Chapter # 11: Financial Statements

Chapter # 11
Financial Statements
Principles of Accounting – XI
Sameer Hussain
www.a4accounting.weebly.com
Chapter # 11
Chapter contents
 Financial Statements.
 Cost of goods sold.
 Income statement:
o Single – step income
statement.
o Multi – step income
statement.
 Elements of multi – step income
statement.
 Income statement of servicing
business.
 Balance sheet:
o Report form balance sheet.
o Account form balance sheet.
 Missing figure in trial balance.
 Illustrations.
 Practice questions.
 Multiple Choice Questions (MCQs).
www.a4accounting.weebly.com Sameer Hussain

Page 224
Chapter # 11
Chapter # 11
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Financial statement is a written report which quantitatively describes the financial health of a
company. This includes an income statement, balance sheet, cash flow statement and statement
of changes in equity. Financial statements are usually compiled on a quarterly and annually
basis. Financial statements consist of five statements:
1. Income Statement.
2. Balance Sheet.
3. Cash Flow Statement.
4. Statement of Changes in Equity.
5. Notes to the Financial Statements.
COST OF GOODS SOLD

Cost of goods sold is the price of purchasing or producing a product that is sold; also called cost
of sales. It is calculated by the formula beginning inventory plus net purchases less ending
inventory. This total is an expense on the income statement. In a manufacturing setting, the cost
of goods sold is the cost of direct materials, direct labor, and overhead associated with the units
sold. In a retail setting, the cost of goods sold is the wholesale cost of the items sold, plus any
transportation cost to get the items to the warehouse.
Format of Statement of Cost of Goods Sold:
Name of Business
Statement of Cost of Goods Sold
For the Period Ended _______
Merchandise inventory beginning XXX
Add: Net Purchases:
Purchases XXX
Add: Transportation in XXX
Add: Import duty XXX
Add: Wages expense XXX
Delivered purchases XXX
Less: Purchase discount (XXX)
Less: Purchase returns & allowances (XXX)
Net purchases XXX
Merchandise available for sale XXX
Less: Merchandise inventory (end) (XXX)
Cost of goods sold XXX
ILLUSTRATION # 1: 1991 Regular & Private – BIEK

(Cost of Goods Sold)
The following balances are taken from the books of Rehmat & Co. for the year ending December
31, 1990:-
Merchandise inventory (1.1.90) Rs.15,000 Purchase returns Rs.2,000
Purchases 70,000 Transportation in 1,250
Merchandise inventory (31.12.90) 10,000 Purchase discount 1,400
REQUIRED
Prepare Statement of Cost of Goods Sold.
Sameer Hussain www.a4accounting.weebly.com

Page 225
Chapter # 11
Solution # 1:
REHMAT & CO.
STATEMENT OF COST OF GOODS SOLD
FOR THE PERIOD ENDED 31 DECEMBER 1990
Merchandise inventory (beginning) Rs.15,000
Add: Net Purchases:
Purchases Rs.70,000
Add: Transportation in 1,250
Delivered purchases 71,250
Less: Purchase discount (1,400)
Less: Purchase returns (2,000)
Net purchases 67,850
Merchandise available for sale 82,850
Less: Merchandise inventory (ending) (10,000)
Cost of goods sold Rs.72,850
COST OF GOODS SOLD ACCOUNT

Cost of Goods Sold
Merchandise inventory beginning XXX Purchase return and allowance XXX
Purchases XXX Purchase discount XXX
Transportation – in XXX Merchandise inventory ending XXX
Import duty XXX Cost of goods sold (Transferred to XXX
Wages expense XXX Profit and loss account)
XXX XXX
ILLUSTRATION # 2:
(Cost of Goods Sold Account)
The following balances are taken from the books of Karim Sons for the year ending December
31, 2003:-
Merchandise inventory opening Rs.10,000 Purchase returns Rs.2,000
Purchases 100,000 Transportation in 3,000
Merchandise inventory ending 20,000 Purchase discount 4,000
Wages expense 20,000 Import duty 5,000
REQUIRED
Prepare Cost of Goods Sold account.
Solution # 2:
Karim Sons
Cost of Goods Sold Account
Merchandise inventory beginning 10,000 Purchase return and allowance 2,000
Purchases 100,000 Purchase discount 4,000
Transportation – in 3,000 Merchandise inventory ending 20,000
Import duty 5,000 Cost of goods sold (Transferred to 112,000
Wages expense 20,000 Profit and loss account)
138,000 138,000
Explanation of Solution # 2:
All the expenses are recorded on the left (debit) side of cost of goods sold account and all those
accounts that reduces expense or are credit in nature, are recorded on the credit side of the

Page 226
Chapter # 11
account. The balancing amount on credit side is the amount of cost of goods sold which is
transferred to the income statement or profit and loss account.
INCOME STATEMENT
Income statement shows the financial performance of the business. It shows the result of
operations for a period. It consists of revenue and expenses. When total revenues exceed the
total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting
amount is net loss.
Income
Statement
Revenues Expenses
SINGLE – STEP INCOME STATEMENT

A format for the income statement that lists all revenues and gains, and then all expenses and
losses (except taxes), without classifying them by source is called single – step income
statement. Taxes are usually separated from the other expenses and losses and are on the last
line, right before net income.
Format of Single – Step Income Statement:
Name of Business
Income Statement
Revenues:
Sales revenue XXX
Interest income XXX
Commission income XXX
Total revenues XXX
Less: Total Expenses:
Cost of goods sold XXX
Salaries expense XXX
Advertising expense XXX
Utilities expense XXX
Bad debts expense XXX
Rent expense XXX
Insurance expense XXX
Supplies expense XXX
Repair expense XXX
Depreciation expense XXX
Total expenses (XXX)
Operating profit/loss XXX/(XXX)
Less: Income tax expense (XXX)
Net income/loss XXX/(XXX)

Page 227
Chapter # 11
ILLUSTRATION # 3:
(Single – Step Income Statement)
The following balances are extracted from the books of Mr. Furqan for the year ending
December 31, 1998:-
Cost of goods sold Rs.300,000 Sales revenue Rs.500,000
Salaries expense 20,000 Rent income 30,000
Insurance expense 10,000 Advertising expense 25,000
Depreciation expense 15,000 Utilities expense 20,000
REQUIRED
Prepare single – step income statement for the period ended December 31, 1998.
Solution # 3:
MR. FURQAN
INCOME STATEMENT
FOR THE PERIOD ENDED DECEMBER 31, 1998
Revenues:
Sales revenue 500,000
Rent income 30,000
Total revenues 530,000
Less: Total Expenses:
Cost of goods sold 300,000
Salaries expense 20,000
Advertising expense 25,000
Utilities expense 20,000
Insurance expense 10,000
Depreciation expense 15,000
Total expenses (390,000)
Net income 140,000
Total revenues are Rs.530,000 and total expenses are Rs.390,000. Total revenues exceeds from
total expenses by Rs.140,000 (530,000 – 390,000 = 140,000). When total revenues are more
than total expenses, it results net profit. Here, net profit is Rs.140,000.
MULTI – STEP INCOME STATEMENT

A format for the income statement that classifies revenues, gains, expenses, and losses into
operating and non-operating categories.
 Multiple-step income statements always start with sales revenue and deduct the cost of
goods sold to get gross profit. This relationship is thus highlighted by presentation on
the face of the income statement. The single-step format does not do this.
 The multiple-step format then lists the operating expenses, usually classifying them as
selling expenses, general expenses, or administrative expenses.
 Income from operations, or operating income, is the difference between the gross profit
and operating expenses, and is specifically listed.
 The next section on the multiple-step income statement includes other revenues and
gains, expenses, and losses. This section presents items that are not related to the
regular business activities, such as interest and gains or losses from selling assets.
 The multiple-step format then highlights the income before taxes, the net of income
from operations, and the “other” section.
 The next line is tax expense, followed by net income.

Page 228
Chapter # 11
ELEMENTS OF MULTI – STEP INCOME STATEMENT

Following are the elements used for preparing a multi – step income statement:
The total amount of sales revenue before adjusting for sales returns,
Gross Sales:
sales allowances, or sales discounts.
The value of sales made during an accounting period, reduced by any

Net Sales: returns made by customers, any discounts given to customers, and any
other reductions from the original selling price of the goods.
Calculated by the formula beginning inventory plus net purchases less

ending inventory. This total is an expense on the income statement. In
a manufacturing setting, the cost of goods sold is the cost of direct
Cost of Goods Sold:
materials, direct labor, and overhead associated with the units sold. In
a retail setting, the cost of goods sold is the wholesale cost of the items
sold, plus any transportation cost to get the items to the warehouse.
The value and the number of units, that are in inventory at the
Merchandise Inventory
beginning of the accounting period. Beginning inventory is used to
Beginning:
calculate the cost of goods sold.
Purchases shows the buying of merchandise for resale purpose.

Purchase of fixed assets or supplies are not recorded as purchases. The
Gross Purchases:
total amount of purchases of merchandise before adjusting purchase
returns and purchase discounts is called gross purchases.
The value of a company’s inventory purchases during an accounting

period reduced by any returns, discounts, or other reductions of the
Net Purchases: price actually paid for the goods. Net purchases can be used to
calculate the cost of goods sold in businesses using periodic inventory
systems.
The delivery cost associated with getting purchased inventory items

from the source to the company that will resell them. Freight-in is a
Freight – in:
cost that is included in inventory and is reflected in the cost of goods
sold.
The compensation earned by hourly-paid employees during the

Wages Expenses:
interval of time is called wages expenses.
In a retail environment, calculated by the formula beginning inventory

plus net purchases. This total represents the cost of all products
Merchandise Available
available for sale during the period. In a manufacturing business,
for Sale:
goods available for sale can be calculated as beginning-finished-goods
inventory plus goods completed during the accounting period.
The value and the number in units, in inventory at the end of the
Merchandise Inventory accounting period. Ending inventory is used to calculate the cost of
Ending: goods sold. Ending inventory from one year becomes the next year’s
beginning inventory.

Page 229
Chapter # 11
When the sales revenue is more than the cost of goods sold, it is called
Gross Profit:
gross profit.
When the sales revenue is less than the cost of goods sold, it is known
Gross Loss:
as gross loss.
Costs associated with the regular business activities of an entity.

Operating Expenses: Operating expenses are listed on a multiple-step income statement
after the cost of goods sold.
Cost incurred to sell (e.g., advertising, salesperson commission) or

Selling Expenses: distribute (e.g., freight-out) merchandise. It is one of the types of
operating expenses and is a period cost.
All expenses incurred in connection with performing general and

Administrative administrative activities. Examples are executives' salaries and legal
Expenses: expenses. General and administrative expenses are shown under
operating expenses in the income statement.
The cost of delivering products to the buyer. Freight-out is classified as

Freight – out:
a selling expense.
Sales minus the cost of goods sold minus selling, general, and
administrative expenses. On the income statement, operating income
Operating Income: is found before the “other revenues, gains, expenses, and losses”
section. Operating income can also be calculated by starting with net
income and deducting taxes and interest.
The result of cost of goods sold and operating expenses exceeding

Operating Loss: revenues. Contrast with operating income, which is equal to the excess
of revenues over the cost of goods sold and operating expenses.
The amount of income tax that is associated with (matches) the net
income reported on the company's income statement. This amount
Income Tax Expense: will likely be different than the income taxes actually payable, since
some of the revenues and expenses reported on the tax return will be
different from the amounts on the income statement.
Total revenues and gains less total expenses and losses for the
Net Income:
accounting period.
In a business, the result of expenses and losses exceeding revenues and

Net Loss: gains. Contrast with net income, in which the reverse is true, and
revenues exceed expenses.

