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Chapter # 11 Financial Statements

Principles of Accounting – XI

Sameer Hussain

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Financial Statements

Chapter # 11

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Sameer Hussain

Chapter contents

Financial Statements. Cost of goods sold. Income statement:

o Single – step income statement.

o Multi – step income statement.

Elements of multi – step income statement.

Income statement of servicing business.

Balance sheet: o Report form balance sheet. o Account form balance sheet.

Missing figure in trial balance. Illustrations. Practice questions. Multiple Choice Questions (MCQs).


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Sameer Hussain Page 225


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FINANCIAL STATEMENTS FINANCIAL STATEMENTS Financial statement is a written report which quantitatively describes the financial health of a company. This includes an income statement, balance sheet, cash flow statement and statement of changes in equity. Financial statements are usually compiled on a quarterly and annually basis. Financial statements consist of five statements:

1. Income Statement. 2. Balance Sheet. 3. Cash Flow Statement. 4. Statement of Changes in Equity. 5. Notes to the Financial Statements.

COST OF GOODS SOLD Cost of goods sold is the price of purchasing or producing a product that is sold; also called cost of sales. It is calculated by the formula beginning inventory plus net purchases less ending inventory. This total is an expense on the income statement. In a manufacturing setting, the cost of goods sold is the cost of direct materials, direct labor, and overhead associated with the units sold. In a retail setting, the cost of goods sold is the wholesale cost of the items sold, plus any transportation cost to get the items to the warehouse.

Format of Statement of Cost of Goods Sold:

Name of Business Statement of Cost of Goods Sold

For the Period Ended _______ Merchandise inventory beginning XXX Add: Net Purchases: Purchases XXX Add: Transportation in XXX Add: Import duty XXX Add: Wages expense XXX Delivered purchases XXX Less: Purchase discount (XXX) Less: Purchase returns & allowances (XXX) Net purchases XXX Merchandise available for sale XXX Less: Merchandise inventory (end) (XXX) Cost of goods sold XXX

ILLUSTRATION # 1: 1991 Regular & Private – BIEK

(Cost of Goods Sold) The following balances are taken from the books of Rehmat & Co. for the year ending December 31, 1990:- Merchandise inventory (1.1.90) Rs.15,000 Purchase returns Rs.2,000 Purchases 70,000 Transportation in 1,250 Merchandise inventory (31.12.90) 10,000 Purchase discount 1,400 REQUIRED Prepare Statement of Cost of Goods Sold.


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Solution # 1: REHMAT & CO.

STATEMENT OF COST OF GOODS SOLD FOR THE PERIOD ENDED 31 DECEMBER 1990

Merchandise inventory (beginning) Rs.15,000 Add: Net Purchases: Purchases Rs.70,000 Add: Transportation in 1,250 Delivered purchases 71,250 Less: Purchase discount (1,400) Less: Purchase returns (2,000) Net purchases 67,850 Merchandise available for sale 82,850 Less: Merchandise inventory (ending) (10,000) Cost of goods sold Rs.72,850

COST OF GOODS SOLD ACCOUNT Cost of Goods Sold

Merchandise inventory beginning XXX Purchase return and allowance XXX Purchases XXX Purchase discount XXX Transportation – in XXX Merchandise inventory ending XXX Import duty XXX Cost of goods sold (Transferred to XXX Wages expense XXX Profit and loss account) XXX XXX

ILLUSTRATION # 2:

(Cost of Goods Sold Account) The following balances are taken from the books of Karim Sons for the year ending December 31, 2003:- Merchandise inventory opening Rs.10,000 Purchase returns Rs.2,000 Purchases 100,000 Transportation in 3,000 Merchandise inventory ending 20,000 Purchase discount 4,000 Wages expense 20,000 Import duty 5,000 REQUIRED Prepare Cost of Goods Sold account.

Solution # 2: Karim Sons

Cost of Goods Sold Account Merchandise inventory beginning 10,000 Purchase return and allowance 2,000 Purchases 100,000 Purchase discount 4,000 Transportation – in 3,000 Merchandise inventory ending 20,000 Import duty 5,000 Cost of goods sold (Transferred to 112,000 Wages expense 20,000 Profit and loss account) 138,000 138,000

Explanation of Solution # 2: All the expenses are recorded on the left (debit) side of cost of goods sold account and all those accounts that reduces expense or are credit in nature, are recorded on the credit side of the


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account. The balancing amount on credit side is the amount of cost of goods sold which is transferred to the income statement or profit and loss account.

INCOME STATEMENT Income statement shows the financial performance of the business. It shows the result of operations for a period. It consists of revenue and expenses. When total revenues exceed the total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting amount is net loss.

SINGLE – STEP INCOME STATEMENT A format for the income statement that lists all revenues and gains, and then all expenses and losses (except taxes), without classifying them by source is called single – step income statement. Taxes are usually separated from the other expenses and losses and are on the last line, right before net income. Format of Single – Step Income Statement:

Name of Business Income Statement

For the Period Ended _______ Revenues: Sales revenue XXX Interest income XXX Commission income XXX Total revenues XXX Less: Total Expenses: Cost of goods sold XXX Salaries expense XXX Advertising expense XXX Utilities expense XXX Bad debts expense XXX Rent expense XXX Insurance expense XXX Supplies expense XXX Repair expense XXX Depreciation expense XXX Total expenses (XXX) Operating profit/loss XXX/(XXX) Less: Income tax expense (XXX) Net income/loss XXX/(XXX)

Income Statement

Revenues Expenses


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ILLUSTRATION # 3:

(Single – Step Income Statement) The following balances are extracted from the books of Mr. Furqan for the year ending December 31, 1998:- Cost of goods sold Rs.300,000 Sales revenue Rs.500,000 Salaries expense 20,000 Rent income 30,000 Insurance expense 10,000 Advertising expense 25,000 Depreciation expense 15,000 Utilities expense 20,000 REQUIRED Prepare single – step income statement for the period ended December 31, 1998.

Solution # 3: MR. FURQAN

INCOME STATEMENT FOR THE PERIOD ENDED DECEMBER 31, 1998

Revenues: Sales revenue 500,000 Rent income 30,000 Total revenues 530,000 Less: Total Expenses: Cost of goods sold 300,000 Salaries expense 20,000 Advertising expense 25,000 Utilities expense 20,000 Insurance expense 10,000 Depreciation expense 15,000 Total expenses (390,000) Net income 140,000

Explanation of Solution # 3: Total revenues are Rs.530,000 and total expenses are Rs.390,000. Total revenues exceeds from total expenses by Rs.140,000 (530,000 – 390,000 = 140,000). When total revenues are more than total expenses, it results net profit. Here, net profit is Rs.140,000.

MULTI – STEP INCOME STATEMENT A format for the income statement that classifies revenues, gains, expenses, and losses into operating and non-operating categories.

Multiple-step income statements always start with sales revenue and deduct the cost of goods sold to get gross profit. This relationship is thus highlighted by presentation on the face of the income statement. The single-step format does not do this.

The multiple-step format then lists the operating expenses, usually classifying them as selling expenses, general expenses, or administrative expenses.

Income from operations, or operating income, is the difference between the gross profit and operating expenses, and is specifically listed.

The next section on the multiple-step income statement includes other revenues and gains, expenses, and losses. This section presents items that are not related to the regular business activities, such as interest and gains or losses from selling assets.

The multiple-step format then highlights the income before taxes, the net of income from operations, and the “other” section.

The next line is tax expense, followed by net income.


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ELEMENTS OF MULTI – STEP INCOME STATEMENT Following are the elements used for preparing a multi – step income statement:

Gross Sales: The total amount of sales revenue before adjusting for sales returns, sales allowances, or sales discounts.

Net Sales: The value of sales made during an accounting period, reduced by any returns made by customers, any discounts given to customers, and any other reductions from the original selling price of the goods.

Cost of Goods Sold:

Calculated by the formula beginning inventory plus net purchases less ending inventory. This total is an expense on the income statement. In a manufacturing setting, the cost of goods sold is the cost of direct materials, direct labor, and overhead associated with the units sold. In a retail setting, the cost of goods sold is the wholesale cost of the items sold, plus any transportation cost to get the items to the warehouse.

Merchandise Inventory Beginning:

The value and the number of units, that are in inventory at the beginning of the accounting period. Beginning inventory is used to calculate the cost of goods sold.

Gross Purchases:

Purchases shows the buying of merchandise for resale purpose. Purchase of fixed assets or supplies are not recorded as purchases. The total amount of purchases of merchandise before adjusting purchase returns and purchase discounts is called gross purchases.

Net Purchases:

The value of a company’s inventory purchases during an accounting period reduced by any returns, discounts, or other reductions of the price actually paid for the goods. Net purchases can be used to calculate the cost of goods sold in businesses using periodic inventory systems.

Freight – in:

The delivery cost associated with getting purchased inventory items from the source to the company that will resell them. Freight-in is a cost that is included in inventory and is reflected in the cost of goods sold.

Wages Expenses: The compensation earned by hourly-paid employees during the interval of time is called wages expenses.

Merchandise Available for Sale:

In a retail environment, calculated by the formula beginning inventory plus net purchases. This total represents the cost of all products available for sale during the period. In a manufacturing business, goods available for sale can be calculated as beginning-finished-goods inventory plus goods completed during the accounting period.

Merchandise Inventory Ending:

The value and the number in units, in inventory at the end of the accounting period. Ending inventory is used to calculate the cost of goods sold. Ending inventory from one year becomes the next year’s beginning inventory.


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Gross Profit: When the sales revenue is more than the cost of goods sold, it is called gross profit.

Gross Loss: When the sales revenue is less than the cost of goods sold, it is known as gross loss.

Operating Expenses: Costs associated with the regular business activities of an entity. Operating expenses are listed on a multiple-step income statement after the cost of goods sold.

Selling Expenses: Cost incurred to sell (e.g., advertising, salesperson commission) or distribute (e.g., freight-out) merchandise. It is one of the types of operating expenses and is a period cost.

Administrative Expenses:

All expenses incurred in connection with performing general and administrative activities. Examples are executives' salaries and legal expenses. General and administrative expenses are shown under operating expenses in the income statement.

Freight – out: The cost of delivering products to the buyer. Freight-out is classified as a selling expense.

Operating Income:

Sales minus the cost of goods sold minus selling, general, and administrative expenses. On the income statement, operating income is found before the “other revenues, gains, expenses, and losses” section. Operating income can also be calculated by starting with net income and deducting taxes and interest.

Operating Loss: The result of cost of goods sold and operating expenses exceeding revenues. Contrast with operating income, which is equal to the excess of revenues over the cost of goods sold and operating expenses.

Income Tax Expense:

The amount of income tax that is associated with (matches) the net income reported on the company's income statement. This amount will likely be different than the income taxes actually payable, since some of the revenues and expenses reported on the tax return will be different from the amounts on the income statement.

Net Income: Total revenues and gains less total expenses and losses for the accounting period.

Net Loss: In a business, the result of expenses and losses exceeding revenues and gains. Contrast with net income, in which the reverse is true, and revenues exceed expenses.


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Format of Multi – Step Income Statement:


For the Period Ended _______ Sales XXX Less: Sales discount XXX Less: Sales returns and allowances XXX (XXX) Net sales XXX Less: Cost of Goods Sold: Merchandise inventory (beg) XXX Add: Net Purchases: Purchases XXX Add: Transportation in XXX Add: Import duty XXX Add: Wages expense XXX Delivered purchases XXX Less: Purchase discount (XXX) Less: Purchase returns & allowances (XXX) Net purchases XXX Merchandise available for sale XXX Less: Merchandise inventory (end) (XXX) Cost of goods sold (XXX) Gross profit / loss XXX/(XXX) Less: Operating Expenses: Selling Expenses: Sales salaries expense XXX Advertising expense XXX Utilities expense – Selling XXX Bad debts expense XXX Rent expense – Selling XXX Total selling expense XXX Administrative Expenses: Office salaries expense XXX Insurance expense XXX Utilities expense – Office XXX Supplies expense XXX Office rent expense XXX Repair expense XXX Depreciation expense XXX Total administrative expenses XXX Total operating expenses (XXX) Profit/loss from operation XXX/(XXX) Add: Other Income: Commission income XXX Income before income tax XXX Less: Income tax expense (XXX) Net profit/Loss XXX/(XXX)


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(Income Statement Without Adjusting Entries – Net Profit) The following balances have been taken from the ledger of Zahid and Co. on December 31, 1996, the close of their financial year: Merchandise inventory January 1, 1996 Rs.6,000; Purchases Rs.39,000; Freight Rs.2,000; Merchandise inventory December 31, 1996 Rs.10,000; Office supplies expense Rs.1,400; Rent expense Rs.200; Salaries expense Rs.1,600; General expense Rs.1,500; Sales Rs.70,000. REQUIRED Prepare classified Income Statement for the year ended December 31, 1996.

