Solution Manual for Financial Accounting, Reporting, Analysis And Decision Making, 6th Edition by Ace Test Banks

Solution Manual for Financial Accounting, Reporting, Analysis And Decision Making, 6th Edition

richard@qwconsultancy.com

1|Pa ge

Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 1: An introduction to accounting

Chapter 1: An introduction to accounting Assignment classification table

Learning objectives 1. Explain the business context and the need for decision making.

Brief exercises

Exercises 1

Problems

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

1.1

1A,1B

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 1.1.

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.

1.2.

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.

1.3.

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.

1.4.

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.

1.5.

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

1.6.

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.

Statement of profit or loss. Statement of financial position. Statement of financial position. Statement of profit or loss. Statement of financial position. Statement of financial position.

1.2

Chapter 1: An introduction to accounting

1.7.

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.

1.8.

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.

1.9.

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

1.10.

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.

1.11.

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.

1.12.

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

1.13.

(a)

Tia is not correct. There are three characteristics: • liquidity • profitability • 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.

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

(b) (c)

(d)

1.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to brief exercises BE1.1 (a) (b) (c)

P SP C

Shared control, increased skills and resources. Simple to set up and maintain control with founder. Easier to transfer ownership and raise funds, no personal liability.

BE1.2 (a) (b) (c)

False True False

BE1.3 1.

Trying to determine whether the company complied with the Corporations Act.

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) (b) (c) (d) (e)

3 2 4 5 1

Executive directors Bank managers Shareholders Chief Financial Officer ASIC

1.4

Chapter 1: An introduction to accounting

BE1.4 ABC Pty Ltd Statement of financial position as at 31 December 2018 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 Total equity

15 000 $15 000

BE1.5 P/L SFP SCF SCF

(a) (b) (c) (d)

Revenues during the period. Accounts receivable at the end of the year. Cash received from borrowing during the period. Cash payments for the purchase of property, plant and equipment.

BE1.6 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

1.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE1.7 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

1.6

Chapter 1: An introduction to accounting

Solutions to exercises E1.1 (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

1.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.2 Rosie’s Rentals Pty Ltd Statement of profit or loss for the year ended 31 December 2018 $ 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 2018

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

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

1.8

Chapter 1: An introduction to accounting

E1.3 Quality Products Ltd Statement of financial position as at 30 June 2018

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

*$18,000 – $3,000

1.9

40,000 $40,000

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.4 Black Ltd (a)

(b)

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

Calculation of profit for Black Ltd for the year ended 30 June 2018 $ 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

1.10

Chapter 1: An introduction to accounting

E1.5 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

1.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.6 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, 2018 results would not be comparable to previous years’ results, and the problem would recur in 2019. 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.

E1.7 Maximum Energy Limited Statement of financial position (Partial) as at 30 June 2019 $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

421.5 2766.0 199.5 280.3 586.6 4253.90 70.9 43.8 49.6 523.5 742.6 7997.4 4724.1 1093.8 507.7 41.1 15794.50 $20048.40

1.12

Chapter 1: An introduction to accounting

E1.8 Field Limited Statement of financial position (Partial) as at 30 June 2019 $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

603.1 182.9 138.9 0.1 8.1 16.6 1.9 951.6 0.9 6.5 521.5 57.1 1410.5 1.0 1997.5 $2949.1

1.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.9 (a) Christchurch Flooring Pty Ltd Statement of profit or loss for the year ended 31 July 2018 $ 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 2018 $ Retained earnings, 1 August 2017 Add: Profit Retained earnings, 31 July 2018

2,000 15,000 $17,000

1.14

Chapter 1: An introduction to accounting

(b) Christchurch Flooring Pty Ltd Statement of financial position as at 31 July 2018 $ 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

1.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.10 (a) Teddy Pty Ltd Statement of profit or loss for the year ended 31 July 2020 $ 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 2020 $ 10,900 35,000 $45,900

Retained earnings, 1 July 2019 Add: Profit Retained earnings, 30 June 2020

1.16

Chapter 1: An introduction to accounting

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

265,000

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

176,400 441,400 520,100

45,200

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

1.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.11 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.

1.18

Chapter 1: An introduction to accounting

E1.12 Energy Limited

(a) Debt to assets ratio

$9026.8

2019

2018

0.6753

67.53%

$8605.5

$13367.8 (b) Cash debt coverage ratio

(c)

$621.8 ($9027 + $8606) / 2

0.5468

0.057

54.68%

$15738.4

0.070

$467.5 ($8606 + $7804) / 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 2019 Energy’s cash provided by operations ($621.8.0M) was sufficient to cover the cash used in investing activities ($559.6M). In 2018 the net investing activities ($532.3M) was more than the cash generated from operating activities there was a cash deficiency Energy Limited, being a publicly listed company, could raise more money from the public through the issue of shares or borrow funds.

1.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E1.13 Oldfield Limited

(a) Debt to assets ratio

$1324.5

2019

2018

0.4804

48.04%

2756.8 (b) Cash debt coverage ratio

(c)

$188.7 ($1325 + $1329) / 2

$1328.7

0.4931

0.095

49.31%

$2694.8

0.142

$130 ($1329 + $1405) / 2

The ratio of debt to total assets decreased from 49% to 48%, indicating a slight decrease in the reliance on debt. The net cash flows from operations increased and the cash coverage of total liabilities increased, indicating a better solvency position.

(d) The cash flows from operating activities in both years is greater than required for investing activities in both years.

1.20

Chapter 1: An introduction to accounting

Solutions to Problem Set A PSA1.1 (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.

1.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA1.2 (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 Giorgina’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.

1.22

Chapter 1: An introduction to accounting

PSA1.3 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 2019 $

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

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

Equity Total equity

32,000 $32,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA1.4 PQR Pty Ltd Statement of profit or loss for the month ended 31 October 2018 $

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 2018 $ Retained earnings, 1 October Add: Profit

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

Less: Dividends Retained earnings, 31 October

1.24

Chapter 1: An introduction to accounting

PQR Ltd Statement of financial position as at 31 October 2018 $

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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA1.5 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 2018

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

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

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

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

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Chapter 1: An introduction to accounting

PSA1.6 Ultra Pty Ltd Statement of profit or loss for the month ended 31 May 2019 $

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 2019 $ Retained earnings, 1 May Add: Profit

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

Less: Dividends Retained earnings, 31 May

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Ultra Pty Ltd Statement of financial position as at 31 May 2019 $

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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Chapter 1: An introduction to accounting

PSA1.7 Liddy Ltd Liddy 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 2019

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$148 000 (85 000) 63 000

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

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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA1.8 Cement Ltd Balance Sheet as at 30 June 2019 $’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 Other financial 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

249.9 80.6 877.8 620.0 21.6 32.8 1882.7

26.8 13.6 44.6 13.5 3367.1 859.9 153.7 58.5 4537.7 6420.4 761.1 136.9 29.1 66.1 242.1 1235.3

8.4 1639.6 35.5 58.6 146.5 1888.6 3123.9 $3296.5 2533.8 75.4 588.0 3197.2 99.3 $3296.5

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Chapter 1: An introduction to accounting

PSA1.9 City Sales Pty Ltd (a) (b)

(c)

Working capital

= $474,500 – $250,000 = $224,500

Current ratio

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

Current cash debt coverage ratio

$260,000

$250,000+ $100,000 = 1.5 times 2

(d)

(e)

(f)

(g)

Debt to total assets ratio

Cash debt coverage ratio

Profit margin ratio

Return on assets ratio

$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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA1.10 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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Chapter 1: An introduction to accounting

Solutions to Problem Set B PSB1.1 (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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PSB1.2 (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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PSB1.3 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 2019 $

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

63 000 30 000 93 000 $72 000

Equity Total equity

72 000 $72 000

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PSB1.4 Evans Ltd Statement of profit or loss for the year ended 30 June 2019 $

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 73 300

Evans Ltd Calculation of retained earnings for the year ended 30 June 2019 $ Retained earnings, 1 July 2018 Add: Profit

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

Less: Dividends Retained earnings, 30 June 2019

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Evans Ltd Statement of financial position as at 30 June 2019 $

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

90 000 114 800 $203 300

Equity: Share capital Retained earnings Total equity

150 000 53 300 $203 300

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PSB1.5 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 2018

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$509 200 (301 500) 207 700

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

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

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PSB1.6 Goodwin Ltd Statement of profit or loss for the month ended 31 May 2019 $

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 2019 $ Retained earnings, 1 May Add: Profit

0 14 200 14 200 (750) $13 450

Less: Dividends Retained earnings, 31 May

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Goodwin Ltd Statement of financial position as at 31 May 2019 $

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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PSB1.7 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 2019

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$515 000 (205 000) 310 000

(105 000) (105 000) (77 000) (77 000) $128 000

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PSB1.8 (a) Retail Ltd Statement of profit or loss for the year ended 30 June 2018 $ 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 2018 $ 12 500 20 370 32 870 7 800 $25 070

Retained earnings, 1 July 2017 Add: Profit Less: Dividend Retained earnings, 30 June 2018

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(c) Retail Ltd Statement of financial position as at 30 June 2018 $ Current assets: Cash Accounts receivable Inventory Total current assets Non-current assets: Equipment Intangibles Total non-current assets Total Assets Current liabilities: Accounts payable Total current liabilities Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets

$ 24 250 8 320 21 500 54 070

83 000 6 300 89 300 143 370

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

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(d)

Retail Ltd Statement of cash flows for the year ended 30 June 2018 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)

(e) Calculate the Cash account balance at 1 July 2017 (i.e.) the opening balance). Opening cash balance = Closing balance + decrease in cash = $24 250 + $6 000 = $30 350

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PSB1.9 Nixon Pty Ltd (a)

(b)

(c)

(d)

(e)

(f)

(g)

= $711 750 – $375 000 =

Working capital $336 750 Current ratio

$711750 = 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% $1522 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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PSB1.10 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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Building business skills Financial reporting and analysis BBS1.1 Financial reporting problem: Giorgina’s Pizza Enterprises Ltd Giorgina’s

(a)

Giorgina’s total assets at 30 June 2019 were $142,312,000 and at 1 July 2018 were $131,491,000

(b)

Giorgina’s had $5,014,000 of inventory at 30 June 2019.

(c)

Giorgina’s had Trade and other payables totalling $28,541,000 at 30 June 2019 and $25,629,000 on 1 July 2018.

(d)

Giorgina’s reported sales in 2019 of $141,473,000 and in 2018 of $126,350,000.

(e)

Giorgina’s profit before tax decreased by $1,656,000 from 2018 to 2019, from $32,228,000 to $30,572,000.

(f)

Giorgina’s accounting equation is: Assets = $142,312.00

(g)

Liabilities + $65,378.00

Equity $76,934.00

Giorgina’s has current liabilities of $38,708,000 at 1 July 2018.

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BBS1.2 Comparative analysis problem: Giorgina’s Pizza Enterprises Ltd Giorgina’s Pizza Enterprises Ltd vs. Classic Food Ltd (a) (Amounts in thousands)

Giorgina’s Pizza Enterprises Ltd

Classic Food Ltd

1. Return on Total $21,400/ [($142,312+$131,491)/2] $23,552/[($364,227+$170,296)/2] assets = 15.63% = 8.8% 2. Profit Margin Ratio* $21,400 / $141,473 = 15.12% $23,552 / $650,738 = 3.6% * Sales Revenue from the statement of profit or loss was used here for the profit margin. (b) The ratios indicate that Giorgina’s has a stronger profitability because both its return on total assets and profit margin ratio are greater than those of Classic’s. Overall Giorgina’s is a stronger performer although Classic is a larger entity. (c)

Working capital Current ratio

$6,807 ($45,286 – $38,479) 1.177:1 ($45,286 / $38,479)

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

(d) Giorgina’s appears to have better liquidity because it has a higher current ratio and more working capital. Classic Food 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 Food 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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BBS1.3 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 2018 and 2019 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 2018 or 2019.

(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 2019. However, this may be reasonably expected during the start-up phase of a communications company. There was a new share issue during 2019 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 2019. 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.

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BBS1.4 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 as at February 2018. (a) Deloitte Australia: ‘’Deloitte’ is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk advisory, tax and related services to select clients’. Audit & Assurance: helping to build and maintain strong foundations for the client’s future aspirations. Consulting services: specialising in ‘operations, finance, people management, strategy and technology with extensive industry experience to make a difference to the operational performance’ of their clients. Financial Advisory services: includes restructuring, finance transformation, business modelling and capital optimisation. Risk Advisory services: allows clients to manage risk more effectively and reach their full potential, thus creating and protecting value for shareholders. Tax services: a broad range of fully integrated tax services. (b)

Deloitte operates in over 100 locations around the world including Albania, Argentina, Armenia, Algeria, Australia, Austria, Bahamas, Bahrain, Belarus, Belgium, Brazil, Bermuda, Brunei Darussalam, Bulgaria, Canada, Cayman Islands, Chile, China, Costa Rica, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, Ethiopia, Finland, France, Germany, Gibraltar, Greece, Guatemala, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Korea, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Moldova, Morocco, Mozambique, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Sweden, Syria, Taiwan, Thailand, Turkey, United Kingdom, United States, Uruguay, Vietnam, Yemen.

(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: Summer Vacation Program: spend three to eight weeks in one of the business units, with the prospect of obtaining a graduate position. The Summer Vacation Program is open for students in their penultimate (second last) year of study. Deloitte Development Program: a one or two-day workshop that provides the opportunity to learn about career options, networking opportunities and how to be successful in gaining vacationer and graduate roles at Deloitte. Graduate Program: provides the tools and training to ensure ‘graduates can achieve success through mentoring, peer support and e-learning’.

(d)

Australia: February 2018:

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Media Releases, 1 February 2018, ‘Mining sector poised for growth amidst rapid change and disruption in 2018’. (by Ian Sanders, Global Lead Client Service Partner for BHP and National Mining Leader for Deloitte Australia; David Cormack, Deloitte Consulting’s Strategy and Operations practice). ‘To thrive in the mining industry’s historical boom and bust cycle, and capitalise on new opportunities, companies must rethink the traditional mining model’. (Ian Sanders, Deloitte National Mining leader). This article discusses the top 10 issues shaping the mining industry, as identified in the 2018 edition of Tracking the Trends. They are: 1. Commodities of the future — predicting tomorrow’s disruptors. 2. Bringing digital to life. 3. Overcoming innovation barriers. 4. The future of work. 5. Shifting perceptions. 6. Transforming stakeholder relationships. 7. Water — finding sustainable solutions to a pressing issue. 8. Changing shareholders’ expectations. 9. Reserve replacement woes. 10. Realigning mining boards to drive transformation. The full article can be found at: https://www2.deloitte.com/au/en/pages/media-releases/articles/mining-sector-poisedgrowth-amidst-rapid-change-disruption-2018-010218.html

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Critical thinking BBS1.5 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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BBS1.6 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 2019. 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 2019’.

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 2019 $

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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BBS1.7 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 the lecturer: for ease of 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 2017 (latest available) was used for this solution. Note the full sustainability report is 89 pages long. ‘As the largest private coal fired energy generator in Australia, the largest private operator of renewable energy generation assets in Australia and as one of Australia’s largest energy retailers, we’re uniquely placed to shape a sustainable energy future for Australia. We are moving from being a mass retailer to a personalised retailer — using smarter solutions, technology and service to empower our customers. We are transitioning from being an owner and operator of large generation assets to an orchestrator of large and small assets, allowing energy to be generated, stored and shared by individuals. And we are moving to lower-emissions technology. We’ve set a deadline to close our coal plants and are investing heavily in renewable energy. We’ve been committed to sustainability for a long time. In fact, we’ve been reporting on our sustainability journey since 2004. To us, ‘sustainability’ simply means thinking about the long-term responsibilities we have to all our stakeholders (our employees, our customers, our investors, and the community) and to the environment in which we all work and live. We think this way because we recognise that our future success and reputational standing is shaped and measured by more than just our economic performance; it is also influenced by the social and environmental consequences of our decisions and actions for all our stakeholders.’ (AGL Sustainability Report 2017 / Sustainable Business Strategy, p.1) 1. AGL Approach AGL uses The Global Reporting Initiative (GRI) Standards.

‘The GRI Standards are designed to be used by organisations to report about their impacts on the economy, the environment and/or society. The GRI Standards were launched in October 2016 to replace the GRI G4 Guidelines, which will be phased out by 1 July 2018. Further information about the GRI Standards is available at the GRI website. For the © John Wiley and Sons Australia, Ltd 2019

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purposes of applying the GRI Standards, the material issues we identified have been mapped back to the available topic-specific GRI Standards’. (AGL Sustainability Report 2017 / Sustainable Business Strategy, p.8) 2. AGL’s achievements: results and how measured. For health and safety and the environment only. Health and safety: AGL is ‘committed to providing our people with a safe and healthy place to work. The wellbeing of our people is critically important, as our people are our greatest assets’. (AGL Sustainability Report 2017 / Sustainable Business Strategy, p.50) Health and safety: ‘Provide a safe and healthy workplace and eliminate work-related injuries and illnesses’. (p.60) ‘Strong and dedicated safety leadership and sound dynamic management systems are essential components of our efforts to achieve a ‘zero harm’, safe and sustainable work environment’. (p.60) Health and safety section of the report: From the table below AGL achieved its goal of < 3.9%. Vision

Target FY2017

Zero harm

Total Injury Frequency Rate <3.9%

Performance FY2017 Total Injury Frequency Rate was 2.0%

Target FY2018 Total Injury Frequency Rate ≤1.7%

Approach: ‘An effective safety culture requires pro-active commitment, accountability, and continuous reinforcement from all levels of management, including the AGL Board. The AGL Board and Executive Team review HSE performance via the monthly Group Performance Report. The Board Safety, Sustainability and Corporate Responsibility Committee also reviews safety performance on a quarterly basis, as well as reviewing audit findings and recommendations, strategic priorities, and significant incidents’. (p.60) The key aspects of AGL’s strategic approach to health and safety include: • Values • Policy • strategic framework (Target Zero) • HSE commitments • Management system • Hazard, incident and near miss reporting. (p.60-1). ‘AGL measures and tracks safety performance using a number of lagging performance indicators based on reported safety incidents. We also track leading indicators to provide insight into trends to inform us on our current and future programs’. (p.61) Results: ‘The total injury frequency rate (TIFR) for employees decreased from 4.3 in FY16 to 2.0, exceeding our target of 3.0. A stretch target of a 50% reduction in contractor TIFR was set for FY17 (equivalent to a TIFR of <5.5). The total injury frequency rate for contractors decreased from 11.0 in FY16 to 5.4, exceeding our target of 5.5. © John Wiley and Sons Australia Ltd, 2019

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The combined TIFR for both employees and contractors decreased from 6.2 to 3.1. The decrease in the combined TIFR indicates that the implementation of the Target Zero Strategic Framework, targeted prevention and leadership programs, and the evolving HSEMS are all playing a part in the prevention of injury and illness in our workplaces. Half of the TIFR-related injuries were lacerations, with the remaining injuries equally fractures, crush or muscular related. The occupational injury frequency rate (OIFR)2 for employees increased from 1.5 in FY16 to 1.8, whereas the OIFR for contractors decreased from 1.1 in FY16 to 1.0. The combined OIFR for both employees and contractors increased from 1.4 to 1.5. All OIFR-related injuries related to an irritation of a previously acquired injury, eight of which were associated with the back or neck. There were 13 TIFR-related and 12 OIFR-related employee incidents in FY17 compared to 29 and 10 respectively in FY16, showing a substantial decrease in TIFR-related injuries and a minor increase in OIFR-related injuries. Similarly, contractor TIFR-related and OIFRrelated incidents changed from 29 and three to 17 and three respectively. In FY17, there was one employee and four contractor significant incidents (defined as incidents classified as ‘high risk’ or above, representing a significant decrease compared to FY16 (18 employee and 19 contractor significant incidents). The data indicates that in relation to significant incidents, a primary area of focus will be on reducing what has been classified as ‘AGL Line of Fire’3 events (more that 40% of all TIFR incidents) and a focus on evolving issues such as physical health, wellbeing and mental health. During FY17, there were 9,859 Health and Safety Walks, 4,254 Environment Walks and 6,142 HSE Technical Interactions. There were also 4,054 hazards (comprising 3,414 safety hazards and 640 environmental hazards) and 1,105 near misses (comprising 850 safety near misses and 255 environmental near misses) reported. These results reflect a substantial improvement in reporting behaviour compared to FY164’. (p.61-2) Environment: Approach: ‘A number of our operations have a material environmental footprint. The Australian community has an interest in ensuring that we are held to high standards of accountability for the impact of our operations on the environment. We are working to reduce the risk to the environment and to reduce our environmental footprint by considering environmental outcomes in all our activities. The AGL Environment Policy outlines our approach to protecting the environment and minimising our environmental footprint in the areas where we operate, and includes the following commitments: • We will adhere to high standards to protect the environment where we do business. • We will strengthen our business by integrating environmental considerations into all business activities. • We will analyse and improve the way we do business to reduce environmental risks and impacts. • We will use resources and energy efficiently, minimising emissions and waste. This section focuses on: • Climate change (greenhouse and energy): The greenhouse and energy section shows how we measure and manage our greenhouse footprint, and how we are leading the transition to a carbon constrained future. © John Wiley and Sons Australia, Ltd 2019

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• Renewable energy: We are committed to the development of renewable energy in Australia, and through the Powering Australian Renewables Fund, we’ve commenced the construction of the Silverton Wind Farm in New South Wales. • Water management: The management of water resources is a critical environmental issue facing Australia and one that is relevant to our business. We want to be recognised as a prudent and responsible user of water, and a user who does not adversely impact local water resources. • Air, waste and noise: Emissions from our operations can potentially contribute to regional airshed environmental issues, so it is important that our operations run efficiently and within the parameters set by regulatory licences. • Biodiversity and cultural heritage: We operate and develop assets on land that, in many cases, has value for reasons of biodiversity and cultural heritage, in addition to its commercial value. • Rehabilitation: We recognise our responsibility to rehabilitate assets to an appropriate state upon the cessation of activity’. (p.63)

Vision Climate change (greenhouse and energy) (p. 64)

Target FY2017

Performance Target FY2018 FY2017 Progressively decarbonise the energy supply to our customers. Compliance with AGL Greenhouse Gas Policy: 100%

Compliance with AGL Greenhouse Gas Policy: 100%

Target met. Annually offset the greenhouse gas emissions from electricity consumed at AGL’s corporate workplaces

2,405 tCO2e of Gold Standard abatement was purchased to offset the emissions associated with electricity purchased for AGL’s corporate workplaces

Annually offset the greenhouse gas emissions from electricity consumed at AGL’s corporate workplaces

Target met.

Customers signed up to AGL’s Future Forests carbon offset product3: 10,000 Renewable energy (p. 67)

Continue to be Australia’s leading privately-owned operator of renewable energy. Development of first project to financial close,

Financial close on Silverton Wind Farm achieved 19

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through the Powering Australian Renewables Fund Water management (p. 69)

January 2017 Target met.

financial close, via the Powering Australian Renewables Fund

Manage water resources sustainably Environmental Regulatory Reportable Frequency Rate (ERRFR): <1.5

Environmental Regulatory Reportable Frequency Rate (ERRFR): 1.0

Environmental Regulatory Reportable Incidents: ≤12

Target met. Air, waste and noise (p. 72)

Minimise our environmental footprint Environmental Regulatory Reportable Frequency Rate (ERRFR): <1.5

Environmental Regulatory Reportable Frequency Rate (ERRFR): 1.0

Environmental Regulatory Reportable Incidents: ≤12

Target met. Biodiversity and cultural heritage (p. 75)

Rehabilitation (p. 77)

Minimise our environmental footprint Environmental Regulatory Reportable Frequency Rate (ERRFR): <1.5

Environmental Regulatory Reportable Frequency Rate (ERRFR): 1.0

Environmental Regulatory Reportable Incidents: ≤12

Target met. Rehabilitate sites to an appropriate state, with appropriate community consultation, upon cessation of activity. Compliance with AGL Rehabilitation Principles: 100%

Compliance with AGL Rehabilitation Principles: 100% (delivered through the Rehabilitation Report

Compliance with AGL Rehabilitation Principles: 100%

Target met.

1.59

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS1.8 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.

1.60

Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 2: The recording process

Chapter 2: The recording process Assignment classification table

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

Brief exercises 1

Exercises 1,2,3,10

Problems 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

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: Reporting, analysis and decision making 6e

Solutions to questions 2.1.

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.)

2.2.

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.

2.3.

(a) (b) (c) (d)

2.4.

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.

2.5.

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.

Decrease assets, cash and decrease in equity, cleaning expenses. Increase assets, equipment and decrease assets cash. Increase assets, cash and increase equity, share capital Decrease assets, cash and decrease liabilities, accounts payable.

2.2

Chapter 2: The recording process

2.6.

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

Asset accounts are increased by debits and decreased by credits. Liability accounts are decreased by debits and increased by credits. The share capital account is decreased by debits and increased by credits. Revenue accounts are decreased by debits and increased by credits. Expense accounts are increased by debits and decreased by credits. Dividend account are increased by debits and decreased by credits.

2.7.

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

Equipment — debit balance. Cash — debit balance. Advertising expense — debit balance. Accounts payable — credit balance. Service revenue — credit balance. Accounts receivable — debit balance. Share capital — credit balance.

2.8.

(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. 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.

(b)

2.9.

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.

2.10.

(a)

(b)

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. 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: Reporting, analysis and decision making 6e

Solutions to brief exercises BE2.1 Assets + + –&+

(a) (b) (c)

Liabilities + NE NE

Equity NE + NE

BE2.2

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

Accounts payable Advertising expense Service revenue Accounts receivable Retained earnings Dividends

Debit effect

Credit effect

Decrease Increase Decrease Increase Decrease Increase

Increase Decrease Increase Decrease Increase Decrease

Normal balance Credit Debit Credit Debit Credit Debit

BE2.3 (a) Aug

Dudley Advertising Ltd 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

BE2.4 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

BE2.5 Gonzales Ltd

5/5

Service revenue*

Accounts receivable 13,200 12/5 Cash

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

Accounts receivable Service revenue

13,200 12,000

Cash 12,400 12,000

2.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE2.6 Evans Ltd Trial balance as at 30 June 2019 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

BE2.7 Timaru Ltd Trial balance as at 31 December 2019 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

2.6

Chapter 2: The recording process

Solutions to exercises E2.1 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.

E2.2 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: Reporting, analysis and decision making 6e

E2.3 Foxes Ltd Statement of profit or loss for the month ended 31 August 2019 $ 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 2019 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 2019 $ Retained earnings 1 August Add: Profit Less: Dividends Retained earnings 31 August

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

2.8

Chapter 2: The recording process

E2.4 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: Reporting, analysis and decision making 6e

E2.5 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

Credit $ 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

300

400

2.10

Chapter 2: The recording process

E2.6 Bookit Pty Ltd Account debited (b) Specific account

(c)

Account credited

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

Effect

(d) Normal balance

(a) Basic type

(b) Specific account

(d) Normal balance

2.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E2.7 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

Credit $ 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

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

1,500

3,400 3,400

600 600

2.12

Chapter 2: The recording process

E2.8 Ink Pad Printers Ltd (a)

1/8 10/8 31/8

Share capital Service revenue Accounts receivable

1/9

Opening balance

25/8

Service revenue

1/9

Opening balance

12/8

Cash/bank loan

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

Share capital 1/8

Closing balance

1,000 29,000 30,000

Accounts receivable 1,500 31/8 Cash Closing balance 1,500 900 Office equipment 4,000

Bank loan 12/8

31/8

Office equipment Closing balance

600 900 1,500

Office equipment

3,000

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 2020 Account name Cash Accounts receivable Office equipment Bank loan Share capital Service revenue

Debit $ 29,000 900 4,000

$33,900

Credit $

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

2.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E2.9 Zebra Tours Ltd (a) General journal Date Apr.

Account titles and explanation 1

Cash

Debit

Credit

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

200

700

Revenue received in advance (Received cash for services to be performed in the future)

700

2.14

Chapter 2: The recording process

(b) Zebra Tours Ltd Trial balance as at 30 April 2019 Account name Cash Accounts receivable Supplies Accounts payable Revenue received in advance Share capital Service revenue Salaries expense

Debit $ 8,550 2,200 4,800

Credit $

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

$16,300

2.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E2.10 Ranch Ltd (a) Assets

Cash Sept

1 5

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

25 30

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

(b) Ranch Ltd General journal Account titles and explanation

Date Sept

Ref

Debit

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

Cash Share capital (Issued shares for cash)

Credit

45,000

10,000 15,000

7,500

1,000

2.16

Chapter 2: The recording process

1/9

5/9

25/9

30/9

Share capital

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

100 10,000 7,500 1,000

Equipment Accounts payable Dividend

Cash/accounts payable

Equipment 25,000

Cash

Accounts payable 7,500 5/9 Equipment

200 15,000

Share capital 1/9

300 45,000

Cash

120

Cash

Dividends 1,000

320

2.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E2.11 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. E2.12 Sushi To Go Ltd Trial balance as at 31 July 2019 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

2.18

Chapter 2: The recording process

E2.13 Boxer Ltd Trial balance as at 31 March 2020 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

2.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to Problem set A PSA2.1 a) Let’s Go Travel Agency Ltd Cash 1.

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

1,200

5,000

40,000

13,800

$1,200

$5,000

$40,000

$13,800

–16,000

+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

Key to Retained earnings column above. (a) Rent expense (b) Advertising expense (c) Service revenue (d) Dividends (e) Salaries expense

2.20

(e)

Chapter 2: The recording process

(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 ($13,800 – $0) Add: Dividends Profit

$13,800 400 $14,200

2.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA2.2 (a) Best Consulting Pty Ltd

Date

Cash

Accounts receivable

Assets + Supplies

Office equipment

Bank loan

Liabilities + Accounts payable

Share capital

Equity + Retained earnings

1/5 2/5 3/5 5/5

$10,000 (1,050)

$10,000

(75)

9/5 12/5 15/5 17/5 20/5 23/5 26/5 29/5 30/5

1,250 (100)

1,250 (100) 3,500 (2,000)

($1050)

$250

$3,500 (2,000) (250) 2,250 2,500

Advertising expense Service revenue Telephone Service revenue Salaries expense

(250) (2,250) $2,500 $1,200

(125) $12,400

Rent expense

$250

$1,250

$250

$1,200

1,200 =

$2,500

$1,200

2.22

$10,000

(125) $1,400

Electricity expense

Chapter 2: The recording process

(b) Best Consulting Pty Ltd Statement of profit or loss for the month ended 31 May 2019 $ 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 2019 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: Reporting, analysis and decision making 6e

PSA2.3 (a) Ivan Izo Pty Ltd Cash Bal. 1. 2 3. 4. 5.

6. 7.

$4,000 +1,400 5,400 –2,700 2,700 +3,000 5,700 –400 5,300 –1,500 –900 –350 2,550 –550 2,000 +2,000 4,000

Accounts receivable + $1,500 –1,400 + 100

Assets + Supplies +

$500

Office equipment $5,000

500

5,000

500

5,000

100 +3,400 3,500

500

3,500

500

5,000 +1,000 6,000

= =

Bank loan

Liabilities + Accounts payable + $4,200

Equity Share + Retained capital earnings $6,500 + $300

4,200 –2,700 1,500

6,500

300

6,500

1,500 +600 2,100

6,500

300 +6,400 6,700

6,500

3,500

500

6,000

2,100

6,500

3,500

500

6,000

2,100

6,500

3,500

500

6,000

+$2,000 2,000

6,500

$3,500

$500

$6,000

$2,000

2,100 +250 $2,350

$6,500

8. $4,000

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

6,700 –1,500 –900 –350 3,950 –550 3,400 3,400 –250 $3,150

(a)

(b) (c) (d) (e)

(f)

Chapter 2: The recording process

(b) Ivan Izo Pty Ltd Statement of profit or loss for the month ended 31 August 2019 $ 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 2019 $ 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

9,650 $9,650

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

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

2.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA2.4 Fantasy Miniature Golf and Driving Range Pty Ltd Date

Mar.

Account titles and explanation

Cash

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

Golf revenue (Revenue received in cash) 19

Debit

100 300

Share capital (Issued shares for cash) 3

Post ref

Cash

Credit

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

PSA2.5 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

100 400

9,450

Salaries expense Cash (Paid monthly salary)

500 100

5,850

Accounts payable Cash (Paid Speedy Art Supplies on account)

200 100

3,450

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

Cash Service revenue (Revenue received in cash)

Credit

2,850

7,650

4,050

1,650

9,450

5,850

3,450

2.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b)

1/ 4 11/4

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

100 2,850 5,850

20/4

Share capital Revenue received in advance Service revenue

1/5

Opening balance

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

Service revenue

Accounts receivable 4,050

110

10/4

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

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

Cash

400 4,050 9,450 13,500

Accounts receivable Cash

Salaries expense 5,850

500

Cash

510

Cash

Rent expense 2,850

2.28

Chapter 2: The recording process

(c) Mahon Consultants Pty Ltd Trial balance as at 30 April 2019 Account name Cash Accounts receivable Supplies Accounts payable Revenue received in advance Share capital Service revenue Salaries expense Rent expense

Debit $ 75,450 4,050 7,650

Credit $

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

2.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA2.6 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

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

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

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

115 2,400 18,000 20,400

120

Opening balance

Supplies 5,600

130

1/10

Opening balance

Equipment 30,800

20/10 31/10

Cash Closing balance

1/10

17/10 31/10

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

Service revenue Closing balance

Cash

200 18,800

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

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

Opening balance

Dividends 800 Service revenue 10/10 17/10

310

400 12,800 1,200

Accounts receivable Revenue received in advance

14,000 © John Wiley and Sons Australia Ltd, 2019

2.30

Chapter 2: The recording process

15/10

Cash

Salaries expense 3,600

31/10

Cash

Electricity expense 1,600

500

510

2.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Date

Account titles and explanation

Oct 5

Post ref

Debit

100 115

2,400

Accounts receivable Service revenue (Invoiced customers for services performed)

115 400

12,800

Salaries expense Cash (Paid employee salaries)

500 100

3,600

Revenue received in advance Service revenue (Performed services for customers who paid in advance)

210 400

1,200

Accounts payable Cash (Paid creditors on account) Dividends Cash (Payment of cash dividend)

200 100

5,200

310 100

800

Electricity expense Cash (Paid electricity)

510 100

1,600

Cash Accounts receivable (Received cash from customers on account)

Credit

2,400

12,800

3,600

1,200

5,200

800

1,600

2.32

Chapter 2: The recording process

(d) Lou Lou’s Beauty Centre Pty Ltd Trial balance as at 31 October 2019 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

2.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA2.7 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

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

Accounts receivable 1,100 2/5 Cash 1,750 31/5 Closing balance 2,850 4,800

1/5

Opening balance

Supplies 850

1/5

Opening balance

Equipment 4,000

18/5 31/5

Cash Closing balance

15/5 31/5

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

Service revenue Closing balance

Cash

115 450 2,400 2,850

130

200 2,500

Opening balance

2,500 1,700 210 350 350 50 300 7,350

Opening balance

Dividends 250 Service revenue 8/5 15/5

120

Opening balance

Revenue received in advance 300 1/5 Opening balance 50 350 1/11 Opening balance Share capital 1/5

25/5

100 600 800 250 350 2,700 4,700

Salaries expense Accounts payable Dividend Electricity expense Closing balance

310

400 1,750

Accounts receivable Revenue received in advance

300 2,050

2.34

Chapter 2: The recording process

Cash

Salaries expense 600

500

12/5

Cash

Electricity expense 350

510

31/5

2.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Date

Account titles and explanation

May 2

Cash

Debit

Credit

100 115

450

Accounts receivable Service revenue (Invoiced customers for services performed)

115 400

1,750

Salaries expense Cash (Paid employee salaries)

500 100

600

Revenue received in advance Service revenue (Performed services for customers who paid in advance)

210 400

300

Accounts payable Cash (Paid creditors on account) Dividends Cash (Payment of cash dividend)

200 100

800

310 100

250

Electricity expense Cash (Paid electricity)

510 100

350

Accounts receivable (Received cash from customers on account) 8

Post Ref

450

1,750

600

300

800

250

350

2.36

Chapter 2: The recording process

(d) Western Laundry Services Pty Ltd Trial balance as at 31 May 2019 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

2.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA2.8 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

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

105

Coffee cart revenue

Accounts receivable 1,110

110

1/3

Opening balance

Equipment 19,100

Opening balance

Land 45,100

120

1/3

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

31/3

1/3

10/3 31/3

Cash Closing balance

Share capital 1/3

12/3

Cash

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

Film rental expense Accounts payable Advertising Film rental expense Salaries expense Closing balance

Opening balance Film rental expense

Admission revenue 9/3 Cash 20/3 Cash 31/3 Cash

400 11,600 10,300 21,600 43,500

Coffee cart revenue 31/3 Cash/Accounts receivable

410 2,220

Advertising expense 3,900

500

2.38

Chapter 2: The recording process

2/3 20/3

Accounts payable/Cash Cash

31/3

Cash

Film rental expense 15,100 5,000 20,100

510

Salaries expense 6,900

520

2.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

100 400

11,600

200 100

14,200

7,100 8,000

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

2.40

Chapter 2: The recording process

(d) The Drive-in Movie Palace Ltd Trial balance as at 31 March 2019 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

2.41

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA2.9 (a) Queenstown Ltd Trial balance as at 30 June 2020 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.

2.42

Chapter 2: The recording process

PSA2.10 (a) Helpful Services Ltd Trial balance as at 30 June 2019 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 6,680

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.

2.43

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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 PSB2.1 CRAZY BOB’S REPAIR SHOP LTD (a)

(1)

Cash

Accounts receivable

Supplies

Office equip

Accounts payable

16,000

16,000 (2)

–

Retained earnings

16,000 16,000

(5,000)

11,000 (3)

Share capital +

5,000 5,000

16,000 –

(400) 10,600

(4)

–

(500)

500

10,100

500

10,100

500

5,000

550

16,000

500

5,000

550

16,000

3,150

500

5,000

550

16,000

2,650

500

5,000

550

16,000

1,450

500

5,000

550

16,000

1,310

500

5,000

550

16,000

–

(500)

–

(1,200)

(140)

12,360

(10)

+ 12,360

(11)

120

4,100

(500)

12,500 (9)

(550)

400 400

–

(120)

2.44

(b)

(950) +

13,700 (8)

–

550

4,100 14,200

(7)

(a)

(400)

(5)

(6)

(400)

400 1,710

(c)

(d)

(e)

(f)

(g)

Chapter 2: The recording process (a)

Cash

12,480

Accounts receivable

280

Supplies

500

Office equip

Accounts payable

5,000

550

Share capital +

Retained earnings

16,000

1,710

2.45

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

2.46

Chapter 2: The recording process Key to Retained earnings column: a) Rent expense b) Service revenue c) Dividend d) Petrol expense e) Service revenue f) Electricity expense g) Salary expense.

PSB2.2 ROGERS DELIVERIES LTD (a)

Assets

Date

Cash

01/06

30,000 30,000

02/06

–

(4,000) 26,000

03/06

–

Accounts receivable

2,000 2,000

(400) 24,600

2,000

24,600

2,000

300 300

(1,500) 500

300

1,500 26,100

–

20,000 20,000

23/06

–

Share capital +

30,000

20,000

16,000

30,000

20,000

16,000

30,000

Retained earnings

–

(1,000) (1,000)

2,000 1,000

–

16,000

30,000

(400) 600

20,000

300 16,300

30,000

600

20,000

16,300

30,000 30,000

600

Accounts + payable

16,000 16,000

17/06

20/06

20,000 +

Delivery van

12/06

15/06

Shareholders’ equity

30,000 30,000

25,000 –

Supplies

(1,000) 25,000

05/06

09/06

Liabilities

–

(200) 400

26,100

500

300

20,000

200 16,500

3,000 29,100

500

300

20,000

16,500

30,000

3,000 3,400

(1,000) 28,100

500

300

20,000

(1,000) 15,500

30,000

3,400

–

30,000

2.47

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(a) Date

26/06

29/06

30/06

Assets Cash

(500) 27,600

Accounts receivable

500

Supplies

300

Delivery van

20,000

Liabilities

Shareholders’ equity

Accounts + payable

Share capital +

15,500

(200)

Retained earnings

30,000

(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

2.48

Chapter 2: The recording process

(b)

ROGER DELIVERIES LTD Statement of profit or loss for the Month Ended 30 June 2019 $ 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 2019 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

2.49

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB2.3 HEALTHY PAWS LTD Equity (a) Cash

O/B 1

–

+ Accounts receivable

Assets + Supplies

Office equipment

9,000 (3,100) 5,900

1,700

600

6,000

1,700

600

1,300 7,200

(1,300) 400

600

(800) 6,400

400

600

6,000

13,000

700

6,000

500

13,000

700

4,100 + 10,100

3,300 3,800

13,000

700

6,400 6,800

600

10,100

3,800

13,000

(600) 8,300

6,800

600

10,100

3,800

6,800

600

10,100

3,800 +

6,400

6,800

600

10,100

170 3,970

7,000 13,400

6,800

600

10,100

3,970 2.50

8,900 9,600

(a)

–

(600) 9,000

(b)

13,000

(700) (900) (300) 7,100

(f)

13,000

(170) 6,930

13,000

6,930

–

+ Retained earnings 700

2,500 + 8,900

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

Share capital 13,000

–

3,600 (3,100) 500

Liabilities = Accounts + Bank loan payable

7,000 7,000

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 2019 $ Revenues: Service revenue Expenses: Rent expense Salaries expense Advertising expense Electricity expense Total expenses Profit

$ 8,900 900 700 300 170 2,070 $6,830

Healthy Paws Ltd Calculation of Retained earnings for the Month Ended 30 September 2018 $ Retained earnings 1 September Add: Profit Less: Dividends Retained earnings 30 September

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

2.51

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Healthy Paws Ltd Statement of financial position as at 30 September 2019 $ 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

2.52

Chapter 2: The recording process

PSB2.4 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

2.53

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB2.5 (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

2.54

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

Closing balance

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

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

2.55

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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 2019 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Total expenses

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

Profit

2.56

Chapter 2: The recording process

Accurate Accountants Statement of financial position as at 31 May 2019 $ 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

2.57

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB2.6 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

Share capital 1-Jul Opening balance

310 31-Jul Cash

10,796 10,796

72,508

Dividends 1,000 © John Wiley and Sons Australia Ltd, 2019

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Chapter 2: The recording process

400 31-Jul Closing balance

Dry cleaning revenue 11-Jul Cash 19,250 22-Jul Accounts receivable 19,250 1-Aug Opening 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

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

10,428 10,428

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

Credit 9,872

4,200

Dry cleaning revenue (Received cash for services provided) 14

Accounts payable Cash (Paid creditors)

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

1,108

9,400

10,380

1,000

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Chapter 2: The recording process

(d) Wellington Dry Cleaners Trial balance as at 31 July, 2019 No. 100 110 120 130 200 210 300 310 400 500 510 520

Account name Cash Accounts receivable Supplies Equipment Accounts payable Revenue received in advance Share capital Dividends Dry cleaning revenue Repairs Expense Salaries expense Electricity expense

Debit $ 7,706 20,600 10,796 51,900

Credit $

11,365 3,460 72,508 1,000 19,250 984 10,428 3,168 $106,582

$106,582

(e) Wellington Dry Cleaners Statement of profit or loss for the month ended 31 July 2019 $ Revenues: Service revenue Expenses: Salaries expense Repairs expense Electricity expense Total expenses Profit

$ 19,250

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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Wellington Dry Cleaners Statement of financial position as at 31 July 2019 $ 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

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Chapter 2: The recording process

PSB2.7 (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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

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Chapter 2: The recording process

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

Debit $ 87,660 3,800 1,600

Credit $

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

$97460

(d) Busy Bookkeepers Pty Ltd Statement of profit or loss for the month ended 31 January 2019 $ Revenues: Service revenue Expenses: Salaries expense Rent expense Total expenses Profit

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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Busy Bookkeepers Pty Ltd Statement of financial position as at 31 January 2019 $ 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

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Chapter 2: The recording process

PSB2.8 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

2-Apr Film rental expense 10-Apr Accounts payable 10-Apr Mortgage payable 12-Apr Advertising expense 29-Apr Salaries expense 30-Apr Prepaid rentals Closing balance

105 30-Apr Candy bar revenue

Accounts receivable 85

Prepaid rentals 700

120 1-Apr Opening balance

Land 10,000

130 1-Apr Opening balance

Buildings 8,000

140 1-Apr Opening balance

Equipment 6,000

200 10-Apr Cash 30-Apr Closing balance

Accounts payable 1,000 1-Apr Opening balance 1,500 20-Apr Film rental 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

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

13,085 6,685

Opening balance

107 30-Apr Cash

Cash 6,000 3,800 3,200 85

2,000 500 2,500 1,500

8,000 8,000 6,000

Share capital Opening balance

20,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

400 Closing balance

410

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

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 Accounts payable 1-May Opening balance

Film rental expense 800 500 30-Apr Closing balance 1,300 1,300

530 29-Apr Cash

Salaries expense 1,600

2.68

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

85 85 170 170

1,300 1,300

Chapter 2: The recording process

(b) Date Apr.

Account titles and explanation Film rental expense Cash (Paid film rental)

No entry — not a transaction.

Cash

Debit 800

800

3,800 Admission revenue (Received cash for admissions)

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

3,800

2,000 1,000 3,000

No entry — not a transaction.

Advertising expense Cash (Paid advertising expenses)

300

Film rental expense Accounts payable (Rented film on account)

500

Cash

300

500

3,200 Admission revenue (Received cash for admissions)

Credit

Salaries expense Cash (Paid salaries expense)

3,200

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

170

700

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d) Lights Out Theatre Ltd Trial balance as at 30 April 2019

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

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Chapter 2: The recording process

(e) Lights Out Theatre Ltd Statement of profit or loss for the month ended 30 April 2019 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 2019 Assets: Current assets Cash Account receivable Prepaid rentals Total current assets Non-current assets Land Buildings Equipment Total non-current assets Total assets

6,685 85 700 7,470

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

Liabilities: Current liabilities Accounts payable Non-current liabilities Mortgage payable Total liabilities Net assets

1,500

6,000 7,500 $23,970

Equity Share capital Retained earnings Total equity

20,000 3,970 $23,970

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB2.9 New Trial balance as follows. Theatre Adelaide Ltd Trial balance as at 31 May 2019 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

PSB2.10 New Trial balance as follows. Glasgow Pty Ltd Trial balance as at 31 December 2019 Debit Account names $ 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 $51,160

Credit $

9,000 3,200 18,000 20,960

$51,160

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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS2.1 Financial reporting problem: Giorgina’s Pizza Enterprises Ltd (a)

Account

Issued capital Trade and other payables (Accounts payable) Trade and other receivables (Accounts receivable) Marketing expenses Inventories Property, plant and equipment (net book value) Sales revenue

Increase side

Decrease side

Normal balance

Right Right

Left Left

Credit Credit

Left

Right

Debit

Left Left Left

Right Right Right

Debit Debit Debit

Right

Left

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.

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Chapter 2: The recording process

BBS2.2 Comparative analysis problem: Giorgina’s Pizza Enterprises Ltd Giorgina’s Pizza Enterprises Ltd vs. Freedom Foods Group Limited (a) Giorgina’s Pizza Enterprises Ltd Debit Debit Credit Credit Credit

Freedom Foods Group Limited

1. 2. 3. 4. 5.

Cash Goodwill Borrowings Retained earnings Sales revenue

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) and/or Cash is decreased (credited).

Sales revenue is increased: Cash and/or Accounts receivable are increased (debited).

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS2.3 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

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Chapter 2: The recording process

Critical thinking BBS2.4 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

BBS2.5 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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS2.6 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.

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Chapter 2: The recording process

BBS2.7 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 …

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 3: Accrual accounting concepts

Chapter 3: Accrual accounting concepts Assignment classification table

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

Brief exercises 1

Exercises 1,9

Problems 7A

Explain criteria for revenue recognition and expense recognition.

2,3,4

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

5,9, 10, 11,13

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

Prepare adjusting entries for prepayments and accruals.

3, 4

5, 6, 7, 8,9, 10,11,12,1 3

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.

6, 7

Describe the purpose and the basic form of a worksheet.

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

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

3.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 3.1.

(a)

(b)

3.2.

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

3.3.

The accounting standard for revenue recognition IFRS 15/AASB 15 Revenue from Contracts with Customers, is mandatory for reporting periods commencing 1 January 2018, but earlier adoption was permitted. The main principle in this standard is that revenue is to be recognised to depict the transfer of goods or services to customers in amounts which reflect the payment (i.e. consideration) which the business expects to receive. IFRS 15/AASB 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 party’s 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.

3.2

Chapter 3: Accrual accounting concepts

3.4.

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 rights were transferred and it is probable the law firm will receive the service revenue. That is in April.

3.5.

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

3.6.

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.

3.7.

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.

3.8.

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.

3.9.

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.

3.10.

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

3.11.

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

Prepaid expenses (if initially recorded as an expense) or Accrued revenue. Revenues received in advance. Accrued expenses or revenue received in advance (if initially recorded as revenue). Accrued expenses or prepaid expenses (if initially recorded as an asset). Prepaid expenses (if initially recorded as an asset). Accrued revenues or revenues received in advance (if initially recorded as a liability). © John Wiley and Sons Australia Ltd, 2019

3.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

3.12.

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

Chapter 3: Accrual accounting concepts

Solutions to brief exercises BE3.1 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

BE3.2 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.

BE3.3 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

Depreciation expense

FINANCIALSTATEMENT PRESENTATION IS NET Equipment Less Accumulated depreciation

25 000 (3 000) $22 000

3.5

3 000

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE3.4 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

BE3.5 Hoi Ltd Item

Account

(a) (b) (c) (d)

Accounts receivable Prepaid insurance Equipment Accum. depreciation — equipment Bank loan Interest payable Service revenue received in advance Interest receivable Wages payable

(e) (f) (g) (h) (i)

(1) Type of adjustment

(2) Related account

Accrued revenue Prepaid expense Depreciation refer item (d) Prepaid expense

Service revenue Insurance expense Depreciation expense

Accrue interest refer item (f) Accrued expense Revenue received in advance

Interest expense Service revenue

Accrued revenue Accrued expense

Interest revenue Wages expense

BE3.6

Account (a) (b) (c)

Accumulated depreciation Depreciation expense Retained earnings

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

Dividends Service revenue Supplies Accounts payable

Khanna Ltd Financial statement

Post-closing trial balance Yes No Yes

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

No No Yes Yes

3.6

Chapter 3: Accrual accounting concepts

BE3.7 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 the closing entries. Prepare a post-closing balance.

3.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to exercises E3.1 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).

E3.2 (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.

E3.3 (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

Chapter 3: Accrual accounting concepts

E3.4 (a) (b) (c) (d) (e) (f) (g) (h)

9. 7. 3. 4. 8. 1. 5. 6.

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

E3.5 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

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E3.6 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). E3.7 Con James Dental Practice General journal

Date Account name(narration) 2019 Jan 31 Accounts receivable Service revenue (Service performed 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

3.10

Chapter 3: Accrual accounting concepts

E3.8

Date

Wong Pty Ltd General journal Account name (narration)

Post ref

2019 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

E3.9 Wolfmother Ltd Statement of profit or loss for the month ended 31 July 2020

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

3.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E3.10 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 2018

Purchase date: On 31 July balance is $2400 so there is 3 months’ coverage remaining ($800 x 3). Thus, the purchase date was 9 months earlier on 1 November 2018.

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

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

3.12

1700 7300 9000 1500 $3000 2400 600

1725

1150 1125

Chapter 3: Accrual accounting concepts

E3.11 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 2019

Purchase date = 1 Oct 2019 (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

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

3.13

1500 1800 3300 800 $2000 1600 400

1150

1150 750

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E3.12 Snowmass Ltd General journal Date (a)

Account name (narration)

July 10 Supplies Cash 14 Cash

$ Debit 200

200 3 000

Service revenue 15 Salaries expense Cash

3 000 1 200 1 200

20 Cash

700 Service revenue received in advance

(b)

$ Credit

700

July 31 Supplies expense Supplies

500 500

31 Salaries expense Salaries payable

1 200

31 Service revenue receivable Service revenue

500

31 Service revenue received in advance Service revenue

900

1 200

500

900

3.14

Chapter 3: Accrual accounting concepts

E3.13

Date

Monkey Ltd General journal Account name (narration)

2019 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 30/6/19 is $16 650 Prepayment of A2958 at 30/6/19 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.

3.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to problem set A PSA3.1 (a) Ewok Ltd General journal

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) 2019 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.

3.16

Chapter 3: Accrual accounting concepts

(b) 30/6

Ewok Ltd General ledger Cash 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

Accounts payable 30/6

2 880 200

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

3.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Salaries payable 30/6

215 Salaries expense

6 400

Electricity payable 30/6

218 Electricity expense

Share capital 30/6

300 Balance

100 000

Service revenue

30/6

Closing balance

1 200

400

30/6

Balance

76 600

30/6

Service rev. in adv.

3 000

87 600 30/6

Accounts receivable

8 000

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

3.18

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.

3.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA3.2 (a) Maxi Services Ltd General journal Account name (narration)

Date

Post ref.

$ Debit

$ Credit

2020 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

3 000 3 000

500

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)

3.20

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

Accounts payable 30/6

24 000 200

Opening balance

7 400

3.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

Opening balance Salaries payable

Salaries expense 34 000 4 600 38 600 Supplies expense 500

500

505

30/6

Supplies

Opening balance

Rent expense 2 000

510

30/6

Opening balance Prepaid insurance

Insurance expense 1 200 1 600

515

30/6 30/6

2 800

3.22

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

(c) Maxi Services Ltd Adjusted trial balance as at 30 June 2020 No. 100 104 112 113 130 131 200 213 215 218 300 310 400 500 505 510 515 520 530

Account name Cash Accounts receivable Prepaid insurance Supplies Office equipment Accumulated depreciation Accounts payable Service revenue received in advance Salaries payable Electricity payable Share capital Retained earnings Service revenue Salaries expense Supplies expense Rent expense Insurance expense Depreciation expense Electricity expense

Debit $ Credit $ 54 800 19 400 1 600 1 000 30 000 24 000 7 400 1 000 4 600 300 60 000 7 500 54 200 38 600 500 2 000 2 800 4 000 4 300 _______ $159 000 $159 000

3.23

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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.

3.24

Chapter 3: Accrual accounting concepts

PSA3.3 (a)

Auckland Consulting Ltd General journal Date Account name (narration) 2019 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

3.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Auckland Consulting Ltd Statement of profit or loss for the three months ended 30 September 2019 $ 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 2019 Retained earnings, 1 July Add: Profit

2 370 2 370 (1 800) $ 570

Less: Dividends Retained earnings, 30 September

3.26

Chapter 3: Accrual accounting concepts

Auckland Consulting Ltd Statement of financial position as at 30 September 2019 $ 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 2019. 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.

3.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA3.4 (a) Frog Ltd General journal Date Account name (narration) 2019 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

3.28

Chapter 3: Accrual accounting concepts

(b) Frog Ltd Statement of profit or loss for the year ended 30 June 2019 $ 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 2019 Retained earnings, 1 July Add: Profit

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

Less: Dividends Retained earnings, 30 September

3.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Frog Ltd Statement of financial position as at 30 June 2019 $ 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

3.30

Chapter 3: Accrual accounting concepts

(c) Frog Ltd General journal Date Account name (narration) 2019 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

3.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA3.5 (a) Nathan Ltd General journal Date Account name (narration) 2019 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

3.32

Chapter 3: Accrual accounting concepts

(b) Nathan Ltd Statement of profit or loss for the three months ended 30 September 2019 $ 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 2019 Retained earnings, 1 July Add: Profit

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

Less: Dividends Retained earnings, 30 September

3.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Nathan Ltd Statement of financial position as at 30 September 2019 $ 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 2019. 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

3.34

Chapter 3: Accrual accounting concepts

PSA3.6 (a) Characters Ltd General journal Date Account name (narration) 2020 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

3.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Characters Ltd Statement of profit or loss for the year ended 30 June 2020 $ 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 2020 Retained earnings, 1 July 2019 Add: Profit

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

Less: Dividends Retained earnings, 30 June 2020

3.36

Chapter 3: Accrual accounting concepts

Characters Ltd Statement of financial position as at 30 June 2020 $ 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 2019 = $2 200

(f)

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

(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?

3.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA3.7 Smart Rentals Ltd Worksheet as at 30 June 2020 (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

Profit

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

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

3.38

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

Chapter 3: Accrual accounting concepts

(b)

Smart Rentals Ltd General journal Date Account name (narration) 2020 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

3.39

Credit $

2 700

4 200

5 400 4 500

3 150

9 000

1 800

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

Furniture 30/6

Balance

5 400 130

100 800 Accumulated depreciation — furniture 30/6

131

Depreciation expense

Accounts payable 30/6

4 500 200

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 3.40

Chapter 3: Accrual accounting concepts

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

3.41

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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 2020 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

3.42

Chapter 3: Accrual accounting concepts

(e) Smart Rentals Ltd Statement of profit or loss for the three months ended 30 June 2020 $ 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 2020 Retained earnings, 1 April Add: Profit Retained earnings, 30 June 2020

$ 15 450 $15 450

3.43

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Smart Rentals Ltd Statement of financial position as at 30 June 2020 $ 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.

3.44

Chapter 3: Accrual accounting concepts

PSA3.8 (a) Central Cleaning Ltd General journal Account name (narration)

Date 2019 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

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)

Credit $

60 000

15 000 33 000

3 600

14 400

15 720

11 400

9 600

12 000

10 800

3.45

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Petrol & oil expense Cash (Paid for petrol and oil) Dividends Cash (Paid cash dividend)

500 100

1 200

315 100

2 250

1 200

2 250

3.46

Chapter 3: Accrual accounting concepts

(b), (e) & (h)

1/7 21/7

Share capital Accounts receivable

1/8

Opening balance

12/7 25/7 31/7

Service revenue Service revenue Service revenue*

1/8

Opening balance

Cash 60 000 1/7 12 000 5/7 18/7 20/7 31/7 31/7 31/7 72 000 18 150

Motor vehicles Prepaid insurance Accounts payable Salaries expense Petrol & oil expense Dividends Closing balance

Accounts receivable 15 720 21/7 Cash 10 800 6 000 31/7 Closing balance 32 520 20 520

100 15 000 14 400 11 400 9 600 1 200 2 250 18 150 72 000

110 12 000 20 520 32 520

* (e) adjusting entry, balance was $14520 dr before adjusting entry

3/7

Accounts payable

1/8

Opening balance

Cleaning supplies 3 600 31/7 31/7 3 600 1 200

Cleaning supplies expense* Closing balance

120 2 400 1 200 3 600

* (e) adjusting entry, balance was $3600 Dr before adjusting entry Prepaid insurance 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 5/7

1/7

Cash

Cash/Accounts payable

Truck 48 000

170

Accumulated depreciation — trucks 31/7 Depreciation expense* * (e) adjusting entry, nil balance before adjusting entry

130 1 200 13 200 14 400

3.47

171 750

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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,

31/7

Profit or loss summary

Service revenue 32 520 12/7 25/7 31/7 32 520

Accounts receivable Accounts receivable Accounts rec’ble*

400 15 720 10 800 6 000 32 520

* (e) Adjusting entry, $26 520 Cr balance before adjusting entry, $32 520 Cr after adjustment, before closing

31/7

Cash

Petrol & oil expense 1 200 31/7 Profit or loss summary

3.48

500 1 200

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

20/7 31/7

Cash Salaries payable*

Salaries expense 9 600 31/7 Profit or loss summary 900 10 500

540 10 500 10 500

* (e) adjusting entry, $9600 Dr balance before adjusting entry, $10 500 Dr after adjusting entry before closing.

3.49

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c) & (f) Central Cleaning Ltd Trial balance as at 31 July 2019 No. 100 110 120 130 170 171 200 210 300 310 400 500 510 520 530 540

Account name 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

9 600 $111 720

$111 720

(f) Adjusted Debit $ Credit $ 18 150 20 520 1 200 13 200 48 000 750 25 200 900 60 000 2 250 32 520 1 200 2 400 750 1 200 10 500 $119 370 $119 370

(d)

Date 1.

Central Cleaning Ltd General journal Account name (narration) July 31 Accounts receivable Service revenue

Post ref. 110

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)

3.50

Chapter 3: Accrual accounting concepts

(g) Central Cleaning Ltd Statement of profit or loss for the month ended 31 July 2019 $ 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 2019 Retained earnings 1 July Add: Profit

$ 16 470 16 470 (2 250) $14 220

Less: Dividends Retained earnings 31 July

3.51

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Central Cleaning Ltd Statement of financial position as at 31 July 2019 $ 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

3.52

Chapter 3: Accrual accounting concepts

(h) Central Cleaning Ltd General journal Account name (narration)

Date July 31

Service revenue Profit or loss summary

POST REF. 400

Debit $

Credit $

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 2019 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

3.53

Credit $

750 25 200 900 60 000 14 220 $101 070

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(j)

Today’s society is aware of their social responsibility and as such businesses 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.

3.54

Chapter 3: Accrual accounting concepts

PSA3.9 (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

Opening balance

800

1 300 25/7 Salaries expense

3 000

31/7 Closing balance

300

9 100 1/8

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

3.55

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

151

1/7

Opening balance

1 000

31/7

Depreciation expense

1 240

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

3.56

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 © John Wiley and Sons Australia Ltd, 2019

525 3.57

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

24/7

Cash

400

Date 2019 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

Accounts receivable (Cash received from customers on account) 12

Cash Service revenue (To record service revenue)

July 27

Credit $

3 000

2 000

800

8 000

3 400

2 000

800

3 000

2 300 3.58

Chapter 3: Accrual accounting concepts

Cash Service revenue received in advance (Received cash from customers in advance)

100 210

1 300 1 300

3.59

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(e) and (g)

No 100 110 120 130 150 151 200 210 215 300 310 400 510 515 520 525

Bulwara Ltd Trial balance as at 31 July 2019 Unadjusted Account names Debit $ Credit $ Cash 300 Accounts receivable 5 900 Supplies 5 400 Prepaid rent 400 Store equipment 28 000 Accumulated depreciation 1 000 Accounts payable 13 600 Service revenue received in advance 2 100 Salaries payable Share capital 20 000 Retained earnings 5 600 Service revenue 3 100 Depreciation expense Supplies expense Salaries expense 5 000 Rent expense 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

Chapter 3: Accrual accounting concepts

(f) Bulwara Ltd General journal Account names (narration)

Date 1.

Post ref. 515 120

Debit $ 2 200

31 Salaries expense Salaries payable (To record accrued salaries)

520 215

1 000

31 Depreciation expense Accumulated dep’n. — 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

July 31 Supplies expense Store supplies ($5400 – $3200) (To record supplies used)

2 200

1 000

240

600

(h) Bulwara Ltd Statement of profit or loss for the month ended 31 July 2019 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 2019 $ 5 600 (5140) $ 460

Retained earnings 1 July Less: Loss Retained earnings 31 July

Credit $

3.61

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Bulwara Ltd Statement of financial position as at 31 July 2019 $ 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

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

TOTAL EQUITY

$20 460

3.62

Chapter 3: Accrual accounting concepts

(i) Bulwara Ltd Worksheet as at 31 July 2019 . Trial balance 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

Dr $ 300 5 900

Cr $

Adjustments Dr $

Cr $

5 400 400 28 000

2 200

1 000 13 600 2 100

Adjusted trial balance. Dr $ Cr $ 300 5 900 3 200 400 28 000

600 1 000

600 240 2 200 1 000

5 000 400

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 Totals

_______ $45 400

_______ $4 040

_______ $46 640

Statement of financial position Dr $ Cr $ 300 5 900 3 200 400 28 000

240

20 000 5 600 3 100

Statement of profit or loss Dr $ Cr $

_______ $46 640

3.63

______ $8 840

5 140 ______ $8 840

5 140 _______ $42 940

______ $42 940

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA3.10 (a) Willard Cleaning Ltd General journal Account name (narration)

Date 2020 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

3 250

Accounts receivable Service revenue (Invoiced customers)

110 400

5 975

Petrol & oil expense

500

432

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

3 250

5 975

3.64

Chapter 3: Accrual accounting concepts

Cash (Paid for petrol and oil) Dividends Cash (Paid cash dividend)

100

432

315 100

600 600

3.65

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b), (e) & (h) Willard Cleaning Ltd General ledger

1/4 23/4

Share capital Accounts receivable

1/5

Opening balance

14/4 25/4 30/4

Service revenue Service revenue Service revenue*

1/8

Opening balance

Cash 37 500 1/4 3 250 7/4 21/4 21/4 30/4 30/4 30/4 40 750 5 873

100 12 500 5 820 12 125 3 400 432 600 5 373 40 750

Motor vehicles Prepaid insurance Accounts payable Salaries expense Petrol & oil exp Dividends Closing balance

Accounts receivable 6 850 23/4 Cash 5 975 1 150 30/4 Closing balance 13 975 10 725

110 3 250 10 725 13 975

* (e) adjusting entry, balance was $9 575 Dr before adjusting entry

5/4

Accounts payable

1/8

Opening balance

Cleaning supplies 4 875 30/4 30/4 4 875 750

Cleaning supplies exp* Closing balance

120 4 125 750 4 875

* (e) adjusting entry, balance was $4 875 Dr before adjusting entry

7/4

Cash

1/8

Opening balance

Prepaid insurance 5 820 30/4 30/4 5 820 5 335

130 Insurance expense* Closing balance

485 5 335 5 820

* (e) adjusting entry, balance was $5 820 Dr before adjusting entry

1/4

Cash/Accounts payable

Motor vehicle 22 500

171

Accumulated depreciation — trucks 30/4 Depreciation expense* * (e) adjusting entry, nil balance before adjusting entry

3.66

172 375

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

Opening balance

200 10 000 4 875 14 875 2 750

Salaries expense*

210 1 200

Motor vehicles Cleaning supplies

Salaries payable 30/4

* (e) adjusting entry, nil balance before adjusting entry Share capital 1/4

30/4 30/4

30/4

30/4 30/4

Dividends Closing balance

Cash

Retained earnings 600 30/4 3 358 3 958 1/8 Dividends 600 30/4

Cash

Expenses Retained earnings

300 37 500

Profit or loss summary 10 017 30/4 3 958 13 975

Profit or loss summary

310 3 958

Opening balance

3 958 3 358

Retained earnings

315 600

Revenue

320 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.

30/4

Profit or loss summary

Service revenue 13 975 14/4 25/4 30/4 13 975

Accounts receivable Accounts receivable Accounts rec’ble*

400 6 850 5 975 1 150 13 975

* (e) Adjusting entry, $12825 Cr balance before adjusting entry, $13975 Cr after adjustment, before closing

30/4

Cash

Petrol & oil expense 432 30/4 Profit or loss summary

3.67

500 432

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

21/4 30/4

Cash Salaries payable*

Salaries expense 3 400 30/4 Profit or loss summary 1 200 4 600

540 4 600 4 600

* (e) adjusting entry, $3400 Dr balance before adjusting entry, $4600 Dr after adjusting entry before closing.

3.68

Chapter 3: Accrual accounting concepts

(c) & (f) Willard Cleaning Ltd Trial balance as at 30 April 2020 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 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

(f) Adjusted Debit $ Credit $ 5 873 10 725 750 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

3.69

$55 800

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d) Willard Cleaning Ltd General journal Account name (narration)

Date 1.

April 30

Accounts receivable Service revenue

Post ref.

Debit $

110

Credit $

1 150

400

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)

3.70

Chapter 3: Accrual accounting concepts

(g) Willard Cleaning Ltd Statement of profit or loss for the month ended 30 April 2020 $ 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 2020 Retained earnings 1 April Add: Profit

3 958 3 958 (600) $3 358

Less: Dividends Retained earnings 30 April

3.71

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Willard Cleaning Ltd Statement of financial position as at 30 April 2020 $ 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

5 873 10 725 750 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

3.72

Chapter 3: Accrual accounting concepts

(h)

Willard Cleaning Ltd General journal Account name (narration)

Date 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 2020 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 $ 5 873 10 725 750 5 335 22 500

$45 183

3.73

Credit $

375 2 750 1 200 37 500 3 358 $45 183

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(j) Willard Cleaning Ltd Worksheet as at 30 April 2020 Prepare +adjusting entries and adjusted trial balance using a worksheet.

Trial balance 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

Dr $

Cr $

5 873 9 575 4 875 5 820 22 500

Adjustments Dr $

Cr $

1 150 4 125 485

Adjusted trial balance Dr $ Cr $ 5 873 10 725 750 5 335 22 500

375 1 200 37 500

5 873 10 725 750 5 335 22 500

12 825

1 150

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

375 2 750 1 200 37 500

600

432

Statement of financial position Dr $ Cr $

375 2 750 1 200 37 500

2 750

600

Statement of profit or loss Dr $ Cr $

$53 075

$7 335

3.74

$55 800

$13 975

3 958 $13 975

$45 783

Chapter 3: Accrual accounting concepts

Solutions to problem set B PSB3.1 (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) 2019 June 30 Supplies expense Supplies ($2000 – $1300) (To adjust supplies account to reflect supplies used)

$ Credit

700

150

200

2 500

1 500

250

3.75

3 000

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

Accounts payable 30/6

250 200

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

3.76

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

3.77

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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.

