East West University

Department of Business Administration

Question 1:
When today’s university students are asked about their long-term career choice, a surprisingly large
number respond that they wish to someday own and manage their own business. In fact, the aspiration
to start a business, to be an entrepreneur, is nearly universal. It is widely acknowledged that a degree in
accounting offers many advantages to be an entrepreneur. In fact, if you ask owners of small businesses
which skill they wish they had more expertise in, they will very frequently reply “accounting”. No matter
what the business may be, the owner and/or manager must be able to understand the accounting and
financial consequences of business decisions.

Required: Do you agree with this view? Why or why not? Explain.

Question 2:
You are the Accounts Manager for a small computer programming company. You must record the
following transactions. What values do you think you will use for each transaction?
Required: Justify your answer with accounting concepts, principles and assumptions.
A. The company purchased a secondhand van to be used to travel to customers. The sellers told you
they believe it is worth $12,500 but agreed to sell it to your company for $11,000. You believe the
company got a really good deal because the van has a $13,000 Blue Book value.
B. Your company purchased its office building five years ago for $175,000. Values of real estate haven
been rising quickly over the last five years, and a realtor told you the company could easily sell it for
$250,000 today. Since the building is now worth $250,000, you are contemplating whether you should
increase its value on the books to reflect this estimated current market value.

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C. Your company has performed a task for a customer. The customer agreed to a minimum price of
$2,350 for the work, but if the customer has absolutely no issues with the programming for the first
month, the customer will pay you $2,500 (which includes a bonus for work well done). The owner of the
company is almost 100% sure she will receive $2,500 for the job done. You have to record the revenue
earned and need to decide how much should be recorded.
D. The owner of the company believes the most valuable asset for his company is the employees. The
service the company provides depends on having intelligent, hardworking, dependable employees who
believe they need to deliver exactly what the customer wants in a reasonable amount of time. Without
the employees, the company would not be so successful. The owner wants to know if she can include
the value of her employees on the balance sheet as an asset.

Question 3:

Accounting information provides useful information about business transactions and events. Those who
provide and use financial reports must often select and evaluate accounting alternatives. The FASB
statement on qualitative characteristics of accounting information examines the characteristics of
accounting information that make it useful for decision-making. It also points out that various limitations
inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the
characteristics of useful information.

Required:

(a) Describe briefly the following characteristics of useful accounting information.

(1) Relevance. (2) Faithful representation. (3) Understandability. (4) Comparability. (5)
Consistency

(b) For each of the following pairs of information characteristics, give an example of a situation in

which one of the characteristics may be sacrificed in return for a gain in the other?

(1) Relevance and faithful representation. (2) Relevance and consistency. (3) Comparability and
consistency. (4) Relevance and understandability.

Question: 4

Two accountants for the firm of XYZ Company are arguing about the merits of presenting an income
statement in a multiple-step versus a single-step format. The discussion involves the following 2020
information related to ABC Company ($000 omitted):

Administrative expense

Officers’ salaries $ 4,900

Depreciation of office furniture and equipment 3,960

Cost of goods sold 60,570

Rent revenue 17,230

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 Selling expense

Delivery expense 2,690

Sales commissions 7,980

Depreciation of sales equipment 6,480

Sales revenue 96,500

Income tax 9,070

Interest expense 1,860

Required:

(a) Prepare an income statement for the year 2020 using the multiple-step form. Common
shares outstanding for 2020 total 40,550 (000 omitted).

(b) Prepare an income statement for the year 2020 using the single-step form.

(c) Which one do you prefer? Justify your answer.

Good luck!

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