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Certified Bookkeeper Program January 12,19, 26 and February 2 Holiday Inn Galleria ADB Ave., Ortigas

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Page 1: CB Module 3 Constructive Accounting

Certified Bookkeeper Program

January 12,19, 26 and February 2Holiday Inn GalleriaADB Ave., Ortigas

Page 2: CB Module 3 Constructive Accounting

COURSE SYLLABUS

MODULE 3

CONSTRUCTIVE ACCOUNTING

LEARNING OBJECTIVES:

A Careful study of this module should enable you to know, explain andunderstand the:

Certified Accounting Technician Program

understand the:

1. The internal controls to safeguard assets most specially cash2. Imprest Cash System3. Single entry bookkeeping systems.4. Reconstruction of Incomplete records.5. Conversion of Cash-basis of Accounting in to Accrual Basis6. Correction of Errors.7. Analysis and Interpretation of Financial Statements.

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INTERNAL CONTROLS

comprise the plan of the organization together withits methods and measures in order to protect itsassets, check the accuracy and reliability of

Certified Accounting Technician Program

assets, check the accuracy and reliability ofaccounting information, promote operationalefficiency, and encourage adherence to prescrivedmanagerial policies.

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Cardinal Principles of Internal Controls

1. Responsibilities must be fixed.2. Functional responsibilities must be segregated.3. No one person must be in complete charge of a

business transactions.4. All available proof of accuracy must be utilized. 5. Personnel must be carefully selected and trained.6. Personnel should be bonded, especially those in

a position of trust..7. Personnel should be rotated.

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Cardinal Principles of Internal Controls

8. Operating instructions must be reduced into writing.

9. Do not exaggerate double entry 9. Do not exaggerate double entry accounting.

10. Use of controlling accounts.11. Use of mechanical or electronic

equipment, if feasible.

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Transactional controls

• Authorization• Execution• Recording• Recording• Custodianship• Periodic Accountability

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INTERNAL CONTROL OF CASH:

Cash – includes coins, checks, money orders, bank drafts and otherforms of money substitutes that can be accepted at face valueupon deposit and can be used for general disbursement purposes.Money on deposit is also included in cash provided there is norestriction as to its withdrawal.

Certified Accounting Technician Program

restriction as to its withdrawal.

Preventive Controls – are procedures designed to detect, preventand protect cash from the theft and misuse from the time cash isreceived until it is deposited to a bank.

Internal Controls – refer to those steps and procedures the businesstakes to protect cash and other assets.

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Examples are:

1. Limiting the number of persons handling cash.2. The cashier must not have access to the accounting

records.3. Bonding (insuring) employees who handle cash or cash

records.records.4. Using a safe or a cash register.5. Depositing cash receipts in the bank daily.6. Using checks to make all cash payments.7. Establish petty cash for making small payments.

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Module 3– Constructive Accounting

IMPEREST CASH SYSTEM

Cash is the business’s most liquid asset and it needs the greatestprotection to prevent loss or waste. One of the most commonly usedcontrols is a checking account.

Checking Account – is blank account that allows a bank customer todeposit cash and to write checks against the account balance.

Depositor – is a person or business that has cash on deposit in a bank.Depositor – is a person or business that has cash on deposit in a bank.To open a checking account, a person or business owner must fill asignature card, deposit minimum cash required by the bank, andacquire a checkbook.

Signature Card – contains the signature(s) of the person (s) authorized towrite checks on the bank account. The signature cash is kept on fileby the bank so that it can be matched against signed checkspresented for payment. This helps protect both the account holderand the bank against checks with forged signatures.

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Module 3 – Constructive Accounting

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MAKING DEPOSITS

A business should make regular daily deposits of their collections to protect cash(coins, bills and checks) it receives.

Recording Deposits in the Checkbook – the checks stubs in the checkbook are aduplicate record of the Cash in Bank account. The completed check stubscontain the records of all checking account transactions: deposits, withdrawalsand bank service charges.

WRITING CHECKS:WRITING CHECKS:

Writing checks is a simple procedure governed by a few important rules. These rulesmust be followed to ensure correct record keeping and proper handling of themoney represented by the check. Complete the check stub before writing thecheck to remove the chance of forgetting to complete the stub.

1. Write the checks in ink. Written in pencil is not acceptable.2. Checks should preferably be typewritten.3. Check writers are used by some companies for security and control.

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Check – is a written document signed by the depositor, ordering thebank to pay a sum of money to an individual or entity.

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Drawer – is the one who signs the check ordering the bank tomake payment

Drawee – is the bank on which the check is drawn.

Payee – is the part to whom payment is to be made.

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Deposit Slip – is a bank form on which the currency (bills andcoins) and checks to be deposited are listed. The deposit slipor ticket gives both the depositor and the bank a detailedrecord of a deposit. The bank teller validates the deposit. Thebank teller validates the deposit slip before a copy given to thedepositor or representative.

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Module 3 - Constructive Accounting

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CHECKING THE CASH BALANCE

The balance in the Cash in Bank account in the general ledger is regularlycompared with the balance in the checkbook. This is to check whether all thedeposits and payments by checks are recorded in the books. If they do not tally,the error must be located and corrections be made. If the balance in the generalledger is in agreement with the balance as per the checkbook, the balance willnow be compared with the bank statement.

Bank Statement – is an itemized record of all transactions occurring in aBank Statement – is an itemized record of all transactions occurring in adepositor’s account over a given month. This includes

•Cash balance at the beginning of the month.•List of all deposits made by the business during the month.•List of all check paid by the bank during the month.•List of any other deductions from the depositor’s account.•List of any other credits to the depositor’s account.•Checking account balance at the end of the month.

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Cancelled Checks – checks paid by the bank that were deducted from thedepositor’s account and returned together with the monthly bank statement sent bythe bank to the depositor.

Bank Reconciliation – the process of determining any difference between thebalance shown on the bank statement and the cash per book balance. Threecommon differences between the bank statement and the checkbook balance are:a.) Deposit in Transit, b.) Outstanding Checks, and c.) Bank Service Charges.

The New City Bank Statement of Account showed a balance of P31, 893.20 as ofJuly 31, 20CY, a bank service charge (bsc) of P500 and a credit memo (cm) for P3,030.00. Below is the last check issued on July 31, 20CY and the checkbook showeda deposit of P7, 845.80 and the cash balance of P32, 887.90 as of July 31, 20CY.The checkbook and the cash per book balance are in agreement.

