PRINCIPLES OF ACCOUNTING

ANSWERS TO EXERCISES

EXERCISE 1 Q1 (a)10,700 (b) 23,100 (c) 4,300 (d) 3,150 (e) 25,500 (f) 51,400

Q2 Wrong Assets : Loan from C Smith, Creditors; Wrong Liabilities: Stock of goods, Debtors. Q3 Assets : Motor 2,000; Premises 5,000; Stock 1,000; Bank 700; Cash 100 = total 8,800. Liabilities: Loan from Bevan 3,000; Creditors 400 = total 3,400. Capital : 8,800 3,400 = 5,400. Q4 A Foster Statement of Financial Position as at 31 December 20X8 Non Current assets Fixtures Motor vehicles Current assets Stock of goods Debtors Cash at bank Total Current Assets Total Assets Current liabilities Creditors Owners Equity Capital Total Liability and equity $ 5,500 5,700 8,800 4,950 1,250 15,000 26,200 2,450 23,750 26,200 $ 11,200

Q5 C Sangster Statement of Financial Position as at 7 May 20X8 Non Current assets Fixtures Motor vehicles Current assets Stock Debtors Bank Cash Total Assets Current liabilities Creditors Owners Equity Capital Total Liability and equity 4,500 4,200 5,720 3,000 5,450 400 14,570 23,270 2,370 20,900 23,270

8,700

EXERCISE 2 Q1 (a) (b) (c) Collected amount due from a customer (increase cash, decrease receivables). Purchased land for cash (increase land and decrease cash). Paid amount due a creditor (decrease cash, decrease accounts payable). Owner withdrew cash (decrease cash, decrease owner's capital). Paid rent (decrease cash, decrease owner's capital). Reflected supplies expense (decrease supplies on hand, decrease owner's capital). Borrowed money from a bank (increase cash, increase notes payable). (e) Increase (f) Increase (g) Increase

(d)

Q2

(a) No effect (b) Decrease

(c) Decrease (d) No effect Q3

$400,000 Assets - $160,000 Liabilities = $240,000 Owners' Equity Less : 200,000 (Capital) = $40,000 (Retained Earnings)

Answer : Retained Earning = $40,000

Q4

a) Increase assets (Office Equipment) Decrease assets (Cash) b) Increase assets (Accounts Receivable) Increase owners equity (Capital) c) Decrease assets (Cash) Decrease owners equity ( Capital) d) Increase assets(Cash) Increase owners equity ( Capital) e) Increase Assets ( Cash), Decrease Assets ( Debtors) f) Increase assets (Supplies Increase liabilities (Accounts payable) g) Decrease assets (Cash) Decrease owners equity ( Capital) h) Decrease liabilities (Accounts Payable) Decrease assets (Cash) i) Decrease owners equity ( Capital) Decrease Assets(Cash)

5 (a) Blaney Painters Statement of Financial Position as at End of Current Year Non Current assets Equipment Current assets Stock of goods Accounts Receivable Total Assets Current Liabilities Accounts payable Owners Equity Capital Total Liabilities and equity Use the concept of the capital account to answer parts b), c). Capital at the end of year = capital at the beginning of year + additional Capital contributed + net profit Drawings 5b) 26,500 = 18,000 + 0 + net profit 17,000 Net Profit = 26,500 18000 + 17000 = 25,500 Answer : 25,500 5c) 26,500 = 18,000 + 4,000 + net profit 17000 Net profit = 26,500 18,000 4,000 + 17,000 = 21,500 Answer : 21,500 12,000 6,500 18,500 27,000 500 26,500 27,000

8,500

Q6 a) Sunshine Delivery Service Income Statement for the month ended March l9XX Revenue : Delivery Fees Less; Expenses Rent Expense Advertising Expense Supplies Expense Salaries Expense Insurance Expense Miscellaneous Expense Net Profit $1 800 300 2 700 5 600 100 200 10 700 $ 5 500

$16 200

b) Sunshine Delivery Service Statement of Financial Position as at End of March 19XX Current assets Cash Accounts Receivable Supplies on Hand Prepaid Insurance Total Current assets Total Assets Current liabilities Accounts payable Note payable $ 14,600 11,300 6,500 1,100 $

33,500 33,500 4,000 10,000

Total Current Liabilities Owners Equity Capital* Total Liabilities and equity

14,000 19,500 33,500

*Note: This could be reconciled as: capital at beginning + Net profit less drawings = 15,000 + 5,500 1,000 = 19,500

Q7 Account Professional Fees Accounts Receivable Accounts Payable Cash Adams, Capital Advertising Expense Supplies on Hand Adams, Drawing Type Revenue Asset Liability Asset Owners Equity Expanse Asset Owners Equity

Entry to Increase Credit Debit Credit Debit Credit

Debit Debit Debit

Q8 (a) (c) (e) (g) (i) Debited Purchases Van Cash Cash/Bank Purchases Credited Creditors Creditors Sales Machinery Creditors (b) (d) (f) (h) (j) Debited Debtors Bank Creditors Sales Returns Creditors Credited Sales Sales Purchase Returns Debtors Purchase Returns

10

Exercise 3 Question1 details Wages Expense Cash Accounts Receivable Sales Electricity Expense Cash Stationary Expense Cash Office Supplies Accounts Payable Cash Accounts Receivable General Journal Debit Credit 7,800 7,800 15,000 15,000 4,500 4,500 100 100 1.000 1,000 5,000 5,000

11

Question Two Details Purchases Accounts Payable Accounts Payable Cash Cash Accounts Receivable Drawings Cash Cash Sales Furniture Bank Wages Cash Cash Loan Motor Vehicle Capital Debit 10,000 Credit 10,000 1,000 1,000 500 500 700 700 2,000 2,000 1,800 1,800 900 900 3,000 3,000 10,000 10,000

12

Question Three JOURNAL ENTRIES Date 2000 April 1 Bank Capital 2 Bank Capital 4 Purchases Bank 5 Furniture Creditors 6 Advertising Bank 8 Bank Sales 10 Wages Bank 12 Bank Sales 15 No Entry 20 Creditors Bank 25 Electricity Bank 27 Drawings Bank 2,000 2,000 500 500 800 800 12,000 12,000 20,000 20,000 10,000 10,000 2,000 2,000 100 100 7,000 7,000 200 200 6,500 6,500 Details Debit Credit

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General Ledger
Debit

Date 1/4 2/4 8/4 12/4

Account Capital Capital Sales Sales

Credit Bank Amt Date Account Amt 12,000 4/4 Purchases 10,000 20,000 6/4 Advertising 100 7,000 10/4 Wages 200 6,500 20/4 Creditors 2,000 25/4 Electricity 500 27/7 Drawings 800

TOTAL 45,500 BALANCE BD 31,900 Furniture 5/4 Creditors 2,000

Purchases

TOTAL

13,600

Date Account 4/4 Bank

Amt 10,000
Creditors

Date

Account

Amt

Date Account 20/4 Bank Date Account

Amt 2,000 Capital Amt

Date Account Amt 5/4 Furniture 2,000 Date Account Amt 1/4 Bank 12,000 2/4 Bank 20,000 TOTAL 32,000 Date Account Amt

Drawings

Date 27/4

Account Bank

Amt 800

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Debit

Date

Account

Sales Amt

Credit

Date Account Amt 8/4 Bank 7,000 12/4 Bank 6,500 TOTAL 13,500 Date Account Amt

Electricity

Date Account 25/4 Bank` Date Account 10/4 Bank Date Account 6/4 Bank Frank Car Dealer Trial Balance As at 30 April 2000 Account Bank Furniture Capital Drawings Sales Purchases Electricity Wages Advertising

