Additional Practice for Mid-Term Test 1

COMPLETION

1. ________________________________________ establish the rules to be followed when

preparing financial statements.

2. An ____________________ is considered to be separate from its owners and from any other
business.

3. A ____________________ is an exchange of property or service by a business with another

entity.

4. A ____________________ is a business record used as evidence that a transaction has

occurred.

5. ____________________ are the business’ economic resources that will provide future
benefits to the business.

6. _________________________ are the amounts owed to the business by customers.

7. ____________________ are the economic obligations (debts) of the business.

8. ____________________ are the external parties to whom a business owes the debts

9. ____________________ are amounts owed to suppliers for credit purchases.

10. ____________________ are the amounts owed to employees for work they have done.

11. The ____________________ of a business is the owner’s current investment in the assets of
the business.

12. The _________________________ is presented as Assets = Liabilities + Owner’s Equity.

13. Assets – ____________= Owner’s Equity.

14. Due to the ______________________________, a business must make at least two changes
in its assets, liabilities and/or owners’ equity when it records each transaction.

15. ____________________ are the prices a business charged to its customers for goods or
services provided during a specific time period.

16. ____________________ are the costs of providing the goods or services to customers

17. An ____________________ is the time span for which a business reports its revenues and
expenses.

18. Under ____________________, a business records its revenues and the related expenses in
the same accounting period that it provides the goods or services, regardless of whether it
receives or pays cash during the period.
19. The effect on the accounting equation of the business banking/depositing $1,000 of cash
received from a customer (debtor) paying his account for an amount owing is:
a. increase the asset cash; increase profit or loss to record income.
b. increase the asset cash; decrease the accounts payable.
c. increase the asset cash; decrease the accounts receivable.
d. decrease the asset cash; decrease the profit or loss.

20. Refer to the following Cost-Volume-Profit (CVP) graph of a business entity to answer the next
two questions.

Which line in the graph is the total fixed costs line?

a. a
b. b
c. c
d. d

21. Which of the following entries records the sales to customers on account /credit?
a. Accounts Payable, decrease; Fees Earned, increase
b. Accounts Receivable, increase; Sales Revenue, increase
c. Accounts Receivable, decrease; Cash, increase
d. Cash, increase; Accounts Receivable, decrease

22. Which of the following entries records the receipt of cash from clients on account?
a. Accounts Payable, decrease; Fees Earned, increase
b. Accounts Receivable, increase; Fees Earned, increase
c. Accounts Receivable, increase; Cash, decrease
d. Cash, increase; Accounts Receivable, decrease

Answer:
1. ANS: Generally accepted accounting principles
2. ANS: entity
3. ANS: transaction
4. ANS: source document
5. ANS: Assets

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 6. ANS: Accounts receivable
7. ANS: Liabilities
8. ANS: Creditors
9. ANS: Accounts payable
10. ANS: Wages and salaries payable
11. ANS: owner’s equity
12. ANS: accounting equation
13. ANS: liabilities
14. ANS: dual effect of transactions
15. ANS: Revenues
16. ANS: Expenses
17. ANS: accounting period
18. ANS: accrual accounting
19. ANS: c
20. ANS: b
21. ANS: b
22. ANS: d

1. Abro Ltd sells its products for $55each.The variable costs for each product are $25 labour & $10
materials. Fixed costs are $80,000 each month.

1. Calculate the monthly sales volume to break even.

2. To increase its market share Abro decided to reduce the selling price by $5 and at the
same time purchase additional manufacturing equipment which will reduce the direct
labour component of the variable cost by $7 per unit. The new equipment will add
$22,000 depreciation to monthly fixed costs. After those changes are made, calculate the
number of units to be sold to make a profit of $13,000 per month.

Answer:

2. GloGreen is a business selling start-up veggie garden kit for $12 each. This year, GloGreen’s fixed
cost totals $110,000. The variable cost per kit is $7.

Required: a. What is the break-even point in number of kits?

b. How many kits GloGreen has to sell to earn a profit of $70,000?
c. If the total fixed cost increases to $160,000 next year, what profit/loss will GloGreen have if
it sells 30,000 kits?

