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Accounting Solutions 2

Solutions to Lecture Activities ACCT 1046 Introductory Accounting Semester 1, 2010 Lecture 1 Unit 1 – Business Decision Making and Accounting Lecture Activity 1 1. The accounting information system comprises four main procedures: analysis, recording, reporting and identification.

The order in which they occur is: a) Reporting, analysis, recording, identification b) Identification, analysis, recording, reporting c) Analysis, identification, recording, reporting d) Identification, recording, analysis, reporting e) Analysis, recording, reporting, identification Source: Workbook to accompany Accounting an Introduction, 3rd edition, Jenner & Silvester, Pearson Prentice Hall 2006 Lecture Activity 1 (continued) 2. Which of the following phrases best describes the key qualitative characteristic of ‘relevance’? ) Relevance means that accounting reports should be expressed with as much clarity as possible b) Relevance infers the same accounting treatment for similar items c) Relevance means that accounting information must not contain any undue bias or error of a material nature d) Relevance means that accounting information should have the ability to influence decisions e) None of the above Source: Workbook to accompany Accounting an Introduction, 3rd edition, Jenner & Silvester, Pearson Prentice Hall 2006

Lecture Activity 1 (continued) 3. When accounting information is free from material bias or error, it is said to be: a) Comparable b) Reliable c) Relevant d) Understandable e) Material Source: Workbook to accompany Accounting an Introduction, 3rd edition, Jenner & Silvester, Pearson Prentice Hall 2006 Lecture Activity 1 (continued) 4.

An item of accounting information that is relevant to a particular decision, and reliable, comparable and understandable by decision makers, may still not be produced because: a) Nobody would be interested anyway; b) The costs of producing the information do not outweigh the perceived benefits; c) Unless an accounting standard states that the item needs to be produced, there is no need to do so; d) The costs of producing the information outweigh the perceived benefits; e) None of the above.

Source: Workbook to accompany Accounting an Introduction, 3rd edition, Jenner & Silvester, Pearson Prentice Hall 2006 Lecture Activity 1 (continued) 5. Which of the following phrases best describes ‘reliability’ as it relates to accounting information? a) Accounting information should be free from any material error or bias; b) Accounting reports should be expressed as clearly as possible; c) Accounting information must have the ability to influence decisions; d) Items which are essentially similar should be given the same accounting treatment; e) None of the above.

Source: Workbook to accompany Accounting an Introduction, 3rd edition, Jenner & Silvester, Pearson Prentice Hall 2006 Page 2 of 53 Lecture Activity 1 (continued) 6. Accounting information is designed to meet the needs of a) Potential investors only b) Management c) Government agencies only d) Internal and external users Source: Accounting Business Reporting for Decision Making Study Guide, 2nd edition, Boland, Wiley Publishing 2008 Page 3 of 53

Lecture 2 Unit 2 – Different Accounting Entities Lecture Activity 1 1. An advantage of a sole trader is that the owner has a) unlimited liability b) a variety of skills available to tap into c) effective control over his or her business strategy d) the Australian stock exchange to help when in financial trouble Adapted from Accounting Business Reporting for Decision Making Study Guide, 2nd edition, Boland, Wiley Publishing 2008 Lecture Activity 1 (continued) . Which of the following is not an advantage for a relatively new partnership? a) Resources can be shared among one another b) Each partner has an unlimited liability c) The partnership entity is on a low tax rate of 30 per cent d) The government imposes a high level of regulations on a new partnership Source: Accounting Business Reporting for Decision Making Study Guide, 2nd edition, Boland, Wiley Publishing 2008 Lecture Activity 1 (continued) 3.

The maximum liability for a shareholder in a normal company structure is: a) Determined by the directors b) The value of any unpaid portion of their share entitlement c) The first instalment value of the share if issued in instalments d) Always 30 per cent of any unpaid portion of their share entitlements Source: Accounting Business Reporting for Decision Making Study Guide, 2nd edition, Boland, Wiley Publishing 2008 Lecture Activity 1 (continued) 4. True or False Question: – By observing the equity account or accounts in the respective balance sheets, one may ascertain the business structure of a particular entity – True or false? TRUE Source: Accounting Business Reporting for Decision Making Study Guide, 2nd edition, Boland, Wiley Publishing 2008 Lecture Activity 2 1. What does corporate governance refer to? a) The entity or government code of ethics b) The government of the day assisting companies with their corporate governance strategies c) The direction, control and management of an enterprise d) The actions of the shareholders (owners) of an enterprise Source: Accounting Business Reporting for Decision Making Study Guide, 2nd edition, Boland, Wiley Publishing 2008 Page 4 of 53

Lecture Activity 3 1. Retained profits is a shareholders’ equity account that a) Is equivalent to cash for buying assets b) Reflects the net result of a company’s lifetime after tax net profit (loss), retained in the business c) Reflects an arbitrary amount available from share oversubscriptions d) Gives a summary view of the liquidity and financial strength of the company Source: Study guide to accompany Hoggett & Edwards Accounting in Australia 4th edition and Financial Accounting in Australia 4th edition Duffus, Wiley Publishing 2000 Lecture Activity 4 . John retires from his job as a manager to start his own lawn-mowing business. He decides he wants to own and operate the business himself. This is an example of: a) A proprietory company b) Public-sector ownership c) A partnership d) Sole ownership Source: Accounting-A Framework for Decision Making, 2nd edition, Jackling, Raar, Williams & Wines, McGraw-Hill Irwin 2007 Lecture Activity 4 (continued) 2. What entity produces accounting information and ceases on the death of a member, and what entity’s members are liable for any debts incurred? ) Group of companies b) Partnership c) Accounting entity d) Subsidiary company Source: Accounting-A Framework for Decision Making, 2nd edition, Jackling, Raar, Williams & Wines, McGraw-Hill Irwin 2007 Lecture Activity 4 (continued) 3. The ease of transferability of ownership coupled with limited liability for an entity’s debts adds attractiveness to investment in: a) A partnership b) A single proprietorship c) Company shares d) A sole trader Source: Study guide to accompany Hoggett & Edwards Accounting in Australia 4th edition and Financial Accounting in Australia 4th edition Duffus, Wiley Publishing 2000 Page 5 of 53

Lecture 3 Unit 3 –Financial Position Lecture Activity 1 Question: Think about one asset that you personally have???? Money in a bank account? Car? Property? Jewellery? Lecture Activity 2 Question: Think about one liability that you personally have or perhaps your family or friends have???? Money owed on a credit card? Car loan? Mortgage on a property? Lecture Activity 3 1. The best description of assets is: (a) The financial claims of non owners (b) Resources capable of providing future benefits to the enterprise (c) Amounts intended to be converted into cash within 12 months (d) Items owned by the business and held for use.