Page 230
Chapter # 11
Format of Multi – Step Income Statement:
Name of Business
Income Statement
Sales XXX
Less: Sales discount XXX
Less: Sales returns and allowances XXX (XXX)
Net sales XXX
Less: Cost of Goods Sold:
Merchandise inventory (beg) XXX
Add: Net Purchases:
Purchases XXX
Add: Transportation in XXX
Add: Import duty XXX
Add: Wages expense XXX
Delivered purchases XXX
Less: Purchase discount (XXX)
Less: Purchase returns & allowances (XXX)
Net purchases XXX
Merchandise available for sale XXX
Less: Merchandise inventory (end) (XXX)
Cost of goods sold (XXX)
Gross profit / loss XXX/(XXX)
Less: Operating Expenses:
Selling Expenses:
Sales salaries expense XXX
Utilities expense – Selling XXX
Rent expense – Selling XXX
Total selling expense XXX
Administrative Expenses:
Office salaries expense XXX
Utilities expense – Office XXX
Office rent expense XXX
Repair expense XXX
Total administrative expenses XXX
Total operating expenses (XXX)
Profit/loss from operation XXX/(XXX)
Add: Other Income:
Income before income tax XXX
Net profit/Loss XXX/(XXX)

Page 231
Chapter # 11

(Income Statement Without Adjusting Entries – Net Profit)
The following balances have been taken from the ledger of Zahid and Co. on December 31, 1996,
the close of their financial year:
Merchandise inventory January 1, 1996 Rs.6,000; Purchases Rs.39,000; Freight Rs.2,000;
Merchandise inventory December 31, 1996 Rs.10,000; Office supplies expense Rs.1,400; Rent
expense Rs.200; Salaries expense Rs.1,600; General expense Rs.1,500; Sales Rs.70,000.
REQUIRED
Prepare classified Income Statement for the year ended December 31, 1996.
Solution # 4:
ZAHID AND CO.
INCOME STATEMENT
Sales 70,000
Merchandise inventory beginning 6,000
Add: Net Purchases:
Purchases 39,000
Add: Freight 2,000
Less: Merchandise inventory ending (10,000)
Cost of goods sold (37,000)
Gross profit 33,000
Rent expense 200
Office supplies expense 1,400
General expense 1,500
Total operating expenses (4,700)
Net profit 28,300
Sales revenue is Rs.70,000 and cost of goods sold is Rs.37,000. Sales revenue is more than cost
of goods sold which shows the gross profit of Rs.33,000 (70,000 – 37,000 = 33,000). Operating
expenses are Rs.4,700. Net profit is Rs.28,300 (33,000 – 4,700 = 28,300).
ILLUSTRATION # 5:
(Income Statement Without Adjusting Entries – Net Loss)
The following balances have been taken from the ledger of Mr. Kamran on June 30, 2003:
Merchandise inventory July 1, 2002 Rs.10,000; Purchases Rs.90,000; Purchase returns and
allowance Rs.3,000; Purchase discount Rs.2,000; Transportation – in Rs.8,000; Merchandise
inventory June 30, 2003 Rs.3,000; Insurance expense Rs.5,000; Rent expense Rs.6,000; Salaries
expense Rs.10,000; Sales Rs.120,000; Sales return and allowance Rs.1,000; Sales discount
Rs.2,000.
REQUIRED
Prepare classified Income Statement for the year ended June 30, 2003.

Page 232
Chapter # 11
Solution # 5:
MR. KAMRAN
INCOME STATEMENT
FOR THE PERIOD ENDED JUNE 30, 2003
Sales 120,000
Less: Sales return allowance (1,000)
Less: Sales discount (2,000)
Net sales 117,000
Add: Net Purchases:
Purchases 90,000
Add: Transportation – in 8,000
Less: Purchase return and allowances (3,000)
Gross profit 17,000
Rent expense 6,000
Net loss (4,000)
Net sales is Rs.117,000 and cost of goods sold is Rs.100,000. Sales revenue is more than cost of
goods sold which shows the gross profit of Rs.17,000 (117,000 – 100,000 = 17,000). Operating
expenses are Rs.21,000. Total operating expenses are more than gross profit which results net
loss of Rs.4,000 (17,000 – 21,000 = 4,000).
ILLUSTRATION # 6:
(Income Statement With Adjusting Entries)
The following balances have been taken from the ledger of Saeed & Co. on December 31, 2001:
Inventory opening Rs.30,000; Prepaid insurance Rs.5,000; Prepaid rent Rs.4,000; Furniture
Rs.15,000; Allowance for depreciation Rs.3,000; Purchases Rs.200,000; Sales Rs.300,000; Sales
return and allowance Rs.2,000; Purchas return and allowance Rs.5,000; Salaries expense
Rs.35,000; Advertising expense Rs.5,000; Interest income Rs.1,000.
Data for Adjustment on December 31, 2001:
(a) Inventory ending was Rs.50,000. (b) Rent expired during the year Rs.3,000.
(c) Insurance expired during the year Rs.2,000. (d) Outstanding salaries Rs.3,000.
(e) Interest receivable Rs.1,000. (f) Depreciation on furniture Rs.2,000.
REQUIRED
Prepare Income Statement for the year ended December 31, 2001.

Page 233
Chapter # 11
Solution # 6:
SAEED & CO.
ADJUSTING ENTRIES
Date Particulars P/R Debit Credit
1 Merchandise inventory 50,000
Expense and revenue summary 50,000
(To adjust the merchandise inventory)
2 Rent expense 3,000
Prepaid rent 3,000
(To adjust the prepaid rent)
3 Insurance expense 2,000
Prepaid insurance 2,000
(To adjust the prepaid insurance)
4 Salaries expense 3,000
Salaries payable 3,000
(To adjust the accrued salaries)
5 Interest receivable 1,000
Interest income 1,000
(To adjust the accrued interest income)
6 Depreciation expense 2,000
Allowance for depreciation – Furniture 2,000
(To adjust the depreciation expense)
SAEED & CO.

INCOME STATEMENT
Sales 300,000
Less: Sales return allowance (2,000)
Net sales 298,000
Add: Net Purchases:
Purchases 200,000
Less: Purchase return and allowances (5,000)
Gross profit 123,000
Salaries expense (35,000 + 3,000) 38,000
Rent expense 3,000
Profit from operation 73,000
Add: Other Income:
Interest income (1,000 + 1,000) 2,000
Net income 75,000

Page 234
Chapter # 11
Net sales were Rs.298,000 and cost of goods sold computed as Rs.175,000. Sales revenue were
more than cost of goods sold which shows gross profit of Rs.123,000 (298,000 – 175,000 =
123,000). Operating expenses include:
 Salaries expense of Rs.35,000 as per trial balance. Adjustment data shows unpaid
salaries of Rs.3,000. Unpaid salaries increases expense and liability as well. Therefore,
salaries expense was reported in income statement as Rs.38,000 ( 35,000 + 3,000 =
38,000).
 Trial balance showed advertising expense of Rs.5,000. There was no adjustment for
advertising. Therefore, Rs.5,000 was reported in income statement.
 Trial balance showed prepaid advertising (asset). No asset account is recorded in
income statement. But adjustment data showed rent expired Rs.3,000. It showed
increase in rent expense and decrease in prepaid rent by Rs.3,000. Increase in expense is
recorded in income statement by Rs.3,000. The same treatment was for insurance
expense.
 Depreciation expense was recorded in income statement by Rs.2,000.
Total operating expenses were Rs.50,000 which was less than gross profit. Operating income
was Rs.73,000 (123,000 – 50,000 = 73,000). Other income included interest income which
showed a balance of Rs.1,000 in trial balance. Adjustment data indicated accrued interest of
Rs.1,000. Accrued interest increases income as well as receivable. Increase in income was added
in interest income. Therefore, total interest income was Rs.2,000 (1,000 + 1,000 = 2,000) and
net profit was Rs.75,000 (73,000 + 2,000 = 75,000).
INCOME STATEMENT OF SERVICING BUSINESS

In a servicing business, sales revenue account, merchandise account and cost of goods sold
account are not prepared because these accounts relate to merchandising business. The income
statement of servicing business consists of service revenue less operating expenses.
Format of Single – Step Income Statement:
Name of Business
Income Statement
Salaries expense XXX
Utilities expense XXX
Rent expense XXX
Repair expense XXX
Total operating expenses (XXX)
Operating profit/loss XXX/(XXX)
Net income/loss XXX/(XXX)
There could be any other income like rent income, interest income, etc. depending on the nature
of business.

Page 235
Chapter # 11
ILLUSTRATION # 7:
(Income Statement of Servicing Business)
A summary of the records of Mr. Adnan for the year ending December 31, 2004 is as follows:
Commission income Rs.100,000; Salaries expense Rs.30,000; Rent expense Rs.20,000; Furniture
Rs.20,000; Insurance expense Rs.8,000; Utilities expense Rs.7,000; Advertising expense
Rs.6,000.
Additional Information on December 31, 2004:
(i) Accrued salary Rs.20,000.
(ii) Prepaid rent Rs.5,000.
(iii) Accrued commission income Rs.10,000.
(iv) Depreciation expense on furniture Rs.1,000.
(v) Bad debts expense Rs.3,000.
REQUIRED
Prepare income statement for the period ended December 31, 2004.
Solution # 7:
MR. ADNAN
ADJUSTING ENTRIES
2 Prepaid rent 5,000
Rent expense 5,000
(To adjust the rent expense)
3 Commission receivable 10,000
Commission income 10,000
(To adjust the accrued commission income)
Allowance for depreciation – Furniture 1,000
5 Bad debts expense 3,000
Allowance for bad debts 3,000
(To adjust the bad debts expense)
MR. ADNAN
INCOME STATEMENT
Commission income (100,000 + 10,000) 110,000
Salaries expense (30,000 + 20,000) 50,000
Rent expense (20,000 – 5,000) 15,000
Utilities expense 7,000
Bad debts expense 3,000
Net income 20,000

Page 236
Chapter # 11
 Commission income is Rs.100,000 as per trial balance and accrued commission
Rs.10,000 as per adjustment data. Accrued income increases the commission income
which is added in commission income by Rs.10,000. Total commission income is
Rs.110,000 (100,000 + 10,000 = 110,000).
 Salaries expense is Rs.60,000 and adjustment data shows accrued salary of Rs.20,000.
Accrued expenses increases the salaries expense by Rs.20,000. Total salaries expense of
Rs.80,000 (60,000 + 20,000 = 80,000) is reported in income statement.
 Rent expense is Rs.20,000 but adjustment data indicates prepaid rent of Rs.5,000.
Prepaid reduces the rent expense by Rs.5,000. Therefore, total rent expense of Rs.15,000
(20,000 – 5,000 = 15,000) is reported in income statement.
 Insurance expense of Rs.8,000; utilities expense of Rs.7,000 and advertising expense of
Rs.6,000 have no adjustment at the en do the period. Hence, the same amount of these
expenses are reported in income statement.
 Depreciation is reported as Rs.1,000.
 Bad debts expense is reported in income statement Rs.3,000.
Total expenses are Rs.90,000 and total revenues are Rs.110,000. Total revenue exceeds from
total expenses by Rs.20,000 (110,000 – 90,000 = 20,000) which is considered as net profit.
BALANCE SHEET
Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and
owner’s equity on a given date. It is a quantitative summary of company’s financial condition at
a specific point in time, including assets, liabilities and net worth. The first part of balance sheet
shows all the productive assets a company owns, and the second part shows all the financing
methods (such as liabilities and owner’s equity).
Balance Sheet
Assets = Liabilities + Owner’s Equity
Current Assets + Current Liabilities + Capital +

Fixed Assets + Long Term Liabilities Additional Investment +
Fictitious Assets – Net Profit* –
Contra Assets Drawings
* Net profit is added in the capital because it increases owner’s equity. But in case of loss,
owner’s equity decreases. Net loss is subtracted from capital.
REPORT FORM BALANCE SHEET

It is a presentation format of the balance sheet that lists assets, followed by liabilities and
equities.
ACCOUNT FORM BALANCE SHEET

It is a presentation format of the balance sheet that lists assets on the left side of the sheet and
liabilities and equities on the right side. Contrast with the report form of the balance sheet, in
which assets are listed first, followed vertically by liabilities and equities.

