Course: Financial Accounting (1413)
Q. 1 a. Distinguish between debt and
equity securities and between short-term
and long-term investments
b. Describe how to report equity securities with controlling influence. (20)?
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**a. Distinguishing Between Debt and
Equity Securities and Short-Term vs. Long-Term Investments:**
**Debt Securities vs. Equity Securities:**
Debt
securities and equity securities are distinct financial instruments that
represent different ways of investing in and financing companies.
**Debt Securities:**
Debt
securities, such as bonds and Treasury bills, represent loans made by investors
to an entity, usually a corporation or government. Investors receive regular
interest payments, and the principal is repaid at maturity. Key characteristics
include fixed income, priority in repayment in case of bankruptcy, and a
predetermined maturity date.
**Equity Securities:**
Equity
securities, such as stocks or shares, signify ownership in a company. Investors
become partial owners and benefit from capital appreciation and potential
dividends. Unlike debt securities, equity holders do not receive fixed income
and bear the risk of market fluctuations. They also have voting rights in
corporate decisions.
**Short-Term vs. Long-Term Investments:**
**Short-Term Investments:**
Short-term
investments are assets held for a brief period, typically one year or less.
Examples include Treasury bills and money market instruments. These investments
offer high liquidity, low volatility, and quick access to funds. However,
returns are generally lower compared to long-term investments.
**Long-Term Investments:**
Long-term
investments involve holding assets for an extended period, often more than a
year. Stocks, real estate, and long-term bonds are common examples. Long-term
investments are associated with higher risk and potential returns. They benefit
from the compounding effect, with returns reinvested over time for enhanced
overall gains.
**b. Reporting Equity Securities with Controlling
Influence:**
When a
company acquires a significant ownership stake in another entity, it may gain
controlling influence, typically defined as ownership of more than 50% of the
voting shares. The reporting of equity securities with controlling influence
involves consolidating the financial statements of the subsidiary into those of
the parent company. This process ensures a comprehensive view of the combined
financial performance and position of both entities.
Here is a step-by-step guide on how to
report equity securities with controlling influence:
**1. Consolidation Process:**
- **Identify Controlling Interest:** Determine
if the parent company holds a controlling interest in the subsidiary, usually
through ownership of more than 50% of the voting shares.
- **Consolidation Decision:** If
controlling influence exists, the parent company must consolidate the financial
statements of the subsidiary into its own financial statements.
**2. Preparation of Consolidated Financial
Statements:**
- **Combine Assets and Liabilities:**
Combine the assets and liabilities of both the parent and subsidiary. This
includes the consolidation of revenues, expenses, and equity.
- **Eliminate Intercompany Transactions:**
Remove
any transactions between the parent and subsidiary to avoid double-counting.
Intercompany revenues, expenses, and profits are eliminated.
**3. Equity Accounting:**
- **Recognition of Non-controlling
Interest (NCI):** If there are external minority shareholders,
their portion of equity, known as non-controlling interest, is recognized
separately in the consolidated financial statements.
- **Allocation of Equity Components:** Allocate
the consolidated equity into components such as common stock, retained
earnings, and additional paid-in capital.
**4. Presentation in Financial
Statements:**
- **Balance Sheet:** Present
the consolidated balance sheet, combining assets and liabilities of both
entities. Non-controlling interest is reported separately.
- **Income Statement:** Combine
the revenues and expenses of the parent and subsidiary to present a
consolidated income statement.
- **Cash Flow Statement:** Prepare
a consolidated cash flow statement, incorporating the cash flows of both
entities.
**5. Disclosures:**
- **Note to Financial Statements:** Provide
detailed disclosures explaining the nature and extent of the parent's
controlling interest, any significant intercompany transactions, and the
financial impact of consolidating the subsidiary.
- **Segment Reporting:** If the
subsidiary operates as a separate business segment, segment information may
need to be disclosed.
**6. Compliance with Accounting
Standards:**
- **Follow Applicable Standards:**
Ensure compliance with accounting standards, such as Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting Standards
(IFRS), governing the consolidation process.
**Conclusion:**
Reporting
equity securities with controlling influence involves consolidating the
financial statements of the parent and subsidiary to present a comprehensive
view of the combined entity. This process enhances transparency and facilitates
a more accurate assessment of the financial performance and position of the
entire consolidated group. Understanding the distinctions between debt and
equity securities and short-term vs. long-term investments is fundamental for
investors and financial analysts to make informed decisions based on their risk
tolerance and investment objectives.
