cpap study guide to vce accounting answers … · 2 the cpap study guide to vce accounting, 4th...

1 The CPAP Study Guide to VCE Accounting, 4

th Edition (2013) by Vicki Baron and Simon Phelan SOLUTIONS TO MINI EXAMS

CPAP STUDY GUIDE TO VCE ACCOUNTING ANSWERS TO MINI EXAMINATIONS

SOLUTIONS UNIT 3: MINI EXAM NO. 1 Question 1 a. An appropriate accounting system that Michael Wild may use is a double-entry, accrual based recording and reporting system. This system requires the use of special journals and ledger accounts so that each transaction undertaken will be recorded in a manner that recognises the two-fold effect on the accounting equation. Revenue and expenses will be reported as they are earned and incurred, rather than when cash is exchanged, so that a more accurate figure for profit can be determined. This will allow better decision-making by the owner as the information presented is more relevant. In addition, Michael should use a system of Control Accounts and subsidiary records as a means of cross-checking information, summarising some details so only totals are presented in reports. This ensures reliability and understandbility.

1 mark for double-entry system 1 mark for accrual system 1 mark for Relevance 1 mark for Control accounts 1 mark for reliability and understand ability May also discuss perpetual system and FIFO

b. General Journal Date Details General Ledger Subsidiary Ledger 2016 Debit Credit Debit Credit

1-Jul Cash at Bank 5 600

Debtors Control 3 400

Stock Control 11 200

Shop Fittings 14 000

Land & Buildings 160 000

Creditors Control 8 900

GST Clearing 1 300

Loan - HiFinance 35 000

Capital - E. Baxter 149 000

Establishment of a double-entry recording system

3 marks 1 mark for Assets 1 mark for Liabilities 1 mark for Capital -1 if narration not included

a.

Relevance The value of the Shop Fittings to the new business is only $14,000 as this is the value of the asset that will provide a future economic benefit to the business. The value of $20,000 was what the previous business’ valuation of the asset. This amount has no relevance for decision making for the new owner.

1 mark for Relevance



1 mark for current value useful for decision making 1 mark for Accumulated Depreciation/Historical Cost not relevant for new business.

Students who select Reliability for their characteristic must value asset at $20,000 and include Accumulated Depreciation in their entry. Question 2

a. FIFO operates on the assumption that the first stock purchased by the business will be the first stock that the business sells.

b. Stock item: Equal Exercise Bike

Date Details IN OUT BALANCE

2016 Qty Unit Cost

Total Cost Qty

Unit Cost

Total Cost Qty Unit Cost

Total Cost

1-Aug Balance 12 150 1 800

9-Aug Inv EE16 5 150 750 7 150 1 050

15-Aug Rec 37 1 150 150 6 150 900

21-Aug Inv HH21 10 160 1 600 6

10 150 160 2 500

23-Aug Rec 40 3 150 4503

10 150 160 2 050

24-Aug Inv EE17 32

150160 770

8

160 1 280

1 mark for each entry in the Stock Card -1 (max) if Selling Price used -1 (max) if GST included in cost -1 (max) if documents not used



Cash Receipts Journal Date 2016 Details

Rec. No. Bank

Disc. Exp

DebtorsControl

Cost of Sales Sales Sundries GST

2-Aug Sales 35 462 210 420 42

12-Aug Rye Sporting Club 36 3 900 100 4 000

15-Aug Sales 37 330 150 300 30 17-Aug L. Watkins 38 500 500 22-Aug Sales 39 1 188 540 1 080 108 23-Aug Sales 40 990 450 900 90

24-Aug Ferns Gymnasium 41 1 000 1 000

8 370 100 5 500 1 350 2 700 270 1 mark for each entry in the journal -1 mark if no total for ALL columns

Sales Journal

Date 2016 Debtor

Inv. No.

Cost of Sales Sales GST

Debtors Control

9-Aug Chelsea Gymnasium EE16 2 100 4 200 420 4 620

24-Aug Ferns Gymnasium EE17 3 150 6 300 630 6 930

26-Aug Pulse Gymnasium EE18 2 100 4 220 422 4 642

7 350 14 720 1 472 16 192 1 mark for each entry

Cash Payments Journal

Date 2016 Details

ChqNo. Bank

Disc. Rev

Creditors Control

Stock Control Wages Sundries GST

3-Aug GetFit Ltd 74 2 200 2 200

21-Aug Ace Equipment 85 4 000 4 000

29-Aug GetFit Ltd 91 1 900 100 2 000

GST Clearing 92 750 750

8 850 100 8 200 - - 750 - 1 mark for each entry Payment for GST MUST be in the Sundries column

General Journal Date Details General Ledger Subsidiary Ledger2016 Debit Credit Debit Credit 31-Aug Stock Loss 220 Stock Control 220

1 mark for each line of the entry Narration is not required



Stock Control Date Cross-reference Amount Date Cross-reference Amount 1-Aug Balance 8 880 30-Aug Drawings 220 31-Aug Creditors Control 6 600 Advertising 210 Cost of Sales 7 350 Cost of Sales 1 350 Stock Loss 220 Balance 6 130 15 480 15 480

