Accounts Paper2

QUESTION #1.

PART A

Generally speaking, an asset is any item of property that has monetary value. Assets are shown in the balance sheets of businesses.

One requirement for an asset is that it must be acquired in a transaction. Your mechanical knowledge and skills is not included as an asset to the business due to the fact that firstly, they were not acquired in a specific transaction that your business took part in, such as when you bought your alignment machine.

Another requirement for recognition of an item as an asset is that its cost at the time of its acquisition must be able to be objectively measured. Your mechanical knowledge and skills cannot be objectively measured in dollars and cents. Your valuation of your knowledge or skill is a subjective judgment and another person evaluating the valuation of the same may not agree on your monetary valuation of such skills.

On the basis of these reasons your mechanical knowledge and skills cannot be truly recognised as assets of the business.

PART B

The answer to this question would depend on the purpose or use of the house.

ASSUMPTION 1: The house is not used for business purposes

If the house is not used for business purposes but rather you reside in the house, then the house would not be listed under the company's assets at all because it is not owned by the company although it is owned by you.

According to the Economic entity concept, accounting records are maintained for a specific, identifiable entity - separate from its owners. Therefore, in this case, you and your company are considered separate legal entities (for accounting purposes). Thus the house would not be shown in the records of the business at all.

ASSUMPTION 2: The house is used for business purposes

However if the house is used for business purposes then it would have to be recorded in the balance sheet of the business at its historical cost of $300,000. It would be recorded at its historical cost of $300,000.00 because, although the asset is now worth $500,000 that cost is just a subjective valuation based on market prices. At its time of sale, the house may not actually sell for $500,000 but will instead sell at its valuation at its time of sale and this will depend on the worth of the house to the potential buyer at that point in time. In accounting, the value of assets that are recorded on the balance sheet must always be able to be objectively measured and universally agreed upon. The only valuation that fits these criteria is the historical cost value of $300,000 and therefore the house would be recorded at its historical cost of $300,000.00

PART C

There are two main types of assets, fixed assets and current assets. Fixed assets are essentially assets that are tangible, are long-lived and are not acquired to be resold at a later date, instead they may be acquired to be used by the business to produce goods or services which will generate future cash inflows, e.g. your equipment that you use to repair cars. Current assets on the other hand are assets that can be easily converted to cash or consumed within the normal operating cycle of the business or within one (1) year whichever is longer, for example, cash, and your stock of rims for sale.

PART D

The fact that you sell and repair vehicles will lead to a situation where you have motor vehicles in your possession for the sole purpose of resale. As such, these motor vehicles will be considered to be part of the inventory or stock of your business. Inventory is a current asset and therefore the motor vehicles in your possession for the sole purpose of resale are considered current assets of the business as it is expected that they will be sold by the business within the normal operating cycle of your business or within one (1) year whichever is longer.

However there are motor vehicles that you use to conduct your business such as your wrecker, courtesy car and the vans used to collect and deliver parts etc., which will be considered fixed assets as they have not been acquired to be resold at a later date but instead have been acquired to be used in the course of your business transactions.

PART E

Profit is the amount by which revenues exceed expenses for the relevant period. Therefore, if you have a profit of $50,000, this means that the revenues which you earned for the goods and services you provided have exceeded expenses incurred in providing those goods and services. The $20,000 in your bank account reflects the actual monies that you collected from your customers for good and services provided. However, it does not include goods or services that you provided to your customers on credit and therefore it would not include monies that your customers owe you (accounts receivables), nor does it include expenses that you paid in advance (prepaid expenses).

Revenues, however, are recognized in the period in which you perform those services, whether you have received cash or not. Therefore even though cash is not received, revenue will still be recognized for the period in which the services have been performed and therefore it is possible to have a profit of $50,000 even though your bank account has only increased by $20,000.

(Figure 1)

CENTRAL HARDWARE STORE

INCOME STATEMENT

For the six (6) months ended June 30th 2006

$ $

Sales ($210,000 + 30,000) 240,000

Less: Cost of Goods Sold

Purchases ($30,000 + 96,000 + 24,000) 150,000

Less; Ending Inventory (18,000)

Cost of Good Sold 132,000

GROSS MARGIN 108,000

Less: Expenses

Rent (1/2 yr @ $14,400/yr) 7,200

Operating Expenses 45,000

Depreciation expense: