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T A S M A N I A N Accounting

C E R T I F I C A T E Subject Code: ACC315111 O F E D U C A T I O N 2012 Assessment Report

2012 Assessment Report

Question 1 (a) Marking Scheme: 1 mark was allocated for the definition and 1 mark for a suitable

example (total of 10 marks).

If candidates are asked to support their definition with an example, then one must be provided. Examples need to clearly demonstrate their understanding of a term or concept; for example, merely stating that Inventories are the same as Stock only earned half a mark (specific examples of Inventories should have been provided eg shoes for a shoe shop or magazines and newspapers for a newsagency). Where appropriate, account classifications should have been included as a part of definitions (asset, liability, owner’s equity, revenue or expense – current or non-current where appropriate).

(i) Double Entry Bookkeeping: p.45 of Kirkwood Double entry means that for every transaction entered in the accounts, total debits

equals total credits. eg. Purchased GST inclusive goods for $550 cash. Dr Inventories $500, Dr GST Credits Received $50 and Cr Cash at Bank $550 Candidates are reminded that double entry does not mean that only two accounts

are affected as in some cases more than two accounts are involved (see example above). In order to gain 2 marks candidates needed to state that total debit entries must equal total credit entries and provide an appropriate example.

(ii) Intangible Asset: p. 444 of Kirkwood These are non-current assets which lack physical substance but are of

considerable value to a business. As non-current assets, they appear on the Balance Sheet.

eg. Patents on inventions, copyright on books, music or film, goodwill paid when purchasing a business.

Many candidates omitted to state that Intangible Assets are classified as NCA.

Erroneous examples included Shares, Debentures and Government Bonds (all Other Financial Assets), and Forests (PP&E) which may have been confused with Leaseholds or Carbon Credits?

(iii) Accounts Receivable: p. 242 of Kirkwood Amounts owing to the business for goods and/or services supplied by the

business to customers on credit. Sometimes called trade debtors (because these debts result from the business’s trading operations or performance of services). They are a current asset and appear in the Balance Sheet. eg. Money owed to the business from credit sales of inventories.

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Subject Code: ACC315111


Candidates must know the difference between Accounts Receivable and Other Receivables and needed to include in their definition that the amounts are owed because of the sale of stock or the supply of a service on credit. Accounts Receivable do not arise as a result of a loan to an outside party or because a NCA has been sold on credit eg a vehicle(unless the business’s normal operations include vehicle sales).

Accounts Receivable are not Creditors. (iv) Cost of Goods Sold: p. 80 and p. 292 of Kirkwood Cost of Goods Sold (COGS) includes all costs associated with the inventories

sold (including the inventories purchase price, customs and other import duties and taxes, cartage in and handling costs, and any other costs associated with getting the inventories in a location and condition ready for sale (eg repackaging). It also includes any Inventory Adjustments due to inventory loss, shortage or damage. The Cost of Goods Sold (COGS) account is an expense account and appears in the Income Statement.

eg. Cash sales of Inventory for $220 which had a cost price of $100 - the entry affecting COGS would be Dr COGS $100 and Cr Inventory $100.

Better answers also mentioned the Perpetual Inventory System and that COGS

account keeps a continuous record of all sales related movements of inventory (ie. sales or sales returns) in and out of the business recorded at the cost price.

Candidates needed to explain that COGS includes more than just the cost price of the Inventory purchased to gain full marks.

(v) Source Document: p. 39-40 of Kirkwood A source document provides details of a transaction and the evidence that a

transaction has occurred. (They are the second step in the Accounting Cycle ie. transaction occurs, then it is recorded in/on a source document.) Source documents include details such as the type of transaction, the date, the amount and parties involved, and any GST included.

eg. Handwritten or electronic receipts provide evidence and details of the collection of cash.

This question was well answered and was relatively easy in comparison to others. (vi) Inventory: p. 291 of Kirkwood Inventories are items held for sale in the ordinary course of the normal operations

of the business. Inventories are Current Assets of a business and appear in the Balance Sheet.

eg. For a car yard, inventories would be the cars that they sell, for a butcher, their meat.

Many candidates failed to state that Inventories are current assets.

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(vii) Accrued Expense: p. 107 of Kirkwood Accrued expenses are expenses incurred in the current accounting period but not

yet paid for or recorded. Accrued Expenses are amounts owing on Balance Day and appear in the Balance Sheet as a Current Liability (as they represent amounts that need to be paid in the near future).

eg. Wages owing on balance day of $200. The entry to record the accrued expense would be:

Dr Wages $200 and Cr Accrued Expenses $200. Many candidates failed to state that the amount is owing on Balance Day for

expenses incurred in the current accounting period (not the previous one as some candidates claimed) and is therefore a BDA and a CL. Wages owing was not an adequate example of an accrued expense and such examples received ½ a mark. Candidates needed to state that the Wages were outstanding or owing on balance day (and would not be paid until the next accounting period) to clearly demonstrate this concept for 1 mark.

(viii) Owner’s Equity: p. 20 of Kirkwood Owner's Equity is the difference between the assets and liabilities of a business

(A-L = OE), and equals the amount of the owner's interest or investment in the business.

eg. Owner's Equity is made up of the Capital contributions made by the owner, plus any Profits (less any Losses), and less any Drawings made by the owner.

Candidates needed to explain that Owner’s Equity is more than just the owner’s

initial investment in the business and they needed to also show how Owner’s Equity is calculated (A-L=OE) for 1 mark.

Many candidates failed to give an example of Owner’s Equity or implied that it only included capital injections by the owner.

