Task 1:
Laura Prebble, the owner-manager of a small business, had carefully monitored her cash position over the past financial year, and was pleased to note at the end of the year that the cash position was strong, and had shown a healthy 50% increase over the year. When presented with the income statement for the year, she was dismayed to note that the profit earned in the last year had deteriorated significantly and had become a loss for the current period. In her anger, she accuses you of having made errors in the accounting since ‘such a silly situation could not possibly exist'.
Required
Draft a response to Laura.
Task 2:
‘A statement of cash flows is of limited use as a business needs to know if it will have sufficient cash to support its planned future activities.'
Required
Discuss the merit of this statement focusing on both the purpose and limitations of a statement of cash flows.
Task 3:
After calculating the current ratio for an entity and finding that the ratio's value was 5:1, a student analyst decided that the company was in a sound position for paying its liquid liabilities.
Required
Discuss the shortcomings of making such a conclusion.
Task 4:
The financial statements for the business of Trinh's Nail Supplies for the past two years are presented below.
TRINH'S NAIL SUPPLIES
Comparative Income Statements
for the year ended 30 June
|
|
2016
|
2017
|
|
Sales
|
$ 400??000
|
$ 500??000
|
|
Cost of sales
|
350??000
|
458??000
|
|
GROSS PROFIT
|
50??000
|
42??000
|
|
Interest income
|
1??000
|
2??000
|
|
Loss on sale of fixtures
|
-
|
800
|
|
|
51??000
|
43??200
|
|
Office supplies used
|
10??000
|
11??000
|
|
Other expenses
|
29??000
|
29??000
|
|
|
39??000
|
42??000
|
|
Profit
|
$ 12??000
|
$ 3??200
|
TRINH'S NAIL SUPPLIES
Comparative Statements of Financial Position
as at 30 June
|
2016 2017
|
|
ASSETS
|
|
|
|
Cash at bank
|
$ 4??400
|
-
|
|
Accounts receivable
|
42??000
|
$ 60??000
|
|
Inventory
|
80??000
|
40??000
|
|
Office supplies
|
2??000
|
5??000
|
|
Freehold property
|
60??000
|
80??000
|
|
Fixtures
|
40??000
|
46??000
|
|
Accumulated depreciation - fixtures
|
(16??000)
|
(20??200)
|
|
Investments
|
6??000
|
16??000
|
|
|
$ 218??400
|
$ 226??800
|
|
LIABILITIES AND EQUITY
|
|
|
|
Bank overdraft
|
-
|
$ 4??000
|
|
Accounts payable
|
$ 26??000
|
40??000
|
|
Trinh, Capital
|
192??400
|
182??800
|
|
|
$ 218??400
|
$ 226??800
|
Additional information
a. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash.
b. The bank overdraft is considered to be part of the entity's cash management function.
c. During the year ended 30 June 2017, the owner, Trinh, withdrew $12??800 in cash for personal use.
d. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost $4200 and had been written down to a carrying amount at the date of sale of $2000.
e. Depreciation of fixtures has been included in ‘other expenses' for the year ended 30 June 2017. All remaining other expenses were paid in cash.
Required
1. Prepare the statement of cash flows for Trinh's Nail Supplies for the year ended 30 June 2017, using the direct method.
2. Comment on the cash flow position of the entity as shown in the statement of cash flows.
Task 5:
Sunrise Ltd completed the following transactions during a given year:
| Transaction |
Ratio |
| 1. Sold obsolete inventory at cost |
Profit margin |
| 2 Redeemed debentures by issuing ordinary shares |
Return on ordinary equity |
| 3. Issued a share dividend on ordinary shares |
Earnings per share |
| 4. Declared a cash dividend on ordinary shares |
Dividend payout |
| 5. Paid the GST owing to the tax office |
Dividend yield |
| 6. Purchased inventory on credit |
Quick ratio |
| 7. Sold inventory for cash |
Current ratio |
| 8. Wrote off a bad debt against Allowance for Doubtful Debts |
Current ratio |
| 9. Collected an account receivable |
Receivables turnover |
| 10 Sold inventory on credit |
Inventory turnover |
| 11 Issued additional ordinary shares for cash |
Debt ratio |
| 12 Paid trade accounts payable |
Return on assets |
Required
State and discuss whether each transaction would cause the ratio listed with the transaction to increase, decrease or remain unchanged.