Source: Accounting-A Framework for Decision Making, 2nd edition, Jackling, Raar, Williams & Wines, McGraw-Hill Irwin 2007 2. Liabilities are: (a) Obligations to make future dispositions of economic benefits (b) Debts owed by a business to outside parties called creditors (c) Amounts owed to employees for wages and salaries not yet paid (d) All of the above. Source: Accounting Study Guide, Hoggett, Edwards, Medlin & Tilling, Prepared by Latimer, Wiley Publishing 2009 3.

The best description of liabilities is: (a) Creditors and lenders (b) Financial claims on assets after all debts have been paid (c) Claims of non owners (d) A list of future cash payments due. Source: Accounting-A Framework for Decision Making, 2nd edition, Jackling, Raar, Williams & Wines, McGraw-Hill Irwin 2007 Page 6 of 53 Lecture Activity 4 Classify the following items as an asset (A), liability (L) or owner’s equity (OE): 1. Office equipment ASSET 2. Accounts payable LIABILITY 3. Capital – B. Bob OWNERS’ EQUITY 4. Bank loan LIABILITY 5. Cash at bank ASSET 6. Creditors LIABILITY 7. Drawings OWNERS’ EQUITY 8.

Bank overdraft LIABILITY 9. Loan to R. Roger ASSET 10. Debtors ASSET Lecture Activity 5 1. Fill in the missing dollar amount (represented by ? ) in the accounting equation for each of the situations given below: Situation Assets $ 1 2 3 4 5 6 7 32,000 60,000 36,000 25,980 44,000 729,554 11,948 Liabilities $ 8,000 32,000 14,000 5,380 27,120 220,214 3,912 Equity $ 24,000 28,000 22,000 20,600 16,880 509,340 8,036 Source: Accounting Study Guide, Hoggett, Edwards, Medlin & Tilling, Prepared by Latimer, Wiley Publishing 2009 Page 7 of 53 Lecture Activity 6 Using the transactions that appear below: 1.

Analyse each of the following transactions (transaction analysis). 2. Show the effect of each transaction on a very basic balance sheet for the business. 3. Show that the basic accounting equation balances after each transaction. Transactions: May 1 May 3 May 4 May 7 T. Nguyen contributes $150,000 to commence his plumbing business. Van purchased for $40,000 by obtaining finance from Happy Bank Purchased plumbing supplies for $5,000 on credit from ABC Plumbing. T. Nguyen took $1,000 from the business bank account for personal use. Page 8 of 53 Solution May 1 1. Transaction Date May 1 T.

Nguyen contributes $150,000 to commence his plumbing business. Accounting Element (A, L, OE) Asset Owners equity ^ or v in Accounting Element ^ ^ Specific Account Name Bank Capital Amount $ 150,000 150,000 2. Assets Bank Balance Sheet Liabilities 150,000 Owners equity Capital 150,000 150,000 150,000 3. Check if the accounting equation balances …. A = L + OE 150,000 = 0 + 150,000 Page 9 of 53 Solution May 3 Van purchased for $40,000 by obtaining finance from Happy Bank ^ or v in Accounting Element ^ ^ Specific Account Name Van Loan-Happy Bank Amount $ 40,000 40,000 1.

Transaction Accounting Element Date (A, L, OE) May 3 Asset Liability 2. Assets Bank Van Balance Sheet Liabilities 150,000 Loan-Happy Bank 40,000 Owners equity Capital 190,000 40,000 150,000 190,000 3. Check if the accounting equation balances …. A = L + OE 150,000 + 40,000 = 40,000 + 150,000 190,000 = 190,000 Page 10 of 53 Solution May 4 Purchased plumbing supplies for $5,000 on credit from ABC Plumbing. ^ or v in Accounting Element ^ ^ Specific Account Name Supplies Creditor (ABC Plumbing) Amount $ 5,000 5,000 1. Transaction Accounting Element Date (A, L, OE) May 4 Asset Liability 2.

Assets Bank Van Supplies Balance Sheet Liabilities 150,000 Loan-Happy Bank 40,000 Creditor-ABC Plumbing 5,000 Owners equity Capital 195,000 40,000 5,000 150,000 195,000 3. Check if the accounting equation balances …. A = L + OE 190,000 + 5,000 = [40,000 + 5,000] + 150,000 195,000 = 195,000 Page 11 of 53 Solution May 7 1. T. Nguyen took $1,000 from the business bank account for personal use. ^ or v in Accounting Element v v Specific Account Name Bank Drawings Amount $ 1,000 1,000 Transaction Accounting Element Date (A, L, OE) May 7 Asset Owners’ equity 2. Assets Bank Van Supplies

Balance Sheet Liabilities 149,000 Loan-Happy Bank 40,000 Creditor-ABC Plumbing 5,000 Owners equity Capital Drawings 194,000 40,000 5,000 150,000 (1,000) 194,000 3. Check if the accounting equation balances …. A = L + OE 195,000 – 1,000 = 45,000 + [150,000 – 1,000] 194,000 = 45,000 + 149,000 Page 12 of 53 Lecture Activity 6 (Adapted from Activity 3. 10 from Textbook) Using the transactions that appear below for A. Dunn, Solicitor: 1. Analyse each of the following transactions (transaction analysis) showing their impact on assets, liabilities, owners’ equity, income and expenses. 2.

Show the effect of each transaction on a very basic balance sheet for the business 3. Show that the expanded accounting equation balances after each transaction. Date 1/3/2009 2/3/2009 3/3/2009 4/3/2009 5/3/2009 7/3/2009 10/3/2009 12/3/2009 15/3/2009 Transaction Commenced business by contributing $100,000 cash and office furniture and fittings valued at $10,000 Purchased computer equipment for cash $3,000 Billed client, C. Crime, for services $1,500 Purchased office stationery for cash, $300 Solicitor fees received in cash for services provided $2,500 Paid wages to staff $800 Received full payment from client, C.

Crime Owner withdrew cash, $200 for personal use Purchased office equipment for $9,000 by taking a loan out with Excellent Finance Ltd Source: Accounting-An Introduction, 4th edition, Atrill, McLaney, Harvey & Jenner, Pearson Education Australia 2009 Page 13 of 53 Solution 1/3/2009 Commenced business by contributing $100,000 cash and office furniture/fittings valued at $10,000 1. Transaction Accounting Element Date (A, L, OE) 1/3/2009 Asset Owners equity 1/3/2009 Asset Owners equity ^ or v in Accounting Element ^ ^ ^ ^ Specific Account Name Bank Capital Office furniture/fittings Capital

Amount $ 100,000 100,000 10,000 10,000 2. Assets Bank Office furniture/fittings Balance Sheet Liabilities 100,000 10,000 Owners equity Capital 110,000 110,000 110,000 3. Check if the accounting equation balances …. A = L + OE 100,000 + 10,000 = 0 + 110,000 110,000 = 110,000 Page 14 of 53 Solution 2/3/2009 Purchased computer for cash $3,000 1. Transaction Accounting Element ^ or v in Accounting Date (A, L, OE) Element 2/3/2009 Asset v Asset ^ 2. Assets Bank Office furniture/fittings Computer Balance Sheet Liabilities 97,000 10,000 Owners equity 3,000 Capital 110,000