3.78

Chapter 3: Accrual accounting concepts

PSB3.2 (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)

2019 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

3.79

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

Accounts payable 30/6

1 875 200

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 3.80

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

3.81

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

3.82

Chapter 3: Accrual accounting concepts

PSB3.3 (a)

Date

Matrix Ltd General journal Account name (narration)

Post ref.

Debit $

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

2019 Sept. 30 Commission receivable Commission revenue (To record accrued commission revenue)

Credit $

780

260

455

520

390

3.83

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Matrix Ltd Statement of profit or loss for the quarter ended 30 September 2019 $ 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 2019 $ Retained earnings 1 July Add: Profit

0 4 277 4 277 (780) $3 497

Less: Dividends Retained earnings 30 September

3.84

Chapter 3: Accrual accounting concepts

Matrix Ltd Statement of financial position as at 30 September 2019 $ 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 2019. 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 2019 (alternatively, 1 September 2019).

3.85

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB3.4 (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)

Ref #

$ Debit

110 400

300

510 120

800

530 130

750

540 141

600

500 210

550

220 410

400

$ Credit

300

800

750

600

550

400

(b) Aurora Pty Ltd Statement of profit or loss for the year ended June 30 2020 $

Revenues: Service revenue Rent revenue Total revenue Expenses: Salaries expense Office supplies expense Rent expense Insurance expense Depreciation expense Total expenses Profit

17 300 5 900 23 200 9 050 800 7 500 750 600 18 700 $4 500

3.86

Chapter 3: Accrual accounting concepts

Aurora Pty Ltd Calculation of Retained earnings for the year ended June 30 2020 $ 2 800 4 500 $ 7 300

Retained earnings, 1 July 2019 Add: Profit Retained earnings, 30 June 2020 Aurora Pty Ltd Statement of financial position as at 30 June 2020 $ 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

3.87

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

3.88

Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.5 (a) McPherson Ltd General journal Account name (narration)

Date 2019 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 2019 $

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

3.89

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

McPherson Ltd Calculation of Retained earnings for the 3 months ended 31 March 2019 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 2019 $ 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

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

EQUITY Share capital Retained earnings TOTAL EQUITY

15 000 19 390 $34 010

25 000 9 010 $34 010

(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 2019 or 1 February 2019. 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. © John Wiley and Sons Australia Ltd, 2019

3.90

Chapter 3: Accrual accounting concepts

PSB3.6 (a) Lou’s Advertising Agency Pty Ltd General journal Account name (narration) Post ref.

Date 2020 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 Accum. 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)

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 2020 $ 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

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Lou’s Advertising Agency Pty Ltd Calculation of Retained earnings for the year ended 31 December 2020 Retained earnings, 1 January Add: Profit

$ 15 400 96 460 111 860 (33 600) $78 260

Less: Dividends Retained earnings, 31 December

ASSETS Current assets Cash Accounts receivable Art supplies Prepaid insurance Total current assets

Lou’s Advertising Agency Pty Ltd Statement of financial position as at 31 December 2020 $

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

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

EQUITY Share capital Retained earnings TOTAL EQUITY

(c)

14 000 47 740 $134 260

$56 000 78 260 $134 260

Accounts to be closed: Advertising Revenue, Salaries expense, Depreciation expense, Rent expense, Art Supplies expense, Insurance expense, Interest expense, Dividends

3.92

Chapter 3: Accrual accounting concepts

(d)

Annual interest rate on bank loan: Interest expense for 10 months Interest expense for 12 months Interest Rate Interest Rate

(e)

= $1 400 = $1 680 =1 680 ÷ 14,000 = 12%

Salaries payable on 31 December 2019: Salaries paid in 2020 $31 200 Salaries payable 31 December 2020 3 640 34 840 Salaries expense for 2020 (31 640) Salaries payable 31 December 2019 $ 3 200

(f)

The effect of profit from the adjustments is a net decrease of $ 27 440.

3.93

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB3.7 (a) Palpatine Hotel Ltd Worksheet for month ended 31 May 2019 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 Accum. depn — building Furniture Accum. 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 $ 4 500 2 520 2 660 21 000 98 000

Cr $

Adjustments Dr $

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

Profit

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

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

Chapter 3: Accrual accounting concepts

(b) Palpatine Hotel Ltd General journal Account name (narration)

Date

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

2019 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

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

Furniture 31/5

Balance

420 130

23 520 Accumulated depreciation — furniture 31/5

131

Depreciation expense

Accounts payable 31/5

350 200

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

Chapter 3: Accrual accounting concepts

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

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d)

No. 100 112 113 120 122 123 130 131 200 212 214 215 220 300 400 505 506 510 512 515 525 530

Palpatine Hotel Ltd Adjusted trial balance as at 31 May 2019 Account name Debit $ $ Cash 4 500 Prepaid insurance 2 310 Supplies 1 680 Land 21 000 Building 98 000 Accumulated depreciation — building Furniture 23 520 Accumulated depreciation — furniture Accounts payable Rent revenue received in advance Salaries payable Interest payable Mortgage payable Share capital Rent revenue Advertising expense 700 Depreciation expense 770 Electricity expense 1 400 Insurance expense 210 Interest expense 500 Salaries expense 4 620 Supplies expense 980 $160 190

Credit $ $

420 350 6 580 2 940 420 500 50 000 84 000 14 980

$160 180

3.98

Chapter 3: Accrual accounting concepts

(e) Palpatine Hotel Ltd Statement of profit or loss for the month ended 31 May 2019 $ 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

Palpatine Hotel Ltd Calculation of retained earnings for the month ended 31 May 2019 $ Retained earnings, 1 May 2019 Add: Profit Retained earnings, 31 May 2019

0 5 800 $5 800

3.99

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Palpatine Hotel Ltd Statement of financial position as at 31 May 2019 $ 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

Chapter 3: Accrual accounting concepts

PSB3.8 (a) Contract Cleaners Pty Ltd General journal Account name (narration)

Date 2019 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

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b), (e) & (h)

1/7 21/7

Share capital Accounts receivable

1/8

Opening balance

12/7 25/7 31/7

Service revenue Service revenue Service revenue*

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

Motor vehicles Prepaid insurance Accounts payable Salaries expense Petrol & oil expense Dividends Closing balance

Accounts receivable 7 500 21/7 Cash 6 000 3 300 31/7 Closing balance 16 800 12 600

100 9 000 3 600 4 500 3 600 600 1 800 8 100 31 200

110 4 200 12 600 16 800

* (e) adjusting entry, balance was $9 300 Dr before adjusting entry

3/7

Accounts payable

Cleaning supplies 2 700 31/7 31/7

Cleaning supplies expense* Closing balance

2 700 1/8

Opening balance

120 900 1 800 2 700

1 800

* (e) adjusting entry, balance was $2 700 Dr before adjusting entry

5/7

Cash

1/8

Opening balance

Prepaid insurance 3 600 31/7 31/7 3 600 3 300

Insurance expense* Closing balance

* (e) adjusting entry, balance was $3 600 Dr before adjusting entry Motor vehicles 1/7 Cash/Accounts 18 000 payable

171

Accumulated depreciation — motor vehicles 31/7 Depreciation expense* * (e) adjusting entry, nil balance before adjusting entry

130 300 3 300 3 600

3.102

172 600

Chapter 3: Accrual accounting concepts

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

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

Expenses Retained earnings

Profit or loss summary 7 200 31/7 Revenue 9 600 16 800

320 16 800

16 800

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.

31/7

P & L Summary

Service revenue 16 800 12/7 25/7 31/7 16 800

Accounts receivable Accounts receivable Accounts receivable*

400 7 500 6 000 3 300 16 800

* (e) Adjusting entry, $13 500 Cr balance before adjusting entry, $16 800 Cr after adjustment, before closing

31/7

Cash

Petrol & oil expense 600 31/7 P & L Summary

500 600

3.103

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

31/7

Cleaning supplies*

Cleaning supplies expense 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

20/7 31/7

Cash Salaries payable*

Salaries expense 3 600 31/7 P & L Summary 1 200 4 800

540 4 800 4 800

* (e) adjusting entry $3 600 Dr balance before adjusting entry, $4 800 Dr after adjusting entry before closing (c) & (f)

No. 100 110 120 130 171 172 200 210 300 310 400 500 510 520 530 540

Contract Cleaners Pty Ltd Trial balance as at 31 July 2019 (c) Unadjusted Account name Debit $ Credit $ Cash 8 100 Accounts receivable 9 300 Cleaning supplies 2 700 Prepaid insurance 3 600 Motor vehicles 18 000 Accum. depreciation — MV Accounts payable 7 200 Salaries payable Share capital 27 000 Dividends 1 800 Service revenue 13 500 Petrol & oil expense 600 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

Chapter 3: Accrual accounting concepts

(d) General journal Contract Cleaners Pty Ltd Account name (narration) Post ref.

Date 1.

July 31

Debit

Accounts receivable Service revenue (Accrued revenue)

110 400

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

Credit

3 300

600

300

900

1 200

3.105

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(g) Contract Cleaners Pty Ltd Statement of profit or loss for the month ended 31 July 2019 $ 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 Cleaners Pty Ltd Calculation of retained earnings for the month ended 31 July 2019 Retained earnings 1 July Add: Profit

$9 600 9 600 (1 800) $7 800

Less: Dividends Retained earnings 31 July Contract Cleaners Pty Ltd Statement of financial position as at 31 July 2019 $

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

Chapter 3: Accrual accounting concepts

(h) Contract Cleaners Pty Ltd General journal closing entries Account name (narration)

Date July 31

POST REF.

Debit

Service revenue Profit or loss summary (Close revenue accounts)

400 320

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

Credit

16 800

600 900 600 300 4 800

9 600

1 800

(i) Contract Cleaners Pty Ltd Post-closing trial balance as at 31 July 2019 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 $

Credit $

8 100 12 600 1 800 3 300 18 000

$43 800

(j)

600 7 200 1 200 27 000 7 800 $43 800

After the adjusting entries reported profit increased by $300.

3.107

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB3.9 (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

Chapter 3: Accrual accounting concepts

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 rec’d in advance

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

15 600

3 600 15 600

1/12

Opening balance

15 600

15 600 Accumulated depreciation

30/11 Closing balance

1 320

744 1/11

151

Opening balance

600

30/11 Depreciation expense

144

744

744 1/12

Opening balance

744

3.109

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Accounts payable 20/11 Cash

200

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

Opening balance

4 920 210

Service revenue received in advance 30/11 Service revenue

360 1/11

Opening balance

30/11 Closing balance

780 29/11 Cash

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

1 2 0

* Adjusting entry balance before adjusting entry $ 2 760 Depreciation expense 30/11 Accumulated depreciation

510

144

Supplies expense 30/11 Supplies

515

1 080

3.110

Chapter 3: Accrual accounting concepts

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

3.111

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Account name (narration)

Post ref

Debit $

Credit $

2019 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

3.112

Chapter 3: Accrual accounting concepts

(e) & (g)

Account name s

Naboo Equipment Ltd Trial balance as at 30 November 2019 Unadjusted Debit Credit

$1 248 2 652 3 000 15 600

Adjusted Debit Credit $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)

Date

Naboo Equipment Ltd General journal Account name (narration) Post ref

2019 1. Nov. 30 Supplies expense Supplies ($3,000 – $1,920) (To record supplies used) 2.

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

3.113

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(g) Naboo Equipment Ltd Statement of profit or loss for the month ended 30 November 2019 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 2019 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 2019 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

3.114

Chapter 3: Accrual accounting concepts

(i) Naboo Equipment Ltd Worksheet as at 30 November 2019 Trial balance No. 100 110 120 150 151 200 210 215 300 310 400 510 515 520 525

Account names Cash Accounts receivable Supplies Store equipment Acc’d depreciation Accounts payable Service revenue rec’d in advance Salaries payable Share capital Retained earnings Service revenue Depreciation expense Supplies expense Salaries expense Rent expense

Dr $ 1 248 2 652 3000 15 600

Cr $

Adjustments Dr $

Cr $

1 080 600 4 920 1 140

144 360

Adjusted trial balance. Dr $ Cr $ 1 248 2 652 1 920 15 600 744 4 920 780

600 12 000 3 360 2 760

1 920 360

600 12 000 3 360 3 120

360 144 1 080 600

Statement of profit or loss Dr $ Cr $

144 750 2 520 9 200

600 12 000 3 360 3 120 144 750 2 520 9 200

Loss Totals

$24 780

$2 184

3.115

$25 524

Statement of financial position Dr $ Cr $ 1 248 2 652 1 920 15 600 744 4 920 780

$25 524

$4 104

984

$4 104

$22 404

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB3.10 On Call Services Ltd General journal Account name (narration)

Date 2018 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 Sept. 1)

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

500 100

1980

Cash

Credit $

150 000

(Issued shares for cash) 1

Accounts receivable (Collected cash from customers on account) 25

45 000 45 000

18 600

27 000

26 700

55 500

15 300

18 000

28 500

1980 3.116

Chapter 3: Accrual accounting concepts

(Paid for petrol and oil) Dividends Cash (Paid cash dividend)

315 100

3.117

900 900

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b), (e) & (h) On Call Services Ltd General ledger

1/9 23/9

Share capital Accounts receivable

1/10

Opening balance

14/9 25/9 30/9

Service revenue Service revenue Service revenue*

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 26 700 23/9 Cash 28 500 5 400 30/9 Closing balance 60 600 42 600

110 18 000 42 600 60 600

* (e) adjusting entry, balance was $37 200 Dr before adjusting entry

5/9

Accounts payable

1/8

Opening balance

Cleaning supplies 18600 30/9 30/9 18 600 3 600

Cleaning supplies exp.* Closing balance

120 15 000 3 600 18 600

* (e) adjusting entry, balance was $18600 Dr before adjusting entry

7/9

Cash

1/8

Opening balance

Prepaid insurance 27 000 30/9 30/9 27 000 24 750

Insurance expense* Closing balance

130 2 250 24 750 27 000

* (e) adjusting entry, balance was $27000 Dr before adjusting entry

1/9

Cash/Accounts payable

Motor vehicle 90 000

171

Accumulated depreciation — trucks 30/9 Depreciation expense* * (e) adjusting entry, nil balance before adjusting entry

3.118

172 1 500

Chapter 3: Accrual accounting concepts

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

30/9 30/9

Dividends Closing balance

Cash

Expenses Retained earnings

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 315 900

Retained earnings

Profit or loss summary 41 430 30/9 Revenue 19 170 60 600

320 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.

30/9

Profit or loss summary

Service revenue 60 600 14/9 25/9 30/9 60 600

Accounts receivable Accounts receivable Accounts rec’ble*

400 26 700 28 500 5 400 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

3.119

500 1 980

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

21/9 30/9

Cash Salaries payable*

Salaries expense 15 300 30/9 Profit or loss summary 5 400 20 700

540 20 700 20 700

* (e) adjusting entry, $15 300 Dr balance before adjusting entry, $20 700 Dr after adjusting entry before closing.

3.120

Chapter 3: Accrual accounting concepts

(c) & (f) On Call Services Ltd Trial balance as at 30 September 2018 No. 100 110 120 130 171 172 200 210 300 310 400 500 510 520 530 540

(f) Adjusted Debit $ 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

$213 300

60 600 1 980 15 000 1 500 2 250 20 700 $225 600

$225 600

(d) General journal Account name (narration)

Date 1.

Sept 30

Accounts receivable Service revenue

Post ref. 110

$ 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)

3.121

5 400 5 400

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(g) On Call Services Ltd Statement of profit or loss for the month ended 30 September 2018 $ 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 2018 Retained earnings 1 September Add: Profit

$19 170 19 170 (900) $18 270

Less: Dividends Retained earnings 30 September

3.122

Chapter 3: Accrual accounting concepts

On Call Services Ltd Statement of financial position as at 30 September 2018 $ 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

3.123

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(h) On Call Services Ltd General journal Account name (narration)

Date July 31

Service revenue Profit or loss summary

POST REF. 400

Debit

Credit

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 2018 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

3.124

Chapter 3: Accrual accounting concepts

(j) On Call Services Ltd Worksheet as at 30 September 2018 Trial balance 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

Dr $ 22 320 37 200 18 600 27 000 90 000

Cr $

Adjustments Dr $

Cr $

5 400 15 000 2 250 1 500

Adjusted trial balance. Dr $ Cr $ 22 320 42 600 3 600 24 750 90 000 1 500

8 100 5 400

8 100 5 400 150 000

900 55 200

5 400

1 980

15 300

900 60 600

1 980 15 000 1 500 2 250 20 700

15 000 1 500 2 250 5 400

Statement of financial position Dr $ Cr $ 22 320 42 600 3 600 24 750 90 000 1 500

8 100 5 400 150 000

150 000 900

Statement of profit or loss Dr $ Cr $

60 600 1 980 15 000 1 500 2 250 20 700

Profit

19 170 Totals

$213 300

$29 550

3.125

$225 600

$60 600

19 170 $60 600

$61 390

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS3.1 Financial reporting problem: Giorgina’s Pizza Limited Ltd (a)

Items that may have resulted in adjusting entries for accruals are: ▪ ▪ ▪ ▪

Other revenue (accrued) Income tax expense (accrued) Employee benefits (Wages, salaries and annual leave) (accrued) Provisions (accrued)

(b)

The total provision for the period was $2,663,000. The current (short-term) provision amount was $2,332,000 and the non-current (long-term) provision amount was $331,000.

(c)

The statement of cash flows reports income taxes paid in 2019 of $8,847,000. The statement of profit or loss reports income tax expense of $9,172,000.

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Chapter 3: Accrual accounting concepts

BBS3.2 Financial reporting problem: MYOB Group Limited At the time of writing the latest annual report available for the MYOB Group Limited was the 2016 Annual report. a) Extract from Note 4 Revenue from the 2016 MYOB financial report: ‘4 REVENUE Revenue is measured at the fair value of the consideration received or receivable. Subscriptions Revenue from sale of subscription services is recognised on a straight line basis over the period of subscription, from the date of contract until expiry, reflecting the period over which the services are supplied. Maintenance and cover support Unearned income from maintenance and cover support is recognised upon receipt of payment for maintenance/support contracts. Revenue is brought to account over time as it is earned. Transactional and other services Revenue such as seminar fees is recognised when the service is provided. Other revenue Other revenue is predominantly New Zealand research and development grants, or the royalties derived from sale of copyrighted forms and product sales under licence. This revenue is recognised on an accruals basis. Sale of goods (new software and software upgrades) Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. Risks and rewards are considered passed to the buyer at the time of delivery of the goods to the customer. In the case of products, the physical stock must have been shipped to the customer.’

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(b)

The recognition of revenue is consistent with the principles of recognition discussed in the chapter. As stated in the chapter: The Conceptual Framework provides revenue recognition criteria. Revenue should be recognised when and only when: (a) it is probably that any future economic benefits associated with the revenue will flow to the entity and (b) the revenue can be measured with reliability.’ Students should notice that the wording in the MYOB accounts are similar to the Conceptual Framework and the accounting standard applicable (IAS18, Revenue) at the date the accounts were prepared. Note: The new accounting standard for revenue recognition is IFRS 15 ‘Revenue from Contracts with Customers’. This new standard is effective from reporting periods 1 January 2018 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 party’s 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.

(c)

The sources and amounts of revenue recorded by MYOB in the 2016 Annual Report are: o Revenue from service o Revenue from sale of goods o Other

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).

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BBS3.3 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 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

(c) Micro Ltd Statement of profit or loss (partial) For the year ended 30June 2019 Revenues: Net sales Interest revenue and other

$8607 418 9025

Expenses: Cost of sales Selling, general and administrative Research and development Interest expense

Profit before income tax

7050 1204 (1) 351 (2) 380 (3) 8985 $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.

(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. © John Wiley and Sons Australia Ltd, 2019

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BBS3.4 Financial analysis on the web Fairfax Media Limited This solution is based on the 2017 Annual Report of Fairfax Media Limited At the time of writing, the most recent annual report was for 2017. Fairfax did not include a statement in Note 1 regarding the recognition criteria for revenue. Instead, the accounting policy for the recognition of revenue is included in Note 2 Revenues. ‘2. REVENUES Revenue from advertising, circulation, subscription for newspapers, magazines and other publications is recognised on the publication date. Revenue from the provision of advertising on websites is recognised in the period the advertisements are placed or when the impression occurs. Revenue from the provision of property listings on websites is recognised over the period the listing is placed or the period until the agent withdraws the listing (e.g. On sale or rental). Revenue from radio advertising is recognised when the programme is aired. Revenue from commission is recognised on an accruals basis in accordance with the substance of the relevant agreement. Amounts disclosed as revenue are net of commissions, rebates, discounts and returns which are recognised when they can be reliably measures. 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 income. 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 i.e. 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. Note 30. Summary of Significant Other Accounting Policies makes mention of the new accounting standard for revenue recognition under section (D) New Accounting Standards and Urgent Issues Group (UIG) Interpretations. The note states: ‘AASB 15 Revenue from Contracts with Customers Effective 1 January 2018, the Group must apply from FY19. AASB 15 provides a single, principles-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognised, accounting for variable consideration, costs of fulfilling and obtaining a contract and various related matters. The Group is also undertaking a comprehensive review of the implementation impacts of AASB 15. The Group has not reached a determination as to the impacts of these accounting standards’. 3.131

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Critical thinking BBS3.5 Group decision case (a) Holiday Travel Australasia Statement of profit or loss for the year ended 31 March 2020 $ 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

21 700 56 700 4 920 1 200 6 000 15 750 500 106 770 $27 230

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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BBS3.6 Communication activity (a) – (d) Sam Portafello 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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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BBS3.7 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS3.8 Communication activity Woolworths Group Corporate Responsibility Strategy 2020 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’ priority of the environmental sustainability issues. Plant: for a healthy Australia. ‘We recognise the environment impact we have across our value chain and will work with our suppliers, service providers and operations to innovate for a healthy planet. We will move to a circular economy, source environmentally sustainable commodities and respond to climate change’. Priority issues for environmental sustainability: • Moving to a circular economy — moving towards zero food waste to landfill. • Environmentally responsible sourcing — sustainably source all fish and seafood, sugar, chocolate, coffee and tea to an independent standard. • Raising awareness of sustainably sourced products. • Protecting forests — net zero deforestation through our supply chain. • Responding to climate change: energy and carbon initiatives — 10% reduction in Woolworths’ carbon emissions below 2015 levels by 2020. • Refrigerant management. • Building capacity in our suppliers — climate change risks with a focus on water. Full details of these issues are contained on pp. 16 and 17 of the Corporate Responsibility Strategy 2020 report.

Woolworths Corporate Responsibility Report 2017 Achievements in the areas of contribution to the community and environmental stewardship: In summary, Woolworths’ contributions to the community include: • • • •

Promoting gender equity: Women in leadership and Equal opportunities: Embracing diversity: Reflecting the communities we serve Supporting Aboriginal and Torres Strait Islander employment Creating opportunities for all: o Focusing on mental health o Confined spaces training o Natural disaster preparation (New Zealand earthquakes) o Preventing pedestrian accidents o Truck brake alerts o Lightening the load o LGBTI community support © John Wiley and Sons Australia Ltd, 2019

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Full details of each achievement can be located on pp. 8–12 of the Woolworths Corporate Responsibility Report 2017. In summary, Woolworths’ contributions to the environment include: • Moving to a circular economy: o Reducing food waste in Australia and New Zealand o The end of the plastic bag o Own brand packaging • Sourcing environmentally sustainable commodities o Environmentally responsible sourcing o Sustainable fish and seafood o Net zero deforestation o Palm oil o Paper, pulp and timber o Catalogues and paper • Animal welfare o NZ 100% cage free eggs by 2025 o Personal care and cosmetic animal welfare standards • Energy and carbon initiatives o Warehouse skylights o Solar o Focus on water to manage risk o Refrigerant management Full details of each achievement can be located on pp. 14–20 of the Woolworths Corporate Responsibility Report 2017.

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

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 6e

Solutions to questions 4.1.

4.2.

(a)

Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service enterprise.

(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)

Less

Cost of Sales

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: 1.

cost of sales

operating expenses.

4.3. Net sales revenues Cost of sales Gross profit

$220,000 154,000 $66,000

4.4.

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.

4.5.

(a)

(b)

The primary source documents are: (1)

cash sales — cash register tapes

(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

Credit

xx xx

4.2

Chapter 4: Inventories

Sales Cost of sales Inventory

xx xx xx

4.6. 24 July

Accounts Payable ($2,240 – 140) Discount Received ($2,100 x 2%) Cash ($2,100 – 42)

2,100 42 2,058

4.7. Gross profit Less: Profit before tax Operating expenses 4.8.

$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.

4.9.

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.

4.10.

(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 6e

Solutions to brief exercises BE4.1 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)

BE4.2 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

BE4.3 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 b.

BE4.4 Aditya Ltd Statement of Profit or Loss (Partial) for the month ended 31 October 2018

Sales Revenues: Sales ($363,000 + $121,000) Less: Sales returns and allowances Net sales

$484,000 (24,200) $459,800

BE4.5 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 6e D.

BE4.6 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%

BE4.7 Maori Jewellery Cash collected = NZ$28,750 ($25,000 + 15% x $25,000) Revenue earned = NZ$25,000

BE4.8 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 E4.1 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 6e

E4.2 (a)

STOKERS PTY LTD 1 Jul

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.

E4.3 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

E4.4 Cambells Office Supplies 6 Sept. 9 Sept. 10 Sept. 12 Sept.

14 Sept.

20 Sept.

Inventory (80 x $22) Cash

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

E4.5 Hampton Pty Ltd (a)

(1)

(2)

(3)

(4)

(5)

(b)

5 April

6 April

7 April

8 April

11 April

4 May

Inventory Accounts Payable Freight In Cash

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 6e

E4.6 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

E4.7 (a) Dawson Ltd Statement of Profit or Loss for the month ended 31 January 2018

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

14,000 2,000

EXPENSES Selling expenses: Freight out Rent expense — store space

14,000 20,000

34,000

Administrative expenses: Insurance expense Office salaries expense

12,000 61,000

73,000

16,000 100

16,100

Financial expenses: Discount allowed Bank charges Total operating expenses

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 6e

(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.

E4.8 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

E4.9 (a) Lulu Ltd Statement of Profit or Loss for the year ended 30 June 2019

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 6e

E4.10 Snuffy Pty Ltd Statement of Profit or Loss (Partial) for the year ended 30 June 2018

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.

E4.11 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

E4.12 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

E4.13 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 6e

Solutions to Problem set A PSA4.1 (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

3,150 2,100 2,100

4,200

140

3,150

100

Credit

3,979

630

1,680

161

1,330

175

4,340 3,038 3,038

700

4.16

Chapter 4: Inventories

Date 27

Particulars Accounts Payable Discount Received ($1,330 x 2%) Cash

Post Ref. 200 410

Debit 1,330

Credit 27

100

1,303

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

70 49 49

1,120 784 784

*rounded to nearest dollar (b) May

June

1 9 15 24

Opening Bal. Accounts Receivable Inventory Sales

Opening. Bal.

May

2 31

Sales Sales

June

Opening Bal.

Cash 3,500 May 3,087 161 4,340

10 11

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

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

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

Supplies 630 © John Wiley and Sons Australia Ltd, 2019

130

4.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

May

5 10 27 31

Inventory Cash & Discount Cash & Discount Closing Bal.

Accounts Payable 140 May 3 4,060 20 1,330 25 700 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

May

29 Cash

May

2 Inventory 24 Inventory 31 Inventory

May

Sales Returns and Allowances 70

405

Discount Received 108 May 10 27 108

410 81 27 108

21 Closing Bal.

May

Accounts Receivable

21 Cash

400 3,150 4,340 1,120 8,610

Accounts Payable Accounts Payable

Discount Allowed 63

Cost of Sales 2,100 May 29 3,038 784 31 5,922

500

Inventory Closing Bal.

Freight Inwards 175

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 =

Gross profit rate =

Profit after tax Net sales

$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 6e

PSA4.2 (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 © John Wiley and Sons Australia Ltd, 2019

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 6e

PSA4.3 (a)

Harrots Department Store Pty Ltd Statement of Profit or Loss for the year ended 30 June 2018

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

5,720 15,158 12,870 57,200 28,600 5,005

124,553

Administrative expenses: Dep’n expense — office equipment Electricity expense Insurance expense Office salaries expense Rent expense — office space Rates and taxes expense Financial expenses: Interest expense Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

11,440

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 2018 Retained Earnings, 1 July 2017 Add: Profit

$20,306 66,037 86,343 (17,160) 69,183

Less: Dividends Retained Earnings, 30 June 2018

Harrots Department Store Pty Ltd Statement of Financial Position as at 30 June 2018 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

$11,440 16,830 51,766 6,435 $86,471

178,750 (59,774) 81,510 (28,142)

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

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 6e

(b) Return on assets =

Profit after tax Av total assets =

66 ,037 = 27 .1% 243 ,808

Average total assets = (228, 800 + 258,815) /2 = 243,808 Profit margin =

(c)

Profit after tax Net sales

66 ,037 = 5 .1 % 1,287 ,000

Gross profit rate =

Gross Profit = Net Sales

Operating expenses to sales ratio =

294 ,294 Operating Expenses = 22 .9% = Net Sales 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

PSA4.4 (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 6e

(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

100 144 2,646 1,069 2,621 6,480

105 108 1,980 792 2,880

792

Share Capital April 1

April 27

Freight Inwards Accounts Payable

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 © John Wiley and Sons Australia Ltd, 2019

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, 2019 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 2019

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 6e

PSA4.5 Peninsula Pty Ltd Statement of Profit or Loss for the year ended 30 June 2018

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

13,200 186,450

4,400 550

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

6,050 118,800 67,650 (20,295) $47,355

4.28

Chapter 4: Inventories

PSA4.6 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. Dep’n. 15,000

Dec.

Depreciation Expense — Equipment 31 Accum. Dep’n. 13,500

Dec.

31 Interest Payable

85,500 15,000 100,50 0

63,600 13,500 77,100

Interest Expense 10,500

Interest Payable Dec. 31

Interest Expense

10,50 0

4.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c) Rankins Ltd Adjusted Trial Balance As at 30 June 2019 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 2019

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 Administrative expenses: Dep’n expense — buildings Insurance expense Office salaries expense Petrol and oil expense Repair expense — computers 13,350 Utilities expense Financial expenses: Discount allowed Interest expense Total operating expenses

13,500 22,200

35,700

15,000 5,250 82,500 10,800

14,100

141,000

5,400 10,500

15,900

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 2019 Retained Profits, 1 January Add: Net Profit Less: Dividends Retained Profits, 31 December

$101,700 86,940 188,640 (15,000) $173,640

4.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Rankins Ltd Statement of Financial Position As at 30 June 2019 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

$50,100 56,400 165,000 $271,500

$138,000 $295,500 100,500 125,250 77,100

LIABILITIES AND OWNER’S EQUITY Current Liabilities: Bank loan (portion due in 2020) 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

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

PSA4.7 (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) © John Wiley and Sons Australia Ltd, 2019

4.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Apr. 1 13 16 23

Opening Bal. Accounts Receivable Inventory Sales

May 1

Opening Bal.

Cash 4,950 Apr. 7 2,695 11 275 4,070

14 22 26 27 29 30

Freight Out Accounts Payable

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 Apr. 13 Cash & Discount 2,035 30 Closing Bal. 4,785 2,035

Apr. 6 30

Sales Sales

May 1

Opening Bal.

Apr. 4 14 21 26 29

Accounts Payable Cash Accounts Payable Cash Cost of sales

May 1

Opening Bal.

Apr. 6 11 27

Inventory Cash & Discount Cash & Discount

Inventory 3,245 Apr. 6 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 Apr. 4 Inventory 3,080 21 Inventory 3,150 6,395

Share Capital Apr. 1

Opening Bal.

Sales Apr. 6 Accounts Receivable 23 Cash 30 Accounts Receivable

Apr. 29

Cash

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

Discount Received Apr. 11 Accounts Payable © John Wiley and Sons Australia Ltd, 2019

62 4.34

Chapter 4: Inventories

Accounts Payable

63 125

Discount Allowed 55

Apr. 13

Accounts Receivable

Apr. 22

Cash

Freight In 55

Apr. 7

Cash

Freight Out 110

Apr. 6 23 30

Inventory Inventory Inventory

May 1

Opening Bal.

Cost of Sales 2,200 Apr. 29 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 2018 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 =

GP 1,572 – 495 oper. expen* + disc. rec’d $125

Gross Profit Net Sales

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 6e

PSA4.8 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 6e

Solutions to Problem set B PSB4.1 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

Accounts Receivable © John Wiley and Sons Australia Ltd, 2019

35 1,850 4.38

Chapter 4: Inventories Sales

1,850

Cost of Sales Inventory

1,500 1,500

(b)

April1 13 16 23

Opening Bal. Accounts Receivable Inventory Sales

May 1

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

Freight-Out Accounts Payable

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 23

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 Cash

2,500 3,700

4.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

April29

Accounts Receivable

1,850 8,050

Sales Returns and Allowances 45

Cash

Discount Received April11 Accounts Payable 27 Accounts Payable

April13

April22

April7

April 6 23 30

Accounts Receivable

Discount Allowed 50

Cash

Freight-In 50

Cash

Freight-Out 100 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 2019 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 1,430 – 450 oper. expen. + disc. rec’d $98

Gross Profit Net Sales

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.

4.40

Chapter 4: Inventories

PSB4.2 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

750

1,000

600

4.41

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Accounts Payable ($900 – $150) Cash

750 750

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

PSB4.3

(a)

ENOTECA DEPARTMENT STORE Statement of Profit or Loss for the Year Ended 30 June 2018

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 6e

ENOTECA DEPARTMENT STORE Statement of Changes in Equity for the Year Ended 30 June 2018 Retained Earnings, 1 July 2017 Add: Profit

$29,260 34,210 63,470 30,800 $32,670

Less: Dividends Retained Earnings, 30 June 2018 ENOTECA DEPARTMENT STORE Statement of Financial Position as at 30 June, 2018 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

Liabilities and Equity Current liabilities Accounts payable Mortgage payable Rates and taxes payable Sales commissions payable Interest payable Total current liabilities Non-current liabilities Mortgage payable — long term (due after 2019) Total liabilities Equity Share capital Retained Earnings Total equity Total liabilities and equity © John Wiley and Sons Australia Ltd, 2019

214,060 $390,830

$ 87,230 22,000 5,280 3,850 8,800 127,160 66,000 193,160 165,000 32,670 197,670 $390,830 4.44

Chapter 4: Inventories

(b)

Return on assets = profit after tax/average total assets = 34,210/371,415 = 9.2% 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)

PSB4.4 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

Accounts Receivable Sales © John Wiley and Sons Australia Ltd, 2019

Credit

1,350 900 60 450 36 1,164 750 75 45 1,350 1,350 4.45

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

20 21

27 30

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

795 750 750 15 735 45

Accounts Receivable

750

(b)

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

Accounts Receivable 1,350 20-Apr Cash 1,350 27-Apr Sales returns 30-Apr Cash Closing balance 2,700 1,155

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

Accounts Payable 60 6-Apr Inventory 1,200 14-Apr Inventory 750 0 2,010

2,871 5,325

750 45 750 1,155 2,700

900 60 75 795 3,180 5,010

1,260 750

2,010 4.46

Chapter 4: Inventories

1-May Opening balance

Share Capital Opening balance

6,300

Sales 8-Apr Accounts receivable 18-Apr Accounts receivable

27-Apr Accounts receivable

1,350 1,350 2,700

Sales Returns and Allowances 45

Discount Received 13-Apr Accounts payable 21-Apr Accounts payable

8-Apr Inventory 18-Apr Inventory

7-Apr Cash 17-Apr Cash

36 15 51

Cost of Sales 900 795 1,695 Freight-In 60 45 105

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 4.47

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d) RACQUETS ‘R’ US TENNIS SHOP Statement of Profit or Loss (Partial) for the Month Ended 30 April 2019

(e)

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 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.

4.48

Chapter 4: Inventories

PSB4.5 Sirimon Ltd Statement of Profit or Loss for the year ending 30 June 2019 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

4.49

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB4.6 (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 Dep’n exp — SE 4,500 Bal 23,500

Accumulated Depreciation — Office Equipment 30/6 Bal. 30/6 Dep’n 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 Accum. Dep’n store equipment 4,500 Depreciation Expense — Office Equipment 30/6 Accum. Depn — office equip

3,500 Interest Expense

30/6 Interest payable 5,500 Interest Payable © John Wiley and Sons Australia Ltd, 2019

4.50

Chapter 4: Inventories

30/6 Interest expense 30/6 Bal.

5,500 5,500

(c) DANIELA’S FASHION HOUSE Adjusted Trial Balance 30 June 2020 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 $508,850

5,500 $508,850

4.51

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d) DANIELA’S FASHION HOUSE Statement of Profit or Loss for the Year Ended 30 June 2020 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)

4.52

Chapter 4: Inventories

DANIELA’S FASHION HOUSE Statement of Changes in Equity for the Year Ended 30 June 2020 Retained Earnings, July 1, 2019 Less: Loss Dividends Retained Earnings, June 30, 2020

$15,000) $8,300 6,000

( 14,300)) $ 700)

DANIELA’S FASHION HOUSE Statement of Financial Position as at 30 June 2020 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

$ 18,350 16,850 22,500 1,750 59,450

$42,500 23,500 19,000

$19,000

6,500

12,500

Liabilities and Equity Current liabilities: Notes payable due in 2021 Accounts payable Interest payable Total current liabilities Long-term liabilities Notes payable due after 2021 Total liabilities Equity Share capital Retained Earnings Total equity Total liabilities and equity © John Wiley and Sons Australia Ltd, 2019

31,500 $90,950

$ 15,000 24,250 5,500 44,750 5,500 50,250 40,000 700 40,700 $90,950 4.53

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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.

4.54

Chapter 4: Inventories

PSB4.7 (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 4.55

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

4.56

Chapter 4: Inventories

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

405

Discount Received May 10 Accounts Payable 27 Accounts Payable

410 58 19 77

Discount Allowed 45

500

May 9

Accounts Receivable

May 2 24 31

Inventory Inventory Inventory

Cost of Sales 1,500 May 29 2,170 560 4,195

May 21

Cash

Jun 1

Opening Balance

Freight Inwards 125 May 31 125 125

505 35

Inventory

510 125 125

Closing Balance

4.57

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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%

4.58

Chapter 4: Inventories

PSB4.8 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

4.59

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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)

GST Clearing (To record GST refund from tax authority) © John Wiley and Sons Australia Ltd, 2019

1,854 18,546

50,500

2,737

4.60

Chapter 4: Inventories

Building business skills Financial reporting and analysis BBS4.1 Financial reporting problem This solution uses the MYOB 2016 Annual Report. (a)

Percentage change in revenue from sale of goods: 2018 to 2019 ($370,417,000 – $327,777,000) ÷ $327,777,000 = 13% Percentage change in profit after tax: 2015 to 2016 ($53,992,000 – $(42,257,000)) ÷ $(42,257,000) = 227.77% In 2015 the Loss from operations after income tax was $(42,257,000) then in 2016 the Profit from operations after income tax was $53,992,000. There has been a 227.77% increase in profit from 2015 to 2016.

Additional notes to students: Use the notes included in the MYOB 2016 Annual report to determine if there was a particular event that occurred in 2015 that caused the entity to incur a loss in that year.

(b)

Operating expenses to sales ratio: (note: net finance costs have not been included in the below calculations for operating expenses). 2015 2016

$274,576,000 ÷ $327,777,000 = 83.77% $281,882,000 ÷ $370,417,000 = 76.10%

When the net finance costs are included in the above calculation, the results are: 2015 2016

$394,864 ÷ $327,777,000 = 120.47% $296,671 ÷ $370,417,000 = 80.09%

The operating expenses to sales ratio has decreased between 2015 and 2016. Given the dramatic decrease in this ratio from 120% to 80% when the operating expenses includes the finance costs, it could be determined that the main contributing factor to the loss in 2015 is due to much higher finance costs in that year. Further investigation into the notes to the financial statements would be required. Note: Analysis of trend typically involves a longer period. Trend analysis is covered in chapter 12.

4.61

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS4.2 Comparative analysis problem Nike vs. Adidas Group The analysis is based on the 2016 reports (a) Nike ($’000,000)

Adidas ($’000,000)

(1)

Profit margin

$3,760 $32,376 = 11.6% *Net income from continuing operations

$1,019* $19,291 = 5.3%

(2)

Gross profit (000’s)

$14,971

$9,379

(3)

Gross profit rate

$14,971 $32,376

= 46.2%

$9,379 = 48.6% $19,291

(4)

Profit after tax $3,760 *Net income from continuing operations

$1,019*

(5)

Percent change in Profit after tax

$3,760 – $3,273 = 14.9% $3,273

$1,019–$686 = 48.5% $686

(6)

Operating expenses to sales ratio

$10,469 $32,376= 32.3%

$8,337** = 43.2% $19,291

**($8,263 + $74)

(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 2015 and 2016. Although Nike has a lower gross profit margin, it achieved a higher profit margin because it had a lower operating expense to sales ratio i.e. 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.

4.62

Chapter 4: Inventories

BBS4.3 Community and social perspective (a)

Some of the benefits to businesses that make donations of excess inventory include: • • • • •

(b)

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.

4.63

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS4.4 A global focus Jacaranda vs. Empire (a) Jacaranda AUS$ (in millions)

Empire US$ (in millions)

Gross profit rate

15,000 = 25.86% 58,000

115,000 = 24.47% 470,000

Operating expense sales

12,000 = 20.69% 58,000

93,000 = 19.79% 470,000

Based on these ratios and assuming consistent accounting policies, it would appear that Jacaranda is able to command a higher mark-up than Empire, but that Empire 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) Jacaranda AUS$ (in millions)

Empire US$ (in millions)

Return on assets

2,100 = 10% 21,000

15,400 = 7.55% 204,000

Profit margin

2,100 = 3.62% 58,000

15,400 = 3.28% 470,000

Jacaranda’s return on assets is greater than that of Empire which indicates it is more efficient in generating profit from its assets. Also, from the data we observe that the profit margin for Jacaranda is also greater than Empire which indicates that Jacaranda generates more profit from each dollar of sales.

4.64

Chapter 4: Inventories

Empire US$ (in millions)

Current ratio

6,000 = 0.80:1 7,500

61,000 = 0.88:1 69,000

Debt to total assets ratio

13,000 = 59.1% 22,000

123,000 = 60.3% 204,000

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 59–60%. (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.)

BBS4.5 Financial analysis on the web Answers will vary depending on the company and article chosen by student.

4.65

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Critical thinking BBS4.6 Group decision case (a)

(1) Grosby Music Store Projected Statement of Profit or Loss for the year ended 30 June 2020

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)

Grosby Music Store Projected Statement of Profit or Loss for the year ended 30 June 2020

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

4.66

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 2018 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.

4.67

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS4.7 Ethics case Delicacy 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.

4.68

Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 5: Reporting and analysing inventory

Chapter 5: Reporting and analysing inventory Assignment classification table

Learning objectives

Brief exercises

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 6e

Solutions to questions 5.1. Accounts Payable ($1,600 – $100)

July 24

1,500

Discount Received ($1,500 x 2%) Cash ($1,500 – $30) 5.2.

5.3.

(a)

x = Purchase returns and allowances.

(b)

x = Cost of goods purchased.

(c)

x = Ending inventory.

(a)

(b)

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.

5.4.

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.

5.5.

No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be consistently applied.

5.6.

(a)

FIFO

(b)

Average cost

(c)

LIFO.

5.7.

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

5.8.

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).

5.9.

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.

5.10.

(a)

Peta Ltd’s 2019 profit will be understated $5,000;

(b)

2020 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 6e

Solutions to brief exercises BE5.1 a) Perpetual system, specific identification b) Perpetual system, average cost c) Periodic system, specific identification d) Perpetual system, FIFO e) Periodic system, specific identification BE5.2 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

BE5.3 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

BE5.4

Inventory Categories

Olynda Garden Centre Cost

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 BE5.5 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 6e

BE5.6 Harrots Department Store 1.

FIFO

June 1 sale: Aug. 27 sale:

$240 234

474 $834

LIFO June 1 sale: Aug. 27 sale:

30 units @ $12 = 20 units @ $12 = 13 units @ $18 =

Cost of Sales $360

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.

BE5.7 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 2018 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 E5.1 (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

E5.2 Francine Pty Ltd Statement of Profit or Loss (partial) for the year ended 30 June 2019

Beginning inventory 1 July 2018 Purchases Less: Purchase returns and allowances Net purchases Cost of goods available for sale Ending inventory 30 June 2019 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 6e

E5.3 (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

E5.4 Hooton Ltd (a) Ending inventory — physical count 1. No effect — title passes to purchaser upon shipment when terms are FOB shipping point 2.

No effect — title does not transfer to Hooton Ltd until goods are received

$147,500 –

–

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 6e

E5.5 Djuric Ltd Statement of Profit or Loss for the month ended 31 January 2019

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

E5.6 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 6e

(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

E5.7 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 than 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 6e

E5.8 (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.

E5.9 (a) BJ Electronics Ltd 2018 Inventory turnover ratio

2019

2020

$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 2018 to 2020, 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 2018 to 2020.

5.14

Chapter 5: Reporting and analysing inventory

E5.10 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 6e

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) Ending Inventory FIFO Ending Inventory LIFO (c)

Periodic $1,575 $1,455

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

E5.11 Goddard Pty Ltd (a) 2018 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)

2019

$90,000 + $120,000 = $78,000 + $132,000 =

$210,000 210,000 $ –

Dear Sir/Madam Because your ending inventory of 30 June 2018 was overstated by $12,000, your gross profit and profit for 2018 was overstated by $12,000 and your gross profit and profit for 2019 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 2018, 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 (2019) 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 6e

E5.12 Closing debit and credit accounts to profit or loss summary. Goddard Pty Ltd General Journal Date 30-6-19

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

E5.13 Goddard Pty Ltd 30 June 2018

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 PSA5.1 (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 6e

(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 2018 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 6e

(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 2018

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

PSA5.2 Pumpkin Patchwork Ltd Statement of Profit or Loss for the year ended 30 November 2019 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 December 2018 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 2019 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 6e

PSA5.3 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

Total Cost

$35 40 45 50 55

$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 6e

PSA5.4 (a)

CANTERBURY LTD Comparative Statements of Profit or Loss for the Year Ended 31 December 2019

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

PSA5.5

(a) World Building Products Ltd 2018 Inventory turnover ratio

$306,729.80 ($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 6e

PSA5.6 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 14/7 21/7

27/7

(b)

Sales (3 @ $95)

(3 @ $106) (3 @ $112)

$336

(3 @ $112)} (1 @ $106)} Ending inventory = $190

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

The highest ending inventory is $224 under the FIFO method.

5.28

Chapter 5: Reporting and analysing inventory

PSA5.7 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 6e

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 6e

(c) Kids Sportstore Pty Ltd Trial Balance as at 31 October 2019 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 2019

$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 6e

PSA5.8 (a) Fashionista Ltd Statement of Profit or Loss for the year ended 30 June 2020 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 6e

PSA5.9 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). © John Wiley and Sons Australia Ltd, 2019

5.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA5.10 Sweet Cookies Ltd 2018 Inventory turnover ratio

$328,942.60 ($139,851.60+$142,257.40)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

PSA5.11 (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

$104,544 9,075

Profit or Loss Summary

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 6e

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

PSA5.12 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 6e

Solutions to Problem set B PSB5.1 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 6e

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 2018 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 2018

$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 6e

PSB5.2 Bargains Department Store Statement of Profit or Loss for the year ended 30 November 2019 $ $ OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 December 2018 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 2019 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

PSB5.3 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 March 1 5 13 21

Units 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 6e

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.

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Chapter 5: Reporting and analysing inventory

PSB5.4 (a)

PEORIA LTD Comparative Statements of Profit or Loss for the Year Ended 31 December 2019

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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB5.5 (a) Prestige Motors Ltd 2018 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.

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Chapter 5: Reporting and analysing inventory

PSB5.6 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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB5.7 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

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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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

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Chapter 5: Reporting and analysing inventory

(c) Mill Park Tennis Shop Pty Ltd Trial Balance as at 31 October 2019 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(e) Mill Park Tennis Shop Pty Ltd Partial Statement of Profit or Loss for the month ended 31 October 2019

$5,200 (60) $5,140 3,400 $4,080 (180) 3,900 140 4,040 7,440 3,600 3,840 $1,300

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Chapter 5: Reporting and analysing inventory

PSB5.8 Westfields Ltd Statement of Profit or Loss for the year ended 30 June 2020 $ OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory 1 July 2019 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 2020 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB5.9 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

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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. © John Wiley and Sons Australia Ltd, 2019

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB5.10 (a) Plant Food Ltd 2018 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

PSB5.11 (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 6e

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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Chapter 5: Reporting and analysing inventory

PSB5.12

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 6e

Building business skills Financial reporting and analysis BBS2.1 Financial reporting problem: Domino’s Pizza Enterprises Ltd — 2017 Annual Report (Note: All dollar amounts are in thousands) (a)

Inventories were $16,675 as at 30 June 2016 (beginning of current period).

(b)

Inventories increased $4,423 in 2017. Using 2016 as the base year, the increase was approximately 26.5%. In 2017, inventories were 11.23% of current assets ($21,098 ÷ $187,825).

BBS5.2 Comparative analysis problem Soft Drink Co. vs. Soda Pop Inc. (a) Soft Drink Co. (A$ in millions) 1.

Inventory turnover

Soda Pop Inc. (US$ in millions)

$1,422 ($172+$178)/2

$16,750 ($755+$751)/2

= 8.13 times

22.24 times

365 = 44 days 8.13

365 = 16.41 days 22.24

Days in inventory

(b)

Soda Pop Inc. sells its inventory within 16 days which is significantly quicker than the 44 days taken by Soft Drink Co. This is more than two and a half times the rate of Soft Drink Co. Generally, companies that are able to keep their inventory at lower levels and higher turnovers and still satisfy customer needs are the most successful. Soft Drink Co. and Soda Pop Inc. sell short shelf life items — beverages — so the turnover would be expected to be high.

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Chapter 5: Reporting and analysing inventory

BBS5.3 A global focus and interpreting financial statements Cross Trainers Group and Fitness Shoes Limited (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)

Cross Trainers Group’s inventories are stated at lower of cost or net realisable value and valued on a FIFO or average cost basis. Fitness Shoes Limited’s merchandise and finished goods are valued at the lower of cost or net realisable value. Costs are determined using the average cost method.

(c)

The format used by Fitness Shoes 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. Fitness Shoes uses other companies to do much of their production (as evidenced by the minor amounts of raw materials and work-in-progress reported).

(d) Cross Trainers

Fitness Shoes

Inventory turnover $7,140 ($1,611 + $1,717) / 2 = 4.29 times

$3,676 ($1,319 + $1,242) / 2 = 2.87 times

Days in inventory 365 4.29 = 85 days

365 2.87= 127 days

The inventory turnover for Fitness Shoes is lower and days in inventory is higher than Cross Trainers, suggesting that Cross Trainers is more efficient in selling its inventory.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS5.4 Financial analysis on the web JB Hi-Fi Ltd (Note: All dollar amounts are in thousands) The following responses are based on the 2017 Consolidated figures in the annual report. (a)

Inventories: $859.9m as at 30 June 2017. Cost of sales for the year: $4,397.5m.

(b)

Note 7: 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: $859.9 $2,452.3 = 35.07%

(d)

Inventory turnover ratio: $4,397.5 ($859.9 + $546.4) / 2 = 6.25 times Days in inventory 365 6.25 = 58.4 days JB Hi-Fi’s inventory turnover is 6.25 times per annum which converts to 58 days in inventory. This is slower than Plush Furnishings and Fine Furniture, suggesting that JB Hi-Fi is unable to manage and sell its inventory as efficiently as Original Furnishings and Artistry Furniture.

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Critical thinking BBS5.5 Group decision case Chem Products International Ltd (a)

The items owned by Chem Products 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 Chem Products’ inventory account on or before 30 June 2019 would be items described in 3 and 5. The transactions that involve Chem Products’ inventory account after 30 June 2019 would be items described in 2 and 7. Note: Items that are inventory would be those items related to Chem Products’ final products (chemicals and airbags). The receipt of office supplies or steel for building are therefore not inventory.

BBS5.6 Communication activity City Jeans Ltd To:

Su Lee, Managing Director

From:

Accountant

Subject:

2018 Ending Inventory Error

As you know, the 2018 ending inventory figure was overstated by $1 million. This error will cause the 2018 profit figure to be incorrect because the ending inventory is used to calculate the 2018 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 2019 profit. The 2018 ending inventory is also the 2019 beginning inventory. Therefore, 2019 beginning inventory is also overstated, which causes an overstatement of Cost of Sales and an understatement of 2019 profit.

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Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 6: Accounting information systems

Chapter 6: Accounting information systems Assignment classification table

Learning objectives Identify the basic principles of accounting information differences.

Brief exercises 1

Exercises

Problems

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

1A,2A,3A, 4A,5A,6A,7 A,8A,9A,10 A 1B,2B,3B,4 B,5B,6B,7B, 8B,9B,10B

10.

Explain how special journals are used in recording transactions.

3,4,5,6,7,8, 9,11,13,14, 15

1A,2A,3A,4 A,5A,6A,7A, 8A,9A,10A 1B,2B,3B,4 B,5B,6B,7B, 8B,9B,10B

11.

Understand the basic features of computerised accounting systems including an introduction to MYOB and appreciate the role of and use of nonintegrated systems.

1,2

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

12.

Identify the advantages and disadvantages of computerised accounting systems.

13.

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

14.

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

Solutions to questions 6.1.

(a) (b)

6.2.

An accounting information system involves collecting and processing data and disseminating financial information. 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.

6.3.

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.

6.4.

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 6e

6.5.

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.

6.6.

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.

6.7.

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.

6.8.

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 © John Wiley and Sons Australia Ltd, 2019

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Chapter 6: Accounting information systems

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 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. 6.9.

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: • • • •

6.10.

(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.

6.11.

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.

6.12.

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.

6.6

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

6.13.

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. 6.14.

(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.

6.15.

(a) (b) (c)

General journal General journal Cash receipts journal

(d) (e) (f)

Sales journal Cash receipts journal General journal

6.16.

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. © John Wiley and Sons Australia Ltd, 2019

6.7

Chapter 6: Accounting information systems

Solutions to brief exercises BE6.1 (a) (b) (c)

True False True

BE6.2 (a) (b) (c) (d)

Analysis Follow-up Design Implementation

BE6.3 Cumin Ltd (a) (b) (c)

Separation of duties Independent internal verification Documentation procedures

BE6.4 (a) (b) (c) (d)

General ledger Subsidiary ledger General ledger Subsidiary ledger

BE6.5 (a) (b) (c) (d) (e) (f)

Cash receipts journal Cash payments journal Cash payments journal Sales journal Purchases journal Cash receipts journal

BE6.6 (a) (b) (c) (d)

No Yes Yes No

BE6.7 (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.)

6.8

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE6.8 (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.

6.9

Chapter 6: Accounting information systems

Solutions to exercises E6.1 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.

E6.2 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.

E6.3 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.

6.10

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E6.4 Teone Ltd (a) & (b) General Ledger Accounts Receivable Control Date Explanation Sept. 1 30 30 30

Balance Credit sales Cash Sales Allowance

Ref.

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 Sept. 1 Balance 30 Credit sales 30 Cash

Lee Date

Explanation

Sept. 1 Balance 30 Cash

Roemer Date Explanation Sept. 1 Balance 30 Credit sales 30 Cash

Schulz Date

Explanation

Sept. 1 30 30 30

Balance Credit sales Cash Sales Allowance

Ref.

S1 CR1

Ref.

Debit

Credit

675 620

Debit

Credit

CR1

Ref.

S1 CR1

Ref.

S1 CR1 G1

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 © John Wiley and Sons Australia Ltd, 2019

6.11

Chapter 6: Accounting information systems

Date

Explanation

Sept. 30 Credit sales 30 Cash

Ref.

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 2019

(d)

Edmonds Lee Roemer Schulz Henry Total

$1,275 420 925 1,550 310 $4,480

Accounts Receivable control account balance 30/9/19

$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.

6.12

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E6.5 Duckstein Ltd (a) & (b) Sales Journal

Date

Account Debited

2020 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

2020 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.

6.13

Chapter 6: Accounting information systems

E6.6 Vanessa Bosnat (a) & (b) Cash Receipts Journal CR1 Account Credited

Date

2019 May 1 V Bosant, Cap. 2 22 R Dusto

Cash Dr Ref

Discount Allowed Dr

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.

2019 May 3 14

101 102

Inventory Salary Expense

Ref.

Other Accounts Dr

Accounts Payable Dr

Discount Received Cr

Cash Cr

18,000 1,400

19,400

E6.7 Jamie’s 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) © John Wiley and Sons Australia Ltd, 2019

6.14

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E6.8 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

E6.9 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

E6.10 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 6e

E6.11 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

E6.12 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 6e

E6.13 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.

E6.14 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.

E6.15 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 PSA6.1 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 Apr. 1 Balance 30

Ref.

Debit

CR4

Credit

17,460

No. 112 Balance 22,050 4,590

Accounts Receivable Subsidiary Ledger East PC Ltd Date Explanation Apr. 1 Balance 10

Ref.

Debit

CR4

Credit

2,400

Balance 4,650 2,250

6.20

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Date

Office Supplies Ltd Ref. Debit

Explanation

Apr. 1 Balance 29

Date

CR4

PC West Ltd Ref.

Explanation

Apr. 1 Balance 5 23

Date

Debit

Credit

CR4

Accounts receivable balance Accounts Receivable subsidiary account balances: East PC Ltd PC West Ltd 2,340 Total

3,600 0

Balance

1,860 4,500

Computers for U Ltd Ref. Debit

Explanation

Balance

3,600

CR4 CR4

Apr. 1 Balance 4

(c)

Credit

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

PSA6.2 Antique Jewels Pty Ltd (a) Cash Payments Journal

Date

Ch. No.

Account Debited

Oct. 1 3 5

63 64 65

10 15 16

66 67 68

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 6e

(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 6e

PSA6.3 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 Squash Club Ltd Teeny Tennis Ltd Martin Ltd Teeny Tennis Ltd Squash Club Ltd Randee Ltd Martin Ltd

Post Ref √ √ √ √ √ √ √

Accounts Receivable Dr Sales Cr

Cost of Sales Dr. Inventory Cr

1,980 2,200 3,795 1,507 341 3,080 4,290 17,193 (112)/(401)

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 July 31

Inventory Date Explanation July 31 31

Ref S1 G1

Ref. P1 G1 S1

Supplies Date Explanation

Ref.

July 31

Equipment Date Explanation

Ref.

July 31

Accounts Payable Date Explanation

Ref.

July 31

P1 G1

Debit

Credit

No. 112 Balance

17,193 55

Debit

No. 120 Credit Balance

25,410 550 12,036

Debit

Credit

990

Credit

No. 157 Balance

330

Debit

330

Credit

No. 201 Balance

28,336 550

25,410 24,860 12,824

No. 126 Balance

990

Debit

17,193 17,138

28,336 27,786

6.26

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Sales Date Explanation

Ref.

July 31

Sales Returns and Allowances Date Explanation

Ref.

Debit

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

Credit

No. 401 Balance

Credit 55

Debit

12,036

Balance 12,036

Credit

550 462

Debit

No. 412 Balance 55

No. 505 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 July 3 16

Ref. 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 July 3 21 22

Ref. 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

Debit

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

550

P1 P1 © John Wiley and Sons Australia Ltd, 2019

550 462

550 1,012 6.28

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

PSA6.4 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 6e

Cash Receipts Journal CR15

Date

Account Credited

Jan. 6 13 14 Mays Ltd 17 Toys 4 U 20 27 30 Kids Time Ltd

Ref

√ √

√

Cash Dr

4,725 8,010 8,613 10,875 4,800 5,595 1,800 44,418 (101)

Discount Allowed Dr

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 87 (716)

21,375 (112)

23,130 (401)

0 (x)

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

Inventory Dr

Discount Received Cr

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 equal the total dollar credits.

6.31

Chapter 6: Accounting information systems

PSA6.5 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 Balance 270CR 25,122 6,981 18,141 1,560 16,581

Credit 270

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 6e

Williams, Drawings Date Explanation July 19

Ref CP16

Debit 1,500

Sales Date Explanation July 31 31

Ref S15 CR16

Debit

Discount Received Date Explanation July 31

Cost of Sales Date Explanation July 31 31

Ref CP16

Ref S15 CR16

No. 401 Credit Balance 10,740 10,740 2,400 13,140

No. 405 Credit Balance 137 137

Debit

Debit 6,981 1,560

Discount Allowed Date Explanation July 31

Ref CR16

Debit

Supplies Expense Date Explanation July 31 Adjusting entry

Ref G5

Rent Expense Date Explanation July 31 Adjusting entry

Ref G5

Credit

No. 306 Balance 1,500

No. 505 Credit

Balance 6,981 8,541

Credit

No. 614 Balance 51

Debit 276

Credit

No. 631 Balance 276

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 6e

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 2020 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 31/7/20: D Jacob R Gamble

$7,632

$5,280 2,352 $7,632

Accounts Receivable Control Balance

$2,400

Schedule of Accounts Receivable 31/7/20: S Kane

$2,400

6.36

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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 2020 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

PSA6.6 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

Other Accounts Cr

Sales 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 6e

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 Credit Balance 21,500 54,195 20,225 33,970

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

Ref G1 P1 CR1 S1

Equipment Date Explanation Jan. 1 Balance

Ref

Accumulated Depreciation — Equipment Date Explanation Jan. 1 Balance

B Beatle, Capital Date Explanation Jan. 1 Balance

6,600

Debit

CR1

Inventory Date Explanation Jan. 1 Balance 30 31 31 31

Accounts Payable Date Explanation Jan. 1 Balance 30 31 31

Debit

Ref

Ref G1 P1 CP1

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 6e

Sales 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

No. 401 Credit Balance 5,000 5,000 6,600 11,600

Debit

Debit 350

Credit

No. 405 Balance 0

Credit

No. 412 Balance 350

Debit

No. 415 Credit Balance 250 250

No. 505 Credit Balance 3,250 7,539 228 7,311

Cost of Sales Date Explanation Jan. 31 31 14

Ref CR1 S1 G1

Debit 3,250 4,289

Freight In Date Explanation Jan. 11

Ref CP1

Debit 250

Credit

No. 506 Balance 250

Credit

No. 714 Balance 55

Discount Allowed Date Explanation Jan. 31

Ref CR1

Debit

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

Celebrations Date Explanation Jan. 1 Balance 24

Ref

Debit

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 6e

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 2020 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 6e

PSA6.7 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

Credit 800

Ref.

Debit

CR1

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 6e

PSA6.8 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

Supplies S Healy Equipment L Held J Hill, Drawings R Landly

Ref.

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

Debit 39,000

Inventory Date Explanation Feb. 28 18 28 28

Ref. P1 CR1 S1 CR1

Debit 64,350

Supplies Date Explanation Feb. 9 28 Adjusting entry

Ref. CP1 G1

Debit 1,500

Equipment Date Explanation Feb. 15

Ref. CP1

Accumulated Depreciation — Equipment Date Explanation Feb. 28 Adjusting entry

Accounts Payable Date Explanation Feb. 28 28

J Hill, Capital Date Explanation Feb. 1

J Hill, Drawings Date Explanation Feb. 20

Ref. G1

Ref. P1 CP1

Ref. CR1

Ref. CP1

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 6e

Sales Date Explanation Feb. 28 28

Discount Received Date Explanation Feb. 28

Cost of Sales Date Explanation Feb. 28 28

Discount Allowed Date Explanation Feb. 28

Supplies Expense Date Explanation Feb. 28 Adjusting entry

Depreciation Expense Date Explanation Feb. 28 Adjusting entry

Ref. S1 CR1

Ref. CP1

Ref. S1 CR1

Ref. CR1

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 6e

(e) Clover Hill Trial Balance as at 28 February 2019 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 2019 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 6e

PSA6.9 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 Nov. 1 Balance 31

Ref.

CP10

Debit

9,750 3,050

6,700

Accounts Payable Subsidiary Ledger Cotton Balls Ltd Date Explanation Nov. 1 Balance 30

Ref.

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 6e

PSA6.10 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 6e

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 July 2 28

Ref. 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. S1 S1 G1

Debit

Credit

2,160 310

Balance 2,160 2,470 2,410 6.57

Chapter 6: Accounting information systems

Teeny Feet Ltd Date Explanation July 3 16

Ref. 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 July 1 15

Ref

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

600

P1 P1

600 504

600 1,104

6.58

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Lepa Ltd 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 A PSB6.1 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 6e

(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

PSB6.2 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 6e

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 Receivable — Nelles Ltd

Credit

550

110

330

112/√

220

(b) General Ledger Accounts Receivable Date Explanation May 31 26

Ref S1 G1

Debit 11,605

Credit

No. 112 Balance 11,605 220 11,385

Inventory Date Explanation May 10

Ref G1

Debit

Credit 550

No. 120 Balance 39,820

330 39,490

P1 40,370

40,370 8,124 31,366

Supplies Date Explanation May 15 17

Ref P1 G1

Debit 990

No. 126 Credit Balance 990 110 880

6.63

Chapter 6: Accounting information systems

Equipment 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

Advertising Expenses Date Explanation May 25

Ref P1 P1

Ref P1

No. 157 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

Debit 440 550

Debit 990

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

6.64

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Hend Ltd Date Explanation May 5 23

Ref S1 S1

Debit 2,970 2,640

Credit

Balance 2,970 5,610

Nelles Ltd Date Explanation May 5 23 26

Ref S1 S1 G1

Debit 1,650 2,420

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

330

110

550

6.65

Chapter 6: Accounting information systems

Ball Advertising Date Explanation May 25

(c)

Ref P1

Debit

Accounts receivable balance Subsidiary account balances Penner Ltd Hendrix Ltd Nelles Ltd Total

Balance 990

$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

Credit 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 6e

PSB6.3 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

√

Cash Dr

Discount Allowed Dr

4,580 4,410 4,090 54,000 4,235 2,621 4,270 78,206 (101)

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

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

Oct 5 9 18 23 26

Account Debited

Supplies Mason Ltd Inventory Quinn Ltd Land Buildings 30 Advertising Expense

Ref

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 6e

PSB6.4 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

CR4

Debit

Credit

No. 112 Balance

11,640

14,700 3,060

Accounts Receivable Subsidiary Ledger Horn Date Explanation Apr. 1 Balance 10

Ref

Debit

CR4

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 6e

PSB6.5 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 Oct. 1 Balance 31

Ref

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 6e

PSB6.6

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

√ √ √ √

S17 Cost of Sales Dr Inventory Cr

Accounts Receivable Dr Sales Cr 7,975 6,380 1,320 10,265 25,940 (112)/(401)

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

Ref

Other Accounts Dr

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 6e

PSB6.7 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

Ref

Other Accounts Dr

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

Debit 56,020

No. 101 Credit Balance 41,500 97,520 39,400 58,120

6.76

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Accounts Receivable Control Date Explanation Jan. 1 Balance 14 31 31

Ref G1 CR1 S1

Commissions Receivable Date Explanation Jan. 1 Balance 29

Ref

Ref G1 P1 CR1 S1

Equipment Date Explanation Jan. 1 Balance

Ref

Accumulated Depreciation — Equipment Date Explanation Jan. 1 Balance

S Alomar, Capital Date Explanation Jan. 1 Balance

11,700

Debit

CR1

Inventory Date Explanation Jan. 1 Balance 30 31 31 31

Accounts Payable Control Date Explanation Jan. 1 Balance 30 31 31

Debit

Ref

Ref G1 P1 CP1

Ref

Debit

4,100

Debit

Debit 500 33,950

Debit

No. 112 Credit Balance 15,000 700 14,300 7,500 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

6.77

Chapter 6: Accounting information systems

Sales Date Explanation Jan. 31 31

Ref CR1 S1

Commissions Revenue Date Explanation Jan. 31

Ref

No. 401 Credit Balance 8,600 8,600 11,700 20,300

Debit

Credit

No. 405 Balance 0

No. 412 Balance 700

Sales Returns and Allowances Date Explanation Jan. 14

Ref G1

Debit 700

Credit

Discount Received Date Explanation Jan. 31

Ref CP1

Debit

Credit 150

No. 415 Balance 150

Cost of Sales Date Explanation Jan. 31 31 14

Ref CR1 S1 G1

No. 505 Debit Credit 5,590 7,605 455

Balance 5,590 13,195 12,740

Freight In Date Explanation Jan. 11

Ref CP1

Debit 300

Credit

No. 506 Balance 300

Discount Allowed Date Explanation Jan. 31

Ref CR1

Debit

Credit

No. 714 Balance 80

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 6e

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

B Cole Date Explanation Jan. 1 Balance 24

Ref

Debit

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 6e

(d) Camperdown Carpets Trial Balance as at 31 January 2020 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

PSB6.8 Collins Bikes (a), (d) & (g) General Ledger Cash Date Explanation July 31 31

Accounts Receivable Date Explanation July 31 31

Inventory Date Explanation July 31 29 31 31

Ref CR1 CP1

Ref S1 CR1

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 6e

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

Cost of Sales Date Explanation July 31 31

Discount Allowed Date Explanation July 31

Ref CP1

Ref S1 CR1

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 6e

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 2019 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 6e

(h) Collins Bikes Adjusted Trial Balance as at 31 July 2019 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

PSB6.9 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 Apr. 1 Balance 30

Ref.

