Financial Accounting and Audit

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Financial Accounting
and Audit

Table of Content
QUESTION 1...................................................................................................................................2
(a) Preparing journal entries to deal with all necessary adjustments......................................2
(b) Income statement and statement of financial position......................................................3
QUESTION 2...................................................................................................................................4
Describing clearly two advantages and two disadvantages that might be faced by Mr Wyke if
he converted his business into a limited company.................................................................4
QUESTION 3...................................................................................................................................6
How could you use the financial statements of a listed company to make a decision as to
whether you should invest in that company’s shares?............................................................6
List 3 other sources of information that would help you to make the right decision.............6
QUESTION 4...................................................................................................................................7
(a)............................................................................................................................................7
(b)...........................................................................................................................................7
QUESTION 5...................................................................................................................................7
Describing the work that an auditor of a company should carry out to verify the figure in the
financial statements for trade receivables...............................................................................7
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QUESTION 1
(a) Preparing journal entries to deal with all necessary adjustments.
Particulars Debit Credit
Depreciation Expense - building Dr. 50000
To Accumulated depreciation account 50000
Depreciation Expense - shop fittings Dr. 141000
To Accumulated depreciation account 141000
Depreciation Expense - Machinery Dr. 200000
To Accumulated depreciation account 200000
Drawings account Dr. 12000
To Inventory - Raw materials 12000
Insurance account Dr. 56000
To prepaid insurance account 56000
Heat and light account Dr. 220000
To administration account 73333
To production account 146667
Inventory - raw material Dr. 640000
Cost of goods sold Dr. 12000
Drawings account Dr. 28000
To Inventory - raw material (beginning) 680000
Inventory - Work in progress (ending) Dr. 380000
To Inventory - Work in progress (beginning) 360000
To purchases 20000
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Inventory - finished goods (ending) Dr. 560000
To Inventory - finished goods (beginning) 520000
To purchases 40000
Bad debt expense Dr. 64000
to allowance for bad debt account 26000
to allowance for doubtful debt account 38000
Shop fittings Dr. 60000
To cash account 60000
(b) Income statement and statement of financial position
Income statement
Particulars Amount
Sales 5500000
Discounts received 298000
Cost of goods sold:
Raw materials 12000
Carriage inwards 336000
Purchases (40000+20000+28000+2,792000+360000) 3240000
Total cost of goods sold 3588000
Gross profit 2210000
Expenses:
Carriage outwards 426000
Discounts allowed 224000
Returns outwards 430000
Wages 1010000
Total expenses 2090000
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Net profit 120000
Balance sheet
Assets Liabilities
Cash at bank (60000+446000) 506000 Payables 590000
Account receivables 706000
Bank loan at 6%
p.a. 5000000
Inventory (640+380+560) 1580000 Capital 2,339,000
Preapid insurance 56000 Net profit 120000
Land and building (6000000-
50000+250000) 5700000 Drawings 205,000 2,254,000
machinery (1000000-
200000+570000) 230000 Wages 1010000
Shop fittings (940000-
(141000+460000)-60000) 279000
Allowance for
receivables 48000
Receivables 706000 Bad debt expense 64000
Suspense account 797000
9763000 9763000
QUESTION 2
Describing clearly two advantages and two disadvantages that might be faced by Mr Wyke if he
converted his business into a limited company.
Mr. Wyke operates as a sole trader and manufacturer of clothes and also a retailer. Mr. Wyke is
planning to what is business into a limited company wine operating in a manufacturing and
retailing industry. The limited company structure is the most common and the popular set up in a
business of UK. Every business structure have some advantages and disadvantages associated
with it either a sole trader for a limited company. The three structures used in UK are limited
company sole traders and partnership allowing them to create a business as a separate entity e
and running as an entrepreneur in the marketplace. A limited company structure is there the
owner and the shareholders do not need to risk their personal finances and just risk their
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investments. It is popular because of the protection it offers to the owners and shareholders if the
business fails. Advantages and disadvantages of a limited company are as follows which can be
faced by Mr Wyke is converts their operations.
