SOLUTIONS MANUAL For Financial Accounting: Recording, Analysis and Decision Making Fifth Edition. by StudyGuide

Chapter 1: An introduction to accounting

CHAPTER 1 – AN INTRODUCTION TO ACCOUNTING ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises

Learning Objectives

Exercises

Problems

Explain the business context and the need for decision making.

Define accounting, describe the accounting process and define the diverse roles of accountants.

Explain the characteristics of the main forms of business organisation.

Understand the Conceptual Framework and the purpose of financial reporting.

Identify the users of financial reports and describe users’ information needs.

2A; 2B

Identify the elements of each of the four main financial statements.

4,5,6

1,2,3,4,5, 7, 8,9,10

3A,4A,5A,6A 7A,8A,3B,4B 5B,6B,7B,8B

Describe the financial reporting environment.

Explain the accounting concepts, principles, qualitative characteristics and constraints underlying financial statements

3A, 3B

Calculate and interpret ratios for analysing an entity’s profitability, liquidity and solvency.

11,12,13

9A,10A 9B,10B

1A,1B

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CHAPTER 1 – INTRODUCTION TO ACCOUNTING ANSWERS TO QUESTIONS 1.

The first step in the process of decision making is to identify the issue or the decision to be made. The next step is to gather the relevant information required for the analysis. Once gathered, you then identify the tool or technique that can provide the analysis of the issue so a decision may be made. The final step is to evaluate the results of the analysis and make the decision. The primary function of accounting is to relevant information to aid in making a business decision.

When running a business most of your actions require decisions. Beginning with deciding which is the most suitable business structure and where are you going to locate your business and are you going to have an online presence as well, how are you going to fund your activities (borrow or have equity investors), how many employees do you need and what level of inventory is required to name a few decisions. When starting a new business deciding on the suitable accounting system and information system is important. Are you intending to have eftpos? Are you going to have online sales? Etc.

Advantages of company structure are limited liability (shareholders not being personally liable for corporate debts), indefinite life, easy transferability of ownership (through selling shares), and greater ability to raise funds. Disadvantages of a company are the establishment costs and ongoing fees and increased government regulations.

External users are those outside the business who have an interest in knowing about the activities of the entity as resource providers, recipients of goods or services or parties performing a review of oversight function. Examples include investors, creditors such as banks and suppliers, taxing authorities, regulatory agencies, trade unions and customers.

(a)

Statement of profit or loss.

(b)

Statement of financial position.

(c)

Statement of financial position.

(d)

Statement of profit or loss.

(e)

Statement of financial position.

(f)

Statement of financial position.

The Conceptual Framework consists of a set of concepts to be followed by preparers of financial statements and standard setters. The Conceptual Framework provides guidance to preparers of financial information by defining who is required to report and who the users are likely to be.

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Chapter 1: An introduction to accounting

It is important to determine if a business is a reporting entity as it is only reporting entities that are required to prepare general purpose financial reports in accordance with the accounting standards. Three main indicators determine which of the forms of business organisation fall into the category of a reporting entity. That is, an entity is more likely to be classified as a reporting entity if it is (1) managed by individuals who are not owners of the entity, (2) politically or economically important, and (3) sizable in any of the following ways — sales, assets, borrowings, customers or employees.

The three categories in the statement of cash flows are operating activities, investing activities and financing activities. The categories were chosen because they represent the three principal types of business activity.

Retained earnings is the profit retained in a company. Retained earnings is increased by profit and is decreased by dividends and by losses.

10.

The going concern principle lends credibility to the cost principle; otherwise items would be reported at liquidation value. By assuming the entity will continue to operate, assets can continue to be reported at cost because they are expected to bring benefits to the business through use even though they may have little or no resale value.

11.

Rose Ena is correct. Comparability means that financial statements can be compared between companies and over time. Using the same accounting principles and accounting methods from period to period with a company, facilitates comparability. When accounting methods are inconsistent, it is difficult to determine whether a company is better off, worse off or the same from period to period.

12.

A company’s operating cycle is the average time taken to acquire goods and services and convert them to cash in producing revenues.

13.

(a)

Tia is not correct. There are three characteristics: • liquidity, • profitability; and • solvency

(b)

The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the business. In contrast, long-term creditors and shareholders are primarily interested in the profitability and solvency of the company. However, they may use the same financial statements as a source of information.

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14.

(a)

The increase in profit margin is good news because it means that a larger percentage of profit is generated for each dollar of net sales.

(b)

An increase in the current ratio generally signals good news because the company improved its liquidity.

(c)

The decrease in the debt to total assets ratio is good news because it means that the company has decreased the proportion of assets funded by creditors, thus reducing risk of being unable to repay debt.

(d)

An increase in current cash debt coverage ratio is good news because it means that the company has increased its ability to meet short-term obligations. The higher the current cash debt coverage the more favourable is the liquidity of the business.

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1.1 (a)

Shared control, increased skills and resources.

(b)

Simple to set up and maintain control with founder.

(c)

Easier to transfer ownership and raise funds, no personal liability.

BRIEF EXERCISE 1.2 (a)

False

(b)

True

(c)

False

BRIEF EXERCISE 1.3 1. Trying to determine whether the company complied with the Corporations Act. 2.

Trying to determine whether the entity can pay its obligations.

Trying to determine whether a major investment proposal will be cost effective.

Trying to determine whether the company’s profit will result in a share price increase.

Trying to determine whether the entity should use debt or equity financing. (a)

Executive directors

(b)

Bank managers

(c)

Shareholders

(d)

Chief Financial Officer

(e)

ASIC

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BRIEF EXERCISE 1.4 ABC Pty Ltd Statement of financial position as at 31 December 2015 Assets Cash

$30 000

Accounts receivable

10 000

Inventory

7 500

Total assets

47 500

Liabilities Accounts payable

32 500

Net assets

$15 000

Equity Share capital

15 000

Total equity

$15 000

BRIEF EXERCISE 1.5 PorL

(a)

Revenues during the period.

SFP

(b)

Accounts receivable at the end of the year.

SCF

(c)

Cash received from borrowing during the period.

SCF

(d)

Cash payments for the purchase of property, plant and equipment.

BRIEF EXERCISE 1.6 Swift Ltd Statement of financial position (Partial)

Current assets: Cash Short-term investments Accounts receivable Supplies Prepaid rent Total current assets Non-current assets: Property, plant and equipment Total non-current assets Total assets

$4,500 12,000 15,000 2,000 1,000 34,500 40,000 40,000 $74,500

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BRIEF EXERCISE 1.7 Return on assets ratio

$1,176,000 Profit = = 23% Average total assets $5,113,000

Profit margin ratio

Profit Sales

$1,176,000 = 15% $7,840,000

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SOLUTIONS TO EXERCISES EXERCISE 1.1 (a)

Auditor’s opinion

(b)

Accounts payable

(c)

Share capital

(d)

Company

(e)

Accounts receivable

(f)

Equity Investors

(g)

Sole trader

(h)

Partnership

(i)

Decision

EXERCISE 1.2 Rosie’s Rentals Pty Ltd Statement of profit or loss for the year ended 31 December 2015 $ Revenues: Hire revenue Expenses: Advertising expense Electricity expense Rent expense Wages expense Total expenses Profit

$ 140,000

3,000 4,800 20,200 56,000 84,000 $56,000

Rosie’s Rentals Pty Ltd Calculation of retained earnings for the year ended 31 December 2015

Retained earnings, 1 January Add: Profit Less: Dividends Retained earnings, 31 December

$ 90,000 56,000 146,000 (14,000) $132,000

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EXERCISE 1.3 Quality Products Ltd Statement of financial position as at 30 June 2015

Assets: Cash Accounts Receivable Supplies Inventory Total assets

$15,000 6,000 5,600 28,400 55,000

Liabilities: Accounts payable Net Assets

15,000 $40,000

Equity: Share capital Retained earnings Total Equity

$25,000 *15,000

40,000 $40,000

*$18,000 – $3,000

EXERCISE 1.4 Black Ltd (a)

Eq E E A L E E E L A R A Eq E Eq A

Retained earnings Cost of sales Wages expense Cash Current payables Interest expense Other expense Depreciation expense Non-current borrowings Inventories Sales revenue Accounts Receivable Reserves Income tax expense Contributed equity Property and Equipment

$2,000 24,600 18,300 11,200 14,500 6,200 1,100 1,800 22,000 4,500 66,000 12,000 8,000 4,200 30,000 20,000

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(b)

Calculation of profit for Black Ltd for the year ended 30 June 2015 $ Sales revenue Expenses: Cost of sales Wages expense Interest expense Other expense Depreciation expense Income tax expense Total expenses Profit

$ 66,000

24,600 18,300 6,200 1,100 1,800 4,200 56,200 $9,800

EXERCISE 1.5 Road Ltd Note to solve the missing amounts the student needs to decide the order to solve the missing amounts 1. The Statement of changes in equity shows the ending retained earnings as $45,000 which then can be substituted into the Statement of financial position so that (b) equals $45,000. 2. Now (a) Contributed equity can be calculated. Accounts payable + Contributed equity + Retained earnings = Total liabilities and equity. $26,000 + (a) + $45,000 = $106,000 (a) = $106,000 – $45,000 – $26,000 (a) = $35,000 3. Items (d) and (e) are the same figure. Therefore solve (e) first in the Statement of changes in equity Beginning retained earnings+ Profit – Dividends = Ending retained earnings $12,000 + (e) – $8,000 = $45,000 (e) = $45,000 –$12,000 + $8,000 (e) = $41,000 and also (d) equals $41,000 4. Lastly now item (c) can be calculated Revenue – Cost of sales – Administrative expenses = Profit $200,000 – (c) – $14,000 = $41,000 $200,000 – $14,000 – $41,000 = (c) (c) = $145,000

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EXERCISE 1.6 Cheong Pty Ltd (a)

This is a violation of the cost principle. The inventory was written up to its market value when it should have remained at cost.

(b)

This is a violation of the accounting entity concept. The treatment of the transaction treats Cheong Kong and Cheong Pty Ltd as one entity when they are two separate entities. The computer should not have been charged to the expense account. If paid for by the business, it should have been treated as a loan from the business to Cheong Kong.

(c)

This is a violation of the period concept. This concept states that the economic life of an entity can be divided into artificial time periods (months, quarters or a year). By adding two more days to the year, Cheong Pty Ltd would be misleading financial statement users. In addition, 2015 results would not be comparable to previous years’ results, and the problem would recur in 2016. The period should have been 52 weeks or 53 at the most. Retailers often use a complete number of weeks rather than an exact year. As a 365-day year consists of 52 weeks plus one day, many retailers use 52-week periods and then, approximately every 5 years, use a 53-week year. However, this is fully disclosed for comparative purposes. For example Woolworths Limited.

EXERCISE 1.7 AGL Energy Limited Ltd Statement of financial position (Partial) as at 30 June 2013 $M Current assets: Cash and cash equivalents Receivables Inventories Other financial assets Other current assets Total current assets Non-current assets Receivables Inventories Investments (long term) Exploration and evaluation assets Oil and gas assets Property, plant and equipment Intangibles Deferred tax assets Other financial assets Other non-current assets Total non-current assets Total assets

281.0 1844.0 133.0 186.9 391.1 2836.0 47.3 29.2 33.1 349.0 495.1 5331.6 3149.4 729.2 338.5 27.4 10529.8 $13365.8

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EXERCISE 1.8 Goodman Fielder Limited Statement of financial position (Partial) as at 30 June 2013 $M Current assets: Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax receivable Other current assets Assets held for sale Total current assets Non-current assets Receivables Investments in jointly controlled entities Property, plant and equipment Deferred tax assets Intangible assets Other non-current assets Total non-current assets Total assets

403.1 162.9 128.9 0.1 9.1 14.6 1.7 720.4 0.8 5.5 511.5 47.1 1490.5 1.0 2056.4 $2776.8

EXERCISE 1.9 (a) Christchurch Flooring Pty Ltd Statement of Profit or Loss for the year ended 31 July 2015 $ Revenues: Sales revenue Less: Cost of sales Gross profit Other revenue Rent revenue Expenses: Salaries expense Depreciation expense Other expenses Total expense Profit

$ 62,000 30,000 32,000 30,000

25,000 4,000 18,000 (47,000) $15,000

Calculation of Retained Earnings for the year ended 31 July 2015 $ Retained earnings, 1 August 2014 Add: Profit Retained earnings, 31 July 2015

2,000 15,000 $17,000

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(b) Christchurch Flooring Pty Ltd Statement of financial position as at 31 July 2015 $ Current assets: Cash Inventory Total current assets Non-current assets: Land Building Less: Accumulated depreciation Total non-current assets

$ 33,000 26,000 59,000

80 000 70,000 (12,000)

58,000 138,000

Total Assets

197,000

Current liabilities: Accounts payable Rent received in advance Total current liabilities Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets

8,000 2,000 10,000

80 000 80,000 90 000 $107 000

Equity Share capital Retained earnings Total equity

90,000 17,000 $107,000

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EXERCISE 1.10 (a) Teddy Pty Ltd Statement of Profit or Loss for the year ended 31 July 2017 $ Revenues: Sales revenue Less: Cost of sales Gross profit Other revenue Rent revenue Expenses: Salaries expense Depreciation expense Other expenses Total expense Profit

$ 100,000 42,000 58,000 36,000

27,000 5,400 26,600 59,000 $ 35,000

(b) Teddy Pty Ltd Calculation of Retained Earnings for the year ended 30 June 2017

Retained earnings, 1 July 2016 Add: Profit Retained earnings, 30 June 2017

$ 10,900 35,000 $45,900

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Current assets: Cash Inventory Total current assets

42,500 36,200 78,700

Non-current assets: Land Building Less: Accumulated depreciation Total non-current assets Total Assets

196,000 19,600

Current liabilities: Accounts payable Rent received in advance Total current liabilities

39,400 5,800

Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets Equity Share capital Retained earnings Total equity

265,000 176,400 441,400 520,100

45,200

208,000 208,000 253,200 $266,900 221,000 45,900 $266,900

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EXERCISE 1.11 Retail Ltd (a)

(b)

Working capital = current assets – current liabilities Beginning of year $53,764,000

= $223,313,000 – $169,549,000

End of year: $78,485,000

= $208,426,000 – $129,941,000

Current ratio

= current assets/current liabilities

Beginning of year: 1.32:1

= $223,313,000 / $169,549,000

End of year: 1.60:1

= $208,426,000 / $129,941,000

These measures indicate that Retail Ltd’s liquidity improved during the year.

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EXERCISE 1.12 AGL

(a) Debt to assets ratio (b) Cash debt coverage ratio

(c)

2013 $M

2012 $M

$6026.8 = 0.45 or 45.09% $13365.8

$7605.5 = 0.52 or 51.6% $14738.4

$601 .8 = 0.088 $6027 + $7605  2

$466.5 = 0.085  $7605 + $3354   2

 

The ratio of debt to total assets decreased, indicating decreased reliance on debt, and, AGL’s cash flows from operating activities increased and the coverage of total liabilities increased marginally.

(d) In 2013 AGL’s cash provided by operations ($601.8.0M) was sufficient to cover the cash used in investing activities ($549.6M). In 2012 the net investing activities ($531.3M)was more than the cash generated from operating activities there was a cash deficiency AGL, being a publicly listed company, could raise more money from the public through the issue of shares or borrow funds. If the Statement of cash flows is downloaded then it can be seen that the cash from operating activities did cover investing outflows but was not sufficient to cover financing resulting in a net decrease in cash for the year of $1584.1M. In 2012 cash increased by $1124.6M. Cash flow from operating activities was $466.5M and a review of the statement of cash flows indicates cash from new share issues of $883.8M plus an increase in net borrowings $431M. This was used in 2013 to repay borrowings of $1 543.9M

Note to instructor This exercise would be suitable for post graduate class and also provide the URL so that can complete the response in more depth. If students wish to investigate Wattyl’s annual report the web address is http://agl.com.au/about/InvestorToolkit/Pages/AnnualReports.aspx

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EXERCISE 1.13 Goodman Fielder Limited 2013 $’000

2012 $’000

(a) Debt to assets ratio

$1224.5 = 0.44 or 44.1% $2776.8

$1318.7 = 0.49 or 48.95% $2693.8

(b) Cash debt coverage ratio

$178.7 = 0.14  $1224.5 + $1318.7   2

(c)

 

$129 = 0.09 $1318.7 + $1482.8  2

The ratio of debt to total assets decreased from 49% to 44%, indicating decreased reliance on debt. The net cash flows from operations increased and the cash coverage of total liabilities increased slightly indicating an better solvency position.

(d) However the cash flows from operating activities in both years is greater than required for investing activities and in both years. If the cash flows statement was to be downloaded you would see that during 2013 a segment of the business was sold and this was used to pay off debt. In both years there was an increase in the cash position. It should be remembered the cash position only tells part of the story mid-way through 2014 the company on the back of declining profit forecast was subject to a takeover from a Singaporean company. The Directors at the time of writing this solution have just advised the shareholders to accept the takeover offer. If students wish to investigate Goodman Fielder’s annual report the web address is: http://www.goodmanfielder.com.au/index.php?q=node/147

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SOLUTIONS TO PROBLEM SET A PROBLEM SET A 1.1 (a)

The concern over legal liability would make the limited liability company form a better choice over a partnership. Also, the corporate form will allow the business to raise cash more easily which may be of importance in a rapidly growing industry.

(b)

Sarah and Andrew should adopt the partnership form because it facilitates bringing together the contribution of skills and resources. Also there does not appear to be any expected needs for further fund in the near future.

(c)

The fact that the combined business expects that it will need to raise significant funds in the near future makes the company form more desirable in this case.

(d)

It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the firm. Service firms, like consulting businesses, are frequently formed as partnerships. Alternatively, they may prefer the company form to simplify subsequent expansion and take advantage of limited liability, but they would need to consider the additional regulation that it would involve.

(e)

One way to ensure control would be for Anthony to form a sole proprietorship. However in order for this business to thrive, it will need a substantial investment of funds early. This would suggest the company form of business. In order for Anthony to maintain control over the business, he would need to own more than 50 percent of the voting power. In order for the business to grow, he may have to be willing to give up some control.

PROBLEM SET A 1.2 (a)

In deciding whether to extend credit for 30 days you would be most interested in the Statement of financial position because it shows the assets on hand that would be available for settlement of the debt in the near-term.

(b)

In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Domino’s. The statement of profit or loss provides the most useful information for predicting future performance.

(c)

In extending a loan for a relatively long period of time, the bank is most interested in the probability that the company will generate sufficient income to meet its interest payments and repay its principal. The bank would therefore be interested in predicting future profit using the statement of profit or loss. It should be noted, however, that the lender would also be very interested in both the Statement of financial position and the Statement of cash flows — the Statement of financial position would show the amount of debt the company has already incurred, as well as assets that could be liquidated to repay the loan. And the bank would be interested in the Statement of cash flows because it would provide useful information for predicting the company’s ability to generate cash to repay its obligations.

(d)

The finance director would be most interested in the Statement of cash flows since it shows how much cash the company generates and how that cash is used. The Statement of cash flows can be used to predict the company’s future cash-generating ability. .

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PROBLEM SET A 1.3 Smart Travel Goods Pty Ltd (a)

1. The accounting entity concept states that economic events can be identified with a particular unit of accountability. Since the Sunshine Coast villa is the personal property of Mark Austin – not Smart Travel Goods Pty Ltd – it should not be reported on the company’s Statement of financial position. Likewise, the loan is a personal loan of Mark Austin – not a liability of the company. 2. The cost principle dictates that assets are recorded at their original cost. Therefore reporting the inventory at $40,000 would be improper and violates the cost principle. The inventory should be reported at $15,000. 3. Including the personal telephone account payable is a violation of the accounting entity concept. The $6,000 payable is not a liability of Smart Travel Goods Pty Ltd. If the company pays the telephone account on behalf of Mark Austin, it should be accounted for as a loan to Mark.

(b) Smart Travel Goods Pty Ltd Statement of financial position as at 30 June 2015 $ Assets Cash Accounts receivable Inventory Total assets

$ 30 000 23 000 15 000 68,000

Liabilities Accounts payable ($30,000-$6,000) Notes payable Total liabilities Net Assets Equity Total equity

24,000 12,000 36,000 $32,000 32,000 $32,000

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PROBLEM SET A 1.4 PQR Pty Ltd Statement of profit or loss for the month ended 31 October 2015 $ Revenues: Service revenue

$ 25,000

Expenses: Advertising expense Fuel expense Insurance expense Rent expense Repair expense Total expenses Profit

1,200 8,700 1,000 4,000 800 15,700 $9,300

PQR Pty Ltd Calculation of Retained Earnings for the month ended 31 October 2015 $ Retained earnings, 1 October Add: Profit

0 9,300 9,300 (2,000) $7,300

Less: Dividends Retained earnings, 31 October

PQR Ltd Statement of financial position as at 31 October 2015 $ Assets: Current Assets Cash Accounts receivable

9,200 28,500 37,700

Non-Current Assets Equipment Total assets

80,000 117,700

Liabilities: Current Liabilities Accounts payable Non-Current Liabilities Bank loan Total liabilities Net Assets

5,400

40,000 45,400 $72,300

Equity: Share capital Retained earnings Total equity

65,000 7,300 $72,300

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PROBLEM SET A 1.5 Daisy Ltd Dunstan Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers Cash received from share issue

Daisy Ltd Statement of cash flows for the year ended 31 December 2015

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Cash received issue of shares Dividends paid Net cash used in financing activities Net increase in cash

$264,000 (195,000) 69,000

(35,000) (35,000) 10,000 (15,000) (5,000) $29,000

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PROBLEM SET A 1.6 Ultra Pty Ltd Statement of profit or loss for the month ended 31 May 2016 $ Revenues: Service revenue

$ 42 800

Expenses: Advertising expense Fuel expense Insurance expense Rent expense Repair expense Total expenses Profit

800 3 600 2 600 12 500 1 800 21 300 $21 500

Ultra Pty Ltd Calculation of Retained Earnings for the month ended 31 May 2016 $ Retained earnings, 1 May Add: Profit

0 21 500 21 500 (2 000) $19 500

Less: Dividends Retained earnings, 31 May

Ultra Pty Ltd Statement of financial position as at 31 May 2016 $ Assets: Current Assets Cash Accounts receivable

30 500 25 400 55 900

Non-Current Assets Equipment Total assets

87 000 142 900

Liabilities: Current Liabilities Accounts payable Non-Current Liabilities Bank loan Total liabilities Net Assets

8 400

40 000 48 400 $94 500

Equity: Share capital Retained earnings Total equity

75 000 19 500 $94 500

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PROBLEM SET A 1.7 Liddy Ltd Pod Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers

Liddy Ltd Statement of cash flows for the year ended 30 June 2016

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Dividends paid Net cash used in financing activities Net increase in cash

$148 000 (85 000) 63 000

(25 000) (25 000) (9 000) (9 000) $29 000

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PROBLEM SET A 1.8 Boral Ltd Balance Sheet as at 30 June 2013 $’m Current assets: Cash and cash equivalents Cash on deposit Receivable Inventories Other financial assets Other current assets Total current assets Non-current assets: Receivables Inventories Investments accounted for using equity method Other financial assets Property, plant and equipment Intangible assets Deferred tax asset Other non-current assets Total non-current assets Total assets Current liabilities: Payables Loans and borrowings Current tax liabilities Provisions Total current liabilities Non-current liabilities: Payables Loans and borrowings Other financial liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities NET ASSETS Equity: Issued Capital Reserves Retained earnings Total parent entity interest Non-controlling interests TOTAL EQUITY

149.9 70.6 887.8 680.0 11.6 11.6 1842.7

16.8 19.6 34.6 23.5 3347.1 849.9 133.7 48.5 4473.7 6316.4 760.1 126.9 19.1 212.0 1174.3

9.4 1539.6 25.5 57.6 116.5 1748.6 2922.9 $3393.5 2433.8 74.4 796.0 3304.2 89.3 $3393.5

If students wish to look up Boral’s annual report the web address is http://www.boral.com.au/PromoList/annual_sustainability_reports.asp

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PROBLEM SET A 1.9 City Sales Pty Ltd (a) (b)

(c)

(d)

(e)

(f)

(g)

Working capital

= $474,500 – $250,000 = $224,500

Current ratio

$474,500 = 1.9 : 1 $250,000

Current cash debt coverage ratio

Debt to total assets ratio

Cash debt coverage ratio

Profit margin ratio

Return on assets ratio

$260,000 $250,000 + $100,000  = 1.5 times 2

$460,000 = 0.453 : 1 or 45.3% $1,014,800 $260,000 $460,000 + $300,000  = 0.7 times 2

$115,000 = 0.052 : 1 or 5.2 % $2,200,000

$115,000 $115,000 = = 0.127 : 1 OR 12.7%  $790,800 + $1,014,800  $902,800   2 .

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PROBLEM SET A 1.10 AKA Ltd and UFO Ltd Ratio

AKA (All dollars are in thousands)

UFO

(a)

Working capital

$33,000 - $15,000 = $18,000

$20,000 - $10,000 = $10,000

(b)

Current ratio

2.2:1 ($33,000 ÷ $15,000)

2.0:1 ($20,000 ÷ $10,000)

(c)

Debt to total assets ratio

53.1% [($15,000 + $70,000) ÷ $160,000]

87.2% [($10,000 + $160,000) ÷ $195,000]

(d)

Return on assets

10.7% =

$16,000 ($160,000 + $140,000 ) / 2

2.9% =

$5,000 ($195,000 + $155,000 ) / 2

(e)

Profit margin ratio

13.3% =

$16,000 $120,000

5.0% =

$5,000 $100,000

(f)

The comparison of the two companies shows the following: Liquidity – AKA’s current ratio of 2.2:1 is better than UFO’s 2.0:1. AKA also has higher working capital than UFO. Solvency – AKA’s debt to total assets ratio is lower than that of UFO, indicating that AKA has better solvency. Profitability – AKA has a higher return on assets and profit margin ratio than UFO, indicating that it is more profitable than UFO. Note that UFO’s higher borrowing costs, resulting from its greater reliance on debt, has reduced its profitability.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 1.1 (a)

One way to ensure control would be for Fiona to form a sole proprietorship. However in order for this business to thrive, it will need a substantial investment of funds early. This would suggest the company form of business. In order for Fiona to maintain control over the business, she would need to own more than 50 percent of the voting power. In order for the business to grow, she may have to be willing to give up some control, maybe her family would also invest or loan the business funds in the early stages of establishment.

(b)

Mark should incorporate the business to minimise tax plus he will need to prepare financial forecast to present to the financial institutions to borrow funds. It is likely Mark would not immediately have the advantage of limited liability as the financial institutions would usually require a personal guarantee from Mark for the debt borrowings.

(c)

It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the business. Alternatively, they may prefer the company form to simplify subsequent expansion and take advantage of limited liability, but they would need to consider the additional regulation that it would involve.

(d)

Amanda and Jessica should adopt the partnership form because it facilitates bringing together the contribution of skills and resources. Also there does not appear to be any expected needs for further fund in the near future.

(e)

The fact that the combined business expects that it will need to raise significant funds in the near future makes the company form more desirable in this case.

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PROBLEM SET B 1.2 (a)

(b)

In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Woolworths’. The statement of profit or loss provides the most useful information for predicting future performance.

(c)

(d)

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 1.3 Jupiter Pty Ltd (a)

1. The accounting entity concept states that economic events can be identified with a particular unit of accountability. Since the Port Macquarie villa is the personal property of Mary Eagle – not Jupiter Pty Ltd – it should not be reported on the company’s Statement of financial position. Likewise, the loan is a personal loan of Mary Eagle – not a liability of the company. 2. The cost principle dictates that assets are recorded at their original cost. Therefore reporting the inventory at $75,000 would be improper and violates the cost principle. The inventory should be reported at $25,000. 3. Including the personal electricity account payable is a violation of the accounting entity concept. The $2,000 payable is not a liability of Jupiter Pty Ltd. If the company pays the electricity account on behalf of Mary Eagle, it should be accounted for as a loan to Mary.

(b) Jupiter Pty Ltd Statement of financial position as at 30 June 2016 $ Assets Cash Accounts receivable Inventory Total assets

$ 56 000 84 000 25 000 165 000

Liabilities Accounts payable ($65,000-$2,000) Notes payable Total liabilities Net Assets Equity Total equity

63 000 30 000 93 000 $72 000 72 000 $72 000

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PROBLEM SET B 1.4 Evans Ltd Statement of profit or loss for the year ended 30 June 2016 $ Revenues: Service revenue

$ 250 000

Expenses: Advertising expense Depreciation expense Insurance expense Office expense Rent expense Repair expense Total expenses Profit

16 500 30 000 24 000 68 000 37 500 700 176 700 $53 300

Evans Ltd Calculation of Retained Earnings for the year ended 30 June 2016 $ Retained earnings, 1 July 2015 Add: Profit

0 73 300 73 300 (20 000) $53 300

Less: Dividends Retained earnings, 30 June 2016 Evans Ltd Statement of financial position as at 30 June 2016 $ Assets: Current Assets Cash Accounts receivable

155 100 43 000 198 100

Non-Current Assets Equipment Total assets

120 000 318 100

Liabilities: Current Liabilities Accounts payable Non-Current Liabilities Bank loan Total liabilities Net Assets

24 800

90 000 150 000 $203 300

Equity: Share capital Retained earnings Total equity .

150 000 53 300 $203 300 1.31

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PROBLEM SET B 1.5 Buzzy Bee Ltd Dunstan Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers Cash received from share issue

Buzzy Bee Ltd Statement of cash flows for the year ended 31 December 2015

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Cash from share issue Dividends paid Net cash provided in financing activities Net increase in cash

$509 200 (301 500) 207 700

(210 000) (210 000) 50 000 (15 000) 35 000 $32 700

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PROBLEM SET B 1.6 Goodwin Ltd Statement of profit or loss for the month ended 31 May 2016 $ Revenues: Service revenue

$ 30 000

Expenses: Advertising expense Office expense Insurance expense Rent expense Repair expense Total expenses Profit

2 000 8 200 1 200 3 800 600 15 800 $14 200

Goodwin Ltd Calculation of Retained Earnings for the month ended 31 May 2016 $ Retained earnings, 1 May Add: Profit

0 14 200 14 200 (750) $13 450

Less: Dividends Retained earnings, 31 May

Goodwin Ltd Statement of financial position as at 31 May 2016 $ Assets: Current Assets Cash Accounts receivable

38 350 14 800 53 150

Non-Current Assets Equipment Total assets

63 000 116 150

Liabilities: Current Liabilities Accounts payable Non-Current Liabilities Bank loan Total liabilities Net Assets

2 700

40 000 42 700 $73 450

Equity: Share capital Retained earnings Total equity

60 000 13 450 $73 450

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PROBLEM SET B 1.7 Spoon Ltd Spoon Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers

Spoon Ltd Statement of cash flows for the year ended 30 June 2016

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Dividends paid Net cash used in financing activities Net increase in cash

$515 000 (205 000) 310 000

(140 000) (140 000) (77 000) (77 000) $93 000

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Chapter 1: An introduction to accounting

PROBLEM SET B 1.8 (a) Retail Ltd Statement of profit or loss for the year ended 30 June 2015 $ Revenues: Sales revenue Less: Cost of sales Gross profit Expenses: Salaries expense Advertising Expense Insurance Expense Rent Expense Repairs Expense Other expenses Total expense Profit

$ 167 420 82 000 85 420

35 000 5 000 1 300 2 500 15 000 6 250 (65 050) $20 370

(b) Retail Ltd Calculation of Retained Earnings for the year ended 31 July 2015

Retained earnings, 1 July 2014 Add: Profit Less: Dividend Retained earnings, 30 June 2015

$ 12 500 20 370 32 870 7 800 $25 070

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c) Retail Ltd Statement of financial position as at 30 June 2015 $ Current assets: Cash Accounts receivable Inventory Total current assets Non-current assets: Equipment Intangibles Total non-current assets Total Assets

$ 24 250 8 320 21 500 54 070

83 000 6 300 89 300 143 370

Current liabilities: Accounts payable Total current liabilities Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets

3 300 3 300 15 000 15 000 18 300 $125 070

Equity Share capital Retained earnings Total equity

100 000 25 070 $125 070

(d)

Retail Ltd Statement of cash flows for the year ended 30 June 2015

Cash flows from operating activities: Cash received from customers Cash paid operating expenses Cash paid to suppliers Net cash provided by operating activities Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Cash from borrowing Dividends paid Net cash provided in financing activities Net decrease in cash

$172 350 (65 050) (84 500) 22 800

(36 000) (36 000) 15 000 (7 800) 7 200 ($6 000)

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(e) Calculate the Cash account balance at 1 July 2014 (i.e.) the opening balance). Opening cash balance = Closing balance + decrease in cash = $24 250 + $6 000 = $30 350

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 1.9 Nixon Pty Ltd (a)

(b)

(c)

(d)

(e)

(f)

(g)

= $711 750 – $375 000 =

Working capital $336 750

Current ratio

$711 750 = 1.9 : 1 $375 000

Current cash debt coverage ratio

Debt to total assets ratio

Cash debt coverage ratio

Profit margin ratio

Return on assets ratio

$375 000 $375 000 + $150 000 = 1.43 times 2

$690 000 = 0.453 : 1 or 45.3% $1 522 200 $375 000 $690 000 + $450 000  = 0.66 times 2 $172,500 = 0.052 : 1 or 5.2 % $3,300,000

$172,500 $172 500 = = 0.127 : 1 OR 12.7%  $1522200 + $11862000  $1354200   2   .

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Chapter 1: An introduction to accounting

PROBLEM SET B 1.10 New Ltd and Old Ltd Ratio

New Ltd (All dollars are in thousands)

Old ltd

(a)

Working capital

$115 500 - $52 500 = $63 000

$70 000 - $35 000 = $35 000

(b)

Current ratio

2.2:1 ($115 500 ÷ $52 500)

2.0:1 ($70 000 ÷ $35 000)

(c)

Debt to total assets ratio

53.1% [($52 500 + $245 000) ÷ $560 000]

87.2% [($35 000 + $560 000) ÷ $682 500]

(d)

Return on assets

10.7% =

$56000 ($560000 + $490000) / 2

2.9% =

$17500 ($682500 + $542500) / 2

(e)

Profit margin ratio

13.3% =

$56000 $420000

5.0% =

$17500 $350000

(f)

The comparison of the two companies shows the following: Liquidity – NEW’s current ratio of 2.2:1 is better than OLD’s 2.0:1. NEW also has higher working capital than OLD. Solvency – NEW’s debt to total assets ratio is lower than that of OLD, indicating that NEW has better solvency. Profitability – NEW has a higher return on assets and profit margin ratio than OLD, indicating that it is more profitable than OLD. Note that OLD’s higher borrowing costs, resulting from its greater reliance on debt, has reduced its profitability.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 1.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

Domino’s total assets at 30 June 2013 were $189,751,000 and at 1 July 2012 were $175,319,000

(b)

Domino’s had $6,685,000 of inventory at 30 June 2013.

(c)

Domino’s had Trade and other payables totalling $38,055,000 at 30 June 2013 and $34,172,000 on 1 July 2012.

(d)

Domino’s reported sales in 2013 of $182,000,000 and in 2012 of $162,337,000. See note 5

(e)

Domino’s profit before tax increased by $3,121,000 from 2012 to 2013, from $37,644,000 to $40,765,000.

(f)

Domino’s accounting equation is:

Assets Liabilities Equity = + $189,751,000 $87,169,000 $102,582,000 (g)

Domino’s has current liabilities of $51,561,000 at 1 July 2012.

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BUILDING BUSINESS SKILLS 1.2

COMPARATIVE ANALYSIS PROBLEM

Domino’s Pizza Enterprises Ltd vs. Classic Food Ltd Domino’s Pizza Enterprises Ltd

(a) (Amounts in thousands)

Classic Food Ltd

1. Return on Total $28,657/ [($189,751+$175313)/2] $23,552/[($364,227+$170,296)/2] assets = 15.70% = 8.8% 2. Profit Margin Ratio* $28,657 / $188,631 = 15.19% $23,552 / $650,738 = 3.6% * Revenue from the statement of profit or loss was used here for the profit margin. If you used net Sales (Note 5) the profit margin would be 15.75% (b) The ratios indicate the Domino’s has a stronger profitability because both its return on total assets and profit margin ratio are greater than those of Classic’s. Overall Domino’s is a stronger performer although Classic is a larger entity. (c)

Working capital Current ratio

$9,079 ($60,383 - $51,304) 1.177:1 ($60,383 / $51,304)

-$20,300 ($174,700 - $195,000) 0.90:1 ($174,700 / $195,000)

(d) Domino’s appears to have better liquidity because it has a higher current ratio and more working capital. Classic Retail has negative working capital. (e) In order to make an informed assessment of the two companies’ performances you would require industry information as a benchmark. You would also need as full set of accounts including the notes to the accounts. Classic Foods has doubled in size during last twelve months. So details of any acquisitions and new share issues. Information about the companies from their web pages or media releases

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 1.3

INTERPRETING FINANCIAL STATEMENTS

NuSmart Technology Ltd (a)

Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. During 2015 and 2016 NuSmart Technology’ operating activities used cash instead of generating it, which is not uncommon in start-up companies in this industry. The company has been reliant on borrowing and contributions from shareholders to meet its investing cash needs and provide cash for operations. Creditors may also be concerned about reduced cash holdings which occurred in both years. Creditors may be reluctant to lend to the company without having some additional assurance of repayment. Although details were not provided in the question as to when the company was to generate cash inflows from operating activities it was disclosed that NuSmart Technology had not received any cash from customers in 2015 or 2016.

(b)

Shareholders are interested in the long-term performance of a company and how that translates into its share price. Shareholders may be concerned that the company’s operations have continued to drain cash flows in 2016. However, this may be reasonably expected during the start-up phase of a communications company. There was a new share issue during 2016 so investor/shareholders must believe in the future viability of the technology the company is developing.

(c)

More detailed information about the components of operating, financing and investing cash flows would be useful to determine how cash is being used and in particular, why investing cash flows were a net inflow in 2016. The Statement of cash flows reports information on a cash basis. An investor cannot get the complete story without looking at the statement of profit or loss and statement of financial position as well. A copy of the prospectus used to raise the capital would provide useful information about the elected future cash flows of NuSmart.

BUILDING BUSINESS SKILLS 1.4

FINANCIAL ANALYSIS ON THE WEB

Answers to this question will differ over time and depending on the accounting forms chosen by the student, choice of services (part b) and choices of news item (part d). We provide the following solution for Deloitte & Touche as at June 2014. (a)

Choose from – Australia:

“Deloitte offers a broad range of integrated services in areas that include Audit, Tax, Consulting, Deloitte Private, Financial advisory and Risk. Our approach combines insight and innovation from multiple disciplines with business and industry knowledge to help our clients excel anywhere in the world. Deloitte Assurance and Advisory offers external audit, financial reporting and accounting services. We are innovative suppliers of Financial Instruments Advisory Services, Regulatory Compliance and Consulting, Transaction Services, Carbon Reporting, and tailored assurance based solutions for our clients. For the consulting “We combine specialist skills in operations, finance, people management, strategy and technology with extensive industry experience to make a difference to the operational performance of our clients.”

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Deloitte Private provides services for small business individuals and families. Deloitte’s also offers services of assisting dealing with overseas countries. There are specialist groups within the firm which deal with China, Japan, Korea and Africa.-“Deloitte professionals are involved in almost every aspect of business today - from economics, innovation and sustainability to advisory services on doing business internationally in Africa, China, Japan and Korea. We offer a full range of services to help you tackle all of these challenges, and a lot more. Each service offered gives you the depth, experience and solutions you need to create and innovate. “

New Zealand: “Deloitte brings together more than 1000 specialists providing New Zealand's widest range of high quality professional services. We focus on audit, tax, technology and systems, strategy and performance improvements, risk management, corporate finance, business recovery, forensics and accounting services. Our people are based in Auckland, Hamilton, Rotorua, Wellington, Christchurch and Dunedin, serving clients that range from New Zealand's largest companies to smaller businesses with ambition to grow.” http://www.deloitte.com/nz/about

(b)

Deloittes operate in 150 countries including Albania, Argentina, Aruba, Australia, Austria, Bahrain, Bangladesh, Belarus, Belgium, Bonaire, Belize, Bermuda, Bosnia and Herzegovina, Brazil, Brunei Darussalam, Bulgaria, Canada, Cayman Islands, Chile, China, Costa Rica, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Ecuador, Estonia, Finland, France, Germany, Gibraltar, Guam, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Korea, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia, Marshall Islands, Malta, Micronesia, Moldova, Morocco, Netherlands, Netherlands Antilles, New Zealand, North Mariana Islands, Norway, Oman, Pakistan, Palau, Papua New Guinea, Philippines, Poland, Qatar, Romania, Russia, St Maarten, Saudi Arabia, Serbia and Montenegro, Singapore, Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Syria, Taiwan, Thailand, Turkey, Uruguay, Vietnam. Regions: Asia Pacific, Europe, North America, Latin America, the Middle East and Africa.

(c)

Australia: Careers information and student programs.

Deloitte run a graduate program for new university graduates but also operate student programs (listed below). The advantage of the student programs is that “those who participate in our student programs often secure a Deloitte graduate position well before their peers.” The student programs are: “The Summer Vacation Program provides you with paid work experience over the summer (or winter) holidays and the opportunity to obtain a graduate position with Deloitte. If you are in your penultimate year of study you are eligible for our Summer Vacation Program. The Deloitte Development Program provides you with the opportunity to learn about career options, networking opportunities and how to be successful in gaining vacationer and graduate roles at Deloitte. If you are in your first year of a three year degree, second year of a four year degree or third year of a five year degree, you are eligible to apply. Our Deloitte Private Young Achievers Program (offered in Sydney only) gives you the opportunity to work flexibly while you are studying to complete your degree, enabling you to gain real business and client experience before you graduate! You are eligible to apply if you are in your first semester of your first year of your degree and are studying an accounting degree that will enable you to be CA eligible upon graduation, for commencement in the second semester of your first year.

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Our Deloitte Technology Insight Night is a hands on event for Information Technology, Information Systems, Engineering and Computer Science students. This is not a standard show and tell evening about what we do – you get the chance to actually experience what we do and how we help our clients with their complex technology and digital issues. We host this event in many of our office locations throughout the year. Registration is open to students up to (and including) their penultimate year of an undergraduate or postgraduate technology-focused degree.” New Zealand: Careers information. Such as The Summer Intern Programme is designed to help you make a sound career choice by showing you what it’s like working with Deloitte and our clients. You’ll be paired up with a buddy to get you instantly involved in challenging and interesting projects. (d)

Australia: June 2014: “Deloitte says we must do better for retiring Australians Adequacy and the Australian Superannuation System- a Point of View” There are a variety of papers published by research carried out by Deloitte’s or funded by Deloitte’s e.g. in May they published commentary on federal budget Also published in May “Australian Business Trends 2014: examining how Australian business can capitalise on the latest global trends.” Strengthening our already strong relationships with the new global giants such as China and India will become more important than ever as we seek to establish a stronger presence in their markets and their companies continue to enter ours. The report Australian Business Trends 2014 examines how Australian business can capitalise on the latest global trends has been recently prepared by professional services firm Deloitte. Both in Australia and New Zealand they also send out monthly Accounting and Tax Alerts and updates in the form of electronic newsletters.

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CRITICAL THINKING BUILDING BUSINESS SKILLS 1.5

GROUP DECISION CASE Permanent Press

(a)

(b)

(1)

This is an expense of the business because Permanent Press has provided its stationery, T-shirts and office decorations.

(2)

The donation of the grevilleas was an expense of the business; the planting of the gardens was likely on the employees’ own time and therefore a personal donation of time by the employees. If Permanent Press paid wages and salaries to its personnel for planting the gladiolas, that would be an expense of Permanent Press.

(3)

This is a business expense since the payment is made by Permanent Press to the charity.

(4)

As the executives are volunteering their own time, this is not an expense of Permanent Press. It is a personal cost to the executives.

(1)

Advertising Expense is the most likely category of those listed because the name, Permanent Press, and the company logo were on all the gifts.

(2)

Charitable Contribution Expense is the most likely account. It is not Grounds Maintenance Expense because the grounds maintained are not those of the company. If the employees were paid wages while planting grevilleas, the cost would be recorded as wages expense.

(3)

This is a Charitable Contribution Expense.

(4)

Not recorded in the company’s financial records at all.

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BUILDING BUSINESS SKILLS 1.6

COMMUNICATION ACTIVITY

(a) J. B. Hamilton Ltd To:

Amy Joan

From:

Student

Date:

DD/MM/YY

I have reviewed the Statement of financial position of J. B. Hamilton Ltd as at 30 June 2016. The purpose of a Statement of financial position is to report a company’s assets, liabilities and equity at a point in time. It reports what the company controls (assets) and what it owes (liabilities) and the net amount attributed to owners (equity). A number of items in this Statement of financial position are not properly reported. They are: 1.

The Statement of financial position should be dated as at a specific date not for a period of time. Therefore, it should be stated ‘as at 30 June 2016’.

Equipment is usually listed below Supplies on the Statement of financial position. In a classified Statement of financial position it would be shown as a non-current asset.

Accounts receivable should be shown as an asset and is usually reported between Cash and Supplies on the Statement of financial position.

Inventory should be shown as an asset on the Statement of financial position.

Liabilities and shareholders’ equity should be shown separately on the Statement of financial position. Contributed equity, Retained earnings and Dividends are not liabilities.

Contributed equity, Retained earnings and Dividends are part of shareholders’ equity. The Dividends account is not reported on the Statement of financial position but is subtracted from Retained earnings to arrive at the ending balance.

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(b) A corrected Statement of financial position is as follows: J. B. Hamilton Ltd Statement of financial position as at 30 June 2016 $

Assets Cash Accounts receivable Inventory Supplies Equipment Total assets

12 000 25 000 6 000 1 400 30 750 $75 150

Liabilities: Accounts payable Total liabilities

$21 650 $21 650

Equity: Contributed equity Retained earnings Total liabilities and equity

40 000 *13 500

* Retained earnings Less: Dividends Ending retained earnings

$17 000 (3 500) $13,500

53 500 $75 150

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 1.7

SUSTAINABILITY

The term sustainability is about making sure the social, economic and environmental needs of our community are met and kept healthy for future generations. Sustainable development must not just be about economic growth but also environmental quality and social equity. Corporate social responsibility (CSR) for business means companies must be aware and have a core understanding of CSR characteristics; an understanding of the basic issues and how they may affect decision making; to be able to apply this basic knowledge with competence to specific activities; and have strategic alignment i.e. have an in depth understanding of the issues and possess the expertise to embed CSR principles into the business decision making process. AGL sustainability report BACKGROUND For Lecturer – for ease marking sections of the sustainability report have been downloaded, but the students naturally need to express in their own words or reference the page in the report. We suggest you set a word limit to indicate the extent of the discussion you require. The 2013 (latest available) was used for this solution. Note the full sustainability report is 113 pages long. “AGL Energy Limited (AGL) is an ASX 50 listed company with over 3.5 million customer accounts and 2,757 employees. AGL operates Retail, Merchant Energy and Upstream Gas businesses in New South Wales, Victoria, South Australia and Queensland. In the last eight years, AGL has invested more than $3 billion in renewable energy generation making AGL the largest developer of renewable energy assets in Australia over that period.”

1. AGL Approach AGL has published sustainability reports since 2004. AGL uses The Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (G3) including the Electric Utility Sector Supplement. These guidelines were used as it provides a comparable framework for reporting so stakeholders can understand and also provides AGL with guidance on the disclosures contained within the report. AGL has self-assessed (and had it audited) the extent to which the GRI index applies. A full GRI content index is included on pages 99 to 110 of the 2103 sustainability report 2and AGL indicate how these items are addressed and where it is reported.

Using the above approach in 2010, AGL established a framework for sustainability reporting. “Twelve strategic indicators of success were developed, together with visions to guide performance in the longer term. Performance data as well as forward targets for each indicator have been published since 2010. An account of performance against each of the FY2013 sustainability targets is detailed ….. together with new commitments for FY2014.” “Performance data in this report has been structured into six chapters, representing the categorisation of AGL’s sustainability risks: Economic, Customers, Community, People and .

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safety, Sustainable energy (formerly Climate Change) and Environment. Within each chapter, two focus areas have been identified. Together, these 12 focus areas represent those issues considered to be the most material sustainability challenges for AGL” 2. AGL’s achievements: results and how measured. For health and safety and the environment only. Health and safety: “AGL’s goal is to engage our employees in ways that support our business, grow their skills and deliver outstanding results in a safe and sustainable way. The two key focus areas for the People and safety chapter of this report are employee engagement and health and safety.

Health and safety: Health and safety performance is indicative of the values that underpin an organisation, the business ‘culture’, and the effectiveness of health and safety policies and procedures. Health and safety performance is also a significant influencing factor for employee engagement.

Health and safety section of the report: From the table below AGL did not achieve its goal of < 4.9%.

Vision

Target FY2013

Zero harm

Total Injury Frequency Rate <4.9%

Performance FY2013 Total Injury Frequency Rate was 5.9

Target FY2014 Total Injury Frequency Rate <5.0%

Approach: “Providing a safe and healthy workplace for employees and contractors is a key priority for AGL. Safety performance is regularly monitored at the AGL Board level through the quarterly meetings of the Safety, Sustainability and Corporate Responsibility Committee. Safety performance is also monitored by the Executive Team and reviewed in leadership and team meetings across the business. AGL assesses workplace risks in consultation with employees and, where appropriate, independent external advisors, and manages these risks by identifying and implementing suitable controls. HSE risks are managed as a component of organisation-wide risks, using the Fully Integrated Risk Management approach. Key HSE risks include: contractor safety management; slips/trips/ falls; psychological injury; fatigue; musculoskeletal injury; working remotely; working at heights; flammable gas; electricity; and customer contact hazards.”

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AGL measures and tracks safety performance using a number of trailing performance indicators based on reported safety incidents. The trailing indicators include Total Injury Frequency Rate (TIFR) and Lost Time Injury Frequency Rate (LTIFR). AGL also tracks leading indicators of Health and Safety to provide insight into trends. The leading indicators include HSE activities in Action Plans, safety and wellbeing conversations and ‘near miss’ incident reporting.

At AGL an incident is defined as anything that resulted or had the

potential to result in an injury or illness to any person, damage to plant, adverse impact to the environment or reputational damage. Incidents that have high potential risk are reported as Significant Incidents. AGL also records ‘near misses’ which are events that did not result in an injury, but had the potential to do so. Total injury frequency rate (TIFR)1”

Results: “In FY2013, AGL’s Total Injury Frequency Rate (TIFR) decreased to 5.9 from 6.6 in FY2012. Of the injuries reported: >>A third were ‘non-event related’ and defined as occupational illnesses, where repetitive exposure resulted in soft tissue damage/joint deterioration or were mental health illnesses (predominantly stress related); and >>45% were a result of a slip, trip or fall.

For FY2014, AGL will separate Occupational Illness Frequency Rate (OIFR) from TIFR. The OIFR incorporates those longer term occupational injuries that are gradual onset and cannot be attributed to a specific event. This will provide a better understanding of the nature of injuries across the organisation. The purpose of capturing injury data is to inform HSE initiatives thereby increasing the granularity of data by splitting out injuries that occur from a single occurrence from those where there is a gradual development of symptoms. This will enable a better understanding of HSE risks and an appropriate allocation of HSE resources.” AGL’s has six different measures injury frequency: “1. Lost time injury frequency rate( LTIFR) in FY2013 decreased to 3.4 from 4.2 in FY2012. There were 15 lost time injuries during FY2013 compared to 17 in FY2012.

2. Medical treatment injury frequency rate (MTIFR)- -MTIFR for FY2013 increased slightly to 2.5 from 2.4 in FY2012. There were 11 medical treatment injuries during FY2013 compared to 10 in FY2012.

3. Fatalities- In FY2013 there was no fatalities.

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Chapter 1: An introduction to accounting

4. Incidents- Incidents that have the potential to cause significant harm to people, plant, environment or the business are classified and reported as significant incidents. The number of significant incidents reported in FY2013 was 24, compared to 28 in FY2012. This reduction has been the result of extensive work to address issues relating to electrical safety, work at heights and the safety management of contractors.

5. Contractor safety performance -AGL monitors and reports the LTIFR of contractors, to provide a more comprehensive representation of AGL’s safety performance. In FY2013 the LTIFR for contracted workers was 3.5, which whilst comparable to the LTIFR of 3.4 for AGL employees, is an increase from 1.1 in FY2012. The major factor in this increase is related to improved focus on incident reporting to make sure injuries were recorded.

6. AGL Loy Yang Safety Performance -The TIFR for AGL Loy Yang was 5.3, a 66% reduction from 15.4 in FY2012. As of 30 June 2013, the power station has been free of lost time injuries for 712 days.”

During April and May 2013, AGL surveyed a number of stakeholders (both internal and external) to gauge their views on AGL’s material issues and the level of importance they attach to them. The survey of stakeholders revealed - “Workplace health and safety: Ensuring that employees stay safe at work every day. In the materiality survey, this ranked as the issue of most importance to respondents, the majority of whom were employees.”

Environment: Approach: “A number of AGL’s operations have a material environmental footprint and have the potential to interact with, and impact on, various aspects of the environment. AGL’s corporate health, safety and environmental management system, Life Guard, establishes a framework of requirements, policies, environmental standards and compliance guides based on the ISO 14001 Environmental Management Systems standard. Life Guard provides a framework to enable continuous improvement in health, safety and environmental performance and facilitates the pro-active management of environmental risks and compliance responsibilities. AGL’s environmental management program is risk-based and driven by a desire to prevent any harm to the environment in areas where AGL operates. Management of water is a particularly critical environmental issue. Governments and communities expect the energy industry to act responsibly so that water resources are not harmed by exploration and .

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

development activities, or energy production operations. The two key focus areas for the Environment chapter of this report are therefore environmental risk and water management. Environmental risk: AGL’s environmental program is driven by the environmental risk profile of the business and by regulatory requirements. AGL’s long-term vision is to have an environmental risk profile that is ‘As Low As Reasonably Practicable’. This aspiration incorporates both the need to operate in an environmentally responsible manner and the need to target resources and efforts on a risk basis.

Water management: Management of water resources is a critical environmental issue facing Australia and one that is relevant to AGL’s business. AGL’s long-term vision is to be recognised as a prudent and responsible user of water that does not adversely impact on local water resources.”

Vision Environmental Risk To have an environmental risk profile that is As Low As Reasonably Practicable (ALA RP).

Water management To be recognised as a prudent and responsible user of water that does not adversely impact on local water resources.

Target FY2013

Performance FY2013

Target FY2014

100% of approved risk register actions for the highest residual environmental risks implemented in accordance with targeted milestones.

96% of actions (or 60 of 62) were implemented in accordance with targeted milestones:

100% of approved risk register actions for the highest residual environmental risks implemented in accordance with targeted milestones.

Increase number of dedicated monitoring bores and stream gauging sites relative to overall number of CSG wells/sites.

The number of dedicated monitoring bores and stream gauging sites increased from 73 (61 monitoring bores to 12 stream gauging sites) from 1 July 2012 to 103 (88 monitoring bores to 15 stream gauging sites) at 30 June 2013. This represents an increase in the ratio of water monitoring sites to gas wells from 0.45 to 0.63.

Analysis of significant water usage across business units and development of KPI’s for water usage and wastewater reduction by end June 2014.

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Chapter 1: An introduction to accounting

How measured and results: “AGL’s key environmental risks are systematically identified and reviewed in workshops run in the Upstream Gas and Merchant Energy business units. The workshops involve a diverse range of operations personnel and environmental specialists. Given internal and external factors result in continuous changes to AGL’s environmental risks, risk registers and actions to reduce risks are reviewed on a regular basis to ensure their effectiveness. To drive the timely completion of actions that have been approved by AGL’s management to mitigate AGL’s highest residual environmental risks, AGL’s environmental risk target for FY2013 was to have 100% of such actions implemented in line with targeted milestones. The target was applied to AGL-operated sites that had environmental risk registers in place as at 1 July 2012, with the exception of AGL Loy Yang which was acquired by AGL on 29 June 2012. During FY2013, AGL’s highest residual environmental risks included risks related to surface water, land and groundwater at a number of power stations. Target actions designed to control these risks were developed and approved and 96% of actions (or 60 of 62) were completed within the allocated timeframes. The two outstanding actions related to an internal review of screen washing practices at AGL Torrens and the necessary actions will be implemented in the first quarter of FY2014.

Some examples of activities completed in FY2013 to reduce environmental risk include: >> conducting a review of fuel and chemical storage and the potential for loss of containment at AGL Hydro >>developing a Fuel Management Procedure for AGL Hydro which outlines environmental management requirements associated with the transport, storage and handling of fuel, including the management of underground petroleum storage systems >> reviewing documentation relating to inspections and monitoring at AGL Torrens and AGL Hydro power stations >> reviewing environmental content within Asset Management Plans for both AGL Torrens and AGL Hydro power stations >> commencing targeted contamination investigations at selected AGL Hydro power stations, as well as continuing remediation work at AGL Torrens.” “Overall, AGL’s FY2013 environmental risk target was effective in driving the completion of risk register actions, thereby further reducing AGL’s environmental risk profile. The target will be maintained in FY2014 and extended to AGL Loy Yang where the highest environmental risks relate to surface water, land, groundwater and air.” .

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Results from stakeholder survey - “Environmental impact: Complying with legislative and licence obligations with respect to the environmental impact of AGL’s operations. Again, this was an issue ranked of high importance by respondents to the materiality survey.”

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Chapter 1: An introduction to accounting

BUILDING BUSINESS SKILLS 1.8

ETHICS CASE

Mobile Phones Pty Ltd (a)

The stakeholders in this case are: You, as chief financial officer Jack Frost, managing director Users of the company’s financial statements.

(b)

The ethical issue is the continued circulation of significantly misstated financial statements. As chief financial officer, you have contributed to the preparation of misleading financial statements. Jack Frost and any other directors are responsible for the preparation of the financial statements issued by Mobile Phones Pty Ltd. You have acted ethically by telling the company’s managing director. The managing director has reacted unethically by allowing the misleading financial statements to continue to circulate.

(c)

As chief financial officer, you have a professional ethical responsibility to attempt to persuade the managing director not to issue misleading financial statements (they would mislead users, cause damage to the company’s reputation and possibly incur fines). Other actions that may be considered include reporting the matter to other directors and resigning. If the statements are audited, the matter may be referred to the auditors.

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Chapter 2: The recording process

CHAPTER 2 – THE RECORDING PROCESS ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises

Problems

1,2,3,10

1A,2A,3A, 1B,2B,3B

4,6

4A,5A,6A,7A, 8A, 4B,5B,6B 7B,8B

5,7,9,10

4A,5A,6A,7A,8A, 4B,5B,6B,7B 8B

5A,6A,7A,8A, 5B,6B,7B, 8B

Analyse the effect of accounting transactions and events on the basic accounting equation.

Explain what an account is and how it helps in the recording process.

Define debits and credits and explain how they are used to record accounting transactions.

Identify the basic steps in the recording process.

Explain what a journal is and how it helps in the recording process.

4,7

Explain what a general ledger is and how it helps in the recording process.

Explain what posting is and how it helps in the recording process.

8,10

5A,6A,7A,8A, 5B,6B,7B,8B

Explain the purposes of a trial balance.

6,7

8,9,11,12, 13

5A,6A,7A,8A,9A, 10A,5B,6B,7B, 8B,9B,10B

2.1

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

CHAPTER 2 – THE RECORDING PROCESS ANSWERS TO QUESTIONS 1.

The system of collecting and processing transactions or data and communicating financial information to interested parties is known as the accounting information system. The first step of the accounting process is to identify transactions and events that are to be recorded. Once identified and measured, the transactions and events are recorded to provide a permanent history of the financial activities of the organisation. Recording begins with a chronological record of transactions and events in an orderly and systematic manner in a journal. The next step is to transfer the journal information to the appropriate accounts in the ledger. (Note further steps in the recording process are discussed in chapter 3.)

Accounting transactions and events of the enterprise are recorded by accountants because they affect the basic equation (assets, liabilities and equity items).

(a)

No, the death of a major shareholder of the company is not an accounting transaction or event. Applying the accounting entity concept from Chapter 1 and therefore it does not affect the basic equation.

(b)

Yes, Supplies purchased on account is an accounting transaction and it is recorded as an increase in an asset, supplies and an increase in liabilities, accounts payable .

(c)

No, an employee being fired is not an accounting transaction or event which is recorded. When the employee provides services (works), this is when the event is recorded. Upon ceasing employment it is only the services which have accrued which need to be accounted for.

(d)

Yes, paying a cash dividend to shareholders is an accounting transaction which is recorded as a decrease in an asset, cash and a decrease in equity, retained earnings.

(a)

Decrease assets, cash and decrease in equity, cleaning expenses.

(b)

Increase assets, equipment and decrease assets cash.

(c)

Increase assets, cash and increase equity, share capital

(d)

Decrease assets, cash and decrease liabilities, accounts payable.

Charles is incorrect. The double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once with a dual effect. In other words, for each transaction, debits must equal credits.

Tanya is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favourable nor unfavourable.

2.2

Chapter 2: The recording process

(a)

Asset accounts are increased by debits and decreased by credits.

(b)

Liability accounts are decreased by debits and increased by credits.

(c)

The share capital account is decreased by debits and increased by credits.

(d)

Revenue accounts are decreased by debits and increased by credits.

(e)

Expense accounts are increased by debits and decreased by credits.

(f)

Dividend account are increased by debits and decreased by credits.

(a)

Equipment– debit balance.

(b)

Cash – debit balance.

(c)

Advertising Expense – debit balance.

(d)

Accounts Payable – credit balance.

(e)

Service Revenue – credit balance.

(f)

Accounts Receivable – debit balance.

(g)

Share Capital – credit balance.

(a)

The entire group of accounts maintained by an entity company, including all the asset, liability, and equity accounts, is referred to collectively as the ledger.

(b)

The chart of accounts is important, particularly for an entity that has a large number of accounts, because it helps organise the accounts, identify their location in the ledger and facilitate the recording process. The amount of detailed information which can be extracted in the form of reports will depend on the chart of accounts.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalised transactions have been posted. A trial balance also facilitates the discovery of errors in journalising and posting. In addition, it is useful in preparing financial statements.

10.

(a)

The trial balance would balance. However this does not mean the transaction has been analysed and recorded correctly. The correct recording would be to debit Cash for $900 and credit Accounts Receivable for $900. In order to correct the error a journal reversing the initial entry would also need to be made.

(b)

The trial balance would not balance, as the debit side is $810 greater than the credit side of the postings.

2.3

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2.1 Assets + + -&+

(a) (b) (c)

Liabilities + NE NE

Equity NE + NE

BRIEF EXERCISE 2.2 Debit Effect

Credit Effect

Normal Balance

(a)

Accounts Payable

Decrease

Increase

Credit

(b)

Advertising Expense

Increase

Decrease

Debit

Service Revenue Accounts Receivable

Decrease Increase

Increase Decrease

Credit Debit

(e)

Retained Earnings

Decrease

Increase

Credit

(f)

Dividends

Increase

Decrease

Debit

BRIEF EXERCISE 2.3 Dudley Advertising Ltd (a) Aug

Basic Analysis

(b)

Debit-Credit Analysis

The asset Cash is increased $15,000; Share Capital (equity) is increased.

Debits increase assets: debit Cash $15,000. Credits increase equity: credit Share Capital $15,000

The asset Prepaid Insurance is increased; the asset Cash is decreased.

Debits increase assets: debit Prepaid Insurance $1,800. Credits decrease assets: credit Cash $1,800.

The asset Cash is increased; the revenue Service Revenue is increased.

Debits increase assets: debit Cash $9,000. Credits increase revenues: credit Service Revenue $9,000.

The expense Salaries Expense is increased; the asset Cash is decreased.

Debits increase expenses: debit Salaries Expense $500. Credits decrease assets: credit Cash $500.

2.4

Chapter 2: The recording process

BRIEF EXERCISE 2.4 Dudley Advertising Ltd DATE Aug.

Description Cash Share Capital Being the issue of share for cash Prepaid Insurance Cash Being the payment of the insurance premium Cash Service Revenue Being the receipt of cash for services Salaries Expense Cash Being the payment of salaries

Debit 15,000

Credit 15,000

1,800 1,800

9,000 9,000 500 500

BRIEF EXERCISE 2.5 Gonzales Ltd

5/5

Accounts Receivable 13,200 12/5 Cash

Service Revenue*

12,400

*Service Revenue is the cross-reference. See pp. 167-8 of the text for further explanation. Service Revenue 5/5 Accounts Receivable 15/5 Cash

12/5 15/5

13,200 12,000

Cash 12,400 12,000

Accounts Receivable Service Revenue

2.5

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BRIEF EXERCISE 2.6 Evans Ltd Trial Balance as at 30 June 2016 Account name

Debit $ 6,400 5,600 23,000

Cash Accounts Receivable Equipment Accounts Payable Share Capital Dividends Service Revenue Salaries Expense Rent Expense

Credit $

8,650 30,000 2,200 11,500 9,000 3,950 $50,150

$50,150

BRIEF EXERCISE 2.7 Timaru Ltd Trial Balance as at 31 December 2015 Account name Cash Prepaid Insurance Accounts Payable Revenue Received in Advance Share Capital Retained Earnings Dividends Service Revenue Insurance expense Salaries Expense Rent Expense

Debit $ 32,100 1,500

Credit $

8,700 3,500 25,000 9,000 4,500 34,800 8,700 18,900 15,300 $81,000

$81,000

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Chapter 2: The recording process

SOLUTIONS TO EXERCISES EXERCISE 2.1 Speedy Lawn Care Pty Ltd 1. 2. 3. 4. 5. 6. 7. 8. 9.

Increase in assets and increase in equity. Decrease in assets and decrease in equity. Increase in assets and increase in equity. Increase in assets and increase in equity. Decrease in assets and decrease in equity. Increase in liabilities and decrease in equity. Increase in assets and decrease in assets. Increase in assets and decrease in assets. Increase in assets and increase in liabilities.

EXERCISE 2.2 Foxes Ltd (a)

1. Shareholders invested $34,000 cash in the business. 2. Purchased office equipment for $10,000, paying $4,000 in cash and the balance of $6,000 on account. 3. Paid $1,100 cash for supplies. 4. Recognised $27,400 in revenue, receiving $21,800 cash and $5,600 on account. 5. Paid $3,000 cash on accounts payable. 6. Paid $1,000 cash dividends to shareholders. 7. Paid $2,750 cash for rent. 8. Collected $3,200 cash from customers on account. 9. Paid salaries of $5,700. 10. Received invoice for $1500 electricity used.

(b)

Issued Share Capital Service Revenue Dividends Rent Expense Salaries Expense Electricity Expense Increase in Equity

$34,000 27,400 (1,000) (2,750) (5,700) (1,500) $50,450

(c)

Service Revenue Rent Expense Salaries Expense Electricity Expense Profit for the Month

$27,400 (2,750) (5,700) (1,500) $17,450

(d)

The profit for the month is part of the increase in equity. The profit is part of the retained earnings which has increased with the $17,450 profit and decreased by the payment of the dividend of $1,000 leaving a balance of $16,450. At month end equity is represented by the Share capital of $34,000 and the Retained earnings of $16,450 as per total equity of $50,450 as per part (b) above. .

2.7

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 2.3 Foxes Ltd Statement of profit or loss for the month ended 31 August 2016 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Electricity expense Total expenses Profit

$ 27,400 5,700 2,750 1,500 9,950 $17,450

Foxes Ltd Statement of financial position as at 31 August 2016 Assets: Cash Accounts receivable Supplies Office equipment Total assets Liabilities: Accounts payable Net Assets Equity: Share capital Retained Earnings Total equity

$ 41,450 2,400 1,100 10,000

54,950 4,500 $50,450 34,000 16,450 $50,450

Foxes Ltd Calculation of Retained earnings for the month ended 31 August 2016 $ Retained Earnings 1 August Add: Profit Less: Dividends Retained Earnings 31 August

0 17,450 17,450 (1,000) $16,450

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Chapter 2: The recording process

EXERCISE 2.4 Expensive Designs Pty Ltd Account debited

Transaction

(a) Basic type

(b) Specific Account

Account credited (d) Normal balance

(a) Basic type

(b) Specific account

(d) Normal balance

Asset

Cash

Increase

Debit

Equity

Share Capital

Increase

Credit

Asset

Equipment/ Motor Vehicles

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Supplies

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Accounts Receivable

Increase

Debit

Equity

Service Revenue

Increase

Credit

Equity

Advertising Expense

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Cash

Increase

Debit

Asset

Accounts Receivable

Decrease

Debit

Liability

Accounts Payable

Decrease

Credit

Asset

Cash

Decrease

Debit

Equity

Dividends

Increase

Debit

Asset

Cash

Decrease

Debit

2.9

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 2.5 Expensive Designs Pty Ltd General Journal Transaction Account Titles 1

Cash

Share Capital (Issued shares to investors for cash) Equipment/Motor Vehicles Cash (Purchased car for business for cash)

Supplies Accounts Payable (Purchased supplies on account) Accounts Receivable Service Revenue (Invoiced customers for services performed)

Debit $ 10,000

10,000 5,000 5,000

500 500

1,800 1,800

Advertising Expense Cash (Paid advertising expense)

200

Cash

700

200

Accounts Receivable (Received cash from customers on account) 7

700

Accounts Payable Cash (Paid amount owing to accounts payable)

300

Dividends Cash (Paid dividends to shareholders)

400

Credit $

300

400

2.10

Chapter 2: The recording process

EXERCISE 2.6 Bookit Pty Ltd Account debited (b) Specific Account

Transaction

(a) Basic type

Asset

Cash

Increase

Debit

Equity

Share Capital

Increase

Credit

Asset

Equipment/ Photocopier

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Supplies

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Accounts Receivable

Increase

Debit

Equity

Service Revenue

Increase

Credit

Equity

Advertising Expense

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Cash

Increase

Debit

Asset

Accounts Receivable

Decrease

Debit

Liability

Accounts Payable

Decrease

Credit

Asset

Cash

Decrease

Debit

Equity

Rent Expense

Increase

Debit

Asset

Cash

Decrease

Debit

(c)

Account credited

Effect

(d) Normal balance

(a) Basic type

(b) Specific account

(d) Normal balance

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 2.7 Bookit Pty Ltd General Journal Transaction Account Titles 1

Debit $ 10,000

Cash Share Capital (Issued shares to investors for cash) Equipment/Photocopier Accounts Payable (Purchased photocopier for business account) Supplies Accounts Payable (Purchased supplies on account) Accounts Receivable Service Revenue (Invoiced customers for services performed) Advertising Expense Cash (Paid advertising expense) Cash

10,000 3,000 3,000 on

400 400

1,800 1,800

300 300

1,500

Accounts Receivable (Received cash from customers on account) 7

Credit $

Accounts Payable Cash (Paid amount owing to accounts payable) Rent Expense Cash (Paid rent for month)

1,500

3,400 3,400

600 600

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Chapter 2: The recording process

EXERCISE 2.8 Ink Pad Printers Ltd (a)

1/8 10/8 31/8 1/9

Share Capital Service Revenue Accounts Receivable Opening Balance

25/8

Service Revenue

1/9

Opening Balance

12/8

Cash/Bank Loan

31/8

Cash 17,000 12/8 12,400 31/8 600 30,000 29,000

Office Equipment Closing Balance

1,000 29,000 30,000

Accounts Receivable 1,500 31/8 Cash Closing Balance 1,500 900 Office Equipment 4,000

Closing balance

600 900 1,500

Bank Loan 12/8

Office Equipment

3,000

Share Capital 1/8

Cash

17,000

Service Revenue 13,900 10/8 Cash 25/8 Accounts Receivable 13,900 31/8 Balance

12,400 1,500 13,900 13,900

(b) Ink Pad Printers Ltd Trial Balance as at 31 August 2017 Account Name

Debit $ 29,000 900 4,000

Cash Accounts Receivable Office Equipment Bank Loan Share Capital Service Revenue

$33,900

Credit $

3,000 17,000 13,900 $33,900

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 2.9 Zebra Tours Ltd (a) General Journal Date Apr.

Account Titles and Explanation 1

Cash

Debit 10,000

Share Capital (Sold shares for cash) 4

10,000

Supplies Accounts Payable (Purchased supplies on account)

4,800

Accounts Receivable Service Revenue (Invoiced customers for services rendered)

2,400

Cash

1,900

4,800

2,400

Service Revenue (Received cash for services performed) 15

Salaries Expense Cash (Paid salaries) Accounts Payable Cash (Paid creditors on account) Cash

1,900

750 750

3,500 3,500

200

Accounts Receivable (Received cash from customers on account) 30

Cash Revenue Received in Advance (Received cash for services to be performed in the future)

Credit

200

700 700

2.14

Chapter 2: The recording process

(b) Zebra Tours Ltd Trial Balance as at 30 April 2016 Account Name

Debit $ 8,550 2,200 4,800

Cash Accounts Receivable Supplies Accounts Payable Revenue Received in Advance Share Capital Service Revenue Salaries Expense

Credit $

1,300 700 10,000 4,300 750 $16,300

$16,300

EXERCISE 2.10 Ranch Ltd (a)

Cash Sept

1 5 25 30

Assets

+ 45,000 - 10,000 35,000 + - 7,500 27,500 + -1,000 26,500 +

Equipment

Liabilities Accounts Payable

Equity

Equity +45,000 Issued shares

+ 25,000 25,000 = 25,000 =

+ 15,000 15,000 + - 7,500 7,500 +

25,000 =

7,500 +

$51,500

45,000 45,000 -1,000 Dividends 44,000

$51,500

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b) Ranch Ltd General Journal Date Sept

Account Titles and Explanation

Ref

Debit

Cash

100 300

45,000

Equipment Cash Accounts Payable (Purchased equipment part cash, part on account)

120 100 200

25,000

Accounts Payable Cash (Paid amount owed on account)

200 100

7,500

Dividends Cash (Paid cash dividend)

320 100

1,000

Share Capital (Issued shares for cash) 5

(c)

1/9

5/9

25/9

30/9

Credit

45,000

10,000 15,000

7,500

1,000

Ranch Ltd Cash 45,000 5/9 25/9 30/9

Share Capital

Equipment Accounts Payable Dividend

100 10,000 7,500 1,000

Cash/Accounts Payable

Equipment 25,000

120

Cash

Accounts Payable 7,500 5/9 Equipment

200 15,000

Share Capital 1/9

300 45,000

Cash

Dividends 1,000

Cash

320

2.16

Chapter 2: The recording process

EXERCISE 2.11 Equipment Repair Pty Ltd (a) Error

(a) In Balance

1 2 3 4 5 6

No Yes Yes No Yes No

(b) Difference

$600 300 9

Debit Credit Credit

(b) The trial balance will not detect postings to the correct side of the ledger but the incorrect ledger account, omitted transactions, transactions posted incorrect amounts on both sides of the ledger. That is the trial balance detects when debits do not equal credits.

EXERCISE 2.12 Sushi To Go Ltd Trial Balance as at 31 July 2016 Account Name Cash ($193,314 – Debit total without Cash $163,880) Accounts Receivable Prepaid Insurance Delivery Equipment Bank Loan Accounts Payable Salaries Payable Share Capital Retained Earnings Dividends Service Revenue Salaries Expense Fuel Expense Repair Expense Insurance Expense

Debit $ 29,434 27,184 3,836 118,620

Credit $

$56,800 14,692 1,530 79,900 9,172 1,300 31,220 8,756 1,416 1,822 946 $193,314

$193,314

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 2.13 Boxer Ltd Trial Balance as at 31 March 2017 Account Name Cash Accounts Receivable Prepaid Insurance Delivery Equipment Accounts Payable Salaries Payable Bank Loan Share Capital Retained Earnings ($303,600– $281,823 ) Dividends Service Revenue Salaries Expense Fuel Expense Repair Expense Insurance Expense

Debit $ 76,526 13,450 6,345 165,000

Credit $

23,774 3,460 75,000 112,000 21,777 2,700 67,589 23,700 7,890 3,421 4,568 $303,600

$303,600

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Chapter 2: The recording process

Key to Retained Earnings column above. (a) Rent Expense (b) Advertising Expense (c) Service Revenue (d) Dividends (e) Salaries Expense

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 2.1 a) Cash 1.

Let’s Go Travel Agency Ltd

Accounts Receivable

Supplies

Office Equipment

-5,000 +

-1,200

40,000

(800)

40,000

(800)

5,000

600

40,000

(1,400)

+16,000

16,000

1,200

5,000

600

40,000

(1,400) +18,000

1,200

5,000

600

40,000

16,000

1,200

5,000

600

40,000

16,200

(c)

40,000

16,200

(d)

-600 +

16,000

1,200

5,000

-2,400

-2,400 +

+16,000 $47,600

(b)

16,600 -400

-600

31,600 10.

-600

-400

34,000 9.

+2,000

34,600

(a)

+1,200

33,000

40,000

+600

35,000

Retained Profit

+5,000

34,200

-800

Share Capital

-800

34,200

+$40,000

39,200 3.

Accounts Payable

+$40,000 40,000

16,000

1,200

5,000

40,000

13,800

$1,200

$5,000

$40,000

$13,800

(e)

-16,000 +

2.19

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b) Calculation of profit or loss for the year Service Revenue Expenses: Salaries Expense Rent Expense Advertising Expense Profit

$18,000 $2,400 800 800

3,800 $14,200

OR Increase in retained earnings ($6,900 - $0) Add: Dividends Profit

$13,800 400 $14,200

2.20

Chapter 2: The recording process

PROBLEM SET A 2.2 (a) Best Consulting Pty Ltd Assets Date

Cash

1/5

$10,000

2/5

(1,050)

Accounts Receivable

Liabilities

Supplies

Office Equipment

Bank Loan

Equity

Accounts Payable

Share Capital

Retained Earnings

$10,000 =

3/5

($1050)

$250

Rent Expense

$250

5/5

(75)

9/5

1,250

Service Revenue

12/5

(100)

Telephone

3,500

Service Revenue

(2,000)

Salaries Expense

(125)

Electricity Expense

15/5

$3,500

17/5

(2,000)

20/5

(250)

23/5

2,250

26/5

2,500

(250) (2,250) $2,500

29/5 30/5

$1,200

1,200

(125) $12,400

Advertising Expense

$1,250

$250

$1,200

$2,500

$1,200

$10,000

$1,400

2.21

Chapter 2: The recording process

(b) Best Consulting Pty Ltd Statement of profit or loss for the month ended 31 May 2016 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Electricity expense Telephone expense Advertising expense Total expenses Profit

$ 4,750

2,000 1,050 125 100 75 3,350 $1,400

(c) Best Consulting Pty Ltd Statement of financial position as at 31 May 2016 Assets: Cash Accounts receivable Supplies Office equipment Total assets Liabilities: Accounts payable Bank loan Total liabilities Net Assets Equity: Share capital Retained Earnings Total equity

$ 12,400 1,250 250 1,200

15,100 1,200 2,500 3,700 $11,400 10,000 1,400 $11,400

2.23

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 2.3 (a)

Ivan Izo Pty Ltd Assets

Liabilities

Cash

Accounts Receivable

Supplies

Office Equipment

Bal.

$4,000

$1,500

$500

$5,000

+1,400

500

5,000

-2,700

5,400 2,700 3.

Accounts Payable

$4,200

4,200

Share Capital

Retained Earnings

$6,500

$300

6,500

300

6,500

300

-1,400 +

100

-2,700 +

100

+3,000 5,700

Bank Loan

Equity

500

5,000

1,500

+3,400 +

3,500

+6,400 +

500

5,000

1,500

6,500

6,700

-400

-1,500

(b)

-900

(c)

- 350

(d)

5,300

2,550 6.

-550

+2,000

2,000

4,000

+1,000

(a)

3,500

500

6,000

+600 =

2,100

6,500

6,700

-550 +

3,500

500

6,000

2,100

6,500

3,400

2,100

6,500

3,400

(e)

+$2,000 +

3,500

500

6,000

2,000

-250

+250 $4,000

3,950

$3,500

$500

$6,000

$2,000

$2,350

Key to Retained Earnings column above: (a) Service Revenue. (b) Salaries Expense. (c) Rent Expense. (d) Advertising Expense (e) Dividends (f) Electricity Expense.

2.24

$6,500

$3,150

(f)

Chapter 2: The recording process

(b) Ivan Izo Pty Ltd Statement of profit or loss for the month ended 31 August 2016 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Advertising expense Electricity expense Total expenses Profit

$ 6,400 1,500 900 350 250 3,000 $3,400

Ivan Izo Pty Ltd Statement of financial position as at 31 August 2016 $ Current assets: Cash Accounts receivable Supplies Total current assets Non-current assets: Office equipment Total assets Current liabilities: Accounts Payable Non-current liabilities: Bank loan* Total liabilities Net Assets Equity: Share capital Retained Earnings ** Total Equity

$ 4,000 3,500 500 8,000 6,000 14,000

2,350

2,000 4,350 $9,650 6,500 3,150

19,600 $9,650

* Loan could be current or non-current shown as non-current

**Retained earnings $300 + Profit $3,400-less dividend $550 =$3,150

2.25

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 2.4 Fantasy Miniature Golf and Driving Range Pty Ltd Date

Post

Account Titles and Explanation

Debit

Credit

Ref Mar.

Cash

100 300

60,000

Land Buildings Equipment Cash (Purchased Lee’s Golf Land)

130 135 138 100

23,000 9,000 6,000

Advertising Expense Cash (Paid for advertising)

500 100

1,600

Prepaid Insurance Cash (Paid for one-year insurance policy)

112 100

1,480

Equipment Accounts Payable (Purchased equipment on account)

138 200

1,600

Cash

100 400

800

100

1,500

Share Capital (Issued shares for cash) 3

Golf Revenue (Revenue received in cash) 19

Cash

60,000

38,000

1,600

1,480

1,600

800

Golf Revenue received in Advance (Received cash for voucher books sold) 25

1,500

Dividends Cash (Payment of cash dividend)

320 100

500

Salaries Expense Cash (Paid salaries expense)

510 100

600

Accounts Payable Cash (Paid creditor on account)

200 100

1,600

Cash Golf Revenue (Revenue received in cash)

100 400

800

500

600

1,600

800

2.26

Chapter 2: The recording process

PROBLEM SET A 2.5 Mahon Consultants Pty Ltd (a) Date

Apr.

Account Titles and Explanation

Cash Share Capital (Issued shares for cash)

Post Ref

Debit

100 300

76,500 76,500

No entry – not a transaction.

Rent Expense Cash (Paid monthly office rent)

510 100

2,850

Supplies Accounts Payable (Purchased supplies on account from Speedy Art Supplies)

115 200

7,650

Accounts Receivable Service Revenue (Invoiced clients for services rendered)

110 400

4,050

Cash

100 209

1,650

100

9,450

Revenue Received in Advance (Received cash advance for future service) 20

Cash Service Revenue

Credit

2,850

7,650

4,050

1,650

400

9,450

(Revenue received in cash) 30

Salaries Expense

500

Cash

100

5,850 5,850

(Paid monthly salary) 30

Accounts Payable

200

Cash

100

3,450 3,450

(Paid Speedy Art Supplies on account)

2.27

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b)

1/ 4 11/4

Cash 76,500 2/4 1,650 30/4

20/4

Share Capital Revenue Received in Advance Service Revenue

1/5

Opening Balance

9,450 30/4 30/4 86,700 75,450

110

Service Revenue

Accounts Receivable 4,050

115

Accounts Payable

Supplies 7,650

Accounts Payable 3,450 3/4 4,200 7,650 1/5

Supplies

200 7,650

Opening Balance

7,650 4,200

10/4

30/4 30/4

Cash Closing Balance

2/4

Accounts Payable Closing Balance

3,450 75,450 86,700

Revenue Received in Advance 11/4 Cash

209 1,650

Share Capital 1/4

300 76,500

Service Revenue 10/4 20/4

30/4

Rent Expense Salaries Expense

100 2,850 5,850

Cash

Accounts Receivable Cash

400 4,050 9,450 13,500 500

Cash

Salaries Expense 5,850

510

Cash

Rent Expense 2,850

2.28

Chapter 2: The recording process

Debit $ 75,450 4,050 7,650

Cash Accounts Receivable Supplies Accounts Payable Revenue Received in Advance Share Capital Service Revenue Salaries Expense Rent Expense

Credit $

4,200 1,650 76,500 13,500 5,850 2,850 $95,850 $95,850

PROBLEM SET A 2.6 Lou Lou’s Beauty Centre Pty Ltd (a) & (c)

1/10 5/10

Opening Balance Accounts Receivable

1/11

Opening Balance

1/10 10/10

Opening Balance Service Revenue

1/11

Opening Balance

1/10

Cash 32,800 15/10 2,400 20/10 29/10 31/10 31/10 35,200 24,000

Salaries Expense Accounts Payable Dividend Electricity Expense Closing Balance

Accounts Receivable 7,600 5/10 Cash 12,800 31/10 Closing Balance 20,400 18,000

100 3,600 5,200 800 1,600 24,000 35,200

115 2,400 18,000 20,400

120

Opening Balance

Supplies 5,600

130

Opening Balance

Equipment 30,800

2.29

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

20/10 31/10

17/10 31/10

Cash Closing Balance

Service Revenue Closing Balance

Accounts Payable 5,200 1/10 13,600 18,800 1/11

Cash

Opening Balance

18,800 13,600

Revenue Received in Advance 1,200 1/10 Opening Balance 400 1,600 1/11 Opening Balance Share Capital 1/10

29/10

Opening Balance

200 18,800

210 1,600 1,600 400 300 56,400

Opening Balance

Dividends 800

310

Service Revenue 10/10 17/10

400 12,800 1,200

Accounts Receivable Revenue Received Advance

14,000

15/10

31/10

500

Cash

Salaries Expense 3,600

510

Cash

Electricity Expense 1,600

2.30

Chapter 2: The recording process

(b) Date

Account Titles and Explanation

Post

Debit

Credit

Ref

Oct 5

Cash

100 Accounts Receivable

2,400

115

2,400

(Received cash from customers on account) 10

Accounts Receivable Service Revenue

115

12,800

400

12,800

(Invoiced customers for services performed) 15

Salaries Expense

500

Cash

100

3,600 3,600

(Paid employee salaries) 17

Revenue Received in Advance

210

Service Revenue

400

1,200 1,200

(Performed services for customers who paid in advance) 20

Accounts Payable

200

Cash

100

5,200 5,200

(Paid creditors on account) 29

Dividends

310

Cash

800

100

800

(Payment of cash dividend) 31

Electricity Expense

510

Cash

100

1,600 1,600

(Paid electricity)

2.31

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(d) Lou Lou’s Beauty Centre Pty Ltd Trial Balance as at 31 October 2016 No.

Account Name

100 115 120 130 200 210 300 310 400 500 510

Cash Accounts Receivable Supplies Equipment Accounts Payable Revenue Received in Advance Share Capital Dividends Service Revenue Salaries Expense Electricity Expense

Debit $ 24,000 18,000 5,600 30,800

Credit $

13,600 400 56,400 800 14,000 3,600 1,600 $84,400 $84,400

PROBLEM SET A 2.7 Western Laundry Services Pty Ltd (a) & (c)

1/5 2/5

Opening Balance Accounts Receivable

1/11

Opening Balance

1/5 8/5

Opening Balance Service Revenue

1/11

Opening Balance

1/5

Cash 4,250 12/5 450 18/5 25/5 31/5 31/5 4,700 2,700

Salaries Expense Accounts Payable Dividend Electricity Expense Closing Balance

Accounts Receivable 1,100 2/5 Cash 1,750 31/5 Closing Balance 2,8500 4,800

100 600 800 250 350 2,700 4,700

115 450 2,400 2,850

120

Opening Balance

Supplies 850

130

Opening Balance

Equipment 4,000

2.32

Chapter 2: The recording process

18/5 31/5

15/5 31/5

Accounts Payable 800 1/5 1,700 2,500 1/11

Cash Closing Balance

Service Revenue Closing Balance

12/5

31/5

Opening Balance

2,500 1,700

Revenue Received in Advance 300 1/5 Opening Balance 50 350 1/11 Opening Balance Share Capital 1/5

25/5

Opening Balance

200 2,500

Cash

210 350 350 50 300 7,350

Opening Balance

Dividends 250

310

Service Revenue 8/5 15/5

400 1,750

Accounts Receivable Revenue Received Advance

in 300 2,050

500

Cash

Salaries Expense 600

510

Cash

Electricity Expense 350

2.33

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b) Date

Account Titles and Explanation

Post

Debit

Credit

Ref

May 2

Cash

100 Accounts Receivable

450

115

450

(Received cash from customers on account) 8

Accounts Receivable Service Revenue

115

1,750

400

1,750

(Invoiced customers for services performed) 12

Salaries Expense

500

Cash

100

600 600

(Paid employee salaries) 15

Revenue Received in Advance

210

Service Revenue

400

300 300

(Performed services for customers who paid in advance) 18

Accounts Payable

200

Cash

100

800 800

(Paid creditors on account) 25

Dividends Cash

310

250

100

250

(Payment of cash dividend) 31

Electricity Expense

510

Cash

100

350 350

(Paid electricity)

2.34

Chapter 2: The recording process

(d) Western Laundry Services Pty Ltd Trial Balance as at 31 May 2016 No.

Account Name

100 115 120 130 200 210 300 310 400 500 510

Cash Accounts Receivable Supplies Equipment Accounts Payable Revenue Received in Advance Share Capital Dividends Service Revenue Salaries Expense Electricity Expense

Debit $ 2,700 2,400 850 4,000

Credit $

1,700 50 7,350 250 2,050 600 350 $11,150 $11,150

2.35

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 2.8 The Drive-in Movie Palace Ltd (a) & (c)

1/3 9/3 20/3 31/3 31/3

Opening Balance Admission Revenue Admission Revenue Coffee Cart Revenue Admission Revenue

Opening Balance

31/3

1/3

10/3 31/3

Cash 19,100 2/3 11,600 10/3 10,300 12/3 1,110 20/3 21,600 31/3 31/3 63,710 25,710

Film Rental Expense Accounts Payable Advertising Film Rental Expense Salaries Expense Closing Balance

100 8,000 14,200 3,900 5,000 6,900 25,710 63,710

Accounts Receivable 1,110

105

110

Opening Balance

Equipment 19,100

120

Opening Balance

Land 45,100

130

Opening Balance

Buildings 21,100

Accounts Payable 14,200 1/3 8,000 2/3 22,200 1/4

Opening Balance

200 15,100 7,100 22,200 8,000

Opening Balance

300 89,300

Coffee Cart Revenue

Cash Closing Balance

Share Capital 1/3

Opening Balance Film Rental Expense

Admission Revenue 9/3 Cash 20/3 Cash 31/3 Cash

Coffee Cart Revenue 31/3 Cash/Accounts Receivable

400 11,600 10,300 21,600 43,500 410 2,220

2.36

Chapter 2: The recording process

500

12/3

Cash

Advertising Expense 3,900

510

2/3 20/3

Film Rental Expense Accounts Payable/Cash 15,100 Cash 5,000 20,100

31/ 3

Salaries Expense 6,900

Cash

520

2.37

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b) Date Mar. 2

Account Titles and Explanation Film Rental Expense Accounts Payable Cash (Rented films for cash and on account)

No entry.

Cash Admission Revenue (Received cash for admissions)

Accounts Payable ($7,100 + $7,100) Cash (Paid creditors on account)

Post Ref 510 200 100

Debit 15,100

7,100 8,000

100 400

11,600

200 100

14,200

11,600

14,200

No entry.

Advertising Expense Cash (Paid advertising expenses)

500 100

3,900

Cash

100 400

10,300

Film Rental Expense Cash (Paid film rental)

510 100

5,000

Salaries Expense Cash (Paid salaries expense)

520 100

6,900

Cash Accounts Receivable Coffee Cart Revenue (Received cash and balance on account for coffee cart revenue)

100 105 410

1,110 1,110

Cash

100 400

21,600

Admission Revenue (Received cash for admissions) 20

Admission Revenue (Received cash for admissions)

Credit

3,900

10,300

5,000

6,900

2,220

21,600

2.38

Chapter 2: The recording process

(d) The Drive-in Movie Palace Ltd Trial Balance as at 31 March 2015 No.

Account Name

100 105 110 120 130 200 300 400 410 500 510 520

Cash Accounts Receivable Equipment Land Buildings Accounts Payable Share Capital Admission Revenue Coffee Cart Revenue Advertising Expense Film Rental Expense Salaries Expense

Debit $ 25,710 1,110 19,100 45,100 21,100

Credit $

8,000 89,300 43,500 2,220 3,900 20,100 6,900 $143,020 $143,020

2.39

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 2.9 (a) Queenstown Ltd Trial Balance as at 30 June 2017 Account Name Cash ($17940 + $900) Accounts Receivable ($21093 - $900) Supplies ($5700 - $500) Equipment ($18,900 + $500) Accounts Payable ($16896 - $2163 - $2136) Revenue Received in Advance Share Capital Dividends ($5700 + $3300) Service Revenue ($15180 + $5,616) Salaries Expense ($21300 + $4500 - $3300) Office Expense

Debit $ 18,840 20,193 5,200 19,400

Credit $

12,587 8,100 60,000 9,000 20,796 22,500 6,360 $101,493

$101,493

(b) Explanation: The first number in the brackets is the balance as per the initial trial balance given in the question. The subsequent numbers are the corrections. Note that Cash should start in the debit and Revenue received in advance should start in the credit. Brief explanation of each error: 1.

$4320 – $3420 = $900. Need to decrease Accounts Receivable by $900 and increase cash by $900 to correctly record the collection of $4320 on account.

Calculator should not be included in Supplies so decrease Supplies by $500. Calculators should be included in Equipment, so increase Equipment by $500.

Rental Revenue needs to be adjusted upwards by $5616 ($6240 – $624).

Increase Salaries Expenses by $4500.

A payment on account should be debit to Accounts Payable. The amount of $2163 was incorrectly credited. To correct this entry, the balance of Accounts Payable must be reduced by $2163. To correctly record the payment of $2136 on account, Accounts Payable is reduced further by $2136.

Need to reduce Salaries Expense by $3300 and increase Dividends by $3300.

2.40

Chapter 2: The recording process

PROBLEM SET A 2.10 (a) Helpful Services Ltd Trial Balance as at 30 June 2015 Account Name Cash ($5680 + $360) Accounts Receivable ($6462 - $360) Supplies ($1600 - $680) Equipment ($6,000 + $680) Accounts Payable ($5332 - $520 - $412) Revenue Received in Advance Share Capital Dividends ($1600 + $800) Service Revenue ($4760 + $1602) Salaries Expense ($6800 + $1200 - $800) Office Expense

Debit $ 6,040 6,102 920 6,880

Credit $

4,400 2,400 18,000 2,400 6,362 7,200 1,820 $31,162 $31,162

(b) Explanation: The first number in the brackets is the balance as per the initial trial balance in question. The subsequent numbers are the corrections. Note that Cash should start in the debit and Revenue received in advance should start in the credit. Brief explanation of each error: 1.

$1500 – $1140 = $3600. Need to decrease Accounts Receivable by $360 and increase cash by $360 to correctly record the collection of $1500 on account.

Calculator should not be included in Supplies so decrease Supplies by $680. Calculators should be included in Equipment, so increase Equipment by $680.

Service Revenue needs to be adjusted upwards by $1602 ($1780– $178).

Increase Salaries Expenses by $1200.

A payment on account should be debit to Accounts Payable. The amount of $520 was incorrectly credited. To correct this entry, the balance of Accounts Payable must be reduced by $520. To correctly record the payment of $206 on account, Accounts Payable is reduced further by $412.

Need to reduce Salaries Expense by 800 and increase Dividends by $800.

2.41

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e Key to Retained Earnings column a) Rent Expense b) Advertising Expense c) Service Revenue d) Dividends e) Salaries Expense f) Electricity Expense g) Service Revenue

SOLUTIONS TO PROBLEM SET B CRAZY BOB’S REPAIR SHOP LTD

PROBLEM SET B 2.1

(a)

Cash

(1)

16,000 16,000

(2)

(5,000) 11,000

(3)

(400) 10,600

(4)

(500) 10,100

Accounts Receivable

Supplies

Office Equip

5,000 5,000

(8)

(9)

Share Capital

Retained Earnings

16,000 16,000

16,000

(400) (a) (400)

(550) (b) (950)

+ 16,000

4,100 (c) 3,150

500 500

10,100

(7)

Accounts Payable

(5)

(6)

500

4,100 14,200

500

550 550

5,000

550

16,000

(500) 13,700

500

5,000

550

16,000

(500) (d) 2,650

(1,200) 12,500

500

5,000

550

16,000

(1,200) (e) 1,450

(140) 12,360

500

5,000

550

16,000

(140) (f) 1,310

(10)

+ 12,360

400 400

+ 500

5,000

550

2.42

16,000

400 (g) 1,710

Chapter 2: The recording process (a)

(11)

Cash

120 12,480

Accounts Receivable -

Supplies

(120) 280

500

Office Equip

5,000

Accounts Payable

550

Share Capital

Retained Earnings

16,000

1,710

2.43

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b)

Service Revenue Expenses Salaries Expense Rent Expense Advertising Expense Electricity Expense Profit

...........................................................

$4,500

................................................ $1,200 ................................................ 400 ................................................ 550 ................................................ 140 ...........................................................

2,290 $2,210

Increase in retained earnings ($1,710 – $0) Add: Dividends Profit

........................................... ........................................... ...........................................

$1,710 500 $2,210

2.44

Chapter 2: The recording process

PROBLEM SET B 2.2 (a)

Assets

Date

Cash +

30,000 30,000

02/06

(4,000) 26,000

Accounts Receivable

Delivery van

20,000 20,000

Retained Earnings

30,000

16,000

30,000

(1,000) (1,000)

2,000 1,000

16,000

30,000

(400) 24,600

2,000

20,000

16,000

30,000

(400) 600

300 16,300

30,000

600

1,500

300 300

2,000 -

+ 20,000

(1,500)

30,000

26,100

500

300

20,000

26,100

500

300

20,000

16,000 16,000

Share + Capital 30,000 30,000

20,000

17/06

23/06

Accounts + Payable

20,000

24,600

20/06

2,000 2,000

Shareholders Equity

25,000

12/06

15/06

Supplies

(1,000) 25,000

05/06

09/06

Liabilities +

01/06

03/06

ROGERS DELIVERIES LTD

3,000 29,100

500

300

20,000

(1,000) 28,100

500

300

20,000

16,300

30,000

200 16,500

30,000

600 -

(200) 400

16,500

30,000

3,000 3,400

(1,000) 15,500

30,000

3,400

2.45

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(a)

Assets

Date

Cash

26/06

29/06

30/06

Key: (a) (b) (c) (d) (e) (f) (g)

Liabilities +

(500) 27,600

Accounts Receivable 500

Supplies

300

Delivery van

Accounts + Payable

20,000

15,500

(200)

Shareholders Equity

Share Capital

30,000

Retained Earnings (500) 2,900

(200)

27,400

500

300

20,000

15,300

30,000

2,900

(1,000) 26,400

500

300

20,000

15,300

30,000

(1,000) 1,900

Rent expense Service revenue Dividend Petrol expense Service revenue Electricity expense Salary expense

2.46

Chapter 2: The recording process

(b)

ROGER DELIVERIES LTD Statement of profit or loss for the Month Ended 30 June 2016 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Electricity expense Petrol expense Total expenses Profit

$ 5,000 1000 1000 500 200 2,700 $2,300

(c) ROGER DELIVERIES LTD Statement of financial position as at 30 June 2016 Assets: Cash Accounts receivable Supplies Delivery Van Total assets Liabilities: Accounts payable Total liabilities Net Assets Equity: Share capital Retained Earnings* Total equity

$ 26,400 500 300 20,000

47,200 15,300 15,300 $31,900 30,000 1,900 $31,900

*Retained earnings = Profit $2300 less dividends $400 = $1900

2.47

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 2.3

HEALTHY PAWS LTD Equity

(a) Cash

O/B 1

+ Accounts Receivable

9,000 (3,100)

1,700

Assets + Supplies

600

Office equipment

Liabilities = Accounts + Bank Loan + Share Payable Capital

6,000

+ Retained Earnings

1,700

600

6,000

3,600 (3,100) 500

(1,300) 400

600

6,000

500

13,000

700

3,300 3,800

13,000

700

13,000

700

13,000

700

5,900 2

1,300 7,200

(800) 6,400

+ 400

600

4,100 + 10,100

2,500 + 8,900

6,400 6,800

600

10,100

3,800

13,000

(600) 8,300

6,800

600

10,100

3,800

13,000

(600) (b) 9,000

3,800

13,000

(700) (c ) (900) (d) (300) (e) 7,100

13,000

(170) 6,930

13,000

6,930

6,800

600

10,100

6,400

6,800

600

10,100

170 3,970

7,000 13,400

6,800

600

10,100

3,970

8,900 (a) 9,600

(700) (900) (300) 6,400

2.48

7,000 7,000

(f)

Chapter 2: The recording process

Key to Retained Earnings column on previous page. (a) (b) (c) (d) (e) (f)

(b)

Service Revenue Dividends Salaries Expense Rent Expense Advertising Expense Electricity Expense

Healthy Paws Ltd Statement of profit or loss for the Month Ended 30 September 2015 $ Revenues: Service revenue Expenses: Rent expense Salaries expense Advertising expense Electricity expense Total expenses Profit

$ 8,900 900 500 300 170 2,070 $6,830

Healthy Paws Ltd Calculation of Retained earnings for the Month Ended 30 September 2015 $ Retained Earnings 1 September Add: Profit Less: Dividends Retained Earnings 30 September

700 6,830 7,530 (600) $6,930

2.49

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

Healthy Paws Ltd Statement of financial position as at 30 September 2015 $ Current assets: Cash Accounts receivable Supplies Total current assets Non-current assets: Office equipment Total assets Current liabilities: Accounts Payable Non-current liabilities: Bank loan* Total liabilities Net Assets Equity: Share capital Retained Earnings Total Equity

13,400 6,800 600 20,800 10,100 30,900

3,970

7,000 10,970 $19,930 13,000 6,930 $19,930

2.50

Chapter 2: The recording process

PROBLEM SET B 2.4 Just for Fun Park Date Apr.

12 13

Account Titles and Explanation Cash Share capital (Issued shares for cash) Land Cash (Purchased land for cash) Advertising Expense Accounts Payable (Incurred advertising expense on account) Salaries Expense Cash (Paid salaries) No entry. Prepaid Insurance Cash (Paid for one-year insurance policy) Dividends Cash (Payment of cash dividend) Cash Admission Revenue (Received cash for services rendered) Cash Revenue received in advance (Received advance for future services) Cash Admission Revenue (Received cash for services provided) Accounts Payable Cash (Paid creditor on account)

Debit 90,000

Credit 90,000

45,000 45,000 2,700 2,700 2,550 2,550

4,500 4,500 900 900 8,550 8,550 3,750 3,750 11,850 11,850 1,050 1,050

2.51

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 2.5 (a) Accurate Accountants Date

Account Titles and Explanation

May 1 Cash Share capital (Issued shares for cash)

Ref 100 300

Debit $ 156,000

Credit $ 1562,000

2 No entry—not a transaction. 3 Supplies Accounts Payable (Purchased supplies on account)

115 200

3,600

7 Rent Expense Cash (Paid office rent)

510 100

2,700

11 Accounts Receivable Service Revenue (Billed client for services provided)

110 400

3,300

12 Cash

100 210

13,500

100 400

3,600

31 Salaries Expense Cash (Paid salaries)

500 100

3,000

31 Accounts Payable ($1,200 X 40%) Cash (Paid creditor on account)

200 100

1,440

Revenue received in advance (Received an advance for future services) 17 Cash Service Revenue (Received cash for revenue earned)

3,600

2,700

3,300

13,500

3,600

3,000

1,440

2.52

Chapter 2: The recording process

(b) Accurate Accountants’ general ledger

1-May 12-May

Cash 156,000 7-May 13,500 31-May

17-May

1-Jun

Opening balance

3,600 31-May 31 May 173,100 165,960

Service revenue

Accounts Receivable 3,300

110

11-May

Accounts Payable

Supplies 3,600

115

3-May

31-May 31 May

Cash Closing balance

31 May

Accounts Payable 1,440 3-May 2,160 3,600 1 June

Closing balance

Rent expense Salaries expense

100 2,700 3,000

Share capital Revenue received in advance Service revenue

Accounts payable Closing balance

1,440 165,960 173,100

Supplies

200 3,600

Opening balance

3,600 2,160

Revenue received in advance 12-May Cash

210 13,500

Share Capital 1-May

300 156,000

Service Revenue 11-May 6,900 17-May 6,900 1 June

Cash

Accounts receivable Cash Opening balance

400 3,300 3,600 6,900 6,900

Cash

Salaries Expense 3,000

500

31-May

Cash

Rent Expense 2,700

510

7-May

2.53

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

Account Name

100 110 115 200 210 300 400 500 510

Cash Accounts Receivable Supplies Accounts Payable Revenue Received in Advance Share Capital Service Revenue Salaries Expense Rent Expense

(d)

Debit $ 165,960 3,300 3,600

Credit $

2,160 13,500 156,000 6,900 3,000 2,700 $178,560

$178,560

Accurate Accountants Statement of profit or loss for the month ended 31 May 2015 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Total expenses

$ 6,900 3,000 2,700 5,700 $ 1,200

Profit

2.54

Chapter 2: The recording process

Accurate Accountants Statement of financial position as at 31 May 2015 $ Current assets: Cash Accounts receivable Supplies Total assets Current liabilities: Accounts Payable Rent revenue received in advance Total liabilities Net Assets Equity: Share capital Retained Earnings Total Equity

165,960 3,300 3,600 172,860

2,160 13,500 15,660 $157,200 156,000 1,200 $157,200

2.55

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 2.6 Wellington Dry Cleaners (a) and (c) 100 1-Jul Opening balance 8-Jul Accounts receivable 11-Jul Dry cleaning revenue

110 1-Jul Opening balance 22-Jul Dry cleaning revenue

120 1-Jul Opening balance 17-Jul Accounts payable

9-Jul Salaries expense 14-Jul Accounts payable 30-Jul Various expenses

4,200 21,500 10,380

31-Jul Dividends 31-Jul Closing balance

1,000 7,706 44,786

44,786 7,706

1-Aug Opening balance

Cash 25,064 9,872 9,850

Accounts Receivable 21,072 8-Jul Cash 9,400 31-Jul Closing balance 30,472 20,600

8,872 20,600 30,472

1-Aug Opening balance

Supplies 9,688 1,108 31-Jul Closing balance 10,796 10,796

130 1-Jul Opening balance

Equipment 51,900

200 14-Jul Cash 31-Jul Closing balance

Accounts Payable 21,500 1-Jul Opening balance 11,364 17-Jul Supplies 32,864 1-Aug Opening balance

31,756 1,108 32,864 11,364

Revenue received in advance 1-Jul Opening balance

3,460

210

300

10,796 10,796

Share Capital 1-Jul Opening balance

310 31-Jul Cash

72,508

Dividends 1,000

2.56

Chapter 2: The recording process

400

Dry Cleaning Revenue 11-Jul Cash 19,250 22-Jul Accounts receivable 19,250 1-Aug Opening balance

31-Jul Closing balance

500 30-Jul Cash

Repair Expense 984

510 9-Jul Cash 30-Jul Cash 1-Aug Opening balance

Salaries Expense 4,200 6,228 31-Jul Closing balance 10,428 10,428

520 30-Jul Cash

Electricity Expense 3,168

(b) Date July 8

Account Titles and Explanation Cash Accounts Receivable (Received cash on account)

Debit 9,872

Salaries Expense Cash (Paid salaries)

4,200

Cash

9,850

Accounts Payable Cash (Paid creditors)

Credit

4,200

9,850 21,500 21,500

Supplies Accounts Payable (Purchased supplies on account)

1,108

Accounts Receivable Dry Cleaning Revenue (Billed for services provided)

9,400

Salaries Expense Electricity Expense Repair Expense Cash (Paid for various expenses)

6,228 3,168 984

Dividends Cash (Payment of cash dividend)

1,000

10,428 10,428

9,872

Dry Cleaning Revenue (Received cash for services provided) 14

9,850 9,400 19,250 19,250

1,108

9,400

10,380

1,000

2.57

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(d) Wellington Dry Cleaners Trial Balance as at 31 July, 2015 No. 100 110 120 130 200 210 300 310 400 500 510 520

Account Name

Debit $

Cash Accounts Receivable Supplies Equipment Accounts Payable Revenue received in advance Share Capital Dividends Dry Cleaning Revenue Repairs Expense Salaries Expense Electricity Expense

(e)

Credit $

7,706 20,600 10,796 51,900 11,365 3,460 72,508 1,000 19,250 984 10,428 3,168 $106,582

$106,582

Wellington Dry Cleaners Statement of profit or loss for the month ended 31 July 2015 $ Revenues: Service revenue Expenses: Salaries expense Repairs expense Electricity expense Total expenses Profit

$ 19,250

10,428 984 3,168 14,580 $4,670

2.58

Chapter 2: The recording process

Wellington Dry Cleaners Statement of financial position as at 31 July 2015 $ Current assets: Cash Accounts receivable Supplies Total current assets Non-current assets: Equipment Total assets Current liabilities: Accounts Payable Revenue received in advance Total liabilities Net Assets Equity: Share capital Retained Earnings * Total Equity

7,706 20,600 10,796 39,102 51,900 91,002

11,364 3,460 14,824 $76,178 72,508 3,670 $76,178

*retained earnings profit $4,670 less dividend $1000= $3,670

2.59

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 2.7 (a) Busy Bookkeepers Pty Ltd Date

Account Titles and Explanation

Jan 2 Cash Share capital (Issued shares for cash)

Ref 100 300

Debit $ 88,000

88,000

No entry—not a transaction.

Supplies Accounts Payable (Purchased supplies on account)

115 200

1,600

Rent Expense Cash (Paid office rent)

510 100

2,400

Accounts Receivable Service Revenue (Billed client for services provided)

110 400

3,800

Cash

100 210

3,000

100 400

1,700

Salaries Expense Cash (Paid salaries)

500 100

2000

Accounts Payable ($1,600 X 40%) Cash (Paid creditor on account)

200 100

640

Revenue received in advance (Received an advance for future services) 17

Cash Service Revenue (Received cash for revenue earned)

Credit $

1,600

2,400

3,800

3,000

1,700

2,000

640

2.60

Chapter 2: The recording process

(b) Busy Bookkeepers Pty Ltd

2-Jan 12-Jan

Cash 88,000 7-Jan 3,000 31-Jan

17-Jan

1-Feb

Opening balance

Service revenue

Accounts Receivable 3,800

110

11-Jan

Accounts Payable

Supplies 1,600

115

4-Jan

31-Jan 31 Jan

Cash Closing balance

31 Jan

Closing balance

1,700 31-Jan 31 Jan 92,700 87,660

Accounts Payable 640 4-Jan 960 1,600 1 Feb

Rent expense Salaries expense

100 2,400 2,000

Share capital Revenue received in advance Service revenue

Accounts payable Closing balance

640 87,660 92,700

Supplies

200 1,600

Opening balance

1,600 960

Revenue received in advance 12-Jan Cash

210 3,000

Share Capital 2-Jan

300 88,000

Service Revenue 11-Jan 5,500 17-Jan 5,500 1 Feb

Cash

Accounts receivable Cash Opening balance

400 3,800 1,700 5,500 5,500

Cash

Salaries Expense 2,000

500

31-Jan

Cash

Rent Expense 2,400

510

7-Jan

2.61

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

Account Name

100 110 115 200 210 300 400 500 510

Cash Accounts Receivable Supplies Accounts Payable Revenue Received in Advance Share Capital Service Revenue Salaries Expense Rent Expense

(d)

Debit $ 87,660 3,800 1,600

Credit $

960 3,000 88,000 5,500 2,000 2,400 $97460

$97460

Busy Bookkeepers Pty Ltd Statement of profit or loss for the month ended 31 January 2016 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Total expenses Profit

$ 5,500 2,000 2,400 4,400 $1,100

2.62

Chapter 2: The recording process

Busy Bookkeepers Pty Ltd Statement of financial position as at 31 January 2016 $ Current assets: Cash Accounts receivable Supplies Total assets Current liabilities: Accounts Payable Revenue received in advance Total liabilities Net Assets Equity: Share capital Retained Earnings Total Equity

87,660 3,800 1,600 93,060

960 3,000 3,960 $89,100 88,000 1,100 $89,100

2.63

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 2.8 Lights Out Theatre Ltd (a) and (c) 100 1-Apr Opening balance 9-Apr Admission revenue 25-Apr Admission revenue 30-Apr Candy bar revenue

Opening balance 105 30-Apr Candy bar revenue

107 30-Apr Cash

Cash 6,000 3,800 3,200 85

2-Apr Rental expense 10-Apr Accounts payable 10-Apr Mortgage payable 12-Apr Advertising expense 29-Apr Salaries expense 30-Apr Prepaid rent Closing balance

800 1,000 2,000 300 1,600 700 6,685 13,085

13,085 6,685 Accounts Receivable 85

Prepaid Rent 700

120 1-Apr Opening balance

Land 10,000

130 1-Apr Opening balance

Building 8,000

140 1-Apr Opening balance

Equipment 6,000

200 10-Apr Rent expense 30-Apr Closing balance

Accounts Payable 1,000 1-Apr Opening balance 1,500 20-Apr Rent expense 2,500 1-May Opening balance

210 10-Apr Cash 30-Apr Closing balance

Mortgage Payable 2,000 1-Apr Opening balance 6,000 8,000 Opening balance

300

2,000 500 2,500 1,500

8,000 8,000 6,000

Share Capital Opening balance

20,000

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Chapter 2: The recording process

400 Closing balance

410

Admission Revenue 9-Apr Cash 7,000 25-Apr Cash 7,000 1-May Opening balance

3,800 3,200 7,000 7,000

30-Apr Closing balance

Candy Bar Revenue 30-Apr Cash 170 30-Apr Accounts receivable 170 1-May Opening balance

510 12-Apr Cash

Advertising Expense 300

520 2-Apr Cash 20-Apr Cash

Film Rental Expense 800 500 30-Apr Closing balance 1,300 1,300

1-May Opening balance 530 29-Apr Cash

1,300 1,300

Salaries Expense 1,600

(b) Date Apr.

Account Titles and Explanation 2

Film Rental Expense Cash (Paid film rental)

No entry—not a transaction.

Cash

Debit

Credit

800 800

3,800 Admission Revenue (Received cash for admissions)

Mortgage Payable Accounts Payable Cash (Made payments on mortgage and accounts payable)

No entry—not a transaction.

Advertising Expense Cash (Paid advertising expenses) .

85 85 170 170

3,800

2,000 1,000 3,000

300 300

2.65

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

Date 20

Account Titles and Explanation

Debit

Film Rental Expense Accounts Payable (Rented film on account)

500 500

Cash

3,200 Admission Revenue (Received cash for admissions)

Credit

3,200

Salaries Expense Cash (Paid salaries expense)

1,600 1,600

Cash Accounts Receivable Candy Bar Revenue (17% X $1,000) (Received cash and balance on account for concession revenue)

85 85

Prepaid Rentals Cash (Paid cash for future film rental)

700

(d)

170

700

Lights Out Theatre Ltd Trial Balance as at 30 April 2016 No. Account Name

Debit

100 Cash ................................................................................... $ 6,685 105 Accounts Receivable .......................................................... 85 107 Prepaid Rentals .................................................................. 700 120 Land ................................................................................... 10,000 130 Buildings ............................................................................. 8,000 140 Equipment .......................................................................... 6,000 200 Accounts Payable ............................................................... 210 Mortgage Payable............................................................... 300 Share Capital ...................................................................... 400 Admission Revenue ............................................................ 410 Candy Bar Revenue ........................................................... 510 Advertising Expense ........................................................... 300 520 Film Rental Expense ........................................................... 1,300 530 Salaries Expense ................................................................ 1,600 $34,670 .

Credit

$ 1,500 6,000 20,000 7,000 170

000,000 $34,670 2.66

Chapter 2: The recording process

(e) Lights Out Theatre Ltd Statement of profit or loss for the month ended 30 April 2016 Revenues Admission revenue Candy bar revenue Total revenue Expenses Advertising expense Film rental expense Salaries expense Total expenses Profit

7000 170 7170 300 1300 1600 3,200 $3,970

Lights Out Theatre Ltd Statement of financial position as at 30 April 2016 $ $

Assets: Current assets Cash Account receivable Prepaid rentals Total current assets Non-current assets Land Buildings Equipment Total non-current assets Total assets Liabilities: Current liabilities Accounts payable Non-current liabilities Mortgage payable Total liabilities Net Assets

6,685 85 700 7,470

10,000 8,000 6,000 24,000 31,470

1,500

6,000 7,500 $23,970

Equity Share capital Retained Earnings Total equity

20,000 3,970 $23,970

2.67

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 2.9 New Trial Balance as follows: Theatre Adelaide Ltd Trial Balance as at 31 May 2016 Debit Account Names $ Cash ($5,850 + $420 – $225) ............................................................. 6,045 Accounts Receivable ($2,750 – $180 – $210) ..................................... 2,360 Prepaid Insurance ($700 + $100) ........................................................ 800 Supplies ($0 + $420) ........................................................................... 420 Equipment ($8,000 – $420) ................................................................. 7,580 Accounts Payable ($4,500 – $100 + $420 – $210) .............................. Rates and Taxes Payable ................................................................... Share Capital ($5,700 + $700) ............................................................ Retained Earnings ............................................................................. Dividends ($0 + $700) ......................................................................... 700 Service Revenue ($6,690 + $270)....................................................... Salaries Expense ($4,200 + $200) ...................................................... 4,400 Advertising Expense ($1,100 + $225) ................................................. 1,325 Rates and Taxes Expense ($800 + $100) ........................................... 900 $24,530

Credit $

4,610 560 6,400 6,000 6,960

000,000 $24,530

The following explanations assume normal balances (i.e. an increase in a debit account = debit the relevant amount): 1 Prepaid insurance, Rates and taxes expense each increase by $100; Accounts payable decreases by $100 2 Accounts receivable decreases by $(2750-2570) = 180; Service revenue increases by $(6960 – 6690) = 270 3 Salaries expense increases by $200 4 Dividends increases by $700, Share capital increases by $700 5 Equipment decreases by $420; Supplies increases by $420; Cash increases by $420; Accounts payable increases by $420 6 Cash decreases by $(250 – 25) = 225; Advertising expense increases by $225 7 Accounts payable decreases by $210; Account receivable decreases by $210 Note also-Accounts receivable, Rates and taxes payable, Service revenue and Advertising expense were listed on the incorrect sides for their normal balances

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Chapter 2: The recording process

PROBLEM SET B 2.10 New Trial Balance as follows: Glasgow Pty Ltd Trial Balance as at 31 December 2015 Debit $

Credit $

Cash ($7,804 -$720) ........................................................................... 7,084 Accounts Receivable ($5,752 +$360) .................................................. 10,456 Supplies ($1,820 -$220) ...................................................................... 3,200 Equipment ($7,780 +$220) .................................................................. 10,000 Accounts Payable ($5,399 -$490-$409) .............................................. Revenue Received in Advance ........................................................... Share Capital ...................................................................................... Dividends ($1200 + $1200) ................................................................. 2,400 Service Revenue ($19,808 +$1152) .................................................... Salaries Expense ($12,600 +$1800-$1200) ........................................ 13,200 Office Expense .................................................................................... 4,820

9,000 3,200 18,000

$51,160

Account Names

20,960

Explanation: The first number in the brackets is the balance as per the initial trial balance in the question. The subsequent numbers are the corrections. Note that Cash should start in the debit and Revenue received in advance should start in the credit. Brief explanation of each error: 1.

$1680 – $960 = $720. Need to decrease Accounts Receivable by $720 and increase cash by $720 to correctly record the collection of $960 on account.

Printer should not be included in Supplies so decrease Supplies by $440. Printers should be included in Equipment, so increase Equipment by $440.

Service Revenue needs to be adjusted upwards by $1152 ($1280– $128).

Increase Salaries Expenses by $1800.

A payment on account should be debit to Accounts Payable. The amount of $980 was incorrectly credited. To correct this entry, the balance of Accounts Payable must be reduced by $980. To correctly record the payment of $818 on account, Accounts Payable is reduced further by $818.

Need to reduce Salaries Expense by $1200 and increase Dividends by $1200.

2.69

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 2.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a) Account

Issued Capital Trade and other Payables (Accounts Payable) Trade and other Receivables (Accounts Receivable) Marketing expenses Prepayments (in Note 11) Property, Plant and Equipment (net) Revenue from Sale of Goods(Note 2)

Increase Side

Decrease Side

Normal Balance

Right Right

Left Left

Credit Credit

Left

Right

Debit

Left Left Left Right

Right Right Right Left

Debit Debit Debit Credit

(b)

1. 2. 3.

Cash is increased. Cash is decreased. Cash is decreased.

(c)

1. 2.

Cash is decreased. Cash is decreased or Bank Loan is increased.

2.70

Chapter 2: The recording process

BUILDING BUSINESS SKILLS 2.2 COMPARATIVE ANALYSIS PROBLEM Domino’s Pizza Enterprises Ltd vs. Freedom Foods Group Limited (a) Domino’s Pizza Enterprises Ltd

Freedom Foods Group Limited

1. 2. 3. 4. 5.

Cash Goodwill Borrowings Retained Earnings : Revenue from Sale of Goods:

Debit Debit Credit Credit Credit

1. 2. 3. 4. 5.

Inventories: Current Tax Liabilities Provisions: Issued Capital Administrative Expenses

(b)

The following other accounts are ordinarily involved:

debit credit credit credit debit

Decrease in accounts receivable: Cash is increased (debited).

Bank loan is increased: Cash is increased (debited).

Increase in equipment: Bank Loan is increased (credited) or Cash is decreased (credited).

Sales Revenue is increased: Cash or Accounts Receivable are increased (debited).

2.71

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 2.3

INTERPRETING FINANCIAL STATEMENTS

NOTE TO INSTRUCTOR: Students are required to select their own company. Part of the requirements is to provide the web address of the company selected and where in the financial statements they located the information. Below is where the information is often located. The solution will depend on company selected. (a) (b)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

What company did you select? Please also provide web address and date you accessed the website. The solution here only provides where the information is usually located but it may be in numerous locations in the annual report. Principal activities.- in Directors report The number of controlled entities/subsidiaries and the countries in which they operate.-Notes to the financial statements towards the end after Contingency Note The percentage ownership in the company of the 20 largest shareholders. In Notes to the financial statements towards the end The number of Directors. –Directors report The accounting policy for Depreciation.- Accounting policy note in Notes to the financial statements The amount of income tax expense and the profit for the year.-Statement of profit and loss Name of its auditors. – Auditors report List the business segments. Notes to the financial statements The amount of Current Assets. –Statement of financial position The amount of net cash flows from operating activities.- Statement of cash flows The amount of dividends paid. In dividend note in Notes to the financial statements Describe any related party transactions.- Notes to the financial statements

2.72

Chapter 2: The recording process

CRITICAL THINKING BUILDING BUSINESS SKILLS 2.4

GROUP DECISION CASE

Supreme Riding School Pty Ltd (a) Note to instructor the entries below are the journal which should have been entered not a correcting journal entry. May

Correct.

No entry should be recorded

Cash

5,000 Lesson Revenue

Cash

5,000 5,000

Revenue Received in Advance 9

5,000

Hay and Feed Expense Hay and Feed Supplies Accounts Payable

2,000 8,000

Office Equipment Cash

2,500

Dividends Cash

6,000

Cash

13,500

10,000

2,500

6,000

Riding Revenue 31

(b)

Veterinary Expense Accounts Payable

13,500 6,750 6,750

The error in the entries of May 14 and May 20 would prevent the trial balance from balancing.

(c) Profit as reported Add: May 2, Salaries Expense May 5, Lesson fees May 9, Hay and Feed Expense* May 15, Salaries Expense (Dividends declared and paid) Less: May 7, Boarding Revenue Received in Advance Correct Profit

$15,100 $10,000 5,000 8,000 6,000

29,000 44,100 (5,000) $39,100

* Student may treat the entire transaction as supplies as accrual accounting is in next chapter. If so increase the profit by $2,000 more to $ 41,100 .

2.73

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(d)

Cash as reported ............................................................................ Add: 9/5, Purchase on account ................................................. ......................................................................................... Less: 20/5, Transposition error ..................................................

$ 20,650 10,000 30,650 (18,000) $12,650

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Chapter 2: The recording process

BUILDING BUSINESS SKILLS 2.5

COMMUNICATION ACTIVITY

Fancy Flowers Limited To: From: Re:

Assistant Accountant – Fancy Flowers Limited Accounting Student Steps in Recording Process

In the first transaction, invoices totalling $8,500 were sent to customers for services provided. Therefore, the asset Accounts Receivable is increased $8,500 and the revenue Service Revenue is increased $8,500. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable Service Revenue (Invoice customer for services provided)

8,500 8,500

The $8,500 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue. In the second transaction, $3,200 was paid in salaries to employees. Therefore, the expense Salaries Expense is increased $3,200 and the asset Cash is decreased $3,200. Debits increase expenses and credits decrease assets, so the journal entry is: Salaries Expense Cash (Salaries paid)

3,200 3,200

The $3,200 amount is then posted to the debit side of the general ledger account Salaries Expense and to the credit side of the general ledger account Cash.

2.75

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 2.6

COMMUNICATION ACTIVITY John Jones

To: From: Re:

John Jones Assistant Accountant – ABC Accounting Practice Accounting Student Purposes of a Trial Balance

A trial balance is a list of the accounts in the general ledger and their balances at a given time. The trial balance is usually prepared at the end of an accounting period, for example monthly and the accounts are listed in the order they appear in the general ledger. The debit balances are listed in one column and the credit balances in the other and the totals of the two columns must be equal. The purpose of the trial balance is primarily to check the mathematical equality after the postings have been completed. This is necessary particularly in a manual accounting system. In today’s accounting environment the transactions are often processed with the use of computers so the programs are written as such that the debits will equal the credits. However the use of computers does not ensure the transactions have been processed correctly, nor if the trial balance balances does it ensure the transactions have been processed and posted correctly. The types of errors the trail balance detects is where the debits do not equal the credits such as omitting one side of the posting or transposing a figure when the entry was posted. The trial balance will not specifically identify if the posting was to the correct side of the ledger, say a debit to an assets account when the item should have been expensed, nor will it identify an omitted transaction, a journal entry posted twice, incorrect amounts are posted to both sides or errors where co-incidentally offset one another so the debits still equal the credits. However the listing of the balances would facilitate in the identification of posting errors, where you as the accountant use your knowledge of the expected balances. For example you would not expect Accounts receivable to have a credit balance or the miscellaneous expense account to have a large balance. So despite the limitation the trail balance is a useful screen in identifying recording errors. The trail balance is also useful in providing an overview of the account balances for review and preparation of the financial statements.

2.76

Chapter 2: The recording process

BUILDING BUSINESS SKILLS 2.7

ETHICS CASE

(a)

The word ethics comes from the Greek word ethicos meaning related to custom or habit. The second edition of the Macquarie concise dictionary (page 320) defines ethical as ‘1. pertaining to or dealing with morals or the principles of morality; pertaining to right and wrong conduct 2. in accordance with the rules or standards for right conduct or practice, esp. the standards of a profession’.

(b)

The student answer could include: ethical behaviour is acting morally, acting in a way that is right or appropriate, acting in a way that people should behave, acting according to rules or agreed and acceptable ways of behaving, acting for the good or benefit of others rather than harm…etc…

(c)

Criteria that an accountant was behaving ethically could include: acts credibly and honestly – e.g. Provides credible information/advice and acts honestly abides by the professional rules/standards fair cost for service provided safeguard the interests of clients and the public integrity – honest and sincere approach to their work objectivity – fair and not prejudice or bias – treat all clients equally Reliability – can be relied upon to get the job done

(d)

Personal and financial costs of Unethical behaviour include: feeling of shame, remorse or guilt for acting unethically if caught - being disgraced, discredited if caught - damaged reputation and loss of current and future employment if caught - jail sentence or fine or be excluded from the profession and unable to practice as a professional cause harm to others – e.g. financial loss

(e)

Students’ own experiences …

2.77

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

CHAPTER 3 – ACCRUAL ACCOUNTING CONCEPTS ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives 1.

Differentiate between the cash basis and the accrual basis of accounting.

Explain criteria for revenue recognition and expense recognition.

Explain why adjusting entries are needed and identify the major types of adjusting entries.

Prepare adjusting entries for prepayments and accruals.

Brief Exercises

Exercises

1,9

Problems 7A

2,3,4

5,9, 10, 11,13

1A, 2A,10A, 1B,2B.10B

3, 4

5, 6, 7, 8,9, 10,11,12,13

ALL PROBLEMS

Describe the nature and purpose of the adjusted trial balance.

9,10,11

ALL PROBLEMS

Explain the purpose of closing entries.

3A, 4A,5A,6A, 7A,8A, 9A,10A, 3B, 4B, 5B,6B, 7B,8B,9B,10B

Describe the required steps in the accounting cycle.

Describe the purpose and the basic form of a worksheet.

6, 7

3A, 5A,6A,8A, 9A,10A,3B,5B, 6B,8B,9B,10B 13

9A,10A 7B,9B,10B

3.1

Chapter 3: Accrual accounting concepts

CHAPTER 3 – ACCRUAL ACCOUNTING CONCEPTS ANSWERS TO QUESTIONS 1.

(a)

Under the accounting period concept, an accountant is required to determine the impact of each accounting transaction or event in specific accounting periods.

(b)

An accounting time period of one year in length is referred to as a financial year.

The accounting principles and the qualitative characteristics, together with accounting standards, are collectively referred to as Australian generally accepted accounting principles (GAAP). Generally accepted accounting principles that pertain to adjusting the accounts include (choose two):

The revenue recognition criteria which states that revenues should be recognised in the time period in which it is probable that any future economic benefits associated with the revenue will flow to the entity and the revenue can be reliably measured;

The accounting period concept which states that the life of a business can be divided into artificial periods, such as one month, six month, 12 months, and that useful financial statements give feedback on the profitability of the business;

The expense recognition criteria which states that expenses should be recognised when the outflow of future economic benefits associated with the expense is probable and the expense can be measured reliably.

3.2

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

The new accounting standard for revenue recognition IFRS 15 ‘Revenue from Contracts with Customers’, is mandatory for reporting periods commencing 1 January 2017, but earlier adoption is permitted. The main principle in this new standard is that revenue is to be recognised to depict the transfer of goods or services to customers in amounts which reflect the payment (ie consideration) which the business expects to receive. IFRS 15 sets out a five step process. Essentially revenue can be recognised when an entity satisfies a performance obligation. The following conditions must be met:

the contract has been approved by parties to the contract

each parties rights in relation to the goods to be transferred has been identified

the payment terms have been identified

the contract has commercial substance; and

it is probable that the consideration to which the entity is entitled to in exchange for the goods will be collected.

Assuming the law firm uses accrual accounting it should recognise the revenue in April as this is when the contract obligation was performed. The revenue recognition criterion states that revenue should be recognised in the accounting period in which it is probable that any future economic benefits associated with the revenue will flow to the entity and the revenue can be reliably measured. If the engagement has been completed the amount of revenue would typically be able to be measured reliably. Applying the new criteria under IRFS15 it is assumed both parties agreed to the conditions of the contract, the payment terms were specified so the contract has commercial substance. The timing of the recognition is when the right were transferred and it is probable the law firm will receive the service revenue. That is in April.

Expenses of $3600 should be deducted from the revenues in April in order to match the revenue recognised in April.

The financial information in a trial balance may not be up-to-date because: (1)

Some events are not journalised daily because it is unnecessary and inexpedient to do so.

(2)

The expiration of some costs occurs with the reduction in an asset with the passage of time.

(3)

Some items may be unrecorded because the transaction data are not known.

3.3

Chapter 3: Accrual accounting concepts

The two categories of adjusting entries are prepayments and accruals. Prepayments are either revenues received in advance or prepayments of amounts that provide economic benefit for more than one period, e.g. prepaid rent. Accruals consist of revenues and expenses earned or incurred but which have not been recorded through daily recording of transactions. In this text we teach you to recognise a transaction which affects more than 1 reporting [period as an asset. Therefore in a prepaid expense adjusting entry, expenses are debited and assets are credited, to reflect the expiry of the asset. In a revenue received in advance adjusting entry liabilities are debited and revenues are credited.

Depreciation expense is an expense account whose normal balance is a debt. This account shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognised from the date of acquisition to the reporting date.

Liability and revenue. The revenue account is debited and liability account (Revenue Received in Advance) is credited. This is the nature of the adjusting entry if the original entry was to record the amount received as revenue.

10.

An asset (Prepayments) is debited and an expense is credited by the adjusting entry.

11.

(a)

Prepaid expenses (if initially recorded as an expense) or Accrued revenue.

12.

(b)

Revenues received in advance.

(c)

Accrued expenses or revenue received in advance (if initially recorded as revenue).

(d)

Accrued expenses or prepaid expenses (if initially recorded as an asset).

(e)

Prepaid expenses (if initially recorded as an asset).

(f)

Accrued revenues or revenues received in advance (if initially recorded as a liability).

A worksheet is a multi-columned form. The columns of the worksheet from left to right are two columns each for the trial balance, adjustments, adjusted trial balance, statement of profit or loss and other comprehensive income and statement of financial position. .

3.4

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3.1 Cash $ -120 0 0 +960 -3,000 0 0

(a) (b) (c) (d) (e) (f) (g)

Retained Earnings $ 0 -60 +1,200 0 0 -1,200 0

BRIEF EXERCISE 3.2 Riko Ltd (1) Type of Adjustment

Item (a)

Prepaid Expense

(b)

Accrued Revenue

(c)

Accrued Expense

(d)

Revenue Received in Advance

(2) Accounts Before Adjustment Asset Overstated Expense Understated Asset Understated Revenue Understated Expense Understated Liability Understated Liability Overstated Revenue Understated.

BRIEF EXERCISE 3.3 Shah Ltd June

Depreciation Expense - Equipment Accumulated Depreciation – Equipment (Depreciation for the year )

3 000 3 ,000

Depreciation Expense – Equipment 30/6

Accumulated Depreciation

3 000

Accumulated Depreciation – Equipment 30/6 FINANCIALSTATEMENT PRESENTATION IS NET Equipment Less Accumulated depreciation

Depreciation Expense

3 000

25 000 (3 000) $22 000 3.5

Chapter 3: Accrual accounting concepts

BRIEF EXERCISE 3.4 DeVoe Ltd General Journal Date

(a)

(b)

(c)

Account name(narration) June 30 Interest Expense Interest Payable (Accrual of interest on loan) June 30 Service Revenue Receivable Service Revenue (Accrual of revenue) June 30 Salaries Expense Salaries Payable (Accrual of salaries)

Debit $ 200

G 15 Credit $ 200

700 700 350 350

BRIEF EXERCISE 3.5 Hoi Ltd Item

(1) Type of Adjustment

Account

(2) Related Account

(a)

Accounts Receivable

Accrued Revenue

Service Revenue

(b) (c)

Prepaid Insurance Equipment

Prepaid Expense Depreciation refer item (d)

Insurance Expense

(d)

Accum. Depreciation – Equipment

Prepaid Expense

Depreciation Expense

(e)

Bank Loan

Accrue interest refer item (f)

(f)

Interest Payable

Accrued Expense

Interest Expense

(g)

Service Revenue Received in Advance Interest Receivable Wages Payable

Revenue Received in Advance

Service Revenue

Accrued revenue Accrued expense

Interest Revenue Wages Expense

(h) (i)

BRIEF EXERCISE 3.6 Account (a) (b) (c)

Accumulated Depreciation Depreciation Expense Retained Earnings

(d) (e) (f) (g)

Dividends Service Revenue Supplies Accounts Payable .

Khanna Ltd Financial Statement Statement of financial position Statement of profit or loss Statement of financial position (and statement of changes in equity) Statement of changes in equity Statement of profit or loss Statement of financial position Statement of financial position

Post Closing Trial Balance Yes No Yes No No Yes Yes 3.6

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

BRIEF EXERCISE 3.7 The proper sequencing of the required steps in the accounting cycle is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9.

(e) (a) (b) (i) (g) (d) (h) (f) (c)

Analyse business transactions. Journalise the transactions. Post to ledger accounts. Prepare a trial balance. Journalise and post adjusting entries. Prepare an adjusted trial balance. Prepare financial statements. Journalise and post closing entries. Prepare a post-closing balance.

3.7

Chapter 3: Accrual accounting concepts

SOLUTIONS TO EXERCISES

EXERCISE 3.1 Tang Pty Ltd (a)

Service Revenue - Operating Expenses - Insurance Expense Profit (b)

Cash Basis $ 66,000 40,500 6,500 $19,000

Accrual Basis $ 78,000 45,000 $33,000

Both accrual basis and cash basis provide useful information. However, it can be argued that the accrual basis of accounting provides more useful information about performance for decision makers because it recognises the impact of accounting transactions or events on specific accounting periods. The cash basis of accounting only recognises cash transactions. The accrual basis of accounting provides a more comprehensive picture of the business activities in the records. For example, accrued basis profit takes account of all revenues and expenses for a period whether or not cash is received or paid (provided recognition criteria are met). It also takes account of internal events, such as the consumption of supplies or the depreciation of plant assets. However, cash basis accounting is also useful. For example, the statement of cash flows shows how much cash is generated from ordinary operating activities (which will invariably be greater or less than accrual basis profit).

EXERCISE 3.2 (a) (b) (c) (d) (e) (f) (g) (h)

6. 1. 5. 8. 7. 2. 4. 3.

Going concern principle. Accounting entity concept. Full disclosure principle. Monetary principle. Materiality. Accounting period concept. Expense recognition criteria. Cost principle.

EXERCISE 3.3 (a) (b) (c) (d) (e) (f)

Revenue recognition criteria. Accounting period concept. No violation (not a violation of cost as the principle used for inventory is measurement at the lower of cost and net realisable value). Going concern principle. Cost principle. Accounting entity concept. .

3.8

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.4 (a) 9. Materiality. (b) 7. Expense recognition criteria. (c) 3. Monetary principle. (d) 4. Accounting period concept. (e) 8. Cost principle. (f) 1. Accounting entity concept. (g) 5. Full disclosure principle. (h) 6. Revenue recognition criteria.

EXERCISE 3.5 Zimbabwe Ltd

Item

(1) Type of Adjustment

(2) Accounts Before Adjustment

(b) Effect on profit Overstated /(understated) Understated

(a)

Accrued Revenue

Asset Understated Revenue Understated

(b)

Prepaid Expense

Asset Overstated Expense Understated

Overstated

(c)

Accrued Expense

Expense Understated Liabilities Understated

Overstated

(d)

Revenue Received in Advance

Liability Overstated Revenue Understated

Understated

(e)

Accrued Expense

Expense Understated Liability Understated

Overstated

(f)

Prepaid Expense

Asset Overstated Expense Understated

Overstated

3.9

Chapter 3: Accrual accounting concepts

EXERCISE 3.6 Uniform Ltd General Journal

Date 1.

Account name(narration)

June 30 Depreciation Expense Accumulated Depreciation – Equipment (Depreciation for the quarter ($1600 x 3)) 30 Revenue Received in Advance Rent Revenue (Rent Revenue April-Jun now earned($36270 / 9 x 3)) 30 Interest Expense Interest Payable (Accrued interest) 30 Supplies Expense Supplies (supplies used $8400-$2800) 30 Insurance Expense Prepaid Insurance (Interest expense for the 3 months to June ($1170 x 3))

Post Ref.

$ Debit

420 121

4 800

210 300

12 090

400 220

975

440 110

5 600

430 100

3 510

$ Credit

4 800

12 090

975

5 600

3 510

NB. Adjusting entries are made quarterly (i.e. every 3 months).

3.10

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.7 Con James Dental Practice General Journal

Date Account name(narration) 2016 Jan 31 Accounts Receivable Service Revenue (Service preformed January) 31 Electricity Expense Electricity Payable (Accrued electricity) 31 Depreciation Expense Accumulated Dep’n – Dental Equipment (Depreciation for the month) 31 Interest Expense Interest Payable (Accrued interest) 31 Insurance Expense Prepaid Insurance (January insurance exp $24000/12) 31 Supplies Expense Supplies ($3200 - $700) (Supplies used January)

$ Debit

$ Credit

1 500 1 500 1 040 1 040 1 600 1 600 500 500 2 000 2 000 2 500 2 500

3.11

Chapter 3: Accrual accounting concepts

EXERCISE 3.8

Date

Wong Pty Ltd General Journal Account name (narration)

Post ref

2016 Oct. 31 Advertising Supplies Expense Advertising Supplies ($2,500 - $1,600) (Supplies used October ) 31 Insurance Expense Prepaid Insurance (Insurance expense October) 31 Depreciation Expense Accumulated Depreciation – Office Equipment (Depreciation expense October) 31 Service Revenue Received in Advance Service Revenue (Revenue now performed) 31 Accounts Receivable Service Revenue (Accrued revenue) 31 Interest Expense Interest Payable (Accrued interest) 31 Salaries Expense Salaries Payable (Accrued salaries)

$ Credit

505 110

900

515 112

100

520 131

213 400

300

104 400

700

518 210

500 215

1 300

900

100

300

700

1 300

EXERCISE 3.9 Wolfmother Ltd Statement of profit or loss for the month ended 31 July 2017

Revenues: Service revenue ($5 500 + $800) Expenses: Wages expense ($2 300 + $300) Supplies expense ($1 200 - $400) Electricity expense Insurance expense Depreciation expense Total expenses Profit

$ 6 300

2 600 800 600 300 150 4 450 $1 850

3.12

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.10 Darcy Designs Pty Ltd Answer (a)

Supplies balance 1/7= $1 400

Calculation/Account Reconstruction Supplies expense Add: Supplies (31/7) Less: Supplies purchased Supplies (1/7)

1/7*

(b)

(c)

$1220 1500 (1320) $1400

Supplies 1400 1320 31/7 2720

Bal. Purchases

Expense Bal.

Total premium = $9 600

Total premium = Monthly premium x 12; $800 x 12 =$9 600

Purchase date = 1 Nov 2015

Purchase date: On 31 Julybalance is $2400 so there is 3 months coverage remaining ($800 x 3). Thus, the purchase date was 9 months earlier on 1 November 2015.

Salaries payable = $1 700

Cash paid Salaries payable (31/7 )

$7500 1500 $9000 7300 $1700

Less: Salaries expense Salaries payable (1/7 or 30/6)

31/7

Salaries paid Bal

Salaries Payable 7500 1/7 Bal 1500 9000

1700

Salaries exp. 31/7 Bal

(d)

1220 1500 2720

Service revenue = $1 725

Service revenue Amount received for July services Revenue received in Advance now recognised

31/7

Service Revenue Received in Advance Services 600 1/7 Bal. Performed Bal. 1125 1725 31/7 Bal

3.13

7300 9000 1500 $3000 2400 600

1725

1150 1125

Chapter 3: Accrual accounting concepts

EXERCISE 3.11 Martin Pty Ltd Answer (a)

Supplies balance 1/3= $800

Calculation/Account Reconstruction Supplies expense Add: Supplies (31/3) Less: Supplies purchased Supplies (1/3)

1/3*

(b)

Total premium = $4 800

$950 700 (850) $800

Supplies 800 850 31/3 1650

Bal. Purchases

Expense Bal.

950 700 1650

Total premium = Monthly premium x 12; $400 x 12 = $4,800 (2400:4800 = 50%) At 31 March the prepaid amount is half the annual premium so policy was purchased six months earlier on 1 October 2016

Purchase date = 1 Oct 2016 (c)

Salaries payable = $1 500

Cash paid Salaries payable (31/3 )

$2500 800 $3300 1800 $1500

Less: Salaries expense Salaries payable (1/3)

31/3

Salaries paid Bal

Salaries Payable 2500 1/3 Bal 800 3300

1500

Salaries exp. 31/3 Bal

(d)

Service revenue = $1 150

Service revenue Amount received for March services Revenue received in Advance now recognised

31/3

Service Revenue Received in Advance Services 400 1/3 Bal. Performed Bal. 750 1150 31/3 Bal

3.14

1800 3300 800 $2000 1600 400

1150

1150 750

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.12 Snowmass Ltd General Journal Date (a)

Account name (narration)

July 10 Supplies Cash 14 Cash

$ Debit 200

$ Credit 200

3 000 Service Revenue

15 Salaries Expense Cash 20 Cash

3 000 1 200 1 200 700

Service Revenue Received in Advance (b)

July 31 Supplies Expense Supplies 31 Salaries Expense Salaries Payable

700 500 500 1 200 1 200

31 Service Revenue Receivable Service Revenue

500

31 Service Revenue Received in Advance Service Revenue

900

500

900

3.15

Chapter 3: Accrual accounting concepts

EXERCISE 3.13

Date

Monkey Ltd General Journal Account name (narration)

2016 June 30 Insurance Expense Insurance Payable Calculations: $33300 ÷ 3 yrs = $11 100 per annum, 1.5 yrs remain $9510 ÷ 2 yrs= 4 755 per annum, 1 year remains $15 855 Prepayment of B4564 at 30/6/16 is $16 650 Prepayment of A2958 at 30/6/16 is 4 755 $ 21 405 Pre adjustment balance $ 37 260 Adjustment required to expense $ 15 855

$ Debit

$ Credit

15 855 15 855

30 Subscription Revenue Received in Advance Subscription Revenue Calculations: Apr 200 x $130 x 3/12 = $6 500 May 300 x $130 x 2/12 = 6 500 Jun 540 x $130x 1/12 = 5 850 Subscriptions earned and to be recognised as revenue $18 850

18 850

30 Interest Expense Interest Payable Calculation: $100,000 x 6% x 3/12 = $1 500

1 500

30 Salaries Expense Salaries Payable Calculations: 4 x $1050 x 2/5 = 3 x $1350 x 2/5 =

3 300

18 850

1 500

3 300 $1 680 1 620 $3 300

(b) Subscriptions are usually paid in advance and for revenue to be recognised it needs to meet the revenue recognition criteria. The revenue is recognised as the work is performed not when the cash is received.

3.16

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

SOLUTIONS TO PROBLEM SET A

PROBLEM SET A 3.1 Ewok Ltd General Journal (a).

Post Ref.

$ Debit

505 113

6 400

30 Electricity Expense Electricity Payable (Accrued electricity)

530 218

1 200

30 Insurance Expense Prepaid Insurance (Prepaid insurance expired ($9600 ÷ 12 mth x 2)

515 112

1 600

30 Service Revenue Received in Advance Service Revenue (Services performed in relation to revenue received in advance)

213 400

3 000

30 Salaries Expense Salaries Payable (Accrued salaries)

500 215

6 400

30 Depreciation Expense Accumulated Depreciation – Office Equipment (Record depreciation expense ($1440 x 2 ))

520 131

2 880

30 Accounts Receivable Service Revenue (Accrued revenue)

104 400

8000

Date Account Titles (Narration) 2015 June 30 Supplies Expense Supplies (To adjust supplies account to reflect supplies used ($13600 - $7200))

$ Credit

6 400

1 200

1 600

3 000

6 400

2 880

8 000

Students need to look and see what has been recorded in the ledgers to work out if one or two months adjustments are required. For insurance and depreciation no expense had been recorded to date.

3.17

Chapter 3: Accrual accounting concepts

(b) Ewok Ltd General ledger Cash 30/6

Balance

100

34 560 Accounts Receivable

30/6

Balance

26 040 30/6

30/6

Service Revenue

8 000

104 Balance

34 040

34 040 1/7

Opening Balance

34 040

34 040 Prepaid Insurance

30/6

Balance

9 600 30/6 30/6

112 Insurance Expense

1 600

Closing Balance

8 000

9 600 1/7

Opening Balance

9 600

8 000 Supplies

30/6

Balance

13 600 30/6 30/6

113 Supplies Expense

6 400

Closing Balance

7 200

13 600 1/7

Opening Balance

13 600

7 200 Office Equipment

30/6

Balance

130

86 400 Accumulated Depreciation – Office Equipment 30/6

131

Depreciation Expense

2 880

Accounts Payable 30/6

200 Balance

19 800

Service Revenue Received in Advance

213

30/6

Service Revenue

3 000 30/6

30/6

Closing Balance

1 800

Balance

4 800

4 800 1/7

Opening Balance

1 800

3.18

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Salaries Payable 30/6

215 Salaries Expense

6 400

Electricity Payable 30/6

218 Electricity Expense

1 200

Share Capital 30/6

300 Balance

100 000

Service Revenue

30/6

Closing Balance

400

30/6

Balance

76 600

30/6

Service Rev in Adv

3 000

Accounts Receivable

8 000

87 600 30/6 87 600

87 600 1/7

Opening Balance

87 600

Salaries Expense 30/6

Balance

23 800

30/6

Salaries Payable

6 400

500

30 200

Supplies Expense 30/6

Supplies

505

6 400 Rent Expense

30/6

Balance

510

7 200 Insurance Expense

30/6

Prepaid Insurance

515

1 600 Depreciation Expense

30/6

Accumulated Depreciation

520

2 880 Electricity Expense

30/6

Electricity Expense

530

1 200

3.19

Chapter 3: Accrual accounting concepts

Account Name

100 104 112 113 130 131 200 213 215 218 300 400 500 505 510 515 520 530

Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation – Office Equipment Accounts Payable Service Revenue Received in Advance Salaries Payable Electricity Payable Share Capital Service Revenue Salaries Expense Supplies Expense Rent Expense Insurance Expense Depreciation Expense Electricity Expense

Debit $ 34 560 34 040 8 000 7 200 86 400

Credit $

2 880 19 800 1 800 6 400 1 200 100 000 87 600 30 200 6 400 7 200 1 600 2 880 1 200 $219 680

$219 680

(d)

Profit for the month Revenues $87 600 less expenses ($30200+6400+7200+1600+2880+1200) = $38 120

(e)

If the cost of the equipment was allocated over the two years then the annual depreciation expense would be $43 200 ($86 400/2) instead of $17 280 which means profit in the first 2 years would be $25 920 ($43 200-$17280) less than if the depreciation was charged over the useful life and this would mean the profit in year 3 4 and 5 would be $17 280 more as no depreciation would be charged. Note over the 5 years total depreciation is the same is $86 400 either rate used.

3.20

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.2 (a) Maxi Services Ltd General Journal Date

Account Name (narration)

Post Ref.

$ Debit

$ Credit

2017 1.

June 30

Supplies Expense Supplies

505

500

113

500

(Supplies used $1500-$1000) 2.

Electricity Expense Electricity Payable

530

300

218

300

(Accrued expense) 3.

Insurance Expense Prepaid Insurance

515

1 600

112

1 600

(Prepaid insurance expired) 4.

Revenue Received in Advance

213

Service Revenue

400

Salaries Expense Salaries Payable

500

3 000 3 000 4 600

215

4 600

(Accrued salaries) 6.

Depreciation Expense Accumulated Depreciation

520

4 000

131

4 000

(Depreciation expense) 7.

Accounts Receivable Service Revenue

104

4 400

400

4 400

(Accrued revenue)

3.21

Chapter 3: Accrual accounting concepts

(b) MAXI SERVICES LTD GENERAL LEDGER Cash 30/6

Opening Balance

100

54 800

Accounts Receivable 30/6

Opening Balance

15 000

30/6

Service Revenue

4 400 30/6

104 Closing Balance

19 400

19 400 1/7

Opening Balance

19 400

19 400 Prepaid Insurance

30/6

Opening Balance

112

3 200 30/6

Insurance Expense

1 600

____ 30/6

Closing Balance

1 600

3 200 1/7

Opening Balance

3 200

1 600 Supplies

30/6

Opening Balance

113

1 500 30/6

Supplies Expense

500

____ 30/6

Closing Balance

1 000

1 500 1/7

Opening Balance

1 500

1 000 Office Equipment

30/6

Opening Balance

130

30 000

Accumulated Depreciation 30/6

Closing Balance

24 000

131

30/6

Opening Balance

20 000

30/6

Depreciation Expense

4 000

24 000

24 000 1/7

Opening Balance

24 000

Accounts Payable 30/6

200 Opening Balance

7 400

3.22

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Service Revenue Received in Advance

213

30/6

Service Revenue

3 000 30/6

Opening Balance

30/6

Closing Balance

1 000

........