Amt 500 Wages Amt 200

Advertising

Date

Account

Amt

Amt Date 100

Account

Amt

$ 31,900 2,000 800

$ 32,000 13,500

10,000 500 200 100 $45,500

$45,500

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Question Four
Transaction

Details

1 Bank Capital 2 Purchases Bank Creditors 3 Wages Expense Bank 4 Bank Sales 5 Debtors Sales

Debit 50,000 30,000

Credit 50,000 15,000 15,000

600 600 8,000 8,000 2,000 2,000 5,000 5,000 500 500 5,000 5,000

6 Computer Creditors 7 Bank Debtors 8 Creditors Bank

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General Ledger
Debit

Date 1 4 7 Date

Account Capital Sales Debtors BALANCE Account

Bank Amt 50,000 8,000 500 37,900 Sales Amt

Credit

Date

Account Amt 2 Purchases 15,000 3 Wages 600 8 Creditor 5,000 Account 4 5 Amt

Date

Bank 8,000 Debtor 2,000 TOTAL 10,000 Account Account Amt Amt

Date Account 3 Bank Date Account 2 Bank/Creditor Date Account 5 Sales BALANCE Date Account 6 Creditors Date Account 8 Bank

Wages Amt 600

Purchases

Date Date

Amt 30,000 Debtors Amt 2,000 1,500 Computer Amt 5,000

Creditors

Date 7 Date

Account

Amt Bank 500 Amt

Account

Amt 5,000 Capital Amt

Date 2 6 Date 1

Account Amt Purchases 15,000 Computer 5,000 TOTAL 15,000 Account Amt Bank 50,000

Date

Account

17

Kelly Venice Trial Balance As at 30 June 1999 Account Bank Debtors Purchases Computer Wages Creditors Capital Sales $ 37,900 1,500 30,000 5,000 600 $

$75,000

15,000 50,000 10,000 $75,000

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Exercise 4 Question 1 1) Polishing Machine Cost as at 1/1/97 Residual Value Depreciation each year (1/10) New Polishing Machine Cost as at 1/1/99 Residual Value Depreciation each year (1/10) 2) Grinding machine Cost 1997 Depreciation 30% 1998 Depreciation 30% 1999 Depreciation 30% 3) Sale of polishing machine Cost 100,000 Acc depn 19,000 = 81,000 NBV Sold For Loss on sale 45,000 36,000 30,000 9,000 21,000 6,300 14,700 4,4,10 10,290 120,000 6,000 114,000 11,400 100,000 5,000 95,000 9,500

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Extracts from the Income Statement for the year ended 21/12/99 Depreciation of equipment (Polishing machine 9,500 + 11,400+ Grinding machine 4,410) Loss on sale of equipment 25,310

36,000

Extracts from the Statement of Financial Position as at 21/12/99 COST Fixed Assets Polishing machine Grinding Machine 220,000 30,000 250,000 ACC DEPN 39,900* 19,710** 59610 NET BOOK VALUE 180,100 10,290 190,310

* (9,500 X 3 years ) + 11,400 = 39,900 ** (9000+6,300+4,410) = 19,710 b) The following 4 points are relevant to the question: I. Depreciation is an allocation of cost ( matching concept) less expected residual value over the assets useful life (it is like a prepayment) II. Because the process of depreciation is based on cost, the amount in the Accumulated balance does not accumulate to a figure needed to replace the fixed assets in the future as the future price of the asset may increase III. The amount of depreciation expense is considered a non cash expense. Therefore Depreciation does not effect cash flows IV. The choice of the method for depreciation depends on: a)Cost Vs Benefits b) The method chosen should reflect the benefit pattern from the use of the asset. For example, of more benefits are expected from use of the assets in its earlier years, then the reducing balance method should be used. Profit / Loss arises because the residual and useful life are only estimates and as long as these do not equal the actual amounts, a gain/loss may arise.

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Question 2 (a)
Allocated Amounts Land Building Truck : 210/1,400 X $1,300,000 = $195,000 : 518/1,400 X $1,300,000 = $481,000 : 42/1,400 X $1,300,000 = $39,000

Equipment : 630/1,400 X $1,300,000 = $585,000 Note: Cost of the consultant is a cost necessary to ready assets for use, so include in cost of asset.

(b)
Land Building Truck : = $195,000 : = $481,000 : = $39,000

Equipment : = $585,000

(c) Depreciation Building : 481,000- 31,000/ 15 years = 30,000

Equipment : 585,000- 45,000/ 9 years = 60,000 Truck : 39,000 4,000/ 5 years = 7,000

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Question 3 a) Annual Depreciation Expense for the first 6 years = 450,000- 54,000 / 8 years = $49,500 Annual Depreciation in 7th year, assuming prorated depreciation for 8 months: $49,500 X 8/ 12 = $33,000 b) Original Cost Acc Depreciation Net Book Value Insurance Proceeds Loss on Disposal = $450,000 = 330,000* = 120,000 = 100,000 = 20,000

* 49,500 X 6 years + 33,000 = 330,000

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EXERCISE 5

SOLUTIONS QUESTION 1 Burt Inc Income Statement for the year ending 30 June 2001 Sales Less Sales returns Less Cost of Sales Opening Inventory Purchases Less Closing Inventory Gross Profit Add Interest received on Investment Less Expenses Advertising Rent Expense Telephone expense Wages Net Loss Burt Inc Statement of Financial Position as at 30 June 2001 $ $ Non Current Asset Delivery Vehicle Current Assets Cash at Bank Debtors Inventory Stationary Total Current Assets Total Assets Current Liability Trade Creditors Owners equity : Closing Capital Total Liabilities and equity 78,000 10,000 30,000 400 118,400 143,400 9,000 134,400 143,400 25,000 9,000 90,000 800 25,000 89,000 11,000 78,000 24,000 45,000 69,000 30,000 39,000 39,000 1,500 40,500

124,800 84,300

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QUESTION 2 Workings: Rent Expense: (2) 13,500 + (2) 1,500= $15,000 Rent payable: (2) $1,500 Advertising Expense: (5) 1,000 = $1,000 Prepaid advertising expense: (5)$100 Electricity expense = (6) $1,000 Wages Expense: (7)45,000+ (7)700 = $45,700 Wages Payable: (7)$700 Purchases = (8) 124,000 +(9) 12,500 =$136,500 Trade creditors = (8)124,000 (13)80,000 = 44,000 Sales: (10)150,000+ (11)20,000= $170,000 Trade debtors = (10)150,000 (12)100,000 = 50,000 Depreciation Expense = (4)2,000 Accumulated Depreciation = (4) 2,000 Cash at Bank = (1)62,000 (2)13,500- (3)10,000 (5)1,100 (6)1,000- (7)45,000 (9)12,500 +(11)20,000 + (12)100,000 - (13)80,000 = $18,900 Capital = (1)62,000 Computing equipment: (3)10,000 Computation : Closing Inventory: + 124,000 + 12,500 70,000 8,000 = $58,500

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Ali & Sons Income Statement for the year ending 31 December 2001 SALES Credit Cash Less Cost of Sales Opening Stocks Add: Purchases Less: Closing Stocks Cost Of sales Gross Profit LESS EXPENSES Advertising Computer equipment Depreciation Electricity Rent Wages NET PROFIT 150,000 20,000 0 136,500 58,500 (78,000) $92,000 1,000 2,000 1,000 15,000 45,700 $64,700 $27,300

170,000

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Ali & Sons Statement of Financial Position as at 31 December 2001 Non-current assets Computing equipment Less accumulated depreciation Current Assets Cash at Bank Trade Debtors Inventory Prepaid advertising expense Total Current Assets Total assets Current Liabilities Trade Creditors Rent Payable Wages Payable Total Current Liabilities Capital, 1 January 2001 Add: Current Years Profit Capital, 31 December 2001, Total Liabilities and equity 10,000 (2,000) 8,000 18,900 50,000 58,500 100 127,500 135,500 44,000 1,500 700 46,200 62,000 27,300 89,300 135,500

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QUESTION 3 TR MEDICAL CLINIC Income Statement For year ended 30 September 2010 REVENUES Service fees(304,400+19450+16000) EXPENSES Council rates expense(12985- 1565) Fee discounts allowed Interest expense Medical staff salaries Office staff wages Rental expense - office equipment Staff car parking expense Telephone expense Total Operating Expense Profit Before Interest Expense Less: Interest Expense(11,000+1,254) NET PROFIT $ $ 339,850

$11,420 $2,134 $12,254 $62,669 $76,000 $34,050 $12,347 $2,310 200,930 138,920 12,254 $126,666

