Questions and Answers of Fundamental Accounting

True or False: Investment analysis is concerned with revenues and expenses. (Explain your answer.)
Suppose that two projects each cost $12,000. The first project returns $4,000 per year for 6 years. The second project returns $6,000 per year for 2 years. Which has the better payback period? Are
How much will $6,000 invested at 5% simple interest be worth in 3 years? What will it be worth if the interest rate is 7%?
How much will $5,000 invested at 3% interest be worth in 4 years if it is compounded annually? Quarterly? How much if the interest rate is 6%?
Suppose you were offered $10,000 every year at the same point in time for 10 years and you could earn a 5% interest rate every year. How much would these cash flows be worth today? What if the cash
The Ward County Hospital Center (WCHC) wants to buy a new mobile primary care van to use in screening residents in an underserved local neighborhood. The van will last 5 years and costs $68,000. WCHC
Suppose the Williams Health Clinic (WHC) receives a multiyear pledge from a donor. The donor stipulates that she will donate $50,000 at the beginning of each year for 5 years. WHC expects that it can
Return to question 9. Suppose at the end of year 5, WHC decides it would like to use the accumulated money from the multiyear donation for various capital projects that the organization has. Assuming
Community Health Center (CHC) is considering spending $50,000 on a blood analyzer. The annual cash profits from the machine will be $7,000 for each of the 7 years of its useful life. The board of
Why can the IRR method lead to suboptimal decision making by organizations?
Working capital techniques focus specifically on what aspects of an organization’s finances?
What specific tasks does a manager undertake when handling working capital issues?
What are the three primary reasons an organization holds cash or cash equivalents?
What is the accounts receivable cycle? Why is this task especially important for health care organizations?
What is the goal of the EOQ? How does it differ from JIT inventory?
Suppose your department uses medical supplies in the provision of services. The supplies cost $7 per box and the department uses 5,000 boxes per year. Storage and financing costs are estimated at $50
What are the steps in managing the revenue cycle?
Should an organization take a discount of 1. 5/10 N/30 on a $9,000 invoice or simply pay the bill when due?
What is capital structure? Why should health care organizations care about it?
What is equity financing in the not-for-profit sector?
How do investors make money on an organization’s stock?
Assume a for-profit company has $8 million of long-term debt with an interest rate of 6%. It has $3 million of preferred stock with a required dividend rate of 8% and $4 million of common stock that
Assume a not-for-profit company has $10 million of longterm tax-exempt debt with an interest rate of 4. 5%. The organization has $7 million of net assets without donor restrictions, with an estimated
The Hospital for Healthy Living (HHL) financial statements are in the Excel file named “CH18_Financials_Templates” at this text’s companion website. During fiscal year 2023, HHL decides to
The following transactions occurred during the year. Record these transactions.a. HHL took out a long-term loan for $3 million.b. HHL purchased $1 million in inventory with cash.c. HHL purchased
Using these transactions, create financial statements for HHL for 2023.
Calculate ratios for HHL to assess its financial strengths and weaknesses.
List the circumstances under which the members of a CC may lose their limited liability as stated in sections 63 and 64 of the Close Corporations Act.
Briefly define these terms:• Capitalisation shares.• Par value shares.• Share premium.• Participating preference shares.
Briefly describe what the purpose of an underwriter is and how they are compensated for their work.
The trial balance of Ikaneng Ltd included these balances as at 31 December 20x6:The directors decided to write all issue expenses off and to issue capitalisation shares.You are required to:1 Show
The trial balance of Allumi Limited as at 30 June 20x9 included these balances:Additional information:• The directors of Allumi Limited want to issue another 50 000 shares @ R2/share to the
Explain these terms and highlight the differences between them:• No par value shares.• Nominal value and market value.• Ordinary shares and preference shares.
Discuss the difference between a rights issue and a capitalisation issue.
The trial balance of Alfredo Limited as at 31 December 20x6 included these balances:The newly appointed bookkeeper of Alfredo Limited has approached you to assist him with these questions (each
Here is the post-closing trial balance of Easy Ltd as at 31 December 20x8:Additional information:• The company has an authorised capital consisting of 400 000 ordinary shares and 50 000 redeemable
At a meeting of the board of directors of Nahim Ltd it was decided:• On 30 September 20x1, to redeem the redeemable preference shares of the company.• To achieve this by a fresh issue of the
Here is an extract from Mapule Ltd’s statement of financial position as at 31 December 20x2:Additional information:• The preference shares are redeemable at a premium of 2% on 3 January 20x3.•
On 1 January 20x0, the company was incorporated with an authorised share capital of 150 000 ordinary shares and 50 000 preference shares (fixed annual dividend of 10c/share).The post-closing trial
The bookkeeper of Investor (Pty) Ltd, Ms Inexperienced, prepared a post-closing trial balance as at 31 October 20x5. She, however, did not take into account the additional information.Additional
Why should the amount of premium or discount arising on the issue of debentures be charged on an equitable basis to revenue?
