Question

Assignment Question(s):

Q1. Explain the gross and net methods of recording receivables.

Q2.What are the systems for maintaining inventory records?

Q3.Calculate cash flow from operating activities from the following data:

• Profits made during the year SAR. 145,000 after considering the following items:

             Amortization of Goodwill                                                                    3,000

Depreciation of Fixed Assets                                                                           17,000

Loss on Sale of Fixed Assets                                                                             2,500

Transfer to General Reserve                                                                             15,000

The following is the position of current assets and current liabilities:

Particulars	31.3.07	31.3.08
Creditors Debtors Prepaid Expenses Bills Payable	12,000 16,200 250 5,000	8,200 12,000 750 7,000

Q4.Prepare journal entries for Mars Co. for:

(a) Accounts receivable in the amount of SAR500,000 were assigned to Utley Finance Co. by Mars as security for a loan of SAR425,000. Utley charged a 3% commission on the accounts; the interest rate on the note is 12%.

(b) During the first month, Mars collected SAR200,000 on assigned accounts after deducting SAR450 of discounts. Mars wrote off a SAR530 assigned account.

(c) Mars paid to Utley the amount collected plus one month's interest on the note.

Answer 1

Ans : 1

Gross Method:

Under gross method, the sales transaction is recorded at gross price i.e., without deducting the amount of discount offered. The accounts receivable account is debited and the sales account is credited with the gross amount. Afterward, if buyer makes the payment within discount period, the seller allows him a discount according to the terms of sale but if he fails to make the payment within discount period then no discount is allowed to him. In short, the amount receivable from debtors are recorded without reducing discount.

Net method:

Under net method, the sales are initially recorded with the net amount i.e., after deducting the amount of discount from the gross price. The accounts receivable account is debited and the sales account is credited with the net amount.

Ans: 2:

Inventory Record System, as the name suggests is one that is concerned with keeping a track of physical quantities and the complete monetary valuation inventories sold and in hand. It ensures that the records maintained by the business enterprise are up-to-date.

Basically, there are two systems of maintaining a record of inventory, i.e. Perpetual Inventory System and Periodic Inventory System.

Periodic Inventory System

Otherwise called as a Physical inventory system, it is a method of determining the value of unsold inventory along with its physical quantities. In this method, an actual physical count is undertaken with respect to the measurement and weight of all the inventory units at a specific date. Major limitations of the physical count is that normal business operations are hampered during the process of physical verification of stock.

Perpetual Inventory System

A system of ascertaining the value of inventory in which the inventory balances are entered after every receipt and issue of stock.

Ans: 3

Cash Flow from operating activities
		$
	Profit of the year	14,500
Add:	Non Cash Expenses
	Depreciation	17,000
	Transfer to Genral Reserve	15,000
	Amortization of Goodwill	3,000
Add:	Non Operating Losses
	Loss on sale of Fixed Asset	2,500
Add	Decrease in Current Assets:
	Debtors	4,200
Less	Increase in Current Assets
	Prepaid Expenses	-500
Add	Increase in Current Liabilities
	Bills Payable	2,000
Less	decrease in Current Liabilities
	Creditors	-3,800
	Cash Flow from Operating Activities	53,900