2015 ACCOUNTING ATTACH SACE REGISTRATION NUMBER LABEL TO THIS BOX

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1 External Examination ACCOUNTING FOR OFFICE USE ONLY SUPERVISOR CHECK ATTACH SACE REGISTRATION NUMBER LABEL TO THIS BOX RE-MARKED Monday 16 November: 1.30 p.m. Time: 2 hours Pages: 31 Questions: 5 Examination material: one 31-page question booklet one SACE registration number label Approved dictionaries and calculators may be used. Instructions to Students 1. You will have 10 minutes to read the paper. You must not write in your question booklet or use a calculator during this reading time but you may make notes on the scribbling paper provided. 2. This paper consists of five problem questions. Answer all questions in the spaces provided in this question booklet. 3. The total mark is The financial analysis ratios are on page 3, which you may remove from this booklet before the examination begins. 5. Remove the tear-out information sheets on pages 5, 15, 21, and 27 from the booklet, so that you can refer to them when you write your answers. 6. Show all working in this booklet. (You are strongly advised not to use scribbling paper. Work that you consider incorrect should be crossed out with a single line.) 7. Use only black or blue pens for all work other than calculations, for which you may use a sharp dark pencil. 8. Attach your SACE registration number label to the box at the top of this page. SACE Board of South Australia 2015

2 STUDENT S DECLARATION ON THE USE OF CALCULATORS By signing the examination attendance roll I declare that: my calculators have been cleared of all memory no external storage media are in use on these calculators. I understand that if I do not comply with the above conditions for the use of calculators I will: be in breach of the rules have my results for the examination cancelled or amended be liable to such further penalty, whether by exclusion from future examinations or otherwise, as the SACE Board of South Australia determines. page 2 of 31

3 You may remove this page from the booklet by tearing along the perforations, so that you can refer to it when you write your answers. FINANCIAL ANALYSIS RATIOS Profitability (Return) For all entities: Return on equity Return on total assets Net profit margin Expense Gross profit margin net profi t owner s equity* net profi t interest expense total assets* net profi t net sales individual expenses net sales gross profi t net sales Expressed as % % % % % For companies: Earnings per ordinary share Earnings yield Dividend per ordinary share Dividend yield net profi t for ordinary shareholders number of ordinary shares earnings per ordinary share market price per ordinary share total ordinary dividend number of ordinary shares dividend per ordinary share market price per ordinary share $ % $ % Financial Stability (Risk) Short Term (Liquidity) Quick asset (acid test) Working capital Debtors turnover Inventory turnover current assets inventory current liabilities current assets current liabilities net credit sales debtors* cost of goods sold inventory* ratio ratio times times Long Term (Solvency) Total debt/total assets Debt/equity Times interest earned total liabilities total assets total liabilities owner s equity net profi t interest expense interest expense % % times *Averages are used for these values. However, the availability of information may necessitate the use of opening or closing values. It is acceptable also to deduct bank overdrafts from current liabilities when calculating this ratio, as appears in some textbooks and study guides. page 3 of 31 PLEASE TURN OVER

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5 You may remove this page from the booklet by tearing along the perforations, so that you can refer to the following information when you write your answers to Question 1. QUESTION 1 Sizzling Burgers are a chain of hamburger restaurants, run by Cooked to a Crisp. They need to have their end-of-year financial reports prepared and have provided the following trial balance as at 30 June 2015 to help in the preparation of the reports: SIZZLING BURGERS Trial Balance as at 30 June 2015 Account Debit Credit Debtors Inventory (1 July 2014) Shop shelving Accumulated depreciation on shop shelving Motor vehicles Accumulated depreciation on motor vehicles Bank overdraft Creditors Sales revenue received in advance Loan (repayable 1 October 2017) Cooked to a Crisp, capital (1 July 2014) Cooked to a Crisp, drawings Sales revenue Sales returns and allowances Purchases Delivery expense Freight inwards expense Office operating expense Advertising expense Interest expense Sales wages Discount allowed General insurance expense Shop rent expense More Information as at 30 June 2015 A stocktake revealed that inventory on hand totalled $ Shop shelving is depreciated at 20% per annum, using the straight-line method. Rent is $4000 per month. The rent for June has not yet been paid or recorded. The sales revenue received in advance relates to two events planned for June and July. The first event took place on 20 June and earned $1400. A new motor vehicle was purchased by the business on 1 March for $ This transaction has already been recorded. Motor vehicles are depreciated at 15% per annum, using the reducing-balance method. The advertising expense relates to an 18-month contract that was paid for on 1 January page 5 of 31 PLEASE TURN OVER