(b) (ix) pg. 106 of Kirkwood

when cash realisation = revenue and cash spent = expense Accrual recognise R and E at point of sale or incurring for economic impact, and realisation is secondary. More accurate profit/loss from accrual a/cing that matches R and E at end of A/cing period, including balance day adjustments. Cash 1 , Accrual 1, 1 accurate profit, Accounting period and matching, 1 balance day adjustments =4

(x) p. 270 of Kirkwood

Bad debts = 2 Doubtful debts = 2

(xi) p. 492 and 634 of Kirkwood

Cash Budget 2 Cash Flow 2 but if leaves out the 3 flows in Cash Flow Statement -1

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(xii) p. 19 and 443-444 of Kirkwood Define assets, in Balance sheet = 1 CA =1 , example = ½ NCA = 1, example = ½

(xiii) p. 74 and p. 80 of Kirkwood

Full explanation including revenue source of Service and Trading = 2 + 2 (c) (xiv) Very few candidates responded to this question. Some candidates did not read the

question properly and therefore did not understand that they needed to answer each part separately. They needed to Outline the process first and then explain the detail of each step when purchasing by cheque. In most cases GST was left out of the process.

Suggested marking scheme: 2 marks for listing the steps, 6 marks for explaining

how the transaction mentioned fits in with the steps at each stage (1 mark per step)

The Accounting Cycle is Transaction - Source Document - Journal - Ledger Account –Trial Balances Reports – eg Income Statement and Balance sheet - Decision Making or Adjustments

Purchase of inventory is a transaction. The source documents that are evidence of the transaction would be an invoice/receipt and the Cheque butt with the payee details on it. This would be entered in the Cash Payments Journal or the General Journal

(DR Inventories 100 DR GST Credits Received 10 CR Cash at Bank 110. ) This entry is then transferred into the 3 Ledger Accounts mentioned. The 3

entries then become part of the totals for these accounts in the Balance Sheet - showing an increase in Inventories, a decrease in the Cash at Bank and an increase in GST Credits Received. Owners and Managers can then use this information to make decisions about their Cash and Inventory assets e.g. whether to buy more or less stock.

(xv) Generally this question was answered the best within the 3 choices offered in 1c.

Most candidates could differentiate between internal and external users and provide examples. Some candidates, in providing an example of the information they might use, did not use accounting terminology adequately. Eg. Responses said that managers would like to see sales data to how the business is going. A better answer would say that managers needed to examine Income Statements to determine the profitability of the business as a result of sales.

Most candidates could state 2 difficulties that the external user faces when using

accounting information. Some candidates stated the same difficulty in different words, care should be taken to clearly separate the ideas.

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Suggested marking scheme: 2 marks for explaining ‘Internal’ and ‘External’ users(1 mark for each) , 2 marks for examples, 2 marks for the information they would need and 2 marks for the 2 difficulties that might be faced.

Internal users are the owners, managers or staff of the business. Eg. the managers will examine Income Statements to check on profit and expenses and revenue items so that they can make decisions regarding the running of the business. External users are parties outside the business who have an interest in the financial details of the business e.g. potential investors, lenders, the tax office. e.g. the bank would want to view the Income Statement and Statement of Cash Flows to see whether the business generates profit and cash flow to repay a loan, and the Balance Sheet to see whether the business owns assets that could be used as security for the loan. Two difficulties external users might face is: Can they rely on the truthfulness, accuracy, reliability of the information provided? If the business is not legally obligated to provide the information, they may not be able to access it at all. Difficulties with access, comparability, relevance, understand ability of information P482.

(xvi) This was the question that most candidates responded to, but it was not answered

very well. Some of the definitions of capital expenditure left out that it relates to the cost of

buying and installing non-current assets. Better responses used an example to explain the concept or differentiated it from revenue expenditure/maintenance to clarify their answer. Many responses erroneously said that capital expenditure was owners’ equity/capital.

Many of the responses to depreciation omitted that it relates to non-current assets.

Better responses provided an example. Instead of explaining the factors that influence depreciation methods, most

responses discussed the straight-line and diminishing cost depreciation methods – which did not answer the question. Better answers used the factor, for example wear and tear on equipment, to explain how the asset loses value over time and is depreciated.

The quote was confusing. Few candidates understood what was required of them

as it wasn’t clear how the quote linked in with the question. Many candidates raised the historical cost assumption. Others said the book value should equal the selling price without delving into the practicalities of finding a market price and how this may differ from the book value.

Suggested marking scheme: 2 marks for defining capital expenditure, 2 marks for

defining depreciation, 2 marks for factors taken into account when choosing a depreciation method, 2 marks for commenting on the statement.

Capital expenditure is the cost of buying and installing or improving non - current assets such as vehicles or buildings. It does not include maintenance or regular

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expenses like insurance (other than insurance on delivery costs) associated with these types of assets. Depreciation is the allocation of the cost of Property, Plant and Equipment Assets over their useful life due to wear and tear, obsolescence etc. The factors that might be taken into account when choosing a depreciation method include: tax laws, accounting standards, estimate useful life of the assets, the type of asset, amount of use that the item gets, when it will need replacing, estimated scrap value etc. It is very difficult to estimate the sale price of an item, as this depends on market conditions such as the availability of buyers for the item, supply and demand, entry of new products onto the market, so, in general there will usually be a profit or loss on the sale of equipment. The Estimated residual value is not the same as the selling price, and the asset may be sold before the end of its estimated life.

Question 2 As a general comment, candidates need to pay greater attention to correct use of account names, narrations and formatting. Each line was allocated .75 of a mark. Candidates needed to get the entire line (i.e. account name, amount and correct side (DR/CR) correct to get the mark. There was considerable discussion of ‘acceptable’ terminology for Accounts. The following were considered as acceptable: Cost of Goods Sold, COGS, Cost of Goods, Inventories, Inventories Control, Accounts Receivable Control, Accounts Payable Control, Accounts Receivable, Accounts Payable, GST Received, GST Credits Received, CAB, Inventory Adjustment, Stock Loss, Inventory Loss Expense The following were considered as not acceptable: For the entry on the 1st of April: Accounts Payable was NOT accepted (Loan or Other Payable was accepted) GST Credits, Salaries, the use of rounding or not showing all digits (e.g. $192.5 or 193) was a 1 mark deduction. Formatting and narrations were allocated 7.5 marks in total, with 60% for the narration and 40% for the formatting (Dates, Indenting, Ruling off and DR entry before the CR entry). For Narrations, deductions were made if narrations had no brackets or if they were not on a separate line.