Page 237
Chapter # 11
Format of Report Form Balance Sheet:

Name of Business
Balance Sheet
As on __________
ASSETS
Current Assets:
Cash XXX
Bank XXX
Marketable securities XXX
Accounts receivable XXX
Less: Allowance for bad debts (XXX) XXX
Notes receivable XXX
Merchandise inventory XXX
Supplies XXX
Prepaid expenses XXX
Other current assets XXX
Total current assets XXX
Fixed Assets:
Tangible Fixed Assets:
Building XXX
Less: Allowance for depreciation (XXX) XXX
Furniture XXX
Equipment XXX
Land XXX
Total tangible fixed assets XXX
Intangible Fixed Assets:

Goodwill XXX
Trademark XXX
Patents XXX
Copyright XXX
Total intangible fixed assets XXX
Total fixed assets XXX
Total assets XXX
EQUITIES
Liabilities:
Current Liabilities:
Accounts payable XXX
Notes payable XXX
Accrued liabilities XXX
Unearned revenue XXX
Bank overdraft XXX
Other current liabilities XXX
Total current liabilities XXX

Page 238
Chapter # 11
Long Term Liabilities:

Debentures payable XXX
Bonds payable XXX
Mortgage payable XXX
Bank loan XXX
Other long term liabilities XXX
Total long term liabilities XXX
Total liabilities XXX
Owner’s Equity:
Capital XXX
Add: Additional investment XXX
Add: Net profit/(Net loss) XXX/(XXX)
XXX
Less: Drawings (XXX)
Total owner’s equity XXX
Total equities XXX
Format of Account Form Balance Sheet:

Name of Business
Balance Sheet
As on ________
ASSETS EQUITIES
Current Assets: Liabilities:
Cash XXX Current Liabilities:
Bank XXX Accounts payable XXX
Marketable securities XXX Notes payable XXX
Accounts receivable XXX Accrued liabilities XXX
Less: All. for bad debts (XXX) XXX Unearned revenues XXX
Notes receivable XXX Bank overdraft XXX
Merchandise inventory XXX Other current liabilities XXX
Prepaid expenses XXX Total current liabilities XXX
Supplies XXX
Other current assets XXX Long Term Liabilities
Total current assets XXX Mortgage payable
Debentures payable XXX
Fixed Assets: Bonds payable XXX
Tangible Fixed Assets: Bank loan XXX
Equipment XXX Other long term liabilities XXX
Less: All. for dep. (XXX) XXX Total long term liabilities XXX
Land XXX Total liabilities XXX
Total tangible fixed assets XXX
Owner’s Equity:
Intangible Fixed Assets: Capital XXX
Goodwill XXX Add: Additional investment XXX
Patents XXX Add: Net profit/(Net loss) XXX/(XXX)
Total intangible fixed assets XXX XXX
Total fixed assets XXX Less: Drawings (XXX)
Total owner’s equity XXX
Total assets XXX Total equities XXX

Page 239
Chapter # 11
MISSING FIGURE IN TRIAL BALANCE

If amount of any asset or expense (or debit balance of any account) is missing, it can obtained by
subtracting available debits from total credits and if the amount of liability, revenue or owner’s
equity (or credit balance of any account) is missing, it can be computed by subtracting available
credits from total debits.

(Balance Sheet Without Adjusting Entries)
On December 31, 1996, the ledger accounts of Waseem Traders showed the following balances:-
Cash Rs.3,700 Merchandise inventory Rs.7,500
Accounts receivable 4,000 Shop furniture 7,000
Prepaid rent 4,600 Office equipment 3,500
Building 44,000 Bank loan 10,000
Office furniture 4,000 Capital ?
Accounts payable 5,500 Drawings 4,500
Bank 8,500 Net income 35,700
Note receivable 5,000
REQUIRED
Prepare classified report form balance Sheet.
Solution # 8:
WASEEM TRADERS
BALANCE SHEET
AS ON 31 DECEMBER 1996
ASSETS
Current Assets:
Cash 3,700
Bank 8,500
Accounts receivable 4,000
Merchandise inventory 7,500
Prepaid rent 4,600
Total current assets 33,300
Fixed Assets:
Building 44,000
Office furniture 4,000
Shop furniture 7,000
Office equipment 3,500
Total fixed assets 58,500
Total assets 91,800
EQUITIES
Liabilities:
Current Liabilities:
Accounts payable 5,500
Bank loan 10,000
Total liabilities 15,500

Page 240
Chapter # 11
Owner’s Equity:
Capital 45,100
Add: Net profit 35,700
80,800
Less: Drawings (4,500)
Total owner’s equity 76,300
Total equities 91,800
Computation of Capital:
Total Debits:
Cash Rs.3,700
Prepaid rent 4,600
Building 44,000
Bank 8,500
Shop furniture 7,000
Drawings 4,500
Total debits 96,300
Less: Total Credits:
Bank loan 10,000
Net income 35,700
Total credits (51,200)
Capital 45,100
 Capital is missing in the trial balance. As we know that total debits of trial balance must
equal to the total credits of trial balance. Capital is missing. It means a credit amount is
missing from credit side of trial balance. To find the capital balance, subtract the total
credits from the total debits. Total debits are Rs.96,300 and total credits are Rs.51,200.
Capital is Rs.45,100 (96,300 – 51,200 = 45,100).
 Balance sheet states that assets equal to liabilities plus owner’s equity. Total assets are
Rs.91,800 which is equal to liabilities plus owner’s equity Rs.91,800 (15,500 + 76,300 =
91,800).
ILLUSTRATION # 9:
(Balance Sheet With Adjusting Entries)
On December 31, 1984, the ledger accounts of Akram Sons showed the following balances:
Cash Rs.10,000 Merchandise inventory Rs.13,000
Accounts receivable 15,000 Capital 102,000
Prepaid rent 4,000 Drawings 4,000
Building 80,000 Net loss 20,000
Accounts payable 20,000 Bank overdraft 10,000
1) Unpaid salaries Rs.2,000.
2) Depreciation on building @ 10% per annum.

Page 241
Chapter # 11
3) Rent expired during the period Rs.1,000.

4) Bad debts was estimated Rs.3,000.
REQUIRED
Prepare classified account form balance Sheet.
Solution # 9:
AKRAM SONS
ADJUSTING ENTRIES
2 Depreciation expense (80,000 x 10%) 8,000
Allowance for depreciation – Building 8,000
3 Rent expense 1,000
Prepaid rent 1,000
AKRAM SONS
BALANCE SHEET
ASSETS EQUITIES
Cash 10,000 Accounts payable 20,000
Accounts receivable 15,000 Bank overdraft 10,000
Less: All. For Bad debts (3,000) 12,000 Salaries payable 2,000
Merchandise inventory 13,000 Total liabilities 32,000
Prepaid rent 3,000
Total current assets 38,000 Owner’s Equity:
Capital 102,000
Fixed Assets: Less: Net loss (20,000)
Building 80,000 Less: Drawings (4,000)
Less: All. for depreciation (8,000) Total owner’s equity 78,000
Total assets 110,000 Total equities 110,000
 Adjustment data shows unpaid salaries of Rs.2,000. Accrued salaries increases the
expense as well as liability of the business. Increases in expenses is reported in income
statement and increase in liability is reported in balance sheet Rs.2,000 under liabilities
section.
 Depreciation on building reduces the value of building by Rs.8,000.
 Rent expense decreases the prepaid rent by Rs.1,000. Prepaid rent in trial balance is
Rs.4,000 and prepaid rent reduces by Rs.1,000 at the end of the period. Remaining
prepaid of Rs.3,000 is reported in balance sheet as current assets.

Page 242
Chapter # 11
 Bad debts reduces accounts receivable by Rs.3,000.

Total of assets Rs.110,000 is equal to the total of liabilities plus owner’s equity Rs.110,000
(32,000 + 78,000 = 110,000).

(Income Statement & Balance Sheet Without Adjusting Entries)
The following have been taken from the adjusted trial balance of Al-Mukhtar and Company
prepared on December 31, 1989.
DEBIT BALANCES CREDIT BALANCES
Cash 600 Allow. for depreciation -Furniture 4,000
Accounts receivable 1,500 Accounts payable 1,400
Merchandise inventory 6,000 Salaries payable 300
Store supplies 300 Rent payable 200
Prepaid advertising 4,000 Advance from customers 2,300
Furniture 10,000 Mukhtar Capital 10,000
Cost of goods sold 80,000 Sales revenue 91,600
Sales salaries 4,000
Office rent expense 1,200
Store supplies expense 200
Depreciation expenses 1,000
REQUIRED
a) Income Statement for the year ended December 31, 1989.
b) Balance Sheet as of December 31, 1989 (properly classified).
Solution # 10:
AL-MUKHTAR & COMPANY
INCOME STATEMENT
Sales 91,600
Less: Cost of goods sold (80,000)
Gross profit 11,600
Sales salaries 4,000
Store supplies expense 200
Depreciation expenses 1,000
Net profit 4,200
AL-MUKHTAR & COMPANY

BALANCE SHEET
ASSETS EQUITIES
Cash 600 Accounts payable 1,400
Accounts receivable 1,500 Salaries payable 300
Merchandise inventory 6,000 Rent payable 200
Store supplies 300 Advance from customers 2,300

Page 243
Chapter # 11
Prepaid advertising 4,000 Total liabilities 4,200

Total current assets 12,400
Owner’s Equity:
Fixed Assets: Capital 10,000
Furniture 10,000 Add: Net profit 4,200
Less: All. for depreciation (4,000) Total owner’s equity 14,200

Sales revenue is Rs.91,600 and cost of goods sold is Rs.80,000. Revenue is more than cost of
goods sold which results gross profit of Rs.11,600 (91,600 – 80,000 = 11,600). Operating
expenses are Rs.7,400. Net income is Rs.4,200 (11,600 – 7,400 = 4,200).
Current assets are Rs.12,400 and fixed assets are Rs.6,000. Therefore, total assets are Rs.18,400
(12,400 + 6,000 = 18,400). Total liabilities are Rs.4,200 and total owner’s equity is Rs.14,200.
Total equities are Rs.18,400 (4,200 + 14,200 = 18,400) which is equal to total assets.

(Income Statement & Balance Sheet With Adjusting Entries)
The following balances have been taken from the pre-closing trial balance of Ehsan & Company
prepared on June 30, 1988.
Debit Balances Credit Balances
Cash 10,000 Sales 60,000
Accounts receivable 35,000 Commission income 3,000
Office furniture 10,000 Accounts payable 13,500
Advertising expense 4,000 Ehsan Capital 43,000
Office supplies expense 1,500
Prepaid office rent 6,000
Delivery expense 600
Purchases 30,000
Carriage inwards 400
Sales salaries expense 9,000
Sales return and allowance 500
Supplementary Data for Adjustment on 30.06.1988:
(i) Prepaid office rent Rs.3,000.
(ii) Unused office supplies Rs.500.
(iii) Make allowance for depreciation on office furniture for Rs.1,000.
(iv) Allowance for bad debts to be provided Rs.500.
(v) Outstanding sales salaries Rs.1,000.
(vi) Merchandise inventory on 30.6.1998 was valued at Rs.9,000.
REQUIRED
a) Prepare Income Statement for the year ended 30 June, 1988.
b) Prepare Balance Sheet as of June 30, 1988 is classified form.

