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ACCA F3 - Financial Accounting
Workbook Questions & Answers
F3 Financial Accounting Full Course Q & A!
Lecture 1 - Introduction to Accounting
F3 Financial Accounting Full Course Q & A!
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are the 3 main characteristics of a sole trader?
Owner managedEmployeesLosses borne by owner
2. What are the negative aspects of being a sole trader?
Unlimited liabilityPersonal riskRely on owner
3. What are the positives of a partnership?
More resourcesPeople combine to work together
4. What are the 3 main characteristics of a limited company?
Business owned by shareholdersOnly lose amount investedManagers run the business
5. What are the positives of a limited company?
Limited LiabilityTax efficient
6. What are the main differences between a limited company and sole traders/partnerships?
Separate Legal entityProperty belongs to Co.Transferable shares
F3 Financial Accounting Full Course Q & A!
7.What is the purpose of Financial Accounts?
For external usersBased on standardsComparability
8. What is the IFRS Foundation, and what are its objectives?
What - International Financial Reporting Standards Foundation Supervises IASB GovernanceObjectives - Develop global standards Assist investors
9. What is the IASB
International Accounting Standards Board
10. What is the alternative to operating under IFRS?
National Standards
11. What are the two types of legal based regulations that countries can operate under?
Principles BasedRules Based
F3 Financial Accounting Full Course Q & A!
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Lecture 2 - Sole Trader Financial Statements
F3 Financial Accounting Full Course Q & A!
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Illustration 1Jim owns a very small business that he runs himself as a sole trader.
The following financial statements show his current position and results.
Statement of Financial PositionStatement of Financial Position
Non Current Assets 300
Inventory 150
Cash 50
500
Capital B/F 540
Add: Profit 30
Capital Introduced 0
Less: Drawings 70
500
Income StatementIncome Statement
Sales 500
Cost of Sales -300
Gross Profit 200
Expenses -170
Profit 30
The following then occurs:
1. Goods, that were originally purchased for $40, were sold for $50.2. More goods were purchased at a cost of $30.3. Rent was paid at a cost of $15.4. A non-current asset was purchased for $10.5. Capital of $20 was introduced by the Jim.6. Jim took $5 of drawings from the business.
How do these transactions affect the position and results of the business?
F3 Financial Accounting Full Course Q & A!
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Solution
Statement of Financial Position
Statement of Financial Position
Movement
Non Current Assets 300 +10 (Note 4) 310
Inventory 150 -40 (Note 1)+30 (Note 2)
140
Cash 50 +50 (Note 1)-30 (Note 2)-15 (Note 3)-10 (Note 4)+20 (Note 5)-5 (Note 6)
60
500 510
Capital B/F 540 540
Add: Profit 30 I/S 25
Capital Introduced 0 +20 (Note 5) 20
Less: Drawings -70 -5 (Note 6) -75
500 510
Income StatementIncome Statement
Sales 500 +50 (Note 1) 550
Cost of Sales -300 -40 (Note 1) -340
Gross Profit 200 210
Expenses -170 -15 (Note 3) -185
Profit 30 25
F3 Financial Accounting Full Course Q & A!
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Note 1The inventory had cost $40 so must now be removed. The $40 will increase COS also on the Income Statement.The Cash received of $50 must increase the amount of cash. The sale of $50 must be recorded.
Note 2The goods purchased must be included in inventory $30.The cash paid of $30 must be shown in cash.
Note 3The rent paid of $15 is an expense so must be shown in the income statement.The cash paid will reduce cash by $15 on the Statement of Financial Position.
Note 4The purchase of an asset will increase assets by $10.The cash paid for it will reduce cash by $10.
Note 5The capital introduced will increase cash by $20.Capital introduced will also be increased by $20.
Note 6The drawings of $5 will decrease capital by that amount.Cash will also be decreased by $5.
F3 Financial Accounting Full Course Q & A!
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Test Your KnowledgeIf you can’t answer all of the questions below without
looking at the answer then you need to do some more work on this area!1. What are the two main elements of a sole trader’s financial statements?
1. Income Statement2. Statement of Comprehensive Income 3. Statement of Financial Position4. Statement of Changes in Equity
A. 1 and 2 onlyB. 3 and 4 onlyC. 1 and 3 onlyD. 2 and 4 only
Solution: C
2. The Income statement is prepared on a(n) ...
1. Going concern basis2. Accruals basis3. Bi-annual basis4. Annual basis
A. 1 and 3 onlyB. 2 and 4 onlyC. 2 and 3 onlyD. 1 and 4 only
Solution: B
3. What is the accounting equation?
1. Assets=Capital + Liabilities2. Assets=Equity + Capital3. Assets=Equity - Liabilities4. Assets=Capital - Liabilities
Solution: A
4. What is the definition of an asset?
Solution: Resource controlled by entity from which future economic benefit is expected to flow to entity
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5. What is the definition of a liability?
Solution: A present obligation as a result of past events which result in an outflow of economic benefit.
F3 Financial Accounting Full Course Q & A!
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Lecture 3 - Double Entry Bookkeeping
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Illustration 1Jim decides to start a small business that he runs himself as a sole trader.
The following then occurs:1. Capital of $20,000 was introduced by the Jim.2. Goods were purchased for $3000 for resale.3. Sales of $4000 were made of goods that had cost $2500.4. Rent was paid at a cost of $700.5. A non-current asset was purchased for $10,000.6. Jim took $500 of drawings from the business.7. A customer returns goods to Jim that were purchased for $50.8. Jim returns unwanted purchases for which he had paid $80.9. Jim makes sales with advertised price of $100 at a discount of 10%.10.Jim Purchases goods worth $500 on credit.11.Jim pays for the $500 of goods and gets a 5% discount for early payment.
Show the ledger transactions and the trial balance for the above information.
Solution
Note DR CR
1 DR CASH 20,000
1 CR CAPITAL INTRODUCED 20,000
Being capital introduced by JimBeing capital introduced by JimBeing capital introduced by JimBeing capital introduced by Jim
2 DR PURCHASES 3,000
2 CR CASH 3,000
Being Purchases bought for cashBeing Purchases bought for cashBeing Purchases bought for cashBeing Purchases bought for cash
3 DR CASH 4,000
3 CR SALES 4,000
Being Sales of $4,000Being Sales of $4,000Being Sales of $4,000Being Sales of $4,000
4 DR RENT 700
4 CR CASH 700
Being Rent paid of $700Being Rent paid of $700Being Rent paid of $700Being Rent paid of $700
5 DR ASSET 10,000
5 CR CASH 10,000
Being Asset purchased for cashBeing Asset purchased for cashBeing Asset purchased for cashBeing Asset purchased for cash
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Note DR CR
6 DR DRAWINGS 500
6 CR CASH 500
Being drawings takenBeing drawings takenBeing drawings takenBeing drawings taken
7 DR SALES RETURNS 50
7 CR CASH 50
Being returns of goods soldBeing returns of goods soldBeing returns of goods soldBeing returns of goods sold
8 DR CASH 80
8 CR PURCHASE RETURNS 80
Being returns of goods purchasedBeing returns of goods purchasedBeing returns of goods purchasedBeing returns of goods purchased
9 DR CASH (100 X 90%) 90
9 CR SALES 90
Being sales at discounted valueBeing sales at discounted valueBeing sales at discounted valueBeing sales at discounted value
10 DR PURCHASES 500
10 CR PAYABLE 500
Being purchase of goods on creditBeing purchase of goods on creditBeing purchase of goods on creditBeing purchase of goods on credit
11 DR PAYABLES 475
11 CR CASH 475
11 DR PAYABLES 25
11 CR DISCOUNTS RECEIVED 25
Being discount on purchasesBeing discount on purchasesBeing discount on purchasesBeing discount on purchases
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CASHCASHCASHCASH
DRDR CRCR
Capital Introduced (Note 1) 20,000 Purchase of Goods (Note 2) 3,000
Sales (Note 3) 4,000 Rent Paid (Note 4) 700
Purchase Returns (Note 8) 80 Non Current Asset (Note 5) 10,000
Discounted Sales (Note 9) 90 Cash Drawings (Note 6) 500
Sales Returns (Note 7) 50
Payables Payment (Note 11) 475
Carried Forward 9,445
24,170 24,170
Brought Forward 9,445
CapitalCapitalCapitalCapital
DRDR CRCR
Capital Introduced (Note 1) 20,000
Carried Forward 20,000
20,000 20,000
Brought Forward 20,000
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PURCHASESPURCHASESPURCHASESPURCHASES
DRDR CRCR
Purchase of Goods (Note 2) 3,000
Purchases on Credit (Note 10) 500
Carried Forward 3,500
3,500 3,500
Brought Forward 3,500
SALESSALESSALESSALES
DRDR CRCR
Sales for Cash (Note 3) 4,000
Discounted Sales (Note 9) 90
Carried Forward 4090
4090 4090
Brought Forward 4090
RENTRENTRENTRENT
DRDR CRCR
Rent Paid (Note 4) 700
Carried Forward 700
700 700
Brought Forward 700
F3 Financial Accounting Full Course Q & A!
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ASSETASSETASSETASSET
DRDR CRCR
Purchase NCA (Note 5) 10,000
Carried Forward 10,000
10,000 10,000
Brought Forward 10,000
DRAWINGSDRAWINGSDRAWINGSDRAWINGS
DRDR CRCR
Cash Drawings (Note 6) 500
Carried Forward 500
500 500
Brought Forward 500
SALES RETURNSSALES RETURNSSALES RETURNSSALES RETURNS
DRDR CRCR
Cash for returned sales (Note 7) 50
Carried Forward 50
50 50
Brought Forward 50
PURCHASE RETURNSPURCHASE RETURNSPURCHASE RETURNSPURCHASE RETURNS
DRDR CRCR
Cash for purchase returns (note 8) 80
Carried Forward 80
80 80
Brought Forward 80
F3 Financial Accounting Full Course Q & A!
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PAYABLESPAYABLESPAYABLESPAYABLES
DRDR CRCR
Cash Paid (Note 11) 475 Purchases on Credit (Note 10) 500
Discount Received (Note 11) 25
Carried Forward 0
500 500
DISCOUNT RECEIVEDDISCOUNT RECEIVEDDISCOUNT RECEIVEDDISCOUNT RECEIVED
DRDR CRCR
Discount on Purchases (Note 11) 25
Carried Forward 25
25 25
Brought Forward 25
F3 Financial Accounting Full Course Q & A!
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Trial Balance for JimTrial Balance for JimTrial Balance for Jim
DR CR
Cash 9445
Capital 20,000
Purchases 3,500
Sales 4090
Rent 700
Non Current Assets 10,000
Drawings 500
Sales Returns 50
Purchase Returns 80
Discounts Received 25
24,195 24,195
F3 Financial Accounting Full Course Q & A!
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. To increase, we..
1. Debit assets and expenses2. Credit assets and expenses3. Debit liabilities and income4. Credit liabilities and income
A. 1 and 3 onlyB. 2 and 4 onlyC. 2 and 3 only D. 1 and 4 only
Solution: D
2. For introducing capital, what is the double entry?
Solution: Dr Cash, Cr Capital
3. For purchasing goods, what is the double entry?
Solution: Dr Purchases, Cr Cash
4. For paying expenses, what is the double entry?
Solution: Dr Expense, Cr Cash
5. For purchasing an asset, what is the double entry?
Solution: Dr Asset, Cr Cash
F3 Financial Accounting Full Course Q & A!
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Lecture 4 - Inventory
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Illustration 1
ABC Co. has the following items in inventory:
i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy has meant that these goods will now sell for $42,000 with costs to sell of $2,500.
ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The manufacturer of the materials has just announced that from now on they will sell these materials to you at a lower price of $28,000 per tonne.
iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the customer of $60,000. New health and safety requirements mean that the plant will need to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.
At what value should each of the above be included in the inventory of ABC Co.
Solution
Goods at $40,000Goods at $40,000Goods at $40,000
Cost 40,000
Net Realisable Value ($42,000 - 2,500) 39,500
Use Lower so value at... 39,500
The value of inventory will be reduced by $500 and this will be written off to the income statement.The value of inventory will be reduced by $500 and this will be written off to the income statement.The value of inventory will be reduced by $500 and this will be written off to the income statement.
Materials at $30,000 per tonne
The fact that the manufacturer has changed the cost price is irrelevant.
The goods will be sold at a profit and thus will be valued at $30,000 per tonne cost.
Plant at $50,000Plant at $50,000Plant at $50,000
Cost 50,000
Net Realisable Value ($60,000 - 4,000) 56,000
Use Lower so value at... 50,000
The value of the inventory will remain at $50,000.The value of the inventory will remain at $50,000.The value of the inventory will remain at $50,000.
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Illustration 2
Jane starts a business on 1st June and the following takes place:
I. 2nd June 10 units purchased at $10II.4th June 13 units purchased at $11III.8th June 20 units purchased at $9
20 units are sold on 10th June for $15 per unit.
Required
(a) Which of the following is the value of the closing inventory using the FIFO and AVCO methods.
1. FIFO $260, AVCO $190.162. FIFO $$255, AVCO $188.163. FIFO $213, AVCO $226.324. FIFO $218, AVCO $180.12
(b) Prepare and compare the income statement for the period under both FIFO and AVCO.
