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Assignment no. 1
Book Code 8404
Waqar Ali

Question no 1: How do accounting conventions, such as the consistency

principle and conservatism principle, contribute to the reliability and
comparability of financial statements, and what impact do they have on the
decision-making process of financial statement users?
Ans: Role of Accounting Conventions in Financial Statements

Accounting conventions, like the consistency principle and the conservatism

principle, play a critical role in ensuring the reliability and comparability of
financial statements. These conventions provide guidelines for how financial data
is recorded, reported, and interpreted, which significantly impacts the decision-
making process of financial statement users, such as investors, creditors, and
regulators.

1. Consistency Principle:

The consistency principle requires that once a company adopts an accounting

method (e.g., for inventory valuation or depreciation), it should apply the same
method across periods, unless a justified reason for change exists.

Contribution to Reliability and Comparability:

 Reliability: By using the same methods over time, companies ensure that
their financial data is reliable and reflects a consistent pattern of reporting,
making it less prone to manipulation.
 Comparability: When the same accounting practices are followed
consistently, users of financial statements can easily compare performance
across different periods. This consistency allows investors and other
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 stakeholders to track trends, analyze performance, and make more informed
decisions.

Impact on Decision-Making:

 Users of financial statements can rely on past trends and performance to

predict future results because the data is presented consistently. This
consistency allows for better benchmarking and decision-making, such as
deciding whether to invest, lend, or assess the company’s performance
relative to peers.

Example:

 If a company changes its depreciation method from straight-line to

accelerated depreciation without disclosure, it might distort the financial
results. But if consistency is maintained, stakeholders can compare how the
company has been using its resources and whether assets are being managed
efficiently.

2. Conservatism Principle:

The conservatism principle advises that accountants should choose solutions that
result in lower reported profits and asset valuations when faced with uncertainty.
This means that potential losses should be recognized when they are probable, but
gains should only be recorded when they are realized.

Contribution to Reliability and Comparability:

 Reliability: The conservatism principle enhances reliability by preventing

overstatement of assets and income. It ensures that financial statements
present a cautious view, protecting stakeholders from undue optimism in
reporting.

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  Comparability: By adopting a conservative approach, financial statements
can provide a conservative yet realistic basis for comparison across firms
and periods, reducing the likelihood of significant fluctuations due to
speculative gains or aggressive accounting.

Impact on Decision-Making:

 The conservatism principle helps protect the interests of stakeholders by

providing a more risk-averse view of the company’s financial health.
Investors and creditors are less likely to be misled by overly optimistic
projections and can make better-informed decisions regarding the
company's financial stability and profitability.

Example:

 If a company faces a potential lawsuit, the conservatism principle would

require it to record a liability if the loss is likely and can be estimated.
However, if the company expects a gain from a pending legal settlement, it
cannot record that gain until it is realized. This conservative approach
protects stakeholders from relying on uncertain gains in their decision-
making process.

Impact on Financial Statement Users:

1. Investors:
o The consistency principle allows investors to assess the long-term
performance of a company and predict future earnings based on past
trends.
o The conservatism principle ensures that the financial statements
reflect a realistic view of the company’s financial situation, enabling
investors to make cautious and informed investment decisions.
2. Creditors:
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 o Consistency helps creditors assess a company’s ability to meet its
obligations by comparing financial data across periods.
o Conservatism prevents overstatement of assets, providing a clear
picture of a company’s financial health and its ability to repay debt.
3. Regulators:
o Both principles contribute to a higher level of transparency and
reliability in financial reporting, ensuring that companies follow fair
reporting practices that protect the public interest.

Conclusion:

The consistency principle ensures that financial statements are comparable across
periods, providing stakeholders with reliable data for decision-making. The
conservatism principle helps ensure that financial statements present a cautious
and realistic view of a company’s financial position. Together, these accounting
conventions enhance the reliability, transparency, and comparability of financial
statements, allowing users to make better-informed decisions with a higher degree
of confidence.

