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PRINCIPLES OF ACCOUNTING

ANSWERS TO EXERCISES

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EXERCISE 1 Q1 (a)10,700 (b) 23,100 (c) 4,300 (d) 3,150 (e) 25,500 (f) 51,400 Q2 Wrong Assets : Loan from C Smith, Creditors; Wrong Liabilities: Stock of goods, Debtors. Q3 Assets : Motor 2,000; Premises 5,000; Stock 1,000; Bank 700; Cash 100 = total 8,800. Liabilities: Loan from Bevan 3,000; Creditors 400 = total 3,400. Capital : 8,800 – 3,400 = 5,400. Q4 A Foster Statement of Financial Position

as at 31 December 20X8

Non Current assets $ $ Fixtures 5,500 Motor vehicles 5,700 11,200 Current assets Stock of goods 8,800 Debtors 4,950 Cash at bank 1,250 Total Current Assets 15,000 Total Assets 26,200 Current liabilities Creditors 2,450 Owner’s Equity Capital 23,750 Total Liability and equity 26,200

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Q5 C Sangster Statement of Financial Position

as at 7 May 20X8

Non Current assets Fixtures 4,500 Motor vehicles 4,200 8,700 Current assets Stock 5,720 Debtors 3,000 Bank 5,450 Cash 400 14,570 Total Assets 23,270 Current liabilities Creditors 2,370 Owner’s Equity Capital 20,900 Total Liability and equity 23,270

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EXERCISE 2 Q1 (a) Collected amount due from a customer (increase cash, decrease

receivables). Purchased land for cash (increase land and decrease cash).

(b) Paid amount due a creditor (decrease cash, decrease accounts payable).

(c) Owner withdrew cash (decrease cash, decrease owner's capital). Paid rent (decrease cash, decrease owner's capital). Reflected supplies expense (decrease supplies on hand, decrease owner's capital).

(d) Borrowed money from a bank (increase cash, increase notes payable).

Q2 (a) No effect (e) Increase (b) Decrease (f) Increase (c) Decrease (g) Increase (d) No effect Q3 $400,000 Assets - $160,000 Liabilities

= $240,000 Owners' Equity Less : 200,000 (Capital) = $40,000 (Retained Earnings) Answer : Retained Earning = $40,000

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Q4 a) Increase assets (Office Equipment) Decrease assets (Cash) b) Increase assets (Accounts Receivable) Increase owner’s equity

(Capital) c) Decrease assets (Cash) Decrease owner’s equity ( Capital) d) Increase assets(Cash) Increase owner’s equity ( Capital) e) Increase Assets ( Cash), Decrease Assets ( Debtors) f) Increase assets (Supplies Increase liabilities (Accounts

payable) g) Decrease assets (Cash) Decrease owners equity ( Capital) h) Decrease liabilities (Accounts

Payable) Decrease assets (Cash) i) Decrease owner’s equity ( Capital) Decrease Assets(Cash)

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5 (a)

Blaney Painters Statement of Financial Position as at End of Current Year

Non Current assets

Equipment 8,500 Current assets Stock of goods 12,000 Accounts Receivable 6,500 18,500 Total Assets 27,000 Current Liabilities Accounts payable 500 Owner’s Equity Capital 26,500 Total Liabilities and equity

27,000

Use the concept of the capital account to answer parts b), c). Capital at the end of year = capital at the beginning of year + additional Capital contributed + net profit – Drawings 5b) 26,500 = 18,000 + 0 + net profit – 17,000 Net Profit = 26,500 –18000 + 17000 = 25,500 Answer : 25,500

5c) 26,500 = 18,000 + 4,000 + net profit –17000 Net profit = 26,500 – 18,000 – 4,000 + 17,000 = 21,500 Answer : 21,500

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Q6

a) Sunshine Delivery Service Income Statement for the month ended March l9XX Revenue : Delivery Fees $16 200

Less; Expenses Rent Expense

$1 800

Advertising Expense 300 Supplies Expense 2 700 Salaries Expense 5 600 Insurance Expense 100 Miscellaneous Expense 200

Net Profit

10 700 $ 5 500

b) Sunshine Delivery Service Statement of Financial Position as at End of March 19XX

Current assets $ $ Cash 14,600 Accounts Receivable 11,300 Supplies on Hand 6,500 Prepaid Insurance 1,100 Total Current assets 33,500 Total Assets 33,500 Current liabilities Accounts payable 4,000 Note payable 10,000

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Total Current Liabilities 14,000 Owner’s Equity Capital* 19,500 Total Liabilities and equity 33,500

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

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Q7 Entry to Account Type Increase Professional Fees Revenue Credit Accounts Receivable Asset Debit Accounts Payable Liability Credit Cash Asset Debit Adams, Capital Owner’s Credit Equity Advertising Expense Expanse Debit Supplies on Hand Asset Debit Adams, Drawing Owner’s Debit Equity

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Q8

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

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Exercise 3

Question1 General Journal

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

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Question Two

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

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Question Three JOURNAL ENTRIES

Date Details Debit Credit 2000 April

1 Bank 12,000 Capital 12,000

2 Bank 20,000 Capital 20,000

4 Purchases 10,000 Bank 10,000

5 Furniture 2,000 Creditors 2,000

6 Advertising 100 Bank 100

8 Bank 7,000 Sales 7,000

10 Wages 200 Bank 200

12 Bank 6,500 Sales 6,500

15 No Entry

20 Creditors 2,000 Bank 2,000

25 Electricity 500 Bank 500

27 Drawings 800 Bank 800

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General Ledger Debit Bank Credit Date Account Amt Date Account Amt

1/4 Capital 12,000 4/4 Purchases 10,000 2/4 Capital 20,000 6/4 Advertising 100 8/4 Sales 7,000 10/4 Wages 200

12/4 Sales 6,500 20/4 Creditors 2,000 25/4 Electricity 500 27/7 Drawings 800 TOTAL 45,500 TOTAL 13,600 BALANCE BD 31,900 Furniture

5/4 Creditors 2,000 Purchases

Date Account Amt Date Account Amt 4/4 Bank 10,000

Creditors

Date Account Amt Date Account Amt 20/4 Bank 2,000 5/4 Furniture 2,000

Capital

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

Date Account Amt Date Account Amt 27/4 Bank 800

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Debit Sales Credit

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

Date Account Amt Date Account Amt 25/4 Bank` 500

Wages

Date Account Amt Date Account Amt 10/4 Bank 200

Advertising

Date Account Amt Date Account Amt 6/4 Bank 100

Frank – Car Dealer Trial Balance As at 30 April 2000

Account $ $ Bank 31,900 Furniture 2,000 Capital 32,000 Drawings 800 Sales 13,500 Purchases 10,000 Electricity 500 Wages 200 Advertising 100 $45,500 $45,500

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Question Four Transaction Details Debit Credit

