Documente Academic
Documente Profesional
Documente Cultură
BSB110 ACCOUNTING
QUESTION 1
(a) Gatton Gardeners Cash Flow Statement
For the year ended 30 June 2007
Inflow
(Outflow)
Cash flows from operating activities
Receipts from customers 241000
Payments to suppliers & employees (221000)
Net cash provided by operations 20000
(b) --cash is not related to profitprofit of $1600 and cash decreased by $200
--profit is based on accrual accounting measured as revenue earned less expenses incurred
not cash in or cash out
--need to be clear about difference between cash balance and profit
--best way to explain to Gary is via the Cash Flow Statement
--the cash provided by operating activities ie. Related to profit activities is $20,000 ie. the
cash inflows from profit activities is much greater than the accrual profit of $1600.
--need to explain how cash decreasedhe invested in additional assets equipment and land
total of $13,000
--he withdrew $40,200 and this is the major contributor to decline in cash balancethis
amount does not affect profit but does affect cash balance
--he increased the mortgage and did contribute additional capital but only to the extent of total
of $33,000
--so overall the major factor causing the decrease in cash is the drawings he made
QUESTION 2
(a) Kody Anthony
Cash Flow Statement for the year ended 30 June 2006
QUESTION 3
(a) Albert Clarence
Cash Flow Statement for the financial year ended 30 June 2005
Cash flows from operating activities
Receipts from customers 41470
Payments to suppliers and employees (23085)
Net cash provided by operating activities 18385
Cash flows from investing activities
Payments for purchase of office furniture (13600)
Payments for purchase of delivery vehicles (26835)
Net cash used in investing activities (40435)
Cash flows from financing activities
Increase in borrowings 11640
Capital contributed 15000
Drawings (7535)
Net cash provided by financing activities 19105
Net (decrease) in cash held (2945)
Cash at beginning of year 260
Cash at end of year $(2685)
(b)
QUESTION 4
(a) Louisa Hannah
Cash Flow Statement for the year ended 30 June 2006
(b) Can a company have a good net profit and little cash generated from operations in the
same year? Provide an explanation including examples to justify your answer.
Yes net profit based on accrual accounting - if large amounts of sales on credit but
little amount of collections from customers
Also if payments to suppliers is greater then purchases on credit
Then there will be little cash generated from operations but large profit
Cash flow Statement based on CASH flowsnot accrual accounting.
QUESTION 5
(1) INVENTORY CARDAVERAGE COST
Date Explanation Purchases Cost of Goods Sold Balance
Un Unit Total Un Unit Total Un Unit Total
it Cost Cost it Cost Cost it Cost Cost
(3) The calculations are different because we have used two different inventory costing
methods for the inventory cardsFIFO and Average Cost
Note that in this question, inventory purchase price (cost) rose during the month.
The effect of this is dependent on the Inventory Costing method used
--FIFO ending inventory (asset) is higher than Average Cost
--FIFO Cost of Goods Sold (expense) is lower than Average Cost
--thus FIFO profit is higher than Average Cost.
The opposite effects would occur if inventory purchase price fell during the period
(4) The best valuation of inventory depends on what management wants to achieve and its
goals for the firm.
Because, the costing method used affects assets and profits
Management must choose the most appropriate method
Depending on the type of inventory that the firm is selling
This then in an important decision for Management
The items affected by the inventory costing method are:
*COGS
*Gross Profit
*Net Profit
*Inventory in the Balance Sheet and
*Owners Equity (as net profit is affected)
--The specific unit cost method assigns each inventory item its particular cost. The specific
unit cost method is used for inventory items that are individually identifiable, like jewels and
motor vehicles.
--The average cost method assigns the weighted-average cost of inventory available during
the period to ending inventory and cost of goods sold.
--Under the first-in, first-out (FIFO) method, the first inventory costs incurred during the
period are assigned to cost of goods sold. The latest unit costs are assigned to ending
inventory. When prices are rising, FIFO produces the highest reported profit.
--Under the last-in, first-out (LIFO) method, the last inventory costs incurred during the period
are the first to be assigned to cost of goods sold. The earliest unit costs of the period are
assigned to ending inventory. When prices are rising, LIFO produces the lowest
reported profit.
In general: FIFO results in the ending inventory being valued at the most current cost. The
earliest costs of the period are assigned to cost of goods sold, leaving the last (that is, the most
current) costs for ending inventory. LIFO results in the cost of goods sold amount being
valued at the last (the most current) cost.