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Question 3 Income Statement Superannuation is a General and Administrative Expense – many candidates placed it in the Balance Sheet Provision for Doubtful Debts adjustment was badly done overall! Inventory adjustment was quite well done Sales and Cost of Goods, not actually hand-written under those headings in many cases $ sign and double underlining often ignored with Net Loss figure Balance Sheet Depreciation adjustment done very well, with correct figure being calculated for Accumulated Depreciation on Plant and Equipment in most cases Loan to XYZ due 31/3/2013. Wow, this certainly caused plenty of grief and a staggering number of candidates put it in the wrong place! I was so interested that I went back and looked at how many actually placed it in the Liabilities – either CL or NCL. Out of the 262 papers I marked, a staggering 149 recorded it as a Liability – that’s 57% of candidates!! When it is clearly shown in the Debit column of the Trial Balance, I don’t understand how or why so many got it wrong! Several candidates would have got 100% for Question, 3 had they not placed it in the wrong section of the Balance Sheet – so the error wasn’t just confined to the average or lower ability candidates! Next year, teachers of Accounting should really emphasise the importance of placing things in the correct columns and ensuring that Net Assets and Owners Equity total are double underlined with a $ sign next to them. Many, many candidates lost easy marks for not doing these basic things. The Owners Equity section was particularly badly done as far as using the correct columns are concerned. Many, many candidates placed the Capital, Net Loss and Drawings amounts directly underneath one another instead of starting on the left and moving sub-totals to the right. Again, easy marks lost in lots of cases. Question 4 (a) (i) and (ii) The completion of the ‘Cash at Bank account’ and ‘Cash at Bank withdrawals’

was generally well done. Some candidates scored poorly where dates and erroneous details were entered while others showed a limited understanding of the process of reconciling accounts. There was a deduction of one mark for each additional erroneous entry. The omission of dates and details in the accounts was common and resulted in a 0.5 mark deduction for each.

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(iii) The opening balance was a credit entry which was commonly entered on debit side. There was a 1 mark deduction for this and a 0.5 mark deduction for the incorrect date. It should be 1 April and 30 April for receipts and payments. Some candidates wrote ‘bal’ and ‘sundry amounts or acccounts’ in abbreviated format on the debit and credit columns. There was no distinction in this case of whether it was receipts(deposits) or payments (withdrawals) and 1 mark for each of the entries was deducted as often amounts were incorrect in both columns. There was no penalty for an incorrect pencil balance if it was on the Dr side, where the errors had been transferred from the ‘Cash at Bank deposits’ and ‘Cash at Bank withdrawals’ as it was a transfer from the journals and should not have been penalised twice. If the entries were correct and all figures were in correct column with pencil balance on the Dr side, full marks were awarded. It was a common error that the opening balance was 31 March and some candidates thought it was April 31 rather than 30.

(iv) The Bank Reconciliation Statement was challenging for some as there was an

expectation of a similar format to previous years. Even though the question was very straight forward, it was a common error that candidates did not follow the processes of reconciling the ‘Cash at Bank withdrawals’ in the journal with the debit entries for cheques in the bank statement. Many did not include appropriate cheques or were confused and entered too many. It is important to actually ‘tick off’ cheques in both to avoid the problem of entering figures to try to balance the Reconciliation Statement. This was common where the bank account balance was incorrect. Some candidates misread the question and wrote a theoretical explanation about the structure and purpose of the bank reconciliation. Reading the questions, during 15 minutes reading time may eliminate the possibility of this error.

The narration at the beginning was a Credit Balance as per Bank Statement and a

Dr Balance as per Cash at Bank account. This was poorly done. Some ‘hedged their bets’ and blended the two and so for example, ‘Cash at Bank as per Credit Statement’ was the result. It is essential there is a distinction made between the two to show an understanding of the process. I mark was deducted for incorrect cheque entered as an unpresented cheque (rather than ‘check’), 1 mark incorrect narration and 0.5 marks for deposits and subtotals no included. The question was not well done. Presentation, ruling and legibility could be improved along with set out in columns. Formatting was generally poor.

(v) The wording of the question proved a challenge for some candidates. This

question required an explanation of how and why which was generally ignored. It was common to state such information as ‘amounts not found’ or ‘cheques sitting in the business’ or ‘cheques going bad’. The question required an understanding of not only terminology such as deposit not yet presented, entered or credited and unpresented cheques. Succinct explanations involve accounting terminology rather than colloquial expressions. A common error was to include these two as one reason while ignoring the second reason (only 2 marks were allocated for this

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response), leaving the section blank, or incorrectly stating delays in collection of accounts receivable or fees. It would have been beneficial in the discussion to provide an example as an illustration and generally those who did were awarded full marks.

(b) (vi) The Statement of Estimated Receipts from Accounts Receivable for Checks and

Balances was very well completed. Candidates sometimes made arithmetical errors in totals even though other figures were correct, with a deduction of 0.5 marks. Where candidates incorrectly calculated the third month figures there was a deduction of 1.5 marks (0.5 marks for each incorrect figure).

(vii) The terminology of Credit Expense and Cash Expenses with Loan Repayments

proved challenging and some were very confused. Loan Repayments were problematic and 1 mark was deducted for not showing it as a separate payment. Where candidates entered the cash expenses but did not deduct $1000 for each month no penalty was applied, although 1 mark was deducted for not recording the loan repayment in the payments section. 0.5 marks were deducted for increasing cash expenses by $1000 each month when the loan repayment was also shown.

Accounts Payable (Credit Expenses) could have been addressed in two ways.

