11 ACCOUNTING
CORE STUDIES 2 REVISION HOMEWORK SHEET 3
1 In the role of Junior Accountant, you have been asked to report to client Brian Woodward. Mr Woodward owns Woodward Enterprises, which sells a wide range of computer components. The business is operated from one store and its good reputation is widely recognised. Calculate the ratios for gross profit ratio, net profit ratio and rate of return on owner’s equity. You are required to show the formulae, working used and round your answer to 2 decimal places.
Income Statement
for year ended 30 June 2013
2013 / 2012Cash Sales / 250 000 / 260 000
Credit Sales / 240 000 / 490 000 / 200 000 / 460 000
Less Cost of Goods Sold / 149 000 / 102 000
Gross Profit / 341 000 / 358 000
Less Other Expenses:
Selling and Distribution / 152 000 / 150 000
General and Administrative / 130 000 / 136 000
Finance / 54 000 / 336 000 / 52 000 / 338 000
Net Profit / 5 000 / 20 000
Balance Sheet
as at 30 June 2013
2013 / 2012Assets
Cash at Bank / 18 000 / 23 000
Accounts Receivable / 110 000 / 92 000
Inventories / 40 000 / 27 500
Furniture / 55 000 / 54 000
Vehicle / 31 100 / 20 500
Building / 145 000 / 145 000
Land / 170 000 / 569 100 / 170 000 / 532 000
Less Liabilities
Accounts Payable / 115 100 / 92 000
Loan from Bank / 104 000 / 85 000
Mortgage / 55 000 / 274 100 / 55 000 / 232 000
Net Assets / 295 000 / 300 000
Owner’s Equity
Capital / 300 000 / 285 000
Add Net Profit / 5 000 / 305 000 / 20 000 / 305 000
Less Drawings / 10 000 / 5 000
295 000 / 300 000
You are required to: report to Mr Woodward about the earning capacity of his business. Explain the purpose of each ratio, give an informed analysis of the trends apparent over the two years and by comparing Woodward Enterprise’s results to that of the Industry and make recommendations to Mr Woodward about the future direction of the business in terms of earning capacity.
Industry Averages: Gross Profit: 70%, Net Profit: 10%, Rate of Return on Equity: 6%.
2. Accrued revenues are:
a) revenues earned but not received
b) revenues owing by the firm
c) revenues received but not earned
d) revenues listed in the income statement
3. Prepaid expenses are:
a) an asset
b) a liability
c) a revenue
d) an expense
4. The Balance Sheet:
a) forms part of the double entry procedure
b) is prepared in the ledger
c) is prepared in the journal
d) is a report
5. Explain why the accounting period assumption is an important consideration at the end of the financial year.
6. Outline the difference between ‘gross profit’ and ‘net profit’.
7. State 2 effects on the business if balance day adjustments are not prepared.
8. List Explain the difference between cash and accrual accounting.
9. Explain the meaning of the Accounting Period Assumption.
10. Thomas Brown, the owner of a business, shows you, as his senior accountant, the Income Statement prepared by your trainee and asks:
“This statement shows a net profit of $35 000. Now, I know cash collections of $95 000 were received and cash payments of $55 000 were made for expenses during the year, so that makes my profit calculation higher. Does the trainee have any idea of what he is doing? Which figure should I use?”
You are to write to Thomas explaining the different procedures that may be used for the determination of profit. Recommend the best procedure to Thomas by outlining the advantages of preparing the Income Statement using this method.
11. Investigate the account below in order to provide appropriate responses to the following questions:
ADVERTISING ACCOUNT
Jan 1 / Bank / 3800 / 3800 / DRJan 21 / Bank / 6500 / 10300 / DR
Jan 31 / Accrued Expenses / 1000 / 11300 / DR
Jan 31 / Profit and Loss / 11300 / 0 / DR
Feb 1 / Accrued Expenses / 1000 / 1000 / CR
a) How much was paid in advertising during the month of January?
b) What was the actual advertising expense for January?
c) Why was the debit entry made on 31 January?
d) How would the profit/loss figure be affected if the debit entry on 31 January was omitted?
e) What is the purpose of the entry on 1 February?
12 Balance day adjustments
a) enable a proper matching of revenues and expenses
b) occur at the end of the accounting period
c) enable a more accurate profit figure to be calculated
d) all of the above
13 Accrued expenses
a) decrease the amount of expense for the period
b) are classified as an asset
c) are classified as a liability
d) are expenses which have been paid in the current period but which will be incurred in a future period
14 If balance day is Wednesday 30 June, calculate the amount of accrued wages if payday is each Friday and the weekly bill (five day week) is $40 000
a) $16 000
b) $24 000
c) $32 000
d) $40 000
15 Indicate whether each of the following statements is true or false.
TRUE OR FALSEa) In the accounting cycle, balance day adjustments are recorded before closing entries.
b) The accrual basis of accounting recognizes transactions and events when the associated cash flows occurs
c) all balance day adjustments have to be reversed at the beginning of the next accounting period
d) A sole trader is regarded as a separate legal entity.
16 Examine the following ledger account, and then answer the questions which follow:
INTEREST ACCOUNT
Jan 1 / Bank / 350 / 350 / CRFeb 1 / Bank / 350 / 700 / CR
Mar 1 / Bank / 300 / 1000 / CR
Mar 31 / Accrued Interest / 350 / 1350 / CR
Mar 31 / Profit and Loss / 1350 / 0
a) Is this an expense or revenue account?
b) How much interest was received to 31 March?
c) What is the value of outstanding interest as at the 31 March?
d) What is the value of interest that will be matched against revenue earned for the period?
17 What account is drawings closed off to at the end of the financial year?
18 What does a debit balance in the Profit and Loss Account indicate?
19 Is it better for earning capacity ratios to be above or below industry averages?
20 Prepare the following information for M Rogers:
1. General Journal entries showing all balance day adjustments for June 30 including GST accounts to GST Clearing (show narrations).
2. An Income Statement
3. A Balance Sheet
4. Ratios for Gross Profit, Net Profit and Rate of Return on Owner’s Equity.
M ROGERS
Trial Balance as at 30 June 2013
AmountSales / 196 000
Sales Returns / 6 000
Commission Revenue / 4 000
Discount Revenue / 2 000
Rent Revenue / 10 000
Gain on Disposal of Delivery Van / 2 000
Cost of Goods Sold / 40 000
Advertising / 20 000
Delivery Van Expenses / 7 000
Insurance / 12 000
Telephone / 8 000
Loss on Disposal of Office Furniture / 2 000
Bad Debts / 600
Discount Expense / 10 000
Interest Expense / 400
Cash in Hand / 2 000
Cash at Bank / 20 000
M Hussey (Accounts Receivable) / DR 21 000
J Maher (Accounts Receivable) / DR 4 000
Inventories / 24 000
Shares in ABC Co / 40 000
Office Furniture / 30 000
Delivery Vans / 40 000
Buildings / 100 000
Land / 100 000
Goodwill / 20 000
R Girdler (Accounts Payable) / CR 7 500
GST Collected / 5 400
GST Credits Received / 5 000
Loan from Bank (due May 2014) / 40 000
Mortgage / 100 000
Capital / 165 500
Drawings / 20 400
Additional Information:
· Insurance is prepaid by $2 000
· Rent received in advance $500
· Advertising owing $4 000
· Commission revenue owing $1 150
· $400 Interest is owing on the Loan from Bank
G:\Coredata\Curriculum\Business\Subject Areas\Accounting\11 Accounting Units\2013\2013 CS2 Revision Homework Sheet 3.doc 4