Page 244
Chapter # 11
Solution # 11:
EHSAN & COMPANY
INCOME STATEMENT
FOR THE PERIOD ENDED 30 JUNE 1988
Sales 60,000
Less: Sales return and allowance (500)
Net sales 59,500
Merchandise inventory (beg) 10,000
Add: Net Purchases:
Purchases 30,000
Add: Carriage inwards 400
Less: Merchandise inventory (end) (9,000)
Gross profit 28,100
Office supplies expense (1,500 – 500) 1,000
Delivery expenses 600
Sales salaries expense (9,000 + 1,000) 10,000
Bad debts expense 500
Profit from operation 5,500
Add: Other Income:
Commission income 3,000
Net income 8,500
EHSAN & COMPANY

BALANCE SHEET
AS ON 30 JUNE 1988
ASSETS EQUITIES
Accounts receivable 35,000 Salaries payable 1,000
Less: All. For Bad debts (500) 34,500 Total current liabilities 14,500
Office supplies 500 Owner’s Equity:
Prepaid office rent 3,000 Capital 43,000
Total current assets 57,000 Add: Net profit 8,500
Fixed Assets:
Less: All. for depreciation (1,000)

Page 245
Chapter # 11
AKRAM SONS
ADJUSTING ENTRIES
1 Office rent expense 3,000
Prepaid office rent 3,000
2 Office supplies 500
Office supplies expense 500
(To adjust the office supplies expense)
Allowance for depreciation – Office furniture 1,000
4 Bad debts expense 500
Allowance for bad debts 500
5 Sales salaries expense 1,000
Sales salaries payable 1,000
(To adjust the unpaid sales salaries)
(To close the ending inventory)

Net sales are Rs.59,500 and cost of goods sold is Rs.31,400, hence, gross profit is Rs.28,100
(59,500 – 31,400 = 28,100). Operating expenses are:
 Advertising expense Rs.4,000; general expense Rs.2,500 and delivery expense Rs.600 do
not have any adjustments. Therefore, same amounts are reported in income statements.
 Trial balance shows office supplies expense of Rs.1,500 while adjustment data shows
unused supplies of Rs.500. Unused supplies reduces the supplies expense by Rs.500 and
reported in income statement as supplies expense by Rs.1,000 (1,500 – 500 = 1,000).
Rs.500 is reported in balance sheet as supplies under current assets.
 Prepaid office rent shows Rs.6,000 in trial balance and adjustment data shows Rs.3,000
still prepaid. Out of Rs.6,000 only Rs.3,000 is prepaid and Rs.3,000 is expired. Expense
amount of rent is reported in income statement Rs.3,000 and Rs.3,000 is reported in
balance sheet under current asset.
 Trial balance shows salaries expense Rs.9,000 and adjustment data indicates Rs.1,000 as
accrued salaries. Accrued expense increases expense as well as liability. Salaries expense
is reported in income statement as Rs.10,000 (9,000 + 1,000 = 10,000) and Rs.1,000 is
reported in balance sheet as salaries payable (current liabilities).
 Depreciation Rs.1,000 and bad debts expense Rs.500 are reported in income statement
and allowance for depreciation is deducted from furniture and allowance for bad debts
is subtracted from accounts receivable.
 Total operating expense are Rs.22,600 which is less than gross profit of Rs.28,100. It
indicates operating profit of Rs.5,500 (28,100 – 22,600 = 5,500). Commission income
increases the operating profit by Rs.3,000. Therefore, net income is Rs.8,500 (5,500 +
3,000 = 8,500).
Total assets are Rs.66,000 (current assets Rs.57,000 + fixed assets Rs.9,000) which is equal to
the total equities of Rs.66,000 (liabilities Rs.14,500 + owner’s equity Rs.51,500).

Page 246
Chapter # 11

(Financial Statements Without Indicating Debit & Credit in Trial Balance)
Balances taken from the ledger of Shahji, a sole trader on June 30, 1995 before adjustments,
were as follows:-
Cash Rs.3,600; Accounts receivable Rs.4,800; Merchandise inventory (1.7.94) Rs.2,400;
Insurance expense Rs.900; Office equipment Rs.1,800; Allowance for bad debts Rs.240;
Accounts payable Rs.3,600; Shahji Capital Rs.9,480; Sales revenue Rs.12,000; Sales discount
Rs.120; Purchases Rs.6,000; Carriage-in Rs.480; Purchase discount Rs.180; Prepaid shop rent
Rs.2,400; Salaries expense Rs.4,200; Commission income Rs.1,200.
Supplementary Data for Adjustments on 30.6.1995:
(a) Salaries payable Rs.600. (b) Commission receivable Rs.132.
(c) Taxes payable Rs.60. (d) Insurance unexpired Rs.180.
(e) Shop rent prepaid Rs.1,800.
(f) Bad debts expense was estimated at Rs.300.
(g) Allowance for depreciation on office equipment was estimated Rs.180.
(h) Merchandise inventory was valued at Rs.3,600 on 30.6.1995.
REQUIRED
a) Income Statement for the year ended June 30, 1995 (Group expense and revenue data).
b) Balance Sheet as of June 30, 1995 (classified form).
Solution # 12:
SHAHJI
ADJUSTING ENTRIES
1 Salaries expense 600
Salaries payable 600
(To adjust the unpaid salaries)
2 Commission receivable 132
Commission income 132
(To adjust the accrued commission income)
3 Taxes expense 60
Taxes payable 60
(To adjust the accrued taxes)
4 Prepaid insurance 180
Insurance expense 180
(To adjust the insurance expense)
5 Shop rent expense 600
Prepaid shop rent 600
(To adjust the prepaid shop rent)
6 Bad debts expense 300
Allowance for bad debts 300
7 Depreciation expense 180
Allowance for depreciation – Office equipment 180

Page 247
Chapter # 11
SHAHJI
INCOME STATEMENT
Less: Sales discount (120)
Net sales 11,880
Add: Net Purchases:
Purchases 6,000
Add: Carriage in 480
Less: Purchase discount (180)
Net purchases 6,300
Gross profit 6,780
Salaries expense (4,200 + 600) 4,800
Insurance expense (900 - 180) 720
Taxes expense 60
Shop rent expense (2,400 – 1,800) 600
Bad debts expense 300
Depreciation expense 180
Profit from operation 120
Add: Other Income:
Commission income (1,200 + 132) 1,332
Net profit 1,452
SHAHJI
BALANCE SHEET
AS ON 30 JUNE 1995
ASSETS EQUITIES
Accounts receivable 4,800 Salaries payable 600
Less: All for bad debts (540) 4,260 Taxes payable 60
Merchandise inventory 3,600 Total liabilities 4,260
Prepaid shop rent 1,800
Prepaid insurance 180 Owner’s Equity:
Commission receivable 132 Capital 9,480
Fixed Assets:
Less: All for depreciation (180)

Page 248
Chapter # 11

The above trial balance is maintained without indicating debit and credit balances of accounts.
It is known that assets, expenses, and contra revenue accounts have debit balances while
liability, revenue, owner’s equity, contra expenses, and contra assets accounts have credit
balances.
 Net sales are Rs.11,880 and cost of goods sold is Rs.5,100 resulting gross profit of
Rs.6,780 (11,880 – 51,00 = 6,780). Operating expenses are:
 Trial balance shows salaries expense of Rs.4,200 while adjustment data indicates
salaries payable of Rs.600. Accrued salaries increases expenses as well as liability
(salaries payable) of Rs.600. Salaries expense is reported in income statement as
Rs.4,800 (4,200 + 600 = 4,800) and salaries payable of Rs.600 is showing in balance
sheet as liabilities.
 Trial balance shows insurance expense of Rs.900 and adjustment data shows unexpired
insurance of Rs.180. Prepaid insurance decreases expense and increases prepaid by
Rs.180. Insurance expense is reported in income statement by Rs.720 (900 – 180 = 720)
and prepaid insurance is reported in balance sheet by Rs.180 under current assets.
 Prepaid shop rent shows Rs.2,400 in trial balance and adjustment data indicates that
prepaid rent is Rs.1,800 at the end of the period. There is decrease in prepaid rent by
Rs.600 (2,400 – 1,800 = 600) which result increase in expense. Shop rent expense is
reported in income statement Rs.600 and prepaid shop rent is reported in balance sheet
by Rs.1,800 as current assets.
 Tax expense of Rs.60; depreciation expense of Rs.180 and bad debts expense of Rs.300
are reported in income statement. Allowance for bad debts shows a credit balance of
Rs.240 in trial balance and adjusting entry shows credit of allowance for bad debts of
Rs.300 which result increase in allowance for bad debts and deducted from accounts
receivable Rs.540 (240 + 300 = 540) in the balance sheet. Allowance for depreciation is
deducted from fixed assets. Salaries payable of Rs.60 is reported in balance sheet as
liabilities.
 Total operating expenses are Rs.6,660 which is less than gross profit and resulting
operating profit of Rs.120 (6,780 – 6,660 = 120).
 Commission income shows Rs.1,200 in trial balance and adjustment data shows Rs.132
as accrued. Accrued income increases income as well as receivable. Commission income
of Rs.1,332 (1,200 + 132 = 1,332) is reported in income statement and Rs.132 is
reported in balance sheet as commission receivable under current assets.
 Other income increases the profit by Rs.1,332. Therefore, net profit for the period is
Rs.1,452 (120 + 1,332 = 1,452).
Total current assets are Rs.13,572 and total fixed assets are Rs.1,620. Hence, total assets are
Rs.15,192 (13,572 + 1,620 = 15,192) which is equal to the total equities of Rs.15,192 (total
liabilities Rs.4,260 and total owner’s equity Rs.10,932).

(Income Statement & Balance Sheet With Adjusting & Correcting Entries)
The following are unadjusted account balances taken from the books of Mr. Riaz on May 31,
1994:-
Cash Rs.6,000
Merchandise inventory (June 1, 1993) 11,000
Allowance for depreciation – Office equipment Rs.10,000

Page 249
Chapter # 11

Riaz Capital 59,000
Riaz Drawings 8,000
Sales return 3,000
Sales discount 2,000
Purchases 45,000
Purchase returns 3,000
Purchase discount 4,000
Transportation in 5,000
Delivery expense 2,000
Office salaries expense 10,000
169,000 169,000
Supplementary Data for Adjustments on May 31, 1994:
(i) Bad debts expense was estimated at Rs.1,200.
(ii) Insurance was paid in advance for 10 months on March 1, 1994.
(iii) Make allowance for depreciation on office equipment at 10% of the cost.
(iv) Advertising prepaid was Rs.1,500.
(v) Unpaid office salaries was Rs.2,500.
(vi) An item of transportation in of Rs.600 was wrongly charged to purchases.
(vii) An item of delivery expense of Rs.300 was wrongly debited to transportation in
account.
(viii) Merchandise inventory on May 31, 1994 was valued at Rs.16,000.
REQUIRED
a) Prepare income statement for the year ended May 31, 1994.
b) Prepare classified balance sheet as of May 31, 1994.
Solution # 13:
MR. RIAZ
ADJUSTING ENTRIES
FOR THE PERIOD ENDED 31 MAY 1994
2 Insurance expense 1,800
(To adjust the prepaid insurance)
Allowance for depreciation – Office equipment 5,000
4 Prepaid advertising 1,500
(To adjust the advertising expense)
5 Office salaries expense 2,500
Office salaries payable 2,500
(To adjust the unpaid office salaries)
6 Transportation in 600
Purchases 600
(To correct the purchases account)

