Solutions

Question 1
a) i
Sherbrooke Walking Tours and Souvenirs
Income Statement
for the year ended 30 June 2011
Revenue Sales - souvenirs
tours*
Less: Sales returns
Net Sales
Less: Cost of Goods Sold
Inventory, 1 July 2010
Purchases
Inventory, 30 June 2011
Gross Profit
Less: Operating expenses
Selling Expenses
Advertising (16,900 2,600)
Sales staff wages (54,500 + 6,200)
#Depreciation shop fittings
Administration Expenses
Printing & Stationery
Rent
Finance Expenses
Loan interest
Total Expenses
Net Profit

47,000
163,000

$
175,700
121,100

210,000
32,400

14,300
60,700
5,700

80,700

4,100
16,000

20,100

$
296,800
4,400
292,400

177,600
114,800

9,000
109,800
5,000

* this could also be classified as other income

# depreciation of shop fittings could also be classified as a selling expense

a) ii
Sherbrooke Walking Tours and Souvenirs
Balance Sheet
as at 30 June 2011
Assets
Current Assets
Cash at Bank
Accounts Receivable
Inventory
Prepaid Advertising
Total Current Assets

23,000
27,700
32,400
2,600
85,700

Non-Current Assets
Shop Fittings & equipment
Accumulated Depreciation (9,800 + 5,700)
Total Assets

38,000
15,500

Liabilities
Current Liabilities
Accounts Payable
Staff wages owing
Total Current Liabilities

22,500
108,200

19,800
6,200
26,000

Non-Current Liabilities
Bank loan
Total Liabilities

45,000
71,000

Owners Equity
Capital
Net Profit
Drawings
Total Owners Equity

46,200
5,000
- 14,000
37,200

Total Liabilities & Owners Equity

108,200

b)

Depreciation is the process of allocating the use of the portion of a non-current

asset of the business used in the production of income for the accounting period. It
is an expense of the accounting period to which it relates.
The depreciation is shown as an expense in the Income Statement and at its cost
less accumulated depreciation in the Balance Sheet.

Question 2
a)
Surfhaven
Income Statement
for the year ended 30 June 2011
Sales
less Sales Returns
Net Sales
Less Cost of Goods Sold
Inv. Beg
Purchases
Purchases returns

$314,000
6,000
308,000
$57,000
$179,100
3,500

Inv end
Gross Profit from operating
Other Income
Commission Income
Gross Profit
less Operating expenses
Selling expenses
Advertising
Sales staff wages 59,500+3,900
Total selling expenses
Administration expenses
General office expenses
Insurance
Rent
26,400-3,200
Depreciation of f/f
Total Administration expenses
Finance expenses
Bad debts
Interest expense
34,200x5%
Discount received*
Discount allowed
Total Finance expenses
Total Operating Expenses
Net Profit from operating
Other Expenses
Loss on sale of furniture & fittings
Net Loss

175,600
232,600
48,000

184,600
123,400

600+1,900

2,500
125,900

6,800
63,400
70,200
15,500
4,300
23,200
4,400
47,400
2,200
1710
-4,100
5,900
5,710
123,310
2,590
6,600
4,010

* Discount received may also be classified as other income

b)

Surfhaven
Balance Sheet
as at 30 June 2011
Assets
Current Assets
Accounts Receivable
Inventory
Commission income owing
Prepaid rent
Total Current Assets
Non-Current Assets
Shop fittings & fixtures
less Accum. Depreciation
Total Assets

$63,400
48,000
1,900
3,200
$116,500

(6,200 + 4,400)

Liabilities
Current Liabilities
Bank Overdraft
Accounts Payable
Wages owing
Interest owing
Total Current Liabilities
Non-Current Liabilities
Bank loan
Total Liabilities

33,400
149,900

12,500
39,100
3,900
1,710
57,210
34,200
91,410

Owners Equity
Capital
Net Profit/Loss
Drawings
Total Owners Equity

72,400
-4,010
-9,900
58,490

Total Liabilities & Owners Equity

b)

44,000
10,600

149,900

Accrual basis accounting which results from applying the revenue and expense
recognition principles means that transactions are recorded in the period in which
those events occur, rather than the period in which the cash is actually received or
paid. Adjusting entries are required to ensure that the above principles are followed.
Before adjusting entries are recorded, some accounts may have incorrect balances
because some events may not have been recorded in the accounting records or may
apply to more than one accounting period.
Adjusting entries are required every time financial statements are prepared to ensure
that the accounts reflect accrual accounting principles.