Where candidates entered Credit Expenses with $6000, $3 600 and $4 200 applying them to the following month, but also including an Accounts Payable figure of $6000, 0.5 marks were deducted. Some candidates used the alternative and entered only $6000 which was also correct. Others combined the cash expenses and credit expenses and were penalised for this.

Candidates should be using correct narrations of ‘Collections from Accounts

Receivable’ and ‘Payments to Accounts Payable’ and 0.5 marks were deducted where this was not written. There is still a tendency to use headings and not write these narrations on separate lines. GST Payable should be written in full and candidates were penalised for abbreviations or incorrect terminology.

Dr and Cr balances should be included in after figures in columns rather than next

to ‘Bank Balance at Start’. The ‘Bank Balance at end’ should also be a Dr or Cr balance and clearly written, 0.5 marks deducted for each exclusion.

(viii) A discussion of two options involves more than a statement of the option itself.

There were many options and the question therefore provided the opportunity for candidates to show knowledge and understanding. The discussion about the options was not well done. Weaker candidates only offered one option with no explanation or reasons as to why it would be an option. Some stronger candidates were able to prioritise options and show the relationship in some cases between the two. Some confused the concept of mortgage and made an assumption it was ‘appropriate for a computer’, rather than a loan, even though they may have

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understood the definition of a liability. Discussion should directly relate to the options and the course of action and its feasibility. For example, interest on a loan and the time allocation for borrowing monies, whether it would be an expensive option and the factors that should be taken into account. Some candidates simply wrote everything they had learned and did not address the question, while others provided four or five options. Candidates must answer the question as additional options were ignored.

Question 5 (a) This was straightforward, If figures correct = ½ mark. If all correct = 2 (b) (iv) Marking Scheme: 2 marks each - ½ mark for stating an improvement or

deterioration, incorporating the actual figures to demonstrate this. ½ mark for comparing the performance of Cressy Clothing to the industry average. 1 mark for explaining a factor behind the improvement or deterioration.

The most common problems in the responses to this question were:

• Industry averages were not incorporated into the response (the question did not explicitly ask this but this is implied in the provision of these figures).

• Reasons for the improvement / deterioration were omitted. Candidates needed to complete both parts for each of the 5 ratios.

• Working capital ratio – candidates did not stipulate that assets and liabilities were current.

• The improvement of turnover of inventories was frequently explained by an improvement in debt collection, which is incorrect. Many candidates also erroneously stated that the turnover of inventory had deteriorated.

(v) Marking Scheme: 2 marks - 1 mark for the recommendation and 1 mark for

outlining a reason for the recommendation. The question asked candidates to comment on the profitability of the business

(comments on the GPR, NPR or Rate of Return on Total Assets were all appropriate). Some candidates said the business should improve the working capital ratio, liquidity, financial stability or debt collection, which missed the question and were inappropriate.

Many candidates recommended that Cressy Clothing needed to improve its GPR

(correct and marked accordingly) in order to improve its profitability but clearly from the data provided the main problem area for this business was its significantly declining NPR and increasing operating expenses.

(vi) Marking Scheme: 2 marks - 1 mark for the reason and 1 mark for the explanation p. 567 of Kirkwood

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Candidates needed to explain the two limitations of ratios that they had identified;

simply listing them did not provide enough information to allocate all the marks. Perhaps the question could have been more structure and read ‘Detail’ two limitations, rather than ‘Outline’ and asked for examples. Candidates also need to clearly identify their limitations from an accounting perspective.

(c) (vii) If all parts explained = 4 If no reference to Cash flows for Investing then – ½ For overview =1 ½ Then 1 for Operating, 1 Financing (viii) 2 recommendations =2+2 Answers must do more than just name a recommendation – must explain the

implications to get full marks.

Suggested solutions 2012 QUESTION 1

(a) Suggested marking scheme: 1.5 marks for the definition:0.5 marks for the example (total of 10 marks)

(i) Double Entry Bookkeeping : p.45 of Kirkwood Double entry means that for every

transaction entered in the Accounts, total debits equals total credits.

e.g. Paid wages $500 Wages DR 500 Cash at bank CR 500

(ii) Intangible Asset p. 444 of Kirkwood These are non-‐current assets which lack physical

substance, but are of considerable value to a business. e.g. Patents on inventions,

copyright on books, music or film, goodwill paid when purchasing a business. As non-‐

current assets, they appear on the Balance Sheet.

(iii) Accounts Receivable p. 242 of Kirkwood Amounts owing to the business for goods

and/or services supplied by the business to customers on credit. Sometimes called

trade debtors. They are a current asset and appear on the Balance Sheet. e.g. money

owed to us from credit sales of inventories

(iv) Cost of Goods Sold p. 80 of Kirkwood In the Perpetual inventory system, COGS is an

expense account that keeps a continuous record of all sales related movements of

inventory (i.e. sales or sales returns ) in and out of the business recorded at the cost

price. e.g. cash sales of inventory for $220 which had a cost price of $100 -‐ the entry

affecting COGS would be COGS Dr $100 Inventory CR $100.

(v) Source Document p. 39-‐40 of Kirkwood A source document provides details of a

transaction and the evidence that a transaction occured. They are the second step in the

Accounting Cycle i.e. transaction occurs, then it is recorded in/on a source document e.g.

handwritten or electronic receipts provide evidence and details of the collection of cash

(vi) Inventory p. 291 of Kirkwood Inventories are items held for sale in the ordinary course

of the normal operations of the business. e.g. for a car yard, inventories would be the

cars that they sell, for a butcher, their meat.

(vii) Accrued Expense p. 107 of Kirkwood Accrued expenses are expenses incurred

in the current accounting period but not yet paid for or recorded. e.g. wages owing on

balance day of $200. The entry to record the accrued expense would be Wages Dr $200

Accrued Expense Cr $200. Accrued Expenses appear on the Balance Sheet as a Current

Liability as they represent amounts that need to be paid in the near future.

