Week 1.

Overview of accounting

2 In general, students will need to be aware of the contents of the AASB Framework and the more recent IASB Conceptual Framework.
Accordingly, responses should include at least the following points:
a Employees are interested in the generation of cash flows and whether the entity is achieving its objectives. This information is
available from general purpose financial reports (GPFRs) which also contain non-financial information on the future direction of
the entity.
b Investors are interested in the amount and timing of profitability, the generation of cash flows, whether the company is achieving
its objectives and its future direction. This information is available from GPFRs, ASX extracts and media releases.
c Regulators are interested in whether the reporting entity is operating in the interests of its members, whether the entity is achieving
its objectives, and if it is operating economically and efficiently. They are also interested in ensuring that reporting entities are
complying with various rules and regulations, i.e. AAS, AASB, Corporations Act 2001, ASX. Additionally, regulators are
concerned with the efficiency of the law and will therefore monitor reports to ensure that regulation complies with public
expectation. This information is available from GPFRs and other reports to meet specific regulatory requirements, i.e.,
Corporations Act 2001, ASX.
d Suppliers of goods and services are primarily interested in whether the entity is solvent. In addition, they are concerned with
profitability and cash flows, and whether the entity is achieving its objectives. This information is available from the statement of
comprehensive income and the balance sheet.
e Customers are interested in the ability of the entity to continue a future supply of goods and services, the level at which they will be
provided and the likely cost of provision. Ongoing supply depends on profitability and cash flows. In addition, they may be
concerned with non-financial issues, such as externalities (pollution, land degradation and so on).

6 You are employed by the client, but there are certain obligations to regulatory bodies, such as ASIC and the ASX, which cannot be
deliberately disobeyed.

7 Information on costs, including goods purchased, wages, rents, electricity and other overheads, so prices can be set to cover all
costs and return a profit to the owner.
Information on cash flows weekly or even daily.
Information on inventory levels so goods can be ordered in time to be available before all items are sold. Daily and weekly,
depending on items.
Competitor pricing policy.
Opportunity costs. What could you earn with your money invested elsewhere and what is the cost of wages you could earn by
working as an employee? This is an issue that should be considered at some stage, preferably before making the decision to buy the
supermarket.
8 What is the amount per band member? What are the opportunity costs of taking the job, i.e. what does the band give up? Any costs to
incur, such as hiring equipment, transport to the venue? Tax implications should also be considered.

9 a Some examples are: selling price, costs of manufacture, set-up costs, marketing costs, patent costs, expected life for the product.
b Some examples are: size of market, competitors, technical specifications. Potential costs which may arise given the risk of hang
gliders: does the company need to consider special insurance protection is it available? This is not the companys core business.
What skills does it have in this industry? Costs of relocating to Sydney.

10 Information about competitors.

Any proposed changes to zoning in the area which may affect the business.
If a lease, when is the lease due for renewal?
Information about suppliers.
Any new competitors likely to enter the area?
Market research may be necessary but this depends on how long the business has been established and how successful it has been.
Any new developments or road construction in the area.

12 Financial issues cost of building, machinery, training costs, purchase of components, personnel (wages, annual leave,
superannuation and so on), provision for any tax on externalities, projected revenue, life of the project.
Health and safety issues location of plant, emissions of toxic substances.
Social and legal issues location of plant, disposal of waste products, procurement of necessary licences for construction.
Market research demand, price, competition.
Note: if nuclear-powered Frisbees are made and/or tested on site then the above issues will need to be expanded (e.g.
community reaction, strict health and safety regulations, adequate containment of nuclear materials, as well as the impact these
may have on future legislation, adherence to Consumers Protection Act and so on).
14 a
Thug
Possessions Exchange rates Equivalent morsels of meat
6 large brown furs 50 morsels of meat each 300
2 small brown furs 30 morsels of meat each 60
5 small black furs 15 small brown furs at 30 morsels of meat per fur 450
34 morsels of meat 3 small brown furs at 30 morsels each 34
Rock fridge Taxed at 1 rock for every 10 morsels 90
934
93 rocks
Olga
Possessions Exchange rates Equivalent morsels of meat
2 large brown furs 50 morsels of meat each 100
10 large black furs 20 large brown furs at 50 morsels of meat each 1000
9 small black furs 27 small brown furs at 30 morsels of meat per fur 810
22 morsels of meat 2 large brown furs at 50 morsels each (equivalent to 1 22
Rock fridge large black fur) 100
Taxed at 1 rock for every 10 morsels 2032
203 rocks