Question 3

a.
Butternut Imports Ltd
Statement of Cash Flows for the year ending 30 June 2012
Cash flows from operating activities
Inflows:
Cash sales
Receipt of dividend revenue
Collection of accounts receivable
Outflows
Payment of rent expense
Payment of income tax
Payment to accounts payable for inventory
Payment of salaries and wages
Net cash inflow from investing activities
Cash flows from investing activities
Inflows
Proceeds from sale of aircraft
Outflows
Purchase of land for cash
Purchase of equipment for cash
Net cash outflow from investing activities

120,000
28,000
380,000

528,000

30,000
32,000
200,000
136,000

398,000
130,000

480,000
348,000
244,000

592,000
-112,000

Cash flows from financing activities

Inflows
Issue of shares for cash
Outflows
Repayment of mortgage
Payment of dividends
Net increase from financing activities
Increase in cash

150,000
90,000
28,000

118,000
32,000
50,000

Cash at bank, 1 July 2011

Cash at bank, 30 June 2012
Increase in cash

18,000
68,000
50,000

Question 4

Gaslight Company Ltd

Statement of Cash Flows
For year ending 30 June 2011
Cash flows from operating activities
Inflow from operating
Receipts from customers
Interest received
Outflows from operating
Payments to suppliers
Wages paid
Interest paid
General expenses
Income tax paid
Net cash used by operating activities

$
86,000
6,600
61,400
11,800
1,200
22,800
6,200

92,600

(103,400)
(10,800)

Calculations:
Cash from customers

Sales
+ Accts Receivable beginning
- Accts Receivable at end
Cash received

Cash paid to suppliers:

Purchases
+ Accounts Payable at beginning
- Accounts Payable at end
Cash paid to suppliers

General expenses

General expenses
- Prepaid expenses at beginning
+ Prepaid expenses at end
Cash paid

Wages

Wages
+ Wages owing at beginning
- Wages owing at end
Cash paid

$110,000
82,000
192,000
106,000
86,000
$52,000
58,400
110,400
49,000
61,400
$23,000
800
22,200
600
22,800
11,000
1,200
12,200
400
11,800

b. The purpose of the statement of cash flows is to provide users of financial statements
with information about the cash flows of the entity. It shows the cash receipts and
payments, and the net effect. The statement of cash flows can help a user evaluate the
entitys potential to generate cash flows, meet its financial commitments, fund its
activities and obtain finance.

Question 5

Skinner Pty Ltd

Statement of Cash Flows
For the year ended 30 June 2011
Cash flows from operating activities
Inflows:
Cash from customers (sales) (1)
Interest received

Outflows:
Cash paid for purchases (2)
Cash paid for operating expenses (3)
Interest paid
Tax paid
Net cash provided from operating activities

Cash flows from investing activities

Inflows:
Sale of land
Sale of equipment

536,000
176,000
12,000
65,000

$
848,000

789,000
59,000

25,000
34,000

Outflows:
Purchase of equipment
Net cash outflow from investing activities

59,000

166,000
-107,000

Net cash flows from financing activities

Inflows:
Issue of shares

130,000

Outflows:
Dividends paid
Cash paid for converting notes
Net cash from financing activities

55,000
10,000

65,000
65,000

Net increase in cash

17,000

Cash balance at beginning

Cash balance at end
Change in cash position

37,000
54,000
17,000

Calculations
1

Cash from customers (sales)

