Ch04_sm_carlon_5e.docx 526bn

Solutions Manual to accompany

Financial ing: Recording, Analysis and Decision Making Fifth Edition Prepared by

Lorena Mitrione

John Wiley & Sons Australia, Ltd 2016

Chapter 4: Inventories

CHAPTER 4 – INVENTORIES ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises

Problems

2

2,4,5,6

1A,2A,4A, 7A 1B, 2B,4B, 7B

1.

Identify the differences between a service business and a merchandising business.

2.

Explain the recording of purchases under a perpetual inventory system.

3.

Explain the recording of sales revenue under a perpetual inventory system.

2,3

1,2,3,4

1A, 2A, 4A, 7A, 1B, 2B, 4B, 7B

4.

Prepare a fully classified statement of profit or loss.

1,4,5

7,8,9,10

1A, 3A, 4A, 5A, 6A, 7A 1B, 3B, 4B, 5B, 6B, 7B

5.

Use ratios to analyse profitability.

7,8,9

1A, 3A, 7A 1B, 3B, 7B

6.

Understand the basic process and main features of the goods and services tax (GST).

7.

Complete journal entries to record GST.

6

7,8

© John Wiley and Sons Australia Ltd, 2016

11,12,13

8A, 8B

4.1

Solutions manual to accompany Financial ing: Reporting, Analysis and Decision Making 5e

CHAPTER 4 – INVENTORIES ANSWERS TO QUESTIONS 1.

2.

(a)

Disagree. The steps in the ing cycle are the same for both a merchandising company and a service enterprise. See Chapter 3, Figure 3-26 page 179 Required Steps in the ing Cycle.

(b)

The measurement of profit is conceptually the same. In both types of companies, profit (or loss) is determined by subtracting expenses from revenues.

(a)

The profit measurement process is as follows:

Sales Revenue

(b)

Cost of Sales

Less

Equals

Gross Profit

Less

Operating Expenses

Net Profit

Equals

Profit measurement in a merchandising business differs from a service business as follows: (i)

sales are the primary source of revenue; and

(ii)

expenses are divided into two main categories: 

cost of sales, and



operating expenses

3. Net sales revenues Cost of sales Gross profit 4.

$220,000 154,000 $66,000

Agree. In accordance with the revenue recognition principle, sales revenues are generally recognised when the goods are transferred from the seller to the buyer. Recognition of revenue is not dependent on the cash collection of credit sales.


4.2


5.

(a)

(b)

The primary source documents are: (1)

cash sales – cash tapes, and

(2)

credit sales – sales invoices.

The entries for the perpetual method of ing for inventories are: Debit Cash sales -

Credit sales -

Cash

xx

Sales Cost of sales Inventory

xx

s Receivable Sales Cost of sales Inventory

Credit

xx xx xx xx xx xx

6. 24 July

s Payable ($2,240 - 140) Discount Received ($2,100 x 2%) Cash ($2,100- 42)

2,100 42 2,058

7. Gross profit Less: Profit before tax Operating expenses 8.

$348,000 (180,000) $168,,000

(a)

Businesses most likely to use a perpetual inventory system would include those selling products which have a high unit-value such as automobile dealerships, equipment supply companies. With computerisation, perpetual systems are becoming increasingly cost-effective, for example, the use of optical scan cash s in supermarkets means that a perpetual system can be employed for high turnover low unit cost items.

(b)

Owners of small businesses such as cafes, restaurants and greengrocers are more likely to use periodic inventory systems because for them, the costs of using perpetual inventory systems may outweigh the benefits.

9.

Factors affecting a company’s gross profit rate include selling products with a higher (or lower) ‘mark-up’, increased competition that results in lower selling prices and price increases from suppliers.

10.

(a)

False. GST may be paid on taxable supplies at each stage in the commercial chain, however, it is the final consumer, not the first purchaser, who bears the cost of the GST.

(b)

True. The GST is a value-added tax, which means that tax is levied on the value added by a business at each stage in the production and distribution chain. The GST is not a tax on business income. © John Wiley and Sons Australia Ltd, 2016

4.3


SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4.1 Felix Ltd (a)

Sales

=

$471,900 ($186,940 + $284,960)

(b)

Cost of sales

=

$81,900 ($195,000 - $113,100)

(c)

Gross profit

=

$111,800 ($280,800 - $169,000)

(d)

Operating expenses

=

$85,020 ($113,100 - $28,080)

(e)

Operating expenses

=

$35,100 ($111,800 - $76,700)

(f)

Profit

=

$182,260 ($284,960 - $102,700)

BRIEF EXERCISE 4.2 Neo Ltd Inventory s Payable

1 800 1 800 Gruff Ltd

s Receivable Sales Cost of sales Inventory

1 800 1 800 1 200 1 200

BRIEF EXERCISE 4.3 Simon Ltd (a)

(b)

(c)

2 Mar

6 Mar

8 Mar

s Receivable Sales Cost of sales Inventory Sales Returns and Allowances s Receivable Inventory Cost of sales Cash ($385,000 - $7,700) Discount Allowed ($385,000x 2%) s Receivable ($450,000 - $65,000)


450,000 450,000 300,000 300,000 65,000 65,000 40,000 40,000 377,300 7,700 385,000

4.4


BRIEF EXERCISE 4.4 Aditya Ltd Statement of Profit or Loss (Partial) for the month ended 31 October 2015

Sales Revenues: Sales ($363,000 + $121,000) Less: Sales returns and allowances Net sales

$484,000 (24,200) $459,800

BRIEF EXERCISE 4.5 These items and where they would appear in a fully classified statement of profit or loss are listed below: Item

Section

Interest revenue Cost of sales Depreciation expense

Sales returns and allowances Purchase returns and allowances

Discount received Discount allowed

Revenue or other income (below gross profit) it depends on the type of business Cost of sales Operating expenses. Depreciation expenses could be further classified either as an istrative expense (e.g. depreciation of office equipment) or a selling expense (e.g. depreciation of store or warehouse equipment). Sales revenue. Under the periodic inventory system, purchase returns and allowances appears in the statement of profit or loss in the calculation of cost of sales as part of the determination of gross profit. Under the perpetual inventory system, purchase returns and allowances are recorded as a decrease in inventory and therefore do not appear on the statement of profit or loss Other income Financial expenses


4.5


BRIEF EXERCISE 4.6 Long Pty Ltd (a)

Return on assets

=

$88,000  14.5% $550,000  $660,000  2

(b)

Profit margin

= 88,000 ÷ $275,000 = 32.0%

(c)

Gross profit rate

= ($275,000 - $110,000) ÷ $275,000 = 60.0%

(d)

Operating expenses to sales ratio

= $55,000 ÷ $275,000 = 20.0%

BRIEF EXERCISE 4.7 Maori Jewellery Cash collected = NZ$28,750 ($25,000 + 15% x $25,000) Revenue earned = NZ$25,000 BRIEF EXERCISE 4.8 These journal entries record the payment of GST to the taxation authority. Sellers Limited has collected $100 GST on sales during the reporting period, and the amount of GST paid on purchases is $90; the remaining balance is the amount of cash paid to the tax authority.


4.6


SOLUTIONS TO EXERCISES EXERCISE 4.1 Unique Artworks Ltd (a)

(1)

7 Dec

s Receivable

792,000

Sales Cost of sales

792,000 528,000

Inventory (2)

8 Dec

Sales Returns and Allowances

528,000 33,000

s Receivable (3)

13 Dec

Cash ($759,000 - $15,180) Discount Allowed [($792,000 - $33,000) x 2%]

33,000 743,820 15,180

s Receivable ($792,000 - $33,000) (b)

2 Jan

Cash

759,000 759,000

s Receivable ($792,000 - $33,000) (c)

759,000

The advantages associated with granting a discount for early payment are that the purchaser saves money and the seller is able to shorten the operating cycle thereby improving cash flow by converting s receivable to cash earlier. The disadvantage to the seller is that there is a cost associated with offering a discount.


4.7


EXERCISE 4.2 (a)

1 Jul

STOKERS PTY LTD Inventory

20,000

s Payable 10 Jul

s Payable

20,000 20,000

Cash

19,400

Discount Received (b)

1 Jul

Inventory

600 20,000

s Payable 10 Jul

s Payable

20,000 20,000

Cash

19,400

Inventory (c)

600

In part (a), profit and assets will initially be $600 higher than in part (b). As inventory is transferred to cost of sales, cost of sales will be higher in part (a) than part (b). By the time all the inventory is sold the total profit and assets in part (a) and (b) will be the same.

