Accounting Foundations

Module 3. Accounting for Financing and Investing

Instructions
Use this template to write your answers to the question(s) for the assignment you are
submitting. Please review the material contained in the subsequent sections of this module
to help you complete this assignment.

Once complete, submit this document in the “Assignment Box” section of the course.
You will need to attach this document with your submission.

Question 1:
Accounting defines the level of wealth in a company as the shareholders’ equity, which
is represented in the equation reflected in the Balance Sheet as follow:

Shareholders’ Equity = Total Assets – Total Liabilities

a) Based on the equation above as reflected in the Balance Sheet, we can see
the claims on total assets. What are the two primary categories of claims on
assets? How do these claims arise in a business?

b) What is the key risk of using too much debt/liabilities to finance the assets in a
business? What are the advantages of using debt/liabilities to finance the
assets?
Assurance

c) A company issues 1,000 shares of its stock for $10,000, where the par value of
its stock is $1 per share; and also borrows $10,000 from a bank. Which
accounts in the balance sheet are affected by this transaction, and what is the
impact on each account?

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Accounting Foundations
Module 3. Accounting for Financing and Investing

Question 2:
Total assets are made up of current assets and non-current assets. Both types of
assets are investments made by the company to create wealth.

a) What is the key difference between current assets and non-current assets?
How do current assets and non-current assets create wealth for the company?

b) Please identify whether each of the following items recorded in the Balance
Sheet is a current asset or a non-current asset:

i. Prepaid Rental Expenses (3 months)

ii. Patent Rights
iii. Work-in-progress goods
iv. Investment in Associated Companies

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Accounting Foundations
Module 3. Accounting for Financing and Investing

Question 3: Application
Below is a set of financial statements for Evergreen Trading Company.

Profit & Loss Account Yr 20x1 Yr 20x2

For the years ended: S$000 S$000
Sales 3450 3801
Less: Cost of goods sold
Opening inventory 500 1000
Purchases ( all credit) 2570 2340
3070 3340
less: closing inventory 1000 1060
Cost of Goods sold 2070 2280

Gross Profit 1380 1520

Less: Depreciation 220 226

Less: Salaries & Wages 420 433
Less: Operating expenses (variable) 340 375
Less: Operating expenses (fixed) 240 240
Total expenses 1220 1273

Net profit/(loss) before taxation 160 247

Taxation @ 20% 32 18% 44

Net profit/(loss) 128 203

Balance Sheet for the year ended: Yr 20x1 Yr 20x2

S$000 S$000
Net Fixed Assets 1400 1234
Investments 290 290
Current Assets
Inventory 1000 1060
Trade debtors 360 417
Other debtors 20 20
Cash and bank balances 120 511
Total current assets 1500 2008
Total Assets 3190 3532
Current Liabilities
Trade creditor 258 385
Other creditor 232 232
Provision for taxation 32 44

Copyright © 2014 by Educasia Inc. All rights reserved.

Accounting Foundations
Module 3. Accounting for Financing and Investing

Total current liabilities 522 661

Long-term liabilities
Loan due in 2009 900 900
Shareholders' equity
Share capital 1000 1000
Retained earnings at start of year 640 768
Net Profit for the year 128 203
Total shareholders' equity 1768 1971
Total Shareholders' equity & liabilities 3190 3532

Cashflow Statement for the year ended: Yr 20x1 Yr 20x2

S$000 S$000
Opening balance 490 120

Receipts:
Collections from trade debtors 2650 3744

Total receipts 2650 3744

Payments:
Trade purchases 1600 2213
Operating expenses(Variable & Fixed) 760 615
Salaries & Wages 420 433
Payment of income tax 100 32
Purchase of fixed assets 140 60
Total payments 3020 3353

Increase/(Decrease) in cash flows (370) 391

Closing balance 120 511

a) What were the levels of financing from its owners and its liabilities respectively
that Evergreen Trading Company used to support its total assets as at end
20x2?

b) What were the noncurrent asset items in Evergreen Trading Company’s

financial statements as at end 20x1? What was the change in monetary terms
of the company’s noncurrent assets from 20x1 to 20x2?

Copyright © 2014 by Educasia Inc. All rights reserved.