1 Bank 50,000 Capital 50,000

2 Purchases 30,000 Bank 15,000 Creditors 15,000

3 Wages Expense 600 Bank 600

4 Bank 8,000 Sales 8,000

5 Debtors 2,000 Sales 2,000

6 Computer 5,000 Creditors 5,000

7 Bank 500 Debtors 500

8 Creditors 5,000 Bank 5,000

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General Ledger

Debit Bank Credit Date Account Amt Date Account Amt

1 Capital 50,000 2 Purchases 15,000 4 Sales 8,000 3 Wages 600 7 Debtors 500 8 Creditor 5,000

BALANCE 37,900 Sales

Date Account Amt Date Account Amt 4 Bank 8,000 5 Debtor 2,000 TOTAL 10,000 Wages

Date Account Amt Date Account Amt 3 Bank 600

Purchases Date Account Amt Date Account Amt

2 Bank/Creditor 30,000 Debtors

Date Account Amt Date Account Amt 5 Sales 2,000 7 Bank 500

BALANCE 1,500 Computer

Date Account Amt Date Account Amt 6 Creditors 5,000

Creditors

Date Account Amt Date Account Amt 8 Bank 5,000 2 Purchases 15,000

6 Computer 5,000 TOTAL 15,000 Capital

Date Account Amt Date Account Amt 1 Bank 50,000

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Kelly Venice Trial Balance As at 30 June 1999

Account $ $ Bank 37,900 Debtors 1,500 Purchases 30,000 Computer 5,000 Wages 600 Creditors 15,000 Capital 50,000 Sales 10,000 $75,000 $75,000

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Exercise 4 Question 1

1) Polishing Machine Cost as at 1/1/97 100,000 Residual Value 5,000 95,000 Depreciation each year (1/10) 9,500 New Polishing Machine

Cost as at 1/1/99 120,000 Residual Value 6,000 114,000 Depreciation each year (1/10) 11,400

2) Grinding machine

Cost 30,000 1997 Depreciation 30% 9,000 21,000 1998 Depreciation 30% 6,300 14,700 1999 Depreciation 30% 4,4,10 10,290

3) Sale of polishing machine

Cost 100,000 – Acc depn 19,000 = 81,000 NBV Sold For 45,000 Loss on sale 36,000

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Extracts from the Income Statement for the year ended 21/12/99 Depreciation of equipment 25,310 (Polishing machine 9,500 + 11,400+ Grinding machine 4,410) Loss on sale of equipment 36,000 Extracts from the Statement of Financial Position as at 21/12/99 Fixed Assets

COST ACC DEPN NET BOOK VALUE

Polishing machine 220,000 39,900* 180,100 Grinding Machine 30,000 19,710** 10,290 250,000 59610 190,310 * (9,500 X 3 years ) + 11,400 = 39,900 ** (9000+6,300+4,410) = 19,710 b) The following 4 points are relevant to the question:

I. Depreciation is an allocation of cost ( matching concept) less expected residual value over the asset’s useful life (it is like a prepayment)

II. Because the process of depreciation is based on cost, the amount in the Accumulated balance does not accumulate to a figure needed to replace the fixed assets in the future as the future price of the asset may increase

III. The amount of depreciation expense is considered a non –cash expense.

Therefore Depreciation does not effect cash flows IV. The choice of the method for depreciation depends on: a)Cost Vs Benefits

b) The method chosen should reflect the benefit pattern from the use of the asset. For example, of more benefits are expected from use of the assets in its earlier years, then the reducing balance method should be used. Profit / Loss arises because the residual and useful life are only estimates and as long as these do not equal the actual amounts, a gain/loss may arise.

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Question 2 (a) Allocated Amounts Land : 210/1,400 X $1,300,000 = $195,000 Building : 518/1,400 X $1,300,000 = $481,000 Truck : 42/1,400 X $1,300,000 = $39,000 Equipment : 630/1,400 X $1,300,000 = $585,000 Note: Cost of the consultant is a cost necessary to ready assets for use, so include in cost of asset. (b) Land : = $195,000 Building : = $481,000 Truck : = $39,000 Equipment : = $585,000 (c) Depreciation Building : 481,000- 31,000/ 15 years = 30,000 Equipment : 585,000- 45,000/ 9 years = 60,000 Truck : 39,000 – 4,000/ 5 years = 7,000

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

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EXERCISE 5 SOLUTIONS QUESTION 1

Burt Inc Income Statement for the year ending 30 June 2001

Sales 89,000 Less Sales returns 11,000 78,000 Less Cost of Sales Opening Inventory 24,000 Purchases 45,000 69,000 Less Closing Inventory 30,000 39,000 Gross Profit 39,000 Add Interest received on Investment 1,500 40,500 Less Expenses Advertising 9,000 Rent Expense 90,000 Telephone expense 800 Wages 25,000 124,800 Net Loss 84,300

Burt Inc Statement of Financial Position as at 30 June 2001

$ $ Non Current Asset Delivery Vehicle 25,000 Current Assets Cash at Bank 78,000 Debtors 10,000 Inventory 30,000 Stationary 400 Total Current Assets 118,400 Total Assets 143,400 Current Liability Trade Creditors 9,000 Owner’s equity : Closing Capital 134,400 Total Liabilities and equity 143,400

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

(9)12,500 +(11)20,000 + (12)100,000 - (13)80,000 = $18,900 Capital = (1)62,000 Computing equipment: (3)10,000 Computation : Closing Inventory: + 124,000 + 12,500– 70,000 – 8,000 = $58,500

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Ali & Sons

Income Statement for the year ending 31 December 2001

SALES Credit 150,000 Cash 20,000 170,000 Less Cost of Sales Opening Stocks 0 Add: Purchases 136,500 Less: Closing Stocks 58,500 Cost Of sales (78,000) Gross Profit $92,000 LESS EXPENSES Advertising 1,000 Computer equipment Depreciation 2,000 Electricity 1,000 Rent 15,000 Wages 45,700 $64,700 NET PROFIT $27,300

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Ali & Sons Statement of Financial Position as at 31 December 2001

Non-current assets Computing equipment 10,000 Less accumulated depreciation (2,000) 8,000 Current Assets Cash at Bank 18,900 Trade Debtors 50,000 Inventory 58,500 Prepaid advertising expense 100 Total Current Assets 127,500 Total assets 135,500 Current Liabilities Trade Creditors 44,000 Rent Payable 1,500 Wages Payable 700 Total Current Liabilities 46,200 Capital, 1 January 2001 62,000 Add: Current Year’s Profit

27,300

Capital, 31 December 2001, 89,300 Total Liabilities and equity 135,500

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QUESTION 3

TR MEDICAL CLINIC Income Statement

For year ended 30 September 2010 REVENUES $ $ Service fees(304,400+19450+16000) 339,850

EXPENSES Council rates expense(12985- 1565) $11,420 Fee discounts allowed $2,134 Interest expense $12,254 Medical staff salaries $62,669 Office staff wages $76,000 Rental expense - office equipment $34,050 Staff car parking expense $12,347 Telephone expense $2,310 Total Operating Expense 200,930 Profit Before Interest Expense 138,920 Less: Interest Expense(11,000+1,254) 12,254 NET PROFIT $126,666