Specific Account Name Bank Computer Amount $ 3,000 3,000 110,000 110,000 3. Check if the accounting equation balances …. A = L + OE 97,000 + 10,000 + 3,000 = 0 + 110,000 110,000 = 110,000 Page 15 of 53 Solution 3/3/2009 Billed client, C. Crime, for services $1,500 1. Transaction Accounting Element Date (A, L, OE) 3/3/2009 Asset Income 2. Assets Bank Office furniture/fittings Computer Accounts receivable-C. Crime ^ or v in Accounting Element ^ ^ Specific Account Name Accounts receivable-C. Crime Fees revenue Amount $ 1,500 1,500

Balance Sheet Liabilities 97,000 10,000 Owners equity 3,000 Capital 1,500 Fees revenue 111,500 110,000 1,500 111,500 3. Check if the accounting equation balances …. A = L + OE 97,000 + 10,000 + 3,000 + 1,500 = 0 + 110,000 (+ 1,500) 111,500 = 111,500 Page 16 of 53 Solution 4/3/2009 Purchased office stationery for cash $300 1. Transaction Accounting Element Date (A, L, OE) 4/3/2009 Asset Asset 2. Assets Bank Office furniture/fittings Computer Accounts receivable-C. Crime Office stationery ^ or v in Accounting Element ^ v Specific Account Name Office stationery Bank Amount $ 300 300

Balance Sheet Liabilities 96,700 10,000 Owners equity 3,000 Capital 1,500 Fees revenue 300 111,500 110,000 1,500 111,500 3. Check if the accounting equation balances …. A = L + OE 96,700 + 10,000 + 3,000 + 1,500 + 300 = 0 + 110,000 (+ 1,500) 111,500 = 111,500 Page 17 of 53 Solution 5/3/2009 Solicitor fees received in cash for services provided $2,500 1. Transaction Accounting Element Date (A, L, OE) 5/3/2009 Asset Income 2. Assets Bank Office furniture/fittings Computer Accounts receivable-C. Crime Office stationery ^ or v in Accounting Element ^ ^ Specific Account Name Bank Fee revenue

Amount $ 2,500 2,500 Balance Sheet Liabilities 99,200 10,000 Owners equity 3,000 Capital 1,500 Fees revenue 300 114,000 110,000 4,000 114,000 3. Check if the accounting equation balances …. A = L + OE 99,200 + 10,000 + 3,000 + 1,500 + 300 = 0 + 110,000 (+ 4,000) 114,000 = 114,000 Page 18 of 53 Solution 7/3/2009 Paid wages to staff $800 1. Transaction Accounting Element Date (A, L, OE) 7/3/2009 Asset Expense 2. Assets Bank Office furniture/fittings Computer Accounts receivable-C. Crime Office stationery ^ or v in Accounting Element v ^ Specific Account Name Bank Wages

Amount $ 800 800 Balance Sheet Liabilities 98,400 10,000 Owners equity 3,000 Capital 1,500 Fees revenue 300 Wages expense 113,200 110,000 4,000 (800) 113,200 3. Check if the accounting equation balances …. A = L + OE 98,400 + 10,000 + 3,000 + 1,500 + 300 = 0 + 110,000 (+ 4,000 – 800) 113,200 = 113,200 Page 19 of 53 Solution 10/3/2009 Received full payment from client, C. Crime 1. Transaction Accounting Element Date (A, L, OE) 10/3/2009 Asset Asset 2. Assets Bank Office furniture/fittings Computer Accounts receivable-C. Crime Office stationery ^ or v in Accounting Element ^ v

Specific Account Name Bank Accounts receivable-C. Crime Amount $ 1,500 1,500 Balance Sheet Liabilities 99,900 10,000 Owners equity 3,000 Capital 1,500 Fees revenue 300 Wages expense 113,200 110,000 4,000 (800) 113,200 3. Check if the accounting equation balances …. A = L + OE 99,900 + 10,000 + 3,000 + 300 = 0 + 110,000 (+ 4,000 – 800) 113,200 = 113,200 Page 20 of 53 Solution 12/3/2009 Owner withdrew cash, $200 for personal use 1. Transaction Accounting Element Date (A, L, OE) 12/3/2009 Owners equity Asset 2. Assets Bank Office furniture/fittings Computer Office stationery or v in Accounting Element v v Specific Account Name Drawings Bank Amount $ 200 200 Balance Sheet Liabilities 99,700 10,000 Owners equity 3,000 Capital 300 Fees revenue Wages expense Drawings 113,000 110,000 4,000 (800) (200) 113,000 3. Check if the accounting equation balances …. A = L + OE 99,700 + 10,000 + 3,000 + 300 = 0 + 110,000 (+ 4,000 – 800) – 200 113,000 = 113,000 Page 21 of 53 Solution 15/3/2009 Purchased office equipment for $9,000 by taking a loan out with Excellent Finance Ltd 1. Transaction Accounting Element Date (A, L, OE) 13/3/2009 Liability Asset 2.

Assets Bank Office furniture/fittings Computer Office stationery Office equipment ^ or v in Accounting Element ^ ^ Specific Account Name Loan-Excellent Finance Ltd Office equipment Amount $ 9,000 9,000 Balance Sheet Liabilities 99,700 Loan-Excellent Finance Ltd 10,000 Owners equity 3,000 Capital 300 Fees revenue 9,000 Wages expense Drawings 122,000 9,000 110,000 4,000 (800) (200) 122,000 3. Check if the accounting equation balances …. A = L + OE 99,700 + 10,000 + 3,000 + 300 + 9,000 = 9,000 + 110,000 (+ 4,000 – 800) – 200 122,000 = 122,000 Page 22 of 53

Lecture 4 Unit 3 –Financial Position (continued) Lecture Activity 1 The following is a list of assets and claims for A. Dunn, Solicitor, at March 15, 2009 that we used in a previous lecture activity. Using this information, prepare a fully classified Balance Sheet (using the horizontal format) for A. Dunn, Solicitor, as at March 15, 2009. Account Name Bank Office furniture/fittings Computer Office stationery Office equipment Loan-Excellent Finance Ltd (repayable in 2013) Capital-A. Dunn Drawings-A. Dunn Solution: $ 99,700 10,000 3,000 300 9,000 9,000 113,200 200

Dunn, Solicitor Balance Sheet as at March 15, 2009 Assets Liabilities Current Assets Non Current Liabilities Bank 99,700 Loan-Excellent Finance Ltd Office stationery 300 Non Current Assets Owners equity Office furniture/fittings 10,000 Capital Computer 3,000 Drawings Office equipment 9,000 122,000 9,000 113,200 (200) 122,000 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 23 of 53 Lecture Activity 2 (Application Ex 3. ) The following is a list of assets and claims of a manufacturing business at a particular point in time: $ 22,000 245,000 18,000 23,000 127,000 100,000 28,000 54,000 34,000 Bank overdraft Freehold land and buildings Inventory of raw materials Trade creditors Plant and machinery Loan from National Australia Bank Inventory of finished goods Delivery vehicles Trade debtors Prepare a balance sheet in the standard vertical format incorporating these figures. Hint: There is a missing figure which needs to be calculated and inserted.

