Accounting for Business Major Assignment SP1 2015 Instructions
Due Date Thursday 7th May 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
Bill Smith has started a lawn mowing business (Bill’s 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. Bill has never owned or run a business before. To start the business on 1 February 2014, he deposited $3,600 into a new bank account opened in the name of the business. The $3,600 consisted of a $3000 interest free loan from his Uncle (to be repaid in full over 2 years in equal amounts at the end of each month) and $600 of his own money. Bill rented some equipment, purchased supplies, and hired friends to mow and trim his customer’s lawns.
At the end of each month Bill 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, Bill’s business account cheque book shows a balance of $2,245, and his customers still owe him $750. During the period, he collected $5,800 from customers. His cheque book lists payments for supplies totalling $550, and he still has fuel and supplies that cost a total of $75 on hand. He paid his employees $3,200, and he still owes them $620 for their final week of work.
Bill rented some equipment from Kennard’s Hire. On 1 February, he signed a six-month rental agreement on lawnmowers and paid $1050 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, Bill has kept the equipment in excellent condition. In fact during May paid $310 to repair one of the mowers.
To transport employees and equipment to jobs, Bill used a trailer that he bought for $780. He believes that the period’s work used up one-quarter of the trailer’s service potential. The business cheque book lists a payment of $660 for private cash withdrawals by Bill during the period, in addition he has a diary entry indicating that he also used $35 worth of fuel for his own vehicle.
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 Bill’s venture successful? Give the reasons for your answer. 150 – 250 words only.
(5 marks)
Total for Question 1: 25 marks
Question 2
In selecting events to record in the financial statements two important criteria are relevance and reliability.
i) Define each of these two terms and explain why they are important criteria for the selection of events to record in the financial statements.
[4 marks]
ii) Theoretically, conventional financial reports uphold reliability and relevance as equally important qualities. It is sometimes said, however, that in practice wherever there is a conflict between the two, the greater importance is placed upon reliability. Do you agree that reliability effectively takes priority over relevance in external financial reporting? Explain why, noting the use of historic cost as opposed to other values such as replacement cost and net realisable value.
[3 marks]
iii) If you had to choose between them, which quality, relevance or reliability would you believe to be most important in internal managerial accounting? Explain your answer.
[3 marks]
Total for Question 2: 10 marks
Question 3
Bill 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:
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Buildings: 3% of cost
Office furniture and equipment: 20% of cost (Note: $10,000 of the furniture was acquired on 01/01/14)
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Total for Question 3: 22 marks
Question 4
You are provided the following financial information for Sinclair Ltd:
Sinclair LTD
COMPARATIVE BALANCE SHEETS
AS AT JUNE 30
2014 2013
Current Assets
Cash on Hand $6375 $5400
Cash at Bank - 1250
Accounts Receivable (net)* 5275 4600
Inventory 21600 19600
Prepaid Expenses 1750 28625 870 31720
Non Current Assets
Plant and Equipment 77000 65000
less Acc. Depreciation (22000) 53000 (18600) 46400
Total Assets 88000 78120
Current Liabilities
Bank Overdraft 6450 -
Accounts Payable 4200 3700
Accrued Expenses 920 730
Tax Payable 830 12400 1100 5530
Non Current Liabilities
Bank Loan 26500 21000
Total Liabilities 38900 26530
Net Assets 49100 51590
Equity
Share Capital 33500 27000
Retained Earnings 15600 24590 49100 51590
*A/C Rec (2014)=5450 less Allowance for Doubtful Debts=175
A/C Rec (2013)=5060 less Allowance for Doubtful Debts = 460
(continued over the page)
Sinclair LTD
INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, 2014
Net Sales $93500
Cost of Sales 56400
Gross Profit: 37100
Other Revenue:
Interest Revenue 110
Discount Received 375 485
37585
Expenses:
Selling & Admin Expense 20900
Doubtful Debts Expense** 275
Depreciation Expense 6050
Interest Expense 2250 29475
Profit before tax 8110
Income tax expense 2433
Profit $ 5677
**Bad debts written off during the year amounted to $925.
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 Sinclair 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 Modal Ltd.
2013 2014
Sales revenue 303,514 294,147
Interest expense 13,988 11,665
Income tax expense 27,976 22,619
Profit 29,613 26,626
Total assets 292,956 273,861
Total liabilities 174,190 152,145
Ordinary share capital 52,785 55,786
Retained earnings 33,255 34,486
Preference share capital 32,085 32,085
Preference dividends paid 1,449 1,449
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Required;
Note: All calculations must be shown to be awarded any marks.
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 SP1 2015
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