ACCT S1 2021 1006 Lecture Wk 7 PDF

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BUSINESS SCHOOLACCT 1006Accounting and Financial ManagementWeekMid Semester RevisionTimothy WangREVISION LEARNING TIPEFFECTIVE REVISIONin this subject involves1) What is the most important2) Exercises to practice:› Doing practical/written questions› Explaining concepts›Using Feedback given3) additio...

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ACCT 1006 Accounting and Financial Management

Week7 MidSemesterRevision TimothyWang

BUSINESS SCHOOL

REVISION LEARNING TIP

EFFECTIVE REVISION in this subject involves 1) What is the most important 2) Exercises to practice: › Doing practical/written questions › Explaining concepts › Using Feedback given 3) additional questions to practice 2

GAAP (Week 1)

›Generally accepted accounting principles (GAAP) ›What does GAAP consist of? - Accounting standards (optional in this unit, required in advanced accounting units) - The Conceptual Framework (objective of GPFR, reporting entity, qualitative characteristics and elements of financial statements) - Accounting concepts & principles 3

GAAP (week 1)

› Exercise 1 › The following transaction was recorded in the accounts of ABC Ltd during the year ending 30 June 2020. › June 1, 2020 Supplies Cash

Dr Cr

$2 000 $2 000

Required For the journal entry recorded above, explain fully the asset, definition that underlies and informs the process of recording the transaction. IMPORTANT: 1) focus on an increase 2) Link the asset definition to the transaction given

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GAAP (week 1) › An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. › In this case, supplies is an asset because it is a present resource controlled by ABC Ltd as a result of a cash purchase. This economic resource represents a right that has the potential to produce economic benefits through its use in the provision of services to customers.

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Adjusting entries (Week 2)

›Adjusting entries - Why adjusting entries? - Update ledger accounts

- When do you prepare adjusting entries? - Whenever you want to prepare financial statements

- Be able to do some calculations - Adjusting entries for a prepayment depend on the initial journal entry to record prepayment

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Adjusting entries (Week 2)

› Exercise 2 › On 1 June 2020, 3 years’ rent of $ 36 000 was paid in advance and was debited to rent expense. › Required: Prepare adjusting entry for rent on 30 June 2020.

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Adjusting entries (Week 2) › On 1 June 2020, 3 years’ rent of $ 36 000 was paid in advance and was debited to rent expense. › Required: Prepare adjusting entry for rent on 30 June 2020. › On 1 June 2020, overstated rent expenses by 36 months (or 3 years) and understated prepaid rent by 36 months › From 1 June to 30 June 2020, one month rent expense $1000 ($36000/(12months *3)=$1000) was incurred › On June 30 2020, overstated rent expenses 35 months and understated prepaid rent by 35 months. › Dr Prepaid rent › Cr Rent expense

35000 35000

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Inventory (weeks 3 and 4) › On what basis is inventory measured? The lower of cost and NRV (net realisable value): if cost > NRV, write down inventory to NRV; if cost < NRV, no change required because inventory has already been measured at cost, which is the lower. › For the cost, it can be actual cost (unit identification method) or make cost flow assumptions (FIFO, average cost and LIFO). › The way you apply a particular cost flow assumption depends on whether you are using a perpetual or periodic inventory system, which in turn affects journal entries for transactions under each system: - Apply a cost flow assumption continuously throughout the whole accounting period under a perpetual inventory system via a perpetual inventory card (paper based or electronic) - Apply a cost flow assumption once only at the end of an accounting period under a periodic inventory system 9

Inventory (weeks 3 and 4) › Exercise 3 › On June 1, ABC Ltd had opening inventory of 10 * $50 unit cost=$500. › On June 3, sold 8 units for $100 each. › On June 16, it purchased 10 units at $55 each. › On June 23, it sold 1 unit for $100 each. › Required › 1. What was the ending inventory on June 30 under a perpetual inventory system using FIFO? › 2. What was the ending inventory on June 30 under a periodic inventory system using FIFO? 10

Inventory (weeks 3 and 4) Date

Purchases

Cost of Sales

1/6

(10 @ $50) $500

3/6 16/6

Inventory Balance

(8 @ $50) $400 (10 @ $55) $550

(2 @ $50) $100 (2 @ $50) (10 @ $55) $650

23/6

(1 @ $50) $50

(1 @ $50) (10@$55) $600

Inventory (weeks 3 and 4) › At 30 June, the perpetual inventory card using FIFO indicated the ending inventory was $600 (namely, 1@ $50 and 10 @$55). › Does this mean that the firm should report $600 in its balance sheet? › Not necessarily. Ending inventory $600 was subject to two possible adjustments: › 1) A stocktake based adjustment: › 2) The lower of cost and NRV: If the NRV (net realisable value) is $30 per unit, prepare the adjusting entry.