QUESTION 6
(1) Inventory Card--FIFO
Date Explanation Purchases Cost of Goods Sold Balance
Unit Unit Total Unit Unit Total Unit Unit Total
Cost Cost Cost Cost Cost Cost
Apr 1 Balance 7 220 1540
2 Purchase 12 225 2700 7 220 1540
12 225 2700
4 Sales--10 7 220 1540
3 225 675 9 225 2025
10 Purchase 14 230 3220 9 225 2025
14 230 3220
18 Sales--16 9 225 2025
7 230 1610 7 230 1610
22 Sales--4 4 230 920 3 230 690
TOTAL 6770
Ending Inventory = $ 690 Cost of Goods Sold = $ 6770
(3) Highest profit for April is the method with the LOWEST cost of goods sold = FIFO.
QUESTION 7
(a)
5/4 Inventory 1,400
Accounts PayableGolden Ltd 1,400
(b)
11/3 Accounts ReceivableP. Scott 900
Sales 900
Inventory 50
Cost of Goods Sold 50
(c) 1. Sales - Sales Returns & Allowances = Net Sales = $21,500 - $165 = $21,335
2. Net Sales - Cost of Goods Sold = Gross Profit = $21,335 - $15,975 = $5,360
QUESTION 8
Interest earned 74
9,421
9011 o/d
QUESTION 9
Bank Reconciliation
As at 30 April
Balance as per Bank Statement 30 April 15405 CR
Add outstanding deposit 570
15975
less bank error on Chq no. 828 100
15875
less Unpresented cheques:
No. 818 369
827 248
830 210 827
Balance as per Cash at Bank A/C in ledger 30 April $15048 DR
QUESTION 10
QUESTION 11
Hannah's Hair Fashions--Cash Budget for May
Cash balance at 1 May 775
Add receipts
Collections from customers
60% of May sales 2200 1320
40% of April sales 1760 704
Cash available 2799
Less payments
Purchases
70% of May 1320 924
30% of April 1020 306
Rates 270
Rent 150
Wages 550
New equipment 180
Total payments 2380
Cash balance at 31 May $419
(ii) If Hannah wants to maintain a cash balance of $600 she will need to CONTRIBUTE
additional cash of ($600 419) = $181
QUESTION 12
(a)
Cash Receipts Journal $ Cash Payments Journal $
Total to date 387 Total to date 459
Dividend received 100 Fee 10
NSF (22) Int. on O/D 82
$465 $551
QUESTION 13
(a)
Cost = 160000 RV = 20000 Depreciable Amount = 140000 EUL = 4 years
140000
Straight line = = 35000 p.a.
4
for 2000 = 35000
for 2001 = 35000
140000
Units of production = per unit = = 70c/unit
200000
QUESTION 14
(a)
(i) Straight lineuniform charges over the life of an assetequal amounts each year
depreciation is a function of time
--ideal for buildings
(ii) Reducing Balanceaccelerated depreciation i.e. greater depreciation in early years as
compared to later years when smaller depreciation
--ideal for assets which are used a lot in early years and then not so much in later
yearsequipment which deteriorates quickly
--or computer equipment which suffers from technical and commercial obsolescence
and thus greater depreciation in early years of life
(iii) units of productiondepreciation is a function of USErequires extra record
keeping to measure the production output (or usage) of the asset
--ideal for assets whose usage can be measured easily e.g. machines which produce
units; or e.g. motor vehiclesuse kilometres travelled
(b)
Note: cost of asset = 15,000 + 600 + 400 = $16,000
QUESTION 15
(a) Book value of asset=cost less accumulated depreciation
Depreciation is simply an ALLOCATION of the cost of the asset over the useful life
--depreciation is NOT a valuation technique i.e. selling price is NOT what book value equals
--depreciation is NOT a measure of efficiency or value of asset i.e. efficient value of asset is
not what book value equals
NBBook Value is also written down value
The production manager and the managing director are BOTH WRONG IN THEIR
ARGUMENTS
(b) (i)
Straight line Reducing balance 37.5% Units of Production
Depreciation Carrying Depreciation Carrying Depreciation Carrying
amount amount amount
Year 1 7500 32500 15000 25000 8250 31750
2 7500 25000 9375 15625 9000 22750
3 7500 17500 5625 10000 6750 16000
4 7500 10000 ------ 10000 6000 10000
QUESTION 16
1
Cost of Goods Sold is 50% of budgeted sales: $3/$6 = 50%
2
Desired Ending Inventory is 40% of the following months Cost of Goods Sold.
