AC12 ch8

Where are we headed?
After completing this chapter,

you should be able to:
identify and define revenues
and expenses
calculate Net Profit or Loss
prepare an Income
Statement
report a Net Profit or Loss in
the Balance Sheet
distinguish between cash
and profit
explain the uses of an Income
Statement.
CHAPTER 8
INCOME
STATEMENT
KEY TERMS
After completing this chapter, you should be familiar with the
following terms:
revenue
expense
Income Statement
Net Profit
Net Loss.
Anthony SImmons, Richard Hardy 2012

Cambridge University Press
ISBN 978-1-107-65709-0
Photocopying is restricted under law and this material must not be transferred to another party.
CAMBRIDGE VCE ACCOUNTING
142
8.1
UNITS 1&2
CALCULATING PROFIT
The most basic function of any small business is to earn a profit for the owner, so from
time to time the owner must calculate whether a profit or loss has been generated.
Basically, profit is the net increase in the owners equity as a result of the firms
operations. It is calculated by measuring the firms revenue (what it has earned from
its customers for performing a service) and deducting from this its expenses (what it
has cost the business to provide those services). Thus the calculation of profit is simple
enough profit is what is left over after expenses are deducted from revenues. That is:

Profit
Revenues
Expenses
However, not all the cash the business receives is as a result of its trading activities,
and therefore not all of it is revenue. The same applies to cash payments: not all cash
payments are expenses. In fact, the definitions of revenues and expenses are quite
specific.
Revenue
Revenue
an inflow of an economic
benefit (or saving in an
outflow) in the form of
an increase in assets (or
decrease in liabilities)
that increases owners
equity (except for capital
contributions)
Revenue is defined as an inflow of an economic benefit (or saving in an outflow of an

economic benefit) in the form of an increase in assets or reduction in liabilities that leads
to an increase in owners equity (except for a capital contribution).
Lets break this definition into its components as we did for the definitions of assets
and liabilities. A revenue must be:
an inflow of an economic benefit (or saving in an outflow)
Note that rather than specifying cash, the definition refers to economic benefits that
come into the firm. Revenue for a service firm will usually be cash, but it does not have
to be; the economic benefit could be in the form of a debtor (if services are provided
on credit), or even stock (for a stock gain).

ISBN 978-1-107-65709-0
CHAPTER 8
I N C O M E S TAT E M E N T
143
an increase in assets (or decrease in liabilities)

If a service is performed for cash, then the asset which increases will be Bank, but there
could be other assets received from earning revenue, like Debtors.
an increase in owners equity (except for capital contributions)
Revenue must increase what the business owes to the owner, but it cannot be as a result
of a capital contribution, as this is not a result of the firms operations.
Revenue then represents the increase in owners equity that occurs through business
activities, and in most cases will be what the business has earned from the services that
it has provided to its customers. The key here is that a revenue must increase owners
equity, but not as a consequence of the owner making a contribution.
STUDY TIP
If an item does not

fit all parts of the
definition, it is not
revenue.
Expenses
An expense is defined as an outflow or consumption of an economic benefit (or
reduction in an inflow of an economic benefit) in the form of a decrease in assets or
increase in liabilities that leads to a decrease in owners equity (except for Drawings).
Therefore, an expense must be:
an outflow or consumption of an economic benefit (or reduction in an inflow)

Whereas assets refer to future economic benefits benefits the business still has
expenses refer to benefits that have been consumed (or used up), and are thus gone.
For instance, there is no lasting benefit from paying wages if the owner wants the
employee to work again next week, another payment will be required. However,
expenses need not involve a cash payment; any time the business consumes an
economic benefit, an expense has been incurred.
Expense
an outflow or
consumption of an
economic benefit (or
reduction in an inflow) in
the form of a decrease
in assets (or increase in
liabilities) that reduces
owners equity (except
for Drawings)
a decrease in assets (or increase in liabilities)

If the expense is paid in cash, then the asset which decreases will be Bank, but an
expense could also involve the consumption of stock.
STUDY TIP
a decrease in owners equity (except for drawings)

Expenses decrease profit, and profit goes to the owner; therefore, expenses decrease
owners equity. However, expenses refer to what the business has consumed to earn
revenue, not what the owner has withdrawn for personal purposes, so Drawings is
excluded as an expense.
Compare the
definitions of revenues
and expenses
opposites definitely
apply here.
Expenses then represent decreases in owners equity that occur through business
activities, or what a business has consumed to earn its revenue. The key here is that an
expense must decrease owners equity, but not as a consequence of the owner making
a withdrawal from the business.
The Reporting period and Relevance