Source: Accounting-An Introduction, 4th edition, Atrill, McLaney, Harvey & Jenner, Pearson Education Australia 2009 SOLUTION: Balance Sheet $ Current assets Trade debtors Inventory-finished goods Inventory-raw materials Non current assets Delivery vehicles Plant and machinery Freehold land and buildings Total assets minus Current liabilities Bank overdraft Trade creditors Non current liabilities Loan – National Australia Bank Total liabilities Net assets equals Owners’ equity Capital 22,000 23,000 34,000 28,000 18,000 80,000 54,000 127,000 245,000 426,000 506,000 $ 5,000 100,000 145,000 361,000 361,000 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 24 of 53 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 25 of 53 Lecture Activity 3 1) The entity of Paddy Jim and Partners in preparing its balance sheet excludes Paddy Jim’s personal motor vehicle (not used in the business) because of the following assumption: a.

The accrual basis assumption b. The period assumption c. The accounting entity assumption d. The going concern assumption Source: Accounting Study Guide, Hoggett, Edwards, Medlin & Tilling, Prepared by Latimer, Wiley Publishing 2009 2) The assumption that a business entity will continue to exist for an undefined period of time is: a. The going concern assumption b. The accounting entity assumption c. The accrual basis assumption d. The period assumption Source: Accounting Study Guide, Hoggett, Edwards, Medlin & Tilling, Prepared by Latimer, Wiley Publishing 2009 ) At the end of an accounting period the Wagga Wagga Company had $21,000 in its bank account, other assets totaling $5,000 and amounts owed to creditors totaling $11,000. The total equity in the company was: a. $15,000 b. $26,000 c. $37,000 d. $48,000 Source: Accounting Study Guide, Hoggett, Edwards, Medlin & Tilling, Prepared by Latimer, Wiley Publishing 2009 4) The business entity of Book and Book has total assets of $80,000, equity of $30,000 and borrowings from the bank of $20,000. The entity has: a. Net assets of $50,000 b.

Other liabilities of $30,000 c. Profit of $20,000 d. Income of $20,000 Source: Accounting Study Guide, Hoggett, Edwards, Medlin & Tilling, Prepared by Latimer, Wiley Publishing 2009 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 26 of 53 Lecture 5 Unit 4 –Financial Performance Lecture Activity 1 (Adapted from Application Exercise 4. 5) Prepare an income statement for the year ended 30 June 2008 given the following account balances. Note: some accounts may not be relevant) $ 3,000 280,000 37,000 15,000 4,000 2,000 40,000 1,500 12,400 160,000 11,000 9,100 3,700 32,000 1,600 4,500 1,700 3,200 1,700 3,400 800 Cash Sales Salary and wages Accounts receivable Loan interest Insurance Loan Telephone and postage Rent and rates Cost of sales Inventory Accounts payable Heat and light Motor vehicles Equipment repairs Depreciation-motor vehicles Motor vehicle running costs Depreciation-equipment Royalties received Accounting and audit Bad and doubtful debts SOLUTION:

Income Statement for the year ended June 30, 2008 Income Sales Less Cost of sales Gross profit Add miscellanous income Royalties Less Operating Expenses Salaries and wages Loan interest Insurance Telephone and postage Rent and rates Heat and light Equipment repairs Depreciation-motor vehicle $ $ 280,000 160,000 120,000 1,700 121,700 37,000 4,000 2,000 1,500 12,400 3,700 1,600 4,500 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 27 of 53

Motor vehicle running costs Depreciation-equipment Accounting and audit Bad and doubtful debts 1,700 3,200 3,400 800 75,800 45,900 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 28 of 53 Lecture Activity 2 Identify the following items as an Asset (A), Liability (L), Owners’ Equity (OE), Income (I) or Expense (E) from the perspective of a business:

ITEM Cash at bank Fees revenue Wages Debtors Interest on loan Insurance Loan from XYZ Bank Postage Electricity Accrued wages Inventory Creditors Sales Delivery vehicles Repairs to machinery Depreciation-delivery vehicles Motor vehicle insurance Depreciation-equipment Unearned fees revenue Accounting and audit Prepaid rent Accounts payable Accrued revenue Depreciation on delivery vehicles Bank overdraft Goodwill A, L, OE, I or E A I E A E E L E E L A L I A E E E E L E A L A E L A

These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 29 of 53 Lecture 6 Unit 4 –Financial Performance (continued) Solutions to Lecture 6 Lecture Activities Lecture Activity 1 1 (a) Straight line = 22,000 – 2,000 / 4 = 20,000 / 4 = $5,000 per year Year 1 2 3 4 Formula (22,000 – 2,000) / 4 (22,000 – 2,000) / 4 (22,000 – 2,000) / 4 (22,000 – 2,000) / 4 Total Depreciation Amount of depreciation 5,000 5,000 5,000 5,000 20,000 (b) Reducing balance method Year 1 2 3 4 Formula 22,000 x 45% (22,000 – 9,900) x 45% (22,000 – 9,900 – 5,445) x 45% (22,000 – 9,900 – 5,445 – 2,995) x 45% Total Depreciation Amount of depreciation 9,900 5,445 2,995 1,647 19,987 * • Rounding results in depreciation not exactly equalling 20,000 1 (c) Units of output method Year 1 2 3 4 Formula (22,000 – 2,000) / 200,000 x 20,000 (22,000 – 2,000) / 200,000 x 60,000 (22,000 – 2,000) / 200,000 x 80,000 (22,000 – 2,000) / 200,000 x 40,000 Total Depreciation Amount of depreciation 2,000 6,000 8,000 4,000 20,000 2.