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 6e

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

Debit

Credit

Balance

930 2,250

Debit

Credit

CR4

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

PSB6.10 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 6e

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 Dec 3 18

Ref. 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 © John Wiley and Sons Australia Ltd, 2019

6.92

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Date

Explanation

Dec 5

Singh Ltd Date Explanation Dec 5 23 Smith Ltd Date Explanation Dec 5 23 26

Ref. S1

Ref. S1 S1

Ref. 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 Dec 2 16 20

Ref 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

Office Supply Date Explanation Dec 15 17

750

P1 P1

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 6e

Solutions to Problem set A 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

√ 115

31,500 1,458 38,340 70,200 188,370 (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 6e

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)

Ref

Debit

Jan. 9 Sales Returns and Allowances Accounts Receivable — Beautiful Homes Ltd (Issued credit for goods returned)

412 √/112

540

18 Accounts Payable — Lee Importers Purchase Returns and Allowances (Received credit for returned goods)

√/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

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 Greta, Drawings

301 306

1,440

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

Ref

Debit

CR1 CP1

188,370

No. 101 Credit Balance 64,350 252,720 131,805 120,915

6.98

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

Debit

Equipment Date Explanation Jan. 1 Balance

Ref

Accumulated Depreciation — Equipment Date Explanation Jan. 1 Balance 31 Depreciation expense

Ref

Debit

No. 112 Credit Balance 23,400 57,960 20,700 37,260 540 36,720

No. 115 Balance 70,200 70,200 0 39,600

Credit

No. 120 Balance 32,400 61,200 32,400 28.800

Credit

No. 125 Credit Balance 1,800 2,880 1,980 900

No. 130 Balance 3,600 360 3,240

Credit

No. 157 Balance 11,610

No. 158 Credit 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 6e

Commissions Revenue Date Explanation Jan. 31 Commission Receivable 31 Profit or Loss Summary

Ref G1 G1

Debit 39,600

Purchases Date Explanation Jan. 31 Accounts payable 31 Profit or Loss Summary

Ref P1 G1

Debit 97,920

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

Sales Salaries Expense Date Explanation Jan. 31 Cash 31 Profit or Loss Summary

Ref CP1 G1

No. 417 Credit Balance 39,600 39,600 0

No. 510 Credit Balance 97,920 97,920 0

Credit 360

360

No. 512 Balance 360 0

No. 516 Balance 324 324 0

Credit

Debit 7,740

No. 627 Credit Balance 7,740 7,740 0

No. 711 Credit Balance 225 225 0

Depreciation Expense Date Explanation Jan.31 Accumulated depreciation 31 Profit or Loss Summary

Ref G1 G1

Debit 225

Insurance Expense Date Explanation Jan. 31 Prepaid Insurance 31 Profit or Loss Summary

Ref G1 G1

Debit 360

Credit

Discount Allowed Date Explanation Jan. 31 Cash 31 Profit or Loss Summary

Ref CR1 G1

Debit 270

Credit

No. 722 Balance 360 360 0

No. 725 Balance 270 270 0

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

Table Tops Date Explanation Jan. 1 Balance 7 25

Lowell Chairs Date Explanation Jan. 1 Balance 7 11 21

Ref

CR1 S1

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

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 6e

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

I Keah Date Explanation Jan. 1 Balance 21

Nordin Office Furniture Date Explanation Jan. 1 Balance 9 16 23 27

Walden & Co Date Explanation Jan. 5 16 27

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

Ref CP1

Ref CP1 P1 CP1 P1

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 2021

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

(3)

36,720

36,720 39,600 32,400

28,800

900

3,240

3,240 11,610

225

2,925

45,360

141,660

1,440 132,300

540 459

97,920

28,800

11,610

141,660

540

120,915

39,600

360

Statement of financial position

120,915

32,400

1,440

Statement of Profit or Loss

132,300 540

459 97,920

360

459 97,920

360

324

7,740

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 725

Discount Allowed

270

727

Office Salaries Expense

4,680

729

Rent Expense

1,800

1,980

360

Totals

$322,839

728

Office Supplies Expense

(1) 1,980

722

Insurance Expense

(2)

360

711

Depreciation Expense

(3)

225

417

Commissions Revenue Totals

225

(4) 39,600 $42,165

$42,165

39,600 $362,664

$362,664

Profit

39,600 148,239

201,519

243,225

189,945

$201,519

$243,225

53,280 Totals

$201,519

53,280

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Chapter 6: Accounting information systems

(d) Greta’s Furniture Pty Ltd Statement of Profit or Loss for the month ended 31 January 2021

OPERATING REVENUE Sales revenues: Gross sales Less: Sales returns and allowances Net sales revenue Cost of sales: Beginning inventory, 1/1/21 Purchases Less: Purchase returns and allowances Net purchases Freight in Cost of goods available for sale Less: Ending inventory 31/1/21 Cost of sales Gross profit

$132,300 (540) 131,760

$32,400 $97,920 (360) 97,560 324

97,884 130.284 (28,800) 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

39,600 459

40,059 70,335

$7,740 $4,680 1,800 1,980 360 225

Financial expenses: Discount Allowed Profit

9,045

270

17,055 $53,280

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Greta’s Furniture Pty Ltd Statement of financial position as at 31 January 2021

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 $230,175 $11,610 (2,925)

LIABILITIES Current liabilities: Accounts payable Total liabilities NET ASSETS

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 2021

P Greta, Capital 1 January 2021 Add: Profit

$141,660 53,280 194,940

Less: Drawings P Greta, Capital, 31 January 2021

(1,440 $193,500

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Chapter 6: Accounting information systems

(f) Greta’s Furniture Pty Ltd Post-Closing Trial Balance as at 31 January 2021 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS6.1 Financial reporting problem: SKY Network Television Limited — 2017 Annual Report (a)

SKY Network 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. SKY Network has many customers and creditors, a large amount of property, plant and equipment and intangibles — the company is likely to have subsidiary ledgers and control accounts for these items. The 2017 Consolidated Balance Sheet and the notes to the financial statements revealed the following: Trade and other receivables (customers) Trade and other payables (creditors) Property, plant and equipment Intangible assets Share capital

$69,475,000 $186,187,000 $238,066,000 $1,488,273,000 $577,403,000

Control accounts and subsidiary ledgers are needed to continually record, monitor and update these large accounts. (b)

There are no obvious disadvantages to SKY Network 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 errors in

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Chapter 6: Accounting information systems

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 2017 annual report, the Corporate Governance Statement for SKY Network states that the disclosures and compliance statements are provided in accordance with the ASX Corporate Governance Principles and Recommendations and the NZX Corporate Governance Best Practice Code. The full Corporate Governance Statement is provided via a link within the annual report. In situations that the board has considered that SKY has not complied with the ASX and NZX regulations, the report includes references to the relevant section in the standard and reasons for the deviation to the regulations.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Critical thinking BBS6.2 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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Chapter 6: Accounting information systems

(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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS6.3 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 © John Wiley and Sons Australia Ltd, 2019

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Chapter 6: Accounting information systems

BBS6.4 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.

BBS6.5 Research case Answers will vary depending on the resources chosen by the students. However, at a minimum they should look at 2019 annual report and press releases provided on the company website.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS6.6 Jewels, Jewels and More Jewels Ltd (a) 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

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 7: Reporting and analysing cash and receivables

Chapter 7: Reporting and analysing cash and receivables Assignment classification table

Learning objectives

Brief exercises

Exercises

Problems 1A, 1B

Identify the impact of business transactions on cash.

Describe electronic banking processes.

2, 9

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 6e

Solutions to questions 7.1.

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.

7.2.

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.

7.3.

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.

7.4.

Cash should be reported at $38,850 ($15,000 + $1,850 + $22,000).

7.5.

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.

7.6.

The basic principles of cash management are:

7.7.

(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

7.8.

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.

7.9.

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.

7.10.

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.

7.11.

(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.

7.12.

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 6e

Solutions to brief exercises BE7.1 Cash flows — monthly loan payment; car loan payment Assets — inventory; GST receivable; motor vehicle Liabilities — bank loan; car loan

(a) (b) (c)

BE7.2 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. BE7.3 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 BE7.4 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. BE7.5 Sazin Mar. 20

Postage Expense Supplies Travel Expense Cash

32 26 22

80 7.4

Chapter 7: Reporting and analysing cash and receivables

BE7.6 (a) (b) (c)

Other receivables. Notes receivable. Accounts receivable.

BE7.7 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

BE7.8 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

BE7.9 (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. © John Wiley and Sons Australia Ltd, 2019

7.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to exercises

E7.1 (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.

E7.2 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.

7.6

Chapter 7: Reporting and analysing cash and receivables

E7.3 (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.

E7.4 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

7.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E7.5 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.

E7.6 Hair Styles Pty Ltd (In general journal form) Date Account Titles and Explanation Oct. 1 Petty Cash Cash at Bank

Debit

31 Office Supplies Telecommunications Expense Postage Expense Freight-out Cash Short and Over Cash at Bank Petty Cash Cash at Bank

Credit 130 130

36.50 21.30 53.70 8.80 1.40 121.7 130 130

7.8

Chapter 7: Reporting and analysing cash and receivables

E7.7 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 2018 to 2019. However, of concern is the fact that each of the three categories of older accounts increased substantially during 2019. That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change.

7.9

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E7.8 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.

7.10

Chapter 7: Reporting and analysing cash and receivables

E7.9 Spring & Co Ltd Notes to the Financial Statements as at 30 June 2018 (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.

E7.10 Honey Factory Ltd (a) Receivables turnover ratio =

Average collection period =

2020

2019

$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) Credit risk ratio =

(c)

2020 $6.3 = 4 .3 % $146.6

2019 $ 5 .7 = 5 .5 % $104.3

The credit and collection policies in Honey Factory Ltd. seemed to have worked well in 2020. The company’s receivables turnover has improved from 8.3 times in 2020 to 9.3 times in 2020, 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 2020.

7.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E7.11 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.

E7.12 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

E7.13

(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).

7.12

Chapter 7: Reporting and analysing cash and receivables

E7.14 Advanced Lifestyle Ltd (a) 1.Receivable turnover 2. Average collection period 3. Credit risk ratio: 2019 2018

(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 2019, 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.

7.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to Problem set A

PSA7.1 (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.

7.14

Chapter 7: Reporting and analysing cash and receivables

PSA7.2 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.

7.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA7.3 JONA Ltd Bank Reconciliation Statement 31 December 2019 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

7.16

Chapter 7: Reporting and analysing cash and receivables

PSA7.4

Delicious Pies Pty Ltd Bank Reconciliation Statement 31 October 2020 (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.

7.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA7.5 (a) Computec Ltd Bank Reconciliation Statement 31 May 2018

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

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

3,000 80

700

7.18

Chapter 7: Reporting and analysing cash and receivables

PSA7.6 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 31/12/2019

Particular Allowance for Doubtful Debt

Allowance for Doubtful Debt Date 31/12/2019 31/12/2019 31/3/2020

Particular Balance Bad Debts Expense Accounts Receivable (Bad Debts Write-off)

31/5/2020

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

2020 31 Allowance for Doubtful Debts ........................... 500 Accounts Receivable ...................................

500

31 Accounts Receivable........................................ 500 Allowance for Doubtful Debts...................................................

500

31 Cash .............................................................. 500 Accounts Receivable ...................................

500

2020 Bad Debts Expense............................................ 31,100 Allowance for Doubtful Debts ................................. ($30,300 + $800)

31,100

7.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA7.7 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.

PSA7.8 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.

7.20

Chapter 7: Reporting and analysing cash and receivables

PSA7.9 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

7.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA7.10 Jumbo Airlines and Comfort Air (a) Jumbo Airlines A$ million

Comfort Air NZ$ million

Receivables turnover ratio

$13,772 ($1,054 − $27 + $1,088− $6)/2 =13.06 times

$4,046 ($274− $2 + $322− $3)/2 =13.69 times

Average collection period

365 = 28 days 13.06

365 = 26.7 days or 27 days 13.69

Jumbo Airlines and Comfort Air 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): Jumbo Airlines

Comfort Air

$27 ÷ $1,054= 2.56% $6÷ $1,088 = 0.55%

$2 ÷ $274 = 0.73% $3 ÷ $322 = 0.93%

Jumbo Airlines 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, Comfort Air appeared to have continued with the same credit-granting practices over the year as both the allowance for doubtful debt and the associated credit risk ratio are maintained.

7.22

Chapter 7: Reporting and analysing cash and receivables

Solutions to Problem set B PSB7.1 (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.

7.23

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSB7.2 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.

7.24

Chapter 7: Reporting and analysing cash and receivables

PSB7.3 Watson Pty Ltd Bank Reconciliation Statement 30 November 2018 (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 7.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSB7.4 (a) Wizards and Dragons Pty Ltd Bank Reconciliation Statement 31 October 2019 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.

7.26

Chapter 7: Reporting and analysing cash and receivables

PSB7.5 (a) Interactive Ltd Bank Reconciliation Statement 31 May 2019

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

Debit 6,120 40

31 Accounts Receivable — W Hoad Cash at Bank

1,400

Credit

6,000 160

1,400

31 Sales Cash at Bank

31 Cash at bank Accounts Payable — M Helms

360

31 Bank Charges Cash at Bank

120

360

120 7.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSB7.6 (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 31/12/2019 Allowance for Doubtful Debt Date 31/12/2019 31/12/2019

Particular Allowance for Doubtful Debt

31/3/2020

Particular Balance Bad Debts Expense Accounts Receivable (Bad Debts Write-off)

31/5/2020

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) 2020 (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

7.28

Chapter 7: Reporting and analysing cash and receivables

PSB7.7 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 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, stated at recoverable amount, then represents the present value of the cash flows expected to be derived from the receivable.

PSB7.8 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.

7.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSB7.9 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

7.30

Chapter 7: Reporting and analysing cash and receivables

PSB7.10 Sugar Mills and Tropico (a) Sugar Mills $M

Tropico $M

Receivables turnover ratio

$3,754.9 ($562.1− $9 + $491.9 − $7.5) / 2 = 7.24 times

$4,546.8 ($671− $7.8 + $777.6 − $9) / 2 = 6.35 times

Average collection period

365 = 50.4 days 7.24

365 = 57.5days 6.35

Sugar Mill’s receivable turnover ratio was slightly higher than Tropico’s, which means on average, Sugar Mill was more efficient than Tropico 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): Sugar Mills

Tropico

$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.

7.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS7.1 Financial reporting problem: Health Care Equipment and Services industry Answers will vary according to the company chosen by each student. The required information can be located in the Financial Statements and Notes sections of the chosen annual report.

BBS7.2 Comparative analysis problem: Giorgina’s Pizza (a)

Dollars are in $’000 2019

2018

Cash/cash equivalents balance (end) $14,017 Cash expenses* $221,299 Average daily cash expenses $606.30 Ratio of cash to daily cash expenses 23.1 days *cash payments for provision of services, interest and taxes (b)

$30,255 $194,404 $532 61 56.8 days

2018 has a stronger cash position as indicated by the ratio of cash to daily cash expenses.

Critical thinking BBS7.3 Group decision case Campus Fashions (a)

2020

2019

2018

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

$2,940 4,560 9,600 3,000 900 $21,000

$3,000 4,560 11,520 3,600 1,080 $23,760

$1,920 4,560 7,680 2,400 720 $17,280

7.32

Chapter 7: Reporting and analysing cash and receivables

Total expenses as a percentage of net credit sales

(b)

3.5%

3.3%

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.

7.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e BBS7.4 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.

7.34

Chapter 7: Reporting and analysing cash and receivables

BBS7.5 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

7.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e BBS7.6 Communication activity Accountant’s role in combatting cyber crooks a) Small to medium enterprises (SMEs) are easier targets for hackers than the larger organisations as they tend to have less complex security systems in place. For this reason, they are often described as ‘low-hanging fruit’. The article identifies the sectors of finance, insurance and real estate as those that are targeted the most. The growing number of data pathways is expected to provide more opportunities for cybercrime in unexpected places. b) Some of the common forms of cybercrime are: •

Ransomware and extortion: This usually involves malware infecting the company network, which locks all access to systems, with a ransom message demanding payment in order to regain access to systems.

•

Financial transfer phishing: The target is any form of financial transaction between entities, for which the hacker will send a fake communication with incorrect bank details in an attempt to direct the transaction to the hacker’s account.

•

Data exfiltration: Once a hacker has infected an entity with malware, they may decide to be more discreet, stealing as much confidential data as possible without detection. The stolen data can then be sold or used to commit financial fraud.

•

Internal threats: Simple human error with no malicious intent, for instance losing a company laptop containing client data, can have serious repercussions. Malicious attacks by disaffected employees can also be devastating.

•

Common software exposure: One of the scariest threats from an industry standpoint is the systemic exposure posed by attacks on common forms of software used by an entire industry group. One example of this scenario involves exploiting a security loophole in a common system — such as a piece of bookkeeping software — resulting in data from thousands of practices being locked and held to ransom.

c) There are many detection and security solutions available to businesses to help them in their fight against cybercrime. Regardless of the electronic method used, all businesses should ensure they have the following risk management strategies in place. •

Ensuring security software is patched and updated regularly. Quite often, companies set and forget their IT security systems. An outdated system is unable to detect new threats, so updating software regularly is essential in a climate where new threats are identified daily.

•

Focusing on physical security in addition to network security. All the software in the world won’t help if there is unrestricted access to your office space.

•

Making sure that there is a strong focus on people when designing IT security measures. Human error is often the weakest link in any IT security system, which is why it’s so important that all staff, right across the business, understand the IT security measures and escalations that are in place.

•

Encrypting sensitive data. While not unbreakable, encryption is a good habit to get into when data is being transferred or stored. It adds another layer of protection.

•

Not storing unnecessary data. Only keep what is required for business and regulatory purposes. Storing unrequired data represents unnecessary exposure.

7.36

Chapter 7: Reporting and analysing cash and receivables

•

Implementing two-factor security measures where appropriate. An example would be a password and PIN combination. This space will evolve as biometric technology becomes more accessible.

•

Maintaining a balance between prevention and detection. Without measures to detect anomalies in the system, a breach may go unnoticed for months.

•

Restricting administrative privileges. This reduces the number of targets and decreases the probability of a large-scale breach occurring if a hacker obtains employee credentials.

•

Drafting a cyber-specific business continuity plan. This is essential to ensure your breach response is well-planned and the recovery process can begin as soon as possible. The Australian Cybercrime Online Reporting Network has an online reporting tool that can help you assess whether an event should be referred to law enforcement, as well as further resources on cyber events and reporting.

d) Students’ responses will be different based on their experiences and fields of interest.

7.37

Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 8: Reporting and analysing non-current assets

Chapter 8: Reporting and analysing non-current assets Assignment classification table

Learning objectives Explain the business context of noncurrent assets and the need for decision making for non-current assets

Brief exercises 6

Exercises

Problems

1A, 2A, 1B, 2B

2, 3

2, 3, 4, 7, 10

2A, 4A, 6A, 7A, 8A, 2B, 4B, 6B, 7B, 8B

Describe how the cost principle applies to property, plant and equipment assets.

Explain the concept of depreciation.

Calculate depreciation using various methods and contrast the expense patterns of the methods.

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: Reporting, analysis and decision making 6e

Solutions to questions 8.1.

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?

8.2.

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.

8.3.

GST only impacts on accounting for the purchase and sale of non-current assets.

8.4.

The primary advantages of leasing are: (a) reduced risk of obsolescence (b) nil or low down payment (c) shared tax advantages .

8.5.

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.

8.6.

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.

8.7.

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.

8.8.

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.

8.9.

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.

8.2

Chapter 8: Reporting and analysing non-current assets

8.10.

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.

8.11.

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.

8.12.

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: Reporting, analysis and decision making 6e

Solutions to brief exercises BE8.1 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). BE8.2 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. BE8.3 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:

Year 1 Year 2

Carrying Amount $96,600 ($96,600 – $28,980)

Rate 30% 30%

Depreciation $28,980 $20,286

BE8.4 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

8.4

Chapter 8: Reporting and analysing non-current assets

BE8.5 Elliot Ltd (i) (a)

1/7/18

Patent

$220,000 Cash/Accounts Payable

31/6/19

(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.

1/7/18

Patent GST

$200,000 $20,000 Cash/Accounts Payable

31/6/19

(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.

BE8.6 Fish Ltd (a)

Average useful life

= Average cost of PPE assets Depreciati on expense

= ((40.8b + 39.2b)/2)/1.6b = 25 years

(b)

= Accumulate d depreciati on

Average Age

Depreciati on 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

8.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE8.7 Irish Ltd Partial Statement of Financial Position as at 31 March 2020

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)

$ ‘000

$1916.9

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 $198.9 59.4 $258.3

Please note: numbers are given for illustrative purposes (these are not given in question).

8.6

Chapter 8: Reporting and analysing non-current assets

Solutions to exercises E8.1 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: Reporting, analysis and decision making 6e

E8.2 Tops Ltd Cost of new machine $228,000 purchased 1 October 2018 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%

2018 Depreciation expense

= = =

Depreciable amount x dep’n rate x 3 months $200,000 x 10% x 3/12 $5,000

2019 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% 2018 depreciation

$228,000 x 20% x 3/12 = $11,400

Carrying value January 1, 2019 = $228,000 – $11,400 = $216,600 Remember the Diminishing-balance method applies the rate to the carrying value not the depreciable amount. 2019 depreciation (c)

Units-of-production method: Depreciation cost per unit

2018 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

E8.3 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 2018 2019 2020 2021 2022

End of Year

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

Accumulated Depreciation $62,350 122,550 187,050 230,050 258,000

8.9

Carrying Value $205,650 145,450 80,950 37,950 10,000

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E8.4 Lion Ltd Balance date 30 June 1 January 2019

Equipment Cost Estimated Residual Depreciable Amount

Straight line depreciation rate (a)

100% ÷ 8 years = 12.5%

Depreciation expense for year 2019 $160,000 x 12.5% x 6 months

$10,000

Depreciation expense for year 2020 $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 2022:

Carrying value at 30/6/21 $180,000 less ($10,000 + $20,000 + $20,000) = $130,000. 1 July 2021 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 2022 is $138,800 x 20% = $27,760.

8.10

Chapter 8: Reporting and analysing non-current assets

E8.5 Able Ltd Balance date 30 June 1 Oct 2019

Equipment Cost Estimated Residual Depreciable Amount

$160,000 10,000 $150,000

Useful life is 8 years  depreciation rate 12.5% Depreciation 30/6/2020 = $150,000 x 12.5% x 8/12 = $12,500 Carrying amount 30/6/2020 = $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 Machinery $160,000 Cash/Payables (Being purchase) 30/6/20 Depreciation Expense 12,500 Accumulated Dep’n Machinery (Being annual depreciation) 1/7/20 Impairment Loss 48,750 Accumulated Impairment Loss (Being impairment writedown) 1/10/19

$160,000

12,500

48,750

8.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E8.6 Wall Ltd 1 January 2018

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 2020, new depreciation is over 7 years. (a) 1/1/18

30/6/18

30/6/19

30/6/20

Journal Entries Equipment Cash (Being purchase of equipment)

Sale 1/1/22

1/1/22

$ 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 1/7/20 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $39,375)

30/6/21

3,125

6,250

15,625 15,625

Equipment Revaluation Surplus (New carrying amount $70,000. Revaluation (70,000 – 39,375) = 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

Revaluation Surplus Retained Earnings Being derecognition of balances related to sold asset

30 625

8.12

30,625

10,000

5,000

70,000 1,500

30 625

Chapter 8: Reporting and analysing non-current assets

Note: This is the required treatment under IAS 16 para 41, but this is not included in the text examples as it is not required at this level Calculation of gain on sale Cost Accumulated Depreciation (10,000 + 5,000) Carrying amount of equipment sold Proceeds from sale Gain on sale

$70,000 (15,000) 55,000 56,500 $1,500

(b) 1 January 2018

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 2020, new depreciation is over 7 years.

1/4/18

30/6/18

30/6/19

30/6/20

Journal Entries Equipment GST Paid Cash (Being purchase of equipment)

Sale 1/1/22

1/1/22

$ 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 1/7/20 Accumulated Depreciation — Equipment Equipment (Carrying value before revaluation = $35,937)

30/6/21

2813

5,625

14,063 14,063

Equipment Revaluation Surplus [New carrying amount $70,000. Revaluation (70,000 – 35,937) = 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

15,000

34,063

10,000

5,000

8.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Cash Loss on sale of equipment GST Collected Equipment (Being disposal of equipment)

56,500 3,636

Revaluation Surplus Retained Earnings Being derecognition of balances related to sold asset Note: This is the required treatment but not included in the text examples as it is not required at an introductory level (IAS 16 para 41).

34 063

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

5,136 70,000

34 063

$70,000 (15,000) 55,000 51,364 $3,636

8.14

Chapter 8: Reporting and analysing non-current assets

E8.7 (a) Capers Ltd Balance date 30 June 1 July 2017 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 Equipment GST Paid Cash (Being purchase of equipment)

$ 200,000 20,000

30/6/18 Depreciation Expense Accumulated Depreciation — Equipment ($185,000 x 10%)

18,500

30/6/19 Depreciation Expense Accumulated Depreciation — Equipment ($185,000 x 10%)

18,500

1/7/17

Revaluation 1/7/19 Accumulated Depreciation — Equipment Equipment (Carrying value before revaluation = $163,000) Equipment Revaluation Surplus (New carrying amt $163,000 + $17,000 = $180,000) 30/6/20 Depreciation Expense Accumulated Depreciation — Equipment [($180,000 – $10,000) ÷ 8 years]

1/1/21

Revaluation downward Depreciation Expense Accumulated Depreciation — Equipment [($180,000 – $10,000) ÷ 8 years x 6/12]

220,000

18,500

37,000 37,000

17,000 17,000

21,250 21,250

10,625 10,625

Accumulated Depreciation — Equipment Equipment (Carrying value before revaluation downwards $148,125)

31,875

Revaluation Surplus Revaluation Expense Equipment (Being revaluation downward by $20,000)

17,000 3,000

31,875

20,000

(b) New carrying value = $128,125 (148,125 – 20,000)

8.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E8.8 Zhou Ltd 2019 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

8.16

Chapter 8: Reporting and analysing non-current assets

E8.9 Wilkins Ltd

1/1/18

1/7/18

1/9/18

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] 31/12/18 Amortisation Expense Accumulated Amortisation Patents Accumulated Amortisation Franchise Ending balances 31/12/18: 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)

8.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E8.10 (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.

8.18

Chapter 8: Reporting and analysing non-current assets

E8.11 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. E8.12 Beta Ltd Year ended 31 January 2018. (a)

Average useful life of PPE Assets

= =

(b)

Average age of PPE Assets

15.3 years

Accumulate d depreciati on Depreciati on expense $38,797 $6,399

(c)

Asset turnover ratio

Average cost of PPE assets Depreciati on expense ($105,282 + $90,861)  2 $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.

8.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to Problem Set A PSA8.1 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

8.20

Chapter 8: Reporting and analysing non-current assets

PSA8.2 Balance date is 30 June Porter Ltd (a) 1 2018 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 (1/1/12) 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

2019 Jan 1

June 30

Equipment Cash (Purchase of Equipment)

1,000,000 1,000,000

Accumulated Dep’n — Equipment Equipment (Equipment fully depreciated on 31/12/2017)

470,000

Depreciation Expense Accumulated Dep’n — Buildings ($28,500,000 x 1/40)

712,500

470,000

(a) 2 2019 June 30

June 30

Depreciation Expense Accumulated Depreciation — Equipment

712,500 4,735,500 4,735,500

8.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

$46,855,000* x 1/10 $1,000,000 x 1/10 x 6/12

4,685,500 50,000 4,735,500

*($48,000,000 – $675,000 – $470,000) (a) 3 Porter Ltd Partial Statement of financial position as at 30 June 2019 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.

30/06/18 Bal. B/d 1/8/18 Cash 30/6/19

Bal. b/d

Accumulated Depreciation — Buildings 30/06/18 Bal. b/d 12,812,500 30/06/19 Dep’n Exp. 12,812,500 30/06/19 Bal b/d

30/06/18 01/01/19 Cash

30/06/19 Bal. b/d

01/10/18 30/06/19 30/06/19

Cash Bal. c/d

300,000 6,330,000 6,630,000

Buildings 28,500,000

30/06/18

30/06/19

Land 4,000,000 1/12/18 2,630,000 30/6/19 6,630,000 6,330,000

Equipment 48,000,000 1/10/18 1,000,000 30/6/19 - 30/06/19 49,000,000 47,855,000

Cash, etc. Acc. Depr. Bal. c/d

Accumulated Depreciation — Equipment Equipment, etc. 455,625 30/06/18 Equip. 470,000 1/10/18 Dep’n Exp. Bal. c/d 8,826,750 30/06/19 Dep’n Exp.

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

8.22

Chapter 8: Reporting and analysing non-current assets

9,752,375 31/12/19

Bal. b/d

9,752,375 8,826,750

(b) 1 2018 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 (1/1/12) (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

2019 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

1,000,000

470,000

8.23

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) 2 2019 June 30

June 30

Depreciation Expense Accumulated Dep’n — Buildings ($28,500,000 x 1/40)

712,500 712,500

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) (b) 3 Porter Ltd Partial Statement of financial position as at 30 June 2019 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

8.24

Chapter 8: Reporting and analysing non-current assets

PSA8.3 CupCake Ltd 2018 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 1/7 x 6/12)

June 30

Cash Accumulated Depreciation — Computer Gain on Disposal Computer (Sale of computer) Calculation of disposal Cost (1/1/15) 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 (purchased 1/1/14) 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

8.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA8.4 Jupiter Ltd Year ending 30 June 2019 (a)

1/7/18

1/10/18

(b)

30/6/19

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

= 1− 4

120,000

12,500 43,200

9,000 120,000

= 1 – .5233 = 48% (approximately) Dep’n 30/06/19= $120,000 x 48% x 9/12 = $43,200

(c)

1/7/19

Land

80,000 Revaluation Surplus

1/7/19

(d)

31/12/19

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

8.26

Chapter 8: Reporting and analysing non-current assets

PSA8.5 Shark Ltd Year ending 30 June

(a) 30/6/19

(b) 30/6/19

Depreciation Expense — Machinery Accumulated Depreciation — Machinery ($50,000 x 1/5 or #1 $2000, #2 $5000, #3 $3000)

(d) 30/6/20

CV Recoverable Amt $8,000 $9,000 20,000 13,000 12,000 13,000

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 (To record reversal of impairment writedown of mach. #2 )

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.

$ 10,000

Impairment Loss Accumulated Impairment Loss Machine #2 (Writedown of Mach #2 to recoverable amount) Machine 1 2 3

$ 10,000

8.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA8.6 Toy Ltd Journal Entries $ (a) 30/6/18 Land — Wellington 1,400,000 Land — Auckland 400,000 Revaluation Surplus (Revaluation of land Wellington $1,400,000, Auckland 400,000) 30/6/18 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) 30/6/19 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

8.28

Chapter 8: Reporting and analysing non-current assets

PSA8.7 Button Ltd Balance date 31 December (a)

Year

Accumulated Depreciation 31/15

2015 2016 2017 2018

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

2016 2017 2018

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

2016 2017 2018

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 2018 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 2016 = $26,000 x 30% = $7,800 o 2017 = ($26,000 – $7,800) x 30% = $5,460 o 2018 = ($26,000 – $7,800 – $5,460) x 30% = $3,822 • Units-of-production (from answer (a) above for 2018 = $16,000 Depreciation expense in 2018 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 2018. (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 2018. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier years of an asset’s life.

8.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA8.8 Carpet Ltd (a) STRAIGHT-LINE DEPRECIATION Calculation

Years 2018 2019 2020 2021

Depreciable Cost *$360,000 360,000 360,000 360,000

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 2018 2019 2020 2021

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 2018 depreciation expense ($90,000) and, therefore, the highest 2018 profit. Diminishing-balance depreciation provides the highest amount for 2018 depreciation expense ($176,000) and, therefore, the lowest 2018 profit. Over the four-year period, both methods result in the same total depreciation expense ($360,000) and, therefore, the same total profit.

8.30

Chapter 8: Reporting and analysing non-current assets

PSA8.9 Wang Ltd Year end 30 June 2019 (a) Jul 1 Patent Cash (Successfully defend Patent) Jul to Dec 1

Jan 1

Apr 1

$ 25,000

25,000

Development Costs (expenses) Cash/Payables (Development expenses incurred in developing new product)

100,000

Patent Development Costs (expenses) ((Transfer development costs for patent for new product to asset account)

100,000

Brand Expense (internal cannot be capitalised) 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 2019 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 2018 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.

8.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA8.10 Ross Ltd & Yang Ltd (a) Ross Ltd

(b)

Yang Ltd

(1)

Average age of PPE assets

$1,420,000 = 3.3 years $420,000

$937,500 = 7.2years $130,000

(2)

Average useful life

$3,360,000 = 8 years $420,000

$2,000,000 = 15 years $130,000

(3)

Asset turnover ratio

$10,300,000 = 2.3times $4,480,000

$12,600,000 = 3.36times $3,750,000

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.

8.32

Chapter 8: Reporting and analysing non-current assets

Solutions to Problem Set B PSB8.1 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

8.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB8.2 King Ltd 2019 (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 (1/1/15) 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 31/12/19 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)

8.34

Chapter 8: Reporting and analysing non-current assets

(a) 3. King Ltd Partial Statement of financial position as at 31 December 2019 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.

31/12/19 Bal. b/d

Land 3,600,000 1/6/19 2,400,000 31/12/19 6,000,000 5,500,000

31/12/18

Buildings 31,800,000

31/12/18 Bal. B/d 1/4/19 Cash

31/12/19

Cash Bal. c/d

500,000 5,500,000 6,000,000

Accumulated Depreciation — Buildings 31/12/18 Bal. b/d 15,315,000 31/12/19 Dep’n Exp. 15,315,000 31/12/19 Bal b/d

31/12/18 1/7/19 Cash

31/12/19 Bal. b/d

Equipment 48,000,000 1/5/19 2,000,000 31/12/19 - 31/12/19 50,000,000 48,780,000

Cash, etc. Accum. Depr. Bal. c/d

Accumulated Depreciation — Equipment 1/5/19 Equipment 312,000 31/12/19 31/12/19 Equipment 500,000 1/5/19 Dep’n Exp. 31/12/19 Dep’n Exp. 31/12/19 Bal. c/d 10,040,000 31/12/19 Dep’n Exp. 10,852,000 31/12/19 Bal. b/d

8.35

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

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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 (1/1/15) 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. 2019 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)

8.36

Chapter 8: Reporting and analysing non-current assets

(b) 3.

King Ltd Partial Statement of Financial Position as at 31 December 2019 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

8.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB8.3 Cox Ltd 2019 Jan 1

June 30

$ $ Accumulated Dep’n — Machinery Machinery (Scrapping machinery fully depreciated 31/12/18)

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 (1/1/2016) 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

8.38

Chapter 8: Reporting and analysing non-current assets

PSB8.4 Mars Ltd Year ending 30 June 2019

(a)

1/7/18

1/10/18 (b)

30/6/19

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

= 1− 4

120,000 12,500 43,200

9,000 120,000

= 1 – .5233 = 48% (approximately = $120,000 x 48% x 9/12 = $43,200

1/7/19

(d) 31/12/19

31/12/19

Land

200,000 Revaluation Surplus 200,000 Note: The $200,000 is considered ‘other comprehensive income’ and would appear on the Statement of Profit or 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

8.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB8.5 Fox Ltd Year ending 30 June

(a) 01/07/18

30/6/19

(b) 30/6/19

Machinery Cash (Purchase of machine)

(d) 30/6/20

$ 85,000

Depreciation Expense — Machinery Accumulated Depreciation — Machinery (($85,000 – $5,000) ÷ 8)

10,000

Impairment Loss Accumulated Impairment Loss — Machinery (Writedown of machine to recoverable amount)

14,000

Machine 30/6/16 (c) 30/6/20

$ 85,000

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 30/6/20 $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

8.40

Chapter 8: Reporting and analysing non-current assets

PSB8.6 Red Ltd Journal Entries 30/6/19 Land — Darwin Revaluation Surplus (Revaluation of land Darwin to $600,000)

$ 200,000

30/6/19 Revaluation Surplus Land — Perth (Revalue Land — Perth downwards to $1,000,000)

200,000

30/6/19 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB8.7 Winter Ltd Balance date 31 December (a)

Year

Accumulated Depreciation 31/12

2015 2016 2017 2018

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

2016 2017 2018

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

2016 2017 2018

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 2018 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 2016 = $65,000 x 30% = $19,500 o 2017 = ($65,000 – $19,500) x 30% = $13,650 o 2018 = ($65,000 – $19,500 – $13.650) x 30% = $9,555 • Units-of-production (from answer (a) above for 2018 = $20,000 Depreciation expense in 2018 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 2018. (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 2018. 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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Chapter 8: Reporting and analysing non-current assets

PSB8.8 Buttercup Ltd (a) STRAIGHT-LINE DEPRECIATION Calculation Depreciable Years Cost 2018 *$270,000 2019 270,000 2020 270,000 2021 270,000 2022 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 2018 2019 2020 2021 2022

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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b)

Straight-line depreciation provides the lowest amount for 2018 depreciation expense ($54,000) and, therefore, the highest 2018 profit. Diminishing-balance depreciation provides the highest amount for 2018 depreciation expense ($105,400) and, therefore, the lowest 2018 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

PSB8.9 Future Ltd Year ended 31 December 2020 (a)

Jan 1

$ 13,500

Patents Cash (Defence of patent)

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 2020 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: Reporting, analysis and decision making 6e

PSB8.10 Zhou Ltd & Wang Ltd (a)

(b)

Zhou Ltd

Wang Ltd

(1)

Average age of PPE assets

$360,000 = 2.25 years $160,000

$750,000 = 6.05 years $124,000

(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 BBS8.1 Financial reporting problem: Domino’s Pizza Enterprises Ltd The solution to this problem is dependent on the year the student investigates. (a)

The carrying (book) value of property, plant and equipment will be shown in the Statement of Financial Position. Asset costs will be in the notes to the account.

(b)

Refer to note on Depreciation

(c)

Depreciation and amortisation expense, will be disclosed in a note

(d)

Additions to non-current assets. See notes *Note additions include acquisitions through business combinations

(e)

Note to the accounts will disclose financial leases together with their present value and will also give information on operating leases.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS8.2 Comparative analysis problem Sugar Mills Ltd vs. Bamboo Ltd (a)

(1) Average useful life of PPE assets Average cost of PPE assets Depreciati on expense

(2) Average age of PPE assets Accumulate d depreciati on Depreciati on expense

(3) Asset turnover ratio Net sales Average total assets

(b)

Sugar Mills Ltd

Bamboo Ltd

((2105.1 + 1922.5)/2) 128.5 15.67 years

((6911.8 + 6892.0)/2) 395.2 17.46 years

1053 / 128.5

3941.4 / 395.2

8.2 years

10 years

2523.6 (3049.0 + 3368.2)/2 0.787 times

7814.1 (9474.6 + 9748.5)/2 0.813 times

= = =

= =

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. Sugar Mills’ and Bamboo’s PPE assets have been used for 8.2 years and 10 years respectively. Sugar Mills’ PPE assets have a shorter estimated life than Bamboo’s PPE assets. The remaining estimated life of Sugar Mills’ PPE assets is 7.47 years (15.67 – 8.2), while Bamboo’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. Sugar Mills’ asset turnover ratio is 0.787 times and Bamboo’s 0.813 times. Therefore, it can be concluded that Bamboo Ltd is slightly more efficient in usage of assets.

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Chapter 8: Reporting and analysing non-current assets

BBS8.3 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.

$47,314 =0.89 ($54, 422 + $51, 472)  2

$53,796 = 1.01 ($63,706 + $42,906)  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: Reporting, analysis and decision making 6e

BBS8.4 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 BBS8.5 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

measured. If other entities can purchase these types of assets then they must be able to be measured. 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

BBS8.6 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: Reporting, analysis and decision making 6e

BBS8.7 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 2018 2019 2020

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 2018 2019 2020 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

BBS8.8 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 i.e. 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 • 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.

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

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 and explain how to report contingent liabilities.

7, 8, 9, 10

Prepare entries to record provisions for warranties.

5, 6

7A, 8A, 7B, 8B

Evaluate an entity’s liquidity and solvency.

8, 9

9A, 10A, 9B, 10B

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 9.1.

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.

9.2.

(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

9.3.

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.

9.4.

$1000 ($50 000 x 8% x 3/12)

9.5.

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.

9.6.

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.

9.7.

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.

9.8.

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 © John Wiley and Sons Australia Ltd, 2019

9.3

Chapter 9: Reporting and analysing liabilities

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.

9.9.

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.

9.10.

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 6e

Solutions to brief exercises BE9.1 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.

BE9.2 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

BE9.3 31 May 16

Interest Expense $ 902 Loan Payable $4,098 Cash at Bank (To record the loan payment for May)

$5,000

BE9.4 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

BE9.5 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)

BE9.6 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)

BE9.7 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 6e

BE9.8 Johnson Ltd ($ in thousands)

2019

(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

BE9.9 Fresh Flowers Ltd 30 June

31 Aug

Delivery truck lease receivable Delivery truck lease revenue

$100

Cash

$300

$100

Delivery truck lease receivable Delivery truck lease revenue

$100 $200

9.7

Chapter 9: Reporting and analysing liabilities

Solutions to exercises E9.1 (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

E9.2 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

E9.3 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 6e

E9.4 (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

E9.5 (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 2020.

(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.

E9.6 (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

E9.7 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). E9.8 Olden Motor Vehicles Ltd (a) Summary entry for claims during the year ended 30 June 2019 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 30/06/19.) (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.

E9.9 Benson Builder Pty Ltd Summary entry for claims during the year ended 31 December, 2019 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.) © John Wiley and Sons Australia Ltd, 2019

9.10

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E9.10

Investment Ltd (a) ($ in thousands)

2019

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 favourably in comparison to competitors and entities in similar industries.

9.11

Chapter 9: Reporting and analysing liabilities

E9.11 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.

E9.12 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 6e

E9.13 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 PSA9.1 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 6e

(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.

720

$ 360 30/9 31/10 30/11 31/12

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.

. © John Wiley and Sons Australia Ltd, 2019

9.15

Chapter 9: Reporting and analysing liabilities

PSA9.2 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 6e

PSA9.3 D100 Ltd (a)

(b)

2020 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

2021 (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.

PSA9.4 Cameron Ltd (a)

(b)

2018 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)

2019 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 © John Wiley and Sons Australia Ltd, 2019

9.17

Chapter 9: Reporting and analysing liabilities

PSA9.5 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 6e

PSA9.6 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.

PSA9.7 Botch’s Watches Ltd Summary entry for the year ended 30 June 2020 (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 2020. 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. © John Wiley and Sons Australia Ltd, 2019

9.19

Chapter 9: Reporting and analysing liabilities

PSA9.8 Lennox Plumbing Services Pty Ltd (a) WARRANTY PROVISION ACCOUNT Spare parts inventory (amount of warranty claims) $110,000 2019 Beginning balance Warranty Expense (amount of adjusting journal entry) Closing balance 130,000 $240,000 2020 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 6e

PSA9.9 (a) Digital Ltd Data Corporation New Zealand Ltd 2022 ($ 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

Digital Ltd 2022 ($ 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 2022 Digital Ltd outperformed Data Corporation New Zealand in both measures. Digital Ltd has a higher debt to total assets ratio than Data Corporation New Zealand, indicating a larger proportion of assets financed by creditors, however it also has higher interest coverage than Data Corporation New Zealand. In summary, Digital Ltd appears to be more liquid and solvent than Data Corporation New Zealand.

9.21

Chapter 9: Reporting and analysing liabilities

PSA9.10 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 6e

PSA9.11 (a)

Month Ending 30.6.2018

Beginning Balance

Payment

Interest

Reduction of Principal

Closing Balance

$200,000

$55,480

$24,000

$31,480

$168,520

30.6.2019

168,520

55,480

20,222

35,258

133,262

30.6.2020

133,262

55,480

15,991

39,489

93,774

30.6.2021

93,774

55,480

11,253

44,227

49,547

5,934*

49,546

30.6.2022

49,547 55,480 *Rounding error $12 adjusted against interest

(b) 2018 30 Jun.

Interest Expense $24,000 Loan Payable 31,480 Cash at Bank (To record the annual loan payment)

$55,480

2019 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

PSA9.12

Duncan Ltd (a) Lease repayment schedule:

Date

Lease Payment $

Interest 8% $

Principal reduction $

Balance lease obligation $

01.07.2018 30.6.2019

100,000 38,803

8,000

30,803

69,197

30.6.2020

38,803

5,536

33,267

35,930

35,929

30.6.2021

38,803 2,875* *Rounding error $1 adjusted against interest

(b) 2019 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 amortisation expense At the end of the period $100,000 ÷ 3)

$38,803

$33,333

(c) Statement of Financial Position (Extract) As at 30 June 2019 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 6e

Solutions to Problem set B PSB9.1

(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 6e

PSB9.2 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.

9.27

Chapter 9: Reporting and analysing liabilities

PSB9.3 Spring Hill Capital Ltd 2019 (a) Jan.

(b)

Jul.

2020 (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.

PSB9.4 Thompson Ltd (a)

(b)

2018 Jul.

2018/19 Dec. 31

Jun.

(c)

2020 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

9.28

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB9.5 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

9.29

Chapter 9: Reporting and analysing liabilities

PSB9.6 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.

PSB9.7 Quinton Mechanics Ltd Summary entry for the year ended 30 June 2019 (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 2019. 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. © John Wiley and Sons Australia Ltd, 2019

9.30

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB9.8 Davis Builders Pty Ltd (a) WARRANTY PROVISION ACCOUNT Spare parts inventory (amount of warranty claims) $133,000 2019 Beginning balance Warranty Expense (amount Closing balance 39,000 of adjusting journal entry) $172,000 2020 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

PSB9.9 Omni Co Ltd (a) Data Corporation New Zealand Ltd 2019 ($ 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

Omni Co Ltd 2019 ($ 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 2019 Omni Co Ltd outperformed Data Corporation New Zealand in both measures. Omni Co Ltd also has a much lower debt to total assets ratio than Data Corporation New Zealand, indicating a smaller proportion of assets is financed by creditors. Omni Co Ltd also has a much higher interest coverage than Data Corporation New Zealand. In summary, Omni Co Ltd appears to be more liquid and solvent than Data Corporation New Zealand.

9.32

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB9.10 Matrix Ltd (a)

2019

2018

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 2019, 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 2019. In summary, Matrix Ltd’s liquidity levels dropped significantly but there was relatively little change in its solvency.

9.33

Chapter 9: Reporting and analysing liabilities

PSB9.11 (a) Month Ending 30.6.2019 30.6.2020 30.6.2021 30.6.2022 30.6.2023 •

Beginning Balance

Payment

Interest

Reduction of Principal

$100000 83620 65602 45782 23980

$26380 26380 26380 26380 26380

$10000 8362 6560 4578 2400*

$16380 18018 19820 21802 23980

Closing Balance $83620 65602 45782 23980 0

Rounding error $2 adjusted against interest

(b) 2019 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)

2020

$19,820

Non-Current Liabilities Loan payable

$45,782

9.34

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB9.12

Cooper Ltd (a) Lease repayment schedule: Lease Interest 12% Date Payment $ $

Principal reduction $

Balance lease obligation $

01.7.2019 30.6.2020

75000 20,805

9,000

11,805

63,195

30.6.2021

20,805

7,583

13,222

49,973

30.6.2022

20,805

5,997

14,808

35,165

30.6.2023

20,805

4,220

16,585

18,580

18,575

30.6.2024 •

20,805 2,235* Rounding error $5 adjusted against interest

(b) 2020

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 2021 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 BBS9.1 Financial reporting problem: Giorgina’s Pizza Limited (a) current liabilities at 30 June 2022 were $38,479,000 (b) current provisions at 30 June 2022 were $2,332,000 (c) change in the value of total liabilities from 2021 to 2022: $65,378,000 – $43,710,000 = $21,668,000 (d) working capital, current ratio, quick ratio, debt to total assets ratio and times interest earned for 2022.

($ in thousands)

2022

Working capital Current assets − Current liabilities

45,286 – 38,479 = 6,807

Current ratio Current assets Current liabilities

45,286 38,479 = 1.18:1

Quick ratio Cash+ Marketable securities + Net receivables Current liabilities

14,017+0+19,809 38,479 = 0.88:1

Debt to total assets ratio Total liabilities Total assets

65,378 142,312 = 0.46:1

Times interest earned Profit before income tax + Interest expense* Interest expense

30,572 + 304 304 = 101.57

*referred as finance expenses in Giorgina’s Pizza Ltd’s Statement of profit or loss

9.36

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS9.2 Comparative analysis problem Original Furnishings Limited vs. Artistry Furniture Limited (a) 2022

($’000)

Original Furnishings Limited

Artistry Furniture Limited

Working capital Current assets − Current liabilities

187 470 – 123 975 = 63 495

41 650 – 29 130 = 12 520

Current ratio Current assets Current liabilities

187 470 123 975 = 1.51:1

41 650 29 130 = 1.43:1

Quick ratio Cash+ Marketable securities + Net rec. Current liabilities

108 000 + 0 + 20 250 123 975 = 1.03:1

24 000 + 724 + 4 420 29 130 = 1.0005:1

Debt to total assets ratio Total liabilities Total assets

170 235 287 370 = 0.59:1

39 140 65 250 = 0.60:1

Times interest earned Profit before income tax + Interest expense* Interest expense

57 500 + 4 896 4 896 = 12.74

21 400 + 214 214 = 101.00

also referred to as EBIT* ... earnings before interest and tax

(b)

Both entities have positive working capital. Original Furnishings has a higher current ratio than Artistry Furniture, however in both cases the current ratios appear to be comfortably greater than 1:1. Original Furnishings’ quick ratio of 1.03 is only slightly above 1:1 due to inventory taking up 30% of its current assets. Artistry Furniture’s quick ratio is equal to 1:1 and it also has 30% of its current assets as inventory. The quick ratios of both entities would be of concern in the absence of industry average information and inventory turnover ratios as it would appear they may both have liquidity problems. Original Furnishings’ debt to total assets ratio of 59% is much the same as Artistry Furniture’s 60%, however Artistry Furniture’s times interest earned is substantially higher at 101 times than Original Furnishings’ at 12.74 times. Both these ratios indicate each company to be solvent.

9.37

Chapter 9: Reporting and analysing liabilities

BBS9.3 A global focus Drawing on note 18 to the 2017 financial statements, Telstra has borrowings in the following foreign currencies: • United States dollars • Euro • Japanese yen • Swiss francs • Other — includes Philippine peso and British pounds sterling. 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 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 dollar devalued against the US dollar, it would take more Australian dollars to repay US loans borrowed by Australian companies such as Telstra.

BBS9.4 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.

9.38

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Critical thinking BBS9.5 Group decision case Mall Ltd 2021 (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 2024, or refinancing of that issue at that time and consider what interest rates will be in 2024 in evaluating a redemption and issue in 2021.

Sincerely,

9.39

Chapter 9: Reporting and analysing liabilities

BBS9.6 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 2019, 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 2020, 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 2019 and 2020 are based on assumptions that the stage of completion at 30 June 2019 and 30 June 2020 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 2019 and 30 June 2020 when revenue is to be recognised. Signed

9.40

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS9.7 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

Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 10: Reporting and analysing equity

Chapter 10: Reporting and analysing equity Assignment classification table

Learning objectives Explain the business context and the importance of decision making relating to equity.

Brief exercises

Exercises

Problems

1,2,8,9

1A,2A,3A,9A, 1B,2B,3B,9B

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.

Identify 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 6e

Solutions to questions 10.1.

Lenders, shareholders, management are three groups referred to in the text. See LO 1 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.

10.2.

(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.

(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.

10.3.

10.4.

In the absence of restrictive provisions, the basic ownership rights of ordinary shareholders are the rights to: -

vote for the election of the board of directors and in corporate actions that require shareholders’ approval. share in company profits. share in net assets upon liquidation.

10.2

Chapter 10: Reporting and analysing equity

10.5.

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.

10.6.

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.

10.7.

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 (c) has no effect on equity.

10.8.

The adjustment required is to decrease assets and decrease opening retained earnings in the current period. In presenting financial statements for 2018, the comparative figures for 2017 should be adjusted by decreasing assets and increasing expenses with resulting decreases in profit and closing retained earnings for 2017.

10.9.

No. The additional depreciation results from a change in accounting estimates and should be recognised as an expense.

10.10. (a)

(b)

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. 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.

10.11. 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 6e

10.12. 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. 10.13. 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. 10.14. 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. 10.15. 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 BE10.1 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

BE10.2 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)

Credit $ 200,000

Share Dividend Payable 200,000 Share Capital 200,000 (To record the issue of shares as per dividend declared)

10.5

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

BE10.3 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

BE10.4 Spinning Ltd General Journal Date 2019 June 30

July 31

Account name (narration)

Debit $

Credit $

Dividend Declared/Retained Earnings 2250 Dividend Payable (To record declaration of dividend (15,000 X $0.15)

2250

Dividend Payable Cash at Bank (To record the payment of the dividend)

2250

10.6

Chapter 10: Reporting and analysing equity

BE10.5 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

BE10.6 Basil Ltd Income statement (Partial) Profit before income tax Income tax expense Profit for the period

$600,000 180,000 $420,000

The prior period adjustment is adjusted in opening retained earnings.

BE10.7 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 6e

BE10.8 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 E10.1 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 6e

E10.2 (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 $

2019

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 2019 $

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

E10.3 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. E10.4 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 6e

E10.5 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 effect 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

E10.6 Gold Ltd Statement of Changes in Retained Earnings For the year ended 30 June 2018 Retained earnings 1 July 2017* 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 2018

$20,000 40,000 60,000 (8,000) (12,000) (8,000)

(28,000) $32,000

E10.7 Speedy Deliveries Statement of Changes in Retained Earnings For the year ended 31 December 2018 Retained earnings 1 January 2018 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 2018

$34,000 20,000 54,000 (4,500) (3,000) (5,000)

(12,500) $41 500

10.12

Chapter 10: Reporting and analysing equity

E10.8 (a) South Island Skiwear Ltd General Journal Date 2019 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 2019 Jan 10 Cash at bank Mar 1 Cash at bank May 1 Cash at bank 282,500 Sep 1 Cash at bank $282,500 Jan 1/20 Opening Bal*

SHARE CAPITAL (10% preference) Account name Amount Date Account name 2019 Closing bal. 8,000 Nov 1 Cash at bank $8,000 Jan 1/20 Opening Bal*

Amount 90,000 7,500 125,000 60,000 $282,500 $282,500

Amount 8,000 $8,000 $8,000

Share capital at 31 December 2019 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 6e

E10.9 (a) Young Ltd General Journal Date 2019 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 2019 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

Jan 1/20

Opening Bal

480,000 90,000 315,000 80,000 105,000 $1,070,000 $1,070,000

Share capital at 31 December 2019 is $1,070,000

10.14

Chapter 10: Reporting and analysing equity

E10.10 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 2019 = $210,000 + $70,000 – $40,000 =$240,000 E10.11 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 interest 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 6e

Solutions to Problem Set A PSA10.1 (a) Public issue of shares Sport’s Field Ltd General Journal Date 2019 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

10.16

Chapter 10: Reporting and analysing equity

(b)

2/3

Application $ 21,000 1/3

$ 21,000

21,000

Allotment $ 31/3 10,500 2/3

10,500

Bal. C/b

(c)

Sport’s Field Ltd

Call $

2/3 2/3 35,000 1/11 35,000 1/12 Bal

10,500

Share Capital $

21,000 10,500 3,500 35,000 35,000

$ 30/11 3,500

$ 1/11

3.500

3,500

Share capital: $35,000

3,500

10.17

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSA10.2 (a) CoffeeForU Ltd General Journal Date 2019 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 2019 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

10.18

Chapter 10: Reporting and analysing equity

PSA10.3 Amber Consulting Pty Ltd General Journal Account name (narration) Debit $

Date 2020 Oct

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) Cash

600 6,000

590 3,200

660 660

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

10,000

3,200 320 3,520

200

10.19

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

GST Paid Cash (To record electricity payment)

20 220

10.20

Chapter 10: Reporting and analysing equity

PSA10.4 (a) Rake Ltd General Journal Date 2019 Feb 1

Mar 1

July 1

July 31

Dec 1

Account name (narration)

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

10.21

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

(b) Share Capital $ C/B 2,040,000 2,040,000

$ 1/1 Bal. 1,800,000 31/7 240,000 2,040,000 31/12 bal. 2,040,000

Dividends Payable $ $ 1/3 36,000 1/2 36,000 Bal. 33,000 1/12 33,000 69,000 69,000 1/1/20 bal. 33,000

Retained Earnings $ $ 1/2 36,000 1/1 Bal. 900,000 1/7 240,000 1/12 33,000 31/12 bal 591,000 . 900,000 900,000 1/1/20 bal. 591,000

31/7

Share Dividends Payable $ $ 240,000 7/1 240,000 240,000 240,000

General Reserve $ $ 1/1 Bal. 250 000

(c) Equity section of the Statement of Financial Position Rake Ltd Statement of Financial Position (partial) As at 31 December 2019 EQUITY $ Share capital 2,040,000 General reserve 250,000 Retained earnings 591,000 TOTAL EQUITY $ 2,881,000

10.22

Chapter 10: Reporting and analysing equity

PSA10.5 (a) CanDo Ltd General Journal Date 2018 Dec 31

2019 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 2019 Retained earnings 1 July 2018 Add: Profit Less: Interim dividend (20,000 x $0.20) Final dividend (60,000 x $0.10) Retained earnings 30 June 2019

$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.

10.23

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSA10.6 (a) Rocky Ltd General Journal Date 2018 Sep 30

Account name (narration)

Oct 10

Share Dividend Payable Share Capital (Being payment of interim share dividend)

2019 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 2019 Retained earnings 1 April 2018 Add: Profit Less: Interim share dividend Final cash dividend Retained earnings 31 March 2019

$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

10.24

Chapter 10: Reporting and analysing equity

PSA10.7 (a) Harre Pty Ltd General Journal Date 2019

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 2019

Balance 1 July 2018 Profit Cash Dividends Transfer to reserve Balance 30 June 2019

Share Capital $ 20

General Reserve $ 10,000

$20

8,000 $18,000

Retained earnings $ 22,000 35,000 (19,000) (8,000) $30,000

10.25

Total

32,020 35,000 (19,000) $48,020

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSA10.8 (a) Silk Ltd General Journal Date 2019 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 2019 Share General Retained Capital Reserve earnings $’000 $’000 $’000 Balance 1 January 2019* 5,000 192 33 Profit 60 Cash Dividends (31) Transfer to reserve 20 (20) Balance 31 December 2019 $5,000 $212 $42 *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.

10.26

Total $’000 5,225 60 (31) $5,254

Chapter 10: Reporting and analysing equity

PSA10.9 (a) Wellington Ltd General Journal Date 2019 Aug 15

Oct 1

2020 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 2019 Profit Share issue dividend Cash Dividends Transfer to reserve Balance 30 June 2020

(c)

Wellington Ltd Statement of Changes in Equity For the Year ending 31 December 2020 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

Equity increased by $180,000 profit less cash dividend $15,000= $165,000 ($675,000 less $510,000 = $165,000)

10.27

Total $ 510,000 180,000 (15,000) $675,000

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

(d)

Dividend to be paid out of 2020 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%

10.28

Chapter 10: Reporting and analysing equity

PSA10.10 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.

10.29

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

Solutions to Problem Set B PSB10.1 (a) Jumping Jack Ltd General Journal Date 2019 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

10.30

Chapter 10: Reporting and analysing equity

(b)

2.5

Application $ 600,000 1.5

$ 600,000

600,000

31/5

Share Capital $

Bal C/d 1,200,000 1,200,000

(c)

2/5 2/5 1/8

Jumping Jack Ltd

$ 600,000 400,000 200,000 1,200,000 1,200,000

15/8

Allotment $ 400,000 2/5

$ 400,000

400,000

Call $ 200,000 1/8

$ 200,000

200,000

Share capital: $1,200,000

PSB10.2 (a) Luke Ltd General Journal Date 2019 Mar 15

June 10

July 31

(b)

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.

10.31

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSB10.3 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

10.32

Chapter 10: Reporting and analysing equity

PSB10.4 (a) Ellie Ltd General Journal Date 2019 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)

Share Dividends Payable (Equity)

$ 1/9 90,000 Bal.84,000 174,000

$ 1/8 1/12 31/12 bal

90,000 84,000 174,000 84,000

31/10

$ 100,000 100,000

1/10

10.33

$ 100,000 100,000

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSB10.5 (a) Beta Ltd General Journal Date 2018 Dec 30

2019 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 2019 Retained earnings 1 July Add: Profit Less: Transfer to General reserve Interim cash dividend Final cash dividend Retained earnings 30 June

$100,000 100,000 200,000 (5,000) (22,500) (75,000)

102,500 $97,500

(c) Beta Ltd Statement of financial position (Partial) As at 30 June 2019 EQUITY Share capital (60,000) shares Reserves Retained earnings TOTAL EQUITY

$150,000 95,000 97,500 $342 500

10.34

Chapter 10: Reporting and analysing equity

(b)

Cash Dividend payout = $97,500/$100,000 = 97.5% Return on shareholders’ equity = $100,000/[($342,500 + $340,000)/2] = 29.3%

(e)

See the Share Split section of this chapter. The purpose of a share split is to increase the marketability of the shares by lowering the market value per share. This makes it easier for the corporation to issue additional shares. The effect of a share split on the market value of shares is generally inversely proportional to the size of the share split

10.35

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSB10.6 (a) Brownstone Ltd General Journal Date 2018 Dec 31

2019 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 2019 Retained earnings 1 July 2018 Add/(Less): Profit (loss) Less: Interim share dividend Final cash dividend Retained earnings 30 June 2019

(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 the chapter for discussion on share dividends. Because a share dividend does not result in a distribution of assets, many view it as nothing more than a publicity gesture. Share dividends are often issued by companies that do not have adequate cash to issue a cash dividend. These companies may not want to announce that they will not issue a dividend at their normal time to do so. By issuing a share dividend they ‘save face’ by giving the appearance of distributing a dividend. Note that since a share dividend neither increases nor decreases the assets in the company, investors are not receiving anything they didn’t already own.

10.36

Chapter 10: Reporting and analysing equity

PSB10.7 (a) Pansies Pty Ltd General Journal Date 2019 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 2018 Profit Cash Dividends Transfer to reserve Balance 30 June 2019

Pansies Pty Ltd Statement of Changes in Equity For the Year ending 30 June 2019 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

10.37

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSB10.8 (a) Swedish Ltd General Journal Date 2019 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 2018 Profit Cash Dividends Transfer to reserve Balance 30 June 2019

Swedish Ltd Statement of Changes in Equity For the Year ending 30 June 2019 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.

10.38

Chapter 10: Reporting and analysing equity

PSB10.9 (a) Gemini Ltd General Journal Date 2019 Aug 15

Oct 1

2020 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 2019 Profit Share Dividend Cash Dividend Transfer to Reserve Balance 30 June 2020

Gemini Ltd Statement of Changes in Equity For the Year ending 30 June 2020 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 2020 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%.

10.39

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

PSB10.10 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.

10.40

Chapter 10: Reporting and analysing equity

Building business skills Financial reporting and analysis BSB10.1 Financial reporting problem: Health Care Equipment and Services Industry Answers will vary depending on the companies chosen. For part (e), the formulas for the required ratio calculations are: Dividend payout rate = Cash dividends declared on ordinary shares Profit Return on ordinary shareholders’ equity = Profit – preference dividends Ordinary shareholder’s average equity BSB10.2 Financial reporting problem: Energy Industry Answers will vary depending on the companies chosen. BSB10.3 Comparative analysis problem Blue Heeler Ltd vs. Jack Russell Ltd (a) Blue Heeler $’000

Jack Russell $’000

2019 Dividend payout rate

$21,594  $27,016 = 79.9%

$19,440  $32,004 = 60.7%

2018 Dividend payout rate

$26,712  $41,976 = 63.6%

$14,580  $18,408 = 79.2%

$27,016 $(216,290 + 217,972)/2 =12%

$32,004 $(72,668 + 54,706)/2 = 50%

2019 Return on shareholders’ equity

(b)

Based on the return on shareholders’ equity Jack Russell Limited was much more profitable, generating 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. Blue Heeler Limited’s rate seems to have increased whereas Jack Russell Limited’s rate has reduced.

10.41

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

BSB10.4 A global focus Please note: the answer to this question will depend on when the site is accessed as the website changes over time. (a) The site notes the advantages as including its recognition as a global international financial listing hub with over US$2.4 trillion assets under management and approximately 40% of listed companies overseas. It also notes that Singapore possesses leading sectors in Asia, including its global hub, and the world’s largest bunker port and second largest container port. The Exchange is the region’s largest foreign exchange trading and active commodities trading centre. It is also a trusted regulatory regime with an AAA rating. It has a comprehensive list of services and products and has world-class connectivity. The section headed Why SGX states ‘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.’ (b) Australia Bermuda China France Hong Kong Indonesia Japan Malaysia Roc Taiwan Singapore Thailand United Kingdom United States (c) This will depend on the company chosen and year. This answer is based on information available on 8 December 2017. 1. 2. 3.

4. 5. 6. 7. 8. 9. 10. 11.

Name: AusNet Services Ltd (formerly: SP AUSNET) Place of incorporation: Australia Address of registered office: Level 31, 2 Southbank Boulevard Southbank, Victoria 3006 Australia Website: http://www.ausnetservices.com.au When it was listed on the SGX: 14 December 2005 What other exchanges, if any, is it listed on: ASX Name of auditor: KPMG Nature of operations: Energy Company Largest shareholder: Singapore Power International Pty Ltd Contributed Equity: A$5153.2 million; Total Equity: A$3698.4 million (negative reserves) Countries in which the company — or its subsidiaries — operates: Australia and UK

10.42

Chapter 10: Reporting and analysing equity

Critical thinking BSB10.5 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 6e

BSB10.6 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. 2. 3.

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. 2. 3. 4.

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

BSB10.7 Communication activity Goodman Fielder Sustainability & Environment Note to lecturer: at the time of writing this solution the website of Goodman Fielder had changed. Ask students to comment on the company’s achievements in three of the following areas: • Environmental policy • Environmental management • Packaging • Sustainable palm oil • Genetically modified foods • Animal welfare • Human rights

10.45

Solutions manual to accompany Financial Accounting: Reporting, Analysing and Decision Making 6e

BSB10.8 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.

10.46

Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 11: Statement of cash flows

Chapter 11: Statement of cash flows Assignment classification table

Learning objectives Indicate the main purpose of the statement of cash flows.

Brief exercises

Exercises

Problems

1, 2

1, 5

2A, 6B

1A, 2A, 3A, 4A, 5A, 6A, 7A, 8A, 9A, 10A, 1B, 2B, 3B, 4B, 5B, 7B, 8B, 9B, 10B

Distinguish among operating, investing and financing activities.

Prepare a statement of cash flows.

3, 4, 5, 6

2, 4, 6, 7, 8, 9, 11, 12, 13

Explain the impact of the product life cycle on an entity’s cash flows.

Use the statement of cash flows to evaluate an entity.

4, 10

4A, 8A, 4B, 8B

11.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 11.1.

The statement of cash flows answers the following questions about cash: (a) Where did the cash come from during the period? (b) What was the cash used for during the period? (c) What was the change in cash balance during the period?

11.2.

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).

11.3.

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.

11.4.

(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

11.5.

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.

11.6.

Sales Less: Increase in receivables Cash receipts from customers

11.7.

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.

11.8.

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.

11.9.

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’.

11.10. (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 6e

Solutions to brief exercises BE11.1 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

BE11.2 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

BE11.3 Cheong’s Chinese Herbs Ltd Cash receipts from customers

Sales

+ Decrease in accounts receivable  revenues - Increase in accounts receivable

  – bad debts written off 

$588,000 = $600,000 – $10,000 (Increase in accounts receivable) – $2,000 BE11.4 Pete’s Pies Ltd + Increase in prepaid expenses  - Decrease in prepaid expenses

Cash payments for operating expenses

= Operating expenses

and

excluding depreciati on

+ 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

BE11.5 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

BE11.6 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

BE11.7 (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 6e

Solutions to exercises E11.1 (a) Wilderness Equipment Ltd Reconciliation of profit after tax to cash provided by operating activities (i) (ii) (iii) (iv) (v) (vi) (vii)

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

E11.2 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

11.6

28,000 $228,000

Chapter 11: Statement of cash flows

E11.3 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. E11.4 (a) Big Bang Balloons Pty Ltd Statement of Cash Flows for the year ended 30 June 2018 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)

1,023,600 139,200

(42,000)

Net increase in cash Cash at beginning of period Cash at end of period

(51,600) 45,600 26,400 $72,000

11.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Calculations: (1) Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers (2)

(3)

$1,173,600 (10,800) $1,162,800

Cash payments to suppliers: Cost of sales Deduct: Decrease in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$633,600 (10,800) 622,800 15,600 $638,400

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

Average current liabilities

$139,200 $56,400 + $40,800 ÷ = 2.86 times (per part (a)) 2 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)

11.8

Chapter 11: Statement of cash flows

E11.5 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

E11.6 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

Payments for year Closing Balance

$170,000 (43,000) $127,000 80,000 (33,000) (1,000) 46,000 $81,000

*Accounts Receivable 170,000 Cash receipts for year Closing Balance 170,000 43,000

127,000 43,000 170,000

**Accounts Payable Balance, Beginning of year 46,000 Operating expenses for year 33,000 79,000 Opening Balance

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.