Question No. 2 (20 Marks)

In March 2011, Mary Tone organized a corporation to provide package delivery
services. The company, called Tone Deliveries, Inc., began operations
immediately. Transactions during the month of March were as follows:
Mar. 2 The corporation issued 40,000 shares of capital stock to Mary Tone in
exchange for $80,000 cash.
Mar. 4 Purchased a truck for $45,000. Made a $15,000 cash down payment and
issued a note payable for the remaining balance.
Mar. 5 Paid Sloan Properties $2,500 to rent office space for the month.
Mar. 9 Billed customers $11,300 for services for the first half of March.
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Mar. 15 Paid $7,100 in salaries earned by employees during the first half of March.
Mar. 19 Paid Bill’s Auto $900 for maintenance and repair services on the company
truck.
Mar. 20 Collected $3,800 of the amounts billed to customers on March 9.
Mar. 28 Billed customers $14,400 for services performed during the second half
of the month.
Mar. 30 Paid $7,500 in salaries earned by employees during the second half of the
month.
Mar. 30 Received an $830 bill from SY Petroleum for fuel purchased in March.
The entire amount is due by April 15.
Mar. 30 Declared a $1,200 dividend payable on April 30.

Requirement: Pass the journal entries .Ans;

Here are the journal entries for Tone Deliveries, Inc., based on the transactions
provided:

Journal Entries for March 2011:

March 2:
Issued 40,000 shares of capital stock to Mary Tone in exchange for $80,000 cash.

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Debit: Cash $80,000
Credit: Common Stock $80,000
(To record the issuance of shares for cash)

March 4:
Purchased a truck for $45,000, with a $15,000 cash down payment and a note
payable for the balance.

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Debit: Truck $45,000
Credit: Cash $15,000
Credit: Notes Payable $30,000
(To record the purchase of a truck with cash and a note payable)

March 5:
Paid $2,500 to rent office space for the month.

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Debit: Rent Expense $2,500
Credit: Cash $2,500
(To record the payment of rent for the office space)

March 9:
Billed customers $11,300 for services performed in the first half of March.

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Debit: Accounts Receivable $11,300
Credit: Service Revenue $11,300
(To record the revenue from services billed to customers)

March 15:
Paid $7,100 in salaries earned by employees during the first half of March.

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Debit: Salaries Expense $7,100
Credit: Cash $7,100
(To record the payment of employee salaries)
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March 19:
Paid $900 for maintenance and repair services on the truck.

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Debit: Maintenance and Repairs Expense $900
Credit: Cash $900
(To record payment for truck maintenance and repairs)

March 20:
Collected $3,800 from the amounts billed to customers on March 9.

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Debit: Cash $3,800
Credit: Accounts Receivable $3,800
(To record the collection of cash from customers)

March 28:
Billed customers $14,400 for services performed in the second half of March.

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Debit: Accounts Receivable $14,400
Credit: Service Revenue $14,400
(To record the revenue from services billed to customers)

March 30:
Paid $7,500 in salaries earned by employees during the second half of March.

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Debit: Salaries Expense $7,500
Credit: Cash $7,500
(To record the payment of employee salaries)

March 30:
Received a bill for $830 from SY Petroleum for fuel purchased in March. Payment
is due by April 15.

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Debit: Fuel Expense $830
Credit: Accounts Payable $830
(To record the fuel bill for the truck, payment due in April)

March 30:
Declared a $1,200 dividend payable on April 30.

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Debit: Dividends Declared $1,200
Credit: Dividends Payable $1,200
(To record the declaration of dividends payable)

Summary:

These journal entries reflect the company’s cash transactions, service revenue,
expenses, liabilities, and equity changes. Each transaction has been properly
accounted for based on its nature and timing.