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Note: The checkbook balance and the bank statement balance are not in agreement. The causes of the difference are thedeposit in transit, outstanding checks, bank service charge, and credit memo for note collected by the bank and NSF (NoSufficient Fund) check.

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Module 3 - Constructive Accounting

Deposit in Transit or Outstanding Deposit – is a deposit that has been madeand recorded in the depositor’s book but that does not appear in the bankstatement. Usually this is the end of the month deposit.

Outstanding Checks – are checks that have been written and recorded in thedepositor’s book but not yet presented for payment to the bank.

Bank Service Charge – is a fee charged by the bank for maintaining bankBank Service Charge – is a fee charged by the bank for maintaining bankrecords and for processing bank statement items for the depositor.

Bank Debit Memo – is a charge made by the bank to the depositor’s account,usually for bank service charge.

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Module 3 - Constructive Accounting

Bank Credit Memo – is a credit made by the bank to the depositor’s account,sometimes for interest credit on deposits or collection made by the bank for thedepositor’s account.

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NSF Check – is one returned by the bank because there are no sufficient funds inthe drawer’s checking account to cover the amount of the check. Under the currentpractice, when a depositor receives a check payment from a customer and depositsit in the bank, the bank will not credit the depositor’s account until it is cleared by thedrawee bank. If not cleared, the bank returns this check to the depositor as an NSFcheck with corresponding bank charges.

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BANK RECONCILIATION STATEMENT – it is assumed that there are norecording errors made by the bank or the depositor but the reconciliation statementshould provide space in case such error/s occurs. Normally there are manyoutstanding checks to be listed, that is why the reconciliation statement providesfor the purpose.

If the adjusted balances match, the bank statement has been reconciled. If theadjusted balances do not match, the error must be found and corrected.

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Book Adjustments – Entries must be made in the depositor’s books thataffect the business’s cash per reconciliation above.

July 31 Cash in Bank 3,030.00Notes Receivable 3,000.00Interest Income 30.00

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Interest Income 30.00

31 Accounts Receivable 2,000.00Miscellaneous Expenses 500.00

Cash in Bank 2,500.00

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Steps in Reconciling a Bank Statement:

Step 1

Step 1

• Arrange the cancelled issued/cleared checks in numerical order. Compare thecanceled checks with those listed on the bank statement and with the checkstubs and recorded per books.

• List on the bank reconciliation form, by number and amount, all checks issued

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• List on the bank reconciliation form, by number and amount, all checks issuedwhich not part of the cancelled checks or listed on the bank statement. Theseare the outstanding checks.

• Compare deposits listed on the bank statement to deposits listed and recordedper books. Deposits per books not listed on the bank statement are deposits intransit.

• List debit and credit memos listed in the bank statement but not yet recordedin the depositor’s books.

• List NSF checks returned by the bank for No Sufficient Funds.

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Step 2

1. Enter the ending balance shown on the bank statement.

2. Add the total outstanding deposits to the bank statement balance.

3. Add bank error charged to the depositor’s account.

4. Deduct total outstanding checks.

5. Deduct the bank error credited to the depositor’s account.

6. Determine the adjusted bank balance.

Step 3

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Step 3

1. Enter the ending cash balance per checkbook or book balance.

2. Add the credit memo credited by the bank not yet recorded.

3. Add book error causing reduction to the cash account.

4. Deduct the debit memo debited by the bank not yet recorded.

5. Deduct NSF Check returned by the bank.

6. Deduct book error causing increase to the cash account.

7. Determine the adjusted book balance.

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PETTY CASH

Petty Cash Fund – it is a cash fund established by the business to handlesmall, incidental cash payments.

Petty Cash Fund Custodian – It is the person responsible for maintainingpetty cash fund and for making disbursement from the fund.

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petty cash fund and for making disbursement from the fund.

Establishing the Petty Cash Fund – Before a petty cash fund is established, abusiness must determine the amount of cash needed in the fund. Thebusiness estimates the amount of cash that it will need for a certain period oftime, usually a month. The entry to establish a petty cash fund is as follows:

Aug. 1 Petty Cash Fund 3,000.00

Cash in Bank 3,000.00

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Making Petty Cash Payments – The petty cash fund custodian is responsiblefor making payments from the petty cash fund. Whenever a cash payment ismade, a petty cash voucher or receipt is completed.Petty Cash Voucher/Receipt - It is a proof of payment from the petty cashfund.

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Replenishing Petty Cash – As payment are made out of the petty cash fund, the amountof cash in the petty cash box decreases. Replenishing the petty cash fund restores thefund to its original balance. If the petty cash vouchers, coins and currency total differfrom the established fund, there is cash short or over.

Assuming at the end of the month the summary of petty cash payments are: OfficeSupplies – P544.60; Delivery Expense – P345.90; Advertising Expense – P300.00; TravelExpenses – P200.00; Miscellaneous Expense – P480.80.

The entry to replenish the fund is:

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Aug. 31 Office Supplies 544.60

Delivery Expense 345.90

Advertising Expense 300.00

Travel Expense 200.00

Miscellaneous Expense 480.80

Cash in Bank 1,871.30

Note: Petty Cash fund is debited only when the fund is set up or the amount of the fundis increased.

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EXAMPLE PROBLEM 1:

The accounting records of Jumbo Company indicated the followingsummary of data for cash receipts and payments for July of the current year.July 1 Cash balance – P78,870.00; Total cash receipts – P579,432.00; Totalchecks issued – P564,116.40. The bank statement received for July 31indicates a balance of P 182,862.20.

In making bank reconciliation, the following reconciling items werediscovered:

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discovered:

a. A deposit of P37,044.20 representing receipts of July 31 has been madetoo late to appear on the bank statement.

b. Check outstanding were: #321228 – P32, 652.70; #321231 – P26,557.20;and #321235 – P46,095.50.

c. The bank collected for Jumbo Company P20,600 on a note left forcollection. The face value of the note was P20,000.

d. Check #321225 for P3,690 was incorrectly charged by the bank as P3,960.

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e. Check #321232 cleared by the bank for P2,400 had beenrecorded in the depositor’s book as P4,200. This was the payment ofcreditor’s account.

f. A customers check for P3,850.60 was returned by the bank withstamped NSF.

g. The bank service charges for the month of July totaled P864.00.

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Required:

a) Prepare a bank reconciliation for July.

b) Journal entries to be made by Jumbo Company.