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Solution
Total Units Purchased (10 + 13 + 20) 43
Units Sold 20
Inventory Remaining 23
FIFO $
10 Units on 2nd June (All Sold) 0
13 Units on 4th June (3 Remaining) (3 x 11) 33
20 Units on 8th June (All Remaining) (20 x 9) 180
Inventory Value under FIFOInventory Value under FIFO 213
AVCOAVCO
Total Units Purchased 43
Total Cost (10 x $10) + (13 x $11) + (20 x $9)
$423
Average Cost Per Unit (423 / 43) $9.84
Closing Stock Value under AVCO ($9.84 x 23) 226.32
Solution: 3 only
F3 Financial Accounting Full Course Q & A!
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FIFOFIFOFIFOFIFO
Sales (20 x $15) 300
Cost of Sales
Purchases (10 x $10) + (13 x $11) + (20 x $9) 423
Closing Inventory -213
210
Profit 90
AVCOAVCOAVCOAVCO
Sales (20 x $15) 300
Cost of Sales
Purchases (10 x $10) + (13 x $11) + (20 x $9) 423
Closing Inventory -226.32
196.68
Profit 103.32
F3 Financial Accounting Full Course Q & A!
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Illustration 3
Jane runs a business selling cushions.
At the start of the year she had 350 cushions in inventory at a cost of $5,000.
She purchased 1000 cushions in the year for $15,000 and at the year end had 400 left in inventory at cost of $6,000.
950 cushions were sold for $25 each.
Show how the journal entries, prepare the ledger accounts and calculate the Gross Profit for the year.
Solution
Journal DR CR
1 DR CASH 23,750
1 CR SALES 23,750
BEING SALES IN YEARBEING SALES IN YEARBEING SALES IN YEARBEING SALES IN YEAR
2 DR PURCHASES 15,000
2 CR CASH 15,000
BEING PURCHASES IN YEARBEING PURCHASES IN YEARBEING PURCHASES IN YEARBEING PURCHASES IN YEAR
3 DR INCOME STATEMENT (OP. INV) 5,000
3 CR INVENTORY 5,000
BEING REMOVAL OF OPENING INVENTORYBEING REMOVAL OF OPENING INVENTORYBEING REMOVAL OF OPENING INVENTORYBEING REMOVAL OF OPENING INVENTORY
4 DR INVENTORY 6,000
4 CR INCOME STATEMENT (CL. INV) 6,000
BEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTSBEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTSBEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTSBEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTS
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PURCHASESPURCHASESPURCHASESPURCHASES
DRDR CRCR
Cash Purchases in Year 15,000
Income Statement 15,000
15,000 15,000
SALESSALESSALESSALES
DRDR CRCR
Cash Sales 23,750
Income Statement 23,750
23,750 23,750
INVENTORYINVENTORYINVENTORYINVENTORY
DRDR CRCR
Balance B/F 5,000 Income Statement 5,000
Income Statement 6,000
Carried Forward 6,000
11,000 11,000
Brought Forward 6,000
F3 Financial Accounting Full Course Q & A!
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INCOME STATEMENTINCOME STATEMENTINCOME STATEMENTINCOME STATEMENT
DRDR CRCR
Purchases 15,000 Sales 23,750
Opening Inventory 5,000 Closing Inventory 6,000
Gross Profit C/F 9,750
29,750 29,750
Gross Profit B/F 9,750
Gross ProfitGross ProfitGross Profit
Sales 23,750
Cost of Sales
Opening Inventory 5,000
Purchases 15,000
Closing Inventory -6,000
14,000
Gross Profit 9,750
F3 Financial Accounting Full Course Q & A!
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Inventory is held at the lower of ...
Solution: Cost and NRV
2. Define NRV?
Solution: Selling price less costs to complete and selling costs.
3. What are the three different cost methods that can be used to value inventory?
Solution: Unit Cost, FIFO, AVCO
4. How is the cost of sales calculated for inventory?
Solution: Opening inventory + purchases in yr - closing inventory
5. What are some of the disclosures which are required for inventory?
Solution: Raw materials, WIP, Finished goods, valuation methods
F3 Financial Accounting Full Course Q & A!
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Lecture 5 - Sales Tax
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Illustration 1
John sells the following goods to:
1. Jack at a tax inclusive price of $200.2. Jerry at a tax exclusive price of $500
How much sales tax is John collecting on behalf of the government? Tax rate = 20%.
1. $144.442. $1603. $125.554. $133.33
Solution - 4 only
$
Sales to Jack (Tax Inclusive) $200 x (20 / 120) 33.33
Sales to Cosmo (Tax Exclusive) $500 x (20 / 100) 100
Total Sales Tax Collected ($70 + $122.50) 133.33
Illustration 2
Jill purchases goods for $180,000 (including sales tax) and sells goods for $240,000 (including sales tax). A tax rate of 20% is applicable
What amount of tax is payable?
Solution
$
Sale of Goods (Includes Tax) $180,000 x (20 / 120) 30,000
Purchases of Goods (Includes Tax) $240,000 x (20 / 120)) 40,000
Total Payable ($40,000 - $30,000) 10,000
F3 Financial Accounting Full Course Q & A!
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Illustration 3
Net Sales Tax Total
$ $ $
Purchases (on credit) 100,000 20,000 120,000
Sales (on credit) 150,000 30,000 180,000
Record these transactions in ledger accounts.
Solution
DR CR
DR Purchases 100,000
DR Sales Tax 20,000
CR Receivables 120,000
DR Payables 180,000
CR Sales 150,000
CR Sales Tax 30,000
F3 Financial Accounting Full Course Q & A!
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Illustration 4
Jenny’s business is registered for sales tax purposes. During the quarter ending 31 December 2011, she made the following sales and purchases, all of which were subject to sales tax at 20%:
Sales $ Purchases $
Sales of Goods (Excludes Tax) 550 Purchase of Goods (Excludes Tax) 1,055
Sales of Goods (Includes Tax) 900 Purchase of Goods (Includes Tax) 720
Sales of Goods (Excludes Tax) 945 Purchase of Goods (Includes Tax) 420
Sales of Goods (Includes Tax) 660 Purchase of Goods (Includes Tax) 1,140
What is the balance on the sales tax account on 31 December 2011?
Solution
$
Sale of Goods (Excludes Tax) 550 x 20% 110
Sale of Goods (Includes Tax) 900 x (20 / 120) 150
Sale of Goods (Excludes Tax) 945 x 20% 189
Sale of Goods (Includes Tax) 660 x (20 / 120) 110
Total Sales Tax on Sales 559
Purchases of Goods (Excludes Tax) 1,055 x 20% 211
Purchases of Goods (Includes Tax) 720 x (20 / 120) 120
Purchases of Goods (Includes Tax) 420 x (20 / 120) 70
Purchases of Goods (Includes Tax) 1,140 x (20 / 120) 190
Total Sales Tax on Purchases 591
Total Receivable (591 - 559) 32
F3 Financial Accounting Full Course Q & A!
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is Sales tax?
Solution: Government tax collected by the business.
2. The payment by the business to government is the net amount of...
Solution: Output tax collected less input tax paid
3. Sales tax is .... from sales on the income statement.
Solution: Excluded
4. How would you calculate tax if the sales price is tax inclusive?
Solution: eg. tax rate 20%, (20% / 120%) x item
5. How would you calculate tax if the sales price is tax exclusive?
Solution: eg. tax rate 20%, (20% x item)
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Lecture 6 - Accruals and Repayments
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Illustration 1
Judy Garland’s business has an accounting year end of 31 March 2012. She rents a property at a rental cost of $2500 per quarter, payable in arrears.
During the year cash payments of rent have been as follows:
30 June (for quarter to 30 June 2011) $250028 September (for quarter to 30 September 2011) $25002 January (for quarter to 31 December 2011) $2500
The final payment due on 31 March 2012 for the quarter was not paid until 5 April 2012.
Show the ledger accounts required to record the above transactions.
Solution
Rental Expense AccountRental Expense AccountRental Expense AccountRental Expense Account
DR CR
30 June Cash 2500
28 September Cash 2500
2 January Cash 2500
Accrued Expense 2500 Income Statement 10,000
10000 10,000
F3 Financial Accounting Full Course Q & A!
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Illustration 2
Gene Kelly pays the rental expense on his factory in advance. He commences business on 1 June 2012 and on that date pays $2400 in respect of the first quarter’s rent. During the year, he also pays the following amounts:
3 September (in respect of quarter ended 30 November) $240025 November (in respect of quarter ended 28 February) $240020 February (in respect of quarter ended 31 May) $240021 May (in respect of first quarter of 2013) $2800
Show these transactions in the rental expense account.
Solution
Rental Expense AccountRental Expense AccountRental Expense AccountRental Expense Account
DR CR
1 June Cash 2400
3 September Cash 2400
25 November Cash 2400
20 February Cash 2400 Pre-Payment c/f 2800
21 May Cash 2800 Income Statement 9600
12400 12400
Illustration 3
On 1 April 2010, Liza Minelli owed $1,000 of the previous year’s gas. Liza made the following payments during the year ended 31 March 2011:
5 May $8005 August $2005 November $6005 February $1,200
At the 31 March 2011, Liza owed $400 of gas from the last part of the year.
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What is the gas charge to the I/S?
1. $2,000,2. $2,4003. $2,2004. $1,800
Solution - 3 only
Electricity Expense AccountElectricity Expense AccountElectricity Expense AccountElectricity Expense Account
DR CR
Accrual B/F 1,000
05 May 800
05 August 200
05 November 600
05 February 1,200
Accrual 400 Income Statement 2,200
3,200 3,200
Illustration 4
Ginger Rogers receives income from two properties as follows:
Property 1 Received Property 2 Received
$ $ $ $
QE 31/03/2011 1200 30/12/2010 2000 10/04/2011
QE 30/06/2011 1300 28/03/2011 2000 10/07/2011
QE 30/09/2011 1300 26/06/2011 2000 11/10/2011
QE 31/12/2011 1300 18/09/2011 2200 03/01/2012
QE 31/03/2012 1400 28/12/2012 2200 06/04/2012
QE 30/06/2012 1400 27/03/2011 2200 05/07/2012
What is Ginger’s rental income in the income statement for the year ended 31 March 2012?
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Solution
Rental Income Account (Unit 1)Rental Income Account (Unit 1)Rental Income Account (Unit 1)Rental Income Account (Unit 1)
DR CR
QE 30/06/2011 Pre-Paid 1,300
QE 30/09/2011 Cash 1,300
QE 31/12/2011 Cash 1,300
Prepayment QE 30/06/12 1,400 QE 31/03/2012 Cash 1,400
Income Statement 5,300 QE 30/06/2012 Cash 1,400
6,700 6,700
Rental Income Account (Unit 2)Rental Income Account (Unit 2)Rental Income Account (Unit 2)Rental Income Account (Unit 2)
DR CR
QE 30/09/04 Accrued 2,000
QE 31/03/2011 Cash 2,000
QE 30/06/2011 Cash 2,000
QE 30/09/2011 Cash 2,000
QE 31/12/2011 Cash 2,200
Income Statement 8,400 QE 31/03/2012 Accrued 2,200
10,400 10,400
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the purpose of accruals and prepayments?
Solution: To match the income/expense to the period of time they relate to.
2. Define accruals.
Solution: Expenses not paid by Y/E, income not received by Y/E
3. Define prepayments
Solution: Expenses paid now relating to next year, income received now relating to next year.
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Lecture 7 - Receivables and Bad Debt
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Illustration 1
Daniel Evans & Co have a total of accounts receivable of $50,000 at their accounting year-end. Of these, it was discovered that Ms Konta (who owes $800) has disappeared, and another whose name is Mr Coupland (who owes $1,500) has been declared bankrupt.
Calculate the effect in the financial statements of writing off these irrecoverable debts.
1. Bad debt expense $2,300, Receivables $52,3002. Bad debt expense $1,500, Receivables $51,5003. Bad debt expense $1,500, Receivables $48,5004. Bad debt expense $2,300, Receivables $47,700
Solution - 4 only
DR CR
DR Bad Debt Expense (800 + 1,500) 2,300
CR Receivables 2,300
Effect on Financial StatementsEffect on Financial StatementsEffect on Financial Statements
Receivables (50,000 - 2,300) 47,700
Bad Debt Expense (I/S) 2,300
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Illustration 2Heather Watson had receivables of $3,000 at 30 June 2011. At that date she wrote off a debt from Goran Ivanisevic of $200. During the year, Heather made credit sales of $15,000 and received cash from customers of $10,000. She also received the $200 from Goran Ivanisevic that had already been written off in the year to 30 June 2011.
What is the final balance on the receivables account at 30 June 2011 and 2012?
Solution
$
Receivables 30 June 2011 3,000
Bad Debt Expense (I/S) -200
Revised Balance 30 June 2011 2,800
Sales in 2012 15,000
Cash Received 10,000
Balance 30 June 2012 7,800
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Illustration 3
On the 31 May 2011 John Williams had receivables of $30,000. John estimated that 5% of customers were unlikely to pay their debts, therefore he wishes to make an allowance for this amount. During the year to 31 May 2012, John made credit sales of $250,000 and received cash from customers of $220,000. He still considered that 5% of these closing receivables would not be paid.
During the year to 31 May 2013, John had sales of $220,000 and collected $230,000 from his receivables. The 5% allowance for receivables still applies.
Calculate the allowance for receivables and irrecoverable debt expense, as well as closing balances of receivables for the years 2011, 2012 & 2013.
Solution
Receivables Allowance Net Charge (I/S)Movement on
Allowance
31 May 2011 30,000 1,500 28,500 -1,500
Sales 2012 250,000 DR Movement
Cash Received -220,000
31 May 2012 60,000 3,000 57,000 -1,500
Sales 2013 220,000 DR Movement
Cash Received -230,000
31 May 2013 50,000 2,500 47,500 500
CR Movement
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Illustration 4
Shane Long has opening balances of $60,000 and $1,500 for his trade receivables and allowance for receivable accounts at 1 April 2010. During the year to 31 March 2011, there are credit sales of $100,000 and cash receivables totaling $95,000.
