accounting

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 four months. Mark has never owned or run a business before. To start the business on 1 March 2014, he deposited $2,400 into a new bank account opened in the name of the business. The $2,400 consisted of a $2000 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 30th June, 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 30 June, Mark’s business account cheque book shows a balance of $1,900, and his customers still owe him $500. During the period, he collected $4,800 from customers. His cheque book lists payments for supplies totalling $510, and he still has fuel and supplies that cost a total of $65 on hand. He paid his employees $2,000, and he still owes them $400 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 $250 to repair one of the mowers.

To transport employees and equipment to jobs, Mark used a trailer that he bought for $660. 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 $660 for private cash withdrawals by Mark during the period. In June Mark paid back a quarter of the amount his father had lent to him.

Mark estimates that he spent approximately 80 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)

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

(11 marks)

0. 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

Harry Smith  is confused about the depreciation expense in the accounts for his shop, Kaiken, and would like you to explain the following to him:

i) Why is depreciation charged against the income statement for the display shelving even though Harry  believes the shelving is worth more now than when he bought it just over two years ago?

[3 marks]

ii) Harry is considering closing the shop in two years time and retiring. If Harry decides to go ahead with this decision can he still charge the same amount of depreciation expense for the shop shelving as has been done so in the past? Use the Going Concern Assumption in answering Harry’s question.

[4 marks]

iii) If Kaiken makes a loss in any year Harry wants to know if he still has to include depreciation expense in the income statement?

[3 marks]

Total for Question 2: 10 marks

Question 3

Mark Thompson 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:

A.   Rent expense for the premises includes $660 for July and August. B.   A payment of $1,750 for new office furniture has been incorrectly debited to the advertising expense account. The furniture had been purchased on 30 June 2014. C.   Commission due to sales representatives for the month of June, $2,000, has been not been paid or recorded. D.   Repairs to Mark's private motor vehicle, $750, have been debited to the vehicle expense account. E.   The unearned revenue account includes an amount of $350 for services provided during June. F.   A fire insurance policy covering buildings was taken out on 01 April 2014, the annual premium of $960 was paid in advance on this date and debited to the  Insurance expense account. G.   Interest of $960 on the loan held by the business was due, but has not been recorded or paid. H.   No depreciation has been recognised for the year ending 30 June 2014. The draft Balance Sheet shows the following: Buildings (at cost) $120,000 Less Accumulated Depreciation 32,000 $88,000 Office Furniture & Equipment (at cost) 20,000 Less Accumulated Depreciation 8,000 12,000 These amounts do not include any of the transactions listed above. Annual depreciation is to be calculated as follows:

 Buildings: 3% of cost

 Office furniture and equipment: 20% of cost

Required 1.   Ignoring GST, show the journal entries required to make the necessary adjustments/corrections listed. Make sure that your journal entries are complete and properly formatted. (18 marks) 2.   Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $21,300 as shown in the draft accounts. (4 marks)

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

                                                                                    2013                 2012

                                                                                      

Current Assets

Cash on Hand $2500        $5000

Cash at Bank                   -           1200

Accounts Receivable (net)   5200             4500

Inventory 21000          19000

Prepaid Expenses   1650       30350      800     30500

Non Current Assets

Plant and Equipment 76000        64000

less Acc. Depreciation            (23000)       53000  (17600)  46400

Total Assets                 83350           76900

Current Liabilities

Bank Overdraft    6550              -

Accounts Payable    4100           3800

Accrued  Expenses        680             790

Tax Payable        720      12050      1200    5790

Non Current Liabilities

Bank Loan                        25000          20000

Total Liabilities              37050                 25790

Net Assets              46300                 51110

Equity

Share Capital       32000               26000

Retained Earnings       14300               25110       46300               51110

(continued over the page)

RELIANCE  LTD

INCOME STATEMENT

FOR THE YEAR ENDED JUNE 30, 2014

Net Sales $92500

Cost of Sales  55200

Gross Profit:  37300

Other Revenue:

Interest Revenue        60

Discount Received      400     460

36840

Expenses:

Selling & Admin Expense  21000

Doubtful Debts Expense*                              250

Depreciation Expense       5400

Interest Expense    2700 29350

Profit before tax 7490

Income tax expense  2973

Profit           $ 6937

*Bad debts written off during the year amounted to $950.

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 Victorinox Ltd.

2013 2014

Sales revenue        595,125           600,300

Interest expense            27,428            23,805

Income tax expense            54,855            46,161

Profit            58,065              54,338

Total assets          574,425          558,900

Total liabilities          341,550          310,500

Ordinary share capital          103,500          113,850

Retained earnings            65,205            70,380

Preference share capital            64,170            64,170

Preference dividends paid 2,898 2,898

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