Solution: ECOM058 Principles of Accounting Online Exam, 2020

This document presents a comprehensive solution to an accounting exam, addressing key concepts and practical applications. It begins with an adjusted trial balance for the year ending December 31, 2020, including detailed workings for depreciation calculations and provisions. The solution then delves into inventory valuation using both FIFO and LIFO methods, providing step-by-step calculations for cost of goods sold and closing inventory. A cash flow statement is constructed, analyzing operating, investing, and financing activities. Furthermore, the document includes a financial ratio analysis, comparing liquidity and solvency ratios for 2019 and 2020. Finally, it differentiates between accounting concepts, accounting standards, and accounting policies, clarifying their roles in financial reporting.

ECOM058 PRINCIPLES OF
ACCOUNTING ONLINE
EXAM

TABLE OF CONTENTS
QUESTION- 1.................................................................................................................................1
Adjusted trial balance as at 31st December, 2020.......................................................................1
QUESTION- 2.................................................................................................................................2
a) Inventory valuation by FIFO method......................................................................................2
b) Inventory valuation by LIFO method......................................................................................3
c) Cost of goods sold and closing inventory are different in FIFO and LIFO methods..............5
QUESTION 3...................................................................................................................................6
QUESTION 4...................................................................................................................................9
REFERENCES..............................................................................................................................11

QUESTION- 1
Adjusted trial balance as at 31st December, 2020
S.NO PARTICULARS DEBIT CREDIT
1 Share Capital 30000
2 Cash 16000
3 Trade Receivables 16000
4 Building at cost 65000
5 Accumulated depreciation on building 40000
6 Sales Return 2000
7 Inventory 12000
8 Retained profits 32500
9 Discount received 1500
10 Provision for bad and doubtful debts 800
11 Purchase 35000
12 Sales 76000
13 Rent 13000
14 Prepaid Rent 6000
15 Electricity 4500
16 Electricity outstanding 600
17 Machinery 30000
18 Accumulated depreciation on machinery 17400
19 Bad debts written off 1000
20 Indirect income 2000
21 provision expenses 300
200800 200800
Working Note:-
1) Depreciation on building based on the straight line method:-
Building at cost= 65000
Residual value= 15000
Useful life= 25 years
Straight line method= Cost – Residual value / Useful life
= 65000 – 15000 / 25
= 2000
2) Depreciation on machinery based on the reducing balance method:-
Machinery at cost= 30000
Accumulated depreciation= 12000
Reduced value of machine= 30000 – 12000= 18000
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Reducing balance method= Reduced balance of machine * rate of depreciation
= 18000 * 30% = 5400
3) Prepaid rent account = 4000
4) Outstanding electricity bill= 600
5) Bad debts written off= 1000
6) Provision for bad and doubtful debts= Trade receivables – Bad debts written off * % of
provision for the doubtful debts
= 17000 – 1000 * 5% = 800
7) The provision in respect of the defective goods is no longer required and this is the reason
that the provisioning shall be reversed and the liability shall be cancelled booking it as an
indirect income for the company (Amir, 2021).
8) Closing inventory for the company is 12000.
The following adjustments are made in the trial balance above that is prepared for the
year ending 31 December, 2020. The trial balance shall be showing the closing balances of all
the accounts that are assets, liabilities, expenses and the incomes of the business. The matching
of both the sides of the trial balance shall be showing the arithmetic accuracy in the recording of
the business transactions in the books of accounts. This shall verify that the double entry book
keeping has been efficiently managed by the company.