At 31 March 2011, Shane reviews his receivables and confirms that it is unlikely that he will receive debts totaling $1,000. From past experience, Shane uses an allowance of 5% for remaining receivables after writing off the irrecoverable debts.
What is the amount of Shane’s irrecoverable debt expense for the year to 31 March 2011? What are the effects on the income statement and statement of financial position?
Solution
Receivables Bad Debt Allowance 5%
Net Charge (I/S)Movement on Allowance +
Bad Debt
Jan 2006 60,000 1,500 58,500
Credit Sales 100,000
Cash Rec’d 95,000
31 Dec 2006 65,000 1,000 3,200 60,800 -1,700
DR Movement
Movement on ReceivablesMovement on ReceivablesMovement on ReceivablesMovement on ReceivablesMovement on Receivables 1,700
Bad Debt ExpenseBad Debt ExpenseBad Debt ExpenseBad Debt ExpenseBad Debt Expense 1,000
Total ChargeTotal ChargeTotal ChargeTotal ChargeTotal Charge 2,700
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Why would you allow sales on credit/
Solution: Increased sales, customer loyalty, new markets
2. What does the aged receivables analysis show?
Solution: List of debts outstanding
3. Why might some debt not be repaid?
Solution: Financial Difficulty, Disputes, Bankruptcy
4. Why might you wish to have credit limits?
Solution: To reduce risk and build trust
5. What are the steps required in calculating the allowance for receivables?
Solution: 1. Write off any bad debts2. Remove any specific allowances3. Calculate general allowances on remaining balance4. Has total allowance changed (general + specific?)5. Account for change
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Lecture 8 - Non-Current Assets
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Illustration 1
Mahesh Bhupathi started a painting business on 1 April 2010. In the year to 31 March 2011, he incurred costs which are summarised below.
Item $
Office 200,000
Legal fees relating to purchase of office
8,000
Cost of materials and labour to paint office
250
Paint brushes for business use
10,000
Delivery costs of brushes 50
Staff wages 45,000
What amounts should be capitalised as Land and buildings, and Paint Brushes?
Land & Buildings Paint Brushes
$ $
1 200,000 10,050
2 208,000 10,050
3 208,000 10,000
4 200,000 10,000
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Solution - 2 only
Land & Buildings $
Office 200,000
Legal Fees 8,000
Painting not included -
Total 208,000
Paint Brushes $
Paint brushes for business use 10,000
Delivery cost of brushes 50
Wages (Paid each year) -
Total 10,050
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Illustration 2
Charlotte has been running a creche since 1 July 2010. She has purchased the following items relating to this business:
1. A new microwave for the creche kitchen at a cost of $200 (purchased 5 May 2011)2. New tables for the creche at a cost of $600 (purchased 1 July 2011)
She depreciates the oven at 8% straight line and the tables at 20% reducing balance. a full year’s depreciation is charged in the year of purchase and none in the year of disposal.
What is the total depreciation charge for the year ended 30 September 2013?
Solution
TablesTablesTablesTables
Year O’Bal Dep’n Cl’Bal
2011 600 120 480
2012 480 96 384
2013 384 77 307
Microwave $
Cost at 5 May 2011 200
Dep’n 30 Sep 2012 (200 x 8%) 16
Dep’n 30 Sep 2013 (200 x 8%) 16
Total Depreciation (16 + 77) 93
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Illustration 3
The following relates to the purchase of plant by Windsor Automotive:
$
Cost $20,000
Purchase Date 1 September 2010
Depreciation method Straight line pro rata
Residual value 2,000
Useful economic life 5
Review, 1 Sep 2011
New residual value 0
New Useful economic life 8
What is the total depreciation charge for the years ended 30 November 2010 and 2011?
Solution
$
Cost at 01 Sep 2010 20,000
Depreciation to date (20,000 - 2,000) / 5) x 3/12 -1125
Carrying Value 30 Nov 2010 18,875
New Depreciation (18,875 - 0) / 8 -2,360
Carrying Value 30 Nov 2011 16,515
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Illustration 4
Grigor Dimitrov purchased a new tennis racquet for $1,000 on 1 January 2010. At that time, he believed that its useful economic life would be 10 years, with no residual value.
On 1 January 2012, Grigor changes his estimations. He believes that the racquet will be used for a further 10 years after which time it will have a second-hand value of $100.
What is the depreciation charge for the year ended 31 December 2013?
Solution
$
Cost at 01 Jan 2010 1,000
Depreciation to date (1,000 / 10) x 2 -200
Carrying Value 800
New Depreciation (800 - 100) / 10 70
Illustration 5
Mr Gall runs a construction company. On 1 January 2010, he purchased a fork-lift vehicle for $8,000. He depreciates it at 5% straight line on a monthly basis. A few years later, he decides to replace it with one which is of superior quality. He sells the forklift truck on 30 June 2012 for $7,500.
How much is charged to Mr Gall’s income statement for the year ended 31 December 2012?
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Solution
$
Cost at 01 Jan 2010 8,000
Depreciation 31 Dec 2010 (8,000 x 5%) -400
Depreciation 31 Dec 2011 (8,000 x 5%) -400
Depreciation 30 June 2012 (8,000 x 5%) x 6/12 -200
Carrying Value 7,000
Sale Proceeds 7,500
Profit On Disposal 500
Depreciation in Year -200
Disposal AccountDisposal AccountDisposal AccountDisposal Account
DR CR
Asset at Cost 8,000 Accumulated Dep’n 1,000
Proceeds 7,500
Profit on Sale 500
8,500 8,500
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Define Non-Current Assets.
Solution:1. Asset to be used in business for greater than 1 yr.2. Tangible or intangible3. Used to generate a return4. Not liquid assets
2. Define Capital expenditure
Solution: Buying asset to use, or improving existing asset. Long term expenditure.
3. Subsequent expenditure. Capitalise if....
Solution: Asset improved i.e more income produced
4. The costs of purchasing exclude...
Solution: Repairs, renewals and repainting
5. Depreciation reflects...
Solution: Economic benefit generated by asset. Write off asset value against income generated by it over useful economic life.
6. What are the two different methods of calculating depreciation?
Solution: Straight line method, reducing balance method.
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Lecture 9 - Non-Current Assets II
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Illustration 1
Mary Poppins runs a business producing umbrellas. On 1 August 2011, she bought a machine for $3,000. She depreciates the machine using the straight line method at 10% per annum, and charges a full year of depreciation in the year of acquisition and none in the year of disposal.
The business has grown, and she now requires a faster machine. During July 2015, a salesman offers her a part exchange deal:
Part exchange allowance for original machine: $800
Balance to be paid for new machine: $5,000
Show the ledger entries for this transaction for the Y/E 31 July 2015
Solution
$
Cost at 01 August 2011 3,000
Depreciation 31 July 2012 3,000 x 10% -300
Depreciation 31 July 2013 3,000 x 10% -300
Depreciation 31 July 2014 3,000 x 10% -300
Depreciation 31 July 2015 None 0
Carrying Value 2100
Sale Proceeds Part Exchange 800
Loss On Disposal -1300
Depreciation in Year
Old Machine None
New Machine (800 + 5,000) x 10% 580
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Disposal AccountDisposal AccountDisposal AccountDisposal Account
DR CR
Asset at Cost 3,000 Accumulated Dep’n 900
Proceeds 800
Loss on Sale 1300
3,000 3000
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Illustration 2
John Boy has had a non current asset for several years which he bought for $300,000. The depreciation on the asset to date has been $50,000. He decides to revalue the asset and finds that it is now worth $350,000.
Show the journal entries to record the transaction.
$
Asset at cost 300,000
Depreciation to date -50,000
Carrying Value 250,000
New Value 350,000
Revaluation Reserve 100,000
Journal Entries
DR CR
DR Acc Dep’n 50,000
DR Asset at Cost 50,000
CR Rev. Reserve 100,000
Illustration 3
Jamie owns a shoe factory. The premises were bought on 1 May 2003 for $600,000 and depreciated at 3% per annum straight line.
Jamie now wishes to revalue the factory premises to $900,000 on 1 May 2008 to reflect market value.
What is the balance on the revaluation reserve after this transaction?
1. $450,0002. $370,0003. $390,0004. $410,000
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Solution - 3 only
$
Cost at 1 May 2003 600,000
Depreciation to 1 May 2008 (600,000 x 3%) x 5 -90,000
Carrying Value 510,000
New Value 900,000
Revaluation Reserve (900,000 - 510,000) 390,000
Illustration 4
Charlie owns a shop in Smallville. He bought it 30 years ago for $150,000, depreciating it over 50 years. At the start of 2008 he decides to revalue the unit to $900,000. The shop has a remaining useful life of 20 years. A transfer is made in reserves for excess depreciation each year.
What is the balance on the revaluation reserve at the end of 2008?
Solution
$
Cost 30 yrs ago 150,000
Accumulated Dep’n (150,000 / 50) x 30 -90,000
Carrying Value 60,000
New Value 900,000
Revaluation Reserve 840,000
Old Depreciation 150,000 / 50 3,000
New Depreciation 840,000 / 20 42,000
Transfer in Reserves DR Revaluation Reserve 39,000
CR Accumulated Profits 39,000
Closing Rev Reserve (840,000 - 39,000) 801,000
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. When disposing an asset using part exchange, how should you calculate the total
value of the new asset?
Solution: Part Exchange Allowance (PEA) + Cash Paid
2. Define the steps in a part exchange of an asset.
Solution:1. Record Cash2. Record PEA3. Remove Acc Dep’n4. Remove Asset
3. Why should assets be revalued?
Solution: Assets may appreciate or depreciate in value, and this must by reviewed periodically.
4. Where is a revaluation gain shown?
Solution: Statement of Other Comprehensive Income
5. What Disclosures are required for NCA’s?
Solution:1. Cost or Revaluation model?2. Dep’n method and UEL3. Reconciliation of CV4. Commitment to future purchases5. Revaluation
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Lecture 10 - Preparing Final Accounts
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Illustration 1
The trial balance of Welby is as follows:
Trial balance of Welby 30 June 2010
$ $
Capital Account 7,629
Drawings by proprietor 2,985
Purchases 36,505
Returns inwards 538
Returns outwards 1,860
Discounts 936 483
Credit Sales 48,262
Cash sales 15,151
Customs duty 5,880
Carriage inwards 1,465
Carriage outwards 881
Salesman’s commission 356
Salesman’s salary 1,985
Office salaries 3,604
Bank charges 490
Loan interest 225
Light and heat 1,327
Sundry expenses 1,050
Rent 1,658
Insurance 2,000
Printing and postage 1,052
Advertising 522
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$ $
Irrecoverable debts 896
Allowance for receivables 219
Inventory 3,825
Receivables 5,380
Payables 3,706
Cash at bank 1,317
Cash in hand 40
New delivery van (less trade-in) 1,100
Motor expenses 493
Furniture and equipment:
Cost 4,000
Depreciation at 1 July 2009 1,200
Old delivery van:
Cost 1,000
Depreciation at 1 July 2009 500
Loan account at 5% (repayable in 10 years) 2,500
81,510 81,510
Notes:
1. Closing inventory is $4245. The balance on the Trial Balance is opening inventory.
2. Old delivery van was sold on 30 September 2009 and traded in against the cost of new van. The trade-in price was $700 and the cost of the new van was $1,800. No entries have been created for this transaction, apart from debiting $1,100 cash paid to the New delivery van account.
3. Straight line depreciation is provided on a monthly basis at the following rates per annum:
Motor vans, 25%Furniture and equipment, 10%
4. Allowance for Receivables = 5% of closing receivables
5. Accrual of $186 is required in respect of light and heat.
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6. Rent due for QE 31 July 2010 of $450 was paid on 5 June 2010. Insurance for the year to 31 March 2011 of $840 was paid on 17 June 2010.