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TR MEDICAL CLINIC Statement of Financial Position As at 30 September 2010 Non-current Assets Premises Current Assets Cash at Bank Accounts receivable Accrued consultation revenue Prepaid council rates Total Current Assets Total assets Current Liabilities Accounts payable Interest payable Total Current Liabilities Long Term Liabilities Mortgage Loan Owners equity Opening Capital Add Current Years Profit Less: Drawings Total Liabilities and equity 573,947 126,666 3,520 697,093 762,867 $ $ 221,522 19,780 16,000 1,565 258,867 762,867 4,520 1,254 5,774 60,000 $ 504,000

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Question 4 a)
Universal Retailers Income Statement For the year ended 30 June 2006 Sales Less: Cost of Sales Opening stock Add Purchases Less: Closing Stocks Cost Of Sales Gross Profit Less: expenses Bad Debts expense Office Expense Office Salary Rent Utilities(3,400+200) Depreciation Advertising Wages Insurance(428 X 12 months) Total Expenses Net profit 205,000 22,000 119,000 (25,000) 116,000 89,000

1,245 3,975 28,000 18,000 3,600 1,000 3,469 10,500 5,136 74,925 14,075

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b)
Universal Retailers

Statement of Financial Position

Non-current Assets Fixtures & Fittings Net Current Assets Bank Trade Debtors Inventory Prepaid Insurance Total Current Assets Total Assets Current Liabilities Trade Creditors Utilities Payable Total Current Liabilities Owners equity Opening Capital Add:Net Profit Closing Capital

93,000

6,750 21,054 25,000 856 53,660 146,660 12,000 200 12,200 120,385 14,075 134,460

Total liability and equity c)

146,660

1) Income statement shows the performance of the company, can judge the effectiveness of management strategy. 2) Statement of Financial Position reflect the financial position, liquidity, solvency of the company.

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Question 5 Amir & Daughters Income Statement For the year ended 31 December 2006 Sales Less: Cost of Sales Gross Profit Less: Expenses Rent ( 16,500+1,500) Stationary Telephone Wages Insurance Expense Depreciation Total Expenses Net profit Part c) Amir & Daughters 129,000 39,000 90,000 18,000 700 500 15,000 2,400 3,000 39,600 50,400

Statement of Financial Position

As at 31 December 2006 Non current Assets Motor Car Less: Acc Depn(3,000+3,000) Net Book value Current Assets Bank Trade Debtors Inventory Prepaid Insurance (2,600-2,400) Total Current Assets Total assets Current Liabilities Trade Creditors Rent payable Total Current Liabilities Owners equity Opening Capital Add Net Profit Closing Capital Total liability and equity 30,000 6,000 24,000

82,000 8,000 32,000 200 122,200 146,200 7,000 1,500 8,500 87,300 50,400 137,700 146,200

Part a & d
Opening capital 87,300 Part d Adjustments are necessary due to the accrual accounting principle which requires that revenues earned be matched with expenses incurred in the same period.

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Question 6 a)
Kiasu & Company Income Statement For the year ended 30 June 2008 Sales Less: Cost of Sales Cost Of Sales Gross Profit Less: Expenses Salary Rent Utilities Repairs Depreciation Insurance Expense Interest Expense Total Expenses Net profit $ 420,000 149,000 271,000

37,000 22,000 5,600 3,000 22,000 2,400 1,500 93,500 177,500 $ $

b)
Kiasu & Company

Statement of Financial Position

As at 30 June 2008 Non-current Assets Equipment Less: Accumulated Depreciation Net Book Value Current Assets Bank Debtors Inventory Prepaid Insurance Total Current Assets Total Assets Current Liabilities Creditors Loan Payable Interest payable Total Current Liabilities Opening Capital Add Net Profit Closing Capital 220,000 44,000 176,000 10,000 58,000 32,000 2,400 102,400 278,400 15,000 30,000 1,500 46,500 54,400 177,500 231,900

Total Liability & Equity

278,400

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Question 7 a)
Forest Trees Income Statement For the year ended 31 December 2008 Sales Less: Cost of Sales Gross Profit Less: Expenses Rent Wages Utility(7000+300) Advertising Depreciation Total Expenses Net profit b) Forest Trees Balance Sheet As at 31 December 2008 Non-current assets Equipment Less: Acc Depn(76000+19000)) Net Book value Current Assets Bank Trade Debtors Stocks Total Current Assets Total Assets Current Liabilities Trade Creditors Utility payable Total Current Liabilities Opening Capital Add Net Profit Closing Capital $ 1,420,740 1,014,380 406,360 33,000 85,000 7,300 125,200 19,000 269,500 136,860 $ $

190,000 95,000 95,000

43,150 230,720 127,920 401,790 496,790 120,190 300 120,490 239,440 136,860 376,300

Total Liabilities & Equity

496,790

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EXERCISE 6 Question 1 a. b. Net Profit = 20,000 less ( 400+ 800+1,600+14000) = 3,200 Capital At beginning + Net Profit Drawings = Capital at the end 15000+ 3200-1200 = 17000. Question 2 A Opening Capital = 2800 Closing capital = 4000 Use equation: 1) Capital = Assets less liabilities 2) Opening capital + additional capital + revenue expenses drawings = closing capital 2800+ 600 + a 3200-400 = 4000. Solving for a A= 4000-2800-600 +3200+ 400 Therefore a = 4200 B Opening Capital = 6000 Opening capital + additional capital + revenue expenses drawings = closing capital 6000 + 1500 + 5200 3600 500 = Closing capital Closing capital = 8600 Therefore closing liabilities = 10000 8600 = 1400 (b)

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C Opening Capital = 12500 Closing capital = 16000 Opening capital + additional capital + revenue expenses drawings = closing capital 12500 + c + 6000 3800 1200 = 16000 c = 16000 12500 6000 + 3800 + 1200 = 2500 D Closing capital = 17000 Opening capital + additional capital + revenue expenses drawings = closing capital Opening capital + 3500 + 15000 10000 1500 = 17000 Opening capital = 17000- 3500 15000 + 10000 + 1500 = 10000 Therefore Assets = 10000 + 6000 = 16000. (d) Question 3 Retained earning = Equity = Assets less Liabilities A ) ( 45000 + 20000 + 5000 + 120000 ) Less 30000 = 160000 b) Opening Retained Earning + current profits drawings = closing retained earnings 40000 + current profits - 5000 = 160000 current profits = 160000 40000 + 5000 = 125000 Therefore Current year = Net Profit of 125000

35

Question 4 Chez Michel, Catering Service (a) & (b) Chez Michel, Catering Service Statement of financial position as at 31 May l9XX Fixed Assets Equipment Current Assets Cash Accounts Receivable Supplies on Hand Total Current Assets Total Assets Current Liabilities Notes Payable Accounts Payable Total Current Liabilities Total Assets Less Current Liabilities Represented By Capital Retained Earnings Total Equity 46 000 6 500 5 800 4 200 16,500 $62 500 18 000 3 500 21 500 41,000 25 000 16 000 41 000 2 June l9XX 52 000 2500 5 800 4 200 12,500 $64 500 22 000 3 500 25 500 39,000 25000 14 000 39 000

36

Question 5 Parker Packaging Service Parker Packaging Service Statement of financial postion as at 31 December This Year Non-current assets Equipment Buildings Land Total non-current assets Current Assets Cash Accounts Receivable Supplies on Hand Prepaid Insurance Total Current Assets Total Assets Current Liabilities Accounts Payable Long Term Liabilities Mortgage Payable Parker, Capital Total Liability & Equity (b) Parker, Ending Capital Parker, Beginning Capital Increase Add: Drawings Less: Contributions Net Profit, This Year 24,000 32,000 10,000 66,000 18,000 56,000 2,400 600 $77,000 143,000 2,000 52 000 89,000 143,000 $89 000 78 600 10 400 9 000 19 400 6 000 $13 400

31 December Last Year 28,000 35,000 10,000 73,000 12,000 48,000 2,600 400 $63,000 136,000 2,400 55,000 78,600 136,000

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Question 6 P Chiong, Interior Decorator P Chiong Income Statement For the Year Ended 31 December (a) Revenue Decorating Fees Expenses Advertising Expense Insurance Expense Miscellaneous Expense Rent Expense Salaries Expense Supplies Expense Net Profit, This Year 350 120 80 3 600 9 800 1 200

