Accounting for Business Major Assignment SP3 2014 Instructions

Due Date Monday 5th January 2015 1.00pm Assignments must be submitted through the Turnitin link on the subject portal

Groups up to 3 students maximum are permitted.

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 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)

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

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:

 Buildings: 3% of cost

 Office furniture and equipment: 20% 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

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

ACCT1008 Accounting for Business Assignment SP3 2014