The question of when to calculate profit depends on the needs of the owner. Remember,
the Going Concern principle assumes that the life of the business is continuous or neverending, so to follow this principle alone means that profit could never be determined!
As a result, the owner would not have information about the performance of their firm
until it was too late to do anything about it. This is why the Reporting Period principle is
so important: it allows us to divide the life of the business into arbitrary periods in order
to determine profit.
Note that the length of these reporting periods is arbitrary (or subjective) it is up
to owners to decide how often they want profit to be determined. Some owners will
want profit calculated every month; others will be satisfied with seasonal or quarterly

ISBN 978-1-107-65709-0
144
UNITS 1&2
profit reports. In fact, the length of the reporting period can be as short or as long as
the owner desires (although taxation requirements mean that the reporting period must
be no longer than one year) and the length of the reporting period will determine how
frequently profit is calculated.
Once the length of the reporting period is determined, it is important that the
calculation of profit includes only revenues and expenses. This ensures Relevance
in the reports by including only information that is useful for decision-making about
profit. If we were to include items other than revenues and expenses (like Drawings
or loan repayments), our reports would contain information that would not be useful
for decision making, but would actually distort decision-making (and probably lead to
negative consequences for the business and its owner).
REVIEW QUESTIONS 8.1
1 Define the following terms:

profit
revenue
expense.
2 State one reason why a capital contribution is excluded by the definition of
revenue.
3 State one reason why Drawings is excluded by the definition of an expense.
4 Explain how the Reporting Period principle assists in the calculation of profit.
5 Explain how the Reporting Period principle leads to Relevance in accounting
reports.
8.2
Income Statement
an accounting report
which details the revenues
earned and expenses
incurred during the
reporting period
EXAMPLE
THE INCOME STATEMENT
The information about profit or loss must be reported to the owner in a formal
accounting report known as an Income Statement. For a business that deals only in
cash transactions, the cash journals (or the Statement of Receipts and Payments which
reports the information summarised in the cash journals) contain all the information
necessary to prepare an Income Statement.
Nomis Naturopathy has provided the following information relating to

its trading activities for May 2016.
NOMIS NATUROPATHY
Balance Sheet as at 30 April 2016
Current Assets
Bank
Stock of Stationery
Non-Current Assets
Equipment
Premises
Total Assets
4 000
500
4 500
12 000
80 000
Current Liabilities
GST Payable
Mortgage
Non-Current Liabilities
Mortgage
400
6 000
6 400
60 000
92 000
Owners Equity
Capital Nomi
30 100
96 500
Total Equities
96 500

ISBN 978-1-107-65709-0
CHAPTER 8
NOMIS NATUROPATHY
Statement of Receipts and Payments for May 2016
$
Cash Receipts
Naturopathy Fees
6 000
Capital Contribution
1 000
Loan INS Finance
2 000
Interest on Bank Account

GST Received
20
600
9 620
Less Cash Payments

Wages
1 800
Mortgage Repayment
500
Electricity
400
Office Furniture
3 000
Interest on Mortgage
200
GST Settlement
400
Supplies
1 400
GST Paid
440
Drawings
2 000
Cash Surplus (Deficit)
10 140
(520)
Add Bank Balance at Start (1 May 2016)
4 000
Bank Balance at End (31 May 2016)
3 480
Additional information:
All supplies were consumed during May 2016.
The Loan INS Finance is an interest-only loan payable 1 May 2018.
Identifying revenues
Some cash receipts are revenues, as the cash received represents an inflow of economic
benefits, in the form of an increase in Bank:
Naturopathy Fees is revenue received from providing a service.
Interest on Bank Account is a by-product of the business operating a bank account.
Both items meet the definition of revenue as inflows of economic benefits (cash
received) in the form of an increase in assets (Bank) which increase owners equity.
However, even though they are all inflows of economic benefits, some Cash Receipts
are not revenues:
Capital Contribution is expressly excluded by the definition of revenue, as it is not
earned by the business, but rather simply contributed by the owner.
Loan INS Finance is not revenue because it doesnt increase owners equity;
it increases assets (Bank), but also increases liabilities (Loan INS Finance).
GST Received is not revenue because it doesnt increase owners equity either;
it increases assets (Bank), but also increases liabilities (GST payable).