Q. 2 General Electronics uses a sales
journal, a purchases journal, a cash
receipts journal, a cash disbursements
journal, and a general journal as
illustrated in this chapter. General
recently completed the following
transactions a through h. Identify the
journal in which each transaction
should be recorded.
a. Paid cash to a creditor. e. Borrowed
cash from the bank.
b. Sold merchandise on credit. f. Sold
merchandise for cash.
c. Purchased shop supplies on credit. g.
Purchased merchandise on credit.
d. Paid an employee’s salary in cash. h.
Purchased inventory for cash. (20)
In
accounting, different types of transactions are recorded in various journals to
efficiently organize and manage financial information. General Electronics utilizes
several journals, each designed for specific types of transactions. Let's
identify the appropriate journal for each of the given transactions (a through
h).
**a. Paid cash to a creditor:**
- **Journal:** Cash
Disbursements Journal
- **Explanation:** When a
company pays cash to settle an obligation with a creditor, such as for the
payment of accounts payable, it is recorded in the Cash Disbursements Journal.
This journal is used to track all cash payments made by the company.
**b. Sold merchandise on credit:**
- **Journal:** Sales
Journal
- **Explanation:** When
a company sells merchandise on credit, meaning the customer is allowed to pay
at a later date, the transaction is recorded in the Sales Journal. This journal
is specific to credit sales and helps in tracking sales revenue.
**c. Purchased shop supplies on credit:**
- **Journal:** Purchases
Journal
- **Explanation:** Purchases
of supplies on credit are recorded in the Purchases Journal. This journal is
used to track all credit purchases of goods other than merchandise for resale.
Shop supplies, being an indirect expense, fall into this category.
**d. Paid an employee’s salary in cash:**
- **Journal:** Cash
Disbursements Journal
- **Explanation:** When a
company pays its employees' salaries in cash, it is recorded in the Cash
Disbursements Journal. This journal captures all cash payments made by the
company, including payments for operating expenses like salaries.
**e. Borrowed cash from the bank:**
- **Journal:** Cash
Receipts Journal
- **Explanation:** Borrowing
cash from the bank results in an increase in the company's cash holdings. This
transaction is recorded in the Cash Receipts Journal, which is used to log all
cash inflows, including loans.
**f. Sold merchandise for cash:**
- **Journal:** Sales
Journal
- **Explanation:** Sales
of merchandise for cash are recorded in the Sales Journal. This journal tracks
all cash sales, providing an overview of the company's revenue generated from
immediate cash transactions.
**g. Purchased merchandise on credit:**
- **Journal:** Purchases
Journal
- **Explanation:**
Similar to transaction (c), the purchase of merchandise on credit is recorded
in the Purchases Journal. This journal captures credit purchases of inventory
items for resale.
**h. Purchased inventory for cash:**
- **Journal:** Purchases
Journal
- **Explanation:** When a
company buys inventory for cash, it is recorded in the Purchases Journal. This
journal is used to track all cash purchases of goods for resale.
**Conclusion:**
Properly
categorizing transactions into the appropriate journals is fundamental for
accurate record-keeping and financial reporting. General Electronics employs
various journals such as the Sales Journal, Purchases Journal, Cash Receipts
Journal, Cash Disbursements Journal, and General Journal to ensure that each
type of transaction is recorded in a systematic and organized manner. This
practice facilitates efficient financial management and reporting for the
company.
Q. 3 What do you know about event and
transactions? Explain. Also, describe 5
events and 5 transactions which change the
equity. (20)
**Understanding Events and Transactions in
Accounting:**
n
accounting, events and transactions are fundamental concepts that form the
basis for recording and reporting financial information. These terms are often
used interchangeably, but they have distinct meanings in the accounting
context.
**Events:**
An
event is any occurrence that has a financial impact on a business and can be
measured and recorded. Events may or may not involve an exchange of assets, but
they result in changes to the financial position or performance of an entity.
Events can be categorized into two types:
1. **External Events:** These
are events that originate outside the entity. For example, changes in market
conditions, natural disasters, or changes in government regulations are
external events.
2. **Internal Events:** These
are events that occur within the entity. Examples include employee
resignations, changes in management, or modifications to internal processes.
While
events are important to understand the overall context in which a business
operates, accounting primarily focuses on transactions.