4 000

4 000 1/7

4 000

Opening Balance

1 00

Salaries Payable 30/6

215 Salaries Expense

4 600

Electricity Payable 30/6

218 Electricity Expense

300

Share Capital

300

30/6

Opening Balance

60 000

Retained Earnings 30/6

310 Opening Balance

7 500

Service Revenue

400

30/6

Opening Balance

46 800

30/6

Serv. rev rec’d in advance

3 000

30/6

Accounts Receivable

4 400 54 200

30/6 30/6

30/6

30/6 30/6

Opening balance Salaries Payable

Supplies

Salaries Expense 34 000 4 600 38 600 Supplies Expense 500

500

505

510

Opening Balance

Rent Expense 2 000

515

Opening Balance Prepaid Insurance

Insurance Expense 1 200 1 600 2 800

3.23

Chapter 3: Accrual accounting concepts

30/6

30/6 30/6

Depreciation Expense Accumulated Depreciation 4 000

520

Electricity Expense 4 000 300 4 300

530

Opening balance Electricity Payable

Account name Cash

104

Accounts Receivable

19 400

112

Prepaid Insurance

1 600

113

Supplies

1 000

130

Office Equipment

30 000

131

Accumulated Depreciation

24 000

200

7 400

215

Accounts Payable Service Revenue Received in Advance Salaries Payable

218

Electricity Payable

300

Share Capital

60 000

310

Retained Earnings

7 500

400

Service Revenue

54 200

500

Salaries Expense

38 600

505

Supplies Expense

500

510

Rent Expense

2 000

515

Insurance Expense

2 800

520

Depreciation Expense

4 000

530

Electricity Expense

4 300

_______

$159 000

213

Debit $ Credit $ 54 800

1 000 4 600 300

3.24

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d) Profit for the year: $ Service revenue Less Expenses: Salaries expense Supplies expense Rent expense Insurance expense Depreciation expense Electricity expense Profit

38 600 500 2 000 2 800 4 000 4 300

$ 54 200

52 200 $ 2 000

(e) To report a higher profit the expense adjustments would be avoided therefore adjustment numbers 1, 2, 3, 5, and 6.

3.25

Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.3 (a)

Auckland Consulting Ltd General Journal Date Account name (narration) 2016 Sept 30 Rent Expense Prepaid Rent (To record expired rent)

Post Ref

Debit $

510 120

4 500

30 Supplies Expense Supplies (To record supplies consumed)

530 130

450

30 Depreciation Expense – Equipment Accumulated Depreciation – Equipment (To record depreciation expense)

520 151

2 250

30 Accounts Receivable Commission Revenue (To record commission revenue not yet received)

110 400

18 600

30 Interest Expense Interest Payable (To record interest accrued)

550 220

300

30 Rent Revenue Received in Advance Rent Revenue (To record services provided for revenue)

230 410

2 400

30 Salaries Expense Salaries Payable (To record accrued salaries)

500 210

4 200

Credit $

4 500

450

2 250

18 600

300

2 400

4 200

3.26

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) Auckland Consulting Ltd Statement of profit or loss for the three months ended 30 September 2016 $ Revenues: Rent revenue Commission revenue Total revenues Expenses: Salaries expense Rent expense Depreciation expense Supplies expense Electricity expense Interest expense Total expenses Profit

$ 32 400 22 200 54 600

28 200 19 500 2 250 450 1 530 300 52 230 $ 2 370

Auckland Consulting Ltd Calculation of retained earnings for the three months ended 30 September 2016 Retained earnings, 1 July Add: Profit Less: Dividends Retained earnings, 30 September

2 370 2 370 (1 800) $ 570

3.27

Chapter 3: Accrual accounting concepts

Auckland Consulting Ltd Statement of financial position as at 30 September 2016 $ Assets Current assets Cash Accounts receivable Supplies Total current assets Non-current assets Equipment Less: Accumulated depreciation – equipment Total assets Liabilities Accounts payable Salaries payable Interest payable Rent revenue received in advance Bank loan* Total liabilities Net Assets Equity: Share capital Retained earnings Total equity

4 950 19 800 900 25 650 45 000 (2 250)

42 750 68 400

4 530 4 200 300 1 800 15 000 25 830 $42 570 42 000 570 $42 570

* bank loan could also be classified as non-current

(c)

The following accounts would be closed: Commission Revenue, Rent Revenue, Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense, Electricity Expense, Interest Expense, Dividends.

(d)

1 August 2016. Interest of 12% per year equals a monthly rate of 1%; monthly interest is $150 ($15000 x 1%). Since total interest expense is $300, the loan has been outstanding for two months.

3.28

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.4 (a) Frog Ltd General Journal Date Account name (narration) 2015 June 30 Accounts Receivable Revenue (To record revenue not yet received)

Post Ref 110 400

900

30 Office Supplies Expense Office Supplies (To record supplies consumed)

510 120

2 400

30 Insurance expense Prepaid Insurance (To record insurance expense)

530 130

2 250

30 Depreciation Expense – Equipment Accumulated Depreciation – Equipment (To record depreciation expense)

540 141

1 800

30 Salaries Expense Salaries Payable (To record accrued salaries)

500 210

1 650

30 Rent Revenue Received in Advance Rent Revenue (To record services provided for revenue)

220 410

1 200

Debit $

Credit $

900

2 400

2 250

1 800

1 650

1 200

3.29

Chapter 3: Accrual accounting concepts

(b) Frog Ltd Statement of profit or loss for the year ended 30 June 2015 $ Revenues: Service revenue Rent revenue Total revenues Expenses: Salaries expense Office Supplies expense Rent expense Insurance expense Depreciation expense Total expenses Profit

$ 51 900 17 700 69 600

27 150 2 400 22 000 2 250 1 800 55 600 $14 000

Frog Ltd Calculation of retained earnings for the year ended 30 June 2015 Retained earnings, 1 July Add: Profit Less: Dividends Retained earnings, 30 September

5 600 14 000 19 600 (-) $19 600

3.30

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Frog Ltd Statement of financial position as at 30 June 2015 $ Assets Current assets Cash Accounts receivable Office supplies Prepaid insurance Total current assets Non-current assets Equipment Less: Accumulated depreciation – equipment Total non-current assets Total assets Liabilities Accounts payable Salaries payable Rent revenue received in advance Total liabilities Net Assets Equity Share capital Retained earnings Total equity

14 500 14 100 1 050 3 750 33 400 18 000 (5 400) 12 600 46 000 8 700 1 650 1 050 11 400 $34 600 15 000 19 600 $34 600

3.31

Chapter 3: Accrual accounting concepts

(c) Frog Ltd General Journal Date Account name (narration) 2015 June 30 Service Revenue Rent revenue Profit or loss summary (To close revenue accounts)

Post Ref

Debit $

400 410 330

51 900 17 700

30 Profit or loss summary Salaries expense Office Supplies expense Rent expense Insurance expense Depreciation expense (To close expense accounts)

330 500 510 520 530 540

55 600

30 Profit or loss summary Retained earnings (To close profit to retained earnings)

330 310

14 000

Credit $

69 600

27 150 2 400 22 000 2 250 1 800

14 000

3.32

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.5 (a)

Nathan Ltd General Journal Date Account name (narration) 2016 Sept 30 Accounts Receivable Sales Revenue (To record Sales revenue)

Post Ref

$ Debit

110 400

7 500

30 Rent Expense Prepaid Rent (To record expired rent )

510 120

7 500

30 Supplies Expense Supplies (To record supplies consumed)

530 130

4 500

30 Depreciation Expense – Equipment Accumulated Depreciation – Equipment (To record depreciation expense)

520 151

6 000

30 Salaries Expense Salaries Payable (To record accrued salaries)

500 210

10 800

30 Interest Expense Interest Payable (To record interest accrued)

550 220

900

30 Comm Revenue Received in Advance Commission Revenue (To record services provided for revenue)

230 410

6 600

$ Credit

7 500

4 500

6 000

10 800

900

6 600

3.33

Chapter 3: Accrual accounting concepts

(b) Nathan Ltd Statement of profit or loss for the three months ended 30 September 2016 $ Revenues: Sales revenue Commission revenue Total revenues Expenses: Salaries expense Rent expense Depreciation expense Supplies expense Electricity expense Interest expense Total expenses Profit

$ 85 200 51 600 136 800

65 100 22 500 6 000 4 500 5 250 900 104 250 $32 550

Nathan Ltd Calculation of retained earnings for the three months ended 30 September 2016 Retained earnings, 1 July Add: Profit Less: Dividends Retained earnings, 30 September

$ 32 550 32 550 (3 000) $29 550

3.34

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Nathan Ltd Statement of financial position as at 30 September 2016 $ Assets Current assets Cash Accounts receivable Prepaid Rent Supplies Total current assets Non-current assets Equipment Less: Accumulated depreciation – equipment Total assets Liabilities Accounts payable Salaries payable Interest payable Commission revenue received in advance Bank loan* Total liabilities Net Assets Equity Share capital Retained earnings Total equity

114 450 12 900 15 000 4 500 146 850 120 000 (6 000)

114 000 260 850

19 200 10 800 900 5 400 90 000 126 300 $134 550 105 000 29 550 $134 550

* bank loan could also be classified as non-current

(c)

The following accounts would be closed: Sales Revenue, Commission Revenue, Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense, Electricity Expense, Interest Expense, Dividends.

(d)

1 August 2016. Interest of 6% per year on loan $90 000 = $5 400. Monthly interest is $450 ($5400/12) Since total interest expense is $900, the loan has been outstanding for two months.

(e)

Useful live-need to calculate the depreciation rate. Three months depreciation was $6 000 or $24 000 annually. Useful life = cost/annual depreciation = $120 000/$24 000= Five years

3.35

Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.6 (a) Characters Ltd General Journal Date Account name (narration) 2017 June 30 Insurance Expense Prepaid Insurance (To record expired insurance)

Post Ref

Debit $

505 120

950

30 Supplies Expense Supplies (To record supplies consumed)

530 130

3 800

30 Depreciation Expense – Equipment Accumulated Depreciation – Equipment (To record depreciation expense)

520 151

7 840

30 Accounts Receivable Revenue (To record commission revenue not yet received)

110 400

1 680

30 Interest Expense Interest Payable (To record interest accrued)

510 220

120

30 Revenue Received in Advance Revenue (To record services provided for revenue)

230 400

1 570

30 Salaries Expense Salaries Payable (To record accrued salaries)

500 240

1 400

Credit $

950

3 800

7 840

1 680

120

1 570

1 400

3.36

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) Characters Ltd Statement of profit or loss for the year ended 30 June 2017 $ : Revenue Expenses: Salaries expense Insurance expense Interest expense Depreciation expense Supplies expense Rent expense Total expenses Profit

$ 68 880

12 600 950 720 7 840 3 800 4 480 30 390 $38 490

Characters Ltd Calculation of retained earnings for the year ended 30 June 2017 Retained earnings, 1 July 2016 Add: Profit Less: Dividends Retained earnings, 30 June 2017

$6 160 38 490 44 650 (13 440) $31 210

3.37

Chapter 3: Accrual accounting concepts

Characters Ltd Statement of financial position as at 30 June 2017 $ Assets Current assets Cash Accounts receivable Supplies Prepaid Insurance Total current assets Non-current assets Equipment Less: Accumulated depreciation Total non-current assets Total assets Liabilities Current liabilities Accounts payable Salaries payable Interest payable Revenue received in advance Total current liabilities Non-current liabilities Bank loan Total liabilities Net Assets Equity Share capital Retained earnings Total equity

24 520 24 080 5 600 2 800 57 000 67 200 (39 200) 28 000 85 000

5 600 1 400 120 6 270 13 390 18 000 31 390 $53 610 22 400 31 210 $53 610

(c)

The following accounts would be closed: Revenue, Salaries Exp, Insurance Exp, Interest Exp, Depreciation Exp, Supplies Exp, Rent Exp, and Dividends.

(d)

The total interest expense for the six months is $720. So annually the interest is $1440. Rate is $1 440 ÷ $18 000 = 8%.

(e)

O/B? + exp$12 600 –Paid $13 400 = C/B $1 400 Opening balance 30 June 2016 = $2 200

(f)

The effect on profit was to reduce profit by $10 860 ( $950+3800+7840 - 1680 +120 – 1570 + 1400).

3.38

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(g)

Information concerning the future forecast for the next year. What has been budgeted for sales and expenses? Any new markets for the business? Who are the major competitors? and what are the general economic conditions?

3.39

Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.7 Smart Rentals Ltd Worksheet as at 30 June 2017 (a) Trial Balance No. 100 112 113 120 122 123 130 131 200 212 214 215 220 300 400 505 506 510 512 515 525 530

Account names Cash Prepaid Insurance Supplies Land Building Acc’d Depn – Building Furniture Acc’d Depn –Furniture Accounts Payable Rent Rev Rec’d in Adv Salaries Payable Interest Payable Mortgage Payable Share Capital Rent Revenue Advertising Expense Depreciation Expense Electricity Expense Insurance Expense Interest Expense Salaries Expense Supplies Expense

Dr $ 15 000 10 800 11 400 90 000 420 000

Cr $

Adjustments Dr $

Cr $ 2 700 4 200

1 2

5 400

4 500

1 800 3 150

5 6 4

9 000

100 800 28 200 21 600

9 000

210 000 360 000 55 200 3 000 9 900

2 700 3150 1 800 4 200 $30 750

1 4 6 2

6 000

18 000 $675 000

$675 000

$30 750

Adjusted Trial Balance. Dr $ C $r 15 000 8 100 7 200 90 000 420 000 5 400 100 800 4 500 28 200 12 600 1 800 3 150 210 000 360 000 64 200 3 000 9 900 6 000 2 700 3 150 19 800 4 200 $689 850 $689 850

Profit

Statement of profit or loss Dr $ Cr $

64 200 3 000 9 900 6 000 2 700 3 150 19 800 4 200 15 450 $64 200

3.40

Statement of financial position Dr $ Cr $ 15 000 8 100 7 200 90 000 420 000 5 400 100 800 4 500 28 200 12 600 1 800 3 150 210 000 360 000

$64 200

$641 100

15 450 $641 100

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) Smart Rentals Ltd General Journal

Date Account name (narration) 2017 June 30 Insurance expense Prepaid Insurance (To record expired insurance)

Post Ref

Debit $

512 112

2 700

30 Supplies Expense Supplies (To record supplies consumed)

530 113

4 200

30 Depreciation Expense Accumulated Depreciation – Building Accumulated Depreciation – Furniture (To record depreciation expense for 3 months)

506 123 131

9 900

30 Interest Expense Interest Payable (To record interest accrued ($210,000 x6%)x3/12)

512 215

3 150

30 Rent Revenue Received in Advance Rent Revenue (To record June rent)

212 400

9 000

30 Salaries Expense Salaries Payable (To record accrued salaries)

525 214

1 800

Credit $

2 700

4 200

5 400 4 500

3 150

9 000

1 800

3.41

Chapter 3: Accrual accounting concepts

Smart Rentals Ltd General Ledger Cash Balance

100

15 000 Prepaid Insurance

30/6

Balance

10 800 30/6 30/6

112 Insurance Expense

2 700

Closing Balance

8 100

10 800 1/7

Opening Balance

10 800

8 100 Supplies

30/6

Balance

11 400 30/6 30/6

113 Supplies Expense

4 200

Closing Balance

7 200

11 400 1/7

Opening Balance

11 400

7 200 Land

30/6

Balance

120

90 000 Building

30/6

Balance

122

420 000 Accumulated Depreciation – Building 30/6

123

Depreciation Expense

5 400

Furniture 30/6

Balance

130

100 800 Accumulated Depreciation – Furniture 30/6

131

Depreciation Expense

4 500

Accounts Payable 30/6

200 Balance

28 200

Rent Revenue Received in Advance

212

30/6

Rent Revenue

9 000 30/6

30/6

Closing Balance

12 600

Balance

21 600

21 600 1/7

Opening Balance

12 600 3.42

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Salaries Payable 30/6

214 Salaries Expense

1 800

Interest Payable 30/6

215 Interest Expense

3 150

Mortgage Payable 30/6

220 Balance

210 000

Share Capital 30/6

300 Balance

360 000

Rent Revenue

400

30/6

Balance

55 200

30/6

Rent Revenue in Advance

9 000 64 200

Advertising Expense 30/6

Balance

505

3 000 Depreciation Expense

30/6

Accumulated Depreciation

506

9 900 Electricity Expense

30/6

Balance

510

6 000 512 Insurance Expense

30/6

Prepaid Insurance

2 700 515 Interest Expense

30/6

Interest Payable

3 150 525 Salaries Expense

30/6

Balance

18 000

30/6

Salaries Payable

1 800 19 800 Supplies Expense

30/6

Supplies

530

4 200

3.43

Chapter 3: Accrual accounting concepts

(d)

No. 100 112 113 120 122 123 130 131 200 212 214 215 220 300 400 505 506 510 512 515 525 530

Smart Rentals Ltd Adjusted Trial Balance as at 30 June 2017 Account names Debit $ Cash 15 000 Prepaid Insurance 8 100 Supplies 7 200 Land 90 000 Building 420 000 Accumulated Depreciation – Building Furniture 100 800 Accumulated Depreciation – Furniture Accounts Payable Rent Revenue Received in Advance Salaries Payable Interest Payable Mortgage Payable Share Capital Rent Revenue Advertising Expense 3 000 Depreciation Expense 9 900 Electricity Expense 6 000 Insurance Expense 2 700 Interest Expense 3 150 Salaries Expense 19 800 Supplies 4 200 $689 850

Credit $

5 400 4 500 28 200 12 600 1 800 3 150 210 000 360 000 64 200

$689 850

3.44

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(e) Smart Rentals Ltd Statement of profit or loss for the three months ended 30 June 2017 $ Revenues: Rent revenue Expenses: Advertising expense Depreciation expense Electricity expense Insurance expense Interest expense Salaries expense Supplies expense Total expenses Profit

$ 64 200

3 000 9 900 6 000 2 700 3 150 19 800 4 200 48 750 $ 15 450

Smart Rentals Ltd Calculation of retained earnings for the three months ended 30 June 2017 Retained earnings, 1 April Add: Profit Retained earnings, 30 June 2017

$ 15 450 $15 450

3.45

Chapter 3: Accrual accounting concepts

Smart Rentals Ltd Statement of financial position as at 30 June 2017 $ Assets Current Assets Cash Prepaid Insurance Supplies Total current assets Non-current assets Land Building Less: Accumulated depreciation Furniture Less: Accumulated depreciation Total non-current assets Total assets Liabilities Current Liabilities Accounts payable Rent revenue received in advance Salaries payable Interest payable Total current liabilities Non-current Liabilities Mortgage Payable Total liabilities Net Assets Equity Share capital Retained earnings Total equity

(f)

15 000 8 100 7 200 30 300 90 000 420 000 (5 400) 100 800 (4 500)

414 600 96 300 600 900 631 200

28 200 12 600 1 800 3 150 45 750 210 000 255 750 $375 450 360 000 15 450 $375 450

The following accounts would be closed: Rent Revenue, Advertising expense, Depreciation Expense, Electricity Expense, Insurance Expense, Interest Expense, Salaries Expense, Supplies Expense.

3.46

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.8 (a) Central Cleaning Ltd General Journal Account name (narration)

Date 2016 July 1

Post Ref

Debit $

100 300

60 000

170 100 200

48 000

Cleaning Supplies Accounts Payable (Purchased cleaning supplies)

120 200

3 600

Prepaid Insurance Cash (Paid insurance annual policy July 1)

130 100

14 400

Accounts Receivable Service Revenue (Invoiced customers)

110 400

15 720

Accounts Payable Cash (Paid accounts payable)

200 100

11 400

Salaries Expense Cash (Paid salaries)

540 100

9 600

Cash

100 110

12 000

110 400

10 800

500 100

1 200

315 100

2 250

Cash Share Capital (Issued shares for cash)

Truck Cash Accounts Payable (Purchased truck)

Accounts Receivable (Collected cash from customers on account) 25

Accounts Receivable Service Revenue (Invoiced customers) Petrol & Oil Expense Cash (Paid for petrol and oil) Dividends Cash (Paid cash dividend) .

Credit $

60 000

15 000 33 000

3 600

14 400

15 720

11 400

9 600

12 000

10 800

1 200

2 250

3.47

Chapter 3: Accrual accounting concepts

(b), (e) & (h)

1/7 21/7

Share Capital Accounts Receivable

Cash 60 000 1/7 12 000 5/7 18/7 20/7 31/7 31/7 31/7

1/8

Opening Balance

100 15 000 14 400 11 400 9 600 1 200

Motor Vehicles Prepaid Insurance Accounts Payable Salaries Expense Petrol & Oil Expense Dividends Closing Balance

2 250 18 150 72 000

72 000 18 150

Accounts Receivable 12/7 Service Revenue 15 720 21/7 Cash 25/7 Service Revenue 10 800 31/7 Service Revenue* 6 000 31/7 Closing Balance 32 520 1/8 Opening Balance 20 520 * (e) adjusting entry, balance was $14520 dr before adjusting entry

110 12 000 20 520 32 520

Cleaning Supplies 3/7 Accounts Payable 3 600 31/7 Cleaning Supplies Expense* 31/7 Closing Balance 3 600 1/8 Opening Balance 1 200 * (e) adjusting entry, balance was $3600 dr before adjusting entry

120 2 400 1 200 3 600

Prepaid Insurance 5/7 Cash 14 400 31/7 Insurance Expense* 31/7 Closing Balance 14 400 1/8 Opening Balance 13 200 * (e) adjusting entry, balance was $14 400 dr before adjusting entry

130 1 200 13 200 14 400

1/7

Cash/Accounts Payable

Truck 48 000

170

Accumulated Depreciation – Trucks 31/7 Depreciation Expense* * (e) adjusting entry, nil balance before adjusting entry

171 750

3.48

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

18/7 31/7

Cash Closing Balance

Accounts Payable 11 400 1/7 25 200 3/7 36 600 1/8 Salaries Payable 31/7

Opening Balance

200 33 000 3 600 36 600 25 200

Salaries Expense*

210 900

Motor Vehicles Cleaning Supplies

* (e) adjusting entry, nil balance before adjusting entry Share Capital 1/7

31/7 31/7

31/7

Dividends Closing Balance

Retained Earnings 2 250 31/7 14 220 16 470 1/8 Dividends 2 250 31/7

Cash

300 60 000

Cash

Profit or loss summary

310 16 470

Opening Balance

16 470 14 220

Retained Earnings

315 2 250

Profit or loss summary 320 31/7 Expenses 16 050 31/7 Revenue 32 520 31/7 Retained Earnings 16 470 35 520 35 520 Entries to this account are closing entries. It has a nil balance before and after closing entries because the balance, profit, is closed to retained earnings, Service Revenue 400 31/7 Profit or loss summary 32 520 12/7 Accounts Receivable 15 720 25/7 Accounts Receivable 10 800 31/7 Accounts Rec’ble* 6 000 32 520 32 520 * (e) Adjusting entry,$26 520 cr balance before adjusting entry, $32 520 cr after adjustment, before closing

31/7

Petrol & Oil Expense 1 200 31/7 Profit or loss summary

Cash

500 1 200

3.49

Chapter 3: Accrual accounting concepts

31/7

Cleaning Supplies*

Cleaning Supplies Expense 2 400 31/7 Profit or loss summary

510 2 400

* (e) Adjusting entry, nil balance before adjusting entry, $2400 dr after adjustment, before closing 6 31/7

Depreciation Expense Accumulated Depreciation* 750 31/7 Profit or loss summary

520 750

* (e) adjusting entry, nil balance before adjusting entry

31/7

Prepaid Insurance*

Insurance Expense 1 200 31/7 Profit or loss summary

530 1 200

* (e) Adjusting entry, nil balance before adjusting entry, $1200 dr after adjustment, before closing Salaries Expense 540 20/7 Cash 9 600 31/7 Profit or loss summary 10 500 31/7 Salaries Payable* 900 10 500 10 500 * (e) adjusting entry, $9600 dr balance before adjusting entry, $10 500 dr after adjusting entry before closing.

3.50

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Account name

100 110 120 130 170 171 200 210 300 310 400 500 510 520 530 540

Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Trucks Accumulated Depreciation – Trucks Accounts Payable Salaries Payable Share Capital Dividends Service Revenue Petrol & Oil Expense Cleaning Supplies Expense Depreciation Expense Insurance Expense Salaries Expense

(d) Date 1.

Debit $

(f) Adjusted

Credit $

18 150 14 520 3 600 14 400 48 000

Debit $ 18 150 20 520 1 200 13 200 48 000

750 25 200 900 60 000

25 200 60 000 2 250

2 250 26 520

1 200

9 600 $111 720

Central Cleaning Ltd General Journal Account name (narration) July 31 Accounts Receivable Service Revenue

Credit $

$111 720

32 520 1 200 2 400 750 1 200 10 500 $119 370

Post Ref. 110

$119 370

Debit $ 6 000

400

Credit $ 6 000

(Accrued revenue) 2.

Depreciation Expense Accumulated Depreciation

520

750

172

750

(Depreciation expense) 3.

Insurance Expense Prepaid Insurance

530

1 200

130

1 200

(Prepaid insurance expired) 4.

Cleaning Supplies Expense Cleaning Supplies

510

2 400

120

2 400

(Supplies used) 5.

Salaries Expense Salaries Payable

540

900

210

900

(Accrued salaries)

3.51

Chapter 3: Accrual accounting concepts

(g) Central Cleaning Ltd Statement of profit or loss for the month ended 31 July 2016 $ Revenues: Service revenue Expenses: Salaries expense Cleaning supplies expense Depreciation expense Petrol & Oil expense Insurance expense Total expenses Profit

$ 32 520

10 500 2 400 750 1 200 1 200 16 050 $16 470

Central Cleaning Ltd Calculation of retained earnings for the month ended 31 July 2016

Retained earnings 1 July Add: Profit Less: Dividends Retained earnings 31 July

$ 16 470 16 470 (2 250) $14 220

3.52

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Central Cleaning Ltd Statement of financial position as at 31 July 2016 $ ASSETS Current assets Cash Accounts receivable Cleaning supplies Prepaid insurance Total current assets Non-current assets Property, plant and equipment: Motor Vehicles Less: Accumulated depreciation Total non-current assets Total assets LIABILITIES Current liabilities Accounts payable Salaries payable Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

18 150 20 520 1 200 13 200 53 070

48 000 (750) 47 250 100 320

25 200 900 26 100 $74 220 60 000 14 220 $74 220

3.53

Chapter 3: Accrual accounting concepts

(h)

Central Cleaning Ltd General Journal

Date

Account name (narration)

Post

Debit $

Credit $

Ref

July 31

Service Revenue

400

Profit or loss summary

32 520

320

32 520

(Close revenue accounts) 31

Profit or loss summary

320

16 050

Petrol & Oil Expense

500

1 200

Cleaning Supplies Expense

510

2 400

Depreciation Expense

520

750

Insurance Expense

530

1 200

Salaries Expense

540

10 500

(Close expense accounts) 31

Profit or loss summary Retained Earnings

320

16 470

310

16 470

(Close Profit or loss summary account) 31

Retained Earnings

310

Dividends

315

2 250 2 250

(Close dividends account) (i) Central Cleaning Ltd Post-Closing Trial Balance as at 31 July 2016 No. 100 110 120 130 170 171 200 210 300 310

Account name Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Trucks Accumulated Depreciation – Trucks Accounts Payable Salaries Payable Share Capital Retained Earnings

Debit $ 18 150 20 520 1 200 13 200 48 000

$101 070

Credit $

750 25 200 900 60 000 14 220 $101 070

3.54

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(j)

Today’s society is aware of their social responsibility and as such business’s can only operate successfully if they meet society’s expectations and as such are willing to take actions which is socially responsible. This means using environmentally friendly resources even though it may not be the cheapest. Triple bottom line reporting means measuring success not only the economic return but also the environment and the social dimensions.

3.55

Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.9 (a) Chart of accounts: students may have different account numbers as long as they are grouped to sections of the ledger. 100 110 120 130 150 151 200 210 215 300 310 400 510 515 520 525

Cash Accounts receivable Supplies Prepaid rent Store equipment Accumulated Depreciation Accounts Payable Service Revenue Received in Advance Salaries Payable Share Capital Retained earnings Service Revenue Depreciation Expense Supplies Expense Salaries Expense Rent Expense

(b), (d) and (f) Bulwara Ltd General Ledger Cash

100

1/7

Opening Balance

5 000 8/7

Salaries Expense/Payable

10/7

Accounts Receivable

2 000 24/7 Accounts Payable

12/7

Service Revenue

27/7

Revenue Rec’d in Advance

2 000

800 24/7 Rent Expense/prepaid

800

1 300 25/7 Salaries Expense

3 000

31/7 Closing Balance

300

9 100 1/8

Opening Balance

3 000

9 100

300 Accounts Receivable

110

1/7

Opening Balance

5 600 10/7

Cash

2 000

27/7

Service Revenue

2 300 31/7

Closing Balance

5 900

7 900 1/8

Opening Balance

7 900

5 900

3.56

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Supplies

120

1/7

Opening Balance

2 000 31/7

Supplies Expense

2 200

17/7

Accounts Payable

3 400 31/7

Closing Balance

3 200

5 400 1/8

Opening Balance

5 400

3 200

Balance before adjusting entry $2000 + $3400 = $5400 Prepaid rent 24/7

Cash

130

400 Store Equipment

1/7

Opening Balance

20 000 31/7

15/7

Accounts Payable

8 000

150 Closing Balance

28 000

28 000 1/8

Opening Balance

28 000

Accumulated Depreciation – Store Equipment 31/7

Closing Balance

1/7

Opening Balance

31/7

Depreciation Expense

151 1 000 240

1 240

1 240 1/8

Opening Balance

1 240

Balance before adjusting entry $1000 Accounts Payable 24/7 31/7

Cash Closing Balance

200

2 000 1/7

Opening Balance

4 200

15/7

Store Equipment

8 000

Supplies

3 400

13 600 17/7 15 600

15 600 1/8

Opening Balance

13 600

Service Revenue Received in Advance 31/7

Service Revenue

600 1/7

31/7

Closing Balance

1 500 27/7

210

Opening Balance

800

Cash

1 300

3 100

3 100 1/8

Opening Balance

1 500

Balance before adjusting entry $800 + $1300 = $2100

3.57

Chapter 3: Accrual accounting concepts

Salaries Payable

215

8/7

Cash

1 000 1/7

Opening Balance

1 000

31/7

Closing Balance

1 000 31/7

Salaries Expense

1 000

1 000 1/8

Opening Balance

1 000

Balance before adjusting entry, $1000 - $100 = $0 Share Capital 1/7

300 Opening Balance

20 000

Retained Earnings 1/7

310 Opening Balance

5 600

Service Revenue

400

12/7

Cash

800

27/7

Accounts Receivable

31/7

Service Revenue in Advance

2 300 600 3 700

Balance before adjusting entry $800+ $2300 = $3100 Depreciation Expense 31/7

Accumulated Depreciation

510

240

Nil balance before adjusting entry Supplies Expense 31/7

Supplies

515

2 200

Nil balance before adjusting entry Salaries Expense 8/7

Cash

2 000

25/7

Cash

3 000

31/7

Salaries Payable

1 000

520

6 000 Balance before adjusting entry $2000 + $3000 = $5000 Rent Expense 24/7

Cash

525

400

3.58

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Bulwara Ltd General Journal Account name (narration)

2016 July 8

Post Ref

Debit $

Salaries Payable Salaries Expense Cash (Payment of salaries for June and July)

215 520 100

1 000 2 000

Cash

100 110

2 000

100 400

800

Store Equipment Accounts Payable (Purchased store equipment on account)

150

8 000

Supplies Accounts Payable (Purchased supplies on account)

120 200

3 400

Accounts Payable Cash (Paid creditors on account)

200 100

2 000

Rent Expense Prepaid rent Cash (Paid July/August rent)

525 130 100

400 400

Salaries Expense Cash (Paid salaries)

520 100

3 000

Accounts Receivable Service Revenue (To record service revenue)

110 400

2 300

Cash

100 210

1 300

Accounts Receivable (Cash received from customers on account) 12

Cash Service Revenue (To record service revenue)

July 27

Service Revenue Received in Advance (Received cash from customers in advance)

Credit $

3 000

2 000

800

8 000

3 400

2 000

800

3 000

2 300

1 300

3.59

Chapter 3: Accrual accounting concepts

(e) and (g) Bulwara Ltd Trial Balance as at 31 July 2016

No 100 110 120 130 150 151 200 210 215 300 310 400 510 515 520 525

Account names Cash Accounts Receivable Supplies Prepaid Rent Store Equipment Accumulated Depreciation Accounts Payable Service Revenue Received in Advance Salaries Payable Share Capital Retained Earnings Service Revenue Depreciation Expense Supplies Expense Salaries Expense Rent Expense

Unadjusted Debit $ Credit $ 300 5 900 5 400 400 28 000 1 000 13 600 2 100 20 000 5 600 3 100

5 000 400 $45 400

$45 400

Adjusted Debit $ Credit4 300 5 900 3 200 400 28 000 1 240 13 600 1 500 1 000 20 000 5 600 3 700 240 2 200 6 000 400 $46 640 $46 640

3.60

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(f)

Bulwara Ltd General Journal Date

Account names (narration)

Post Ref

Debit $

July 31 Supplies Expense Store Supplies ($5400 - $3200) (To record supplies used)

515 120

2 200

31 Salaries Expense Salaries Payable (To record accrued salaries)

520 215

1 000

31 Depreciation Expense Accumulated Depr. – Store Equipment (To record one month’s depreciation expense)

510 151

240

30 Service Revenue Received in Advance Service Revenue (To record revenue)

210 400

600

2 200

1 000

240

600

(h) Bulwara Ltd Statement of profit or loss for the month ended 31 July 2016 Revenues: Service revenue Expenses: Salaries expense Supplies expense Rent expense Depreciation expense Total expenses Loss

$ 3 700 6 000 2 200 400 240 8 840 ($5 140)

Bulwara Ltd Calculation of retained earnings for the month ended 31 July 2016 Retained earnings 1 July Less: Loss Retained earnings 31 July

Credit $

$ 5 600 (5140) $ 460

3.61

Chapter 3: Accrual accounting concepts

Bulwara Ltd Statement of financial position as at 31 July 2016 $ ASSETS Current Assets Cash Accounts receivable Supplies Prepaid Rent Total current assets Non-current assets Store equipment Less: Accumulated depreciation Total non-current assets Total assets LIABILITIES Accounts payable Salaries payable Service revenue received in advance Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

300 5 900 3 200 400 9 800 28 000 (1 240) 26 760 36 560

13 600 1 000 1 500 16 100 $20 460 20 000 460 $20 460

3.62

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.9 (i) Bulwara Ltd Worksheet as at 31 July 2016 .

No. 100 110 120 130 150 151 200 210 215 300 310 400 510 515 520 525

Account names Cash Accounts receivable Supplies Prepaid rent Store equipment Accumulated Depreciation Accounts Payable Service Rev Rec’d in Advance Salaries Payable Share Capital Retained earnings Service Revenue Depreciation Exp Supplies Expense Salaries Expense Rent Expense

Trial Balance

Adjustments

Dr $

Cr $

Adjusted Trial Balance. Dr $ Cr $ 300 5 900

Cr $

300 5 900 5 400 400 28 000

2 200

1 000 13 600 2 100

3 200 400 28 000

240

600 1 000

20 000 5 600 3 100

600 240 2 200 1 000

5 000 400

Statement of profit or loss Dr $ Cr $

3 200 400 28 000 1 240

1 240

13 600 1 500

1 000 20 000 5 600 3 700

1 000 20 000 5 600

240 2 200 6 000 400

3 700 240 2 200 6 000 400

Loss _______ $45 400

Totals

_______ $45 400

_______ $4 040

_______ $46 640

Statement of Financial Position Dr $ Cr $ 300 5 900

_______ $46 640

3.63

______ $8 840

5 140 ______ $8 840

5 140 _______ $42 940

______ $42 940

Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.10 (a)

Willard Cleaning Ltd General Journal Account name (narration)

Date 2017 April 1

Post Ref.

Debit $

100 300

37 500

Motor Vehicles Cash Accounts Payable (Purchased truck)

171 100 200

22 500

Cleaning Supplies Accounts Payable (Purchased cleaning supplies)

120 200

4 875

Prepaid Insurance Cash (Paid insurance annual policy July 1)

130 100

5 820

Accounts Receivable Service Revenue (Invoiced customers)

110 400

6 850

Accounts Payable Cash (Paid accounts payable)

200 100

12 125

Salaries Expense Cash (Paid salaries)

540 100

3 400

Cash

100 110

2 750

Accounts Receivable Service Revenue (Invoiced customers)

110 400

5 975

Petrol & Oil Expense Cash (Paid for petrol and oil) Dividends Cash (Paid cash dividend)

500 100

432

315 100

600

Cash Share Capital (Issued shares for cash)

Accounts Receivable (Collected cash from customers on account) 25

Credit $

37 500

12 500 10 000

4 875

5 820

6 850

12 125

3 400

2 750

5 975

432

600 3.64

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b), (e) & (h) Willard Cleaning Ltd General Ledger

1/4 23/4

Share Capital Accounts Receivable

1/5

Opening Balance

Cash 37 500 1/4 2 750 7/4 21/4 21/4 30/4 30/4 30/4 40 250 5 373

100 12 500 5 820 12 125 3 400 432 600 5 373 40 250

Motor Vehicles Prepaid Insurance Accounts Payable Salaries Expense Petrol & Oil Exp Dividends Closing Balance

Accounts Receivable 14/4 Service Revenue 6 850 23/4 Cash 25/4 Service Revenue 5 975 30/4 Service Revenue* 1 150 30/4 Closing Balance 13 975 1/8 Opening Balance 11 225 * (e) adjusting entry, balance was $10 075 dr before adjusting entry

110 2 750 11 225 13 975

Cleaning Supplies 5/4 Accounts Payable 4 875 30/4 Cleaning Supplies Exp* 30/4 Closing Balance 4 875 1/8 Opening Balance 750 * (e) adjusting entry, balance was $4 875 dr before adjusting entry

120 4 125 750 4 875

Prepaid Insurance 7/4 Cash 5 820 30/4 Insurance Expense* 30/4 Closing Balance 5 820 1/8 Opening Balance 5 335 * (e) adjusting entry, balance was $5 820 dr before adjusting entry

130

1/4

Cash/Accounts Payable

485 5 335 5 820

Motor vehicle 22 500

171

Accumulated Depreciation – Trucks 30/4 Depreciation Expense* * (e) adjusting entry, nil balance before adjusting entry

172 375

3.65

Chapter 3: Accrual accounting concepts

21/4 30/4

Cash Closing Balance

Accounts Payable 12 125 1/4 2 750 5/4 14 875 1/8 Salaries Payable 30/4

Opening Balance

200 10 000 4 875 14 875 2 750

Salaries Expense*

210 1 200

Motor Vehicles Cleaning Supplies

* (e) adjusting entry, nil balance before adjusting entry Share Capital 1/4

30/4 30/4

30/4

Dividends Closing Balance

Retained Earnings 600 30/4 3 358 3 958 1/8 Dividends 600 30/4

Cash

300 37 500

Cash

Profit or loss summary

310 3 958

Opening Balance

3 958 3 358

Retained Earnings

315 600

Profit or loss summary 320 30/4 Expenses 10 017 30/4 Revenue 13 975 30/4 Retained Earnings 3 958 13 975 13 975 Entries to this account are closing entries. It has a nil balance before and after closing entries because the balance, profit, is closed to retained earnings, Service Revenue 400 30/4 Profit or loss summary 13 975 14/4 Accounts Receivable 6 850 25/4 Accounts Receivable 5 975 30/4 Accounts Rec’ble* 1 150 13 975 13 975 * (e) Adjusting entry,$12825 cr balance before adjusting entry, $13975 cr after adjustment, before closing

30/4

Petrol & Oil Expense 432 30/4 Profit or loss summary

Cash

500 432

3.66

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

30/4

Cleaning Supplies*

Cleaning Supplies Expense 4 125 30/4 Profit or loss summary

510 4 125

* (e) Adjusting entry, nil balance before adjusting entry, $4 125 dr after adjustment, before closing

30/4

Depreciation Expense Accumulated Depreciation* 375 30/4 Profit or loss summary

520 375

* (e) adjusting entry, nil balance before adjusting entry

30/4

Prepaid Insurance*

Insurance Expense 4850 30/4 Profit or loss summary

530 485

* (e) Adjusting entry, nil balance before adjusting entry, $485 dr after adjustment, before closing Salaries Expense 540 21/4 Cash 3 400 30/4 Profit or loss summary 4 600 30/4 Salaries Payable* 1 200 4 600 4 600 * (e) adjusting entry, $3400 dr balance before adjusting entry, $4600 dr after adjusting entry before closing.

3.67

Chapter 3: Accrual accounting concepts

Account name

100 110 120 130 171 172

Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Motor Vehicles Accumulated Depreciation – Motor vehicles Accounts Payable Salaries Payable Share Capital Dividends Service Revenue Petrol & Oil Expense Cleaning Supplies Expense Depreciation Expense Insurance Expense Salaries Expense

200 210 300 310 400 500 510 520 530 540

Debit $

Credit $

5 373 10 075 4 875 5 820 22 500

(f) Adjusted Debit $

Credit $

5 373 11 225 750 5 335 22 500 375 2 750

2 750 1 200 37 500

37 500 600

600 12 825

432

3 400 $53 075

$53 075

13 975 432 4 125 375 485 4 600 $55 800

$55 800

3.68

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d) Date 1.

Willard Cleaning Ltd General Journal Account name (narration) April 30 Accounts Receivable Service Revenue

Post ref. 110

Debit $ 1 150

400

Credit $ 1 150

(Accrued revenue) 2.

Depreciation Expense Accumulated Depreciation

520

375

172

375

(Depreciation expense) 3.

Insurance Expense Prepaid Insurance

530

485

130

485

(Prepaid insurance expired) 4.

Cleaning Supplies Expense Cleaning Supplies

510

4 125

120

4 125

(Supplies used) 5.

Salaries Expense Salaries Payable

540

1 200

210

1 200

(Accrued salaries)

3.69

Chapter 3: Accrual accounting concepts

(g) Willard Cleaning Ltd Statement of profit or loss for the month ended 30 April 2017 $ Revenues: Service revenue Expenses: Salaries expense Cleaning supplies expense Depreciation expense Petrol & Oil expense Insurance expense Total expenses Profit

$ 13 975 4 600 4 125 375 432 485 10 017 $3 958

Willard Cleaning Ltd Calculation of retained earnings for the month ended 30 April 2017

Retained earnings 1 April Add: Profit Less: Dividends Retained earnings 30 April

3 958 3 958 ( 600) $3 358

3.70

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Willard Cleaning Ltd Statement of financial position as at 30 April 2017 $ ASSETS Current assets Cash Accounts receivable Cleaning supplies Prepaid insurance Total current assets Non-current assets Motor Vehicles Less: Accumulated depreciation Total non-current assets Total assets LIABILITIES Current liabilities Accounts payable Salaries payable Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

5 373 11 225 750 5 335 22 683 22 500 (375) 22 125 44 808

2 750 1 200 3 950 $40 858 37 500 3 358 $40 858

3.71

Chapter 3: Accrual accounting concepts

(h)

Willard Cleaning Ltd General Journal

Date

Account name (narration)

July 31

Service Revenue Profit or loss summary

Post Ref 400

Debit $

Credit $

13 975

320

13 975

(Close revenue accounts) 31

Profit or loss summary

320

10 017

Petrol & Oil Expense

500

432

Cleaning Supplies Expense

510

4 125

Depreciation Expense

520

375

Insurance Expense

530

485

Salaries Expense

540

4 600

(Close expense accounts) 31

Profit or loss summary Retained Earnings

320

3 958

310

3 958

(Close Profit or loss summary account) 31

Retained Earnings

310

Dividends

315

600 600

(Close dividends account) (i) Willard Cleaning Ltd Post-Closing Trial Balance as at 30 April 2017 No. 100 110 120 130 171 172 200 210 300 310

Account name Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Motor vehicles Accumulated Depreciation – MV Accounts Payable Salaries Payable Share Capital Retained Earnings

Debit $ 5 373 11 225 750 5 335 22 500

$45 183

Credit $

375 2 750 1 200 37 500 3 358 $45 183

3.72

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.10 (j) Willard Cleaning Ltd Worksheet as at 30 April 2017 Prepare +adjusting entries and adjusted trial balance using a worksheet.

No. 100 110 120 130 171 172 200 210 300 310 315 320 400 500 510 520 530 540

Account names Cash Accounts receivable Cleaning Supplies Prepaid insurance Motor vehicles Accumulated Depreciation Accounts Payable Salaries Payable Share Capital Retained earnings Dividends Profit or loss summary Service Revenue Petrol & oil expense Cleaning Supplies Expense Depreciation Expense Insurance Expense Salaries Expense

Trial Balance

Adjustments

Dr $

Cr $

5 373 10 075 4 875 5 820 22 500

Adjusted Trial Balance. Dr $ Cr $

Cr $

1 150 4 125 485

5 373 11 225 750 5 335 22 500

375

5 373 11 225 750 5 335 22 500 375 2 750 1 200 37 500

2 750 1 200 37 500 600

Statement of Statement of profit or loss Financial Position Dr $ Cr $ Dr $ Cr $

375 2 750 1 200 37 500

600 12 825

1 150

432

13 975 432 4 125 375 485 4 600

4 125 375 485 1 200

3 400

600 13 975 432 4 125 375 485 4 600 3 958

Profit Totals

$53 075

$7 335

$55 800

3.73

$55 800

$13 975

3 958 $13 975

$45 783

Chapter 3: Accrual accounting concepts

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 3.1 (a). Solo Ltd General Journal

Post Ref.

$ Debit

505 113

700

30 Electricity Expense Electricity Payable (Accrued electricity)

530 218

150

30 Insurance Expense Prepaid Insurance (Prepaid insurance ($2400 ÷ 12 months)

515 112

200

30 Service Revenue Received in Advance Service Revenue (Services performed in relation to revenue received in advance)

213 400

2 500

30 Salaries Expense Salaries Payable (Accrued salaries)

500 215

1 500

30 Depreciation Expense Accumulated Depreciation – Office Equipment ($15,000 ÷ 60 months) (Record depreciation expense for month)

520 131

250

30 Service revenue Receivable Service Revenue (Accrued revenue)

104 400

3 000

Date Account name (narration) 2016 June 30 Supplies Expense Supplies ($2000 - $1300) (To adjust supplies account to reflect supplies used)

$ Credit

700

150

200

2 500

1 500

250

3 000

3.74

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) General Ledger Solo Ltd Cash 30/6

Balance

100

7 750 Accounts Receivable

30/6

Balance

6 000 30/6

30/6

Service Revenue

3 000

104 Balance

9 000

9 000 1/7

Opening Balance

9 000

9 000 Prepaid Insurance

30/6

Balance

2 400 30/6 30/6

112 Insurance Expense

200

Closing Balance

2 200

2 400 1/7

Opening Balance

2 400

2 200 Supplies

30/6

Balance

2 000 30/6 30/6

113 Supplies Expense

700

Closing Balance

1 300

2 000 1/7

Opening Balance

2 000

1 300 Office Equipment

30/6

Balance

130

15 000 Accumulated Depreciation – Office Equipment 30/6

131

Depreciation Expense

250

Accounts Payable 30/6

200 Balance

4 500

Service Revenue Received in Advance

213

30/6

Service Revenue

2 500 30/6

30/6

Closing Balance

1 500

Balance

4 000

4 000 1/7

Opening Balance

1 500

Salaries Payable 30/6

215 Salaries Expense

1 500

3.75

Chapter 3: Accrual accounting concepts

Electricity Payable 30/6

218 Electricity Expense

150

Share Capital 30/6

300 Balance

21 750

Service Revenue

400

30/6 Balance

7 900

30/6 Accounts Receivable

3 000

30/6 Service Revenue in Advance

2 500 13 400

Salaries Expense 30/6

Balance

4 000

30/6

Salaries Payable

1 500

500

5 500 Supplies Expense 30/6

Supplies

505

700 Rent Expense

30/6

Balance

510

1 000 Insurance Expense

30/6

Prepaid Insurance

515

200 Depreciation Expense

30/6

Accumulated Depreciation

520

250

Electricity Expense 30/6

Electricity Expense

530

150

3.76

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Account name

100 104 112 113 130 131 200 213 215 218 300 400 500 505 510 515 520 530

Debit $ 7 750 9 000 2 200 1 300 15 000

Credit $

250 4 500 1 500 1 500 150 21 750 13 400 5 500 700 1 000 200 250 150 $43 050

$43 050

(d)

Profit for the month Revenues $13 400 less expenses ($5500 +$700 +$10500+ $200+ $250 + $150) = $5 600

(e)

If the cost of the equipment was allocated over the two years then the annual depreciation expense would be $7 500 ($15000/2) instead of $3 000 which means profit in the first 2 years would be $4 500 ($7500-$3000 ) less than if the depreciation was charged over the useful life and this would mean the profit in year 3 4 and 5 would be $4 500 more as no depreciation would be charged. Note over the 5 years total depreciation is the same is $15 000 either rate used.

3.77

Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.2 (a). Brothers Ltd General Journal Date 1.

Post Ref.

$ Debit

505 113

1 860

30 Electricity Expense Electricity Payable (Accrued electricity)

530 218

110

30 Insurance Expense Prepaid Insurance (Prepaid insurance( ($2520 ÷ 12 months)x 5 months))

515 112

1 050

30 Service Revenue Received in Advance Service Revenue (Services performed in relation to revenue received in advance)

213 400

800

30 Salaries Expense Salaries Payable (Accrued salaries)

500 215

770

30 Depreciation Expense Accumulated Depreciation – Office Equipment ($22500 ÷ 60 months x 5) (Record depreciation expense)

520 131

1 875

30 Accounts Receivable Service Revenue (Accrued revenue)

104 400

1 500

Account name (narration)

2016 June 30 Supplies Expense Supplies ($2350 - $490) (To adjust supplies account to reflect supplies used)

$ Credit

1 860

110

1 050

800

770

1 875

1 500

3.78

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b)

Brothers Ltd General Ledger Cash

30/6

Balance

100

9 480 Accounts Receivable

30/6

Balance

3 150 30/6

30/6

Service Revenue

1 500

104 Balance

4 650

4 650 1/7

Opening Balance

4 650

4 650 Prepaid Insurance

30/6

Balance

2 520 30/6 30/6

112 Insurance Expense

1 050

Closing Balance

1 470

2 520 1/7

Opening Balance

2 520

1 470 Supplies

30/6

Balance

2 350 30/6 30/6

113 Supplies Expense

1 860

Closing Balance

490

2 350 1/7

Opening Balance

2 350

490 Office Equipment

30/6

Balance

130

22 500 Accumulated Depreciation – Office Equipment 30/6

131

Depreciation Expense

1 875

Accounts Payable 30/6

200 Balance

1 550

Service Revenue Received in Advance

213

30/6

Service Revenue

800 30/6

30/6

Closing Balance

700

Balance

1 500

1 500 1/7

Opening Balance

700

Salaries Payable 30/6

215 Salaries Expense

770

3.79

Chapter 3: Accrual accounting concepts

Electricity Payable 30/6

218 Electricity Expense

110

Share Capital 30/6

300 Balance

20 000

Service Revenue

400

30/6

Balance

25 495

30/6

Accounts Receivable

1 500

30/6

Service Revenue in Advance

800 27 795

Salaries Expense 30/6

Balance

30/6

Salaries Payable

500

3 295 770 4 065 Supplies Expense

30/6

Supplies

505

1 860 Rent Expense

30/6

Balance

510

5 250 Insurance Expense

30/6

Prepaid Insurance

515

1 050 Depreciation Expense

30/6

Accumulated Depreciation

520

1 875

Electricity Expense 30/6

Electricity Expense

530

110

3.80

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d)

No.

Account name

100 104 112 113 130 131 200 213 215 218 300 400 500 505 510 515 520 530

Debit $ 9 480 4 650 1 470 490 22 500

Credit $

1 875 1 550 700 770 110 20 000 27 795 4 065 1 860 5 250 1 050 1 875 110 $52 800

$52 800

To report the higher profit the adjustments to accrue expense and not write down assets would be avoided hence depreciation, writing down supplies and the prepaid insurance, recognising salaries and electricity expense. The shareholders old and potential new shareholders and the creditors would be affected as they would make incorrect assumptions about the profitability and liquidity of the business

3.81

Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.3 (a) Matrix Ltd General Journal Date

Account name (narration)

Post Ref.

Debit $

2016 Sept. 30 Commission Receivable Commission Revenue (To record accrued commission revenue)

110 400

780

30 Rent Expense Prepaid Rent (To record expired prepaid rent)

510 120

780

30 Supplies Expense Supplies (To record supplies used)

530 130

260

30 Depreciation Expense Accumulated Depreciation – Equipment (To record depreciation expense)

520 151

455

30 Salaries Expense Salaries Payable (To record accrued salaries)

500 210

520

30 Interest Expense Interest Payable (To record accrued interest)

550 220

30 Rent Revenue Received in Advance Rent Revenue (To record revenue)

230 410

390

Credit $

780

260

455

520

390

3.82

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) Matrix Ltd Statement of profit or loss for the quarter ended 30 September 2016 $ Revenues: Commission revenue Rent revenue Total revenues Expenses: Salaries expense Rent expense Depreciation expense Supplies expense Electricity expense Interest expense Total expenses Profit

$ 18 980 910 19,890

12 220 1 950 455 260 663 65 15 613 $4 277

Matrix Ltd Calculation of retained earnings for the quarter ended 30 September 2016 $ Retained earnings 1 July Add: Profit Less: Dividends Retained earnings 30 September

0 4 277 4 277 (780) $3 497

3.83

Chapter 3: Accrual accounting concepts

Matrix Ltd Statement of financial position as at 30 September 2016 $ ASSETS Current assets Cash Accounts receivable Prepaid rent Supplies Total Current assets Non-current assets Equipment Less: Accumulated depreciation – equipment Total assets LIABILITIES Liabilities: Accounts payable Salaries payable Interest payable Rent revenue received in advance Bank loan Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

8 710 1 300 1 170 1 300 12 480 19 500 (455)

19 045 31 525

1 963 520 65 780 6 500 9 828 $21 697

18 200 3 497 $21 697

*bank loan could also be classified as non-current (c)

The following accounts would be closed: Commission Revenue, Rent Revenue, Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense, Electricity Expense, Interest Expense, Dividends.

(d)

31 August 2016. Interest of 12% per year equals a monthly rate of 1%; monthly interest is $65 ($6,500 x 1%). Since total interest expense is $65, the loan has been outstanding one month. OR Monthly interest is [$6,500 x .12) x 1/12] = $65 Since the total interest expense is $65, the company must have taken out the loan one month ago on 31 August 2016. (Alternatively, 1 September 2016)

3.84

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.4 (a)

Date

Aurora Pty Ltd General Journal Account name (narration)

June 30 Accounts Receivable Service Revenue (To accrue revenue) 30 Office Supplies Expense Office Supplies (Record use of supplies) 30 Insurance Expense Prepaid Insurance (to write down prepaid insurance) 30 Depreciation Expense Accumulated Depreciation – Office Equipment ( To record depreciation) 30 Salaries Expense Salaries Payable (to accrue salaries) 30 Rent Revenue Received in Advance Rent Revenue (to record rent revenue now earned) (b) Aurora Pty Ltd Statement of profit or loss for the year ended June 30 2017

Ref #

$ Debit

110 400

300

510 120

800

530 130

750

540 141

600

500 210

550

220 410

400

$ Revenues: Service revenue Rent revenue Total revenue Expenses: Salaries expense Office supplies expense Rent expense Insurance expense Depreciation expense Total expenses Profit

$ Credit

300

800

750

600

550

400

$ 17 300 5 900 23 200

9 050 800 7 500 750 600 18 700 $4 500

3.85

Chapter 3: Accrual accounting concepts

Aurora Pty Ltd Calculation of Retained Earnings for the year ended June 30 2017 $ 2 800 4 500 $ 7 300

Retained earnings, 1 July 2016 Add: Profit Retained earnings, 30 June 2017

Aurora Pty Ltd Statement of financial position as at 30 June 2017 $ ASSETS Current Assets Cash Service revenue receivable Office supplies Prepaid insurance Total current assets Non-Current Assets Office equipment Less: Accumulated depreciation – office equipment Total assets LIABILITIES Accounts payable Salaries payable Rent received in advance Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

5 200 4 700 350 1 250 11 500 7 000 (2 400)

4 600 16 100

2 900 550 350 3 800 $12 300

5 000 7 300 $12 300

3.86

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c)

Date

Aurora Pty Ltd General Journal Account name (narration)

June 30 Service Revenue Rent Revenue Profit or loss summary (Closing entry) 30 Profit or loss summary Salaries Expense Office Supplies Expense Rent Expense Insurance Expense Depreciation Expense (Closing entry ) 30 Profit or loss summary Retained Earnings (Closing Entry)

Ref #

Debit $

Credit $

17 300 5 900 23 200 18 700 9 050 800 7 500 750 600 4 500 4 500

3.87

Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.5 (a) McPherson Ltd General Journal Date Account name (narration) 2015 Mar 31 Accounts Receivable Sales Revenue (Accrues revenue) 31 Supplies Expense Supplies (Supplies used) 31 Rent Expense Prepaid Rent (Rent now expensed) 31 Depreciation Expense Acc’d Depreciation - Equipment (to record depreciation) 31 Interest Expense Interest Payable (Interest accrued) 31 Rent Revenue Received in Advance Rent Revenue (Rent revenue now earned) 31 Salaries Expense Salaries Payable (Accrued salaries)

Post Ref

Debit

110 400

5 500

530

900

Credit

5 500

4,760 510 120

2 000

520 151

1 750

550 220

250

230 410

500

500 210

1 800

2 000

1 750

250

1,960

1 800

(b) McPherson Ltd Statement of profit or loss for the 3 months ended 31 March 2015 $ Revenues: Sales revenue Rent revenue Expenses: Salaries expense Rent expense Depreciation expense Supplies expense Electricity expense Interest expense Total expenses Profit

$ 18 600 12 000 30 600

11 340 6 000 1 750 900 750 250 20 990 $ 9 610

3.88

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

McPherson Ltd Calculation of Retained Earnings for the 3 months ended 31 March 2015 Retained earnings, 1 January Add: Profit

$ 9 610 9 610 (600) $9 010

Less: Dividends Retained earnings, 31 December

McPherson Ltd Statement of financial position as at 31 March 2015 $ ASSETS Current Assets Cash Accounts receivable Supplies Total Current Assets Non-Current Assets Equipment Less: Accumulated Depreciation Total Non-Current Assets Total Assets LIABILITIES Current Liabilities Accounts Payable Interest Payable Salaries Payable Rent Revenue Received in Advance Total Current Liabilities Non-Current Liabilities Bank Loan Total Non-Current Liabilities Total Liabilities NET ASSETS EQUITY Share Capital Retained Earnings TOTAL EQUITY

15 750 6 800 600 23 150

32 000 (1 750) 30 250 53 400

1 840 250 1 800 500 4 390

15 000 15 000 19 390 $34 010

25 000 9 010 $34 010

3.89

Chapter 3: Accrual accounting concepts

(c)

Accounts to be closed: Sales Revenue and Rent Revenue, Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense, Electricity Expense, Interest Expense,

(d)

Loan was taken out 31 January 2015 or 1 February 2015. Bank loan $15 000 x 10%= $1,500 annually or $125 monthly. Interest expense is $250 so the loan was taken out 2 months before reporting date.

3.90

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.6 (a) Lou’s Advertising Agency Pty Ltd General Journal Date Account name (narration) 2017 Dec 31 Accounts Receivable Advertising Revenue (accrue revenue) 31 Art Supplies Expense Art Supplies (supplies used) 31 Insurance Expense Prepaid Insurance (insurance expired) 31 Depreciation Expense Acc’d Depreciation - Equipment (depreciation for year) 31 Interest Expense Interest Payable (Interest expense accrued) 31 Advertising Revenue Received in Advance Advertising Revenue (Revenue now earned) 31 Salaries Expense Salaries Payable (Salaries accrued)

Post Ref

Debit $

110 400

4 200

530 130

9 520

505 140

2 380

520 151

19 600

510 220

420

230 400

3 920

500 240

3 640

Credit $

4 200

9 520

2 380

19 600

420

3 920

3 640

(b) Lou’s Advertising Agency Pty Ltd Statement of profit or loss for the year ended 31 December 2017 $ Revenues: Advertising revenue Expenses: Salaries expense Depreciation expense Rent expense Art supplies expense Insurance expense Interest expense Total expenses Profit

$ 172 200

31 640 19 600 11 200 9 520 2 380 1 400 75 740 $96 460

3.91

Chapter 3: Accrual accounting concepts

Lou’s Advertising Agency Pty Ltd Calculation of Retained Earnings for the year ended 31 December 2017 Retained earnings, 1 January Add: Profit

$ 15 400 96 460 111 860 (33 600) $78 260

Less: Dividends Retained earnings, 31 December

Lou’s Advertising Agency Pty Ltd Statement of financial position as at 31 December 2017 ASSETS Current Assets Cash Accounts receivable Art supplies Prepaid Insurance Total Current Assets Non-Current Assets Printing Equipment Less: Accumulated Depreciation Total Non-Current Assets Total Assets LIABILITIES Current Liabilities Accounts Payable Interest Payable Salaries Payable Advertising Revenue Received in Advance Total Current Liabilities Non-Current Liabilities Bank Loan Total Non-Current Liabilities Total Liabilities NET ASSETS EQUITY Share Capital Retained Earnings TOTAL EQUITY

30 800 60 200 14 000 7 000 112 000

$168 000 (98 000) 70 000 182 000

14 000 420 3 640 15 680 33 740

14 000 14 000 47 740 $134 260

$56 000 78 260 $134 260

3.92

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c)

Accounts to be closed: Advertising Revenue, Salaries Expense, Depreciation Expense, Rent Expense, Art Supplies Expense, Insurance Expense, Interest Expense, Dividends

(d)

Annual Interest Rate on Bank Loan: Interest Expense for 10 months Interest Expense for 12 months Interest Rate Interest Rate

(e)

Salaries Payable on 31 December 2016: Salaries paid in 2017 Salaries Payable 31 December 2017 Salaries Expense for 2017 Salaries Payable 31 December 2016

(f)

= $1 400 = $1 680 =1 680 ÷ 14,000 = 12%

$31 200 3 640 34 840 (31 640) $ 3 200

The effect of profit from the adjustments is a net decrease of $ 27 440.

3.93

Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.7 (a) Palpatine Hotel Ltd Worksheet for month ended 31 May 2016 No. 100 112 113 120 122 123 130 131 200 212 214 215 220 300 400 505 506 510 512 515 525 530

Trial Balance

Adjustments

Dr $ 4 500 2 520 2 660 21 000 98 000

Dr $

Cr $

Cr $ 210 980

1 2

420

350

420 500

5 6 4

2 100

23 520 6 580 5 040

2 100

50 000 84 000 12 880 700 770

210 500 420 980 $4 980

1 4 6 2

1 400

4 200 $158 500

$158 500

$4 980

Adjusted Trial Balance. Dr $ C $r 4 500 2 310 1 680 21 000 98 000 420 23 520 350 6 580 2 940 420 500 50 000 84 000 14 980 700 770 1 400 210 500 4 620 980 $160 190 $160 190

Profit

Statement of profit or loss Dr $ Cr $

14 980 700 770 1 400 210 500 4 620 980 5 800 $14 980

3.94

Statement of financial position Dr $ Cr $ 4 500 2 310 1 680 21 000 98 000 420 23 520 350 6 580 2 940 420 500 50 000 84 000

$14 980

$151 010

5 800 $151 010

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.7 CONTINUED (b) The Palpatine Hotel Ltd General Journal Date Account Name (narration)

Post ref

Debit $

512 112

210

31 Supplies Expense Supplies (To record supplies consumed)

530 113

980

31 Depreciation Expense Accumulated Depreciation – Building Accumulated Depreciation –Furniture (To record monthly depreciation expense)

506 123 131

770

31 Interest Expense Interest Payable [($50,000 x 12%) x 1/12] (To record interest accrued)

515 215

500

31 Rent Revenue Received in Advance Rent Revenue (To record services provided for revenue)

212 400

2 100

31 Salaries Expense Salaries Payable (To record accrued salaries)

525 214

420

2016 May 31 Insurance Expense Prepaid Insurance (To record expired insurance)

Credit $

210

980

420 350

500

2 100

420

Balance

100

4 500 Prepaid Insurance

31/5

Balance

2 520 31/5 31/5

112 Insurance Expense

210

Closing Balance

2 310

2,520 1/6

Opening Balance

2 520

2 310

3.95

Chapter 3: Accrual accounting concepts

Supplies 31/5

Balance

2 660 31/5 31/5

113 Supplies Expense

980

Closing Balance

1 680

2 660 1/6

Opening Balance

2 660

1 680 Land

31/5

Balance

120

21 000 Building

31/5

Balance

122

98 000 Accumulated Depreciation – Building 31/5

123

Depreciation Expense

420

Furniture 31/5

Balance

130

23 520 Accumulated Depreciation – Furniture 31/5

131

Depreciation Expense

350

Accounts Payable 31/5

200 Balance

6 580

Rent Revenue Received in Advance

212

31/5

Rent Revenue

2 100 31/5

31/5

Closing Balance

2 940

Balance

5 040

5 040 1/6

Opening Balance

2 940

Salaries Payable 31/5

214 Salaries Expense

420

Interest Payable 31/5

215 Interest Expense

500

Mortgage Payable 31/5

220 Balance

50 000

3.96

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Share Capital 31/5

300 Balance

84 000

Rent Revenue

400

31/5

Balance

12 880

31/5

Rent Revenue in Advance

2 100 14 980

Advertising Expense 31/5

Balance

505

700 Depreciation Expense

31/5

Accumulated Depreciation

506

770

Electricity Expense 31/5

Balance

510

1 400 Insurance Expense

31/5

Prepaid Insurance

512

210 Interest Expense

31/5

Interest Payable

515

500 Salaries Expense

31/5

Balance

31/5

Salaries Payable

525

4,200 420 4 620 Supplies Expense

31/5

Supplies

530

980

3.97

Chapter 3: Accrual accounting concepts

(d) The Palpatine Hotel Ltd Adjusted Trial Balance as at 31 May 2016 No.

Account name

100 112 113 120 122 123 130 131 200 212 214 215 220 300 400 505 506 510 512 515 525 530

Cash Prepaid Insurance Supplies Land Building Accumulated Depreciation – Building Furniture Accumulated Depreciation – Furniture Accounts Payable Rent Revenue Received in Advance Salaries Payable Interest Payable Mortgage Payable Share Capital Rent Revenue Advertising Expense Depreciation Expense Electricity Expense Insurance Expense Interest Expense Salaries Expense Supplies Expense

Debit $ $ 4 500 2 310 1 680 21 000 98 000

Credit $ $

420 23 520 350 6 580 2 940 420 500 50 000 84 000 14 980 700 770 1 400 210 500 4 620 980 $160 190

$160 180

3.98

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(e) The Palpatine Hotel Ltd Statement of profit or loss for the month ended 31 May 2016 $ Revenues: Rent revenue Expenses: Salaries expense Electricity expense Supplies expense Advertising expense Interest expense Insurance expense Depreciation expense Total expenses Profit

$ $14 980

4 620 1 400 980 700 500 210 770 9 180 $5 800

The Palpatine Hotel Ltd Calculation of retained earnings for the month ended 31 May 2016 $ Retained earnings, 1 May 2016 Add: Profit Retained earnings, 31 May 2016

0 5 800 $5 800

3.99

Chapter 3: Accrual accounting concepts

The Palpatine Hotel Ltd Statement of financial position as at 31 May 2016 $ ASSETS Current assets Cash Prepaid insurance Supplies Total current assets Non-current assets Land Buildings Less: Accumulated depreciation – building Furniture Less: Accumulated depreciation – furniture Total non-current Total assets LIABILITIES Current Liabilities Accounts payable Rent revenue received in advance Salaries payable Interest payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

(f)

4 500 2 310 1 680 8 490 21 000 98 000 (420) 23 520 (350)

97 580 23 170 141 750 150 240

6 580 2 940 420 500 10 440 50 000

50 000 60 440 $89 800 84 000 5 800 $89,800

The following accounts would be closed: Rent Revenue, Salaries Expense, Electricity Expense, Advertising Expense, Interest Expense, Insurance Expense, Supplies Expense, Depreciation Expense

3.100

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.8 (a) Contract Cleaning Pty Ltd General Journal Account name (narration)

Date 2015 July 1

Post Ref.

$ Debit

100 300

27 000

Motor Vehicles Cash Accounts Payable (Purchased truck)

171 100 200

18 000

Cleaning Supplies Accounts Payable (Purchased cleaning supplies)

120 200

2 700

Prepaid Insurance Cash (Paid insurance)

130 100

3 600

Accounts Receivable Service Revenue (Invoiced customers)

110 400

7 500

Accounts Payable Cash (Paid accounts payable)

200 100

4 500

Salaries Expense Cash (Paid salaries)

540 100

3 600

Cash

100 110

4 200

Accounts Receivable Service Revenue (Invoiced customers)

110 400

6 000

Petrol & Oil Expense Cash (Paid for petrol and oil)

500 100

600

Dividends Cash (Paid cash dividend)

315 100

1 800

Cash Share Capital (Issued shares for cash)

Accounts Receivable (Collected cash from customers on account) 25

$ Credit

27 000

9 000 9 000

2 700

3 600

7 500

4 500

3 600

4 200

6 000

600

1 800

3.101

Chapter 3: Accrual accounting concepts

(b), (e) & (h)

1/7 21/7

Share Capital Accounts Receivable

1/8

Opening Balance

Cash 27 000 1/7 4 200 5/7 18/7 20/7 31/7 31/7 31/7 31 200 8 100

100 9 000 3 600 4 500 3 600 600 1 800 8 100 31 200

Motor Vehicles Prepaid Insurance Accounts Payable Salaries Expense Petrol & Oil Expense Dividends Closing Balance

Accounts Receivable 12/7 Service Revenue 7 500 21/7 Cash 25/7 Service Revenue 6 000 31/7 Service Revenue* 3 300 31/7 Closing Balance 16 800 1/8 Opening Balance 12 600 * (e) adjusting entry, balance was $9 300 dr before adjusting entry

3/7

Accounts Payable

Cleaning Supplies 2 700 31/7 31/7

110 4 200 12 600 16 800

Cleaning Supplies Expense* Closing Balance

2 700

120 900 1 800 2 700

1/8 Opening Balance 1 800 * (e) adjusting entry, balance was $2 700 dr before adjusting entry Prepaid Insurance 5/7 Cash 3 600 31/7 Insurance Expense* 31/7 Closing Balance 3 600 1/8 Opening Balance 3 300 * (e) adjusting entry, balance was $3 600 dr before adjusting entry 1/7

Cash/Accounts Payable

130 300 3 300 3 600

Motor Vehicles 18 000

171

Accumulated Depreciation – Motor Vehicles 31/7 Depreciation Expense* * (e) adjusting entry, nil balance before adjusting entry

172 600

3.102

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

18/7 31/7

Cash Closing Balance

Accounts Payable 4 500 1/7 7 200 3/7 11 700 1/8 Salaries Payable 31/7

Opening Balance

200 9 000 2 700 11 700 7 200

Salaries Expense*

210 1 200

Cash

300 27 000

Profit or loss summary

310 9 600

Opening Balance

9 600 7 800

Retained Earnings

315 1 800

Motor Vehicles Cleaning Supplies

* (e) adjusting entry, nil balance before adjusting entry Share Capital 1/7

31/7 31/7

31/7

Dividends Closing Balance

Retained Earnings 1 800 31/7 7 800 9 600 1/8 Dividends 1 800 31/7

Cash

Profit or loss summary 320 31/7 Expenses 7 200 31/7 Revenue 16 800 31/7 Retained Earnings 9 600 16 16 800 800 Entries to this account are closing entries. It has a nil balance before and after closing entries because the balance, profit, is closed to retained earnings, Service Revenue 400 31/7 P & L Summary 16 800 12/7 Accounts Receivable 7 500 25/7 Accounts Receivable 6 000 31/7 Accounts Receivable* 3 300 16 800 16 800 * (e) Adjusting entry,$13 500 cr balance before adjusting entry, $16 800 cr after adjustment, before closing

31/7

Petrol & Oil Expense 600 31/7 P & L Summary

Cash

500 600

3.103

Chapter 3: Accrual accounting concepts

31/7

Cleaning Supplies Expense Cleaning Supplies* 900 31/7 P & L Summary

510 900

* (e) Adjusting entry, nil balance before adjusting entry, $450 dr after adjustment, before closing

31/7

Depreciation Expense 600 31/7 P & L Summary

Accumulated Depreciation*

520 600

* (e) adjusting entry, nil balance before adjusting entry 31/7

Prepaid Insurance*

Insurance Expense 300 31/7 P & L Summary

530 300

* (e) Adjusting entry, nil balance before adjusting entry, $300 dr after adjustment, before closing Salaries Expense 540 20/7 Cash 3 600 31/7 P & L Summary 4 800 31/7 Salaries Payable* 1 200 4 800 4 800 * (e) adjusting entry $3 600 dr balance before adjusting entry, $4 800 dr after adjusting entry before closing (c) & (f) Contract Cleaning Pty Ltd Trial Balance as at 31 July 2015

No. 100 110 120 130 171 172 200 210 300 310 400 500 510 520 530 540

Account name Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Motor Vehicles Acc’ed Depreciation – M. Vehicles Accounts Payable Salaries Payable Share Capital Dividends Service Revenue Petrol & Oil Expense Cleaning Supplies Expense Depreciation Expense Insurance Expense Salaries Expense

3 600 $47 700

$47 700

(f) Adjusted Debit $ Credit $ 8 100 12 600 1 800 3 300 18 000 600 7 200 1 200 27 000 1 800 16 800 600 900 600 300 4 800 $52 800 $52 800

3.104

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d) Date 1.

General Journal Contract Cleaning Pty Ltd Account name (narration) Post Ref. July 31 Accounts Receivable 110 Service Revenue 400 (Accrued revenue) 31

Debit

Credit

3 300 3 300

Depreciation Expense Accumulated Depreciation (Depreciation expense)

520 172

600

Insurance Expense Prepaid Insurance (Prepaid insurance expired)

530 130

300

Cleaning Supplies Expense Cleaning Supplies (Supplies used)

510 120

900

Salaries Expense Salaries Payable (Accrued salaries)

540 210

1 200

600

300

900

1 200

(g) Contract Cleaning Pty Ltd Statement of profit or loss for the month ended 31 July 2015 $ Revenues: Service revenue Expenses: Salaries expense Cleaning supplies expense Depreciation expense Petrol & Oil expense Insurance expense Total expenses Profit

$ 16 800 4 800 900 600 600 300 7 200 $9 600

Contract Cleaning Pty Ltd Calculation of retained earnings for the month ended 31 July 2015 Retained earnings 1 July Add: Profit Less: Dividends Retained earnings 31 July .

$9 600 9 600 (1 800) $7 800 3.105

Chapter 3: Accrual accounting concepts

Contract Cleaning Pty Ltd Statement of financial position as at 31 July 2015 $

ASSETS Current assets Cash Accounts receivable Cleaning supplies Prepaid insurance Total current assets Non-current assets: Motor Vehicles Less: Accumulated depreciation Total non-current assets Total assets LIABILITIES Current liabilities: Accounts payable Salaries payable Total current liabilities NET ASSETS

18 000 (600)

EQUITY: Share capital Retained earnings TOTAL EQUITY

27 000 7 800

8 100 12 600 1 800 3 300 25 800

17 400 43 200

7 200 1 200 8 400 $34 800

$34 800

3.106

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(h) Contract Cleaning Pty Ltd General Journal closing entries Date

Account name (narration)

July 31

Service Revenue Profit or loss summary (Close revenue accounts)

Post Ref 400 320

Debit

Credit

16 800 16 800

Profit or loss summary Petrol & Oil Expense Cleaning Supplies Expense Depreciation Expense Insurance Expense Salaries Expense (Close expense accounts)

320 500 510 520 530 540

7 200

Profit or loss summary Retained Earnings (Close Profit or loss summary account)

320 310

9 600

Retained Earnings Dividends (Close dividends account)

310 315

1 800

600 900 600 300 4 800

9 600

1 800

(i) Contract Cleaning Pty Ltd Post-Closing Trial Balance as at 31 July 2015 No.

Account name

100 110 120 130 150 151 200 210 300 310

Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Motor Vehicles Accumulated Depreciation – Motor Vehicles Accounts Payable Salaries Payable Share Capital Retained Earnings

Debit $ 8 100 12 600 1 800 3 300 18 000

$43 800

(j)

Credit $

600 7 200 1 200 27 000 7 800 $43 800

After the adjusting entries reported profit increased by $300.

3.107

Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.9 (a) Chart of accounts: students may have different account numbers as long as they are grouped to sections of the ledger. 100 110 120 150 151 200 210 215 300 310 400 510 515 520 525

Cash Accounts receivable Supplies Store equipment Accumulated Depreciation Accounts Payable Service Revenue Received in Advance Salaries Payable Share Capital Retained earnings Service Revenue Depreciation Expense Supplies Expense Salaries Expense Rent Expense

3.108

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Naboo Equipment Ltd General Ledger (b), (d) and (f) Cash 1/11

Opening Balance

100

3 348 8/11

Salaries Expense/Payable

10/11 Accounts Receivable

1 440 20/11 Accounts Payable

12/11 Service Revenue

1 680 22/11 Rent Expense

29/11 Revenue Advance

Rec’d

1 320 3 000 360

660 25/11 Salaries Expense

1 200

30/11 Closing Balance

1 248

7,128 1/12

Opening Balance

7,128

1 248 Accounts Receivable

1/11

Opening Balance

27/11 Service Revenue 1/12

Opening Balance

110

3 012 10/11 Cash

1 440

1 080 30/11 Closing Balance

2 652

4,092

4 092

2 652 Supplies

1/11

Opening Balance

17/11 Accounts Payable 1/12

Opening Balance

120

1 200 30/11 Supplies Expense

1 080

1 800 30/11 Closing Balance

1 920

3 000

1 920 Store Equipment

1/11

Opening Balance

15/11 Accounts Payable

150

12 000 30/11 Closing Balance 3 600 15 600

1/12

Opening Balance

15 600 15 600

15 600 Accumulated Depreciation

30/11 Closing Balance

744 1/11

151

Opening Balance

600

30/11 Depreciation Expense

144

744

744 1/12

Opening Balance

744

Accounts Payable 20/11 Cash

3 000 1/11

30/11 Closing Balance

Opening Balance

2 520

15/11 Store Equipment

3 600

4 920 17/11 Supplies

1 800

7 920

7 920 1/12

200

Opening Balance

4 920 3.109

Chapter 3: Accrual accounting concepts

Service Revenue Received in Advance 30/11 Service Revenue

360 1/11

30/11 Closing Balance

780 29/11 Cash

210

Opening Balance

480 660

1 140

1 140 1/12

Opening Balance

780

Salaries Payable 8/11

Cash

215

600 1/11

30/11 Closing Balance

Opening Balance

600

600 30/11 Salaries Expense

600

1,200

1,200 1/12

Opening Balance

600

Share Capital 1/11

300 Opening Balance

12 000

Retained Earnings 1/11

310 Opening Balance

3 360

Service Revenue

400

12/11 Cash

1 680

27/11 Accounts Receivable

1 080

30/11 Service Revenue in Advance*

360 3 120

•

Adjusting entry balance before adjusting entry $ 2 760 Depreciation Expense

30/11 Accumulated Depreciation

510

144

Supplies Expense 30/11 Supplies

515

1 080 Salaries Expense

8/11

Cash

720

25/11 Cash

1 200

30/11 Salaries Payable

520

600 2 520

*balance before adjusting entry $ 1 920 Rent Expense 22/11 Cash

525

360

3.110

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Naboo Equipment Ltd General Journal Date

Account name (narration)

Post ref

Debit $

Credit $

2015 Nov 8

Salaries Payable Salaries Expense Cash (Payment of salaries for October & November)

215 520 100

600 720

Cash

100 110

1 440

100 400

1 680

Store Equipment Accounts Payable (Purchased store equipment on account) Supplies Accounts Payable (Purchased supplies on account)

150 200

3 600

120 200

1 800

Accounts Payable Cash (Paid creditors on account)

200 100

3 000

Rent Expense Cash (Paid November rent)

525 100

360

Salaries Expense Cash (Paid salaries)

520 100

1 200

Accounts Receivable Service Revenue (To record service revenue)

110 400

1 080

Cash

100 210

660

Accounts Receivable (Cash received from customers on account) 12

Cash Service Revenue (To record service revenue)

Service Revenue Rec’d in Advance (Received cash from customers for future services)

1 320

1 440

1 680

3 600

1 00

3 000

360

1 00

1 080

660

3.111

Chapter 3: Accrual accounting concepts

(e) & (g) Naboo Equipment Ltd Trial Balance as at 30 November 2015

Account name s Cash Accounts Receivable Supplies Store Equipment Accumulated Depreciation Accounts Payable Service Revenue Received in Advance Salaries Payable Share Capital Retained Earnings Service Revenue Depreciation Expense Supplies Expense Salaries Expense Rent Expense

Unadjusted Debit Credit

Adjusted Debit Credit

$1 248 2 652 3 000 15 600

$1 248 2 652 1 920 15 600 $ 600 4 920 1 140

$ 744 4 920 780 600 12 000 3 360 3 120

12,000 3 360 2 760

1 920 360 $24 780

$24 780

144 1 080 2 520 360 $25 524

$25 524

(f) Naboo Equipment Ltd General Journal Date

Account name (narration) 2015 1. Nov. 30 Supplies Expense Supplies ($3,000 - $1,920) (To record supplies used) 2.

Post ref

Debit $

515 120

1 080

30 Salaries Expense Salaries Payable (To record accrued salaries)

520 215

600

30 Depreciation Expense Accum Depreciation. (To record one month’s depreciation expense)

510 151

144

30 Service Revenue Received in Advance Service Revenue (To record revenue)

210 400

360

Credit $

1 080

600

144

360

3.112

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(g) Naboo Equipment Ltd Statement of profit or loss for the month ended 30 November 2015 Revenues: Service revenue Expenses: Salaries expense Supplies expense Rent expense Depreciation expense Total expenses Loss

$3 120 $2 520 1 080 360 144 4 104 ($ 984)

Naboo Equipment Ltd Calculation of retained earnings For the month ended 30 November 2015 Retained earnings 1 November Less: Loss Retained earnings 30 November

$3 360 (984) $2 376

Naboo Equipment Ltd Statement of financial position as at 30 November 2015 ASSETS Current Assets Cash Accounts receivable Supplies Total Current assets Non-current assets Store equipment Less: Accumulated depreciation Total assets LIABILITIES Accounts payable Salaries payable Service revenue received in advance Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

$ 1 248 2 652 1 920 5 820

15 600 (744)

14 856 20 676

4 920 600 780 6 300 $14 376

12 000 2 376 $14 376

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Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.9 (i) Naboo Equipment Ltd Worksheet as at 30 November 2015 Trial Balance

No. 100 110 120 150 151 200 210 215 300 310 400 510 515 520 525

Adjustments

Adjusted Trial Balance.

Statement profit or loss

Account names Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cash 1 248 1 248 Accounts receivable 2 652 2 652 Supplies 3000 1 080 1 920 Store equipment 15 600 15 600 Acc’d Depreciation 600 144 744 Accounts Payable 4 920 4 920 Service revenue rec’d in 1 140 360 780 advance Salaries Payable 600 600 Share Capital 12 000 12 000 Retained earnings 3 360 3 360 Service Revenue 2 760 360 3 120 Depreciation Expense 144 144 144 Supplies Expense 1 080 750 750 Salaries Expense 1 920 600 2 520 2 520 Rent Expense 360 9 200 9 200 Loss Totals

$24 780

$2 184

$25 524

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$25 524

$4 104

of Statement of Financial Position Cr $ Dr $ Cr $ 1 248 2 652 1 920 15 600 744 4 920 780 600 12 000 3 360 3 120

984

$4 104

$22 404

Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.10 On Call Services Ltd General Journal Account name (narration)

Date 2015 Sept 1

Post Ref.

Debit $

100 300

150 000

Motor Vehicles Cash Accounts Payable (Purchased truck)

171 100 200

90 000

Cleaning Supplies Accounts Payable (Purchased cleaning supplies)

120 200

18 600

Prepaid Insurance Cash (Paid insurance annual policy Sept1)

130 100

27 000

Accounts Receivable Service Revenue (Invoiced customers)

110 400

26 700

Accounts Payable Cash (Paid accounts payable)

200 100

55 500

Salaries Expense Cash (Paid salaries)

540 100

15 300

Cash

100 110

18 000

Accounts Receivable Service Revenue (Invoiced customers)

110 400

28 500

Petrol & Oil Expense Cash (Paid for petrol and oil) Dividends Cash (Paid cash dividend)

500 100

1980

315 100

900

Cash

Credit $

150 000

(Issued shares for cash) 1

Accounts Receivable (Collected cash from customers on account) 25

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45 000 45 000

18 600

27 000

26 700

55 500

15 300

18 000

28 500

1980

900

Chapter 3: Accrual accounting concepts

(b), (e) & (h) On Call Services Ltd General Ledger

1/9 23/9

Share Capital Accounts Receivable

1/10

Opening Balance

Cash 150 000 1/9 18 000 7/9 21/9 21/9 30/9 30/9 30/9 168 000 22 320

100 45 000 27 000 55 500 15 300 1 980 900 22 320 168 000

Motor Vehicles Prepaid Insurance Accounts Payable Salaries Expense Petrol & Oil Exp Dividends Closing Balance

Accounts Receivable 14/9 Service Revenue 26 700 23/9 Cash 25/9 Service Revenue 28 500 30/9 Service Revenue* 5 400 30/9 Closing Balance 60 600 1/10 Opening Balance 42 600 * (e) adjusting entry, balance was $37 200 dr before adjusting entry

110 18 000

Cleaning Supplies 5/9 Accounts Payable 18600 30/9 Cleaning Supplies Exp* 30/9 Closing Balance 18 600 1/8 Opening Balance 3 600 * (e) adjusting entry, balance was $18600 dr before adjusting entry

120 15 000 3 600 18 600

Prepaid Insurance 7/9 Cash 27 000 30/9 Insurance Expense* 30/9 Closing Balance 27 000 1/8 Opening Balance 24 750 * (e) adjusting entry, balance was $27000 dr before adjusting entry

130 2 250 24 750 27 000

1/9

Cash/Accounts Payable

42 600 60 600

Motor vehicle 90 000

171

Accumulated Depreciation – Trucks 30/9 Depreciation Expense* * (e) adjusting entry, nil balance before adjusting entry

172 1 500

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21/9 30/9

Cash Closing Balance

Accounts Payable 55 500 1/9 8 100 5/9 63 600 1/10 Salaries Payable 30/9

Opening Balance

200 45 000 18 600 63 600 8 100

Salaries Expense*

210 5 400

Motor Vehicles Cleaning Supplies

* (e) adjusting entry, nil balance before adjusting entry Share Capital 1/9

30/9 30/9

30/9

Dividends Closing Balance

Cash

Retained Earnings 900 30/9 18 270 19 170 1/10 Dividends 900 30/9

Cash

Profit or loss summary

300 150 000 310 19 170 19 170

Opening Balance

Retained Earnings

315 900

Profit or loss summary 320 30/9 Expenses 41 430 30/9 Revenue 60 600 30/9 Retained Earnings 19 170 60 600 60 600 Entries to this account are closing entries. It has a nil balance before and after closing entries because the balance, profit, is closed to retained earnings, Service Revenue 400 30/9 Profit or loss summary 60 600 14/9 Accounts Receivable 26 700 25/9 Accounts Receivable 28 500 30/9 Accounts Rec’ble* 5 400 60 600 60 600 * (e) Adjusting entry,$55 200 cr balance before adjusting entry, $20200 cr after adjustment, before closing

30/9

Cash

Petrol & Oil Expense 1 980 30/9 Profit or loss summary

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500 1 980

Chapter 3: Accrual accounting concepts

30/9

Cleaning Supplies*

Cleaning Supplies Expense 15 000 30/9 Profit or loss summary

510 15 000

* (e) Adjusting entry, nil balance before adjusting entry, $15000 dr after adjustment, before closing

30/9

Depreciation Expense Accumulated Depreciation* 1 500 30/9 Profit or loss summary

520 1 500

* (e) adjusting entry, nil balance before adjusting entry

30/9

Prepaid Insurance*

Insurance Expense 2 250 30/9 Profit or loss summary

530 2 250

* (e) Adjusting entry, nil balance before adjusting entry, $750 dr after adjustment, before closing Salaries Expense 540 21/9 Cash 15 300 30/9 Profit or loss summary 20 700 30/9 Salaries Payable* 5 400 20 700 20 700 * (e) adjusting entry, $15 30 dr balance before adjusting entry, $20 700 dr after adjusting entry before closing.

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Account name

100 110 120 130 171 172

200 210 300 310 400 500 510 520 530 540

(d) Date 1.

Debit $

22 320 37 200 18 600 27 000 90 000

Credit $

22 320 42 600 3 600 24 750 90 000 1 500 8 100

8 100 5 400 150 000

150 000 900

900 55 200

1 980

15 300 $213 300

General Journal Account name (narration) Sept 30

Credit $

(f) Adjusted

Accounts Receivable

$213 300

60 600 1 980 15 000 1 500 2 250 20 700 $225 600

Post Ref. 110

Service Revenue

$225 600

$ Debit 5 400

400

$ Credit 5 400

(Accrued revenue) 2.

Depreciation Expense

520

Accumulated Depreciation

1 500

172

1 500

(Depreciation expense) 3.

Insurance Expense

530

Prepaid Insurance

2 250

130

2 250

(Prepaid insurance expired) 4.

Cleaning Supplies Expense Cleaning Supplies

510

15 000

120

15 000

(Supplies used) 5.

Salaries Expense

540

Salaries Payable

210

(Accrued salaries)

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Chapter 3: Accrual accounting concepts

(g) On Call Services Ltd Statement of profit or loss for the month ended 30 September 2015 $ Revenues: Service revenue Expenses: Salaries expense Cleaning supplies expense Depreciation expense Petrol & Oil expense Insurance expense Total expenses Profit

$ 60 600

20 700 15 000 1 500 19 800 2 250 41 430 $19 170

On Call Services Ltd Calculation of retained earnings for the month ended 30 September 2015

Retained earnings 1 September Add: Profit Less: Dividends Retained earnings 30 September

$19 170 19 170 ( 900) $18 270

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On Call Services Ltd Statement of financial position as at 30 September 2015 $ ASSETS Current assets: Cash Accounts receivable Cleaning supplies Prepaid insurance Total current assets Non-current assets: Motor Vehicles Less: Accumulated depreciation Total non-current assets Total assets LIABILITIES Current liabilities: Accounts payable Salaries payable Total liabilities NET ASSETS EQUITY Share capital Retained earnings TOTAL EQUITY

22 320 42 600 3 600 24 750 93 270 90 000 (1 500) 88 500 181 770

8 100 5 400 13 500 $168 270 150 000 18 270 $168 270

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(h)

On Call Services Ltd General Journal Account name (narration)

Date

Post

Debit

Credit

Ref

July 31

Service Revenue

400

Profit or loss summary

60 600

320

60 600

(Close revenue accounts) 31

Profit or loss summary

320

41 430

Petrol & Oil Expense

500

1 980

Cleaning Supplies Expense

510

15 000

Depreciation Expense

520

1 500

Insurance Expense

530

2 250

Salaries Expense

540

20 700

(Close expense accounts) 31

Profit or loss summary Retained Earnings

320

19 170

310

19 170

(Close Profit or loss summary account) 31

Retained Earnings

310

Dividends

315

900 300

(Close dividends account) (i) On Call Services Ltd Post-Closing Trial Balance as at 30 September 2015 No. 100 110 120 130 171 172 200 210 300 310

Account name Cash Accounts Receivable Cleaning Supplies Prepaid Insurance Motor vehicles Accumulated Depreciation – MV Accounts Payable Salaries Payable Share Capital Retained Earnings

Debit $ 22 320 42 600 3 600 24 750 90 000

$183 270

Credit $

1 500 8 100 5 400 150 000 18 270 $183 270

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PROBLEM SET B 3.10 (j)

No. 100 110 120 130 171 172 200 210 300 310 315 320 400 500 510 520 530 540

Account names Cash Accounts receivable Cleaning Supplies Prepaid insurance Motor vehicles Accumulated Depreciation Accounts Payable Salaries Payable Share Capital Retained earnings Dividends Profit or loss summary Service Revenue Petrol & oil expense Cleaning Supplies Exp Depreciation Expense Insurance Expense Salaries Expense

On Call Services Ltd Worksheet as at 30 September 2015 Trial Balance Adjustments Adjusted Statement of profit Statement of Trial Balance. or loss Financial Position Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ 22 320 22 320 22 320 37 200 5 400 42 600 42 600 18 600 15 000 3 600 3 600 27 000 2 250 24 750 24 750 90 000 90 000 90 000 1 500 1 500 1 500 8 100

8 100 5 400 150 000

5 400 150 000 900

8 100 5 400 150 000

900 55 200

5 400

1 980

60 600 1 980 15 000 1 500 2 250 20 700

15 000 1 500 2 250 5 400

15 300

900 60 600 1 980 15 000 1 500 2 250 20 700

Profit

19 170 Totals

$213 300

$29 550

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$225 600

$60 600

19 170 $60 600

$61 390

Chapter 3: Accrual accounting concepts

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS

BUILDING BUSINESS SKILLS 3.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

Items that may have resulted in adjusting entries for accruals are: ▪ ▪ ▪ ▪ ▪ ▪

Franchise income (accrued, note 3.8.2) Royalties (accrued, note 3.8.4) Interest revenue (accrued, note 3.8.5) Income tax expense (accrued note 3.10 but explanation is somewhat obscure for introductory students) Employee benefits(Wages, salaries and annual leave) (accrued, note 3.21) Provisions (accrued, note 3.22)

(b)

The employee benefits provision was $3,383,000. The split between current and noncurrent is unclear .Other provisions of $167,000 are included and of total provisions $3,550,000 ($3,383,000 +$167,000) -- $3,109,000 is classified as current and $441,000 as non-current. There is also a note stating that $2,715,000 of the current employee benefit provisions relates to annual leave and long service leave which is not expected to be paid out within the next twelve months ( that is it is technically current but Dominos do not expect all employees to claim their leave entitlements within the next year.).

(c)

The statement of cash flows reports income taxes paid in 2013 of $11,796,000. The consolidated statement of profit or loss and other comprehensive income reports income tax expense of $12,108,000.

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BUILDING BUSINESS SKILLS 3.2

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

The different forms of revenue recorded by Domino’s are: Extract from Note 3.8 Revenue recognition of the 2013 Domino’s financial report: “3.8 REVENUE RECOGNITION Revenue is measured at the fair value of the consideration received or receivable. 3.8.1 Sale of goods Revenue from the sale of goods is recognised when the Consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods. 3.8.2 Franchise income Franchise income is recognised on an accrual basis in accordance with the substance of the relevant agreement. 3.8.3 Rendering of services Service revenue relates primarily to store building services and is recognised by reference to the stage of completion of the contract. 3.8.4 Royalties Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Consolidated entity and the amount of revenue can be measured reliably). Royalties determined on a time basis are recognised on a straight-line basis over the period of the agreement. Royalty arrangements that are based on sales and other measures are recognised by reference to the underlying arrangement. 3.8.5 Dividend and interest revenue Dividend revenue from investments is recognised when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Consolidated entity and the amount of revenue can be reliably measured). Interest revenue is recognised when it is probable that the economic benefits will flow to the Consolidated entity and the amount of revenue can be measured reliably. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.”

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(b)

The recognition of revenue for the sale of goods is consistent with the principles of recognition discussed in the chapter. As stated in the chapter: IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: (a)

the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b)

the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c)

the amount of revenue can be recognised reliably;

(d)

it is probable that the economic benefits of the revenue will flow to the entity; and

(e)

the costs incurred or to be incurred in respect of the transaction can measured

reliably.’

Students should notice that the wording in the Dominos accounts are similar to the accounting standard applicable at the date the accounts were prepared. . Note the new accounting standard for revenue recognition was released in May 2014 and is IFRS 15 ‘Revenue from Contracts with Customers’ which is effective from reporting periods 1 January 2017 but may be adopted earlier. In the new standard a five step model framework is used. Essentially revenue is recognised when an entity satisfies a performance obligation. The following conditions must be met: o the contract has been approved by parties to the contract o each parties rights in relation to the goods to be transferred has been identified o the payment terms have been identified o the contract has commercial substance; and o it is probable that the consideration to which the entity is entitled to in exchange for the goods will be collected.

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(c)

The distinction between revenue and other income flows from the source. In Chapter 1 the textbook explains the definition from the conceptual Framework. Income encompasses both revenue and other gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. You examined the definition and recognition criteria for these items in your answer to part (a) .

Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in this Framework. Gains include, for example, those arising on the disposal of non-current assets. See Note 8 of the Domino’s financial statements.

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Chapter 3: Accrual accounting concepts

BUILDING BUSINESS SKILLS 3.3

INTERPRETING FINANCIAL STATEMENTS Micro Ltd General Journal

(a)

(Amounts in millions) Account name (narration)

Depreciation Expense Accumulated Depreciation (Depreciation for the year) Office Supplies Expense Office Supplies (To record office supplies used) Administrative Salaries Expense R&D salaries Expense Salaries Payable (To accrue salaries) Insurance Expense Prepaid Insurance (balance of Prepaid Insurance now expired)) Rent Expense Prepaid Rent (Prepaid rent now expensed) Interest Expense Interest Payable (To accrue interest expense)

Debit $ $M 50

Credit $ $M 50

2 2 15 15 30 4 4

12 12 20 20

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(b)

The accounts are considered in the order of the journal entries:

General Ledger Account

Statement of profit or loss Item

Depreciation Expense Accumulated Depreciation Office Supplies Expense Office Supplies Administrative Salaries Expense R&D Salaries Expense Salaries Payable Insurance Expense Prepaid Insurance Rent Expense Prepaid Rent Interest Expense Interest Payable

Selling general and administrative N/A (statement of financial position) Selling, general and administrative N/A (statement of financial position) Selling, general and administrative

(c)

Research and development N/A (statement of financial position) Selling, general and administrative N/A (statement of financial position) Selling, general and administrative N/A (statement of financial position) Interest expense N/A (statement of financial position)

Increased (Decreased) Increased Increased Increased Increased Increased Increased Increased

Micro Ltd Statement of profit or loss (partial) For the year ended 30June 2016

Revenues: Net sales Interest revenue and other

$8607 418 9025

Expenses: Cost of sales Selling, general and administrative Research and development Interest expense

7050 1204 (1) 351 (2) 380 (3) 8985

Profit before income tax

$40

(1) Original figure $1121 million + 50, depreciation, + 2, office supplies, + 15, salaries, +4, insurance expense, + 12, rent expense, = $1204 million. (2)

Original figure $336 million + $15, salaries, = $351 million

(3)

Original figure $360 million + $20 million not recorded = $380 million.

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Chapter 3: Accrual accounting concepts

(d)

Useful information to disclose would be the basis of accounting for the items. For example: when is revenue recognised? The statement of profit or loss has categories of expenses which are classified according to areas within the business. It may be useful to further split the expense between administrative and selling. The accounts are usually prepared using last year as a comparative.

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BUILDING BUSINESS SKILLS 3.4

FINANCIAL ANALYSIS ON THE WEB Fairfax Media Limited

This solution is based on the 2014 Annual Report of Fairfax Media Limited See p79 part note 1 to the financial statements “G REVENUE RECOGNITION Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the amount of the revenue can be reliably measured. Revenue from advertising, circulation, subscription, online services, radio broadcasting and printing is recognised when control of the right to be compensated has been obtained and the stage of completion of the contract can be reliably measured. For newspapers, magazines and other publications the right to be compensated is on the publication date. Revenue from the provision of online advertising on websites is recognised in the period the advertisements are placed or the impression occurs. Amounts disclosed as revenue are net of commissions, rebates, discounts, returns, trade allowances, duties and taxes paid. Dividend revenue is recognised when the Group’s right to receive the payment is established, which is generally when the dividend has been declared. Interest revenue is recognised as it accrues, based on the effective yield of the financial asset. “ (b)Which items referred to in the revenue recognition policy require accrual adjustments and which items require adjustments for prepaid revenue? Items which need accrual would be the interest and the dividend revenue. Items which would need adjustment for prepaid revenue could be if advertising is paid ahead of the publication or the online impression. It is assumed here revenue is before Fairfax completes the contract. For example it may be a twelve month subscription to a publication. So Fairfax would recognise the revenue when they meet their obligation under the contract ie when the monthly publication is produced and send to the customer. (c) Is the way that Fairfax Media recognises revenue consistent with the revenue recognition criteria discussed in the chapter? The revenue recognition is consistent with the conceptual framework in that the revenue amount must be reliably measured and it is probable that the economic benefits will flow to the group. It is also consistent with old IAS 18 Revenue, where Fairfax states it will only recognise when control of the right to be compensated has been obtained and the stage of completion of the contract can be reliably measured. Although the new recognition criteria uses different wording, I do not expect any change to the method of revenue recognition at Fairfax. The five step process would be in place: 1. the parties to the contract are committed to perform the respective obligation 2. Fairfax can identify each party’s rights 3. the payment terms can be identified 4. the contracts have commercial substance (ie Fairfax expects to receive the revenue) and 5. it is probable Fairfax will receive the consideration. 3.131

Chapter 3: Accrual accounting concepts

CRITICAL THINKING BUILDING BUSINESS SKILLS 3.5

GROUP DECISION CASE

(a) Holiday Travel Australasia Statement of profit or loss for the year ended 31 March 2017 $ Revenues: Service revenue ($150000 - $16000) Expenses: Advertising expense (8700 +15000 – 5200+3200) Wages expense ($56400 + $300) Electricity expense ($4600 + $320) Depreciation expense Repair expense ($4000 + $2000) Insurance expense ($21000 x 9/12) Interest expense ($20000 x 10%x 3/12) Total expenses Profit

(b)

$ 134 000

18 800 56 700 4 920 1 200 6 000 15 750 500 115 670 $19 330

Accrual accounting was not followed with respect to several items of revenue and expense. Revenue recognition criteria had not been followed as revenue of $16,000 had been recognised for services not yet performed. Similarly, expense recognition principles were not followed. Expenses were not recorded even though a decrease in economic benefits had occurred (consumption of supplies, expiry of insurance) and they could be measured reliably. Likewise not recording the advertising, electricity and repair expenses (and corresponding liabilities), was inconsistent with the expense and recognition criteria; it is probable that an outflow will occur because the parties who have invoiced Holiday Travel Australasia have a valid and enforceable claim, and the amount can be recognised reliably as the invoice has been received. Similarly, the expense recognition criteria were not followed with respect to wages expense and interest expense. While these amounts were not invoiced they could be measured reliably by calculating the unpaid wages and interest.

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BUILDING BUSINESS SKILLS 3.6

COMMUNICATION ACTIVITY Sam Portafello

(a) – (d) Report on Comparison of Cash-Based and Accrual Accounting Executive Summary This report examines two alternative forms of accounting: cash-based and accrual accounting. Adoption of accrual accounting is recommended because it provides more information about the financial position of the business, in particular, assets and liabilities, and results in a more inclusive measure of profit that reflects increases and decreases in all assets and liabilities, and not only movements in cash. Detailed Report Accrual accounting records the events in the periods in which the events occur, rather than in the periods in which the entity receives or pays cash. This report presents an argument in favour of the use of accrual accounting for business reporting. Cash-based accounting records transactions when cash is paid or received. Thus some items that may be relevant to assessing how the business has performed during the period may be omitted because the resulting cash is received or paid in a different period. For example, wages and other expenses, such as telephone and electricity expenses, are omitted to the extent that they are unpaid at the end of the period. Further, revenues for which the customer has not yet paid are omitted by cash-based accounting. Some items are included as revenues and expenses under cash-based accounting that would be separately identified as assets and liabilities under accrual accounting. For example, a receipt for rent revenue in advance is accounted for as revenue under cash-based accounting. Under accrual accounting only that portion of the rental receipt that pertains to the current reporting period is recognised as revenue; and the amount of the rental payment received for a rental period that has not expired at the reporting date, is recognised as a liability (rent received in advance). Examples of omitted assets include prepaid insurance and prepaid rent. Under cash-based accounting, all insurance premiums and rental paid are treated as expenses even though the periods covered by the premiums and rentals may not have expired. Another omitted item under cash-based accounting is depreciation. Accrual accounting allocates the cost of long-lived assets over their useful life. Under cash-based accounting the asset is expensed in the period in which it is paid for. Depreciation spreads the cost of the asset over the periods in which the economic benefits are consumed. In doing so, it provides better performance measurement because the consumption of economic benefits is spread over the periods in which the benefits are realised through using the asset. The differences between accrual accounting and cash-based accounting are more pronounced when non-current assets are involved. Non-current assets involve large payments and benefits which extend over more reporting periods than other forms of prepayments (such as insurance premiums). Accordingly, the acquisition of non-current assets causes greater distortion of profit 3.133

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in a single period, thus making the use of accrual accounting more appropriate for the measurement of profitability. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash basis accounting, revenue is recorded only when cash is received, and an expense is recognised only when cash is paid. This results in the omission of assets and liabilities. As a result, the cash basis of accounting often leads to misleading financial statements. Accordingly, accrual accounting is recommended for your business to provide more comprehensive information about its financial position and financial performance to assist decision makers.

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BUILDING BUSINESS SKILLS 3.7

ETHICS CASE

Wellcovered Insurance Ltd (a)

The stakeholders in this situation include anyone who relies on the press release.

(b)

Ed’s application of the timeliness constraint is inappropriate. The constraint refers to situations where delaying the reporting of information until all aspects of a transaction or event are known may cause loss of relevance. Thus it may be necessary to report information before all aspects of a transaction are known. In the case of Wellcovered Insurance, Ed Honcho is suggesting that the information be reported before ANY aspects of the relevant transactions are known.

(c)

Ed’s actions are inconsistent with reliability, which is one of the principal qualitative characteristics identified in the Framework for the Preparation and Presentation of Financial Statements. One aspect of reliability is that the information is free of material error. Ed and Ben are unable to determine the reliability of the information due to the effects of the computer virus. Accordingly the estimated numbers may be very misleading,

(d)

It would be unethical to report the financial results without full disclosure that they are estimates, and that actual figures are unavailable due to the computer virus. Users relying on the information should be aware of its inherent uncertainty and the associated risks.

(e)

A significant overestimation of profit is likely to increase the share price. However, this would be a temporary gain because the share price would fall when the actual information is disclosed. Shareholders who sold while the price was high would make a gain at the expense of those who purchased them. More long-term damage to the company (in the form of share price and reputation) may occur when shareholders and investors observe that the company disclosed information that was subsequently found to be materially in error; they may have less confidence in information provided by the company in future.

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BUILDING BUSINESS SKILLS 3.8

COMMUNICATION ACTIVITY

Woolworths Limited Sustainability Report Note to instructor the response will depend on which sustainability report the student accesses. You can vary the question depending on what you wish to student to concentrate their research on. Woolworths: http://www.woolworthslimited.com.au/ Students were asked to outline Woolworths the priority of the environmental sustainability issues. This is contained on pp 10 and 11 of the report. Priority issues for Woolworths Limited 1. Climate change: •

Use of energy and greenhouse gas emissions.

•

Use of fuel and associated greenhouse gas and other emissions in our distribution network (trucks) and our company cars/business travel.

2. Direct use of water and the effect of drought. 3. Sourcing of our private label products and ingredients as well as other products and services. 4. Packaging – including consumer packaging in our private label products and distribution packaging. 5. Waste generation from all our stores. 6. Store development (design, construction, equipment and materials specification). The students were then required to access the latest annual sustainability report and summarise the achievements in contribution to the community and environmental stewardship. It would be expected that the students would then list the goal and how it was measured and how the achievement in that area was measured. The following is the link to the 2103 CR report: http://www.woolworthslimited.com.au/CRReport/2013/downloads/Woolworths_Limited_Corporat e_Responsibility_Report_2013.pdf Page 52 outlines the approach which refers to the strategic document given in the questions. “Woolworths has set targets and made commitments to be a responsible and sustainable business; this can only be achieved with the support of our people at all levels of our business. .

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As any business should, Woolworths gives priority to issues that are material to the business and which align with our strategic pillars. The Destination Zero safety strategy and the Sustainability Strategy 2007–2015 provide the direction and focus for practices, policies and investment.” CONTRIBUTION TO THE COMMUNITY Woolworths target was the equivalent of 1% of pre-tax profit going towards supporting communities in which it operates. In 2013 Woolworth’s invested the equivalent $63.6 Million to support community partners programs such as the Salvation Army Legacy, plus various other charities in Australia. In New Zealand the Countdown supermarkets contributed by running the Countdown kids hospital appeal , Countdown food Rescue programs and giving in other local programs. The $63,3 M was comprised of $33.2 m in cash donation; $19.6 raised by staff and customers; $1.6m in kind; and $9.2m in staff and management’s time. Under the heading of ENVIRONMENTAL STEWARDSHIP, the company reported (p34) The priority was to minimise the carbon footprint Woolworth used aa a baseline the 2007 financial year and the reduction targets are reductions from projected growth based on a business-as-usual model. Based on that the 2013 performance was “Woolworths’ total carbon emissions in Australia and New Zealand were 4.33 Mt, a 5.8% increase from the previous year. Emissions from our buildings totalled 3.6 Mt, which was a 7.8% increase in emissions. The report continued with more positive achievements: “Despite this, our carbon emissions are still 570,000 tonnes lower than they would have been without our investment in energy efficient and low carbon technology. Our positive results extend to: – 13.7% reduction in carbon emissions in 2013 (compared to projected emissions from business-as-usual growth). – $141.7 million in estimated operational cost savings by 2015,from $87 million invested in energy efficiency since 2009. – 25% reduction in carbon emissions generated per square metre of floor space for new supermarkets built in Australia in 2013. – 20.2% reduction in carbon emissions per carton delivered in 2013. We implemented 22 new projects in 2013, which reduced electricity usage by 16,022 MWh and reduced carbon emissions by 14,580 tonnes during the year. Photovoltaic systems at Petrol sites in Hume and Belconnen in the Australian Capital Territory generated 86,641 kWh, reducing carbon emissions by 92 tonnes – the equivalent of taking 21 cars off the road. Most of Woolworths’ company car fleet comply with the high environmental standards set for fuel efficiency and emissions. Annual car emissions have been reduced by 6,438 tonnes compared to 2007, which is equivalent to taking almost 1,500 vehicles off the road.”

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Chapter 3: Accrual accounting concepts

Other points noted were: • Water usage and wastage and use of recycled water had improved. • Reviewed packaging used on 1,349 Own Brand products in Supermarkets, using an estimated 24,460 tonnes of material; and • Prevented 9,340 tonnes of unsold food from going to landfill through donations to food relief organisations, and diverting food waste to composting and waste to energy.

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Chapter 4: Inventories

CHAPTER 4 – INVENTORIES ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises

Problems

Identify the differences between a service business and a merchandising business.

Explain the recording of purchases under a perpetual inventory system.

2,4,5,6

1A,2A,4A, 7A 1B, 2B,4B, 7B

Explain the recording of sales revenue under a perpetual inventory system.

2,3

1,2,3,4

1A, 2A, 4A, 7A, 1B, 2B, 4B, 7B

Prepare a fully classified statement of profit or loss.

1,4,5

7,8,9,10

1A, 3A, 4A, 5A, 6A, 7A 1B, 3B, 4B, 5B, 6B, 7B

Use ratios to analyse profitability.

7,8,9

1A, 3A, 7A 1B, 3B, 7B

Understand the basic process and main features of the goods and services tax (GST).

Complete journal entries to record GST.

7,8

11,12,13

8A, 8B

4.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CHAPTER 4 – INVENTORIES ANSWERS TO QUESTIONS 1.

(a)

Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service enterprise. See Chapter 3, Figure 3-26 page 179 Required Steps in the Accounting Cycle.

(b)

The measurement of profit is conceptually the same. In both types of companies, profit (or loss) is determined by subtracting expenses from revenues.

(a)

The profit measurement process is as follows:

Sales Revenue

(b)

Cost of Sales

Less

Equals

Gross Profit

Less

Operating Expenses

Net Profit

Equals

Profit measurement in a merchandising business differs from a service business as follows: (i)

sales are the primary source of revenue; and

(ii)

expenses are divided into two main categories: •

cost of sales, and

•

operating expenses

3. Net sales revenues Cost of sales Gross profit 4.

$220,000 154,000 $66,000

Agree. In accordance with the revenue recognition principle, sales revenues are generally recognised when the goods are transferred from the seller to the buyer. Recognition of revenue is not dependent on the cash collection of credit sales.

4.2

Chapter 4: Inventories

(a)

(b)

The primary source documents are: (1)

cash sales – cash register tapes, and

(2)

credit sales – sales invoices.

The entries for the perpetual method of accounting for inventories are: Debit Cash sales -

Credit sales -

Cash

Sales Cost of sales Inventory

Accounts Receivable Sales Cost of sales Inventory

Credit

xx xx xx xx xx xx

6. 24 July

Accounts Payable ($2,240 - 140) Discount Received ($2,100 x 2%) Cash ($2,100- 42)

2,100 42 2,058

7. Gross profit Less: Profit before tax Operating expenses 8.

$348,000 (180,000) $168,,000

(a)

Businesses most likely to use a perpetual inventory system would include those selling products which have a high unit-value such as automobile dealerships, equipment supply companies. With computerisation, perpetual systems are becoming increasingly cost-effective, for example, the use of optical scan cash registers in supermarkets means that a perpetual system can be employed for high turnover low unit cost items.

(b)

Owners of small businesses such as cafes, restaurants and greengrocers are more likely to use periodic inventory systems because for them, the costs of using perpetual inventory systems may outweigh the benefits.

Factors affecting a company’s gross profit rate include selling products with a higher (or lower) ‘mark-up’, increased competition that results in lower selling prices and price increases from suppliers.

10.

(a)

False. GST may be paid on taxable supplies at each stage in the commercial chain, however, it is the final consumer, not the first purchaser, who bears the cost of the GST.

(b)

True. The GST is a value-added tax, which means that tax is levied on the value added by a business at each stage in the production and distribution chain. The GST is not a tax on business income. .

4.3

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4.1 Felix Ltd (a)

Sales

$471,900 ($186,940 + $284,960)

(b)

Cost of sales

$81,900 ($195,000 - $113,100)

(c)

Gross profit

$111,800 ($280,800 - $169,000)

(d)

Operating expenses

$85,020 ($113,100 - $28,080)

(e)

Operating expenses

$35,100 ($111,800 - $76,700)

(f)

Profit

$182,260 ($284,960 - $102,700)

BRIEF EXERCISE 4.2 Neo Ltd Inventory Accounts Payable

1 800 1 800 Gruff Ltd

Accounts Receivable Sales Cost of sales Inventory

1 800 1 800 1 200 1 200

BRIEF EXERCISE 4.3 Simon Ltd (a)

(b)

(c)

2 Mar

6 Mar

8 Mar

Accounts Receivable Sales Cost of sales Inventory

450,000

Sales Returns and Allowances Accounts Receivable Inventory Cost of sales

65,000

Cash ($385,000 - $7,700) Discount Allowed ($385,000x 2%) Accounts Receivable ($450,000 - $65,000)

377,300 7,700

450,000 300,000 300,000

65,000 40,000 40,000

385,000

4.4

Chapter 4: Inventories

BRIEF EXERCISE 4.4 Aditya Ltd Statement of Profit or Loss (Partial) for the month ended 31 October 2015

Sales Revenues: Sales ($363,000 + $121,000) Less: Sales returns and allowances Net sales

$484,000 (24,200) $459,800

BRIEF EXERCISE 4.5 These items and where they would appear in a fully classified statement of profit or loss are listed below: Item

Section

Interest revenue Cost of sales Depreciation expense

Sales returns and allowances Purchase returns and allowances

Discount received Discount allowed

Revenue or other income (below gross profit) it depends on the type of business Cost of sales Operating expenses. Depreciation expenses could be further classified either as an administrative expense (e.g. depreciation of office equipment) or a selling expense (e.g. depreciation of store or warehouse equipment). Sales revenue. Under the periodic inventory system, purchase returns and allowances appears in the statement of profit or loss in the calculation of cost of sales as part of the determination of gross profit. Under the perpetual inventory system, purchase returns and allowances are recorded as a decrease in inventory and therefore do not appear on the statement of profit or loss Other income Financial expenses

4.5

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BRIEF EXERCISE 4.6 Long Pty Ltd (a)

Return on assets

$88,000 = 14.5% ($550,000 + $660,000)  2

(b)

Profit margin

= 88,000 ÷ $275,000 = 32.0%

(c)

Gross profit rate

= ($275,000 - $110,000) ÷ $275,000 = 60.0%

(d)

Operating expenses to sales ratio

= $55,000 ÷ $275,000 = 20.0%

BRIEF EXERCISE 4.7 Maori Jewellery Cash collected = NZ$28,750 ($25,000 + 15% x $25,000) Revenue earned = NZ$25,000

BRIEF EXERCISE 4.8 These journal entries record the payment of GST to the taxation authority. Sellers Limited has collected $100 GST on sales during the reporting period, and the amount of GST paid on purchases is $90; the remaining balance is the amount of cash paid to the tax authority.

4.6

Chapter 4: Inventories

SOLUTIONS TO EXERCISES EXERCISE 4.1 Unique Artworks Ltd (a)

(1)

7 Dec

Accounts Receivable

792,000

Sales Cost of sales

792,000 528,000

Inventory (2)

8 Dec

Sales Returns and Allowances

528,000 33,000

Accounts Receivable (3)

13 Dec

33,000

Cash ($759,000 - $15,180)

743,820

Discount Allowed [($792,000 - $33,000) x 2%]

15,180

Accounts Receivable ($792,000 - $33,000) (b)

2 Jan

Cash

759,000 759,000

Accounts Receivable ($792,000 - $33,000) (c)

759,000

The advantages associated with granting a discount for early payment are that the purchaser saves money and the seller is able to shorten the operating cycle thereby improving cash flow by converting accounts receivable to cash earlier. The disadvantage to the seller is that there is a cost associated with offering a discount.

4.7

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 4.2 (a)

1 Jul

STOKERS PTY LTD Inventory

20,000

Accounts Payable 10 Jul

Accounts Payable

20,000 20,000

Cash

19,400

Discount Received (b)

1 Jul

Inventory

600 20,000

Accounts Payable 10 Jul

Accounts Payable

20,000 20,000

Cash

19,400

Inventory (c)

600

In part (a), profit and assets will initially be $600 higher than in part (b). As inventory is transferred to cost of sales, cost of sales will be higher in part (a) than part (b). By the time all the inventory is sold the total profit and assets in part (a) and (b) will be the same.

EXERCISE 4.3 QUEENSCLIFF PTY LTD

(a)

1 Jul

Accounts Receivable

20,000

Sales Cost of sales

20,000 12,000

Inventory (b)

10 Jul

Cash

12,000 19,400

Discount Allowed

600

Accounts Receivable

20,000

4.8

Chapter 4: Inventories

EXERCISE 4.4 Cambells Office Supplies 6 Sept.

Inventory (80 x $22) Cash

9 Sept. 10 Sept. 12 Sept.

14 Sept.

20 Sept.

1,760 1,760

Freight In Cash

Accounts Receivable Inventory

Accounts Receivable (26 x $33) Sales Cost of sales (26 x $22) Inventory

858

Sales Returns and Allowances Accounts Receivable

Inventory Cost of sales

Accounts Receivable (30 x $33) Sales Cost of sales (30 x $22) Inventory

990

88 44 858 572 572 33 22 990 660 660

EXERCISE 4.5 Hampton Pty Ltd (a)

(1)

(2)

(3)

(4)

(5)

(b)

5 April

Inventory Accounts Payable

6 April

Freight In Cash

7 April

8 April

11 April

4 May

9,000 9,000 450 450

Equipment Accounts Payable

52,000

Accounts Payable Inventory

1,500

Accounts Payable ($9,000- $1500) Discount Received [($9,000- $1500) x 2%] Cash ($7,500 - $150)

7,500

Accounts Payable ($9,000 - $1,500) Cash

7,500

52,000

1,500

150 7,350

7,500

4.9

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 4.6 Grand Accessories Ltd (a)

10 June

11 June

12 June

17 June

Inventory Accounts Payable (Terms 2/7, n/30)

$5,400 $5,400

Freight In Cash

$270

Accounts Payable Inventory

$270

Accounts Payable ($5,400 - $270) Discount Received ($5,130 x 2%) Cash ($5,130 - $103*)

$270 $5,130 $103 $5,027

* to the nearest dollar (b)

Highend Distributors Ltd 10 June

Accounts Receivable Sales

5,400

Cost of sales Inventory

2,700

5,400

2,700

11 June

No entry (freight paid by the purchasing company)

12 June

Sales Returns and Allowances Accounts Receivable

270

Inventory Cost of sales

135

19 June

Cash ($5,130 - $103*) Discount Allowed ($5,130 x 2%) Accounts Receivable($5,400 - $270)

270

135 5,027 103 5,130

* to the nearest dollar (c)

Freight-in refers to freight costs paid by the purchaser. Freight-in forms part of the cost of inventory but because of the difficulty of allocating freight costs to individual inventory items when several items are delivered at the same time, a freight-in account is often kept and the amount of freight-in is incorporated into cost of sales in the statement of profit or loss. Freight-out refers to freight costs paid by the seller. These costs appear under operating expenses (selling and distribution expenses) on the statement of profit or loss. Customers may be charged an additional amount to cover freight-out expenses.

4.10

Chapter 4: Inventories

EXERCISE 4.7 (a) Dawson Ltd Statement of Profit or Loss for the month ended 31 January 2015

INCOME Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales GROSS PROFIT

$700,000 (26,000) $674,000 (416,000) 258,000

Other income: Discount received Rent revenue

EXPENSES Selling expenses: Freight out Rent expense – store space Administrative expenses: Insurance expense Office salaries expense Financial expenses: Discount allowed Bank charges Total operating expenses

14,000 2,000

14,000 20,000

34,000

12,000 61,000

73,000

16,000 100

16,100

16,000 274,000

123,100

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT

150,900 (45,270) $105,630

(b) Profit margin =

105,630 = 15.7% 674,000

Gross profit rate =

258,000 = 38.3% 674,000

Operating expenses to sales ratio =

123,1000 = 18.3% 674,000

4.11

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c)

It is often more useful to be able to compare financial ratios than to compare the actual financial results. For example, knowing the gross profit rate gives a better indicator of an entity’s profitability than knowing the dollar amount of the gross profit. Just knowing the operating expenses is less useful than knowing the operating expenses to sales ratio. Furthermore, ratios allow for meaningful comparisons than just using dollars. For example, the gross profit ratio relates gross profit to sales and provides an indication of mark-up on cost. Finally, using ratios enables analysts to compare the profitability of entities of different sizes because ratios control for size whereas a dollar value does not.

EXERCISE 4.8 Bright Ltd & Dull Ltd (a) Bright Ltd

Dull Ltd

Sales Sales returns Net sales

$180,000 *(18,000) $162,000

*$200,000 (10,000) $190,000

Net sales Cost of sales Gross profit

$162,000 (112,000) *$50,000

$190,000 *114,000 $76,000

Gross profit Operating expenses Profit

$50,000 (30,000) *$20,000

$76,000 *(46,000) $30,000

*Indicates missing amount. (b) Bright Ltd

Dull Ltd

Profit margin

$20,000 ÷ $162,000 = 12.3%

$30,000 ÷ $190,000 = 15.8%

Gross profit rate

$50,000 ÷ $162,000 = 30.9%

$76,000 ÷ $190,000 = 40%

Operating expenses to sales ratio

$30,000 ÷ $162,000 = 18.5%

$46,000 ÷ $190,000 = 24.2%

4.12

Chapter 4: Inventories

EXERCISE 4.9 (a) Lulu Ltd Statement of Profit or Loss for the year ended 30 June 2016

OPERATING REVENUE Net sales revenue: Less: Cost of sales GROSS PROFIT

$1,410,000 (593,400) $816,600

Other operating revenue

27,000 843,600

OPERATING EXPENSES Selling expenses

414,000

Administrative expenses

261,000

Financial expenses Total operating expenses

42,000

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

717,000 126,600 (37,980) $88,620

(b) Profit margin =

Profit after tax Net sales

88,620 =6.3% 1,410,000

Gross profit rate =

Gross Profit Net Sales

816,600 = 57.9% 1,410,000

Operating expenses to sales ratio =

Operating Expenses Net Sales

717,000 = 50.9% 1,410,000

4.13

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 4.10 Snuffy Pty Ltd Statement of Profit or Loss (Partial) for the year ended 30 June 2015

Sales revenue: Sales Less: Sales returns and allowances Net sales

$585,000 (9,100) $575,900

Note: Freight-out is a selling expense. Discount allowed is a financial expense.

EXERCISE 4.11 Ezios Earthenware Ltd (a)

(b)

Dr Cash/Accounts Receivable Cr GST Collected (liability) Cr Sales

$6,600

Dr Inventory Dr GST Paid (asset) Cr Cash/Accounts Payable

$1,100 110

Dr GST Collected Cr GST Paid Cr Cash

$600 $6,000

$1,210 $600 $110 $490

Alternatively a single GST clearing account can be used instead of GST Collected and GST Paid accounts.

4.14

Chapter 4: Inventories

EXERCISE 4.12 Phams Pottery Ltd (a)

May 3

May 10

Dr Inventory Dr GST Paid Cr Cash/Accounts payable

400 40

Dr Cash/Accounts receivable Cr Sales Cr GST collected

550

Dr GST Collected Cr GST Paid Cr Cash

440

500 50

40 10

EXERCISE 4.13 Ezios Earthenware Ltd (a)

(b)

Dr Cash/Accounts Receivable Cr GST Clearing Cr Sales

6,600

Dr Inventory Dr GST Clearing Cr Cash/Accounts Payable

1,100 110

Dr GST Clearing Cr Cash

600 6,000

1,210 490 490

4.15

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 4.1 (a) Papermark Ltd General Journal

Date May

Particulars 2

May

Post Ref.

Debit

Accounts Receivable Sales Cost of Sales Inventory

110 400 505 120

3,150

Inventory Accounts Payable

120 200

4,200

Accounts Payable Inventory

200 120

140

Cash ($3,150 - $63) Discount Allowed ($3,150 x 2%) Accounts Receivable

100 500 110

3,087 63*

Accounts Payable ($4,200 - $140) Discount Received ($4,060 x 2%) Cash

200 410

4,060

Supplies Cash

130 100

630

Inventory Cash

120 100

1,680

Cash

100 120

161

Inventory Inventory Accounts Payable

120 200

1,330

Freight Inwards Cash

510 100

175

Cash

100 400 505 120

4,340

120 200

700

Sales Cost of Sales Inventory 25 Inventory Accounts Payable

Credit

3,150 2,100 2,100

4,200

140

3,150

100

3,979

630

1,680

161

1,330

175

4,340 3,038 3,038

700

4.16

Chapter 4: Inventories

Date

Post Ref.

Particulars 27

Debit

Accounts Payable Discount Received ($1,330 x 2%) Cash

200 410

Sales Returns and Allowances Cash Inventory Cost of Sales

405 100 120 505

Accounts Receivable Sales Cost of Sales Inventory

110 400 505 120

1,120

Credit

1,330 27

100

1,303

70 49 49

1,120 784 784

*rounded to nearest dollar (b) May

1 9

Cash 3,500 May 3,087

15 24

Opening Bal. Accounts Receivable Inventory Sales

June

Opening. Bal.

May

2 31

Sales Sales

June

Opening Bal.

May

3 12 20 25 29

Accounts Payable Cash Accounts Payable Accounts Payable Cost of Sales

Inventory 4,200 May 1,680 1,330 700 49

June

Opening Bal.

7,959 1,736

May

11 Cash

161 4,340

Accounts. Payable Supplies

12 21 27 29 31

Inventory Freight Inwards Accounts Payable Sales Returns Closing Bal.

11,088 3,251

Accounts Receivable 3,150 May 9 1,120 31 4,270 1,120

Supplies 630 .

10 11

2 5 15 24 31 31

100 3,979 630 1,680 175 1,303 70 3,251 11,088

Cash & Discount Closing Bal.

110 3,150 1,120 4,270

Cost of Sales Accounts Payable Cash Cost of Sales Cost of Sales Closing Bal.

120 2,100 140 161 3,038 784 1,736 7,959

130 4.17

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

May

Accounts Payable 5 Inventory 140 May 3 10 Cash & Discount 4,060 20 27 Cash & Discount 1,330 25 31 Closing Bal. 700 6,230 June 1

Share Capital May 1

May

31 Closing Bal.

Sales 8,610 May

2 24 31

Inventory Inventory Inventory

200 4,200 1,330 700

Opening Bal.

6,230 700

Bal.

300 3,500

Accounts Receivable Cash Accounts Receivable

8,610

Sales Returns and Allowances 70

405

Discount Received 108 May 10 27 108

410 81 27 108

May

29 Cash

May

21 Closing Bal.

May

Accounts Receivable

2 Inventory 24 Inventory 31 Inventory

Accounts Payable Accounts Payable

Discount Allowed 63

Cost of Sales 2,100 May 29 3,038 784 31 5,922 Freight Inwards 175

21 Cash

400 3,150 4,340 1,120 8,610

500

Inventory Closing Bal.

505 49 5,873 5,922 510

4.18

Chapter 4: Inventories

OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Freight inwards GROSS PROFIT

8,610 (70) 8,540 5,873 175

(6,048) $2,492

(d) Profit margin ratio =

Profit after tax Net sales

Gross profit rate =

$2,492 (Gross P) - $980 (Op. Exp.*) - $133 (Tax Exp.) + $108 (Dis. Rec’d) =

Gross Profit Net Sales

1,487 = 17.4% 8,540 2,492 = 29.2% 8,540

* Note: Discount allowed included in operating expenses.

4.19

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 4.2 (a) June

The Novelty Bookstore General Journal

Inventory (130 x $6) Accounts Payable (Terms 1/7, n/30) Freight In Cash Accounts Receivable (140 x $12) Sales (Terms 2/7, n/30) Cost of Sales (140 x $6) Inventory

780 780 60 60 1,680 1,680 840 840

Accounts Payable Inventory

Accounts Payable ($780 - $60) Discount Received ($720 x 1%*) Cash

720

Cash

7 713 1,680

Accounts Receivable

Accounts Receivable (120 x $12) Sales (Term 2/7, n/30) Cost of Sales (120 x $6) Inventory Inventory (120 x $6) Accounts Payable (Term 2/7, n/30) Cash Discount Allowed ($1,440 x 2%*) Accounts Receivable Accounts Payable Discount Received ($720 x 2%*) Cash Accounts Receivable (110 x $12) Sales

1,680

1,440 1,440 720 720 720 720

1,411 29 1,440 720 14 706 1,320 1,320

Cost of Sales (110 x $6) Inventory

660

Sales Returns and Allowances Accounts Receivable

180

Inventory Cost of Sales

660

180

*to the nearest dollar .

4.20

Chapter 4: Inventories

(b)

The advantages for The Novelty Bookstore of using a perpetual inventory system as opposed to a periodic inventory system are: • • • •

Inventory is constantly updated every time a purchase or sale is made. This means that The Novelty Bookstore will be aware of when to reorder items of inventory. Cost of sales is updated every time a sale is made so interim financial statements can be prepared without having to conduct an inventory count. When The Novelty Bookstore does conduct an inventory count (which should be at least annually), any inventory losses can be accurately determined. Using a perpetual inventory system would be a disadvantage for The Novelty Bookstore if the business does not have a suitable computer system to maintain inventory records.

4.21

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 4.3 (a)

Harrots Department Store Pty Ltd Statement of Profit or Loss for the year ended 30 June 2015

OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales

$1,301,30 0 (14,300) $1,287,000 (905,505) $381,495

GROSS PROFIT Other operating revenue: Discount received Interest revenue

OPERATING EXPENSES Selling expenses: Dep’n expense – store equipment Freight out Rent expense – store space Sales commissions expense Sales salaries expense

1,430 5,720

7,150 388,645

13,585 11,726 12,870 20,020 100,100

158,301

Dep’n expense – office equipment Electricity expense Insurance expense Office salaries expense Rent expense – office space Rates and taxes expense

5,720 15,158 12,870 57,200 28,600 5,005

124,553

Interest expense Total operating expenses

11,440

Administrative expenses:

Financial expenses:

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

11,440 294,294 94,351 (28,314) 66,037

4.22

Chapter 4: Inventories

Harrots Department Store Pty Ltd Statement of Changes in Equity for the year ended 30 June 2015 Retained Earnings, 1 July 2014 Add: Profit

$20,306 66,037 86,343 (17,160) 69,183

Less: Dividends Retained Earnings, 30 June 2015

Harrots Department Store Pty Ltd Statement of Financial Position as at 30 June 2015 ASSETS Current Assets: Cash Accounts receivable Inventory Prepaid Insurance Total Current Assets

Non-Current Assets: Property, plant and equipment Store equipment Less: Accum. dep’n – store equipment Office equipment Less: Accum. Dep’n – office equipment Total Non-Current Assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities: Accounts payable Income tax payable Rates and taxes payable Sales commissions payable Total Current Liabilities Non-Current Liabilities: Bank loan Total Liabilities Equity Share capital Retained Earnings Total Equity TOTAL LIABILITIES AND EQUITY

$11,440 16,830 51,766 6,435 $86,471

178,750 (59,774) 81,510 (28,142)

118,976 53,368 172,344 $258,815

39,053 28,314 5,005 8,580 80,952 65,780 146,732 42,900 69,183 112,083 $258,815

4.23

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) Return on assets =

66,037 Profit after tax = = 27.1% Av total assets 243,808

Average total assets = (228, 800 + 258,815) /2 = 243,808

(c)

Profit margin =

Profit after tax Net sales

Gross profit rate =

Gross Profit = Net Sales

Operating expenses to sales ratio =

294,294 Operating Expenses = = 22.9% Net Sales 1,287,000

66,037 = 5.1% 1,287,000

381,495 = 29.6% 1,287,000

A fully classified statement of profit or loss provides more information than a summary-type statement. For instance, readers of the statement can ascertain how many sales were returned, discounts allowed on sales, and discounts received on purchases. Useful ratios such as the gross profit ratio and operating expenses to sales ratio can also be calculated. If the operating expense ratio is high, a further breakdown of expenses into categories can give insight as to which particular expenses were excessive.

4.24

Chapter 4: Inventories

PROBLEM SET A 4.4 (a) Alexander’s Tennis Pro Shop Pty Ltd General Journal

Date April

Particulars

Post Ref

Inventory Accounts Payable

115 200

3,060

505 100

144

Accounts Payable Inventory

200 115

360

Accounts Receivable Sales

105 400

1,620

Cost of Sales Inventory

500 115

1,134

Inventory Accounts Payable

115 200

1,188

Accounts Payable ($3,060 – $360) Discount Received ($2,700 x 2%) Cash

200 410 100

2,700

Accounts Payable Inventory

200 115

108

Accounts Receivable Sales

105 400

1,260

Cost of Sales Inventory

500 115

882

Accounts Payable ($1,188 - $108) Discount Received ($1,080 x 1%) Cash

200 410 100

1,080

Sales Returns and Allowances Accounts Receivable

405 105

108

Cash

100 105

1,980

8 Freight Inwards Cash 9

Accounts Receivable

Debit

Credit

3,060

144

360

1,620

1,134

1,188

54 2,646

108

1,260

882

11* 1069

108

1,980

* rounded to nearest dollar

4.25

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) April 1

Opening Bal

Accounts Receivable

Cash 4,500 April 8 April 14 1,980 21 30

May 1

Opening Bal.

April 10

Sales

Closing Bal.

6,480 2,621 Accounts Receivable 1,620 April 27 Sales Returns & Allowances 1,260 30 Cash 2,880 30 Closing Bal.

May 1

Opening Bal.

April 1 7 14

Opening Bal. Accounts Payable Accounts Payable

May 1

Opening Bal.

April 9 14 17 21

Inventory Cash & Discount Inventory Cash & Discount

Inventory 6,300 April 9 3,060 10 1,188 17 20 30 10,548 8,064

Accounts Payable Cost of sales Accounts Payable Cost of sales Closing Bal.

Accounts Payable 360 April 7 Inventory 2,700 14 Inventory 108 1,080 4,248

Sales April 10 20

Accounts Receivable

2,621 6,480

105 108 1,980 792 2,880

792

Share Capital April 1

April 27

Freight Inwards Accounts Payable

100 144 2,646 1,069

Opening Bal.

Accounts Receivable Accounts Receivable

115 360 1,134 108 882 8,064 10,548

200 3,060 1,188

4,248

300 10,800

400 1,620 1,260 2,880

Sales Returns and Allowances 108

405

Discount Received April 14 Accounts Payable 21 Accounts Payable

410 54 11 65 4.26

Chapter 4: Inventories

May

April

10 Inventory 20 Inventory

Cash

Cost of Sales 1,134 882 2,016

500

Freight Inwards 144

505

(c) Alexander’s Tennis Pro Shop Pty Ltd Trial Balance as at April 30, 2016 Debit Cash Accounts Receivable Inventory Accounts Payable Share Capital Sales Sales Returns and Allowances Discount Received Cost of Sales Freight Inwards

Credit $2,621 792 8,064 $10,800 2,880 108 65 2,016 144 $13,745

$13,745

(d) Alexander’s Tennis Pro Shop Pty Ltd Statement of Profit or Loss (Partial) for the month ended 30 April 2016

Sales revenues Sales Less: Sales returns and allowances Net sales Less: Cost of sales Freight inwards Gross Profit

$2,880 (108) $2,772 2,016 144

2,160 $ 612

4.27

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 4.5 Peninsula Pty Ltd Statement of Profit or Loss for the year ended 30 June 2015

OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales GROSS PROFIT

$495,000 (16,500) $478,500 (305,250) $173, 250

Other operating revenue: Discount received Rent revenue Total operating revenue

8,800 4,400

OPERATING EXPENSES Selling expenses: Advertising 5,500 Freight out 16,500 Sales commissions expense (3300 + 2200) 5,500 Sales salaries expense 44,000

71,500

Administrative expenses: Dep’n expense – office equipment 4,400 Office salaries expense 20,350 Rent expense – office space (13200-3300) 9,900 Electricity expense 6,600

41,250

Financial expenses: Discount allowed Interest expense 1,100 Bank charges Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

13,200 186,450

4,400 550

6,050 118,800 67,650 (20,295) $47,355

4.28

Chapter 4: Inventories

PROBLEM SET A 4.6 Rankins Ltd (a)

Dec.

Depreciation Expense – Buildings Accumulated Dep’n - Buildings

15,000

Depreciation Expense – Equipment Accumulated Dep’n – Equipment

13,500

Interest Expense Interest Payable

10,500

Income Tax Expense Income Tax Payable

37,260

15,000

13,500

10,500

37,260

Note: The figure used for the income tax expense entry was derived after the Statement of Profit or Loss in (d) was prepared.

(b) Accumulated Depreciation – Buildings Dec. 31 Balance 31 Depreciation Exp.

Accumulated Depreciation - Equipment Dec. 31 Balance 31 Depreciation Exp.

Dec.

Depreciation Expense – Buildings 31 Accum. Depr. 15,000

Dec.

Depreciation Expense – Equipment 31 Accum. Depr. 13,500

Dec.

31 Interest Payable

63,600 13,500 77,100

Interest Expense 10,500

Interest Payable Dec. 31

85,500 15,000 100,50 0

Interest Expense

10,50 0

4.29

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c) Rankins Ltd Adjusted Trial Balance As at 30 June 2016 Debit Cash Accounts Receivable Inventory Land Buildings Accumulated Depreciation – Buildings Equipment Accumulated Depreciation – Equipment Accounts Payable Income Tax Payable Interest Payable Bank Loan Share Capital Retained Profits Interest Revenue Dividends Sales Sales Returns and Allowances Discount Allowed Cost of Sales Salaries Expense (Office) Salaries Expense (Sales) Utilities Expense Repair Expense Petrol & Oil Expense Insurance Expense Depreciation Expense – Buildings Depreciation Expense – Equipment Income Tax Expense Interest Expense Interest Payable Totals

Credit

$50,100 56,400 165,000 138,000 295,500

$100,500

125,250 77,100 56,250 37,260 10,500 75,000 300,000 101,700 1,500 15,000 1,381,650 1,500 5,400 1,064,850 82,500 22,200 14,100 13,350 10,800 5,250 15,000 13,500 37,260 10,500 $2,141,460

$2,141,460

4.30

Chapter 4: Inventories

(d) Rankins Ltd Statement of Financial Performance for the Year Ended 30 June 2016

OPERATING REVENUE Sales revenue: Gross sales revenue

$1,381,65 0 (1,500)

Less: Sales returns and allowances Net sales revenue Less: Cost of sales GROSS PROFIT

$1,380,150 (1,064,850) $315,300

Other operating revenue: Interest revenue

1,500 1,500 316,800

Total operating revenue OPERATING EXPENSES Selling expenses: Dep’n expense – store equipment Sales salaries expense

13,500 22,200

35,700

Administrative expenses: Dep’n expense – buildings Insurance expense Office salaries expense Petrol and oil expense Repair expense – computers Utilities expense

15,000 5,250 82,500 10,800 13,350 14,100

141,000

5,400 10,500

15,900

Financial expenses: Discount allowed Interest expense Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense NET PROFIT AFTER INCOME TAX

192,600 124,200 (37,260) $86,940

Rankins Ltd Statement of Changes in Equity for the year ended 30 June 2016 Retained Profits, 1 January Add: Net Profit

$101,700 86,940 188,640 (15,000) $173,640

Less: Dividends Retained Profits, 31 December

Rankins Ltd .

4.31

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Statement of Financial Position As at 30 June 2016 ASSETS Current Assets: Cash Accounts receivable Inventory Total Current Assets Non-Current Assets: Property, plant and equipment Land Buildings Less: Accum. dep’n – buildings Store equipment Less: Accum. Dep’n – store equipment Total Non-Current Assets TOTAL ASSETS LIABILITIES AND OWNER’S EQUITY Current Liabilities: Bank loan (portion due in 2017) Accounts payable Interest payable Income tax payable Total Current Liabilities Non-Current Liabilities: Bank loan Total Liabilities Owners’ Equity Share capital Retained profits Total Owners’ Equity TOTAL LIABILITIES AND OWNERS’ EQUITY

$50,100 56,400 165,000 $271,500

$138,000 $295,500 100,500 125,250 77,100

195,000 48,150 381,150 $652,650

22,500 56,250 10,500 37,260 126,510 52,500 179,010 300,000 173,640 473,640 $652,650

(e) The statement of profit or loss is prepared for a period of time because it summarises income and expenses for that period. The profit or loss then is used to update equity at the end of that period. The statement of financial position shows the financial position, i.e., the balances of assets, liabilities, and equity on the date the statement of financial position is prepared.

4.32

Chapter 4: Inventories

PROBLEM SET A 4.7 (a) Belle Boutique Fashion Pty Ltd General Journal April

Inventory Accounts Payable

3,245

Accounts Receivable Sales

2,750

Cost of Sales Inventory

2,200

Accounts Payable Inventory

165

Freight Out Cash

110

3,245

2,750

2,200

165

110

Accounts Payable ($3,245 - $165) Discount Received ($3,080 x 2%) Cash

3,080

Cash Discount Allowed ($2,750 x 2%) Accounts Receivable

2,695 55

Inventory Cash

2,420

Cash

62 3,018

2,750

2,420 275

Inventory 21

Inventory Accounts Payable Freight In Cash Cash

275 3,150 3,150 55 55 4,070

Sales

4,070

Cost of Sales Inventory

3,366

Inventory Cash

1,265

Accounts Payable Discount Received ($3,150 x 2%) Cash

3,150

3,366

1,265

63 3,087

Sales Returns and Allowances Cash

Inventory Cost of Sales

Accounts Receivable Sales

2,035

Cost of Sales Inventory

1,650

2,035

1,650

(b) .

4.33

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

April1 13 16 23

Opening Bal. Accounts Receivable Inventory Sales

May 1

Opening Bal.

April6 30

Sales Sales

May 1

Opening Bal.

Cash 4,950 April7 2,695 11 275 4,070

110 3,018

Inventory Freight In Inventory Accounts Payable Sales Returns Closing Bal.

2,420 55 1,265 3,087 50 1,985 $11,990

$11,990 1,985

Accounts Receivable 2,750 April13 Cash & Discount 2,035 30 Closing Bal. 4,785 2,035

April4 14 21 26 29

Accounts Payable Cash Accounts Payable Cash Cost of sales

May 1

Opening Bal.

April6 11 27

14 22 26 27 29 30

Freight Out Accounts Payable

Inventory Cash & Discount Cash & Discount

Inventory 3,245 April6 2,420 6 3,150 16 1,265 23 38 30 30 10,118 2,462

Cost of sales Accounts Payable Cash Cost of sales Cost of sales Closing Bal.

Accounts Payable 165 April4 Inventory 3,080 21 Inventory 3,150 6,395

Share Capital April1

Opening Bal.

Sales April6 Accounts Receivable 23 Cash 30 Accounts Receivable

April29

2,750 2,035 4,785

2,200 165 275 3,366 1,650 2,462 10,118

3,245 3,150 6,395

4,950

2,750 4,070 2,035 8,855

Sales Returns and Allowances 50

Cash

Discount Received April11 Accounts Payable .

62 4.34

Chapter 4: Inventories

Accounts Payable

63 125

Discount Allowed 55

April13

Accounts Receivable

April22

Cash

Freight In 55

April7

Cash

Freight Out 110

April 6 23 30

Inventory Inventory Inventory

May 1

Opening Bal.

Cost of Sales 2,200 April29 3,366 30 1,650 7,216 7,178

Inventory Closing Bal.

38 7,178 7,216

(c) Belle Boutique Fashion Pty Ltd Statement of Profit or Loss (Partial) for the month ended 30 April 2015 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Freight in GROSS PROFIT

$8,855 (50) $8,805 (7,178) (55)

(7,233) $1,572

(d) Profit margin ratio = Profit Net sales Gross profit ratio =

Gross Profit Net Sales

GP 1,572 – 495 oper. Expen* + disc. rec’d $125

1,202 = 13.7% 8,805

1,572 / 8,805 = 17 .9%

*Note: It is assumed that discounts allowed and freight out are included in operating expenses.

4.35

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 4.8 Kids + Kites Ltd (a) Cash/Accounts Receivable GST Collected ($70,700/11) Sales (To record sales revenue and GST collected)

70,700

Sales Returns and Allowances GST Collected ($1,400/11) Accounts Receivable

1,273 127

Inventory GST Paid ($28,560/11) Accounts Payable (To record inventory purchase and GST paid)

25,964 2,596

Accounts Payable GST Paid ($3,360/11) Inventory (To record purchase return and GST recovered)

3,360

GST Collected GST Paid Cash (To record payment of GST to tax authority)

6,300

Cash/Accounts Receivable GST Clearing Sales (To record sales revenue and GST collected)

70,700

Sales Returns and Allowances GST Clearing Accounts Receivable (To record sales returns and GST refunded)

1,273 127

Inventory GST Clearing Accounts Payable (To record inventory purchase and GST paid)

25,964 2,596

Accounts Payable GST Clearing Inventory (To record purchase return and GST recovered)

3,360

GST Clearing Cash (To record payment of GST to tax authority)

4,009

6,427 64,273

1,400

28,560

305 3,055

2,291 4,009

(b)

6,427 64,273

1,400

28,560

305 3,055

4,009

4.36

Chapter 4: Inventories

28,560

Inventory GST Paid ($70,700/11) Accounts Payable (To record inventory purchase and GST paid)

64,273 6,427

Cash GST Collected GST Paid (To record refund of GST from tax authority)

3,831 2,596

Cash/Accounts Receivable GST Clearing Sales (To record sales and GST collected)

28,560

Inventory GST Clearing Accounts Payable (To record inventory purchase and GST paid)

64,273 6,427

Cash

3,831

2,596 25,964

70,700

6,427

(d) 2,596 25,964

70,700

GST Clearing (To record GST refund from tax authority)

3,831

4.37

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 4.1 Clucker Poultry Distributing Company General Journal April

Inventory Accounts Payable

2,950

Accounts Receivable Sales

2,500

Cost of Sales Inventory

2,000

2,950

2,500

2,000

Freight-out Cash

100

Accounts Payable Inventory

150

100

150

Accounts Payable ($2,950 - $150) Discount Received ($2,800 x 2%) Cash

2,800

Cash Discount Allowed ($2,500 x 2%) Accounts Receivable

2,450 50

Inventory Cash

2,200

Cash

56 2,744

2,500

2,200 250

Inventory 21

Inventory Accounts Payable Freight-In Cash Cash

250 2,100 2,100 50 50 3,700

Sales

3,700

Cost of Sales Inventory

3,060

Inventory Cash

1,150

Accounts Payable Discount Received ($2,100 x 2%) Cash

2,100

3,060

1,150

42 2,058

Sales Returns and Allowances Cash

Inventory Cost of Sales

35 4.38

Chapter 4: Inventories

Accounts Receivable Sales

1,850

Cost of Sales Inventory

1,500

1,850

1,500

(b)

April1 13 16 23

May 1

Opening Bal. Accounts Receivable Inventory Sales

Opening Bal.

April6 30

Sales Sales

May 1

Opening Bal.

April4 14 21 26 29

Accounts Payable Cash Accounts Payable Cash Cost of Sales

May 1

Opening Bal.

April8 11 27

Inventory Cash & Discount Cash & Discount

Cash 4,500 April7 2,450 11 250 3,700

14 22 26 27 29 30

100 2,744

Inventory Freight-In Inventory Accounts Payable Sales Returns Closing Bal.

2,200 50 1,150 2,058 45 2,553 $10,900

$10,900 2,553

Accounts Receivable 2,500 April13 Cash & Discount 1,850 30 Closing Bal. 4,350 1,850

Inventory 2,950 April6 2,200 8 2,100 16 1,150 23 35 30 30 8,435 1,475

Cost of Sales Accounts Payable Cash Cost of Sales Cost of Sales Closing Bal.

Accounts Payable 150 April4 Inventory 2,800 21 Inventory 2,100 5,050

Share Capital April1

Sales April6 .

Freight-Out Accounts Payable

2,500 1,850 4,350

2,000 150 250 3,060 1,500 1,475 8,435

2,950 2,100 5,050

Opening Bal.

4,500

Accounts Receivable

2,500 4.39

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

23 30

April29

Cash Accounts Receivable

3,700 1,850 8,050

Sales Returns and Allowances 45

Cash

Discount Received April11 Accounts Payable 27 Accounts Payable

Discount Allowed 50

April13

Accounts Receivable

April22

Cash

Freight-In 50

April7

Cash

Freight-Out 100

April 6 23 30

Cost of Sales 2,000 April29 3,060 30 1,500 6,560

Inventory Inventory Inventory

56 42 98

Inventory Closing Bal.

35 6,525 6,560

(c) Clucker Poultry Distributing Company Statement of Profit or Loss (Partial) for the month ended 30 April 2016 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Freight in GROSS PROFIT

$8,050 (45) $8,005 (6,525) (50)

(6,575) $1,430

(d) Profit margin = Profit net sales Gross profit rate =

Gross Profit Net Sales

Gross Profit 1,430 – 450 oper. expen. + disc. rec’d $98

1,078 = 13.5% 8,005

1,430 = 17.9% 8,005

Note: It is assumed that freight-out and discounts allowed are included in operating expenses. PROBLEM SET B 4.2 .

4.40

Chapter 4: Inventories

Wen Goh Warehouse July

Inventory (50 X $15) Accounts Payable

750

Accounts Receivable (40 X $25) Sales

1,000

Cost of Sales (40 X $15) Inventory

600

Accounts Payable Discount received ($750 X 0.01) Cash

750

Cash Discounts allowed (1,000 x .01) Accounts Receivable

990 10

Accounts Receivable (30 X $25) Sales

750

Cost of Sales (30 X $15) Inventory

450

Inventory (60 X $15) Accounts Payable

900

750

1,000

600

8 742

1,000

750

450

900

Freight-In Cash

100

Accounts Payable Inventory

150

100

150

Cash Discounts allowed ($750 X .01) Accounts Receivable

742 8

Accounts Receivable (40 X $25) Sales

1,000

Cost of Sales (40 X $15) Inventory

600

Accounts Payable ($900 – $150)

750

1,000

600

4.41

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Cash 31

750

Sales Returns and Allowances Accounts Receivable

125

Inventory Cost of Sales

125

(b) The advantages for Wen Goh Warehouse of using a perpetual inventory system as opposed to a periodic inventory system are: •

Inventory is constantly updated every time a purchase or sale is made. This means that Wen Goh Warehouse will be aware of when to reorder items of inventory.

•

Cost of sales is updated every time a sale is made so interim financial statements can be prepared without having to conduct an inventory count.

•

When Wen Goh Warehouse does conduct an inventory count (which should be at least annually), any inventory losses can be accurately determined.

•

Using a perpetual inventory system would be a disadvantage for Wen Goh Warehouse if the business does not have a suitable computer system to maintain inventory records.

