Question

Test 1.

1. Define Accounting –

     a. based on the PICPA definition

     b. based on the AICPA definition

2. What is the purpose of accounting?

3. Why do countries have different accounting standards?

Test 2. From the given data below, determine if

1. the company is liquid, compute for

     a. working capital

    b. the liquidity ratio

2. if the company is solvent, compute for the solvency ratio

3. if the company is profitable, compute for the profitability ratio.

Cash	40,000
Accounts Receivable	8,000
Property, Plant, and Equipment	150,000
Inventory	30,000
Accounts Payable	15,000
Wages Payable	22,000
Common Stock	50,000
Retained Earnings	60,000
Sales	380,000
Cost of Goods Sold	120,000
Rent Expense	60,000
Wages and Salary Expense	110,000
Advertising Expense	9,000

Answer 1

TEST 1

1. (a) PICPA Definition of Accounting is same as AICPA

(b) Accounting based on the AICPA Definition:

"The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof."

2. Purpose of Accounting:

(i) Prepare financial Statements: The main purpose of accounting is to prepare financial statements that provide information about organization. In financial statements, we get gross profit and net profit.

(ii) Economic decision making: The purpose of accounting is also to provide the information that is needed for sound economic decision making.

(iii) To help the employer achieve one key objective - making profit:

By making and understanding accounting, employers can understand how a business makes money, making you a complete professional and connecting you with your clients and their goals.

(iv) Accountancy provides you with the skills you need to manage your money: By accounting, you can trace and categorize your expenses and effectively budget your income.

3. Why do countries have different accounting standards?

Accounting standards of different countries differ due to differences in accounting practice, principles, and reports.

For Example:

There are differences in the principles of inventory valuation, depreciation, taxation, and disclosures, etc, which lead to differences in accounting standards.

TEST 2

Working Notes:

Balance Sheet (Memorandum)

Liabilities	Amount	Assets	Amount
Common stock	50,000	Cash	40,000
Retained earnings	60,000	Accounts Receivable	8,000
Accounts Payable	15,000	Property, Plant and Equipment	150,000
Wages Payable	22,000	Inventory	30,000
Long-term Debt (Balancing Figure)	81,000
	228,000		228,000

Note: Differences in assets and liabilities is considered as Long-term Debt of 81,000

Income Statement

Particulars	Amount
Sales	380,000
Less: Cost of Goods Sold	120,000
Gross Profit	260,000
Less: Rent Expense 60,000
Wages and Salary Expense 110,000
Advertising expense 9,000	179,000
Net Profit	81,000

1 (a) Working Capital = Current Assets- Current Liabilities

Current Assets = 40,000 cash+8,000 accounts receivable

+ 30,000 inventory = 78,000

Current Liabilities = 15,000 Accounts Payable+22,000 Wages Payable

= 37,000

Working Capital= 78,000-37,000=41,000

(b) Liquidity Ratio:

(i) Current Ratio=Current Assets/Currrent Liabilities

=78,000/37,000=2.11:1

(ii) Liquid Ratio = Liquid Assets\Current Liabilities

Liquid Assets = 40,000 cash+8,000 accounts receivable

= 48,000

Liquid Ratio=48,000/37,000=1.30:1

2. Solvency Ratio:

(i) Debt-to-Equity ratio = Total Debt/Total Equity

Total Debt = Short-term debt(Current Liabilities)+Long-term Debt

=15,000 Accounts Payable+22,000 Wages Payable

+ 81,000 Long-term Debt = 118,000

Total Equity = 50,000 common stock+6,000 retained earnings

= 110,000

DER=118,000/110,000=1.07

(ii) Debt-to-Assets Ratio=Total Debt/Total Assets

= 118,000/228,000=0.52

3. Profitability Ratio

(i) Gross Profit Ratio=(Gross Profit/Seles)100

= (260,000/380,000)100=68.42%

(ii) Net Profit Ratio=(Net Profit/Seles)100

= (81,000/380,000)100=21.32%