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Question 1 – Concepts and Principles (4 marks)
You are the financial manager of LAKTA LTD, a company in the wine industry. The company has recently bought a building for $500,000 which has been represented in the statement of financial position. The Chief Executive Officer has noticed that the building was worth $515,000 but the company received a $15,000 discount on the purchase price. The CEO has asked you to reflect the $515,000in the financial statements but you have mentioned that accountants need to follow the concepts and principles.
a) Name and briefly explain all the concepts and principles of accounting. (3 marks)
b) Name the concept or principle that has not been followed in this case and explain how it has been breached? (1 mark)
Answer
a) Monetary principle – express accounting concepts in monetary terms
b) Acc entity concept – owners transaction are separated from firms transactions
c) Period concept – entity life is divided into periods and reports are also divided into those periods
d) Cost principle – all assets are recorded as their purchase price.
e) Full disclosure principle – all events that make difference to decision making process must be disclosed in the financial statements.
f) Going concern principle – business will remain in operation in the future.
b)
Cost principle has been breached because the CEO wants to say in financial statements it was bought for 515,000 but it was bought for 500,000 with 15,000 discount. The ceo does not want the asset to be recorded on its real purchase price.
Question 2 – Sustainability (6 marks)
The following is an extract from the Sustainability Report (2020) for JB Hi-Fi:
a) What is meant by the term sustainability? (1.5 marks)
b) Explain the 3 aspects of sustainability? Include an example for each (Do not use examples from JB Hi-Fi) (1.5 marks)
c) Based on the information from the sustainability report above, explain how JB Hi-Fi has met each of the 3 aspects of sustainability. (3 marks)
Answer
a) Sustainability means that for a business to be sustainable for the long term it has to focus on 3 main things and they are people , planet and profit.
b) People – means you care about the people and treat them with respect such as having proper and mutual respect with the employees and don’t deny or strip them away from their rights.
Planet – to make sure you don’t hurt the environment , ex: your business does not effect the environment
Profit – the business needs profit to be sustainable because a business cant run without profit or you will go bankrupt.
C) They managed to keep the stores open and having to take tests for customers that indicates they care about the people and profits and planet by making sure covid-19 does not spread and infect more people.
Question 3 – Financial statement analysis (9 marks)
The comparative financial highlights of Optus Inc and Vodafone Inc for 2020 and 2019 is provided.
Optus Vodafone
FY 2020 FY 2019 FY 2020 FY 2019
Current Assets 7,176 7,078 32,644 39,817
Non-Current Assets 41,779 41,837 133,917 103,276
Current Liabilities 10,579 8,794 32,456 25,523
Non-Current liabilities 11,562 10,311 72,036 53,894
Total Equity 26,814 29,810 62,625 63,445
Net Cash Provided by Operating Activities 5,817 5,368 17,379 12,980
Revenue 16,542 17,372 44,974 43,666
Net Profit 1,075 3,095 795 137
a) For financial year (FY) 2020, calculate the following ratios for Optus and Vodafone:
b) Which company appears to have stronger liquidity, profitability, and solvency? Explain your answers based on your calculations in part a). (3 marks)
a)
Formula Optus Vodaphone
Full workings and answer Full workings and answer
Profit margin
(Profit / net sales) x 100 2019 : (profit / net sales ) x 100(3,095 / 17,372) x 100 = 17.82 %
2020 : (Profit / net sales) x 100
(1,075 / 16,542 ) x 100 = 6.50 %
2019 : (profit / net sales ) x 100
(137 / 43,666) x 100 = 0.31%
2020 : (profit / net sales ) x 100
(795 / 44,974) x 100 = 1.77%
Working capital
Current assets - current liabilities 2019: Current assets - current liabilities 7,078 – 8,794 = -1,716
2020: Current assets – current liabilities
7,176 – 10,579 = -3403 2019: Current assets – current liabilities
39,817 – 25,523 = 14,249
2020: Current assets – current liabilities
32,644 – 32,456 = 188
Current ratio
(Current assets / current liabilities) x100 2019: (Current assets / current liabilities) x100 (7,078 / 8,794)x100 = 80.49%
2020: (Current assets / current liabilities) x100
(7,176 / 10,579 )x100 = 67.83% 2019: (Current assets / current liabilities) x100
(39,817 / 25,523) x100 = 156%
2020: (Current assets / current liabilities) x100
(32,644 / 32,456)x100 = 100.58%
Debt to total assets
Total liabilities / total assets 2019: Total liabilities / total assets 19,105 / 48,915 = 0.39:1
2020: Total liabilities / total assets
22,141 / 48,955 = 0.45:1 2019: Total liabilities / total assets
79,417 / 143,093 = 0.56:1
2020: Total liabilities / total assets
104,492 / 166,561 = 0.63:1
Cash debt coverage
Net cash from operating activities / average total liabilities 2019: 5,368 / 9552.5 = 0.56:12020: 5,817 / 11,070.5 = 0.53:1 2019: 12,980 / 39,708.5 = 0.33:1
2020: 17,379 / 52,246 = 0.33:1
Return on assets
Profit / average total assets 2019: 3,095 / 24,457.5 = 0.13:12020: 1,075 / 24,477.5 = 0.04:1 2019: 137 / 71,546.5 = 0.0019:1
2020: 795 / 83,280.5 = 0.0095:1
b)
Which company has the stronger result? Explain
Liquidity
Vodaphone It has better current ratio compared to optus and working capital is also higher both in 2019 and 2020
Profitability
Optus It has a higher profit margin and return on asset compared to vodaphone , and vodaphone maybe have borrowings to pay that result in lower profitability
Solvency
Optus It has lower debt to asset ratio compared to vodaphone , therefore it has better solvency
Question 4 – Adjusting entries (12 marks)
Fan Fare Ltd has provided you with the following trial balances at the end of year 30 June 2020:
Fan Fare Ltd
Trial Balance as at 30 June 2020
Journalise the annual adjusting entries that were made to prepare the adjusted trial balance from the unadjusted trial balance. Please ensure you include narrations.