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• P78, 870.00 + P579, 432.00 – P564, 116.40 = P 94,185.60

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Solution Example Problem 1-b)

July 31 Cash in Bank 22,400.00

Notes Receivable 20,000.00

Interest Income 600.00

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Accounts Payable 1,800.00

31 Accounts Receivable 3,850.60

Miscellaneous Expenses 864.00

Cash in Bank 4,714.60

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SINGLE ENTRY SYSTEM:

Single Entry Bookkeeping System – is a method used where transactions arerecorded without analyzing and considering the dual effect of each transaction asis done in double entry system. The single entry method will result to haverecords that are incomplete.

Under the single entry system transactions are recorded normally to maintainrecord of cash, accounts receivable, accounts payable, property and equipment,

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record of cash, accounts receivable, accounts payable, property and equipment,and expenses paid. The most important record under the single entry system isthe Cash Record or the Cash Book.

Under this method the cash record or cash book shows the cash receipts andpayments with description of what is received and paid but without specific debitsor credits. With respect to accounts receivable and accounts payable, only a listof customers and creditors is available with their corresponding balances.

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PROBLEMS ENCOUNTERED IN SINGLE ENTRY SYSTEM:

1. Determining the firm’s net income or loss.2. Preparation of Income Statement.3. Preparation of Balance Sheet.

Net Assets or Capital Approach of Determining Net Income:

For Proprietor or Partnership:

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For Proprietor or Partnership:

Capital, end of the accounting period P xxxAdd: Withdrawals during the period xxxTotal P xxxLess: Capital, beginning of the accounting period P xxx

Additional Investment xxxNet Income (Loss) P xxx

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Retained Earnings Approach of Determining Net Income:

For a Corporation:

Retained Earnings, end of the accounting period P xxxAdd: Dividends declared or paid during the period xxxTotal P xxx

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Total P xxxLess: Retained Earnings, beginning of the accounting period xxxNet Income (Loss) P xxx

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EXAMPLE PROBLEM 2:

The following data were made available:

December 31, 20PY December 31, 20CY

Total Assets P1, 000,000 P2, 000,000

Total Liabilities 600,000 1,400,000

Net Assets (Capital) 400,000 600,000

For Single Proprietorship or Partnership:

Additional Investments 500,000

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Additional Investments 500,000

Withdrawals 600,000

For Corporation:

Retained Earnings 100,000 200,000

Capital Stock 300,000 400,000

Dividends declared and paid 300,000

Required:

a) Determine the net income for 20CY for a Single Proprietorship or Partnership.

b) Determine the net income for 20CY for a Corporation.

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Solution Example Problem 2-a)

Capital, December 31, 20CY P 600,000

Add: Withdrawals during 20CY 600,000

Total P 1,200,000

Less: Capital, December 31, 20PY P 400,000

Additional Investment 500,000 900,000

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Net Income P 300,000

Alternate Solution:

Increase in Net Assets P 200,000

Add: Excess of withdrawals over investment 100,000

Net Income P 300,000

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Solution Example Problem 2 – b)

Retained Earnings, December 31, 20CY P 200,000

Add: Dividends declared and paid during 20CY 300,000

Total P 500,000

Less: Retained Earnings, December 31, 20PY 100,000

Net Income P 400,000

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Alternate Solution:

Increase in Net Assets P 200,000

Add: Dividends declared and paid P 300,000

Less: Increase in Capital Stock 100,000 200,000

Net Income P 400,000

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RECONSTRUCTING INCOMPLETE RECORDS:

Income statement accounts are reconstructed from single entryrecordings with reference to cash receipts, cashdisbursements and the changes in assets and liabilities are:

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1. Sales

2. Purchases

3. Income other than sales

4. Operating Expenses including depreciation

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Balance sheet accounts not determinable from incomplete records may be done asfollows:

a. CASH- this can be determined through cash count and by looking at the banstatement.

b. NOTES and ACCOUNTS RECEIVABLE – this can be determined by summarizing theuncollected sales invoices and the confirmed promissory notes of tecustomers.

c. INVENTORY and SUPPLIES ON HAND at the end- that can be determined by physicalcount. To check the accuracy of the count, the beginning inventory plus the

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count. To check the accuracy of the count, the beginning inventory plus thepurchases minus the sales (in the case of inventory) or used (in the case ofsupplies) should be equal to the ending inventory.

d. Property ad Equiptment- thiscan be determined by loking at the deed of sale and otherdocuments evidencing ownwership.

e. NOTES and ACCOUNTS PAYABLE- this can be determined from by summarizing theunpaid invoices and the confirmed promissory notes given to the suppliers.

f. OWNER’S EQUITY OR CAPITAL- this can be determined by subtracting the assets andliabilities as of any given date.

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EXAMPLE PROBLEM 3:

The following data were made available from a single entry set of books of ABC Tradingowned by Juan Abalos and transactions for the current year:

Assets January 1 December 31Cash P 900,000 P 1,200,000Notes Receivable 270,000 550,000Accounts receivable 1,200,000 1,100,000Inventory 900,000 750,000Prepaid Expense 30,000 50,000

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Prepaid Expense 30,000 50,000Furniture and Equipment 750,000 900,000

Total Assets P 4,050,000 P 4,550,000

LiabilitiesNotes payable P 400,000 P 500,000Accounts payable 850,000 710,000Accrued Expense 50,000 40,000Interest Payable 5,000 15,000Unearned rent income 20,000 30,000

Total Liabilities P 1,325,000 P1, 295,000

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The cash record of the current year showed the following information:

Receipts: Disbursements:

Balance, January 1, P 900,000 Accounts payable P 1,200,000

Accounts Receivable 2,150,000 Notes payable 950,000

Notes receivable 750,000 Cash purchases 450,000

Cash Sales 600,000 Interest paid 50,000

Rent collection 150,000 Expense paid 600,000

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Sales of equipment costing Equipment purchased 300,000

P150,000 – 50% depreciated Withdrawals 300,000

Additional investment 400,000

Total P 5,050,000 Total P 3,850,000

Balance, December 31, P 1,200,000

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Additional Information:

1. Sales returns and allowance granted to customers P175,0002. Sales discounts granted to customers 75,0003. Uncollectible accounts written off 40,0004. Purchase discounts on accounts payable paid 50,000

Required:

a. Determine the Net income or loss for the year ending December 31, 20CY.