EXERCISE 4.3 QUEENSCLIFF PTY LTD

(a)

1 Jul

s Receivable

20,000

Sales Cost of sales

20,000 12,000

Inventory (b)

10 Jul

Cash

12,000 19,400

Discount Allowed

600

s Receivable


20,000

4.8


EXERCISE 4.4 Cambells Office Supplies 6 Sept.

Inventory (80 x $22) Cash

9 Sept. 10 Sept. 12 Sept.

14 Sept.

20 Sept.

1,760 1,760

Freight In Cash

88

s Receivable Inventory

44

88 44

s Receivable (26 x $33) Sales Cost of sales (26 x $22) Inventory

858

Sales Returns and Allowances s Receivable

33

Inventory Cost of sales

22

s Receivable (30 x $33) Sales Cost of sales (30 x $22) Inventory

858 572 572 33 22 990 990 660 660

EXERCISE 4.5 Hampton Pty Ltd (a)

(1)

(2)

(3)

(4)

(5)

(b)

5 April

6 April

7 April

8 April

11 April

4 May

Inventory s Payable Freight In Cash Equipment s Payable

9,000 9,000 450 450 52,000 52,000

s Payable Inventory

1,500

s Payable ($9,000- $1500) Discount Received [($9,000- $1500) x 2%] Cash ($7,500 - $150)

7,500

s Payable ($9,000 - $1,500) Cash

7,500


1,500

150 7,350

7,500

4.9


EXERCISE 4.6 Grand Accessories Ltd (a)

10 June

11 June

12 June

17 June

Inventory s Payable ( 2/7, n/30)

$5,400 $5,400

Freight In Cash

$270

s Payable Inventory

$270

$270

s Payable ($5,400 - $270) Discount Received ($5,130 x 2%) Cash ($5,130 - $103*)

$270 $5,130 $103 $5,027

* to the nearest dollar (b)

Highend Distributors Ltd 10 June

s Receivable Sales

5,400

Cost of sales Inventory

2,700

5,400

2,700

11 June

No entry (freight paid by the purchasing company)

12 June


270

Inventory Cost of sales

135

19 June

Cash ($5,130 - $103*) Discount Allowed ($5,130 x 2%) s Receivable($5,400 - $270)

270

135 5,027 103 5,130

* to the nearest dollar (c)

Freight-in refers to freight costs paid by the purchaser. Freight-in forms part of the cost of inventory but because of the difficulty of allocating freight costs to individual inventory items when several items are delivered at the same time, a freight-in is often kept and the amount of freight-in is incorporated into cost of sales in the statement of profit or loss. Freight-out refers to freight costs paid by the seller. These costs appear under operating expenses (selling and distribution expenses) on the statement of profit or loss. Customers may be charged an additional amount to cover freight-out expenses.


4.10


EXERCISE 4.7 (a) Dawson Ltd Statement of Profit or Loss for the month ended 31 January 2015

INCOME Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales GROSS PROFIT

$700,000 (26,000) $674,000 (416,000) 258,000

Other income: Discount received Rent revenue

EXPENSES Selling expenses: Freight out Rent expense – store space istrative expenses: Insurance expense Office salaries expense Financial expenses: Discount allowed Bank charges Total operating expenses

14,000 2,000

14,000 20,000

34,000

12,000 61,000

73,000

16,000 100

16,100

16,000 274,000

123,100

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT

150,900 (45,270) $105,630

(b) Profit margin =

105,630  15.7% 674,000

Gross profit rate =

258,000  38.3% 674,000

Operating expenses to sales ratio =

123,1000  18.3% 674,000


4.11


(c)

It is often more useful to be able to compare financial ratios than to compare the actual financial results. For example, knowing the gross profit rate gives a better indicator of an entity’s profitability than knowing the dollar amount of the gross profit. Just knowing the operating expenses is less useful than knowing the operating expenses to sales ratio. Furthermore, ratios allow for meaningful comparisons than just using dollars. For example, the gross profit ratio relates gross profit to sales and provides an indication of mark-up on cost. Finally, using ratios enables analysts to compare the profitability of entities of different sizes because ratios control for size whereas a dollar value does not.

EXERCISE 4.8 Bright Ltd & Dull Ltd (a) Bright Ltd

Dull Ltd

Sales Sales returns Net sales

$180,000 *(18,000) $162,000

*$200,000 (10,000) $190,000

Net sales Cost of sales Gross profit

$162,000 (112,000) *$50,000

$190,000 *114,000 $76,000

Gross profit Operating expenses Profit

$50,000 (30,000) *$20,000

$76,000 *(46,000) $30,000

*Indicates missing amount. (b) Bright Ltd Profit margin

$20,000 ÷ $162,000 = 12.3%

Gross profit rate

$50,000 ÷ $162,000 = 30.9%


$30,000 ÷ $162,000 = 18.5%


Dull Ltd $30,000 ÷ $190,000 = 15.8% $76,000 ÷ $190,000 = 40%

$46,000 ÷ $190,000 = 24.2%

4.12


EXERCISE 4.9 (a) Lulu Ltd Statement of Profit or Loss for the year ended 30 June 2016

OPERATING REVENUE Net sales revenue: Less: Cost of sales GROSS PROFIT

$1,410,000 (593,400) $816,600

Other operating revenue

27,000 843,600

OPERATING EXPENSES Selling expenses

414,000

istrative expenses

261,000

Financial expenses Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX

42,000 717,000 126,600 (37,980) $88,620

(b) Profit margin =

Profit after tax Net sales

88,620 6.3% 1,410,000

Gross profit rate =

Gross Profit Net Sales

816,600  57.9% 1,410,000


Operating Expenses Net Sales

717,000  50.9% 1,410,000


4.13


EXERCISE 4.10 Snuffy Pty Ltd Statement of Profit or Loss (Partial) for the year ended 30 June 2015

Sales revenue: Sales Less: Sales returns and allowances Net sales

$585,000 (9,100) $575,900

Note: Freight-out is a selling expense. Discount allowed is a financial expense.

EXERCISE 4.11 Ezios Earthenware Ltd (a)

(b)

Dr Cash/s Receivable Cr GST Collected (liability) Cr Sales

$6,600

Dr Inventory Dr GST Paid (asset) Cr Cash/s Payable

$1,100 110

Dr GST Collected Cr GST Paid Cr Cash

$600 $6,000

$1,210 $600 $110 $490

Alternatively a single GST clearing can be used instead of GST Collected and GST Paid s.


4.14


EXERCISE 4.12 Phams Pottery Ltd (a)

May 3

May 10

Dr Inventory Dr GST Paid Cr Cash/s payable

400 40

Dr Cash/s receivable Cr Sales Cr GST collected

550

Dr GST Collected Cr GST Paid Cr Cash

440

500 50 50 40 10

EXERCISE 4.13 Ezios Earthenware Ltd (a)

(b)

Dr Cash/s Receivable Cr GST Clearing Cr Sales

6,600

Dr Inventory Dr GST Clearing Cr Cash/s Payable

1,100 110

Dr GST Clearing Cr Cash


600 6,000

1,210 490 490

4.15


SOLUTIONS TO PROBLEM SET A PROBLEM SET A 4.1 (a) Papermark Ltd General Journal

Date May

Particulars 2

3

5

9

10

11

12

15

20

21

24

Debit

s Receivable Sales Cost of Sales Inventory

110 400 505 120

3,150

Inventory s Payable

120 200

4,200

s Payable Inventory

200 120

140

Cash ($3,150 - $63) Discount Allowed ($3,150 x 2%) s Receivable

100 500 110

3,087 63*

s Payable ($4,200 - $140) Discount Received ($4,060 x 2%) Cash

200 410

4,060

Supplies Cash

130 100

630

Inventory Cash

120 100

1,680

Cash

100 120

161

Inventory s Payable

120 200

1,330

Freight Inwards Cash

510 100

175

Cash

100 400 505 120

4,340

120 200

700

Inventory May

Post Ref.

Sales Cost of Sales Inventory 25 Inventory s Payable

3,150 2,100 2,100

4,200

140

3,150

81

100


Credit

3,979

630

1,680

161

1,330

175

4,340 3,038 3,038

700

4.16


Date

Post Ref.

Particulars 27

29

31

Debit

s Payable Discount Received ($1,330 x 2%) Cash

200 410

Sales Returns and Allowances Cash Inventory Cost of Sales

405 100 120 505

70


110 400 505 120

1,120

Credit

1,330 27

100

1,303

70 49 49

1,120 784 784

*rounded to nearest dollar (b) May

1 9

Cash 3,500 May 3,087

15 24

Opening Bal. s Receivable Inventory Sales

June

1

Opening. Bal.

