August 28, 2017 | Author: mickeykoh | Category: Dividend, Equity (Finance), Expense, Discounting, Depreciation
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QUESTION ONE a) The current ratio increase is a favourable indication as to liquidity, but alone tells little about the going concern prospects of the client. From this ratio alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The decline in the quick ratio to 0.8 is an unfavourable indication as to immediate liquidity, especially when the current-ratio increase is also considered. This decline is also unfavourable because it reflects a declining cash position and raises questions as to reasons for the increases in other current assets, such as inventories. The cash debt coverage ratio is a solvency ratio that indicates a company’s ability to repay its liabilities from cash generated by operations. Since this ratio declined during 2013, it indicates that the company’s cash provided by operations decreased and/or its liabilities increased. The asset turnover and earnings per share ratio indicate profitability. Since both ratios are higher in 2013, it is likely that the company’s sales revenue is increasing. Increases in sales and profit are favourable for going-concern prospects. It is most likely that there has been no change in the number of issued ordinary shares (although more information is necessary to make this judgement). This, in turn, indicates that financing was not obtained through the issue of ordinary shares. b) The collective implications of these data alone are that the client entity is about as solvent at the end of the current year as it was at the beginning, although there may be a need for short-term operating cash. Creditors should however seek further information. The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the client’s competitive position, the public’s demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the client’s specific plans. c)

The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of

alternative accounting methods, atypical data at year-end, and the diversification of companies, making industry comparisons difficult. Different accounting methods affect the analysis of trends and comparisons with industry statistics or other companies within the industry.

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QUESTION TWO (a) Relax Ltd Statement of Cash Flows for the year ended 31 December 2011 Cash Flows from Operating Activities Cash Receipts from Customers Cash Payments to Suppliers Rent Paid Interest Paid Payment for Operating Expenses Net Cash Inflow from Operating Activities

1,914,000 (934,000) (27,000) (9,000) (559,000)

Cash Flows from Investing Activities Cash Proceeds from Sale of Office Equipment Cash Purchases of Office Equipment Cash Purchases of Land Net Cash Outflow from Investing Activities

42,000 (296,000) (600,000)

Cash Flows from Financing Activities Proceeds of Loan Proceeds from Share Issue Paid Dividends Net Cash Inflow from financing activities



100,000 500,000 (75,000) 525,000

Net Cash Inflow for the period Cash at Bank at Start of Year Cash at Bank at End of Year

56,000 49,000 105,000


Opening Sales

Opening Purchases

Bank Closing

Accounts Receivable 74,000 Bank 1,936,000 Closing 2,010,000

1,914,000 96,000 2,010,000

Inventory 88,000 COGS 943,000 Closing 1,031,000

908,000 123,000 1,031,000

Accounts Payable 934,000 Open 37,000 Purchases 971,000

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28,000 943,000 971,000

Opening Bank

Prepaid Rent 9,000 Rent Exp 27,000 Closing 36,000

33,000 3,000 36,000

Bank Closing

Interest Payable 9,000 Open 12,000 Inter. Exp 21,000

6,000 15,000 21,000

Open Bank

Office Equipment - cost 254,000 Sold cost 296,000 Closing 550,000

80,000 470,000 550,000

Sold Acc Closing

Accum Depre – Office Equipment 50,000 Open 105,000 220,000 Depre Exp 165,000 270,000 270,000

Open Bank

Bank Closing



Land 2,000,000 Sold cost 600,000 Closing 2,600,000

0 2,600,000 2,600,000

Dividend Payable 75,000 Opening Interim Div 55,000 Final Div 130,000

40,000 35,000 55,000 130,000

Loan 300,000 Opening Bank 300,000

200,000 100,000 300,000

Share Capital 2,400,000 Opening Bank 2,400,000

1,900,000 500,000 2,400,000

Original cost of equipment sold Less Acc Dep - Equipment sold WDV Equipment sold Profit on sale of equipment Bank

80,000 - 50,000 30,000 12,000 42,000

(b) A net loss means that accrual-based expenses exceeded accrual-based revenues for the period. However, if you eliminate the effect of (add back) such non-cash expenses as depreciation and amortisation, it is possible to have produced a positive net cash flow from operations. Increasing payables Page 3 of 8

(not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales this period) would also cause cash flow to be higher than related net income or loss.

QUESTION THREE a) 1/01/2010



Cash at Bank


31/12/2010 Depreciation Expense - Equipment


Accumulated Depreciation – Equipment


600,000*0.10= 60,000

31/12/2011 Depreciation Expense – Equipment


Accumulated Depreciation – Equipment


(600,000 – 60,000)*0.10 = 54, 000

01/01/2012 Cash at Bank


Accumulated Depreciation – Equipment


Loss on sale of equipment




b) The four bases of measurement in financial statements: i)

Historical cost – assets recorded at amount paid and liabilities recorded at amounts expected to

be paid

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Current cost – assets recorded at amount that would have been paid if asset bought today.