Prepare accounting entries for:
A. InventoryB. non-current assets and depreciationC. accrualsD. prepaymentsE. bad debt allowance and irrecoverable debts
Solution
A - Closing Inventory
DR CR
DR Cost of Sales 3,825
CR Inventory 3,825
Being Removal of Opening InventoryBeing Removal of Opening InventoryBeing Removal of Opening Inventory
DR Inventory 4,245
CR Cost of Sales 4,245
Being Closing Inventory Brought in Being Closing Inventory Brought in Being Closing Inventory Brought in
B - Non Current Assets
New Van Old Van Furniture Total
Cost 1,000 4,000 5,000
Additions 1,800 1,800
Disposals -1,000 -1,000
1,800 0 4,000 5,800
Dep’n to June 2010 0 500 1,200 1,700
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New Van Old Van Furniture Total
Dep’n in Year 337.5 62.5 400 800
Disposals -562.5 -562.5
Total Dep’n 337.5 0 1,600 1,937.5
Carrying Value 1,462.5 0 2,400 3,862.5
Old Van Calculations
$
Cost 1,000
Depreciation to date -500
Depreciation in Year 1,000 x 25% x 3/12 -62.5
Carrying Value 437.5
Sale Proceeds 700
Profit on Sale of Van 262.5
New Van Calculations
$
Cost 1,800
Depreciation in Year 1,800 x 25% x 9/12 -337.5
Carrying Value 1,462.5
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C & D - Light & Heat Accrual, Rent & Insurance prepeayment
Dr Cr $
Light & Heat Accrual 186
Light & heat expense 186
Current Liabilities 186
Rent Prepayment (1/3 x $450) 150
Insurance Prepayment (9/12 x $840) 630
E - Bad Debt and Irrecoverable Debt
Receivables Per TB 5,380
Allowance Required (5% x $5380) 269
Previous Allowance 219
Movement on Receivables 50
DR Bad Debt Expense 50
CR Allowance For Receivables 50
Irrecoverable debt ($896 + 50) 946
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Illustration 2
Trial Balance, Wasp Ltd, 31 December 2011
$ $
Capital 320,500
Sales and purchases 120,000 200,000
Inventory at 1 January 2011 25,000
Returns 2,000 3,000
Wages 50,000
Rent 20,000
Motor expenses 5,000
Insurance 800
Irrecoverable debts 200
Allowance for receivables
1 January 2011 600
Discounts 900 1,500
Light and heat 3,500
Bank overdraft interest 80
Motor vehicles at cost 20,000
aggregate depreciation - 1 Jan 2011 8,750
Fixtures and fittings cost 30,000
aggregate depreciation - 1 Jan 2011 18,000
Land 120,000
Receivables and payables 18,000 20,000
Bank 4,370
Buildings at cost 100,000
aggregate depreciation - 1 Jan 2011 10,000
Drawings 22,000
Total 541,850 541,850
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The following notes also apply:
1. Inventory was $40,000 at 31 December 2011.2. Rent was prepaid by $2,000 and light and heat owed was $500 at 31 December 2011.3. Land is to be revalued to $200,000 at 31 December 2011.4. At year end, Wasp Plc wish to write off a further debt of $100. They wish to retain the
allowance for receivables of 5% of the year end balance.5. Depreciation is as follows: A Building, 2% straight-line annually B Fixtures and fittings - straight line method, assuming a useful economic life of five years with no residual value. C Motor vehicles - 25% annually on a reducing balance basis.
A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
Prepare an Income Statement for the Y/E 31 December 2011 and a statement of financial position at that date.
Solution
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Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011
$ $
Sales 200,000
Returns in -2,000
198,000
Cost of Sales
Opening Inventory 25,000
Purchases 120,000
Returns out -3,000
142,000
Closing inventory -40,000
-140,000
Gross Profit 58,000
Sundry Income
Discount received 1,500
59,000
Expenses
Wages 50,000
Rent 20,000
Motor expenses 5,000
Insurance 800
Irrecoverable debts ($200 + $100) 300
Increase in Allowance for receivables (895(SOFP) - 600) 295
Discounts allowed 900
Light and heat ($3,500 + 500) 4,000
Bank interest 80
Depreciation
Buildings (W1) 2,000
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Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011
Fixtures and Fittings (W1) 6,000
Motor vehichles (W1) 2,812.5
92,187.5 -92,187.5
Net loss -33,187.5
Other Comprehensive Income
Revaluation Gain ($200,000 - $120,000) 80,000
Total Comprehensive Income 46,812.5
Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011
$ $ $
Cost Dep’n NBV
Non-Current Assets
Land 200,000 - 200,000
Buildings 100,000 12,000 88,000
Fixtures & Fittings 30,000 24,000 6,000
Motor vehicles 20,000 11,562.5 8,437.5
350,000 47,562.5 302,437.5
Current Assets
Inventory 40,000
Receivables ($18,000 - $100) 17,900
Allowance for Receivables (17,900 x 5%) -895
17,005
Prepaid expenses (rent) 2,000
$ $
Bank 4,370
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Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011
$ $ $
Cost Dep’n NBV
Non-Current Assets
Land 200,000 - 200,000
Buildings 100,000 12,000 88,000
Fixtures & Fittings 30,000 24,000 6,000
Motor vehicles 20,000 11,562.5 8,437.5
350,000 47,562.5 302,437.5
Current Assets
Inventory 40,000
Receivables ($18,000 - $100) 17,900
Allowance for Receivables (17,900 x 5%) -895
17,005
Prepaid expenses (rent) 2,000
$ $
Bank 4,370
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the purpose of the trial balance?
Solution: To check Dr’s and Cr’s and to assist preparers.
2. However, the trial balance does not...
Solution: identify all errors or incorrect entries
3. State the adjustments required for closing inventory, depreciation, accruals and pre-payments.
Solution:
Closing Inventory - Dr Inventory, Cr COSDepreciation - Dr Depreciation Expense (I/S), Cr Acc, Depreciation (SFP)Accruals - Dr Expenses (I/S0, Cr Accruals (SFP)Prepayments - Dr Prepayments (SFP), Cr Expenses (I/S)
4. State the adjustments required for irrecoverable debt, and bad debt allowance (increase & decrease)
Solution:
Irrecoverable debt - Dr Irrecoverable debt (I/S), Cr Receivables (SFP)Bad debt allowance increase - Dr Bad debt expense (I/S), Cr Allowance (SFP)Bad debt allowance decrease - Dr Allowance (SFP), Cr Bad debt Expense (I/S)
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Lecture 11 - Accounting Records
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Illustration 1
The following sales invoices have been issued by Mr Jones in August:
Date Invoice Customer Ref. Sales
8 August 1100 Simpson A8 $480 (including sales tax)
10 August 1101 Burns B5 $1,000 (excluding sales tax)
Mr Jones is registered for sales tax, which is 20%.
Prepare the Sales Day Book and the relevant accounting entries.
Solution
Date Invoice Customer Ref. Gross Tax Net
8 July 1100 Simpson A8 480 80 400
10 July 1101 Burns B5 1,200 200 1,000
TotalsTotalsTotalsTotals 1680 280 1400
DR CR
DR Receivables Control A/CDR Receivables Control A/CDR Receivables Control A/CDR Receivables Control A/CDR Receivables Control A/C 1680
CR Sales TaxCR Sales TaxCR Sales TaxCR Sales TaxCR Sales Tax 280
CR SalesCR SalesCR SalesCR SalesCR Sales 1400
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Illustration 2
Janet is a sole trader. At 1 December 2010 the following balances existed in the company’s records.
Dr Cr
$ $
Receivables ledger control account 27,000 500
Payables ledger control account 100 21,500
The following information is extracted from the December 2010 company records:
$
Credit sales 125,500
Cash sales 17,000
Credit purchases 38,500
Cash purchases 14,500
Credit sales returns 5,500
Credit purchase returns 1,500
Amounts received from credit customers 121,000
Dishonoured cheques 250
Amounts paid to credit suppliers 37,000
Cash discount allowed 1,500
Cash discount received 1,000
Irrecoverable debts written off 500
Increase in allowance for receivables 600
Interest charged to customers 700
Contra settlements 400
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At 31 December the balances in the receivables and payables ledgers were as follows:
Dr Cr
$ $
Receivables ledger control account To be calculated 1,000
Payables ledger control account 100 To be calculated
Prepare the receivables ledger control account and payables ledger control account for the month of December 2011.
Solution
Receivables Control A/CReceivables Control A/CReceivables Control A/CReceivables Control A/C
DR CR
Balance B/F 27,000 Balance B/F 500
Credit Sales (SDB) 125,500 Sales Returns (SRDB) 5,500
Returned Cheques 250 Bank Receipts 121,000
Irrecoverable Debts 500
Interest Charged 700 Discounts Allowed 1,500
Contra 400
Balance C/F 1,000 Balance C/F 25,050
154,450 154,450
Payables Control A/CPayables Control A/CPayables Control A/CPayables Control A/C
DR CR
Balance B/F 100 Balance B/F 21,500
Bank Payments 37,000
Purchase Returns (PRDB)
1,500 Credit Purchases (PDB) 38,500
Discounts Received 1,000
Contra 400
Balance C/F 20,100 Balance C/F 100
60,100 60,100
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. List the documentation required for an accounting record.
Solution: Quotation, Purchase Order, Sales Order, Goods Delivery Note, Good Received Note, Purchase Invoice, Statement, Credit note
2. List the books of prime entry.
Solution: Sales day book, Purchases day book, Sales return day book,Purchases return day book, Cash book, Petty cash book, The journal
3. What is the purpose of the books of prime entry?
Solution: To record initial transactionsTo simplify ledgersForms basis for ledgersPeriodic totals to ledgers
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Lecture 12 - Cashbook and Reconciliations
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Illustration 1
The following is the cash receipts book of Lines Technology.
Date Detail Bank received
Discount ledger
Receivables Bank Interest
$ $ $ $
21/10/08 Headphones 12,000 800 12,000
21/10/08 Interest Acc 1 60 60
21/10/08 Amplifiers 20,000 20,000
21/10/08 Interest Acc 2 100 100
21/10/08 Microphones 10,000 500 10,000
42,160 1300 42,000 160
What are the accounting entries in the cashbook at the end of the day?
Solution
DR CR
DR Bank 42,160
CR Receivables Control A/C 42,160
CR Interest Income 160
Then discount is recordedThen discount is recordedThen discount is recorded
DR Discounts Allowed 1,300
CR Receivables Control A/C 1,300
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Illustration 2Pinocchio runs a fast food outlet. Here are the following transactions for the day:
1. Closing Inventory of 250 litres of a fizzy drink which cost $3,0002. Depreciation on lease for outlet, which cost him $120,000 and is depreciated over 20
years.3. A regular customer to the outlet, Aladdin, has a tab of $450. However, he has recently
purchased a one-way trip to Arabia, and Pinocchio intends to write the debt off.4. On the last day of the year Pinocchio purchased tables and chairs for the outlet. They
cost $1,200, but the purchase has not been reflected in the accounts.
What journals should Pinocchio post?
Solution
DR CR
DR Closing Inventory (SFP) 3,000
CR Closing Inventory (COS) 3,000
Being the recording of the closing inventoryBeing the recording of the closing inventoryBeing the recording of the closing inventory
DR Depreciation (I/S) (120,000 / 20) 6,000
CR Accumulated Depreciation 6,000
Being Depreciation on the outlet leaseBeing Depreciation on the outlet leaseBeing Depreciation on the outlet lease
DR Irrecoverable Debt Expense 450
CR Receivables Control A/C 450
Being write-off of debt o/s from AladdinBeing write-off of debt o/s from AladdinBeing write-off of debt o/s from Aladdin
DR Fixtures & Fittings Cost 1,200
CR Cash 1,200
Being the purchase of tables and chairs for the outletBeing the purchase of tables and chairs for the outletBeing the purchase of tables and chairs for the outlet
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Illustration 3Ms Williams operates as a sole trader. Currently, she has a receivables ledger control account balance of $344,240 and a receivables ledger balance of $352,268.
The following have been found:
1. Contra item of $3,000 has not been entered in the receivables ledger control account.2. Cheque from customer of $1,110 has been dishonoured. The correct double entry has
been recorded, but the their account has not been updated.3. A payment of $644 from a customer has incorrectly been entered in the accounts
receivables ledger as $466.4. Discounts allowed of $240 have not been entered in the control account.5. Cash received of $1,600 has been debited to the customer’s account in the accounts
receivable ledger.6. Total credit sales of $9,000 to an accountancy firm, Watkins have been posted correctly
to the ledger account but not recorded in the control account.
Correct the receivables ledger account and carry out a reconciliation of the Receivables Ledger.
Solution
Receivables Control A/CReceivables Control A/CReceivables Control A/CReceivables Control A/C
DR CR
Balance B/F 344,240
Credit Sales (SDB) 9,000 Contra 3,000
Discounts Allowed 240
Balance C/F 350,000
353,240 353,240
Receivables Ledger ReconciliationReceivables Ledger ReconciliationReceivables Ledger ReconciliationReceivables Ledger Reconciliation
Balance Per Receivables LedgerBalance Per Receivables LedgerBalance Per Receivables Ledger 352,268
Dishonored ChequeDishonored ChequeDishonored Cheque 1,110
MispostingMispostingMisposting -178
Cash ReceivedCash ReceivedCash Received -3,200
Revised BalanceRevised BalanceRevised Balance 350,000
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Illustration 4
Rafter received a statement from a supplier, Connors, for $15,000. Rafter’s payables ledger shows a balance due to Connors of $10,000. An investigation reveals the following:
1. Cash sent to Connors of $3,000 has not been received yet by Connors.2. Rafter received a discount of $50, but forgot to record this in the payables ledger.3. An invoice of $2,050 was sent by Connors but not yet received by Rafter.
What is the difference between Rafter and Connors records after taking these items into account?
Solution
Connors $ Rafter $
Balance Per Question 15,000 10,000
Cash in Transit -3,000
Discount Received -50
Invoice Not Received 2,050
Revised Balance 12,000 12,000
Difference 00
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the purpose of petty cash?
Solution: Small daily transactions eg. milk, travel
2. What controls are required for petty cash?
1. Safe/secure box2. Reliable person in charge3. Receipts for all expenses4. All signed5. Spot checks
3. What is the purpose of the journal?
Solution: To list other entries not placed through the bank for bookkeeping purposes.