**Transactions:**
A
transaction is a specific type of event that involves an exchange or transfer
of something of value between two entities. Transactions are measurable in
monetary terms and have a direct impact on the financial statements of an
organization. Every transaction affects at least two accounts and follows the
accounting equation: Assets = Liabilities + Equity.
Transactions are classified into three
categories:
1. **Asset Transactions:**
Involve changes in the company's assets, such as the purchase or sale of
inventory, property, plant, and equipment.
2. **Liability Transactions:** Involve
changes in the company's liabilities, such as borrowing money or paying off
debts.
3. **Equity Transactions:** Involve
changes in the company's equity, reflecting the ownership interest of
shareholders.
**Five Events and Five Transactions
Changing Equity:**
**Events Changing Equity:**
1. **Issuance of Dividends:**
- **Nature:** Distribution
of profits to shareholders.
- **Impact:** Reduces
retained earnings, thus reducing equity.
2. **Net Income or Net Loss:**
- **Nature:** Results
from the company's operating activities.
- **Impact:** Net
income increases equity, while net loss decreases it.
3. **Stock Splits:**
- **Nature:** Increase
in the number of outstanding shares without affecting total equity.
- **Impact:** Reduces
the market price per share, making the stock more affordable.
4. **Changes in Accounting Policies:**
- **Nature:**
Alterations in accounting principles or methods.
- **Impact:** Can
result in adjustments to retained earnings, impacting equity.
5. **Revaluation of Assets:**
- **Nature:**
Adjustments to the carrying value of assets, often seen in fair value changes.
- **Impact:** Can
directly affect equity by revaluing assets.
**Transactions Changing Equity:**
1. **Common Stock Issuance:**
- **Nature:** Sale
of additional shares to investors.
- **Impact:** Increases
equity by the amount received from the issuance.
2. **Share Repurchases:**
- **Nature:** Company
buys back its own shares.
- **Impact:** Reduces
the number of outstanding shares and increases earnings per share.
3. **Retained Earnings Distribution:**
- **Nature:**
Company allocates profits to retained earnings.
- **Impact:** Increases
equity by retaining earnings for future use.
4. **Debt-to-Equity Conversion:**
- **Nature:** Conversion
of debt into equity, often through the issuance of stock.
- **Impact:** Increases
equity while reducing debt.
5. **Stock Options Exercise:**
- **Nature:**
Employees exercising stock options.
- **Impact:** Increases
equity as employees gain ownership in the company.
**Conclusion:**
Events
and transactions are integral components of accounting, serving as the building
blocks for financial reporting. While events encompass a broader spectrum of
occurrences, transactions specifically involve measurable exchanges that impact
the financial statements. Understanding the distinction between events and
transactions is crucial for maintaining accurate and transparent financial
records. The examples provided demonstrate how various events and transactions
can influence equity, a critical component of the accounting equation. Proper
accounting for these changes ensures that financial statements accurately
reflect the economic activities of a business.
Q. 4 (a) Explain the steps in processing
transactions and the role of source
documents. Also describe the ledger and
chart of accounts. (10)
(b) (10)
**4(a) Steps in Processing Transactions
and the Role of Source Documents:**
Processing
transactions is a crucial aspect of accounting that involves several steps to
ensure accurate and systematic recording of financial activities. Source
documents play a pivotal role in this process as they provide evidence of
transactions. Here are the steps in processing transactions and the
significance of source documents:
**Steps
in Processing Transactions:**
1. **Identification of Transactions:**
- **Process:** The
first step involves identifying and recognizing the transactions that have
occurred. These could be sales, purchases, expenses, or other financial
activities.
2. **Source Document Creation:**
- **Process:** Source
documents are generated as evidence of each transaction. These documents can
include invoices, receipts, purchase orders, checks, and other records that
validate the occurrence and details of the transaction.
3. **Source Document Collection:**
- **Process:** Collect
all relevant source documents associated with each transaction. These documents
serve as the foundation for recording entries in the accounting system.
4. **Analysis of Transactions:**
- **Process:** Examine
each transaction to determine its impact on the financial position of the business.
Identify accounts affected and the nature of the transaction (e.g., revenue,
expense, asset acquisition).
5. **Recording in Journals:**
- **Process:** Record
the transactions in the appropriate journals. Journals are chronological
records that classify transactions based on their nature, such as sales
journal, purchases journal, or general journal.
