assets” are the other
assets.
Question 14: Here are the beginning BS, the
income statement, and the ending BS, for an accounting cycle of a firm.
What is the ROCE of the year? (explain and
calculate the figure)
ROCE = operating result / (average
CE) = 90 / (average of 520 and 550) = 90 / 535 = 16,8%
Question 15: What is the difference between
cash and value?
Discussion question: see course for
long answer.