EFIM10006 Fundamentals of Accounting and Finance 2 Assignment Answer UK

EFIM10006 Fundamentals of Accounting and Finance 2 course delves into the essential concepts and principles that underpin the world of accounting and finance. Whether you’re a business major, an aspiring financial professional, or simply interested in gaining a solid foundation in this field, this course is designed to provide you with a comprehensive understanding of key financial concepts and their applications.

Throughout this course, you will develop the skills necessary to interpret financial statements, evaluate the financial performance of a company, and make informed decisions based on financial information. We will also emphasize the importance of ethical considerations in accounting and finance and explore the role of accounting in corporate governance and financial regulation.

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Below, we will describe some assignment briefs. These are:

Assignment Brief 1: Explain and apply the principles of double-entry bookkeeping, including the use of an extended trial balance.

Double-entry bookkeeping is a system of recording financial transactions that ensures accuracy and integrity in accounting. It follows the fundamental principle that every transaction has two aspects, a debit and a credit, which must be recorded in at least two different accounts.

Here are the principles of double-entry bookkeeping:

1. Dual Aspect Principle: This principle states that every transaction affects at least two accounts. The total debits must equal the total credits in the accounting system.
2. Debit/Credit Principle: Debits and credits are used to record transactions. Debits increase asset accounts and decrease liability and equity accounts. Credits decrease asset accounts and increase liability and equity accounts.
3. Matching Principle: This principle states that revenues should be recognized when earned, and expenses should be recognized when incurred. It ensures that expenses are matched against the revenues they help generate.
4. Historical Cost Principle: According to this principle, assets should be recorded at their original cost and not their current market value.
5. Consistency Principle: The consistency principle requires that once an accounting method is adopted, it should be consistently applied throughout the financial statements.

Now let’s discuss the use of an extended trial balance. A trial balance is a statement that lists all the general ledger accounts and their balances at a specific point in time. It ensures that debits equal credits and serves as a preliminary step before preparing financial statements.

An extended trial balance expands on the basic trial balance by including additional columns to record adjustments, such as accruals, prepayments, and provisions. These adjustments are necessary to accurately reflect the financial position and results of a business.

The extended trial balance includes the following columns:

1. Account Name: This column lists all the accounts in the general ledger.
2. Debit: This column records the debit balances for each account.
3. Credit: This column records the credit balances for each account.
4. Adjustments: This column is used to record any adjusting entries needed to correct account balances. Adjustments may include accruals (e.g., unpaid expenses or unrecorded revenue), prepayments (e.g., prepaid expenses or unearned revenue), and provisions (e.g., estimated liabilities).

By using an extended trial balance, accountants can ensure that all necessary adjustments are properly recorded before finalizing the financial statements. It allows for a more accurate representation of a company’s financial position and results by capturing any necessary adjustments to the account balances.

Assignment Brief 2: Prepare and explain a Statement of Financial Position for a single entity; prepare and explain a Statement of Comprehensive Income for a single entity.

Sure! I can help you prepare and explain a Statement of Financial Position (also known as a Balance Sheet) and a Statement of Comprehensive Income (also known as an Income Statement) for a single entity.

Statement of Financial Position (Balance Sheet): The Statement of Financial Position provides a snapshot of an entity’s financial position at a specific point in time. It presents the company’s assets, liabilities, and shareholders’ equity. Here’s an example of a Statement of Financial Position:

Company XYZ Statement of Financial Position As of December 31, 2022

Assets: Current Assets:

• Cash and cash equivalents: $100,000
• Accounts receivable: $50,000
• Inventory: $80,000 Total Current Assets: $230,000

Non-Current Assets:

• Property, plant, and equipment: $500,000
• Intangible assets: $100,000 Total Non-Current Assets: $600,000

Total Assets: $830,000

Liabilities: Current Liabilities:

• Accounts payable: $40,000
• Short-term loans: $20,000 Total Current Liabilities: $60,000

Non-Current Liabilities:

• Long-term loans: $300,000 Total Non-Current Liabilities: $300,000

Total Liabilities: $360,000

Shareholders’ Equity:

• Share capital: $200,000
• Retained earnings: $270,000 Total Shareholders’ Equity: $470,000

Total Liabilities and Shareholders’ Equity: $830,000

Explanation: The Statement of Financial Position is divided into three main sections: assets, liabilities, and shareholders’ equity. Assets are listed in order of liquidity, with current assets presented first. Liabilities are classified as current or non-current based on their due dates. Shareholders’ equity represents the residual interest in the company after deducting liabilities from assets.