ISBN 978-1-107-65709-0
145
146
UNITS 1&2
With the exception of capital contribution, these cash receipts that are not revenue
affect an element of the accounting equation other than owners equity, and this effect
must be reported separately on the Balance Sheet.
Identifying expenses
Some cash payments are expenses, as the cash paid represents an outflow of economic
benefits, in the form of a decrease in Bank:
Wages and Supplies are consumed in the process of providing naturopathy services.
Electricity is consumed by using the business premises.
Interest on Mortgage is incurred as a result of using a mortgage to purchase the
business premises.
Each of these items meets the definition of an expense as they are outflows or
consumptions of economic benefits (cash paid) that decrease assets (Bank) and result in
a decrease in owners equity.
However, even though they are all outflows of economic benefits, some cash
payments are not expenses:
Mortgage Repayment is not an expense because it doesnt decrease owners equity;
it decreases assets (Bank), but also decreases a liability (Mortgage).
GST Settlement is not an expense because it doesnt decrease owners equity; it
decreases assets (Bank), but also decreases a liability (GST Payable).
Office Equipment is not an expense because it doesnt decrease owners equity,
and it doesnt actually decrease assets either; it decreases a current asset (Bank)
but increases a non-current asset (Office Equipment.) The office furniture is a future
economic benefit rather than an outflow of an economic benefit.
GST Paid is not an expense because it doesnt decrease owners equity; it decreases
assets (Bank), but also decreases a liability (GST payable).
Drawings is excluded by the definition of an expense, as it is not consumed by the
business to earn revenue, but withdrawn by the owner for personal use.
With the exception of Drawings, these cash payments that are not expenses affect
an element of the accounting equation other than owners equity, and this effect must
be reported separately on the Balance Sheet.
The Income Statement for Nomis Naturopathy for May 2016 is shown in Figure 8.1.
Figure 8.1
Income Statement
NOMIS NATUROPATHY
Income Statement for May 2016
$
Revenue
Naturopathy Fees
Interest on Bank Account
Less
STUDY TIP
Note that the bottom

line is profit the
final result hence the
saying!
6 000
20
6 020
Expenses
Wages
1 800
Electricity
400
Interest on Mortgage
200
Supplies
Net Profit
1 400
3 800
$ 2 220

ISBN 978-1-107-65709-0
CHAPTER 8
Like all accounting reports, the title of the Income Statement states who the report
is prepared for (Nomis Naturopathy), what type of report it is (Income Statement), and
when the period to which it applies (May 2016.) Like the Statement of Receipts and
Payments, the Income Statement reports transactions that have occurred not just on the
one day, but over a period of time, so the report specifies for May 2016.
This report tells the owner that as a result of operating the naturopathy business,
there was an increase in the owners equity caused by a Net Profit of $2 220, which itself
was the result of earning $6 020 in revenue, and consuming $3 800 worth of expenses
in the process.
1 Explain why the following items are excluded from an Income Statement:
capital contribution
purchase of a non-current asset
loan repayment
Drawings.
2 Explain why an Income Statement is titled for a particular period rather than
as at a particular date.
8.3
CASH VERSUS PROFIT
The fact that not all cash receipts are revenues, and not all cash payments are expenses,
means that it is possible for a business to earn a profit (with an attendant increase
in owners equity), and yet suffer a cash deficit (leading to a decrease in Bank.) The
opposite can also be true, with a firm that incurs a loss (leading to a decrease in owners
equity) capable of generating a cash surplus (leading to an increase in Bank). This can
be a confusing concept, but we must remember that a cash surplus (or deficit) and profit
(or loss) do not measure the same thing.
A cash surplus (deficit) measures the difference between cash receipts and cash
payments.
A Net Profit (or Loss) measures the difference between revenues and expenses.
Earning a Net Profit but suffering a cash deficit

Many business owners assume that earning a profit means that the business will have
more cash on hand. However, this is not always the case. It is possible for a business to
earn a Net Profit but still suffer a cash deficit due to:
Drawings
a loan repayment
a cash purchase of a non-current asset
a GST settlement.
These items will have no effect on Net Profit as they are not expenses. However,
each is a cash payment, and as a consequence will decrease Bank. Therefore a business
which earns a Net Profit could still find itself with less cash in the bank at the end of the
period.

