Tutorial work - Week 2 - 6, 8 - 13 PDF

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BUSN1001 Business Reporting & Analysis Week 2 tutorial solutions 2.0

Discussion on the conduct of tutorials. Students must come to tutorials prepared with their own written answers. Tutorial marks are awarded for preparation and participation.

2.1

The body that creates accounting standards, including the conceptual framework, for Australian companies is?

a. b.

ASIC - Australian securities and investments commission SEC - United States equivalent of ASIC

c. d. e.

CPA Australia – A professional body of which accountants are members in Australia AASB Australian Accounting Standards Board e.g. See page 20

2.2

Assets are best defined as:

ASX – Australian securities exchange

a. resources owned by the entity as a result of current event, from which future economic benefits are expected to flow. b. resources owned by the entity as a result of past event, from which future economic benefits are expected to flow. c. resources controlled by the entity as a result of current event, from which future economic benefits are expected to flow. d. resources controlled by the entity as a result of past event, from which future economic benefits are expected to flow. 2.3

Explain in a paragraph the accounting concept of reliability.

Page 18: “The financial statements should report the economic substance of events happening to the company, and the numbers should measure the events neutrally, neither overstating nor understating their impact. Reliable information will, without bias or undue error, faithfully represent those transactions and events that have occurred.” Ok, but what does that mean? It does not mean that reliability is 100% accuracy. Minor errors would be expected. 2.4 Measuring financial position On March 30, 2015 art student Gary started his new business called “Red Hot Artwork”: by contributing cash of $2,000, and borrowing $10,000 from his parents. At the end of his first day of business Gary’s business has Cash (in bank account) $ 12,000; Loan from parents $ 10,000; and a Vehicle (cost less depreciation) $ 7,000. Explain the financial position of Gary’s new business as at the end of March 30, 2015.

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2.5 answer: Asked about the “financial position” so why not prepare a balance sheet for Gary. (I know you were not explicitly asked, but it is the appropriate accounting technique to use to solve the problem posed.) Balance sheet for Red Hot Artwork As at 30 March, 2015 Assets Cash

12,000

Vehicle Total assets

7,000 19,000

Liabilities Loan

10,000

Total liabilities

______ 10,000

Owner’s equity = Assets – Liabilties = 19,000 – 10,000 = 9,000

Total assets

19,000

Owner’s equity Total Liabilities and equity

9,000 19,000

Check: why is owner’s equity 9,000? Gary contributed $2,000 in cash and a vehicle worth $7,000 for a total of $9,000 Interpretation: The financial position of Gary’s business is that he has $19,000 in assets, financed with a loan of $10,000 from his parents and $9,000 from his contribution of cash and a vehicle to his business. Further discussion: Gary hasn’t made any sales yet. What is the plan for this business? Similar problems: See textbook pages 12-13; study guide problem 1.6. 2.5 real business example: Woolworths Limited Complete Case 1A parts (2) to (9) on page 39 of Trotman, Gibbins and Carson “Financial Accounting: An Integrated Approach” 5th edition. The Woolworths accounts for 2011 are reproduced in Appendix 1 from page 745. 2.5 solutions below: (parts 1, 10-14 were not requested, bonus solutions provided)

(not required: 1 Indicators that Woolworths uses accrual accounting: (Numerous correct answers) “Woolworths Ltd” is a company and would be required to use GAAP (accrual) accounting. Woolworths provides an income statement separate from a cash flow statement. Note 1 of the financial statements mentions accounting for probable obligations (not just cash accounting). Use of Trade and Other Receivables and Trade and Other Payables on the balance sheet indicate accounting for credit transactions not just accounting for cash. The income statement includes non-cash expenses e.g. depreciation.) 2 3 4 5

Total assets at 26 June 2011 = 21,094.5 m Total Liabilities at 26 June 2011 = 13,248.7 m Shareholders’ equity at 26 June 2011 = 7,845.8 m Accounting equation in dollar figures at 26 June 2011 A = L + OE 21,094.5m 13,248.7 m + 7,845.8 m