6. **Posting to Ledgers:**
- **Process:**
Transfer the information from journals to ledgers. Ledgers are organized
accounts that summarize transactions for specific accounts (e.g., cash,
accounts receivable). Posting involves updating account balances.
7. **Trial Balance:**
- **Process:** Prepare
a trial balance to ensure that debits equal credits. This step aids in
identifying errors and verifying the accuracy of the recorded transactions.
8. **Adjustments:**
- **Process:** Make
any necessary adjusting entries, such as accruals or prepayments, to ensure
that financial statements accurately reflect the financial position and
performance of the business.
9. **Financial Statements:**
- **Process:**
Prepare financial statements, including the income statement, balance sheet,
and cash flow statement. These statements provide a comprehensive view of the
company's financial performance.
10. **Closing Entries:**
- **Process:** Close
temporary accounts (revenue and expense accounts) to retained earnings. This
step prepares the accounts for the next accounting period.
**Role of Source Documents:**
- **Verification:** Source
documents act as evidence that a transaction has occurred. They provide details
such as dates, amounts, parties involved, and terms, helping to verify the
accuracy of recorded transactions.
- **Record Keeping:** Source
documents serve as a reference for future transactions and audits. They provide
a paper trail for each financial activity, aiding in compliance and
accountability.
- **Authorization:**
Source documents often require signatures or approvals, providing evidence that
transactions were authorized by relevant parties, preventing unauthorized
activities.
- **Documentation:** They
serve as documentation for tax purposes, helping businesses substantiate
income, expenses, and deductions when filing tax returns.
**4(b) Ledger and Chart of Accounts:**
**Ledger:**
A
ledger is a principal accounting record that contains all accounts used by a
company. It is a categorized and summarized collection of all transactions.
Each account in the ledger is a separate page and contains details of
transactions related to that specific account. There are two main types of
ledgers:
1. **General Ledger:**
-
Contains summary-level information for all accounts in the chart of accounts.
It provides an overview of the financial position of the company.
2. **Subsidiary Ledger:**
-
Breaks down specific accounts from the general ledger into more detailed
sub-accounts. For example, an accounts receivable subsidiary ledger may provide
details for each customer.
**Chart of Accounts:**
The
chart of accounts is a structured listing of all the accounts in a company's
accounting system. It is a comprehensive index that helps in organizing and
classifying financial information. The chart of accounts typically includes the
following components:
1. **Asset Accounts:**
-
Represent resources owned or controlled by the company, such as cash, accounts
receivable, and property.
2. **Liability Accounts:**
-
Reflect obligations or debts owed by the company, including accounts payable,
loans, and accrued liabilities.
3. **Equity Accounts:**
-
Indicate the owner's interest in the business, encompassing common stock,
retained earnings, and dividends.
4. **Revenue Accounts:**
-
Record income generated from the company's primary operations, such as sales
revenue or service fees.
5. **Expense Accounts:**
-
Capture the costs incurred to generate revenue, including salaries, utilities,
and rent.
6. **Contra Accounts:**
-
Offset the balance in related accounts. For example, accumulated depreciation
is a contra account to the asset account.
7. **Control Accounts:**
-
Summarize the activity in subsidiary ledgers. For instance, an accounts
receivable control account summarizes individual balances in the accounts
receivable subsidiary ledger.
**Importance of the Ledger and Chart of
Accounts:**
- **Organization:** The
ledger organizes and summarizes financial transactions by account, providing a
systematic and efficient record-keeping system.
- **Accuracy:** By
following the chart of accounts, companies ensure that all transactions are
appropriately categorized and recorded in the ledger, promoting accuracy in
financial reporting.
- **Analysis:** Both
the ledger and chart of accounts facilitate financial analysis by allowing
businesses to track and evaluate specific accounts or categories of
transactions.
- **Reporting:** Financial
statements are generated from the ledger, providing essential information for
decision-making, external reporting, and compliance purposes.
- **Audit Trail:** The
ledger and chart of accounts collectively create an audit trail, enabling
internal and external auditors to trace transactions back to their source documents.
In
conclusion, the ledger and chart of accounts are integral components of the
accounting system, providing a structured framework for recording, organizing,
and reporting financial information. They play a crucial role in ensuring the
accuracy, reliability, and transparency of a company's financial records.
