16

Unit 1: Introduction to financial accounting

Test your knowledge and

understanding

Using the knowledge gained from Section 1.1, answer the following questions.
Question 1
Write a brief report for your parents explaining the nature of accounting and the distinction
between financial accounting and management accounting.
Question 2
Your uncle is about to start a business and has asked you to advise him whether to operate as a
sole trader or as a limited liability company. What would you advise him?
Question 3
a. Speak to a friend or member of your family who owns or works in a small business. Ask them
whether that business is a sole trader, a partnership, a limited liability company or a limited
liability partnership and why that particular structure was chosen.
b. Ask them to explain to you the role of accounting in their business.
Question 4
‘Published financial statements should be relevant and reliable.’
Distinguish between these two characteristics of useful financial information and give an
example of when they might be in conflict in financial accounting.
 25
Unit 1: Introduction to financial accounting

Test your knowledge and understanding

Using the knowledge gained from Section 1.2, answer the following questions.
Question 1
Your uncle knows you are studying accounting. Write a note to him explaining what is shown on
an income statement and on a statement of financial position.
Question 2
Define the following:
a. Asset
b. Liability
c. Non-current asset
d. Current asset
e. Inventory
f. Trade receivables
g. Trade payables
h. Equity
i. Share capital
j. Share premium
k. Cost of goods sold (COGS)
l. Expenses
Question 3
At 31.12.X3 and 31.12.X4, the assets and liabilities of Company A are as follows:

31.12.X3 31.12.X4
£ £
Non-current assets 150,000 137,000
Long-term loans 20,000 17,000
Overdraft 1,000 -
Inventory 28,000 35,000
Trade payables 15,000 19,000
Share capital 10,000 10,000
Retained profits 180,000 187,000
Accruals 12,000 14,000
Trade receivables 37,000 40,000
Bank balance - 5,000
Prepayments 23,000 30,000
Unit 1: Introduction to financial accounting • Section 1.2: Income statement 26
and statement of financial position

Required:
a. Prepare a statement of financial position of Company A at 31.12.X3 and at 31.12.X4.
b. Company A has paid a dividend in 20X4 of £35,000. What was the profit after tax for that year?
Question 4
a. Prepare an income statement for Company B for 20X4 from the following information:

£
Closing inventory 45,000
Electricity 14,000
Wages 24,000
Interest paid 2,000
Taxation 41,000
Sales revenue 540,000
Purchases 275,000
Opening inventory 31,000
Rent 26,000

b. If the company paid a dividend in the year of £35,000 and the retained profits at 31.12.X4
were £154,000, what were the retained profits at 31.12.X3?
Question 5
The tax affairs of John Smith are being investigated by the tax authority. The tax inspector
believes that Mr Smith has understated his income in the tax year as being £40,700.
Mr Smith has been asked to give full details of his assets and liabilities at the beginning and end
of the tax year and a summary of personal expenditure during the year, which he believes to be
about £36,500.
Details of his assets and liabilities appear below:

Assets and liabilities, at original cost

Beginning of year End of year
£ £
House purchased 10 years ago 95,000 95,000
Furniture and fittings 35,000 39,000
Government bonds 4,000 4,000
Shares 15,600 18,600
Bank accounts 1,400 2,600
Cars 6,700 16,800
Mortgage 21,000 20,000
Overdraft 300 400

Required:
a. Prepare statements of financial position at the beginning and end of the tax year.
b. From the answer to part (a) and his estimate of personal expenditure, deduce Mr Smith’s
income in the year.
c. What action do you think the tax department should take?