Page 250
Chapter # 11

7 Delivery expense 300
Transportation in 300
(To correct the transportation in account)
MR. RIAZ
INCOME STATEMENT
FOR THE PERIOD ENDED 31 MAY 1994
Sales 85,000
Less: Sales return and allowances 3,000
Less: Sales discount 2,000 (5,000)
Net sales 80,000
Add: Net Purchases:
Purchases (45,000 – 600) 44,400
Add: Transportation in (5,000 + 600 – 300) 5,300
Less: Purchase returns and allowances (3,000)
Cost of goods sold 37,700
Gross profit 42,300
Advertising expense (9,000 – 1,500) 7,500
Delivery expense (2,000 + 300) 2,300
Office salaries expense (10,000 + 2,500) 12,500
Insurance expense (6,000 x 3/10) 1,800
Bad debts expense 1,200
Net profit 12,000
MR. RIAZ
BALANCE SHEET
AS ON 31 MAY 1994
ASSETS EQUITIES
Accounts receivable 12,000 Salaries payable 2,500
Less: All for bad debts (1,200) 10,800 Total liabilities 10,500
Prepaid insurance 4,200 Owner’s Equity:
Prepaid advertising 1,500 Capital 59,000
71,000

Page 251
Chapter # 11
Fixed Assets: Less: Drawings (8,000)

Office equipment 50,000 63,000
Less: All for depreciation (15,000)

 Trial balance shows purchases of Rs.45,000 and adjustment data shows an error in
purchase that transportation is charged to purchase account by Rs.600. This error
increases the purchase account and decreases the transportation by Rs.600. for
rectification, Rs.600 is subtracted from the purchases and Rs.600 is added in
transportation account.
 Another error is made in transportation that delivery charges of Rs.300 is wrongly
recorded in transportation account. It results increase in transportation and decrease in
delivery account. To correct this error, Rs.300 is subtracted from transportation and
added in delivery expense account.
 After the above corrections, net sales are Rs.80,000 and cost of goods sold is Rs.37,700
which results gross profit of Rs.42,300 (80,000 – 37,700 = 42,300).
 Advertising expense shows Rs.9,000 in trial balance and Rs.1,500 of advertising is still
prepaid according to adjustment data. Unexpired advertising results decrease in
expense and increase in prepaid by Rs.1,500. Therefore, advertising expense of Rs.7,500
(9,000 – 1,500 = 7,500) is reported in income statement and prepaid advertising of
Rs.1,500 is reported in balance sheet as current assets.
 Delivery expense of Rs.2,300 (2,000 + 300 = 2,300) is reported in income statement
after correction.
 Salaries expense account shows Rs.10,000 in trial balance and adjustment data shows
unpaid salaries of Rs.2,500. Accrued expense increases expense and liability. Salaries
expense of Rs.12,500 (10,000 + 2,500 = 12,500) is reported in income statement and
salaries payable of Rs.2,500 is reported in balance sheet as current liabilities.
 Prepaid insurance of Rs.6,000 was paid on March 1, 1994 for 10 months. Insurance for 1
month is Rs.600 (6,000/10 = 600) and period covered during this accounting period is
from March to May (3 months). The expense for 3 months is Rs.1,800 (600 x 3 = 1,800)
and remaining amount of insurance Rs.4,200 (6,000 – 1,800 = 4,200) is still prepaid.
Therefore, insurance expense of Rs.1,800 is reported in income statement and Rs.4,200
is reported in balance sheet under current assets as prepaid insurance.
 Bad debts expense of Rs.1,200 is reported in income statement and allowance for bad
debts of Rs.1,200 is deducted from accounts receivable in balance sheet.
 Depreciation expense of Rs.5,000 is reported in income statement and allowance for
depreciation of Rs.15,000 is subtracted from fixed asset in balance sheet. Allowance for
depreciation shows a balance of R.10,000 in trial balance and adjusting entry also shows
credit of allowance for depreciation of Rs.5,000. Therefore, accumulated depreciation is
Rs.15,000.
Total operating expenses are Rs.30,300 which is less than gross profit and shows net profit of
Rs.12,000 (42,300 – 30,300 = 12,000).
Total current assets Rs.38,500 and total fixed assets Rs.35,000. Hence, total assets Rs.73,500
(38,500 + 35,000 = 73,500) which is equal to the total equities of Rs.73,500 (total liabilities
Rs.10,500 and total owner’s equity Rs.63,000).

Page 252
Chapter # 11
Practice questions
Question # 1: 2007 Regular & Private – BIEK
The following balances are taken from the books of Shah & Sons for the year ending December
31, 2006.
Purchase Rs. 10,000
Purchase return Rs. 1,000
Purchase discount Rs. 500
Transport expense Rs. 1,200
Merchandise inventory opening Rs. 3,000
Merchandise inventory ending Rs. 2,000
REQUIRED
Prepare the Statement of Cost of Goods Sold.
Question # 2: 2014 Regular – BIEK

i) Merchandise inventory (opening) Rs.25,000
ii) Purchased merchandise Rs.133,000
iii) Merchandise inventory (ending) Rs.18,000
iv) Purchases returns Rs.500
v) Purchases discount Rs.1,000
vi) Transportation Rs.800
REQUIRED
Compute cost of goods sold.

The following closing entries were made by Raja Cloth House at the end of the current year
December 31.
1 Merchandise inventory Rs.55,000
Sales Rs.300,000
Purchase returns and allowances Rs.2,400
Purchase discount Rs.3,600
Income summary Rs.361,000
2 Income summary Rs.316,800
Merchandise inventory Rs.42,000
Sales return and allowances Rs.2,400
Sales discount Rs.3,600
Purchases Rs.180,000
Transport-in Rs.4,800
Selling expense Rs.48,000
General and administrative expenses Rs.36,000
REQUIRED
Use the information in the above closing entries and prepare an income statement for Raja Cloth
House.

The following is the post-closing Trial Balance of Alam Automobile Service.
ALAM AUTOMOBILE SERVICES
TRIAL BALANCE DECEMBER 31, 2001
Debit Credit
Cash 6,500

Page 253
Chapter # 11
Un-expired insurance 600

Office supplies 600
Testing equipment 7,200
Allowance for depreciation 100
Unearned service fees 3,000
Alam Capital 10,400
18,900 18,900
REQUIRED
Prepare Balance Sheet as on December 31, 2001.

Following are the post-closing account balances of the CHAIN STORES at December 31, 1999:
Cash Rs.5,000 Allowance for bad debts Rs.500
A/Receivable 12,000 Allow. for depreciation – Building 10,000
12% Note receivable 6,000 Allow. for depreciation – Equipment 4,000
Accrued interest on note receivable 360 Accounts payable 8,000
Building 50,000 10% Note payable 10,000
Equipment 40,000 Accrued interest on note payable 500
Prepaid expenses 800 Accrued salaries expense 800
Merchandise inventory 15,000 Unearned revenue 600
Mortgage payable 15,000
Long term loan 10,000
Tahir capital ?
REQUIRED
Prepare a classified Balance Sheet as of December 31, 1999.

The following balances were extracted from the ledger of a vegetable seller on March 31, 2001.
Cash Rs.2,000; Accounts receivable Rs.4,000; Rent security deposit Rs.6,000; Equipment
Rs.2,000; Accounts payable Rs.3,000; Malik Capital Rs. ?; Sales Rs.35,000; Purchases Rs.19,000;
Salaries expense Rs.6,000; Rent expense Rs.3,000; Miscellaneous expense Rs.1,500; Cartage-in
Rs.500.
REQUIRED
(i) Determine Malik Capital.
(ii) Prepare Income Statement for 3 month, ended March 31, 2001.
(iii) Balance Sheet as of March 31, 2001.

Following are the account balances of M/S. AK & Sons on June 30, 2010:
Cash in hand Rs.35,000, Furniture Rs.140,000, Cash at bank Rs.45,000, Capital Rs.428,000,
Accumulated depreciation (Furniture) Rs.23,000, Machinery Rs.220,000, Accumulated
depreciation (Machinery) Rs.35,000, Purchases Rs.135,000, Sales Rs.280,000, Accounts
receivable Rs.30,000, Accounts payable Rs.42,000, Purchase return & allowance Rs.4,000,
Allowance for bad debts Rs.6,000, Merchandise inventory (beginning) Rs.25,000, Merchandise
inventory (ending) Rs.87,000, Salaries expense Rs.45,000, Rent expense Rs.33,000, Advertising
expense Rs.22,000, Travelling expense Rs.32,000, Office supplies expense Rs.12,000, Utility
charges Rs.26,000, Bad debts expense Rs.2,000, Depreciation expense Rs.10,000, Sales return
and allowance Rs.6,000.

Page 254
Chapter # 11
REQUIRED
Prepare:
(i) Income Statement in report form.
(ii) Balance Sheet as on June 30, 2010.

Presented below the information taken from the accounting records of the FELLOWS CO. for the
year ended December 31, 1999.
Freight-in Rs.300; Rent expenses Rs.400; Merchandise inventory Jan.1, 1999 Rs.1,200; Salaries
expenses Rs.600; Merchandise inventory December 31, 1999 Rs.1,900; Sales Rs.6,600;
Purchases Rs.4,300; Sales returns and allowances Rs.200; Sales discount Rs.400; Purchases
return and allowances Rs.300.
Date for Adjustments at December 31, 1999:
a) Make provision for bad debts at 2% of net sales.
b) Accrued salaries Rs.200.
c) Prepaid rent Rs.100.
REQUIRED
(i) Make the Adjusting Entries in the General Journal.
(ii) Prepare a Multi-Step Income Statement for the year ended December 31, 1999.

The following is the Pre-Closing Trial Balance of Kamran & Co. prepared on December 31, 1990:
Cash 10,000 Sales 75,000
Merchandise inventory (1.1.90) 8,000 Purchase returns 500
Office equipment 30,000 Kamran Capital 60,000
Purchases 52,000 Allowance for depreciation -
Salaries expense 5,500 Office equipment 2,500
Rent expense 5,000 Accounts payable 17,000
Office supplies 500
Insurance prepaid 1,200
Sales returns 500
Furniture 17,300
Kamran Drawings 5,000
Total 155,000 155,000
Data for Adjustments on December 31, 1990:
(i) Merchandise inventory was valued at Rs.10,000.
(ii) Salaries Payable Rs.500.
(iii) Accrued rent Rs.1,000.
(iv) Office supplies unused Rs.200.
(v) Insurance expired Rs.800.
(vi) Depreciation on office equipment was estimated at Rs.2,500.
REQUIRED
a) Prepare Income Statement in classified report form for the year ended December 31,
1990.
b) Prepare Balance Sheet in classified account form as of December 31, 1990.

Page 255
Chapter # 11
Question # 10: 2014 Private – BIEK

The following balances have been taken from the ledger of Raza & Co. on December 31, 2013:
Debit Balance Credit Balance
Cash Rs.60,000 Accounts payable Rs.38,000
Accounts receivable Rs.40,000 Notes payable Rs.32,000
Merchandise inventory Rs.80,000 Unearned rent Rs.32,000
Prepaid insurance Rs.26,000 Sales Rs.220,000
Office equipment Rs.50,000 Accumulated depreciation Rs.22,000
Purchase Rs.190,000 Raza’s Capital Rs.157,000
Salaries expense Rs.30,000
Sales return Rs.25,000
Rs.501,000 Rs.501,000
(i) Merchandise inventory Rs.80,000.
(ii) Insurance expired Rs.4,000.
(iii) Bad debts estimated Rs.600.
(iv) Outstanding salaries Rs.4,000.
(v) Depreciation on office equipment for the year Rs.3,000.
(vi) Rent earned Rs.8,000.
REQUIRED
(a) Income statement for the year ended December 31, 2013.
(b) Balance sheet as on December 31, 2013.