ISBN 978-1-107-65709-0
147
148
STUDY TIP
The reason(s) for a

difference between
cash and profit
will depend on
the business itself;
examine the firms
reports to identify
which of these reasons
applies.
UNITS 1&2
Generating a cash surplus despite incurring a Net Loss

It is also possible for a business to incur a loss, and yet still see its bank balance increase,
if it receives:
a loan
a capital contribution from the owner
a GST refund.
These items will have no effect on Net Profit as they are not revenues. However, all
are cash receipts, and will increase Bank.
GST
Aside from a GST settlement or GST refund, the GST a business receives from its
customers and pays to its suppliers will also affect its cash position, but not its profit.
If GST received from customers is greater than GST paid to suppliers, Bank will
increase, and this may be one of the reasons why the business has more cash than
profit.
If GST paid to suppliers is greater than GST received from customers, Bank will
decrease, and this may be one of the reasons why the business has less cash than
profit.
1 Citing four examples, explain how a business can earn a Net Profit and yet
suffer a cash deficit.
2 Citing three examples, explain how a business can incur a Net Loss and yet
generate a cash surplus.
3 Explain how GST received from customers and paid to suppliers can lead to:
more cash than profit
less cash than profit.
8.4

REPORTING A NET PROFIT OR LOSS IN THE

BALANCE SHEET
As was noted earlier, the profit or loss the business earns affects owners equity: a Net
Profit represents a net increase in owners equity, whereas a Net Loss represents a net
decrease in owners equity, both as a result of business operations. This must then be
reported in the owners equity section of the Balance Sheet. In fact, the Balance Sheet
must show the initial capital balance, as well as any capital contribution, Net Profit or
Loss, and Drawings to show how the capital at end was determined.
The Balance Sheet for Nomis Naturopathy as at 31 May 2016 is shown in Figure 8.2.

ISBN 978-1-107-65709-0
CHAPTER 8
Figure 8.2
149
Reporting Net Profit in the Balance Sheet

NOMIS NATUROPATHY
Balance Sheet as at 31 May 2016
Current Assets
Bank
Stock of Stationery3
1
3 480
500
Office Furniture
Equipment3
Premises3
GST Payable
Loan INS Finance5
Mortgage6
4
3 980
Non-Current Assets
2
Current Liabilities
$
160
2 000
6 000
8 160
Non-Current Liabilities
3 000
12 000
80 000
95 000
Mortgage6
Owners Equity
Capital Nomi7
Plus Net Profit8
Less Drawings9
Total Assets
98 980
59 500
31 100
2 220
33 320
2 000
Total Equities
31 320
98 980
Notes to the Balance Sheet

1 Bank
$3 480
This is the closing Bank balance from the Statement of Receipts and Payments for
May 2016.
2 Office Furniture
$3 000
This was reported as a cash payment in the Statement of Receipts and Payments for
May 2016.
3 Other assets
There were no transactions affecting Stock of Stationery, Equipment or Premises, so
these items remain unchanged.
4

GST Clearing
Opening GST Payable
Less
GST Settlement
Plus
GST Received on Fees
Less
GST Paid to Suppliers
GST Payable
$ 160
$ 400
400
600
440
$ 160
5 Loan INS Finance

$2 000
This was reported as a cash receipt in the Statement of Receipts and Payments for
May 2016.
6 Mortgage
$6 000/$59 500
$500 was reported as a cash payment in the Statement of Receipts and Payments
for May 2016. Note that the $500 payment was taken from the non-current part of
the mortgage; the current section must always show how much is due in the twelve
months from the date of the statement (12 months $500 per month = $6 000).
7 Capital
$31 100
This is the Capital of $30 100 from the previous Balance Sheet (as at 30 April 2016),
plus the capital contribution reported as a cash receipt in the Statement of Receipts
and Payments for May 2016.
8 Plus Net Profit
$2 220
This is the Net Profit determined in the Income Statement for May 2016.
9 Less Drawings
$2 000
This was reported as a cash payment in the Statement of Receipts and Payments for
May 2016.
STUDY TIP
Using the accounting

equation will calculate
Owners Equity at the
end, but the Balance
Sheet must show
how that figure was
calculated by reporting
Net Profit (Loss) and
Drawings.