1-Sep Balance 6 130

1 mark for Creditors Control 1 mark for Drawings 1 mark for Advertising 1 mark for each Cost of Sales entry 1 mark for Stock Loss 1 mark for balancing account – must bring Opening Balance forward -1 for incorrect titles – Cost of Goods Sold No abbreviations

Creditor – GetFit

Date Cross-reference Amount Date Cross-reference Amount 3-Aug Bank 2 200 1-Aug Balance 4 200

29-Aug Bank/Discount Revenue 2 000 21-Aug

Stock Control/GST Clearing 7 260

1 mark for the entries on the debit side 1 mark for entry on credit side

Creditors Schedule at 31 August 2016 GetFit Ltd $7260 Ace Equipment $1600 HiSense $1400 $10260

1 mark for GetFit Ltd and Ace Equipment 1 mark for HiSense and Total

c. The Stock donated to a school raffle has been treated as an advertising expense. An Expense is an outflow of economic benefits in the form of a decrease in assets that lead to a decrease in owner’s equity, except drawings. As stock has decreased, as well as Owners Equity, this transaction is an expense.

1 mark for decrease in assets (Stock) 1 mark for decrease in Owners’ Equity



d. Assets (Bank) Decrease $1,900 Liabilities (Creditors Control) Decrease $2,000 Owners Equity (Net Profit -> Discount Revenue) Increase $100

1 mark for each line.

e. Reliability Documents provide reliable evidence that is free from bias about financial transactions of the business. They allow for information to be cross-checked.

1 mark for Reliability 1 mark for ‘free from bias’ 1 mark for cross-checking

f.

Subsidiary ledgers contain all relevant information about each individual debtor, creditor or stock item. It allows cross checking with the Control account and assists in keeping bulky detail out of the General ledger. Also allows for specialisation of duties with staff allocated responsibility for maintaining subsidiary records.

1 mark for containing information about individual debtors, creditors and stock. 1 mark for any other point.

g.

Theft Undersupply from supplier Stocktake error, where stock counted is less than what is actually on hand Oversupply to customer

1 mark for each reason given At the end of August 2016 the business was holding less stock. Identify one advantage and one disadvantage of holding less stock.

Advantage – less cost of managing stock, such as insurance. Not as much cash ‘tied up’ in stock Disadvantage – continually having to reorder stock, costly. May miss out on sales if stock runs out.

1 mark for an advantage 1 mark for a disadvantage

h. Stock Cards can be used to identify re-order points Stock Cards monitor the flow of stock in and out of the business Stock Cards help identify fast and slow moving stock to assist in ordering/purchasing decisions.

1 mark for each relevant point



Question 3 a.

Entry (1) – settlement of GST liability to the ATO because GST collected and charged was greater than GST paid and incurred Entry (2) – GST paid on the purchase of stock, Non-current asset and payment of expenses. Item from CPJ

1 mark for each explanation b. The GST is recorded at the time of the credit purchases in the Purchases Journal

c.

The GST Clearing account will have a credit balance at 31 October 2016. This means the account is a Current Liability and represents a present obligation of the entity arising from past transactions, the settlement of which is expected to result in an outflow from the entity of economic benefits to the ATO within the next reporting period (or within 12 months).

1 mark for recognition it is a Current Liability 1 mark for obligation of the business

d.

GST Clearing can have a debit balance if the amount of GST paid on stock, non-current asset purchase and payment of expenses plus GST incurred on credit purchases exceeds the amount of GST collected on cash sales and earned from credit sales.

1 mark for GST paid and incurred 1 mark for collected and owed If no mention of incurred and/or owed, then 1/2.

Question 4 On 1 September 2016, Sigourney Wilson decided to transfer ownership of her Motor Vehicle to the business. The details of this asset were as follows: Purchase date: 1 February 2008 Purchase price: $35 000 Payment method: $15 000 cash and $20 000 loan through Wiz Car Loans Current agreed market value: $23 000 Current balance of Loan: $13 000



a. General Journal Date Details General Ledger Subsidiary Ledger 2016 Debit Credit Debit Credit

1-Sep Motor Vehicle 23 000

Loan – Wiz Car Loans 13 000

Capital - E. Baxter 10 000

Owner contributed own vehicle and took on loan [Memo 12]

1 mark for each line of the entry 1 mark for narration – must show document number Allow for consequential errors in amounts

b.

Historical Cost states that assets should be valued at their original verifiable cost. Relevance states that all items in reports should be useful for decision-making. While $35,000 (Historical Cost) is verifiable it is not relevant to this business as it no longer represents the current future economic benefit that the asset will provide to this business. It was relevant to the owner, who has used the asset but for this ‘new’ owner, they will only be able to depreciate the asset from $23,000 so this is the amount that is relevant and useful for decision-making and should be reported. Relevance overrules Historical Cost

1 mark for definition of Historical Cost 1 mark for definition of Relevance 1 mark for relevant value for this business 1 mark for useful for decision-making.

c.

The agreed value of an asset is the value of an asset determined by the business when the owner contributes an asset to the business. This may be different from the original purchase price of the asset as evidenced by the purchase invoice. Historical Cost is an accounting principle requiring assets to be reported at their original, verifiable purchase price. However, as the business will not enjoy the full benefit of the asset over the life of the asset, the agreed value is more useful for the business for decision-making. It is this value that will be depreciated and reported in the financial reports of the business.