32 000

15 150 16 850

P Chiong Statement of financial position as at 31 December (c) Current Assets Cash Accounts Receivable Supplies on Hand Prepaid Insurance

2600 18 200 1600 300 22 700

Current Liabilities Accounts Payable Notes Payable P Chiong Capital Total Liability & Equity

700 1500 2 200 20 500 22,700

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Question 7 Badjak Plumbing Contractors Badjak Plumbing Contractors Statement of financial position as at 30 June, 19XX (a) Non-current assets Equipment Current assets Cash Accounts Receivable Supplies on Hand Prepaid Insurance Total Current Assets Total assets Current liabilities Accounts Payable Notes Payable Capital Retained Earnings Total Liabilities & Equity

106 000 21 600 24 000 8 000 600 54,200 160,200 4 200 6 000 10,200 120 000 30 000 150,000 160,200

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Badjak Plumbing Contractors Statement of financial position as at 2 July, l9XX (b) Non-current Assets Equipment Current Assets Cash Accounts Receivable Supplies on Hand Prepaid Insurance Total Assets Current Liabilities Accounts Payable Notes Payable Total Current Liabilities Represented By: Capital Retained Earnings Total Capital Total Liability & Equity 10,600 24,000 8,000 600 43, 200 157,200 4,200 3,000 7,200 120,000 30,000 150,000 157,200

114,000

THE END

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EXERCISE 7 Question 1 (a) Tan & Sons Income Statement For the Year-ended 31 may 2002 $ Sales Returns inwards Opening stock Purchases Less closing stock Cost Of Sales Gross profit Discounts received 91,788 264,636 356,424 95,500 260,924 236,344 12,400 248,744 $ 500,000 (2,732) 497,268

Less: Operating Expenses Rates 15,000 Wages and salaries 51,900 Insurance 11,800 General expenses 3,120 Bad debts 4,056 Over-provision for Doubtful Debts (389) Depreciation 40,000 Total Operating Expense Net Profit Before Interest Expense Less : Interest Expense Net Profit (125,487) 123,257 9,600 113,657

41

Tan & Sons Statement of financial Position As at 31 May 2002 Non-current assets Land Building Furniture & Fittings Total Current Assets Cash In hand Debtors Less: Provision for Doubtful Debts Stocks Prepaid Insurance Total Current Assets Total Assets Current Liabilities Creditors Bank Loan Interest payable Wages payable Total Current Liabilities Less: Long Term Liabilities Loan Payable Equity Opening Capital Add: Net Profit Total Liability & Equity Cost 206,400 240,000 140,000 586,400 Acc Depn 0 60,000 76,000 126,000 5,324 96,140 4,807 91,333 95,500 700 192,857 643,257 39,800 49,100 4,800 1,900 95,600 96,000 338,000 113,657 451,657 643,257 Net Book Value 206,400 180,000 64,000 450,400

42

Question 2 Part A a) Depreciation expense for the year ended 30 June 2002 200,000 50,000/20 = $7,500 b) Net Book Value = 200,000 30,000 = 170,000 Part B Date 1/7/99 30/6/00 30/6/01 30/6/02 30/6/02 Part C Depreciation Process of Allocation, not valuation Matching Principle Building has to be depreciated even though value has appreciated because match cost against benefit Description Original Amount Depreciation Balance Depreciation Balance Depreciation Net Book Value $ 30,000 (4,500) 25,500 3825 21675 3251 18424

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Question 3 Bank : 50,000(1) 20,000(2) 1,500(3) +1,000(5) -1,200(6) 890(8) 2,000 (9) Ending Total = 25,410 Motor Vehicle : 45,000(1) Capital : 95,000(1) Plant & Equipment: 60,000(2) Long Term Bank Loan: 40,000(2) 490(8) = 39,510 Prepaid Rent : 1,500 (3) Debtors: 6,000 (4) Sales : 6,000 (4) Unearned Revenue: 1,000(5) Wages & Salary : 1,200(6) Supplies: 1,300(7) Creditors: 1,300(7) Interest expense : 400 (8) Drawings: 2,000(9)

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Part 1 George Business Unajusted Trial Balance As at end of transaction 9 Accounts Bank Motor Vehicle Capital Plant & Equipment Long Term Bank Loan Prepaid Rent Debtors Sales Unearned Revenue Wages & Salary Supplies Creditors Interest expense Drawings Total Debit 25,410 45,000 60,000 39,510 1,500 6,000 6,000 1,000 1,200 1,300 1,300 400 2,000 142,810 142,810 Credit 95,000

45

Part 2 Accounts Bank Motor Vehicle Capital Plant & Equipment Long Term Bank Loan Prepaid Rent Debtors Sales Unearned Revenue Wages & Salary Supplies Creditors Interest expense Drawings Total Rent Expense Salary payable Supplies Expense Electricity & Telephone Expense Electricity & Telephone Payable

Debit 25,410 45,000 60,000

Credit 95,000 39,510

Adjustment

1,500 6,000 6,000 1,000 1,200 1,300 1,300 400 400 142,810 500 800 150 150 142,810 800

-500 +1000 -1000 +800 -800

George Business Income Statement why is there no opening stock + cost of sales ? For the year ended 31 March 2010 $ $ Sales 7,000 Less: Operating Expenses Wages & Salary 2,000 Rent Expense 500 Supplies Expense 800 Electricity & Telephone Expense 150 Total Operating Expense 3,450 Profit Before Interest Expense 3,550 Less: Interest Expense 400 Net Profit 3,150

46

George Business Statement of financial position As at 31 March 2010 $ Non-current Assets Motor Vehicle Plant & Equipment Total non-current assets Current Assets Cash at Bank Debtors Prepaid Rent Supplies On Hand Total Current Assets Total assets Current Liabilities Creditors Salary payable Electricity & Telephone Payable Total Current Liabilities Long Term Liabilities Long Term Bank Loan Equity Opening Capital Add:Net Profit Less: Drawings Total Liability & Equity 45,000 60,000 105,000 25,410 6,000 1,000 500 32,910 137,910 1,300 800 150 2,250 39,510 95,000 3,150 2,000 96,150 137,910 $

47

Question 4 A. Tourist galore Pte Ltd Revised Income Statement for the year ended 30 June 2002 Operating revenues: Tour Revenue ($480 000 - $21189 + $11,000) 469,811 Other revenues 6 000 isn't this "had not been collected"? Operating expenses: Salaries and wages expense ($117 000 + $8,000) 125,000 Depreciation expense ($93 000 + $10000) 103,000 Rental expense ($69 000 + 3,000) 72 000 Fuel and oil expense 46 500 Maintenance expense 27 000 Insurance expense 21 000 Sundry expenses 9 000 Net profit C.

$475,811

403 500 $72,311

For businesses that transact a significant amount of business on credit, the accrual basis of accounting is considered a more appropriate basis for determining net profit. Under such a system, revenues are recognised when economic benefits are increased, that is often once a service is performed and obligations are satisfied, rather than when cash is received.

Question 5 A) Closing Stocks a) FIFO = (4000 X $6) + (16000 X $8) = $152,000 b) LIFO = ( 4000 X $5) + (16000 X $6) =$116,000 c) WAC = Average cost = (10000X 5)+ (30000 X 6) + (16000 X $8) 56,000units 20,000 X $6.39 Per unit = $127,857

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Cost Of sales = Opening Stocks + Purchases Closing Stocks Opening stock = $0 FIFO = 358,000 152,000 = $206,000. LIFO = 358,000- 116,000 = $242,000. WAC = 358,000 127,857 = $230,143.
what?

B) $7 is the net realisable value(NRV) of the stock . Need to apply the prudence rule of the lower of cost and NRV and there new ending stock valuation: a) FIFO = (4000 X 6) + (16000 X $7)= $136,000 b) LIFO no change as cost is below the NRV. c) WAC no change as cost is below the NRV.