Answer:

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 Solutions:
1. 1 Break even quantity=fixed costs/contribution per unit =$80,000 / 20* = 4,000 units

* $55 selling price- $35 variable costs per unit

1. 2 revised fixed costs = $80,000 + 22,000 = $102,000

revised variable costs = $28 (i.e.$35-$7 )
revised selling price = $50 (i.e.$55-$5)

Units to sell = (fixed costs + target profit) / contribution per unit

= (102,000 + 13,000) / (50 - 28)
= 5,227 units per month

2a. Break even quantity=fixed costs/contribution per unit

$110 000
= $5
= 22 000 kits

b. Sales volume for $70 000 desired profit

Total fixed costs + Desired profit

= Contribution margin per unit
$110 000 + $70 000
= $5
$180 000
= $5
= 36 000 kits

c. Loss = $5(30 000) - $160 000

= $150 000 - $160 000
= $(10 000)

Another way to calculate:

$160 000
(i) Break-even point= $5
= 32 000 kits
At 30,000 units, means the entity is selling 2000 units below the BEP level (of 32,000 units).
Loss = 2000 units X $5 = $10 000

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 3. Mann Lee commenced business providing pet grooming services on 1
March 2014, by contributing equipment at $4,800, a commercial van at
$23,000 and cash of $2,300. Transactions during March for Lee Grooming
Services were as follows (Ignore GST):

March 4 Leased premises and paid two months’ rent $700 in advance.
4 Purchased office and grooming supplies worth $400, paying $100
cash and the rest on credit.
14 Interviewed, followed by hiring a grooming assistant at an agreed
wage of $600 fortnightly.
19 Sent invoices for $1,525 earned from providing grooming service to a
few customers on credit.
21 Paid balance on office & grooming supplies purchased on credit on 4
March.
21 Lee withdrew $500 cash for personal use.
24 Received cash of $250 from accounts receivable.
25 Received advice that $200 of accounts receivable was not collectable
and the figure was written off as an expense.
25 Paid vehicle maintenance and Petrol expenses $385.
26 Received cash of $180 from accounts receivable after allowing for a
$10 discount considered as a necessary expense to speed up
collection.
27 Stock take of office supplies showed $85 worth of the supplies has
been used.
28 Paid the fortnightly wages to assistant $600.
31 At the end of the month when preparing financial statements, the
following adjustment are made:
- The rent expense incurred for the month is recognised.
- Depreciation for the vehicle and the equipment of $200 and
$100 respectively are recognised.
- Although the electricity invoice will only be received in the next
month, the electricity usage for the current month estimated to
be $100 is recognised.

Required:

(a) Complete a worksheet for the month of March (in chronological order).
Record all transactions and events in the appropriate columns of the
worksheet template provided.

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(b) What 2 accounting concepts relates with (grounding) the recognition of the
electricity usage as an adjustment entry at the end of the period (in the
question above)?

Answer (b): accrual accounting and matching costs with revenue. The electricity expense is a
cost happening during the period.
Accrual accounting- though it is not paid yet, it should be recognised when it happened.
Matching costs with revenue: the cost is recognised in the period where the revenue associated
with the cost is recognised.

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a) Worksheet for Lee Grooming Service
Date Cash Vehicle Equipment Office & Accounts Prepay- Accounts Capital Revenue (-) Expenses Description
Grooming Receivable ments Payable
Supplies

Total

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Solutions:

Vehicle Equip Office Acs Acs (-)Expenses

trans Cash Ment Suppl Rec Pre Accrual Payable Capital Revenue
payments
June 1 2 300 23 000 4800 30 100
4 -700 700
4 -100 400 300
14 Not a
trans
19 1525 1525
21 -300 -300
21 -500 -500
24 250 -250
25 -200 -200
25 -385 -385
26 180 -190 -10
27 -85 -85
28 -600 -600
Rent 30 -350 -350
Electr. 100 -100
Depr. (200) (100) -300

Total 145 22 800 4 700 315 885 350 100 --- 29 600 1,525 (-)2,030