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Question No. 3 The cash transactions and cash balances of Banner, Inc., for July
were as follows: (20 Marks)
1) The ledger account for Cash showed a balance at July 31 of $125,568.
2) The July bank statement showed a closing balance of $114,828.
3) The cash received on July 31 amounted to $16,000. It was left at the bank in
the night depository chute after banking hours on July 31 and therefore was
not recorded by the bank on the July statement.
4) Also included with the July bank statement was a debit memorandum from
the bank for $50 representing service charges for July.
5) A credit memorandum enclosed with the July bank statement indicated that a
non-interest bearing note receivable for $4,000 from Rene Manes, left with
the bank for collection, had been collected and the proceeds credited to the
account of Banner, Inc.
6) A comparison of the paid checks returned by the bank with the entries in the
accounting records revealed that check no. 821 for $519, issued July 15 in
payment for office equipment, had been erroneously entered in Banner’s
records as $915.
7) Examination of the paid checks also revealed that three checks, all issued in
July, had not yet been paid by the bank: no. 811 for $314; no. 814 for $625;
no. 823 for $175.
8) Included with the July bank statement was a $200 check drawn by Howard
Williams, a customer of Banner, Inc. This check was marked “NSF.” It had
been included in the deposit of July 27 but had been charged back against the
company’s account on July 31. Instructions a.
Required:
a) Prepare a bank reconciliation for Banner, Inc., on July 31.
b) Prepare journal entries (in general journal form) to adjust the accounts on July
31. Assume that the accounts have not been closed.

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State the amount of cash that should be included in the balance sheet on
July31. Ans;
a) Bank Reconciliation for Banner, Inc., on July 31

Bank Statement Balance:

Closing balance as per the bank statement: $114,828

Add:

 Deposit in transit (cash received on July 31) = $16,000

Less:

 Outstanding checks:
o Check No. 811 = $314
o Check No. 814 = $625
o Check No. 823 = $175
Total outstanding checks = $1,114

Adjusted Bank Balance:

114,828+16,000−1,114=129,714114,828 + 16,000 - 1,114 =

129,714114,828+16,000−1,114=129,714

Book Balance (per ledger):

Closing balance as per the cash ledger: $125,568

Add:

 Collection of note receivable (credit memo) = $4,000

Less:

 Bank service charges (debit memo) = $50

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  NSF check from Howard Williams = $200
 Error in check No. 821: Recorded as $915 instead of $519. The difference
is:

915−519=396(Addbacktheexcessrecordedamount)915 - 519 = 396 \quad (Add

back the excess recorded
amount)915−519=396(Addbacktheexcessrecordedamount)

Adjusted Book Balance:

125,568+4,000−50−200+396=129,714125,568 + 4,000 - 50 - 200 + 396 =

129,714125,568+4,000−50−200+396=129,714

The adjusted bank balance ($129,714) equals the adjusted book balance
($129,714), reconciling both records.

b) Journal Entries for July 31 Adjustments

1. Bank service charges:

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Debit: Bank Service Charges Expense $50
Credit: Cash $50
(To record bank service charges for July)

2. NSF check from Howard Williams:

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Debit: Accounts Receivable – Howard Williams $200

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 Credit: Cash $200
(To record NSF check from Howard Williams)

3. Note receivable collected by the bank:

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Debit: Cash $4,000
Credit: Notes Receivable $4,000
(To record the collection of note receivable by the bank)

4. Correction of error in recording check No. 821:

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Debit: Cash $396
Credit: Office Equipment Expense $396
(To correct the overstatement of check No. 821)

c) Amount of Cash to Be Included in the Balance Sheet on July 31

The amount of cash to be reported on the balance sheet on July 31 is the adjusted
book balance after all reconciliations and adjustments:

Cash balance to be included in balance sheet=$129,714\text{Cash balance to be

included in balance sheet} =
\$129,714Cash balance to be included in balance sheet=$129,714

This is the accurate, reconciled cash amount after considering all the bank and book
adjustments.

c)
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Question No. 4 On January 22, 2011, Dome, Inc., sold 700 toner cartridges to
Maxine Supplies. Immediately before this sale, Dome’s perpetual inventory records
for these units included the following cost layers:

Purchase Date Quantity Unit Sold Total Cost

Dec 12, 2010 400 $ 20 8,000
Jan 16, 2011 1200 $ 22 26,400
Total on Hand 1600 34,400

Required: Prepare a separate journal entry to record the cost of goods sold relating
to the January 22 sale of 700 toner cartridges, assuming that Dome uses:
1. Specific identification (300 of the units sold had been purchased on December
12, and the remaining 400 had been purchased on January 16).
2. Average cost.
3. FIFO.