Total 80 Marks



SOLUTIONS UNIT 3: MINI EXAM NO. 2

Question 1

a. Business Name Balance Sheet as at 1 July 2016 Assets Equities Current Assets Current Liabilities GST Clearing 1 700 Cash at Bank 4 600 Prepaid Insurance Expense 10 000 Accrued Wages 4 500 Debtors Control 23 400 Creditors Control 38 900 Stock Control 41 900 Loan - HiFiNance 12 000

77 000 60 000 Non-Current Assets Non-Current Liabilities Shop Fittings (at cost) 32 000 Loan - HiFinance 83 000 Accumulated Depreciation (8 000) 143 000 Land & Buildings 240 000 Motor Vehicle (at cost) 40 000 Accumulated Depreciation (12 000) Owners Equity

292 000 Capital – E. Baxter 186 000

Total Assets

329 999 Total Equities

329 000

1 mark for each of the 5 sections of the report -1 for incorrect titles – must have ‘Control’, ‘Clearing’

b.

GST Clearing can have a debit balance if the amount of GST paid on stock, non-current asset purchase and payment of expenses plus GST incurred on credit purchases exceeds the amount of GST collected on cash sales and owed from credit sales.

1 mark for GST paid and incurred 1 mark for collected and owed If no mention of incurred and/or owed, then 1/2.

c.

Relevance states that all information should be recorded but only the information that is useful for decision-making should be reported. It is not necessary or relevant to list all debtors in the Balance Sheet. The total of Debtors (balance of Control Account) is the item to be used for decision-making so only that item need be reported. All information about individual debtors can be found (if needed) in the subsidiary records.

1 mark for definition of Relevance 1 mark for explanation of how Debtors Control meets characteristic

d.

Reporting Period – Balance Sheet shown at a point in time (...as at 1 July 2016). Also, recognition of Accrued Wages suggests an expense for a future reporting period.



Going Concern – Accumulated Depreciation indicates that the business has been operating for a number of reporting periods and will continue to operate into the future Historical Cost – Two Non-current Assets (Motor Vehicle and Shop Fittings) are shown at their Historical Cost. Other assets such as Stock Control are shown at their original price rather than at their realisable value.

1 mark for identification of an item from the Balance Sheet for each principle 1 mark for explanation of each item in reference to the principle.

Question 2

a. General Journal Date 2016

Details General Ledger Subsidiary Ledger Debit Credit Debit Credit

Jun 30 Insurance Expense Prepaid Insurance Expense

12 40012 400

1 mark for each line of the entry General Journal Date 2016


Jun 30 Commission Expense Accrued Commission Expense

1 0001 000

1 mark for each line of the entry General Journal Date 2016


Jun 30 Depreciation – Shop Fittings Accumulated Depreciation – Shop Fittings

3 2003 200

1 mark for each line of the entry. Must have amount correct

General Journal Date 2016


Jun 30 Depreciation – Motor Vehicle Accumulated Depreciation – Motor Vehicle

4 0004 000

1 mark for whole entry. Must have amount correct





Jun 30 Stock Control Stock Gain

200200

1 mark for each line of the entry. General Journal Date 2016


Jun 30 Bad Debts Debtors Control Debtor – L. Lynch

550550

550

1 mark for debit entry. 1 mark for both credit entries



Jun 30 Drawings Other Expenses GST Clearing

1 1001 000

100

1 mark for each line of the entry

b. Ben’s Beds Post-adjustment Trial Balance as at 30 June 2016

ACCOUNT

DR $

CR $

Cash at Bank 8 450Shop Fittings 32 000GST Clearing 2 730Sales 368 000Capital 236 420Drawings 42 100Stock Control 43 980Discount Revenue 3 200Cost of Sales 184 000Motor Vehicle 40 000Accumulated Depreciation – Shop Fittings 15 200Debtors Control 27 050Creditors Control 35 780Accumulated Depreciation – Motor Vehicle 16 000Interest Expense 6 000Discount Expense 2 400Land & Buildings 240 000Loan - HiFinance 83 000Customs Duty 9 200Prepaid Insurance Expense 12 000Office Expenses 27 100



Commission Expense 4 000Wages 80 000Insurance Expense 12 400Accrued Commission Expense 1 000Depreciation – Shop Fittings 3 200Depreciation – Motor Vehicle 4 000Stock Gain 200Bad Debts 550 769 980 769 980

1 mark for GST Clearing/Drawings/Other Expenses 1 Mark for Debtors Control/Bad Debts 1 mark for Stock Control/Stock Gain 1 mark for Depreciation/Accumulated Depreciation (both assets) 1 mark for Accrued Commission/Commission Expense 1 mark for Prepaid Insurance/Insurance Expense

c.

