ACCOUNTING DUE IN 2 hours

Assignment must be in word format only.

All calculations and workings must be shown to receive any marks for each question

Do not include the question in your answers!

Question 1

Mark Davies has started a lawn mowing business (MD Lawnmowing) as a temporary job/business which he intends to run until he starts his business degree at the University of South Australia in five months. Mark has never owned or run a business before. To start the business on 1 March 2014, he deposited $2,200 into a new bank account opened in the name of the business. The $2,200 consisted of a $1800 loan from his father and $400 of his own money. Mark rented some equipment, purchased supplies, and hired friends to mow and trim his customer’s lawns.

At the end of each month Mark sent invoices to his customers. On 31 July, he was ready to dissolve the business and start his university studies. As he was so busy, he kept few records other than his cheque book and a list of amounts owed to him by customers.

At 31 July, Mark’s business account cheque book shows a balance of $1,880, and his customers still owe him $600. During the period, he collected $4,750 from customers. His cheque book lists payments for supplies totalling $480, and he still has fuel and supplies that cost a total of $50 on hand. He paid his employees $2,100, and he still owes them $300 for their final week of work.

Mark rented some equipment from Kennard’s Hire. On 1 April, he signed a six-month rental agreement on lawnmowers and paid $720 for the full period. Kennard’s Hire will refund the unused portion of the prepayment if the equipment is in good order when he returns it. In order to get the refund, Mark has kept the equipment in excellent condition. In fact during May paid $200 to repair one of the mowers.

To transport employees and equipment to jobs, Mark used a trailer that he bought for $450. He believes that the period’s work used up one-third of the trailer’s service potential. The business cheque book lists a payment of $520 for private cash withdrawals by Mark during the period. In July Mark paid back a third of the amount his father had lent to him.

Mark estimates that he spent approximately 75 hours working on the business during the period. He plans to recommence operations on a similar basis during major breaks in his university study and believes he will do better in later periods as he now has an existing customer base to work from.

Required

1. Prepare the business Income Statement for the period.

(9 marks)

2. Prepare the classified Balance Sheet at the end of the period.

(11 marks)

3. Was Mark’s venture successful? Give the reasons for your answer. 150 – 250 words only.

(5 marks)

Total for Question 1: 25 marks

Question 2

A. The owner of Shoes R Us, Red does not understand why she cannot expense the entire amount for computer purchased on 1 June 2012 in the income statement for the year ended 30 June 2012.

(i) Explain the correct treatment for recording computer to Shoes R Us‘s owner Red and why she cannot expense the entire amount. [3]

(ii) Red is considering selling the business now due to the downturn in the economy and buying another business. She thinks that the $1 800 represents the current market value or replacement price for the computer. Explain the meaning of following amounts in the balance sheet extract below : (Note: We are not asking you to explain the calculation of the numbers)

[4]

Shoes R Us

Balance sheet extract

as at 30 June 2012

Computer $2 000

Less Accumulated Depreciation 200 $1 800

(iii) Red was informed by the accountant that she needs to include depreciation expense as an adjusting entry in the preparation of the financial statements. Explain to her the importance of adjusting entries using the relevant accounting concepts and the effect on profit if adjusting entry is not included. [3]

Total for Question 2: 10 marks

Question 3

Ian Smith submits to you draft accounts for the year ended 30 June 2014, and a Balance Sheet as at that date. Towards the end of the financial year his accountant resigned and he had completed the records himself. He thinks that errors may have occurred and asks for your help. An examination of the accounting records reveals the following:

 Buildings: 3% of cost

 Office furniture and equipment: 25% of cost

Total for Question 3: 22 marks

Question 4

You are provided the following financial information for Reliance Ltd:

RELIANCE LTD

COMPARATIVE BALANCE SHEETS

AS AT JUNE 30

2014 2013

Current Assets

Cash on Hand $1500 $4000

Cash at Bank - 1200

Accounts Receivable (net) 5200 4500

Inventory 20000 18000

Prepaid Expenses 1650 28350 800 28500

Non Current Assets

Plant and Equipment 74000 64000

less Acc. Depreciation (23000) 51000 17600 46400

Total Assets 79350 74900

Current Liabilities

Bank Overdraft 5660 -

Accounts Payable 4000 3800

Accrued Expenses 780 790

Tax Payable 720 11160 1200 5790

Non Current Liabilities

Bank Loan 20000 20000

Total Liabilities 31160 25790

Net Assets 48190 49110

Equity

Share Capital 30000 26000

Retained Earnings 18190 23110 48190 49110

(continued over the page)

RELIANCE LTD

INCOME STATEMENT

FOR THE YEAR ENDED JUNE 30, 2014

Net Sales $93000

Cost of Sales 54200

Gross Profit: 38800

Other Revenue:

Interest Revenue 60

Discount Received 400 460

39260

Expenses:

Selling & Admin Expense 19000

Doubtful Debts Expense 200

Depreciation Expense 5400

Interest Expense 2400 27000

Profit before tax 12260

Income tax expense 3378

Profit $ 8882

Note: Bad debts written off during the year were $200

REQUIRED:

Answer this question on the separate question 3 pro forma provided.

a. Prepare a Statement of Cash Flow in the format required by the applicable accounting standard. Show all calculations in your answer.

[14 marks]

b. The owners of Reliance Limited cannot understand why there is such a difference between the profit for the period and the total cash flows. Briefly explain some of the factors causing this difference.

[2 marks]

c. What information is provided by a Statement of Cash Flow which is not provided by other Financial Statements? (ie: Income Statement, Balance Sheet and Statement of Changes in Equity)

[2 marks]

TOTAL FOR QUESTION 4: 18 Marks

Question 5

The following information has been extracted from the financial statements and notes of Origin Pty Ltd.

2014 2013

Sales revenue 1,044,000 1,035,000

Interest expense 41,400 47,700

Income tax expense 80,280 95,400

Profit 94,500 100,980

Total assets 972,000 999,000

Total liabilities 540,000 594,000

Ordinary share capital 198,000 180,000

Retained earnings 122,400 113,400

Preference share capital 111,600 111,600

Preference dividends paid 5,040 5,040

Required

1. Calculate the following ratios for 2014:

A. return on total assets

B. return on ordinary equity

(2 marks each)

2. Calculate the following ratios for 2013 and 2014:

A. profit margin

B. debt ratio

C. times interest earned

(A & B = 3 marks C = 4 marks)

3. What do these ratios show in relation to the company's profitability and financial stability? (200 – 250 words maximum)

(5 marks)

4. What are some of the limitations or shortcomings of ratio analysis? Give at least four different examples and provide two or three sentences explaining each example.

(6 marks)

Total for Question 5: 25 marks

ACCT1008 Accounting for Business Assignment SP2 2014