4. LIFO Ans;
Here are the journal entries to record the cost of goods sold (COGS) for the sale of
700 toner cartridges by Dome, Inc. on January 22, 2011, under different inventory
accounting methods:

1. Specific Identification Method

Under this method, we know the exact units sold and their respective costs. Dome
sold 300 units from the December 12 purchase and 400 units from the January 16
purchase.

Calculation:

 300 units from Dec 12 purchase @ $20 = $6,000

 400 units from Jan 16 purchase @ $22 = $8,800
 Total COGS = $6,000 + $8,800 = $14,800
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Journal Entry:

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Debit: Cost of Goods Sold $14,800
Credit: Inventory $14,800
(To record the cost of 700 toner cartridges sold under specific identification
method)

2. Average Cost Method

In this method, we calculate the average cost per unit based on total costs and total
quantities available.

Calculation:

 Total units available = 1,600 units

 Total cost = $34,400
 Average cost per unit = $34,400 ÷ 1,600 = $21.50
 COGS for 700 units = 700 units × $21.50 = $15,050

Journal Entry:

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Debit: Cost of Goods Sold $15,050
Credit: Inventory $15,050
(To record the cost of 700 toner cartridges sold under average cost method)

3. FIFO (First-In, First-Out) Method

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Under FIFO, the oldest inventory costs are used first. Thus, Dome sells from the
December 12 purchase first, followed by the January 16 purchase.

Calculation:

 400 units from Dec 12 purchase @ $20 = $8,000

 300 units from Jan 16 purchase @ $22 = $6,600
 Total COGS = $8,000 + $6,600 = $14,600

Journal Entry:

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Debit: Cost of Goods Sold $14,600
Credit: Inventory $14,600
(To record the cost of 700 toner cartridges sold under FIFO method)

4. LIFO (Last-In, First-Out) Method

Under LIFO, the most recent costs are used first. Therefore, Dome sells from the
January 16 purchase first, followed by the December 12 purchase.

Calculation:

 400 units from Jan 16 purchase @ $22 = $8,800

 300 units from Dec 12 purchase @ $20 = $6,000
 Total COGS = $8,800 + $6,000 = $14,800

Journal Entry:

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Debit: Cost of Goods Sold $14,800
Credit: Inventory $14,800
(To record the cost of 700 toner cartridges sold under LIFO method)

Summary of COGS Under Different Methods:

 Specific Identification: $14,800

 Average Cost: $15,050
 FIFO: $14,600
 LIFO: $14,800

These different methods highlight how the cost of goods sold can vary based on the
inventory accounting approach used by the company.

Question No. 5 XYZ Corporation owns 80% of ABC Inc. The financial
statements of both entities have been prepared separately. Explain the concept
of consolidated financial statements, outlining the process of consolidating
these two entities' financials. Additionally, discuss the benefits and challenges
associated with presenting consolidated financial statements, and how they
provide a comprehensive view of the group's financial performance.
Ans; Concept of Consolidated Financial Statements

Consolidated financial statements are financial reports that present the financial
position and performance of a parent company and its subsidiaries as a single entity.
When a corporation, like XYZ Corporation, owns a significant portion of another
company, such as ABC Inc. (in this case, 80%), it is required to consolidate the
financial statements of the subsidiary into its own. This consolidation provides
stakeholders with a comprehensive view of the entire corporate group's financial
health and operational results.