Solution # 4: ZAHID AND CO.

INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 1996

Sales 70,000 Less: Cost of Goods Sold: Merchandise inventory beginning 6,000 Add: Net Purchases: Purchases 39,000 Add: Freight 2,000 Net purchases 41,000 Merchandise available for sale 47,000 Less: Merchandise inventory ending (10,000) Cost of goods sold (37,000) Gross profit 33,000 Less: Operating Expenses: Salaries expense 1,600 Rent expense 200 Office supplies expense 1,400 General expense 1,500 Total operating expenses (4,700) Net profit 28,300

Explanation of Solution # 4: Sales revenue is Rs.70,000 and cost of goods sold is Rs.37,000. Sales revenue is more than cost of goods sold which shows the gross profit of Rs.33,000 (70,000 – 37,000 = 33,000). Operating expenses are Rs.4,700. Net profit is Rs.28,300 (33,000 – 4,700 = 28,300).

ILLUSTRATION # 5:

(Income Statement Without Adjusting Entries – Net Loss) The following balances have been taken from the ledger of Mr. Kamran on June 30, 2003: Merchandise inventory July 1, 2002 Rs.10,000; Purchases Rs.90,000; Purchase returns and allowance Rs.3,000; Purchase discount Rs.2,000; Transportation – in Rs.8,000; Merchandise inventory June 30, 2003 Rs.3,000; Insurance expense Rs.5,000; Rent expense Rs.6,000; Salaries expense Rs.10,000; Sales Rs.120,000; Sales return and allowance Rs.1,000; Sales discount Rs.2,000. REQUIRED Prepare classified Income Statement for the year ended June 30, 2003.


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Solution # 5: MR. KAMRAN

INCOME STATEMENT FOR THE PERIOD ENDED JUNE 30, 2003

Sales 120,000 Less: Sales return allowance (1,000) Less: Sales discount (2,000) Net sales 117,000 Less: Cost of Goods Sold: Merchandise inventory beginning 10,000 Add: Net Purchases: Purchases 90,000 Add: Transportation – in 8,000 Delivered purchases 98,000 Less: Purchase return and allowances (3,000) Less: Purchase discount (2,000) Net purchases 93,000 Merchandise available for sale 103,000 Less: Merchandise inventory ending (3,000) Cost of goods sold (100,000) Gross profit 17,000 Less: Operating Expenses: Insurance expense 5,000 Rent expense 6,000 Salaries expense 10,000 Total operating expenses (21,000) Net loss (4,000)

Explanation of Solution # 5: Net sales is Rs.117,000 and cost of goods sold is Rs.100,000. Sales revenue is more than cost of goods sold which shows the gross profit of Rs.17,000 (117,000 – 100,000 = 17,000). Operating expenses are Rs.21,000. Total operating expenses are more than gross profit which results net loss of Rs.4,000 (17,000 – 21,000 = 4,000).

ILLUSTRATION # 6:

(Income Statement With Adjusting Entries) The following balances have been taken from the ledger of Saeed & Co. on December 31, 2001: Inventory opening Rs.30,000; Prepaid insurance Rs.5,000; Prepaid rent Rs.4,000; Furniture Rs.15,000; Allowance for depreciation Rs.3,000; Purchases Rs.200,000; Sales Rs.300,000; Sales return and allowance Rs.2,000; Purchas return and allowance Rs.5,000; Salaries expense Rs.35,000; Advertising expense Rs.5,000; Interest income Rs.1,000. Data for Adjustment on December 31, 2001: (a) Inventory ending was Rs.50,000. (b) Rent expired during the year Rs.3,000. (c) Insurance expired during the year Rs.2,000. (d) Outstanding salaries Rs.3,000. (e) Interest receivable Rs.1,000. (f) Depreciation on furniture Rs.2,000. REQUIRED Prepare Income Statement for the year ended December 31, 2001.


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Solution # 6: SAEED & CO.

ADJUSTING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER 2001

Date Particulars P/R Debit Credit 1 Merchandise inventory 50,000 Expense and revenue summary 50,000 (To adjust the merchandise inventory) 2 Rent expense 3,000 Prepaid rent 3,000 (To adjust the prepaid rent) 3 Insurance expense 2,000 Prepaid insurance 2,000 (To adjust the prepaid insurance) 4 Salaries expense 3,000 Salaries payable 3,000 (To adjust the accrued salaries) 5 Interest receivable 1,000 Interest income 1,000 (To adjust the accrued interest income) 6 Depreciation expense 2,000 Allowance for depreciation – Furniture 2,000 (To adjust the depreciation expense)

SAEED & CO.


Sales 300,000 Less: Sales return allowance (2,000) Net sales 298,000 Less: Cost of Goods Sold: Merchandise inventory beginning 30,000 Add: Net Purchases: Purchases 200,000 Less: Purchase return and allowances (5,000) Net purchases 195,000 Merchandise available for sale 225,000 Less: Merchandise inventory ending (50,000) Cost of goods sold (175,000) Gross profit 123,000 Less: Operating Expenses: Salaries expense (35,000 + 3,000) 38,000 Advertising expense 5,000 Rent expense 3,000 Insurance expense 2,000 Depreciation expense 2,000 Total operating expenses (50,000) Profit from operation 73,000 Add: Other Income: Interest income (1,000 + 1,000) 2,000 Net income 75,000


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Explanation of Solution # 6: Net sales were Rs.298,000 and cost of goods sold computed as Rs.175,000. Sales revenue were more than cost of goods sold which shows gross profit of Rs.123,000 (298,000 – 175,000 = 123,000). Operating expenses include:

Salaries expense of Rs.35,000 as per trial balance. Adjustment data shows unpaid salaries of Rs.3,000. Unpaid salaries increases expense and liability as well. Therefore, salaries expense was reported in income statement as Rs.38,000 ( 35,000 + 3,000 = 38,000).

Trial balance showed advertising expense of Rs.5,000. There was no adjustment for advertising. Therefore, Rs.5,000 was reported in income statement.

Trial balance showed prepaid advertising (asset). No asset account is recorded in income statement. But adjustment data showed rent expired Rs.3,000. It showed increase in rent expense and decrease in prepaid rent by Rs.3,000. Increase in expense is recorded in income statement by Rs.3,000. The same treatment was for insurance expense.

Depreciation expense was recorded in income statement by Rs.2,000. Total operating expenses were Rs.50,000 which was less than gross profit. Operating income was Rs.73,000 (123,000 – 50,000 = 73,000). Other income included interest income which showed a balance of Rs.1,000 in trial balance. Adjustment data indicated accrued interest of Rs.1,000. Accrued interest increases income as well as receivable. Increase in income was added in interest income. Therefore, total interest income was Rs.2,000 (1,000 + 1,000 = 2,000) and net profit was Rs.75,000 (73,000 + 2,000 = 75,000).

INCOME STATEMENT OF SERVICING BUSINESS In a servicing business, sales revenue account, merchandise account and cost of goods sold account are not prepared because these accounts relate to merchandising business. The income statement of servicing business consists of service revenue less operating expenses.

Format of Single – Step Income Statement:


For the Period Ended _______ Commission income XXX Less: Operating Expenses: Salaries expense XXX Advertising expense XXX Utilities expense XXX Bad debts expense XXX Rent expense XXX Insurance expense XXX Supplies expense XXX Repair expense XXX Depreciation expense XXX Total operating expenses (XXX) Operating profit/loss XXX/(XXX) Less: Income tax expense (XXX) Net income/loss XXX/(XXX)

There could be any other income like rent income, interest income, etc. depending on the nature of business.


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ILLUSTRATION # 7:

(Income Statement of Servicing Business) A summary of the records of Mr. Adnan for the year ending December 31, 2004 is as follows: Commission income Rs.100,000; Salaries expense Rs.30,000; Rent expense Rs.20,000; Furniture Rs.20,000; Insurance expense Rs.8,000; Utilities expense Rs.7,000; Advertising expense Rs.6,000. Additional Information on December 31, 2004:

(i) Accrued salary Rs.20,000. (ii) Prepaid rent Rs.5,000. (iii) Accrued commission income Rs.10,000. (iv) Depreciation expense on furniture Rs.1,000. (v) Bad debts expense Rs.3,000.

REQUIRED Prepare income statement for the period ended December 31, 2004.

Solution # 7: MR. ADNAN


Date Particulars P/R Debit Credit 1 Salaries expense 20,000 Salaries payable 20,000 (To adjust the accrued salaries) 2 Prepaid rent 5,000 Rent expense 5,000 (To adjust the rent expense) 3 Commission receivable 10,000 Commission income 10,000 (To adjust the accrued commission income) 4 Depreciation expense 1,000 Allowance for depreciation – Furniture 1,000 (To adjust the depreciation expense) 5 Bad debts expense 3,000 Allowance for bad debts 3,000 (To adjust the bad debts expense)

MR. ADNAN


Commission income (100,000 + 10,000) 110,000 Less: Operating Expenses: Salaries expense (30,000 + 20,000) 50,000 Rent expense (20,000 – 5,000) 15,000 Insurance expense 8,000 Utilities expense 7,000 Advertising expense 6,000 Depreciation expense 1,000 Bad debts expense 3,000 Total operating expenses (90,000) Net income 20,000


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Explanation of Solution # 7: Commission income is Rs.100,000 as per trial balance and accrued commission

Rs.10,000 as per adjustment data. Accrued income increases the commission income which is added in commission income by Rs.10,000. Total commission income is Rs.110,000 (100,000 + 10,000 = 110,000).

Salaries expense is Rs.60,000 and adjustment data shows accrued salary of Rs.20,000. Accrued expenses increases the salaries expense by Rs.20,000. Total salaries expense of Rs.80,000 (60,000 + 20,000 = 80,000) is reported in income statement.

Rent expense is Rs.20,000 but adjustment data indicates prepaid rent of Rs.5,000. Prepaid reduces the rent expense by Rs.5,000. Therefore, total rent expense of Rs.15,000 (20,000 – 5,000 = 15,000) is reported in income statement.

Insurance expense of Rs.8,000; utilities expense of Rs.7,000 and advertising expense of Rs.6,000 have no adjustment at the en do the period. Hence, the same amount of these expenses are reported in income statement.

Depreciation is reported as Rs.1,000. Bad debts expense is reported in income statement Rs.3,000.

Total expenses are Rs.90,000 and total revenues are Rs.110,000. Total revenue exceeds from total expenses by Rs.20,000 (110,000 – 90,000 = 20,000) which is considered as net profit.

BALANCE SHEET Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and owner’s equity on a given date. It is a quantitative summary of company’s financial condition at a specific point in time, including assets, liabilities and net worth. The first part of balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and owner’s equity).

Balance Sheet

Assets = Liabilities + Owner’s Equity

Current Assets + Fixed Assets +

Fictitious Assets – Contra Assets

Current Liabilities + Long Term Liabilities

Capital + Additional Investment +

Net Profit* – Drawings

* Net profit is added in the capital because it increases owner’s equity. But in case of loss, owner’s equity decreases. Net loss is subtracted from capital.

REPORT FORM BALANCE SHEET It is a presentation format of the balance sheet that lists assets, followed by liabilities and equities.

