Exam 2019, answers PDF

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MARKING GUIDE – Practise Exam

University

SAIBT

Exam Code

ACCT1008

Title of Paper

Accounting for Business

Exam Duration

180 minutes

QUESTION 1 – Balance Day Adjustment Journals (25 marks)

1

Part a Date

Account Name

Debit ($)

30 June Sales

Credit ($)

11300

Unearned Sales

1 mark 11300

1 mark

(to record sales that have not yet been earned)

Bookkeepers Wages Expense

750

Bookkeepers Wages Payable

1 mark 750

1 mark

(Bookkeepers wages payable at year end)

Depreciation – Cash Reg

475

Accum Dep – Cash Reg

1 mark 475

1 mark

(to record depreciation of POS equipment)

Depreciation – Shop Shelving

3 200

Accum Dep – Shop Shelving

1 mark 3 200

1 mark

(to record depreciation of Shop Shelving)

Rent Expense

600

Rent Payable

1.5 mark 600

1.5 mark

(to record rent owing)

Cash at Bank

29

Interest earned

1 mark 29

(to update accounting records for interest earned)

2

1 mark

Stock Loss

1 200

Inventory

1 mark 1 200

1 mark

(to record stock variance)

Insurance Expense

250

Prepaid Insurance

1.5 mark 250

1.5 mark

(to recognise prepaid insurance used)

Doubtful Debts

760

Allowance for Doubtful Debts

1 mark 760

1 mark

(to recognise AR that is unlikely to be collected) 20 marks

QUESTION 1 – Balance Day Adjustment Journals (continued) (b)

Accounts Receivable is an asset

(2 marks)

A future economic benefit to the entity (1 mark) Arising from past transaction or event(1 mark) Controlled by the entity (1 mark)

3

QUESTION 2 – Financial Statement Preparation (25 marks)

TWISTED GARDEN NURSERY INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2017 Sales

$318 970

less Sales Returns

12 370

less Discount Allowed

900

Net Sales

1.5

305 700

less Cost of Sales Opening Inventory

$116 000

add Purchases

156 900

add Freight in

19 000

less Purchase returns and allowances

(3 450)

less Discounts Received

(6 600)

Cost of Goods Available for Sale

281 850

less Closing Inventory

128 600

GROSS PROFIT

3

153 250 152 450

LESS EXPENSES Selling Freight Outwards

$9 400

Wages Sales Staff

62 000

Van Maintenance Expense

10 000

Nursery Rent Expense

24 000

Advertising Expense

7 000

Depreciation Garden Equip

6 000

Depreciation Delivery Van

5 000

123 400

3½

8 000

8 000

.5

Administrative Accounting Wages

4

Financial Doubtful Debts Expense

3 040

3 040

PROFIT

134 440

.5

$ 18 010

▪ Deduct 3 marks if no classification provided but it is otherwise correct ▪ Deduct 2 marks if partly classified only ▪ Deduct 1 mark if only very minor misclassification. ▪ Deduct ½ mark for each item wrongly included account. ▪ 2 column format is OK if presentation is clear ▪ Particularly poor presentation should have up to 2 marks deducted

Part b TWISTED GARDEN NURSERY BALANCE SHEET AS AT 30 JUNE 2017 ASSETS Current Cash at Bank Accounts Receivable less Allowance for D.Debts

$58 000

[.5]

$76 000

[.5]

3 040

72 960

[.5]

128 600

[.5]

Prepaid Rent

2 000

[.5]

Term Deposit

5 000

Inventory

$266 560

[.5]

Non-Current Term Deposit

125 000

Gardening Equipment

62 000

less Accum. Depreciation

24 000

[.5] [.5]

38 000

5

[.5]

Delivery Van

35 000

less Accum. Depreciation

17 500

[.5] 17 500

TOTAL ASSETS

180 500

[.5]

447 060

less LIABILITIES Current Accounts Payable

63 000

[.5]

Unearned Revenue

3 100

[.5]

Accrued Van M. E. Maintenance mmkmainMaintenance

1 900

[.5]

Accrued Accounting wageswwagesfWage

3 200

[.5]

Mortgage

5 000

76 200

[.5]

15 000

[.5]

Non-Current Mortgage Total Liabilities

91 200 $355 860

NET ASSETS

▪ Current Assets not in liquidity order – deduct 1 mark ▪ Deduct 3 marks if no classification but otherwise correct ▪ Deduct ½ mark (to maximum marks for each section) for each item wrongly included.

Part B (continued) TWISTED GARDEN NURSERY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2017 Capital

1 July 2016

$346 150 [.5 mark]

6

Add : Profit Less : Drawings Capital 30 June 2017

18 010 [1 mark] 364 160 8 300 [1 mark] 355 860 [1 mark]

Part C The entity is using the periodic method. (2marks) This is determined from looking at the trial balance as the entity is using a purchases account. (1 mark) The inventory balance has remained the same since the start of the period indicated by the date of 1/7/2016. (1 mark)

QUESTION 3 – Statement Analysis (25 marks) a.

The Current and Quick ratio measures of liquidity appear to be good or overall the liquidity position is good. (2 marks)

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b.