49

EXERCISE 8 WORKINGS Question 1 ( 30 marks) 1. Neon Lights Inc. sells lighting equipment to retail outlets and the following trial balance has been prepared as at 30 April 2002: Interest Expense 280 Interest payable 280 !! ! ! ! ! ! ! ! ! "###! ! ! !"###! Freehold land at cost 2,000 Buildings: cost 5,300 provision for depreciation at 1 May 2001+106 1,060 Fittings and fixtures: cost -230 2,400 provision for depreciation at 1 May 2001 -69+127.9 960 Stock at 1 May 2001 700 Trade debtors -150 1,740 Provision for doubtful debts -32.35 88 Bank 365 Trade creditors -3 1,100 Capital 2,700 7% Loan, 2004 4,000 Profit and loss account at 1 May 2001 195 Sales 13,500 Purchases 9,500 Salaries and wages +25 1,690 Light and power 210 Insurance -8 68 Administration and distribution expenses 390 Drawings 150 Sale of fixed asset account -180 180 Bad Debts 150 24,148 24,148 Depreciation Expense(127.9+106) 233.9 Gain on disposal 19 The following additional information is supplied: Prepaid Insurance 8 (1) During the year fittings and fixtures which had cost "230,000, and on which depreciation of "69,000 had been provided at 1 May 2001, were sold the proceeds being credited to the sale of fixed asset account appearing in the trial balance. No depreciation is charged on fixed assets in the year of sale. Other Income 32.35 Wages payable 25 (2) Depreciation is to be provided on fixed assets at the following rates: Purchase Returns 3 Buildings 2% on cost Fittings and fixtures 10% on a reducing balance basis 50

Neon Lights Inc Income Statement As at 30/4/02 $000 Sales Less: Cost Of Sales Opening Stock Add: Purchases Less:Purchase Returns Less: Closing Stocks Cost Of Goods Sold Gross Profit Add: Gain On Disposal Other Income $000 13,500.00

700.00 9,500.00 3.00 797.00 9,400.00 4,100.00 19.00 32.35 4,151.35

Less: Expenses Depreciation Expense(106+127.9) Interest Expense Salary & Wages Light & Power Insurance Administration & Distribution Bad Debts Total Expenses Net profit

233.90 280.00 1,715.00 210.00 60.00 390.00 150.00 3,038.90 1,112.45

51

Neon Lights Inc Statement of Financial Position As at 30/4/02 Non-Current Assets Freehold Land Building Fixtures & Fittings Total Current Assets Trade Debtors Less:Prov For Doubtful Debts Net Debtors Stocks Prepaid Insurance Total Current Assets Total Assets Current Liabilities Bank Overdraft Trade Creditors Interest Payable Wages payable Total Current Liabilities Non-current Liabilities 7% Loan Equity Capital Retained Profit (195+1,112.45-150) Total Equity Total Liabilities & Equity

$000 Cost 2,000.00 5,300.00 2,170.00 9,470.00

$000 Acc Depn 1,166.00 1,018.90 2,184.90

$000 Net Book Value 2,000.00 4,134.00 1,151.10 7,285.10

1,590.00 55.65 1,534.35 797.00 8.00 2,339.35 9,624.45 365.00 1,097.00 280.00 25.00 1,767.00

4,000.00 2,700.00 1,157.45 3,857.45 9,624.45

52

Question 2 (10 marks) Answers Should Incorporate the following Points: a) Discussion of depreciation: Definition : allocation of the cost of a fixed asset over the period of benefit. Other Points 1) Process of allocation not valuation 2) Only fixed ( non current asset depreciated) 3) Must depreciate fixed asset that have gone up in value 4) Purpose of depreciation is to provide for proper matching b) The Accumulated Depreciation Account 1) This account merely shows the amount of depreciation expense that has been charged in the past. 2) It generally will not equal to the amount needed to replace the fixed asset as the replacement cost will generally be higher than the cost of purchase because of inflation. 3) It generally will not equal to the amount needed to replace the fixed asset as depreciation involves subjective estimates such as residual values, useful lives. 4) The company should consider setting up a sinking fund to cater for the replacement of the fixed asset. This involves setting funds aside periodically to ensure enough funds available for fixed asset replacement.

53

EXERCISE 9
Tip Interior Income Statement For the year ended 31 March 19x6 $ Sales Less: Cost Of Sales Opening stocks Add: Purchases Less: Closing Stocks Cost of Goods Sales Gross Profit Less: Expenses Rent & Rates(54440+3000) Wages & salary Electricity Transport Sundry Audit fees Bonus Advertising Bad Debts Doubtful Debts Depreciation(4000+3000+32000) Total Operating Expense Profit Before Interest & tax Less: Interest expense Profit before tax Less: Tax Expense Net Profit Retained Profit For the Year $ 1,420,740

144,600 997,700 127,420 1,014,880 405,860

57,440 85,000 17,510 30,060 60,190 5,000 20,000 12,000 5,000 6,772 39,000 337,972 67,888 2,400 65,488 40,000 25,488 25,488

54

Yip Interiors Statement of Financial Position As at 31 March 19X6

Acc Cost Depn $ $ 200,000 4,000 160,000 96,000 30,000 15,000 390,000 115,000 43,150 225,720 6,772 218,948 127,420 NBV $ 196,000 64,000 15,000 275,000

Non Current assets Premises Delivery Vans Shop Fittings Total Current Assets Bank Debtors (230720 -5000) Less: Provision For DD(3 % X 225720) Stocks(127920-500)

Total Current Assets Total Assets Current Liabilities Trade Creditors Tax Payable Unearned Fees Audit fees Payable Interest payable(40000X 12% X0.5) Total Current Liabilities Non-current liabilities Long Term Loan Total Liabilities Shareholders Equity Share Capital Reserves: Share Premium(50-20+160) Retained profits(59440+25,488) Total Shareholders equity Total Liabilities & Equity

389,518 664,518

120,190 40,000 2,000 5,000 2,400 169,590

40,000 209,590

180,000

190,000 84,928 454,928 664,518

55

Exercise 10 Emco Plc Cash Flow Statement For the year Ended 31 December 19X4

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Less: Gain on disposal Add: Interest expense Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less: Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets
Sale of Fixed asset

77,000 34,000 (20,000) 12,000 (8,000) (7,000) 9,000 97,000 (12,000) (17,000) (26,000) 42,000 (90,000) 70,000 (20,000) 7,000 20,000 27,000 49,000 11,000 60,000

Net Cash outflow Investment activities Financing activities

Issue of Share Issue of Debenture

Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

56

Working : Reconciliation: Operating cash flow Operating Profit Depreciation Gain on disposal Increase in stocks Increase in debtors Increase In creditors Net cash flow from Operating activities 2) Fixed assets Opening Balance Add: Purchase Revaluation Reserve Less: Disposal (20 +50) Closing Balance 3) Accumulated Depreciation Opening Balance Add: Current Depreciation Less: Disposal Closing Balance 56 34 20 70 $000 $89 34 (20) (8) (7) 9 97 180 90 30 70 230

4) Gain on disposal of Fixed assets = 70,000 50000 = 20,000

Part b The cash Flow statement shows a increase of cash of $49,000.

57

The increase in cash has been brought about from successful operations, which have in fact generated healthy cash flows of 97,000 The increase in cash is also due to issue of shares and debentures of $27,00. A close eye must be kept on the cash situation, since many companies have gone under by trying to expand too quickly. Overall the cash situation is stable.

58

EXERCISE 11 Rene Plc Cash Flow Statement For the year Ended 31 May 19X9

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Add : Interest expense Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less: Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets Financing activities
Issue of Share Issue of Debenture

87,000 42,000 8,000 (4,000) (21,000) 15,000 127,000

(8,000) (20,000) (22,000) 77,000 (146,000)

Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

60,000 30,000 90,000 21,000 (14,000) 7,000

59

Workings Dividends : Opening Bal = 16 Declared = 24 Closing bal = 18 Dividend paid =22 Taxation Opening Bal = 28 Declared = 31 Closing bal = 39 Tax paid =20 Purchase of Fixed Assets Opening Fixed Assets = Less: Depreciation Add: Revaluation Closing Fixed Assets Difference = Addition 514 (42) 10 482 628 146

b) Comment on cash flow The cash Flow statement shows a increase in cash of 21,000. This cash flow was mainly generated from Operating and Financing activities. The Operating activities generated a cash flow of $127,000 whereas the financing activities generated a cash flow of $90,000. A major portion of these cash flow were used to for the purchase of fixed assets of $146,000. This investment will generate benefits in terms of higher cash flow in later years. More financing cash flow should be generated to finance the purchase of the fixed assets. The purchase of fixed assets was for $146 000 whereas only $90,000 of these was financed from long term sources.