ACCOUNT FORM BALANCE SHEET It is a presentation format of the balance sheet that lists assets on the left side of the sheet and liabilities and equities on the right side. Contrast with the report form of the balance sheet, in which assets are listed first, followed vertically by liabilities and equities.


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Format of Report Form Balance Sheet: Name of Business

Balance Sheet As on __________

ASSETS Current Assets: Cash XXX Bank XXX Marketable securities XXX Accounts receivable XXX Less: Allowance for bad debts (XXX) XXX Notes receivable XXX Merchandise inventory XXX Supplies XXX Prepaid expenses XXX Other current assets XXX Total current assets XXX Fixed Assets: Tangible Fixed Assets: Building XXX Less: Allowance for depreciation (XXX) XXX Furniture XXX Less: Allowance for depreciation (XXX) XXX Equipment XXX Less: Allowance for depreciation (XXX) XXX Land XXX Total tangible fixed assets XXX Intangible Fixed Assets: Goodwill XXX Trademark XXX Patents XXX Copyright XXX Total intangible fixed assets XXX Total fixed assets XXX Total assets XXX

EQUITIES

Liabilities: Current Liabilities: Accounts payable XXX Notes payable XXX Accrued liabilities XXX Unearned revenue XXX Bank overdraft XXX Other current liabilities XXX Total current liabilities XXX


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Long Term Liabilities: Debentures payable XXX Bonds payable XXX Mortgage payable XXX Bank loan XXX Other long term liabilities XXX Total long term liabilities XXX Total liabilities XXX Owner’s Equity: Capital XXX Add: Additional investment XXX Add: Net profit/(Net loss) XXX/(XXX) XXX Less: Drawings (XXX) Total owner’s equity XXX Total equities XXX

Format of Account Form Balance Sheet: Name of Business

Balance Sheet As on ________

ASSETS EQUITIES Current Assets: Liabilities: Cash XXX Current Liabilities: Bank XXX Accounts payable XXX Marketable securities XXX Notes payable XXX Accounts receivable XXX Accrued liabilities XXX Less: All. for bad debts (XXX) XXX Unearned revenues XXX Notes receivable XXX Bank overdraft XXX Merchandise inventory XXX Other current liabilities XXX Prepaid expenses XXX Total current liabilities XXX Supplies XXX Other current assets XXX Long Term Liabilities Total current assets XXX Mortgage payable Debentures payable XXX Fixed Assets: Bonds payable XXX Tangible Fixed Assets: Bank loan XXX Equipment XXX Other long term liabilities XXX Less: All. for dep. (XXX) XXX Total long term liabilities XXX Land XXX Total liabilities XXX Total tangible fixed assets XXX Owner’s Equity: Intangible Fixed Assets: Capital XXX Goodwill XXX Add: Additional investment XXX Patents XXX Add: Net profit/(Net loss) XXX/(XXX) Total intangible fixed assets XXX XXX Total fixed assets XXX Less: Drawings (XXX) Total owner’s equity XXX Total assets XXX Total equities XXX


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MISSING FIGURE IN TRIAL BALANCE If amount of any asset or expense (or debit balance of any account) is missing, it can obtained by subtracting available debits from total credits and if the amount of liability, revenue or owner’s equity (or credit balance of any account) is missing, it can be computed by subtracting available credits from total debits.


(Balance Sheet Without Adjusting Entries) On December 31, 1996, the ledger accounts of Waseem Traders showed the following balances:- Cash Rs.3,700 Merchandise inventory Rs.7,500 Accounts receivable 4,000 Shop furniture 7,000 Prepaid rent 4,600 Office equipment 3,500 Building 44,000 Bank loan 10,000 Office furniture 4,000 Capital ? Accounts payable 5,500 Drawings 4,500 Bank 8,500 Net income 35,700 Note receivable 5,000 REQUIRED Prepare classified report form balance Sheet.

Solution # 8: WASEEM TRADERS

BALANCE SHEET AS ON 31 DECEMBER 1996

ASSETS Current Assets: Cash 3,700 Bank 8,500 Accounts receivable 4,000 Merchandise inventory 7,500 Prepaid rent 4,600 Note receivable 5,000 Total current assets 33,300 Fixed Assets: Building 44,000 Office furniture 4,000 Shop furniture 7,000 Office equipment 3,500 Total fixed assets 58,500 Total assets 91,800

EQUITIES

Liabilities: Current Liabilities: Accounts payable 5,500 Bank loan 10,000 Total liabilities 15,500


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Owner’s Equity: Capital 45,100 Add: Net profit 35,700 80,800 Less: Drawings (4,500) Total owner’s equity 76,300 Total equities 91,800

Computation of Capital: Total Debits: Cash Rs.3,700 Accounts receivable 4,000 Prepaid rent 4,600 Building 44,000 Office furniture 4,000 Bank 8,500 Note receivable 5,000 Merchandise inventory 7,500 Shop furniture 7,000 Office equipment 3,500 Drawings 4,500 Total debits 96,300 Less: Total Credits: Accounts payable 5,500 Bank loan 10,000 Net income 35,700 Total credits (51,200) Capital 45,100

Explanation of Solution # 8:

Capital is missing in the trial balance. As we know that total debits of trial balance must equal to the total credits of trial balance. Capital is missing. It means a credit amount is missing from credit side of trial balance. To find the capital balance, subtract the total credits from the total debits. Total debits are Rs.96,300 and total credits are Rs.51,200. Capital is Rs.45,100 (96,300 – 51,200 = 45,100).

Balance sheet states that assets equal to liabilities plus owner’s equity. Total assets are Rs.91,800 which is equal to liabilities plus owner’s equity Rs.91,800 (15,500 + 76,300 = 91,800).

ILLUSTRATION # 9:

(Balance Sheet With Adjusting Entries) On December 31, 1984, the ledger accounts of Akram Sons showed the following balances: Cash Rs.10,000 Merchandise inventory Rs.13,000 Accounts receivable 15,000 Capital 102,000 Prepaid rent 4,000 Drawings 4,000 Building 80,000 Net loss 20,000 Accounts payable 20,000 Bank overdraft 10,000 Data for Adjustment on December 31, 1984:

1) Unpaid salaries Rs.2,000. 2) Depreciation on building @ 10% per annum.


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3) Rent expired during the period Rs.1,000. 4) Bad debts was estimated Rs.3,000.

REQUIRED Prepare classified account form balance Sheet.

Solution # 9: AKRAM SONS


Date Particulars P/R Debit Credit 1 Salaries expense 2,000 Salaries payable 2,000 (To adjust the accrued salaries) 2 Depreciation expense (80,000 x 10%) 8,000 Allowance for depreciation – Building 8,000 (To adjust the depreciation expense) 3 Rent expense 1,000 Prepaid rent 1,000 (To adjust the prepaid rent) 4 Bad debts expense 3,000 Allowance for bad debts 3,000 (To adjust the bad debts expense)

AKRAM SONS BALANCE SHEET

AS ON 31 DECEMBER 1984 ASSETS EQUITIES

Current Assets: Liabilities: Cash 10,000 Accounts payable 20,000 Accounts receivable 15,000 Bank overdraft 10,000 Less: All. For Bad debts (3,000) 12,000 Salaries payable 2,000 Merchandise inventory 13,000 Total liabilities 32,000 Prepaid rent 3,000 Total current assets 38,000 Owner’s Equity: Capital 102,000 Fixed Assets: Less: Net loss (20,000) Building 80,000 Less: Drawings (4,000) Less: All. for depreciation (8,000) Total owner’s equity 78,000 Total fixed assets 72,000 Total assets 110,000 Total equities 110,000


Adjustment data shows unpaid salaries of Rs.2,000. Accrued salaries increases the expense as well as liability of the business. Increases in expenses is reported in income statement and increase in liability is reported in balance sheet Rs.2,000 under liabilities section.

Depreciation on building reduces the value of building by Rs.8,000. Rent expense decreases the prepaid rent by Rs.1,000. Prepaid rent in trial balance is

Rs.4,000 and prepaid rent reduces by Rs.1,000 at the end of the period. Remaining prepaid of Rs.3,000 is reported in balance sheet as current assets.


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Bad debts reduces accounts receivable by Rs.3,000. Total of assets Rs.110,000 is equal to the total of liabilities plus owner’s equity Rs.110,000 (32,000 + 78,000 = 110,000).


(Income Statement & Balance Sheet Without Adjusting Entries) The following have been taken from the adjusted trial balance of Al-Mukhtar and Company prepared on December 31, 1989.

DEBIT BALANCES CREDIT BALANCES Cash 600 Allow. for depreciation -Furniture 4,000 Accounts receivable 1,500 Accounts payable 1,400 Merchandise inventory 6,000 Salaries payable 300 Store supplies 300 Rent payable 200 Prepaid advertising 4,000 Advance from customers 2,300 Furniture 10,000 Mukhtar Capital 10,000 Cost of goods sold 80,000 Sales revenue 91,600 Sales salaries 4,000 Office rent expense 1,200 Advertising expense 1,000 Store supplies expense 200 Depreciation expenses 1,000 REQUIRED

a) Income Statement for the year ended December 31, 1989. b) Balance Sheet as of December 31, 1989 (properly classified).

Solution # 10: AL-MUKHTAR & COMPANY

INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 1989

Sales 91,600 Less: Cost of goods sold (80,000) Gross profit 11,600 Less: Operating Expenses: Sales salaries 4,000 Office rent expense 1,200 Advertising expense 1,000 Store supplies expense 200 Depreciation expenses 1,000 Total operating expenses (7,400) Net profit 4,200

AL-MUKHTAR & COMPANY

BALANCE SHEET AS ON 31 DECEMBER 1989

ASSETS EQUITIES Current Assets: Liabilities: Cash 600 Accounts payable 1,400 Accounts receivable 1,500 Salaries payable 300 Merchandise inventory 6,000 Rent payable 200 Store supplies 300 Advance from customers 2,300


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Sameer Hussain

Prepaid advertising 4,000 Total liabilities 4,200 Total current assets 12,400 Owner’s Equity: Fixed Assets: Capital 10,000 Furniture 10,000 Add: Net profit 4,200 Less: All. for depreciation (4,000) Total owner’s equity 14,200 Total fixed assets 6,000 Total assets 18,400 Total equities 18,400

Explanation of Solution # 10: Sales revenue is Rs.91,600 and cost of goods sold is Rs.80,000. Revenue is more than cost of goods sold which results gross profit of Rs.11,600 (91,600 – 80,000 = 11,600). Operating expenses are Rs.7,400. Net income is Rs.4,200 (11,600 – 7,400 = 4,200). Current assets are Rs.12,400 and fixed assets are Rs.6,000. Therefore, total assets are Rs.18,400 (12,400 + 6,000 = 18,400). Total liabilities are Rs.4,200 and total owner’s equity is Rs.14,200. Total equities are Rs.18,400 (4,200 + 14,200 = 18,400) which is equal to total assets.


(Income Statement & Balance Sheet With Adjusting Entries) The following balances have been taken from the pre-closing trial balance of Ehsan & Company prepared on June 30, 1988.

Debit Balances Credit Balances Cash 10,000 Sales 60,000 Accounts receivable 35,000 Commission income 3,000 Office furniture 10,000 Accounts payable 13,500 Advertising expense 4,000 Ehsan Capital 43,000 Office supplies expense 1,500 Prepaid office rent 6,000 General expense 2,500 Delivery expense 600 Merchandise inventory 10,000 Purchases 30,000 Carriage inwards 400 Sales salaries expense 9,000 Sales return and allowance 500 Supplementary Data for Adjustment on 30.06.1988:

(i) Prepaid office rent Rs.3,000. (ii) Unused office supplies Rs.500. (iii) Make allowance for depreciation on office furniture for Rs.1,000. (iv) Allowance for bad debts to be provided Rs.500. (v) Outstanding sales salaries Rs.1,000. (vi) Merchandise inventory on 30.6.1998 was valued at Rs.9,000.

REQUIRED a) Prepare Income Statement for the year ended 30 June, 1988. b) Prepare Balance Sheet as of June 30, 1988 is classified form.


