TOPIC 2: WORKED EXAMPLES

The Basic Accounting Equation states that: Assets = Liabilities + Equity.

Exercise 1
Using the sign + to indicate an increase and the sign - to indicate a decrease, fill
in the following chart to show the dual effect of each of a series of transaction on
the financial position (accounting equation) of a business
The effect upon
Assets Equity Liabilitie
s
1 Bought a vehicle paying by cheque

2 Bought goods on credit

3 Sold goods for cash

4 Bought equipment on credit

5 The owner invested more funds in business

6 Returned some of the goods bought on credit

7 Sold goods on credit

8 Paid balance due for goods bought on credit

9 Some goods sold on credit returned,- not suitable

10 Returned some of the equipment at 4 above

11 Received balance due for goods sold on credit

12 Negotiated a long-term loan from lender

13 Owner took some goods for own use

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Exercise 2
Classify the following items as assets, Equity or liabilities

Assets Equity Liabilitie

s
1 Plant and equipment
2 Loan of funds to company
3 Owners investment in firm
4 Credit for goods supplied to the
company
5 Goods supplied on credit to the
company
5 Computers
6 Amounts due to firm
7 Amounts owed by firm
8 Inventory of goods
9 Credit for goods purchased from firm

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Exercise 3
Suppose ROCK Company had the following assets, equity and liabilities at 31
Dec 20X0

Trade Payables (or Accounts Payable) 600
Motor Vehicles 300
Long Term Borrowing 500
Land 600
Buildings 900
Trade Receivables (or Accounts Receivable) 1100
Inventories 500
Cash 400
Equipment 800
Share Capital 1000
Share Premium 2000
Retained Earnings 500

Draw up a classified Statement of Financial Position at 31 December 20X0.

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Exercise 4
(a) ROLL Company is a new enterprise which was formed on 1 June 20X2.
The following transactions took place in June. Show how each of the
following transactions impact the basic accounting equation (A=L+E)

(i) The directors of ROLL invested $1000 cash in the business. In

total, they received 1000 $1 shares (par value) in return. The
authorised share capital of the business is 5000 shares
(ii) Bought furniture for $30 cash
(iii) Took an interest free long-term loan from LMN Company for $60
cash
(iv) Purchased 100 units of Inventory for $100 cash
(v) Purchased 100 units of Inventory for $100 on account (i.e., on
credit)
(vi) Purchased Land for $200 cash
(vii) Purchased a Building for $300 financed by a mortgage loan.
(viii) The owners of ROLL company decided to repay LMN company
$30 cash

Assets Liabilities Equity

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(b) Show the balances on each of the individual assets, equity and liabilities at
how each of the following transactions impact the basic accounting
equation (A=L+E)

(c) Draw up a classified SOFP at 30 June 20X2. Use the information from
(b) to compile the SOFP.

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Exercise 2.4 from MLA book page 75

Exercise 2.5 from MLA book page 75

Exercise 2.7 from MLA book page 76

5
The Basic Accounting Equation states that: Assets = Liabilities + Equity.
Exercise 1
Using the sign + to indicate an increase and the sign - to indicate a decrease, fill
in the following chart to show the dual effect of each of a series of transaction on
the financial position (accounting equation) of a business
The effect upon
Assets Equity Liabilitie
s
1 Bought a vehicle paying by cheque +-

2 Bought goods on credit + +

3 Sold goods for cash +-

4 Bought equipment on credit + +

5 The owner invested more funds in business + +

6 Returned some of the goods bought on credit - -

7 Sold goods on credit +-

8 Paid balance due for goods bought on credit - -

9 Some goods sold on credit returned,- not suitable +-

10 Returned some of the equipment at 4 above - -

11 Received balance due for goods sold on credit +-

12 Negotiated a long-term loan from lender + +

13 Owner took some goods for own use - -

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Exercise 2
Classify the following items as assets, Equity or liabilities

