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QUESTION ONE

a) The current ratio increase is a favourable indication as to liquidity, but alone tells little about the going
concern prospects of the client. From this ratio alone, it is impossible to know the amount and direction of
the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the
reasons for the changes. The decline in the quick ratio to 0.8 is an unfavourable indication as to
immediate liquidity, especially when the current-ratio increase is also considered. This decline is also
unfavourable because it reflects a declining cash position and raises questions as to reasons for the
increases in other current assets, such as inventories.
The cash debt coverage ratio is a solvency ratio that indicates a companys ability to repay its liabilities
from cash generated by operations. Since this ratio declined during 2013, it indicates that the companys
cash provided by operations decreased and/or its liabilities increased. The asset turnover and earnings
per share ratio indicate profitability. Since both ratios are higher in 2013, it is likely that the companys
sales revenue is increasing. Increases in sales and profit are favourable for going-concern prospects. It is
most likely that there has been no change in the number of issued ordinary shares (although more
information is necessary to make this judgement). This, in turn, indicates that financing was not obtained
through the issue of ordinary shares.
b) The collective implications of these data alone are that the client entity is about as solvent at the end of
the current year as it was at the beginning, although there may be a need for short-term operating cash.
Creditors should however seek further information. The creditors should evaluate conclusions drawn from
ratio analysis in light of the current status of, and expected changes in, such things as general economic
conditions, the clients competitive position, the publics demand (for the product itself, increased quality of
the product, control of noise and pollution, etc.), and the clients specific plans.
c)

The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of

alternative accounting methods, atypical data at year-end, and the diversification of companies, making
industry comparisons difficult. Different accounting methods affect the analysis of trends and comparisons
with industry statistics or other companies within the industry.

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QUESTION TWO
(a)
Relax Ltd Statement of Cash Flows
for the year ended 31 December 2011
Cash Flows from Operating Activities
Cash Receipts from Customers
Cash Payments to Suppliers
Rent Paid
Interest Paid
Payment for Operating Expenses
Net Cash Inflow from Operating Activities

1,914,000
(934,000)
(27,000)
(9,000)
(559,000)

Cash Flows from Investing Activities


Cash Proceeds from Sale of Office Equipment
Cash Purchases of Office Equipment
Cash Purchases of Land
Net Cash Outflow from Investing Activities

42,000
(296,000)
(600,000)

Cash Flows from Financing Activities


Proceeds of Loan
Proceeds from Share Issue
Paid Dividends
Net Cash Inflow from financing activities

385,000

(854,000)

100,000
500,000
(75,000)
525,000

Net Cash Inflow for the period


Cash at Bank at Start of Year
Cash at Bank at End of Year

56,000
49,000
105,000

Workings

Opening
Sales

Opening
Purchases

Bank
Closing

Accounts Receivable
74,000 Bank
1,936,000 Closing
2,010,000

1,914,000
96,000
2,010,000

Inventory
88,000 COGS
943,000 Closing
1,031,000

908,000
123,000
1,031,000

Accounts Payable
934,000 Open
37,000 Purchases
971,000

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28,000
943,000
971,000

Opening
Bank

Prepaid Rent
9,000 Rent Exp
27,000 Closing
36,000

33,000
3,000
36,000

Bank
Closing

Interest Payable
9,000 Open
12,000 Inter. Exp
21,000

6,000
15,000
21,000

Open
Bank

Office Equipment - cost


254,000 Sold cost
296,000 Closing
550,000

80,000
470,000
550,000

Sold Acc
Closing

Accum Depre Office Equipment


50,000 Open
105,000
220,000 Depre Exp
165,000
270,000
270,000

Open
Bank

Bank
Closing

Closing

Closing

Land
2,000,000 Sold cost
600,000 Closing
2,600,000

0
2,600,000
2,600,000

Dividend Payable
75,000 Opening
Interim Div
55,000 Final Div
130,000

40,000
35,000
55,000
130,000

Loan
300,000 Opening
Bank
300,000

200,000
100,000
300,000

Share Capital
2,400,000 Opening
Bank
2,400,000

1,900,000
500,000
2,400,000

Original cost of equipment sold


Less Acc Dep - Equipment sold
WDV Equipment sold
Profit on sale of equipment
Bank

80,000
- 50,000
30,000
12,000
42,000

(b) A net loss means that accrual-based expenses exceeded accrual-based revenues for the period.
However, if you eliminate the effect of (add back) such non-cash expenses as depreciation and
amortisation, it is possible to have produced a positive net cash flow from operations. Increasing payables
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(not paying all expenses incurred this period) and decreasing receivables (collecting more receivables
than sales this period) would also cause cash flow to be higher than related net income or loss.

QUESTION THREE
a)
1/01/2010

Equipment

600,000

Cash at Bank

600,000

31/12/2010 Depreciation Expense - Equipment

60,000

Accumulated Depreciation
Equipment

60,000

600,000*0.10= 60,000

31/12/2011 Depreciation Expense Equipment

54,000

Accumulated Depreciation
Equipment

54,000

(600,000 60,000)*0.10 = 54, 000

01/01/2012 Cash at Bank

450,000

Accumulated Depreciation
Equipment

114,000

Loss on sale of equipment

36,000

Equipment

600,000

b) The four bases of measurement in financial statements:


i)

Historical cost assets recorded at amount paid and liabilities recorded at amounts expected to

be paid

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ii)

Current cost assets recorded at amount that would have been paid if asset bought today.