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7 QUESTION 1 (a) (i) Show the calculation for depreciation on motor vehicles. (3 marks) (ii) Show the calculation for the adjustment for prepaid advertising. (b) Complete the general journal entries to record the adjustments shown. GENERAL JOURNAL Date Particulars Debit Credit Recording depreciation on shop shelving Sales revenue received in advance (3 marks) (c) Identify two accounting concepts that make it necessary for balance-day adjustments to be performed. page 7 of 31 PLEASE TURN OVER

8 (d) Complete the extract from the income statement for Sizzling Burgers for the year ended 30 June SIZZLING BURGERS Extract from Income Statement for Year Ended 30 June 2015 Revenue Sales Less sales returns and allowances Cost of Goods Sold Opening inventory Plus purchases Plus freight inwards Less closing inventory Gross Profit Expenses Selling Administrative Financial Profit/Loss (7 marks) page 8 of 31

9 (e) Complete the extract from the balance sheet for Sizzling Burgers as at 30 June SIZZLING BURGERS Extract from Balance Sheet as at 30 June 2015 ASSETS Current Non-current TOTAL ASSETS (6 marks) (f ) Cooked to a Crisp is concerned that the liquidity of the business may be a problem. Calculate the working capital ratio for Sizzling Burgers. (g) The current industry average relevant to Sizzling Burgers is 4.2:1. With reference to the information above, comment on Sizzling Burgers liquidity. TOTAL: 25 marks End of Question 1 page 9 of 31 PLEASE TURN OVER

10 QUESTION 2 Malcolm Corston is the owner of a clothing store called Sweaters and Urban Clothing. He provides the following information for June 2015: Debtors Ageing Analysis at 31 May 2015 Debtor 0 30 Days Days Days 91+ Days Total S. Smyth N. Harry J. Chan R. Hill L. Lambos Total Sales Journal Cost price Selling price Sales Returns Journal Cost price 100 Selling price 360 Purchases Journal Purchases Returns Journal 100 Cash Receipts Journal Bank Cash sales, cost price Cash sales, selling price Cash received from debtors Discount allowed to debtors 240 Cash Payments Journal Bank Cash purchases Payments to creditors Discount received from creditors 120 Other Information at 30 June The account of debtor L. Lambos is to be written off as irrecoverable. The business charges $50 interest to debtor R. Hill for non-payment during the month. (a) State two advantages of maintaining a debtors ageing analysis. page 10 of 31

11 (b) Complete the general journal entry to record the interest charged to R. Hill. A narration is required. GENERAL JOURNAL Date Particulars Debit Credit (c) Using the information on page 10, complete and formally balance the debtors control account for June June Balance Debtors Control Account (4 marks) page 11 of 31 PLEASE TURN OVER

12 (d) Sweaters and Urban Clothing wants to create an allowance for doubtful debts account that is 8% of the debtors closing balance. (i) Complete the general journal entry to record the allowance for doubtful debts account. GENERAL JOURNAL Date Particulars Debit Credit Creating an allowance for doubtful debts account (ii) Define the concept of prudence and describe how recording the allowance for doubtful debts account relates to this concept. (iii) State one concept or convention that is not being followed by creating an allowance for doubtful debts account. (e) Suggest two ways in which Sweaters and Urban Clothing could screen future debtors in order to avoid bad debts. page 12 of 31

13 (f ) State one advantage that the business would gain if it used control accounts. (g) Malcolm Corston is considering investing in Hard Roads Ltd and is examining the following financial information about the company: Profit $ Profit retained for expansion $ Dividend to ordinary shareholders $ Number of ordinary shares Market price per share $10.62 Industry average (benchmark) dividend per ordinary share $1.50 Industry average (benchmark) dividend yield 18.43% (i) Is Malcolm Corston an internal user or an external user of the financial information above? Give a reason for your answer. (ii) Using the information in the table above, calculate the dividend yield for Hard Roads Ltd. (iii) Comparing your results in part (ii) with the industry average, do you consider that this is a good investment opportunity? page 13 of 31 PLEASE TURN OVER

14 (iv) State two factors that affect the size of the dividend paid to ordinary shareholders. (v) What is the significance of the abbreviation Ltd in the business name Hard Roads Ltd? TOTAL: 25 marks End of Question 2 page 14 of 31