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TR MEDICAL CLINIC

Statement of Financial Position As at 30 September 2010

Non-current Assets $ $ $ Premises 504,000 Current Assets Cash at Bank 221,522 Accounts receivable 19,780 Accrued consultation revenue 16,000 Prepaid council rates 1,565 Total Current Assets 258,867 Total assets Current Liabilities

762,867

Accounts payable 4,520 Interest payable 1,254 Total Current Liabilities 5,774 Long Term Liabilities

Mortgage Loan 60,000 Owner’s equity Opening Capital 573,947 Add Current Year’s Profit

126,666

Less: Drawings 3,520 697,093 Total Liabilities and equity 762,867

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Question 4 a) Universal Retailers Income Statement For the year ended 30 June 2006 Sales 205,000 Less: Cost of Sales Opening stock 22,000 Add Purchases 119,000 Less: Closing Stocks (25,000) Cost Of Sales 116,000 Gross Profit 89,000 Less: expenses Bad Debts expense 1,245 Office Expense 3,975 Office Salary 28,000 Rent 18,000 Utilities(3,400+200) 3,600 Depreciation 1,000 Advertising 3,469 Wages 10,500 Insurance(428 X 12 months) 5,136 Total Expenses 74,925 Net profit 14,075

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b) Universal Retailers Statement of Financial Position $ $ Non-current Assets Fixtures & Fittings Net 93,000 Current Assets Bank 6,750 Trade Debtors 21,054 Inventory 25,000 Prepaid Insurance 856 Total Current Assets 53,660

Total Assets 146,660

Current Liabilities Trade Creditors 12,000 Utilities Payable 200 Total Current Liabilities 12,200 Owners equity Opening Capital 120,385 Add:Net Profit 14,075 Closing Capital 134,460

Total liability and equity 146,660 c)

1) Income statement shows the performance of the company, can judge the effectiveness of management strategy.

2) Statement of Financial Position reflect the financial position, liquidity, solvency of the company.

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Question 5 Amir & Daughters Income Statement For the year ended 31 December 2006 Sales 129,000 Less: Cost of Sales 39,000 Gross Profit 90,000 Less: Expenses Rent ( 16,500+1,500) 18,000 Stationary 700 Telephone 500 Wages 15,000 Insurance Expense 2,400 Depreciation 3,000 Total Expenses 39,600 Net profit 50,400 Part c) Amir & Daughters Statement of Financial Position As at 31 December 2006 Non current Assets Motor Car 30,000 Less: Acc Depn(3,000+3,000) 6,000 Net Book value 24,000 Current Assets Bank 82,000 Trade Debtors 8,000 Inventory 32,000 Prepaid Insurance (2,600-2,400) 200 Total Current Assets 122,200

Total assets 146,200

Current Liabilities Trade Creditors 7,000 Rent payable 1,500 Total Current Liabilities 8,500 Owners equity Opening Capital 87,300 Add Net Profit 50,400 Closing Capital 137,700 Total liability and equity 146,200

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

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Question 6 a) Kiasu & Company Income Statement For the year ended 30 June 2008 $ Sales 420,000 Less: Cost of Sales Cost Of Sales 149,000 Gross Profit 271,000 Less: Expenses Salary 37,000 Rent 22,000 Utilities 5,600 Repairs 3,000 Depreciation 22,000 Insurance Expense 2,400 Interest Expense 1,500 Total Expenses 93,500 Net profit 177,500

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

Total Liability & Equity 278,400

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Question 7 a) Forest Trees Income Statement For the year ended 31 December 2008 $ Sales 1,420,740 Less: Cost of Sales 1,014,380 Gross Profit 406,360 Less: Expenses Rent 33,000 Wages 85,000 Utility(7000+300) 7,300 Advertising 125,200 Depreciation 19,000 Total Expenses 269,500 Net profit 136,860 b) Forest Trees $ $ Balance Sheet As at 31 December 2008 Non-current assets Equipment 190,000 Less: Acc Depn(76000+19000)) 95,000 Net Book value 95,000 Current Assets Bank 43,150 Trade Debtors 230,720 Stocks 127,920 Total Current Assets 401,790 Total Assets 496,790 Current Liabilities Trade Creditors 120,190 Utility payable 300 Total Current Liabilities 120,490 Opening Capital 239,440 Add Net Profit 136,860 Closing Capital 376,300

Total Liabilities & Equity 496,790

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EXERCISE 6 Question 1

a. Net Profit = 20,000 less ( 400+ 800+1,600+14000) = 3,200

b. Capital At beginning + Net Profit – Drawings = Capital at the end

15000+ 3200-1200 = 17000. Question 2 A Opening Capital = 2800 Closing capital = 4000 Use equation: 1) Capital = Assets less liabilities 2) Opening capital + additional capital + revenue –expenses – drawings = closing capital 2800+ 600 + a –3200-400 = 4000. Solving for a A= 4000-2800-600 +3200+ 400 Therefore a = 4200 B Opening Capital = 6000 Opening capital + additional capital + revenue –expenses – drawings = closing capital 6000 + 1500 + 5200 – 3600 – 500 = Closing capital Closing capital = 8600 Therefore closing liabilities = 10000 – 8600 = 1400 (b)

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

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Question 4

Chez Michel, Catering Service (a) & (b)

Chez Michel, Catering Service Statement of financial position as at

31 May l9XX 2 June l9XX

Fixed Assets Equipment 46 000 52 000 Current Assets Cash 6 500 2500 Accounts Receivable 5 800 5 800 Supplies on Hand 4 200 4 200 Total Current Assets 16,500 12,500 Total Assets $62 500 $64 500 Current Liabilities Notes Payable 18 000 22 000 Accounts Payable 3 500 3 500 Total Current Liabilities 21 500 25 500 Total Assets Less Current Liabilities 41,000 39,000 Represented By Capital 25 000 25000 Retained Earnings 16 000 14 000 Total Equity 41 000 39 000

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Question 5 Parker Packaging Service

Parker Packaging Service

Statement of financial postion as at 31 December

This Year 31 December

Last Year Non-current assets Equipment 24,000 28,000 Buildings 32,000 35,000 Land 10,000 10,000 Total non-current assets 66,000 73,000 Current Assets Cash 18,000 12,000 Accounts Receivable 56,000 48,000 Supplies on Hand 2,400 2,600 Prepaid Insurance 600 400 Total Current Assets $77,000 $63,000 Total Assets 143,000 136,000 Current Liabilities Accounts Payable 2,000 2,400 Long Term Liabilities Mortgage Payable 52 000 55,000 Parker, Capital 89,000 78,600 Total Liability & Equity 143,000 136,000 (b) Parker, Ending Capital $89 000 Parker, Beginning Capital 78 600 Increase 10 400 Add: Drawings 9 000

19 400 Less: Contributions 6 000 Net Profit, This Year $13 400

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Question 6 P Chiong, Interior Decorator

P Chiong Income Statement

For the Year Ended 31 December

(a) Revenue

Decorating Fees 32 000 Expenses

Advertising Expense 350 Insurance Expense 120 Miscellaneous Expense 80 Rent Expense 3 600 Salaries Expense 9 800 Supplies Expense 1 200 15 150

Net Profit, This Year 16 850

P Chiong Statement of financial position as at 31 December

(c)