ISBN 978-1-107-65709-0
150
UNITS 1&2
Reporting a Net Loss

Should the business incur a Net Loss, the Owners Equity section of the Balance Sheet
would appear as is shown in Figure 8.3.
Figure 8.3
Reporting a Net Loss in the Balance Sheet
Owners Equity
Capital Nomi
Less Net Loss

Less Drawings
31 320
600
30 720
1 800 28 920
1 Explain the relationship between the Income Statement and the Balance
Sheet.
2 State the effect on Owners Equity of:
Net Profit
Net Loss
Drawings
Capital Contributions.
8.5
USES OF THE INCOME STATEMENT
An Income Statement must be prepared in order to provide information for the business
owner. By highlighting the revenue and expense items, and identifying whether the
business achieved a Net Profit or Loss, the report is useful as a decision making tool.
The specific benefits of preparing an Income Statement are to:
1 aid decision-making about the firms operations by measuring the firms performance.
Detailing revenues and expenses (and ultimately profit) allows the owner to identify
where changes may be necessary.
2 assess whether the business is meeting its revenue and expense targets by
comparing the Income Statement against budgeted (or expected) performance.
3 assist in planning for future service activities by providing a basis for the next
budgeted Income Statement, which will set targets for the future. This may include
setting targets to achieve a certain level of fees, staffing requirements, or advertising
expenditure.
4 assess the performance of management in operating the business, primarily relating
to generating sales and controlling expenses.
1 Explain how the preparation of an Income Statement can assist decisionmaking.

2 Explain how the preparation of an Income Statement can assist planning for
the future.

ISBN 978-1-107-65709-0
CHAPTER 8
151
WHERE HAVE WE BEEN?

Revenues are inflows of economic benefits (or savings in outflows) in the form of
increases in assets (or decreases in liabilities) that increase owners equity (except for
capital contributions by the owner).
Expenses are outflows or consumptions of economic benefits in the form of
decreases in assets (or increases in liabilities) that reduce owners equity (except for
Drawings by the owner).
Net Profit or Loss is calculated by comparing revenue earned less expenses incurred
in a reporting period.
GST is not included as a revenue or expense item as it is collected/paid on the
governments behalf and will result in either a GST asset or GST liability.
Cash is not the same as profit because not all receipts are revenue and not all
payments are expenses.
The Income Statement is useful as a tool for planning and decision-making.
EXERCISE 8.1
For each of the following transactions, state the effect on the:
Statement of Receipts and Payments
Income Statement
Balance Sheet.
a
b
c
d
e
f
g
h
W B
page 107
EXERCISES
Paid wages
Cash Fees
Cash drawings
Cash purchase of equipment
Receipt of a loan
Paid rent
Capital contribution
Credit purchase of office furniture.

ISBN 978-1-107-65709-0
152
UNITS 1&2
EXERCISE 8.2
INCOME STATEMENT
W B
page 109
Christis Car Clean Emporium has provided its Statement of Receipts and Payments for
January 2016.
CHRISTIS CAR CLEAN EMPORIUM
Statement of Receipts and Payments for January 2016
$
Cash Receipts
Car Washing Fees
7 300
Car Detailing Fees
1 130
GST Received
843
10 000
19 273
Less Cash Payments

Wages
2 250
Cleaning Supplies
3 000
Drawings
700
GST Paid
1 430
Equipment
9 000
Advertising
300
Rent
2 000
Loan Repayment
5 000
23 680
(4 407)
Add Bank Balance at Start (1 January 2016)
6 500
Bank Balance at End (31 January 2016)
2 093
All cleaning supplies were consumed during January 2016.
Owners equity as at 1 January 2016 was $23 000.
Required
Prepare an Income Statement for Christis Car Clean Emporium for January 2016.
Referring to your answer to part a, explain your treatment of:
Cleaning Supplies.
Explain two reasons why Christis Car Clean Emporium suffered a cash deficit in
January 2016 despite earning a profit.
d Show the owners equity section of the Balance Sheet of Christis Car Clean
Emporium as at 31 January 2016.
a
b

c

ISBN 978-1-107-65709-0
CHAPTER 8
EXERCISE 8.3
INCOME STATEMENT
W B
page 111
Batman and Bowler is a specialist cricket coaching clinic, and as at 1 October 2016, the
Balance Sheet showed Owners Equity of $39 400. The owner has provided the firms
Statement of Receipts and Payments for October 2016.
BATMAN AND BOWLER
Statement of Receipts and Payments for October 2016
$
Cash Receipts
Coaching Fees
6 000
GST Received
600
Interest on Investments
150
GST Refund
2 300
Loan ANZ
2 000
11 050
Less Cash Payments