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a. Determine the Net income or loss for the year ending December 31, 20CY.b. Compute the gross sales.c. Compute the total gross purchases.d. Compute the interest expense.e. Compute the rent income.f. Compute the gain on sale of equipment.g. Compute the expensesh. Compute the depreciation on furniture and equipmenti. Prepare the Statement of Comprehensive Income for the year ended

December 31, 20CYj. Prepare the Statement of Financial Position as of December 31, 20CY

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Solution Example Problem 3-a) Net Income computation

Capital, December 31 (4,550,00 – 1,295,000) P 3,255,000Add: Withdrawals during 20CY 300,000

Total P 3,555,000Less: Capital, January 1, (4,050,000 – 1,325,000) P 2,725,000

Additional investments 400,000 3,125,000

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Additional investments 400,000 3,125,000Net Income P 430,000

Note: Analysis on increases in assets and decreases in liabilities increase netincome while decrease in assets and increases in liabilities decrease netincome.

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Solution Example Problem 3- b) Computation of Gross Sales

Notes receivable, December 31 P 550,000

Accounts receivable, December 31 1,100,000

Collections of Notes receivable 750,000

Collections of Accounts receivable 2,150,000

Sales returns and allowances 175,000

Sales discounts 75,000

Uncollectible accounts written off – Bad debts 40,000

Total 4,840,000

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Total 4,840,000

Less: Notes receivable, January 1 P 270,000

Account receivable, January 1 1,200,000 1,470,000

Sales on Account P 3,370,000

Cash Sales 600,000

Total Gross Sales P 3,970,000

Note: If the information given is only the increase or decrease in Notes or Accounts receivable, Theprocedure is add the increase or deduct the decrease in your computation. The same procedure isfollowed in the computation of purchases below.

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Solution Example Problem 3-c) Computation of Gross Purchases

Notes Payable, December 31 P 500,000Accounts payable, December 31 710,000Payments of Notes payable 950,000Payments of Accounts payable 1,200,000

Purchase discounts 50,000Total P3,410,000

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Total P3,410,000Less: Notes payable, January 1 P 400,000

Accounts payable, January 1 850,000 1,250,000Purchases on Account P 2,160,000Cash Purchases 450,000Total Gross Purchases P 2,610,000

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Solution Example Problem 3 –d) Computation of Interest Expense

Interest expense paid P 50,000

Add: Interest payable – December 31 15,000

Total 65,000

Less: Interest payable – January 1 5,000

Interest Expense 60,000

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Solution Example Problem 3- e) Computation of Rent Income

Rent income received P 150,000

Add: Unearned rent income – January 1 20,000

Total P 170,000

Less: Unearned rent income – December 31 30,000

Rent Income P 140,000

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Solution Example Problem 3 – f) Computation of Gain on Sale

Selling Price P 100,000

Less: Book Value of equipment sold (P150,000*50%)= 75,000

Gain on sale of equipment P 25,000

Solution Example Problem 3 – g) Computation of Expenses

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Expense paid P 600,000

Add: Prepaid expense – January 1 P 30,000

Accrued expenses – December 31 40,000 70,000

Total P 670,000

Less: Prepaid expenses – December 31 P 50,000

Accrued expenses – January 1 50,000 100,000

Expenses P 570,000

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Solution Example Problem 3 – h) Computation of Depreciation Expense

Furniture and Equipment – January 1 P 750,000Add: Equipment purchased 300,000Total P1,050,000Less: Furniture and Equipment - December 31 P 900,000

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Less: Furniture and Equipment - December 31 P 900,000BV of Equipment sold – P150,000*50% = 75,000 975,000

Depreciation Expense P 75,000

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Solution Example Problem 3 – I) Income StatementABC COMPANY

Statement of Comprehensive Income For the Year Ended December 31, 20CY

Sales P 3,970,000Less: Sales discounts P 75,000

Sales returns and allowances 175,000 250,000Net Sales 3,720,000Cost of Sales ( 2,710,000)Gross profit 1,010,000Rent Income 140,000

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Rent Income 140,000Gain on sale of equipment 25,000Total income 1,175,000Less Expenses:

Cash expenses 570,000Depreciation Expense 75,000Bad debts expense 40,000Interest expense 60,000 745,000

Profit P 430,000

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Solution Example Problem 3 – j) Balance Sheet

ABC COMPANYStatement of Financial PositionAs of December 31, 20CY

ASSETSCurrent Assets:

Cash P 1,200,000

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Cash P 1,200,000Notes receivable 600,000Accounts receivable 1,100,000Inventory 750,000 P3,650,000

Non Current Assets:Furniture and Equipment (Net) 900,000

Total Asset P 4,550,000

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LIABILITIES AND OWNER’S EQUITY

Current Liabilities:Notes payable P 500,000Accounts Payable 750,000Interest Payable 15,000

Unearned rent income 30,000 P 1,295,000

Owner’s Equity:

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Owner’s Equity:Juan Abalos, Capital – January 1 P 2,725,000Add: Net Income 430,000

Additional Investment 400,000Total P 3,555,000Less: Juan Abalos, Withdrawals 300,000 3,255,000

Total Liabilities and Owner’s Equity P 4,550,000

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ACCRUAL VERSUS CASH BASIS OF ACCOUNTING:

Accrual Basis of Accounting – this method recognizes and recordsrevenues, services provided or products sold, when earnedregardless of whether cash has been received. It also recognizesand records expenses when incurred regardless of whether cashhas been paid. The accrual method is the best method ofmeasuring income for most businesses.

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measuring income for most businesses.

Cash Basis of Accounting – this method recognizes and recordsrevenues, services provided or products sold, only when cash hasbeen received expenses only when cash has been paid. The cashmethod is used in some small businesses.

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EXAMPLE PROBLEM 4:

The following data represents the summarized transactions of XYZ Trading for the year 20CY,its second year of operations.

Cash sales P 750,000 Purchase return & discounts P 60,000

Sales on accounts 4,500,000 Salaries and wages paid 1,050,000

Collections from customers 4,300,000 Store and office supplies paid 300,000

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Collections from customers 4,300,000 Store and office supplies paid 300,000

Sales returns & discounts 80,000 Other operating expenses paid 100,000

Cash purchases 450,000 Interest received 60,000

Purchases on account 3,000,000 Equipment purchased 600,000

Payment to creditors 2,700,000 Interest paid 50,000

Rental collections 140,000 Accounts receivable written off 10,000

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Equipment was acquired at the beginning of its first year with a 10-year useful life.

