Where the amount paid during the year is less than the full expense for the period

the difference is
known as an accrual. Accrued expenses are recorded in the balance sheet as: Liabilities

The expense is still incurred and we owe the supplier/provider for this expense which means
a liability has increased.

Your company paid a telephone bill two days before year-end. The bill included next month's
phone line rental of $100 and charges for calls made of $300. The phone line rental would
be reflected in the financial statements as an asset.
The phone line rental has been prepaid and a prepayment is an asset.

During the year to 31 March 2003, Kiwi Limited paid wages of $127,000. The amount of
accrued wages on 1 April 2002 was $8,000 and on 31 March 2003 it was $11,000. The
wages expense for the year ended 31 March 2003 was $130,000.

expense is the amount of cost used up during the period

Payment $127,000 + extra expense $11,000 - prior year expense $8,000 = $130,000

The audit report for a company expresses an opinion on whether the financial statements
present fairly the company's financial position.

If a company reports goodwill as an asset in its Balance Sheet, what is one thing you know
with certainty? The company purchased another business.
Goodwill may be recognised when a business is purchased.

From the following information calculate the depreciation for the motor vehicle using the
straight-line method. The motor vehicle had a purchase price of $10,000 and delivery costs
of $2,000. The residual value of the motor vehicle is 0. It has a physical life of 6 years and a
useful life of 4 years. $3,000

Depreciable amount = $10,000 + $2,000 = $12,000 (all costs to get asset to working order
are included in the cost of the asset)
Useful life = 4 years
SL depreciation = $12,000 ÷ 4 = $3,000

To calculate a depreciation charge for a period, several factors need to be considered. What
is the "useful life of the asset"? Economic life
the useful life of asset is its economic life to the business
If a company chooses to depreciate an asset with an expected life of ten years using the
“diminishing value” method, rather than the “straight line” method the total effect on profit will
be the same over the life of the asset

Wilson Harris Limited publishes a monthly magazine, Auto Today. At the beginning of
September, the company’s unearned revenues included 1,200 one-year subscriptions at $36
each for this magazine. During September, the company received 200 new one-year
subscriptions. The September issue was distributed to all subscribers on 25 September. The
amount of subscription revenue the company should recognise in September would be
$4,200.

The revenue recognised is the portion of the subscription covered by the expired period.
The annual subscription is $36 therefore $3 per magazine.
Recognise revenue for 1,200 + 200 = 1,400 subscribers.
September revenue = 1,400 x 3 = 4,200.

The measurement of profit requires the calculation of revenue. Revenue is defined as:
increases in assets or decreases in liabilities that result in increases in equity, other than those
relating to contributions from holders of equity claims.

Revenue or income increases in assets or decreases in liabilities that result in increases in

equity, other than those relating to contributions from holders of equity claims

On December 31, 2005, a business reported profit of $42,000 for the year. But this figure did
not include the following: $500 of wages due but unpaid; rent of $1,200 which was prepaid
for January 2006; interest of $100 due but not received on a term deposit; and an
unprocessed customer sales order for a $1,000 January delivery. The correct profit for the
year is: $41,600

correct
$42,000-500+100 = $41,600
The rent is prepaid so doesn't affect this periods profit and an order is not a sale yet so does
not impact profit.

A major purpose of an audit report is to show that an independent party believes that the
financial statements do not contain any significant errors.

An audit report is the opinion of an independent party as to whether the financial information
is ‘true and fair’.
A company purchased new equipment at the beginning of the current accounting period. If a
manager wants to maximise the net profit for the period, he/she would choose to depreciate
this equipment using none of the other options as all would reduce the net profit for the current
period.