Wages
4 200
Drawings
1 000
GST Paid
345
Electricity
400
Insurance
250
Rent
2 000
Accounting Fees
800
Interest on Loan
100

Add Bank Balance at Start (1 October 2016)
Bank Balance at End (31 October 2016)
9 095
1 955
500
2 455
Required
Prepare an Income Statement for Batman and Bowler for October 2016.
Referring to your answer to part a, explain your treatment of:
Interest on Investments
Drawings.
Explain two reasons why Batman and Bowler suffered a loss despite generating a
cash surplus for October 2016.
d Show the owners equity section of the Balance Sheet of Batman and Bowler as at
31 October 2016.
a
b

c

ISBN 978-1-107-65709-0
153
154
UNITS 1&2
EXERCISE 8.4
INCOME STATEMENT AND BALANCE
SHEET
W B
page 113
Jackson Pollock is the owner/operator of Blue Pools, a swimming pool maintenance

service. Jackson employs two pool cleaners and is personally responsible for customer
management and bookkeeping. On 28 February 2016, the unclassified Balance Sheet
of Blue Pools showed the following.
Assets
Equities
Bank
14 500
Tools and Equipment

Van
27 000
15 000
$56 500
Loan Wizard
24 000
GST Payable
Capital J. Pollock
360
32 140
$56 500
The Statement of Receipts and Payments for Blue Pools for March 2016 showed the
following information.
BLUE POOLS
Statement of Receipts and Payments for March 2016
$
Cash Receipts
Cash Fees
13 800
GST Received
1 380
1 000
Small Business Prize
500
16 680
Less Cash Payments

Wages
9 500
Drawings
3 000
GST Paid
415
Interest on Loan
250
Loan Repayment
500
Van Expenses
150
GST Settlement
360
Tools and Equipment

4 000
18 175
(1 495)
Add Bank Balance at Start (1 March 2016)
14 500
Bank Balance at End (31 March 2016)
13 005
The Small Business Prize was awarded by Stonnington Council in recognition of Blue
Pools outstanding customer satisfaction rating.
The Loan Wizard is repayable in monthly instalments of $500.

ISBN 978-1-107-65709-0
CHAPTER 8
Required
a Prepare an Income Statement for Blue Pools for March 2016.

b Referring to your answer to part a, explain your treatment of the small business
prize.
c Suggest two actions Jackson could take to reduce cash payments without directly
affecting net profit for March 2016.
d Prepare an appropriately classified Balance Sheet for Blue Pools as at 31 March
2016.
EXERCISE 8.5
ACCOUNTING REPORTS
page 115
W B
On 1 January 2016 Bella Bancroft left her job as a computer technician, keen to start her
own clothing alterations and mending service called Sew Well. On 31 May 2016, the
unclassified Balance Sheet of Sew Well showed the following information.
Assets
Bank
Tools and Equipment
Van
Equities
Loan Aussie
GST Payable
Capital Bancroft
5 500
78 000
27 000
$110 500
30 000
1 000
79 500
$110 500
The cash journals for Sew Well for June 2016 showed the following.
Cash Receipts Journal (extract)
Date
June 2016
Details
Rec.
No.
Bank
Alteration Sundries
Fees
GST
4 000
TOTALS
19 290
13 900
4 000
1 390
Cash Payments Journal (extract)