Sales
+ Accounts Receivable at beginning
Accounts Receivable at end
Cash received

890,000
26,000
916,000
68,000
848,000

I/S
B/S

B/S

Cash paid for purchases

Inventory at beginning
+ Purchases (Step 2)
= Total available for sale (Step 1)
-Inventory at end
Cost of Goods Sold

0
519,000
519,000
54,000
465,000

Purchases
+ Accounts Payable at beginning

519,000
40,000
559,000
23,000
536,000

- Accounts Payable at end

Cash paid
3

B/S

B/S
I/S

B/S
B/S

Cash paid for operating expenses

Operating expenses
-Depreciation

221,000
33,000
188,000
4,000
6,000
186,000
0
10,000
176,000

+Prepaid expenses at end

-Prepaid expenses at beginning
+ Accrued expenses at beginning
-Accrued expenses at end
Cash paid

I/S
I/S
B/S
B/S
B/S
B/S

Question 6

$6 x 2,100
- fixed costs
Net Profit

12,600
9,000
3,600

or
Sales
(2,100 x $9)
-V/costs
(2,100 x $3)
C.M.
'F.C.
Net Profit

$ 18,900
6,300
12,600
9,000
3,600

Selling Price
-variable costs
Contribution margin

$ 9.00
3.00
6.00

b/e (vol)
B/e ($)

$9,000/6
x $9

or
Cmr: 6/9 = 0.6667

$9,000/0.6667

$6,000 + $9,000/$6

2,500

2,500 - 1,500 =

1,000

or
$22,500 - $13,500

$9,000

SP
VC (3+.5)
cm

1,500
$13,500

meals

$ 8.00
3.50
4.50
3,600+9,000+3,598)/4.5
= 3,599.96(3,600)

Question 7
Selling Price
$25.00
Less: Variable Costs -20.00
Contribution margin ratio = $5 / $25 x 100 = 20%
a.

Break-even (vol) = $468,000 / $5 = 93,600 disks

Break-even ($) = $468,000 / .20 = $2,340,000.00
or
93,600 x $25.00 = $2,340,000

b. Level of Profit for forecast sales of 120,000 disks

Total Sales (120,000 x $25.00)
Less: Total Variable Costs (120,000 x $20.00)
Total Contribution Margin
Less: Total Fixed Costs

$3,000,000.00
-2,400,000.00
600,000.00
-468,000.00

Net Profit

$ 132,000.00

c. Margin of Safety
120,000 93,600 = 26,400 disks
or
$3,000,000 - $2,340,000 = $660,000
d. Target Sales in Volume and Target Sales in $s
Total fixed costs = $468,000 + $12,000 = $480,000
$480,000 + $132,000 / $5 = 122,400 total disks to be sold 2,400 more
e. 15% Return on Assets: $1,000,000 x 15% = $150,000
$468,000 + $150,000 / $5 = 123,600 disks

10

Question 8
a) i. Current ratio:

Current Assets
Current Liabilities

$30,000
$10,000

ii. Quick Asset ratio: Current Assets Inventory

Current Liabilities

= 3.00

$30,000 - $13,600
$10,000

= 1.64

ii. Accounts Receivable turnover(average settlement period of accounts receivable):

Credit Sales
$80,640
Avg Accts Receivable
$10,000 = 8.064 times
365/8.064 times =45.26 days
alternate calculation:
Avg Accounts Receivable
Net Credit Sales

$10,000
$80,640 x 365 = 45.26

x 365

Average accounts receivable: $8,800 + $11,200 / 2 = $10,000

Inventory turnover:
C.O.G.S.
Avg. Inventory

$54,400
$13,000
= 4.185
365/4.185 times = 87.22 days

alternate calculation:
Avg. Inventory
C.O.G.S.
x 365

$13,000
$54,400

x 365 = 87.22

Average inventory: $12,400 + $13,600 / 2 = $13,000

Operating cycle (working capital cycle)*:
Accounts Receivable turnover:
45.26 days
Inventory turnover
87.22 days
132.48 days
*This is differentiated from the operating cash cycle which is:
Inventory turnover + Average settlement period for accounts receivable average
settlement period for accounts payable

b) The operating cycle is the period of time it takes for inventories to be converted to
accounts receivable and accounts receivable to cash. (in the case of credit sales). For
Ranges Transport, it takes on average 87 days for inventory to be sold and then another
45 days on average to receive the cash from accounts receivable of credit sales.
c)

