Question 1
Billy Bristol has a job working as a skilled labourer for a business which builds home extensions and does renovations. He earns $25 per hour and works for 40 hours per week Monday to Friday. Billy enjoys the type of work that he does, and is very good at his job but he is not really happy working for other people. He would prefer to work for himself.
Billy has always been a handyman. He enjoys making and fixing things and has learned many skills whilst working for the building firm.During April 2014 he has decided to leave his job and start his ownhome maintenance business (Bristol Maintenance). Billy is trying to earn as much money as possible as he would like to buy a new car.
Billy has never owned or run a business before. To start the business on 1stMay 2014, he deposited $1,500 of his own money into a new bank account opened in the name of the business. He also contributed $2,400 worth of his personal tools and equipment to the business, Billy believes that these will last four years after which they will have no value. He was not sure that his $1,500 would be enough cash to get the business started so on 2nd May he borrowed a further $1,500 from his mother and added this money to the business bank account. Billy does not have to pay any interest to his mum but has agreed that he will repay her the $1,500 at the start of September 2014.
Before long Billy has lots of work to do. As he is so busy, he keeps few records other than his business cheque book and a list of amounts owed to him by customers. Twice a month Billy sends invoices to his customers for the work he has done. One customer insisted on paying in cash at the time the job was done, this customer paid $260 and Billy decided that it was not worth producing an invoice for an amount which had already been received. All work done during the period has been invoiced. By 30th June invoices totalling $13,300 had been issued.
At 30th June his customers still owe him $1,500. His business cheque accountshows payments for building supplies totalling $3,700, he used $80 worth of supplies to fix some taps at his own flat and he still has supplies that cost $450 on hand. He paid somecontractors $2,400 for work that he was unable to do himself, and he still owes them a further $270. He has also paid $127 for various sundry expenses.
Billy rented a cement mixer from Marsden Hire Co. On 1stMay, he signed a twelve-month rental agreement and paid $1,200 for the full period. The agreement states that Billy must keep the equipment that he has hired in good working condition. To do this during June hehad to have repair and service work performed on cement mixer at a cost of $300, he has not paid for this work yet.
To transport equipment to jobs, Billy used an oldvan that he bought on 1st May for $2,000. He believes that the period's work used up 5% of the van's service potential. The business cheque book lists a payment of $1,960 for private cash withdrawals by Billy during the period. On 30th June Billy paid his mobile telephone bill of $270 from his personal bank account. He estimates that 70% of the calls made were for business use.
Billy believes that his business will do better in subsequent periods as he now has an existing customer base to work from and has started to receive enquiries from family and friends of his people he has already worked for.
Imagine that you are an accounting student on a work experience assignment during your final year of study. One of the partners at the firm where you are engaged has asked you to prepare some financial reports for a new client (Billy Bristol). She has also asked you to use the reports you have prepared to assist in the preparation of a decision making case which she can present to Billy. She would like to do this because Billy is unsure whether he is financially any better off running his business compared to working as an employee. He wonders if he should continue with Bristol Maintenance or return to working for somebody else.
Required
1. Prepare the business Income Statement for the period.
2. Prepare the business Statement of Changes in Equity for the period
3. Prepare afully classified Balance Sheet at the end of the period.
4. Using the steps outlined in the decision making model you studied at the beginning of this course explore whether theventure has been successful? In the final step (review/feedback) provide discussion points which your boss can use to assist Billy in his decision making.
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 $70,000 when cash collections of $180,000 were received and cash payments for expenses during the period totaled only $80,000?" 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
Michael Stone's accountant moved interstate in April 2014 leaving Michael to completehis draft accounts for the year ended 30 June 2014, and a Balance Sheet as at that date. He thinks that he may have made a few mistakes and asks for your help. An examination of the accounting records reveals the following:
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A.
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Interest of $600 on the investments held by the business was due, but has not been recorded or received.
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B.
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Repairs to Michael's private motor vehicle, $840, have been debited to the vehicle expenses account.
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C.
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Commission due to sales representatives for the month of June, $2,000, has been overlooked.
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D.
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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.
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E.
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Rent due from customers of $1,350 is not included in the accounts.
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F.
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An 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.
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G.
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A payment of $11,000 on 1 July 2013 for additions to buildings has been debited to repairs and maintenance.
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H.
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No depreciation has been recognised for the year ending 30 June 2014. The draft Balance Sheet shows the following:
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Buildings (at cost)
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$80,000
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Less Accumulated Depreciation
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16,000
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$64,000
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Office Furniture & Equipment (at cost)
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10,500
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Less Accumulated Depreciation
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6,500
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4,000
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These amounts do not include any of the
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transactions listed above.
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Annual depreciation is to be calculated as follows:
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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 $63,500 as shown in Michael's draft accounts.
Question 4
Brisbane Ltd Perth Ltd
Income statement data for the year ended 30th June 2014
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Net sales
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$260,000
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$415,000
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Cost of sales
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161,000
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311,000
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Gross profit
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99,000
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104,000
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Selling and admin expenses
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50,000
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65,000
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Interest expense
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22,000
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10,000
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Other expenses
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2,000
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4,000
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Profit before tax
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25,000
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25,000
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Income tax expense
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7,500
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7,500
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Profit after tax
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17,500
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17,500
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Balance Sheet Data as at 30th June 2014
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Current assets
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Cash
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$8,000
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$15,000
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Accounts receivable
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41,000
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30,000
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Inventory
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24,000
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25,000
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73,000
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70,000
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Non-current assets
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Plant and equipment (net)
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90,000
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110,000
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Total assets
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163,000
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180,000
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Current liabilities
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Accounts payable
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20,000
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24,000
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Non-current liabilities
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Loans
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120,000
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80,000
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Total liabilities
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140,000
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104,000
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Equity
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Total shareholders' equity
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23,000
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76,000
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The following balances were recorded as at 30 June 2013 for each company:
Brisbane Ltd Perth Ltd
$ $
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Accounts receivable
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35,000
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24,000
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Inventory
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30,000
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20,000
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Total assets
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170,000
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195,000
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Required
1. Calculate the following ratios (for each company) for 2014:
A. Gross Profit Margin B. Profit Margin
C. Return on Assets D. Current Ratio
E. Quick Ratio F. Receivables Turnover
G. Inventory Turnover
2. Write a short report which uses the ratios your have calculated in part 1 of this question to compare the profitability and liquidity of the two companies.