REVISION QUESTIONS- WEEK 12

1. What are the advantages to a business of being formed as a company? What are the
disadvantages?
 REVISION QUESTIONS- WEEK 12

2. Financial decisions often place heavier emphasis on one type of financial statement
over the others. Consider each of the following hypothetical situations independently.

a. North Sales Ltd is considering extending credit to a new customer. The terms of the
credit would require the customer to pay within 30 days of receipt of goods.

b. An investor is considering purchasing shares in Giorgina’s. The investor plans to hold

the investment for at least 5 years.

Required

Although the decision makers should refer to all financial statements, for each situation, state
whether the decision maker would be most likely to place the main emphasis on information
provided by the statement of profit or loss, statement of financial position or statement of
cash flows. In each case provide a brief justification for your choice. Choose only one
financial statement in each case.
 REVISION QUESTIONS- WEEK 12

3. These financial statement items are for Teddy Pty Ltd at year-end, 30 June 2020:

Cost of sales $42 000

Salaries expense 27 000
Other expenses 26 600
Building 196 000
Accounts payable 39 400
Sales revenue 100 000
Rent revenue 36 000
Rent revenue received in advance 5 800
Share capital 221 000
Cash 42 500
Bank loan 208 000
Accumulated depreciation 19 600
Land 265 000
Depreciation expense 5 400
Retained earnings (beginning of the year) 10 900
Inventory 36 200

Required

a. Prepare a statement of profit or loss for the year.

Variable costing income statement:

Revenues

Variable expense

- Variable production expenses (such as DM, Dl, VOH)

- Variable selling and administrative expenses

= Contribution margin

Fixed expense

- Fixed production expenses (including most FOH)

- Fixed selling and administrative expenses

= Net profit or loss

 REVISION QUESTIONS- WEEK 12

b. Prepare a calculation of retained earnings for the year.

RE= begin RE + net profit/loss – Cash dividends – stock dividends

c. Prepare a classified statement of financial position at 30 June 2020.

Current Liabilities
 Accounts payable
 Accrued expenses
Total Current Liabilities
Long-term Liabilities
 Mortgages payable
 Notes payable
Total Long-term Liabilities

Owner’s Equity

Common stock

Additional paid-in Capital

Retained earnings
Total Owner’s Equity
 REVISION QUESTIONS- WEEK 12

4. Here are some accounting reporting situations:

a. Tercek Ltd recognises revenue at the end of the production cycle but before sale. The
price of the product, as well as the amount that can be sold, is not certain.

b. Bonilla Co. Ltd is in its fifth year of operation and has yet to issue financial
statements. (Do not use the full disclosure principle.)

c. Barton Ltd is carrying inventory at its current market value of $100 000. Inventory
had an original cost of $110 000.

d. Hospital Supply Co. Ltd reports only current assets and current liabilities on its
statement of financial position. Property, plant and equipment and bills payable are
reported as current assets and current liabilities, respectively. Property, plant and
equipment is stated at the amount for which it could be sold at short notice.
Liquidation of the entity is unlikely.

e. Watts Ltd has inventory on hand that cost $400 000. Watts reports inventory on its
statement of financial position at its current market value of $425 000.

f. Steph Wolfson, manager of Classic Music Ltd, bought a computer for her personal
use. She paid for the computer with company funds and debited the ‘computers’
account.

Required

For each situation, give the concept, principle, recognition criteria or constraint that has been
violated, if any. Some of these concepts, principles and constraints were presented in the
previous chapter. Give only one answer for each situation.
 REVISION QUESTIONS- WEEK 12

5. Here are the comparative statements of City Sales Pty Ltd:

CITY SALES PTY LTD

Statement of profit or loss
for the year ended 30 June 2019
2019 2018

Net sales $2 200 000 $2 000 000

Cost of sales 1 120 000 996 000

Selling and administrative expense 830 000 824 000

Interest expense 31 000 30 000

Income tax expense 104 000 50 000

Profit $115 000 $100 000

CITY SALES PTY LTD

Statement of financial position
as at 30 June 2019
2019 2018

ASSETS

Current assets

 Cash $100 500 $60 000

 Short-term investments 90 000 50 000

 Accounts receivable (net) 139 000 125 000

 Inventory 145 000 115 500

 Total current assets 474 500 350 500

Property, plant and equipment (net) 540 300 440 300

Total assets 1 014 800 790 800

LIABILITIES

Current liabilities

 Accounts payable 146 000 65 400

 Income taxes payable 104 000 34 600

 Total current liabilities 250 000 100 000

Debentures payable 210 000 200 000

Total liabilities 460 000 300 000

Net assets $554 800 $490 800

EQUITY

 Contributed equity $350 000 $300 000

 REVISION QUESTIONS- WEEK 12

CITY SALES PTY LTD

Statement of financial position
as at 30 June 2019
 Retained earnings 204 800 190 800

Total equity $554 800 $490 800

The cash provided by operating activities for 2019 was $260 000.