The Current ratio is above industry averages (2 marks)however given the Quick ratio is marginally below the inventory average it would suggest inventory is pushing the Current ratio up. This would be worth investigation as the business may be holding outdated stock given it is in the clothing business.

c.

The Average Collection period has improved from 38 days to 34 days which indicates that there credit control is improving however it is above the rule of thumb of 30 days and is above the industry average. (2 marks)

d.

The debt ratio is higher than the industry average and has increased during 2016 indicating a higher reliance on borrowings. (2 marks) The business is financing more than half of its assets with debt. (2 marks)

e.

The times interest earned has stayed relatively stable over the two years, showing that even though the company’s debt has increased, it is managing to pay the interest on the debt as well as it has in the past year. (2 mark) Whilst the TIE ratio is lower than the industry average this is unsurprising as the business is more reliant on debt financing than its peers. (1 mark)

f.

The TIE ratio of 5.0 times in 2016 should not be of particular concern is it is proportionally closer to the industry average than is the debt ratio. (1 mark) In fact it would appear that the funds borrowed during 2016 have been used effectively as the profit margin and TIE have increased indicating that the return generated is better than the cost of borrowings (1 mark)

Above is simply a guide to matters which student may raise in answering this section. You need to use some degree of discretion when reading the student response. There are obviously other points which could validly be made. Use the following matrix as a guide:

Marks Very Good Understanding Uses the data to make solid recommendations

10 - 15

and draws insightful conclusions. Is able to relate the data to 'real world' situations/circumstance. Point e. is an example.

Good Understanding

Displays reasonable comprehension of the

7 - 10

information inferred by the data. Makes comments/recommendations which demonstrate a working knowledge of the nature of the information. Points c & d are examples.

Basic Understanding

Accurately describes the information but does not use it to draw reasonable conclusions or make informative recommendations.

8

4-7

Points a & b are examples.

Poor Understanding

Displays a crude understanding of the nature of

up to 4

the task but fails to demonstrate a reasonable level of understanding .

i.

Inventory Turnover = Liquidity

ii.

Return on Equity = Profitability

iii.

Operating Cycle = Liquidity

iv.

Asset Turnover = Financial Stability (Solvency)

v.

Debt Ratio = Financial Stability (Solvency)

vi.

Quick (acid test) Ratio = Liquidity

(1 each)

Part c The accounting period assumptions states that the life of an entity is divided up into equal periods of time.(2 marks)In order to reliably compare the information from one period to another it is essential that the two periods under review are of the same length otherwise the information would not be comparable. (2 marks) Overall = 4 marks

***looking for a sensible discussion from the student, the essence is the periods need to be the same length of time in order for the financial performance / position to be reliably compared.

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QUESTION 4 - Statement of Cash Flows (25 marks) CALCULATIONS: Cash Cash on Hand Cash at Bank Bank Overdraft

30/6/17 70 418 (40) 448

30/6/16 24 196 0 220

Receipts from Customers Net Sales + Op. A/C Rec – Cl. A/C Rec – Doubtful Debts 3 980 + 108 - 116 -18 = 3 954

[4]

Paid to Suppliers COS – Op Inv + Cl Inv – Disc Rec + Op A/C Pay – Cl A/C Pay 2 600 - 660 + 620 - 10 + 160 - 128 = 2 582

[3]

Paid for Expenses S & A Exp – Depn - Op PP Exp + Cl PP Exp + Op Acc Exp – Cl Acc Exp 840 - 64 -66 + 70 + 62 - 42 = 800

[3]

2 582 + 800 = 3 382

[1]

Interest Received [1]

8 (given in Income Statement) Income Tax Paid Op Tax Payable + Tax Expense – Cl Tax Payable 116 + 194 84 = 226 Dividend Paid Op. bal capital + Net Profit - Cl. bal captial 1780 + 450 - 1900 = 330

[1.5]

[1.5]

If the number in the statement is correct award full marks and ignore calculations. When answer is incorrect consider the students calculations and award marks on a prorate basis were the student has demonstrated comprehension of the task at hand. As a guide each error in calculation should attract a deduction of 1 mark. Any method of calculation is acceptable i.e. account reconstruction and/or narrative method are OK.

10

MAVERICK PRODUCTION LTD STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2017 $'000 Cash Flows from Operating Activities Receipts from Customers 3 954 Payments to Suppliers & Employees (3 382) Dividends Received* Interest Received* 16 Interest Paid* (24) Income Tax paid (226) Cash Flows from Investing Activities Payment for Plant & Equipment Proceeds from Sale of Buildings Cash Flows from Financing Activities Proceeds from Loan Drawings Increase in cash held Cash at Start Cash at End

(160) 320

$'000 [4] [7]

338

[1] [1] [1.5]

160

[.5] [.5]

60 (330)

[1] [½] (270) 228 220 448

[1.5] [1½] 20 marks

Question 4 b. Cash accounting – income recognised when cash received and expenses recognised when paid. (1.5 marks) Use of a Cashflow statement and Income Statement account to illustrate* (1 mark) Versus Accrual accounting – income recognised when earned and expenses recognised when incurred. (1.5 marks) Use of a Cashflow statement and Income Statement account to illustrate* (1 mark) *if the student opts to illustrate using the Cashflow Statement and Income Statement generally that’s fine.

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