Question 1:
Frank Crosby (who has never owned or run a business before) started a lawn mowing business (Crosby's Cutters) as a temporary job/business which he intended to run until he started his business degree at the University of Woop Woop in Semester 2, 2014. To start the business on 1 April 2014, he deposited $1,000 into a new bank account opened in the name of the business. The $1,000 consisted of a $600 loan from his father and $400 of his own money. Frank rented some equipment, purchased supplies, and hired friends to mow and trim his customer's lawns.
At the end of each month Frank sent invoices to his customers. On 31 July, he was ready to dissolve the business and start his university studies. As he was so busy, he kept few records other than his cheque book and a list of amounts owed to him by customers. At 31 July, Frank's business account cheque book shows a balance of $690, and his customers still owe him $500. During the period, he collected $4,250 from customers. His cheque book lists payments for supplies totalling $400, and he still has fuel and supplies that cost a total of $50 on hand. He paid his employees $1,900, and he still owes them $200 for their final week of work.
Frank rented some equipment from Scholes Machine Shop. On 1 April, he signed a sixmonth rental agreement on lawnmowers and paid $600 for the full period. Scholes will refund the unused portion of the prepayment if the equipment is in good order when he returns it. In order to get the refund, Frank has kept the equipment in excellent condition. In fact during May, he paid $300 to repair one of the mowers.
To transport employees and equipment to jobs, Frank used a trailer that he bought for $300. He believes that the period's work used up one-third of the trailer's service potential. The business cheque book lists a payment of $460 for private cash withdrawals by Frank during the period. In July Frank paid back the money his father had lent to him.
Frank estimates that he spent approximately 70 hours working on the business during the period. He plans to recommence operations on a similar basis during major breaks in his university study and believes he will do better in later periods as he now has an existing customer base to work from.
Required
1. Prepare the business Income Statement for the period.
2. Prepare the classified Balance Sheet at the end of the period.
3. Was Frank's venture successful? Give the reasons for your answer. 150 - 250 words only.
Question 2:
1. The owner of a business reviews the Income Statement prepared by you and asks, "Why do you report a profit of only $30,000 when cash collections of $100,000 were received and cash payments for the period totaled only $50,000 for expenses?" How would you respond to the owner's question?
2. Give two examples which support your answer to part 1 of this question.
Question 3:
Barry Cooper submits to you draft accounts for the year ended 30 June 2014, and a Balance Sheet as at that date. Towards the end of the financial year his accountant resigned and he had completed the records himself. He thinks that errors may have occurred and asks for your help. An examination of the accounting records reveals the following:
A. Rent due from customers of $800 is not included in the accounts.
B. A payment of $1,300 for new office furniture has been incorrectly debited to the sundry expenses account. The furniture had been purchased on 30 June 2014.
C. Commission due to sales representatives for the month of June, $1,400, has been overlooked.
D. Repairs to Barry's private motor vehicle, $840, have been debited to the vehicle expenses account.
E. A payment of $11,000 on 1 July 2013 for additions to buildings has been debited to repairs and maintenance.
F. A fire insurance policy covering buildings was taken out on 30 April 2014; the annual premium of $720 was paid in advance on this date and debited to the Prepaid Insurance account.
G. Interest of $600 on the investments held by the business was due, but has not been recorded or received.
H. No depreciation has been recognised for the year ending 30 June 2014. The draft Balance Sheet shows the following:
Buildings (at cost).......................................$80,000
Less Accumulated Depreciation........................16,000 $64,000
Office Furniture & Equipment (at cost)................10, 500
Less Accumulated Depreciation..........................6,500 4,000
These amounts do not include any of the transactions listed above.
Annual depreciation is to be calculated as follows:
- Buildings: 2% of cost
- Office furniture and equipment: 20% of cost
Required:
1. Ignoring GST, show the journal entries required to make the necessary adjustments/corrections listed. Make sure that your journal entries are complete and properly formatted.
2. Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $20,300 as shown in the draft accounts.
Question 4:
Lucy Chan owns an online financial services company called RightFinance.com. She has some idea about accrual accounting but is not very clear on what to do, so she has come to you for help. Lucy aims to achieve a profit margin on her business of 10%, that is, she expects profit divided by total revenue to be at least 10% or more. Lucy has provided the Income Statement below, which shows a profit margin of 7% ($29,000/$414,285). If the profit margin falls below 10%, Lucy intends to sell the business. Lucy knows that some accrual accounting adjustments need to be made and that is why she is seeking your help.
To determine the adjustments that need to be made, you have a long discussion with Lucy that reveals the following:
A. The fees revenue includes $900 for cash received but the services have not yet been provided to the customer.
B. A staff member went on holidays at the end of June and his July wages of $2,300 are included in ‘salaries'.
C. A prepayment of rent of $1,400 for June is still shown in the Balance Sheet as an asset.
D. Depreciation expense of $6,000 for the year has not yet been charged to the accounts.
Required:
1. Prepare the required adjusting journal entries. Make sure that your journal entries are complete and properly formatted.
2. Reproduce the revised Income Statement as it would appear after the adjustments have been processed.
3. Should Lucy retain the business or sell it, given her requirement that the profit margin must be 10%? Explain the reason for your conclusion, showing calculations.
Question 5:
The following information has been extracted from the financial statements and notes of Go Broncos Pty Ltd, consultants.
|
|
2013
|
2012
|
|
Services revenue
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$870,000
|
$862,500
|
|
Interest expense
|
34,500
|
39,750
|
|
Income tax expense
|
66,900
|
79,500
|
|
Profit
|
78,750
|
84,150
|
|
Preference dividends
|
4,200
|
4,200
|
|
Total assets
|
810,000
|
832,500
|
|
Total liabilities
|
450,000
|
495,000
|
|
Preference share capital
|
93,000
|
93,000
|
|
Ordinary share capital
|
165,000
|
150,000
|
|
Retained earnings
|
102,000
|
94,500
|
Required:
1. Calculate the following ratios for 2013:
A. return on total assets
B. return on ordinary equity
2. Calculate the following ratios for 2012 and 2013:
A. profit margin
B. debt ratio
C. times interest earned
3. What do these ratios show in relation to the company's profitability and financial stability? (200 - 250 words maximum)
4. What are some of the limitations or shortcomings of ratio analysis? Give at least four different examples and provide two or three sentences explaining each example.