Assignment

Prepared By
Mohamed Safwat Mostafa

Part 1:
1. Which of the following do not considered as a GAAP principles:
a) Conservatism.
b) Matching.
c) Segregation of duties.
d) Objective.

Correct answer is: c) Segregation of duties.

Justification:
GAAP are common set of accounting principles, rules, standards and procedure that used by
companies to prepare its financial statement
GAAP are:

The business entity concept: accounting is separate from personal affairs from its owner

The going concern concept: the business will continue to operate

Conservatism: accounting should be fair and reasonable

Objective: recorded according to objective evidence

Time line: accounting take place over known period of time

Matching: each revenue recognized should recognize the cost related

Consistency: apply same principle and accounting policies from period to period

Materiality: cost and benefit should take place in gathering information

So segregation of duties is not considered as GAAP principles

2. One of the following is not a credit nature account:

a) Capital.
b) Accrued interest income.
c) Capital Gain.
d) Long term loans.

Correct answer is: b) Accrued interest income.

Justification:

Capital is considered as liability of the business to the owner so it is credit in nature

Capital gain is a profit come from disposition of asset and this profit considered as
revenue which is credit in nature so capital gain is credit nature

Long term loans is non-current liability so it is credit nature

Accrued interest income is interest which is not collected yet so it considered as asset
which is debit nature.

3. Assets should be classified as Current assets when it is expected to be realized within ..

a) One Month.
b) Operating business cycle.
c) Three months.
d) C or B.

Correct answer is:

b) Operating business cycle.

Justification:
Current asset is asset that expected to convert into cash, sell, or consume in operation within a
single operating cycle which generally considered 12 month

4. When company purchases an asset on credit, the accounts that will be affected on the journal
entry are:
a) Cash & Assets.
b) Assets & Capital.
c) Assets & Payables.
d) Investments & Payables.
Correct answer is:

c) Assets & Payables.

Justification:

When buy asset on credit asset account will increase and also payable will increase and
it will reported as Debit asset credit payable

So answer a) Cash & Assets is not correct as company purchase asset on credit so cash
account will not be affected

b) Assets & Capital is not correct as capital account will not be affected as nature of
asset is not mentioned its nature

d) Investments & Payables is not correct as type of asset not mentioned for invest or
other thing .

5. Inventory opening balance + Purchases Inventory ending balance = .:

a) Operating expenses.
b) Other operating expenses.
c) Depreciation of inventory.
d) Cost of Goods sold.

Correct answer is:

d) Cost of Goods sold.

Justification:

This is one of the fundamental equation in accounting

For example : if opening balance of inventory is 100,000 USD and we buy goods with
50,000 USD and the inventory ending balance is 90,000 USD
The cost of goods sold will be 60,000 USD

6. Entity A purchased a machine with USD 100,000. The companys technician expects the
machine to be used for 5 years only. Five years depreciation period means . % each year.
a) 20%.
b) 5 %.
c) 15%.
d) 25%.
Correct answer is:

a) 20%.

Justification:
When machine expected to be used over 5 years only, its value after 5 years should be zero so
it depreciation by year will equal 100%/5 years = 20% each year

7. Following the previous information, in year TWO the Fixed Assets Net line item in balance
sheet will equal to:
a) USD 80,000.
b) USD 20,000.
c) USD 60,000.
d) USD 40,000.
Correct answer is:

c) USD 60,000.

Justification:
Depreciation is 20% per year so in 2 years machine will be depreciated by 40% so the remaining
will be 60% (fixed assets net)

8. The depreciation expense journal entry will affects the two accounts:
a) Depreciation expenses and provision.
b) Depreciation expenses and accumulated depreciation.
c) Depreciation expenses and allowance for doubtful debts.
d) Depreciation expenses and accrued expenses.
Correct answer is:

b) Depreciation expenses and accumulated depreciation.

Justification:
Accumulated depreciation is total depreciation of fixed assets and it will be charged as expense
since the asset was made available for use and this account is credit nature so it will appear in
balance sheet as reduction of asset amount
So Journal entry for depreciation expense will be:
Debit

depreciation expense (income statement)

Credit accumulated depreciation (balance sheet)

Provision is a liability of uncertain time or amount so answer A is not correct as depreciation

increase with fixed amount within certain period

Allowance for doubtful debts is reduction of amount of account receivables and it represent
amount of receivables that will not be paid by customer so answer C is not correct

Accrued expenses is expense which has been incurred but not yet paid so answer D is not
correct

9. Company A has the following balances at the yearend; Non-current assets equal 30,000,
current assets equal USD 15,000 and Equity with USD 25,000. The total liability balance will
be:
a) USD 70,000.
b) USD 20,000.
c) USD 40,000.
d) USD 45,000.
Correct answer is:

b) USD 20,000.

