Download Financial Accounting Management and System and more Exercises Financial Accounting in PDF only on Docsity!
Contents
- Exercises
- Depreciation Case Study
- Fun Run Enterprise – Exercise Details
- A task on variance analysis- Exercise Details.................................................................................................
- Variance reports – Exercise Detail
- Cash flow statements – Exercise Details
- Horse people – Exercise Detail.........................................................................................................................
- Departmental Profit and Loss statement A – Exercise Details
- Cash versus profit – Case Study details
- Departmental profit and loss statement B- Exercise Details........................................................................
- A stock control problem – Eercise Detail
- Perpetual stock - Exercise Details
- Solutions
- Fun Run Enterprises - Exercise Resolution
- Task on variance analysis – Exercise Solution
- Variance reports – Exercise Solution
- Cash flow statements – Exercise Solution
- Horse people – Exercise Solution
- Departmental Profit and Loss statement A– Exercise solution
- Cash versus profit – Case Study Solution
- Departmental profit and loss statement B- Exercise Solution
- A stock control problem – Exercise Solution
- Perpetual stock - Exercise Solution
Exercises
Depreciation Case Study
Calculations:
Straight line
- = $15 000 - $3000 = $12 000/6 years = $2000 X 9/12 = $
In this first calculation the asset has only been in the possession of the business for 9 months
and this has to be factored into the calculation.
- =$15 000 - $3000 = $12 000/6 years = $
Diminishing balance
- = $15 000 X .25 X 9/12 = $
- = $15 000 - $2813 = $12 187 X .25 = $
Note: It is unlikely that you will have irregular figures as per the diminishing balance calculations
above.
You may be asked why the amount of depreciation for diminishing balance is greater in the
second year than in the first. The answer is that in the first year the business only had the asset
for 9 months of that time.
You will note that the straight line method takes into account residual value whilst the
diminishing balance method ignores that amount for purposes of calculation.
Straight line
General journal
Depreciation of Pizza Oven 1 500
Accumulated depreciation of Pizza Oven 1 500
Pizza Oven depreciated at straight line for
6 years.
Profit and Loss account 1 500
Depreciation of Pizza Oven 1 500
Depreciation posted to Profit and Loss
account.
It is important to include the name of the asset in the title - should a student simply use the
term ‘depreciation, there would be a one mark deduction.
less Expenses 4 000
- Depreciation of Pizza Oven 2 813 Total Expenses 6 813 Net profit 1 187
Diminishing balance
Profit and Loss for year ended 30.6. $ $ Sales 8 000 less Expenses 4 000
- Depreciation of Pizza Oven 3 047 Total Expenses 7 047 Net profit^953
You will notice that the diminishing balance charges more to depreciation in the first two years. In 2002 it is $1313 greater and in the year 2 003, $1047 more. This reduces profit by those amounts in the first two years.
Balance sheet extracts - 30.6.
Straight line Diminishing balance
Pizza Oven 15 000 15 000
less accumulated
depreciation
Carrying cost 13 500 12 187
Balance sheet extracts - 30.6.
Straight line Diminishing balance
Pizza Oven 15 000 15 000
less accumulated
depreciation
Carrying cost 11 500 9 140
CC = carrying costs
The accumulated depreciation represents the amount of the cost of an asset allocated as an expense added up over a number of accounting periods.
CC represents that portion of the total cost of a non-current asset not yet allocated as a cost. It also includes the residual value.
Fun Run Enterprise – Exercise Details
A budgeting problem - Fun Run Enterprises
Fun Run enterprises commenced business in 2002. The following budgeted information for the year ending 30.6.2003 has been provided.
Sales
- total sales for the year is expected to be $400 000
- 40% of sales are for cash
- staff are expected to be paid $60 000 in salaries
- sales returns are anticipated at $
Goods sold
- cost of goods sold is to be set at 60% of (gross) sales. All goods are bought on credit
- creditors are paid
- stock loss is expected to be $
- stock on hand at 30.6.2003 is anticipated to be $34 000
Anticipated payments
- advertising $16 000
- cleaning $
- drawings $45 000
- loan repayment $10 000
Other items
- discount expense $
- bad debts $
Cash budget for the month ending 31 May
1/7/2002 30/6/ Assets $ $ Bank 11 000? Stock 32 000 34 000 Prepaid advertising 1 500 2 000 Debtors 52 000 55 000 Machinery 80 000 80 000 less Accumulated depreciation (4 000) (12 000) Liabilities Creditors 20 000 22 000 Accrued salaries 4 400 4 100 Accrued interest 6 500 Loan 100 000 90 000 Owner's equity
Variance reports – Exercise Detail
Advice
- To complete the variance reports the following steps are necessary.