Current Assets

Cash 2600 Accounts Receivable 18 200 Supplies on Hand 1600 Prepaid Insurance 300 22 700

Current Liabilities

Accounts Payable 700 Notes Payable 1500 2 200 P Chiong Capital 20 500

Total Liability & Equity 22,700

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Question 7 Badjak Plumbing Contractors

Badjak Plumbing Contractors

Statement of financial position as at 30 June, 19XX (a)

Non-current assets

Equipment 106 000 Current assets Cash 21 600 Accounts Receivable 24 000 Supplies on Hand 8 000 Prepaid Insurance 600 Total Current Assets 54,200 Total assets 160,200 Current liabilities Accounts Payable 4 200 Notes Payable 6 000

10,200

Capital 120 000 Retained Earnings 30 000

150,000 Total Liabilities & Equity 160,200

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Badjak Plumbing Contractors

Statement of financial position as at 2 July, l9XX (b) Non-current Assets Equipment 114,000 Current Assets Cash 10,600 Accounts Receivable 24,000 Supplies on Hand 8,000 Prepaid Insurance 600 43, 200 Total Assets

Current Liabilities 157,200

Accounts Payable 4,200 Notes Payable 3,000 Total Current Liabilities 7,200 Represented By: Capital 120,000 Retained Earnings 30,000 Total Capital 150,000

Total Liability & Equity 157,200

THE END

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EXERCISE 7 Question 1

(a) Tan & Sons Income Statement For the Year-ended 31 may 2002 $ $ Sales 500,000

Returns inwards (2,732) 497,268 Opening stock 91,788

Purchases 264,636 356,424 Less closing stock 95,500

Cost Of Sales 260,924 Gross profit 236,344 Discounts received 12,400 248,744 Less: Operating Expenses Rates 15,000 Wages and salaries 51,900 Insurance 11,800 General expenses 3,120 Bad debts 4,056 Over-provision for Doubtful Debts (389) Depreciation 40,000 Total Operating Expense (125,487) Net Profit Before Interest Expense 123,257 Less : Interest Expense 9,600 Net Profit 113,657

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Tan & Sons Statement of financial Position As at 31 May 2002 Non-current assets Cost Acc Depn Net Book

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

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Question 2

Part A a) Depreciation expense for the year ended 30 June 2002

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

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

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

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Part 2 Accounts Debit Credit Adjustment Bank 25,410 Motor Vehicle 45,000 Capital 95,000 Plant & Equipment 60,000 Long Term Bank Loan 39,510 Prepaid Rent 1,500 -500 Debtors 6,000 Sales 6,000 +1000 Unearned Revenue 1,000 -1000 Wages & Salary 1,200 +800 Supplies 1,300 -800 Creditors 1,300 Interest expense 400 Drawings 400 Total 142,810 142,810 Rent Expense 500 Salary payable 800 Supplies Expense 800 Electricity & Telephone Expense 150 Electricity & Telephone Payable 150 George Business Income Statement For the year ended 31 March 2010 $ $ Sales 7,000 Less: Operating Expenses Wages & Salary 2,000 Rent Expense 500 Supplies Expense 800 Electricity & Telephone Expense 150 Total Operating Expense 3,450 Profit Before Interest Expense 3,550 Less: Interest Expense 400 Net Profit 3,150

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

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Question 4 A.

Tourist galore Pte Ltd Revised Income Statement

for the year ended 30 June 2002

Operating revenues: Tour Revenue ($480 000 - $21189 + $11,000) 469,811 Other revenues 6 000 $475,811 Operating expenses: Salaries and wages expense ($117 000 + $8,000) 125,000 Depreciation expense ($93 000 + $10000) 103,000 Rental expense ($69 000 + 3,000) 72 000 Fuel and oil expense 46 500 Maintenance expense 27 000 Insurance expense 21 000 Sundry expenses 9 000 403 500 Net profit $72,311 C. For businesses that transact a significant amount of business on credit,

the accrual basis of accounting is considered a more appropriate basis for determining net profit. Under such a system, revenues are recognised

when economic benefits are increased, that is often once a service is performed and obligations are satisfied, rather than when cash is received. Question 5 A) Closing Stocks

a) FIFO = (4000 X $6) + (16000 X $8) = $152,000

b) LIFO = ( 4000 X $5) + (16000 X $6) =$116,000

c) WAC = Average cost = (10000X 5)+ (30000 X 6) + (16000 X $8) 56,000units

20,000 X $6.39 Per unit = $127,857

49

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

B) $7 is the net realisable value(NRV) of the stock . Need to apply the prudence rule of the lower of cost and NRV and there new ending stock valuation:

a) FIFO = (4000 X 6) + (16000 X $7)= $136,000 b) LIFO no change as cost is below the NRV. c) WAC no change as cost is below the NRV.

50

EXERCISE 8 WORKINGS Question 1 ( 30 marks) 1. Neon Lights Inc. sells lighting equipment to retail outlets and the following

trial balance has been prepared as at 30 April 2002: Interest Expense 280 Interest payable 280

!! ! ! ! ! ! ! ! ! "###! ! ! !"###! Freehold land at cost 2,000 Buildings: cost 5,300 provision for depreciation at 1 May 2001+106 1,060 Fittings and fixtures: cost -230 2,400 provision for depreciation at 1 May 2001 -69+127.9 960 Stock at 1 May 2001 700 Trade debtors -150 1,740 Provision for doubtful debts -32.35 88 Bank 365 Trade creditors -3 1,100 Capital 2,700 7% Loan, 2004 4,000 Profit and loss account at 1 May 2001 195 Sales 13,500 Purchases 9,500 Salaries and wages +25 1,690 Light and power 210 Insurance -8 68 Administration and distribution expenses 390 Drawings 150 Sale of fixed asset account -180 180

Bad Debts 150 24,148 24,148 Depreciation Expense(127.9+106) 233.9 Gain on disposal 19 The following additional information is supplied: Prepaid Insurance 8

(1) During the year fittings and fixtures which had cost "230,000, and on which depreciation of "69,000 had been provided at 1 May 2001, were sold the proceeds being credited to the sale of fixed asset account appearing in the trial balance. No depreciation is charged on fixed assets in the year of sale. Other Income 32.35 Wages payable 25

(2) Depreciation is to be provided on fixed assets at the following rates: Purchase Returns 3 Buildings 2% on cost Fittings and fixtures 10% on a reducing balance basis

51

Neon Lights Inc Income Statement As at 30/4/02 $000 $000 Sales 13,500.00 Less: Cost Of Sales Opening Stock 700.00 Add: Purchases 9,500.00 Less:Purchase Returns 3.00 Less: Closing Stocks 797.00 Cost Of Goods Sold 9,400.00 Gross Profit 4,100.00 Add: Gain On Disposal 19.00 Other Income 32.35 4,151.35 Less: Expenses Depreciation Expense(106+127.9) 233.90 Interest Expense 280.00 Salary & Wages 1,715.00 Light & Power 210.00 Insurance 60.00 Administration & Distribution 390.00 Bad Debts 150.00 Total Expenses 3,038.90 Net profit 1,112.45