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c) Working capital position : Current ratio Quick Ratio 19X9 2.01 0.90 19X8 1.99 0.82

The overall working capital position has improved from 19x8 t0 19x9 as indicated by both the current and quick ratio. This is further evidenced by the improved cash flow position of the company in 19X9 compared to 19X8.

61

EXERCISE 12 Question 1 Emma Ltd Cash Flow Statement For the year Ended 31 December 19X2

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Less: Gain on disposal Add: Loss on disposal Add: Interest expense Less: Interest received Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less: Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets
Purchase on intangibles Sale of investment

$000 300 90 (5) 13 75 (25) (48) (75) 8 333

$000

(75) (110) (80) 68 (201) (50) 30 32 25 (164) 60 100 160 64 (97) (33)

Sale of non-current asset Interest received Net Cash outflow Investment activities Financing activities
Issue of Share Issue of loans

Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

62

1) Tangible Fixed Assets Closing Balance = Opening balance + Purchase + Revaluation increment disposal 720= 595 + Purchase + 9 85 Purchases = 720-595 9 + 85 = 201 2) Net Increase in cash Closing net cash = Opening Net cash = Net Increase in cash (33) (97) 64

Remember to offset bank balance to overdraft balance in respective years.

63

Question 2 Rene Plc Cash Flow Statement For the year Ended 31 May 19X9

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Add: Interest expense Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less: Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets

$000

$000

87 42 8 (4) (21) 15 127

(8) (20) (22) 77 (146)

Financing activities
Issue of Share Issue of Debenture

Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

60 30 90 21 (14) +7

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Workings Dividends : Opening Bal = 16 Declared = 24 Closing bal = 18 Dividend paid =22 Taxation Opening Bal = 28 Declared = 31 Closing bal = 39 Tax paid =20 Purchase of Non current Assets Opening Fixed Assets = Less: Depreciation Add: Revaluation Closing Fixed Assets Difference = Addition 514 (42) 10 482 628 146

b) Comment on cash flow The cash Flow statement shows a increase in cash of 21,000. This cash flow was mainly generated from Operating and Financing activities. The Operating activities generated a cash flow of $127,000 whereas the financing activities generated a cash flow of $90,000. A major portion of these cash flow were used to for the purchase of fixed assets of $146,000. This investment will generate benefits in terms of higher cash flow in later years.

65

More financing cash flow should be generated to finance the purchase of the fixed assets. The purchase of fixed assets was for $146 000 whereas only $90,000 of these was financed from long term sources.

Question 3
Gross Profit Margin 2004 39.45% 202/512 19.92% 102/512 0.73 512/700 14.57% 102/700 16.73% 82/490 2005 30.67% 230/750 5.60% 42/750 0.63 750/1,200 3.50% 42/1200 3.52% 34/965 Times

Net Profit Margin

Asset Turnover

ROA

ROE

Part b) Analysis of performance 1) Decreasing trend of falling profitabilty over the two years as indicated falling Profit margins and overall returns. 2) Gross profit margin decline by about 9%, indicating rising cost of sales not passed on the final consumers. 3) ROA and ROE has decline significantly, most likely due to increased direct and indirect expenses 4) Asset Turnover has decline, indicating declining ability to generate sales, relative to an increased asset base. 5) Business should review its direct and indirect expenses to determine the cause of the significant inncrease 6) If necessary, the business may have to increase prices, review the utilisation of assets to eliminate redundant assets. Any other relevant insight and recommendations.

66

Part c) a) Liquidity ratios measure the short term solvency of the business b) Gearing ratio measure the financial risk of the business, this is the amount of debt used in the business. c) Both ratios are an assessment of the risk of the business. Other relevant points.

NOTE: FOR INFORMATION ONLY.NOT PART OF ANSWER 2003 2004 2005 Total Assets 500 900 1500 Debts 200 220 250 Equity 300 680 1250

Question 4
Current Ratio = 285/300 ROA = 90/950 ROE = 90-50-20/200 Interest Coverage= 90/50 Net Profit margin= 90/850 0.95 9.47% 10% 1.8 Times 10.59%

b) Any reasonable answe Example: 1) Interest expense seem to be very high. The company may be very highly geared, indicating high financial risk. 2) Current ratio is low, indicating low liquidity and high solvency risk. c) 2 limitations b) Any reasonable answer.(2 MARKS EACH) Examples: 1) Need to compare against a proper benchmark for analysis. 2) Based on accounting information which may be subjective.

67

d) Any reasonable answer. E.g. It depends, if the company's share price is correctly valued, a high PE I indicates low risk or high growth potential. But if not a high PE, may be indicative of overvaluation.

Question 5
Gross Profit Margin 285/850 X100% Profit Margin 165/850 X 100% Return On Total Assets 165/950 X 100% Asset Turnover 850/950 Debt to Equity Ratio 185/200 X 100% b) Analysis 1) Gross Profit margin higher than industry average, indicating higher selling price charged or a lower direct cost compared to industry average 2) Lower profit margin, indicates a need for better control over indirect cost as they are higher than industry averages 3) The Return on total assets is signifinantly lower, probably due to lower profit margin as well as the Asset runover of 0.89 comparable to industry average. 4) The debt to equity ratio is significantly higher than industry average, indicating higher financial risk. 33.53%

19.41%

17.37%

0.89

times

92.50%

68

EXERCISE 13 Question 1 a) Computation of Purchases Opening Bal Creditor + Purchases less closing balance of creditors = Payment 7,400 + P 8,900 = 103, 300 ( 101,500 + 1,800) Therefore Purchases = 103,300 7,400 + 8,900 =104,800 Total Purchases = 104,800 Less : drawings = 600 Net Purchases = 104,200 b) T Lambert Trading, P & L Account For the year ended 31/12/X1 $ Sales Less; Cost Of Goods Sold Opening stocks Purchases Less Closing stocks COGS Gross Profit Less: Labour (1200+ 6620) Rent(5040+300-420) Delivery Electricity(1390+160-210) Net Profit 7,820 4,920 3,000 1,340 17,080 14,920 8,600 104,200 16,800 96,000 32,000 $ 128,000

69

T Lambert Balance Sheet As at 31/12/X1 $ Current Assets Bank Cash Debtors Stocks Prepayments Current Liabilities Creditors Accruals Net Assets Opening capital Add :Net Profit Less: Drawings* *Cash Drawings = 7730 Goods taken Total = 600 8,330 7,850 14,920 8,330 14,440 1,650 330 4,300 16,800 420 23,500 8,900 160 9,060 14,440 $

70

Question 2
Performance 2000 Gross Profit margin Net Profit margin Common Size Statement Sales Cost of Sales Gross Profit Less: Expenses Net Profit 40.00% 20.00% 2000 100 60 40 20 20 2001 33.33% 6.67% 2001 100 66.67 33.33 26.66 6.67 % Decline 6.67% 13.33%

Note: for ratio analysis, remember that you have to be a little flexible in the use of the formulas. Sales increased by 50% over the previous year but net profit fell from $100,000 to $50,000. The rapid expansion of the business has created problems. In the previous period, the business was making a gross profit of 40c for every $1 of sales made (200,000 / 500,000). This reduced in the following year to 33c for every $1 of sales made (250,000 / 750,000). This seems to suggest that the rapid expansion was fuelled by a reduction in prices. Although the gross profit increased in absolute terms by $50,000, net profit decreased. In the previous year the business was making a net profit of 20c for every $1 of sales (100,000 / 500,000), whereas in the following year this has decreased to nearly 7c for every $1 of sales made (50,000 / 750,000). This means that overhead expenses have increased considerably. Some increase in expenses may be expected in order to service the increased level of sales, however the increase appears to be exceptional.

71

Question 3 (a) RATIO (i) (ii) (iii) (iv) Return on Net Assets Gross profit ratio Operating profit ratio Asset turnover FORMULA 2000 1999 135/510 = 26.47% 285/580 = 49.14% 135/580 = 23.28% 580/510 = 1.14

Operating profit before interest 110/520 Net assets = 21.15% Gross profit Net sales 260/650 = 40%

Operating Profit before interest 110/650 Net sales = 16.92% Net sales Average assets 650/520 = 1.25

(b) Points to consider and discuss. Rate of return from assets employed has declined from 26.47% in 1999 to 21.15% in 2000. This is not a good sign. Gross profit margin is improving. This is a good sign. Net profit ratio has declined from 23.28% in 1999 to 16.92% in 2000. Asset turnover has increased from 1.14 to 1.25.

