· This examination consists of three compulsory questions.
· Read each question carefully and make sure that you understand it before you begin answering.
· In questions that require calculations, credit will be given for showing your detailed workings.
· It’s imperative that you write your answer using your own words. Plagiarism will be penalized depending on its severity and according to AOU plagiarism policy
A- Classify the following list of items as: revenue/expense/current asset/non-current asset/current liability/non-current liability/capital
1. Non-Current Asset.
4. Non-Current Liability
5. Non-Current Asset
6. Current Liability
7. Non-Current Asset
C- Analyze the transactions of a business organized as a proprietorship described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.
A- The two main sets of accounting standards followed by businesses are GAAP and IFRS. Briefly explain how the balance sheet is formatted under each set. (You should search the internet to answer this question) (6 marks)
Under GAAP the items of a balance sheet are listed in order of their liquidity (descending order) i.e. most liquid to least liquid. The asset side begins with Current Assets. It is also called Un-Classified Balance Sheet. The balance sheet generally represents total assets equaling total liabilities and shareholders’ equity. GAAP format is globally accepted.
Under IFRS the items are listed in the reverse order then that of GAAP i.e. least liquid to most liquid. The asset side begins with Non-Current Assets. It is also called Classified Balance Sheet, showing the classification of current assets & non-current assets and current liabilities & non-current liabilities.
B- Farah Consulting completed the following transactions during December 2016:
Dec. 2 Farah invested $20,000 cash into the business
2 Paid monthly office rent, $2,000.
3 Paid cash for a computer, $3,600.
4 Purchased office furniture on account, $3,000.
5 Purchased office supplies on account, $800.
9 Performed consulting service for a client on account, $2,500.
12 Paid utilities expenses, $ 150.
18 Performed service for a client and received cash of $2,100.
21 Borrowed $2,400 cash, signing a note payable to be paid May 31, 2018.
21 Hired an administrative assistant to be paid $2,055 on the 20th day of each month.
The secretary begins work immediately.
26 Paid $200 on account.
28 Collected $400 on account.
29 Farah withdrew $1,000 cash from the business for personal use.
1. Journalize the transactions, Explanations are not required.
2. Post the journal entries to the T-accounts, and calculate account balances.
3. Prepare a trial balance as of December 31, 2016.
4. Prepare the income statement of Farah Consulting for the month ended December 31, 2016.
5. Prepare a classified balance sheet as of December 31, 2016.
6. Is Farah’s ability to pay its short term debts strong or weak? Support your answer by calculating the suitable ratio(s). (You should search the internet to answer this question) (46 marks)
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