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ACCT1101 Tutorial Solutions – Week 9 (Tute 8) CHAPTER 11 DISCUSSION QUESTIONS D4.

‘Although the process of bank reconciliation provides a measure of control over cash in a business entity, bank reconciliation is useless unless it operates within a framework that incorporates essential elements of a good internal control system.’ Discuss this statement.

Preparing a bank reconciliation statement does not ensure that all cash receipts in an entity have been banked or that all payments are properly authorised. Only a good internal control system (of which bank reconciliation is only a part) can do that. A good internal control system is needed to ensure that all cash is received and is duly banked intact, and that all payments are authorised by responsible personnel. Nevertheless, a bank reconciliation statement, reconciling cash records of receipts and payments with the bank’s statement of account is useful in maintaining control over banked receipts and payments made by cheques, direct transfer, or by a system of electronic payments. The bank reconciliation statement helps prove the accuracy of both the entity’s and the bank’s records.

Exercise 11.1 Cash Flow management Benjamin runs a cheese shop at the local shopping centre. Some months Benjamin seems to have more than enough cash to pay his bills when they are due. Other months Benjamin struggles to pay bills on time as he runs short of cash in the business’s bank account and has to use money from his personal account to pay business expenses. Required (a) Advise Benjamin on ways he can overcome his cash flow management issues. Benjamin needs to take control of cash flow and reduce the amount of money he needs to keep his business running from day to day and earn a higher return. Benjamin need’s to create a cash flow forecast. The forecast should show exactly how much cash will flow in and out of his business each month. It will help him identify months in which he may be short of money and makes sure his has enough cash on hand. Benjamin needs to track his actual cash flow performance from week to week. It would help to run a single bank account for his business and to use one of the many cash flow tools available for free on most bank web sites.

Exercise 11.7 Bank reconciliation Sandy Poglase, owner of Sandy’s Sandwiches, wants a bank reconciliation statement to be prepared for the month ended 31 March 2019 using the following information: 1. Final balance in the Cash at Bank account in the ledger of Sandy’s Sandwiches (after all entries arising from the bank statement had been entered) was $13 204.26 Dr. 2. Balance shown by the bank statement at 31 March was $13 155.10 Cr. 3. Cheques recorded in the cash payments journal but not presented to the bank for payment were as follows.

4. A deposit of $1270.30 appears as a deposit in the cash receipts journal but had not been recorded by the bank at the date of the statement. Required (a) Prepare the bank reconciliation statement at 31 March, 2019. (a) SANDY’S SANDWICHES Bank Reconciliation Statement as at 31 March 2019 Balance as per bank statement Cr Add: Deposit not credited Less: Cheques not presented Cheque No. 41 Cheque No. 43 Cheque No. 46 Cheque No. 51 Cash at Bank balance Dr

$13 155.10 1 270.30 14 425.40 $339.50 262.64 423.90 195.10

1 221.14 $13 204.26

Exercise 11.12 Budgeted cash receipts from sales GST Applies Kay’s Hardware Ltd’s budgeted monthly sales for January to June 2016 are given below. About 70% of the monthly sales are expected to be on credit. Approximately 60% of the credit sales are collected in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale; 5% are never collected and are written off. The budgeted gross sales including GST of 10% by month are as follows.

Required (a) Prepare a schedule of expected cash receipts from sales for April, May and June 2016 (a) KAY’S HARDWARE LTD Budgeted Cash Receipts from Sales April May From cash sales in same month [1] $37 500 $45 000 [30% × current month]

June $39 000

From credit sales same month [70% × current month × 60%)

[2]

52 500

63 000

54 600

From preceding month’s sales [70% × 30% × preceding month]

[3]

29 190

26 250

31 500

From second preceding month [4] [70% × 5% × second preceding month]

5 670

4 865

4 375

$124 860 $139 115 $129 475

[1] [2] [3] [4]

30% of monthly sales are for cash. 70% of monthly sales are for credit. 60% of monthly credit sales are collected in month of sale. 30% of monthly credit sales are collected in the next month. 5% of monthly credit sales are collected two months later.

CHAPTER 18 D3.

Explain why cash flows from operating activities are important to users of a statement of cash flow.

Cash flows from operating activities are important to users of cash flow statements because they represent cash flows generated by the entity’s business operations. A high and constant stream of these cash flows would generally indicate an entity’s capacity to generate cash to carry on as a going concern, and its flexibility to change the nature of its activities. As stated in paragraph 13 of AASB 107, the amount of cash flows from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of finance.

Exercise 18.10 Proprietary Company, with Direct and Indirect Methods The following comparative statements of financial position and income statement are for the business of Bargains Galore Pty Ltd.

Additional information 1. All sales and purchases of inventory are on credit. 2. Income tax is paid in one instalment during the year. 3. A dividend had been paid to shareholders. 4. Additional plant had been acquired for a cash outlay.

Required (a) Prepare the statement of cash flows for the company for the year ended 30 June 2020. Use the direct method. (b) Repeat requirement A using the indirect method.

(a) BARGAINS GALORE PTY LTD Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Income taxes paid Net cash from operating activities

$822 000 (684 000) 138 000 (50 000) $88 000

Cash flows from investing activities: Purchase of plant and equipment Net cash used in investing activities

(48 000)

Cash flows from financing activities: Dividends paid Net cash used in financing activities

(30 000)

Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

(48 000)

(30 000) 10 000 20 000 $30 000

Workings: Cash receipts from customers:

Balance b/d Sales

Accounts Receivable 74 000 Cash from customers 800 000 Balance c/d 874 000

822 000 52 000 874 000

Inventory 60 000 Cost of Goods sold 436 000 Balance c/d 496 000

408 000 88 000 496 000

Cash paid to suppliers: Cash payments for purchases:

Balance b/d Purchases

Cash paid Balance c/d

Accounts Payable 472 000 Balance b/d 60 000 Purchases 532 000

96 000 436 000 532 000

Cash Balance c/d

Expenses Payable 212 000 Balance b/d 40 000 Other expenses* 252 000

22 000 230 000 252 000

*Other expenses = $160 000 (wages) + $78 000 (other expenses) – $8000 (prepaid expenses expired) * = $230 000 Cash paid to suppliers and employees = $472 000 (inventory) + $212 000 (expenses) = $684 000

Income tax paid:

Cash paid Balance c/d

Current Tax Liability 50 000 Balance b/d 44 000 Income tax expense 94 000

50 000 44 000 94 000

Retained Earnings 30 000 Balance b/d 180 000 Profit for the period 210 000

150 000 60 000 2100

Dividends paid:

Dividends paid Balance c/d

(b)

BARGAINS GALORE PTY LTD Statement of Cash Flows for the year ended 30 June 2020 Inflows (Outflows) Cash flows from operating activities Profit for the period Depreciation expense Changes in assets and liabilities Decrease in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Increase in expenses payable Decrease in current tax liability

$60 000 50 000 22 000 (28 000) 8 000 (36 000) 18 000 (6 000)

88 000

Net cash flows from operating activities Cash flows from investing activities Purchase of plant and equipment

(48 000) (48 000)

Net cash flows from investing activities Cash flows from financing activities Dividends paid Net cash flows from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

(22 000)

(30 000) (30 000) 10 000 20 000 $30 000...