Accounting Fundamentals Homework Solution - State University

This document presents a comprehensive solution to an accounting fundamentals assignment, covering key concepts and principles. The assignment addresses the three basic forms of business organizations (sole proprietorship, partnership, and corporation), their advantages, and disadvantages, along with the categorization of business entities by their activities (service, merchandising, and manufacturing). It identifies the primary objectives of businesses and the four basic financial statements (balance sheet, income statement, statement of retained earnings, and cash flow statement), explaining what information each presents and how they relate to business objectives. The solution also delves into the accounting equation, the framework for the accounting process, and defines accounting transactions with examples. Furthermore, it outlines the five fundamental accounting concepts or assumptions (money measurement, business entity, going concern, exchange-price, and periodicity) and their application to financial statements. The assignment concludes with examples of how various transactions affect financial statements and a discussion of an ethical violation related to software piracy, including potential legal consequences. This solution is designed to assist students in understanding and mastering the core principles of accounting.

Running Head: Fundamentals of Accounting
Fundamentals of Accounting

Fundamentals of Accounting 2
Question 1:
Proficient-level:
Identify and describe the three basic forms of business organizations.
What are the advantages and disadvantages of each form of ownership?
Distinguished-level:
Business entities can also be categorized by the type of business activities they perform.
Identify and describe the three types. What do all three types have in common?
Answer:
The three basic forms of business organisations and their advantages and disadvantages are:
1. Sole Proprietorship:
This means the business is owned and controlled by one person.
Advantages:
i) Sole decision making power lies in the hands of the owner.
ii) All the profits remain with the owner only. No profit sharing will be there.
Disadvantages:
i) The owner is personally liable for all the misdeeds and law suits.
ii) If the owner of the business dies, the business will either terminate or defunct.
2. Partnership:
Two or more people join hands together and share the profits and losses earned by
them.
Advantages:
i) All the partners will contribute in financing and are equally held liable for the
losses.
ii) It is easy to form and terminate as per the will of the partners.
Disadvantages:
i) It is difficult to take decision as every partner’s consent is necessary.
ii) The case of conflict arises in-between the partners.
3. Corporation:
It is an entity owned and controlled by multiple of shareholders. It has a different
identity from the owners of the corporation as the entity is recognised as an artificial
person.
Advantages:
i) It can easily raise additional funds by raising share capital.
ii) Every shareholder has a limited liability only up to their stake in the capital of
the corporation.
Disadvantages:
i) It is difficult to form and regulate as so many laws and regulations intervene
the running of the corporation.
ii) The profits are divided to the shareholders only in the ratio of the capital held
by them in the company. That means high investment and low returns
(Walker, 2009)
Categorisation of business entity by the type of business activities they perform:
1. Service Companies

Fundamentals of Accounting 3
2. Merchandising Companies
3. Manufacturing Companies
All these three companies have a common practice to prepare financial statements at the
end of the financial year. These financial statements include balance sheet, income
statement, the statement of retained earnings and cash flow statement.
Question 2:
Proficient-level:
Identify the primary objectives of every business.
What are the four basic financial statements that measure the primary objectives of every
business?
Describe what information each statement presents and which of the primary objective(s) can
be met through the information presented on the statement.
Distinguished-level:
Describe the difference between an asset, liability, and equity on a company’s balance sheet.
Answer:
The primary objective of every business is profit maximization and the survival of the
business.
The four basic financial statements that measure the primary objective of every business are:
i) Balance sheet:
This stows the financial position of the company and reports on the company’s
assets, liabilities and owner’s equity at a given point of time.
ii) Income Statement:
This presents the revenues, expenses and profit/loss generate by the company in
the reporting period say one financial year. This is also knows as profit and loss
statement.
iii) The statement of Retained Earnings:
Also known as statement of changes in equity shows the movement of owner’s
equity in a given period of time.
iv) Cash Flow Statement:
This shows the inflow and outflow of cash in operating, investing and financing
activities of the company.
The difference between an asset, liability and equity on a company’s balance sheet:
Asset:
They are the tangible and intangible items owns and belongs to the company they can be
current and non-current as can be kept for more than one year and can be realised in cash
before a year (Walker, 2006)
Liabilities:
The money company owes to other person that is the outsiders. They needs to repay that
amount within the given period of time they can be current as well as non-current as need to
repay the sum within a year and year and the tenure can be more than one year.

