Question

A. What are the elements of the Financial statements and indicate which Financial statement each element belongs to

B. List and Explain Three assumptions and Four Principles in accounting

C. Merchandizers are those in the business of buying and re-selling of Merchandize. Below is an example of the activities of transactions that take place in a Merchandizing business and answer the questions that follow During June of the current year, the following transactions took place between Distance Hardware, a retailer of home and building supplies, and their supplier, Full-Time Materials.

June 1. Full-Time Materials sold K15,000 worth of merchandise on account to Distance Hardware on terms of 3/10, n/45, FOB shipping point Full-Time Materials prepaid shipping charges of K220 and included this amount in the invoice total. These goods had a cost to Full-Time Materials of K7,500.

June 4.When Distance Hardware checked the items received from the purchase of June l, they realized that they had received too many electrical inserts. They returned KK3,500 of the merchandise to Full-Time Materials. Full-Time Materials restocked this inventory, which had an original cost of K1,875.

June 10. Distance Hardware paid the amount owed to Full-Time Materials for the June 1 purchase, less the return and the discount.

June 25 Distance Hardware sold K3,200 worth of merchandise to Sarah Craft for cash. This merchandise had a cost to Distance Hardware of K1,700.

Requirements

1. What kinds of discounts exist in a merchandizing business and what purpose do they serve in a business?

2. Journalize these transactions for Distance Hardware.

Answer 1

A. What are the elements of the Financial statements and indicate which Financial statement each element belongs to

Answer:

Elements of the Financial statements	Financial statement each element belongs to
Assets	Statement of Financial Position or Balance Sheet and Noted to Financial Statements
Liabilities	Statement of Financial Position or Balance Sheet and Noted to Financial Statements
Equity	Statement of Financial Position or Balance Sheet and Statement of Change in Equity
Revenue	Statement of Financial Performance, or Income Statement and and Noted to Financial Statements
Expense	Statement of Financial Performance, or Income Statement and and Noted to Financial Statements

Changes in 'Elements of the Financial statements' belongs to 'statement of cash flows'

B. List and Explain Three assumptions and Four Principles in accounting

Answer:

Three assumptions in accounting

i) Going concern: The financial statement are prepared on the assumption that the entity is going to and is capable of operating for the another financial year. If the going concern assumption fails it has to be specified in the financial statement and audit report and the financial statement are prepared as if the Company would be desolved immediately.

ii) Accrual basis of accounting: The income and expenses are recorded in the year to which it belongs instead of the year in which it is paid or received. Like salary for March 2020 will be booked in March 2020 irrespective of when it is paid.

iii) Consistency: The financial statement is prepared for the all the years presented using the same accounting standards, policies and principles unless specified in any accounting guidance.

Four Principles in accounting

i) Revenue recognition: Revenue should be recognised for the goods and services provided to the customer at the juncture when the risk and reward has been transferred to the customer, recoverability of the amount is certain and determinable.

ii) Materiality: While making decision of accounting a transaction, the entity should factor in the materiality of the entity. It is done so that the preparer of financial statement do not waste time on cost benefit analysis on irrelevant transactions and amount which will not have much impact on the financial statement.

iii) Matching concept: The expense should be recognised in the financial statement in the period when the corresponding revenue is recognised. It resulted in reflecting the correct profit and loss of the entity for the period.

iv) Economic Entity: The business unit i.e. the entity/Company etc should be treated separate from its owner when preparing the financial statement.

Question c.1. What kinds of discounts exist in a merchandizing business and what purpose do they serve in a business?

Answer: Type of discounts exist in a merchandizing business and what purpose do they serve in a business:

i) Cash discount: The cash discount is usually given to promote instant payments by the purchaser. Like in this question if the payment is made in 10 days the 3% discount would be provided.

ii) Volume discount: The discount which depends to the volume or number of units purchased. On reaching the target purchase the purchaser is given discounts. This is given to promote and enhance an entity's sales

Question c.2. Journalize these transactions for Distance Hardware.

Date	General Journal	Debit	Credit
June 1	Purchases	15,220
	To Accounts payable		15,220	(15000+220)
	(Being material received from Full-Time Materials)
June 4	Accounts payable	3,500
	To Purchases		3,500
	(Being material returned Full-Time Materials)
June 10	Accounts payable	11,720		(15220-3500)
	To Cash		11,375	(11720-345)
	To Discount received-Purchases		345	((15000-3500)*3%)
	(Being Accounts payable paid)
June 25	Cash	3,200
	To Sales		3,200
	(Being sales made)
	Cost of goods sold	1,700
	To Purchases		1,700
	(Being cost of goods sold recognised made)