4. What is the process of a reconciliation?
1. Start with relevant balance2. Post errors3. Match balances
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Lecture 13 - Bank Reconciliations & Errors
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Illustration 1
The following are records from the records of H Singh Bank Account:
Dr Cr
$ Chq no $
1 May Balance b/f 15,250 1 May Max 111 850
2 May Al 540 3 May Rent 112 250
11 May Bo 606 12 May Mia 113 550
13 May Dee 1,254 16 May Lee 114 100
20 May Gee 2,143 22 May Jo 115 546
23 May Cash sales 657 27 May Li 116 204
29 May Mo 200 31 May Balance c/f 18,150
20,650 20,650
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Bank Statement - H Singh
Date Details Withdrawals Deposits Balance
$ $ $
1 May Balance b/f 16,000
2 May 109 450
2 May 110 500 15,050
3 May Deposit 200 15,250
5 May 111 850
5 May Bank charges 50 14,350
6 May Deposit 540 14,890
10 May Standing order (rates)
140 14,750
10 May 112 255 14,495
12 May Deposit 606 15,101
13 May 113 550 14,551
14 May Deposit 1,254 15,805
21 May Deposit 2,143 17,948
24 May Deposit 655 18,603
25 May 115 546 18,057
28 May 365923 305 17,752
31 May Balance c/f 17,752
(i) Prepare a bank reconciliation statement at 1 May
(ii) Adjust the cash book for May and prepare a bank reconciliation statement at 31 May.
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Solution
$
Balance per bank statement 16,000
Less O/S cheques (450 + 500) -950
Add O/S lodgments 200
Balance Per Cash Book 15,250
Cash BookCash BookCash BookCash Book
DR CR
Balance B/F 18,150
Error - chq 112 (255 - 250) 5
Deposit Difference (655 - 657) 2
Rates S/O 140
Bank Charges 50
Revised Bal. c/f 17,953
18,150 18,150
Revised Bal B/F 17,953
Balance Per Bank StatementBalance Per Bank StatementBalance Per Bank Statement 17,752
Less O/S cheques (No. 114 & 116: 100 & 204)Less O/S cheques (No. 114 & 116: 100 & 204)Less O/S cheques (No. 114 & 116: 100 & 204) -304
Add O/S lodgmentsAdd O/S lodgmentsAdd O/S lodgments 200
Bank ErrorBank ErrorBank Error 305
Revised Balance Per Cash BookRevised Balance Per Cash BookRevised Balance Per Cash Book 17,953
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Illustration 2Amy’s cashbook for September is as follows:
$ $
Receipts 1,540 Balance b/f 640
Balance c/f 440 Payments 1,340
1,980 1,980
All receipts are banked and payments made by cheque.
On investigation, you discover the following discrepancies:
1. Bank charges of $150 entered on the bank statement had not been entered in the cash book.
2. Cheques of $300 had not been presented to the bank for payment.3. A cheque of $30 had been entered as a receipt in the cash book instead of as a
payment.4. A cheque drawn for $8 had been entered in the cash book as $88.
What balance is shown on the bank statement on 31 September?
Solution
Cash BookCash BookCash BookCash Book
DR CR
Balance B/F 440
Adjustment Re. Chq 80 Bank Charges 150
Paid Cheque entered as receipt
60
Balance C/F 570
650 650
Revised Balance Per Cash BookRevised Balance Per Cash BookRevised Balance Per Cash Book -570
Add O/S chequesAdd O/S chequesAdd O/S cheques 300
Balance Per Bank StatementBalance Per Bank StatementBalance Per Bank Statement -270
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Illustration 3Provide the journal to correct each of these errors:
1. Cash sale of $200 not recorded2. Rates expense of $700, paid in cash has been debited to the rent account in error.3. A non-current asset purchase of $500 on credit has been debited to the repairs expense
account rather than an asset account.4. A rent bill of $1,000 in cash has been debited to the rent account as $1,200 and a
casting error in the sales account has resulted in sales being overstated by $200.5. A cash sale of $87 has been recorded as $76.6. A cash sale of $100 has been debited to sales and credited to cash.
Solution
DR CR
1. Double entry was not entered1. Double entry was not entered1. Double entry was not entered
Double entry should have beenDouble entry should have beenDouble entry should have been
DR Cash 200
CR Sales 200
2. Double entry made was2. Double entry made was2. Double entry made was
DR Rent 700
CR Cash 700
Double entry should have beenDouble entry should have beenDouble entry should have been
DR Rates 700
CR Cash 700
CorrectionCorrectionCorrection
DR Rates 700
CR Rent 700
3. Double entry made was3. Double entry made was3. Double entry made was
DR Repairs 500
CR Payables 500
Should have beenShould have beenShould have been
DR Non Current Asset 500
CR Payables 500
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DR CR
CorrectionCorrectionCorrection
DR Non Current Asset 500
CR Repairs 500
4. Double entry made was4. Double entry made was4. Double entry made was
Dr Rent 1,200
CR Cash 1,000
Should have beenShould have beenShould have been
DR Rent 1,000
CR Cash 1,000
CorrectionCorrectionCorrection
CR Rent 200
DR Sales 200
5. Double entry made was5. Double entry made was5. Double entry made was
DR Cash 76
CR Sales 76
Should have beenShould have beenShould have been
DR Cash 87
CR Sales 87
CorrectionCorrectionCorrection
DR Cash 11
CR Sales 11
6. Double entry made was6. Double entry made was6. Double entry made was
DR Sales 100
CR Cash 100
Should have beenShould have beenShould have been
DR Cash 100
CR Sales 100
CorrectionCorrectionCorrection
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DR CR
DR Cash 200
CR Sales 200
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Illustration 4The debit side of a company’s trial balance totals $2,000 more than the credit side. Which of the following errors would account for the difference?
1. Petty cash balance of $2,000 has been omitted from trial balance.2. A receipt of $2,000 from receivables has been omitted from the records.3. $1,000 paid for plant maintenance as been correctly entered into the cashbook and
credited to the plant cost account.4. Discount received of $1,000 has been debited to the discount allowed account.
Solution
4.
Illustration 5The following errors were found in Pitt’s accounting records:
1. In recording the sale of a non-current asset, cash received of $35,000 was credited to the disposals account as $32,000.
2. An opening accrual of $400 has been omitted.3. Cash of $10,000 paid for plant repairs was correctly accounted for in the cash book but
was credited to the plant cost account.4. A cheque for $15,000 paid for the purchase of a machine was debited to the machinery
account as $51,000.
Which of the errors will require an entry to the suspense account to correct them?
Solution
All of them.
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Illustration 6The following corrections have been posted by Jamelia:
1. Dr Suspense $2,000, Cr Rent $2,0002. Dr Payables $1,400, Cr Suspense $1,4003. Dr Loan interest $800, Cr Loan $8004. Dr Suspense $900, Cr Sundry income $9005. Dr Suspense $10,000, Cr Cash 10,000
Jamelia’s draft profit figure to the posting of these journals is $480,000.
What is the revised profit figure?
Solution
No Effect Increase Decrease $
Profit 480,000
Rent 2,000 2,000
Payables X
Loan 800 -800
Sundry Income 900 900
Cash X
Revised ProfitRevised ProfitRevised ProfitRevised Profit 482,100
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. List unrecorded items that can cause differences in a bank reconciliation.
Solution.1. Interest2. Charges3. Dishonoured cheques
2. Which items may cause a timing difference in a bank reconciliation?
Solution1. O/S cheques2. O/S Lodgements
3. Remember, Bank Drs & Crs are....
Solution: the opposite way around.
4. List the different types of error.
Solution:1. Omission2. Commission (wrong account)3. Principle (conceptually wrong)4. Compensating (one cancels the other)5. Transcription error6. Entry reversal (posted the wrong way around)
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Lecture 14 - Incomplete Records
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Illustration 1Trudy’s statement of financial position shows net assets of $10,000 at 31 May 2010. The statement financial position at 31 May 2011 shows net assets of $14,000. Trudy’s drawings for the year amounted to $2,000 and she did not introduce any further capital in that year.
What profit did Trudy make in the year to 31 May 2011?
1. $4,0002. $10,0003. $6,0004. $8,000
Solution - 3 only
Change in Net Assets = Capital Introduced + Profit for the year - Drawings for year
14,000 - 10,000 = 0 + Profit - 2,000Profit = 4,000 + 2,000 = 6,000
Illustration 2The opening receivables of Flintoff’s business are $20,000. There have been total receipts from customers of $35,000 of which $10,000 relates to cash sales and $25,000 relates to receipts from receivables. Discounts allowed in the year totalled $2,000 and closing receivables were $28,000.
What are total sales for the year?
Solution
ReceivablesReceivablesReceivablesReceivables
DR CR
Balance B/F 20,000 Bank 25,000
Discounts 2,000
Sales (Bal Fig.) 35,000
Balance C/F 28,000
55,000 55,000
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Illustration 3The opening payables of Harmison’s business are $10,000. Total payments to suppliers during the year were $8,000. Discounts received were $400 and closing payments were $14,000.
What are total purchases for the year?
Solution
PayablesPayablesPayablesPayables
DR CR
Bank 8,000 Balance B/F 10,000
Discounts 400
Purchases (Bal Fig.) 12,400
Balance C/F 14,000
22,400 22,400
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Illustration 4The following relates to J Johnson’s business:
$
1 January Electricity accrued 300
Rent Prepaid 400
Cash paid in the year Electricity 1,200
Rent 2,500
31 December Electricity accrued 400
Rent Prepaid 500
What are the income statement charges for electricity and rent for the year?
Solution
Electricity Rent
Accrued -300
Pre-Paid 400
Paid In Year 1,200 2,500
Accrued 400
Pre-Paid -500
1,300 2,400
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Illustration 5On 1 June Road Runner’s bank account is overdrawn by $1,400. Payments in the year totaled $9,000 and on the 31 May the following year the closing balance is $2500 (positive).
What are the total receipts for the year?
Solution
BankBankBankBank
DR CR
Balance B/F 1,400
Receipts (Bal. Fig) 12,900 Payments 9,000
Balance C/F 2,500
12,900 12,900
Illustration 6On 1 September, J Chan’s business had a cash float of $1,000. During the year cash of $8,000 was banked, $1,500 paid out as drawings and wages of $2,000 were paid. On 31 August the following year the float was $1,200.
How much cash was received from customers for the year?
Solution
Cash in TillCash in TillCash in TillCash in Till
DR CR
Balance B/F 1,000 Bank 8,000
Receipts (Bal. Fig) 11,700 Drawings 1,500
Wages 2,000
Balance C/F 1,200
12,700 12,700
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Illustration 7Peter O’Mahoney has sales of $3,000, He makes a margin of 20%.
What is the cost of sales figure?
Solution
$
Sales 3,000
Cost of Sales (Bal.) 2,400
Gross Profit (20% x 3,000) 600
Illustration 8Liz Jones has a cost of sales of $800 and a mark-up of 20%.
What is her sales figure?
Solution
$
Sales 960
Cost of Sales 800
Gross Profit (20% x 800) 160
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Illustration 9Jamie can tell you the following with regard to his business:
Margin 20%
Opening Inventory $1,000
Closing Inventory $800
Purchases $3,000
Complete Jamie’s income statement with the above figures.
Solution
$ $
Sale (3,200/80 x 100) 4,000
Opening Inventory 1,000
Purchases 3,000
Closing Inventory -800
3,200
Gross Profit 800
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Illustration 10Jo lost her entire inventory due to flooding. Her unsigned insurance policy is still in her possession. Jo has supplied you with the following information:
Mark up 25%
Sales $12,000
Opening inventory $2,500
Purchases $8,000
Prepare Jo’s Income Statement and show the journal to record closing inventory.
Solution
$ $
Sale (9,600 x 125%) 12,000
Opening Inventory 2,500
Purchases 8,000
Lost Inventory (Bal Fig) -900
-9,600
Gross Profit 2,400
DR CR
DR Income Statement Expense 900
CR Income Statement (COS) 900
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are the different ways in which incomplete records can be solved?
Solution:1. Use accounting equation2. Calculate opening capital3. Use margins/mark ups4. Use balancing figure5. Lost inventory method
2. Net Profit =...
SolutionCapital + Profit - Drawings
3. Opening Capital =....
SolutionOpening Assets - Opening Liabilities
4. Using Mark-ups & margins, Gross Profit =....
SolutionMargin: Sales x Margin%Mark-up: Sales x (Mk-up/(mk-up + 100))
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Lecture 15 & 16 - Company Accounts
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Statement of Financial Position Pro-Forma
YZ Group Statement of Financial Position as at 31 December 20X5YZ Group Statement of Financial Position as at 31 December 20X5YZ Group Statement of Financial Position as at 31 December 20X5
Assets
Non-Current Assets
Property Plant & Equipment X
Investments X
Intangibles X
X
Current Assets
Inventories X
Trade Receivables X
Cash & Cash Equivalents X
Total Assets X
X
Equity & Liabilities
Share Capital & Reserves
Retained Earnings X
Other Components of Equity X
Total Equity X
Non-Current Liabilities X
Long Term borrowings X
Deferred Tax X
Current Liabilities X
Trade Payables X
Short Term Borrowings X
Current Tax Payable X
Short Term Provisions X X
Total Equity & Liabilities X
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Statement of Changes in Equity Pro-Forma
Share Capital
SharePremium
RevaluationReserve
RetainedEarnings
TotalEquity
$ $ $ $ $
Balance B/F X X X X X
Change in Accounting Policy/prior year error
(X) (X)
Restated Balance X X X X X
Dividends (X) (X)
Shares Issued X X X
Profit for the Period X X
Revaluation gain/loss X X
Transfer to Retained Earnings
(X) X -
Balance C/F X X X X X
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Statement of Comprehensive Income Pro-Forma
$
Revenue X
Cost of Sales (X)
Gross Profit X
Distribution Costs (X)
Admin Expenses (X)
Profit from Operations X
Finance Cost (X)
Investment Income X
Profit Before Tax X
Income Tax Expense (X)
Profit For the Year X
Other Comprehensive Income
Gain/Loss on Revaluation X
Gain/Loss on Financial Instruments Through Comprehensive Income
X
Total Comprehensive Income for the Year X
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Illustration 1
Clonard issues 100,000 30c shares at a price of $1.25 each.