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Solution # 11: EHSAN & COMPANY

INCOME STATEMENT FOR THE PERIOD ENDED 30 JUNE 1988

Sales 60,000 Less: Sales return and allowance (500) Net sales 59,500 Less: Cost of Goods Sold: Merchandise inventory (beg) 10,000 Add: Net Purchases: Purchases 30,000 Add: Carriage inwards 400 Net purchases 30,400 Merchandise available for sale 40,400 Less: Merchandise inventory (end) (9,000) Cost of goods sold (31,400) Gross profit 28,100 Less: Operating Expenses: Advertising expense 4,000 Office supplies expense (1,500 – 500) 1,000 General expense 2,500 Delivery expenses 600 Sales salaries expense (9,000 + 1,000) 10,000 Office rent expense 3,000 Depreciation expense 1,000 Bad debts expense 500 Total operating expenses (22,600) Profit from operation 5,500 Add: Other Income: Commission income 3,000 Net income 8,500

EHSAN & COMPANY

BALANCE SHEET AS ON 30 JUNE 1988

ASSETS EQUITIES Current Assets: Liabilities: Cash 10,000 Accounts payable 13,500 Accounts receivable 35,000 Salaries payable 1,000 Less: All. For Bad debts (500) 34,500 Total current liabilities 14,500 Merchandise inventory 9,000 Office supplies 500 Owner’s Equity: Prepaid office rent 3,000 Capital 43,000 Total current assets 57,000 Add: Net profit 8,500 Total owner’s equity 51,500 Fixed Assets: Office furniture 10,000 Less: All. for depreciation (1,000) Total fixed assets 9,000 Total assets 66,000 Total equities 66,000


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www.a4accounting.weebly.com 6

Sameer Hussain

AKRAM SONS ADJUSTING ENTRIES

FOR THE PERIOD ENDED 31 DECEMBER 1984 Date Particulars P/R Debit Credit 1 Office rent expense 3,000 Prepaid office rent 3,000 (To adjust the prepaid rent) 2 Office supplies 500 Office supplies expense 500 (To adjust the office supplies expense) 3 Depreciation expense 1,000 Allowance for depreciation – Office furniture 1,000 (To adjust the depreciation expense) 4 Bad debts expense 500 Allowance for bad debts 500 (To adjust the bad debts expense) 5 Sales salaries expense 1,000 Sales salaries payable 1,000 (To adjust the unpaid sales salaries) 6 Merchandise inventory 9,000 Expense and revenue summary 9,000 (To close the ending inventory) Explanation of Solution # 11: Net sales are Rs.59,500 and cost of goods sold is Rs.31,400, hence, gross profit is Rs.28,100 (59,500 – 31,400 = 28,100). Operating expenses are:

Advertising expense Rs.4,000; general expense Rs.2,500 and delivery expense Rs.600 do not have any adjustments. Therefore, same amounts are reported in income statements.

Trial balance shows office supplies expense of Rs.1,500 while adjustment data shows unused supplies of Rs.500. Unused supplies reduces the supplies expense by Rs.500 and reported in income statement as supplies expense by Rs.1,000 (1,500 – 500 = 1,000). Rs.500 is reported in balance sheet as supplies under current assets.

Prepaid office rent shows Rs.6,000 in trial balance and adjustment data shows Rs.3,000 still prepaid. Out of Rs.6,000 only Rs.3,000 is prepaid and Rs.3,000 is expired. Expense amount of rent is reported in income statement Rs.3,000 and Rs.3,000 is reported in balance sheet under current asset.

Trial balance shows salaries expense Rs.9,000 and adjustment data indicates Rs.1,000 as accrued salaries. Accrued expense increases expense as well as liability. Salaries expense is reported in income statement as Rs.10,000 (9,000 + 1,000 = 10,000) and Rs.1,000 is reported in balance sheet as salaries payable (current liabilities).

Depreciation Rs.1,000 and bad debts expense Rs.500 are reported in income statement and allowance for depreciation is deducted from furniture and allowance for bad debts is subtracted from accounts receivable.

Total operating expense are Rs.22,600 which is less than gross profit of Rs.28,100. It indicates operating profit of Rs.5,500 (28,100 – 22,600 = 5,500). Commission income increases the operating profit by Rs.3,000. Therefore, net income is Rs.8,500 (5,500 + 3,000 = 8,500).

Total assets are Rs.66,000 (current assets Rs.57,000 + fixed assets Rs.9,000) which is equal to the total equities of Rs.66,000 (liabilities Rs.14,500 + owner’s equity Rs.51,500).


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(Financial Statements Without Indicating Debit & Credit in Trial Balance) Balances taken from the ledger of Shahji, a sole trader on June 30, 1995 before adjustments, were as follows:- Cash Rs.3,600; Accounts receivable Rs.4,800; Merchandise inventory (1.7.94) Rs.2,400; Insurance expense Rs.900; Office equipment Rs.1,800; Allowance for bad debts Rs.240; Accounts payable Rs.3,600; Shahji Capital Rs.9,480; Sales revenue Rs.12,000; Sales discount Rs.120; Purchases Rs.6,000; Carriage-in Rs.480; Purchase discount Rs.180; Prepaid shop rent Rs.2,400; Salaries expense Rs.4,200; Commission income Rs.1,200. Supplementary Data for Adjustments on 30.6.1995:

(a) Salaries payable Rs.600. (b) Commission receivable Rs.132. (c) Taxes payable Rs.60. (d) Insurance unexpired Rs.180. (e) Shop rent prepaid Rs.1,800. (f) Bad debts expense was estimated at Rs.300. (g) Allowance for depreciation on office equipment was estimated Rs.180. (h) Merchandise inventory was valued at Rs.3,600 on 30.6.1995.

REQUIRED a) Income Statement for the year ended June 30, 1995 (Group expense and revenue data). b) Balance Sheet as of June 30, 1995 (classified form).

Solution # 12: SHAHJI

ADJUSTING ENTRIES FOR THE PERIOD ENDED 30 JUNE 1995

Date Particulars P/R Debit Credit 1 Salaries expense 600 Salaries payable 600 (To adjust the unpaid salaries) 2 Commission receivable 132 Commission income 132 (To adjust the accrued commission income) 3 Taxes expense 60 Taxes payable 60 (To adjust the accrued taxes) 4 Prepaid insurance 180 Insurance expense 180 (To adjust the insurance expense) 5 Shop rent expense 600 Prepaid shop rent 600 (To adjust the prepaid shop rent) 6 Bad debts expense 300 Allowance for bad debts 300 (To adjust the bad debts expense) 7 Depreciation expense 180 Allowance for depreciation – Office equipment 180 (To adjust the depreciation expense) 8 Merchandise inventory 3,600 Expense and revenue summary 3,600

(To adjust the merchandise inventory)


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Sameer Hussain

SHAHJI INCOME STATEMENT

FOR THE PERIOD ENDED 30 JUNE 1995 Sales revenue 12,000 Less: Sales discount (120) Net sales 11,880 Less: Cost of Goods Sold: Merchandise inventory (beg) 2,400 Add: Net Purchases: Purchases 6,000 Add: Carriage in 480 Delivered purchases 6,480 Less: Purchase discount (180) Net purchases 6,300 Merchandise available for sale 8,700 Less: Merchandise inventory (end) (3,600) Cost of goods sold (5,100) Gross profit 6,780 Less: Operating Expenses: Salaries expense (4,200 + 600) 4,800 Insurance expense (900 - 180) 720 Taxes expense 60 Shop rent expense (2,400 – 1,800) 600 Bad debts expense 300 Depreciation expense 180 Total operating expenses (6,660) Profit from operation 120 Add: Other Income: Commission income (1,200 + 132) 1,332 Net profit 1,452

SHAHJI

BALANCE SHEET AS ON 30 JUNE 1995

ASSETS EQUITIES Current Assets: Liabilities: Cash 3,600 Accounts payable 3,600 Accounts receivable 4,800 Salaries payable 600 Less: All for bad debts (540) 4,260 Taxes payable 60 Merchandise inventory 3,600 Total liabilities 4,260 Prepaid shop rent 1,800 Prepaid insurance 180 Owner’s Equity: Commission receivable 132 Capital 9,480 Total current assets 13,572 Add: Net profit 1,452 Total owner’s equity 10,932 Fixed Assets: Office equipment 1,800 Less: All for depreciation (180) Total fixed assets 1,620 Total assets 15,192 Total equities 15,192


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Explanation of Solution # 12: The above trial balance is maintained without indicating debit and credit balances of accounts. It is known that assets, expenses, and contra revenue accounts have debit balances while liability, revenue, owner’s equity, contra expenses, and contra assets accounts have credit balances.

Net sales are Rs.11,880 and cost of goods sold is Rs.5,100 resulting gross profit of Rs.6,780 (11,880 – 51,00 = 6,780). Operating expenses are:

Trial balance shows salaries expense of Rs.4,200 while adjustment data indicates salaries payable of Rs.600. Accrued salaries increases expenses as well as liability (salaries payable) of Rs.600. Salaries expense is reported in income statement as Rs.4,800 (4,200 + 600 = 4,800) and salaries payable of Rs.600 is showing in balance sheet as liabilities.

Trial balance shows insurance expense of Rs.900 and adjustment data shows unexpired insurance of Rs.180. Prepaid insurance decreases expense and increases prepaid by Rs.180. Insurance expense is reported in income statement by Rs.720 (900 – 180 = 720) and prepaid insurance is reported in balance sheet by Rs.180 under current assets.

Prepaid shop rent shows Rs.2,400 in trial balance and adjustment data indicates that prepaid rent is Rs.1,800 at the end of the period. There is decrease in prepaid rent by Rs.600 (2,400 – 1,800 = 600) which result increase in expense. Shop rent expense is reported in income statement Rs.600 and prepaid shop rent is reported in balance sheet by Rs.1,800 as current assets.

Tax expense of Rs.60; depreciation expense of Rs.180 and bad debts expense of Rs.300 are reported in income statement. Allowance for bad debts shows a credit balance of Rs.240 in trial balance and adjusting entry shows credit of allowance for bad debts of Rs.300 which result increase in allowance for bad debts and deducted from accounts receivable Rs.540 (240 + 300 = 540) in the balance sheet. Allowance for depreciation is deducted from fixed assets. Salaries payable of Rs.60 is reported in balance sheet as liabilities.

Total operating expenses are Rs.6,660 which is less than gross profit and resulting operating profit of Rs.120 (6,780 – 6,660 = 120).

Commission income shows Rs.1,200 in trial balance and adjustment data shows Rs.132 as accrued. Accrued income increases income as well as receivable. Commission income of Rs.1,332 (1,200 + 132 = 1,332) is reported in income statement and Rs.132 is reported in balance sheet as commission receivable under current assets.

Other income increases the profit by Rs.1,332. Therefore, net profit for the period is Rs.1,452 (120 + 1,332 = 1,452).

Total current assets are Rs.13,572 and total fixed assets are Rs.1,620. Hence, total assets are Rs.15,192 (13,572 + 1,620 = 15,192) which is equal to the total equities of Rs.15,192 (total liabilities Rs.4,260 and total owner’s equity Rs.10,932).


(Income Statement & Balance Sheet With Adjusting & Correcting Entries) The following are unadjusted account balances taken from the books of Mr. Riaz on May 31, 1994:-

Debit Balances Credit Balances Cash Rs.6,000 Accounts receivable 12,000 Merchandise inventory (June 1, 1993) 11,000 Prepaid insurance 6,000 Office equipment 50,000 Allowance for depreciation – Office equipment Rs.10,000


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Sameer Hussain

Accounts payable 8,000 Riaz Capital 59,000 Riaz Drawings 8,000 Sales revenue 85,000 Sales return 3,000 Sales discount 2,000 Purchases 45,000 Purchase returns 3,000 Purchase discount 4,000 Transportation in 5,000 Advertising expense 9,000 Delivery expense 2,000 Office salaries expense 10,000 169,000 169,000 Supplementary Data for Adjustments on May 31, 1994:

(i) Bad debts expense was estimated at Rs.1,200. (ii) Insurance was paid in advance for 10 months on March 1, 1994. (iii) Make allowance for depreciation on office equipment at 10% of the cost. (iv) Advertising prepaid was Rs.1,500. (v) Unpaid office salaries was Rs.2,500. (vi) An item of transportation in of Rs.600 was wrongly charged to purchases. (vii) An item of delivery expense of Rs.300 was wrongly debited to transportation in

account. (viii) Merchandise inventory on May 31, 1994 was valued at Rs.16,000.