Other information that would be beneficial to evaluate the short-term liquidity position
includes:
credit terms for both credit ales and purchases
industry averages
past years data

11

Question 9

Eastern Trucking Services

a) Return on Assets
Net Profit before Interest & Tax
Average Total Assets

Asset turnover
Sales
Average Total Assets

x 100 =

$800,000
$500,000

Net Profit ratio

Net Profit before Interest & Tax
Sales
x 100
Gross Profit ratio
Gross Profit
Sales
x 100

= 1.6

$280,000
$800,000

$60,000
$500,000 x 100 = 12%

$60,000
$800,000 x 100 = 7.5%

x 100

35%

b) Cost of Goods Sold and other operating expense details

Prior years data
Industry averages
c)

Information regarding the industry within which the business operates e.g. special
needs and/or conditions, management policies and procedures,
business/environment risk

12

Question 10

Part A
2011: Inventory turnover = 1900,000/(420,000+ 480,000)/2 = 4.22 times which is 365/4.22 =
86.5 days
2010: IT = 2100000/(380,000 + 420000)/2 =5.25 times which is 69.52 days (365 / 5.25)
The businesss inventory position has deteriorated. The inventory turnover has increased
from 69 to 86 days. The sales level has declined, while the inventory levels have grown,
thus resulting in the deteriorating inventory position. The business should investigate and
act on possible reasons for this decrease. ( ie changing trends in the market price, wrong
stock, poor debtor control, ineffective management).
Part B
a. What the ratios indicate:
Liquidity: Both the current ratio and the quick asset ratio have increased in 2011. This is not
necessarily a good indicator, as too much tied up in assets such as cash, inventory and
debtors can represent an inefficient allocation of resources. Nevertheless, on the surface,
this is generally a good position to be in.
Management efficiency: The entity is selling its inventory less quickly in 2011 compared with
2010; however, the accounts receivable are taking on average 15 more days to pay. The
entity may have to review its collection policy and the credit terms offered to customers. It
would be useful to know what line of business the entity engages in to assess how
reasonable the turnover is.
Profitability: The profit margin has increased. This may suggest that the entity has increased
its selling price (due to increase in demand) even though it is not moving inventory any faster
( a very good, or lucky, position to be in). Alternatively it could be a function of lower
expenses per dollar of sales.
b. Other information could include consumer tastes; changes in economic conditions in the
economy; industry conditions and technological advances
Part C
David should be focusing on an understanding of the relationships between current assets (
and their liquidity) and current liabilities as a short term measure. (i.e. how easy it is to
convert these assets to cash, if necessary, in hard times to cover the entitys liabilities).
Similarly in the long term we are looking for a measure of the relationship between debt
financing (as in loans) and equity financing (as in owners capital). Borrowing money with
the resulting tax deduction may be a lot cheaper than using ones own capital. The latter
could be invested more efficiently (with higher returns) elsewhere.
b. Limitations in using ratios include their timeliness ( ie figures may be out of date by the
time we use them), use of historical costs ( bases of accrual accounting), use of summarised
information from the financial statements, and changes in anchor points used in common
sized statements. We are really identifying only the symptoms not necessarily the causes.
David must remember that ratio analysis is only one tool used in analysing an entity.
c. Factors external to an entity can affect the entitys financial performances and, again,
these may not be obvious when using ratio analysis. Such factors include interest rates
13

changes, exchange rates, government policy and the general state of the economy,
technological advancements and the like.
Part D
GKBs expansion plans:
a