Justification:
Equity= Total asset (non-current + current) liabilities (current +long term liabilities)

25,000 = (30,000 + 15,000) liabilities

Liabilities = 45,000 25,000 = 20,000

10. Method of recording that recognizes Costs when deserved, rather than when paid is:
a) Conservatism.
b) Matching.
c) Materiality.
d) Accrual Base.

Correct answer is:

d) Accrual Base.

Justification:
Accrual base is method of recording that recognize economic events regardless of when cash
transaction is paid so it give more accurate picture about company situation as it allow
combination of current cash inflow/ outflow with future expected cash inflow / outflow
Conservatism, Matching and Materiality are GAAP

Conservatism: accounting should be fair and reasonable

Matching: each revenue recognized should recognize the cost related

Materiality: cost and benefit should take place in gathering information

Part 2
1. What do we mean by Accounting Cycle?
Accounting Cycle: is a series of steps which are repeated every reporting period. This
process starts with making accounting entries for each transaction and goes through closing
the book
It consist of 8 steps:
1. Transaction

8. Closing the
books

2. Journal entries

Accounting
Cycle

7. Financial
statement

6. Adjusting
journal entries

3. Posting

4. Trial balance

5. Worksheet

1. Collecting and analyzing data from transactions and events.

2. Putting transactions into the general journal.
3. Posting entries to the general ledger.
4. Preparing an unadjusted trial balance.
5. Adjusting entries appropriately.
6. Preparing an adjusted trial balance.
7. Organizing the accounts into the financial statements.
8. Closing the books.
Preparing a post-closing trial balance to check the accounts.

2. Medical Company established on July 1, 2014 with USD 50 000 share capital. Also, it had
issued a bond for 5 years converted to share capital at par value any time with USD 15 000
at 8% interest per annum.
At the year end the company converted 50% of the bonds payable to shares and paid the
rest of the payable amount. You are required to prepare the journal entries on first of
July & at the end of December?
Journal entries
July 1, 2014
Dr Cash

65,000
Cr Capital

50,000

Cr Bonds payable

15,000

Cr Capital

7,500

Cr Cash

8,100

December 31, 2014

Dr Bond payables

15,000

Dr Interest expense

600

Calculations:
After 6 month from July 1, 2014 to December 31, 2014 50 % of the bond payable converted
to shares so capital increase by 7,500 USD (15,000 / 2)
Rest of the bonds paid (7,500)
Interest expense will be (6 months) =15,000 X (6/12) X 8%= 600
So cash will decrease by 7,500+600 = 8,100

3. ABC Company has the following balances in USD and the end of its first financial year:
Net loss
(400,000).
Depreciation Expenses
30,000.
Interest expenses
50,000.
Loan
270,000
Receivables
100,000.
Payables
90,000.
Tax paid
50,000
Cash & Cash equivalents
60,000.
Assets
160,000
How much is the Cash generated or used from/in operating activities?
ABC Company
Statement of cash flow for the year ended
(Amount in USD)
Cash flow from operating activities
Net loss before taxation
(400,000)
Adjusted for;
Depreciation expenses
30,000
Interest expenses
50,000
_____
Loss before changes in working capital (320,000)
Receivables
(100,000)
Payables
90,000
_____
Cash used in operation
Tax paid

(330,000)
50,000
____

Net cash flow used in operating activities (280,000)

So cash used in operating activities for ABC Company is 280,000 USD
4. What are the main differences between Current & Non-Current Assets?
Non-current assets

Realized after 12 months

Used for long term investment
Not related to operation except fixed
assets

Current assets

Realized within 12 months

Used for short term trading
Related to operation
Cash and cash equivalents

(ex.: inventory)

5. ABC Company made the following transactions during September 2015; you are required to
prepare the entry or entries for each transaction along with the description needed,
T accounts & the trail balance for September.
- The company sold goods on credit with USD 35 000, in which USD 19 000 were collected in cash.
- The company incurred expenses with USD 19 000 in which USD 11 000 were paid in cash.
- The companys total purchases from its sole supplier RED ROSE is 12,000 units with $ 0.8 per
unit. The company paid USD 5 000 to this supplier.
- The overdraft opening balance were USD 5 000.
- The cash opening balance were USD 5 000.
Cost of goods purchased from RED ROSE = 12000 * 0.8 = 9600 USD

Journal entries
1Dr Receivables

35000
Cr Revenue

35000

Goods sold on credit with 35000 USD

2Dr Cash

19000
Cr receivables

19000

19000 USD Cash collected from selling goods on credit

3Dr expenses

19000
Cr accrued expense

19000

Company incurred expenses with 19000 USD

4Dr accrued expense

11000
Cr Cash

11000

Expenses paid with 11000 USD

5Dr Inventory

9600
Cr RED ROSE payables 9600

Purchasing from RED ROSE by 9600 USD

6Dr RED ROSE payables

5000

Cr cash

5000

RED ROSE payables paid with 5000 USD

T Account

DR
BF

Revenue

CR

35000

Goods sold 35000

Opening

5000

35000

35000

Receivables
5000

19000

35000CF

35000

Total
5000
CF

DR

Expenses

TB Bal.

