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Tutorial Work: Chapter 2 pg 34-36 1 Miscellaneous terms (LO1, 7) The following definitions were discussed in the chapter: a A form of business in which two or more people combine their capital and talents. PARTNERSHIP b Information following the financial statements that provides additional information and disclosures. NOTES TO THE FINANCIAL STATEMENT c A form of business that is a separate legal entity, established by filing proper forms with ASIC. SOLE PROPRIETORSHIP d A report that attests to the fair presentation of a company’s financial statements. AUDITORS REPORT e The most common form of business. COMPANY OR CORPORATION f Information on role of the board and how it provides responsible leadership. GOVERNANCE INFORMATION REQUIRED Match each definition with one of the following terms: sole proprietorship; governance information; notes to the financial statements; partnership; auditor’s report; company or corporation. 7 Statement of Changes in Equity (LO 4) A company provides the following account balances for the current year:

REQUIRED Prepare a statement of changes in equity at year-end in a single column to give the closing balance of total equity. Beginning equity + Net income – Dividends +/- Other changes = Ending equity Statement of Changes in Equity For 1 year

Beginning Equity

83 096



Profit

22 133



Dividends

9 500



Addition Contr. Equity

100 000

Ending Equity

195 729

8 Classified balance sheet The following is a list of accounts:  Mortgage payable, due in 15 years NON-CURRENT LIABILITY  Short-term investments CURRENT ASSET  Cash CURRENT ASSET  Prepaid rent CURRENT ASSET  Patents NON-CURRENT ASSET  Contributed equity SHAREHOLDERS EQUITY  Accounts payable CURRENT LIABILITY  Buildings NON-CURRENT ASSET  Notes payable, due in six months. CURRENT LIABILITY REQUIRED Identify each account as a current asset, non-current asset, intangible asset, current liability, noncurrent liability, contributed equity, or retained earnings. 11 Classified balance sheet The following items were taken from the 30 June balance sheet of Samantha Solarium:

REQUIRED Recreate the company’s classified balance sheet, assuming that $27 200 of the mortgage payable balance will be paid within three months of the balance sheet date. Samantha Solarium Balance Sheet Assets Current Assets Cash

41 680

Equipment

127 360

Prepaid Insurance

9 360

Non-Current Assets Buildings and Land

244 000

Total Assets

422 400

Liabilities Current Liabilities Accounts Payable

24 960

Mortgage Payable

27 200

Interest Payable

7 200

Total Liabilities

59 360

Equity Contributed Equity

132 000

Retained Earnings

80 000

Total Liabilities and Equity

271 360

12 Multi-step income statement (LO4) These items were taken from the financial records of Tran Nguyen Pty Ltd:

REQUIRED Prepare a multi-step income statement assuming Tran Nguyen pays the 25 per cent company rate and has a 30 June financial year end (you can assume in this case accounting profit equals taxable income). Tran Nguyen Pty Ltd Multi-Step Income Statement For year ended 30 June

Net Sales Cost of Sales

154 900 75 620

$79 280

Gross Profit Operating Expenses Electricity Expense

17 650

Selling Expense

14 600

Administrative Expense

15 230 47 480

Other Revenue and Expenses Interest Revenue

500

Interest Expense

(50)

450 Profit (income) before income taxes

$32 250

Income tax expense ($32 250 x 25%)

8 062.50

Net Profit

$24 187.50

pg 38-39 21 Prepare and analyse the balance sheet (LO 3, 5) The following comparative balance sheet items are available from Lim Limited as of 30 June 2021:

REQUIRED a Prepare a comparative, classified balance sheet for Lim Limited.

2021

2020

$ Change

% Change VA 2021 (%)