ROA ratio

Before
700,000/3,000,000 =
23.3%

After
790,000/3,500,000 = 22.6%

Return on ordinary
shareholders

448,000/2,200,000 =
20.4%

490,000/2,100,000 = 23.3%

Debt to total assets

ratio

800,000/3,000,000 =
26.7%

1,400,000/3,500,000 = 40%

Time interest earned

700,000/60,000 = 11.6
times

790,000/90,000 = 8.8 times

Shareholders overall would probably be happy due to their returns increasing from 20.4% to
23.3%. However, the return on total assets has fallen, debt to total assets has increased and
interest coverage has fallen, all of which need to be addressed in the future.

14

Question 11

a) i. Current ratio:

Current Assets
Current Liabilities

$30,000
$10,000

= 3.00

ii. Quick Asset ratio: Current Assets Inventory $30,000 - $13,600

Current Liabilities
$10,000
ii. Accounts Receivable turnover:
Credit Sales
$80,640
Avg Accts Receivable
$10,000 = 8.064 times
365/8.064 times =45.26 days
alternate calculation:
Avg Accounts Receivable
Net Credit Sales

= 1.64

$10,000
$80,640 x 365 = 45.26

x 365

Average accounts receivable: $8,800 + $11,200 / 2 = $10,000

Inventory turnover:
C.O.G.S.
Avg. Inventory

$54,400
$13,000
= 4.18
365/4.185 times = 87.22 days

alternate calculation:
Avg. Inventory
C.O.G.S.
x 365

$13,000
$54,400

x 365 = 87.22

Average inventory: $12,400 + $13,600 / 2 = $13,000

Operating cycle:
Accounts Receivable turnover:
Inventory turnover

45.26 days
87.22 days
132.48 days

b) The operating cycle is the period of time it takes for inventories to be converted to
accounts receivable and accounts receivable to cash. (in the case of credit sales). For
Rodger Ramjet, it takes on average 87 days for inventory to be sold and then another 45
days on average to receive the cash from accounts receivable of credit sales.

15

Question 12

Answer (and one possible numbered sequence of solving the problem):

Cash balance, beginning

Add collections from customers
Total cash available
Less disbursements:
Purchase of inventory
Operating expenses
Capital additions
Payment of dividends
Total disbursements
Excess (deficiency) of cash
available over disbursements
Borrowings
Repayments (including interest).
Cash balance, ending

July

August
9. $ 20
107
8. 127

Septemb
er
10. $ 20
11. 136
156

$ 25
1. 69
94

$ 25
17. 312
337

3. 50
30
34
2. 114

60
7. 39
8
107

48
16. 24
15. 2
14. 9
83

18. 158
19. 93
44
9
304

(20)
5. 40
4. $ 20

6. 20
$ 20

73
13. 41
12. $ 32

20. 33
21. 40
22. 41
$ 32

16

Total

Question 13

The Cats Meow.

Cash Budget
For the months of April, May, and June

Beginning cash balance

Cash Receipts:
From credit sales made in:
Jan
$ 45,000
February $60,000
March$65,000
April
$65,000
May $ 70,000
June
$95,000
Total cash receipts
Total cash available
Cash Disbursements:
For operating expenses incurred in:
April
May
June
For payment of supplies
Total disbursements
Ending cash balance

April
$ (5,000)

4,500
12,000
13,000
32,500

62,000
$57,000

May
$(3,000)

June
$ 4,000

6,000
13,000
13,000
35,000

6,500
13,000
14,000
47,500
81,000
$85,000

67,000
$64,000

60,000
60,000

$60,000
$(3,000)

$60,000
$ 4,000

60,000
35,000
$95,000
$(10,000)

Cash budgeting permits the practice manager to see where the cash balances falls
to the negative. The irregular purchase of supplies will cause the cash position to
remain precarious. The business needs additional working capital. By bringing the
collection period forward not all money owed by customers will be recovered.