b Thug should pay taxes equivalent to 93 rocks and Olga should pay the equivalent of 203 rocks. They could either collect the rocks
themselves or pay Ugg by means of furs and morsels of meat equivalent to the amounts of tax they owe.
(Tutors should discuss other possible solutions and alternative measurements, e.g. the rock fridge is shown at two different
amounts. Discuss the concept of decline in value through use.Week 2

Week 2 .
Types of Organisations & the Financial Reporting Framework

1 A sole trader has one owner whereas a partner has at least two. Partners are jointly and severally liable for the debts of partnership, there
needs to be separate accounts kept of the transactions relating to each partner, agreements need to be reached regarding profit shares and
so on. All partners are bound by the requirements of the Partnership Act.
2 The liability of the owners (shareholders) is limited to the amount paid on their shares.
3 Legal status, membership of company, dividends vs. drawings, limited liability, audit, filing of accounts and so on.
6 Students should raise and discuss the following points dealt with in the text:
Advantages:
ease of formation
limited rules and regulations
provision of capital and expertise
taxation advantages.
Disadvantages:
limited life
unlimited liability
mutual agency.
8 Points raised by students on the various influences on external reporting for companies in Australia should include:
international financial reporting standards as issued by the IASB are now issued as Accounting Standards by the AASB and must
be complied with by all reporting entities
Corporations Act 2001
ASX listing requirements, where applicable.
9 Consolidated financial statements are reports which show the financial position and results of an economic entity comprising of a parent
entity and all other entities that are controlled by the parent entity.
The purpose of consolidated financial statements is to portray the parent and controlled entities as if they were a single economic
entity to enable users of financial statements to judge how well the parent entity has performed in pursuing its goals.
10 A subsidiary or controlled entity is one where the operating and financial policies are controlled by another entity.
12 It is a set of interrelated concepts that define the nature, subject, purpose and broad content of general-purpose financial reporting. It is
an attempt to establish the foundations from which general-purpose financial statements can be prepared.
13 It is an entity which has users who require general-purpose financial reports (GPFRs) to assist them in making decisions about the
allocation of scarce resources. Such users are unable to demand information and receive it from the entity as would normally be the case
if they were a banker or large creditor.
14 The users of general-purpose financial reports are those users who cannot demand and receive information from an entity. For example,
the Reserve Bank would be able to demand and receive any information from a bank in Australia; therefore the Reserve Bank does not
rely on general-purpose financial reports to assist in its supervision of the banks. However, most users, whether they are shareholders,
employees, customers or analysts, are unable to demand and receive financial information from an entity. (Tutors may ask students how
 successful they would be if they approached BHP for financial information.) Users require general-purpose financial reports to assist
them with a range of decisions, for example, to buy or sell shares in the entity, to provide goods to the entity, to buy goods from the
entity and so on.
17 Conservatism is often used to describe an approach to accounting whereby assets, income and revenues should not be overstated and
expenses and liabilities should not be understated. It is sometimes associated with prudence and is acceptable provided there is no
deliberate overstatement of expenses and liabilities or understatement of assets and income and revenues.
18 Faithful representation and irrelevant financial information e.g. amounts to the exact dollars and cents for any items in the financial
statements. Cannot be faithfully represented and relevant information estimates of probability of success from research and
development expenditure, extent of reserves underground for mining companies, value of internally generated goodwill.
19 The purpose of an external audit is to add credibility to general-purpose financial reports so that users can be assured that the reports are
a true and fair representation of the economic activities of the reporting entity.
20 The expectation gap refers to the difference between what an auditor is legally required to do in auditing general-purpose financial
reports and what is expected by users of financial statements.
Example: an auditor is required under the Corporations Act to report an incident of fraud or illegal acts discovered during the
course of an audit. This requirement may raise the expectation among individual shareholders that if an auditor reports no such acts,
then no fraud or illegal act has been perpetrated.
The law, on the other hand, requires the auditor to exercise due care when forming his or her opinion but does not require the
auditor to detect fraud.
21 An audit adds credibility to general-purpose financial reports; however, the preparation and presentation of the reports remains the
responsibility of the directors of public companies. It would therefore be incorrect to conclude that public financial statements would
not be true and fair merely because they were not audited.