(viii) Owner's Equity p. 20 of Kirkwood In the Accounting Equation, Owner's equity is

the difference between the assets and liabilities of a business (A-‐L = OE), and equals the

amount of the owner's interest or investment in the business. e.g. Owner's equity is

made up of the Capital contributions made by the owner, plus any profits (less any

losses), and less any Drawings made by the owner.

(b) Suggested marking scheme: 1mark (each) for describing each term, two marks for

explaining the difference.

(ix) Cash accounting and accrual accounting : Cash accounting only records transactions that

affect the bank e.g. paid wages. Accrual accounting records all transactions that affect

the Accounting equation -‐ which includes non-‐cash transactions such as Credit sales and

purchases, balance day adjustment entries e.g. prepaid expenses, depreciation, etc.

Accrual accounting is the only way to estimate profit as it takes into account all the

expenses that a business incurs (according to the matching principle). Organisations

that are not as concerned with calculating profit, but are more concerned with managing

their cash on a year to year basis are often content to use cash accounting (e.g. amateur

sporting clubs, many government departments), whereas, any profit making enterprise

really needs to use Accrual Accounting so that they are fully aware of their expenses –

including non-‐cash expenses like Depreciation and Bad Debts , and are generating

enough revenue to make an adequate profit.

(x) bad debts and doubtful debts : Bad Debts are an expense incurred when an account (or

part of an account) is written off as being "uncollectable". e.g. we may receive notice

that a debtor has been declared bankrupt and will therefore not be paying any of the

amount owed to us -‐ the entry to record bad debts is:

Bad and Doubtful Debts DR 600 GST Collected DR 60 Accounts Receivable -‐ J Smith CR 660.

Doubtful debts are an expense also, but they are an estimate of the expected bad debts

from the Accounts Receivable balance on balance day (this estimate can be based on

past experience , or the age of the accounts). The actual account(s) to be written off

have not been specifically identified . The entry to record Doubtful debts is:

Bad and Doubtful Debts DR 200 Provision for Doubtful Debts CR 200.

(xi) A cash flow statement and a cash budget: A cash flow statement categorises cash flows

into 3 areas -‐ Operations, Financing and Investing. It shows cash movements in each of

these areas over the past accounting period. Operations is cash flows related to the

earning of revenue (mostly revenue and expense items). Financing is cash flows in

relation to borrowing or the owner's capital/drawings. Investing is cash flows in

relation to the purchase and sale of non-‐current assets (other than inventory). The cash

flow statement therefore tells the business the sources of cash and where the cash is

being used.

A Cash budget is a look into the immediate future, and shows Expected Cash Receipts

and Expected Cash Payments to help forecast a predicted Cash Position for the business

and to help them make decisions regarding their borrowing needs and/or investing

opportunities.

Both reports are cash management tools.

(xii) P.443 – 444. Current assets and non-‐current assets Current assets include assets

which are in cash form (cash at bank, petty cash, cash on hand or will soon be

"liquidated" i.e. sold or collected e.g. Debtors, inventories. Prepaid expenses and

Accrued revenues are also in this category of assets. Non current assets are items held

which will generally not be "liquidated" within the next accounting period e.g. Property,

Plant and Equipment, Investments, and Intangible assets. Both classes of assets appear

on the Balance Sheet.

(xiii) a service entity and a trading entity: A service entity earns revenue by

performing work for its customers e.g. a hairdresser , plumber or doctor. A Trading

entity earns revenue by selling inventories to its customers e.g. a shop

(c)

(xiv) Suggested marking scheme: 2 marks for listing the steps, 6 marks for explaining

how the transaction mentioned fits in with the steps at each stage (1 mark per step)

The Accounting Cycle is Transaction -‐ Source Document -‐ Journal -‐ Ledger Account -‐

Reports -‐ Decision Making

Purchase of inventory is a transaction. The source documents that are evidence of the

transaction would be an invoice/receipt and the Cheque butt with the payee details on

it. This would be entered in the Cash Payments Journal or the General Journal

DR Inventories 100 DR GST Credits Received 10 CR Cash at Bank 110.

This entry is then transferred into the 3 Ledger Accounts mentioned. The 3 entries then

become part of the totals for these accounts in the Balance Sheet -‐ showing an increase

in Inventories, a decrease in the Cash at Bank and an increase in GST Credits Received.

Owners and Managers can then use this information to make decisions about their Cash

and Inventory assets e.g. whether to buy more or less stock.

(xv) Suggested marking scheme: 2 marks for explaining ‘Internal’ and ‘External’

users(1 mark for each) , 2 marks for examples, 2 marks for the information they would

need and 2 marks for the 2 difficulties that might be faced.

Internal users are the owners , managers or staff of the business. E.g. the managers

will examine Income Statements to check on profit and expenses and revenue items so

that they can make decisions regarding the running of the business. External users are

parties outside the business who have an interest in the financial details of the business

e.g. potential investors, lenders, the tax office. e.g. the bank would want to view the

Income Statement and Statement of Cash Flows to see whether the business generates

profit and cash flow to repay a loan, and the Balance Sheet to see whether the business

owns assets that could be used as security for the loan. Two difficulties external users

might face is: Can they rely on the truthfulness of the information provided? If the

business is not legally obligated to provide the information, they may not be able to

access it at all.

(xvi) Suggested marking scheme: 2 marks for defining capital expenditure, 2 marks for

defining depreciation, 2 marks for factors taken into account when choosing a

depreciation method, 2 marks for commenting on the statement.

Capital expenditure is the cost of buying and installing or improving non -‐ current assets

such as vehicles or buildings. It does not include maintenance or regular expenses like

insurance (other than insurance on delivery costs) associated with these types of assets.