Advantages:
 Limited liability- Mr. Wyke if converts their business into a limited company then it will
offer very limited liabilities to him compares to a sole trader who is liable for all the
business. The advantage of limited company is it provides protection to the owners
against any casualty and failure of business. Having a limited company means that if a
business in cause any debts then the personal finances and assets of the owner and
shareholders are protected in the eye of law.
 Separate entity- According limited company business is a separate entity of its owners.
This is another very use benefit of a separate entity or a limited company which is
provided to the owners. The directors of a limited company has the protection if the
business fails and as the entity is the company is a separate entity it is entering in a
contract and liable for all the business actions on its own providing no impact on the
owners of any failures.
Disadvantages:
 Complicated to set- The complexity or a disadvantage limited company which has to be
faced by Mr. Wyke is setting up a limited company includes a lot of complex procedures
then setting up a sole trader ship.
 Complex accounts- The limited company accounts are very complicated to maintain
and repair as compared to other business structures. the owners have to record their
information and data on the monthly basis and some of the transactions are needed to be
covered in tax documents business expenses and keeping the business accounts up-to-
date.
QUESTION 3
How could you use the financial statements of a listed company to make a decision as to whether
you should invest in that company’s shares?
The financial statement of a listed company is a secondary source of information which is
available in the market to the people for making appropriate decisions in relation with investment
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and purchasing share of a particular company. Financial data of the organisation presents the
appropriate picture of it in front of the users helping them to analyse it or take suggestions from
an expert before making any purchasing decision.
List 3 other sources of information that would help you to make the right decision.
Differential statement of an organisation is the most potential source holding all the
information about the company but these are developed by the auditors and the internal staff of
the entity which can be easily manipulated. therefore there are several other sources which helps
in individual in investment decision making in relation with an organisation:
Auditor's report- Auditors are the individuals who are responsible for providing there
assurance about the truth presentation of the financial reports of an organisation. Auditor is an
external party who to evaluate and analysis the financial statement prepared by the company for
providing their assurance about the truthness and sadness of the financial transaction and their
representations. Therefore an auditor's report is a very important and essential document or
resource which can provide the investors appropriate knowledge about the organisation and help
them in investment decision making.
Third party suggestion- An individual who are seeking for appropriate investment
decisions in a particular firm for an organisation compulsorily well aware about the facts and
technical knowledge related with finance and accounting. Potential resource for the individual
while making investment decisions in a particular organisation is third party expertise and their
suggestions. Individual can appoint or ask for suggestions from an expert about making an
investment in a company by acquiring its shares or through other means. The third party can be
a financial expert who has appropriate knowledge about the respective field and can analyze the
documents presented by the organisation appropriately.
Market Analysis- Another very important and essential aspect which is needed to be
considered by the investor before making any investment decision is about the market condition
and position of a particular company. Master of the individual planning to invest their money in
a particular company should conduct appropriate market analysis where they get other related
information about the company such as their goodwill in the market, there competitive edge and
there position in the market among all the competitors many more
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QUESTION 4
(a)
Total cost of goods sold 720000
Less: inventory after the theft 42000
cost of the inventory stolen 678000
(b)
Sales 1,200,000
Cost of goods sold 720,000
Gross profit (40%) 480000
QUESTION 5
Describing the work that an auditor of a company should carry out to verify the figure in the
financial statements for trade receivables.
The auditor of a company can make use of different tools such as cut-off testing substantive tools
and analytical tools for very fine different figures of the financial data. In order to verify the
figures in the financial statement for trade receivables the auditor can make use of cut off testing
there they thoroughly evaluate existence, occurrence and presentation of the trade receivables.
An auditor as several different ways and methods to carry out for defines financial
amounts and figures present by the company in respective to their trade receivables. There are
several ways which can be used by the foremost and the best way to verify the authenticity of the
trade receivable amount is to check the invoices and the dates on which they are received. Other
words the auditor can ask the management of company to provide the invoice list and on
sampling basis check few invoices their dates of occurrence and presentation. Auditors can also
make use of the period end account receivable aging report from which they can recheck the
grand total of the amount in the trade receivable account with general ledger. Moreover the
auditors can also add of the account receivable invoices for matching with the total of the
account in order to check the authenticity and appropriateness of the figures presented in the
financial statement of company.
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