4.42

Chapter 4: Inventories

PROBLEM SET B 4.3

(a)

ENOTECA DEPARTMENT STORE Statement of Profit or Loss for the Year Ended 30 June 2015

Operating revenue Sales revenues Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Gross profit Other operating revenue: Interest revenue

$690,800 8,800 682,000 453,970 228,030 4,400 4,400 232,430

Operating expenses Selling expenses: Sales commissions expense Sales salaries expense

15,950 83,600

99,550

Administrative expenses Depreciation expense—equipment Depreciation expense—building Electricity expense Insurance expense Office salaries expense Rates and taxes expense

14,630 11,440 12,100 7,920 35,200 5,280

86,570

12,100

Financial expenses: Interest expense Total operating expenses Profit before income tax

198,220 34,210

4.43

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

ENOTECA DEPARTMENT STORE Statement of Changes in Equity for the Year Ended 30 June 2015 Retained Earnings, 1 July 2014 Add: Profit

$29,260 34,210 63,470 30,800 $32,670

Less: Dividends Retained Earnings, 30 June 2015 ENOTECA DEPARTMENT STORE Statement of Financial Position as at 30 June, 2015 Assets Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets Non-current assets Property, plant, and equipment Building Less: Accumulated depreciation— building Equipment Less: Accumulated depreciation— equipment Total assets

$ 36,300 55,330 82,500 2,640 176,770

$209,000 57,750 110,000

$151,250

47,190

62,810

214,060 $390,830

Liabilities and Equity Current liabilities Accounts payable $ 87,230 Mortgage payable 22,000 Rates and taxes payable 5,280 Sales commissions payable 3,850 Interest payable 8,800 Total current liabilities 127,160 Non-current liabilities Mortgage payable – long term (due after 2016) 66,000 Total liabilities 193,160 Equity Share capital 165,000 Retained Earnings 32,670 Total equity 197,670 Total liabilities and equity $390,830 (b) Return on assets = profit after tax/average total assets = 34,210/371,415 = 9.2% .

4.44

Chapter 4: Inventories

Note: average total assets = (352,000+390,830)/2 = 371,415 Profit margin = profit after tax/net sales = 34,210/682,000 = 5.0% Gross profit rate = gross profit / net sales = 228,030/682,000 = 33.4% Operating expenses to sales ratio = operating exp./net sales = 198,220/682,000 = 29.1% (c)

4.45

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 4.4 RACQUETS ‘R’ US TENNIS SHOP General Journal

(a) Date Apr. 6 7 8

Account Titles Inventory Accounts Payable Freight-In Cash

Debit 1,260

1,260 60 60

Accounts Receivable Sales

1,350

Cost of Sales Inventory

900

Accounts Payable Inventory

Inventory Cash

450

Accounts Payable ($1,260 – $60) Discount received ($1,200 X 3%) Cash

1,200

Inventory Accounts Payable

750

Cash

Inventory Freight-In Cash

10 11 13

20 21

27 30

Credit

1,350 900 60 450 36 1,164 750 75 45

Accounts Receivable Sales

1,350

Cost of Sales Inventory Cash Accounts Receivable

795

Accounts Payable Discount received ($750 X 2%) Cash

750

Sales Returns and Allowances Accounts Receivable

Cash

750

1,350 795 750 750 15 735 45

Accounts Receivable

750

(b) .

4.46

Chapter 4: Inventories

Opening balance 15-Apr Inventory 20-Apr Accounts receivable

Cash 3,750 75 750

30-Apr Accounts receivable

750

1-May Opening balance

5,325 2,871

7-Apr Freight-In 11-Apr Inventory 13-Apr Accounts payable

60 450 1,164

17-Apr Freight-In 21-Apr Accounts payable

45 735

Closing balance

8-Apr Sales 18-Apr Sales

1-May Opening balance

Opening balance 6-Apr Accounts payable 11-Apr Cash 14-Apr Accounts payable

1-May Opening balance

10-Apr Inventory 13-Apr Discount and cash 21-Apr Discount and cash 30-Apr Closing balance

2,871 5,325

Accounts Receivable 1,350 20-Apr Cash 1,350 27-Apr Sales returns 30-Apr Cash Closing balance 2,700 1,155

750 45 750 1,155 2,700

Inventory 2,550 8-Apr COGS 1,260 10-Apr Accounts payable 450 15-Apr Cash 750 18-Apr COGS Closing balance 5,010 3,180

900 60 75 795 3,180 5,010

Accounts Payable 60 6-Apr Inventory 1,200 14-Apr Inventory 750 0 2,010 1-May Opening balance

1,260 750

2,010 0

Share Capital Opening balance

6,300

Sales 8-Apr Accounts receivable 18-Apr Accounts receivable

1,350 1,350 2,700

4.47

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

27-Apr Accounts receivable

Sales Returns and Allowances 45

Discount Received 13-Apr Accounts payable 21-Apr Accounts payable

36 15 51

Cost of Sales 900 795 1,695

8-Apr Inventory 18-Apr Inventory

Freight-In 60 45 105

7-Apr Cash 17-Apr Cash

Cash Accounts receivable Inventory Accounts payable Share capital Sales Sales returns and allowances Cost of sales Freight-In Discount received

Debit 2,871 1,155 3,180

Credit

6,300 2,700 45 1,695 105 9,051

51 9,051

(d) RACQUETS ‘R’ US TENNIS SHOP Statement of Profit or Loss (Partial) for the Month Ended 30 April, 2016 Sales revenues Sales ................................................................................................. $2,700 Less: Sales returns and allowances .................................................. 45 Net sales............................................................................................ $2,655 Cost of sales (Cost of sales + Freight-In)..................................................... 1,800 Gross profit.................................................................................................. $ 855

4.48

Chapter 4: Inventories

(e)

The chart of accounts lists all the accounts in the general ledger and serves as an index of accounts. Each ledger account has a title and unique number. The chart of accounts is helpful for recording transactions because it identifies which accounts should be used.

PROBLEM SET B 4.5 .

4.49

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Sirimon Ltd Statement of Profit or Loss for the year ending 30 June 2016 OPERATING REVENUE Sales revenue: Gross sales revenue (1,053,000 15,000) Less: Sales returns and allowances Net sales revenue

$1,038,00 0 0 $1,038,00 0 (705,000) $333,000

Less: Cost of Sales GROSS PROFIT Other operating revenue: Interest revenue

7,950

7,950 340,950

OPERATING EXPENSES Selling expenses: Advertising Depreciation expense - store equip Freight out Sales commissions expense Sales salaries expense

15,000 11,250 15,000 9,750 114,000

Administrative expenses: Insurance expense (10,500-1,800) Office salaries expense Rent expense – office space Electricity expense

8,700 28,500 24,000 12,000

165,000

73,200 Financial expenses: Discount allowed Interest expense Bank charges Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

16,950 6,000 1,500

24,450 262,650 78,300 (23,490) 54,810

4.50

Chapter 4: Inventories

PROBLEM SET B 4.6 (a)

June. 30 30

Daniela’s Fashion House Store Supplies Expense Store Supplies Depr. Expense—Store Equipment Accumulated Depreciation— Store Equipment Depr. Expense—Office Equipment Accumulated Depreciation— Office Equipment Interest Expense Interest Payable

1,000 1,000 4,500 4,500 3,500 3,500 5,500 5,500

(b) Store Supplies 30/6 Bal. 30/6 Bal.

2,750 1,750

30/6 Supplies expense 1,000

Accumulated Depreciation— Store Equipment 30/6 30/6 30/6

Bal. 19,000 Deprec exp – SE 4,500 Bal 23,500

Accumulated Depreciation— Office Equipment 30/6 Bal. 30/6 Deprec exp – OE 30/6 Bal.

3,000 3,500 6,500

Store Supplies Expense 30/6

Supplies 1,000 Depreciation Expense—Store Equipment

30/6 Accu. Deprn store equipment

4,500

Depreciation Expense— Office Equipment 30/6 Accu. Deprn office equip 3,500 Interest Expense 30/6 Interest payable

5,500 Interest Payable 30/6 Interest expense 5,500 30/6 Bal. 5,500

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

DANIELA’S FASHION HOUSE Adjusted Trial Balance 30 June 2017 Debit Cash Accounts Receivable Inventory Store Supplies Store Equipment Accumulated Depreciation—Store Equipment Office Equipment Accumulated Depreciation—Office Equipment Notes Payable Accounts Payable Share Capital Retained Earnings Dividends Sales Sales Returns and Allowances Cost of Sales Salaries Expense Administrative Staff Sales Staff Advertising Expense Electricity Expense Repair Expense Freight Out Rent Expense Store Supplies Expense Depreciation Expense—Store Equipment Depreciation Expense—Office Equipment Interest Expense Interest Payable Totals

Credit

18,350 16,850 22,500 1,750 42,500 $

23,500

19,000 6,500 20,500 24,250 40,000 15,000 6,000 373,600 2,100 253,700 50,000 15,000 13,200 7,000 6,050 8,350 12,000 1,000 4,500 3,500 00,00115500 ,0005500

5,500 $508,850

$508,850

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Chapter 4: Inventories

(d) DANIELA’S FASHION HOUSE Statement of Profit or Loss for the Year Ended 30 June 2017 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of Sales

$373,600 (2,100) $371,500 (253,700) $117,800

GROSS PROFIT Other operating revenue:

0 117,800

OPERATING EXPENSES Selling expenses: Advertising Depreciation expense - store equip Freight out Store supplies expense Sales salaries expense Administrative expenses: Depreciation exp - office equipment Office salaries expense Repair expense Rent expense - office space Electricity expense

13,200 4,500 8,350 1,000 15,000

42,050

3,500 50,000 6,050 12,000 7,000 78,550

Financial expenses: Interest Total operating expenses PROFIT(LOSS) BEFORE INCOME TAX (Ignore income tax)

5,500

5,500 126,100 (8,300)

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

DANIELA’S FASHION HOUSE Statement of Changes in Equity for the Year Ended 30 June 2017 Retained Earnings, July 1, 2016 Less: Loss Dividends Retained Earnings, June 30, 2017

$15,000) $8,300 6,000

( 14,300)) $ 700)

DANIELA’S FASHION HOUSE Statement of Financial Position as at 30 June 2017 Assets Current assets: Cash Accounts receivable Inventory Store supplies Total current assets Non-current assets: Property, plant, and equipment Store equipment Accumulated depreciation— store equipment Office equipment Accumulated depreciation— Office equipment Total assets Liabilities and Equity Current liabilities: Notes payable due in 2018 Accounts payable Interest payable Total current liabilities Long-term liabilities Notes payable due after 2018 Total liabilities Equity Share capital Retained Earnings Total equity Total liabilities and equity .

$ 18,350 16,850 22,500 1,750 59,450

$42,500 23,500 19,000

$19,000

6,500

12,500

31,500 $90,950

$ 15,000 24,250 5,500 44,750 5,500 50,250 40,000 700 40,700 $90,950 4.54

Chapter 4: Inventories

(e)

The statement of profit or loss is prepared for a period of time because it summarises income and expenses for that period. The profit or loss then is used to update equity at the end of that period. The statement of financial position shows the financial position, i.e., the balances of assets, liabilities, and equity on the date the statement of financial position is prepared.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 4.7 (a) Fixit Hardware Pty Ltd Date

Details

May 2

Accounts Receivable Sales Cost of Sales Inventory

Post Ref 110 400 505 120

Inventory Accounts Payable

120 200

3,000

Accounts Payable Inventory

200 120

100

Cash Discount Allowed Accounts Receivable

100 500 110

2,205 45

Accounts Payable Cash Discount Received

200 100

2,900

Supplies Cash

130 100

450

Inventory Cash

120 100

1,200

Cash Inventory

100 120

115

Inventory Accounts Payable

120 200

950

Freight Inwards Cash

510 100

125

May 3

May 5

May 9

May 10

May 11

May 12

May 15

May 20

May 21

May 24

May 25

May 27

May 29

Debit

Credit

2,250 2,250 1,500 1,500

3,000

100

2,250

2,842 58

450

1,200

115

950

125

Cash Sales Cost of Sales Inventory

100 400 505 120

3,100

Inventory Accounts Payable

120 200

500

Accounts Payable Cash Discount Received

200 100 410

950

Sales Returns and Allowance Cash Inventory Cost of Sales

405 100 120 505

3,100 2,170 2,170

500

931 19

50 35 35 4.56

Chapter 4: Inventories

May 31

Accounts Receivable Sales Cost of Sales Inventory

110 400 505 120

800 800 560 560

(b)

May 1 9 15 24

Jun 1

May 1 2 31 Jun 1

Opening Balance Accounts Receivable Inventory Sales

Opening Balance

Cash 2,500 May 10 2,205 11 115 3,100

12 21 27 29

______ 7,920

100 2,842 450

Accounts Payable Supplies Inventory Freight Inwards Accounts Payable Sales Returns and Allowances Closing Balance

1,200 125 931 50 2,322 7,920

2,322

Accounts Receivable Opening Balance 0 May 9 Cash and Discount Allowed Sales 2,250 31 Closing Balance Sales 800 3,050 Opening Balance 800

110 2,250

Inventory 3,000 May 2 1,200 5 950 15 500 24 35 31 5,685 31

Cost of Sales Accounts Payable Cash Cost of Sales Cost of Sales Closing Balance

120 1,500 100 115 2,170 560 1,240 5,685

Closing Balance

130 450 450

May 3 12 20 25 29

Accounts Payable Cash Accounts Payable Accounts Payable Cost of Sales

Jun 1

Opening Balance

May 11

Cash

Jun 1

Opening Balance

800 3,050

1,240

Supplies 450 May 31 450 450

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

May 5 10 27 31

Accounts Payable Inventory 100 May 1 Cash and Discount 2,900 3 Received Cash and Discount 950 20 Received Closing Balance 500 25 4,450 Jun 1

Share Capital May 1

Sales May 2 24 31

May 29

200 0 3,000

Opening Balance Inventory Inventory

950

Inventory Opening Balance

500 4,450 500

Opening Balance

300 2,500

400 2,250 3,100 800 6,150

Accounts Receivable Cash Accounts Receivable

Sales Returns and Allowances 50

Cash

May 9

Accounts Receivable

May 2 24 31

Inventory Inventory Inventory

May 21

Cash

Jun 1

Opening Balance

405

Discount Received May 10 Accounts Payable 27 Accounts Payable

410 58 19 77

Discount Allowed 45

500

Cost of Sales 1,500 May 29 2,170 560 4,195

Freight Inwards 125 May 31 125 125

505 35

Inventory

510 125 125

Closing Balance

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Chapter 4: Inventories

Operating Revenue Sales Revenue Gross Sales Revenue Less: Sales Returns and Allowances Net Sales Revenue Less: Cost of Sales Gross Profit

6,150 (50) 6,100 (4,195) 1,905

(d)

Profit margin =

Profit/Net Sales

Gross profit ratio =

Gross Profit/Net Sales

Profit: 1,905 Gross Profit + (58 + 19) Discount Received – 700 Operating Expense = 1,282

1,282/6,100 = 21.02%

1,905/6,100 = 31.23%

4.59

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 4.8 Nguyen Electronics Ltd (a) Cash/Accounts Receivable GST Collected ($50,500/11) Sales (To record sales revenue and GST collected)

50,500

Sales Returns and Allowances GST Collected ($1,000/11) Accounts Receivable (To record sales revenue and GST returned)

909 91

Inventory GST Paid ($20,400/11) Accounts Payable (To record inventory purchase and GST paid)

18,546 1,854

Accounts Payable GST Paid ($2,400/11) Inventory (To record purchase return and GST recovered)

2,400

GST Collected GST Paid Cash (To record payment of GST to tax authority)

4,500

4,591 45,909

1,000

20,400

218 2,182

1,636 2,864

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Chapter 4: Inventories

(b) Cash/Accounts Receivable GST Clearing Sales (To record sales revenue and GST collected)

50,500

Sales Returns and Allowances GST Clearing Accounts Receivable (To record sales returns and GST refunded)

909 91

Inventory/Purchases GST Clearing Accounts Payable (To record inventory purchase and GST paid)

18,546 1,854

Accounts Payable GST Clearing Inventory (To record purchase return and GST recovered)

2,400

GST Clearing Cash (To record payment of GST to tax authority)

2,864

Cash/Accounts Receivable GST Collected ($20,400/11) Sales (To record sales revenue and GST collected)

20,400

Inventory GST Paid ($50,500/11) Accounts Payable (To record inventory purchase and GST paid)

45,909 4,591

Cash GST Collected GST Paid (To record refund of GST from tax authority)

2,737 1,854

Cash/Accounts Receivable GST Clearing Sales (To record sales and GST collected)

20,400

Inventory GST Clearing Accounts Payable (To record inventory purchase and GST paid)

45,909 4,591

Cash

2,737

4,591 45,909

1,000

20,400

218 2,182

2,864

50,500

4,591

(d) 1,854 18,546

50,500

GST Clearing (To record GST refund from tax authority)

2,737

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 4.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Limited (a)

Percentage change in revenue from sale of goods: 2012 to 2013 ($182,000,000 - $162,337,000) ÷ $162,337,000= 12.1% Percentage change in profit after tax: 2012 to 2013 ($28,657,000 – $26,936,000) ÷ $26,936,000 = 6% There has been a 6% increase in profit from 2012 to 2013

(b)

Operating expenses to sales ratio: 2012 2013

$151,725,000 ÷ $162,337,000 = 93.5% $172,539,000 ÷ $182,000,000 = 94.8%

The operating expenses to sales ratio has increased marginally between 2012 and 2013, which indicates that expenses have risen in a slightly larger proportion than sales. Note: Analysis of trend typically involves a longer period. Trend analysis is covered in Chapter 12.

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Chapter 4: Inventories

BUILDING BUSINESS SKILLS 4.2

COMPARATIVE ANALYSIS PROBLEM

Nike vs. Adidas Group The analysis is based on the 2013 reports (a) Nike ($’000,000) (1)

Profit margin

Adidas ($’000,000)

$2,464 $25,313 = 9.7%

$790 $14,492

= 5.5%

(2)

Gross profit (000’s)

$11,034 ($25,313-$14,279)

$7,140 ($14,492–$7,352)

(3)

Gross profit rate

$11,034 $25,313

$7,140 = 49.3% $14,492

= 43.6%

(4)

Profit after tax

$2,464

$790

(5)

Percent change in Profit after tax

$2,464-$2,269 = 8.6% $2,269

$790–$524 = 50.7% $524

(6)

Operating expenses to sales ratio

$7,780 $25,313= 30.7%

$6,227** = 43% $14,492

**($6,133 + $94)

(b)

Nike’s higher profit margin suggests that it was better at turning sales dollars into profit. The gross profit rate is better for Adidas, suggesting that Adidas can command a higher mark-up on its goods and/or lower product costs. Alternatively, the difference could reflect different accounting policies between the two companies. Adidas’s operating profit increased substantially between 2012 and 2013. Although Nike has a lower gross profit margin, it achieved a higher profit margin because it had a lower operating expense to sales ratio ie: better control of its operating expenses. However, we should be careful not to read too much into a comparison based on only one year’s data.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 4.3

(a)

Some of the benefits to businesses that make donations of excess inventory include: • • • • •

(b)

COMMUNITY AND SOCIAL PERSPECTIVE

Freeing up storage space from excess, overstocked, obsolete or outdated inventory; The business can claim a tax deduction for the market value of merchandise donated; Enhance the business’ corporate image by donating excess items to a good cause, rather than dumping or liquidating the items; Avoid sending the wrong message to customers that a liquidation sales may bring; Avoid disrupting the business’ distribution or sales channels with excessive inventory that are becoming obsolete.

The procedures for making donations of excess inventory with Charity Link Australia are: • The donor company completes a Product Donation Agreement which contains relevant information about the products being donated, including description, quantity, configuration, timing, inventory location and fair market value of the inventory. • The charity organisation will confirm receipt of the Product Donation Agreement and collect or arrange transfer of the donated inventory. • Charity Link Australia will warehouse the donations until requested by welfare organisations that are qualified and meet the registration criteria. Where possible, the requested donations will be delivered directly to the welfare organisations or the families in need. • Charity Link Australia will provide tax documentation to the donor company in accordance with the Australian Taxation Office requirements and valuations.

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Chapter 4: Inventories

BUILDING BUSINESS SKILLS 4.4

A GLOBAL FOCUS

Woolworths vs. Wal-Mart (a) Woolworths AUS$ (in millions)

Wal-Mart US$ (in millions)

Gross profit rate

15,762 =26.94% 58,517

115,007 =24.31% 473,076

Operating expense sales

12,825 =21.92% 58,517

93,688 = 19.80% 473,076

Based on these ratios and assuming consistent accounting policies, it would appear that Woolworths is able to command a higher mark-up than Wal-Mart, but that Wal-Mart is better at controlling its operating costs. It is possible, however, that some of this difference is due to a difference between the two companies in the way that they report expenses, e.g. what one company includes in cost of sales, the other company reports as an operating expense.

(b) Woolworths AUS$ (in millions)

Wal-Mart US$ (in millions)

Return on assets

2,255 =10.29% 21,916

16,695 =8.19% 203,928

Profit margin

2,255 =3.85% 58,517

16,695 = 3.53% 473,076

Woolworths’ return on assets is greater than that of Wal-Mart which indicates it is more efficient in generating profit from its assets. Also, from the data we observe that the profit margin for Woolworths is also greater than Wal-Mart which indicates that Woolworths generates more profit from each dollar of sales..

4.65

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Wal-Mart US$ (in millions)

Current ratio

6,226 =0.90 : 1 6,886

61,185 =0.88 : 1 69,345

Debt to total assets ratio

12,950 =58.2% 22,250

123,412 = 60.3% 204,751

Both companies report low current ratios. Both are less than 1. This is not surprising since it is the retail industry which has a quick turnaround of inventory and mostly cash sales, limiting the amount of current assets that they hold. However, further investigation as to the cause would be worthwhile. The debt to total assets ratio of both companies are comparable in the range of 58 – 60%. (d)

Ratios improve our ability to compare these two companies that report financial information using different currencies. However, other factors can still reduce our ability to compare them. As noted in part (a), the two companies might classify items quite differently. Also, different accounting standards in the two countries might result in dramatically different results under the same circumstances. Besides, differences in laws, such as insolvency laws, can affect the results. For example, if Australian insolvency laws favour shareholders more than US insolvency laws, then Australian companies may rely more on debt financing than US companies. Finally, the data for comparison is just one year. It would be more useful to compare the trend over a number of years. (Note to lecturer: Trend analysis is covered in Chapter 12 of the textbook.)

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Chapter 4: Inventories

BUILDING BUSINESS SKILLS 4.5

FINANCIAL ANALYSIS ON THE WEB

Answers will vary depending on the company and article chosen by student.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CRITICAL THINKING BUILDING BUSINESS SKILLS 4.6 (a)

GROUP DECISION CASE

(1) Groove Music Store Projected Statement of Profit or Loss for the year ended 30 June 2017

Net sales [$700,000 + ($700,000 x 6%)] Cost of sales ($742,000 x 75%)* Gross profit ($742,000 x 25%)** Operating expenses: Selling expenses Administrative expenses Finance expenses Total operating expenses Profit

$742,000 556,500 185,500

$100,000 20,000 5,000 125,000 $60,500

*75% = ($546,000/700,000) –3%; Alternatively: Net sales $742,000 – gross profit, $185,500 **25% = ($154,000 ÷ $700,000) + 3%

(a)

(2)

Groove Music Store Projected Statement of Profit or Loss for the year ended 30 June 2017

Net sales Cost of sales Gross profit

$700,000 546,000 154,000

Operating expenses: Selling expenses* Administrative expenses Finance expenses Profit

$72,000 20,000 5,000

97,000 $57,000

*$100,000 - $30,000 – ($30,000 x 40%) + ($700,000 x 2%) = $72,000

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Chapter 4: Inventories

(b)

Fiona’s proposed changes will increase profit by $31,500. Frank’s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in profit. Thus, if the choice is between Fiona’s plan and Frank’s plan, Fiona’s plan should be adopted. While Frank’s plan will increase profit, it may also have an adverse effect on sales personnel. Under Frank’s plan, sales personnel will be taking a cut of $16,000 in compensation {$60,000 – ($30,000 + $14,000)}. In some circumstances, a commission may be expected to motivate staff to try to make more sales, although this has been assumed not to be the case for the Groove Music Store.

Net sales Cost of sales Gross profit

$742,000 556,500 185,500

Operating expenses: Selling expenses* Administrative expenses Finance expenses Profit

$72,840 20,000 5,000

97,840 $87,660

*$72,000 + 2% x ($742,000 - $700,000) = $72,840. If both plans are implemented, profit will be $58,660 ($87,660 - $29,000) higher than the 2015 results. This is an increase of over 200%. (d)

A variety of factors might be presented by the student. For example, increasing the quantity of inventory purchased will increase warehousing and other costs of inventory. It will also increase the risk of holding obsolete or out-of-fashion inventory. Reduced store deliveries may anger customers, especially if competitors provide more frequent service. Staff morale may be affected by the lower salaries which are not fully offset by commissions. Given the size of the increase, Frank’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $7,740 [$60,000 – ($30,000 - $742,000 x 3%)]. Cutting salespersons’ salaries and making them more dependent on commissions might actually be viewed favourably by the sales staff if they have the potential to increase their total compensation.

4.69

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 4.7

ETHICS CASE Fine Foods

(a)

Sonya Packovski, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her boss’ unethical instructions or offend her boss and maybe lose the job she just assumed.

(b)

The stakeholders (affected parties) are: Sonya Packovski, the assistant accountant Adam Fox, the accountant Delicacy Foods, the company Creditors of Delicacy Foods (suppliers) Mail room employees (those assigned the blame) The Post Office (also assigned blame).

(c)

Sonya’s alternatives: 1.

Tell the accountant (her boss) that she will attempt to take every allowable cash discount by preparing and mailing cheques within the discount period – the ethical thing to do. This will offend her boss and may jeopardise her continued employment.

Join the team and continue the unethical practice of taking undeserved settlement discounts.

Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Adam. The company may not condone this practice. Sonya definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Sonya submits to this request, she may be asked to perform other unethical tasks. If Sonya stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things – if she isn’t fired. Maybe nobody has ever challenged Adam’s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.

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Chapter 5: Reporting and analysing inventory

CHAPTER 5 – REPORTING AND ANALYSING INVENTORY ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises

Learning Objectives

Exercises

Problems

Record purchases and sales of inventory under a periodic inventory system.

1A, 7A, 1B, 7B

Determine cost of sales under a periodic inventory system.

2, 3

1A, 2A, 7A, 8A, 1B,2B, 7B, 8B

Describe the steps in determining inventory quantities

Identify the unique features of the statement of profit or loss for a merchandising business under a periodic inventory system.

1A, 2A, 7A, 8A, 1B, 2B, 7B, 8B

Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.

6, 7

3A, 4A, 9A, 3B, 4B, 9B

Explain the financial statement effects of each of the inventory cost flow methods

Explain the lower of cost and net realizable value basis of accounting for inventories

Calculate and interpret inventory turnover.

5A, 10A, 5B, 10B

Apply the inventory cost flow methods to perpetual inventory records.

6A, 12A, 6B, 12B

10.

Indicate the effect of inventory errors on the financial statements

11.

Record the closing entries for merchandising entities

1, 3

3A, 4A, 9A, 3B, 4B, 9B

12, 13

11A, 11B

5.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

CHAPTER 5 – REPORTING AND ANALYSIS INVENTORY ANSWERS TO QUESTIONS 1. July 24

Accounts Payable ($1,600 - $100) Discount Received ($1,500 x 2%) Cash ($1,500 – $30)

(a)

x = Purchase returns and allowances.

(b)

x = Cost of goods purchased.

(c)

x = Ending inventory.

(a)

(b)

1,500 30 1,470

(1)

The goods will be included in Shields Ltd’s inventory if the terms of sale are FOB destination.

(2)

They will be included in Francine Ltd’s inventory if the terms of sale are FOB shipping point.

Shields Ltd should include goods shipped to a consignee in its inventory. Goods held by Shields Ltd on consignment should not be included in inventory.

The primary basis of accounting for inventories is cost in accordance with the cost principle. The major objective for inventories is the proper determination of profit in accordance with the matching principle.

No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be consistently applied.

(a)

FIFO

(b)

Average cost

(c)

LIFO.

Lee Ltd is using the FIFO method of inventory costing and Lam Ltd is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the statement of financial position should be close to current costs. The reverse is true of the LIFO method. Lee Ltd will have the lower gross profit because cost of goods will include a higher proportion of goods purchased at earlier (higher) costs.

5.2

Chapter 5: Reporting and analysing inventory

Nancy should know the following: (a)

A departure from the cost basis of accounting for inventories is justified when the value of the goods is no longer as great as its cost. The write-down to market value should be recognised in the period in which the price decline occurs.

(b)

IAS 2 defines net realisable value as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale (i.e. marketing, selling and distributing to customers).

Disagree. The results under the FIFO method are the same but the results under the LIFO method are different. The reason is that the pool of inventoriable costs (costs of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale.

10.

(a)

Peta Ltd’s 2016 profit will be understated $5,000;

(b)

2017 profit will be overstated $5,000; and

(c)

the combined profit for the two years will be correct.

5.3

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5.1 a) Perpetual system, specific identification b) Perpetual system, average cost c) Periodic system, specific identification d) Perpetual system, FIFO e) Periodic system, specific identification BRIEF EXERCISE 5.2 Jess Ltd OPERATING REVENUE Sales revenue: Gross sales revenue

472, 500

Less: Sales returns and allowances

Net sales revenue

472,500

Cost of sales: Beginning inventory

45,000

Purchases

300,000

Less: Purchase returns and allowances

(14, 250)

Net purchases

285,750

Freight-in

12,000

Cost of goods purchased

297,750

Cost of goods available for sale

342,750

Less: Ending inventory

(67,500)

Add:

Cost of sales

272,250

GROSS PROFIT

197,250

BRIEF EXERCISE 5.3 Cushion Ltd (a)

The ending inventory under FIFO consists of 400 units at $18 for a total allocation of $7,200.

(b)

The ending inventory under LIFO consists of 300 units at $12 + 100 units at $14 for a total allocation of $5,000 ($3,600 + $1,400).

5.4

Chapter 5: Reporting and analysing inventory

BRIEF EXERCISE 5.4 Olynda Garden Centre Cost

Inventory Categories Native trees Potting mix Garden statues Total valuation

$16,800 12,600 19,600 $49,000

NRV

LCNRV

$14,280 13,300 17,920 $45,500

$14,280 12,600 17,920 $44,800

The lower of cost and net realisable value (LCNRV) is $44,800

BRIEF EXERCISE 5.5 Che Eyewear Ltd Inventory turnover ratio:

$129,201 $129,201 = = 2.79 ($39,300 + $53,322)  2 $46,311

Days in inventory:

365 = 130.8 days 2.79

5.5

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

BRIEF EXERCISE 5.6 Harrots Department Store 1.

FIFO

June 1 sale: Aug. 27 sale:

Cost of Sales $360 $240 234

474 $834

LIFO June 1 sale: Aug. 27 sale:

30 units @ $12 = 20 units @ $12 = 13 units @ $18 =

30 units @ $12 = 30 units @ $18 = 3 units @ $12 =

Cost of Sales $360 $540 36

576 $936

AVERAGE COST June 1 sale: Aug. 27 sale:

30 units @ $12 = 33units @ $15.60* =

Cost of Sales $360 515** $875

[(50 − 30)  $12] + (30  $18) 50 units

** rounded.

BRIEF EXERCISE 5.7 The understatement of ending inventory caused cost of sales to be overstated by $14,000 and gross profit to be understated by $14,000. The correct profit for 2015 is $194,000 ($180,000 + $14,000). Total assets in the statement of financial position will be understated by the amount that ending inventory is understated, $14,000.

5.6

Chapter 5: Reporting and analysing inventory

SOLUTIONS TO EXERCISES EXERCISE 5.1 (a) Peters Ltd (1)

(2)

(3)

(4)

(5)

(b)

5 April

6 April

7 April

8 April

9 April

4 May

Purchases Accounts Payable

9,000 9,000

Freight-in Cash

450 450

Equipment Accounts Payable

13,000

Accounts Payable Purchase Returns and Allowances

1,500

Accounts Payable ($9,000 - $1,500) Discount Received [($9,000 - $1,500) x 2%] Cash ($7,500 - $150)

7,500

Accounts Payable ($9,000 - $1,500) Cash

7,500

13,000

1,500

150 7,350

7,500

EXERCISE 5.2 Francine Pty Ltd Statement of Profit or Loss (partial) for the year ended 30 June 2016

Beginning inventory 1 July 2015 Purchases Less: Purchase returns and allowances Net purchases Cost of goods available for sale Ending inventory 30 June 2016 Cost of sales

$56,760 $469, 920 6,600 463,320 520,080 85,800 $434,280

5.7

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

EXERCISE 5.3 (a) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (b)

$1,460 $1,570 $1,510 $50 $200 $120 $7,500 $730 $8,940 $5,200 $1,500 $44,330

($1,500 - $40) ($1,460 + $110) ($1,820 - $310) ($1,080 - $1,030) ($1,230 - $1,030) ($1,350 - $1,230) ($290 + $7,210) ($7,940 - $7,210) ($1,000 + $7,940) ($49,530 - $44,330 from (l)) ($43,590 - $42,090) ($42,090 + $2,240)

The purpose of this exercise is to develop the skill to determine the relationship between each component in the calculation of cost of sales.

5.8

Chapter 5: Reporting and analysing inventory

EXERCISE 5.4 Hooton Ltd (a) Ending inventory – physical count 1. No effect – title passes to purchaser upon shipment when terms are FOB shipping point 2.

$147,500 -

No effect – title does not transfer to Hooton Ltd until goods are received -

Add to inventory: Title passed to Hooton Ltd when goods were shipped 12,500

Add to inventory: Title remains with Hooton Ltd until purchaser received goods

The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory

The goods should have been written-off under IAS 2 by application of the LCNRV rule.

Correct inventory

(b)

20,000 (22,000)

(25,000) $133,000

It is important for the Bank of Epping to determine the correct amount for inventory before granting a loan to Hooton Ltd because this will help the Bank determine the accuracy of the financial statements. The Bank’s main interest in the financial statements is trying to determine whether Hooton Ltd has the ability to repay the loan. The year-end inventory balance of $147,500 is overstated by $14,500. Therefore assets in the statement of financial position are overstated. Cost of sales in the statement of profit or loss would be understated so the profit would also be overstated.

5.9

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

EXERCISE 5.5 Djuric Ltd Statement of Profit or Loss for the month ended 31 January 2016

INCOME Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 January Purchases Less: Purchase returns and allowances Net purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Less: Ending Inventory 31 January Cost of sales GROSS PROFIT

$446,160 18,590 $427,570

60,060 $286,000 12,870 273,130 14,300 287,430 347,490 90,090 257,400 170,170

OPERATING EXPENSES Selling expenses: Freight-out Rent expense – store space Sales salaries expense

10,010 14,300 30,030

54,340

Administrative expenses: Insurance expense Office salaries expense Rent expense – office space

17,160 57,200 14,300

88,660

11 440

11,440

Financial expenses: Discount allowed Total operating expenses PROFIT

154,440 $15,730

5.10

Chapter 5: Reporting and analysing inventory

EXERCISE 5.6 SurfsUp Ltd (a) FIFO Beginning inventory (26 x $97) Purchases: 12 May (45 x $102) 19 May (28 x $104) 22 May (40 x $105) Cost of goods available for sale Less: Ending inventory (*15 x $105) Cost of sales * 15 = 139 – 124

$2,522 $4,590 2,912 4,200

11,702 14,224 1,575 $12,649

PROOF Date 1/5 12/5 19/5 22/5

Units

Unit Cost

Total Cost

26 45 28 25 124

$97 102 104 105

$2,522 4,590 2,912 2,625 $12,649

LIFO Cost of goods available for sale Less: Ending inventory (15 x $97) Cost of sales

$14,224 1,455 $12,769

PROOF Date 26/5 19/5 12/5 1/5

Units

Unit Cost

Total Cost

40 28 45 11 124

$105 104 102 97

$4,200 2,912 4,590 1,067 $12,769

5.11

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

(b)

FIFO $1,575 (ending inventory) + $12,649 (Cost of sales) = $14,224 = Cost of goods available for sale. LIFO $1,455 (ending inventory) + $12,769 (Cost of sales) = $14,224 = Cost of goods available for sale. Under both methods, the sum of the ending inventory and Cost of sales equals the same amount, $14,224, which is the cost of goods available for sale.

5.12

Chapter 5: Reporting and analysing inventory

EXERCISE 5.7 Fenning Pty Ltd (a) 1.

FIFO Beginning inventory (200 x $10) Purchases: 12 June (300 x $12) 23 June (500 x $14) Cost of goods available for sale Less: Ending inventory (180 x $14) Cost of sales

$2,000 $3,600 7,000

10,600 12,600 2,520 $10,080

LIFO Cost of goods available for sale Less: Ending inventory (180 x $10) Cost of sales

$12,600 1,800 $10,800

AVERAGE COST Cost of Goods Available for Sale $12,600

Total Units Available for Sale 1,000

Weighted Average Unit Cost $12.60

Ending inventory (180 x $12.60) $2,268 Cost of sales (820 x $12.60) $10,332 or $12,600 - $2,268 = $10,332

(b)

The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to Cost of Sales, and the latest costs remain in ending inventory. The LIFO method will produce the highest Cost of Sales for Fenning Pty Ltd. Under LIFO the most recent costs are charged to Cost of Sales and the earliest costs are included in the ending inventory.

(c)

The average cost ending inventory ($2,268) is higher then LIFO ($1,800) but lower than FIFO ($2,520). For Cost of Sales, average cost ($10,332) is higher than FIFO ($10,080) but lower than LIFO ($10,800).

(d)

The simple average would be ($10 + $12 + $14)/3 = $12. However, the average cost method uses a weighted average unit cost, not a simple average of unit costs.

5.13

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

EXERCISE 5.8 (a) Fashionista Hair Accessories Pty Ltd Inventory Categories

Cost

NRV

Silk ribbons Gold-plated hair clips Crystal hair jewels Total valuation

$25,200 18,900 29,400 $73,500

$21,420 19,950 26,880 $68,250

The lower of cost and net realisable value is.

$67,200

(b)

LCNRV $21,420 18,900 26,880 $67,200

It is important to account for inventory using the LCNRV basis as this is required by IAS 2. No asset should be valued at an amount greater than the economic benefits expected to be received from that asset.

EXERCISE 5.9 (a) BJ Electronics Ltd 2015 Inventory turnover ratio

2016

2017

$8,452 ($1,051+ $853)  2

$8,525 ($853 + $732)  2

$9,330 ($732 + $1,016)  2

=8.88

=10.76

= 10 .68

Days in inventory

365 = 41 days 8 .9

365 = 33.8 days 10.8

365 = 34.1 days 10.7

Gross profit ratio

$20,337 − $8,452

(b)

$20,337

= 0.58

$20,917 − $8,525 $20,917

= 0.59

$22,348 − $9,330 $22,348

= 0.58

The inventory turnover ratio increased by approximately 20% from 2015 to 2017, while the days in inventory decreased by almost 17% over the same time period. Both of these changes would be considered positive in nature. BJ Electronics’s gross profit ratio remained relatively unchanged from 2015 to 2017.

5.14

Chapter 5: Reporting and analysing inventory

EXERCISE 5.10 SurfsUp Ltd (a)

FIFO Date 1/5 5/5 12/5

Purchases

Sales

(12 @ $97) $1,164 (45 @ $102)

$4,590

16/5

(14 @ $97) (36 @ $102) $5,030

19/5

(28 @ $104)

$2,912

26/5

(40 @ $105)

$4,200

29/5

Balance (26 @ $97) $2,522 (14 @ $97) $1,358 (14 @ $97) (45 @ $102) $5,948 (9 @ $102) $918 (9 @ $102) (28 @ $104) $3,830 (9 @ $102) (28 @ $104) (40 @ $105) $8,030

(9 @ $102) (28 @ $104) (25 @ $105) $6,455

(15 @ $105) $1,575

Sales

Balance

LIFO Date 1/5 5/5 12/5

Purchases

(12 @ $97) $1,164 (45 @ $102)

$4,590

16/5

(5 @ $97) (45 @ $102) $5,075

19/5

(28 @ $104)

$2,912

26/5

(40 @ $105)

$4,200

29/5

(22 @ $104) (40 @ $105) $6,488

(26 @ $97) $2,522 (14 @ $97) $1,358 (14 @ $97) (45 @ $102) $5,948 (9 @ $97) $873 (9 @ $97) (28 @ $104) $3,785 (9 @ $97) (28 @ $104) (40 @ $105) $7,985 (9 @ $97) (6 @ $104) $1,497

5.15

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

AVERAGE COST Date 1/5 5/5 12/5 16/5 19/5 22/5 29/5

Purchases

(45 @ $102) (28 @ $104) (40 @ $105)

Sales

Balance

(12 @ $97)

$1,164

(50 @ $100.81)

$5,041*

(62 @ $104.14)

$6,457*

$4,590 $2,912 $4,200

(26 @ $97) (14 @ $97) (59 @ $100.81)a (9 @ $100.81) (37 @ $103.22)b (77 @ $104.14)c (15 @ $104.14)

$2,522 $1,358 $5,948 $907 $3,819 $8,019 $1,562

* Rounded a 5948 ÷ 59 = 100.81 b 3819 ÷ 37 = 103.22 c 8019 ÷ 77 = 104.14 (b) Periodic $1,575 $1,455

Ending Inventory FIFO Ending Inventory LIFO (c)

Perpetual $1,575 $1,497

FIFO yields the same ending inventory value under both periodic and perpetual inventory systems LIFO yields different ending inventory values when using either a periodic or perpetual inventory system.

5.16

Chapter 5: Reporting and analysing inventory

EXERCISE 5.11 Goddard Pty Ltd (a) 2015 Sales Cost of sales: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory ($80,000 - $12,000) Cost of sales Gross profit

(b)

$420,000 $500,000 64,000 68,000 346,000 404,000 410,000 472,000 68,000 104,000 342,000 368,000 $78,000 $132,000

The cumulative effect on total gross profit for the two years is nil as shown below: Incorrect gross profits: Correct gross profits: Difference:

(c)

2016

$90,000 + $120,000 = $78,000 + $132,000 =

$210,000 210,000 $ -

Dear Sir/Madam Because your ending inventory of 30 June 2015 was overstated by $12,000, your gross profit and profit for 2015 was overstated by $12,000 and your gross profit and profit for 2016 was understated by $12,000. In a periodic system, the Cost of Sales is calculated by deducting the cost of ending inventory from the total cost of goods you have available for sale in the period. Therefore, if ending inventory is overstated as it was in June 2015, the Cost of Sales is understated and therefore profit will be overstated by that amount. This overstated ending inventory figure goes on to become the next period’s beginning inventory amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats itself in the reverse. Because the errors over the two year period cancel each other out, at the end of the second year (2016) inventory and retained earnings are correct. Thank you for allowing me to bring this to your attention. If you have any question, please contact me at your convenience. Sincerely,

5.17

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

EXERCISE 5.12 Closing debit and credit accounts to profit or loss summary. Goddard Pty Ltd General Journal Date 30-6-16

Accounts Debit Credit Sales 500,000 Ending Inventory 104,000 Profit or loss summary 604,000 (Closing credit accounts to profit or loss summary) Profit or loss summary Beginning Inventory Purchases (Closing debit accounts to profit or loss summary)

484,000 80,000 404,000

EXERCISE 5.13 Goddard Pty Ltd 30 June 2015

Inventory Sales Purchases

Adjusted Trial Balance DR CR 64,000 420,000 346,000

Closing Entries DR CR 80,000 64,000 420,000 346,000

5.18

Chapter 5: Reporting and analysing inventory

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 5.1 (a) EAGLE RIDGE GOLF PTY LTD Date

Particulars

Debit

Oct. 5 Purchases Accounts Payable

Credit

5,460 5,460

7 Freight-in Cash

168

9 Accounts Payable Purchase Returns and Allowances

210

168

210

10 Accounts Receivable Sales

2,520

12 Purchases Accounts Payable

1,386

12 Accounts Payable ($5,460 - $210) Discount Received ($5,250 x 2%) Cash ($5,250 - $105)

5,250

17 Accounts Payable Purchase Returns and Allowances

126

2,520

1,386

105 5,145

126

18 Accounts Payable ($1,386 - $126) Discount Received Cash ($1,260 - $13)

1,260

20 Accounts Receivable Sales

1,890

27 Sales Returns and Allowances Accounts Receivable 30 Cash

13 1,247

1,890 63 63 1,260

Sales

1,260

30 Cash

2,310 Accounts Receivable

2,310

5.19

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

(b) Cash 1/10

Opening Balance

5,250 7/10

Freight in

30/10

Sales

1,260 12/10

Accounts payable

5,145

30/10

Accounts receivable

2,310 21/10

Accounts payable

1,247

31/10

Closing Balance

2,260

8,820 1/11

Opening Balance

168

8,820

2,260 Accounts Receivable

10/10

Sales

2,520 27/10

Sales returns

20/10

Sales

1,890 30/10

Cash

2,310

Closing Balance

2,037

31/10 4,410 1/11

Opening Balance

4,410

2,037 Inventory

1/10

Opening Balance

7,350 Accounts Payable

9/10

Purchase returns

210 5/10

Purchases

5,460

12/10

Discounts and cash

5,250 12/10

Purchases

1,386

17/10

Purchase returns

126

18/10

Discounts and cash

1,260 6,846

6,846 1/11

Opening Balance

1/10

Opening Balance

12,600

10/10

Accounts Receivable

2,520

20/10

Accounts Receivable

1,890

30/10

Cash

1,260

Share Capital

Sales

5,670

5.20

Chapter 5: Reporting and analysing inventory

Sales Returns and Allowances 27/10

Accounts receivable

63 Purchases

5/10

Accounts payable

5,460

12/10

Accounts payable

1,386 6,846

Purchase Returns and Allowances 9/10

Accounts payable

210

17/10

Accounts payable

126 336

Discount Received 12/10

Accounts payable

105

18/10

Accounts payable

13 118

Freight-in 7/10

Cash

168

(c) Eagle Ridge Golf Pty Ltd Trial Balance as at 31 October 2015 Debit Cash Accounts Receivable Inventory Accounts Payable Share Capital Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Discount Received Freight-in

Credit

$2,260 2,037 7,350 12,600 5,670 63 6,846 336 118 168 $18,724

$18,724

5.21

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

(d) Date

Particulars

Debit

Credit

Oct 31 Profit or loss summary

14,427 Beginning inventory Sales returns and allowances Purchases Freight inwards (To close various debits amounts to the Profit or Loss Summary)

Ending inventory 8,820 Sales 5,670 Purchases returns and allowances 336 Discount received 118 Profit or loss summary (To close various credit accounts to profit or loss summary)

7,350 63 6,846 168

Oct 31

(e)

14,944

Eagle Ridge Golf Pty Ltd Statement of Profit or Loss (partial) for the month ended 31 October 2015

Sales revenues: Sales Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 October Purchases Less: Purchase returns and allowances Net purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Ending inventory 31 October Cost of sales Gross profit

$5,670 (63) 5,607 7,350 $6,846 (336) 6,510 168 6,678 14,028 (8,820) (5,208) $399

5.22

Chapter 5: Reporting and analysing inventory

PROBLEM SET A 5.2 Pumpkin Patchwork Ltd Statement of Profit or Loss for the year ended 30 November 2016 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 December 2015 Purchases Less: Purchase returns and allowances Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Less: Ending inventory 30 November 2016 Cost of sales GROSS PROFIT

1,056,000 11,000 1,045,000

39,820 693,000 (3,300) 689,700 5,566 695,266 735,086 (37,796) 697,290 347,710

Other operating revenue: Discount received

7,700

OPERATING EXPENSES Selling expenses: Depreciation expense – store equipment Freight-out Sales commissions expense

10,450 9,020 13,200

32,670

Administrative expenses: Depreciation expense – office equipment Insurance expense Office salaries expense Rates and taxes expense Rent expense – office space Electricity expense

4,400 9,900 154,000 3,850 20,900 22,660

215,710

1,100

Financial expenses: Bank charges Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

7,700 355,410

249,480 105,930 (31,779) $74,151

5.23

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET A 5.3 Modelmania Ltd (a)

Cost of Goods available for Sale

Date

Explanation

March 1 5 13 21 26

Beginning inventory Purchase Purchase Purchase Purchase Total

(b)

Units 90 210 330 240 90 960

Unit Cost $35 40 45 50 55

Total Cost $3,150 8,400 14,850 12,000 4,950 $43,350

FIFO (1) Date

Ending Inventory Units

March 26 21

Unit Cost

90 60 *150

$55 50

Total Cost $4,950 3,000 $7,950

*960 – 810

(2)

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

$43,350 (7,950) $35,400

Proof of Cost of sales Date March 1 5 13 21

Units

Unit Cost 90 210 330 180 810

$35 40 45 50

Total Cost $3,150 8,400 14,850 9,000 35,400

5.24

Chapter 5: Reporting and analysing inventory

LIFO (1) Date

Ending Inventory Units Unit Cost

March 1 5

(2)

90 60 150

$35 40

$3,150 2,400 $5,550

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

Date

Total Cost

$43,350 (5,550) $37,800

Proof of Cost of sales Units Unit Cost

March 26 21 13 5

90 240 330 150 810

$55 50 45 40

Total Cost $4,950 12,000 14,850 6,000 37,800

AVERAGE COST (1)

Ending Inventory

$43,350 ÷ 960 = $45.15 Units Unit Cost 150

(2)

$45.15

(1) (2)

$6,773

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

(c)

Total Cost

$43,350 (6,773) $36,577

As shown in (b) above, FIFO produces the highest inventory amount, $7,950. As shown in (b) above, LIFO produces the highest Cost of sales, $37,800.

5.25

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET A 5.4 (a)

CANTERBURY LTD Comparative Statements of Profit or Loss for the Year Ended 31 December 2016

Sales Cost of sales Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of sales Gross profit Operating expenses Profit before income tax Income tax expense (30%) Profit

FIFO $997,500

LIFO $997,500

52,500 753,000 805,500 229,500a 576,000 421,500 180,000 241,500 72,450 $169,050

52,500 753,000 805,500 202,500b 603,000 394,500 180,000 214,500 64,350 $150,150

20,000 x $6.75 + 15,000 x $6.3 = $229,500. $52,500 + (25,000 x $6) = $202,500.

(b)

(1)

The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchases. It can also be argued that FIFO best represents the physical flow of goods for most companies, resulting in an ending inventory figure that is a more faithful representation of reality.

(2)

It is argued that LIFO produces the most meaningful profit because the Cost of Sales is measured with the most recent purchases. Some argue that because LIFO does not approximate physical flow for most companies, Cost of Sales is not a faithful representation of reality, and that this “unreliable” figure cannot be meaningful.

(3)

The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimise spoilage and obsolescence.

(4)

There will be $8,100 additional cash available under LIFO because income taxes are $64,350 under LIFO and $72,450 under FIFO.

(5)

Gross profit under the average cost method will be (a) lower than FIFO and (b) higher than LIFO.

5.26

Chapter 5: Reporting and analysing inventory

PROBLEM SET A 5.5

(a) World Building Products Ltd 2015 Inventory turnover ratio

$306,729.8 0 ($31,465.20+$31,738.20 )2 = 9 .7

Days in inventory

365 = 37.6 days 9.7

Current ratio

$115,343.8 0 =0.93 : 1 $124,295.6 0

(b)

The inventory turnover ratio indicates the number of times on average that inventory is sold during the period. The average days in inventory indicates the average number of days it takes to sell the inventory.

(c)

Generally it is considered to be better to have a higher inventory turnover or lower number of days in inventory as this means that inventory is selling faster. This is beneficial to the entity as it will have less cash tied up in inventory and there is less chance that the inventory will become obsolete. If the inventory turnover ratio is too high, it may be an indication that the entity may not have enough inventory and may lose customers. Businesses which sell perishable items will generally have higher inventory turnover ratios than businesses which sell non-perishable items.

5.27

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET A 5.6 Fontana Ltd (a)

(1) Date 1/7 6/7 11/7

FIFO Purchases (5 @ $95) $475 (4 @ $106)

Sales

14/7 21/7

(3 @ $95)

$285

(2 @ $95)} (1 @ $106)}

$296

$424

(3 @ $112)

$336

27/7

(3 @ $106)} (1 @ $112) $430

Balance (5 @ $95) $475 (2 @ $95) $190 (2 @ $95) (4 @ $106) $614 (3 @ $106) (3 @ $106)} (3 @ $112)}

$318

($2 @ $112)

$224

$654

Ending inventory=$224 (2) Date 1/7 6/7 11/7 14/7 21/7 27/7

AVERAGE COST Purchases (5 @ $95) $475

Sales (3 @ $95)

(4 @ $106)

$285

$424 (3 @ $102.3) $308

(3 @ $112)

$336 (4 @ $107)

$428

Balance (5 @ $95) $475 (2 @ $95) $190 (6 @ $102)* $614 (3 @ $102) $306 (6 @ $107)** $642 (2 @ $107) $214

*$614 ÷ 6 = $102.3 **$642 ÷ 6 = $107 Ending inventory = $214 (3) LIFO Date Purchases 1/7 (5 @ $95) $475 6/7 11/7 (4 @ $106) $424

Sales (3 @ $95)

14/7 21/7

(3 @ $106) (3 @ $112)

$336

27/7

(3 @ $112)} (1 @ $106)}

Balance (5 @ $95) $475 $285 (2 @ $95) $190 (2 @ $95)} (4 @ $106)} $614 $318 (2 @ $95)} (1 @ $106)} $296 (2 @ $95)} (1 @ $106)} (3 @ $112)} $632 $442 (2 @ $95)

$190

Ending inventory=$190

(b)

The highest ending inventory is $224 under the FIFO method. .

5.28

Chapter 5: Reporting and analysing inventory

PROBLEM SET A 5.7 Kids Sportstore Ltd General Journal (a)

Date

Particulars

Debit

Oct. 4 Purchases Accounts Payable 6 Freight-in Cash

Credit

1,974 1,974 84 84

8 Accounts Receivable Sales 10 Accounts Payable Purchase Returns and Allowances

1,890 1,890 84 84

11 Purchases Cash

1,260

11 Accounts Payable ($1,974 - $84) Discount Received ($1,890 x 3%) Cash ($1,890 - $57)

1,890

14 Purchases Accounts Payable

1,050

1,260

15 Cash

57 1,833

1,050 105

Purchase Returns and Allowances 17 Freight-in Cash

105 63 63

18 Accounts Receivable Sales

1,680

20 Cash

1,050

1,680

Accounts Receivable 20 Accounts Payable Discount Received ($1,050 x 2%) Cash

1,050 1,050 21 1,029

5.29

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

Date

Particulars

Debit

27 Sales Returns and Allowances Accounts Receivable

Credit

63 63

30 Accounts Receivable Sales

1,890

30 Cash

1,050

1,890

Accounts Receivable

1,050

(b) Cash 1/10

Opening Balance

5,250 6/10

Freight-in

15/10

Purchase returns

105 11/10

Purchases

1,260

20/10

Accounts receivable

1,050 11/10

Accounts payable

1,833

30/10

Accounts receivable

1,050 17/10

Freight-in

20/10

Accounts payable

1,029

31/10

Closing Balance

3,186

7,455 1/11

Opening Balance

7,455

3,186

Accounts Receivable 8/10

Sales

1,890 20/10

Cash

18/10

Sales

1,680 27/10

Sales returns

30/10

Sales

1,890 30/10

Cash

1,050

Closing Balance

3,297

31/10 5,460 1/11

Opening Balance

1,050 63

5,460

3,297 Inventory

1/10

Opening Balance

3,570 Accounts Payable

10/10

Returns and allowances

84 4/10

Purchases

1,974

11/10

Discounts and cash

1,890 14/10

Purchases

1,050

20/10

Discounts and cash

1,050 3,024

3,024

5.30

Chapter 5: Reporting and analysing inventory

Share Capital 1/10

Opening Balance

8,820

8/10

Accounts receivable

1,890

18/10

Accounts receivable

1,680

30/10

Accounts receivable

1,890

Sales

5,460 Sales Returns and Allowances 27/10

Accounts Receivable

63 Purchases

4/10

Account Payables

1,974

11/10

Cash

1,260

14/10

Accounts Payable

1,050 4,284

Purchase Returns and Allowances 10/10

Accounts Payable

15/10

Cash

105 189

Discount Received 11/10

Accounts Payable

20/10

Accounts Payable

21 78

Freight-in 6/10

Cash

17/10

Cash

63 147

5.31

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

(c) Kids Sportstore Pty Ltd Trial Balance as at 31 October 2016 Debit Cash Accounts Receivable Inventory Accounts Payable Share Capital Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Discount Received Freight-in

Credit

$3,186 3,297 3,570 $8,820 5,460 63 4,284 189 78 147 $14,547

$14,547

(d) Closing entries: Profit or loss summary

$8,064 Beginning inventory Sales returns and allowances

Purchases Freight-in (To close various debits amounts to the Profit or Loss Summary)

Ending inventory $3,780 Sales 5,460 Purchases returns and allowances 189 Discount received 78 Profit or loss summary (To close various credit accounts to profit or loss summary)

$3,570 63 4,284 147

$9,507

5.32

Chapter 5: Reporting and analysing inventory

(e) Kids Sportstore Pty Ltd Partial Statement of Profit or Loss for the month ended 31 October 2016

$5,460 (63) 5,397 3,570 $4,284 (189) 4,095 147 4,242 7,812 3,780 4,032 $1,365

5.33

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET A 5.8 (a) Fashionista Ltd Statement of Profit or Loss for the year ended 30 June 2017 OPERATING REVENUE Sales revenue: Gross sales revenue

$1,120,08 0 12,480

Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory Purchases Less: Purchase returns and allowances Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Less: Ending inventory Cost of sales GROSS PROFIT

$1,107,6 00

117,000 $689,520 (9,984) 679,536 8,736 688,272 805,272 (63,180) 742,092 365,508

Other operating revenue: Discount received

18,720

OPERATING EXPENSES Selling expenses: Sales commissions expense Sales salaries expense Administrative expenses: Depreciation expense – equipment Depreciation expense – building Office salaries expense Rates and taxes expense Insurance expense Electricity expense Financial expenses: Interest expense Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

22,620 118,560

141,180

20,748 16,224 49,920 10,608 11,232 17,160

125,892

3,120

18,720 384,228

270,192 114,036 (34,211) $79,825

5.34

Chapter 5: Reporting and analysing inventory

(b)

Fashionista Ltd has “purchases” and “purchases returns and allowances” accounts in the adjusted trial balance. These accounts are used by entities that account for inventory using the periodic inventory system. If an entity uses the perpetual inventory system to account for inventory, there will be a “Cost of Sales” ledger account in the trial balance and no “purchases” or “purchase returns and allowances” accounts.

5.35

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET A 5.9 Movieworld Ltd (a)

Cost of Goods available for Sale

Date Oct 1 3 9 19 25

(b)

Explanation

Units

Unit Cost

Beginning inventory Purchase Purchase Purchase Purchase Total

1,100 3,850 4,400 3,300 2,200 14,850

Total Cost

$10 12 14 16 18

$11,000 46,200 61,600 52,800 39,600 $211,200

FIFO (1)

Ending Inventory

Date

Units

Oct. 25 19

Unit Cost

2,200 550 *2,750

Total Cost

$18 16

$39,600 8,800 $48,400

*14,850 – 12,100 (Units available for sale less units sold)

(2)

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

$211,200 (48,400) $162,800

Proof of Cost of sales Date

Units Oct. 1 3 9 25

1,100 3,850 4,400 2,750 12,100

Unit Cost $10 12 14 16

Total Cost $11,000 46,200 61,600 44,000 $162,800

5.36

Chapter 5: Reporting and analysing inventory

LIFO (1) Ending Inventory Date Units Oct. 1 3

(2)

Unit Cost

1,100 1,650 2,750

$10 12

Total Cost $11,000 19,800 $30,800

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

Proof of Cost of sales Date Units Oct. 25 19 9 3

$211,200 (30,800) $180,400

Unit Cost

2,200 3,300 4,400 2,200 12,100

$18 16 14 12

Total Cost $39,600 52,800 61,600 26,400 180,400

AVERAGE COST (1)

Ending Inventory

$211,200÷ 14,850 = $14.22 Units Unit Cost 2,750

(2)

$14.22

$39,105

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

(c)

Total Cost

$211,200 (39,105) $172,095

(1)

FIFO results in the highest inventory amount for the statement of financial position ($48,400).

(2)

LIFO results in the highest Cost of Sales for the statement of profit or loss ($180,400). .

5.37

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET A 5.10 Sweet Cookies Ltd 2015 Inventory turnover ratio

$328,942.6 0 ($139,851. 60+$142,257.4 0)2

= 2 .3

(b)

Days in inventory

365 = 158.7 days 2.3

Current ratio

$187,663 = 2.32 : 1 $81,019.4

Of the two companies, Sweet Cookies Ltd has the better current ratio: 2.32:1 versus 0.75:1; however, Sweet Cookies’s stronger current ratio is offset by its much lower inventory turnover and days in inventory. Obviously, I would like more information as to why one company has a much lower current ratio and the other a much lower inventory turnover. I would also like to compare these figures to the industry averages.

5.38

Chapter 5: Reporting and analysing inventory

PROBLEM SET A 5.11 (a)

Michael Ltd Perceptual Inventory Method Sales Revenue

$154,275 Profit or Loss Summary

$154,275

(To close various credit accounts to profit or loss summary)

Profit or Loss Summary

$113,619 Cost of sales Sales returns and allowances

$104,544 9,075

(To close various debit amounts to the Profit or Loss Summary)

Profit or Loss Summary

$40,656 Retained Earnings

$40,656

(To close Profit or Loss Summary to Retained Earnings )

OR one net entry Sales Revenue

$154,275 Cost of sales Sales returns and allowances Profit or Loss Summary

$104,544 9,075 40,656

(To close various debit and credit amounts to the Profit or Loss Summary)

5.39

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

Sonya Ltd Periodic Inventory Method Profit or loss summary

$144,474 Beginning inventory Sales returns and allowances

$25,410 9,075

Purchases Freight inwards

108,900 1,089

(To close various debit amounts to the Profit or Loss Summary)

Ending inventory Sales Purchases returns and allowances Profit or loss summary

$29,040 154,275 1,815 $185,130

(To close various credit accounts to profit or loss summary)

Profit or Loss Summary Retained Earnings

$40,656 $40,656

(To close Profit or Loss Summary to Retained Earnings)

(b) General ledgers Perpetual method Cost of sales, etc. Retained Earnings

Profit or Loss Summary 113,619 Sales revenue 40,656

$154,275

154,275

$154,275

Periodic method Profit or Loss Summary Beginning Inventory, etc. 144,474 Ending Inventory etc Retained Earnings

185,130

40,656

$185,130

5.40

Chapter 5: Reporting and analysing inventory

PROBLEM SET A 5.12 Better Office Supplies 6 Sept.

9 Sept.

10 Sept.

12 Sept.

14 Sept.

20 Sept.

Inventory (80 x $20) GST Paid Cash (Purchase 80 calculators @ $22)

1 600 160 1 760

Freight Inwards/Inventory GST Paid Cash (Paid freight )

80 8

Accounts Receivable (2 x $22) Inventory (2 x $20) GST Paid (Returned 2 calculators - credit given)

Accounts Receivable (26 x $33) Sales GST Collected Cost of Sales (26 x $20) Inventory (Sold 26 calculators)

858

Sales Returns and Allowances GST Collected Accounts Receivable Inventory Cost of Sales (1 calculator was returned into stock)

30 3

Accounts Receivable (30 x $33) Sales GST Collected Cost of Sales [(5 x $20) + (25 x $20)] * Inventory (Sold 30 calculators to Mega Ltd)

990

40 4

780 78 520 520

33 20 20

900 90 600 600

*Note: Better Office Supplies uses the FIFO inventory cost flow assumption, which means that inventory purchased earlier will be sold first. On 1st September, Better Office Supplies had 30 calculators on stock @ $20 each. The first 26 calculators were sold to Reader Book Store on 12th September, so there were only 4 calculators left @ $20. But 1 Calculator was returned from Reader Book Store on 14 September. So when Better Office Supplies sold 30 calculators to Mega Ltd on 20th September, 5 calculators from old stock @ $20 each were sold first, and the remaining 25 calculators were taken from the new stock purchased on 6th September also @ $20 each.

5.41

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 5.1 Hancock’s Pro Shop Pty Ltd (a) Date

Particulars

Debit

Oct. 5 Purchases Accounts Payable

5,200 5,200

7 Freight-in Cash

160

9 Accounts Payable Purchase Returns and Allowances

200

160 200

10 Accounts Receivable Sales

2,400

12 Purchases Accounts Payable

1,320

12 Accounts Payable ($5,200 - $200) Discount Received ($5,000 x 2%) Cash ($5,000 - $100)

5,000

17 Accounts Payable Purchase Returns and Allowances

120

2,400

1,320

100 4,900 120

18 Accounts Payable ($1,320 - $120) Discount Received Cash ($1,200- $12

1,200

20 Accounts Receivable Sales

1,800

12 1,188

1,800

27 Sales Returns and Allowances Accounts Receivable 30

Credit

Cash

60 60 1,200

Sales

1,200

30 Cash

2,200 Accounts Receivable

2,200

5.42

Chapter 5: Reporting and analysing inventory

(b) Cash 1/10

Opening Balance

5,000 7/10

Freight-in

310/10

Sales

1,200 14/10

Accounts Payable

4,900

30/10

Accounts Receivable

2,200 18/10

Accounts Payable

1,188

Closing Balance

2,152

31/10 8,400 1/11

Opening Balance

160

8,400

2,152 Accounts Receivable

10/10

Sales

2,400 27/10

Sales Return

20/10

Sales

1,800 30/10

Sales

2,200

Closing Balance

1,940

31/10 4,200 1/11

Opening Balance

4,200

1,940 Inventory

1/10

Opening Balance

7,000 Accounts Payable

9/10

Purchase returns

200 5/10

Purchases

5,200

12/10

Discounts and cash

5,000 12/10

Purchase

1,320

17/10

Purchase returns

120

18/10

Discounts and cash

1,200 6,520

6,520 1/11

Opening Balance

1/10

Opening Balance

12,000

10/10

Accounts Receivable

2,400

20/10

Accounts Receivable

1,800

30/10

Cash

Share Capital

Sales

1,200 5,400

5.43

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

Sales Returns and Allowances 27/10

Accounts Receivable

Purchases 5/10

Accounts Payable

5,200

12/10

Accounts Payable

1,320 6,520

Purchase Returns and Allowances 9/10

Accounts Payable

200

17/10

Accounts Payable

120 320

Discount Received 12/10

Accounts Payable

100

18/10

Accounts Payable

12 112

Freight-in 7/10

Cash

160

5.44

Chapter 5: Reporting and analysing inventory

(c) Hancock’s Pro Shop Pty Ltd Trial Balance as at 31 October 2015 Debit Cash Accounts Receivable Inventory Accounts Payable Share Capital Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Discount Received Freight-in

(d)

Credit

$2,152 1,940 7,000 $12,000 5,400 60 6,520 320 112 160 $17,832

$17,832

Hancock’s Pro Shop Pty Ltd Statement of Profit or Loss for the month ended 31 October 2015

$5,400 (60) $5,340 7,000 $6,520 (320) 6,200 160 6,360 13,360 8,400 4,960 $380

5.45

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET B 5.2 Bargains Department Store Statement of Profit or Loss for the year ended 30 November 2016 $ $ OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 December 2015 Purchases Less: Purchase returns and allowances Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale

1,440,00 0 15,000 1,425,000 54,300 945,000 (4,500) 940,500 7,590 948,090 1,002,39 0 (51,540)

Less:

Ending inventory 30 November 2016 Cost of sales GROSS PROFIT

950,850 474,150

Other operating revenue: Discount received

10,500

OPERATING EXPENSES Selling expenses: Depreciation expense – store equipment Freight-out Sales commissions expense

14,250 12,300 18,000

44,550

Administrative expenses: Depreciation expense – office equipment Insurance expense Office salaries expense Rates and taxes expense Rent expense – office space Electricity expense

6,000 13,500 210,000 5,250 28,500 30,900

294,150

1,500

Financial expenses: Bank charges Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

10,500 484,650

340,200 144,450 (43,335) $101,115

5.46

Chapter 5: Reporting and analysing inventory

PROBLEM SET B 5.3 Rye Sails (a)

Cost of Goods available for Sale

Date

Explanation

March 1 5 13 21 26

Beginning inventory Purchase Purchase Purchase Purchase Total

(b)

Units

Unit Cost

150 350 550 400 150 1,600

Total Cost

$35 40 45 50 55

$5,250 14,000 24,750 20,000 8,250 $72,250

FIFO (1)

Ending Inventory

Date

Units

March 26 21

Unit Cost

150 100 *250

$55 50

Total Cost $8,250 5,000 $13,250

*1,600 – 1,350

(2)

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

$72,250 (13,250) $59,000

Proof of Cost of sales Date

Units

March 1 5 13 21

150 350 550 300 1350

Unit Cost $35 40 45 50

Total Cost $5,250 14,000 24,750 15,000 $59,000

5.47

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

LIFO (1) Ending Inventory Date Units March 1 5

(2)

Unit Cost

150 100 250

$35 40

Total Cost $5,250 4,000 $9,250

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

Proof of Cost of sales Date Units March 26 21 13 5

$72,250 (9,250) $63,000

Unit Cost

150 400 550 250 1,350

$55 50 45 40

Total Cost $8,250 20,000 24,750 10,000 $63,000

Average Cost (1)

Ending Inventory

$72,250 ÷ 1,600 = $45.16 Units Unit Cost 250

(2)

$45.16

(1) (2)

$11,290

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

(c)

Total Cost

$72,250 (11,290) $60,960

As shown in (b) above, FIFO produces the highest inventory amount, $13,250. As shown in (b) above, LIFO produces the highest Cost of sales, $63,000.

5.48

Chapter 5: Reporting and analysing inventory

PROBLEM SET B 5.4 (a)

PEORIA LTD Comparative Statements of Profit or Loss for the Year Ended 31 December 2016

FIFO $865,000

LIFO $865,000

34,000 578,500 612,500 53,000a 559,500 305,500 147,000 158,500 50,720 $107,780

34,000 578,500 612,500 45,500b 567,000 298,000 147,000 151,000 48,320 $102,680

20,000 x $2.65 = $53,000. $34,000 + ($5,000 x $2.30) = $45,500.

(b)

(1)

(2)

(3)

The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimise spoilage and obsolescence.

(4)

There will be $2,400 additional cash available under LIFO because income taxes are $48,320 under LIFO and $50,720 under FIFO.

(5)

Gross profit under the average cost method will be (a) lower than FIFO and (b) higher than LIFO.

5.49

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET B 5.5 (a) Prestige Motors Ltd 2015 Inventory turnover ratio

$353,919 ($36,306+$36,621)2

$353,919 =9.7 $36,463.50

(b)

Days in inventory

365 = 37.6 days 9.7

Current ratio

$133,089 =0.93 : 1 $143,418

A low inventory turnover or high days in inventory is not ideal for shareholders. If there is a low inventory turnover, it generally indicates that sales are slow. It may indicate that too much cash is being tied up in inventory. Nevertheless, inventory turnover needs to be compared with ratios for businesses in a similar industry or with industry averages. Some industries have lower inventory turnover ratios than others due to the nature of the business.

5.50

Chapter 5: Reporting and analysing inventory

PROBLEM SET B 5.6 Watson Pty Ltd (a)

(1) Date 1/7 6/7 11/7

FIFO Purchases (5 @ $90) $450 (4 @ $99)

(3 @ $90)

$270

(2 @ $90)} (1 @ $99)}

$279

$396

14/7 21/7

Sales

(3 @ $106)

$318

27/7

(3 @ $99)} (1 @ $106)}

$403

Balance (5 @ $90) $450 (2 @ $90) $180 (2 @ $90) (4 @ $99) $576 (3 @ $99) (3 @ $99)} (3 @ $106)}

$297

$2 @ $106)

$212

$615

Ending inventory=$212

(2) Date 1/7 6/7 11/7 14/7 21/7 27/7

AVERAGE COST Purchases $5 @ $90) $450 (4 @ $99)

Sales (3 @ $90)

$270

(3 @ $96)

$288

(4 @ $101)

$404

$396

(3 @ $106)

$318

Balance (5 @ $90) $450 (2 @ $90) $180 (6 @ $96)* $576 (3 @ $96) $288 (6 @ $101)** $606 (2 @ $101) $202

*$576 ÷ 6 = $96 **$606 ÷ 6 = $101 Ending inventory=$202 (3) LIFO Date Purchases Sales 1/7 (5 @ $90) $450 6/7 (3 @ $90) 11/7 (4 @ $99) $396 14/7 21/7

(3 @ $99) (3 @ $106)

$270

$297

$318

27/7

(3 @ $106)} (1 @ $99)}

$417

Balance (5 @ $90) (2 @ $90) (2 @ $90)} (4 @ $99)} (2 @ $90)} (1 @ $99)} (2 @ $90)} (1 @ $99)} (3 @ $106)} (2 @ $90)

$450 $180 $576 $279

$597 $180

Ending inventory=$180 (b)

The highest ending inventory is $212 under the FIFO method.

5.51

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET B 5.7 Mill Park Tennis Shop Pty Ltd General Journal (a) Date

Particulars

Debit

Oct. 4 Purchases Accounts Payable (Terms 3/7, n/30) 6 Freight-in Cash

Credit

1,880 1,880

80 80

8 Accounts Receivable Sales

1,800 1,800

10 Accounts Payable Purchase Returns and Allowances

80 80

11 Purchases Cash

1,200

11 Accounts Payable ($1,880 - $80) Discount Received ($1,800 x 3%) Cash ($1,800 - $54)

1,800

14 Purchases Accounts Payable (Terms 2/7, n/60)

1,000

1,200

15 Cash

54 1,746

1,000

100 Purchase Returns and Allowances

17 Freight-in Cash

100 60 60

18 Accounts Receivable Sales

1,600

20 Cash

1,000

1,600

Accounts Receivable 20 Accounts Payable Discount Received ($1,000 x 2%) Cash

1,000 1,000 20 980

5.52

Chapter 5: Reporting and analysing inventory

27 Sales Returns and Allowances Accounts Receivable

60 60

30 Accounts Receivable Sales

1,800

30 Cash

1,000

1,800

Accounts Receivable

1,000

(b) Cash 1/10

Opening Balance

5,000 6/10

Freight-in

15/10

Purchase returns

100 11/10

Purchases

1,200

20/10

Accounts Receivable

1,000 11/10

Accounts Payable

1,746

30/10

Accounts Receivable

1,000 17/10

Freight-in

20/10

Accounts Payable

980

31/10

Closing Balance

3,034

7,100 1/11

Opening Balance

7,100

3,034 Accounts Receivable

8/10

Sales

1,800 20/10

Cash

18/10

Sales

1,600 27/10

Sales Returns

30/10

Sales

1,800 30/10

Cash

1,000

Closing Balance

3,140

31/10 5,200 1/11

Opening Balance

1,000 60

5,200

3,140 Inventory

1/10

Opening Balance

3,400 Accounts Payable

10/10

Purchase Returns

80 4/10

Purchases

1,880

11/10

Discounts Received & Cash

1,800 14/10

Purchases

1,000

20/10

Discounts Received & Cash

1,000 2,880

2,880

5.53

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

Share Capital 1/10

Opening Balance

8,400

8/10

Accounts Receivable

1,800

18/10

Accounts Receivable

1,600

30/10

Accounts Receivable

1,800

Sales

5,200 Sales Returns and Allowances 27/10

Accounts Receivable

Purchases 4/10

Accounts Payable

1,880

11/10

Cash

1,200

14/10

Accounts Payable

1,000 4,080

Purchase Returns and Allowances 10/10

Accounts Payable

15/10

Cash

100 180

Discount Received 11/10

Accounts Payable

20/10

Accounts Payable

20 74

Freight-in 6/10

Cash

17/10

Cash

60 140 .

5.54

Chapter 5: Reporting and analysing inventory

(c) Mill Park Tennis Shop Pty Ltd Trial Balance as at 31 October 2016 Debit Cash Accounts Receivable Inventory Accounts Payable Share Capital Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Discount Received Freight-in

Credit

$3,034 3,140 3,400 $8,400 5,200 60 4,080 180 74 140 $13,854

$13,854

(d) Closing entries: Profit or loss summary

7,680 Beginning inventory Sales returns and allowances

Purchases Freight inwards (To close various debits amounts to the Profit or Loss Summary) Ending inventory 3,600 Sales 5,200 Purchases returns and allowances 180 Discount received 74 Profit or loss summary (To close various credit accounts to profit or loss summary)

3,400 60 4,080 140

8,994

5.55

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

(e) Mill Park Tennis Shop Pty Ltd Partial Statement of Profit or Loss for the month ended 31 October 2016

$5,200 (60) $5,140 3,400 $4,080 (180) 3,900 140 4,040 7,440 3,600 3,840 $1,300

5.56

Chapter 5: Reporting and analysing inventory

PROBLEM SET B 5.8 Westfields Ltd Statement of Profit or Loss for the year ended 30 June 2017 $ OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 July 2016 Purchases Less: Purchase returns and allowances Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Less: Ending inventory 30 June 2017 Cost of sales GROSS PROFIT

789,800 (8,800) 781,000

44,550 486,200 (7,040) 479,160 6,160 485,320 529,870 (82,500) 447,370 333,630

Other operating revenue: Discount received

13,200

OPERATING EXPENSES Selling expenses: Sales salaries expense Sales commissions expense Administrative expenses: Depreciation expense – equipment Depreciation expense – building Office salaries expense Rates and taxes expense Insurance expense Electricity expense Financial expenses: Interest expense Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

83,600 15,950

99,550

14,630 11,440 35,200 7,480 7,920 12,100

88,770

2,200

13,200 346,830

190,520 156,310 (46,893) $109,417

5.57

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET B 5.9 Movies Abound Pty Ltd (a)

Cost of Goods available for Sale

Date

Explanation

Oct 1 3 9 19 25

(b)

Units

Beginning inventory Purchase Purchase Purchase Purchase Total

1,000 3,500 4,000 3,000 2,000 13,500

Unit Cost

Total Cost

$10 12 14 16 18

$10,000 42,000 56,000 48,000 36,000 $192,000

FIFO (1)

Ending Inventory

Date

Units

Oct. 25 19

Unit Cost

2,000 500 *2,500

$18 16

Total Cost $36,000 8,000 $44,000

*13,500 – 11,000

(2)

Cost of Sales

Cost of goods available for sale Less: Ending inventory Cost of sales

$192,000 (44,000) $148,000

Proof of Cost of Sales Date

Units Oct. 1 3 9 25

1,000 3,500 4,000 2,500 11,000

Unit Cost $10 12 14 16

Total Cost $10,000 42,000 56,000 40,000 $148,000

5.58

Chapter 5: Reporting and analysing inventory

LIFO (1) Ending Inventory Date Units Oct. 1 3

(2)

Unit Cost

1,000 1,500 2,500

$10 12

Total Cost $10,000 18,000 $28,000

Cost of Sales

Cost of goods available for sale Less: Ending inventory Cost of sales

$192,000 (28,000) $164,000

Proof of Cost of Sales Date

Units

Oct. 25 19 9 3

Unit Cost

2,000 3,000 4,000 2,000 11,000

$18 16 14 12

Total Cost $36,000 48,000 56,000 24,000 $164,000

AVERAGE COST (1)

Ending Inventory

$192,000÷ 13,500 = $14.22 Units Unit Cost 2,500

(2)

$14.22

(1) (2)

$35,550

Cost of sales

Cost of goods available for sale Less: Ending inventory Cost of sales

(c)

Total Cost

$192,000 (35,550) $156,450

FIFO results in the highest inventory amount for the statement of financial performance, $44,000. LIFO results in the highest Cost of sales, $164,000. .

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

PROBLEM SET B 5.10 (a) Plant Food Ltd 2015 Inventory turnover ratio

$234,959 ($99,894 + $101,751)  2

$234,959 = 2.3 $100,822.5

(b)

Days in inventory

365 = 158.7 days 2.3

Current ratio

$134,045 = 2.32 : 1 $57,871

Of the two companies, Plant Food has the better current ratio: 2.32:1 versus 0.8:1; however, Plant Food’s stronger current ratio is offset by its much lower inventory turnover and days in inventory. Obviously, I would like more information as to why one company has a much lower current ratio and the other a much lower inventory turnover. I would also like to compare these figures to the industry averages.

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Chapter 5: Reporting and analysing inventory

PROBLEM SET B 5.11 (a)

Mastrilli Ltd Perceptual Inventory Method Sales Revenue

46,750 Profit or Loss Summary

46,750

(To close various credit accounts to profit or loss summary)

Profit or Loss Summary

34,430 Cost Of Sales Sales Returns and Allowances

34,430 2,750

(To close various debit amounts to the Profit or Loss Summary)

Profit or Loss Summary

12,320 Retained Earnings

12,320

(To close Profit or Loss Summary to Retained Earnings )

OR one net entry Sales Revenue

46,750 Cost Of Sales Sales Returns and Allowances

31,680 2,750

Profit or Loss Summary

12,320

(To close various debit and credit amounts to the Profit or Loss Summary)

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

Errica Ltd Periodic Inventory Method Profit or loss summary

43,780 Beginning inventory Sales returns and allowances

7,700 2,750

Purchases Freight inwards

33,000 330

(To close various debit amounts to the Profit or Loss Summary)

Ending inventory Sales Purchases returns and allowances Profit or loss summary

8,800 46,750 550 56,100

(To close various credit accounts to profit or loss summary)

Profit or Loss Summary Retained Earnings

12,320 12,320

(To close Profit or Loss Summary to Retained Earnings )

(b) General ledgers Perpetual method Cost of Sales, etc. Retained Earnings

Profit or Loss Summary 34,430 Sales revenue 12,320

46,750

Periodic method Profit or Loss Summary Beginning Inventory, etc. 43,780 Ending Inventory etc Retained Earnings

56,100

12,320

56,100

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PROBLEM SET B 5.12

Petrocelli Office Supplies 6 Sept.

9 Sept.

10 Sept.

12 Sept.

14 Sept.

20 Sept.

Inventory (120 x $29*) GST Paid (120 x $3) Cash (Purchase 120 USB @ $32)

$3 480 360

Freight Inwards/Inventory GST Paid Cash (Paid freight )

120 12

Accounts Receivable (2 x $32) Inventory (2 x $29) GST Paid (Returned 2 USB - credit given)

Accounts Receivable (39 x $43) Sales GST Collected Cost of Sales (39 x $30) Inventory (Sold 39 USB)

1 677

Sales Returns and Allowances GST Collected Accounts Receivable Inventory Cost of Sales (1 USB was returned into stock)

39 4

Accounts Receivable (45 x $43) Sales GST Collected Cost of Sales [(7 x $30) + (38 x $29)] * Inventory (Sold 45 USB)

$3 840

132

58 6

1 521 156 1 170 1 170

43 30 30 1 935 1 755 180 1 312 1 312

*Rounding to the nearest dollar **Note: Petrocelli Office Supplies uses the FIFO inventory cost flow assumption, which means that inventory purchased earlier will be sold first. On 1st September, Petrocelli Office Supplies had 45 USB on stock @ $30 each. The first 39 USB were sold to Sunny Store on 12th September, so there were 6 USB left @ $20. But 1 USB was returned from Sunny Store on 14th September. When Petrocelli Office Supplies sold 45 USB to Martins Ltd on 20th September, 7 USB from old stock @ $30 each were sold first, and the remaining 38 were taken from the new stock purchased on 6th September @ $29 each.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 5.1

FINANCIAL REPORTING PROBLEM

Domino Pizza Enterprises Ltd (Note: All dollar amounts are in thousands) (a)

Inventories were $6,685 as at 30 June 2013.

(b)

Inventories increased $979 in 2013. Using 2012 as the base year, the increase was approximately 17.2%. In 2013, inventories were 11.1% of current assets ($6,685 ÷ $60,383).

BUILDING BUSINESS SKILLS 5.2

COMPARATIVE ANALYSIS PROBLEM

Coca-Cola Amatil Ltd vs. PepsiCo (a) Coca-Cola Amatil Ltd (A$ in millions) 1.

Inventory turnover

PepsiCo (US$ in millions)

$2,843 ($345+$347) / 2

$31,243 ($1,533 +$1,509) / 2

= 8.22 times

=20 .54 times

365 =44 days 8.22

365 =18 days 20.54

Days in inventory

(b)

PepsiCo sells its inventory within 18 days which is significantly quicker than the 44 days taken by Coca-Cola. This is approximately two and a half times the rate of Coca-Cola Amatil. Generally companies that are able to keep their inventory at lower levels and higher turnovers and still satisfy customer needs are the most successful. Note: In figure 5.18 the inventory turnover ratios for Fantastic Holdings and Nick Scali are much slower than Coca-Cola Amatil and Pepsico. Fantastic Holdings sells its inventory within 116 days whereas Nick Scali takes 103 days to achieve the same. Coca-Cola Amatil and Pepsico sell short shelf life items – beverages – so the turnover would be expected to be higher. In contrast, Fantastic Holdings and Nick Scali sell longer term floor items – furnishings which are slower to turnover.

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BUILDING BUSINESS SKILLS 5.3

A GLOBAL FOCUS AND INTERPRETING FINANCIAL STATEMENTS Nike and Adidas

(a)

Both companies have international sales: thus, they must move their goods around the world. Styles/fashions are often cultural so what sells in one country may not in another. Because trends/fashion in their industry change quickly, both must manage inventory carefully. If a trend/fashion is really popular, a company must make sure it has enough inventory before people’s interest in the product fades. But it doesn’t want to “get stuck” with a lot of excess inventory. The best approach is to have very efficient inventory production and distribution systems that allow a company to respond to changes in demand very quickly.

(b)

Nike’s inventories are stated at lower of cost or market and valued using an average cost basis. Adidas’ merchandise and finished goods are valued at the lower of cost or net realisable value. Costs are determined using a standard valuation method which is the average cost method.

(c)

The format used by Adidas is the approach used by manufacturers. It allows the financial statement reader to see how much inventory is in each stage of production of inventory. This can be useful. For example, if the company is planning to increase production, we would expect to see raw materials increase, or if it is planning a slow-down, we would expect to see raw materials decline. Both Nike and Adidas use other companies to do much of their production (as evidenced by the minor amounts of raw materials and work-in-progress reported by Nike and by the fact that Adidas reports that ‘substantially all’ of its inventory is finished goods. Thus, in this case, it is not surprising that Adidas did not provide this information, and it probably was not necessary that Nike did.

(d) Nike

Adidas

Inventory turnover $14,279 ($3,222 + $3,434) / 2 = 4.29 times

$7,352 ($2,486 + $2,634) / 2 = 2.87 times

Days in inventory 365 4.29 = 85 days

365 2.87= 127 days

Adidas’s inventory turnover is lower and days in inventory is higher than Nike, suggesting that Nike is more efficient in selling its inventory.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e

BUILDING BUSINESS SKILLS 5.4 FINANCIAL ANALYSIS ON THE WEB JB Hi-Fi Ltd (Note: All dollar amounts are in thousands) The following responses are based on the 2013 Consolidated figures in the annual report. (a)

Inventories: $426,000 as at 30 June 2013. Cost of sales for the year: $2,596,194.

(b)

Inventories are stated at the lower of cost and net realisable value. Net realisable value represents the estimated selling price less all estimated costs necessary to make the sale.

(c)

Inventories to total assets ratio: $426,000 $843,304 = 50.51%

(d)

Inventory turnover ratio: 2,596,194 (426,000+428,290) / 2 = 6.08 times Days in inventory 365 6.08 = 60 days JB Hi-Fi’s inventory turnover is 6.08 times per annum which converts to 60 days in inventory which is much quicker than Fantastic Holdings and Nick Scali. This suggests that JB Hi-Fi is able to manage and sell its inventory more efficiently than Fantastic Holdings and Nick Scali. In figure 5.18 the inventory turnover ratios for Fantastic Holdings and Nick Scali are much slower than JB Hi-Fi. Fantastic Holdings sells its inventory within 116 days and Nick Scali takes 103 days to achieve the same. JB Hi-Fi sells popular high turnover items such as CDs, DVDs, games, smart phones and computers, so the turnover would be expected to be higher. In contrast, Fantastic Holdings and Nick Scali sell furnishings which are generally more expensive and slower to turnover.

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Chapter 5: Reporting and analysing inventory

CRITICAL THINKING BUILDING BUSINESS SKILLS 5.5

GROUP DECISION CASE

ChemCo International Ltd (a)

The items owned by ChemCo on 30 June would be those purchased and to whom ownership had already passed, as well as those items sold but from which ownership had not yet passed. These would include items described in parts 1, 5 and 7. For item 8, it is not possible to determine ownership as the shipping date is not given in the question and this information is critical.

(b)

The transactions that involve ChemCo’s inventory account on or before 30 June 2016 would be items described in 3 and 5. The transactions that involve ChemCo’s inventory account after 30 June 2016 would be items described in 2 and 7. Note: Items that are inventory would be those items related to ChemCo’s final products (chemicals, airbags and salt). The receipt of office supplies or steel for building are therefore not inventory.

BUILDING BUSINESS SKILLS 5.6

COMMUNICATION ACTIVITY

City Jeans Ltd To:

Su Lee, Managing Director

From:

Accountant

Subject:

2015 Ending Inventory Error

As you know, the 2015 ending inventory figure was overstated by $1 million. This error will cause the 2015 profit figure to be incorrect because the ending inventory is used to calculate the 2015 Cost of Sales. Since the ending inventory is subtracted in the calculation of Cost of Sales, an overstatement of ending inventory results in an understatement of Cost of Sales and therefore an overstatement of profit. Unfortunately, unless corrected, this error will also affect 2016 profit. The 2015 ending inventory is also the 2016 beginning inventory. Therefore, 2016 beginning inventory is also overstated, which causes an overstatement of Cost of Sales and an understatement of 2016 profit.

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Chapter 6: Accounting information systems

CHAPTER 6 – ACCOUNTING INFORMATION SYSTEMS ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises

Learning Objectives 1.

Identify the basic principles of accounting information differences.

Explain the major phases in the development of an accounting system.

Define internal control.

Appreciate managements’ responsibility in relation to internal control.

Identify the principles and limitations of internal control.

Understand the accounting processes underlying the generation of financial reports.

Describe the sales and receivables cycle and the purchases and payments cycle.

Apply internal control principles to the sales and receivables and purchases and payments cycle for transforming data.

1,2

Describe the nature and purposes of control accounts and subsidiary ledgers.

3,4,5,6,10, 12,13,14,1 5

10.

Explain how special journals are used in recording transactions.

3,4,5,6,7,8, 9,11,13,14, 15

11.

Understand the basic features of computerised accounting systems including an introduction to MYOB.

12.

Appreciate the role of and use of nonintegrated systems.

Exercises

Problems

1,2

1A,2A,3A, 4A,5A,6A,7A, 8A,9A,10A 1B,2B,3B,4B, 5B,6B,7B,8B, 9B,10B 1A,2A,3A,4 A,5A,6A,7A ,8A,9A,10A 1B,2B,3B,4 B,5B,6B,7B ,8B,9B,10B

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

13.

Identify the advantages and disadvantages of computerised accounting systems.

14.

Record transactions for sales, purchases, cash receipts and cash payments in special journals.

5,6,7,8,11

1A,2A,3A,4A, 5A,6A,7A,8A, 9A,10A 1B,2B,3B,4B, 5B,6B,7B,8B, 9B,10B

15.

Understand how multi-column special journals are posted.

3,4,8,12,13 ,14,15

1A, 2A, 3A, 4A, 5A, 6A, 7A, 8A, 9A, 10A, 1B, 2B. 3B, 4B, 5B, 6B, 7B, 8B, 9B, 10B

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Chapter 6: Accounting information systems

CHAPTER 6 – ACCOUNTING SUBSYSTEMS ANSWERS TO QUESTIONS 1.

(a)

An accounting information system involves collecting and processing data and disseminating financial information.

(b)

Disagree. An accounting information system applies regardless of whether manual or computerised procedures are used to process the transaction data.

There are four phases when developing an accounting information system: Analysis First determine the information needs of internal and external users. Then a system analyst identifies the sources of the required information and the records and procedures for collecting and reporting the data (if an existing system is being analysed - its strengths and weaknesses must be identified). Design In this phase forms and documents designed, methods and procedures selected, job descriptions prepared, controls integrated, reports formatted and equipment selected. (Redesigning an existing system may require minor modification or a major overhaul). Implementation Requires that documents, procedures and processing equipment be installed and made operational. Personnel must be trained in the start-up period. Follow-up Once the system is up and running it must be monitored for weaknesses or breakdowns. Effectiveness should be compared with design and organisational objectives. Changes in design or implementation may be necessary.

Corporate governance can be defined as the system in which entities are directed or controlled, managed and administered. It influences how the objectives of a company are set and achieved, how risk is monitored and assessed, and how performance of the entity is optimised. It is largely about the decision-making process of the entity, ensuring that the goals and hence the decisions made by management are aligned with those of the shareholders.

No, corporate governance applies to all forms of entities regardless of how large or small. Family businesses, for example, still need to focus on strategic business issues and clear lines of responsibility.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

An internal auditor is an employee of the business who evaluates on a continuous and regular basis the effectiveness of the business’s system of internal control.

Disagree. Internal control is also concerned with the effectiveness and efficiency of operations, compliance with laws and regulations, and the safeguarding of company assets from employee theft, robbery and unauthorised use.

Data is transformed into accounting reports through the following sequence: (1) Identify the transaction from source documents, such as receipts, cheque butts etc. (2) Analyse each transaction for its effect on the accounts. (3) Enter the transaction information in a journal (book of original entry). (4) Transfer the journal information to the appropriate accounts in the ledger (book of accounts). (5) Prepare a trial balance. (6) Prepare the financial reports.

The following internal control principles apply to both the sales and receivables cycle and the purchases and payments cycle. • • • • •

Establishment of responsibility. Segregation of duties. Documentation procedures. Physical, mechanical and electronic controls Independent internal verification.

With regard to both the sales and receivables cycle, it is important to ensure that each employee is authorised to carry out their task and has the required skills to do so. For example, the warehouse clerk needs to have the authority to fill a customer order and to update the inventory records. It is important to also ensure there is segregation of duties. So in the sales and receivables cycle it would be important to have different personnel recording the sale and filling and despatching the sales order. It would also be important to have another staff member, say within the accounting department, sending the invoice to the customer. It is important to have documented procedures in place, for example, a requirement that the warehouse clerk signs the sales order to confirm that the goods have been despatched. This will ensure that the sales order does not get filled twice and also enables identification of the person who filled the order. Many businesses will also have security for their inventory such as allowing only authorised personnel in to the warehouse and many would also have security cameras as recall inventory is an important asset for the business. Internal auditors will also perform checks within the business to ensure the process is being followed correctly. With regard to the purchases and payments cycle, again, it is important to ensure that staff are appropriately trained and have the responsibility to carry out each of their assigned tasks. For example, the warehouse clerk needs to know when to re-order stock when stock levels are low and how to fulfil the completion of the customer order. Related activities also need to assign to different personnel. For example, the purchasing clerk will place the order for goods, whilst the warehouse clerk will receive the goods and ensure that the goods match the order. This latter task, that is, of checking that the goods ordered has been received is an example of independent internal verification. Further segregation is required in this cycle with regard to payment for the goods; we would expect an accounts payable clerk to pay the supplier and not personnel within the warehousing department. Goods are kept in the warehousing department and the accounting records are in the accounts payable department. This is an important internal control to safeguard the inventory. Note that within this cycle there .

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Chapter 6: Accounting information systems

is also a requirement for the warehousing clerk to sign the delivery docket confirming the receipt of goods ordered an example of a documented procedure. 9.

A subsidiary ledger is a group of accounts with a common characteristic. The accounts are assembled to facilitate the accounting process by freeing the general ledger from details concerning individual balances. The advantages of using subsidiary ledgers are that they: • • • •

10.

(a)

Permit transactions affecting a single customer or single creditor to be shown in a single account, thus providing necessary up-to-date information on specific account balances. Free the general ledger of excessive details relating to inventory, accounts receivable and accounts payable. As a result, a trial balance of the general ledger does not contain potentially thousands of individual account balances. Assist in locating errors in individual accounts by reducing the number of accounts combined in one ledger and by using control accounts. Permit a division of labour in posting by having one employee post to the general ledger and a different employee(s) post to the subsidiary ledgers.

(1)

Individual transactions are generally posted daily to the subsidiary ledger.

(2) (b)

In contrast, postings to the control accounts are usually made in total at the end of the month.

A control account is a general ledger account that summarises subsidiary ledger data. Subsidiary ledger accounts keep track of specific account activity (i.e. specific debtors or creditors). A subsidiary ledger is outside the general ledger and is not used in the trial balance. The control account provides the same information as the subsidiary ledger – only in summary.

11.

At the end of the month, after all posting to both the general ledger and the subsidiary ledger accounts have been made, a total of a subsidiary ledger account balances should equal the balance of the control account in the general ledger. In this case, the control account balance will be $450 larger than the total of the subsidiary accounts. The difference would be investigated by checking the postings made to the control account and subsidiary ledger accounts and the error would be discovered.

12.

The general journal may be used to record such transactions as the granting of credit to a customer for a sales return or allowance or the receipt of credit from a supplier for purchases returned. In addition, all correcting, adjusting and closing entries should be made in the general journal.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

13.

Sales journal: Cash receipts journal: Purchases journal: Cash payments journal:

Records entries for all sales of inventory on account. Records entries for all cash received by the business. Records entries for all purchases of inventory on account. Records entries for all cash paid.

Some advantages of each journal are given below: Sales Journal (1) Since the sales journal employs only one column to record an Accounts Receivable debit and a Sales credit, its use reduces recording time; (2) The credit to Sales is only posted once an accounting period; and (3) The journal’s use allows for dividing responsibilities between employees. Cash Receipts Journal (1) Its use aids in the posting process since the totals for Cash, Discount Allowed, Accounts Receivable, and Sales are all recorded in the general ledger only at the end of the month; and (2) It allows all accounts receivable credits to be posted to the appropriate subsidiary ledger accounts daily. Purchases Journal The advantages are similar to those of the sales journal except that items involved are Inventory debits and Accounts Payable credits. Cash Payments Journal Similar advantages to cash receipts journal except the columns involved are different. In general, special journals: (1) Allow greater division of labour because various individuals can record entries in different journals at the same time; and (2) Reduce posting time of journals because only column totals are posted to the general ledger. 14.

(a)

(b)

No, the customers’ ledger (accounts receivable subsidiary ledger) will not agree with the Accounts Receivable control account. The customers’ ledger will be posted correctly, but the Accounts Receivable control account will be incorrect. The trial balance totals will be agreed and the trial balance will balance. However, the balance in the Cash and Accounts Receivable control accounts will be incorrect due to the addition error.

15.

(a) (b) (c)

General journal General journal Cash receipts journal

(d) (e) (f)

Sales journal Cash receipts journal General journal

16.

One such example is a purchase return. Here the accounts payable control and subsidiary ledger account must be debited for the same amount. The debit/credit equality is unaffected since the trial balance is prepared using general ledger (control) accounts only. The total of the subsidiary ledger accounts should be equal to the related control account balance.

SOLUTIONS TO BRIEF EXERCISES .

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Chapter 6: Accounting information systems

BRIEF EXERCISE 6.1 (a) (b) (c)

True False True

BRIEF EXERCISE 6.2 (a) (b) (c) (d)

Analysis Follow-up Design Implementation

BRIEF EXERCISE 6.3 Cumin Ltd (a) (b) (c)

Separation of duties Independent internal verification Documentation procedures

BRIEF EXERCISE 6.4 (a) (b) (c) (d)

General ledger Subsidiary ledger General ledger Subsidiary ledger

BRIEF EXERCISE 6.5 (a) (b) (c) (d) (e) (f)

Cash receipts journal Cash payments journal Cash payments journal Sales journal Purchases journal Cash receipts journal

BRIEF EXERCISE 6.6 (a) (b) (c) (d)

No Yes Yes No

BRIEF EXERCISE 6.7 (a) (b) (c) (d)

Both in total and daily In total In total Only daily (Note: They can also be individually posted at the end of the month.)

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BRIEF EXERCISE 6.8 (a) (b) (c) (d) (e)

Cash receipts journal Cash receipts journal Cash receipts journal Sales journal or cash receipts journal Purchases journal or cash payments journal.

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Chapter 6: Accounting information systems

SOLUTIONS TO EXERCISES EXERCISE 6.1 Rotundo’s Pizza 1.

Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas.

Segregation of duties. Employees who make the pizza do not handle cash.

Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales.

Physical, mechanical and electronic controls. A cash register is used to record the sale.

Independent internal verification. The counter clerk handling the pizza compares the type of the pizza with the type indicated on the orders.

EXERCISE 6.2 The following are the internal control principles which are lacking for Caterpilla Tractors: 1. Segregation of duties. The same employee orders the goods and receives the wheels. This may bring about a situation where wheels are ordered for their own personnel use (e.g. for re-sale) and paid for by the company which may go undetected. 2. Independent internal verification. Sam processes the purchase order in the accounting department as well as receiving the wheels. 3. Documentation procedures. It is unclear in the question as to whether there are any documented procedures but since the business is starting out, we can assume that perhaps there isn’t.

EXERCISE 6.3 Tessa Ltd (a)

$261,650. Beginning balance of $200,000 plus $125,150 debit from sales journal less $63,500 credit from cash receipts journal.

(b)

$48,430. Beginning balance of $45,000 plus $27,180 credit from purchases journal less $23,750 debit from cash payments journal.

(c)

The column total of $125,150 in the sales journal would be posted to the credit side of the Sales account and the debit side of the Accounts Receivable account in the general ledger.

(d)

The accounts receivable column total of $63,500 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 6.4 Teone Ltd (a) & (b) General Ledger Accounts Receivable Control Date Explanation Sept. 1 30 30 30

Ref.

Balance Credit sales Cash Sales Allowance

S1 CR1 G1

Debit

Credit

2,140 3,530 110

Balance 5,980 8,120 4,590 4,480

Accounts Receivable Subsidiary Ledger Edmonds Date Explanation

Ref.

Sept. 1 Balance 30 Credit sales 30 Cash

Lee Date

S1 CR1

Explanation

Ref.

Sept. 1 Balance 30 Cash

Ref.

Sept. 1 Balance 30 Credit sales 30 Cash

Explanation

Sept. 1 30 30 30

Balance Credit sales Cash Sales Allowance

S1 CR1

Ref.

S1 CR1 G1

Credit

675 620

Debit

CR1

Roemer Date Explanation

Schulz Date

Debit

Credit

900

Debit

Credit

550 655

Debit

Credit

400 1,150 110

Balance 1,220 1,895 1,275

Balance 1,320 420

Balance 1,030 1,580 925

Balance 2,410 2,810 1,660 1,550

Henry .

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Chapter 6: Accounting information systems

Date

Explanation

Ref.

Sept. 30 Credit sales 30 Cash

Debit

S1 CR1

Credit

Balance

515

515 310

205

Note: Henry is a new customer so another subsidiary ledger account has been added. (c) Teone Ltd Schedule of Accounts Receivable as at 30 September 20163

(d)

Edmonds Lee Roemer Schulz Henry Total

$1,275 420 925 1,550 310 $4,480

Accounts Receivable control account balance 30/9/16

$4,480

The subsidiary ledger accounts contain the detail of the totals posted to the control account; therefore the totals of subsidiary ledger and the control accounts must agree. If the balance of the control account and the schedule do not agree, then this indicates that an error has be made which must be corrected before proceeding any further with the accounting process.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 6.5 Duckstein Ltd (a) & (b) Sales Journal

Date

Account Debited

2017 Sept. 2 R Crow 21 Buffy Ltd

Invoice No.

Ref.

101 102

√ √

Accounts Receivable Dr. Sales Cr.

Cost of Sales Dr. Inventory Cr.

960 1,600 2,560

600 960 1,560

Duckstein Ltd Purchases Journal

Date

Account Credited

2017 Sept. 10 L Dayne 25 F Sage

Terms

Ref.

2/7, n/30 n/30

√ √

P1 Inventory Dr. Accounts Payable Cr. 1,200 1,800 3,000

(c)

A multicolumn purchases journal enables purchases on credit other than inventory to be recorded in the purchases journal rather than the general journal.

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EXERCISE 6.6 Vanessa Bosnat (a) & (b) Cash Receipts Journal CR1 Account Credited

Date

2016 May 1 V Bosant, Cap. 2 22 R Dusto

Discount Allowed Dr

Cash Dr Ref

Accounts Receivable Cr

Sales Cr

Other Accounts Cr

30,000

Cost of Sales Dr Inventory Cr

30,000

12,000

√

8,400

18,000 18,000 60,000

18,000

12,000

30,000

8,400

Vanessa Bosnat Cash Payments Journal CP1

Date

Account Debited

Ch. No.

2016 May 3 14

101 102

Ref.

Inventory Salary Expense

Other Accounts Dr

Accounts Payable Dr

Discount Received Cr

Cash Cr

18,000 1,400

19,400

EXERCISE 6.7 Jamies Hardware

1. 2.

(a) Journal Cash Payments Cash Receipts

3. 4.

Cash Payments Cash Payments

5. 6. 7. 8. 9. 10.

Cash Receipts Cash Payments Cash Payments Cash Receipts Cash Payments Cash Receipts

(b) Columns in the journal Other Accounts (Dr); Cash (Cr). Cash (Dr); Discount Allowed (Dr); and Accounts Receivable (Cr). Inventory (Dr); Cash (Cr). Accounts Payable (Dr); Cash (Cr); and Discount Received (Cr). Cash (Dr); Accounts Receivable (Cr)’ Other Accounts (Dr); Cash (Cr). Other Accounts (Dr); Cash (Cr). Cash (Dr); Other Accounts (Cr). Other Accounts (Dr); Cash (Cr). Cash (Dr); Sales (Cr); Cost of Sales (Dr); and Inventory (Cr)

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 6.8 Opera House Ltd (a) Date Account Titles and Explanation Mar. 2 Equipment Accounts Payable – Harbour Ltd (Purchased equipment on account)

Debit 6,000

6,000

5 Accounts Payable – Boat & Co. Inventory (Received a credit note for inventory damaged in shipment)

300

7 Sales Returns and Allowances Accounts Receivable – Luna Ltd

400

Inventory Cost of Sales (Issued a credit note for inventory returned)

(b)

Credit

300

400 260 260

Memorandum

To:

Managing Director

From:

Accountant

Subject:

Posting to Control Accounts and Subsidiary Ledger Accounts

The posting to control and subsidiary ledger accounts varies with the journals used for recording the transactions. Single column sales and purchases journals – the total for the month is posted to the accounts receivable and accounts payable control accounts respectively. The individual entries are posted daily to the subsidiary accounts. Multicolumn cash receipts and cash payments journals – the total of the control account column for the month is posted to the control account. The individual amounts in the column are posted daily to the subsidiary accounts. General journal – the individual debit and credit entries are posted daily or at the end of the month. Each entry that pertains to a control and a subsidiary account is dual-posted. That is, it is posted to both the control account and the subsidiary ledger account. I hope this memo answers your questions about posting.

6.15

Chapter 6: Accounting information systems

EXERCISE 6.9 Rotunda Printworks 1. 2. 3. 4. 5. 6. 7.

Cash Payments Journal General Journal Cash Receipts Journal Cash Receipts Journal Sales Journal Cash Receipts Journal General Journal

8. 9. 10. 11. 12. 13.

Cash Receipts Journal Cash Payments Journal General Journal General Journal Cash Payments Journal Purchases Journal

EXERCISE 6.10 Frenchy Ltd (a)

The debit posting reference on 28 February should be from the cash payments journal (CP) to record the payments made during the month. The missing general ledger debit amount should be $29,500 to balance. Wang’s ending balance must be $3,240. (Accounts Payable control balance of $9,840 less Sealy, $4,600, and Gates, $2,000.)

(b)

All amounts posted in total to the control account are also posted in detail in the accounts payable subsidiary ledger account. This system ensures that the total of the subsidiary ledger accounts will equal the total in the corresponding control account.

6.16

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 6.11 Peterson Ltd (a) Purchases Journal

Date July 3 12 14 17 20 21 29

Account Credited

Ref

Benton Ltd Emerick Ltd Dunlap Ltd Comerica Materials Benton Ltd Emerick Ltd Comerica Materials

√ √ √ √ √ √ √

P10 Inventory Dr Accounts Payable Cr 1,000 250 550 700 350 300 1,050 4,200 120/201

(b) General Journal Date

(c)

Account Titles and Explanations

Ref.

Debit

July 1 Store Equipment Accounts Payable – Alou Equipment Ltd (Purchase of store equipment on account)

153 201/√

1,800

15 Inventory Accounts Payable – Galant Transit (Correction of an error in recording an inventory purchase on credit)

120 201/√

200

18 Accounts Payable – Comerica Materials Inventory (Received a credit note for inventory returned)

201/√ 120

25 Accounts Payable – Dunlap Pty Ltd Inventory (Received a credit note for inventory returned)

201/√ 120

100

Credit

1,800

200

100

An advantage of using specialised journals is that transactions of a similar nature are grouped together, eliminating the necessity for narrations. Time is also saved because much of the posting will be limited to posting column totals at the end of the month. The circumstances under which it would not be better to use specialise journals would be if there are very few transactions in each accounting period.

6.17

Chapter 6: Accounting information systems

EXERCISE 6.12 Musac Hi Fi Ltd $597 ($120 + $174 + $87 + $114 + $102). All of the debit postings to the subsidiary ledger accounts should be from the sales journal. The total of all these debits should therefore be the total credit sales for the month which would be the same amount as the end-of-month debit posting from the sales journal to Accounts Receivable control account.

6.18

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 6.13 Ruby Ltd (a)

$392,475. Beginning balance of $300,000 plus $187,725 debit from sales journal less $95,250 credit from cash receipts journal.

(b)

$72,645. Beginning balance of $67,500 plus $40,770 credit from purchases journal less $35,625 debit from cash payments journal.

(c)

The column total of $187,725 in the sales journal would be posted to the credit side of the Sales account and the debit side of the Accounts Receivable account in the general ledger.

(d)

The accounts receivable column total of $95,250 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger.

(e)

Preparing a schedule of Accounts Receivable allows the subsidiary ledger total to be agreed to the total Accounts Receivable Control in the General Ledger.

EXERCISE 6.14 Bing Ltd (a)

The debit posting reference on 28 February should be from the sales journal (SJ) to record some of the credit sales during the month. The missing general ledger debit amount should be $5,000 to balance. Ring’s ending balance must be $5,762. (Accounts Receivable control balance of $33,022 less Ding, $15,060, and King, $12,200.)

(b)

All amounts posted in total to the control account are also posted in detail in the accounts receivable subsidiary ledger account. This system ensures that the total of the subsidiary ledger accounts will equal the total in the corresponding control account.

EXERCISE 6.15 Building Blocks Pty Ltd (a)

$1,194 ($240 + $348 + $174 + $228 + $204). All of the credit postings to the subsidiary ledger accounts should be from the purchases journal. The total of all these credits should therefore be the total credit purchases for the month which would be the same amount as the end-of-month credit posting from the purchases journal to Accounts Payable control account.

(b)

No. Because details in the Accounts Payable subsidiary ledger would be exactly the same as in the general ledger control account.

6.19

Chapter 6: Accounting information systems

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 6.1 Computer Supplies Ltd (a) Cash Receipts Journal

CR4 Date

Account Credited

Ref

Cash Dr

Apr. 1 4 5 8 10 11 23 29

S Wiggle, Capital Computer for U PC West Ltd Cash Sales East PC Ltd Inventory PC West Ltd Office Supplies

301 √ √

18,000 4,998 1,860 21,736 2,400 1,650 4,500 3,600 58,744 (101)

√ 120 √ √

Discount Allowed Dr

Accounts Receivable Cr

102

5,100 1,860

Sales Cr

Other Accounts Cr

Cost of Sales Dr Inventory Cr

18,000

21,736

13,040

2,400 1,650 4,500 3,600 17,460 (112)

102 (414)

21,736 (401)

19,650 (x)

13,040 (505)/(120)

Cross-footing Totals $71,886 Dr Total = $71,886 ($58,744 + $102 + $13,040) Cr Total = $71,886 ($17,460 + $21,736 + $19,650 + $13,040)

(b) General Ledger Accounts Receivable Date Explanation

Ref.

Apr. 1 Balance 30

Debit

CR4

Credit

17,460

No. 112 Balance 22,050 4,590

Accounts Receivable Subsidiary Ledger East PC Ltd Date Explanation

Ref.

Apr. 1 Balance 10

CR4

Debit

Credit

2,400

Balance 4,650 2,250

6.20

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Office Supplies Ltd Date Explanation

Ref.

Apr. 1 Balance 29

CR4

PC West Ltd Date Explanation

Ref.

Apr. 1 Balance 5 23

CR4 CR4

Computers for U Ltd Date Explanation

Ref.

Apr. 1 Balance 4

(c)

Debit

Credit

3,600

Debit

Credit

Debit

Accounts Receivable subsidiary account balances: East PC Ltd PC West Ltd 2,340 Total

3,600 0

Balance

1,860 4,500

Credit

CR4

Accounts receivable balance

Balance

8,700 6,840 2,340

Balance

5,100

5,100 0

$4,590

$2,550 $4,590

6.21

Chapter 6: Accounting information systems

PROBLEM SET A 6.2 Antique Jewels Pty Ltd (a) Cash Payments Journal

Date

Ch. No.

Oct. 1 3 5

63 64 65

10 15 16

66 67 68

Account Debited Inventory Equipment Diamond Factory Ltd Inventory Ruby R Us Ltd Amy Amethyst, Drawing Precious Stones Ltd Angus and Bandicoot

Ref

Other Accounts Dr

Accounts Payable Dr

Inventory Dr

CP10 Discount Received Cash Cr Cr

1,540 157 √

1,760 3,740

75 4,950

√ 306

4,950 3,080 880

3,080 880

√

3,080

√

5,720 2,640 (x)

15,620 (201)

1,540 1,760 3,665

3,018 5,720

6,490 (120)

137 (405)

24,613 (101)

Cross-footing Totals = $24,750 Total Debits = $24,750 ($2,640 + $15,620 + $6,490) Total Credits = $24,750 ($137+ $24,613)

6.22

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) General Ledger Accounts Payable Date Explanation

Ref.

Oct. 1 Balance 31

CP10

Debit

Credit

No. 201 Balance 23,420 7,800

15,620

Accounts Payable Subsidiary Ledger Diamond Factory Date Explanation

Ref.

Oct. 1 Balance 5

CP10

Precious Stones Ltd Date Explanation

Ref.

Oct. 1 Balance 19

CP10

Ruby R Us Ltd Date Explanation

Ref.

Oct. 1 Balance 15

CP10

Angus and Bandicoot Date Explanation

Ref.

Oct. 1 Balance 29

CP10

Debit

Credit

3,740 -

3,740

Debit

Credit

Balance 3,080 0

3,080

Debit

Balance 5,500 2,420

3,080

Debit

Balance

Credit

5,720

Balance 11,100 5,380

$7,800

Accounts payable subsidiary account balances: Precious Stones Ltd Angus and Bandicoot Total

$2,420 5,380 $7,800

6.23

Chapter 6: Accounting information systems

(d)

Social Implications: • Corporate social responsibility (CSR) is ‘social responsibility’ applied in a business environment and involves businesses acting with regard to social principles and acting ethically. Basically, it is about business people’s obligation to act responsibly for the benefit of society when carrying on business activities. Amy has an obligation to be socially responsible so given she knows the goods are stolen it is not socially responsible to sell them to her customers. Financial implications: • Choosing not to sell stolen goods may impact Antique Jewels Ltd’s profits for the period if they cannot obtain sufficient supplies to meet the demand.

6.24

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 6.3 Racquets ‘R’ Us Ltd (a) Purchases Journal P1 Date

July 1 2 5 13 15 15 18 24 26 28

Account Credited (Debited)

Post Ref

Tennis Australia Ltd Johnson Shipping Grant and Sons Racquet Supplies Tennis Australia Lepa Ltd Dennisen Advertisements Grant and Sons Racquet Supplies (Equipment) Johnson Shipping

√ 510/√ √ 126√ √ √ 610/√ √ 157/√ 510/√

Other Accounts Dr

Inventory Dr

8,800 550 5,500 990 3,960 3,190 594 3, 960 330 462 2,926 (x)

25,410 (120)

Accounts Payable Cr

8,800 550 5,500 990 3,960 3,190 594 3,960 330 462 28,336 (201)

Sales Journal S1 Date

July 3 3 16 16 21 21 30

Account Debited

Post Ref √ √ √ √ √ √ √

Squash Club Ltd Teeny Tennis Ltd Martin Ltd Teeny Tennis Ltd Squash Club Ltd Randee Ltd Martin Ltd

Accounts Receivable Dr Sales Cr 1,980 2,200 3,795 1,507 341 3,080 4,290 17,193 (112)/(401)

Cost of Sales Dr. Inventory Cr 1,386 1,540 2,657 1,055 239 2,156 3,003 12,036 (505)/(120)

6.25

Chapter 6: Accounting information systems

General Journal G1 Date

Account Titles and Explanations

Ref

July 8 Accounts Payable – Grant and Sons Inventory (Received a credit note on inventory returned)

201/√ 120

550

412 112/√

22 Sales Returns and Allowances Accounts Receivable – Squash Club Ltd (Granted an allowance for inventory damaged in shipment)

Debit

Credit

550

(b) General Ledger Accounts Receivable Date Explanation

Ref

July 31

S1 G1

Inventory Date Explanation

Ref.

July 31

P1 G1 S1

Supplies Date Explanation

Ref.

July 31

Equipment Date Explanation

Ref.

July 31

Accounts Payable Date Explanation

Ref.

July 31

P1 G1

Sales

Debit

Credit

No. 112 Balance

17,193 55

Debit

No. 120 Credit Balance

25,410 550 12,036

Debit

17,193 17,138

Credit

25,410 24,860 12,824

No. 126 Balance

990

Debit

990

Credit

No. 157 Balance

330

Debit

330

Credit

No. 201 Balance

28,336 550

28,336 27,786

No. 401 .

6.26

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Date

Explanation

Ref.

July 31

Debit

Credit

Sales Returns and Allowances Date Explanation

Ref.

17,193

Debit

Cost of Sales Date Explanation

Ref.

July 31

Freight In Date Explanation

Ref.

July 31 31

P1 P1

Advertising Expense Date Explanation

Ref.

July 31

Balance

Credit 55

12,036

Balance 12,036

Credit

550 462

Debit

No. 412 Balance 55

No. 505 Debit Credit

Debit

17,193

No. 510 Balance 550 1,012

Credit

594

No. 610 Balance 594

Helpful Hint: When posting the individual amounts from the ‘Other Accounts’ column in the Purchases Journal (at the end of the month), the 31 July date can be used or the actual date of the transaction. Both are acceptable. Accounts Receivable Subsidiary Ledger Teeny Tennis Ltd Date Explanation

Ref.

July 3 16

S1 S1

Debit 2,200 1,507

Credit

Balance 2,200 3,707

6.27

Chapter 6: Accounting information systems

Squash Club Ltd Date Explanation

Ref.

July 3 21 22

S1 S1 G1

Martin Ltd Date Explanation

Ref.

July 16 30

S1 S1

Randee Ltd Date Explanation

Ref.

July 21

Debit

Credit

1,980 341 55

Debit

Credit

3,795 4,290

Debit

Balance 1,980 2,321 2,266

Balance 3,795 4,290

Credit

3,080

Balance 3,080

Accounts Payable Subsidiary Ledger Racquet Supplies Date Explanation

Ref

July 13 26

P1 P1

Tennis Australia Ltd Date Explanation July 1 15

Ref P1 P1

Grant and Sons Date Explanation July 5 24 8

Johnson Shipping Date Explanation July 2 28

Credit

Balance

990 330

990 1,320

Debit

Credit 8,800 3,960

Balance 8,800 12,760

Ref P1 P1 G1

Debit

Credit 5,500 3,960

Balance 5,500 9,460 8,910

Ref

Debit

Credit

Balance

P1 P1

Debit

550

550 462

550 1,012

6.28

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Lepa Ltd Date Explanation July 15

Ref P1

Debit

Credit 3,190

Balance 3,190

Dennisen Advertisements Date Explanation July 18

Ref P1

Debit

Credit 594

Balance 594

(c) Accounts Receivable Control Balance Subsidiary account balances: Teeny Tennis Ltd Squash Club Ltd Martin Ltd Randee Ltd Total

$17,138

$3,707 2,266 8,085 3,080 $17,138

Accounts Payable Control Balance Subsidiary account balances: Racquet Supplies Tennis Australia Ltd Grant and Sons Johnson Shipping Lepa Ltd Dennison Advertisements Total

$27,786

$1,320 12,760 8,910 1,012 3,190 594 $27,786

6.29

Chapter 6: Accounting information systems

PROBLEM SET A 6.4 Bouncing Balls Ltd (a), (b) & (c) Sales Journal

Date

Account Debited

Jan. 4 9 17 31

Toys 4 U Mays Ltd Kid Time Ltd Toys 4 U

Invoice No.

Post Ref

371 372 373 374

√ √ √ √

S17 Cost of Sales Dr Inventory Cr

Accounts Receivable Dr Sales Cr 10,875 8,700 1,800 13,995 35,370 (112)/(401)

6,525 5,220 1,080 8,397 21,222 (505)/(120)

Purchases Journal

Date

Account Credited

Ref

Jan. 3 8 11 23 24

Ball Supplies Ltd Balls Ltd Hoble Ball Supplies Ltd Levine

√ √ √ √ √

P13 Inventory Dr Accounts Payable Cr 15,000 6,750 5,550 11,700 7,035 46,035 (120)/(201)

General Journal Date

Account Titles and Explanation

Jan. 5 Accounts Payable – Ball supplies. Inventory (Returned damaged goods purchased previously on credit) 19 Equipment Sundry Accounts Payable – Johnson Ltd (Purchased equipment on account)

Ref.

Debit

201/√ 120

450

157 202/√

8,250

G14 Credit

450

8,250

6.30

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Cash Receipts Journal CR15

Date

Account Credited

Jan. 6 13 14 Mays Ltd 17 Toys 4 U 20 27 30 Kids Time Ltd

Ref

√ √

√

Discount Allowed Dr

Cash Dr

4,725 8,010 8,613 10,875 4,800 5,595 1,800

Accounts Receivable Cr

Sales Cr

Other Accounts Cr

Cost of Sales Dr Inventory Cr

4,725 8,010

2,835 4,806

4,800 5,595

2,880 3,357

8,700 10,875

1,800

44,418 (101)

87 (716)

21,375 (112)

23,130 (401)

0 (x)

Inventory Dr

Discount Received Cr

13,878 (505)/(120)

Cross-footing Totals $58,383 Dr Total = $58,383 ($44,418 + $87 + $13,878) Cr Total = $58,383 ($21,375 + $23,130 + $13,878) Cash Payments Journal CP15

Date

Account Debited

Ref

Jan. 4 13 15 20 31

Supplies Ball Supplies Ltd Salaries Expense Balls Ltd Salaries Expense

126 √ 726 √ 726

Other Accounts Dr

Accounts Payable Dr

120 14,550

291

6,750

135

21,450 19,800 41,370 (x)

21,300 (201)

0 (x)

426 (416)

Cash Cr

120 *14,259 21,450 6,615 19,800 62,244 (101)

Cross-footing Totals = $62,670 Dr Total = $62,670 ($41,370 + $21,300) Cr Total = $62,670 ($426 + $62,244)

*Helpful Hint: Purchased $15,000 from Ball supplies on 3 Jan. 5 Jan returned $450 damaged goods. Balance paid is $14,550 less 2% discount. (d)

Cross-footing the special journals prior to posting the totals to the ledger accounts ensures that the total dollar debits equals the total dollar credits.

6.31

Chapter 6: Accounting information systems

PROBLEM SET A 6.5 Mill Park Heights Bikes (a), (d) & (g) General Ledger Cash Date Explanation July 31 31

Ref CR16 CP16

Debit 58,959

No. 101 Credit Balance 58,959 23,083 35,876

No. 112 Credit Balance 10,740 8,340 2,400

Accounts Receivable Date Explanation July 31 31

Ref S15 CR16

Debit 10,740

Inventory Date Explanation July 29 31 31 31

Ref CR16 P14 S15 CR16

Debit

Store Supplies Date Explanation July 4 31 Adjusting entry

Ref CP16 G5

Debit 360

Prepaid Rent Date Explanation July 11 31 Adjusting entry

Ref CP16 G5

25,392

Debit 3,600

Accounts Payable Date Explanation July 31 31

Ref P14 CP16

Debit

Williams, Capital Date Explanation July 1

Ref CR16

Debit

17,760

No. 120 Credit Balance 270 270CR 25,122 6,981 18,141 1,560 16,581 No. 127 Balance 360 276 84

Credit

No. 131 Credit Balance 3,600 300 3,300

No. 201 Credit Balance 25,392 25,392 7,632

No. 301 Credit Balance 48,000 48,000

6.32

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Williams, Drawings Date Explanation July 19

Ref CP16

Debit 1,500

Sales Date Explanation July 31 31

Ref S15 CR16

Debit

Ref CP16

Debit

Cost of Sales Date Explanation July 31 31

Ref S15 CR16

Debit 6,981 1,560

Ref CR16

No. 306 Balance 1,500

No. 401 Credit Balance 10,740 10,740 2,400 13,140

Discount Received Date Explanation July 31

Discount Allowed Date Explanation July 31

Credit

No. 405 Credit Balance 137 137

No. 505 Credit

Balance 6,981 8,541

Credit 51

No. 614 Balance 51

Debit

Supplies Expense Date Explanation July 31 Adjusting entry

Ref G5

Debit 276

Credit

No. 631 Balance 276

Rent Expense Date Explanation July 31 Adjusting entry

Ref G5

Debit 300

Credit

No. 729 Balance 300

6.33

Chapter 6: Accounting information systems

Sales Journal

(b)

Date

Account Debited

July 6 Toy World Co. 8 Biker Ltd 10 L Lemansky 21 S Kane

Post Ref

Accounts Receivable Dr Sales Cr

√

3,240

√ √ √

2,160 2,940 2,400 10,740 (112)/(401)

S15 Cost of Sales Dr Inventory Cr

2,106 1,404 1,911 1,560 6,981 (505)/(120)

Cash Receipts Journal CR16

Account Credited

Date July 1 Williams, Capital 7 13 Biker Limited 16 L Lemansky 20 Toy World 29 Inventory

Cash Dr Ref 301

√ √ √ 120

Discount Allowed Dr

Accounts Receivable Cr

Sales Cr

48,000 2,400 2,138 2,911 3,240 270 58,959 (101)

Other Accounts Cr

Cost of Sales Dr Inventory Cr

48,000 2,400 22 29

2,160 2,940 3,240

51 (614)

8,340 (112)

2,400 (401)

1,560

270 48,270 (x)

1,560 (505)/(120)

Cross-footing Totals $60,570 Dr Total = $60,570 ($58,959 + $51 + $1,560) Cr Total = $60,570 ($8,340 + $2,400 + $48,270 + $1,560)

6.34

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Accounts Payable Subsidiary Ledger Dixon’s Bikes Date Explanation July 4 15

Ref P14 CP16

Debit

Bike Supplies Date Explanation July 5 10

Ref P14 CP16

Debit

R Gamble Date Explanation July 11

Ref P14

M Hill Date Explanation July 13 21

D Jacob Date Explanation July 20

Credit 4,080

Balance 4,080 0

Credit 4,500

Balance 4,500 0

Debit

Credit 2,352

Balance 2,352

Ref P14 CP16

Debit

Credit 9,180

Balance 9,180 0

Ref P14

Debit

Credit 5,280

Balance 5,280

Credit

Balance 3,240 0

4,080

4,500

9,180

Accounts Receivable Subsidiary Ledger Toy World Co. Date Explanation July 6 20

Ref S15 CR16

Debit 3,240

S Kane Date Explanation July 21

Ref S15

Debit 2,400

Credit

Balance 2,400

L Lemansky Date Explanation July 10 16

Ref S15 CR16

Debit 2,940

Credit

Balance 2,940 0

3,240

2,940

6.35

Chapter 6: Accounting information systems

Biker Ltd Date Explanation July 8 13

Ref S15 CR16

Debit 2,160

Credit 2,160

Balance 2,160 0

(e) Mill Park Heights Bikes Unadjusted Trial Balance as at 31 July 2017 Debit 101 112 120 127 131 201 301 306 401 405 505 614

Cash Accounts Receivable Inventory Store Supplies Prepaid Rent Accounts Payable Williams, Capital Williams, Drawings Sales Discount Received Cost of Sales Discount Allowed

Credit

$35,876 2,400 16,581 360 3,600 $7,632 48,000 1,500 13,140 137 8,541 51 $68,909

$68,909

(f) Accounts Payable Control Balance Schedule of Accounts Payable 31/7/17: D Jacob R Gamble

$7,632

$5,280 2,352 $7,632

Accounts Receivable Control Balance

$2,400

Schedule of Accounts Receivable 31/7/17: S Kane

$2,400

6.36

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) & (g) General Journal Date

Account Titles and Explanation

Ref

July 31 Supplies Expense Store Supplies (Adjusting entry to record supplies used)

631 127

276

729 131

300

31 Rent Expense Prepaid Rent (Adjusting entry to recognise July rent expense)

Debit

G5 Credit

276

300

(h) Mill Park Heights Bikes Adjusted Trial Balance as at 31 July 2017 Debit 101 112 120 127 131 201 301 306 401 405 505 614 631 729

(i)

Cash Accounts Receivable Inventory Store Supplies Prepaid Rent Accounts Payable Williams, Capital Williams, Drawings Sales Discount Received Cost of Sales Discount Allowed Supplies Expense Rent Expense

Credit

$35,876 2,400 16,581 84 3,300 $7,632 48,000 1,500 13,140 137 8,541 51 276 300 $68,909

$68,909

If the trial balance doesn’t balance: • Re-add the columns • Check if all accounts have normal balances. • Check that all balances have been accurately transferred from the general ledger • If the difference between the total of the debit and credit columns is divisible by 2, it may indicate an amount that was posted to the same side twice instead of once as a debit and once as a credit. • If the difference is divisible by 9, a transposition error may have been made i.e., the order of the digits in a number may have been reversed, or the error may be a slide i.e., the decimal place may have been incorrectly placed in one of the postings.

6.37

Chapter 6: Accounting information systems

PROBLEM SET A 6.6 Party Shop Ltd (b) & (c) Cash Receipts Journal CR1

Account Credited

Date Jan. 7 S Devine 12 W. Wong 23 29 Commission Receivable

Ref √ √

115

Cash Dr 1,750 2,695 5,000 23,250 32,695 (101)

Discount Allowed Dr

Accounts Receivable Cr

1,750 2,750

Sales Cr

Other Accounts Cr

Cost of Sales Dr Inventory Cr

5,000

55 (714)

4,500 (112)

3,250 23,250 23,250 (x)

5,000 (401)

3,250 (505)/(120)

Cross-footing Totals $36,000 Dr Total = $36,000 ($32,695 + $55 + $3,250) Cr Total = $36,000 ($4,500 + $5,000 + $23,250 + $3,250) Cash Payments Journal CP1

Date

Account Debited

Jan. 11 12 15 18

Freight Inwards Rent Expense D Harms Sales Salaries Expense 18 Office Salaries Expense 20 R Grilson 27 S Warren

Other Accounts Dr

Ref

Accounts Payable Dr

Inventory Cr

Discount Received Cr

Cash Cr

506 729 √ 726

250 1,000 1,250

250 1,000 7,500 1,250

727

500

7,750

√ √ 3,000 (x)

9,250 475 17,475 (201)

250

0 (x)

250 (415)

9,250 475 20,225 (101)

Cross-footing Totals = $20,475 Dr Total = $20,475 ($3,000 + $17,475) Cr Total = $20,475 ($250 + $20,225)

6.38

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Sales Journal Account Debited

Date

Post Ref

Jan 5 W Wong 24 Celebrations Ltd

S1 Cost of Sales Dr Inventory Cr

Accounts Receivable Dr Sales Cr

√ √

2,750 3,850

1,787 2,502

6,600 (112)/(401)

4,289 (505)/(120)

Purchases Journal

Date

Account Credited

Jan. 5 S Warren 17 D Lapeska

Terms

Ref

2/7, n/30 2/7, n/30

√ √

Inventory Dr Accounts Payable Cr 1,500 750 2,250 (120)/(201)

General Journal Date

Account Titles and Explanation

Ref

Jan. 14 Sales Returns and Allowances Accounts Receivable – Party Time Inventory Write Down Expense ($350 x .65) Cost of Sales (Issued a credit for return of damaged inventory. The inventory is considered unsaleable.) 30 Accounts Payable – D Lapeska Inventory (Returned inventory to supplier)

Debit

412 √/112

350

750 505

228

√/201 120

250

G1 Credit

350

228

250

(a) & (c) General Ledger Cash Date Explanation Jan. 1 Balance 31 31

Ref CR1 CP1

Debit 32,695

No. 101 Balance 21,500 54,195 20,225 33,970

Credit

6.39

Chapter 6: Accounting information systems

Accounts Receivable Date Explanation Jan. 1 Balance 14 31 31

Ref G1 CR1 S1

Commissions Receivable Date Explanation Jan. 1 Balance 29

Ref

Debit

6,600

Debit

CR1

Inventory Date Explanation Jan. 1 Balance 30 31 31 31

Ref G1 P1 CR1 S1

Equipment Date Explanation Jan. 1 Balance

Ref

Accumulated Depreciation – Equipment Date Explanation Jan. 1 Balance

Accounts Payable Date Explanation Jan. 1 Balance 30 31 31

Ref

Ref G1 P1 CP1

B Beatle, Capital Date Explanation Jan. 1 Balance

Ref

Debit

2,250

Debit

Debit 250 17,475

Debit

No. 112 Balance 8,250 350 7,900 4,500 3,400 10,000

Credit

No. 115 Balance 23,250 23,250 0

Credit

No. 120 Credit Balance 12,250 250 12,000 14,250 3,250 11,000 4,289 6,711

Credit

No. 157 Balance 3,975

Credit

No. 158 Balance 2,250

No. 201 Credit Balance 22,250 22,000 2,250 24,250 6,775

Credit

No. 301 Balance 44,725

6.40

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Sales Date Explanation Jan. 31 31

Ref CR1 S1

Commissions Revenue Date Explanation Jan. 31

Ref

No. 401 Credit Balance 5,000 5,000 6,600 11,600

Debit

Sales Returns and Allowances Date Explanation Jan. 14

Ref G1

Debit 350

Discount Received Date Explanation Jan. 31

Ref CP1

Debit

Cost of Sales Date Explanation Jan. 31 31 14

Ref CR1 S1 G1

Debit 3,250 4,289

Credit

No. 405 Balance 0

Credit

No. 412 Balance 350

No. 415 Credit Balance 250 250

No. 505 Balance 3,250 7,539 228 7,311

Credit

Freight In Date Explanation Jan. 11

Ref CP1

Debit 250

Credit

No. 506 Balance 250

Discount Allowed Date Explanation Jan. 31

Ref CR1

Debit

Credit

No. 714 Balance 55

Sales Salaries Expense Date Explanation Jan. 18

Ref CP1

Debit 1,250

Credit

No. 726 Balance 1,250

Office Salaries Expense Date Explanation Jan. 18

Ref CP1

Debit 500

Credit

No. 727 Balance 500

6.41

Chapter 6: Accounting information systems

Rent Expense Date Explanation Jan. 12

Ref CP1

Debit 1,000

Credit

No. 729 Balance 1,000

Inventory Write Down Expense Date Explanation Jan. 14

Ref G1

Debit 228

Credit

No. 750 Balance 228

Accounts Receivable Subsidiary Ledger Party Time Ltd Date Explanation Jan. 1 Balance 14

Ref

Debit

Celebrations Date Explanation Jan. 1 Balance 24

Ref S1

S Devine Date Explanation Jan. 1 Balance 7

CR1

W Wong Date Explanation Jan. 5 12

Ref S1 CR1

Ref

Credit 350

Debit

Credit

Balance 4,000 7,850

Credit

Balance 2,750 1,000

3,850

Debit

1,750

Debit 2,750

Balance 1,500 1,150

Credit 2,750

Balance 2,750 0

Accounts Payable Subsidiary Ledger Toys 4 U Date Explanation Jan. 1 Balance

R Grilson Date Explanation Jan. 1 Balance 20

Ref

Debit

Credit

Balance 5,250

Ref

Debit

Credit

Balance 9,250 0

CP1

9,250

6.42

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

D Harms Date Explanation Jan. 1 Balance 15

CP1

D Lapeska Date Explanation Jan. 17 30

Ref P1 G1

Debit

S Warren Date Explanation Jan. 5 27

Ref P1 CP1

Debit

Ref

Debit

Credit

Balance 7,750 0

Credit 750

Balance 750 500

Credit 1,500

Balance 1,500 1,025

7,750

250

475

(d) Party Shop Ltd Trial Balance as at 31 January 2017 Debit 101 112 115 120 157 158 201 301 401 412 415 505 506 714 726 727 729 750

Cash Accounts Receivable Commissions Receivable Inventory Equipment Accumulated Depreciation – Equipment Accounts Payable B Beatle, Capital Sales Sales Returns and Allowances Discount Received Cost of Sales Freight In Discount Allowed Sales Salaries Expense Office Salaries Expense Rent Expense Inventory Write Down Expense

Credit

$33,970 10,000 6,711 3,975 $2,250 6,775 44,725 11,600 350 250 7,311 250 55 1,250 500 1,000 228 $65,600

$65,600

6.43

Chapter 6: Accounting information systems

(e) Accounts Receivable Subsidiary Ledger: Party Time Celebrations S Devine

Accounts Receivable Control

$1,150 7,850 1,000 $10,000 $10,000

Accounts Payable Subsidiary Ledger: Toys 4 U D Lapeska S Warren

Accounts Payable Control

$5,250 500 1,025 $6,775 $6,775

6.44

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 6.7 Wyatt Sports (a) Cash Receipts Journal CR1

Date

Account Credited

June J Wyatt, 1 Capital 3 Mastin Pty Ltd 6 Field Ltd 7 9 Block & Son 11 Inventory 15 20 Green Bros.

Discount Allowed Dr

Accounts Receivable Cr

Ref

Cash Dr

301

5,000

√

490

500

√

931 3,068 1,715

950

1,750

√ 120 √

Other Accounts Cr

Cost of Sales Dr Inventory Cr

5,000

3,068

100 2,625 800 14,729 (101)

Sales Cr

2,045

100 2,625

1,750

800 64 (614)

4,000 (112)

5,693 (401)

5,100 (x)

3,795 (505)/(120)

Cross-footing Totals $18,588 Dr Total = $18,588 ($14,729 + $64 + $3,795) Cr Total = $18,588 ($4,000 + $5,693 + $5,100 + $3,795

6.45

Chapter 6: Accounting information systems

(b) General Ledger Accounts Receivable Date Explanation Jan. 1 Balance 31

Ref.

Debit

CR1

No. 112 Credit Balance 4,000 4,000 0

Accounts Receivable Subsidiary Ledger Block & Son Date Explanation June 1 Balance 9

Ref. CR1

Field Ltd Date Explanation June 1 Balance 6

Debit

CR1

Debit

CR1

Debit

CR1

Credit 800

Ref.

Accounts receivable control balance Sum of all subsidiary accounts

Credit 950

Ref.

Mastin Pty Ltd Date Explanation June 1 Balance 3

Credit 1,750

Ref.

Green Bros. Date Explanation June 1 Balance 20

(c)

Debit

Credit 500

Balance 1,750 0

Balance 950 0

Balance 800 0

Balance 500 0

=0 =0

6.46

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 6.8 Clover Hill (b) Purchases Journal P1 Date Account Credited Feb. S Healy 6 9 L Held 16 R Landly 21 J Able

Terms 1/7, n/30

Ref. √

Inventory Dr Accounts Payable Cr 6,000

1/10, n/30 2/7, n/30 1/7, n/30

√

45,000

√ √

3,600 9,750 64,350 (120)/(201)

Cash Payments Journal CP1

Date

Feb. 9 12 15 17 20 28

Account Debited

Ref.

Supplies S Healy Equipment L Held J Hill, Drawings R Landly

126 √ 157 √ 306 √

Other Account s Dr.

Accounts Payable Dr.

Inventor y Dr

Discount Received Cr.

1,500 6,000

45,000

450

12,000 1,650 15,150 (x)

3,600 54,600 (201)

510 (405)

Cash Cr.

1,500 5,940 12,000 44,550 1,650 3,600 69,240 (101)

(a), (d) & (g) Note: Corrected post references for Sales Journal and Cash Receipts Journal are S1 and CR1 respectively as illustrated in the solution below. General Ledger Cash Date Explanation Feb. 28 28

Ref. CR1 CP1

Debit 72,892

Credit 69,240

No. 101 Balance 72,892 3,652

6.47

Chapter 6: Accounting information systems

Accounts Receivable Date Explanation Feb 28 28

Ref. S1 CR1

Inventory Date Explanation Feb. 28 18 28 28

Ref. P1 CR1 S1 CR1

Supplies Date Explanation Feb. 9 28 Adjusting entry

Ref. CP1 G1

Equipment Date Explanation Feb. 15

Ref. CP1

Accumulated Depreciation - Equipment Date Explanation Feb. 28 Adjusting entry

Accounts Payable Date Explanation Feb. 28 28

Ref. G1

Ref. P1 CP1

J Hill, Capital Date Explanation Feb. 1

Ref. CR1

J Hill, Drawings Date Explanation Feb. 20

Ref. CP1

Debit 39,000

Debit 64,350

Debit 1,500

Debit 12,000

Debit

Debit 54,600

Debit

Debit 1,650

No. 112 Credit Balance 39,000 18,000 21,000

No. 120 Credit Balance 64,350 225 64,125 25,740 38,385 6,435 31,950

No. 126 Credit Balance 1,500 1,050 450

No. 157 Credit Balance 12,000

No. 158 Credit Balance 300 300

No. 201 Credit Balance 64,350 64,350 9,750

No. 301 Credit Balance 45,000 45,000

No. 306 Credit Balance 1,650

6.48

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Sales Date Explanation Feb. 28 28

Ref. S1 CR1

Discount Received Date Explanation Feb. 28

Ref. CP1

Cost of Sales Date Explanation Feb. 28 28

Ref. S1 CR1

Discount Allowed Date Explanation Feb. 28

Ref. CR1

Supplies Expense Date Explanation Feb. 28 Adjusting entry

Ref. G1

Depreciation Expense Date Explanation Feb. 28 Adjusting entry

Ref. G1

No. 401 Credit Balance 39,000 39,000 9,750 48,750

Debit

No. 405 Credit Balance 510 510

Debit

Debit 25,740 6,435

No. 505 Credit Balance 25,740 32,175

No. 614 Credit Balance 83

Debit 1,050

No. 631 Credit Balance 1,050

Debit 300

No. 711 Credit Balance 300

Debit

Ref. S1 CR1

Debit 8,250

P Babcock Date Explanation Feb. 9 26

Ref. S1 CR1

Debit 9,750

Credit 8,250

Credit 9,750

Balance 8,250 0

Balance 9,750 0

6.49

Chapter 6: Accounting information systems

D Chambers Date Explanation Feb. 12

Ref. S1

Debit 12,000

Credit

Balance 12,000

K Dawson Date Explanation Feb. 26

Ref. S1

Debit 9,000

Credit

Balance 9,000

Accounts Payable Subsidiary Ledger J Able Date Explanation Feb. 21

Ref. P1

Debit

Credit 9,750

Balance 9,750

S Healy Date Explanation Feb. 6 12

Ref. P1 CP1

Debit

Credit 6,000

Balance 6,000 0

L Held Date Explanation Feb. 9 17

Ref. P1 CP1

Debit

R Landly Date Explanation Feb. 16 28

Ref. P1 CP1

Debit

6,000

Credit 45,000

Balance 45,000 0

Credit 3,600

Balance 3,600 0

45,000

3,600

6.50

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(e) Clover Hill Trial Balance as at 28 February 2016 Debit 101 112 120 126 157 201 301 306 401 405 505 614

Cash Accounts Receivable Inventory Supplies Equipment Accounts Payable J Hill, Capital J Hill, Drawings Sales Discount Received Cost of Sales Discount Allowed

Credit

$3,652 21,000 31,950 1,500 12,000 $9,750 45,000 1,650 48,750 510 32,175 83 $104,010

$104,010

(f) Accounts Receivable Control Account

$21,000

Accounts Receivable Subsidiary Accounts: D Chambers K Dawson

$12,000 9,000

$21,000

Accounts Payable Control Account

$9,750

Accounts Payable Subsidiary Account: J Able

$9,750

(g) General Journal Date

Account Titles and Explanation

Feb. 28 Supplies Expense Supplies (Record supplies used) 28 Depreciation Expense Accumulated Depreciation – Equipment (Record depreciation expense)

Ref.

Debit

631 126

1,050

711 158

300

G1 Credit

1,050

300

6.51

Chapter 6: Accounting information systems

(h) Clover Hill Adjusted Trial Balance as at 28 February 2016 Debit 101 112 120 126 157 158 201 301 306 401 405 505 631 614 711

Cash Accounts Receivable Inventory Supplies Equipment Accumulated Depreciation – Equipment Accounts Payable J HIll, Capital J Hill, Drawings Sales Discount Received Cost of Sales Supplies Expense Discount Allowed Depreciation Expense

Credit

$3,652 21,000 31,950 450 12,000 $300 9,750 45,000 1,650 48,750 510 32,175 1,050 83 300 $104,310

$104,310

6.52

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 6.9 Lacquer Nail Supplies (a) Cash Payments Journal

Ch. No.

Account Debited

Nov. 1 3 5 11 15 16 19

Inventory

12 13 14 15 16 17

25 30

18 19

Equipment Creams & Oils R Us Inventory Plastic Nails Pty Ltd V. Pinky, Drawing Nail Polish Professionals Prepaid Insurance Cotton Balls Ltd

Date

Ref

157 √

Other Accounts Dr

Accounts Payable Dr

Inventory Dr

CP10 Discount Received Cash Cr Cr

900

1,700

1,000

1,300

1,700 1,881 2,000 970 500 1,274

2,900 (120)

75 (405)

3,000 2,500 14,725 (101)

Credit

No. 201 Balance

1,900

19 2,000

√ 306 √ 130 √

500

3,000 5,200 (x)

2,500 6,700 (201)

Cross-footing Totals = $14,800 Total Debits = $14,800 ($5,200 + $6,700 + 2,900) Total Credits = $14,800 ($75 + $14,725)

(b) General Ledger Accounts Payable Date Explanation

Ref.

Nov. 1 Balance 31

CP10

Debit

9,750 3,050

6,700

Accounts Payable Subsidiary Ledger Cotton Balls Ltd Date Explanation

Ref.

Nov. 1 Balance 30

CP10

Debit

2,500

Credit

Balance 4,500 2,000

6.53

Chapter 6: Accounting information systems

Nail Polish Professionals Date Explanation

Ref.

Nov. 1 Balance 19

CP10

Plastic Nails Pty Ltd Date Explanation

Ref.

Nov. 1 Balance 15

CP10

Creams & Oils R Us Date Explanation

Ref.

Nov. 1 Balance 5

(c)

CP10

Debit

Credit

2,350 1,050

1,300

Debit

Credit

1,900

Accounts payable balance

$3,050

Accounts payable subsidiary account balances: Cotton Balls Ltd Nail Polish Professionals Total

$2,000 1,050 $3,050

Balance 1,000 0

1,000

Debit

Balance

Balance 1,900 0

6.54

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 6.10 Fancy Footwear Ltd (a) Purchases Journal P1 Date

July 1 2 5 13 15 15 18 24 26 28

Other Accounts Dr

Account Credited (Debited)

Post Ref

Little Feet Ltd Quick Shipping Grant and Sons Shoe Supplies Little Feet Lepa Ltd Shoe Advertisements Pty Ltd Grant and Sons Shoe Supplies Quick Shipping

√ 510/√ √ 126√ √ √ 610/√ √ 157/√ 510/√

Inventory Dr

Accounts Payable Cr

9,600 600 6,000 1,080 4,320 3,480 372 4,320 360 504 2,916 (x)

27,720 (120)

9,600 600 6,000 1,080 4,320 3,480 372 4,320 360 504 30,636 (201)

Sales Journal S1 Date

Account Debited

Post Ref

July 3 3 16 16 21 21 30

Pete’s Shoes Ltd Teeny Feet Ltd Martin’s Spartans Ltd Teeny Feet Ltd Pete’s Shoes Ltd Sandles Ltd Martin’s Spartans Ltd

√ √ √ √ √ √ √

Accounts Receivable Dr Sales Cr 2,160 2,400 4,140 648 310 3,360 4,680 17,698 (112)/(401)

Cost of Sales Dr. Inventory Cr 1,512 1,680 2,898 454 217 2,352 3,276 12,389 (505)/(120)

6.55

Chapter 6: Accounting information systems

General Journal G1 Date

Account Titles and Explanations

Ref

July 8 Accounts Payable – Grant and Sons Inventory (Received a credit note on inventory returned)

201/√ 120

600

412 112/√

22 Sales Returns and Allowances Accounts Receivable – Pete’s Shoes Ltd (Granted an allowance for inventory damaged in shipment)

Debit

Credit

600

(b) General Ledger Accounts Receivable Date Explanation

Ref

July 22 31

G1 S1

Inventory Date Explanation

Ref.

July 8 31 31

G1 P1 S1

Supplies Date Explanation

Ref.

July 15

Equipment Date Explanation

Ref.

July 26

Debit

Credit

No. 112 Balance

60 17,698

Debit

Credit 600 12,389

Credit

No. 126 Balance

1,080

Debit 360

No. 120 Balance 600CR 27,120DR 14,731DR

27,720

Debit

60CR 17,638

1,080

Credit

No. 157 Balance 360

6.56

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Accounts Payable Date Explanation

Ref.

July 8 31

G1 P1

Sales Date Explanation

Ref.

July 31

Sales Returns and Allowances Date Explanation

Ref.

July 22

Cost of Sales Date Explanation

Ref.

July 31

Freight In Date Explanation

Ref.

July 2 28

P1 P1

Advertising Expense Date Explanation

Ref.

July 18

Debit

No. 201 Balance

Credit

600

Debit

30,636

600DR 30,036CR

Credit

No. 401 Balance

17,698

Debit

Credit

No. 412 Balance

No. 505 Debit Credit

Balance

12,389

Debit

12,389

Credit

No. 510 Balance

600 504

Debit

17,698

600 1,104

Credit

No. 610 Balance

372

Ref.

July 3 21 22

S1 S1 G1

Debit

Credit

2,160 310 60

Balance 2,160 2,470 2,410

6.57

Chapter 6: Accounting information systems

Teeny Feet Ltd Date Explanation

Ref.

July 3 16

S1 S1

Martin’s Spartans Ltd Date Explanation

Ref.

July 16 30

S1 S1

Sandles Ltd Date Explanation

Ref.

July 21

Debit

Credit

2,400 648

Debit

2,400 3,048

Credit

4,140 4,680

Debit

Balance

Balance 4,140 8,820

Credit

3,360

Balance 3,360

Accounts Payable Subsidiary Ledger Little Fleet Ltd Date Explanation

Ref

July 1 15

Debit

P1 P1

Credit

Balance

9,600 4,320

9,600 13,920

Credit 6,000 4,320

Balance 6,000 5,400 9,720

Grant and Sons Date Explanation July 5 8 24

Ref P1 G1 P1

Debit

Shoe Supplies Date Explanation July 13 26

Ref P1 P1

Debit

Credit 1,080 360

Balance 1,080 1,440

Quick Shipping Date Explanation

Ref

Debit

Credit

Balance

July 2 24

P1 P1

600

600 504

600 1,104

Lepa Ltd .

6.58

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Date Explanation July 15

Ref P1

Debit

Credit 3,480

Balance 3,480

Shoe Advertisements Pty Ltd Date Explanation July 18

Ref P1

Debit

Credit 372

Balance 372

(c) Accounts Receivable Control Balance Subsidiary account balances: Pete’s Shoes Ltd Teeny Feet Ltd Martin’s Spartans Ltd Sandles Ltd Total

17,638

$2,410 3,048 8,820 3,360 $17,638

Accounts Payable Control Balance Subsidiary account balances: Little Feet Ltd Shoe Supplies Grant and Sons Quick Shipping Lepa Ltd Shoe Advertisements Total (d)

$30,036

$13,920 1,440 9,720 1,104 3,480 372 $30,036

The advantages of using a computerised accounting system over a manual system is that it is possible to process a much larger number of transactions in a much shorter period of time. Data entry is minimal and posting of the transactions is done immediately by the computer. Information can be obtained on a more timely basis and with fewer errors. The disadvantages include the need for hardware and software to be compatible, the possibility that data is lost due to power failures or viruses, the need to have staff with suitable training, and the possibility of computer hacking or fraud.

6.59

Chapter 6: Accounting information systems

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 6.1 South Morange’s Hardware (a) Cash Payments Journal CP1 Date

Chq No.

