Introduction to Accounting and Finance (Online Test) Solution

This document presents a comprehensive solution to an online test on Introduction to Accounting and Finance. Section A includes a detailed income statement and statement of financial position for P. Piper trader, along with explanations of key accounting concepts such as the going concern, unit measurement, prudence, matching, and accrual concepts. Section B delves into capital budgeting techniques, comparing projects using payback period, Net Present Value (NPV), and Internal Rate of Return (IRR), with an analysis of project viability. Furthermore, the solution covers break-even analysis, calculating break-even points under various scenarios, and determining the volume of sales required to achieve a target profit, including adjustments for changes in fixed costs and selling prices. The document includes all the calculations and formulas used to arrive at the solutions.

INTRODUCTION TO ACCOUNTING AND
FINANCE (ONLINE TEST)

SECTION A
Answer 1:
Income statement of P. Piper trader
For the year ended 30th September, 2019
Amount £ Amount £
Sales £339,742
Less: COGS
Opening stock £24,953
Add: Purchases £279,600
Less: Closing stock £21,620 £282,933
Gross profit £56,809
Less: Operating and administration
expenses
Rent £2,250
Light and heat £792
Insurance £507
Salaries £10,587
Stationery and printing £1,228
Telephone and postage £862
General expenses = 3407
Less: Advance expenses = 407 £3,000
Travelers commission and expenses £16,542
Bad debts written off £552
Depreciation on furn. And equip.@20% £480 £36,800
Add: Other incomes:
Discount received £1,830
Less: Discount allowed £862 £968
Net profit before interest and tax £20,977
Less: Income tax £976
Net profit after tax £20,001
Statement of financial position of P.Piperas
at 30th September, 2019
Amount
£
Amount
£
ASSETS
Non-current assets:

Office furniture and equipment 2400
Less: Depreciation = 480 £1,920 £1,920
Current assets:
Inventories £21,620
Trade receivables £31,833
Cash £48
Prepaid expenses £407
Bank £11,005 £64,913
Total Assets £66,833
Owner's equity and Liabilities
Capital £40,398
Less: Drawings £8,147
Add: Retained earnings £20,001 £52,252
Non-current liabilities:
Current Liabilities:
Trade payables £13,605
Outstanding rent £750
Outstanding lighting and heating £226 £14,581
Total liabilities £66,833
Answer 2(a)
i. Going concern concept:
The Going concern concept is one of the key accounting guidelines. It will accept during and
after the cash period, after which an organization will finalize its current plans, utilize existing
resources and continue to fulfill its cash commitments. Fundamentally, it is a belief that the
organization will remain in business and the speculation of its benefits will continue. This hidden
direction is otherwise known as the idea of proceeding with worry.
If an organization leaves the business, its benefits consistently lose the value that they once relied
on the industry report. This is because the organization's unique utility resources (for example,

personalized programming) may be worth less to resell to others than the cost necessary to obtain
it. Or again, if an organization needs to sell their winnings quickly, they will most likely not be
able to afford the cost of a separate sale. If an accountant is persuaded to question the ability of a
company to proceed as a persistent concern and fulfill its promises and ensure its benefits, they
are bound by a solemn duty to remember this for the relationship of review.
ii. Unit measurement concept:
The Unit measurement concept is a standard presentation used in accounting, in which all
exchanges must be reliably recorded using a similar currency. For example, a company that
maintains its records in the United States records all of its exchanges in US dollars, while a
German group records all of its exchanges in Euros. When the possibility exists of an exchange
involving revenue or allowances in other currencies, the amount is converted into the national
currency used by an association before being recorded. Without a standard unit of measure, it is
difficult to create budget summaries.
iii. Prudence concept:
As per the prudence concept of accounting, Assets and income should not be overstated, and
liabilities and expenses should not be understated. Once a liability or expense has occurred,
provision should be provided for even if the amount or time is uncertain. As regards income, it
can be recognized only if the amount and receipt is certain.
iv. Matching concept:
The matching concept is an accounting practice whereby companies recognize revenue and
related expenses in the same accounting period. Companies report "income", that is, with the
"costs" that bring them. The purpose of the matching concept is to avoid false statements for
some time.
v. Accrual concept:
Accrual accounting is one of two accounting method, the other being cash accounting. Accrual
accounting measures the performance and position of a company by recognizing economic
events regardless of when cash transactions occur.

Answer 2b
Motor vehicle account
Amount Dr. Amount Cr.
To balance b/d £200,000 By accumulated dep. £30,000
By Dep. £3,400
By Motor vehicle
disposal account (bal.) £166,600
£200,000 £200,000
Accumulated Depreciation
To bal. b/d £30,000
To motor vehicle £3,400 By bal. c/d £33,400
£33,400 £33,400
Motor vehicle disposal account
To sales £134,000 Motor vehicle £166,600
To Profit/loss (loss) £32,600
£166,600 £166,600
Profit /loss account
To bal. c/d £32,600
By Motor vehicle
disposal £32,600
£32,600 £32,600
Answer 2c
i. Gross profit margin = Gross profit
Net sales ×100 = Sales−Cost of sales
Sales ×100
= 1,500,000−1,250,000
1,500,000 × 100
= 16.67%
ii. Operating profit margin = 9.67%
SECTION B
Answer 3(a)

(a)
i. Payback period: Project 1 = 2.86 yrs; Project 2 = 2.625 yrs
ii. NPV; Project 1 = £16,714.5; Project 2 = £5,258
iii. IRR; Project 1 = 16.594%; Project 2 = 13.257%
b)
After comparing all three methods; it’s clear that Project 1 has better opportunity as it gives
positive NPV and highest IRR. Among all these methods; NPV is the best one because it
considers the size of the investment through showing positive figures and amounts which a
particular project will give to business and also it considers time value of money invested on
project.
Answer 4
a)
Above information applies:
Break even points in units = £2,926,000/£32 = 91,737.5
Break even points in units £s per week = Selling price × Break even points in units
= £180 × 91,737.5 = £16,458,750
If the land and buildings charges are 60% higher
Break even point in units = 114,875
Break even points in units £s per week = £20,677,500
Average selling price is reduced to £160 per unit
Break even point in units = 243,833

Break even points in units £s per week = £39,013,333
2926
b)
Volume of sales in units per week = £29,115,000
c)
New fixed cost = £2,926,000 - £200,000 = £2,726,000
Loss = £56,000
d) In this question part c the total units has been taken as x and formed an equation. These
equations alter subtract from each other and the result found was loss of £56,000. It is also
assumed that no other factors affect the calculations like strike, natural disasters, any fluctuation
in price and variable cost per unit while calculating net profit for the given questions.