Balance taken from the ledger of Haji Tabba, a sole trader, on June 30, 1992 before adjustments
were as follows:
Debit Balances:
Cash Rs.1,800; Accounts receivable Rs.2,850; Merchandise inventory (1.7.91) Rs.1,200; Office
equipment Rs.900; Purchases Rs.3,000; Prepaid shop rent Rs.1,200; Carriage in Rs.225; Salaries
expense Rs.2,100; Insurance expense Rs.450; Sales discount Rs.75.
Credit Balances:
Accounts payable Rs.2,250; Haji Tabba capital Rs.4,725; Sales revenue Rs.6,000; Purchase
discount Rs.105; Commission income Rs.600; Allowance for bad debts Rs.120.
Supplementary Data for Adjustments on June 30, 1992
(i) Salaries payable Rs.285.
(ii) Taxes payable Rs.39.
(iii) Shop rent prepaid Rs.375.
(iv) Insurance unexpired Rs.90.
(v) Commission receivable Rs.66.
(vi) Merchandise inventory was valued at Rs.1,950 on June 30, 1992.
(vii) Bad debts expense was estimated at Rs.150.
(viii) Allowance for depreciation on office equipment was estimated at Rs.90.
REQUIRED
a) Prepare Income Statement for the year ended June 30, 1992. (Group the expense and
revenue data properly and give complete title to the statement).
b) Prepare Balance Sheet as of June 30, 1992 in classified form, giving complete title.
(Note: You may prepare the two financial statements either in account form or report form).

The following have been taken from the pre-closing Trial Balance prepared from the ledger of
Anwar & Sons on December 31, 1997:-

Page 256
Chapter # 11
Debit Balance:
Sales equipment Rs.27,000; Prepaid office rent Rs.9,000; Anwar & Sons drawings Rs.3,000;
Sales returns & allowances Rs.3,000; Purchases Rs.66,000; Transportation in Rs.6,000; Office
salaries expense Rs.18,000; Sales salaries expenses Rs.24,000.
Credit Balances:
Accounts payable Rs.24,000; Sales Rs.120,000; Purchase returns and allowances Rs.4,500;
Purchase discount Rs.5,400; Allowance for bad debts Rs.6,000; Allowance for depreciation on
sales equipment Rs.9,000; Anwar & Sons Capital Rs.53,100.
Data for Adjustment and Correction on December 31, 1994:
(1) Office salaries expense outstanding Rs.5,000.
(2) Sales salaries were prepaid to the extent of Rs.1,400.
(3) Merchandise inventory on December 31, 1997 was valued at Rs.25,000.
(4) Provide depreciation on equipment Rs.2,500.
(5) Prepaid office rent expired Rs.4,000.
(1) Increase allowance for bad debts by Rs.2,000.
REQUIRED
a) Prepare INCOME STATEMENT for the period ended on December 31, 1997, grouping
properly revenue and expense items.
b) Prepare Classified BALANCE SHEET as of December 31, 1992.
c) Prepare cost of goods sold account

The following balances have been taken from the pre-closing Trial Balance, prepared from the
ledger of Ghulam Ali & Sons. On Dec 31, 2002:-
Debit Balances:-
Cash Rs.43,000; Accounts receivable Rs.145,000; Merchandise inventory (1-1-2002) Rs.50,000;
Office salaries expense Rs.36,000; Insurance expense Rs.21,000; Supplies Rs.6,000; Furniture
Rs.30,000; Drawings Rs.17,600; Purchases Rs.121,000; Total = Rs.469,600.
Credit Balances:-
Allowance for depreciation furniture Rs.6,000; Accounts payable Rs.54,000; Capital Ghulam Ali
Rs.140,000; Sales Rs.233,600; Rent revenue Rs.36,000; Total = Rs.469,600.
Supplementary Data for Adjustments:
(a) Goods costing Rs.2,000 taken by Ghulam Ali for personal use were not recorded.
(b) Unexpired insurance Rs.7,000.
(c) Salaries expense for the year Rs.40,000.
(d) Merchandise inventory closing Rs.32,000.
(e) Depreciation on Furniture for the year Rs.3,000.
(f) Office supplies unused Rs.1,700.
(g) Unearned rent Rs.5,000.
REQUIRED
a) Prepare Income Statement for the year ended Dec 31, 2002.
b) Prepare classified Balance Sheet as of Dec 31, 2002.

The following balances were taken from the ledger of Khurshid & Sons on Dec 31, 2002.
Debits Credits
Cash 30,000
Office supplies 2,000
Merchandise inventory (1.1.2002) 10,000

Page 257
Chapter # 11

Khurshid’s Capital 40,500
Khurshid’s Drawings 500
Sales 40,000
Purchases 18,000
Rent expense 5,000
Advertisement expense 7,000
95,500 95,500
Adjustment Data:
(i) Merchandise inventory Dec 31, 2002 Rs.7,000.
(ii) Estimate allowance for bad debts Rs.1,000.
(iii) Estimate allowance for depreciation on office furniture @ 20%.
(iv) Office supplies unused Rs.300.
(v) Accrued rent Rs.2,000.
REQUIRED
(i) Prepare Income Statement for the year ended Dec. 31, 2002.
(ii) Prepare classified Balance Sheet as of Dec 31, 2002.

The following have been taken from the pre-closing Trial Balance prepared from the ledger of
Mr. Bazil on Dec. 31, 2003.
Debit Balance
Cash Rs. 48,000
Accounts receivable Rs. 140,000
Merchandise inventory (1.1.2003) Rs. 70,000
Office supplies Rs. 5,000
Furniture Rs. 50,000
Purchases Rs. 200,000
Salaries expenses Rs. 3,500
Prepaid insurance Rs. 2,000
Rent expenses Rs. 4,200
Total Rs. 522,700
Credit Balance
Accounts payable Rs. 22,700
Sales Rs. 340,000
Bazil – Capital Rs. 150,000
Total 522,700
Data for Adjustments:
(a) Insurance expired by Rs.1,500.
(b) Depreciation expenses on furniture Rs.5,000.
(c) Salaries expenses for the year Rs.4,200.
(d) Rent expense for the year Rs.3,500.
(e) Office supplies on hand Rs.2,000.
(f) Merchandise inventory on Dec. 31, 2003 Rs.80,000.
REQUIRED
(ii) Prepare classified Balance Sheet as of Dec. 31, 2003.

Page 258
Chapter # 11

The following balances were taken from the pre-closing Trial Balance of Fatima & Co. prepared
on Dec. 31, 2004.
Debit Balances:
Cash Rs.6,400; Accounts receivable Rs.40,000; Merchandise inventory (Jan.01) Rs.32,000; Sales
equipment Rs.30,000; Prepaid insurance Rs.800; Sales supplies Rs.1,200; Purchases Rs.100,000;
Sales salaries expenses Rs.9,600; Office salary expense Rs.4,000; Advertising expense Rs.4,000
(Total Rs.228,000).
Credit Balances:
Sales Rs.156,000; Accounts payable Rs.24,000; Fatima capital Rs.48,000 (Total Rs.228,000).
Data for Adjustments on December 31:
(i) Merchandise inventory was valued at Rs.30,000.
(ii) Sales supplies were Rs.200.
(iii) Insurance expired Rs.400.
(iv) Unpaid sales salaries were Rs.500.
(v) Depreciation on fixed assets was estimated Rs.5,000.
(vi) Bad debts on accounts receivable Rs.3,000.
REQUIRED
(ii) Prepare Report form balance Sheet as of Dec. 31, 2004.

The following were taken from the ledgers of Abbas & Co. on December 31, 2005:
Debit Balance
Cash Rs. 55,000
Accounts receivable Rs. 150,000
Merchandise inventory (01/01/05) Rs. 80,000
Office supplies Rs. 8,000
Furniture Rs. 65,000
Purchases Rs. 250,000
Salaries expenses Rs. 5,000
Prepaid insurance Rs. 5,000
Rent expenses Rs. 5,000
Total Rs. 623,000
Credit Balance
Accounts payable Rs. 30,000
Sales Rs. 400,000
Abbas Capital Rs. 178,000
Total 623,000
(a) Insurance expired by Rs.2,500.
(b) Depreciation expenses on furniture Rs.6,500.
(c) Salaries expenses for the year Rs.7,000.
(d) Rent expense for the year Rs.4,000.
(e) Office supplies on hand Rs.3,000.
(f) Merchandise inventory on December 31, 2003 Rs.85,000.
REQUIRED
(1) Prepare Income Statement for the year ended December 31,20 05.
(2) Prepare classified Balance Sheet as of December 31, 2005.

Page 259
Chapter # 11

The following balances have been taken from the pre-closing trial balance of Khursheed Zaidi on
31.12.2007:
Debit Balances:
Office equipment Rs.40,000; Purchases Rs.120,000; Machine Rs.100,000; Salaries expense
Rs.9,000; Wages expense Rs.4,000; Packing charges Rs.10,000; Prepaid rent Rs.10,000;
Khursheed Zaidi’s Drawings Rs.2,000; Transportation-in Rs.2,000; Sales returns Rs.20,000.
Credit Balances:
Sales revenue Rs.200,000; Purchase returns Rs.2,000; Accumulated depreciation on machine
Rs.10,000; Accounts payable Rs.5,000; Bank loan Rs.20,000; Khursheed Zaidi’s Capital
Rs.145,000.
Supplementary Data for Adjustments:
(i) Outstanding salaries Rs.6,500.
(ii) Rent expense for the year Rs.8,000.
(iii) Provide bead debts @ 2% of net sales.
(iv) Depreciation on fixed assets at 10% per annum.
(v) Merchandise inventory on 31.12.2007, Rs.20,000.
REQUIRED
a) Prepare Income Statement for the year ended 31.12.2007.
b) Prepare classified Balance Sheet on 31.12.2007.

Ledger balances and adjustment data for Rajput Company at the end of annual accounting
period, December 31, 2008 are as follows:
Debit Balances:
Cash Rs.4,000; Accounts receivable Rs.8,000; Merchandise inventory – January 1 Rs.5,000;
Unexpired insurance Rs.3,000; Furniture Rs.10,000; Drawings Rajput Rs.6,000; Purchases
Rs.40,000; Salaries expenses Rs.15,000; Rent expenses Rs.2,000.
Credit Balances:
Accounts payable Rs.7,000; Unearned commission Rs.3,000; Allowance for depreciation
Rs.3,000; Capital Rajput Rs.30,000; Sales Rs.50,000.
Adjustment Data:
(i) Merchandise inventory at December 31, Rs.6,000.
(ii) Insurance expired by Rs.2,000.
(iii) Bad debts estimated @ 2% of sales.
(iv) Depreciation estimated @ 10% of the cost of furniture.
(v) Accrued salaries Rs.1,000.
(vi) Unearned commission Rs.1,000.
REQUIRED
Prepare a multi-step Income Statement & a classified Balance Sheet for December 31, 2008.

Balances taken from the ledger of Maaz a sole trader on December 31, 2009 before adjustments
are as under:
Debits Credits
Accounts receivable 20,000 Notes payable 12,000
Merchandise inventory 60,000 Unearned rent 12,000
Prepaid insurance 6,000 Sales 200,000
Office equipment 30,000 Accumulated depreciation -

Page 260
Chapter # 11
Purchases 170,000 (Office equipment) 2,000

Salaries expense 10,000 Maaz Capital 97,000
Sales return 5,000
155,000 155,000
(i) Merchandise inventory on December 31, 2009 was valued at Rs.80,000.
(ii) Insurance was expired Rs.4,000.
(iii) Bad debts expense estimated Rs.600.
(iv) Outstanding salaries amounting to Rs.4,000.
(v) Depreciation expense on equipment for the year Rs.3,000.
(vi) Rent earned Rs.8,000.
REQUIRED
Prepare a multi-step Income Statement & a classified Balance Sheet for December 31, 2009.

The balances taken from the pre-closing trial balance of Usra & Co. as of December 31, 2010 are
as follows:
Debit Balances:
Cash Rs.40,000, Accounts receivable Rs.35,000, Merchandise inventory (opening) Rs.30,000,
Unexpired insurance Rs.20,000, Purchases Rs.130,000, Transportation – in Rs.5,000, Sales
discount Rs.5,000, Sales equipment Rs.40,000, Drawings Rs.12,000, Rent expense Rs.25,000.
Credit Balances:
Accounts payable Rs.25,000, Sales revenue Rs.105,000, Commission income Rs.7,000, Purchase
return Rs.5,000, Long-term loan Rs.80,000, Capital Rs.120,000.
Data for Adjustments on December 31, 2010:
(i) Merchandise inventory at December 31, 2010 Rs.60,000.
(ii) Unpaid rent Rs.2,000.
(iii) Insurance expired Rs.12,000.
(iv) Depreciation on sales equipment estimated at Rs.4,000.
REQUIRED
(a) Prepare income statement for the year ended December 31, 2010.
(b) Prepare balance sheet as of December 31, 2010 in classified form.

