[PDF] Accounting Study Guide: Solutions to Exercises

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Accounting Study Guide Solutions to Exercises

SOLUTIONS TO EXERCISES

Lesson 1: Definition of Accounting

1. What is accounting? What are its main functions?

Accounting is the process of financially measuring, recording, summarizing and communicating the economic activity of an organization. Accounting provides financial information about an organization's economic activities which is intended to be used as a basis for decision making. It provides the information required to answer important questions such as: what are the resources of the organization? Wh at debts does it owe? How do its operating expenses compare with its revenue? Is it sustainable?

2. What is the difference between Financial and Management Accounting?

Financial accounting presents a summary view of the financial results of past operations and its reports are generally aim ed at external audiences. Management accounting information is tracked and presented at a much more detailed level, such as by programme or branch. Projected financial information is also a part of management accounting and is aimed primarily at internal audience s. 3. Name the three key financial statements and briefly describe each. The Balance Sheet is a summary of the organization's uses of funds (assets) and sources of funds (liabilities and equity) at a specific point in time. A Balance Sheet always balances, in that assets are equal to the sum of liabilities plus equity. The Income Statement reports the organization's economic performance over a specified period of time. The Statement of Changes in Financial Position reports the organization's sources and uses of funds (also referred to as the Statement of Changes in Sources and Use s of Funds or the Cash Flow Statement). It explains how an organization obtains cash (sources of funds) and how it spends cash (use of funds) including the borrowing and repayment of debt, capital transactions, and other factors that may affect the cash position.

4. Name five of the Basic Accounting Principles:

I. the Business Entity Concept

ii. the Cost Principle iii. the Going Concern Concept iv. Double-entry Accounting v. the Realization Principle

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Accounting Study Guide Solutions to Exercises

5. Write the meaning of the following Principles:

i. Cost Principle All assets must be recorded on the books of a business at their actual cost. This amount may be different from what it would cost today to replace them or the amount the assets could be sold for. ii. Consistency Principle Organizations must consistently apply the same accounting principles from period to period. This ensures that reports from various periods may be compared to produce meaningful conclusions on the financial position of the organization, and the results of its operations. iii. Business Entity Concept Every business is a separate entity, distinct from its owner and from every other business. Therefore, the records and reports of a business should not include the personal transactions or assets of either its owner(s) or those of another business.

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Accounting Study Guide Solutions to Exercises

Lesson 2: The Balance Sheet

1. What are the main elements of a Balance Sheet?

The main elements of a Balance Sheet are: Assets, Liabilities and Equity.

2. What is the Accounting Equation?

TOTAL ASSETS = TOTAL LIABILITIES + EQUITY

3. Define: Asset, Liability and Equity.

Assets represent what is owned by the organization or owed to it. Assets are those items in which an organization has invested its funds for the purpose of generating future receipts of cash. On the Balance Sheet, total assets are always equal to the sum of liabilities plus equity. Liabilities represent what is owed by the organization to others either in the form of a loan which has been extended to it or obligations for the organization to provide goods and services in the future.

Equity is equal to assets less liabilities. Unlike liabilities, the Equity of an organization does not

have to be repaid. It therefore represents the value or net worth of the organization. Equity includes capital contributions of any investors or donors, retained earnings, and the current year surplus.

4. Put ( ) in the appropriate column:

ITEMS ASSETS LIABILITIES EQUITY

Cash

Equipment

Client Savings

Net Deficit - current year

Restricted/Deferred Revenue

Building

Loans Outstanding - current

Loan Fund Capital

Long-term Investments

Long-term Debt (concessional)

Loans Outstanding - Past Due

Loan Loss Reserve*

Restructured Loans

*Is sometimes treated as a liability.

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5.

For the follo

wing tran sa ctio ns, sh ow h o w these affect the Balan c e S heet: i.

Purcha

se lan d on credit (> one year) vi.

Purcha

se a T r ea su ry Bill fo r ca sh ii.

Disburse lo

an to client vii.

Client with

dra w s saving s iii.

Purchase motorcy

c les fo r staff - pay hal f cash; half short-term cr e d i t v i i i

Receive

an unrestri cted donation iv.

Purcha

se office furnitu r e o n sho r t-te rm cre d it ix.

A Current loa

n become s p a st due v.

Take lo

an fro m bank at co mmercial rate of interest (> one year) x. Re ceive a re stricted do nati on for ope rati ons (3 years) ASSET S

LIABILITIES

EQUITY

Cash

Current

Loa ns

Outstanding

Loa ns

Past Du

e In v e stmen t s Prope rty

Equipme

n t

Short-term Borro

w i ng

Client

Sa v i ngs Lon g-te rm Debt

Restri

cted /Defer red Re v e nue

Equity

Purchas

e la nd on cred it one year)

Disburs

e lo an to clie nt

Purchas

e motorc y c les for staff - pa y half cash, half short-term cred it

Purchas

e office furniture o n short-term cred it T a ke loan from bank one year)

Purchas

e a T

Bill for cash

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