Additional Information at December 31, 20CY:Notes & A/c receivable, 12/31/CY P 320,000Notes & A/c payable, 12/31/CY P 540,000Notes & A/c receivable, 12//31/PY 210,000Notes & A/c payable, 13/31/PY 300,000Accrued salaries payable 110,000

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Accrued salaries payable 110,000Accrued Interest payable 10,000Unused Store & office supplies 75,000Inventory, 12/31/CY 600,000Accrued Interest receivable 15,000Inventory, 12/13/PY 500,000Unearned rent income 20,000

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Required:

1. Compute the following under Cash and Accrual basis of accounting:

a. Total gross sales e. Interest expense

b. Total gross purchase f. Salaries and wages

c. Interest Income g. Store and offices supplies expense

d. Rent Income h. Depreciation expense

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2. Statement of Comprehensive Income for the year ended December 31,20CY under Cash basis of accounting.

3. Convert the Cash basis Income statement to Accrual basis of accounting.

4. Adjusting entries necessary to convert to Accrual basis.

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Solution Example Problem 4-1) Computations

Cash Basis Accrual Basisa. Cash Sales 750,000.00 750,000.00

Sales on accounts - 4,500,000.00Collections from customers 4,300,000.00 -Total Gross Sales 5,050,000.00 5,250,000.00

Computations under Accrual if sales on accounts is not given:Notes & Accounts receivable, 12/31/CY 320,000.00

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Notes & Accounts receivable, 12/31/CY 320,000.00Collections from customers 4,300,000.00Sales returns and discounts 80,000.00Accounts receivable written off 10,000.00Total 4,710,000.00Notes & Accounts receivable, 12/31/PY 210,000.00Sales on accounts 4,500,000.00Cash Sales 750,000.00Total Gross Sales 5,250,000.00Note: This procedure shows how to reconstruct an item or account not given.

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b. Cash Purchases 450,000.00 450,000.00

Purchases on account - 3,000,000.00

Payment to creditors 2,700,000.00 -

Total Gross Purchases 3,150,000.00 3,450,000.00

Computations under Accrual if Purchases on account is not given:

Notes & Accounts payable 12/31/CY 540,000.00

Payment to creditors 2,700,000.00

Purchases returns and discounts 60,000.00

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Total 3,300,000.00

Notes & Accounts payable 12/31/PY 300,000.00

Purchases on account 3,000,000.00

Cash Purchases 450,000.00

Total Gross Purchases 3,450,000.00

c. Interest received 60,000.00 60,000.00

Accrued Interest receivable 15,000.00

Interest Income 60,000.00 75,000.00

Under accrual deduct Accrued Interest receivable 12/31/PY if given.

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d. Rental collections 140,000.00 140,000.00

Unearned rent income (20,000.00)

Rent income 140,000.00 120,000.00

Under accrual add Unearned rent income 12/31/PY if given.

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e. Interest paid 50,000.00 50,000.00

Accrued Interest Payable 10,000.00

Interest expense 50,000.00 60,000.00

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Under accrual deduct Accrued Interest payable 12/31/PY if given.

f. Salaries and wages paid 1,050,000.00 1,050,000.00Accrued Salaries payable 110,000.00Salaries and Wages 1,050,000.00 1,160,000.00

Under accrual deducted Accrued salaries payable 12/31/PY if given.

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g. Store and office supplies paid 300,000.00 300,000.00Unused Store & office supplies (75,000.00)Store and office supplies expense 300,000.00 225,000.00

Under accrual and Unused Store & office supplies 12/31/PY if given.

h. Depreciation expense (P600,000/10 years)60,000.00 60,000.00

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Solution Example Problem 4-2) Income Statement (Cash Basis)

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Formula for Income other than Sales: Accrual basisIncome received P xxxAdd: Deferred income – beginning P xxx

Accrued income – ending xxxTotal xxxLess: Deferred income – ending P xxx

Accrued income – beginning xxx xxxIncome for the Period P xxx

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Formula for Operating Expenses: Accrual basisExpense Paid P xxxAdd: Prepaid expense – beginning P xxx

Accrued expenses – ending xxx xxxTotal P xxxLess: Prepaid expense - ending P xxx

Accrued expense – beginning xxx xxxExpense for the Period P xxx

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Solution Example Problem 4-4) Adjusting entries to convert to Accrual Basis

1. Sales 210,000.00Capital/ Retained earnings 210,000.00

Unearned Notes/Accounts receivable – 12/31/PY collected in the CY.

Note: Capital is for Proprietorship or Partnership, Retained earnings is for corporation.

2. Notes/Accounts receivable 320,000.00Sales 320,000.00Unrecorded Notes/Accounts receivable – 12/31/CY

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Unrecorded Notes/Accounts receivable – 12/31/CY

3. Capital/Retained earnings 300,000.00Purchases 300,000.00Unrecorded Notes/Accounts payable –12/31/PY paid in the CY.

4. Purchases 540,000.00Notes/Accounts payable 540,000.00Unrecorded Notes/Accounts payable – 12/31/CY.

5. Accrued Interest receivable 15,000.00Interest Income 15,000.00Unrecorded Accrued interest receivable –12/31/CY

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6. Rent Income 20,000.00Unearned rent Income 20,000.00Unrecorded Unearned rent income – 12/31/CY

7. Interest expense 10,000.00Accrued interest payable 10,000.00Unrecorded Accrued interest payable- 12/31/CY

8. Salaries and wages 110,000.00Accrued salaries payable 110,000.00

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Accrued salaries payable 110,000.00Unrecorded Accrued salaries payable – 12/31/CY

9. Unused store and office supplies 75,000.00Store and office supplies 75,000.00Unrecorded Unused store and office supplies – 12/31/CY

10. Capital/Retained earnings 60,000.00Depreciation expense 60,000.00Accumulated depreciation 120,000.00

Depreciation expense for CY and unrecorded depreciation for PY.

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ERROR CORRECTIONS

Kinds of Errors:

1. Clerical Errors –errors that are normally detected in the performance of theaccounting procedures and are immediately corrected. Examples arearithmetical errors (error in addition, subtraction, multiplication or division),posting to the wrong side or account, misstating an amount (over or understated)

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posting to the wrong side or account, misstating an amount (over or understated)or error of omission.

