Chapter 2 – Exercises & Cases

Multiple Choice Questions

1. Which financial statement shows a business's financial position at a specific point in time?
   a) Income Statement
   b) Statement of Owner's Equity
   c) Balance Sheet
   d) Statement of Cash Flows
   Answer: c) The Balance Sheet shows assets, liabilities, and equity at a specific date.

2. Net Income from the Income Statement flows into which statement?
   a) Balance Sheet only
   b) Statement of Owner's Equity
   c) Statement of Cash Flows only
   d) Both Balance Sheet and Statement of Cash Flows
   Answer: b) Net Income flows into the Statement of Owner's Equity, which then flows to the Balance Sheet.

3. In Luxembourg, which PCN class contains cash and bank accounts?
   a) Class 3
   b) Class 4
   c) Class 5
   d) Class 6
   Answer: c) Class 5 contains financial accounts (cash and banks).

4. A company's accounts receivable would be classified as:
   a) Current Asset
   b) Noncurrent Asset
   c) Current Liability
   d) Expense
   Answer: a) Accounts receivable are expected to be collected within one year, making them a current asset.

5. In Luxembourg, what is the minimum share capital required for a SARL?
   a) €10,000
   b) €12,000
   c) €25,000
   d) €30,000
   Answer: b) A SARL requires minimum share capital of €12,000.

6. Which PCN class contains expense accounts?
   a) Class 4
   b) Class 5
   c) Class 6
   d) Class 7
   Answer: c) Class 6 contains all expense accounts.

7. If a business has €50,000 in assets and €30,000 in liabilities, what is its equity?
   a) €20,000
   b) €30,000
   c) €50,000
   d) €80,000
   Answer: a) Equity = Assets - Liabilities = €50,000 - €30,000 = €20,000.

8. Revenue accounts in Luxembourg PCN are classified in:
   a) Class 5
   b) Class 6
   c) Class 7
   d) Class 1
   Answer: c) Class 7 contains all revenue accounts.

9. A bank loan due in 18 months would be classified as:
   a) Current Asset
   b) Noncurrent Asset
   c) Current Liability
   d) Noncurrent Liability
   Answer: d) A loan due after one year is a noncurrent liability.

10. In Luxembourg, annual accounts must be filed with RCS within how many months of the fiscal year end?
    a) 5 months
    b) 6 months
    c) 7 months
    d) 12 months
    Answer: c) Annual accounts must be filed within 7 months of fiscal year end.

---

Questions

1. Explain the difference between the Income Statement and the Balance Sheet. What does each statement show, and over what time period?

2. How do the four financial statements interconnect? Trace how information flows from one statement to another.

3. Define current assets and noncurrent assets. Give three examples of each and explain why they are classified as they are.

4. What is the accounting equation? How does it relate to the Balance Sheet?

5. Explain the difference between revenue and expenses. How do they relate to net income?

6. Describe the seven PCN account classes. Give an example account from each class and explain where it appears on the financial statements.

7. Compare and contrast a SARL and an SA. What are the key differences in their accounting and equity presentation?

8. Why must financial statements in Luxembourg use PCN classifications? What are the consequences of not following PCN?

9. Explain how a business can have positive net income but negative cash flow. Which statements would show this?

10. A Luxembourg business purchases €10,000 of equipment. How does this transaction affect the Balance Sheet? Which PCN class accounts are involved?

---

Problems Set A

Problem A-1: Classifying Accounts

Classify each of the following accounts according to PCN and indicate whether it appears on the Income Statement or Balance Sheet:

a) Cash (€5,000) b) Sales Revenue (€50,000) c) Accounts Payable (€8,000) d) Salaries Expense (€25,000) e) Equipment (€30,000) f) VAT Payable (€2,000) g) Rent Expense (€6,000) h) Retained Earnings (€15,000)

Problem A-2: Preparing an Income Statement

Using the following information for a Luxembourg restaurant, prepare an Income Statement for the month ended November 30, 2024:

• Sales Revenue: €20,000
• Cost of Goods Sold: €8,000
• Salaries Expense: €5,000
• Rent Expense: €1,000
• Utilities Expense: €500
• Other Expenses: €1,500

Problem A-3: Accounting Equation

For each scenario, calculate the missing amount:

a) Assets = €100,000, Liabilities = €40,000, Equity = ? b) Assets = €75,000, Liabilities = ?, Equity = €50,000 c) Assets = ?, Liabilities = €30,000, Equity = €45,000

Problem A-4: PCN Classification

Identify the PCN class (1-7) for each account:

a) Share Capital b) Cash c) Sales Revenue d) Accounts Receivable e) Salaries Expense f) Equipment g) VAT Payable h) Inventory

Problem A-5: Preparing a Balance Sheet

Using the following information, prepare a Balance Sheet as of December 31, 2024:

Assets:

• Cash: €10,000
• Accounts Receivable: €5,000
• Inventory: €8,000
• Equipment: €25,000

Liabilities:

• Accounts Payable: €12,000
• VAT Payable: €2,000
• Bank Loan (due in 2 years): €15,000

Equity:

• Share Capital: €15,000
• Retained Earnings: €4,000

---

Problems Set B

Problem B-1: Complete Financial Statements

Prepare all three financial statements (Income Statement, Statement of Owner's Equity, and Balance Sheet) for Tech Services SARL for the year ended December 31, 2024, using the following trial balance:

Account                          Debit        Credit
─────────────────────────────────────────────────────
Cash (510000)                    €40,000
Accounts Receivable (410000)      25,000
Equipment (223000)               50,000
Accounts Payable (400000)                    €15,000
VAT Payable (430000)                          3,000
Bank Loan - Long Term (120000)               30,000
Share Capital (101000)                       20,000
Retained Earnings, Jan 1 (104000)            12,000
Sales Revenue (701000)                       80,000
Salaries Expense (620000)       35,000
Rent Expense (612000)            8,000
Utilities Expense (615000)       2,000
Other Expenses (619000)          4,000
─────────────────────────────────────────────────────
Totals                           €164,000    €164,000

Problem B-2: Entity Form Comparison

Compare how equity would be presented on the Balance Sheet for: a) A SARL with €20,000 share capital and €15,000 retained earnings b) An SNC partnership with two partners, each contributing €15,000, and €10,000 current year profit (split equally) c) An individual business with owner's capital of €35,000

Explain the differences and why they exist.