Assets Equity Liabilities

1 Plant and equipment x
2 Loan of funds to company x
3 Owners investment in firm x
4 Credit for goods supplied to the x
company
5 Goods supplied on credit to the x
company
5 Computers x
6 Amounts due to firm x
7 Amounts owed by firm x
8 Inventory of goods x

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EXAMPLE 2.1: ROCK COMPANY SOLUTION

ROCK COMPANY

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X0

ASSETS
Non-Current Assets
Land 600
Buildings 900
Equipment 800
Motor Vehicles 300
2600

Current Assets
Inventory 500
Accounts Receivable 1100
Cash 400
2000

TOTAL ASSETS 4600

LIABILITIES & EQUITY

LIABILITIES
Non-Current Liabilities
Long Term Borrowings 500

Current Liabilities
Accounts Payable 600

Total Liabilities 1100

EQUITY
Share Capital 1000
Share Premium 2000
Contributed Capital 3000
Retained Earnings 500
TOTAL EQUITY 3500

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 LIABILITIES + EQUITY 4600
Note: Accounts Receivable is another name for Trade Receivables. Accounts Payable
is another name for Trade Payables.

EXAMPLE 2.2: SOLUTION TO ROLL

Assets Liabilities Equity

(i) Cash +1000 Share Capital

+1000
(ii) Cash -30
Furniture +30

(iii) Cash +60 Long Term Loan (LMN)

+60
(iv) Inventory +100
Cash -100

(v) Inventory+100 Accounts Payable +100

(vi) Land +200

Cash -200

(vii) Building +300 Long Term Loan

(Mortgage) +300
(viii) Cash -30 Long Term Loan (LMN) -
30

List of Balances at 30 June for ROLL

Share Capital 1000

Furniture 30
Cash (See Below) 700
Inventory 200
Long Term Loan (Mortgage) 300
Long Term Loan (LMN) 30
Accounts Payable 100
Land 200
Buildings 300

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 Note: Tracking the Movement in Cash
In Cash Flow Statement
Transaction Would Be Classified as:
(i) +1000 Financing
(ii) -30 Investing
(iii) +60 Financing
(iv) -100 Operating
(vi) -200 Investing
(viii) -30 Financing
CLOSING BALANCE: CASH 700

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 ROLL COMPANY

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X0

ASSETS
Non-Current Assets
Land 200
Buildings 300
Furniture 30
530

Current Assets
Inventory 200
Cash 700
900

TOTAL ASSETS 1,430

LIABILITIES & EQUITY

LIABILITIES
Non-Current Liabilities
Long Term Loans 330

Current Liabilities
Accounts Payable 100

Total Liabilities 430

EQUITY
Share Capital 1000
Share Premium 0
Contributed Capital 1,000
Retained Earnings 0
TOTAL EQUITY 1,000

LIABILITIES + EQUITY 1,430

(Note: the two long term loans could be shown separately or together - as
above)

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 Measuring and reporting financial position

Solution to exercise 2.4

Joe Conday
Statement of financial position as at 1 March

ASSETS
Bank 20,000

EQUITY AND LIABILITIES

Equity 20,000

Statement of financial position as at 2 March

ASSETS
Bank (20,000 6,000) 14,000
Fixtures and fittings 6,000
Inventories 8,000
Total assets 28,000

EQUITY AND LIABILITIES

Equity 20,000
Trade payables 8,000
Total equity and liabilities 28,000

Statement of financial position as at 3 March

ASSETS
Bank (14,000 + 5,000) 19,000
Fixtures and fittings 6,000
Inventories 8,000
Total assets 33,000
EQUITY AND LIABILITIES
Equity 20,000
Trade payables 8,000
Borrowings 5,000
Total equity and liabilities 33,000

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 Statement of financial position as at 4 March