2.2. Balance Sheet Errors – errors that will affect only the real accounts (balancesheet accounts). Examples are misstatement of balnce sheet items, errors in theclassification such as current asset is eroneously classified as non-current asset,etc.

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3. Income Statement Errors – errors that will affect only the nominalaccounts (income statement accounts). Examples are misstatement inthe classification of expenses such as curent asset is eroneouslycharged to miscellaneous expense, etc.

4.4. Errors affecting both Balance Sheet and Income Statement – errorsthat will affect assets, liability or equity accounts that will have a

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that will affect assets, liability or equity accounts that will have acorresponding effect on income or expense items. The effect will eitherunderstate or overstate assets, liabilities or equity accounts withcorresponding understatement or overstatement of income and revenueitems that will understate or overstate net income.

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Errors Affecting Balance Sheet and Income Statement – The errors thataffect both these statements are either counterbalancing or non-counterbalancing.

Counterbalancing Errors – are errors that will be offset or corrected over twoperiods.

Non-counterbalancing Errors – are errors that are not offset in the nextaccounting period.

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accounting period.

COUNTERBALANCING ERRORS – First determine whether or not the bookshave been closed for the period in which the error is found.

If the books have been closed:

a. If the error is already counterbalanced, no entry is necessary.b. If the error is not yet counterbalanced, an entry is necessary to adjust thepresent balance of capital or retained earnings.

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EXAMPLE PROBLEM 5:

Jumbo Trading owned by Mario Portal reported net income as follows: 20PY –P350,000; 20CY – P500,000. It is assumed that year-end adjustments for 20CY wereproperly made except fro errors and misstatement for 20PY.

The audit and review of the records of Jumbo Trading disclosed the following errorsmade in the year 20PY.1. Inventory at the year-end was understated. P60,0002. Sales on account was recorded in 20CY. 20,0003. Purchases on account was recorded in 20CY 15,000

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4. Year –end accrued advertising was not recorded 5,0005. Year – end prepaid insurance was not recorded 8,0006. Year –end unearned rent income was omitted 6,0007. Year –end accrued interest income was omitted 3,0008. Year -end unused office supplies was unrecorded 2,5009. Year –end depreciation of equipment was omitted 4,00010. Year –end provision for bad debts was not taken up 3,500

Required:a. Prepare an analysis showing the corrected net income for 20PY and 20CY.b. Prepare the correcting entries at year-end of 20CY assuming:1) Books have not been closed.2) Books have been closed.

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Solution Example Problem 5-a.

20PY 20CYNet Income 350,000.00 500,000.00Errors made in 20PY:1. Inventory – understated 60,000.00 (60,000.00)2. Sales on account – unrecorded 25,000.00 (25,000.00)3. Purchase on account – unrecorded (15,000.00) 15,000.004. Accrued advertising – unrecorded (5,000.00) 5,000.00

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4. Accrued advertising – unrecorded (5,000.00) 5,000.005. Prepaid insurance – unrecorded 8,000.00 (8,000.00)6. Unearned rent income – omitted (6,000.00) 6,000.007. Accrued interest income – omitted 3,000.00 (3,000.00)8. Unused office supplies – unrecorded 2,500.00 (2,500.00)9. Depreciation of equipment – omitted (4,000.00) -10. Bad Debts – not taken up (3,500.00) -

Corrected Net Income 415,000.00 427,500.00

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Solution Example Problem 5-b.

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Errors are treated as prior period adjustments and reported in the current year asadjustments in the beginning balance of Capital or Retained earnings. If comparativestatements are presented, the prior year statements affected should be restated tocorrect for the error.

FINANCIAL STATEMENT ANALYSIS

OBJECTIVES:

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1. It attempts to evaluate a business entity for financial and management decision making purposes.

2. It explores some aspect of a firm’s profitability or its risk (short – term and Long– term Liquidity, or both).

3. It attempts to measure the firm’s operational efficiency and investment providedby owners and creditors.

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In order to draw valid conclusions about the financial health of an entity, it isessential to analyze and compare specific types and source of information.This analysis would include consideration of the following:

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1. A review of the firm’s accounting policies.2. An examination of recent auditors reports.3. Analysis of footnotes and other supplemental information accompanying

the various financial statements, and4. Additional information provided by trade journals and industry

publications.

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HOW TO ANALYZE FINANCIAL STATEMENTS:

1. Comparative Statements – The presentation of financial information for current and prior periods, which allows the statement user to compare changes in the individual items.

2. Horizontal Analysis – The presentation of financial statement data on a percentage basis over time. An index value of 100 is assigned to each particular base year. In succeeding years, peso amount of each item is divided by the peso

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base year. In succeeding years, peso amount of each item is divided by the peso amount of the same item in the base year. The result is the presentation of the relative growth or decline of each item in terms of the base year.

3. Vertical Analysis – The presentation of each item on a financial statement as a percentage of an appropriate base amount. Statements presented in this form are known as Common- size Statements. In an income statement, the base amount is Total Net Sales expressed as 100%. In the balance asset, the base amount is Total Assets or Total Liabilities and Owner’s Equity expressed also as 100%.

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RATIO ANALYSIS

USES OF RATIO ANALYSIS:

1. It provides an indication of the firm’s financial strengths

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1. It provides an indication of the firm’s financial strengthsand weaknesses and should generally be used inconjunction with other evaluation techniques.

2. Ratios are useful tools of financial statement analysisbecause they summarize data in a form easy tounderstand, interpret, and compare.

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CONCLUSIONS DRAWN FROM RATIO ANALYSIS

1. Short-Term Solvency – The ability of a firm to meet its current obligations as they mature.

2. Long –Term Solvency – The ability of the firm to meet interest payments, preferred dividend, and other charges. Long – term solvency is a required precondition for the repayment of principal.

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a required precondition for the repayment of principal.

3. Operational Efficiency – The ability of the business entity to generate income and earn a satisfactory return on investments.

4. Profitability – The ability of the firm to generate income and earn satisfactory returns to common stockholders.

5. Investment Analysis – Measures total investment provided by stockholders and T. resources provided by the creditors.

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EVALUATION OF SHORT-TERM SOLVENCY

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EVALUATION OF LONG-TERM SOLVENCY

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EVALUATION OF OPERATIONAL EFFICIENCY

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EVALUATION OF PROFITABILITY

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INVESTMENT ANALYSIS

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EXAMPLE PROBLEM 6:

The following are the balance sheet and income statement data of

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REQUIREMENTS:

1. Prepare comparative balance sheets for 20PY and 20CY, showing peso andpercentage increases or decreases (Horizontal Analysis).