Account Debited

Post Ref

Other Accounts Dr

Nov 1 3 5 11 15 16 19 25 30

11 12 13 14 15 16 17 18 19

Inventory Equipment Wald Bros. Inventory R. Snyder V. Creek, Drawing G. Paul Prepaid Insurance R. Huff

120 157 √ 120 √ 306 √ 130 √

450 850

Accounts Payable Dr

950

500

650

1,250 3,350 (201)

37 (120)

1,000 250 1,500 4,050 (X)

Cross-footing Totals:

Discount Received Dr

Dr = 7,400

Cash Cr 450 850 941 1,000 485 250 637 1,500 1,250 7,363 (101)

Cr = 7,400

6.60

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) General Ledger Accounts Payable Control Date Explanation Nov. 1 Balance 30

Post √ CP1

Debit

Credit

3,350

No. 201 Balance 4,875 1,525

Accounts Payable Subsidiary Ledger R. Huff Date Explanation Nov. 1 Balance 30

Post √ CP1

Debit

G. Paul Date Explanation Nov. 1 Balance 19

Post √ CP1

Debit

R. Snyder Date Explanation Nov. 1 Balance 15

Post √ CP1

Debit

Wald Bros. Date Explanation Nov. 1 Balance 5

Post √ CP1

Debit

(c)

Accounts payable control balance: Subsidiary account balances: R. Huff G. Paul

Credit

Balance 2,250 1,000

Credit

Balance 1,175 525

Credit

Balance 500 0

Credit

Balance 950 0

1,250

650

500

950

$1,525

$1,000 525 $1,525

(d) The ethical response is for Mr.Dodgy to offer and make it known to R.Snyder that purchases will only be made in the best interests, and as required by South Morange’s Hardware.

6.61

Chapter 6: Accounting information systems

PROBLEM SET B 6.2 Victoria Ltd (a) Purchases Journal P1 Date

Account Credited (Debited)

Post Ref

May 2 3 8 8 15 16 16 18 25 28

Vons Ltd The Freight People Golden Ltd Dorn Ltd Engle Supply (Supplies) Vons Ltd Golden Ltd The Freight People Ball Advertising (Adv. Exp.) Engle Supply (Equipment)

√ 510 √ √ 126/√ √ √ 510 610/√ 157/√

Other Accounts Dr

Inventory Dr

Accounts Payable Cr

10,450

10,450 440 8,800 9,570 990 4,950 6,600 550

440 8,800 9,570 990 4,950 6,600 550 990

990 275

275 3,245 (X)

40,370 (120)

43,615 (201)

Sales Journal

Date

Account Debited

Ref

May 5 5 5 23 23

Penner Ltd Hend Ltd Nelles Ltd Hend Ltd Nelles Ltd

√ √ √ √ √

Accounts Receivable Dr Sales Cr 1,925 2,970 1,650 2,640 2,420 11,605 (112)(401)

S1 Cost of Sales Dr Inventory Cr

1,348 2,079 1,155 1,848 1,694 8,124 (505)(120)

6.62

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

General Journal Date

Account Titles and Explanation

Ref

Debit

May 10 Accounts Payable - Dorn Ltd Inventory

201/√ 120

550

17 Accounts Payable –Engle Supply Supplies

201/√ 126

110

20 Accounts Payable –Vons Ltd Inventory

201/√ 120

330

412

220

26 Sales Returns and Allowances Accounts ReceivableNelles Ltd

Credit

550

110

330

112/√

220

(b) General Ledger Accounts Receivable Date Explanation May 31 26

Ref S1 G1

Inventory Date Explanation May 10

Ref G1

Debit 11,605

Debit

No. 112 Credit Balance 11,605 220 11,385

Credit 550

No. 120 Balance 39,820

330 39,490

40,370

40,370 8,124 31,366

Supplies Date Explanation May 15 17

Ref P1 G1

Equipment

Debit 990

No. 126 Balance 990 110 880

Credit

No. 157 .

6.63

Chapter 6: Accounting information systems

Date Explanation May 28

Ref P1

Debit 275

Credit

Accounts Payable Date Explanation May 10 17 20

Ref G1 G1 G1

Debit 550 110 330

Credit

43,615

Sales Date Explanation May 31

Ref S1

Debit

Sales Returns and Allowances Date Explanation May 26

Ref G1

Debit 220

Cost of Sales Date Explanation May 31

Ref S1

Debit 8,124

Freight In Date Explanation May 3 18

Ref P1 P1

Debit 440 550

Advertising Expenses Date Explanation May 25

Ref P1

Debit 990

Balance 275

No. 201 Balance 550 DR 660 DR 990 DR 42,625 CR

No. 401 Credit Balance 11,605 11,605

Credit

No. 505 Credit

Credit

No. 412 Balance 220

Balance 8,124

No. 510 Balance 440 990

No. 610 Balance 990

Accounts Receivable Subsidiary Ledger Penner Ltd Date Explanation May 5

Ref S1

Debit 1,925

Credit

Balance 1,925

Hend Ltd Date Explanation

Ref

Debit

Credit

Balance

6.64

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

May 5 23

Nelles Ltd Date Explanation May 5 23 26

S1 S1

2,970 2,640

Ref S1 S1 G1

Debit 1,650 2,420

2,970 5,610

Credit

220

Balance 1,650 4,070 3,850

Accounts Payable Subsidiary Ledger The Freight People Date Explanation May 3 18

Ref P1 P1

Debit

Credit 440 550

Balance 440 990

Vons Ltd Date Explanation May 2 16 20

Ref P1 P1 G1

Debit

Credit 10,450 4,950

Balance 10,450 15,400 15,070

Engle Supply Date Explanation May 15 17 28

Ref P1 G1 P1

Debit

Credit 990 275

Balance 990 880 1,155

Golden Ltd Date Explanation May 8 16

Ref P1 P1

Debit

Credit 8,800 6,600

Balance 8,800 15,400

Dorn Ltd Date Explanation May 8 10

Ref P1 G1

Debit

Credit 9,570

Balance 9,570 9,020

Ball Advertising Date Explanation

Ref

Debit

Credit

Balance

330

110

550

6.65

Chapter 6: Accounting information systems

May 25

(c)

990

Accounts receivable balance Subsidiary account balances Penner Ltd Hendrix Ltd Nelles Ltd Total

$11,385

$1,925 5,610 3,850 $11,385

Accounts payable balance Subsidiary account balances The Freight People Vons Ltd Engle Supply Golden Ltd Dorn Ltd Ball Advertising Total

990

$42,625

$ 990 15,070 1,155 15,400 9,020 990 $42,625

6.66

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 6.3 Allegra Pty Ltd (a), (b) & (c) Sales Journal

Date

Account Debited

Oct. 4 17 25 30

Parker Ltd L. Boyton Ltd Green Ltd L. Boyton Ltd

Invoice No.

Ref.

204 205 206 207

√ √ √ √

S1 Cost of Sales Dr Inventory Cr

Accounts Receivable Dr Sales Cr 4,500 2,675 2,610 2,300 12,085 (112)(401)

2,700 1,605 1,566 1,380 7,251 (505)(120)

Purchases Journal P1 Date

Account Credited

Ref

Oct. 2 10 27 30

Mason Ltd Quinn Ltd Schmid Ltd Mason Ltd

√ √ √ √

Inventory Dr Accounts Payable Cr 9,250 2,100 4,250 7,000 22,600 (120)(201)

General Journal Date

Accounts and Explanations

Oct. 13 Accounts Payable – Quinn Ltd Inventory 25 Supplies Accounts Payable - Frey Ltd

Ref

Debit

201/√ 120

125

126

130

201/√

G1 Credit

125

130

6.67

Chapter 6: Accounting information systems

Cash Receipts Journal

Date

Account Credited

Oct. 7 10 Parker Ltd 14 16 Land 21 25 L. Boyton Ltd

Ref

√ 140

√

Discount Allowed Dr

Cash Dr 4,580 4,410 4,090 54,000 4,235

Accounts Receivable Cr

Sales Cr

Other Accounts Cr

CR1 Cost of Sales Dr Inventory Cr

4,580

2,748

4,090

2,454

4,500 54,000

2,621 4,270 78,206 (101)

54 144 (112)(401)

4,235

2,541

4,270 17,175 (401)

2,562 10,305 (505)(120)

2,675 7,175 (112)

54,000 (X)

Cross-footing Totals $88,655 Dr Total = $88,655 ($78,206 + $144 + $10,305) Cr Total = $88,655 ($7,175 + $17,175 + $54,000 + $10,305)

Cash Payments Journal CP1 Date

Account Debited

Ref

Oct 5 9 18 23 26

Supplies Mason Ltd Inventory Quinn Ltd Land Buildings 30 Advertising Expense

126 √ 120 √ 140 145 610

Other Accounts Dr

Accounts Payable Dr

Discount Received Cr

40 9,250

185

1,065 1,975

Cash Cr 40 9,065 1,065 1,975

42,000 28,000

70,000

200 71,305 (X)

200 82,345 (101)

11,225 (201)

185 (120)

Balancing Totals $82,530 Dr Total = $82,530 ($71,305 + $11,225) Cr Total = $82,530 ($185 +$82,345) (d) It is helpful to place ledger account numbers and ticks in the journals to cross reference to ledgers and to indicate that this part of the accounting cycle has been completed.

6.68

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 6.4 Illuminate Lighting (a) Cash Receipts Journal CR4

Date

Account Credited

Apr. 1 F Francis, Capital 4 Smith 5 North Ltd 8 Cash Sales 10 Horn 11 Inventory 23 North Ltd 29 Harris

Ref

Cash Dr

301

12,000

√ √

3,332 1,240 14,490

√ 120 √ √

Discount Allowed Dr

Accounts Receivable Sales Cr Cr

Other Accounts Cr

Cost of Sales Dr Inventory Cr

12,000 68

3,400 1,240 14,49 0

1,600 1,100 3,000 2,400 39,162

3,000 2,400 11,640

(101)

(414)

(112)

8,694

1,600 1,100

14,49 0 (401)

13,100

8,694

(x)

(505)/(120)

Cross-footing Totals $47,924 Dr Total = $47,924 ($39,162 + $68 + $8,694) Cr Total = $47,924 ($11,640 + $14,490 + $13,100 + $8,694) (b) General Ledger Accounts Receivable Date Explanation

Ref

Apr. 1 Balance 30

Debit

CR4

Credit

No. 112 Balance

11,640

14,700 3,060

Accounts Receivable Subsidiary Ledger Horn Date Explanation

Ref

Apr. 1 Balance 10

CR4

Debit

Credit

1,600

Balance 3,100 1,500

6.69

Chapter 6: Accounting information systems

Harris Date Explanation

Ref

Apr. 1 Balance 29

CR4

North Ltd Date Explanation

Ref

Apr. 1 Balance 5 23

CR4 CR4

Smith Date Explanation

Ref

Apr. 1 Balance 4

(c)

(d)

Debit

Credit

Balance 2,400 0

2,400

Debit

Credit

Balance 5,800 4,560 1,560

1,240 3,000

Debit

Credit

CR4

Balance

3,400

Accounts receivable balance

$3,060

Accounts Receivable subsidiary account balances: Horn North Ltd $3,060

$1,500 1,560

3,400 0

Total

The advantages to the seller of offering a settlement discount are that the seller is able to shorten the operating cycle by converting the accounts receivable to cash earlier. The disadvantages are that the seller receives less cash as well as the additional work to keep track of whether customers had appropriately calculated the discount and paid within the discount period. The advantage for the buyer is that the buyer saves money and the disadvantage is that the buyer would have to pay for the goods earlier.

6.70

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 6.5 Findon Pty Ltd (a) Cash Payments Journal CP10

Date

Ch. No.

Account Debited

Oct. 1 3 5 10 15 16

63 64 65 66 67 68

19 29

69 70

Inventory Equipment Hester Ltd Inventory Tario Ltd L Findon, Drawing Milos Ltd Pagan and Sons

Ref

Other Accounts Dr

Accounts Payable Dr

Inventory Dr

Discount Received Cr

2,800 157 √

3,200 6,800

136 9,000

√ 306

5,600 1,600

√ √

5,600 10,400 4,800 (x)

28,400 (201)

11,800 (120)

Cash Cr 2,800 3,200 6,664 9,000 5,600 1,600

112

5,488 10,400

248 (405)

44,752 (101)

Cross-footing Totals = $45,000 Total Debits = $45,000 ($4,800 + $28,400 + $11,800) Total Credits = $45,000 ($248 + $44,752)

(b) General Ledger Accounts Payable Date Explanation

Ref

Oct. 1 Balance 31

CP10

Debit

Credit

No. 201 Balance 37,200 8,800

28,400

Accounts Payable Subsidiary Ledger Hester Date Explanation

Ref

Oct. 1 Balance 5

CP10

Milos Ltd Date Explanation

Ref

Oct. 1 Balance 19

CP10 .

Debit

Credit

6,800 0

6,800

Debit

5,600

Balance

Credit

Balance 10,000 4,400 6.71

Chapter 6: Accounting information systems

Tario Ltd Date Explanation

Ref

Oct. 1 Balance 15

CP10

Pagan and Sons Date Explanation

Ref

Oct. 1 Balance 29

(c)

CP10

Debit

Credit

5,600 0

5,600

Debit

Credit

10,400

Accounts Payable Control balance

$8,800

Accounts Payable subsidiary account balances: Milos Ltd Pagan and Sons Total

$4,400 4,400 $8,800

Balance

Balance 14,800 4,400

6.72

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 6.6

Ruby Ltd (a), (b) & (c) Sales Journal

Date

Account Debited

Jan. 4 9 17 31

Gilbert Mays Ltd Amber Ltd Gilbert

Invoice No.

Post Ref

371 372 373 374

√ √ √ √

Accounts Receivable Dr Sales Cr 7,975 6,380 1,320 10,265 25,940 (112)/(401)

S17 Cost of Sales Dr Inventory Cr

4,785 3,828 792 6,159 15,564 (505)/(120)

Purchases Journal

Date

Account Credited

Ref

Jan. 3 8 11 23 24

Bell Bros. Law Ltd Hoble Bell Bros. Levine

√ √ √ √ √

P13 Inventory Dr Accounts Payable Cr 11,000 4,950 4,070 8,580 5,160 33,760 (120)/(201)

General Journal Date

Account Titles and Explanation

Ref

Debit

Jan. 5 Accounts Payable – Bell Bros. Inventory (Returned damaged goods purchased previously on credit)

201/√ 120

330

19 Equipment Accounts Payable – Johnson Ltd (Purchased equipment on account)

157 201/√

6,050

G14 Credit

330

6,050

6.73

Chapter 6: Accounting information systems

Cash Receipts Journal CR15 Date

Account Credited

Ref

Jan. 6 13 14 Mays Ltd 17 Gilbert 20 27 30 Amber Ltd

√ √

√

Cash Dr

3,465 5,874 6,316 7,975 3,520 4,103 1,320 32,573 (101

Discount Allowed Dr

Accounts Receivable Cr

Sales Cr

Other Accounts Cr

Cost of Sales Dr Inventory Cr

3,465 5,874

2,079 3,524

3,520 4,103

2,112 2,462

6,380 7,975

1,320 15,675 (112)

64 (716)

16,962 (401)

0 (x)

10,177 (505)/(120)

Balancing Totals $42,814 Dr Total = $42,814 ($32,573 + $64 + $10,177) Cr Total = $42,814 ($15,675 + $16,962 + $10,177) Cash Payments Journal CP15

Date

Account Debited

Other Accounts Dr

Ref

Jan. 4 Supplies 13 Bell Bros.

126 √

15 Salaries Expense 20 Law Ltd 31 Salaries Expense

726

15,730

√ 726

14,520 30,338 (x)

Accounts Payable Dr

Inventory Dr

Discount Received Cr

Cash Cr 88 *10,45 7 15,730

10,670

213

4,950

4,851 14,520

312 (416)

45,646 (101)

15,620 (201)

0 (x)

Cross-footing Totals = $45,958 Total Debits = $45,958 ($30,338 + $15,620) Total Credits = $45,958 ($312 + $45,646) *Helpful Hint: Purchased $11,000 from Bell Bros on 3 Jan. 5 Jan returned $330 damaged goods. Balance paid is $10,670 less 2% discount.

6.74

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 6.7 Camperdown Carpets (b) & (c) Cash Receipts Journal CR1

Account Credited

Date

Cash Dr

Ref

Jan 7 S Devine 12 B Senton 23 29 Commission Receivable

√ √

115

Discount Allowed Dr

3,500 3,920 8,600 40,000 56,020 (101)

Accounts Receivable Sales Cr Cr

Other Accounts Cr

Cost of Sales Dr Inventory Cr

3,500 4,000 8,600

80 (714)

7,500 (112)

5,590 40,000 40,000 (x)

8,600 (401)

5,590 (505)/(120)

Cross-footing Totals $61,690 Dr Total = $61,690 ($56,020 + $80 + $5,590) Cr Total = $61,690 ($7,500 + $8,600 + $40,000 + $5,590)

Cash Payments Journal CP1 Account Debited

Date

Jan. 11 12 15 18

Freight In Rent Expense D Harms Sales Salaries Expense 18 Office Salaries Expense 20 R Grilson 27 S Warren

Other Accounts Dr

Ref

Accounts Payable Dr

Inventory Cr

Discount Received Cr

Cash Cr

506 729 √ 726

300 1,000 2,800

300 1,000 14,850 2,800

727

1,500

15,000

√ √ 5,600 (x)

18,000 950 33,950 (201)

150

0 (x)

150 (415)

18,000 950 39,400 (101)

Cross-footing Totals = $39,550 Dr Total = $39,550 ($5,600 + $33,950) Cr Total = $39,550 ($150 + $39,400)

6.75

Chapter 6: Accounting information systems

Sales Journal

Date

Account Debited

July 5 B Senton 24 B Cole

Post Ref

S1 Cost of Sales Dr Inventory Cr

Accounts Receivable Dr Sales Cr

√ √

4,000 7,700 11,700 (112)/(401)

2,600 5,005 7,605 (505)/(120)

Purchases Journal

Date

Account Credited

Jan. 5 S Warren 17 D Lapeska

Terms

Ref

2/7, n/30 2/7, n/30

√ √

Inventory Dr Accounts Payable Cr 2,500 1,600 4,100 (120)/(201)

General Journal Date

Account Titles and Explanation

Ref

Jan. 14 Sales Returns and Allowances Accounts Receivable – R Barton Inventory Write Down Expense ($700 x .65) Cost of Sales (Issue a credit return for return of damaged inventory from a customer) 30 Accounts Payable – D Lapeska Inventory (Returned inventory to supplier)

Debit

412 √/112

700

750 505

455

√/201 120

500

G1 Credit

700

455

500

(a) & (c) General Ledger Cash Date Explanation Jan. 1 Balance 31 31

Ref CR1 CP1

Accounts Receivable Control

Debit 56,020

No. 101 Credit Balance 41,500 97,520 39,400 58,120

No. 112 .

6.76

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Date Explanation Jan. 1 Balance 14 31 31

Ref G1 CR1 S1

Commissions Receivable Date Explanation Jan. 1 Balance 29

Ref

Debit

700 7,500 11,700

Debit

CR1

Inventory Date Explanation Jan. 1 Balance 30 31 31 31

Ref G1 P1 CR1 S1

Equipment Date Explanation Jan. 1 Balance

Ref

Accumulated Depreciation - Equipment Date Explanation Jan. 1 Balance

Accounts Payable Control Date Explanation Jan. 1 Balance 30 31 31

Ref

Ref G1 P1 CP1

S Alomar, Capital Date Explanation Jan. 1 Balance

Ref

Sales

Credit

Debit

4,100

Debit

Debit 500 33,950

Debit

Balance 15,000 14,300 6,800 18,500

No. 115 Balance 45,000 40,000 5,000

Credit

No. 120 Credit Balance 23,000 500 22,500 26,600 5,590 21,010 7,605 13,405

Credit

No. 157 Balance 6,450

Credit

No. 158 Balance 1,500

No. 201 Credit Balance 43,000 42,500 4,100 46,600 12,650

Credit

No. 301 Balance 86,450

No. 401 .

6.77

Chapter 6: Accounting information systems

Date Explanation Jan. 31 31

Ref CR1 S1

Commissions Revenue Date Explanation Jan. 31

Ref

Sales Returns and Allowances Date Explanation Jan. 14

Discount Received Date Explanation Jan. 31

Ref G1

Ref CP1

Debit

Credit 8,600 11,700

Debit

Debit 700

Credit

No. 405 Balance 0

Credit

No. 412 Balance 700

No. 415 Credit Balance 150 150

Debit

Cost of Sales Date Explanation Jan. 31 31 14

Ref CR1 S1 G1

No. 505 Debit Credit 5,590 7,605 455

Freight In Date Explanation Jan. 11

Ref CP1

Debit 300

Discount Allowed Date Explanation Jan. 31

Ref CR1

Balance 8,600 20,300

Balance 5,590 13,195 12,740

Credit

No. 506 Balance 300

Credit 80

No. 714 Balance 80

Debit

Sales Salaries Expense Date Explanation Jan. 18

Ref CP1

Debit 2,800

Credit

No. 726 Balance 2,800

Office Salaries Expense Date Explanation Jan. 18

Ref CP1

Debit 1,500

Credit

No. 727 Balance 1,500

6.78

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Rent Expense Date Explanation Jan. 12

Ref CP1

Debit 1,000

Credit

No. 729 Balance 1,000

Inventory Write Down Expense Date Explanation Jan. 14

Ref G1

Debit 455

Credit

No. 750 Balance 455

Accounts Receivable Subsidiary Ledger R Barton Date Explanation Jan. 1 Balance 14

Ref

Debit

B Cole Date Explanation Jan. 1 Balance 24

Ref S1

S Devine Date Explanation Jan. 1 Balance 7

CR1

B Senton Date Explanation Jan. 5 13

Ref S1 CR1

Ref

Credit 700

Debit

Credit

Balance 7,500 15,200

Credit

Balance 5,000 1,500

7,700

Debit

3,500

Debit 4,000

Balance 2,500 1,800

Credit 4,000

Balance 4,000 0

6.79

Chapter 6: Accounting information systems

Accounts Payable Subsidiary Ledger S Field Date Explanation Jan. 1 Balance

R Grilson Date Explanation Jan. 1 Balance 20

Ref

Debit

Credit

Balance 10,000

Ref

Debit

Credit

Balance 18,000 0

Credit

Balance 15,000 0

Credit 1,600

Balance 1,600 1,100

Credit 2,500

Balance 2,500 1,550

CP1

18,000

D Harms Date Explanation Jan. 1 Balance 15

CP1

D Lapeska Date Explanation Jan. 17 30

Ref P1 G1

Debit

S Warren Date Explanation Jan. 5 27

Ref P1 CP1

Debit

Ref

Debit 15,000

500

950

6.80

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(d) Camperdown Carpets Trial Balance as at 31 January 2017 Debit 101 112 115 120 157 158 201 301 401 412 415 505 506 714 726 727 729 750

Cash Accounts Receivable Commissions Receivable Inventory Equipment Accumulated Depreciation – Equipment Accounts Payable S Alomar, Capital Sales Sales Returns and Allowances Discount Received Cost of Sales Freight In Discount Allowed Sales Salaries Expense Office Salaries Expense Rent Expense Inventory Write Down Expense

Credit

$58,120 18,500 5,000 13,405 6,450 $1,500 12,650 86,450 20,300 700 150 12,740 300 80 2,800 1,500 1,000 455 $121,050

$121,050

(e) Accounts Receivable Subsidiary Ledger: R Barton B Cole S Devine

Accounts Receivable Control

$1,800 15,200 1,500 $18,500 $18,500

Accounts Payable Subsidiary Ledger: S Field D Lapeska S Warren

Accounts Payable Control

$10,000 1,100 1,550 $12,650 $12,650

6.81

Chapter 6: Accounting information systems

PROBLEM SET B 6.8 Collins Bikes (a), (d) & (g) General Ledger Cash Date Explanation July 31 31

Ref CR1 CP1

Accounts Receivable Date Explanation July 31 31

Ref S1 CR1

Inventory Date Explanation July 31 29 31 31

Ref P1 CR1 S1 CR1

Debit 98,265

Debit 17,900

Debit 42,320

Store Supplies Date Explanation July 4 31

Ref CP1 G1

Debit 600

Prepaid Rent Date Explanation July 11 31 Adjusting entry

Ref CP1 G1

Debit 6,000

Accounts Payable Date Explanation July 31 31

Ref P1 CP1

Debit

Collins, Capital Date Explanation July 1

Ref CR1

29,600

Debit

No. 101 Balance 98,265 38,472 59,793

Credit

No. 112 Credit Balance 17,900 13,900 4,000

No. 120 Credit Balance 42,320 450 41,870 11,635 30,235 2,600 27,635

No. 127 Credit Balance 600 460 140

No. 131 Balance 6,000 500 5,500

Credit

No. 201 Credit Balance 42,320 42,320 12,720

No. 301 Credit Balance 80,000 80,000

6.82

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Collins, Drawings Date Explanation July 19

Ref CP1

Debit 2,500

Sales Date Explanation July 31 31

Ref S1 CR1

Debit

Discount Received Date Explanation July 31

Ref CP1

Cost of Sales Date Explanation July 31 31

Ref S1 CR1

Discount Allowed Date Explanation July 31

Ref CR1

Credit

No. 306 Balance 2,500

No. 401 Credit Balance 17,900 17,900 4,000 21,900

No. 405 Credit Balance 228 228

Debit

No. 505 Debit Credit 11,635 2,600

Balance 11,635 14,235

Credit 85

No. 614 Balance 85

Debit

Supplies Expense Date Explanation July 31 Adjusting entry

Ref G1

Debit 460

Credit

No. 631 Balance 460

Rent Expense Date Explanation July 31 Adjusting entry

Ref G1

Debit 500

Credit

No. 729 Balance 500

Helpful Hint: No page numbers are specified in the question for the sales, cash receipts and general journals. In this solution the following numbers are used: CR1, S1, G1.

6.83

Chapter 6: Accounting information systems

(b) Sales Journal

Date

Account Debited

Post Ref

July 6 8 10 21

Hardy Co. D Wasburn L Lemansky S Kane

√ √ √ √

Accounts Receivable Dr Sales Cr. 5,400 3,600 4,900 4,000 17,900 (112)/(401)

S1 Cost of Sales Dr Inventory Cr 3,510 2,340 3,185 2,600 11,635 (505)/(120)

Cash Receipts Journal

Date July 1 7 13 16 20 29

Account Credited

Ref

Collins, Capital

301

D Wasburn L Lemansky Hardy Co. Inventory

√ √ √ 120

Cash Dr 80,000 4,000 3,564 4,851 5,400 450 98,265 (101)

Discount Allowed Dr

Accounts Receivable Cr

Sales Cr

Other Accounts Cr

CR1 Cost of Sales Dr Inventory Cr

80,000 4,000 36 49

3,600 4,900 5,400

85 (614)

13,900 (112)

4,000 (401)

2,600

450 80,450 (x)

2,600 (505)/(120)

Cross-footing Totals $100,950 Dr Total = $100,950 ($98,265 + $85 + $2,600) Cr Total = $100,950 ($13,900 + $4,000 + $80,450 + $2,600) (c) Accounts Payable Subsidiary Ledger J Dixon Date Explanation July 4 15

Ref P1 CP1

Debit

W Engel Date Explanation July 5 10

Ref P1 CP1

Debit

Credit 6,800

Balance 6,800 0

Credit 7,500

Balance 7,500 0

6,800

7,500

6.84

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

R Gamble Date Explanation July 11

Ref P1

Debit

Credit 3,920

Balance 3,920

M Hill Date Explanation July 13 21

Ref P1 CP1

Debit

Credit 15,300

Balance 15,300 0

D Jacob Date Explanation July 20

Ref P1

Debit

Credit 8,800

Balance 8,800

Credit

Balance 5,400 0

15,300

Accounts Receivable Subsidiary Ledger Hardy Co. Date Explanation July 6 20

Ref S1 CR1

Debit 5,400

S Kane Date Explanation July 21

Ref S1

Debit 4,000

Credit

Balance 4,000

L Lemansky Date Explanation July 10 16

Ref S1 CR1

Debit 4,900

Credit

Balance 4,900 0

D Wasburn Date Explanation July 8 13

Ref S1 CR1

Debit 3,600

5,400

4,900

Credit 3,600

Balance 3,600 0

6.85

Chapter 6: Accounting information systems

(e) Collins Bikes Trial Balance as at 31 July 2016 Debit 101 112 120 127 131 201 301 306 401 405 505 614

Cash Accounts Receivable Inventory Store Supplies Prepaid Rent Accounts Payable Collins, Capital Collins, Drawings Sales Discount Received Cost of Sales Discount Allowed

Credit

$59,793 4,000 27,635 600 6,000 $12,720 80,000 2,500 21,900 228 14,235 85 $114,848

$114,848

(f) Accounts Payable Control Balance

$12,720

Subsidiary accounts balance: D Jacob R Gamble

$8,800 3,920 $12,720

Accounts Receivable Control Balance

$4,000

Subsidiary accounts balance: S Kane

$4,000

(b) & (g) General Journal Date

Account Titles and Explanation

Ref

July 31 Supplies Expense Store Supplies (Adjusting entry to record supplies used)

631 127

460

729 131

500

31 Rent Expense Prepaid Rent (Adjusting entry to recognise July rent expense)

Debit

G1 Credit

460

500

6.86

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(h) Collins Bikes Adjusted Trial Balance as at 31 July 2016 Debit 101 112 120 127 131 201 301 306 401 405 505 614 631 729

(i)

Cash Accounts Receivable Inventory Store Supplies Prepaid Rent Accounts Payable Collins, Capital Collins, Drawings Sales Discount Received Cost of Sales Discount Allowed Supplies Expense Rent Expense

Credit

$59,793 4,000 27,635 140 5,500 $12,720 80,000 2,500 21,900 228 14,235 85 460 500 $114,848

$114,848

Adjusting entries are needed to ensure that the recognition criteria are followed for all assets, liabilities, revenues and expenses. Without adjusting entries, some asset and liability accounts may be overstated, while others will be understated. The corresponding revenues and expenses thus will also show incorrect balances. The net effect will be that financial position and performance will not faithfully represent the substance of the underlying events.

6.87

Chapter 6: Accounting information systems

PROBLEM SET B 6.9 Beachcombers’ Supplies Pty Ltd (a) Cash Receipts Journal

CR4 Date

Account Credited

Ref

Cash Dr

Apr. 1 4 5 8 10 11 23 29

Beach Boy, Capital Wet Suits Galore Sand Wedge Ltd Cash Sales Board Barn Inventory Sand Wedge Ltd I’m Board Ltd

301 √ √

9,000 2,499 930 10,868 1,200 825 2,250 1,800 29,372 (101)

√ 120 √ √

Discount Allowed Dr

Accounts Receivable Cr

Other Accounts Cr

Sales Cr

COS Dr Inventory Cr

9,000 51

2,550 930 10,868

6,520

1,200 825 2,250 1,800 8,730 (112)

51 (414)

10,868 (401)

9,825 (x)

6,520 (505)/(120)

Cross-footing $35,943 Dr Total = $35,943 ($29,372 + $51 + $6,520) Cr Total = $35,943 ($8,730 + $10,868 + $9,825 + $6,520)

(b) General Ledger Accounts Receivable Date Explanation

Ref.

Apr. 1 Balance 30

Debit

CR4

Credit

8,730

No. 112 Balance 11,025 2,295

Accounts Receivable Subsidiary Ledger Board Barn Ltd Date Explanation

Ref.

Apr. 1 Balance 10

CR4

I’m Board Ltd Date Explanation

Ref.

Apr. 1 Balance 29

CR4

Debit

Credit

1,200

Debit

Credit

1,800

Balance 2,325 1,125

Balance 1,800 0

6.88

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Sand Wedge Ltd Date Explanation

Ref.

Apr. 1 Balance 5 23

CR4 CR4

Wet Suits Galore Pty Ltd Date Explanation

Ref.

Apr. 1 Balance 4

CR4

Debit

Credit

Balance

930 2,250

Debit

Credit

4,350 3,420 1,170

Balance

2,550

2,550 0

$2,295 $1,125 1,170 $2,295

6.89

Chapter 6: Accounting information systems

PROBLEM SET B 6.10 Richards Ltd (a) Purchases Journal P1 Date

Dec 2 3 8 8 15 16 16 18 25 28

Other Accounts Dr

Account Credited (Debited)

Post Ref

Celtic Ltd Fast Delivery Ripping Ltd Lamb Ltd Office Supply Celtic Ltd Ripping Ltd Fast Delivery Striking Advertising Office Supply

√ 510/√ √ √ 126√ √ √ 510/√ 610/√ 157√

Inventory Dr

Accounts Payable Cr

14,250 600 12,000 13,050 1,350 6,750 9,000 600 1,350 375 4,275 (x)

55,050 (120)

14,250 600 12,000 13,050 1,350 6,750 9,000 600 1,350 375 59,325 (201)

Helpful Hint: This is a multicolumn purchases journal so purchases of items other than inventory can be recorded. Note in the case of a multicolumn purchases journal, separate columns are needed for Inventory and Accounts Payable. Furthermore, a Freight Inwards account must be added to the Chart of Accounts. Freight Inwards is account number 510. In some versions of the book no amount has been specified for the freight charge on the invoice received on 18th December. This solution assumes the amount is the same as the amount invoiced on 3 December (i.e. $600) Sales Journal S1 Date

Account Debited

Dec 5 5 5 23 23

Wang Ltd Singh Ltd Smith Ltd Singh Ltd Smith Ltd

Post Ref √ √ √ √ √

Accounts Receivable Dr Sales Cr 2,625 4,050 2,250 1,200 3,300 13,425 (112)/(401)

Cost of Sales Dr. Inventory Cr 1,838 2,835 1,575 840 2,310 9,398 (505)/(120)

6.90

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

General Journal G1 Date

Account Titles and Explanations

Ref

Debit

Dec 10 Accounts Payable – Lamb Ltd Inventory (Received a credit note on inventory returned)

201/√ 120

750

17 Accounts Payable – Office Supply Supplies (Received a credit note on supplies returned)

201 126

150

20 Accounts Payable – Celtic Ltd Inventory

201/√ 120

450

26 Sales Returns and Allowances Accounts Receivable – Smith Ltd (Granted an allowance for inventory damaged in shipment)

412 112/√

300

Credit

750

150

450

300

(b) General Ledger Accounts Receivable Date Explanation

Ref

Dec 26 31

G1 S1

Inventory Date Explanation

Ref.

Dec 10 20 31 31

G1 G1 P1 S1

Supplies Date Explanation

Ref.

Dec 15 17

P1 G1

Equipment Date Explanation

Ref. .

Debit

Credit

No. 112 Balance

300 13,425

Debit

Credit

No. 120 Balance

750 450

750CR 1,200CR 53,850DR 44,452DR

55,050 9,398

Debit

Credit

No. 126 Balance

1,350 150

Debit

Credit

300CR 13,125

1,350 1,200

No. 157 Balance 6.91

Chapter 6: Accounting information systems

Dec 28

Accounts Payable Date Explanation

Ref.

Dec 10 17 20 31

G1 G1 G1 P1

Sales Date Explanation

Ref.

Dec 31

Sales Returns and Allowances Date Explanation

Ref.

Dec 26

Cost of Sales Date Explanation

Ref.

Dec 31

Freight In Date Explanation

Ref.

Dec 3 18

P1 P1

Advertising Expense Date Explanation

Ref.

Dec 25

375

Debit

375

Credit

No. 201 Balance

750 150 450

Debit

59,325

750DR 900DR 1,350DR 57,975

Credit

No. 401 Balance

13,425

Debit

Credit

300

9,398

1,350

Balance 9,398

Credit

600 600

Debit

No. 412 Balance 300

No. 505 Debit Credit

Debit

13,425

No. 510 Balance 600 1,200

Credit

No. 610 Balance 1,350

Helpful Hint: When posting the individual amounts from the ‘Other Accounts’ column in the Purchases Journal (at the end of the month), the 31 December date can be used or the actual date of the transaction. Both are acceptable. Accounts Receivable Subsidiary Ledger Wang Ltd .

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Date

Explanation

Ref.

Dec 5

Singh Ltd Date Explanation

Ref.

Dec 5 23

S1 S1

Smith Ltd Date Explanation

Ref.

Dec 5 23 26

S1 S1 G1

Debit

Credit

2,625

Debit

2,625

Credit

4,050 1,200

Debit

Balance

Balance 4,050 5,250

Credit

2,250 3,300 300

Balance 2,250 5,550 5,250

Accounts Payable Subsidiary Ledger Celtic Ltd Date Explanation

Ref

Dec 2 16 20

P1 P1 G1

Debit

Credit

Balance

14,250 6,750

14,250 21,000 20,550

450

Ripping Ltd Date Explanation Dec 8 16

Ref P1 P1

Debit

Credit 12,000 9,000

Balance 12,000 21,000

Lamb Ltd Date Explanation Dec 8 10

Ref P1 G1

Debit

Credit 13,050

Balance 13,050 12,300

Fast Delivery Date Explanation

Ref

Debit

Credit

Balance

Dec 3 18

750

P1 P1

Office Supply Date Explanation Dec 15 17

Ref P1 G1 .

Debit 150

600 600

600 1,200

Credit 1,350

Balance 1,350 1,200 6.93

Chapter 6: Accounting information systems

Striking Advertising Date Explanation Dec 25

Ref P1

Debit

375

1,575

Credit 1,350

Balance 1,350

$13,125

$2,625 5,250 5,250 $13,125

Accounts Payable Control Balance Subsidiary account balances: Celtic Ltd Ripping Ltd Lamb Ltd Fast Delivery Office Supply Striking Advertising Total

(d)

$57,975

$20,550 21,000 12,300 1,200 1,575 1,350 $57,975

6.94

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

COMPREHENSIVE PROBLEM CHAPTERS 3 TO 6

Students are required to include additional account names and numbers to record the transactions. Please note the following accounts are required, however, students may have used different account names and numbers. Greta’s Furniture Pty Ltd The chart of accounts includes the following account names and numbers: Account number 306 350 401 412 415 417 510 512 516 627 711 722 725 727 728 729

Account name P Greta Drawings Profit or Loss Summary Sales Sales Returns and Allowances Discount Received Commissions Revenue Purchases Purchase returns and allowances Freight in Sales salaries expense Depreciation expense Insurance expense Discount allowed Office salaries expense Office supplies expense Rent expense

(a) Sales Journal S1 Date

Account Debited

Jan. 3 The Furniture Warehouse 3 Beautiful Homes Ltd 11 Couch City 11 Lowell Chairs 22 The Furniture Warehouse 22 Couch City 25 Table Top Ltd 25 Beautiful Homes Ltd

Invoice No.

Post Ref

Accounts Receivable Dr Sales Cr

510

√

5,580

511 512 513 514

√ √ √ √

3,240 2,340 1,620 3,060

515 516 517

√ √ √

1,440 6,300 10,980 34,560 (112)/(401)

6.95

Chapter 6: Accounting information systems

Purchases Journal

Date

Account Credited

Terms

Jan. 5 5 16 16 16 27 27 27

Walden & Co D Landell Nordin Office Furniture Lee Importers Walden & Co Nordin Office Furniture D Landell Walden & Co

Ref

P1 Purchases Dr Accounts Payable Cr

√ √ √ √ √ √ √ √

5,400 3,960 27,000 25,560 2,700 26,100 2,160 5,040 97,920 (510)/(201)

Cash Receipts Journal CR1

Cash Dr Date

Account Credited

Ref

Jan. 7 Lowell Chairs 7 Table Tops Ltd 10 13 The Furniture Warehouse 13 Beautiful Homes Ltd 20 21 Lowell Chairs 31 31 Commissions Rec’d

√ √ √

7,128 3,564 27,900 5,580

√

2,700 31,500 1,458 38,340 70,200

√ 115

188,370 (101)

Discount Allowed Dr

Accounts Receivable Cr

72 36

7,200 3,600

Sales Cr

Other Accounts Cr

27,900 5,580 2,700 31,500 162

1,620 38,340 70,200

270 (725)

20,700 (112)

97,740 (401)

70,200 (x)

6.96

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Cash Payments Journal

Date

Account Debited

Ref.

Jan. 8 9 9 12 15 17 21 23 23 28 31

Freight In Lee Importers Nordin Office Furniture Rent Expense P Crow, Drawings

516 √ √ 729 306

I Keah Nordin Office Furniture Lee Importers

Sales Salaries Expense 31 Office Salaries Expense

Cash Cr

627

324 16,038 19,503 1,800 1,440 720 27,000 27,000 25,200 360 7,740

727

4,680

√ √ √

Discount Received Cr

131,80 5 (101)

Accounts Payable Dr

Office Supplies Dr

CP1 Other Accounts Dr 324

162 297

16,200 19,800 1,800 1,440 720 27,000 27,000 25,200 360 7,740 4,680

459

115,200

1,080

15,984

(415)

(201)

(125)

(x)

(a) & (e) General Journal

Date

Account name (narration)

Jan. 9 Sales Returns and Allowances Accounts Receivable – Beautiful Homes Ltd (Issued credit for goods returned)

Ref

Debit

412 √/112

540

√/201 512

360

31 Office Supplies Expense Office Supplies (Office supplies used)

728 125

1,980

31 Insurance Expense Prepaid Insurance (January insurance expense (1/10 x 3,600))

722 130

360

18 Accounts Payable –Lee Importers Purchase Returns and Allowances (Received credit for returned goods)

G1 Credit

540

360

Adjusting Entries:

1,980

360

6.97

Chapter 6: Accounting information systems

Date

Account name (narration) 31 Depreciation Expense Accumulated Depreciation – Equipment (Depreciation expense (1/12 x 2,700))

Ref 711 158

Debit 225

31 Commissions Receivable Commissions Revenue (Accrued commissions revenue)

115 417

39,600

31 Inventory (Jan. 31) Sales Discount Received Commissions Revenue Purchase Returns and Allowances Profit or Loss Summary

120 401 415 417 512 350

28,800 132,300 459 39,600 360

31 Profit or Loss Summary Inventory (Jan 1) Sales Returns and Allowances Purchases Freight In Rent Expense Sales Salaries Expense Office Salaries Expense Office Supplies Expense Insurance Expense Depreciation Expense Discount Allowed

350 120 412 510 516 729 627 727 728 722 711 725

148,239

31 Profit or Loss Summary P Greta, Capital

350 301

53,280

31 P. Greta, Capital P GretaCrow, Drawings

301 306

1,440

Ref

Debit

Credit

CR1 CP1

188,370

Credit 225

39,600

Closing Entries

201,519

32,400 540 97,920 324 1,800 7,740 4,680 1,980 360 225 270

53,280

1,440

(b) & (e) General Ledger Cash Date Jan. 1 31 31

Explanation Balance Various Receipts Various Payments

No. 101 Balance 64,350 252,720 131,805 120,915

6.98

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Accounts Receivable Date Explanation Jan. 1 Balance 31 Credit Sales 31 Cash and discount 9 Sales Returns

Ref S1 CR1 G1

Commissions Receivable Date Explanation Jan. 1 Balance 31 Cash receipt 31 Commission revenue

Ref CR1 G1

Inventory Date Explanation Jan. 1 Balance 31 Profit or Loss Summary 31 Profit or Loss Summary

Office Supplies Date Explanation Jan. 1 Balance 31 Cash 31 Office supplies expense

Ref G1 G1

Ref CP1 G1

Prepaid Insurance Date Explanation Jan. 1 Balance 31 Insurance expense

Ref

Debit 34,560

Debit

39,600

Debit 28,800

Debit 1,080

Accumulated Depreciation - Equipment Date Explanation Jan. 1 Balance 31 Depreciation expense

No. 115 Balance 70,200 70,200 0 39,600

Credit

No. 120 Credit Balance 32,400 61,200 32,400 28.800

No. 125 Balance 1,800 2,880 1,980 900

Credit

No. 130 Balance 3,600 360 3,240

Debit

Credit

Ref

Debit

Credit

Ref

Debit

Credit

Equipment Date Explanation Jan. 1 Balance

No. 112 Balance 23,400 57,960 20,700 37,260 540 36,720

Credit

No. 157 Balance 11,610

No. 158 Balance 2,700 225 2,925

6.99

Chapter 6: Accounting information systems

Accounts Payable Date Explanation Jan. 1 Balance 31 Purchases 31 Cash 28 Purchases Returns and allowances

P Greta, Capital Date Explanation Jan. 1 Balance 31 Profit or Loss Summary 31 Drawings

Ref

Debit

P1 CP1 G1

115,200 360

Ref

Debit

G1 G1

1,440

P Greta, Drawings Date Explanation Jan. 15 Balance 31 Capital

Ref CP1 G1

Debit 1,440

Profit or Loss Summary Date Explanation Jan. 31 Revenues 31 Expenses 31 P Greta Capital;

Ref G1 G1 G1

Debit

Sales Date Jan. 31 31 31

Ref S1 CR1 G1

Debit

Sales Returns and Allowances Date Explanation Jan. 9 Accounts receivable 31 Profit or Loss Summary

Ref G1 G1

Debit 540

Ref CP1 G1

No. 301 Balance 141,660 53,280 194,940 103,500

Credit

No. 306 Credit Balance 1,440 1,440 0

Credit 201,519

148,239 53,280

Explanation Accounts receivable Cash Profit or Loss Summary

Discount Received Date Explanation Jan. 31 Cash 31 Profit or Loss Summary

No. 201 Balance 63,000 97,920 160,920 45,720 45,360

Credit

132,300

Debit 459

No. 350 Balance 201,519 53,280 0

No. 401 Credit Balance 34,560 34,560 97,740 132,300 0

No. 412 Balance 540 540 0

Credit

No. 415 Credit Balance 459 459 0

6.100

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Commissions Revenue Date Explanation Jan. 31 Commission Receivable 31 Profit or Loss Summary

Ref G1 G1

Purchases Date Explanation Jan. 31 Accounts payable 31 Profit or Loss Summary

Ref P1 G1

Debit

Credit 39,600

39,600

Debit 97,920

No. 510 Credit Balance 97,920 97,920 0

Purchase Returns and Allowances Date Explanation Jan. 18 Accounts Payable 31 Profit or Loss Summary

Ref G1 G1

Debit

Freight In Date Explanation Jan. 8 Cash 31 Profit or Loss Summary

Ref CP1 G1

Debit 324

Credit

Sales Salaries Expense Date Explanation Jan. 31 Cash 31 Profit or Loss Summary

Ref CP1 G1

Debit 7,740

Credit

Depreciation Expense Date Explanation Jan.31 Accumulated depreciation 31 Profit or Loss Summary

Ref G1 G1

360

No. 512 Credit Balance 360 360 0

No. 516 Balance 324 324 0

No. 627 Balance 7,740 7,740 0

Debit 225

No. 711 Credit Balance 225 225 0

No. 722 Credit Balance 360 360 0

Insurance Expense Date Explanation Jan. 31 Prepaid Insurance 31 Profit or Loss Summary

Ref G1 G1

Debit 360

Discount Allowed Date Explanation Jan. 31 Cash 31 Profit or Loss Summary

Ref CR1 G1

Debit 270

No. 417 Balance 39,600 0

No. 725 Balance 270 270 0

Credit

6.101

Chapter 6: Accounting information systems

Office Salaries Expense Date Explanation Jan. 31 Cash 31 Profit or Loss Summary

Office Supplies Expense Date Explanation Jan. 31 Office Supplies 31 Profit or Loss Summary

Rent Expense Date Explanation Jan. 12 Cash 31 Profit or Loss Summary

Ref CP1 G1

Ref G1 G1

Ref CP1 G1

Debit 4,680

No. 727 Balance 4,680 4,680 0

Credit

Debit 1,980

No. 728 Credit Balance 1,980 1,980 0

Debit 1,800

No. 729 Credit Balance 1,800 1,200 0

Accounts Receivable Subsidiary Ledger Couch City Date Explanation Jan. 1 Balance 11 22

S1 S1

2,340 1,440

Beautiful Homes Ltd Date Explanation Jan. 3 9 13 25

Ref S1 G1 CR1 S1

Debit 3,240

Ref

Debit

Ref

Table Tops Date Explanation Jan. 1 Balance 7 25

CR1 S1

Lowell Chairs Date Explanation Jan. 1 Balance 7 11 21

Ref CR1 S1 CR1

Debit

Credit

Balance 2,700 5,040 6,480

Credit

Balance 3,240 2,700 0 10,980

540 2,700 10,980

Credit 3,600

6,300

Debit

Credit 7,200

1,620 1,620

Balance 13,500 9,900 16,200

Balance 7,200 0 1,620 0

6.102

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

The Furniture Warehouse Date Explanation Jan. 3 13 22

Ref S1 CR1 S1

Debit 5,580

Credit 5,580

3,060

Balance 5,580 0 3,060

Accounts Payable Subsidiary Ledger D Landell Date Explanation Jan. 5 27

Lee Importers Date Explanation Jan. 1 Balance 9 16 18 23

Ref P1 P1

Debit

Credit 3,960 2,160

Balance 3,960 6,120

Ref

Debit

Credit

Balance 16,200 0 25,560 25,200 0

CP1 P1 G1 CP1

I Keah Date Explanation Jan. 1 Balance 21

Ref CP1

Nordin Office Furniture Date Explanation Jan. 1 Balance 9 16 23 27

Ref CP1 P1 CP1 P1

Walden & Co Date Explanation Jan. 5 16 27

Ref P1 P1 P1

16,200 25,560 360 25,200

Debit

Credit

Balance 27,000 0

Credit

26,100

Balance 19,800 0 27,000 0 26,100

Credit 5,400 2,700 5,040

Balance 5,400 8,100 13,140

27,000

Debit 19,800

27,000 27,000

Debit

6.103

Chapter 6: Accounting information systems Greta’s Furniture Pty Ltd

Account Name

Worksheet for the month ended 31 January 2018

Trial Balance Dr

Adjustments

Adjusted Trial Balance

101

Cash

120,915

112

Accounts Receivable

36,720

115

Commissions Receivable

120

Inventory

28,800

125

Office Supplies

2,880

(1) 1,980

130

Prepaid Insurance

3,600

(2)

157

Equipment

11,610

158

Accum. Depreciation – Equipment

2,700

201

Accounts Payable

45,360

301

P Greta, Capital

306

P Greta, Drawings

401

Sales

412

Sales Returns and Allowances

415

Discount Received

510

Purchases

512

Purchase Returns and Allowances

516

Freight In

627

Sales Salaries Expense

(4) 39,600

Statement of Profit or Loss Dr

Dr 120,915

36,720

36,720 39,600

32,400

(3)

120,915

39,600

360

Statement of financial position

32,400

28,800

900

28,800 900

3,240

11,610

225

141,660

2,925

45,360

141,660

1,440

141,660

1,440 132,300

540

540 459

132,300 540

459

97,920

97,920 360

459 97,920

360

324

7,740

6.104

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e 725

Discount Allowed

270

727

Office Salaries Expense

4,680

729

Rent Expense

1,800

Totals

$322,839

728

Office Supplies Expense

(1) 1,980

1,980

722

Insurance Expense

(2)

360

711

Depreciation Expense

(3)

225

417

Commissions Revenue

(4) 39,600

Totals

$42,165

Profit

$42,165

39,600 $362,664

$362,664

39,600 148,239

201,519

243,225

189,945

$201,519

$243,225

53,280 Totals

$201,519

53,280

6.105

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(d) Greta’s Furniture Pty Ltd Statement of Profit or Loss for the month ended 31 January 2018

OPERATING REVENUE Sales revenues: Gross sales Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory, 1/1/18 Purchases Less: Purchase returns and allowances Net purchases Freight in Cost of goods available for sale Less: Ending inventory 31/1/18 Cost of sales Gross profit

$132,300 (540) 131,760

$32,400 $97,920 (360) 97,560 324

101,484 20,276

OTHER OPERATING REVENUE Commissions Revenue Discount Received OPERATING EXPENSES Selling expenses: Sales salaries expense Administrative expenses: Office salaries expense Rent expense Office supplies expense Insurance expense Depreciation expense Financial expenses: Discount Allowed Profit

97,884 130.284 (28,800)

39,600 459

$7,740 $4,680 1,800 1,980 360 225

9,045

270

40,059 70,335

17,055 $53,280

6.107

Chapter 6: Accounting subsystems

Greta’s Furniture Pty Ltd Statement of financial position as at 31 January 2018

ASSETS Current assets: Cash Accounts receivable Commissions receivable Inventory Office supplies Prepaid insurance Total current assets Non-current assets: Equipment Less: Accumulated depreciation Total non-current assets

$120,915 36,720 39,600 28,800 900 3,240

LIABILITIES Current liabilities: Accounts payable Total liabilities NET ASSETS

$230,175 $11,610 (2,925) 8,685 238,860

45,360 45,360 $193,500

EQUITY Owners Equity

$193,500

Greta’s Furniture Pty Ltd Statement of Changes in Owner’s Equity for the month ended 31 January 2018

P Greta, Capital 1 January 2018 Add: Profit

$141,660 53,280 194,940

Less: Drawings P Greta, Capital, 31 January 2018

(1,440 $193,500

6.108

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(f) Greta’s Furniture Pty Ltd Post-Closing Trial Balance as at 31 January 2018 No

Account Name

Debit

101 112 115 120 125 130 157 158 201 301

Cash Accounts Receivable Commissions Receivable Inventory Office Supplies Prepaid Insurance Equipment Accumulated Depreciation – Equipment Accounts Payable P Greta, Capital

$120,915 36,720 39,600 28,800 900 3,240 11,610

$241,785 Accounts Receivable Control Balance Accounts Receivable subsidiary ledger account balances: Couch City Beautiful Homes Ltd Table Tops The Furniture Warehouse

$2,925 45,360 193,500 $241,785 $36,720

$6,480 10,980 16,200 3,060

Accounts Payable Control Balance Accounts Payable subsidiary ledger account balances: D Landell Nordin Office Furniture Walden & Co

Credit

$36,720 $45,360

$6,120 26,100 13,140

$45,360

6.109

Chapter 6: Accounting subsystems

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 6.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

Domino’s would use control accounts, subsidiary ledgers and special journals because it is an efficient and effective way for a large business to process numerous transactions (see pages xxx and xxx text). Domino’s has many customers and creditors, a large amount of property, plant and equipment and many shareholders – the company is likely to have subsidiary ledgers and control accounts for these items. The 2013 Consolidated Statement of Financial Position and the notes to the financial statements revealed the following: Receivables (customers) Payables (creditors) Property, plant and equipment Issued capital $40,855,000

$23,597,000 $17,999,000 $49,613,000

Control accounts and subsidiary ledgers are needed to continually record, monitor and update these large accounts. Domino’s pays out and receives large amounts of cash (see the statement of cash flows), it also buys and sells a large number of goods (see the statement of financial performance), so the company is likely to use special journals for sales, purchases, cash receipts and payments. (b)

There are no obvious disadvantages to Domino’s in using control accounts, subsidiary ledgers and special journals but there are many advantages. Advantages of Subsidiary Ledgers Subsidiary ledgers have several advantages. 1. They show transactions affecting one customer or one creditor in a single account, thus providing up-to-date information on specific account balances. 2. They free the general ledger of excessive details. As a result, a trial balance of the general ledger does not contain vast numbers of individual account balances. 3. They provide effective control through the periodic comparison of the total of the schedule of the subsidiary ledger with the balance in the corresponding control account. 4. They make possible a segregation of duties in posting. One employee can post to the general ledger while someone else posts to the subsidiary ledgers.

Advantages of special journals. The use of a special journal to record transactions has a number of advantages. First, all like transactions are grouped at the initial stage of recording. Second, the one-line entry for each transaction saves time. Third, only totals, rather than individual entries, are posted to the general ledger. This saves posting time and reduces the possibilities of .

6.110

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

errors in posting. Finally, a segregation of duties can be achieved because one person can take responsibility for the sales journal, another for the cash receipts and so on. (c)

As per the 2013 annual report, the Corporate Governance Statement for Domino’s Pizza Enterprises Ltd meets the requirements of the ASX Corporate Governance Principles and Recommendations (Third Edition). Each of the eight principles (as noted below) is listed and compliance is noted with Domino’s clearly referencing the relevant page number where investors can find additional information relating to each principle. The seven principles noted are as follows: Principle 1 – Lay solid foundations for management and oversight Principle 2 – Structure the Board and add value Principle 3 – Promote ethical and responsible decision-making Principle 4 – Safeguard integrity in financial reporting Principle 5 – Make timely and balanced disclosure Principle 6 – Respect the rights of shareholders Principle 7 – Recognise and manage risk Principle 8 – Remunerate fairly and responsibly

6.111

Chapter 6: Accounting subsystems

BUILDING BUSINESS SKILLS 6.2

FINANCIAL REPORTING PROBLEM - MANUAL MINI PRACTICE SET Baycity Music Shop

(a) Sales Journal

Date

Account Debited

Invoice No.

Post Ref

Jan. 6 6 11 11 22 22 25 25

J Hendrix N Jones R Danforth S Levin J Hendrix R Danforth B Jiminez N Jones

510 511 512 513 514 515 516 517

√ √ √ √ √ √ √ √

Accounts Receivable Dr Sales Cr 4,480 2,520 1,820 1,260 3,780 1,120 4,900 8,540 28,420 (112)/(402)

S1 Cost of Sales Dr Inventory Cr

2,688 1,512 1,092 756 2,268 672 2,940 5,124 17,052 (505)/(120)

Purchases Journal

Date

Account Credited

Terms

Ref.

Jan. 3 3 17 17 17 27 27 27

Guitar World Drums R Us Aging Violins Microphones ltd Guitar World Aging Violins Drums R Us Guitar World

n/30 n/30 1/7, n/30 2/7, n/30 n/30 1/7, n/30 n/30 n/30

√ √ √ √ √ √ √ √

P1 Inventory Dr Accounts Payable Cr 4,200 3,080 22,400 19,880 2,100 20,300 1,680 6,720 80,360 (120)/(201)

6.112

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Cash Receipts Journal

Date Jan 7 7 10 12 13 15 16 20 31 31

Account Credited

Ref

S Levin B Jiminez

√ √

J Hendrix N Jones Bank Loan S Levin

√ √ 200 √

Discount Allowed Dr

Cash Dr 5,600 2,800 21,700 4,390 2,058 14,000 1,235 24,500 29,820 500 106,603 (101)

Accounts Receivable Cr

Sales Cr

CR1 Cost of Sales Dr Inventory Cr

Other Accounts Cr

5,600 2,800 21,700 90 42

13,020

4,480 2,100 14,000

1,260 24,500 29,820

157 (614)

16,240 (112)

76,020 (401)

14,700 17,892 500 14,500 (x)

45,612 (505)/(120)

Office Supplies Dr

CP1 Other Accounts Dr

Dr Total = $152,372 ($106,603 + $157 + $45,612) Cr Total = $152,372 ($16,240 + $76,020 + $14,500 + $45,612)

Cash Payments Journal

Date Jan 8 9 9 12 15 17 21 23 23 28 31 31

Account Debited

Ref

Freight In Microphones Ltd Aging Violins Rent Expense Peter Dawes, Drawings

417 √ √ 729 306

R Manual Aging Violins Microphones Ltd

√ √ √

Sales Salaries Expense Office Salaries Expense

627 727

Cash Cr 252 12,348 15,246 1,400 1,120 560 15,000 22,176 19,208 280 6,020 3,640 97,250 (101)

Discount Received Cr

Accounts Payable Dr

252 154

12,600 15,400

252

1,400 1,120 560 224 392

15,000 22,400 19,600 280

1,022 (417)

85,000 (201)

840 (125)

6,020 3,640 12,432 (x)

Dr = 98242 Cr = 98242

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Chapter 6: Accounting subsystems

(a) & (e) General Journal Date

Account Titles and Explanation

Jan. 9 Sales Returns and Allowances Accounts Receivable – N Jones

Ref

G1 Debit Credit

412 √/112

420

Inventory ($420 x .60) Cost of Sales (Issued credit for goods returned)

120 505

252

18 Accounts Payable – Microphones Ltd Inventory (Received credit for returned goods)

√/201 120

280

31 Office Supplies Expense Office Supplies (Office supplies used)

728 125

1,140

31 Insurance Expense Prepaid Insurance (One month’s insurance expense 2,000/10 = 200)

722 130

200

31 Depreciation Expense Accumulated Depreciation – Equipment (One month’s depreciation expense: 1,500/12 = 125)

711 158

125

31 Interest Expense Interest Payable (Interest owing on bank loan)

718 230

840

401 417 350

104,440 1,022

420

252

280

Adjusting Entries

1,140

200

125

840

Closing Entries 31 Sales Discount Received Profit or Loss Summary

105,462

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Date Account Titles and Explanation Jan. 31 Profit or Loss Summary Sales Returns and Allowances Cost of Sales Freight In Discount Allowed Rent Expense Sales Salaries Expense Depreciation Expense Interest Expense Insurance Expense Office Salaries Expense Office Supplies Expense

Ref 350 412 505 515 614 729 627 711 718 722 727 728

Debit 76,606

31 Profit or Loss Summary Peter Dawes, Capital

350 301

28,856

31 Peter Dawes, Capital Peter Dawes, Drawings

301 306

1,120

Credit 420 62,412 252 157 1,400 6,020 125 840 200 3,640 1,140

28,856

1,120

(b) & (e) General Ledger Cash Date Explanation Jan. 1 Balance 31 31

Accounts Receivable Date Explanation Jan. 1 Balance 31 31 9

Ref

Debit

CR1 CP1

106,603

Ref

Debit

S1 CR1 G1

Inventory Date Explanation Jan. 1 Balance 31 31 31 9 18

Ref P1 S1 CR1 G1 G1

28,420

Debit 80,360

252

No. 101 Credit Balance 35,750 142,353 97,250 45,103

No. 112 Balance 14,600 43,020 16,240 27,780 420 26,360

Credit

No. 120 Balance 18,000 98,360 17,052 81,278 45,612 35,666 35,918 280 35,668

Credit

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Chapter 6: Accounting subsystems

Office Supplies Date Explanation Jan. 1 Balance 31 31

Ref CP1 G1

Prepaid Insurance Date Explanation Jan. 1 Balance 31

Ref

Debit 840

Debit

Equipment Date Explanation Jan. 1 Balance

No. 125 Balance 1,000 1,840 1,140 700

Credit

No. 130 Credit Balance 2,000 200 1,800

Ref

Debit

Credit

Ref

Debit

Credit

No. 157 Balance 45,450

Accumulated Depreciation - Equipment Date Explanation Jan. 1 Balance 31

No. 158 Balance 1,500 125 1,625

Bank Loan Date Explanation Jan. 15

Ref CR1

Debit

No. 200 Credit Balance 14,000 14,000

Ref

Debit

Credit

Accounts Payable Date Explanation Jan. 1 Balance 31 31 18

P1 CP1 G1

Interest Payable Date Explanation Jan. 31

Ref G1

Debit

No. 230 Credit Balance 840 840

Revenue Received in Advance Date Explanation Jan. 31

Ref CR1

Debit

No. 235 Credit Balance 500 500

85,000 280

No. 201 Balance 43,000 80,360 123,360 38,360 38,080

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Peter Dawes, Capital Date Explanation Jan. 1 Balance 31 31

Ref G1 G1

Debit

1,120

P Dawes, Drawings Date Explanation Jan. 15 31

Ref CP1 G1

Debit 1,120

Profit or Loss Summary Date Explanation Jan. 31 31 31

Ref G1 G1 G1

Debit

Ref S1 CR1 G1

Debit

Sales Returns and Allowances Date Explanation Jan. 9 31

Ref G1 G1

Debit 420

Ref CP1 G1

Cost of Sales Date Explanation Jan. 31 31 9 31

Ref S1 CR1 G1 G1

No. 306 Credit Balance 1,120 1,120 0

Credit 105,461

76,606 28,855

Sales Date Explanation Jan. 31 31 31

Discount Received Date Explanation Jan. 31 31

No. 301 Balance 72,300 28,856 101,155 100,036

Credit

104,440

Debit 1,022

No. 505 Debit 17,052 45,612

No. 350 Balance 105,461 28,855 0

No. 401 Credit Balance 28,420 28,420 76,020 104,440 0

No. 412 Balance 420 420 0

Credit

No. 417 Credit Balance 1,022 1,022 0

Credit

252 62,412

Balance 17,052 62,664 62,412 0

6.117

Chapter 6: Accounting subsystems

Freight In Date Explanation Jan. 8 31

Ref CP1 G1

Discount allowed Date Explanation Jan. 31 31

Ref CR1 G1

Sales Salaries Expense Date Explanation Jan. 31 31

Ref CP1 G1

Debit 252

252

Debit 157

Debit 6,020

No. 627 Credit Balance 6,020 6,020 0

No. 711 Credit Balance 125 125 0

Ref G1 G1

Debit 125

Interest Expense Date Explanation Jan. 31 31

Ref G1 G1

Debit 840

Ref G1 G1

No. 718 Balance 840 840 0

Credit

Debit 200

No. 722 Credit Balance 200 200 0

No. 727 Credit Balance 3,640 3,640 0

Office Salaries Expense Date Explanation Jan. 31 31

Ref CP1 G1

Debit 3,640

Office Supplies Expense Date Explanation Jan. 31 31

Ref G1 G1

Debit 1,140

No. 515 Balance 252 0

No. 614 Credit Balance 157 157 0

Depreciation Expense Date Explanation Jan.31 31

Insurance Expense Date Explanation Jan. 31 31

Credit

No. 728 Balance 1,140 1,140 0

Credit

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Rent Expense Date Explanation Jan. 12 31

Ref CP1 G1

Debit 1,400

No. 729 Balance 1,400 1,400 0

Credit

Accounts Receivable Subsidiary Ledger R Danforth Date Explanation Jan. 1 Balance 11 22

S1 S1

1,820 1,120

N Jones Date Explanation Jan. 6 9 13 25

Ref S1 G1 CR1 S1

Debit 2,520

Ref

Debit

Ref

B Jiminez Date Explanation Jan. 1 Balance 7 25

CR1 S1

S Levin Date Explanation Jan. 1 Balance 7 11 16

CR1 S1 CR1

J Hendrix Date Explanation Jan. 6 12 22

Ref S1 CR1 S1

Ref

Debit

Credit

Balance 1,500 3,320 4,440

Credit

Balance 2,520 2,100 0 8,540

420 2,100 8,540

Credit 2,800

4,900

Debit

Credit 5,600

1,260 1,260

Debit 4,480

Credit 4,480

3,780

Balance 7,500 4,700 9,600

Balance 5,600 0 900 0

Balance 4,480 0 3,780

6.119

Chapter 6: Accounting subsystems

Accounts Payable Subsidiary Ledger Drums R Us Date Explanation Jan. 3 27

Microphones Ltd Date Explanation Jan. 1 Balance 9 17 18 23

Ref P1 P1

Debit

Credit 3,080 1,680

Balance 3,080 4,760

Ref

Debit

Credit

Balance 12,600 0 19,880 19,570 0

CP1 P1 G1 CP1

R Manual Date Explanation Jan. 1 Balance 21

Ref CP1

Aging Violins Date Explanation Jan. 1 Balance 9 17 23 27

CP1 P1 CP1 P1

Guitar World Date Explanation Jan. 3 17 27

Ref P1 P1 P1

Ref

12,600 19,880 280 19,600

Debit

Credit

Balance 15,000 0

Credit

20,300

Balance 15,400 0 22,400 0 20,300

Credit 4,200 2,100 6,720

Balance 4,200 6,300 13,020

15,000

Debit 15,400

22,400 22,400

Debit

6.120

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e (c)

Account Titles

Cash Accounts Receivable Inventory Office Supplies Prepaid Insurance Equipment Accum. Depreciation – Equipment Bank Loan Accounts Payable Interest Payable Revenue Received in Advance Peter Dawes, Capital Peter Dawes, Drawings Sales Discount Received Sales Returns and Allowances Discount Allowed Cost of Sales Freight In Sales Salaries Expense Office Salaries Expense Rent Expense Totals Office Supplies Expense Insurance Expense Depreciation Expense Interest Expense Totals Profit Totals

Baycity Music Shop Worksheet for the month ended 31 January 2017 Adjustments Adjusted Trial Balance

Trial Balance Dr 45,103 26,360 35,668 1,840 2,000 45,450

(1) 1,140 (2) 200 1,500 14,000 38,080

(3)

125

(4)

840

Dr 45,103 26,360 35,668 700 1,800 45,450

1,625 14,000 38,080 840 500 72,300

1,120 104,440 1,022

420 157 62,412 252 6,020 3,640 1,400 231,842

Statement of Financial Position

1,625 14,000 38,080 840 500 72,300

500 72,300 1,120

Statement of Profit or Loss

1,120 104,440 1,022

104,440 1,022

420 157 62,412 252 6,020 3,640 1,400

1,140 200 125 840 232,807

1,140 200 125 840 76,606 28,856 105,461

231,842 (1) 1,140 (2) 200 (3) 125 (4) 840 2,305

2,305

232,807

105,461

156,201

105,461

156,201

6.121

127,345 28,856 156,201

Chapter 6: Accounting subsystems

(d) Baycity Music Shop Statement of Profit or Loss for the month ended 31 January 2017

OPERATING REVENUE Sales revenues: Gross sales Less: Sales returns and allowances Net sales revenue Cost of Sales: Cost of sales Freight in Gross profit Other Operating Revenue: Discount Received OPERATING EXPENSES Selling expenses: Sales salaries expense Administrative expenses: Office salaries expense Rent expense Office supplies expense Insurance expense Depreciation expense

104,440 (420) 104,020 62,412 252

62,664 41,356 1,022 42,377

6,020

Financial expenses: Interest Expense Discount Allowed Profit

3,640 1,400 1,140 200 125

6,506

840 157

997

13,522 28,856

Baycity Music Shop Statement of Changes in Owner’s Equity as at 31 January 2017

Peter Dawes, Capital, 1 January 2017 Add: Profit Less: Drawings Peter Dawes, Capital, 31 January 2017

72,300 28,856 101,155 (1,120) 100,036

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Baycity Music Shop Statement of Financial Position as at 31 January 2017

ASSETS Current assets: Cash Accounts receivable Inventory Office supplies Prepaid insurance

45,103 26,360 35,668 700 1,800

Total current assets

109,631

Non-current assets: Property, Plant and Equipment: Equipment Less: Accumulated depreciation Total non-current assets Total assets LIABILITIES AND OWNER’S EQUITY Current liabilities: Accounts payable Interest payable Revenue Received in Advance Total current liabilities Non-current liabilities: Bank loan Total non-current liabilities Total liabilities

45,450 (1,625) 43,825 153,456

38,080 840 500 39,420

14,000 14,000 53,420

Owner’s Equity: Peter Dawes, Capital Total liabilities and owner’s equity

100,036 153,456

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Chapter 6: Accounting subsystems

(f) Baycity Music Shop Post-Closing Trial Balance as at 31 January 2017 Debit Cash Accounts Receivable Inventory Office Supplies Prepaid Insurance Equipment Accumulated Depreciation – Equipment Bank Loan Accounts Payable Revenue Received in Advance Interest Payable Peter Dawes, Capital

45,103 26,360 35,668 700 1,800 45,450

_ _____ 155,081

Accounts Receivable Control Balance Accounts Receivable subsidiary ledger account balances: R Danforth N Jones B Jiminez J Hendrix

1,625 14,000 38,080 840 500 100,036 155,081 $26,360

$4,440 8,540 9,600 3,780

Accounts Payable Control Balance Accounts Payable subsidiary ledger account balances: Drums R Us Aging Violins Guitar World

Credit

$26,360 $38,080

$4,760 20,300 13,020

$38,080

6.124

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 6.3

COMPUTERISED ACCOUNTING PROGRAMS – AN INTRODUCTION

There are many companies that sell computerised accounting software packages such as MYOB and QuickBooks. These companies provide detailed product information and many provide trial versions on the web site. The aim of this question is to allow students to find out more about computerised accounting software packages and experience using them.

6.125

Chapter 6: Accounting subsystems

CRITICAL THINKING BUILDING BUSINESS SKILLS 6.4

GROUP DECISION CASE Ling & Jessop

(a)

The special journals for Lee & Jones should be: (1) sales journal; (2) purchases journal; (3) cash receipts journal; and (4) cash payments journal. (1)

Sales Journal columns: ▪ Date ▪ Account Debited ▪ Invoice Number ▪ Post Reference ▪ Accounts Receivable, Dr. and Sales – Appliances, Cr. ▪ Cost of Sales, Dr. and Inventory, Cr.

(2)

Purchases Journal columns: ▪ Date ▪ Account Credited ▪ Terms ▪ Post Reference ▪ Accounts Payable, Cr. ▪ Inventory – Appliances, Dr. ▪ Inventory – Parts, Dr.

Note: Because two different types of inventory are purchased on credit, a three-column purchases journal might be used. (3)

Cash Receipts columns: ▪ Date ▪ Account Credited ▪ Post Reference ▪ Cash, Dr. ▪ Accounts Receivable, Cr. ▪ Sales – Appliances, Cr. ▪ Sales – Parts, Cr. ▪ Revenue from Repairs, Cr. ▪ Other Accounts, Cr. ▪ Cost of Sales, Dr. and Inventory, Cr.

Note: A Discount Allowed, Dr. column is not needed because all credit terms are net/30 days.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(4)

Cash Payments Journal columns: ▪ Date ▪ Cheque Number ▪ Accounted Debited ▪ Post Reference ▪ Other Accounts, Dr. ▪ Accounts Payable, Dr. ▪ Advertising Expense, Dr. ▪ Salaries Expense, Dr. ▪ Discount Received, Cr. ▪ Cash, Cr.

Note: A Discount Received column is needed as practically all suppliers offer cash discounts and it is company policy to take all discounts. (b)

Ling & Jessop should have: (1) (2)

An accounts receivable control account with individual customers accounts in a customers’ subsidiary ledger. An accounts payable control account with individual creditors accounts in a creditors’ subsidiary ledger.

The use of control accounts and subsidiary ledgers will: (1) (2) (3) (4)

(c)

provide necessary up-to-date information on specific customer and creditor balances free the general ledger of excessive detail help locate errors in individual accounts make possible a division of labour in posting.

It appears that the accounting information system for the business is still inefficient despite hiring two additional bookkeepers to assist with the accounting work. Reasons for this could include more than one person requiring the ledger to post from the journal. In addition, the daily posting of transactions continues to be very time consuming, manual processes are more subject to errors and it is time consuming trying to locate and correct errors

. (d)

The recommended changes would be to introduce a computerised accounting system to improve efficiency and accuracy of recording transactions. Advantages of computerised systems include: -

less staff are required so in the long run lower salary costs computerised systems can process numerous transactions quickly built in automatic posting error reduction faster response time – e.g. for producing reports in built checks – e.g. not processing a transaction if there are not equal debits and credits

6.127

Chapter 6: Accounting subsystems

BUILDING BUSINESS SKILLS 6.5

COMMUNICATION ACTIVITY

MEMORANDUM To:

Marlene Jones

From:

What’s My Name

Subject:

Customer relationship management

Dear Marlene I have conducted research into customer relationship management (CRM). Please find attached report detailing how your business could benefit from CRM to assist you in understanding and satisfying customer needs and improve profitability. Customer relationship management is a difficult term to define as it means many different things to different people. Generally, it refers to the process by which companies manage interaction with their customers, by collecting and analysing data related to customers, and delivering ‘tailor made’ value propositions to individual customers. The rationale behind this is that customers are all different, and they require different levels of services (e.g. ‘premium’ customers that require constant attention, versus ‘passive’ customers who are happy with the basic service at lower costs). The goal of CRM is to increase customer loyalty by providing personalised attention to customers but without “wasting” company resources on services that customers do not value. CRM often requires the support of different technologies, such as using the company websites to ‘research’ your customers (e.g. which links did they click on?). Amazon.com, for example, often provides personalised recommendations to users when they log on, based on their previous visits and purchases. Other data analysis/data mining tools can also be used to better understand customer behaviour and categorise them into different ‘customer segments’, and in doing so, building customer behaviour models. There are many benefits to CRM, the most obvious one is to allow organisations to more effectively manage their resources by serving the customers the ‘right way’, and ensuring a lower level of customer turnover. As it is generally more expensive to acquire new customers than to sell to existing customers, CRM allows companies to stop the “customer leakage” and maximise profit from their existing accounts. If you have any further queries, please do not hesitate to contact me. Regards

XXXXXX

6.128

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 6.6

ETHICS CASE Tyler Products Ltd

(a)

The stakeholders in this case are: ▪ Don Henke, manager of Tyler Products’ centralised computer accounting operation. ▪ The employees of Tyler Products’ three divisions at Moorebank, Smithfield and Tempe.

(b)

Don’s instructions to assign the Tempe code to all uncoded and incorrectly coded sales documents overstates the sales of Tempe and understates the sales of Moorebank and Smithfield, thereby affecting the employee bonus plan. Don’s intent and actions are unethical. He is increasing the sales of his wife’s, relatives’ and friends’ Tempe division sales and unfairly aiding them in the bonus competition.

(c)

Tyler Products Ltd should have a written policy covering uncoded and incorrectly coded sales documents. This would prevent the manager from arbitrarily designating the division to be credited for the uncoded sales. Tyler Products could design new sales documents which identify clearly from which division the sales were made.

BUILDING BUSINESS SKILLS 6.7

RESEARCH CASE

Answers will vary depending on the resources chosen by the students. However, at a minimum they should look at 2014 annual report and press releases provided on the company website.

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Chapter 6: Accounting subsystems

BUILDING BUSINESS SKILLS 6.8 (a)

JEWELS, JEWELS AND MORE JEWELS LTD

Corporate social responsibility (CSR) is ‘social responsibility’ applied in a business environment and involves businesses acting with regard to social principles and acting ethically. Basically, it is about business people’s obligation to act responsibly for the benefit society when carrying on business activities. This responsibility can be by passive by not engaging in activities that could be socially harmful (e.g. polluting the air), or active, by engaging in activities that directly support people and enhance social goals (e.g. building public playgrounds and parks). For each business what is considered to be ‘socially responsible’ differs, however there are key guiding principles including ensuring quality of life, economic function of the society and social investment.

(b) If the customers of Jewels, Jewels and more Jewels Ltd are aware that one of their main suppliers acquires blood diamond, they may choose to buy their products from socially responsible businesses and they will lose profits. Jewels, Jewels and more Jewels Ltd may also get bad press and exacerbate the decrease in profits. (c)

Jewels, Jewels and more Jewels Ltd could do a number of things to avoid negative consequences including: 1

Find another ethical diamond supplier ASAP and make this information public

Obtain assurance and evidence from Big Diamond Factory that they are ethical socially responsible suppliers and then make that information publicly available.

Put policies into place to ensure all future suppliers are socially responsible and make this information public

6.130

Chapter 7: Reporting and analysing cash and receivables

CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives 1. Identify the impact of business transactions on cash.

Brief Exercises 1

Exercises 1

2, 9

Problems 1A, 1B

Describe electronic banking processes.

Explain the application of internal control principles for handling cash.

2, 3

2A, 4A, 2B, 4B

Prepare a bank reconciliation.

3A, 4A, 5A, 3B, 4B, 5B

Discuss the basic principles of cash management.

4, 11

Business decision making: assessing the adequacy of cash

Identify the different types of receivables.

Valuating receivables.

7, 8

7, 10

6A, 7A, 8A, 9A, 6B, 7B, 8B, 9B

Describe how receivables are reported in financial statements.

8, 9

8A,8B 9A,9B

10.

Analysing and managing receivables.

9,13

10A, 10B

11.

Explain the operation of a petty cash fund.

5, 12

7.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES ANSWERS TO QUESTIONS 1.

Examples of transactions that involve cash at the start-up phase of the business include: cash injected into the business by Edward; if Edward had borrowed funds from his parents or banks, the cash injected through these borrowings; cash used to buy smartphone accessories inventory; cash used to pay for renovating/setting up the shop on the campus etc.

Electronic banking is an electronic payment system that enables customers of a financial institution to conduct financial transactions on a website operated by the bank. To access online banking facility, Edward would need to register with his bank for the service, and set up some password for verification. Once registered, Edward can transact banking tasks through online banking, including transferring funds between the customer’s linked accounts and paying third parties, including bill payments through BPAY.

Disagree. Internal control for handling cash is also concerned with the effectiveness and efficiency of operations, and the safeguarding of cash asset from employee theft, and unauthorised use.

Cash should be reported at $38,850 ($15,000 + $1,850 + $22,000).

Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing up a lower amount and pocketing (stealing) the difference. In addition, the customer receives an itemised receipt, and the cash register provides a record, on tape or electronically, for further verification.

The basic principles of cash management are:

(1)

increase the speed of collection of receivables

(2)

keep inventory levels low

(3)

don’t make payments earlier than necessary

(4)

plan timing of major expenditures

(5)

invest idle cash.

(a)

A dishonoured cheque occurs when the bank on which the cheque is drawn refuses to pay the cheque, because it has been cancelled or because the balance of the account on which it is drawn is less than the amount of the cheque.

(b)

It reduced the balance of the bank account reported on the bank statement. The dishonoured cheque should be recorded in the Cash at Bank account. It does not appear in the bank reconciliation statement.

(c)

A dishonoured cheque should be entered into the cash receipts as a reduction in cash receipts. The adjusting entry in the company’s ledger accounts is a debit to Accounts Receivable and a credit to Cash.

7.2

Chapter 7: Reporting and analysing cash and receivables

The activities in a petty cash system and the related principles are: (a)

(1)

Establishing the fund. ▪

(2)

Making payment from the fund. ▪

(3)

Documentation procedures, such as the use of a pre-numbered petty cash receipt and evidence of authorisation of payments.

Replenishing the fund. ▪

(b)

Establishment of responsibility for custody of the fund.

Independent internal verification of schedule of petty cash receipts because the request for replenishment must be approved before the cheque is signed.

Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased.

Accounts receivables are amounts owed by customers on account. They result from the sale of goods and services in the normal course of business operations (i.e. in trade). Notes receivable represent claims that are evidenced by formal instruments of credit.

10.

Soo Eng should realise that the decrease in the net amount of accounts receivable occurs when estimated uncollectables are recognised in an adjusting entry. The write-off of an uncollectable account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, the net amount of accounts receivable does not change.

11.

(a)

$350,000 of the Trade Debtors should be classified as current receivables; and $150,000 as non-current receivables.

(b)

The 90-day promissory note is a current receivable.

12.

A receivable turnover of 8 times means accounts receivable is turned into cash 8 times in a year, or it takes on average 46 days (365/8) to collect the receivable. If the business has a credit term of 30 days, this suggests that collection policy is not very effective. The business should promptly follow up overdue accounts.

7.3

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7.1 Cash flows – monthly loan payment; car loan payment Assets – inventory; GST receivable; motor vehicle Liabilities – bank loan; car loan

(a) (b) (c)

BRIEF EXERCISE 7.2 Costs associated with accepting EFTPOS payments include the initial setup costs linking the cashier and the payment terminal; training costs to staff for using the payment system; and the on-going merchandise fees charged by the bank etc. The benefits of accepting EFTPOS payments include the possibility of increased business from customers who don’t carry enough cash and prefer to pay by their bank cards; reduced staffing costs for handling cash hence reduced chance for cash misappropriation. BRIEF EXERCISE 7.3 Franklin Office Supplies Ltd There was weakness in the internal controls in this situation. Responsibility was not clearly established and there was no segregation of duties as Aaron could both order and approve his own purchase, leading to possible exploitation of the system BRIEF EXERCISE 7.4 Ridley Pty Ltd Cash balance per bank

$8,420

Add:

2,700

Outstanding deposits

11,120 Less: Unpresented cheques

862

Balance of Cash at Bank account

$10,258

Note: The Bank Service Charge of $20 will have already been included in the cash balance per bank. BRIEF EXERCISE 7.5 Gimbal Mar. 20

Postage Expense Supplies Travel Expense Cash .

32 26 22 80 7.4

Chapter 7: Reporting and analysing cash and receivables

BRIEF EXERCISE 7.6 (a) (b) (c)

Other receivables. Notes receivable. Accounts receivable.

BRIEF EXERCISE 7.7 Massey Ltd (a)

(b)

Bad Debts Expense [($500,000 x 1%) - $3,000] Allowance for Doubtful Debts

2,000

Bad Debts Expense [($500,000 x 1%) + $800] Allowance for Doubtful Debts

5,800

2,000

5,800

7.5

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BRIEF EXERCISE 7.8

Date Account Titles and Explanation Nov 28 Allowance for doubtful debts GST Collected Accounts Receivable (subsidiary ledger also credited) Being the write-off of bad debt of M Waters due to bankruptcy as per mangers decision)

Debit 5,000 500

Credit

5,500

Brian Bazaar To:

Manager

From:

Student

Date:

DD/MM/YY

RE: GST and Bad Debts The issue has arisen where a sale in September on credit was to a debtor who has now bankrupt and we will not be able to recover the debt from him. Accordingly on your advice we have written the debt off. I would like to explain the effect on the GST liability for the write-off. If the reporting of the GST is on the cash basis, then the liability for the GST collected does not arise until the cash is collected. Therefore M Waters transaction would not have the GST liability recorded in our accounting records. As our business records the Sales and GST on an accruals basis, the GST liability arises in September when the sale was made. In November when the debt was written off we need to reverse the GST liability and record a decreasing adjustment against the GST collected account as our business never collected and never will collect the GST. You will note the full debt is credited against the debtors M Waters Account in our records.

7.6

Chapter 7: Reporting and analysing cash and receivables

BRIEF EXERCISE 7.9 Wendy Ltd (a)

(b)

(c)

Bad Debts Expense Allowance for Doubtful Debts Current Assets: Cash Accounts receivable Less: Allowance for doubtful debts Inventory Prepaid expenses Total Current Assets Credit risk ratio =

40,000 40,000

$90,000 $600,000 (40,000)

560,000 130,000 13,000 $793,000

$40,000 = 6.7% $600,000

Receivables turnover ratio =

$3,000,000 = 5.7 times $530,000

Average collection period =

365 days = 64 days 5.7

BRIEF EXERCISE 7.9 (a)

(b)

Cash at Bank ($200 - $8) Credit Card Services Expense ($200 x 4%) Sales Cash at Bank ($50,000 - $2,000) Discount on Sale of Receivables ($50,000 x 4%) Accounts Receivable

192 8 200 48,000 2,000 50,000

Note the discount on sale of receivables is an expense.

7.7

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO EXERCISES EXERCISE 7.1 (a) i.

Cash inflows – Cash sales; Credit card sales ($18,500+$56,000 = $74,500)

ii.

Cash outflows – Loan payment; Operating expenses paid; Payment to suppliers ($5,800+$24,000+$16,000 = $45,800)

iii.

Assets – Inventory; GST receivable; Cash at Bank; Accounts receivable ($28,000+$3,800+8,760+$6,800 = $47,360)

iv.

Liabilities – Outstanding bank loan; Rent payable; Accounts payable ($12,000+$2,400+$8,400 = $22,800)

(b)

From a cash flow’s perspective, Keitha’s fashion boutique looks like a healthy business as it has positive cash flows, i.e. cash inflows are much higher than cash outflows. Further, the value of assets outweighs that of liabilities which is another good sign as a potential for investment.

EXERCISE 7.2 Gerry’s Pizza 1.

Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas.

Segregation of duties. Employees who make the pizza do not handle cash.

Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales.

Physical, mechanical and electronic controls. A cash register is used to record the sale.

Independent internal verification. The counter clerk handling the pizza compares the type of the pizza with the type indicated on the orders.

7.8

Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.3 (a)

(b)

Procedure

Weakness

Principle

Recommended change

Inability to establish responsibility for cash.

Establishment of responsibility

There should be separate cash drawers and register codes for each clerk.

Cash is not adequately Physical, mechanical, protected from theft. and electronic controls.

Cash should be stored in a safe until it is deposited in the bank.

Cash is not independently counted.

Independent internal verification.

A cashier office supervisor should count cash.

The accountant should Segregation of duties. not handle cash.

The cashier’s department should make the deposits.

EXERCISE 7.4 Shoe City Ltd (a)

(b)

Balance as per bank statement Add: Outstanding deposits Less: Unpresented cheques Balance as per Cash at Bank account (1)

$4,392.20 708.00 5,100.20 (876.00) $4,224.20

(1)

$4,770.20

Cash balance per books Less: Dishonoured cheque Bank charges Adjusted cash balance per books

$516.00 30.00

455.00 $4,224.20

(In general journal form) Accounts Receivable Cash at Bank

516.00

Bank Charges Cash at Bank

30.00

516.00

30.00

7.9

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 7.5 Green Dot Furniture The cash to daily cash expenses ratio is calculated by first calculating average daily cash expenses.

$92,728 = $254 thousand per day 365 Then cash on hand is divided by average daily cash expenses: $17,312 = 68.2 days $254

Green Dot’s cash on hand is adequate. It has enough cash on hand to pay for 68 days of expenses. This, combined with positive cash provided by operations indicates strong liquidity.

EXERCISE 7.6 Hair Styles Pty Ltd (In general journal form) Date Account Titles and Explanation Oct. 1 Petty Cash Cash at Bank 31 Office Supplies Telecommunications Expense Postage Expense Freight-out Cash Short and Over Cash at Bank Petty Cash Cash at Bank

Debit

Credit 130 130

36.50 21.30 53.70 8.80 1.40 121.7 130 130

7.10

Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.7 Marc Pty Ltd (a) Accounts Receivable Current 1-30 days past due 31-90 days past due Over 90 days

(b)

(c)

Amount

$65,000 12,600 8,500 6,400

2.0 5.0 30.0 50.0

Mar. 31 Bad Debts Expense Allowance for Doubtful Debts ($7,680 - $1,600)

Estimated Uncollectables $1,300 630 2,550 3,200 $7,680

6,080 6,080

The total balance of receivables increased from 2015 to 2016. However, of concern is the fact that each of the three categories of older accounts increased substantially during 2016. That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change.

7.11

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 7.8 Date Account Titles and Explanation Nov 28 Allowance for doubtful debts GST Collected Accounts Receivable (subsidiary ledger also credited) Being the write-off of bad debt of M Waters due to bankruptcy as per mangers decision)

Debit 5,000 500

Credit

5,500

Brian Bazaar To:

Manager

From:

Student

Date:

DD/MM/YY

7.12

Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.9 Spring & Co Ltd Notes to the Financial Statements as at 30 June 2015 (in millions) Receivables: Trade Receivables: Notes Receivable Accounts Receivable Less: Allowance for Doubtful Debts Other Receivables Net Receivables

$95 290 11

279 22 $396

Note: It is assumed that Notes Receivables are part of Trade Receivables.

EXERCISE 7.10 Honey Factory Ltd (a) Receivables turnover ratio =

Average collection period =

2017

2016

$1,113.0 (($146.6 − $6.3) + ($104.3 − $5.7)) / 2

$899.3 (($104.3 − $5.7) + ($126 − $8.2)) / 2

= 9.3 times

=8.3 times

365 days = 39.2 days or 39 days 9.3

365 days = 43.9 days or 44 days 8.3

(b) 2012 $6.3 = 4.3% $146.6

Credit risk ratio =

(c)

2011 $5.7 = 5.5% $104.3

The credit and collection policies in Honey Factory Ltd. seemed to have worked well in 2017. The company’s receivables turnover has improved from 8.3 times in 2017 to 9.3 times in 2017, with the corresponding average collection period shortened from 44 days to 39 days. The company’s credit risk has also improved from 5.5% to 4.3% in 2017.

7.13

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 7.11 Virtual Appliances Date Mar. 3

Account Titles and Explanation Cash at Bank ($900,000 - $36,000) Discount on Sale of Receivables (1) Accounts Receivable

Debit 864,000 36,000

Credit

900,000

(1) Note this is an expense account. The amount is calculated as 4% x $900,000.

EXERCISE 7.12 New Mark Ltd Date May 10

Account Titles and Explanation Cash at Bank ($2,400 - $36) Credit Card Services Expense (1.5% x $2,400) Sales

Debit 2,364 36

Credit

2,400

EXERCISE 7.13

(a) Average daily cash expenses

Cash to daily cash expenses

Burleigh Heaven =[ (Cash payment to suppliers & employees) +(Cash payment for interest & other finance costs) +(Cash payment for income tax) ]/365

Miami Paradise =[ (Cash payment to suppliers & employees) +(Cash payment for interest & other finance costs) +(Cash payment for income tax) ]/365

= ($63,905+$6,780+$17,672)/365

=($55,802+$16,383+$12,239)/365

=$88,357/365

=$84,424/365

=$242.07

=$231.30

=Cash/Average daily cash expense =$7,110/$242.07

=Cash/Average daily cash expense =$4,289/$231.30

=29.3 days

=18.5 days

(b) If the adequacy of cash is the only factor for the investment decision, Burleigh Heaven appears to be the superior candidate it has a higher cash adequacy then Miami Paradise (29 days compared with 19 days).

7.14

Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.14 Advanced Lifestyle Ltd (a) 1.Receivable turnover 2. Average collection period 3. Credit risk ratio: 2016 2015

(b)

Auckland =$1,498/[($152-$7.2)+($197-$10)/2] = 9 times

Queenstown = $1,388/[($128-$6.2)+($120-$5.2)/2] = 11.7 times

= 365/9 = 40.6 days

= 365/11.7 = 31.2 days

=$10/$197 = 5.08% =$7.2/$152 = 4.74%

=$5.2/$120 = 4.33% =$6.2/$128 = 4.84%

The Queenstown Division has a higher accounts receivable turnover (11.7 vs. 9 times) which means it is collecting accounts receivable 9 days faster than its Auckland counterpart. In terms of credit risk, Queenstown not only has lower credit risk ratios in 2016, it is also on an improving trend while Auckland’s credit risk is deteriorating. In conclusion, Queenstown division seems to have a more effective credit collection policy and credit risk control.

7.15

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 7.1 (a) i.

Cash inflows – Cash sales; Credit card sales ($28,500+$56,000 = $84,500)

ii.

Cash outflows – Loan payment; Operating expenses paid; Payment to suppliers ($12,000+$18,000+$21,000 = $51,000)

iii.

Assets – Food supplies; Cash at Bank; Accounts receivable; GST receivable ($29,500+$13,200+$7,200+$4,900 = $54,800)

iv.

Liabilities – Outstanding bank loan; Rent payable; Accounts payable ($22,000+$14,800+$12,400 = $49,200)

(b)

From a cash flow’s perspective, Toby’s café looks like a healthy business as it has positive cash flows, i.e. cash inflows are much higher than cash outflows. Further, the value of assets outweighs that of liabilities which is another good sign as a potential for investment.

(c)

In addition to the above figures and analysis concerning cash flows and assets and liabilities, James should also look at non-financial information such as location of the café, clientele, quality of the staff and relationship with food suppliers etc. which are all important factors in influencing the continuous success of the business.

7.16

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.2 Burlington Theatre (a) Principles

Application to cash receipts

Establishment of responsibility.

Only cashiers are authorised to sell tickets. Only the manager and cashier can handle cash.

Segregation of duties.

The duties of receiving cash and admitting customers are assigned to the cashier and to the doorperson. The manager maintains custody of the cash, and the company accountant records the cash.

Documentation procedures.

Tickets are pre-numbered. Cash count sheets are prepared. Deposit slips are prepared.

Physical, mechanical, and electronic A safe is used for the storage of cash and a controls. machine is used to issue tickets. Independent internal verification.

(b)

Cash counts are made by the manager at the end of each cashier’s shift. Daily comparisons are made by the company treasurer.

Actions by the doorperson and cashier to misappropriate cash include: (1)

Instead of tearing the tickets, the doorperson could return the tickets to the cashier who could resell them, and the two could divide the cash.

(2)

The cashier could issue a lower priced ticket than paid for and the doorperson would admit the customer. The difference between the ticket issued and the cash received could be divided between the doorperson and cashier.

7.17

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.3 JONA Ltd Bank Reconciliation Statement 31 December 2016 Balance as per bank statement Add: Outstanding deposit

19,580.00 1,190.40 20,770.40

Less: Unpresented cheques No. Amount 3470 720.10 3474 1,050.00 3478 538.20 3481 807.40 3484 832.00 3486 1,389.50

5,337.20

Balance as per Cash at Bank account

15,433.20

Original balance of Cash at Bank account Transposition error (deposit 20/12: 2945-2954) Transposition error (cheque#3485: 540.8-450.8) Collection of note NSF cheque (A. Jordan)

13,034.30 (9.00) (90.00) 3,145.00 (647.10)

Adjusted balance of Cash at Bank Account:

15,433.20

(b) Dec. 31

Cash………………………………………………………………3,145.00 Miscellaneous Expense ........................................................ 15.00 Notes Receivable ................................................... Interest Revenue ....................................................

3,000.00 160.00

Accounts Receivable—A. Jordan.......................................... 647.10 Cash .............................................................

647.10

Accounts Payable ...................................................................... 90.00 Cash .............................................................

90.00

Dec. 31 Accounts Receivable ................................................................. 9.00 Cash .............................................................

9.00

7.18

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.4

Delicious Pies Pty Ltd Bank Reconciliation Statement 31 October 2017 (a) Balance as per bank statement Add: Undeposited receipts

(b)

(c)

$25,732.00 5,313.71 31,045.71

Less: Unpresented cheques: No. Amount 62 $177.45 183 210.00 284 354.55 862 266.99 863 317.52 864 231.39

(1,557.90)

Balance as per Cash at Bank account (1)

$29,487.81

(1)

$30,369.81 280.00 30,649.81 (1,162.00) $29,487.81

Original Balance of Cash at Bank account Add: Bank credit (collection of note receivable) Adjusted balance per books (before theft) Less: Theft Adjusted balance of Cash at Bank account

The cashier attempted to cover the theft of $1,162 by: 1.

Not listing as unpresented three cheques totalling $742.00 (No. 62, $177.45; No. 183, $210.00 and No. 284, $354.55).

Understating the unpresented cheques listed by $140. (The correct total of the 3 cheques listed is $815.90).

Did not add $280 credit note to the book balance.

The principle of independent internal verification has been violated because the cashier prepared the bank reconciliation.

The principle of segregation of duties has been violated because the cashier had access to the accounting records and also prepared the bank reconciliation.

7.19

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.5 (a) Computec Ltd Bank Reconciliation Statement 31 May 2015

Balance as per bank statement Add: Outstanding deposits Bank error – Teller cheque

$7,784.60 $836.15 600.00

Less: Unpresented cheques Balance as per Cash at Bank account (1) (1)

Original Cash at Bank balance per books Add: Collection of note receivable

Less: Dishonoured cheque Error in 12 May receipt Error in recording cheque no. 1181 Bank cheque printing charge Adjusted Cash at Bank account balance

(b)

1,436.15 9,220.75 (1,276.25) $7,944.50 $5,681.50 3,060.00 8,741.50

($700.00) (10.00) (27.00) (60.00)

(797.00) $7,944.50

(In general journal form) Date Account Titles and Explanation May 31 Cash at Bank Bank Charges Note Receivable Interest Revenue

Debit 3,060 20

3,000 80

31 Accounts Receivable – W Hoad Cash at Bank

700

31 Sales Cash at Bank

31 Accounts Payable – M Helms Cash at Bank

31 Bank Charges Cash at Bank

Credit

700

7.20

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.6 Chin Ltd (a)

Dec.

Bad Debts Expense............................................ 25,450 Allowance for Doubtful Debts ................................. ($37,450 – $12,000)

25,450

(a) & (b) Bad Debts Expense Date 31/12/2016

Particular Allowance for Doubtful Debt

Allowance for Doubtful Debt Date 31/12/2016 31/12/2016 31/3/2017

Particular Balance Bad Debts Expense Accounts Receivable (Bad Debts Write-off)

31/5/2017

Accounts Receivable (Reverse Bad Debts Write-Off)

(1)

(2)

Mar.

May

Dr $25,450

Cr $25,450

Balance Dr Cr $25,450

Balance Dr Cr $12,000 $37,450

$500

$36,950

$500

$37,450

2017 31 Allowance for Doubtful Debts ........................... 500 Accounts Receivable ...................................

500

31 Accounts Receivable........................................ 500 Allowance for Doubtful Debts...................................................

500

31 Cash .............................................................. 500 Accounts Receivable ...................................

500

2017 Bad Debts Expense............................................ 31,100 Allowance for Doubtful Debts ................................. ($30,300 + $800)

31,100

7.21

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.7 Eason Ltd (a)

$2,900.

(b)

$700 [($46,000 X 5%) – $1,600].

(c)

$3,450 [(46,000 X 5%) + $1,150].

(d)

Under the direct write-off method, accounts receivable are overstated because future estimated write-offs are not anticipated—write-offs are journalised as they occur. In contrast, under the allowance method, anticipated write-offs are estimated and reduce the ending accounts receivable balance. The resulting estimated balance of accounts receivable then represents the best estimate of the cash flows expected to be derived from the receivable.

PROBLEM SET A 7.8 Lexington Pty Ltd (a)

The allowance method. Since the balance in the allowance for doubtful debts is given, it must be using this method because the account would not exist if it were using the direct write-off method.

(b)

Dec 31 Bad Debts Expense……………………………………….10,750 ($11,750 – $1,000) Allowance for Doubtful Debts...................................................

(c)

(d)

(e)

(f)

Dec. 31

10,750

Bad Debts Expense............................................ 12,750 ($11,750 + $1,000) Allowance for Doubtful Debts...................................................

12,750

Allowance for Doubtful Debts …………………………………….5,000 Accounts Receivable ............................................................

5,000

Bad Debts Expense .................................................................. 5,000 Accounts Receivable ................................................................

5,000

The allowance for doubtful debt is a contra-asset account. It is subtracted from the gross amount of accounts receivable so that the net accounts receivable is reported in the statement of financial position.

7.22

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.9 Diego Ltd Jan. 5 Accounts Receivable—George Company ............................. 16,000 Sales............................................................

16,000

Notes Receivable…………………………………………16,000 Accounts Receivable—George Company ...............................................................

16,000

Notes Receivable ................................................. 8,000 Sales ......................................................................

8,000

Feb. 18

Apr.

May 25

Aug. 18

Sept. 1

Cash ($16,000 + $360) ............................................... 16,360 Notes Receivable .......................................................... Interest Revenue ........................................................... ($16,000 X 9% X 3/12)

16,000 360

Cash ($15,000 + $600) ............................................... 15,600 Notes Receivable .......................................................... Interest Revenue ........................................................... ($15,000 X 12% X 4/12)

15,000 600

Notes Receivable 6,000 Accounts Receivable—Avery Inc................................... Cash ($8,000 + $400) ................................................... 8,400 Notes Receivable .......................................................... Interest Revenue ........................................................... ($8,000 X 10% X 6/12) Accounts Receivable—Avery Inc. ................................. 6,120 ($6,000 + $120) Notes Receivable ................................................... Interest Revenue.................................................... ($6,000 X 8% X 3/12) Notes Receivable ................................................. 10,000 Sales .............................................................................

6,000

8,000 400

6,000 120

10,000

7.23

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.10 Qantas and Air New Zealand (a) Qantas A$ million

Receivables turnover ratio

Average collection period

Air New Zealand NZ$ million

$13,772 ($1,054 − $27 + $1,088 − $6)/2

$4,046 ($274 − $2 + $322 − $3)/2

=13.06 times

=13.69 times

365 = 28 days 13.06

365 = 26.7 days or 27 days 13.69

Qantas and Air New Zealand appeared to have very similar collection experiences in the latest financial period, as shown by the receivable turnover ratio of 13.06 times and 13.60 times, and the corresponding collection period of 28 days and 27 days.

(b)

Start End

Ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio): Qantas

Air New Zealand

$27 ÷ $1,054= 2.56% $6÷ $1,088 = 0.55%

$2 ÷ $274 = 0.73% $3 ÷ $322 = 0.93%

Qantas appeared to have tightened its credit-granting practices as the allowance for doubtful debt has decreased substantially and the corresponding credit risk ratio has improved from the start to the end of the year. On the other hand, Air New Zealand appeared to have continued with the same creditgranting practices over the year as both the allowance for doubtful debt and the associated credit risk ratio are maintained.

7.24

Chapter 7: Reporting and analysing cash and receivables

SOLUTIONS TO PROBLEM SET B

PROBLEM SET B 7.1 (a) i.

Cash inflows – Cash sales; Credit card sales ($22,500+$46,000 = $68,500)

ii.

Cash outflows – Loan payment; Operating expenses paid; Payment to suppliers ($4,000+$22,000+$18,000 = $44,000)

iii.

Assets – Food supplies; Cash at Bank; Accounts receivable; GST receivable ($18,500+$9,200+$7,200+$2,900 = $37,800)

iv.

Liabilities – Outstanding bank loan; Rent payable; Accounts payable ($15,000+$4,800+$14,400 = $34,200)

(b)

From a cash flow’s perspective, Caylie’s bakery looks like a healthy business as it has positive cash flows, i.e. cash inflows are much higher than cash outflows. Further, the value of assets is slightly higher than that of liabilities which is another good sign as a potential for investment.

(c)

In addition to the above figures and analysis concerning cash flows and assets and liabilities, Samantha should also look at non-financial information such as location of the café, clientele, quality of the staff and relationship with food suppliers etc. which are all important factors in influencing the continuous success of the business.

7.25

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.2 Rabbit Ears Pet Food Ltd

Principles

Application to Cash Disbursements

Establishment of responsibility.

Only the accountant and assistant accountant are authorised to sign cheques.

Segregation of duties.

Invoices must be approved by both the purchasing manager and the receiving department supervisor. Payment can only be made by the accountant or assistant accountant, and the cheque signatories do not record the cash disbursement transactions.

Documentation procedures.

Cheques are pre-numbered.

Physical, mechanical, and electronic controls.

Blank cheques are kept in a safe in the treasurer’s office. Only the accountant and assistant accountant have access to the safe.

Independent internal verification.

The cheque signatory compares the check with the approved invoice prior to issue. Bank and book balances are reconciled monthly by the assistant accountant.

Other controls.

Following payment, the invoices are stamped PAID.

7.26

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.3 Watson Pty Ltd Bank Reconciliation Statement 30 November 2015 (a) Balance as per bank statement Add: Outstanding deposits Less: Unpresented cheques: No. 2451 No. 2472 No. 2478 No. 2482 No. 2484 No. 2485 No. 2487 No. 2488

$17,394.60 1,225.00 18,619.60 $1,260.40 426.80 538.20 612.00 829.50 974.80 398.00 800.00 (5,839.70) $12,779.90

Balance as per Cash at Bank account (1) (1) Original Balance of Cash at Bank account Add: Note collected by bank Less:

Cheque printing charge Error in recording cheque no. 2479 ($1,750 - $1,570) Error in 20-11 receipt ($2,954 - $2,945) Adjusted balance of Cash at Bank account

(b)

$11,133.90 1,905.00 13,038.90 (70.00) (180.00) (9.00)

(259.00) $12,779.90

Debit 1,905 15

Credit

(In general journal form) Date Account Titles and Explanation Nov. 30 Cash at Bank Bank Charges Note Receivable Interest Revenue

1,800 120

30 Bank Charges Cash at Bank

30 Accounts Payable Cash at Bank

180

30 Accounts Receivable Cash at Bank

180

9 7.27

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.4 (a) Wizards and Dragons Pty Ltd Bank Reconciliation Statement 31 October 2016 Balance as per bank statement Add: Undeposited receipts

(b)

(c)

$18,380.00 3,795.51 22,175.51

Less: Unpresented cheques: No. Amount 62 $126.75 183 150.00 284 253.25 862 190.71 863 226.80 864 165.28

(1,112.79)

Balance as per Cash at Bank account (1)

$21,062.72

(1)

$21,892.72 200.00 22,092.72 (1,030.00) $21,062.72

Original Balance of Cash at Bank account Add: Bank credit (collec’n of note receivable) Adjusted balance per books (before theft) Less: Theft Adjusted balance of Cash at Bank account

The cashier attempted to cover the theft of $1,030.00 by: 1.

Not listing as unpresented three cheques totalling $530.00 (No. 62, $126.75’ No. 183, $150.00 and No. 284, $253.25).

Understating the unpresented cheques listed by $100. (The correct total is $582.79).

Subtracting the $200 credit from the bank balance instead of adding it to the book balance, thereby concealing $400 of the theft.

The principle of independent internal verification has been violated because the cashier prepared the bank reconciliation.

The principle of segregation of duties has been violated because the cashier had access to the accounting records and also prepared the bank reconciliation.

7.28

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.5 (a) Interactive Ltd Bank Reconciliation Statement 31 May 2016

Balance as per bank statement Add: Outstanding deposits Bank error – Teller cheque

$15,569.20 $1,672.30 1,200.00

Less: Unpresented cheques Balance as per Cash at Bank account (1)

2,872.30 18,441.50 (2,552.50) $15,889.00

Adjustment to bank account balance (1)

Original Cash at Bank balance per books Add: Error in recording cheque no. 1181 Add: Collection of note receivable

Less: Dishonoured cheque Error in 12 May receipt Bank cheque printing charge Adjusted Cash at Bank account balance

(b)

$10,949.00 360.00 6,120.00 17,429.00 ($1,400.00) (20.00) (120.00)

(1,540.00) $15,889.00

(In general journal form) Date Account Titles and Explanation May 31 Cash at Bank Bank Charges Note Receivable Interest Revenue 31 Accounts Receivable – W Hoad Cash at Bank

Debit 6,120 40

6,000 160 1,400 1,400

31 Sales Cash at Bank

31 Cash at bank Accounts Payable – M Helms

360

31 Bank Charges Cash at Bank

120

Credit

360

120 7.29

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.6 (a) & (b) Cain Ltd (a) Date Account Titles and Explanation Dec. 31 Bad Debts Expense Allowance for Doubtful Debts ($34,930 – 10,000)

Debit 24,930

Credit 24,930

(a) & (b) Bad Debts Expense Date 31/12/2016 Allowance for Doubtful Debt Date 31/12/2016 31/12/2016

Particular Allowance for Doubtful Debt

31/3/2017

Particular Balance Bad Debts Expense Accounts Receivable (Bad Debts Write-off)

31/5/2017

Accounts Receivable (Reverse Bad Debts Write-Off)

Dr $24,930

Balance Dr Cr $24,930

$24,930 $600

Balance Cr $10,000 $34,930 $34,330

$600

$34,930

(b) 2017 (1) Mar. 1 Allowance for Doubtful Debts Accounts Receivable

600 600

(2) May 1 Accounts Receivable Allowance for Doubtful Debts

600

1 Cash at Bank Accounts Receivable

600

30,200 30,200

7.30

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.7 Benson Ltd

(a) $3,625. (b) $875 [($57,500 X 5%) – $2,000]. (c) $2,876 [($57,500 X 5%) + $1,438]. (d) Under the direct write-off method, accounts receivable are overstated because future estimated write-offs are not anticipated—write-offs are journalized as they occur. In contrast, under the allowance method, anticipated write-offs are estimated and reduce the ending accounts receivable balance. The resulting estimated balance of accounts receivable, stated at recoverable amount, then represents the present value of the cash flows expected to be derived from the receivable.

PROBLEM SET B 7.8 Shine Ltd (a)

The allowance method. Since the balance in the allowance for doubtful debts is given, it must be using this method because the account would not exist if it were using the direct write-off method.

(b)

Dec. 31

(c)

(d)

(e)

(f)

Dec. 31

Bad Debts Expense ($16,750 - $1,500) Allowance for Doubtful Debts

15,250

Bad Debts Expense ($16,750 + $1,500) Allowance for Doubtful Debts

18,250

Allowance for Doubtful Debts Accounts Receivable

4,500

Bad Debts Expense Accounts Receivable

4,500

15,250

18,250

4,500

The allowance for doubtful debt is a contra-asset account. It is subtracted from the gross amount of accounts receivable so that net accounts receivable is reported in the statement of financial position.

7.31

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.9 Elam Ltd General Journal Date Account Titles and Explanation Jan. 5 Accounts Receivable Sales Feb. 2 Notes Receivable Accounts Receivable

Debit 6,000

Credit 6,000

6,000 6,000

12 Notes Receivable Sales

7,800

26 Accounts Receivable Sales

4,000

Apr. 12 Cash at Bank Notes Receivable

7,800

June 2 Cash at Bank Notes Receivable

6,000

July 15 Notes Receivable Sales

3,000

Aug. 15 Cash at Bank Interest Expense Notes Receivable

2,940 60

7,800

4,000

7,800

6,000

3,000

7.32

Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.10 CSR and CCA (a)

Receivables turnover ratio

Average collection period

CSR $M

CCA $M

$3,754.9 ($562.1 − $9 + $491.9 − $7.5) / 2

$4,546.8 ($671− $7.8 + $777.6 − $9) / 2

= 7.24 times

= 6.35 times

365 = 50.4 days 7.24

365 = 57.5days 6.35

CSR’s receivable turnover ratio was slightly higher than CCA’s, which means on average, CSR was more efficient than CCA in turning receivables into cash in that year. This may reflect differences in the terms allowed to customers and the types of customers (retail versus business customers). (b)

Start End

Ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio): CSR

CCA

$9 ÷ $562.1 = 1.6% $7.5 ÷ $491.9 = 1.5%

$7.8 ÷ $671 = 1.2% $9 ÷ $777.6 = 1.2%

Both companies did not appear to have changed their credit-granting practices over the year as the credit risk ratios are maintained from the start to the end of the year.

7.33

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 7.1

FINANCIAL REPORTING PROBLEM Domino’s Pizza

(a)

The consolidated statement of financial position in 2013 shows cash and cash equivalents as $18,691 (in thousands) as at 30 June 2013. The cash balance was $40,340 (in thousands) at the start of the 2012/13 financial year.

(b)

Cash is defined as including cash on hand and in banks net of outstanding bank overdrafts. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a maturity of three months or less at the date of acquisition.

(c)

The consolidated statement of cash flows indicates net cash provided by operations was $33,180 (in thousands) during 2012/13.

(d)

The ratio of cash to daily cash expenses for 2013 was: Cash balance reported in the Balance sheet is (in thousands) $18,691 Cash payments for operation (in thousands) $282,864+$405+$11,796 = $295,065 Daily cash expenses (in thousands) $295,065 /365 = $808.40 per day $18,691/$808.40 = 23.1 days

BUILDING BUSINESS SKILLS 7.2

COMPARATIVE ANALYSIS PROBLEM Domino’s Pizza

(a)

Dollars are in $’000

Cash/cash equivalents balance Cash expenses Average daily cash expenses Ratio of cash to daily cash expenses

(b)

2013

2012

$18,691 $295,065 $808.40 23.1 days

$40,340 $259,206 $710.15 56.8 days

2012 has a stronger cash position as indicated by the ratio of cash to daily cash expenses.

7.34

Chapter 7: Reporting and analysing cash and receivables

CRITICAL THINKING BUILDING BUSINESS SKILLS 7.3

GROUP DECISION CASE Campus Fashions

(a)

(b)

2017

2016

2015

Net credit sales

$600,000

$720,000

$480,000

Credit and collection expenses: Collection agency fees Salary of accounts receivable clerk Uncollectible accounts Invoicing and mailing costs Credit investigation fees Total Total expenses as a percentage of net credit sales

$2,940 4,560 9,600 3,000 900 $21,000 3.5%

$3,000 4,560 11,520 3,600 1,080 $23,760 3.3%

$1,920 4,560 7,680 2,400 720 $17,280 3.6%

Average accounts receivable (5%)

$30,000

$36,000

$24,000

Investment earnings (10%)

$3,000

$3,600

$2,400

Total credit and collection expense per above Add: Investment earnings* Net credit and collection expense Net expense as a percentage of net sales

$21,000 3,000 $24,000 4.0%

$23,760 3,600 $27,360 3.8%

$17,280 2,400 $19,680 4.1%

*The investment earnings on the cash tied up in accounts receivables is an additional expense of continuing the existing cash policies. (c)

The analysis shows that the credit card fee of 4% of net credit sales will be higher than the percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 4% will be less than the company’s percentage cost if annual net credit sales are less than $600,000. Finally, the decision hinges on: (1) the accuracy of investment earnings (2) the expected trend in credit sales (3) the effect the new policy will have on sales. Non-financial factors include the effects on customer relationships of the alternative credit policies and whether the Berkvoms want to continue with the handling of their own accounts receivable.

7.35

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 7.4

ETHICS CASE Shirts Galore Ltd

(a)

The stakeholders in this situation are: The managing director of Shirts Galore Ltd The chief accountant of Shirts Galore Ltd The shareholders of Shirts Galore Ltd Any other users of the financial statements of Shirts Galore Ltd.

(b)

Yes. The chief accountant is posed with an ethical dilemma – should he/she follow the managing director’s ‘suggestion’ and prepare misleading financial statements (understated net profit and assets) or should he/she attempt to stand up to and possibly anger the managing director by preparing true and fair financial statements.

(c)

Shirts Galore’s growth rate should be a product of the change in profit resulting from the application of generally accepted accounting principles in the preparation of financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

7.36

Chapter 7: Reporting and analysing cash and receivables

BUILDING BUSINESS SKILLS 7.5

COMMUNICATION ACTIVITY

Ms I Rich Manager Aardvark Pty Ltd

Dear Ms Rich During our audit of your financial statements we reviewed the internal controls over cash receipts. The weaknesses we discovered and our suggested improvements are listed below. 1.

Weaknesses A list of cheques received is not prepared by the person who opens the mail.

Suggested Improvement This list should be prepared so that it can later be compared with the daily cash summary. While this procedure does not assure that all cheques will be listed, it does allow the company to verify that all cheques on the list were deposited.

Mail is opened by only one When this occurs, there is no assurance that all person. incoming cheques are forwarded to the cashier’s department.

The cashier is allowed to Under this arrangement it is possible for the cashier to open the mail. open the mail, prepare the cash summary and make the bank deposit. This involves no segregation of duties as the cashier controls the cash from the time it is received until it is deposited in the bank.

The accounts receivable Again, there is poor segregation of duties. In this clerk is allowed to open the case, the clerk could write off a customer’s account as mail. uncollectible and then misappropriate the collection when it is received.

Mail receipts are deposited This makes the receipts vulnerable to robbery and to weekly. misappropriation. The receipts should be deposited intact daily.

We would be pleased to discuss the weaknesses and our recommended improvements with you at your convenience. Yours sincerely

Farmers, Chartered Accountants

7.37

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 7.6

COMMUNICATION ACTIVITY “Trail of guilt”

(a)

The demand for forensic accountants has been increasing over the past decade because of the increase of investigation in the number of corporate fraud cases being committed by unscrupulous staff in the wake of the global financial crisis. Demand is also driven by the number of corporate collapses being investigated by regulators and creditors.

(b)

Some of the emerging areas of forensic investigation include:

(c)

(d)

•

Consulting-style of work

•

Helping companies with their risk-management programs

•

Data mining

Some of the forensic accounting work against high-tech corporate crimes include: •

Investigating stealing by setting up “ghost” employees on the payroll;

•

Detecting inconsistencies in funds transfers and non-existent tax-file numbers.

•

Interrogating very complex and large databases to match bank account details for payments

Discussion question on whether students will consider taking on forensic accounting work.

7.38

Chapter 8: Reporting and analysing non-current assets

CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises

Problems

Explain the business context of noncurrent assets and the need for decision making for non-current assets

Describe how the cost principle applies to property, plant and equipment assets.

1A, 2A, 1B, 2B

Explain the concept of depreciation.

Calculate depreciation using various methods and contrast the expense patterns of the methods.

2, 3

2, 3, 4, 7, 10

2A, 4A, 6A, 7A, 8A, 2B, 4B, 6B, 7B, 8B

Account for subsequent expenditures.

Account for asset impairments.

5A, 5B

Account for the revaluation of property, plant and equipment assets.

6, 7

4A, 6A, 4B, 6B

Account for the disposal of property, plant and equipment assets.

6, 8

2A, 3A, 4A, 2B, 3B, 4B

Describe the use of an asset register.

10.

Identify the basic issues related to reporting intangible assets.

9, 10, 11

9A, 9B

11.

Describe the common types of intangible assets.

12.

Explain the nature and measurement of agricultural assets.

13.

Account for the acquisition and depletion of natural resources.

14.

Indicate how non-current assets are reported in the statement of financial position, and explain the methods of evaluating the use of non-current assets.

6, 7

10, 12

2A, 10A, 2B, 10B

8.1

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS ANSWERS TO QUESTIONS 1.

Review the chapter for the kinds of questions decision makers require for non-current assets including what non-current assets does the entity need to sustain or expand its future operations and profitability? How much of the entity’s resources should be tied up in non-current assets? Should an entity buy or rent?

For PPE assets, the cost principle states that PPE assets are recorded at cost, which consists of all expenditure necessary to acquire the asset and make it ready for its intended use.

GST only impacts on accounting for the purchase and sale of non-current assets.

The primary advantages of leasing are:

(a)

reduced risk of obsolescence

(b)

nil or low down payment

(c)

shared tax advantages

(d)

reduced recorded assets and liabilities.

The effects of the three methods on annual depreciation expense are: (a)

Straight-line – constant amount

(b)

Diminishing-balance – decreasing amount

(c)

Units-of-production – varying amount.

Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset. These expenditures are usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected, whereas expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. These expenditures usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense account as incurred and are an expense in the income statement.

In a sale of PPE assets, the carrying (book) value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the carrying value of the PPE asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying value of the PPE asset sold, a loss on disposal occurs.

8.2

Chapter 8: Reporting and analysing non-current assets

Depreciation, amortisation and depletion are all concerned with writing off the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a PPE asset to expense over its useful life in a rational and systematic manner. Amortisation is the allocating of the cost of an intangible asset to expense. Depletion is the allocating of the capitalised preproduction costs of natural resources to inventory to reflect the units removed. The depleted amounts are recognised as expenses as part of Cost of Sales, when the natural resource inventory is sold.

The favourable attributes which could result in goodwill include exceptional management, desirable location, good customer relations, skilled employees, high quality products, fair pricing policies and harmonious relations with trade unions.

10.

After initial recognition of cost, each class of non-current asset may be measured on the cost or fair value basis. Any revaluations of non-current assets must be carried out by class of asset. For intangibles to be revalued there must be an active market. increases and decreases within the same class must not be offset against one another. Any initial revaluation to a value above the up-to-date carrying amount is referred to as a revaluation increase and is credited directly to equity to an account entitled Revaluation Surplus. Any initial revaluation to a value below the up-to-date carrying amount is a revaluation decrease. A revaluation decrease is treated as an expense in the income statement. If in a subsequent period the initial revaluations reverse, the revaluation increase (decrease) for an asset it should be offset against the previous revaluation decrease (increase) of that asset, to the extent of the amount of the previous revaluations. For reversals against the Revaluation Surplus there must be balances available for that asset in the reserve. The steps to record the revaluation are: (a)

Record the depreciation (if it is a depreciable asset) to date of revaluation

(b)

Transfer the balance of the contra account, Accumulated Depreciation, to the asset account to give the assets carrying value

(c)

Record the revaluation.

11.

Agricultural assets are living animals and plants (biological assets) that are a result of agricultural activity. Agricultural assets include forests, livestock, crops, fruit bearing trees and produce of aquaculturalists. Once the assets are mature and no longer ‘living’ – the tree is felled, the crops harvested, sheep shorn or animals are slaughtered – the assets fall within the scope of IAS 102 Inventories and are measured according to that standard.

12.

By selecting a higher estimated useful life, Jonty Ltd is spreading the PPE asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and profit is higher. Amber Ltd’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower profit. Therefore, Jonty Ltd may appear to be a better performer.

8.3

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8.1 Knight Ltd The GST exclusive amount of all of the expenditure except for fencing should be included in the cost of the land. Therefore the cost of the land is: (a) $214,600* (b) $195,091 (214,600/1.1)** (c) $186,609 (214,600/1.15)** * $180,000 + $10,000 + $9,500 + $8,100 + $7,000. ** To calculate the GST exclusive amount divide the GST inclusive amount by (1+GST rate). BRIEF EXERCISE 8.2 Brianna Ltd Purchase: GST Exclusive amount is $96,600 Depreciable amount is $92,600 ($96,600 - $4,000). With a 5 year useful life, annual depreciation is $18,520 ($92,600 ÷ 5). Under the straight-line method, depreciation is the same each year. Thus, depreciation is $18,520 for both the first and second years.

BRIEF EXERCISE 8.3 Brianna Ltd The declining-balance rate is 30% (1/5 x 1.5) and this rate is applied to book value at the beginning of the year. The calculations are: Carrying Amount

Rate

Depreciation

Year 1

$96,600

30%

$28,980

Year 2

($96,600 - $28,980)

30%

$20,286

8.4

Chapter 8: Reporting and analysing non-current assets

BRIEF EXERCISE 8.4 James Ltd (a) Accumulated Depreciation – Delivery Equipment Delivery Equipment

$59,000

(b) Accumulated Depreciation – Delivery Equipment Loss on Disposal Delivery Equipment

$56,000 $3,000

$59,000

$59,000 $59,000

Cost of delivery equipment Less accumulated depreciation Carrying value at date of disposal Proceeds from sale Loss on disposal

56,000 3,000 0 $ 3,000

BRIEF EXERCISE 8.5 Elliot Ltd (i) (a)

1/7/15

Patent

$220,000 Cash/Accounts Payable

31/6/16

(b)

(ii) (a)

Patent Amortisation Expense ($220,000 ÷ 10) Accumulated Amortisation Patents

$220,000 $22,000 $22,000

Intangible Assets $198,000 The patent cost less accumulated amortisation would be shown in the notes to the financial statements with the net amount recorded in the Statement of Financial Position.

1/7/15

Patent GST

$200,000 $20,000 Cash/Accounts Payable

31/6/16

(b)

Patent Amortisation Expense ($200,000 ÷ 10) Accumulated Amortisation Patents

$220,000 $20,000 $20,000

Intangible Assets $180,000 The patent cost less accumulated amortisation would be shown in the notes to the financial statements with the net amount recorded in the Statement of Financial Position.

8.5

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BRIEF EXERCISE 8.6 Fish Ltd (a)

Average useful life

Average cost of PPE assets Depreciation expense

= ((40.8b+39.2b)/2)/1.6b =25 years

(b)

Average Age

Accumulated depreciation Depreciation expense

=9.6b/1.6b = 6.0 years (c)

Asset turnover ratio

Net sales Average total assets

=21.17b/ (37.42b+35.58b)/2 = 0.58 times

BRIEF EXERCISE 8.7 Irish Ltd Partial Statement of Financial Position as at 31 March 2017

Non-Current Assets Property, plant and equipment Goodwill Other intangibles assets

Note

$ ‘000

13 15 16

1916.9 198.9 59.4

In the Notes to the financial statements the following disclosures would be made: Note 13 Property, plant and equipment Land and buildings Plant and equipment Accumulated depreciation Total property, plant and equipment

$ ‘000 $782.4 3294.6 (2160.1)

Notes 15 & 16 Goodwill Goodwill Impairment of goodwill Other intangibles Accumulated amortisation Total goodwill and intangible assets

$ ‘000 $520.4 (321.5) 145.9 (86.5)

$ ‘000

$1916.9

$ ‘000 $198.9 59.4 $258.3

8.6

Chapter 8: Reporting and analysing non-current assets

SOLUTIONS TO EXERCISES EXERCISE 8.1 Sunny Ltd (a)

The following points explain the application of the cost principle in determining the acquisition of PPE assets. 1. Under the cost principle, the acquisition cost for a PPE asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. 2. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. 3. Cost consists of the fair value of all expenditures necessary to acquire the asset and make it ready for its intended use. 4. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

(b)

1. 2. 3. 4.

Land Delivery Truck Land Improvements Prepaid Insurance

5. 6. 7. 8.

Delivery truck Factory Machinery Motor Vehicle Expense Factory Machinery

8.7

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 8.2 Tops Ltd Cost of new machine $228,000 purchased 1 October 2015 Balance date 31 December Estimated residual $28,000 Depreciable amount = Cost less Residual = $228,000 - $28,000 = $200,000 (a)

(b)

Straight line depreciation rate

100% ÷ 10 years = 10%

2015 Depreciation expense

= = =

Depreciable amount x dep’n rate x 3 months $200,000 x 10% x 3/12 $5,000

2016 Depreciation expense

= = =

Depreciable amount x dep’n rate $200,000 x 10% $20,000

Diminishing-balance method: Straight line rate doubled (given in question) 10% x 2 = 20% 2015 depreciation

$228,000 x 20% x 3/12 = $11,400

Carrying value January 1, 2016 = $228,000 - $11,400 = $216,600 Remember the Diminishing-balance method applies the rate to the carrying value not the depreciable amount. 2016 depreciation (c)

Units-of-production method: Depreciation cost per unit

2015 depreciation

$216,600 x 20% = $43,320

= = =

Depreciable amount ÷ Total units of production $200,000 ÷ 40,000 hours $5.00 per hour

1800 hours x $5.00 = $9,000.

8.8

Chapter 8: Reporting and analysing non-current assets

EXERCISE 8.3 AJ Bus Ltd (a)

Bus purchased $268,000 and residual value $10,000. Therefore the depreciable amount $258,000 ($268,000 - $10,000). Depreciation cost per unit

= = =

(b)

Depreciable amount ÷ Total units of production $258,000 ÷ 120,000 kilometres $2.15 per kilometre

Calculation

Years 2015 2016 2017 2018 2019

Annual Units of Depreciation Depreciation Production X Cost/Unit = Expense 29,000 $2.15 $62,350 28,000 2.15 60,200 30,000 2.15 64,500 20,000 2.15 43,000 13,000 2.15 27,920 120,000 $258,000

End of Year Accumulated Depreciation $62,350 122,550 187,050 230,050 258,000

Carrying Value $205,650 145,450 80,950 37,950 10,000

8.9

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 8.4 Lion Ltd Balance date 30 June 1 January 2016

Equipment Cost Estimated Residual Depreciable Amount

Straight line depreciation rate (a)

100% ÷ 8 years = 12.5%

Depreciation expense for year 2016 $160,000 x 12.5% x 6 months

$10,000

Depreciation expense for year 2017 $160,000 x 12.5%

$20,000

Journal entry for overhaul (i)

(ii)

(c)

$180,000 20,000 $160,000

Equipment Cash/Payables

$8,800

Equipment GST Paid Cash/Payables

$8,000 800

$8,800

Depreciation expense for year 2019:

Carrying value at 30/6/18 $180,000 less ($10,000 + $20,000 + $20,000) = $130,000. 1 July 2018 addition $8,800. Therefore the carrying amount is now $138,800 which will also be the depreciable amount as the expected residual is nil. Depreciation rate is 100% ÷ 5 years = 20% Depreciation expense 2019 is $138,800 x 20% = $27,760.

8.10

Chapter 8: Reporting and analysing non-current assets

EXERCISE 8.5 Able Ltd Balance date 30 June 1 Oct 2016

Equipment Cost Estimated Residual Depreciable Amount

$160,000 10,000 $150,000

Useful life is 8 years  depreciation rate 12.5% Depreciation 30/6/2017 = $150,000 x 12.5% x 8/12 = $12,500

Carrying amount 30/6/2017= $160,000 - $12,500 = $147,500 Recoverable amount $98,750 is the higher of the net selling price ($98,750) and value in use ($90,000) Impairment write down = $147,500 - $98,750 = $48,750 Journal Entries 1/10/1 6

Machinery

Cash/Payables (Being purchase) 30/6/17 Depreciation Expense Accumulated Dep’n Machinery (Being annual depreciation) 1/7/17 Impairment Loss Accumulated Impairment Loss (Being impairment writedown)

$160,000 $160,000 12,500 12,500 48,750 48,750

8.11

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 8.6 Wall Ltd 1 January 2015

Equipment Cost Estimated Residual Depreciable Amount

$55,000 5,000 $50,000

Useful life 8 years. Depreciation rate 100% ÷ 8 years = 12.5% Annual depreciation is $6,250p.a. ($50,000 ÷ 8 or $50,000 x 12.5%) After revaluation 1 July 2017, new depreciation is over 7 years. (a) 1/1/15

30/6/15

30/6/16

30/6/17

Journal Entries Equipment Cash (Being purchase of equipment)

Sale 1/1/19

1/1/19

$ 55,000 55,000

Depreciation Expense Accumulated Depreciation Equipment ($50,000 ÷ 8 x 6/12)

3,125

Depreciation Expense Accumulated Depreciation Equipment ($50,000 ÷ 8)

6,250

Depreciation Expense Accumulated Depreciation Equipment ($50,000 ÷ 8)

6,250

Revaluation 1/7/17 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $39,375)

30/6/18

3,125

6,250

15,625 15,625

Equipment Revaluation Surplus (New carrying amount $70,000. Revaluation (70,00039,375) = 30,625)

30,625

Depreciation Expense Accumulated Depreciation Equipment 70,000 ÷ 7 years]

10,000

Depreciation Expense Accumulated Depreciation Equipment [$70,000  7 years x 6/12 dep’n to date of sale]

5,000

Accumulated Depreciation Equipment Cash Equipment Gain on sale of equipment (Being disposal of equipment)

15,000 56,500

Calculation of gain on sale Cost Accumulated Depreciation (10,000 + 5,000) Carrying amount of equipment sold Proceeds from sale Gain on sale

30,625

10,000

5,000

70,000 1,500

$70,000 (15,000) 55,000 56,500 $1,500

8.12

Chapter 8: Reporting and analysing non-current assets

(b) 1 January 2015

Equipment Cost Estimated Residual Depreciable Amount

$50,000 5,000 $45,000

Useful life 8 years. Depreciation rate 100% ÷ 8 years = 12.5% Annual depreciation is $5625p.a. ($45,000 ÷ 8 or $45,000 x 12.5%) After revaluation 1 July 2017, new depreciation is over 7 years.

1/4/15

30/6/15

30/6/16

30/6/17

Journal Entries Equipment GST Paid Cash (Being purchase of equipment)

Sale 1/1/19

1/1/19

$ 50,000 5,000 55,000

Depreciation Expense Accumulated Depreciation Equipment ($45,000÷ 8 x 6/12)

2,813

Depreciation Expense Accumulated Depreciation Equipment ($45,000 ÷ 8)

5,625

Depreciation Expense Accumulated Depreciation Equipment ($45,000 ÷ 8)

5,625

Revaluation 1/7/17 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $35,937)

30/6/18

2813

5,625

14,063 14,063

Equipment Revaluation Surplus [New carrying amount $70,000. Revaluation (70,00035,937)=34,063]

34,063

Depreciation Expense Accumulated Depreciation Equipment (70,000 ÷ 7 years)

10,000

Depreciation Expense Accumulated Depreciation Equipment [$70,000  7 years x 6/12 dep’n to date of sale]

5,000

Accumulated Depreciation Equipment Cash Loss on sale of equipment GST Collected Equipment (Being disposal of equipment)

15,000 56,500 3,636

Calculation of loss on sale Cost Accumulated Depreciation (10,000 + 5,000) Carrying amount of equipment sold Proceeds from sale (net of GST) Loss on sale

34,063

10,000

5,000

5,136 70,000

$70,000 (15,000) 55,000 51,364 $3,636

8.13

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 8.7 (a) Capers Ltd Balance date 30 June 1 July 2014 Equipment Cost Estimated Residual Depreciable Amount

$200,000 15,000 $185,000

Useful life 10 years. Depreciation rate 100% ÷ 10 years = 10% Annual depreciation is $18,500 p.a. ($185,000 x 10%) Journal Entries 1/7/14

$ 200,000 20,000

Equipment GST Paid Cash (Being purchase of equipment)

220,000

30/6/15 Depreciation Expense Accumulated Depreciation Equipment ($185,000 x 10%)

18,500

30/6/16 Depreciation Expense Accumulated Depreciation Equipment ($185,000 x 10%)

18,500

Revaluation 1/7/16 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $163,000) Equipment Revaluation Surplus (New carrying amt $163,000 + $17,000 = $180,000) 30/6/17 Depreciation Expense Accumulated Depreciation Equipment [($180,000 - $10,000) ÷ 8 years]

1/1/18

Revaluation downward Depreciation Expense Accumulated Depreciation Equipment [($180,000 - $10,000) ÷ 8 years x 6/12] Accumulated Depreciation Equipment Equipment (Carrying value before revaluation $148,125)

18,500

37,000 37,000

17,000 17,000

21,250 21,250

10,625 10,625

31,875 31,875 downwards

Revaluation Surplus Revaluation Expense Equipment (Being revaluation downward by $20,000)

17,000 3,000 20,000

(b) New carrying value = $128,125 (148,125-20,000)

8.14

Chapter 8: Reporting and analysing non-current assets

EXERCISE 8.8 Zhou Ltd 2016 Jan. 1

June 30

Accumulated Depreciation – Machinery Machinery (Machine scrapped fully depreciated. 66,000/1.1)

$ 60,000

60,000 Cost

Depreciation Expense Accumulated Depreciation – Computer [$30,000 (33,000/1.1) x 1/6 x 6/12 – dep’n to date of sale]

2,500

Cash Accumulated Depreciation – Computer Loss on Disposal Computer GST collected

13,200 17,500 500

Calculation of loss on disposal Cost Accumulated Depreciation (5,000 x 3 years + 2,500) Carrying amount of equipment sold Proceeds from sale excluding GST Loss on disposal Dec 31

Dec 31

2,500

30,000 1,200

$30,000 (17,500) 12,500 12,000 $500

Depreciation Expense Accumulated Depreciation – Truck [($20,000* - $2,000) x 1/6] (Update depreciation) *22,000/1.1

3,000

Loss on Scrapping Accumulated Depreciation – Truck [($20,000 - $2,000) x 5] Delivery Truck (Removal of asset from books)

5,000 15,000

3,000

20,000

8.15

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 8.9 Wilkins Ltd

1/1/15

1/7/15

1/9/15

Patents GST Paid Cash (Purchase of patent useful life 10 years)

$ 400,000 40,000

440,000

Franchise GST Paid Cash (Purchase of franchise – remaining useful life 6 years)

300,000 30,000

Research and development expense GST Paid Cash (Assumed it was basic research and therefore expensed)

140,909.01 14,091.91

Amortisation calculations: Patent Expense ($400,000 ÷ 10) Franchise Expense [($300,000 ÷ 6) X 6/12] 31/12/15 Amortisation Expense Accumulated Amortisation Patents Accumulated Amortisation Franchise Ending balances 31/12/15: Patent = Franchises =

330,000

155,000

40 000 25,000 65,000 40,000 25,000

$360,000 ($400,000 - $40,000) $275,000 ($300,000 - $25,000)

8.16

Chapter 8: Reporting and analysing non-current assets

EXERCISE 8.10 (a)

A company should depreciate its buildings because depreciation is necessary in order to allocate the cost of the buildings to the reporting periods in which the future benefits are consumed. Without depreciation, the depreciable assets would be overstated and not be a faithful representation of their future benefits.

(b)

A building can have a nil carrying value if it had no estimated residual value and it was fully depreciated – that is, if it has been used for a period longer than its expected life. Because depreciation is used to allocate cost rather than to reflect market value, it is not at all unlikely that a building could have a low or nil carrying value, but a positive market value.

(c)

Examples of intangibles that might be found on a university campus are; franchises of a bookstore chain or food outlets, and patents developed by academics.

(d)

Typical company or product trade names are: Clothes: Perfume: Cars: Shoes: Breakfast Cereals:

Colorado, Esprit, Lisa Ho, King Gee, Guess, Trelise Cooper. Tommy Hilfiger, Estee Lauder, Chanel No. 5, Lancôme. Daewoo, Nissan, Holden, Ford, Toyota. Honda Nike, Diesel, Vans, Diana Ferrari, Sachi, Ziera Rice Bubbles, Coco Pops, Weet-Bix, Uncle Toby’s.

Trade names and trademarks are reported on the Statement of Financial Position if the trade name or trademark is purchased. If it is developed by the entity, it cannot be recognised.

8.17

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

EXERCISE 8.11 MouseTrap Ltd Issue to be raised in the memo includes: By increasing the estimated life on its capitalised software costs, MouseTrap will increase its reported profit because amortisation expense will decrease. From an analyst’s perspective, one concern would be whether this twelve-year life is reasonable given that software products become obsolete very quickly. Another concern is that the qualitative characteristic of comparability is affected: for example, it becomes more difficult to compare the current year’s results with previous years’ because previous years used the three-year estimated life. EXERCISE 8.12 Beta Ltd Year ended 31 January 2015. (a)

Average useful life of PPE Assets

= = =

(b)

Average age of PPE Assets

= = =

(c)

Asset turnover ratio

= = =

Average cost of PPE assets Depreciation expense ($105,282 + $90,861)  2 $6,399 15.3 years Accumulate d depreciati on Depreciation expense $38,797 $6,399 6 years Net sales Average total assets $1,663,970 ($609,041 + $515,357 )  2 3 times

(d) The average age of PPE assets is often compared with the average useful life calculation. If the ratios are close together, the company may need to replace its assets in the near future, assuming the assumptions made in calculating the ratios are correct. (A test of these assumptions might be to compare the calculations with industry averages or those of competitors.) The asset turnover ratio is one indicator of how efficient a company is using its assets, usually the higher the ratio the better.

8.18

Chapter 8: Reporting and analysing non-current assets

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 8.1 Cameron Ltd Item 1 2 3 4 5 6 7 8 9

Land $250,000

Building

Other Accounts $4,900

Land Improvements

31,800 5,320

Land Improvements Land Tax Expense

27,000 7,270 $21,900 51,000 629,500

(12,700) $271,570

$702,400

$42,020

8.19

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 8.2 Balance date is 30 June Porter Ltd (a) 1 2015 Aug 1

Land

$ 2,630,000

Cash (Purchase of Land) Oct 1

Oct 1

Dec 1

$ 2,630,000

Depreciation Expense Accumulated Dep’n – Equipment ($675,000 x 1/10 x 3/12)

16,875

Cash Accumulated Dep’n – Equipment Equipment Gain on Disposal

350,000 455,625

Cost (1/1/09) Accum. Dep’n – Equipment [($675,000 x 1/10 x 6.75yrs)] Carrying amount Cash proceeds Gain on disposal

$675,000 $455,625

Cash

1,800,000

16,875

675,000 130,625

219,375 350,000 $130,625

Land Gain on Disposal (Sale of Land)

300,000 1,500,000

2016 Jan 1

June 30

Equipment Cash (Purchase of Equipment)

1,000,000 1,000,000

Accumulated Dep’n – Equipment Equipment (Equipment fully depreciated on 31/12/2014)

470,000

Depreciation Expense Accumulated Dep’n – Buildings ($28,500,000 x 1/40)

712,500

470,000

(a) 2 2016 June 30

June 30

712,500

Depreciation Expense Accumulated Depreciation - Equipment

4,735,500

$46,855,000* x 1/10 $1,000,000 x 1/10 x 6/12

4,685,500 50,000 4,735,500

4,735,500

*($48,000,000 - $675,000 - $470,000)

8.20

Chapter 8: Reporting and analysing non-current assets

(a) 3 Porter Ltd Partial Statement of financial position as at 30 June 2016 Property, plant and equipment* Land Buildings Less: Accumulated depreciation – buildings Equipment Less: Accumulated depreciation – equip. Total property, plant and equipment

$6,330,000 $28,500,000 12,812,500 47,855,000 8,826,750

15,687,500 39,028,250 $61,045,750

* See T-accounts which follow. Note that in the external reports the total of Property, plant and equipment would be a one line item in the statement of financial position and the detailed breakdown above would be disclosed in the notes to the financial statements. Land 4,000,000 1/12/15 2,630,000 30/6/16 6,630,000 6,330,000

30/06/15 Bal. B/d 1/8/15 Cash 30/6/16

Bal. b/d

Accumulated Depreciation – Buildings 30/06/15 12,812,500 30/06/16 Dep’n Exp. 12,812,500 30/06/16 Bal b/d

Bal. b/d

Equipment 48,000,000 1/10/15 1,000,000 30/6/16 - 30/06/16 49,000,000 47,855,000

30/06/15 01/01/16 Cash

30/06/16 Bal. b/d

01/10/15 30/06/16 30/06/16

300,000 6,330,000 6,630,000

Buildings 28,500,000

30/06/15

30/06/16

Cash Bal. c/d

Cash, etc. Acc. Depr. Bal. c/d

Accumulated Depreciation – Equipment Equipment, etc. 455,625 30/06/15 Equip. 470,000 1/10/15 Dep’n Exp. Bal. c/d 8,826,750 30/06/16 Dep’n Exp. 9,752,375 31/12/16 Bal. b/d

12,100,000 712,500 12,812,500 12,812,500

675,000 470,000 47,855,000 49,000,000

5,000,000 16,875 4,735.500 9,752,375 8,826,750

8.21

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(b) 1 2015 Aug 1

Oct 1

Land GST Paid Cash (Purchase of Land)

$ 2,390,909 239,091

2,630,000

Depreciation Expense Accumulated Dep’n – Equipment ($613,636($675000/1.1) x 1/10 x 3/12)

15,341

Cash Accumulated Dep’n – Equipment Equipment Gain on Disposal GST Collected

350,000 414,204

15,341

613,636 118,750 31,818

Cost (1/1/09) (675000/1.1) Accum. Dep’n – Equipment [($613,636 x 1/10 x 6.75yrs)] Carrying amount Cash proceeds (350,000/1.1) Gain on disposal Dec 1

Cash

$613,636 414,204 199,432 318,182 $118,750

1,800,000

Land ($300000/1.1) GST Collected (($1800000/1.1)*1/10) Gain on Disposal (Sale of Land)

272,727 163,636 1,363,637

2016 Jan 1

June 30

Equipment GST Paid Cash (Purchase of Equipment)

909,091 90,909

Accumulated Dep’n – Equipment Equipment (Equipment fully depreciated on 31/12/2014)

470,000

Depreciation Expense Accumulated Dep’n – Buildings ($28,500,000 x 1/40)

712,500

1,000,000

470,000

(b) 2 2016 June 30

June 30

712,500

Depreciation Expense Accumulated Depreciation – Equipment

4,737,091

$46,916,364* x 1/10 $909,091 x 1/10 x 6/12

4,691,636 45,455 4,737,091

4,737,091

*($48,000,000 - $613,636 - $470,000)

8.22

Chapter 8: Reporting and analysing non-current assets

Porter Ltd Partial Statement of financial position as at 30 June 2016 Property, plant and equipment Note Land 1 Buildings Less: Accumulated depreciation – buildings Equipment 2 Less: Accumulated depreciation – equip. 3 Total property, plant and equipment

$6,188,182 $28,500,000 12,812,500 47,825,455 8,868,228

15,687,500 38,957,227 $60,832,909

Notes 1 Land: 4,000,000+2,390,909-272,727 2 Equipment: 48,000,000-613,636+909,091-470,000 3 Accumulated Depreciation: 5,000,000+15,341-41,204-470,000+4,737,091

8.23

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 8.3 CupCake Ltd 2015 Jan 1

June 30

Accumulated Dep’n – Machinery Machinery (Scrapping machinery fully depr’d 31/12/15) Depreciation Expense Accumulated Dep’n – Computer (Update depreciation $49,000 x 1/7x 6/12)

June 30

Cash Accumulated Depreciation – Computer Gain on Disposal Computer (Sale of computer) Calculation of disposal Cost (1/1/12) Accum. Dep’n – Equipment [($49,000 x 1/7 x 3.5yrs)] Carrying amount Cash proceeds Gain on disposal Dec 31

Dec 31

$ 52,000

52,000

3,500 3,500

31,000 24,500 6,500 49,000

$49,000 24,500 24,500 31,000 $6,500

Depreciation – Truck Accumulated Dep’n – Truck ([($27,000-$3,000) x 1/8] update depr’n)

3,000

Accumulated Dep’n – Truck (5yrs) Loss on Disposal Truck (Scrapping of truck after 5 years)

15,000 12,000

3,000

27,000

8.24

Chapter 8: Reporting and analysing non-current assets

PROBLEM SET A 8.4 Jupiter Ltd Year ending 30 June 2016 (a)

1/7/15

1/10/15

(b)

30/6/16

Land Buildings Cash/Payables

$ 400,000 250,000

650,000

Machinery Cash/Payables

120,000

Depreciation Expense Accumulated Depreciation - Building Accumulated Depreciation - Machinery (Depreciation Building $250,000 ÷ 20 = $12,500) (Depreciation Machinery

55,700

Rate

120,000

12,500 43,200

= 1 − 4 9,000

120,000

= 1 - .5233 = 48% (approximately) Dep’n 30/06/13= $120,000 x 48% x 9/12 =$43,200

(c)

1/7/16

Land

80,000 Revaluation Surplus

1/7/16

(d)

31/12/16

80,000

Accumulated Depreciation – Building Revaluation Expense Building

12,500 50,000

Depreciation Expense Accumulated Depreciation - Machinery [($120,000 - $43,200) x 48% x 6/12]

18,432

62,500

18,432

Cost of Machinery Accumulated Dep’n ($43,200 + $18,432) Carrying amount at date of sale Proceeds Loss on disposal

$120,000 (61,632) 58,368 50,000 $8,368

Cash Accumulated Depreciation – Machinery Loss on Disposal Machinery

50,000 61,632 8,368

120,000

8.25

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 8.5 Shark Ltd Year ending 30 June

(a) 30/6/16

(b) 30/6/16

Depreciation Expense – Machinery Accumulated Depreciation – Machinery ($50,000 x 1/5 or #1 $2000, #2 $5000, #3 $3000) Impairment Loss Accumulated Impairment Loss Machine #2 (Writedown of mach #2 to recoverable amount) Machine 1 2 3

(d) 30/6/17

CV Recoverable Amt $8,000 $9,000 20,000 13,000 12,000 13,000

$ 10,000

10,000

7,000 7,000

Adj nil 7,000 nil

Depreciation Expense – Machinery Accumulated Depreciation – Machinery (Depn #1 $2,000, #2 $3,250(13,000/4), #3 $3,000)

8,250

Accumulated Impairment Loss Machine #2 Income – Impairment Loss Reversal (Writedown of mach #2 to recoverable amount)

5,250

Machine 1 2 3

8,250

5,250

CV Recoverable Amt Adj $6,000 6,500 nil 9,750* 17,000 5,250** 9,000 9,500 nil

* $25,000-5,000-7,000-3,250=$9,750 **#2CV had the machine not been impaired $25,000-5,000-5,000=$15,000 max reversal permitted $15,000-9,750 =$5,250 This will reinstate #2 to CV of $15,000.

8.26

Chapter 8: Reporting and analysing non-current assets

PROBLEM SET A 8.6 Toy Ltd Journal Entries $ (a) 30/6/15 Land – Wellington 1,400,000 Land – Auckland 400,000 Revaluation Surplus (Revaluation of land Wellington $1,400,000, Auckland 400,000) 30/6/15 Accumulated Dep’n – Buildings Building– Auckland (To close off the accumulated dep’n to asset A/c) Revaluation Surplus Loss on revaluation of building Building– Auckland (Revalue building from $850,000 to $750,000)

(b) 30/6/16 Depreciation Expense – Buildings Accumulated Dep’n – Buildings (Depreciation expense for the year $750,000 x 1/15)

1,800,000

150,000 150,000 50,000 50,000 100,000

50,000 50,000

8.27

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 8.7 Button Ltd Balance date 31 December (a)

Year

Accumulated Depreciation 31/15

2012 2013 2014 2015

Calculation MACHINE 1 $43,500 X 10% = $4,350 $43,500 X 10% = $4,350 $43,500 X 10% = $4,350 $43,500 X 10% = $4,350

2013 2014 2015

MACHINE 2 $38,400 x 18.75% = $7,200 $31,200 x 18.75% = $5,850 $25,350 x 18.75% = 4,753(rounding)

$7,200 13,050 17,803

2013 2014 2015

MACHINE 3 1,000 X $2.00a = $2,000 3,000 x $2.00 = $6,000 4,000 x $2.00 = $8,000

$2,000 8,000 16,000

$4,350 8,700 13,050 17,400

$20,000 ÷ 10,000 hours = $2.00 per machine hour

(b) Depreciation expense for Machine 3 in 2015 under: • Straight-line method: ($26,000-$6,000)/5 = $4,000 • Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5x 1/5 = 30% o 2013 = $26,000 x 30% = $7,800 o 2014 = ($26,000-$7,800) x 30% = $5,460 o 2015 = ($26,000-$7,800-$5,460) x 30% = $3,822 • Units-of-production (from answer (a) above for 2015 = $16,000 Depreciation expense in 2015 is highest under Units-of-production method. The higher the expense, the lower the tax payment. So Units-of-production method is the preferred method for tax purposes for Machine 3 in 2015. (c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the lowest depreciation expense for Machine 3 in 2015. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier year of an asset’s life.