REQUIRED a) Prepare income statement for the year ended May 31, 1994. b) Prepare classified balance sheet as of May 31, 1994.

Solution # 13: MR. RIAZ

ADJUSTING ENTRIES FOR THE PERIOD ENDED 31 MAY 1994

Date Particulars P/R Debit Credit 1 Bad debts expense 1,200 Allowance for bad debts 1,200 (To adjust the bad debts expense) 2 Insurance expense 1,800 Prepaid insurance 1,800 (To adjust the prepaid insurance) 3 Depreciation expense 5,000 Allowance for depreciation – Office equipment 5,000 (To adjust the depreciation expense) 4 Prepaid advertising 1,500 Advertising expense 1,500 (To adjust the advertising expense) 5 Office salaries expense 2,500 Office salaries payable 2,500 (To adjust the unpaid office salaries) 6 Transportation in 600 Purchases 600 (To correct the purchases account)


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Date Particulars P/R Debit Credit 7 Delivery expense 300

Transportation in 300 (To correct the transportation in account) 8 Merchandise inventory 16,000 Expense and revenue summary 16,000 (To adjust the merchandise inventory)

MR. RIAZ

INCOME STATEMENT FOR THE PERIOD ENDED 31 MAY 1994

Sales 85,000 Less: Sales return and allowances 3,000 Less: Sales discount 2,000 (5,000) Net sales 80,000 Less: Cost of Goods Sold: Merchandise inventory (beg) 11,000 Add: Net Purchases: Purchases (45,000 – 600) 44,400 Add: Transportation in (5,000 + 600 – 300) 5,300 Delivered purchases 49,700 Less: Purchase returns and allowances (3,000) Less: Purchase discount (4,000) Net purchases 42,700 Merchandise available for sale 53,700 Less: Merchandise inventory (end) (16,000) Cost of goods sold 37,700 Gross profit 42,300 Less: Operating Expenses: Advertising expense (9,000 – 1,500) 7,500 Delivery expense (2,000 + 300) 2,300 Office salaries expense (10,000 + 2,500) 12,500 Insurance expense (6,000 x 3/10) 1,800 Bad debts expense 1,200 Depreciation expense 5,000 Total operating expenses (30,300) Net profit 12,000

MR. RIAZ

BALANCE SHEET AS ON 31 MAY 1994

ASSETS EQUITIES Current Assets: Liabilities: Cash 6,000 Accounts payable 8,000 Accounts receivable 12,000 Salaries payable 2,500 Less: All for bad debts (1,200) 10,800 Total liabilities 10,500 Merchandise inventory 16,000 Prepaid insurance 4,200 Owner’s Equity: Prepaid advertising 1,500 Capital 59,000 Total current assets 38,500 Add: Net profit 12,000 71,000


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Sameer Hussain

Fixed Assets: Less: Drawings (8,000) Office equipment 50,000 63,000 Less: All for depreciation (15,000) Total fixed assets 35,000 Total assets 73,500 Total equities 73,500


Trial balance shows purchases of Rs.45,000 and adjustment data shows an error in purchase that transportation is charged to purchase account by Rs.600. This error increases the purchase account and decreases the transportation by Rs.600. for rectification, Rs.600 is subtracted from the purchases and Rs.600 is added in transportation account.

Another error is made in transportation that delivery charges of Rs.300 is wrongly recorded in transportation account. It results increase in transportation and decrease in delivery account. To correct this error, Rs.300 is subtracted from transportation and added in delivery expense account.

After the above corrections, net sales are Rs.80,000 and cost of goods sold is Rs.37,700 which results gross profit of Rs.42,300 (80,000 – 37,700 = 42,300).

Advertising expense shows Rs.9,000 in trial balance and Rs.1,500 of advertising is still prepaid according to adjustment data. Unexpired advertising results decrease in expense and increase in prepaid by Rs.1,500. Therefore, advertising expense of Rs.7,500 (9,000 – 1,500 = 7,500) is reported in income statement and prepaid advertising of Rs.1,500 is reported in balance sheet as current assets.

Delivery expense of Rs.2,300 (2,000 + 300 = 2,300) is reported in income statement after correction.

Salaries expense account shows Rs.10,000 in trial balance and adjustment data shows unpaid salaries of Rs.2,500. Accrued expense increases expense and liability. Salaries expense of Rs.12,500 (10,000 + 2,500 = 12,500) is reported in income statement and salaries payable of Rs.2,500 is reported in balance sheet as current liabilities.

Prepaid insurance of Rs.6,000 was paid on March 1, 1994 for 10 months. Insurance for 1 month is Rs.600 (6,000/10 = 600) and period covered during this accounting period is from March to May (3 months). The expense for 3 months is Rs.1,800 (600 x 3 = 1,800) and remaining amount of insurance Rs.4,200 (6,000 – 1,800 = 4,200) is still prepaid. Therefore, insurance expense of Rs.1,800 is reported in income statement and Rs.4,200 is reported in balance sheet under current assets as prepaid insurance.

Bad debts expense of Rs.1,200 is reported in income statement and allowance for bad debts of Rs.1,200 is deducted from accounts receivable in balance sheet.

Depreciation expense of Rs.5,000 is reported in income statement and allowance for depreciation of Rs.15,000 is subtracted from fixed asset in balance sheet. Allowance for depreciation shows a balance of R.10,000 in trial balance and adjusting entry also shows credit of allowance for depreciation of Rs.5,000. Therefore, accumulated depreciation is Rs.15,000.

Total operating expenses are Rs.30,300 which is less than gross profit and shows net profit of Rs.12,000 (42,300 – 30,300 = 12,000). Total current assets Rs.38,500 and total fixed assets Rs.35,000. Hence, total assets Rs.73,500 (38,500 + 35,000 = 73,500) which is equal to the total equities of Rs.73,500 (total liabilities Rs.10,500 and total owner’s equity Rs.63,000).


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Practice questions Question # 1: 2007 Regular & Private – BIEK The following balances are taken from the books of Shah & Sons for the year ending December 31, 2006. Purchase Rs. 10,000 Purchase return Rs. 1,000 Purchase discount Rs. 500 Transport expense Rs. 1,200 Merchandise inventory opening Rs. 3,000 Merchandise inventory ending Rs. 2,000 REQUIRED Prepare the Statement of Cost of Goods Sold. Question # 2: 2014 Regular – BIEK i) Merchandise inventory (opening) Rs.25,000 ii) Purchased merchandise Rs.133,000 iii) Merchandise inventory (ending) Rs.18,000 iv) Purchases returns Rs.500 v) Purchases discount Rs.1,000 vi) Transportation Rs.800 REQUIRED Compute cost of goods sold.

Question # 3: 2002 Regular – BIEK The following closing entries were made by Raja Cloth House at the end of the current year December 31. Date Particulars P/R Debit Credit 1 Merchandise inventory Rs.55,000 Sales Rs.300,000 Purchase returns and allowances Rs.2,400 Purchase discount Rs.3,600 Income summary Rs.361,000 2 Income summary Rs.316,800 Merchandise inventory Rs.42,000 Sales return and allowances Rs.2,400 Sales discount Rs.3,600 Purchases Rs.180,000 Transport-in Rs.4,800 Selling expense Rs.48,000 General and administrative expenses Rs.36,000 REQUIRED Use the information in the above closing entries and prepare an income statement for Raja Cloth House.

Question # 4: 2002 Regular – BIEK The following is the post-closing Trial Balance of Alam Automobile Service.

ALAM AUTOMOBILE SERVICES TRIAL BALANCE DECEMBER 31, 2001 Debit Credit

Cash 6,500 Accounts receivable 4,000


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Sameer Hussain

Un-expired insurance 600 Office supplies 600 Testing equipment 7,200 Allowance for depreciation 100 Unearned service fees 3,000 Accounts payable 2,400 Alam Capital 10,400 Salaries payable 3,000 18,900 18,900

REQUIRED Prepare Balance Sheet as on December 31, 2001.

Question # 5: 2000 Regular & Private – BIEK Following are the post-closing account balances of the CHAIN STORES at December 31, 1999:

Debit Balances Credit Balances Cash Rs.5,000 Allowance for bad debts Rs.500 A/Receivable 12,000 Allow. for depreciation – Building 10,000 12% Note receivable 6,000 Allow. for depreciation – Equipment 4,000 Accrued interest on note receivable 360 Accounts payable 8,000 Building 50,000 10% Note payable 10,000 Equipment 40,000 Accrued interest on note payable 500 Prepaid expenses 800 Accrued salaries expense 800 Merchandise inventory 15,000 Unearned revenue 600 Mortgage payable 15,000 Long term loan 10,000 Tahir capital ? REQUIRED Prepare a classified Balance Sheet as of December 31, 1999. Question # 6: 2001 Regular & Private – BIEK The following balances were extracted from the ledger of a vegetable seller on March 31, 2001. Cash Rs.2,000; Accounts receivable Rs.4,000; Rent security deposit Rs.6,000; Equipment Rs.2,000; Accounts payable Rs.3,000; Malik Capital Rs. ?; Sales Rs.35,000; Purchases Rs.19,000; Salaries expense Rs.6,000; Rent expense Rs.3,000; Miscellaneous expense Rs.1,500; Cartage-in Rs.500. REQUIRED

(i) Determine Malik Capital. (ii) Prepare Income Statement for 3 month, ended March 31, 2001. (iii) Balance Sheet as of March 31, 2001.

Question # 7: 2011 Regular – BIEK Following are the account balances of M/S. AK & Sons on June 30, 2010: Cash in hand Rs.35,000, Furniture Rs.140,000, Cash at bank Rs.45,000, Capital Rs.428,000, Accumulated depreciation (Furniture) Rs.23,000, Machinery Rs.220,000, Accumulated depreciation (Machinery) Rs.35,000, Purchases Rs.135,000, Sales Rs.280,000, Accounts receivable Rs.30,000, Accounts payable Rs.42,000, Purchase return & allowance Rs.4,000, Allowance for bad debts Rs.6,000, Merchandise inventory (beginning) Rs.25,000, Merchandise inventory (ending) Rs.87,000, Salaries expense Rs.45,000, Rent expense Rs.33,000, Advertising expense Rs.22,000, Travelling expense Rs.32,000, Office supplies expense Rs.12,000, Utility charges Rs.26,000, Bad debts expense Rs.2,000, Depreciation expense Rs.10,000, Sales return and allowance Rs.6,000.


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REQUIRED Prepare:

(i) Income Statement in report form. (ii) Balance Sheet as on June 30, 2010.

Question # 8: 2000 Regular & Private – BIEK Presented below the information taken from the accounting records of the FELLOWS CO. for the year ended December 31, 1999. Freight-in Rs.300; Rent expenses Rs.400; Merchandise inventory Jan.1, 1999 Rs.1,200; Salaries expenses Rs.600; Merchandise inventory December 31, 1999 Rs.1,900; Sales Rs.6,600; Purchases Rs.4,300; Sales returns and allowances Rs.200; Sales discount Rs.400; Purchases return and allowances Rs.300. Date for Adjustments at December 31, 1999:

a) Make provision for bad debts at 2% of net sales. b) Accrued salaries Rs.200. c) Prepaid rent Rs.100.

REQUIRED (i) Make the Adjusting Entries in the General Journal. (ii) Prepare a Multi-Step Income Statement for the year ended December 31, 1999.