52

Neon Lights Inc Statement of Financial Position As at 30/4/02 $000 $000 $000 Non-Current Assets Cost Acc Depn Net Book Value Freehold Land 2,000.00 2,000.00 Building 5,300.00 1,166.00 4,134.00 Fixtures & Fittings 2,170.00 1,018.90 1,151.10 Total 9,470.00 2,184.90 7,285.10 Current Assets Trade Debtors 1,590.00 Less:Prov For Doubtful Debts 55.65 Net Debtors 1,534.35 Stocks 797.00 Prepaid Insurance 8.00 Total Current Assets 2,339.35 Total Assets 9,624.45 Current Liabilities Bank Overdraft 365.00 Trade Creditors 1,097.00 Interest Payable 280.00 Wages payable 25.00 Total Current Liabilities 1,767.00 Non-current Liabilities

7% Loan 4,000.00

Equity Capital 2,700.00 Retained Profit 1,157.45 (195+1,112.45-150) Total Equity 3,857.45 Total Liabilities & Equity 9,624.45

53

Question 2 (10 marks) Answers Should Incorporate the following Points: a) Discussion of depreciation: Definition : allocation of the cost of a fixed asset over the period of benefit. Other Points

1) Process of allocation not valuation 2) Only fixed ( non current asset depreciated) 3) Must depreciate fixed asset that have gone up in value 4) Purpose of depreciation is to provide for proper matching

b) The Accumulated Depreciation Account

1) This account merely shows the amount of depreciation expense that has been charged in the past.

2) It generally will not equal to the amount needed to replace the fixed

asset as the replacement cost will generally be higher than the cost of purchase because of inflation.

3) It generally will not equal to the amount needed to replace the fixed asset

as depreciation involves subjective estimates such as residual values, useful lives.

4) The company should consider setting up a sinking fund to cater for the

replacement of the fixed asset. This involves setting funds aside periodically to ensure enough funds available for fixed asset replacement.

54

EXERCISE 9

Tip Interior Income Statement For the year ended 31 March 19x6 $ $ Sales 1,420,740 Less: Cost Of Sales Opening stocks 144,600 Add: Purchases 997,700 Less: Closing Stocks 127,420 Cost of Goods Sales 1,014,880 Gross Profit 405,860 Less: Expenses Rent & Rates(54440+3000) 57,440 Wages & salary 85,000 Electricity 17,510 Transport 30,060 Sundry 60,190 Audit fees 5,000 Bonus 20,000 Advertising 12,000 Bad Debts 5,000 Doubtful Debts 6,772 Depreciation(4000+3000+32000) 39,000 Total Operating Expense 337,972 Profit Before Interest & tax 67,888 Less: Interest expense 2,400 Profit before tax 65,488 Less: Tax Expense 40,000 Net Profit 25,488 Retained Profit For the Year 25,488

55

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

Cost Acc Depn NBV

Non Current assets $ $ $ Premises 200,000 4,000 196,000 Delivery Vans 160,000 96,000 64,000 Shop Fittings 30,000 15,000 15,000 Total 390,000 115,000 275,000 Current Assets Bank 43,150 Debtors (230720 -5000) 225,720 Less: Provision For DD(3 % X 225720) 6,772 218,948 Stocks(127920-500) 127,420 Total Current Assets 8 389,518 Total Assets 664,518 Current Liabilities Trade Creditors 120,190 Tax Payable 40,000 Unearned Fees 2,000 Audit fees Payable 5,000 Interest payable(40000X 12% X0.5) 2,400 Total Current Liabilities 169,590 Non-current liabilities Long Term Loan 40,000 Total Liabilities 209,590 Shareholder’s Equity Share Capital 180,000 Reserves: Share Premium(50-20+160) 190,000 Retained profits(59440+25,488) 84,928 Total Shareholder’s equity 454,928 Total Liabilities & Equity 664,518

56

Exercise 10

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

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Less: Gain on disposal Add: Interest expense Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less:

$

77,000 34,000

(20,000) 12,000 (8,000) (7,000) 9,000

97,000

$

Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets Sale of Fixed asset Net Cash outflow Investment activities Financing activities Issue of Share Issue of Debenture Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

(12,000) (17,000) (26,000) (90,000) 70,000 7,000 20,000

42,000 (20,000) 27,000 49,000 11,000 60,000

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Working : Reconciliation: Operating cash flow $000 Operating Profit $89 Depreciation 34 Gain on disposal (20) Increase in stocks (8) Increase in debtors (7) Increase In creditors 9 Net cash flow from Operating activities 97 2) Fixed assets Opening Balance 180 Add: Purchase 90 Revaluation Reserve 30 Less: Disposal (20 +50) 70 Closing Balance 230 3) Accumulated Depreciation Opening Balance 56 Add: Current Depreciation 34 Less: Disposal 20 Closing Balance 70 4) Gain on disposal of Fixed assets = 70,000 – 50000 = 20,000 Part b The cash Flow statement shows a increase of cash of $49,000.

58

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

59

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

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Add : Interest expense Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less:

$

87,000 42,000 8,000

(4,000) (21,000)

15,000 127,000

$

Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets Financing activities Issue of Share Issue of Debenture Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

(8,000) (20,000) (22,000) 60,000 30,000

77,000 (146,000) 90,000 21,000 (14,000) 7,000

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Workings Dividends : Opening Bal = 16 Declared = 24 Closing bal = 18 Dividend paid =22 Taxation Opening Bal = 28 Declared = 31 Closing bal = 39 Tax paid =20 Purchase of Fixed Assets Opening Fixed Assets = 514 Less: Depreciation (42) Add: Revaluation 10 482 Closing Fixed Assets 628 Difference = Addition 146 b) Comment on cash flow The cash Flow statement shows a increase in cash of 21,000. This cash flow was mainly generated from Operating and Financing activities. The Operating activities generated a cash flow of $127,000 whereas the financing activities generated a cash flow of $90,000. A major portion of these cash flow were used to for the purchase of fixed assets of $146,000. This investment will generate benefits in terms of higher cash flow in later years. More financing cash flow should be generated to finance the purchase of the fixed assets. The purchase of fixed assets was for $146 000 whereas only $90,000 of these was financed from long term sources.

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c) Working capital position : 19X9 19X8 Current ratio 2.01 1.99 Quick Ratio 0.90 0.82 The overall working capital position has improved from 19x8 t0 19x9 as indicated by both the current and quick ratio. This is further evidenced by the improved cash flow position of the company in 19X9 compared to 19X8.

62

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

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Less: Gain on disposal Add: Loss on disposal Add: Interest expense Less: Interest received Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less:

$000

300 90 (5) 13 75

(25) (48) (75) 8 333

$000

Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets Purchase on intangibles Sale of investment Sale of non-current asset Interest received Net Cash outflow Investment activities Financing activities Issue of Share Issue of loans Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

(75) (110) (80) (201) (50) 30 32 25 60 100

68 (164) 160 64 (97) (33)

63

1) Tangible Fixed Assets

Closing Balance = Opening balance + Purchase + Revaluation increment – disposal 720= 595 + Purchase + 9 – 85 Purchases = 720-595 – 9 + 85 = 201

2) Net Increase in cash

Closing net cash = (33) Opening Net cash = (97) Net Increase in cash 64 Remember to offset bank balance to overdraft balance in respective years.