The following balances of Qasim & Co. on December 31, 2013 was as under:
ACCOUNT TITLE DEBIT CREDIT
Cash 40,000
Merchandise inventory ending 18,000
Notes payable 20,000
Unearned commission 10,000
Capital – Qasim 150,000
Sales 120,000
Cost of goods sold ?????
Office supplies 8,000
Rent expenses 3,000
Supplementary Data for Adjustments for December 31, 2013:
a) Office supplies used Rs.5,000.
b) Accrued salaries Rs.4,000.

Page 261
Chapter # 11
c) Commission earned Rs.7,000.

d) Bad debt estimated 2% on sales.
e) Insurance expired during the year Rs.6,000
REQUIRED
(a) Income statement for the year ended December 31, 2013.
(b) Balance sheet as of December 31, 2013.

The following balances were extracted from the books of Yasin Brothers for the financial year
ending December 31, 1998:-
Cash Rs.49,194; Accounts receivable Rs.15,360; Merchandise inventory (opening) Rs.24,400;
Sales equipment Rs.20,780; Purchases Rs.93,800; Salaries expense Rs.18,000; Advertising
expense Rs.10,000; Insurance expense Rs.6,000; Sales discount Rs.3,198; Sales revenue
Rs.230,000; Purchase return Rs.3,200; Accounts payable Rs.17,695; Commission income
Rs.2,000; Capital Yasin Rs.85,312; Yasin – Drawings Rs.6,475; Land Rs.82,000; Building rental
expense Rs.9,000.
Supplementary Data for Adjustment:
(i) Accrued salary Rs.5,000.
(ii) Prepaid advertising Rs.4,000.
(iii) Merchandise inventory (closing) Rs.18,000.
(iv) Commission income receivable Rs.4,300.
(v) Depreciation on fixed asset @ 20%.
(vi) Bad debts expense was estimated at Rs.768.
REQUIRED
a) Prepare Income Statement for the year ending December 31, 1998.
b) Prepare classified Balance Sheet.

The following balanecs were extracted from the Ledger of Mr. Shakir on December 31, 2001,
before the closing of books:-
Cash Rs.8,500/-; Supplies Rs.1,000/-; Accounts receivable Rs.9,000/-; Allowance for bad debts
Rs.1,500/-; Merchandsie inventory (January 1, 2001) Rs.7,000/-; Prepaid insurance Rs.600/-;
Furniture Rs.5,000/-; Notes payable Rs.4,500/-; Shakir’s Capital Rs.16,600/-; Shakir-Drawings
Rs.2,000/-; Sales Rs.50,000/-; Sales discount Rs.500/-; Purchases Rs.30,000/-; Salaries expense
Rs.8,000/-; Rent expense Rs.6,000/-; Commission earned Rs.5,000/-.
Supplementary Data for Adjustments on December 31, 2001:
(i) Unpaid salaries Rs.3,000/-.
(ii) Prepaid rent Rs.1,000/-.
(iii) Unused sales supplies Rs.400/-.
(iv) Insurance was prepaid to the extent of Rs.200/-.
(v) Commission earned Rs.4,000/-.
(vi) Merchandise inventory was valued on December 31, 2001 at Rs.6,000/-.
REQUIRED
a) Prepare Income Statement for the year ended December 31, 2001, and
b) Prepare Balance Sheet as on December 31, 2001.

The following unadjusted balances are obtained from the ledger of a trader “EZ” for the 3
months ended on Mach 31, 2007.
Cash Rs.5,000; Accounts receivable Rs.27,000; Merchandise inventory Rs.30,000; Unexpired
insurance Rs.3,000; Sales Rs.105,000; Purchases Rs.60,000; Sales return & allowances Rs.4,000;

Page 262
Chapter # 11
Purchase discount Rs.2,000; Accounts payable Rs.12,000; “EZ” Drawing Rs.15,000; Unearned
rent Rs.12,000; General expenses Rs.2,000; Salaries expenses Rs.15,000; “EZ” Capital ?
Adjustments:
(i) Merchandise inventory valued at Rs.25,000.
(ii) Insurance expired 1/3.
(iii) Unearned rent 2/3.
(iv) Accrued salaries Rs.3,000.
REQUIRED
Prepare Income Statement and a Balance Sheet for the first quarter ended March 31, 2007.

Following is the pre – closing trial balance of Ishaque and Company for the year ended
December 31, 2011:
Accounts Titles Account No. Debit Credit
Cash 40,000
Merchandise inventory 1.1.2011 42,000
Notes payable 20,000
Unearned commission 3,500
Capital Ishaque 150,000
Drawings Ishaque 12,000
Sales discount 3,000
Purchases 120,000
Carriage – in 8,000
Utility expense 25,000
Rent expense 45,000
Total 475,500 475,500
(i) Merchandise inventory (31 – 12 – 2011) Rs.60,000.
(ii) Bad debts expense @ 5% of net sales.
(iii) Insurance is prepaid up to the extent of Rs.1,500.
(iv) Unearned commission Rs.1,000.
(v) Goods costing Rs.1,000 were taken by Mr. Ishaque for private use were overlooked.
REQUIRED
(i) Prepare adjusting entries in General Journal and prepare cost of goods sold account.
(i) Prepare income statement for the year ended December 31, 2011.
(ii) Prepare classified balance sheet as of December 31, 2011.

The following is the pre – closing trial balance of Syed Sons for the year ended Dec. 31, 2012:
Debit Balance:
Cash Rs.15,000; Accounts receivable Rs.10,000; Merchandise inventory (beginning) Rs.6,500;
Prepaid shop rent Rs.4,000; Sales equipment Rs.10,000; Purchases Rs.20,000; Office supplies
expense Rs.2,000; Salaries expense Rs.14,000; Miscellaneous expense Rs.1,500; Sales return and
allowance Rs.2,000. (Total Rs.85,000).

Page 263
Chapter # 11
Credit Balance:
Sales revenue Rs.45,000; Purchase discount Rs.1,500; Commission income Rs.4,000; Accounts
payable Rs.4,000; Allowance for bad debts Rs.500; Syed’s capital Rs.30,000. (Total Rs.85,000).
(i) Prepaid shop rent was Rs.1,000.
(ii) Office supplies unused Rs.500.
(iii) Allowance for bad debts was increased by Rs.300.
(iv) Outstanding salaries Rs.3,000.
(v) Depreciation on sales equipment was estimated at Rs.1,500.
(vi) Commission unearned Rs.1,000.
(vii) Merchandise inventory was valued on December 31, 2012 Rs.3,000.
REQUIRED
a) Prepare income statement for the year ended December 31, 2012.
b) Prepare balance sheet as of December 31, 2012 in classified form.

The following balances have been taken from the pre-closing trial balance prepared from the
ledger of Edijii Traders on December 31, 1992:-
Debit Balances:
Prepaid office rent Rs.2,000; Sales equipment Rs.8,500; Edijii drawings Rs.1,000; Sales returns
& allowances Rs.800; Purchases Rs.20,000; Transportation in Rs.2,000; Office salaries expense
Rs.5,000; Sales salaries expenses Rs.6,000.
Credit Balances:
Allowance for bad debts Rs.1,500; Allowance for depreciation on sales equipment Rs.2,500;
Accounts payable Rs.6,500; Edijii capital Rs.12,300; Sales Rs.40,000; Purchase returns &
allowances Rs.1,400; Purchase discount Rs.1,600.
Data for Adjustment on December 31, 1992
(a) Increase allowance for bad debts by Rs.500.
(b) Prepaid office rent expired Rs.800.
(c) Provide depreciation on sales equipment for the year Rs.1,000.
(d) Office salaries expense outstanding Rs.900.
(e) Sales salaries were prepaid to the extent of Rs.800.
(f) Merchandise inventory on December 31, 1992 was valued at Rs.6,200.
(g) A purchase of merchandise of Rs.500 was wrongly charged to sales Equipment account.
(h) Salary to a sales person for the last week of December Rs.400 was paid by the owner
from business cash, which was mistakenly debited to his Drawing account.
REQUIRED
(a) Prepare INCOME STATEMENT for the period ended on December 31, 1992, grouping
properly revenues and expenses.
(b) Prepare Classified BALANCE SHEET as of December 31, 1992.
(c) Prepare cost of goods sold account

The following balances have been taken from the pre-closing Trial Balance prepared from the
ledger of Sherdil Traders on December 31, 1994:-
Debit Balances:
Sales equipment Rs.27,000; Prepaid office rent Rs.9,000; Sherdil Drawings Rs.3,000; Sales
returns and allowances Rs.3,000; Purchases Rs.66,000; Transportation in Rs.6,000; Office
salaries expense Rs.18,000; Sales salaries expense Rs.24,000.

Page 264
Chapter # 11
Credit Balances:
Accounts payable Rs.24,000; Sales Rs.120,000; Purchase returns and allowances Rs.4,500;
Purchase discount Rs.5,400; Allowance for bad debts Rs.6,000; Allowance for depreciation on
sales equipment Rs.9,000; Sherdil Capital Rs.53,100.
Data for Adjustment and Correction on December 31, 1994:
(a) Office salaries expense outstanding Rs.3,000.
(b) Sales salaries were prepaid to the extent of Rs.2,400.
(c) Merchandise inventory on December 31, 1994 was valued at Rs.24,000.
(d) Provide depreciation on sales equipment for the year Rs.4,500.
(e) Prepaid office rent expired Rs.3,000.
(f) Increase allowance for bad debts by Rs.1,800.
(g) An item of sales salaries of Rs.2,000 was wrongly debited to office salaries expense account.
(h) An item office salaries expense of Rs.1,000 was wrongly debited to sales salaries expense.
(i) Defective goods worth Rs.500 returned by a customer were wrongly debited to purchase
account.
(j) An item of repairs of sales equipment of Rs.500 was wrongly debited to sales equipment
account.
(k) Drawing of Rs.500 for personal use of Sherdil was wrongly debited to office salaries
expense.
(l) An item of purchase returns of Rs.1,000 was wrongly credited to sales account.
REQUIRED
a) Prepare INCOME STATEMENT for the year ended on December 31, 1994, grouping
properly revenue and expense items.
b) Prepare classified BALANCE SHEET as of December 31, 1994.
c) Prepare cost of goods sold account

Following are the trial balance of Ahmed and Co. as of December 31, 2011:
Debit Balance:
Cash Rs.12,400; Merchandise inventory Rs.87,000; Accounts receivable Rs.56,000; Office
supplies Rs.1,600; Unexpired insurance Rs.4,200; Land Rs.68,000; Building Rs.164,000; Office
equipment Rs.42,600; Ahmed’s drawings Rs.20,000; Sales discount Rs.7,000; Cost of goods sold
Rs.316,600; Sales salaries expense Rs.55,200; Advertising expense Rs.12,200; Office salaries
expense Rs.44,600; Travelling expense Rs.15,600.
Credit Balance:
Accounts payable Rs.38,000; Ahmed’s capital Rs.322,400; Sales Rs.504,000; Allowance for
depreciation (Equipment) Rs.10,600; Allowance for depreciation (Building) Rs.32,000.
Data for Adjustment at December 31:
(a) Office supplies on hand Rs.500.
(b) Unexpired insurance Rs.3,000.
(c) Depreciation for the year on building Rs.4,000; office equipment Rs.1,800.
(d) Unpaid salaries: sales salaries Rs.3,000; office salaries Rs.2,000.
REQUIRED
(i) Prepare income statement for the year ended December 31, 2011.
(ii) Prepare balance sheet as on December 31, 2011.
(iii) Prepare adjusting entries in General Journal.