Year Income Statement Operating Expenses 1 Depreciation expense $5,000 2 Operating Expenses Depreciation expense $5,000 Operating Expenses Depreciation expense $5,000 Operating Expenses 3 4 Balance Sheet Non Current Assets Machine Accumulated depreciationmachine Non Current Assets Machine Accumulated depreciationmachine Non Current Assets Machine Accumulated depreciationmachine Non Current Assets 22,000 (5,000) 17,000 22,000 (10,000) 12,000 22,000 (15,000) 7,000 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 30 of 53

Depreciation expense $5,000 Machine Accumulated depreciationmachine Lecture Activity 2 22,000 (20,000) 2,000 (a) Calculate the value of Debtors at 31 October 2008. Debtors @ 31/10/07 + credit sales – receipts – bad debts written off Debtors @ 31/10/08 $ 966,000 $1,607,825 $1,506,250 $ 19,890 $1,047,685 (b) Calculate the value of debts that are in doubt of collection at 31 October 2008. Debtors @ 31/10/08 = $1,047,685 x 3. 5% = $36,669 (rounded) (c) Calculate the value of Sales for the financial year ended 31 October 2008. Credit sales Cash sales Total $1,607,825 $ 622,660 $2,230,485 d) Calculate the amount of Bad and Doubtful Debts expense. Allowance for Doubtful Debts @ 31/10/07 $20,750 Bad debt written off during year ($19,890) Balance in Allowance for Doubtful Debts 860 New allowance for doubtful debts $36,669 Amount of bad and doubtful debts @ 31/10/08 $35,809 Need to increase allowance by 35,809 (36,669 – 860) to bring amount up to the new allowance (e) Show relevant extracts in the Income Statement and Balance Sheet as at 31 October 2008. Giorgio’s Garden Supplies Income Statement (extract) for the year ended October 31, 2008 Income Sales Less Expenses Bad & Doubtful debts expense $ 2,230,485 5,809 Giorgio’s Garden Supplies Balance Sheet (extract) as at October 31, 2008 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 31 of 53 Assets Current assets Debtors Less Allowance for doubtful debts $ 1,047,685 36,669 $ 1,011,016 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 32 of 53

Lecture Activity 3 The Brown Door Income Statement for the year ended June 30, 2008 Income Sales Cost of goods sold Gross profit Less operating expenses Advertising Rates Electricity General Wages and salaries Insurance Depreciation-office equipment Depreciation-showroom fittings Bad and doubtful debts Net profit Calculations: Depreciation on office equipment = 10,000 – 2,000 / 4 years = $2,000 per year (but have only had the office equipment for 6 months of the year so first year of depreciation is $1000.

Depreciation on showroom fittings = (14,000 – 2,000) x 10% = $1,200 Allowance for doubtful debts = Trade debtors (5000 x 5%) = 250 $ $ 92,300 30,102 62,198 492 352 1,650 782 51,300 1,890 1,000 1,200 250 58,916 3,282 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 33 of 53

The Brown Door Balance Sheet as at June 30, 2008 Assets Current Assets Stock Prepaid insurance Trade debtors Allowance for doubtful debts Total current assets Non-Current Assets Office equipment Accumulated depreciation-office equipment Showroom fittings Accumulated depreciation-showroom fittings # Total Non-Current Assets Total Assets Liabilities Current Liabilities Bank overdraft Trade creditors Accrued advertising expense Total Liabilities Net Assets Owners Equity Capital Profit Drawings Total Owners Equity $ $ 1,070 630 5,000 (250) 4,750 6,450 $ 0,000 (1,000) 14,000 (3,200) 9,000 10,800 19,800 26,250 1,250 2,250 72 3,572 22,678 31,396 3,282 (12,000) 22,678 # accumulated depreciation – showroom fittings = 2000 + 1200 = 3200 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 34 of 53 Lecture 7 Unit 5 –Reporting Cash Flows

Lecture Activity 1 Identify the following items as one or more of the following categories: • Operating Activities section of the Cash Flow Statement (cash inflow or cash outflow? ) • Investing Activities section of the Cash Flow Statement (cash inflow or cash outflow? ) • Financing Activities section of the Cash Flow Statement (cash inflow or cash outflow? ) • Non cash item (not included in the Cash Flow Statement Item Operating / Investing / Financing Activities section Financing Inflow or Outflow or not applicable Outflow

Business pays 10% off the principal of a 25 year loan that ends in 2030 Cash received from a debtor Gain on the sale of a motor vehicle by a business that sells food products Interest paid on a long term loan Depreciation on plant and machinery Payments made to suppliers Cash sales Dividends received from AZ Company Payment of wages to employees A clothing retailer receives an amount of money for the sale of a motor vehicle Interest received on the business’ bank account Business takes out a long term loan to finance the expansion of the business Purchase of new piece of machinery for cash Payment of rent on building for 18 months in advance A company makes a new share issue of 1,000,000 shares at $1 each, payable in full on application Operating Non cash item Inflow Not applicable Operating or Financing Non cash item Operating Operating Operating or Investing Operating Investing Operating or Financing Financing Investing Operating Financing Outflow Not applicable Outflow Inflow Inflow Outflow Inflow Inflow Inflow Outflow Outflow Inflow

These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 35 of 53 Lecture Activity 2 From the following information, prepare a Cash Flow Statement for Almond Ltd for the year ended June 30, 2009: Item Dividend paid to shareholders Sale of equipment for cash Payment of interest on a loan Income tax paid Proceeds from a share issue Depreciation on equipment for the year Payments made to suppliers Purchase of equipment for cash Payments made for operating expenses Money received from customers and debtors Cash balance at July 1, 2007 Cash balance at June 30, 2008 $ 10,000 6,000 8,000 6,000 30,000 12,000 215,000 40,000 58,000 290,400 12,000 1,400

Almond Ltd Cash Flow Statement for the year ended June 30, 2009 $ Cash flows from operating activities Receipts from customers Payments to suppliers Payments for operating expenses Income tax paid Interest paid Net cash provided by operating activities Cash flows from investing activities Purchase of equipment Proceeds from sale of equipment Net cash used in investing activities Cash flows from financing activities Proceeds from share issue Payment of dividend Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 290,400 (215,000) (58,000) (6,000) (8,000) 3,400 $ (40,000) 6,000 (34,000) 30,000 (10,000) 20,000 (10,600) 12,000 1,400 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 36 of 53 Lecture 8 Unit 6 –Financial Ratio Analysis Lecture Activity 1 Example 6. 1 (Accounting – an Introduction 4th edition, Atrill et al. pp. 286-288) We will be using Example 6. 1 from your textbook to calculate some of the ratios and interpret them.

The following financial statements relate to Alexis Ltd, which owns a small chain of wholesale/retail carpet stores. Alexis Ltd Balance Sheet as at 31 March 2008 $’000 $’000 Current assets Bank Trade debtors Inventory at cost Non-current assets Fixtures and fittings at cost Less accumulated depreciation Freehold land and buildings at cost Less accumulated depreciation Total assets Current liabilities Trade creditors Dividends payable Income tax Non-current liabilities 12% Debentures (secured) Capital and reserves Paid-up ordinary capital (shares all issued at 50 cents each) Reserves Retained profit Total liabilities and shareholders equity 6. 1 281. 0 241. 0 528. 1 107. 8 37. 4 351. 2 65. 0 129. 0 64. 4 451. 2 70. 0 2009 $’000 $’000 33. 5 240. 300. 0 574. 3 160. 4 97. 2 451. 2 75. 0 2010 $’000 $’000 41. 0 210. 2 370. 8 622. 0 70. 4 286. 2 356. 6 884. 7 64. 6 381. 2 445. 8 1020. 1 63. 2 376. 2 439. 4 1061. 4 247. 0 32. 0 46. 4 325. 4 200. 0 280. 0 26. 5 52. 8 359. 3 884. 7 221. 4 40. 2 60. 2 321. 8 200. 0 300. 0 26. 5 171. 8 498. 3 1020. 1 228. 8 60. 0 76. 0 364. 8 60. 0 334. 1 40. 0 262. 5 636. 6 1061. 4 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 37 of 53 Alexis Ltd Income statement for the year ended 31 March 2009 $’000 $’000 2240. 8 2010 $’000 $’000 2681. 2