Office Expenses Date Cross-reference Amount Date Cross-reference Amount 30-Jun Balance 28 100 30-Jun Drawings 1 000

Profit & Loss Summary 27 100 28 100 28 100

1 mark for each entry on the credit side

Drawings Date Cross-reference Amount Date Cross-reference Amount 30-Jun Balance 41 000 30-Jun Capital 42 100

Office Expenses/GST Clearing 1 100

42 100 42 100

1 mark for debit side entry 1 mark for credit side entry

Commission Expense Date Cross-reference Amount Date Cross-reference Amount 30-Jun Balance 3 000 30-Jun Profit & Loss Summary 4 000

Accrued Commission Expense 1 000

4 000 4 000

1 mark for debit side entry 1 mark for credit side entry

d. General Journal

Date 2016


Jun 30 Sales Stock Gain Discount Revenue Profit & Loss Summary

368 000 200

3 200371 400



1 mark for debit entries 1 mark for credit entry Allow for consequential

e.

Relevance Balance day adjustments are required to ensure that the revenue earned and the expenses incurred for the period are reported. This ensures that the profit or loss made by the business is accurate and hence relevant for decision making.

1 mark for Relevance 1 mark for revenue earned and expenses incurred 1 mark for link to decision making

f.

It is necessary to close revenue and expense accounts at the end of each reporting period to allow for the calculation of Net Profit in the records and the preparation of reports. The Going Concern principle recognises that a business’ life is continuous and it must be broken up into equal periods of time to allow for profit determination to occur. This report preparation allows business owners to assess performance, identify problem areas and plan for the future. If these accounts were not closed then it would not be possible to determine the success or otherwise of the business. Closing these accounts will zero off accounts, allow preparation of reports and establish the records in preparation for the next reporting period

1 mark for calculation of profit 1 mark for Going Concern 1 mark for Reporting Period 1 mark for performance evaluation 1 mark for prepare accounts for next period

g. Theft Undersupply from supplier Stocktake error, where amount counted is less than amount actually on hand Oversupply to customer

1 mark for each reason given

h.

Residual value is the amount expected to be received when the business disposes of the asset at the end of its Useful Life. The new owner will earn revenue using that asset. Thus this business will not use that part of the asset in its revenue earning therefore it should not be expensed by this business.

1 mark for not used by this business in earning revenue 1 mark for not expense that amount

i.

Unallocated cost refers to the amount of Historical Cost not yet depreciated PLUS the Residual Value of the asset. Found by HC – (AD + RV)

1 mark for amount not yet depreciated 1 mark for plus Residual Value



Question 3 a.


Date 2016 Details

Chq No. Bank

Disc. Rev

Creditors Control

Stock Control Wages Sundries GST

30 Sep Commission Expense 34 2 000 1 000

Accrued Commission Expense 1 000

1 mark for each line

b. The payment of $2,000 in Commission Revenue will result in a decrease in the amount of cash held in the Bank. This is an Asset and so the Assets decrease by $2,000 (the amount paid). Some of this payment will be used to pay back a Liability – an amount owed by the business to employees for commission earned. This decreases Liabilities by $1,000. The remaining $1,000 is the payment of an Expense and so Owner’s Equity, through profit, is decreased as an expense has increased. Overall, the accounting equation remains balanced as the effects balance each side of the equation. Liabilities - Accrued Commission Expense Decrease $1,000 Owners Equity – Net Profit (Commission Expense) Decrease $1,000

1 mark for each effect on each element of the accounting equation 1 mark for the $ value of the effects 1 mark for the overall effect – Accounting Equation still remains balanced

Question 4

a.

Cash Receipts Journal

Date 2016 Details

RecNo. Bank

Disc. Exp

Debtors Control

Cost of Sales Sales

Sundries GST

June Totals to date 385 500 2 500 180 000 90 000 180 000 10 000 18 000 Cash Payments Journal

Date 2016 Details

ChqNo. Bank

Disc. Rev

Creditors Control

Stock Control Wages

Sundries GST

June Totals to date 392 430 200 143 000 40 000 80 000 117 830 11 800 1 mark for each amount



b. Harry’s Hats Cash Flow Statement for month ended 30 June 2016

Inflows Cash Sales 180 000Receipts from Debtors 177 500GST Collected 18 000 375 500 Outflows GST Settlement (2 630)GST Paid (11 800)Payments to Creditors (142 800)Purchases of Stock (40 000)Prepaid Rent Expense (12 000)Wages (80 000)Commission Expense (3 000)Office Expenses (32 000)Loan Interest (7 000) 331230 Net cash from Operating Activities 44 270 Cash Flows from Investing Activities Net cash from Investing Activities Cash Flows from Financing Activities Inflows Capital contribution 10 000Outflows Loan repayment (15 000)Drawings (46 000)Net cash from Financing Activities (51000) Change in cash held (6 730) Cash at 1/06/16 (8 450) Cash at 30/06/16 (15 180)

1 mark for Operating Inflows 1 mark for Operating Outflows – GST Settlement + GST Paid 1 mark for Operating Outflows – Payments to Creditors + Stock Control + Prepaid Rent 1 mark for Operating Outflows – Wages, Commission, Interest and Office expenses 1 mark for Investing Inflows 1 mark for Investing Outflows – Drawings + Loan Repayment 1 mark for ‘finishing report’ -1 for incorrect titles -1 for ‘Aliens’ c. Not all Revenue is cash Not all Cash Payments are expenses If the business has a large amount of credit sales yet does not collect all debts from debtors, the business can

earn a profit but still have poor cash flow. Payments such as Drawings, Loan Repayments and Prepaid Rent all reduce the amount of cash held but do

not affect profit. 1 mark for each example given. 1 mark for cash payments do not equal expenses 1 mark for not all revenue increases cash Examples must be from information in report.