Show this transaction using ledger accounts.
Solution
DR CR
Cash (100,000 x $1,75) 175,000
Share Capital (Nominal Value) 30,000
Share Premium Account (Bal.) 145,000
Illustration 2Turtleneck issues 2,000 40c shares at nominal value in 2010. In 2011, a rights issue of 1 for 4 at $0.80 is made. The offer is fully taken up.
What accounting entries are required for the rights issue?
DR CR
Cash (2,000 / 4) x 80c) 400
Share Capital (Nominal Value) (2000/4) x 40c 200
Share Premium Account (Bal.) 200
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Illustration 3Cascarino, a limited liability company, has 30,000 25c shares in issue (each issued for $1.25) and makes a 1 for 4 bonus issue, capitalising the share premium account.
What are the balances on the share capital and share premium accounts after this transaction?
Share Capital Share Premium
$ $
1 7,500 30,000
2 7,500 28,125
3 9,375 30,000
4 9,375 28,125
Solution - 4 only
Number of Shares Issued (30,000 / 4) 7,500
DR CR
Share Premium Account (7,500 x 25c) 1,875
Share Capital 1,875
Share Capital (30,000 x 25c ) + 1,875Share Capital (30,000 x 25c ) + 1,875 9,375
Share Premium (30,000 x (1.25 - 25c) - 1,875)Share Premium (30,000 x (1.25 - 25c) - 1,875) 28,125
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Illustration 4Glass is an incorporated company which needs to raise funds to purchase plant and machinery. On 1 April 2010 it issues $200,000 10% loan notes, redeemable in 5 years time. Interest is payable half yearly at the end of September and March.
What accounting entries are required for Y/E 31 December 2010? Show extracts from the statement of financial position.
Solution
DR CR
01 April 2010
Cash 200,000
Loan Notes 200,000
31 September 2010
Finance Cost (200,000 x 10% x 6/12) 10,000
Cash 10,000
31 December 2010
Finance Cost (200,000 x 10% x 3/12) 5,000
Interest Accrual 5,000
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Illustration 5
Sebastian Philpott commenced trade on 1 January 2011 and estimates that the tax payable for the year ended 31 December 2011 is $200,000.
In August 2012, the accountant of Sebastian Philpott receives and pays tax of $210,000 for the year ended 31 December 2011. At 31 December 2012 he estimates that the company owes $220,000 for corporation tax in relation to the Y/E 31 December 2012.
Calculate the tax charge and income tax payable accounts for the years ended 31 December 2011 and 2012, and detail the amounts shown in the statement of financial position and income statement in both years.
Solution
DR CR
20X4 $ $
Income Statement Charge (Est. 20X4) 200,000
Corp Tax Provision (SFP) 200,000
20X5
Income Statement Charge (Est. 20X5) 220,000
Under Provision 20X4 to IS 10,000
Corp Tax Provision (SFP) 230,000
20X4 20X5
Corp Tax Provision 200,000 220,000
Tax Expense I/S 200,000 230,000
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Illustration 6
Kettle Ltd estimated last year’s tax charge to be $250,000. However, their tax advisor settled with the tax authorities at $220,000.
This year, Kettle Ltd estimate their tax bill to be $270,000, but they are confused as to how this should be reflected in the financial statements.
Calculate tax liability and tax charge to be shown in the statement of financial position and income statement for the current year.
Solution
$
Income Statement Charge (Est.) 270,000
Over Provision to IS -30,000
Income Statement Charge 240,000
Corp Tax Provision (SFP) 270,000
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Illustration 7Bottle, a company, has share capital as follows:
Ordinary share capital (25c shares) $100,000
10% irredeemable preference share capital $25,000
The company pays an interim dividend of 5c per share to its ordinary shareholders and pays the preference shareholders their fixed dividend. Before the year end the company declares a final dividend of 15c per share to its ordinary shareholders.
Calculate the amounts shown in the statement of changes in equity (SOCIE) and statement of financial position (SOFP) in relation to dividends for the year.
Solution
No. Ordinary Shares $100,000 / 25c 400,000
Ordinary Dividend 400,000 x 12.5c $20,000
Preference Dividend 20,000 x 10% $2,000
SOCI $22,000
15c Div not approved yet so not accounted for (SFP)15c Div not approved yet so not accounted for (SFP) Nil
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. List the Financial Statements that are included in IAS 1.
Solution:1. Statement of Financial Position2. Either Statement of Comprehensive Income or
Income Statement + Other Comp Income3. Statement of changes in Equity4. Statement of Cash Flows
2. What is included in the other components of equity balance of the statement of financial position?
Solution: Revaluation Reserve and General Reserve
3. What is the purpose of the Statement of Changes in Equity?
Solution: Summary of all changes in equity eg. Share issue, dividends paid
4. What are some of the headings that would be listed under the Income Statement?
Solution: Cost of Sales, Distribution Costs, Admin Costs
5. What are the different ways in which capital can be issued?
Solution: Issue at market value, Rights issue, Bonus/script issue
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Lecture 17 - Accounting Standards
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Illustration 1Dawn Ltd purchased a patent, with a useful economic life of twenty years for $50,000 on 1 January 2010.
Prepare extracts of the financial statements for the Y/E 31 December 2010.
Solution
I/SI/SI/S
$
Amortisation ($50,000 / 20) 2,500
Statement of Financial PositionStatement of Financial PositionStatement of Financial Position
Intangible Assets (50,000 - 2,500) 47,500
Illustration 2Which of the following should be classified as development?
1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found in the Arctic Circle is resistant to heat.
2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-equipment which will be more durable.
3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new
heat-resistant body-suit for humans.
Solution
2 & 4 are development
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Illustration 3
Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:
Expense CostsExpense CostsExpense CostsExpense CostsExpense Costs
2005 2006 2007 2008
$ $ $ $
Revenue from other activities
500 700 800 800
Revenue from other widgets 500 700 900
Development costs -600 Show how the development costs should be treated if:
1. the costs do not qualify for capitalisation2. the costs do qualify for capitalisation.
Solution1. Expense Costs1. Expense Costs1. Expense Costs1. Expense Costs1. Expense Costs1. Expense Costs
2005 2006 2007 2008 Total
Revenue from other activities
500 700 800 800 2800
Revenue from other widgets 500 700 900 2100
Development costs -600 -600
Net Profit/Loss -100 1200 1500 1700 4300
2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs
2005 2006 2007 2008 Total
Revenue from other activities
500 700 800 800 2800
Revenue from other widgets 500 700 900 2100
Development costs 0 -143 -200 -257 -600
Net Profit/Loss 500 1057 1300 1443 4300
Working for Costs 600 x 500/2100
600 x 700/2100
600 x 900/2100
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Illustration 4Dolphin Ltd has developed a new material which will enhance its products. The costs incurred meet the capitalisation criteria and by 31 August 2011 Y/E $300,000 has been capitalised.
The new products are expected to generate revenue for six years from the date that commercial production begins on 1 September 2011.
What amount is charged to the income statement in the Y/E 31 August 2012?
Solution
$300,000 / 6 = 50,000
Illustration 5
Which of the following are adjusting events for Fishcakes Ltd? The year end is 30 June 2011 and the accounts are approved on 20 August 2011.
1. Sales of year-end inventory on 4 July 2011 at less than cost2. Issue of new ordinary shares on 10 July 2011.3. A fire in the warehouse occurred on 16 July 2011. All stock was destroyed.4. A major credit customer was declared bankrupt on 20 July 2011.5. All of the share capital of a rival, Haggis Ltd was acquired on 22 July 2011.6. On 4 August, $700,000 was received in respect of an insurance claim dated 13
February 2011.
Which of the following are adjusting events for Fishcakes Ltd?
Solution
1, 4 and 6.
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Illustration 6Draft financial of the West Angleland Company are currently under review. The following points have been raised:
1. An ex-employee has started an action against the company for wrongful dismissal. The company’s legal team have stated that the ex-employee is not likely to succeed. The following estimates have been given by the lawyers relating to the case:
a. Legal costs (to be incurred whether the claim is successful or not) $12,000b. Settlement of claim if successful $30,000Total: $42,000
No provision has been made by the company in the financial statements.
2. The company has a policy of refunding the cost of any goods returned by customers, even though it is under no legal obligation to do so. This policy of making refunds is generally known. In the next year returns totalling $15,000 are expected to have been made.
3. A claim has been made against the company for injury suffered by a pedestrian in connection with building work by the company. Legal advisors have confirmed that the company will probably have to pay damages of $150,000 but that a counterclaim against the building subcontractors for $80,000 would probably be successful.
State with reasons what adjustments, if any, should be made by the company in the financial statements.
Solution
1. Provide for $12,000 but disclose note re. $42,000.2. Constructive obligation so provide for $15,000.3. Provide for $150,000 and disclose contingent asset $80,000.
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Under !AS 38, development can be capitalised if it is....
Solution: CORSET1. Commercially viable2. Overall profitable3. Resources to complete4. Separate project5. Expenditure ID’d6. Technically feasible
2. What is amortisation?
Solution: To write off an intangible asset over its UEL
3. List examples of a Non-adjusting event under IAS 10.
Solution: 1. Purchase/sale assets2. Fire in warehouse3. Share issue
4. List examples of an adjusting event under IAS 10.
Solution:1. Fraud/error discovery2. Doubtful debts3. Damaged inventory
5. What are the characteristics of a provision under IAS 37?
Solution: Present obligation as result of past event, probable outflow of economic benefit and a reliable estimate.
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Lecture 18 - Accounting Standards II
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Illustration 1
Jumble Ltd was incorporated 5 years ago and has depreciated vehicles using the reducing balance method at 25%. It now wishes to change this to allow a fairer presentation to the straight line method over a period of 8 years. In addition, certain freehold properties had not been depreciated during the first 3 years. The directors are now of the opinion that all property, plant and equipment should now be depreciated.
Are the proposals a change in accounting policy or a change in accounting estimate?
Solution
The change in Dep’n rate is an Accounting Estimate as the use of judgement has been made by the accountant.
The fact that we are now charging depreciationn on the property is a change in the measurement of an item in the financial statements and is therefore a change in Accounting Policy.
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are Accounting Policies (IAS 8)?
Solution: Principles, bases, conventions rules and practices applied by an entity in preparing and presenting financial statements.
2. Accounting Policies may change when it...
Solution: Is required by a a new IFRS, or if the change will result in a more relevant and reliable presentation financial statements.
3. What is an accounting estimate?
Solution: An accounting estimate is the method to arrive at an estimate of an asset or liability. These estimates by an accountant can include UEL, depreciation etc.
4. What are the characteristics of Revenue Recognition (IAS 18)?
Solution: Reliable Measure and probable flow of economic benefit.Sale of goods: transfer of risks and rewards of ownershipServices: recognise by stage of completion
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Lecture 19 - Group Workings
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Illustration 1
Almeria Murcia
Non Current Assets
Tangible 100 100
Investment in Murcia 300
Current Assets
Inventory 40 200
Receivables 60 100
Cash 200 200
700 600
Ordinary Shares 160 100
Accumulated Profits 240 200
Equity 400 300
Non Current Liabilities 100 200
Current Liabilities 200 100
700 600
Additional Information
Almeria today acquired all the shares in Murcia for $300m.
The Fair Value of the NCI at acquisition was 0.
Required
Prepare the consolidated statement of financial position for the Almeria group
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Pro-Forma
Working 1 - Group Structure
Almeria
Murcia
Date Acquired
Parent Share
NCI
Working 2 - Equity Table At Acquisition At Year End
Share Capital
Accumulated Profits
! ! ! !
Working 3 - Goodwill
Cost of Parent Investment
Fair Value of NCI at acquisition
Less net assets at acquisition (W2)
Goodwill
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Working 4 - NCI
$
Fair Value of NCI at acquisition
NCI% of Sub Post-Acq Profits
Value of NCI at Year End
Working 5 - Accumulated Profits
$
Parent’s Accumulated Profits
Add: Parent % of the subsidiary’s post acquisition profits
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SFP for Almeria Group
Almeria Murcia Group
Non Current Assets
Goodwill
Tangible 100 100
Investment in Murcia 300
Current Assets
Inventory 40 200
Receivables 60 100
Cash 200 200
700 600
Ordinary Shares 160 100
Accumulated Profits 240 200
Non Controlling Interest
Equity 400 300
Non Current Liabilities 100 200
Current Liabilities 200 100
700 600
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Solution
Working 1 - Group Structure
Almeria
↓100%
Murcia
Date Acquired TODAY
Parent Share 100%
NCI 0%
Working 2 - Equity Table At Acquisition At Year End
Share Capital 100 100
Accumulated Profits 200 200
300 300
! ! ! !
Working 3 - Goodwill
Cost of Parent Investment 300
Fair Value of NCI 0
Less net assets at acquisition (W2) -300
Goodwill 0
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Working 4 - NCI
$
Fair Value of NCI at acquisition 0
NCI% of Sub Post-Acq Profits 0
Value of NCI at Year End 0
Working 5 - Accumulated Profits
$
Parent’s Accumulated Profits 240
Add: Parent % of the subsidiary’s post acquisition profits Nil
240
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SFP for Almeria Group
Almeria Murcia Group
Non Current Assets
Goodwill None (W3) Nil
Tangible 100 100 100 + 100 200
Investment in Murcia 300 Cancel out Nil
Current Assets
Inventory 40 200 40 + 200 240
Receivables 60 100 60 +100 160
Cash 200 200 200 + 200 400
700 600 1000
Ordinary Shares 160 100 Parent 160
Accumulated Profits 240 200 W5 240
Non Controlling Interest W4 Nil
Equity 400 300 400
Non Current Liabilities 100 200 100 + 200 300
Current Liabilities 200 100 200 + 100 300
700 600 1000
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Illustration 2
Ant Dec
Assets 500 500
Investment in Dec 350
850 500
Ordinary Shares 100 200
Accumulated Profits 250 100
Equity 350 300
Liabilities 500 200
850 500
Additional Information
Ant today acquired 160m of the 200m shares in Dec.