This information indicates that the decline in ROA has resulted from a decline in the net profit ratio. The decline has been mitigated by improved utilisation of assets employed to generate sales.

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Lecture 14 Question1 a. & b. Overhead absorption rate Overhead absorbed Actual overhead Over/(under) absorption Department A 19 16 per m/c hr 261,956 263,739 (1,783) Department B 26 89 per m/c hr 455,866 446,613 9,253 374,450 + 58,820 433,270 / 16,110 MIC hrs = 26.89 per m/c hr 26.89 16,953 hrs = 455.866 387,181 + (103,254 0 7 16,953 30,625) = 40,011 + (103,254 0 3 27,568 43,970) = 19.421 446,613 446,613 - 455,866 = 9,253 over abs

Workings : Budgeted Allocated cost 217,860 Overhead absorption rate: Budgeted Apportioned cost+ 45,150 263,010 / Machine hours 13,730 m/c hrs = 19.16 per mlc hr Overhead absorbed 19.16 13,672 hrs = 261,956 Actual overhead Actual allocated cost 219,917 Dept.A = 70%Dept.C + (103,2540.7 Actual Machine Hours 13,672 Total Actual Machine Hours 30.625) , = 32,267 + (103,254 0.3 16,402 43.970) = 11,555 263,739 Over/under absorption 263,739 - 261,956 = 1,783 under abs

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Question 2 (a) and (b) Overhead distribution schedule Production Basis of apportionment Factory rent (W1) Factory premises insurance (W2) Sundry expenses Machinery insurance (W3) Depreciation of factory plant and machinery (W4) Materials Indirect labour (W5) Administration salaries (1:1:1) Apportionment of canteen costs Apportionment of storeroom costs Floor area Floor area Value of plant and machinery Value of plant and machinery Indirect labour employees Cutting ! 100,000 5,000 8,540 2,860 17,600 66,000 Finishing ! 100,000 5,000 4,150 650 4,000 10,000 66,000 Service Canteen ! 10,000 500 29,640 260 1,600 22,000

Stores ! 10,000 500 13,370 130 800 22,000

Total number of employees 70%: 30%

8,000 208,000 24,000 40,600 272,600

8,000 197,800 36,800 17,400 252,000

8,000 54,800 3,200 (58,000) -

64,000 (64,000)

Canteen costs are therefore allocated as follows: Cutting = Finishing Showroom (c) 30/80 x 64,000 = 24,000 = 46/80 x 64,000 = 36,800 = 4/80 x 64,000 = 3,200 272,600 = 58 per 4,700 machine hours

Cutting department overhead absorption rate = machine hour

Finishing department overhead absorption rate = 252,000 = 60 per labour hour 4,200 labour hours

(d)

Job XY129 Cutting = 58 x 40 Finishing = 60 x 30 Total overhead charge = 2,320 = 1,800 4,120 ====

(e)

The cutting department is machine-intensive and it is therefore appropriate for this department to use a machine-hour basis to recover its overhead. The finishing department is labour-intensive and it is therefore appropriate for this department to use a labour-hour basis.

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Question 3 Overhead apportionment schedule for the year ended 30 June 2003 Total
Basis Allocated overheads Electricity Indirect labour Rent Machine maintenance Machine operating hours * No of indirect employees Floor area Machine operating hours 50:30:20 40:60:0 280,000 24,000 36,000 64,000 12,000

Dept A
141,345 12,000 12,000 28,000 6,000

Dept B
82,655 10,000 12,000 26,000 5,000

Dept X
32,000 1,500 6,000 6,000 750

Dept Y
24,000 500 6,000 4,000 250

Re-apportion Dept Y Re-apportion Dept x Total

416,000 Nil Nil 416,000

199,345 17,375 21,280 238,000

135,655 10,425 31,920 178,000

46,250 6,950 (53,200) Nil

34,750 (34,750) Nil Nil

* Alternative answer: Floor area basis is also acceptable which will give slightly different calculcations.

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Question 1 a. (i)Breakeven point = fixed costs Contribute per unit Present situation = 96,000 (1.70 1.40) = 96,000 0.30 Break even point in units x selling price per unit Breakeven point in sales revenue (ii) Annual sales units x contribution per unit (from(i)) Total contribution Less fixed costs Annual profit (iii) Annual sales units Breakeven sales units (from(i)) Margin of safety in units Margin of safety ratio = margin of safety Budgeted annual sales = 320,000 units x 1.70 = 544,000 500,000 x 0.30 150,000 96,000 54,000 500,000 320,000 180,000 180,000 x 100% 500,000 = 36.0% Proposed situation 130,000 (1.60 1.35) = 130,000 0.25 = 520,000 units x 1.60 = 832,000
(+50%)

750,000 x 0.25 187,500 130,000 57,500 750,000 520,000 230,000

230,000 x 100% 750,000 = 30.7%

b. Ocean Blue Ltd Proposal for expansion of production capability Present situation Breakeven point in units 320,000 Breakeven point in sales revenue 544,000 Annual profit 54,000 Margin of safety ratio 36.0% Proposed situation 520,000 832,000 57,500 30.7%

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Question 2 Proposal 1 Current Contribution per unit= Revised unit contribution = Revised break-even point= 8 6 83,333 Workings (20-7-4-1) 8-(10%*20) (200,000+300,000)/6

Based on current sales of 50,000 units, sales have to increase by (83,333-50,000)/50,000 = 67% Proposal 2 Revised unit contribution = Increased sales=20%*50,000 units= Additional contribution = Additional fixed cost = Additional profit 7 10,000 units 70,000 50,000 20,000 Workings 8-1

Proposal 2 will contributes additional profit of 20,000 which will reduce current loss to 80,000. Hence, proposal 2 is better provided the additional production capacity can be achieved.

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Question 1 Accept Inflow Scrap Value of material Net cash Outflow Outflow Material Variable Overheads Net cash Outflow Net cash Outflow Therefore Minimum Price = $5,400 Reasons & assumptions a. The original historical cost of the material in stock is a sunk cost and not relevant. The relevant is the opportunity cost of the saving foregone on on the other materials which now have to be purchased for $4,000. The materials could have been used elsewhere. The workers would be paid even If the contract is not undertaken. There is thus no opportunity cost as the department is already working below capacity. The variable overhead is assumed to be an incremental cost. They are included in the minimum price, as it is assumed they are specifically incurred in conversion work. Depreciation is not a cash flow and is therefore not relevant. Depreciation Apportions the original cost of the machine, a cost which was sunk eight ago. There is no indication of the current resale value of the machine and so it is assumed that there is no intention of selling it. It is also assumed that there is no opportunity cost involved in its use for this contract, as it would not be needed elsewhere. The foreman is already being paid. Therefore his salary is not an Incremental cost. It is assumed that there is no opportunity cost associated with the use of his time for this contract. It is assumed that general fixed overhead will not increase a result of this contract, therefore absorbed overhead is not relevant. Scrap revenue foregone will be an opportunity cost, if the product is Converted rather than sold as scrap. 4,000 400 0 0 4,000 400 4,400 5,400 0 1,000 (1,000) 1,000 Reject Net cash Flow

a. a. a.

a.

a. a.

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Question 2 Calculation of BE price Components Y,Z (75-22) Component W Direct Labour 1.5 X 0.75X 24 1.5 X0.25 X12 Total Relevant Cost X 100 Copiers Total Add: Travelling time 10 hrs X 24 Extra Machine Total Relevant Cos Per Copier 53 34 27 4.5 118.5 100 11850 240 800 12890

Explanation of the figures used Component X is a sunk cost which has already been paid for, is obsolete for future purposes and has no resale value. Component W is an additional cost of this special order. The standard cost would have charged for 50 hours but only 10 will actually be incurred. The cost per hour is assumed to be unchanged. Labour costs need to reflect the lower number of hours and the use of trainees The overheads are fixed and so not relevant costs. The opportunity cost of using the special machine is the loss of the resale value.