Cash budget
- Take the opening bank balance and add that to the total of cash receipts.
- Total cash payments.
- Deduct item 2 from item 1 to arrive at the closing bank balance.
- Transfer the closing bank balance to the Balance sheet as the amount for 'Bank'.
Profit and Loss statement
- Determine net profit by deducting the total of expenses from adjusted gross profit.
- Transfer the net profit to the Owner's equity section of the balance sheet.
Balance sheet
- Total current assets (after the inclusion of bank).
- Determine the new figure for machinery.
- Add depreciation from the Profit and Loss statement to accumulated depreciation ($4 000 on 1 July2002) to get the new figure for that item.
- Total non-current assets.
- Add current and non-current assets to get total assets.
- Total current liabilities.
- Insert net profit.
- Insert drawings.
- Determine total equities.
In preparing this problem the following accounts had to be reconstructed:
- debtors
- creditors
- stock control
- advertising
- salaries
- loan
Cash flow statements – Exercise Details
Stevens Computer Sales has supplied the following list of transactions for his business. The accounting period commenced 1 July 2002 and continues until 30 June 2003
- Steven commenced business with $20 000 cash contribution to the business
- Steven bought a motor vehicle for $15 000 cash on 31.12.
- the motor vehicle is to be depreciated at 10% per annum
- $8000 is borrowed. It is to be repaid by instalment at $2000 per annum
- cash sales are $65 000
- credit sales are $45 000 with $40 000 being received by the end of the financial year from debtors
- wages paid are $37 500, with $2500 still owing
- Steven receives $600 per year from a magazine commission. To date he has received $
- rent is $200 per month and Steven has paid eleven months in this financial year
- Steven bought $15 000 worth of computers and has sold $13 600 worth
- advertising is $2000 per quarter. In this financial year Steven has paid $10 000
- other expenses total $13 000 and they have been paid in cash
Prepare the following:
- a cash flow statement for the year ended 30.6.2003.
- a Profit and Loss statement for the same period.
- a balance sheet as at 30.6.2003.
In preparing the report for the cash flow statement
Likely errors include failure to:
- classify cash inflows and outflows into
- operating
- Investing
- financing items
- reconstruct the accounts to determine revenue received and expenses paid rather than revenue
- earned and expenses incurred
- failure to include all items; for example, loan repayment may be overlooked
- correctly reconstruct accounts
- include opening bank balance into the cash flow statement
- exclude non-cash items
- correct classification of items
Task Requirements
1. Determine cash sales in the cash statement.
2. Reconstruct debtors a/c to find cash received from debtors.
3. Reconstruct rent revenue a/c to find rent revenue (Profit and Loss a/c).
4. Reconstruct creditors a/c to find cash paid to creditors for saddles.
5. Reconstruct advertising a/c to determine advertising expense.
6. Reconstruct wages a/c to determine wages paid.
7. Calculate depreciation at 20 % per annum. Note that the additional equipment is bought on
the last day of the accounting period.
8. Determine office expenses, office salaries, accounting expenses and security expenses in
the appropriate column.
9. Determine accumulated depreciation of equipment in the balance sheet.
10. Determine loan in the balance sheet.
Additional information
In preparing the departmental Profit and Loss statement the following allocations of expenses
occur.
- Advertising is distributed equally
- 90% of petrol is used to deliver saddles and 10% for whips
- The owner uses a personal vehicle and only petrol is charged to the business
- Wages is shared $5000 to whips and the balance to saddles
- Equipment is used 40% for whips and 60% for saddles
- All other expenses are considered ‘general’
Required
Prepare the following fully classified reports:
- Cash flow statement
- Departmental Profit and Loss statement
- Balance sheet
Departmental Profit and Loss statement A – Exercise Details
Welcome to Media World. This business sells DVD players (DVDs) and Television sets (TVs).
At the beginning of November Media World have the following assets and liabilities:
Assets
- stock $
- prepaid rent $
- workshop equipment $36 000
- land and buildings $180 000
Liabilities
- bank overdraft $10 000
- accrued wages $
- loan $40 000
- accumulated depreciation on workshop equipment is $
You have to determine capital at 1 November.