1 a Note 1B states that the accounts are prepared on the basis of historical cost basis except for derivative financial
instruments, financial instruments held for trading and available-for-sale, which are valued at fair value.
b The auditors are Deloitte.
c The auditors were paid $2.326 million for the audit and $541 000 for other non-audit services. As the amount for non-audit
services is significantly less than the audit fee it therefore does not present a problem for audit independence.

2 a Asset something of value that belongs to you.

b Liability an amount you owe someone.
c Equity your interest in a business.
d Expense cost of running a business.
e Income amount received for selling assets and goods and services.

3 a
Mike and Phil
Income statement for year ending 30 June 20X9
$ $
Sales 210 000
Less: cost of goods sold 163 000
47 000
Less:
Selling expenses 7 316
Depreciation expenses 4 322
Financial expenses 1 827
General expenses 12 035 25 500
Net profit 21 500

b Profit share
Mike 36 320 21 500 = $8600
90 800
Phil 54 480 21 500 = $12 900
90 800
WEEK 3
Corporate governance and ethical standards
3 The role of the board of directors is to represent the shareholders of the company, make decisions and endeavour to add value for
the shareholders. The board is one way in which the management of the company is held accountable for its actions.

Problems for discussion and analysis

1 The corporate governance report for Woolworths is available at www.woolworthslimited.com.au (click on annual report). The notes
below are based on the 2013 annual report and are meant as a guide only. It is important for students to discuss whether making
statements about ethical decision making, for example, provides sufficient assurances to shareholders.
Strengths:
Very detailed and transparent. Meets and exceeds most of the best practice guidelines.
There are nine on the board of directors (BOD) and all except for the CEO and CFO are claimed to be non-executive and
independent, which conforms with best practice recommendations. The board size is also not too large and is within the range of
what some researchers have found is desirable.
BOD members are able to seek independent advice at the companys expense.
The roles of chairman and CEO are held by different people.
Has a corporate governance committee that is responsible for the appointment of members to the BOD.
Has an active audit committee (AC) comprised of non-executive directors with financial skills. The AC has wide ranging
responsibilities. The AC requires the lead audit partner to be rotated every five years and has a policy of not appointing the firms
auditors to the BOD at any time. The AC can also seek independent advice at the companys expense. The AC also reviews all on-
audit services provided by the external auditor.
Has a people policy committee made up of non-executive directors, which is responsible for the establishment and review of the
remuneration of the companys senior executives.

Improvements:
There are few areas where the company needs to improve, but one area not mentioned is whether the non-executive members of the
BOD meet independently at any time. Another area could be in terms of directors access to information.

6 a Were the transactions unethical?

