QUESTION 1: Financial Reporting - Worksheet (20 marks) Ollivander’s Magic Empori
ID: 2448038 • Letter: Q
Question
QUESTION 1: Financial Reporting - Worksheet (20 marks)
Ollivander’s Magic Emporium is owned and run by Garrick Ollivander. The following trial balance has been prepared at year’s end.
Debit ($)
Credit ($)
Cash on Hand
12 000
Accounts Receivable
31 000
Inventory (30 June 2015)
32 000
Prepaid Shop Rent
24 000
Display Cabinet
73 000
Acc’d Depreciation Display Cabinet
13 800
Bank Overdraft
1 000
Accounts Payable
1 600
G. Ollivander, Capital (1 July 2014)
133 600
G. Ollivander, Drawings
12 500
Sales
271 000
Sales Returns & Allowances
1 200
Discount Received
1 000
Cost of sales
128 000
Sales Staff Salaries
42 000
Advertising
1 000
Discount Allowed
740
Freight Outwards
360
Interest
1 000
Council Rates
1 400
Administrative Salaries
27 000
Shop Rent
32 000
Sundry Administration
2 800
. .
$422 000
$422 000
OLLIVANDER’S MAGIC EMPORIUM - TRIAL BALANCE
AS AT 30 JUNE 2015
(continued.....)
The following additional information is also provided for the year ended 30 June 2015:
(1) A physical stock take of inventory as at 30 June 2015 revealed $32 500 on hand.
(2) It is estimated that 3.5% of the balance of Accounts Receivable will never be received.
(3) Sales staff salaries owing but not paid as at balance date total $4 300.
(4) The Prepaid shop rent is for rent paid eight months in advance and covers the rent until 31 August 2015.
(5) $5 400 of the recorded sales represent payments for Magic Wands which will not be delivered until 1 July 2015.
(6) Sales of Magic Swords Boxes for $7 000 were delivered on 29 June 2015. This sale was not recorded (or cash received) by balance date.
(7) The Jewellery Display Cabinet is expected to have a useful life of eight years and then be sold for an estimated amount of $600.
(8) Upon receipt of the business’s bank statement, Garrick realised that the business had earned $50 interest on 30 June 2015. This amount was paid directly into the bank account. The accounting records need to be updated for this transaction.
REQUIRED:
Complete the worksheet provided to prepare the above information for assembly into financial statements.
(Please note: you are NOT required to prepare any financial statements for this question. You are only required to complete the worksheet).
Question 1 OLLIVANDER’S MAGIC EMPORIUM, END OF PERIOD WORKSHEET -YEAR ENDED 30 JUNE 2015
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Income Statement
Balance Sheet
Account Name
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Cash on Hand
12 000
Accounts Receivable
31 000
Inventory (30 June 2015)
32 000
Prepaid Shop Rent
24 000
Display Cabinet
73 000
Acc’d Depr Display Cabinet
13 800
Bank Overdraft
1 000
Accounts Payable
1 600
G. Ollivander, Capital (1 July 2014)
133 600
G. Ollivander, Drawings
12 500
Sales
271 000
Sales Returns & Allowances
1 200
Discount Received
1 000
Cost of sales
128 000
Sales Staff Salaries
42 000
Advertising
1 000
Discount Allowed
740
Freight Outwards
360
Interest
1 000
Council Rates
1 400
Administrative Salaries
27 000
Shop Rent
32 000
Sundry Administration
2 800
422 000
422 000
Profit/Loss
QUESTION 2: Financial Reporting - Statements (20 marks)
The following Trial Balance for Ronald’s Bird Cage Menagerie (wholesaler of Owl Cages) has been prepared at year end by Ronald but he realises it is not in the correct order.
REQUIRED:
Using the Trial Balance provided for the period in question below, prepare the following:
Fully classified Income Statement
Ronald’s Bird Cage Menagerie - TRIAL BALANCE AS AT 30 JUNE 2015
Debit ($)
Credit ($)
Cash at Bank
153170
Electricity Expense
420
Accounts Receivable
12690
Inventory - 1 July 2014
12000
Unearned Bird Cage Construction Fees
610
Bird Cage Sales
22000
Interest Revenue
200
Prepaid insurance
2640
Office Equipment
18700
Ronald’s, Capital – 1 July 2014
240000
Owl food Sales
3800
Office supplies on hand
1280
Electricity Account Payable
370
Interest Expense
1250
Salaries Payable
1980
Depreciation Expense – Office Equipment
350
Salaries Expense
9580
Freight Outward
2000
Telephone Expense
510
Purchases
19500
Land
100000
Depreciation Expense – Showroom
350
Building
180500
Accounts Payable
8800
Insurance Expense – Office Equipment
70
Accumulated Depreciation – Showroom
350
Interest Payable
1500
Advertising Expense
200
Freight Inward
50
Bird Cage Construction fees
1500
Accumulated Depreciation – office equipment
350
Mortgage payable
242000
Ronald’s, Drawings
1200
516 460
516 460
(continued.....)