Information
- Media World sells DVDs and TVs. Workshop equipment is only involved in repairing TVs, service costs are only for the DVDs
- Media World employs three sales staff, who spend two-thirds of their time selling DVDs and one- third selling TVs. Two other people work at repairing TVs and another person works in servicing. There are two staff members employed in the office
- the business has four cost centres: sales, workshop, office and finance
- each person employed by Media World is paid $100 per day and works a five day week. The prepaid and accrued expenses must be reversed for each month
- the calendar for November is shown below. Dates shown in bold are the days on which staff are paid. Staff do not work on Monday and Tuesday as Media World operates in a tourist area and these are quiet days. They do work on weekends
- workshop equipment is depreciated at 12% per annum on cost
- interest is paid annually in December. It is $1200 for the year on the Bank overdraft and $3600 for the year for the loan
Cash versus profit – Case Study details
Stan Jones from Stan's CDs, DVDs Videos etc Pty Ltd is a friend seeking some accounting advice. He is unable to distinguish between cash and profit. Having recorded a significant profit for the period Stan is of the opinion that he is entitled to buy a new four-wheel drive vehicle. In fact he does buy the vehicle and has incurred the wrath of his bank manager. He asks you to explain why the bank manager is unhappy. You ask for the financial details of your friend. The reporting period runs from 1 January to 30 June.
At 1 January opening balances appeared as follows:
General journal
1 Jan. Bank 6 500
Debtors 5 400
Prepaid rent 2 000
Vehicles 30 000
Accumulated depreciation of
vehicles
Creditors 6 000
Loan 10 000
Capital 12 900
Opening balances
Between January and June the following events occur:
- the new vehicle is bought for $45 000 cash
- the old vehicle is sold for $13 500, with a loss of $
- $2000 is repaid on the loan. A further $2000 will be repaid in November
- credit sales are $80 000
- debtors pay $76 000. They receive a further $800 discount
- sales returns are $
- cash sales are $85 000
- all goods are bought on credit. Creditors are paid $74 000. There is no discount
- cost of sales is $70 000
- stock at 30 June is $
- rent is $200 per month and is prepaid
- the cash payments journal recorded the following expense payments:
- wages $18 000
- advertising $
- other expenses $
- cash drawings are $20 000
Stan tells you that he has contributed:
- cash of $10 000
- a fax machine valued at $800 (no depreciation this period)
- depreciation on the new vehicle is 12% per annum on cost. The vehicle is to be depreciated for the full reporting period
- there is $500 owing on wages
Required
Prepare the following reports:
- Cash flow statement
- Profit and Loss statement (expenses not required to be classified)
- Balance sheet
Answer the following questions
The increase in the bank balance and net profit is different. Some items only affect cash, others only affect profit whilst some affect both at different amounts. State these items in the table below.
Further question
What alternative actions did Stan have to buying the vehicle in this period?
- postpone the purchase of the vehicle
- acquire the vehicle by leasing rather than buying
Case Profit Affect both at differrent
amounts
Departmental profit and loss statement B- Exercise Details
Welcome to Matts World. This business sells and repairs bicycles.
Information
- Matts World sells and repairs bicycles. Workshop equipment is only involved in repairing bicycles, delivery costs are only for the sale of bicycles
- Matts World employs three sales staff, who spend two-thirds of their time selling bicycles and one- third repairing bicycles. Two other people work full time at repairing bicycles. There are two staff members employed in the office
- The business has four cost centres: sales, workshop, office and finance
- Each person employed by Matts World is paid $100 per day and works a five day week. The prepaid and accrued expenses must be dealt with at the beginning of the month
- The calendar for November is shown below. Dates shown in bold are the days on which staff are paid. Staff do not work on Monday and Tuesday as Matts World operates in a tourist area and these are quiet days. They do work on weekends
Sunday Monday Tuesday Wednesda
y
Thursday Friday Saturday
29 30 □[ □I
- workshop equipment is depreciated at 12% per annum on cost
- interest is paid annually in December. It is $600 for the year on the Bank overdraft, $1600 for the year for the loan and $4000 for the mortgage
- rent is $2400 per month expense and is allocated in equal proportions to sales, workshop and office
- advertising is allocated 60% to sales of bicycles and 40% to repairs
- cash sales are 40% of total sales. Cash sales are $40 000 for the bicycles
- fees are $20 000 for bicycle repairs. All fees are for cash
- there is a mark up of 100% on all bicycles sold
- stock loss is $
- bad debts are $
- at the end of November prepaid rent is $
Other expenses include:
- advertising $
- delivery costs $
- cleaning $
Required
A departmental Profit and Loss statement
- In this particular problem rent has been allocated in equal amounts to sales, repairs and office. This suggests an arbitrary allocation. Do you agree that all expenses should be allocated to departments?
