Introduction to Accounting Practices Homework Assignment Solution

This accounting assignment solution covers key aspects of financial accounting, including cash flow statements, income statements, and inventory systems. Part A explores the differences between cash flow and net income, detailing operating, investing, and financing activities. Part B provides a cash flow statement and income statement, along with relevant calculations. Part C delves into periodic and perpetual inventory systems, discussing their suitability for different business types. Part D focuses on depreciation methods, comparing straight-line and diminishing value methods, and their impact on financial statements. The solution includes detailed calculations, explanations, and references, offering a comprehensive understanding of accounting principles and practices.

INTRODUCTION TO ACCOUNTING 1
INTRODUCTION TO
ACCOUNTING

INTRODUCTION TO ACCOUNTING 2
Part A:
Part 1:
In the absence of a positive cash flow, the company would not be able to meet its financial
obligations. This would lead to a cash crunch or bankruptcy. The cash flow is the movement
of money into and out of the business. This helps the investors in understanding the cash in
hand of the business for the purposes of investing the same in the future. When the cash flow
of the company is positive, it does not mean that the business is profitable ("Chapter 3 - Cash
flow accounting", 2019).
The following are the key areas:
 The cash flows from operating activities helps the users in understanding the cash in
hand of the company from day to day business operations
 Cash flows from investing activities shows the users the purchase and the sale of
plant, property etc by the company
 Cash flows from financing activities shows the users the inflow and outflow of cash
from the share capital, borrowing etc.
If the sum total of the above is negative, then that would mean adverse thing about the
company ("Cash Flow Accounting | Boundless Accounting", 2019).
Part 2:
The amount of net income is when the company has earned an excess of the revenue over the
expenses that it has incurred for the purposes of earnings that income. Hence, the expenses
incurred should be less than the revenue earned. These revenues and expenses should be
calculated using the accrual basis of accounting in which the revenue and the expenses are
incurred during the same period. Whereas, net cash flow is the sum total of the activities,
inflow and outflow, of all of the 3 activities taken together (Bragg & Bragg, 2019).
The differences between the two is mainly due to the following:
 There are some of the expenses that are accrued for which the payments is yet to be
made. These are included while calculating the net income but is not included while
calculating the cash flows.

INTRODUCTION TO ACCOUNTING 3
 Then there are some expenses that have been paid in advance and are still required to
be incurred, hence, these are included in the statement of cash flows but are not
included in the calculation of the net income.
 Deferred revenues are the ones that are reported and are included while calculating
the net income since these have not been earned yet.
 Sales made on credit are included and are reported in the statement of net income but
these are not included while preparing the statement of cash flows (Vaidya, 2019).
Part B:
The following are the relevant calculations:
a
) Cash Flow Statement for the year ending 31
December 20X1
Cash from Operating Activities
Cash receipts from Customers
7,85,0
00
Commission received
19,0
00
Payments to Suppliers
-
3,73,000
Other Operating Expenses
-
34,000
Advertising expense
-
21,000
Wages Paid
-
80,000
Taxes Paid
-
1,23,000
1,7
3,0
00

INTRODUCTION TO ACCOUNTING 4
Cash from Investing Activities
Interest Received
14,0
00
Purchase of New Building
-
2,80,000
Purchase of Shares
-
26,000
Sale of Shares
1,31,0
00
Sale of Old Building
96,0
00
Investment in Term Deposit
-
20,000
-
85,
00
0
Cash from Financing Activites
Interest Paid
-
35,000
Capital Introduced
35,0
00
Cash Drawings
-
90,000
Loan Taken
10,0
00
Loan Repaid
-
10,000
Mortgage Obtained
65,0
00
Mortgage Repaid -
1,65,000 -
1,9

INTRODUCTION TO ACCOUNTING 5
0,0
00
Net Cash Generated / (Used) during the year
-
1,0
2,0
00
Opening Cash & Cash Equivalents
-
6,0
00
Closing Cash & Cash Equivalents
-
1,0
8,0
00
b
)
From the above, it can be seen that Lilly has
generated cash of USD 173000 from its
operations. However, it has utilised more
than that for its Investing and Financing
Activities which has resulted in enhancing its
overdraft to USD 108000
Closing balance of Overdraft doesn’t include
Term Deposit of USD 20000
c
)
Income Statement $ R
em
ar
ks
Descr
iption
Cas
h
fro
m
D
iff
er
e

INTRODUCTION TO ACCOUNTING 6
Ope
ratio
ns
n
ce
Sales
9,00,0
00
Recei
ved
from
Custo
mers
7,85,
000
1,
1
5,
0
0
0
Commission Revenue
29,0
00
Com
missi
on
Recei
ved
19,0
00
1
0,
0
0
0
Interest Revenue
15,7
00
No
n-
Op
era
tin
g
Intere
st
Recei
ved -
1
5,
7
0
0
Discount from Supplier
8,0
00
No
n-
Ca
sh
Disco
unt
from
Suppl
ier -
8,
0
0
0
9,52,7
00 8,04,
000
1,
4
8,
7
0

