Exercises: Accounting obligations: balance sheet and income statement

Define a company's equity and liabilities structure, and explain in your own words what its three balance sheet categories represent: assets, equity, and liabilities.

Classify these balance sheet items as assets, equity, or liabilities: a van, a five-year bank loan, warehouse merchandise, capital contributed by partners, office computers, and a debt to a supplier.

The figure shows the balance sheet structure with its two columns. Identify the missing balance sheet category, marked with "?", explain what it represents, and write the fundamental accounting equation that relates the three categories.

A company has total assets of $\$3\,000\,000$ and liabilities of $\$1\,800\,000$. a) Calculate its equity. b) Interpret the result and explain what negative equity (a situation of technical insolvency) would mean instead.

An academy billed $\$1\,600\,000$ for courses and incurred expenses of $\$1\,300\,000$ (salaries, rent, utilities, and advertising). a) Calculate the profit for the financial year. b) Explain the difference between revenue and cash receipt, and between expense and cash payment, using an example from the academy.

The annual accounts include the balance sheet, the profit and loss account, and the notes to the accounts. Explain what information each document provides and why the law obliges companies to prepare them and file them at the Companies House / Commercial Registry.

A computer equipment trading company closed the month of December with a net profit of $\$45,000$. However, on January 5, its current account balance is only $\$2,000$ and it must face the payment of payroll ($\$22,000$), social security contributions ($\$7,000$), and the maturity of a bank loan installment ($\$18,000$). Its usual commercial policy consists of granting its customers 90-day payment terms, while paying its suppliers in cash; in addition, in December it purchased a delivery van in cash for $\$35,000$. a) Technically justify why a profitable company can find itself at imminent risk of insolvency/suspension of payments, identifying the specific transactions that have caused this liquidity squeeze. b) Design an immediate action plan to face that week's payments without resorting to staff layoffs, and propose two structural measures for managing the operating cycle to prevent the situation from recurring.

The management team of an industrial company experiencing financial difficulties is debating two proposals before closing the financial year to avoid showing losses: 1) not to record the annual depreciation of machinery ($\$35,000$) under the pretext that "it has been stopped for several months and has not worn out", and 2) to fully recognize as income for the year an advance payment of $\$80,000$ made by a customer on account of an order that will be manufactured and delivered next year. a) Rebut both proposals by identifying which mandatory accounting principles and which aspects of the "true and fair view" principle would be violated in each case. b) Reasonably predict the equity, financial, and legal consequences this creative accounting would have for suppliers who decide to grant trade credit to the company based on these accounts, and for the directors who prepare them.

At the close of its first year, a public limited company presents the following pre-adjustment accounting balances: Sales of merchandise $\$120,000$, Commercial premises $\$90,000$ (non-depreciable land accounts for $30\ \%$ of its value), Final inventory of merchandise $\$20,000$, Long-term debts with credit institutions $\$30,000$, Suppliers $\$10,000$, Wages and salaries $\$45,000$, Share capital $\$50,000$, Purchases of merchandise $\$30,000$, Computer equipment $\$10,000$, and Other operating expenses $\$15,000$. The accountant forgot to record the annual depreciation of the premises ($2\ \%$) and the computer equipment ($20\ \%$), as well as the accrual of corporate income tax ($25\ \%$). a) Prepare the adjusted income statement, calculating the profit before tax and the profit for the year after correcting the accounting omissions. b) Prepare the final balance sheet grouped by accounting categories, calculating the cash balance required to balance the balance sheet and incorporating the profit obtained. c) Interpret the meaning of the resulting equity and determine whether the company has generated real self-financing capacity.