19000

Total
5000
CF

19000
8000

DR
Cash pay
19000
BF
Total
5000

Cash

DR

Paid cash
19000
BF
Total
5000

RED ROSE Payables

5000
4600
9600

Purchasing
goods
Total
5000
CF

CR

DR

24000
8000

CR

Expenses 11000
5000
Payables 5000
5000
BF
8000
Total
5000

Receivables

24000

CR

Receivables
5000

35000

Collected 19000
35000
5000
BF
16000

19000

Total
5000
CF

35000

Total
5000

CR

DR

11000
8000

9600

9600
4600

16000

Inventory

Purchasing 9600
goods
Total
5000

9600

35000

CR
BF

9600

Total
5000
CF

9600
9600

ABC Company trial balance

As of September 30, 2015
(Amount in USD)
AM.

Liabilities

Assets

AM.

35000

Revenue

Cash

8000

4600

RED ROSE payables

Inventory

9600

5000

Over draft

Receivables

16000

8000

Accrued expenses

Expenses

19000

52600

Total

Total

52600

Part 3
1

Dr Cash

25000

Cr Revenue

25000

Unrecorded goods sold with USD 25000

2

Dr COGS

17000

Cr Inventory

17000

Unrecorded goods sold with cost 17000

3

Dr Payables

10000

Cr Cash 10000

Payables paid with USD 10000

4

Dr Accrued expenses

4000
Cr Admin expenses

4000

Corrections of extra recorded accrued expenses

5

Dr Cash

50000

Cr Capital

50000

Capital increased with USD 50000

6

Dr Inventory

22000

Cr Cost of goods sold

Returned goods sold with cost USD 22000

7

Dr Revenue

28000

Cr Trade receivables

28000

Returned goods sold with USD 28000

8

Dr Provision expenses 5000

Cr provision liabilities
Provisions required for legal courts

5000

22000

ABC Company trial balance as of December 31, 2X06

(Amount in USD)
Account
Fixed assets
Prepaid Expenses
Investments
Inventory
Trade receivables
Cash & Cash equivalents
Provisions
Provisions expense
Trade payable
Due to related parties
Short term loans
Accrued expenses
Capital
Reserves
Retained earnings
Revenue
Cost of Goods sold
Interest income
Capital gain
Other operating expenses
Admin Expenses
Forex gain
Tax expenses

Balance
130,000
82,000
93,000
110,000
69,000
129,000
(37,000)
5000
(42,000)
(77,000)
(86,000)
(13,000)
(200,000)
(70,000)
(102,000)
(317,000)
264,000
(46,000)
(52,000)
83,000
97,000
(64,000)
44,000

ABC Company income statement for the year ended December 31, 2X06
(Amount in USD)

Revenue
Cost of Goods sold
Gross profit

317,000
264,000
____
53,000

Admin Expenses
Other operating expense
Other operating revenue

(97,000)
(83,000)
116,000
____

Loss from operation

(11,000)

Finance cost Net

Provision expenses

46,000
(5,000)
____

Net profit before tax

Tax expense

30,000
44,000
____

Net loss after tax

(14,000)

ABC Company balance sheet as of December 31, 2X06

(Amounts in thousands USD)
Non-current assets
Fixed assets
Investments
Total non-current assets
Current assets
Inventory
Receivables
Debtor and other debit balance
Cash and cash equivalent
Total current assets
Current liabilities
Provisions
Payables
Creditors
Due to related parties
Short term loans
Total current liabilities
Working capital
Total investment
Equity
Capital
Reserves
Retained earnings
Total equity

130
93
____
223

110
69
82
129
___
390

37
42
13
77
86
___
255
___
135
___
358

200
70
88
___
358

ABC Company
Notes of the Financial Statement for the year ended as of December 31, 2X06.
(Amounts in USD)
1- Debtors & Other debit balances
Prepaid Expense

82,000

Total Debtors

82,000

2- Creditors
Accrued Expenses

13,000

Total Creditors

13,000

3- Working capital
Total current assets

390,000

Less: Total current liabilities

(255,000)

Working capital

135,000

4- Total Investment
Total non-current assets

223,000

Plus: Working capital

135,000

Total Investment

358,000

5- Retained Earnings
Retained Earnings from trial balance

102,000

Less: Net Losses from income statement

(14,000)

Retained Earnings

88,000

6- Other operating Revenue

Capital gain

52,000

Plus: forex gain

64,000

Total other operating Revenue

116,000

7- Finance cost net

Interest income

46,000

Finance cost net

46,000