Case Study 4 (Book)

1. The income statement that Vicky has created is wrong as it breaches 5 GAAPs.
 Vicky has put $25,000 worth of rent into her income statement even though she does
not pay it. This is a breach of the monetary concept has she has not paid out any money
therefore it can not be included into the income statement.
 She has also included $10,000 into her operating income. This is a breach of Accounting
Period, Revenue Recognition and Accrual Basis Concepts. The $10,000 should not be
recognised as income for the 20X1 year but should be recognised as $10,000 worth of
income in advance and a liability in the year 20X1.
 Vicky had included $5,000 that will go towards her holiday. This should not be part of
income statement as herself and the business are separate entities and therefore should
be kept separate. This is a breach of the accounting entity concept.
2. Geotechnical Ltd - Actual Income Statement of the year ended 31 December 20X1

Loan to employee     $50,000

Operating income $70,000
$120,00
Total income 0
   
Less Expenses  
Insurance $8,000  
$15,00
Other operating expenses 0  
$20,00
Wages 0  
Total expenses $43,000
   
Net Profit     $77,000
Case Study 12 (Book)

Monika Gems Enterprise: Cash Flow Statement for the year ended 31 March 20X2

Cash Flows from Operating Activities:

$176,00
Cash from customers 0
-
$62,00
Prodcuts to re-sell 0
-
$55,00
Operating expenses 0
-
$120,00
Interest paid -$3,000 0
$56,00
Net cash inflow from Operating 0

Cash Flows from Investing Activities:

-
Shop furniture & Fittings $18,000
-
Vehicle $15,000
-
$33,00
Net cash outflow from Investing 0

Cash Flows from Financing Activities:

$38,00
Owner's investment 0
$25,00
Loan from bank 0 $63,000
-
$40,00
Drawings 0
-
Loan repayments -$5,000 $45,000
$18,00
Net cash inflow from Financing 0

$41,00
Net increase in cash held 0
Plus: Opening cash balance 0
$41,00
Closing cash balance 0

Monika Gems Enterprise: Accrual Basis Income Statement for the year ended 31 March 20X2
Income
$176,00
Cash sales 0
$223,00
Credit sales $47,000 0

Less Cost of Goods Sold

Opening
inventory 0
Plus: Cash purchases $62,000
Plus: Credit Purchases $46,000
Less: Closing inventory -$43,000
Cost of Products $65,000
$158,00
Gross Profit 0

Less Expenses
Operating expenses $55,000
Operating expenses owing $15,000
Interest expense $3,000
Depreciation: Shop furniture &
Fittings* $1,200
Depreciation: Vehicle** $1,500
Depreciation: Computer*** $1,200 $76,900

Net Profit $81,100

Note:
* 18,000/15 =
$1,200
** 15,000/10 = $1,500
*** 12,000/10 = $1,200

Monika Gems Enterprise: Statement of Financial Position for the year ended 31 March 20X2

OWNER’S EQUITY:
$38,00
Capital at start 0
+ Additional $45,00
Capital 0
$81,10
+ Net Profit 0
-
$40,00
- Drawings 0
$124,10
Capital at end 0
 THIS IS REPRESENTED BY:
ASSETS:
Current Assets:
Bank $41,000
Accounts receivable $47,000
$134,00
Inventory $46,000 0

Non-current
assets
$18,00
Shop furniture & Fittings 0
Less Accumulated
deprecation -$1,200 $16,800
$15,00
Vehicle 0
Less Accumulated
deprecation -$1,500 $13,500
$12,00
Computer 0
Less Accumulated
deprecation -$1,200 $10,800
Total Assets $41,100
$299,20
0
Less Liabilities
Current Liabilities
$46,00
Accounts payable 0
$15,00
Accrued expenses 0 $61,000

Long-Term Liabilities:
$20,00
Bank loan (25,000 - 5,000) 0
$12,00
Accounts payable - Computer 0 $32,000
Total Liabilities $93,000

$206,20
Net Assets 0

1. Accrual Basis is important to determine profit for an enterprise as it will show all transaction
that relates to that financial period regardless of if the enterprise and received or paid for
that good by the end of the period.

Class Discussion Questions 1: Financial Statements and GAAPs

Ace Goods Enterprise (AGE): Cash Flow Statement for the year ended 31 December 2020
 $295,00
Cash from customers 0
-
$182,00
Products to re-sell 0
-
Operating expenses $26,750
Net cash inflow from Operating $86,250

Cash Flows from Financing Activities:

Owner's investment $65,000
$100,00 $165,00
Loan from bank 0 0
-
Drawings $92,250
Net cash inflow from Financing $72,750

$159,00
Net increase in cash held 0
Plus: Opening cash balance 0
$159,00
Closing cash balance 0

Ace Goods Enterprise (AGE): Cash basis Income Statement for the year ended 31 December 2020

Income
$295,00
Cash sales 0

Less Cost of Products

$182,00
Cash purchases 0
$182,00
Cost of Products 0
$113,00
Gross Profit 0

Less Expenses
Operating expenses $26,750
 
Net Profit $86,250

Ace Goods Enterprise (AGE): Cash basis Statement of Financial Position for the year ended 31
December 2020

OWNER’S EQUITY:
Capital at start $65,000
+ Additional
Capital $0
+ Net Profit $86,250
-
- Drawings $92,250
Capital at end $59,000

THIS IS REPRESENTED BY:

ASSETS:
Current Assets:
$159,00
Bank 0

Non-current
assets

$159,00
Total Assets 0

Less Liabilities
Current Liabilities

Long-Term Liabilities:
$100,00
Bank loan 0
$100,00
Total Liabilities 0

Net Assets $59,000

1. AGE overall performance in terms of cash in the enterprise is doing very well. They have a
total profit of $86,250 which fairly good for a first-year enterprise. They also have a good
amount of assets with their Statement of Financial Position has to net Assets of $59,000.
2. 5 items that you would have to show in the financial statements if you had been using the
“accrual basis”
a. Still owing from customers at the end of the year (to be collected next year).
Recorded in Income statement (Income) and Statement of financial Position
(Current Assets)
i. $36,500
b. Owing for purchase of products at the end of the year (to be paid next year).
Recorded in Income Statement (COGS) and Statement of financial Position (Current
liabilities)
i. $32,000
c. Cost of unsold products on hand at the end of the year (to be sold next year).
Recorded in income statement (COGS)
i. $102,000
d. Rent owing and unpaid for the year ended 31 December 2020. Recorded in
Statement of financial position (current liabilities)
 i. $1,500
e. Purchase of vehicle on credit on 1 October 2020 and due to be paid in September
2021. The vehicle is to be kept for 5 years, with an expected salvage value of $1,500
at the end of its life. Recorded in income statement as depreciation (Expenses) and
statement of financial Position (Non-current Asset)
i. $48,500
3. importance of the qualitative characteristics from the NZ Framework is to make useful
decision from financial information. Accrual basis creates a more accurate view of a
company's financial status by recording revenue when it is earned and expenses when they
are incurred helping entity to make useful decisions regarding their enterprise.