Legal considerations: Jan Skullys actions have most likely breached several sections of corporations law. For instance, s.232
which requires directors not to abuse their special position for self-gain; also Part VII 11 of the Act, on conduct in relation to
securities, particularly ss.995998 which outlaw misleading or deceptive conduct of the type given in the case facts. There are also
common law considerations, such as Skully breaching her fiduciary duties as a director.
Ethical considerations: Skullys actions are inconsistent with a number of ethical principles, such as honesty, a duty of care to
protect the uninformed and not to abuse her position of trust. As a member of a professional accounting body, Skully would not
have complied with the principles of integrity (APES 110110), objectivity (APES 110120), independence (APES 110290) and
ethical behaviour (APES 110150) that is, bringing the profession into disrepute.
Her actions will have benefited her (and her family?) in the short term but the transfer of funds from other companies and the
ramping of the share price of Extraordinary Products Ltd has eventually led to losses to the other shareholders (assuming they
exist) of Skullys related companies and the shareholders in Extraordinary. Her actions would also result in a general decline in
public confidence in the share market.
b How could the scheme have been prevented?
As the founder and chairperson of Extraordinary Products Ltd, Skully may well have had a very dominant position on the Board
and may have seen the company as her company. This would have made it difficult to control her actions.
Some possible preventative measures might include:
A strong board of directors made up of a substantial proportion of non-executive directors
Policies in which all director share transactions must be declared to, and approved by, the board of directors
Policies prohibiting insider trading
Internal auditing which reviews changes in the share register and the internal auditor reports to the whole Board (or audit
committee)
A policy of disclosure in the financial report of all related party transactions along the lines of AASB 124
Many of these suggestions have been incorporated in the Corporate Governance Best Practice Guidelines issued by the ASX.
Details are provided in Chapter 12.
4.Statement of financial position

1 It is a list of assets, less liabilities, with the owners equity being the residual figure. It is a snapshot at one point in time and is
therefore only relevant to that point in time.
2 Future economic benefits
Control by the entity
Past transaction or past event.
3 Answers should show that students understand that liabilities are present obligations which result in the entity having to sacrifice future
economic benefits, while equity is the owners interest in the residual of the assets of the entity after the deduction of its liabilities.
4 Current prepaid insurance, prepaid rent, land held for sale.
Non-current mining equipment, specialised machinery, aircraft.
5 The answer should show an understanding that both sides of the balance sheet equation must always be equal.
8 Is there a future benefit to be obtained or has the benefit expired? If there is a future benefit then we have an asset; if the benefit has
been used or consumed then we have an expense.
9 In situations where the answer to the question posed above is not clear cut, students should re-examine the definition and recognition
criteria for an asset. If it is not probable that future economic benefits controlled by the entity do exist and can be reliably measured,
then we should record an expense.1 a Total assets $22 250.2 million; total current assets $6226.1 million; total non-
current assets $16 024.1 million.
b Property, plant and equipment is $9246.1 million and represent about 45 per cent of total assets.
c Total liabilities are $12 949.7 million, total current liabilities $6866.6 million, total non-current liabilities $6083.7 million.
d Borrowings are $4282.5 million and represent about 35 per cent of total liabilities.

2 Current assets = TA NCA

= 200 000 50 000
= 150 000
Current liabilities = TL NCL
= 250 000 25 000
= 225 000
Owners equity = 200 000 250 000
= 50 000
It is unlikely an entity can continue to pass the going concern test with negative owners equity but it can happen. (Orbital Engine
Company in 2002 had negative equity.)
3
20X6 20X7
Assets $100 000 $160 000
Liabilities $50 000 $100 000
Owners equity $50 000 $60 000

a Total assets 20X7 $160 000

b Total liabilities 20X6 $50 000

4 20X8: TA = $186 000, NCL = $103 000, TL = $126 000

20X9: CA = $110 000, TA = $196 000, CL = NIL, OE = $96 000

Balance sheet
$ $ $
 Assets
Current assets
Cash 1 700
Accounts receivable 1 250
Inventory 30 125
Total current assets 33 075
Non-current assets
Office equipment 3 600
Motor vehicles 17 200
Loan to director 21 000
Total non-current assets 41 800 74 875
Total assets
Liabilities
Current liabilities
Accounts payable 42 250
Bank overdraft 32 500
Total current liabilities 74 750
Total liabilities 74 750

NET ASSETS 125

Owners equity
Total owners equity 125 125
125

The business has assets only slightly greater than liabilities and generally this would means it will struggle to pass the going
concern test. It is unlikely creditors would allow the entity to continue to operate.

8 Note: the question has been set up so that there is a situation where the current liabilities exceed the current assets in order to allow an
explanation of how dangerous this can be in terms of risk. The business in the example is likely to be a retailer, as there is no
manufacturing capacity in the non-current assets, and thus an opportunity is provided for the tutor to explore with the students the
expected differences in the structure of assets and liabilities between different industries. The balance sheet is on the next page.

