Question

Short answer questions. Answer each question in the spaces provided. Honey and Maggie are the owners of Happy Pet Supplies, a business that provides pet products. In each of the following three situations below; (1 a), b) and c)), identify the assumption or principle that has been violated and explain why the assumption has been violated. 1) a) Happy Pet Supplies purchased shop racking from China and decided to put the cost in their accounting records as ¥35,000. (¥ is the symbol for the Chinese Yuan currency.). b) Happy Pet Supplies reported Inventory at its market value of $2700. The inventory cost the business $1900 when it was purchased c) Honey used business money to pay for her son’s dental bill. 2) If equity in Happy Pet Supplies at the beginning of the year was $510,000 and at the end of the year was $565,000, no capital contributions were made and drawings during the year were $20,000, how much profit was earned during the year? (1 mark) 3) What type of business structure do you believe the business Happy Pet Supplies has? Explain your answer 4) Based on your answer in 3) above, do you think that Happy Pet Supplies would have Limited or Unlimited Liability. Explain your answer. 5) How do you calculate Liabilities for Happy Pet Supplies using the Accounting Equation? (1 mark) 6) Happy Pet Supplies plans to produce a Balance Sheet year. Explain why a Balance Sheet is required. (1 mark) 7) There are three (3) sections to the Cash Flow Statement. Indicate each section and provide one example of a transaction that would belong to that section.

Answer 1

1a) Principle of cost is affected here because according to this principle assets are shown at their cost price not at any other decided price as given in the case.

1b) Principle of conservatism is violated here because inventory is being shown at higher price in comparison to cost price. This principle explains that inventory should be shown at cost price or market price whichever is less.

1c) Principle of equity is violated here because personal expenses are being paid from the business. According to this principle business and business person both are separate and only business related expenses should be made from the business.

2.Calculation of profit was earned during the year-

Particulars	Amount
Equity at the end of the year was , no capital contributions were made and , how much ?	$565,000
+ Drawings during the year	$20,000
	$5,85,000
- Equity at the beginning of the year was and	$510,000
Profit was earned during the year	$75,000

3. Happy pet should adopt partnership firm because there are 2 people, Honey and Maggie, available here and burden of the business can be easily reduced with investment of more capital.

4. Partnership business has unlimited liability for partners. It means in case of loss and loans, personal property of partners can be taken for payment of loss and loans.

5. Calculation of Liabilities for Happy Pet Supplies using the Accounting Equation can be done on the basis of following equation-

Liabilities+Equity= Assets, or,

Liabilities=Assets-Equity

6.Balance sheet is required to show the financial position at the end of each accounting year. It shows progress or downfall of the business by comparison of assets and liabilities with previous years.

7.There are three sections in cash flow statement-

7.1)  Operating activities-Operating activities are those which belong to regular operations of the business like purchase of raw material or goods for sales.

7.2) investing activities-Investing activities are those which are related to investment in long term or non current assets, like- purchase of buildings, machinery etc. and financing activities operating

7.3) Financing activities-Financing activities are those which are related to arrangement of finance for the business, like-borrow long term loans, issue of shares etc.

Thanks & all the best...........