8.28

Chapter 8: Reporting and analysing non-current assets

PROBLEM SET A 8.8 Carpet Ltd (a) STRAIGHT-LINE DEPRECIATION Calculation Depreciable Years Cost 2015 *$360,000 2016 360,000 2017 360,000 2018 360,000

End of Year

Depreciation Rate 25% 25% 25% 25%

Annual Depreciation Expense $90,000 90,000 90,000 90,000

Accumulated Carrying Depreciation Amount $90,000 $310,000 180,000 220,000 270,000 130,000 360,000 40,000

* ($400,000 – $40,000)

DIMINISHING-BALANCE DEPRECIATION

Years 2015 2016 2017 2018

Calculation Carrying Amount Depreciation Beginning of x Rate# Year $400,000 44% 224,000 44% 125,440 44% 70,246 44%

End of Year

Annual Depreciation Expense $176,000 98,560 55,194 *30,246

Accumulated Depreciation

Carrying Amount

$176,000 274,560 329,754 360,000

$224,000 125,440 70,246 40,000

* Adjusted for rounding error so ending carrying amount will equal residual value. # Depreciation rate

= 1 − 4 $40,000

$400,000

= 1 – 0.5623 = 44% approximately

(b)

Straight-line depreciation provides the lowest amount for 2015 depreciation expense ($90,000) and, therefore, the highest 2015 profit. Diminishing-balance depreciation provides the highest amount for 2015 depreciation expense ($176,000) and, therefore, the lowest 2015 profit. Over the four-year period, both methods result in the same total depreciation expense ($360,000) and, therefore, the same total profit.

8.29

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET A 8.9 Wang Ltd Year end 30 June 2016 (a) Jul 1 Patent Cash (Successfully defend Patent) Jul to Dec 1

Jan 1

Apr 1

$ 25,000

100,000

Development Costs (expenses) Cash/Payables (Development expenses incurred in devoping new product)

100,000

Patent Development Costs (expenses) ((Transfer development costs for patent for new product to asset account)

100,000

Brand Expense Cash/Payables (Developed brand for new product)

30,000

May 1 Copyright Cash/Payables (Purchased copyright)

100,000

30,000

250,000 250,000

(b) Amortisation journals entries for year ended 31 December 2016 June 30

June 30

(c)

Amortisation Expense Accumulated Amortisation Patents [($80,000 ÷ 8 years) + (($25,000 ÷ 7 years) +(100,000/10 * 6/12)]

18,571

Amortisation Expense Accumulated amortisation Copyrights [($36,000 x 1/10) + ($250,000 x 1/50 x 2/12)]

4,433

Intangible Assets Patents ($205,000 cost less $28,571 amortisation) (1) Copyrights ($286,000 cost less $18,833 amortisation (2) Total intangible assets

18,571

4,433

$176,429 267,167 $443,595

(1) Cost ($80,000 + $25,000 + 100,000); amortisation ($10,000 + $18,571) (2) Cost ($36,000 + $250,000); Amortisation ($14,400 + $4,433). (d) The intangible assets of Wang Ltd consist of two patents and two copyrights. One patent with a cost of $105,000 is being amortised over 10 years; the other patent granted 1 July 2015 was developed at a cost $100,000 and is being amortised over its legal life of 10 years. A copyright with a cost of $36,000 is being amortised over 10 years; the other copyright with a cost of $250,000 is being amortised over 50 years.

8.30

Chapter 8: Reporting and analysing non-current assets

PROBLEM SET A 8.10 Ross Ltd & Yang Ltd (a)

(b)

Ross Ltd $1,420,000 = 3.3years $420,000

Yang Ltd $937,500 = 7.2years $130,000

Average useful life

$3,360,000 = 8years $420,000

$2,000,000 = 15years $130,000

Asset turnover ratio

$12,600,000 $10,300,000 = 3.36times = 2.3times $3,750,000 $4,480,000

(1)

Average age of PPE assets

(2)

(3)

Based on the asset turnover ratio, Yang Ltd. is more effective in using assets to generate sales as its asset turnover ratio is higher than Ross Ltd’s ratio. One factor that complicates the comparison of the asset turnovers of the two companies is the wide difference in average age of the PPE assets. Assuming the estimated useful lives are realistically measured, Ross Ltd’s assets are in need of replacement much sooner than Yang Ltd’s (8-3.3 years versus 15-7.2 years). Another factor is the different composition of total assets for each company. For example, Ross Ltd has recorded goodwill, but Yang Ltd does not. Deleting the goodwill from Ross Ltd’s asset turnover ratio improves the ratio to about 2.5. Also, a much greater proportion of Ross Ltd’s total assets consist of PPE and intangibles. Finally, we are not told which valuation models are being used. If one company uses the revaluation model and the other the cost model, the comparison would become even more problematic.

8.31

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 8.1 Box Ltd Item 1 2 3 4 5 6 7 8 9 10

Land $260,000

Building

Other Accounts $6,750 Land Improvements

19,000 $23,000 2,179 29,000 Land Improvements 40,000 6,500 Land Tax Expense 600,000 (5,000) $276,179

$663,000

$42,250

8.32

Chapter 8: Reporting and analysing non-current assets

PROBLEM SET B 8.2 King Ltd 2016 (a) 1. April 1

$ 2,400,000

Land Cash

May 1

June 1

2,400,000

Depreciation Expense Accumulated Dep’n – Equipment ($720,000 x 1/10 x 4/12)

24,000

Cash Accumulated Dep’n – Equipment Equipment Gain on Disposal

420,000 312,000

Cost (1/1/12) Accum. Dep’n – Equipment [($720,000 x 1/10 x 4 + $24,000)] Carrying value Cash proceeds Gain on disposal

$720,000 $312,000

Cash

1,800,000

24,000

720,000 12,000

408,000 420,000 $12,000

Land Gain on Disposal July 1

Dec. 31

(a) 2. Dec. 31

Dec. 31

Equipment Cash

500,000 1,300,000 2,000,000 2,000,000

Depreciation Expense Accumulated Dep’n – Equipment ($500,000 x 1/10- machine to be scrapped)

50,000

Accumulated Dep’n – Equipment Equipment (Equipment at 31/12/16 is now fully depreciated)

500,000

Depreciation Expense Accumulated Dep’n – Buildings ($31,800,000 x 1/40)

795,000

50,000

500,000

795,000

Depreciation Expense Accumulated Depreciation - Equipment

4,778,000

$46,780,000* x 1/10 $2,000,000 x 1/10 x 6/12

$4,678,000 100,000 $4,778,000

4,778,000

*($48,000,000 - $720,000 - $500,000)

8.33

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

(a) 3. King Ltd Partial Statement of financial position as at 31 December 2016 Property, Plant and Equipment* Land Buildings Less: Accumulated depreciation – buildings Equipment Less: Accumulated depreciation – equip. Total property, plant and equipment

$5,500,000 $31,800,000 15,315,000 48,780,000 10,040,000

16,485,000 38,740,000 $60,725,000

* See T-accounts which follow. Note that in the external reports the total of Property, Plant and Equipment would be a one line item in the statement of financial position and the detailed breakdown above would be disclosed in the notes to the financial statements.

31/12/15 1/4/16

Bal. B/d Cash

31/12/16

Bal. b/d

31/12/15 1/7/16

Cash

31/12/16

Bal. b/d

1/5/16 31/12/16 31/12/16

Cash Bal. c/d

500,000 5,500,000 6,000,000

Buildings 31,800,000

31/12/15

31/12/16

Land 3,600,000 1/6/16 2,400,000 31/12/16 6,000,000 5,500,000

Accumulated Depreciation – Buildings 31/12/15 15,315,000 31/12/16 Dep’n Exp. 15,315,000 31/12/16 Bal b/d Equipment 48,000,000 1/5/16 2,000,000 31/12/16 - 31/12/16 50,000,000 48,780,000

Cash, etc. Accum. Depr. Bal. c/d

Accumulated Depreciation - Equipment Equipment 312,000 31/12/16 Equipment 500,000 1/5/16 Dep’n Exp. 31/12/16 Dep’n Exp. Bal. c/d 10,040,000 31/12/16 Dep’n Exp. 10,852,000 31/12/16 Bal. b/d

14,520,000 795,000 15,315,000 15,315,000

720,000 500,000 48,780,000 50,000,000

6,000,000 24,000 50,000 4,778,000 10,852,000 10,040,000

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Chapter 8: Reporting and analysing non-current assets

(b) 1. April 1

May 1

June 1

Land GST Paid Cash

2,181,818 218,182 2,400,000

Depreciation Expense Accumulated Dep’n – Equipment [$720,000 /1.1)x 1/10 x 4/12]

21,812

Cash Accumulated Dep’n – Equipment Equipment GST Collected Gain on Disposal

420,000 283,636

Cost (1/1/12) Accum. Dep’n – Equipment [($654,545 x 1/10 x 4 + $21,818)] Carrying value Proceeds (420,000/1.1) Gain on disposal

$654,545 $283,636

Cash

1,800,000

21,818

654,545 38,182 10,909

370,909 381,818 $10,909

Land (500,000/1.1) GST Collected ((18,000,000/1.1))*1/10) Gain on Disposal July 1

Dec. 31

(b) 2. 2016 Dec 31

Dec 31

Equipment (2000000/1.1) GST Paid ((2000000/1.1)*1/10) Cash

454,545 163,636 1,181,819 1,818,182 181,818 2,000,000

Depreciation Expense Accumulated Dep’n – Equipment [($500,000/1.1) x 1/10- machine to be scrapped]

45,455

Accumulated Dep’n – Equipment Equipment (Equipment at 31/12/16 is now fully depreciated)

454,545

Depreciation Expense Accumulated Dep’n – Buildings ($31,800,000 x 1/40)

795,000

45,455

454,545

795,000

Depreciation Expense Accumulated Depreciation – Equipment

4,780,000

$46,890,910* x 1/10 $1,818,182 x 1/10 x 6/12

4,689,091 90,909 4,780,000

4,780,000

*($48,000,000 - $654,545 - $454,545) (b) 3.

King Ltd Partial Statement of Financial Position

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

as at 31 December 2016 Property, plant and equipment Note Land 1 Buildings Less: Accumulated depreciation – buildings Equipment 2 Less: Accumulated depreciation – equip. 3 Total property, plant and equipment

$5,327,273 $31,800,000 15,315,000 48,709,092 10,109,092

16,485,000 38,600,000 $60,412,273

Notes 1 Land: 3,600,000+2,181,818-454,545 2 Equipment: 46,890,910 + 1,818,182 3 Accumulated Depreciation: 6,000,000+21,818-283,636+45,455-454,545+4,780,000

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Chapter 8: Reporting and analysing non-current assets

PROBLEM SET B 8.3 Cox Ltd 2016 Jan 1

June 30

$ $ Accumulated Dep’n – Machinery Machinery (Scrapping machinery fully depreciated 31/12/15)

Dec 31

78,000

Depreciation Expense Accumulated Dep’n – Office Equipment (Update depreciation $73,500 x 1/5 x 6/12)

7,350

Cash Accumulated Depreciation – Office Equipment Gain on Disposal Office Equipment (Sale of office equipment )

30,000 51,450

Calculation of disposal Cost (1/1/2013) Accumulated Depreciation – Office Equipment [($73,500 x 1/5 x 3.5yrs)] Carrying value Cash proceeds Gain on disposal

Dec 31

78,000

7,350

7,950 73,500

$73,500 51,450 22,050 30,000 $7,950

Depreciation – Truck Accumulated Depreciation – Truck ( [($40,500 - $4,500) x 1/8] update depreciation)

4,500

Accumulated Depreciation – Truck (5yrs) Loss on Disposal Truck (Scrapping of truck after 5 years)

22,500 18,000

4,500

40,500

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 8.4 Mars Ltd Year ending 30 June 2016

(a)

1/7/15

1/10/15

(b)

30/6/16

Land Buildings Cash/Payables

$ 1,200,000 500,000

1,700,000

Machinery Cash/Payables

120,000

Depreciation Expense Accumulated Depreciation - Building Accumulated Depreciation - Machinery (Depreciation Building $500,000 ÷ 40 = $12,500) (Depreciation Machinery

55,700

Rate

120,000

12,500 43,200

= 1 − 4 9,000

120,000

= 1 - .5233 = 48% (approximately = $120,000 x 48% x 9/12 = $43,200

1/7/16

(d) 31/12/16

31/12/16

Land

200,000 Revaluation Surplus 200,000 Note: The $200,000 is considered “other comprehensive income” and would appear on the Statement of Profit and Loss and Comprehensive Income per IAS 1. Accumulated Depreciation – Building Revaluation Expense Building

12,500 25,000

Depreciation Expense Accumulated Depreciation - Machinery [($120,000 - $43,200) x 48% x 6/12]

18,432

Cost of Machinery Accumulated Depreciation ($43,200 + $18,432) Carrying amount at date of sale Proceeds Loss on disposal

$120,000 (61,632) 58,368 50,000 $8,368

Cash Accumulated Depreciation – Machinery Loss on Disposal Machinery

37,500

18,432

50,000 61,632 8,368 120,000

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Chapter 8: Reporting and analysing non-current assets

PROBLEM SET B 8.5 Fox Ltd Year ending 30 June

(a) 01/07/15

30/6/16

(b) 30/6/16

Machinery Cash (Purchase of machine)

(d) 30/6/17

10,000

Impairment Loss Accumulated Impairment Loss - Machinery (Writedown of machine to recoverable amount)

14,000

10,000

14,000

CV Recoverable Amt Adj $75,000 $61,000 14,000

Depreciation Expense – Machinery Accumulated Depreciation – Machinery (Depreciation ($61,000 - $5000) ÷ 7yrs remaining)

8,000

Accumulated Impairment Loss - Machinery Income – Impairment Loss Reversal (Write-down of machine to recoverable amount)

12,000

8,000

12,000

Maximum reversal $85,000 – $20,000* = $65,000 *2 years of normal depreciation had the asset not been impaired. Machine CV Recoverable Amt Adj 30/6/17 $53,000** $70,000 $12,000 **$85,000 -$10,000-$8,000-$14,000= $53,000 The max reversal is to a carrying value of $65,000 Adjustment $53,000 - $65,000 = $12,000

$ 85,000

Depreciation Expense – Machinery Accumulated Depreciation – Machinery (($85,000-$5,000) ÷ 8)

Machine 30/6/16 (c) 30/6/17

$ 85,000

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 8.6 Red Ltd Journal Entries 30/6/16 Land – Darwin Revaluation Surplus (Revaluation of land Darwin to $600,000)

$ 200,000

30/6/16 Revaluation Surplus Land – Perth (Revalue Land – Perth downwards to $1,000,000)

200,000

30/6/16 Accumulated Depreciation – Buildings Buildings– Perth (To close off the accumulated depreciation to asset account)

150,000

Revaluation Surplus Loss on Revaluation - Building Buildings – Perth (Revalue building from $650,000 to $500,000)

$ 200,000

200,000

150,000

100,000 50,000 150,000

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Chapter 8: Reporting and analysing non-current assets

PROBLEM SET B 8.7 Winter Ltd Balance date 31 December (a)

Year

Accumulated Depreciation 31/12

2012 2013 2014 2015

Calculation MACHINE 1 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875

2013 2014 2015

MACHINE 2 $96,000 x 18.75% = $18,000 $78,000 x 18.75% = $14,625 $63,375 x 18.75% = 11,883 (rounding)

$18,000 32,625 44,508

2013 2014 2015

MACHINE 3 1,000 X $5.00a = $5,000 3,000 x $5.00 = $15,000 4,000 x $5.00 = $20,000

$5,000 20,000 40,000

$10,875 21,750 32,625 43,500

$50,000 ÷ 10,000 hours = $5.00 per machine hour

(b) Depreciation expense for Machine 3 in 2015 under: • Straight-line method: ($65,000-$15,000)/5 = $10,000 • Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5 x 1/5 = 30% o 2013 = $65,000 x 30% = $19,500 o 2014 = ($65,000-$19,500) x 30% = $13,650 o 2015 = ($65,000-$19,500-$13.650) x 30% = $9,555 • Units-of-production (from answer (a) above for 2015 = $20,000 Depreciation expense in 2015 is highest under Units-of-production method. The higher the expense, the lower the tax payment. So Units-of-production method is the preferred method for tax purposes for Machine 3 in 2015. (c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the lowest depreciation expense for Machine 3 in 2015. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier years of an asset’s life.

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 8.8 Buttercup Ltd (a) STRAIGHT-LINE DEPRECIATION Calculation Depreciable Years Cost 2015 *$270,000 2016 270,000 2017 270,000 2018 270,000 2019 270,000

End of Year

Depreciation Rate 20% 20% 20% 20% 20%

Annual Depreciation Expense $54,000 54,000 54,000 54,000 54,000

Accumulated Carrying Depreciation Amount $54,000 $256,000 108,000 202,000 162,000 148,000 216,000 94,000 270,000 40,000

* ($310,000 – $40,000)

DIMINISHING-BALANCE DEPRECIATION

Years 2015 2016 2017 2018 2019

Calculation Carrying Value Depreciation Beginning of x Rate# Year $310,000 34% 204,600 34% 135,036 34% 89,124 34% 58,822 34%

End of Year

Annual Depreciation Expense

Accumulated Depreciation

Carrying Amount

$105,400 174,964 220,876 251,178 270,000

$204,600 135,036 89,124 58,822 40,000

$105,400 69,564 45,912 30,302 *18,822

* Adjusted so ending carrying value will equal residual value. # Depreciation rate

= 1 − 5 40,000

310,000

= 1 – 0.6639 = 34% approximately

(b)

Straight-line depreciation provides the lowest amount for 2015 depreciation expense ($54,000) and, therefore, the highest 2015 profit. Diminishing-balance depreciation provides the highest amount for 2015 depreciation expense ($105,400) and, therefore, the lowest 2015 profit. Over the five-year period, both methods result in the same total depreciation expense ($270,000) and, therefore, the same total profit.

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Chapter 8: Reporting and analysing non-current assets

PROBLEM SET B 8.9 Future Ltd Year ended 31 December 2017 (a)

Jan 1

Patents Cash (Defence of patent)

$ 13,500

13,500

Jan Jun

Development Costs Cash (Development costs for a patent)

180,000

Jul 1

Patents Development Costs (Development costs transferred to patent granted on 1 July)

180,000

Advertising Expense Cash (Advertising cost paid)

45,000

200,000

Sep 1

Oct. 1

180,000

45,000

200,000

(b) Amortisation journals for year ended 31 December 2017 Dec. 31

Dec. 31

(c)

Patent Amortisation Expense 14,000 Accumulated Amortisation Patents [($80,000 x 1/10) + ($13,500 x 1/9) + ($180,000 x 1/20 x 6/12)]

14,000

Copyrights Amortisation Expense Accumulated Amortisation Copyrights [($64,000 x 1/10) + ($200,000 x 1/50 x 3/12)]

7,400

Intangible Assets Patents ($273,500 cost less $22,000 amortisation) (1) Copyrights ($264,000 cost less $33,000 amortisation (2) Total intangible assets

7,400

$251,500 231,000 $482,500

(1) Cost ($80,000 + $13,500 + $180,000); Amortisation ($8,000 + $14,000) (2) Cost ($64,000 + $200,000); Amortisation ($25,600 + $7,400).

(d) The intangible assets of Future Ltd consist of two patents and two copyrights. One patent with a cost of $93,500 is being amortised over 10 years; the other patent was obtained at a cost of $180,000 and is being amortised over 20 years. A copyright with a cost of $64,000 is being amortised over 10 years; the other copyright with a cost of $200,000 is being amortised over 50 years.

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

PROBLEM SET B 8.10 Zhou Ltd & Wang Ltd (a)

(b)

Zhou Ltd $360,000 = 2.25 years $160,000

Wang Ltd $750,000 = 6.05 years $124,000

(1)

Average age of PPE assets

(2)

Average useful life

$1,160,000 $1,410,000 = 9.35 years =8.81 years $124,000 $160,000

(3)

Asset turnover ratio

$3,440,000 $3,680,000 = 1.72 times = 1.3 times $2,000,000 $2,840,000

Based on the asset turnover ratio, Wang Ltd is more effective in using assets to generate sales. Its asset turnover ratio is 30% higher than Zhou Ltd’s ratio. One factor that complicates the comparison of the asset turnovers of the two companies is the wide difference in average age of the PPE assets. Assuming the estimated useful lives are realistically measured, Wang Ltd’s assets are in need of replacement much sooner than Zhou Ltd’s (9.35-6.05 years versus 8.81-2.25 years). Another factor is the different composition of total assets for each company. For example, Zhou Ltd has recorded goodwill, but Wang Ltd does not. Deleting the goodwill from Zhou Ltd’s asset turnover ratio improves the ratio to about 1.5. Also, a much greater proportion of Zhou Ltd’s total assets consist of PPE and intangibles. Finally, we are not told which valuation models are being used. If one company uses the revaluation model and the other the cost model, the comparison would become even more problematic.

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Chapter 8: Reporting and analysing non-current assets

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 8.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

At 4 July 2013 the carrying (book) value of property, plant and equipment was $49,693,000 as shown in the Statement of Financial Position Refer note 18 for details of the cost Cost $72,452,000.

(b)

Depreciation is calculated on a straight-line basis so as to write off the cost of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or the estimated useful life, whichever is the shorter, using the straight-line method the assets (refer to note 3.15). The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis.

(c)

Depreciation and amortisation expense, as disclosed in note 11.2, is 2013, $12,792,000; 2012, $10,029,000. Note 11.2 reveals depreciation expense for 2013, $ 7,869,000 and 2012, $6,938,000 and amortisation expense 2013, $4,924,000 and 2012, $3,091,000.

(d)

Additions to non-current assets. See notes 18, 19, 20: Item Plant & Equipment* Goodwill Other intangible assets

2013 $’000 30,261 13,853 8,813

2012 $’000 20,886 8,648 7,350

*Note additions include acquisitions through business combinations (e)

Note 27 and 38 disclose that the company has financial leases with present value of lease payments of $83,000 and non-cancellable operating leases for premises and motor vehicles of $74,424,000. Therefore, it appears the company mainly engages in operating leases. The split between the motor vehicles and the premises is not given. The implication for financial statement analysis is that there are assets and liabilities not disclosed in the financial statements. (Note that there is a strong movement by standard setters to include all non-cancellable leases as finance leases.)

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 8.2

COMPARATIVE ANALYSIS PROBLEM CSR Ltd vs Boral Ltd

(a)

(1) Average useful life of PPE assets Average cost of PPE assets Depreciation expense

(2) Average age of PPE assets Accumulate d depreciati on Depreciation expense

CSR Ltd

Boral Ltd

((1,403.5+1,281.7)/2)/ 85.7

((4,607.9+4,594.7)/2)/ 263.5

15.67 years

17.46 years

702.0/85.7

2,627.6/263.5

8.2 years

10 years

1,682.5/((2,032.7+2,2 45.5)/2)

5,209.4/((6,316.4+6,4 99.1)/2)

0.787 times

0.813 times

= = =

(3) Asset turnover ratio Net sales Average total assets

(b)

The average useful life and the average age of PPE assets are useful to compare these ratios with averages of other companies in the same industry. CSR’s and Boral’s PPE assets have been used for 8.2 years and 10 years respectively. CSR’s PPE assets have a shorter estimated life than Boral’s PPE assets. The remaining estimated life of CSR’s PPE assets is 7.47 years (15.67 - 8.2), while Boral’s PPE assets have a remaining estimated life of 7.46 years (17.46 - 10). So on average both entities have similar aged assets. The asset turnover ratio measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. CSR’s asset turnover ratio is 0.787 times and Boral’s 0.813 times. Therefore, it can be concluded that Boral is slightly more efficient in usage of assets.

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Chapter 8: Reporting and analysing non-current assets

BUILDING BUSINESS SKILLS 8.3

COMPARATIVE ANALYSIS PROBLEM

Meds4U Ltd and Hope Ltd (a)

The primary intangibles of a healthcare products company would probably be patents, goodwill and trademarks. The nature of each of these is quite different; thus an investor would normally want to know what the composition of intangible assets is if it is material. If all intangibles were classified as goodwill then investors would be concerned as they would expect to see the company recognising patents from their development expenditures.

(b)

The asset turnover ratio is calculated as net sales divided by average total assets. This would be calculated as follows for these two companies:

Meds4U Ltd Hope Ltd. $53,796 $47,314 = 1.01 =0.89 ($63,706 + $42,906)  2 ($54,422 + $51,472)  2

This suggests that Hope Ltd is slightly more effective in using its assets to generate sales. (c)

Many corporate executives complain that investors are too concerned about the short-term and don’t reward good long-term planning. As a consequence, they feel that the requirement that research and development expenditures be expensed immediately penalises those executives who do invest in the future. As a consequence, when profit does not look good, it is always tempting to cut research and development expenditures, since this will cause a direct increase in current year reported profits. Of course, it will also diminish the company’s long-term prospects.

(d)

If an entity reports goodwill on its statement of financial position, it can only have resulted from one thing – the entity must have purchased another entity. This is because entities are not allowed to record internally created goodwill. They can only report purchased goodwill. Ironically, if you want to report a large amount of goodwill, all you have to do is overpay when you purchase another business – the more you overpay, the more goodwill you will report. Obviously, reporting a lot of goodwill is not such a good thing. There is an asset impairment test which requires an entity to test annually for the impairment of goodwill.

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 8.4

FINANCIAL ANALYSIS ON THE WEB

The answer to this question will vary on the company the student selects. Try and encourage students within the class to select different industries to be examined and then the class discussion can also focus on the differences between industries.

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Chapter 8: Reporting and analysing non-current assets

CRITICAL THINKING BUILDING BUSINESS SKILLS 8.5

COMMUNICATION ACTIVITY

The CEO would be arguing for recognising the internally generated intangibles. The IASB member would be arguing for the IAS 38 rule which prohibits the recognition of internally generated brands, mastheads, publishing titles, customer lists and items similar in substance. Format of the short report. This should be set out in the style required in your accounting course. This may differ slightly from class to class but in general terms it should include the following elements: Headings Title To From Date Re (what the report is about) Introduction Discussion Conclusion Recommendations You should use some sort of numbering system whether alphanumeric or not.

Some of the issues to be raised in the report: 1. One of the primary underlying principals in accounting is that the transaction or event needs to be clearly identified. Expenditures on internally generated assets, such as brands, mastheads, publishing titles and customer lists, may not be recognised as an asset because the costs incurred are considered indistinguishable from expenditure incurred to develop the business as a whole (internally generated goodwill). This is specifically mentioned in IAS 38 paragraph 64 which states that expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets. 2. One of the issues is how to measure the internally generated intangibles. They are treated in a similar vein to the internally generated goodwill and IAS 38 imposes the restriction of only recognising the item when it is purchased. This restriction has been imposed on the basis of the uncertainty surrounding the value of internally generated goodwill. It is difficult to audit the value assigned to these assets. 3. The IASB framework as such does not prohibit the recognition of the internally generated intangibles. The recognition of an asset would not be dependent upon the requirement that the future economic benefit be purchased, only that it be controlled. The CEO would argue strongly that the value of the intangible can be reliably measured. If other entities can purchase these types of assets then they must be able to be measured.

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

4. There is international controversy regarding the treatment of goodwill. The argument for amortisation is that a company pays a premium for the future earning capacity of the entity it purchased and this is realised over time and as such should be amortised against the future earnings. The counter argument is that the premium paid is for the synergies of the new earning capacity of the investor and investee companies and, as such, it should only be written down or amortised if the asset is impaired. The current standard on goodwill does not require amortisation, but an impairment test. 5. The main issue at hand is that there is an inconsistency if you wish to compare the performance of two entities which are structured differently. Company A may have grown internally and developed intangibles which are valuable and vital to the company’s performance. Company B may have grown by purchasing other business entities and as such have identified and recognised on their statement of financial position various intangible assets. The issue is how Company A can communicate to the market that they are strong performers. One side issue is that if the assets are not recognised in Company A then their return on assets will look superior to that of Company B who has more assets recognised on their statement of financial position.

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Chapter 8: Reporting and analysing non-current assets

BUILDING BUSINESS SKILLS 8.6

ETHICS CASE Glass Ltd

(a)

The stakeholders in this situation are: ▪ Angela Smith, managing director of Glass Ltd ▪ Jonty Upright, accountant ▪ The shareholders of Glass Ltd ▪ Potential investors in Glass Ltd

(b)

The intentional misstatement of the life of an asset or the amount of the residual value is unethical for whatever the reason. There is nothing unethical per se about changing the estimate either of the life of an asset or of an asset’s residual value if the change is an attempt to improve the allocation of the asset’s depreciable cost over the asset’s useful life. In this case, it appears from the accountant’s reaction that the revisions in the useful life and residual value are intended only to improve earnings which would be unethical. The fact that the competition uses a longer life on its equipment is not necessarily relevant. The competition’s maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g. one shift rather than two shifts daily) than Glass Ltd.

(c)

Profit (ignoring income tax) in the year of change is increased $400,000 implementing the managing director’s proposed changes.

Asset cost Estimated residual Depreciable amount Depreciation per year ($6,400,000 ÷ 8)

Asset cost Estimated residual Depreciable amount Depreciation taken to date ($800,000 x 2)

Remaining life in years Depreciation per year Change in depreciation $800,000 - $400,000=

Old Estimates $7,000,000 600,000 6,400,000 $800,000 Revised Estimates $7,000,000 600,000 6,400,000 1,600,000 $4,800,000 12years $400,000 $400,000

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Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 8.7

GROUP DECISION CASE

Auckland Ltd & Wellington Ltd (a) Auckland: Straight-line method Annual Depreciation Building [($460,000 - $60,000) x 2%*] Equipment [($200,000 - $15,000) x 12.5%**] Total annual depreciation

$8,000 23 125 $31 125

Total accumulated depreciation ($31,125 x 3)

$93 375

* (100% ÷ 50 years) = 2% **(100% ÷ 8 years) = 12.5% Wellington Ltd: diminishing-balance method at double the straight line. Year 2015 2016 2017

Depreciation @ 4%* Depreciation @ 25%** Total Depreciation 18,400 50,000 68,400 17,664 37,500 55,164 16,957 28,125 45,082 168,646 * (100% ÷ 50 years) = 2%* 2 **(100% ÷ 8 years) = 12.5%*2

(b)

Year 2015 2016 2017 Total profit

(c)

Auckland Ltd Profit $126,000 123,800 117,500 $367,300

Wellington Ltd Profit as Adjusted $139,275 138,039 141,457 $418,771

Calculation for Wellington Ltd $102,000 + $68,400 - $31,125 = $139,275 $114,000 + $55,164 - $31,125= $138,039 $127,500 + $45,082 - $31,125 = $141,457

As shown above, when the two companies use the same depreciation method, Wellington Ltd is more profitable than Auckland Ltd. When the two companies are using different depreciation methods, Wellington Ltd has more cash than Auckland Ltd for two reasons: 1. its earnings are generating more cash than the earnings of Auckland Ltd, and 2. depreciation expense has no effect on cash. Cash generated by operations can be arrived at by adding depreciation expense to profit. If this is done, it can be seen that Wellington Ltd’s operations generate more cash ($343,500 + $168,646 = $512,146) than Auckland Ltd’s ($367,300 + $93,375 = $460,675). Based on the above analysis, Ms James should invest in Wellington Ltd. Not only is it in a better cash financial position than Auckland Ltd, but it is also more profitable.

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Chapter 8: Reporting and analysing non-current assets

BUILDING BUSINESS SKILLS 8.8

SUSTAINABILITY

Fonterra Co-operative Group sustainability 1. The term sustainability is about making sure the social, economic and environmental needs of our community are met and kept healthy for future generations. Sustainable development must not just be about economic growth but also environmental quality and social equity. Corporate social responsibility (CSR) for business means companies must be aware and have a core understanding of CSR characteristics; an understanding of the basic issues and how they may affect decision making; to be able to apply this basic knowledge with competence to specific activities; and have strategic alignment ie have an in depth understanding of the issues and possess the expertise to embed CSR principles into the business decision making process. 2. Fonterra’s latest sustainability report. The answer will change here depending on which year the sustainability report is accessed. The following is the link to the website where the report can be downloaded: http://www.fonterra.com/. Once the site is accessed, click on sustainability or search the site for sustainability. The students are required to report on: goals, measurement and achievement in • Water • Waste • Resources- and energy use, and • Climate change 3. Climate change can affect asset values either directly e.g. through rising water levels, floods, erosion, droughts etc. damaging land and buildings, leading to asset impairments, or indirectly through changing demands for products and thus the production facilities required for their manufacture. It could also provide new opportunities for capital investment.

8.53

Chapter 9: Reporting and analysing liabilities

CHAPTER 9 – REPORTING AND ANALYSING LIABILITIES ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Exercises

Problems

Explain the differences between current and noncurrent liabilities.

Identify common types of current liabilities and explain how to account for them.

1, 2

1A, 2A, 1B, 2B

Identify common types of non-current liabilities, such as debentures and unsecured notes, and explain how to account for them.

3, 4

3A, 4A, 3B, 4B

Prepare journal entries for loans payable by instalment and distinguish between current and non-current components of long-term debt.

1, 3, 4

5, 6

5A, 6A, 11A, 5B, 6B, 11B

Identify the advantages of leasing and explain the difference between an operating lease and a finance lease.

Complete basic journal entries for accounting for leases and explain how to report leases.

11, 12, 13

12A, 12B

Explain the differences between provisions, contingencies and other types of liabilities.

Explain how to report contingent liabilities.

Prepare entries to record provisions for warranties.

5, 6

7A, 8A, 7B, 8B

10.

Evaluate an entity’s liquidity and solvency.

8, 9

9A, 10A, 9B, 10B

8, 9, 10

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Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

CHAPTER 9 – REPORTING AND ANALYSING LIABILITIES ANSWERS TO QUESTIONS 1. While this is generally true, more precisely a current liability is a debt that can reasonably be expected to be paid within one year or the operating cycle, whichever is longer.

2. (a)

The entry when the tickets are sold is: Cash at Bank .............................................................. 250,000 Football Ticket Revenue Received in Advance ....................

250,000

(b) The entry after each game is: Football Ticket Revenue Received in Advance ............. 50,000 Football Ticket Revenue........................................................

50,000

3. No, Nikki is not right. The market price on any note is a function of three factors: (1) the dollar amounts to be received by the investor (interest and principal), (2) the length of time until the amounts are received (interest payment dates and maturity date), and (3) the market interest rate.

4. $1000 ($50 000 x 8% x 3/12)

5. A provision is a liability for which the amount or timing of the future sacrifice is uncertain (AASB 137 para 10). It requires estimation. For example, a provision for long service leave requires estimation of the proportion of employees who will stay with the entity long enough to receive long service leave entitlements. The amount of the future sacrifice of other liabilities, such as trade creditors and mortgages, is quantified by an invoice or contractual arrangement.

6. A provision is a liability for which the amount or timing of the future sacrifice is uncertain (AASB 137 para 10). It requires estimation for recognition as a liability. An example is a provision for warranty claims. A contingent liability is not recognised because they are not probable or are unable to be measured reliably, or both. A liability may be classified as a contingent liability because it is so uncertain that it cannot be measured reliably, or because it does not satisfy the probability criterion, or if it is dependent upon the occurrence of a future uncertain event outside the control of the entity. An example of a contingent liability is an unresolved lawsuit brought against the company. It is contingent upon the outcome of the court case.

7. Ms Dwyer is incorrect. The obligation for a warranty arises when the sale is made. The warranty contract commences at that point in time. The sacrifice of economic benefits arises when the company honours the customer’s warranty claim. This is similar to having an obligation to pay employees. The obligation arises when the employee performs the service but the sacrifice of economic benefits, that is, the payment, is usually made in the following week.

9.3

Chapter 9: Reporting and analysing liabilities

8. A mortgage loan is a secured liability, repayable in regular instalments over the period of the loan. A mortgage liability should be reported as an interest-bearing liability. The current and non-current components of the mortgage liability should be reported separately. That is, the current portion of the mortgage liability should be included in financial liabilities (also referred to as borrowings) that are classified as current liabilities. The non-current portion of the mortgage liability should be included in the financial liabilities that are classified as non-current liabilities.

9. Many financially healthy companies have current ratios below 2:0. In order to reduce costs, many companies today keep low amounts of inventory on hand. Consequently, liquidity ratios are generally lower than they used to be. Another measure that could be checked is the quick ratio. This ratio is a measure of a company’s immediate short-term liquidity and inventory is not included in this calculation. Another measure of liquidity is working capital.

10. A finance lease is a lease in which substantially all the risks and rewards of ownership of the leased assets are transferred from the lessor to the lessee in exchange for a series of payments over the lease term. If substantially all the risks and rewards of ownership are not transferred, the lease is classified as an operating lease.

9.4

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9.1 Alvin Ltd (a)

A note payable due in two years is a non-current liability.

(b)

Part of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability.

(c)

Interest payable is a current liability, assuming it is due for payment within the next 12 months.

(d)

Accounts payable is a current liability because it is due for payment within the next 12 months.

BRIEF EXERCISE 9.2 Admiralty Ltd (a)

(b)

July

Dec.

Cash at Bank ................................................. $160,000 Notes Payable .................................................... Interest Expense.............................................. $8,000 Interest Payable .................................................. ($160,000 X 10% X 6/12)

$160,000

$8,000

BRIEF EXERCISE 9.3 31 May 16

Interest Expense $ 902 Loan Payable $4,098 Cash at Bank (To record the loan payment for May)

$5,000

BRIEF EXERCISE 9.4 30 Sept. 16

Interest Expense $ 736 Loan Payable $4,264 Cash at Bank $5,000 (To record the loan payment for September)

9.5

Chapter 9: Reporting and analysing liabilities

BRIEF EXERCISE 9.5 Trish’s Toasters Pty Ltd 30 June

Warranty Expense $36,000 Warranty Provision $36,000 (To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date)

BRIEF EXERCISE 9.6 Mac’s Auto Repairs Pty Ltd 30 June

Warranty Expense $9,300 Warranty Provision $9,300 (To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date)

BRIEF EXERCISE 9.7 Eccencia Ltd (a)

(b)

(c)

Jan.

July

Dec.

Cash at Bank ................................... $2,000,000 Debentures Payable ............................... (2,000 X $1,000)

$2,000,000

Interest Expense.............................. $80,000 Cash at Bank .......................................... ($2,000,000 X 8% X 1/2)

$80,000

Interest Expense.............................. $80,000 Interest Payable ...................................... ($2,000,000 X 8% X 1/2)

$80,000

9.6

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

BRIEF EXERCISE 9.8 David Jones Ltd ($ in thousands)

2013

(a) Working capital Current assets − Current liabilities

294 705−301 830 = -7 125

(b) Current ratio Current assets Current liabilities

294 705 301 830 = 0.98 :1

13 877+941+19 092 301 830 = 0.11:1

(d) Debt to total assets ratio Total liabilities Total assets

436 689 1 237 785 = 0.35:1

BRIEF EXERCISE 9.9 Fresh Flowers Ltd 30 June

31 Aug

Delivery truck lease receivable Delivery truck lease revenue

$100

Cash

$300 Delivery truck lease receivable Delivery truck lease revenue

$100

$100 $200

9.7

Chapter 9: Reporting and analysing liabilities

SOLUTIONS TO EXERCISES EXERCISE 9.1 (a)

(b)

May

Cash at Bank.................................................... $12,000 Note Payable.......................................................

$12,000

Interest expense............................................... $100 ($12,000 X .1 X 1/12) Interest Payable ..................................................

$100

(c)

Interest payable accrued each month ........................ $100 Number of months from borrowing to year end .......... x 8 Balance in interest payable account .......................... $800

(d)

Jan.

Note Payable.................................................... $12,000 Interest Payable ................................................. 800 Cash at Bank.......................................................

$12,800

EXERCISE 9.2 Transfield Pty Ltd June 30

Salaries and Wages Expense ................. $105,000 General Health Fund ...................................... PAYG Withheld Tax Payable .......................... Superannuation Payable ................................ Union Fees Payable ....................................... Salaries and Wages Payable ..........................

$6,750 11,250 9,450 2,000 75,550

EXERCISE 9.3 Fairy Wren Ltd (a)

(b) (c)

Jan.

July Dec.

1 31

Cash at Bank ............................................. $100,000 Unsecured Notes Payable ..............................

$100,000

Interest Expense........................................ $5,000 Cash at Bank ($100,000 X 10% X 1/2)……………….

$5,000

Interest Expense............................................ $5,000 Interest Payable ..............................................

$5,000

9.8

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

EXERCISE 9.4 (a)

(b)

June 30

June

Debentures Payable .................................. $130,000 Loss on Redemption of Debentures ................ 2,600 Cash at Bank ($130,000 X 102%)..................

$132,600*

Debentures Payable $180,000 Gain on Redemption of Debentures ....... Cash at Bank ($180,000 X 98%)............

$3,600 176,400

EXERCISE 9.5 (a)

30 June

Interest Expense $861 Loan Payable 4,139 Cash at Bank $5,000 (To record the loan payment for June)

. (b)

The current portion of the mortgage liability is $53,014 ($81,994 - $28,980).

(c)

The non-current portion is $28,980. This is the loan balance at 30 June 2017.

(d)

It is important to classify liabilities as current or non-current because readers of the financial statements use this information to assess a company’s liquidity. A liquidity analysis focuses on current liabilities, often comparing them to current assets, for example. The inability to meet obligations as they become due could lead to bankruptcy. Examples of current liabilities are accounts payable, unearned revenues, wages and salaries, provisions and interest.

EXERCISE 9.6 (a)

30 June

Interest Expense Loan Payable Cash at Bank (To record the loan payment for June)

$2,202 7,798 $10,000

(b)

The carrying amount of the mortgage liability after the above entry is $212,434.

(c)

The current portion of the mortgage liability is $99,884 ($212,434 - $112,550)

(d)

The non-current portion is $112,550.

9.9

Chapter 9: Reporting and analysing liabilities

EXERCISE 9.7 a. An unquantifiable liability for restoring a polluted river - Contingent liabilities b. Accounts payable – Other liabilities c. Wages payable – Other liabilities d. Obligation for unexpired warranty costs - Provisions e. Trade creditors – Other liabilities f. Obligations for employees’ long service leave - Provisions g. Accrued interest liability – Other liabilities h. Mortgage loan – Other liabilities i. Guarantee for another’s loan, which will be payable if the other party defaults – Contingent liabilities unless, at end of reporting period, it is probable that the other party will default. If so, the guarantee should be recognised as a provision (settlement date is uncertain). EXERCISE 9.8 Olden Motor vehicles Ltd (a) Summary entry for claims during the year ended 30 June 2013 Warranty Provision $65,000 Inventory $30,000 Wages Payable 35,000 (To record motor vehicle repairs under warranty) 30 June Warranty Expense $70,000 Warranty Provision $70,000 (To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date $75,000 estimate less $5,000 credit balance at 30/06/13.) (b)

Entities offer warranties because there is a statutory obligation to ensure that the goods or services are of a satisfactory standard. In order to gain consumer confidence and satisfaction and perhaps to increase sales, entities often offer a warranty period greater than that required by law.

EXERCISE 9.9 Benson Builder Pty Ltd Summary entry for claims during the year ended 31 December, 2016 Warranty Provision $85,000 Wages Payable $85,000 (To record work performed under warranty) 31 Dec

Warranty Expense $75,000 Warranty Provision $75,000 (To adjust the liability for Warranty Provision account to the total estimated liability for contracts outstanding at balance date--.01 X $7,000,000 = $70,000 plus the $5,000 debit balance.) .

9.10

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

EXERCISE 9.10

Premier Investment Ltd (a) ($ in thousands)

2013

1, Working capital Current assets − Current liabilities

422 275−89 588 = 332 687

2. Current ratio Current assets Current liabilities

422 275 89 588 = 4.71:1

3. Quick ratio Cash+ Marketable securities + Net receivables Current liabilities

313 157+0 +6 858 89 588 = 3.57:1

4. Debt to total assets ratio Total liabilities Total assets

261 648 1 562 014 = 0.17:1

5. Times interest earned Profit before income tax + Interest expense* Interest expense

245 956 + 6 988 6 988

= 36.20

also referred to as EBIT* ... earnings before interest and tax (b)

Financial statement users are not only interested in a company’s trends, but also how the entity has performed relative to its competitors. Ratios vary from industry to industry. A positive trend in the debt to asset ratio gains more meaning if the company’s debt to asset ratio compares favorably in comparison to competitors and entities in similar industries.

9.11

Chapter 9: Reporting and analysing liabilities

EXERCISE 9.11 Speedy Delivery Ltd 30 June Speedy Delivery Ltd is renting a truck from Fast Trucks Ltd under an operating lease. The journal entry is to record accrual of lease expense for the period ending 30 June. 31 August This entry records the payment made by Speedy Delivery Ltd to Fast Trucks Ltd on 31 August. Part of the payment is for the lease accrued to 30 June and the rest is for lease due in the current accounting period. 30 June This journal entry is for Fast Trucks to record accrual of operating lease revenue earned from Speedy Deliver Ltd up to 30 June. 31 August This journal entry is for Fast Trucks to record the receipt from Speedy Delivery Ltd of operating lease revenue. Part of the receipt is for lease accrued to 30 June and the rest is for lease due in the current accounting period.

EXERCISE 9.12 30 June

31 July

30 June

31 July

Sunny Nursery Ltd (lessee) Gardening tools lease expense Gardening tools lease payable Gardening tools lease expense Gardening tools lease payable Cash

Bunning’s Rentals Ltd (lessor) Gardening tools lease receivable Gardening tools lease revenue Cash Gardening tools lease receivable Gardening tools lease revenue

$400 $400 $400 400 $800

$400 $400 $800 $400 400

9.12

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

EXERCISE 9.13 Grand Design Ltd (lessee) 30 Jun

31 Aug

30 Nov

Office Space lease expense Office Space lease payable

$500

Office Space lease expense Office Space lease payable Cash

$1000 500

Office Space lease expense Cash

$1500

$500

$1500

Doby Ltd (lessor) 30 Jun

31 Aug

Office Space lease Receivable $500 Accrued Office Space lease revenue Cash

$1500 Office Space lease receivable Office Space lease revenue

30 Nov

$500

Cash

$500 1500 $1500

Office Space lease revenue

$1500

9.13

Chapter 9: Reporting and analysing liabilities

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 9.1 Cling-on Ltd (a)

Sept.

Oct.

Nov.

Dec.

Inventory or Purchases .................................. $16,000 Notes Payable ...................................................

$16,000

Interest Expense ............................................ $120 ($16,000 X .09 X 1/12) Interest Payable ................................................

$120

Climbing Wall ................................................. $10,000 Notes Payable ...................................................

$10,000

Interest Expense ............................................ $220 ($10,000 X .12 X 1/12 + $120) Interest Payable ................................................

$220

Vehicles ......................................................... $26,000 Notes Payable ................................................... Cash at Bank .....................................................

$18,000 8,000

Interest Expense ............................................ $430 ($18,000 X .14 X 1/12 + $100 + $120) Interest Payable ................................................

$430

Notes Payable................................................ $16,000 Interest Payable ............................................... 360 Cash at Bank .....................................................

$16,360

Interest Expense ($100 + $210) ..................... $310 Interest Payable ................................................

$310

9.14

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

(b) Notes Payable $

1/12

16,000 1/9 1/10 Clos. Bal. 28,000 1/11

16,000 10,000 18,000

44,000

44,000 Op. Bal.

28,000

Interest Payable $

1/12

Clos. Bal.

360 30/9 31/10 30/11 31/12

720

120 220 430 310

1,080

1,080 Op. Bal.

720

Interest Expense $

30/9 31/10 30/11 31/12

120 Closing 220 Entry to 430 P/L summary 310 1,080

1,080 1,080

Note: The general ledger account Interest Expense will be closed to Income Summary at the end of each accounting period.

(c)

Current liabilities Notes payable ................................................................................... $28,000 Interest payable .................................................................................. 720

(d)

Total interest expense is $1,080.

(e)

The advantage of using notes payable for purchasing inventory is that the purchaser will probably have a longer period of time to pay for the inventory than under the normal credit terms for accounts payable. The disadvantage is that interest will have to be paid on the notes whereas accounts payable is usually interest free. In fact, suppliers often offer a discount for early payment. That would not be available in a notes payable scenario.

. .

9.15

Chapter 9: Reporting and analysing liabilities

PROBLEM SET A 9.2 Annie Clothing Ltd (a)

July

(b)

July

Revenue Received in Advance ........................ $7,500 Service Revenue .................................................

$7,500

PAYG Withheld Tax Payable ........................... $1,750 Cash at Bank.......................................................

$1,750

Cash at Bank ................................................... $27,000 Notes Payable .....................................................

$27,000

Interest Expense ............................................... $71 Interest Payable .................................................. ($27,000 X 12% X 8/365 = $71) Salaries and Wages Expense .......................... $20,000 Health Fund Payable ........................................... PAYG Withheld Tax Payable ............................... Superannuation Payable ..................................... Salaries and Wages Payable ..............................

$71

$1,400 1,900 1,800 14,900

(c)

Current liabilities Notes payable ................................................................................... $ 27,000* Accounts payable ............................................................................. 78,000* Revenue in advance ($21,000 – $7,500) ........................................ 13,500* Interest payable ................................................................................. 71* Health Fund Payable ........................................................................ 1,400* PAYG withheld tax payable .............................................................. 1,900* Superannuation payable ................................................................... 1,800* Salaries and wages payable ............................................................. 14,900* Total current liabilities .............................................................. $138,571

(d)

Examples of other costs employers might incur in relation to their employees include obligations for sick leave, annual leave, union dues, and charitable contributions.

9.16

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET A 9.3 D100 Ltd (a)

(b)

2017 Jan

July

Interest Payable................................... $240,000** Cash at Bank ........................................

$240,000

Interest Expense................................ $240,000** ($4,000,000 X .12 X 1/2) Cash at Bank ........................................

$240,000

Unsecured Notes Payable ................... $2,000,000** Loss on Redemption of Unsecured Notes ............................................... 60,000 Cash at Bank ($2,000,000 X 1.03) ........

$2,060,000

2018 (c)

(d)

July

The advantages of debt financing over issuing shares are: • debt financing does not affect shareholder control of the entity because no additional shares are issued. • the interest paid on the debt is tax deductible whereas dividends paid to shareholders are not and • earnings per share may end up being higher even though interest has to be paid, because of the effects of financial leverage, i.e., if EBIT (earnings before interest and taxes) generated from the debt exceeds interest expense, then the benefit will go to the existing owners.

PROBLEM SET A 9.4 Cameron Ltd (a)

(b)

2015 Jan.

Cash at Bank ........................................... $1,000,000* Debentures Payable ................................. $1,000,000

July

Interest Expense........................................... $50,000* Cash at Bank ............................................

$50,000

Interest Expense........................................... $50,000* Interest Payable ........................................

$50,000

Dec. 31

(c)

2016 Dec. 31

Debentures Payable ................................. $1,000,000 Loss on Redemption of Debentures......... 40,000* Cash at Bank ($1,000,000 X 104%)………………. $1,040,000

9.17

Chapter 9: Reporting and analysing liabilities

PROBLEM SET A 9.5 Southbank Mechanic Ltd (a)

April. 1

Cash at Bank

$112,550

Loan Payable

$112,550

(To record loan from the bank) (b) Month Ending 30.4.15

Beginning Balance $112550

Interest $1126

Reduction of Principal $8875

Closing Balance $103676

Payment $10000

31.5.15 30.6.15

103676 94712

10000 10000

1037 947

8963 9053

94712 85659

31.7.15 31.8.15 30.9.15 31.10.15 30.11.15 31.12.15 31.1.16 28.2.16 31.3.16

85659 76516 67281 57954 48533 39019 29409 19703 9900

10000 10000 10000 10000 10000 10000 10000 10000 10000

857 765 673 580 485 390 294 197 100

9143 9235 9327 9420 9515 9610 9706 9803 9900

76516 67281 57954 48533 39019 29409 19703 9900 0

* rounding of $1 has been adjusted against interest expense (c)

30 April

Interest Expense Loan Payable Cash at Bank (To record the loan payment for April)

$1,126 8,875

31 May

$1,037 8,963

Interest Expense Loan Payable Cash at Bank (To record the loan payment for May)

$10,000

9.18

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET A 9.6 Cherry Ltd (a)

Interest Expense $6,000 Loan Payable 4,000 Cash at Bank $10,000 (To record the loan payment to Eastpac Bank) Interest Expense $2,500 Loan Payable 9,500 Cash at Bank $12,000 (To record the loan payment to State Bank) Interest Expense $7,500 Loan Payable 32,500 Cash at Bank $40,000 (To record the loan payment to NZA Bank)

(b)

Interest expense for the current month is $16,000.

(c)

Interest expense will be less than $16,000 in the next month because the opening balance of each mortgage liability, on which the interest is calculated, will be lower.

PROBLEM SET A 9.7 Botch’s Watches Ltd Summary entry for the year ended 30 June 2017 (a)

Warranty Provision $1,500 Parts Inventory Wages Payable (To record watch repairs under warranty)

$500 1,000

(b)

30 Jun.

Warranty Expense $1,500 Warranty Provision $1,500 (To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date)

(c)

Holding product quality constant (no change in suppliers), the Warranty Provision is likely to be understated at $1,200. In the previous year, a provision of $1,200 was demonstrated to be inadequate: the provision account had a debit balance prior to adjusting entries on 30 June 2017. Furthermore, the current estimate does not reflect the increased sales volume. An increase in the number of watches sold during the year (indicated by the increase in sales revenue in the absence of an increase in prices) suggests that there will be additional warranty claims in the coming year. .

9.19

Chapter 9: Reporting and analysing liabilities

PROBLEM SET A 9.8 Lennox Plumbing Services Pty Ltd (a) WARRANTY PROVISION ACCOUNT Spare parts inventory (amount of warranty claims) $110,000 2016 Beginning balance Warranty Expense (amount of adjusting journal entry) Closing balance 130,000 $240,000 2017 Beginning balance (b)

$100,000

140,000 $240,000 $130,000

Summary entry for the year Warranty Provision $110,000 Spare Parts Inventory $110,000 (To record plumbing repairs under warranty)

Balance day adjustment Warranty Expense $140,000 Warranty Provision $140,000 (To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date)

9.20

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET A 9.9 (a) Telco Ltd Telecom New Zealand Ltd 2013 ($ in NZ millions) 1. Current ratio Current assets Current liabilities 2. Quick ratio Cash+ Marketable securities + Net rec. Current liabilities 3. Debt to total assets ratio Total liabilities Total assets 4. Times interest earned Profit before income tax + Interest expense* Interest expense

Telco Ltd 2013 ($ in millions)

838 1 086 = 0.77:1

10 085 8 680 = 1.16:1

118+348 1 086 = 0.43:1

5 530+23 +4 170 8 680 = 1.12:1

2 080 3 493 = 0.60:1

25 400 39 360 = 0.65:1

341 + 74 74 = 5.61

6 230 + 1 115 1 115 = 6.59

also referred to as EBIT* ... earnings before interest and tax (b)

Liquidity can be measured using the current and quick ratios. In 2013 Telco Ltd outperformed Telecom New Zealand in both measures. Telco Ltd has a higher debt to total assets ratio than Telecom New Zealand, indicating a larger proportion of assets financed by creditors, however it also has higher interest coverage than Telecom New Zealand. In summary, Telco Ltd appears to be more liquid and solvent than Telecom New Zealand.

9.21

Chapter 9: Reporting and analysing liabilities

PROBLEM SET A 9.10 Bayside Ltd (a) 1. Working capital Current assets − Current liabilities

29 600 - 15 390 = 14 210

2. Current ratio Current assets Current liabilities

29 600 15 390 = 1.92 :1

3. Quick ratio Cash+ Marketable securities + Net receivables Current liabilities

6 207+3 400+10 840 15 390 = 1.33:1

4. Debt to total assets ratio Total liabilities Total assets

125 295 357 875= 0.35:1

5. Times interest earned Profit before income tax + Interest expense* Interest expense

246 950 + 11 440 11 440

= 22.59

also referred to as EBIT* ... earnings before interest and tax

(b)

Bayside Ltd’s working capital indicates a positive balance of 14 210. Its current ratio appears to be adequate with $1.92 of current assets to cover each $1 of current liabilities; it still falls below the rule of thumb of 2:1. As measure of liquidity risk, the current ratio has certain limitations as it does not take into account the composition of current assets. The quick ratio compensates for this by including only the most liquid current assets in its numerator. The quick ratio of 1.33 is greater than the rule of thumb of 1:1; this is a good result for Bayside Ltd. As the working capital also is positive, all three liquidity calculations indicate that Bayside Ltd is likely to be able to meet its short term debts. The Debt to total assets ratio shows that only 35% of its assets are funded by creditors, the times interest earned ratio of 22.29 times is much greater than the general rule of thumb of 3 to 4 times, which is the minimum level creditors like to see. These ratios suggest that Bayside Ltd is in a strong financial position and not facing any solvency issues. Even though it appears from the calculations in part (a) that Bayside Ltd is quite capable of meeting its long and short term debts, ratios should always be compared with industry averages.

9.22

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET A 9.11 (a)

Month Ending 30.6.2015

Beginning Balance

Payment

Interest

Reduction of Principal

Closing Balance

$200,000

$55,480

$24,000

$31,480

$168,520

30.6.2016

168,520

55,480

20,222

35,258

133,262

30.6.2017

133,262

55,480

15,991

39,489

93,774

30.6.2018

93,774

55,480

11,253

44,227

49,547

5,934*

49,546

30.6.2019

49,547 55,480 *Rounding error $12 adjusted against interest

(b) 2015 30 Jun.

Interest Expense $24,000 Loan Payable 31,480 Cash at Bank (To record the annual loan payment)

$55,480

2016 30 Jun.

Interest Expense $20,222 Loan Payable 35,258 Cash at Bank (To record the annual loan payment)

$39,488

Non-Current Liabilities Loan payable

$93,774

$55,480

9.23

Chapter 9: Reporting and analysing liabilities

PROBLEM SET A 9.12

Duncan Ltd (a) Lease repayment schedule:

Date

Lease Payment $

Interest 8% $

Principal reduction $

Balance lease obligation $

01.07.2015 30.6.2016

100,000 38,803

8,000

30,803

69,197

30.6.2017

38,803

5,536

33,267

35,930

35,929

30.6.2018

38,803 2,875* *Rounding error $1 adjusted against interest

(b) 2016 30 Jun

30 Jun

Lease Liability Interest Expense Cash at Bank (To record the annual lease repayment)

$30,803 8,000

Lease Amortisation Expense $33,333 Accumulated Amortisation (To record the lease amortization expense At the end of the period $100,000 ÷ 3)

$38,803

$33,333

(c) Statement of Financial Position (Extract) As at 30 June 2016 Non-current assets Lease asset Less: Accumulated amortisation

$100,000 ( 33,333) 66,667

Current liabilities Lease liability

$33,267

Non-current liabilities Lease liability

35,930

9.24

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 9.1

(a)

Mar.

Apr.

May

Jun.

Mountain Bikes Pty Ltd Bikes ............................................................... $8,000 Notes Payable ...................................................

$8,000

Interest Expense .................................................. $60 ($8,000 X .09 X 1/12) Interest Payable ................................................

$60

Land ............................................................. $20,000 Notes Payable ...................................................

$20,000

Interest Expense ............................................ $260 ($20,000 X .12 X 1/12 + $60) Interest Payable ................................................

$260

Cash at Bank ................................................. $15,000 Notes Payable ...................................................

$15,000

Interest Expense ............................................ $335 ($15,000 X .06 X 1/12 + $200 + $60) Interest Payable ................................................

$335

Notes Payable.................................................. $8,000 Interest Payable ............................................... 180 Cash at Bank .....................................................

$8,180

Interest Expense ($75 + $200) ....................... $275 Interest Payable ................................................

$275

9.25

Chapter 9: Reporting and analysing liabilities

(b) Notes Payable $

1/6

8,000 1/3 1/4 Clos. Bal. 35,000 1/5

8,000 20,000 15,000

43,000

Op. Bal. Interest Payable

35,000

$ 1/12

Clos. Bal.

750

$ 180 31/3 30/4 31/5 30/6

60 260 335 275

930

930 Op. Bal.

750

Interest Expense $ 31/3 30/4 31/5 30/6

$ 60 Closing 260 Entry to 335 P/L summary 275

930

930 930

(c)

Current liabilities Notes payable ................................................................................... $35,000 Interest payable .................................................................................. 750

(d)

Total interest expense is $930.

(e)

9.26

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET B 9.2 Jasmine Ltd (a)

Jan

(b)

Jan.

Cash at Bank ................................................... $30,000 Notes Payable .....................................................

$30,000

Service Revenue Received in Advance ............. $2,000 Service Revenue .................................................

$2,000

PAYG Taxes Payable ...................................... $1,320 Cash at Bank.......................................................

$1,320

Interest Expense ............................................... $250 Interest Payable .................................................. ($30,000 X 10% X 1/12 = $250) Salaries and Wages Expense .......................... $16,000 Health Fund Payable ........................................... PAYG Taxes Payable .......................................... Superannuation Payable ..................................... Salaries and Wages Payable ..............................

$250

$2,000 1,450 1,440 11,110

(c)

Current liabilities Notes payable .......................................................................... $ 30,000* Accounts payable ...................................................................... 8,500* Revenue in advance ($3,800 – $2,000) ................................... 1,800* Interest payable ...................................................................... 250* Health Fund Payable ............................................................... 2,000* PAYG Taxes payable............................................................... 1,450* Superannuation payable .......................................................... 1,440* Salaries and wages payable .................................................... 11,110* Total current liabilities $56,550*

(d)

Examples of other costs employers might incur in relation to their employees include obligations for sick leave, annual leave, union dues, and charitable contributions.

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Chapter 9: Reporting and analysing liabilities

PROBLEM SET B 9.3 Spring Hill Capital Ltd 2016 (a) Jan.

(b)

Jul.

2017 (c) Jul

Interest Payable................................................... $60,000 Cash at Bank ............................................

$60,000

Interest Expense................................................. $60,000 Cash at Bank ............................................

$60,000

Notes Payable ..................................................... $30,000 Loss on Redemption of Notes................................ 900 Cash at Bank ($30,000 X 103%) ..........................

$30,900

(d) The advantages of debt financing over issuing shares are: • debt financing does not affect shareholder control of the entity because no additional shares are issued. • the interest paid on the debt is tax deductible whereas dividends paid to shareholders are not and • earnings per share may end up being higher even though interest has to be paid, because of the effects of financial leverage, i.e., if EBIT (earnings before interest and taxes) generated from the debt exceeds interest expense, then the benefit will go to the existing owners.

PROBLEM SET B 9.4 Thompson Ltd (a)

(b)

2015 Jul.

2015/16 Dec. 31

Jun.

(c)

2017 Dec. 31

Cash at Bank ................................................. $4,000,000* Debentures Payable ................................. $4,000,000

Interest Expense............................................... $180,000* Cash at Bank ............................................

$180,000

Interest Expense............................................... $180,000* Cash at Bank ............................................

$180,000

Debentures Payable .................................... $4,000,000 Loss on Redemption of Debenture ................ 80,000 Cash at Bank ($4,000,000 X 102%) .....................

$4,080,000

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Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET B 9.5 Sunflower Ltd (a)

April 1

Cash at Bank

$56,870

Loan Payable

$56,870

(To record loan from the bank) (b) Month Ending

Beginning Balance

Payment

Interest

Reduction of Principal

Closing Balance

30.4.15

$56870

$5000

$474

$4526

$52344

31.5.15

52344

5000

436

4564

47780

30.6.15

47780

5000

398

4602

43178

31.7.15

43178

5000

360

4640

38538

31.8.15

38538

5000

321

4679

33859

30.9.15

33859

5000

282

4718

29141

31.10.15

29141

5000

243

4757

24384

30.11.15

24384

5000

203

4797

19587

31.12.15

19587

5000

163

4837

14751

31.1.16

14751

5000

123

4877

9874

28.2.16

9874

5000

4918

4956

31.3.16 4956 5000 44 4956 * rounding of $3 has been adjusted against interest expense

(c)

30 April

Interest Expense Loan Payable Cash at Bank (To record the loan payment for April)

$474 4,526

31 May

$436 4,564

Interest Expense Loan Payable Cash at Bank (To record the loan payment for May)

$5,000

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Chapter 9: Reporting and analysing liabilities

PROBLEM SET B 9.6 Book City Ltd (a)

Interest Expense $1,500 Loan Payable $3,500 Cash at Bank $5,000 (To record the loan payment to Aussie Bank) Interest Expense $1,125 Loan Payable $4,875 Cash at Bank $6,000 (To record the loan payment to Kiwi Bank) Interest Expense $1,750 Loan Payable $18,250 Cash at Bank $20,000 (To record the loan payment to Bank Outback)

(b)

Interest expense for the current month is $4,375.

(c)

Interest expense will be less than $4,375 in the next month because the opening balance of each mortgage liability, on which interest is calculated, will be lower.

PROBLEM SET B 9.7 Quinton Mechanics Ltd Summary entry for the year ended 30 June 2016 (a)

Warranty Provision $3,000 Parts Inventory Wages Payable (To record car repairs under warranty)

$1,000 2,000

(b)

30 Jun.

Warranty Expense $3,000 Warranty Provision $3,000 (To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date)

(c)

Holding product quality constant (no change in suppliers),the Warranty Provision is likely to be understated at $2,400. In the previous year, a provision of $2,400 was demonstrated to be inadequate: the provision account had a debit balance prior to adjusting entries on 30 June 2016. Furthermore, the current estimate does not reflect the increased sales volume. An increase in the number of car repairs and service during the year (indicated by the increase in revenue from car repairs in the absence of an increase in prices) suggests that there will be additional warranty claims in the coming year. .

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Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET B 9.8 Davis Builders Pty Ltd (a) WARRANTY PROVISION ACCOUNT Spare parts inventory (amount of warranty claims) $133,000 2016 Beginning balance Warranty Expense (amount Closing balance 39,000 of adjusting journal entry) $172,000 2017 Beginning balance (b)

$130,000 42,000 $172,000 $39,000

Summary entry for the year Warranty Provision $133,000 Spare Parts Inventory $133,000 (To record plumbing repairs under warranty) Balance day adjustment Warranty Expense Warranty Provision

$42,000 $42,000

(To adjust the liability for Warranty Provision account to total estimated liability for contracts outstanding at balance date).

9.31

Chapter 9: Reporting and analysing liabilities

PROBLEM SET B 9.9 Omnicom Ltd (a) Telecom New Zealand Ltd 2013 ($ in NZ millions) 1. Current ratio Current assets Current liabilities 2. Quick ratio Cash+ Marketable securities + Net Rec. Current liabilities 3. Debt to total assets ratio Total liabilities Total assets 4. Times interest earned Profit before income tax + Interest expense* Interest expense

838 1 086 = 0.77:1 118+348 1 086 = 0.43:1

Omnicom Ltd 2013 ($ in millions) 501 581 175 896 = 2.85:1 61 086+10 241+175 272 175 896 = 1.40:1

2 080 3 493 = 0.60:1

392 638 982 180 = 0.40

341 + 74 74 = 5.61

165 877 +15 700 15 700 = 10.57

also referred to as EBIT* ... earnings before interest and tax

Liquidity can be measured using the current and quick ratios. In 2013 Omnicom Ltd outperformed Telecom New Zealand in both measures. Omnicom Ltd also has a much lower debt to total assets ratio than Telecom New Zealand, indicating a smaller proportion of assets is financed by creditors. Omnicom Ltd also has a much higher interest coverage than Telecom New Zealand. In summary, Omnicom Ltd appears to be more liquid and solvent than Telecom New Zealand.

9.32

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET B 9.10 Matrix Ltd (a)

2016

2015

Working capital Current assets − Current liabilities

5 450 - 7 120 =- 1 670

4 650 - 5 760= -1110

Current ratio Current assets Current liabilities

5 450 7 120 = 0.77:1

4 650 5 760 = 0.81:1

Quick ratio Cash+ Marketable securities + Net Rec. Current liabilities

2 860 7 120 = 0.40:1

3 145 5 760 = 0.55:1

Debt to total assets ratio Total liabilities Total assets

25 620 32 700 = 0.78:1

21 960 29 750 = 0.74:1

Times interest earned Profit before income tax + Interest expense* Interest expense

2 710 + 450 450 = 7.02

2 670 + 390 390 = 7.85

also referred to as EBIT* ... earnings before interest and tax (b)

In 2016, working capital was a larger negative amount, and both the current ratio and the quick ratio declined. In both years the current and quick ratios were both well below 1.0 and should be monitored closely to avoid future liquidity problems. The debt to asset and times interest earned ratios measure solvency. The reliance on debt financed increased slightly from 74% to 78% and the times interest earned ratio dropped from 7.85 times to 7.02 times in 2016. In summary, Matrix Ltd’s liquidity levels dropped significantly but there was relatively little change in its solvency.

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Chapter 9: Reporting and analysing liabilities

PROBLEM SET B 9.11 (a) Month Ending 30.6.2016 30.6.2017 30.6.2018 30.6.2019 30.6.2020 •

Beginning Balance

Payment

Interest

Reduction of Principal

Closing Balance

$100000

$26380

$10000

$16380

$83620

83620 65602

26380 26380

8362 6560

18018 19820

65602 45782

45782 23980

26380 26380

4578 2400*

21802 23980

23980 0

Rounding error $2 adjusted against interest

(b) 2016 30 Jun.

Interest Expense $10,000 Loan Payable 16,380 Cash at Bank $26,380 (To record the annual loan payment)

30 Jun.

Interest Expense $8,362 Loan Payable 18,018 Cash at Bank $26,380 (To record the annual loan payment)

2017

$19,820

Non-Current Liabilities Loan payable

$45,782

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Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

PROBLEM SET B 9.12

Cooper Ltd (a) Lease repayment schedule:

Date

Lease Payment $

Interest 12% $

Principal reduction $

Balance lease obligation $

01.7.2016 30.6.2017

75000 20,805

9,000

11,805

63,195

30.6.2018

20,805

7,583

13,222

49,973

30.6.2019

20,805

5,997

14,808

35,165

30.6.2020

20,805

4,220

16,585

18,580

18,575

30.6.2021 •

20,805 2,235* Rounding error $5 adjusted against interest

(b) 2017

30 Jun

(d)

Lease Liability Interest Expense Cash at Bank (To record the annual lease repayment)

$11,805 9,000 $20,805

Lease Amortisation Expense $15,000 Accumulated Amortisation (To record the lease amortization expense At the end of the period $75,000 ÷ 5) Lease Liability Interest Expense Cash at Bank (To record the annual lease repayment)

$15,000

$13,222 7,583

Lease Amortisation Expense $15,000 Accumulated Amortisation (To record the lease amortization expense At the end of the period $75,000 ÷ 5)

$20,805

$15,000

Statement of Financial Position (Extract) As at 30 June 2018 Non-current assets Lease asset $75,000 Less: Accumulated amortisation ( 30,000) 45,000 Current liabilities Lease liability $14,808 Non-current liabilities Lease liability .

35,165 9.35

Chapter 9: Reporting and analysing liabilities

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS

BUILDING BUSINESS SKILLS 9.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a) current liabilities at 30 June 2013 were $51,304,000 (b) current provisions at 30 June 2013 were $3,109,000 (c) change in the value of total liabilities from 2012 to 2013: $87,169,000 - 458,278,000 = $28,891,000 (d) working capital, current ratio, quick ratio, debt to total assets ratio and times interest earned for 2013.

($ in thousands)

2013

Working capital Current assets − Current liabilities

60,383 - 51,304 = 9 079

Current ratio Current assets Current liabilities

60,383 51,304 = 1.18:1

Quick ratio Cash+ Marketable securities + Net receivables Current liabilities

18 691+0 +23 597* 51,304 = 0.82:1

Debt to total assets ratio Total liabilities Total assets

87,169 189,751 = 0.46:1

Times interest earned Profit before income tax + Interest expense** Interest expense

40,765 + 405 405 = 101.65

* net receivables –refer to note 13 in Annual Report 13. TRADE AND OTHER RECEIVABLES Trade receivables Allowance for doubtful debts

27,010 (3,413) 23,597

**referred as finance costs in Domino’s Pizza Enterprises Ltd’s Statement of profit or loss

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Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

BUILDING BUSINESS SKILLS 9.2

COMPARATIVE ANALYSIS PROBLEM

Fantastic Holdings Ltd vs. Nick Scali Ltd (a) 2013 Fantastic Holdings Limited

($’000)

Nick Scali Limited

Working capital Current assets − Current liabilities

100 325 - 49 647 = 50 678

48 545 - 28 478 = 20 067

Current ratio Current assets Current liabilities

100 325 49 647 = 2.02:1

48 545 28 478 = 1.70:1

Quick ratio Cash+ Marketable securities + Net rec. Current liabilities

18 993 + 0 + 2 597 26 441 + 852 + 6 397 49 647 = 0.43:1 28 478 = 1.18:1

Debt to total assets ratio Total liabilities Total assets

76 316 184 461 = 0.41:1

37 830 74 164 = 0.51:1

Times interest earned Profit before income tax + Interest expense* Interest expense

17 612 + 1 088 1 088 = 17.19

22 865 + 252 252 = 91.73

also referred to as EBIT* ... earnings before interest and tax

(b)

Both entities have positive working capital. Fantastic Holdings Ltd has a significantly higher current ratio than Nick Scali Ltd, however in both cases the current ratios appear to be comfortably greater than 1:1. Fantastic Holdings’ quick ratio of 0.43 is well below 1:1 due to the large proportion of inventory in its current assets (74%). In contrast, Nick Scali’s quick ratio of 1.18 is much higher as it has a relatively low proportion of inventory in its current assets (30%). Fantastic Holdings’ quick ratios would be of concern in the absence of industry average information and inventory turnover ratios as it would appear that it may have liquidity problems. Fantastic Holdings’ debt to total assets ratios of 41% is much lower than Nick Scali’s 51% however Nick Scali Ltd’s times interest earned is substantially higher than Fantastic Holdings’. These figures indicate that both companies are highly solvent.

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Chapter 9: Reporting and analysing liabilities

BUILDING BUSINESS SKILLS 9.3

A GLOBAL FOCUS

Drawing on note 18 to the 2014 financial statements, Telstra has borrowings in the following foreign currencies: • Swiss francs • Euro • United States dollars • New Zealand dollars • Swiss francs • Hong Kong dollars • Japanese yen Companies borrow overseas or in different currencies for a variety of reasons, including: • • •

convenience for off-shore operations due to restrictions on international currency flows and foreign investment regulations imposed by governments of other countries; to reduce exposure to foreign currency risk generated by off-shore assets or exports; to take advantage of lower interest rates available in other countries.

The major risk involved in off-shore borrowing is that the Australian dollar (or New Zealand dollar for a New Zealand company) might devalue against the currency in which the entity has the off-shore loan. This would mean that the company would have to repay more in terms of its local currency than it had originally borrowed. The extra cost resulting from local currency devaluation would also result in greater interest payments in the local currency. For example, if the Australian and New Zealand dollars devalued against the US dollar, it would take more Australian and New Zealand dollars to repay US loans borrowed by Australian and New Zealand companies, such as Telstra and Telecom New Zealand.

BUILDING BUSINESS SKILLS 9.4

FINANCIAL ANALYSIS ON THE WEB

(a)

The two key areas of services offered by Moody’s are: • Investors Service which is a provider of credit ratings, research and risk analysis. The ratings and analysis track debt covering more than 110 countries, 12,000 corporate issuers, 25,000 public finance issuers and 106,000 structured finance obligations. • Analytics which offers tools for measuring and managing risk by providing software, advisory services and research.

(b)

Moody’s takes the view that most fixed-income market participants are long-term investors and are, therefore, more concerned about the long-terms prospects of a corporation or investment product. Accordingly, Moody’s focuses on assessing the ability of an entity to meet its credit obligations over the long term rather than on temporary fluctuations in prices and returns. Moody’s long term view is, generally a time horizon of five-to-ten years, set to capture at least one full economic cycle. They focus on the risks specific to each borrower’s industry, country and region within the long-term horizon.

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Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

CRITICAL THINKING BUILDING BUSINESS SKILLS 9.5

GROUP DECISION CASE Mall Ltd

2018 (a)

Jan. 1

Debentures Payable (net) ................... $1,144,000 Gain on Redemption of Debentures ..................... Cash at Bank ....................................................... (To record repurchase of 10% debentures)

$144,000 1,000,000

Jan.1

Cash at Bank ...................................... $1,000,000 Debentures Payable............................................. $1,000,000 (To record sale of 10-year, 17.36% debentures at face value)

(b)

Dear Ms Payne, The early redemption of the 10%, 5-year debentures results in recognising an increase in profit of $144,000 that increases current year profit by the after-tax effect of the gain. The amount of the liabilities on the balance sheet will be lowered by the issue of the new debentures and retirement of the 5-year debentures. 1.

The annual cash flow of the company as it relates to debentures payable will be adversely affected as follows: Annual interest payments on the new issue ($1,000,000 X .17.36%) Annual interest payments on the 5-year debentures ($1,200,000 X .10) Additional cash outflows per year

$173,600 120,000 $ 53,600

The amount of interest expense shown on the income statement will be higher as a result of the decision to issue new debentures. These comparisons hold for only the 3-year remaining life of the 10%, 5-year debentures. There will of course be a cash saving on the repayment of the principal five years later but the company will be committed to a higher interest rate for five years. The company must contemplate either redemption of the debentures at maturity, 1 January 2021, or refinancing of that issue at that time and consider what interest rates will be in 2021 in evaluating a redemption and issue in 2018.

Sincerely,

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Chapter 9: Reporting and analysing liabilities

BUILDING BUSINESS SKILLS 9.6 COMMUNICATION ACTIVITY

To:

Board of Directors, Dundee Pty Ltd

From:

I. M. Student

Subject:

Revenue Recognition on Research Contract

The revenue from the research contract, and corresponding expenses, associated with the research contract should be recognised by reference to the stage of completion when the outcome can be measured reliably (AASB 118). No revenue is recognised on entering into the contract because at that time no work has been performed. The performance of services in relation to the research contract differs from the timing of the cash flows of the contract. Recognising revenue by reference to the stage of completion would result in 50% of the revenue being recognised in year ended 30 June 2016, when half of the research work is to be performed. Of the $600,000 received that year, $500,000 should be accounted for as revenue when 50% of the research is complete. The other $100,000 is a liability for revenue received in advance. The remaining 50% of the revenue would be recognised in the year ended 30 June 2017, when the remaining half of the research is to be performed. It is not necessary to delay the recognition of revenue until the cash is received unless there is uncertainty that it will flow to the entity. As stated above the recognition of revenue is subject to the outcome being able to be measured reliably. The outcome of a transaction involving the performance of services is considered to be able to be measured reliably if: (1) Revenue can be recognised reliably (2) It is probable that economic benefits will flow to the entity (3) The stage of completion can be measured reliably and (4) The costs incurred for the transaction and the costs to complete can be measured reliably (AASB 118 para. 20, also discussion in chapter three of this text). The revenue can be measured reliably because the contact has a fixed price. The recommendations for recognition of revenue in 2016 and 2017 are based on assumptions that the stage of completion at 30 June 2016 and 30 June 2017 will be 50% and 100%, respectively. If different levels of completion apply at the time, the actual percentages of completion should be used, assuming they can be measured reliably. It is also assumed that it is probable that benefits will flow to the entity (that is, that this is not a loss making contract). Lastly, it is assumed that the costs incurred on the research contract and expected future costs can be measured reliably at 30 June 2016 and 30 June 2017 when revenue is to be recognised. Signed

9.40

Solutions manual to accompany Financial accounting: reporting analysis and decision making 5e

BUILDING BUSINESS SKILLS 9.7

ETHICS CASE Candy Bars Ltd

(a) The stakeholders in this situation are: shareholders; potential shareholders; creditors; potential creditors; any users of the financial statements; customers, including any consumers of the product; and potential customers, including any potential consumers of the product. (b) Creditors and potential creditors may be harmed by the non-disclosure because they may underestimate the financial risk of extending credit to Candy Bars Ltd. Prospective investors may also be harmed as they may understate the risk attached to future profits, cash flows and dividends of Candy Bars Ltd and consequently pay too much for the shares. Existing shareholders may also be harmed because the non-disclosure may affect their decision to continue investing in the company and if Candy Bar Ltd loses the case, the value of shares to the shareholders may decline. Some people may have avoided that potential loss, at least partially, if, with full disclosure, they would have decided to sell their shares earlier. The stock market as a whole is disadvantaged because if investors cannot rely on companies to disclose information relevant to the value of the shares, investing in companies becomes a much riskier activity. This would be reflected in the cost of capital to companies in general. Customers may be harmed or disadvantaged. However, annual reports are not generally used by consumers as a source of product information. (c) While there are arguments that ethics is a matter of individual judgement, many people would consider this behaviour as unethical. Users are being misinformed about relevant information. This can result in some (such as existing shareholders who wish to sell) obtaining a benefit at the expense of another group (such as future shareholders). One often hears attempts to use directors’ obligations to act in the interests of shareholders as justification for unethical behaviour (and in some extreme instances, fraud and deception). However, this argument is flawed because behaviour that would be unethical if done by one party (shareholders) cannot become ethical simply because it is done by that party’s agent (the directors) acting under some duty to put the interests of his principal above all others. However, even if one did hold to the point of view that directors’ conduct can be justified on the basis that it is in the interests of shareholders, it is not clear in the present case that shareholders (present and future) would benefit from the non-disclosure of the company’s contingent liability for damages caused by one of its products.

9.41

Chapter 10: Reporting and analysing equity

CHAPTER 10 – REPORTING AND ANALYSING EQUITY ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises

Problems

1,2,8,9

1A,2A,3A,9A, 1B,2B,3B,9B

Explain the business context and the importance of decision making relating to equity.

Identify and discuss the main characteristics of a corporation (company).

Record the issue of ordinary shares.

1, 3

Describe the effects of share splits.

Prepare the entries for cash dividends and share dividends.

2,4,5

2,3,4

Understand the concept of earning power and indicate how irregular items are presented.

Indentify the components of comprehensive income and changes in equity

Identify the items that affect retained earnings.

Evaluate a company’s dividend and earnings performance from a shareholder’s perspective.

10.

Evaluate debt and equity as alternative sources of finance.

5A,5B, 2A,3A,4A,5A, 6A,7A,8A,9A, 2B,3B,4B,5B, 6B,7B, 8B,9B

5A,6A,7A,8A, 9A,5B,6B,7B, 8B,9B 4,6,7

5A,6A,7A,8A, 9A,5B,7B,8B, 9B

5A,6A,7A,8A, 9A,5B,6B,7B, 8B,9B

10A,10B

10.1

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

CHAPTER 10 – REPORTING AND ANALYSING EQUITY ANSWERS TO QUESTIONS 1.

Lenders, shareholders, management are three groups referred to in the text. See LO 1 p.590 for full answer. • Lenders: In deciding whether to lend to entities and if so, what debt covenants are required, lenders will exam the ratio to debt to equity among other ratios. • Shareholders will use metrics such as return of equity and dividend payout ratios when deciding to invest or share shares. • Directors and management need to decide whether to raise money through debt or equity, what their dividend payouts should be, whether to issue or repurchase capital etc.

(a) Separate legal existence. A company is separate and distinct from its owners and it acts in its own name rather than in the name if its shareholders. In contrast to a partnership, the acts of the owners (shareholders) do not bind the company unless the owners are duly appointed agents of the company. (b) Limited liability of shareholders. Because of its separate legal existence, creditors of a company ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of shareholders is normally limited to their investment in the corporation. (c)

Transferable ownership rights. Ownership of a company is represented in transferable units called shares. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is entirely at the discretion of the shareholder unless the need for further authorisation is specified in the company’s constitution.

(d) Company Management. The shareholders own a company but the business is managed through the Board of Directors. The Directors are elected by the shareholders. The Directors who work fulltime as employees for the business are the executive Directors. The managing director is the chief executive officer (CEO) and the head accountant is the chief financial officer (CFO). Some owners who are also directors do have an active role in the management of the business. 3.

(a) Company management is an advantage to a company because it can hire professional managers to run the company. Company management is also a disadvantage to a company because it prevents owners from having an active role in directly managing the company. (b) Other disadvantages of a company are government and other regulations. A company is subject to numerous regulations, such as laws for issuing and recording the issue of shares and lodging annual returns.

4. In the absence of restrictive provisions, the basic ownership rights of ordinary shareholders are the rights to: (1) vote for the election of the board of directors and in corporate actions that require shareholders’ approval. (2) share in company profits. (3) share in net assets upon liquidation.

10.2

Chapter 10: Reporting and analysing equity

5. The rules for dividend payment are the same for Australia and New Zealand. Companies can only pay a dividend if: the assets exceed liabilities by more than the amount of dividend proposed; it is fair and reasonable to shareholders as a whole and it does not materially prejudice the company’s ability to pay its creditors. 6. A cash dividend decreases assets, retained earnings and total equity. A share dividend decreases retained earnings, increases paid-in capital, and has no effect on total assets and total equity. 7.

A two for one share issue: (a) increases the number of shares on issue by 100%; (b) has no effect on the share capital account; and (c) has no effect on equity.

The adjustment required is to decrease assets and decrease opening retained earnings in the current period. In presenting financial statements for 2015, the comparative figures for 2014 should be adjusted by decreasing assets and increasing expenses with resulting decreases in profit and closing retained earnings for 2014.

No. The additional depreciation results from a change in accounting estimates and should be recognised as an expense.

10.

(a)

The change to an accelerated method of depreciation means that there will be an increase in the amount of depreciation expense in the current year, part of which will be catching up on depreciation that would have been charged previously, if accelerated depreciation had been used in prior years. This will result in reduced profit being reported.

(b)

This will be reported as a change in accounting policy. The nature of the change, reasons for the change, the effect on current year’s profit and the cumulative effect on prior year income statements should be disclosed in the notes to the financial statements. If practical, comparative information should be restated.

11.

The Statement of Profit or Loss and Comprehensive Income shows the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. The income statement forms part of the Statement of Profit or Loss and Comprehensive Income and shows the income and expenses for the period resulting in the profit or loss which is then transferred to Retained Earnings. As the name suggests, the Statement of Changes in Equity reflects the net changes in the equity accounts for the period. It shows the total comprehensive income for the period; the effects of any retrospective adjustments for accounting errors, changes in accounting policies and reclassification of amounts, as outlined in in this chapter; and the results of transactions with owners/shareholders in their capacity as owners, that is, contributions and distributions. Lastly, the Statement of Changes in Equity must show, for each equity account, a reconciliation between the opening and closing balances, separately disclosing each change.

10.3

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

12.

Share capital is increased by the issue of shares. Reserves are increased by items such as upward asset revaluations (in the case of the Revaluation Surplus/Reserve) and transfers from Retained Earnings. Retained Earnings are increased when profit is closed to retained earnings.

13.

One alternative to purchasing the assets is to lease them through an operating lease agreement (refer chapter 8) in which the lease payments are recorded as an expense. This allows the lessee to keep the leased assets and lease liabilities off the statement of financial position. Another option is to issue shares to raise money for the acquisition of the equipment. This would reduce the debt to total assets ratio rather than increase it.

14.

Some companies maintain a low dividend payout because they prefer use the money for investment. Another reason for low dividend payout ratios is poor liquidity.

15.

The return on equity increases when the company makes more profit. However, the company may choose to retain more profit and save cash that would otherwise be spent on dividends. If this occurs, shareholders may receive lower dividends even though the return on equity has increased. Amber should not be concerned if the company is reducing dividends to finance expansion of profitable activities.

10.4

Chapter 10: Reporting and analysing equity

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10.1 Walrus Ltd General Journal Date Account name (narration) Debit $ June 1 Cash at Bank 12,000 Share Capital (To record share issue by private placement)

G 203 Credit $ 12,000

BRIEF EXERCISE 10.2 Connor Ltd General Journal Date Dec 1

Dec 31

Account name (narration) Debit $ Retained earnings 200,000 Share Dividend Payable (To record dividend declared – 400.000 * 10% * $5) Share Dividend Payable 200,000 Share Capital (To record the issue of shares as per dividend declared)

Credit $ 200,000

200,000

10.5

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

BRIEF EXERCISE 10.3 Makayla Ltd General Journal Date March 31

Account name (narration)

Debit $

Credit $

Bank Trust 5000 Application (To record receipt of money due on application)

5000

April 1

Application 5000 Share Capital 5000 (To record issue of shares 5000 shares, $1.00 due on application)

April 1

Cash at Bank 5000 Bank Trust 5000 (To record the transfer of money to Makayla Ltd’s bank account on issue of shares)

April 1

Allotment Share Capital (To record monies due on allotment)

2500

Cash at Bank Allotment (To record receipt of allotment money)

2500

April 30

2500

BRIEF EXERCISE 10.4 Spinning Ltd General Journal Date 2016 June 30

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 2250 Dividend Payable (To record declaration of dividend (15,000 X $0.15)

July 31

Dividend Payable Cash at Bank (To record the payment of the dividend)

2250

2250 2250

10.6

Chapter 10: Reporting and analysing equity

BRIEF EXERCISE 10.5 TriTop Ltd General Journal Date Dec 31

Jan 31

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 375 Dividend Payable (Being declaration of interim dividend (1500X $0.25)

375

Dividend Payable Cash at Bank (Being payment of interim dividend)

375

450 Jun 30

Dividend Declared/Retained Earnings Dividend Payable(4500 X $0.10) (Being declaration of final dividend)

450

BRIEF EXERCISE 10.6 Basil Ltd Income statement (Partial) For the year ended 2018 Profit before income tax

$600,000

Income tax expense

180,000

Profit for the period

$420,000

The prior period adjustment is adjusted in opening retained earnings.

BRIEF EXERCISE 10.7 Jonty James Ltd Dividend payout = $20 000/$90 000 = 22% Return on shareholders’ equity = $90 000/$500 000 = 18%

10.7

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

BRIEF EXERCISE 10.8 Brianna Ltd Issue Shares

Issue Unsecured Notes

Profit before interest and taxes Interest ($3,000,000 X 6%) Profit before income taxes Income tax expense (30%) Profit (a)

$1,000,000 0 1,000,000 300,000 $ 700,000

$1,000,000 180,000 820,000 246,000 $ 574,000

Shareholders’ equity (b) Earnings per share (a) ÷ (b)

3,800,000 $ 0.18

800,000 $ 0.72

Profit is higher if shares are used. Return on shareholders’ equity is lower than if unsecured notes are used because of the additional equity.

10.8

Chapter 10: Reporting and analysing equity

SOLUTIONS TO EXERCISES EXERCISE 10.1 SunLand Ltd General Journal Date (a) Jan 10

Account name (narration) Debit $ Credit $ Share issue by private placement Cash at Bank 300,000 Share Capital 300,000 (Being issue of shares by private placement (60,000 x $5))

July 1

Cash at Bank 180,000 Share Capital 180,000 (Being issue of shares by private placement (20,000 x $9))

(b) July 1

Public offer for July 1 transactions Cash Trust 90,000 Application 90,000 (Being monies received on application to trust a/c (20 000 x $4.5))

July 1

Application 90,000 Share Capital (Being the issue of shares on allotment date)

90,000

Cash at bank 90,000 Cash Trust (Being trust monies transferred to bank a/c)

90,000

July 1

July 31

Dec 1

Dec 31

Allotment 60,000 Share Capital (Being allotment monies due (20 000 x $3)) 60,000 Cash at Bank Allotment (Being allotment monies received) Call Share Capital (Being call monies due (20 000 x $1.5))

30,000

Cash at Bank Call (Being call monies received)

30,000

60,000

30,000

10.9

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

EXERCISE 10.2 (a) Otter Ltd General Journal Date

Account name (narration)

Debit $

Cash at Bank Share Capital (Being share issue (3,000 X $15))

45,000

Credit $

2016

April 1

45,000 245,000

June 15

July 10

Dec 1

Dec 15

Retained Earnings Dividends Payable (Being dividend declared (98,000 X $2.50))

245,000

Dividends Payable Cash at Bank (Being payment of dividend)

245,000 245,000

Cash at Bank Share Capital (Being share issue (4,000 X $18))

72,000 72,000

Retained Earnings 285,600 Dividends Payable (Being dividend declared (102,000 x $2.80))

285,600

(b) Workings: Share Capital is now 102,000 shares (95,000 + 3,000 + 4,000) Opening Capital: $950,000 +$45,000 + $72,000 =$1,067,000 Otter Ltd Statement of financial position (Partial) as at 31 December 2016 $

Equity: Share Capital Retained earnings Total equity

1,067,000 744,400 $1,811,400

Note balance of retained earnings not given in question. So assume Closing Retained earnings is $744,400(350,000+925,000-245,000-285,600). (c) Companies can only pay a dividend if: the assets exceed liabilities by more than the amount of dividend proposed; it is fair and reasonable to shareholders as a whole and it does not materially prejudice the company’s ability to pay its creditors.

10.10

Chapter 10: Reporting and analysing equity

EXERCISE 10.3 Summer Ltd

Equity Contributed equity Retained earnings Total equity

Original Balances $ 550,000 240,000 $790,000

After Share Dividends $ 583,000 207,000 $790,000

After Cash Dividends $ 550,000 207,000 $757,000

Share Capital

550,000

583,000

550,000

Share dividend: 550,000 shares x 6% x $1 per share= 33,000 shares. Cash dividend: 550,000 shares x $0.06= 33,000 cash. From the analysis above the retained earnings is the same with either method chosen, but the share dividend does not use cash reserves the year you pay the dividend, so these funds can be reinvested into the business. However if the shareholders expect the same dividend per share in the future as the current dividend then the company will need increased profits and funds to be able to meet the future dividends as now the shareholders have 33 000 more shares.

EXERCISE 10.4 Jeckel Ltd General Journal Date 1. Dec 31

2. Dec 31

Account name (narration)

Debit $ $ 15,000

Credit $ $

Retained Earnings Interest Expense 15,000 (To correct error in recording dividend paid as interest expense) Retained Earnings 3,000 Dividends Payable 15,000 Share Dividend Payable 18,000 (To record the dividend as a share dividend and at the correct amount of $18 per share not $15)

10.11

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

EXERCISE 10.5 Bettie Ltd (a)

Current year profit $2,500,000 i) Prior period sales (deduct)* (15,600) ii) Less gain on sale of division of business (45,200) Earning power $1,147,020 iii) Depreciation is not adjusted as affects future earnings iv) Contingent liability is not adjusted but need to read details in the notes to the financial statements to judge the likely affect on the company. Taxes are ignored for this question * Prior period sales error should be adjusted against opening retained earnings. (b) It is important for potential investors to understand the concept of earning power as the financial reports, particularly the profit, is used as a predictor of future cash flows. Earning power is the profit adjusted for irregular items thereby better reflecting the future earning capacity of the company EXERCISE 10.6 Gold Ltd Statement of Changes in Retained Earnings For the year ended 30 June 2015 Retained earnings 1 July 2014* Add: Profit Less: Interim dividend (200,000 X $0.04) Final dividend (200,000 X $0.06) Transfer to general reserve Retained earnings 30 June 2015

$20,000 40,000 60,000 (8,000) (12,000) (8,000)

(28,000) $32,000

EXERCISE 10.7 Speedy Deliveries Statement of Changes in Retained Earnings For the year ended 31 December 2015 Retained earnings 1 January 2015 Add: Profit Less: Interim dividend (30,000 x $0.15) Final dividend (30,000 x $0.10) Transfer to dividends equalisation reserve Retained earnings 31 December 2015

$34,000 20,000 54,000 (4,500) (3,000) (5,000)

(12,500) $41 500

10.12

Chapter 10: Reporting and analysing equity

EXERCISE 10.8 (a) South Island Skiwear Ltd General Journal Date 2016 Jan 10

Mar 1

May 1

Sept 1

Nov 1

Account name (narration)

Debit $

Credit $

Cash at Bank 90,000 Share Capital (Being private issue of shares (90,000 X $1))

90,000

Cash at Bank 7,500 Share Capital (Being private issue of shares (6,000 X $1.25))

7 500

Cash at Bank 125,000 Share Capital (Being private issue of shares (50,000 X $2.5))

125,000

Cash at Bank 60,000 Share Capital (Being private issue of shares (20,000 X $3))

60,000

Cash at Bank 8,000 10 % Preference Shares (Being private issue of 10% preference shares (2,000 X $4))

8,000

(b) Date

Dec 31

Date Dec 31

(c)

Account name

Closing bal.

SHARE CAPITAL (ordinary) Amount Date Account name 2016 Jan 10 Cash at bank Mar 1 Cash at bank May 1 Cash at bank 282,500 Sep 1 Cash at bank $282,500 Dec 31 Opening Bal*

Amount 90,000 7,500 125,000 60,000 $282,500 $282,500

SHARE CAPITAL (10% preference) Account name Amount Date Account name 2016 Closing bal. 8,000 Nov 1 Cash at bank $8,000 Dec 31 Opening Bal*

Amount 8,000 $8,000 $8,000

Share capital at 31 December 2016 is $290,500 ($282,500 ordinary shares and $8,000 10% preference shares) .

10.13

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

EXERCISE 10.9 (a) Young Ltd General Journal Date 2016 Jan10

Mar1

May 1

Sep 1

Nov 1

Account name (narration)

Debit $

Credit $

Cash at Bank 480,000 Share Capital (Being private issue of shares (240,000 X $2))

480,000

Cash at Bank 90,000 Share Capital (Being private issue of shares (30,000 X $3))

90,000

Cash at Bank 315,000 Share Capital (Being private issue of shares (90,000 X $3.50))

315,000

Cash at Bank 80,000 Share Capital (Being private issue of shares (20,000 X $4))

80,000

Cash at Bank 105,000 Share Capital (Being private issue of shares (21,000 X $5))

105,000

(b) SHARE CAPITAL Date

Dec 31

(c)

Account name

Closing bal.

Amount

1,070,000 $1,070,000

Date 2016 Jan 1 Mar 1 May 1 Sep 1 Nov 1

Account name

Amount

Cash at bank Cash at bank Cash at bank Cash at bank Cash at bank

Dec 31

Opening Bal

480,000 90,000 315,000 80,000 105,000 $1,070,000 $1,070,000

Share capital at 31 December 2016 is $1,070,000

EXERCISE 10.10 Yang Pty Ltd Dividend payout rate = $40,000/$70,000 = 57% Return on shareholders’ equity = $70,000/[($210,000 + $240,000)/2] = 31% Shareholders’ equity at 30 June 2016 = $210,000 + $70,000 - $40,000 =$240,000

10.14

Chapter 10: Reporting and analysing equity

EXERCISE 10.11 SpringTime Ltd

Profit before interest and taxes Interest ($1,400,000 X 10%) Profit before taxes Income tax expense (30%) Profit Equity Return on equity

(a) Plan One Issue Shares

(b) Plan Two Issue Debentures

$500,000 0000,000 500,000 150,000 $350,000 $3,400,000 12.96%

$500,000 140,000 360,000 108,000 $252,000 $2,000,000 12.6%

(b) Factors would include: • • • •

Ability to generate cash to meet the interest payments (Plan Two) or possible dividend payments (Plan One) in the future. Tax deductibility of Interest. The stability of interests rates in the future and their effect on the early retirement of the debt. The increase in financial risk from issuing more debt compared with the increased ROE from increased leverage.

10.15

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 10.1 (a) Public issue of shares Sport’s Field Ltd General Journal Date 2016 Jan 10

Account name (narration)

Mar 1

Cash Trust 21,000 Application (Being application monies received (35,000 X $0.60))

21,000

Application 21,000 Share Capital (Being allotment of shares (35,000 X $0.60))

21,000

Cash at bank 21,000 Cash Trust (Being the transfer of funds from trust a/c to coy bank a/c)

21,000

Allotment 10,500 Share Capital (Being allotment monies due (35,000 X $0.30))

10,500

Cash at Bank Allotment (Being receipt of allotment monies)

10,500 10,500

Call Share Capital (Being call monies due (35,000 X $0.10))

3,500

2 Mar

Mar 2

Mar 31

Nov 1

Nov 30

Debit $

Credit $

No entry

3,500

Cash at Bank 3,500 Call (Being receipt of call monies (35,000 X $0.10))

3,500

(b) Application $ 2/3

Allotment $

21,000 21,000

1/3

21,000

31/3 10,500 2/3

10,500

21,000

10,500

10.16

Chapter 10: Reporting and analysing equity

Share Capital $

(c)

Call $

2/3 21,000 Bal. 2/3 10,500 C/b 35,000 1/11 3,500 35,000 35,000 1/12 Bal 35,000 Sport’s Field Ltd Share capital: $35,000

$ 30/11 3,500

$ 1/11

3,500

3.500

3,500

PROBLEM SET A 10.2 (a) CoffeeForU Ltd General Journal Date 2016 Jan 9

Jun 10

Jul 10

(b)

Account name (narration)

Debit $ $ 800,000

Credit $ $

Cash at Bank Share Capital (Being issue of shares for cash (200,000 X $4))

800,000

Retained Earnings 420,000 Dividend Payable (Being cash dividend declared ($2,800,000 X 15%))

420,000

Dividend Payable Cash at Bank (Being payment of dividend)

420,000

Equity section of the Statement of Financial Position CoffeeForU Ltd Statement of Financial Position As at 30 June 2016 EQUITY $ Share capital 2,800,000 Revaluation surplus 400,000 Retained earnings* 880,000 TOTAL EQUITY $ 4,080,000 *Retained earnings $1,300,000 less dividend $420,000= $880,000

10.17

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET A 10.3 Amber Consulting Pty Ltd General Journal Account name (narration) Debit $

Date 2014 May

Cash

Credit $

12,000

Share Capital (To record initial capital investment) 2

12,000

Rent Expense GST Paid Cash (To record office rent paid)

900 90

Office Supplies GST Paid Accounts Payable (Purchased office supplies on account)

600 60

Advertising Expense GST Paid Cash (Paid advertising)

100 10

Cash

990

660

110

4,422

GST Collected Service Fees (To record Cash for services) 12

Retained Earnings/Dividend Cash (To record dividend payments)

402 4,020

500 500

Accounts Receivable GST Collected Service Fees (To record service provided on credit)

6,600

Salaries Expense PAYG withholding/PAYE Cash (To record salaries paid)

3,790

Accounts Payable Cash (To record payment of creditor)

660

Cash

600 6,000

590 3,200

660

5,600

Accounts Receivable (To record debtor receipt) 26

Cash

5,600

10,000

Bank Loan (To record loan from bank) 30

Office Equipment GST Paid Accounts Payable (To record equipment purchase on account) Electricity Expense GST Paid Cash (To record electricity payment)

10,000

3,200 320 3,520

200 20 220

10.18

Chapter 10: Reporting and analysing equity

PROBLEM SET A 10.4 (a) Rake Ltd General Journal Date 2016 Feb 1

Account name (narration)

Mar 1

July 1

July 31

Dec 1

Debit $

Credit $

Retained Earnings 36,000 Dividends Payable (Being dividend declared (60,000 X $0.60))

36,000

Dividends Payable Cash at Bank (Being dividend payment)

36,000

Retained Earnings 240,000 Share Dividends Payable (Being share dividend declared (60,000 x 10% x $40))

240,000

Share Dividends Payable 240,000 Share Capital (Being issue of shares from share dividend)

240,000

Retained Earnings 33,000 Dividends Payable (Being final dividend declared (66,000 x $0.50))

33,000

(b) Share Capital $ C/B 2,040,000 2,040,000

$ 1/1 Bal. 31/7

1,800,000 240,000

2,040,000 31/12 bal. 2,040,000

Dividends Payable $ 1/3 36,000 Bal. 33,000

Retained Earnings $

36,000 33,000

31/12 bal.

69,000 33,000

36,000 240,000

1/12 33,000 31/12 bal 591,000 900,000

1/1 Bal. 900,000

. 900,000 31/12 bal. 591,000

Share Dividends Payable $ $

1/2 1/12

69,000

1/2 2/7

31/7

240,000 240,000

7/1

240,000 240,000

10.19

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

General Reserve $

1/1 Bal. 250000

(c) Equity section of the Statement of Financial Position Rake Ltd Statement of Financial Position (partial) As at 31 December 2016 EQUITY Share capital General reserve Retained earnings TOTAL EQUITY

$ 2,040,000 250,000 591,000 $ 2,881,000

10.20

Chapter 10: Reporting and analysing equity

PROBLEM SET A 10.5 (a) CanDo Ltd General Journal Date 2015 Dec 31

2016 15 Jan

30 Jun

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings Dividend Payable (Being declaration of interim dividend)

4,000

Dividend Payable Cash at Bank (Being payment of interim dividend)

4,000

Dividend Declared/Retained Earnings Dividend Payable (Being declaration of final dividend)

6,000

4,000

6,000

10 February there is no entry for the share split but the number of issued shares becomes 60,000 and affects the subsequent cash dividend. (b) CanDo Ltd Statement of Changes in Retained Earnings For the year ended 30 June 2016 Retained earnings 1 July 2015 Add: Profit Less: Interim dividend (20,000 x $0.20) Final dividend (60,000 x $0.10) Retained earnings 30 June 2016

$18,000 12,000 30,000 (4,000) (6,000)

10,000 $20,000

(c)

Dividend payout = $10,000/$12,000 = 83%

(d)

Equity increased by $2,000, being the increase in retained earnings. The share split has no effect on equity $ accounts.

10.21

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET A 10.6 (a) Rocky Ltd General Journal Date 2015 Sep 30

Account name (narration)

Oct 10

Share Dividend Payable Share Capital (Being payment of interim share dividend)

2016 Mar 31

Debit $

Credit $

Dividend Declared/Retained Earnings 30,000 Share Dividend Payable 30,000 (Being declaration of interim share dividend (50,000 x .30 x $2)) 30,000 30,000

Dividend Declared/Retained Earnings 19,500 Dividend Payable (Being declaration of final dividend (65,000 x $0.30))

19,500

(b) Rocky Ltd Statement in Changes of Retained Earnings For the year ending 31 March 2016 Retained earnings 1 April 2015 Add: Profit Less: Interim share dividend Final cash dividend Retained earnings 31 March 2016

$60,000 30,000 90,000 (30,000) (19,500)

(c)

Cash Dividend payout = $19,500/$30,000 = 65%

(d)

Share capital increased by Retained earnings decreased by Increase in shareholders’ equity

49,500 $40,500

$30,000 (19,500) $10,500

10.22

Chapter 10: Reporting and analysing equity

PROBLEM SET A 10.7 (a) Harre Pty Ltd General Journal Date 2016

Account name (narration)

Debit $

Jun 30

Dividend Declared/Retained Earnings Dividend Payable (Being declaration of final dividend)

19,000

Credit $

19,000

(b)

Dividend ratio = $19,000/$35,000 = 54%

(c)

Return on shareholders’ equity = $35,000/[($48,020 + $32,020)/2] = 87% As the only change in reserves is a transfer from retained earnings (i.e., within equity) the opening shareholders’ equity can be derived as follows: Closing equity Less profit Add back dividends Opening equity

$48,020 (35,000) 19,000 $32,020

(d) Harre Pty Ltd Statement of Changes in Equity For the Year ending 30 June 2016

Balance 1 July 2015 Profit Cash Dividends Transfer to reserve Balance 30 June 2016

Share Capital $ 20

General Reserve $ 10,000

$20

8,000 $18,000

Retained earnings $ 22,000 35,000 (19,000) (8,000) $30,000

Total

32,020 35,000 (19,000) $48,020

10.23

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET A 10.8 (a) Silk Ltd General Journal Date 2016 Dec 31

Account name (narration) Dividend Declared/Retained Earnings Dividend Payable (Being declaration of final dividend)

Debit $

Credit $

31,000 31,000

(b)

Dividend payout ratio = $31,000/$60,000 = 51.7%

(c)

Return on shareholders’ equity = $60,000/[($5,254,000 + $5,225,000)/2] = 1.1%

(d) Silk Ltd Statement of Changes in Equity For the Year ending 31 December 2016 Share General Retained Capital Reserve earnings $’000 $’000 $’000 Balance 1 January 2016* 5,000 192 33 Profit 60 Cash Dividends (31) Transfer to reserve 20 (20) Balance 31 December 2016 $5,000 $212 $42

Total $’000 5,225 60 (31) $5,254

*Opening balances for equity need to be derived as below: • Share capital has not changed. • Reserves increased by $20,000 so opening balance is $192,000. • Retained earnings = $5,225,000-5,000,000-192,000=33,000.

10.24

Chapter 10: Reporting and analysing equity

PROBLEM SET A 10.9 (a) Wellington Ltd General Journal Date 2016 Aug 15

Oct 1

2017 Jan 6

Mar 15

Jun 30

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 15,000 Dividend Payable (Being declaration of interim dividend (100,000 x $0.15))

15,000

Dividend Payable Cash at Bank (Being payment of interim dividend)

15,000

Dividend Declared/Retained Earnings 36,000 Share Dividend Payable 36,000 (Being declaration of interim share dividend (100,000 x 12% x $3)) Share Dividend Payable Share Capital (Being payment of interim share dividend)

36,000

Retained Earnings General Reserve (Being transfer to general reserve)

12,000

36,000

12,000

(b)

Balance 1 July 2016 Profit Share issue dividend Cash Dividends Transfer to reserve Balance 30 June 2017

Wellington Ltd Statement of Changes in Equity For the Year ending 31 December 2017 Share Revaluation General Capital Reserve Reserve $ $ $ 300,000 60,000 36,000

$336,000

$60,000

12,000 $12,000

Retained Earnings $ 150,000 180,000 (36,000) (15,000) (12,000) $267,000

Total $ 510,000 180,000 (15,000) $675,000

(c)

Equity increased by $180,000 profit less cash dividend $15,000= $165,000 ($675,000 less $510,000 = $165,000)

(d)

Dividend to be paid out of 2017 profits is interim share dividend $36,000 plus final cash dividend of $0.15 x 112,000 shares, $ 16,800. Dividend payout = $16,800/$180,000 = 9.3%. (Only the cash dividend counts for this metric.) Return on shareholders’ equity = $180,000/[($675,000 + $510,000)/2] = 30.38%

10.25

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET A 10.10 Donkey Ltd

Profit before interest and tax Interest expense 8% x $3,500,000 Tax expense 30% profit before tax Profit Shareholders’ equity Return on shareholders’ equity

Borrow at 8% $2,200,000 (280,000) (576,000) 1,344,000 7,000,000 19.20%

Issue More Shares $2,200,000 (660,000) 1,540,000 10,500,000 14.67%

Borrowing yields the greater return for Donkey Ltd’s shareholders given the current interest rate. Other factors that should be considered include the liquidity and solvency risk associated with future interest and principal payments and potential changes in interest rates. Also to be considered is the change in ownership structure under the share issue alternative.

10.26

Chapter 10: Reporting and analysing equity

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 10.1 (a) Jumping Jack Ltd General Journal Date 2016 Mar 31

Account name (narration)

May 1

Cash Trust 600,000 Application (Being application monies received (200,000 x $3))

600,000

Application 600,000 Share Capital (Being allotment of shares (200,000 X $3))

600 000

Cash at bank 600,000 Cash Trust (Being the transfer of funds from trust a/c to coy bank a/c)

600,000

Allotment 400,000 Share Capital (Being allotment monies due (200,000 X $2))

400,000

May 2

May 31

Aug 1

Aug 15

Debit $

Credit $

No entry

Cash at Bank Allotment (Being receipt of allotment monies) Call Share Capital (Being call monies due (200,000 X $1))

400,000 400,000 200,000

Cash at Bank 200,000 Call (Being receipt of call monies (200,000 X $1))

200,000

10.27

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

(b) Application 2.5

$ 600,000

Allotment $ 600,000

1.5

600,000

31/5

600,000

$ 400,000 400,000

Share Capital $ 600,000 400,000

2/5 2/5 1/8

400,000

Call

Bal C/d 1,200,000 1,200,000

2/5

$ 400,000

15/8

200,000 1,200,000

$ 200,000

1/8

200,000

$ 200,000 200,000

1,200,000 (c)

Jumping Jack Ltd

Share capital: $1,200,000

PROBLEM SET B 10.2 (a)

Date 2016 Mar 15

June 10

July 31

(b)

Luke Ltd General Journal

Account name (narration)

Debit $

Credit $

Cash at Bank 750,000 Share Capital (Being issue shares for cash (300,000 X $2.50))

750,000

Retained Earnings 675,000 Dividend Payable (Being dividend declared ($6,750,000 X 10%))

675,000

Dividend Payable Cash at Bank (Being dividend payment)

675,000

Equity section of the statement of financial position EQUITY Share capital Revaluation surplus Retained earnings TOTAL EQUITY

$ 6,750,000 200,000 1,425,000* $ 8,375,000

*Retained Earnings: $2,100,000-675,000.

10.28

Chapter 10: Reporting and analysing equity

PROBLEM SET B 10.3 Treetops Ltd General Journal Date

Account name (narration)

$ Debit

Cash

30,000

$ Credit

April

Share Capital (Issue shares for cash) 2.

10.

Rent Expense GST Paid Cash (Paid office rent)

30,000

500 50 550

Office equipment GST Paid Cash (Purchase of office equipment for cash)

2,000 200

Advertising Expense GST Paid Accounts Payable (To record advertising on account)

2,200 220

Office Supplies GST Paid Cash (Paid office supplies)

2,200

2,420

900 90 990

Accounts receivable Cash Service Fees GST Collected (Service revenue month April)

20,020 5,500

Dividends/Retained earnings Cash (Paid cash dividend)

500

23,200 2,320

500

Accounts Payable Cash (Paid supplier)

2,420

Salaries Expense Cash PAYG Withholding/PAYE (Salaries for April)

2,800

Cash

12,500

Accounts Receivable (Customers paid account)

2,420

2,200 600

12,500

10.29

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET B 10.4 (a) Ellie Ltd General Journal Date 2016 Aug.1

Sep.1

Oct. 1

Oct. 31

Dec.1

Account name (narration)

Debit $ $ 90,000

Credit $ $

Retained Earnings Dividends Payable (Being dividend declared (200 000 x $0.45))

90,000

Dividends Payable Cash at Bank (Being dividend payment)

90,000

Retained Earnings 100,000 Share Dividends Payable (Being share dividend declared (200,000 x 5% x $10))

100,000

Share Dividends Payable Share Capital (Being issue of share dividend)

100,000

Retained Earnings 84,000 Dividends Payable (Being cash dividend declared (210,000 x $0.40))

84,000

(b) Share Capital (Equity) $ $ 1/7 Bal. 2,000,000 C/B 2,100,000 31/10 100,000 2,100,000 2,100,000 31/12 bal.

2,100,000

Retained Earnings (Equity) $ $ 1/8 90,000 1/7 Bal. 900,000 1/10 100,000 1/12 84,000 31/12 bal. 626,000 900,000

. 900,000 31/12 bal. 626,000

Dividends Payable (Liability) $ 1/9 90,000 Bal.84,000 174,000

Share Dividends Payable (Equity)

$ 1/8

90,000

1/12

84,000 174,000

31/12 bal

84,000

31/10

$ 100,000 100,000

1/10

$ 100,000 100,000

10.30

Chapter 10: Reporting and analysing equity

PROBLEM SET B 10.5 (a) Beta Ltd General Journal Date 2013 Dec 30

15 Jan

30 Jun

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 22,500 Dividend Payable (Being declaration of interim dividend (15 000 x $1.5))

22,500

Dividend Payable Cash at Bank (Being payment of interim dividend)

22,500

Dividend Declared/Retained Earnings 75,000 Dividend Payable (Being declaration of final dividend (60,000 x $1.25))

75,000

Retained Earnings General Reserve (Being transfer to general reserve)

5,000

March 31 no entry but now 60,000 shares on issue (b) Beta Ltd Statement in Changes of Retained Earnings For the year ending 30 June 2013 Retained earnings 1 July Add: Profit Less: Transfer to General reserve Interim cash dividend Final cash dividend Retained earnings 30 June 2013

$100,000 100,000 200,000 (5,000) (22,500) (75,000)

102,500 $97,500

$150,000

Reserves

95,000

Retained earnings

97,500

TOTAL EQUITY

$342 500

10.31

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

(d)

Cash Dividend payout = $97,500/$100,000 = 97.5% Return on shareholders’ equity = $100,000/[($342,500 + $340,000)/2] = 29.3%

(e)

See page 598 of this chapter.

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Chapter 10: Reporting and analysing equity

PROBLEM SET B 10.6 (a) Brownstone Ltd General Journal Date 2015 Dec 31

2016 Jan 10

30 Jun

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 12,500 Share Dividend Payable 12,500 (Being declaration of interim share dividend 10,000 x 0.25 x $5) Share Dividend Payable 12,500 Share Capital 12,500 (Being payment of interim share dividend, 2500 shares @ $5) Dividend Declared/Retained Earnings 1,875 Dividend Payable 1,875 (Being declaration of final dividend 15c per share on 12,500 shares)

(b) Brownstone Ltd Statement in Changes of Retained Earnings For the year ending 30 June 2016 Retained earnings 1 July 2015 Add/(Less): Profit (loss) Less: Interim share dividend Final cash dividend Retained earnings 30 June 2016

(c)

Share capital increased by Retained earnings decreased by Decrease in equity

$40,500 (5,000) 35,500 (12,500) (1,875)

14,375 $21,125

12,500 (19,375) ($6,875)

It may be helpful to point out to students that the decrease in equity is the sum of the loss and the cash dividend. (d)

See page 601 for discussion on share dividends.

10.33

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET B 10.7 (a) Pansies Pty Ltd General Journal Date 2016 Jun 30

Account name (narration) Dividend Declared/Retained Earnings Dividend Payable (Being declaration of final dividend)

Debit $

Credit $

5,000 5,000

(b)

Dividend payout = $5,000/$8,000 = 63%

(c)

Return on shareholders’ equity = $8,000/[($15,003 + $12,003)/2] = 59% As the only change in reserves is a transfer from retained earnings (i.e., within equity) the opening shareholders’ equity can be derived as follows: Closing equity Less profit Add back dividends Opening equity

15,003 (8,000) 5,000 12,003

(d)

Balance 1 July 2015 Profit Cash Dividends Transfer to reserve Balance 30 June 2016

Pansies Pty Ltd Statement of Changes in Equity For the Year ending 30 June 2016 Share General Retained Capital Reserve earnings $ $ $ 3 12,000 8,000 (5,000) 5,000 (5,000) $3 $5,000 $10,000

Total $ 12,003 8,000 (5,000) $15,003

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Chapter 10: Reporting and analysing equity

PROBLEM SET B 10.8 (a) Swedish Ltd General Journal Date 2016 Jun 30

Account name (narration)

Debit $

Dividend Declared/Retained Earnings Dividend Payable (Being declaration of final dividend )

225,000

Credit $

225,000

(b)

Dividend payout ratio = $225,000/$285,000 = 79%

(c)

Return on shareholders’ equity = $285,000/[($5,422,000 +$5,362,000)/2] = 5.3%

(d)

Balance 1 July 2015 Profit Cash Dividends Transfer to reserve Balance 30 June 2016

Swedish Ltd Statement of Changes in Equity For the Year ending 30 June 2016 Share General Retained Capital Reserve earnings $’000 $’000 $’000 5,000 285 77 285 (225) 45 (45) $5,000 $330 $92

Total $’000 5,362 285 (225) $5,422

NOTE opening balances split can be calculated from the movement during the year.

10.35

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

PROBLEM SET B 10.9 (a) Gemini Ltd General Journal Date 2016 Aug 15

Oct 1

2017 Jan 6

Mar 15

Jun 30

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 20,000 Dividend Payable (Being declaration of final dividend (200,000 x $0.10))

20,000

Dividend Payable Cash at Bank (Being payment of final dividend)

20,000

Dividend Declared/Retained Earnings 60,000 Share Dividend Payable 60,000 (Being declaration of interim share dividend (200,000 x 12% x$2.5) Share Dividend Payable Share Capital (Being payment of interim share dividend) Retained Earnings General Reserve (Being transfer to general reserve)

60,000 60,000 15,000 15,000

(b)

Balance 1 July 2016 Profit Share Dividend Cash Dividend Transfer to Reserve Balance 30 June 2017

Gemini Ltd Statement of Changes in Equity For the Year ending 30 June 2017 Share General Retained Capital Reserve Earnings $ $ $ 400,000 50,000 150,000 100,000 60,000 (60,000) (20,000) 15,000 (15,000) $460,000 $65,000 $155,000

Total $ 600,000 100,000 (20,000) $680,000

(c) Gemini Ltd’s Equity increased by $100,000 profit less cash dividend $20,000 = $80,000 (d) Dividend to be paid out of 2017 profits is interim share dividend $60,000 plus final dividend of $0.09 x 224,000 shares = $ 20,160. Dividend payout formula is cash dividend so only $20,160 was to be paid in cash. Cash Dividend payout = $20,160/$ 100,000 = 20.16%. Return on shareholders’ equity = $100,000/[($680,000 + $600,000)/2] = 15.63%.

10.36

Chapter 10: Reporting and analysing equity

PROBLEM SET B 10.10 Donald Ltd

Profit before interest and tax Interest expense 10% x $4,000,000 Tax expense 30% profit before tax Profit Shareholders’ equity Return on shareholders’ equity

Borrow at 10% 1,000,000 (400,000) (180,000) 420,000 5,600,000 7.5%

Issue More Shares 1,000,000 300,000 700,000 9,600,000 7.3%

Equity shows a higher profit, but yields a slightly less return for Donald Ltd’s shareholders given the current interest rate. Given that there is more profit and only slightly less ROE a logical manager would choose the equity option based on these figures as there is less risk (but potentially lower returns in the future). Other factors that should be considered include the lower liquidity and solvency risk associated with equity financing, and the change in shareholding and ownership that would result from the share issue.

10.37

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 10.1

FINANCIAL REPORTING PROBLEM

Dominos Pizza Enterprises Ltd (a)

69,900 fully paid ordinary shares had been issued by 28 June 2012.

(b)

293 ($1,025) shares were issued during 2013 under executive share scheme and option plan. (See note 28.1 (a))

(c)

$30,042 Capital was returned.

(d) (e)

Share Capital at 4 July 2013 was $40,855. (Being 70,193 shares) All amounts are in ’000. 2013 $’000 $21,690 ÷ $28,657 =75.7%

Dividend payout rate Return on $28,657($102,582+$117,041)/2 = shareholders’ 26% equity

2012 $’000 $18,969÷ $26,936= 70.42% $26,936  ($117,041+$104,916)/2 = 24%

*2013 dividends are interim 15.5 cents and the final dividend 15.4 cents (not recognised at reporting date) $10,880+ $10,810= $21,690; 2012 dividends are interim 13.0 cents and the final dividend 14.1 cents $9,087+ $9,882 = $18,969. See note 31.

10.38

Chapter 10: Reporting and analysing equity

BUILDING BUSINESS SKILLS 10.2

FINANCIAL REPORTING PROBLEM

(a)

The company first listed on the ASX on the 16th May 2005.

(b)

The company changed its name from Domino’s Pizza Australia New Zealand Ltd to Domino’s Pizza Enterprises Ltd effective 18th December 2006. The reason for the change to better reflect the global positioning of the company following the European acquisitions on 3rd July 2006. The company no longer just operated in Australia and New Zealand.

(c)

The Executive Share and Option Plan (ESOP) exists to rewards the efforts of the employees so they work diligently in their endeavors for Domino’s. In the director’s report the following is discussed: “Performance-linked compensation includes both short-term and long-term incentives and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The short-term incentive (“STI”) is an ‘at risk’ bonus provided in the form of cash, while the long-term incentive (“LTI”) is provided as options over ordinary shares of the Company under the rules of the Domino’s Pizza Executive Share and Option Plan (“ESOP”).” Extract note 28.1 During the year, 293,000 options were exercised (2012: 1,492,000). A total of $1,025,500 was received as consideration for 293,000 fully paid ordinary shares of Domino’s Pizza Enterprises Limited on exercise of the options in the current financial year (2012: $5,348,540). Note students are not expected to answer in any more depth than this as this is covered in more advanced financial accounting courses.

(d)

During 2012-13 financial year there were no issues under the dividend reinvestment plan (DRP): On 18th August 2009 the Directors resolved to suspend the DRP until further notice so all dividends for 2013 were paid in cash only.

10.39

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

BUILDING BUSINESS SKILLS 10.3 COMPARATIVE ANALYSIS PROBLEM Fantastic Holdings vs. Nick Scali Ltd (a)

2013 Dividend payout rate 2012 Dividend payout rate 2013 Return on shareholders’ equity

(b)

Fantastic $’000 $10,797$13,508 = 79.9%

Nick Scali $’000 $9,720$16,002 = 60.7%

$13,356$20,988 = 63.4%

$7,290$9,204 = 79.2%

$13,508 $(108,145+108,986)/2 =12%

$16,002 $(36,334+27,353)/2 = 50%

Based on the return on shareholders’ equity Nick Scali was much more profitable. Nick Scali generated $50 cents for every dollar of shareholder’s funds invested. However, analysts, investors and managers would usually look at more than one year before drawing conclusions about which company is more profitable. Both companies have high dividend payout rates and stable dividend policies. Fantastic Holdings rate seems to have increased whereas Nick Scali’s has reduced its percentage but increased its amount per share. From 2013 Nick Scali accounts: “When added to the interim dividend of 6.0 cents per share, the total dividend for the year is 12.0 cents per share fully franked, a 50% increase over the 8.0 cents paid last year.”

10.40

Chapter 10: Reporting and analysing equity

BUILDING BUSINESS SKILLS 10.4 (a)

A GLOBAL FOCUS

The following is reproduced from the website of the Singapore Stock Exchange, accessed 28 September 2014, under About Us: “Singapore Exchange (SGX) is the Asian Gateway, connecting investors in search of Asian growth to corporate issuers in search of global capital. SGX offers its clients Asia’s broadest span of equity index derivatives, uniquely centred on Asia’s three largest economies – China, India and Japan. SGX represents the premier access point for managing Asian capital and investment exposure, and is Asia’s most internationalised exchange with more than 40% of companies listed on SGX originating outside of Singapore. In addition to offering a fully integrated value chain from trading and clearing, to settlement and depository services, SGX is also Asia’s pioneering central clearinghouse. Headquartered in Asia’s most globalised city, and centred within the AAA strength and stability of Singapore’s island nation, SGX is a peerless Asian counterparty for the clearing of financial and commodity products.”

(b)

The following is reproduced from the website of the Singapore Stock Exchange, accessed 28 September 2014, under Learn the benefits of listing with Asia’s financial gateway: “1. An International Listing Hub Singapore, ranked as the world’s best place to do business, is recognised as a dynamic global financial hub with estimated total assets of more than US$2.1 trillion under management, surpassing Hong Kong. SGX is a truly international exchange with approximately 40% of listed companies coming from overseas. 2. Leading Sectors in Asia Singapore is a top global maritime and logistics hub with the world’s largest bunker port and 2nd largest container port. It is home to some of the world’s largest Maritime & Offshore Oil & Gas services related companies. In addition, Singapore boasts an actively traded Commodities Resources sector, and the Real Estate Investment Trusts (REITs) sector on the SGX listing platform is the second largest in Asia 3. Capturing the Attention of Global Investors As the wealth management hub of Asia, Singapore is also the region’s largest foreign exchange trading and active commodities trading centre. It is well supported by more than 600 local and international financial institutions with over 3,000 investment professionals offering a wide range of products and services. 4. A Trusted Regulatory Regime Being one of the few Asian countries with an “AAA” rating, Singapore’s financial market has been built on a robust and efficient legal and judicial framework. Its judicial system is named one of the best in Asia (Political and Economic Risk Consultancy survey, March 2012).

10.41

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

5. Why SGX? SGX delivers a range of innovative products and fast-to-market services for greater reach and flexibility for our customers. With a thriving securities market and derivative trading hub, SGX is Asia’s key risk management centre.” The Products and Services tabs list the multiple products and services provided by the exchange. (c)

As an illustration, an answer is provided using Amtek Engineering International Limited, accessed 21/09/2014.

1. Full Company Name: 2. Incorporated in: 3. Incorporated on: 4. Registered Office:

Amtek Engineering Limited SINGAPORE 22 October 1980 35 Pioneer Road North, Singapore628475

5. Website

http://www.amtek.com.sq

6. Issued & Paid-up Capital: US$38,218,000 7. Listed on 1 December 2010 on SGX Mainboard 8. Auditors: Ernst & Young LLP 9. “The Company was incorporated in Singapore on 22 October 1980 under the name of Amtek Engineering Pte Ltd. Amtek Engineering Ltd provides customers with end-to-end design and manufacturing solutions for precision components, casings and enclosures. Over its 40-year history, the Group has built long term, strategic relationships with its customers. Its core expertise is in the manufacturing of highly complex precision metal, plastic and rubber components, supported by comprehensive tool and die and mould making capabilities. The Group has leveraged its core expertise and expanded its capabilities to offer an end-to-end manufacturing service offering encompassing design, prototyping, tool and die and mould making, precision metal stamping, plastic and rubber moulding, machining, welding, finishing, electro-mechanical and product assembly and testing. The Group works closely with its customers not only during the manufacturing, but also during the important product design, development and engineering stages. Source SGX Website: http://infopub.sgx.com/Apps?A=Cow_CorporateInformation_Content&B=CorpInfoByCo mpanyNameInitial&F=2380 10: Singapore, Indonesia, Mayalsia, Thailand, Vietnam, China, Czech Republic, France, USA, India and Japan. Source: Amtek Engineering Ltd 2013 Annual Report.

10.42

Chapter 10: Reporting and analysing equity

CRITICAL THINKING BUILDING BUSINESS SKILLS 10.5

GROUP DECISION CASE Dianaton Ltd

(a)

The directors should rank the options by comparing return on shareholders’ equity. However this should not be the only consideration. The issue of additional shares may affect the control of the company by existing shareholders. On the other hand, there are risks associated with taking on additional debt, such as rising interest rates (unless the interest is fixed). Another concern is the effect on liquidity and solvency of the need to make periodic interest payments and to subsequently repay the principal. This is of particular concern in the case of Dianaton because of the high operational risk of its operation. Using debt finance would combine financial risk with the existing high operating risk. This may, in turn, have a negative impact on shareholders if their company has too much risk. This may reduce the value of the company’s shares to its shareholders.

(b)

The advantage of the third option is that it reduces the risk to the company of being unable to repay the debt. If the subsidiary is unable to repay the debt the company as a shareholder is only liable for any unpaid capital. The disadvantage of this would be a loss of reputation. Another consideration is that structuring in a manner so as to avoid risk, while taking the benefits of any profits generated by the activity is not being a good corporate citizen. Assuming borrowing was going to be in the interest of shareholders, arguments could be raised for or against the third option. Some students may argue that structuring the operations in a way that effectively transfers risk to the creditors is acting in the best interests of the shareholders, as is the duty of directors. Others may consider such a structure to be poor business ethics as it is taking advantage of the subsidiary structure and limited liability to enable the company and its shareholders to receive the potential benefits if it succeeds while leaving the creditor to bear the loss if it fails.

10.43

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 5e

BUILDING BUSINESS SKILLS 10.6

COMMUNICATION ACTIVITY Purple Regs Ltd

To:

Marama Fisher

From:

I. M. Student

Subject:

Debt versus Equity Financing

The advantages of debt financing over equity financing include: 1.

Shareholder control is not usually affected.

Tax savings result because interest is tax deductible.

Return on shareholders’ equity may be higher.

Disadvantages of debt financing over equity financing include: 1. 2. 3.

Interest has to be paid irrespective of whether the company makes a profit or a loss. Risk is increased. Security for debt may be required or higher interest will be payable.

The types of debt that may be issued are: 1.

Debentures

Unsecured notes

Convertible notes, which can be converted into ordinary shares.

Loans from one party, such as a bank.

If the company wishes to raise funds through a public share issue it will need to issue a prospectus with an application to subscribe for shares. Some, or all, of the price of the share is payable on application. This money should be held in trust until shares are allotted (issued). If shares are issued by private placement, a prospectus is not required. The money may be banked and shares issued immediately upon receipt.

10.44

Chapter 10: Reporting and analysing equity

BUILDING BUSINESS SKILLS 10.7

COMMUNICATION ACTIVITY

Goodman Fielder Sustainability Reporting Taken from 2012/2013 Review http://www.goodmanfielder.com.au/sites/default/files/2013_Annual_Review/ (a) Goodman Fielder applies the Global Reporting Initiative’s G3 Sustainability Reporting Guidelines (GRI Guidelines) to a C+ level. (b) Students were asked to summarise the goals and how measured and what was the achievement for three of four areas below. Our people Environment Community Products Note to instructor: the response will depend on which sustainability report/ review the student accesses. Below is the link to Goodman Fielder. Click on Annual Reports, then choose the relevant Annual Review where the instructor can check students facts. http://www.goodmanfielder.com.au/

BUILDING BUSINESS SKILLS 10.8

ETHICS CASE

(a)

The stakeholders in this situation are: Valerie Flamingo, chief executive officer of Persuasive Ltd. Jonty James, financial director. Current and potential shareholders of Persuasive Ltd.

(b)

There is nothing unethical in issuing a share dividend. But the chief executive’s order to write a press release convincing the shareholders that the share dividend is just as good as a cash dividend is unethical. A share dividend is not a cash dividend and does not necessarily place the shareholder in the same position.

(c)

A share dividend reduces retained earnings and increases capital, thus reducing distributable profit. However, there may be long-term benefits to shareholders in the form of increased dividends in future. If the company maintains a policy of a constant dividend, in terms of cents per share, shareholders will receive more dividends because they will have more shares after the share dividend. Further, the cash dividend reduces the amount of money available to the company for investment, thus reducing future growth compared with the share dividend. The advantages of growth prospects and increased future dividends are less relevant to shareholders who do not intend to be long-term investors in Persuasive. However, they would be interested in the effect of growth and future prospects on the share price in the short term.

10.45

Chapter 11: Statement of cash flows

CHAPTER 11 – STATEMENT OF CASH FLOWS ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives 1.

Indicate the main purpose of the statement of cash flows.

Distinguish among operating, investing and financing activities.

Prepare a statement of cash flows.

Explain the impact of the product life cycle on an entity’s cash flows.

Use the statement of cash flows to evaluate an entity.

Brief Exercises

Exercises

1, 2

1, 5

2A, 6B

3, 4, 5, 6

2, 4, 6, 7, 8, 9, 11, 12, 13

1A, 2A, 3A, 4A, 5A, 6A, 7A, 8A, 9A, 10A, 1B, 2B, 3B, 4B, 5B, 7B, 8B, 9B, 10B

3 4, 10

Problems

4A, 8A, 4B, 8B

11.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CHAPTER 11 – STATEMENT OF CASH FLOWS ANSWERS TO QUESTIONS 1.

The statement of cash flows answers the following questions about cash: (a) (b) (c)

Where did the cash come from during the period? What was the cash used for during the period? What was the change in cash balance during the period?

The three activities are: Operating activities include the cash effects of revenue generating activities (such as the provisions of goods and services) and activities that are not classified as financing or investing activities. Investing activities include: (a)

acquiring and disposing of investments and productive long-lived assets

(b)

lending money and collecting loans.

Financing activities include: (a)

obtaining cash from issuing debt and repaying the amounts borrowed

(b)

obtaining cash from shareholders and providing them with a return on their investment (paying dividends).

Significant non-cash financing and investing activities must be disclosed in notes to the financial statements so that users of financial reports are informed about all of the entity’s financing and investing activities, and not only those involving cash.

(a) (b)

The phases of the company life cycle are the introductory phase, growth phase, maturity phase, and decline phase. During the introductory phase, cash from operations and investing would be expected to be negative, and cash from financing would be positive. During the growth phase, a company would be expected to show some small amounts of cash from operations (moving from negative to positive cash from operations) while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, cash from operations is positive and exceeding investing needs. Financing cash flows become negative as the entity applies the cash surpluses to pay dividends and retire debt. In the decline phase, cash from operations and investment would continue to be positive while cash from financing would be negative.

11.2

Chapter 11: Statement of cash flows

The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the statement of profit or loss and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate, although with advances in computers and information technology, this cost is of declining significance. The advantage of the indirect method is its reconciliation of profit to net cash provided by operating activities, while its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation.

Sales Less: Increase in receivables Cash receipts from customers

A number of factors could have caused an increase in cash despite the loss for the period. These are: (1) high cash revenues relative to low cash expenses (2) sales of property, plant, and equipment (3) sales of investments (4) issue of debt or shares for cash.

Any five of the following: Depreciation expense. Gain or loss on sale of a non-current asset. Increase/decrease in accounts receivable. Increase/decrease in accounts payable. Increase/decrease in inventory. Increase/decrease in prepayments. Increase or decrease in accrued expenses. Increase/decrease in income tax payable.

This transaction is reported in the note or schedule to the financial statements entitled ‘Noncash investing and financing activities’ as follows: ‘Issue of 2 million ordinary shares in consideration for equipment’.

10.

(a) (b) (c)

$2,000,000 200,000 $1,800,000

The current cash debt coverage ratio is a cash-based ratio that measures liquidity. Solvency can be measured by the cash debt coverage ratio (cash-based). Profitability can be measured by the cash return on sales ratio.

11.3

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11.1 Vong’s Thongs Ltd (a) (b) (c) (d)

Cash inflow from financing activity, Cash outflow from investing activity, Cash inflow from investing activity, Cash outflow from financing activity,

$100,000 $75,000 $ 10,000 $ 25,000

BRIEF EXERCISE 11.2 King Fisheries Pty Ltd

Cash flows from financing activities: Proceeds from issue of debentures Payment of dividends Net cash provided by financing activities

$200,000 (40,000) $160,000

BRIEF EXERCISE 11.3 Cheong’s Chinese Herbs Ltd

Cash receipts from customers

+ Decrease in accounts receivable   - bad debts written off  revenues - Increase in accounts receivable 

Sales

$588,000 = $600,000 - $10,000 (Increase in accounts receivable) - $2,000

BRIEF EXERCISE 11.4 Pete’s Pies Ltd + Increase in prepaid expenses  - Decrease in prepaid expenses

Cash payments for operating expenses

Operating expenses excluding depreciation

and + Decrease in accrued expenses payable  - Increase in accrued expenses payable

$202,800 = $216,000 - $7,920 - $5,280

11.4

Chapter 11: Statement of cash flows

BRIEF EXERCISE 11.5 Rotorua Rides Ltd

Profit Adjustments to reconcile profit to net cash provided by operating activities: Decrease in accounts receivable Increase in prepaid expenses Increase in inventories Net cash provided by operating activities

$200,000

$80,000 (12,000) (30,000)

38,000 $238,000

BRIEF EXERCISE 11.6 Lau Pty Ltd

Original cost of equipment sold Less Accumulated depreciation Carrying amount of equipment sold Add: Gain on sale of equipment Cash flow from sale of equipment

$33,000 (9,000) 24,000 4,500 $28,500

BRIEF EXERCISE 11.7 (a)

Cash from operations would be lower than profit during the growth phase because inventory must be purchased for future projected sales. Since during the growth phase sales are projected to be increasing, inventory purchases must increase and inventory expensed on an accrual basis would be less than inventory purchased on a cash basis. Also, collections on accounts receivable would lag behind sales; thus, accrual sales would exceed cash collections during the period.

(b)

Cash from investing is often positive during the late maturity phase and the decline phase because the firm may sell off excess assets that are no longer needed for productive purposes.

(c)

Cash flow from financing activities is often positive during the introductory and growth phases as finance would often need to be raised either by issuing shares or from borrowings for investment in assets.

11.5

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO EXERCISES EXERCISE 11.1 (a).

Wilderness Equipment Ltd Reconciliation of profit after tax to cash provided by operating activities

(a) (b) (c) (d) (e) (f) (g)

Noncash investing and financing activities. Financing activities. Operating activities. Financing activities. Investing activities. Noncash investing and financing activities. Operating activities.

b). Operating activities are the entity’s principal revenue-generating activities such as the provision of goods and services and activities which are not classified as investing or financing activities. Investing activities are the acquisition and disposal of long-term assets, including activities such as purchasing and selling of non-current assets, and lending money and collecting the loans. Financing activities are those that affect the size and composition of contributed equity and borrowing, and include obtaining cash from issuing debt, repaying the amounts borrowed, obtaining cash from shareholders, and paying them dividends or buying back shares

EXERCISE 11.2 Madonna Ltd

Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Increase in accounts payable Increase in prepaid expenses Loss on sale of equipment Net cash provided by operating activities

$200,000

$35,000 (15,000) 8,000 (5,000) 5,000

28,000 $228,000

11.6

Chapter 11: Statement of cash flows

EXERCISE 11.3 Point in Time A B C D

Phase Maturity phase Decline phase Introductory phase Growth phase

During the introductory phase (point C), cash from operations and investing are expected to be negative while cash from financing would be positive. In the growth phase (point D), a company would continue to show negative cash from operations and investing and positive cash from financing. Cash from operations is approximately equal to profit in the maturity phase (A) and declines in the decline phase (B), when the company also has positive investing cash flows from selling of assets and negative financing cash flows as it retires debt.

11.7

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 11.4 (a) Big Bang Balloons Pty Ltd Statement of Cash Flows for the year ended 30 June 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For other operating expenses For interest For income taxes Net cash provided by operating activities

$1,162,800 (1) $638,400 (2) 313,200 (3) 18,000 54,000

Cash flows from investing activities: Sale of land Purchase of equipment Net cash used by investing activities

30,000 (72,000)

Cash flows from financing activities: Repayment of notes payable Issue of shares Payment of dividends Net cash used by financing activities

(60,000) 60,000 (51,600)

(42,000)

Net increase in cash Cash at beginning of period Cash at end of period

Calculations: (1) Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers (2)

Cash payments to suppliers: Cost of sales Deduct: Decrease in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

1,023,600 139,200

(51,600) 45,600 26,400 $72,000

$1,173,600 (10,800) $1,162,800

$633,600 (10,800) 622,800 15,600 $638,400

11.8

Chapter 11: Statement of cash flows

(3)

Cash payments for operating expenses: Total expenses Deduct: COS Depreciation * Interest expense Tax expense Cash payments for operating expenses

1047,600 (633,600) (28,800) (18,000) (54,000) $313,200

* In the absence of any disposals of depreciated assets the change in Accumulated Depreciation is the depreciation expense

(b)

Current cash debt coverage: Net cash provided by operating activities

$139,200 (per part (a)) 2.

Average current liabilities

$56,400 + $40,800 = 2.86 times 2

Cash return on sales ratio: Net cash provided by operating activities

Sales

$139,200 ÷ $1,173,600 = 11.9%

Cash debt coverage: Net cash provided by operating activities

$139,200 ÷

Average total liabilities

$296400  + $220800   = .54 times 2

(* $56,400 + $240,000) (**$40,800 + $180,000)

11.9

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 11.5 Simpson Ltd (a) (b) (c) (d)

(h) (i) (j) (k)

Financing activity Operating activity (reconciliation) Financing activity Operating activity

(e) (f)

Investing activity Financing activity Investing activity Non-cash investing and financing activity Operating activity (reconciliation) Financing activity

(l) (m)

(g)

Operating activity

(n)

Non-cash financing activity Investing activity (cash proceeds from sale) Operating activity

EXERCISE 11.6 Christchurch Motors Pty Ltd

Revenues Deduct: Increase in accounts receivable Cash receipts from customers* Operating expenses Deduct: Increase in accounts payable Bad debts expense Cash payments for operating expenses** Net cash provided by operating activities

Balance, Beginning of year Revenues for the year

Opening Balance

$170,000 (43,000) $127,000 80,000 (33,000) (1,000)

*Accounts Receivable 170,000 Cash receipts for year Closing Balance 170,000 43,000 **Accounts Payable Balance, Beginning of year 46,000 Operating expenses for year 33,000 79,000 Opening Balance

Payments for year Closing Balance

46,000 $81,000

127,000 43,000 170,000

79,000 79,000 33,000

Operating expenses are $79,000 in the reconstruction of Accounts Payable because $1000 of the total operating expenses of $80,000 was for the bad debts expense, a non-cash item.

11.10

Chapter 11: Statement of cash flows

EXERCISE 11.7 Colin Ltd

(a)

(b)

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Add: Decrease in accounts payable Cash paid to suppliers

$355,000 6,000 361,000 8,000 $369,000

Cash payments for operating expenses: Operating expenses exclusive of depreciation Deduct: Decrease in prepaid expenses Add: Decrease in accrued expenses payable Cash paid for operating expenses

$230,000 ($6,000) 12,000

6,000 $236,000

EXERCISE 11.8 Outdoor Adventures Ltd Partial Statement of Cash Flows for the year ended 31 December 2015

Cash flows from operating activities: Cash receipts from: Customers Dividends on investment Cash payments: To suppliers for inventory For operating expenses For salaries and wages For interest For income taxes Net cash provided by operating activities

*$250,000 14,000 264,000 $100,000 20,000 68,000 15,000 16,000

219,000 $45,000

*$60,000 + $190,000

11.11

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 11.9

Chau Ltd

Cash payments for rentals: Rent expense Deduct: Decrease in prepaid rent Cash payments for rent

$93,000 (8,700) $84,300

Cash payments for salaries: Salaries expense Deduct: Increase in salaries payable Cash payments for salaries

$162,000 (9,000) $153,000

Cash receipts from customers: Revenue from sales Add: Decrease in accounts receivable Cash receipts from customers

$540,000 9,000 $549,000

11.12

Chapter 11: Statement of cash flows

EXERCISE 11.10 Kang Ltd and Jang Ltd

Kang Ltd

Jang Ltd

(a)

Current cash debt coverage ratio

$220,000 = 4.4 times $50,000

$240,000 = 2.4 times $100,000

(b)

Cash debt coverage ratio

$220,000 =1.1 times $200,000

$240,000 = .96 times $250,000

(c)

Cash return on sales ratio

$220,000 = .55 : 1 $400,000

$240,000 = .30 : 1 $800,000

Kang Ltd’s liquidity, solvency and profitability ratios are all higher (better) than Jang Ltd’s comparable ratios. Kang current cash debt coverage ratio and cash return on sales ratio are almost twice as high as those of Jang. These ratios indicate that Kang is substantially more liquid and profitable than Jang and is slightly more solvent.

EXERCISE 11.11 Home and Away Travels Ltd Partial Statement of Cash Flows for the year ended 30 June 2016

*$350,000 19,600 369,600 $140,000 28,000 95,200 21,000 22,400

306,600 $63,000

*$84,000 + $266,000

11.13

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 11.12

Opotiki Ltd

Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in accounts payable Increase in accrued expenses payable Increase in prepaid expenses Decrease in inventory Net cash provided by operating activities

$153,000

$19,000 (31,000) (7,000) 10,000 (5,000) 25,000 11,000 $164,000

11.14

Chapter 11: Statement of cash flows

EXERCISE 11.13

Castle Ltd Partial Statement of Cash Flows (Indirect method) for the year ended 30 June 2016 Reconciliation of profit after tax to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Add Depreciation expense Add loss on sale of equipment Less Increase in current assets Add Decrease in current assets Add Increases in current liabilities Less Decrease in current liabilities Net cash provided by operating activities Cash flows from investing activities Purchase of equipment Sale of equipment * Net cash provided by investing activities Cash flows from financing activities Dividends paid

$16,750

$7,000 $750

$xxx xxx

(17,500) 500 (17,000)

(3,500)

* Cash flow from sale of equipment Original cost of equipment sold Less Accumulated depreciation Carrying amount of equipment sold Less: Loss on sale of equipment Cash flow from sale of equipment

$8,750 (7,500) 1,250 750 $500

11.15

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 11.1 Waihi Beach Surfboards Pty Ltd Partial Statement of Cash Flows for the year ended 30 June 2015

Cash flows from investing activities: Purchase of land Sale of plant and equipment Purchase of plant and equipment Net cash used by investing activities

(60,000) 10,250 (50,000)

(1) (99,750)

Equipment 177,500 Cost of equipment sold

Opening balance Equipment purchased

50,000 Closing 227,500 200,000

Opening Balance

balance

27,500 200,000 227,500

(1) Proceeds on sale of equipment = gain on sale plus carrying amount = 3,000 + (27,500 – 20,250) = 3,000 + 7,250 = 10,250

*Accumulated Depreciation - Equipment 20250 Balance, Beginning of year Depreciation Expense (2) 100,000 120,250 Opening Balance

Equipment sold Closing Balance

97,500 22,750 120,250 100,000

(2) Depreciation expense – equipment = total depreciation expense – building depreciation expense = 47,750 – 25,000 = 27,750

11.16

Chapter 11: Statement of cash flows

PROBLEM SET A 11.2 (a) Operating activities is the most important category because it shows the cash provided or used by operations. This source of cash is generally considered to be the best measure of whether an entity can generate sufficient cash to continue as a going concern and to expand. (b) Phillips Screwdrivers Ltd Partial Statement of Cash Flows for the year ended 31 March 2017

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses Tax paid Net cash provided by operating activities

$7,200,000 (1) $4,700,000 (2) 1,240,000 (3) 100,000

(6,040,000) $1,160,000

Calculations: (1)

(2)

Cash receipts from customers: Sales Add: Decrease in accounts receivable Cash receipts from customers

$6,900,000 300,000 $7,200,000

Cash payments to suppliers: Cost of sales Deduct: Decrease in inventories Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$4,700,000 (300,000) 4,400,000 300,000 $4,700,000

(3)

Cash payments for operating expenses: Operating expenses, exclusive of depreciation Add: Increase in prepaid expenses Decrease in accrued expenses payable Cash payments for operating expenses

*$990,000 $150,000 100,000

250,000 $1,240,000

*$450,000 + ($600,000 - $60,000)

11.17

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c) Phillips Screwdrivers Ltd Note to Statement of Cash Flows for the year ended 31 March 2017 Reconciliation of profit after tax to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Decrease in accounts receivable Decrease in inventory Increase in prepaid expenses Decrease in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities

$1,050,000

$60,000 300,000 300,000 (150,000) (300,000) (100,000

110,000 $1,160,000

11.18

Chapter 11: Statement of cash flows

PROBLEM SET A 11.3 Peebody Enterprises Ltd Partial Statement of Cash Flows for the year ended 30 June 2015 (a) Cash flows from operating activities: Cash receipts from customers Cash payments: For operating expenses For income taxes Net cash provided by operating activities

$1,190,000 (1) $862,400 (2) 64,400 (3)

926,800 $263,200

Calculations: (1)

(2)

(3)

Computation of cash receipts from customers: Revenues Add: Decrease in accounts receivable ($79,800 - $65,800) Cash receipts from customers

$1,176,000 14,000 $1,190,000

Computation of cash payments: Operating expenses per statement of profit or loss Deduct: Increase in accounts payable ($57,400 - $46,200) Cash payments for operating expenses

$873,600 (11,200) $862,400

Income tax expense per statement of profit or loss Add: Decrease in income tax payable ($14,000 - $5,600) Cash payments for income taxes

$56,000 8,400 $64,400

(b) Peebody Enterprises Ltd Note to Statement of Cash Flows for the year ended 30 June 2015 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in accounts payable Decrease in income taxes payable Net cash provided by operating activities

$126,000

$84,000 36,400 14,000 11,200 (8,400)

137,200 $263,200

11.19

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 11.4 (a) Metro Meats Ltd Statement of Cash Flows for the year ended 31 December 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For interest For income taxes Net cash provided by operating activities

$236,000 (1) $199,000 (2) 18,500 (3) 2,000 7,000 (4)

Cash flows from investing activities: Sale of equipment Net cash provided by investing activities Cash flows from financing activities: Redemption of debentures Issue of shares Payment of dividends Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period

226,500 $9,500

8,500 8,500

(6,000) 4,000 (2,000) (4,000) 14,000 15,000 $29,000

11.20

Chapter 11: Statement of cash flows

Calculations: (1)

(2)

(3)

(4)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$250,000 (14,000) $236,000

Cash payments to suppliers: Cost of sales Deduct: Decrease in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers

$210,000 (10,000) 200,000 (1,000) $199,000

Cash payments of operating expenses: Operating expenses Deduct: Depreciation * Cash payments for operating expenses

$24,000 (5,500) $18,500

Cash payments for income taxes: Income tax expense Add: Decrease in income taxes payable Cash payments for income taxes

$4,000 3,000 $7,000

*Accumulated Depreciation 9,500 Balance, Beginning of year Depreciation Expense 20,000 29,500 Opening Balance

Equipment sold Closing Balance

24,000 5,500 29,500 20,000

11.21

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) Metro Meats Ltd Note to Statement of cash flows for the year ended 31 December 2015 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in income taxes payable Decrease in inventory Increase in accounts payable Net cash provided by operating activities

(c)

(1)

$9,500 [ Per Part (a)]



$10,000

$5,500 (14,000) (3,000) 10,000 1,000

(500) $9,500

$33,000 * + $34,000 * * = .284 : 1 2

*$25,000 + $8,000 **$26,000 + $3,000 + $5,000 (2)

$9,500  $250,000 = .038

(3)

$9,500 

$66,000 * + $61,000 * * = .15 times 2

*$25,000 + $8,000 + $33,000 (d)

**$26,000 + $3,000+ $5,000 + $27,000

The ratios calculated in part (c) suggest that Metro Meats Ltd’s cash generated from operating activities in 1 year is 28.4% of it’s short term obligations. It generates enough cash in 1 year from operating activities to meet 28.4% of the obligations that are due within 1 year and its cash generated from operating activities is15% of its total liabilities. It would appear that Metro Meats Ltd may have to liquidate some of its productive assets in order to meet its short term obligations.