Question # 9: 1991 Regular & Private – BIEK The following is the Pre-Closing Trial Balance of Kamran & Co. prepared on December 31, 1990:

Debit Balances Credit Balances Cash 10,000 Sales 75,000 Merchandise inventory (1.1.90) 8,000 Purchase returns 500 Office equipment 30,000 Kamran Capital 60,000 Purchases 52,000 Allowance for depreciation - Salaries expense 5,500 Office equipment 2,500 Rent expense 5,000 Accounts payable 17,000 Office supplies 500 Insurance prepaid 1,200 Accounts receivable 20,000 Sales returns 500 Furniture 17,300 Kamran Drawings 5,000 Total 155,000 155,000 Data for Adjustments on December 31, 1990:

(i) Merchandise inventory was valued at Rs.10,000. (ii) Salaries Payable Rs.500. (iii) Accrued rent Rs.1,000. (iv) Office supplies unused Rs.200. (v) Insurance expired Rs.800. (vi) Depreciation on office equipment was estimated at Rs.2,500.

REQUIRED a) Prepare Income Statement in classified report form for the year ended December 31,

1990. b) Prepare Balance Sheet in classified account form as of December 31, 1990.


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Sameer Hussain

Question # 10: 2014 Private – BIEK The following balances have been taken from the ledger of Raza & Co. on December 31, 2013:

Debit Balance Credit Balance Cash Rs.60,000 Accounts payable Rs.38,000 Accounts receivable Rs.40,000 Notes payable Rs.32,000 Merchandise inventory Rs.80,000 Unearned rent Rs.32,000 Prepaid insurance Rs.26,000 Sales Rs.220,000 Office equipment Rs.50,000 Accumulated depreciation Rs.22,000 Purchase Rs.190,000 Raza’s Capital Rs.157,000 Salaries expense Rs.30,000 Sales return Rs.25,000 Rs.501,000 Rs.501,000 Data for Adjustment on December 31, 2013:

(i) Merchandise inventory Rs.80,000. (ii) Insurance expired Rs.4,000. (iii) Bad debts estimated Rs.600. (iv) Outstanding salaries Rs.4,000. (v) Depreciation on office equipment for the year Rs.3,000. (vi) Rent earned Rs.8,000.

REQUIRED (a) Income statement for the year ended December 31, 2013. (b) Balance sheet as on December 31, 2013.

Question # 11: 1992 Regular & Private – BIEK Balance taken from the ledger of Haji Tabba, a sole trader, on June 30, 1992 before adjustments were as follows: Debit Balances: Cash Rs.1,800; Accounts receivable Rs.2,850; Merchandise inventory (1.7.91) Rs.1,200; Office equipment Rs.900; Purchases Rs.3,000; Prepaid shop rent Rs.1,200; Carriage in Rs.225; Salaries expense Rs.2,100; Insurance expense Rs.450; Sales discount Rs.75. Credit Balances: Accounts payable Rs.2,250; Haji Tabba capital Rs.4,725; Sales revenue Rs.6,000; Purchase discount Rs.105; Commission income Rs.600; Allowance for bad debts Rs.120. Supplementary Data for Adjustments on June 30, 1992

(i) Salaries payable Rs.285. (ii) Taxes payable Rs.39. (iii) Shop rent prepaid Rs.375. (iv) Insurance unexpired Rs.90. (v) Commission receivable Rs.66. (vi) Merchandise inventory was valued at Rs.1,950 on June 30, 1992. (vii) Bad debts expense was estimated at Rs.150. (viii) Allowance for depreciation on office equipment was estimated at Rs.90.

REQUIRED a) Prepare Income Statement for the year ended June 30, 1992. (Group the expense and

revenue data properly and give complete title to the statement). b) Prepare Balance Sheet as of June 30, 1992 in classified form, giving complete title.

(Note: You may prepare the two financial statements either in account form or report form). Question # 12: 1998 Regular & Private – BIEK The following have been taken from the pre-closing Trial Balance prepared from the ledger of Anwar & Sons on December 31, 1997:-


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Debit Balance: Cash Rs.21,000; Accounts receivable Rs.33,000; Merchandise inventory (1.1.1992) Rs.12,000; Sales equipment Rs.27,000; Prepaid office rent Rs.9,000; Anwar & Sons drawings Rs.3,000; Sales returns & allowances Rs.3,000; Purchases Rs.66,000; Transportation in Rs.6,000; Office salaries expense Rs.18,000; Sales salaries expenses Rs.24,000. Credit Balances: Accounts payable Rs.24,000; Sales Rs.120,000; Purchase returns and allowances Rs.4,500; Purchase discount Rs.5,400; Allowance for bad debts Rs.6,000; Allowance for depreciation on sales equipment Rs.9,000; Anwar & Sons Capital Rs.53,100. Data for Adjustment and Correction on December 31, 1994:

(1) Office salaries expense outstanding Rs.5,000. (2) Sales salaries were prepaid to the extent of Rs.1,400. (3) Merchandise inventory on December 31, 1997 was valued at Rs.25,000. (4) Provide depreciation on equipment Rs.2,500. (5) Prepaid office rent expired Rs.4,000. (1) Increase allowance for bad debts by Rs.2,000.

REQUIRED a) Prepare INCOME STATEMENT for the period ended on December 31, 1997, grouping

properly revenue and expense items. b) Prepare Classified BALANCE SHEET as of December 31, 1992. c) Prepare cost of goods sold account

Question # 13: 2003 Regular – BIEK The following balances have been taken from the pre-closing Trial Balance, prepared from the ledger of Ghulam Ali & Sons. On Dec 31, 2002:- Debit Balances:- Cash Rs.43,000; Accounts receivable Rs.145,000; Merchandise inventory (1-1-2002) Rs.50,000; Office salaries expense Rs.36,000; Insurance expense Rs.21,000; Supplies Rs.6,000; Furniture Rs.30,000; Drawings Rs.17,600; Purchases Rs.121,000; Total = Rs.469,600. Credit Balances:- Allowance for depreciation furniture Rs.6,000; Accounts payable Rs.54,000; Capital Ghulam Ali Rs.140,000; Sales Rs.233,600; Rent revenue Rs.36,000; Total = Rs.469,600. Supplementary Data for Adjustments:

(a) Goods costing Rs.2,000 taken by Ghulam Ali for personal use were not recorded. (b) Unexpired insurance Rs.7,000. (c) Salaries expense for the year Rs.40,000. (d) Merchandise inventory closing Rs.32,000. (e) Depreciation on Furniture for the year Rs.3,000. (f) Office supplies unused Rs.1,700. (g) Unearned rent Rs.5,000.

REQUIRED a) Prepare Income Statement for the year ended Dec 31, 2002. b) Prepare classified Balance Sheet as of Dec 31, 2002.

Question # 14: 2003 Private – BIEK The following balances were taken from the ledger of Khurshid & Sons on Dec 31, 2002.

Debits Credits Cash 30,000 Accounts receivable 15,000 Office supplies 2,000 Merchandise inventory (1.1.2002) 10,000


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Office furniture 8,000 Accounts payable 15,000 Khurshid’s Capital 40,500 Khurshid’s Drawings 500 Sales 40,000 Purchases 18,000 Rent expense 5,000 Advertisement expense 7,000 95,500 95,500

Adjustment Data: (i) Merchandise inventory Dec 31, 2002 Rs.7,000. (ii) Estimate allowance for bad debts Rs.1,000. (iii) Estimate allowance for depreciation on office furniture @ 20%. (iv) Office supplies unused Rs.300. (v) Accrued rent Rs.2,000.

REQUIRED (i) Prepare Income Statement for the year ended Dec. 31, 2002. (ii) Prepare classified Balance Sheet as of Dec 31, 2002.

Question # 15: 2004 Regular & Private – BIEK The following have been taken from the pre-closing Trial Balance prepared from the ledger of Mr. Bazil on Dec. 31, 2003.

Debit Balance Cash Rs. 48,000 Accounts receivable Rs. 140,000 Merchandise inventory (1.1.2003) Rs. 70,000 Office supplies Rs. 5,000 Furniture Rs. 50,000 Purchases Rs. 200,000 Salaries expenses Rs. 3,500 Prepaid insurance Rs. 2,000 Rent expenses Rs. 4,200 Total Rs. 522,700

Credit Balance Accounts payable Rs. 22,700 Sales Rs. 340,000 Purchase return Rs. 10,000 Bazil – Capital Rs. 150,000 Total 522,700

Data for Adjustments: (a) Insurance expired by Rs.1,500. (b) Depreciation expenses on furniture Rs.5,000. (c) Salaries expenses for the year Rs.4,200. (d) Rent expense for the year Rs.3,500. (e) Office supplies on hand Rs.2,000. (f) Merchandise inventory on Dec. 31, 2003 Rs.80,000.

REQUIRED (i) Prepare Income Statement for the year ended Dec. 31, 2003. (ii) Prepare classified Balance Sheet as of Dec. 31, 2003.


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Question # 16: 2005 Regular & Private – BIEK The following balances were taken from the pre-closing Trial Balance of Fatima & Co. prepared on Dec. 31, 2004. Debit Balances: Cash Rs.6,400; Accounts receivable Rs.40,000; Merchandise inventory (Jan.01) Rs.32,000; Sales equipment Rs.30,000; Prepaid insurance Rs.800; Sales supplies Rs.1,200; Purchases Rs.100,000; Sales salaries expenses Rs.9,600; Office salary expense Rs.4,000; Advertising expense Rs.4,000 (Total Rs.228,000). Credit Balances: Sales Rs.156,000; Accounts payable Rs.24,000; Fatima capital Rs.48,000 (Total Rs.228,000). Data for Adjustments on December 31:

(i) Merchandise inventory was valued at Rs.30,000. (ii) Sales supplies were Rs.200. (iii) Insurance expired Rs.400. (iv) Unpaid sales salaries were Rs.500. (v) Depreciation on fixed assets was estimated Rs.5,000. (vi) Bad debts on accounts receivable Rs.3,000.

REQUIRED (i) Prepare Income Statement for the year ended Dec. 31, 2004. (ii) Prepare Report form balance Sheet as of Dec. 31, 2004.

Question # 17: 2006 Regular & Private – BIEK The following were taken from the ledgers of Abbas & Co. on December 31, 2005:

Debit Balance Cash Rs. 55,000 Accounts receivable Rs. 150,000 Merchandise inventory (01/01/05) Rs. 80,000 Office supplies Rs. 8,000 Furniture Rs. 65,000 Purchases Rs. 250,000 Salaries expenses Rs. 5,000 Prepaid insurance Rs. 5,000 Rent expenses Rs. 5,000 Total Rs. 623,000

Credit Balance Accounts payable Rs. 30,000 Sales Rs. 400,000 Purchase return Rs. 15,000 Abbas Capital Rs. 178,000 Total 623,000

Data for Adjustments: (a) Insurance expired by Rs.2,500. (b) Depreciation expenses on furniture Rs.6,500. (c) Salaries expenses for the year Rs.7,000. (d) Rent expense for the year Rs.4,000. (e) Office supplies on hand Rs.3,000. (f) Merchandise inventory on December 31, 2003 Rs.85,000.

REQUIRED (1) Prepare Income Statement for the year ended December 31,20 05. (2) Prepare classified Balance Sheet as of December 31, 2005.


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Question # 18: 2008 Regular & Private – BIEK The following balances have been taken from the pre-closing trial balance of Khursheed Zaidi on 31.12.2007: Debit Balances: Cash Rs.20,000; Accounts receivable Rs.15,000; Merchandise inventory (01.01.2007) Rs.30,000; Office equipment Rs.40,000; Purchases Rs.120,000; Machine Rs.100,000; Salaries expense Rs.9,000; Wages expense Rs.4,000; Packing charges Rs.10,000; Prepaid rent Rs.10,000; Khursheed Zaidi’s Drawings Rs.2,000; Transportation-in Rs.2,000; Sales returns Rs.20,000. Credit Balances: Sales revenue Rs.200,000; Purchase returns Rs.2,000; Accumulated depreciation on machine Rs.10,000; Accounts payable Rs.5,000; Bank loan Rs.20,000; Khursheed Zaidi’s Capital Rs.145,000. Supplementary Data for Adjustments:

(i) Outstanding salaries Rs.6,500. (ii) Rent expense for the year Rs.8,000. (iii) Provide bead debts @ 2% of net sales. (iv) Depreciation on fixed assets at 10% per annum. (v) Merchandise inventory on 31.12.2007, Rs.20,000.

