Introduction to Financial Accounting

Introduction to
Financial Accounting

Table of Contents
Q1a...................................................................................................................................................3
a. Prepare Trading account..........................................................................................................3
b. Prepare profit and loss account................................................................................................3
c. Draft statement of financial position........................................................................................3
Q1b. Evaluate six of main features of information for users of financial statements. Explain why
they are important and the benefits they will bring to the users......................................................4
Q2a...................................................................................................................................................7
Gross profit Margin.....................................................................................................................7
Return on capital employed.........................................................................................................7
Current ratio.................................................................................................................................8
Trade payables period in days.....................................................................................................8
Trade receivable in days..............................................................................................................9
Q2b..................................................................................................................................................9
a. Bank account............................................................................................................................9
b. All other accounts..................................................................................................................10
c. Trial balance...........................................................................................................................11
Q2c.................................................................................................................................................11
i. Straight-line method at 12.5% per annum..............................................................................11
ii. Reducing balance method at 15% per annum.......................................................................11
iii. Explain the meaning and significance of the following accounting concepts.....................12
References......................................................................................................................................15

Q1a.
a. Prepare Trading account
Bob's trading account
(for the year ended 30th April, 2019
Particulars Amount (£) Amount (£)
Sales £30,000
Less: COGS
Opening stock £4,700
Purchases £15,700
Light and heat £260
Less: Closing stock £4,400 £16,260
Gross profit £13,740
b. Prepare profit and loss account
Bob's Profit and loss account
(for the year ended 30th April, 2019)
Particulars Amount (£) Amount (£)
Gross Profit £13,740
Less: Operating and
administrative
expenses
Shop wages £4,420
Rent £4,500
Insurance £120 £9,040
Net profit £4,700
c. Draft statement of financial position
Balance Sheet
as on 30th April, 2019
ASSETS Amount (£) Amount (£)
Fixed Assets:
Shop fittings 13000 13000
Current Assets:
Inventories 4400
Bank 610
Cash 100

Debtors 120 5230
Total Assets 18230
Equity and Liabilities Amount (£) Amount (£)
Liabilities:
Creditors 2030 2030
Equities:
Capital 15000
Less: Drawings 3500
Retained earnings 4700 16200
Total Liabilities 18230
Q1b. Evaluate six of main features of information for users of financial
statements. Explain why they are important and the benefits they will
bring to the users.
1. Relevance:
Relevance is the concept in which data generated by an accounting framework should
affect the viability of someone analyzing the data. The idea can be about the content of the data
and its practicality, and both can have a dynamic impact. In particular, relevant data provided to
users is considered to be faster. This effect can be simply a confirmation of a choice made by the
spy (for example, holding an interest in a group) or an alternative (such as to sell an investment
in a business). Here are some examples of the importance of using relevance concept:
 A company controller chooses to accelerate the month-end close, with the aim of being
able to provide budget minutes in three days, as opposed to the usual three-week average.
This improves the speed at which different collections can be found in and out of tax
summaries, improving the quality of the data they receive.
 The industrial engineering manager is considering installing another higher level machine
in the fabrication area. If the industrial sector provides another data showing a decrease in
contracts, this is of considerable significance for the choice of the design manager, as it
may not again be important to get such a high-end machine (Kimmel, Weygandt, Kieso
and Trenholm , 2016).