Question 1:

Classify each of the following according to whether it is an

ASSET, LIABILITY, OWNERS EQUITY, REVENUE or EXPENSE

Account Account type

Accounts receivable A
Bank fees E
Capital O
Cash A
Cleaning expense E
Cost of Sales E
Discount Allowed E
Fees Revenue R
GST Collections L
Interest expense E
Inventory A
Loan Payable L
Profit O
Property, plant and equipment A
Rent revenue R
Service fees revenue R
Stationery A/E
Unearned Revenue L
Vehicle A
Wages Payable L

Question 2

Using your knowledge of the accounting equation, solve the missing values in the following
table:

Assets Liabilities Equity

200 000 40 000 160 000

194 000 60 000 134 000

190 000 150 000 40 000
16 600 11 000 5 600

Question 3
ABC Ltd considers that its most valuable asset is its employees—yet it has to leave them off
the statement of financial position. Explain, using the conceptual framework, why this is the
case.

Employees are not listed on the statement of financial position because their value is hard to
measure in monetary terms, unlike tangible assets.

Question 4

Explain how you would account for the following items, justifying your answer by reference
to the Conceptual Framework’s definitions and recognition criteria:

(a) A trinket of sentimental value only.

(b) You receive 1000 shares in X Ltd, trading at $4 each, as a gift from a grateful client.

(c) The panoramic view of the coast from your café’s windows, which you are convinced
attracts customers to your café.

(d) The court has ordered your firm to repair the environmental damage it caused to the local
river system. You have no idea how much this repair work will cost.

1. Trinket of sentimental value only:

Not accounted for, as it lacks economic value.
assets are resources controlled by an entity as a result of past events and from which future
economic benefits are expected to flow. Since the trinket does not generate economic
benefits, it does not meet the definition of an asset. Therefore, it would not be recognized in
the financial statements.

2. Gift of 1000 shares in X Ltd:

Accounted for as an asset at their fair value since they provide potential economic benefits.
, an asset is recognized if it is probable that future economic benefits will flow to the entity
and the item has a cost or value that can be reliably measured. Since the shares have a market
value, which can be reliably measured and they are likely to generate future economic
benefits through dividends or capital appreciation, they meet the recognition criteria and
should be recognized as an asset in the financial statements at their fair value.

3. Panoramic view of the coast from your café's windows:

Not accounted for as an asset, as it doesn't have a market value or generate economic
benefits.
An asset is expected to provide future economic benefits to the entity. However, the view
does not generate cash flows or have a market value that can be reliably measured. Therefore,
despite its perceived value in attracting customers, the panoramic view would not be
recognized as an asset in the financial statements.

4. Court-ordered environmental repair work:

Accounted for as a liability, estimating the repair costs, as it represents a present obligation
from past events.
A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow of resources embodying economic benefits. The
obligation to repair the environmental damage arises from past events (the environmental
damage caused by the firm), and it is probable that it will require an outflow of resources to
settle the obligation. However, since the exact amount of the repair costs is uncertain, the
liability would need to be recognized as a provision, with the cost estimated based on the best
available information at the time.