Rent $5,000 + salaries $40,000 + overhead costs $15,000 = $60,000

17

Question 14

(a) Break-even ($)

(b)

$228,000 / 0.2 = $1,140,000.00

Level of profit for forecast sales of 144,000 games

Total Sales (144,000 x $20.00)
Less: Total variable Costs (144,000 x $16.00)
Equals: Total Contribution Margin
Less: Total Fixed Costs
Equals: Net Profit

$2,880,000.00
2,304,000.00
576,000.00
228,000.00
$ 348,000.00

Alternative calculation:
Total Contribution Margin (144,000 x $16.00)
$576,000.00
Less: Total Fixed Costs
228,000.00
Equals: Net Profit
$ 348,000.00
(c ) Margin of safety
$2,880,000 - $1,140,000 = $ 1,740,000
This means that sales can fall by $1,740,000 before a loss is incurred.
(d) Target sales
Total fixed costs: $228,000 + $14,000 = $242,000
Target sales;
$242,000 + $348,000 / 0.20 = $2,950,000
147,500 games to be sold (an additional 3,500)
(e) 18% Return on Assets:
Target sales:

$2,000,000 x 18% = $360,000

$242,000 + $360,000 / .20 = $3,010,000

= 150,500 games

(f) Current contribution margin ratio:

$4 / $20 = 0.2 (or 20%)
New variable cost per unit:
$16 x 1.10 = $17.60
Contribution margin ratio = Contribution margin / Selling price
0.2 = (SP - $17.60) / SP
SP = $22
(g) No. If selling price decreases and variable costs stay the same, contribution margin per
unit will decrease, therefore need to sell as many to cover fixed costs and therefore
break-even point is increased.

18

Question 15

A. Receipts from Debtors Schedule for 12 months ending 31 December 2011

December
March
June
September
December

March
150,000
420,000

$500,000
$600,000
$700,000
$800,000
$850,000

$570,000

June

September

180,000
490,000

December

210,000
560,000

$670,000

$770,000

240,000
595,000
$835,000

B.
Cash budget
for 12 months ended 31 December 2011
March

June

570,000

670,000

770,000

835,000

570,000

670,000

770,000

835,000

385,000
150,000
68,000

410,000
150,000
68,000

390,000
150,000
68,000

420,000
150,000
67,490
25,400

Total Payments
603,000
Excess (Deficit) receipts over
payments
(33,000)
Bank balance at beginning of
month
18,260
Bank Balance at End of Month
$(14,740)

628,000

608,000

662,890

42,000

162,000

172,110

(14,740)
$27,260

27,260
$189,260

189,260
$361,370

ANTICIPATED RECEIPTS
Receipts from debtors
Total receipts
ANTICIPATED PAYMENTS
Payments to creditors
Marketing and Administration
Occupancy
IT equipment

19

September

Dec

Question 16

a. Receipts from Debtors Schedule for two months ending 31 January

December
6,000
32,000
50,000

October
$60,000
November $80,000
December $100,000
January
$50,000

$88,000

January
8,000
40,000
25,000
$73,000

b.
Cash budget
for 2 months ended 31 January
Dec

Jan

88,000
42,000

73,000
30,000

161,000
72,000

Total receipts
ANTICIPATED PAYMENTS
Selling and administration
Car hoist
Inventory consumables
Total Payments
Excess (Deficit) receipts over payments
Bank balance at beginning of month

130,000

103,000

233,000

58,000
20,000
45,000
123,000
7,000
30,000

58,000

58,000
45,000
37,000

116,000
20,000
45,000
181,000
52,000
30,000

Bank Balance at End of Month

$37,000

$82,000

$82,000

ANTICIPATED RECEIPTS
Receipts from debtors
Cash sales

Total

c. Ken likes to maintain a minimum cash balance of $30,000. He should be able to achieve
this over the December/January period. In fact as his planned cash balance is $37,000
at the end of December, he could choose to transfer $7,000 to a higher-interest earning
account. During January, he may be able to add to this as the cash flow through January
based on the estimates is very favourable.

20