11.9

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E11.7 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

E11.8 Outdoor Adventures Ltd Partial Statement of Cash Flows for the year ended 31 December 2018 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

*$60,000 + $190,000

11.10

219,000 $45,000

Chapter 11: Statement of cash flows

E11.9 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

E11.10 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.

11.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E11.11 Home and Away Travels Ltd Partial Statement of Cash Flows for the year ended 30 June 2019 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

*$350,000 19,600 369,600 $140,000 28,000 95,200 21,000 22,400

306,600 $63,000

*$84,000 + $266,000

E11.12 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

$153,000

$19,000 (31,000) (7,000) 10,000 (5,000) 25,000 11,000 $164,000

Net cash provided by operating activities

11.12

Chapter 11: Statement of cash flows

E11.13 Castle Ltd Partial Statement of Cash Flows (Indirect method) for the year ended 30 June 2019 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

$16,750

$7,000 $750

$xxx xxx

(17,500) 500 (17,000)

Cash flows from financing activities Dividends paid

(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

11.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to problem set A PSA11.1 Waihi Beach Surfboards Pty Ltd Partial Statement of Cash Flows for the year ended 30 June 2018 Cash flows from investing activities: Purchase of land Sale of plant and equipment Purchase of plant and equipment Net cash used by investing activities

Opening balance Equipment purchased Opening Balance

(60,000) 10,250 (50,000)

(1) (99,750)

Equipment 177,500 Cost of equipment sold 50,000 Closing 227,500 200,000

27,500

balance

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

Equipment sold Closing Balance

*Accumulated Depreciation — Equipment 20250 Balance, Beginning of year Depreciation Expense (2) 100,000 120,250 Opening 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

11.14

Chapter 11: Statement of cash flows

PSA11.2 (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 2020 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)

11.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c) Phillips Screwdrivers Ltd Note to Statement of Cash Flows for the year ended 31 March 2020 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

11.16

Chapter 11: Statement of cash flows

PSA11.3 (a)

Peebody Enterprises Ltd Partial Statement of Cash Flows for the year ended 30 June 2018 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 2018 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

11.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA11.4 (a) Metro Meats Ltd Statement of Cash Flows for the year ended 31 December 2018 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)

226,500 $9,500

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

8,500 8,500

(6,000) 4,000 (2,000)

Net increase in cash Cash at beginning of period Cash at end of period

(4,000) 14,000 15,000 $29,000

11.18

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

Equipment sold Closing Balance

*Accumulated Depreciation 9,500 Balance, Beginning of year Depreciation Expense 20,000 29,500 Opening Balance

24,000 5,500 29,500 20,000

(b) Metro Meats Ltd Note to Statement of cash flows for the year ended 31 December 2018 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

$10,000

$5,500 (14,000) (3,000) 10,000 1,000

(500) $9,500

11.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c)

(1)

$9,500 [ Per Part (a)]



$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 its 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 is 15% 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.

11.20

Chapter 11: Statement of cash flows

PSA11.5 (a) Freshest Farmers Ltd Statement of Cash Flows for the year ended 31 March 2019 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)

(187,125) 239,175

(146,250)

Net increase in cash Cash at beginning of period Cash at end of period

(3,525) 89,400 57,600 $147,000

11.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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 Cash payments for operating expenses

$18,615 $3,600 450

4,050 $22,665

(b) Freshest Farmers Ltd Note to Statement of Cash Flows (Indirect method) for the year ended 31 March 2019 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

11.22

Chapter 11: Statement of cash flows

PSA11.6 (a) Sticky Stationery Supplies Ltd Partial Statement of Cash Flows for the year ended 30 June 2018 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 (1) $5,380,000 (2) 1,275,000 (3)

(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 $170,000 Decrease in accrued expenses payable 180,000 Cash payments for operating expenses

$925,000

350,000 $1,275,000

(b) Sticky Stationery Supplies Ltd Note to Statement of Cash Flows for the year ended 31 March 2018 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)

11.23

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA11.7 (a) Yu’s Shoes Ltd Partial Statement of Cash Flows for the year ended 31 March 2018 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 2018 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

11.24

Chapter 11: Statement of cash flows

PSA11.8 (a) Mountain King Tours Ltd Statement of Cash Flows for the year ended 31 December 2019 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)

230,000 $16,000

3,000

Net increase in cash Cash at beginning of period Cash at end of period

(2,000) 17,000 13,000 $30,000

11.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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 2019 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

11.26

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.

11.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA11.9 (a) Takahashi Enterprises Pty Ltd Statement of Cash Flows for the year ended 30 June 2020 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

11.28

Chapter 11: Statement of cash flows

Calculations: (1)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers

$150,000 (14,900) $135,100

(2)

Cash payments to suppliers: Cost of sales Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers (3) Cash payments for operating expenses: Operating expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses

$49,730 9,625 59,355 (2,210) $57,145 $7,335 3,365 $10,700

(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 2020 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

11.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA11.10 (a) DVDS and More Ltd Statement of Cash Flows for the year ended 30 June 2019 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)

376,000 $260,000

10,000

Net increase in cash Cash at beginning of period Cash at end of period

(185,000) 85,000 80,000 $165,000

11.30

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) DVDS and More Ltd Note to Statement of Cash Flows for the year ended 30 June 2019 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

11.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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

90,000 250,000

340,000 250,000

340,000

Accumulated Depreciation — Equipment Balance, Beginning of year Accum. Depn. Equip. sold 40,000 Depreciation Expense Closing Balance 110,000 150,000 Opening Balance (5) Land Balance, Beginning of year 360,000 Land sold Land purchased 80,000 Upward revaluation 60,000 Closing Balance

Opening Balance

500,000 420,000

90,000 60,000 150,000 110,000

80,000 420,000 500,000

11.32

Chapter 11: Statement of cash flows

Solutions to problem set B PSB11.1 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

Closing Balance

3,000 (80,000) (30,000) (107,000) Buildings 750,000 Closing Balance 750,000 750,000

Opening Balance

Equipment 240,000 Equipment sold 80,000 Closing Balance

337,500 337,500

320,000

101,500 37,500 64,000

*Accumulated Depreciation — Equipment 16,000 Balance, Beginning of year Depreciation Expense 144,000 160,000 Opening Balance

Carrying amount of equipment sold (20,000 – 16,000) Loss on sale of equipment Proceeds of sale of equipment

300,000 37,500

20,000 300,000

320,000 300,000

Total depreciation expense Less depreciation expense — building = depreciation expense — equipment

Closing Balance

750,000

*Accumulated Depreciation — Buildings Balance, Beginning of year Depreciation Expense 337,500 337,500 Opening Balance

Balance, Beginning of year Cash (purchase of equipment)

Equipment sold

750,000

96,000 64,000 160,000 144,000 $4,000 1,000 $3,000

11.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB11.2 (a) Okamoto Motors Ltd Statement of Cash Flows for the year ended 31 December 2018 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

11.34

Chapter 11: Statement of cash flows

(b) Okamoto Motors Ltd Note to Statement of Cash Flows (Indirect Method) for the year ended 31 December 2018 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

11.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB11.3 (a)

Nguyen and Tran Ltd Partial Statement of Cash Flows for the year ended 31 March 2020 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 2020 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 ($10,000) Decrease in accounts payable (11,000) Increase in income taxes payable 2,000 Net cash used by operating activities (c)

$103,000

(19,000) ($84,000)

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.

11.36

Chapter 11: Statement of cash flows

PSB11.4 (a) Kiwi Ltd Statement of Cash Flows for the year ended 31 December 2018 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)

332,800 $20,800

(5) 3,900

Net decrease in cash Cash at beginning of period Cash at end of period

(6) (33,800) (9,100) 42,900 $33,800

11.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

Opening Balance

19,500 91,000

110,500 91,000

110,500

(6) Dividends paid Closing Balance

Retained Earnings 46,800 Balance, Beginning of year Profit 42,900 89,700 Opening Balance

11.38

36,400 53,300 89,700 42,900

Chapter 11: Statement of cash flows

(b) Kiwi Ltd Note to Statement of Cash Flows for the year ended 31 December 2018 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.

11.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB11.5 (a) Aleksia Ltd Statement of Cash Flows for the year ended 31 December 2019 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)

135,900 $117,800

(4) (103,500)

Net increase in cash Cash at beginning of period Cash at end of period

(5) 45,000 59,300 33,400 $92,700

11.40

Chapter 11: Statement of cash flows

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

Sale of equipment Closing 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

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

(5) Dividends paid Closing Balance

Retained Earnings 75,000 Balance, Beginning of year Profit 175,600 250,600 Opening Balance

11.41

107,940 142,660 250,600 175,600

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Aleksia Ltd Note to Statement of Cash Flows (Indirect Method) for the year ended 31 December 2019 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

PSB11.6 Transaction

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

Where Reported (O), Investing (I), Financing (F) or as non-cash (NC) O I NC F NC O O

Cash Inflow, Cash outflow, No Effect

No effect Outflow Inflow No effect Outflow No effect Inflow No effect Outflow No effect

11.42

Chapter 11: Statement of cash flows

PSB11.7 (a) Bear’s Chairs Ltd Partial Statement of Cash Flows for the year ended 30 November 2018 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

11.43

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Bear’s Chairs Ltd Note to Statement of Cash Flows for the year ended 30 November 2018 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

11.44

Chapter 11: Statement of cash flows

PSB11.8 (a) XYZ Children’s Centre Ltd Statement of Cash Flows for the year ended 31 December 2019 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)

552,000 $38,400

7,200

Net increase in cash Cash at beginning of period Cash at end of period

(4,800) 40,800 31,200 $72,000

11.45

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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 2019 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

11.46

Chapter 11: Statement of cash flows

(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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB11.9 (a) ABC Manufacturing Pty Ltd Statement of Cash Flows for the year ended 30 June 2018 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 (1) $114,290 (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

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)

(145,900) $121,800

(73,950)

Net increase in cash Cash at beginning of period Cash at end of period

1,600 49,450 47,250 $96,700

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

$297,500 (29,800) $267,700

$99,460 19,250 118,710 (4,420) $114,290 $14,670 6,730 $21,400

11.48

Chapter 11: Statement of cash flows

(b) ABC Manufacturing Pty Ltd Note to Statement of Cash Flows for the year ended 30 June 2018 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

11.49

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB11.10 (a) SIMIC AND NIKOLIC Ltd Statement of Cash Flows for the year ended 30 June 2019 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

(2) (3) (4) (5)

12,182,000 $1,786,000

(106,000)

Net increase in cash Cash at beginning of period Cash at end of period

250,000 1,930,000 1,220,000 $3,150,000

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Chapter 11: Statement of cash flows

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

(6) Balance, Beginning of year Upward revaluation

Land 1,900,000 Land sold 160,000 Closing Balance

430,000 1,630,000

2,060,000 Opening Balance 1,630,000 Proceeds from land sold = cost 430,000 + gain of 210,000 = $640,000

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

2,100,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Closing Balance

Accumulated Depreciation — Building Balance, Beginning of year 540,000 Depreciation expense 540,000

500,000 40,000 540,000 540,000

Opening Balance (8) Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Plant sold Closing Balance

Plant and Equipment 1,258,000 Equipment sold 696,000 Closing Balance

500,000 1,454,000

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

740,000 440,000

Opening Balance Carrying amount of plant sold = 500,000 – 300,000 = 200,000 Proceeds from sale = carrying amount + gain = 200,000 + 230,000 = 430,000 (9) Balance, Beginning of year Cash (purchase of equipment)

Opening Balance

Office Equipment 380,000 Equipment sold 50,000 Closing Balance

0 430,000

430,000 430,000

430,000

Accumulated Depreciation — Office Equipment Office equipment sold 0 Balance, Beginning of year Closing Balance 270,000 Depreciation expense 270,000

190,000 80,000 270,000 270,000

Opening Balance (10) Cash dividends declared/paid Transfer to reserve Closing Balance

Cash paid 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 1,350,000

3,714,000 2,764,000

500,000 850,000 1,350,000 600,000

1,618,000 2,096,000

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Chapter 11: Statement of cash flows

(11)

Closing Balance

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

(b) SIMIC AND NIKOLIC Ltd Note to Statement of Cash Flows (Indirect method) for the year ended 30 June 2019 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

11.53

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS11.1: Financial reporting problem: Giorgina’s Pizza Limited Giorgina’s Pizza Limited (a)

Net cash provided by operating activities: 2019 2018

$24,885,000 $28,259,000

Giorgina’s 2019 cash flows are consistent with the growth phase. Operating cash flows are positive and cash receipts from customers and revenue have increased in 2019 over 2018. Cash generated by operations is positive and Giorgina’s is still borrowing and investing to grow the business. (b)

The increase in cash for the year ended 30 June 2018 was $10,553,000. The decrease in cash for the year ended 30 June 2019 was $17,836,000.

(c)

The change in borrowings comprised repayments of $15,380,000 and additional borrowings of $32,791,000. This was a net increase in borrowings of $17,411,000.

(d)

Total net cash used for investing activities in 2019 was ($22,797,000).

(e)

The interest (borrowing cost) paid in 2019 was $304,000 and income tax paid was $8,847,000 in 2019.

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Chapter 11: Statement of cash flows

BBS11.2 Comparative analysis problem: Company A vs. Company B Company A vs. Company B (a) All dollar amounts are in $’000 Company A

Company B

1. Current cash debt coverage

$113,393 $131,615 = 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 = 0.36 times = 0.83 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 2020. 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 2020. 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 2020.

11.55

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS11.3 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

2021 2020 2019

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 2019 to 2021. Free cash flow increased from 2019 to 2020 and remained stable in 2021. The capital expenditure ratio increased in 2020 and declined in 2021, as both CFO and capital expenditure increased. Current cash debt coverage: 2021

$7,433 = 1.11times ($5,834 + $7,576) / 2

2020

$7,057 = 1.00 times ($8,230 + $5,834) / 2

2019

$7,098 = 0.81times ($9,279 + $8,230) / 2

The current cash debt coverage has increased consistently from 2019, when it was below one. The improvement reflected reduced current liabilities in 2020 and increased cash provided by operations in 2021. The increased current cash debt coverage indicates Peter’s of Buckingham’ improved liquidity since 2019.

Cash debt coverage: 2021

$7,433 = 0.37 times ($20,177 + $19,632) / 2

2020

$7,057 = 0.32 times ($24,113 + $20,177) / 2

2019

$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

11.56

Chapter 11: Statement of cash flows

liabilities each year from 2019 to 2021. The improvement reflected reduced liabilities in 2020 and increased cash provided by operations in 2021.

Cash return on sales ratio: 2021 2020 2019

$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 2019 to 2021.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS11.4 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.

BBS11.5 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 BBS11.6 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

11.59

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS11.7 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? 4. Also, whether any benefits have any been achieved?

11.60

Chapter 11: Statement of cash flows

BBS11.8 Ethics case Big Rubber Ltd (a)

It is unethical of the board to place 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. 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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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’s financial 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 the 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’.

11.62

Chapter 11: Statement of cash flows

BBS11.9 Sustainability (a) (1) Directive 2012/19/EU on Waste Electrical and Electronic Equipment (WEEE): The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is a European community (EU) directive on waste electrical and electronic equipment (WEEE) which became law in Europe 2003. The directive has since been revised and new legislation became effective in 2014. The purpose of the directive is to ‘contribute to sustainable production and consumption by, as a first priority, the prevention of WEEE and, in addition, by the reuse, recycling and other forms of recovery of such wastes so as to reduce the disposal of waste and to contribute to the efficient use of resources and the retrieval of valuable secondary raw materials’ (WEEE Directive, para. 6). 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 ‘private households should be able to return their waste at least free of charge’ (WEEE Directive, para. 14). (2) A positive impact of compliance could include the favourable image of the company being seen to be active in their sustainability procedures and caring about the environment impact that their product has. A negative impact of compliance could be the cost of implementation of this directive. The company would be required 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 a negative impact on the finances and operations of Phones R 4 U Ltd.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b)

Extract Telstra Annual Report 2017 page 30: ‘Electronics reuse and recycling: Telstra has supported responsible recycling programs for nearly 20 years. We are a founding member of MobileMuster — a nonprofit, government accredited, mobile phone recycling scheme in Australia. This year we launched our first Electronics Reuse and Recycling Strategy, Unlocking Hidden Value, to systematically manage and reduce our e-waste impact across our value chain. It brings focus to the importance of applying integrated and collaborative approaches to realise business value through increased electronics recovery, reuse and recycling. This presents an opportunity for Telstra to unlock value through materials efficiency, which includes striving to keep resources in use for as long as possible, extracting the maximum value from them while in use, then recovering and remanufacturing products at the end of each service life. For example, devices returned through our Go Mobile Swap lease plans are refurbished and reused, if they are beyond repair they are responsibly recycled. In FY17 we collected 19.9 tonnes of mobile phones and accessories through the MobileMuster program, exceeding our target of 17 tonnes. We collected 4,353 tonnes of e-waste with a recycling rate of 99.9 per cent.’

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 12: Financial statement analysis and decision making

Chapter 12: Financial statement analysis and decision making Assignment classification table

Learning objectives

Brief exercises

Exercises

Problems

Discuss the need for comparative analysis and identify the tools of financial statement analysis.

Explain and apply horizontal analysis.

1, 2, 4

2, 3, 6, 7

Explain and apply vertical analysis.

4, 5, 6, 7

1A, 1B

Identify and calculate ratios and describe their purpose and use in analysing the liquidity, solvency and profitability of a business.

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

Discuss the limitations of financial statement analysis.

9A, 10B

12.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 12.1.

(a)

Intra-Entity. This is a comparison within an entity. For example, Coca Cola’s cash balance as of 31 Dec 2019 is compared with its cash balance as of 31 Dec 2020. 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 2019 is compared with Pepsi’s total sales for the year of 2019.

(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.

12.2.

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

2020 2019 2018 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 2019 and an increase of 10% in Net Sales from 2019 to 2020. 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.

12.2

Chapter 12: Financial statement analysis and decision making

12.3.

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.

12.4.

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.

12.5.

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.

12.6.

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.

12.7.

(a) (b) (c) (d)

12.8.

The price/earnings (P/E) ratio is a reflection of investors’ assessments of a company’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.

Asset turnover. Average collection period. Profit margin. Current ratio, Quick ratio or Current ash debt coverage.

12.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

12.9.

(a)

(b)

(e)

(f)

(g)

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. 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. A decrease in the quick ratio signals bad news because the company’s ability to meet maturing short-term obligations has declined. 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. 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. 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’. 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.

12.10. (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 straight-line 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.

(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. © John Wiley and Sons Australia Ltd, 2019

12.4

Chapter 12: Financial statement analysis and decision making

Solutions to brief exercises BE12.1 (a)

Intra-entity

(b)

Intra-entity

(c)

Inter-entity

(d)

Industry averages

(e)

Intra-entity

(f)

Inter-entity

BE12.2 Horizontal analysis:

Accounts receivable

30 June 2020 800 000

30 June 2019 600 000

30 June 2018 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%

12.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE12.3 Vertical analysis:

Accounts receivable

30 June 2020 800 000

17.4%

30 June 2019 600 000

Inventory

15.8%

30 June 2018 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%

BE12.4 Comparing the percentages presented results in the following conclusions: The profit increased in 2019 due to the combination of an increase in sales and a decrease in both cost of sales and expenses. However, in 2020 sales decreased while both cost of sales and expenses increased which resulted in an overall decrease in profit.

12.6

Chapter 12: Financial statement analysis and decision making

BE12.5 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

12.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE12.6 Bristol Ltd Accounts receivable turnover =

Net credit sales Average net receivable s

2020

(a)

$6,600,000 =1 0.68 times $618,000

(b)

Average collection period:

2019

$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. BE12.7 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

12.8

Chapter 12: Financial statement analysis and decision making

Solutions to exercises E12.1 White Ltd 2019 (a)

Ratios for 2019 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 2018 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 -

(b)

Cost of Sales has decreased by 0.28% from 2018 to 2019. Current Assets has decreased by 1.51% from 2018 to 2019. The sum of cash, net receivables and marketable securities has decreased by 1.02% from 2018 to 2019. Net receivables has decreased by 8.98% from 2018 to 2019. Inventory has increased by 35.37% from 2018 to 2019. Current Liabilities has increased by 4.81% from 2018 to 2019. Current Ratio has decreased by about 0.02 from 2018 to 2019. This means White is a little less liquid in 2019 compared 2018. Quick Ratio has decreased by about 0.01 from 2018 to 2019. This means White is a little less liquid in 2019 compared 2018. Changes in the current and quick ratios are insignificant so that the entity has essentially remained the same.

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.

12.9

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E12.2 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-20 150 000 380 000 530 000 85 000 140 000 225 000 175 000 130 000 305 000 530 000

30-Jun-19 103 000 315 000 418 000 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%

E12.3 (a) Forrester Ltd Partial Statement of Financial Position as at 30 June Horizontal Analysis

(b)

30-Jun-20 96 000 680 000 776 000

30-Jun-17 88 000 630 000 718 000

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

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.

12.10

Chapter 12: Financial statement analysis and decision making

E12.4 (a) Spectre Ltd Statement of Financial Performance Vertical Analysis 2020 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

2019 % 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.

12.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E12.5 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)

2019 $ 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%

2018 $ % 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 2018 to 2019. 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.

12.12

Chapter 12: Financial statement analysis and decision making

E12.6 Jay’s Jeans Ltd Partial Statement of Financial Position as at 30 June 2020 Horizontal Analysis (a) 30-Jun-20

30-Jun-19

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 2020 Vertical Analysis

(b)

30-Jun-20 Current assets

30-Jun-19

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.

12.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E12.7 (a) Bondi Ltd Condensed Statement of Financial Position as at 30 June 2020 Horizontal Analysis Percentage Change from 2019

2020

2019

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 2020 Vertical Analysis 2020 $

2019 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%

12.14

Chapter 12: Financial statement analysis and decision making

E12.8 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)

E12.9 Global Ltd (a)

Current ratio as of 1 February 2019 = 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 2019= 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.

12.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E12.10 Sonic Ltd (a) Current ratio:

$145, 000 = 2.9 :1.0 $50, 000

Quick ratio:

$85,000 = 1.7 : 1.0 $50,000

(b)

(d)

Average collection period:

(e) Inventory turnover:

(f)

Cash return on sales:

(i)

Cash debt coverage:

(1)

$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:

(g)

(h)

$350,000 = 5.6 times $62,500 (1)

$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:

$50, 000 = .91 times $60, 000 + $50, 000 2

12.16

Chapter 12: Financial statement analysis and decision making

E12.11 Cyber Ltd 2020 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%

12.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E12.12 Centro Ltd 2019 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%

12.18

Chapter 12: Financial statement analysis and decision making

E12.13 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 2019 + Total assets June 2018) = Average assets 2 (Total assets June 2019 + $805,000) = $892,760 2 Total assets June 2019 = ($892,760 x 2) – $805,000 = $980,520.

12.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to Problem set A PSA12.1 (a) Spencer Ltd and Forrester Ltd Condensed Statement of profit or loss for the year ended 30 June 2019 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

163 100

Average total assets (847 285 + 812 410) / 2

62 860 (428 000 + 396 000) / 2 412 829 847.5 000 19.7%

15.3%

163 100

62 860

Return on ordinary shareholders’ equity Profit Average total equity (659 190 + 646 595) / 2

(365 000 + 340 000) / 2 652 892.5 352,500 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.

12.20

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

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

12.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA12.2 Bayview Ltd

(a) Earnings per share =

$202,300 = $2.52 per share 80,137

(b) Return on ordinary shareholders’ equity =

(c)

Return on assets =

(d) Current ratio =

(e) Quick ratio =

(f)

(g) (h)

$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 =

12.22

Chapter 12: Financial statement analysis and decision making

(k) Asset turnover =

$1,818,500 = 1.8 times $996,500

(l) Debt to total assets =

(m)

(n)

(o)

$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

12.23

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA12.3 (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)

2020 (1)

2019

Profit margin ratio: $44,000 = 6.3% $700,000

(2)

$32,000 = 4.9% $650,000

Gross profit ratio: $280,000 = 40% $700,000

(3)

$250,000 = 38% $650,000

Asset turnover. $650,000 = 1.2 times  $533,000 + $590,000    2  

$700,000 = 1.1times  $590,000 + $640,000    2  

(4)

Earnings per share. $44,000 = $1.38 per share 4,000   30,000 + 2   

(5)

$32,000 = $1.07 per share 30,000

Price–earnings ratio. $5.00 = 4.7 times $1.07

$7.95 = 5.8 times $1.38

(6)

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

12.24

Chapter 12: Financial statement analysis and decision making

(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 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. Similarly, its cash dividend payout ratio has decreased, which should help its overall solvency.

PSA12.4 Digimax Ltd Liquidity

2019

2018

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 2020, becoming a current liability.

Profitability

2019

2018

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.

12.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA12.5

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. © John Wiley and Sons Australia Ltd, 2019

12.26

Chapter 12: Financial statement analysis and decision making

PSA12.6 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)

Quick ratio =

$15, 000 + $18, 000 + $92, 000 = 0.9 :1.0 $135,000

Receivables turnover =

Average collection period =

Inventory turnover =

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

(g)

(h)

$580,000 = 7.0 times  $92,000 + $74,000    2

Asset turnover =

$580, 000 = 1.0 times  $632, 000 + $560, 000    2 (i)

(j)

Return on assets =

Return on ordinary shareholders’ equity =

(k) 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(l) Price–earnings ratio =

$19.50 = 17.2 times $1.13

Cash dividend payout ratio =

$17, 000 (2) = 50% $34, 000

(m)

(2) $200,000 + $34,000 – $217,000 (n) Debt to total assets =

$265, 000 = 41.9% $632, 000

Times interest earned =

$59, 200 (3) = 8.2 times $7, 200

(o)

(3) $34,000 + $18,000 + $7,200

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Chapter 12: Financial statement analysis and decision making

PSA12.7 Ascot Ltd

$11,000,000 Average receivable s

Receivables turnover = 10 =

Average receivables =

$11,000,000 = $1,100,000 10

Receivables 30/6/18 = $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 =

$1,595,000 Average assets

Assets (30/6/18) = $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 =

$2,880, 000 Current liabilities

12.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

12.30

Chapter 12: Financial statement analysis and decision making

PSA12.8 Calgary Ltd (a)

Free cash flow = net cash from operating activities – capital expenditure = 101,344 – 32,560 = 68,784

Capital expenditure ratio

Current cash debt coverage

Cash debt coverage

Cash return on sales ratio = =

(b)

12.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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 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 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. 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 © John Wiley and Sons Australia Ltd, 2019

12.32

Chapter 12: Financial statement analysis and decision making

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. 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 meet short term debts as they fall due.

12.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA12.9 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.

12.34

Chapter 12: Financial statement analysis and decision making

Solutions to Problem set B PSB12.1 (a) Black Ltd and White Ltd Condensed Statement of profit or loss for the year ended 31 December 2019 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 2019. 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%

12.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

12.36

Chapter 12: Financial statement analysis and decision making

PSB12.2 Halifax Ltd (a)

(b)

(c)

Gross profit rate =

$340,000 = 43.6% $780,000

Return on ordinary shareholders’ equity =

$157, 200 = 22.3%  $735,800 + $672, 000    2 $280,500 = 1.45 :1.0 $193,500

Return on assets =

(d) Current ratio =

(e)

$157, 200 = 39.0%  $410,300 + $396, 000    2

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)

Average days in inventory =

365 ÷ 4.9 = 75 days

Times interest earned =

$186, 200 + $9,920 = 19.8 times $9,920

(i)

(j)

Asset turnover =

$780, 000 = 1.1 times  $735,800 + $672, 000    2 (k)

(l)

Debt to total assets =

$325,500 = 44.2% $735,800

12.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

$41, 000 = 0.235times  $193,500 + $156, 000    2 (m)

Cash debt coverage =

$41,000 = 0.136times  $325,500 + $276,000    2

12.38

Chapter 12: Financial statement analysis and decision making

PSB12.3 Jasmine Ltd (a)

2019 (1)

Profit margin ratio:

$120, 000 = 16.2% $740, 000 (2)

$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)

2018

$660, 000 = 1.1 times  $533, 000 + $665, 000    2

Earnings per share.

$100, 000 = $3.33 per share 30, 000 (5)

Price–earnings ratio.

$15.00 = 4.0 times $3.75 (6)

$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

12.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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)

12.40

Chapter 12: Financial statement analysis and decision making

PSB12.4 Multimedia Ltd (a)

Liquidity

2019

Current

Quick

Receivables turnover

Inventory turnover

2018

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 2019 than there were in 2018. This decline is exacerbated by the slower turnover of both receivables and inventory.

Profitability

2019

2018

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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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.

12.42

Chapter 12: Financial statement analysis and decision making

PSB12.5 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.

12.43

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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.

PSB12.6 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

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Chapter 12: Financial statement analysis and decision making

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 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

12.45

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Dividends

31/18

$ 101 450*

1/1 Bal. Profit

$ 245 000 121 450

31/18 bal.

366 450 265 000

bal 265 000 366 450

12.46

Chapter 12: Financial statement analysis and decision making

PSB12.7 Jade Ltd Receivables turnover =

10 =

Average receivables =

Receivables 30/6/18 = $1,100,000 – $475,000 = $625,000 Profit margin = 14.5% = .145 = 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 =

Assets (30/6/18) = $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 = Current liabilities = Non-current liabilities = $2,050,000 – $480,000 = $1,570,000 Inventory turnover = 4.8 = 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 © John Wiley and Sons Australia Ltd, 2019

12.47

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB12.8 Kalamata Ltd (a) Receivables turnover = 10 = Average receivables =

= 275,000

Receivables 30/6/18 = $550,000 – $237,500 = $312,500 Profit margin = 14.5% = .145 = 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 =

Assets (30/6/18) = $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 = Current liabilities =

= $240,000

Non-current liabilities = $1,025,000 – $240,000 = $785,000 Inventory turnover = 4.8 = Cost of sales = $362,500 x 4.8 = $1,740,000 Gross profit = $2,750,000 – $1,740,000 = $1,010,000 © John Wiley and Sons Australia Ltd, 2019

12.48

Chapter 12: Financial statement analysis and decision making

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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB12.9 Spectre Ltd (a) 1.

Free cash flow = net cash from operating activities – capital expenditure = 202,688 – 65,120 = 137,568

Capital expenditure ratio = =

Current cash debt coverage = =

/ = 0.5 times

Cash debt coverage =

= 5.

Cash return on sales ratio = =

(b)

= 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 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 © John Wiley and Sons Australia Ltd, 2019

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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.

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 © John Wiley and Sons Australia Ltd, 2019

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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 meet short term debts as they fall due.

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PSB12.10 Victoria Ltd and Conrad Ltd (a) Ratio

Victoria Ltd

Conrad Ltd

(1) Return on assets

39.0% 354,000

$138,000 ÷

30.3%

($94,000 ÷ $310,000)

(2) Return on ordinary shareholders’ equity (3) Profit margin

67.6% $204,000)

($138,000 ÷

58.7%

($94,000 ÷ $160,000)

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 (7) Debt to equity

2.7 times

($276,000 ÷ $104,000)

3.8 times

($300,000 ÷ $80,000)

73.5%

($150,000 ÷ $204,000)

93.8%

($150,000 ÷ $160,000)

(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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS12.1 Financial reporting problem (a) GAYLE MURRAY LTD Five Year Summary 2018–2019 All figures are in $’000’s

Sales

Gross Profit Department Store — EBIT Financial Services — EBIT PROFIT AFTER TAX

2019 2,767,5 18 93% 1,059,2 16 90% 149,298 54% 74,199 120% 152,331 65% 1,856,6 78 655,034 1,201,6 44

Total Assets Total Liabilities Total Equity Basic earnings per share (cents) Dividends per share (cents) Return on shareholder equity (%)

2018 2,801,726 94% 1,049,745 89% 157,493 57% 74,127 120% 151,655 65%

2020 2019 2018 2,942,6 3,079,6 2,978,2 16 31 35 99% 103% 100% 1,150,9 1,223,5 1,179,2 04 94 19 98% 104% 100% 298,505 307,197 276,566 108% 111% 100% 71,561 66,569 61,911 116% 108% 100% 252,209 256,149 234,783 107% 109% 100%

1,821,8 1,792,3 1,687,0 1,861,346 25 82 11 697,790 643,605 676,025 659,748 1,178,2 1,116,3 1,027,2 1,163,556 20 57 63

28.8

29.1

49.5

51.0

47.3

25.5

26.3

42.0

45.0

42.0

12.9%

13.0%

22.0%

23.9%

22.9%

This trend analysis of GMY shows an unfavourable trend with continual decline in sales revenue over the past five years, with the exception of 2019. A similar trend can be seen with gross profit. A concern is the significant drop of 46% in Department Store EBIT by 2019 compared to the base year of 2018. This is offset to some extent by the growth in the Financial Services EBIT in 2019 which has increased by 20% since the base year. Overall profitability has declined substantially since 2018 with the 2019 profit after tax decreasing to 65% of the base year. GMY profit has decreased significantly since 2018 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

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(b) Calculate the following ratios for 2019 and 2018.

2019

2018

655 034 1 856 678

697 790 1 861 346

35.3%

37.5%

152 331 2 767 518

151 655 2 801 726

5.5%

5.4%

2 767 518 1 859 012

2 801 726 1 841 586

1.49

1.52

152 331 1 182 600

151 655 1 170 888

12.9%

13.0%

25.5 28.8

26.3 29.1

88.5%

90.4%

* Average total assets

(1 856 678 + 1 861 346) / 2

(1 861 346 + 1 821 825) / 2

** Average total equity

(1 201 644 + 1 163 556) / 2

(1 163 556 + 1 178 220) / 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)

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(c)

Evaluate Gayle Murray 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 2019. Despite the drop in sales, there was a marginal increase in the profit margin from 5.4% to 5.5% in 2019 Sales generated from GMY’s 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 2019 The lower profit and concurrent increase in equity also impacted on lowering the ROE. This dropped slightly from 13% to 12.9% in 2019. This return has dropped substantially since 2018 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 90.4% to 88.5%. This may also be related to the lower profit in 2019.

What other information may be useful to making a decision about investing in Gayle Murray Ltd shares. Further information about the management outlook and future direction of Gayle Murray Ltd would be helpful in understanding the 2019 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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BBS12.2 Interpreting financial statements Digitech Ltd Financial Statement Analysis (a) all figures in $’000.

(1)

2019 Profit margin:

2018

$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

$3,119 = 2.5% ($125,623+124,000)/2

$2,619

( $125,623 +$124,000 ) /2

= 2.1%

(3) Return on Assets using profit after tax from continuing operations: $6,723

( ($291,680 + $333,352 ) /2

= 2.2%

$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 2018 and 2019 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. © John Wiley and Sons Australia Ltd, 2019

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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 2019, 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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BBS12.3 Managerial analysis Grayson Global Ltd (a)

Grayson Global Ltd ‘s customers are paying their invoices faster in 2020 than in 2019. The evidence for this is the accounts receivable turnover of 7.2 times in 2020, compared with only 6.8 times in 2018. The average collection period in 2020 was 50.7 days compared with 53.7 days in 2018.

(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 2019; 142% in 2020) at a greater rate than the increasing receivables turnover. In 2018 receivables were 14.7% of sales revenue (inverse of the turnover). In 2020 the receivables were only 13.9% of the sales revenue. As sales in 2020 were 1.42 times the sales in 2018, receivables in 2020 must be 19.7% (13.9% x 1.42 times) of the 2018 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 2020 and 2019, 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 2019 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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BBS12.4 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.

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.

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Chapter 12: Financial statement analysis and decision making

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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BBS12.5 Comprehensive financial analysis exercise with web search The Flash Company and Green Arrow 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

Formula

Flash 2019

Flash 2018

Green Arrow 2019

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

46,854 4,816*

9.73

9.92

9.49

365 9.73

37.52 days

36.79 days

38.46 days

18,421 3,271*

5.63

6.00

8.94

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

*(4,759 + 4,873) / 2 5. Average collection period (days) 365 days Receivables turnover

6. Inventory turnover (times per year) Cost of sales Average Inventory *(3,264 + 3,277) / 2

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Chapter 12: Financial statement analysis and decision making

7. Days in Inventory 365 Inventory Turnover

365 5.63

64.80

60.88

40.83

days

Flash’s current ratio increased from 1.09:1 in 2018 to 1.13:1 in 2019 as the increase in current assets was greater than the increase in current liabilities. Flash’s competitor, Green Arrow, reported a current ratio of 1.24:1 in 2019, which is significantly higher than Flash’s ratio of 1.13 in 2019. 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 Flash’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. Flash’s quick ratio has improved from 0.77:1 in 2018 to 0.90:1 in 2019 which is slightly lower than Green Arrow’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. Flash 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. Flash’s current cash debt coverage has decreased from 0.27:1 in 2018 to 0.25:1 in 2019. 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. Flash’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, Green Arrow’s current cash debt coverage of 0.37:1 in 2019 is considerably higher but also below the required benchmark of 0.40:1. Flash’s receivables turnover decreased slightly from 9.92 in 2018 to 9.73 times per year in 2019. 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. Flash’s average collection period remained relatively unchanged from 36.79 days in 2018 to 37.52 days in 2019.To assess this ratio we need to know Flash’s credit policy in relation to the company’s credit terms before we can comment on the adequacy of their collection. Green Arrow’s average collection period of 38.46 days in 2019 is similar to Flash’s 37.52 days. If both companies have 30-day credit terms these results indicate their credit policies are appropriate and their 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 because of a lack of stock. Flash’s inventory turnover was slightly slower dropping from 6.00 times in 2018 to 5.63 times per year in 2019. The days in inventory ratio converts the inventory turnover into days. Flash’s days in inventory increased slightly from 60.88 days in 2018 and 64.80 days in 2019. Although the cost of sales had decreased in 2019, there was a higher level of inventory held. Although these figures are considerably higher than Green Arrow’s inventory turnover of 40.83 days, they are quite acceptable when we consider the goods that the Flash Company sells are soft drinks, juices, energy drinks and water; items that normally have expiry dates longer than one year. If The Flash Company can sell its inventories within 70 days, the Flash Company manages its inventory well.

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Summary — Liquidity From the analysis of the liquidity ratios along comparisons with competitor Green Arrow, it appears that Flash 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 Flash’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

Flash 2019

Flash 2018

Green Arrow 2019

56 615 90 055

0.63

0.62

0.69

11 940 463

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 Total liabilities Total assets

9. Times interest earned Earnings Before Interest and Tax Interest Expense

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

Flash’s debt to total assets ratio indicates a marginal increase in the level of debt used to finance assets from 0.62:1 in 2018 to 0.63:1 in 2019. These figures are significantly lower than Green Arrow’s debt to total assets ratio of 0.69:1 in 2019. 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. Flash’s times interest earned dropped substantially from 30.8 times in 2018 to 25.8 times in 2019. This was attributed to the combination of a decrease in Flash’s EBIT with a higher interest expense. Despite Flash’s lower interest coverage in © John Wiley and Sons Australia Ltd, 2019

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2019, it is very strong in comparison to Green Arrow’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. Flash’s cash debt coverage decreased slightly from 0.21:1 in 2018 to 0.19:1 in 2019. These figures are slightly higher than Green Arrow’s coverage ratio of 0.18:1 in 2019. 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. Flash’s free cash flow has increased from $7,865 million in 2018 to $7,992 million in 2019. In 2019 Flash spent $2,550 million on capital expenditures. Summary — Solvency Based on the solvency ratios, it appears that Flash is solvent with the ability to meet its longterm 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. Flash 2019

Flash 2018

Green Arrow 2019

25.8 cents

27.7 cents

28.8 cents

8,626 88,115*

9.7 cents

10.9 cents

8,626 46,854

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

$41.31 $1.94

21.3

18.1

19.0

4 969 8,584

58%

51%

Ratio

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

8.9 cents

*(86,174 + 90,055) / 2 14. Profit margin: Profit after tax Sales 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

18,205 46,854

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 20. Price/Earnings ratio (times) Share price Earning per share

21. Dividend payout Dividends Profit available to ordinary shareholders

10,542 46,854 8,584 4,425

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

The return on ordinary shareholders’ equity (ROE) shows the amount of profit earned for each dollar invested by the shareholders. Flash’s return increased marginally from 27.7 cents in 2018 to 25.8 cents in 2019. These results are reflective of a drop in the profit available to ordinary shareholders and an increase in the average ordinary shareholders’ equity in 2019. Flash’s ROE of 25.8 cents in 2019 is lower than Green Arrow’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. Flash’s return on assets decreased slightly from 10.9 cents in 2018 to 9.7 cents in 2019. This was due to a decrease in Flash’s profit after tax in 2019 and an increase in the asset base. Flash’s return on assets over the 2 years is slightly higher than Green Arrow’s return on assets of 8.9 cents in 2019. Flash’s profit margin showed a slight drop from 18.9 cents in 2018 to 18.4 cents in 2019. The increase in profit after tax was marginally greater than the increase in sales. As Flash’s results over the 2 years are much higher than Green Arrow’s 10.2 cents in 2019, this suggests that it had better control over its expenses in 2019. The asset turnover decreased slightly over the 2-year period. In 2019 Flash generated 53 cents in sales for every dollar invested in assets compared to 58 cents in 2018. These figures are significantly lower than Green Arrow’s asset turnover of 87 cents in 2019 which suggest that it is much more effective than Flash in using its assets to generate sales. Flash’s gross profit margin showed a slight improvement from 60.3 cents in 2018 to 60.7 cents in 2019. As the increase in gross profit was marginally higher than the increase in sales, Flash had better control over its cost of sales in 2019. These results are similar to Green Arrow’s gross profit margin of 60.9 cents. Flash’s operating expenses to sales ratio has increased slightly from 37.9% in 2018 to 38.9% in 2019. These results are similar to Green Arrow’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. Flash’s cash return on sales show a slight increase from 22.2% in 2018 to 22.5% in 2019. Green Arrow’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. Flash’s EPS decreased from $2.00 in 2018 to $1.94 in 2019. This was mainly due to a substantial decrease in profit available to ordinary shareholders. These results are significantly lower than Green Arrow’s EPS of $4.37. Flash’s P/E ratio increased from 18.1 times in 2018 to 21.3 times in 2019. This is mainly due to the large increase in share price from $36.25 in 2018 to $41.31 in 2019. At the 2019 reporting date, Flash’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. Flash’s P/E ratio was slightly higher than Green Arrow’s P/E ratio of 19 times in 2019. 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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Chapter 12: Financial statement analysis and decision making

The dividend payout ratio measures the percentage of profits distributed in the form of dividends. Flash’s dividend payout ratio increased from 51% in 2018 to 58% in 2019. Flash 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 Flash and Green Arrow 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, Flash is a profitable entity. Profitability is frequently used as the ultimate test of management’s operating effectiveness. It appears that management is operating Flash’s assets efficiently and controlling prices and expenses adequately. This enables Flash to generate sufficient cash to continue its investments in innovation as well as pay out generous dividends to shareholders.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

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

2019

Flash

Green Arrow

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, Green Arrow appears to be more liquid than Flash. The receivables turnover and average collection period are similar for both companies. Flash has higher average days in inventory of almost 64.80 days compared to 40.83 days for Green Arrow. This suggests that Green Arrow can sell its inventory significantly faster than its competitor. Overall, Green Arrow is in a better position to pay their debts as they fall due. SOLVENCY Green Arrow has a slightly higher debt to total assets ratio that Flash so Green Arrow has more debt funding. The Cash debt coverage ratio is similar across both companies. Flash’s Times Interest Earned is much higher than Green Arrow’s. However, the both Green Arrow’s and Flash’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 Flash’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 Flash and Green Arrow which suggest that both companies have similar cost of sales. The profit margin is 18 cents for Flash and 10 cents for Green Arrow which suggests that. Flash 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 Flash and 29 cents for Green Arrow, which indicates that there is slightly more profit is available to ordinary shareholders of Green Arrow. The asset turnover and return on assets may be used to evaluate the ability of each entity to generate profits and sales from its assets. The asset turnover is much higher for Green Arrow at 87 cents compared to 53 cents for Flash. However, this significant difference is lost when we look at the return on assets as they are very similar at 10 cents for Flash and 9 cents Green Arrow. 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Critical thinking BBS12.6 Group decision case 2019

2018

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 2019, 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 2019 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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Chapter 12: Financial statement analysis and decision making

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)

(d)

(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.

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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS12.7 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. © John Wiley and Sons Australia Ltd, 2019

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Chapter 12: Financial statement analysis and decision making

BBS12.8 Ethics case Positive Perception Ltd (a)

The internal stakeholders in this case are Positive Perception Ltd’s: • 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.

(b)

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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS12.9 SUSTAINABILTY Download PepsiCo’s 2016 annual report and summarise the key initiatives outlined for ensuring sustainable growth in relation to: •

its products

•

the marketplace

•

communities.

Extracts from PepsiCo’s 2016 annual report From the start, Performance with Purpose has been more than a slogan, more than a single program. It has been an overarching vision — a governing philosophy — guiding every aspect of our business. (p.5) PepsiCo’s challenge is to generate healthy financial returns ‘consistently, sustainably, quarter after quarter, year after year’. Aim to do this by: • ‘making healthier foods and beverages for our consumers • generating healthy growth for our retail and foodservice partners. • Contributing to a healthier planet while boosting our bottom line • Creating a healthy workplace and culture for our associates • Promoting healthier communities wherever we operate’. (p.5) (Each of the above points are explained in detail on pages 7 & 8 of the 2016 PepsiCo Annual Report. Students should summarise these goals in terms of their effect on PepsiCo’s products, marketplace, and communities.) ‘Together, these steps form a virtuous cycle that is powering our ongoing transformation as a company, enabling us to do well by doing good, positioning us for success not only over the short run, but also over the long run, and securing our place as one of the defining corporations of the 21st century’. (p.5) Performance with Purpose 2025 Agenda ‘In 2016, we announced new Performance with Purpose goals for the next decade. By continuously improving the products we sell, protecting our planet, and empowering people and communities around the world, we believe we can create conditions that enable our business and society to thrive’. (p.10)

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Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 13: Analysing and integrating GAAP

Chapter 13: Analysing and integrating GAAP Assignment classification table

Learning objectives Explain and apply the concepts and principles underlying the recording of accounting information.

Brief exercises 1, 2, 3

Exercises 1, 2, 3, 4, 5

Problems 1A, 2A

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.

5, 6

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.

4A, 5A

6A, 9A

10A

13.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Note to instructors Students are invited to discuss their own views in the questions throughout the end of chapter activities. 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.

Solutions to questions 13.1. There are two concepts and four 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.

13.2

Chapter 13: Analysing and integrating GAAP

13.2. 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 2019. 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 2019, 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. 13.3.

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.

13.4.

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.

13.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

13.5. 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.

13.4

Chapter 13: Analysing and integrating GAAP

13.6.

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. 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.

13.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

13.7.

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 843. 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 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.

13.8.

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?

13.6

Chapter 13: Analysing and integrating GAAP

13.9.

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) 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.

13.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

13.10. 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. 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

13.8

Chapter 13: Analysing and integrating GAAP

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 13.4 summarises the enhancing qualitative characteristics of financial information and the constraint of providing financial information as outlined in the in the Conceptual Framework.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

13.11. 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. 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.

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Chapter 13: Analysing and integrating GAAP

13.12. 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. This is a challenging question and will require the educator to scaffold students’ answers to help broaden their view of the world. Can the world be objectively measured? OR Is measurement subjective therefore subject to bias? There are questions to ask students to help them think more broadly. Giving examples of subjectivity e.g. the measurement of useful life of an asset, estimated residual value, choice of depreciation method all require subjective measurement. Educators might like to make the following article available to students to read and discuss in class. 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.’ 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. 13.13. 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

13.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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. 13.14. 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. 13.15. 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. See also solution to question 12 above for additional insights.

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Chapter 13: Analysing and integrating GAAP

13.16. The conceptual framework identifies qualitative characteristics as either fundamental or enhancing depending on how they affect the usefulness of financial information. Fundamental qualitative characteristics 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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. 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. See also solution to question 17 below for further insights.

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Chapter 13: Analysing and integrating GAAP

13.17. 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 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. 13.18. A liability is defined in the Conceptual Framework as an outflow of economic benefits that the entity is presently obliged to make as a result of past events. As discussed in the chapter, this definition of liabilities is currently being reviewed and is expected to be updated in the new conceptual framework. A similarly worded definition is provided in IAS 37/AASB 137 Provisions, Contingent Liabilities and Contingent Assets. Essential characteristics of a liability. First, the entity must have a present obligation. This means the entity has a duty to act or perform in a certain way in the future. For example, transactions involving revenue received in advance (recorded as a liability). In this case, the entity had a present obligation to deliver goods or provide services at a future date. A second essential characteristic is that the obligation must be as a result of a past transaction or event. To illustrate, an intention to buy an asset in the future does not give rise to a present obligation. Generally, the obligation arises after the purchase of the asset has taken place. Finally, a liability must result in an outflow of resources or economic benefits such that it can reduce directly or indirectly the future cash flows or cash equivalents of the entity. As mentioned above, in the case of revenue received in advance, the liability can be discharged by providing goods or services. In the case of accounts payable, these can be discharged by issuing another liability such as notes payable. Liabilities can also be discharged by issuing shares instead of repaying the liability in cash. We also need the recognition criteria, which are discussed below. Recognition criteria As outlined in the Conceptual Framework, a liability is recognised in the statement of

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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). 13.19. 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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Chapter 13: Analysing and integrating GAAP

13.20. 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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

13.21. 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. 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. 13.22. Income is recognised when income definition and income recognition criteria are met. 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.’ 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 15 ‘Revenue from Contracts with Customers’ prescribes a five-step model framework for the recognition of revenue. (Refer chapter 3 for an explanation of the five steps). Under the new standard, revenue is recognised when the entity satisfies the performance obligation. For a service entity, revenue is recognised at the time the service is performed. An example of a service entity would be a dry-cleaning business that provides dry-cleaning services for a customer on 30 June, but the customer does not collect and pay for the clothes until 5 July. The revenue would be recorded on 30 June when the service was performed, not in July when the cash is received. Basically, for merchandising organisations revenue is recognised when the goods are delivered. For service organisations revenue is recognised when the services have been provided. 13.23. 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

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Chapter 13: Analysing and integrating GAAP

[2] The amount of assets, liabilities, revenues or expenses can be measured reliably. 13.24. 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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

13.25. 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 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). 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.

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Chapter 13: Analysing and integrating GAAP

13.26. Three future developments in financial reporting are: [1] The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) joint project to develop the Conceptual Framework is currently ongoing. At the time of writing this chapter, the IASB was in the process of revising the 2010 version of the Conceptual Framework, however the new version had not been released. The revised Conceptual Framework 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 taken many years and is yet to be completed. The process is lengthy as involves 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. In the same way that we are moving towards one conceptual framework and one set of international standards for financial reporting, we need a framework and set of standards for sustainability reporting. Integrated reporting The International Integrated Reporting Framework, developed by the International Integrated Reporting Council (IIRC), provides a set of guidelines to support organisations to integrate sustainability into their objectives and to account more fully for the value organisations create in the short, medium and long term. Further information about the International Integrated Reporting Council (IIRC), integrated reporting and future developments can be found on the IIRC website, www.integratedreporting.org.

SOLUTIONS TO BRIEF EXERCISES

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to brief exercises BE13.1 (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.

BE13.2 (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.

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BE13.3 (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. BE13.4 (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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE13.5 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.

BE13.6 Users

Information needs

1. Managers

6. Information to calculate the amount of tax owing and whether the entity complies with tax laws 4. Information on whether an entity will continue to honour product warranties and support its product lines 7. Information to determine whether the entity is operating within prescribed rules 5. Information on whether the entity has the ability to pay increased wages and benefits, and offer job security 3. Information to determine whether to grant credit based on risks and ability of the entity to repay debts 2. Information to determine whether to invest based on future profitability, return on capital growth 1. Information to plan, organise and run a business

2. Investors

3. Creditors 4. Customers

5. Employees and trade unions 6. Government authorities 7. Regulatory agencies

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Chapter 13: Analysing and integrating GAAP

BE13.7 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 BE13.8 (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 BE13.9 (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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE13.10 (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 E13.1 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, 2020. In order to report the correct income and asset figures in the financial statements ending December 2020, 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. 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.

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E13.2 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 Cash

$20,000 $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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E13.3 (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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.4 (a) A violation of revenue recognition criteria has occurred. As explained in chapter 3, AASB 15 Revenue from Contracts with Customers, prescribes a five-step model framework for the recognition of revenue. In the context of revenue recognition (income), AASB 15 Revenue from Contracts with Customers, revenue is recognised when the performance obligation has been satisfied. 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, a performance obligation will have been satisfied when the goods sold have been delivered to the customer. 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 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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E13.5 (1) Drawings 3,000 Cash 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 50,000 Cash 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 2020 Dr Prepaid Insurance 24,000 Cr Cash 24,000 (Company purchased a 1-year insurance policy for $24,000 on 1 January 2020) 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 2020 Insurance Expense Prepaid Insurance (Adjusting entry for Insurance)

12,000 12,000

(4) Building 1,000,000 Cash (Purchased a building for $1,000,000)

1,000,000

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.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(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 2019 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 2019, 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 2019, 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. (7) 25 June 2020 Accounts Receivable 1,000 Service Revenue 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 ‘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.’ 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.

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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 15 Revenue from Contracts with Customers requires revenue to be recognised when a performance obligation has been satisfied. 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 increases in equity, other than those relating to contributions from equity participants, is probable and can be reliably measured. (8) Dec 31 2020 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 2020. The initial entry was recorded as a debit to prepaid rent. The adjusting entry above was made on 31 December 2020 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.6 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. 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.

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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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.7 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), IFRS 15/AASB 15 Revenue from Contracts with Customers prescribes a five-step model for the recognition of revenue Basically, revenue is recognised when the entity satisfies the performance obligation. 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 2019, 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 Cr Wages Payable

400 400

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 Interest Payable

2,000 2,000

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E13.8 (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) (6) The adjusting entry would be: Dr Interest Expense Cr Interest Payable (To record accrued interest) (b)

400 400

2,000 2,000

Initial Reported Profit Revenue that should have not been recorded Supplies expense that should have not been recorded Insurance expense that was not recorded Advertising expense that was not recorded Repairs expense that was not recorded Electricity expense that was not recorded Wages expense that was not recorded Interest expense that was not recorded Revised Profit

50,560 (20,000) 2,300 (3,000) (2,500) (2,000) (800) (400) (2,000)

(28,400) 22,160

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.9 (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, IFRS 15/AASB 15 Revenue from Contracts with Customers prescribes a five-step model for the recognition of revenue Basically, revenue is recognised when the entity satisfies the performance obligation. 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; and (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 2020) (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). 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.

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(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.

E13.10 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.11 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 Revenue Received in Advance

100,000 100,000

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 Wages payable

X 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.12 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 ‘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.’ 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 15 Revenue from Contracts with Customers requires revenue to be recognised when a performance obligation has been satisfied. 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. 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

(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

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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 satisfied its performance obligation. 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

X X

(f) Once the magazines are delivered, revenue can be recognised as Surfin’ Magazines has satisfied its performance obligation. 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e E13.13 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 Revenue Received in Advance

3,000,000 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 manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to problem set A PSA13.1 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 2021 sales in the 2020 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) i.

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.

ii.

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).

iii.

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 Memorabilia should not include the sales figure for the first two days of 2021 in the 2020 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

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reliably. Revenue is recognised on the sale of goods when a number of conditions are satisfied, including that the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. Clearly the sales made during the first two days of 2021 (when the goods were delivered) must be excluded from 2020 revenue since the ownership of goods has not yet been transferred to customers in 2020 and thus revenue should not be recognised at that point. iv.

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 Memorabilia in 2020 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 2020 and can be measured reliably. Hence, the manager should have recorded $13,000 interest expense during 2020.

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 Memorabilia, although the lawsuit damages satisfy 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 Memorabilia 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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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. ii.

The correct journal entry should be: Drawings — Ima McBride Cash

2,500 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. iii.

No sales occurred in 2021 should be recorded in the statement of profit or loss for the year ending 2020. For the statement of profit or loss for the year ending 2021, record the first two days’ sales: Accounts Receivable or Cash Sales

iv.

X X

Interest expense of $13,000 should be recorded in 2020 as follows: Interest Expense Interest Payable

13,000 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 Memorabilia has incurred $13,000 of interest expense in the year ended 31 December 2020. v.

No journal entry recorded since the amount of damages cannot be measured reliably. However, given Beautiful Wedding Memorabilia 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 Memorabilia 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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PSA13.2 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) 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). In ED2015/3 ‘Income is increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims’ (p. 12). Revenue is a subset of income. More specifically, IFRS 15/AASB 15 Revenue from Contracts with Customers requires revenue to be recognised when the entity satisfies the performance obligation. In this situation, the definition of income is discussed, rather than revenue recognition criteria IFRS 15/AASB 15 Revenue from Contracts with Customers. After Moo Cow Farm Ltd has delivered goods to customers, revenue can be recognised. (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.

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PSA13.3 (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). ‘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 main chapters are: 1. 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). 2. ‘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). 3. ‘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). 4. ‘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).

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(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 8 chapters: [1] the objective of general purpose financial reporting [2] qualitative characteristics of useful financial information [3] financial statements and the reporting entity, [4] the elements of financial statements [5] recognition and derecognition [6] measurement [7] presentation and disclosure [8] concepts of capital and capital maintenance Chapters 1 to 4 are the four main chapters of the Conceptual Framework. 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 need 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

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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. 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e business activities. It is not practicable to require financial statements to be understandable to novices. The reporting entity is defined in the Conceptual Framework as an entity that is required, or chooses, to prepare financial statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity (paragraph 3.10). The definitions of asset, liability, equity, income and expense are also outlined in the Conceptual Framework. Assets are defined in the Framework as ‘a present economic resource controlled by the entity as a result of past events’ (paragraph 4.3). A liability is defined in the Framework as ‘a present obligation of the entity to transfer an economic resource as a result of past events’ (paragraph 4.26). Equity is defined in the Framework as ‘the residual interest in the assets of the entity after deducting all its liabilities’ (paragraph 4.63). Income is defined in the Framework as ‘increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims’ (paragraph 4.68). Finally, expenses are ‘decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims’ (paragraph 4.69).

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PSA13.4 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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PSA13.5 (a)

In the Conceptual Framework, the primary categories of users include: • Equity investors: - shareholders - holders of partnership interests - other equity owners. • Lenders: - lenders (e.g. banks) - purchasers of traded debt instruments (e.g. debentures). • Other creditors: - 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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PSA13.6 (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 notfor-profit 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. (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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA13.7 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 noncurrent 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. This is a challenging question and if the educator would like to take it deeper with their students then they will need to scaffold the students to help broaden their view of the world. Can the world be objectively measured? OR Is measurement subjective therefore subject to

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bias? There are questions to ask students to help them think more broadly. Giving examples of subjectivity e.g. the measurement of useful life of an asset, estimated residual value, choice of depreciation method all require subjective measurement. Educators might like to make the following article available to students to read and discuss in class. 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 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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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e PSA13.8 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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PSA13.9 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 15 Revenue from Contracts with Customers prescribes a five-step model framework for the recognition of revenue. 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 is out of stock and cannot satisfy its performance obligation (delivery of the goods) until the following period. 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.

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 Doubtful Debts which is a contra asset account to account receivables and reduces the net receivables reported in the statement of financial position.

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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.

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.

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.’ 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.

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.

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

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November 2020, 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 2020, 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.

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(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 Revenue

400,000 400,000

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

Inventory Write-down Expense Inventory

3,000

16,000

3,000

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 Cash Discount Received

10,000 9,900 100

No journal entry is recorded, but information about the contingent liability (lawsuit) must be disclosed in the notes to the financial statements.

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

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(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 • the company is considered large when measured in terms of sales, assets, borrowings, customers and employees.

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PSA13.10 (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. Table 13.2. The summary of the various aspects of GAAP is as follows: GAAP Reporting question Who is required to prepare general purpose financial reports (preparers)? What is the purpose of general purpose financial reporting? Who uses general purpose financial reports (recipients)? What is reported in general purpose financial reports? How are items reported in general purpose financial reports?

Conceptual element of GAAP Reporting entity

Objective of financial reporting

Source Authority Statement of Accounting Concepts 1(The Australian conceptual framework) Conceptual Framework

Users of financial reports

Conceptual Framework

Qualitative characteristics and constraints Definition of elements and recognition criteria Concepts and principles

Conceptual Framework

Rules Measurement

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. 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).

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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 need 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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 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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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. (i) The Global Reporting Initiative (GRI) is a network-based organisation 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.

(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

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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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Educators might also like to discuss with their students The International Integrated Reporting Framework, developed by the International Integrated Reporting Council (IIRC), which provides a set of guidelines to support organisations to integrate sustainability into their objectives and to account more fully for the value organisations create in the short, medium and long term. Improving the quality of information available to financial capital providers enables a more efficient and productive allocation of capital. Capital is used by organisations to create value over time. A more efficient and productive allocation of capital ultimately supports a more financially stable global economy. Integrated reporting (IR) is becoming the new norm for corporate reporting. The guidelines have been primarily prepared for business organisations but can be adapted for government and not-for-profit entities. Figure 13.6 lists the IR framework’s guiding principles and content elements that underpin the preparation of an integrated report. See https://www.globalreporting.org/information/news-and-press-center/Pages/GRIworks-with-IIRC-and-leading-companies-to-eliminate-reporting-confusion.aspx

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Building business skills Financial reporting and analysis BBS13.1 Financial reporting problem: Domino’s Pizza Enterprises Ltd Domino’s — 2017 Annual Report Please note: the solution provided is for the year 2017. If another year is selected by a student, please use this response as a guide. (a) 3.9

Revenue recognition Revenue is measured at the fair value of the consideration received or receivable.

3.9.1 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. 3.9.2

Franchise income Franchise income is recognised on an accrual basis in accordance with the substance of the relevant agreement.

3.9.3 Rendering of services Service revenue relates primarily to store building services and is recognised by reference to the stage of completion of the contract. 3.9.4

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.

3.9.5 Dividend and interest revenue

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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 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)

Standard/Interpretation AASB 15 ‘Revenue from Contracts with Customers’. AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’ AASB 2-15-8 ‘Amendments to Australian Accounting Standards — Effective date of AASB 15’

Effective for annual reporting periods beginning on or after 1 January 2018

Expected to be initially applied in the financial year ending 30 June 2019

Under AASB 118, 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

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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. (c) 3.8

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) 3.14

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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BBS13.2 Financial analysis on the web COCA-COLA AMATIL LTD (a)

Students are required to access the CCA 2016 annual report. (Note: the financial statement note on Revenue is reported in Note 2 of the annual report). 2. Revenue Revenue is recognised and measured at the fair value of the consideration received or receivable 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: Sale of products 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; Rental income We earn rental income from equipment hire, which is accounted for on a straight-line basis over the term of the rental contract. 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; Finance income Finance income mainly comprises of interest income on cash in bank, term deposits and implied returns under the defined benefit superannuation plans. We record interest income as it is earned, using the effective interest method.

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(b)

In the 2016 annual report, Coca-Cola Amatil has included the following in Note 24 New Standards and Interpretations. The Group has not early adopted any new standards: Reference

Summary

AASB 15 Revenue from Contracts with Customers

Requires revenue to be recognised on satisfaction of the performance obligations specified under contracts

Application date of Impact on the standard Group 1 January 2018 *The Group’s impact assessment of this new standard is currently in progress, with disclosure of estimated financial impacts to be made in Coca-Cola Amatil Limited’s 2017 halfyear financial report.

*Students should access Coca-Cola Amatil’s 2017 half-year and full year financial reports and comment on the disclosures made for the application of the new standard on revenue, AASB 15. 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. (c)

Yes, the company’s policies of revenue recognition are consistent with the revenue recognition criteria discussed in the chapter. 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.

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(d)

Both company’s methods of revenue recognition are consistent. They have both noted the new standard, AASB 15 Revenue from Contracts with Customers, in the annual reports as to when they will take up the application of the standard. 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 ‘Revenue’. Both companies’ policies on recognising income from services are also consistent with the AASB 118. 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’s Pizza and Coca-Cola Amatil’s policies on revenue recognition comply with what outlines in the Conceptual Framework.

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BBS13.3 A global focus COCA-COLA COMPANY LTD (a)

Excerpt from 10K — 2016 (p.40–1): 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 $6.6 billion, $6.8 billion and $7.0 billion in 2016, 2015 and 2014, 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 ‘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.’ 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. At the time of writing, Coca-Cola Amatil were yet to apply AASB 15 Revenue from Contracts with Customers. In the context of revenue recognition (income), AASB 118 ‘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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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 ‘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 BBS13.4 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 2020 Revenues Service revenue Operating expenses Advertising Wages Electricity Depreciation Repairs Insurance Supplies Interest Total operating expenses Profit

151 200 (1) 12040 (2) 59640 (3) 6580 (4) 1680 8400 (5) 11200 (6) 10780 (7) 700(8) 111020 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b)

Revenue recognition criteria were not followed as IFRS 15/AASB 15 Revenue from Contracts with Customers requires revenue to be recognised when the entity satisfies the performance obligation 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 (i.e. the entity has satisfied its performance obligation). 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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BBS13.5 Sustainability COCA-COLA AMATIL LTD Please note: the solution provided is for the year 2017. If another year is selected by a student, please use this response as a guide. (a)

Students are required to access CCA 2016 sustainability report.

(b)

CCA’s Sustainability Strategy is on pages 42–44 of the 2016 annual report. CCA has achieved many outcomes in the areas of environment and community. Key Highlights in these areas for 2016 include: Environment: • Maintaining certification to ISO14001 across manufacturing and expanding to include more distribution sites. • Continuing to supply customers with some of the most energy-efficient coolers on the market and trialling new technologies such as natural refrigerants. • Optimise packaging and include more recycled content particularly in PET. • Continued focus on sustainable use of water sources by regularly updating hydrogeological studies. • Setting and achieving targets in water and energy efficiency as well as waste to landfill and recycling. • Installation of large scale solar system at Fijian non-alcohol beverages plant. • Removing 2.8 million kilograms of rubbish from 9.7 kms of Bali’s beaches. • Donation of > 46,000 trees to vulnerable areas in Indonesia. • Water for Life program in partnership with the East Bali Poverty Project. Community (Australia): • Assisting disadvantaged young people with > $1m per annual in grants through the Coca-Cola Foundation. • Supporting community causes of interest to employees, matching dollar for dollar and providing volunteer leave. • Donating products to support delivery of ½ million meals to charities. • Assisting in natural disaster response. • Donations to charity events. • Ongoing charity partnerships with Avner Pancreatic Cancer Foundation and McGrath Foundation.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e BBS13.6 Communication activity

To: From: Subject:

STATISTICS R US PTY LTD Board of Directors, Statistics R Us Pty Ltd Accountant 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 15 Revenue from Contracts with Customers prescribes that revenue is recognised when a performance obligation is satisfied. 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 the facts are as follows: 13 June 2018

Contract signed for $ 1 million — no work has been completed by the year ended 2018. Hence no revenue should be recognised.

Cash to be received:

Year ended 2019 Year ended 2020 Year ended 2021 Total

$600,000 $300,000 $100,000 $1,000,000

Work to be completed:

Year ended 2019 Year ended 2020

50% 50%

AASB 15 prescribes that in order to be recognised as revenue, the performance obligation must be satisfied (that is, the services must be performed). 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, 2018 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.

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June 30, 2019 By June 2019, $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 Revenue Received in Advance

500,000 100,000

June 30, 2020 By June 2020, 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 Revenue Received in Advance Accounts Receivable Service Revenue

300,000 100,000 100,000 500,000

August 2020 At this stage, the amount owed for the work completed in June 2020 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,

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS13.7 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 nondisclosure, the managing director’s actions are unethical.

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BBS13.8 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 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

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 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.

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Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 14: Technology concepts

Chapter 14: Technology concepts Assignment classification table

Learning objectives Appreciate the use of a computerised accounting information system such as Xero.

Brief exercises

Exercises 1

Problems

Understand why organisations are motivated to implement or upgrade to an enterprise resource planning (ERP) system.

Categorise the key business processes that ERP systems support.

Describe the main modules in an ERP system through using SAP as an example.

Explain how XBRL is used in reporting systems.

2A; 2B

Compare and contrast the different ways XBRL can be used.

4,5,6

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

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

Justify the benefits of XBRL.

Understand the various concepts in using XBRL.

3A, 3B

Categorise the different types of Cloudbased computing including Software as a Service.

11,12,13

9A,10A 9B,10B

10.

Appreciate new technologies and how they may impact the future of accounting.

1A,1B

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 14.1.