Balance sheet
$ $ $
Assets
Current assets
Cash 1 000
Stock of goods held for resale 13 000
Total current assets 14 000
Non-current assets
Office furniture 4 600
Delivery van 3 200
Fixtures and fittings 15 200
Freehold land and buildings 64 000
Total non-current assets 87 000
Total assets 101 000
Liabilities
Current liabilities
Bank overdraft 20 700
Total current liabilities 20 700
Non-current liabilities
Mortgage on land and buildings 58 000
Total non-current liabilities 58 000
Total liabilities 78 700

Net assets 22 300

Owners equity
Total owners equity 22 300
9
Transom Trading
Balance sheet as at 31 December 20X1

$ $ $
Assets
Current assets
Cash 49 400
Inventory 24 000

Total current assets 73 400

Non-current assets
Freehold shop 176 000
Shop fittings 3 000
Ford Escort 8 000
Cash register 1 200

Total non-current assets 188 200

TOTAL ASSETS 261 600

Liabilities 13 000
Current liabilities
Bank overdraft
Total current liabilities 13 000
Non-current liabilities 60 000
Mortgage loan
Total non-current liabilities 60 000
Total liabilities 73 000

Net assets 188 600

Owners equity
Capital 201 000
Retained earnings 12 400
Total owners equity 188 600
 Week 5
Presentation of Financial Performance

Review questions
1 The answer should note that expenses are consumptions, or losses of service potential or future economic benefits.
2 The answer should point out that a cost can be incurred which will result in both an asset, i.e. something that has a future benefit, or an
expense, i.e. something where the benefit has been used up.
3 The intention here is to reinforce the idea that costs of one period may be expenses of another period. Examples could include
prepayments, non-current assets, accruals and so on.
4 To provide a guide to the way in which a business has performed over a period of time. For example, it will be used by owners and
other users for making decisions in respect of continued investment in that entity and help them to form a judgement of managers
performance.

6 When the cost does not relate to the business, e.g. the purchase of private assets through the business bank account.
7 They are both important and provide different information about an entity. It really depends on what a user requires as to which
statement is the most important.
8 a Cash and owners equity
b Cash and income (revenue)
c Supplies asset and accounts payable
d Cash and electricity expense
e Cash, land and loan payable

Problems for discussion and analysis

1 a The revenue from operating activities for 2013 was $58 516.4 million.
b The gross profit for 2013 was $15 761.4 million. For 2012 it was $14 461 million. The gross profit increased by $1 300 million or
about 9 per cent.
c For 2013 the profit before tax was $3214.8 million and in 2012 it was $3064.2 million. This is an increase of about $150 million
or about 5 per cent. One of the main reasons was the increase in gross profit for the year.
d The total comprehensive income for the year ended 30 June 2013 was $2496.6 million and for 2012 was $1741.5 million.

2 a Owners equity 1 January = $132 400 $68 300

= $64 100
b Owners equity 31 December = $333 000 $128 300
= $204 700
c Profit = $204 700 $64 100
= $140 600
3 a TL = $50 000, TE = $26 000
b TA = $26 900, Net loss = $1000
c OE = $16 000, TR = $13 000
d TL = $25 000, OE = $25 000, TR = $15 000, TE = $12 000
4 a NCA $120 000; NCL $90 000; TL $120 000; TE $112 300
b NCA $147 100; TA $165 300; CL $22 000; TE $93 500
c CA $17 400; TL $92 800; OE $10 900; NP $50
d NCA $65 080; NCL $40 380; OE $42 770; TE $155 400
e CA $23 460; TA $133 660; CL $11 960; TR $40 800
f CA $1300; TA $37 700; TL $10 400; TE $100 350; NP$33 450
7 Owners equity at 30 June 20X1 = $134 645 + $5000 $56 737 + $34 692
= $117 600
 9
Balance sheet
Assets $ $ Liabilities and $ $
owners equity
Current liabilities
Accounts payable 14 020
Bank overdraft 2 300
16 320
Non-current
liabilities
Mortgage 23 000 23 000

