Accounting Assignment Evaluating Financial Data Of Businesses

Question

Task: Answer the following questions through this accounting assignment:
Question 1: Asian Corporation Pte Ltd provides the following balances which were from its books of accounts for the year ended 31st Dec 2020:

Additional-information-in-accounting-assignment

Additional information:

a) Depreciation is to be provided at 10% and 25% on the cost of Machinery and Furniture & Fittings respectively.
b) The closing stock as at 31 Dec 2020 was valued at $315,000.
c) Prepaid rent of $3,200 was included in rent.
d) Provide for irrecoverable debts on debtors at 1.5%
e) Accured wages $4,000
f) Provide for income tax @15%

Required:
a) Prepare the Statement of Profit or Loss for the year ended 31 December 2020
b) Prepare the Statement of Financial Position as at 31 Dec 2020

Question 2:
“There are definitely errors in the accounts if the Trail Balance is not balanced. However, a balanced Trial Balance does not necessarily mean that there are no errors.”
Citing examples, list and explain five errors not revealed by a Trial Balance.

Question 3:
“Ratio analysis reveals hidden facts” – Comment on this statement highlighting the merits and demerits of ratio analysis.

Question 4:
From the following information, you are required to classify the type of account whether it is as asset (capital expenditure) or an expense (revenue expenditure) and justify your classification with appropriate reasons:

i) Tyres and mirror purchased for motor vehicles
ii) Cost of additions and alternations to office building
iii) Legal costs incurred for purchase of building

iv) Purchases of good for resale
v) Sales promotion expenses to promote a new product
vi) Carriage inwards to bring the goods inside the factory
vii) Grading and Levelling costs incurred on a land meant for construction
viii) Enhancement of configuration to increase computer disc capacity
ix) Thumb drive for storage of accounting information
x) Stamp duty for purchase of new office premises

Answer

The trial balance of the Asian Corporation Pte Ltd before adjustments has been shown below in this accounting assignment:

Asian Corporation Pte Ltd
Trial Balance as on 31st December 2020
	Dr	Cr
Equity Share Capital		500,000
Profit and Loss - Opening Balance		75,000
Commission Received		6,500
Wages	120,000
Utilities Charges	20,000
Carriage inwards	10,000
Loan Interest	5,000
Rent	35,000
Insurance	9,000
Machinery at cost	700,000
Purchases	1,116,500
Sales		1,525,000
Return inwards	15,000
Return outwards		1,500
Furniture and Fittings at cost	100,000
Acc. Depn - Machinery - Opening balance		210,000
Acc. Depn - Furniture and Fittings - Opening balance		30,000
Trade receivables	320,000
Trade payables		62,500
Bank overdraft		40,000
Opening stock	78,000
Cash at bank	22,000
Term loan (repayable in 2030)		100,000
	2,550,500	2,550,500

The statement of profit and loss account for the year ended 31st December 2020 has been shown below:

Asian Corporation Pte Ltd
Statement of Profit and Loss for year ended 31st December 2020
	Amt.($)	Amt.($)
Sales	1,525,000
Less: Return Inwards	(15,000)	1,510,000
Less: Cost of Goods Sold
Opening Stock	78,000
Add: Purchases	1,116,500
Less: Closing Stock	(315,000)
	879,500
Less: Return Outwards	(1,500)	878,000
Gross Profit		632,000

Less: Other incomes and expenses
Wages	(124,000)
Utilities Charges	(20,000)
Carriage inwards	(10,000)
Loan Interest	(5,000)
Rent	(31,800)
Insurance	(9,000)
Depreciation on Machinery	(70,000)
Depreciation on Furniture and Fittings	(25,000)
Commission Received	6,500
Provision for Doubtful debts	(4,800)	(293,100)
Profit before tax		338,900
Less: Income tax @15%		(50,835)
Profit after tax		288,065

The statement of financial position at on 31st December 2020 has been shown below:

Asian Corporation Pte Ltd
Statement of Financial Position as on 31st December 2020
	Amt.($)	Amt.($)	Amt.($)
*Assets*
Non-Current Assets
Machinery at cost	700,000
Less: Accumulated Depreciation	(280,000)	420,000
Furniture and Fittings at cost	100,000
Less: Accumulated Depreciation	(55,000)	45,000	465,000

Current Assets
Inventories in hand		315,000
Trade receivables	320,000
Less: Provision for doubtful debt	(4,800)	315,200
Cash at bank		22,000
Prepaid Rent		3,200	655,400
Total Assets			1,120,400

*Equity and Liabilities*
Non-Current Liabilities
Term loan (repayable in 2030)		100,000	100,000

Current Liabilities
Bank overdraft		40,000
Trade payables		62,500
Accrued Wages		4,000
Income tax provision		50,835	157,335
Total Liabilities			257,335

Equity
Equity Share Capital		500,000
Retained earnings	75,000
Add: Profit for the year	288,065	363,065	863,065
Total Equity			863,065
Total Equity and Liabilities			1,120,400