The accounting functions that are available using Xero include: • Accounts tab allows access to the business bank accounts, sales, purchases, inventory, expense claims and fixed assets. The business bank accounts are automatically updated when recording cash received from customers and payments to suppliers and employees. Direct receipts and payments from the bank accounts can be recorded easily as Xero allows direct linking to the major banks for daily downloading of up-to-date bank statements. Bank reconciliations can also be completed efficiently. Subsidiary ledges for accounts receivable and accounts payable and automatically updated by Xero when sales and purchases are recorded. The inventory tab allows the business to check and maintain current inventory levels which Xero automatically updates when inventory is purchased from suppliers and sold to customers. The general ledger accounts are automatically updated with the processing of every transaction and various reports, including profit and loss and balance sheets, can be run at any time for the business to monitor its financial performance over a particular period and its financial position at a particular date. • Payroll tab is where the individual employee records can be maintained, and the regular pay runs are processed. At the end of each pay run the general ledger payroll accounts and bank account are automatically updated. • Reports tab allows reports from the following categories to be customised and accessed: financial, tax, accounting, fixed assets, sales, purchases, inventory and payroll. Reports that are frequently used can be flagged as ‘favourites’ to allow for quick and easy access. • Contacts tab is a central area for the adding and auditing of all details relating to suppliers, customers, and employees. They can be set up into Groups and Smart Lists for monitoring of overdue accounts. • Settings tab is where the general organisational settings are recorded (e.g. business address, financial settings, chart of accounts, conversion balances, tax rates, and templates for invoices and purchase order, etc.

14.2.

To illustrate the integration in an ERP system, consider the sales and marketing module. The sales and marking module provides various functions in the business to market and sell the organisations’ products. The first thing that occurs, transaction wise, is a sales order. This function links with the customer. However, there are links to accounting/finance function when a credit check is undertaken on the customer. There are links to the production relating to checking the inventory to ensure that the inventory is in stock. There are also links to the production relating to the costing for the production. This occurs if the product is a standard product that has been manufactured. Once the product is sold the customer is billed. This billing information is passed to the accounting division as it is receivable. The amount in the stock inventory is also reduced. If the product is special order then this needs to be passed onto the manufacturing module to calculate its cost and its promise by date. The pricing of that product is based on its cost and on input from accounting and finance.

14.3.

The benefits of an ERP system relate to its ability to integrate. So there is benefit to individual modules such as manufacturing relating to the inventory, materials, labour and overhead needed. There are benefits to the customers of better service through

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Chapter 14: Technology concepts

the planning, schedule and delivering of orders, which relates to the integration of sales and marketing to manufacturing. There is also better management of the customer in the integrated product. There are benefits due to having a database with the all the data in that one database and all modules use the same customer data and when it is updated the data is updated in one place only. This can also translate to benefits relating to the number of staff an organisation needs to have to update the system. With the integration and data stored only once less staff is needed to maintain the system as only one system not multiple systems are being updated.

14.4.

There are four key business processes that ERP systems need to support: 1. Sales or order to cash process 2. Purchases or purchase to pay process 3. Manufacturing or value adding process 4. Human resources or payroll process

14.5.

An ERP system supports key business processes through: • data capture • operations facilitation • decision making. The ERP system captures all the necessary activities and transactions so that someone who was not a party to the business event can reconstruct every aspect of what happened. The system looks for four dimensions in the business event: • Who was involved in the event; • What resources were exchanged in the event; • Where the event took place, including where the resources reside before and after the event; • When the event was completed, including any future exchanges of resources because of the event. By collecting these dimensions of any business event, the organisation can aggregate and summarise data in various forms to suit the requirements of the questions that a decision maker is asking. The system would also have programmed procedures that can generate routine accounting reports periodically and automatically. The data is captured in a centralised database that splits the capture into business event data and master data. Business event data normally contains reference information, such as at what point in the sales process is the customer, the warehouse location of an item that a customer is ordering, or whether a customer order has been shipped. Therefore, it records and tracks the activities and the status of a business process as those activities occur, but before the transactions have been completed. Master data normally contains completed transactional information, such as a sales transaction. The sales, accounts receivables and customer tables are updated to reflect the sales transaction. At any time, staff from departments other than sales and marketing can view whether the operation has been completed. This facilitates the operations of any key business process. Business event data and master data from an ERP system can also be used for more complex decision making. For example, in the sales process, the marketing

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

manager might want to have a list of customers who have not made a purchase in the past three months. To obtain this information, the manager would have to combine sales and customer tables. In the purchasing process, a warehouse manager may want to examine the schedule of purchase deliveries to determine the staffing and warehouse requirements. This information comes from combining purchases and supplier tables.

14.6.

The typical modules in SAP ERP systems are sales and distribution (sales process), materials management (purchasing and value adding process), financial accounting (reporting), controlling and profitability analysis (decision making), human resources (payroll, recruitment, management and firing). Most ERP systems have similar modules and similar functionality. The modules and functionality mimic the key business processes that occur in reality.

14.7.

XBRL can be used in financial reporting systems to code the data according to the characterisation in the financial reporting system that is used. By this the XBRL site has the codes/tags for each item in the financial reports. So, if your reporting systems are International Financial Reporting Standards you can download the tags for the items in your financial reports. You apply the codes to your financial reports. Many countries have reporting using XBRL as compulsory such as the US. The codes that you apply to your financial statements mean that others that down load your financial reports can see what each item is coded as.

14.8.

The benefits of XBRL are the consistent coding of data. That means if your data is coded (tagged) using international standards it can be extracted for many different types of users. It also means that there will be reduced data manipulation involved. Since the data is in electronic format it can be sent to the users using paperless reporting. The ability to code (tag) the data and then send it means that timeliness of reporting is assisted as well as that when sending it electronically is another advantage.

14.9.

In Australia and New Zealand, it has not been adopted for external financial reporting. However, in many other countries such as the United States compulsory reporting using XBRL is required. The impetus for Australia and New Zealand to use it has not occurred. Australia and New Zealand have used it for other aspects such as the government reporting agencies.

14.10. Cloud computing is the ability to use services over the Internet to satisfy your computing needs. The services are for software, hardware and infrastructure. The advantage of cloud computing is that you can increase your usage when you actually more of the service and you only pay for what you use. Therefore, your organisation does not have to put large investment in buying information systems infrastructure. The disadvantage is that your precious data is stored in the cloud and if something goes wrong — the data may be lost of realised to the public. So the issue of backup and security of that data needs to be considered.

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Chapter 14: Technology concepts

14.11. Big data is looking at utilising a lot of data that is collected by modern systems that previously has not been saved in databases. Data from social media or control systems are examples of the sort of data that is collected. Environmental management systems have many sensors and collect a large number of data points. With recorded this data into a database we can now analyse the data and find patterns in the data which may change the way the business operates. Many of the databases used for Big data are not relational databases that businesses traditionally use they are no SQL databases that is capable of storing efficiently the sparse data that many of the data items that are coming from Big data are. 14.12 A Blockchain is a distributed, decentralised ledger which records digital currency transactions. A ‘distributed ledger’ is a dynamic, independently maintained database that lives across a network of computers. The blockchain securely manages digital relationships and is a single ledger that records transactions between organisations, their suppliers and customers. Blockchains store transactions in blocks. Each block is time stamped and linked to the previous block, thus forming a blockchain. All parties to the transaction can see the information in real time. The main benefit of a blockchain to the future of accounting is that, once a transaction in the blockchain is verified, the transaction can be automatically entered into the ledger of each party involved in the transaction. Blockchains cannot be altered once they have been entered thus increasing the integrity of the data. A Bitcoin is a digital currency created and held electronically and stored in a ‘digital wallet’ which exists on a user’s computer or in the cloud. The digital wallet is a virtual bank account. Bitcoins can be used to pay for goods electronically without the user having to pay with cash transferred from a bank. People who own bitcoins can send them to each other electronically using their computers or mobile applications in a similar way to transferring cash electronically. The difference is that bitcoins eliminate the need for the middle man — the bank. Bitcoins are not physically printed; they are created (‘mined’) digitally in a distributed network. The bitcoin protocol states that only 21 million bitcoins can ever be created by miners. These bitcoins can be divided into smaller parts, down to a one hundred millionth of a bitcoin, known as a ‘Satoshi’ (named after the alias used by the creator of the bitcoin). Bitcoins are decentralised (not controlled by a central authority such as a bank). The bitcoin network is made up of every machine that mines bitcoins and processes transactions. Bitcoins are completely transparent as every transaction is stored in the network’s digital general ledger, the blockchain. For now, bitcoins are mainly being used as a form of investment. At the time of writing this solution, one bitcoin was valued at $10,683 Australian dollars. 14.13. Artificial intelligence (AI) is a sub-area of computer science where a machine imitates intelligent human behaviour through pattern recognition, algorithms and machine learning. Artificial intelligence is not just about human-like robots. It is currently used to assist finding similar products while shopping online, searching websites, and allowing advancements in machine technology such as robotic vacuum cleaners and cars that park themselves. Machine learning is also being used for computerised grading of assignments, and language translations. The future of AI in Accounting could include: • Improving fraud detection through training the computer on ‘normal’ activities and allowing for the prediction of fraudulent activities • Using machine learning-based predictive models to forecast revenues • Improving analysis of unstructured data such as contracts and emails.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to exercises E14.1 Xero is popular with small businesses as it is simple and easy to use, thus allowing business owners more time to improve and grow their business. Xero can be accessed anywhere 24/7 through a variety of electronic devices such as laptops, iPads, and mobile phones. The software would allow Mary to quickly process and email purchase orders for her supplies and record them as received when they are delivered to her shop. Any supplies purchased whilst out of the shop can be recorded easily on a mobile device at the time of the purchase. Mary could also record sales transactions at the time of the sale and either send the account instantly to the customer via email or record the payment at the time of delivery through a mobile device. Mary will be able to link directly with her bank and download bank statements on a daily basis. Xero is intuitive and will match regular bank transactions with the general ledger account and match customer receipts with an invoice allowing for easy completion of the bank reconciliation and automatic updating of the bank ledger account. This will enable Mary to follow up, on a timely basis, with those customers with overdue accounts. Mary will also be able to pay suppliers electronically and have those payments automatically recorded against the relevant suppliers so she can monitor her debts and bank account balance. If Mary has any employees, Xero also includes payroll functions enabling her to easily process her employees’ wages and have the pay run automatically updated to the relevant general ledger accounts free of any error. Being able to process these transactions as they occur will mean Mary will have more time to spend with her family at the end of the day. As all transactions are automatically processed to the general ledger accounts, Mary will be able to generate reports at any time to obtain the most up-to-date results of her business’ financial performance and position. From this, Mary will be able to make business decisions more efficiently and with confidence that the information she is using is reliable.

E14.2 ERP systems are designed to capture a wide range of information about all key business events in the four major areas in a typical organisation: finance, human resources, sales and marketing and manufacturing. It was developed based on the view that an organisation was part of a chain of suppliers and customers. As a result, employees of the organisation have access to one centralised database that stores information for all the employees in the company. Each employee would want to access the part of the database that is relevant to his or her role. Each employee would also want to do his or her own type of analysis and processing. The benefit to the Green Grocer is that all eight book stores could be processing their information at the same time. The inventory for the store could be listed according to where the inventory was i.e. which store the book was in or if the book was in a central warehouse. Therefore, if another store wanted a book that another store had they could request this via there ERP system. They would know what stores had the book and get the book in for their customer. Therefore, the inventory stock of all stores would be visible to all stores from their ERP system view.

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Chapter 14: Technology concepts

E14.3 (a) The first thing that would need to be explained is that XBRL uses the same underlying internet technologies as that used for webpages so there is no need to buy additional hardware or software, as he can use his existing web technologies and browsers XBRL is able to code financial information into a computer-readable tag that is similar to a product barcode. Companies use XBRL to save costs and streamline their processes for collecting and reporting financial information. It allows semantics, or meaning, to be embedded within strings of financial data, allowing more efficient analysis to be conducted by the users of that data. XBRL is freely licensed, is available to the public, and is widely available in software applications. (b) See www.xbrl.org for current users of XBRL. Benefits such as being able to code the data once and produce differing information.

E14.4 Advantages for preparers: • Once the data is prepared in SBR the data could be extracted for the multiple reporting requirements. Therefore, prepare data once use for multiple users would save time in preparation and reporting. Advantages for the users: • This advantage is for the government that receives these reports. The foods are in electronic format and in a consistent standard. They would be easily loaded into packages and all the data from all the agencies could be compared with minimum fuss and without re-entry of the data. The data would be tagged use consistent and comparable tags. E14.5 The tags during the information processing are when the tag of the codes would attach to the chart of accounts. Therefore, XBRL financial reports could be produced easily. Tagging at the end of the financial reporting process is tagging the financial statements using the XBRL tags downloaded from XBRL.org using the tags that would be the most appropriate to the type of reporting system you use. For Australia and New Zealand that would be International Financial Reporting Standards.

E14.6 Many companies across the globe have introduced International Financial Reporting Standards which are a consistent set of financial reporting standards that ensure consistency and comparability. XBRL enables the International Financial Reporting Standards to be used as a basis of their coding structure. Therefore, accounts tagged in XBRL are consistent and comparable and also in electronic format. When the data is transferred electronically the data that is coded can be seen for what it is coded as so the code attaches to that item of data. Therefore, there is no uncertainty as to what a figure means. Therefore, XBRL can be used to electronically compare financial reports from many companies in different countries, which is important in today’s global environment.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E14.7 The ERP system with SAP installed on it would be able to have the XBRL codes attached to the chart of accounts. There would be benefits to the internal users of the data in that the data would be able to be extracted from their accounting system to satisfy each of the users such as shareholders, regulatory bodies and the tax office. As XBRL could extract this data there are benefits of no re-entry and re-manipulation of data for each of the users. There is ability for paperless reporting. This method would also reduce the accounting time needed and there is the recognition by the major software vendors that can accommodate XBRL coding. The costs of using XBRL in the organisation would be small as they already have an ERP system with SAP on it and web browsers. The main cost would be coding the chart of the accounts with the XBRL codes and making sure the reports as a result were correct. This involves some initial set up time, which would ensure that the data preparation and timeliness of reporting in the future was reduced.

E14.8 Accountants need an understanding as they are applying the XBRL code to the accounts. These are financial reporting codes that define different types of assets, liabilities and equity according to the financial reporting standards. The accountant would be the most experienced at knowing that an item in the financial statement is a liability or a contingent liability. This is the sort of information that an accountant is familiar with certainly more so than the information technology people.

E14.9 In many jurisdictions it has been mandated. Which means that the accounts for these companies are available downloadable from the Share Exchange site and users are able to analyse these accounts without further data manipulation using the account tags that have been provided. This is the argument for using XBRL. I guess the argument against mandating XBRL is perhaps companies will see the benefit of XBRL and adopt it to provide a competitive advantage over their competitors. Therefore, they will voluntarily adopt XBRL as they can see the benefits to the preparation of financial data to themselves and to the users of the financial data. New Zealand and Australia is in the position where XBRL has not been mandated as it has in many other jurisdictions and could implement it leisurely. However, if it is mandated then they would need to implement it in the timeline given by the regulators which may be difficult with their other priorities.

E14.10 This answer will vary depending on what data is retrieved.

E14.11 This answer will vary depending on what data is retrieved.

14.8

Chapter 14: Technology concepts

E14.12 There are many websites that identify the current price of bitcoin and have news articles that discuss the latest trends. Students may start with https://www.bitcoin.com.au for the current price in AUD and the latest news.

E14.13 The following report from MYOB discusses the latest technology trends and their various threats and opportunities for accountants and bookkeepers: MYOB radar — Trends shaping your future, The mega-trends in accounting and bookkeeping and how to respond to them, 2017. Accessed at https://www.myob.com/au/campaign/myob-radar

Blockchain — data storage for ledger (p.10–11) ‘A blockchain is a data structure that enables a public digital ledger of transactions to be shared across a distributed network of computers. Users can record transactions on the blockchain without the need for a central authority. Blockchains are emerging as a way to make and verify transactions on a network instantaneously without a central authority. The blockchain can handle complex transactions and maybe even reduce the need for companies. People may be able to connect and work together without companies and management. Increased transparency for businesses is possible, as the blockchain becomes a global ledger storing all transactions, which are all viewable by all users’. ‘By 2023 it is forecast that the first government will collect taxes using blockchain technology.’14 ‘By the end of 2017, blockchain will be used by 15% of big banks’.15 MYOB radar discusses the use of blockchain in accounting (https://www.myob.com/au/campaign/myob-radar/blockchain, 2018) Blockchain in accounting And so to the possible impact of blockchains and cryptocurrencies on the accounting industry moving forward. One could be forgiven for thinking that the logical champions of a universally shared, indisputable, unbreakable ledger would be accountants and bookkeepers. And yet there’s little heard in the mainstream about its use and adoption. Over time we think this will change. Already there’s activity among the big four, with Deloitte in particular taking a large interest in the technology and its future uses. There are two specific areas that blockchain may affect the accounting and bookkeeping industry. Triple entry accounting By now you may have had a lightbulb moment about the effect the blockchain could have for double entry accounting. Triple entry accounting using digitally signed receipts was first proposed by Ian Grigg in his 2005 paper ‘Triple Entry Accounting’ — an often-referenced work that paved the way for bitcoin and blockchain. Instead of ledgers being kept separately by two businesses, they’re securely shared with a third entry — the blockchain register — officially, securely, immutably recording the transaction.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

The main resistance to this concept is usually around the inflexibility of the technology when considering the way in which a business’s accounts are managed. With blockchain (and by extension triple entry accounting), a transaction has taken place or it hasn’t. Either the ledger has been adjusted and cryptographically confirmed or it hasn’t. In accounting, ledgers can be more philosophically managed, with transactions sometimes viewed as liabilities and sometimes as something else. Still, this hasn’t stopped developers like Balanc3 from working on accounting solutions using this technology. The audit With its intrinsic and near unbreakable cryptographic record keeping, it’s reasonable to assume that the early deployment of blockchain technology for accounting may come in the field of auditing. Commentators — among them Matthew Spoke of Deloitte Canada — see a future where auditing is drastically changed through the removal of many time-demanding processes. A decentralised ledger — available to all users, exactly the same for all users, unalterable by all users, in which all parties agree that transactions have taken place – has the potential to eliminate key tasks of the modern-day auditor. Does that mean the end for the auditor? It’s doubtful. While the blockchain records the transactions, it doesn’t describe them (at this stage). An auditor would still need to confirm the classification of those transactions. The tendency with observations like these is that one is inclined to imagine that outcome, but not the process and journey leading to that outcome. In all likelihood, auditors will still be required — perhaps to audit the blockchain itself in real time.

E14.14 Artificial Intelligence (AI) is discussed in the same MYOB radar report as discussed in Exercise 14.13. (https://www.myob.com/au/campaign/myob-radar/artificial-intelligence, 2018) What is AI? ‘Artificial Intelligence (AI) is usually defined as the science of making computers do things that require intelligence when done by humans.’ Jack Copeland, 2000. We bunch artificial intelligence into three types: Narrow AI — Whereby a computer does one thing really, really well. A chess-playing computer, for example. Much of the AI in place today falls under the narrow AI banner: the afore-mentioned spam sorter in your email, your phone’s map and music apps (among loads of other phone examples), self-driving cars … they’re all narrow AI. General AI — General AI describes the arbitrary achievement of a computer to reach the approximate intelligence level of a human. It’s perhaps inspired in part by one of the founders of modern AI — Alan Turing and his Turing test. A computer ‘passes’ the Turning test when its intelligence is indistinguishable from a human’s. Microsoft’s XiaoIce chatbot is a sort of example of general AI. It is however missing the ability to reason and think abstractedly like a human can, among things.

14.10

Chapter 14: Technology concepts

Super AI — When we think of AI in popular culture such as movies and books, we tend to think of super AI; HAL 9000 from 2001: A Space Odyssey, for instance. Super AI occurs when computers accelerate past the intelligence of humans. We’re not there yet. Nor are we across what it will mean for humanity. What problems will a computer with an IQ a trillion times more powerful than ours be able to solve? All of Earth’s problems, perhaps? An AI future For the accounting and bookkeeping industry, it’s advancements in narrow AI that most concern us for the next five to ten years. Continued automation breakthroughs in transaction processing, for example, will create opportunities for smart operators, and dangers for laggards. The small business owner of the future may not know whether they have accounting software. They may go about the business of doing their business without entering a transaction or recording an invoice or approving a pay run. Frictionless transactions might enable that future, where the business advisor sets their client up with the accounting solution, while sensors in-store record data that feeds into the accounting solution managed by the business owner’s advisor. Sound far-fetched? Amazon Go will allow customers to shop without scanning their goods. No cashier, no self-scanning — simply walk in, select what you want, and walk out. The Committee for Economic Development of Australia (CEDA) identified the probability that 40% of Australia’s workforce (more than five million people) could be replaced by automation within the next 10 to 20 years. This is a common prediction but in the past new technology has not necessarily destroyed jobs but created new ones. We can’t know what new jobs might emerge in the future but there will be more roles in the artificial intelligence industry as that technology becomes more mainstream. AI will disrupt industries though, some jobs will be lost, and people will need to learn new skills. It’s interesting to note that there have been around 1,500 new jobs created since 1990 — positions such as SEO specialist, web analyst, social media manager, vlogger (or blogger, for that matter). In most major cities, approximately 10% of workers are in one of those 1,500 roles. There are always signals that a job is losing relevance, and a recent MYOB stakeholder survey showed clearly that bookkeepers are aware that their roles are changing right now. This doesn’t mean that their future is one where they become obsolete though. It does mean that bookkeepers and their stakeholders need to rethink how their service can be redefined and offered in different ways to maintain relevance. Opportunities through AI ‘I didn’t go to university to learn numbers — I went there to learn how to help businesses.’ Amanda Gascoigne, Gascoigne Consulting. Improvements in artificial intelligence in accounting and bookkeeping will create new service opportunities for both professions. Perhaps the most profound change won’t be technical, though. Rather it’s the change in engagement model — from reactive to proactive.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

The AI-augmented future will see accountants and bookkeepers actively and constantly engaging with clients. The machines will do the laborious work, while the humans will provide the emotional, social, and contextual intelligence that an AI cannot hope to replicate anytime soon. It’s worth repeating that the machines will augment our work, not replace it. No computer will adequately ask questions of a client unassisted — certainly not in the foreseeable future. The key is to embrace technology, to put it to work, and to turn any time savings into new service opportunities. Accounting and bookkeeping forecasts •

• •

•

Accounting may be the next on-demand community, similar to Airbnb and Uber. People may use an app to identify what companies specialise in services they require and connect the client with that company directly from the app. Thanks to AI and improvements in algorithms, bookkeepers will manage, guide and check the data, not record it. As compliance and advisory work continue to be unbundled, accountants will be providing consumable analytics and actionable advice for clients, focusing on delivering actionable value. Business advisory services will generate more than 80% of revenue for accounting practices.

14.12

Chapter 14: Technology concepts

Building business skills BBS14.1 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.

BBS14.2 Communication activity Students’ answers will vary depending on the news articles found. Their findings would make for a great class discussion on the future of AI in Accounting.

BBS14.3 Research case Forex is short for foreign exchange market and it is a global decentralised market for the trading of currencies with the main participants in the market being the larger international banks. The following discussion was taken from https://www.cityindex.com.au/forextrading/what-is-forex-trading/ — accessed 2018. ‘What is Forex trading? FX trading allows you to speculate on the changes in currency strengths over time, trading currencies and buying or selling one against the other. Forex traders seek to profit from fluctuations in the exchange rates between currencies, speculating on whether one currency's value, like the Australian dollar, will go up or down in relation to another, such as the US dollar. With over 5 trillion dollars’ worth of currencies traded globally every day, the foreign exchange market is the most traded in the world, making it a highly liquid and dynamic market. This high market liquidity means that prices can change rapidly in response to news and short-term events, creating multiple trading opportunities for retail FX traders. Why is leveraged Forex trading popular with investors? • Trade on rising and falling markets trade on falling markets (going short) as well as rising markets (going long) • Leveraged product use a small amount of money to control a much larger position • Volatility currency prices are constantly fluctuating with each other offering frequent trading opportunities • 24 hour trading an OTC product, not restricted to physical exchange hours • Liquidity spreads tend to remain tight meaning your dealing costs remain low

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

How does Forex trading work? Forex is always quoted in pairs, in terms of one currency versus another. Take for example EUR/USD (Euro vs US dollar) – the fluctuations in the exchange rate between these two is where a trader looks to make their profit. The first currency, also known as the base is the one that you think will go up or down against the second currency, which is known as the quote. When trading currencies, you can speculate on the future direction of the market, taking either a long (buy) or short (sell) position depending on whether you think the currency’s value will go up or down. Forex price movements are triggered by currencies either appreciating in value (strengthening) or depreciating in value (weakening).’ Bitcoin is a cryptocurrency that is decentralised — has no central bank regulation. Another type of cryptocurrency that is currently being traded is Ethereum. The following discussion was taken from https://www.cityindex.com.au/trading-academy/crypto/ — accessed 2018. ‘What is Cryptocurrency trading? Cryptocurrencies are an emerging type of currency market first made popular by Bitcoin. There are dozens of Cryptocurrencies (also known simply as “Cryptos”) available but most traders are interested in the leading currencies, like Bitcoin and Ethereum. Cryptocurrencies are ‘mined’ by people who have substantial computer processing power who receive the virtual coins in return for leasing that power. Unlike traditional currencies, the supply of Cryptocurrencies is controlled and most have a maximum total supply — once that is reached, no new coins will be produced. Cryptocurrencies are increasingly becoming more mainstream and it is now possible to trade the price of the leading Cryptos against other currencies like the US dollar. Like other currencies, Cryptos have an exchange rate which fluctuates. Why is Cryptocurrency trading so popular? Crypto trading has become popular because of the massive press coverage Bitcoin and Ethereum have generated. In addition, Cryptos are not subject to the same dynamics as conventional currencies. Cryptos have no central bank regulating how much of a currency is in circulation. They are not tied to a particular interest rate and it is not possible for a central bank to “print” more Cryptos. The traditional forces that influence other currencies — e.g. economic factors like inflation data — generally don’t affect Cryptos. Like other currencies the value of Cryptos is measured against what they are worth against different currencies. This means you can go long or short on a particular Cryptocurrency against the US dollar, GBP or Euro. Is Cryptocurrency trading right for me? Cryptocurrencies are a new and rapidly evolving market. Several key factors make them attractive as a potential trading opportunity: • Go long and short: you can take advantage of both rising and falling Cryptocurrency prices • Trade without owning: you can trade the price of Cryptocurrencies without having to buy them yourself • Volatility: Cryptocurrencies can be much more volatile than ‘normal’ currencies • Range: the price band within which a Cryptocurrency’s price can trade • 24 hours: Cryptocurrency markets are open all day, every day

14.14

Chapter 14: Technology concepts

•

Leveraged trading: Leverage can be used to enhance profits — and losses — from Cryptocurrency trades The characteristics of the leading currencies differ in a number of key ways: • How anonymous are the owners? This varies between Cryptos but has always been one of their main attractions • Are consumers and/or banks using it? Some Cryptos have more use outside their own networks, becoming more like real currencies • What is the Crypto being used for? Cryptocurrencies have been invented for different reasons, but for the main part they were either intended to make financial transactions easier or to support the development of alternative finance and data networks • How much of the Crypto is in circulation? Some Cryptos may reach a point where no more are produced while others have a potentially unlimited supply What affects the price of Cryptocurrencies? Cryptocurrencies are extremely new, consequently not much is known about what really drives the price. They are often sensitive to news stories, for example the prospect of further regulation, or news that attacks the credibility of a currency. Changes to the way a Crypto is produced have the biggest short term impact. Cryptocurrency volatility Traders can use CFDs to trade Cyptocurrency markets without having to buy “coins” or “tokens” which can be a lengthy process. Buying physical Cryptocurrencies requires the submission of applications to specialist Crypto platforms which can take days or weeks to execute a trade. A Crypto CFD works in a similar way to CFDs based on other currency pairs, you trade the value of the Crypto of your choice against a mainstream currency like the US Dollar. Cryptocurrencies can see very sudden swings in price, for example from news regarding possible further regulation of this market. That is why it important that you protect your profits and manage risk smartly with stop losses and take profit orders. Another aspect of Cryptocurrency trading to be aware of is “forking”. A “hard fork” is when the software supporting a Cryptocurrency needs to be updated. Traders are protected from most of the risks involved when a Cryptocurrency forks though it can still lead to sudden and unexpected price movements. As with other types of currency trades, it is important to manage your margin and the amount of leverage you are using, as it is possible to lose more money that you have allocated to the trade at first. Cryptocurrency forking policy In the event that the current cryptocurrency splits into two, new cryptocurrencies are created, this is known as a hard fork. We will generally follow the cryptocurrency that has the majority consensus of cryptocurrency users and will therefore use this as the basis for our prices. In addition, we will also consider the approach adopted by the exchanges we deal with, which will help determine the action we take. We reserve the right to determine which cryptocurrency unit has the majority consensus behind them. As the hard fork results in a second cryptocurrency, we reserve the right to create an equivalent position on client accounts to reflect this. However, this action is taken at our absolute discretion, and we have no obligation to do so.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

If the second cryptocurrency is tradeable on major exchanges, which may or may not include the exchanges we deal with, we may choose to represent that value, but have no obligation to do so. We may do this by making the product available to close based on the valuation, or by booking a cash adjustment on client accounts. If, within a reasonable timeframe, the second cryptocurrency does not become tradeable, then we may void positions that had previously been created at no value on client accounts. Over periods of substantial price volatility around fork events, and we may take any action as we consider necessary in accordance with our terms and conditions including suspending trading throughout if we deem not to have reliable prices from the underlying market.

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 15: Introduction to management accounting

Chapter 15: Introduction to management accounting Assignment classification table

Learning objectives Explain the distinguishing features of management accounting

Questions 1, 2, 3

Brief exercises 1

Exercises 7

Identify the three broad functions of management and discuss how management accounting tools assist these functions.

3, 4

Define the three classes of manufacturing costs.

3, 4

1, 2, 3

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

Distinguish between product and period costs.

5, 6

2, 3

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

Explain the difference between a merchandising and a manufacturing Statement of Profit or Loss.

4, 8, 9, 10, 13

7A, 7B

Explain the difference between a merchandising and a manufacturing balance sheet.

8, 9

4, 8, 10, 12, 13

7A, 7B

Indicate how costs of goods manufactured and sold are determined.

6, 7, 8

4, 5, 6, 9, 10, 13

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

Describe contemporary developments in management accounting.

Prepare a worksheet and closing entries for a manufacturing entity.

5, 6

Problems

8A, 8B

15.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 15.1.

15.2.

(a)

Disagree. Management accounting is a field of accounting that provides economic and financial information for managers and other internal users.

(b)

Pat is incorrect. Management accounting applies to all types of businesses — service, merchandising and manufacturing.

(a)

Financial accounting is concerned primarily with external users such as shareholders, creditors and regulatory agencies. In contrast, managerial accounting is concerned primarily with internal users such as officers, department heads, managers and supervisors in the company. Classified financial statements are the end product of financial accounting. The statements are prepared quarterly, six monthly and annually. In management accounting, internal reports may be prepared daily, weekly, monthly, quarterly, annually, or as needed. The purpose of financial accounting is to provide general purpose information for all users. The purpose of management accounting is to provide special purpose information for a particular user for a specific decision.

(b)

(c)

15.3.

Karen should know that the management of an organisation performs three broad functions: (1) Planning requires management to look ahead and to establish objectives. (2) Directing and motivating involves coordinating the diverse activities and human resources of a company to produce a smooth running operation. (3) Controlling is the process of keeping the activities of the entity on track.

15.4.

Disagree. Decision making is not a separate management function. Rather, decision making involves the exercise of good judgement in performing the three management functions explained in the answer to question three above.

15.5.

Since office building is not used for manufacturing purposes, its depreciation is classified as a period cost.

15.6. Fisher Ltd

Direct materials Direct Labour Manufacturing overhead Total

Prime costs $ 12,000 15,000 $27,000

Conversion costs $ 15,000 9,000 $24,000

15.2

Chapter 15: Introduction to management accounting

15.7. Harn Manufacturing Raw materials opening inventory Raw materials purchases Total raw materials available for use Raw materials closing inventory Direct materials used

$32,000 200,000 232,000 29,000 $203,000

15.8. Griggs Manufacturing (a) Direct materials used Direct labour used Total manufacturing overhead Total manufacturing costs (b) Total cost of work in process (beginning WIP + total manufacturing costs) [$27,200 + $600,000] (c)

15.9.

Cost of goods manufactured (total cost of WIP – ending WIP) [$627,200 – $36,400]

$280,000 100,000 220,000 $600,000 $627,200

$590,800

The accounting cycle for a manufacturing entity is the same as for a merchandising entity.

15.10. The typical account balances are: • work in process inventory • raw materials inventory • raw material purchases • direct labour • indirect labour; and • factory overhead accounts, such as power, repairs and depreciation.

15.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to brief exercises BE15.1 Financial Accounting External users General purpose information for all users

Main users Purpose of reports

Frequency of reports Type of reports Content of reports Verification process

Quarterly, six monthly and annually Classified financial statements General-purpose, classified financial statements Annual audit by registered company auditor

Management Accounting Internal users Special purpose information for a particular user for a specific decision. As the need arises Internal reports Customised, internal reports No independent audit.

BE15.2 1. 2. 3.

(a) (b) (c)

Planning Directing and motivating Controlling

BE15.3 (a) (b) (c) (d)

Direct materials Direct materials Direct labour Manufacturing overhead

(e) (f) (g) (h)

Manufacturing overhead Direct materials Direct materials Manufacturing overhead

BE15.4 OFFICE MATE PTY LTD

Direct Material (a) (b) (c) (d)

Product Cost Direct Labour

Factory Overhead x

Prime Cost

Conversion Cost x

x x x

x x

15.4

Chapter 15: Introduction to management accounting

BE15.5 SUNNY LTD

1. 2. 3.

A Direct Material Used $98,000 $44,000 $11,000

B + Direct Labour Used $122,000 $44,000 $30,000

C Factory Overhead $100,000 $60,000 $19,000

D Total Manufacturing Costs $320,000 $148,000 $60,000

BE15.6 SUNNY LTD

1. 2. 3.

Total Manufacturing Costs $320,000 $98,000 $150,000

–

Work in Process (1/1) $60,000 $110,000 $235,000

Work in Process (31/12) $43,000 $49,000 $27,000

Cost of Goods Manufactured $337,000 $159.000 $358,000

BE15.7 LAWNEY MANUFACTURING Account Finished Goods Inventory Work in Process Inventory Raw Materials Purchases Direct Labour

Work Sheet Column Statement of Profit or Loss (DR) Cost of Goods Manufactured (DR) Cost of Goods Manufactured (DR) Cost of Goods Manufactured (DR)

15.5

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to exercises E15.1 MAUER LTD 1. 2. 3. 4. 5.

(b) (c) (c) (c) (a)

Direct labour Manufacturing overhead Manufacturing overhead Manufacturing overhead Direct materials

6. 7. 8. 9. 10.

(b) (c) (c) (c) (a)

Direct labour Manufacturing overhead Manufacturing overhead Manufacturing overhead Direct materials

E15.2 OSCAR LTD (a)

Direct materials Direct labour Prime costs

$143,400 72,100 $215,500

(b)

Factory power Depreciation on factory equipment Indirect factory labour Indirect materials Factory manager’s salary Rates and taxes on factory building Factory repairs Manufacturing overhead

$10,200 11,240 52,600 101,200 10,000 3,500 2,100 $190,840

(c)

Direct labour Manufacturing overhead Conversion costs

$72,100 190,840 $262,940

(d)

Direct materials Direct labour Manufacturing overhead Product costs

$143,400 72,100 190,840 $406,340

(e)

Depreciation on delivery trucks Sales salaries Repairs to office equipment Advertising Office supplies used Period costs

$3,000 51,700 1,500 16,000 4,000 $76,200

15.6

Chapter 15: Introduction to management accounting

E15.3 TOWER COMPUTERS 1. 2.

3. 4.

(a) (c)

5. 6.

(b) (d)

7. 8.

(a) (b)

9. 10.

E15.4 PIAZZA MANUFACTURING LTD 1. 2. 3.

(a) (a) (a), (c)

4. 5. 6.

(b) (a) (a)

7. 8. 9.

(a) (b), (c) (a)

10. 11. 12.

(a), (b) (b) (b)

13. 14. 15.

(a) (a) (a)

16.

(a)

E15.5 DALBY LTD Case A (a)

Total manufacturing costs Less: Manufacturing overhead Direct labour Direct materials used

$180,650 (42,500) (60,000) $78,150

(b)

Total cost of work in process Less: Total manufacturing costs Work in process (1/1/19)

$221,500 (180,650) $40,850

(c)

Total cost of work in process Less: Cost of goods manufactured Work in process (31/12/19)

$221,500 (185,275) $36,225

(d)

Direct materials used Direct labour Manufacturing overhead Total manufacturing costs

$70,000 86,000 81,600 $237,600

(e)

Total manufacturing costs Work in process (1/1/19) Total cost of work in process

$237,600 16,500 $254,100

(f)

Total cost of work in process Less: Work in process (31/12/19)

$254,100 (9,000)

Case B

15.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Cost of goods manufactured

$245,100

(g)

Total manufacturing costs Less: Manufacturing overhead Direct materials used Direct labour

$260,000 (102,000) (130,000) $28,000

(h)

Total cost of work in process Less: Total manufacturing cots Work in process (1/1/19)

$327,000 (260,000) $67,000

(i)

Total cost of work in process Less: Work in process (31/12/19) Cost of goods manufactured

$327,000 (70,000) $257,000

Case C

E15.6 SOLOMON MANUFACTURING LTD Raw materials inventory (1/1): Direct materials used Add: Raw materials inventory (31/12) Less: Raw materials purchases Raw materials inventory

$190,000 7,500 (158,000) $39,500

Total cost of work in process: Cost of goods manufactured Add: Work in process (31/12) Total cost of work in process

$560,000 81,000 $641,000

Total manufacturing costs: Total cost of work in process Less: Work in process (1/1) Total manufacturing costs

$641,000 (200,000) $441,000

Direct labour: Total manufacturing costs Less: Total overhead Direct materials used Direct labour

$441,000 (122,000) (190,000) $129,000

15.8

Chapter 15: Introduction to management accounting

E15.7 (a) External auditors (b) Inventory (c) Globalisation (d) Total quality management (e) Budgets (f) Balanced scorecard (g) Creditors, shareholders (h) Management accounting E15.8 (a) Merchandising companies (b) Work in process inventory (c) Service company (d) Manufacturing companies (e) Finished goods inventory (f) Raw materials

15.9

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E15.9 BROADBEACH LTD (a) Broadbeach Ltd Cost of Goods Manufactured Schedule For the month ended 30 June 2020 Work in process (1/6/20) Direct materials used Direct labour Manufacturing overhead: Indirect labour Factory manager’s salary Indirect materials Depreciation — equipment Maintenance — equipment Factory electricity Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process (30/6/20) Cost of goods manufactured

$3,000 $20,000 25,000 $4,500 3,000 2,200 1,700 1,300 400 13,100 58,100 61,100 (3,500) $57,600

(b) Broadbeach Ltd Statement of Profit or Loss (Partial) For the month ended 30 June 2020 Net sales Cost of sales: Finished goods inventory (1/6/20) Cost of goods manufactured [from (a)] Cost of goods available for sale Finished gods inventory (30/6/20) Cost of sales Gross profit

$98,100 $5,000 57,600 62,600 6,000

56,600 $41,500

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Chapter 15: Introduction to management accounting

E15.10 SALAZAR MANUFACTURING (a) Salazar Manufacturing Cost of Goods Manufactured Schedule for the month ended 30 June 2019 Work in process (1/6) Direct materials Raw materials inventory (1/6) Raw materials purchases Total raw materials available for use Less: Raw materials inventory (30/6) Direct materials used Direct labour Manufacturing overhead: Indirect labour Factory insurance Machinery depreciation Factory power Machinery repairs Miscellaneous factory costs Total manufacturing overhead Total manufacturing costs for the month Total cost of work in process Less: Work in process inventory, (30/6) Cost of goods manufactured

$5,000 $8,800 62,000 70,800 11,000 59,800 45,000 $5,500 4,000 4,800 2,500 1,800 1,300 19,900 124,700 129,700 7,000 $122,700

(b) Salazar Manufacturing Statement of Financial Position (Partial) as at 30 June 2019 Current Assets Inventories Finished goods Work in process Raw materials

$6,000 7,000 11,000

$24,000

Note: In the external financial report of the statement of financial position, the total value of inventory $24,000 is shown, and in the notes to the financial statements the breakdown of the individual components of inventory is usually in the following order, finished goods, work in process and raw materials.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E15.11 SALAZAR MANUFACTURING Salazar Manufacturing Partial worksheet for month ended 30 June 2019

Finished Goods Work in Process Raw materials Raw materials purchase Direct labour Indirect labour Factory insurance Machinery depreciation Machinery repairs Factory power Miscellaneous

Adjusted trial balance Dr Cr $8,000 5,000 8,800 62,000 45,000 5,500 4,000 4,800 1,800 2,500 1,300 148,700

Cost of goods manufactured Dr Cr $5,000 8,800 62,000 45,000 5,500 4,000 4,800 1,800 2,500 1,300 140,700

Cost of goods manufactured 140,700

Statement of profit or loss Dr Cr $8,000 $6,000

Statement of financial position Dr Cr $6,000 7,000 11,000

$7,000 11,000

18,000 122,700

122,700

140,700

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Chapter 15: Introduction to management accounting

E15.12 LANIER MANUFACTURING LTD Raw materials inventory (1/1): Direct materials used Add: Raw materials inventory (31/12) Less: Raw materials purchases Raw materials inventory

$135,500 6,500 (132,000) $10,000

Total cost of work in process: Cost of goods manufactured Add: Work in process (31/12) Total cost of work in process

$560,000 87,000 $647,000

Total manufacturing costs: Total cost of work in process Less: Work in process (1/1) Total manufacturing costs

$647,000 (200,000) $447,000

Direct labour: Total manufacturing costs Less: Total overhead Direct materials used Direct labour

$447,000 (127,000) (135,500) $184,500

15.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E15.13 FIERO MOTOR LTD (a) Raw Materials account: Work in Process account: Finished Goods account: Cost of Sales account: Selling Expenses account: (b)

To: From: Subject:

(5,000 – 4,650) x $8 (4,600 x 10%) x $8 (4,600 x 90% x 20%) x $8 (4,600 x 90% x 80%) x $8 50 x $8

= = = = =

$ 2,800 $ 3,680 $ 6,624 $26,496 $400

Chief Accountant Student Statement Presentation of Accounts

Two accounts, Cost of Sales and Selling Expenses will appear in the Statement of Profit or Loss. Cost of Sales will be deducted from net sales in determining gross profit. Selling Expenses will be shown under operating expenses and will be deducted from gross profit in determining profit. The other accounts associated with the manufacturing of headlamps are inventory accounts which contain end of period balances. Thus, they will be reported under inventories in the current asset section of the statement of financial position. In the notes to the financial statements, the breakdown of the components of inventory will be shown usually in the following order: raw materials, work in process and finished goods.

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Chapter 15: Introduction to management accounting

Solutions to problem set A PSA15.1 GALEX LTD (a) Based on the production of 1 300 stereo systems per month.

Cost Item Raw materials (1) Wages for workers (2) Rent on equipment Miscellaneous materials (3) Factory supervisor’s salary Cleaning costs Advertising Depreciation on factory building (4) Rates and taxes on factory building (5)

Direct Materials $91,000

Product Costs Direct Manufacturing Labour Overhead $97,500 $4,500 6,500 3,500 1,300

$70 x 1 300 $15 x 5 x 1 300 $5 x 1 300 $7,200/12 $6,000/12

= = = = =

Prime Conversion Costs Costs $91,000 97,500 $97,500 4,500 6,500 3,500 1,300

$8,500

$91,000 (1) (2) (3) (4) (5)

Period Costs

$97,500

600 500 $16,900

$8,500

$188,500

$91,000 $97,500 $6,500 $600 $500

(b) Total production costs: Direct materials Direct labour Manufacturing overhead Total production cost:

$91,000 $97,500 $16,900 $205,400

Production costs per stereo = $205,400/1,300

$158.00

15.15

600 500 $114,400

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA15.2 GLAZIER LTD (a) Based on the production of 100 motorcycles per month.

Cost Item Rent on factory equipment Insurance on factory building Raw materials Power costs for factory Supplies for general office Wages for assembly line workers Depreciation on office equipment Maintenance factory Factory manager’s salary Miscellaneous materials Advertising for cycles Sales commissions Depreciation on factory building

Direct Materials

Product Costs Direct Manufacturing Labour Overhead $6,200 3,000

Period Costs

$30,000

Prime Costs

Conversion Costs $6,200 3,000

$30,000 800

800 $200

$45,000

45,000

400 600 5,000 600

600 5,000 600 10,000 5,000

$30,000

$45,000

800 $17,000

$15,600

$75,000

(b) Total production costs: Direct materials Manufacturing overhead Direct labour Total production cost:

$30,000 $45,000 $17,000 $92,000

Production cost per motorcycle = $92,000/100 =

$920.00

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800 $62,000

Chapter 15: Introduction to management accounting

PSA15.3 LUCAS KIDS TOWN LTD (a) Lucas Kids Town Ltd Cost of Goods Manufactured Schedule For the year ended 30 June 2019 Work in process (1/7/18) Direct materials Raw materials inventory (1/7/18) Add: Raw materials purchased Less: Raw materials inventory (30/6/19) Direct materials used Direct labour Manufacturing overhead Depreciation — factory machinery Factory supplies Factory power Indirect labour Total overhead Total manufacturing costs Total cost of work in process Less: Work in process, 30/6/19 Cost of goods manufactured

(b)

$3,825 $2,490 22,500 3,960 21,030 41,000 7,250 2,800 3,000 16,250 29,300 91,330 95,155 4,940 $90,215

If depreciation — office equipment was included in manufacturing overhead, it will overstate the conversion cost of overhead. The cost of goods manufactured for the current period will also be overstated.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA15.4 LUCAS KIDS TOWN LTD (a) Lucas Kids Town Ltd Statement of Profit or Loss For the year ended 30 June 2019 Sales revenue Cost of sales: Finished goods inventory (1/7/18) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (30/6/19) Cost of sales Gross profit Operating expenses: Depreciation — office equipment Administrative expense Sales commissions Total operating expenses Net profit

$132,000 8,000 90,215 98,215 14,350 83,865 48,135 3,800 7,800 7,250 18,850 $29,285

(b) Cost of sales will be reduced because cost of goods available for sale would be the same as cost of goods manufactured if there was no beginning finished goods. With a reduced cost of sales, both gross and net profit would increase.

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Chapter 15: Introduction to management accounting

PSA15.5 HAWKINSON LTD (a) Hawkinson Ltd Cost of Goods Manufactured Schedule for the month ended 31 August 2019 Work in process inventory (1/8) Direct materials: Raw materials inventory (1/8) Raw materials purchased Total raw materials available for use Less: Raw materials inventory (31/8) Direct materials used Direct labour Manufacturing overhead: Factory rent Depreciation on factory equipment Indirect labour Factor power (10,000 x .7) Factory insurance (5,000 x .8) Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process (31/8) Cost of goods manufactured

$25,000 $18,000 200,000 218,000 (33,000) $185,000 150,000 60,000 40,000 20,000 7,000 4,000

131,000 466,000 491,000 (21,000) $470,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Hawkinson Ltd Statement of Profit or Loss for the month ended 31 August 2019 Sales (net) Cost of sales: Finished goods inventory (1/8) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (31/8) Cost of sales Gross profit Operating expenses Advertising expenses Selling and administrative salaries Depreciation expense on sales equipment Power expense ($10,000 x .3) Insurance expense ($5,000 x .2) Total operating expenses Profit

$670,000 $40,000 470,000 510,000 62,000 448,000 222,000 80,000 70,000 55,000 3,000 1,000 209,000 $13,000

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Chapter 15: Introduction to management accounting

PSA15.6 (a)

Case 1 (a)

Direct materials used Direct labour Manufacturing overhead Total manufacturing costs

$8,300 3,000 4,000 $15,300

(b)

Total manufacturing cost Plus: Beginning work in process Less: Cost of goods manufactured Ending work in process inventory

$15,300 1,000 (12,800) $3,500

(c)

Goods available for sale Less: Cost of goods manufactured Beginning finished goods inventory

$17,300 (12,800) $4,500

(d)

Goods available for sale Less: Ending finished goods inventory Cost of sales

$17,300 (1,200) $16,100

(e)

Sales Less: Sales discounts Cost of sales Gross profit

$21,500 (1,500) (16,100) $3,900

(f)

Gross profit Less: Operating expenses Profit

$3,900 (2,700) $1,200

(g)

Total manufacturing costs Less: Direct labour Manufacturing overhead Direct materials used

$22,000 (4,000) (5,000) $13,000

(h)

Cost of goods manufactured Ending work in process inventory Less: Total manufacturing costs Beginning work in process inventory

$21,000 2,000 (22,000) $1,000

(i)

Sales? Need to solve (k) first. Gross profit Cost of sales Sales discounts Sales

$6,000 22,500 1,200 $29,700

Case 2

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b)

(j)

Beginning finished goods inventory Cost of goods manufactured Goods available for sale

$4,000 21,000 $25,000

(k)

Goods available for sale Less: Ending finished goods inventory Cost of sales

$25,000 (2,500) $22,500

(l)

Gross profit Less: Profit Operating expenses

$6,000 (2,800) $3,200

Case 1 Condensed Cost of Goods Manufactured Schedule Work in process, beginning Direct materials Direct labour Manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, ending Cost of goods manufactured

(c)

$1,000 $8,300 3,000 4,000 15,300 16,300 (3,500) $12,800

Case 1 Statement of Profit or Loss Sales Less: Sales discounts Net sales

$21,500 (1,500) 20,000

Cost of sales: Finished goods inventory, beginning Cost of goods manufactured Cost of goods available for sale Finished goods inventory, ending Cost of sales Gross profit Operating expenses Profit

$4,500 12,800 17,300 1,200 16,100 3,900 2,700 $1,200

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Chapter 15: Introduction to management accounting

Case 1 Partial Statement of Financial Position Current assets: Cash Receivables Inventories: Finished goods Work in process Raw materials Prepaid expenses Total current assets

$4,300 10,000 $1,200 3,500 700

5,400 200 $19,900

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA15.7 MAURO MANUFACTURING LTD (a) Mauro Manufacturing Ltd Cost of Goods Manufactured Schedule for the year ended 31 December 2020 Work in process inventory (1/1/20) Direct materials: Raw materials inventory (1/1/20) Raw materials purchases Freight-in on materials purchased Total raw materials available for use Less: Raw materials inventory (31/12/20) Direct materials used Direct labour Manufacturing overhead: Factory manager’s salary Indirect labour Factory power Factory machinery, depreciation Factory rates and taxes Factory insurance Factory repairs Total manufacturing overheads Total manufacturing costs Total cost of work in process Less: Work in process (31/12/20) Cost of goods manufactured

$25,240 $43,000 206,800 5,640 255,440 (39,600) $215,840 250,600 60,000 35,410 36,000 18,090 10,100 5,400 4,500

169,500 635,940 661,180 (23,600) $637,580

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Chapter 15: Introduction to management accounting

(b) Mauro Manufacturing Ltd Statement of Profit or Loss (Partial) for the year ended 31 December 2020 Sales revenues: Sales Less: Sales discounts Net sales Cost of sales: Finished goods inventory (1/1/20) Cost of goods manufactured (see schedule) Cost of goods available for sale Finished goods inventory (31/12/20) Cost of sales Gross profit

$890,900 (10,120) 880,780 76,000 637,580 713,580 83,200 630,380 $250,400

(c) Mauro Manufacturing Ltd Statement of Financial Position (Partial) as at 31 December 2020 Current assets Cash Accounts receivable Inventories: Finished goods Work in process Raw materials Total current assets

$15,000 45,000 $83,200 23,600 39,600

146,400 $206,400

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA15.8 GRAYSON MANUFACTURING LTD (a)

Grayson Manufacturing Ltd Work Sheet for the year ended 30 June 2018 Adjusted Trial Balance

Cash Accounts Receivable (net) Finished Goods Inventory Work in Process Inventory Raw Materials Inventory Plant Assets Accumulated Depreciation Accounts Payable Bills Payable Income Taxes Payable Share Capital Retained Earnings Sales Raw Materials Purchases Direct Labour Indirect Labour Factory Repairs Factory Depreciation Factory Manager’s Salary Factory Insurance Factory Rates and Taxes Factory Power Selling Expenses Administrative Expenses Income Taxes Expense Totals Cost of Goods Manufactured Totals Profit Totals

Dr $30,500 72,100 55,200 17,400 23,400 720,000

Cost of Goods Manufactured Dr Cr

Statement of Profit or Loss Dr Cr

55,200 17,400 23,400 275,000 31,000 42,000 8,100 300,000 190,400 932,000

211,600 265,400 23,200 9,600 18,000 40,000 4,700 12,900 13,300 108,600 120,800 31,800 $1,778,500

51,400

22,800 21,700

Statement of Financial Position Dr Cr $30,500 72,100 51,400 22,800 21,700 720,000 275,000 31,000 42,000 8,100 300,000 190,400

932,000 211,600 265,400 23,200 9,600 18,000 40,000 4,700 12,900 13,300

$1,778,500

639,500 $639,500

44,500 595,000 $639,500

108,600 120,800 31,800 316,400 595,000 911,400 72,000 $983,400

983,400

918,500

$983,400

$918,500

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846,500 72,000 $918,500

Chapter 15: Introduction to management accounting

(b) Grayson Manufacturing Ltd Cost of Goods Manufactured Schedule for the year ended 30 June 2018 Work in process inventory (1/7/17) Direct materials: Raw materials inventory (1/7/17) Raw materials purchased Total raw materials available for use Less: Raw materials inventory (30/6/18) Direct materials used Direct labour Manufacturing overhead: Factory manager’s salary Indirect labour Factory depreciation Factor repairs Factory power Factory rates and taxes Factory insurance Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process (30/6/18) Cost of goods manufactured

$17,400 $23,400 211,600 235,000 (21,700) $213,300 265,400 40,000 23,200 18,000 9,600 13,300 12,900 4,700 121,700

600,400 617,800 (22,800) $595,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c) Grayson Manufacturing Ltd Statement of Profit or Loss for the year ended 30 June 2018 Sales Cost of sales: Finished goods inventory (1/7/17) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (30/6/18) Cost of sales: Gross profit Operating expenses Selling expenses Administrative expenses Total operating expenses Profit before income tax Income tax expense Profit

$932,000 $55,200 595,000 650,200 (51,400) 598,800 333,200 108,600 120,800 229,400 103,800 31,800 $72,000

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Chapter 15: Introduction to management accounting

Grayson Manufacturing Ltd Statement of Financial Position as at 30 June 2018 Current assets Cash Accounts receivable (net) Inventories: Finished goods Work in process Raw materials Total current assets Property, plant and equipment: Plant assets Less: Accumulated depreciation Total assets

$30,500 72,100 $51,400 22,800 21,700

720,000 (275,000)

Current liabilities: Accounts payable Bills payable Income taxes payable Total liabilities Net assets

95,900 198,500

445,000 643,500

31,000 42,000 8,100 81,100 $562,400

Shareholders’ Equity Share capital Retained earnings ($190,400 + $72,000) Total Shareholders’ Equity

300,000 262,400 $562,400

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d) General Journal June 30

June 30

Work in process inventory (30/6/18) Raw materials inventory (30/6/18) Manufacturing summary

$22,800 21,700

Manufacturing summary Work in Process Inventory (1//7/17) Raw materials Inventory (1/7/17) Raw materials purchased Direct labour Indirect labour Factory repairs Factory depreciation Factor manager’s salary Factory insurance Factory rates and taxes Factory power

$639,500

Finished Goods Inventory (30/6/18) Sales Profit or Loss Summary

$51,400 932,000

Profit or Loss Summary Finished Goods Inventory (1/7/17) Manufacturing Summary Selling Expenses Administrative Expenses Income Tax Expense

$911,400

Profit or Loss Summary Retained Earnings

$72,000

$44,500

$17,400 23,400 211,600 265,400 23,200 9,600 18,000 40,000 4,700 12,900 13,300

$983,400

$55,200 595,000 108,600 120,800 31,800

$72,000

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Chapter 15: Introduction to management accounting

(e)

June 30

Closing entry

June 30 June 30

Closing entry Retained Profits

Manufacturing Summary $639,500 June 30 Closing entry June 30 P or L Summary $639,500

$44,500 595,000 $639,500

Profit or Loss Summary $911,400 June 30 Closing entry 72,000 $1,050,600

$1,050,600

15.31

$983,400

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to problem set B PSB15.1 MOLIK LTD (a)

Based on the production of 3,000 racquets per month.

Direct Materials $84,000

(b)

$28 x 3,000 $15 x 2 x 3,000 $3 x 3,000 $19,200/12 $4,800/12

= = = = =

Total production costs: Direct materials Direct labour Manufacturing overhead Total production cost

Period Costs

Prime Costs $84,000 90,000

$90,000 $4,000 9,000 2,500 2,000

Conversion Costs $90,000 4,000 9,000 2,500 2,000

$6,000

$84,000 (1) (2) (3) (4) (5)

Product Costs Direct Manufacturing Labour Overhead

$48,000

1,600 400 $19,500

$6,000

$84,000 $90,000 $9,000 $1,600 $400

$84 000 90,000 19,500 $193,500

Production cost per racket = $193,500/3,000 = $64.50

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$174,000

1,600 400 $109,500

Chapter 15: Introduction to management accounting

PSB15.2 MAREK ACCESSORIES (a)

Based on the production of 10,000 helmets per month.

Cost Item Rent on factory equipment Insurance on factory building Raw materials Power costs for factory Supplies for general office Wages for assembly line workers Depreciation on office equipment Miscellaneous materials Factory manager’s salary Rates and taxes on factory building Advertising for helmets Sales commissions Depreciation on factory building

Direct Materials

Product Costs Direct Manufacturing Labour Overhead $8,000 1,500

Total production costs Direct materials Manufacturing overhead Direct labour Total production cost

Prime Costs

$80,000

Conversion Costs $8,000 1,500

$80,000 800

800 $400

$106,000

106,000

800 1,500 5,700 800

1,500 5,700 800 11,000 6,500

$80,000

(b)

Period Costs

$106,000

3,000 $21,300

$18,700

$80,000 106,000 21,300 $207,300

Production cost per helmet = $207,300/10,000 = $20.73

15.33

$186,000

3,000 $127,300

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB15.3 GREENSPRING LTD (a) Cost of Goods Manufactured Schedule for the year ended 30 June 2019 Work in process (1/7/18) Direct materials Raw materials inventory (1/7/18) Add: Raw materials purchased Less: Raw materials inventory (30/6/19) Direct materials used Direct labour Manufacturing overhead Depreciation — factory machinery Factory supplies Factory power Indirect labour Total overhead Total manufacturing costs Total cost of work in process Less: Work in process (30/6/19) Cost of goods manufactured

$19,125 $12,450 112,500 19,800 105,150 205,000 36,250 14,000 15,000 81,250 146,500 456,650 475,775 24,700 $451,075

(b) If depreciation — office equipment was included in manufacturing overhead, it will overstate the conversion cost of overhead. The cost of goods manufactured for the current period will also be overstated.

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Chapter 15: Introduction to management accounting

GREENSPRING LTD (a) Statement of Profit or Loss (Partial) for the year ended 30 June 2019 Sales revenue Cost of goods sold: Finished goods inventory (1/7/18) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (30/6/19) Cost of sales Gross profit Operating expenses: Depreciation — office equipment Administrative expense Sales commissions Total operating expenses Net profit

$660,000 $40,000 451,075 491,075 71,750 419,325 240,675 19,000 39,000 36,250 94,250 $146,425

(b) Cost of sales will be reduced because cost of goods available for sale would be the same as cost of goods manufactured if there were no beginning finished goods. With a reduced cost of sales, both gross and net profit would increase.

15.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB15.5 NOONAN LTD (a) Cost of Goods Manufactured Schedule for the month ended 31 October 2019 Work in process inventory (1/10) Direct materials: Raw materials inventory (1/10) Raw materials purchased Total raw materials available for use Less: Raw materials inventory (31/10) Direct materials used Direct labour Manufacturing overhead: Factory rent Depreciation on factory equipment Indirect labour Factory power (12,000 x .7) Factory insurance (8,625 x .8) Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process (31/10) Cost of goods manufactured

$13,000 $20,000 271,000 291,000 (25,000) $266,000 210,000 72,000 30,000 32,000 8,400 6,900

149,300 625,300 638,300 (16,000) $622,300

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Chapter 15: Introduction to management accounting

(b) Noonan Ltd Statement of Profit or Loss for the month ended 31 October 2019 Sales (net) Cost of sales: Finished goods inventory (1/10) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (31/10) Cost of sales Gross profit Operating expenses Advertising expenses Selling and administrative salaries Depreciation expense on sales equipment Power expense ($12,000 x .3) Insurance expense ($8,625 x .2) Total operating expenses Profit

$840,000 $30,000 622,300 652,300 (48,000) 604,300 235,700 85,000 81,000 43,000 3,600 1,725 214,325 $21,375

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB15.6 (a)

Case 1 (a)

Direct materials used Direct labour Manufacturing overhead Total manufacturing costs

$8,000 6,000 5,000 $19,000

(b)

Total manufacturing cost Plus: Beginning work in process Less: Cost of goods manufactured Ending work in process inventory

$19,000 1,000 (16,500) $3,500

(c)

Goods available for sale Less: Cost of goods manufactured Beginning finished goods inventory

$18,000 (16,500) $1,500

(d)

Goods available for sale Less: Ending finished goods inventory Cost of sales

$18,000 (3,000) $15,000

(e)

Sales Less: Sales discounts Cost of sales Gross profit

$24,500 (2,500) (15,000) $7,000

(f)

Gross profit Less: Operating expenses Profit

$7,000 (2,500) $4,500

(g)

Total manufacturing costs Less: Direct labour Manufacturing overhead Direct materials used

$21,000 (8,000) (4,000) $9,000

(h)

Cost of goods manufactured Ending work in process inventory Less: Total manufacturing costs Beginning work in process inventory

$22,000 3,000 (21,000) $4,000

(i)

Sales? Need to solve (k) first. Gross profit Cost of sales Sales discounts Sales

$7,000 23,000 1,400 $31,400

Beginning finished goods inventory Cost of goods manufactured

$3,500 22,000

Case 2

(j)

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Chapter 15: Introduction to management accounting

(b)

Goods available for sale

$25,500

(k)

Goods available for sale Less: Ending finished goods inventory Cost of sales

$25,500 (2,500) $23,000

(l)

Gross profit Less: Profit Operating expenses

$7,000 (2,800) $4,200

(c)

$1,000 $8,000 6,000 5,000 19,000 20,000 (3,500) $16,500

Case 1 Statement of Profit or Loss Sales Less: Sales discounts Net sales

$24,500 (2,500) $22,000

Cost of sales: Finished goods inventory, beginning Cost of goods manufactured Cost of goods available for sale Finished goods inventory, ending Cost of sales Gross profit Operating expenses Profit

$1,500 16,500 18,000 3,000 15,000 7,000 2,500 $4,500

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Case 1 Partial Statement of Financial Position Current assets: Cash Receivables Inventories: Finished goods Work in process Raw materials Prepaid expenses Total current assets

$4,000 15,000 $3,000 3,500 600

7,100 400 $26,500

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Chapter 15: Introduction to management accounting

PSB15.7 SCHEVE MANUFACTURING LTD (a) Scheve Manufacturing Ltd Cost of Goods Manufactured Schedule for the year ended 30 June 2019 Work in process inventory (1/7/18) Direct materials: Raw materials inventory (1/7/18) Raw materials purchases Freight-in on raw materials purchased Total raw materials available for use Less: Raw materials inventory (30/6/19) Direct materials used Direct labour Manufacturing overhead: Factory manager’s salary Factory electricity Indirect labour Factory depreciation — machinery Factor property rates Factory insurance Factory repairs Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process (30/6/19) Cost of goods manufactured

$21,000 $46,500 89,800 8,600 144,900 (39,600) $105,300 147,250 29,000 24,600 24,460 15,000 9,600 4,600 1,400 108,660 361,210 382,210 (18,700) $363,510

(b) Scheve Manufacturing Ltd Statement of Profit or Loss (Partial) for the year ended 30 June 2019 Sales revenues Sales Less: Sales discounts Net sales Cost of sales: Finished goods inventory (1/7/18) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (30/6/19) Cost of sales Gross profit

$547,000 3,300 543,700 $96,000 363,510 459,510 (95,900) 363,610 $180,090

15.41

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c) Scheve Manufacturing Ltd Statement of Financial Position (Partial) as at 30 June 2019 Current assets Cash Accounts receivable (net) Inventories: Finished goods Work in process Raw materials Total current assets

$32,000 27,000 $95,900 18,700 39,600

154,200 $213,200

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Chapter 15: Introduction to management accounting

PSB15.8 EVERHEART MANUFACTURING LTD (a)

Everheart Manufacturing Ltd Work Sheet for the year ended 30 June 2018 Adjusted Trial Balance

Dr $16,700 62,900 56,000 27,800 37,200 890,000

Cost of Goods Manufactured Dr Cr

Statement of Profit or Loss Dr Cr

$56,000 $27,800 37,200 $353,000 38,200 45,000 9,000 352,000 205,300 996,000

236,500 280,900 27,400 17,200 19,000 40,000 11,000 12,900 13,300 98,500 115,200 36,000 $1,998,500

$54,600

$23,400 46,500

Statement of Financial Position Dr Cr $16,700 62,900 54,600 23,400 46,500 890,000 353,000 38,200 45,000 9,000 352,000 205,300

996,000 236,500 280,900 27,400 17,200 19,000 40,000 11,000 12,900 13,300 98,500 115,200 36,000

$1,998,500

723,200 $723,200

69,900 653,300 $723,200

653,300 959,000 91,600 $1,050,600

1,050,600

1,094,100

$1,050,600

$1,094,100

15.43

1,002,500 91,600 $1,094,100

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Everheart Manufacturing Ltd Cost of Goods Manufactured Schedule for the year ended 30 June 2018 Work in process inventory (1/7/17) Direct materials: Raw materials inventory (1/7/17) Raw materials purchased Total raw materials available for use Less: Raw materials inventory (30/6/18) Direct materials used Direct labour Manufacturing overhead: Factory manager’s salary Indirect labour Factory depreciation Factor repairs Factory power Factory rates and taxes Factory insurance Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process (30/6/18) Cost of goods manufactured

$27,800 $37,200 37,200 236,500 236,500 273,700 273,700 (46,500) 46,500 $227,200 280,900 40,000 40,000 27,400 27,400 19,000 19,000 17,200 17,200 13,300 13,300 12,900 12,900 11,000 11,000 140,800 648,900 676,700 (23,400) $653,300

(c) Everheart Manufacturing Ltd Statement of Profit or Loss for the year ended 30 June 2018 Sales Cost of sales: Finished goods inventory (1/7/17) Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory (30/6/18) Cost of sales Gross profit Operating expenses Selling expenses Administrative expenses Total operating expenses Profit before income tax Income tax expense Profit

$996,000 $56,000 653,300 709,300 (54,600) 654,700 341,300 98,500 115,200

213,700 127,600 36,000 $91,600

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Chapter 15: Introduction to management accounting

Everheart Manufacturing Ltd Statement of Financial Position as at 30 June 2018 Current assets Cash Accounts receivable (net) Inventories: Finished goods Work in process Raw materials Total current assets Property, plant and equipment: Plant assets Less: Accumulated depreciation Total assets Current liabilities: Accounts payable Bills payable Income taxes payable Total liabilities Net assets

$16,700 62,900 $54,600 23,400 46,500

890,000 (353,000)

124,500 204,100

537,000 741,100

38,200 45,000 9,000 92,200 $648,900

Shareholders’ Equity Share capital Retained earnings ($205,300 + $91,600) Total Shareholders’ Equity

352,000 296,900 $648,900

(d) General Journal June 30

June 30

Work in process inventory (30/6/18) Raw materials inventory (30/6/18) Manufacturing summary

$23,400 46,500

Manufacturing summary Work in Process Inventory (1//7/17) Raw materials Inventory (1/7/17) Raw materials purchases Direct labour Indirect labour Factory repairs Factory depreciation Factor manager’s salary Factory insurance Factory rates and taxes Factory power

723,200

Finished Goods Inventory (30/6/18)

54,600

$69,900

27,800 37,200 236,500 280,900 27,400 17,200 19,000 40,000 11,000 12,900 13,300

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Sales

996,000 Profit or Loss Summary

June 30

1,050,600

Profit or Loss Summary Finished Goods Inventory (1/7/17) Manufacturing Summary Selling Expenses Administrative Expenses Income Tax Expense

959,000

Profit or Loss Summary Retained Earnings

91,600

56,000 653,300 98,500 115,200 36,000

91,600

(e)

June 30

Closing entry

June 30 June 30

Closing entry Retained Earnings

Manufacturing Summary $723,200 June 30 Closing entry June 30 P or L Summary $723,200

Profit or Loss Summary $959,000 June 30 Closing entry 91,600 $1,050,600

$69,900 653,300 $723,200

$1,050,600

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Chapter 15: Introduction to management accounting

Building business skills Financial reporting and analysis BBS15.1 Managerial analysis GOLF, ANYONE? LTD Since the questions were fairly open ended, the following are only suggested answers. The class may be able to think of others or of more items for each one. (a)

(b)

(c)

Marshall Loadsman

Needs information on sales, perhaps by salesperson and by territory.

Anthony Chan

Needs cost information for his department.

Martine Clancy

Needs all accounting information.

Jack Jones

Needs product cost information.

Louise Parker

Needs information on component costs and costs for her department.