6 Net profit before tax = 3,014.9 m 2

7 Net profit after tax = 2,140.3 m 8 Largest cash inflow relating to operating activities = 58,886.6 m Largest cash outflow relating to operating activities = 54,797.3 m 9 Give two reasons why the cash flow from operations is a different figure from profit after tax: (See discussion of accrual accounting versus cash accounting at page 10) Cash flow from operations is a different figure to operating profit after tax because the operating profit is calculated on an accrual basis and includes a number of items omitted from the cash flow from operations including: – Revenue earned but received in other periods – Expenses incurred but paid for in other periods – Expenses not involving cash outlays including depreciation and bad debts In addition the cash flow from operations includes revenues and expenses relating to prior or subsequent periods. Or perhaps: Item Profit after tax

Cash flow from operations Or perhaps: Item

Profit after tax

Cash flow from operations

Type of accounting Accrual Accounting Cash Accounting

Includes

Increases with:

Decreases with:

Includes credit and cash transactions Includes only changes in cash

Revenue

Expenses

Cash Inflows

Cash Outflows

Non-cash expenses

Revenue earned but received in prior or future periods Include sales when they occur (e.g. when goods delivered) Includes cash collected from sales regardless of when the sale occurs.

Includes non-cash expenses such as depreciation, allowance for bad debts Exclude all non-cash items

Expenses paid in prior or subsequent period Include when resource consumed

Include only when cash paid

Additional answers to Case 1A page 40 – not asked for in the tutorial question: 10 Total assets increased over the last year. 11 Woolworths Limited had $3,736.5 million worth of inventory as at 26 June 2011. 12 26 June 2011 13 a 2 years b 2 years c 2 years 14 Yes, they are. There is an auditor’s declaration (by Deloitte) in the report. Deloitte. 3

Tutorial questions BUSN1001 Business Reporting & Analysis Answers are in green. Week 3 tutorial (chapters 1-2) 3.1

The purchase of an asset for cash will:

A B

have no affect on total assets, liabilities, and owners’ equity. increase total assets and increase total liabilities.

C D

increase total assets and increase total owners’ equity. increase total assets.

Assets

=

liabilities + equity

An asset (such as inventory) $100 Cash -$100 3.2

If equipment was acquired by borrowing $20,000 from a bank and paying $10,000 in cash: total assets are decreased by $10,000

A B C

total assets are increased by $30,000 total assets are increased by $20,000

D E

total owner’s equity is decreased by $10,000 total owner’s equity is decreased by $20,000

Assets

=

liabilities + equity

Cash + equipment = borrowings + equity -$10,000 + $30,000 = $20,000 3.3

Tom purchased an item for $5,050 in 2008. He sold the item to a complete stranger for $7000 in 2009 and incurred a sum of $250 for advertising it. Which of the following statements is true?

a b

Historical cost is $5,050. Fair value is $7,000.

c d

Net realisable value is $6,750. All of the above.

Difficult - Refer top page 57, plus use of textbook glossary 3.4

Paris decided to start a shop selling flowers. The following are the transactions of Paris’s shop for June 2014. Record the business transactions for Paris’s flower shop onto a worksheet to show the financial position of Paris’s business.

. a. b.

Paris opened a business account and deposited $20,000 of her own money. Purchased flowers for cash $2,000.

c. d.

Purchased a van for $8,000, paying $3,000 in cash and borrowing $5,000 Borrowed $1,000 from a bank

e. Paris purchased a couch for her own house, paying $2,000 in cash; the payment was made from the shop’s business account 1

f.

Purchased a display stand for cash of $1,200 cash for displaying the flowers for sale. Assets

Cash a

20,000

b

-2,000

c

-3,000

d

1,000

e

-2,000

f

-1,200

Bal.

3.5

12,800

+

Inventory

+

Van (or

Display stand

Vehicle)

(or furniture)

=

Liabilities

+

Equity

=

Borrowings

+

Capital 20,000

2,000 8,000

5,000 1,000 -2,000 1,200

+

2,000

+

8000

1,200

=

6,000

+

18,000

Continuing from problem 3.4, Paris is having a wonderful time running her new business. As her financial advisor what are three major problems with her flower business?