2. Prepare income statement for the year ended December 31 20CY withcommon size percentages (Vertical Analysis).

3. Prepare comparative common-size balance sheets as of December 31 20PY

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and 20CY (Vertical Analysis).4. Evaluate the firm’s short-term solvency for 20CY5. Evaluate the firm’s long-term solvency for 20CY6. Evaluate the firm’s operational efficiency for 20CY7. Evaluate the firm’s profitability for 20CY8. Make an investment analysis for 20CY

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SOLUTION TO EXAMPLE PROBLEM 6-1

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SOLUTION TO EXAMPLE PROBLEM 6-2

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SOLUTION TO EXAMPLE 6-3

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SOLUTION TO EXAMPLE PROBLEM 6-4

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SOLUTION TO EXAMPLE PROBLEM 6-5

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SOLUTION TO EXAMPLE PROBLEM 6-6

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SOLUTION TO EXAMPLE PROBLEM 6 -7

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SOLUTION TO EXAMPLE PROBLEM 6 -8

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PROBLEMS:

3.1 Everest Company received the August Bank Statement that showeda balance of P38, 810.00 as of August 31. Other information are as follows:Balance per checkbookChecks Outstanding: P38, 120.00

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Customer’s check returned NSF P 680.00August 31 deposit not recorded in the bank statement 8,430.00Check No. 750153 for P 2,120.00 returned with the statement

Had been recorded in the books as P 2,210.00Bank service charges 550.00

Required: Prepare bank reconciliation on August 31.

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3.2 The following information pertains to GH Company’s checking account for the monthofOctober current year:Balance per bank statement, October 31 P 67, 777.70Balance per checkbook, October 31 73, 331.00Check Outstanding: No. 159179310.00Deposit on October 31 not recorded by the bank 4,000.00Returned check marked “NSF” 552.30Bank Service Charge 141.00

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Bank Service Charge 141.00

The bookkeeper of GH Company had recorded several checks incorrectly:

Required: Prepare bank reconciliation on October 31.

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3.3 On June 30, the Francis Trading Co. had a cash account balance of P17, 940.The bank statement for June showed a balance of P6, 970. The deposit of 18, 500made on June 30 were still in transit. The following information was also available:

Customer’s check returned for no sufficient funds P 530.00Bank service charges for June 80.00Check No. 211346 had been written for 3, 620 but had been

recorded in the books at 6, 320 for payment of accounts.

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recorded in the books at 6, 320 for payment of accounts.The bank incorrectly credited Francis account for 2, 500 deposit.

The following checks were outstanding:No. 211350 – P570; No. 211354 – P 1, 120; No. 211355 – P 1, 250.

Required: a. Prepare bank reconciliation.b. Prepare journal entries necessary to correct cash account.

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1.1 Joy Enterprises owned by Joyce Marcela uses a single entry system andher accountant provided the following data for the year 20CY:

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The cash record of the current year showed the following information:

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Additional information:1. Sales returns and allowances granted to customers P 160, 0002. Sales discounts granted to customers 50,0003. Uncollectible accounts written off 60,0004. Purchase discounts on accounts payable paid 50,0005. Purchase returns on merchandise purchases 40.000

Required

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Requireda. Determine the Net Income or Loss for the year ending December 31, 20CY.b. Compute the total gross sales.c. Compute the total gross purchases.d. Compute the interest expense.e. Compute the rent income.f. Compute the depreciation on equipment.g. Compute the result on sale of equipment.h. Prepare the Income Statement for the year ended December 31 20CY.i. Prepare the Balance a Balance Sheet as of December 31 20CY.

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3.5 An analysis of the incomplete records of Darlene Trading owned by DarleneRoxon provided by the following data for the year 20CY:

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The cash recorded of the current year showed the following information:

Receipts:

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Additional information:

1. Sales discounts granted to customers2. Uncollectible accounts written off3. Purchase discounts on accounts payable paid

Required:

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a. Determine the Net Income or Loss for the year ending December 31 20CYb. Compute the total Sales.c. Compute the total purchases.d. Compute the insurance expense.e. Compute the interest income.f. Compute the depreciation on equipmentg. Prepare the Income Statement for the year ended December 31, 20CY.

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1.1 The following data represents the summarized transactions of ABC Tradingowned by Adeline Cruz for the year 20CY, its second year of operations.

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At the beginning of its first year, equipment was acquired with a 10-year useful life.Additional information at December 31 20CY

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Required:

1. Compute the following under Cash and Accrual basis of accounting:a. Total gross sales e. Interest expensesb. Total gross purchases f. Salaries and wagesc. Interest Income g. Advertising expensed. Rent Income h. Depreciation expense

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d. Rent Income h. Depreciation expense

2. Income statement for the year ended December 31, 20CY under Cash basisof accounting.

3. Convert the Cash basis Income statement to Accrual basis of accounting.

4. Adjusting entries necessary to convert to Accrual basis.

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3.7 Zulu Enterprises began operations on January 1, 20PY. During the two-yearperiod ended December 31, 20CY the cash basis of accounting has beenemployed. The trial balance prepared from these records on December 31, 20CYappeared as follows:

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The following data were gathered from the records which showed:

a. Accounts receivableDecember 31, 20PY 150,000December 31, 20CY 250,000

b. Included in sales of 20PY was a 30,000 deposit by a customer formerchandise to be delivered in 20CYc. Accounts payable:

December 31, 20PY 140,000December 31, 20CY 175,000

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December 31, 20CY 175,000d. Included in purchases of 20PY was 50,000 cash advance to supplier for

merchandise to be delivered in 20CY.e. Accrued expenses:

December 31, 20PY 140,000December 31, 20CY 175,000

f. Merchandise Inventory:December 31, 20PY 350,000December 31, 20CY 420,000

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a. Building and equipment were acquired on January 1, 20PY. Building has anestimated useful life of 10 years and equipment 5 years.

b. It was determined that accounts receivable as of December 31, 20CY has95% collectibility and the remainder is uncollectible.c. Bank loan was made on July 1, 20CY with the interest rate of 12% perannum payable semi-annually on July 1 and January 1. the loan is for 5 years.