Statement of Comprehensive Income (Income Statement): The Statement of Comprehensive Income summarizes the revenues, expenses, gains, and losses of an entity over a specific period. It shows the company’s net income or loss and other comprehensive income. Here’s an example of a Statement of Comprehensive Income:

Company XYZ Statement of Comprehensive Income For the Year Ended December 31, 2022

Revenue: $500,000 Cost of Goods Sold: $300,000 Gross Profit: $200,000

Operating Expenses:

• Salaries and wages: $50,000
• Rent expense: $20,000
• Marketing expenses: $30,000 Total Operating Expenses: $100,000

Operating Income: $100,000

Other Income: $10,000 Other Expenses: $5,000

Income Before Tax: $105,000 Income Tax Expense: $30,000

Net Income: $75,000

Other Comprehensive Income:

Unrealized gains on available-for-sale investments: $5,000 Total Comprehensive Income: $80,000

Explanation: The Statement of Comprehensive Income begins with the company’s revenue and subtracts the cost of goods sold to calculate the gross profit. Operating expenses are then deducted from the gross profit to determine the operating income. Other income and expenses, which are not directly related to the company’s primary operations, are included next. The income tax expense is subtracted to arrive at the net income. Lastly, other comprehensive income, which includes items not included in net income, is presented to show the total comprehensive income.

Assignment Brief 3: Prepare and explain a Statement of Changes in Equity for a single entity.

A Statement of Changes in Equity (also known as Statement of Shareholders’ Equity) is a financial statement that presents the changes in equity of a single entity over a specific period. It shows how the company’s equity position has evolved during the period, including transactions with shareholders and changes in comprehensive income.

The statement typically includes the following components:

1. Opening Balance of Equity: This is the equity balance at the beginning of the period.
2. Share Capital: This section includes the details of changes in share capital during the period, such as the issuance of new shares, repurchases, or cancellations. It shows the number of shares, par value, and any premium or discount related to share issuances.
3. Additional Paid-in Capital: This component reflects any additional contributions made by shareholders that are not related to share capital. For example, it may include amounts from the issuance of preferred shares or contributions made through a rights issue.
4. Retained Earnings: Retained earnings represent the cumulative net profits or losses of the company from inception to the end of the reporting period, minus any dividends or distributions to shareholders. This section shows the net income or loss for the period, as well as any dividends declared and paid.
5. Other Comprehensive Income: Other comprehensive income includes gains or losses that are not recognized in the income statement but are directly included in equity. Examples of items included in this section are foreign currency translation adjustments, gains or losses on cash flow hedges, and unrealized gains or losses on available-for-sale financial assets.
6. Treasury Stock: If the company repurchases its own shares, the treasury stock account reflects the cost of those repurchased shares. It is deducted from the total equity.
7. Closing Balance of Equity: This is the final equity balance at the end of the reporting period, which is calculated by summing up the opening balance, changes in equity components, and closing adjustments.

The Statement of Changes in Equity provides important information about the sources and uses of equity for a single entity, allowing stakeholders to assess the company’s financial position, capital structure, and overall performance.

Assignment Brief 4: Prepare and explain a Statement of Cash Flow for a single entity.

A Statement of Cash Flows is a financial statement that provides information about the cash inflows and outflows of an entity during a specific period. It helps users of financial statements assess the entity’s ability to generate cash and its cash management practices. Here’s a step-by-step guide to preparing and explaining a Statement of Cash Flows for a single entity:

1. Identify the three main sections: a. Cash flows from operating activities: Includes cash transactions related to the entity’s core operations, such as sales and expenses. b. Cash flows from investing activities: Includes cash transactions related to the acquisition or disposal of long-term assets, investments, and other non-current assets. c. Cash flows from financing activities: Includes cash transactions related to obtaining or repaying funds from investors or creditors.
2. Gather the necessary information: a. Begin with the entity’s net income, which can be found on the income statement. b. Collect information about non-cash items, such as depreciation and amortization, gains or losses on asset sales, and changes in working capital accounts (accounts receivable, accounts payable, etc.). c. Review the entity’s investing and financing activities, such as purchases or sales of property, plant, and equipment, investments, issuance or repayment of debt, and issuance or repurchase of shares.
3. Prepare the operating activities section: a. Start with the net income figure. b. Add back non-cash expenses, such as depreciation and amortization. c. Adjust for changes in working capital accounts. If there was an increase in an asset (e.g., accounts receivable), subtract that amount. If there was an increase in a liability (e.g., accounts payable), add that amount. d. Include any gains or losses on the sale of assets.
4. Prepare the investing activities section: a. List all cash inflows and outflows related to investing activities, such as proceeds from asset sales and purchases of property, plant, and equipment. b. Summarize the net cash flow from investing activities.
5. Prepare the financing activities section: a. List all cash inflows and outflows related to financing activities, such as proceeds from issuing debt or equity and repayment of debt. b. Summarize the net cash flow from financing activities.
6. Calculate the overall change in cash: a. Summarize the net cash flow from operating, investing, and financing activities. b. Add the net cash flow to the beginning cash balance to determine the ending cash balance.
7. Present the Statement of Cash Flows: a. Start with the heading “Statement of Cash Flows” and provide the name of the entity and the period covered. b. List the three sections (operating, investing, and financing) with their respective subtotals. c. Present the net change in cash and the beginning and ending cash balances.