64

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

Reconciliation of net operating Profit to net cash flow from Operating activities Profit before taxation Add: Depreciation expense Add: Interest expense Increase stocks Increase debtors Increase creditors Cash flow from operating activities Less:

$000

87 42 8

(4) (21) 15

127

$000

Interest paid Taxation Paid Dividends Paid Net Cash Flow from Operations Investment Activities Purchase of non-current assets Financing activities Issue of Share Issue of Debenture Net Cash Inflow financing Change in cash Add: Opening bank balance Closing bank balance

(8) (20) (22) 60 30

77 (146) 90 21 (14) +7

65

Workings

Dividends : Opening Bal = 16 Declared = 24 Closing bal = 18 Dividend paid =22 Taxation Opening Bal = 28 Declared = 31 Closing bal = 39 Tax paid =20 Purchase of Non current Assets Opening Fixed Assets = 514 Less: Depreciation (42) Add: Revaluation 10 482 Closing Fixed Assets 628 Difference = Addition 146 b) Comment on cash flow The cash Flow statement shows a increase in cash of 21,000. This cash flow was mainly generated from Operating and Financing activities. The Operating activities generated a cash flow of $127,000 whereas the financing activities generated a cash flow of $90,000. A major portion of these cash flow were used to for the purchase of fixed assets of $146,000. This investment will generate benefits in terms of higher cash flow in later years.

66

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

Question 3

2004 2005 Gross Profit Margin 39.45% 30.67% 202/512 230/750 Net Profit Margin 19.92% 5.60% 102/512 42/750 Asset Turnover 0.73 0.63 Times 512/700 750/1,200 ROA 14.57% 3.50% 102/700 42/1200 ROE 16.73% 3.52% 82/490 34/965 Part b) Analysis of performance 1) Decreasing trend of falling profitabilty over the two years as indicated falling Profit margins and overall returns. 2) Gross profit margin decline by about 9%, indicating rising cost of sales not passed on the final consumers. 3) ROA and ROE has decline significantly, most likely due to increased direct and indirect expenses 4) Asset Turnover has decline, indicating declining ability to generate sales, relative to an increased asset base. 5) Business should review its direct and indirect expenses to determine the cause of the significant inncrease 6) If necessary, the business may have to increase prices, review the utilisation of assets to eliminate redundant assets. Any other relevant insight and recommendations.

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Part c) a) Liquidity ratios measure the short term solvency of the business b) Gearing ratio measure the financial risk of the business, this is the amount of debt used in the business. c) Both ratios are an assessment of the risk of the business. Other relevant points. NOTE: FOR INFORMATION ONLY.NOT PART OF ANSWER 2003 2004 2005 Total Assets 500 900 1500 Debts 200 220 250 Equity 300 680 1250

Question 4

Current Ratio = 285/300 0.95 ROA = 90/950 9.47% ROE = 90-50-20/200 10% Interest Coverage= 90/50 1.8 Times Net Profit margin= 90/850 10.59% b) Any reasonable answe Example: 1) Interest expense seem to be very high. The company may be very highly geared, indicating high financial risk. 2) Current ratio is low, indicating low liquidity and high solvency risk. c) 2 limitations b) Any reasonable answer.(2 MARKS EACH) Examples: 1) Need to compare against a proper benchmark for analysis. 2) Based on accounting information which may be subjective.

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

Question 5

Gross Profit Margin 285/850 X100% 33.53% Profit Margin 165/850 X 100% 19.41% Return On Total Assets 165/950 X 100% 17.37% Asset Turnover 850/950 0.89 times Debt to Equity Ratio 185/200 X 100% 92.50% b) Analysis 1) Gross Profit margin higher than industry average, indicating higher selling price charged or a lower direct cost compared to industry average 2) Lower profit margin, indicates a need for better control over indirect cost as they are higher than industry averages 3) The Return on total assets is signifinantly lower, probably due to lower profit margin as well as the Asset runover of 0.89 comparable to industry average. 4) The debt to equity ratio is significantly higher than industry average, indicating higher financial risk.

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EXERCISE 13 Question 1

a) Computation of Purchases

Opening Bal – Creditor + Purchases less closing balance of creditors = Payment 7,400 + P – 8,900 = 103, 300 ( 101,500 + 1,800) Therefore Purchases = 103,300 –7,400 + 8,900 =104,800 Total Purchases = 104,800 Less : drawings = 600 Net Purchases = 104,200

b) T Lambert Trading, P & L Account For the year ended 31/12/X1 $ $ Sales 128,000 Less; Cost Of Goods Sold Opening stocks 8,600 Purchases 104,200 Less Closing stocks 16,800 COGS 96,000 Gross Profit 32,000 Less: Labour (1200+ 6620) 7,820 Rent(5040+300-420) 4,920 Delivery 3,000 Electricity(1390+160-210) 1,340 17,080 Net Profit 14,920

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

Goods taken = 600

Total 8,330

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

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

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Question 3 (a)

RATIO FORMULA 2000 1999

(i) Return on Net Assets

Operating profit before interest Net assets

110/520 = 21.15%

135/510 = 26.47%

(ii) Gross profit ratio

Gross profit Net sales

260/650 = 40%

285/580 = 49.14%

(iii) Operating profit ratio

Operating Profit before interest Net sales

110/650 = 16.92%

135/580 = 23.28%

(iv) Asset turnover Net sales Average assets

650/520 = 1.25

580/510 = 1.14

(b) Points to consider and discuss. • Rate of return from assets employed has declined from 26.47% in 1999 to 21.15% in

2000. This is not a good sign.

• Gross profit margin is improving. This is a good sign. • Net profit ratio has declined from 23.28% in 1999 to 16.92% in 2000. • Asset turnover has increased from 1.14 to 1.25. This information indicates that the decline in ROA has resulted from a decline in the net profit ratio. The decline has been mitigated by improved utilisation of assets employed to generate sales.

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Lecture 14 Question1 a. & b.

