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.

Bill estimates that he spent approximately 45 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 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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A.  

Rent expense for the premises includes $1320 for the next 6 months including June of this year.

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B.  

A payment of $1,750 for office supplies has been incorrectly debited to the advertising expense account.

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C.  

Commission paid to sales representatives for the month of June, $2,000, was recorded as a sundry expense.

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D.  

Repairs to Bill's private motor vehicle, $850, have been debited to the vehicles account.

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E.  

The unearned revenue account includes an amount of $780 for services provided during June.

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F.  

A fire insurance policy covering buildings was taken out on 01 May 2014, the annual premium of $960 was paid in advance on this date and debited to the Insurance expense account.

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G.  

Interest on the $30,000 loan held by the business was due, but has not been recorded or paid. The loan was taken out on 01/01/14 at 6% interest rate.

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H.  

No depreciation has been recognised for the year ending 30 June 2014. The draft Balance Sheet shows the following:

Buildings (at cost)

$140,000

Less Accumulated Depreciation

32,000

$108,000

Office Furniture & Equipment (at cost)

20,000

Less Accumulated Depreciation

4,000

16,000

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 (Note: $10,000 of the furniture was acquired on 01/01/14)

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Required

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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)

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2.  

Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $22,750 as shown in the draft accounts.

(4 marks)

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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