i) Stock was acquired at sh.29 per unit, throughout the current year, until the last purchase (which was still in raw materials state at the end of the year) was made in September 1993. At that time the company was able to negotiate a special price and acquired 10,000 units at sh.25 per unit. The purchase was recorded as follows: Sh. Sh. Stock 290,000 Cash 250,000 Revenue 40,000 (ii) On 2 January 1993 a new truck was purchased for sh.270, 000. The truck had an estimated useful life of five years and a residual value of sh.20, 000. Depreciation expenses for the year (straight-line method) was recorded as follows to avoid reporting a net operating loss: Depreciation expense: trucks sh.20, 000 Provision for depreciation: trucks sh.20, 000 (iii) M.K. Industries purchased an expensive special-purpose machine with an estimated useful life of 10 years. Proper installation of the machine required that it be set in the concrete floor of the factory. Once the machine was installed the assistant factory manager argued that the machine had no resale value and thus directed that the entire cost of the machine should be written off in the current year.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
You have been appointed as an accountant of M.K. Industries a company formed by Mr. Mutiso and Mr. K.Kyalo to manufacture cooking fats for sale. While reviewing the accounting records of the company, you discovered that the following transactions and events were recorded during the year ending 30 September 1993.
(i) Stock was acquired at sh.29 per unit, throughout the current year, until the last purchase (which was still in raw materials state at the end of the year) was made in September 1993. At that time the company was able to negotiate a special price and acquired 10,000 units at sh.25 per unit. The purchase was recorded as follows:
Sh. Sh.
Stock 290,000 Cash 250,000
Revenue 40,000
(ii) On 2 January 1993 a new truck was purchased for sh.270, 000. The truck had an estimated useful life of five years and a residual value of sh.20, 000.
Depreciation expense: trucks sh.20, 000
Provision for depreciation: trucks sh.20, 000
(iii) M.K. Industries purchased an expensive special-purpose machine with an estimated useful life of 10 years. Proper installation of the machine required that it be set in the concrete floor of the factory. Once the machine was installed the assistant factory manager argued that the machine had no resale value and thus directed that the entire cost of the machine should be written off in the current year.
(iv) Land was reported at its estimated selling price, which is substantially higher than its cost. The increase in value was included in the income statement.
(v) The personal assets of M.Mutiso and K.Kyalo are not included in the financial statements of the business although M.Mutiso and K.Kyalo are agreeable to guaranteeing the bank overdraft of the business.
Required:
For each of the above items, explain which basis of accounting principle(s), concept(s) or convection(s), if any, are violated or observed. In each case, indicate the correct treatment.
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