Date
June 2016
Details
Chq. No.
Bank
Wages
Drawings
Sundries
Van Expenses
800
Loan Repayment
400
GST Settlement
1 000
Sewing Machines
4 500
Interest on Loan
TOTALS
GST
150
20 380
10 200
2 800
6 850
530
The Loan Aussie HL is repayable at $4 800 p.a.
Required
*
*
*
a Prepare a Statement of Receipts and Payments for Sew Well for June 2016.
b Prepare an Income Statement for Sew Well for June 2016.
c Explain two reasons why Sew Well was able to earn a profit despite suffering a cash
deficit for June 2016.
d Prepare an appropriately classified Balance Sheet for Sew Well as at 30 June 2016.
e Explain why the Balance Sheet is titled as at, yet the Income Statement is titled for
the period.
ISBN 978-1-107-65709-0
155
156
UNITS 1&2
EXERCISE 8.6
ACCOUNTING REPORTS
page 117
W B
Mark Lindsberg runs a drycleaning business in Frankston called Clean as a Whistle. Most
customers are small businesses whose employees wear uniforms, but as an expert in the
field, Mark is also consulted by clothing firms who seek his advice regarding the care
instructions for new garments. Garments are picked up and delivered using a company
van. On 31 August 2016, the assets and equities of Clean as a Whistle were as follows.
Assets
Bank
Computer
Office Furniture
Cleaning Equipment
Delivery Van
Equities
Loan ANZ
Capital Lindsberg
GST Payable
2 500
3 200
7 600
59 000
12 400
$84 700
42 000
40 000
2 700
$84 700
Lindsbergs capital as at 1 August 2016 was $35 300. In August 2016 he withdrew
$1 200 in cash for his own use.
Required
a Calculate the Net Profit or Loss of Clean as a Whistle for August 2016.
The cash journals of Clean as a Whistle for September 2016 showed the following.
Cash Receipts Journal (extract)
Date
Sept. 2016
Details
Rec. No.
Bank
Cleaning Consultancy Sundries

Fees
Fees
Loan ANZ
GST
4 000
TOTALS
18 300
9 500
3 500
4 000
1 300
Cash Payments Journal (extract)

Date
Details
Chq. No. Bank Supplies Drawings Wages Sundries GST
Sept. 2016 Electricity
600
Interest on Loan
150
Cleaning Equipment
800
Rent
1 500
Advertising
1 000
TOTALS
16 590
6 500
1 400
3 600
4 050
1 040
The Loan ANZ was extended in September 2016 in readiness for the purchase of a
new computer in mid-October 2016 and is repaid in quarterly instalments of $2 100.
Required
*
*
*
b Prepare a Statement of Receipts and Payments for Clean as a Whistle for September
2016.
c Prepare an Income Statement for Clean as a Whistle for September 2016.
d Explain two reasons why Clean as a Whistle suffered a Net Loss despite generating
a cash surplus for September 2016.
e Prepare an appropriately classified Balance Sheet for Clean as a Whistle as at
30 September 2016.

ISBN 978-1-107-65709-0
CHAPTER 8
EXERCISE 8.7
INCOME STATEMENT AND BALANCE SHEET
W B
page 120
Alex Chilton runs a painting business in Sydenham called Big Star Decorating. Most of
her work is done for cash for individuals who are renovating their homes, but she also
does some credit jobs for small businesses. Paint is purchased only as necessary for
each job, so Alex never keeps any paint on hand. On 1 January 2016, the assets and
liabilities of Big Star Decorating were as follows.
Assets
Bank
Computer
Office Furniture
Painting Equipment
Van
1 000
5 500
8 600
26 500
12 400
$54 000
Equities
Loan nab
GST Payable
Capital Chilton
16 000
2 000
36 000
$54 000
The loan principal is repaid in equal instalments of $1 000 per quarter.
During December 2015, Big Star Decorating earned a profit of $5 400, and Alex
withdrew $3 500.
Required
a Calculate Alexs capital as at 1 December 2015.
b Calculate the Working Capital Ratio of Big Star Decorating as at 1 January 2016.
c Referring to the Working Capital Ratio, comment on the liquidity of Big Star
Decorating as at 1 January 2016.
The Statement of Receipts and Payments for Big Star Decorating for January 2016
showed the following.
BIG STAR DECORATING
Statement of Receipts and Payments for January 2016
$
Cash Receipts
Cash Fees
GST Received
8 000
800
8 800
Less Cash Payments

Wages
500
Paint
4 000
Drawings
3 000
GST Paid
490
Insurance
200
Loan Principal
1 000
Interest on Loan
100
GST Settlement
2 000
Van Expenses
Add Bank Balance at Start (1 January 2016)
Bank Balance at End (31 January 2016)
700
11 990
(3 190)
1 000
(2 190)