Total 75 Marks SOLUTIONS UNIT 4: MINI EXAM NO. 1



AREA OF STUDY 1 Total marks = 80

ERIN’S EXERCISE BIKES Question 1

a. Net Realisable Value is the estimated selling price of stock (Realisable Value) less the estimated selling, distributing and marketing costs associated with selling the stock.

1 mark for estimated selling price 1 mark for estimated selling costs

b.

General Journal

Date 2016

Details

General Ledger Subsidiary Ledger Debit Credit Debit Credit

2 Mar Stock Write Down 480 Stock Control 480

Write down of 12 Elite Exercise Bikes – Memo 13

1 mark for debit entry 1 mark for credit entry 1 mark for narration. Narration must include the document number and the number of units

c.

Stock card: Item – Excel Exercise Bike


2016 Qty Unit Cost

Total Cost Qty

Unit Cost

Total Cost Qty

Unit Cost

Total Cost

2 Mar Balance 12 220 26402 Mar Memo 13 12 40 480 12 180 2160

1 mark for whole line of Stock Card

d. Cost refers to the original purchase price of a unit of stock and all product costs. It is to this price that a mark-up is added that determines the selling price. However, on occasions it is not possible to sell stock at a price above cost—due to damage or obsolescence of the stock. This is the net realisable value of the stock and is the estimated selling price of stock less any estimated expenses involved in selling the stock. On these occasions it is important to recognise this loss in value and to write the stock down. This is done as soon as it is known that this write down will occur—conforming to the principle of conservatism where losses are recorded as soon as they are recognised as having occurred. By recording the write down and valuing stock in the records at the lower value, the owner is conforming to relevance whereby the value of stock is more accurate and more useful for decision-making as the stock value has fallen below the original purchase price.

1 mark for definition of cost 1 mark for calculation of selling price 1 mark for definition and reason for net realisable value



1 mark for Conservatism 1 mark for Relevance

e.

Conservatism The adjustment is required to ensure that the expenses incurred for the period are accurate and reflect the true position of the business. Hence the business should recognise losses as soon as it becomes apparent that a loss exists so as not to overstate assets and net profit.

1 mark for Conservatism 1 mark for accurate calculation of profit 1 mark for recognising losses when they become apparent

Question 2 a. Product costs – costs associated with getting stock into a position and condition for sale that can be logically linked to each unit of stock. In the Invoice given, Cartage is considered a product cost as it can be linked to each individual item of stock on a logical basis. Whereas period costs are costs associated with getting stock into a position and condition for sale that can’t be logically linked to each unit of stock. In the Invoice, Insurance is considered a period cost as it can’t be linked logically to each individual item of stock and relates to the delivery as a whole.

1 mark for linked to each item of stock 1 mark for Cartage as a product cost 1 mark for not linked to each item of stock 1 mark for Insurance as a period cost

b. $300 + $5 Cartage = $305 unit cost of 1 Fittest Exercise Bike

1 mark for correct calculation c. GST is a tax on goods and services sold. As such it represents an obligation of businesses to the ATO. Hence it is not considered part of the cost of stock as it is not a resource controlled by the business that will bring future economic benefit to the business, but a decrease to the GST Liability account

1 mark for represents an obligation to the ATO 1 mark for not providing an economic benefit to the business

d. Once cost is determined a mark-up per unit is applied to determine the selling price of the stock. The mark-up in this instance is 100%. As the cost price is $305 (from above, using product costing), then the selling price is $610 plus GST. With 7 units sold, this would result in revenue of $4,270. Cost of Sales would be $2,135 and the Insurance of $70 would be expensed. This would result in a profit on the sale of the Fittest Exercise Bikes of $2,065. However, if the Cartage was also treated as a period cost, then the cost price of the stock would be $300 and the selling price only $600. Revenue would be $4,200 and Cost of Sales would be $2,100. The total cost of the Cartage ($200) as well



as the Insurance ($70) would be expensed at this time, resulting in a profit of $1,830. Treating all costs as period costs would result in a lower profit in situations where not all stock is sold.

1 mark each for each COGS amount 1 mark each for each Revenue amount 1 mark for overall effect on profit

e. Relevance – an accurate calculation for cost is important for decision making so that an appropriate mark up can be applied to ensure expenses are covered and a net profit earned.

1 mark for Relevance 1 mark for calculation of mark up 1 mark for covering expenses and earning Net Profit

Question 3

a. Sales Journal

Date 2016

Debtor Inv. No Cost of Sales

Sales GST Debtors Control

May 4 NOW Gymnasium EE61 2,280 4 560 456 5 016

1 mark or first 4 columns 1 mark for last 3 columns

Purchases Journal

Date 2016

Creditor Inv. No.

