Prepare financial statements for non-reporting entities
FNSACC404A
Detailed Reading Guide
Week / Topic / Chapter / Resources1 / Error Correction / 1
2 / Ratio Analysis – Profitability / 1
3 / Ratio Analysis - Liquidity / 1
4 / Not For Profit / 4
5 / Incomplete Records / Supplement / Read:
Also: Chapter 2 of textbook pages 75-84
6 / Cash Flow Statements / 2
7 / Assessment #1 Due
8 / Partnerships – Formation / 3
+ supplement
9 / Partnerships – Operation / 3
+ supplement
10 / Partnerships – Admission new partner / 3
+ supplement
11 / Partnerships - Dissolution / 3
+ supplement
12 / Revise partnerships
13 / Assessment #2 Due
Homework Answers:
Answers to the even questions are provided
Prepare Financial Statements – FNSACC404A
Week 1
1) Error Correction
Types of errors – disclosed and undisclosed
- transposition
- compensating
- error of principle
- omission
- mathematical
Errors in Trial Balance
Questions:
Q1.1 Q1.2 Q1.3 Q1.4 Q1.5 Q1.6 Q1.7
Prepare Financial Statements – FNSACC404A
Week 2
1) Ratios - Profitability
Explain and calculate the following ratios:
- gross profit ratio
GP 100
NS x 1
- net profit ratio
NP 100
NS x 1
- current ratio
current assets 2:1
current liabilities
- liquid ratio
Current assets – inventory 1:1
Current liabilities - overdraft
Questions:
Q1.9 Q1.10
Prepare Financial Statements – FNSACC404A
Week 3
1) Ratios - Liquidity
Explain and calculate the following ratios:
- gross profit ratio GP 100
NS x 1
- net profit ratio NP 100
NS x 1
- current ratio current assets 2:1
current liabilities
- liquid ratio current assets – inventory 1:1
current liabilities - overdraft
Questions:
Q1.13 (a-f) Q1.14 a – i + ii only ratios only (discuss changes)
Q1.16 (a-c) Q1.17
Q1.20
Prepare Financial Statements – FNSACC404A
Week 4
1) Not For Profit
Types of NFP – clubs & societies
- not to make profit
- provides services, activities and facilities to community
Financial information dealing with
- statement of receipts and payments (ie cashbook)
- members subscription accounts – fees charged to members (incl sub in advance (CA) & sub in arrears (CL))
- trading accounts (each activity ie bar trading, liquor, dining, poker machines, fundraising, bowling fees)
o only income and expenses DIRECTLY related to activity incl depreciation
o using periodic inventory
o surplus or deficit
o accumulated funds (not capital)
- income and expenditure (income statement / P&L)
o includes surplus or deficit from trading accounts
o other income & expenses not specific to a trading activity eg pg 201/202
Questions:
Q4.9 receipts and statements
Q4.11 Q4.12 Q4.15 trading account
Q4.13 & Q4.27
Additional questions
- Q4.17
- Q4.19 (a-e)
- Q4.21
- Q4.25
Prepare Financial Statements – FNSACC404A
Week 5
1) Incomplete Records supplement to text
- single entry system ie cashbook only
- reconcile / recreate accounts
- not enough information to make business decisions
- profit determined by comparison of capital or reconstruction of accounts (ie cashflow to P&L)
- use existing figures / values to reconstruct accounts
- recreate A/P & A/R ledger accounts
- recreate income and expense items
o sales – including cash & credit
o purchases – including cash & credit
o wages
o NCA such as plant & machinery
- comparison of capital (pg 5-8)
o inc / dec in assets & liabilities
o eg pg 27 – comparison & analysis methods
Questions:
Q7 Q9 Q11 Q13 Q15 Q16 Q17 Q20 Q23
Q18 & Q24
Prepare Financial Statements – FNSACC404A
Week 6
1) Cash Flow Statements – Chp 2
Deals with the cash received and the cash paid (cashbook) within a business
Operating Activities
- these are generally profit and loss items and include receipts from customers, payments to suppliers, payments to employees, interest paid & received, dividends received etc
Investing Activities
- these are generally non-current asset items – for purchase and sale of non-current assets disclosed under this heading. Both the inflow and outflow must be noted (separately).
Financing Activities
- these are generally liability and proprietorship items – including additional capital contributions, drawings, receipt and payment of loans (the inflow and outflow must be noted (separately).
Need to note whether net cash has been used or provided by each activity
Reconcile back to Cash and cash equivalents (bank accounts)
Questions:
Q2.5 Q2.6 Q2.7
Q2.8 Q2.9 Q2.11 Q2.13
Prepare Financial Statements – FNSACC404A
Week 7
Work on and submit Ass #1
Prepare Financial Statements – FNSACC404A
Week 8
1) Partnerships - Formation
- Plus Additional Handout
- What is a partnership ?
- Why have a partnership agreement ?
- Partnership records like a sole trader but need to record each partner’s account separately – can have a FIXED capital account or a standard capital account showing the effect of all transactions.