3
Beginning Inventory is 40% of current months Cost of Goods Sold (or simply last
months Ending Inventory!)
4
Beginning Inventory is 200 units $3 ea = $600
5
The next months projected Cost of Goods Sold = 1,000 units $3 ea = $3,000; Ending
Inventory = 40% $3,000 = $1,200
QUESTION 17
Check calculation: if sell 2,000 balls then that is 500 above the break even point. Every sale
above the break even point earns the CM per unit in profit. 500 x $10 = $5000 = profit as
per the profit and loss statement.
QUESTION 19
Sales $280,000
Less: Variable Expenses
Cost of Goods Sold $120,000
Marketing Expense 24,500
General Expense 35,000 179,500
Contribution Margin 100,500
Less: Fixed Expenses
Marketing Expense 10,500
General Expense 35,000 45,500
Net Profit $ 55,000
QUESTION 20
Clarence Enterprises
(a) Purchases, Cost of Goods Sold and Inventory Budget
** ending inventory = 5000 plus 60% of the budgeted cost of good sold for the
following month
August = 5000 + 60% of 62400
September = 5000 + 60% of (80% of 92000)
(b)
Sales 78000
QUESTION 21
(a)
Liquidity = ability to pay debts in short term
Current Ratio = amount of CA available to pay CL --Rule of thumb is 2:1.
For 2000 good just above rule of thumb
--Improved since 1999 = good
Acid Test Ratio = amount of very liquid assets available to pay CL
--A mere stringent test of liquidity--Rule of thumb is 1:1.
For 2000 good just above rule of thumb
--Improved since 1999 = good
Inventory T/O very industry dependent
no information here as to what industry, difficult to comment higher the better
increased since 1999= good
at 3.75 times not a fruit shop which should have T/O of roughly 185 times
approximately
must be selling slow moving items that have long shelf life
A/Cs Rec T/O increased since 1999 good higher better
QUESTION 22
Profitability Analysis:
The profit ratio measures the profit per dollar of sales. Profitability has fallen sharply
from 15.00% in 1998 to 6.67% in 1999 as indicated by the profit ratio. In other words,
for every dollar of sales, the company is only earning 6.67 cents. This is of major
concern.
The rate of return on net assets measures the return earned by management through
activities; shows the success a company has in using its assets to earn a profit. This ratio
has also dropped from 15.52% to 9.04% indicating that the ability of the assets to
generate profits has declined. This, too, is of major concern.
Liquidity Analysis:
The current ratio measures the company's ability to satisfy its obligations in the short-
term. The company's current ratio has fallen from 7.00 times to 2.33 times, indicating
that it is finding it more difficult to pay its debts as and when they fall due. This is an
area of concern, although 2.33 times is satisfactory - a rule of thumb is usually 2:1.
The quick ratio tells us whether the company could pay all of its current liabilities if
they became due and payable immediately. The company's quick ratio has fallen
dramatically from 4.00 times to 1.11 times. This is an area of concern, although 1.11
times is satisfactory - a rule of thumb is usually 1:1.
The inventory turnover ratio is a measure of the adequacy of inventory and how
efficiently it is being managed. Inventory turnover has increased slightly between 1998
and 1999. The higher the turnover, the better, as it means that inventory is being turned
over more frequently. Steps should be taken to try to increase this.
QUESTION 23
(i)
PROFITABILITY shows the ability of the firm to earn profits
Profit Margin has improved from 97 to 98. Shows the % of each $ of
sales that is profit.
LIQUIDITY shows the ability of the firm to pay its debts in the short term
Current ratio current assets to current liabilities has decreased from 97
to 98. Rule of thumb is usually 2:1; was OK for 97 at 2.3:1 and has
declined in 98 to below the 2:1 benchmark. But beware of Rules of Thumb
as they are only averages and should look at the industry. Also the more
liquid the firm, the less profitable. As liquid assets are not usually
profitable.
Quick ratio more stringent test of liquidity only "quick" assets included in
numerator rule of thumb 1:1; OK for 97 and then decreased to 0.67:1. Not
too bad though.
Inventory T/O measures number of times inventory is turned over during
year. Has decreased from 97 to 98. Industry dependent.
Receivables T/O measures how quickly the cash is received from
receivables has decreased. Compare to average credit period of 30
days.