Sales Less cost of sales Opening stock Purchases Less closing stock Gross profit Wages and salaries Directors’ salaries Rates Heat and light Insurance Interest expense Postage and telephone Audit fees Depreciation Freehold buildings Fixtures and fittings Net profit before tax Less income tax Net profit after tax Add retained profit brought forward Transfer to reserves Dividends proposed Retained profit carried forward 241. 0 300. 0 1804. 4 2142. 8 2045. 4 2442. 8 300. 0 1745. 4 370. 8 2072. 0 495. 4 609. 2 137. 8 195. 0 48. 0 80. 6 12. 2 12. 4 8. 4 13. 6 4. 6 7. 0 24. 0 6. 2 3. 4 7. 4 5. 6 9. 0 5. 0 27. 0 5. 0 32. 8 276. 0 219. 4 60. 2 159. 2 52. 8 212. 0 (40. 2) 171. 8 369. 0 240. 2 76. 0 164. 2 171. 8 336. 0 (13. 5) (60. 0) 262. 5

These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 38 of 53 Alexis Ltd Cash flow statement for the year ended 31 March 2009 $’000 $’000 Cash flows from operations Cash receipts from customers Cash paid to suppliers and employees Interest paid Tax paid Net cash provided by operating activities Investing activities Purchase of non-current assets Net cash used in investing activities Financing activities Dividends paid Proceeds from issuance of share capital Repayment of long-term loan Net cash used in financing activities Increase in cash and cash equivalents 2281 (2050) (24) (46. 4) 160. 6 (121. 2) (121. 2) (32. 0) 20. 0 (12) 27. 4 (40. 2) 34. (140. 0) (146. 1) 7. 5 (31. 4) (31. 4) 2010 $’000 $’000 2711. 8 (2460. 4) (6. 2) (60. 2) 185 The company employed 14 staff in 2009 and 18 in 2010 All sales and purchases are made on credit The market value of the shares of the company at the end of each year was $2. 50 and $3. 50 respectively. The issue of equity shares during the year ended 31 March 2010 occurred at the beginning of the year. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 39 of 53 Profitability Ratios – Alexis Ltd Ratio Return on shareholders funds (ROSF)

Description Compares the amount of profit for the period available to the owners with the owners’ stake in the business Formula ROSF = Net profit after taxation and preference dividend (if any) x 100 Average ordinary share capital plus reserves Normally expressed as a percentage = 159. 2 (359. 3 + 498. 3) / 2 = 164. 2 (498. 3 + 636. 6) / 2 Return on total assets (ROA): Compares the net profit generated by the business with the assets owned by the business x 100 = 37. 1% (for year ended 31/3/2009) x 100 = 28. 9% (for year ended 31/3/2010) Normally expressed as a percentage ROA = Net profit before interest and taxation x 100 Average total assets = = (219. 4 + 24. 0) (884. 7 + 1020. ) / 2 (240. 2 + 6. 2) (1020. 1 + 1061. 4) / 2 x 100 = 25. 6% (for year ended 31/3/2009) x 100 = 23. 7% (for year ended 31/3/2010) These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 40 of 53 Profitability Ratios – Alexis Ltd (continued) Net profit margin: Relates the net profit for the period to the sales during that period Net profit margin = Net profit before interest and taxation Sales x 100 Normally expressed as a percentage = (219. 4 + 24. 0) 2240. 8 = (240. 2 + 6. 2) 2681. 2 x 100 = 10. 9% (for year ended 31/3/2009) x 100 = 9. % (for year ended 31/3/2010) Gross profit margin: Relates the gross profit of the business to the sales generated during the same period Gross profit represents the difference between sales and cost of sales Gross profit margin = Gross profit x 100 Sales = 495. 4 x 100 = 22. 1% (for year ended 31/3/2009) 2240. 8 = 609. 2 x 100 = 22. 7% (for year ended 31/3/2010) 2681. 2 Asset turnover = Sales Average total assets Normally expressed as a percentage Asset turnover ratio: Examines how efficiently the assets of the business are being employed in generating sales revenue = 2240. 8 = 2. 4 times (for year ended 31/3/2009) (884. 7 + 1020. 1) / 2 = 2681. 2 = 2. times (for year ended 31/3/2010) (1020. 1 + 1061. 4) / 2 = Normally expressed in terms of times when assessing profitability Analysis: Gross profit margin had slight increase in 2010 compared to 2009. May be because there was an increase in selling prices or decrease in cost of sales. Net profit margin slightly decreased over the 2 years. Therefore, operating expenses are taking up (absorbing) a larger portion of sales income in 2010 compared to 2009. Net profit available to shareholders increased only slightly over the 2 years whereas the company’s share capital and reserves increased significantly (refer financial reports. This has lead to a decrease in return to owner’s equity.

ROA decreased only slightly in 2010 because net profit has not increased in line with the increase in total assets. The asset turnover ratio shows that in 2009, the business generated sales of $2. 40 for each dollar invested in its assets. This then increased to $2. 60 per dollar of assets invested in assets. The increase appears favourable but comparison with an industry average may provide a better indication of whether this degree of efficiency is sufficient. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 41 of 53 Efficiency Ratios – Alexis Ltd

Ratio Average inventory turnover period: Description Measures the average period inventory was held Formula Inventory turnover periods = Average inventory held x 365 Cost of sales = (241. 0 + 300. 0) / 2 x 365 = 57 days (for year ended 31/3/2009) 1745. 4 = (300. 0 + 370. 8) / 2 x 365 = 59 days (for year ended 31/3/2010) 2072. 0 Average settlement period for accounts receivable (debtors): Calculates how long, on average credit customers take to pay amounts owed Average settlement period = Average trade debtors x 365 Credit sales = (281 + 240. 8) / 2 x 365 = 43 days (for year ended 31/3/2009) 2240. 8 = (240. 8 + 210. 2) / 2 x 365 = 31 days (for year ended 31/3/2010) 2681. 2 Normally expressed in terms of days Normally expressed in terms of days

These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 42 of 53 Efficiency Ratios – Alexis Ltd (continued) Average settlement period for accounts payable (creditors): Calculates how long, on average the business takes to pay its creditors Average settlement period = Average trade creditors x 365 Credit purchases = (247. 0 + 221. 4) / 2 x 365 = 47 days (for year ended 31/3/2009) 1804. 4 = (221. 4 + 228. 8) / 2 x 365 = 38 days (for year ended 31/3/2010) 2142. 8 Asset turnover period: Examines how effectively the assets of the business are being employed in generating sales revenue Average asset turnover period = Average total assets employed x 365 Sales = (884. + 1020. 1) / 2 x 365 = 155 days (for year ended 31/3/2009) 2240. 8 = (1020. 1 + 1061. 4) / 2 x 365 = 142 days (for year ended 31/3/2010) 2681. 2 Normally expressed in terms of days Can be expressed in terms of days Analysis: Comparison of efficiency ratios provides mixed picture. Average settlement period for debtors and creditors has decreased. May be because of deliberate policy decisions such as tighter credit control for debtors and/or paying creditors promptly to take advantage of discounts/maintaining good relationship with creditors. Warning: they are averages and can be distorted by a few exceptional amounts owed to creditors or by debtors.