15 You may remove this page from the booklet by tearing along the perforations, so that you can refer to the following information when you write your answers to Question 3. QUESTION 3 Declan s Doggy Day Care Centre began business in 2005 and has been extremely successful. However, since the recent opening of several new Doggy Day Care Centres the number of dogs attending Declan s centre has fallen and as a consequence so have profits and cash levels. The following information has been provided to help in the preparation of a cash budget for September and October. Actual figures for August have been included. More Information 80% of fees for day care are paid in cash and 20% on credit. Fees for August were $ Fees for September and October are expected to be $ and $ respectively. Fees on credit are expected to be collected: 70% in the month of sale 25% in the month after sale. The remainder is expected to be uncollectable. Cash received for dog grooming is expected to decline by 5% each month. Purchases of dog food and treats are made in cash and are expected to be 10% of the monthly fees. All other expenses are expected to be the same as in August except that rent will increase by $500 per month in October. A $ interest-only loan was taken out in August to pay for synthetic grass to be installed in the outdoor areas. The grass is expected to have a useful life of 10 years and is to be depreciated using the straight-line method. Interest on the loan is 10% per annum, payable monthly, starting in September. page 15 of 31 PLEASE TURN OVER

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17 QUESTION 3 (a) Complete the collection from debtors schedule for September and October. DECLAN S DOGGY DAY CARE CENTRE Collection from Debtors Schedule for September and October Month Total Fees Fees on Credit September October August September October TOTAL (b) Prepare the cash budget for September and October. DECLAN S DOGGY DAY CARE CENTRE Cash Budget for September and October August (actual) September (budget) October (budget) Receipts Cash fees From debtors Grooming Loan Total Receipts Payments Wages Purchases (dog food and treats) Rent Insurance 600 Telephone 225 Synthetic grass Total Payments Opening bank balance Receipts less payments Closing bank balance (8 marks) page 17 of 31 PLEASE TURN OVER

18 (c) (i) What does the cash budget that you prepared in part (b) on page 17 indicate about the predicted cash position of Declan s Doggy Day Care Centre for September and October? (ii) What is the main reason for the trend indicated in the cash budget? (iii) What action could be taken to improve the predicted cash position? (d) Declan is concerned that if the trend referred to in part (c) continues he will be forced to close the business. (i) (1) Name two other accounting statements that should be prepared. (2) How could each of these statements help in Declan s decision-making? (ii) Name two pieces of qualitative information that could also be considered in this decision-making. page 18 of 31

19 (e) Declan is considering introducing a dog-training program as an optional activity. A trainer would cost the business $ per month in wages. Customers would be charged $50 per training session. Treats for each training session would cost the business $3 per dog. (i) How many dogs would need to be enrolled in the training program for it to break even? (ii) If 300 dogs were enrolled in the training program, what profit or loss would be made? (iii) A total of 385 dogs attended the centre in August. Do you consider that the dog-training program should, or should not, proceed? Give a reason for your answer. page 19 of 31 PLEASE TURN OVER

20 (f ) Declan has received his bank statement for August, and notices that the balance on the statement is different from the balance in his records. Give two reasons why the bank balance in the business records would be different from the balance on the bank statement for the same date. TOTAL: 25 marks End of Question 3 page 20 of 31

21 You may remove this page from the booklet by tearing along the perforations, so that you can refer to the following information when you write your answers to Question 4. QUESTION 4 Janina Melville is the owner of Moby s Aquarium. She has presented the following income statement for the year ended 30 June 2015, as well as comparative balance sheets for 2014 and 2015 (on page 22), to be used in the preparation of a statement of cash flows for the year ended 30 June 2015: MOBY S AQUARIUM Income Statement for Year Ended 30 June 2015 Revenue Cash sales Credit sales Cost of Goods Sold Opening inventory Purchases Freight in Closing inventory (45 000) Gross Profit Other Revenue Commission revenue 750 Other Expenses Rent Electricity Wages Bad debts Administrative expenses Interest expense Depreciation on delivery van Depreciation on fixtures and fittings Profit The information for Question 4 is continued on page 22. page 21 of 31 PLEASE TURN OVER

22 MOBY S AQUARIUM Comparative Balance Sheets as at 30 June 2015 and 30 June Owner s Equity Capital Additional capital Net profit Drawings (3 000) (5 000) Total Owner s Equity Current Assets Cash Inventory Debtors Prepaid rent Accrued commission Non-current Assets Delivery van Less accumulated depreciation (5 300) (4 000) Fittings and fixtures Less accumulated depreciation (4 000) (2 000) Premises Total Assets Current Liabilities Creditors Non-current Liabilities Loan Total Liabilities Net Assets More Information All sales and acquisitions of non-current assets were paid for in cash. All drawings and capital contributions were made in cash. page 22 of 31

