90022

1
Level 1 Accounting, 2005

90022 Demonstrate an understanding

of the conceptual basis of accounting

Credits: Three

You should answer ALL the questions in this booklet.

© New Zealand Qualifications Authority, 2005

All rights reserved. No part of this publication may be reproduced by any means without the prior permission of the
New Zealand Qualifications Authority

L1 Accounting 2005, 90022 – page 2 of 5

 You are advised to spend 30 minutes answering the questions in this booklet.

QUESTION ONE: DESCRIBE ACCOUNTING

Sam Hohepa lives in Taihape and owns a small bookstore called Books 4 U. The store currently sells
books and magazines. Sam is planning to expand his shop to include stationery and children’s toys.
Sam uses the services of the local chartered accountant Susan Cho for most of his accounting
needs.

(a) Susan Cho employs Ben Morris, an accounting technician. Both Susan and Ben work on the
Books 4 U accounts, tax returns, financial statements, and reports.

1 (i) Describe ONE task Ben, the accounting technician, is likely to perform for Books 4 U.
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3 (ii) Describe ONE task Susan, the chartered accountant, is likely to perform for Books 4 U.
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(b) Sam has applied to the bank for a loan to finance the expansion of the shop. The bank
manager has asked Sam to provide a copy of Books 4 U’s latest Statement of Financial
Position.

State ONE reason the bank manager wants to see Books 4 U’s Statement of Financial
Position.

(c) Sam is more interested in Books 4 U’s Statement of Financial Performance. Explain why this
statement is important to Sam.

(d) As a sole proprietor, Sam has unlimited liability for the business debts of Books 4 U. Fully
explain what unlimited liability means for Sam.
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(e) State ONE advantage of Sam operating his business as a sole proprietor.

QUESTION TWO: ELEMENTS OF ACCOUNTING

Books 4 U’s Chart of Accounts has the following ledger accounts.

Bank GST Payable Depreciation on Buildings

Revenue in Advance Book Sales Mortgage
Loan Buildings Shop Assistants’ Wages
Prepayments Interest on Loan Accumulated Depreciation on Buildings

(a) From the list of accounts above, identify THREE liabilities.

(1)
(2)
(3)

(b) Fully explain why Magazine Sales for cash are recorded as revenue of Books 4 U.

L1 Accounting 2005, 90022 – page 3 of 5

(c) The following questions relate to the recording of Shop Fittings as an asset of Books 4 U.

(i) State the asset characteristic being described in each of the following two statements.

(ii) Explain how Shop Fittings meet the following asset characteristic:
“the asset has future economic benefit”

(d) Fully explain why the payment of shop electricity is recorded as an expense of Books 4 U.

(e) Sam has expanded his bookstore and in the process he has paid for a number of extra items
for his shop. For each item in the table below, place a tick (✓) in the correct box to indicate
whether it represents capital expenditure or revenue expenditure. ‘New shop fittings’ has
been done for you.

L1 Accounting 2005, 90022 – page 4 of 5

 QUESTION THREE: ACCOUNTING CONCEPTS

(a) Sam has expanded his bookstore. Books for U’s financial statements are prepared on the
assumption the business will be operating into the foreseeable future. State the concept that
recognises this.

(b) Define historical cost, using the example of new shop fittings costing $7 000 to help you.

(c) (i) State the concept being applied when the financial statements of Books 4 U are
prepared every 12 months.

(ii) Fully explain the concept you have identified in (c) (i) above.

1 (d) On balance day, $1 200 has been paid in advance for insurance. Fully explain how the
reporting of this prepayment illustrates the accrual basis concept.
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(e) When Sam takes magazines home for his children, he records the cost of the magazines as
drawings.

Fully explain why Sam does this based on the notion of accounting entity.

L1 Accounting 2005, 90022 – page 5 of 5