May

2 31

June

1

Opening Bal.

May

3 12 20 25 29

s Payable Cash s Payable s Payable Cost of Sales

Inventory 4,200 May 1,680 1,330 700 49

June

1

Opening Bal.

7,959 1,736

May

11 Cash

Sales Sales

161 4,340

10 11

s. Payable Supplies

12 21 27 29 31

Inventory Freight Inwards s Payable Sales Returns Closing Bal.

11,088 3,251 s Receivable 3,150 May 9 1,120 31 4,270 1,120

2 5 15 24 31 31

100 3,979 630 1,680 175 1,303 70 3,251 11,088

Cash & Discount Closing Bal.

110 3,150 1,120 4,270

Cost of Sales s Payable Cash Cost of Sales Cost of Sales Closing Bal.

120 2,100 140 161 3,038 784 1,736 7,959

Supplies 630 © John Wiley and Sons Australia Ltd, 2016

130 4.17


May

s Payable 5 Inventory 140 May 3 10 Cash & Discount 4,060 20 27 Cash & Discount 1,330 25 31 Closing Bal. 700 6,230 June 1

Share Capital May 1

May

31 Closing Bal.

Sales 8,610 May

2 24 31

Inventory Inventory Inventory

200 4,200 1,330 700

Opening Bal.

6,230 700

Bal.

s Receivable Cash s Receivable

8,610

May

29 Cash

405

Discount Received 108 May 10 27 108

410 81 27 108

21 Closing Bal.

May

9

May

May

2 Inventory 24 Inventory 31 Inventory

21 Cash

400 3,150 4,340 1,120 8,610

Sales Returns and Allowances 70

May

s Receivable

300 3,500

s Payable s Payable

Discount Allowed 63

Cost of Sales 2,100 May 29 3,038 784 31 5,922

500

Inventory Closing Bal.

Freight Inwards 175


505 49 5,873 5,922 510

4.18


(c) Papermark Ltd Statement of Profit or Loss (Partial) for the month ended 31 May 2015

OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Freight inwards GROSS PROFIT

8,610 (70) 8,540 5,873 175

(6,048) $2,492

(d) Profit margin ratio =

Gross profit rate =


$2,492 (Gross P) - $980 (Op. Exp.*) - $133 (Tax Exp.) + $108 (Dis. Rec’d) =


1,487  17.4% 8,540 2,492  29.2% 8,540

* Note: Discount allowed included in operating expenses.


4.19


PROBLEM SET A 4.2 (a) June

2

3

6

9

15

The Novelty Bookstore General Journal

Inventory (130 x $6) s Payable ( 1/7, n/30) Freight In Cash s Receivable (140 x $12) Sales ( 2/7, n/30) Cost of Sales (140 x $6) Inventory s Payable Inventory s Payable ($780 - $60) Discount Received ($720 x 1%*) Cash Cash

780 780 60 60 1,680 1,680 840 840 60 60 720 7 713 1,680

s Receivable

17

20

24

26

28

30

s Receivable (120 x $12) Sales (Term 2/7, n/30) Cost of Sales (120 x $6) Inventory Inventory (120 x $6) s Payable (Term 2/7, n/30) Cash Discount Allowed ($1,440 x 2%*) s Receivable s Payable Discount Received ($720 x 2%*) Cash s Receivable (110 x $12) Sales

1,680

1,440 1,440 720 720 720 720

1,411 29 1,440 720 14 706 1,320 1,320

Cost of Sales (110 x $6) Inventory

660


180

Inventory Cost of Sales

660

180 90 90

*to the nearest dollar © John Wiley and Sons Australia Ltd, 2016

4.20


(b)

The advantages for The Novelty Bookstore of using a perpetual inventory system as opposed to a periodic inventory system are:    

Inventory is constantly updated every time a purchase or sale is made. This means that The Novelty Bookstore will be aware of when to reorder items of inventory. Cost of sales is updated every time a sale is made so interim financial statements can be prepared without having to conduct an inventory count. When The Novelty Bookstore does conduct an inventory count (which should be at least annually), any inventory losses can be accurately determined. Using a perpetual inventory system would be a disadvantage for The Novelty Bookstore if the business does not have a suitable computer system to maintain inventory records.


4.21


PROBLEM SET A 4.3 (a)

Harrots Department Store Pty Ltd Statement of Profit or Loss for the year ended 30 June 2015

OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales

$1,301,30 0 (14,300) $1,287,000 (905,505) $381,495

GROSS PROFIT Other operating revenue: Discount received Interest revenue

OPERATING EXPENSES Selling expenses: Dep’n expense – store equipment Freight out Rent expense – store space Sales commissions expense Sales salaries expense

1,430 5,720

7,150 388,645

13,585 11,726 12,870 20,020 100,100

158,301

Dep’n expense – office equipment Electricity expense Insurance expense Office salaries expense Rent expense – office space Rates and taxes expense

5,720 15,158 12,870 57,200 28,600 5,005

124,553

Interest expense Total operating expenses

11,440

istrative expenses:

Financial expenses:

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX


11,440 294,294 94,351 (28,314) 66,037

4.22


Harrots Department Store Pty Ltd Statement of Changes in Equity for the year ended 30 June 2015 Retained Earnings, 1 July 2014 Add: Profit

$20,306 66,037 86,343 (17,160) 69,183

Less: Dividends Retained Earnings, 30 June 2015

Harrots Department Store Pty Ltd Statement of Financial Position as at 30 June 2015 ASSETS Current Assets: Cash s receivable Inventory Prepaid Insurance Total Current Assets

Non-Current Assets: Property, plant and equipment Store equipment Less: Accum. dep’n – store equipment Office equipment Less: Accum. Dep’n – office equipment Total Non-Current Assets TOTAL ASSETS

$11,440 16,830 51,766 6,435 $86,471

178,750 (59,774) 81,510 (28,142)

LIABILITIES AND EQUITY Current Liabilities: s payable Income tax payable Rates and taxes payable Sales commissions payable Total Current Liabilities Non-Current Liabilities: Bank loan Total Liabilities Equity Share capital Retained Earnings Total Equity TOTAL LIABILITIES AND EQUITY


118,976 53,368 172,344 $258,815

39,053 28,314 5,005 8,580 80,952 65,780 146,732 42,900 69,183 112,083 $258,815

4.23


(b) Return on assets =

66,037 Profit after tax =  27.1% Av total assets 243,808

Average total assets = (228, 800 + 258,815) /2 = 243,808

(c)

Profit margin =


Gross profit rate =

Gross Profit  Net Sales


294,294 Operating Expenses   22.9% Net Sales 1,287,000

=

66,037  5.1% 1,287,000

381,495  29.6% 1,287,000

A fully classified statement of profit or loss provides more information than a summary-type statement. For instance, readers of the statement can ascertain how many sales were returned, discounts allowed on sales, and discounts received on purchases. Useful ratios such as the gross profit ratio and operating expenses to sales ratio can also be calculated. If the operating expense ratio is high, a further breakdown of expenses into categories can give insight as to which particular expenses were excessive.


4.24


PROBLEM SET A 4.4 (a) Alexander’s Tennis Pro Shop Pty Ltd General Journal

Date April

7

Particulars

Post Ref

Inventory s Payable

115 200

3,060

505 100

144

s Payable Inventory

200 115

360

s Receivable Sales

105 400

1,620

Cost of Sales Inventory

500 115

1,134

Inventory s Payable

115 200

1,188

s Payable ($3,060 – $360) Discount Received ($2,700 x 2%) Cash

200 410 100

2,700

s Payable Inventory

200 115

108

s Receivable Sales

105 400

1,260


500 115

882


200 410 100

1,080


405 105

108

Cash

100 105

1,980

8 Freight Inwards Cash 9

10

14

17

20

21

27

30

s Receivable

Debit

Credit

3,060

144

360

1,620

1,134

1,188

54 2,646

108

1,260

882

11* 1069

108

1,980

* rounded to nearest dollar


4.25


(b) April 1 30

Cash 4,500 April 8 April 14 1,980 21

Opening Bal s Receivable

30 May 1

Opening Bal.

April 10

Sales

20

Sales

Closing Bal.

6,480 2,621 s Receivable 1,620 April 27 Sales Returns & Allowances 1,260 30 Cash 2,880 30 Closing Bal.

May 1

Opening Bal.

April 1 7 14

Opening Bal. s Payable s Payable

May 1

Opening Bal.