Depreciation is the allocation of the cost of Property, Plant and Equipment Assets over

their useful life due to wear and tear, obsolescence etc. The factors that might be taken

into account when choosing a depreciation method include: tax laws, accounting

standards, estimate useful life of the assets, the type of asset, amount of use that the item

gets, when it will need replacing, estimated scrap value etc. It is very difficult to

estimate the sale price of an item, as this depends on market conditions such as the

availability of buyers for the item, supply and demand, entry of new products onto the

market, so, in general there will usually be a profit or loss on the sale of equipment. The

Estimated residual value is not the same as the selling price, and the asset may be sold

before the end of its estimated life.

QUESTION 2 Suggested Marking scheme: 30 lines: 0.75 marks per line, 7.5 marks for Narrations and format. Date Particulars Debit Credit

31-Mar Cash at Bank 30000

Capital 30000

(Owner introduced Cash as Capital) 1-Apr Inventories Control 12500

GST Credits Received 1250

Cash at Bank 13750

(Paid cash for Inventories) 1-Apr Delivery Van 7000


Loan - ABC Finance 7700

(Purchased Delivery Van with a loan from ABC Finance) 30-Apr Cash at Bank 3300

Sales 3000

GST Collected 300

(Cash received for sale of inventories)

Cost of Goods Sold 1500

Inventories 1500

(Cost price of inventories sold) 13-May Wages 750

Cash at Bank 750

(Paid Wages) 27-May Freight Expense 550

Drawings 550

(Error Correction) 3-Jun Inventory adjustment 110

Inventories 110

(Inventory thrown out) 15-Jun Stationery Expense 150

GST Credits Received 15 Cash at Bank 165 Drawings 44

GST Credits Received

4

Stationery Expense

40

(Purchased stationery for cash, some of which was for personal use)

20-Jun Accounts Payable - Ace Electronics 165

Inventories Control 150


(Returned goods to supplier (purchased on credit)) 30-Jun Interest Expense 192.50

Accrued Expense 192.50

(Balance Day adjustment for Accrued Interest Expense)

QUESTION 3 Suggested Marking Scheme:

Item Incorrect Deduction Income Statement Item omitted completely 3 Balance Sheet item included 3 Adjustment ignored 3 Expense item recorded as Revenue (or visa versa) 2 Adjustment attempted but incorrect figure 2 Wrong expense or revenue classification 1 Additional information ignored 2 Mathematical errors 1 Sub-totals missing 1 Incorrect columns 1 Incorrect figure transferred from Trial Balance 1 Incorrect heading 1 Heading omitted 1 Net profit figure to be double underlined and with a $ character in front 1/2 Balance Sheet Item omitted completely 3 Income Statement item included 3 Adjustment ignored 3 GST Accounts not cleared 3 Asset recorded as Liability (or visa versa) 2 Adjustment attempted but incorrect 2 Wrong asset or liability classification 1 Mathematical errors 1 Sub-totals missing 1 Less Drawings before Add Net Profit 1 Incorrect columns 1 Incorrect figure transferred from Trial Balance 1 Incorrect heading 1 Heading omitted 1 Net assets and Owners Equity to be double underlined and with a $ character in front

1/2

Income Statement for Bernies Pies for the year ending 30 June 2012

Sales $ $ $

Sales

180000

Less Cost of Goods Sold

Cost of Goods Sold

120000

Inventory Adjustment

1000 121000

Gross Profit

59000

Add Other Operating Revenues

Interest Received

1500

Sub-total 60500

Less Other Operating Expenses

Selling Expenses

Salaries - sales 18400

Delivery Expenses 7000

Advertising 5600 31000

General/Administrative Expenses

Insurance 3600

Salaries - office 15300

Stationery Expense 960

Superannuation 3033

Rates and Land Tax 2430

Telephone 750

Electricity 1300

Depreciation on Plant and Equipment 1746 29119

Financial Expenses

Bank fees 1020

Bad and Doubtful Debts 1100

Interest on loan 4000 6120 66239

Net Loss

-$5,739.00

Balance Sheet for Bernies Pies as at 30 June 2012

Assets Current Assets Cash on hand

620 Prepaid Expenses

1800

Inventory Control

23700

Accounts Receivable Control 25000

less Provision for Doubtful Debts 500 24500 Loan to XYZ due 31/3/2013

2000 52620

Non Current Assets

Property Plant and Equipment Plant and Equipment 19800

less Accumulated Depreciation on Plant and Equipment 9906 9894

Land and Buildings

98800 108694 161314

Less Liabilities Current Liabilities Bank overdraft

4200 GST Clearing

6000

Accounts Payable Control

14000 24200

Non Current Liabilities Mortgage on building

50000 50000 74200

Net Assets

$ 87,114.00

Owners Equity Capital

116153 less Net Loss

-5739 110414

Less Drawings

23300 $ 87,114.00

QUESTION 4 (a) (i) Suggested marking scheme: Cash at Bank account deposits =2 marks (1 for Direct Deposit, 1 for final total) Cash at Bank account deposits Date Details $$ 2012 Apr 8 Capital 805 15 Sales 1412 22 Sales 2903 29 Debtors 246 Sub Total 5366 9 Rent 696 $6062

(ii) Suggested marking scheme: Cash at Bank account withdrawals = 2 marks (1/2mark for each entry = 1 marks, 1 mark for final total) Cash at Bank account withdrawals Date Details Chq No $ 2012 Apr 2 Creditors 571 82

8 Creditors 572 137 9 Creditors 574 1513 12 Insurance 575 642 15 Purchases 576 701 21 Drawings 577 240 28 Postage 578 194 579 311 580 293 581 114

30 Subtotal 12 Lease Payments 435 17 Bank Fees 421 $5083

(iii) Suggested marking scheme: 4 marks (1 for opening balance, 1 for pencil balance, 1 each for Receipts and Payments, deduct 0.5 marks for incorrect date, deduct one mark (each) for Receipts or Payments entered on the wrong side). Accept any wording in the Particulars column which gives the correct sense to the account. T account format

Extract from General Ledger of Dahlia Day Care Cash at Bank Account

2011 30 Apr Receipts 6062 1 April Balance 568

30 April Payments 5083 OR Columnar Format (iii) Date Particulars Debit ($) Credit ($)

Balance ($)

1 April .

Balance ...........................................................................