11.22

Chapter 11: Statement of cash flows

PROBLEM SET A 11.5 (a) Freshest Farmers Ltd Statement of Cash Flows for the year ended 31 March 2016

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities

$426,300 (1) $150,615 (2) 22,665 (3) 10,500 3,345

Cash flows from investing activities: Purchase of investments Sale of machinery Purchase of machinery Net cash used by investing activities

(21,000) 2,250 (127,500)

Cash flows from financing activities: Issue of shares Redemption of debentures Payment of cash dividends Net cash used by financing activities

52,500 (22,500) (33,525)

Net increase in cash Cash at beginning of period Cash at end of period

(187,125) 239,175

(146,250)

(3,525) 89,400 57,600 $147,000

11.23

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Calculations: (1)

(2)

(3)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$513,000 (86,700) $426,300

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers

$173,190 14,475 187,665 (37,050) $150,615

Cash payments for operating expenses: Operating expenses excluding depreciation Add: Increase in prepaid expenses Decrease in accrued expenses payable

$18,615 $3,600 450

4,050 $22,665

Cash payments for operating expenses

(b) Freshest Farmers Ltd Note to Statement of Cash Flows (Indirect method) for the year ended 31 March 2016 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Loss on sale of machinery Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Increase in prepaid expenses Net cash provided by operating activities

$226,350

$69,750 11,250 (86,700) (14,475) 37,050 (450) (3,600)

12,825 $239,175

11.24

Chapter 11: Statement of cash flows

PROBLEM SET A 11.6 (a)

Sticky Stationery Supplies Ltd Partial Statement of Cash Flows for the year ended 30 June 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses Net cash used by operating activities

$6,590,000 $5,380,000 1,275,000

(2) (3)

(1)

(6,655,000) ($65,000)

Calculations: (1)

(2)

(3)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$7,100,000 (510,000) $6,590,000

Cash payments to suppliers: Cost of purchases per statement of financial performance Deduct: Increase in accounts payable Cash payments to suppliers

5,430,000 (50,000) $5,380,000

Cash payments for operating expenses: Operating expenses ($400,000 + $525,000) Add: Increase in prepaid expenses Decrease in accrued expenses payable Cash payments for operating expenses

$925,000 $170,000 180,000

350,000 $1,275,000

(b)

Sticky Stationery Supplies Ltd Note to Statement of Cash Flows for the year ended 31 March 2015 Reconciliation of profit after tax to cash used by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Amortisation expense Increase in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Decrease in accrued expenses payable Net cash used by operating activities

$860,000

$75,000 30,000 (510,000) (220,000) (170,000) 50,000 (180,000)

(925,000) ($65,000)

11.25

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 11.7 (a) Yu’s Shoes Ltd Partial Statement of Cash Flows for the year ended 31 March 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: For operating expenses For income taxes Net cash provided by operating activities (1)

(2)

(3)

$1,140,000 (1) $582,000 (2) 176,000 (3)

Computation of cash receipts from customers: Revenues Deduct: Increase in accounts receivable Cash receipts from customers

758,000 $382,000

$1,160,000 (20,000) $1140,000

Computation of cash payments for operating expenses: Operating expenses Add: Decrease in accounts payable ($82,000 - $60,000) Cash payments for operating expenses

$560,000 22,000 $582,000

Income tax expense: Deduct: Increase income taxes payable ($12,000 - $8,000) Cash payments for income taxes

$180,000 (4,000) $176,000

(b) Yu’s Shoes Ltd Note to Partial Statement of Cash Flows (Indirect method) for the year ended 31 March 2015 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Increase in accounts receivable Decrease in accounts payable Increase in income taxes payable Net cash provided by operating activities

$420,000

($20,000) (22,000) 4,000

(38,000) $382,000

11.26

Chapter 11: Statement of cash flows

PROBLEM SET A 11.8 (a) Mountain King Tours Ltd Statement of Cash Flows for the year ended 31 December 2016

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For interest For income taxes Net cash provided by operating activities

$246,000 (1) $183,000 (2) 33,000 (3) 2,000 12,000 (4)

Cash flows from investing activities: Sale of boat Purchase of motors Net cash provided by investing activities

10,000 (7,000)

Cash flows from financing activities: Proceeds from issue of shares Proceeds from issue of debentures Payment of cash dividends Net cash used by financing activities

5,000 5,000 (12,000)

Net increase in cash Cash at beginning of period Cash at end of period

230,000 $16,000

3,000

(2,000) 17,000 13,000 $30,000

11.27

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Calculations: (1)

(2)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$250,000 (4,000) $246,000

Cash payments to suppliers: Cost of sales Deduct: Decrease in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$180,000 (1,000) 179,000 4,000 $183,000

(3)

Operating expenses $28 000 + $16 000 Less depreciation

(4)

Cash payments for income taxes: Income tax expense Add: Decrease in income taxes payable Cash payments for income taxes

$44,000 (11,000) $33,000 $7,000 5,000 $12,000

(b) Mountain King Tours Ltd Note to Statement of Cash Flows for the year ended 31 December 2016 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Decrease in accounts payable Decrease in income taxes payable Net cash provided by operating activities

$17,000

$11,000 (4,000) 1,000 (4,000) (5,000)

(1,000) $16,000

11.28

Chapter 11: Statement of cash flows

(c)

(1)

Current cash debt coverage

$16,000 

$44,000 * + $53,000 * * = .33 times 2

*$29,000 + $15,000

**$33,000 + $20,000

(2)

Cash return on sales ratio

$16,000 ÷ $250,000 = 6.4% or .064:1

(3)

Cash debt coverage

$16,000 

$59,000 * + $63,000 * * = .26 times 2

*$29,000 + $15,000 + $15,000

(4)

(d)

Free cash flow

**$33,000 + $20,000 + $10,000

$16,000 - $7,000 = $9,000

33% of Mountain King Tours Ltd’s short term obligations in one year could be covered by the cash generated from its operating activities and the cash flow from operating activities is sufficient to cover 26% of its total obligations. The cash return on sales figure of 6.4% compares favourably to the profit ratio of 6.8% (17,000/250,000) and there is free cash flow of $9,000 which suggests that after investing in new property, plant and equipment to maintain operations at their current level, there is still cash available for expansion or payment of dividends.

11.29

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 11.9 (a) Takahashi Enterprises Pty Ltd Statement of Cash Flows for the year ended 30 June 2017 Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities: Sale of investments Sale of plant and equipment Purchase of plant and equipment Net cash used by investing activities Cash flows from financing activities: Proceeds from issue of shares Proceeds from issue of debentures Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period

$135,100 (1) $57,145 (2) 10,700 (3) 3,635 2,720

1,200 7,775 (46,000)

74,200 $60,900

(4) (37,025)

25,000 15,000 (40,000) nil 23,875 23,625 $47,500

Calculations: (1)

(2)

(3)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers Cash payments for operating expenses: Operating expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses .

$150,000 (14,900) $135,100

$49,730 9,625 59,355 (2,210) $57,145 $7,335 3,365 $10,700 11.30

Chapter 11: Statement of cash flows

(4) Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Plant and Equipment 102,500 Equipment sold 46,000 Closing Balance

23,500 125,000

148,500 125,000

148,500

(b) Takahashi Enterprises Pty Ltd Note to Statement of Cash Flows (Indirect Method) for the year ended 30 June 2017 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Gain on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities

$66,105

$24,850 (4,375) (14,900) (9,625) 2,210 (3,365)

(5,205) $60,900

11.31

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 11.10 (a) DVD’S and More Ltd Statement of Cash Flows for the year ended 30 June 2016

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes Net cash provided by operating activities

$636,000 (1) $290,000 (2) 23,000 (3) 63,000 (4)

Cash flows from investing activities: Purchase of land (6) Sale of land Sale of equipment (5) Purchase of equipment (60,000 – 20,000) Net cash provided by investing activities

(80,000) 100,000 30,000 (40,000)

Cash flows from financing activities: Proceeds from issue of shares Payment of cash dividends Repayment of borrowings (100,000 + 60,000) Net cash used by financing activities

50,000 (75,000) (160,000)

Net increase in cash Cash at beginning of period Cash at end of period

376,000 $260,000

10,000

(185,000) 85,000 80,000 $165,000

11.32

Chapter 11: Statement of cash flows

Calculations: (1)

Cash receipts from customers: Sales Add: Decrease in accounts receivable Deduct: Bad debts written off Cash receipts from customers

$620,000 20,000 (4,000) $636,000

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$240,000 30,000 270,000 20 ,000 $290,000

(3)

Operating expenses $28 000 -$5,000

$23,000

(4)

Cash payments for income taxes: Income tax expense(92,000 + 18,000) deduct: Increase in income taxes payable Cash payments for income taxes

$110,000 (47,000) $63,000

(2)

(b) DVD’s and More Ltd Note to Statement of Cash Flows for the year ended 30 June 2016 Reconciliation of profit to cash provided by operating activities Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Loss on sale of office equipment Profit on sale of land Decrease in accounts receivable Increase in allowance for doubtful debts Decrease in prepaid rent Increase in inventory Decrease in accounts payable Increase in accrued expenses Increase in income taxes payable Net cash provided by operating activities

$100,000

$90,000 $20,000 ($20,000) 20,000 8,000 40,000 (30,000) (20,000) 5,000 47,000

160,000 $260,000

11.33

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(5) Balance, Beginning of year Cash (purchase of equipment) Purchase via long term note

Opening Balance

Equipment 280,000 Equipment sold 40,000 Closing Balance 20,000 340,000 250,000

Accumulated Depreciation - Equipment Balance, Beginning of year Accum. Depn. Equip. sold 40,000 Depreciation Expense Closing Balance 110,000 150,000 Opening Balance

90,000 250,000

340,000

90,000 60,000 150,000 110,000

(5) Balance, Beginning of year Land purchased Upward revaluation

Opening Balance

Land 360,000 Land sold 80,000 60,000 Closing Balance 500,000 420,000

80,000 420,000 500,000

11.34

Chapter 11: Statement of cash flows

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 11.1 Wholesale Foods Ltd Cash flows from investing activities Proceeds from sale of equipment Purchase of equipment Purchase of land Net cash used by investing activities

Balance, Beginning of year

Opening Balance

3,000 (80,000) (30,000) (107,000)

Buildings 750,000 Closing Balance

750,000

750,000 750,000

750,000

*Accumulated Depreciation - Buildings Balance, Beginning of year Depreciation Expense 337,500 337,500 Opening Balance

Closing Balance

Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Equipment 240,000 Equipment sold 80,000 Closing Balance

337,500 337,500

20,000 300,000

320,000 300,000

Total depreciation expense Less depreciation expense - building = depreciation expense – equipment

300,000 37,500

320,000

101,500 37,500 64,000

11.35

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

*Accumulated Depreciation - Equipment 16,000 Balance, Beginning of year Depreciation Expense 144,000 160,000 Opening Balance

Equipment sold Closing Balance

Carrying amount of equipment sold (20,000 - 16,000) Loss on sale of equipment Proceeds of sale of equipment

96,000 64,000 160,000 144,000 $4,000 1,000 $3,000

11.36

Chapter 11: Statement of cash flows

PROBLEM SET B 11.2 (a) Okamoto Motors Ltd Statement of Cash Flows for the year ended 31 December 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses Net cash provided by operating activities

$1,477,500 (1) 845,000 (2) 232,500 (3)

Calculations: (1) Cash receipts from customers: Sales Add: Decrease in accounts receivable Cash receipts from customers (2)

(3)

1,077,500 400,000

$1,350,000 127,500 $1,477,500

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers

$822,500 35,000 857,500 (12,500) $845,000

Cash payments for operating expenses: Operating expenses Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses

$231,250 42,500 (41,250) $232,500

11.37

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) Okamoto Motors Ltd Note to Statement of Cash Flows (Indirect Method) for the year ended 31 December 2015 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Amortisation expense Decrease in accounts receivable Increase in inventory Increase in accounts payable Increase in prepaid expenses Increase in accrued expenses payable Net cash provided by operating activities

$260,000

$31,250 5,000 127,500 (35,000) 12,500 ((42,500) 41,250

140,000 $400,000

11.38

Chapter 11: Statement of cash flows

PROBLEM SET B 11.3 (a)

Nguyen and Tran Ltd Partial Statement of Cash Flows for the year ended 31 March 2017

Cash flows from operating activities: Cash receipts from customers Cash payments: For operating expenses For income taxes Net cash provided by operating activities (1)

(2)

(3)

$420,000 (1) $291,000 (2) 45,000 (3)

336,000 $84,000

Computation of cash receipts from customers: Revenues Deduct: Increase in accounts receivable Cash receipts from customers

$430,000 (10,000) $420,000

Computation of cash payments for operating expenses: Operating expenses Add: Decrease in accounts payable ($41,000 - $30,000) Cash payments for operating expenses

$280,000 11,000 $291,000

Income tax expense: Deduct: Increase income taxes payable ($6,000 - $4,000) Cash payments for income taxes

$47,000 (2,000) $45,000

(b)

Nguyen and Tran Ltd Note to Partial Statement of Cash Flows for the year ended 31 March 2017 Reconciliation of profit after tax to cash used by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Increase in accounts receivable Decrease in accounts payable Increase in income taxes payable Net cash used by operating activities

$103,000

($10,000) (11,000) 2,000

(19,000) ($84,000)

11.39

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c)

Direct method is a method of presenting cash payments as deductions from cash receipts to determine net cash provided by operating activities. Indirect method is a method of preparing a cash flow statement in which profit is adjusted for timing differences, non-cash items and cash flows classified as investing to determine net cash provided by operating activities.

PROBLEM SET B 11.4 (a) Kiwi Ltd Statement of Cash Flows for the year ended 31 December 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities

$353,600 (1) 284,700 (2) 37,700 (3) 1,300 (4) 9,100

Cash flows from investing activities: Proceeds from sale of equipment Purchase of plant and equipment Net cash provided by investing activities

13,000 (9,100)

Cash flows from financing activities: Proceeds from issue of bonds Dividends paid Net cash used by financing activities

13,000 (46,800)

Net decrease in cash Cash at beginning of period Cash at end of period

332,800 $20,800

(5) 3,900

(6) (33,800) (9,100) 42,900 $33,800

11.40

Chapter 11: Statement of cash flows

Calculations: (1)

(2)

(3)

(4)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$371,800 (18,200) $353,600

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$252,200 16,900 269,100 15,600 $284,700

Cash payments for operating expenses: Operating expenses (36,400 – 10,400 + 11,700)

$37,700

Income tax expense Increase in income tax payable Income taxes paid

$9,100 (7,800) $1,300

(5) Property, Plant and Equipment Balance, Beginning of year 101,400 Equipment sold Cash (purchase of equipment) 9,100 Closing Balance 110,500 91,000

Opening Balance

19,500 91,000 110,500

(6) Retained Earnings 46,800 Balance, Beginning of year Profit 42,900 89,700 Opening Balance

Dividends paid Closing Balance

36,400 53,300 89,700 42,900

11.41

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(b) Kiwi Ltd Note to Statement of Cash Flows for the year ended 31 December 2015 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Increase in inventory Decrease in accounts payable Increase in income tax payable Net cash provided by operating activities

$53,300

$10,400 (18,200) (16,900) (15,600) 7,800

(32,500) $20,800

Current cash debt coverage = $20,800  ($74,100 + $81,900)/2 = 0.27:1 Cash debt coverage = $20,800  ($100,100 + $94,900)/2 = 0.21:1 Free cash flow = $20,800 - $9,100 = $11,700

(c)

(1) (2) (3)

(d)

Kiwi Ltd has the ability to cover 27% of its short-term liabilities from the cash generated from its operating activities. The cash debt coverage of 0.21 shows that Kiwi Ltd’s cash flows from operating activities is sufficient to cover 21% of its total liabilities. After investing in new property, plant and equipment to maintain operations at their current level, Kiwi Ltd still has $11,700 cash available for expansion or payments of dividends, as shown by its free cash flow of $11,700.

11.42

Chapter 11: Statement of cash flows

PROBLEM SET B 11.5 (a) Aleksia Ltd Statement of Cash Flows for the year ended 31 December 2016

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities

$253,700 (1) $104,290 (2) 21,400 (3) 7,270 2,940

Cash flows from investing activities: Sale of investments Sale of plant and equipment Purchase of plant and equipment Net cash used by investing activities

22,500 15,000 (141,000)

Cash flows from financing activities: Proceeds from issue of shares Proceeds from issue of bonds Payment of cash dividends Net cash provided by financing activities

50,000 70,000 (75,000)

Net increase in cash Cash at beginning of period Cash at end of period

135,900 $117,800

(4) (103,500)

(5) 45,000 59,300 33,400 $92,700

11.43

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Calculations: (1)

(2)

(3)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$297,500 (43,800) $253,700

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers

$99,460 19,250 118,710 (14,420) $104,290

Cash payments for operating expenses: Operating expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses

$14,670 6,730 $21,400

(4) Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Plant and Equipment 205,000 Equipment sold 141,000 Closing Balance

36,000 310,000

346,000 310,000

346,000

Accumulated Depreciation – Equipment Balance, Beginning of year 26,000 Depreciation expense 49,500 75,500 Opening Balance

Sale of equipment Closing Balance

Original cost of equipment sold Less accumulated depreciation Carrying amount of equipment sold Sale price Gain on sale of equipment

40,000 35,500 75,500 49,500

36,000 26,000 10,000 15,000 5,000

11.44

Chapter 11: Statement of cash flows

(5) Retained Earnings 75,000 Balance, Beginning of year Profit 175,600 250,600 Opening Balance

Dividends paid Closing Balance

107,940 142,660 250,600 175,600

(b) Aleksia Ltd Note to Statement of Cash Flows (Indirect Method) for the year ended 31 December 2016 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Gain on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities

$142,660

$35,500 (5,000) (43,800) (19,250) 14,420 (6,730)

(24,860) $117,800

11.45

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 11.6 Transaction

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Where Reported (O), Investing (I), Financing (F) or as non-cash (NC)

Cash Inflow, Cash outflow, No Effect

No effect Outflow Inflow No effect Outflow No effect Inflow No effect Outflow No effect

O I NC F NC O O

PROBLEM SET B 11.7 (a) Bear’s Chairs Ltd Partial Statement of Cash Flows for the year ended 30 November 2015 Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses Net cash provided by operating activities

$7,500,000 (1) $4,740,000 (2) 1,290,000 (3)

6,030,000 $1,470,000

Calculations: (1)

(2)

(3)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$7,700,000 (200,000) $7,500,000

Cash payments to suppliers: Cost of purchases per statement of profit or loss Add: Decrease in accounts payable Cash payments to suppliers

4,400,000 340,000 $4,740,000

Cash payments for operating expenses: Operating expenses ($1,150,000 - $110,000) Add: Increase in prepaid expenses $150,000 Add: Decrease in accrued expenses payable 100,000 Cash payments for operating expenses .

$1,040,000

250,000 $1,290,000 11.46

Chapter 11: Statement of cash flows

(b) Bear’s Chairs Ltd Note to Statement of Cash Flows for the year ended 30 November 2015 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Increase in prepaid expenses Decrease in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities

$1,650,000

$110,000 (200,000) 500,000 (150,000) (340,000) (100,000)

(180,000) $1,470,000

11.47

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 11.8 (a) XYZ Children’s Centre Ltd Statement of Cash Flows for the year ended 31 December 2016

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For interest For income taxes Net cash provided by operating activities

$590,400 (1) $439,200 (2) 79,200 (3) 4,800 28,800 (4)

Cash flows from investing activities: Sale of Furniture Purchase of Equipment Net cash provided by investing activities

24,000 (16,800)

Cash flows from financing activities: Proceeds from issue of shares Proceeds from issue of debentures Payment of cash dividends Net cash used by financing activities

12,000 12,000 (28,800)

Net increase in cash Cash at beginning of period Cash at end of period

552,000 $38,400

7,200

(4,800) 40,800 31,200 $72,000

11.48

Chapter 11: Statement of cash flows

Calculations: (1)

(2)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$600,000 (9,600) $590,400

Cash payments to suppliers: Cost of sales Deduct: Decrease in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$432,000 (2,400) 429,600 9,600 $439,200

(3)

Operating expenses $60 000 + $45 600 Less depreciation

(4)

Cash payments for income taxes: Income tax expense Add: Decrease in income taxes payable Cash payments for income taxes

$105,600 (26,400) $79,200 $16,800 12,000 $28,800

(b) XYZ Children’s Centre Ltd Note to Statement of Cash Flows (Indirect method) for the year ended 31 December 2016 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Decrease in accounts payable Decrease in income taxes payable Net cash provided by operating activities

$40,800

$26,400 (9,600) 2,400 (9,600) (12,000)

(2,400) $38,400

11.49

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c)

(1)

Current cash debt coverage = $38,400/ [($105,600* + 127,200**)/2] = 0.33 *$69,600 + $36,000 **$79,200 + $48,000

(2)

Cash return on sales ratio

$38,400 ÷ $600,000 = 6.4% or .064:1

(3)

Cash debt coverage = $38,400/[(141,600* + 151,200**)/2] = 0.26 *$69,600 + $36,000 + $36,000 **$79,200 + $48,000 + $24,000

(4)

(d)

Free cash flow

$38,400 - $16,800 = $21,600

33% of XYZ Children’s Centre Ltd’s short term obligations in one year could be covered by the cash generated from its operating activities and the cash flow from operating activities is sufficient to cover 26% of its total obligations. The cash return on sales figure of 6.4% compares favourably to the profit ratio of 6.8% (40,800/600,000) and there is free cash flow of $21,600 which suggests that after investing in furniture and equipment to maintain operations at their current level, there is still cash available for expansion or payment of dividends.

11.50

Chapter 11: Statement of cash flows

PROBLEM SET B 11.9 (a)

ABC Manufacturing Pty Ltd Statement of Cash Flows for the year ended 30 June 2015

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities

$267,700 $114,290 21,400 7,270 2,940

Cash flows from investing activities: Sale of investments Sale of plant and equipment Purchase of plant and equipment Net cash used by investing activities

2,500 15,550 (92,000)

Cash flows from financing activities: Issue of shares Issuance of debentures Payment of cash dividends Net cash provided by financing activities

50,000 30,000 (78,400)

Net increase in cash Cash at beginning of period Cash at end of period

(2) (3) (145,900) $121,800

(73,950)

1,600 49,450 47,250 $96,700

Calculations: (1)

(2)

(3)

$297,500 (29,800) $267,700

$99,460 19,250 118,710 (4,420) $114,290 $14,670 6,730 $21,400

11.51

(1)

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e (b)

ABC Manufacturing Pty Ltd Note to Statement of Cash Flows for the year ended 30 June 2015 Reconciliation of profit after tax to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Gain on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities

$132,210

$49,700 (8,750) (29,800) (19,250) 4,420 (6,730)

(10,410) $121,800

11.52

Chapter 11: Statement of cash flows

PROBLEM SET B 11.10 (a) SIMIC AND NIKOLIC Ltd Statement of Cash Flows for the year ended 30 June 2016

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For interest expenses For income taxes Net cash provided by operating activities

$13,968,000 (1) $8,846,000 1,976,000 160,000 1,200,000

Cash flows from investing activities: Sale of equipment (8) Sale of land (6) Purchase of plant & equipment (8) Purchase of office equipment (9) Purchase of building (7) Net cash used by investing activities

430,000 640,000 (696,000) (50,000) (430,000)

Cash flows from financing activities: Proceeds from issue of shares (11) Payment of cash dividends (10) Proceeds from borrowings Net cash provided by financing activities

200,000 (750,000) 800,000

Net increase in cash Cash at beginning of period Cash at end of period

(2) (3) (4) (5)

12,182,000 $1,786,000

(106,000)

250,000 1,930,000 1,220,000 $3,150,000

11.53

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Calculations: (1)

(2)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Deduct: Bad debts written off Cash receipts from customers

$14,126,000 (140,000) (18,000) $13,968,000

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers

$8,876,000 220,000 9,096,000 (250,000) $8,846,000

(3)

Cash payments for operating expenses: Other expenses + insurance expense ($1796,000 + $140,000) Add: Increase in prepaid insurance Add: Decrease in accrued expense payable Cash payments for operating expenses (4)

(5)

Cash payments for interest expense: Interest expense Deduct: Increase in interest payable Cash payments for interest expense Cash payments for income taxes: Income tax expense (1,100,000 + 80,000) add: decrease in income taxes payable Cash payments for income taxes

$1,936,000 20,000 20,000 $1,976,000

$180,000 (20,000) $160,000

$1,180,000 20,000 $1,200,000

11.54

Chapter 11: Statement of cash flows

(6) Balance, Beginning of year Upward revaluation

Land 1,900,000 Land sold 160,000 Closing Balance

2,060,000 Opening Balance 1,630,000 Proceeds from land sold = cost 430,000 + gain of 210,000 = $640,000

430,000 1,630,000 2,060,000

(7) Balance, Beginning of year Purchase

Opening Balance

Building 1,670,000 430,000 Closing Balance 2,100,000 2,100,000

2,100,000

Accumulated Depreciation – Building Balance, Beginning of year 540,000 Depreciation expense

Closing Balance

2,100,000

540,000

500,000 40,000

Opening Balance

540,000 540,000

Plant and Equipment 1,258,000 Equipment sold 696,000 Closing Balance

500,000 1,454,000

(8) Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Plant sold Closing Balance

1,954,000 1,454,000

1,954,000

Accumulated Depreciation – Plant and Equipment 300,000 Balance, Beginning of year 440,000 Depreciation expense (250,000 –

610,000 130,000

80,000-40,000)

740,000 Opening Balance

740,000 440,000

Carrying amount of plant sold = 500,000 – 300,000 = 200,000 Proceeds from sale = carrying amount + gain = 200,000 + 230,000 = 430,000

11.55

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(9) Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Office Equipment 380,000 Equipment sold 50,000 Closing Balance 430,000 430,000

0 430,000 430,000

Accumulated Depreciation – Office Equipment Office equipment sold 0 Balance, Beginning of year Closing Balance 270,000 Depreciation expense 270,000 Opening Balance

190,000 80,000 270,000 270,000

(10) Cash dividends declared/paid Transfer to reserve Closing Balance

Retained Earnings 850,000 Balance, Beginning of year 100,000 Profit 2,764,000 3,714,000 Opening Balance

Dividend Payable 750,000 Balance, Beginning of year 600,000 Dividends declared

Cash paid Closing Balance

1,350,000

1,618,000 2,096,000 3,714,000 2,764,000

500,000 850,000

Opening Balance

1,350,000 600,000

Share Capital Balance, Beginning of year Asset revaluation reserve 1,400,000 Cash 1,400,000 Opening Balance

1,000,000 200,000 200,000 1,400,000 1,400,000

(11)

Closing Balance

11.56

Chapter 11: Statement of cash flows

(b) SIMIC AND NIKOLIC Ltd Note to Statement of Cash Flows (Indirect method) for the year ended 30 June 2016 Reconciliation of profit to cash provided by operating activities Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Amortisation expense Gain on sale of land Gain on sale of equipment Increase in accounts receivable Increase in allowance for doubtful debts Increase in inventory Increase in prepaid insurance Increase in accounts payable Decrease in accrued expenses Increase in interest payable Decrease in income taxes payable Net cash provided by operating activities

$2,096,000

$250,000 20,000 ($210,000) ($230,000) (140,000) 10,000 (220,000) (20,000) 250,000 (20,000) 20,000 (20,000)

(310,000) $1,786,000

11.57

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 11.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

Net cash provided by operating activities: 2013 2012

$33,180,000 $37,678,000

Domino’s 2013 cash flows are consistent with the growth phase. Operating cash flows are positive and cash receipts from customers and revenue have increased in 2013 over 2012. Cash generated by operations is positive and Domino’s is still and borrowing and investing to grow the business. (b)

The decrease in cash for the year ended 30 June 2013 was $21,649,000 and for the year ended 30 June 2012 was $12,255,000 increase in cash.

(c)

The change in borrowings comprised repayments of $20,506,000 and additional borrowings of $43,721,000

(d)

Total cash used for investing activities in 2013 was ($30,395,000).

(e)

The interest (borrowing cost) paid in 2013 was $405,000 and income tax paid was $11,796,000 in 2013.

11.58

Chapter 11: Statement of cash flows

BUILDING BUSINESS SKILLS 11.2

COMPARATIVE ANALYSIS PROBLEM

Company A vs. Company B (a) All dollar amounts are in $’000 Company A

Company B

1. Current cash debt coverage

$131,615 $113,393 = 0.75 times = 0.93times $(188,896 + $162,582) / 2 ($112,907 + $130,769) / 2

2. Cash return on sales ratio

$113,393 = 0.22 : 1 $505,754

3. Cash debt coverage

$113,393 $131,615 = 0.83 times = 0.36 times ($387,638 + $334,298) / 2 ($124,497 + $149,139) / 2

(b)

$131,615 = .18 : 1 $744,285

The current cash debt coverage uses cash generated from operations during the period and provides a better representation of liquidity on an average day than measures such as the current ratio. Company A’s ratio of $0..93 of cash from operations for every dollar of current liabilities was more than Company B’s $0.75 of cash from operations per dollar of current liabilities and indicates that Company A was more liquid than Company B in 2017. The cash return on sales ratio indicates a company’s ability to turn sales into dollars (cash). Since Company A’s cash return on sales ratio was slightly higher than Company B’s (0.22 vs. 0.18), Company A was more efficient in turning sales into cash in 2017. The cash debt coverage ratio shows a company’s ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets employed in its operations. Since Company A’s cash debt coverage was more than 2 times greater than Company B’s (.83 vs. .36), Company A’s ability to repay liabilities with cash from operations was significantly greater than Company B’s in 2017.

11.59

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 11.3

INTERPRETING FINANCIAL STATEMENTS

Peter’s of Buckingham Ltd All dollar amounts are in $million. Capital expenditure ratio and free cash flow: Capital expenditure ratio $7,433 ÷ $3,683 = 2.02 $7,057 ÷ $3,332 = 2.12 $7,098 ÷ $3,662 = 1.94

2018 2017 2016

Free cash flow $7,433 - $3,683 = $3,750 $7,057 - $3,332 = $3,725 $7,098 - $3,662 = $3,436

, Peter’s of Buckingham was able to finance its capital expenditure from the cash provided by operations each year from 2016 to 2018. Free cash flow increased from 2016 to 2017 and remained stable in 2018. The capital expenditure ratio increased in 2017 and declined in 2018, as both CFO and capital expenditure increased. Current cash debt coverage: 2018

$7,433 = 1.11times ($5,834 + $7,576 ) / 2

2017

$7,057 = 1.00 times ($8,230 + $5,834 ) / 2

2016

$7,098 = 0.81times ($9,279 + $8,230 ) / 2

The current cash debt coverage has increased consistently from 2016, when it was below one. The improvement reflected reduced current liabilities in 2017 and increased cash provided by operations in 2018. The increased current cash debt coverage indicates Peter’s of Buckingham’ improved liquidity since 2016.

Cash debt coverage: 2018

$7,433 = 0.37 times ($20,177 + $19,632) / 2

2017

$7,057 = 0.32 times ($24,113 + $20,177 ) / 2

2016

$7,098 = 0.30 times ($23,751+ $24,113) / 2

The cash debt coverage mirrored the current cash debt coverage. Peter’s of Buckingham solvency has improved. It has provided more cash from operations for every dollar of liabilities each year from 2016 to 2018. The improvement reflected reduced liabilities in 2017 and increased cash provided by operations in 2018. .

11.60

Chapter 11: Statement of cash flows

Cash return on sales ratio: 2018 2017 2016

$7,433 ÷ $20,737 = 0.36 $7,057 ÷ $20,495 = 0.34 $7,098 ÷ $20,196 = 0.35

Peter’s of Buckingham ability to generate cash from sales has remained stable at around 35% during the three-year period from 2016 to 2018.

11.61

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 11.4

RESEARCH CASE

(a)

Profit is an accrual-based measure of performance. Net cash provided by operations includes receipts and payments in the period in which cash is paid or received, rather than when the initiating transaction, such as the sale of goods, occurs. The difference between cash provided by operations and profit can be explained quantitatively by examining the reconciliation between profit and cash provided by operations, disclosed in the notes to the financial statements. Students’ answers will vary with the choice of company and year of the annual report used.

(b)

Students’ answers will vary with the choice of company and year of the annual report used.

(c)

Students’ answers will vary with the choice of company and year of the annual report used.

(d)

Students’ answers will vary with the choice of company and year of the annual report used.

BUILDING BUSINESS SKILLS 11.5

FINANCIAL ANALYSIS ON THE WEB

Answers will vary depending on the company chosen by the students and the year of the financial statements. (a) company chosen by student (b) Company provided financial statements on its website Y or N? (c) Amounts of cash generated or used by operating activities?

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Chapter 11: Statement of cash flows

CRITICAL THINKING BUILDING BUSINESS SKILLS 11.6

WRITTEN COMMUNICATION ACTIVITY

Cool Shooz Pty Ltd MEMO To:

Peter Sole

From:

Student

Date:

XX/MM/YYYY

Subject:

Statement of cash flows

The statement of cash flows provides information about the cash receipts and cash payments of a firm, classified as operating, investing and financing activities. The operating section of your company’s statement of cash flows shows the amount of cash received through operating activities such as the sale of goods and collection of cash from customers. Cash payments relating to operating activities such as the payment of salaries and wages are deducted from cash receipts to determine net cash provided by operating activities. The investing section of the statement reports the cash flows resulting from changes in investments and other non-current assets. The financing section of the statement reports the cash flows resulting from changes in financial liabilities and equity, such as the issue of shares, borrowings and the payment of cash dividends. If you have any further questions, please do not hesitate to contact me.

Signature

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 11.7

ORAL COMMUNICATION ACTIVITY

Students are asked to present a 5 minute presentation on one of the projects on the B team website. The B team is a Richard Branson initiative he initiated to explore how people in business can develop a better version of capitalism that considers how people are treated and how businesses impact the cultures they are based in, economically, socially and environmentally.

Answers will vary depending on the company chosen by the students and the year of the financial statements. 1. Project chosen by student explains some background to the problem this project is aiming to address. 2.Outlines What businesses are being asked to do differently based on the objectives of this project? 3. Explains the social and environmental impacts and the intended benefits of this project? Also, whether any benefits have any been achieved? BUILDING BUSINESS SKILLS 11.8

ETHICS CASE Big Rubber Ltd

(a) It is unethical of the board to placed undue pressure on the managing director to have a cash dividend each year to keep her job “safe”. The managing director’s statement: ‘We must get that amount above $1million’, puts undue pressure on the accountant and expresses a willingness to report cash flows more favourably than would result from the application of standards and the true and fair principle. This statement along with her statement, ‘I know you won’t let me down’, encourages the accountant to do something unethical. The accountant’s reclassification (intentional misclassification) of a cash inflow from a long-term note (financing activity) issue to an ‘increase in payables’ (affecting the calculation of cash provided by operating activities) is inappropriate and unethical. It provided biased information intended to mislead other directors so that a dividend will be paid in circumstances when it would otherwise not be paid. Hence the managing director’s actions are unethical and she is requesting that the accountant intentionally provide misleading information to users of financial statements And by intentionally preparing incorrect financial statements the accountant actions are unethical as well.

(b) Are the board members or anyone else likely to discover the misclassification? It is unlikely that any board members (other than board members who are also officers of the company) would discover the misclassification. Board members generally do not have detailed enough knowledge of their company’s transactions to detect this misstatement. It is possible that an officer of the bank that made the loan would detect the misclassification upon close reading of Big Rubber Ltd’s statement of cash flows. It is also possible that close scrutiny of the balance sheet and notes to the financial statements showing an increase in notes payable (long-term debt) would reveal that there is no comparable financing activity item (proceeds from note payable) in the statement of cash flows. .

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Chapter 11: Statement of cash flows

The auditors (internal or external), who have access to the detail of transactions and journal entries, may detect the misrepresentation in their audit of the financial statements. Alternatively, if the company cannot pay its bills and goes into receivership – the administrators may find the misclassification.

(c) The key stakeholders in this situation could be positively or negatively impacted by the note reclassification as follows:

The managing director of Big Rubber Ltd benefits if the misrepresentation is not discovered as she gets to keep her job. She could lose her job and reputation if the intentional misrepresentation is revealed. The Board of Directors are responsible for the presentation of the financial statements and effective leadership. Harmful to their reputation if the misrepresentation is discovered and particularly because it was done as a result of undue pressure on the managing director’s job security by the board. The accountant could lose his job and reputation if the intentional misrepresentation is revealed. Benefit: The accountant could keep the managing director happy and reduce conflict at work. The shareholders of Big Rubber Ltd could benefit in the short term by receiving a dividend. In the long term this payment might put the firm at financial risk. Users of Big Rubber’sfinancial statements could make poor investing and lending decisions

(d) What ethical actions could the accountant take? Explain the implications of these actions. First the accountant could talk to the managing director and refuse to make the change. The negative consequence is that it might result in harming the relationship with the managing director and might even get fired. The positive outcome is the accountant has acted professionally and ethically. If the managing director will not listen, the accountant can approach to board to expose the undue pressure. If the board will not back down, then the accountant has no choice but to go outside the organisation. The accountant could approach the auditor, the accounting professional bodies or a government authority to report the undue pressure. The implications are the accountant has acted professionally and ethically, however, will now be seen as a ‘whistle blower’.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 11.9

SUSTAINABILITY

Part A (1) the nature of the environmental laws that have come into effect in some countries Apple Inc operates in is the requirement to provide customers the ability to return the electrical product they purchased form the company at the end of its useful life at no charge to the customer which places the responsibility and the cost for environmentally safe disposal or recycling of components with the Apple Inc. The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is a Eurpean community (EU) directive on waste electrical and electronic equipment (WEEE) which became law in Europe 2003. The directive imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers of the equipment. Those companies should establish an infrastructure for collecting WEEE, in such a way that "Users of electrical and electronic equipment from private households should have the possibility of returning WEEE at least free of charge". Also, the companies are compelled to use the collected waste in an ecologically-friendly manner, either by ecological disposal or by reuse/refurbishment of the collected WEEE. (2) Compliance with these environmental laws could materially adversely affect the Company as it would require them to develop the infrastructure to collect products at the end of their life (for example you may have seen the mobile phone recycling bins located in various phone re-seller shops), as well as the infrastructure or the outsourcing to enable the recycling and or disposal of the electrical products in an environmentally friendly manner. All of this takes time and resources which can have negative impact on the finances and operations of Apple Inc’s business. Part B Extract Telstra report page 31:

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Chapter 12: Financial statement analysis and decision making

CHAPTER 12 – FINANCIAL STATEMENT ANALYSIS AND DECISION MAKING ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises

Learning Objectives 1.

Discuss the need for comparative analysis and identify the tools of financial statement analysis.

Explain and apply horizontal analysis.

Explain and apply vertical analysis.

Identify and calculate ratios and describe their purpose and use in analysing the liquidity, solvency and profitability of a business.

Discuss the limitations of financial statement analysis.

Exercises

Problems

1, 2, 4

2, 3, 6, 7

4, 5, 6, 7

1A, 1B

5, 6, 7

1, 8, 9, 10, 11, 12, 13

1A, 2A, 3A, 4A, 5A, 6A, 7A, 8A, 1B, 2B, 3B, 4B, 5B, 6B, 7B, 8B, 9B 9A, 10B

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CHAPTER 12 – FINANCIAL STATEMENT ANALYSIS AND DECISION MAKING ANSWERS TO QUESTIONS 1. (a) Intra-Entity. This is a comparison within an entity. For example, Coca Cola’s cash balance as of 31 Dec 2016 is compared with its cash balance as of 31 Dec 2017. Industry Averages. This is a comparison between a company and industry average. For example, Coca Cola’s financial data is compared with beverage industry’s financial data. The beverage industry’s financial data is calculated from all beverage companies’ financial data. Inter-Entity. This is a comparison between different entities. For example, Coca Cola’s total sales for the year of 2016 is compared with Pepsi’s total sales for the year of 2016. (b) The purpose of an Intra-Entity Basis comparison is to detect changes in financial relationships and significant trends. The purpose of an Industry Averages comparison is to provide information about an entity’s relative position within the industry. The purpose of an Inter-Entity Basis comparison is to provide insight into an entity’s competitive position. 2. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time. Its purpose is to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. For example, if Alpha Ltd has the following data: Year Net Sales

2017 2016 2015 132,000 120,000 100,000 132%

120%

100%

We can conclude that the Alpha Ltd has an increase of 20% in Net Sales in 2016 and an increase of 10% in Net Sales from 2016 t0 2017. Vertical Analysis is a technique for evaluating financial statement data that expresses each item in a financial statement as a percentage of a base amount. When analysing a statement of profit or loss, expenses are expressed as a percentage of sales revenue. For example, selling expenses are 20% of sales revenue. When analysing a statement of financial position, each item is expressed as a percentage of total assets or total liabilities and equity, both totals are the same. For example, current assets are 48% of total assets. Horizontal analysis uses data from more than one period of time while vertical analysis uses data from only one period of time.

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Chapter 12: Financial statement analysis and decision making

Current Ratio is Current Asset/Current Liabilities. Quick Ratio is (Cash + Marketable Securities + Net Receivable)/Current Liabilities. Quick Ratio calculation does not include Inventory and Prepaid Expense. Cash, marketable securities (current) and receivables (net) are more liquid when compared with inventory and prepaid expenses. The inventory may not be readily saleable and the prepaid expenses may not be transferable to others. For this reason, the Quick Ratio provides a better picture of a company’s short-term liquidity than the Current Ratio.

A disadvantage of the Current Ratio and Quick Ratios is that they use year-end balances of current asset and current liability accounts. These year-end balances may not be representative of the entity’s current position during most of the year. The Current Cash Debt Coverage partially corrects this problem by using net cash provided by operating activities and average current liabilities. Net cash provided by operating activities is from the whole year’s operating activities. Average current liabilities are also obviously better than year-end balance of current liabilities because it has the component of both beginning of year balance and year-end balance.

The average collection period of receivables is useful to assess the effectiveness of an entity’s credit and collection policies. The general rule is that the collection period should not greatly exceed the credit term period (i.e. the time allowed for payment). If the collection period is significantly higher than the credit term period, then there is a problem with its receivables collection. For example, if an entity offers 30-day credit terms and has an average collection period of 27 days, this provides an indication that the firm’s credit policy is appropriate and the monitoring of receivables collection is effective. A company whose average collection period is significantly above its credit terms suggests that it may be granting credit to customers who are not credit worthy or need to change their credit policies or collection procedures.

Megasonic Ltd’s inventory turnover is much slower than the industry average; its inventory stays on the shelf approximately 46 days compared with 26 days, on average, for the industry. Megasonic may be carrying excessive inventory relative to its sales volume.

(a)

Asset turnover.

(b)

Average collection period.

(c)

Profit margin.

(d)

Current ratio, Quick ratio or Current ash debt coverage.

The price-earnings (P/E) ratio is a reflection of investors’ assessments of a ompany’s future earnings. The P/E ratio takes into account such factors as relative risk, stability or profits, trends in profits, and the market’s perception of the company’s growth potential. In this case, investors favour Domino's as it has the higher P/E ratio of 54.8 compared to Telstra’s P/E ratio of 16.4 The investors feel that Domino's will be able to generate even higher future profits and so the investors are willing to pay more for its shares.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

10.

(a)

The decrease in gross profit margin is bad news because it means that a lower percentage of net sales remains as gross profit after deducting cost of sales.

(b)

The decrease in inventory turnover signals bad news because the company is taking longer to sell the inventory and consequently there is a greater chance of inventory obsolescence.

(c)

A decrease in the quick ratio signals bad news because the company’s ability to meet maturing short-term obligations has declined.

(d)

The increase in return on assets is good news for the company because it could mean an increase in profit; or that the company needs to invest less in assets to generate profit.

(e)

The increase in the price-earnings ratio is generally good news because it means that the market price per share has increased (relative to profit) and investors are willing to pay more multiples of profit per share.

(f)

From a solvency perspective, the increase in debt to total assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity ‘buffer’.

(g)

The increase in current cash debt coverage is good news because it means that the company’s ability to meet current liabilities from the cash generated by operations has improved.

(a) Estimates Financial statements contain numerous estimates. Estimates are used, for example, in determining the allowance for uncollectable receivables, periodic depreciation and the costs of warranties. To the extent that these estimates are inaccurate, the financial ratios and percentages are also inaccurate. (b) Cost Traditional financial statements are based on cost and are not adjusted for price-level changes. Comparisons of unadjusted financial data from different periods may be rendered invalid by significant inflation or deflation. For example, if a 5-year comparison of revenues shows a growth of 24%, and the general price level also increased by 24%, the entity’s real growth would be nil. Also, some assets such as property, plant and equipment might be many years old. The carrying amount (cost less accumulated depreciation) at which they are shown on the statement of financial position might be significantly lower than their current market value. Thus, ratios such as return on investment would appear more favourable than if the entity had new assets. (c) Alternative Accounting Methods Variations among entities in the application of generally accepted accounting principles may hamper comparability. For example, one entity may use the straightline method of depreciation, whereas another entity in the same industry may use the diminishing balance method. This would affect ratios that use profit and, to a lesser extent, ratios that use total assets.

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Chapter 12: Financial statement analysis and decision making

(d) Atypical Data Financial year-end data may not be typical of an entity’s financial condition during the year. In such cases, certain account balances (cash, receivables, payables and inventories) may not be representative of the balances in the accounts during the year. (e) Diversification Diversification within entities also limits the usefulness of financial statement analysis as it hampers comparison with competitors and industry statistics. Many entities today are so diversified that they cannot be classified by industry. Others appear to be comparable but are not.

12.5

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12.1 (a)

Intra-entity

(b)

Intra-entity

(c)

Inter-entity

(d)

Industry averages

(e)

Intra-entity

(f)

Inter-entity

BRIEF EXERCISE 12.2 Horizontal analysis:

Accounts receivable

30 June 2017 800 000

30 June 2016 600 000

30 June 2015 700 000

Inventory

950 000

420 000

530 000

Total assets

4 600 000

3 800 000

2 400 000

Accounts receivable

800 000

600 000

700 000

Base year

700 000

114.3%

85.7%

100.0%

Inventory

950 000

420 000

530 000

Base year

530 000

179.2%

79.2%

100.0%

Total assets

4 600 000

Base year

2 400 000

3 800 000 2 400 000

2400000 2 400 000

191.7%

158.3%

100.0%

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Chapter 12: Financial statement analysis and decision making

BRIEF EXERCISE 12.3 Vertical analysis:

Accounts receivable

30 June 2017 800 000

17.4%

30 June 2016 600 000

Inventory

15.8%

30 June 2015 700 000

29.2%

950 000

20.7%

420 000

11.1%

530 000

22.1%

Total assets

4 600 000

100.0%

3 800 000

100.0%

2 400 000

100.0%

Accounts receivable

800 000

Total assets

4 600 000

Inventory

950 000

Total assets

4 600 000

Total assets

4 600 000

Total assets

4 600 000

600 000 17.4%

3 800 000

700 000 15.8%

420 000 20.7%

100.0%

3 800 000

2 400 000

29.2%

530 000 11.1%

2 400 000

3 800 000

2 400 000

3 800 000

100.0% 2 400 000

22.1%

100.0%

BRIEF EXERCISE 12.4 Horizontal analysis percentages for Jayden Ltd’s sales, cost of sales and expenses are presented below:

Horizontal analysis Sales Cost of sales Expenses

2017 92% 105% 107%

2016 105% 93% 96%

2015 100% 100% 100%

Explain whether Jayden Ltd’s net profit increased, decreased or remained unchanged over the 3-year period. Comparing the percentages presented results in the following conclusions: The profit increased in 2016 due to the combination of an increase in sales and a decrease in both cost of sales and expenses. However in 2017 sales decreased while both cost of sales and expenses increased which resulted in an overall decrease in profit.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BRIEF EXERCISE 12.5 Sunnydale Ltd

Cash* Marketable securities* Accounts receivable* Inventories Other current assets Total current assets

640,000 84,500 106,300 924,000 375,000 2,129,800

Total current liabilities

1,810,000

Current ratio

Quick ratio*

CA CL

2,129,800 1,810,000

1.18

QA* CL

830,800 1,810,000

0.46

QA* Cash* Marketable securities* Accounts receivable*

640,000 84,500 106,300

830,800

12.8

Chapter 12: Financial statement analysis and decision making

BRIEF EXERCISE 12.6 Bristol Ltd Accounts receivable turnover =

Net credit sales Average net receivable s

2017

(a)

$6,600,000 =1 0.68 times $618,000

(b)

Average collection period:

2016

$4,920,000 = 8.54 times $576,000

365 = 34.2 days 10.68

365 = 42.7 days 8.54

Bristol Ltd’s results are evident of the entity’s effectiveness in managing its credit and collection policies. It has decreased the average collection period by over 8 days and the collection period of approximately 34 days is well within the 45 days allowed in the credit terms. BRIEF EXERCISE 12.7 Madison Ltd (a)

Current cash debt coverage: $912,000 = 3.62 times $216,000 + $288,000 2

(b)

Cash return on sales: $912,000 = 11.1% $8,232,000

(c)

Cash debt coverage: $912,000 = .543 times $1,800,000 + $1,560,000 2

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO EXERCISES EXERCISE 12.1 (a) White 2016 Ratios for 2016 Current Ratio = Current Asset / Current Liabilities = 9,998,000/7,770,000 = 1.29 :1 Quick Ratio

= (Cash + Marketable Securities + Net Receivables)/Current Liabilities = 6,800,000/7,770,000 = 0.88:1

Inventory Turnover = Cost of Sales/Average Inventory = 17,988,000/ [(3,100,000 + 2,290,000)/2] = 6.67 times Average Days in Inventory = 365 days/Inventory Turnover = 365 days/6.67 = 54.72 days Ratios for 2015 Current Ratio = Current Asset/Current Liabilities = 10,151,000/7,753,000 = 1.31:1 Quick Ratio

= (Cash + Marketable Securities + Net Receivables)/Current Liabilities = 6,870,000/7,753,000 = 0.89:1

Intra-entity comparison •

Cost of Sales has decreased by 0.28% from 2015 to 2016

•

Current Assets has decreased by 1.51% from 2015 to 2016

•

The sum of cash, net receivables and marketable securities has decreased by 1.02% from 2015 to 2016

•

Net receivables has decreased by 8.98% from 2015 to 2016

•

Inventory has increased by 35.37% from 2015 to 2016

•

Current Liabilities has increased by 4.81% from 2015 to 2016

•

Current Ratio has decreased by about 0.02 from 2015 to 2016.

•

This means White is a little less liquid in 2016 compared 2015

•

Quick Ratio has decreased by about 0.01 from 2012 to 2013.

•

This means White is a little less liquid in in 2016 compared 2015

•

Changes in the current and quick ratios are insignificant so that the entity has essentially remained the same

(b) Intra-entity comparisons (comparisons within an entity) are often useful to detect changes in financial relationships and significant trends. Inter-entity comparisons (comparisons made between different entities) provide insights into an entity’s competitive position. Industry comparisons provide information about an entity’s relative position within the industry. .

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Chapter 12: Financial statement analysis and decision making

EXERCISE 12.2 Spencer Ltd Condensed Statement of Financial Position as at 30 June Horizontal Analysis

Current assets Property, plant and equip. (net) Total Assets Current liabilities Non-current liabilities Total Liabilities Share capital, $1 each Retained earnings Total Equity Total Liabilities and Equity

30-Jun-17 150 000 380 000 530 000 85 000 140 000 225 000 175 000 130 000 305 000 530 000

30-Jun-16 103 000 315 000 418 000 72 000 104 000 176 000 100 000 142 000 242 000 418 000

change $ 47 000 65 000 112 000

% 46% 21% 66%

13 000 36 000 49 000

18% 35% 53%

75 000 -12 000 63 000 112 000

75% -8% 67% 58%

change $ 8 000 50 000 58 000

% 9% 8% 17%

-5 000 -6 000 -11 000

-10% -8% -18%

85 000 -16 000 69 000 58 000

23% -7% 16% 9%

EXERCISE 12.3 (a) Forrester Ltd Partial Statement of Financial Position as at 30 June Horizontal Analysis

30-Jun-17 96 000 680 000

30-Jun-16 88 000 630 000

Total Assets

776 000

718 000

Current liabilities Non-current liabilities Total Liabilities Share capital, $1 each Retained earnings Total Equity Total Equity and Liabilities

45 000 72 000 117 000 450 000 209 000 659 000 776 000

50 000 78 000 128 000 365 000 225 000 590 000 718 000

Current assets Property, plant and equip. (net)

(b)

Although Forrester Ltd’s overall increase in total assets was financed by an increase in equity therefore making the company more financially stable than it was in the previous year.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 12.4

(a) Spectre Ltd Statement of Financial Performance Vertical Analysis

2017 Sales Cost of sales Gross profit Selling expenses Administrative expenses Total operating expenses Profit before income tax Income tax expense Profit

(b)

$ 900 000 520 000 380 000 140 000 65 000 205 000 175 000 52 500 122 500

2016 % 100.0% 57.8% 42.2% 15.6% 7.2% 22.8% 19.4% 5.8% 13.6%

$ 870 000 460 000 410 000 93 000 61 000 154 000 256 000 76 800 179 200

% 100.0% 52.9% 47.1% 10.7% 7.0% 17.7% 29.4% 8.8% 20.6%

Horizontal analysis can provide insights into underlying conditions for entities that may not be apparent from the individual components presented in financial statements. Horizontal analysis is even more meaning if it is supplemented with further information such as inter-company comparisons with a competitor in the same industry as well as other relevant information such as general economic conditions, industry trends or averages, information from directors’ reports and media releases.

Like horizontal analysis, vertical analysis can provide insights into underlying conditions for entities that may not be apparent from the individual components presented in financial statements. However, vertical analysis is even more meaning if it is supplemented with further information such as general economic conditions, industry trends or averages, information from directors’ reports and media releases. Vertical analysis enables you to compare entities in the same industry even if they are different sizes.

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Chapter 12: Financial statement analysis and decision making

EXERCISE 12.5 Ridge Ltd Income Statement Vertical Analysis (a)

Sales Cost of sales Gross profit Selling expenses Administrative expenses Total operating expenses Profit before income tax Income tax expense Profit (b)

2016 $ 1 500 000 745 000 755 000 123 000 92 000 215 000 540 000 162 000 378 000

% 100.0% 49.7% 50.3% 8.2% 6.1% 14.3% 36.0% 10.8% 25.2%

2015 $ % 1 350 000 100.0% 738 000 54.7% 612 000 45.3% 105 000 7.8% 81 000 6.0% 186 000 13.8% 426 000 31.6% 127 800 9.5% 298 200 22.1%

Profit for the period as a percentage of sales increased by 3.1% from 2015 to 2016. Although the selling expenses as a percentage of sales increased slightly by 0.4% over the period, the cost of sales as a percentage of sales decreased by 5%. As the cost of sales is a much larger proportion of Ridge Ltd’s expenses, management’s ability to reduce this expense more than offset the increase in selling expenses to explain the increase in profit.

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 12.6 Jai’s Jeans Ltd Partial Statement of Financial Position as at 30 June 2017 Horizontal Analysis (a) 30-Jun-17

30-Jun-16

change

Current assets

13000

18000

-5000

-27.80%

Property, plant and equip. (net)

951000

862000

89000

10.30%

Intangibles

56000

52000

4000

7.70%

Total Assets

1034000

950000

84000

8.80%

Current liabilities

45000

50000

-5000

-10.00%

Non-current liabilities

320000

311000

9000

2.90%

Total Liabilities

365000

361000

4000

1.10%

Total Equity

669000

589000

80000

13.60%

Total Equity and Liabilities

1034000

950000

84000

8.80%

Jai’s Jeans Ltd Condensed Statement of Financial Position as at 30 June 2017 Vertical Analysis

(b)

30-Jun-17 Current assets

30-Jun-16

13000

1.30%

18000

1.80%

951000

92.00%

862000

86.20%

Intangibles

56000

5.40%

52000

5.20%

Total Assets

1034000

100.00%

950000

100.00%

Current liabilities

45000

4.40%

50000

5.30%

Non-current liabilities

320000

30.90%

311000

32.70%

Total Liabilities

365000

35.30%

361000

38.00%

Total Equity

669000

64.70%

589000

62.00%

Total Equity and Liabilities

1034000

100.00%

950000

100.00%

Property, (net)

(c)

plant

and

equip.

Horizontal analysis gives an investor useful information about trends in an entity’s (intra-entity) performance or financial position. Vertical analyses provide information on the significance of financial statement items as a function of some total on the financial statement. Both types of calculations can be compared with industry averages or companies in the same industry. Because vertical and horizontal analyses are complementary, both are useful when making the investment decision.

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Chapter 12: Financial statement analysis and decision making

EXERCISE 12.7 (a) Bondi Ltd Condensed Statement of Financial Position as at 30 June 2017 Horizontal Analysis Percentage Change from 2013

2017

2016

Increase (Decrease)

Current assets Property, plant & equipment (net) Intangibles Total assets

$88,000 81,000 31,000 $200,000

$80,000 90,000 40,000 $210,000

$8,000 (9,000) (9,000) ($10,000)

10% (10.0%) (22.5%) (4.8%)

Current liabilities Non-current liabilities Equity Total liabilities & equity

$52,000 135,000 13,000 $200,000

$48,000 150,000 12,000 $210,000

$4,000 (15,000) 1,000 ($10,000)

8.3% (10.0%) 8.3% (4.8%)

(b) Bondi Ltd Condensed Statement of Financial Position as at 30 June 2017 Vertical Analysis 2017 $

2016 Percent

Percent

Current assets Property, plant & equipment (net) Intangibles Total assets

$88,000 81,000 31,000 $200,000

44.0% 40.5% 15.5% 100.0%

$80,000 90,000 40,000 $210,000

38.1% 42.9% 19.0% 100%

Current liabilities Non-current liabilities Equity Total liabilities & equity

$52,000 135,000 13,000 $200,000

26.0% 67.5% 6.5% 100.0%

48,000 150,000 12,000 $210,000

22.9% 71.4% 5.7% 100%

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Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 12.8 Grayson Ltd Current ratio = 1.59:1.0 ($1,100 ÷ $690) Quick ratio

= 0.60:1.0 ($411 ÷ $690)

Current cash debt coverage = .33 times ($215 ÷ $658.5) Receivables turnover

= 12.0 times ($3,894 ÷ $324.5)

Average collection period

= 30.4 days (365 days ÷ 12.0)

Inventory turnover

= 4.3 times ($2,600 ÷ $607)

Average days in inventory

= 85. days (365 days ÷ 4.3)

EXERCISE 12.9 Global Ltd (a)

Current ratio as of 1 February 2016 = 2 or 2.0:1.0 ($200,000 ÷ $100,000). Feb.

(b)

2.0 No change in total current assets or liabilities.

1.75 ($175,000 ÷ $100,000). Current assets decrease by $25,000.

1.75 No change in total current assets or liabilities.

1.87 ($161,000 ÷ $86,000). Current assets and current liabilities decrease by $14,000

1.75 ($161,000 ÷ $92,000). Current liabilities increase by $6,000.

Quick ratio as of 1 February 2016= 1.7 or 1.7:1.0 ($170,000 ÷ $100,000). Feb.

2.4 No change in total quick assets or current liabilities.

1.45 ($145,000 ÷ $100,000). Quick assets decrease by $25,000

1.42 ($142,000 ÷ $100,000). Quick assets decrease by $3,000.

1.49 ($128, 000 ÷ $86,000). Quick assets and current liabilities decrease by $14,000.

1.39 ($128,000 ÷ $92,000). Current liabilities increase by $6,000.

12.16

Chapter 12: Financial statement analysis and decision making EXERCISE 12.10

Sonic Ltd (a)

(b)

(c)

(d) (e)

(f) (g)

(h)

(i)

Current ratio:

$145, 000 = 2.9 :1.0 $50, 000

Quick ratio:

$85,000 = 1.7 : 1.0 $50,000

Receivables turnover:

$350, 000 = 5.6 times $62,500 (1)

Average collection period:

Inventory turnover:

Cash debt coverage:

$60,000 + $50,000 2

365 days ÷ 3.6 = 101 days

$50, 000 = 14.3% $350, 000 $50, 000 = .323 times $160, 000 + $150, 000 2

Current cash debt coverage:

$65,000 + $60,000 2

365 days ÷ 5.6 = 65.2 days.

$200, 000 = 3.6 times (2) $55, 000 (2)

Average days in inventory:

Cash return on sales:

(1)

$50, 000 = .91 times $60, 000 + $50, 000 2

12.17

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 12.11 Cyber Ltd 2017

a. Profit margin Profit Net credit sales

164 000 950 000 17.3%

b. Asset turnover Net credit sales Average total assets (710 000+670 000) / 2

950 000 690 000 137.7%

c. Return on assets Profit Average total assets (710 000+670 000) / 2

164 000 690 000 23.8%

d. Return on ordinary shareholders’ equity Profit Average total equity (610000+580,000) / 2

164 000 595 000 27.6%

e Cash return on sales Net cash flows from operating activities Net credit sales

95 000 950 000 10.0%

f. Gross profit margin Gross profit Net credit sales

416 000 950 000 43.8% .

12.18

Chapter 12: Financial statement analysis and decision making

EXERCISE 12.12 Centro Ltd 2016

a. EPS Profit available to ordinary shareholders Weighted average no. of ordinary shares

118 800 20 000 $5.94

b. P/E ratio Share price

$23.00 $5.94

Earnings per share

3.9 times c. Dividend payout rate. Dividends to ord. shareholders

15 000

Profit

121 800

Cash dividend payout ratio includes dividends paid to ordinary shareholders only.

12.3%

d. Times interest earned. Profit before income tax and interest expense Interest expense

210,000 36 000 5.8

e Cash return on sales Net cash flows from operating activities Net credit sales

95 000 580 000 16.4%

12.19

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 12.13 Xander Ltd

(a)

Inventory turnover = 3.6 = Cost of sales $200,000+$180,000 2 3.6 x $190,000 Cost of sales

(b)

= cost of sales = $684,000

Receivables turnover = 9.4 =

Net sales (credit)  $126,000 + $72,500    2  

Net sales (all on credit) = 9.4 x $99,250 = $932,950

(c)

Return on ordinary shareholders’ equity = 22% =

Profit ($400, 000 + $113,500 + $400, 000 + $101, 000 ) 2 Profit = .22 x $507,250 = $111,595

(d)

Return on assets = 12.5% =

Average assets =

$111,595 [see (c) above] Average assets

$111,595 = $892, 760 .125

(Total assets June 2016 + Total assets June 2015) = Average assets 2 (Total assets June 2016 + $805,000) = $892,760 2 Total assets June 2016 = ($892,760 x 2) - $805,000 = $980,520.

12.20

Chapter 12: Financial statement analysis and decision making

SOLUTIONS TO PROBLEM SET A PROBLEM SET A 12.1 (a) Spencer Ltd and Forrester Ltd Condensed Statement of profit or loss for the year ended 30 June 2016 Vertical Analysis

Sales Cost of sales Gross profit Total operating expenses EBIT interest expense Profit before income tax Income tax expense Profit

Spencer Ltd $ % 1 250 000 100.0% 690 000 55.2% 560 000 44.8% 321 000 25.7% 239 000 19.1% 6 000 0.5% 233 000 18.6% 69 900 5.6% 163 100 13.0%

Forrester Ltd $ % 410 000 100.0% 257 000 62.7% 153 000 37.3% 62 000 15.1% 91 000 22.2% 1 200 0.3% 89 800 21.9% 26 940 6.6% 62 860 15.3%

(b) Spencer Ltd has a lower relative profitability after tax. However it’s gross profitability is higher relative to Forrester Ltd. This is due to Spencer’s lower cost of sales. The major difference is the relatively greater operating expenses, lowering Spencer’s EBIT which flows through to the other profit measures. Spencer Ltd

Forrester Ltd

Return on assets Profit Average total assets (847 285+812 410) / 2

163 100 62 860 829 847.5 (428 000+396 000) / 2 412 000 19.7%

15.3%

Return on ordinary shareholders’ equity Profit Average total equity (659 190+646 595) / 2

163 100 62 860 652 892.5 (365 000+340 000) / 2 352,500 25.0%

17.8%

Although Spencer Ltd’s profit margin was lower than Forrester Ltd, it has a higher Return on assets and Return on ordinary shareholders’ equity.

12.21

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Details provided below for show calculations for : average total assets * and average total equity **

Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Share capital, $10 each Retained earnings

Spencer Ltd 325 975 312 410 521 310 500 000 847 285 812 410 79 595 7 5815 108 500 90 000 188 095 165 815 500 000 500 000 159 190 146 595

Forrester Ltd 188 000 180 000 240 000 216 000 428 000 396 000 36 000 32 000 27 000 24 000 63 000 56 000 320 000 300 000 45 000 40 000

Total Equity

659 190

365 000

646 595

340 000

12.22

Chapter 12: Financial statement analysis and decision making

PROBLEM SET A 12.2 Bayview Ltd

(a)

Earnings per share =

$202,300 = $2.52 per share 80,137

(b) Return on ordinary shareholders’ equity =

(c)

(d)

(e)

(f)

(g) (h)

Return on assets =

Current ratio =

Quick ratio =

$202,300  $465, 400 + $736, 700    2 $202,300 = = 33.7% $601, 050

$202,300 $202,300 = = 20.3% $996,500  $852,800 + $1,140, 200    2

$514,900 = 2.7 :1.0 $193,500

$314,900 = 1.6 :1.0 $193,500

Receivables turnover =

$1,818,500 $1,818,500 = = 14.4 times $126, 400  $102,800 + $150, 000    2

Average collection period = 365 days ÷ 14.4 = 25.4 days. Inventory turnover =

$1, 005,500 $1, 005,500 = = 6.4 times $157,500  $115,500 + $200, 000    2

(i)

Average days in inventory = 365 days ÷ 6.4 = 57.3 days.

(j)

Times interest earned = $18,000 = 17.0 times

$307,000

12.23

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(k)

(l)

(m)

(n)

(o)

Asset turnover =

$1,818,500 = 1.8 times $996,500

Debt to total assets =

$403,500 = 35.4% $1,140, 200

Current cash debt coverage ratio =

Cash return on sales =

Cash debt coverage =

$280,000 = 1.47 times $187,400 + $193,500 2

$280,000 = 15.4% $1,818,500

$280,000 = .708 times $387,400 + $403,500 2

12.24

Chapter 12: Financial statement analysis and decision making

PROBLEM SET A 12.3 (a)

Comparative analysis is performed to evaluate an entity’s short-term liquidity, profitability and long-term solvency. Comparisons can detect changes in financial relationships and significant trends, and can provide insight into an entity’s competitive position within its industry. Financial statements may be analysed horizontally, vertically, and with ratios.

Metro Ltd

(b)

2017 (1)

Profit margin ratio: $44,000 = 6.3% $700,000

(2)

$32,000 = $1.07 per share 30,000

Price-earnings ratio. $7.95 = 5.8 times $1.38

(6)

$650,000 = 1.2 times  $533,000 + $590,000    2  

Earnings per share. $44,000 = $1.38 per share 4,000   30,000 + 2   

(5)

$250,000 = 38% $650,000

Asset turnover. $700,000 = 1.1times  $590,000 + $640,000    2  

(4)

$32,000 = 4.9% $650,000

Gross profit ratio: $280,000 = 40% $700,000

(3)

2016

$5.00 = 4.7 times $1.07

Cash dividend payout ratio. $24,000 * * = 54.5% $44,000

$20,000 * = 62.5% $32,000

**($125,000 + $44,000 - $145,0000)

*($113,000 + $32,000 - $125,000)

(7)

Debt to total assets. $155,000 = 24.2% $640,000

$165,000 = 28% $590,000

12.25

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c)

The underlying profitability of the company appears to have improved. For example, profit margin and earnings per share have both increased. In addition, the company’s priceearnings ratio has increased, which suggests that investors may be looking more favourably at the company. Also, the company appears to be involved in attempting to reduce its debt burden as its debt to total assets has decreased. Similarly, its cash dividend payout ratio has decreased, which should help its overall solvency.

PROBLEM SET A 12.4 Digimax Ltd Liquidity

2016

2015

Change

Current

$364,000 = 1.1 :1.0 $335,000

$343,000 = 1.9 :1.0 $182,000

Decrease

Quick

$209,000 = 0.6 :1.0 $335,000

$195,000 = 1.1 :1.0 $182,000

Decrease

Receivables turnover

$850,000 = 9.2 times $92,000

$790,000 = 8.9 times $89,000

Increase

Inventory turnover

$620,000 = 4.9 times $127,500

$575,000 = 4.8 times $120,000

Increase

Although the amount of current and quick assets to cover current liabilities has declined, in relative terms, the turnover of receivables and inventory has improved. The decline in the current and quick ratios is caused by the notes payable due March 2014, becoming a current liability.

Profitability

2016

2015

Change

Profit margin

$36,000 = 4.2% $850,000

$35,000 = 4.4% $790,000

Decrease

Asset turnover

$850,000 = 1.3 times $666,000

$790,000 = 1.2 times $639,000

Increase

Return on assets

$36,000 = 5.4% $666,000

$35,000 = 5.5% $639,000

Decrease

Earnings per share

$36,000 = $1.80 per share 20,000

$35,000 = $1.75 per share 20,000

Increase

Profitability has remained relatively the same.

12.26

Chapter 12: Financial statement analysis and decision making PROBLEM SET A 12.5

Eastco Ltd and Westco Ltd (a) Ratio

Eastco Ltd

Westco Ltd

(1)

Current ratio

2.0:1

($11,000 ÷ $5,500)

1.2:1

($11,000 ÷ $9,000)

(2)

Receivables turnover

7.3 times

($40,000 ÷ $5,500)

37.3 times

($82,000 ÷ $2,200)

(3)

Average collection period

50 days

(365 ÷ 7.3)

9.8 days

(365 ÷ 37.3)

(4)

Inventory turnover

6.4 times

($32,000 ÷ $5,000)

8.1 times

($65,000 ÷ $8,000)

(5)

Average days in inventory

57 days

(365 ÷ 6.4)

45 days

(365 ÷ 8.1)

(6)

Profit margin

1.8%

($700 ÷ $40,000)

2.4%

($2,000 ÷ $82,000)

(7)

Asset turnover

2.1

($40,000 ÷ $18,752)

3.0

($82,000 ÷ $27,461)

(8)

Return on assets

3.7%

($700 ÷ $18,752)

7.3%

($2,000 ÷ $27,461)

(9)

Return on ordinary shareholders’ equity Debt to total assets

11.3%

($700 ÷ $6,196.5)

20.8%

($2,000 ÷ $9,617)

68.5%

($13,700 ÷ $20,000)

70.2%

($20,000 ÷ $28,481)

(11)

Times interest earned

2.7 times

($1,600 ÷ $600)

4.2 times

($4,200 ÷ $1,000)

(12)

Current cash debt coverage

0.18 times [$1,000÷($5,500+$5,698) ÷2]

0.26 times

[$2,500 ÷ ($9,000+$9,981) ÷ 2]

(13)

Cash return on sales

2.5%

3.0%

($2,500 ÷ $82,000)

(14)

Cash debt coverage*

.08 times [$1,000 ÷ ($13,700 + $11,411)/2]

.14

[$2,500 ÷ ($20,000 + $15,688)/2]

(10)

($1,000 ÷ $40,000)

* Beginning of the year total liabilities can be determined from beginning-of-year figures for total assets and shareholders’ equity as for: Eastco Ltd $17,504 - $6,093 = $11,411;:

Westco Ltd $26,441 - $10,753 = $15,688.

(b) A simple comparison of current ratios would suggest that Eastco is more liquid. However, Eastco takes 107 days to convert inventory to cash (sum of average days in inventory and average collection period) whereas Westco takes only 55 days. Westco also has higher current cash debt coverage. While Eastco has a lower debt to total assets ratio, indicating better solvency, Westco has a higher cash debt coverage and times interest earned, indicating that it is more able to service its debt. Westco was more profitable in the year of this analysis. It has both a higher asset turnover and a higher profit margin contributing to the greater return on assets. Westco also has a higher return on shareholders equity and generates more cash with each dollar of sales.

12.27

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 12.6 Diva Ltd (a)

$209, 000 = 1.6 :1.0 $135, 000

Current ratio =

Should be 1.54 8 to 1. So rounding is off. Should be 1.5, if to one decimal. (b)

(c)

(d) (e)

(f) (g)

(h)

Quick ratio =

$15, 000 + $18, 000 + $92, 000 = 0.9 :1.0 $135, 000

Receivables turnover =

Average collection period = Inventory turnover =

$580, 000 = 7.0 times  $92, 000 + $74, 000    2 365 ÷ 7.0 = 52 days

$400, 000 = 5.2 times  $84, 000 + $70, 000    2

Average days in inventory =

365 ÷ 5.2 = 70 days

Profit margin ratio =

$34, 000 = 5.9% $580, 000

Asset turnover =

$580, 000 = 1.0 times  $632, 000 + $560, 000    2 (i)

(j)

(k)

Return on assets =

Return on ordinary shareholders’ equity =

Earnings per share =

$34, 000 = 5.7%  $632, 000 + $560, 000    2 $34, 000 = 9.5%  $367, 000 + $350, 000    2

$34, 000 = $1.13 per share 30, 000 (1) (1) $150,000  $5.00

(l)

Price-earnings ratio =

$19.50 = 17.2 times $1.13 12.28

Chapter 12: Financial statement analysis and decision making

(m)

Cash dividend payout ratio =

$17, 000 (2) = 50% $34, 000 (2) $200,000 + $34,000 - $217,000

(n)

(o)

Debt to total assets =

$265, 000 = 41.9% $632, 000

Times interest earned =

$59, 200 (3) = 8.2 times $7, 200 (3) $34,000 + $18,000 + $7,200

12.29

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 12.7 Ascot Ltd

$11,000,000 Average receivable s

Receivables turnover = 10 =

Average receivables =

$11,000,000 = $1,100,000 10

(Receivables 30 June 12 + $950, 000) = $1,100,000 2 Receivables 30/6/12 = $2,200,000 - $950,000 = $1,250,000

Profit margin = 14.5% = .145 =

Profit $11, 000, 000

Profit = $11,000,000 x .145 = $1,595,000 Profit before income taxes = $1,595,000 + $560,000 = $2,155,000

Return on assets = 22% = .22 =

Average assets =

$1,595,000 Average assets

$1,595,000 = $7,250,000 .22

(Assets (30/6/12) + $7,000,000) = $7,250,000 2 Assets (30/6/12) = $14,500,000 - $7,000,000 = $7,500,000 Total current assets = $7,500,000 - $4,620,000 = $2,880,000 Inventory = $2,880,000 - $1,250,000 - $450,000 = $1,180,000 Total liabilities and shareholders’ equity = $7,500,000 Total liabilities = $7,500,000 - $3,400,000 = $4,100,000 Current ratio = 3:1 =

Current liabilities =

$2,880, 000 Current liabilities $2,880,000 = $960,000 3

12.30

Chapter 12: Financial statement analysis and decision making

Non-current liabilities = $4,100,000 - $960,000 = $3,140,000 Inventory turnover = 4.8 = Cost of sales $1,720,000+$1,180,000 2 Cost of sales = $1,450,000 x 4.8 = $6,960,000 Gross profit = $11,000,000 - $6,960,000 = $4,040,000 Gross profit - operating expenses – interest expense = profit before income tax $4,040,000 - $1,665,000 – interest expense = $2,155,000 Interest expense = $2,375,000 - $2,155,000 = $220,000

12.31

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 12.8 Calgary Ltd (a)

Free cash flow = net cash from operating activities – capital expenditure = 101,344 – 32,560 = 68,784

Capital expenditure ratio =

net cash flow from operating activities capital expenditure

= 3.

Current cash debt coverage net cash flow from operating activities = average current liabilities =

101,344 3.1: 1 32,560

101,344 = 0.5 times [(202,680 + 203,500) ÷ 2]

Cash debt coverage =

net cash flow from operating activities average total liabilities

101,344 = 0.25 times [(505,000 + 306,500) / 2]

Cash return on sales ratio = net cash flow from operating activities net sales = 101,344 = 0.17 times 608,000

(b)

12.32

Chapter 12: Financial statement analysis and decision making

of $68,784 is available for the acquisition of new assets, the retirement of debt, or the payment of dividends. CAPITAL EXPENDITURE RATIO Another indicator of an entity’s ability to generate sufficient cash to finance the purchase of new property, plant and equipment is the capital expenditure ratio — net cash provided by operating activities divided by capital expenditures. This measure is similar to free cash flow, except that free cash flow reveals the amount of cash available for discretionary use by management, whereas the capital expenditure ratio provides a relative measure of cash provided by operations compared with cash used for the purchase of productive assets. Amounts spent on capital expenditures are listed in the investing activities section of the statement of cash flows. Using the information from Calgary Ltd the calculations reveal its capital expenditure ratio 3.1: 1 The ratio of 3.1:1 suggests that Calgary Ltd could have purchased more than three times as much property, plant and equipment as it did without requiring any additional outside financing. This ratio will vary across industries depending on the capital intensity of the industry. That is, we would expect a manufacturing entity to have a lower ratio (because it has higher capital expenditures) than a software entity, which spends less of its money on noncurrent assets and more on ‘intellectual’ capital. The phase of an entity’s life cycle will also affect the expected capital expenditure ratio. It is likely to be lower in the introductory and growth phases and higher in the maturity and decline phases. LIQUIDITY Liquidity is the ability of an entity to meet its immediate obligations. One measure of liquidity is the current ratio: current assets divided by current liabilities. A disadvantage of the current ratio is that it uses year-end balances of current asset and current liability accounts, and these year-end balances may not be representative of the entity’s position during most of the year. CURRENT CASH COVERAGE A measure that partially corrects this problem is the current cash debt coverage which is the net cash provided by operating activities divided by average current liabilities. Because net cash provided by operating activities involves the entire year rather than a balance at one point in time, it is often considered a better representation of liquidity. Calgary Ltd net cash provided by operating activities in 1 year is 0.5:1. That is, it generates 50 cents of net cash provided by operating activities for every $1 of current liabilities. It generates enough cash from operating activities in 1 year to meet 50% of the obligations that are due within 1 year. A ratio closer to 1:1 would indicate that it generates 100 cents of net cash provided by operating activities for every $1 of current liabilities. SOLVENCY Solvency is the ability of an entity to survive over the long term. CASH DEBT COVERAGE A measure of solvency that uses cash figures is the cash debt coverage which is measured as the net cash provided by operating activities divided by total debt as represented by average total liabilities. This measure indicates an entity’s ability to repay its liabilities from cash generated from operations, i.e. without having to liquidate productive assets such as property, plant and equipment. The cash debt coverage for Calgary Ltd is 0.25 times. Calgary Ltd’s net cash provided by operating activities is 0.25:1. This means that the entity has 25 cents net cash provided by operating activities for every $1 of average total liabilities. Hence, Calgary Ltd net cash provided by operating activities is 25% of its total liabilities. Another way to consider this measure is to look at the reciprocal, which is 4. It would take Calgary Ltd 4 years to repay all of its liabilities from cash provided by operating activities at the current level. .

12.33

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e PROFITABILITY Profitability refers to an entity’s ability to generate a reasonable return. Accrual-based ratios that measure profitability are discussed, such as gross profit rate, profit margin and return on assets. In measures of profitability the potential differences between cash accounting and accrual accounting are most pronounced. Although some differences are expected because of the difference in the timing of revenue and expense recognition under cash versus accrual accounting, significant differences should be investigated. A cash-based measure of performance is the cash return on sales ratio. CASH RETURN ON SALES RATIO The cash return on sales ratio is calculated as net cash provided by operating activities divided by net sales. This ratio indicates the entity’s ability to turn sales into dollars. The cash return on sales ratio can be compared with the corresponding accrual-based ratio. A lower cash return on sales ratio should be investigated because it might indicate that the entity is recognising sales that are not really sales (i.e. sales it will never collect), or incurring a lot of expenditure relative to revenue. Alternatively, it may reflect payments for increased inventory and other lags occurring in the growth phase. The cash return on sales ratio for Calgary Ltd is 0.17,0.17:1 or 17%. Overall it appears that Calgary Limited ratios indicate the business is profitable and solvent, can replace its assets as needed and has free cash flow. However, further investigation is needed into the liquidity of the business to ensure that there is adequate cash flow to met short term debts as they fall due.

12.34

Chapter 12: Financial statement analysis and decision making PROBLEM SET A 12.9 Yin Ltd and Yan Ltd

(a) Ratio

Yin Ltd

Yan Ltd

(1)

Return on assets

39.0%

($276,000 ÷ $708,000)

30.3%

($188,000 ÷ $620,000)

(2)

67.6%

($276,000 ÷ $408,000)

58.7%

($188,000 ÷ $320,000)

(3)

Return on ordinary shareholders’ equity Profit margin

27.6%

($276,000 ÷ $1,000,000)

18.8%

($188,000 ÷ $1,000,000)

(4)

Current ratio

4.1:1

($488,000 ÷ $120,000)

3.7:1

($440,000 ÷ $120,000)

(5)

Receivables turnover

5 times

($1,000,000 ÷ $200,000)

5 times

($1,000,000 ÷ $200,000)

Inventory turnover

2.7 times

($552,000 ÷ $208,000)

3.8 times

($600,000 ÷ $160,000)

Debt to equity

73.5%

($300,000 ÷ $408,000)

93.8%

($300,000 ÷ $320,00)

(7)

(b)

Using different accounting methods has affected all measures except the receivables turnover ratio. The use by Yan Ltd of weighted average valuation and reducing balance depreciation has increased their expenses, reduced their profit and therefore decreased their total asset and equity values. This in turn causes their return on assets, return on equity, profit margin, current ratio, and debt to equity ratio to be considerably lower than Yin Ltd.; however, Yan Ltd’s inventory turnover was better because the weighted average inventory method (in a period of rising prices) results in a higher cost of sales and a lower ending inventory value than does the FIFO inventory method.

12.35

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM SET B PROBLEM SET B 12.1 (a) Black Ltd and White Ltd Condensed Statement of profit or loss for the year ended 31 December 2016 Vertical Analysis

Sales Cost of sales Gross profit Total operating expenses EBIT interest expense Profit before income tax Income tax expense Profit

(b) Return on assets

Black $ % 430 000 100.0% 185 000 43.0% 245 000 57.0% 97 000 22.6% 148 000 34.4% 4 500 1.0% 143 500 33.4% 43 050 10.0% 100 450 23.4%

Black

Profit Average total assets *

100 450 1 050 000

White $ % 750 000 100.0% 392 500 52.3% 357 500 47.7% 173 000 23.1% 184 500 24.6% 8 000 1.1% 176 500 23.5% 52 950 7.1% 123 550 16.5%

White 123 550 566 500

9.6%

21.8%

100 450 647 000

123 550 353 500

15.5%

35.0%

Return on ordinary shareholders’ equity (ROE) Profit Average total equity **

Although White Ltd has more profit in dollar terms it has been less profitable than Black Ltd during 2016. White Ltd incurs greater cost of sales and operating expenses, relative to sales, than Black Ltd and therefore achieves a lower profit margin. Black’s return on assets of 9.6% is lower than White’s return on assets of 21.8% Black’s return on equity of 29.1% is lower than White’s return on equity of 35%

12.36

Chapter 12: Financial statement analysis and decision making

Details provided below for show calculations for: average total assets * and average total equity **

Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Share capital, $10 each Retained earnings Total Equity

Black 94 000 97 000 971 000 938 000 1 065 000 1 035 000 81 000 76 000 349 000 300 000 430 000 376 000 500 000 494 000 135 000 165 000 635 000

Average total assets * Average total equity **

659 000

(1 065 000 +1 035 000) / 2 (635 000 + 659 000) / 2

White 60 000 520 000 580 000 38 000 175 000 213 000 320 000 47 000

47 000 506 000 553 000 32 000 181 000 213 000 300 000 40 000

367 000

340 000

(580 000 + 553 000) / 2 (367 000 + 340 000) / 2

12.37

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 12.2 Halifax Ltd

(a)

(b)

(c)

(d)

(e)

Gross profit rate =

$340,000 = 43.6% $780,000

Return on ordinary shareholders’ equity =

$157, 200 = 39.0%  $410,300 + $396, 000    2 $157, 200 = 22.3%  $735,800 + $672, 000    2 $280,500 = 1.45 :1.0 $193,500

Return on assets =

Current ratio =

Receivables turnover =

$780, 000 = 7.8 times  $106, 200 + $93,800    2 (f)

Average collection period =

(g)

Inventory turnover =

365 ÷ 7.8 = 46.8 days

$440, 000 = 4.9 times  $116, 400 + $64, 000    2 (h) (i)

Average days in inventory =

365 ÷ 4.9 = 75 days

Times interest earned =

$186, 200 + $9,920 $9,920

= 19.8 times

12.38

Chapter 12: Financial statement analysis and decision making

(j)

Asset turnover =

$780, 000 = 1.1 times  $735,800 + $672, 000    2 (k)

(l)

$325,500 = 44.2% $735,800

Debt to total assets =

Current cash debt coverage =

$41, 000 = 0.235times  $193, 500 + $156, 000    2 (m)

Cash debt coverage =

$41, 000 = 0.136times  $325,500 + $276, 000    2

12.39

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 12.3 Jasmine Ltd (a)

2016 (1)

Profit margin ratio:

$120, 000 = 16.2% $740, 000 (2)

$100, 000 = $3.33 per share 30, 000

Price-earnings ratio.

$15.00 = 4.0 times $3.75 (6)

$660, 000 = 1.1 times  $533, 000 + $665, 000    2

Earnings per share.

$120, 000 = $3.75 per share 31,984 (5)

$210, 000 = 31.8% $660, 000

Asset turnover.

$740, 000 = 1.0 times  $795, 000 + $665, 000    2 (4)

$100, 000 = 15.2% $660, 000

Gross profit ratio:

$320, 000 = 43.2% $740, 000 (3)

2015

$10.00 = 3.0 times $3.33

Cash dividend payout ratio.

$20, 000** = 17% $120, 000

$13, 000* = 13% $100, 000

**($200,000 + $120,000 - $300,0000)

*($113,000 + $100,000 - $200,000)

(7)

Debt to total assets.

$155, 000 = 19.5% $795, 000

$165, 000 = 24.8% $665, 000

12.40

Chapter 12: Financial statement analysis and decision making

(b)

The underlying profitability of the company appears to have improved. For example, profit margin and gross profit ratio have both increased. The earnings per share has increased even though there are more shares in the denominator. In addition, the company’s price-earnings ratio has increased, which suggests that investors may be looking more favourably at the company. Also, the company appears to be involved in attempting to reduce its debt burden as its debt to total assets has decreased.

(c)

The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of alternative accounting methods, atypical data at year-end, and the diversification of entities.

12.41

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 12.4 Multimedia Ltd (a)

Liquidity

2016

Current

Quick

Receivables turnover

Inventory turnover

2015

Change

$695,000 = 2.1: 1.0 $335,000

$510,000 = 3.1:1.0 $165,000

Decrease

$230,000 = 0.7: 1.0 $335,000

$179,000 = 1.1: 1.0 $165,000

Decrease

$1,000,000 = 10.7 times $93,500

$940,000 = 11.3 times $83,500

Decrease

$650,000 = 1.8 times $370,000

$635,000 = 2.0 times $325,000

Decrease

The current ratio and the quick ratio declined indicating lower liquidity. There are relatively fewer current assets for every dollar of current liabilities in 2016 than there were in 2015. This decline is exacerbated by the slower turnover of both receivables and inventory.

Profitability

2016

2015

Change

Profit margin

$115,000 = 11.5% $1,000,000

$80,000 = 8.5% $940,000

Increase

Asset turnover

$1,000,000 = 0.9 times ($1,340,000+$985,000)/2

$940,000 _ = 0.9 times ($985,000+$1,175,000)/2

Stable

Return on assets

$115,000 = 9.9% ($1,340,000+$985,000)/2

$80,000 _ = 7.4% ($985,000+$1,175,000)/2

Earnings per share

$115,000 = $1.15 per share 100,000

$80,000 = $0.80 per share 100,000

Increase

Profitability has improved. The improved profitability was driven by the greater profitability of each dollar of sales, rather than efficiency in asset turnover, which remained stable.

12.42

Chapter 12: Financial statement analysis and decision making

(b)

Current Ratio is Current Asset divided by Current Liabilities. Higher ratio means better short-term liquidity. Current Ratio of 2.1 means, for every dollar of current liabilities, there is $2.10 of current assets in the company’s statement of financial position. Quick Ratio is calculated as follows: (Cash + Marketable Securities + Net Receivables)/Current Liabilities Current Ratio, higher ratio means better short-term liquidity. Quick Ratio calculation, however, does not include inventory and prepaid expense. For this reason, Quick Ratio is considered better than Current Ratio. Cash, marketable securities and net receivables are more liquid when compared with inventory and prepaid expenses. The inventory may not be readily saleable and the prepaid expenses may not be transferable to others. Receivables Turnover is Net Credit Sales divided by Average Net Trade Receivables. Receivables Turnover measures the number of times, on average, that receivables are collected during the period. The higher the receivables turnover, the shorter the period of time between an entity making a credit sale and collecting the cash for the receivable. The higher the receivables turnover, the more liquid the receivables of an entity. Inventory Turnover is Cost of Sales divided by Average Inventory. Inventory Turnover measures the number of times on average the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory. Further, the higher the turnover, the less chance inventory will be slow moving or become obsolete and un-saleable. Profit Margin is a measure of the amount of each dollar of sales that results in profit. It is calculated by dividing profit by net sales for the period. A Profit Margin of 11.5% means that net sales of $1 results in profit of 11.5 cents. Asset Turnover measures how efficiently an entity uses its asset to generate sales. The higher the number, the more efficient. Asset Turnover is calculated by dividing net sales by average total assets for the period. Return on Assets is Profit divided by Average Total Asset. Return on Assets measures the overall profitability of assets in terms of the rate earned on each dollar invested in assets. Earnings per share is a measure of the profit earned on each ordinary share. It is calculated by dividing profit available to ordinary shareholders by the weighted average number of ordinary shares issued.

12.43

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 12.5 Angel Ltd and Buffy Ltd (a) Ratio

Angel Ltd

Buffy Ltd

(1)

Current

1.6:1

($9,187 ÷ $5,626)

1.5:1

($15,338 ÷ $9,973)

(2)

Receivables turnover

21.7 times

($34,025 ÷ $1,570)

118.7 times

($82,494 ÷ $695)

(3)

Average collection period

16.8 days

(365 ÷ 21.7)

3.1 days

(365 ÷ 118.7)

(4)

Inventory turnover

3.6 times

($25,992 ÷ $7,317)

5.2 times

($65,586 ÷ $12,539)

(5)

Average days in inventory

101.4 days

(365 ÷ 3.6)

70.2 days

(365 ÷ 5.2)

(6)

Profit margin

0.9%

($296 ÷ $34,025)

3.2%

($2,681 ÷ $82,494)

(7)

Asset turnover

2.0

($34,025 ÷ $17,267)

2.8

($82,494 ÷ $29,630)

(8)

Return on assets

1.7%

($296 ÷ $17,267)

9.0%

($2,681 ÷ $29,630)

(9)

Return on ordinary shareholders’ equity

4.9%

($296 ÷ $6,063)

22.8%

($2,681 ÷ $11,740

(10)

Debt to total assets

64.6%

($10,997 ÷ $17,029)

61.2%

($20,093 ÷ $32,819)

(11)

Times interest earned

1.8 times

($904 ÷ $494)

7.0 times

($4,968 ÷ $706)

(12)

Current cash debt coverage*

.062

($351 ÷ $5,626)

.311

($3,106 ÷ $9,973)

(13)

Cash return on sales

($351 ÷ $34,025)

3.8%

($3,106 ÷ $82,494)

(14)

Cash debt coverage**

.032

[$351 ÷ ($5,626 + $5,371)]

.155

[$3,106 ÷ ($9,973 + $10,120)]

* **

using year-end amounts because beginning of year data is not available. using year-end amounts. Alternatively, beginning of the year total liabilities can be determined from beginning-of-year figures for total assets and shareholders’ equity as for

Angel Ltd: $11,411 ($17,504 - $6,093): [$351 ÷ ($10,997 + $11,411)/2] = .031; Buffy Ltd $15,688 ($26,441 - $10,753): [$3,106 ÷ ($20,093 + $15,688)/2] = .174.

12.44

Chapter 12: Financial statement analysis and decision making

(b) A simple comparison of current ratios would suggest that Angel is more liquid. However, Angel takes 118 days to convert inventory to cash (sum of average days in inventory of 101 days and average collection period of 17 days) whereas Buffy takes only 73days for the same. Buffy also has higher current cash debt coverage. Buffy has a lower debt to total assets ratio, indicating better solvency, Buffy also has a higher cash debt coverage and times interest earned, indicating that it is more able to service its debt. Buffy was more profitable in the year of this analysis. It has both a higher asset turnover and a higher profit margin contributing to the greater return on assets. Buffy also has a much higher return on shareholders’ equity and generates more cash with each dollar of sales.

12.45

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e PROBLEM SET B 12.6

Beachcombers Ltd a. Current ratio CA CL

240 600 111 600

b. Quick ratio

2.16

QA = (cash 25,000 + MS 15 600 + Acc. Rec. 110 000) CL

150 600 111 600 1.35

c. Receivables turnover Net credit sales Net receivables

704 000 102 500 6.9 times

d. Average collection period days in year Receivables turnover.

365 6.9 52.9 days

e. Inventory turnover Cost of sales Inventory

376 000 84 000 4.5 times

f. days in inventory days in year inventory turnover

365 4.5 81.1 days

g. Profit margin ratio Profit Net credit sales

121 450 704 000 17.3%

h. Asset turnover Net credit sales Average total assets (760 600+680 000) / 2

704 000 720 300 97.7%

i. Return on assets Profit Average total assets (760 600+680 000) / 2

121 450 720 300 16.9%

j. Return on ordinary shareholders’ equity .

12.46

Chapter 12: Financial statement analysis and decision making

Profit Average total equity (465 000+ 425 000) / 2

121 450 445 000 27.3%

k. Earnings per share Profit Weighted average no. of ordinary shares

121 450 40 000 $3.04

l. Price/earnings ratio Share price Earnings per share

28.5 $3.04 9.4 times

m. Cash dividend payout ratio Dividends Profit

101 450* 121 450 83.5%

n. Debt to total assets Total liabilities Average total assets (760 600+680 000) / 2

295 600 720 300 41.0%

o. Times interest earned Profit before income tax and interest expense Interest expense

183 000 9 500 19.3 times

Retained Earnings $ 101 450* 1/1 Bal. Profit

Dividends

31/12

bal 265 000 366 450 31/12 bal.

$ 245 000 121 450

366 450 265 000

12.47

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 12.7 Jade Ltd

Receivables turnover = 10 =

$5,500,000 Average receivables

Average receivables =

$5,500,000 10

(Receivables 30/6/12 + $475,000) 2

= 550,000

= $550,000

Receivables 30/6/12 = $1,100,000 - $475,000 = $625,000 Profit

Profit margin = 14.5% = .145 =

$5,500,000

Profit = $5,500,000 x .145 = $797,500 Profit before income taxes = $797,500 + $280,000 = $1,077,500 Return on assets = 22% = .22 =

Average assets =

$797,500 average assets

$797,500 .22

(Assets (30/6/12) + $3,500,000) 2

= $3,625,000

Assets (30/6/12) = $7,250,000 - $3,500,000 = $3,750,000 Total current assets = $3,750,000 - $2,310,000 = $1,440,000 Inventory = $1,440,000 - $625,000 - $225,000 = $590,000 Total liabilities and shareholders’ equity = $3,750,000 Total liabilities = $3,750,000 - $1,700,000 = $2,050,000 Current ratio = 3:1 =

$1,440,000 current liabilities

Current liabilities =

$1,440,000 3

= $480,000

Non-current liabilities = $2,050,000 - $480,000 = $1,570,000 Inventory turnover = 4.8 =

COGS [(860,000 + 590,000) / 2]

Cost of sales = $725,000 x 4.8 = $3,480,000 Gross profit = $5,500,000 - $3,480,000 = $2,020,000 Gross profit - operating expenses – interest expense = profit before income tax $2,020,000 - $832,500 – interest expense = $1,077,500 Interest expense = $1,187,500 - $1,077,500 = $110,000 .

12.48

Chapter 12: Financial statement analysis and decision making

PROBLEM SET B 12.8 Kalamata Ltd (a) Receivables turnover = 10 =

Average receivables =

$2,750,000 Average receivables $2,750,000 = 275,000 10

(Receivables 30/6/15 + $237,500) = $275,000 2

Receivables 30/6/15 = $550,000 - $237,500 = $312,500 Profit

Profit margin = 14.5% = .145 = $2,750,000 Profit = $2,750,000 x .145 = $398,750 Profit before income taxes = $398,750 + $140,000 = $538,750 Return on assets = 22% = .22 =

Average assets =

$398,750 average assets

$398,750 = $1,812,500 .22

(Assets (30/6/15) + $1,750,000) = $1,812,500 2

Assets (30/6/15) = $3,625,000 - $1,750,000 = $1,875,000 Total current assets = $1,875,000 - $1,155,000 = $720,000 Inventory = $720,000 - $312,500 - $112,500 = $295,000 Total liabilities and shareholders’ equity = $1,875,000 Total liabilities = $1,875,000 - $850,000 = $1,025,000 Current ratio = 3:1 =

$720,000 current liabilities

Current liabilities =

$720,000 3

= $240,000

Non-current liabilities = $1,025,000 - $240,000 = $785,000 COGS

Inventory turnover = 4.8 = [(430,000 + 295,000)÷ 2] Cost of sales = $362,500 x 4.8 = $1,740,000

12.49

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

Gross profit = $2,750,000 - $1,740,000 = $1,010,000 Gross profit - operating expenses – interest expense = profit before income tax $1,010,000 - $416,250 – interest expense = $538,750 Interest expense = $593,750 - $538,750 = $55,000 (b)

Based on the ratios provided above, Kalamata Ltd would appear to be a reasonable investment. The profitability ratios appear strong. And the current ratio suggests that the entity does not have a liquidity problem. The only ratio of concern is the inventory turnover which suggests that inventory is slow to sell. Before making any investment decision, comparisons with industry averages and trend analysis would be advisable.

12.50

Chapter 12: Financial statement analysis and decision making

PROBLEM SET B 12.9 Spectre Ltd (a) 1. Free cash flow = net cash from operating activities – capital expenditure = 202,688 – 65,120 = 137,568 2. Capital expenditure ratio =

Net cash flow from operating activities

capital expenditure 202,688 65,120

3. Current cash debt coverage = = 4. Cash debt coverage = =

net cash flow from operating activities average current liabilities 202,688 [(403,000 + 406,500) ÷ 2]

average total liabilities 202,688 [(990,800 + 608,500) ÷ 2]

= 0.5 times

net cash flow from operating activities

5. Cash return on sales ratio =

(b)

= 3.1: 1

= 0.25 times

net cash flow from operating activities 202,688 1,216,000

net sales

= 0.17 times

Traditionally, to evaluate an entity, the ratios most commonly used by investors and creditors have been based on accrual accounting. In this question some cash-based ratios are explored that are gaining increasing acceptance among analysts. FREE CASH FLOW In the statement of cash flows, cash provided by operating activities is intended to indicate the cash-generating capability of the entity. Analysts have noted, however, that net cash provided by operating activities fails to take into account that an entity must invest in new property, plant and equipment just to maintain its current level of operations, and it may need to maintain dividends at current or minimum levels to satisfy investors. Free cash flow is the term used to describe the cash from operations available for expansion or the payment of dividends. It is the amount of cash flow from operating activities remaining after deducting investing expenditure necessary to maintain the current level of operations. For Spectre Ltd Free cash flow of $137 568 is available for the acquisition of new assets, the retirement of debt, or the payment of dividends. CAPITAL EXPENDITURE RATIO Another indicator of an entity’s ability to generate sufficient cash to finance the purchase of new property, plant and equipment is the capital expenditure ratio — net cash provided by operating activities divided by capital expenditures. This measure is similar to free cash flow, except that free cash flow reveals the amount of cash available for discretionary use by management, whereas the capital expenditure ratio provides a relative measure of cash provided by operations compared with cash used for the purchase of productive assets. Amounts spent on capital expenditures are listed in the investing activities section of the statement of cash flows. Using the information from Spectre Ltd the calculations reveal its capital expenditure ratio 3.1: 1 The ratio of 3.1:1 suggests that Spectre Ltd could have purchased more than three times as much property, plant and equipment as it did without requiring any additional outside financing. This ratio will vary across industries depending on the capital intensity of the industry. That is, we would expect a manufacturing entity to have a lower ratio (because it has higher capital expenditures) than a software entity, which spends less of its money on non-current assets and more on ‘intellectual’ capital. The phase of an entity’s life cycle will also affect the expected capital expenditure ratio. It is likely to be lower in the introductory and growth phases and higher in the maturity and decline phases.

12.51

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e LIQUIDITY Liquidity is the ability of an entity to meet its immediate obligations. One measure of liquidity is the current ratio: current assets divided by current liabilities. A disadvantage of the current ratio is that it uses year-end balances of current asset and current liability accounts, and these year-end balances may not be representative of the entity’s position during most of the year. CURRENT CASH COVERAGE A measure that partially corrects this problem is the current cash debt coverage which is the net cash provided by operating activities divided by average current liabilities. Because net cash provided by operating activities involves the entire year rather than a balance at one point in time, it is often considered a better representation of liquidity. Spectre Ltd net cash provided by operating activities in 1 year is 0.5:1. That is, it generates 50 cents of net cash provided by operating activities for every $1 of current liabilities. It generates enough cash from operating activities in 1 year to meet 50% of the obligations that are due within 1 year. A ratio closer to 1:1 would indicate that it generates 100 cents of net cash provided by operating activities for every $1 of current liabilities. SOLVENCY Solvency is the ability of an entity to survive over the long term. CASH DEBT COVERAGE A measure of solvency that uses cash figures is the cash debt coverage which is measured as the net cash provided by operating activities divided by total debt as represented by average total liabilities. This measure indicates an entity’s ability to repay its liabilities from cash generated from operations, i.e. without having to liquidate productive assets such as property, plant and equipment. The cash debt coverage for Spectre Ltd is 0.25 times. Spectre Ltd’s net cash provided by operating activities is 0.25:1. This means that the entity has 25 cents net cash provided by operating activities for every $1 of average total liabilities. Hence, Spectre Ltd net cash provided by operating activities is 25% of its total liabilities. Another way to consider this measure is to look at the reciprocal, which is 4. It would take Spectre Ltd 4 years to repay all of its liabilities from cash provided by operating activities at the current level. PROFITABILITY Profitability refers to an entity’s ability to generate a reasonable return. Accrual-based ratios that measure profitability are discussed, such as gross profit rate, profit margin and return on assets. In measures of profitability the potential differences between cash accounting and accrual accounting are most pronounced. Although some differences are expected because of the difference in the timing of revenue and expense recognition under cash versus accrual accounting, significant differences should be investigated. A cash-based measure of performance is the cash return on sales ratio. CASH RETURN ON SALES RATIO The cash return on sales ratio is calculated as net cash provided by operating activities divided by net sales. This ratio indicates the entity’s ability to turn sales into dollars. The cash return on sales ratio can be compared with the corresponding accrual-based ratio. A lower cash return on sales ratio should be investigated because it might indicate that the entity is recognising sales that are not really sales (i.e. sales it will never collect), or incurring a lot of expenditure relative to revenue. Alternatively, it may reflect payments for increased inventory and other lags occurring in the growth phase. The cash return on sales ratio for Spectre Ltd is 0.17, 0.17:1 or 17%. This means the entity generates 17 cents in cash for every $1 of sales. Overall it appears that Spectre Ltd ‘s ratios indicate the business is profitable and solvent, can replace its assets as needed and has free cash flow. However, further investigation is needed into the liquidity of the business to ensure that there is adequate cash flow to met short term debts as they fall due. .

12.52

Chapter 12: Financial statement analysis and decision making

PROBLEM SET B 12.10 Victoria Ltd and Conrad Ltd

(a) Ratio

Victoria Ltd

Conrad Ltd

(1)

Return on assets

39.0%

$138,000 ÷ 354,000

30.3%

($94,000 ÷ $310,000)

(2)

67.6%

($138,000 ÷ $204,000)

58.7%

($94,000 ÷ $160,000)

(3)

Return on ordinary shareholders’ equity Profit margin

27.6%

($138,000 ÷ $500,000)

18.8%

($94,000 ÷ $500,000)

(4)

Current ratio

4.1:1

($244,000 ÷ $60,000)

3.7:1

($220,000 ÷ $60,000)

(5)

Receivables turnover

5 times

($500,000 ÷ $100,000)

5 times

($500,000 ÷ $100,000)

Inventory turnover

2.7 times

($276,000 ÷ $104,000)

3.8 times

($300,000 ÷ $80,000)

Debt to equity

73.5%

($150,000 ÷ $204,000)

93.8%

($150,000 ÷ $160,000)

(7)

(b)

Using different accounting methods has affected all measures except the receivables turnover ratio. The use by Conrad Ltd of weighted average valuation and reducing balance depreciation has increased their expenses, reduced their profit and therefore decreased their total asset and equity values. This in turn causes their return on assets, return on equity, profit margin, current ratio, and debt to equity ratio to be considerably lower than Victoria Ltd; however, Conrad Ltd’s inventory turnover was better because the weighted average inventory method (in a period of rising prices) results in a higher cost of sales and a lower ending inventory value than does the FIFO inventory method.

12.53

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 12.1 (a)

FINANCIAL REPORTING PROBLEM DAVID JONES LTD

Five Year Summary 2009–2013 All figures are in $’000’s

Sales Gross Profit Department Store – EBIT Financial Services – EBIT PROFIT AFTER TAX

Total Assets Total Liabilities Total Equity Basic earnings per share (cents) Dividends per share (cents) Return on shareholder equity (%)

2013 1,845,012 93% 706,144 90% 99,532 54% 49,466 120% 101,554 65%

2012 1,867,817 94% 699,830 89% 104,995 57% 49,418 120% 101,103 65%

2011 1,961,744 99% 767,269 98% 199,003 108% 47,707 116% 168,139 107%

2010 2,053,087 103% 815,729 104% 204,798 111% 44,379 108% 170,766 109%

2009 1,985,490 100% 786,146 100% 184,377 100% 41,274 100% 156,522 100%

1,237,785 436,689 801,096

1,240,897 465,193 775,704

1,214,550 429,070 785,480

1,194,921 450,683 744,238

1,124,674 439,832 684,842

19.2 17.0 12.70%

19.4 17.5 13.00%

33.0 28.0 21.40%

34.0 30.0 22.90%

31.5 28.0 22.90%

This trend analysis of DJS shows an unfavourable trend with continual decline in sales revenue over the past five years, with the exception of 2010. A similar trend can be seen with gross profit. A concern is the significant drop of 46% in Department Store EBIT by 2013 compared to the base year of 2009. This is offset to some extent by the growth in the Financial Services EBIT in 2013 which has increased by 20% since the base year. Overall profitability has declined substantially since 2009 with the 2013 profit after tax decreasing to 65% of the base year. . DJS profit has decreased significantly since 2009 with a significant downturn in Department Store EBIT. Although there is an increase in the Financial Services EBIT, this is not sufficient to avert the overall decline in profit after tax

12.54

Chapter 12: Financial statement analysis and decision making

(b) Calculate the following ratios for 2013 and 2013.

2013

2012

436 689 1 237 785

465 193 1 240 897

35.3%

37.5%

10 1554 1 845 012

101 103 1 867 817

5.5%

5.4%

1 845 012 1 239 341

1 867 817 1 227 724

1.49

1.52

101 554 788 400

101 103 780 592

12.9%

13.0%

17.0 19.2

17.5 19.4

88.5%

90.2%

* Average total assets

(1 237 785 + 1 240 897) / 2

(1 240 897 + 1 214 550) / 2

** Average total equity

(801 096 +775 704) / 2

(775 704 + 785 480) / 2

Debt to total assets ratio Total liabilities Total assets

Profit margin Profit after tax Sales

Asset turnover Sales Average total assets *

Return on shareholders’ equity Profit after tax Average total equity **

Dividend payout Dividends per share (cents) Basic earnings per share (cents)

12.55

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

(c)

Evaluate David Jones Ltd s profitability, solvency and investment potential based on the ratios calculated.

Debt to total assets ratio

Profit margin

Asset turnover

Return on shareholders’ equity

Dividend payout

(d)

A slightly lower level of debt used to finance assets, decreasing from 37.5 cents to 35.3 cents for each dollar of assets in 2013. Despite the drop in sales, there was a marginal increase in the profit margin from 5.4% to 5.5% in 2013 Sales generated from DJS’ assets was slightly lower due to a decrease in profit with a concurrent increase in the asset base. This reduced the asset turnover from 1.52 down to 1.49 in 2013 The lower profit and concurrent increase in equity also impacted on lowering the ROE. This dropped slightly from 13% to 12.9% in 2013. This return has dropped substantially since 2009 when the ROE was at its highest at 22.9%. This can be calculated by comparing the DPS to the EPS. The payout ratio has dropped from 90.2 to 88.5%. This may also be related to the lower profit in 2013.

What other information may be useful to making a decision about investing in David Jones Ltd shares. Further information about the management outlook and future direction of David Jones Ltd would be helpful in understanding the 2013 performance and assessing potential for profitability in future. Further, substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often critical to the successful operations of a company. Financial reports in the media, disclosures to the Stock Exchange and publications of financial service firms (Standard & Poor’s, Dun & Bradstreet) will provide additional relevant information not usually found in the annual report.

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BUILDING BUSINESS SKILLS 12.2

INTERPRETING FINANCIAL STATEMENTS

Digitech Ltd Financial Statement Analysis (a) all figures in $’000.

(1)

2016 Profit margin:

2015

$3119 = 0.6% $548,864

$6723 = 1.1% $624,576 Sales revenue = $627,708 - $39-$470-$823$1800 = $624,576

Sales revenue = $550324 - $60-$600-$300-$500 = $548,864

(2) Return on Shareholders’ Equity – profit from continuing operations: $6,723

( ($123,874+ $125,623)) /2

= 5.4%

Return on Shareholders’ Equity using profit for the period:

$1,500 = 1.2% ($123,874 + $125,623 )/2 (3) Return on Assets using profit after tax from continuing operations: $6,723 = 2.2% ( ($291,680+ $333,352) /2

$3,119 = 2.5% ($125,623 + 124,000 )/2

$2,619

( $125,623+$124,000) /2

= 2.1%

$3,119 = 0.9% (($333,352 + $330,000 )/2

Return on Assets using profit for the period:

$1,500

( ($291,680+ $333,352) /2

= 0.5%

$2,619

( ($333,352+ $333,000) /2

= 0.8%

(4) Times Interest Earned using profit from continuing operations before finance cost and tax expense:

$11,723 + $8,529 = 2.4 times $8,529

$5,830 + $6,440 = 1.9 times $6,440

A comparison of Digitech Ltd’s profitability ratios for 2015 and 2016 could be quite misleading if the effect of the discontinuing operations were not taken into account. Using profit for the period gives the impression that Digitech’s profitability is declining as the return on shareholders’ equity and return on assets decline. However, when profit from continuing operations is used the reverse trend is observed, that is, profitability is improving as evidenced by the increase in the return on shareholders’ equity and the return on assets. The profit margin also shows improvement during this period.

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(b)

all figures in $’000 (1)

Inventory Turnover:

$279,519 = 3.9 times ($55,117 + $88,853)/2 (2)

Receivables Turnover:

$624,576 = 11.2 times ($47,583 + $63,908)/2 (3)

Gross Profit Rate

$624,576 − $279,519 = 55.2% $624,576 (c)

$548,864 − $233,313 = 57.5% $548,864

Profitability has been improving and this has contributed to an improvement in Digitech Ltd’s ability to cover its interest expense. Although the gross profit rate decreased in 2013, this was offset by an increase in sales revenue which resulted in an increase in the dollar amount of gross profit. Digitech Ltd has discontinued some operations that appear to have been draining profitability. Although improved, interest cover is still low and should be monitored closely. Also, the inventory turnover is slow, indicating that Digitech has enough inventory in stock to cover approximately three months sales. Unless there is a long lead time for inventory acquisition or uncertainties about sources of supply, there may be scope for more efficient inventory policies.

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BUILDING BUSINESS SKILLS 12.3

MANAGERIAL ANALYSIS

Grayson Global Ltd (a)

Grayson Global Ltd ‘s customers are paying their invoices faster in 2017 than in 2013. The evidence for this is the accounts receivable turnover of 7.2 times in 2017, compared with only 6.8 times in 2015. The average collection period in 2017 was 50.7 days compared with 53.7 days in 2015.

(b)

It is becoming harder for Grayson Global Ltd to pay its invoices as they come due. Although the current ratio has improved from 1.3 to 2.0 to 2.5 over the three years, the quick ratio has deteriorated steadily from 1.4 to 0.9 to 0.5. Additionally, inventory is turning over more slowly (inventory turnover decreased from 7.6 times to 6.1 times), indicating that a greater proportion of current assets is tied up in inventory, thus increasing reliance on creditors to finance current assets.

(c)

The balance in accounts receivable is increasing. This is a result of increasing sales (121% in 2016; 142% in 2017) at a greater rate than the increasing receivables turnover. In 2015 receivables were 14.7% of sales revenue (inverse of the turnover). In 2017 the receivables were only 13.9% of the sales revenue. As sales in 2017 were 1.42 times the sales in 2015, receivables in 2017 must be 19.7% (13.9% x 1.42 times) of the 2015 sales revenue. .

(d)

The amount carried in inventory must be increasing. Inventory turnover is decreasing and sales (along with cost of sales) are increasing. Cost of sales has remained at 60% of sales each year. This combination has to result in a larger amount of inventory.

(e)

The amount of earnings per share is increasing. The dividends per share have remained the same ($3.00) for the three-year period, while the dividend payout ratio is decreasing. For the dividend payout ratio to be decreasing, the earnings per share must be increasing as there has been no change in the number of shares outstanding.

(f)

In 2017 and 2016, Grayson Global Ltd used leverage to the advantage of its shareholders because it was able to achieve a before-tax return on assets in excess of the rate of interest paid on borrowed funds. However, in 2016 Grayson Global Ltd traded on the equity at a loss as the before tax return on total assets was less than the rate of interest paid on borrowed funds.

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BUILDING BUSINESS SKILLS 12.4

FINANCIAL ANALYSIS ON THE WEB

For consistency with IBM’s Guide, the US terminology is retained. (a)

The purpose of the annual report is to provide a means by which a company can report on its performance to its shareholders and others. Any of the following could be answered as an optional element of US annual reports: financial highlights; letter to stockholders; corporate message; report of management; Board of Directors and management; and stockholder information.

(b)

The auditor’s report is a summary of the findings of an independent firm of certified public accountants (US), showing whether the financial statements are complete, reasonable and prepared in accordance with generally accepted accounting principles.

(c)

The required elements are the Statement of Earnings, which summarises revenues, expenses and results; statement of financial position, which reports on assets, liabilities and stockholders’ equity; and statement of cash flows. Key numbers in the statement of earnings are revenue, gross profit, operating income (operating profit), net earnings (net income or net profit) and earnings per share.

(d)

Students may choose any two of the following (1–6 are suggestion by a business school dean, and 7-11 are suggestions by a business executive, and 12-14 were suggested by a high-school economics teacher, and some suggestions were made by more than one person but not duplicated below): 1.

Look at changes from year to year in terms of raw changes and percentages to identify trends that are useful in assessing a company. Most large companies report up to three years historic data but a longer period is recommended for analysis.

Find out information about the company’s products, people and technology and other resources that may give it a competitive advantage in the market place.

Look at the ratio of operating income to total revenue (sales). Ideally this should be growing in absolute and percentage terms.

Look at total stockholders’ equity and the ratio of total liabilities to total stockholders. Generally a lower ratio means a lower risk for creditors and lower borrowing costs.

Check the notes for liabilities. You may find environmental liabilities, contingencies and additional lease liabilities. Not all liabilities can be measured in financial terms. Statements of financial position may also omit certain assets, such as those that do not result from transactions.

Look at cash provided/used by operating activities. This is the most critical number and represents the most basic business of the company.

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For young companies, particularly technology companies, speak to experts who understand the technology and markets.

Look at sales and sales growth and compare it to inflation.

Look at earnings, earnings growth, earnings growth compared with growth in sales.

10.

Look at the Price Earnings ratio. Some companies include this in the annual report. Compare this ratio to that of the company’s major competitors. Comparison should be at the same point in time.

11.

Look at the year-end figure for ‘backlog’. This is the dollar amount of unshipped customer orders for sales in the coming year. This can be a good indicator of what might happen in the next year.

12.

Analyse why profit has been made (this may involve looking at its website), e.g. new product, management style, which would indicate it is a healthy growing company. Profit made from cost-cutting may have serious long-term consequences if it is at the expense of quality.

13.

Investigate losses. A loss may have explanations that indicate future profitability, such as expenses on research and development that can benefit future years.

14.

Look at the movement in owners’ equity. If a large percentage of profits is declared as dividends, it could indicate that the company is not planning for expansion and innovation. It could indicate that the company will not grow in the future.

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BUILDING BUSINESS SKILLS 12.5 COMPREHENSIVE FINANCIAL ANALYSIS EXERCISE WITH WEB SEARCH The Coca-Cola Company and PepsiCo Inc. (a) Liquidity Liquidity ratios measure the short-term ability of the entity to pay its maturing obligations and to meet unexpected needs for cash. Ratio

Coca-Cola 2013

Coca-Cola 2012

PepsiCo 2013

31,304 27,811

1.13

1.09

1.24

25,141 27,811

0.90

0.77

0.93

10,542 27,816*

0.25

0.27

0.37

9.73

9.92

9.49

37.52 days

36.79 days

38.46 days

5.63

6.00

8.94

64.80 days

60.88 days

40.83 days

Formula

1. Current ratio:

Current assets Current liabilities 2. Quick Ratio

Cash + Marketable securities + Net receivables Current liabilities 3. Current cash debt coverage

Net cash provided by operating activities Average current liabilities *(27,821+27,811) / 2 4. Receivables turnover (times)

Net credit sales Average net trade receivables

46,854 4,816*

*(4,759 + 4,873) / 2 5. Average collection period (days) 365 9.73

365 days Receivables turnover 6. Inventory turnover (times per year)

18,421 3,271*

Cost of sales Average Inventory *(3,264+ 3,277) / 2 7. Days in Inventory

365 5.63

365 Inventory Turnover

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Chapter 12: Financial statement analysis and decision making

Coca-Cola’s current ratio increased from 1.09:1 in 2012 to 1.13:1 in 2013 as the increase in current assets was greater than the increase in current liabilities. Coca-Cola’s competitor, PepsiCo, reported a current ratio of 1.24:1 in 2013, which is significantly higher than CocaCola’s ratio of 1.13 in 2013. What is considered to be an acceptable ratio may vary from industry to industry; however, around 1.5:1 is generally considered to be an acceptable current ratio for most industries. Although Coca-Cola’s ratio is below 1.5:1, it still has more current assets than current liabilities. This suggests that it can meet its current obligations when they fall due. Coca-Cola’s quick ratio has improved from 0.77:1 in 2012 to 0.90:1 in 2013 which is slightly lower than PepsiCo’s quick ratio of 0.93. As a rule of thumb, some analysts suggest that a quick ratio of approximately 1:1 is adequate however this is arbitrary and subject to debate and exception. Coca-Cola s quick ratio for both years in below 1:1, which suggests that it may have difficulties in meeting its current obligations when they fall due. Coca-Cola’s current cash debt coverage has decreased from 0.27:1 in 2012 to 0.25:1 in 2013. The acceptable level for current cash debt coverage may vary between industries however a value below 0.40:1 is considered cause for additional investigation of an entity’s liquidity. Coca-Cola’s current cash debt coverage is well below this benchmark which indicates that it is not in a strong position to meet its current liabilities. In contrast, PepsiCo’s current cash debt coverage of 0.37:1 in 2013 is considerably higher but also below the required benchmark of 0.40:1. Coca-Cola’s receivables turnover decreased slightly from 9.92 in 2012 to 9.73 times per year in 2013. To assess the effectiveness of an entity’s credit and collection policies, the average collection period should be calculated. The general rule is that the collection period should not greatly exceed the credit term period; the time allowed for payment. Coca-Cola’s average collection period remained relatively unchanged from 36.79 days in 2012 to 37.52 days in 2013.To assess this ratio we need to know Coca-Cola’s credit policy but their 10-K report does not reveal the company’s credit terms so we cannot comment on the adequacy of their collection. However, we can compare it to PepsiCo’s credit policy which is explained under the Accounting Policies section of PepsiCo’s 2013 annual report which indicates that payment required within 30 days of delivery in the United States and within 30 to 90 days internationally and discounts may be allowed for early payment. To evaluate Coca-Cola’s credit and collection policies more accurately we would need the break-up between international and local receivables. As this data is not available in the information provided above, we need to evaluate the results with caution. PepsiCo’s average collection period of 38.46 days in 2013 is similar to The Coca Cola Company’s 37.52 days, which is close to the 30-day credit terms for its US customers, indicates the company’s credit policy is appropriate and its monitoring of receivables collection is effective. The inventory turnover measures the number of times on average the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory. The higher the turnover the less chance stock will be slow moving or become obsolete or spoiled and unsaleable. It is important to monitor the amount of resources invested in inventory as part of managing the business. Entities do not want to unnecessarily have too much cash tied up in inventories. At the same time, they do not want to be understocked and miss out on sales be-cause of a lack of stock. Coca-Cola’s inventory turnover was slightly slower dropping from 6.00 times in 2012 to 5.63 times per year in 2013.

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The days in inventory ratio converts the inventory turnover into days. Coca-Cola’s days in inventory increased slightly from 60.88 days in 2012 and 64.80 days in 2013. Although the cost of sales had decreased in 2013, there was a higher level of inventory held. Although these figures are considerably higher than PepsiCo’s inventory turnover of 40.83 days, they are quite acceptable when we consider the goods that the Coca Cola Company sells soft drinks, juices, energy drinks and water are items that normally have expiry dates longer than one year. If The Coca Cola Company can sell its inventories within 70 days, the Coca Cola Company manages its inventory well.

Summary – Liquidity From the analysis of the liquidity ratios along comparisons with competitor PepsiCo, it appears that Coca-Cola has effective credit and collection policies for receivables and is adequately turning its inventory over to avoid stock spoilage and wasted resources invested in inventory but maintain adequate supplies to meet product demand. It is noted that CocaCola’s current ratio, quick ratio and current cash debt coverage are below expected benchmarks. This may be an indication that it may experience difficulties in paying its debts as they fall due. To minimise the risk of future liquidity problems, these measures should be monitored and investigated further if the decline continues.

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(b) Solvency Solvency ratios measure the financial stability of the entity and its ability to survive over a long period of time. Long-term creditors and shareholders are interested in a company’s long-term solvency, particularly its ability to pay interest as it falls due and to repay the face value of debts at maturity. The debt to total assets, times interest earned and cash debt coverage provide information about debt-paying ability. The higher the percentage of total liabilities to total assets, the greater the financial risk that the entity may be unable to meet its maturing obligations. The lower the ratio, the more equity ‘buffer’ is available to creditors if the entity becomes insolvent. Therefore, from the creditors’ point of view, a low ratio of debt to total assets is usually desirable.

Ratio

Coca-Cola 2013

Coca-Cola 2012

PepsiCo 2013

0.63

0.62

0.69

25.8 times

30.8 times

10.8 times

10,542 54 811*

0.19

0.21

0.18

10,542 - 2,550

7,992

7 865

6 893

Formula

8. Debt to total assets ratio 56 615 90 055

Total liabilities Total assets

9. Times interest earned Earnings Before Interest and Tax Interest Expense

11 940 463

10. Cash debt coverage

Net cash provided by operating activities Average total liabilities (53 089+52 239) / 2

11. Free cash flow ($ millions) Net cash provided by operating activities − Capital expenditures

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Coca-Cola’s debt to total assets ratio indicates a marginal increase in the level of debt used to finance assets from 0.62:1 in 2012 to 0.63:1 in 2013. These figures are significantly lower than PepsiCo’s debt to total assets ratio of 0.69:1 in 2013 As the amount of debt increases, long-term creditors become more concerned if the company is less able to repay their long term obligations. To assess whether the entity’s profit is adequate to meet interest payments we can calculate the times interest earned. Coca-Cola’s times interest earned dropped substantially from 30.8 times in 2012 to 25.8 times in 2013. This was attributed to the combination of a decrease in Coca-Cola’s EBIT with a higher interest expense. Despite Coca-Cola’s lower interest coverage in 2013, it is very strong in comparison to PepsiCo’s coverage of 10.8 times. The interest coverage for both companies is extremely high and well exceeds the rule of thumb of 3 to 4 times interest coverage. The cash debt coverage ratio provides additional insight into an entity’s ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets used in its operations. Coca-Cola’s cash debt coverage decreased slightly from 0.21:1 in 2012 to 0.19:1 in 2013. These figures are slightly higher than PepsiCo’s coverage ratio of 0.18:1 in 2013. The general rule of thumb indicates that a cash debt coverage ratio below 0.20:1 is considered cause for additional investigation. Both companies fall within this range. Free cash flow provides information about the company’s solvency and its ability to pay dividends or invest in new projects. Coca-Cola’s free cash flow has increased from $7,865 million in 2012 to $7,992 million in 2013. In 2013 Coca-Cola spent $2,550 million on capital expenditures. Summary – Solvency Based on the solvency ratios, it appears that Coca-Cola is solvent with the ability to meet its long-term obligations as they fall due and can meet its planned capital expenditures

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(c) Profitability Profitability ratios measure the profit or operating success of an entity for a given period of time. An entity’s profit affects its ability to obtain debt and equity financing, its liquidity position and its ability to grow. As a consequence, creditors and investors alike are interested in evaluating profitability. Profitability is frequently used as the ultimate test of management’s operating effectiveness. Ratio

Coca-Cola 2013

Coca-Cola 2012

PepsiCo 2013

25.8 cents

27.7 cents

28.8 cents

10.9 cents

8.9 cents

18.4 cents

18.9 cents

10.2 cents

46,854 88,115*

53 cents

58 cents

87 cents

28,433 46,854

60.7 cents

60.3 cents

60.9 cents

38.9%

37.9%

38.3%

22.5%

22.2%

14.6%

$1.94

$2.00

$4.37

Formula

12. Return on ord. shareholders’ equity Profit available to ord. shareholders Average ordinary shareholders equity

8,584 33,304*

*(33,168+33,440) / 2 13. Return on assets: Profit after tax Average total assets

8,626 88,115*

9.7 cents

*(86,174+90,055) / 2 14. Profit margin: Profit after tax Sales

8,626 46,854

15. Asset turnover Net sales Average total assets *(86,174+90,055) / 2 16. Gross profit margin Gross profit Net sales 17. Operating expenses to sales Operating expenses Net sales 18. Cash return on sales Net cash provided by operating activities Net sales 19. Earnings per share (EPS) Profit available to ordinary shareholders Weighted average no. of ordinary shares

18,205 46,854 10,542 46,854 8,584 4,425

20. Price/Earnings ratio (times) Share price Earning per share

$41.31 $1.94

21.3

18.1

19.0

21. Dividend payout Dividends Profit available to ordinary shareholders

4 969 8,584

58%

51%

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The return on ordinary shareholders’ equity (ROE) shows the amount of profit earned for each dollar invested by the shareholders. Coca-Cola’s return increased marginally from 27.7 cents in 2012 to 25.8 cents in 2013. These results are reflective of a drop in the profit available to ordinary shareholders and an increase in the average ordinary shareholders equity in 2013. Coca-Cola’s ROE of 25.8 cents in 2013 is lower than PepsiCo’s 28.8 cents. The higher the ROE, the more attractive investment in the company is as it indicates a greater return on shareholder funds invested. The return on assets measures the overall profitability of assets in terms of the profit earned on each dollar invested in assets. It is a measure of management’s effectiveness based on normal business activities. Coca-Cola’s return on assets decreased slightly from 10.9 cents in 2012 to 9.7 cents in 2013. This was due to a decrease in Coca-Cola’s profit after tax in 2013 and an increase in the asset base. Coca-Cola’s return on assets over the 2 years is slightly higher than PepsiCo’s return on assets of 8.9 cents in 2013. Coca-Cola’s profit margin showed a slight drop from 18.9 cents in 2012 to 18.4 cents in 2013. The increase in profit after tax was marginally greater than the increase in sales. As Coca-Cola’s results over the 2 years are much higher than PepsiCo’s 10.2 cents in 2013, this suggests that it had better control over its expenses in 2013. The asset turnover decreased slightly over the 2 year period. In 2013 Coca-Cola generated 53 cents in sales for every dollar invested in assets compared to 58 cents in 2012. These figures are significantly lower than PepsiCo’s asset turnover of 87 cents in 2013 which suggest that it is much more effective than Coca-Cola in using its assets to generate sales. Coca-Cola’s gross profit margin showed a slight improvement from 60.3 cents in 2012 to 60.7 cents in 2013. As the increase in gross profit was marginally higher than the increase in sales, Coca-Cola had better control over its cost of sales in 2013. These results are similar to PepsiCo’s gross profit margin of 60.9 cents. Coca-Cola’s operating expenses to sales ratio has increased slightly from 37.9% in 2012 to 38.9% in 2013. These results are similar to PepsiCo’s operating expenses to sales of 38.3 cents. The cash return on sales ratio focuses on the cash generated from operating activities and therefore eliminates the impact of non-cash expenses such as depreciation which are included in the calculation of profit based ratios. Coca-Cola’s cash return on sales show a slight increase from 22.2% in 2012 to 22.5% in 2013. PepsiCo’s cash return on sales of 14.6 % is well below this range. The Earnings Per Share, also referred to as the EPS, is a measure of the profit earned on each ordinary share. Coca-Cola’s EPS decreased from $2.00 in 2012 to $1.94 in 2013. This was mainly due to a substantial decrease in profit available to ordinary shareholders. These results are significantly lower than PepsiCo’s EPS of $4.37. Coca-Cola’s P/E ratio increased from 18.1 times in 2012 to 21.3 times in 2013. This is mainly due to the large increase in share price from $36.25 in 2012 to $41.31 in 2013. At the 2013 reporting date, Coca-Cola’s shares were selling for $41.31, and its EPS was $1.94, therefore the share price is approximately 21.3 times higher than the EPS of $1.94. CocaCola’s P/E ratio was slightly higher than PepsiCo’s P/E ratio of 19 times in 2013. The higher the P/E ratio, the more confident the shareholder is about the future earning capacity of the company. Both companies would be considered profitable investments.

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The dividend payout ratio measures the percentage of profits distributed in the form of dividends. Coca-Cola’s dividend payout ratio increased from 51% in 2012 to 58% in 2013. Coca-Cola has a relatively high dividend payout ratio which is indicative of a company in maturity; however, it also recognises that to maintain innovation and effectiveness it needs to reinvest funds into the business. Both Coca-Cola and PepsiCo appear to have a balanced approach to distributing funds to shareholders and reinvesting funds into the business. Summary – Profitability Based on the ratios calculated and discussed in this section as well as the information sourced from the annual report, Coca-Cola is a profitable entity. Profitability is frequently used as the ultimate test of management’s operating effectiveness. It appears that management is operating Coca-Cola’s assets efficiently and controlling prices and expenses adequately. This enables Coca-Cola to generate sufficient cash to continue its investments in innovation as well as pay out generous dividends to shareholders.

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Ratio

Formula

Liquidity 1. Current Ratio 2. Quick Ratio 3. Current Cash Debt Coverage 4. Receivables Turnover 5. Average Collection Period 6. Inventory Turnover 7. Average Days in Inventory

Current Assets Current Liabilities Cash + Marketable Securities + Net Rec. Current Liabilities Net cash provided by op. activities Average current liabilities Net credit sales Average net trade receivables 365 days Receivables Turnover Cost of Sales Average Inventory 365 days Inventory Turnover

2013

Coca Cola

Pepsi

1.13:1

1.24:1

0.90:1

0.93:1

0.25:1

0.37:1

9.73 times 37.52 days 5.63 times 64.80 days

9.49 times 38.46 days 8.94 times 40.83 days

0.63:1

0.69:1

25.79 times

10.76 times

Solvency 8. Debt to Total Assets 9. Times Interest Earned

Total Liabilities Total Assets Earnings before inc. tax + Interest exp. interest Expense

10. Cash Debt Coverage

Net cash provided by op. activities Average Total Liabilities

0.19:1

0.18:1

11. Free Cash Flow

Net cash provided by op. activities Capital expenditures

$7 992 million

$6 893 million

Profit avail.to ordinary shareholders Average ordinary shareholders’ equity

26 cents

29cents

10 cents

9 cents

18 cents

10 cents

53 cents

87 cents

61%

0.39:1

0.38:1

0.22:1

0.15:1

$1.94

$4.37

21.29 times

18.96 times

58%

51%

Profitability 12. Return on Ord. Shareholder Equity 13. Return on Assets 14. Profit Margin 15. Asset Turnover 16. Gross Profit Margin 17. Operating Exp. to Sales 18. Cash Return on Sales 19. Earnings per share 20. Price/earnings Ratio 21. Dividend Payout

Profit Average Total Assets Profit Net Sales Net Sales Average Total Assets Gross Profit Net Sales Operating Expenses Net Sales Net cash provided by op. activities Net Sales Profit avail.to ordinary shareholders Weighted average no. of ord.. shares Share price Earnings per share Dividends Profit

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Chapter 12: Financial statement analysis and decision making

LIQUIDITY Based on the current ratio, quick ratio and current cash debt coverage, PepsiCo appears to be more liquid than Coca Cola. The receivables turnover and average collection period are similar for both companies. Coca Cola has higher average days in inventory of almost 64.80 days compared to 40.83 days for PepsiCo. This suggests that PepsiCo can sell its inventory significantly faster than its competitor. Overall, PepsiCo is in a better position to pay their debts as they fall due. SOLVENCY PepsiCo has a slightly higher debt to total assets ratio that Coca Cola so PepsiCo has more debt funding. The Cash debt coverage ratio is similar across both companies. Coca Cola’s Times Interest Earned is much higher than PepsiCo’s. However, the both PepsiCo’s and Coca Cola’s interest coverage figures are well above the general rule of thumb that profits should be approximately 3–4 times interest expense. Finally both companies have significant free cash flow with Coca Cola’s higher by $1 099 million. Overall, based on these ratios it appears that both companies are solvent. PROFITABILITY Gross profit margin is 61% for Coca Cola and PepsiCo which suggest that both companies have similar cost of sales. The profit margin is 18 cents for Coca Cola and 10 cents for PepsiCo which suggests that. Coca Cola is more effective in generating sales and managing its expenses. However, the return on ordinary shareholders’ equity is similar with a ROE of 26 cents for Coca Cola and 29 cents for PepsiCo, which indicates that there is slightly more profit is available to ordinary shareholders of PepsiCo. The asset turnover and return on assets may be used to evaluate the ability of each entity’s to generate profits and sales from its assets. The asset turnover is much higher for PepsiCo at 87 cents compared to 53 cents for Coca Cola. However, this significant difference is lost when we look at the return on assets as they are very similar at 10 cents for Coca Cola and 9 cents PepsiCo. Both companies have the same dividend payout of 61% which indicates a significant portion of their profits are paid out as dividends to its shareholders. Overall both companies appear to be sound and profitable investments.

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CRITICAL THINKING BUILDING BUSINESS SKILLS 12.6

GROUP DECISION CASE 2016

2015

Current ratio

3.1

2.1

Quick ratio

0.8

1.4

Asset turnover

2.8

2.2

Cash debt coverage

0.1

0.2

Profit

Up 32%

Down 8%

Earnings per share

$3.30

$2.50

(a) Lenders prefer that financial statements are audited because an audit gives independent assurance that the financial statements give a true and fair representation of the company’s financial position and results of operations. With this independent assurance we feel more comfortable making a decision. (b) The current ratio increase is a favourable indication as to liquidity, but alone tells little about the going concern prospects of the client. From this ratio alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The decline in the quick ratio to 0.8 is an unfavourable indication as to immediate liquidity, especially when the current-ratio increase is also considered. This decline is also unfavourable because it reflects a declining cash position and raises questions as to reasons for the increases in other current assets, such as inventories. The cash debt coverage ratio is a solvency ratio that indicates a company’s ability to repay its liabilities from cash generated by operations. Since this ratio declined during 2016, it indicates that the company’s cash provided by operations decreased and/or its liabilities increased. At the current level of cash generated by operations, Leverage Ltd would take 10 years to repay its existing liabilities. The asset turnover and earnings per share ratio indicate profitability. Since both ratios are higher in 2016 and profit has increased, it is most likely that the company’s sales revenue is increasing. Increases in sales and profit are favourable for going-concern prospects. The 32 per cent increase in earnings per ordinary share, which is identical to the percentage increase in net profit, is an indication there has probably been no change in the number of issued ordinary shares. This, in turn, indicates that financing was not obtained through the issue of ordinary shares.

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The collective implications of these data alone are that the client entity is about as solvent at the end of the current year as it was at the beginning, although there may be a need for short-term operating cash. Creditors should however seek further information. Although a quick evaluation of a reporting entity can be made using only a few ratios and comparing these with past ratios and industry statistics, the creditors should realise the limitations of such analysis even from the best prepared statements carrying a CPA’s unqualified opinion. It is not possible to reach conclusions about solvency and gong-concern prospects without additional information about the nature and extent of financing. When evaluating changes in ratio or percentages, the evaluation should be directed to the nature of the item being evaluated because very small differences in ratios or percentages can represent significant changes in dollar amounts or trends. The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the client’s competitive position, the public’s demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the client’s specific plans. (c) (1)

Current cash debt coverage ratio – indicates liquidity.

(2)

Debt to total assets ratio – indicates insolvency.

(3)

Times interest earned ratio – indicates ability to repay interest when due. Other answers are possible.

(d) The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of alternative accounting methods, atypical data at year-end, and the diversification of companies, making industry comparisons difficult. Different accounting methods affect the analysis of trends and comparisons with industry statistics or other companies within the industry.

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BUILDING BUSINESS SKILLS 12.7

COMMUNICATION ACTIVITY

Digital Designs Ltd To:

Shannon Leahy

From:

Accounting Student

Re:

Financial Statement Analysis

Date:

DD/MM/YY

There are two fundamental considerations in financial statement analysis: (1) (2)

the bases of comparison and the limitations of financial statement analysis. Each of these considerations is explained below.

Bases of Comparison. The bases of comparison are: (a)

(b)

(c)

Intra-company – this basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. Inter-company – this basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. Industry averages – this basis compares an item or financial relationship of a company with industry averages (or norms).

Limitations in financial statement analysis are: (a)

Estimates – financial statements contain estimates that may be inaccurate.

(b)

Cost – financial statements are based on cost, which may be affected by significant inflation or deflation. This affects comparisons over time and between companies with assets purchased in different periods.

(c)

Alternative accounting methods – variations among companies in the application of generally accepted accounting principles may hamper comparability.

(d)

Atypical data – fiscal year-end data may not be typical of the financial condition during the year. For instance, if the company’s year-end falls immediately after the peak of its sales (e.g. after Christmas sales in a department store), its inventory in the statement of financial position may be below normal levels.

(e)

Diversification of firms – many firms are so diversified they cannot be classified by industry.

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BUILDING BUSINESS SKILLS 12.8

ETHICS CASE

Positive Perception Ltd (a)

The internal stakeholders in this case are Positive Perception Ltd’s: • ▪ ▪ ▪ ▪ ▪ ▪ ▪

(b)

managing director other directors public relations officer you, as the chief accountant shareholders potential investors creditors potential creditors

The external stakeholders would be any readers of the press release. . The managing director’s press release is deceptive and incomplete and to that extent, his action is unethical. While inflating the share price may provide a benefit to existing shareholders if they are selling their shares, this is at the expense of a stakeholder who buys the shares at an overstated price. Further, the biased press release may cause investors to make decisions (such as retaining their shares or buying more shares) that would be different if they were provided with unbiased and complete information.

(c)

As chief accountant, you should at least inform the public relations (PR) officer, about the biased content of the release. The PR officer should be aware that the information to be released, while factually accurate, is deceptive and incomplete. The chief accountant has the responsibility to inform the managing director (and other directors) of the bias of the about-to-be-released information.

(d)

Immediately, it would be appropriate to speak/write to the PR officer and then the managing director. Students may be encouraged to discuss how this should be done (whether in writing) and what could and/or should be done if the managing director refuses to alter the press release. Suggestions include: other directors; the recipient of the press release; and the audit committee (if one exists).

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BUILDING BUSINESS SKILLS 12.9

SUSTAINABILTY

Download PepsiCo’s 2013 annual report and summarise the key initiatives outlined for ensuring sustainable growth in relation to: •

its products.

•

the marketplace.

•

communities.

Extracts from PepsiCo’s 2013 annual report P.9 How We “Future-Proof” PepsiCo: Performance with Purpose As long as Performance with Purpose is our guide, I believe PepsiCo will continue to deliver long-term, sustainable growth. Performance with Purpose is PepsiCo’s recognition that the company’s success is inextricably linked to society’s success. In order to do well by our shareholders, we also have to take into account the needs and concerns of a wide range of stakeholders. If our financial success comes at the expense of the environment, our consumers or our communities, we will not be viable in the long run. In practice, Performance with Purpose means we provide a range of foods and beverages from treats to healthy eats; we find innovative ways to minimize our impact on the environment and lower our costs through energy and water conservation as well as reduced use of packaging material; we provide a safe and inclusive workplace for our employees globally; and we respect, support and invest in the local communities in which we operate. Performance with Purpose remains our true north, and it is more important than ever. I encourage you to please take the time to read our latest Sustainability Report, which details our work and progress toward our goals around the world. As 2014 begins, every PepsiCo associate feels an incredible sense of duty and responsibility to those who depend on us to offer sustainable financial returns over the long term. It is for these long-term investors that we run PepsiCo.

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Specific goals on Human sustainability Page 10 “Products: Provide more food and beverage choices made with wholesome ingredients that contribute to healthier eating and drinking. • increase the amount of whole grains, fruits, vegetables, nuts, seeds and low-fat dairy in our global product portfolio. • reduce the average amount of sodium per serving in key global food brands by 25 percent. • reduce the average amount of saturated fat per serving in key global food brands by 15 percent. • reduce the average amount of added sugar per serving in key global beverage brands by 25 percent. Market Place: Encourage people to make informed choices and live healthier. • display calorie count and key nutrients on our food and beverage packaging by 2012. • advertise to children under 12 only products that meet our global science-based nutrition standards. • eliminate the direct sale of full-sugar soft drinks in primary and secondary schools around the globe by 2012. • increase the range of foods and beverages that offer solutions for managing calories, like portion sizes. Community: • • • •

actively work with global and local partners to help address global nutrition challenges. invest in our business and research and development to expand our offerings of more affordable, nutritionally relevant products for underserved and lower-income communities. expand Pepsico Foundation and Pepsico corporate contribution initiatives to promote healthier communities, including enhancing diet and physical activity programs integrate our policies and actions on human health, agriculture and the environment to make sure that they support each other.

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Chapter 13: Analysing and integrating GAAP

CHAPTER 13 – ANALYSING AND INTEGRATING GAAP ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises 1, 2, 3, 4, 5

Problems

Explain and apply the concepts and principles underlying the recording of accounting information.

1, 2, 3

Describe the Conceptual Framework for Financial Reporting (the Conceptual Framework).

Explain the objective of general purpose financial reporting.

Identify the primary and other users, and their uses of financial reports.

Explain the nature of a reporting entity.

Identify and apply the qualitative characteristics and constraint on financial reporting.

3, 4, 5

2A, 7A

Define assets, liabilities, equity, income and expenses and apply recognition criteria.

3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13

2A, 8A, 9A

Integrate principles, concepts, standards and the Conceptual Framework.

Appreciate, at an introductory level, various future developments in financial reporting.

1A, 2A

4A, 5A 5, 6

6A, 9A

10A

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CHAPTER 13 – ANALYSING AND INTEGRATING GAAP Note to Instructors Students are invited to discuss their own views in the questions throughout the end of chapter activities. For example, question 4 requires students discuss the advantages of a conceptual framework. The question also asks students to discuss if they believe these advantages can actually be achieved. As there are no correct or recommended answers for these types of questions, the solution manual states “student’s personal views and discussion required” in these instances. ANSWERS TO QUESTIONS 1.

There are 2 concepts and 4 principles that underlie the recording of accounting information. In many cases, more than one principle or concept can apply to each transaction. For example, the monetary principle requires that only those things that can be expressed in monetary terms be included in the accounting records. Hence, all accounting transactions will be based on the monetary principle, but may also be based on others. Accounting Entity Concept This concept states that every entity can be separately identified and accounted for. Accounting Period Concept The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. Monetary Principle This principle requires that the items included in the accounting records must be able to be expressed in monetary terms. Going Concern Principle This principle states that financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading. Cost Principle The cost principle states that all assets are initially recorded in the accounts at their purchase price or cost. This is applied not only at the time the asset is purchased but also over the time the asset is held. Full Disclosure Principle The full disclosure principle requires that all circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements.

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Accounting concepts, principles and recognition criteria are interrelated and provide guidance when recording certain transactions. An example is the best way to illustrate this point. Consider the payment of a 2 year insurance policy for $24,000 on 1 January 2016. The initial recording and subsequent adjustments related to this transaction are informed by both the accounting period concept and recognition criteria. The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. The recognition criteria inform when a transaction is to be recorded – that is when it is probable and can be reliably measured. On January 1, the payment can be recorded as: Dr Prepaid Insurance $24,000 Cr Cash $24,000 If the year-end is 30 June 2016, in order to provide useful information to our users about the accounting period, we can use the expense recognition criteria and the period assumption to inform the following adjusting entry: Dr Insurance Expense $6,000 Cr Prepaid Insurance $6,000 That is $6,000 of future economic benefits in relation to insurance have expired and are recorded as an expense in the period in which it expired.

A conceptual framework consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general purpose financial reports and standard setters. In Australia, the conceptual framework has 4 main components: [1] the objective of general purpose financial reporting, [2] the reporting entity (SAC 1), [3] the qualitative characteristics [4] and the definition of elements in financial statements.

A conceptual framework consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general purpose financial reports and standard setters. The advantages or benefits of a conceptual framework are that it improves the standard setting process and consistency in accounting practice. To illustrate, prior to the late 1970s there was no generally accepted theory of financial accounting. This meant that the development of accounting standards for financial accounting practice was piecemeal as the standards were not based on any particular theory. This resulted in some inconsistencies between standards and therefore inconsistencies in accounting practice. The development of a conceptual framework in relation to financial reporting is beneficial in that it outlines the objectives of financial reporting, the required qualitative characteristics for financial information and to provide clear guidance on how to measure and account for economic events when recording transactions and preparing financial information. Question part 2 – do you believe that these benefits can actually be achieved? Student’s personal views and discussion required. .

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As defined in Paragraph 2 “a reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain they information they need in making decisions about providing resources to the entity in assessing whether management and the governing board of that entity have made efficient and effective use of the resources provided.” This definition is consistent with the definition in the Framework and is linked to the objective of general purpose financial reporting in the Conceptual Framework. The exposure draft identifies the three features as necessary but not always sufficient conditions to identify a reporting entity. First, a reporting entity conducts, has conducted or will conduct economic activities. Second the economic activities can be distinguished from other entities and the economic environment. Third, linking back to the objective of financial reporting, financial information about the economic entities will be useful in making decisions about providing resources to the entity and in assessing the efficiency and effectiveness of management and the governing board. A related concept to the reporting entity is the accounting entity concept. While the accounting entity concept applies to all accounting entities, not all entities are reporting entities. The Accounting Entity Concept states that every entity can be separately identified and accounted for. In particular for sole traders and partnerships, it is extremely important that the owners do not confuse the entity’s transactions with their personal transactions, or the transactions of any other entity. Accounting entity must be identified and reported as separate from its owners. Question part 2 - Do you believe the accounting entity concept is helpful? Once the entity concept is explained as above, then student’s personal views and discussion required.

The different categories of entities include: • profit companies and entities, • public sector entities and • not-for-profit entities. The Australian and New Zealand reporting requirements for each of these entities is provided below. Australia AASB 1053 Application of Tiers of Australian Accounting Standards establishes a differential financial reporting framework consisting of two tiers of reporting requirements for preparing general purpose financial reports. Tier 1 Tier 1, are required apply the full AASB standards. Tier 1 entities are for-profit entities in the private sector that have public accountability and the Australian Government and State, Territory and Local Governments entities. .

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Tiers 2 Tiers 2 entities are: for-profit private sector entities that do not have public accountability; all not-for-profit private sector entities; and public sector entities other than the Australian Government and State, Territory and Local Governments. Tier 2 entities are required to apply the full recognition, measurement and presentation requirements of IFRSs, but have substantially reduced disclosure requirements. The disclosures required by Tier 2 and the disclosures required by the IASB’s, IFRS for SMEs, are similar. However, the IFRS for SMEs do not include all the recognition and measurement requirements corresponding to those in IFRSs. New Zealand In 2011, the New Zealand government announced changes to the financial reporting requirements for New Zealand entities. These changes are enacted in the Financial Reporting Act 2013. The main change is that many small and medium sized New Zealand companies will no longer need to prepare accounting reports using New Zealand generally accepted accounting practice (GAAP). Complementary to this, the External Reporting Board (XRB) announced that, for financial reporting, New Zealand would change from a single set of sector neutral accounting standards to a multi-sector and standards approach. The full effect of these changes will take effect in 2016. Now, New Zealand is similar to the international standards where the for-profit publicly accountable entities will use New Zealand equivalents to the International Financial Reporting Standards (NZ IFRS) and public benefit entities (not-for-profit and government sector) will report using PBE standards, which are based primarily on International Public Sector Accounting Standards (IPSAS), modified as necessary for the New Zealand environment by the XRB. Also within the two-sector reporting regime there are four tiers. Tier one in both sectors will use the full standards with fewer requirements as the tiers go down. 7.

The Conceptual Framework identifies the objective of general purpose financial reporting as the provision of financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making their decisions about providing resources to the entity. Why is it necessary to have an objective? This is best explained with reference to the building analogy given in the text on p 775. We see that understanding who the primary users of a building are, as well as details of their needs would more likely result in a building that would satisfy their needs and achieve the purpose the building was constructed to fulfil. The same is true for financial reporting – if we know the objective of financial reporting is the provision of information to users for decision making and we know who the users are and their decision making needs – the reports are more likely to fulfil their purpose! Furthermore we can also consider how that objective is best served and in what format the financial information should be presented to meet the objectives. These issues are addressed by chapter 3 of the Conceptual Framework. The Conceptual Framework provides guidance on the qualitative characteristics that information contained in general purpose .

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financial reports should have to achieve the objective of providing useful information for decision making. That is, the qualitative characteristics are the attributes that make the information in financial statements useful. 8.

Figure 13.3 sets out the primary users of the general purpose financial reports being those users who provide resources to the entity and therefore require information to make decisions concerning the provision of those resources. (1) Equity investors provide resources to an entity usually by investing cash for the purpose of receiving a return and include shareholders, holders of partnership interests and other equity owners. (2) Lenders provide resources to an entity by lending cash for the purpose of receiving a return in the form of interest. (3) Other creditors including employees, suppliers and customers (but only in their capacity to provide resources to the entity are they considered primary users). Some questions that may be asked by investors and lenders about a company include: • Is the company earning satisfactory profit? • How does the company compare in size and profitability with its competitors? • Will the company be able to pay its debts as they fall due? • Is the company paying regular dividends to its shareholders? • What is the company’s potential for generating future cash flows? • Should I invest in the company? • Should I lend funds to this company?

The conceptual framework sets out both the primary and other users. The primary users of the general purpose financial reports being those users who provide resources to the entity and therefore require information to make decisions concerning the provision of those resources. (1) Equity investors provide resources to an entity usually by investing cash for the purpose of receiving a return and include shareholders, holders of partnership interests and other equity owners. (2) Lenders provide resources to an entity by lending cash for the purpose of receiving a return in the form of interest. (3) Other creditors including employees, suppliers and customers (but only in their capacity to provide resources to the entity are they considered primary users). Suppliers are considered to be other creditors when they extend credit to facilitate a sale, employees are considered to be other creditors when they provide their services (human resources) in exchange for remuneration and customers are considered to be other creditors when they prepay for goods or services which are to be provided in the future. These parties are only considered resource providers to the extent that they provide the entity with resources in the form of credit or services, and they make decisions based on providing such resources. When they are not in this capacity they are referred to as other users. Figure 13.3 summarises the three main categories of users. In addition to ‘primary users’ there are also ‘other users’. Other users include government agencies, members of the public as well as suppliers, customers and employees (when not resource providers as explained above). The information needs and questions of other users vary considerably. For example, taxation authorities such as the ATO want to know whether the entity complies with the tax laws. Regulatory agencies such as the Australian Securities and Investments Commission (ASIC) .

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or the Australian Competition and Consumer Commission (ACCC) want to know whether the entity is operating within prescribed rules. While these other users have specialised information needs, they may find the financial information that meets the needs of resource providers useful. Like the primary users, the common information needs of other users include an assessment of the entity’s future cash flows (amount, timing and uncertainty) and evidence that management has discharged its responsibilities to use the entity’s resources efficiently and effectively. However, it is made clear that financial reporting is not primarily directed to other users but rather to equity investors, lenders and other creditors. 10.