April 9 14 17 21

Inventory Cash & Discount Inventory Cash & Discount

Inventory 6,300 April 9 3,060 10 1,188 17 20 30 10,548 8,064

s Payable Cost of sales s Payable Cost of sales Closing Bal.

s Payable 360 April 7 Inventory 2,700 14 Inventory 108 1,080 4,248

Sales April 10 20

s Receivable

2,621 6,480 105 108 1,980 792 2,880

792

Share Capital April 1

April 27

Freight Inwards s Payable

100 144 2,646 1,069

Opening Bal.

s Receivable s Receivable

115 360 1,134 108 882 8,064 10,548

200 3,060 1,188

4,248 300 10,800 400 1,620 1,260 2,880


405

Discount Received April 14 s Payable 21 s Payable


410 54 11 65 4.26


May

April

10 Inventory 20 Inventory

8

Cash

Cost of Sales 1,134 882 2,016

500

Freight Inwards 144

505

(c) Alexander’s Tennis Pro Shop Pty Ltd Trial Balance as at April 30, 2016 Debit Cash s Receivable Inventory s Payable Share Capital Sales Sales Returns and Allowances Discount Received Cost of Sales Freight Inwards

Credit $2,621 792 8,064 $10,800 2,880 108 65 2,016 144 $13,745

$13,745

(d) Alexander’s Tennis Pro Shop Pty Ltd Statement of Profit or Loss (Partial) for the month ended 30 April 2016

Sales revenues Sales Less: Sales returns and allowances Net sales Less: Cost of sales Freight inwards Gross Profit


$2,880 (108) $2,772 2,016 144

2,160 $ 612

4.27


PROBLEM SET A 4.5 Peninsula Pty Ltd Statement of Profit or Loss for the year ended 30 June 2015

OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales GROSS PROFIT

$495,000 (16,500) $478,500 (305,250) $173, 250

Other operating revenue: Discount received Rent revenue Total operating revenue

8,800 4,400

OPERATING EXPENSES Selling expenses: Advertising 5,500 Freight out 16,500 Sales commissions expense (3300 + 2200) 5,500 Sales salaries expense 44,000

71,500

istrative expenses: Dep’n expense – office equipment Office salaries expense Rent expense – office space (13200-3300) Electricity expense

41,250

Financial expenses: Discount allowed Interest expense 1,100 Bank charges Total operating expenses

4,400 20,350 9,900 6,600

13,200 186,450

4,400 550

PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX


6,050 118,800 67,650 (20,295) $47,355

4.28


PROBLEM SET A 4.6 Rankins Ltd (a)

Dec.

31

31

31

31

Depreciation Expense – Buildings Accumulated Dep’n - Buildings

15,000

Depreciation Expense – Equipment Accumulated Dep’n – Equipment

13,500

Interest Expense Interest Payable

10,500

Income Tax Expense Income Tax Payable

37,260

15,000

13,500

10,500

37,260

Note: The figure used for the income tax expense entry was derived after the Statement of Profit or Loss in (d) was prepared.

(b) Accumulated Depreciation – Buildings Dec. 31 Balance 31 Depreciation Exp.

Accumulated Depreciation - Equipment Dec. 31 Balance 31 Depreciation Exp.

Dec.

Depreciation Expense – Buildings 31 Accum. Depr. 15,000

Dec.

Depreciation Expense – Equipment 31 Accum. Depr. 13,500

Dec.

31 Interest Payable

85,500 15,000 100,50 0

63,600 13,500 77,100

Interest Expense 10,500

Interest Payable Dec. 31


Interest Expense

10,50 0

4.29


(c) Rankins Ltd Adjusted Trial Balance As at 30 June 2016 Debit Cash s Receivable Inventory Land Buildings Accumulated Depreciation – Buildings Equipment Accumulated Depreciation – Equipment s Payable Income Tax Payable Interest Payable Bank Loan Share Capital Retained Profits Interest Revenue Dividends Sales Sales Returns and Allowances Discount Allowed Cost of Sales Salaries Expense (Office) Salaries Expense (Sales) Utilities Expense Repair Expense Petrol & Oil Expense Insurance Expense Depreciation Expense – Buildings Depreciation Expense – Equipment Income Tax Expense Interest Expense Interest Payable Totals


Credit

$50,100 56,400 165,000 138,000 295,500

$100,500

125,250 77,100 56,250 37,260 10,500 75,000 300,000 101,700 1,500 15,000 1,381,650 1,500 5,400 1,064,850 82,500 22,200 14,100 13,350 10,800 5,250 15,000 13,500 37,260 10,500 $2,141,460

$2,141,460

4.30


(d) Rankins Ltd Statement of Financial Performance for the Year Ended 30 June 2016

OPERATING REVENUE Sales revenue: Gross sales revenue

$1,381,65 0 (1,500)

Less: Sales returns and allowances Net sales revenue Less: Cost of sales GROSS PROFIT

$1,380,150 (1,064,850) $315,300

Other operating revenue: Interest revenue

1,500 1,500 316,800

Total operating revenue OPERATING EXPENSES Selling expenses: Dep’n expense – store equipment Sales salaries expense istrative expenses: Dep’n expense – buildings Insurance expense Office salaries expense Petrol and oil expense Repair expense – computers Utilities expense Financial expenses: Discount allowed Interest expense Total operating expenses

13,500 22,200

35,700

15,000 5,250 82,500 10,800 13,350 14,100

141,000

5,400 10,500

15,900

PROFIT BEFORE INCOME TAX Less: Income tax expense NET PROFIT AFTER INCOME TAX

192,600 124,200 (37,260) $86,940

Rankins Ltd Statement of Changes in Equity for the year ended 30 June 2016 Retained Profits, 1 January Add: Net Profit

$101,700 86,940 188,640 (15,000) $173,640

Less: Dividends Retained Profits, 31 December

Rankins Ltd © John Wiley and Sons Australia Ltd, 2016

4.31


Statement of Financial Position As at 30 June 2016 ASSETS Current Assets: Cash s receivable Inventory Total Current Assets Non-Current Assets: Property, plant and equipment Land Buildings Less: Accum. dep’n – buildings Store equipment Less: Accum. Dep’n – store equipment Total Non-Current Assets TOTAL ASSETS

$50,100 56,400 165,000 $271,500

$138,000 $295,500 100,500 125,250 77,100

LIABILITIES AND OWNER’S EQUITY Current Liabilities: Bank loan (portion due in 2017) s payable Interest payable Income tax payable Total Current Liabilities Non-Current Liabilities: Bank loan Total Liabilities Owners’ Equity Share capital Retained profits Total Owners’ Equity TOTAL LIABILITIES AND OWNERS’ EQUITY

195,000 48,150 381,150 $652,650

22,500 56,250 10,500 37,260 126,510 52,500 179,010 300,000 173,640 473,640 $652,650

(e) The statement of profit or loss is prepared for a period of time because it summarises income and expenses for that period. The profit or loss then is used to update equity at the end of that period. The statement of financial position shows the financial position, i.e., the balances of assets, liabilities, and equity on the date the statement of financial position is prepared.


4.32


PROBLEM SET A 4.7 (a) Belle Boutique Fashion Pty Ltd General Journal April

4

6

7

11

13

14

16

Inventory s Payable

3,245

s Receivable Sales

2,750


2,200

s Payable Inventory

165

Freight Out Cash

110

3,245

2,750

2,200

165

110


3,080

Cash Discount Allowed ($2,750 x 2%) s Receivable

2,695 55

Inventory Cash

2,420

Cash

62 3,018

2,750

2,420 275

Inventory 21

22

23

Inventory s Payable Freight In Cash Cash

275 3,150 3,150 55 55 4,070

Sales

26

27

29

30

4,070


3,366

Inventory Cash

1,265


3,150

3,366

1,265

63 3,087

Sales Returns and Allowances Cash

50


38

50

38

s Receivable Sales

2,035


1,650

2,035

1,650

(b) © John Wiley and Sons Australia Ltd, 2016

4.33


April1 13 16 23

May 1

Cash 4,950 April7 2,695 11


275 4,070

Sales Sales

May 1

Opening Bal.

Inventory Freight In Inventory s Payable Sales Returns Closing Bal.

2,420 55 1,265 3,087 50 1,985 $11,990

s Receivable 2,750 April13 Cash & Discount 2,035 30 Closing Bal. 4,785 2,035

April4 14 21 26 29

s Payable Cash s Payable Cash Cost of sales

May 1

Opening Bal.

April6 11 27

110 3,018

$11,990 1,985

Opening Bal.