Cash

15 000

26 635

-11 635

-43.6

1.9

Accounts Receivables

50 000

85 065

-35 065

-41.2

6.2

Supplies

12 500

13 500

- 1 000

-7.4

1.5

Inventory

25 650

27 270

-1 620

-5.9

3.2

Prepaid Rent

10 150

12 275

-2 125

-17.3

1.3

TOTAL CURRENT ASSETS

113 300

164 745

-51 445

-31.2

14.0

Buildings

240 000

300 000

-60 000

-20

29.7

Land

300 000

200 000

100 000

50

37.1

Equipment

24 000

24 000

0

0

3.0

Long-Term Investment

125 000

100 000

25 000

25

15.5

CURRENT ASSETS

NON-CURRENT ASSETS

TOTAL NON-CURRENT ASSET

695 000

630 000

65 000

10.3

86.0

808,300

793,745

14 555

1.8

Accounts Payable

75 500

35 035

40 465

115.5

9.3

Income Tax Payable

12 250

16 465

-4 215

-25.6

1.5

Interest Payable

13 755

7 550

6 205

82.2

1.7

Salaries Payable

35 500

33 560

1 940

5.8

4.4

Notes Payable

100 000

100 000

0

0

12.3

TOTAL CURRENT LIABILITIES

237 005

192 610

44 395

23.0

29.3

Bonds Payable

125 000

25 000

100 000

400

15.5

TOTAL LIABILITIES

362 005

217 610

144 395

66.4

44.8

Contributed Equity

100 000

80 000

20 000

25

12.3

Additional Equity

200 000

190 000

10 000

5.3

24.7

Retained Earnings

146 295

306 135

-159 840

-52.2

18.1

TOTAL EQUITY

446 295

576 135

-129 840

-22.5

55.2

TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

808 300

793 745

14 555

1.8

Intangible Assets TOTAL ASSETS LIABILITIES & SHAREHOLDERS EQUITY CURRENT LIABILITIES

NON-CURRENT LIABILITIES

SHAREHOLDERS EQUITY

b Perform horizontal and vertical analyses and interpret the results. Round percentages to one decimal point (e.g. 10.1%). HORIZONTAL ANALYSIS  Dollar Change in Account Balance = Current Year Balance – Prior Year Balance  Percentage Change in Account Balance = Dollar Change/Prior Year Balance

VERTICAL ANALYSIS  What are the big changes? Are they favourable or unfavourable for the business? Do any of them relate to one another? Together can they tell a story? Can you guess

what has happened to the company to cause the changes? Are there large changes in category totals, e.g between current and non-current classifications? Between debt and equity? Between revenues and expenses? Are any of the observations alarming/concerning? What kinds of actions can I take, now that I know this information? o Whilst their Current assets had decreased from 2020 to 2021, it is very clear that this was most probably an intentional cut in order to shift recourses to build for the future with investing into non-current assets such as land and buildings, which makes up 37.1% and 29. 7% respectively of the businesses assets for 2021. The decrease in Equity of 22.5% could also attributed to the investment, however some of this some could also be due to Shareholders Withdrawals in the form of dividends. o Whilst the business seems great in terms of total assets, these assets are predominantly non-current with 86% via vertical analysis. Total liabilities are over double the current assets, which suggests that the business upon investing in its future has taken on a lot of Liabilities that will need to be payed off in the future in order for the total assets to reflect a greater level of stability o As long as they have a solid plan into which they are investing large sums, that have drastically increased their liabilities, in order to repay those liabilities and start generating great profits these changes will be favourable for the businesses future. c Assume the same information above except that in 2021, Bonds payable is $0 while Retained earnings is $271 295. Does this new information change any interpretations previously made?  Would I be concerned if I was deciding whether to invest? o NO? YES? 23 Prepare and analyse an income statement (LO4, 5) The following income statement items are available from Bugeja Limited for the years ending 31 December:

REQUIRED a Prepare a comparative, multi-step income statement for Bugeja. 2019 $

2018 $

$ Change

% Change As % of As % of Total Rev. Total Rev. 2019 2018

Sales

95 950

106 569

(10 619)

(10)

Cost of Sales

48 596

58 896

(10 300)

(17.5)

50.6

55.3

Gross Profit

47 354

47 673

(319)

(0.7)

49.4

44.7

Operating Expenses Advertising Expense

7 765

9 789

(2 024)

(20.7)

8.1

9.2

4 879

6 010

(1 131)

(18.8)

5.1

5.6

Insurance Expense

4 897

5 236

(339)

(6.5)

5.1

4.9

Supplies Expense

1 654

2 106

(452)

(21.5)

1.7

1.9

Salaries Expense

19 320

21 012

(1 692)

(8.1)

20.1

19.7

Rent Expense

7 634

7856

(222)

(2.8)

8.0

7.4

Commissions Expense

46 149

52 009

(5 860)

(11.3)

48.1

48.8

Other Revenue and Expenses Interest Revenue

4 287

4189

98

2.3

4.5

4.4

Interest Expense

(2 584)

(2 695)

(111)

4.1

(2.7)

(2.8)

1 703

1 494

209

14.0

1.8

1.6

Profit (income) before income taxes

$2 908

$(2 842)

5 750

(202.3)

3.0

(3.0)

Income tax expense

(2 217)

(2 684)

(467)

17.4

(2.3)

(2.8)

691

(5 526)

(6 217)

112.5

0.7

(5.2)

Net Profit (Sales Rev.)

b Perform horizontal and vertical analyses and interpret the results. Round percentages to one decimal point (e.g. 10.1%).

 The cost of sales accounted for over 50% of their sales revenue, with expenses covering almost 50% of their sales. Incurring extra expenses such as tax in 2018 had resulted -5.2% losses from their total sales, which may have been the result from attempting to expand the business, as in 2019 whilst their only retained 0.7% of their sales as Net Profit, at least they had started building a bridge to revive their business c Assume the following changes: Cost of sales in 2019, $62 470 and in 2018, $45 670. Does this new information change previously made interpretations?



If this was the case it would seem that the business is digressing in their attempts to rebuild and if such a pattern continues I wouldn’t invest and suggest liquidating business assets before bankruptcy....