Problem B-3: Statement Interrelationships

A business started the year with:

• Assets: €100,000
• Liabilities: €40,000
• Equity: €60,000

During the year:

• Earned revenue: €80,000
• Incurred expenses: €55,000
• Owner made no additional investments or withdrawals

Prepare: a) Income Statement for the year b) Statement of Owner's Equity for the year c) Balance Sheet at year end

Verify that all statements are properly connected.

Problem B-4: Luxembourg Compliance

Explain what a Luxembourg SARL must do to comply with financial statement requirements: a) What statements must be prepared? b) What PCN requirements must be followed? c) When must statements be filed? d) Where must they be filed? e) What happens if requirements are not met?

---

Comprehensive Problem

Comprehensive Problem 2: Complete Financial Statement Preparation for a Luxembourg SME

Boulangerie Schmidt SARL is a family-owned bakery in Esch-sur-Alzette. The company's trial balance as of December 31, 2024, is as follows:

Boulangerie Schmidt SARL
Trial Balance
December 31, 2024

Account                          Debit        Credit
─────────────────────────────────────────────────────
Cash (510000)                    €15,000
Accounts Receivable (410000)       3,000
Inventory (321000)                 5,000
Equipment (223000)                40,000
Vehicles (224000)                 25,000
Accounts Payable (400000)                    €12,000
VAT Payable (430000)                          2,500
Social Charges Payable (420000)               1,500
Bank Loan - Current Portion (121000)         5,000
Bank Loan - Long Term (120000)               30,000
Share Capital (101000)                       20,000
Retained Earnings, Jan 1 (104000)           8,000
Sales Revenue (700000)                       95,000
Cost of Goods Sold (602000)      45,000
Salaries Expense (620000)        25,000
Rent Expense (612000)             8,000
Utilities Expense (615000)        2,500
Insurance Expense (613000)        1,200
Depreciation Expense (640000)     4,000
Other Expenses (619000)           2,800
─────────────────────────────────────────────────────
Totals                           €177,500    €177,500

Required:

1. Prepare an Income Statement for the year ended December 31, 2024. Show all PCN account classifications.

2. Prepare a Statement of Owner's Equity for the year ended December 31, 2024. Assume no distributions were made to owners.

3. Prepare a Balance Sheet as of December 31, 2024. Classify assets and liabilities as current or noncurrent. Show all PCN account classifications.

4. Verify that:
   a) The Income Statement and Statement of Owner's Equity are properly connected
   b) The Statement of Owner's Equity and Balance Sheet are properly connected
   c) The Balance Sheet equation balances (Assets = Liabilities + Equity)

5. Identify which PCN class each account belongs to and explain why.

6. As a SARL, what are Boulangerie Schmidt's filing requirements with RCS? What format must the statements follow?

7. If Boulangerie Schmidt had sales of €3.5 million instead of €95,000, how would this affect:
   a) The type of financial statements required (abbreviated vs. full)?
   b) Audit requirements?
   c) Disclosure requirements?

---

Cases

Case 2-1: Understanding Financial Statements

Marie has received her first set of financial statements from her accountant for Le Petit Bistro. She's confused about several items:

1. The Income Statement shows Net Income of €2,500, but her bank account only increased by €1,000. She asks: "Where did the other €1,500 go?"

2. The Balance Sheet shows Equipment of €15,000, but she knows she paid €18,000 for the equipment. She's concerned the accountant made an error.

3. She sees "VAT Payable" of €1,500 on the Balance Sheet and wonders if this is money she owes or money owed to her.

Questions for Analysis:

1. How would you explain to Marie why Net Income doesn't equal the change in cash? What statement would help clarify this?

2. Explain to Marie why the Equipment on the Balance Sheet might be different from what she paid. What accounting concept is involved?

3. What is VAT Payable, and why does it appear on the Balance Sheet? Is this an asset or liability?

4. How can Marie use these financial statements to make better business decisions?

5. What questions should Marie ask her accountant to better understand her financial statements?

Case 2-2: Choosing a Legal Entity Form

Three friends—Luc, Sophie, and Marc—want to start a consulting business in Luxembourg. They're trying to decide between forming a SARL or an SNC partnership.

Considerations:

• Initial investment: €30,000 total (€10,000 each)
• Expected first-year revenue: €150,000
• They want to keep it simple and inexpensive to set up
• They plan to split profits equally
• They want limited liability if possible

Questions for Analysis:

1. Compare SARL vs. SNC for this situation. What are the advantages and disadvantages of each?

2. How would equity be presented differently on the Balance Sheet for each entity form?

3. What are the accounting and filing requirements for each?

4. What are the liability implications for each form?

5. What would you recommend to Luc, Sophie, and Marc? Why?

6. If they choose SARL, what is the minimum share capital, and how should the €30,000 be allocated?

---

---

Solutions are published in supplementary/instructor/solutions/chapter_02_solutions.md.