Marshall Loadsman

Statement of Profit or Loss.

Anthony Chan

None.

Martine Clancy

All.

Jack Jones

Statement of Profit or Loss and cost of goods manufactured schedule.

Louise Parker

None.

Marshall Loadsman

Sales by Territory — Detailed information, possibly by product line, issued daily or weekly.

Anthony Chan

Cost of Computer Programs — Accumulated cost incurred by each major program used including maintenance and updates of program, issued monthly.

Martine Clancy

Cost of Preparing Reports — Detailed analysis of all reports provided, their frequency, time and estimated cost to prepare, issued monthly.

Jack Jones

Cost of Product — Detailed cost by product line, including a comparison with estimated costs for that product. Issued as each batch of production is completed.

Louise Parker

Cost of Product Design — Accumulate total costs of each new product, issued at end of each project.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS15.2 Research case CSL Ltd (a)

The principal activities of CSL Ltd during the financial year ended 30 June 2017 were the research, development, manufacture, marketing and distribution of biopharmaceutical and allied products.

(b)

Latest report available was the year ended 30 June 2017.

Total Operating Revenue Cost of Sales

2017 $’m 6,615.8 3,326.8

2016 $’m 5,909.5 3,052.8

Revenue increased by 12% over 2017, while cost of sales increased by 9% with resulting increase in gross profit of 17.4% (c)

The consolidated entity is organised in the following business segments: • CSL Behring — manufactures, markets and develops plasma products. • Seqirus — manufactures and distributes non-plasma biotherapeutic products.

Segments CSL Behring Seqirus Total

2017 Revenue Revenue $m % 5,834.8 88% 781.0 12% 6,615.8 100

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Chapter 15: Introduction to management accounting

BBS15.3 Research case The solution provided is for Qantas Airways Ltd (www.qantas.com.au). Qantas since the GFC has been experiencing losses, so their strategy is targeted at the company's recovery. Based on the 2017 annual report: (a)

What is the main strategy for the company in the current year? The general strategy from the Qantas Annual Report (Review of Operations, page 12–3) is below.

The Qantas Group reported an Underlying Profit Before Tax1 of $1,401 million for the 12 months ended 30 June 2017, a decline of $131 million from the record result of the 2015/16 financial year. The Group’s Statutory Profit After Tax of $853 million was down $176 million from the prior year, primarily due to financial year 2015/16 including the one-off benefit of the gain on sale of the Sydney Domestic Terminal. The Statutory result for this financial year included $220 million of costs which were not included in Underlying PBT. These costs included redundancies, restructuring and other costs associated with the Qantas Transformation Program. The Group is delivering against its strategy to maximise long-term shareholder value, building on our leading position in domestic Australia, building a more resilient Qantas International, growing non-cyclical earnings at Qantas Loyalty, aligning Qantas and Jetstar with the rise of Asia and investing in our people and our customers. Over 2016/17, strategic highlights included: • The second highest Underlying Profit Before Tax in the Group’s 97-year history • Continued strong Return on Invested Capital (ROIC) at 20.1 per cent with all segments delivering ROIC greater than the weighted average cost of capital (WACC) • All Qantas Transformation targets were delivered • Record earnings were achieved by Qantas Domestic and Group Domestic • Second highest earnings for Qantas International and Jetstar Group • Record earnings for Qantas Loyalty • Record levels of customer advocacy • Record people engagement. Three years ago the Group set out an ambitious plan to successfully turnaround the business. The turnaround program is complete and has achieved a significant improvement in financial performance, record customer advocacy and record employee engagement. Through the program, the Group has demonstrated its ability to deliver sustainable financial performance and is positioned for a strong future. Importantly, the Group has embedded a culture of transformation and continuous improvement to ensure it will deliver sustainable returns well into the future. The Group’s Financial Framework continues to guide our strategy. Our balance sheet strength and disciplined approach to capital allocation has allowed us to invest in the business while delivering returns to shareholders. Some key achievements include: • Net debt of $5.2 billion, towards the low end of the target range of $4.8 billion to $6 billion • Credit rating from Moody’s Investor Services upgraded to Baa2 and maintained a BBB- rating from Standard & Poor’s

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

• • • •

Cost of capital minimised by continuing to use cash in excess of short-term requirements to refinance operating leases $627 million returned to shareholders in 2016/17 through dividends totalling 14 cents per share and an on-market share buy-back totalling $366 million Additional capital management initiatives announced, including an unfranked seven cents per share ordinary dividend totalling $127 million and the announcement of an onmarket share buy-back of up to $373 million $425 million Australian Dollar bond issuance, extending debt tenor

The Group’s strong result was achieved in mixed global trading conditions, with a two per cent decrease in Unit Revenue partially offset by a total unit cost improvement of one per cent. Domestic Australia experienced a stable competitive environment with a 1.1 per cent increase in market demand13 through: • Healthy demand in price driven segments • Strengthening business market demand • Strong east coast performance from both business and leisure markets This resulted in a Group Domestic Unit Revenue increase of two per cent in financial year 2016/17. The Group’s international operating environment was very competitive, with competitor capacity growth and sharper pricing activity seen on key routes. Competitor capacity of 11 per cent was added in the first-half of the financial year. This moderated to an 8.5 per cent increase for the full year, providing some relief from the competitive pressure on airfares. Jetstar benefited from the strong demand in the growing Asian markets. Group International Unit Revenue decreased five per cent in financial year 2016/17.

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(b)

Outline the performance measures/indicators the entity uses to assess if the entity is meeting its stated objectives. Qantas’s performance is assessed against the strategy, budgets and forecasts using financial and non-financial measures. Underlying Profit Before Tax (PBT) is the key budgetary and financial performance measure for the Qantas Group. Key financial metrics include: 3-year rolling TSR (Total Shareholder Return) performance, return on invested capital, underlying profit before tax, operating cash flow, and earnings per share. Operational measures include: • Group profitability • Qantas transformation program • Profit margin in the Australian domestic market • People and operational safety • Customers • Growth and strategic initiatives Descriptions of these measures are provided on page 44 of the 2017 annual report.

(c)

Describe the entity’s risk management policy (include an outline of monitoring mechanisms used by the entity). Qantas Risk Management is summarised on page 16 of the Qantas Group Business Practices document, available on the Qantas website: www.qantas.com.au ‘We are committed to embedding risk management practices including business resilience capability within the business to support the achievement of business objectives and to fulfill corporate governance obligations’.

Risk Management Managing risks All businesses face a range of external and internal factors that make it uncertain whether they will achieve their business objectives. The effect that uncertainty has on objectives is risk. By proactively understanding and managing risk we can provide greater certainty and security for our employees, customers and stakeholders. All people at Qantas manage risk when they make decisions and take action. We provide them with the tools they need to help them discover, understand and respond to risk in the most appropriate way. We train them in the use of these tools so that the management of risk becomes a natural part of everything we do to help embed a risk management culture. Monitoring and reviewing our risk management performance is important to help us all to continue to deliver on our strategy and vision. It is important to: enable accurate and timely risk © John Wiley and Sons Australia Ltd, 2019

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

information to be captured and shared across the Qantas Group; to treat the risks; capture lessons learned; and promote continuous improvement. Responding to emergencies or crisis While we are committed to the highest standards of safety, security and risk management, it is acknowledged that the aviation industry operates in a volatile environment subject to internal and external impacts. For us to sustain such an environment, and continuously grow our ability and agility to respond to change, we integrate business resilience capabilities into our risk management framework. In the event of a major incident or crisis that has the potential to impact the Qantas Group, an airline partner or the broader community, business resilience capabilities enables us to work together and to take a leadership role in: • ensuring the safety and welfare of our people, customers and wider community; • protecting our brands; and • operating critical services. These capabilities are assured through a robust exercise program focused on building confidence and effective stakeholder co-ordination and management processes.

(d)

What performance measures are used to report on the social and environmental issues associated with the entity? Qantas Environmental policy is summarised on page 18 of the Qantas Group Business Practices document, available on the Qantas website: www.qantas.com.au ‘We are committed to being recognised as a leading airline group committed to environmental sustainability. We are focused on continually improving our environmental performance’.

Being environmentally responsible All of our people have a responsibility to continually reduce the environmental footprint of our business. This is achieved through managing impacts and risks to the environment, while making sure we comply with all relevant laws. We also set and regularly review our environmental strategy to drive continuous improvement. Our long-term strategy is based on: • robust measurement and transparent reporting of our environmental footprint; • investment in advanced technologies and fuel efficient aircraft; • leading fuel conservation and airspace management activities that represent best practice and leadership; and • active involvement in industry efforts to develop sustainable aviation fuel. We need the support and engagement of our people and suppliers to build environmental awareness, capability and contribution across the Qantas Group. Importantly, our people must take responsibility for ensuring compliance with relevant laws and internal standards, taking the initiative to lead environmental improvement projects as well as reporting of any environmental hazards and incidents.

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Chapter 15: Introduction to management accounting

We encourage all of our stakeholders to consider how they can minimise their impact on the environment. Particular focus should be given to: optimising fuel, electricity and water consumption; reducing waste-to-landfill; and improving sustainable procurement practices. Qantas Sustainability Report can be located under the Investor section of their website. Students should refer to this report for information on the Qantas Group’s approach to creating and protecting its long-term value through the strategic pillars of: Looking Ahead and Acting Responsibly.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Critical thinking BBS15.4 Group decision case DESKINS MANUFACTURING LTD Ending Raw Materials Inventory Beginning raw materials + Raw materials purchased = Raw materials available for use = $16,000 + $360,000 = $376,000 Raw materials available for use – Direct materials used = Ending raw materials Direct materials = $376,000 – $362,000 = $14,000

Ending Work in Process Inventory Direct materials + Direct labour + Manufacturing overhead = Total manufacturing costs = $362,000 + $280,000 + ($280,000 x 60%) = $810,000 Beginning work in process inventory + Total manufacturing costs = Total cost of work in process = $22,000 + $810,000 = $832,000 Cost of goods manufactured + Beginning finished goods inventory = Cost of goods available for use Cost of goods manufactured + $56,000 = $850,000 Cost of goods manufactured = $850,000 – $56,000 = $794,000 Total cost of work in process – Ending work in process inventory = Cost of goods manufactured $832,000 – Ending work in process inventory = $794,000 Ending work in process inventory = $832,000 – $794,000 = $38,000

Ending Finished Goods Inventory Sales – Cost of sales (60% sales) = Gross profit (40% of sales) $1,300,000 – Cost of sales = $1,300,000 – $780,000($1.3m x60%)

= $520,000

Cost of goods available for sale – Ending finished goods inventory = Cost of sales $850,000 – Ending finished goods inventory = $780,000 Ending finished goods inventory = $850,000 – $780,000 = $70,000

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Chapter 15: Introduction to management accounting

Or alternatively: Deskins Manufacturing Ltd Cost of Goods Manufactured Schedule for the month ended 31 January 2019 Derived inventory amounts Work in process inventory (1/1/19) Direct materials: Raw materials inventory (1/1/19) Purchases Raw materials inventory (31/1/19) Direct materials used Direct labour Manufacturing overhead (280,000 x 60%) Total manufacturing costs Total cost of work in process Work in process (31/1/19) Cost of goods manufactured

$22,000 $16,000 360,000 376,000 14,000

$14,000 $362,000 280,000 168,000 810,000 832,000 (38,000) $794,000

$38,000

Deskins Manufacturing Ltd Statement of Profit or Loss for the month ended 31 January 2019 Sales Cost of sales: Finished goods inventory (1/1/19) Cost of goods manufactured Cost of goods available Finished goods inventory (31/1/19) Cost of sales (1,300,000 x 60%) Gross profit (1,300, 000 x 40%)

$1,300,000 $56,000 794,000 850,000 (70,000)

$70,000 780,000 $520,000

Insurance claim

$122,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS15.5 Communication activity The later chapters will explain how this information is used and what the relevant information is for the various decisions to be made. 1.

Billabong International The types of information for a new store in Canada: • demographics of the area population likely to buy the snow wear products • cost of renting/building premises for the store • location of main competitors for similar products • marketing information of major events to provide opportunities for promotion of brands.

Qantas The types of information for altering flights: • The current cost of each flight broken down into the individual components such as fuel, personnel, terminal charges, etc. • The expected usage of the flight, competitors’ routes • Availability of planes, staff, terminal space • Estimated costing of varying the flights.

Coca-Cola Amatil The types of information in deciding to invest in new flavour beverage: • Estimated net returns • Funding budgets • Consumer demand for such products • Cost associated with developing the new drink

CSR LTD The types of information for production schedules would be: • Expected sales for coming quarter, broken down into weekly order dates • Minimum and maximum inventory levels • Staffing costs • Machine productive capacities.

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Chapter 15: Introduction to management accounting

BBS15.6 Communication activity STEVEN ROGER

Date:

14 April 2019

To:

Steven Roger

From:

Anne Student, Assistant Accountant

Re:

Management Accounting Techniques

Mr Roger, I am employed in your firm as the assistant accountant and I have been at meetings when you expressed your frustration at the lack of performance of your company. I am writing you this memo to point out to you that there are accounting techniques that can provide you with the relevant information you require. Management accounting can provide specific reports designed to meet the information needs you desire. The information can be broken down into various products and store locations. This must be requested before the start of the period so it can be coded appropriately to provide the detailed data. Cost–volume–profit analysis can be undertaken where the costs are split into fixed, mixed and variable costs, so that changes in volume/activity and the reaction of the costs can be analysed. Flexible budgets can be prepared providing the basis for controlling costs and expenses by assigning responsibility for cost centres. Finally, incremental analysis can be undertaken where we look at the relevant cost appropriate when making a decision such as a change in a product or the addition or removal of a product line. Software is available which can monitor the supply chain and the business can implement a Total Quality Management system. If you would like to discuss or have more details on any of the above, please contact me and arrange a suitable time to meet.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS15.7 Ethics case CASPER LTD (a)

The stakeholders in this situation are: • The users of Casper Ltd’s financial statements. • John Shepherd, the accountant. • The director of finance. • The CEO of Casper Ltd. • Potential investors of the company’s debentures.

(b)

The ethical issues in this situation pertain to the adherence to sound and acceptable accounting principles. Intentional violation of generally accepted accounting principles in order to satisfy a practical short-term personal or company need and thus create misleading financial statements would be unethical. Selecting one acceptable method of accounting and reporting among other acceptable methods is not necessarily unethical.

(c)

Ethically, the management of Casper Ltd should be trying to report the financial condition and results of operations as fairly as possible; that is, in accordance with GAAP. Normally, advertising costs are expensed in the period in which they are incurred because it is very difficult to associate them with specific future benefits. At best, if the benefits will be derived in future periods, then they would constitute a prepayment. From the facts in this situation, it is not the case. Disguising the cost as part of inventory is a deliberate deceit to convince the market the company is preforming better than the reality. John should inform management what is acceptable accounting and what is not. The advertising costs should be expensed as a period cost in the current reporting period.

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 16: Cost accounting systems

Chapter 16: Cost accounting systems Assignment classification table

Learning objectives 1. Explain the characteristics and purposes of cost accounting systems.

Questions 1

Brief exercises 1

Exercises

Problems

1, 2, 3

PSA 1 PSB 1

1, 2, 3, 4

PSA 1, 2 PSB 1, 2

5, 7

PSA 3 PSB 4, 5

3, 4

5, 6 ,8

PSA 4, 5 PSB 3, 5

5, 7

3, 9, 10, 11, 12

PSA 6, 7, 8, 9, 10 PSB 6, 7, 8, 9, 10

PSA 8

3, 10, 12, 13

PSA 7, 10 PSB 7, 10

Describe the flow of costs in a job order cost system.

Explain a job cost sheet and the accounting entries for a job order cost system.

3, 4

Describe the flow of costs in a process cost system.

Prepare the accounting entries for a process cost system.

Prepare a production cost report.

Recognise the difference between traditional costing and activity-based costing and identify the activity cost pools and activity drivers used in activity-based systems.

7, 6

Understand the benefits and limitations of activity-based costing.

Differentiate between valueadded and non-value-added activities.

10.

Explain just-in-time (JIT) processing.

6, 7

16.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 16.1.

(a)

(b)

Cost accounting involves the measuring, recording and reporting of product or service costs. A cost accounting system consists of manufacturing cost accounts that are fully integrated into the general ledger of a company. An important feature of a product cost accounting system is the use of a perpetual inventory system that provides information immediately on the cost of a product. For financial accounting product costs are needed to value inventory in the Statement of financial position and the cost of sales in the Income Statement.

16.2.

The major steps in the flow of costs in a job order cost accounting system are: (1) accumulating the manufacturing costs incurred (2) assigning the accumulated costs to work done.

16.3.

The purpose of a job cost sheet is to record the costs chargeable to a specific job and to determine the total and unit cost of the completed job.

16.4.

Under-applied overhead means that the overhead assigned to work in process is less than the overhead incurred. Over-applied overhead means that the overhead assigned to work in process is greater than the overhead incurred. Manufacturing Overhead will have a debit balance when overhead is under-applied and a credit balance when overhead is over-applied. At the end of the year under- or over-applied overhead is usually considered to be an adjustment to cost of sales.

16.5.

The features of process cost accounting are: (1) separate work-in-process accounts for each process (2) production cost reports (3) product costs calculated for each accounting period (4) unit costs calculated based on total manufacturing costs.

16.6.

In developing an ABC costing system, it is a two stage process. First you need to identify activities in the business and assign costs to those activities and then the second stage is you need to identify each product or service use of that activity. In practical terms this means assigning overhead costs to activity cost pools and then assigning the costs to the product or service using the cost driver. For example, the activity cost pool may be inspecting and testing and the driver is the number of inspections.

16.2

Chapter 16: Cost accounting systems

16.7.

(a)

The principal differences are:

(1) Primary focus (2) Bases of allocation (3) Total product costs

(b)

Activity-Based Costing Activities performed in making products Multiple cost drivers Sum of the costs of activities consumed in making the product.

Traditional Costing Units of production Single unit-level bases Direct materials plus manufacturing overhead.

There are two assumptions that must be met in using ABC: (1) All overhead costs related to the activity must be driven by the cost driver used to assign costs to products. (2) All overhead costs related to the activity should respond proportionally to changes in the activity level of the cost driver.

16.8.

Identifying non-value-added activities highlights for managers the activities that should be reduced or eliminated because they add no worth to the product.

16.9.

(a)

Just-in-time processing philosophy is to have the right amount of materials, products or parts at the time they are needed. Under JIT processing raw materials are received just in time for use in production, using a demand-pull approach in manufacturing.

(b)

The major elements in JIT processing for a business entity are that they must possess: 1. Dependable suppliers who will deliver on short notice 2. A multi-skilled workforce to operate work centre areas 3. A total quality control system.

16.10. The overall objective of using ABC in service industries is no different than for manufacturing industries; that is, improved costing of services rendered (by job, service contract or customer). The general approach to costing is the same — analyse operations, identify activities, allocate overhead costs to activity cost pools and identify and use cost drivers to assign the cost pools to the services.

16.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to brief exercises BE16.1 (a) Job costing (b) Process costing (c) Process costing (d) Job costing (e) Process costing

BE16.2 DIAMOND TOOL & DIE PTY LTD Raw Materials Inventory (1) Purchases (4) Materials used

Factory Labour (2) Factory (5) Factory labour labour used incurred

Work in Process Inventory (4) Direct materials (7) Cost of completed used jobs (5) Direct labour used (6) Overhead applied

Finished Goods Inventory (7) Cost of completed (8) Cost of goods jobs sold

Cost of sales (8) Cost of goods sold

Manufacturing Overhead (3) Depreciation (6) Overhead insurance applied repairs (4) Indirect materials (5) Indirect labour

16.4

Chapter 16: Cost accounting systems

BE16.3 BURROUGH MANUFACTURING

(a)

May

July

Beginning work in process Started into production Total units to be accounted for

January 9 000 9 000

15 000 15 000

20 000 20 000

25 000 25 000

Transferred out Ending work in process Total units accounted for

7 000 2 000 9 000

12 000 3 000 15 000

16 000 4 000 20 000

10 000 15 000 25 000

(b) January March May July

Materials 9000 (7 000 + 2 000) 15 000 (12 000 + 3 000) 20 000 (16 000 + 4 000) 25 000 (10 000 + 15 000)

March

Conversion Costs 8 200[7 000 + (2 000 x 60%)] 12 900 [12 000 + (3 000 x 30%)] 19 200 [16 000 + (4 000 x 80%)] 16 000 [10 000 + (15 000 x 40%)]

BE16.4 CLARK MANUFACTURING

Materials

Units transferred out Work in process, 30 March Materials (2,000 x 100%) Conversion costs (2,000 x 60%) Total equivalent units

11,000

Conversion Costs

11,000

2,000 13,000

1,200 12,200

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE16.5 SMYTH LTD

Machine set-ups Machining Inspections

$180 000 / 2 000 $325 000 / 25 000 $70 000 / 1 750

= $90 per set-up = $13 per machine hour = $40 per inspection

BE16.6 DEWEY NOVELTY PTY LTD

1. 2. 3. 4.

Non-value-added Non-value-added Value-added Non-value-added

5. 6. 7. 8.

Non-value-added Non-value-added Non-value-added Value-added

BE16.7 ELBURN PLASTICS LTD (a) (b) (c) (d) (e) (f) (g) (h)

Facility-level Unit-level Product-level Unit-level Batch-level Batch-level Product-level Facility-level

16.6

Chapter 16: Cost accounting systems

Solutions to exercises E16.1 STANDISH LTD (a) 1. The source documents are: • Direct materials — Materials requisition slips • Direct labour — Time tickets • Manufacturing overhead — Predetermined overhead rate. 2. $20,200 ($7,000 + $8,000 + $5,200). 3. Last year 65% ($5,200 / $8,000); this year 70% (either $4,900 / $7,000 or $3,500 / $5,000) (b) Jan 31

Jan 31

Work in Process Inventory Raw Materials Inventory

9,000

Work in Process Inventory Factory Labour

12,000

Work in Process Inventory Manufacturing Overhead Applied

8,400

Finished Goods Inventory Work in Process Inventory

49,600

9,000

12,000

8,400

49,600

16.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E16.2 KANG PTY LTD (a) ? + $50,000 + $42,500 = $185,650 (a) = $93,150 $185,650 + (b) = $203,100 (b) = $17,450 $203,100 – (c) = $193,700 (c) = $9,400 [Note: The instructions indicate that manufacturing overhead is applied on the basis of direct labour cost, and the rate is the same in all cases. From Case A, a student should note the overhead rate to be 85% ($42,500 / $50,000).] (d) = .85 x $90,000 (d) = $76,500 $85,000 + $90,000 + $76,500 = (e) (e) = $251,500 $251,500 + $15,500 = (f) (f) = $258,400 $258,400 – $12,200 = (g) (g) = $267,000 [Note:(h) and (i) are solved together.] (i) = .85(h) $63,150 + (h) + .85(h) = $287,000 1.85(h) = $223,850 (h) = $121,000 (i) = $102,850 $287,000 + $18,000 = (j) (j) =$305,000 $305,000 – (k) = $262,000 (k) = $43,000

16.8

Chapter 16: Cost accounting systems

E16.3 (a) Just-in-time processing (b) Job costing (c) Activity-based costing (d) Non-valued added (e) Overhead (f) Under-applied E16.4 BERG PRINTING COMPANY

$ 172 000

Raw Materials Inventory Accounts Payable

$ 172 000

Factory Labour Factory Wages Payable

87 300

Work in Process Inventory Manufacturing Overhead Control Raw Materials Inventory

150 530 4 470

Work in Process Inventory Manufacturing Overhead Control Factory Labour

84 000 3 300

Manufacturing Overhead Control Accounts Payable

39 500

Manufacturing Overhead Control Accumulated Depr’n Machinery

14 ,550

Work in Process Inventory Manufacturing Overhead Applied ($84,000 x 75%)

63 000

Finished Goods Inventory Work in Process Inventory (*as per calculation on job sheet)

235 180

87 300

155 000

87 300

39 500

14 550

63 000

235 80

16.9

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Calculation of finished jobs Job

A20 A21 A22

Direct Materials $

Direct Labour $

Manufacturing Overhead $

32,240 42,920 39,270

18,000 26,000 25,000

13,500 19,500 18,750

Total $ 63 740 88 420 83 020 $235 180

E16.5 KOHLER LTD (a)

Materials Units transferred out Work in process 31 July: 1,000 x 100% 1,000 x 40%

Conversion Costs

8 000

1 000 400 8 400

9 000 (b)

Materials Costs in July Equivalent units Unit costs

(c)

Conversion Costs

$900 000 9 000 $100.00

Transferred out (8 000 x $150.00) Work in process: Materials (1,000 x $100) Conversion costs (400 x $50) Total costs

$420 000 8 400 $50.00

Total $1 320 000 $150.00 $1 200 000

$100 000 20 000

120 000 $1 320 000

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Chapter 16: Cost accounting systems

E16.6 NAGANO MANUFACTURING

Physical Units

Quantities

Equivalent Units Materials Conversion Costs

(Step 1) Units to be accounted for: Work in process (1/2) Started into production Total units

15 000 60 000 75 000

Units accounted for: Transferred out Work in process (28/2) Total units

49 000 26 000 75 000

Costs Unit costs (Step 3) Costs in February Equivalent units Unit costs (a) / (b)

(a) (b)

(Step 2)

49 000 26 000 75 000

49 000 5 200 54 200

Materials

Conversion Costs

$198 000 75 ,000 $2.64

$113 820 54 200 $2.10

Costs to be accounted for: Work in process (1/2) Started into production Total costs

Total

$311 820 $4.74

$32 175 279 645 $311 820

Cost Reconciliation Schedule (Step 4) Costs accounted for: Transferred out (49,000 x $4.74) Materials costs (26,000 x $2.64) Conversion costs (5,200 x $2.10) Total costs

$232 260 68 640 10 920

79 560 $311 820

16.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E16.7 HENDERSON MANUFACTURING Henderson Manufacturing General Journal

Date Account name (narration) Raw Materials Inventory Accounts Payable

Debit $ 35,600

Credit $ 35,600

Factory Labour Wages Payable

56,000

Manufacturing Overhead Cash Accounts Payable

70,000

Work in Process — Cutting Work in Process — Assembly Raw Materials Inventory

15,700 8,900

Work in Process — Cutting Work in Process — Assembly Factory Labour

29,000 27,000

Work in Process — Cutting Work in Process — Assembly Manufacturing Overhead Applied

34,800 32,400

Work in Process — Assembly Work in Process — Cutting

67,700

Finished Goods Inventory Work in Process — Assembly

134,900

Cost of Sales Finished Goods Inventory

130,000

Accounts Receivable Sales

200,000

56,000

42,000 28,000

24,600

56,000

67,200

67,700

134,900

130,000

200,000

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Chapter 16: Cost accounting systems

E16.8 LARRY LAIR Memo To: Larry Lair From: Student Re: Ending inventory The reason for any confusion related to your department's ending inventory quantity stems from the fact that the quantity can be measured in two different ways, depending on what the information is used for. The ending inventory quantity can be measured in physical units or equivalent units. Physical units are actual units present without regard to the stage of completion. Your department's ending inventory in physical units is at least double the amount reported as equivalent units. Equivalent units measure the work done on the physical units, expressed in terms of fully completed units. Therefore, if your ending inventory contains 2,000 units which are 50% complete, that is equivalent to having 1,000 completed units at month end. Therefore, that ending inventory could be expressed as containing 2,000 physical units or 1,000 equivalent units. I hope this clears up any misunderstandings. Please contact me if you have any further questions.

16.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E16.9 ROBINA JAM FACTORY (a) The overhead rates are: Activity cost pools

Estimated Overhead

Purchasing Blending Packaging

$12,000 35,000 6,750

Expected use of cost drivers 500 9,800 540

Rate per cost driver unit $24.00 $3.57 $12.50

(b) The assignment of the overhead costs per unit to each product is as follows:

Purchasing ($24/order) Blending ($3.57/L) Packaging ($12.5/carton) Total allocated overhead No. of bottles Overhead per unit

Blueberry Driver Units Amount 200 $4,800

Raspberry Driver Units Amount 300 $7,200

2,400

$8,568

7,400

$26,418

180

$2,250

360

$4,500

$15,618

$38,118

4,500

13,500

$3.47

$2.82

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Chapter 16: Cost accounting systems

E16.10 VALLIANCE VINEYARDS (a)

The following cost drivers might be used to assign overhead: 1. 2. 3. 4. 5. 6. 7. 8.

(b)

Labour hours Labour hours Labour hours Litres of chemicals Number of carts full Number of carts full Litres of juice Litres of juice

9. 10. 11. 12. 13. 14. 15.

Litres of wine or months of ageing Number of bottles Number of bottles Number of boxes Number of shipments Number of litres processed Number of litres processed

1. Value-added. It is assumed that any activity which directly enhances or improves the quality or quantity of the vines, grapes, or wine, is a value-added activity. 2. Value-added 9. Value-added 3. Non-value-added 10. Value-added 4. Value-added 11. Non-value-added 5. Non-value-added 12. Non-value-added 6. Value-added 13. Non-value-added 7. Value-added 14. Non-value-added 8. Value-added 15. Non-value-added

16.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E16.11 AMEND INSTRUMENT LTD (a)

The overhead rates are: Activity

Overhead

Materials handling Machine set-ups Quality inspections (b)

Expected Use of Cost Drivers

Overhead Rate

1,000 requisitions 500 set-ups 600 inspections

$35 54 45

$35,000 27,000 27,000

The assignment of the overhead costs to products is as follows: Instruments Cost Requisitions ($35) Set-ups ($54) Inspections ($45) Total costs (a)

Number

Cost

400 200 200

$14,000 10,800 9,000 $33,800

Total units (b) Cost per unit (a) / (b)

Gauges Number 600 300 400

Cost $21,000 16,200 18,000 $55,200

300

$676

$184

Total Overhead $35,000 27,000 27,000 $89,000

The Chief Executive Officer, Amend Instrument Ltd

From: Student Re:

Benefits of activity-based costing (ABC)

ABC focuses on the activities performed in producing a product. Overhead costs are assigned to products based on cost drivers that measure the activities performed on the product. The primary benefit of ABC is more accurate and meaningful product costing. This improved cost data can lead to reduced costs as managers become more aware of the underlying causes of cost incurrence. Thus, control over costs is enhanced. The improved cost data should also lead to better management decisions. More accurate product costing should contribute to setting selling prices which will achieve desired profitability levels. In addition, it should be helpful in deciding whether to discontinue or expand a product line or in deciding whether to make or buy a product component.

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Chapter 16: Cost accounting systems

E16.12 STYLISH CLOTHING COMPANY (a)

(1)

Traditional product costing system: Selling costs assigned in March to the ‘high intensity’ product line. $400,000 X .60 = $240,000

(2)

Activity-based costing system: Cost Driver

Activity Cost Pool Sales commissions Advertising-TV/Radio Advertising-Newspaper Catalogues Cost of catalogue sales Credit and collection

Overhead Rate x

$930,000 250 3,000 60,000 8,500 $930,000 $1,478,400

Overhead cost assigned $

$.05 per sale $300 per min $10 per col $2.50 per cat $1.00 per order $.03 per sale

46,500 75,000 30,000 150,000 8,500 27,900 $337,900

(b)

As compared to ABC, traditional costing grossly undercosts the selling costs assigned to the ‘high intensity’ product line. The difference of $97,900 ($337,900 – $240,000) in the month of March is a 29% understatement.

(c)

All six activities, as selling activities, are non-value-added activities.

16.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E16.13 GROAT AND GROAT Value-Added Activities

Hours

Writing contracts and letters Taking depositions Contemplating a legal strategy

1.0 1.5 1.5 4.0

Non-Value-Added Activities

Hours

Attending staff meetings Doing research Travelling to and from court Eating lunch Instructing Barristers Entertaining a prospective client

0.5 1.0 1.0 1.0 2.5 1.5 7.5

Questionable Classifications Writing contracts is value-added; writing letters may be value-added if related to a specific case or it may be non-value-added if it is billing a client or collecting receivables. Research may be value-added if it is unique, related to a specific case, and is billable. Research may be non-valued added if it is something the solicitor should already have known and is not billable to the client.

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Chapter 16: Cost accounting systems

Solutions to problem set A PSA16.1 MERCURY LTD General Journal (a) 1.

Raw Materials Inventory Accounts Payable

3,860

Manufacturing Overhead Accumulated dep’d equipment Accounts Payable

1,100

Work in Process Manufacturing Overhead Raw Materials Inventory

4,900 1,500

Work in Process Manufacturing Overhead Factory Labour

2,660 1,200

Work in Process ($2,660 x 150%) Manufacturing Overhead Applied

3,990

Finished Goods Inventory Work in Process

13,450

Rockford Aurora Moline Total

$ 3,900

Factory Labour Wages Payable

Job

$ 3,900

3,860

700 400

6,400

3,860

3,990

13,450

Direct materials 1,700 1,300 2,200

Direct Labour 1,020 900 1,380

Manufacturing overhead 1,530 1,350 2,070

Total costs 4,250 3,550 5,650 $13,450

Cost of sales Finished Goods Inventory

13,450

Accounts Receivable Sales

18,900

Cash

18,900

13,450

18,900

Accounts Receivable

18,900

16.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Work in Process Inventory 1/6 Balance 5,900 Completed work Direct materials 4,900 Balance c/d Direct labour 2,660 Manufacturing overhead 3,990 17,450 30/6 Balance 4,000

(c)

13,450 4,000

17,450

Work in process inventory Elgin $2,000 direct materials + $800 direct labour + $1,200 Manufacturing overhead = $4,000

(d) Mercury Ltd Cost of goods Manufactured for the month of June 2019 $ Work in process 1 June Direct materials used Direct labour Manufacturing overhead Total cost work in process Less: Work in process 30 June Cost of goods manufactured

$ 5,900

4,900 2,660 3,990

11,550 17,450 (4,000) $13,450

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Chapter 16: Cost accounting systems

PSA16.2 URBANA MANUFACTURING LTD (a)

Calculation of pre-determined overhead rate: Department D: $1,170,000 / $1,500,000 = 78% of direct labour cost Department E: $1,500,000 / 120,000 = $12.50 per direct labour hour Department K: $1,248,000 / 156,000 = $8.00 per machine hour

(b)

Manufacturing costs

Manufacturing costs Direct materials Direct labour Overhead applied Total * $120,000 x 78% **11,000 x$12.50 ***12,480 x $8.00

D $ 140,000 120,000 *93,600 $353,600

Department E $ 126,000 110,000 **137,500 $373,500

K $ 93,600 45,000 ***99,840 $238,4400

D $ 98,000 93,600 $4,400

Department E $ 129,000 137,500 ($8,500)

K $ 96,000 99,840 ($3,840)

(d)

The $7,940 over applied overhead is credited to the cost of sales section of the income statement.

16.21

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA16.3 VARGAS LTD General Journal October 2018 1. Raw Materials Inventory Accounts Payable 2.

400,000 400,000

Work in Process — Mixing Work in Process — Packaging Raw Materials Inventory

210,000 45,000

Factory Labour Cash/Wages Payable

238,900

Work in Process — Mixing Work in Process — Packaging Factory Labour

182,500 56,400

Manufacturing Overhead Accounts Payable

790,000

Work in Process — Mixing Work in Process — Packaging Manufacturing Overhead Applied

700,000 175,000

Work in Process — Packaging Work in Process — Mixing

999,000

255,000

238,900

790,000

875,000

999,000

Finished Goods Inventory Work in Process — Packaging

1,455,000

Cost of sales Finished Goods Inventory

1,540,000

Accounts Receivable Sales

2,500,000

1,455,000

1,540,000

2,500,000

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Chapter 16: Cost accounting systems

PSA16.4 FREEDO LTD (a) Stamping Dept Plant A Plant B R12 refrigerators F24 freezers

1. Physical units Units to be accounted for: Work in process (1/6) Started into production Total units

0 20,000 20,000

2. Equivalent units Plant A-R12 refrigerators Materials Conversion 18,000 18,000

Transferred out Work in process (30/6) (100% materials, 75% conversion costs) Total units

2000 20,000

Transferred out Work in process, 30 June 2,500 (100% materials, 60% conversion costs) Total units

3. Unit cost of production Materials ($840,000/20,000) ($700,000/20,000) Conversion costs ($643,500/19,500) ($570,000/19,000) Total unit cost

1,500 19,500

Plant B- F24 freezers Materials Conversion 17,500 17,500 2,500

1,500

20,000

19,000

R12 refrigerators $42

F24 freezers $35

33 $75

30 $65

16.23

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

4. R12 refrigerators Transferred out 18,000 x $75 Work in process Materials (2,000 x$42) Conversion (1,500 x$33) Total Costs F24 freezers Transferred out 17,500 x $65 Work in process Materials (2,500 x$35) Conversion (1,500 x$30) Total Costs

$1,350,000 $84,000 49,500

133,500 $1,483,500

$1,137,500 $87,500 45,000

…132,500 $1,270,000

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Chapter 16: Cost accounting systems

(b) Plant A Production Cost Report for the month ended 30 June 2019 Equivalent Units Physical Conversion Units Materials Costs

Quantities

(Step 1) Units to be accounted for: Work in process (1/6) Started into production Total units

20,000 20,000

Units accounted for: Transferred out Work in process (30/6) Total units

18,000 2,000 20,000

(Step 2)

18,000 2,000 20,000

Costs

Materials

Unit costs (Step 3) Costs in June Equivalent units Unit costs (a) / (b)

(a) (b)

18,000 1,500 19,500

(2,000 x 75%)

Conversion Costs

$840,000 20,000 $42

Total

$643,500 $1,483,500 19,500 $33 $75

Costs to be accounted for: Work in process (1/6) Started into production Total costs

1,483,500 $1,483,500

Cost Reconciliation Schedule (Step 4) Costs accounted for: Transferred out (18,000 x $75) Work in process, 30 June Materials (2,000 x $42) Conversion costs (1,500 x $33) Total costs

$1,350,000 $84,000 49,500

133,500 $1,483,500

16.25

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA16.5 TAYLOR PROCESSING LTD Taylor Processing Company Mixing and Blending Department Production Cost Report for the month ended 31 October Equivalent Units Physical Units

Quantities Units to be accounted for: Work in process (1/10) (40% materials, 20% conversion costs) Started into production Units accounted for: Transferred out Work in process (31/10) (50% materials, 25% conversion costs) Total units

Costs Unit costs Costs in March Equivalent units Unit costs

Materials Conversion Costs

20,000 160,000 180,000 140,000

140,000

40,000 180,000

20,000 160,000

10,000 150,000

Materials

Conversion Costs

$240,000 160,000 $1.50

$90,000 150,000 $0.60

Costs to be accounted for: Work in process (1/10) Started into production Total costs

Total $330,000 $2.10

$30,000 300,000 $330,000

Cost reconciliation schedule Costs accounted for: Transferred out (140,000 x $2.10) Work in process (31/10): Materials (20,000 x $1.50) Conversion costs (10,000 x $0.60) Total costs

$294,000 30,000 6,000

36,000 $330,000

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Chapter 16: Cost accounting systems

PSA16.6 CHRIS AT BURLEIGH LTD Traditional costing: 1. Material handling costs $120,000 / 2,000* hours = $60 per direct labour hour (* 700 DLH for short boards + 1300 DLH for long boards) a. One short board: 700 hours x $60 = $42,000; $42,000 / 200 units = $210/unit b. One long board: 1,300 hours x $60 = $78,000; $78,000 / 150 units = $520/unit 2. Purchasing activity costs $45,600 / 2,000 hours = $22.80 per direct labour hour a. One short board: 700 hours x $22.80 = $15,960; $15,960 / 200 units = $79.80/unit b. One long board: 1,300 hours x $22.80 = $29,640; $29,640 / 150 units = $197.60/unit Activity-based costing: 1. Material handling costs $120,000 / 500* moves = $240 per move (*300 moves for short boards + 200 moves for long boards) a. One short board: 300 moves x $240 = $72,000; $72,000 / 200 units = $360/unit b. One long board: 200 moves x $240 = $48,000; 48,000 / 150 units = 320/unit 2. Purchasing activity costs $45,600 / 800 orders = $57 per order a. One short board: 450 orders x $57 = $25,650; $25,650 / 200 units = $128.25/unit b. One long board: 350 orders x $57 = $19,950; $19,950 / 150 units = $133/unit

16.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Summary Short Board Traditional costing ABC Difference per board

(c)

Long Board

$289.80 488.25 ($–198.45)

$717.60 453 $264.60

The traditional costing methods under-priced the short board by $198.45 per unit. This may account for the 200 production run when compared with the more expensive long board. The long board using the traditional method was over costed by $264.60 per unit and therefore may be missing additional sales (assuming the selling price was also overpriced) than if it were costed and priced correctly. It may prove to be more profitable to produce the long board. Further information regarding competitors pricing and demand would be needed before any further decisions are made.

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Chapter 16: Cost accounting systems

PSA16.7 CURLY-SOO LTD (a) Calculation of unit costs — Traditional costing

Manufacturing Costs

Products Hair Hair Curler Dryer

Direct materials Direct labour Overhead Total unit cost

$5.25 8.00 3.68 $16.93

$9.75 8.00 3.68 $21.43

(b)

Activity Cost Pool Purchasing Receiving Assembling Testing Finishing Packing and shipping

Estimated Overhead $57,500 42,000 169,600 52,000 60,000 60,500 $441,600

Expected Use of Cost Drivers

500 orders 168,000 kg 848,000 parts 130,000 tests 120,000 units 12,100 cartons

Activity-Based Overhead Rate $115 per order $0.25 per kg $0.20 per part $0.40 per test $0.50 per unit $5.00 per ctn

16.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Activity Cost Pool Purchasing Receiving Assembling Testing Finishing Packing and shipping Total assigned cost

Expected Use of Drivers

170 70,000 424,000 82,000 80,000 8,040

Overhead Rate

$115.00 $0.25 $0.20 $0.40 $0.50 $5.00

Hair Dryer

Cost Assigned

Expected Use of Drivers

$19,550 17,500 84,800 32,800 40,000 …40,200

330 98,000 424,000 48,000 40,000 4,060

Overhead Rate

$115.00 $0.25 $0.20 $0.40 $0.50 $5.00

Cost Assigned

$37,950 24,500 84,800 19,200 20,000 …20,300

$234,850

$206,750

Units produced

80,000

40,000

Overhead cost per unit

$2.94

$5.17

(d) ABC Manufacturing Costs Direct materials Direct labour Overhead Total cost per unit

Hair Curler $5.25 8.00 2.94 $16.19

Hair Dryer $9.75 8.00 5.17 $22.92

(e) Activity Purchasing Receiving Assembling Testing Finishing Packing and shipping

Value vs Non-Value-Added Non-value-added Non-value-added Value-added Non-value-added Value-added Value-added

16.30

Chapter 16: Cost accounting systems

(f)

(1)

Activity-based costing shows the Hair dryer absorb 75% more overhead per unit than the hair curler.

(2)

The comparison of ABC and traditional costing shows that the proper amount of overhead assigned to the two products is not equal at $3.68, but rather $2.94 for the hair curlers and $5.17 for the hair dryers. Under traditional costing, the margin of error on the hair curlers was an over statement of $0.74 or 25% and an understatement of $1.49 or 29% on the hair dryers. These distorted overhead assignments have likely led to overpricing the curlers and under-pricing the hair dryer.

16.31

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA16.8 CASTRO CABINET COMPANY LTD Kitchen cabinets (a) Predetermined overhead rate using machine hours: $1,650,000 / 100,000 hrs = $16.50 per machine hour (b) Manufacturing cost per kitchen under traditional costing:

(c)

Direct materials Direct labour Overhead (15,000 x $16.50) Total cost of 50 kitchens

$180,000 200,000 247,500 $627,500

Cost per kitchen ($627,500 / 50)

$12,550

Manufacturing cost per cabinet under activity-based costing:

Activity Cost Pool

Calculation of Activity-Based Overhead Rate Estimated Total Estimated Overhead / Drivers =

Purchasing Handling materials Production Setting up machines Inspecting Inventory control Power

$114,400 164,320 400,000 174,480 184,800 252,000 360,000 $1,650,000

650 orders 8,000 moves 100,000 D/L hours 1,200 set-ups 6,000 inspections 36,000 components 90,000 m2

Activity-Based Overhead Rate $176 per order $20.54 per move $4 per D/L hour $145.40 per set-up $30.80 per inspection $7 per component $4 per m2

Calculation of Overhead to Order of 50 kitchens Expected Use of x Activity-Based Activity Cost Pool Drivers Overhead Rate Purchasing Handling materials Production Setting up machines Inspecting Inventory control Power Total overhead assigned

50 orders 800 moves 12,000 D/L hours 100 set-ups 450 inspections 3,000 components 8,000 m2

$176 $20.54 $4 $145.40 $30.80 $7 $4

Cost Assigned $8,800 16,432 48,000 14,540 13,860 21,000 32,000 $154,632

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Chapter 16: Cost accounting systems

Total manufacturing cost per kitchen under ABC: Direct materials Direct labour Overhead Total cost of 50 kitchens

$180,000 200,000 154,632 $534,632

Total cost per kitchen (d)

$10,692.64

The difference between the traditional cost and the activity-based cost per unit, $12,550.00 versus $10,692.64, is $1,857.36 or 17.3% of the more correct ABC cost per unit. Activity-based costing is the preferable costing system for setting prices because the real costs are more accurately reflected. The greater accuracy is a result of multiple, more relevant activity-cost drivers under ABC than the single cost driver used with the traditional volume-based system.

16.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA16.9 JACKSON ELECTRONICS (a)

The allocation of total manufacturing overhead using activity-based costing is as follows: Royale

Activity-Based Overhead Rate Purchase orders @ $30 Machine set-ups @ $50 Machine hours @ $40 Quality control @ $25 Total costs assigned (a)

Drivers Used

Cost Assigned

Drivers Used

15,000 6,000 75,000 8,000

$450,000 300,000 3,000,000 200,000 $3,950,000

25,000 12,000 45,000 20,000

Majestic Cost Assigned

Total Overhead

$750,000 600,000 1,800,000 500,000 $3,650,000

$1,200,000 900,000 4,800,000 700,000 $7,600,000

Units produced (b)

25,000

10,000

Cost per unit (a) / (b)

$158

$365

(b)

The cost per unit and the gross profit of each product under ABC costing were: Royale

Direct materials Direct labour Manufacturing overhead Total cost per unit Sales price per unit Cost per unit Gross profit (loss)

(c)

Majestic

$700 120 158 $978

$420 100 365 $885

$1,600 978 $622

$1,300 885 $415

Activity-based costing reveals a very different situation than traditional costing. Management must be stunned to learn that the ‘Majestic’ profit margin is $415 per unit, while its other product ‘Royale’ earns gross profit of $622 per unit. Management’s future plans for the two models are not sound. By applying ABC and activity based management analysis the company may determine how to reduce the costs of producing the ‘Majestic model’. Customer demand and future technology changes need also to be taken into account when making such decisions.

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Chapter 16: Cost accounting systems

PSA16.10 HORSES AND DOGS VETERINARY CLINIC (a)

Calculation of assigned overhead under traditional: Total cost of services / Direct labour hours $260,000 / 5,000 = $52 Overhead assigned to Farm animals: $52 x 2,000 Overhead assigned to Pets: $52 x 3,000

(b)

(1)

Calculation of activity-based overhead rate:

Activity Cost Pool Drug treatment Surgery Travel Consultation Accounting/office Boarding/grooming

(2)

= $104,000 = $156,000

Estimated Overhead

Total Expected Use of Cost Drivers

$64,000 65,000 28,000 33,000 30,000 40,000 $260,000

4,000 treatments 800 operations 28,000 kms 3,000 calls/app’nt 5,000 d/l hrs Direct

Activity-Based Overhead Rate $16 per treatment $81.25 per operation $1 per kms $11 per appointment $6 per DL hr Direct

Assignment of overhead to farm animals and pets: Farm animals

Activity Cost Pool Drug treatment Surgery Travel Consultation Accounting/office Boarding/grooming Overhead assigned

Expected Use of Drivers

1,800 200 26,000 600 2,000

Overhead Rate

$16 $81.25 $1 $11 $6 Direct

Pets Expected Cost Use of Assigned Drivers

$28,800 16,250 26,000 6,600 12,000

2,200 600 2,000 2,400 3,000

$89,650

Overhead Rate

Cost Assigned

$16 $81.25 $1 $11 $6 Direct

$35,200 48,750 2,000 26,400 18,000 40,000 $170,350

16.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c)

(d)

Activity

Value-Added vs Non-Value-Added

Drug treatment Surgery Travel Consultation Accounting/office Boarding/grooming

Value-added Value-added Non-value-added Value-added Non-value-added Value-added

Overhead is assigned to the two service lines as follows:

Traditional costing ABC Difference

Farm animals

Pets

$104,000 89,650 $14,350

$156,000 170,350 $14,350

There is a difference of $14,350 which Farm Animals services are over assigned and costing is overstated by 13.7%. This means the clinic may be undercharging for the Pets services and the Farm Animal services are providing a greater contribution than was originally thought.

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Chapter 16: Cost accounting systems

Solutions to problem set B PSB16.1 ASTICIO MANUFACTURING (a) Work in Process Inventory 1/1 Balance (i) 115 500 Completed work (v) (3) Direct materials (ii) 90 000 Balance c/d Direct labour (iii) 130 000 Manufacturing overh’d (iv) 162 500 498 000 31/12 Balance 175 000

(i)

(ii)

(iii)

(iv)

(v)

Opening WIP Job 7650 Job 7651

498 000

$63 000 52 500 115 500

Direct materials Job 7650 Job 7651 Job 7652

$22 000 28 000 40 000 $90 000

Direct Labour Job 7650 Job 7651 Job 7652

$30 000 40 000 60 000 $130 000

Manufacturing Overhead Job 7650 Job 7651 Job 7652 Completed jobs (1) Job 7650 Beginning balance Direct materials Direct labour Manufacturing overhead

(2)

323 000 175 000

Job 7651 Beginning balance Direct materials Direct labour Manufacturing overhead

$37 500 50 000 75 000 $162 500

$63 000 22 000 30 000 37 500 $152 500

$52 500 28 000 40 000 50 000 $170 500

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(3)

Total cost of completed work Job 7650 Job 7651

$152 500 170 500 $323 000

Work in process balance

$175 000

Unfinished Job No. 7652 (a)

(b)

Current year’s cost Direct materials Direct labour Manufacturing overhead

(a)

$175 000

$40 000 60 000 75 000 $175 000

Actual overhead costs Incurred on account Indirect materials Indirect labour Depreciation

$120 000 12 000 18 000 6 000 $156 000

Applied overhead costs Job 7650 Job 7651 Job 7652

$37 500 50 000 75 000 $162 500

Actual overhead Applied overhead Overapplied overhead

$156 000 162 500 $6 500

(b) Manufacturing Overhead Applied Cost of sales

6 500 6 500

Sales (given) Cost of sales Add: Job 7648 Job 7649 Job 7650

$390 000

Deduct: Overapplied overhead Gross profit

$98 000 62 000 152 500 312 500 (6 560)

306 000 $84 000

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PSB16.2 HAN WU MANUFACTURING (a)

Predetermined overhead rate based on direct labour cost $ 500 000 / 20 000 = $25 per direct labour hour *Overhead estimated only $500 000 not $1 500 000

(b)

See solution under part (e)

(c)

Journal entries for January

$ 45 000

Raw Materials Inventory Accounts Payable

$ 45 000

Factory Labour Payroll Tax Payable Wages Payable

31 500

Manufacturing Overhead Raw Materials Inventory Factory Labour Accumulated depreciation Accounts Payable

33 750

Work in Process Raw Materials Inventory ($5,000 + $20,000 + $15,000)

40 000

Work in Process Factory Labour ($3,000 + $12,000 + $9,000)

24 000

Work in Process Manufacturing Overhead Applied ((200 + 800 + 600) x$25)

40 000

6 500 25 000

10 000 7 500 1 250 15 000

(d) 1.

40 000

24 000

40 000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(e) Job No. 50 Date

Direct Materials $

31/12 Jan

10 000 5 000 15 000 Cost of completed jobs Direct materials Direct labour Manufacturing overhead Total Cost Job No. 51 Date

Direct Materials $

Jan

20 000 20 000 Cost of completed jobs Direct materials Direct labour Manufacturing overhead Total Cost

Job No. 52 Date

Jan

Direct Labour $ 6 000 3 000 9 000

Manufacturing Overhead $

Total $

10 500 5 000 15 500 15 000 9 000 15 500 $39 500

Direct Labour $ 12 000 12 000

Manufacturing Overhead $

Total $

20 000 20 000 20 000 12 000 20 000 $52 000

Direct Materials $

Direct Labour $

15 000

9 000

Manufacturing Overhead $

Total $

15 000

Cost of completed jobs Direct materials Direct labour Manufacturing overhead Total Cost

Finished Goods Inventory Work in Process — Packaging ($39 500 + $45 000)

$ 91 500

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Chapter 16: Cost accounting systems

(f) Cost of sales Finished Goods Inventory ($45 000 + $39 500) Accounts Receivable Sales ($67 000 + $74 000)

(g)

84 500 84 500 141 000 141 000

The finished goods inventory is job #51 at value of $52 000.

(h) *Manufacturing overhead incurred $ 33 750 Manufacturing applied $ 40 000 Over applied $ 6 250

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB16.3 BUEHLER SKIS (a)

(b)

Physical units Units to be accounted for: Work in process, 1 January Started into production Total units

0 35,200 35,200

Units accounted for: Transferred out Work in process, 31 January Total units

31,200 4,000 35,200

Equivalent units

Units transferred out Work in process, 31 January: 4,000 x 100% 4,000 x 65% Total equivalent units

Materials

Conversion Costs

31,200

4,000 35,200

2,600 33,800

Costs accounted for: Transferred out (31,200 x $21.77) Work in process, 31 January: Materials (4,000 x $11.38) Conversion cots (2,600 x $10.39) Total costs

$11.38 $10.39 $21.77

$679,224 $45,520 27,014

72,534 $751,758

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Chapter 16: Cost accounting systems

(e) Moulding Department Production Cost Report for the month ended 30 June 2016

Physical Units

Quantities

Equivalent Units Conversion Materials Costs

(Step 1) Units to be accounted for: Work in process (1/6) Started into production Total units

35,200 35,200

Units accounted for: Transferred out Work in process (30/6) Total units

31,200 4,000 35,200

(Step 2)

Costs Unit costs (Step 3) Costs in June Equivalent units Unit costs (a) / (b)

(a) (b)

31,200 4,000 35,200

31,200 2,600 33,800

Materials

Conversion Costs

$400,400 35,200 $11.38

$351,120 33,800 $10.39

(4,000 x 65%)

Costs to be accounted for: Work in process (1/6) Started into production Total costs

Total

$751,520 $21.77

751,520 $751,520*

Cost Reconciliation Schedule (Step 4) Costs accounted for: Transferred out (31,200 x $21.77) Work in process (30/6) Materials (4,000 x $11.38) Conversion costs (2600 x $10.39) Total costs *Difference of $238 due to rounding

$679,224 $45,520 27,014

72,534 $751,758*

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB16.4 PICKARD PTY LTD 1.

Raw Materials Inventory Accounts Payable

25,000

Work in Process — Blending Work in Process — Packaging Raw Materials Inventory

16,930 7,140

Factory Labour Wages Payable

18,770

Work in Process — Blending Work in Process — Packaging Factory Labour

13,320 5,450

Manufacturing Overhead Accounts Payable

41,500

Work in Process — Blending (900 x $35) Work in Process — Packaging (300 x $35) Manufacturing Overhead Applied

31,500 10,500

Work in Process — Packaging Work in Process — Blending

54,940

Finished Goods Inventory Work in Process — Packaging

74,490

Accounts Receivable Sales

90,000

Cost of sales Finished Goods Inventory

62,000

25,000

24,070

18,770

41,500

42,000

54,940

74,490

90,000

62,000

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Chapter 16: Cost accounting systems

PSB16.5 FLUID CLEANERS Equivalent Units Physical Units

Quantities Units to be accounted for: Work in process (1/3) (40% materials, 20% conversion costs) Started into production Units accounted for: Transferred out Work in process (31/3) (60% materials, 20% conversion costs) Total units

Materials Conversion Costs

10,000 100,000 110,000 95,000

95,000

15,000 110,000

9,000 104,000

3,000 98,000

Conversion Materials Costs

Costs Unit costs Costs in March Equivalent units Unit costs

$156,000 104,000 $1.50

$98,000 98,000 $1.00

Costs to be accounted for: Work in process (1/3) Started into production Total costs

Total $254,000 $2.50

$8,700 245,300 $254,000

Cost reconciliation schedule Costs accounted for: Transferred out (95,000 x $2.50) Work in process (31/3): Materials (9,000 x $1.50) Conversion costs (3,000 x $1) Total costs

$237,500 13,500 3,000

16,500 $254,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB16.6 PRINCE BOAT LTD (a) Traditional costing: 1. Material handling costs $245,000 / 460* hours = $533 per direct labour hour (rounded) *Sail Boat 175 hours + Power Boat 285 hours a. One Sail Boat 175 hours x $533 = $93,275; $93,275 / 50 units = $1,865.5 per unit b. One Power Boat 285 hours x $533 = $151,905; $151,905 /30 units=$5,063.5 per unit 2. Purchasing activity costs $69,800 / 460 hours = $152 per direct labour hour (rounded) a. One Sail Boat 175 hours x $152 = $26,600; $26,600 / 50 units = $532 per unit b. One Power Boat 285 hours x $152 = $43,320; $43,320 / 30 units = $1,444 per unit (b) Activity-based costing: 1. Material handling costs $245,000 / 100* moves = $2450 per move * Sail Boat 20 moves + Power Boat 80 moves a. One Sail Boat 20 moves x $2450 = $49,000; $49,000 / 50 units = $980 per unit b. One Power Boat 80 moves x $2,450 = $196,000; $196,000 /30units = $6,533 per unit 2. Purchasing activity costs $69,800 / 200 orders = $349 per order a. One Sail Boat 80 orders x $349 = $27,920; $27,920 / 50 units = $558.40 per unit b. One Power Boat 120 orders x $349 = $41,880; $41,880 / 30units = $1,396 per unit

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Chapter 16: Cost accounting systems

Summary

Traditional costing ABC Difference per board

(c)

Sail Boat

Power Boat

$2,397.50 1538.40 $859.10

$6,507.50 7929 ($1,421.50)

The traditional costing methods under-priced the Power Boat by $1,421.50 per unit. The Sail Boat using the traditional method was over costed by $859.10 per unit and therefore may be missing additional sales (assuming the selling price was also overpriced) than if it were costed and priced correctly. It may prove to be more profitable to produce Sail Boat. Further information regarding competitors pricing and demand would be needed before any further decisions are made.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB16.7 SPARTAN SAFETY (a) Calculation of unit costs — Traditional costing:

Manufacturing Costs

Products Home Commercial Model Model

Direct materials Direct labour Overhead Total unit cost

$18.50 19.00 *23.25 $60.75

$26.50 19.00 *23.25 $68.75

*$15.50 x 1.5 = $23.25 (b)

Activity Cost Pool Receiving Forming Assembling Testing Painting Packing and shipping

Estimated Overhead $70,350 150,500 381,600 51,000 52,080 787,250 $1,492,780

Expected Use of Cost Drivers 335,000 kg 35,000 Machine hr 212,000 parts 25,500 tests 6,510 litre 335,000 kg

Activity-Based Overhead Rate

$.21 per kg $4.30 per machine hr $1.80 per part $2.00 per test $8.00 per litre $2.35 per kg

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Chapter 16: Cost accounting systems

Activity Cost Pool

Expected Use of Overhead Drivers x Rate

Receiving Forming Assembling Testing Painting Packing and shipping Total assigned cost Units produced Overhead cost per unit

215,000 27,000 162,000 15,500 4,510 215,000

$.21 $4.30 $1.80 $2.00 $8.00 $2.35

Commercial Model Cost = Assigned

$45,150 116,100 291,600 31,000 36,080 505,250

Expected Use of Overhead Drivers x Rate

120,000 8,000 50,000 10,000 2,000 120,000

Cost = Assigned

$.21 $4.30 $1.80 $2.00 $8.00 $2.35

$25,200 34,400 90,000 20,000 16,000 282,000

$1,025,180

$467,600

54,000

10,200

$18.98

$45.84

(d) ABC Manufacturing Costs Direct materials Direct labour Overhead Total cost per unit

Home Model

Commercial Model

$18.50 19.00 18.98 $56.48

$26.50 19.00 45.84 $91.34

(e) Activity

Value vs. Non-Value-Added

Receiving Forming Assembling Testing Painting Packing and shipping

Non-value-added Value-added Value-added Non-value-added Value-added Value-added

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(f)

(1)

Activity-based costing shows the commercial model absorbs nearly 2 ½ times as much overhead per unit as the home model.

(2)

The comparison of ABC and traditional costing shows that the proper amount of overhead assigned to the two products is not equal at $23.25, but rather $18.98 for the home model and $45.84 for the commercial model. Under traditional costing, the margin of error on the commercial model was 101%, an understatement of $23.51 on an assignment of $23.25. These distorted overhead assignments have likely led to overpricing the home model and under-pricing the commercial model.

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Chapter 16: Cost accounting systems

PSB16.8 DESIGNED STAIRS (a)

Predetermined overhead rate using machine hours: $819,840 / 100,000 hrs = $8.1984 per machine hour

(b)

Manufacturing cost per stair under traditional costing: Direct materials Direct labour Overhead (14,500 x $8.1984) Total cost of 280 stairs

$103,600.00 112,000.00 118,876.80 $334,476.80

Cost per stair ($334,476.80 / 280) (c)

$1,194.56

Manufacturing cost per stair under activity-based costing:

Activity Cost Pool

Calculation of Activity-Based Overhead Rate Estimated Total Estimated Overhead / Drivers =

Purchasing Handling materials Production Setting up machines Inspecting Inventory control Power

$57,000 82,000 200,000 84,840 90,000 126,000 180,000 $819,840

600 orders 8,000 moves 100,000 D/L hours 1,200 set-ups 6,000 inspections 168,000 components 90,000 m2

Activity-Based Overhead Rate $95 per order $10.25 per move $2 per D/L hour $70.70 per set-up $15 per inspection $.75 per component $2 per m2

Calculation of Overhead to Order of 280 Stairs Expected Use of x Activity-Based Activity Cost Pool Drivers Overhead Rate Purchasing Handling materials Production Setting up machines Inspecting Inventory control Power Total overhead assigned

60 orders 800 moves 5,000 D/L hours 100 set-ups 450 inspections 16,000 components 8,000 m2

$95 $10.25 $2 $70.70 $15 $.75 $2

Cost Assigned $5,700 8,200 10,000 7,070 6,750 12,000 16,000 $65,720

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Total manufacturing cost per stair under ABC: Direct materials Direct labour Overhead Total cost of 280 stairs

$103,600 112,000 65,720 $281,320

Total cost per stair (d)

$1,004.71

The difference between the traditional cost and the activity-based cost per unit, $1,194.56 versus $1,004.71, is not great in amount but $189.85 ($1,194.56 – $1,004.71) is 18.9% of the more correct ABC cost per unit. Activity-based costing is the preferable costing system for setting prices because the real costs are more accurately reflected. The greater accuracy is a result of multiple, more relevant activity-cost drivers under ABC than the single cost driver used with the traditional volume-based system.

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PSB16.9 LETO PLASTICS (a)

The allocation of total manufacturing overhead using activity-based costing is as follows:

Activity-Based Overhead Rate Purchase orders @ $40 Machine set-ups @ $250 Machine hours @ $4 Tests and inspections @ $20 Total costs assigned (a)

Ice House Cool Chest Drivers Cost Drivers Cost Used Assigned Used Assigned

2,500 500 60,000 5,000

$100,000 125,000 240,000 100,000 $565,000

2,000 300 20,000 3,000

$80,000 75,000 80,000 60,000 $295,000

Units produced (b)

50,000

20,000

Cost per unit (a) / (b)

$11.30

$14.75

(b)

Total Overhead

$180,000 200,000 320,000 160,000 $860,000

The cost per unit and the gross profit of each product under ABC costing were: Ice House

Cool Chest

Direct materials Direct labour Manufacturing overhead Total cost per unit

$9.50 8.00 11.30 $28.80

$6.00 5.00 14.75 $25.75

Sales price per unit Cost per unit Gross profit (loss)

$35.00 28.80 $6.20

$24.00 25.75 $(1.75)

(c)

Activity-based costing reveals a very different situation than traditional costing. Management must be stunned to learn that the ‘Cool Chest’ is unprofitable, losing $1.75 per unit, while its other product ‘Ice House’ earns gross profit of $6.20 per unit. Obviously, management must revise its marketing and selling efforts as well as its pricing, and maybe its production of the ‘Cool Chest’.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB16.10 WISE AND OTHERWISE (a)

Calculation of assigned overhead under traditional costing (‘direct labour dollars’ appears in the first line of the schedule of overhead data): Predetermined overhead rate x direct labour dollars Overhead assigned to audit: .40 x $1,000,000 Overhead assigned to tax: .40 x $900,000

(b)

(1)

Calculation of activity-based overhead rate:

Activity Cost Pool Employee training Typing and secretarial Computing Facility rental Travel

(2)

= $400,000 = $360,000

Estimated Overhead

$209,000 76,200 204,000 142,500 128,300 $760,000

Total Expected Use of Cost Drivers

$1,900,000 DL dollars 2,500 reports/forms 60,000 minutes 38 employees Direct

$0.11 per DL dollar $30.48 per report/form $3.40 per minute $3,750 per employee Direct

Assignment of overhead to audit and tax services: AUDIT

Activity Cost Pool

Activity-Based Overhead Rate

Expected Use of Drivers

Employee $1,000,000 training Typing 600 and secretarial Computing 25,000 Facility 20 rental Travel 86,800 Overhead assigned

TAX

Overhead Cost x Rate = Assigned

Expected Use of Overhead Cost Drivers X Rate = Assigned

$.11

$110,000

$900,000

$.11

$99,000

$30.48

18,288

1,900

$30.48

57,912

$3.40 $3,750

85,000 75,000

35,000 18

$3.40 $3,750

119,000 67,500

Direct

86,800 $375,088

41,500

Direct

41,500 $384,912

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Chapter 16: Cost accounting systems

(c)

(d)

Activity

Value-Added vs Non-Value-Added

Employee training Word processing Computing Facility rental Travel

Non-value-added Value-added Value-added Non-value-added Non-value-added

Overhead is assigned to the two service lines as follows:

Traditional costing ABC Difference

Audit

Tax

$400,000 375,088 $24,912

$360,000 384,912 $24,912

There is a difference of $24,912 between the two overhead allocation methods, but in this case the difference is less than 7%.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Building business skills Financial reporting and analysis BBS16.1 Managerial analysis DAVIDSON FURNITURE (a)

The unit cost of materials for Framing department for May is: $140 ($420,000 / 3,000).

(c)

The materials cost of the sofas transferred out is $350,000 (2,500 x $140). Conversion costs therefore are $200,000 ($550,000 – $350,000) and per unit conversion cost is $80 ($200,000 / 2,500). Or $550,000/ 2500= Total cost $$220. $220 less material$140= $80 conversion cost.

(c)

There are 500 units in ending work-in-process inventory (3,000 started – 2,500 transferred out). The materials cost is $70,000 (500 x $1140). Thus, the conversion costs in the inventory are $10,000($80,000 – $70,000). $13,000 divided by $80 per unit conversion cost equals 125 units or 25% (125 / 500) complete.

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BBS16.2 Managerial analysis NEW TECH PHARMACEUTICALS (a)

Calculation of activity-based overhead ratio:

Activity Cost Pool

Total Estimated Overhead

Market analysis Product design Product development Prototype testing

$1 050 000 2 280 000 3 600 000 1 400 000

(b)

Expected Use of Cost Drivers

15 000 hours 2 500 designs 90 products 700 redesigns

Activity-Based Overhead Rate $70 per hour $912 per design $40 000 per product $2 000 per redesign

Charges to in-house manufacturing department:

Activity Cost Pool

Cost Drivers Used

Overhead Rate

Cost Assigned

Market Analysis Product Design Product Development Prototype Testing Total overhead assigned

1,800 hours 280 designs 10 products 92 redesigns

$70 $912 $40 000 $2 000

$126 000 255 360 400 000 184 000 $965 360

(c)

Charges to outside R & D contractor:

Activity Cost Pool

Cost Drivers Used

Overhead Rate

Cost Assigned

Market Analysis Product Design Product Development Prototype Testing Total overhead assigned

800 hours 178 designs 3 products 70 redesigns

$70 $912 $40 000 $2 000

$56 000 162 336 120 000 140 000 478 336

(d)

Activity-based costing permits the company to identify its R & D costs by the activities that cause the costs. That is, ABC allows closer scrutiny of the causes for cost incurrences hence greater control. By charging in-house manufacturing departments for their fair share of their company’s R & D costs, these departments may exert their own control over such costs. Activity-based costing allows New Tech to compile realistic costs for bidding and charging outside users of its R & D department’s services.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS16.3 Surfing the net The answer the students will give will depend on the companies selected. The task was to select two manufacturing companies that are likely to use process costing. What the students should address is why they believe the manufacturer would use process costing and if there was anything in the website that convinced them that the process costing was suitable.

