Accounting questions

Accounting questions A The need for closing temporary accounts and journal entries for closing supplies expense account The main reason why temporary accounts are closed at the end of an accounting period is because the accounts relates to investment transactions in the particular periods and needs to reflected in the income statements of the specific periods in which the transactions occurred as provided for by the accruals concept.
Journal entry (extract for expense account)
Particulars
Debit
credit
Supplies
Cash
To record cash expenditure on supplies
xxx
xxx
2.
How to construct an unadjusted trial balance and example of debit credit rule
An unadjusted trial balance is constructed from the closing balances of all accounts in an accounting period. The balances are correspondingly transferred to either the debit or the credit side of the trial balance.
An example of the debit credit rule that is applicable to the development of a trial balance is the requirement that the sum of the debit entries be equal to the sum the credit entries.
3.
Smart hiring and internal control
Internal controls aims at ensuring quality and minimum standards in accounting processes. This includes ensuring legal and ethical competence among accounting staff. Smart hiring processes that ensures recruitment of the desired qualities of employees therefore facilitates the purpose of internal controls.
Implementation
The control through smart hiring can be implemented by applying a wide scoped recruitment strategy followed by a well predefines selection criteria such as practice based interviews. Further training also facilitates competencies towards effective internal controls.
4.
Application of the FIFO method
Inventory valuation using the FIFO method assumes that older inventories are sold first.
Impact of FIFO on gross profit
The method varies gross profit with trend of cost of supplies. It leads to higher gross profit margin when costs of purchases are rising with time.
5.
Acid test ratio=current assets/current liabilities
The ratio is computed by dividing the sum of current assets by current liabilities
Application in ‘decision-making’
The ratio shows an organization’s capacity to meet its ‘short-term’ obligations. Lenders and suppliers therefore use it to determine an organization’s capacity to finance its debts.
B
1.
Computation of the ‘straight-line’ depreciation method
The ‘straight-line’ method is computed by determining the depreciable value that is then equally distributed to the life of the item.
Example
Since there is no final salvage value, depreciable amount = 25000-0=25000
Rate=25000/4
=$6250 per year
2.
Selling price
The bond’s selling price is $ 1000, the face value.
Recording the sale
Depending in the issuing approach, bank account is debited and issue of bonds account credited with the selling price as shown in the journal entries bellow
Journal entry (extract)
Particulars
Debit
credit
Bank
Issue of bonds
To record receipt from sale of bonds
xxx
xxx
3.
Preparation of common size financial statements
Common size statements are prepared by expressing items in a statement as a percentage of a chosen item in the statement.
Application of the statements in ‘decision-making’
The results of the statement are useful in determining desirable profit margins based on past trends in margins.
C
1.
Benefits of a corporation’s separate legal entity
The legal entity ensures continuity of the enterprise through perpetual succession and limited liabilities.
Benefits of right to vote
The right to vote is important because it is the stockholder’s tool towards management of the enterprise and it checks on the director’s managerial decisions.
2.
Cost of goods sold
=(120*9)+(180*10)
=$ 2880
3.
‘Short-term’ investments
Examples of ‘short-term’ investments include investments in securities, working capital and loan advancements. While securities involve purchase of stock of another company, investment in working capital involves plowing back of profits and loan advancement involves provision of financial services at an interest.
Reference
Wood, F. and Sangster, A. (2008). Frank Woods Business Accounting 1. New Jersey: Pearson Education