QUESTION- 2
a) Inventory valuation by FIFO method
DATE PURCHASE SALES BALANCE
Units Cost Amount Units Cost Amount Units Cost Amount
01/01/20 300 20 6000
10/02/20 500 18 9000 300 20 6000
500 18 9000
03/03/20 300 20 6000
300 18 5400 200 18 3600
12/03/20 100 18 1800 200 18 3600
100 18 1800
24/05/20 700 16 11200 200 18 3600
100 18 1800
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700 16 11200
03/06/20 200 18 3600 100 18 1800
700 16 11200
07/09/20 100 18 1800
400 16 6400 300 16 4800
21/10/20 300 14 4200 300 16 4800
300 14 4200
07/11/20 400 12 4800 300 16 4800
300 14 4200
400 12 4800
21/11/20 200 16 3200 100 16 1600
300 14 4200
400 12 4800
800 10600
Cost of goods sold:-
Date Units Price Amount
03/03/20 300 20 6000
03/03/20 300 18 5400
03/06/20 200 18 3600
07/09/20 100 18 1800
07/09/20 400 16 6400
21/11/20 200 16 3200
26400
Closing Inventory:-
Date Units Price Amount
31/12/20 100 16 1600
300 14 4200
400 12 4800
800 10600
b) Inventory valuation by LIFO method
DATE PURCHASE SALES BALANCE
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Units Cost Amount Units Cost Amount Units Cost Amount
01/01/20 300 20 6000
10/02/20 500 18 9000 300 20 6000
500 18 9000
03/03/20 500 18 9000
100 20 2000 200 20 4000
12/03/20 100 18 1800 200 20 4000
100 18 1800
24/05/20 700 16 11200 200 20 4000
100 18 1800
700 16 11200
03/06/20 200 16 3200 200 20 4000
100 18 1800
500 16 8000
07/09/20 500 16 8000 200 20 4000
100 18 1800
21/10/20 300 14 4200 200 20 4000
100 18 1800
300 14 4200
07/11/20 400 12 4800 200 20 4000
100 18 1800
300 14 4200
400 12 4800
21/11/20 200 12 2400 200 20 4000
100 18 1800
300 14 4200
200 12 2400
800 12400
Cost of goods sold:-
Date Units Price Amount
03/03/20 500 18 9000
03/03/20 100 20 2000
03/06/20 200 16 3200
07/09/20 500 16 8000
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21/11/20 200 12 2400
24600
Closing Inventory:-
Date Units Price Amount
31/12/20 200 20 4000
100 18 1800
300 14 4200
200 12 2400
800 12400
c) Cost of goods sold and closing inventory are different in FIFO and LIFO methods
The valuation of the cost of goods sold and the closing inventory differs in the two
methods First in first out (FIFO) and the Last in first out (LIFO) as the value of the sold goods
differ in both the processes. In the first in first out method the oldest inventory lot is sold first
and consequently in the similar manner (YADAV, ABID, BANSAL, Tyagi and KUMAR, 2020).
Whereas on the contrary it can be analysed that in the last in first out method the most recent
batch of the inventory is sold to the buyers and the prices of the goods are accordingly charged
belonging to the latest inventory stock. It can be assessed that in the last in first out method the
goods are sold at the prevailing prices in the market first at priority. So, it can be assessed that
the apart from the units of the closing inventory both the sales value and the value of the closing
stock differs in both the methods. Both the methods have separate sales price at each of the
transaction date which is ascertained based on their processes that they follow (Ching, Mutuc
and Jose, 2019).
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QUESTION 3
a.
Cashflow statement
Cash flow statement
For the year ended 31/12/2020
cash flows from operating activities:
profit before tax 111498
add: interest paid 5800
Add: non-cash items:
Depreciation 20000
Add: lost on disposal 16250
Less: gain on disposal 0
operating cash flow before working capital changes 153548
changes in working capital:
less: increase in current assets -16907
add: increase in current liabilities 52185
cash generated from operations 188826
less: interest paid -5800
cash flow from operating activities A 183026
cash flow from investment activities:
money paid to purchase non-current assets -355000
cash received from selling non-current assets 178750
cash flow from investment activities B -176250
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cash flow from financing activities:
mining received from issuing shares 0
money paid to repurchase shares 0
money received from issuing loan/ other debts 0
money paid to repay loan / other debts -70000
dividend paid -23026
cash flow from financing activities C -93026
Total Cash flow for the year or Net movement = A + B + C -86250
Working note:
PPE a/c
To balance b/d 151250 By Bank 118750
To Bank a/c 205000 By p&L a/c 16250
By Depreciation
(20000 – 3750) 16250
By balance c/d 205000
356250 356250
On analysing the above formulated cash flow statement, it can be stated that the company has its
main source of cash flow from its operating activities which is 183026. In addition to this, the
company has also acquired cash by selling its non-current assets. In terms of uses or application
of cash, the company has spent most of the amount in purchasing its on-current assets which
exceeds it cash inflow from selling the fixed assets, making the cash from investment activities
negative. In the year 2020, the company has made a repayment of its bank loan and along with
that paid dividend to its shareholders.
b.
Particulars 2019
Liquidity ratio
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Current assets 799661 816568
Current liabilities 115650 167770
Current ratio Current assets / Current liabilities
6.91449
2
4.8671
87
Inventory 240000 358076
Quick assets Current assets - Inventory 559661 458492
Quick ratio Quick assets / Current liabilities
4.83926
5
2.7328
6
solvency ratios
Long term Debt 350000 280000
Shareholder's fund 482376 570848
Debt to equity ratio Long term debt / shareholder’s funds
0.72557
5
0.4904
98
Total assets 1075911
115406
8
Equity ratio
Shareholder’s funds / Total Assets *
100 45% 49%
Liquidity Ratio
In terms of the liquidity ratio, the current ratio of the company has shown a decline over
the year which is a good sign as it is better to have current ratio between 1 to 3. In the year 2019,
the ratio was 6.9 which is much higher indicating that the company is having large amount of
current assets which are left idle and increases of the chances of turning into bad debts or
irrecoverable (Easton and et.al., 2018). But in 2020, the ratio declines but it is still high and
posses a threat. But now it seems that the situation is under control.