ASSETS
Bank (19,000 7,000 200) 11,800
Fixtures and fittings 6,000
Inventories 8,000
Motor car 7,000
Total assets 32,800
EQUITY AND LIABILITIES
Equity (20,000 200) 19,800
Trade payables 8,000
Borrowings 5,000
Total equity and liabilities 32,800

Statement of financial position as at 5 March

ASSETS
Bank (11,800 2,500) 9,300
Fixtures and fittings 6,000
Inventories 8,000
Motor car 9,000
Total assets 32,300

EQUITY AND LIABILITIES

Equity (19,800 500) 19,300
Trade payables 8,000
Borrowings 5,000
Total equity and liabilities 32,300

Statement of financial position as at 6 March

ASSETS
Bank (9,300 + 2,000 1,000) 10,300
Fixtures and fittings 6,000
Inventories 8,000
Motor car 9,000
Total assets 33,300

EQUITY AND LIABILITIES

Equity (19,300 + 2,000) 21,300
Trade payables 8,000
Borrowings (5,000 1,000) 4,000
Total equity and liabilities 33,300
McLaney and Atrill, Accounting and Finance: An Introduction, 8th edition,

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Solution to exercise 2.5

Manufacturing business
Statement of financial position at a point in time

000

ASSETS
Non-current assets
Property, plant and equipment
Property 245
Plant and equipment 127
Delivery vans 54
426
Current assets
Inventories raw materials 18
finished goods 28
Trade receivables 34
80
Total assets 506
EQUITY AND LIABILITIES
Equity (Owners capital which is the missing figure) 361
Non-current liabilities
Long-term borrowings (Manufacturing Finance Co) 100
Current liabilities
Trade payables 23
Short-term borrowings 22
45
Total equity and liabilities 506

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Solution to exercise 2.7

BEFORE TRANSACTIONS

Statement of financial position as at the START of the week

ASSETS
Property 145,000
Furniture and fittings 63,000
Inventories 28,000
Trade receivables 33,000
Total assets 269,000
EQUITY AND LIABILITIES
Equity 203,000
Short term borrowing (Bank Overdraft) 43,000
Trade payables 23,000
Total equity and liabilities 269,000

TRANSACTIONS

Assets Liabilities Equity

(a) Cash +11,000 Sales +11,000

Inventory 8,000 Cost of goods
8,000
(b) Trade receivables Sales + 23,000
+23,000 Cost of goods
Inventory 17,000 - 17,000

(c) Cash +18,000

Trade receivables
18,000
(d) Cash +100,000 Equity + 100,000

(e) Motor Van 10,000 Equity 10,000

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 (f) Inventory + 14,000 Trade payables +
14,000
(g) Cash 13,000 Trade payables
-13,000
Total 119,000 1,000 118,000

Statement of financial position as at the end of the week showing the

transactions

ASSETS

Property 145,000
Furniture and fittings 63,000
Motor van 10,000
Inventories (28,000 8,000 17,000 + 14,000) 17,000
Trade receivables (33,000 + 23,000 18,000) 38,000

Total assets 273,000

EQUITY AND LIABILITIES

Equity (203,000 + 11,000 8,000 + 23,000
17,000 + 100,000 + 10,000) 322,000

Borrowings (Bank overdraft) (43,000 11,000

18,000 100,000 + 13,000) (73,000)
Trade payables (23,000 + 14,000 13,000) 24,000

Total equity and liabilities 273,000

Since the bank balance is now positive, we can rewrite this statement of financial position
as:

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 Statement of financial position as at the end of the week

ASSETS
Non-current assets
Property 145,000
Furniture and fittings 63,000
Motor van 10,000
218,000
Current assets
Inventories 17,000
Trade receivables 38,000
Cash at bank 73,000
128,000

Total assets 346,000

EQUITY AND LIABILITIES

Non-current liabilities (none but layout included for illustration

purposes)
24,000
Current liabilities
Trade payables 24,000

Total liabilities

322,000

Equity
Total equity 322,000

Total equity and liabilities 346,000

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