Financial Accounting Questions and Solutions

Question 1: Ahmed's Small Business Trial Balance

Question 1: Ahmed owns a small business selling coffee makers to other businesses. On 31st December 2020 he extracted the following trial balance.

1.Closing inventory was valued at $95,796.

2.Equipment is depreciated by 10% on Straight line basis.

3.Motor vehicles are depreciated by 20% on reducing balance basis.

4.Accrued wages at the end of 2020 amount to $3,015.

5.On 1 November 2020 Johns paid $1,350 for insurance which is valid until 31 October 2021.

6.Irrecoverable receivables of $2,250 need to be written off.

7.Ahmed decides to increase the allowance for receivable for $4,707.

8.Ahmed has taken goods worth $4,050 for his own use.

a.Prepare Ahmed’s income statement for the year ending 31st December 2020.

b.Prepare Ahmed’s balance sheet as at December 2020.

Question 2: The stakeholder’ equity section in the balance sheet of Sun Ltd. is as follows:

B.A partial balance sheet for orange company is presented below.

Prepare the operating activities section of the statement of cash flows using indirect method

Question 3: A.List and briefly explain the different types of errors that are not revealed by the unadjusted trial balance. Give examples.

B.Explain the meaning of corporate governance and briefly discuss the primary objectives of implementing corporate governance mechanisms. Support your answerwith example.

C.Managers many want to manipulate the information in the financial statements. Briefly discuss any two reasons and give examples.

Question 4: A.Ahmed operates a business as a sole trader. Ahmed prepared his financial statements for the year ended 31st December 2020. He then remembered that he had not yet prepared a bank reconciliation statement as at 31st December 2020.

Comparing the cash book with the bank statement he found the following discrepancies.

1.Bank charges $200 appeared on the bank statement as having been deducted on 31st December.

2.A cheque for $5,000 from credit customer Mr. Ali had been entered in the cash book but not yet cleared by the bank.

3.Ahmed had mistakenly paid for the private dinner costing $200 with the business debit card. There was no entry in the cash book.

4.A cheque for $6,000 from credit customer paid on December 27 was dishonored on 31st December and Ahmed decided to write off the amount as an irrecoverable receivable.

5.On 30th December interest received on the business deposit account of $2,500 had been credited to the business current account accordance with Ahmed’s instructions but this amount had not yet been entered in the cash book.

6.Cheques for the total of $24,200 to suppliers Sara entered into the cash book on 31st December had not yet appeared on the bank statement.
The cash book showed a debit balance of $15,400 before any correcting entries and the balance as per the bank statement was $30,700.

1.Calculate the adjusted closing balance in the cash book.

2.Prepare a bank reconciliation statement as at 31st December 2020, starting with the unadjusted closing balance as per the cash book.

B.Mary and Johns run a business together and are organized as a partnership to which each has contributed $ 70,000 in capital. During their accounting years they made a profit of $120,000. Drawings amounted to $7,000 for Mary and $9,000 for Johns.

Their partnership agreement stipulates the following:

A profit sharing ratio of 2:3

Eight percent interest on capital

Ten percent interest charged on drawings

Mary receives a salary of $20,000 per annum

Required: Prepare an appropriation statement for the partnership

Question 5: Gulf and Co. is a manufacturer of computer accessories. The following are selected items appearing in the income statement and balance sheet for the year ended December 31st, 2020.