Total liabilities 39 320

Non-current assets Owners equity

Equipment Capital 63 138
Motor vehicles 3 200 Plus: Net profit 48 972
Land & buildings 23 230
125 000 151 430 112 110
Total liabilities and
owners equity
Total assets 151 430 151 430

Statement of comprehensive income

$ $
Sales 132 000

Less
Cost of goods sold 32 400

Gross profit 99 600

Less expenses
Insurance 932
Salaries 1 236
Electricity + telephone 9 560
Wages 38 900 50 628
Net profit 48 972*
Other comprehensive income 0
Total comprehensive income 48 972
* No depreciation has been recorded.
15 a

Mandy Plover worksheet

ASSETS = LIABILITIES + OWNERS EQUITY
Date Bank Prepaid Fixtures & Computer Supplies Accounts Prepaid Lease Accounts Capital Profit
Rent Fittings Receivable Rent = Payable & Loss
July 1 30 000 30 000
3 000 3 000
275 275
50 50
475 475
2 1 000 1 000
3 17 500 17 500
4 1 380 1 380
15 2 750 2 750
15 No entry
15 750 750
16 225 225
16 2 000 2 000
18 17 500 17 500
22 300 300
23 780 780
29 750 750
29 300 300
31 340 3 110 3 450
Balance 3 985 3 000 1 000 17 500 1 380 4 855 2 000 = 0 30 000 3 720
Adjustment
Rent 1 000 1 000
Lease 1 000 1 000
Supplies* -115 115
Adjusted 3 985 2 000 1 000 17 500 1 265 4 855 1 000 = 0 30 000 1 605
Balance
*Assumed to last for one year, therefore 1 380 1/12 = 11
 b
Mandy Plover
Statement of comprehensive income for month ending 31 July
$ $
Revenue 6 800
Less Expenses
Wages 1 500
Rent 1 000
Motor Vehicle Lease 1 000
Telephone 275
Electricity Fee 50
Office Equipment 475
Bad Debts 780
Supplies 115 5 195
Net Profit
Other comprehensive income 1 605
Total comprehensive income 0
1 605

Mandy Plover
Balance sheet as at 31 July
Assets $ $ Liabilities and owners equity $
Current assets Owners equity
Bank 3 985 Capital 30 000
Accounts receivable 4 855 Retained earnings 1 605
Supplies 1 265
Prepaid rent 2 000
Prepaid lease rent 1 000 13 105

Non-current assets
Fixtures and fittings 1 000
Computer 17 500 18 500

Total assets 31 605 31 605

c For the month of July, Mandy has made a profit of $1605. However, this figure is overstated for the following reasons:
No expense recorded for electricity or telephone as no account has been received as at 31 July
No depreciation recorded for the computer or the signs
No allowance made for any further bad debts
Based on the investment of $30 000, Mandy is receiving the following return:

1605 12 100
30 000

= 64.2 per cent per annum

The other issue Mandy must consider is whether her wages of $750 per fortnight represent what she could earn
elsewhere. If in fact her wages are understated at $750 per fortnight or $20 000 per annum, then her return on investment
is overstated.
Finally, the effect of the lease of the BMW must be considered. For July the impact on profit has only been $1000
but in future months the impact will be $2000 per month. If Mandy continues to earn the same profit each month then
the following figures show the impact of the BMW:

Net profit for July $1 605

Add back BMW lease cost $1 000
$2 605

x 12 for full year x 12

$31 260
Less full year cost of BMW $24 000
$7 260

Contemporary Accounting (9th edition) Solutions Manual

2015 Cengage Learning Australia Pty Limited.
 0113

Return on investment:

$7 260 100
$30 000

= 24.2 per cent

In summary then, Mandys business looks very promising. However, further analysis is required after a few more
months of business to enable a more accurate assessment of the financials. Perhaps Mandy could earn a higher return by
investing her money in shares and working for someone else, but then she loses her independence and perhaps the car.
Even if she continues in her own business she could improve the return on her investment by choosing to lease a less
expensive motor vehicle.

Contemporary Accounting (9th edition) Solutions Manual

2015 Cengage Learning Australia Pty Limited.