Accounting and Financial Statements

Introduction to Accounting

• The Cash Book is an essential accounting tool that serves two primary functions:
  • As a Journal: It records all cash-related transactions in chronological order.
  • As an Account: It summarizes all cash inflows and outflows in a single account.

Accounting Information

Question 2

i) What Constitutes Accounting Information?

a. Five (5) Users of Accounting Information:

1. Investors: Individuals or organizations that invest capital in a company.
2. Management: Internal users who utilize accounting information to make informed business decisions.
3. Creditors: Entities that supply goods or services to a company on credit or lend money to it.
4. Regulators: Government agencies that require financial reporting for compliance.
5. Employees: Workers who utilize accounting data to assess job security and company performance.

b. Five (5) Characteristics Any Accounting Information Must Have:

1. Relevance: Information should influence decisions by helping users evaluate past, present, or future events.
2. Reliability: Information must be trustworthy and free from bias.
3. Comparability: Users must be able to compare financial statements of different firms.
4. Understandability: Information should be clear and easily comprehensible to users.
5. Timeliness: Information must be available when needed to be useful for decision-making.

c. Three (3) Important Uses of Accounting Information to Management:

1. Performance Measurement: Management uses accounting information to assess the effectiveness of operations.
2. Budgeting: Historical accounting data assist in preparing future budgets and financial forecasts.
3. Decision-Making: Accurate financial reporting enables management to make informed strategic decisions.

ii) Accounting Terms

1. Meaning of 'Accounting Equation':

• The accounting equation represents the relationship between assets, liabilities, and equity:
  $ext{Assets} = ext{Liabilities} + ext{Equity}$

2. What is a 'Balance Sheet' in Accounting?:

• A Balance Sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and equity.

3. Why is the Balance Sheet Not an 'Account'?:

• A Balance Sheet is a summary of the financial position, while an 'Account' typically refers to individual records of specific transactions for particular items (e.g., cash account, accounts receivable account).

Expenditures

i) Definition of Expenditures:

• Expenditures represent the funds spent or costs incurred by a business, classified into capital or revenue expenditures.

ii) Differences Between Revenue Expenditure and Capital Expenditure:

1. Nature:
   • Revenue Expenditure: Short-term costs for day-to-day operations (e.g., rent, utilities).
   • Capital Expenditure: Long-term investments in physical assets (e.g., machinery, buildings).
2. Duration of Benefit:
   • Revenue Expenditure: Benefits are consumed within the accounting period.
   • Capital Expenditure: Benefits extend beyond one accounting period.
3. Recording in Financial Statements:
   • Revenue Expenditure: Charged directly to the profit and loss account.
   • Capital Expenditure: Added to the balance sheet as assets.
4. Impact on Profit:
   • Revenue Expenditure: Decreases profits for the current period.
   • Capital Expenditure: Not shown as costs immediately, profits may be impacted in future periods due to depreciation.

Kwasi Oppong Company Limited - Trial Balance Preparation

Question 5

• The following accounts and transaction amounts have been extracted from the books of Kwasi Oppong Company Limited as of December 31, 2017:
  • Land and Buildings: GH₵ 35,000
  • Plant and Machinery: GH₵ 15,000
  • Motor Van: GH₵ 45,000
  • Furniture and Fittings: GH₵ 5,000
  • Sundry Creditors: GH₵ 16,000
  • Cash in Hand: GH₵ 12,000
  • Cash at Bank: GH₵ 18,000
  • Stock: GH₵ 900
  • Rent and Rates: GH₵ 600
  • Lighting and Heating: GH₵ 400
  • Insurance: GH₵ 500
  • Sales: GH₵ 80,000
  • Carriage Inwards: GH₵ 200
  • Carriage Outwards: GH₵ 450
  • Purchases: GH₵ 45,000
  • Sales Returns: GH₵ 700
  • Purchases Returns: GH₵ 400
  • Discount Allowed: GH₵ 700
  • Discount Received: GH₵ 800
  • Bad Debts: GH₵ 300
  • Sundry Debtors: GH₵ 25,000
  • Repairs (Buildings): GH₵ 1,000
  • Salaries: GH₵ 10,000
  • Drawings: GH₵ 2,000
  • Capital: GH₵ 110,250
  • Stock at Year-End (December 31, 2017): GH₵ 12,500

Required:

• Prepare the Trial Balance for Kwasi Oppong Company Limited as of December 31, 2017.

Question 6 - Financial Statements Preparation

• Based on the account balances provided above, prepare the following financial statements for Kwasi Oppong Company Limited:
  • a) Trading Account
  • b) Profit and Loss Account
  • c) Balance Sheet as of December 31, 2017

Question 7 - Balance Sheet Analysis

• Below is the Balance Sheet of Akosua Abiba, a Sole Trader, as at 31st December 2012:

Balance Sheet:

• Capital: GH₵ 15,500
• Fixed Assets:
  • Goodwill: GH₵ 4,000
  • Plant & Machinery: GH₵ 8,000
  • Motor Van: GH₵ 5,000
  • Office Furniture: GH₵ 250

Total Fixed Assets: GH₵ 20,000

• Net Profit Added: GH₵ 4,500

• Less Drawings: GH₵ 2,000

Total Capital After Drawings: GH₵ 18,000

Current Assets:

• Loan from Esi: GH₵ 5,000
• Stock: GH₵ 8,000
• Debtors: GH₵ 4,000
• Pre-payments: GH₵ 2,000
• Cash in Hand: GH₵ 2,500

Total Current Assets: GH₵ 32,000

Current Liabilities:

• Creditors: GH₵ 4,000
• Accruals: GH₵ 1,200
• Bank Overdraft: GH₵ 3,200

Total Current Liabilities: GH₵ 8,400

Required Calculations:

• a. Value of Intangible Assets: GH₵ 4,000
• b. Value of Fixed Tangible Assets: GH₵ 20,000
• c. Value of Current Assets: GH₵ 27,600
• d. Value of Current Liabilities: GH₵ 8,400
• e. Working Capital: $ext{Current Assets} - ext{Current Liabilities} = GH₵ 27,600 - GH₵ 8,400 = GH₵ 19,200$
• f. Capital Owned: GH₵ 18,000
• g. Capital Employed: $ext{Total Assets} - ext{Current Liabilities} = GH₵ 32,000 - GH₵ 8,400 = GH₵ 23,600$
• h. Balance on the Profit and Loss Account for the year ended December 31, 2012 (Net Profit): GH₵ 4,500