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Process of Consolidating Financial Statements

The process of consolidating financial statements involves several key steps:

1. Identify the Parent and Subsidiary:

o In this case, XYZ Corporation is the parent company, and ABC Inc.
is the subsidiary.
2. Combine Financial Statements:
o Gather the financial statements of both entities. This typically
includes the balance sheet, income statement, and cash flow
statement.
3. Eliminate Intercompany Transactions:
o Remove any transactions between the parent and subsidiary, such as
sales, purchases, loans, and dividends. This ensures that revenues
and expenses are not overstated due to internal transactions.
4. Adjust for Non-Controlling Interests:
o Since XYZ owns 80% of ABC, the remaining 20% is owned by
other shareholders. The financial statements must reflect the share
of profits attributable to the non-controlling interest (NCI). The NCI
is reported separately in the consolidated income statement and the
equity section of the consolidated balance sheet.
5. Unify Accounting Policies:
o Ensure that both entities apply the same accounting policies. If there
are differences, adjustments may need to be made to align the
financial data.
6. Consolidate Line Items:
o Combine similar line items from both companies. For instance, total
assets, liabilities, revenues, and expenses will be aggregated to
reflect the overall financial position and performance of the
consolidated entity.

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 7. Prepare Consolidated Financial Statements:
o Finally, prepare the consolidated financial statements, which
include the consolidated balance sheet, income statement, and cash
flow statement.

Benefits of Consolidated Financial Statements

1. Comprehensive Overview:
o Consolidated financial statements provide a complete picture of the
financial performance and position of the entire group, rather than
just the individual entities. This is crucial for stakeholders, including
investors and creditors, in evaluating the group's overall financial
health.
2. Simplified Financial Reporting:
o Stakeholders benefit from having a single set of financial statements
that represent the entire corporate group. This simplifies analysis
and decision-making processes.
3. Better Decision-Making:
o Investors and management can make more informed decisions based
on the consolidated results, which reflect the true economic
activities of the parent and its subsidiaries.
4. Transparency:
o Consolidated statements can enhance transparency by disclosing the
interrelationships between the parent and subsidiary, making it
easier to assess the risk and return profile of the entire organization.

Challenges of Consolidated Financial Statements

1. Complexity of Elimination Entries:

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 o Identifying and eliminating intercompany transactions can be
complex, especially if multiple subsidiaries are involved, which may
lead to additional accounting work and potential for errors.
2. Differences in Accounting Policies:
o If the parent and subsidiary use different accounting methods or
policies, adjustments must be made, which can complicate the
consolidation process.
3. Valuation of Assets and Liabilities:
o Accurately valuing the assets and liabilities of the subsidiary at the
time of acquisition can be challenging, particularly if there are
intangible assets or goodwill involved.
4. Increased Disclosure Requirements:
o Consolidated financial statements require more detailed disclosures
regarding the nature of relationships, risks, and non-controlling
interests, which can complicate reporting and may confuse users.

Comprehensive View of the Group’s Financial Performance

Consolidated financial statements provide a comprehensive view of the group's

financial performance by:

 Aggregating Results: They show the total revenues, expenses, and profits
of the parent and subsidiaries, giving stakeholders insight into the overall
profitability of the group.
 Enhancing Comparability: By presenting combined results, these
statements allow for easier comparison with other entities or industry
benchmarks, aiding investors and analysts in assessing relative
performance.
 Clarifying Financial Position: The consolidated balance sheet presents the
combined assets and liabilities of the entities, allowing stakeholders to
assess the financial strength and capital structure of the entire group.
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Conclusion

Consolidated financial statements are crucial for organizations with multiple

subsidiaries, as they provide a holistic view of financial performance and position.
By following a structured process to consolidate financial data, companies can
deliver meaningful insights to stakeholders, though they must also navigate the
complexities and challenges inherent in consolidation. Ultimately, these statements
serve to improve transparency, facilitate informed decision-making, and enhance
the credibility of financial reporting for the entire corporate group.

1.

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