Liabilities recorded at undiscounted amount needed to settle obligation today.


ii)

Realisable value assets recorded at current arms length price. Liabilities recorded at settlement

value.
iv)

Present value assets recorded at discounted value of future net cash flows. Liabilities recorded

at discounted value of future net cash flows required for settlement.


[Students must briefly explain the measurement bases]

QUESTION FOUR
a)
Statement of Financial Position for Bruce Enterprises Ltd as at 30 June 2013
Shareholders Equity
Share Capital (1,100,000 x $6)

6,600,000

General Reserve

250,000

Retained Earnings [1,500,000 (profit for 2012) + 1,200,000


(profit for 2013) (1,100,000 x $0.15) (final dividend) 250,000

2,285,000

(transfer to general reserve)]


Total Equity

9,135,000

b) Companies generally issue share dividends to:


a) Satisfy shareholders dividend expectations without spending cash
b) Emphasise that a portion of equity has been permanently invested in the business and therefore is
unavailable for cash dividends

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QUESTION FIVE
a)
Cash at Bank
31 July 2012

Balance b/f

31 July 2012

Bank interest
received

31 July 2012

Note receivable
(bank collection)

5,330

31 July 2012

Bank Charges

20

15

31 July 2012

Cheque error

27

650 31 July 2012

31 July 2012

Cash receipt error

202

Balance c/f

5746
5,995

5,995
1 August
2012

Opening Balance

5746

Or
Cash at Bank
Date
2012
31
July
July

Particulars

Debit
$

Credit
$

Balance
Bank charges

Balance
$
5,330
5,310

DR
DR

5,325

DR

27

5,298

DR

202

5,096

DR

5,746

DR

20

July

Bank interest received

July

Cheque error

July

Cash receipt error

July

Note Receivable (Bank collection)

DR/CR

15

650

b)
Best Price Store
Bank Reconciliation Statement as at 31st March 2012
Balance as per bank statement

4,786 Cr

Add: Outstanding deposit

1,815
6,601

Deduct: Unpresented cheques

(855)

Balance as per Cash at Bank ledger account

5,746 Dr

(c) Segregation of duties pertains to the assignment of responsibility so that i) related activities are
assigned to different people and ii) custody of assets is separated from the person who records the asset.
In contrast, independent internal verification involves reviewing, comparing and reconciling data prepared
by one or several employees.
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QUESTION SIX
(a) Four enhancing qualitative characteristics:
-

Comparability: Between different companies/ between different years of the same company
Verifiability: Faithful representation/independent observer consensus
Timeliness: Information produced in timely manner before it ceases relevance/ capable of
influencing decisions
Understandability: able to be understood by proficient users/understandability depends on the
capability of users

Students must provide brief discussion.


(b)
-Decreases economic benefits during the accounting period in the form of decrease of the asset
(accounts receivable)
- results in an decrease in equity
- is not a distribution to owners of Bina Ltd
- As customer made the payment within 7 days (discount requirement), it is probable that Bina Ltd would
allow the discount
- the discount can be measured reliably at $36.
Therefore, discount allowed is consistent with expense definition and recognition criteria.
(c)

The viewpoint expressed in the statement reflects the views of Milton Freedman.
Shareholders invest in a business entity, and lenders/creditors lend to a business entity, with the
objective of obtaining an economic return. Therefore, it can be argued that business entities only
need to report to shareholders and lenders/creditors on their financial performance and risk,
because this is only what shareholders and lenders/creditors are interested in.
Alternatively, it can be argued that business entities have a responsibility to a broader group of
stakeholders than just shareholders and lenders/creditors, including local communities,
customers, suppliers, employees, government and even future generations, because these
stakeholders interact with the business entity, and/or affected by the actions of the business
entity.
It can be argued that business entities, (especially companies), are granted the right to exist and
operate by the community, and therefore in return are accountable to the community/broad group
of stakeholders for their social and environmental performance as well as their financial
performance.
There is also a growing interest in ethical investment by investors/shareholders.
If business entities are accountable for their social and environmental performance, it follows that
business entities should report on their social and environmental performance.
Traditional financial reporting is inadequate for reporting on a business entitys social and
environmental performance, because traditional financial reporting provides very limited
information about a business entitys social and environmental performance, (e.g. limited to
provisions for site restoration and clean-up costs, which are heavily discounted to present value).
If the business entity is not directly involved in a transaction or event, it is not recognised in the
financial accounting system. The use and/or abuse, (e.g. contamination), of resources not
controlled (owned/licenced) by the business entity is not recorded, because these resources do
not have a cost to the entity.
Social and environmental costs and liabilities may not be recorded and/or disclosed, because
they are immaterial, or incapable of reliable measurement.
However, a business entitys social and environmental performance can represent a significant
risk to the entitys financial performance. Adverse reaction by stakeholders such as customers,
employees, local communities, and local government, to a business entitys poor social and/or
environmental performance, can a significant adverse effect on a business entitys reputation,
and therefore its financial performance, (decline in sales, difficultly in retaining and attracting
employees, additional restrictions and costs imposed by local government).
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Social and environmental reporting can be used by a business entity as a means to project an
image of being a good corporate citizen concerned about social and environmental issues,
(truthfully, or falsely), thereby seeking to legitimise the business entity, manage powerful
stakeholders, and forestall the imposition of more stringent social and environmental laws, and
disclosure requirements, with the ultimate objective of increasing the economic wealth of
investors and lenders/creditors.

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