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Inventory (weeks 3 and 4) › At 30 June, the perpetual inventory card using FIFO indicated the ending inventory was $600 (namely, 1@ $50 and 10 @$55). › Does this mean that the firm should report $600 in its balance sheet? › Not necessarily. Ending inventory $600 was subject to two possible adjustments: › 1) A stock based adjustment: › 2) The lower of cost and NRV: If the NRV (net realisable value) is $30 per unit, prepare the adjusting entry. › Dr Inventory write-down expense $270 › Cr Inventory $270

($50-$30)*1 + ($55-$30)*10

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Inventory (Weeks 3 and 4) › Under a periodic inventory system › Step 1: perform a stocktake at the end of the accounting period › 10 opening inventory – 8 sold + 10 purchased -1 sold = 11 units on hand › Step 2: apply FIFO at the end of the accounting period › 10 units * $55 + 1 unit * $50=$600 › This ending inventory $600 will be subject to the lower of cost and NRV adjustment too.

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Inventory (Weeks 3 and 4) › Exercise 4: The adjusted trial balance of ABC Ltd for the year ended 30 June 2020 was as follows. Required: prepare closing entries. Debit Cash Ending inventory AccountsReceivable Inventory Equipment AccumulatedDepreciation‐Equipment AccountsPayable NotesPayable ShareCapital RetainedEarnings Dividends Sales SalesReturnsandAllowances Perpetual inventory Costofsales system DepreciationExpense InterestExpense

Credit $5940 560 3800 4250 $1390 920 890 2000 10080 1500 5450 250 2000 2200 230 $20730

$20730

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Inventory (Weeks 3 and 4) › Step 1 close income/revenue and contra expense accounts to profit or loss summary › Step 2 close expense and contra revenue accounts to profit or loss summary › Step 3 close profit or loss summary account to retained earnings or capital account › Step 3 close distribution to owners to retained earnings or capital account › Note: we can swap step 1 and step 2

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Inventory (Weeks 3 and 4) Sales ProfitorLossSummary

Dr Cr

5450

ProfitorLossSummary CostofSales DepreciationExpense InterestExpense SalesReturnsandAllowances

Dr Cr Cr Cr Cr

4680

ProfitorLossSummary RetainedEarnings

Dr Cr

770

RetainedEarnings Dividends

Dr Cr

1500

5450

2000 2200 230 250

770

1500 17

The amount of cost of sales= opening inventory 3200 + purchases 2600 – purchases returns and allowance + freight in – ending inventory 3800 = 2000

eks 3 and 4)

› Exercise 5: The adjusted trial balance of ABC Ltd for the year ended 30 June 2020 was as follows. Ending inventory based on a stocktake was $3800. Required: prepare closing entries. Ending inventory

Debit

Cash AccountsReceivable Opening inventory Inventory Equipment AccumulatedDepreciation‐Equipment AccountsPayable NotesPayable ShareCapital RetainedEarnings Dividends Sales SalesReturnsandAllowances Periodic inventory Purchases DepreciationExpense InterestExpense

Credit $5940 560 3200 4250 $1390 920 890 2000 10080 1500 5450 250 2600 2200 230 $20730

$20730 18

Inventory (Weeks 3 and 4) 1) Reduced overstated amount of cost of sales transferred to profit or loss summary 2) update inventory account.

Inventory(ending) Sales ProfitorLossSummary

Dr Dr Cr

3800 5450

ProfitorLossSummary Purchases Inventory(opening) DepreciationExpense InterestExpense SalesReturnsandAllowances

Dr Cr Cr Cr Cr Cr

ProfitorLossSummary RetainedEarnings

Dr Cr

770

RetainedEarnings Dividends

Dr Cr

1500

9250 8480

Overstated the amount of cost of sales that is transferred to profit or loss summary $5800 (i.e., purchases $2600 + opening inventory $3200)

2600 3200 2200 230 250

770

1500 19

Inventory (Weeks 3 and 4) Inventory Date

Dr

Cr

Bal

30-Jun

3200 Dr

30-Jun 30-Jun

3200 3800

0 3800 Dr

Compare closing entries under a perpetual inventory system and a periodic inventory system: Perpetual: close cost of sales account directly and don’t need to update inventory account; Periodic: close opening inventory, purchases, purchase returns and allowances, Freight in accounts plus establish the ending balance for inventory account.

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Accounting Subsystems (Week 5) › Step 1 Record a transaction in a journal, either general journal or one of the four special journals (Sales journal, Purchases journal, Cash payments journal, Cash receipts journal); › Step 2 Daily basis of posting (posting an individual amount to a) subsidiary ledger account, b) other accounts, c) accounts dr or cr in General Journal) plus posting references › Repeat Step 1 and 2 for every other transaction › Step 3 Post column totals from special journals to ledger accounts affected at the end of the month and plus posting references

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Accounting Subsystems (Week 5)

› If control and subsidiary accounts are involved, two changes are required: › –1) In journalising, both the control and subsidiary ledger accounts must be identified. › –2) In posting, there must be a dual posting – once to the control account and once to the subsidiary account. › Without the above two changes, a control account balance will not be equal to the sum or total of individual subsidiary ledger account balances.