Page 265
Chapter # 11

Accounts’ balances and data for adjustment of Zulfiqar & Co. at the end of accounting period,
June 30, 2012 are as follows:
Debit Balances:
Cash Rs.59,500/-, Accounts receivable Rs.73,000/-, Merchandise inventory July 1, 2011
Rs.198,000/-, Prepaid insurance Rs.24,000/-, Furniture Rs.45,000/-, Drawings Rs.50,000/-,
Purchases Rs.284,000/-,
Salaries expense Rs.58,000/-, Rent expense Rs.32,000/-.
Credit Balances:
Notes payable Rs.20,000/-, Unearned commission Rs.8,500/-, Accumulated depreciation
(Furniture) Rs.9,000/-, Zulfiqar Capital Rs.400,000/-, Sales Rs.386,000/-.
Data for Adjustment on June 30, 2012:
(c) Cost of goods sold Rs.242,000/-.
(d) Unearned commission Rs.6,000/-.
(e) Salaries expense for the year Rs.72,000/-.
(f) Accumulated depreciation Rs.13,500/-.
(g) Prepaid insurance Rs.16,000/-.
REQUIRED
Prepare Income Statement and Balance Sheet.

Page 266
Chapter # 11
MULTIPLE CHOICE QUESTIONS (MCQS)

1) Which of the following financial statements is also known as a statement of financial
position?
a) Balance sheet b) Income statement
c) Statement of cash flow d) Bank statement
2) Which of the following shows the details and results of the company's profit-related
activities for a period of time?
c) Statement of cash flow d) Bank reconciliation statement
3) The body of a balance sheet consists of how many distinct sections?

a) Two b) Three c) Four d) Varying numbers
4) A business has the following items extracted from its trial balance:
Opening inventory Rs.10,000 Purchases Rs.25,000
Sales Rs.40,000 Expenses Rs.10,000
In addition, its ending inventory is valued at Rs.15,000.
What is the correct figure for the business gross profit?
a) Rs.20,000 b) Rs.10,000 c) Rs.15,000 d) Nil
5) A business has the following items in its accounts at its year end 31 December 2001:
Opening inventory Rs.5,000 Closing inventory Rs.10,000
Purchases Rs.90,000 Purchase returns Rs.2,000
What is the correct figure for cost of goods sold in 2001?
a) Rs.85,000 b) Rs.83,000 c) Rs.95,000 d) Rs.93,000
6) If Rent expenses Rs.5,000, Insurance expenses Rs.4,000, Prepaid rent expenses

Rs.3,000. What amount of total expenses will be shown in income statement?
a) Rs.9,000 b) Rs.12,000 c) Rs.8,000 d) Rs.6,000
7) Net profit is computed in:

c) Cash flow statement d) Bank reconciliation statement
8) In income statement, gross profit is always equal to:

a) Sales – Expenses b) Income – Expenses
c) Sales – Cost of goods sold d) Sales – Selling expenses
9) Opening inventory + Purchases – Ending inventory =

a) Amount of sales b) Gross profit c) Cost of goods sold d) Net income
10) The expenses related to the main operations of the business are referred to as:
a) Administration expenses b) Non – administration expenses
c) Selling expenses d) Operating expenses
11) The expenses paid out of gross profit are:

a) General expenses b) Financial expenses
c) Selling expenses d) All of the above

Page 267
Chapter # 11
12) Gross profit Rs.50,000; Net profit Rs.42,000; Sales Rs.250,000. Amount of operating
expense is:
a) Rs.92,000 b) Rs.62,500 c) Rs.300,000 d) Rs.8,000
13) If commission received during the year amounts to Rs.20,000 and commission
accrued at year end is Rs.5,000, what is the amount of commission for the year?
a) Rs.20,000 b) Rs.5,000 c) Rs.15,000 d) Rs.25,000
14) Which of the following is shown in income statement?

a) Prepaid salaries b) Accrued salaries c) Salaries expense d) Salaries paid
15) If salaries paid during the year amounts to Rs.9,000 and salaries accrued at the
year-end are Rs.3,000. The amount of salaries expense for the year will be:
a) Rs.9,000 b) Rs.3,000 c) Rs.6,000 d) Rs.12,000
16) Which of the following is correct statement?

a) Profit does not change owner’s equity b) Profit increases owner’s equity
c) Profit decreases owner’s equity d) Profit decreases liabilities
17) This is not shown in income statement:

a) Cash b) Salaries expense c) Sales d) Sales return
18) Cost of goods sold is a part of:

a) Equities b) Balance sheet
c) Statement of retained earnings d) Income statement
19) The owner’s equity in the business arises from these two sources:
a) Net income and cash b) Net profit and drawings
c) Net profit and additional investment d) All of these
20) Gross profit is:

a) Excess of sales revenue over cost of goods sold
b) Cost of goods sold plus opening stock
c) Sales less ending stock
d) Net profit less expenses
21) Supplies on hand on Jan. 1, Rs.140, supplies purchased during the period Rs.530,
supplies consumed Rs.480, supplies at the end were:
a) Rs.910 b) Rs.760 c) Rs.670 d) Rs.190
22) When gross profit is zero, it implies that:

a) Gross profit < Cost of goods sold b) Cost of goods sold > Gross profit
c) Net sales = Gross profit d) Net sales = Cost of goods sold
23) If sales return is debited to purchase account erroneously by Rs.2,000, the net
income will show:
a) Increase by Rs.2,000 b) Decrease by Rs.2,000
c) No effect d) Decrease by Rs.1,000

Page 268
Chapter # 11
24) This is not a balance sheet item:

a) Allowance for bad debts b) Unearned fee
c) Bills receivable d) Depreciation expense
25) This account is shown in Income Statement:

a) Unearned rent b) Prepaid rent c) Rent payable d) Rent income
26) The item shown in both income statement and balance sheet is:
a) Merchandise inventory (beginning) b) Allowance for bad debts
c) Depreciation expense d) Merchandise inventory (ending)
27) While calculating a gross profit, the following account is irrelevant:

a) Transportation in b) Sales
c) Delivery expense d) Merchandise inventory
28) This is shown in current assets on balance sheet:

a) Unearned rent b) Rent income c) Prepaid rent d) Rent expense
29) This statement is not necessarily prepared at the end of financial year:
a) Income statement b) Balance sheet
c) Bank reconciliation statement d) Post – closing trial balance
30) Which of the following would not be included on a balance sheet?

a) Capital b) Accounts payable c) Sales d) Cash
31) At the end of the current accounting period, Johnson Company failed to record
utilities consumed during the period. Johnson will be billed for the utilities during
the next accounting period. As a result, current period assets, liabilities, owner’s
equity and income respectively are:
a) Overstated, overstated, correct, correct
b) Correct, understated, overstated, overstated
c) Overstated, understated, overstated, overstated
d) Overstated, understated, correct, correct
32) Given figures showing:

Sales Rs.8,200; Opening inventory Rs.1,300; Closing inventory Rs.900; Purchases
Rs6,400; Carriage inwards Rs.200; the cost of goods sold figure is:
a) Rs.6,800 b) Rs.6,200 c) Rs.7,000 d) Another figure
33) At the balance sheet date the balance of allowance for depreciation account is:
a) Transferred to depreciation expense account
b) Transferred to liability account
c) Simply deducted from the asset in the balance sheet
d) Transferred to the asset account
34) In the trial balance, the balance on the allowance for depreciation account is:
a) Shown as a credit item
b) Not shown, as it is part of depreciation expense
c) Shown as a debit item
d) Sometimes shown as a credit, sometimes as a debit

Page 269
Chapter # 11
35) If the gross profit is Rs.5,000; and the net profit is 25% of the gross profit, then the
operating expenses are:
a) Rs.1,250 b) Rs.3,750 c) Rs.4,150 d) Rs.6,250
36) A fixed asset is reported on balance sheet at its:

a) Replacement value b) Scrap value
c) Book value d) Market value
37) This financial statement is based on the accounting equation:

c) Statement of retained earnings d) Bank reconciliation statement
38) Sales are equal to:

a) Cost of goods sold – Gross profit b) Cost of goods sold + Gross profit
c) Cost of goods sold – Net profit d) Cost of goods sold + Net profit
39) In case of loss, revenue is always:

a) More than cost b) Less than cost
c) Equal to cost d) None of these

Page 270

Chapter # 11: Financial Statements

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter # 11: Financial Statements

Uploaded by

Copyright:

Available Formats

Chapter # 11

www.a4accounting.weebly.com Sameer Hussain

COST OF GOODS SOLD

Format of Statement of Cost of Goods Sold:

ILLUSTRATION # 1: 1991 Regular & Private – BIEK

Sameer Hussain www.a4accounting.weebly.com

COST OF GOODS SOLD ACCOUNT

www.a4accounting.weebly.com Sameer Hussain

SINGLE – STEP INCOME STATEMENT

Format of Single – Step Income Statement:

Sameer Hussain www.a4accounting.weebly.com

MULTI – STEP INCOME STATEMENT

www.a4accounting.weebly.com Sameer Hussain

ELEMENTS OF MULTI – STEP INCOME STATEMENT

The value of sales made during an accounting period, reduced by any

Calculated by the formula beginning inventory plus net purchases less

Purchases shows the buying of merchandise for resale purpose.

The value of a company’s inventory purchases during an accounting

The delivery cost associated with getting purchased inventory items

The compensation earned by hourly-paid employees during the

In a retail environment, calculated by the formula beginning inventory

Sameer Hussain www.a4accounting.weebly.com

Costs associated with the regular business activities of an entity.

Cost incurred to sell (e.g., advertising, salesperson commission) or

All expenses incurred in connection with performing general and

The cost of delivering products to the buyer. Freight-out is classified as

The result of cost of goods sold and operating expenses exceeding

In a business, the result of expenses and losses exceeding revenues and

www.a4accounting.weebly.com Sameer Hussain

Format of Multi – Step Income Statement:

Sameer Hussain www.a4accounting.weebly.com

ILLUSTRATION # 4: 1997 Regular & Private – BIEK

www.a4accounting.weebly.com Sameer Hussain

Sameer Hussain www.a4accounting.weebly.com

SAEED & CO.

www.a4accounting.weebly.com Sameer Hussain

INCOME STATEMENT OF SERVICING BUSINESS

Format of Single – Step Income Statement:

Sameer Hussain www.a4accounting.weebly.com

www.a4accounting.weebly.com Sameer Hussain

Assets = Liabilities + Owner’s Equity

Current Assets + Current Liabilities + Capital +

REPORT FORM BALANCE SHEET

ACCOUNT FORM BALANCE SHEET

Sameer Hussain www.a4accounting.weebly.com

Format of Report Form Balance Sheet:

Intangible Fixed Assets:

www.a4accounting.weebly.com Sameer Hussain

Long Term Liabilities:

Format of Account Form Balance Sheet:

Sameer Hussain www.a4accounting.weebly.com

MISSING FIGURE IN TRIAL BALANCE

ILLUSTRATION # 8: 1997 Regular & Private – BIEK

www.a4accounting.weebly.com Sameer Hussain

Sameer Hussain www.a4accounting.weebly.com

3) Rent expired during the period Rs.1,000.

Total assets 110,000 Total equities 110,000

www.a4accounting.weebly.com Sameer Hussain

 Bad debts reduces accounts receivable by Rs.3,000.

ILLUSTRATION # 10: 1990 Regular & Private – BIEK

AL-MUKHTAR & COMPANY

Sameer Hussain www.a4accounting.weebly.com

Prepaid advertising 4,000 Total liabilities 4,200