INTRODUCTION TO ACCOUNTING 7
0
Less:
COGS
3,33,0
00
Paym
ent to
Suplie
rs
3,73,
000
-
4
0,
0
0
0
Other Operating Expenses
34,0
00
Other
Opera
ting
Expen
ses
34,0
00 -
Depreciation - Building
24,0
00
No
n-
Ca
sh
Depre
ciatio
n -
Buildi
ng -
2
4,
0
0
0
Depreciation - Equipment
4,0
00
No
n-
Ca
sh
Depre
ciatio
n -
Equip
ment -
4,
0
0
0
Advertising Expenses
21,0
00
Adver
tising
Expen
ses
21,0
00 -
Wages 85,0
00
Wage
s Paid 80,0
00
5,
0
0

INTRODUCTION TO ACCOUNTING 8
0
Interest Expense
40,0
00
No
n-
Op
era
tin
g
Intere
st
Paid -
4
0,
0
0
0
Loss on Sale of Old Buildings ($110000-
$96000)
14,0
00
No
n-
Op
era
tin
g
Loss
on
Sale
of
Old
Buildi
ng -
1
4,
0
0
0
Loss on Sale of Shares of Jones Ltd. (balancing
figure)
45,7
00
No
n-
Op
era
tin
g
Loss
on
Sale
of
Share
s -
4
5,
7
0
0
Income Tax Expense
1,12,0
00
Incom
e Tax
Paid
1,23,
000
-
1
1,
0
0
0
7,12,7
00
6,31,
000
8
1,
7
0
0

INTRODUCTION TO ACCOUNTING 9
Net Profit
2,40,0
00
1,73,
000
6
7,
0
0
0
Part C:
More and more businesses have bene using barcode scanners today at some or the other point
of sale. As per the GAAP, the companies could choose the periodic or the perpetual inventory
system.
The periodic inventory system is the one in which the management records the beginning
inventory and the ending within a short period of accounting. But they do not track the
inventory on daily basis. Under this system, the companies go on tor record all of the
purchases to the purchase account. Once a physical inventory has been taken, the balance is
transferred to the purchases account which is then shifted into the inventory account. Then
the cost of ending inventory is matched ("Should You Use Periodic or Perpetual Inventory
for Your Business?", 2019).
Under the perpetual inventory system, all of the adjustments to the balance of the inventory is
made after each transaction. This leads to an elimination of the need to close down the store
for the physical inventory stock taking since this systems requires a continuous stock taking
of the inventory. This system helps in running the accounts of the company after each and
every item is sold or is returned ("Supermarket Service Modeling and Evaluation", 2019).
A large supermarket such as Pak n Save must use perpetual inventory system due to the
following reasons:
 Adjustment to the inventory balance would help in ascertaining the inventory balance
after each sale
 Provides the owners with the detailed sales transactions
 Inventory records can be kept from any location

INTRODUCTION TO ACCOUNTING 10
A small dairy could use periodic inventory system due to the following reasons:
 Physical stock taking is done which is helpful
 No requirements of staff since stock taking is done each day
 No closing down of the shop to count inventories
Part D:
The following are the relevant calculations:
a
) Extract from Fixed Assets Section
At 31 December 20X1
Act
ual
Cos
t
A
cc
um
ula
ted
De
pr
eci
ati
on
at
the
be
gin
nin
g
D
ep
re
cia
tio
n
fo
r
th
e
ye
ar
A
cc
u
m
ul
at
ed
De
pr
eci
ati
on
at
th
e
en
d
Cl
osi
ng
W
D
V
Factory Machine
49,0
00 -
3,
92
0
3,9
20
45,
08
0
Vehicle

INTRODUCTION TO ACCOUNTING 11
35,0
00 -
7,
00
0
7,0
00
28,
00
0
84,0
00 -
10
,9
20
10,
92
0
73,
08
0
At 31 December 20X2
Act
ual
Cos
t
A
cc
um
ula
ted
De
pr
eci
ati
on
at
the
be
gin
nin
g
D
ep
re
cia
tio
n
fo
r
th
e
ye
ar
A
cc
u
m
ul
at
ed
De
pr
eci
ati
on
at
th
e
en
d
Cl
osi
ng
W
D
V
Factory Machine
49,0
00
3,9
20
5,
88
0
9,8
00
39,
20
0
Vehicle
35,0
00
7,0
00
5,
60
12,
60
22,
40

INTRODUCTION TO ACCOUNTING 12
0 0 0
84,0
00
10,
92
0
11
,4
80
22,
40
0
61,
60
0
At 31 December 20X3
Act
ual
Cos
t
A
cc
um
ula
ted
De
pr
eci
ati
on
at
the
be
gin
nin
g
D
ep
re
cia
tio
n
fo
r
th
e
ye
ar
A
cc
u
m
ul
at
ed
De
pr
eci
ati
on
at
th
e
en
d
Cl
osi
ng
W
D
V
Factory Machine
49,0
00
9,8
00
7,
84
0
17,
64
0
31,
36
0
Vehicle
35,0
00
12,
60
0
4,
48
0
17,
08
0
17,
92
0