On account of the quick ratio, in the year it was 4.8 and in 2020, it reduced to 2.7 times,
which conveys that this drastic difference between the current and the quick ratio is due to cash
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blocked in the inventory of the company. This is a sign of danger for the company even though
the ratio is good which the reason behind it is not good. The company has increased its
investment in the inventory over the year. This ratio has declined over the period of time as the
company has started repaying its debt amount. This is a good sign in respect to the
Solvency ratio
In the context of debt to equity ratio, the ratio computed clearly depicts that the
company is having sufficient amount of equity funds in order to meet with its long term debt
obligations. This is a good sign and indicates less risky financial situation of the company.
In respect to the equity ratio, it determines the amount of capitalization currently
utilized by the company (Patil and Mohanthy, 2017). Higher the ratio better it is for the company
since it depicts the company is having sufficient amount of equity in order to support the
functions of the business entity. While the lower ratio indicates that the company is having large
amount of debt. In respect XYX company, the ratio is high which is good sign of financial
stability. This has increased during period from 2019 to 2020.
QUESTION 4
a.
Difference between accounting concepts, accounting standards and accounting policies
The accounting policies are basically the norms, rules or the methods which the
business decides for themselves. These policies are not universal in nature and can differ from
one company to another. The accounting policies mainly defines the way in which the
transactions should be accounted. For instance, one company decided to charge the depreciation
based on the straight-line method while some other company decided to do it by using written
down value method (Polzer, Grossi and Reichard, 2021). This is because, of the company policy
pertaining to charging of depreciation. But it is important to understand that the accounting
policies is not arbitrary or selected at random pick of card. Even if it differs from one person to
another, it still falls based upon an overall framework in order to be acceptable.
On the other hand, accounting concept refers to the basic assumption and the principles
which works as the base for recording the business transactions along with preparing the
accounts. The concept is based upon the assumption that the accounting purposes, business entity
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and its owners are separate and independent from each other. In simple terms, accounting
concepts are the crucial conventions with which the accounting transactions are recorded.
Accounting standard are referred to as the uniform rules which all the assesses are
required to follow the accounting standards. The main or the primary objective of the accounting
standard is the correct measurement and disclosure. It defines the rules for treating different
types of transaction which helps in presenting the true picture of the financial accounts of the
company.
b.
Accrual concept
The accrual accounting principle is the accounting concept in which transactions ae being
recorded during the time period in which they occur irrespective of the fact whether actual cash
flow pertaining to the transaction is received or not (How to Use Accrual Accounting in Your
Growing Business. 2020). The main idea behind this principle that the financial events are
properly recognised by matching revenue to its expenses. For example, ABC company uses
accrual accounting principle for recording its transactions. it sends an invoice to a software
company for a monthly sales amount of $10000, of which 60% is paid in cash while rest on
credit. Thus, under this principle, the accountant treats the credit transaction as sales and
therefore, expenses will be deducted.
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REFERENCES
Books and Journals
YADAV, A. S., ABID, M., BANSAL, S., Tyagi, S. L. and KUMAR, T., 2020. FIFO & LIFO IN
GREEN SUPPLY CHAIN INVENTORY MODEL OF HAZARDOUS SUBSTANCE
COMPONENTS INDUSTRY WITH STORAGE USING SIMULATED
ANNEALING. Advances in Mathematics: Scientific Journal. 9. pp.5127-5132.
Ching, P. L., Mutuc, J. E. and Jose, J. A., 2019. Assessment of the quality and sustainability
implications of FIFO and LIFO inventory policies through system dynamics. Advances
in Science, Technology and Engineering Systems. 4(5). pp.69-81.
Amir, X., 2021. Calculation of the value of inventories involved in the creation of intangible
assets in the accounting system of the Republic of Uzbekistan. Elementary Education
Online. 20(5). pp.4664-4675.
Easton, P. D., and et.al., 2018. Financial statement analysis & valuation. Boston, MA:
Cambridge Business Publishers.
Patil, D. and Mohanthy, J. N., 2017. Analysis of Financial Statements in the Sugar
Industry. Available at SSRN 2962855.
Polzer, T., Grossi, G. and Reichard, C., 2021, April. Implementation of the international public
sector accounting standards in Europe. Variations on a global theme. In Accounting
Forum (pp. 1-26). Routledge.
Online
How to Use Accrual Accounting in Your Growing Business. 2020. [Online]. Available
Through:< https://www.netsuite.com/portal/resource/business-solutions-articles/accrual-
accounting.shtml>.
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