Solution to Question 2
A balanced Trial Balance does not necessarily mean that there are no errors. The above statement is apt and appropriate considering that following errors might occur while preparation of trial balance even though the total of debits and credits might be matching.
1. Error of principle: There might be a fundamental error in recording of the transaction. For example, purchase of machinery may be recorded in the purchases account, amount spent on repairs of the building may be debited to building account instead of repairs and maintenance account (Nicholson, 1989).
2. Error of Omission: There may be times when the transaction has been completely omitted to be recorded in books. In such a scenario, the trial balance will still match as both the debit as well as the credit side would go unrecorded. For example, sales transaction unrecorded means it is omitted in both sales and accounts receivables account.
3. Posting to wrong account: The amounts may be recorded to wrong accounts but on correct side (debit or credit). For example, the amount due from John may be recorded in account of Kelly and the trial balance may not be able to identify it.
4. Error of amounts in original books: There may be an accounting error where $292 may be recorded as $929 in the books and the trial balance may still be matching as arithmetically it is correct but in fact, there is an error.
5. Compensating errors: In case in one of the ledgers is debited with $800 more and another ledger is credited with $800 more than both these errors cancel each other and hence it is compensating in nature. In such a case as well, the trial balance would be matching but still there is an error in it (Alexander, 2016).

Solution to Question 3
Ratio analysis is one of most powerful technique of doing fundamental analysis of any company. It does helps in revealing the hidden facts and also analyze the trend of the ratios over the period of time. For instance, in case the company’s sales as well as gross profit has increased in absolute terms, one may assume that the company is performing well until gross profit % which is one of the profitability ratios is calculated. There may be an instance that even though both sales and gross profit has increased in absolute terms but the margin has declined due to increase in cost of goods sold (Thanassoulis, 1996). Hence the statement that “ratio analysis reveals hidden facts” is apt and appropriate.

Some of the merits of ratio analysis includes:
• It helps in establishing trend and thereby forecasting and planning purposes
• It provides comparison between two companies in same industry
• It helps in evaluating the liquidity and solvency position of the company
• It helps management in identifying the areas of improvement and where the efficiency needs to be built (Supriyanto & Darmawan, 2018).
• It helps different stakeholders in understanding the performance of the business over the years.

Some of the demerits of ratio analysis are mentioned below:
• Ratio analysis is generally based on the historical data whereas the stakeholders are more interested as how the company will perform in future.
• It ignores the changes in regulations, laws, market changes etc.
• Different industry may not be comparable via ratio analysis as different industries have different parameters (Edmister, 1972).
• The financial accounting data may be based on assumptions and hypothesis and ratio analysis ignores the same. It also ignores change in accounting policies and business conditions.
• It ignores the effect of inflation and changes in exchange rates.

Solution to Question 4

Sl. No.	Description	Revenue/ Capital Expenditure	Justification
i	Tyres and mirror purchased for motor vehicles	Capital	The purchase of tyres is in nature of increasing the useful life of the motor vehicles and hence it should be capitalized.
ii	Cost of additions and alterations to office building	Capital	Since there is an addition to the office building besides alterations, this qualifies as capital expenditure as it will give future economic benefits to
iii	Legal costs incurred for purchase of building	Capital	This is allied cost which is usually capitalized in the asset cost at the time of purchase (Bromwich & Scapens, 2016)
iv	Purchases of goods for resale	Revenue	Purchase and sale of goods is in the usual course of operating business activity and finds place in profit and loss account
v	Sales promotion expenses to promote a new product	Revenue	This is in the nature of advertisement cost and hence should be charged off as revenue expenditure
vi	Carriage inwards to bring the goods inside the factory	Revenue	This is the freight cost incurred in the normal course of business which does not have future economic benefit and hence should be charged off as revenue expenditure
vii	Grading and levelling cost incurred on a land meant for construction	Capital	Since the land is meant for construction, so this expense would qualify as work in progress and hence capital expenditure (Sithole, Chandler, Abeysekera, & Paas, 2017)
viii	Enhancement of configuration to increase computer disc capacity	Capital	This is a capital expenditure as it increases the useful life or efficiency of the asset
ix	Thumb drive for storage of accounting information	Revenue	This is not leading to improvement in working efficiency of asset and hence should be treated as revenue expenditure
x	Stamp duty for purchase of new office premises	Capital	This is allied cost which is usually capitalized in the asset cost at the time of purchase

References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431. Retrieved from https://doi.org/10.1080/00221546.2000.11778843
Bromwich, M., & Scapens, R. (2016). Management Accounting Research: 25 years on. Management Accounting Research, 31(1), 1-9. Retrieved from https://doi.org/10.1016/j.mar.2016.03.002
Edmister, R. O. (1972). An empirical test of financial ratio analysis for small business failure prediction. Journal of Financial and Quantitative analysis, 7(2), 1477-1493. Retrieved from https://doi.org/10.2307/2329929
Nicholson, M. (1989). Errors Not Affecting Trial Balance Agreement. Accounting assignment Accounting Skills, 246-255. Retrieved from https://doi.org/10.1007/978-1-349-10853-4_27
Sithole, S., Chandler, P., Abeysekera, I., & Paas, F. (2017). Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), 220. Retrieved from http://psycnet.apa.org/buy/2016-21263-001
Supriyanto, J., & Darmawan, A. (2018). The effect of financial ratio on financial distress in predicting bankruptcy. Journal of Applied Managerial Accounting, 2(1), 110-120. Retrieved from https://doi.org/10.30871/jama.v2i1.727
Thanassoulis, E. B. (1996). A comparison of data envelopment analysis and ratio analysis as tools for performance assessment. Omega, 24(3), 229-244. Retrieved from https://doi.org/10.1016/0305-0483(95)00060-7

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