Firstly, Paris has no sales. Paris’s flower business has been in business for some portion of June and she has no sales! (Cash is declining but when will some cash be received by the business? It would also be reasonable to assume that Paris has no business plan.) Second, Paris has borrowed $6,000, so 25% of her business (Borrowing 6,000/ [Total liabilities + equity 24,000]) is financed with borrowings that need to be repaid. There not only needs to be sales there needs to be a level of cash from sales to make the necessary payments on these loans as they fall due. Third, Paris business is selling flowers. Flowers are a highly perishable product. The inventory cost $2,000, but are these flowers still fresh and available for sale? (Has Paris been giving them away? Is the inventory worth $2,000 or is a write-down required?) Fourth, a shop is mentioned but there is no transaction to reflect rental of a shop. Was a lease signed? What liability was incurred? (Should there be rental expense for June?) Fifth, has Paris checked for any licenses needed to start her business? Has she registered a business name? Sixth, there are no costs for running the van. Has it been used?

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3.6

Problem 2.9 page 82 Trotman, Gibbins and Carson

Problem 2.9 Working: It might help to first classify the list given as Asset, Liability, Equity, Revenue, Expense or Dividend Accounts Receivable Accounts Payable Advertising expense Cash Sales Cost of goods sold Electricity expense Furniture and fittings Inventory Land and buildings Loan payable Projection equipment Rent expense Retained profits Jan 1, 2012 Share capital Ticket revenue

13,450 13,910 42,780 4,610 12,300 10,500 5,090 34,000 18,000 60,000 35,000 41,000 33,200 59,720 60,000 81,700

Asset Liability Expense Asset Revenue Expense Expense Asset Asset Asset Liability Asset Expense SHE (Equity – owners are shareholders so SHE) SHE (Equity) Revenue

Then prepare your financial statements as requested. The simpler format of exhibit 2.7 on page 68 is acceptable. This solution includes subtotals that are commonly used on these financial statements. Solution: 1 Century Cinemas Income Statement For the year ended 31 December 2012 $ $ Ticket revenue 81,700 Confectionery sales 12,300 Less Cost of confectionery sold (10,500) Gross profit 83,500 Less operating expenses Advertising expense 42,780 Rent expense 33,200 Electricity expense 5,090 (81,070) Net profit 2,430

3

2 Century Cinemas Statement of retained profits For the year ended 31 December 2012 Retained profits, 1 January 2012 Net profit for 2012

$ 59,720 2,430

Retained profits, 31 December 2012

62,150

3

Current assets Cash Accounts receivable Inventory Noncurrent assets Furniture and fittings Land and buildings Projection equipment Total assets

Century Cinemas Balance Sheet as at 31 December 2012 Current liabilities $ 4,610 Accounts payable 13,450 Noncurrent liabilities 18,000 36,060 Loan payable Total liabilities 34,000 Shareholders’ equity 60,000 Share capital 41,000 Retained profits 135,000

60,000 62,150 122,150

171,060

171,060

Total liabilities and shareholders’ equity

$ 13,910 35,000 48,910

(You can present the balance sheet in long form e.g. page 73. The vertical presentation style used here is merely to highlight the basic balance sheet relation that Assets = Liabilities + Equity.)

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3.7

Own study of real company example – Case 2A Trotman, Gibbins and Carson page 86. (Solution will be in tutorial solutions)

Case 2A more advanced as real company. 1 Point of time at which the balance sheet is drawn up – 26 June 2011. 2 Currency in which accounts in the balance sheet are measured – Australian dollars. 3 The 2011 balance sheet of Woolworths Limited balances as follows: Assets (21,094.5) = Liabilities (13,248.7) + Shareholders’ Equity (7,845.8) 4 The assets of 21,094.5 were financed by current liabilities 8,288.3, noncurrent liabilities 4,960.4 and shareholders’ equity 7,845.8 (including issued capital 3,988.6 and retained profits 3,897.5). 5 The ‘net assets’ figure of 7,845.8 is determined by deducting liabilities, 13,248.7 from assets 21,094.5. i.e. net assets = assets - liabilities $ million 6 Balances at 26 June 2011 – current assets 6,593.0 From balance sheet – current liabilities 8,288.3 – noncurrent assets 14,501.5 – noncurrent liabilities 4,960.4 7 Balance of Working Capital at 26 June 2011= current assets – current liabilities = 6,593.0 – 8,288.3 = – 1,695.3. 8 Dividends paid $1,260.0 m as per statement of cash flows, plus $13.2 million to minority interests 9 Amount of share capital issued – 3,988.6. 10 Companies included in the consolidated figures – Mac’s Liquor Stores, Dick Smith Electronics, Australian Safeway Stores, etc. 11 In 2011 the cost of goods sold amounted to $ 40,186.3 million. 12 As you would expect the two figures are different. Profit is based upon accrual accounting and includes credit transactions. The change in cash only includes items that actually changed the cash – items that changed cash held at the bank or in cash equivalents. Net profit after income tax is $2,140.3 million, whereas the cash balance has increased from $713.4 million to $1,519.6 million. Note that this figure includes the net change in cash from operations and all investing and financing activities. (As you will discover in chapter 14, companies are required to reconcile the cash flow from operating activities to net profit after tax.) 13 $2,124.0 million. 14 $54,279.5 million. 15 $3,736.5 million. 16 Cash increased by $806.2 (from $713.4 in 2010 to $1,519.6). Page 748.