- What advantages will Matt's World gain by classifying the Profit and Loss statement into departments?
- What advantages will Matt's World gain by classifying the balance sheet into departments?
- What are the benefits of reporting more frequently?
- The repairs department is not performing nearly as well as the sales department. What reasons may exist for retaining this department despite what appears to be a relatively poor performance?
- Suggest two reasons why it may be inappropriate to allocate cleaning to floor space
- Define the term 'contribution margin'
- List four items you would consider 'general expenses'
- It is discovered that $200 of cleaning has been used by Matt for private use. How would you make this correction in the general journal
Perpetual stock - Exercise Details
Hayley Badge has recently converted from using the physical stock method to the perpetual stock approach. When asked why by her friends Hayley was at a loss to explain, other than that she no longer has to spend one Sunday each month counting stock in her licensed grocery. This will help 'free up' her social life.
The introduction of a new computer system has helped minimise the time spent recording daily transactions. Hayley has been unsure of a number of transactions and they have not 'gone through' the system. For instance, some of her stock has been used for wine tastings as part of her new marketing program. Hayley has also taken wine home for her personal use and she donated two bottles of her favourite wine to a local charity. Old habits die hard and at the end of the accounting period of one month Hayley carried out a physical stock take on her favourite wine. Allowing for the transactions above she is sure that there are three bottles less than expected in her stock card.
The particular wine has experienced a fall in selling price as new, fruitier wines have come onto the market. Hayley bought the 'Tabletop' brand for $8 per bottle plus $1 per bottle licence fee. It now sells for $7.00 per bottle, including the licence fee of $1.50.
Hayley has heard about the 'lower of cost and net realisable value on an item by item rule' from a friend and wonders if it applies in this situation.
She also has a number of questions that she seeks to ask you regarding other aspects of stock control.
Required
Hayley provides you with a partly completed stock card along with some diary entries. You are required to complete the stock card.
Stock card
Item: Tabletop
Date Particulars IN OUT BALANCE
Qty Unit Qty Unit Qty Unit Total
1 Nov. Balance 10 9 90
12 Inv. 099 25 9 35 9 315
16 Inv. 211 7 9 28 9 252
23 CN 96 2 9 26 9 234
Diary entries relating to 'Tabletop' wines.
- 6 bottles used for wine tastings
- 2 bottles donated to charity
- 4 bottles used for personal imbibing
- 3 bottles 'missing'
The diary entries are to be recorded on 30 November.
It may be assumed that the 'lower of cost and net realisable value (NRV) rule on an item by item basis' will apply. You are to record this event in the stock card.
Hayley would also like the details contained in the stock card to be recorded in the 'stock control account'.
Hayley asks a series of questions regarding stock management:
- explain the meaning of the terms 'cost' and 'net realisable value'.
- what is the effect of a stock write down on the Profit and Loss statement and the balance sheet using the example above?
- explain what accounting principle would be breached by failure to adopt the 'lower of cost and net realisable value rule'.
- in relation to this rule what is meant by the phrase 'on an item by item basis'?
- how is a stock write down recorded in the General journal?
- describe two ways the stock card may assist management decision making
- explain two advantages of Hayley carrying out a physical stock take on 30 November when using the perpetual system.
- Hayley has introduced computers to her business. Identify two advantages of a computer-based system of maintaining stock cards.
- state two advantages of using perpetual stock.
- state two advantages of using physical stock.
- Hayley is concerned about 'stock loss' in her business.
- give four reasons why stock loss may occur.
- give two reasons as to how a stock gain may occur.
Hayley is unsure whether to use FIFO or identified cost in valuing stock. Answer the following questions.
- explain what each of these terms mean
- provide two advantages of using FIFO
- provide two advantages of using identified cost