A high inflation rate makes the traditional debenture market unattractive to the investor. What changes can be made to debentures in such circumstances to adjust to market needs?
Explain the difference between debentures and shares.
Define these terms:• Current liabilities. • Current assets.• Debentures. • Liquidity.• Leverage. • Operating cycle.• Financial assets. • Contingent liability
Give the categories into which non-current assets can be divided, with an example of each.
These balances were included on the statement of financial position of Thebe Ltd as at 30 June 20x9:1. On 31 August 20x9, the preference shares were redeemed at a premium of 40c/share.The redemption
Flavour (Pty) Ltd issued R200 000 12% secured debentures at 105% on 1 July 20x4.• Interest is payable twice yearly on 31 December and 30 June.• The debentures are redeemable at par value in ten
Balantine Ltd issued 1 000 10% secured redeemable debentures of R100 each at a discount of 95% on 1 January 20x3. Interest is payable twice yearly on 31 December and 30 June. The effective interest
The directors of Vitafix Ltd decided:• On 30 June 20x4, to issue 15 000 15%-convertible debentures of R50 each to the public at 95%.• All debentures should be fully paid before allocation.• The
Why should financial statements of companies be drafted to comply with minimum disclosure requirements and how are these requirements defined?
What is the purpose of the statement of accounting policies and how may it affect the past performance and present position of a company?
You are the newly appointed auditor of Utopia Ltd and have been presented with this statement of financial position:Utopia LtdNOTES TO THE FINANCIAL STATEMENTS OF 30 SEPTEMBER 20x61 Accounting
The Companies Act 71 of 2008 draws a distinction between provisions and reserves, and between distributable and non-distributable reserves.You are required to:1. Define the terms ‘provision’,
Here is a list of balances and totals extracted from the general ledger of Rowells Replacements Ltd at 31 December 20x3, other than share capital, reserves and dividends paid:The post-closing trial
The minimum content of a company’s annual financial statements is defined in the Companies Act 71 of 2008 and IAS 1.You are required to:List the basic contents of a set of company annual financial
Here is a list of balances and totals as at 30 June 20x9, from the books of Lapping Ltd.The registered office of the company is at 12 Robberts Road, Bellville. The detailed trading and profit and
Bonokuhle Ltd is a public company that makes electrical components.• 10 000 redeemable preference shares were redeemed on 1 June 20x3 at a premium of 10%. The only entry made, when this was done,
Explain the meaning of each of these terms and give an example in each case:• Contingent liability.• Reserve.• Provision.• Capital commitment.
Malapo Ltd operates profitably in the property letting industry. The company owns six blocks of flats, situated on Beach Road, Sea Point.On 30 June 20x3, these items appeared in the annual financial
Epsilon Ltd is engaged in the manufacture and distribution of motor spares and accessories.These balances and totals appeared in the pre-adjustment trial balance as at 30 June 20x2 (financial year
The statement of profit or loss & other comprehensive income of a company is considered by many to be the most important single statement in the annual financial statements.Prospective
Total Onslaught (Pty) Ltd is a small company which (because of its aggressive advertising campaigns) has a significant profile. The company manufactures gas-filled hot air balloons.On 31 December
Briefly discuss the two interpretations of the term ‘funds’ and indicate which interpretations are adopted in drafting the statement of cash flows.
Here are the financial statements of Diamond Ltd on 31 December 20x7:Additional information:1. Favourable market conditions enabled the company to place 200 000 ordinary shares privately with
Why is the statement of cash flows useful to the external analysers of financial statements?
Here are the financial statements of Karriem Manufacturing Company Ltd:Additional information:1. A new machine was purchased to replace an old one during the current financial year.– The old
Define these terms:• Operating activities. • Investing activities. • Financing activities.• Cash equivalents. • Statement of cash flows.
Frankie and Charlie Ltd has these balances and totals, among others, as at 31 December 20x9:1. Additional information on 1 January 20x9:2. These amounts are included in the profit before taxation:You
Why does IAS 7 require gross amounts rather than net amounts to be disclosed in a statement of cash flows?