- If using a FIXED capital account, then also need to have a current account ledger to keep track of any changes to their balance (drawings, share of P&L, interest etc)
- May purchase an existing sole trader’s (partner’s) business at AGREED or FAIR VALUE. If we pay more than the value of net assets, we have paid Goodwill. If we pay less, then we have a gain on acquisition (an income that needs to be written off to P&L)
- The AGREED value for the existing business is the partner’s capital contribution
- Various transactions occur that affect the partner’s accounts:
o Drawings
o Profit or loss (partners share of the P&L appropriation account)
o Interest paid
o Interest received
(transferred to partners current account as well as the income or expense accounts. These income and expense accounts would be closed to the P&L appropriation account)
- Profit or loss is not always shared equally amongst partners … will depend on the partnership agreement and may be noted as 5:3:2 etc
Questions:
Q3.6 Q3.7 Q3.9 Q3.11 Q3.12 Q3.13 Q3.15
Prepare Financial Statements – FNSACC404A
Week 9
1) Partnerships - Operation
- A new account called P&L Appropriation is used to calculate the distribution to partners and includes:
o Profit or loss
o Interest received (on drawings or loan)
o Interest paid (on capital or loan)
- Appropriation account
o Transfer from P&L to P&L appropriation and then (after adjustments above) to current / partner’s accounts
- Review steps on pg 129 of text
Questions:
Q3.17 Q3.19 Q3.21
Q3.23 Q3.25
Prepare Financial Statements – FNSACC404A
Week 10
1) Revise – Partners Accounts
P&L
Includes interest on loans and salaries paid to partners (not drawings)
Current Accounts
Includes interest on drawings, drawings, P&L appropriation, salary due but not paid, interest on capital & interest on loan
P&L Appropriation
Includes interest on drawings (Dr Current Acc, Cr P&L Approp); interest on capital (Dr P&L Approp, Cr Current Acc); Profit or Loss; and transfer to current accounts
2) Partnerships - Admission of New Partner pg 134
- Partnership may expand and add a new partner, who will then be entitled to a share of future profits or losses, and a share of the partnership’s equity
- The current partnership ratio will need to change to accommodate the new partner ie previous ratio A=60% & B=40%
C is joining the partnership and will get 20% of the business
Therefore new partnership ratio will be (if A & B are keeping the same split)
A = 60% x (100 – 20) = 48
B = 40% x (100 – 20) = 32
C = 20 so 48:32:20 or 12:8:5
- When a new partner joins the partnership, the original partnership’s assets maybe revalued to an ‘agreed’ or ‘fair value’.
- An agreement is also reached on how much the new partner is required to pay for their ‘share’ (shown in equity adjustment account)
- If the value of their share is over and above the net value (their % share of the current assets & liabilities) then they will be paying a PREMIUM (otherwise known as GOODWILL) pg 135
SELF TEST QUESTION 3E
- The adjustments to the assets are noted in the Equity Adjustment Account
(DR equity account with a decrease in assets or allowance for doubtful debts;
CR equity account with an increase in assets or accumulated depreciation)
- The balance of the Equity Adjustment Account is transferred to the existing partner’s CAPITAL account using their current profit sharing ratio
Questions:
Q3.34 a&b profit sharing ratios
Q3.35 Q3.37 goodwill
Q3.39 Q3.41 equity adjustment account & goodwill premium
Prepare Financial Statements – FNSACC404A
Week 11
1) Partnerships - Dissolution of partnership pg 141
Partnerships will end and the partnership will then cease to exist. All assets will be sold, and liabilities paid. The balance (if any) will be returned to the partners in their profit-sharing ratio.
Step 1: transfer the balance of the partners current accounts to the capital accounts
Step 2: open a realisation account – transfer the value of the assets into this account. Any funds received from the sale of these assets should also be noted in the realisation account.
Dr Realisation Dr Accum Deprec
Cr Asset Cr Realisation
Dr Realisation Dr Allow Doubtful Debts
Cr Acc Receivable Cr Realisation
Dr Bank
Cr Realisation
Step 3: Transfer the value of any assets taken by partners to their capital account (at agreed value)
Dr Capital
Cr Realisation
Step 4: Pay all liabilities as normal (including accounts payable). If a discount has been allowed, this needs to be noted in the realisation account, as would any interest or additional funds that are being paid out.
Dr Acc Payable Dr Acc Payable (disc rcd)
Cr Bank Cr Realisation
Step 5: Any expenses incurred in the disposal of assets / liabilities are paid from the bank, and debited to realisation
Dr Realisation
Cr Bank
Step 6: Once all assets and liabilities have been disposed of, the balance of the account is then transferred to the partner’s capital accounts (based on their normal profit sharing ratios)
Step 7: If a partner has a debit balance in their capital account (owe the business money) then they should pay this into the partnerships bank account. The balance of the bank account is then used to pay out the partner’s capital accounts.
Questions:
Q3.56 Q3.57 Q3.58 Q3.61
Q3.63 Q3.65 Q3.66
Prepare Financial Statements – FNSACC404A
Week 12
Revise partnerships
Prepare Financial Statements – FNSACC404A
Week 13
Complete and submit Assessment #2
FNSACC404A – Detailed Reading Guide – Version 1 Page 1