Q. 5 Kearl Associates is a professional
corporation providing management
consulting services. The company initially
debits assets in recording prepaid
expenses and credits liabilities in recording
unearned revenues. Give the
entry that Kearl would use to record each
of the following transactions on
the date it occurred. Prepare the
adjusting entries needed on December 31,
2012. (20)
In
order to provide the specific entries for each transaction and the adjusting
entries on December 31, 2012, let's consider the scenarios provided.
**1. Transaction: Paid cash to purchase
office supplies.**
**Entry on the Date:**
Office Supplies Expense Debit
Cash Credit
```
**Explanation:**
This entry reflects the purchase of office
supplies, which is an expense. The decrease in cash is offset by the increase
in the Office Supplies Expense account.
**Adjusting Entry on December 31, 2012:**
```
Office Supplies Expense Debit
Prepaid Expenses Credit
```
**Explanation:**
At the
end of the accounting period, some of the office supplies may still be unused.
The adjusting entry converts a portion of the Office Supplies Expense to
Prepaid Expenses to reflect the supplies that have not been consumed.
**2. Transaction: Received cash from a
client for services not yet performed.**
**Entry on the Date:**
```
Cash Debit
Unearned Revenue Credit
```
**Explanation:**
This
entry recognizes the cash received for services that have not been provided
yet. The company records a liability (Unearned Revenue) until the services are
delivered.
**Adjusting Entry on December 31, 2012:**
```
Unearned Revenue Debit
Service Revenue Credit
```
**Explanation:**
As the
company delivers the services, the Unearned Revenue is reduced, and Service
Revenue is recognized. This adjusting entry reflects the portion of services
that have been earned by the end of the accounting period.
**3. Transaction: Paid cash to rent office
space for the month.**
**Entry on the Date:**
```
Rent Expense Debit
Cash Credit
```
**Explanation:**
This
entry recognizes the payment for office space rental, reducing cash and
increasing the Rent Expense.
**Adjusting Entry on December 31, 2012:**
```
Rent Expense Debit
Prepaid Rent Credit
```
**Explanation:**
If the
rent payment covers multiple months, the adjusting entry at the end of the
accounting period converts a portion of Rent Expense to Prepaid Rent,
reflecting the future benefit of the prepaid rent.
**4. Transaction: Billed a client for
services performed but not yet collected cash.**
**Entry on the Date:**
```
Accounts Receivable Debit
Service Revenue Credit
```
**Explanation:**
This
entry recognizes the revenue for services performed, even though the cash has
not been received. It increases the Accounts Receivable, representing the
amount to be collected.
**Adjusting Entry on December 31, 2012:**
*(Assuming no uncollectible amounts)*
```
Cash Debit
Accounts Receivable Credit
```
**Explanation:**
The
adjusting entry reflects the collection of cash against the accounts
receivable. This ensures that the company recognizes the actual cash received
during the accounting period.
**5. Transaction: Paid an insurance
premium for coverage beginning next month.**
**Entry on the Date:**
```
Prepaid Insurance Debit
Cash Credit
```
**Explanation:**
This
entry records the payment for insurance coverage, increasing Prepaid Insurance
and decreasing cash.
**Adjusting Entry on December 31, 2012:**
Insurance Expense Debit
Prepaid Insurance Credit
**Explanation:**
As the
insurance coverage is utilized over time, the adjusting entry at the end of the
accounting period recognizes a portion of the Prepaid Insurance as an expense.
**Adjusting Entries Summary on December
31, 2012:**
1. **Office Supplies:**
```
Office Supplies Expense Debit
Prepaid Expenses Credit
```
2. **Unearned Revenue:**
```
Unearned Revenue Debit
Service Revenue Credit
```
3. **Rent Expense:**
```
Rent Expense Debit
Prepaid Rent Credit
```
4. **Accounts Receivable:**
```
Cash Debit
Accounts Receivable Credit
5. **Prepaid Insurance:**
Insurance Expense Debit
Prepaid Insurance Credit
These
adjusting entries ensure that the financial statements accurately reflect the
company's financial position and performance at the end of the accounting
period. They consider the matching principle, recognizing expenses and revenues
in the period they are incurred or earned.
Dear Student,
Ye sample assignment h. Ye bilkul
copy paste h jo dusre student k pass b available h. Agr ap ne university
assignment send krni h to UNIQUE assignment
hasil krne k lye ham c contact kren:
0313-6483019
0334-6483019
0343-6244948
University c related har news c
update rehne k lye hamra channel subscribe kren:
JUST
5 BULLET POINTS WITHOUT ANY HEADINGS AND SUB BULLET POINTS