When explaining the statement, it’s essential to highlight significant cash flow trends or events, such as increased borrowing, substantial investments, or changes in the entity’s cash position. The statement should provide a clear picture of how the entity generated and used cash during the period, enabling users to assess its liquidity and financial health.

Assignment Brief 5: Explain, apply and evaluate alternative cost flow assumptions for measuring inventory (FIFO, LIFO and weighted average cost.

When measuring inventory, businesses have the option to use different cost flow assumptions to determine the value of their inventory and cost of goods sold. Three commonly used cost flow assumptions are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average cost. Let’s delve into each of these methods, discuss their application, and evaluate their advantages and disadvantages.

1. FIFO (First-In, First-Out): FIFO assumes that the items purchased or produced first are the first ones sold or used. Under this method, the cost of the oldest inventory is assigned to the cost of goods sold, while the cost of the most recent inventory is assigned to the ending inventory.

Application: FIFO is often used when the business wants to reflect the actual flow of goods. It is especially useful when dealing with perishable items or goods that have a short shelf life. FIFO generally produces a more accurate representation of current costs and is widely accepted for financial reporting purposes.

Advantages:

• Reflects the physical movement of inventory more accurately.
• Typically matches the flow of costs more closely to the current market prices.
• Results in a better representation of the company’s financial position.

Disadvantages:

• During periods of rising prices, FIFO may lead to lower cost of goods sold, higher ending inventory, and higher profits. This can potentially overstate the financial position of the company.
• May not accurately reflect the economic reality in situations where the oldest items in inventory are not the ones sold first.

1. LIFO (Last-In, First-Out): LIFO assumes that the most recent items purchased or produced are the first ones sold or used. Under this method, the cost of the newest inventory is assigned to the cost of goods sold, while the cost of the oldest inventory is assigned to the ending inventory.

Application: LIFO is often used when a business wants to match the most recent costs with the revenue generated from sales. It can be beneficial during periods of inflation as it tends to increase the cost of goods sold and reduce taxable income.

Advantages:

• Can be advantageous in periods of rising prices, as it leads to higher cost of goods sold and potentially lower taxable income.
• Can help with cash flow management, as taxes are deferred until later periods.

Disadvantages:

• May not represent the actual physical flow of goods.
• Generally not allowed under International Financial Reporting Standards (IFRS) and is only allowed under specific conditions in the United States.
• In periods of inflation, LIFO can result in understated inventory values, potentially affecting the accuracy of financial statements.

1. Weighted Average Cost: The weighted average cost method calculates the average cost of all units in the inventory and applies it uniformly to the units sold or remaining in inventory.

Application: The weighted average cost method is relatively simple and straightforward to apply. It is commonly used when the business does not have a significant level of inventory turnover or when there are no specific reasons to use FIFO or LIFO.

Advantages:

• Simplicity and ease of use.
• Smooths out the fluctuations in inventory costs, as the average cost is used.
• Generally acceptable for financial reporting purposes.

Disadvantages:

• Does not reflect the actual physical flow of goods.
• Can result in a distorted cost of goods sold and ending inventory value if significant price fluctuations occur.

Evaluation: The choice of cost flow assumption depends on various factors, including industry norms, tax regulations, management preferences, and the impact on financial statements. Each method has its advantages and disadvantages. FIFO tends to be more accurate in reflecting the physical flow of goods and is widely accepted. LIFO can be advantageous in specific situations but may not be allowed under certain accounting standards. Weighted average cost provides simplicity but may not accurately reflect cost fluctuations. Businesses should carefully evaluate their specific circumstances and requirements before selecting a cost flow assumption for measuring inventory. It’s also important to note that the choice of method may have tax implications and should be considered in consultation with tax professionals.

Assignment Brief 6: Explain the purpose of control accounts and perform reconciliations.

Control accounts are used in accounting to summarize and monitor the transactions related to a specific category or group of accounts. They serve as a means of control and provide a check on the accuracy and completeness of the accounting records.

The main purpose of control accounts is to simplify the accounting process and improve the efficiency of financial reporting. Instead of maintaining detailed records for individual accounts, transactions are recorded and summarized in the control account. This allows for easier monitoring and analysis of financial information.