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Required:

1. Compute the income statement accounts that will be converted from cash toaccrual basis.

2. Prepare the adjusting entries on December 31, 20CY.3. Statement of Comprehensive Income for the year ended December 31, 20CY\

under accrual basis4. Statement of Financial Position as of December 31, 20CY

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1.8 State the effects of each of the following errors made in 20PY and thefollowing errors made in 20PY and the balance sheets and the incomestatements prepared in 20PY and 20CY following the analysis of accountingerrors format below.

a. The ending inventory is understated as a result of an error in the physicalcount of goods on hand by 5,500.b. The ending inventory is overstated as a result of an error including in thephysical count goods received on consignment by 8, 000.c. A purchase of merchandise for 10, 000 at the end of 20PY is not recorded

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c. A purchase of merchandise for 10, 000 at the end of 20PY is not recordeduntil payment is made for the goods in 20CY. The goods purchased wereincluded in the ending inventory of 20PY.d. A sale of merchandise in 20PY for P15, 000 is not recorded until cash isreceived for the goods in 20 CY. The goods sold with a cost of 12, 000 wereexcluded from ending inventory of 20PY.e. Goods shipped to consignees in 20PY were reported as sales of P12, 000.Goods in the hands of the consignees at the end of 20PY were not recognizedfor inventory purposes. Sale of such goods in 2OCY and collection as suchsales were recorded as credits to the receivables established with consigneesin 20PY.

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f. Accrued interest receivable was not recognized and recorded at the end of20PY amounting to P3, 000.

g. Prepaid insurance of P2, 500 was not recognized and recorded at the end of20PY.

h. Unpaid sales salaries of P 6, 000 were omitted at the end of 20PY.

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i. Unearned rent of P5, 000 was not recorded at the end of 20PY.

j. The total of one week’s sales of P25, 000 during 20PY.

k. No depreciation statement in 20PY and 20CY for equipment costingP200,000 acquired on June 30PY. The equipment has a useful

life of 10 years.

l. A customer notes receivables of 30, 000 was debited to accountsreceivable

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1.8 Rambo Trading owned by John Rambo reported net income as follows:20PY – 250,000; 20CY – 300,000. It is assumed that year-end adjustments for 20CYwere properly made expect for errors and misstatements for 20PY.The audit and review of the records of Rambo Trading disclosed the following errors

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The audit and review of the records of Rambo Trading disclosed the following errorsmade in the year 20Y:

1. Inventory at the year-end was overstated P 30, 0002. Sales on account was recorded in 20CY 12, 5003. Purchases on account was recorded in 20CY 10, 0004. Year-end accrued advertising was not recorded 3, 0005. Year-end prepaid insurance was not recorded 4, 0006. Year-end unearned rent income was omitted 3, 5007. Year-end accrued interest income was omitted 2, 5008. Year-end unused office supplies was unrecorded 2, 0009. Year-end depreciation of equipment was omitted 5, 00010. Year-end provision for bad debts was not taken up 1, 750

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Required:a. Prepare an analysis showing the corrected net income for 20PY and 20CY:b. Prepare the correcting entries at year-end f 20CY assuming:1. Books have not been closed2. Books have been closed

3.9.1 The following errors were discovered in the accounting records of Paul andPhil Partnership on January 5, 20SY.

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The partners share profit and losses as follows: Paul -40%; Phil – 60%.

1. Prepare correcting journal entries on January 5, 20SY, assuming that the books were closed for20CY.2. Prepare the correcting journal entries on January 5, 20SY, assuming that the books were still openfor 20CY.

• SY – Subsequent year.

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Cam had 10, 000 shares of common stock outstanding throughout the year. Themarket price of the stock at year-end was P65 per share. All sales are on credit.

Compute the following ratios as of the end of 20CY or for the year-ended December31, 20CY, whichever is appropriate.

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3.12 The balance sheet, income statement and related information of the Brief Companyare shown below:

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Additional Information: -

There were no preferred dividends in arrears and the balance in the accounts receivable andinventory accounts are unchanged from January 1, 20CY and there were no change in thebonds payable, preferred stock or common stock accounts during 20CY.

REQUIRED: Compute the following for the year 20CY:

a. Current ratiob. Number of times bond interest was earnedc. Average number of days’ sales in inventories (360 days)d. Book value per share of common stocke. Rate of return on common stockholders’ equityf. Debt equity ratio

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3.13

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REQUIRED

Compute the following ratios and measurable for 20CY:

a. Amount of Working Capital

b. Amount of Net Monitory Asset

c. Current Ratio

d. Acid-test (Quick) Ratio

e. Cash flow from Operations to Current Liabilities

f. Inventory Turnover

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f. Inventory Turnover

g. Ratof gross Profit on sales

h. Book value per share of stock

i. Ratio of Net Income to Net Sales

j. Net earnings per share of stock

k. Rate of return on invested capital

l. Cash Flow from Operational to Total Liabilities

m. Ratio of Stockholders’ Equity to Total Liabilities

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The following are made available to you by the management of CORVEAU Trading:

Credit sales P 420,000Inventory Turnover 7xCurrent liabilities P 80, 000Current Ratio 2 to 1Quick Ratio 1.25 to 1

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Quick Ratio 1.25 to 1Average Collection period 36 daysNumber of working days 360

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REQUIRED Compute the following:

a. Cash P _________b. Accounts receivable _________c. Inventory _________d. Total current assets P __________

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d. Total current assets P __________

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The accountant of Cornelius Trading, using HORIZONTAL ANALYSIS for analyzing the Income Statement, came up with the

following:

1998 1999 Peso Change Percentage ChangeSales P 100,000 P 1) P 2) 20%Cost of Sales 3) 63,000 3,000 4)Gross Profit P 5)P 6) P 7) 8)Expenses 30,000 9) 10) 11)

Module 3 – Constructive Accounting

Expenses 30,000 9) 10) 11)Net Profit P 12)P 13) P 14) 50%

REQUIRED: Compute the missing amounts. (1-14)

Page 133: CB Module 3 Constructive Accounting

Shown below is the condensed Income Statement of Arevalo Trading:

Sales P 1) 2) %Sales Return 3) 10)Net Sales P 4) 5) Cost of Sales 6) 70%GrossProfit P 7) 8)Expenses 9) 10)

Module 3 – Constructive Accounting

Expenses 9) 10)Net Profit P 35, 000 17.50%

REQUIRED: Compute the missing amounts. (1-10)