FINANCIAL STABILITY shows the ability of the firm to survive in long run
security
Debt Ratio shows % of assets funded by outside debt. In Australia, 60%
is the maximum preferred Rose Wines very stable with only 30%+ then
increase to 34.3% therefore very secure.
(ii)
Profitability Rate of Return of Assets measures return that assets produced
Liquidity Receivables Collection Period convert receivables T/O to Days
Inventory T/O period covert inventory T/O to Days
Financial Stability - Times interest earned shows how well net profit covers interest
expense commitment
(iii)
would expect this to be the case
ie. profit margin increased and current ratio decreased
profitability versus liquidity
liquid assets are generally not profitable eg. cash at bank earns very low interest, prepaid
expenses earn no interest, the more liquid the assets the less profitable the firm and
vice versa
here--less liquid increased profits
(iv)
would expect this to be the case
ie. profit margin increased and inventory T/O decreased
profitability versus liquidity
they usually move in opposite directions
though an increased inventory T/O would likely lead to increased profits as selling more
but perhaps cost of sales is too high to allow for much increase in profits
(v) Other info = Industry averages, Past years data, Trend analysis
Info re: economic climate , Investor's preference for risk and returns
(vi) Changing dep'n method affects dep'n exp and accumulated dep'n net assets
affects net profit and Total Assets
all ratios which include there two items will be affected
QUESTION 24
(a)
Inventory T/O increase means good newsinventory was sold more quickly therefore better
liquiditymore sales alsowould also expect this would lead to higher potential profits
Receivables T/O increase means good newscollected money from customers more quickly
quicker cash collectionbetter liquidityless problems with bad debts perhapsthis does
not affect profitability
BUT net profit decreasedtherefore COGS must have been increased at a GREATER rate
than sales OR operating expenses have increased at a greater rate than sales
Overall any kind of expense must have risen at a greater rate than the increased turnover
(b) PART (i) FOR THIS SECTION NEED TO LOOK JUST AT THE RATIOS GIVEN
CANNOT DO COMPLETE DISCUSSION BECAUSE OF THE LACK OF DATA AND
THE LIMITATIONS AS PER SECTIONS (ii) and (iii)
PROFITABILITY
Ability of firm to generate profits
Profit Margin=the return on sales
Has decreased from 10% to 7% --on the face of itnot a good signbut at least profits are
being earned
LIQUIDITY
Ability of firm to pay its short term debts as they fall due
Current Ratio = current assets compared to current liabilities
Decreased from X8 to X9 was 2:1=rule of thumb
Beware use of the Rule of Thumbtoo much liquidity can lead to decreased profitability
Quick Ratio = more stringent test of liquidityrule of thumb here is 1:1firm quick ratio
has DECREASED cause for concern
Both these measures are STATIC measures of liquidityfor a more complete analysis look at
Receivables collection period and Inventory T/O
Receivables collection period = no. of days to collect accounts receivablecompare to
credit period for firmusual credit period is 30 daysthis firm was doing well at 30 days
and has now DECLINED to 45 daystaking longer to collect receivablesleads to
decreasing cash balancescould lead to BAD DEBTS
Inventory T/O = no. of times inventory is turned over during the yearmore times the better
higher T/O would lead to higher liquidityhas DECREASED in this case form 33 times to
28 timesthe firm must not be selling perishablesfruit shop T/O would be 60 or greater
timesMercedes Benz retailer T/O around 15 times approx
FINANCIAL STABILITY
Ability of firm to survive in the futurelong term liquidity
Debt Ratio = % of assets funded by debt as opposed to equityaverage in Aust approx 60%
The more debt in a firmthe higher interest expense and the lower the profits and the more
debt repayments
Has increasedBAD newsfrom .64 up to .72 above Aust Averagemore debt to service
and repay
Times Interest Earnedability of profits to cover interest expenserule of thumb around 3
or 4 times
--has DECLINED from 2 down to 1.7area of concern
(ii)
NONOT ENOUGH INFORMATION TO MAKE A DECSION
OTHER INFO NEEDED;
--industry averages
--past years data to see if the decline is a trend
--trend analysis
--info re the economic climate
--the friends preference for risk and return
(iii) LIMITATIONS
--based on past data
--based on historical cost measurement
--based on year-end data
--limited disclosures by certain companies
--entities may not be comparable
e.g. different industries
different accounting methods
different sizes
--must consider info in other reports