Telephone expense is split with 70% office and 30% showroom.
Electricity Expense is split with 40% office and 60% showroom.
$5 000 of the mortgage is payable by 31st December 2015.
The Prepaid Insurance is for a 2 year policy that commences in 1st July 2015.
The salaries expense is $3 580 for Showroom Staff, $4 000 for Office Staff, $1 000 for the Bookkeeper and $1 000 for the Cleaner.
Closing Inventory balance is $10 000
Answer on following pages
QUESTION 3: Financial Report Analysis (16 marks)
Part of your role at Numbers Up Accountants is to make recommendations to clients about potential investments. You have been asked to provide a recommendation on the best investment regarding two jewellery businesses detailed below. The only information that you have to work with is the following ratio values.
Ratio
Bling Bling (BB)
Alchemy Matters (AM)
Return on Equity
24%
35%
Return on Assets
18%
20%
Average Collection Period
52 days
39 days
Inventory Turnover
10 times
7 times
Gross Profit Margin
59%
70%
Profit Margin
16%
12%
Times Interest Earned
10 times
17 times
REQUIRED:
Write a short report to the owner in your own words in relation to the profitability, liquidity and financial stability of the businesses (BB and AM) based on the ratio results in the table above. In your report, consider what commercial or market factors might have impacted on the results (i.e. competition, suppliers, etc.) and which business would make the better investment based on the information provided (maximum 400 words)
Answer on following page
Q3
QUESTION 4: Accounting Concepts (10 marks)
In your own words and using referencing where applicable please answer the following (maximum 400 words for each section 1, 2 and 3)
Of the two methods for recording inventory transactions which have been discussed in ACG11:
Which method provides the higher gross profit figure?
Which method provides the most information for control purposes?
Explain how cost of sales is calculated under the periodic system. (3 marks)
Explain the impact on the valuation of inventory if the net realisable value is lower than historic cost. What is the name of the applicable inventory valuation rule? (3 marks)
Explain why adjusting entries such as depreciation and doubtful debts expense are necessary under the conceptual framework using the relevant concepts of accrual accounting, accounting period and materiality. (4 marks)
QUESTION 5: Statement of Cash Flows (16 marks)
You are provided the following financial information for Madam Malkin’s Exquisite Robes, an exclusive fashion manufacturing and retailing company:
Madam Malkin’s Exquisite Robes
Comparative Balance Sheets
As at 30th June
2015 2014
$'000's
$,000's
Current Assets
Cash on Hand
48
112
Cash at Bank
-
288
Accounts Receivable (net)
240
432
Inventory
368
288
Prepaid Advertising Expense
144
800
48
1 168
Non-Current Assets
Manufacturing Equipment
5 088
4 960
less Acc. Depreciation
1 120
3 968
2 400
2 560
Investments
672
-
. .
Total Assets
5 440
3 728
Current Liabilities
Overdraft
Accounts Payable
320
288
512
Accrued Rent Expense
48
16
Interest Payable
144
800
320
848
Non-Current Liabilities
Loan
2 400
800
Total Liabilities
3 200
1 648
Net Assets
2 240
2 080
Equity
M. Malkin, Capital
2 240
2 080
(continued .........)
Madam Malkin’s Exquisite Robes
Income Statement
For the year ended 30th June 2015
$'000's
Net Sales
11 776
Less: COS
Gross Profit:
5 856
5 920
Other Revenue:
Gain from Sale of Assets
16
Dividend Revenue
32
Discount Received
64
112
6 032
Expenses:
Selling & Admin Expense
4 864
Discounts Allowed
112
Depreciation Expense
320
Interest Expense
176
5 472
Profit
560
Additional Information:
Manufacturing Equipment with an historic cost of $1,760,000 was sold for $176,000 cash and made the company a profit of $16,000.
M. Malkin contributed no additional capital to the business during the year.
REQUIRED:
Answer this question on the pro forma provided below.