Inventory turnover period slightly increased but may not be significant. Overall, asset turnover ratio increased, meaning that sales increased by a greater proportion than the assets of the company. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 43 of 53 Liquidity Ratios – Alexis Ltd Ratio Current ratio: Description Compares the business’s liquid assets with shortterm liabilities (current liabilities) Formula Current ratio = Current assets Current liabilities = 528. 1 = 1. 6 times (for year ended 31/3/2008) 325. 4 = 574. 3 = 1. 8 times (for year ended 31/3/2009) 321. 8 = 622. 0 = 1. times (for year ended 31/3/2010) 364. 8 Acid test ratio = Current assets (excluding inventory & prepayments) Current liabilities Expressed in terms of the number of times the current assets will cover the current liabilities Acid test (also known as the quick or liquid) ratio: Represents a more stringent test of liquidity than the current ratio = (528. 1 – 241. 0) 325. 4 = (574. 3 – 300. 0) 321. 8 = (622. 0 – 370. 8) 364. 8 = 0. 9 times (for year ended 31/3/2008) = 0. 9 times (for year ended 31/3/2009) = 0. 7 times (for year ended 31/3/2010) Expressed in terms of the number of times the ‘liquid’ current assets will cover the current liabilities Cash flows from operations ratio:

Compares the operating cash flows with the current liabilities of the business Cash flows from operations ratio = = = 160. 6 321. 8 185 364. 8 Operating cash flows Current liabilities = 0. 5 times (for year ended 31/3/2009) Expressed in terms of the number of times the operating cash flows will cover the current liabilities = 0. 5 times (for year ended 31/3/2010) Analysis: Liquidity ratios reveal decrease in current and acid test ratios. This suggests worsening liquidity position for the company. Company needs to monitor liquidity carefully and be alert to any further deterioration in these ratios. Operating cash flows ratio has not changed over the period.

It is quite low and reveals that cash flows for the period do not cover maturing obligations and should provide cause for concern. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 44 of 53 Financial Gearing (Leverage) – Alexis Ltd Ratio Gearing ratio: Description Measures the contribution of longterm lenders to the long-term capital structure of the business Formula Gearing ratio = Long term liabilities Share capital + Reserves + Long-term liabilities x 100 Expressed in terms of a percentage Gearing ratio = Gearing ratio = 200. 0 (200. 0 + 498. 3) 60. 0 (60 + 636. 6) x 100 = 28. % (for year ended 31/3/2009) x 100 = 8. 6% (for year ended 31/3/2010) Interest cover ratio (times interest earned): Measures the amount of profit available to cover interest expense of the business Interest cover ratio = Profit before interest and taxation Interest expense Interest cover ratio = (219. 4 + 24. 0) = 10. 1 times (for year ended 31/3/2009) 24. 0 Interest cover ratio (240. 2 + 6. 2) = 39. 7 times (for year ended 31/3/2010) 6. 2 Usually expressed in terms of the number of times Analysis: The gearing and interest cover ratio have improved significantly in 2010, mainly because a large part of the long-term loan, in the form of debentures, were repaid during 2010.

This had the effect of decreasing the relative contribution of long-term lenders to the financing of the company and decreasing the amount of interest expense. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 45 of 53 Lecture 9 Unit 7 –Managing Working Capital Lecture Activity 1 Kangaroo Ltd has found the following pattern exists regarding collection of receipts from debtors: 60% of debtors pay in the month of sale, 25% pay in the month after the month of sale, 12% pay in the second month after the month of sale and 3% become bad debts. Using the following information, prepare a Schedule of Receipts from Debtors for Kangaroo Ltd for October, November and December 2008.

August Credit Sales ($) 45,000 September 48,000 2008 October 44,000 November 52,000 December 55,000 Answer: Kangaroo Ltd Schedule of Receipts from Debtors for October, November and December 2008 Month (2008) August September October November December TOTAL Credit sales ($) 45,000 48,000 44,000 52,000 55,000 Collection from debtors ($) October November December 5,400 12,000 5,760 26,400 11,000 5,280 31,200 13,000 33,000 43,800 47,960 51,280 Workings: Month (2008) August September October November December Credit sales ($) 45,000 48,000 44,000 52,000 55,000 Collection from debtors ($) October November December 12% 25% 12% 60% 25% 12% 60% 25% 60%

These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 46 of 53 Lecture Activity 2 This is activity 13. 9 from your textbook, page 166-167 (Atrill et al. ) The accounts of Freezeqwik Ltd, a distributor of frozen foods, are set out below for the year ended 31 December 2008. Income statement for the year ended 31 December 2008 $’000 Sales Less cost of sales Opening inventory Purchases Less closing inventory Gross profit Administration expenses Other expenses Net profit Income tax Net profit after tax $’000 820 142 568 710 166 120 127 544 276 247 29 7 22

Statement of financial position (balance sheet) as at 31 December 2008 $’000 Assets Current assets Cash Trade debtors Inventory Non current assets Motor vans Accumulated depreciation-motor vans Fixtures and fittings at written down value Accumulated depreciation-fixtures and fittings Freehold premises at valuation Total assets Liabilities Current liabilities Trade creditors Income tax payable Shareholders’ equity Ordinary share capital Preference share capital Retained profit Total liabilities and shareholders’ equity $’000 $’000 24 264 166 454 202 100 180 98 102 82 180 364 818 159 7 166 300 200 152 652 818 Note: all purchases and sales are on credit. Required: 1. Calculate the operating cash cycle for the company. 2. Suggest how the company may seek to reduce the cash cycle. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 47 of 53 Answers: 1. Calculate the operating cash cycle for the company.

Need to calculate the 3 ratios involved: Average inventory turnover period (days) = Average inventory held x 365 Cost of sales = (142 + 166) / 2 544 = 103 days Average settlement period for debtors (days) = Average trade debtors x 365 Credit sales = 264 x 820 = 118 days Average settlement period for creditors (days) = Average trade creditors x 365 Credit purchases = 159 x 568 = 102 days Operating cash cycle: Average inventory turnover period (days) + Average settlement period for debtors (days) – Average settlement period for creditors (days) = 103 + 118 – 102 = 119 days This means it takes approximately 119 days from the time the goods purchased are paid for until the time the debtor pays for the goods the business has sold them. This can have an impact on working capital requirements. 365 365 x 365 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 48 of 53 2. Suggest how the company may seek to reduce the cash cycle. Inventory seems to be held for too long (103 days) – may need to reduce stocks of inventory. It represents more than 3 months of sales.