April6 30

14 22 26 27 29 30

Freight Out s Payable

Inventory Cash & Discount Cash & Discount

Inventory 3,245 April6 2,420 6 3,150 16 1,265 23 38 30 30 10,118 2,462

Cost of sales s Payable Cash Cost of sales Cost of sales Closing Bal.

s Payable 165 April4 Inventory 3,080 21 Inventory 3,150 6,395

Share Capital April1

Opening Bal.

Sales April6 s Receivable 23 Cash 30 s Receivable

April29

Cash

2,750 2,035 4,785

2,200 165 275 3,366 1,650 2,462 10,118

3,245 3,150 6,395

4,950

2,750 4,070 2,035 8,855

Sales Returns and Allowances 50 Discount Received April11 s Payable © John Wiley and Sons Australia Ltd, 2016

62 4.34


27

s Payable

63 125

Discount Allowed 55

April13

s Receivable

April22

Cash

Freight In 55

April7

Cash

Freight Out 110

April 6 23 30


May 1

Opening Bal.

Cost of Sales 2,200 April29 3,366 30 1,650 7,216 7,178


38 7,178 7,216

(c) Belle Boutique Fashion Pty Ltd Statement of Profit or Loss (Partial) for the month ended 30 April 2015 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Freight in GROSS PROFIT

$8,855 (50) $8,805 (7,178) (55)

(7,233) $1,572

(d) Profit margin ratio = Profit Net sales Gross profit ratio =

GP 1,572 – 495 oper. Expen* + disc. rec’d $125


1,202  13.7% 8,805

1,572 / 8,805  17.9%

*Note: It is assumed that discounts allowed and freight out are included in operating expenses.


4.35


PROBLEM SET A 4.8 Kids + Kites Ltd (a) Cash/s Receivable GST Collected ($70,700/11) Sales (To record sales revenue and GST collected) Sales Returns and Allowances GST Collected ($1,400/11) s Receivable Inventory GST Paid ($28,560/11) s Payable (To record inventory purchase and GST paid)

70,700 6,427 64,273

1,273 127 1,400 25,964 2,596 28,560

s Payable GST Paid ($3,360/11) Inventory (To record purchase return and GST recovered)

3,360

GST Collected GST Paid Cash (To record payment of GST to tax authority)

6,300

305 3,055

2,291 4,009

(b) Cash/s Receivable GST Clearing Sales (To record sales revenue and GST collected)

70,700

Sales Returns and Allowances GST Clearing s Receivable (To record sales returns and GST refunded)

1,273 127

Inventory GST Clearing s Payable (To record inventory purchase and GST paid)

6,427 64,273

1,400

25,964 2,596 28,560

s Payable GST Clearing Inventory (To record purchase return and GST recovered)

3,360

GST Clearing Cash (To record payment of GST to tax authority)

4,009


305 3,055

4,009

4.36


(c) Cash/s Receivable GST Collected ($28,560/11) Sales (To record sales revenue and GST collected)

28,560

Inventory GST Paid ($70,700/11) s Payable (To record inventory purchase and GST paid)

64,273 6,427

Cash GST Collected GST Paid (To record refund of GST from tax authority)

2,596 25,964

70,700

3,831 2,596 6,427

(d) Cash/s Receivable GST Clearing Sales (To record sales and GST collected)

28,560


64,273 6,427

Cash

2,596 25,964

70,700

3,831

GST Clearing (To record GST refund from tax authority)


3,831

4.37


SOLUTIONS TO PROBLEM SET B PROBLEM SET B 4.1 Clucker Poultry Distributing Company General Journal April

4

6

7

8

11

13

14

16

Inventory s Payable

2,950

s Receivable Sales

2,500


2,000

2,950

2,500

2,000

Freight-out Cash

100

s Payable Inventory

150

100

150


2,800

Cash Discount Allowed ($2,500 x 2%) s Receivable

2,450 50

Inventory Cash

2,200

Cash

56 2,744

2,500

2,200 250

Inventory 21

22

23

Inventory s Payable Freight-In Cash Cash

250 2,100 2,100 50 50 3,700

Sales

26

27

29

3,700


3,060

Inventory Cash

1,150


2,100

3,060

1,150

42 2,058

Sales Returns and Allowances Cash

45


35


45

35 4.38


30

s Receivable Sales

1,850


1,500

1,850

1,500

(b)

April1 13 16 23

May 1


Opening Bal.

April6 30

Sales Sales

May 1

Opening Bal.

April4 14 21 26 29

s Payable Cash s Payable Cash Cost of Sales

May 1

Opening Bal.

April8 11 27

Inventory Cash & Discount Cash & Discount

Cash 4,500 April7 2,450 11 250 3,700

14 22 26 27 29 30

Freight-Out s Payable

100 2,744

Inventory Freight-In Inventory s Payable Sales Returns Closing Bal.

2,200 50 1,150 2,058 45 2,553 $10,900

$10,900 2,553 s Receivable 2,500 April13 Cash & Discount 1,850 30 Closing Bal. 4,350 1,850

Inventory 2,950 April6 2,200 8 2,100 16 1,150 23 35 30 30 8,435 1,475

Cost of Sales s Payable Cash Cost of Sales Cost of Sales Closing Bal.

s Payable 150 April4 Inventory 2,800 21 Inventory 2,100 5,050

Share Capital April1 Sales April6

Opening Bal.

s Receivable


2,500 1,850 4,350

2,000 150 250 3,060 1,500 1,475 8,435

2,950 2,100 5,050

4,500

2,500 4.39


23 30

April29

Cash s Receivable

3,700 1,850 8,050


Cash

Discount Received April11 s Payable 27 s Payable Discount Allowed 50

April13

s Receivable

April22

Cash

Freight-In 50

April7

Cash

Freight-Out 100

April 6 23 30

Cost of Sales 2,000 April29 3,060 30 1,500 6,560


56 42 98


35 6,525 6,560

(c) Clucker Poultry Distributing Company Statement of Profit or Loss (Partial) for the month ended 30 April 2016 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Freight in GROSS PROFIT

$8,050 (45) $8,005 (6,525) (50)

(6,575) $1,430

(d) Profit margin = Profit net sales Gross profit rate =

Gross Profit 1,430 – 450 oper. expen. + disc. rec’d $98


1,078  13.5% 8,005

1,430  17.9% 8,005

Note: It is assumed that freight-out and discounts allowed are included in operating expenses. PROBLEM SET B 4.2 © John Wiley and Sons Australia Ltd, 2016

4.40


Wen Goh Warehouse July

1

3

6

9

17

18

20

21

22

22

30

Inventory (50 X $15) s Payable

750

s Receivable (40 X $25) Sales

1,000

Cost of Sales (40 X $15) Inventory

600

s Payable Discount received ($750 X 0.01) Cash

750

Cash Discounts allowed (1,000 x .01) s Receivable

990 10


750


450

Inventory (60 X $15) s Payable

900

750

1,000

600

8 742

1,000

750

450

900

Freight-In Cash

100

s Payable Inventory

150

100

150

Cash Discounts allowed ($750 X .01) s Receivable

742 8


1,000


600

s Payable ($900 – $150)

750


750

1,000

600

4.41


Cash 31

750


125


75

125

75

(b) The advantages for Wen Goh Warehouse of using a perpetual inventory system as opposed to a periodic inventory system are: 

Inventory is constantly updated every time a purchase or sale is made. This means that Wen Goh Warehouse will be aware of when to reorder items of inventory.



Cost of sales is updated every time a sale is made so interim financial statements can be prepared without having to conduct an inventory count.



When Wen Goh Warehouse does conduct an inventory count (which should be at least annually), any inventory losses can be accurately determined.



Using a perpetual inventory system would be a disadvantage for Wen Goh Warehouse if the business does not have a suitable computer system to maintain inventory records.