Required

Calculate these values and ratios for 2019:

a. Working capital.
b. Current ratio.
c. Current cash debt coverage.
d. Debt to total assets ratio.
e. Cash debt coverage.
f. Profit margin.
g. Return on assets.
 REVISION QUESTIONS- WEEK 12

6. Just for Fun Park was started on 1 April by Greg Winters. These selected events and
transactions occurred during April:

Apr 1 Shareholders invested $90 000 cash in the business in exchange for shares.
.
4 Purchased land costing $45 000 for cash.
8 Incurred advertising expense of $2700 on account.
11 Paid salaries to employees, $2550.
12 Hired park manager at a salary of $6000 per month, effective 1 May.
13 Paid $4500 for a 1-year insurance policy.
17 Paid $900 cash dividends.
20 Received $8550 in cash for admission fees.
25 Sold 150 voucher books for $25 each. Each book contains 10 vouchers that entitle the holder to one
admission to the park. (Hint: The revenue is recorded as revenue received in advance until the
vouchers are used.)
30 Received $11 850 in cash admission fees.
30 Paid $1050 on account for advertising incurred on 8 April.

Just for Fun Park uses the following accounts: Cash, Prepaid insurance, Land, Accounts
payable, Revenue received in advance, Share capital, Dividends, Admission revenue,
Advertising expense, and Salaries expense.

Required

Journalise the April transactions, including narrations.

 REVISION QUESTIONS- WEEK 12

7. The accounts in the ledger of Boxer Ltd contain the following balances on 31 March
2020:

Accounts receivable $13 450 Prepaid insurance $6 345

Accounts payable 23 774 Repair expense 3 421
Cash 76 526 Service revenue 67 589
Delivery equipment 165 000 Dividends 2 700
Fuel expense 7 890 Share capital 112 000
Insurance expense 4 568 Salaries expense 23 700
Bank loan 75 000 Salaries payable 3 460
Retained earnings ?

Required

Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the
missing amount for retained earnings.
 REVISION QUESTIONS- WEEK 12

8. The ledger of Uniform Ltd on 30 June of the current year includes

these selected accounts and corresponding account numbers before adjusting entries
have been prepared:

Debits Credits
100 Prepaid insurance $14 040
110 Supplies 8 400
120 Equipment 97 500
121 Accumulated depreciation—equipment $31 800
200 Bank loan 78 000
210 Rent revenue received in advance 36 270
300 Rent revenue 234 000
400 Interest expense —
410 Wage expense 54 600
An analysis of the accounts shows the following:

1. The equipment depreciates $1600 per month.

2. The rent revenue received in advance was for the 9 months commencing 1 April.
3. Interest of $975 is accrued on the bank loan.
4. Supplies on hand total $2800.
5. The benefits of prepaid insurance expire at the rate of $1170 per month.

Required

Prepare the adjusting entries at 30 June, assuming that adjusting entries are made quarterly.
Additional accounts and account numbers are: 420 Depreciation expense, 430 Insurance
expense, 220 Interest payable, and 440 Supplies expense.
 REVISION QUESTIONS- WEEK 12

9. Two qualitative characteristics that financial information should possess are relevance and
faithful representation. Explain these concepts and discuss whether you believe one is more
important than the other, or if they are equally important?
 REVISION QUESTIONS- WEEK 12

10- Ethics
Mark is at a party with his neighbors. In the party, Mark starts a conversation with a neighbour, Tim,
about his job. Mark is member of CPA Australia and works as an accountant in a large construction
firm and Tim is member of CA and works for a large bank. During the conversation Tim falsely states
that he is in charge of Mark company’s line of credit and claims that their company’s credit is about to
be cancelled because of some irregularities with the security documents. Mark tells Tim that he
believes that the founder of the company has quietly increased his shareholdings in a listed company
that supplies components to the company. The components manufacturing company is about to
announce to the share market that it has just won a very large, and very profitable, contract with a
Chinese company.
Discuss the ethical issues regarding Mark and Tim’s conversation at the party. (use APES 110
codes of ethics to discuss your answer)