Stock Control

GST Creditors Control

May 8 GetFit Limited GF34 2900 290 3190

1 mark for first 3 columns 1 mark for last 3 columns


Details


May 11 Sales Returns 1 140 GST Clearing 114 Debtors Control 1 254 Dr – NOW Gymnasium 1 254 Stock Control 570 Cost of Sales 570

1 mark for Sales Returns/GST Clearing 1 mark for Debtors Control/Dr – NOW Gymnasium 1 mark for Stock Control 1 mark for Cost of Sales




Details


May 13 Creditors Control 627 Cr – GetFit Limited 627 Stock Control 570 GST Clearing 57

1 mark for Creditors Control/Cr – GetFit 1 mark for Stock Control/GST Clearing


Details


May 17 Drawings 285 Stock Control 285

1 mark for each entry Cash Receipts Journal

Date Details

Rec. Bank Disc. Debtors Cost of Sales Sundries GST 2016 No. Exp. Control Sales

May 22 Sales 68 1881 855 1710 171

1 mark for first 4 columns 1 mark for Cost of Sales/Sales/GST columns General Journal

Date 2016

Details


May 30 Stock Loss 290 Stock Control 290

1 mark for each entry b.

Stock card: Item – Elite Exercise Bike


2016 Qty Unit Cost

Total Cost Qty

Unit Cost

Total Cost Qty

Unit Cost

Total Cost

May 1 Balance 12 285 3420

May 4 Inv EE61 8 285 2280 4 285 1140

May 8 Inv GF34 10 290 29004

10 285 290 4040

May 11 CN 32 2 285 5706

10 285 290 4610

May 13 CN 8 2 285 5704

10 28290 4040

May 17 Memo 3 1 285 2853

10 285 290 3755

May 22 Rec 68 3 285 855

10

290 2900

May 30 Memo 4 1 290 290 9 290 2610 1 mark for each line of the Stock Card (except balance)



c.

May 11 – Sales Return. This will reduce revenue by $1 140 as well as reducing Cost of Sales by $ 570. However, Revenue will decrease by more – an overall decrease in Net Profit of $570 May 17 – Drawings. This will have no effect on Net Profit as it is not an expense of the business.

1 mark for reduction in revenue and CoS 1 mark for overall decrease in Net Profit 1 mark for recognition of Drawings 1 mark for no effect on Net Profit

d.

May 11 - Item delivered was damaged/faulty May 30 – Theft/recording error/undersupply by supply/Stocktake error

1 mark for each valid reason Question 4

a. $6000 – Invoice cost plus installation

1 mark for correct answer

b. General Journal

Date 2016

Details


Oct 1 Depreciation – Computer Equipment 90 1

Accumulated Depreciation – Computer Equipment

90 1

Disposal of Computer Equipment 3 600 1 Computer Equipment 3 600 1

Accumulated Depreciation – Computer Equipment

3 190 1

Disposal of Computer Equipment 3 190 1 Computer Equipment 6 000 1 GST Clearing 600 1

Sundry Creditor – Asious Computing

6 600 1

Sundry Creditor – Asious Computing 300 1

Disposal of Computer Equipment

300 1

Loss on Disposal of Computer Equipment

110 1

Disposal of Computer Equipment

110 1

1 mark for each line in the General Journal




Date 2016 Details

ChqNo.

Bank

Disc. Rev

Creditors Control

Stock Control Wages

Sundries GST

Oct 1 Sundry Creditor – Asious Computing 500 500

1 mark for the entry as shown

c.

Carrying Value is the amount found from deducting Accumulated Depreciation from Historical Cost. As depreciation is charged annually, this figure will change each reporting period – it will decrease. As depreciation is based on estimates – estimated useful life and estimated residual value, depreciation cannot be accurate and so it is not expected that Carrying Value will reflect the current market value of an asset at any given time. Carrying Value doesn’t reflect the market value of the asset as the market value may be affected by supply, wear and tear on asset, new models available.

1 mark for how Carrying Value is determined. 1 mark for carrying value changes each reporting period 1 mark for depreciation based on estimates 1 mark for factors that affect the value of an asset.

d.

Loss on Sale of Asset occurs when the proceeds from sale is less than the Carrying Value of the asset. This may be because the asset may have been under depreciated as the estimate of life or residual value may have been overstated. Depreciation is the allocation of the cost of the asset over its useful life. It matches the expense of the asset against the revenue it helps to earn.

1 mark for Proceeds less than carrying Value 1 mark for over depreciation 1 mark for allocation of cost over the useful life 1 mark for matching revenue and expenses

Total 80 Marks



SOLUTIONS UNIT 4: MINI EXAM NO. 2 AREA OF STUDY 2 Total marks = 85

ERIN’S EXERCISE BIKES Question 1

a. Liquidity refers to the ability of a business to meet its short term financial commitments as they fall due in the short term.

1 mark for meet short term commitments 1 mark for as they fall due

b.

Deteriorated as both ratios have declined over the period shown

c.

A worsening Cash Flow Cover suggests an increase in Creditors or other Current Liabilities or a decline in Net cash Flow from Operations.

Taking out a short-term Loan or a slowing Creditors Turnover will increase Current Liabilities. A slowing Debtors Turnover or lower Cash Sales may mean a lower Net Cash from Operating Activities.

d.

If the decline in Cash Flow Cover is the result of the business borrowing more, then increased interest payments will worsen profitability. If the change in Cash Flow is due to a decline in cash sales or a worsening Debtors Turnover, revenue will fall and/or Bad Debts may rise, worsening profitability.

e.