Department A Department B Overhead absorption rate Overhead absorbed Actual overhead Over/(under) absorption

£19 16 per m/c hr £261,956 £263,739 (£1,783)

£26 89 per m/c hr £455,866 £446,613 £9,253

Workings : Overhead absorption rate: £217,860

+ £45,150 £374,450

+ £58,820 £263,010

13,730 m/c hrs = £19.16 per mlc hr

£433,270 16,110 MIC hrs = £26 89 per m/c hr

Overhead absorbed £19.16 13,672 hrs £26.89 16,953 hrs = £261,956 = £455.866 Actual overhead £219,917

+ (103,254 0 7 13,672

£387,181 + (103,254 0 7 16,953

30.625) = £32,267 + (103,254 0 3 16,402

30,625) = £40,011 + (103,254 0 3 27,568

43.970) = £11,555

43,970) = £19.421

£263,739 £446,613 Over/under absorption 263,739 - 261,956

= £1,783 under abs 446,613 - 455,866

= £9,253 over abs

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Question 2 (a) and (b) Overhead distribution schedule Production Service Basis of

apportionment

Cutting

Finishing

Stores

Canteen ! ! ! ! Factory rent (W1) Floor area 100,000 100,000 10,000 10,000 Factory premises insurance (W2)

Floor area

5,000

5,000

500

500

Sundry expenses - 8,540 4,150 13,370 29,640 Machinery insurance (W3) Value of plant

and machinery 2,860 650 130 260

Depreciation of factory plant and machinery (W4)

Value of plant and machinery

17,600

4,000

800

1,600

Materials - - 10,000 - - Indirect labour (W5) Indirect labour 66,000 66,000 22,000 22,000 employees Administration salaries (1:1:1)

- 8,000

8,000

8,000

-

208,000 197,800 54,800 64,000 Apportionment of canteen costs

Total number of employees

24,000 36,800 3,200 (64,000)

Apportionment of storeroom costs

70%: 30%

40,600

17,400

(58,000)

272,600 252,000 - - Canteen costs are therefore allocated as follows: Cutting = 30/80 x £64,000 = £24,000 Finishing = 46/80 x £64,000 = £36,800 Showroom = 4/80 x £64,000 = £ 3,200 (c) Cutting department overhead absorption rate = 272,600 = £58 per

machine hour 4,700 machine hours Finishing department overhead absorption rate = £252,000 = £60 per labour hour 4,200 labour hours (d) Job XY129 £ Cutting = £58 x 40 = 2,320 Finishing = £60 x 30 = 1,800 Total overhead charge 4,120 ==== (e) The cutting department is machine-intensive and it is therefore appropriate for

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

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Question 3 Overhead apportionment schedule for the year ended 30 June 2003

Total Dept A Dept B Dept X Dept Y Basis £ £ £ £ £

Allocated overheads

280,000 141,345 82,655 32,000 24,000

Electricity Machine operating hours *

24,000 12,000 10,000 1,500 500

Indirect labour No of indirect employees

36,000 12,000 12,000 6,000 6,000

Rent Floor area 64,000 28,000 26,000 6,000 4,000 Machine maintenance

Machine operating hours

12,000 6,000 5,000 750 250

416,000 199,345 135,655 46,250 34,750 Re-apportion Dept Y

50:30:20 Nil 17,375 10,425 6,950 (34,750)

Re-apportion Dept x

40:60:0 Nil 21,280 31,920 (53,200) Nil

Total £416,000 £238,000 £178,000 Nil Nil * Alternative answer: Floor area basis is also acceptable which will give slightly different calculcations.

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Question 1 a. Present situation Proposed situation (i)Breakeven point = fixed costs

Contribute per unit = £96,000

£(1.70 – 1.40)

£130,000 £(1.60 – 1.35)

= £96,000 £0.30

= £130,000 £0.25

Break even point in units x selling price per unit Breakeven point in sales revenue

= 320,000 units x £1.70 = £544,000

= 520,000 units x £1.60 = £832,000

(ii) Annual sales units x contribution per unit (from(i)) Total contribution Less fixed costs Annual profit

500,000 x £0.30 £150,000 £96,000 £54,000

(+50%) 750,000 x £0.25 £187,500 £130,000 £57,500

(iii) Annual sales units Breakeven sales units (from(i)) Margin of safety in units

500,000 320,000 180,000

750,000 520,000 230,000

Margin of safety ratio = margin of safety Budgeted annual sales

180,000 x 100% 500,000

230,000 x 100% 750,000

= 36.0% = 30.7% b.

Ocean Blue Ltd Proposal for expansion of production capability

Present situation Proposed situation Breakeven point in units Breakeven point in sales revenue Annual profit

320,000 £544,000 £54,000

520,000 £832,000 £57,500

Margin of safety ratio 36.0% 30.7%

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Question 2 Proposal 1

Workings

Current Contribution per unit= 8

(20-7-4-1) Revised unit contribution = 6

8-(10%*20)

Revised break-even point= 83,333

(200,000+300,000)/6

Based on current sales of 50,000 units, sales have to increase by

(83,333-50,000)/50,000 = 67%

Proposal 2

Workings Revised unit contribution = 7

8-1

Increased sales=20%*50,000 units= 10,000 units

Additional contribution = £ 70,000

Additional fixed cost = £ 50,000

Additional profit £ 20,000

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

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Question 1

Accept Reject Net cash Flow Inflow

Scrap Value of material 0 1,000 (1,000) Net cash Outflow 1,000

Outflow

Material 4,000 0 4,000 Variable Overheads 400 0 400 Net cash Outflow 4,400

Net cash Outflow 5,400

Therefore Minimum Price = $5,400 Reasons & assumptions

a. The original historical cost of the material in stock is a sunk cost and not relevant. The relevant is the opportunity cost of the saving foregone on on the other materials which now have to be purchased for $4,000. The materials could have been used elsewhere.

a. The workers would be paid even If the contract is not undertaken. There is thus no

opportunity cost as the department is already working below capacity.

a. The variable overhead is assumed to be an incremental cost. They are included in the minimum price, as it is assumed they are specifically incurred in conversion work.

a. Depreciation is not a cash flow and is therefore not relevant. Depreciation Apportions the

original cost of the machine, a cost which was sunk eight ago. There is no indication of the current resale value of the machine and so it is assumed that there is no intention of selling it. It is also assumed that there is no opportunity cost involved in its use for this contract, as it would not be needed elsewhere.

a. The foreman is already being paid. Therefore his salary is not an Incremental cost. It is

assumed that there is no opportunity cost associated with the use of his time for this contract.

a. It is assumed that general fixed overhead will not increase a result of this contract,

therefore absorbed overhead is not relevant.

a. Scrap revenue foregone will be an opportunity cost, if the product is Converted rather than sold as scrap.

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Question 2

Calculation of BE price

Per Copier

Components Y,Z 53 (75-22)

Component W 34 Direct Labour

1.5 X 0.75X 24 27 1.5 X0.25 X12 4.5

Total Relevant Cost 118.5 X 100 Copiers 100

Total 11850 Add: Travelling time

10 hrs X 24 240 Extra Machine 800

Total Relevant Cos

12890

Explanation of the figures used

• Component X is a sunk cost which has already been paid for, is obsolete for future purposes and has no resale value.

• Component W is an additional cost of this special order.

• The standard cost would have charged for 50 hours but only 10 will actually be incurred. The cost per hour is assumed to be unchanged.

• Labour costs need to reflect the lower number of hours and the use of trainees

• The overheads are fixed and so not relevant costs. • The opportunity cost of using the special machine is the loss of the resale value.

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(b)Factors to be considered in setting a price.

• customer. This price gives a contribution of £2,110 which represents a 16% margin of safety on the estimated costs. This reduces the financial risk of accepting the order.

• The cost estimates on a one-off special order do contain an element of risk.

• With a change in manufacturer would it be a better strategy to cease

• Will there be enough staff for the job and the introduction of new copiers? Is it sensible to have trainees working on old types of copier? • If this is a large customer would we lose goodwill if we refused The upgrade? Could this damage future relationships and other sales possibilities?