The Fair Value of the NCI was 60.
Required
Prepare the consolidated statement of financial position for the Ant group
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Illustration 2 Pro-Forma
Working 1- Group Structure
↓
Date Acquired
Parent Share
NCI
Working 2- Equity Table
At Acquisition At Year End
Share Capital
Accumulated Profits
Working 3 - Goodwill
Cost of Parent Investment
Fair Value of NCI at acquisition
Less net assets at acquisition (W2)
Goodwill
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Working 4 - NCI
$
Fair Value of NCI at acquisition
NCI% of Sub Post-Acq Profits
Value of NCI at Year End
! ! ! ! !Working 5 - Accumulated Profits
$
Parent’s Accumulated Profits
Add: Parent % of the subsidiary’s post acquisition profits
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Statement of Financial Position for Ant Group
Ant Dec Group
Goodwill
Assets 500 500
Investment in Dec
350
850 500
Ordinary Shares
100 200
Accumulated Profits
250 100
NCI
Equity 350 300
Liabilities 500 200
850 500
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Illustration 2 Solution
Working 1- Group Structure
Ant
↓80%
Dec
Date Acquired TODAY
Parent Share 80%
NCI 20%
100%
Working 2- Equity Table
At Acquisition At Year End
Share Capital 200 200
Accumulated Profits 100 100
300 300
Working 3 - Goodwill
Cost of Parent Investment 350
Fair Value of NCI at acquisition 50
Less net assets at acquisition (W2) -300
Goodwill 100
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Working 4 - NCI
$
Fair Value of NCI at acquisition 50
NCI% of Sub Post-Acq Profits 0
Value of NCI at Year End 50
! ! ! ! !Working 5 - Accumulated Profits
$
Parent’s Accumulated Profits 250
Add: Parent % of the subsidiary’s post acquisition profits Nil
250
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Statement of Financial Position for Ant Group
Ant Dec Group
Goodwill W3 100
Assets 500 500 500 + 500 1000
Investment in Dec
350 Cancelled in Goodwill W3
Nil
850 500 1110
Ordinary Shares
100 200 Parent Only 100
Accumulated Profits
250 100 W5 250
NCI W4 50
Equity 350 300 410
Liabilities 500 200 500 +200 700
850 500 1110
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Define the acquisition method under IFRS3.
Solution:1. Identify acquirer2. Determine acquisition date3. Recognise & measure assets & liabilities4. Measure goodwill/bargain purchase5. Calculate NCI
2. Net Assets =....
Solution: Share Capital + Reserves
3. What is goodwill?
Solution: An intangible assets, which is the excess value over net assets.
4. What is the NCI?
Solution: Non-Controlling Interest, the part the entity does not own.
5. What is included in reserves?
Solution: Accumulated profits of parents, share of sub’s profit
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Lecture 20 - Group SFP
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Illustration 1
Evan Dando
Assets 200 350
Investment in Dando 500
Current Assets 200 300
900 650
Ordinary Shares ($1) 200 200
Accumulated Profits 250 100
Equity 450 300
Non Current Liabilities 280 200
Liabilities 170 150
900 650
Additional Information
Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m.
The Fair Value of the NCI was 75 on the date of acquisition.
Required
Prepare the consolidated statement of financial position for the Evan group.
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Solution
Working 1- Group Structure
Evan
↓75%
Dando
Date Acquired 1 Year Ago
Parent Share 75%
NCI 25%
100%
Working 2 - Equity Table
At Acquisition At Year End
Share Capital 200 200
Accumulated Profits 40 100
240 300
! ! ! !
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Working 3 - Goodwill
Cost of Parent Investment 500
Fair Value of NCI at acquisition 70
Less net assets at acquisition (W2) -240
Goodwill 330
Working 4 - NCI
$
Fair Value of NCI at acquisition 70
NCI% of Sub Post-Acq Profits (60 x 25%) 15
Value of NCI at Year End 85
Working 5 - Accumulated Profits
$
Parent’s Accumulated Profits 250
Add: Parent % of the subsidiary’s post acquisition profits (75% x 60m) 45
295
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Statement of Financial Position for Evan Group
Evan Dando Group
Goodwill W3 330
Assets 200 350 200 + 350 550
Investment in Dando
500 Cancelled out in W3.
Nil
Current Assets 200 300 200 + 300 500
900 650 1380
Ordinary Shares ($1)
200 200 Parent Only 200
Accumulated Profits
250 100 W5 295
NCI W4 85
Equity 450 300 570
Non Current Liabilities
280 200 280 + 200 480
Liabilities 170 150 170 + 150 320
900 650 1380
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Illustration 2Anton Ltd. purchased 75% of Brendon Ltd. 1 year ago when the share capital of Brendon were 500m and the reserves were 200m.
At the date of acquisition some plant had a fair value 50m above the value in the financial statements of Brendon.
The Non Current Assets of Anton and Brendon were 1000 and 500 respectively at the year end
By the year end, the reserves of Brendon were 300m.
Show the treatment for the Fair Value Adjustment.
Solution
At Acquisition At Year End
Share Capital 500 500
Accumulated Profits 200 300
Fair Value Adjustment 50 50
750 850
Anton Brendon Group
Non Current Assets 1,000 500 +50 1,550
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are Post-acquisition profits?
Solution: Profits made by subsidiary between the acquisition date and the reporting date.
2. What net assets may have to be adjusted at acquisition?
Solution: Land, property and plant.
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Lecture 21 - More Adjustments
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Illustration 1A Parent company has recorded an asset of $300 receivable with a subsidiary.
The subsidiary had recorded this as an liability payable of $300.
How should this be adjusted for on consolidation?
Solution
When cross casting assets & liabilities:
Less Payables $250 (DR)
Less Receivables $300 (CR)
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Illustration 2Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary.
The subsidiary has a balance of $500 recorded as a liability in payables.
How should this be treated on consolidation?
Solution
When cross casting assets & liabilities:
Less Payables $500 (DR)
Less Receivables $500 (CR)
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Illustration 3Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.
I. Calculate the PURP.
II. Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the subsidiary company is the seller.
IV. Do parts I - III if the goods had been sold at a margin of 30%.
Solution (Mark-up)
Unsold Inventory Mark-up PURP
(400 x 3/4) = 300 25/125 60
Parent is seller
DR/CR Account $ $
DR Accumulated Profits (W5) to decrease 60
CR Inventory to decrease 60
Subsidiary is seller
DR/CR Account $ $
DR Accumulated Profits (W5) with parent share to decrease (60 x 80%)
48
DR NCI (W4) with subsidiary share to decrease 12
CR Inventory to decrease 60
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Solution (Margin)
Unsold Inventory Margin PURP
(400 x 3/4) = 300 30% 90
Parent is seller
DR/CR Account $ $
DR Accumulated Profits (W5) to decrease 90
CR Inventory to decrease 90
Subsidiary is seller
DR/CR Account $ $
DR Accumulated Profits (W5) with parent share to decrease (90 x 80%)
72
DR NCI (W4) with subsidiary share to decrease 18
CR Inventory to decrease 90
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are inter company transactions?
Solution: Amounts owed between parent and subsidiary when selling to one another.
2. What is a PURP?
Solution: Provision for unrealised profit. Sales Between P & S, where no profit can be realised.
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Lecture 22 - Statement of
Comprehensive Income
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Illustration 1Argentina owns an 80% share of Messi which it purchased 6 months ago.
The information below relates to Messi at the date of acquisition.
The income statements for both are:
Argentina Messi
Revenue 8000 3000
Cost of Sales -4000 -1000
Gross Profit 4000 2000
Operating Costs -1500 -1500
Finance Costs -1000 -200
Profit Before Tax 1500 300
Tax -700 -100
Profit for the year 800 200
Other information
I. Argentina sold goods to Messi after the acquisition at a margin of 40% and worth $100m. Half of these goods have been sold on by Messi by the year end.
II. The fair value of Messi’s net assets were equal to their book value at the date of acquisition, with the exception of some machinery which had a fair value of 200 above it’s book value.
Produce a consolidated Income Statement for the Argentina group.
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Illustration 1 Solution
Working 1- Group Structure
Argentina
↓80%
Messi
Date Acquired 6 Months Ago (Time apportionment)
Parent Share 80%
NCI 20%
100%
Working 2 - Inter Company
PURP
Unsold Inventory Margin PURP
(100 x 1/2) = 50 40% 20
As the Parent is seller
DR/CR Account $ $
DR Cost of sales to increase 20
CR Inventory to decrease 20
Remember to remove the total amount of the sales also from sales and cost of sales
DR/CR Account $ $
DR Revenue to decrease 100
CR Cost of sales to decrease 100
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Working 3 - Cost of Sales
$m
Parent 4000
Subsidiary (1,000 x 6/12) 500
Less Inter Company Sales -100
Plus the PURP 20
4420
Working 4 - NCI
$
NCI % of the subsidiary’s profits in question (200 x 6/12) x 20% 20
20
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Income statement for Argentina Group
Argentina Messi 6 Mths Group
Revenue 8000 3000 1500 8000 + 1500 - 100 inter company sales 9400
Cost of Sales W4 -4420
Gross Profit 4000 2000 4980
Operating Costs -1500 -1500 -750 1500 + 750 -2250
Finance Costs -1000 -200 -100 1000 + 100 -1100
Profit Before Tax 1630
Tax -700 -100 -50 700 + 50 -750
Profit for the year 880
Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure) 860
Attributable to NCI (W5)Attributable to NCI (W5)Attributable to NCI (W5)Attributable to NCI (W5)Attributable to NCI (W5) 20
880
! ! !
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Illustration 2
3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of $400,000. Since that time Wars Ltd.has had the following results:
Year Profit
1 $200,000
2 $160,000
3 $30,000
Show the treatment of War Ltd. in the statement of financial position of Star Group and in the Income statement for year 3.
Solution
Investment In Associate (SFP)Investment In Associate (SFP)Investment In Associate (SFP)
Initial Investment 400,000
Parent Share of Post Acquisition Profit (200,000 + 160,000 + 30,000) x 25% 97,500
Investment in Associate 497,500
Income From Associate (Income Statement)Income From Associate (Income Statement)Income From Associate (Income Statement)
Parent share of Current Year Income (30,000 x 25%) 7,500
Income From Associate 7,500
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Income and Expenses ...
Solution: Fully cross cast, time apportion if sub acquired mid-year.
2. Inter company items...
Solution: Sales - Remove from Revenue/COSPURP - if sub is seller, adjust NCI. Add to COS
3. NCI Share of Group Profit includes...
Solution
NCI share of profit in Sub less any PURPS (if sub seller)
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Lecture 23 - Statement of Cash Flows
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Illustration 1The Statement of financial position of a business are:
20X8 20X7
$ $
Non-Current assets
Inventories 55,000 60,000
Receivables 250,000 160,000
Cash 70,000
375,000 220,000
Share capital 100,000 100,000
Reserves 75,000
175,000 100,000
Payables 200,000 120,000
375,000 220,000
Extracts from the income statement for 20X8 are:$ $
Sales revenue 1,000,000
Cost of sales
Purchases (no inventory) 565,000
Wages and salaries 200,000
-765,000
Administration
Purchases 80,000
Salaries 80,000
-160,000
Operating profit & retained profit for year 75,000
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Additional Information
Payables consist of:
Payables LedgerPayables Ledger
20X8 20X7
$ $
Re non-current assets 50,000
Other 160,000 110,000
Wages accrued 10,000 10,000
Purchase invoices relating to the acquisition on non-current assets totaling $100,000 have been posted to the payables ledger during the year.
Calculate the net cash flow from operating activities using the direct method.
Solution
W1 - Receivables
Receivables Control A/CReceivables Control A/CReceivables Control A/CReceivables Control A/C
DR CR
Balance B/F 160,000
Cash Receipts (Bal) 910,000
Sales Revenue 1,000,000
Balance C/F 250,000
1,160,000 1,160,000
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W2 - Payables
Payables Control A/CPayables Control A/CPayables Control A/CPayables Control A/C
DR CR
Balance B/F 110,000
Cash Paid (Bal) 595,000
Purchases:
COS 565,000
Admin 80,000
Balance C/F 160,000
755,000 755,000
W3 - Wages
Wages Control A/CWages Control A/CWages Control A/CWages Control A/C
DR CR
Balance B/F 10,000
Cash Paid (Bal) 280,000
Purchases:
COS 200,000
Admin 80,000
Balance C/F 10,000
290,000 290,000
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Calculation
$ $
Cash Sales (None - all on credit) 0
Cash From Debtors W1 910,000
Less:
Cash Purchases (None - all on credit) 0
Cash Paid to Suppliers W2 595,000
Cash Expenses W3 280,000
-875,000
Net Cash From OperationsNet Cash From OperationsNet Cash From Operations 35,000
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Illustration 2Statement of financial position of Traveller at 31 May:
2011 2010
$m $m
Non-Current assets 100 80
Accumulated depreciation -20 -10
80 70
Current assets
Inventory 10 11
Trade Receivables 12 9
Dividend receivable 6 4
Cash 4 2
32 26
Total assets 112 96
Capital and reserves
Share Capital 20 12
Share premium 10 7
Revaluation reserve 21 1
Accumulated profits 28 23
79 43
Non-current liabilities
Loan 16 30
Current liabilities
Trade payables 5 12
Dividend payable 3 3
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2011 2010
$m $m
Interest accrual 1 1
Tax 8 7
33 53
Total liabilities 112 96
Income Statement of Traveller 31 May 2011:
$m
Sales revenue 110
Cost of sales -71
Gross Profit 39
Operating expenses -25
Operating profit 14
Investment income - interest 3
Investment income -dividends 8
Finance charge -2
Income tax -7
Net profit for year 16
Operating expenses include a loss on disposal of non-current assets of $1 million.