4.42


PROBLEM SET B 4.3

(a)

ENOTECA DEPARTMENT STORE Statement of Profit or Loss for the Year Ended 30 June 2015

Operating revenue Sales revenues Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Gross profit Other operating revenue: Interest revenue

$690,800 8,800 682,000 453,970 228,030 4,400 4,400 232,430

Operating expenses Selling expenses: Sales commissions expense Sales salaries expense

15,950 83,600

99,550

istrative expenses Depreciation expense—equipment Depreciation expense—building Electricity expense Insurance expense Office salaries expense Rates and taxes expense

14,630 11,440 12,100 7,920 35,200 5,280

86,570

12,100

12,100

Financial expenses: Interest expense Total operating expenses Profit before income tax


198,220 34,210

4.43


ENOTECA DEPARTMENT STORE Statement of Changes in Equity for the Year Ended 30 June 2015 Retained Earnings, 1 July 2014 Add: Profit

$29,260 34,210 63,470 30,800 $32,670

Less: Dividends Retained Earnings, 30 June 2015 ENOTECA DEPARTMENT STORE Statement of Financial Position as at 30 June, 2015 Assets Current assets Cash s receivable Inventory Prepaid insurance Total current assets Non-current assets Property, plant, and equipment Building Less: Accumulated depreciation— building Equipment Less: Accumulated depreciation— equipment Total assets

$ 36,300 55,330 82,500 2,640 176,770

$209,000 57,750 110,000

$151,250

47,190

62,810

214,060 $390,830

Liabilities and Equity Current liabilities s payable $ 87,230 Mortgage payable 22,000 Rates and taxes payable 5,280 Sales commissions payable 3,850 Interest payable 8,800 Total current liabilities 127,160 Non-current liabilities Mortgage payable – long term (due after 2016) 66,000 Total liabilities 193,160 Equity Share capital 165,000 Retained Earnings 32,670 Total equity 197,670 Total liabilities and equity $390,830 (b) Return on assets = profit after tax/average total assets = 34,210/371,415 = 9.2% © John Wiley and Sons Australia Ltd, 2016

4.44


Note: average total assets = (352,000+390,830)/2 = 371,415 Profit margin = profit after tax/net sales = 34,210/682,000 = 5.0% Gross profit rate = gross profit / net sales = 228,030/682,000 = 33.4% Operating expenses to sales ratio = operating exp./net sales = 198,220/682,000 = 29.1% (c)

A fully classified statement of profit or loss provides more information than a summary-type statement. For instance, readers of the statement can ascertain how many sales were returned, discounts allowed on sales, and discounts received on purchases. Useful ratios such as the gross profit ratio and operating expenses to sales ratio can also be calculated. If the operating expense ratio is high, a further breakdown of expenses into categories can give insight as to which particular expenses were excessive.


4.45


PROBLEM SET B 4.4 RACQUETS ‘R’ US TENNIS SHOP General Journal

(a) Date Apr. 6 7 8

Titles Inventory s Payable Freight-In Cash s Receivable Sales Cost of Sales Inventory

10 11 13

14

s Payable Inventory Inventory Cash s Payable ($1,260 – $60) Discount received ($1,200 X 3%) Cash Inventory s Payable

Debit 1,260

1,260 60 60 1,350 1,350 900 900 60 60 450 450 1,200 36 1,164 750 750

15

Cash

75

17

Inventory Freight-In Cash

45

18

20 21

27 30

s Receivable Sales

75 45 1,350 1,350

Cost of Sales Inventory Cash s Receivable

795

s Payable Discount received ($750 X 2%) Cash

750

Sales Returns and Allowances s Receivable Cash

Credit

795 750 750 15 735 45 45 750

s Receivable

750

(b) © John Wiley and Sons Australia Ltd, 2016

4.46


Opening balance 15-Apr Inventory 20-Apr s receivable

Cash 3,750 75 750

30-Apr s receivable

750

7-Apr Freight-In 11-Apr Inventory 13-Apr s payable

60 450 1,164

17-Apr Freight-In 21-Apr s payable

45 735

Closing balance 1-May Opening balance

8-Apr Sales 18-Apr Sales

1-May Opening balance

Opening balance 6-Apr s payable 11-Apr Cash 14-Apr s payable

1-May Opening balance

10-Apr Inventory 13-Apr Discount and cash 21-Apr Discount and cash 30-Apr Closing balance

2,871 5,325

5,325 2,871

s Receivable 1,350 20-Apr Cash 1,350 27-Apr Sales returns 30-Apr Cash Closing balance 2,700 1,155

750 45 750 1,155 2,700

Inventory 2,550 8-Apr COGS 1,260 10-Apr s payable 450 15-Apr Cash 750 18-Apr COGS Closing balance 5,010 3,180

900 60 75 795 3,180 5,010

s Payable 60 6-Apr Inventory 1,200 14-Apr Inventory 750 0 2,010 1-May Opening balance

1,260 750

2,010 0

Share Capital Opening balance

6,300

Sales 8-Apr s receivable 18-Apr s receivable


1,350 1,350 2,700

4.47


27-Apr s receivable


Discount Received 13-Apr s payable 21-Apr s payable

8-Apr Inventory 18-Apr Inventory

7-Apr Cash 17-Apr Cash

36 15 51

Cost of Sales 900 795 1,695 Freight-In 60 45 105

(c) RACQUETS ‘R’ US TENNIS SHOP Trial Balance As at 30 April, 2016

Cash s receivable Inventory s payable Share capital Sales Sales returns and allowances Cost of sales Freight-In Discount received

Debit 2,871 1,155 3,180

Credit

6,300 2,700 45 1,695 105 9,051

51 9,051

(d) RACQUETS ‘R’ US TENNIS SHOP Statement of Profit or Loss (Partial) for the Month Ended 30 April, 2016 Sales revenues Sales ................................................................................................. $2,700 Less: Sales returns and allowances .................................................. 45 Net sales............................................................................................ $2,655 Cost of sales (Cost of sales + Freight-In)..................................................... 1,800 Gross profit.................................................................................................. $ 855


4.48


(e)

The chart of s lists all the s in the general ledger and serves as an index of s. Each ledger has a title and unique number. The chart of s is helpful for recording transactions because it identifies which s should be used.

PROBLEM SET B 4.5 © John Wiley and Sons Australia Ltd, 2016

4.49


Sirimon Ltd Statement of Profit or Loss for the year ending 30 June 2016 OPERATING REVENUE Sales revenue: Gross sales revenue (1,053,000 15,000) Less: Sales returns and allowances Net sales revenue

$1,038,00 0 0 $1,038,00 0 (705,000) $333,000

Less: Cost of Sales GROSS PROFIT Other operating revenue: Interest revenue

7,950

7,950 340,950

OPERATING EXPENSES Selling expenses: Advertising Depreciation expense - store equip Freight out Sales commissions expense Sales salaries expense

15,000 11,250 15,000 9,750 114,000

istrative expenses: Insurance expense (10,500-1,800) Office salaries expense Rent expense – office space Electricity expense

8,700 28,500 24,000 12,000

165,000

73,200 Financial expenses: Discount allowed Interest expense Bank charges Total operating expenses PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT AFTER INCOME TAX


16,950 6,000 1,500

24,450 262,650 78,300 (23,490) 54,810

4.50


PROBLEM SET B 4.6 (a)

June. 30 30

30

30

Daniela’s Fashion House Store Supplies Expense Store Supplies Depr. Expense—Store Equipment Accumulated Depreciation— Store Equipment Depr. Expense—Office Equipment Accumulated Depreciation— Office Equipment Interest Expense Interest Payable

1,000 1,000 4,500 4,500 3,500 3,500 5,500 5,500

(b) Store Supplies 30/6 Bal. 30/6 Bal.

2,750 1,750

30/6 Supplies expense 1,000

Accumulated Depreciation— Store Equipment 30/6 30/6 30/6

Bal. 19,000 Deprec exp – SE 4,500 Bal 23,500

Accumulated Depreciation— Office Equipment 30/6 Bal. 30/6 Deprec exp – OE 30/6 Bal.

3,000 3,500 6,500

Store Supplies Expense 30/6

Supplies 1,000 Depreciation Expense—Store Equipment

30/6 Accu. Deprn store equipment

4,500

Depreciation Expense— Office Equipment 30/6 Accu. Deprn office equip 3,500 Interest Expense 30/6 Interest payable

5,500 Interest Payable 30/6 Interest expense 30/6 Bal.