Date Account name (narration) Debit Credit
30 june Accounts receivable 1,100
Service revenue 1,100
( Accrued revenue )
30 june Supplies expense 400
Supplies 400
( Used supplies )
30 june Rent expense 600
Prepaid rent 600
( Used rent expense )
30 june Depreciation expense 200
Accumulated depreciation -MV 200
(recording depreciation )
30 june Interest expense 120
Interest payable 120
(Interest accrued)
30 june revenue received in advance 100
Service revenue 100
(Rent revenue now earned)
30 june Salaries expense 600
Salaries payable 600
(Accrued salaries)
30 june Electricity expense 300
Accounts payable 300
(used electricity)
Question 5 – Financial Statements (9 marks)
a)
(7 marks)
On your first day of work in a large accounting office you have been presented with the following accounting reports. There are many errors in the reports and you have been asked to complete corrected reports.
Blackworks ltd
Income statement for the month ended 31 May 2021
Revenue $ $
Service revenue 39,250 39,250
Expenses
Salaries expense 25,000
Depreciation expense 5,500
Supplies expense 6,000
36,500
Net profit / loss 2,750
Blackworks ltd
Statement of changes of equity for the month ended 31 May 2021
$ $Share capital 134,500 134,500
Retained earnings
Retained earnings, 1 may 67,750
Net profit 2,750
Less dividends (23,000)
Retained earnings, 31 may 47,500
Equity at 31 may 2021 182,000
Blackworks ltd
Balance sheet as at 31 may 2021
Assets $ $ $
Current assets
Cash 43,500
Accounts receivable 3,500
Supplies 1,000 48,000
Non current assets
Equipment 175,000
Total assets 198,000
Liabilities
Current liabilities
Accounts payable 4,550
Salaries payable 8,250
Revenue rec”d in advance 3,200 16,000
Non- current liabilities
Total liabilities 16,000
Net assets 182,000
Equity
Share capital 134,500
Retained earnings 67,750
Net profit 2,750
Less dividends (23,000) 182,000
b)
(2 marks)
Solid Sam Ltd has provided you with the following financial information for the year ended 30 June 2020. You are required to indicate which items would be used in preparing the Cash Flow Statement:
$ Yes/NoIncome tax paid 115,500 yes
Loss on sale of building 323,500
Cash paid to suppliers 876,750 Yes
Cash received from customers 1,811,250 Yes
Depreciation expense 283,500
Interest paid 189,000 Yes
Payments of dividends to shareholders 47,250 Yes
Payments to employees 645,750 Yes
Question 6 – Recording transactions (15 marks)
Transactions for Filly Farm Ltd for the month of March are presented below.
March 1 Received $135,000 from shareholders.
March 5 Purchased equipment for $245,000, paid $150,000 in cash and the remainder is due in 30 days.
March 7 $12,500 was received for service to be completed in April.
March 13 Paid $3,000 rent for the current month.
March 17 Completed services for $42,500 on account.
March 26 Received $7,000 in cash for services provided.
March 27 Collected $22,000 from customers on account.
March 30 Paid $12,000 insurance on building for 12 months, commencing 1 April.
March 31 Paid $3,500 in cash dividends.
Required
Journalise each transaction. Narrations are required.
Date Account name (narration) Debit Credit
Mar 1 Cash 135,000
Capital 135,000
( received contribution )
Mar 5 Equipment 245,000
Cash 150,000
Accounts payable 95,000
(purchased equipment)
Mar 7 Cash 12,500
Revenue received in advance 12,500
( Prepaid revenue )
Mar 13 Cash 3,000
Rent expense 3,000
( Paid rent )
Mar 17 Accounts receivable 42,500
Service revenue 42,500
(done service on account )
Mar 26 Cash 7,000
Service revenue 7,000
(received cash for service )
Mar 27 Cash 22,000
Acc receivable 22,000
( Collect cash )
Date Account name (narration) Debit Credit
Mar 30 Prepaid insurance 12,000
Cash 12,000
( Paid insurance )
Mar 31 Dividends paid 3,500
Cash 3,500
( Paid dividends )
Question 7- Ethics (5 marks)
Members of the two accounting professional bodies, CPA Australia and the Chartered Accountants of Australia and New Zealand (CAANZ), must comply with the APES 110 Code of Ethics for Professional Accountants.
Starry an accountant completed his personal tax return for 2020. He declared income of $150,000 from his accounting practice but failed to declare income of $650,000 from other sources.
Required:
a) List and briefly explain the sections in APES 110 Code of Ethics for Professional Accountants
b) State which section/s of APES 110 have been breached by Starry and explain why you believe they have been breached.
Answer
a)
Integrity – all members must be honest
Objectivity – no influences that effects the decisions or bias.
Professional competence and due care – maintain professional knowledge when providing services
Confidentiality – disclose firm information and do not use it for personal use.
Professional behaviour – do not break the laws.
b) He broke the code of professional competence and due care and he also broke honesty as he did not mention the other 650,000 dollars on his report.
Sample Solution