These balances and totals are from Levenstein Ltd for the year ended 30 June 20x8:You are required to:Calculate the amount of dividends and taxation paid. Real accounts section SARS: Income
Discuss briefly the general format of a statement of cash flows and the advantages of this format.
How and where should the replacement of non-current assets be disclosed in the statement of cash flows?
Here are the post-closing trial balances of Pine Oak Ltd as at 30 June 20x4 and 30 June 20x5:Additional information:1. In March 20x5, the company sold a vacant stand that cost R5 000 for R10 000 cash
Here is the statement of financial position for Ilvico Ltd as at 30 June 20x6:Additional information:1. On 30 June 20x6, property, plant and equipment that had cost R25 000 (and on which depreciation
These balances and totals are from the books of Fit Health Club as at 31 December 20x6:Additional information:• Salary bonus of R400 is to be provided.• R150 of assessment rates is for the 20x7
Define these terms:1. Non-profit Organisation. 2. Accumulated fund. 3. Surplus.4. Receipts and payments account. 5. Statement of income and expenditure.
Under what conditions is it appropriate to capitalise income rather than disclose it in the statement of income and expenditure?
A treasurer of a tennis club has prepared this draft statement of receipts and payments. The club committee, however, wants the financial statements for 20x3 (and subsequent years) to be in the form
What is the purpose of special fund accounts?
Below is the receipts and payments account of the Reygersdal Soccer Club for the period 1 July 20x6 to 30 June 20x7, and their statement of financial position as at 30 June 20x6:Additional
This information appeared in the books of Seaview Rugby Club:These transactions took place between 1 July 20x2 and 30 June 20x3:1. Total membership subscription fees received from existing members up
These balances were taken from the books of the Welkom Squash Club at 28 February 20x8:This a summary of the club’s cash transactions for the year ended 28 February 20x9:Adjustments:1. Inventory on
This a summary of the transactions of the Keepfit Recreation Club for 20x1:1. The bank statement on 1 January 20x1 showed a credit balance of R207.2. Eighteen new members joined the club during 20x1
Below are the financial statements of Melkbos Tennis Club:Listed below are the receipts and payments for the year ended 31 December 20x5:Adjustments and other information:1. On 31 December 20x5, bar
This information is for the NWP Country Club for the year ended 31 December 20x3:1. The club had 36 members during 20x2 of whom only 31 members paid their membership subscription fees for 20x2, while
On 1 January 20x4, these balances appeared in the records of EWR Rugby Club:Adjustments and other information:1. On 31 December 20x4, the amount owed to bar payables amounted to R326.2. The accrued
On 1 January 20x3, these balances appeared in the books of the Stayfit Club:Listed below are the receipts and payments for the year ended 31 December 20x3:Additional information:1. Entrance fees are
Fancy Free Social Club was established with the main aim of promoting jogging, cycling and indoor exercise. Their cash flow for the year ended 31 May 20x2 is summarised below:Their assets and
Listed below are the financial statements of Swingles (a social club) for the year ended 30 June 20x3:Additional information:1. The bar operates on a coupon and credit basis.2. Coupons not used
To facilitate payments for drinks and to reduce the risks of misappropriation of cash by waiters, the Wonderboom Walkers Club sells books of coupons to members at a discount of 5% of their face
Arnold Traders, a sole proprietor, did not keep proper accounting records. Mr Arnold furnished you with this information relating to Arnold Traders that he extracted from his note book:Additional
You are the newly appointed accountant of Inner-City (a sole proprietor) and you have received this letter from your client:You are required to:1. Prepare the statement of profit or loss & other
Mutt and Jeff are equal partners in a sport shop called Born Losers. These balances appeared in the pre-adjustment trial balance as at 28 February 20x3: (Ignore VAT.)Adjustments:1. Depreciation must
Name and briefly discuss five factors which should be outlined in a partnership agreement.
Apple, Banana and Cherry are partners in a business called Fruit Retailers. The partnership agreement provides:1. Interest is to be allowed or charged on opening capital/current accounts at 15% per
Discuss the circumstances under which it would be equitable to introduce interest on capital in a partnership agreement.
Explain the purpose of a:1. Current account for each partner. 2. Statement of changes in equity
Q, S and T are partners in Quesentee. The partnership agreement provides for the following:1. Capital remain unchanged at:2 When dividing profits and losses, this information must be taken into
This information concerning the year ended 28 February 20x3 was extracted from the books of H. Jump and V. Spring: (Ignore VAT.)1. Net profit, before taking into account the salaries of partners,
Define goodwill and indicate the role it plays when changes in the composition of a partnership occur.

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