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Critical thinking BBS16.4 Group decision case COSTELLO PRODUCTS (a)

The manufacturing cost element that is responsible for the fluctuating unit costs is manufacturing overhead. Manufacturing overhead is being included as incurred rather than being applied on a predetermined basis. Direct materials and direct labour are not the cause as they have the same unit cost per batch in each quarter.

(b)

The solution is to apply overhead using a predetermined overhead rate based on a relevant basis of production activity. Based on actual overhead incurred and using batches of product TC1 as the activity base, the overhead rate is $22,500 per batch [($157,500 + $184,000 + $146,000 + $187,500) / 30]. Another approach would be to use direct labour cost as the relevant basis to apply overhead on a predetermined basis. For example, a rate of 125% of direct labour cost ($675,000 / $540,000) could be used. Either approach will provide the same result.

(c)

The quarterly results using a predetermined overhead rate are as follows:

Costs Direct materials Direct labour Manufacturing overhead applied Total

1 $ 150,000 90,000 112,500 $352,500

Quarter 2 3 $ $ 330,000 120,000 198,000 72,000 247,500 90,000 $775,500 $282,000

4 $ 300,000 180,000 225,000 $705,000

Production in batches

Unit cost (per batch)

$70,500

(Note: The unit cost of a batch remains the same in each quarter. Both sales and production should be pleased with this solution to fluctuating unit costs.)

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS16.5 Group decision case MENDOZA LTD (a)

The unit cost suggests that Jeff took the highest total costs and divided these costs by the units started into production. The highest total costs would be the total costs charged to the Mixing Department ($88,000 + $600,000 + $785,800) divided by the units started during July (100,000 litres), which results in a per-unit cost of $14.74 (1,473,800 / 100,000).

(b)

The principal errors made by Jeff were: (1) he did not compute equivalent units of production. (2) he did not use the weighted-average costing method. (3) he did not assign costs to ending work-in-process.

Quantities

Physical Units

Units to be accounted for: Work in process, 1 July Started into production Total units

(Step 1) 8,000 100,000 108,000

Units accounted for: Transferred out Work in process, 31 July Total units

103,000 5,000 108,000

Materials Conversion Costs

103,000 5,000 108,000

103,000 1,000 104,000

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Costs Unit costs (Step 3) Costs in July Equivalent units Unit costs (a) / (b)

Materials (a) (b)

Conversion Costs

621,000 108,000 $5.75

852,800 $1,473,800 104,000 $8.20 $13.95

Costs to be accounted for: Work in process, 1 July Started into production Total costs Cost reconciliation schedule (Step 4) Costs accounted for: Transferred out (103,000 x $13.95) Work in process, 31 July: Materials (5,000 x $5.75) Conversion costs (1,000 x $8.20) Total costs

Total

$88,000 1,385,800 $1,473,800

$1,436,850 28,750 8,200

36,950 $1,473,800

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS16.6 Communication activity EASY RELAX To:

Sue Smithers, Regional Sales Manager

From:

Maria King, Accounting Manager

Re:

Production Cost Reports

Clara, congratulations again on your promotion! It is going to be great working with you. It kind of reminds me of our days at Hammonds Furniture after school (although this work is more fun, and it certainly pays better!) I’ll try to clear up some of the questions you raised in your fax. Here in the Furniture Division, we use process costing rather than the job order system that Special Projects uses. The reason for this is that we produce all our products in a more or less continuous process, even when we run occasional special orders. You see, all our workers are assigned a particular part of the process to control. One might be in charge of making sure the mixing machines work properly, while another verifies the weight of the finished products. Whichever job a worker is assigned, he or she stays with it to completion, or at least the completion of that particular process. That’s different to what you had in Special Projects, where workers moved from job to job. That’s why we don’t usually track the orders separately. Our special orders are for various quantities of the furniture we produce, so only the Packing Department needs to be concerned with the particular set of products shipped to the particular customer – which is its ordinary concern anyway. Your next question was about ‘what in the world’ an equivalent unit is. Well, you know already that Special Projects bids on various jobs, and then costs are recorded when the jobs are complete. The costs accumulated on jobs that aren’t complete are reflected in Work in Process inventory. We in furniture goods can’t use that method for a simple reason – we produce our products in batches that we keep going fairly continuously. Or, in other words, we don’t have ‘jobs’ that we can record as ‘complete’. A batch may contain enough of our product to fill thirty or more orders, so we may have thirty or more ‘jobs’ in each batch. One job may happen to be filled from two batches. Since the cost of each batch is about the same, it isn’t worth keeping track of separately. At the end of the month, we need to record what we finished and what still remains undone. Equivalent units are the way we measure the amount of work we have done on our work in process. It’s kind of like comparing the size of a dining table with the size of a coffee table. It doesn’t make sense to compare by counting the number of tables you have. We compare by the number of ‘units’ of materials or labour that are required to finish a product completely. If it requires half the materials and 30 minutes of labour for a finished table, for example, then the half the materials and 30 minutes are ‘finished equivalents’. If we have 30 tables 50% complete, then we have 15 ‘finished equivalent’ tables. Your last question is the easiest to answer. You get four reports because we use four processes here in Furniture Division. Each process has to report its status at the end of every month. It’s kind of like we have four miniature factories, each reporting ‘completion’ of a certain number of

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products. The products from one department are used as raw materials for other departments, so we have a chain of reports. Notice that the units and costs transferred out of Process 1 are the same as the units and costs transferred into Process 2, and so on. I hope this helps. Call, write or fax me any time!

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS16.7 Communication activity BEGA CHEESE LIMITED

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.

For (a) and (b) 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: https://www.begacheese.com.au Click on the Environment tab on the main page of the website to access Bega’s latest Sustainability The students are required to report on goals, measurement and achievement in: • Farming sustainability • Factory sustainability

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 17: Cost–volume–profit relationships

Chapter 17: Cost–volume–profit relationships Assignment classification table

Learning objectives 1. Distinguish between variable, fixed and mixed cost behaviour.

Questions 1, 2, 4

Brief exercises 1

Exercises 1, 2

Problems PSA 1 PSB 1

1, 3

PSA 2, 3, 4 PSB 2, 3, 4

Explain the difference between absorption costing and variable costing.

Explain the five basic assumptions of cost– volume–profit (CVP) analysis.

Indicate the meaning of contribution margin and identify break-even point and the use of break-even analysis.

3, 4

1, 4, 5, 6, 8, 9

PSA 1, 5, 7, 8, 9,10 PSB 1, 5, 6, 7, 8, 9, 10

Determine target net profit by applying formula

PSA 5, 6, 10 PSB 5, 10

Explain how CVP analysis is used with multiple products.

8, 9

7, 8

10, 11, 12

PSA 8, PSB 8

Describe the essential features of a CVP Statement of Profit or Loss.

PSA 5, 9 PSB 5, 9

17.1

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 17.1.

(a) (b)

17.2.

(a)

(b)

Cost behaviour analysis is the study of how specific costs respond to changes in the level of activity within a company. Cost behaviour analysis is important to management in planning business operations and in deciding between alternative courses of action. The activity index identifies the activity that causes changes in the behaviour of costs. Once the index is determined, it is possible to classify the behaviour of costs in response to changes in activity levels into three categories: variable, fixed or mixed. Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity.

17.3.

Under absorption costing, both variable and fixed manufacturing costs are considered to be product costs. Under variable costing, only variable manufacturing costs are product costs and fixed manufacturing costs are expensed when incurred.

17.4.

(a) (b)

The relevant range is the range of activity that a company expects to operate during the year. Disagree. The behaviour of both fixed and variable costs are linear only over a certain range of activity.

17.5.

The basic assumptions of CVP analysis are: 1. The behaviour of both costs and revenues is linear throughout the relevant range of the activity index. 2. All costs can be classified as either variable or fixed with reasonable accuracy. 3. Changes in activity are the only factors that affect costs. 4. All units produced are sold. 5. When more than one type of product is sold, total sales will be in a constant sales mix. Sales mix complicates CVP analysis because different products will have different cost relationships.

17.6.

Contribution margin is $18 ($40 – $22). The contribution margin ratio is 45% ($18 / $40).

17.7.

At breakeven sales, variable costs are $390,000 ($600,000 – $210,000) or 65% of sales ($390,000 / $600,000). The sales volume to achieve net profit of $56,000 is as follows: x = 65%x + $210,000 + $56,000 .35x = $266,000 x = $760,000

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Chapter 17: Cost–volume–profit relationships

17.8.

Contribution margin for Product A is $8 and $12 for Product B. Weighted average contribution margin can then be calculated as $10.40 ([($8 x 2) + ($12 x 3)] / 5). As shown below:

Selling Price Unit variable cost Contribution Margin Sales Mix Weighted CM

17.9.

Product Product A B Total 20 30 12 18 8 2 16

12 3 36

WACM

5 52

10.4

The contribution margin per unit of limited resources is determined by dividing the contribution margin per unit of the product by the number of units of the limited resources required to produce the product.

17.10. Reeves Ltd CVP Statement of Profit or Loss Sales Variable expenses: Cost of sales Operating expenses Contribution margin Fixed expenses: Cost of sales Operating expenses Profit

$900,000 $350,000 140,000

150,000 60,000

490,000 410,000

210,000 $200,000

17.3

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to brief exercises BE17.1 KIWI & CO Indirect labour is a variable cost because it increases in total directly and proportionately with the change in the activity level. Supervisors’ salaries are a fixed cost because it remains the same in total regardless of changes in the activity level. Maintenance is a mixed cost because it increases in total but not proportionately with changes in the activity level.

BE17.2 The difference between absorption costing and variable costing net profit arises because absorption costing defers some fixed manufacturing overhead in ending inventory, while variable costing expenses all the fixed manufacturing overhead in the period incurred. Since Kate’s beauty salon is a service business which has no fixed manufacturing overhead or inventory, therefore there will be no difference between absorption costing and variable costing net profit.

BE17.3 1.

(a) (b)

$160 ($400 – $240) 40% ($160 / $400)

$560 ($700 – $140) 20% ($140 / $700)

(e) (f)

$1 200 ($480 / 40%) $720 ($1 200 – $480)

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Chapter 17: Cost–volume–profit relationships

BE17.4 SMART LTD (a)

x = .65x + $140 000 .35x = $140 000 x = $400 000 Contribution margin per unit $175 ($500 – $325) x = $140 000 / $175 x = 800 units 800 units x $500= $400 000

(b)

BE17.5 RANCH LTD x = .75x + $180,000 + $60,000 .25x = $240,000 x = $960,000 BE17.6 WHITEHEAD MANUFACTURING LTD CVP Statement of Profit or Loss for the quarter ended 31 March 2019 Sales Variable expenses: Cost of sales Selling expenses Administrative expenses Total variable expenses Contribution margin Fixed expenses: Cost of sales Selling expenses Administrative expenses Total fixed expenses Profit

$2,300,000 $785,000 195,000 78,000 1,058,000 1,242,000 600,000 80,000 112,000

792,000 $450,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE17.7 LOOS PTY LTD Product Unit Data Contribution margin Sales mix

$100 3

$200 1

Total contribution margin = $500 [($100 x $3) + ($200 x 1)] Weighted average unit contribution margin = $125 ($500 / 4) Unit sales = 2,400 units ($300,000 / $125). Loos should sell 1,800 units of Product AA (2,400 x 3/4) and 600 units of Product BB (2,400 x 1/4). BE17.8 CRUZ LTD

Contribution margin per unit (a) Machine hours required (b) Contribution margin per unit of limited resource [(a) / (b)]

Product A

Product B

$10 2 $5

$12 3 $4

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Chapter 17: Cost–volume–profit relationships

Solutions to exercises E17.1 (a) Total fixed costs (b) Contribution margin (c) Absorption costing (d) Break-even point (e) Variable cost (f) Margin of safety E17.2 MASSEY & CO (a)

The determination as to whether a cost is variable, fixed or mixed can be made by comparing the cost in total and on a per-unit basis at two different levels of production. Variable Costs Fixed Costs Mixed Costs

(b)

Vary in total but remain constant on a per-unit basis. Remain constant in total but vary on a per-unit basis. Contain both a fixed element and a variable element. Vary both in total and on a per-unit basis.

Using these criteria as a guideline, the classification is as follows: Direct materials Direct labour Electricity

Variable Variable Mixed

Rent Maintenance Supervisors’ salaries

Fixed Mixed Fixed

17.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E17.3 DESKMATE LTD (a) Manufacturing costs under variable costing: Direct materials Direct labour Variable manufacturing overhead Total unit cost

$60 45 30 $135

(b) Deskmate Ltd Statement of Profit or Loss (using variable costing) For the year ended 30 June 2019

Sales ($300 x 1500 units) Cost of sales Inventory (1/7/18) Cost of goods manufactured ($135 x 2500 units) Cost of goods available for sale Less: Inventory (30/6/19 ($135 x 1000 units) Cost of sales Gross profit Fixed manufacturing overhead Less: Selling and administrative expenses (variable $15 x 1500 units) + (fixed $50,000) Total expenses Profit from operation

$450,000 $0 337,500 337,500 (135,000) 202,500 247,500 150,000 72,500 222,500 $25,000

E17.4 MARIA’S BEAUTY SALON (a)

Contribution margin (in dollars): $112,000 (2,800 x $40) – $78,400 ($112,000 x 70%) = $33,600. Contribution margin (per unit): $40 – $28 ($40 x 70%) = $12 Contribution margin (ratio): $12 / $40 = 30%

(b)

Breakeven sales (in dollars): Breakeven sales (in units):

(c)

Margin of safety (in dollars): Margin of safety (ratio):

$21,000 = $70,000 30% $21,000 = 1,750 units $12

$112,000 – $70,000 = $42,000 / $112,000 =

$42,000 37.5%

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Chapter 17: Cost–volume–profit relationships

E17.5 TRUE & CO (a)

$3,200

Sales Line

2,800

DOLLARS (000)

2,400

Total Cost Line

2,000 Breakeven Point 1,600 1,400

1,200 800 Fixed Cost Line 400

100 200 300 400 500 600 700 800 350

Number of Units (in thousands) (b)

(c)

(1)

Breakeven sales in units: $4x = $2x + $700,000 2x = $700,000 X = 350,000 units

(2)

Breakeven sales in dollars: X = .50x + $700,000 .50x = $700,000 X = $1,400,000

(1) (2)

Margin of safety in dollars: Margin of safety ratio:

$2,000,000 – $1,400,000 $600,000 / $2,000,000

= $600,000 = $30%

17.9

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E17.6 WIGGINS LTD (a)

Unit contribution margin

Variable cost per unit

FixedCosts Breakeven Sales in Units

$105,000 ($350,000  $7.00)

$2.10

= = =

Unit selling price – Unit contribution margin $7.00 – $2.10 $4.90

OR 50,000 x $7.00 = 50,000X + $105,000 where x = Variable cost per unit Variable cost per unit = $4.90

(b)

Contribution margin ratio

$2.10 / $7.00 =30%

Fixed costs

= = =

Breakeven sales units x Unit contribution margin ($455,000 / $7.00) x $2.10 $136,500

= = =

Breakeven sales x Contribution margin ratio $455,000 x 30% $136,500

OR Fixed costs

Since fixed costs were $105,000 in 2019, the increase in 2020 is $31,500 ($136,500 – $105,000).

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Chapter 17: Cost–volume–profit relationships

E17.7 VOWELL LTD (a)

Sales $150x $60x x

= = = =

Variable Cost + Fixed Cost + Target Net Profit $90x + $630,000 + $90,000 $720,000 12,000 units

OR Units sold in 2018

($630,000 + $90,000) = 12,000 units ($150 - $90)

(b)

Units needed in 2019

($630,000 + $150,000*) = 13,000 units ($150 - $90)

(c)

$630,000 + $150,000 x - $90

*$90,000 + $60,000 = $150,000 = 12,000 units, where x = new selling price

$780,000 12,000

= x –$90

= $155.00

E17.8 ANGEL LTD 1.

Increase selling prices to $88 ($80 x 110%) Profit = $440,000 – $290,000 – $90,000 = $60,000

Reduce variable costs to 62% of sales. Profit = $400,000 – $248,000 – $90,000 = $62,000

Reduce fixed costs to $80,000 ($90,000 – $10,000) Profit = $400,000 – $290,000 – $80,000 = $30,000 Alternative 2, decreasing variable costs to 62% of sales will produce the highest profit.

17.11

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E17.9 PEPPER LTD 1.

Increase selling prices to $94.50 ($90.00 x 105%) Profit = $945,000 – $630,000 – $230,000 = $85,000

Reduce variable costs to 65% of sales. Profit = $900,000 – $585,000 – $230,000 = $85,000

Reduce fixed costs to $200,000 ($230,000 – $30,000) Profit = $900,000 – $630,000 – $200,000 = $70,000

Memo To: CEO, Pepper Ltd From: Management Accountant Date: 15 May, 2018 Re: Evaluation of three options to increase profit The following three options to increase profit are analysed: (1) Increase selling price by 7% with no change in total variable costs; (2) Reduce variable costs to 65% of sales; (3) Reduce fixed costs by $30,000 It was found that both options (1) or (2) will produce the highest profit of $85,000. But Option (2) would be preferable than Option (1) because the increase in selling price may cause a reduction in the number of units sold. Thus sales revenue may decrease under Option (1).

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Chapter 17: Cost–volume–profit relationships

E17.10 BURNIE LTD (a)

Sales mix of X:Y = 80,000 / 40,000 = 2:1

(b)

Unit Data Selling price Variable manufacturing costs Contribution margin Sales mix

Total contribution margin: Product X – $7.00 x 80,000 Product Y – $10.00 x 40,000 Total

= =

Product X

Product Y

$11.00 4.00 $7.00

$18.00 8.00 $10.00

$560,000 400,000 $960,000

Weighted average unit contribution margin: $960,000 / 120,000 = $8.00 OR Product X – $7.00 x 2 = Product Y – $10.00 x 1 =

$14.00 10.00 $24.00

Weighted average unit contribution margin: $24.00/ 3 units= $8.00 per unit (c)

Break-even point in units = ($256,000 + $80,000)/$8.00= 42,000 units (Product A – 28,000; 2/3 x 42,000; Product B – 14,000; 1/3 x 42,000)

17.13

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E17.11 THE HOME APPLIANCE CENTRE (a) and (b) Step 1 — Determine unit contribution margin: Economy

Standard

$500 400 $100

$650 500 $150

Economy

Standard

500 5 $500

300 3 $450

Unit selling price Unit variable costs Unit contribution margin (a)

Deluxe $800 600 $200

Step 2 — Determine weighted contribution margin:

Expected unit sales Sales mix ratio (b) Weighted contribution margin (a) x (b)

Deluxe 200 2 $400

Step 3 — Determine the weighted average unit contribution margin for all products: ($500 + $450 + $400) / 10 = $135 Breakeven sales in units = $297,000 / $135 = 2,200 units

Breakeven sales in units Sales dollars Variable costs Contribution margin

Economy

Standard

Deluxe

1100 (5/10)

660 (3/10)

440 (2/10)

2200

$550,000 440,000 $110,000

$429,000 330,000 $99,000

$352,000 264,000 $88,000

$1,331,000 1,034,000 $297,000

Total

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Chapter 17: Cost–volume–profit relationships

E17.12 SENSOR PTY LTD

(a)

Contribution margin per unit (a) Machine hours required (b) Contribution margin per unit of limited resources (a) / (b)

Product B

$5 2 $2.50

$3.50 1 $3.50

C $2 2 $1

(b)

Product B should be manufactured because it results in the highest contribution margin per machine hour.

(c)

(1) A Machine hours (a) (1,500 / 3) Contribution margin per unit of limited resource (b) Total contribution margin [(a) x (b)]

500 $2.50 $1,250

Product B 500 $3.50 $1,750

C 500 $1 $500

The total contribution margin is $3,500 ($1,250 + $1,750 + $500). (2)

Product B

Machine hours (a) Contribution margin per unit of limited resource (b) Total contribution margin [(a) x (b)]

1,500 $3.50 $5,250

17.15

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E17.13 CHALET LTD CVP Statement of Profit or Loss for year ended 31 December 2019 $ Sales (60,000 x $25) Less: Variable expenses (60,000 x $12) Contribution margin Less Fixed expenses Profit

1,500,000 720,000 780,000 500,000 $280,000

Alternative: Chalet Ltd CVP Statement of Profit or Loss for year ended 31 December 2019 $ Sales (63,000 x $23.80) Less: Variable expenses (63,000 x $9.60) Contribution margin Less Fixed expenses ($500,000 + $50,000) Profit

1,499,400 604,800 894,600 550,000 $344,600

1,2 3

1. 60,000 x 105%=63,000units 2. $25 – ($2.40 x 50%)= $23.80 3. $720,000 / 60,000 =$12 reduce by 20% $12 x80% = $9.60

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Chapter 17: Cost–volume–profit relationships

Solutions to problem set A PSA17.1 CUTE NAILS SALON (a)

Variable costs (per manicure) Manicurists’ commission Rent Supplies Total variable

(b)

$7.00 .50 5.00 $12.50

Fixed costs (per month) Salaries Rent Advertising Power Magazines Depreciation Total fixed

Breakeven in units $25x = $12.5x + $11,875 $12.5x = $11,875 x = 950 units or manicures

$10,050 800 300 280 45 400 $11,875

Breakeven in dollars x = .50xa + $11,875 .50x = $11,875 x = $23,750 a

$12.5 / $25

(c)

(d)

Cute Nails Salon

Profit = $37,500 – [($12.50 x 1,500) + $11,875] = $6,875

17.17

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA17.2 POULLAS LTD (a) Statement of Profit or Loss for the year ended 30 June (Variable Costing)

Sales Variable expenses: Inventory (1/1) Variable manufacturing costs Cost of goods available for sale Inventory (31/12) Variable cost of sales Variable selling expenses Total variable expenses Contribution margin Fixed expenses: Manufacturing overhead Administrative Total fixed expenses Profit from operations

2019

2020

$20,400,000

$24,000,000

16,800,000 (1) 16,800,000 2,520,000 (2) 14,280,000 2,040,000 (3) 16,320,000 4,080,000

2,520,000 14,280,000 16,800,000 16,800,000 2,400,000 19,200,000 4,800,000

2,000,000 1,800,000 3,800,000 $280,000

2,000,000 1,800,000 3,800,000 $1,000,000

2019 Calculations (1) (2) (3)

200,000 x $84 ($120 x 70%) 30,000 x $84 170,000 X $12($120 x 10%)

(4)

(5)

2020 Calculations (4) (5)

170,000 x $84 200,000 x $12

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Chapter 17: Cost–volume–profit relationships

(b) Poullas Ltd Statement of Profit or Loss for the year ended 31 December (Absorption Costing)

Sales Cost of sales Inventory, 1/1 Cost of goods manufactured Cost of goods available for sale Inventory, 31/12 Cost of sales Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Profit from operations

2019

2020

$20,400,000

$24,000,000

18,800,000 (1) 18,800,000 2,820,000 (2) 15,980,000 4,420,000

2,820,000 16,280,000 (3) 19,100,000 19,100,000 4,900,000

2,040,000 1,800,000 3,840,000 $580,000

2,400,000 1,800,000 4,200,000 $700,000

2019 Calculations (1) (2)

(c)

200,000 x [$84 + ($2,000,000 / 200,000)] 30,000 x $94

2020 Calculations (3)

170,000 x [$84 + ($2,000,000 / 170,000)]

The variable costing and the absorption costing profit from operations can be reconciled as follows: 2019

Variable costing income Fixed manufacturing overhead expensed with variable costing Less: Fixed manufacturing overhead expensed with absorption costing Difference Absorption costing income

2020 $280,000

$1,000,000

$2,000,000

(1,700,000)

(2,300,000)

(1)

(2)

300,000 $580,000

(300,000) $700,000

(1)

In 2019, with absorption costing $1,700,000 {$2,000,000 x (170,000 sold/200,000 units produced} of the fixed manufacturing overhead is expensed as part of cost of sales, and $300,000 ($2,000,000 – $1,700,000) is included in the ending inventory. (2)

In 2020, with absorption costing $2,300,000 of fixed manufacturing overhead is expensed as part of cost of sales. This includes the fixed manufacturing overhead of $2,000,000 plus $300,000 of fixed manufacturing overhead from 2019 that was included in the beginning inventory for 2020.

17.19

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA17.3 KARMING METAL LTD (a) Statement of Profit or Loss for the year ended 30 June (Variable Costing)

Sales Variable expenses: Inventory, 1/1 Variable manufacturing costs Cost of goods available for sale Inventory, 31/12 Variable cost of sales Variable selling expenses Total variable expenses Contribution margin Fixed expenses: Manufacturing overhead Administrative Total fixed expenses Profit from operations

2019

2020

$2 400 000

$3 200 000

2019 Calculations (1) (2) (3)

40 000 x $16 ($80 x 20%) 10,000 x $16 30 000 x $8

640 000 (1) 640 000 160 000 (2) 480 000 240 000 (3) 720 000 1 680 000

160 000 480 000 640 000 640 000 320 000 960 000 2 240 000

1 200 000 200 000 1 400 000 $280 000

1 200 000 200 000 1 400 000 $840 000

(4)

(5)

2020 Calculations (4) (5)

30 000 x $16 40 000 x $8

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Chapter 17: Cost–volume–profit relationships

(b) Karming Metal Ltd Statement of Profit or Loss for the year ended 31 December (Absorption Costing)

2019

2020

$2 400 000

$3 200 000

2019 Calculations (1) (2) (c)

40 000 x [$16 + ($1 200 000 / 40 000)] 10 000 x $46

1 840 000 (1) 1 840 000 60 000 (2) 1 380 000 1 020 000

460 000 1 680 000 (3) 2 140 000 2 140 000 1 060 000

240 000 200 000 440 000 $580 000

320 000 200 000 520 000 $540 000

2020 Calculations (3)

30 000 x [$16 + ($1 200 000 / 30 000)]

The variable costing and the absorption costing profit from operations can be reconciled as follows: 2019

Variable costing income Fixed manufacturing overhead expensed with variable costing Less: Fixed manufacturing overhead expensed with absorption costing Difference Absorption costing income

2020 $280 000

$840 000

$1 200 000

(900 000)

(1 500 000)

(1)

(2)

300 000 $580 000

(300 000) $540 000

(1)

In 2019, with absorption costing $900 000 {$1 200 000 x (30 000 sold/40 000 units produced} of the fixed manufacturing overhead is expensed as part of cost of sales, and $300 000 ($1 200 000 x (10 000 inventory/40 000 units produced}) is included in the ending inventory. (2)

In 2020, with absorption costing $1 500 000 of fixed manufacturing overhead is expensed as part of cost of sales. This includes the fixed manufacturing overhead of $1 200 000 plus $300 000 of fixed manufacturing overhead from 2019 that was included in the beginning inventory for 2020.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA17.4 RAIN HEAVEN LTD. (a) Manufacturing costs:

Type of cost Unit variable manufacturing costs Unit fixed manufacturing overhead ($10,000/2,000 units) Total unit cost

(i) Absorption costing $15

(ii) Variable costing $15

5 $20

$15

(b) (i) Rain Heaven Ltd Statement of Profit or Loss (using absorption costing) For the month ended 31 January 2018 Sales ($40 x 1000 units) Cost of sales Inventory, 1 January Cost of goods manufactured ($20 x 2000 units) Cost of goods available for sale Less: Inventory, 31 January ($20 x 1000 units) Cost of sales Gross profit Less: Selling and administrative expenses (variable $4 x 1000 units) + (fixed $8000)

$40 000 $0 40 000 40 000 (20,000) 20 000 20 000 12 000

Profit from operations

$8 000

(b) (ii) Rain Heaven Ltd Statement of Profit or Loss (using variable costing) For the month ended 31 January 2018 Sales ($40 x 2000 units) $40,000 Cost of sales Inventory, 1 January $0 Cost of goods manufactured ($15 x 2000 units) 30 000 Cost of goods available for sale 30 000 Less: Inventory, 31 January ($15 x 1000 units) (15,000) Cost of sales 15 000 Gross profit 25 000 Fixed manufacturing overhead Less: Selling and administrative expenses (variable $4 x 1000 units) + (fixed $8000) Total expenses Profit from operations

10 000 12 000

22 000 $3 000

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Chapter 17: Cost–volume–profit relationships

(c)

Profits are different because what are included as product costs are different under the two costing methods. Under absorption costing, all manufacturing costs, i.e. direct materials, direct labour and overheads are all counted as product cost. However, under variable costing, only direct materials, direct labour and variable overheads are included as product cost. During the first month of Rain Heaven’s operation, production exceeded sales by 1000 units. Therefore, absorption costing net profit is higher than variable costing net profit. This is because absorption costing defers $5,000 (1,000 units $5 fixed manufacturing overhead per unit) to next month as an asset in the ending inventory. In contrast, variable costing expenses all the fixed manufacturing overhead in the current period.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA17.5 TYSON LTD (a) CVP Statement of Profit or Loss for the year ending 31 December 2019 Net sales Variable expenses: Cost of sales Selling expenses Administrative expenses Total variable expenses Contribution margin Fixed expenses: Cost of sales Selling expenses Administrative expenses Total fixed expenses Profit

(1)

(b)

(c)

(d)

$1,800,000 $980,000 (1) 80,000 20,000 1,080,000 720,000 283,000 65,000 52,000 400,000 $320,000

Direct materials $400,000 + Direct labour $280,000 + Variable manufacturing overhead $300,000

Variable costs = 60 % of sales ($1,080,000 / $1,800,000) or $0.24 per bottle ($.40 x 60%). Total fixed costs = $400,000. (1)

$.40x $.16x x

= $.24x + $400,000 = $400,000 = 2,500,000 units (breakeven)

(2)

x .40x x

= .60x + $400,000 = $400,000 = $1,000,000 (breakeven)

Contribution margin ratio

= ($.40 – $.24) / $.40 = 40%

Margin of safety ratio

= ($1,800,000 – $1,000,000) / $1,800,000 = 44%

Required sales: x = .60x + $400,000 + $150,000 .40x = $550,000 x = $1,375,000

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Chapter 17: Cost–volume–profit relationships

PSA17.6 CRUZ MANUFACTURING LTD (a)

Sales were $2,400,000 and variable expenses were $1,560,000 which means variable expenses were 65% of sales ($1,560,000 / $2,400,000). Therefore, the breakeven point in dollars is: x .35x x

(b)

= .65x + $1,050,000 = $1,050,000 = $3,000,000 The effect of this alternative is to increase the selling price per unit to $5 ($4 x 125%). Total sales become $3,000,000 (600,000 x $5). Thus, the percentage of variable costs to net sales changes to 52% ($1,560,000 / $3,000,000). The new breakeven point is:

x .48x x 2.

= .52x + $1,050,000 = $1,050,000 = $2,187,500 The effects of this alternative are to change total fixed costs to $910,000 ($1,050,000 – $140,000) and to change the percentage of variable costs to net sales to 68% (65% + 3%). The new breakeven point is:

x .32x x

= .68x + $910,000 = $910,000 = $2,843,750

The effects of this alternative are: (1) variable and fixed cost of sales are $2,100,000 become vc $1,260,000 and fc $ 840,000, (2) total variable costs become $1,380,000 ($1,260,000 + $72,000 + $48,000), and (3) total fixed costs are $1,230,000 ($840,000 + $228,000 + $162,000). The new breakeven point is:

x x .425x x

= = = =

($1380,000 / $2,400,000)x + $1,230,000 .575x + $1,230,000 $1,230,000 $2,894,118 (rounded)

Alternative 1 is the recommended course of action using breakeven analysis because it has the lowest breakeven point.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA17.7 MIX N MATCH (a)

Monthly fixed costs: Depreciation ($12,000/4 years/12 months) Rent Total fixed costs

$250 800 $1,050

Selling price Unit variable costs Contribution margin per unit Contribution margin ratio ($2/$3.5)

$3.5 1.5 $2 57%

(b)

Contribution margin is $2/cup which means that for each cup of coffee you sell, $2 will go towards covering the fixed costs and profit. Likewise, a contribution margin of 57% means that for each dollar of sales, 57 cents will go towards covering fixed costs and profit. (c)

BEP = Total monthly fixed costs / contribution margin, i.e. $1050/$2 = 525 cups

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Chapter 17: Cost–volume–profit relationships

PSA17.8 MIX N MATCH (a)

Monthly fixed costs: Existing Operation

New plan

Total

$250 800 $1,050

$250 1,100 $1,350

$500 1,900 $2,400

Depreciation ($12,000/4 years/12 months) Rent Total fixed costs (b)

Selling price Unit variable costs Contribution margin per unit Sales mix Contribution margin sales mix

Coffee Juice Total WACM $3.5 $4.5 1.5 1.5 $2 $3 3 2 5 6 6 12 $2.4

The weighted average contribution margin is $2.4, meaning that each basket of sales of 3 cups of coffee to 2 glasses of juice will generate $2.4 towards covering fixed costs and contribution to profit. (c)

BEP for the sales mix = Total monthly fixed costs / weighted average contribution margin; $2,400 / $2.4 = 1,000 units Sales for coffee = 1,000 units x 3/5 = 600 cups Sales for juice = 1,000 units x 2/5 = 400 glasses

No. of cups/glasses Selling price Sales Unit variable costs Contribution margin per unit Total monthly fixed costs Profit

Coffee 600 $3.5 $2,100 $900 $1,200

Juice 400 $4.5 $1,800 $600 $1,200

Total 1,000 $3,900 $1,500 $2,400 $2,400 $0

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA17.9 VALUE SHOE STORE (a)

(b)

Current breakeven point:

$40x $20x x

= $20x + $240,000 (where x = pairs of shoes) = $240,000 = 12,000 pairs of shoes

New breakeven point:

$38x $18x x

= $20x + ($240,000 + $48,000) = $288,000 = 16,000 pairs of shoes

Current margin of safety percentage =

New margin of safety percentage

(c)

(20,000 x $40) - (12,000 x $40) (20,000 x $40)

40%

(24,000 x $38) - (16,000 x $38) (24,000 x $38)

33% (rounded)

Value Shoe Store CVP Statement of Profit or Loss Current New Sales (20,000 x $40) Variable expenses (20,000 x $20) Contribution margin Fixed expenses Net Profit

$800,000 400,000 400,000 240,000 $160,000

$912,000 480,000 432,000 288,000 $144,000

(24,000 x $38) (24,000 x $20)

The proposed changes will raise the breakeven point 4,000 units or 33%. This is a significant increase. Margin of safety is 7% lower and profit is $16,000 lower. The recommendation is to not accept the proposed changes.

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Chapter 17: Cost–volume–profit relationships

PSA17.10 VISTA LTD (a) Unit sales Less: Unit variable costs Unit contribution margin Contribution margin ratio (b) / (a) (b) Fixed costs Contribution margin ratio Breakeven sales (a) / (b) (c)

Fixed costs Profit Fixed costs + net profit Contribution margin ratio Required sales (a) / (b)

(a) (b)

Clearfrost

Superfreeze

$420 252 $168 40%

$630 441 $189 30%

$84,000 40% $210,000

$84,000 30% $280,000

$84,000 36,000 120,000 40% $300,000

$84,000 48,000 132,000 30% $440,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to problem set B PSB17.1 THE UNIVERSITY BARBER SHOP (a)

Variable costs (per haircut) Barbers’ commission Rent Barber supplies Total variable

(b)

$4.00 0.60 0.40 $5.00

Fixed costs (per month) Barbers’ salaries Rent Depreciation Electricity Advertising Total fixed

Breakeven in units $10x = $5x + $7 000 $5x = $7 000 x = 1 400 units or haircuts

$5 200 800 500 300 200 $7 000

Breakeven in dollars x = .50xa + $7 000 .50x = $7 000 x = $14 000 a

$5 / $10

(c)

(d)

The University Barber Shop

Profit = $16 000 – [($5.00 x 1 600) + $7 000] = $1 000

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Chapter 17: Cost–volume–profit relationships

PSB17.2 TINGA LTD (a) Statement of Profit or Loss for the year ended 31 December (Variable Costing) 2019 Sales Variable expenses: Inventory (1/1) Variable manufacturing costs Cost of goods available for sale Inventory (31/12) Variable cost of sales Variable selling expenses Total variable expenses Contribution margin Fixed expenses: Manufacturing overhead Administrative Total fixed expenses Profit from operations

$4,000,000

$5,000,000

1,250,000 (1) 1,250,000 250,000 (2) 1,000,000 240,000 (3) 1,240,000 2,760,000

250,000 1,000,000 1,250,000 1,250,000 300,000 1,550,000 3,450,000

1,400,000 250,000 1,650,000 $1,110,000

1,400,000 250,000 1,650,000 $1,800,000

2019 Calculations (1) (2) (3)

50,000 x $25 ($100 x 25%) 10,000 x $25 40,000 X $6

2020

(4)

(5)

2020 Calculations (4) (5)

40,000 x $25 50,000 x $6

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Tinga Ltd Statement of Profit or Loss for the year ended 31 December (Absorption Costing)

Sales Cost of sales Inventory (1/1) Cost of goods manufactured Cost of goods available for sale Inventory (31/12) Cost of sales Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Profit from operations

2019

2020

$4,000,000

$5,000,000

2,650,000 (1) 2,650,000 530,000 (2) 2,120,000 1,880,000

530,000 2,400,000 2,930,000 2,930,000 2,070,000

240,000 250,000 490,000 $1,390,000

300,000 250,000 550,000 $1,520,000

2019 Calculations

(3)

2020 Calculations

(1) (2)

50,000 x [$25 + ($1,400,000 / 50,000)] 10,000 x $53

(3)

40,000 x [$25 + ($1,400,000 / 40,000)]

(c)

The variable costing and the absorption costing profit from operations can be reconciled as follows: 2019

Variable costing income Fixed manufacturing overhead expensed with variable costing Less: Fixed manufacturing overhead expensed with absorption costing Difference Absorption costing income

2020

$1,110,000

$1,800,000

$1,400,000

(1,120,000)

(1,680,000)

(1)

(2)

280,000 $1,390,000

(280,000) $1,520,000

(1)

In 2019, with absorption costing $1,120,000 {$1,400,000 x (40,000 sold/50,000 units produced} of the fixed manufacturing overhead is expensed as part of cost of sales, and $280,000 ($1,400,000 – $1,120,000) is included in the ending inventory.

(2)

In 2020, with absorption costing $1,680,000 of fixed manufacturing overhead is expensed as part of cost of sales. This includes the fixed manufacturing overhead of $1,400,000 plus $280,000 of fixed manufacturing overhead from 2019 that was included in the beginning inventory for 2020.

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Chapter 17: Cost–volume–profit relationships

PSB17.3 GLOWBUS (a) Statement of Profit or Loss for the year ended 30 June (Variable Costing)

2018

2019

$6 000 000

$8 000 000

2018 Calculations (1) (2) (3)

4 000 x $300 ($2000 x 15%) 1 000 x $300 3 000 x $200

1 200 000 (1) 1 200 000 300 000 (2) 900 000 600 000 (3) 1 500 000 4 500 000

300 000 900 000 1 200 000 1 200 000 800 000 2 000 000 6 000 000

2 400 000 600 000 3 000 000 $1 500 000

2 400 000 600 000 3 000 000 $3 000 000

(4)

(5)

2019 Calculations (4) (5)

3 000 x $300 4 000 x $200

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Glowbus Statement of Profit or Loss for the year ended 31 December (Absorption Costing)

2018 Calculations (1) (2) (c)

2018

2019

$6 000 000

$8 000 000

3 600 000 (1) 3 600 000 900 000 (2) 2 700 000 3 300 000

900 000 3 300 000 (3) 4 200 000 4 200 000 3 800 000

600 000 600 000 1 200 000 $2 100 000

800 000 600 000 1 400 000 $2 400 000

2019 Calculations

4 000 x [$300 + ($2 400 000 / 4 000)] 1 000 x $900

(3)

3 000 x [$300 + ($2 400 000 / 3 000)]

The variable costing and the absorption costing profit from operations can be reconciled as follows: 2018 2019

Variable costing income Fixed manufacturing overhead expensed with variable costing Less: Fixed manufacturing overhead expensed with absorption costing Difference Absorption costing income

$1 500 000

$3 000 000

$2 400 000

(1 800 000)

(3 000 000)

(1)

(2)

600 000 $2 100 000

(600 000) $2 400 000

(1)

In 2018, with absorption costing $1 800 000 {$2 400 000 x (3 000 sold/4 000 units produced} of the fixed manufacturing overhead is expensed as part of cost of sales, and $600 000 ($2 400 000 x (1 000 inventory/4 000 units produced}) is included in the ending inventory. (2) In 2019, with absorption costing $1 500 000 of fixed manufacturing overhead is expensed as part of cost of sales. This includes the fixed manufacturing overhead of $2 400 000 plus $600 000 of fixed manufacturing overhead from 2018 that was included in the beginning inventory for 2019.

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Chapter 17: Cost–volume–profit relationships

PSB17.4 ELLA LANG DESIGN (a) Manufacturing costs: Type of cost Unit variable manufacturing costs Unit fixed manufacturing overhead ($100000/2000 units) Total unit cost

(i) Absorption costing $150 50 $200

(ii) Variable costing $150 $150

(b) (i) Ella Lang Design Statement of Profit or Loss (using absorption costing) For the year ended 31 December 2018 Sales ($400 x 1000 units) Cost of sales Inventory (1/1) Cost of goods manufactured ($200 x 2000 units) Cost of goods available for sale Less: Inventory (31/12) ($200 x 1000 units) Cost of sales Gross profit Less: Selling and administrative expenses (variable $40 x 1000 units) + (fixed $80,000)

$400,000 $0 400,000 400,000 (200,000) 200,000 200,000 (120,000)

Profit from operations

$80,000

(b) (ii)

Ella Lang Design Statement of Profit or Loss (using variable costing) For the year ended 31 December 2018 Sales ($400 x 1000 units) $400,000 Cost of sales Inventory (1/1) $0 Cost of goods manufactured ($150 x 2000 units) 300,000 Cost of goods available for sale 300,000 Less: Inventory (31/12) ($150 x 1000 units) (150,000) Cost of sales 150,000 Gross profit 250,000 Fixed manufacturing overhead Less: Selling and administrative expenses (variable $40 x 1000 units) + (fixed $80000) Total expenses Profit from operations

100,000

120,000

(220,000) $30,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c)

Profits are different because what is included as product costs are different under the two costing methods. Under absorption costing, all manufacturing costs, i.e. direct materials, direct labour and overheads are all counted as product cost. However, under variable costing, only direct materials, direct labour and variable overheads are included as product cost. During the first year of operation of Ella Lang’s Design, production exceeded sales by 1000 units. Therefore, absorption costing net profit is higher than variable costing net profit. This is because absorption costing defers $50,000 (1,000 units  $50 fixed manufacturing overhead per unit) to next year as an asset in the ending inventory. In contrast, variable costing expenses all the fixed manufacturing overhead in the current period.

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Chapter 17: Cost–volume–profit relationships

PSB17.5 CORBIN LTD (a) CVP Statement of Profit or Loss for the year ending 31 December 2019 Net sales Variable expenses: Cost of sales Selling expenses Administrative & Financial expenses Total variable expenses Contribution margin Fixed expenses: Cost of sales Selling expenses Administrative & Financial expenses Total fixed expenses Profit

(1)

(b)

(c)

(d)

$2 000 000 $1 080 000 (1) 90 000 34 000 1 204 000 796 000 380 000 150 000 66,000 606,000 $190,000

Direct materials $360 000 + Direct labour $450 000 + Variable manufacturing overhead $270 000

Variable costs = 60.2 % of sales ($1204000 / $2000000) or $0.301 per bottle ($.50 x 60.2%). Total fixed costs = $606 000. (1)

$.50x $.199x x

= $.301x + $606 000 = $606 000 = 3 045 227 units (breakeven) note round up to next unit

(2)

x .398x x

= .602x + $606 000 = $606 000 = $1,522 613 (breakeven)

Contribution margin ratio

= ($.50 – $.301) / $.5 = 39.8%

Margin of safety ratio

= ($2 000 000 – $1 522 613) / $2 000 000 = 23.87%

Required sales: x = .602x + $606 000 + $220 000 .398x = $826 000 x = $2 075 377

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB17.6 UNIQUE MANUFACTURING (a)

(b)

Sales were $2 250 000 and variable expenses were $1 575 000 which means variable expenses were 70% of sales ($1,575,000 / $2,250,000). Therefore, the breakeven point in dollars is: x .30x x

= .70x + $1 260 000 = $1 260 000 = $4 200 000

The effect of this alternative is to increase the selling price per unit to $52.50. Total sales become $3,150,000 (60,000 x $52.50). Thus, the percentage of variable costs to net sales changes to 50% ($1,575,000 / $3,150,000). The new breakeven point is:

x .50x x

= .50x + $1 260000 = $1 260 000 = $2 520 000

The effects of this alternative are to change total fixed costs to $1,035,000 ($1,260,000 – $225,000) and to change the percentage of variable costs to net sales to 75% (70% + 5%). The new breakeven point is:

x .25x x

= .75x + $1 035 000 = $1 035 000 = $4 140 000

The effects of this alternative are: (1) variable and fixed cost of sales become $1,012,500 each, (2) total variable costs become $1,192,500 ($1,012,500 + $110,000 + $70,000), and (3) total fixed costs are $1,642,500 ($1,012,500 + $520,000 + $110,000). The new breakeven point is:

x x .47x x

= = = =

$1 192 500 / $2 250 000)x + $1 642 500 .53x + $1 642 500 $1 642 500 $3 494 681 (rounded)

Alternative 1 is the recommended course of action using breakeven analysis because it has the lowest breakeven point.

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Chapter 17: Cost–volume–profit relationships

PSB17.7 SUPER CHARGE (a)

Monthly fixed costs: Depreciation ($24,000/4 years/12 months) Rent Total fixed costs

$500 1,000 $1,500

Selling price Unit variable costs Contribution margin per unit Contribution margin ratio ($3/$4.5)

$4.5 1.5 $3 67%

(b)

Contribution margin is $3/glass which means that for each glass of juice you sell, $3 will go towards covering the fixed costs and profit. Likewise, a contribution margin of 67% means that for each dollar of sales, 67 cents will go towards covering fixed costs and profit. (c)

BEP = Total monthly fixed costs / contribution margin, i.e. $1,500/$3 = 500 glasses

17.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB17.8 SUPER CHARGE (a)

Monthly fixed costs:

Depreciation ($24,000 and $28,800 /4 years/12 months) Rent Total fixed costs

Existing New operation plan

Total

$500 1,000 $1,500

$600 1,200 $1,800

$1,100 2,200 $3,300 WACM

(b) Selling price Unit variable costs Contribution margin per unit Sales mix Weighted average contribution margin

Juice $4.5 1.5 3 3

Yogurt $4.5 1.5 3 2

Total

$15

5 $3

The weighted average contribution margin is $3, meaning that each basket of sales of 3 glasses of juice to 2 cups of yogurt will generate $3 towards covering fixed costs and contribution to profit. (c)

BEP for the sales mix = Total monthly fixed costs / weighted average contribution margin; $3,3003/$3 = 1,100 units Sales for juice = 1,100 units x 3/5 = 660 glasses Sales for yogurt = 1,100 units x 2/5 = 440 cups

No. of glasses / cups Selling price Sales Variable costs Contribution margin per unit Total monthly fixed costs Profit

Juice 660 $4.5 2,970 990 1,980

Yogurt 440 $4.5 1,980 660 1,320

Total 1,100 4,950 1,650 3,300 3,300 $0

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Chapter 17: Cost–volume–profit relationships

PSB17.9 THRIFTY SHOE STORE (a)

(b)

Current breakeven point:

$30x $15x x

= $15x + $210,000 (where x = pairs of shoes) = $210,000 = 14,000 pairs of shoes

New breakeven point:

$28x $13x x

= $15x + ($210,000 + $37,000) = $247,000 = 19,000 pairs of shoes

Current margin of safety percentage =

New margin of safety percentage

(c)

[(16,000 x $30) - (14,000 x $30) (16,000 x $30)

12.5%

[(21,000 x $28) - (19,000 x $28) (21,000 x $28)

9.5%

Thrifty Shoe Store CVP Statement of Profit or Loss Current New Sales (16,000 x $30) Variable expenses (16,000 x $15) Contribution margin Fixed expenses Net Profit

$480,000 240,000 240,000 210,000 $30,000

$588,000 315,000 273,000 247,000 $26,000

(21,000 x $28) (21,000 x $15)

The proposed changes will raise the breakeven point 5,000 pair of shoes or 36%. This is a significant increase. Margin of safety is 3% lower and profit is $4,000 lower. The recommendation is to not accept the proposed changes.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB17.10 CASHMERE LTD (a) Unit sales Less: Unit variable costs Unit contribution margin Contribution margin ratio (b) / (a) (b) Fixed costs Contribution margin ratio Breakeven sales (a) / (b) (c)

Fixed costs Profit Fixed costs + profit Contribution margin ratio Required sales (a) / (b)

(a) (b)

Turbotub

Ultraclean

$400 280 $120 30%

$500 375 $125 25%

$90,000 30% $300,000

$90,000 25% $360,000

$90,000 36,000 126,000 30% $420,000

$90,000 30,000 120,000 25% $480,000

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Chapter 17: Cost–volume–profit relationships

Building business skills Financial reporting and analysis BBS17.1 Managerial analysis RIVERINA AND MURRAY (a)

The variable costs per unit are: Cost of sales ($840,000 / 300,000) Selling expenses ($165,000 / 300,000) Administrative expenses ($45,000 / 300,000)

$2.80 0.55 0.15 $3.50

Fixed Costs ($360,000 + $110,000 + $135,000 + = 620 000 $15,000) The breakeven points are: x x .30x x

= = = =

$5.00x = $1.50x = x =

(b)

($3.50 / $5.00)x + $620,000 .7x + $620,000 $620,000 $2,066,667 $3.50x + $620,000 $620,000 413,334 units or $2 066 667 / $5 ($1500000/300000) = 413,334 Note must round up as you can’t sell .40 of a unit.

Riverina’s Plan Variable unit cost of sales = $4.05 ($3.50 + $0.55) Sales volume – 390,000 units (300,000 x 130%) Total sales = 390,000 x $6.00 = $1,690,000 Profit calculations: Sales (390 000 x $6) Variable expenses: Cost of sales (390,000 x $3.35) Selling expenses (390,000 x $.55) Administrative expenses (390,000 x $0.15) Total variable expenses Contribution margin Fixed expenses: Cost of sales Selling expenses Administrative expenses Financial expenses

2 340 000 $1,306,500 214,500 58,500

1,579,500 760,500 $360,000 110,000 135,000 15,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Total fixed expenses Profit

620,000 $140,500

New breakeven sales x = ($4.05 / $6)x + $620,000 x = .675x + $480,000 .325x = $620,000 x = $1,907,692 (rounded) or 317,949 units (c)

Murray’s Plan Sales [450,000 x ($5.00 – $.20)] Variable expenses: Cost of sales (450,000 x $2.80) Selling expenses (450,000 x $.65) Administrative expenses (450,000 x $.15) Total variable expenses Contribution margin Fixed expenses: Cost of sales Selling expenses ($110,000 + $20,000) Administrative expenses Financial expenses Total fixed expenses Profit/(Loss)

$2,160,000 $1,260,000 292,500 67,500 1,620,000 540,000 $360,000 130,000 135,000 15,000 640,000 ($100,000)

New breakeven sales: x = ($1,620,000 / $2,160,000)x + $640,000 x = .75x + $640,000 .25x = $640,000 x = $2,560,000 or 533,334 units (d)

Riverina’s plan should be accepted as it produces a profit not a loss and a lower breakeven point than Murray’s plan.

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Chapter 17: Cost–volume–profit relationships

BBS17.2 Surfing the net Answers will vary, depending upon the company the student selects. An example solution is provided below for CSR Ltd. CSR Ltd (a)

From www.csr.com.au: “CSR is the name behind some of the market's most trusted and recognised brand names in providing building products for residential and commercial construction. Names that builders and generations of Australians have come to know and trust. Like Gyprock™ plasterboard, Bradford™ insulation, PGH™ bricks and pavers, Monier™ roof-tiles and Viridian™ glass to name a few. We operate low cost manufacturing facilities and a strong distribution network to service our customers across Australia and New Zealand. And because these products come from CSR, our customers can be sure that they are manufactured to meet all relevant building codes and standards to do the job. We're continually reinvesting in our business to meet new challenges in construction. We're also continuing to invest in research and development to develop new products to help our customers meet these challenges. Products like energy efficient Viridian™ glass, Bradford™ insulation and lightweight Hebel® concrete to make Australian homes more energy efficient. We endeavour to develop more innovative products right across our portfolio targeting the buildings of the future. Our customers benefit from our knowledge and our expertise. It means we have the resources to provide our customers with the service they need to get their job done. CSR is also a joint venture participant in the globally cost competitive Tomago aluminium smelter, located near Newcastle, NSW. CSR generates additional earnings from its Property division which focuses on maximising financial returns by developing surplus former manufacturing sites and industrial land for sale.” (source CSR website 3/4/2018 ‘about us’

(b)

Major industry segments (from CSR 2017 Annual Report Note 2 Segment Information in the notes to the financial statements). • Building products • Glass (Viridian) • Aluminium • Property

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Production costs of pavers or bricks — 2 each category.

(c)

Fixed Costs • Supervisors’ salaries • Depreciation on factory building • Insurance on factory building or equipment • Leases on equipment used in factory • Maintenance • Cleaning of factory • Air conditioning/heating Variable Costs • Raw materials • Labour on production line • Inspections and quality control • Depreciation on equipment if units-of-production method used • Power costs Students may argue that the costs are mixed or some may have described them as variable. The concept of relevant range could also be discussed. BBS17.3 Real-world focus BMW (a) Main steps in making motor vehicles: 1. Origin: cut out of steel and aluminium plates. 2. Dies and tooling: tools and dies constructed and produced for press plant and body shop. 3. Press plant: crude panels cut into shapes and right forms. 4. Body shop: Industrial robots put together metal components to form the body of a car. 5. Paint shop: layers of paint are applied on vehicles. 6. Modules: components such as the engines, seats and cockpits etc. are completed in advance. 7. Assembly: assembly workers completed the painted body-shells. 8. Finish: functional and visual inspection of the completed cars. (b) Two variable costs: Aluminium and paint. Two fixed costs: Rent of assembly plant and depreciation of industrial robots

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Chapter 17: Cost–volume–profit relationships

Critical thinking BBS17.4 Group decision case Suggestions for discussion: • Relevant range: Time, one semester. Fixed expenses include: • Rent — stays the same for each semester. • Transportation — if purchased weekly/monthly ticket. • Car Insurance and registration. Variable expenses include: • Textbook — total cost change with number of subjects studied. • Printing — the more printing of notes, the higher the printing costs. • Eating-out. Mixed expenses: • Mobile phone charges. • Internet charges. • Tuition fee — fixed portion: union fee; variable portion: tuition charge per subject/per credit point.

17.47

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS17.5 Group decision case To:

My Classmate

From:

Your Classmate

Subject:

Cost–Volume–Profit Questions

In response to your request for help, I send you the following: (a)

The mathematical formula for breakeven sales is: Breakeven Sales = Variable Costs + Fixed Costs Breakeven sales in dollars is found by expressing variable costs as a percentage of unit selling price. For example, if the percentage is 70%, the breakeven formula becomes x – .70x + Fixed Costs. The answer will be in sales dollars. Breakeven sales in units is found by using unit selling price and unit variable costs in the formula. For example, if the selling price is $300 and variable costs are $210, the breakeven formula becomes $300x – $210x + Fixed Costs. The answer will be in sales units.

(b)

The formulas for contribution margin per unit and contribution margin ratio differ as shown below: Unit Selling Price – Unit Variable Costs = Contribution Margin per Unit Contribution Margin per Unit / Unit Selling Price = Contribution Margin Ratio You can see that CM per Unit is used in calculating the CM ratio.

(c)

When contribution margin is used to determine breakeven sales, total fixed costs are divided by either the contribution margin ratio or contribution margin per unit. Using the CM ratio results in determining the breakeven point in dollars. Using CM per unit results in determining the breakeven point in units. The formula for determining breakeven sales in dollars is: Fixed Costs / Contribution Margin Ratio = Breakeven Sales in Dollars The formula for determining breakeven sales in units is: Fixed Costs / Contribution Margin per Unit = Breakeven Sales in Units. I hope this memorandum answers your questions.

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Chapter 17: Cost–volume–profit relationships

BBS17.6 Communication activity To:

A Manager, CEO

From:

A Student

Subject:

Benefits of Variable Costing

As you are aware, absorption costing, where both fixed and variable manufacturing costs are treated as products costs, is used for external reporting in accordance with generally accepted accounting principles. Many argue that to prepare variable costing information is a waste of time and money. Variable costs are costs which vary in total directly and proportionately with changes in activity level, within a relevant range. Under variable costing, it is only direct material, direct labour, and variable manufacturing costs which are considered product costs. Fixed manufacturing costs are treated as period costs as they are incurred irrespective of the volume of factory capacity utilised. The benefits of variable costing are that it forces management to evaluate the cost behaviour patterns of each cost item. This information is presented in a profit and loss format and provides the basis for CVP analysis, flexible budgeting, cost control and resource allocation. I hope you consider the benefits of variable costing information and ensure it is prepared as a tool for management decision-making.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS17.7 Communication activity BMW Student responses will vary, depending upon the Sustainability Report selected. The excerpts below are from the BMW Group Sustainable Value Report (SVR) 2017. Once on the website, click on the responsibility tab, then Sustainable Value Report and download the full report. Use the following link to access the site: https://www.bmwgroup.com/en/responsibility/sustainable-value-report.html

(a) ‘The BMW Group manages its business in accordance with responsible corporate governance principles geared to sustainable value creation in all areas of the company. To ensure compliance with these principles, clear lines of accountability have been defined in the BMW Group’s management system, which are reinforced through guidelines as well as control and incentive systems. Involving the Board in sustainability management The Board of Management governs the enterprise under its own responsibility, acting in the interests of the company and with the aim of achieving sustainable growth in value. It determines the strategic orientation of the enterprise and ensures its implementation. The Board of Management is also responsible for ensuring compliance with all provisions of the law and internal regulations as well as for adequate risk management and controlling. The Supervisory Board advises and supervises the Board of Management in conducting its duties (dual management system). Sustainability is a component of our corporate strategy. For this reason, our Sustainability and Environmental Protection department has been directly incorporated into our Corporate Planning and Product Strategy department since 2007, under the mandate of the Chairman of the Board of Management. This unit is responsible for sustainability strategy and sustainability management worldwide. Its tasks include the following: o To identify challenges and opportunities for sustainable operations o To develop and monitor sustainability goals o To further develop, specify and integrate our sustainability initiatives into individual divisions, taking the entire value chain into account o To ensure the cooperation of all departments in the company involved in sustainability o To provide a central corporate function for environmental protection (group representative) and manage the environmental protection network o To manage global centres of competence on a range of environmental issues Managing sustainability The Sustainability Board makes decisions on the long-term alignment of the sustainabilityrelated areas of action included in Strategy NUMBER ONE > NEXT. The entire Board of Management is represented on the Sustainability Board, along with the heads of Sustainability and Environmental Protection and of Corporate Communications. The Sustainability Board convenes at least once a year to assess the company’s progress on

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Chapter 17: Cost–volume–profit relationships

economic, environmental and social issues as well as the degree to which sustainability principles have been integrated into the various divisions.’ • GRI 102–31 The Strategy Circle comprises department heads from all divisions. In meetings that take place twice a year, it explicitly addresses sustainability topics and prepares decisions made by the Sustainability Board. • GRI 102–19, GRI 102–20, GRI 102– 27 The BMW Group management principles are also set down in the • Corporate Governance Code. (b)

Please use the link above to access the 2017 Sustainability Report and the information required for this part of the solution.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS17.8 Ethics case SWAN LTD (a)

The stakeholders in this situation are: • Richard Blake, accountant of Swan Ltd. • The dislocated personnel of Swan Ltd. • The senior management who made the decision.

(b)

The ethical issue is that due to Richard’s erroneous calculations, decisions were made which affected the employees of the company, causing their relocation. The real issue for Richard is that he should either admit that his forecast calculations were in error so next time someone may check the calculations or keep quiet due to compensating issues that profit will be about what was expected and the error will not be detected.

(c)

Richard’s alternatives are: • Keep quiet. • Confess his mistake to management. The students’ recommendation should recognise the practical aspects of the situation but they should be idealistic and ethical. If the students can’t be totally ethical when really nothing is at stake, how can they expect to be ethical under real-world pressures?

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Solutions manual to accompany

Financial accounting: Reporting, analysis and decision making 6th edition by Carlon et al.

Chapter 18: Budgeting

Chapter 18: Budgeting Assignment classification table

Learning objectives Outline the benefits and essential elements of effective budgeting.

Brief exercises

Exercises

Problems

Identify and describe the components of the master budget.

1, 2

1, 2, 3, 4, 5, 6

1A, 2A, 3A, 5A 1B, 2B ,3B ,5B

Explain and prepare the main sections of a cash budget.

4A, 4B

Describe the sources for preparing the budgeted statement of profit or loss and balance sheet

1A,2A,5A,6A 1B,2B,5B,6B

Indicate the applicability of budgeting in non-manufacturing entities.

5A, 5B

Explain the concept of budgetary control.

Compare and contrast the use of static and flexible budgets.

Describe the concept of responsibility accounting.

Identify the content of responsibility reports and their use in performance evaluation.

7, 8

7A, 8A, 7B, 8B

3, 9, 10

7A, 8A, 9A 7B, 8B, 9B

3, 11

10A, 11A, 10B, 11B

3, 12, 13

10A,11A,12A 10B, 11B, 12B

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to questions 18.1.

The primary benefits of budgeting are: (1) It requires all levels of management to plan ahead. (2) It provides definite objectives for evaluating subsequent performance. (3) It creates an early warning system for potential problems, which gives management additional time to solve the problem. (4) It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. (5) It results in greater management awareness of the entity’s overall operations and the impact of external factors such as economic trends on the company’s operations. (6) It contributes to positive behaviour patterns throughout the organisation by motivating personnel to meet planned objectives.

18.2.

The essentials of effective budgeting are: (1) a sound organisational structure (2) research and analysis (3) management acceptance of the budget.

18.3.

The required units of production are 36,000 (30,000 + 10,000 – 4,000).

18.4.

The required units of production are 154,000 (150,000 + 10,000 – 6,000).

18.5.

In a service enterprise, expected revenues can be obtained from expected output or expected input. The former is based on anticipated billings of clients for services rendered. The latter is based on expected billable time of the professional staff.

18.6.

Purpose (a) (b) (c)

18.7.

Name of Report Wastage Departmental overhead costs Statement of profit or loss

Frequency

Primary Recipient(s)

Daily Monthly Monthly and Quarterly

Production Manager Department Manager Top Management

Yes, this is true. A flexible budget is a series of static budgets at different levels of activity.

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Chapter 18: Budgeting

18.8.

The steps in preparing a flexible budget are: (1) Identify the activity index and the relevant range of activity. (2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. (3) Identify the fixed costs and determine the budgeted amount for each cost. (4) Prepare a budget for selected increments of activity within the relevant range.

18.9.

Ann should know that the following conditions contribute to the use of responsibility accounting: (1) Costs and revenues can be directly associated with the specific level of management responsibility. (2) The costs and revenues are controllable at the level of responsibility with which they are associated. (3) Budget data can be developed for evaluating the manager’s effectiveness in controlling the costs and revenues.

18.10. Return on investment (ROI) measures the effectiveness of a manager of an investment centre in terms of the usage of assets to generate profit. ROI is influenced by profit margin and the valuation of operating assets.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to brief exercises BE.1 O’CONNOR MANUFACTURING

18.4

Chapter 18: Budgeting

BE.2 HAUGHT & SON Direct Labour Budget for the six months ended 30 June 2018 Quarter 1 Units to be produced Direct labour time (hours) per unit Total required direct labour hours Direct labour cost per hour Total direct labour cost

5000 1.5 7,500 x $12 $90,000

Six Months

6,000 x 1.5 9,000 x $12 $108,000

11,000 x 1.5 16,500 x $12 $198,000

BE.3 LIANG INDUSTRIES Collections from Customers January February March

Credit Sales January, February, March,

$300,000 $275,000 $450,000

$180,000

$120,000 165,000 $285,000

$110,000 270,000 $380,000

BE.4 BIRTLES PTY LTD Budgeted Statement of profit or loss for the year ended 31 December Sales Cost of sales (60,000 x $35) Gross profit Selling and administrative expenses Profit before income taxes Income tax expense Profit

$3,000,000 2,100,000 900,000 600,000 300,000 90,000 $210,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BE.5 MARCO CONSULTING

Service Revenue Salary expense Rent expense Other operating expenses Profit

Budget Actual Difference $85,000 $95,000 $10,000 F 55,000 62,000 7,000 U 12,000 12,000 0 10,000 14,000 4,000 U $8,000 $7,000 1,000 U

% 12% 13% 0% 40% 13%

Comments: Service Revenue exceeded budgeted figure by $10,000 (12%) so this is good. However, both salary and other operating expenses were over the budgeted amounts by $7000 and $2500 (13% and 40%). The over-spending resulted in the profit being $1000 less than budgeted. BE.6 BIRCH LTD Static Budget Report for the month ended 31 January Budget Direct Labour (10,000 x $20)

$200,000

Birch Ltd Flexible Budget Report for the month ended 31 January Budget Direct Labour (10,800 x $20)

$216,000

Actual

Difference

$207,000

$7,000 U

Actual

Difference

$207,000

$9,000 F

The static budget does not provide a proper basis for evaluating performance because the budget is not based on the hours actually worked. In contrast, the flexible budget provides the proper basis for evaluating performance because the budget is based on the hours actually worked.

18.6

Chapter 18: Budgeting

BE.7 LEHMAN MANUFACTURING Aqua Division Management Responsibility Report for the year ended 31 December 2019 Budget Actual Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

$2,500,000 1,500,000 1,000,000 400,000 $600,000

$2,600,000 1,550,000 1,050,000 410,000 $640,000

Difference $100,000 F 50,000 U 50,000 F 10,000 U $40,000 F

BE.8 DINGO LTD (a)

ROI calculations A. 25% ($1,800,000 / $7,200,000) B. 30% ($2,880,000 / $9,000,000) C. 32% ($3,840,000 / $12,000,000)

(b)

Expected ROI given changes next year: (A)

An increase sales by 10% is $240,000 ($2,400,000 x 10%) and in turn the controllable margin by $192,000 ($240,000 x 80%). The new ROI is 27.7% ($1,992,000 / $7,200,000)

(B)

A decrease in costs results in a corresponding increase in controllable margin. The new ROI is 32.5% ($3,120,000 / $9,600,000).

(C)

A decrease in average operating assets reduces the denominator. The new ROI is 33.3% ($3,840,000 / $11,520,000).

18.7

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Solutions to exercises E18.1 L QUICK ELECTRONICS LTD Sales Budget for six months ending 30 June 2018

XQ-103

Quarter 1 Quarter 2 Six months Selling Total Selling Total Selling Total Units Units Units price sales price sales price sales 45,000 $12 $540,000 40,000 $12 $480,000 85,000 $12 $1,020,000

XQ-104

18,000

Product

63,000

$20

360,000

20,000

$900,000

60,000

$20

400,000

38,000

$20

$880,000 123,000

$1,780,000

E18.2 S. STAHL PTY LTD Production Budget for the year ending 31 December 2019

1 Expected unit sales 7,000 Add: Desired ending finished 5,400 goods units(1) Total required units 12,400 Less: Beginning finished goods 4,200 units Required production units 8,200 (1) (2)

PRODUCT HD-240 Quarter 2 3

Year

9,000 10,000

12,000 38,000

6,000

5,460(2)

7,200

5,460

15,000 17,200

17,460 43,460

5,400

7,200

6,000

9,600 11,200

4,200

10,260 39,260

60% of next quarter’s sales 60% (7,000 x 130%)

760,000

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Chapter 18: Budgeting

1 Expected unit sales Add: Desired ending finished (1) goods units Total required units Less: Beginning finished goods units Required production units (1) (2)

PRODUCT LL-250 Quarter 2 3

12,000 20,000 12,000 13,200

Year

22,000 24,000

40,000 94,000 9,360(2) 9,360

24,000 33,200 46,000 7,200 12,000 13,200,

49,360 103,360 24,000 7,200

16,800 21,200

25,360 96,160

32,800

60% of next quarter’s sales 60% (12,000 X 130%)

E18.3 (a) Profit centres (b) Master budget (c) Sales budget (d) Return on investment (e) Flexible budget (f) Investment centre

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E18.4 KASPER LTD (a) Kasper Ltd Production Budget for the six months ended 30 June 2019 Quarter

Expected unit sales Add: Desired ending finished goods units(1) Total required units Less: Beginning finished goods units Required production units

6,000 2,250 8,250 1,500 6,750

9,000 2,000 11,000 2,250 8,750

(3)

Six Months

(2)

15,500

25% of next quarter’s sales 25% x 8,000 (3) 25% x 6,000 (1) (2)

(b) Kasper Pty Ltd Direct Materials Budget for the six months ended 30 June 2019 Quarter 1

Units to be produced Direct materials per unit Total kilograms needed for production Add: Desired ending direct materials (kilograms) (1) Total materials required Less: Beginning direct materials (kilograms) Direct materials purchases Cost per kilogram Total cost of direct materials purchases

6,750 x3 20,250 13,125 33,375 10,125 23,250 x $5 $116,250

(2)

8,750 x3 26,250 12,750 39,000 13,125 25875 x $5 $129,375

Six Months

(3)

$245,625

50% of next quarter’s production [50% x (8,750 x 3)] 50% x (6,750 x 3). (3) 50% x (8,500 x 3) (1) (2)

18.10

Chapter 18: Budgeting

E18.5 MANIES PTY LTD Direct Labour Budget for the year ended 31 December 2018 Quarter 1 Units to be produced Direct labour time (hours) per unit Total required direct labour hours Direct labour cost per hour Total direct labour cost

20,000 25,000 x 1.6 x 1.6 32,000 40,000 x $14 x $14 $448,000 $560,000

Year

35,000 30,000 110,000 x 1.6 x 1.6 x 1.6 56,000 48,000 176,000 x $15 x $15 $840,000 $720,000 $2,568,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E18.6 SALLY LTD (a)

Budgeted Statement of Profit or Loss for the year ended 31 December 2019 Sales Cost of sales (see below) Gross profit Selling and administrative expenses Profit before income tax Income tax expense ($250,000 x 30%) Profit

$2,000,000 1,600,000 400,000 150,000 250,000 75,000 $175,000

Calculation of Cost of Sales Cost of one unit of finished goods: Direct materials (2 x $5) Direct labour (3 x $12) Manufacturing overhead (3 x $6) Total

$10 36 18 $64

25,000 units x $64 = $1,600,000

(b). The budgeted statement of profit or loss and balance sheet are prepared from (a) the sales budget, (b) the budgets for direct materials, direct labour and manufacturing overhead, and (c) the selling and administrative expense budget and the cash budget.