During the year, plant which originally cost $3 million and with depreciation of $1 million was disposed of.
Calculate the cash generated from operations using the indirect method.
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Solution
$m
Profit Before Tax 23
Finance Charge (Often accrued - not cash so add back)
2
Investment Income -11
Depreciation (Not Cash - add back) W1 11
Loss On Sale of NCA (Not Cash - exclude) 1
Operating cash flow before working capital changesOperating cash flow before working capital changesOperating cash flow before working capital changes 26
Decrease in Inventory 1
Increase in Receivables -3
Decrease in Payables - -7 -9
Cash Generated from OperationsCash Generated from OperationsCash Generated from Operations 17
W1 - Depreciation
Accumulated Dep’nAccumulated Dep’nAccumulated Dep’nAccumulated Dep’n
DR CR
Balance B/F 10
Disposals 1
Depreciation Chg. (Bal) 11
Balance C/F 20
21 21
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Illustration 3
Identify and calculate interest payable, accumulated profits, dividend payable and income tax payable to be shown under the heading of “Cash flows from operating activities,” in Traveller’s statement of cash flows.
Solution
Interest PayableInterest PayableInterest PayableInterest Payable
DR CR
Balance B/F 1
Cash Paid (Bal) 2
Income Statement 2
Balance C/F 1
3 3
Accumulated ProfitsAccumulated ProfitsAccumulated ProfitsAccumulated Profits
DR CR
Balance B/F 23
Dividends (Bal) 11
Income Statement Profit 16
Balance C/F 28
39 39
Dividend PayableDividend PayableDividend PayableDividend Payable
DR CR
Balance B/F 3
Dividends Paid (Bal) 11
Dividend Declared (W2) 11
Balance C/F 3
14 14
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Tax PayableTax PayableTax PayableTax Payable
DR CR
Balance B/F 7
Cash Paid (Bal) 6
Income Statement 7
Balance C/F 8
14 14
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Illustration 4Calculate interest and dividends received for Traveller to be shown under the heading of “cash flow from investing activities.”
Solution
Interest receivable - $3 million.
Dividends ReceivableDividends ReceivableDividends ReceivableDividends Receivable
DR CR
Balance B/F 4
Cash Receipts (Bal) 6
Income Statement 8
Balance C/F 6
12 12
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Illustration 5Calculate accumulated depreciation, PPE and the proceeds from the sale of plant to be shown under the heading of “Cash flows from investing activities” in Traveller’s statement of cash flows.
Solution
Accumulated Dep’nAccumulated Dep’nAccumulated Dep’nAccumulated Dep’n
DR CR
Balance B/F 10
Disposals 1
Depreciation Chg. (Bal) 11
Balance C/F 20
21 21
PPE @ CostPPE @ CostPPE @ CostPPE @ Cost
DR CR
Balance B/F 80
Disposals 3
Additions (Bal) 3
Revaluations 20
Balance C/F 100
103 103
DisposalsDisposalsDisposalsDisposals
DR CR
Accumulated Dep’n 1
Cost 3 Loss on Disposal 1
Proceeds (Bal) 1
3 3
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Illustration 6
Calculate amounts to be shown under “cash flows from financing activities” to be shown in Traveller’s statement of cash flows.
Solution
Share Cap & PremiumShare Cap & PremiumShare Cap & PremiumShare Cap & Premium
DR CR
Balance B/F Share Cap 12
Balance B/F Share Prem 7
Shares Issued 11
Balance C/F Share Cap 20
Balance C/F Share Prem 10
30 30
W2 - Loan
LoanLoanLoanLoan
DR CR
Balance B/F 30
Repayments of Loans 14
Balance C/F 16
30 30
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Describe the purpose of a Statement of Cash flows.
Solution:Looks at cash flows (not profit)Cash flows cannot be manipulatedMore information to users about expenditure and cash inflows
2. What are some of the downsides of a Statement of Cash Flows?
Solution:Uses historic informationIgnores future cash flows
3. What are the 3 main headings of a Statement of Cash Flows?
Solution: Cash from Operating ActivitiesCash from Investing ActivitiesCash from Financing Activities
4. What are the two methods of calculating cash generated from operations?
Solution: Direct and Indirect Method
5. What is included in cash from investing activities?
Solution: Interest received, Dividends received, Sale/purchase NCA
6. What is included in cash from financing activities?
Solution: Issue of shares, issue of loans
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Lecture 24 - Interpretation of Financial Statements
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Illustration 1
2011 2010
ASSETS $‘000 $‘000
Non Current Assets 1000 1000
Inventory 300 400
Receivables 200 300
Cash 300 200
1800 1900
LIABILITIES
Ordinary Shares 800 800
Reserves 200 100
Long term Liabilities 700 900
Payables 100 100
Overdraft -
1800 1900
$‘000 $‘000
Revenue 1000 1200
COS 800 1100
Gross Profit 200 100
Other Costs 100 90
Net Profit 100 10
All sales are made on credit.
Required:
Calculate the Inventory, Receivables and Payables days for Inter Ltd. in each of the 2 years as well as the current and quick ratios.
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Solution
Item Working 2011 Working 2010
Inventory Period 300/800 x 365
137 400/1100 x 365
133
Collection Period 200/1000 x 365
73 300/1200 x 365
92
Payables Period 100/800 x 365
46 100/1100 x 365
33
Current Ratio 800/100 8 900/100 9
Quick Ratio 500/100 5 500/100 5
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Illustration 2
X1 X2 X3
Non Current Assets 500 700 1000
Current Assets 150 200 300
650 900 1300
Ordinary Shares ($1) 300 300 300
Reserves 100 280 430
Loan Notes 150 200 300
Payables 100 120 270
650 900 1300
Revenue 3000 3500 4200
COS 2000 2400 3200
Gross Profit 1000 1100 1000
Admin Costs 300 350 400
Distribution Costs 200 250 300
PBIT 500 500 300
Interest 100 150 220
Tax 120 90 50
Profit After Tax 280 260 30
Dividends 100 110 30
Retained Earnings 180 150 0
Share Price $3.30 $4.00 $2.20
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Using the information on the previous page calculate and comment on the following Ratios:
I. Return on Capital EmployedII. Return on EquityIII. Gross MarginIV. Net MarginV. Operating MarginVI. Revenue GrowthVII. GearingVIII. Interest CoverIX. Dividend CoverX. Dividend YieldXI. P/E Ratio
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Solution
ROCE
X1 X2 X3
Equity + LT Liabilities
Shares 300 300 300
Reserves 100 280 430
LT Loan Notes 150 200 300
Capital Employed 550 780 1030
Non Current Assets + Net Current Assets
Non Current Assets 500 700 1000
Net Current Assets (Current Assets - Current Liabilities)
(150 - 100) = 50 (200 - 120) = 80 (300 - 270) = 30
Capital Employed 550 780 1030
Total Assets - Current Liabilities
Total Assets 650 900 1300
Current Liabilities 100 120 270
Capital Employed 550 780 1030
PBIT 500 500 300
Return on Capital Employed
PBIT / Capital Employed
(500 / 550) = 90.91%
(500 / 780) = 64.10%
(300 / 1030) = 29.13%
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X1 X2 X3
Return on Capital Employed (ROCE) 90.91% 64.10% 29.13%
In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.
In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.
In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.
In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.
In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.
In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.
ROE
X1 X2 X3
Profit After Tax 280 260 30
Ordinary Shares 300 300 300
Reserves 100 280 430
Total 400 580 730
Return on Equity (PAT / Ord Shares + Reserves)
(280 / 400) = 70%
(260 / 580) = 44.8%
(30 / 730) = 4.1%
In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.
In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.
In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.
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Margins
X1 X2 X3
Revenue 3000 3500 4200
Gross Profit 1000 1100 1000
PAT 280 260 30
PBIT 500 500 300
Gross Margin (Gross Profit / Revenue) (1000 / 3000) = 33.33%
(1100 / 3500) = 31.42%
(1000 / 4200) = 23.89%
Net Margin (PAT / Revenue) (280 / 3000) = 9.3%
(260 / 3500) = 7.4%
(30 / 4200) = 0.7%
Operating Margin (PBIT / Revenue) (500 / 3000) = 16.66%
(500 / 3500) = 14.28%
(300 / 4200) = 7.1%
The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.
The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.
The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.
The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.
The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.
The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.
The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.
The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.
The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.
The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.
The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.
The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.
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Gearing
X1 X2 X3
Debt 150 200 300
Equity Number of Shares
300 300 300
Share Price 3.30 4 2.20
Market Value (300 x 3.30) = 990
(300 x 4) = 1200
(300 x 2.20) = 660
Gearing (Debt / Equity) (150 / 990) = 15%
(200 / 1200) = 16.66%
(300 / 660) = 45.45%
Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.
In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.
In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.
In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.
In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.
In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.
In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.
In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.
In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.
In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.
In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.
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Interest Cover
X1 X2 X3
PBIT 500 500 300
Interest 100 150 220
Interest Cover (PBIT / Interest) (500 / 100) = 5 times
(500 / 150) = 3.33 times
(300 / 220) = 1.36 times
Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.
In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.
In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.
In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.
In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.
In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.
Dividend Cover
X1 X2 X3
PAT 280 260 30
Dividends 100 110 30
Dividend Cover (PAT / Dividends) (280 / 100) = 2.8 times
(260 / 110) = 2.36 times
(30 / 30) = 1 time
Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.
In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.
In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.
In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.
In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.
In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.
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Dividend Yield
X1 X2 X3
Number of Shares (300 / 1) 300 300 300
Dividends 100 110 30
Dividends Per Share (100 / 300) = 33c (110 / 300) = 36c (30 / 300) = 10c
Dividend Yield (Dividends Per Share / Share Price)
(33 / 330) = 10% (36 / 400) = 9% (10 / 220) = 4.5%
The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.
In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.
In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.
P/E Ratio
X1 X2 X3
Share Price $3.30 $4 $2.20
Profit After Tax 280 260 30
No. Ordinary Shares 300 300 300
EPS (280 / 300) = 93c (260 / 300) = 86c (30 / 300) = 10c
P/E Ratio (Share Price / EPS) (330 / 93) = 3.54 (400 / 86) = 4.65 (220 / 10) = 22
The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.
In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.
In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.
In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.
In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.
In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.
In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.
In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.
In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the formula for Operating margin?
Solution: PBIT/Turnover
2. What is the formula for ROCE?
Solution: PBIT/Capital Employed
3. What is the formula for net asset turnover?
Solution: Sales Revenue/Capital Employed
4. What is the formula for the Current Ratio?
Solution: Current Assets/Current Liabilities
5. What is the formula for the quick ratio?
Solution: Current Assets - Inventory/Current Liabilities
6. What is the formula for the inventory period?
Solution: Ave/current inventory / COS
7. What is the formula for the collection period?
Solution: Ave/current Receivables / Credit Sales
8. What is the formula for Capital Gearing?
Solution: Debt/Equity
9. What is the formula for interest cover?
Solution: PBIT/Interest
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10. What is the formula for the P/E ratio?
Solution: Share Price/EPS
11. What is the formula for EPS?
Solution: Earnings/No Ordinary Shares
12. What is the formula for Dividend Cover?
Solution: PAT/Dividends
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Lecture 25 - The Framework
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!Which of the following are qualitative characteristics of useful financial information?
1. Relevance
2. Reliability
3. Comparability
4. Understandability
A. 2 and 3 only.
B. All of them
C. 1 and 2 only
D. 1 and 3 only
Solution: B
Which of the following are accounting principles?
1. Going Concern
2. Prudence
3. Comparability
4. Substance over form
A. 1 and 4 only
B. All of them
C. 2 and 3 only
D. 1, 2 and 4 only
Solution: D
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Which of the following are advantages of using historical cost?
1. Simple method
2. Comparability
3. Measured at actual cost
4. No relation to true value
A. 1 and 2 only
B. 3 and 4 only
C. All of them
D. 1, 2 and 3 only
Solution D
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Lecture 26 - Governance
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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!Which of the following are benefits of having a system of governance?
1. Attracts investment
2. Increases investor confidence
3. Monitors management
4. Enhanced controls
A. All of them
B. 1, 2 and 3 only
C. 1, 2 and 4 only
D. 2, 3 and 4 only
Solution: A
Which of the following are concepts of governance?
1. Fairness
2. Integrity
3. Transparency
4. Responsibility
A. 1, 3 and 4 only
B. 2 and 4 only
C. All of them
D. 1, 2 and 3 only
Solution: C
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Which of the following are examples of external stakeholders?
1. Auditors
2. Employees
3. Investors
4. Management
A. All of them
B. 1, 3 and 4 only
C. 1 and 3 only
D. 1, 2 and 3 only
Solution: C
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