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Control Accounts and Subsidiary Ledgers

Accounting Subsystems (Week 5) › Exercise 6: In June 2020, the chart of accounts of ABC Ltd includes the following selected accounts: Account no. Account title 105

Cash

120

Inventory

205

Accounts Payable

410

Discount Received

629

Dividends

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Accounting Subsystems (Week 5) › Exercise 6: In June 2020, the following transactions occurred Date Transaction June 1, 20 Purchased inventory $770 on credit from Amy Ltd. June 2

Paid Diamond Ltd (a supplier) balance due of $1850, less 2% discount.

June 15

Returned inventory $400 to Amy Ltd.

June 20

Paid a dividend of $50 000 to shareholders.

June 28

Paid Stones Ltd (a supplier) in full for invoice no. 264, $2860.

Required: Show how the completed Cash Payments Journal and General Journal would look like on 30 June 2020 after you recorded transactions and posted to ledger accounts. 25

Post the individual amount Dr 1850 to Diamond Ltd account on June 2 – first posting

Accounting Subsystems (Week 5) Cash Payments Journal

Date

Account debited

Ref

02/06

Diamond Ltd

√

20

Dividends

629

28

Stones Ltd

√

Other accounts debited

Accounts Payable Dr 1850

Inventory

Discount Cash received Cr Cr 37

50000

1813 50000

2860

2860

50000

4710

37

54673

(x)

(205)

(410)

(105)

Post the column total Dr 4710 including Dr 1850 to Accounts Payable account at the end of the month, we are posting Dr 1850 again- second posting 26

Accounting Subsystems (Week 5) General Journal Date

Account titles and explanation

Ref

Debit

June 15

Accounts PayableAmy Ltd

205/√

400

Inventory

120

Credit

400

(Returned inventory to supplier)

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Accounts Receivable (Week 6) › Don’t overstate Accounts Receivable in statement of financial position and don’t overstate net income in statement of profit or loss by accounting for uncollectable.

Percentage of net sales Allowance Accounting for uncollectable Direct write-off

Ageing of accounts receivable

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Accounts Receivable (Week 6)

› Exercise 7: During the financial year ended 30 June 2020, ABC Ltd had net sales of $240,000, a credit balance in Allowance for doubtful debts of $11,700. In the past, about 1.4% of net sales have proved to be uncollectable. Also, an aging analysis of accounts receivable reveals that $15,000 of the receivables appears to be uncollectable. Assume that adjusting entries are prepared at the end of a financial year. › Required: › Prepare entries in general journal to record bad debts expenses for the financial year ended 30 June 2020 using (a) the percentage of net sales method and (b) the accounts receivable aging method. What is the resulting balance of Allowance for doubtful debts under each method?

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Accounts Receivable (Week 6) Before I prepare the adjusting entry for bad debts expense, the following two ledger accounts look like this:

Date

Dr

Baddebtsexpense Cr

Balance

Before adjustment balance

Allowancefordoubtfuldebts Dr Cr Balance

Date 30‐Jun‐20

11700

30

Accounts Receivable (Week 6) (a) General journal

$

Bad debts expense

Dr

Allowance for doubtful debts

$

3360

Cr

3360

(To estimate bad debts expense for the year) 240,000*1.4%=$3360

Baddebtsexpense Date 30-Jun-20

Dr

Cr

Balance

3360

first

3360

Allowancefordoubtfuldebts Dr Cr Balance

Date 30‐Jun‐20 30-Jun-20

11700 3360

15060

Then, after adjust ment bal. 31

Accounts Receivable (Week 6) (b) General journal

$

Bad debt expense

Dr

Allowance for doubtful debts

$

?

Cr

?

(To estimate bad debt expense for the year) (15000-11700=3300)

Date

Dr

Baddebtsexpense Cr

Balance

?

?

Allowancefordoubtfuldebts Dr Cr Balance

Date 30‐Jun‐20 30‐Jun‐20

?

11700 15000 32

Accounts Receivable (Week 6) (b) General journal

$

Bad debts expense

Dr

Allowance for doubtful debts

$

3300

Cr

3300

(To estimate bad debt expense for the year) (15000-11700=3300)

Date

Dr

30-Jun-20

Baddebtsexpense Cr 3300

Balance

then

3300

Allowancefordoubtfuldebts Dr Cr Balance

Date 30‐Jun‐20 30-Jun-20

11700 3300

first

15000 33

Additional questions to practice › Additional questions to practice and learn from: 1. Unseen questions and answers, online tutorial homework on Canvas Quizzes, written tutorial homework 2. Extra practice questions and answers 3. Lecture demonstration questions and answers 4. The demonstrations within the text, interactivity exercises, videos, concept quiz

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Thank you and best wishes in your exam

Thank you! I WISH YOU ALL THE BEST IN THE EXAM

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