• Working Capital Ratio/Quick Asset Ratio • Industry Average • Budgeted and Variance Report

These ratios may show the business is able to meet its short term debts by comparing CA with CL or QA with QL. Industry Averages may show that the business is performing better than other businesses in the same industry Variance reports compare actual with budgeted figures – the variances may show that the business has performed better than expected.

1 mark for each measure identified. 1 mark for each explanation.



Question 2 a.

Debtors Control Date 2017 Cross-reference Amount

Date 2017 Cross-reference Amount

1 Jan Balance 18 000 31 Dec Bank 164 700 31 Dec Sales 150 000 Discount Expense 3 000 GST Clearing 15 000 Bad Debts 1 500 Balance 13 800 183 000 183 000

1 mark for Opening Balance/Sales/GST Clearing 1 mark for Bank 1 mark for Discount Expense/Bad Debts 1 mark for Closing Balance

Creditors Control



31 Dec Bank 99 300 1 Jan Balance 24 000 Discount Revenue 7 000 31 Dec Stock Control 93 000

Balance 20 000 GST Clearing 9 300 126 300 126 300

1 mark for Bank/Discount Revenue 1 mark for Opening & Closing Balances

Stock Control



1 Jan Balance 28 000 31 Dec Stock Loss 750 31 Dec Creditors Control 93 000 Drawings 2 000 Bank 55 000 Cost of Sales 149 250 Advertising 2 000 Balance 22 000 176 000 176 000

1 mark for Cost of Sales 1 mark for Drawings/Advertising 1 mark for Bank/Creditors Control 1 mark for Stock Loss



b. Erin’s Exercise Bikes Budgeted Cash Flow Statement for Year Ended 31 December 2017 [Extract]

$ $ Cash Flow from Operating Activities

Cash sales

148 500

Interest Revenue

2 000

GST Collected

14 850

Cash received from Debtors

164 700

330 050

Payments to Creditors

99 300

Wages

(45 000)

GST paid

(9 445)

Stock Control

(55 000)

Prepaid Rent Expense

(30 000)

Advertising

(6 300)

Interest Expense

(4 200)

Office expenses

(9 450)

258 695

NET CASH FROM OPERATING ACTIVITIES

71 355

1 mark Receipts 1 mark for Payments to Creditors/Stock Control/GST Paid 1 mark for Wages 1 mark for Prepaid Rent/Office Expenses 1 mark for Advertising/Interest Expense



c. Erin’s Exercise Bikes Budgeted Income Statement for Year Ended 31 December 2017 Revenue

$ $

Cash sales

148 500

Credit Sales

150 000

298 500

Less Cost of Goods Sold

Cost of Sales

149 250

149 250

Gross Profit

149 250

Less Stock Loss

750

Adjusted Gross Profit

148 500

Add Other Revenue

Discount Revenue

7 000

Interest Revenue

2 000

9 000

157 500

Less Expenses

Rent Expense

29 000

Advertising

8 300

Wages

47 000

Discount Expense

3 000

Bad Debts

1 500

Depreciation - Equipment

8 000

Interest Expense

4 200

Office Expenses

9 450

110 450

Net Profit

47 050

1 mark for Revenue 1 mark for Cost of Sales 1 mark for Stock Loss



1 mark for Other Revenue 1 mark for Discount Expense/Bad Debts 1 mark for Advertising/Wages 1 mark for Depreciation/Rent Expense 1 mark for Interest Expense/Other Expenses

d.

Bank Date 2017 Cross-reference Amount


31 Dec Interest Revenue 2 000 1 Jan Balance 2 140 Debtors Control 164 700 Drawings 34 000

Sales 148 500 Wages 45 000 GST Clearing 14 850 Stock Control 55 000

Advertising 6 300 Loan – Eastpac 12 000 Creditors Control 90 000 Interest Expense 4 200 Other Expenses 9 450 Prepaid Rent 30 000 GST Clearing 9 445 Balance 32 515

330 050

330 050

1 mark for Debit entries 1 mark for Drawings/Wages 1 mark Loan/GST Clearing 1 mark for Stock Control/Creditors Control/Advertising 1 mark for Interest Expense/Other Expenses/Prepaid rent

e.

Erin’s Exercise Bikes Budgeted Balance Sheet as at 31 December 2017 [Extract] Current Assets Current Liabilities Debtors Control $12 300 GST Clearing $11 105 Stock Control $22 000 Creditors Control $20 000 Cash at Bank $32 515 Accrued Wages $ 2 000 Prepaid Rent Expense $5 000 Loan – Eastpac $ 8 000 $71 815 $41 105

• 1 mark for Cash at Bank • 1 mark for Debtors/Stock Control • 1 mark for Prepaid Rent • 1 mark for Creditors Control • 1 mark for Accrued Wages/Loan



Question 3 Carrying Value is the amount found from deducting Accumulated Depreciation from Historical Cost. As depreciation is charged annually, this figure will change each reporting period – it will decrease. As depreciation is based on estimates – estimated useful life and estimated residual value, depreciation is unlikely to be accurate and so it is not expected that Carrying Value will reflect the current market value of an asset at any given time. Carrying Value doesn’t reflect the market value of the asset as the market value may be affected by supply, wear and tear on asset, new models available.