Seems to be taking too long for debtors to pay (118 days) being nearly 4 months of sales. To reduce this, may need to offer discounts, have tighter control over credit, charge interest on accounts that are overdue. This needs to be done in light of current trading conditions for that industry/business. Could reduce operating cash cycle by extending period of credit taken to pay suppliers/creditors but this needs to be considered very carefully. Lecture Activity 3 Complete the table by identifying which techniques of analysis relate to specific working capital components (note: there may be more than one component that may use the same analysis technique! ).

Techniques of analysis Turnover ratios ABC system Shelf life Operating cycle EOQ Pattern of credit sale receipts Collection period Cash flow statement Payment period Pattern of credit purchase payments Cost of cash discounts Cash v Debtors v v v v v v th Inventory v v v v v v Creditors v v v v v v v Source: Workbook to accompany Accounting – An Introduction 4 edition, Pearson Education Australia. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 49 of 53 Lecture 10 Unit 8 – Cost Volume Profit Lecture Activity 1 Fill in the missing spaces in the table below: Sales $ 2,000 3,000 4,000 4,000 Variable costs $ 1,400 1,200 1,000 2,500 Fixed costs $ 600 800 400 1,000 Total costs $ 2,000 2,000 1,400 3,500 th Profit $ 0 1,000 2,600 500 Contribution Margin $ 600 1,800 3,000 1,500

Source: Adapted from Contemporary Accounting, Bazley & Hancock, 2004, 6 edition, Cengage Learning Australia, page 587 Lecture Activity 2 Remember Enterprises manufactures miniature digital diaries. Variable costs are $30 per diary, the selling price is $45, and fixed costs are $90,000. Required: (a) What is the contribution margin for one diary? (b) How many diaries must Remember Enterprises sell to break even? (c) If Remember Enterprises wants to make a profit of $20,000 how many diaries do they need to sell? (d) If Remember Enterprises sells 6,300 diaries, what is the net profit? Source: Adapted from Contemporary Accounting, Bazley & Hancock, 2004, 6th edition, Cengage Learning Australia, page 587

Solution: (a) Selling price/per unit less Variable cost/per unit = Contribution Margin per unit (diary) $45 – $30 = $15 (b) Break even = fixed costs / contribution margin per unit = 90,000 / $15 = 6000 diaries (c) = fixed costs + desired profit / contribution margin per unit = 90,000 + 15,000 / $15 = 7,000 diaries (d) Contribution margin/per unit x number of units sold $15 x 6,300 = 94,500 Contribution margin less fixed costs = net profit 94,500 – 90,000 = 4,500 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 50 of 53 Lecture Activity 3 (Past exam question) George was recently retrenched and has decided to set up his own up-market fast food restaurant. The initial estimates for the first year of operation are outlined below: Item Selling price per hamburger Cost of ingredients per hamburger Rental of hamburger stall per annum Counter staff salary Cook’s salary Cost of packaging per hamburger Utilities per annum Advertising REQUIRED: (a) Calculate the break-even point in sales dollars for the first year. (b) George wishes to earn a profit of $10,000 for the first year. Calculate the number of hamburgers George will need to sell.

Solution: (a) Fixed costs = rental of hamburger stall + counter staff salary + cook’s salary + utilities + advertising = 20,000+15,000+18,000+2,500+800 = 56,300 Variable costs = cost of ingredients per hamburger + costs of packaging per hamburger = $0. 55 + $0. 10 = $0. 65 Contribution margin per unit = selling price per unit – variable costs per unit = 3. 60 – 0. 65 = 2. 95 Break even = Fixed costs / Contribution margin per unit = 56,300 / 2. 95 = 19,085 hamburgers (rounded) Now multiply by the selling price to determine the break even sales revenue: = 19,085 hamburgers x $3. 60 = $68,706 Sales in units = 19,085 Sales in dollars = 19,085 x $3. 60 = $68,706 (b) Fixed costs + desired profit / contribution margin per unit = 56,300 + 10,000 / 2. 5 = 22,475 hamburgers $ 3. 60 0. 55 20,000 15,000 18,000 0. 10 2,500 800 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 51 of 53 Lecture 11 Unit 9 – Budgeting Lecture Activity 1 As the accountant of Eye-Scan, a company that sells sunglasses, you are required to prepare a cash budget for the three months ending 30 June 2010. As the product is seasonal, it is necessary to manage the firm’s cash to ensure that there are sufficient funds available to pay the accounts during the winter months, when sales of sunglasses are low.

You have obtained the following information from the accounting information system. (a) The balance of the cash at bank account at 1 April 2010 is expected to be $16,400. (b) The firm expects to purchase $30,000 of brand name sunglasses from manufacturers in China during May 2010 on credit. The firm pays trade creditors in the month following the transaction. (c) Additional storage shelves will be purchased during April 2010 for $14,000 cash. (d) All sales of sunglasses are made on credit. Sales for March and April 2010 are expected to be $70,000 and $80,000 respectively. Sales for May and June 2010 are expected to be $75,000 and $50,000 respectively.

Regarding the collection of sales, 40% of the amount owing is expected to be collected in the month of the sale and 60% is expected to be collected in the month following the sale. (e) Cash payments for wages and salaries are $20,000 per month. (f) Rent of the shop is $5,000 per month. Electricity and telephone accounts are expected to be $500 per month and $250 per month respectively. (g) The firm has approval from their bank for a loan of up to $20,000 per month to cover any shortfall in cash flow. Required: Prepare the Cash Budget for Eye-Scan for the three months ending 30 June 2010. These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 52 of 53

SOLUTION: Eye-Scan Cash Budget for the three months ending 30 June 2010 April $ Receipts Debtors Payments Creditors Shelving Wages Rent Electricity Telephone Total payments Cash surplus (deficit) Opening cash balance Closing cash balance 14,000 20,000 5,000 500 250 39,750 34,250 16,400 50,650 20,000 5,000 500 250 25,750 52,250 50,650 102,900 30,000 20,000 5,000 500 250 55,750 9,250 102,900 112,150 74,000 78,000 65,000 May $ June $ Workings: Collections from debtors Collections Sales March April May June Total 70,000 80,000 75,000 50,000 74,000 78,000 April 42,000 32,000 48,000 30,000 45,000 20,000 65,000 May June Adapted from Jackling, Raar, Williams & Wines, 2007, Accounting a Framework for Decision Making, McGraw-Hill p. 718 These notes have been adapted from power point slides from Atrill, McLaney, Harvey & Jenner, ‘Accounting: An Introduction’, 4th edition, Pearson Education Australia Page 53 of 53

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