Polo Company sold equipment that originally cost $50,000 for $22,000 cash. If the company
correctly reports a $5,000 loss on sale, the accumulated depreciation on the asset at the
date of sale was: $23,000

the difference between asset sale price and book value (cost less accumulated
depreciation) is loss or gain on sale
If there was a loss the asset carrying value would have been $27,000 ($22,000+$5,000).
Accumulated depreciation = cost - carrying value = $50,000 - $27,000 = $23,000

The method of depreciation chosen will have an effect on the profit and loss and the balance
sheet. From the following statements choose the one that most correctly describes the effect
of depreciation in the profit and loss statement. At the end of the useful life of the asset the
depreciation charged against the asset will be the same whichever method was chosen.

As a result of a large advertising campaign in December 2000, 'Newsy' sold 1,000 annual
subscriptions for their new monthly magazine called 'Sisters'. Subscribers began receiving
copies of 'Sisters' in January 2001. Each copy of 'Sisters' sells for $5 in supermarkets. The
subscribers pay just $4.50. The revenue Newsy has earned from the subscribers to 'Sisters'
for the 6 months ended 30 June 2001 is $ 27,000

Revenue recognised is the portion of the subscriptions covered by the expired period.
The subscription period is January to June so 6 months.
1000 copies sold x $4.50 each x 6 months = $27,000

The Net profit is seen as a measure of the performance of a business. Which of the following
items won't be included in the calculation of Net profit? Loan received from S Hark
Receipt of a loan is not revenue it is a liability

What is the effect on the balance sheet and the income statement when the business has
cash sales of $12,000 of goods that were originally purchased for $8,000? increase asset
cash $12,000, decrease asset inventory $8,000; sales increased by $12,000 and cost of sales
increased by $8,000 which causes an increase to owners' equity of $4,000
During the year to 31 July 2004, Moa Limited paid insurance of $107,000. The amount of
prepaid insurance on 1 August 2003 was $26,000 and on 31 July 2004 it was $31,000. The
insurance expense for the year ended 31 July 2004 was $102,000.

The expense recognised is the portion of prepaid insurance used up during the expired
period.
In the prepaid insurance account the balance was $26,000 then a further $107,000 was paid
increasing that to $133,000 however $31,000 was prepaid again which makes the expense
$102,000.
($26,000+$107,000-$31,000 = $102,000)

On 1 Oct 2011, the company made an insurance payment of $1200 for the year ahead. This
transaction will be reflected in the Financial Statements for year-end 31 March 2012 as

Balance Sheet: Prepaid Insurance - $1200

Income Statement includes the amount of prepaid expense used up during a period and
Balance Sheet reflects the remaining prepaid expense
6 months have passed therefore 6 months is an expense and 6 months is a prepayment.

A manager who behaves opportunistically to manipulate earnings upwards could, in the first
year of depreciating an asset, estimate a higher residual value.

The nature of depreciation is best described as an allocation of cost of a fixed asset to the
periods in which benefits are received.

The measurement of profit requires the calculation of expenses. Expenses are defined as:
decreases in economic benefits during the accounting period in the form of outflows or depletions
of assets or incurrences of liabilities that result in decreases in equity, other than those relating to
distributions to equity participants

An insurance payment of $1,200 for the next 12 months was paid on November 1, 2012.
Yearly financial reports are prepared on December 31, 2012. Which of the following
statements is true about the December 31, 2012 financial reports? The Balance Sheet would
show a $1,000 non-current asset.

expense is the amount of cost used up during a period

$1,200 is paid for 12 months. Two months expense is $200. The remaining $1,000 is an
asset (prepaid expense) and this would be classed as a current asset.
At the beginning of each academic year (March), the University Fitness Studio sells annual
memberships that will expire at the end of February the following year. This year they sold
3,500 memberships at a price of $314. The revenue that would be recognised on these
memberships for the year ended June 30 is: $366,333

The revenue recognised is the portion of the fees covered by the expired period. This is for 6
months and 6 months have not passed as the academic year starts in March.
March to June is 4 months.
Revenue recognised = 3,500 memberships x $314 each x 4 ÷ 12 = $366,333