1 mark for how Carrying Value is determined. 1 mark for carrying value changes each reporting period 1 mark for depreciation based on estimates 1 mark for factors that affect the value of an asset.

Question 4

a.

Item Budget Actual Variance F/U $ $ $ Credit Sales 150 000 165 000 15 000 F Debtors at End 12 300 21 500 9 200 F Discount Expense 3 000 1 000 2 000 F Discount Revenue 7 000 4 000 3 000 U

• 1 mark for each line of the report

b. Debtors may not have taken advantage of the credit terms offered. Credit terms are very tight and discount only 1% so many Debtors may not consider it worthwhile. Poor cash flow may have meant the business was receiving cash slower and unable to take advantage of the discount offered by suppliers. Less credit purchases of stock – bought for cash to receive a reduced price.

1 mark each for any valid reason for Discount Expense and Discount Revenue

c. Discount Expense If Debtors are not taking advantage of the discount offered then the business is incurring less expenses. This will lead to a larger Net Profit and hence improved profitability. However, if Debtors are not taking advantage of the discount offered, then there is no reason for them to pay promptly. Hence our Debtors Turnover may slow meaning the businesses efficiency is worsening.

1 mark for linking reason to profitability 1 mark for linking reason to efficiency

Discount Revenue If the business is buying stock for cash rather than credit then the business will have less Creditors. The business will be spending a lot of cash on stock and may defer paying Creditors, worsening the Creditors Turnover and worsening efficiency. Also, by paying Creditors later the business is foregoing the Discount offered, losing revenue and worsening profitability.

1 mark for linking reason to profitability



1 mark for linking reason to efficiency

d. Budgets allow the business to plan for the future, setting targets and goals for the business. It helps the business determine if their plans will be successful. May improve decision making as business can see how plans may unfold and whether the business should go ahead with plans. Variance reports are useful for evaluating how well the business has done relative to their budget. They help to identify areas of strength (or weakness) for the business, as well as showing areas for improvement.

1 mark for budgets help planning. 1 mark for setting targets 1 mark for review of budgets 1 mark for identifying strengths/weaknesses

Question 5

a. Efficiency is the ability of the business to manage debtors, stock and creditors. It refers to the speed of the trading cycle. It involves ensuring Debtors pay their accounts, that there is an adequate level and variety of stock and that Creditors are paid in a timely manner.

1 mark for manage Debtors, Stock and Creditors 1 mark for Debtors paying promptly/adequate levels of Stock/Creditors paid promptly.

b.

Deteriorated

c. Increased chance of Bad Debts which decreases net profit Cash flow slows which may mean the business defers paying Creditors or needs to borrow money to meet short term financial commitments

1 mark for each reason provided

d. Debtors Turnover – change credit terms. Offer 2% discount if payments received within 14 days. This will provide more incentive for Debtors to pay in a timely manner. Also, reminder notices, follow up calls to encourage Debtors to pay. Stock Turnover – find a cheaper supplier. This will lower the cost of sales and allow the business to sell stock at a lower price, thus generating more sales. Hold less stock and/or remove slow moving lines of stock. Creditors Turnover – as Creditors Turnover is above Debtors Turnover and below Industry Average, the business does not need to make any significant changes to its handling of Creditors.

1 mark for each action linked to a measure. 1 mark for each outline



Question 6 a.

Profitability refers to the ability of a business to generate a profit. It can be measured by comparing Net Profit against items that contribute to the generation of profit – assets, sales, and owner’s investment.

1 mark for ability to generate profit 1 mark for compared to assets/sales/owners investment

b.

Improved

c. The business made more profit in 2016 than 2016 – the ratios do not measure Profit, but rather the relationship of Profit to another item. In this case, Sales may have declined, with Net Profit remaining stable. This would cause the Net Profit Rate to improve, with no change to Net Profit. (Can discuss ROI or GP Rate).

1 mark for ratios not measuring profit 1 mark for reason why ratio may improve but not Profit

The business has a healthy cash position – profit and cash are different resources. A change in profit is not necessarily mirrored by a similar change in cash. The business may earn a significant profit but large amounts of cash Drawings, cash purchase of Non-Current Assets or repayments of a Loan will adversely affect the cash position.

1 mark for cash and profit are different 1 mark for reason why cash may decline despite a profit.

d.

Performance indicators assist the business in determining whether or not the business is operating efficiently and providing an adequate return for the owner. It also allows the business to set targets and plan and review their performance in relation to those targets.

1 mark for assessing performance 1 mark for setting targets and reviewing target performance

e.

Return on Assets or Industry Average Question 7 At 31 December 2017 the accountant provided the following information to the owner:

2016

2017

Net Profit $45,800 $49,500 Net Profit Rate Net Profit 13% 11% Sales

a.

Deteriorated



b. Net Profit may increase due to an increase in sales. The increase in sales may also lead to an increase in expenses. The increase in expenses is greater in % terms than the % increase in sales [A 10% increase in sales and a 20% increase in expenses]. This can lead to a higher Net Profit figure, but as a proportion of sales, net profit is lower. 1 mark for increase in sales 1 mark for increase in expenses 1 mark for % increase in expenses greater than % increase in sales 1 mark for outcome Total 85 marks