5,500 5,500

(c) © John Wiley and Sons Australia Ltd, 2016

4.51


DANIELA’S FASHION HOUSE Adjusted Trial Balance 30 June 2017 Debit Cash s Receivable Inventory Store Supplies Store Equipment Accumulated Depreciation—Store Equipment Office Equipment Accumulated Depreciation—Office Equipment Notes Payable s Payable Share Capital Retained Earnings Dividends Sales Sales Returns and Allowances Cost of Sales Salaries Expense istrative Staff Sales Staff Advertising Expense Electricity Expense Repair Expense Freight Out Rent Expense Store Supplies Expense Depreciation Expense—Store Equipment Depreciation Expense—Office Equipment Interest Expense Interest Payable Totals

$

Credit

18,350 16,850 22,500 1,750 42,500 $

23,500

19,000 6,500 20,500 24,250 40,000 15,000 6,000 373,600 2,100 253,700 50,000 15,000 13,200 7,000 6,050 8,350 12,000 1,000 4,500 3,500 00,00115500 ,0005500

5,500 $508,850

$508,850


4.52


(d) DANIELA’S FASHION HOUSE Statement of Profit or Loss for the Year Ended 30 June 2017 OPERATING REVENUE Sales revenue: Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of Sales

$373,600 (2,100) $371,500 (253,700) $117,800

GROSS PROFIT Other operating revenue:

0 117,800

OPERATING EXPENSES Selling expenses: Advertising Depreciation expense - store equip Freight out Store supplies expense Sales salaries expense istrative expenses: Depreciation exp - office equipment Office salaries expense Repair expense Rent expense - office space Electricity expense

13,200 4,500 8,350 1,000 15,000

42,050

3,500 50,000 6,050 12,000 7,000 78,550

Financial expenses: Interest Total operating expenses PROFIT(LOSS) BEFORE INCOME TAX (Ignore income tax)


5,500

5,500 126,100 (8,300)

4.53


DANIELA’S FASHION HOUSE Statement of Changes in Equity for the Year Ended 30 June 2017 Retained Earnings, July 1, 2016 Less: Loss Dividends Retained Earnings, June 30, 2017

$15,000) $8,300 6,000

( 14,300)) $ 700)

DANIELA’S FASHION HOUSE Statement of Financial Position as at 30 June 2017 Assets Current assets: Cash s receivable Inventory Store supplies Total current assets Non-current assets: Property, plant, and equipment Store equipment Accumulated depreciation— store equipment Office equipment Accumulated depreciation— Office equipment Total assets

$ 18,350 16,850 22,500 1,750 59,450

$42,500 23,500 19,000

$19,000

6,500

12,500

Liabilities and Equity Current liabilities: Notes payable due in 2018 s payable Interest payable Total current liabilities Long-term liabilities Notes payable due after 2018 Total liabilities Equity Share capital Retained Earnings Total equity Total liabilities and equity © John Wiley and Sons Australia Ltd, 2016

31,500 $90,950

$ 15,000 24,250 5,500 44,750 5,500 50,250 40,000 700 40,700 $90,950 4.54


(e)

The statement of profit or loss is prepared for a period of time because it summarises income and expenses for that period. The profit or loss then is used to update equity at the end of that period. The statement of financial position shows the financial position, i.e., the balances of assets, liabilities, and equity on the date the statement of financial position is prepared.


4.55


PROBLEM SET B 4.7 (a) Fixit Hardware Pty Ltd Date

Details

May 2


Post Ref 110 400 505 120

Inventory s Payable

120 200

3,000

s Payable Inventory

200 120

100

Cash Discount Allowed s Receivable

100 500 110

2,205 45

s Payable Cash Discount Received

200 100

2,900

Supplies Cash

130 100

450

Inventory Cash

120 100

1,200

Cash Inventory

100 120

115

Inventory s Payable

120 200

950

Freight Inwards Cash

510 100

125

May 3

May 5

May 9

May 10

May 11

May 12

May 15

May 20

May 21

May 24

May 25

May 27

May 29

Debit

Credit

2,250 2,250 1,500 1,500

3,000

100

2,250

2,842 58

450

1,200

115

950

125

Cash Sales Cost of Sales Inventory

100 400 505 120

3,100

Inventory s Payable

120 200

500

s Payable Cash Discount Received

200 100 410

950

Sales Returns and Allowance Cash Inventory Cost of Sales

405 100 120 505

50


3,100 2,170 2,170

500

931 19

50 35 35 4.56


May 31


110 400 505 120

800 800 560 560

(b)

May 1 9 15 24

Jun 1

May 1 2 31 Jun 1

Opening Balance s Receivable Inventory Sales

Opening Balance

Cash 2,500 May 10 2,205 11 115 3,100

12 21 27 29

______ 7,920

31

100 2,842 450

s Payable Supplies Inventory Freight Inwards s Payable Sales Returns and Allowances Closing Balance

1,200 125 931 50 2,322 7,920

2,322

s Receivable Opening Balance 0 May 9 Cash and Discount Allowed Sales 2,250 31 Closing Balance Sales 800 3,050 Opening Balance 800

May 3 12 20 25 29

s Payable Cash s Payable s Payable Cost of Sales

Jun 1

Opening Balance

May 11

Cash

Jun 1

Opening Balance

Inventory 3,000 May 2 1,200 5 950 15 500 24 35 31 5,685 31

110 2,250 800 3,050

Cost of Sales s Payable Cash Cost of Sales Cost of Sales Closing Balance

120 1,500 100 115 2,170 560 1,240 5,685

Closing Balance

130 450 450

1,240

Supplies 450 May 31 450 450


4.57


May 5 10 27 31

s Payable Inventory 100 May 1 Opening Balance Cash and Discount 2,900 3 Inventory Received Cash and Discount 950 20 Inventory Received Closing Balance 500 25 Inventory 4,450 Jun 1 Opening Balance

Share Capital May 1

Sales May 2 24 31

May 29

200 0 3,000 950 500 4,450 500

300 2,500

Opening Balance

400 2,250 3,100 800 6,150

s Receivable Cash s Receivable


Cash

May 9

s Receivable

May 2 24 31


May 21

Cash

Jun 1

Opening Balance

405

Discount Received May 10 s Payable 27 s Payable

410 58 19 77

Discount Allowed 45

500

Cost of Sales 1,500 May 29 2,170 560 4,195 Freight Inwards 125 May 31 125 125

505 35

Inventory

510 125 125

Closing Balance


4.58


(c) Fixit Hardware Pty Ltd Statement of Profit or Loss (Partial) For the month ended May 31

Operating Revenue Sales Revenue Gross Sales Revenue Less: Sales Returns and Allowances Net Sales Revenue Less: Cost of Sales Gross Profit

6,150 (50) 6,100 (4,195) 1,905

(d)

Profit margin =

Profit/Net Sales

Gross profit ratio =

Gross Profit/Net Sales

Profit: 1,905 Gross Profit + (58 + 19) Discount Received – 700 Operating Expense = 1,282


1,282/6,100 = 21.02%

1,905/6,100 = 31.23%

4.59


PROBLEM SET B 4.8 Nguyen Electronics Ltd (a) Cash/s Receivable GST Collected ($50,500/11) Sales (To record sales revenue and GST collected)

50,500

Sales Returns and Allowances GST Collected ($1,000/11) s Receivable (To record sales revenue and GST returned)

909 91


4,591 45,909

1,000

18,546 1,854 20,400

s Payable GST Paid ($2,400/11) Inventory (To record purchase return and GST recovered)

2,400

GST Collected GST Paid Cash (To record payment of GST to tax authority)

4,500


218 2,182

1,636 2,864

4.60


(b) Cash/s Receivable GST Clearing Sales (To record sales revenue and GST collected) Sales Returns and Allowances GST Clearing s Receivable (To record sales returns and GST refunded) Inventory/Purchases GST Clearing s Payable (To record inventory purchase and GST paid)

50,500 4,591 45,909

909 91 1,000

18,546 1,854 20,400

s Payable GST Clearing Inventory (To record purchase return and GST recovered)

2,400

GST Clearing Cash (To record payment of GST to tax authority)

2,864

218 2,182

2,864

(c) Cash/s Receivable GST Collected ($20,400/11) Sales (To record sales revenue and GST collected)

20,400


45,909 4,591

Cash GST Collected GST Paid (To record refund of GST from tax authority)

1,854 18,546

50,500

2,737 1,854 4,591

(d) Cash/s Receivable GST Clearing Sales (To record sales and GST collected)

20,400


45,909 4,591

Cash

1,854 18,546

50,500

2,737

GST Clearing (To record GST refund from tax authority)


2,737

4.61


BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 4.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Limited (a)

Percentage change in revenue from sale of goods: 2012 to 2013 ($182,000,000 - $162,337,000) ÷ $162,337,000= 12.1% Percentage change in profit after tax: 2012 to 2013 ($28,657,000 – $26,936,000) ÷ $26,936,000 = 6% There has been a 6% increase in profit from 2012 to 2013

(b)

Operating expenses to sales ratio: 2012 2013

$151,725,000 ÷ $162,337,000 = 93.5% $172,539,000 ÷ $182,000,000 = 94.8%

The operating expenses to sales ratio has increased marginally between 2012 and 2013, which indicates that expenses have risen in a slightly larger proportion than sales. Note: Analysis of trend typically involves a longer period. Trend analysis is covered in Chapter 12.