ISBN 978-1-107-65709-0
157
158
UNITS 1&2
Alex is concerned that because the business has suffered a cash deficit, it must not
be making a profit.
Required
*
*
d Prepare an Income Statement for Big Star Decorating for January 2016.
e Explain two reasons apart from Drawings why Big Star Decorating was able to earn
a profit despite suffering a cash deficit for January 2016.
f Prepare an appropriately classified Balance Sheet for Big Star Decorating as at
31 January 2016.
EXERCISE 8.8
INCOME STATEMENT AND
BALANCE SHEET
W B
page 122
At the start of 2016, Michael Owen left his job as a courier with Speedy Deliveries to
start up his own courier business called Faster than the Rest. Michael had been earning
$45 000 p.a., but was eager to take up the challenge of owning and operating his own
small business. As at 30 June 2016, the unclassified Balance Sheet of Faster than the
Rest showed the following.
Assets
GST Receivable
Office Equipment
Courier Vans
1 000
11 500
42 000
$54 500
Equities
Bank
Loan nab
Capital Owen
1 500
24 000
29 000
$54 500
The Loan nab was taken out on a fixed-term at the start of January 2016. The
principal is repaid on the first of every month in equal instalments of $500.
At 1 June 2016, Michaels equity in Faster than the Rest amounted to $31 000.
During June 2016, the firm earned a profit of $1 500.
Required
a
b
c
d
Calculate the date at which the loan will be repaid in full.

Calculate Michaels Return on Owners Investment (ROI) for June 2016.
Calculate Michaels Drawings for June 2016.
Suggest one reason why Michael should decrease his Drawings, and one reason
why Michael should not decrease his Drawings.
For further questions relating to Exercise 8.8, please view the Cambridge VCE
Accounting Units 1&2 page on Cambridge GO at www.cambridge.edu.au/GO

ISBN 978-1-107-65709-0

AC12 ch8

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AC12 ch8

Uploaded by

Copyright:

Available Formats

Where are we headed?

After completing this chapter,

Anthony SImmons, Richard Hardy 2012

CAMBRIDGE VCE ACCOUNTING

Revenue is defined as an inflow of an economic benefit (or saving in an outflow of an

Anthony SImmons, Richard Hardy 2012

an increase in assets (or decrease in liabilities)

If an item does not

a decrease in assets (or increase in liabilities)

a decrease in owners equity (except for drawings)

The Reporting period and Relevance

Anthony SImmons, Richard Hardy 2012

CAMBRIDGE VCE ACCOUNTING

REVIEW QUESTIONS 8.1

1 Define the following terms:

THE INCOME STATEMENT

Nomis Naturopathy has provided the following information relating to

Anthony SImmons, Richard Hardy 2012

Loan INS Finance

Interest on Bank Account

Less Cash Payments

Cash Surplus (Deficit)

Add Bank Balance at Start (1 May 2016)

Bank Balance at End (31 May 2016)

Anthony SImmons, Richard Hardy 2012

CAMBRIDGE VCE ACCOUNTING

Note that the bottom

Anthony SImmons, Richard Hardy 2012

REVIEW QUESTIONS 8.2

CASH VERSUS PROFIT

Earning a Net Profit but suffering a cash deficit

Anthony SImmons, Richard Hardy 2012

CAMBRIDGE VCE ACCOUNTING

The reason(s) for a

Generating a cash surplus despite incurring a Net Loss

REVIEW QUESTIONS 8.3

REPORTING A NET PROFIT OR LOSS IN THE

Anthony SImmons, Richard Hardy 2012

Reporting Net Profit in the Balance Sheet

Notes to the Balance Sheet

5 Loan INS Finance

Using the accounting

Anthony SImmons, Richard Hardy 2012

CAMBRIDGE VCE ACCOUNTING

Reporting a Net Loss

Reporting a Net Loss in the Balance Sheet

REVIEW QUESTIONS 8.4

USES OF THE INCOME STATEMENT

REVIEW QUESTIONS 8.5

1 Explain how the preparation of an Income Statement can assist decisionmaking.

Anthony SImmons, Richard Hardy 2012

WHERE HAVE WE BEEN?

Anthony SImmons, Richard Hardy 2012

CAMBRIDGE VCE ACCOUNTING

Car Detailing Fees

Less Cash Payments

Cash Surplus (Deficit)

Add Bank Balance at Start (1 January 2016)

Bank Balance at End (31 January 2016)

Anthony SImmons, Richard Hardy 2012

Less Cash Payments

Cash Surplus (Deficit)

Anthony SImmons, Richard Hardy 2012