REQUIRED a) Prepare Income Statement for the year ended 31.12.2007. b) Prepare classified Balance Sheet on 31.12.2007.

Question # 19: 2009 Regular & Private – BIEK Ledger balances and adjustment data for Rajput Company at the end of annual accounting period, December 31, 2008 are as follows: Debit Balances: Cash Rs.4,000; Accounts receivable Rs.8,000; Merchandise inventory – January 1 Rs.5,000; Unexpired insurance Rs.3,000; Furniture Rs.10,000; Drawings Rajput Rs.6,000; Purchases Rs.40,000; Salaries expenses Rs.15,000; Rent expenses Rs.2,000. Credit Balances: Accounts payable Rs.7,000; Unearned commission Rs.3,000; Allowance for depreciation Rs.3,000; Capital Rajput Rs.30,000; Sales Rs.50,000. Adjustment Data:

(i) Merchandise inventory at December 31, Rs.6,000. (ii) Insurance expired by Rs.2,000. (iii) Bad debts estimated @ 2% of sales. (iv) Depreciation estimated @ 10% of the cost of furniture. (v) Accrued salaries Rs.1,000. (vi) Unearned commission Rs.1,000.

REQUIRED Prepare a multi-step Income Statement & a classified Balance Sheet for December 31, 2008.

Question # 20: 2010 Regular & Private – BIEK Balances taken from the ledger of Maaz a sole trader on December 31, 2009 before adjustments are as under:

Debits Credits Cash 40,000 Accounts payable 18,000 Accounts receivable 20,000 Notes payable 12,000 Merchandise inventory 60,000 Unearned rent 12,000 Prepaid insurance 6,000 Sales 200,000 Office equipment 30,000 Accumulated depreciation -


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Purchases 170,000 (Office equipment) 2,000 Salaries expense 10,000 Maaz Capital 97,000 Sales return 5,000 155,000 155,000 Data for Adjustments:

(i) Merchandise inventory on December 31, 2009 was valued at Rs.80,000. (ii) Insurance was expired Rs.4,000. (iii) Bad debts expense estimated Rs.600. (iv) Outstanding salaries amounting to Rs.4,000. (v) Depreciation expense on equipment for the year Rs.3,000. (vi) Rent earned Rs.8,000.

REQUIRED Prepare a multi-step Income Statement & a classified Balance Sheet for December 31, 2009. Question # 21: 2011 Private – BIEK The balances taken from the pre-closing trial balance of Usra & Co. as of December 31, 2010 are as follows: Debit Balances: Cash Rs.40,000, Accounts receivable Rs.35,000, Merchandise inventory (opening) Rs.30,000, Unexpired insurance Rs.20,000, Purchases Rs.130,000, Transportation – in Rs.5,000, Sales discount Rs.5,000, Sales equipment Rs.40,000, Drawings Rs.12,000, Rent expense Rs.25,000. Credit Balances: Accounts payable Rs.25,000, Sales revenue Rs.105,000, Commission income Rs.7,000, Purchase return Rs.5,000, Long-term loan Rs.80,000, Capital Rs.120,000. Data for Adjustments on December 31, 2010:

(i) Merchandise inventory at December 31, 2010 Rs.60,000. (ii) Unpaid rent Rs.2,000. (iii) Insurance expired Rs.12,000. (iv) Depreciation on sales equipment estimated at Rs.4,000.

REQUIRED (a) Prepare income statement for the year ended December 31, 2010. (b) Prepare balance sheet as of December 31, 2010 in classified form.

Question # 22: 2014 Regular – BIEK The following balances of Qasim & Co. on December 31, 2013 was as under:

ACCOUNT TITLE DEBIT CREDIT Cash 40,000 Accounts receivable 60,000 Merchandise inventory ending 18,000 Prepaid insurance 20,000 Notes payable 20,000 Unearned commission 10,000 Capital – Qasim 150,000 Sales 120,000 Cost of goods sold ????? Salaries expense 11,000 Office supplies 8,000 Rent expenses 3,000 Supplementary Data for Adjustments for December 31, 2013:

a) Office supplies used Rs.5,000. b) Accrued salaries Rs.4,000.


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Sameer Hussain

c) Commission earned Rs.7,000. d) Bad debt estimated 2% on sales. e) Insurance expired during the year Rs.6,000

REQUIRED (a) Income statement for the year ended December 31, 2013. (b) Balance sheet as of December 31, 2013.

Question # 23: 1999 Regular & Private – BIEK The following balances were extracted from the books of Yasin Brothers for the financial year ending December 31, 1998:- Cash Rs.49,194; Accounts receivable Rs.15,360; Merchandise inventory (opening) Rs.24,400; Sales equipment Rs.20,780; Purchases Rs.93,800; Salaries expense Rs.18,000; Advertising expense Rs.10,000; Insurance expense Rs.6,000; Sales discount Rs.3,198; Sales revenue Rs.230,000; Purchase return Rs.3,200; Accounts payable Rs.17,695; Commission income Rs.2,000; Capital Yasin Rs.85,312; Yasin – Drawings Rs.6,475; Land Rs.82,000; Building rental expense Rs.9,000. Supplementary Data for Adjustment:

(i) Accrued salary Rs.5,000. (ii) Prepaid advertising Rs.4,000. (iii) Merchandise inventory (closing) Rs.18,000. (iv) Commission income receivable Rs.4,300. (v) Depreciation on fixed asset @ 20%. (vi) Bad debts expense was estimated at Rs.768.

REQUIRED a) Prepare Income Statement for the year ending December 31, 1998. b) Prepare classified Balance Sheet.

Question # 24: 2002 Private – BIEK The following balanecs were extracted from the Ledger of Mr. Shakir on December 31, 2001, before the closing of books:- Cash Rs.8,500/-; Supplies Rs.1,000/-; Accounts receivable Rs.9,000/-; Allowance for bad debts Rs.1,500/-; Merchandsie inventory (January 1, 2001) Rs.7,000/-; Prepaid insurance Rs.600/-; Furniture Rs.5,000/-; Notes payable Rs.4,500/-; Shakir’s Capital Rs.16,600/-; Shakir-Drawings Rs.2,000/-; Sales Rs.50,000/-; Sales discount Rs.500/-; Purchases Rs.30,000/-; Salaries expense Rs.8,000/-; Rent expense Rs.6,000/-; Commission earned Rs.5,000/-. Supplementary Data for Adjustments on December 31, 2001:

(i) Unpaid salaries Rs.3,000/-. (ii) Prepaid rent Rs.1,000/-. (iii) Unused sales supplies Rs.400/-. (iv) Insurance was prepaid to the extent of Rs.200/-. (v) Commission earned Rs.4,000/-. (vi) Merchandise inventory was valued on December 31, 2001 at Rs.6,000/-.

REQUIRED a) Prepare Income Statement for the year ended December 31, 2001, and b) Prepare Balance Sheet as on December 31, 2001.

Question # 25: 2007 Regular & Private – BIEK The following unadjusted balances are obtained from the ledger of a trader “EZ” for the 3 months ended on Mach 31, 2007. Cash Rs.5,000; Accounts receivable Rs.27,000; Merchandise inventory Rs.30,000; Unexpired insurance Rs.3,000; Sales Rs.105,000; Purchases Rs.60,000; Sales return & allowances Rs.4,000;


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Purchase discount Rs.2,000; Accounts payable Rs.12,000; “EZ” Drawing Rs.15,000; Unearned rent Rs.12,000; General expenses Rs.2,000; Salaries expenses Rs.15,000; “EZ” Capital ? Adjustments:

(i) Merchandise inventory valued at Rs.25,000. (ii) Insurance expired 1/3. (iii) Unearned rent 2/3. (iv) Accrued salaries Rs.3,000.

REQUIRED Prepare Income Statement and a Balance Sheet for the first quarter ended March 31, 2007. Question # 26: 2012 Private – BIEK Following is the pre – closing trial balance of Ishaque and Company for the year ended December 31, 2011:

Accounts Titles Account No. Debit Credit Cash 40,000 Accounts receivable 50,500 Prepaid insurance 6,000 Merchandise inventory 1.1.2011 42,000 Office equipment 50,000 Accounts payable 40,000 Notes payable 20,000 Unearned commission 3,500 Capital Ishaque 150,000 Drawings Ishaque 12,000 Sales revenue 262,000 Sales discount 3,000 Purchases 120,000 Carriage – in 8,000 Utility expense 25,000 Advertising expense 34,000 Salaries expense 40,000 Rent expense 45,000 Total 475,500 475,500 Data for Adjustment on December 31, 2011:

(i) Merchandise inventory (31 – 12 – 2011) Rs.60,000. (ii) Bad debts expense @ 5% of net sales. (iii) Insurance is prepaid up to the extent of Rs.1,500. (iv) Unearned commission Rs.1,000. (v) Goods costing Rs.1,000 were taken by Mr. Ishaque for private use were overlooked.

REQUIRED (i) Prepare adjusting entries in General Journal and prepare cost of goods sold account. (i) Prepare income statement for the year ended December 31, 2011. (ii) Prepare classified balance sheet as of December 31, 2011.

Question # 27: 2013 Private – BIEK The following is the pre – closing trial balance of Syed Sons for the year ended Dec. 31, 2012: Debit Balance: Cash Rs.15,000; Accounts receivable Rs.10,000; Merchandise inventory (beginning) Rs.6,500; Prepaid shop rent Rs.4,000; Sales equipment Rs.10,000; Purchases Rs.20,000; Office supplies expense Rs.2,000; Salaries expense Rs.14,000; Miscellaneous expense Rs.1,500; Sales return and allowance Rs.2,000. (Total Rs.85,000).


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Sameer Hussain

Credit Balance: Sales revenue Rs.45,000; Purchase discount Rs.1,500; Commission income Rs.4,000; Accounts payable Rs.4,000; Allowance for bad debts Rs.500; Syed’s capital Rs.30,000. (Total Rs.85,000). Data for Adjustment on December 31, 2012:

(i) Prepaid shop rent was Rs.1,000. (ii) Office supplies unused Rs.500. (iii) Allowance for bad debts was increased by Rs.300. (iv) Outstanding salaries Rs.3,000. (v) Depreciation on sales equipment was estimated at Rs.1,500. (vi) Commission unearned Rs.1,000. (vii) Merchandise inventory was valued on December 31, 2012 Rs.3,000.

REQUIRED a) Prepare income statement for the year ended December 31, 2012. b) Prepare balance sheet as of December 31, 2012 in classified form.

Question # 28: 1993 Regular & Private – BIEK The following balances have been taken from the pre-closing trial balance prepared from the ledger of Edijii Traders on December 31, 1992:- Debit Balances: Cash Rs.6,000; Accounts receivable Rs.10,000; Merchandise inventory (1.1.1992) Rs.4,500; Prepaid office rent Rs.2,000; Sales equipment Rs.8,500; Edijii drawings Rs.1,000; Sales returns & allowances Rs.800; Purchases Rs.20,000; Transportation in Rs.2,000; Office salaries expense Rs.5,000; Sales salaries expenses Rs.6,000. Credit Balances: Allowance for bad debts Rs.1,500; Allowance for depreciation on sales equipment Rs.2,500; Accounts payable Rs.6,500; Edijii capital Rs.12,300; Sales Rs.40,000; Purchase returns & allowances Rs.1,400; Purchase discount Rs.1,600. Data for Adjustment on December 31, 1992

(a) Increase allowance for bad debts by Rs.500. (b) Prepaid office rent expired Rs.800. (c) Provide depreciation on sales equipment for the year Rs.1,000. (d) Office salaries expense outstanding Rs.900. (e) Sales salaries were prepaid to the extent of Rs.800. (f) Merchandise inventory on December 31, 1992 was valued at Rs.6,200. (g) A purchase of merchandise of Rs.500 was wrongly charged to sales Equipment account. (h) Salary to a sales person for the last week of December Rs.400 was paid by the owner

from business cash, which was mistakenly debited to his Drawing account. REQUIRED

(a) Prepare INCOME STATEMENT for the period ended on December 31, 1992, grouping properly revenues and expenses.