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Question 3 (a) Standard cost cards

Absorption Costing Basis

£

Marginal Costing Basis

£ Material m1 (0.25 kilos at £2 per kilo) Material M2 (0.75 kilos at £3 per kilo) Labour (0.10 hours at £4.00 per hour) Variable overhead (at £6 per labour hour) Fixed overhead (£6,600/4 x 330)

0.50 2.25 0.40 0.60 5.00

0.50 2.25 0.40 0.60

-

Total Standard Cost/Marginal cost 8.75 3.75

(b) (i) & b (ii) Income Statements

Income Statement for the 3 months ending 31 Mar 2000 Absorption Basis £ Marginal Basis £ Sales (290 x £15) 4,350.00 Sales As Absorption 4,350.00 Less: Less: Cost of sales V. Cost of sales 290X 3.75 1,087.50 290X8.75 2,537.50 Contribution 3,262.50 Profit £1,812.50 Less Fixed costs (1,650.00) Profit £1,612.50 (c) Reconciliation of profit under absorption costing and profit under marginal costing

£ Absorption costing profit 1,812.50 Marginal costing profit 1,612.50 Difference £200.00

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

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THIS IS BLANK PAGE

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

May June July

Bank-start 5,000 28,225 (13,325)

RECEIPTS

Debtors (see Debtors schedule below) 223,250 205,000 241,250

Machine sale 500

TOTAL 228,250 233,725 227,925

PAYMENTS

Creditors (see Creditors schedule below) 125,400 136,800 135,600

Council rates 5,200

Salaries 58,500 75,000 63,000

Loan Interest 12,400

Office expenses 14,625 18,750 15,750

Drawings 1,500 1,500 1,500

Machine-deposit 1,300

Machine-instalment 1,300 1,300

TOTAL 200,025 247,050 222,350

Bank-end 28,225 (13,325) 5575

84

Schedule of collections of sales revenue from Debtors

Total Sales May June July

March 200,000

Cash (15%) 30,000

Credit (80% & 5%) 160,000 10,000

April 230,000

Cash (15%) 34,500

Credit (80% & 5%) 184,000 11,500

May 195,000

Cash (15%) 29,250

Credit (80% & 5%) 156,000 9,750

June 250,000

Cash (15%) 37,500

Credit (80% & 5%) 200,000

July 210,000

Cash (15%) 31,500

Credit (80% & 5%)

TOTAL 223,250 205,000 241,250

85

Schedule of payment of inventory purchases

Total

Purchases

May June July

April (60% of sales) 138,000

cash (60%) 82,800

credit (40%) 55,200

May (60% of sales) 117,000

cash (60%) 70,200

credit (40%) 46,800

June (60% of sales) 150,000

cash (60%) 90,000

credit (40%) 60,000

July (60% of sales) 126,000

cash (60%) 75,600

credit (40%)

TOTAL 125,400 136,800 135,600

86

Question 2 Prepare for the months of October, November and December 1999: (a) A schedule of collections from debtors

SALES August September October November December August 160,000 112,000 32,000 12,800 September 220,000 154,000 44,000 17,600 October 200,000 140,000 40,000 16,000 November 180,000 126,000 36,000 December 162,000 113,400

196,800 183,600 165,400 (b) A schedule of payments to creditors.

PURCHASES October November December September 132,000 105,600 October 120,000 24,000 96,000 November 108,000 21,600 86,400 December 97,200 19,440

129,600 117,600 105,840 (c) A cash budget

October November December Cash at start (13,950) (57,250) (427,700) Sales Revenues 196,800 183,600 165,400 Courier Revenues 20,000 21,000 TOTAL CASH 182,850 146,350 (241,300)

Purchases 129,600 117,600 105,840

Shop rent 66,000 Staff wages 40,000 36,000 32,400 Tax 110,950 Loan 160,000 Drawings 4,500 4,500 4,500 Insurance 22,000 Courier service start 100,000 100,000 Courier service on-going 45,000 45,000 TOTAL EXPENSES 240,100 574,050 309,740

Cash at End (57,250) (427,700) (551,040)

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

THE END

87

Question 1 Materials £ Standard cost of actual production ( 2,020/40 x £100 ) 5,050 Actual quantity x standard price 52 x £100 5,200 Actual cost 5,096 Usage variance 150 A Price variance 104 F Total material cost variance 46 A Labour Standard cost of actual production ( 2,020/50 x 20 x £1.25 ) 1,010 Actual quantity x standard price ( 40 x 20 x £1.25 ) 1,000 Actual cost 3 x £1.30 x 40 = £156 2 x £1.20 x 40 = £ 96 15 x £1.25 x 40 = £750 1,002 Efficiency variance 10 F Rate variance 2 A Total wages cost variance 8 F Overhead – Absorption rate = £288,000/96,000 = £3 per unit Overhead absorbed 2,020 x £3 6,060 Budgeted overhead £288,000/48 6,000 Actual overhead 6,200 Volume variance 60 F Expenditure variance 200 A Overhead cost variance 140 A Materials £ Standard cost of actual production ( 2,020/40 x £100 ) 5,050 Actual quantity x standard price 52 x £100 5,200 Actual cost 5,096 Usage variance 150 A Price variance 104 F Total material cost variance 46 A Labour Standard cost of actual production ( 2,020/50 x 20 x £1.25 ) 1,010 Actual quantity x standard price ( 40 x 20 x £1.25 ) 1,000 Actual cost 3 x £1.30 x 40 = £156 2 x £1.20 x 40 = £ 96 15 x £1.25 x 40 = £750 1,002 Efficiency variance 10 F Rate variance 2 A Total wages cost variance 8 F Overhead – Absorption rate = £288,000/96,000 = £3 per unit

88

Overhead absorbed 2,020 x £3 6,060 Budgeted overhead £288,000/48 6,000 Actual overhead 6,200 Volume variance 60 F Expenditure variance 200 A Overhead cost variance 140 A Question 2 Price Variance

143 (U) (b)

(0.4 - 0.42)X 7,150

Usage Variance (6,960 - 7150)X 0.4

76 (U) (b)

Total Material Variance 219 (U) (a)

89

Question 1

Contribution per year (520-400)*220 26,400 Fixed cost

-44,000

Yearly subsidy

40,000 Annual net profit

22,400

Year 0 Year 1 Year 2 Closing NBV 200,000 160,000 120,000 Ave NBV

180,000 140,000

AROR

22,400 22,400

180,000 140,000

=

12.4% 16.0%

90

Question 2 2009 2009 2010 2011 2012 2013 2014 000 Start Sales 0 800 800 800 640 400 Equipment (480) 80 Stock` (60) 60 W Capital (40) 40 Overheads (16) (16) (19.2) (19.2) (19.2) Materials (480) (480) (480) (384) (240) Variable Cost

(80)

(80)

(80)

(64)

(40)

Cash Flow (580) 576) 224 220.8 332.8 520.8 400 D Factor 1 0.893 0.797 0.712 0.636 0.567 0.507 Present Value

(580)

(514.4)

178.5

157.2

211.7

295.3

202.8

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