4.62


BUILDING BUSINESS SKILLS 4.2

COMPARATIVE ANALYSIS PROBLEM

Nike vs. Adidas Group The analysis is based on the 2013 reports (a) Nike ($’000,000) (1)

Profit margin

Adidas ($’000,000)

$2,464 $25,313 = 9.7%

$790 $14,492

= 5.5%

(2)

Gross profit (000’s)

$11,034 ($25,313-$14,279)

$7,140 ($14,492–$7,352)

(3)

Gross profit rate

$11,034 $25,313

$7,140 = 49.3% $14,492

= 43.6%

(4)

Profit after tax

$2,464

$790

(5)

Percent change in Profit after tax

$2,464-$2,269 = 8.6% $2,269

$790–$524 = 50.7% $524

(6)


$7,780 $25,313= 30.7%

$6,227** = 43% $14,492

**($6,133 + $94)

(b)

Nike’s higher profit margin suggests that it was better at turning sales dollars into profit. The gross profit rate is better for Adidas, suggesting that Adidas can command a higher mark-up on its goods and/or lower product costs. Alternatively, the difference could reflect different ing policies between the two companies. Adidas’s operating profit increased substantially between 2012 and 2013. Although Nike has a lower gross profit margin, it achieved a higher profit margin because it had a lower operating expense to sales ratio ie: better control of its operating expenses. However, we should be careful not to read too much into a comparison based on only one year’s data.


4.63



(a)

Some of the benefits to businesses that make donations of excess inventory include:     

(b)

COMMUNITY AND SOCIAL PERSPECTIVE

Freeing up storage space from excess, overstocked, obsolete or outdated inventory; The business can claim a tax deduction for the market value of merchandise donated; Enhance the business’ corporate image by donating excess items to a good cause, rather than dumping or liquidating the items; Avoid sending the wrong message to customers that a liquidation sales may bring; Avoid disrupting the business’ distribution or sales channels with excessive inventory that are becoming obsolete.

The procedures for making donations of excess inventory with Charity Link Australia are:  The donor company completes a Product Donation Agreement which contains relevant information about the products being donated, including description, quantity, configuration, timing, inventory location and fair market value of the inventory.  The charity organisation will confirm receipt of the Product Donation Agreement and collect or arrange transfer of the donated inventory.  Charity Link Australia will warehouse the donations until requested by welfare organisations that are qualified and meet the registration criteria. Where possible, the requested donations will be delivered directly to the welfare organisations or the families in need.  Charity Link Australia will provide tax documentation to the donor company in accordance with the Australian Taxation Office requirements and valuations.


4.64



A GLOBAL FOCUS

Woolworths vs. Wal-Mart (a) Woolworths AUS$ (in millions)

Wal-Mart US$ (in millions)

Gross profit rate

15,762 26.94% 58,517

115,007 24.31% 473,076

Operating expense sales

12,825 21.92% 58,517

93,688  19.80% 473,076

Based on these ratios and assuming consistent ing policies, it would appear that Woolworths is able to command a higher mark-up than Wal-Mart, but that Wal-Mart is better at controlling its operating costs. It is possible, however, that some of this difference is due to a difference between the two companies in the way that they report expenses, e.g. what one company includes in cost of sales, the other company reports as an operating expense.

(b) Woolworths AUS$ (in millions)


Return on assets

2,255 10.29% 21,916

16,695 8.19% 203,928

Profit margin

2,255 3.85% 58,517

16,695  3.53% 473,076

Woolworths’ return on assets is greater than that of Wal-Mart which indicates it is more efficient in generating profit from its assets. Also, from the data we observe that the profit margin for Woolworths is also greater than Wal-Mart which indicates that Woolworths generates more profit from each dollar of sales..


4.65


(c) Woolworths AUS$ (in millions)


Current ratio

6,226 0.90 : 1 6,886

61,185 0.88 : 1 69,345

Debt to total assets ratio

12,950 58.2% 22,250

123,412  60.3% 204,751

Both companies report low current ratios. Both are less than 1. This is not surprising since it is the retail industry which has a quick turnaround of inventory and mostly cash sales, limiting the amount of current assets that they hold. However, further investigation as to the cause would be worthwhile. The debt to total assets ratio of both companies are comparable in the range of 58 – 60%. (d)

Ratios improve our ability to compare these two companies that report financial information using different currencies. However, other factors can still reduce our ability to compare them. As noted in part (a), the two companies might classify items quite differently. Also, different ing standards in the two countries might result in dramatically different results under the same circumstances. Besides, differences in laws, such as insolvency laws, can affect the results. For example, if Australian insolvency laws favour shareholders more than US insolvency laws, then Australian companies may rely more on debt financing than US companies. Finally, the data for comparison is just one year. It would be more useful to compare the trend over a number of years. (Note to lecturer: Trend analysis is covered in Chapter 12 of the textbook.)


4.66



FINANCIAL ANALYSIS ON THE WEB

Answers will vary depending on the company and article chosen by student.


4.67


CRITICAL THINKING BUILDING BUSINESS SKILLS 4.6 (a)

GROUP DECISION CASE

(1) Groove Music Store Projected Statement of Profit or Loss for the year ended 30 June 2017

Net sales [$700,000 + ($700,000 x 6%)] Cost of sales ($742,000 x 75%)* Gross profit ($742,000 x 25%)** Operating expenses: Selling expenses istrative expenses Finance expenses Total operating expenses Profit

$742,000 556,500 185,500

$100,000 20,000 5,000 125,000 $60,500

*75% = ($546,000/700,000) –3%; Alternatively: Net sales $742,000 – gross profit, $185,500 **25% = ($154,000 ÷ $700,000) + 3%

(a)

(2)

Groove Music Store Projected Statement of Profit or Loss for the year ended 30 June 2017


$700,000 546,000 154,000

Operating expenses: Selling expenses* istrative expenses Finance expenses Profit

$72,000 20,000 5,000

97,000 $57,000

*$100,000 - $30,000 – ($30,000 x 40%) + ($700,000 x 2%) = $72,000


4.68


(b)

Fiona’s proposed changes will increase profit by $31,500. Frank’s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in profit. Thus, if the choice is between Fiona’s plan and Frank’s plan, Fiona’s plan should be adopted. While Frank’s plan will increase profit, it may also have an adverse effect on sales personnel. Under Frank’s plan, sales personnel will be taking a cut of $16,000 in compensation {$60,000 – ($30,000 + $14,000)}. In some circumstances, a commission may be expected to motivate staff to try to make more sales, although this has been assumed not to be the case for the Groove Music Store.

(c) Groove Music Store Projected Statement of Profit or Loss for the year ended 30 June 2017


$742,000 556,500 185,500

Operating expenses: Selling expenses* istrative expenses Finance expenses Profit

$72,840 20,000 5,000

97,840 $87,660

*$72,000 + 2% x ($742,000 - $700,000) = $72,840. If both plans are implemented, profit will be $58,660 ($87,660 - $29,000) higher than the 2015 results. This is an increase of over 200%. (d)

A variety of factors might be presented by the student. For example, increasing the quantity of inventory purchased will increase warehousing and other costs of inventory. It will also increase the risk of holding obsolete or out-of-fashion inventory. Reduced store deliveries may anger customers, especially if competitors provide more frequent service. Staff morale may be affected by the lower salaries which are not fully offset by commissions. Given the size of the increase, Frank’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $7,740 [$60,000 – ($30,000 - $742,000 x 3%)]. Cutting salespersons’ salaries and making them more dependent on commissions might actually be viewed favourably by the sales staff if they have the potential to increase their total compensation.


4.69



ETHICS CASE Fine Foods

(a)

Sonya Packovski, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her boss’ unethical instructions or offend her boss and maybe lose the job she just assumed.

(b)

The stakeholders (affected parties) are: Sonya Packovski, the assistant ant Adam Fox, the ant Delicacy Foods, the company Creditors of Delicacy Foods (suppliers) Mail room employees (those assigned the blame) The Post Office (also assigned blame).

(c)

Sonya’s alternatives: 1.

Tell the ant (her boss) that she will attempt to take every allowable cash discount by preparing and mailing cheques within the discount period – the ethical thing to do. This will offend her boss and may jeopardise her continued employment.

2.

the team and continue the unethical practice of taking undeserved settlement discounts.

3.

Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Adam. The company may not condone this practice. Sonya definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Sonya submits to this request, she may be asked to perform other unethical tasks. If Sonya stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things – if she isn’t fired. Maybe nobody has ever challenged Adam’s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.


4.70

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