Control accounts are typically used for categories such as accounts receivable, accounts payable, inventory, and bank accounts. For example, the accounts receivable control account summarizes all the individual customer accounts, while the accounts payable control account summarizes all the individual supplier accounts.

Reconciliation is the process of comparing two sets of records to ensure they are in agreement and resolve any discrepancies. In the context of control accounts, reconciliations are performed to verify the accuracy of the summarized control account balances and their alignment with the detailed subsidiary ledger or individual accounts.

To perform a reconciliation for a control account, you would typically follow these steps:

1. Obtain the relevant subsidiary ledger or individual account records.
2. Compare the transactions recorded in the subsidiary ledger with those recorded in the control account. Ensure that all transactions are accurately included in both sets of records.
3. Check for any discrepancies or differences between the subsidiary ledger and the control account balances.
4. Investigate the discrepancies and identify the reasons for any variances. This may involve reviewing supporting documentation and tracing transactions to their source.
5. Make any necessary adjustments to the subsidiary ledger or control account to correct the discrepancies.
6. Reconcile the balances by ensuring that the adjusted subsidiary ledger balances match the control account balance.
7. Document the reconciliation process and the reasons for any adjustments made.
8. Periodically perform reconciliations to ensure ongoing accuracy and control.

Reconciling control accounts helps to identify errors, omissions, and fraudulent activities, ensuring that the financial records are reliable and accurate. It provides assurance to the organization and its stakeholders that the financial statements reflect a true and fair view of the company’s financial position.

Assignment Brief 7: Prepare and explain partnership accounts, including where there is a change in partnership or in profit-sharing ratio, and explain the associated principles and techniques.

Partnership accounts refer to the financial records and statements that are prepared for a partnership business. They provide information about the financial position, performance, and distribution of profits among the partners. Partnership accounts are typically prepared using the principles and techniques of partnership accounting.

Partnership Formation: When a partnership is formed, the partners contribute capital in the form of cash, assets, or services. The initial capital contributed by each partner is recorded in a Capital Account. The Capital Account shows the individual capital balances of each partner and represents their ownership interest in the partnership.

Profit and Loss Sharing Ratio: The profit-sharing ratio determines how the partnership profits or losses will be shared among the partners. It is usually agreed upon based on the terms of the partnership agreement. The ratio can be equal, or it can vary based on the partners’ contributions, experience, or any other mutually agreed criteria. The profit-sharing ratio is expressed as a fraction or percentage and is used to distribute profits or losses at the end of an accounting period.

Distribution of Profits: At the end of each accounting period, the partnership’s net profit or loss is determined by preparing a Profit and Loss Account. The net profit is distributed among the partners based on their profit-sharing ratio. The distribution is recorded by transferring the respective shares from the Profit and Loss Account to the partners’ Capital Accounts. The Capital Accounts are then adjusted by adding the share of profits to each partner’s capital balance.

Change in Partnership: A change in partnership can occur due to various reasons, such as admission of a new partner, retirement of an existing partner, death of a partner, or dissolution of the partnership. Each of these situations requires appropriate adjustments to the partnership accounts.

• Admission of a New Partner: When a new partner joins the partnership, their capital contribution is recorded in a new Capital Account. The new partner’s share of profits is determined based on the profit-sharing ratio agreed upon. The new partner’s capital balance is added to the existing partners’ capital balances, and any necessary adjustments are made to reflect the change.
• Retirement of a Partner: When a partner retires, their capital balance is paid out by the partnership. The retiring partner’s share of profits up to the retirement date is determined, and any remaining profits or losses are shared among the remaining partners based on the revised profit-sharing ratio. The retiring partner’s capital balance is deducted from the partnership’s Capital Accounts, and adjustments are made accordingly.
• Change in Profit-Sharing Ratio: If the partners agree to change the profit-sharing ratio, adjustments are made to the Capital Accounts of the partners. The revised ratio is used to distribute profits or losses, and the Capital Accounts are adjusted accordingly.

Goodwill and Revaluation: In certain situations, such as admission, retirement, or change in profit-sharing ratio, the partnership may need to revalue its assets and liabilities. Any changes in the values of assets or liabilities are recorded through a process called revaluation. Additionally, if the partnership has goodwill, it is recorded in the books and distributed among the partners based on their agreed shares.

These are the key principles and techniques involved in partnership accounts. It is important to note that the specific details and procedures may vary depending on the partnership agreement and accounting policies followed by the business. It is recommended to consult with a professional accountant or refer to relevant accounting standards and regulations for accurate and comprehensive preparation of partnership accounts.

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