According to the Conceptual Framework, the qualitative characteristics are classified as either fundamental or enhancing depending on how they affect the usefulness of financial information. Enhancing qualitative characteristics and fundamental qualitative characteristics are complementary. Fundamental qualitative characteristics For the information in general purpose financial reports to be useful, it must be relevant and provide a faithful representation of the economic phenomena it represents. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. Relevance Information is considered relevant if it is capable of making a difference in the decisions made by users. Information that has predictive value and/or confirmatory value is considered to be relevant. Faithful representation Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. Relevance and faithful representation work together in enhancing the decision usefulness of information. Relevance is applied to determine which economic phenomena to represent and then faithful representation is applied to determine which depictions best represent the underlying economic phenomena. Enhancing qualitative characteristics Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. These characteristics are called enhancing characteristics as they enhance the decision usefulness of relevant information faithfully represented in financial statements. The enhancing qualitative characteristics are summarised in Figure 13.4 Comparability Information that is comparable facilitates users identifying similarities and differences between different economic phenomena. Consistency refers to the use of the same accounting policies between entities, at the same point in time, or the same entity over time. Consistency supports the achievement of comparability.

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Verifiability Information is verifiable if it faithfully represents the economic phenomena it is meant to represent. Verifiability means that independent observers could reach a consensus – but not necessarily one hundred percent agreement- that a particular depiction is a faithful representation. Direct verification is through direct observation like counting cash to verify cash balance reported on the statement of financial position or counting inventory to determine quantities in stock. Indirect verification is where techniques or calculations are used to check the representation. For example verifying the ending inventory balance in the statement of financial position by checking quantities and costs using the same cost flow assumption. See chapter 5 for more information on calculating ending inventory using different cost flow assumptions. Timeliness Timeliness is measured by whether the information is available to users before it ceases to be relevant; that is, the information is received while it is still capable of influencing the decisions users make based on the information. Financial information may lose its relevance Understandability Understandability is the last of the enhancing qualitative characteristics and relates to the quality of information that assists users to understand the meaning of the information provided Constraint on financial reporting There is only one constraint on financial reporting namely cost. Providing decision-useful information imposes costs, and the benefits of providing the information should outweigh the costs. Costs can include those associated with collecting, processing, verifying and disseminating information. Assessing whether benefits outweigh costs is usually more qualitative than quantitative and is often incomplete. In an attempt to ensure benefits outweigh costs, it is important to consider whether one or more enhancing qualitative characteristics may be sacrificed to reduce costs. Figure 13.5 summarises the fundamental and enhancing qualitative characteristics of financial information and the constraint of providing financial information as outlined in the in the Conceptual Framework. 11.

Accounting information is deemed to be relevant if it would make a difference in a business decision. Users of financial information need to make many decisions based on the information contained in general purpose financial reports. Decisions such as “shall I invest in this entity?” or “should I lend money to this entity?” require information on the entity’s future profitability and ability to pay its debts as they fall due. It seems then that, for information to be relevant, it must have predictive value, to help users make predictions about the future, or provide feedback, to help users assess the accuracy of their past predictions and decisions. Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. It is important that the information depicts the economic substance of the transactions, events or circumstances. .

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At times, economic substance may not be the same as the legal form. To be complete, all of the information needed to represent the economic phenomena faithfully is included and there is no omission which could make the information misleading. Hence, like relevance, faithful representation is also linked to the full disclosure principle. Question part 2 – Discuss whether you believe one is more important than the other, or if they are equally important? Student’s personal views and discussion required. Relevance and faithful representation are both important however, they can involve some trade-offs. For example, information about future profits is very relevant. However, as we are unable to tell the future with certainty, such information may not be faithful represented. While they are both important to answer which one is more important in a particular instance it is helpful to consider the information needs of the user. For example, if the user is a capital provider then relevance and faithful representation could be considered equally important. However, if the user is a government agency performing a review or oversight function, faithful representation could be considered more important than relevance if relevance relates to future information, rather than relevance of the information to the oversight function. 12.

Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. To be complete, all of the information needed to represent the economic phenomena faithfully is included and there is no omission that could make the information misleading. Information that is considered to be neutral is free from bias. Information is biased if it is intended to attain or induce a particular behaviour or result. Some of the information in general purpose financial reports is measured using estimates in conditions of uncertainty. Question part 2 – Do you believe that financial information can, in reality, be neutral and representationally faithful? Explain your answer. Student’s personal views and discussion required. Ruth Hines explores this very question in R. Hines 1991, ‘The FASB’s Conceptual framework, financial accounting and the maintenance of the social world’, Accounting Organizations and Society, vol. 16, no. 4, pp. 313–2. Some time ago in this journal article she wrote about the FASB’s conceptual framework. She suggested that it appears that the ‘assumption underpinning the Conceptual Framework is that the relationship between financial accounting and economic reality is a unidirectional, reflecting or faithfully reproducing relationship: economic reality exists objectively, intersubjectively, concretely and independent of financial accounting practices; financial accounting reflects, mirrors, represents or measures the pre-existent reality’. This is an objectivist’s view of the world. If this was our world view then we would answer the question by stating “Yes it is possible for information to be represented faithfully and neutral.” .

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On the other hand, if we held a subjectivists view of the world, we would assume there is no such phenomena as an economic reality to be measured objectively that exists independent of people’s perceptions. That is, reality is subjective and the result of personal interpretation. Based on this assumption, accounting information is subjective and it requires judgements, estimates and interpretations and must, therefore, be biased and cannot be representationally faithful. 13.

Cost is a constraint that limits the information provided by financial reporting. Cost Preparers and standard setters seek to ascertain that the costs of preparing certain financial information are not greater than the benefits to be derived from using that information. The costs and particularly the benefits of financial information are difficult to measure; consequently, it is a subjective measure. Assessing whether benefits outweigh costs is usually more qualitative than quantitative and is often incomplete. In an attempt to ensure benefits outweigh costs, it is important to consider whether one or more enhancing qualitative characteristics may be sacrificed to reduce costs.

14.

General purpose financial statements of an entity can provide valuable information about an entity. However, this information is more meaningful if it is supplemented with additional information including general economic conditions, political climate, industry trends or averages, information from directors’ reports and media releases. For example, in times of increasing interest rates, pressures on the housing markets have affected the demand for other sales such as building materials and furniture sales. These general economic conditions make it more difficult for entities to increase their prices without potentially losing sales to competitors and might explain decreases in sales for the period. Investing in a government project in a country which is politically unstable might explain financial losses if the government has changed. Industry averages or competitors’ ratios for a variety of ratios – e.g. return on assets, debt to equity, dividend payout etc…allow us to determine how effective a particular entity is in relation to its competitors.

15.

General purpose financial reports should be seen more as models of transactions rather than exact depictions of transactions and events given the information contained in general purpose financial reports is, to a significant extent, based on estimates and judgements. Many types of judgements have been explored throughout the book. For example, we calculated estimates to accrue expenses in chapter 3, estimates for bad and doubtful debts in chapter 7, and estimates for warranties in chapter 9. The Conceptual Framework outlines the concepts that underlie the estimates and judgements necessary for financial reports. For this reason, general purpose financial reports can be seen as models of the transactions and events that have occurred in relation to an entity rather than an exact depiction.

16.

The conceptual framework identifies qualitative characteristics as either fundamental or enhancing depending on how they affect the usefulness of financial information. Fundamental qualitative characteristics

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For the information in general purpose financial reports to be useful, it must be relevant and provide a faithful representation of the economic phenomena it represents. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. Information is considered relevant if it is capable of making a difference in the decisions made by users as capital providers. Information that has predictive value and/or confirmatory value is considered to be relevant. Information is considered to have predictive value if it can be used by capital providers to develop their expectations for the future. Information is considered to have confirmatory value if it confirms or disconfirms users’ past or present expectations. Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. It is important that the information depicts the economic substance of the transactions, events or circumstances. To be complete, all of the information needed to represent the economic phenomena faithfully is included and there is no omission that could make the information misleading. Hence, faithful representation is linked to the full disclosure principle. Information that is considered to be neutral is free from bias. Information is biased if it is intended to attain or induce a particular behaviour or result. Some of the information in general purpose financial reports is measured using estimates in conditions of uncertainty. Hence, it is not reasonable to expect that reports will be completely error free. However, despite this limitation, faithful representation is achieved when the inputs used to make the judgements and estimate reflect the best available information at the time. Relevance and faithful representation work together in enhancing the decision usefulness of information as follows. First, relevance is applied to determine which economic phenomena to represent. Then, faithful representation is applied to determine which depictions best represent the underlying economic phenomena. Enhancing qualitative characteristics and fundamental qualitative characteristics are complementary. Enhancing qualitative characteristics Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability, and are used to distinguish more useful information from less useful information. They are called enhancing characteristics as they enhance the decisionusefulness of relevant information faithfully represented in financial reports. Information that is comparable facilitates users’ identification of similarities and differences between different economic phenomena. Consistency refers to the use of the same accounting policies between entities, at the same point in time, or by the same entity over time. Consistency supports the achievement of comparability. Information is verifiable if the information presented represents the economic phenomena without bias or material error and has been prepared with appropriate recognition and measurement methods. Timeliness is measured by whether the information is available to users before it ceases to be relevant; that is, the information is received while it is still capable of influencing the decisions that users make. .

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Understandability is the last of the enhancing qualitative characteristics and relates to the quality of information that facilitates users to comprehend the meaning of the information provided. It is important to recognise that it is highly dependent upon the capabilities of users of financial reports and that users are assumed to have a reasonable knowledge of business activities and economic phenomena. However, classifying, characterising and presenting comparable information clearly and concisely will enhance understandability. What makes a qualitative characteristic fundamental or enhancing depends on how it affects the usefulness of financial information. Given the aim of general purpose financial reports is to be useful, it must therefore be relevant and provide a faithful representation of the economic phenomena it represents. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. While enhancing qualitative characteristics improve the usefulness of financial information and should be maximised where possible, they cannot make information decision useful if the information is irrelevant or not faithfully represented. Question part 2 - What makes a qualitative characteristic fundamental or enhancing? For the information in general purpose financial reports to be useful, it must be relevant and provide a faithful representation of the economic phenomena it represents. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability, and are used to distinguish more useful information from less useful information. They are called enhancing characteristics as they enhance the decisionusefulness of relevant information faithfully represented in financial reports. Question part 3 – Do you believe this is an important distinction? Student’s personal views and discussion required 17.

Cost is the constraint that limits the information provided by financial reporting. Providing decision-useful information imposes costs, and the benefits of providing the information should outweigh the costs. Costs can include the costs of collecting, processing, verifying and disseminating information. Assessment of benefits and costs is usually more qualitative than quantitative and is often incomplete. When attempting to ensure that the benefits of providing the information outweigh the costs, it may be necessary to sacrifice one or more enhancing (rather than fundamental) qualitative characteristics in order to reduce costs. This is justified by the fact that for the information in general purpose financial reports to be useful, it must be relevant and provide a faithful representation of the economic phenomena it represents. Therefore, relevance and faithful representation cannot be compromised to save costs. Enhancing qualitative characteristics on the other hand are used to distinguish more useful information from less useful information. Given they are only ‘enhancing’ characteristics as

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they enhance the decision-usefulness of relevant information they can be sacrificed and users can still have faithfully represented and relevant information in financial reports. 18.

A liability is defined in the Conceptual Framework as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’ (paragraph 4.4b). Recognition criteria As outlined in the Conceptual Framework, a liability is recognised in the statement of financial position when: (a) it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation (b) the amount at which the settlement will take place can be measured reliably ( paragraph 4.46).

19.

Income is defined in the Conceptual Framework as ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’(paragraph 4.25a). It is important to note that, like the definition of equity, the definition of income is linked to the definitions of assets and liabilities. As defined in the Conceptual Framework expenses are ‘decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants’(paragraph 4.25b). It is important to note that, like the definitions of equity and income, the definition of expenses is linked to the definitions of assets and liabilities.

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20.

Assets are defined in the Conceptual Framework as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.” (para 4.4a). First, the entity must have control over the asset. While control often means ownership of the asset, ownership is not an essential characteristic. A second essential characteristic is that the control of the future economic benefits must be as a result of a past transaction or event. Generally, this is after the purchase of the asset has taken place. It is important to note that resources to be purchased in the future are not considered an asset of the entity until the exchange takes place. However, to further complicate matters, payment is not an essential characteristic of an asset; a donated resource, once the entity has control of the future economic benefits, meets the definition of an asset as well. Finally, the resource must be able to provide future economic benefits or service potential, such that it can contribute directly or indirectly to the future cash flows or cash equivalents of the entity. The definition of an asset identifies its essential features but does not attempt to specify the criteria that need to be met before it can be recognised in the statement of financial position. Hence, it is not sufficient to record assets based only upon the definition of assets. We also need the recognition criteria. Recognition is the process of recording in the financial statements any item that meets the definition of an element and satisfies the criteria for recognition. Assets that satisfy the recognition criteria should be incorporated in the statement of financial position when: [1] it is probable that the future economic benefits will flow to the entity, and [2] the asset has a cost or value that can be measured with reliability. The first recognition criterion results from the fact that business entities operate in uncertain environments. We use the concept of probability to refer to the degree of uncertainty that surrounds whether the future economic benefits will flow to or from the entity in relation to a transaction or event. To assess the degree of probability of the future economic benefits, all of evidence available when the financial statements are prepared is used. For example, when it was probable that a receivable would be collected, it was recognised as an asset. When it was probable that a receivable would not be collected, we incurred doubtful debts expense. The second recognition criterion requires that each item possesses a cost or value that can be measured with reliability. Some items are recorded at cost and very straight forward. Some items such as provision for warranties must be estimated. Items that cannot be reasonably estimated are not recognised in the financial statements.

21.

Equity is defined in the Conceptual Framework as “the residual interest in the assets of the entity after deducting all its liabilities.” Equity is what remains when we subtract liabilities from assets. The accounting equation can be restated from: Assets = Liabilities + Equity to: Equity = Assets – Liabilities.

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The above equation shows that equity cannot be defined independently of the other elements in the statement of financial position. Equity is the residual. Examples of transactions that affect equity are sale of equipment that results in gain or loss, capital injection into a business or withdrawals by owners, and asset valuations. Examples of transactions that do not affect equity are purchase of equipment, payment of debts, purchase of an insurance policy and receipt of cash for existing receivables. 22.

Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. To illustrate, a sale of goods on credit results in an increase in Accounts Receivable (asset) and a corresponding increase in Sales Revenue (income). Another illustration, the provision of goods or services in relation to a customer who has paid in advance would be recorded as a decrease in Revenue Received in Advance (liability) and an increase in Revenue (income). In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided.

23.

The 2 basic common recognition criteria that are applied to assets, liabilities, revenues and expenses are: [1] Increase or decrease in economic benefits is probable, and [2]The amount of assets, liabilities, revenues or expenses can be measured reliably.

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24.

The four bases of measurement as outlined in the Conceptual Framework are: [1] Historical Cost Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. [2] Current Cost Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently. [3] Realisable (Settlement) Value Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business. [4] Present Value Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business. There are some common alternative measurement bases that can be found in general purpose financial reports. Some assets that are originally recorded at cost are reported on a revalued basis in statement of financial position. This means the assets were revalued either upward or downward to their fair value. Fair value is a subset of the realisable (settlement) value in the Conceptual Framework. Another alternative measurement base is the fair value less any costs incurred in selling the asset. For example, inventories are usually reported at the lower of cost and net realisable value.

25.

GAAP consists of accounting standards, underlying accounting concepts and principles and the Conceptual Framework. The Conceptual Framework defines which entities are required to prepare general purpose financial reports, explains the objective of general purpose financial reports, outlines what is reported in general purpose financial reports, and provides guidance on how items are reported. In addition to the Conceptual Framework, other aspects of GAAP outline what is reported in general purpose financial reports as well as how those items are reported in general purpose financial reports. The various other aspects include the concepts and principles, the .

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accounting standards backed by legislation, as well as the measurement rules as outlined in the standards and the Conceptual Framework. After the Corporations Act, accounting standards are the first point of guidance for preparers. Accounting standards and authoritative interpretations of accounting standards must be followed as they have legislative backing. If the standards are silent on an accounting issue, preparers can seek guidance from the conceptual framework (the Conceptual Framework plus SAC 1 and SAC 2). The concepts and principles that traditionally underlie accounting are applied where there is no guidance on an issue in the conceptual framework. To summarise, GAAP is applied as follows: first the Corporations Act, then accounting standards and interpretations are consulted, then the conceptual framework and finally the underlying concepts and principles. 26.

Three future developments in financial reporting are: [1] International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are currently conducting a joint project to develop the Conceptual Framework. This will impact financial reporting in many ways including what transactions and events will be reported and how. As this is a comprehensive project, it has been divided into eight phases that will take many years to complete and will involve consultation with many and varied stakeholders at all stages of the project. [2] Sustainability Reporting: Mining, deforestation, toxic wastes in river and oceans, and natural resource consumption are some of many negative impacts that businesses all around the world have on natural environment. Currently, many companies disclose information on the impact of their businesses on the environment, however these social and environmental disclosures are voluntary. There are increasing pressures on companies from shareholders and other stakeholders to measure, report on and reduce their environmental impact. [3] Business entities use their accounting information systems to record, analyse and communicate the economic transactions of a business. While businesses collect similar information in the main, they can vary widely in the format and level of detail of the information they collect. These differences make it difficult for organisations to share information reliably or cost effectively. To further complicate matters, elements of financial information can be defined differently, different accounting methods can be used, and in different countries reporting requirements can vary. This creates difficulties for multinational companies that operate and report all over the world. There is something called eXtensible Business Reporting Language (XBRL) which can help solving these problems. XBRL is a language for describing exactly which information is included in a report. It can even take into account differences in definitions and measurements of elements in other countries. The goal of XBRL is to make the analysis and reporting financial information more consistent and reliable, and easier to facilitate. The financial information based on XBRL can be used to report to shareholders, banks, regulators and other parties. To report financial information in a consistent form, the creators of XBRL have developed a taxonomy or vocabulary that can affect the format of financial information throughout the complete life cycle of that information. XBRL will also facilitate the completion of reports required by regulatory agencies and the preparation of financial reports.

SOLUTIONS TO BRIEF EXERCISES .

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13.1 (a) False The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. This concept does not include “smoothing out seasonal fluctuations between periods”. (b) False The cost principle states that all assets are initially recorded in the accounts at their purchase price or cost. This is applied not only at the time the asset is purchased but also over the time the asset is held. (c) False The going concern principle states that financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading. Following that, the going concern assumption is that the business will remain in operation for the foreseeable future.

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BRIEF EXERCISE 13.2 (a) In this case the accounting entity concept has been incorrectly applied. This concept states that every entity can be separately identified and accounted for. The owner’s personal transactions should not be recorded as part of the business transactions and they should be kept separate. Hence, recording personal vehicle expenses in the entity’s statement of profit or loss is a violation of accounting entity concept. (b) In this case, no amount would be reported in the financial statements but would be disclosed in the notes, as a law suit of this nature is classified as a contingent liability. Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. Contingent liabilities are not recognised in the financial statements. However, information about contingent liabilities must be disclosed in the notes to the financial statements if they are material. If the children’s toy manufacturer does not disclose the lawsuit and probable loss, there is a violation of full disclosure principle. The full disclosure principle requires that all circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements. (c) The cost principle states that all assets are initially recorded in the accounts at their cost. This is applied not only at the time the asset is purchased but also over the time the asset is held. The going concern principle states that financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading. So, unless the business is to cease trading or is to be liquidated, recording land and buildings at their estimated selling price is a deviation from the cost principle.

BRIEF EXERCISE 13.3 (a) The going concern principle states that financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading. (b) The full disclosure principle requires that all circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements. (c) The accounting entity concept states that states that every entity can be separately identified and accounted for. Under this concept, the personal transactions of the owners (regardless of entity form i.e. sole trader, partnership or company) should be accounted for separately from the entity’s transactions.

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BRIEF EXERCISE 13.4 (a)

True. Prior to 1970 there was no generally accepted theory of accounting.

(b)

False. While there are many financial accounting theories with a variety of aims, the capitalist theory is not one of them.

(c)

True. Prior to the late 1970s there was no generally accepted theory of financial accounting. This meant that the development of accounting standards for financial accounting practice was piecemeal as the standards were not based on any particular theory. This resulted in some inconsistencies between standards and therefore inconsistencies in accounting practice.

(d)

True. In Australia, the conceptual framework (the Framework) consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general purpose financial reports and standard setters.

(e)

False. Currently, the authoritative status of the Conceptual Framework is that entities that prepare financial statements in accordance with IFRSs are required to consider the Conceptual Framework when there is no particular standard or interpretation that applies to a transaction or event. The IASB and FASB have not decided upon the authoritative status of the proposed improved conceptual framework; however, it will not have the same status as financial reporting standards, nor will it override standards.

BRIEF EXERCISE 13.5 User Category Potential equity investors Regulators Existing equity investors Lenders Members of the public Other creditors Financial advisers Customers •

Primary users

Other users X X

X X X X* X**

X X

Include employees, suppliers and **customers in their capacity as resource providers otherwise they are not considered primary users

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BRIEF EXERCISE 13.6 Users

Information needs

1. Managers

6. Information to calculate the amount of tax owing and whether the entity complies with tax laws

2. Investors

4. Information on whether an entity will continue to honour product warranties and support its product lines

3. Creditors

7. Information to determine whether the entity is operating within prescribed rules

4. Customers

5. Information on whether the entity has the ability to pay increased wages and benefits, and offer job security

5. Employees and trade unions

3. Information to determine whether to grant credit based on risks and ability of the entity to repay debts

6. Government authorities

2. Information to determine whether to invest based on future profitability, return on capital growth

7. Regulatory agencies

1. Information to plan, organise and run a business

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BRIEF EXERCISE 13.7 There are three main indicators used to decide whether a business organisation is a reporting entity. An entity is more likely to be classified as a reporting entity if: •

the entity is managed by individuals who are not owners of the entity;

•

the entity is politically or economically important; and

•

the entity is considered large when measured in terms of sales, assets, borrowings, customers and employees.

Based on these criteria, reporting entities include public companies and some large private companies as well as government authorities, as these entities have external users with a significant stake or interest in the organisation but are unable to command the preparation of specialised reports to satisfy their information needs. Hence: (a) Less likely (b) More likely (c) Not clear…need more information (if it had a small customer base it is less likely than if it has a large customer base, regardless of satisfaction) (d) More likely (e) Less likely (f) More likely

BRIEF EXERCISE 13.8 (a) Constraint (b) Neither constraint nor qualitative characteristic (c) Qualitative characteristic (d) Qualitative characteristic (e) Neither constraint nor qualitative characteristic (f) Neither constraint nor qualitative characteristic (g) Qualitative characteristic (h) Qualitative characteristic

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BRIEF EXERCISE 13.9 (a) Fundamental (b) Neither fundamental or enhancing * (c) Enhancing (d) Enhancing (e) Neither fundamental or enhancing but a constraint (f) Enhancing (g) Neither fundamental or enhancing (h) Fundamental (i) Enhancing * While materiality is not explicitly mentioned as a fundamental or enhancing characteristic - the relevance of the information is affected by its materiality. Information is material if its omission or misstatement could affect users’ decisions.

BRIEF EXERCISE 13.10 (a) Assets are defined in the Conceptual Framework as a resource controlled by the entity as a result of past events and from which ‘future economic benefits’ (not resources) are expected to flow ‘to’ (not ‘from’) the entity. (b) Expenses are defined in the Conceptual Framework as ‘decreases’ (not ‘increases’) in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. (c) Equity is defined in the Conceptual Framework as the residual interest in the ‘assets’ (not ‘equity’) of the entity after deducting all its liabilities. (d) Income is defined in the Conceptual Framework as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, ‘other than those relating to’ contributions from equity participants (not ‘as well as’ contributions from equity participants).

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SOLUTIONS TO EXERCISES

EXERCISE 13.1 Accounting Entity Concept: Tony is the sole owner of Tony’s Pizza Palace. Recently, he purchased a bicycle for his own personal use from his business bank account. He never delivers pizza using the bicycle. At the time of purchase, Tony recorded the transaction in his business accounts as: Dr Withdrawals Cr Bank Accounting Period Concept: A company with a December year end purchased a 1-year fire insurance policy for $12,000 on October 1, 2017. In order to report the correct income and asset figures in the financial statements ending December 2017, the transaction was recorded as: Dr Prepaid Insurance $9,000 Dr Insurance Expense $3,000 Cr Cash $12,000 This transaction recognises a $3000 expense in period one and a 9,000 expense in the following accounting period. Alternatively the $12,000 could have been initially recorded using either the asset method or the expense method and then adjusted at year end. Note that asset and expense definitions and recognition criteria are also relevant and related. Going Concern Principle: Company A purchased equipment for $1 million. A year later, the equipment is still reported at its book value (purchase price minus accumulated depreciation), not liquidation value. Cost Principle: Company A purchased a piece of land for $ 1,000,000 after obtaining a loan. At the time of purchase, the company was considered to be a going concern and the land was recorded in the statement of financial position at $ 1,000,000. Dr Land $ 1,000,000 Bank Loan $ 1,000,000 In the next reporting period, the land will still be recorded at $1,000,000 under the cost principle, although the price of the land may have increased to $1,200,000.

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Full Disclosure Principle: Company A was sued for defective products that resulted in customer injuries. The legal representation for the company assessed that the company is likely to lose the case and will be required to pay a large amount of money as compensation. While the payment is probable, however at this stage it cannot be reliably estimated. While no amount is recorded in the financial statements, Company A discloses information about the law suit and likely losses in its notes to the financial statements.

EXERCISE 13.2 SALAMI 4 U (a) (i) The purchase of motor vehicle transaction was recorded incorrectly. The purchase of plant and equipment was recorded correctly. (ii)The entry for the purchase of motor vehicle was incorrectly recorded as it violates the accounting entity concept. The accounting entity concept states that every entity can be separately identified and accounted for. In this case the personal transactions of the owner were not recorded separately from the transactions of the entity. The purchase of the motor vehicle for personal use out of company funds should be recorded as a withdrawal of capital. (iii) Correcting entry: Drawings $20,000 Motor Vehicles

$20,000

Correct entry that should have been recorded in the first instance: Drawings $20,000 Cash $20,000 (b) If the car were to be used for business purposes, then the initial entry of debit to Motor Vehicles and credit Cash would have been correct. If the vehicle is purchased solely for business use, it is correct to report the vehicle as a company asset and accounting entity concept is not violated.

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EXERCISE 13.3 (a) 7. (Going Concern Principle) This principle states that financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading. (b) 1. (Accounting Entity Concept) This concept states that every entity can be separately identified and accounted for. (c) 6. (Full Disclosure Principle) The full disclosure principle requires that all circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements. (d) 2. (Monetary Principle) This principle requires that the items included in the accounting records must be able to be expressed in monetary terms. (e) 5. (Materiality) The relevance of information is affected by its materiality. Information is material if its omission or misstatement could affect users’ decisions. (f) 3. (Accounting Period Concept) The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. (g) 9. (Expense recognition criteria) The Conceptual Framework provides expense recognition criteria. Expenses should be recognised when ‘a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably’ (paragraph 94). (h) 4. (Cost Principle) The cost principle states that all assets are initially recorded in the accounts at their purchase price or cost. This is applied not only at the time the asset is purchased but also over the time the asset is held.

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EXERCISE 13.4 (a) A violation of revenue recognition criteria has occurred. AASB 118 and NZ IAS 18 ‘Revenue’ prescribe principles for the recognition of revenue for the sale of goods. As explained in chapter 3, IAS 18 Revenue prescribes five principles for the recognition of revenue from the sale of goods and four principles for the recognition of revenue from the provision of services. In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. In this case no sale has occurred however, revenue has been recognised. Normally, the transfer of significant risks and rewards of ownership occurs when legal title passes to the buyer. Further, as outlined in the Conceptual Framework, income (which includes revenues and gains) is recognised in the statement of profit or loss ‘when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably’. in the question we are also told that the amount cannot be reliably measured at this stage – a further violation of the recognition criteria. (b) A violation of Accounting Period Concept has occurred. The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. In this case no reports have been prepared. (c) In this case no violation is evident as the inventory is being carried at the lower of cost or net realisable value. Although the cost principle states that assets are to be recorded at their cost, AASB 102 Inventories mandates that ‘inventories shall be measured at the lower of cost and net realisable value’ (para.9). Furthermore, the Conceptual Framework also provides expense recognition criteria. Expenses should be recognised when ‘a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably’ (paragraph 94). In this case the net realisable value is lower than the cost of inventory so there has been a decrease in an asset (inventory) and an increase in an expense (inventory write-down expense). (d) A violation of going concern principle is evident in this case. The going concern principle states that financial statements are prepared on a going basis unless management either intends to or must liquidate the business or cease trading. In this case, liquidation is unlikely, so property plant and equipment should not be reported at the amount for which it could be .

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sold at short notice, but either cost or revalued basis. In addition, property, plant and equipment and bills payable also need to be classified as non-current assets and liabilities respectively. (e) A violation of cost principle in this case. The cost principle states that all assets are initially recorded in the accounts at their purchase price or cost. This is applied not only at the time the asset is purchased, but also over the time the asset is held. If the net realisable value is lower than cost, then Surf’s Up Ltd should report the inventory at net realisable value. (f) A violation of accounting entity concept is evident in this case. This concept states that every entity can be separately identified and accounted for. In other words, owner’s personal transactions must be clearly separated from the entity’s transactions. Hence a computer that is purchased for personal use should not be included in the company records.

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EXERCISE 13.5 (1) Drawings Cash

3,000 3,000

(Purchase of a computer from entity funds for personal use) Accounting Entity Concept states that every entity can be separately identified and accounted for. Hence personal transactions of the owner should be recorded separately from the transactions of the entity. Therefore, the purchase of computer for personal use using company funds is recorded as a withdrawal of capital rather than an asset of the entity. (2) Paintings Cash

50,000 50,000

(Purchased paintings for $50,000 in cash) The monetary principle requires that the items included in the accounting records must be able to be expressed in monetary terms. This principle underlies all recorded transactions. Hence the purchase of paintings for use within the business is recorded in monetary terms at cost as indicated above. (3) 1 Jan 2017 Dr Prepaid Insurance 24,000 Cr Cash 24,000 (Company purchased a 1-year insurance policy for $24,000 on 1 January 2017)

The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. If the company’s year-end is 30 June, in order to provide useful reports at the end of each accounting period, the company must make adjusting entries to ensure assets, liabilities, revenues and expenses are reported correctly. The adjusting entry is: 30 June 2017 Insurance Expense Prepaid Insurance

12,000 12,000

(Adjusting entry for Insurance) (4) Building Cash

1,000,000 1,000,000

(Purchased a building for $1,000,000)

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Cost principle states that all assets are initially recorded in the accounts at their purchase price or cost. In the above example, the company recorded the purchase of its new building at cost. (5) Notes to the financial statements: Our company is currently involved in a law suit in relation to damages caused by one of our products. While the exact amount of the possible payout is currently unknown, it is expected that a payout will be awarded and could be in the vicinity of $500,000 to $1,000,000. In this case, no amount would be reported in the financial statements but would be disclosed in the notes as shown above, as a law suit of this nature is classified as a contingent liability. Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. Contingent liabilities are not recognised in the financial statements. However, information about contingent liabilities must be disclosed in the notes to the financial statements if they are material. If this company did not disclose the lawsuit and probable loss, there is a violation of full disclosure principle. The full disclosure principle requires that all circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements. (6) 31 December 2016 Depreciation Expense 20,000 Accumulated Depreciation – Building

20,000

(Depreciation expense for the year - Cost $1,000,000 / 50 years no residual value = $20,000) On January 1 2016, Dido Ltd purchased a building for $1,000,000. The building is to be depreciated with straight line method over 50 years with no residual value. On December 31 2016, the company recorded the above journal entry. Dido Ltd is in a strong financial position and has no liquidation plans. The going concern principle states that financial statements are prepared on going concern basis unless management either intends to or must liquidate the business or cease trading. As the company is a going concern the building is not reported at liquidation value. The above journal entry records the annual depreciation charge. The building cost $1,000,000 less the accumulated depreciation charge $20,000 will be reported in the statement of financial position in the non-current asset section.

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(7) 25 June 20015 Accounts Receivable Service Revenue

1,000 1,000

(Billed customer for services performed) Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. Revenue is a subset of income. To illustrate, a sale of goods on credit results in an increase in Accounts Receivable (asset) and a corresponding increase in Sales Revenue (income). Another illustration, the provision of goods or services in relation to a customer who has paid in advance would be recorded as a decrease in Revenue Received in Advance (liability) and an increase in Revenue (income). In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. Once the services have been performed, the inflow of economic benefits during the accounting period in the form of inflows or enhancements of assets that result in increase in equity, other than those relating to contributions from equity participants, is probable and can be reliably measured.

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(8) Dec 31 2017 Rent Expense 1,000 Prepaid Rent 1,000 (Year-end adjusting entry for rent expense) Expenses are defined in the Conceptual Framework as ‘decreases’ in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. The Conceptual Framework provides expense recognition criteria. Expenses should be recognised when ‘a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably’ (paragraph 94). The 2 basic common recognition criteria that are applied to assets, liabilities, revenues and expenses are: [1] Increase or decrease in economic benefits is probable, and [2]The amount of assets, liabilities, revenues or expenses can be measured reliably In this case, the asset in the form of Prepaid Rent has expired as the service has been provided. The depletion of assets has arisen and can be reliably measured. The company paid $2,000 for 2 months’ rent in advance on 1 December 2017. The initial entry was recorded as a debit to prepaid rent. The adjusting entry above was made on 31 December 2017 to recognise that an expense had been incurred based on the expense recognition criteria, that is a decrease in assets that can be measured reliably.

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EXERCISE 13.6 Provisions are defined as liabilities for which the amount of the future sacrifice is uncertain. That is, whether a liability is a provision or some other type of liability (e.g. borrowings, trade creditors, accruals) depends upon the extent of uncertainty associated with the amount of the future sacrifice. For borrowings such as debentures, leases, unsecured notes and mortgages, the amount of the future sacrifice (i.e. the repayment) can be predicted with a high level of certainty. Similarly, the amount of the future sacrifice for trade creditors can be measured with a high level of certainty because it is quantified on the supplier’s invoice. The uncertainty associated with the amounts of future sacrifice varies along a continuum ranging from very low uncertainty to very high uncertainty. Provisions are liabilities for which there is significant uncertainty about the amount of the future sacrifice but which are considered able to be measured reliably by estimation. Examples include provisions for warranties, and provisions for employee entitlements such as long service leave. A warranty is an obligation of the supplier of goods or services to the purchaser that the product will be functional or that the work performed will remain satisfactory for a stated period after the sale of goods or the provision of services. There is significant uncertainty in the measurement of the future sacrifices that will be needed to satisfy existing warranties. This is due to two reasons: 1. The future sacrifice is conditional upon the customer making a claim. 2. The costs of satisfying claims vary with the nature of the fault. Some warranty claims may require the replacement of a small part, while other warranty claims may require replacement of the goods sold to the customer. There is significant uncertainty about the future sacrifice required for employee entitlements, such as long service leave, because the amount payable is affected by the following: • whether employees stay with the employer long enough to become entitled to long service leave • when employees take long service leave • the extent to which the employee is promoted before taking long service leave • increases in general salaries between the time the liability is recorded and when it is paid. Other liabilities such as accruals are liabilities to pay for goods or services that have been provided but for which a supplier’s invoice has not yet been recorded as an account payable. Accruals often involve estimation, such as the amount of the next electricity bill or telephone account. Although higher than borrowings and trade creditors, the level of uncertainty of accruals is typically low because they are often for recurring services such as telephone connections, electricity usage and interest.

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Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably. Liabilities are also classified as contingent if they do not satisfy the probability criterion, or if they are dependent upon the occurrence of an uncertain future event outside the control of the entity. Examples include an unresolved lawsuit brought against the entity and the potential liability resulting from a tax audit in progress. Contingent liabilities are not recognised because they are not probable or are unable to be measured reliably, or both, i.e. they do not satisfy the probability criterion and the measurement criterion for the recognition of liabilities. Based on these definitions, the liabilities are classified as follows: (a) Contingent liabilities (b) Other liabilities (c) Other liabilities (d) Provisions (e) Other liabilities (f) Provisions (g) Other liabilities (h) Other liabilities (i) Contingent liabilities

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EXERCISE 13.7 COMPUTER GAMES LTD (1) Revenue recognition criteria were not followed. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.”

Further, in the context of revenue recognition (income), as explained in chapter 3, IAS 18 Revenue prescribes principles for the recognition of revenue for the sale of goods. The revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. In this case part (a) has not been satisfied and revenue should not be recorded until the computer games are delivered in March. The effect of this error is an overstatement of revenue and hence an overstatement of profit and also an understatement of liabilities in the form of Revenue Received in Advance by $20,000. The correcting entry would be: Dr Service Revenue 20,000 Cr Revenue Received in Advance 20,000 (To adjust the Service Revenue account for revenue received in advance) (2) Expense recognition criteria were not followed. Expenses are recorded when there is a decrease in future economic benefits related to a decrease in an asset or an increase in liability. In this case there was no decrease in assets as the advertising supplies (asset) were still on hand and have not been used. The entry to correct this error: Dr Supplies Inventory 2,300 Cr Supplies Expense 2,300 (To adjust the supplies expense account for supplies still on hand) The effect of the error is an overstatement of the company’s expenses, an understatement of the company’s assets and therefore an understatement of the company’s profit by $2,300.

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(3) Expenses are recorded when there is a decrease in future economic benefits related to a decrease in an asset or an increase in liability. In this case the expense recognition criteria were not followed as there was a decrease in assets (prepaid insurance which had expired) which could be reliably measured. The prepaid insurance should amount to $9,000 as of 31 December 2016, hence the company should record an adjusting entry at year end to account for the decline in the asset and increase in insurance expense. The adjusting journal entry would be a debit of $3,000 for Insurance Expense and a credit of $3,000 for Prepaid Insurance. In this case the decrease in future economic benefits related to a decrease in an asset and the amount of that decrease can be measured reliably, and so the expense must be recorded. The effect of this error is an understatement of expenses, an overstatement of assets and an overstatement of profit by $3,000. (4) Expenses were not recorded correctly and the company did not follow expense recognition criteria. In these cases there have been decreases in future economic benefits related to increases in liabilities and the amounts can be measured reliably, and so the expenses must be recorded. The expenses should be recorded (accrued) as follows: Dr Advertising Expense Cr Advertising Payable Dr Repairs Expense Cr Repairs Payable Dr Electricity Expense Cr Electricity Payable

2,500 2,500 2,000 2,000 800 800

The effect of not recording the expenses correctly is an understatement of expenses and an understatement of liabilities by $5,300. Therefore, profit is also overstated by $5,300. (5) Expenses were not recorded correctly and the company did not follow expense recognition criteria. In this case there has been a decrease in future economic benefits related to an increase in liabilities and the amount can be measured reliably, and so the expense must be recorded. Once employees have performed their duties, wages expenses have been incurred. Therefore, the company must record the wages expenses and corresponding liabilities. In this case, the journal entry: Dr Wages Expense 400 Cr Wages Payable 400 The impact of this error is an understatement of expenses and liabilities and an overstatement of profit by $400.

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(6) Expenses were not recorded correctly and the company did not follow expense recognition criteria. In this case there has been a decrease in future economic benefits related to an increase in liabilities and the amount can be measured reliably, and so the expense must be recorded. The interest for 1 year is $24,000. As the amount for December has not been recorded, expenses and liabilities are understated and the profit is overstated by $2,000. The journal entry to record the expense and corresponding liability is: Interest Expense 2,000 Interest Payable 2,000

EXERCISE 13.8 (a) (1) The correcting entry would be: Dr Service Revenue 20,000 Cr Revenue Received in Advance 20,000 (To adjust the Service Revenue account for revenue received in advance) (2) The entry to correct this error: Dr Supplies Inventory 2,300 Cr Supplies Expense 2,300 (To adjust the supplies expense account for supplies still on hand) (3) The adjusting entry is as follows: Dr Insurance Expense $3,000 Cr Prepaid Insurance $3,000 (To adjust the prepaid insurance to recognise the amount expired) (4) The adjusting entry would be: Dr Advertising Expense Cr Advertising Payable Dr Repairs Expense Cr Repairs Payable Dr Electricity Expense Cr Electricity Payable (To record various accrued expenses)

2,500 2,500 2,000 2,000 800 800

(5) The adjusting entry would be: Dr Wages Expense Cr Wages Payable (To recorded accrued wages) .

400 400

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(6) The adjusting entry would be: Dr Interest Expense Cr Interest Payable (To record accrued interest)

(b)

2,000 2,000

Initial Reported Profit

50,560

Revenue that should have not been recorded

(20,000)

Supplies expense that should have not been recorded

2,300

Insurance expense that was not recorded

(3,000)

Advertising expense that was not recorded

(2,500)

Repairs expense that was not recorded

(2,000)

Electricity expense that was not recorded

(800)

Wages expense that was not recorded

(400)

Interest expense that was not recorded

(2,000)

Revised Profit

(28,400) 22,160

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EXERCISE 13.9 (a)

Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Further, in the context of revenue recognition (income), as explained in chapter 3, IAS 18 Revenue prescribes principles for the recognition of revenue for the sale of goods. The revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. In this case the entity has NOT transferred to the buyer the significant risks and rewards of ownership of the goods (i.e. the tubing is yet to be manufactured and shipped), hence revenue cannot be recognised. As outlined in the Conceptual Framework, a liability is recognised in the statement of financial position when: (a) it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation (b) the amount at which the settlement will take place can be measured reliably (paragraph 91). In this case there is a present obligation to manufacture and ship the machinery, and therefore a liability should be recognised as follows: Cash

200,000

Revenue Received in Advance 200,000 (To record revenue received in advance form a customer for goods to be shipped in Feb 2017)

(b)

Assets are defined in the Conceptual Framework as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’ (paragraph 49(a)). Assets that satisfy the recognition criteria should be incorporated in the statement of financial position when: (1) it is probable that the future economic benefits will flow to the entity (2) the asset has a cost or value that can be measured with reliability (paragraph 89).

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In this case, the equipment is a result of a past transaction (settlement for goods sold), is controlled by Tough Tyres, and provides the business with future economic benefits (generating revenue). Hence one asset account has increased (equipment) and another decreased (accounts receivable). Journal Entry: Equipment Accounts Receivables

3,000 3,000

As an asset account is increased by $3,000 and another asset account is decreased by $3,000, the total amount of assets does not change.

(c) Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. Contingent liabilities are not recognised in the financial statements. However, information about contingent liabilities must be disclosed in the notes to the financial statements if they are material. In this case the amount cannot be measured with reliability, and cannot be reported on the face of the financial statements (no journal entry). However, while the amount is unknown a future obligation is certain as the courts have ordered the repairs. Hence, this must be disclosed in the notes to the financial statements as a contingent liability.

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EXERCISE 13.10 Assets are defined in the Conceptual Framework as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Assets that satisfy the recognition criteria should be incorporated in the statement of financial position when [1] it is probable that the future economic benefits will flow to the entity and [2] the asset has a cost or value that can be measured with reliability. (a) Saleable inventory is an asset (as opposed to old and obsolete inventory which has no expected future economic benefit). It is it is probable that the future economic benefits will flow to the entity through the sale of inventory in the form of receivables and then cash and this can be measured with reliability (i.e. known selling price and cost price). (b) Not an asset. While the antique boot is an interesting talking point and meets some of the elements in the definition and recognition criteria of an asset (e.g. it is controlled by the entity), we are told that it has no commercial value (cannot provide future economic benefits in the form of sale). An asset needs to provide a future economic benefit and a cost or value that can be measured with reliability. (c) Consignment stock is not an asset of Shiny Shoes (the consignee); it is an asset of the consignor. Although Shiny Shoes has possession of the consigned shoes, it does not have control of the shoes as the ownership still belongs to the consignor. (d) While in colloquial terms we often hear ‘employees are the greatest assets of a company’, in terms of the definition of an asset in accounting, staff members are not the company’s assets. Shiny Shoes does not have control of the three staff members, which is essential to the definition of an asset. While staff members may provide future economic benefits to the company, they are not controlled by the company as they are able to resign anytime and work elsewhere. (e) Shelving to display shoes is an asset. It is controlled by the entity as a result of past events (i.e. purchase transaction). It provides a probable future economic benefit in that displaying shoes is likely to result in shoe sales or the shelves themselves can be sold for cash. Shelves also have costs that can be measured with reliability (i.e. purchase price), and therefore should be recognised in the financial statements.

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EXERCISE 13.11 Liability is defined in the Conceptual Framework as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A liability is recognised in the statement of financial position when [1] it is probable that an outflow of resources embodying economic benefit will result from the settlement of a present obligation, and [2] the amount at which the settlement will take place can be measured reliably. (a) The purchase of tyres, glass and steel on account should be recognised as a liability. Once the goods are received, a present obligation of a-Forden and a-Holden Custom Cars (i.e. obligation to pay for the materials) arising from past events (i.e. purchase transaction) exists, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits e.g. the payment of cash. It is probable that an outflow of resources embodying economic benefit will result from the settlement of the obligation, and the amount of the settlement can be measured reliably through the purchase price. The journal entry to recognise the liability is: Manufacturing Materials Accounts Payable

X X

(b) The receipt of $100,000 as a deposit for cars to be built is recognised as a liability. The deposit received, cannot be recorded as Revenue as the work to manufacture the car has not been completed. Once the deposit is received, a present obligation of the company to build homes for its clients has risen from a past event (i.e. receipt of the deposit). The settlement of the obligation is expected to result in an outflow from the company of resources embodying economic benefits e.g. resources used to build cars or the repayment of the deposit. The journal entry to recognise the liability is: Cash 100,000 Revenue Received in Advance

100,000

It is probable that an outflow of resources embodying economic benefit will result from the settlement of the obligation to build homes, and the amount of the settlement can be measured reliably through the amount of deposit received.

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(c) An agreement to employ new staff is not recorded as liability as no present obligation exists and there is no transaction from past event (the new staffs have not commenced working). Once the new staff members start working, a present obligation to pay them will exist. The journal entry to recognise the liability after the work has been completed will be: Wages Expense X Wages payable X

(d) No liability should be recorded, however in this case there may be a contingent liability. Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. Although the amount of the lawsuit can be measured reliably ($13,000), whether or not an outflow of resources embodying economic benefit resulting from the settlement of the lawsuit occurs would depend on the court’s decision, which is outside the control of aForden and a-Holden Custom Cars. While the company believes that it might lose the case, the result cannot be determined until court decisions are made. Given that the lawsuit does not satisfy the probability criterion and are dependent upon the court’s decision, it should be disclosed in the notes to the financial statements as a contingent liability.

(e) No liability recorded as the amount of damages cannot be measured reliably. However, given that the company has been ordered by the court to pay damages even though the amount is uncertain, it must be disclosed in the notes of the financial statement as a contingent liability. Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. In this case there is an obligation but the amount is uncertain.

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EXERCISE 13.12 Revenue is a subset of income. Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. To illustrate, a sale of goods on credit results in an increase in Accounts Receivable (asset) and a corresponding increase in Sales Revenue (income). Another illustration, the provision of goods or services in relation to a customer who has paid in advance would be recorded as a decrease in Revenue Received in Advance (liability) and an increase in Revenue (income). Further, in the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. (a) Revenue is not recognised as the magazines have yet to be delivered, hence the transaction doesn’t meet the revenue recognition criteria as the seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. . Currently Surfin’ Magazines has an obligation to either refund the money or to deliver the magazines, hence the $24,000 is recorded as a liability (Revenue Received in Advance) and not a revenue. Revenue will be recognised once the magazines have been delivered to subscribers. (b) Dividend received is recognised as income because it is an increase in economic benefit during the accounting period in the form of inflow or enhancement of assets (i.e. cash) that results in increase in equity, other than those relating to contribution from equity participants. Since the dividend has already been received, the economic benefits associated with the transaction have flown to Surfin’ Magazines and the amount of dividends can be measured reliably. In this case the transaction would be recorded as follows: Cash

X Dividend Income

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(c) Payment of interest on a loan is not recognised as revenue. Rather, it is recognised as an expense as it involves a decrease of future economic benefits in the form of outflows of assets (cash). The journal entry would be: Interest expense Cash

X X

(d) Discount Received is recorded as revenue. Discount Received is revenue as the discount represents a saving in outflows of economic resources - a consequential reduction in liabilities and also an increase in equity other than those relating to contributions from equity participants. Furthermore, the increase in future economic benefits related to the decrease in liability (account payable) has arisen and can be measured reliably. The journal entry should be: Accounts Payable Cash Discount Received

X X X

(e) Once the magazines are delivered, revenue can be recognised as Surfin’ Magazines has fulfilled all of the recognition criteria including transfer of the significant risks and rewards of ownership of the goods to the customers. The amount of revenue can be measured reliably as reflected in the subscription price. Hence the amount previously recorded as Revenue Received in Advance can now be recorded as Revenue. The journal entry: Revenue Received in Advance Revenue (f)

X X

Once the magazines are delivered, revenue can be recognised as Surfin’ Magazines has fulfilled all of the recognition criteria including transfer of the significant risks and rewards of ownership of the goods to the customers. Since the customers have not yet paid the subscription fees, the revenue is recognised with a corresponding receivable account to record payments owed by the customers. The journal entry: Accounts Receivable Revenue

X X

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EXERCISE 13.13 NIGHT GOLF COURSE LTD As defined in the Conceptual Framework expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Expenses should be recognised when a decrease in future economic benefits related to a decrease in an asset or an increase of liability has arisen that can be measured reliably. (a) A payment of public liability insurance 1 year in advance does not meet the definition criteria of an expense. No expense is recognised because no depletion of assets or incurrence of liabilities that result in decreases in equity has occurred. Instead, an asset account has decreased (cash) and another asset account has increased (prepaid insurance) by the same amount (hence there is no change in total assets). Insurance expense will start to be recognised next month when the insurance fee for the 1st month expires. The journal entry is: Prepaid Insurance Cash

240,000 240,000

(b) A payment of dividends is a distribution of profit and not an expense. Expenses are outflows or depletions of assets (cash) or incurrence of liabilities that result in decreases in equity other than those relating to distributions to equity participants. In this case the depletion of assets relates to equity participants in the form of dividend payments. (c) Interest payment is an expense. There is a decrease in economic benefit in the form of a depletion of assets (cash) and the amount can be measured reliably. The journal entry: Interest Expense Cash

X X

(d) Discount allowed is recorded as an expense. There is a decrease in future economic benefit in the form of depletion of assets (i.e. reduction in the amount of cash received from customers) that result in decreases in equity. If no discount was allowed more cash would have been received. The journal entry: Cash Discount Allowed Accounts Receivable

X 2000 XX

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(e) Fees paid in advance by members are not recorded as expenses. There has been no decrease yet in economic benefit i.e. outflows or depletions of assets (cash) or incurrence of liabilities that result in decreases in equity. Rather, Night Golf Course should recognise the fees received in advance as a liability, because the fees have created a present obligation for Night to provide facilities/services to its members, which will result in outflows of its resources or future economic benefits. The transaction should be recorded as: Cash 3,000,000 Revenue Received in Advance 3,000,000 An asset account (cash) is increased by $3 million and a liability account (Revenue Received in Advance) is increased by $3 million. (f) The electricity bill is recorded as an accrued expense. The company has used the electricity for the period and incurred a liability to pay for the electricity used that results in a decrease in equity other than those relating to distributions to equity participants and the amount can be measured reliably. The journal entry: Electricity Expense Electricity Payable

X X

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SOLUTIONS TO PROBLEM SET A

PROBLEM SET A 13.1 BEAUTIFUL WEDDING MEMORABILIA LTD (a) a) In this case reporting inventory at net realisable value is violation of cost principle. b) In this case recording the computer as an asset of the business is a violation of accounting entity concept. c) In this case, including 2018 sales in the 2017 period to increase profit violates both the accounting period concept and revenue recognition criteria. d) In this case, excluding incurred yet not paid expenses to increase profit violates both the accounting period concept and expense recognition criteria. e) Non-disclosure of the law suit is a violation of the full disclosure principle and the definition and recognition criteria for liabilities. (b) a) The cost principle states that all assets are initially recorded in the accounts at their purchase price or cost. This is applied not only at the time the asset is purchased but also over time the asset is held. Under the lower of cost or net realisable value rule, inventory should be reported in the statement of financial position at cost, unless the net realisable value is less than cost. Hence, merchandise inventory with a cost of $68,000 and a realisable value of $100,000 should not be recorded at its net realisable value but at its cost. b) Accounting Entity Concept states that every entity can be separately identified and accounted for. Hence, the personal transactions of the owner should be recorded separately from the transactions of the entity. The purchase of a computer for personal use out of company funds should be recorded as a withdrawal of owner’s capital (i.e. a debit to Drawings and a credit to Cash), not an increase in the company’s assets (i.e. a debit to office equipment). c) The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. This implies that only transactions that occur in one period can be included in the report for that particular period. Therefore, the manager of Beautiful Wedding Memorobilia should not include the sales figure for the first two days of 2018 in the 2017 statement of profit or loss. Income (e.g. revenue) is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”. Recognition criteria require the inflow of resources to be probable and measured reliably. Revenue is recognised on the sale of goods when a number of conditions are satisfied, including that the entity has .

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transferred to the buyer the significant risks and rewards of ownership of the goods. Clearly the sales made during the first two days of 2018 (when the goods were delivered) must be excluded from 2017 revenue since the ownership of goods has not yet been transferred to customers in 2017 and thus revenue should not be recognised at that point. d) The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. This implies that an interest payment incurred in 2017 should be recorded in 2017 period even though payment has not yet been made. Expenses are defined in the Framework as decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. The $13,000 interest payment incurred by Beautiful Wedding Memorobilia in 2017 satisfies the definition of an expense, as there was a decrease in economic benefits in the form of incurrence of a liability (i.e. interest payable) that result in a decrease in equity other than those relating to distributions to equity participants. In addition, the decrease in economic benefits was incurred in 2017 and can be measured reliably. Hence, the manager should have recorded $13,000 interest expense during 2017. e) The definition and recognition criteria for liabilities and the full disclosure principle are relevant to this case. Full disclosure requires that all circumstances and events that could make a difference to the decision financial statement users might make should be disclosed in the financial statements. In this case there is a lawsuit for which there is a probable payout. This circumstance could cause financial statement users to make a different decision, for example by not investing as much to the company if they found out about the lawsuit. Therefore, the accountant should disclose this information in the notes to the financial statements. In the case of Beautiful Wedding Memorobilia, although the lawsuit damages satisfies the definition of liabilities, it fails the recognition criteria due to the uncertainty of the amount to be paid. Following that, the damages is not a liability, but a contingent liability. Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. Contingent liabilities are not recognised in the financial statements. However, information about contingent liabilities must be disclosed in the notes to the financial statements if they are material. Hence, Beautiful Wedding Memorobilia must disclose information about the lawsuit in the notes of financial statement so as to provide all the relevant data needed for financial statement users in making decisions.

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(c) a) Statement of Financial Position Current Assets: Inventory 68,000 Inventory should be reported in the statement of financial position at cost as the net realisable value is greater than cost. b) The correct journal entry should be: Drawings – Ima McBride 2,500 Cash 2,500 Given the computer was purchased for personal use, it should not be recorded as the company’s transactions. Rather, the transaction should be recorded as a withdrawal of Ima’s capital. c) No sales occurred in 2018 should be recorded in the statement of profit or loss for the year ending 2017. For the statement of profit or loss for the year ending 2018, record the first two days sales: Accounts Receivable or Cash X Sales X d) Interest expense of $13,000 should be recorded in 2017 as follows: Interest Expense 13,000 Interest Payable 13,000 Interest expense is recorded when there is as decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities (interest payable). Beautiful Wedding Memorobilia has incurred $13,000 of interest expense in the year ended 31 December 2017. e) No journal entry recorded since the amount of damages cannot be measured reliably. However, given Beautiful Wedding Memorobilia is likely to pay damages, information about the lawsuit must be disclosed in the notes to the financial statements as the lawsuit could make a difference to the decisions made by financial statement users. Notes to the financial statements: Currently Beautiful Wedding Memorobilia is being sued by a customer in relation to one of the company’s products. While the amount of damages to be paid is unknown at this stage, it is expected that the company will have to pay damages in the vicinity of $XX$XX.

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PROBLEM SET A 13.2 MOO COW FARM LTD Please note that under REQUIRED that part (j) refers to the cost principle and for part (h) cost refers to the cost constraint on financial reporting.

(a) In this situation, the concept of materiality has been correctly applied. The relevance of information is affected by its materiality. Information is material if its omission or misstatement could affect users’ decisions. In this case, as the fence repair tools are immaterial they are expensed immediately rather than being capitalised and depreciated over the life of the asset. (b) In this situation, the expense recognition criteria have been correctly applied. Expenses should be recognised when a decrease in future economic benefit related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Clearly, unpaid farm hand salaries are decreases in future economic benefits in the form of incurrence of liabilities (i.e. salaries payable) that result in decreases in equity, other than those relating to distributions to equity participants. The decrease in future economic benefits has arisen when the workers complete their work, and the amount can be measured reliably through the salary rate. Therefore, the salaries incurred but unpaid should be recognised as expenses in the period when they were incurred. (c) In this situation, the monetary principle has been correctly applied. The monetary principle requires that the items included in the accounting records must be able to be expressed in monetary terms, such as dollar, pound, or euro. (d) In this situation, the accounting period concept has been correctly applied. The accounting period concept states that the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity. Consequently, financial information must be separated into time periods for reporting purposes. (e) In this situation, the cost principle has been correctly applied. The cost principle states all assets are initially recorded in the accounts at their purchase price or cost. This can be applied not only at the time the asset is purchased but also over the time the asset is held. However, assets can be re-valued as appropriate. (f) In this situation, the accounting entity concept has been correctly applied. This concept states that every entity can be separately identified and accounted for. Therefore the personal transactions of owners should be recorded separately from the transactions of the business entity.

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(g) In this situation, the full disclosure principle has been correctly applied. The full disclosure principle requires that all circumstances and events that could make a difference to the decision financial statement users might make should be disclosed in the financial statements. (h) In this situation, the revenue recognition criteria have been correctly applied. Revenue is recognised in the statement of profit or loss when an increase in future economic benefit related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. The increase in asset or decrease in liability must result in increase in equity, other than those relating to contributions from equity participants. (i) This situation illustrates the cost versus benefits constraint. Preparers and standard setters seek to ascertain that the costs of preparing certain financial information are not greater than the benefits to be derived from using that information.

PROBLEM SET A 13.3 (a) “The Conceptual Framework looks like a window that you can see the world through” (In the text book, the analogy of the window is used to help students understand how the Conceptual Framework works. That is, the Conceptual Framework is likened to a window because it allows users, standard setters and preparers to view the economic world in a particular way. The Conceptual Framework itself does not look like a window; this student has not understood or discussed the analogy used in the book correctly). “and has four sections”. (There are 4 sections in the Conceptual Framework. This is correctly pointed out). “It talks about accounting concepts”. (A conceptual framework indeed outlines accounting concepts, so this is correct). “It talks about what accounting is about”. (More specificity is required in the answer, the Conceptual Framework identifies the objective of financial reporting rather than ‘what it is about’.) “It tells accountants how to prepare financial statements”. (Correct, the Conceptual Framework. provides guidance for standard setters and preparers). “It is helpful to standard setters” (Correct, see comments above). The four parts are: (a) the accounting entity, which states that the transactions of the owners should be separate from that of the business”. (Incorrect. The student should refer to “the reporting entity”, not the accounting entity. The reporting entity is an entity in which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions).

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(b) “the objective of businesses, which states the objective of a business, is to make profit to be able to pay dividends to the owners”. (Incorrect. The Conceptual Framework explains “the objective of general purpose financial reporting.” The objective of general purpose financial reporting is to provide information to users that is useful for making and evaluating decisions about the allocation of scarce resources). (c) “the qualitative characteristics, which include the monetary principle, the accounting period concept and the going concern and cost principles”. (Incorrect. According to the Conceptual Framework, the qualitative characteristics are classified as either fundamental or enhancing depending on how they affect the usefulness of financial information. Enhancing qualitative characteristics and fundamental qualitative characteristics are complementary. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability). (d) “the definition of elements in the financial statements, which is the last window. For example, accounts receivable is defined as ‘the right to receive cash upon the sale of goods or provision of services to a customer.’” (Incorrect. The Conceptual Framework defines the major elements of general purpose financial reports namely assets, liabilities, equity, income and expenses). (b) A possible model or correct answer: The conceptual framework consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general purpose financial reports and standard setters. The conceptual framework in Australia, also known as the Conceptual Framework, has 4 main components: [1] the reporting entity (SAC 1), [2] the objective of general purpose financial reports [3] the qualitative characteristics, and [4] the definition of elements of financial statements. The reporting entity is defined in the Conceptual Framework as an entity for which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions (SAC 1). The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making their decisions about providing resources to the entity. Decisions include: buying, selling or retaining shares and providing loans or settling amounts owed to the entity. To make those decisions, users need information to help them assess the prospects for future net cash inflows to an entity. This will allow them to estimate the return they can expect from the resources they provide to the entity. .

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This definition highlights the primary users of general purpose financial reports to be existing and potential investors, lenders and other creditors, however, these users cannot generally require a reporting entity to provide information directly to them so they rely on general purpose financial reports. It is acknowledged that general purpose financial reports cannot provide all of the information that each of the primary users may need, neither do they provide a valuation of an entity. However, they seek to provide information set that will meet the needs of the maximum number of primary users. Hence, financial reports, together with other sources of information such as general economic conditions, political climate and industry conditions, allow primary users to estimate the value of the reporting entity and assess the prospects for future net cash inflows to an entity. It is, however, acknowledged that other groups may also be interested in the financial information. For example, the management of the reporting entity is one such group but it was decided that management does not need to rely on general purpose financial reports because managers can obtain the financial information they needs internally. Other parties such as regulators and members of the public may also find general purpose financial reports useful. However, it is made clear that financial reporting is not primarily directed to other users but rather to equity investors, lenders and other creditors. According to the Conceptual Framework, the qualitative characteristics are classified as either fundamental or enhancing depending on how they affect the usefulness of financial information. Enhancing qualitative characteristics and fundamental qualitative characteristics are complementary. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. Relevance - information is considered relevant if it is capable of making a difference in the decisions made by users. Information that has predictive value and/or confirmatory value is considered to be relevant. Information is considered to have predictive value if it can be used to develop expectations for the future. Information is considered to have confirmatory value if it confirms or contests users’ past or present expectations. Information can often be both predictive and confirmatory. Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. It is important that the information depicts the economic substance of the transactions, events or circumstances. At times, economic substance may not be the same as the legal form. To be complete, all of the information needed to represent the economic phenomena faithfully is included and there is no omission which could make the information misleading. Hence, like relevance, faithful representation is also linked to the full disclosure principle. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. These characteristics are called enhancing characteristics as they enhance the decision usefulness of relevant information faithfully represented in financial statements. Comparability Information that is comparable facilitates users identifying similarities and differences between different economic phenomena. Consistency refers to the use of the same accounting policies between entities, at the same point in time, or the same entity over time. Consistency supports the achievement of comparability. .

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Verifiability Information is verifiable if it faithfully represents the economic phenomena it is meant to represent. Verifiability means that independent observers could reach a consensus - but not necessarily one hundred percent agreement- that a particular depiction is a faithful representation. Direct verification is through direct observation like counting cash to verify cash balance reported on the balance sheet or counting inventory to determine quantities in stock. Indirect verification is where techniques or calculations are used to check the representation. Timeliness is measured by whether the information is available to users before it ceases to be relevant; that is, the information is received while it is still capable of influencing the decisions users make based on the information. Financial information may lose its relevance if it is not reported in a timely manner, however, some information may remain timely even long after the reporting period as the information is used to determine trends. Application of timeliness means that the preparer should not take so long to collect and prepare financial information that the reported information loses its relevance. Application of this principle may mean that some transactions and events are reported before all the facts are known. Understandability refers to the extent to which information can be understood by proficient users; that is, users who have reasonable knowledge of accounting and business activities. It is not practicable to require financial statements to be understandable to novices. The definitions of asset, liability, equity, income and expense are also outlined in the Conceptual Framework. Assets are defined in the Framework as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’ (paragraph 49(a)). A liability is defined in the Framework as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’ (paragraph 49(b)). Equity is defined in the Framework as ‘the residual interest in the assets of the entity after deducting all its liabilities’ (paragraph 49(c)). Income is defined in the Framework as ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’ (paragraph 70(a)). Finally, expenses are ‘decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants’ (paragraph 70(b)).

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PROBLEM SET A 13.4 THRIFTY TYRES LTD

(a) A number of different objectives or purposes of financial reporting have been suggested, for example, the stewardship or accountability objectives (or perspectives) of financial reporting. These perspectives suggest that for entities where there is a separation of ownership from control (e.g. in a company where shareholders do not manage the business), general purpose financial reports can support the stewardship or accountability function. Managers can use general purpose financial reports to show the owners they are fulfilling their stewardship function effectively and that the resources are being managed effectively and appropriately, and shareholders can use the reports to check on managers and make them accountable. An alternative purpose or objective of financial reporting is the decision usefulness perspective where the objective of general purpose financial reports is to provide information to users that is useful for making and evaluating decisions about the allocation of scarce resources.

(b) The Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making their decisions about providing resources to the entity. Decisions include: buying, selling or retaining shares and providing loans or settling amounts owed to the entity. To make those decisions, users need information to help them assess the prospects for future net cash inflows to an entity. This will allow them to estimate the return they can expect from the resources they provide to the entity. (c) It is acknowledged that general purpose financial reports cannot provide all of the information that each of the primary users may need, neither do they provide a valuation of an entity. However, they seek to provide information set that will meet the needs of the maximum number of primary users. Hence, financial reports, together with other sources of information such as general economic conditions, political climate and industry conditions, allow primary users to estimate the value of the reporting entity and assess the prospects for future net cash inflows to an entity. Furthermore, financial information about the economic entities will be useful in assessing the efficiency and effectiveness of management and the governing board.

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PROBLEM SET A 13.5

(a)

In the Conceptual Framework, the primary categories of users include: - Equity investors: ⚫ ⚫ ⚫ - Lenders ⚫ ⚫ - Other creditors ⚫ ⚫ ⚫ ⚫

Shareholders Holders of partnership interests Other equity owners Lenders (e.g. banks) Purchasers of traded debt instruments (e.g. debentures) Employees* Suppliers* Customers* Other groups*

*Only in their capacity as resource providers, otherwise they are not considered primary users. (b)

Other users include government agencies, members of the public as well as suppliers, customers and employees (when not resource providers as explained above). The information needs and questions of other users vary considerably. For example, taxation authorities, such as the Australian Taxation Office (ATO), want to know whether the entity complies with taxation laws. Regulatory agencies, such as the Australian Securities and Investments Commission (ASIC) or the Australian Competition and Consumer Commission (ACCC), want to know whether the entity is operating within prescribed rules.

(c)

The Conceptual Framework distinguishes between primary and other users because the objective of general purpose financial reporting is to satisfy the needs of primary users – that is to provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making their decisions about providing resources to the entity. Given it is also acknowledged that other groups may also be interested in the financial information such as government agencies, members of the public as well as suppliers, customers and employees (when not resource providers as explained above). may also find general purpose financial reports useful. Hence it is useful to distinguish who the primary and other users are.

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PROBLEM SET A 13.6 (a) Accounting entity concept states that every entity can be separately identified and accounted for. For example, if a sole trader purchased a car for personal use by obtaining the funds from their personal bank account, the accounting entity concept implies that the transaction should not be recorded in the accounts of the entity. However, if the owner purchased a car from their personal bank account for use within the business, then, based on the accounting entity concept, this transaction would be recorded as a debit to an asset account (Motor Vehicles) and a credit to an equity account (Owner’s Capital). (b) At the time of writing the book the section on the reporting entity was not available in Conceptual framework. Hence, Australian business entities and standard setters use that section form the previous conceptual framework known as the Framework. The Framework (in SAC1) defines a reporting entity as “an entity in which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions”. (c) The statement “all accounting entities are reporting entities” is incorrect. The accounting entity concept states that every entity can be separately identified and accounted for. This is particularly important for sole proprietorships and partnerships as they are not separate legal entities. It is important that the owners do not confuse the entity’s transactions with their personal transactions, or the transactions of any other entity. There are many different forms of business organisation, including the sole trader, partnerships, companies and not-forprofit organisations. While each of these businesses records accounting transactions based on the accounting entity concept and is likely to prepare financial information for a variety of users, not all businesses are defined as reporting entities. Hence, while the accounting entity concept applies to all entities, not all entities are reporting entities. The Framework defines the reporting entity “as an entity in which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions” (SAC 1). Based on this definition, there would be little point in requiring a small business to prepare general purpose financial reports if the owner is also the manager of the business and there are no external users who would be dependent on the reports to make decisions. Therefore the statement is incorrect, as not all accounting entities are reporting entities. (d) A business organisation is more likely to be classified as a reporting entity if (1) the entity is managed by individuals who are not owners of the entity, (2) the entity is politically or economically important, and (3) the entity is considered large when measured in terms of sales, assets, borrowings, customers and employees. (e) Based on the indicators, publicly listed companies, some large private companies and government authorities are generally classified as reporting entities.

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(f) It is important to link the definition of a reporting entity to the objective of financial reporting because what classifies an entity as a reporting entity would be dependent on whether there are users who rely on general purpose financial reports to make and evaluate decisions about the allocation of scarce resources (which is the objective of financial reporting). In other words, if there is no user who needs the report to make economic decisions, then most likely the entity is not a reporting entity.

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PROBLEM SET A 13.7 BUSY B CLEANING LTD (a) Relevance and faithful representation as defined in the Conceptual Framework: Accounting information is deemed to be relevant if it would make a difference in a business decision. Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. (b) Relevance and reliability are both important qualitative characteristics of financial information. Accounting information that is not relevant is not useful in decision making because it does not help users to predict the future or assess the accuracy of their past predictions. Accounting information that is not reliable is also not useful because users cannot depend on the information to make decisions. Relevance and reliability can involve some trade-offs. For example, information about future profits is very relevant. However, as we are unable to tell the future with certainty, such information lacks reliability. (c) Based on GAAP, the alternative ways land can be reported is at cost (based on the cost principle) or at fair value. In chapter 8 we discussed the recording and reporting of non-current assets. In that chapter, examples of asset revaluations were provided. Recall that after the initial recognition of an asset at cost (which is its fair value at the time of acquisition), an entity may choose to revalue its non-current assets to fair value. A revaluation is a reassessment of the fair value of a non-current asset at a particular date. After the initial recognition of a property, plant and equipment (PPE) asset at cost, AASB 116 requires each class of PPE to be measured on either the cost basis or the revalued basis. Assets can be revalued upwards or downwards as relevant. When the PPE asset is measured using the revaluation basis, any impairment loss is treated as a revaluation decrement. You can review chapter 8 if you cannot recall how to record non-current assets. (d) Your recommendation as to the land should be reported, including justification for your answer. The decision should be based on providing the information that will best serve the objective for financial reporting – that is the objective of general purpose financial reporting is to satisfy the needs of primary users – that is to provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making their decisions about providing resources to the entity. Student’s personal views and discussion required (e) Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. To be complete, all of the information needed to represent the economic phenomena faithfully is included and there is no omission that could make the information misleading. Information that is considered to be neutral is free from bias. Information is biased if it is intended to attain or induce a particular behaviour or result. Some of the information in general purpose financial reports is measured using estimates in conditions of uncertainty. Ruth Hines explores whether financial information can be neutral and representationally faithful in R. Hines 1991, ‘The FASB’s Conceptual framework, financial accounting and the .

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maintenance of the social world’, Accounting Organizations and Society, vol. 16, no. 4, pp. 313–2. Some time ago in this journal article she wrote about the FASB’s conceptual framework. She suggested that it appears that the ‘assumption underpinning the Conceptual Framework is that the relationship between financial accounting and economic reality is a unidirectional, reflecting or faithfully reproducing relationship: economic reality exists objectively, intersubjectively, concretely and independent of financial accounting practices; financial accounting reflects, mirrors, represents or measures the pre-existent reality’. This is an objectivist’s view of the world. From this world view “it is possible for information to be free from material error and neutral.” On the other hand, if we held a subjectivists view of the world, we would assume there is no such phenomena as an economic reality to be measured objectively that exists independent of people’s perceptions. That is, reality is subjective and the result of personal interpretation. Based on this assumption, accounting information is subjective and it requires judgements, estimates and interpretations and must, therefore, be biased and cannot be representationally faithful.

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PROBLEM SET A 13.8 BRAIDWOOD HAIR LTD

Reporting assets - leased and purchased. (a and b) Assets are defined in the Conceptual Framework as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity” (paragraph 49(a)). The entity must have control over the asset. Ownership is not necessary. An asset is recognised when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured with reliability. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A liability is recognised when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. (c) An operating lease is where the lessor effectively retains the risks and rewards of owning an asset and, consequently, operating leases are reported in the statements of financial position of the lessor. A finance lease is where the substantial risks and rewards of ownership of the asset are effectively transferred to the lessee even though the ownership remains with the lessor. In essence, a finance lease is simply another way to finance the purchase of an asset and hence, the asset and the liability should be reported on the statement of financial position of the lessee as they would have been if the entity had borrowed funds to finance the asset’s purchase. Consequently, finance leases are reported on the lessee’s statement of financial position. (d) A finance lease meets the definition and recognition criteria for assets and liabilities. First, the lessee has control over the asset as the lease contract transfers all the benefits and risks of ownership to the lessee. The control is a result of past events, which is the lease agreement. The leased asset also provides future economic benefits to the lessee, as the lessee is able to use the asset to generate future income. In relation to the lessee’s liability, there is a present obligation to make lease payments. The present obligation is a result of past events (i.e. the lease agreement) and there will be outflows of resources embodying economic benefits (cash outlays for lease payments). In conclusion, Braidwood Hair Ltd would record asset and liability in its statement of financial position if the assets are acquired under a finance lease. Under a finance lease, the substantial risks and rewards of ownership of the asset are effectively transferred to the lessee; hence the asset and liability must be recorded in the lessee’s statement of financial position.

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PROBLEM SET A 13.9 TRAVEL THE WORLD BAGS LTD (a) a) Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. To illustrate, a sale of goods on credit results in an increase in Accounts Receivable (asset) and a corresponding increase in Sales Revenue (income). Another illustration, the provision of goods or services in relation to a customer who has paid in advance would be recorded as a decrease in Revenue Received in Advance (liability) and an increase in Revenue (income). In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. In the case of Travel the World Bags, revenue cannot be recognised on the sale of goods as Travel the World Bags has not transferred to the buyer the significant risks and rewards of ownership of the goods (i.e. the goods have not been delivered to the buyer). Therefore, no revenue can be recorded. Instead, a liability is recorded (Revenue Received in Advance) as Travel the World Bags has a present obligation to the buyer resulting in an outflow of resources – either in the form of the good to be delivered or the payment refunded. Once the goods are delivered, then sales revenue can be recognised. b) In this case Travel the World Bags needs to record an expense. An expense should be recognised when decreases in future economic benefits related to decreases in assets or increases in liabilities have arisen that can be measured reliably. Based on past experience, it is expected that $16,000 of the $400,000 recorded as accounts receivable will not be collected, so there has been a decrease in future economic benefits for Travel the World Bags in the form of forgone cash receipts from payments of receivables. The amount of bad debts cab be measured reliably based on the receivable collection history of the company. The expense is called bad debts expense. As Travel the World Bags does not know which debts will go bad, it should credit an account called Allowance for .

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Doubtful Debts which is a contra asset account to account receivables and reduces the net receivables reported in the statement of financial position. c) Expense should be recognised when a decrease in future economic benefit related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably. In this case, Travel the World Bags has $3,000 of inventory which is no longer saleable as it had been damaged by water. There is a decrease in future economic benefits related to the asset as the inventory can no longer be sold to generate income. The amount of damaged inventory can be measured reliably during the stocktake. Travel the World Bags must record an expense of $3,000 (Inventory Write-Down Expense) and a decrease in Inventory of $3,000. d) Assets are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Travel the World Bags, the consignee, has possession of goods on consignment. However, Travel the World Bags does not have control of the assets, since the ownership of the assets still belongs to the consignor. If Travel the World Bags does not sell the consigned goods within the agreed consignment period, the goods will be returned to the consignor. Hence, the consigned goods should not be included in the stocktake as inventory. The stocktake figures should be adjusted to exclude the consignment stock to ensure the correct inventory figures are reported in the statement of financial position. e) Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability can be measured reliably.” In this case, Travel the World Bags should record a Discount Received of $100. Discount Received is recorded by the buyer as income, as a discount represents a saving in outflows and a consequential reduction in liabilities and an increase in equity other than those relating to contributions from equity participants. f) Liability is recognised in the statement of financial position when [1] it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and [2] the amount at which the settlement will take place can be measured reliably. It is probable that Travel the World Bags will need to pay for the damages. However, as the amount is yet to be determined it cannot be measured reliably. In this case, no amount would be reported in the financial statements but would be disclosed in the notes to the financial statements. A lawsuit of this nature is classified as a contingent liability. Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably, that do not satisfy the probability criterion, or are dependent upon the occurrence of an uncertain future event outside the control of the entity. Contingent liabilities are not recognised in the financial statements. However, information about contingent liabilities must be disclosed in the notes to the financial statements if they are material. In this case, the estimated $500,000 is considered a material amount.

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g) Assets are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. On 1 November 2017, Travel the World Bags purchased a one-year prepaid insurance of $12,000. This prepaid insurance is recognised as an asset, because it is owned by Travel the World Bags as a result of a past event (i.e. the purchase) and from which future economic benefits in the form of payments for unexpected damages/losses are expected to flow to Travel the World Bags. As of 31 December 2017, the value of the prepaid insurance is only $10,000 because the 2-month prepaid insurance for November and December has expired. Expense should be recognised when a decrease in future economic benefit related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably. Therefore, $2,000 worth of prepaid insurance that has expired should be recognised as an expense, as there is a decrease in future economic benefit related to a decrease in the prepaid insurance and the amount can be measured reliably. Travel the World Bags must record an insurance expense of $2,000. h) An expense should be recognised when a decrease in future economic benefit related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably. Travel the World Bags has used the electricity for the period and a liability has arisen to pay for the use of electricity to the electricity company, which can be measured reliably based on the electricity bill. Therefore, Travel the World Bags must record $2,500 of Electricity Expense and $2,500 of Electricity Payable. (b) a)

Cash

2,500 Revenue Received in Advance

2,500

b) At the time of sales, the journal entry is as follows: Accounts Receivable

400,000

Revenue

400,000

The journal entry to record collection of receivables would be: Cash

300,000 Accounts Receivable

300,000

The journal entry to record bad debt expense is: Bad Debts Expense Allowance for Doubtful Debts

16,000 16,000

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Inventory Write-down Expense

3,000

Inventory

3,000

d) No journal entry recorded if Travel the World Bags inventory has not been adjusted to include the consignment stock. In that case the stocktake figures should be adjusted to exclude the consignment stock to ensure the correct inventory figures are reported in the statement of financial position.

Accounts Payable

10,000

Cash

9,900

Discount Received

100

f) No journal entry is recorded, but information about the contingent liability (lawsuit) must be disclosed in the notes to the financial statements. g) At the time of purchase of insurance, the journal entry is as follows: Prepaid Insurance

12,000

Cash

12,000

At the end of year, the adjusting journal entry is as follows: Insurance Expense

2,000

Prepaid Insurance

h) Electricity expense

2,000

2,500

Electricity Payable

2,500

(c) Travel the World Bags is considered to be a reporting entity if it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions. Using the indicators of a reporting entity, Travel the World Bags would be classified as a reporting entity if: •

Travel the World Bags is managed by individuals who are not its owners;

•

the company is politically or economically important; and

•

the company is considered large when measured in terms of sales, assets, borrowings, customers and employees.

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PROBLEM SET A 13.10 (a) GAAP consists of accounting standards, underlying accounting concepts and principles and the Conceptual Framework. In your notes you may like to use the summary table provided in Chapter 13. Figure 13.7. The summary of the various aspects of GAAP is as follows: GAAP Reporting question

Conceptual element of GAAP Who is required to prepare Reporting entity general purpose financial reports (preparers)? What is the purpose of Objective of financial general purpose financial reporting reporting? Who uses general purpose Users of financial reports financial reports (recipients)? What is reported in general Qualitative characteristics purpose financial reports? and constraints How are items reported in Definition of elements and general purpose financial recognition criteria reports? Concepts and principles

Rules Measurement

Source Authority Statement of Accounting Concepts 1(The Australian conceptual framework) Conceptual Framework

Conceptual Framework

Conceptual Framework Conceptual Framework Evolved over time, Conceptual Framework , accounting standards Accounting standards, Corporations Act Conceptual Framework accounting standards

GAAP consists of accounting standards, underlying accounting concepts and principles and the Conceptual Framework .

The Conceptual Framework consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general purpose financial reports and standard setters. The Conceptual Framework has 4 main components: [1] the reporting entity (SAC 1), [2] the objective of general purpose financial reports and users [3] the qualitative characteristics and [4] the definition of elements in financial statements.

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The reporting entity is defined in the Framework as an entity for which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions (SAC 1). The reporting entity is defined in the Conceptual Framework as an entity for which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make economic decisions (SAC 1). The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making their decisions about providing resources to the entity. Decisions include: buying, selling or retaining shares and providing loans or settling amounts owed to the entity. To make those decisions, users need information to help them assess the prospects for future net cash inflows to an entity. This will allow them to estimate the return they can expect from the resources they provide to the entity. This definition highlights the primary users of general purpose financial reports to be existing and potential investors, lenders and other creditors, however, these users cannot generally require a reporting entity to provide information directly to them so they rely on general purpose financial reports. It is acknowledged that general purpose financial reports cannot provide all of the information that each of the primary users may need, neither do they provide a valuation of an entity. However, they seek to provide information set that will meet the needs of the maximum number of primary users. Hence, financial reports, together with other sources of information such as general economic conditions, political climate and industry conditions, allow primary users to estimate the value of the reporting entity and assess the prospects for future net cash inflows to an entity. It is, however, acknowledged that other groups may also be interested in the financial information. For example, the management of the reporting entity is one such group but it was decided that management does not need to rely on general purpose financial reports because managers can obtain the financial information they needs internally. Other parties such as regulators and members of the public may also find general purpose financial reports useful. However, it is made clear that financial reporting is not primarily directed to other users but rather to equity investors, lenders and other creditors. According to the Conceptual Framework, the qualitative characteristics are classified as either fundamental or enhancing depending on how they affect the usefulness of financial information. Enhancing qualitative characteristics and fundamental qualitative characteristics are complementary. Relevance and faithful representation are therefore classified as fundamental qualitative characteristics. Relevance - information is considered relevant if it is capable of making a difference in the decisions made by users. Information that has predictive value and/or confirmatory value is considered to be relevant. Information is considered to have predictive value if it can be used to develop expectations for the future. Information is considered to have confirmatory value if it confirms or contests users’ past or present expectations. Information can often be both predictive and confirmatory.

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Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. It is important that the information depicts the economic substance of the transactions, events or circumstances. At times, economic substance may not be the same as the legal form. To be complete, all of the information needed to represent the economic phenomena faithfully is included and there is no omission which could make the information misleading. Hence, like relevance, faithful representation is also linked to the full disclosure principle. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. These characteristics are called enhancing characteristics as they enhance the decision usefulness of relevant information faithfully represented in financial statements. Comparability Information that is comparable facilitates users identifying similarities and differences between different economic phenomena. Consistency refers to the use of the same accounting policies between entities, at the same point in time, or the same entity over time. Consistency supports the achievement of comparability. Verifiability Information is verifiable if it faithfully represents the economic phenomena it is meant to represent. Verifiability means that independent observers could reach a consensus - but not necessarily one hundred percent agreement- that a particular depiction is a faithful representation. Direct verification is through direct observation like counting cash to verify cash balance reported on the balance sheet or counting inventory to determine quantities in stock. Indirect verification is where techniques or calculations are used to check the representation. Timeliness is measured by whether the information is available to users before it ceases to be relevant; that is, the information is received while it is still capable of influencing the decisions users make based on the information. Financial information may lose its relevance if it is not reported in a timely manner, however, some information may remain timely even long after the reporting period as the information is used to determine trends. Application of timeliness means that the preparer should not take so long to collect and prepare financial information that the reported information loses its relevance. Application of this principle may mean that some transactions and events are reported before all the facts are known. Understandability refers to the extent to which information can be understood by proficient users; that is, users who have reasonable knowledge of accounting and business activities. It is not practicable to require financial statements to be understandable to novices. The definitions of asset, liability, equity, income and expense are also outlined in the Conceptual Framework. Assets are defined in the Framework as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’ (paragraph 49(a)). A liability is defined in the Framework as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’ (paragraph 49(b)). Equity is defined in the Framework as ‘the residual interest in the assets of the entity after deducting all its liabilities’ (paragraph 49(c)). Income is defined in the Framework as ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’ (paragraph 70(a)). Finally, expenses are ‘decreases in economic benefits during the accounting period in the .

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form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants’ (paragraph 70(b)). In addition to the Conceptual Framework, other aspects of GAAP include the corporations act, accounting concepts and principles, accounting standards including the measurement rules as outlined in the standards. There are 2 concepts and 4 principles that underlie the recording of accounting information: •

Accounting Entity Concept: every entity can be separately identified and accounted for.

•

Accounting Period Concept: the life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity.

•

Monetary Principle: the items included in the accounting records must be able to be expressed in monetary terms.

•

Going Concern Principle: financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading.

•

Cost Principle: all assets are initially recorded in the accounts at their purchase price or cost. This is applied not only at the time the asset is purchased but also over the time the asset is held. Full Disclosure Principle: all circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements.

•

It is important to identify the order in which the various aspects of GAAP must be applied. After the Corporations Act accounting standards are the first point of guidance for preparers. Accounting standards and authoritative interpretations of accounting standards must be followed as they have legislative backing, which means they are required by law. If the standards are silent on an accounting issue, preparers can seek guidance from the conceptual framework (the Conceptual Framework plus SAC 1 from the Framework). The concepts and principles that traditionally underlie accounting are applied where there is no guidance on an issue in the conceptual framework. Further, if any conflicts arise between standards, the conceptual framework or concepts and principles, the various aspects of GAAP are still applied in the order listed above. To summarise, GAAP is applied as follows: first the Corporations Act, then accounting standards and interpretations are consulted, then the conceptual framework and finally the underlying concepts and principles.

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(b) The various aspects of GAAP do not operate in isolation, but are interrelated. Examples of the interrelationships include: • reporting entities are required to prepare general purpose financial reports and the objective of general purpose financial reports is to provide decision-useful information to users. • the objective of general purpose financial reporting is to provide decision-useful information to users and usefulness is dependent upon the information’s qualitative characteristics. • the accounting period concept and the revenue and expense recognition criteria are interrelated. Revenue (expense) recognition criteria require that revenues (expenses) are recognised in the period when the increase (decrease) in assets or decrease (increase) in liabilities become probable and can be measured reliably. In other words, only the increase/decrease in assets or liabilities that occur in a certain period can be recognised as revenue or expense in that period. This is consistent with the accounting period concept. (c) (i) The Global Reporting Initiative (GRI) is a network-based organization that pioneered the world’s most widely used sustainability reporting framework. The Sustainability Reporting Framework provides guidance on how organisations can disclose their sustainability performance. It consists of the Sustainability Reporting Guidelines, Sector Supplements and the Technical Protocol - Applying the Report Content Principles. The Framework is applicable to organisations of any size or type, from any sector or geographic region, and has been used by thousands of organisations worldwide as the basis for producing their sustainability reports. GRI is committed to the Framework’s continuous improvement and application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance. GRI's Reporting Framework is developed through a consensus-seeking, multistakeholder process. Participants are drawn from global business, civil society, labour, academic and professional institutions. Sustainability reporting is a process for publicly disclosing an organisation’s economic, environmental, and social performance. Many organisations find that financial reporting alone no longer satisfies the needs of shareholders, customers, communities, and other stakeholders for information about overall organisational performance. The term “sustainability reporting” is synonymous with citizenship reporting, social reporting, triple-bottom line reporting and other terms that encompass the economic, environmental, and social aspects of an organisation’s performance.

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(ii) The benefits of GRI Reporting: For reporting organisations, the GRI Reporting Framework provides tools for: management, increased comparability and reduced costs of sustainability, brand and reputation enhancement, differentiation in the marketplace, protection from brand erosion resulting from the actions of suppliers or competitors, networking and communications. For report users, the GRI Reporting Framework are a useful benchmarking tool, corporate governance tool and an avenue for long term dialogue with reporting organisations. GRI promotes a standardised approach to reporting to stimulate demand for sustainability information – benefitting both reporting organisations and report users. Sustainability reports based on the GRI Framework can be used to demonstrate organisational commitment to sustainable development, to compare organisational performance over time, and to measure organisational performance with respect to laws, norms, standards and voluntary initiatives. Other benefits include increased comparability. Companies follow a generally accepted reporting framework for financial reporting. Without a similarly accepted framework for sustainability reports, such reports could lack the features that could make them broadly useful: credibility, consistency, and comparability. If the thousands of companies that voluntarily disclose their sustainability impacts did not refer to a generally accepted reporting framework, they would risk producing non-comparable reports, and/or reports which inadequately address the full spectrum of stakeholder interests. A generally accepted sustainability reporting framework also simplifies report preparation and assessment, helping both reporters and report users gain greater value from sustainability reporting. Because the development costs of the GRI framework is shared among multiple users, the overall transaction cost for reporters is considerably lower than costs might be should a company develop it’s ‘own company’ or ‘own sector’ reporting framework. (iii) GRI Reporting Framework The Reporting Framework sets out the principles and Performance Indicators that organisations can use to measure and report their economic, environmental, and social performance. The cornerstone of the Framework is the Sustainability Reporting Guidelines. The third version of the Guidelines – known as the G3 Guidelines - was published in 2006, and is a free public document. The Guidelines are the foundation of the Framework and are now in their third generation (G3). They feature Performance Indicators and Management Disclosures that organisations can adopt voluntarily, flexibly and incrementally, enabling them to be transparent about their performance in key sustainability areas. The G3.1 Guidelines are the latest and most complete version of GRI's G3 Sustainability Reporting Guidelines. These Guidelines are based on G3 but contain expanded guidance on local community impacts, human rights and gender. While G3-based reports are still valid, GRI recommends that reporters use G3.1, the most comprehensive reporting guidance available today.

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BUILDING BUSINESS SKILLS

FINANCIAL REPORTING AND ANALYSIS

BUILDING BUSINESS SKILLS 13.1

FINANCIAL REPORTING PROBLEM DOMINOES

(a) 3.8 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. 3.8.1 Sale of goods Revenue from the sale of goods is recognised when the Consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods. 3.8.2 Franchise income Franchise income is recognised on an accrual basis in accordance with the substance of the relevant agreement. 3.8.3 Rendering of services Service revenue relates primarily to store building services and is recognised by reference to the stage of completion of the contract. 3.8.4 Royalties Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Consolidated entity and the amount of revenue can be measured reliably). Royalties determined on a time basis are recognised on a straightline basis over the period of the agreement. Royalty arrangements that are based on sales and other measures are recognised by reference to the underlying arrangement. 3.8.5 Dividend and interest revenue Dividend revenue from investments is recognised when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Consolidated entity and the amount of revenue can be reliably measured). Interest revenue is recognised when it is probable that the economic benefits will flow to the consolidated entity and the amount of revenue can be measured reliably. Interest revenue is accrued on a time basis, with reference to the principal outstanding and at the effective .

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interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. (b) Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. Yes, Domino’s revenue recognition methods are consistent with the revenue recognition criteria discussed in the chapter. For example: Domino’s policy on the sale of goods corresponds with part (a) of AASB 118 and NZ IAS 18 ‘Revenue’ for sale of goods the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;. DOMINO’S “Revenue from the sale of goods is recognised when the Consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods”. Royalty revenue is recognised as they accrue, in accordance with the relevant agreement and effective yield on the financial asset. This implies that those revenues are recognised when the increase in future economic benefits have arisen (accrued) and can be measured reliably using the agreement and relevant yield, which is consistent with the income recognition criteria outlined in the Conceptual Framework.

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(c) 3.7 Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except: (i) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or (ii) for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified within operating cash flows. (d) 3.13 Inventories Inventories are stated at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventories by the method most appropriate to each particular class of inventory, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

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BUILDING BUSINESS SKILLS 13.2

FINANCIAL ANALYSIS ON THE WEB

COCA-COLA AMATIL LTD

(b)

Students are required to access the CCA 2013 annual report. g) Revenue Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is recognised net of discounts, allowances and applicable amounts of value added taxes such as the Australian goods and services tax. The following specific recognition criteria must also be met before revenue is recognised: i) Sale of goods and materials Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably; ii) Rendering of services Revenue from installation and maintenance of equipment is recognised when the services have been performed and the amount can be measured reliably; iii) Interest income Interest income is recognised as the interest accrues, using the effective interest method; and iv) Rental income Rental income arising from equipment hire is accounted for on a straight line basis over the term of the rental contract.

(c)

In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. Yes, the company’s policies of revenue recognition are consistent with the revenue recognition criteria discussed in the chapter. .

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For example: Coca-Cola Amatil Ltd’s policy on the sale of goods corresponds with AASB 118 and NZ IAS 18 ‘Revenue’ for sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably . Similarly, Coca-Cola’s policy on the rendering of service follows part (a) and (b) of AASB 118 and NZ IAS 18 ‘Revenue’ for rendering of services Revenue from installation and maintenance of equipment is recognised when the services have been performed and the amount can be measured reliably; . Furthermore, interest income is recognised when it accrues. and the method of rental income arising from equipment hire is accounted for on a straight line basis over the term of the rental contract. This is consistent with the income recognition criteria as outlined in the Conceptual Framework. (d)

Both company’s methods of revenue recognition are consistent with the revenue recognition criteria discussed in the chapter. For example, for the sale of goods, they both recognise revenue when significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably with AASB 118 and NZ IAS 18 ‘Revenue’ Both companies’ policies on recognising income from services are also consistent with the AASB 118 and NZ IAS 18. In terms of interest, dividend, rent and royalty income, both companies recognise the income when they accrue, which is when the increase in economic benefits have arisen and can be measured reliably. In summary, both Domino Pizza and Coca-Cola Amatil’s policies on revenue recognition comply with what outlines in the Conceptual Framework.

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BUILDING BUSINESS SKILLS 13.3

A GLOBAL FOCUS

COCA-COLA AMATIL LTD (a) Excerpt from 10K Revenue Recognition We recognize revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable and collectability is reasonably assured. For our Company, this generally means that we recognize revenue when title to our products is transferred to our bottling partners, resellers or other customers. Title usually transfers upon shipment to or receipt at our customers’ locations, as determined by the specific sales terms of each transaction. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our part. Our customers can earn certain incentives which are included in deductions from revenue, a component of net operating revenues in our consolidated statements of income. These incentives include, but are not limited to, cash discounts, funds for promotional and marketing activities, volume-based incentive programs and support for infrastructure programs. Refer to Note 1 of Notes to Consolidated Financial Statements. The aggregate deductions from revenue recorded by the Company in relation to these programs, including amortization expense on infrastructure programs, were $6.9 billion, $6.1 billion and $5.8 billion in 2013, 2012 and 2011, respectively. In preparing the financial statements, management must make estimates related to the contractual terms, customer performance and sales volume to determine the total amounts recorded as deductions from revenue. Management also considers past results in making such estimates. The actual amounts ultimately paid may be different from our estimates. Such differences are recorded once they have been determined and have historically not been significant.

(b) Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must .

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be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. Yes, the company’s methods of revenue recognition are consistent with the revenue recognition criteria discussed in the chapter. For example: Coca-Cola Company’s policy on the sale of goods requires that the “delivery of products has occurred” for sales revenue to be recognised. This corresponds with AASB 118 and NZ IAS 18 ‘Revenue’ that the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. Furthermore, the Coca-Cola Company’s policy on the sale of goods requires that the “sales price charged is fixed or determinable and collectability is reasonably assured”. This implies that for sales revenue to be recognised, increase in future economic benefits in the form of cash receipts can be reliably measured, which is consistent with the income recognition criteria outlined in the Conceptual Framework.

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CRITICAL THINKING

BUILDING BUSINESS SKILLS 13.4

GROUP DECISION CASE

VITA HEALTH LTD (a) Correct statement of profit or loss: Vita Health Ltd Statement of Profit or Loss For the year ended 31 March 2017 Revenues Service revenue Operating expenses Advertising Wages Electricity Depreciation Repairs Insurance Supplies Interest Total operating expenses

151 200 (1) 12040 (2) 59640 (3) 6580 (4) 1680 8400 (5) 11200 (6) 10780 (7) 700(8) 111020

Profit

40180

Workings: (1) 168000 - 16 800 =151 200 (2) 8540 + 3500 = 12040 (3) 59080 + 560 = 59640 (4) 5460 + 1120 = 6580 (5) 5600 + 2800 = 8400 (6) 22400/12 months * 6 months = 11200 (7) 14000 – 3220= 10780 (8) (28,000*0.1/12) * 3 = 700

(b) Revenue recognition criteria were not followed as revenue was recognised before Vita Health has transferred to the buyer the significant risks and rewards of ownership of the goods. Hence the $16800 advanced money should be recorded as a liability (Revenue Received in Advance). The effect on the results of this error is that profit is overstated by $16800. The $16800 cash receipts will be recognised as revenue once the goods have been delivered to the buyer.

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Expenses should be recognised when a decrease in future economic benefit related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Wang did not follow the expense recognition criteria as he did not record some expenses which have been incurred but not yet paid, such as advertising, electricity, repairs, wages, and interest. In addition, a portion of prepaid expenses such as advertising supplies and insurance which have expired should be recognised as expenses since the decrease in economic benefits have arisen. The effect of not recognising expenses also results in an overstatement of profits. Overall profit was overstated by $47460.

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BUILDING BUSINESS SKILLS 13.5

SUSTAINABILITY

COCA-COLA AMATIL LTD

(a) Students are required to access CCA 2013 sustainability report. (b) CCA’s achievements in the areas of environment and community: CCA has achieved many outcomes in the areas of environment and community. Key Highlights in these areas 2011-2013 include: ENVIRONMENT • 14,000 tonnes of rubbish removed from 5 Bali beaches since 2008 • the Coca-Cola company’s $1.24 million keep Australia beautiful recycling project 1380 new bins recycling 274 tonnes of beverage containers • water efficiency improved by 1.9% • lighter glass bottles - 1500 tonnes of glass saved annually • world’s most energy-efficient fridges - 60% lower emissions since 2009 • 9,000 tonnes of pet resin saved • 65,000 truck kilometres reduced from supply chain COMMUNITY • 7,000 children in 280 villages play coke kicks soccer program • remote communities strategy 4.2% shift away from sugar sweetened drinks to water and low or no-sugar drinks • 1,500 homes in Bali have clean water from the water for life program • low and no-sugar beverages growing 2.5 x the rate of sugar beverages

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BUILDING BUSINESS SKILLS 13.6

COMMUNICATION ACTIVITY

STATISTICS R US PTY LTD

To:

Board of Directors, Statistics R Us Pty Ltd

From:

Accountant

Subject:

Accounting for Revenue

Income is recognised when income definition and income recognition criteria are met. Income is defined in the Conceptual Framework as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Income is recognised in the statement of profit or loss “when an increase in future economic benefits related to an increase in an asset or a decrease of a liability can be measured reliably.” That is, the recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. To illustrate, a sale of goods (or the provision of services) on credit results in an increase in Accounts Receivable (asset) and a corresponding increase in Sales (or Service) Revenue (income). Another illustration, the provision of goods or services in relation to a customer who has paid in advance would be recorded as a decrease in Revenue Received in Advance (liability) and an increase in Revenue (income). In the context of revenue recognition (income), AASB 118 and NZ IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of goods. Revenue is recognised on the sale of goods when all of the following conditions are satisfied: the revenue and the associated costs must be able to be reliably measured and it is probable the economic benefits, usually in the form of cash inflows, will accrue to the seller. The seller must have transferred to the buyer the effective control over the goods and not have any continuing managerial involvement, thereby transferring the significant risks and rewards of ownership. AASB 118 prescribes that in order to be recognised as revenue, services must be performed, or the stage of completion at the reporting date can be measured reliably. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided.

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In this case the facts are as follows: 13 June 2015

Contract signed for $ 1 million – no work has been completed by the ended 2015. Hence no revenue should be recognised.

Cash to be received: Year ended 2016

$600,000

Year ended 2017

$300,000

Year ended 2018

$100,000

Total

$1,000,000

Work to be completed: Year ended 2016

50%

Year ended 2017

50%

year

AASB 118 prescribes that in order to be recognised as revenue, services must be performed, or the stage of completion at the reporting date can be measured reliably. Therefore, Statistics R Us should recognise service revenue when the research has been performed. Details of the appropriate treatment of revenue each year are reported below.

June 13, 2015 No entry – there has not been an accounting transaction - no past transaction or event has occurred. A contract has been signed but no work has been completed.

June 30, 2016 By June 2016, $600,000 cash will have been received, hence a debit of $600,000 to cash. However, given only 50% of the work would have been completed, only 50% of the revenue should be recognised (i.e. 50% of $1 million, or $500,000). The rest of the cash received ($100,000) should be recorded as Revenue Received in Advance as the cash has been received in advance of the service being performed. This is a liability account, as it represents a future obligation of Statistics R Us to either provide the service or to pay back the cash. The journal entry is as follows: Cash

600,000 Service Revenue

500,000

Revenue Received in Advance

100,000

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June 30, 2017 By June 2017, a further $300,000 cash will have been received, hence a debit of $300,000 to cash. Given the final 50% of the work would have been completed, then the final 50% of the revenue (i.e. $500,000) should be recognised as income and be credited to service revenue account. The $100,000 amount of revenue received in advance from the previous year can now be recognised as revenue as the work has been completed. This is recorded as a debit of $100,000 to Revenue Received in Advance. By this time, all research works would have been performed, however the last $100,000 payment has not been received. Since the work has been completed, the $100,000 should be recognised as revenue and hence a debit to Accounts Receivable for $100,000 is made. The journal entry is as follows: Cash

300,000

Revenue Received in Advance

100,000

Accounts Receivable

100,000

Service Revenue

500,000

August 2017 At this stage, the amount owed for the work completed in June 2017 has now been received. Hence, Accounts Receivable is credited for $100,000 to account for the collection. The journal entry is as follows: Cash

100,000 Accounts Receivable

100,000

I hope this report will be able to clarify your queries in regards to the appropriate treatment for the revenue arising from the research contract. Please do not hesitate to contact me if you have further questions.

Yours sincerely,

13.85

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 13.7

ETHICS CASE

TOFFEE AND MORE LTD

(a) The stakeholders in this situation are: •

Sweet Tooth, the managing director

•

creditors of Toffee and More

•

shareholders of Toffee and More

•

employees of Toffee and More

•

potential investors of Toffee and More

•

potential customers

(b) Many stakeholders could be potentially harmed by the non-disclosure. For example: shareholders may lose their investment and/or receive decreased dividends if a large payout is made. Potential investors may lose money if they have decided to invest in Toffee and More without the knowledge of the lawsuit. Toffee and More’s ability to repay its creditors may also be affected if it has to pay for large amount of damages. On the worst scenario, Toffee and More may declare bankruptcy after paying the damages, which results in the employees losing their jobs and investors their money. Potential customers may also be disadvantaged if they are not made aware of the incident before they decide to buy the company’s products. (c) The managing director’s actions are inappropriate as he does not follow generally accepted accounting principles. The lawsuit is classified as a contingent liability. While it is not reported in the financial statements because the amount is unknown and cannot be measured reliably, contingent liabilities must be disclosed in the notes of financial statements. Given many stakeholders could be harmed or disadvantaged by the non-disclosure, the managing director’s actions are unethical.

13.86

Chapter 13: Analysing and integrating GAAP

BUILDING BUSINESS SKILLS 13.8

ETHICS CASE

HEALTHY LIVING LTD (a) The stakeholders in this situation include: •

Con Puter, the business information system manager

•

Abit Crooked, the CFO

•

Alot Crooked, the CEO

•

shareholders of Healthy Living

•

potential inventors of Healthy Living

•

any reader of the press release.

(b) Financial information must be reported in a timely manner; otherwise it will lose its relevance. In order to be timely, some estimates need to be made. For example, an estimated amount for doubtful debts is calculated rather than waiting until the debt goes bad. Expenses are accrued, e.g. for electricity and telephone expenses, if the expenses have been incurred but no invoice has been received or paid by year end. However, while some estimates are consistent with the timeliness constraint, it is not consistent with the timeliness constraint to estimate the revenue on health cover contracts sold. This information needs to be accurate, not estimated. It is also not consistent to estimate all other expenses if the data is not available due to a computer error. (c) No, the actions requested by Alot Crooked are not consistent with GAAP. The income and expense recognition criteria require revenues and expenses to be recognised when the increase or decrease in future economic benefits are probable and can be measured reliably. Furthermore, one of the fundamental qualitative characteristics of financial information as outlined in the Conceptual Framework is faithful representation. Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error. Without accurate computer records, the revenue and expense figures cannot be measured faithfully. As a result, the estimated profit figure will not be complete or free from material error. (d) Faithful representation is only achieved when the inputs used to make the judgment and estimate reflect the best available information at the time. In this case, reporting estimated fictitious figures does not result in faithful representation of the economic reality of the business, since the actual revenue and expense figures have been recorded. Further, given many stakeholders could be harmed by the disclosure of estimated figures which could result in poor information and hence poor decisions, the managing director’s action in reporting estimated profit figure is unethical.

(e) A significant error in estimating profit can result in wrong decisions made by people who rely on the information. For example, shareholders may lose their investment and/or receive less .

13.87

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

dividends if the financial information is misrepresented in the form of an overstatement of profit. Potential investors may lose money if they decide to invest in the organisation they believe is more profitable than it actually is. Creditors may not be repaid as expected if they lend money based on overstated profits. Overstatement of profit could result in employees and trade unions trying to get higher wages and better working conditions. The general public could be harmed by the overstatement of profits if they choose to invest or purchase products from the company based on the incorrect figures. Errors and inappropriate behaviours in business decrease people’s faith in accounting and the business world.

13.88

Case Study Solutions Manual For

Financial Accounting: Recording, Analysis and Decision Making Fifth Edition

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Chapter 1: an introduction to accounting Case study Q1.1 – decision making: David Johnson has decided to start a business and is a new client of your small public accounting practice called Trent Accounting Services. He has come to seek your advice about what form of business organisation/structure he should use, to set up his business given his circumstances. David Johnson is a computer technician and was working for a computer repair company. He would now like to be his own boss, so he plans to start up a business in that field with the objective of later developing the business into one that also sells a variety of electronic items such as phones, tablets, notebooks, laptops, PlayStation equipment and games. The business name he would like to use if possible is Electronic Emporium. He estimates his turnover in the first year of operation will be around $60,000 and he does not anticipate employing any staff until business turnover increases. David and his wife Jasmine live in a country town. They do not have any children as yet. He would like to include his wife in the business but she is currently employed full time. He is also concerned about putting the family home and a rental property at risk should the business fail. Both properties are held in David’s name. Required Of the three main forms of business organisation (sole proprietorship, partnership, company) covered in chapter one, which form(s) would you recommend to David for his business and which would you not recommend, and why? In reaching a conclusion, your answer should include at least two advantages and two disadvantages for each of these business structures with reference to David’s particular circumstances.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q1.1 – suggested answer: Sole trader Advantage(s) • It is quick and inexpensive to set up and wind down. • There are few legal and tax formalities. • You are in complete control of your business. • All the assets and profits belong to you. Disadvantage(s) • You are legally responsible for all aspects of the business – including any debts your business incurs. • Depending on the level of profits you may pay higher taxes on the profits than under a different business structure. • Possible limitations on expansion due to lack of appropriate skills or capital. Conclusion This would be the simplest and easiest structure for David to begin trading as, but given that he has concerns about putting his personal assets at risk, and a lot of new businesses do fail in the first few years of operation, it is probably not the best structure for him to use. Partnership Advantage(s) • It is relatively inexpensive to set up and operate and although a formal partnership agreement is useful, because it sets out in writing the division of profits and losses where they are not equal, they are not essential as there is a Partnership Act that governs this type of entity. • Responsibilities and control or management of the business is shared. • Can bring together people with different skills that can aid the business. • Can be a source of additional capital for the business. • Income and losses are shared among the partners, which can be a tax advantage by reducing income tax for each partner. Disadvantage(s) • Each partner is responsible for the debts of the partnership, even if they did not directly incur or cause the debt. • A partnership has a limited life, because if a partner dies or wishes to leave the partnership a new partnership must be formed. • Control or management of the business is shared and this can cause disputes between the partners, perhaps resulting in the collapse of the partnership and/or business. • Income and losses are shared among the partners who sometimes feel aggrieved because he or she feels they deserve more because they do more work. Conclusion If he made his wife a partner he could split the profits between them and it would reduce the amount of tax he would have to pay. However, because his wife is working full time it would .

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

likely increase the amount of tax she would have to pay, thereby nullifying that advantage. If his marriage failed, the partnership would cease to exist and he could lose the business. They would still be liable for the debts of the business should it fail and his personal assets would be at risk. Therefore, probably not the best business structure to use. Company Advantage(s) • A company is a business that is a legal entity in its own right, formed under the Corporations Act 2001 (Cwlth) in Australia or the New Zealand Companies Act 1993 (Public Act) and separate from its shareholders. • The company owns all its assets and liabilities, therefore the shareholder’s responsibility for any debts are generally limited to the amount they have invested as share capital in the business. • A company can sue and be sued and enter into contracts in its own name. • A company provides some asset protection but directors can be legally liable for their actions and, in some cases, the debts of a company. • A company has indefinite life. • A company's operations are controlled by its directors and the company is owned by its shareholders. This is an advantage where the owners do not have the expertise required to run the day-to-day operations of a larger business. • A flat rate of tax (currently 30% in Australia and 28% in New Zealand) can reduce tax payable when profits are substantial. Disadvantage(s) • A company is a complex business structure, with higher set-up costs and administrative costs because of additional reporting requirements. • A company's operations are controlled by its directors and the company is owned by its shareholders. This can mean loss of the control and decision-making power afforded by being a sole trader. • A flat rate of tax can mean a higher tax payable than that of a sole trader when profits a small. Conclusion With this business structure his assets would be safe, provided he as a director did not misbehave (misrepresentation or misleading or deceptive conduct of a director lifts the corporate veil). He can incorporate a sole director/shareholder propriety limited company which means that he still has total control of the operations of the business, or he could include his wife as a director and/or shareholder (in the event of a marriage breakdown that could be costly) as the company pays the tax on the profits, not the individuals. This is probably the business structure that would give him more peace of mind.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q1.2 – research and report In addition to advice about which business structure David should use, he has asked for advice on how to go about setting up the business. David would like to understand any legal requirements for each of the business structures. Required Research the requirements for setting up each of the three forms of business organisation previously discussed. In your report explain the requirements for: (a) registering a business name and/or incorporating a company (b) registering for income tax purposes and the goods and services tax (c) name the relevant authorities involved for parts (a) and (b) Hint: prepare a report on the requirements applicable in either Australia or New Zealand, whichever country you reside. The following URLs are provided to assist you. Australia: https://www.ato.gov.au/Business/Starting-and-running-your-small-business/Starting-yourbusiness/ http://www.business.gov.au/Pages/default.aspx http://www.asic.gov.au/for-business/registering-a-business-name/ http://www.asic.gov.au/for-business/starting-a-company/ New Zealand: http://www.business.govt.nz/starting-and-stopping/entering-a-business/starting-a-business http://www.business.govt.nz/companies/learn-about/starting-a-company

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case Study Q1.2 – suggested answer: Australia – sole trader: Registering a business name Business name registration is handled by the Australian Securities and Investments Commission (ASIC). If you wish to carry on a business under a business name, you must register your business name with ASIC. You do not need to register a business name if the entity is an individual and the business name is the individual’s name (e.g. John Smith). Before applying for a business name you should check to see if your proposed name already exists or is similar to a currently registered name, otherwise your application may be rejected. You should check whether anyone else is using a trade mark, brand or logo that is identical or similar to your proposed business name and that can be done through IP Australia. Tax file number (TFN) As a sole trader, you use your individual tax file number (TFN) when you lodge your income tax return. Tax file number applications are handled by the Australian Taxation Office (ATO). Australian business number (ABN) If you carry on an enterprise in Australia as a sole trader, you can apply for an ABN for your business and use this number for all your business dealings. Applications can be made online at www.abr.gov.au for an ABN. The Australian Business Register handles these applications and you will need and ABN before you can apply for a business name. Goods and services tax (GST) You can register for goods and services tax (GST) if you carry on an enterprise. You must be registered for GST if your annual GST turnover is $75,000 or more or if you provide taxi travel or are a car hire operator. If your annual turnover is less than $75,000 registration is voluntary. Registration can be done on the ABN application form or through the ATO. Australia – partnership: Registering a business name Business name registration is handled by the Australian Securities and Investments Commission (ASIC). If you wish to carry on a business under a business name, you must register your business name with ASIC. You do not need to register a business name if the entity is a partnership and the business name consists of all of the partners’ names (e.g. John Smith & Tom Watt). Before applying for a business name you should check to see if your proposed name already exists or is similar to a currently registered name, otherwise your application may be rejected. You should check whether anyone else is using a trade mark, brand or logo that is identical or similar to your proposed business name and that can be done through IP Australia. Tax file number (TFN) .

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

If you operate your business as a partnership, it needs its own TFN that you use when lodging its annual business income tax return. You can apply for this on the ABN application form or directly from the ATO. Australian business number (ABN) If you carry on an enterprise as a partnership in Australia, you can apply for an ABN for the partnership and use it for all the partnership's business dealings. Applications can be made online at www.abr.gov.au for an ABN. The Australian Business Register handles these applications and you will need and ABN before you can apply for a business name. Goods and services tax (GST) As a member of a partnership, you can apply for GST registration for the partnership if it is carrying on an enterprise. A partnership must be registered for GST if its annual GST turnover is $75,000 or more. If turnover is less than $75,000 registration is voluntary. You can apply for registration on the ABN application form or through the ATO. Australia – company: Incorporation and/or business name registration Incorporation and registration of business names is handled by the Australian Securities and Investments Commission (ASIC). If you wish to carry on a business under a business name, you must register your business name with ASIC. You do not need to register a business name if the entity is a registered company and the business name is the company’s name (e.g. ABC Pty Ltd) Before applying for a company and/or business name you should check to see if your proposed name already exists or is similar to a currently registered name, otherwise your application may be rejected. You should check whether anyone else is using a trade mark, brand or logo that is identical or similar to your proposed business name and that can be done through IP Australia. Tax file number (TFN) A company needs to apply for a TFN and use it when lodging its annual tax return. You can apply for a TFN for the company on the ABN application form or directly from the ATO. Australian business number (ABN) A company registered under the Corporations Act 2001 is entitled to an ABN. A company that is not registered under the Corporations Act may register for an ABN if it is carrying on an enterprise in Australia. Goods and services tax (GST) A company can register for GST if it is carrying on an enterprise. A company must be registered for GST if its annual GST turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000. Turnover of less than $75,000 is voluntary. Application can be done on the ABN application form or directly from the ATO.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

New Zealand – sole trader: Registering a business name You don’t register a business name in New Zealand. You can usually use any name you like unless, of course, someone else already is. If you wish to operate as a sole trader there is no central register. Check the IPONZ (The Intellectual Property Office of New Zealand) to see if there is a similar registered trademark or brand name to the one you want already in use. ONECheck is an online search tool that combines a company name, domain and trade mark search all in one place. Sole traders don’t have any protection over their business names. However, they can apply for a trade mark from IPONZ for their brand or logo to give them exclusive rights to use it in a unique way. Inland Revenue Department number (IRD) If you’re carrying on business as a sole trader you should return your business income under your personal IRD number. IRD number applications are handled by Inland Revenue (IR). Goods and services tax (GST) Businesses must become registered for GST once they reach (or expect to reach in the next 12 months) an annual turnover of more than $60,000. If your turnover is under $60,000 you may choose to register voluntarily. Registration is handled by IR. New Zealand – partnership: Registering a business name You don’t register a business name in New Zealand. You can usually use any name you like unless, of course, someone else already is. Check the IPONZ (The Intellectual Property Office of New Zealand) to see if there is a similar registered trademark or brand name to the one you want already in use. ONECheck is an online search tool that combines a company name, domain and trade mark search all in one place. Partnerships don’t have any protection over their business names. However, they can apply for a trade mark from IPONZ for their brand or logo to give them exclusive rights to use it in a unique way. Inland Revenue Department number (IRD) If you’re carrying on business as a partnership you should return business income under your partnership IRD number. IRD number applications are handled by Inland Revenue (IR). Goods and services tax (GST) Businesses must become registered for GST once they reach (or expect to reach in the next 12 months) an annual turnover of more than $60,000. If your turnover is under $60,000 you may choose to register voluntarily. Registration is handled by IR.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

New Zealand – company: Incorporation and/or business name registration Every company in New Zealand has to be incorporated – or registered – with the Companies Office (the national registrar of companies). The Registrar of Companies is responsible for the approval and reservation of company names. As soon as a business name is reserved on the companies register, it is impossible for others to reserve the same or a similar name within the next 20 days. That name protection becomes permanent once the company is registered. This protection only stops other companies being registered in New Zealand under the same name and should not be confused with the intellectual property protection offered by a patent, trade mark or copyright. Inland Revenue Department number (IRD) If your business will be run through a company, you need to get an IRD number for it. However, rather than going through Inland Revenue, you can do this through the Companies Office when you register your company for incorporation. Goods and services tax (GST) Businesses must become registered for GST once they reach (or expect to reach in the next 12 months) an annual turnover of more than $60,000. If your turnover is under $60,000 you may choose to register voluntarily. Registration is handled by IR.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Chapter 2: the recording process Case Study Q2.1 – analysing, decision making, recording and reporting: David Johnson has decided that a company is the best business structure for him and on 15 July Electronic Emporium Pty Ltd was incorporated as a private company with David as the sole director/shareholder. The company now has a tax file number and an Australian Business Number (Australian students), an IRD number (New Zealand students), and David has chosen not to register the company for GST at present. David has signed a lease on a shop for 2 years with an option to renew for a further 3 years. He has opened a bank account in the company’s name with the ANZ Bank, and at the same time applied for a loan of $50,000 from the bank to enable him to set up the shop and provide him with working capital. He contracted a shopfitter to fit out the shop, which opened for business on 24 July. As David’s accountant you have recommended that the following accounts be used as a guide when setting up the chart of accounts for the general ledger: Accountancy Fees (600), Accounts Payable (200), Accounts Receivable, Advertising Expense, Bank Fees, Bank Loan, Borrowing Expense, Cash at Bank (100), Depreciation Expense, Discount Allowed, Dividends, Electricity Expense, Insurance Expense, Interest Expense, Motor Vehicles Expense, Motor Vehicles (160), Accumulated Depreciation: Motor Vehicles (161), Office Supplies Expense, Prepaid Advertising (130), Prepaid Insurance, Prepaid Rent, Rent Expense, Repairs Expense, Retained Earnings, Service Revenue (400), Share Capital (300), Shareholders Loan Account, Shop Equipment & Fittings, Accumulated Depreciation: Shop Equipment & Fittings, Telephone Expense. These are the transactions for the month. July 15 David deposited $10,000 to open the business bank account. This was his investment in the company in exchange for 10,000 ordinary shares. 17 The bank deposited the $49,500 loan funds into the bank after deducting $500 in costs to establish the loan. Hint: Post the costs to establish the loan to borrowing expenses. 18 Paid rent of $1485 to Atlas Realty (cheque no.1). 20 Paid Adams Shopfitters $20,000 for display cabinets, counters and shelving (cheque no.2). 21 Paid the local newspaper (Community Times) $1,000 for a series of weekly advertisements to commence this week (cheque no.3). 22 Paid $1,500 to Bayview Insurance Brokers for a 1-year business insurance policy commencing 21 July (cheque no.4). 23 Purchased from Tony’s Second-hand Mart, a cash register for $350, a lounge suite for $400 and a table & chairs for $380 for the shop (cheque no.5).

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

24 David contributed equipment valued at $5,000 for repairing computers to the business. At present he does not want to take cash out of the business, so this will take the form of an interest free loan to be repaid two years from now. 31 Banked $2,520 cash and cheques from servicing computers since the shop opened. Required (a) Analysing/decision making Use the worksheet provided below to create the chart of accounts ensuring that you correctly classifying the accounts by type i.e. asset, liability, equity, revenue, cost of sales, and expenses. A few account numbers have been provided as a guide. Asset accounts begin with the number 1, liabilities with 2, equity with 3, income with 4, cost of sales with 5, and expenses with 6. Hint: Number expense and prepayment accounts 5 numbers apart, and for all other accounts number the accounts 10 numbers apart. Exceptions are related noncurrent asset accounts which use consecutive numbers for the cost of the asset and the corresponding accumulated depreciation for that asset. The current/non-current column is for the asset and liability accounts in the Statement of Financial Position. Recall: current assets are cash and other assets that are reasonably expected to be converted to cash or used in the business within 1 year or the operating cycle, whichever is longer, and non-current assets are assets that are not expected to be consumed or sold within 1 year or the operating cycle and have not been purchased for trading purposes. Current liabilities are obligations reasonably expected to be paid within the next year or operating cycle, whichever is the longer, and non-current liabilities are liabilities that are not expected to be paid within 1 year or the operating cycle. Account Name

Asset, Liability, Equity, Revenue, Expense. Expense Liability

Current /Non- Account current No.

Current

600 200

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Interest Expense Motor Vehicles Expense Motor Vehicles Accumulated Depreciation: Motor Vehicles Office Supplies Expense Prepaid Advertising Prepaid Insurance Prepaid Rent Rent Expense Repairs Expense Retained Earnings Service Revenue Share Capital Shareholders Loan Account Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Telephone Expense (b) Recording Use the general journal to record the transactions for July, with narrations. Hint: Record the insurance as a prepayment and all other costs (where appropriate) as expenses. More information on how to account for some on these items on an accrual basis is provided in the next chapter. (c) Recording Setup the general ledger T accounts and post the journal entries to them. Remember to include posting references as they provide an audit trail. Use pencil to subtotal and calculate the balance of each account. Do not close off these accounts as they will be used again in the next chapter. (d) Reporting Prepare a trial balance on 31 July.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q2.1 – suggested answer (a): Account Name

Accountancy Fees Accounts Payable Accounts Receivable Advertising Expense Bank Fees Bank Loan Borrowing Expense Cash at Bank Depreciation Expense Discount Allowed Dividends Electricity Expense Insurance Expense Interest Expense Motor Vehicles Expense Motor Vehicles Accumulated Depreciation: Motor Vehicles Office Supplies Expense Prepaid Advertising Prepaid Insurance Prepaid Rent Rent Expense Repairs Expense Retained Earnings Service Revenue Share Capital Shareholders Loan Account Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Telephone Expense

Asset, Liability, Equity, Revenue, Expense. Expense Liability Asset Expense Expense Liability Expense Asset Expense Expense Equity Expense Expense Expense Expense Asset Asset Expense Asset Asset Asset Expense Expense Equity Income Equity Liability Asset Asset Expense

Current/Noncurrent

Current Current

Non-current Current

Non-current Non-current

Current Current Current

Non-current Non-current Non-current

Account No. 600 200 110 605 610 280 615 100 620 625 310 630 635 640 645 160 161 650 130 135 140 655 660 320 400 300 290 170 171 665

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

CHART OF ACCOUNTS ELECTRONIC EMPORIUM PTY LTD Assets Current Assets 100 Cash at Bank 110 Accounts Receivable 130 Prepaid Advertising 135 Prepaid Insurance 140 Prepaid Rent Non-current Assets 160 Motor Vehicles 161 Accumulated Depreciation: Motor Vehicles 170 Shop Equipment & Fittings 171 Accumulated Depreciation: Shop Equipment & Fittings Liabilities Current Liabilities 200 Accounts Payable Non-current Liabilities 280 Bank Loan 290 Shareholders Loan Account Equity 300 Share Capital 310 Dividends 320 Retained Earnings Income 400 Service Revenue Expenses 600 Accountancy Fees 605 Advertising Expense 610 Bank Fees 615 Borrowing Expense 620 Depreciation Expense 625 Discount Allowed 630 Electricity Expense 635 Insurance Expense 640 Interest Expense 645 Motor Vehicle Expense 650 Office Supplies Expense 655 Rent Expense 660 Repairs Expense 665 Telephone Expense Note: Students can also include header accounts for the non-current assets and prepayments. That shows initiative and a more complete chart of accounts.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q2.1 – suggested answer (b): GENERAL JOURNAL Page 1 Date July 15

Account Name Cash at Bank Share Capital Issue of 10 000 ordinary shares

Post Ref. 100 300

Debit 10 000

10 000

Cash at Bank Borrowing Expense Bank Loan Loan funds less costs to establish loan

100 615 280

49 500 500

Rent Expense Cash at Bank Rent paid to Atlas Realty with cheque no.1

655 100

1 485

Shop Equipment & Fittings Cash at Bank Paid Adams Shopfitters for display cabinets, Counters and shelving with cheque no.2

170 100

20 000

Advertising Expense Cash at Bank Advertising in the Community Times (cheque no.3)

605 100

1 000

Prepaid Insurance Cash at Bank Business insurance paid to Bayview Insurance Brokers with cheque no.4

135 100

1 500

Shop Equipment & Fittings Cash at Bank Chq no.5 for a cash register $350, lounge suite $400, table & chairs $380 from Tony’s Second-hand Mart

170 100

1 130

Shop Equipment & Fittings Shareholders Loan Account Loan to company of equipment valued at $5000

170 290

5 000

Cash at Bank Service Revenue Proceeds from cash sales banked

100 400

2 520

Credit

50 000

1 485

20 000

1 000

1 500

1 130

5 000

2 520

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q2.1 – suggested answer (c): GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

Balance

10 000 49 500 2 520 62 020

July

18 20 21 22 23

Account No. 100 Rent GJ1 1 485 Shop Equip & Fittings GJ1 20 000 Advertising GJ1 1 000 Prepaid Insurance GJ1 1 500 Shop Equip & Fittings GJ1 1 130 25 115

36 905

Prepaid Insurance July 22 Cash at Bank

A ccount No. 135 GJ1

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

1 500

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Bank Loan July

Cash at Bank

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

July

Cash at Bank

Account No. 400 GJ1 2 520

Shareholders Loan Account

Share Capital

Service Revenue

Advertising Expense July 21 Cash at Bank

Account No. 280 GJ1 50 000

Account No. 605 GJ1

1 000

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Borrowing Expense July 17 Bank Loan

GJ1

500

Account No. 615

Rent Expense July 18 Cash at Bank

GJ1

1 485

Account No. 655

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q2.1 – suggested answer (d):

Account No. 100 135 170 280 290 300 400 605 615 655

ELECTRONIC EMPORIUM PTY LTD Trial Balance As at 31 July Account Name Debit Cash at Bank Prepaid Insurance Shop Equipment & Fittings Bank Loan Shareholders Loan Account Share Capital Service Revenue Advertising Expense Borrowing Expense Rent Expense

Credit

36 905 1 500 26 130 50 000 5 000 10 000 2 520 1 000 500 1 485 $ 67 520

$67 520

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Chapter 3: accrual accounting concepts Case study Q3.1 – analysis/decision making, recording and reporting It is the end of the month and even though David has not been in business very long he is anxious to see how the business is doing. He hopes he has made profit because he needs to be able to make a reasonable living out of the business. Required (a) Analysing and decision making First, use the worksheet provided to record the trial balance figures from the previous chapter. Second using the information provided below, record the adjusting entries to account for prepayments, accruals and depreciation expenses. Hint: round all calculations to the nearest dollar. • • • • • • •

Rent is $990 per calendar month and rent has been paid for the period up to the end of August. The advertising was for a series of 5 weekly advertisements and only 2 of these were used in July. The commencement date for the annual business insurance premium is 21 July. A telephone was installed in the shop on 21 July, but the bill has not yet been received. David estimates the monthly bill will be $150. Accrue an amount equal to 10 days out of the 31 days only. The company is to pay for the electricity usage for half of the month of July but will not receive a bill until mid-September. David estimates the bill will be approximately $360. Depreciation on shop equipment & fittings is $132 for July. Interest charged to the bank loan account for July is $96.

Complete the worksheet as demonstrated in chapter 3, by determining the adjusted trial balance and the figures that should appear in the statement of profit or loss and statement of financial position. (b) Recording Record the adjusting entries in the general journal and post them to the general ledger accounts developed in the previous chapter. (c) Reporting Prepare a statement of profit or loss, statement of changes in equity, and a statement of financial position for July. (d) Recording Record the closing journal entries in the general journal, and post them to the general ledger. Close off the general ledger accounts. Hint: enter into the chart of accounts a Profit or Loss Summary account (330). (e) Reporting Prepare a post-closing trial balance.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.1 – suggested answer (a): •

Rent is $990 per calendar month and rent has been paid was for the period up to the end of August. o Calculation: $1485 - $990 = $495

•

The advertising was for a series of 5 weekly advertisements and only 2 of these were used in July. o Calculation: $1000/5 = $100 x 3 = $600

•

The commencement date for the annual business insurance premium is 21 July. o Calculation: 10/365 x $1500 = $41

•

A telephone was installed in the shop on 21 July, but the bill has not yet been received. David estimates the monthly bill will be $150. Accrue an amount equal to 10 days only. o Calculation: $150 x 10/31 = $48

•

The company is to pay for electricity usage for half of the month of July but will not receive a bill until mid-September. David estimates the bill will be approximately $360. o Calculation: $360 /4 = $90

•

Depreciation on shop equipment & fittings is $132 for July. o No calculation required – figure given

•

Interest charged to the bank loan account for July is $96. o (No calculation required – figure given)

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

ELECTRONIC EMPORIUM PTY LTD Worksheet For the month ended 31 July Adjustments Adjusted Trial Balance

Trial Balance No. 100 135 170 280 290 300 320 400 605 615 655 140 130 635 665 210 630 215 620 171 640

Account Name Cash at Bank Prepaid Insurance Shop Equipment & Fittings Bank Loan Shareholders Loan Account Share Capital Retained Earnings Service Revenue Advertising Expense Borrowing Expense Rent Expense Prepaid Rent Prepaid Advertising Insurance Expense Telephone Expense Telephone Payable Electricity Expense Electricity Payable Depreciation Expense Accumulated Depreciation: Shop Equipment & Fittings Interest Expense

Dr 36 905 1 500 26 130

Cr (c) 41

50 000 5 000 10 000

Dr 36 905 1 459 26 130

(g) 96

50 096 5 000 10 000

2 520 1 000 500 1 485 67 520

Statement of Profit or Loss Dr Cr

2 520 (b) 600 (a) 990

400 500 495

Statement of Financial Position Dr Cr 36 905 1 459 26 130 50 096 5 000 10 000

2 520 400 500 495

67 520 (a) 990 (b) 600 (c) 41 (d) 48

990 600 41 48 (d) 48

(e) 90 132

1 997

Profit

48 90

90 132

(f) 132 (g) 96 1 997

41 48

90 (e) 90

(f)

990 600

90 132

132 96 67 886

67 886

132 96 1 802 718 2 520

2 520

66 084

2 520

66 084

65 366 718 66 084

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.1 – suggested answer (b): GENERAL JOURNAL Page 2 Date July 31

Account Name Prepaid Rent Rent Expense 1 month’s rent prepaid

Post Ref. 140 655

Debit 990

990

Prepaid Advertising Advertising Expense 3 weekly advertising expenses prepaid

130 605

600

Insurance Expense Prepaid Insurance Portion of insurance premium applicable for July

635 135

Telephone Expense Telephone Payable Estimated telephone expense payable

665 210

Electricity Expense Electricity Payable Estimated electricity expense payable

630 215

Depreciation Expense 620 Accumulated Depreciation: Shop Equipment & 171 Fittings Depreciation for the period

132

Interest Expense Bank Loan Interest charged on bank loan for July

640 280

Credit

600

132

General Journal 2 has been used as the posting reference to indicate adjusting entries posted. General Ledger includes postings for case study questions 3.1(a) and (c).

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d

62 020 36 905

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

b/d

1 500 1 459

Prepaid Rent July 31 Rent Exp.

GJ2

990

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Aug

Balance

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020

Account No. 130

Balance

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140

Account No. 170

Accumulated Depreciation: Shop Equipment & Fittings July 31

Depreciation Exp.

Telephone Payable July

Telephone Exp.

Account No. 210 GJ2 48

July

Electricity Exp.

Account No. 215 GJ2 90

Electricity Payable

Account No. 171 GJ2 132

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Bank Loan 17 31

Cash at Bank Interest Exp.

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

July

Profit or Loss Summary

Account No. 320 GJ3 718

Shareholders Loan Account

Share Capital

Retained Earnings

Profit or Loss Summary No. 330 July 31 Expenses 31 Retained Earnings

Account No. 280 GJ1 50 000 GJ2 96 50 096

July

Account GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

Advertising Expense July 21 Cash at Bank

1 802 718 2 520

July

Revenue

GJ3

2 520

July

Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

July

Profit or Loss Summary

GJ1

500

2 520 2 520

1 000

Borrowing Expense July 17 Bank Loan

GJ3

Account No. 400 GJ1 2 520

Account No. 605 GJ2 600 GJ3 400 1 000

Account No. 615 GJ3 500

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Account No. 630 GJ3 90

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Account No. 635 Profit or Loss Summary GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

July

Account No. 665 Profit or Loss Summary GJ3 48

1 485

Telephone Expense July 31 Telephone Payable

GJ2

Account No. 640 GJ3 96

Account No. 655 GJ2 990 GJ3 495 1 485

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.1 – suggested answer (c): ELECTRONIC EMPORIUM PTY LTD Statement of profit or loss for the period 15 July to 31 July Service Revenue Expenses Advertising Expense Borrowing Expense Depreciation Expense Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense Total Expenses Profit

2 520 400 500 132 90 41 96 495 48 1 802 $ 718

ELECTRONIC EMPORIUM PTY LTD Statement of changes in equity for the period 15 July to 31 July Retained earnings at 15 July Add: Profit Retained earnings at 31 July

0 718 $ 718

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

ELECTRONIC EMPORIUM PTY LTD Statement of Financial Position as at 31 July Current Assets Cash at Bank Prepaid Advertising Prepaid Insurance Prepaid Rent Total Current Assets Non-current Assets Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Total Non-current Assets Total Assets Current Liabilities Telephone Payable Electricity Payable Total Current Liabilities Non-current Liabilities Bank Loan Shareholders Loan Account Total non-current Liabilities Total Liabilities Net Assets Equity Share Capital Retained Earnings Total Equity

36 905 600 1 459 990 39 954 26 130 132 25 998 65 952 48 90 138 50 096 5 000 55 096 55 234 $ 10 718

10 000 718 $ 10 718

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

An alternative presentation: ELECTRONIC EMPORIUM PTY LTD Statement of Financial Position as at 31 July Assets Current Assets Cash at Bank Prepaid Expenses Total Current Assets Non-current Assets Shop Equipment & Fittings (net) Total Non-current Assets Total Assets Liabilities Current Liabilities Accrued Expenses Total Current Liabilities Non-current Liabilities Bank Loan Shareholders Loan Account Total non-current Liabilities Total Liabilities Net Assets Equity Share Capital Retained Earnings Total Equity

36 905 3 049 39 954 25 998 25 998 65 952

138 138 50 096 5 000 55 096 55 234 $ 11 214 10 000 718 $ 10 718

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.1 – suggested answer (d): (See the suggested answer for Q3.1 (a) for postings to the general ledger) GENERAL JOURNAL Page 3 Date July 31

Account Name Service Revenue Profit or Loss Summary To close revenue accounts

Post Ref. 400 330

Debit 2 520

2 520

Profit or Loss Summary Advertising Expense Borrowing Expense Depreciation Expense Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense To close expense accounts

330 605 615 620 630 635 640 655 665

1 802

Profit or Loss Summary Retained Earnings To close profit to retained earnings

330 320

718

Credit

400 500 132 90 41 96 495 48

718

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.1 – suggested answer (e):

Account No. 100 130 135 140 170 171 210 215 280 290 300 320

ELECTRONIC EMPORIUM PTY LTD Post-closing Trial Balance As at 31 July Account Name Debit Cash at Bank Prepaid Advertising Prepaid Insurance Prepaid Rent Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Telephone Payable Electricity Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings

36 905 600 1 459 990 26 130 132

$ 66 084

Credit

48 90 50 096 5 000 10 000 718 66 084

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.2 – decision making: David (the shareholder/director) really does not understand much about accounting so he assumed that all expenses should be accounted for as an expense when paid, and therefore he could not understand when you, as his accountant, explained that the insurance premium should be recorded as a prepaid expense. Required (a) Explain to the necessity of making adjusting entries at the end of an accounting period. Include in your discussion some of the accounting concepts involved and why they are important. (b) What would have been the effect on profit if these adjusting entries had not been made, and would the reports have been useful for decision making without the necessary adjustments?

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.2 – suggested answer (a): When we use the accounting period concept we artificially divide the life of a business into periods such as one year for external reporting purposes, or one month for internal reporting purposes. That allows us to produce useful reports for that period that allow the users of the financial reports to assess the performance of the business, make comparisons against prior periods, or from a management perspective, determine what needs attention for the business to be able to enhance performance or achieve budgets. Users of these financial reports want the information contained in the reports to be relevant as they will be making decisions based on that information. Other important concepts involved in the preparation of those financial reports are materiality (the omission of material information could affect users decisions), full disclosure (non-disclosure of an event affecting the business could affect users decisions), going concern (users assume the business will continue indefinitely, if that is not the case then the values shown in the statement of financial position could be misleading), and comparability (if financial reports are not prepared the same way from one period to the next they may no longer be useful for comparison of performance over time). To produce financial statements that meet these criteria, and using the accrual basis of accounting, we endeavour to match the income earned in one period with the expenses incurred in producing that income in the same period. In order to achieve this adjusting entries are required at the end of an accounting period. Some expenses paid in one period may not have actually expired (been consumed or used up) in that period, as is the case for insurance premiums that are usually for a one year period and will therefore expire month by month over that period. A major item that will be consumed over a very long period of time is plant and equipment. Depreciation expense records the portion of that asset consumed in that period. There may also be some expenses that should be included in that accounting period, but the company has not yet received the bill from the provider. In order to include all relevant data in that period these expenses can be estimated, or apportioned if the bill has arrived prior to the completion of the financial reports. Some costs, such as cost of sales, have a direct relationship to the revenue earned. Others, such as insurance, have an indirect relationship based on the concept of costs involved in running the business for that period. All revenue and expenses relevant for that accounting period must be included in order to produce reports that are useful for the decision making purposes of users.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q3.2 – suggested answer (b): Without any adjusting entries the total expenses would be $2,985, and with revenue of only $2,520 this would result in a loss of $465 instead of the profit of $718. The assets and liabilities in the statement of financial position would have been understated, and the financial reports would be misleading. The owner of the business would have been really disappointed in the performance of his new business.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Chapter 4: inventories David has received requests from customers for laptop computers and other related items, so he has decided that now is the time to expand his computer service business to include the sale of electronic equipment. David plans to keep Electronic Emporium Pty Ltd as a very small business so that keeping track of inventory levels will not be a problem. The periodic inventory system is the simplest method for recording inventory however, the perpetual inventory system has the advantage of providing current inventory and cost of sales values at any time that information is required.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – recording and reporting: In the appendix to chapter 4, we introduce accounting for GST. This question in the case study can be completed without GST or with GST using either the rates for Australia or New Zealand. Inventory can be accounted for using either the periodic or the perpetual method. We have provided the option of completing the case with these methods. Please refer to the instructions from your lecturer as to how this case should be completed. The information you need for the alternative treatments for recording merchandising transactions in the general journal using either (or both) the periodic or perpetual inventory system(s) are as follows: a. ignore GST b. record the transactions using the Australian rate of 10% GST c. record the transactions using the New Zealand rate of 15% GST. Your chart of accounts and general ledger will need to be updated to include the following accounts: Inventory (120), GST Paid (150), GST Collected (250), Sales Revenue (410), Sales Returns & Allowances (420), Discount Received (430), Purchases (500) or Cost of Sales (505), Purchase Returns & Allowances (510), and Freight Costs (520). Hints: i. If you have already used the suggested account numbers in your chart of accounts, use the closest available number. ii. The use of some of the accounts suggested above will depend on the method selected for accounting for inventory – periodic versus perpetual. iii. Use the accounts receivable and accounts payable accounts for all transactions that involve credit terms. iv. To calculate the GST included in a transaction, divide by 11 for Australia and 7.667 for New Zealand, and then round to the nearest dollar. If no mention is made of GST, then that is because there is no GST in that transaction. v. GST included in sales is posted to the GST Collected account and GST included in purchases is posted to the GST Paid account. Any discounts allowed or received will include GST. Please refer to the examples in the appendix to chapter 4 for guidance. vi. Cost of sales figures for the perpetual inventory system only are quoted as $A for Australian students and $NZ for New Zealand students.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Transactions for the month: Aug. 3

5 10 11

14 17

18 21 23 25 31

Received inventory from Samsung on terms of n/30. The total value of their invoice was $12,200 including a freight charge of $100. All figures include GST. Cash sales to the value of $1590 including GST were made and the money banked. (Cost of sales: ignore GST $1,000, $A910, $NZ870.) Received inventory from Sony on terms of 2/7, n/30. The total value of their invoice was $5,500 including GST. Credit sale to Clear Vision Opticians on terms of n/15. The total value of this sale was $3,279 including GST. (Cost of sales: ignore GST $2,130, $A1,938, $NZ1,854.) Clear Vision Opticians returned one of the items sold to them because the screen was cracked. We issued a credit note to them for $298 including GST. (Cost of sales for this item is: ignore GST $210, $A191, $NZ183.) Sent cheque no.6 for $5,390 to Sony in payment of the amount owing to them less discount. Credit sale to ABC Accountants on terms on 5/7, n/30. The total value of this sale was $1,888 including GST. (Cost of sales: ignore GST $1,210, $A1,101, $NZ1,053.) A repayment of $1,000 was made on the bank loan. Cash sales for the week, totalling $4,750 including GST were banked. (Cost of sales: ignore GST $2,575, $A2,345, $NZ2,230.) Received and banked a cheque for $1,794 from ABC Accountants in payment of the amount owing by them, less discount. Received and paid rent the telephone bill of $165 including GST with cheque no.7. The inventory item returned to us by our customer was returned to Samsung as the damage occurred in transit. We received an adjustment (credit) note from Samsung for $210 including GST.

Required (a) Recording Use the general journal to record the transactions for August, with narrations. (b) Recording Post the journal entries to the general ledger. This is a continuation from the previous chapters, so use existing and new general ledger accounts, remembering to include posting references. Use pencil to subtotal and calculate the balance of each account. Do not close off these accounts as they will be used again in the next chapter. (c) Reporting Prepare a trial balance on 31 August.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – suggested answer (periodic & ignore GST): GENERAL JOURNAL Page 4 Date Aug 3

Account Name Purchases Freight Costs Accounts Payable Inventory purchased from Samsung on terms n/30

Post Ref. 500 520 200

Debit 12 100 100

12 200

Cash at Bank Sales Revenue Cash sales banked

100 410

1 590

Purchases Accounts Payable Inventory purchased from Sony on terms 2/7, n/30

500 200

5 500

Accounts Receivable Sales Revenue Sale to Clear Vision Opticians on terms of n/15

110 410

3 279

Sales Returns & Allowances Accounts Receivable Inventory item returned by Clear Vision Opticians

420 110

298

Accounts Payable Discount Received Cash at Bank Payment to Sony less discount

200 430 100

5 500

Accounts Receivable Sales Revenue Sale to ABC Accountants on terms of 5/7, n/30

110 410

1 888

Bank Loan Cash at Bank Loan repayment

280 100

1 000

Cash at Bank Sales Revenue Cash sales for the week banked

100 410

4 750

Credit

1 590

5 500

3 279

298

110 5 390

1 888

1 000

4 750

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Cash at Bank Discount Allowed Accounts Receivable Payment from ABC Accountants less discount

100 625 110

1 794 94

Telephone Expense Cash at Bank Payment of telephone bill with cheque #7

665 100

165

Accounts Payable Purchases Returns & Allowances Inventory items returned to Samsung

200 510

210

1 888

165

210

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d GJ4 GJ4 GJ4

62 020 36 905 1 590 4 750 1 794 45 039

Balance

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25

Acc. Payable Bank Loan Telephone Exp.

Aug

13 23

Sales Returns Cash/Discount

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 6 555

38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

GJ4 GJ4

Balance

3 279 1 888 5 167

Account No. 110 GJ4 298 GJ4 1 888 2 186

2 981

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

b/d

1 500 1 459

July

Account No. 130

Balance

Prepaid Rent July 31 Rent Exp.

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140 GJ2

990

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Accumulated Depreciation: Shop Equipment & Fittings July 31

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns

GJ4 GJ4

5 500 210 5 710

Aug

3 10

Depreciation Exp.

Purchases/Freight Purchases

Balance Telephone Payable July

GJ4

1 000

11 990 Account No. 210 GJ2 48

Account No. 215 GJ2 90

July

Electricity Exp.

July

17 31

Cash at Bank Interest Exp.

Balance Shareholders Loan Account

Account No. 280 GJ1 50 000 GJ2 96 50 096 49 096

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

Share Capital

Account No. 200 GJ4 12 200 GJ4 5 500 17 700

Telephone Exp.

Electricity Payable

Bank Loan Aug 18 Cash at Bank

Account No. 171 GJ2 132

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Retained Earnings

Profit or Loss Summary July 31 Expenses 31 Retained Earnings

GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

GJ3

July

Profit or Loss Summary

Account No. 320 GJ3 718

1 802 718 2 520

July

Revenue

Account No. 330 GJ3 2 520

2 520

July

2 520

Cash at Bank

Sales Revenue Aug

Sales Returns & Allowances Aug 13 Acc. Receivable

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

Account No. 400 GJ1 2 520

Account No. 410 GJ4 1 590 GJ4 3 279 GJ4 1 888 GJ4 4 750 11 507

Account No. 420 GJ4

298

Discount Received Aug

Purchases Aug 3 Acc. Payable 10 Acc. Payable

Acc. Payable

Account No. 430 GJ4 110

Account No. 500 GJ4 GJ4

12 100 5 500 17 600

Purchase Returns & Allowances Aug

Acc. Payable

Account No. 510 GJ4 210

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Freight Costs Aug 3 Acc. Payable

GJ4

100

Account No. 520

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

1 000

Account No. 605 GJ2 600 GJ3 400 1 000

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Discount Allowed Aug 23 Acc. Receivable

GJ4

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Account No. 630 GJ3 90

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Profit or Loss Summary

Account No. 635 GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Account No. 640 GJ3 96

Account No. 625

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

July

Profit or Loss Summary

1 485

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

Account No. 655 GJ2 990 GJ3 495 1 485

Account No. 665 GJ3 48

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Account No. 100 110 130 135 140 170 171 200 210 215 280 290 300 320 410 420 430 500 510 520 625 665

ELECTRONIC EMPORIUM PTY LTD Trial Balance As at 31 August Account Name Debit Cash at Bank Accounts Receivable Prepaid Advertising Prepaid Insurance Prepaid Rent Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings Sales Revenue Sales Returns & Allowances Discount Received Purchases Purchase Returns & Allowances Freight Costs Discount Allowed Telephone Expense

Credit

38 484 2 981 600 1 459 990 26 130 132 11 990 48 90 49 096 5 000 10 000 718 11 507 298 110 17 600 210 100 94 165 $ 88 901

$ 88 901

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – suggested answer (perpetual & ignore GST): GENERAL JOURNAL Page 4 Date Aug 3

Account Name Inventory Freight Costs Accounts Payable Inventory purchased from Samsung on terms n/30

Post Ref. 120 520 200

Debit 12 100 100

12 200

Cash at Bank Sales Revenue Cash sales banked

100 410

1 590

Cost of Sales Inventory Cost of inventory sold for cash

505 120

1 000

Inventory Accounts Payable Inventory purchased from Sony on terms 2/7, n/30

120 200

5 500

Accounts Receivable Sales Revenue Sale to Clear Vision Opticians on terms of n/15

110 410

3 279

Cost of Sales Inventory Cost of inventory sold to Clear Vision Opticians

505 120

2 130

Sales Returns & Allowances Accounts Receivable Inventory item returned by Clear Vision Opticians

420 110

298

Inventory Cost of Sales Cost of goods returned by Clear Vision Opticians

120 505

210

Accounts Payable Discount Received Cash at Bank Payment to Sony less discount

200 430 100

5 500

Credit

1 590

1 000

5 500

3 279

2 130

298

210

110 5 390

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Accounts Receivable Sales Revenue Sale to ABC Accountants on terms of 5/7, n/30

110 410

1 888

Cost of Sales Inventory Cost of inventory sold to ABC Accountants

505 120

1 210

Bank Loan Cash at Bank Loan repayment

280 100

1 000

Cash at Bank Sales Revenue Cash sales for the week banked

100 410

4 750

Cost of Sales Inventory Cost of inventory sold for cash

505 120

2 575

Cash at Bank Discount Allowed Accounts Receivable Payment from ABC Accountants less discount

100 625 110

1 794 94

Telephone Expense Cash at Bank Payment of telephone bill with cheque #7

665 100

165

Accounts Payable Inventory Inventory items returned to Samsung

200 120

210

1 888

1 210

1 000

4 750

2 575

1 888

165

210

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d GJ4 GJ4 GJ4

62 020 36 905 1 590 4 750 1 794 45 039

Balance

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25

Acc. Payable Bank Loan Telephone Exp.

Aug

13 23

Sales Returns Cash/Discount

Account No. 110 GJ4 298 GJ4 1 888 2 186

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 7 125

38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

GJ4 GJ4

Balance

3 279 1 888 5 167 2 981

Inventory Aug 3 Acc. Payable 10 Acc. Payable 13 Cost of Sales

GJ4 GJ4 GJ4

Balance

12 100 5 500 210 17 810

Aug

5 11 17 21 31

10 685

Prepaid Advertising July 31 Advertising Exp

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

b/d

1 500 1 459

GJ2

990

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 6 555

July

Account No. 130

Balance

Prepaid Rent July 31 Rent Exp.

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Accumulated Depreciation: Shop Equipment & Fittings July 31

Depreciation Exp.

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns

Purchases/Freight Purchases

GJ4 GJ4

5 500 210 5 710

Aug

3 10

Balance

Telephone Payable

GJ4

1 000

11 990

July

Telephone Exp.

July

Electricity Exp.

Account No. 215 GJ2 90

July

17 31

Cash at Bank Interest Exp.

Balance Shareholders Loan Account

Account No. 280 GJ1 50 000 GJ2 96 50 096 49 096

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

Share Capital

Account No. 200 GJ4 12 200 GJ4 5 500 17 700

Account No. 210 GJ2 48

Electricity Payable

Bank Loan Aug 18 Cash at Bank

Account No. 171 GJ2 132

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Retained Earnings

Profit or Loss Summary July 31 Expenses 31 Retained Earnings

GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

GJ3

July

Profit or Loss Summary

Account No. 320 GJ3 718

1 802 718 2 520

July

Revenue

Account No. 330 GJ3 2 520

2 520

July

Cash at Bank

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

2 520

Sales Revenue

Sales Returns & Allowances Aug 13 Acc. Receivable

Account No. 400 GJ1 2 520

Account No. 410 GJ4 1 590 GJ4 3 279 GJ4 1 888 GJ4 4 750 11 507

Account No. 420 GJ4

298

Discount Received

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory

GJ4 GJ4 GJ4 GJ4

Balance

1 000 2 130 1 210 2 575 6 915

Aug

Acc. Payable

Account No. 430 GJ4 110

Aug

Inventory

Account No. 505 GJ4 210

6 705

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Freight Costs Aug 3 Acc. Payable

GJ4

100

Account No. 520

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

1 000

Account No. 605 GJ2 600 GJ3 400 1 000

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Discount Allowed Aug 23 Acc. Receivable

GJ4

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Account No. 630 GJ3 90

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Profit or Loss Summary

Account No. 635 GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Account No. 640 GJ3 96

Account No. 625

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

July

Profit or Loss Summary

1 485

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

Account No. 655 GJ2 990 GJ3 495 1 485

Account No. 665 GJ3 48

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Account No. 100 110 120 130 135 140 170 171 200 210 215 280 290 300 320 410 420 430 505 520 625 665

ELECTRONIC EMPORIUM PTY LTD Trial Balance As at 31 August Account Name Debit Cash at Bank Accounts Receivable Inventory Prepaid Advertising Prepaid Insurance Prepaid Rent Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings Sales Revenue Sales Returns & Allowances Discount Received Cost of Sales Freight Costs Discount Allowed Telephone Expense

Credit

38 484 2 981 10 685 600 1 459 990 26 130 132 11 990 48 90 49 096 5 000 10 000 718 11 507 298 110 6 705 100 94 165 $ 88 901

$ 88 901

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – suggested answer (periodic & 10% GST): GENERAL JOURNAL Page 4 Date Aug 3

Account Name Purchases Freight Costs GST Paid Accounts Payable Inventory purchased from Samsung on terms n/30

Post Ref. 500 520 150 200

Debit 11 000 91 1 109

12 200

Cash at Bank Sales Revenue GST Collected Cash sales banked

100 410 250

1 590

Purchases GST Paid Accounts Payable Inventory purchased from Sony on terms 2/7, n/30

500 150 200

5 000 500

Accounts Receivable Sales Revenue GST Collected Sale to Clear Vision Opticians on terms of n/15

110 410 250

3 279

Sales Returns & Allowances GST Collected Accounts Receivable Inventory item returned by Clear Vision Opticians

420 250 110

271 27

Accounts Payable Discount Received GST Paid Cash at Bank Payment to Sony less discount

200 430 150 100

5 500

Accounts Receivable Sales Revenue GST Collected Sale to ABC Accountants on terms of 5/7, n/30

110 410 250

1 888

Bank Loan Cash at Bank

280 100

1 000

Credit

1 445 145

5 500

2 981 298

298

100 10 5 390

1 716 172

1 000 52

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Loan repayment 21

Cash at Bank Sales Revenue GST Collected Cash sales for the week banked

100 410 250

4 750

Cash at Bank Discount Allowed GST Collected Accounts Receivable Payment from ABC Accountants less discount

100 625 250 110

1 794 85 9

Telephone Expense GST Paid Cash at Bank Payment of telephone bill with cheque #7

665 150 100

150 15

Accounts Payable Purchases Returns & Allowances GST Paid Inventory items returned to Samsung

200 510 150

210

4 318 432

1 888

165

191 19

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d GJ4 GJ4 GJ4

62 020 36 905 1 590 4 750 1 794 45 039

Balance

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25

Acc. Payable Bank Loan Telephone Exp.