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Tutorial questions BUSN1001 Business Reporting & Analysis Week 4 tutorial 4.1

Which of the following accounts is not a liability?

a b c d

Wages Payable Inventories purchased Accounts Payable Accruals

Inventories purchased increase the asset inventory. 4.2.

a. b. c. d.

4.3

An entity’s owners’ equity is one-third of its total assets. Its liabilities total $100,000. What is the amount of its total assets? $100,000 $150,000 A = L + E; A = 100,000 + (1/3*A); solve for A. $200,000 $300,000

On 1 July 2007 Motorist Ltd purchased a new car for $32,000 which they expect to sell after it has travelled 40,000 km for $12,000. The company uses the unit of output method of depreciation for depreciating its vehicles. The car travels 5,000 km in the year ended 30 June 2008 and 8,000 km in the year ended 30 June 2009 What is the written-down book value of the car at 30 June 2009?

a. b. c. d.

$25,500. $24,000. $26,400. None of the above. Difficult. Some information search is required. Depreciation expense per unit of output = (Cost – Estimated salvage value) / units of use = ($32,000 - $12,000)/40,000 km = $0.5 per km The book value (also called net book value, carrying amount, carrying value, written down value) = cost – accumulated depreciation Net Book value

= Cost – Accumulated Depreciation = $32,000 – (5,000km + 8,000km) * $ 0.5 per km = $32,000 - $6,500 = $25,500

4.4

Ideal Foods Ltd. had a balance of $200,000 in shareholders’ equity at 30 June 2008. During the year ended 30 June 2009 the company recorded a net profit of $50,000, distributed dividends of $30,000, and borrowed $10,000. What was the company’s shareholders’ equity at 30 June 2009?

a. b. c. d.

$200,000 $210,000 $220,000 $230,000

$220,000 4.5

= $200,000 + $50,000 - $30,000

Paris Ltd had the following transactions during the month of July 2014

1/07/2014

Owners started the company by investing $400,000 in cash.

1/07/2014

Borrowed $12,000 from a bank. The loan is due in three years at 12% interest per year, with interest to be paid at the end of each year.

1/07/2014

Paid a $12,000 insurance premium for the period July 2014 – June 2015.

2/07/2014

Purchased $20, 000 inventories by making a $10,000 cash payment and agreeing to pay for the balance in 90 days.

5/07/2014

Purchased equipment for $55,000 by making a cash payment for the full amount. The equipment is expected to have $5,000 residual value at the end of its five year useful life.

15/07/2014

Received $60,000 cash from a customer for services to be performed in August 2014

31/07/2014

Accrued the interest expense and insurance expense for this month. The equipment is depreciated using straight-line method.

(a1) Record the business transactions in a worksheet format (a2) Record the business transactions in journal entry format (b) Produce a balance sheet as at 31 July 2014 in a vertical format. (c) Briefly explain (one paragraph) the items in the equity section of the balance sheet.

Difficult. Chapter 3 covers the double-entry system and is essential reading for completing part (a2). The selection of transactions are a little more challenging than those given in chapter 3, including adjusting entries covered in chapter 4 and chapter 5. The challenge is to think how transactions are best recorded in the financial statements – not to merely memorize every possible journal entry. If too difficult then start with problem 4.6 (textbook problem 3.20, solution below) and then return to problem 4.5.

2

(a1)

Assets = Liabilities Cash

Prepayments Inventories Equipment

+

Accumulated Unearned Accounts depreciation Accruals venue payable Loans

1/07/2014 400,000 1/07/2014

12,000

1/07/2014

-12,000

2/07/2014

-10,000

5/07/2014

-55,000

15/0...