18.12

Chapter 18: Budgeting

E18.7 SALA PTY LTD Cash Budget for the two months ended 28 February 2019 January Beginning cash balance Add: Receipts Collections from customers Sale of securities Total receipts Total available cash Less: Disbursements Direct materials Direct labour Manufacturing overhead (less $1,000 dep’n) Selling and administrative expenses Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance

February

$32,000

$20,000

87,000 15,000 102,000 134,000

169,000 169,000 189,000

50,000 40,000 20,000 15,000 125,000 9,000

88,000 45,000 29,000 20,000 182,000 7,000

11,000 $20,000

13,000 $20,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E18.8 RAILWAY STREET STORES (a) Railway Street Stores Inventory Purchases Budget for the month ended 30 June 2018 Budgeted cost of sales ($800,000 x 60%) Desired ending inventory ($540,000* x 30%) Total Less: Beginning merchandise inventory ($480,000** x 30%) Budgeted merchandise purchases

$480,000 162,000 642,000 144,000 $498,000

* ($900,000 x 60% = $540,000) ** ($800,000 x60%) = $480,000)

(b) Railway Street Stores Budgeted Statement of profit or loss for the month ended 30 June 2018 Sales Cost of sales: Inventory 1 June Purchases Cost of goods available for sale Less: Inventory 30 June Cost of sales (60%) Gross profit (40%)

$800,000 $144,000 498,000 642,000 162,000 480,000 $320,000

18.14

Chapter 18: Budgeting

E18.9 DEEVA LTD (a) Deeva Ltd Monthly Flexible Manufacturing Overhead Budget for the year 2018 Activity level Direct labour hours Variable costs: Indirect labour ($1.5) Indirect materials ($.75) Electricity ($.45) Total variable ($2.70)

7,000

8,000

9,000

10,000

$10,500 5,250 3,150 $18,900

$12,000 6,000 3,600 $21,600

$13,500 6,750 4,050 $24,300

$15000 7,500 4,500 $27,000

Fixed costs: Supervision Depreciation Rates and taxes Total fixed Total costs

4,500 2,250 1,200 7,950 $26,850

4,500 2,250 1,200 7,950 $29,550

4,500 2,250 1,200 7,950 $32,250

4,500 2,250 1,200 7,950 $34,950

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Deeva Ltd Manufacturing Overhead Budget Report (Flexible) for the month ended 31 July 2018 Difference Direct labour hours (DLH) Expected 9,000 Actual 9,000

Budget at 9,000 DLH

Actual Costs 9,000 DLH

Favourable F Unfavourable U

Variable costs: Indirect labour Indirect materials Electricity Total variable

$13,500 6,750 4,050 24,300

$13,050 6,450 3,750 $23,250

$450 F 300 F 300 F 1,050F

Fixed costs: Supervision Depreciation Rates and taxes Total fixed Total costs

4,500 2,250 1,200 7,950 $32,250

4,500 2,250 1,200 7,950 $31,200

$1,050 F

(c) Deeva Ltd Manufacturing Overhead Budget Report (Flexible) for the month ended 31 July 2018 Difference Direct labour hours (DLH) Expected 8,500 Actual 8,500

Budget at 8,500 DLH

Actual Costs 8,500 DLH

Favourable F Unfavourable U

Variable costs: Indirect labour ($1.50) Indirect materials (0.75) Electricity (0.45) Total variable ($2.70)

$12,750 6,375 3,825 22,950

$13,050 6,450 3,750 $23,250

$300 U 75 U 75 F 300 U

Fixed costs: Supervision Depreciation Rates and taxes Total fixed Total costs

4,500 2,250 1,200 7,950 $30,900

4,500 2,250 1,200 7,950 $31,200

$300 U

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Chapter 18: Budgeting

(d)

In case (b) the performance for the month was satisfactory. In case (c) management may need to determine the causes of the unfavourable differences for indirect labour and indirect materials, or since the differences are small, 2.4% for indirect labour and 1.2% for indirect materials, they might be considered immaterial.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E18.10 O’KEEFE PTY LTD (a) O’Keefe Pty Ltd Selling Expense Budget Report (Flexible) Clothing Department for the month ended 31 October 2018 Difference Sales in units Expected Actual

12,000 15,000

Budget 15,000

Actual 10,000

Favourable F Unfavourable U

Variable expenses: Sales commissions ($.30) Advertising expense ($.15) Travel expense ($.65) Free samples ($.10) Total variable ($1.20)

$4,500 2,250 9,750 1,500 18,000

$4,200 2,100 9,150 1,550 17,000

$300 F 150 F 600 F 50 U 1,000 F

Fixed expenses: Rent Sales salaries Office salaries Depreciation — motor vehicle Total fixed expenses Total costs

1,500 1,200 800 500 4,000 $22,000

1,500 1,200 800 500 4,000 $21,000

$1,000 F

(b)

Todd should not have been reprimanded. As shown in the flexible budget report, variable costs were $1,000 below budget.

18.18

Chapter 18: Budgeting

E18.11 AZA STEEL Responsibility reports for the month of July 2018 (a)

To Brisbane Department Manager — Finishing

Controllable Costs

Month: July

Budget

Direct Materials Direct Labour Manufacturing Overhead Total

$46,000 82,000 49,200 $177,200

Actual $42,000 83,000 51,000 $176,000

Favourable Unfavourable $4,000 F 1,000 U 1,800 U $1,200 F

(b) Factory Manager — Brisbane

Month: July

Controllable Costs

Budget

Brisbane Office Departments: Machining Finishing Total

Actual

Favourable Unfavourable

$92,000

$95,000

$3,000 U

214,000 177,200 $483,200

218,000 176,000 $489,000

4,000 U 1,200 F $5,800 U

Month: July

Controllable Costs

Budget

Production Manager Assembly factories: Adelaide Brisbane Perth Total

$130,000

Actual

Favourable Unfavourable

$132,000

$2,000 U

421,000 426,000 483,200 489,000 499,000 494,000 $1,533,200 $1,541,000

5,000 U 5,800 U 5,000 F $7,800 U

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

E18.12 AMANDA MEDIA LTD (a) (1) (2) (3) (4)

Controllable margin ($320,000 – $180,000) Variable expenses ($450,000 – $320,000) Controllable fixed costs ($450,000 – $185,000) Service revenue ($230,000 + $450,000)

$140,000 130,000 265,000 680,000

(b) Amanda Media Ltd. Online Media Division for the year ended 30 June 2019

Sales Variable expenses Contribution margin Controllable fixed costs Controllable margin

Budget

Actual

Difference

$680,000 230,000 450,000 265,000

$600,000 220,000 380,000 265,000

–$80,000 –10,000 –70,000 0

$185,000

$115,000

–$70,000

Favourable/ Unfavourable U F U

E18.13 MASTERCRAFT DIVISION (a)

Controllable margin = ($3,600,000 – $2,160,000) – $720,000 = $720,000 ROI = $7200,000 / $6,000,000 = 12.0%

(b)

Contribution margin percentage is 40% ($1,440,000 / $3,600,000) Increase in controllable margin = $384,000 x 40% = $153,600 ROI = ($720,000 + $153,600) / $6,000,000 = 14.6%

Variable cost reduce by $120,000, therefore CM & controllable margin increase ROI = ($720,000 + $120,000) / $6,000,000 = 14.0%

Assets reduced by $300,000 ROI = 720,000 / ($6,000,000 – $300,000) = 12.6%

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Chapter 18: Budgeting

Solutions to problem set A PSA18.1 OAKBROOK FARM SUPPLY LTD Sales Budget for the six months ended 30 June 2018 Quarter 1 Expected unit sales Unit selling price Total sales

Six Months

35,000 50,000 85,000 x $60 x $60 x $60 $2,100,000 $3,000,000 $5,100,000

Oakbrook Farm Supply Production Budget for the six months ended 30 June 2018 Quarter

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

35,000 12,000 47,000 8,000 39,000

50,000 18,000 68,000 12,000 56,000

Six Months

95,000

Oakbrook Farm Supply Direct Materials Budget — Gumm for the six months ended 30 June 2018 Quarter 1 Units to be produced Direct materials per unit Total kilograms needed for production Add: Desired ending direct materials (kilograms) Total materials required Less: Beginning direct materials (kilograms) Direct materials purchases Cost per kilogram Total cost of direct materials purchases

39,000 x5 195,000 10,000 205,000 9,000 196,000 x $3 $588,000

Six Months

56,000 x5 280,000 13,000 293,000 10,000 283,000 x $3 $849,000 $1,437,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Oakbrook Farm Supply Direct Materials Budget — Tarr for the six months ended 30 June 2018 Quarter 1 Units to be produced Direct materials per unit Total kilograms needed for production Add: Desired ending direct materials (kilograms) Total materials required Less: Beginning direct materials (kilograms) Direct materials purchases Cost per kilogram Total cost of direct materials purchases

39,000 x8 312,000 20,000 332,000 14,000 318,000 x $1.50 $477,000

Six Months

56,000 x8 448,000 25,000 473,000 20,000 453,000 x $1.50 $679,500 $1,156,500

Oakbrook Farm Supply Direct Labour Budget for the six months ended 30 June 2018 Quarter Units to be produced Direct labour time (hours) per unit Total required direct labour hours Direct labour cost per hour Total direct labour cost

Six Months

39,000 x .25 9,750 x $12 $117,000

56,000 x .25 14,000 x $12 $168,000

95,000 x .25 23,750 x $12 $285,000

Oakbrook Farm Supply Selling and Administrative Expense Budget for the six months ended 30 June 2018 Quarter Variable (8% of sales) Fixed Total

Six Months

168,000 175,000 $343,000

$240,000 175,000 $415,000

$408,000 350,000 $758,000

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Chapter 18: Budgeting

Oakbrook Farm Supply Budgeted Statement of profit or loss for the six months ended 30 June 2018 Sales Cost of sales (85,000x $34.50) Gross profit Selling and administrative expenses Profit from ordinary activities Income tax expense (30%) Profit

$5,100,000 2,932,500 2,167,500 758,000 1,409,500 422,850 $986,650

*Standard Cost Per Bag

Quantity

Unit Cost

Total

Cost Element Direct materials: Gumm Tarr Direct labour Manufacturing overhead (150% of direct labour cost) Total

5 kilograms 8 kilograms .25 hour

$3.00 1.50 12.00

$15.00 12.00 3.00 4.50 $34.50

(c) Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives, (b) analysing the differences to determine their causes, (c) taking appropriate corrective action, and (d) modifying future plans, is necessary.

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA18.2 JOE DUNHAM LTD (a) Joe Dunham Ltd Sales Budget for the year 30 June 2018 JB 50 Expected unit sales Unit selling price Total sales

JB 60

480,000 180,000 x $20 X $25 $9,600,000 $4,500,000

TOTAL

$14,100,000

(b) Joe Dunham Ltd Production Budget for the year 30 June 2018

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

JB 50

JB 60

TOTAL

480,000 25,000 505,000 30,000 475,000

180,000 15,000 195,000 10,000 185,000

660,000

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Chapter 18: Budgeting

(c) Joe Dunham Ltd Direct Materials Budget for the six months ended 30 June 2018 JB 50 Units to be produced Direct materials per unit Total kilograms needed for production Add: Desired ending direct materials (kilograms) Total materials required Less: Beginning direct materials (kilograms) Direct materials purchases Cost per kilogram Total cost of direct materials purchases

JB 60

TOTAL

475,000 185,000 x2 x3 950,000 555,000 30,000 15,000 980,000 570,000 40,000 10,000 940,000 560,000 x $3 x $4 $2,820,000 $2,240,000 $5,060,000

(d) Joe Dunham Ltd Direct Labour Budget for the six months ended 30 June 2018 JB 50 Units to be produced Direct labour time (hours) per unit Total required direct labour hours Direct labour cost per hour Total direct labour cost

475,000 x .40 190,000 x $11 $2,090,000

JB 60 185,000 x .60 111,000 x $11 $1,221,000

TOTAL 660,000 301,000 x $11 $3,311,000

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(e) Joe Dunham Ltd Budgeted Statement of profit or loss for the six months ended 30 June 2018 JB 50 JB 60 Sales 9,600,000 4,500,000 Cost of sales (see below) 5,760,000 3,600,000 Gross profit 3,840,000 900,000 Less: Selling expenses 660,000 360,000 Administrative expenses 420,000 340,000 1,080,000 700,000 Profit from ordinary activities Income tax expense (30%) Profit

TOTAL $14,100,000 9,360,000 4,740,000 1,020,000 760,000 1,780,000 2,960,000 888,000 $2,072,000

(1) JB 50 480,000 x $12 =$5,760,000 (2) JB 60 180,000 x $20 = $3,600,000

18.26

Chapter 18: Budgeting

PSA18.3 HINDU INDUSTRIES LTD (a) Hindu Industries Ltd Sales Budget for the year ending 31 December 2020

Expected unit sales Unit selling price Total sales

Plan A

Plan B

*665,000 x $9.40 $6,251,000

850,000 x $8.50 $7,225,000

*$6,300,000 / $9 = 700,000. 700,000 x95%=665,000 ** 700,000 + 150,000 = 850,000 (b) Hindu Industries Ltd Production Budget for the year ending 31 December 2020 Plan A Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units *665,000 x4%

Plan B

665,000 *26,600 691,600 30,000 661,600

850,000 40,000 890,000 30,000 860,000

Plan B

661,600 x $2,977,200 $4.50 1,800,000 $4,777,200

$3,870,000

Total units (b)

661,600

860,000

Unit Cost (a) / (b)

$7.22

$6.59

Total fixed costs Total costs (a)

860,000 x $4.50

1,800,000 $5,670,000

The difference is due to the fact that fixed costs are spread over a larger number of units (198,400) in Plan B.

18.27

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d)

Gross Profit calculation

Sales Less Cost of Sales Gross Profit

665,000 x $7.22

Plan A

Plan B

$6,251,000

$7,225,000

4,801,300

5,601,500

$1,449,700

$1,623,500

850,000 x $6.59

Plan B should be accepted as it produces a higher gross profit than Plan A

18.28

Chapter 18: Budgeting

PSA18.4 SIERRA STAR (a)

(1) Sierra Star Expected Collections from Customers

November ($200,000) December ($280,000) January ($350,000) February ($400,000) Totals

January

February

$40,000 84,000 175,000 $299,000

$56,000 105,000 200,000 $361,000

(2) Expected Payments for Direct Materials

December ($90,000) January ($95,000) February ($110,000) Totals

January

February

$54,000 38,000 $92,000

$57,000 44,000 $101,000

18.29

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Sierra Star Cash Budget for the two months ended 28 February 2020

Beginning cash balance Add: Receipts: Collections from customers [See Schedule (1)] Interest receivable Sale of investments Total receipts Total available cash Less: Disbursements: Direct materials [See Schedule (2)] Direct labour Manufacturing overhead Selling and administrative expenses Purchase of land Total disbursements Excess (deficiency) of available cash over disbursements Financing: Borrowings Repayments Ending cash balance

January

February

$60,000

$55,000

299,000 3,000

361,000 5,000 366,000 421,000

302,000 362,000 92,000 80,000 60,000 75,000 307,000 55,000

101,000 95,000 75,000 85,000 20,000 376,000 45,000

$55,000

5,000 $50,000

18.30

Chapter 18: Budgeting

PSA18.5 REX LTD (a)

Rex Ltd Auckland Store Purchases Budget for the months of July and August 2020

Budgeted cost of sales Desired ending inventory Total Less: Beginning inventory Required purchases (1)

July

August

$280,000 78,750 358,750 70,000 $288,750

$315,000 87,500 402,500 78,750 $323,750

$500,000 x 70% x 25% = $87,500

(b) Rex Ltd Auckland Store Budgeted Statement of profit or loss for the months of July and August 2020

Sales Cost of sales: Beginning inventory Purchases Cost of goods available for sale Less: Ending inventory Cost of sales Gross profit Operating expenses: Sales salaries Advertising Delivery Sales commissions Rent Depreciation Electricity Insurance Total Profit from ordinary activities Income tax expense (30%) Profit

July

August

$400,000

$450,000

70,000 288,750 358,750 78,750 280,000 120,000

78,750 323,750 402,500 87,500 315,000 135,000

20,000 16,000 8,000 12,000 3,000 700 500 300 60,500 59,500 17,850 $41,650

20,000 18,000 9,000 13,500 3,000 700 500 300 65,000 70,000 21,000 $49,000

18.31

(1)

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA18.6 SAGE INDUSTRIES Sage Industries Budgeted Statement of profit or loss for the year ended 31 December 2019 Sales (10,000 x $40) Cost of sales: Finished goods inventory 1 January Cost of goods manufactured ($120000 + $80000 + $30000)

$400,000 $57,500 230,000

Cost of goods available for sale Less: Finished goods inventory 31 December (4,500 x $23)

287,500 103,500

Cost of sales Gross profit Selling and administrative expenses Profit from operations Interest expense Profit before income taxes Income tax expense (30%) Profit

184,000 216,000 50,000 166,000 5,000 161,000 48,300 $112,700

18.32

Chapter 18: Budgeting

Sage Industries Budgeted Balance sheet as at 31 December 2019 Current assets: Cash Accounts receivable ($100,000 x 40%) Finished goods inventory (4,500 units x $23)

$42,200 40,000 103,500

Total current assets

$185,700

Property, plant and equipment: Equipment ($40,000 + $30,000) Less: Accumulated depreciation ($10,000 + $5,000)

$70,000 15,000

55,000

Total assets

$240,700

Liabilities: Bank loan ($40,000 – $10,000) Accounts payable ($30000x50% + $8,000)

$30,000 23,000

Income taxes payable Total liabilities Shareholders’ equity Share capital Retained earnings ($30,000 + $112,700 – $20,000)

15,000 68,000 $50,000 122,700

Total shareholders’ equity Total liabilities and shareholders’ equity

172,700 $240,700

18.33

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA18.7 GREISH LTD (a) Greish Ltd Assembly Department Monthly Flexible Manufacturing Overhead Budget for the year ended 31 December 2019 Activity level: Direct labour hours Variable costs: Indirect labour ($.30) Indirect materials ($.20) Repairs ($.10) Power ($.08) Lubricants ($.04) Total variable ($0.72)

18,000

20,000

22,000

24000

$5,400 3,600 1,800 1,440 720 $12,960

$6,000 4,000 2,000 1,600 800 $14,400

$6,600 4,400 2,200 1,760 880 $15,840

$7,200 4,800 2,400 1,920 960 $17,280

Fixed costs: Supervision Depreciation Insurance Rent Rates and taxes Total fixed Total costs

$6,000 3,000 800 600 500 $10,900 $23,860

$6,000 3,000 800 600 500 $10,900 $25,300

$6,000 3,000 800 600 500 $10,900 $26,740

$6,000 3,000 800 600 500 $10,900 $28,180

18.34

Chapter 18: Budgeting

(b) Greish Ltd Assembly Department Manufacturing Overhead Budget Report (Flexible) for the month ended 31 January 2019

Direct labour hours (DLH) Expected 20,500 Actual 20,000 Variable costs: Indirect labour Indirect materials Repairs Electricity Lubricants Total variable Fixed costs: Supervision Depreciation Insurance Rent Rates and taxes Total fixed Total costs

(c)

Budget at 20,000 DLH

Actual Costs 20,000 DLH

Difference Favourable F Unfavourable U

$6,000 4,000 2,000 1,600 800 $14,400

$6,200 3,600 1,600 1,250 830 $13,480

–200 U 400 F 400 F 350 F –30 U 920F

$6,000 3,000 800 600 500 $10,900 $25,300

$6,000 3,000 800 700 500 $11,000 $24,480

0 0 0 –100 U 0 0

$820 F

Control over both variable and fixed costs was good.

18.35

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA18.8 NIGH LTD (a)

Budgeted fixed costs plus (budgeted variable costs per unit x activity level). $34,000 + $3.20 [$192,000 / (720,000/12)] x activity level

(b) Nigh Ltd Assembly Department Budget Report (Flexible) for the month ended 31 August 2020

Units) Expected 62,000 Actual 58,000 Variable costs: Direct Materials ($0.80) Direct Labour ($1.30) Indirect materials ($0.40) Indirect labour ($0.30) Power ($0.25) Maintenance ($0.15) Total variable ($3.20) Fixed costs: Rent Supervision Depreciation Total fixed Total costs

Difference Favourable F Unfavourable U

Budget at 58,000 units

Actual Costs 58,000 units

$46,400 75,400 23,200 17,400 14,500 8,700 $185,600

$47,000 74,100 24,200 17,500 14,900 9,200 $186,900

600 F 1,300 U 1,000 U 100 U 400 U 500 U 1,300 U

$10,000 17,000 7,000 $34,000 $219,600

$10,000 17,000 7,000 $34,000 $220,900

$1,300 U

This report shows a better basis for evaluating performance because the budget is based on the level of activity actually achieved. The manager should be criticised because every variable cost except direct labour was over budget.

18.36

Chapter 18: Budgeting

Units) Expected 65,000 Actual 64,000 Variable costs: Direct Materials ($0.80) Direct Labour ($1.30) Indirect materials ($0.40) Indirect labour ($0.30) Power ($0.25) Maintenance ($0.15) Total variable ($3.20) Fixed costs: Rent Supervision Depreciation Total fixed Total costs

Difference Favourable F Unfavourable U

Budget at 64,000 units

Actual Costs 64,000 units

$51,200 83,200 25,600 19,200 16,000 9,600 $204,800

$51,700 81,510 26,620 19,250 16,390 10,120 $205,590

500 U 1,690 F 1,020 U 50U 390 U 520 U 790 U

$10,000 17,000 7,000 34,000 $238,800

$10,000 17,000 7,000 34,000 $239,590

$790 U

The manager’s performance was slightly better in September than in August. However, each variable cost except Direct Labour is still over budget.

18.37

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA18.9 TIGER MANUFACTURING PTY LTD Monthly Flexible Manufacturing Overhead Budget Assembly Department for the month ending 31 July 2019 (a)

Activity level: Direct labour hours Variable costs: Indirect labour ($1) Indirect materials ($0.75) Electricity ($0.3) Maintenance ($0.2) Total variable ($2.25)

18,000

20,000

22,000

24,000

$18,000 13,500 5,400 3,600 $40,500

$20,000 15,000 6,000 4,000 $45,000

$22,000 16,500 6,600 4,400 $49,500

$24,000 18,000 7,200 4,800 $54,000

Fixed costs: Supervision Depreciation Insurance and taxes Total fixed Total costs

$12,500 7,500 5,000 25,000 $65,500

$12,500 7,500 5,000 25,000 $70,000

$12,500 7,500 5,000 25,000 $74,500

$12,500 7,500 5,000 25,000 $79,000

18.38

Chapter 18: Budgeting

Tiger Manufacturing Pty Ltd Budget performance report Assembly Department for the month ending 31 July 2019 (b) Direct labour hours (DLH) Expected 22,500 Actual 22,000 Variable costs: Indirect labour Indirect materials Electricity Maintenance Total variable Fixed costs: Supervision Depreciation Insurance and taxes Total fixed Total costs

Budget at 22, 000 DLH

Actual Costs 22, 000 DLH

Difference

$22,000 16,500 6,600 4,400 $49,500

$21,000 15,000 5,800 4,200 $46,000

$1,000 1,500 800 200 $3,500

$12,500 7,500 5,000 25,000 $74,500

$12,500 7,500 5,000 25,000 $71,000

0 0 0 0 $3,500 F

F/UF

F F F F F

18.39

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(c)

The department has effectively controlled all the costs in July with variable costs all having favourable variances and there were no variances for the fixed costs.

(d)

The formula is fixed costs of $25,000 plus total variable costs of $2.25 per direct labour hour.

(e)

Flexible budget manufacturing overhead 90 80

Costs (000)

70 60 Variable Cost Fixed Cost Total Cost

50 40 30 20 10 0 2

10 12 14 16 18 20 22 24 26 Direct labour hour(000)

18.40

Chapter 18: Budgeting

PSA18.10 EVER GREEN LTD (a) Responsibility Reports No. 1 To: Bottling Department Manager — Brisbane Division Month: December Controllable Costs:

Budget

Actual

Indirect labour Indirect materials Maintenance Electricity Supervision Total

$109,500 70,000 30,750 30,150 30,000 $270,400

$136,000 55,200 30,600 28,900 30,000 $280,700

Differences

F/UF

$26,500 (14,800) (150) (1,250) 0 $10,300

U F F F U

No. 2 To Division Production Manager — Brisbane Division Month: December Controllable Costs:

Budget

Actual

Brisbane Division Departments:

$38,000

$37,000

($1,000)

Squeezing Bottling Packaging Total

240,000 270,400 175,300 $723,700

228,000 280,700 184,000 $729,700

($12,000) 10,300 8,700 $6,000

Differences

18.41

F/UF

F F U U U

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

No. 3 To General Manager — Production Month: December Controllable Costs:

Budget

Actual

Differences F/UF

General Manager Production Divisions:

$68,000

$65,800

($2,200)

723,700 620,000 548,000 $1,959,700

729,700 654,000 553,000 $2,002,500

6,000 34,000 5,000 $42,800

Controllable Costs:

Budget

Actual

Differences F/UF

Managing Director General Managers: Production Finance Sales Total

$76,000

$74,800

1,959,700 115,000 167,000 $2,317,700

2,002,500 108,000 172,000 $2,357,300

Brisbane Sydney Melbourne Total

F U U U U

No. 4 To Managing Director Month: December

(b)

($1,200) F 42,800 (7,000) 5,000 $39,600

Within the Brisbane Division, the rankings of the department managers were: (1) Squeezing (2) Packaging (3) Bottling

At the Division Manager level, the rankings were: (1) Melbourne (2) Brisbane (3) Sydney

Rankings in terms of dollars may be somewhat misleading in this case because of the substantial difference between the production budget and the other budgets. On a percentage basis the differences and rankings are: (1) Finance, 6% Favourable (2) Production, 2% Unfavourable (3) Sales 3% Unfavourable

18.42

U F U U

Chapter 18: Budgeting

PSA18.11 LOCO MANUFACTURING Furniture Division Management Responsibility Report for the year ended 31 December 2019 (a)

Budget

Actual Costs

Difference Favourable F Unfavourable U

Sales

$2,500,000

$2,550,000

$50,000 F

Variable costs: Cost of sales Selling and administrative Total

1,300,000 220,000 1,520,000

1,257,000 227,000 1,484,000

43,000 F 7,000 U 36,000 F

980,000

1,066,000

86,000 F

Contribution margin

Controllable fixed costs: Cost of sales Selling and administrative Total

200,000 50,000 250,000

205,000 52,000 257,000

5,000 U 2,000 U 7,000 U

Controllable margin

$730,000

$809,000

$79,000 F

(b)

The manager did effectively control revenues and costs. Contribution margin was $86,000 favourable and controllable margin was $79,000 favourable. The manager was effective in controlling Sales and cost of sales, but not fixed costs. However, the unfavourable difference of $7,000 was only 2.8% of the expected fixed costs.

(c)

Two costs are excluded from the report: (1) non-controllable fixed costs; and (2) indirect fixed costs. The reason is that neither cost is controllable by the Furniture Division Manager.

18.43

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSA18.12 RIDDER MANUFACTURING LTD Lawnmower Division Management Responsibility Report For the year ended 31 December 2020 (a)

Budget

Actual Costs

Difference Favourable F Unfavourable U

Sales

$3,000,000

$2,800,000

$200,000 U

Variable costs: Cost of sales Selling and administrative Total

1,250,000 350,000 1,600,000

1,400,000 300,000 1,700,000

150,000 U 50,000 F 100,000 U

Contribution margin

1,400,000

1,100,000

300,000 U

270,000 130,000 400,000

$1,000,000

$700,000

$300,000 U

*25%

**17.5

7.5% U

Controllable fixed costs: Cost of sales Selling and administrative Total Controllable margin ROI *$1,000,000 / $4,000,000 **$700,000 / $4,000,000 (b)

The performance of the manager of the lawnmower division was below budget expectations for the year. The item top management would be likely to investigate is the reason why sales were $200,000 below budget. Next inquiry would be made as to the reason variable cost of sales is $150,000 unfavourable. Finally, the reasons for the favourable variable selling and administrative expenses would be discussed. It is conceivable that an inadequate selling effort contributed to the lower sales.

(c)

[$700,000 + ($1,400,000 x 15%)] = 22.75% $4,000,000

$700,000 = 21.9% ($4,000,000 x 80%)

($700,000 + $200,000) = 22.5% $4,000,000

18.44

Chapter 18: Budgeting

Solutions to problem set B PSB18.1 BLUE MOUNTAIN FARM SUPPLY Blue Mountain Farm Supply Sales Budget for the six months ended 30 June 2018 Quarter

Expected unit sales Unit selling price Total sales

Six Months

40,000 x $60 $2,400,000

60,000 x $60 $3,600,000

100,000 x $60 $6,000,000

Blue Mountain Farm Supply Production Budget for the six months ended 30 June 2018 Quarter

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

40,000 15,000 55,000 10,000 45,000

60,000 20,000 80,000 15,000 65,000

Six Months

110,000

18.45

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

Blue Mountain Farm Supply Direct Materials Budget — Crup for the six months ended 30 June 2018 Quarter

Units to be produced Direct materials per unit Total kilograms needed for production Add: Desired ending direct materials (kilograms) Total materials required Less: Beginning direct materials (kilograms) Direct materials purchases Cost per kilogram Total cost of direct materials purchases

Six Months

45,000 x6 270,000 12,000 282,000 9,000 273,000 x $3 $819,000

65,000 x6 390,000 15,000 405,000 12,000 393,000 x $3 $1,179,000

$1,998,000

Blue Mountain Farm Supply Direct Labour Budget for the six months ended 30 June 2018 Quarter 1 Units to be produced Direct labour time (hours) per unit Total required direct labour hours Direct labour cost per hour Total direct labour cost

45,000 x .25 11,250 x $10 $112,500

65,000 x .25 16,250 x $10 $162,500

Six Months 110,000 x .25 27,500 x $10 $275,000

Blue Mountain Farm Supply Selling and Administrative Expense Budget for the six months ended 30 June 2018 Quarter 1 Variable (10% of sales) Fixed Total

240,000 150,000 $390,000

2 $360,000 150,000 $510,000

Six Months $600,000 300,000 $900,000

18.46

Chapter 18: Budgeting

Blue Mountain Farm Supply Budgeted Statement of profit or loss for the six months ended 30June 2018 Sales Cost of sales (100,000 x $38)* Gross profit Selling and administrative expenses Profit from ordinary activities Income tax expense (30%) Profit

$6,000,000 3,800,000 2,200,000 900,000 1,300,000 390,000 $910,000

*Standard Cost Per Bag Quantity Cost Element Direct materials: Crup Dert Direct labour Manufacturing overhead (100% of direct labour cost) Total

6 kilograms 10 kilograms .25 hour

Unit Cost $3.00 1.50 10.00

Total

$18.00 15.00 2.50 2.50 $38.00

18.47

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

PSB18.2 ROYAL PALM LTD (a) Royal Palm Ltd Sales Budget for the year ending 30 June 2018

Expected unit sales Unit selling price Total sales

Product RP 188

Product RP 268

22,000 30 $660,000

14,000 40 $560,000

Product RP 188

Product RP 268

22,000 4,840 26,840 4,400 22,440

14,000 3,080 17,080 2,800 14,280

TOTAL

$1,220,000

(b) Royal Palm Ltd Production Budget for the year ending 30 June 2018

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

TOTAL

36,720

18.48

Chapter 18: Budgeting

Product RP 188

Product RP 268

22,440 2 44,880 8,000

14,280 3 42,840 5,000

52,880 10,000

47,840 7,000

42,880 $4 $171,520

40,840 $5 $204,200

Product RP 188

Product RP 268

22,440 0.4 8,976 $15 $134,640

14,280 0.6 8,568 $15 $128,520

TOTAL

$375,720

(d) Royal Palm Ltd Direct Labour Budget for the year ending 30 June 2018

Units to be produced Direct labour time (hours) per unit Total required direct labour hours Direct labour cost per hour Total direct labour cost

TOTAL

36,720 17,544 $15 $263,160

18.49

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(e) Royal Palm Ltd Budgeted Statement of profit or loss for the year ending 30 June 2018

Sales Cost of sales (see below) Gross profit Less: Selling expenses Administrative expenses

Product RP 188

Product RP 268

TOTAL

660,000 308,000 352,000

560,000 336,000 224,000

$1,220,000 644,000 576,000

110,000 44,000 154,000

84,000 28,000 112,000

194,000 72,000 266,000 310,000 93000 $217,000

Profit from ordinary activities Income tax expense (30%) Profit (1) RP 188: 22,000 units x $14 =$308,000 (2) RP 268: 14,000 units x $24 = $336,000

18.50

Chapter 18: Budgeting

PSB18.3 DAVID CHAMBERS LTD (a) David Chambers Ltd Sales Budget for the year ending 31 December 2020

Expected unit sales Unit selling price Total sales

Plan A

Plan B

*590,625 x $8.60 $5,079,375

756,250 x $7.60 $5,747,500

*656,250 x 90%= 590,635 ** 656,250 + 100,000 = 756,250 (b) David Chambers Ltd Production Budget for the year ending 31 December 2020 Plan A Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

Plan B

59,625 87,500 678,125 75,000 603,125

756,250 100,000 856,250 75,000 781,250

(c) Variable costs = $4.00 ($2.00 + $1.50 + $0.50) for both plans Plan A Total Variable costs Total fixed costs Total costs (a)

603,125x $4 $2,412,500 965,000 $3,377,500

Plan B $3,125,000 781,250x$4 965,000 $4,090,000

Total units (b)

603125

781,250

Unit Cost (a) / (b)

$5.60

$5.23

The difference is due to the fact that fixed costs are spread over a larger number of units (178,125) in Plan B.

18.51

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d)

Gross Profit calculation

Sales Less Cost of Sales Gross Profit

590,625 x $5.60

Plan A

Plan B

$5,079,375 3,307,500

$5,747,500 3,955,188

$1,771,875

$1,792,312

756,250 x $5.23

Plan B should be accepted as it produces a higher gross profit than Plan A

18.52

Chapter 18: Budgeting

PSB18.4 ZHANG LTD (a)

(1) Zhang Ltd Expected Collections from Customers

November ($260,000) December ($300,000) January ($360,000) February ($400,000) Totals

January

February

$52,000 90,000 180,000 $322,000

$60,000 108,000 200,000 $368,000

(2) Expected Payments for Direct Materials

December ($1000,000) January ($125,000) February ($130,000) Totals

January

February

$40,000 75,000 $115,000

$50,000 78,000 $128,000

18.53

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Zhang Ltd Cash Budget for the two months ended 28 February 2020

Beginning cash balance Add: Receipts: Collections from customers [See Schedule (1)] Notes receivable Sale of investments Total receipts Total available cash Less: Disbursements: Direct materials [See Schedule (2)] Direct labour Manufacturing overhead Selling and administrative expenses Drawings Total disbursements Excess (deficiency) of available cash over disbursements Financing: Borrowings Repayments Ending cash balance

January

February

$70,000

$54,000

322,000 15,000

368,000 6,000 374,000 428,000

337,000 407,000 115,000 90,000 70,000 78,000 353,000 54,000

128,000 100,000 75,000 85,000 5,000 393,000 35,000

$54,000

15,000 $50,000

18.54

Chapter 18: Budgeting

PSB18.5 MORRIS LTD (a) Morris Ltd Darwin Store Purchases Budget For the months of January and February 2020 January February Budgeted cost of sales Desired ending inventory Total Less: Beginning inventory Required purchases *$66,000x 30% = $19800 **$66,000 x 110% 60% x 30% = $13068 ***$60000x30% = $18000

$60,000 $19,800* 79,800 $18,000*** $61,800

$66,000 13068** 79,068 19,800 $59,268

18.55

Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(b) Morris Ltd Darwin Store Budgeted statement of profit or loss For the months of January and February 2020 January February $100,000 $110,000

Sales Cost of sales: Beginning inventory Purchases Cost of goods available for sale Less: Ending inventory Cost of sales Gross profit

18,000 61,800 79,800 19,800 60,000 $40,000

19,800 59,268 79,068 13,068 66,000 $44,000

Operating expenses: Sales salaries Advertising Delivery Sales commissions Rent Depreciation Electricity Insurance Total Profit from ordinary activities Income tax expense (30%) Profit

$8,000 5,000 3,000 5,000 3,000 800 1000 500 26,300 $13,700 4,110 $9,590

$8,000 5,500 3,300 5,500 3,000 800 1000 500 27,600 $16,400 4,920 $11,480

18.56

Chapter 18: Budgeting

PSB18.6 VIOLA INDUSTRIES Budgeted Statement of profit or loss for the year ended 31 December 2019 Sales (8,000 x $35) Cost of sales: Finished goods inventory 1 January Cost of goods manufactured ($72,400 + $38,600 + $42,000) Cost of goods available for sale Finished goods inventory 31 December (2,500 x $18) Cost of sales Gross profit Selling and administrative expenses Profit from operations Interest expense Profit before income taxes Income tax expense (30%) Profit

$280,000 $30,000 153,000 183,000 45,000 138,000 142,000 76,000 66,000 3,500 62,500 18,750 $43,750

Viola Industries Budgeted Balance sheet as at 31 December 2019 Current assets: Cash Accounts receivable ($80,000 x 40%) Finished goods inventory (2,500 units x $18) Total current assets Property, plant and equipment: Equipment ($40,000 + $24,000) Less: Accumulated depreciation ($10,000 + $4,000) Total assets Liabilities: Bank loan ($25,000 – $8,000) Accounts payable ($8,500 + $7,500) Income taxes payable Total liabilities Shareholders’ equity Share capital Retained earnings ($30,000 + $43,750 – $5,000) Total shareholders’ equity Total liabilities and shareholders’ equity

$29,750 32,000 45,000 $106,750

$64,000 (14,000)

50,000 $156,750

$17,000 16,000 5,000 38,000 $50,000 68,750 118,750 $156,750

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PSB18.7 CZERNKOWSKI & CO (a) Czernkowski & Co Packaging Department Monthly Flexible Manufacturing Overhead Budget for the year ended 31 December 2020 Activity level: Direct labour hours Variable costs: Indirect labour ($.40) Indirect materials ($.25) Repairs ($.15) Electricity ($.20) Lubricants ($.05) Total variable ($1.05)

27,000

30,000

33,000

36,000

$10,800 6,750 4,050 5,400 1,350 28,350

$12,000 7,500 4,500 6,000 1,500 31,500

$13,200 8,250 4,950 6,600 1,650 34,650

$14,400 9,000 5,400 7,200 1,800 37,800

Fixed costs: Supervision Depreciation Insurance Rent Rates and taxes Total fixed Total costs

7,500 4,500 2,250 3,000 1,500 18,750 $47,100

7,500 4,500 2,250 3,000 1,500 18,750 $50,250

7,500 4,500 2,250 3,000 1,500 18,750 $53,400

7,500 4,500 2,250 3,000 1,500 18,750 $56,550

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(b) Czernkowski & Co Packaging Department Manufacturing Overhead Budget Report (Flexible) for the month ended 31 October 2020

Direct labour hours (DLH) Expected 27,500 Actual 27,000 Variable costs: Indirect labour Indirect materials Repairs Electricity Lubricants Total variable Fixed costs: Supervision Depreciation Insurance Rent Rates and taxes Total fixed Total costs

(c)

Difference Favourable F Unfavourable U

Budget at 27,000 DLH

Actual Costs 27,000 DLH

$10,800 6,750 4,050 5,400 1,350 28,350

$11,760 6,400 4,000 5,900 1,640 29,700

$960 U 350 F 50 F 500 U 290 U 1,350 U

7,500 4,500 2,250 3,000 1,500 18,750 $47,100

7,500 4,500 2,225 3,000 1,500 18,725 $48,425

25 F 25 F $1,325 U

The overall performance of management was slightly unfavourable. However, none of the unfavourable differences exceeded 10% of budget except for lubricants (21%).

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PSB18.8 LORCH LTD (a)

Budgeted fixed costs plus (budgeted variable costs per unit x activity level). $23,000 + $2.40 [$120,000 / ($600,000/12)] x activity level

(b) Lorch Ltd Packaging Department Budget Report (Flexible) for the month ended 31 May 2019

Units) Expected 57,000 Actual 55,000 Variable costs: Direct Materials ($0.60) Direct Labour ($1.00) Indirect materials ($0.30) Indirect labour ($0.25) Power ($0.15) Maintenance ($0.10) Total variable ($2.40) Fixed costs: Rent Supervision Depreciation Total fixed Total costs

Difference Favourable F Unfavourable U

Budget at 55,000 units

Actual Costs 55,000 units

33,000 55,000 16,500 13,750 8,250 5,500 132,000

32,000 53,000 15,200 13,000 7,100 5,200 125,500

1,000 F 2,000 F 1,300 F 750 F 1,150 F 300 F 6,500 F

9,000 9,000 5,000 23,000 $155,000

9,000 9,000 5,000 23,000 $148,500

___-___ $6,500 F

This report shows a better basis for evaluating performance because the budget is based on the level of activity actually achieved.

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Units) Expected 39,000 Actual 40,000 Variable costs: Direct Materials ($0.60) Direct Labour ($1.00) Indirect materials ($0.30) Indirect labour ($0.25) Power ($0.15) Maintenance ($0.10) Total variable ($2.40) Fixed costs: Rent Supervision Depreciation Total fixed Total costs

Difference Favourable F Unfavourable U

Budget at 40,000 units

Actual Costs 40,000 units

$24,000 40,000 12,000 10,000 6,000 4,000 96,000

$25,600 42,400 12,160 10,400 5,680 4,160 100,400

$1,600 U 2,400 U 160 U 400 U 320 U 160 U 4,400 U

9,000 9,000 5,000 23,000 $119,000

9,000 9,000 5,000 23,000 $123,400

$4,400 U

The manager should be criticised because every variable cost was over budget.

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PSB18.9 TARIQ MANUFACTURING PTY LTD (a) Tariq Manufacturing Pty Ltd Monthly Flexible Manufacturing Overhead Budget Assembly Department for the year ending 31 December 2018 Activity level: Direct labour hours Variable costs: Indirect labour ($1.20) Indirect materials ($.70) Electricity ($.30) Maintenance ($.20) Total variable ($2.40)

22,500

25,000

27,500

30,000

$27,000 15,750 6,750 4,500 54,000

$30,000 17,500 7,500 5,000 60,000

$33,000 19,250 8,250 5,500 66,000

$36,000 21,000 9,000 6,000 72,000

Fixed costs: Supervision Depreciation Insurance and taxes Total fixed Total costs

15,000 10,000 5,000 30,000 $84,000

15,000 10,000 5,000 30,000 $90,000

15,000 10,000 5,000 30,000 $96,000

15,000 10,000 5,000 30,000 $102,000

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(b) Tariq Manufacturing Pty Ltd Assembly Department Manufacturing Overhead Budget Report (Flexible) for the month ended 31 July 2018

Direct labour hours (DLH) Expected 27,500 Actual 27,500 Variable costs: Indirect labour Indirect materials Electricity Maintenance Total variable Fixed costs: Supervision Depreciation Insurance and taxes Total fixed Total costs

Difference Favourable F Unfavourable U

Budget at 27,500 DLH

Actual Costs 27,500 DLH

$33,000 19,250 8,250 5,500 66,000

$32,000 17,000 8,100 5,400 62,500

$1,000 F 2,250 F 150 F 100 F 3,500 F

15,000 10,000 5,000 30,000 $96,000

15,000 10,000 5,000 30,000 $92,500

$3,500 F

(c)

Based on the above budget report, control over costs was effective. For variable costs, all differences were favourable. For fixed costs, there were no differences between budgeted and actual costs.

(d)

The formula is fixed costs of $30,000 plus total variable costs of $2.40 per direct labour hour.

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(e)

Total Budgeted Cost Line

$80 70

Costs in (000)

60 50 Budgeted Variable Costs

40 30 20 10

Budgeted Fixed Costs

Direct Labour Hours in (000)

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PSB18.10 OTTO PRODUCTS Otto Products Responsibility Reports (a)

Responsibility reports for cost centres compare actual costs with flexible budget data. The reports show only controllable costs and no distinction is made between variable and fixed costs. Responsibility reports for profit centres show contribution margin, controllable fixed costs, and controllable margin for each profit centre. The main basis for evaluating performance in investment centres is return on investment (ROI). The formula for calculating ROI for investment centres is: Controllable margin (in dollars) / Average operating assets.

(b) No. 1 To: Cutting Department Manager — Melbourne Division

Month: January

Controllable Costs:

Budget

Actual

Indirect labour Indirect materials Maintenance Electricity Supervision Total

$70,000 46,000 18,000 17,000 20,000 $171,000

$73,000 46,700 20,500 20,100 20,000 $180,300

No. 2 To Division Production Manager — Melbourne Division

Fav/Unfav $3,000 U 700 U 2,500 U 3,100 U $9,300 U

Month: January

Controllable Costs:

Budget

Actual

Fav/Unfav

Melbourne Division Departments: Cutting Shaping Finishing Total

$51,000 171,000 148,000 208,000 $578,000

$52,500 180,300 158,000 210,000 $600,800

$1,500 U 9,300 U 10,000 U 2,000 U $22,800 U

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No. 3 To General Manager — Production Controllable Costs: General Manager Production Divisions: Melbourne Christchurch Adelaide Total

No. 4 To Managing Director

Month: January Budget

Actual

Fav/Unfav

$64,000 578,000 673,000 715,000 $2,030,000

$65,000 600,800 676,000 722,000 $2,063,800

$1,000 U 22,800 U 3,000 U 7,000 U $33,800 U

Month: January

Controllable Costs:

Budget

Managing Director General Managers: Production Marketing Finance Total

$74,200

$76,400

$2,200 U

2,030,000 130,000 105,000 $2,339,200

2,063,800 133,600 107,000 $2,380,800

33,800 U 3,600 U 2,000 U $41,600 U

(c)

Actual

Fav/Unfav

Within the Melbourne Division, the rankings of the department managers were: (1) Finishing (2) Cutting (3) Shaping.

At the Division Manager level, the rankings were: (1) Christchurch (2) Adelaide (3) Melbourne.

Rankings in terms of dollars may be somewhat misleading in this case because of the substantial difference between the production budget and the other budgets. On a percentage basis the differences and rankings are: (1) Production, .017 (2) Finance, .019 (3) Marketing. .028

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PSB18.11 MCCLUSKEY MANUFACTURING McCluskey Manufacturing Home Appliance Division Management Responsibility Report for the year ended 31 December 2020 (a)

Budget

Actual Costs

Difference Favourable F Unfavourable U

Sales

$2,400,000

$2,300,000

$100,000 U

Variable costs: Cost of sales Selling and administrative Total

1,200,000 240,000 1,440,000

1,260,000 230,000 1,490,000

60,000 U 10,000 F 50,000 U

Contribution margin

960,000

810,000

150,000 U

Controllable fixed costs: Cost of sales Selling and administrative Total

200,000 60,000 260,000

190,000 66,000 256,000

10,000 F 6,000 U 4,000 F

Controllable margin

$700,000

$554,000

$146,000 U

(b)

The manager did not effectively control revenues and costs. Contribution margin was $150,000 unfavourable and controllable margin was $146,000 unfavourable. Contribution margin was unfavourable primarily because sales were $100,000 under budget and variable cost of sales was $60,000 over budget. Apparently, the manager was unable to control variable cost of sales when sales failed to meet budget expectations. The manager was effective in controlling fixed costs. However, the favourable difference of $4,000 was only 27% of the unfavourable difference in contribution margin.

(c)

Two costs are excluded from the report: (1) non-controllable fixed costs (2) indirect fixed costs. The reason is that neither cost is controllable by the Home Appliance Division Manager.

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PSB18.12 KURIAN MANUFACTURING LTD Kurian Manufacturing Ltd Home Division Management Responsibility Report for the year ended 31 December 2019 (a)

Actual Costs

Difference Favourable F Unfavourable U

$1,400,000

$1,500,000

$100,000 F

Variable costs: Cost of sales Selling and administrative Total

600,000 100,000 700,000

700,000 125000 825,000

100,000 U 25,000 U 125,000 U

Contribution margin

700,000

675,000

25,000 F

Controllable fixed costs: Cost of sales Selling and administrative Total

170,000 100,000 270,000

Controllable margin

$430,000

$405,000

$25,000 U

*21.5%

**20.25

1.25% U

Budget Sales

ROI *$430,000 / $2,000,000 **$405.000 / $2,000,000 (b)

The performance of the manager of the home division was slightly below budget expectations for the year. The item top management would be likely to investigate is the reason why variable cost of sales is $100,000 unfavourable. In making the inquiry, it should be recognised that the budget amount should be adjusted for the increased sales as follows $1,500,000 x ($600,000/$1,400,000) = $643,000. Thus, there should be an explanation of a $57,000 ($7000,000 – $643,000) unfavourable difference.

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(c)

$405,000 + ($700,000 x 6%) = 22.35% $2,000,000

$405,000 = 22.5% $2,000,000 - ($2,000,000 x 10%)

($405,000 + $90,000) = 24.75% $2,000,000

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Building business skills Financial reporting and analysis BBS18.1 Managerial analysis ERGO LTD (a)

(b)

Raw materials

Either lower quality materials resulting in an inferior product and possible lost sales, or fewer units produced resulting in lost sales.

Direct labour

Reducing production resulting in lost sales, or reduction in quality of product resulting in lost sales.

Insurance

Less coverage; may increase risk beyond acceptable levels.

Depreciation

To reduce depreciation, fixed assets would have to be disposed of, and this could result in less production and lost sales.

Machine repairs

Less efficient operations, or lost production and sales.

Sales salaries

Lost sales

Office salaries

Less effective administrative functions.

Factory salaries

Lost production due to inefficiency, and therefore lost sales.

Given the nature of their product, a decline in quality should be avoided, since this could result in lower future sales. Raw materials represent the largest single cost, and thus perhaps the greatest potential savings. Perhaps substitute materials of similar quality can be found, or less expensive materials can be used for aspects of the product where quality is not as critical. Additionally, it may be possible to renegotiate prices with suppliers. Ergo should be very reluctant to reduce repair costs, since in the long run this can be very expensive. Perhaps salaried and hourly employees can be encouraged to take pay cuts if a profit-sharing mechanism is introduced.

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BBS18.2 Managerial analysis OUTBACK (a)

Sally Worthing — Profit Centre: Responsible for sales, inventory cost, advertising, sales personnel, printing and travel. She is not responsible for the assets invested in her division and probably does not control the rent or depreciation costs either. As a profit centre manager, she might have control of the insurance, but she probably does not. Guan Wei — Cost Centre: Responsible for inventory cost, advertising, sales personnel, printing, and travel. As a cost centre manager, he might or might not have control of rent and insurance costs, but he probably does not. He does not have control of the assets invested in his department; thus, he does not have control of the depreciation. Owen Hadley — Investment Centre: Responsible for all items shown.

(b)

Sally Worthington Budget difference: The inventory cost is 30% ($390,000 / $300,000) above budget and so should definitely be brought to her attention. Travel is 25% below budget. Students may differ as to whether they believe that this should be brought to her attention. The differences in rent and depreciation should not be brought to her attention because she does not control those costs. Guan Wei Budget differences: The inventory cost which is 20% above budget should definitely be brought to his attention. Travel costs are 33% below budget. This should probably be brought to his attention so that he can make sure that the purpose that was to have been served by travel is being adequately served by other means. The 66% increase in rent and 10% decrease in depreciation are not under his control and so should not be brought to his attention. It should probably be pointed out to students that all budget differences are monitored by someone within the company. These differences that are not the responsibility of the various managers, but are still within the scope of top management’s responsibility. Oscar Hadley Budget differences: As manager of an investment centre, Mr Hadley is responsible for all categories of the budget. The selection in this case would be which differences merit his attention. Any decrease in a company’s gross profit margin (gross profit / sales) is a cause for concern. (Remember the gross profit is sales minus cost of sales.) Thus, the 5% increase in cost of sales should be brought to his attention. Travel is below budget 25%, which is $1000. This is not a large percentage of total costs, nor is it a large dollar amount, so there could be an argument that this should be left out. The 20% increase in rent is only a $4,000 increase, so it could be included, though it might be left out as immaterial. The 50% increase in depreciation should definitely be included.

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BBS18.3 Real-world focus Students can choose either the Australian or New Zealand governments’ budgets to answer these questions. (a) The Australian government’s main source of income: • Income taxation revenue, including: individuals and other withholding taxes, fringe benefits tax, superannuation funds tax, company tax, petroleum resource rent tax. • Goods and services tax • Excise and customs revenue, including petrol, diesel, crude fuel products, beer, spirits and tobacco • Other taxation revenue, including: wine equalisation tax and luxury car tax • Non-taxation income, including sales of goods and services, dividends and interest received (b) The Australian government’s main types of expenses (by function): • General public services • Defence • Public order and safety • Education • Health • Social security and welfare • Housing and community amenities • Recreation and culture • Fuel and energy • Agriculture, forestry and fishing • Mining, manufacturing and construction • Transport and communication • Other economic affairs (e.g. tourism and immigration) • Other purposes (e.g. natural disaster relief) (c) The Australian government underlying cash deficit forecast will vary from year to year — please visit the website provided for this information: www.budget.gov.au

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BBS18.4 Financial analysis on the web GOLD COAST CITY COUNCIL Gold Coast City Council has a very extensive website explaining the rates. The following information is from the website. (a)

Components of the rates are: • Differential General Rates • State Government Emergency Management Levy • City transport improvement • Open space preservation • Recreational space • Waste management service

2. Differential General Rates A differential system of rates provides equity through recognising different uses made of different properties (both generally and with respect to the revenue-producing potential) and different service levels generated or potentially generated by different properties. Differential general rates incorporate the categories detailed in the Schedule 1 table, which begins at page 15. The basis for developing criteria that distinguish a category is the identification of particular characteristics or factors shared by all lands to be included in the category; for example: • Residential land is categorised by taking into account, but not limited to, whether or not the land is: - a principal place of residence (referenced by categories 1A;1B;1C,1P,1T;1U and 7A); or - rented to permanent residents or is not a principal place of residence (referenced by categories 2A to 2T and 7B to 7H); or - rented to itinerants (referenced by categories 3A to 3T and 7M to 7S). - multi-unit residential property (referenced by categories 8A to 8D). • Commercial land is categorised on its commercial use or in the case of vacant land, usable under Council’s City Plan, for a commercial purpose or a mixed commercial and residential purpose (referenced by categories 4A to 4T). • Farming land is categorised solely on the basis of whether it is valued under Land Valuation Act Chapter 2, Part 2, Division 5, Subdivision 2 for exclusive use of farming (referenced by categories 5A and 5B). • Newly subdivided land is categorised solely by reference to whether it is: - subject to a discounted valuation issued under Land Valuation Act Chapter 2, Part 2, Division 5, Subdivision 3; and - exempt from the minimum general rate as required under Local Government Regulation 2012 section 77, (referenced by categories 6B, 6C and 6G). The minimum general rate for an owner occupied residential property is $921.

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3. Water Utility Charges — Potable (Drinking) Water Residential Pricing Two-part tariff pricing will apply to all residential property within the city (including residential vacant land) that is connected or has access to Council’s water transportation system. The twopart tariff will be composed of: (a) a water access charge, representing a contribution to the capital cost of Council's supply infrastructure; and (b) a water usage charge, namely a single tier charge for each kilolitre of water consumed. Where some lots, but not all, in a community titles scheme supplied by a master meter, are residential lots (Council Land Use Code 10, 12, 14, 15 and 26), all the lots within the scheme will be levied as residential lots unless the majority of the lots within the scheme, based on contribution schedule lot entitlement, are non-residential. A utility charge comprising: (a) an annual water access charge of $212.08; payable in equal quarterly instalments of $53.02; and (b) a water usage charge of $3.90 per kilolitre (inclusive of $2.81 per kilolitre Bulk Component)

(b)

Major projects and strategies of the council are under the following categories: • Arts and culture • Business and economic development • Community • Environment and waste • Information technology • Ocean, beaches and waterways • Parks and community facilities • Planning • Traffic and transport • Water, sewerage and stormwater These business groups run as profit making enterprises and thereby funding is obtained from external sources and internal sources by providing services and products to the council itself. Budgets are prepared for each business and the consolidated group. The Council business group is managed by a holding entity committee (akin to a Board of Directors in a public company). (c)

Students’ answers will differ depending on the activity selected.

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Critical thinking BBS18.5 Group decision case GREEN PASTURES

(a)

(1)

The primary causes of the loss in profit were the decrease in the number of boarding days and the decrease in the boarding fee. The number of boarding days decreased by 2,920 or approximately 13% (2,920 days / 21,900 days), and the boarding fee decreased from $25(a) per day to $20(b) per day, a decrease of 20% ($5 / $25). Together these resulted in a $167,900 decrease in sales revenue, a decrease of approximately 31% ($167,900 / $547,500). (a)

$547,500 / 21,900 days $379,600 / 18,980 days

(b)

(2)

= $25 per day = $20 per day

Management did a poor job in controlling variable expenses. Given that boarding days declined by about 13%, variable expenses should decline by about 13%, or more precisely, variable expenses should decline by $25,404 $190,530 x

2,920 . 21,900

However, variable expenses only declined by $13,826 or about 7% ($13,826 / $190,530). To repeat, management did a poor job in controlling variable expenses. Management did a better job in controlling fixed expenses. Fixed expenses were under budget by $5,000 and this includes the additional expenses incurred in advertising and entertainment. (3)

Management’s decisions to stay competitive probably were sound. Given the decline in boarding days, the decision not to replace the worker was sound. The decision to reduce rates was probably forced by the competition. Without the additional advertising and entertainment expenses, the loss in profit might have been even greater.

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(b) Green Pastures Statement of profit or loss Flexible Budget Report for the year ended 31 December 2019 Difference Boarding days (BD) Expected Actual

Budget at 18,980 BD

Actual at 18,980 BD

Favourable F Unfavourable U

Sales ($25) Less: variable expenses: Feed ($5) Veterinary fees ($3) Blacksmith fees ($.30) Supplies ($.40) Total variable expenses ($8.70)

$474,500

$379,600

$94,900 U

94,900 56,940 5,694 7,592 165,126

104,390 58,838 6,074 7,402 176,704

9,490 U 1,898 U 380 U 190 F 11,578 U

Contribution margin Less fixed expenses: Depreciation Insurance Utilities Repairs and maintenance Labour Advertising Entertainment Total fixed expenses Profit

309,374

202,896

106,478 U

40,000 11,000 14,000 11,000 96,000 8,000 5,000 185,000 $124,374

40,000 11,000 12,000 10,000 88,000 12,000 7,000 180,000 $22,896

2,000 F 1,000 F 8,000 F 4,000 U 2,000 U 5,000 F $101,478 U

(c)

(1)

21,900 18,980

The primary causes of the loss in profit are the decreases in boarding rates and volume. The average daily rate charged was $20 ($379,600 / 18,980). This rate resulted in a decrease in sales revenue of $94,900 or 20% ($94,900 / $474,500). Given that it is ‘an extremely competitive business’, if Green Pastures had not reduced rates, boarding days almost certainly would have declined even more.

(2)

Management did a poor job of controlling variable expenses. These expenses in total were $11,578 over budget or 7% ($11,578 / $165,126). Moreover, each individual variable expense was over budget, except for supplies. Management did a good job on controlling fixed expenses as noted in part (a).

(3)

As noted in part (a), management’s decision to stay competitive probably was sound.

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(d)

Given that the industry is ‘extremely competitive’, management should consider two options. One, become the lowest cost operator. If Green Pastures is the company with the lowest operating costs, it can under-price its competitors and take customers away from them (increasing its sales). Eventually some of its competitors (those with the highest operating costs) will go out of business, and Green Pastures will get their customers, or at least some of them. Option two is to offer its customers a superior product or service. If customers perceive that Green Pastures is the ‘best’ boarding stable in Sydney, the company will take customers away from its competitors. Also, if Green Pastures is perceived as the ‘best’, many customers will be willing to pay a premium for its boarding service, and Green Pastures will be able to raise its rates.

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BBS18.6 Group decision case FISHER LTD (a)

The budget at Fisher Ltd is an imposed ‘top-down’ budget which fails to consider both the need for realistic data and the human interaction essential to an effective budgeting/control process. The CEO has not given any basis for his goals, so no one knows if they are realistic for the company. True participation of company employees in the preparation of the budget is minimal and limited to mechanical gathering and manipulation of data. This suggests there will be little enthusiasm for implementing the budget. The budget process is the merging of the requirements of all facets of the company on a basis of sound judgement and equity. Specific instances of poor procedures other than the approach and goals may include the following:

(b)

The sales by product line should be based upon accurate sales forecast of the potential market. Therefore, the sales by product line should be developed first to derive the sales target rather than the reverse.

Production costs probably would be the easiest and most certain costs to estimate. Given variable and fixed production costs, the company can calculate the sales volume necessary to cover manufacturing costs plus the costs of other aspects of the operation. This would be helpful before the marketing and corporate head office budgets are set.

The initial meeting between CFO, the finance director, the marketing manager and the production manager should be held much earlier in the budgeting process. It is held when all parties are already at logger heads.

Fisher Ltd should consider a ‘bottom-up’ approach for the budget process. This means that the employees responsible for the performance under the budget would participate in the decisions by which the budget is established. In addition, this approach requires initial and continuing involvement of sales, financial and production personnel to define sales and profit goals which are realistic within the constraints under which management operate. Although this approach is more time consuming, it will save time in the end as it will produce a budget which is more acceptable, honest and has a workable goalcontrolling mechanism. The sales forecast should be developed considering internal sales forecasts as well as the external factors. Cost within departments should be divided into fixed and variable, discretionary and nondiscretionary.

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(c)

The functional areas should not necessarily be expected to cut costs when sales volume falls below budget. The time frame of the budget (annual) is short enough so that many costs are relatively fixed in amount. For those costs which are fixed, there is little hope for a reduction as a result of short run changes in production. However, the functional areas should be expected to cut costs should sales volume fall below target when: 1. Control is exercised over the costs within their function 2.

Budgeted costs were more than adequate for the original sales target (i.e.: slack was present).

Budgeted costs vary to some extent with changes in sales

There are discretionary costs which can be delayed or omitted without serious impact on the department.

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BBS18.7 Ethics case VEK-TEK LTD (a)

At best, if you disclose the errors in your calculations, you will be embarrassed. At worst, you will be dismissed without a recommendation for another job.

(b)

The managing director will continue making presentations using data that are grossly overstated. In time, your error may be detected when the events you projected do not materialise.

(c)

The most ethical scenario would be to admit your error, let the managing director know about the error, provide the managing director with corrected projections, and allow the managing director to decide how to alter his presentations during the second week of his speech-making.

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BBS18.8 Communication activity CATHEDRAL LTD (a)

B Sherrick should be able to control all the variable expenses and the fixed expenses of supervision and inspection. Insurance and depreciation ordinarily are not the responsibility of the department manager.

(b)

The total variable cost per unit is $26.50 ($159,000 / 6000). The total budgeted cost during the month to manufacture 4500 units is variable costs $119,250 (4,500 × $26.50) plus fixed costs ($105 000), for a total of $224,250 ($119,250 + $105,000).

(c)

Flexible manufacturing overhead budget report Cathedral Ltd Production Department Manufacturing overhead Budget Report (Flexible) For the month ended 30 April 2018

Units) Expected 6,000 Actual 4,500 Variable costs: Indirect materials ($12.50) Indirect labour ($6.00) Maintenance ($5.00) Manufacturing Supplies ($3.00) Total variable ($26.50) Fixed costs: Supervision Inspection costs Insurance expenses Depreciation Total fixed Total costs

Difference Favourable F Unfavourable U

Budget at 4,500 units

Actual Costs 4,500 units

$56,250 27,000 22,500 13,500 119,250

$75,600 40,500 24,600 15,300 156,000

$19,350 U 13,500 U 2,100 U 1,800 U 36,750 U

51,000 3,000 6,000 45,000 105,000 $224,250

57,900 3,600 6,600 44,100 112,200 $268,200

6,900 U 600 U 600 U 900 F 7,200 U $43,950 U

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

(d)

Responsibility Report Cathedral Ltd Production Department Manufacturing Overhead Responsibility Report For the month ended 30 April 2018

Controllable Costs

Indirect materials Indirect labour Maintenance Manufacturing Supplies Supervision Inspection costs Total

Budget

Actual

$56,250 27,000 22,500 13,500 51,000 3,000 $173,250

$75,600 40,500 24,600 15,300 57,900 3,600 $217,500

Difference Favourable F Unfavourable U $19,350 U 13,500 U 2,100 U 1,800 U 6,900 U 600 U $44,250 U

MEMO To:

Ms B Sherrick — Production Manager

From:

Mr A Student — General Manager

Subject:

Performance evaluation for the month of April 2018

Your performance in controlling costs that are your responsibility was very disappointing in the month of April 2018. As indicated in the accompanying responsibility report, total costs were $44 250 over budget. On a percentage basis, costs were 26% over budget. As you can see, actual costs were over budget for every cost item. In three instances, costs were significantly over budget (indirect materials 34%, indirect labour 50%, and supervision 14%). It is imperative that you get costs under control in your department as soon as possible. We need to talk about ways to implement more effective cost control measures. Please meet in my office at 9 a.m. on Wednesday to discuss possible alternatives.

Respectfully, Andrew Student

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BBS18.9 Communication activity Suggestions for discussion Sources of income may include: • Salary from part-time work • AustStudy from the government • Pocket money from parents • Scholarship Expenses may include: • Tuition fee • Textbooks • Rent • Transportation • Food and drinks • Health care • Mobile phones Use of surplus — pay off debt (HECS fee, credit card), invest in share market, pay for holiday Funding of deficit — borrow from parents, credit card debt

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Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e

BBS18.10 Sustainability (a) • • • • • • • •

Main environmental areas on which the Gold Coast City Council provides data are: Community partnership and education Planning for our environment Protecting landscapes Protecting wildlife Sustainable living Water and sewerage Waste and recycling Disaster management

(b)

Under sustainable living there are 7 elements have been identified 1. Benefits of sustainable living 2. Saving energy 3. Benefits of trees 4. Waster wise 5. Sustainable water 6. Sustainable transport 7. Sustainable building and renovation

(c)

Biodiversity http://www.goldcoastflorafauna.com.au ‘The Gold Coast is home to more than 1730 recorded species of native vascular plants — 109 of which are listed as endangered, vulnerable or near threatened under the Nature Conservation Act 1992. City of Gold Coast officers have also recorded 585 species of native animals — 72 of which are listed as endangered, vulnerable or near threatened under the Nature Conservation Act 1992. Developed by City of Gold Coast, this website assists residents and landowners, developers, conservation groups, students and researchers to identify and locate plants and animals found within the Gold Coast. This initiative is part of our ongoing commitment to conserve the city's biodiversity and natural assets, and is a key initiative of our Nature Conservation Strategy 2009–2019.‘

Protecting wildlife ‘The Gold Coast is one of the most biodiverse cities in Australia with a wide range of plant and animal species. We are home to: • nearly 600 species of recorded native animals — 38 species of amphibians, 352 birds, 84 mammals, 74 reptiles and 37 species of freshwater fish (more fish, birds,

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Chapter 18: Budgeting

• •

amphibians and mammals than Kakadu) — 72 of which are endangered, vulnerable or near threatened under the Nature Conservation Act 1992 more than 1700 species of recorded native plants — 109 of which are endangered, vulnerable or near threatened under the Nature Conservation Act 1992 65 native vegetation types and 56 regional ecosystems.

Despite the extensive biodiversity found within the city's boundaries, the potential impacts of Australia's high population growth and the continued clearing of remnant landscapes for development include loss of species and ecosystems, habitat destruction and fragmentation. The City recognises that our native wildlife is a critical asset, essential to the future environmental, social and economic sustainability of the Gold Coast. Explore how we are working to protect our native wildlife, and what you can do to help’. http://www.goldcoast.qld.gov.au/environment/protecting-wildlife-273.html

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