(b) Prepare Classified BALANCE SHEET as of December 31, 1992. (c) Prepare cost of goods sold account

Question # 29: 1995 Regular & Private – BIEK The following balances have been taken from the pre-closing Trial Balance prepared from the ledger of Sherdil Traders on December 31, 1994:- Debit Balances: Cash Rs.21,000; Accounts receivable Rs.33,000; Merchandise inventory (1.1.94) Rs.12,000; Sales equipment Rs.27,000; Prepaid office rent Rs.9,000; Sherdil Drawings Rs.3,000; Sales returns and allowances Rs.3,000; Purchases Rs.66,000; Transportation in Rs.6,000; Office salaries expense Rs.18,000; Sales salaries expense Rs.24,000.


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Credit Balances: Accounts payable Rs.24,000; Sales Rs.120,000; Purchase returns and allowances Rs.4,500; Purchase discount Rs.5,400; Allowance for bad debts Rs.6,000; Allowance for depreciation on sales equipment Rs.9,000; Sherdil Capital Rs.53,100. Data for Adjustment and Correction on December 31, 1994: (a) Office salaries expense outstanding Rs.3,000. (b) Sales salaries were prepaid to the extent of Rs.2,400. (c) Merchandise inventory on December 31, 1994 was valued at Rs.24,000. (d) Provide depreciation on sales equipment for the year Rs.4,500. (e) Prepaid office rent expired Rs.3,000. (f) Increase allowance for bad debts by Rs.1,800. (g) An item of sales salaries of Rs.2,000 was wrongly debited to office salaries expense account. (h) An item office salaries expense of Rs.1,000 was wrongly debited to sales salaries expense. (i) Defective goods worth Rs.500 returned by a customer were wrongly debited to purchase

account. (j) An item of repairs of sales equipment of Rs.500 was wrongly debited to sales equipment

account. (k) Drawing of Rs.500 for personal use of Sherdil was wrongly debited to office salaries

expense. (l) An item of purchase returns of Rs.1,000 was wrongly credited to sales account. REQUIRED

a) Prepare INCOME STATEMENT for the year ended on December 31, 1994, grouping properly revenue and expense items.

b) Prepare classified BALANCE SHEET as of December 31, 1994. c) Prepare cost of goods sold account

Question # 30: 2012 Regular – BIEK Following are the trial balance of Ahmed and Co. as of December 31, 2011: Debit Balance: Cash Rs.12,400; Merchandise inventory Rs.87,000; Accounts receivable Rs.56,000; Office supplies Rs.1,600; Unexpired insurance Rs.4,200; Land Rs.68,000; Building Rs.164,000; Office equipment Rs.42,600; Ahmed’s drawings Rs.20,000; Sales discount Rs.7,000; Cost of goods sold Rs.316,600; Sales salaries expense Rs.55,200; Advertising expense Rs.12,200; Office salaries expense Rs.44,600; Travelling expense Rs.15,600. Credit Balance: Accounts payable Rs.38,000; Ahmed’s capital Rs.322,400; Sales Rs.504,000; Allowance for depreciation (Equipment) Rs.10,600; Allowance for depreciation (Building) Rs.32,000. Data for Adjustment at December 31:

(a) Office supplies on hand Rs.500. (b) Unexpired insurance Rs.3,000. (c) Depreciation for the year on building Rs.4,000; office equipment Rs.1,800. (d) Unpaid salaries: sales salaries Rs.3,000; office salaries Rs.2,000.

REQUIRED (i) Prepare income statement for the year ended December 31, 2011. (ii) Prepare balance sheet as on December 31, 2011. (iii) Prepare adjusting entries in General Journal.


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Sameer Hussain

Question # 31: 2013 Regular – BIEK Accounts’ balances and data for adjustment of Zulfiqar & Co. at the end of accounting period, June 30, 2012 are as follows: Debit Balances: Cash Rs.59,500/-, Accounts receivable Rs.73,000/-, Merchandise inventory July 1, 2011 Rs.198,000/-, Prepaid insurance Rs.24,000/-, Furniture Rs.45,000/-, Drawings Rs.50,000/-, Purchases Rs.284,000/-, Salaries expense Rs.58,000/-, Rent expense Rs.32,000/-. Credit Balances: Notes payable Rs.20,000/-, Unearned commission Rs.8,500/-, Accumulated depreciation (Furniture) Rs.9,000/-, Zulfiqar Capital Rs.400,000/-, Sales Rs.386,000/-. Data for Adjustment on June 30, 2012:

(c) Cost of goods sold Rs.242,000/-. (d) Unearned commission Rs.6,000/-. (e) Salaries expense for the year Rs.72,000/-. (f) Accumulated depreciation Rs.13,500/-. (g) Prepaid insurance Rs.16,000/-.

REQUIRED Prepare Income Statement and Balance Sheet.


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MULTIPLE CHOICE QUESTIONS (MCQS) 1) Which of the following financial statements is also known as a statement of financial

position? a) Balance sheet b) Income statement c) Statement of cash flow d) Bank statement

2) Which of the following shows the details and results of the company's profit-related

activities for a period of time? a) Balance sheet b) Income statement c) Statement of cash flow d) Bank reconciliation statement 3) The body of a balance sheet consists of how many distinct sections? a) Two b) Three c) Four d) Varying numbers 4) A business has the following items extracted from its trial balance: Opening inventory Rs.10,000 Purchases Rs.25,000 Sales Rs.40,000 Expenses Rs.10,000 In addition, its ending inventory is valued at Rs.15,000. What is the correct figure for the business gross profit? a) Rs.20,000 b) Rs.10,000 c) Rs.15,000 d) Nil 5) A business has the following items in its accounts at its year end 31 December 2001: Opening inventory Rs.5,000 Closing inventory Rs.10,000 Purchases Rs.90,000 Purchase returns Rs.2,000 What is the correct figure for cost of goods sold in 2001? a) Rs.85,000 b) Rs.83,000 c) Rs.95,000 d) Rs.93,000 6) If Rent expenses Rs.5,000, Insurance expenses Rs.4,000, Prepaid rent expenses

Rs.3,000. What amount of total expenses will be shown in income statement? a) Rs.9,000 b) Rs.12,000 c) Rs.8,000 d) Rs.6,000 7) Net profit is computed in: a) Balance sheet b) Income statement c) Cash flow statement d) Bank reconciliation statement

8) In income statement, gross profit is always equal to: a) Sales – Expenses b) Income – Expenses c) Sales – Cost of goods sold d) Sales – Selling expenses 9) Opening inventory + Purchases – Ending inventory = a) Amount of sales b) Gross profit c) Cost of goods sold d) Net income

10) The expenses related to the main operations of the business are referred to as: a) Administration expenses b) Non – administration expenses c) Selling expenses d) Operating expenses

11) The expenses paid out of gross profit are: a) General expenses b) Financial expenses c) Selling expenses d) All of the above


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12) Gross profit Rs.50,000; Net profit Rs.42,000; Sales Rs.250,000. Amount of operating expense is:

a) Rs.92,000 b) Rs.62,500 c) Rs.300,000 d) Rs.8,000 13) If commission received during the year amounts to Rs.20,000 and commission

accrued at year end is Rs.5,000, what is the amount of commission for the year? a) Rs.20,000 b) Rs.5,000 c) Rs.15,000 d) Rs.25,000

14) Which of the following is shown in income statement? a) Prepaid salaries b) Accrued salaries c) Salaries expense d) Salaries paid

15) If salaries paid during the year amounts to Rs.9,000 and salaries accrued at the

year-end are Rs.3,000. The amount of salaries expense for the year will be: a) Rs.9,000 b) Rs.3,000 c) Rs.6,000 d) Rs.12,000

16) Which of the following is correct statement? a) Profit does not change owner’s equity b) Profit increases owner’s equity c) Profit decreases owner’s equity d) Profit decreases liabilities

17) This is not shown in income statement: a) Cash b) Salaries expense c) Sales d) Sales return

18) Cost of goods sold is a part of: a) Equities b) Balance sheet c) Statement of retained earnings d) Income statement

19) The owner’s equity in the business arises from these two sources: a) Net income and cash b) Net profit and drawings c) Net profit and additional investment d) All of these

20) Gross profit is: a) Excess of sales revenue over cost of goods sold b) Cost of goods sold plus opening stock c) Sales less ending stock d) Net profit less expenses 21) Supplies on hand on Jan. 1, Rs.140, supplies purchased during the period Rs.530,

supplies consumed Rs.480, supplies at the end were: a) Rs.910 b) Rs.760 c) Rs.670 d) Rs.190

22) When gross profit is zero, it implies that: a) Gross profit < Cost of goods sold b) Cost of goods sold > Gross profit c) Net sales = Gross profit d) Net sales = Cost of goods sold

23) If sales return is debited to purchase account erroneously by Rs.2,000, the net

income will show: a) Increase by Rs.2,000 b) Decrease by Rs.2,000 c) No effect d) Decrease by Rs.1,000


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24) This is not a balance sheet item: a) Allowance for bad debts b) Unearned fee c) Bills receivable d) Depreciation expense

25) This account is shown in Income Statement: a) Unearned rent b) Prepaid rent c) Rent payable d) Rent income

26) The item shown in both income statement and balance sheet is: a) Merchandise inventory (beginning) b) Allowance for bad debts c) Depreciation expense d) Merchandise inventory (ending)

27) While calculating a gross profit, the following account is irrelevant: a) Transportation in b) Sales c) Delivery expense d) Merchandise inventory

28) This is shown in current assets on balance sheet: a) Unearned rent b) Rent income c) Prepaid rent d) Rent expense

29) This statement is not necessarily prepared at the end of financial year: a) Income statement b) Balance sheet c) Bank reconciliation statement d) Post – closing trial balance

30) Which of the following would not be included on a balance sheet? a) Capital b) Accounts payable c) Sales d) Cash

31) At the end of the current accounting period, Johnson Company failed to record

utilities consumed during the period. Johnson will be billed for the utilities during the next accounting period. As a result, current period assets, liabilities, owner’s equity and income respectively are:

a) Overstated, overstated, correct, correct b) Correct, understated, overstated, overstated c) Overstated, understated, overstated, overstated d) Overstated, understated, correct, correct 32) Given figures showing:

Sales Rs.8,200; Opening inventory Rs.1,300; Closing inventory Rs.900; Purchases Rs6,400; Carriage inwards Rs.200; the cost of goods sold figure is:

a) Rs.6,800 b) Rs.6,200 c) Rs.7,000 d) Another figure 33) At the balance sheet date the balance of allowance for depreciation account is: a) Transferred to depreciation expense account b) Transferred to liability account c) Simply deducted from the asset in the balance sheet d) Transferred to the asset account 34) In the trial balance, the balance on the allowance for depreciation account is: a) Shown as a credit item b) Not shown, as it is part of depreciation expense c) Shown as a debit item d) Sometimes shown as a credit, sometimes as a debit


Chapter # 11


Sameer Hussain

35) If the gross profit is Rs.5,000; and the net profit is 25% of the gross profit, then the operating expenses are:

a) Rs.1,250 b) Rs.3,750 c) Rs.4,150 d) Rs.6,250 36) A fixed asset is reported on balance sheet at its: a) Replacement value b) Scrap value c) Book value d) Market value

37) This financial statement is based on the accounting equation: a) Balance sheet b) Income statement c) Statement of retained earnings d) Bank reconciliation statement

38) Sales are equal to: a) Cost of goods sold – Gross profit b) Cost of goods sold + Gross profit c) Cost of goods sold – Net profit d) Cost of goods sold + Net profit

39) In case of loss, revenue is always: a) More than cost b) Less than cost c) Equal to cost d) None of these

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