ACCT102 TUTORIAL 1

1. Recap: “accounting” and ‘Financial Accounting’

(1) How to define ‘accounting’? The Communication of Financial Information to
Inform & Assists Decisions.
(2) What is ‘financial accounting’? Preparing Financial Reports for decision
makings by external users.
(3) What is the difference between management and financial accounting?
Management is decisions making, financial is preparing the financial reports.

2. Accounting equation
a. Describe the elements of the accounting equation. Assets = Liabilities + Equity.
b. Does the accounting equation tell the whole story about an entity? If not, what
does it leave out? Is this a problem? No, People and small things aren’t included.

3. Inventory - classification
A business purchases a new sewing machine from a supplier. At year and the owner is
unsure how to classify it in the financial statements.

a. In what circumstances might this sewing machine be either a current asset, a fixed
asset, or an expense? Selling it would result in a current asset, were if they were
using it, it would be a fixed one.
b. Why does the classification matter? Doesn’t give an accurate representation if
not classified properly.
c. What is the effect of each classification on net profit? Expense will decrease the
net profit.

4. General Purpose Financial Reporting

According to the NZ Framework, the objective of general purpose financial
reporting of a for-profit entity is:

“… to provide financial information about the reporting entity that is useful to

existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity.”

REQUIRED:

(1) Explain the difference between general purpose financial reporting and special
purpose financial reporting. General purpose is things like the Statement of
Financial Position and Income Statement that are meant for all external and
internals users. Special Purpose Financial Reporting are reports that serve a
specific purpose and can be done at any time.
(2) According to the Financial Reporting Act 2013, general purpose financial
reporting should be prepared in compliance with GAAP. Brief explain what

1
 does it mean by ‘compliance with GAAP’ Follow the accounting rules that
are set by GAAP, like that it must be relevant.

5. Assets on the balance sheet

You are a keen cyclist and have always wanted to own your own cycle repair business.
As you pedal down Colombo Street, you see a Business for Sale sign in the window of
Henry’s Safety Cycle (HSC), a long-established business. After chatting with Henry, he
gives you a summarised balance sheet. You take it, and when you get home, read it
carefully.

a) Explain what is an asset? A

resource that the company
controls.
b) Explain the difference between a
current asset and a non-current
asset Non Current will not be
used within the 12 month
financial period where as
Current Assets will be.
c) Following items have been
purchased recently. But they
have not been recorded. How
would you recommend to
classify and record these items?
Justify your answer

o Repairing tools cost $122 in

total Depends on the type of
tools, could possibly just be an expense and asset.

o Spare parts used for operation in the next three months: Expense and Current Asset

o Storage shelving units Non Current Asset (PPE)

d) What additional information would you need before being able to decide what to
pay for the business (or even whether to buy the business at all)? Revaluation of
the Non-Current Assets, and any existing liabilities. Profit. Expenses.
e) What would you pay for the assets of the business? Depreciation and a
Revaluation needs to be accounted for before buying.