INTRODUCTION TO ACCOUNTING 13
84,0
00
22,
40
0
12
,3
20
34,
72
0
49,
28
0
At 31 December 20X4
Act
ual
Cos
t
A
cc
um
ula
ted
De
pr
eci
ati
on
at
the
be
gin
nin
g
D
ep
re
cia
tio
n
fo
r
th
e
ye
ar
A
cc
u
m
ul
at
ed
De
pr
eci
ati
on
at
th
e
en
d
Cl
osi
ng
W
D
V
Factory Machine
49,0
00
17,
64
0
9,
80
0
27,
44
0
21,
56
0
Vehicle
35,0
00
17,
08
0
3,
58
4
20,
66
4
14,
33
6
84,0
00
34,
72
13
,3
48,
10
35,
89

INTRODUCTION TO ACCOUNTING 14
0 84 4 6
At 31 December 20X5
Act
ual
Cos
t
A
cc
um
ula
ted
De
pr
eci
ati
on
at
the
be
gin
nin
g
D
ep
re
cia
tio
n
fo
r
th
e
ye
ar
A
cc
u
m
ul
at
ed
De
pr
eci
ati
on
at
th
e
en
d
Cl
osi
ng
W
D
V
Factory Machine
49,0
00
27,
44
0
8,
82
0
36,
26
0
12,
74
0
Vehicle
35,0
00
20,
66
4
2,
86
7
23,
53
1
11,
46
9
84,0
00
48,
10
4
11
,6
87
59,
79
1
24,
20
9

INTRODUCTION TO ACCOUNTING 15
b
) Extract from Income Statement
31
Dec
emb
er
20X
5
Operating Expenses
Power
15,2
00
Material
6,50
0
Factory Wages
40,0
00
Depreciation
11,6
87
73,3
87
c
) Diminishing Value Method
Actual Cost of Machine
49,0
00
Rate of Depreciation 20%

INTRODUCTION TO ACCOUNTING 16
Act
ual
Cos
t
A
cc
um
ula
ted
De
pr
eci
ati
on
at
the
be
gin
nin
g
D
ep
re
cia
tio
n
fo
r
th
e
ye
ar
A
cc
u
m
ul
at
ed
De
pr
eci
ati
on
at
th
e
en
d
Cl
osi
ng
W
D
V
For 20X1
49,0
00 -
9,
80
0
9,8
00
39,
20
0
For 20X2
49,0
00
9,8
00
7,
84
0
17,
64
0
31,
36
0
For 20X3
49,0
00
17,
64
0
6,
27
2
23,
91
2
25,
08
8
For 20X4
49,0
00
23,
91
2
5,
01
8
28,
93
0
20,
07
0
For 20X5

INTRODUCTION TO ACCOUNTING 17
49,0
00
28,
93
0
4,
01
4
32,
94
4
16,
05
6
32
,9
44
Straight Line Method
Actual Cost of Machine
49,0
00
Less: Residual Value
5,00
0
44,0
00
Useful Life in years 10
Depreciation / year
4,40
0
Accumulated Depreciation as at 31 Dec 20x5
22,0
00
d
) Units of Use
- Depreciation Charge represents actual usage of the asset
Diminishing Value

INTRODUCTION TO ACCOUNTING 18
- Depreciation Charge along with repairs etc. keeps total
expense in Income Statement relating to an asset more or
less equal as Depreciation Charge is high in initial years
and Repairs Cost is low and this tends to change with the
usage of an asset and passing of time
Straight Line
- Simple and Easy to calculate and account

INTRODUCTION TO ACCOUNTING 19
References
Bragg, S., & Bragg, S. (2019). The difference between net income and net cash flow —
AccountingTools. Retrieved 4 October 2019, from
https://www.accountingtools.com/articles/what-is-the-difference-between-net-income-
and-net-cash-flow.html
Cash Flow Accounting | Boundless Accounting. (2019). Retrieved 4 October 2019, from
https://courses.lumenlearning.com/boundless-accounting/chapter/cash-flow-accounting/
Chapter 3 - Cash flow accounting. (2019). Retrieved 4 October 2019, from
http://www.fao.org/3/w4343e/w4343e04.htm
Should You Use Periodic or Perpetual Inventory for Your Business?. (2019). Retrieved 4
October 2019, from https://www.thebalancesmb.com/choosing-periodic-or-perpetual-
inventory-system-392936
Supermarket Service Modeling and Evaluation. (2019). Retrieved 4 October 2019, from
https://www.igi-global.com/chapter/supermarket-service-modeling-evaluation/66289
Vaidya, D. (2019). Cash flow vs Net Income | Key Differences & Top Examples. Retrieved 4
October 2019, from https://www.wallstreetmojo.com/cash-flow-vs-net-income/