Aug

13 23

Sales Returns Cash/Discount

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 6 555

38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

GJ4 GJ4

Balance

3 279 1 888 5 167

Account No. 110 GJ4 298 GJ4 1 888 2 186

2 981

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

Balance

b/d

1 500 1 459

Prepaid Rent July 31 Rent Exp.

GJ2

990

GST Paid Aug 3 10 25

GJ4 GJ4 GJ4

1 109 500 15 1 624

July

Account No. 130

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140

Acc. Payable Acc. Payable Cash at Bank

Balance

Aug

14 31

Acc. Payable Acc. Payable

Account No. 150 GJ4 10 GJ4 19 29

1 595

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns

GJ4 GJ4

5 500 210 5 710

July

Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Balance

Telephone Payable

GJ4 GJ4

27 9 36

GJ4

1 000

Telephone Exp.

Account No. 210 GJ2 48

July

Electricity Exp.

Account No. 215 GJ2 90

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

July

17 31

Cash at Bank Interest Exp.

Balance Shareholders Loan Account July

11 990

Balance Bank Loan Aug 18 Cash at Bank

Account No. 200 GJ4 12 200 GJ4 5 500 17 700

July

Electricity Payable

GST Collected Aug 13 Acc. Receivable 23 Acc. Receivable

Accoun t No. 171 GJ2 132

Shop Equip & Fit

Account No. 250 GJ4 145 GJ4 298 GJ4 172 GJ4 432 1 047 1 011 Account No. 280 GJ1 50 000 GJ2 96 50 096 49 096 Account No. 290 GJ1 5 000

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Share Capital July

Cash at Bank

Account No. 300 GJ1 10 000

July

Profit or Loss Summary

Account No. 320 GJ3 718

1 802 718 2 520

July

Revenue

2 520

July

Cash at Bank

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

Retained Earnings

Profit or Loss Summary July 31 Expenses 31 Retained Earnings

GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

GJ3

2 520

Sales Revenue

Sales Returns & Allowances Aug 13 Acc. Receivable

Account No. 400 GJ1 2 520

Account No. 410 GJ4 1 445 GJ4 2 981 GJ4 1 716 GJ4 4 318 10 460

Account No. 420 GJ4

271

Discount Received Aug

Purchases Aug 3 10

Account No. 330 GJ3 2 520

Acc. Payable

Account No. 430 GJ4 100

Account No. 500 Acc. Payable Acc. Payable

GJ4 GJ4

11 000 5 000 16 000

Purchase Returns & Allowances Aug

Acc. Payable

Account No. 510 GJ4 191

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Freight Costs Aug 3 Acc. Payable

GJ4

Account No. 520

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

1 000

Account No. 605 GJ2 600 GJ3 400 1 000

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Discount Allowed Aug 23 Acc. Receivable

GJ4

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Account No. 630 GJ3 90

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Profit or Loss Summary

Account No. 635 GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Account No. 640 GJ3 96

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Account No. 625

1 485

Account No. 655 GJ2 990 GJ3 495 1 485

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 150

July

Profit or Loss Summary

Account No. 665 GJ3 48

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Account No. 100 110 130 140 145 150 170 171 200 210 215 250 280 290 300 320 410 420 430 500 510 520 625 665

ELECTRONIC EMPORIUM PTY LTD Trial Balance As at 31 August Account Name Debit Cash at Bank Accounts Receivable Prepaid Advertising Prepaid Insurance Prepaid Rent GST Paid Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable GST Collected Bank Loan Shareholders Loan Account Share Capital Retained Earnings Sales Revenue Sales Returns & Allowances Discount Received Purchases Purchase Returns & Allowances Freight Costs Discount Allowed Telephone Expense

Credit

38 484 2 981 600 1 459 990 1 595 26 130 132 11 990 48 90 1 011 49 096 5 000 10 000 718 10 460 271 100 16 000 191 91 85 150 $ 88 836

$ 88 836

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – suggested answer (perpetual & 10% GST): GENERAL JOURNAL Page 4 Date Aug 3

Account Name Inventory Freight Costs GST Paid Accounts Payable Inventory purchased from Samsung on terms n/30

Post Ref. 120 520 150 200

Debit 11 000 91 1 109

12 200

Cash at Bank Sales Revenue GST Collected Cash sales banked

100 410 250

1 590

Cost of Sales Inventory Cost of inventory sold for cash

505 120

910

Inventory GST Paid Accounts Payable Inventory purchased from Sony on terms 2/7, n/30

10 150 200

5 000 500

Accounts Receivable Sales Revenue GST Collected Sale to Clear Vision Opticians on terms of n/15

110 410 250

3 279

Cost of Sales Inventory Cost of inventory sold to Clear Vision Opticians

505 120

1 938

Sales Returns & Allowances GST Collected Accounts Receivable Inventory item returned by Clear Vision Opticians

420 250 110

271 27

Inventory Cost of Sales Cost of goods returned by Clear Vision Opticians

120 505

191

Credit

1 445 145

910

5 500

2 981 298

1 938

298

191

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Accounts Payable Discount Received GST Paid Cash at Bank Payment to Sony less discount

200 430 150 100

5 500

Accounts Receivable Sales Revenue GST Collected Sale to ABC Accountants on terms of 5/7, n/30

110 410 250

1 888

Cost of Sales Inventory Cost of inventory sold to ABC Accountants

505 120

1 101

Bank Loan Cash at Bank Loan repayment

280 100

1 000

Cash at Bank Sales Revenue GST Collected Cash sales for the week banked

100 410 250

4 750

Cost of Sales Inventory Cost of inventory sold for cash

505 120

2 345

Cash at Bank Discount Allowed GST Collected Accounts Receivable Payment from ABC Accountants less discount

100 625 250 110

1 794 85 9

Telephone Expense GST Paid Cash at Bank Payment of telephone bill with cheque #7

665 150 100

150 15

Accounts Payable Inventory GST Paid Inventory items returned to Samsung

200 120 150

210

100 10 5 390

1 716 172

1 101

1 000

4 318 432

2 345

1 888

165

191 19

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d GJ4 GJ4 GJ4

62 020 36 905 1 590 4 750 1 794 45 039

Balance

GJ4 GJ4

Balance

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25

Acc. Payable Bank Loan Telephone Exp.

3 279 1 888 5 167

Aug

13 23

Sales Returns Cash/Discount

Account No. 110 GJ4 298 GJ4 1 888 2 186

Aug

5 11 17 21 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable

Account No. 120 GJ4 910 GJ4 1 938 GJ4 1 101 GJ4 2 345 GJ4 191 6 485

2 981

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

Balance

11 000 5 000 191 16 191 9 706

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

b/d

1 500 1 459

Prepaid Rent July 31 Rent Exp.

GJ2

990

GST Paid Aug 3 10 25

GJ4 GJ4 GJ4

1 109 500 15 1 624

18 20 21 22 23 31

38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Inventory Aug 3 10 13

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 6 555

July

Account No. 130

Balance

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140

Acc. Payable Acc. Payable Cash at Bank

Aug

14 31

Acc. Payable Acc. Payable

Account No. 150 GJ4 10 GJ4 19 29

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Balance

1 595

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns

GJ4 GJ4

5 500 210 5 710

July

Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Accoun t No. 171 GJ2 132

Account No. 200 GJ4 12 200 GJ4 5 500 17 700

Balance Telephone Payable July

Telephone Exp.

July

Electricity Exp.

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

11 990 Account No. 210 GJ2

Electricity Payable

GST Collected Aug 13 Acc. Receivable 23 Acc. Receivable

GJ4 GJ4

27 9 36

Balance Bank Loan Aug 18 Cash at Bank

GJ4

1 000

July

17 31

Cash at Bank Interest Exp.

Balance

Shareholders Loan Account

Account No. 215 GJ2 90

Account No. 250 GJ4 145 GJ4 298 GJ4 172 GJ4 432 1 047 1 011 Account No. 280 GJ1 50 000 GJ2 96 50 096 49 096

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

Share Capital

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Retained Earnings July

Profit or Loss Summary 330 July 31 Expenses 31 Retained Earnings

Profit or Loss Summary

Account No. 320 GJ3 715

Account No. GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

GJ3

1 802 718 2 520

July

Revenue

2 520

July

Cash at Bank

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

2 520 2 520

Sales Revenue

Sales Returns & Allowances Aug 13 Acc. Receivable

GJ3

Account No. 400 GJ1 2 520

Account No. 410 GJ4 1 445 GJ4 2 981 GJ4 1 716 GJ4 4 318 10 460

Account No. 420 GJ4

271

Discount Received

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory

GJ4 GJ4 GJ4 GJ4

Balance

910 1 938 1 101 2 345 6 294

Aug

Acc. Payable

Aug

Inventory

Account No. 430 GJ4 100

Account No. 505 GJ4 191

6 103

Freight Costs Aug 3 Acc. Payable

GJ4

Account No. 520

Advertising Expense July 21 Cash at Bank

GJ1

1 000 1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Account No. 605 GJ2 600 GJ3 400 1 000

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Discount Allowed Aug 23 Acc. Receivable

GJ4

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Profit or Loss Summary

Account No. 635 GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Account No. 640 GJ3 96

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

July

Profit or Loss Summary

Account No. 625

1 485

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 150

Account No. 630 GJ3 90

Account No. 655 GJ2 990 GJ3 495 1 485

Account No. 665 GJ3 48

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Account No. 100 110 120 130 135 140 150 170 171 200 210 215 250 280 290 300 320 410 420 430 505 520 625 665

ELECTRONIC EMPORIUM PTY LTD Trial Balance As at 31 August Account Name Debit Cash at Bank Accounts Receivable Inventory Prepaid Advertising Prepaid Insurance Prepaid Rent GST Paid Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable GST Collected Bank Loan Shareholders Loan Account Share Capital Retained Earnings Sales Revenue Sales Returns & Allowances Discount Received Cost of Sales Freight Costs Discount Allowed Telephone Expense

Credit

38 484 2 981 9 706 600 1 459 990 1 595 26 130 132 11 990 48 90 1 011 49 096 5 000 10 000 718 10 460 271 100 6 103 91 85 150 $ 88 645

$ 88 645

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – suggested answer (periodic & 15% GST): GENERAL JOURNAL Page 4 Date Aug 3

Account Name Purchases Freight Costs GST Paid Accounts Payable Inventory purchased from Samsung on terms n/30

Post Ref. 500 520 150 200

Debit 10 522 87 1 591

12 200

Cash at Bank Sales Revenue GST Collected Cash sales banked

100 410 250

1 590

Purchases GST Paid Accounts Payable Inventory purchased from Sony on terms 2/7, n/30

500 150 200

4 957 743

Accounts Receivable Sales Revenue GST Collected Sale to Clear Vision Opticians on terms of n/15

110 410 250

3 279

Sales Returns & Allowances GST Collected Accounts Receivable Inventory item returned by Clear Vision Opticians

420 250 110

259 39

Accounts Payable Discount Received GST Paid Cash at Bank Payment to Sony less discount

200 430 150 100

5 500

Accounts Receivable Sales Revenue GST Collected Sale to ABC Accountants on terms of 5/7, n/30

110 410 250

1 888

Bank Loan Cash at Bank

280 100

1 000

Credit

1 383 207

5 500

2 851 428

298

96 14 5 390

1 642 246

1 000 67

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Loan repayment 21

Cash at Bank Sales Revenue GST Collected Cash sales for the week banked

100 410 250

4 750

Cash at Bank Discount Allowed GST Collected Accounts Receivable Payment from ABC Accountants less discount

100 625 250 110

1 794 82 12

Telephone Expense GST Paid Cash at Bank Payment of telephone bill with cheque #7

665 150 100

143 22

Accounts Payable Purchases Returns & Allowances GST Paid Inventory items returned to Samsung

200 510 150

210

4 130 620

1 888

165

183 27

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d GJ4 GJ4 GJ4

62 020 36 905 1 590 4 750 1 794 45 039

Balance

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25

Acc. Payable Bank Loan Telephone Exp.

Aug

13 23

Sales Returns Cash/Discount

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 6 555

38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

GJ4 GJ4

Balance

3 279 1 888 5 167

Account No. 110 GJ4 298 GJ4 1 888 2 186

2 981

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

Balance

b/d

1 500 1 459

Prepaid Rent July 31 Rent Exp.

GJ2

990

GST Paid Aug 3 10 25

GJ4 GJ4 GJ4

1 591 717 22 2 330

July

Account No. 130

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140

Acc. Payable Acc. Payable Cash at Bank

Balance

Aug

14 31

Acc. Payable Acc. Payable

Account No. 150 GJ4 14 GJ4 27 41

2 289

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns

GJ4 GJ4

5 500 210 5 710

July

Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Balance Telephone Payable

GJ4 GJ4

39 12 51

GJ4

1 000

Telephone Exp.

Account No. 210 GJ2 48

July

Electricity Exp.

Account No. 215 GJ2 90

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

July

17 31

Cash at Bank Interest Exp.

Balance Shareholders Loan Account

Account No. 250 GJ4 207 GJ4 428 GJ4 246 GJ4 620 1 501 1 450 Account No. 280 GJ1 50 000 GJ2 96 50 096 49 096

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

July

Profit or Loss Summary

Account No. 320 GJ3 718

Share Capital

Retained Earnings

11 990

Balance Bank Loan Aug 18 Cash at Bank

Account No. 200 GJ4 12 200 GJ4 5 500 17 700

July

Electricity Payable

GST Collected Aug 13 Acc. Receivable 23 Acc. Receivable

Accoun t No. 171 GJ2 132

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Profit or Loss Summary 330 July 31 Expenses 31 Retained Earnings

Account No. GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

GJ3

1 802 718 2 520

July

Revenue

2 520

July

Cash at Bank

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

Account No. 400 GJ1 2 520

Account No. 410 GJ4 1 383 GJ4 2 851 GJ4 1 642 GJ4 4 130 10 006

Account No. 420 GJ4

259

Discount Received Aug

Purchases Aug 3 10

2 520 2 520

Sales Revenue

Sales Returns & Allowances Aug 13 Acc. Receivable

GJ3

Acc. Payable

Account No. 430 GJ4 96

Account No. 500 Acc. Payable Acc. Payable

GJ4 GJ4

10 522 4 783 15 305

Purchase Returns & Allowances Aug

Freight Costs Aug 3 Acc. Payable

GJ4

Advertising Expense July 21 Cash at Bank

GJ1

1 000

Acc. Payable

Account No. 510 GJ4 183

Account No. 520

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Account No. 605 GJ2 600 GJ3 400 1 000

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Discount Allowed Aug 23 Acc. Receivable

GJ4

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Account No. 630 GJ3 90

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Profit or Loss Summary

Account No. 635 GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Account No. 640 GJ3 96

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

July

Profit or Loss Summary

Account No. 625

1 485

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 143

Account No. 655 GJ2 990 GJ3 495 1 485

Account No. 665 GJ3 48

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Account No. 100 110 130 135 140 150 170 171 200 210 215 250 280 290 300 320 410 420 430 500 510 520 625 665

Credit

38 484 2 981 600 1 459 990 2 289 26 130 132 11 990 48 90 1 450 49 096 5 000 10 000 718 10 006 259 96 15 305 183 87 82 143 $ 88 809

$ 88 809

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.1 – suggested answer (perpetual & 15% GST): GENERAL JOURNAL Page 4 Date Aug 3

Account Name Inventory Freight Costs GST Paid Accounts Payable Inventory purchased from Samsung on terms n/30

Post Ref. 120 520 150 200

Debit 10 522 87 1 591

12 200

Cash at Bank Sales Revenue GST Collected Cash sales banked

100 410 250

1 590

Cost of Sales Inventory Cost of inventory sold for cash

505 120

870

Inventory GST Paid Accounts Payable Inventory purchased from Sony on terms 2/7, n/30

10 150 200

4 783 717

Accounts Receivable Sales Revenue GST Collected Sale to Clear Vision Opticians on terms of n/15

110 410 250

3 279

Cost of Sales Inventory Cost of inventory sold to Clear Vision Opticians

505 120

1 854

Sales Returns & Allowances GST Collected Accounts Receivable Inventory item returned by Clear Vision Opticians

420 250 110

259 39

Inventory Cost of Sales Cost of goods returned by Clear Vision Opticians

120 505

183

Credit

1 383 207

870

5 500

2 851 428

1 854

298

183

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Accounts Payable Discount Received GST Paid Cash at Bank Payment to Sony less discount

200 430 150 100

5 500

Accounts Receivable Sales Revenue GST Collected Sale to ABC Accountants on terms of 5/7, n/30

110 410 250

1 888

Cost of Sales Inventory Cost of inventory sold to ABC Accountants

505 120

1 053

Bank Loan Cash at Bank Loan repayment

280 100

1 000

Cash at Bank Sales Revenue GST Collected Cash sales for the week banked

100 410 250

4 750

Cost of Sales Inventory Cost of inventory sold for cash

505 120

2 230

Cash at Bank Discount Allowed GST Collected Accounts Receivable Payment from ABC Accountants less discount

100 625 250 110

1 794 82 12

Telephone Expense GST Paid Cash at Bank Payment of telephone bill with cheque #7

665 150 100

143 22

Accounts Payable Inventory GST Paid Inventory items returned to Samsung

200 120 150

210

96 14 5 390

1 642 246

1 053

1 000

4 130 620

2 230

1 888

165

183 27

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

GJ1 GJ1 GJ1

10 000 49 500 2 520

b/d GJ4 GJ4 GJ4

62 020 36 905 1 590 4 750 1 794 45 039

Balance

GJ4 GJ4

Balance

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25

Acc. Payable Bank Loan Telephone Exp.

3 279 1 888 5 167

Aug

13 23

Sales Returns Cash/Discount

Account No. 110 GJ4 298 GJ4 1 888 2 186

Aug

5 11 17 21 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable

Account No. 120 GJ4 870 GJ4 1 854 GJ4 1 053 GJ4 2 230 GJ4 183 6 190

2 981

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

Balance

10 522 4 783 183 15 488 9 298

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

Aug

b/d

1 500 1 459

Prepaid Rent July 31 Rent Exp.

GJ2

990

GST Paid Aug 3 10 25

GJ4 GJ4 GJ4

1 591 717 22 2 330

18 20 21 22 23 31

38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Inventory Aug 3 10 13

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 6 555

July

Account No. 130

Balance

July

31 31

Insurance Exp. Balance

Account No. 135 GJ2 41 c/d 1 459 1 500

Account No. 140

Acc. Payable Acc. Payable Cash at Bank

Balance

Aug

14 31

Acc. Payable Acc. Payable

Account No. 150 GJ4 14 GJ4 27 41

2 289

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns

GJ4 GJ4

5 700 210 5 910

July

Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Balance Telephone Payable

GJ4 GJ4

39 12 51

GJ4

1 000

Telephone Exp.

Account No. 210 GJ2 48

July

Electricity Exp.

Account No. 215 GJ2 90

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

July

17 31

Cash at Bank Interest Exp.

Balance

Shareholders Loan Account July

Shop Equip & Fit

July

Cash at Bank

Share Capital

11 990

Balance Bank Loan Aug 18 Cash at Bank

Account No. 200 GJ4 12 200 GJ4 5 700 17 900

July

Electricity Payable

GST Collected Aug 13 Acc. Receivable 23 Acc. Receivable

Accoun t No. 171 GJ2 132

Account No. 250 GJ4 207 GJ4 428 GJ4 246 GJ4 620 1 501 1 450 Account No. 280 GJ1 50 000 GJ2 96 50 096 49 096

Account No. 290 GJ1 5 000

Account No. 300 GJ1 10 000

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Retained Earnings July

Profit or Loss Summary 330 July 31 Expenses 31 Retained Earnings

Profit or Loss Summary

Account No. 320 GJ3 718

Account No. GJ3 GJ3

Service Revenue July 31 Profit or Loss Summary

GJ3

1 802 718 2 520

July

Revenue

2 520

July

Cash at Bank

Aug

5 11 17 21

Cash at Bank Acc. Receivable Acc. Receivable Cash at Bank

2 520 2 520

Sales Revenue

Sales Returns & Allowances Aug 13 Acc. Receivable

GJ3

Account No. 400 GJ1 2 520

Account No. 410 GJ4 1 383 GJ4 2 851 GJ4 1 642 GJ4 4 130 10 006

Account No. 420 GJ4

259

Discount Received

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory

GJ4 GJ4 GJ4 GJ4

Balance

870 1 854 1 053 2 230 6 007

Aug

Acc. Payable

Account No. 430 GJ4 96

Aug

Inventory

Account No. 505 GJ4 183

5 824

Freight Costs Aug 3 Acc. Payable

GJ4

Account No. 520

Advertising Expense July 21 Cash at Bank

GJ1

1 000 1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Account No. 605 GJ2 600 GJ3 400 1 000

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD

GJ2

132

July

Profit or Loss Summary

Account No. 620 GJ3 132

Discount Allowed Aug 23 Acc. Receivable

GJ4

Electricity Expense July 31 Electricity Payable

GJ2

July

Profit or Loss Summary

Account No. 630 GJ3 90

Insurance Expense July 31 Prepaid Insurance

GJ2

July

Profit or Loss Summary

Account No. 635 GJ3 41

Interest Expense July 31 Bank Loan

GJ2

July

Profit or Loss Summary

Account No. 640 GJ3 96

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

July

Profit or Loss Summary

Account No. 625

1 485

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 143

Account No. 655 GJ2 990 GJ3 495 1 485

Account No. 665 GJ3 48

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Account No. 100 110 120 130 135 140 150 170 171 200 210 215 250 280 290 300 320 410 420 430 505 520 625 665

Credit

38 484 2 981 9 298 600 1 459 990 2 289 26 130 132 11 990 48 90 1 450 49 096 5 000 10 000 718 10 006 259 96 5 824 87 82 143 $ 88 626

$ 88 626

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.2 – decision making Turnover for the short time the company has been trading was $2,520 in July and around $11,000 in August. At the time of registering the business with the tax authority it was a service business and the estimate of an annual turnover of less than $60,000 seemed reasonable. The business is now growing much faster than expected and it is looking as though David may have underestimated the annual turnover. Required Is the company required to register for GST now, and if not when should it register? Should the company voluntarily register for GST? When preparing your response, include the research you completed in chapter one case study and the results of trading in August. Do you believe there is any advantage to registering for GST now?

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q4.2 – suggested answer: Is the company required to register for GST now? The legislation on the goods and services tax in each of the countries is as follows: • In Australia you must be registered for GST if your annual GST turnover or projected annual turnover is $75,000 or more or if you provide taxi travel or are a car hire operator. If it is less than $75,000 registration is voluntary. • In New Zealand businesses must become registered for GST once they reach (or expect to reach in the next 12 months) an annual turnover of more than $60,000. If your turnover is under $60,000 you may choose to register voluntarily. At present the company has not reached the threshold for either country. New Zealand includes a clause ‘expect to reach in the next 12 months’ and Australia also refers to ‘projected annual turnover’ which could be interpreted as a requirement to register now, given that the projected income for the company will be in excess of $60,000 within 12 months. Companies that do not register for GST from the commencement of business usually do so for a reason. The usual practice in Australia is not to register until you reach the threshold, or expect to do so within the next month. You are therefore required to continually monitor your turnover and register for GST within 21 days of it reaching the GST registration threshold. Should the company voluntarily register for GST? The advantage of registering for GST is that the business can claim back GST paid on inputs and for this company those inputs would include things like rent paid on the shop, electricity, telephone, freight, advertising and so on. It is not limited to GST on inventory acquired for resale. It would also have included GST on the cost of the shop fittings. When a business acquires capital items or is busy building up its inventory, it can often result in a refund of GST from the tax office (Inland Revenue), as would be the case for this business as GST Paid is greater than GST Collected. The disadvantage in registering for GST is that the business must maintain good records to ensure that all income is reported and that they are able to substantiate claims for input credits, should the business be audited by the tax authority. This for very small businesses means more paperwork and often that is the side of business that they dislike the most. Some may argue that having to charge GST on sales increases prices and makes you less competitive, but that is not necessarily so. For example, assume you are not registered for GST and you buy an item for $110 and mark it up by 100% you sell it for $220. If you are registered for GST you buy the same item for $110, but you get the $10 GST back from the government, so it cost you $100. Mark that up by 100% and you have a selling price of $200, to which you add GST and sell it for $220. Same selling price, and same profit margin.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Conclusion Given that the business is growing fast and will soon be required to register for GST anyway, as well as the fact that at present they are in the situation where they would receive a refund of GST because expenses are greater than revenue, then it would be advisable for them to voluntarily register now.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Chapter 5: reporting and analysing inventory Case study Q5.1 – decision making, recording and reporting It is the end of the month and David is happy with the good start to his merchandising venture. He has completed a physical stocktake, to make sure stock levels are as expected, and so that a value for inventory on hand at the end of August could be calculated. The values shown in the table below are provided to assist with the preparation of the statement of profit or loss using the periodic inventory system. Qty PlayStation PS4 console PlayStation PS4 games Samsung Galaxy S5 mobile phone Samsung Galaxy 16gb tablet Sony PlayStation controller

5 30 13 6 5

Unit Total Cost Cost $ 330 1 650 35 1 050 500 6 500 210 1 260 45 225 $ 10 685

Required (a) Analysing/decision making When completing this part of the case, ignore the effects of GST. Your lecturer will provide you with a worksheet with the trial balance figures from the previous chapter. Then using the information provided below, prepare on the worksheet the adjusting journal entries to record to account for prepayments, accruals, and depreciation. •

Prepayments expired during the month are: o Rent - $990 o Advertising - $600 o Insurance - $125

•

Accrual adjustments: o Transfer the amount recorded as telephone payable to the expense account. o Electricity – accrue $180

•

Depreciation on shop equipment & fittings is $218 for August.

•

Interest charged to the bank loan account for August is $211.

Complete the worksheet by determining the adjusted trial balance and the figures that should appear in the statement of profit or loss and statement of financial position. .

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

(b) Recording Record the adjustments in the general journal and post them to the general ledger accounts used in the previous chapter. (c) Reporting Prepare two statements of profit or loss, one using the periodic inventory system and one using the perpetual inventory system. (d) Recording Record closing journal entries in the general journal, and post them to the general ledger. Close off the general ledger accounts.

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5. 1 – suggested answer (a) (periodic inventory):

No. 100 110 120

Account Name Cash at Bank Accounts Receivable Inventory

130 135 140 170 171

Prepaid Advertising Prepaid Insurance Prepaid Rent Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings Sales Revenue Sales Returns & Allowances Discount Received Purchases

200 210 215 280 290 300 320 410 420 430 500

ELECTRONIC EMPORIUM PTY LTD Worksheet – Periodic Inventory For the month ended 31 August Trial Balance Adjustments Adjusted Trial Balance Dr Cr Dr Cr Dr Cr 38 484 38 484 2 981 2 981 (a) 10 10 685 685 600 (c) 600 1 459 (d) 125 1 334 990 (b) 990 26 130 26 130 132 (g) 218 350 11 990 48 90 49 096 5 000 10 000 718 11 507

Statement of Financial Position Dr Cr 38 484 2 981 10 685

1 334 26 130 350

11 990

270 49 307 5 000 10 000 718 11 507

270 49 307 5 000 10 000 718

(e) 48 (f) 180 (i) 211

298

298 110

17 600

Statement of Profit or Loss Dr Cr

11 507 298

110 (a)10 685 .

6915

110 6915

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

510 520 605 620 625 630 635 640 655 665

Purchase Returns & Allowances Freight Costs Advertising Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense

210

100 (c) 600 (g) 218 94 (f) 180 (d) 125 (h) 211 (b) 990 165 88 901

88 901

13 057

(e) 48 13 057

Profit

100 600 218 94 180 125 211 990 117 89 462

89 462

210 100 600 218 94 180 125 211 990 117 9 848 1 979 11 827

11 827

79 614

11 827

79 614

77 635 1 979 79 614

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5.1 – suggested answer (b) & (d) (periodic inventory): GENERAL JOURNAL Page 5 Date Aug 31

Account Name Inventory Purchases Transfer ending inventory figures

Post Ref. 120 500

Debit 10 685

10 685

Rent Expense Prepaid Rent Prepaid rent consumed in August

655 140

990

Advertising Expense Prepaid Advertising Prepaid advertising expenses consumed in August

605 130

600

Insurance Expense Prepaid Insurance Portion of insurance premium applicable for August

635 135

125

Telephone Payable Telephone Expense Telephone expenses payable applied against bill

210 665

Electricity Expense Electricity Payable Estimated electricity expense payable

630 215

180

Depreciation Expense 620 Accumulated Depreciation: Shop Equipment & 171 Fittings Depreciation for the period

218

Interest Expense Bank Loan Interest charged on bank loan for August

211

640 280

Credit

990

600

125

180

218

211

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Aug

13 23 31

Sales Returns Cash/Discount Balance

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

Balance

b/d

62 020 36 905 1 590 4 750 1 794 45 039 38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

GJ4 GJ4

3 279 1 888

Sept

Balance

b/d

5 167 2 981

Purchases

GJ5

10 685

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Aug

Advertising Exp.

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Prepaid Rent July 31 Rent Exp.

GJ2

990

Aug

Rent Exp.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Inventory Aug 31

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167

Account No. 120

Account No. 130 GJ5 600

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459

Account No. 140 GJ5 990

Account No. 170

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

GJ4 GJ4 c/d

Telephone Payable Aug 31 Telephone Exp.

GJ5

5 500 210 11 990 17 700

31 31

Depreciation Exp. Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Sept

Balance

July

Telephone Exp.

July Aug

31 31

Electricity Exp. Electricity Exp.

July

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

Balance

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

July

Revenue

Account No. 330 GJ3 2 520

Aug

Revenue

GJ6

Electricity Payable

Bank Loan Aug 18 Cash at Bank 31 Balance

GJ4 c/d

1 000 49 307

50 307

Shareholders Loan Account

Share Capital

Retained Earnings

Profit or Loss Summary July 31 Expenses 31 Retained Earnings Aug

31 31

GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

1 802 718 2 520 9 848 1 979 11 827

Accou nt No. 171 GJ2 132 GJ5 218 350

July Aug

Account No. 200 GJ4 12 200 GJ4 5 500

b/d

17 700 11 990

Account No. 210 GJ2 48

Account No. 215 GJ2 90 GJ5 180 270

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307

Account No. 320 GJ3 718 GJ6 1 979 2 697

2 520 11 827 11 827

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Service Revenue July 31 Profit or Loss Summary

GJ3

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

11 507

Aug

Cash at Bank

Account No. 410 GJ4 1 590

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

GJ4 GJ4 GJ4

11 507

Sales Returns & Allowances Aug 13 Acc. Receivable

3 279 1 888 4 750 11 507

GJ4

298

Aug

Profit or Loss Summary

Account No. 420 GJ6 298

GJ6

110

Aug

Acc. Payable

Account No. 430 GJ4 110

GJ4 GJ4

12 100 5 500 17 600

Aug

31 31

Inventory Profit or Loss Summary

GJ6

210

Aug

Acc. Payable

Freight Costs Aug 3 Acc. Payable

GJ4

100

Aug

Profit or Loss Summary

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug

GJ5

1 000 600

Aug

Profit or Loss Summary

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Discount Received Aug 31 Profit or Loss Summary

Purchases Aug 3 10

Acc. Payable Acc. Payable

Purchase Returns & Allowances Aug 31 Profit or Loss Summary

Prepaid Advertising

Borrowing Expense July 17 Bank Loan

Account No. 500 GJ5 10 685 GJ6 6 915 17 600

Account No. 510 GJ4 210

Account No. 520 GJ6 100

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD

GJ2 GJ5

132 218

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable

GJ2 GJ5

90 180

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 630 GJ3 90 GJ6 180

Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance

GJ2 GJ5

41 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan

GJ2 GJ5

96 211

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Aug

GJ5

1 485 990

Aug

Profit or Loss Summary

GJ2 GJ4

48 165

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

Prepaid Rent

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

165

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL JOURNAL Page 6 Date Aug 31

Account Name Sales Revenue Discount Received Purchase Returns & Allowances Profit or Loss Summary To close revenue accounts

Post Ref. 410 430 510 330

Debit 11 507 110 210

11 827

Profit or Loss Summary Sales Returns & Allowances Purchases Freight Costs Advertising Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense To close expense accounts

330 420 500 520 605 620 625 630 635 640 655 665

9 848

Profit or Loss Summary Retained Earnings To close profit to retained earnings

330 320

1 979

Credit

298 6 915 100 600 218 94 180 125 211 990 117

1 979

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5.1 – suggested answer (c) (periodic inventory): ELECTRONIC EMPORIUM PTY LTD Statement of Profit or Loss for the period 1 August to 31 August Revenue Sales Revenue Less Sales Returns & Allowances Net Sales Cost of Sales Purchases Less Purchase Returns & Allowances Add Freight Costs Less Inventory 31 August Cost of Sales Gross Profit Other Revenue Discount Received Total Other Revenue

11 507 298 11 209 17 600 210 17 390 100 17 490 10 685 6 805 4 404 110 110 4 514

Expenses Advertising Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense Total Expenses Profit

600 218 94 180 125 211 990 117 2 535 $ 1 979

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q 5.1 – suggested answer (a) (perpetual inventory):

No. 100 110 120 130 135 140 170 171 200 210 215 280 290 300 320 410 420 430 505 520 605

Account Name Cash at Bank Accounts Receivable Inventory Prepaid Advertising Prepaid Insurance Prepaid Rent Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings Sales Revenue Sales Returns & Allowances Discount Received Cost of Sales Freight Costs Advertising Expense

ELECTRONIC EMPORIUM PTY LTD Worksheet – Perpetual Inventory For the month ended 31 August Trial Balance Adjustments Adjusted Trial Balance Dr Cr Dr Cr Dr Cr 38 484 38 484 2 981 2 981 10 685 10 685 600 (b) 600 1 459 (c) 125 1 334 990 (a) 990 26 130 26 130 132 (g) 218 350 11 990 48 90 49 096 5 000 10 000 718 11 507

Statement of Profit or Loss Dr Cr

Statement of Financial Position Dr Cr 38 484 2 981 10 685 1 334 26 130 350

11 990

270 49 307 5 000 10 000 718 11 507

270 49 307 5 000 10 000 718

(d) 48 (e) 180 (f) 211

298

298 110

11 507 298

110

6 705 100

6 705 100 600

(b) 600 .

110 6 705 100 600 95

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

620 625 630 635

Depreciation Expense Discount Allowed Electricity Expense Insurance Expense

640 655 665

Interest Expense Rent Expense Telephone Expense

(g) 218 94 (e) 180 (c) 125 (g) 211 (a)990 165 88 691

88 691

2 372

(d) 48 2 372

Profit

218 94 180 125

211 990 117 89 252

211 990 117 9 638

89 252

1 979 11 617

11 617

79 614

77 635

79 614

1 979 79 614

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5.1 – suggested answer (b) & (d) (perpetual inventory): GENERAL JOURNAL Page 5 Date Aug 31

Account Name Rent Expense Prepaid Rent Prepaid rent consumed in August

Post Ref. 655 140

Debit 990

990

Advertising Expense Prepaid Advertising Prepaid advertising expenses consumed in August

605 130

600

Insurance Expense Prepaid Insurance Portion of insurance premium applicable for August

635 135

125

Telephone Payable Telephone Expense Telephone expenses payable applied against bill

210 665

Electricity Expense Electricity Payable Estimated electricity expense payable

630 215

180

Depreciation Expense 620 Accumulated Depreciation: Shop Equipment & 171 Fittings Depreciation for the period

218

Interest Expense Bank Loan Interest charged on bank loan for August

211

640 280

Credit

600

125

180

218

211

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Aug

13 23 31

Sales Returns Cash/Discount Balance

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167

Aug

5 11 17 21 31 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable Balance

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 c/d 10 685 17 810

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

Balance

b/d

62 020 36 905 1 590 4 750 1 794 45 039 38 484

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

GJ4 GJ4

3 279 1 888

Sept

Balance

b/d

5 167 2 981

Inventory Aug 3 10 13

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

12 100 5 500 210

Sept

Balance

b/d

17 810 10 685

Prepaid Advertising July 31 Advertising Exp

GJ2

600

Aug

Advertising Exp.

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Prepaid Rent July 31 Rent Exp.

GJ2

990

Aug

Rent Exp.

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039

July

Account No. 130 GJ5 600

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459

Account No. 140 GJ5 990

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

Account No. 170 GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

GJ4 GJ4 c/d

Telephone Payable Aug 31 Telephone Exp.

GJ5

5 500 210 11 990 17 700

31 31

Depreciation Exp. Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Sept

Balance

July

Telephone Exp.

July Aug

31 31

Electricity Exp. Electricity Exp.

July

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

Balance

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

Electricity Payable

Bank Loan Aug 18 Cash at Bank 31 Balance

GJ4 c/d

1 000 49 307

50 307

Shareholders Loan Account

Share Capital

Accoun t No. 171 GJ2 132 GJ5 218 350

July Aug

Account No. 200 GJ4 12 200 GJ4 5 500

b/d

17 700 11 990

Account No. 210 GJ2 48

Account No. 215 GJ2 90 GJ5 180 270

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Retained Earnings July Aug

Profit or Loss Summary 330 July 31 Expenses 31 Retained Earnings Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 320 GJ3 718 GJ6 1 979 2 697

Account No. GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

1 802 718 2 520 9 638 1 979 11 617

July

Revenue

GJ3

2 520

Aug

Revenue

GJ6

2 520 11 617 11 617

Service Revenue July 31 Profit or Loss Summary

GJ3

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

11 507

Aug

Cash at Bank

Account No. 410 GJ4 1 590

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

11 507

Sales Returns & Allowances Aug 13 Acc. Receivable

Discount Received Aug 31 Profit or Loss Summary

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory

GJ4 GJ4 GJ4

3 279 1 888 4 750 11 507

GJ4

298

Aug

Profit or Loss Summary

Account No. 420 GJ6 298

GJ6

110

Aug

Acc. Payable

Account No. 430 GJ4 110

GJ4 GJ4 GJ4 GJ4

1 000 2 130 1 210 2 575 6 915

Aug

13 31

Inventory Profit or Loss Summary

Account No. 505 GJ4 210 GJ6 6 705

6 915

100

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Freight Costs Aug 3 Acc. Payable

GJ4

100

Aug

Profit or Loss Summary

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug

GJ5

1 000 600

Aug

Profit or Loss Summary

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD

GJ2 GJ5

132 218

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable

GJ2 GJ5

90 180

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 630 GJ3 90 GJ6 180

Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance

GJ2 GJ5

41 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan

GJ2 GJ5

96 211

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Prepaid Advertising

Account No. 520 GJ6 100

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Aug

GJ5

1 485 990

Aug

Profit or Loss Summary

GJ2 GJ4

48 165

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

Prepaid Rent

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

165

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

102

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL JOURNAL Page 6 Date Aug 31

Account Name Sales Revenue Discount Received Profit or Loss Summary To close revenue accounts

Post Ref. 410 430 330

Debit 11 507 110

11 617

Profit or Loss Summary Sales Returns & Allowances Cost of Sales Freight Costs Advertising Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense To close expense accounts

330 420 505 520 605 620 625 630 635 640 655 665

9 638

Profit or Loss Summary Retained Earnings To close profit to retained earnings

330 320

1 979

Credit

298 6 705 100 600 218 94 180 125 211 990 117

1 979

103

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5.1 – suggested answer (c) (perpetual inventory): ELECTRONIC EMPORIUM PTY LTD Statement of Profit or Loss for the period 1 August to 31 August Revenue Sales Revenue Less Sales Returns & Allowances Net Sales Cost of Sales Cost of Sales Freight Costs Total Cost of Sales Gross Profit Other Revenue Discount Received Total Other Revenue Expenses Advertising Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Rent Expense Telephone Expense Total Expenses Profit

11 507 298 11 209 6 705 100 6 805 4 404 110 110 4 514 600 218 94 180 125 211 990 117 2 535 $ 1 979

104

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5.2 – analysis: David Johnson started this business with the aim of making a good living. However, to date he has not paid himself wages or dividends because the business is new and growing. Ultimately the business must generate sufficient profits to pay wages to David and possibly another employee. The business has completed two periods of trading, with one period as a merchandising company. Required (a) Calculate the following ratios using the data in the worksheet based on August financial reports (ignore GST): • Gross profit • Operating expenses to sales • Return on assets • Profit margin • Inventory turnover • Days in inventory (Hint: divide into 31, not 365) • Current ratio (b) Comment on your findings. Remember to bear in mind that the information gleaned from the relevant ratios used to evaluate profitability will be fairly limited because they are for only a short period.

105

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q5.2 – suggested answer (a): Gross profit ratio 4404 11209 Operating expenses to sales 2535 11209 Return on assets 1979 (65952 + 79264)/2 Profit margin 1979 11209 Inventory turnover 6805 (0 + 10685)/2 Days in inventory

In days 31 1.27

Current ratio 53484 12260

Gross profit Net sales

39.29%

Operating expenses Net sales

22.62%

Profit Average total assets

2.73%

Profit Net sales

17.66%

Cost of sales Average inventory

1.27 times

1 (one month) Inventory turnover

24 days

Current assets Current liabilities

4.36:1

106

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

ELECTRONIC EMPORIUM PTY LTD Profitability ratios Gross Profit 39.29% Operating expenses to sales 22.62% Return on assets 2.73% Profit margin 17.66% Inventory turnover 1.27 times Days in inventory 24 days Current ratio 4.36:1

107

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case Study Q5.2 – suggested answer (b): The gross profit margin is reasonable, but will need to be higher if wages are to be paid out of it. The operating expenses to sales are again reasonable but will rise considerably when wages are paid. The return on assets is poor indicating insufficient sales being generated for the assets employed. The profit margin looks really good, but that profit would have been a loss had wages been paid to the owner. Inventory turnover is slow, but it is early days and people are only just getting to know that the business exists and what it sells. The current ratio is too high (the magical figure recommended is 2:1) indicating that current assets, in particular cash, is not as yet being fully utilised. It is a very new and fast growing business and one month’s ratios are not a good indicator of performance. The current ratio is too high indicating that perhaps it would have been better for the bank loan to have been drawn down in stages as the money was needed. By doing that the company would have reduced the interest expense. The gross profit margin is good, but not good enough to cover wages. The mark-up on inventory items probably needs to be reviewed, but would need to take into account whether an increase in selling prices would impact on sales. An alternative would be to negotiate with suppliers for better buying prices. Either way sales need to be boosted in order to generate sufficient to cover wages.

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Chapter 6: accounting subsystems Case study Q6.1 – recording and reporting: Business is improving. David has received various orders from the local primary and high schools for substantial quantities of laptop computers to be delivered as they gradually bring classes online. The schools have requested that the company also maintain the laptops, as and when required. Good record keeping is now much more important, and for that reason David has decided to employ someone to complete the bookkeeping function on a casual basis. David has also negotiated better buying costs with suppliers that will enable him to increase his margin, while continuing to maintain competitive selling prices. Samantha Farmer is the new bookkeeper and her role, on the days she is there, is to collect all relevant source documents, recorded them in the appropriate journals, and keep the subsidiary ledgers up-to-date. The average cost method will be used for inventory. End of the month processing includes balancing special journals, posting to the general ledger and preparing reports. Required (a) Enter opening balances for the accounts receivable, accounts payable and inventory subsidiary ledgers. Balances provided in the schedules below. (b) Record the transactions below in either a special journal or the general journal.

(c) Post transactions to the subsidiary ledgers (daily) and general ledger (monthly) as required. Round the average cost to the nearest dollar. Hint: only pencil the totals for cash at bank as there will be additional entries to be recorded in next chapter. (d) Prepare schedules of accounts receivable, accounts payable and inventory and verify against control accounts in the general ledger.

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Subsidiary ledger balances:

Customer Clear Vision Opticians

Supplier Samsung Aust.

Electronics

Schedule of Accounts Receivable as at 31 August Invoice No. Terms Date of Invoice 1 n/15 11 August

Amount Due $ 2 981

Schedule of Accounts Payable as at 31 August Invoice No. Terms Date of Invoice 3669 n/30 3 August

Amount Due $ 11 990

Schedule of Inventory as at 31 August Code Description Quantity PS4C PlayStation PS4 console 5 PS4G PlayStation PS4 games 30 SGMO Samsung Galaxy S5 mobile 13 phone SGTB Samsung Galaxy 16gb tablet 6 SOPC Sony PlayStation controller 5

Amount 1 650 1 050 6 500 1 260 225 $ 10 685

Selling Price $ 545 79 795 298 89

110

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Transactions for the month: Sept.

3 4

9 11

16 17 18

22 25

26 28 30

Received 100 copies of Microsoft Office (code MIOF) $75 each from Microsoft Australia together with their invoice no.9978 for $7500 (terms n/15). Paid rent of $990 to Atlas Realty (cheque no.8). Received the following inventory items from Dell Australia together with their invoice no.2960 for $25000 (terms n/7). 100 Dell Inspiron laptops $250 each (code DINS) Credit sale (invoice no.4) to the Willow Shire Council on terms of n/30, the following: 1 Samsung Galaxy S5 mobile phone $795 and 3 Dell Inspiron laptops $398 each. Sent cheque no.9 to Dell Australia in payment of the amount due to them. Banked cash sales totalling $4260 of the following inventory items: • 20 PlayStation PS4 games • 2 PlayStation PS4 consoles • 2 Samsung Galaxy S5 mobile phones Received the following inventory items from Sony Australia together with their invoice no.7757 for $4520 (terms 2/7, n/30): • 100 PlayStation PS4 games $30 each • 5 PlayStation PS4 consoles $280 each • 3 Sony PlayStation controllers $40 each Received and paid the electricity bill for $380 with cheque no.10. Send cheque no.11 to Sony Australia in payment of the amount owing. Credit sale (invoice no.5) to Willow Primary School on terms of n/30, the following: • 40 Dell Inspiron laptops $398 each • 40 Microsoft Office $142 each Credit sale (invoice no.6) to Willow High School on terms of n/30, the following: • 30 Dell Inspiron laptops @ $398 each • 30 Microsoft Office @ $142 each Received a bill from Trent Accounting Services for $500 for services provided. Banked cash sales totalling $4129 for the week of the following: • 28 PlayStation PS4 games • 1 PlayStation PS4 consoles • 2 Sony PlayStation controllers • 3 Samsung Galaxy 16gb tablets • Servicing computer equipment $300 Paid wages of $425 to Samantha Farmer with cheque no.12. Received and banked a cheque from Willow Primary School for $5000. Paid Evans Electrical $290 for some electrical repairs in the shop (cheque no.13).

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q6.1 – suggested answer:

SALES JOURNAL Page: 1 Date Sept. 7 18 21

Inv. No. 4 5 6

Account Willow Shire Council Willow Primary School Willow High School

Terms n/30 n/30 n/30

Post Ref. WSC1 WPS1 WHS1

Cost of Sales 1 250 13 000 9 750 24 000

Sales 1 989 21 600 16 200 39 789

(120)/(505)

(410)

Services

Freight Income

Accounts Receivable 1 989 21 600 16 200 39 789 (110)

PURCHASES JOURNAL Page: 1 Date Sept. 1 4 14 22

Inv. No. 9978 2960 7757

Account Microsoft Australia Dell Australia Sony Australia Trent Account Services (accountancy fees)

Terms n/15 n/7 2/7, n/30 (600)

Post Ref. MIC1 DEL1 SON1 TRE1

37 020

500 500

Accounts Payable 7 500 25 000 4 520 500 37 520

(120)

✓

(200)

Inventory 7 500 25 000 4 520

Freight Costs

Other

112

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

CASH PAYMENTS JOURNAL Page: 1

Date Sept. 3 9 16 17 26 30

Cheque No. 8 9 10 11 12 13

Account Rent Dell Australia Electricity Sony Australia Wages Repairs

Post Ref. 655 DEL1 630 SON1 670 660

Debits Accounts Payable Other 990 25 000 380 4 520 425 290 29 520 2 085 (200)

✓

Credits Cash at Discount Bank Received 990 25 000 380 4 430 90 425 290 31 515 90 (100)

(430)

CASH RECEIPTS JOURNAL Page: 1

Date Sept. 11 25 28

Account Cash Sales Cash Sales Willow Primary School

Post Ref. ✓ ✓ WPS1

Debits Cash at Discount Bank Allowed 4 260 4 129 5 000 13 389 (100)

Credits Service Accounts Revenue Receivable

Cost of Sales 2 360 1 855

Sales 4 260 3 829

4 215

8 089

300

5 000 5 000

(120)/(505)

(410)

(400)

(110)

Other

300

113

Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

INVENTORY SUBSIDIARY LEDGER ITEM: PlayStation PS4 console CODE: PS4C Date Sept.

Explanation 1 Balance 11 Cash sales 14 Inv. 7757 25 Cash sales

Units

Purchases Cost Total

280

Cost of Sales Units Cost Total 2

330

660

299

1400

Units 5 3 8 7

Balance Cost Total 330 1650 330 990 299 2390 299 2091

Units 30 10 110 82

Balance Cost Total 35 1050 35 350 30 3350 31 2510

Units 13 12 10

Balance Cost Total 500 6500 500 6000 500 5000

Units 6 3

Balance Cost Total 210 1260 210 630

ITEM: PlayStation PS4 games CODE: PS4G Date Sept.

Explanation 1 Balance 11 Cash sales 14 Inv. 7757 25 Cash sales

Units

Purchases Cost Total

100

700

840

3000

ITEM: Samsung Galaxy S5 mobile phone CODE: SGMO Purchases Date Explanation Units Cost Total Sept. 1 Balance 7 Sale Inv. 4 11 Cash sales

ITEM: Samsung Galaxy 16gb tablet CODE: SGTB Purchases Date Explanation Units Cost Total Sept. 1 Balance 3 Cash sales

Cost of Sales Units Cost Total

Cost of Sales Units Cost Total 1 2

500 500

500 1000

Cost of Sales Units Cost Total 3

210

630

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

ITEM: Sony PlayStation controller CODE: SOPC Purchases Date Explanation Units Cost Total Sept. 1 Balance 14 Inv. 7757 3 40 120 25 Cash sales

Cost of Sales Units Cost Total

Units 5 8 6

Balance Cost Total 45 225 43 345 43 259

ITEM: Microsoft Office CODE: MIOF Date Sept.

Explanation 1 Inv. 9978 18 Sale Inv. 5 21 Sale Inv. 6

Purchases Units Cost Total 100 75 7500

Cost of Sales Units Cost Total 40 30

75 75

3000 2250

Balance Units Cost Total 100 75 7500 60 75 4500 30 75 2250

ITEM: Dell Inspiron laptop CODE: DINS Date Sept.

Explanation 4 Inv. 2960 7 Sale Inv. 4 18 Sale Inv. 5 21 Sale Inv. 6

Purchases Units Cost Total 100 250 25000

Cost of Sales Units Cost Total 3 40 30

250 750 250 10000 250 7500

Balance Units Cost Total 100 250 25000 97 250 24250 57 250 14250 27 250 6750

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME: Clear Vision Opticians CODE: CVO1 Date Sept. 1

Explanation

Post Ref.

Debit

Credit

Balance 2 981

Post Ref. SJ1

Debit 1 989

Credit

Balance 1 989

Debit 21 600

Credit

Balance 21 600 16 600

Balance

NAME: Willow Shire Council CODE: WSC1 Date Sept. 4

Explanation Invoice no.4

NAME: Willow Primary School CODE: WPS1 Date Explanation Sept. 18 Invoice no.5 28 Cash at Bank

Post Ref. SJ1 CRJ1

5 000

NAME: Willow High School CODE: WHS1 Date Explanation Sept. 21 Invoice no.6

Post Ref. SJ1

Debit 16 200

Credit

Balance 16 200

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME: Samsung Electronics Aust. CODE: SAM1 Date Sept. 1

Explanation

Post Ref.

Debit

Credit

Balance 11 990

Debit

Credit 7 500

Balance 7 500

Debit

Credit 25 000

Balance 25 000 -

Credit 4 520

Balance 4 520 -

Credit 500

Balance 500

Balance

NAME: Microsoft Australia CODE: MIC1 Date Sept. 1

Explanation Invoice no.9978

Post Ref. PJ1

NAME: Dell Australia CODE: DEL1 Date Sept. 4 9

Explanation Invoice no.2960 Cash at Bank

Post Ref. PJ1 CPJ1

25 000

NAME: Sony Australia CODE: SON1 Date Explanation Sept. 14 Invoice no.7757 17 Cash at Bank

Post Ref. PJ1 CPJ1

Debit 4 520

NAME: Trent Accounting Services CODE: TRE1 Date Sept. 22 Invoice

Explanation

Post Ref. PJ1

Debit

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

1 30

Balance Receipts

b/d CRJ1

62 020 36 905 1 590 4 750 1 794 45 039 38 484 13 389

GJ4 GJ4

3 279 1 888

b/d SJ1

5 167 2 981 39 789 42 770

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Sept

1 30

Balance Sales Revenue

Balance Inventory Aug 3 10 13

Sept

1 30

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Sept

Payments

Aug

13 23 31

Sales Returns Cash/Discount Balance

Sept

Cash at Bank

Aug

5 11 17 21 31 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable Balance

Sept

30 30

Cost of Sales Cost of Sales

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039 CPJ1 31 515

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167 CRJ1 5 000

37 770

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

12 100 5 500 210

Balance Acc. Payable

b/d PJ1

17 810 10 685 37 020 47 705 19 490

Balance

28 215

Prepaid Advertising July 31 Advertising Exp

GJ2

600

Aug

Advertising Exp.

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 c/d 10 685 17 810 SJ1 24 000 CRJ1 4 215

Account No. 130 GJ5 600

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459

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Prepaid Rent July 31 Rent Exp.

GJ2

990

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Aug

Rent Exp.

Account No. 170

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

GJ4 GJ4 c/d

Sept

CPJ1

Account No. 140 GJ5 990

Cash at Bank

5 500 210 11 990 17 700 29 520

July Aug

31 31

Depreciation Exp. Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Sept

1 30

Balance Inventory/Other Balance

Telephone Payable Aug 31 Telephone Exp.

GJ5

July

Telephone Exp.

July Aug

31 31

Electricity Exp. Electricity Exp.

July

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

Balance

July

Shop Equip & Fit

Electricity Payable

Bank Loan Aug 18 Cash at Bank 31 Balance

GJ4 c/d

1 000 49 307

50 307

Shareholders Loan Account

Accou nt No. 171 GJ2 132 GJ5 218 350

Account No. 200 GJ4 12 200 GJ4 5 500

b/d PJ1

17 700 11 990 37 520 49 510 19 990

Account No. 210 GJ2 48

Account No. 215 GJ2 90 GJ5 180 270

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307

Account No. 290 GJ1 5 000

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Share Capital July

Cash at Bank

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Retained Earnings

Profit or Loss Summary 330 July 31 Expenses 31 Retained Earnings Aug

31 31

Account No. 300 GJ1 10 000

Account No. 320 GJ3 718 GJ6 1 979 2 697

Account No. GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

Service Revenue July 31 Profit or Loss Summary

GJ3

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

1 802 718 2 520 9 638 1 979 11 617

July

Revenue

GJ3

2 520

Aug

Revenue

GJ6

2 520 11 617

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sept

Cash at Bank

CRJ1

Aug

Cash at Bank

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

GJ4 GJ4 GJ4

Sept

30 30

Acc. Receivable Cash at Bank

SJ1 CRJ1

11 507

11 617

Account No. 410 GJ4 1 590

11 507

Sales Returns & Allowances Aug 13 Acc. Receivable

Discount Received Aug 31 Profit or Loss Summary

300

3 279 1 888 4 750 11 507 39 789 8 089

GJ4

298

Aug

Profit or Loss Summary

Account No. 420 GJ6 298

GJ6

110

Aug

Acc. Payable

Account No. 430 GJ4 110

Sept

Cash at Bank

CPJ1

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Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory

Aug

SJ1 CRJ1

Freight Costs Aug 3 Acc. Payable

GJ4

100

Aug

Accountancy Fees Sept 30 Acc. Payable

PJ1

500

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug

GJ5

1 000 600

Aug

Profit or Loss Summary

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD

GJ2 GJ5

132 218

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable Sept 16 Cash at Bank

GJ2 GJ5 CPJ1

90 180 380

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 630 GJ3 90 GJ6 180

30 30

Inventory Inventory

13 31

Inventory Profit or Loss Summary

Account No. 505 GJ4 210 GJ6 6 705

1 000 2 130 1 210 2 575 6 915 24 000 4 215

Sept

GJ4 GJ4 GJ4 GJ4

6 915

Profit or Loss Summary

Account No. 520 GJ6 100

Account No. 600

Prepaid Advertising

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Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance

GJ2 GJ5

41 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan

GJ2 GJ5

96 211

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Aug Sept

Prepaid Rent Cash at Bank

GJ5 CPJ1

1 485 990 990

Aug

Profit or Loss Summary

Repairs Expense Sept 30 Cash at Bank

CPJ1

290

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

31 3

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

Account No. 660

165

Wages Expense Sept 26 Cash at Bank

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

Account No. 670 CPJ1

425

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Code CVO1 WSC1 WPS1 WHS1

SCHEDULE OF ACCOUNTS RECEIVABLE As at 30 September Account Clear Vision Opticians Willow Shire Council Willow Primary School Willow High School

Code SAM1 MIC1 TRE1

SCHEDULE OF ACCOUNTS PAYABLE As at 30 September Account Samsung Electronics Aust. Microsoft Australia Trent Accounting Services

Code PS4C PS4G SGMO SGTB SPOC MIOF DINS

SCHEDULE OF INVENTORY As at 30 September Description Qty on Hand PlayStation PS4 console 7 PlayStation PS4 games 82 Samsung Galaxy S5 mobile phone 10 Samsung Galaxy 16gb tablet 3 Sony PlayStation controller 6 Microsoft Office 30 Dell Inspiron laptop 27

Amount 2 981 1 989 16 600 16 200 $ 37 770

Amount 11 990 7 500 500 $ 19 990

Amount 2 091 2 510 5 000 630 259 2 250 6 750 $ 19 490

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Case study Q6.2 – decision making: The company now has an employee and there are rules and regulations that must be adhered to. What does David need to understand about the company’s obligations in respect of that employee, and any authorities that must be notified that the company is now an employer? Required Research and discuss or report on the obligations applicable to either Australia or New Zealand. The URLs below are provided to assist you. Australia: https://www.ato.gov.au/Business/Starting-and-running-your-small-business/Engagingworkers/Payments-to-employees/ http://www.fairwork.gov.au/find-help-for/small-business New Zealand: http://dol.govt.nz/workplace/knowledgebase/item/1505 http://dol.govt.nz/infozone/businessessentials/employ/getting-staff-started/

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Case study Q6.2 – suggested answer: Australia The company is required to register with the Australian Taxation Office as a Pay as you go (PAYG) withholder. This is a system for withholding amounts from payments you make to employees and other businesses so they can meet their end-of-year tax liabilities. As an employer you have to pay a minimum of 9.50% super contributions for your eligible employees, based on their ordinary time earnings. You pay these compulsory contributions to a complying super fund at least four times a year. Fringe benefits tax (FBT) is paid on certain benefits employers provide to their employees or their employees' associates in place of salary or wages. If you provide non-cash benefits to your employees or your employees' associates (typically family members), you may have to pay fringe benefits tax and lodge an annual fringe benefits tax return. If you are an employee of your own company or trust, fringe benefits tax can apply to benefits you receive. The Fair Work Act 2009 (FW Act) sets out a number of requirements that businesses need to be aware of. This best practice guide explains: • the safety net of minimum employment conditions • the obligation to bargain in good faith at the enterprise level • obligations to keep records and provide pay slips • unfair dismissal laws that apply to small business • protections for employees and obligations of employers • the functions of the Fair Work Ombudsman (FWO) and the Fair Work Commission. All national system employers must provide 10 minimum entitlements to full-time and parttime employees. These minimum entitlements are called the National Employment Standards (NES). Some of these entitlements do not apply to casual employees. In summary, the NES minimum entitlements are: •

Hours of work o A maximum standard working week of 38 hours (plus reasonable additional hours) for a full-time employee.

•

Right to request flexible working arrangements o Where an employee (including some casual employees) has at least 12 months continuous service, they have a right to request flexible working arrangements if they meet certain conditions.

•

Parental leave o Parental leave entitlements are extended to all employees, where an employee (including some casual employees) has at least 12 months continuous service.

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•

Annual leave o Four (4) weeks paid annual leave (other than for casual employees). Five (5) weeks paid annual leave for certain shift workers. Part-time employees get a proportion of this depending on how much they work.

•

Personal/carer's leave and Compassionate leave o Ten (10) days paid personal/carer's leave each year for full-time, non-casual employees. Part-time employees get a proportion of this depending on how much they work.

•

Community service leave o The right to community service leave for eligible community service activities such as jury service or activities dealing with an emergency or natural disaster. Community service leave is unpaid, with the exception of jury service. Payment for jury service is capped at ten (10) days.

•

Long service leave o The right to accrue long service leave.

•

Public holidays o The right to a day off on public holidays and if the employee would usually have worked on that day, the right to be paid for their ordinary hours of work on that day.

•

Notice and Redundancy Pay o A minimum amount of notice (in writing) prior to termination of the employment (or payment in lieu of notice). The amount of notice that must be provided depends on how long the employee has worked for you.

•

Fair Work Information Statement o Employers are required to provide a copy of the 'Fair Work Information Statement' to all new employees before or as soon as practicable after the commencement of employment.

In addition to all these rules and regulations the company must take out insurance to cover the employee should they be unable to work due to a work related accident.

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New Zealand There are minimum legal requirements for pay, holidays, breaks and workplace safety that you need to know. Keeping good records of time worked, pay, leave, training and accidents is essential to getting the basics right. Examples of some of these requirements are: •

Annual holidays o At the end of each year of employment with any one employer, an employee becomes entitled to four weeks' paid annual holidays.

•

Bereavement leave o After six months employees are entitled to paid bereavement leave

•

Minimum pay o Minimum wage rates must be paid to all employees whether full-time, part-time fixed-term, casual employees, working from home and people paid totally or partly by commission or piece rates.

•

Paying wages o Legally wages must be paid in cash. To pay wages another way (e.g. direct credit, cheque) employers must get their employees written agreement.

•

Public holidays o Employees are entitled to 11 public holidays off work on pay, if they are days when the employee would normally work. Employers must pay employees their relevant daily pay or average daily pay (if applicable) for the public holiday.

• Sick leave o After six months an employee is entitled to five days sick leave on pay. • Parental leave o Employees may be eligible for paid and unpaid parental leave if they meet certain criteria. The paid leave is funded by Government, not employers. There are also guidelines provided to employers on what they must do, as detailed below, the most essential of these being to register as an employer with Inland Revenue. •

Provide a full health and safety briefing to new staff showing them your evacuation plan, any hazards in the workplace and how to be safe from hazards.

•

Provide any safety or other equipment required for the job and train them how to use it correctly.

•

Let them know who to contact in case of absence or emergency. Give them a copy of the contact details to keep at home.

•

Clarify start times, finish times and the duration of breaks. .

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•

Discuss any in-house policies and rules that apply to them or their job. Give them a written copy of those work rules or policies.

•

Get your new employee to complete a tax code declaration (IR330).

•

If this is your first employee, you need to register as an employer with Inland Revenue. They will also advise ACC that you have become an employer.

•

Set up a personal file for your new employee including a holiday and leave record and wage and time record.

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Case study Q6.3 – decision making: The information shown on the inventory, customer and supplier cards is very limited. There is other information that could have been included, but these cards have deliberately been kept very simple. One of the advantages of a computerised system is that a lot more data can be included with minimal effort. Required Select one of the cards and suggest at least three other pieces of information that should be on that card. Explain how each piece of information on that card would be useful to David.

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Case study Q6.3 – suggested answer: Inventory cards: •

Preferred supplier – this information saves time when ordered goods, and is also useful when the person who usually handles purchase orders is away or leaves the company.

•

Reorder point or Minimum level – this information alerts the person in charge of purchasing when stock has reached the minimum level for any item and an order can be generated to restock that item.

•

Reorder quantity – this assists when ordering, as this is the quantity determined by the company to be the normal quantity to order.

Customer cards: •

Customer address – this can be the billing address or the delivery address, or both. Important information for inclusion on invoices and statements.

•

Contact details – this would include phone numbers, email addresses, contact person in that organisation. All of this important so that you know who you usually deal with and how to contact that person, particularly if you are trying to generate more sales or request payment.

•

Terms – businesses normally have set credit terms they give customers, such as n/30. Sometimes new customers are given different terms, discount for prompt payment, or are required to pay on delivery. These reflect management policy and when included on a customer’s card all staff know exactly what terms each customer has.

Supplier cards: •

Supplier address – this is important information for inclusion on purchase orders and remittance advices to avoid goods being delivered to the wrong address or payments allocated to the wrong business.

•

Contact details – this would include phone numbers, email addresses, contact person in that organisation. All of this important so that you know who is the best person to contact in that organisation and how to contact them.

•

Terms – these are very important if a supplier is offering a prompt payment discount, as the company does not want to miss out on the discount. Complying with supplier terms can be important if it is likely the supplier may cut-off credit if an account is not paid on time.

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Chapter 7: reporting and analysing cash and receivables Case study Q7.1 – recording and reporting: It is the end of another month and the company has received the bank statement for the month. In prior periods David didn’t bother doing a bank reconciliation. He couldn’t see the necessity for completing one because there was never any difference between the bank account balance in his records and that shown on the bank statements. However, during the period the business has been operating David has paid for a number of things out of his own pocket and these have not been included in reports prepared to date. Now it is time to reimburse him and include those expenses in the company’s records. Being the only person involved in the business he didn’t bother setting up a petty cash fund. Required •

Begin the process of preparing for a bank reconciliation by ticking off all the items that appear on the bank statement provided below and in the special journals. Then complete the journals to include items that appear on the bank statement but are not as yet in the company records.

•

On 30 September, Samantha wrote cheque no.14 in the amount of $245 to reimburse David for stamps and stationery (office supplies) $95, and fuel used in delivering goods, seeing customers etc. (motor expenses) $150. This needs to be included with the transactions for September.

•

Total the special journals and complete the posting of transactions for the month.

•

Complete the bank reconciliation and prepare a reconciliation report.

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ANZ BANK Willow Branch Account: Electronic Emporium Pty Ltd Period: 1 September to 30 September Date Particulars Sept. 1 Balance 4 Cheque 8 11 Deposit Cheque 9 15 Loan repayment 17 Cheque 10 18 Cheque 11 25 Deposit 28 Deposit Cheque 12 30 Bank fees

Debit

Credit

990

Balance 38 484 Cr 37 494 Cr

4 260 25 000 1 000 380 4 430

425 15

16 754 Cr 15 754 Cr 15 374 Cr 10 944 Cr 4 129 15 073 Cr 5 000 19 648 Cr 19 633 Cr

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Case study Q7.1 – suggested answer: CASH PAYMENTS JOURNAL

Date Sept. 3 9 16 17 26 30 15 30 30 30

Account Rent Dell Australia Electricity Sony Australia Wages Repairs Bank Loan Bank Fees Office Supplies Motor Vehicle Expense

Cheque No. 7 9 10 11 12 13 BS BS 14 14

Post Ref. 655 DEL1 630 SON1 670 660 280 610 650 645

Debits Accounts Payable Other 990 25 000 380 4 520 425 290 1 000 15 95 150 29 520 3 345 (200)

✓

Page: 1 Credits Cash at Discount Bank Received 990✓ 25 000✓ 380✓ 4 430✓ 90 425✓ 290 1 000✓ 15✓ 245 32 775

(100)

(430)

There are no changes to the other special journals and all the deposits appear on the bank statement.

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GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

1 30

Balance Receipts

b/d CRJ1

Oct

Balance

b/d

62 020 36 905 1 590 4 750 1 794 45 039 38 484 13 389 51 873 19 098

GJ4 GJ4

3 279 1 888

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Sept

1 30

Balance Sales Revenue

b/d SJ1

Balance pre w/off Balance post w/off Inventory Aug 3 10 13

Sept

1 30

5 167 2 981 39 789 42 770 37 770 34 789

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

12 100 5 500 210

Balance Acc. Payable

b/d PJ1

17 810 10 685 37 020

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Sept

30 30

Payments Balance

Aug

13 23 31

Sales Returns Cash/Discount Balance

Sept

30 30

Cash at Bank Bad Debts Exp.

Aug

5 11 17 21 31 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable Balance

Sept

30 30

Cost of Sales Cost of Sales

47 705 19 490

Balance Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039 CPJ1 32 775 c/d 19 098 51 873

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167 CRJ1 5 000 GJ7 2 981

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 c/d 10 685 17 810 SJ1 24 000 CRJ1 4 215 28 215

Aug

Advertising Exp.

Account No. 130 GJ5 600

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Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Prepaid Rent July 31 Rent Exp.

GJ2

990

Aug

Rent Exp.

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

20 000 1 130 5 000 26 130

Account No. 140 GJ5 990

Account No. 170

Accumulated Depreciation: Shop Equipment & Fittings

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

GJ4 GJ4 c/d

Sept

CPJ1

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459

Cash at Bank

5 500 210 11 990 17 700 29 520

July Aug

31 31

Depreciation Exp. Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Sept

1 30

Balance Inventory/Other Balance

Telephone Payable Aug 31 Telephone Exp.

GJ5

July

Telephone Exp.

July Aug

31 31

Electricity Exp. Electricity Exp.

Electricity Payable

Account No. 171 GJ2 132 GJ5 218 350

Account No. 200 GJ4 12 200 GJ4 5 500

b/d PJ1

17 700 11 990 37 520 49 510 19 990

Account No. 210 GJ2 48

Account No. 215 GJ2 90 GJ5 180 270

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Bank Loan Aug 18 Cash at Bank 31 Balance

Sept

Cash at Bank

GJ4 c/d

1 000 49 307

CPJ1

50 307 1 000

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

Balance

July

Shop Equip & Fit

Account No. 290 GJ1 5 000

July

Cash at Bank

Account No. 300 GJ1 10 000

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Shareholders Loan Account

Share Capital

Retained Earnings

Profit or Loss Summary 330 July 31 Expenses 31 Retained Earnings Aug

31 31

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307

July

Account No. 320 GJ3 718 GJ6 1 979 2 697

Account No. GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

Service Revenue July 31 Profit or Loss Summary

GJ3

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

1 802 718 2 520 9 638 1 979 11 617

July

31 31

Revenue

GJ3 GJ3

Aug

Revenue

GJ6

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sept

Cash at Bank

CRJ1

Aug

Cash at Bank

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

GJ4 GJ4 GJ4

30 30

Acc. Receivable Cash at Bank

SJ1 CRJ1

11 507

2 520 11 617 11 617

Sept

300

Account No. 410 GJ4 1 590

11 507

2 520

3 279 1 888 4 750 11 507 39 789 8 089

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Sales Returns & Allowances Aug 13 Acc. Receivable

GJ4

298

Aug

Profit or Loss Summary

Account No. 420 GJ6 298

GJ6

110

Aug

Acc. Payable

Account No. 430 GJ4 110

Sept

Cash at Bank

CPJ1

Aug

13 31

Inventory Profit or Loss Summary

Account No. 505 GJ4 210 GJ6 6 705

SJ1 CRJ1

1 000 2 130 1 210 2 575 6 915 24 000 4 215

Freight Costs Aug 3 Acc. Payable

GJ4

100

Aug

Accountancy Fees Sept 30 Acc. Payable

PJ1

500

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug

GJ5

1 000 600

Aug

Profit or Loss Summary

GJ7

2 981

Discount Received Aug 31 Profit or Loss Summary

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory Sept

30 30

GJ4 GJ4 GJ4 GJ4

Inventory Inventory

6 915

Profit or Loss Summary

Account No. 520 GJ6 100

Account No. 600

Prepaid Advertising

Bad Debts Expense Sept 30 Acc. Receivable

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

Account No. 608

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Bank Fees Sept 30

Account No. 610 Cash at Bank

CPJ1

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD

GJ2 GJ5

132 218

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable Sept 16 Cash at Bank

GJ2 GJ5 CPJ1

90 180 380

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 630 GJ3 90 GJ6 180

Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance

GJ2 GJ5

41 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan

GJ2 GJ5

96 211

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Motor Vehicle Expense Sept 30 Cash at Bank

CPJ1

150

Account No. 645

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Office Supplies Expense Sept 30 Cash at Bank

CPJ1

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Aug Sept

Prepaid Rent Cash at Bank

GJ5 CPJ1

1 485 990 990

Aug

Profit or Loss Summary

Repairs Expense Sept 30 Cash at Bank

CPJ1

290

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

31 3

Account No. 650

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

Account No. 660

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

165

Wages Expense Sept 26 Cash at Bank

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

Account No. 670 CPJ1

425

ELECTRONIC EMPORIUM PTY LTD Bank Reconciliation Statement As at 30 September Balance as per bank statement Less: Unpresented cheques: 13 290 14 245 Balance as per Cash at Bank account

$ 19 633 Cr

___535 $ 19 098 Dr

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Case study Q7.2 – decision making and recording: Although it has been a good month for sales, the company has just been advised that Clear Vision Opticians have gone into liquidation and it appears Electronic Emporium Pty Ltd is unlikely to recover any of the money owed to them by this business. This is a somewhat sobering lesson for David, that a company should not make a sale without completing a thorough credit check first. Required (a) There are two alternative treatments for accounting for bad debts. Explain to David what they are and the advantages and disadvantages of each. Then make a recommendation as to which method Electronic Emporium Pty Ltd should use to write off this bad debt. (b) Use the general journal to write off the balance owed to the company by Clear Vision Opticians, and post the transaction to the general ledger. You are to use the direct write-off method (recall the direct write off method is used in a company when bad debts are immaterial) when recording this transaction, but do not let these instructions influence the outcome of your discussion in part 1.

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Case study Q7.2 – suggested answer (a): With the direct write-off method you write the amount off as a bad debt expense when you have determined that the amount is uncollectable. The advantage with this method is that it is the simplest method to use. The disadvantage is that often the debt is written off in a different accounting time period than when the original sale was recorded. It is therefore not the best method for matching revenue and expenses in the same time period, and if bad debts are significant it can cause the financial reports to be misleading to the users. With the allowance method you estimate the proportion of debts that you expect to be uncollectable and any actual bad debts are then written off against that allowance. The advantage with this method is that you are matching revenue and expenses in the same time period and that makes the financial reports more useful for users. The disadvantage is that it can be difficult to estimate what proportion of debts will become uncollectable and over or under-estimation can also be misleading. Recommendation: This is a new company and it would be extremely difficult to estimate what proportion of debts are likely to become bad debts as there is no prior history to use as a guide. Where the incidence of bad debts is extremely rare, or the amounts involved are small, or it is difficult to estimate the proportion of debts likely to become bad debts, then the direct write-off method is the most appropriate one to use.

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Case study Q7.2 – suggested answer (b): GENERAL JOURNAL Page 7 Date Sept 30

Account Name Bad Debts Expense Accounts Receivable/Clear Vision Opticians To record the write-off of Clear Vision Opticians as a bad debt.

Post Ref. 608 110/CV O1

Debit 2 981

Credit 2 981

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME: Clear Vision Opticians CODE: CVO1 Date Explanation Sept. 1 Balance 30 Bad Debt Expense

Post Ref. GJ7

Debit

Credit 2 981

Balance 2 981 -

Refer to the general ledger for the posting of the other parts of this general journal entry.

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Case study Q7.3 – analysing: The company has been providing credit terms to customers for two months now and David would like to know how long it is taking to get the money in. It is vital he collects cash from credit sales as quickly as possible so that he can meet his commitments including loan repayments, payments to suppliers and wages for his employee. Required Calculate the receivables turnover and average collection period, BOTH prior to writing off the bad debt, and after writing it off. The figures for net credit sales for September and net receivables can be obtained from special journals, schedule of accounts receivable, accounts receivable subsidiary ledger accounts and the general ledger accounts that you prepared in the previous chapter. Hint: the period is one month (30 days) not one year.

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Case study Q7.3 – suggested answer: Receivables turnover

Average collection period

Prior to bad debt write-off

Net credit sales Average net receivables

30 Receivables turnover

$39,789 ($2981 + $37770)/2

After bad debt write-off

= =

1.95 times 15 days $39,789 ($2981 + $34789)/2 2.11 times 14 days

It is misleading to assume that collection has improved. The only reason for the reduction in the average collection period is that an amount has been written off as a bad debt.

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Chapter 8: reporting and analysing non-current assets Case study Q8.1 – recording and reporting At the start of September David realized that he had been using his personal vehicle, a Holden utility, to meet with prospective customers and to deliver goods. So he decided to transfer the vehicle into the company’s name and to have the company to pay for all the running costs. A local car dealer valued the vehicle at $26,000. The company does not currently have sufficient cash to pay for the vehicle so David has decided to treat it as a loan to the company to be repaid under the same arrangements as the other equipment he provided. During the month the company traded in the old cash register on a new one because the old one purchased in July could no longer provide printouts for sales needed to keep control of inventory and sales records. Required Use the general journal to record the following: 1. The acquisition of the motor vehicle on 1 September at the valuation provided by the car dealer. 2. The acquisition of the new POS cash register from MCR Cash Registers for $2,800 less $100 on the old cash register that was traded-in. The date of this acquisition was 15 September and the company has given us interest free credit terms of 90 days. 3. The cash register was acquired on 25 July and cost $350. The carrying amount of this asset was $345 at the end of August. Calculate and record the depreciation to the date of disposal and the gain or loss on disposal. 4. Calculate and record the depreciation for the month on these assets. Round figures to the nearest dollar. a. All the shop equipment and fittings are depreciated using the straight line method with no residual value and an estimated useful life of 10 years. i. The display cabinets, counters and shelving were acquired on 20 July and cost $20,000 ii. The computer repair equipment was acquired on 24 July and cost $5,000 iii. The lounge suite, table & chairs were acquired on 25 July and cost $780 b. The motor vehicle has an estimated useful life of 8 years and a residual value of approximately $4,500. Depreciate this asset using the diminishing value method and a rate of 20%. c. The POS cash register has an estimated useful life of 5 years and a residual value of $500. It is to be depreciated using the straight line method. 5. Balance the general ledger accounts (in pencil) and prepare a trial balance.

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Case study Q8.1 – suggested answer: GENERAL JOURNAL Page 8 Date Sept 1

Account Name Motor Vehicles Shareholders Loan Account To record the acquisition of a Holden Utility provided by David Johnson and charged to his loan account.

Shop Equipment & Fittings Shop Equipment & Fittings Accounts Payable/MCR Cash Registers

Post Ref. 160 290

170 170 200/MC R1

Debit 26 000

Credit 26 000

2 800 100 2 700

To record the purchase of a new POS cash register and trade-in of the old cash register.

Depreciation Expense Accumulated Depreciation: Shop Equipment & Fittings To record the depreciation on the old cash register to the date of sale.

620 171

Accumulated Depreciation: Shop Equipment & Fittings Loss on Disposal Shop Equip & Fittings @ Cost To record the loss on disposal of the cash register

171

680 170

244

Depreciation Expense Accumulated Depreciation: Shop Equipment & Fittings Accumulated Depreciation: Motor Vehicles Depreciation for September

620 171

667

161

250

234 433

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Calculation of depreciation: Old cash register to date of sale = ($350/10) x (0.5/12) = $1 Other shop equipment & fittings = ($26130-$350/10) x (1/12) = $215 POS cash register= ($2800-500/5) x (0.5/12) = $19 Motor vehicle = ($26000 x 20%)/12 = $433

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GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

1 30

Balance Receipts

b/d CRJ1

Oct

Balance

b/d

62 020 36 905 1 590 4 750 1 794 45 039 38 484 13 389 51 873 19 098

GJ4 GJ4

3 279 1 888

b/d SJ1

5 167 2 981 39 789 42 770

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Sept

1 30

Balance Sales Revenue

Balance

Inventory Aug 3 10 13

Sept

1 30

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Sept

30 30

Payments Balance

Aug

13 23 31

Sales Returns Cash/Discount Balance

Sept

30 30

Cash at Bank Bad Debts Exp.

Aug

5 11 17 21 31 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable Balance

Sept

30 30

Cost of Sales Cost of Sales

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039 CPJ1 32 775 c/d 19 098 51 873

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167 CRJ1 5 000 GJ6 2 981 7 981

34 789

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

12 100 5 500 210

Balance Acc. Payable

b/d PJ1

17 810 10 685 37 020 47 705

Balance

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 c/d 10 685 17 810 SJ1 24 000 CRJ1 4 215 28 215

19 490

Prepaid Advertising July 31 Advertising Exp

GJ2

600

Aug

Advertising Exp.

Account No. 130 GJ5 600

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Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Prepaid Rent July 31 Rent Exp.

GJ2

990

Aug

Rent Exp.

Motor Vehicles Sept 1 Shareholder Loan

GJ8

26 000

Account No. 140 GJ5 990

Account No. 160

Accumulated Depreciation: Motor Vehicles

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

Sept

GJ8

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459

Acc. Payable

Balance

20 000 1 130 5 000 26 130 2 800 28 930

Sept

Depreciation Exp.

Sept

15 15

Acc. Payable Accum Depn/ Loss

31 31

Depreciation Exp. Depreciation Exp.

15 30

Depreciation Exp. Depreciation Exp.

Account No. 161 GJ8 433

Account No. 170 GJ8 100 GJ8 250 350

28 580

Accumulated Depreciation: Shop Equipment & Fittings Sept 15 Shop Equip @ Cost GJ8 6 July Aug Sept

Balance

Account No. 171 GJ2 GJ5 GJ8 GJ8

132 218 350 1 234 585 579

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Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

GJ4 GJ4 c/d

Sept

CPJ1

Cash at Bank

5 500 210 11 990 17 700 29 520

Aug

3 10

Purchases/Freight Purchases

Sept

1 30 15

Balance Inventory/Other Shop Equip & Fit.

Balance

Telephone Payable Aug 31 Telephone Exp.

GJ5

Sept

Cash at Bank

GJ4 c/d

1 000 49 307

CPJ1

50 307 1 000

17 700 11 990 37 520 2 700 52 210 22 690

Account No. 210 GJ2 48

Telephone Exp.

July Aug

31 31

Electricity Exp. Electricity Exp.

July

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

Balance

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307

Balance

48 307

Shareholders Loan Account July Sept

24 1

Shop Equip & Fit Motor Vehicle@ Cost

July

Cash at Bank

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Share Capital

Retained Earnings

b/d PJ1 GJ8

July

Electricity Payable

Bank Loan Aug 18 Cash at Bank 31 Balance

Account No. 200 GJ4 12 200 GJ4 5 500

Account No. 215 GJ2 90 GJ5 180 270

Account No. 290 GJ1 5 000 GJ8 26 000 31 000 Account No. 300 GJ1 10 000

Account No. 320 GJ3 718 GJ6 1 979 2 697

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Profit or Loss Summary July 31 Expenses 31 Retained Earnings Aug

31 31

GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

Service Revenue July 31 Profit or Loss Summary

GJ3

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

1 802 718 2 520 9 638 1 979 11 617

July

Revenue

Account No. 330 GJ3 2 520

Aug

Revenue

GJ6

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sept

Cash at Bank

CRJ1

Aug

Cash at Bank

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

GJ4 GJ4 GJ4

Sept

30 30

Acc. Receivable Cash at Bank

SJ1 CRJ1

11 507

11 617

Discount Received Aug 31 Profit or Loss Summary

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory Sept

30 30

298

Aug

Profit or Loss Summary

Account No. 420 GJ6 298

GJ6

110

Aug

Acc. Payable

Account No. 430 GJ4 110

Sept

Cash at Bank

CPJ1

Aug

13 31

Inventory Profit or Loss Summary

Account No. 505 GJ4 210 GJ6 6 705

SJ1 CRJ1

3 279 1 888 4 750 11 507 39 789 8 089 47 878

GJ4

GJ4 GJ4 GJ4 GJ4

Inventory Inventory

300

Account No. 410 GJ4 1 590

11 507

Sales Returns & Allowances Aug 13 Acc. Receivable

2 520 11 617

1 000 2 130 1 210 2 575 6 915 24 000 4 215 28 215

6 915

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Freight Costs Aug 3 Acc. Payable

GJ4

100

Accountancy Fees Sept 30 Acc. Payable

PJ1

500

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug

GJ5

1 000 600

Aug

Profit or Loss Summary

Bad Debts Expense Sept 30 Acc. Receivable

GJ6

2 981

Bank Fees Sept 30

CPJ1

Borrowing Expense July 17 Bank Loan

GJ1

500

July

Profit or Loss Summary

Account No. 615 GJ3 500

Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD Sept 15 Shop Equip AD 30 Accum Depn

GJ2 GJ5 GJ8 GJ8

132 218 1 667 668

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Aug

Profit or Loss Summary

Account No. 520 GJ6 100

Account No. 600

Prepaid Advertising

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

Account No. 608

Account No. 610 Cash at Bank

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Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable Sept 16 Cash at Bank

GJ2 GJ5 CPJ1

90 180 380

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 630 GJ3 90 GJ6 180

Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance

GJ2 GJ5

41 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan

GJ2 GJ5

96 211

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Motor Vehicles Expense Sept 30 Cash at Bank

CPJ1

150

Office Supplies Expense Sept 30 Cash at Bank

CPJ1

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Aug Sept

Prepaid Rent Cash at Bank

GJ5 CPJ1

1 485 990 990

Aug

Profit or Loss Summary

Repairs Expense Sept 30 Cash at Bank

CPJ1

290

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

31 3

Account No. 645

Account No. 650

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

Account No. 660

165

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

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Wages Expense Sept 26 Cash at Bank

CPJ1

425

Account No. 670

Loss on Disposal Sept 15 Shop Equip & Fit

GJ8

244

Account No. 680

ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME: MCR Cash Registers CODE: MCR1 Date Explanation Sept. 15 Shop Equip & Fittings

Post Ref. GJ8

Debit

Credit 2 700

Balance 2 700

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Account No. 100 110 120 135 160 161 170 171 200 215 280 290 300 320 400 410 430 505 600 608 610 620 630 645 650 655 660 670 680

ELECTRONIC EMPORIUM PTY LTD Trial Balance As at 30 September Account Name Debit Cash at Bank Accounts Receivable Inventory Prepaid Insurance Motor Vehicles Accumulated Depreciation: Motor Vehicles Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Electricity Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings Service Revenue Sales Revenue Discount Received Cost of Sales Accountancy Fees Bad Debts Expense Bank Fees Depreciation Expense Electricity Expense Motor Vehicle Expense Office Supplies Expense Rent Expense Repairs Expense Wages Expense Loss on Disposal

Credit

19 098 34 789 19 490 1 334 26 000 433 28 580 579 22 690 270 48 307 31 000 10 000 2 697 300 47 878 90 28 215 500 2 981 15 668 380 150 95 990 290 425 244 $ 164 244

$ 164 244

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Case study Q8.2 – analysis: The company has made a significant investment in non-current assets and it is therefore important that they provide a return that justifies the investment. Required Calculate the following for August and September: • Average useful life of PPE assets (hint: Multiply the depreciation expense for the month by 12 to determine the annual depreciation rate before calculating the ratio). • Asset turnover. Comment on the results.

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Case study Q8.2 – suggested answer:

Average useful life of PPE assets

August

September

Asset turnover

August

September

Average cost of PPE assets Depreciation expense

(26130 + 26130)/2 (218 x 12)

26130 2615

10 years

(26130 + 54580)/2 (668 x 12)

40355 8016

5.03 years

Net sales Average total assets

11209 (66448 + 79752)/2

0.15 times

48178 (79752 + 128767)/2

0.46 times

The August result for the average useful life of PPE asset is based on shop equipment and fittings and they were being written off over 10 years using the straight line method. The calculation confirmed that. The September result for the average useful life of PPE assets includes some new shop equipment that is being written off over 5 years and the motor vehicle that has a useful life of 8 years but is being written off using the diminishing value method which loads a higher amount of depreciation at the beginning, hence the lower average figure. The asset turnover figures are pretty dismal, but this is a new business. The September result shows a great improvement on the results for August and if sales continue to grow as fast as they have then the investment in assets will be justified.

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Chapter 9: reporting and analysing liabilities Case study Q9.1 – recording: Electronic Emporium Pty Ltd has now been trading for not quite three months, but three accounting periods and although the monthly reports were interesting David is keen to see what the profit for the year to date is. He is sure the business is now generating enough profit to pay his wages, so would like the financial reports to include wages for him for September, even though he hasn’t actually written a cheque to pay himself as yet. In order to provide a more complete picture of profitability, liquidity and solvency there are a few more journal entries that must be recorded for the month. These will include some new payables now that wages are being paid. There are also some further entries required to account for portions of prepaid expenses applicable. Allowance for doubtful debts and warranties are not required, because the company uses the direct-write off method for bad debts (as write offs are immaterial) and any claims against warranties on the products sold will be the responsibility of the manufacturer, not this company. Required Record the following transactions in the general journal and post to the general ledger. •

The PAYG (pay-as-you-go) Withholding Tax deducted from Samantha Farmer’s wages was $35. (Update the chart of accounts with a new current liability account no.220 PAYG Withholding Payable or the nearest account number if you have already used this account number.)

•

Superannuation payable for Samantha Farmer’s is $44. (New expense account no.662 and current liability account no.225 or the nearest account numbers if you have already used these account numbers.)

•

The company will be paying David $500 per week, therefore $2,000 is to be recorded as wages payable. (New account no.230 or the nearest account number if you have already used this account number.) o Note: Until the wages are actually paid there is no liability for superannuation, and the $2,000 wages payable is the gross wage figure so includes the liability for PAYG Withholding.

•

Interest on the bank loan is $203 for the month.

•

Insurance expense applicable for the month is 1/12 of the premium paid.

•

The electricity bill has come in and been paid, so transfer the balance of the electricity payable account to the expense account.

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Case study Q9.1 – suggested answer: GENERAL JOURNAL Page 9 Date Sept 30

Account Name Wages PAYG Withholding Payable PAYG deducted from wages for the month

Post Ref. 670 220

Debit 35

Credit 35

Superannuation Expense Superannuation Payable Super payable for the month

662 225

Wages Wages Payable Wages payable to David Johnson for September

670 230

2 000

Interest Expense Bank Loan Interest on the bank loan for the month

640 280

203

Insurance Prepaid Insurance Amount applicable for the month

635 135

125

Electricity Payable Electricity Expense Reallocation of payable against expense

215 630

270

2 000

203

125

270

Calculation of insurance expense: 1/12 x $1500 = $125

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GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

1 30

Balance Receipts

b/d CRJ1

Oct

Balance

b/d

62 020 36 905 1 590 4 750 1 794 45 039 38 484 13 389 51 873 19 098

GJ4 GJ4

3 279 1 888

b/d SJ1

5 167 2 981 39 789 42 770

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Sept

1 30

Balance Sales Revenue

Balance

Inventory Aug 3 10 13

Sept

1 30

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Sept

30 30

Payments Balance

Aug

13 23 31

Sales Returns Cash/Discount Balance

Sept

30 30

Cash at Bank Bad Debts Exp.

Aug

5 11 17 21 31 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable Balance

Sept

30 30

Cost of Sales Cost of Sales

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039 CPJ1 32 775 c/d 19 098 51 873

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167 CRJ1 5 000 GJ6 2 981 7 981

34 789

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

12 100 5 500 210

Balance Acc. Payable

b/d PJ1

17 810 10 685 37 020 47 705

Balance

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 c/d 10 685 17 810 SJ1 24 000 CRJ1 4 215 28 215

19 490

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Aug

Advertising Exp.

Account No. 130 GJ5 600

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Sept

Insurance Exp.

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459 GJ9 125

Aug

Rent Exp.

Account No. 140 GJ5 990

Balance

1 209

Prepaid Rent July 31 Rent Exp.

GJ2

990

Motor Vehicles Sept 1 Shareholder Loan

GJ8

26 000

Account No. 160

Accumulated Depreciation: Motor Vehicles

Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

Sept

GJ8

Acc. Payable

Balance

20 000 1 130 5 000 26 130 2 800 28 930

Account No. 161 GJ8 433

Sept

Depreciation Exp.

Sept

15 15

Acc. Payable Accum Depn/ Loss

31 31

Depreciation Exp. Depreciation Exp.

Account No. 171 GJ2 GJ5

15 30

Depreciation Exp. Depreciation Exp.

GJ8 GJ8

Account No. 170 GJ8 100 GJ8 250 350

28 580

Accumulated Depreciation: Shop Equipment & Fittings Sept 15 Shop Equip @ Cost GJ8 6 July Aug Sept

Balance

132 218 350 1 234 585 579

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Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

GJ4 GJ4 c/d

Sept

CPJ1

Cash at Bank

5 500 210 11 990 17 700 29 520

Aug

3 10

Purchases/Freight Purchases

Sept

1 30 15

Balance Inventory/Other Shop Equip & Fit.

Balance

Account No. 200 GJ4 12 200 GJ4 5 500

b/d PJ1 GJ8

17 700 11 990 37 520 2 700 52 210 22 690

Telephone Payable Aug 31 Telephone Exp.

GJ5

July

Telephone Exp.

Electricity Payable Sept 30 Electricity Exp.

GJ9

270

July Aug

31 31

Electricity Exp. Electricity Exp.

Sept

Wages

Sept

Superannuation Exp.

Account No. 225 GJ9

Sept

Wages

Account No. 230 GJ9 2 000

July

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

1 30

Balance Interest Exp.

PAYG Withholding Payable

Superannuation Payable

Wages Payable

Bank Loan Aug 18 Cash at Bank 31 Balance

Sept

Cash at Bank

GJ4 c/d

1 000 49 307

CPJ1

50 307 1 000

Balance

Account No. 210 GJ2 48

Account No. 215 GJ2 90 GJ5 180 270

Account No. 220 GJ9 35

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307 GJ9 203 49 510 48 510

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Shareholders Loan Account 24 1

Shop Equip & Fit Motor Vehicle@ Cost

July

Cash at Bank

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

1 802 718 2 520 9 638 1 979 11 617

July

31 31

Revenue

Aug

Revenue

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sept

Cash at Bank

CRJ1

Aug

Cash at Bank

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

GJ4 GJ4 GJ4

Sept

30 30

Acc. Receivable Cash at Bank

SJ1 CRJ1

Aug

Profit or Loss Summary

Share Capital

Retained Earnings

Profit or Loss Summary July 31 Expenses 31 Retained Earnings Aug

31 31

GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

Service Revenue July 31 Profit or Loss Summary

GJ3

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

Account No. 290 GJ1 5 000 GJ8 26 000 31 000

July Sept

11 507

Account No. 300 GJ1 10 000

Account No. 320 GJ3 718 GJ6 1 979 2 697

Account No. 330 GJ3 2 520 GJ3 2 520 GJ6 11 617 11 617

Account No. 410 GJ4 1 590

11 507

Sales Returns & Allowances Aug 13 Acc. Receivable

GJ4

298

300

3 279 1 888 4 750 11 507 39 789 8 089 47 878

Account No. 420 GJ6 298

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Discount Received Aug 31 Profit or Loss Summary

GJ6

Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory Sept

30 30

GJ4 GJ4 GJ4 GJ4

Inventory Inventory

SJ1 CRJ1

110

Acc. Payable

Sept

Cash at Bank

CPJ1

1 000 2 130 1 210 2 575 6 915 24 000 4 215 28 215

Aug

13 31

Inventory Profit or Loss Summary

Account No. 505 GJ4 210 GJ6 6 705

Aug

6 915

Freight Costs Aug 3 Acc. Payable

GJ4

100

Accountancy Fees Sept 30 Acc. Payable

PJ1

500

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug

GJ5

1 000 600

Aug

Profit or Loss Summary

Bad Debts Expense Sept 30 Acc. Receivable

GJ6

2 981

Bank Fees Sept 30

CPJ1

GJ1

500

Account No. 430 GJ4 110

Aug

Profit or Loss Summary

Account No. 520 GJ6 100

Account No. 600

Prepaid Advertising

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

Account No. 608

Account No. 610 Cash at Bank

Borrowing Expense July 17 Bank Loan

July

Profit or Loss Summary

Account No. 615 GJ3 500

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Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD Sept 15 Shop Equip AD 30 Accum Depn

GJ2 GJ5 GJ8 GJ8

132 218 1 667 668

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable Sept 16 Cash at Bank

GJ2 GJ5 CPJ1

90 180 380

July Aug Sept

31 31 30

Profit or Loss Summary Profit or Loss Summary Electricity Payable

Account No. 630 GJ3 90 GJ6 180 GJ9 270

Balance

110

Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance Sept 30 Prepaid Insurance

GJ2 GJ5 GJ9

41 125 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan Sept 30 Bank Loan

GJ2 GJ5 GJ9

96 211 203

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Motor Vehicles Expense Sept 30 Cash at Bank

CPJ1

150

Office Supplies Expense Sept 30 Cash at Bank

CPJ1

Rent Expense July 18 Cash at Bank

GJ1

1 485

July

31 31

Prepaid Rent Profit or Loss Summary

Aug Sept

GJ5 CPJ1

1 485 990 990

Aug

Profit or Loss Summary

31 3

Account No. 645

Account No. 650

Prepaid Rent Cash at Bank

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

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Repairs Expense Sept 30 Cash at Bank

CPJ1

290

Account No. 660

Superannuation Expense Sept 30 Super Payable

GJ9

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

Account No. 662

165

Wages Expense Sept 26 Cash at Bank 30 PAYG Withholding 30 Wages Payable

CPJ1 GJ9 GJ9

425 35 2 000 2 460

Loss on Disposal Sept 15 Shop Equip & Fit

GJ8

244

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

Account No. 670

Account No. 680

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Case study Q9.2 – reporting: As explained previously, David is anxious to see the year to date figures. With a computerised accounting system the monthly, year-to-date, and comparison figures can be produced very quickly and simply. With a manual system it is a bit more time consuming. In order to produce year to date profit figures, the income and expense figures from the three accounting periods will have to be combined, and the simplest way to do that is in a specialised worksheet. Required Use the specialised worksheet provided to record figures for each of the three accounting periods. Cross add only the income and expense figures in the worksheet for the year to date trial balance and use only the September figures for statement of financial position type accounts. Do not include the retained earnings figure in the Year To Date (YTD) trial balance or you will be double counting the profit for July and August. Complete the columns for the statement of profit or loss and the statement of financial position. The figures you are to use are those shown for the adjusted trial balance in the worksheet for July (chapter 3) and the August adjusted trial balance figures from the perpetual worksheet (chapter 5). The September figures will come from the general ledger accounts for September in the question above.

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Case study Q9.2 – suggested answer: ELECTRONIC EMPORIUM PTY LTD Worksheet For the period ended 30 September August September YTD Trial Balance

July No. 100 110 120 130 135 140 160 161 170 171 200 210 215 220 225 230 280 290 300 320 400 410 420 430 505 520 600

Account Name Cash at Bank Accounts Receivable Inventory Prepaid Advertising Prepaid Insurance Prepaid Rent Motor Vehicles Accumulated Depreciation: Motor Vehicles Shop Equipment & Fittings Accumulated Depreciation: Shop Equipment & Fittings Accounts Payable Telephone Payable Electricity Payable PAYG Withholding Payable Superannuation Payable Wages Payable Bank Loan Shareholders Loan Account Share Capital Retained Earnings Service Revenue Sales Revenue Sales Returns & Allowances Discount Received Cost of Sales Freight Costs Accountancy Fees

Dr 36 905

Dr 38 484 2 981 10 685

600 1 459 990

1 334

Dr 19 098 34 789 19 490

1 209

26 000

26 130 132

48 90

28 580

Statement of Financial Position Dr Cr 19 098 34 789 19 490 1 209

26 000 433

26 130

Statement of Profit or Loss Dr Cr

26 000 433

433

28 580

350

579

11 990

22 690

35 44 2 000 48 510 31 000 10 000

11 507

35 44 2 000 48 510 31 000 10 000 2 697 300 47 878

110

270

50 096 5 000 10 000

49 307 5 000 10 000 718

2 520 298 6 705 100

2 820 59 385 298

28 215 500

2 820 59 385 298

200 34 920 100 500

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605 608 610 615 620 625 630 635 640 645 650 655 660 662 665 670 680

Advertising Expense Bad Debts Expense Bank Fees Borrowing Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Motor Vehicles Expense Office Supplies Expense Rent Expense Repairs Expense Superannuation Expense Telephone Expense Wages Expense Loss on Disposal

400

600 2 981 15

500 132 90 41 96

218 94 180 125 211

495

990

117

67 886

89 242

668 110 125 203 150 95 990 290 44

89 242

2 460 244 166 256

Profit

166 256

1 000 2 981 15 500 1 018 94 380 291 510 150 95 2 475 290 44 165 2 460 244 177 696

177 696

1 000 2 981 15 500 1 018 94 380 291 510 150 95 2 475 290 44 165 2 460 244 48 530 13 875 62 405

62 405

129 166

62 405

129 166

115 291 13 875 129 166

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Case study Q9.3 – decision making and reporting: Some of the accounts in our chart of accounts were classified simply as either current or non-current, when in fact they may be both. These accounts are - prepaid insurance, bank loan and shareholders loan account. It is some time since these were first recorded, so to refresh your memory, the loan from the bank is to be repaid within five years. It is currently being repaid at the rate of $1,000 per month. The shareholder loan is not interest bearing and is to be repaid as soon as possible. Hint: it must be classified as a current liability. Required (a) Decide what proportion of these accounts should be current and what proportion non-current, as at the end of August and September, using 30 June as the end of financial year. (b) Prepare the statement of profit or loss for the year to date. (c) Prepare the statement of financial position based on your decision in (1) above and with comparative figures (August and September). You are also to: i. group all prepayments and show them as either current or non-current ii. group all non-current assets and describe as ‘property, plant and equipment’ iii. group payables (other than accounts payable) and describe as ‘other payables’ iv. describe the bank and shareholders loans as ‘borrowings’ Note: Although the shareholder’s loan is in reality an ‘other payable’, group it with the bank loan for analysis purposes in the next question.

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Case study Q9.3 – suggested answer (a): Prepaid insurance: This premium was originally $1500 and the starting date was 21 July. Therefore a small portion of this premium belongs in the next financial year. $1,500/12 = $125 per month. $125 x 11 months = $1,375 + $41 (July expense) = $1,416 Therefore $1,500 – 1,416 = $84 to be taken into July next year. September balance of the account is $1,209. $84 is non-current, $1,125 is current. August balance was $1 334. Non-current is $84, current is $1,250. Bank loan: This is being repaid at the rate of $1,000 per month. The amount that is due for repayment between now and the end of the financial year is $1,000 x 9 = $9,000. This is the current portion of long term debt. September balance of the account is $48,510. $9,000 is current, $39,510 is non-current. August balance was $49 307. $10,000 ($9,000 + $1,000) is current and $39,307 non-current. Shareholders loan: There is no set repayment timeframe and although some may be repaid during this current financial year, that is not guaranteed. Therefore the whole amount should be classified as non-current.

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Case study Q9.3 – suggested answer (b): ELECTRONIC EMPORIUM PTY LTD Statement of Profit or Loss for the period 15 July to 30 September Revenue Service Revenue Sales Revenue Less Sales Returns & Allowances Net sales Total revenue Cost of Sales Cost of Sales Freight Costs Total Cost of Sales Gross Profit Other Revenue Discount Received Total Other Revenue Expenses Accountancy Fees Advertising Expense Bad Debts Expense Bank Fees Borrowing Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Loss on Disposal Motor Vehicle Expense Office Supplies Expense Rent Expense Repairs Expense Superannuation Expense Telephone Expense Wages Expense Total Expenses Net Profit

2 820 59 385 298 59 087 61 907 34 920 100 35 020 26 887 200 200 27 087 500 1 000 2 981 15 500 1 018 94 380 291 510 244 150 95 2 475 290 44 165 2 460 13 212 $ 13 875

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Case study Q9.3 – suggested answer (c): ELECTRONIC EMPORIUM PTY LTD Statement of Financial Position As at 30 September September Current assets Cash at bank Accounts Receivable Inventory Prepayments Total current assets Non-current assets Prepayments Property, plant and equipment Total non-current assets Total assets Current liabilities Accounts Payable Other Payables Borrowings Total current liabilities Non-current liabilities Borrowings Total non-current liabilities Total liabilities Net assets Equity Share Capital Retained profits Total equity

August

19 098 34 789 19 490 1 125 74 502

38 484 2 981 10 685 1 250 53 400

84 53 568 53 652 128 154

84 25 780 25 864 79 264

22 690 2 079 9 000 33 769

11 990 270 10 000 22 260

70 510 70 510 104 279 23 875

44 307 44 307 66 567 12 697

10 000 13 875 23 875

10 000 2 697 12 697

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Case study Q9.4 – analysis: David knows how important it is for the company to be able to meet its liabilities as an when they fall due, and without too much difficulty. He also understands that the company’s lenders want to be assured that the company is profitable and will be around in the future to meet its long term commitments. David being one of the lenders is also keen to make sure he is eventually repaid the money owed to him. Required Calculate the following ratios for August and September and comment on your findings: •

Liquidity ratios: • Working capital • Current ratio • Quick ratio

•

Solvency ratios: • Debt to total assets ratio • Times interest earned ratio

The interest rate on the bank loan is 5% pa and the shareholders loan is interest free. Calculate the times interest earned ratio on the data recorded to date, and then calculate the ratio again assuming a 5%pa interest rate on the shareholder loan. Then comment on the results. The shareholder loan began on 24 July with a loan of $5,000. An additional $26,000 was loaned to the company on 1 September.

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Case study Q9.4 – suggested answer: Liquidity ratios: Working capital

Current assets – Current liabilities

August:

$53,400 - $22,260

$31,140

September:

$74,502 - $33,769

$40,733

Current assets Current liabilities

Current ratio

August:

$53,400 $22,260

September:

$74,502 $33,769

Quick ratio

August:

($38,484 + $2,981) $22,660

September:

($19,098 + $34,789) $33,769

2.4

2.21

Cash + Marketable securities + Net receivables Current liabilities 1.83

1.6

Working capital has increased which a positive indication of improved liquidity. Both the current ratio and quick ratio have decreased slightly, but both are still very positive, with the current ratio above 2 and the quick ratio well above 1. Overall liquidity looks very positive.

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Solvency ratios: Debt total assets ratio

Total liabilities Total assets

August:

$66,567 $79,264

0.84 or 84%

September:

$104,279 $128,154

0.81 or 81%

Profit before income tax + Interest expense Interest expense

Times interest earned

August:

($3,185 + $307) $307

11.37 times

September:

($14,355 + $510) $510

29.15 times

= $26.03* + $127.40**

Interest calculations for shareholders loan:

$153 rounded

* ($5,000 x 5% x 38/365) **($31,000 x 5% x 30/365 August:

($3,185 + $307) ($307 + $26)

$3,492 $333

= 10.49 times September:

($14,355 + $510) ($510 + $127)

$14,865 $637

23.34 times

The solvency ratios paint conflicting pictures. The debt to total assets ratio indicates a fairly high level of financing by creditors, whereas the times interest earned is very healthy. With the calculations based on data recorded to date the reason would be that because a substantial portion of the debt is owed to David Johnson and is interest free. That tends to distort the result. However, the second set of calculations include interest on the shareholders loan and the times interest earned ratio is still very healthy, indicating that the company is generating

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sufficient profits to meet interest commitments without any problem. Overall there does appear to be any problem with the solvency of the company.

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Chapter 10: reporting and analysing equity Case study Q10.1 – recording: David Johnson as the sole shareholder/director of Electronic Emporium Pty Ltd has been approached by a number of people who are interested in acquiring shares in the company. He has carefully considered the matter and discussed it with you, his accountant. He is aware that in order to grow the company needs more capital, but he is concerned that he may lose control of the company if there are other shareholders and directors. The advice given is that since there are a number interest parties, a private placement of shares would be an appropriate course of action and prior to this, David should convert $11,000 of the amount owed to him into 11,000 ordinary shares of $1.00 each so that he remains the majority shareholder. He should also pay himself the wages owed to him. Then, after the private placement of 20,000 shares at $2.50 each is to be made, reduce the level of debt by repaying the balance of the shareholders loan. Required (a) The following transactions are required to put the accountant’s instructions into effect in the books of account. Record them in the general journal and then post them to the general ledger: Oct. 1 Oct. 1 Oct. 15 Oct. 16

Journalise the conversion of $11,000 of the shareholders loan to share capital. A cheque was issued to David Johnson for $1,900. This was to pay wages owed to him, less PAYG Withholding. 20,000 ordinary shares issued by private placement at $2.50 each. The cash received has been banked. A cheque was issued to David Johnson for $20,000 in settlement of the money loaned by him to the company.

(b) Record the summary figures for the transactions for the month of October the general journal and post to the general ledger. This will then provide you with data for October. Date all transactions 31 October.

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(a) Payments from the bank account: Accounts Payable Less: Discount Received Wages Less: PAYG Withholding Payable Advertising Expense Bank Fees Loan repayment Motor vehicles expense Rent Expense Telephone Expense (b) Deposits to the bank account: Accounts Receivable Sales Revenue (Cost of sales $9,571) (c) Credit purchases: Inventory Freight Costs Accountancy Fees

33 226 27 190 124 3 000 200 800 25 1 000 280 990 265 39 072 21 989 17 083

72 900 72 200 200 500

(d) Credit sales: Sales Revenue (Cost of sales $26,000)

43 200 43 200

(e) Other transactions for the month: Superannuation expense Insurance expense Depreciation expense: Motor Vehicles Shop Equipment & Fittings Interest expense

475 125 426 261 200

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Case study Q10.1 – suggested answer (a) & (b): GENERAL JOURNAL Page 10 Date Oct 1

Account Name Shareholders Loan Account Share Capital Conversion of loan to 11,000 ordinary shares at $1.00 each

Post Ref. 290 300

Debit 11 000

11 000

Wages Payable Cash at Bank PAYG Withholding Payable Payment of wages owing to David Johnson

230 100 220

2 000

Cash at Bank Share Capital Issue of 20,000 ordinary shares at $2.50 each by private placement

100 300

50 000

Shareholders Loan Account Cash at Bank Finalisation of shareholders loan to the company

290 100

20 000

Accounts Payable Discount Received Wages Expense PAYG Withholding Payable Advertising Expense Bank Fees Bank Loan Motor Vehicles Expense Rent Expense Telephone Expense Cash at Bank Payments for October

200 430 670 220 605 610 280 645 655 665 100

27 190

Cash at Bank Accounts Receivable Sales Revenue Cost of sales Inventory Receipts for October

100 110 410 505 120

39 072

Inventory

120

72 200

Credit

1 900 100

50 000

20 000

124 3 000 200 800 25 1 000 280 990 265 33 226

21 989 17 083 9 571 9 571

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Freight Costs Accountancy Fees Accounts Payable Credit purchases for October

520 600 200

200 500

Accounts Receivable Sales Revenue Cost of Sales Inventory Credit sales for October

110 410 505 120

43 200

Superannuation Expense Superannuation Payable Insurance Expense Prepaid Insurance Depreciation Expense Accumulated Depreciation: Shop Equipment & Fittings Accumulated Depreciation: Motor Vehicles Interest Expense Bank Loan Miscellaneous transactions for October

662 225 635 135 620 171

475

161 640 280

72 900

43 200 26 000 26 000

475 125 125 687 261 426 200 200

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GENERAL LEDGER Cash at Bank July 15 Share Capital 17 Bank Loan/Borrow 31 Service Revenue

GJ1 GJ1 GJ1

10 000 49 500 2 520

Aug

1 5 21 23

Balance Sales Revenue Sales Revenue Acc. Receivable

b/d GJ4 GJ4 GJ4

Sept

1 30

Balance Receipts

b/d CRJ1

Oct

1 15 31

Balance Share Capital Sundry receipts

b/d GJ10 GJ10

62 020 36 905 1 590 4 750 1 794 45 039 38 484 13 389 51 873 19 098 50 000 39 072

Nov

Balance

b/d

108170 52 019

GJ4 GJ4

3 279 1 888 5 167 2 981 39 789

Accounts Receivable Aug 11 Sales Revenue 17 Sales Revenue

Sept

1 30

Balance Sales Revenue

b/d SJ1

Oct Oct

1 31

Balance Sales Revenue

b/d GJ10

Nov

Balance

b/d

42 770 34 789 43 200 77 989 56 000

July

18 20 21 22 23 31

Rent Shop Equip & Fittings Advertising Prepaid Insurance Shop Equip & Fittings Balance

Aug

14 18 25 31

Acc. Payable Bank Loan Telephone Exp. Balance

Sept

30 30

Payments Balance

Oct

1 16 31 31 31

Wages Payable Shareholders Loan Sundry expenses Dividends Balance

Aug

13 23 31

Sales Returns Cash/Discount Balance

Sept

30 30 30

Cash at Bank Bad Debts Exp. Balance

Oct

31 31

Cash at Bank Balance

Account No. 100 GJ1 1 485 GJ1 20 000 GJ1 1 000 GJ1 1 500 GJ1 1 130 c/d 36 905 62 020 GJ4 5 390 GJ4 1 000 GJ4 165 c/d 38 484 45 039 CPJ1 32 775 c/d 19 098 51 873 GJ10 1 900 GJ10 20 000 GJ10 33 226 GJ11 1 025 c/d 52 019 108170

Account No. 110 GJ4 298 GJ4 1 888 c/d 2 981 5 167 CRJ1 5 000 GJ6 2 981 c/d 34 789 42 770 GJ10 21 989 c/d 56 000 77 989

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Inventory Aug 3 10 13

Acc. Payable Acc. Payable Cost of Sales

GJ4 GJ4 GJ4

12 100 5 500 210

Aug

5 11 17 21 31 31

Cost of Sales Cost of Sales Cost of Sales Cost of Sales Acc. Payable Balance

Sept

1 30

Balance Acc. Payable

b/d PJ1

17 810 10 685 37 020

Sept

30 30 30

Cost of Sales Cost of Sales Balance

Oct

1 31

Balance Acc. Payable

b/d GJ10

47 705 19 490 72 200

Oct

31 31 31

Cost of Sales Cost of Sales Balance

Nov

Balance

b/d

91 690 56 119

Prepaid Advertising July 31 Advertising Exp.

GJ2

600

Aug

Advertising Exp.

Prepaid Insurance July 22 Cash at Bank

GJ1

1 500

July

31 31

Insurance Exp. Balance

Aug

Balance

b/d

1 500 1 459

Aug

31 31

Insurance Exp. Balance

Sept

Balance

b/d

1 459 1 334

Sept

30 30

Insurance Exp. Balance

Oct

Balance

b/d

1 334 1 209

Oct

31 31

Insurance Exp. Balance

Nov

Balance

b/d

1 209 1 084

Prepaid Rent July 31 Rent Exp.

GJ2

990

Aug

Rent Exp.

Motor Vehicles Sept 1 Shareholder Loan

GJ8

26 000

Account No. 120 GJ4 1 000 GJ4 2 130 GJ4 1 210 GJ4 2 575 GJ4 210 c/d 10 685 17 810 SJ1 24 000 CRJ1 4 215 c/d 19 490 47 705 GJ10 9 571 GJ10 26 000 c/d 56 119 91 690

Account No. 130 GJ5 600

Account No. 135 GJ2 41 c/d 1 459 1 500 GJ5 125 c/d 1 334 1 459 GJ9 125 c/d 1 209 1 334 GJ10 125 c/d 1 084 1 209

Account No. 140 GJ5 990

Account No. 160

Accumulated Depreciation: Motor Vehicles Sept Oct

30 31

Depreciation Exp. Depreciation Exp.

Account No. 161 GJ8 433 GJ10 426 859

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Shop Equipment & Fittings July 20 Cash at Bank 23 Cash at Bank 24 Shareholders Loan

GJ1 GJ1 GJ1

Sept

Acc. Payable

GJ8

Oct

Balance

b/d

20 000 1 130 5 000 26 130 2 800 28 930 28 580

Accumulated Depreciation: Shop Equipment & Fittings Sept 15 Shop Equip @ Cost GJ8 6 30 Balance c/d 579

Sept

15 15 30

Acc. Payable Accum Depn/ Loss Balance

Account No. 170 GJ8 GJ8 c/d

28 930

GJ4 GJ4 c/d

Sept

30 30

Cash at Bank Balance

CPJ1 c/d

Oct

31 31

Cash at Bank Balance

GJ10 c/d

5 500 210 11 990 17 700 29 520 22 690 52 210 27 190 68 400 95 590

Account No. 171 GJ2 132 GJ5 218 350 GJ8 1 GJ8 234 585 b/d 579 GJ10 261 840

July Aug

31 31

Depreciation Exp. Depreciation Exp.

Sept

15 30

Depreciation Exp. Depreciation Exp.

Oct

1 31

Balance Depreciation Exp.

Aug

3 10

Purchases/Freight Purchases

Sept

1 30 15

Balance Inventory/Other Shop Equip & Fit.

b/d PJ1 GJ8

Oct

1 31

Balance Inventory/Other

b/d GJ10

Nov

Balance

b/d

585

Accounts Payable Aug 14 Cash/Discount 31 Purchase Returns 31 Balance

100 250 28 580

Account No. 200 GJ4 12 200 GJ4 5 500 17 700 11 990 37 520 2 700 52 210 22 690 72 900 95 590 68 400

Telephone Payable Aug 31 Telephone Exp.

GJ5

July

Telephone Exp.

Electricity Payable Sept 30 Electricity Exp.

GJ9

270

July Aug

31 31

Electricity Exp. Electricity Exp.

Account No. 215 GJ2 90 GJ5 180 270

Sept Oct

30 1 31

Wages Wages Payable Wages

Account No. 220 GJ9 35 GJ10 100 GJ10 200 335

270

PAYG Withholding Payable

Account No. 210 GJ2 48

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Superannuation Payable Sept Oct

30 31

Superannuation Exp. Superannuation Exp.

Wages Payable Oct 1 Cash at Bank

GJ10

2 000

Sept

Wages

Bank Loan Aug 18 Cash at Bank 31 Balance

GJ4 c/d

1 000 49 307

July

17 31

Cash at Bank Interest Exp.

Aug

Interest Exp.

Sept

1 30

Balance Interest Exp.

Oct

1 31

Balance Interest Exp.

Nov

Balance

July Sept

24 1

Shop Equip & Fit Motor Vehicle@ Cost

July Oct

15 1 15

Cash at Bank Shareholders Loan Cash at Bank

Dividends

Sept

15 30

Cash at Bank Balance

CPJ1 c/d

Oct

31 31

Cash at Bank Balance

GJ10 c/d

Shareholders Loan Account Oct 1 Share Capital 16 Cash at Bank

GJ10 GJ10

50 307 1 000 48 510 49 510 1 000 47 710 48 710

11 000 20 000 31 000

Share Capital

Dividends Oct 31 31

Account No. 225 GJ9 44 GJ10 475 519

Account No. 230 GJ9 2 000

Account No. 280 GJ1 50 000 GJ2 96 50 096 GJ5 211 50 307 b/d 49 307 GJ9 203 49 510 b/d 48 510 GJ10 200 48 710 b/d 47 710

Account No. 290 GJ1 5 000 GJ8 26 000 31 000

Account No. 300 GJ1 10 000 GJ10 11 000 GJ10 50 000 71 000 GJ11 1 025 72 025

Account No. 310 Cash at Bank Share Capital

GJ11 GJ11

1 025 1 025 2 050

Retained Earnings July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 320 GJ3 718 GJ6 1 979 2 697

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Profit or Loss Summary July 31 Expenses 31 Retained Earnings Aug

31 31

GJ3 GJ3

Expenses Retained Earnings

GJ6 GJ6

Service Revenue July 31 Profit or Loss Summary

GJ3

Sales Revenue Aug 31 Profit or Loss Summary

GJ6

1 802 718 2 520 9 638 1 979 11 617

July

Revenue

Account No. 330 GJ3 2 520

Aug

Revenue

GJ6

2 520

July

Cash at Bank

Account No. 400 GJ1 2 520

Sept

Cash at Bank

CRJ1

Aug

Cash at Bank

Account No. 410 GJ4 1 590

11 17 21

Acc. Receivable Acc. Receivable Cash at Bank

GJ4 GJ4 GJ4

Sept

30 30

Acc. Receivable Cash at Bank

SJ1 CRJ1

Oct

31 31

Cash at Bank Acc. Receivable

GJ10 GJ10

11 507

11 617

11 507

Sales Returns & Allowances Aug 13 Acc. Receivable

Discount Received Aug 31 Profit or Loss Summary

2 520 11 617

300

3 279 1 888 4 750 11 507 39 789 8 089 47 878 17 083 43 200

GJ4

298

Aug

Profit or Loss Summary

Account No. 420 GJ6 298

GJ6

110

Aug

Acc. Payable

Account No. 430 GJ4 110

Sept Oct

17 31

Cash at Bank Cash at Bank

CPJ1 GJ10

90 124

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Cost of Sales Aug 5 Inventory 11 Inventory 17 Inventory 21 Inventory Sept

30 30

Inventory Inventory

SJ1 CRJ1

Oct

31 31

Inventory Inventory

GJ10 GJ10

1 000 2 130 1 210 2 575 6 915 24 000 4 215 28 215 9 571 26 000

Freight Costs Aug 3 Acc. Payable Oct 31 Acc. Payable

GJ4 GJ10

100 200

Accountancy Fees Sept 30 Acc. Payable Oct 31 Acc. Payable

PJ1 GJ10

500 500

Advertising Expense July 21 Cash at Bank

GJ1

1 000

July

31 31

Prepaid Advertising Profit or Loss Summary

Aug Oct

GJ5 GJ10

1 000 600 800

Aug

Profit or Loss Summary

Bad Debts Expense Sept 30 Acc. Receivable

GJ6

2 981

Bank Fees Sept 30 Oct 31

CPJ1 GJ10

15 25

GJ1

500

31 31

GJ4 GJ4 GJ4 GJ4

Aug

13 31

Inventory Profit or Loss Summary

Account No. 505 GJ4 210 GJ6 6 705

6 915

Profit or Loss Summary

Account No. 520 GJ6 100

Account No. 600

Prepaid Advertising Cash at Bank

Account No. 605 GJ2 600 GJ3 400 1 000 GJ6 600

Account No. 608

Account No. 610 Cash at Bank Cash at Bank

Borrowing Expense July 17 Bank Loan

July

Profit or Loss Summary

Account No. 615 GJ3 500

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Depreciation Expense July 31 Shop Equip AD Aug 31 Shop Equip AD Sept 15 Shop Equip AD 30 Accum Depn

GJ2 GJ5 GJ8 GJ8

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 620 GJ3 132 GJ6 218

GJ10

132 218 1 667 668 687

Oct

Discount Allowed Aug 23 Acc. Receivable

GJ4

Aug

Profit or Loss Summary

Account No. 625 GJ6 94

Electricity Expense July 31 Electricity Payable Aug 31 Electricity Payable Sept 16 Cash at Bank

GJ2 GJ5 CPJ1

90 180 380

July Aug Sept

31 31 30

Profit or Loss Summary Profit or Loss Summary Electricity Payable

Account No. 630 GJ3 90 GJ6 180 GJ9 270

Accum Depn

Balance

110

Insurance Expense July 31 Prepaid Insurance Aug 31 Prepaid Insurance Sept 30 Prepaid Insurance Oct 31 Prepaid Insurance

GJ2 GJ5 GJ9 GJ10

41 125 125 125

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 635 GJ3 41 GJ6 125

Interest Expense July 31 Bank Loan Aug 31 Bank Loan Sept 30 Bank Loan Oct 31 Bank Loan

GJ2 GJ5 GJ9 GJ10

96 211 203 200

July Aug

31 31

Profit or Loss Summary Profit or Loss Summary

Account No. 640 GJ3 96 GJ6 211

Motor Vehicle Expense Sept 30 Cash at Bank Oct 31 Cash at Bank

CPJ1 GJ10

150 280

Office Supplies Expense Sept 30 Cash at Bank

CPJ1

Account No. 645

Account No. 650

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Rent Expense July 18 Cash at Bank

GJ1

1 485

Aug Sept Oct

Prepaid Rent Cash at Bank Cash at Bank

GJ5 CPJ1 GJ10

1 485 990 990 990

Repairs Expense Sept 30 Cash at Bank

CPJ1

290

Superannuation Expense Sept 30 Super Payable Oct 31 Super Payable

GJ9 GJ10

44 475

Telephone Expense July 31 Telephone Payable Aug 25 Cash at Bank

GJ2 GJ4

48 165

Oct

GJ10

165 265

31 3 31

31 31

Prepaid Rent Profit or Loss Summary

Aug

Profit or Loss Summary

Account No. 655 GJ2 990 GJ3 495 1 485 GJ6 990

Account No. 660

Account No. 662

Cash at Bank

Wages Expense Sept 26 Cash at Bank 30 PAYG Withholding 30 Wages Payable

CPJ1 GJ9 GJ9

Oct

GJ10

425 35 2 000 2 460 3 000

GJ8

244

July

July Aug

31 31 31

Profit or Loss Summary Telephone Payable Profit or Loss Summary

Account No. 665 GJ3 48 GJ5 48 GJ6 117 165

Account No. 670

Cash at Bank

Loss on Disposal Sept 15 Shop Equip & Fit

Account No. 680

Note: the students are not required to complete the inventory subsidiary ledger, unless they want to. It is provided to demonstrate how cost of sales figures and inventory balances were calculated.

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INVENTORY SUBSIDIARY LEDGER ITEM: PlayStation PS4 console CODE: PS4C Date Sept.

Oct

1 11 14 25 31 31

Explanation Balance Cash sales Inv. 7757 Cash sales Purchase Cash sales

Units

Purchases Cost Total

5 10

280 280

Cost of Sales Units Cost Total 2

330

660

299

288

576

1400 2800

Units 5 3 8 7 17 15

Balance Cost Total 330 1650 330 990 299 2390 299 2091 288 4891 288 4315

Units 30 10 110 82 182 134

Balance Cost Total 35 1050 35 350 30 3350 31 2510 30 5510 30 4070

ITEM: PlayStation PS4 games CODE: PS4G Date Sept.

Oct

1 11 14 25 31 31

Explanation Balance Cash sales Inv. 7757 Cash sales Purchase Cash sales

Units

Purchases Cost Total

100

3000

100

3000

ITEM: Samsung Galaxy S5 mobile phone CODE: SGMO Purchases Date Explanation Units Cost Total Sept. 1 Balance 7 Sale Inv. 4 11 Cash sales Oct 31 Purchase 30 500 15000 31 Cash sales

ITEM: Samsung Galaxy 16gb tablet CODE: SGTB Purchases Date Explanation Units Cost Total Sept. 1 Balance 3 Cash sales Oct 31 Purchase 10 210 2100 31 Cash sales

Cost of Sales Units Cost Total 20

700

840

1440

Cost of Sales Units Cost Total 1 2

500 500

500 1000

500

4000

Cost of Sales Units Cost Total 3

210

630

210

420

Balance Units Cost Total 13 500 6500 12 500 6000 10 500 5000 40 500 20000 32 500 16000

Units 6 3 13 11

Balance Cost Total 210 1260 210 630 210 2730 210 2310

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ITEM: Sony PlayStation controller CODE: SOPC Purchases Date Explanation Units Cost Total Sept. 1 Balance 5 Inv. 7757 3 40 120 25 Cash sales Oct 31 Purchase 10 40 400 31 Cash sales

Cost of Sales Units Cost Total

123

Units 5 8 6 16 13

Balance Cost Total 45 225 43 345 43 259 41 659 41 536

Units 100 60 30 230 190 150 148

Balance Cost Total 75 7500 75 4500 75 2250 75 17250 75 14250 75 11250 75 11100

Units 100 97 57 27 127 87 47

Balance Cost Total 250 25000 250 24250 250 14250 250 6750 250 31750 250 21750 250 11750

Units 10 8

Balance Cost Total 220 2200 220 1760

ITEM: Microsoft Office CODE: MIOF Date Sept.

Oct

1 18 21 31 31 31 31

Explanation Inv. 9978 Sale Inv. 5 Sale Inv. 6 Purchase Willow HS Willow PS Cash sales

Units 100

200

Purchases Cost Total 75 7500

Cost of Sales Units Cost Total 40 30

75 75

3000 2250

40 40 2

75 75 75

3000 3000 150

15000

ITEM: Dell Inspiron laptop CODE: DINS Date Sept.

Oct

4 7 18 21 31 31 31

Explanation Inv. 2960 Sale Inv. 4 Sale Inv. 5 Sale Inv. 6 Purchase Willow HS Willow PS

Units 100

100

Purchases Cost Total 250 25000

250

3 40 30

250 250 250

750 10000 7500

40 40

250 250

10000 10000

25000

ITEM: HP Pavillion 320gb notebook CODE: HPNB Purchases Date Explanation Units Cost Total Oct 31 Purchase 10 220 2200 31 Cash sales

Cost of Sales Units Cost Total

Cost of Sales Units Cost Total 2

220

440

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ITEM: HP Officejet Printer CODE: HPOJ Date Oct

31 31

Explanation Purchase Cash sales

Units 10

Purchases Cost Total 75 750

Cost of Sales Units Cost Total 2

150

Units 10 8

Balance Cost Total 75 750 75 600

Units 50 42

Balance Cost Total 9 450 9 378

Units 5 3

Balance Cost Total 1100 5500 1100 3300

ITEM: HP Printer Cartridges CODE: HPTN Date Oct

Explanation 31 Purchase 31 Cash sales

Units 50

Purchases Cost Total 9 450

ITEM: Toshiba Laptop 17” screen CODE: TSLT Purchases Date Explanation Units Cost Total Oct 31 Purchase 5 1100 5500 31 Cash sales

Code PS4C PS4G SGMO SGTB SPOC MIOF DINS HPNB HPOJ HPTN TSLT

Cost of Sales Units Cost Total 9

Cost of Sales Units Cost Total 2

1100

2200

SCHEDULE OF INVENTORY As at 31 October Description Qty on Hand PlayStation PS4 console 15 PlayStation PS4 games 134 Samsung Galaxy S5 mobile phone 32 Samsung Galaxy 16gb tablet 11 Sony PlayStation controller 13 Microsoft Office 148 Dell Inspiron laptop 47 HP Pavillion 320gb notebook 8 HP Officejet printer 8 HP Printer cartridges 42 Toshiba Laptop 17” screen 3

Amount 4 315 4 070 16 000 2 310 536 11 100 11 750 1 760 600 378 3 300 $ 56 119

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Case study Q10.2 – reporting: Before deciding whether or not to declare and pay a dividend the owners would like to see if trading for the month has increased the bottom line. The payment of a dividend will depend on profitability and the availability of cash, as there has been a big increase in inventory levels purchased on credit, which in turn means more liabilities to pay. Required Use the worksheet provided for the period ending 31 October. Enter the year-to-date balances from the worksheet in chapter 9, and then enter the net figures posted to the various accounts in October. Add these two columns together to arrive at the YTD trial balance at 31 October. Transfer those figures in the appropriate financial statement columns and determine the year to date profit.

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Case study Q10.2 – suggested answer: ELECTRONIC EMPORIUM PTY LTD Worksheet For the period ended 31 October YTD September October YTD Trial Balance No. 100 110 120 130 135 140 160 161 170 171 200 210 215 220 225 230 280 290 300 320 400 410 420 430

Dr 19 098 34 789 19 490

Dr 33 946 21 211 36 629

1 209

Dr 53 044 56 000 56 119

125

Statement of Profit or Loss Dr Cr

1 084

26 000

Statement of Financial Position Dr Cr 53 044 56 000 56 119 1 084

26 000

433

426

859

579

261

840

22 690

45 710

68 400

35 44 2 000 48 510 31 000 10 000

300 475

335 519

47 710

61 000

71 000

2 820 59 385

60 283

2 820 119 668

200

124

28 580

859

28 580

2 000 800 31 000

298

28 580

298

298 324

2 820 119 668 324

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505 520 600 605 608 610 615 620 625 630 635 640 645 650 655 660 662 665 670 680

Cost of Sales Freight Costs Accountancy Fees Advertising Expense Bad Debts Expense Bank Fees Borrowing Expense Depreciation Expense Discount Allowed Electricity Expense Insurance Expense Interest Expense Motor Vehicle Expense Office Supplies Expense Rent Expense Repairs Expense Superannuation Expense Telephone Expense Wages Expense Loss on Disposal

34 920 100 500 1 000 2 981 15 500 1 018 94 380 291 510 150 95 2 475 290 44 165 2 460 244 177 696

35 571 200 500 800

70 491 300 1 000 1 800 2 981 40 500 1 705 94 380 416 710 430 95 3 465 290 519 430 5 460 244 312 475

25 687

125 200 280 990 475 265 3 000 177 696

168 704

Profit

312 475

70 491 300 1 000 1 800 2 981 40 500 1 705 94 380 416 710 430 95 3 465 290 519 430 5 460 244 91 648 31 164 122 812

122 812

220 827

122 812

220 827

189 663 31 164 220 827

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Case study Q10.3 – recording: Electronic Emporium Pty Ltd is still a private company, but with five shareholders, two directors, and 41,000 ordinary shares issued. David Johnson holds 21,000 of these with the other four shareholders holding 5,000 ordinary shares each. It has been a good month and the directors have decided to declare and pay a 5c dividend to the shareholders. To avoid depletion of funds available to pay creditors it was decided that 2.5c of this would be paid in cash, and the other 2.5c be reinvested in the company by way of additional shares to each of the shareholders this is, a share dividend. Required Use the general journal to record the following transactions: • The cash dividend paid on 31 October. • The issue of shares in satisfaction of the dividend declared and paid on 31 October. David Johnson will receive 210 shares of $2.50 each and the other shareholders 50 shares each at the same price. Post to the general ledger.

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Case study Q10.3 – suggested answer: GENERAL JOURNAL Page 11 Date Oct 31

Account Name Dividends Cash at Bank Cash dividend of 2.5c per share paid on 41,000 shares Dividends Share Capital Issue of 410 shares as a share dividend of 2.5c per share

Post Ref. 310 100

310 300

Debit 1 025

Credit 1 025

1 025 1 025

The general ledger accounts provided for the answer to question 10.1 include the postings for this question.

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Case study Q10.4 – analysis: The new investors are interested in the company’s dividend record and its earnings performance. As this is the first time the company has paid a dividend the information on that will be limited, but earnings performance before and after the issue of new shares will be of interest to the shareholders. Required • Calculate the dividend payout based on the year to date profit figure. • Calculate the return on ordinary shareholders’ equity for the months of September and October. Shareholder’s equity should include the share dividend. Comment on the results.

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Case study Q10.4 – suggested answer: Dividend payout

October:

1025 31164

Cash dividends Profit

3.29%

The dividend payout on year to date profit is low. It is fast growing company and as such needs to retain cash to fund the expected growth of the company for some time yet. Return on ordinary shareholders’ equity

September:

October:

(13875 – 2697) (12697 + 23875)/2

(31164 – 13875 (23875 + 101139)/2

Profit Ordinary shareholder’s average equity

11178 18286

61.13%

17289 62507

27.66%

The return on ordinary shareholder’s equity is excellent despite the significant reduction in the ratio which is as expected because of the huge increase in share capital. We are only looking at trading on a monthly basis so there has not been sufficient time for the additional capital to have had much impact on the expansion of the business.

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Case study Q10.5 – research: When David was considering the raising of extra capital for his business, he decided to choose a private placement of shares rather than going with his grandiose idea of taking the company public. Required As David’s accountant, explain what is involved in a public issue of shares and why it was wise for David to choose a private placement. Use the URL provided below to research the topic and then explain why Electronic Things Pty Ltd had to remain a private company. http://www.afr.com/asic/glossary/;jsessionid=3251D83A7300A6735CBFC199C947E1F6

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Case study Q10.5 – suggested answer: A public company must have more than 50 non-employee shareholders and even with the private placement of shares Electronic Emporium only has 5 shareholders. Therefore David would have been advised that there were not enough interest parties to meet the requirements of a public company. He would also have been advised that the financial reporting obligations of a public company are more onerous than that of a proprietary company.

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Chapter 11: statement of cash flows Case study Q11.1 – analysing and reporting: Electronic Emporium Pty Ltd is not a public company, and therefore the inclusion of a statement of cash flows in their financial reports is not mandatory. The company has only been trading for just over three months, so in a way that will simplify the calculations required to produce a statement of cash flows for the period because all the beginning balances were zero. Required Use the general ledger and year-to-date figures in the worksheet from chapter 10, but remember to adjust the figures in the worksheet to include the dividends declared and paid after the worksheet was prepared. • Prepare a statement of cash flows using the direct method, including notes for noncash investing and financing activities and the reconciliation of profit to operating cash flows (indirect method).

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Case study Q11.1 – suggested answer: Operating cash flow – calculations for the direct method Service Revenue Sales (net)

2,820 119,370 122,190 (94) (56,000) 66,096

Less: Discount Given Less: Increase in accounts receivable Cash receipts from customers

Cost of sales Freight costs Add: Increase in inventory

70,491 300 56,119 126,910

Less: Discount Received Less: Increase in accounts payable Cash payments to suppliers

(324) (68,400) 58,186

Operating expenses Less: Discount Given Less: Depreciation Less: Loss on disposal Add: Increase in prepayments Less: Increase in accrued expenses Cash payments for operating expenses

20,559 (94) (1,705) (244) 1,084 (854) 18,746_

Investing cash flow - calculations Motor Vehicle Shop Equip & Fittings Add: Cost of equipment sold Sale of Shop Equipment

26 000 28 580 350 28 930 100

Financing cash flow – calculations Share capital Less: share dividend Dividends Less: share dividend

72 025 1 025 71 000 2 050 1 025 1 025

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ELECTRONIC EMPORIUM PTY LTD Statement of Cash Flows For the period ended 31 October Cash flows from operating activities Cash receipts from customers Cash payments: To suppliers 58 186 For operating expenses 18 746 Net cash provided by operating activities Cash flows from investing activities Purchase of motor vehicle Purchase of shop equipment & fittings Sale of shop equipment Net cash provided by investing activities Cash flows from financing activities Increase in borrowings Issue of ordinary shares Payment of dividend Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period

$ 66 096

76 932 (10 836)

26 000 28 930 __(100) (54 830)

47 710 71 000 (1 025) 117 685 52 019 _____0 $ 52 019

Note: A shareholders loan of $11 000 was converted into ordinary shares, and a share dividend of $1025 was paid.

ELECTRONIC EMPORIUM PTY LTD Reconciliation of profit to net cash provided by operating activities For the period ended 31 October Cash flows from operating activities Profit $ 31 164 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense 1 705 Loss on disposal 244 Increase in accounts receivable (56 000) Increase in inventory (56 119) Increase in prepayments (1 084) Increase in accounts payable 68 400 Increase in accrued expenses ___854 (42 000) Net cash provided by operating activities ($ 10 836)

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Case study Q11.2 – analysing and decision making: The goals of the company are to continuing expanding the variety of inventory they sell, invest in a computerised accounting system that will provide them with faster and easier access to important information, and pay cash dividends of around 5c per share to the shareholders at least every quarter. Required Analyse the statement of cash flows and comment on whether the company currently has the ability to generate sufficient operating cash flows to make the investment planned and pay the cash dividends planned.

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Case study Q11.2 – suggested answer: At present the company is generating negative cash flows from operations and for that reason, plans to make further investments in equipment may need to be evaluated carefully before proceeding. However, the investment in a computerised accounting system would not be very expensive and would increase efficiency by reducing the amount of time Samantha Farmer spends preparing everything manually. The plan to keep shareholders happy by paying them dividends every quarter is not practical at present as it would deplete cash that could be better utilised to pay creditors.

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Chapter 12: financial statement analysis Case study Q12.1 – analysing: Two years have now passed and David wants to evaluate the profitability, solvency and liquidity of the company because the rate of growth appears to have slowed a little. Comparative figures are provided below for Electronic Emporium Pty Ltd. These financial reports do not include income tax. This is an item that you usually find in published financial reports, but it has been ignored in these reports in order to simplify them for analysis purposes.

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ELECTRONIC EMPORIUM PTY LTD Statement of Profit or Loss For the year ended 30 June 2016 Operating revenue Sales revenue Net sales revenue Less: Cost of sales Cost of sales Freight costs Total cost of sales Gross profit Other operating revenue Service revenue Discount received Total other operating revenue Operating expenses Selling expenses Advertising expense Depreciation expense Motor vehicles expense Rent expense Total selling expenses Administrative expenses Accountancy fees Electricity expense Insurance expense Office supplies expense Repairs expense Superannuation expense Telephone expense Wages Expense Total administrative expenses Financial expenses Bad debts expense Bank fees Borrowing Expense Discount allowed Interest expense/(income) (Profit)/Loss on disposal Total financial expenses Total operating expenses Net profit

2016

2015

491 551

509 971

302 608 500 303 108 188 443

305 714 1 100 306 814 203 157

5 880 322 6 202 194 645

8 540 578 9 118 212 275

4 620 8 583 4 182 12 296 29 681

4 200 7 330 3 768 11 385 26 683

1 500 2 174 1 774 622 860 7 562 2 495 79 600 96 587

1 000 1 890 1 416 777 818 3 595 1 663 37 860 49 019

126 100 1 519 1 136 (55) 2 826 129 094 65 551

2 981 120 100 2 066 2 187 244 7 698 83 400 128 875

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ELECTRONIC EMPORIUM PTY LTD Statement of Changes in Equity For the year ended 30 June 2016 2016

2015

Share capital Beginning balance Shares issued Ending balance

76 122 0 76 122

0 76 122 76 122

Retained earnings Beginning balance Profit Dividends Ending balance Total equity

120 533 65 551 (8 780) 177 304 253 426

0 128 875 (8 342) 120 533 196 655

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ELECTRONIC EMPORIUM PTY LTD Statement of Financial Position As at 30 June 2016 Assets Current assets Cash and cash equivalents Accounts Receivable Inventory Prepayments Total current assets Non-current assets Prepayments Motor Vehicles (net) Shop Equipment & Fittings (net) Total non-current assets Total assets Liabilities Current liabilities Accounts Payable Accrued Expenses Bank Loan Total current liabilities Non-current liabilities Bank Loan Total non-current liabilities Total liabilities Net assets Equity Share capital Retained earnings Total equity

2016

2015

111 148 31 990 147 483 174 290 795

32 400 40 740 143 296 184 216 620

200 20 825 30 493 51 518 342 313

300 21 667 26 689 48 656 265 276

40 225 6 833 2 500 49 558

23 700 3 734 1 000 28 434

39 329 39 329 88 887 253 426

40 187 40 187 68 621 196 655

76 122 177 304 253 426

76 122 120 533 196 655

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ELECTRONIC EMPORIUM PTY LTD Statement of Cash Flows For THE YEAR ENDED 30 June 2016 Cash flows from operating activities Cash receipts from customers Cash payments: To suppliers For operating expenses Net cash provided by operating activities Cash flows from investing activities Purchase of property, plant & equipment Sale of property, plant & equipment Net cash used by investing activities Cash flows from financing activities Increase in borrowings Repayment of borrowings Issue of ordinary shares Payment of dividend Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

2016

$ 504 662

$ 472 724

(292 823) (113 463) 98 376

(429 532) (63 829) (20 637)

(32 490) 21 000 (11 490)

(56 030) __100 (55 930)

24 990 (24 348) (8 780) (8 138) 78 748 32 400

50 000 (8 813) 71 000 (3 220) 108 967 32 400 _____0

$ 111 148

$ 32 400

Required Prepare either (or both) a vertical or horizontal analysis report on the statement of profit or loss for the three periods. Calculate the total selling, administrative and financial expenses as a percentage of sales, not the individual items within those classifications.

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Calculate the following ratios for two years: •

Liquidity: o Current ratio o Quick ratio o Receivable turnover in days (Cash sales for 20X2 were $107,920 and $124,686 for 20X1) o Inventory turnover in days

•

Solvency: o Debt to total assets o Times interest earned o Free cash flow

•

Profitability: o Gross profit o Profit margin o Return on assets o Return on equity

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Case study Q12.1 – suggested answer:

ELECTRONIC EMPORIUM PTY LTD Vertical analysis Statement of Profit or Loss 2016 2015 Amount % Amount Net sales 491 551 100.00 509 971 Cost of sales (303 108) 61.66 (306 814) Gross profit 188 443 38.34 203 157 Other operating revenue 6 202 1.26 9 118 Selling expenses (29 681) 6.04 (26 683) Administrative expenses (96 587) 19.65 (49 019) Financial expenses (2 826) 0.58 (7 698) Net Profit 65 551 13.34 128 875

% 100.00 60.16 39.84 1.79 5.23 9.61 1.51 25.27

ELECTRONIC EMPORIUM PTY LTD Horizontal analysis Statement of Profit or Loss 2016 2015 Amount % Amount Net sales 491 551 96.39 509 971 Cost of sales (303 108) 98.79 (306 814) Gross profit 188 443 92.76 203 157 Other operating revenue 6 202 68.02 9 118 Selling expenses (29 681) 111.24 (26 683) Administrative expenses (96 587) 197.04 (49 019) Financial expenses (2 826) 36.71 (7 698) Net Profit 65 551 50.86 128 875

% 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Liquidity Current ratio:

2016 290,795 49,558 2015 216,620 28,434 Quick ratio:

2016 (111,148 + 31,990) 49,558 2015 (32,400 + 40,740) 28,434 Receivable turnover in days:

2016 387,992 (40,740 + 31,990)/2 365 10.67 2015 391,759 (0 + 40,740)/2 365 19.23 .

Current assets Current liabilities

5.87

7.62

Cash + Net receivables Current liabilities

2.89

2.57

Net credit sales Average net trade receivables

365 Receivables turnover

10.67 times

34.21 days

19.23 times

18.98 days

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Inventory turnover in days:

2016 303,108 (143,296 + 147,483)/2 365 2.08 2015 306,814 (0 + 143,296)/2 365 4.28

Cost of sales Average inventory

365 Inventory turnover

2.08 times

175.48 days

4.28 times

85.28 days

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Solvency Debt to total assets: 2016 88,887 342,313 2015 68,621 265,276 Times interest earned:

2016 (65,551 + 1,136) 1,136 2015 (128,875 + 2,187) 2,187

Total liabilities Total assets

25.97%

25.87%

Profit + interest expense Interest expense

58.70 times

59.93 times

Net cash provided by = operating activities – capital expenditures

Free cash flow:

2016 98,376 – 11,490

$86,886

2015 (20,637) – 55,930

$7,567

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Profitability Gross profit:

2016 188,443 491,551 2015 203,157 509,971 Profit margin:

2016 65,551 491,551 2015 128,875 509,971 Return on assets:

2016 65,551 (265,276 + 342,313)/2 2015 128,875 (0 + 265,276)/2

Gross profit Net sales

38.34%

39.84%

Profit Net sales

13.34%

25.27%

Profit Average total assets

21.58%

97.16%

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Return on equity:

2016 65,551 (196,655 + 253,426)/2 2015 128,875 (0 + 196,665)/2

Profit available to ordinary shareholders Average ordinary shareholders’ equity

29.13%

131.06%

ELECTRONIC EMPORIUM PTY LTD Summary of ratios LIQUIDITY 2016 Current Ratio 5.87:1 Quick Ratio 2.89:1 Receivable turnover in days 34.21 days Inventory turnover in days 175.48 days SOLVENCY Debt to total assets 25.97% Times interest earned 58.70 times Free cash flow $86,886 PROFITABILITY Gross profit 38.34% Profit margin 13.34% Return on assets 21.58% Return on equity 29.13%

2015 7.62:1 2.57:1 18.98 days 85.28 days 25.87% 59.93 times ($76,567) 39.84% 25.27% 97.16% 131.06%

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Case Study Solutions Manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e by Carlon et al.

Case study Q12.2 – discussion/reporting: Shareholders do not necessarily come from an accounting background, therefore a whole lot of ratios may not mean much to them. Required Present a report (written or verbal) to the owners of the company. Begin by commenting on the trends in net profit between the years as indicated by the vertical and/or horizontal analysis report e.g. that net profit improved (deteriorated) between year 1 and year 2, and then explain the main reason(s) for that change e.g. a reduction in the cost of sales. The next part of the report should explain what each of the groups of ratios indicates e.g. liquidity is looking very good because even though inventory turnover declined slightly there has been a big improvement in the current and quick ratios, and receivable turnover has remained steady etc.

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Case study Q12.2 – suggested answer: Report to shareholders Profit declined from 25.27% in 2015 to 13.34% in 2016 primarily because of a huge increase in administrative expenses due to the fact that wages expense more than doubled. David Johnson did not start paying himself wages until part way through 2015, but 2016 includes a full year’s wages for him. The other factor that added to the decline was that although sales in 2016 were only 96.39% of those in 2015, cost of sales did not decline at the same rate and as a result the gross profit margin declined slightly. The only positive item was a significant decrease in financial expenses after writing off of a bad debt in 2015 there were none in 2016, but that had little effect on the profit. The liquidity ratios give mixed messages. Although the current ratio declined from 7.62 to 5.87 the ratio is still well above the benchmark of 2 for this ratio. The quick ratio improved from 2.57 to 2.89 and is well above the benchmark of 1 for this ratio. Both of these indicate that the company will be able to meet their current commitments without any difficulty at all. The receivable turnover in days increased from 18.98 days to 34.21 days which although a big increase, now more realistically approximates the normal credit terms the company allows its customers. Inventory turnover in days is the ratio that causes most concern as it increased from 85.28 days to 175.48 days. It appears that the company’s planned expansion in the range of products it sells has resulted in the company holding too much inventory for the level of sales they are generating. The company’s liquidity is good, but there needs to be more effort made to reduce inventory levels. This is of particular importance because the items they sell are subject to continuous improvements in technology and the company may be left with out-dated inventory that is difficult to sell. Two of the ratios used to analyse the solvency of the company, namely debt to total assets and times interest earned, have remained fairly static. The level of borrowing for this company is low and interest is not a major expense, hence the huge times interest earned ratios. Free cash flows tell a very different story. There was a very significant turn-around from a negative $76,567 in 2015 to a positive $86,886 in 2016. This came about mainly because of improved cash receipts from customers in 2016 (more reliable customers), and a much lower level payments to suppliers. 2015 was the first year of operation and the business was growing fast. Capital investments were required and inventory levels were increased. In 2016 the company stabilised, and inventory levels remained fairly constant so payments to suppliers were substantially less, and investments in capital items was reduced. All of these ratios indicate that the company is solvent and the outlook for the long-term future of the company and its ability to continue to expand and pay dividends is positive. Although all of the profitability ratios are in decline, they are now probably more realistic. The gross profit margin declined slightly from 39.84% to 38.34% but this is not of major concern unless it continues to decline. The profit margin declined from 25.27% to 13.34% mainly because wages paid now probably better reflect the cost of employing skilled staff to run the company. The return on assets declined from 97.16% to 21.58%, but the return on equity decline was much more dramatic, falling from 131.06% to 29.13%. The ratios for 2015 are the result of starting from a zero base and tend to give an inflated view of these returns. Overall the profitability of the company is good.

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Conclusion 2015 was the year of fast growth from a zero base to a turnover in excess of half a million dollars. This had the effect of producing some exaggerated figures in the ratios. 2016’s results show a company that appears to have stabilised, and is still producing very positive and healthy results as far as liquidity, solvency and profitability are concerned. The only negative is the inventory turnover rate which is something that requires urgent attention.

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