79

(b)Factors to be considered in setting a price. customer. This price gives a contribution of 2,110 which represents a 16% margin of safety on the estimated costs. This reduces the financial risk of accepting the order. The cost estimates on a one-off special order do contain an element of risk. With a change in manufacturer would it be a better strategy to cease Will there be enough staff for the job and the introduction of new copiers? Is it sensible to have trainees working on old types of copier? If this is a large customer would we lose goodwill if we refused The upgrade? Could this damage future relationships and other sales possibilities?

80

Question 3 (a) Standard cost cards Absorption Costing Basis 0.50 2.25 0.40 0.60 5.00 8.75 Marginal Costing Basis 0.50 2.25 0.40 0.60 3.75

Material m1 (0.25 kilos at 2 per kilo) Material M2 (0.75 kilos at 3 per kilo) Labour (0.10 hours at 4.00 per hour) Variable overhead (at 6 per labour hour) Fixed overhead (6,600/4 x 330) Total Standard Cost/Marginal cost (b) (i) & b (ii) Income Statements

Income Statement for the 3 months ending 31 Mar 2000 Absorption Basis Marginal Basis Sales Less: Cost of sales 290X8.75 Profit (290 x 15) 4,350.00 Sales Less: V. Cost of sales Contribution Less Fixed costs Profit As Absorption 290X 3.75

4,350.00 1,087.50 3,262.50 (1,650.00) 1,612.50

2,537.50 1,812.50

(c) Reconciliation of profit under absorption costing and profit under marginal costing Absorption costing profit Marginal costing profit Difference 1,812.50 1,612.50 200.00

Difference is due to the valuation of closing stock:40 units at 5.00 (being the fixed factory overhead which is not included under the marginal basis).

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EXERCISE 18- SOLUTIONS Question 1 Cash budget for May, June and July 1999 May Bank-start
RECEIPTS

June 28,225

July (13,325)

5,000

Debtors (see Debtors schedule below) Machine sale TOTAL

223,250

205,000 500

241,250

228,250

233,725

227,925

PAYMENTS Creditors (see Creditors schedule below) Council rates Salaries Loan Interest Office expenses Drawings Machine-deposit Machine-instalment TOTAL Bank-end 200,025 28,225 14,625 1,500 58,500 75,000 12,400 18,750 1,500 1,300 1,300 247,050 (13,325) 1,300 222,350 5575 15,750 1,500 125,400 136,800 135,600 5,200 63,000

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Schedule of collections of sales revenue from Debtors Total Sales March Cash (15%) Credit (80% & 5%) April Cash (15%) Credit (80% & 5%) May Cash (15%) Credit (80% & 5%) June Cash (15%) Credit (80% & 5%) July Cash (15%) Credit (80% & 5%) TOTAL 223,250 205,000 241,250 210,000 31,500 250,000 37,500 200,000 195,000 29,250 156,000 9,750 200,000 30,000 160,000 230,000 34,500 184,000 11,500 10,000
May

June

July

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Schedule of payment of inventory purchases Total Purchases April (60% of sales) cash (60%) credit (40%) May (60% of sales) cash (60%) credit (40%) June (60% of sales) cash (60%) credit (40%) July (60% of sales) cash (60%) credit (40%) TOTAL 125,400 136,800 135,600 126,000 75,600 150,000 90,000 60,000 117,000 70,200 46,800 138,000 82,800 55,200 May June July

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Question 2
Prepare for the months of October, November and December 1999: (a) A schedule of collections from debtors SALES August 160,000 September 220,000 October 200,000 November 180,000 December 162,000 August September 112,000 32,000 154,000 October 12,800 44,000 140,000 November December 17,600 40,000 126,000 183,600

196,800 (b) A schedule of payments to creditors. PURCHASES September 132,000 October 120,000 November 108,000 December 97,200

16,000 36,000 113,400 165,400

October 105,600 24,000

November 96,000 21,600 117,600

December

129,600 (c) A cash budget Cash at start Sales Revenues Courier Revenues TOTAL CASH Purchases Shop rent Staff wages Tax Loan Drawings Insurance Courier service start Courier service on-going TOTAL EXPENSES Cash at End (d) October (13,950) 196,800 182,850 129,600 66,000 40,000 November (57,250) 183,600 20,000 146,350 117,600 36,000 110,950 160,000 4,500 100,000 45,000 574,050 (427,700)

86,400 19,440 105,840

December (427,700) 165,400 21,000 (241,300) 105,840 32,400

4,500

240,100 (57,250)

4,500 22,000 100,000 45,000 309,740 (551,040)

In the absence of evidence to the contrary, it is assumed that a business will continue to operate indefinitely into the future. Thus its assets generally are assumed that they are not held for resale, nor valued accordingly, but valued on the historical cost principle. If data suggests that continued existence will be a problem, then the accounting record has to indicate this fact. This means that financial reports then are prepared based on expected sales or market values of assets. Solvency refers to the capacity of a business to met it s debts as they become due. Liquidity refers to the speed with which a businesss assets can be turned into cash, without an appreciable loss of value. The cash budget shows that the firm does not have enough cash to satisfy its obligations and planned purchases for December. As a result, it will not be able to conduct its normal operations and may be forced into liquidation.

THE END

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Question 1 Materials
Standard cost of actual production ( 2,020/40 x 100 ) Actual quantity x standard price 52 x 100 Actual cost Usage variance Price variance Total material cost variance Labour Standard cost of actual production ( 2,020/50 x 20 x 1.25 ) Actual quantity x standard price ( 40 x 20 x 1.25 ) Actual cost 3 x 1.30 x 40 = 156 2 x 1.20 x 40 = 96 15 x 1.25 x 40 = 750 1,002 Efficiency variance 10 F Rate variance 2 A Total wages cost variance Overhead Absorption rate = 288,000/96,000 = 3 per unit Overhead absorbed 2,020 x 3 Budgeted overhead 288,000/48 Actual overhead Volume variance Expenditure variance Overhead cost variance 6,060 6,000 6,200 60 F 200 A 140 A 1,010 1,000 5,050 5,200 5,096 150 A 104 F 46 A

8 F

Materials Standard cost of actual production ( 2,020/40 x 100 ) Actual quantity x standard price 52 x 100 Actual cost Usage variance Price variance Total material cost variance Labour Standard cost of actual production ( 2,020/50 x 20 x 1.25 ) Actual quantity x standard price ( 40 x 20 x 1.25 ) Actual cost 3 x 1.30 x 40 = 156 2 x 1.20 x 40 = 96 15 x 1.25 x 40 = 750 1,002 Efficiency variance 10 F Rate variance 2 A Total wages cost variance Overhead Absorption rate = 288,000/96,000 = 3 per unit 1,010 1,000 5,050 5,200 5,096 150 A 104 F 46 A

8 F

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Overhead absorbed 2,020 x 3 Budgeted overhead 288,000/48 Actual overhead Volume variance Expenditure variance Overhead cost variance

6,060 6,000 6,200 60 F 200 A 140 A

Question 2 Price Variance (0.4 - 0.42)X 7,150 Usage Variance (6,960 - 7150)X 0.4 Total Material Variance 143 (U) (b)

76 (U) (b) 219 (U) (a)

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Question 1
Contribution per year Fixed cost Yearly subsidy Annual net profit (520-400)*220 26,400 -44,000 40,000 22,400 Year 1 160,000 180,000 22,400 180,000 12.4% Year 2 120,000 140,000 22,400 140,000 16.0%

Closing NBV Ave NBV AROR =

Year 0 200,000

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Question 2 000 Sales Equipment Stock` W Capital Overheads Materials Variable Cost Cash Flow D Factor Present Value 2009 Start (480) (60) (40) (16) (480) (580) 1 (580) (80) 576) 0.893 (514.4) (16) (480) (80) 224 0.797 178.5 (19.2) (480) (80) 220.8 0.712 157.2 (19.2) (384) (64) 332.8 0.636 211.7 2009 0 2010 800 2011 800 2012 800 2013 640 80 60 40 (19.2) (240) (40) 520.8 0.567 295.3 2014 400

400 0.507 202.8

NPV = (48,900) A negative NPV project should be rejected.

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