Fundamentals of Accounting 4
Equity:
Equity is that portion of total assets of the company which is owned by the owners and the
stakeholders of the company.
Question 3:
Proficient-level:
Identify the framework for the entire accounting process and describe its components and
how they fit together to form this framework.
Distinguished-level:
Define the nature of an accounting transaction and provide multiple examples of these
transactions.
Answer:
The accounting equation is the framework for the entire accounting process. This equation
shows that the assets of the entity are equal to the equity of the company that is Assets=
Liabilities + Owners Equity. Assets are the things having some value and owned by the
company and equity is defined as all the claims and liabilities of the company (Lund, 2008).
For example: Assume that you acquired a company say electronic company for USD 20000
by investing USD 15000 in your own company and borrowing USD 5000 in the name of the
company from a bank. So, your stake in the electronic company is USD 15000 and Banks
stake will be USD 5000. You can describe USD 15000 as stockholders’ equity or interest in
the asset. Hence, the basic accounting equation for this is: Assets (A) = Liabilities (L) +
Owners’ Equity (E).
An accounting transaction is an event or business activity that causes a big amount of change
in the accounting equation. For example: Purchase of Furniture on credit through this
liabilities amount will increase and assets amount will also increase with the same figure
hence, the equation will balance. Merely placing an order will not compromise an accounting
transaction and have no effect on the accounting equation.
Question 4:
Proficient-level:
To allow the accounting process to run smoothly, accountants must rely on a set of
underlying concepts or assumptions. Identify and describe each of the five concepts or
assumptions.
Distinguished-level:
Match each of the concepts or assumptions to one or more of the financial statements that it
applies to.
Answer:
The five concepts or assumptions are:
i) Money Measurement Concept: The economic activity is reported and reported in a
common measure say monetary unit- as dollar in the US and Pound in UK. This
form of measurement is known as money measurement.

Fundamentals of Accounting 5
ii) Business Entity Concept: This is also called accounting entity concept says that
the data gathered in an accounting system relates to the specific entity or specific
business. Business entity concept states that every business has a separate
existence from its owners and other stakeholders.
iii) Going Concern Concept: This concept say that the accountant must assume and do
the accounting as the company will continue its operation for infinite years say its
operations will never come to an end. Such that accountant will value long term
and liabilities accordingly.
iv) Exchange-Price Concept: This is also called as cost concept. Mostly we record
assets in the books of the accounts at their cost and not on the market value but at
the time of sale of the assets we need to determine their market value such that the
selling price of the asset to be fixed accordingly.
v) Periodicity Concept: According to this concept the entities life can be subdivided
into time periods such as years or months to report the economic activities. This is
also called as time period assumption. (Fisher, Tayler, & Cheng, 2008)
In recording the business transactions, the accountants must rely on the these concepts or
assumptions.
Question 5:
Proficient-level:
Many accounting transactions will apply to one or more of the financial statements. In the
case of the balance sheet, multiple account types can be affected. For each of the following
items, provide an example of a transaction that would have the following effects on the items
in a firm’s financial statements. Provide five correct responses:
Distinguished-level:
Correctly provide an example for all of the effects on the items in a firm’s financial
statements.
Answer:
Increase an asset; decrease some other asset.
Harry purchased Furniture worth USD 20000 in cash. This increases the fixed assets at one
hand and decreases the cash say current assets balance.
Increase an asset; increase a liability.
John purchased Furniture worth USD 5000 on credit. Through this the fixed assets amount
will increase and the current liabilities amount will also increase.
Decrease retained earnings; decrease an asset.
The ABC Ltd. Paid dividend $2000. This transaction affected both equity and assets as
retained earnings decrease with $2000 and assets also decrease by $2000.
Increase an asset; increase retained earnings.
The company ABC Ltd raised capital by issuing 2000 shares of $10 each to John. Through
this the asset balance increases by $ 20000 and equity balance also increases by $ 20000.
Decrease an asset; decrease a liability.

Fundamentals of Accounting 6
The cash paid to one of the creditor of ABC Ltd I full and final settlement. Thought this
transaction the assets amount will decrease and the liabilities amount will also decrease
Increase a liability; decrease retained earnings.
Question 6:
Proficient-level:
Consider this scenario. James Stevens was taking an accounting course at State University.
Also, he was helping companies find accounting systems that would fit their information
needs. He advised one of his clients to acquire a software computer package that could record
business transactions and prepare financial statements. The licensing agreement with the
software company specified that the basic charge for one site was USD 4,000 and that USD
1,000 must be paid for each additional site where the software was used. James was pleased
that his recommendation to acquire the software was followed. However, he was upset that
management wanted him to install the software at eight other sites in the company and did
not intend to pay the extra USD 8,000 due the software company. A member of management
stated, “The software company will never know the difference and, besides, everyone else
seems to be pirating software. If they do find out, we will pay the extra fee at that time. Our
expenses are high enough without paying these unnecessary costs.” James believed he might
lose this client if he did not do as management instructed. Discuss whether you believe this is
an ethical violation.
Distinguished-level:
Identify any laws that may have been broken as a result of this issue.
Answer:
In this case as per demand of the company if James installs the pirated software on the eight
other sights and the company does not pay the licence fee for the same, this will result in
breath of the ethical conduct of the company and is in contravention of law which is
completely unacceptable. He and the company both are breaking the rule and the by-laws and
will be subject to criminal prosecution. The penalty for software piracy and illegal use of
software is $50 Billion or more for one year. In fact software piracy and copyright
infringement laws can impose higher amount of penalty and even imprisonment.

Fundamentals of Accounting 7
References:
Fisher, P., Tayler, W. & Cheng, R (2008), Fundamentals of Advanced Accounting, Cengage
Learning, USA
Lund, H (2008). Fundamentals of Financial Accounting, CIMA, USA.
Walker, J (2006). Fundamentals of Accounting, Elsevier, USA.
Walker, J (2009). CIMA Official Learning System Fundamentals of Management Accounting,
Elsevier, USA