.................

.................

568 (Cr) .................

April 30

Receipts ...........................................................................

6062 .................

.................

5494 (Dr) .................

April 30 .............

Payments ...........................................................................

.................

5083 .................

411 (Dr) .................

(iv) Suggested marking scheme: 2 marks for opening line (1 for words + 0.5 for amount, 0.5 for Cr), 1 marks for deposit not yet credited , 1 mark for sub total, 2 marks for unpresented cheques and 2marks for closing line (1 for words + 0.5 for amount, 0.5 for Dr) = 8 marks. Dahlia Day Care Bank Reconciliation Statement as at 30 April 2012 Credit balance as per bank statement $ 2248 Add Deposits not yet credited Less Unpresented cheques

Cheq No

Subtotal: Amount

246 2494

569 1125 577 240 579 311 580 293 581 114 2083 Debit balance as per cash at bank account $411

411

(V) Suggested marking scheme: 1 mark for each example, 1 mark for each explanation

The Bank Statement can be higher than the Cash at Bank Account balance if

• the Cash at Bank Account balance includes payments which have not appeared on the Statement such as cheques that have yet to be presented or bank errors that would result in money being withdrawn from the account.

• It could also be higher (prior to the statement being checked) because of deposits being on the statement which are not yet recorded in the Cash at Bank Account e.g. direct deposits from customers, interest revenue.

NOTE: Incorrect examples would include: Deposits not yet credited, Bank Fees, Interest expense on the Statement

QUESTION 4 (b) (vi) Suggested Marking Scheme: 6 marks ( 0.5 mark for each correct figure (including totals) but do not

penalize if totals are incorrect due to an incorrect figure above. Statement of Estimated Receipts from Accounts Receivable

Credit Sales in:

Total $

Estimated Cash to be received in:

October November December July 18 000 2 160 August 12 000 3 000 1 440 September 15 000 8 820 3 750 1 800- October 10 000 5 880 2 500 November 12 000 7 056 December 9 000 13 980 11 070 11 356

(vii) Marking Scheme: 10marks 1 mark per line and 1 mark for correct starting balance in the Bank Section and 1 mark for completing the bank section Checks and Balances Cash Budget for the three months ending 31 December.

October November December Estimated Cash Receipts Collections from Accounts receivable 13980 11070 11 356 Dividends Revenue 210 Total Estimated Receipts 13980 11280 11356 Estimated Cash Payments Cash Expenses 2000 1500 3000 Payment of credit expenses/Accounts Payable

6000 3600 4200

Drawings 2000 2000 2000 Loan Repayments 1000 1000 1000 GST Payable 3500 Computer 6000 9000 Total Estimated Payments 14500 14100 19200 Bank Balance at Start 3000 Dr 2480 Dr 340 Cr Excess of Receipts over Payments Excess of Payments over Receipts 520 2820 7844 Bank Balance at end 2480 Dr 340 Cr 8184 Cr

Alternative Acceptable Answer:

October November December Estimated Cash Receipts Collections from Accounts receivable 13980 11070 11 356 Dividends Revenue 210 Total Estimated Receipts 13980 11280 11356 Estimated Cash Payments Cash Expenses 2000 1500 3000 Payments to accounts payable 6000 Drawings 2000 2000 2000 Loan Repayments 1000 1000 1000 GST Payable 3500 Computer 6000 9000 Total Estimated Payments 14500 10500 15000 Bank Balance at Start 3000 Dr 2480 Dr 3260 Dr Excess of Receipts over Payments 780 Excess of Payments over Receipts 520 3644 Bank Balance at end 2480 Dr 3260 Dr 384 Cr

(viii) Suggested Marking Scheme: 4 marks made up of 1 mark for each option and 1 marks for the discussion of each option. Discuss two options that could be considered for financing the purchase of the new computer

system. Possible Solutions:

-‐ Arrange a bank overdraft – we would need to contact the bank and fill out the paperwork for an overdraft facility. Check what interest rates apply etc

-‐ The owner put in extra cash as capital: if the owner has spare cash, this could be used to buy the asset.

-‐ Sell an asset: The sale of a non-‐current assets (such as property, equipment etc) could fund the purchase of the computer.

-‐ Increase in cash sales or collections from credit sales -‐ Reduce drawings or operating expenses. If it is at all possible to reduce these

expenses (at least temporarily), the extra cash could then be used to fund the purchase of the computer.

-‐ Defer purchase or renegotiate the purchase terms (eg take out a loan) – can we delay the purchase, or is it vital that we buy the computer now? What terms and conditions would apply to a loan e.g. if we can pay it off within a few months, then we don’t need a loan over several years.

QUESTION 5 (a) Suggested Marking Scheme: 2 marks each – 1 mark for correct calculation, 1 mark for correct use of terminology (i.e. % or times per year) Net Profit Ratio (Net Profit/Net Sales): 25950/812000 = 3.2% Debt Ratio (Total Liabilities/Total Assets) 252800/513775 = 49.2% (A-OE=L) Turnover of Accounts Receivable (COGS/ Average Accounts Receivable) 812000/81000 = 10.02 times per year, which is 36.41 days.