Liabilities recorded at undiscounted amount needed to settle obligation today. ii)

Realisable value – assets recorded at current arms’ length price. Liabilities recorded at settlement

value. iv)

Present value – assets recorded at discounted value of future net cash flows. Liabilities recorded

at discounted value of future net cash flows required for settlement. [Students must briefly explain the measurement bases]

QUESTION FOUR a) Statement of Financial Position for Bruce Enterprises Ltd as at 30 June 2013 Shareholder’s Equity Share Capital (1,100,000 x $6)


General Reserve


Retained Earnings [1,500,000 (profit for 2012) + 1,200,000 (profit for 2013)– (1,100,000 x $0.15) (final dividend) – 250,000


(transfer to general reserve)] Total Equity


b) Companies generally issue share dividends to: a) Satisfy shareholders’ dividend expectations without spending cash b) Emphasise that a portion of equity has been permanently invested in the business and therefore is unavailable for cash dividends

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QUESTION FIVE a) Cash at Bank 31 July 2012

Balance b/f

31 July 2012

Bank interest received

31 July 2012

Note receivable (bank collection)


31 July 2012

Bank Charges



31 July 2012

Cheque error


650 31 July 2012

31 July 2012

Cash receipt error


Balance c/f

5746 5,995

5,995 1 August 2012

Opening Balance


Or Cash at Bank Date 2012 31 July July


Debit $

Credit $

Balance Bank charges

Balance $ 5,330 5,310














Bank interest received


Cheque error


Cash receipt error


Note Receivable (Bank collection)




b) Best Price Store Bank Reconciliation Statement as at 31st March 2012 Balance as per bank statement

4,786 Cr

Add: Outstanding deposit

1,815 6,601

Deduct: Unpresented cheques


Balance as per Cash at Bank ledger account

5,746 Dr

(c) Segregation of duties pertains to the assignment of responsibility so that i) related activities are assigned to different people and ii) custody of assets is separated from the person who records the asset. In contrast, independent internal verification involves reviewing, comparing and reconciling data prepared by one or several employees. Page 6 of 8

QUESTION SIX (a) Four enhancing qualitative characteristics: -

Comparability: Between different companies/ between different years of the same company Verifiability: Faithful representation/independent observer consensus Timeliness: Information produced in timely manner before it ceases relevance/ capable of influencing decisions Understandability: able to be understood by proficient users/understandability depends on the capability of users

Students must provide brief discussion. (b) -Decreases economic benefits during the accounting period in the form of decrease of the asset (accounts receivable) - results in an decrease in equity - is not a distribution to owners of Bina Ltd - As customer made the payment within 7 days (discount requirement), it is probable that Bina Ltd would allow the discount - the discount can be measured reliably at $36. Therefore, discount allowed is consistent with expense definition and recognition criteria. (c) • •

• • •

• •

The viewpoint expressed in the statement reflects the views of Milton Freedman. Shareholders invest in a business entity, and lenders/creditors lend to a business entity, with the objective of obtaining an economic return. Therefore, it can be argued that business entities only need to report to shareholders and lenders/creditors on their financial performance and risk, because this is only what shareholders and lenders/creditors are interested in. Alternatively, it can be argued that business entities have a responsibility to a broader group of stakeholders than just shareholders and lenders/creditors, including local communities, customers, suppliers, employees, government and even future generations, because these stakeholders interact with the business entity, and/or affected by the actions of the business entity. It can be argued that business entities, (especially companies), are granted the right to exist and operate by the community, and therefore in return are accountable to the community/broad group of stakeholders for their social and environmental performance as well as their financial performance. There is also a growing interest in ethical investment by investors/shareholders. If business entities are accountable for their social and environmental performance, it follows that business entities should report on their social and environmental performance. Traditional financial reporting is inadequate for reporting on a business entity’s social and environmental performance, because traditional financial reporting provides very limited information about a business entity’s social and environmental performance, (e.g. limited to provisions for site restoration and clean-up costs, which are heavily discounted to present value). If the business entity is not directly involved in a transaction or event, it is not recognised in the financial accounting system. The use and/or abuse, (e.g. contamination), of resources not controlled (owned/licenced) by the business entity is not recorded, because these resources do not have a cost to the entity. Social and environmental costs and liabilities may not be recorded and/or disclosed, because they are immaterial, or incapable of reliable measurement. However, a business entity’s social and environmental performance can represent a significant risk to the entity’s financial performance. Adverse reaction by stakeholders such as customers, employees, local communities, and local government, to a business entity’s poor social and/or environmental performance, can a significant adverse effect on a business entity’s reputation, and therefore its financial performance, (decline in sales, difficultly in retaining and attracting employees, additional restrictions and costs imposed by local government). Page 7 of 8

Social and environmental reporting can be used by a business entity as a means to project an image of being a good corporate citizen concerned about social and environmental issues, (truthfully, or falsely), thereby seeking to legitimise the business entity, manage powerful stakeholders, and forestall the imposition of more stringent social and environmental laws, and disclosure requirements, with the ultimate objective of increasing the economic wealth of investors and lenders/creditors.

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