Prepare a statement of cash flows for the year ended 30th June 2015 in accordance with the direct method. Show all calculations on the pro forma provided. [10 marks]
Below are the summarised cash flow statements for two other fashion manufacturers. In your own words, comment on which one has a healthier cash flow situation. Justify your answer by explaining the significance of each of the three types of cash flows for each business:
Hermione Designs
Simply Luna
Cash flow from Operating Activities
915
(460)
Cash flow from Investing Activities
(785)
300
Cash flow from Financing Activities
500
420
Net increase / (decrease) in cash held
630
260
Cash at the beginning of the year
50
100
Cash at the end of the year
680
360
[Approximately 200 words expected in your answer]
[6 marks]
A)
Madam Malkin’s Exquisite Robes
Statement of Cash Flows
for the year ended 30 June 2015
Cash flows from operating activities:
Receipts from customers
11 856
Payments to suppliers and employees
Dividends received
32
Interest received
Interest paid
(352)
Net cash from operating activities
Cash flows from investing activities:
Purchase of Equipment
Purchase of Investments
Proceeds from sale of assets
Net cash from investing activities
Cash flows from financing activities:
Loan
Drawings
(400)
Net cash used in financing activities
Net increase/decrease in cash held
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
*Calculations must be provided below. Failure to provide supporting calculations will result in ZERO marks awarded for this question.
Calculations:
B)
Debit ($)
Credit ($)
Cash on Hand
12 000
Accounts Receivable
31 000
Inventory (30 June 2015)
32 000
Prepaid Shop Rent
24 000
Display Cabinet
73 000
Acc’d Depreciation Display Cabinet
13 800
Bank Overdraft
1 000
Accounts Payable
1 600
G. Ollivander, Capital (1 July 2014)
133 600
G. Ollivander, Drawings
12 500
Sales
271 000
Sales Returns & Allowances
1 200
Discount Received
1 000
Cost of sales
128 000
Sales Staff Salaries
42 000
Advertising
1 000
Discount Allowed
740
Freight Outwards
360
Interest
1 000
Council Rates
1 400
Administrative Salaries
27 000
Shop Rent
32 000
Sundry Administration
2 800
. .
$422 000
$422 000
Explanation / Answer
Question 1 OLLIVANDER’S MAGIC EMPORIUM, END OF PERIOD WORKSHEET -YEAR ENDED 30 JUNE 2015 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Account Name Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash on Hand 12000 12000 12000 Accounts Receivable 31000 7000 1085 38000 1085 36915 Inventory (30 June 2015) 32000 500 32500 32500 Prepaid Shop Rent 24000 18000 24000 18000 6000 Display Cabinet 73000 73000 73000 Acc’d Depr Display Cabinet 13800 9050 22850 22850 Bank Overdraft 1000 50 50 1000 950 Accounts Payable 1600 1600 1600 G. Ollivander, Capital (1 July 2014) 133600 133600 133600 G. Ollivander, Drawings 12500 12500 12500 Sales 271000 5400 7000 5400 278000 5400 278000 Sales Returns & Allowances 1200 1200 1200 Discount Received 1000 1000 1000 Cost of sales 128000 500 128000 500 128000 500 Sales Staff Salaries 42000 4300 46300 46300 Advertising 1000 1000 1000 Discount Allowed 740 740 740 Freight Outwards 360 360 360 Interest 1000 1000 1000 Council Rates 1400 1400 1400 Administrative Salaries 27000 27000 27000 Shop Rent 32000 18000 50000 50000 Sundry Administration 2800 2800 2800 Bad debts 1085 1085 1085 Sales Staff Salaries payable 4300 4300 4300 Magic Wands 5400 5400 5400 Depreciation - Display cabiner 9050 9050 9050 Bank interest 50 50 50 Net income c/d to Balance Sheet 4215 4215 422000 422000 45385 45385 467385 467385 279550 279550 172915 172915 Profit 4215 Bird Cage Sales 22000 Owl food Sales 3800 Bird Cage Construction fees 1500 Less:Cost of sales Opening Stock 12000 Add:Purchases 19500 Less: Closing stock 10000 21500 Less: Other Expenses: Freight Inward 50 Telephone Expense - Showroom 153 Depreciation Expense – Showroom 350 Electricity Expense - Showroom 252 Salaries Expense - Showroom staff 4000 4805 Gross margin 995 Less: Operating expenses Interest Expense 1250 Depreciation Expense – Office Equipment 350 Freight Outward 2000 Telephone Expense - Office 357 Insurance Expense – Office Equipment 70 Advertising Expense 200 Electricity Expense - Office 168 Salaries Expense - Office staff 3580 Salaries Expense - Bookkeeper 1000 Salaries Expense - cleaner 1000 9975 Less: Interest revenue 200 Net loss -8780