(b)

(iv) Suggested Marking Scheme: 2 marks each – 1mark for indicating whether there is improvement or deterioration, and relating this to the Industry Average, 1 for giving a factor behind the improvement or deterioration

Gross Profit Ratio: IMPROVEMENT OR DETERIORATION The GPR is increasing, In 2008 and 2009 it was below the average, and it has steadily increased to be above the average. A higher GPR does mean the more dollars in Gross Profit from each sale, but if the higher ratio is caused by higher prices than the prices offered by competitors, it may impact on Sales volume and reduce overall profitability. A higher ratio is therefore not necessarily an improvement, as it may just indicate that you are out of touch with your competitor’s prices, and are therefore suffering from lack of sales as your customers go elsewhere to purchase cheaper stock. ONE FACTOR THAT MAY EXPLAIN THIS IMPROVEMENT OR DETERIORATION The increase in this ratio indicates that either the Selling price is increasing (relative to the cost price) or the Cost price is decreasing (relative to the Selling price). Net Profit Ratio IMPROVEMENT OR DETERIORATION The NPR has fallen steadily from 10% in 2008 down to 7% in 2012 which is below the industry average of 10% and shows a reduced capacity to turn Sales dollars into profit, which is a deterioration in the ratio, as we now have to sell more items to return the same amount of profit. ONE FACTOR THAT MAY EXPLAIN THIS IMPROVEMENT OR DETERIORATION In 2008, Cressy were only spending 40% of their Sales dollars on Other Operating Expenses (GPR minus NPR). This has steadily risen to now sit at 53% of Sales dollars being spent on Other Operating Expenses compared to the Industry Average of 45%. Return on Total Assets IMPROVEMENT OR DETERIORATION

The RoTA is steadily falling which shows deteriorating profitability, as we are now getting less profit per dollar of assets owned by the business. ONE FACTOR THAT MAY EXPLAIN THIS IMPROVEMENT OR DETERIORATION The business may have less profit (caused by increasing Other Operating Expenses or lower Sales volume) or, it is also possible that the business has more Assets, which will also reduce this ratio. Working Capital ratio IMPROVEMENT OR DETERIORATION The Working Capital ratio is steadily declining, which is a deterioration, as it shows that there are fewer current assets (particularly cash) to pay for current liabilities, indicating possible problems with paying these liabilities on time. ONE FACTOR THAT MAY EXPLAIN THIS IMPROVEMENT OR DETERIORATION The deterioration is caused by either having less current assets (particularly cash) or more current liabilities (e.g. accounts payable). The lack of current assets may have been caused by buying non-current assets, or the owner withdrawing cash, leaving the business short of cash to pay bills. Increased current liabilities could be caused by a build up of liabilities (e.g. purchase of a lot of new stock) which the business has been unable to pay (due to a shortage of cash). Turnover of inventories IMPROVEMENT OR DETERIORATION Turnover of inventories has improved. Cressy are now below the industry average by 7 days, which shows that their stock is sitting around for less time before it is sold than was previously the case. ONE FACTOR THAT MAY EXPLAIN THIS IMPROVEMENT OR DETERIORATION This could be because of increased sales or reduced inventory levels (or a combination of both factors).

(v) Comments regarding the GPR, NPR or Rate of Return on Total Assets are acceptable here. See below. Suggested Marking Scheme: 2 marks – 1 mark for the recommendation and 1 mark for outlining a reason for the recommendation

• Cressy needs to reduce Other Operating Expenses or increase their Sales volume to improve the Net Profit ratio.

• With the Gross Profit Ratio, they need to check whether their prices are competitive. They are currently above the average. This is good if their prices are the same as their competitors (or lower) as it indicates that they have a cheaper supplier. To further improve the ratio, they can source cheaper stock or increase prices (if competition allows this). On the other hand, if their prices are too high, then they may need to reduce their prices (which would decrease this ratio) in order to restore their profitability

• Return on Total Assets: To improve this ratio, Cressy needs to increase profit (by reducing Other Operating Expenses or increasing Sales) or if possible (i.e. without

affecting the operations of the business), they could sell off un-needed assets and withdraw these from the business.

(vi) Outline two limitations of using ratio analysis 2 marks for each reason, made up of 1 mark for the reason and 1 mark for the explanation p.567 Some possible reasons include:

• Other sources of information (e.g. the Income Statement and Balance Sheet) help to show more specifically where problem areas are.

• Non-financial indicators of business performance – e.g. ratios may be poor in the short term, but the business is in a good position, and the ratios are expected to improve in the future.

• judgement and estimation used in preparing financial statements will mean that ratios reflect this judgement and estimation and figures will be skewed by them.

• The state of the economy and the business environment may change, therefore past history may not be a good predictor of the future e.g. previously higher ratios may no longer be the norm in the industry.

• End of period figures used to calculate some ratios may not be representative of the position during the year. E.g. Average inventories (for Stock Turnover) and Average assets for Rate of Return on Total Assets.

(vii) 1 mark for identifying the $1000 increase in the bank, 1.5 marks each for discussion of the cash flows from Operating and Financing Activities of the business. Operating Activities is providing an $11000 inflow into the business, the cash coming in from Sales of stock exceeds the payments to suppliers by $17000, which is a positive for the business, Other Outflows account for an outflow of $6000, there are no investing activities, the business has borrowed $30000 and the owner has then withdrawn $40000, which may be of some concern! Overall, there is a $1000 net increase in cash, but this is only because of the borrowings. (viii) 2 marks for each recommendation. Reduce drawings, increase sales, reduce operating expenses, sell assets. All of these will bring in extra cash (or reduce the outflow of cash).

TASMANIAN QUALIFICATIONS AUTHORITY

ACC315111 Accounting

ASSESSMENT PANEL REPORT

Award Distribution

Student Distribution (SA or better)

EA HA CA SA Total

This year 12o/o (33) 30% (83) 3e% (10e) 1e% (53) 278

Last year 13% (33) 31o/o (77) 3s% (e6) 17%o (43) 249

Last year (allexaminedsubjects)

11 o/o 19 o/o 39 o/o 3O o/o

Previous 5 years 13 o/o 26 o/o 36 o/o 25 o/o

Previous 5 years(all examinedsubjects)

11 o/o 19 o/o 40 o/o 30 o/o

Male Female Year 11 Year L2

This year 52Yo (144) 48o/o (134) 30% (84) 70o/o (194)

Last year 52o/o (129) 48o/o (120) 27o/o (68) 73Vo (180)

Previous 5 years 53o/o 47o/o 31o/o 690/o

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