23 QUESTION 4 (a) Complete the following calculations in order to prepare a statement of cash flows for Moby s Aquarium. Cash received from customers. Cash paid to suppliers. Cash received from commission revenue. Cash paid in rent. (6 marks) Use the space below for other calculations. page 23 of 31 PLEASE TURN OVER

24 (b) Complete the statement of cash flows for Moby s Aquarium for the year ended 30 June MOBY S AQUARIUM Statement of Cash Flows for Year Ended 30 June 2015 CASH FLOWS FROM OPERATING ACTIVITIES Inflows Outflows Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Inflows Outflows Net cash flows from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Inflows Outflows Net cash flows from financing activities NET INCREASE/DECREASE IN CASH HELD CASH AT BEGINNING OF YEAR CASH AT END OF YEAR (7 marks) page 24 of 31

25 (c) With reference to the statement of cash flows that you completed in part (b) on page 24, state whether or not Janina should be concerned about the cash flow of her business. Give reasons for your answer. (3 marks) (d) Janina is very reluctant to increase her bank loan and has contributed $ of additional capital in order to reduce her debt. (i) Calculate the debt/equity ratio for Moby s Aquarium at 30 June (ii) Comment on your calculation in part (i), and advise Janina of how the business may benefit from using external finance. (e) Janina was expecting a much larger increase in her cash balance after making a profit of $6000. Why did this not happen? page 25 of 31 PLEASE TURN OVER

26 (f ) What evidence is there in the comparative balance sheets for Moby s Aquarium on page 22 (the back of the tear-out sheet) that each of the following concepts is being used? (i) Accounting period concept. (ii) Historical cost concept. (iii) Accrual accounting concept. (g) Janina is considering expanding her business by offering online sales of fish. Comment on the suitability of this expansion for Moby s Aquarium. TOTAL: 25 marks End of Question 4 page 26 of 31

27 You may remove this page from the booklet by tearing along the perforations, so that you can refer to the following information when you write your answers to Question 5. QUESTION 5 The Paintbox Plus is a business that produces and sells paints and painting equipment. The business uses the first-in first-out perpetual method of recording inventory. During April 2015 the business recorded the following transactions for a particular brand of paint: 5 April Six tins of paint sold to R. Brush for $50 each. 7 April Two tins of paint returned by R. Brush. 12 April Seven tins of paint at $25 each purchased on credit from Peerless Paints. 17 April One damaged tin of paint returned to Peerless Paints. 19 April Twelve tins of paint sold for $50 each. 24 April Ten tins of paint at $28 each purchased for cash. 28 April Two tins of paint withdrawn for owner s own use. A stocktake at the end of the month showed twelve tins of paint on hand. page 27 of 31 PLEASE TURN OVER

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29 QUESTION 5 (a) Complete the following inventory card for April 2015, using the first-in first-out method of recording inventory. Include any inventory adjustment. INVENTORY CARD Date Details In Out Balance Qty Cost Total Qty Cost Total Qty Cost Total 1 April Balance FINAL BALANCE (4 marks) (b) Record the inventory adjustment for April in the general journal. GENERAL JOURNAL Date Particulars Debit Credit Recording inventory adjustment for April page 29 of 31 PLEASE TURN OVER

30 (c) Using the information on page 27 (the tear-out sheet) and your answers on page 29, complete and formally balance the inventory control account. 1 April Opening balance 480 Inventory Control Account (5 marks) (d) Prepare the extract from the income statement for the Paintbox Plus for the month ended 30 April 2015 in order to calculate the gross profit. (Include the inventory adjustment in the calculation.) THE PAINTBOX PLUS Extract from Income Statement for Month Ended 30 April 2015 Revenue Cost of Goods Sold Gross Profit (4 marks) page 30 of 31

31 (e) (i) Using the information recorded in part (c) on page 30, calculate the inventory turnover for April. (ii) The inventory turnover for March was 1.5 times. State a reason for the different results. (f ) The stock had a net realisable value of $500 on 30 April. What value needs to be recorded in the financial statements, and why? (g) The business has told the local council that its old paint stock is collected by an environmental organisation. However, to save costs, the business actually pours its old paint stock down a large drain outlet that connects to the local river system. What is the ethical issue in this situation? TOTAL: 20 marks End of Question 5 page 31 of 31 end of question booklet

2013 ACCOUNTING ATTACH SACE REGISTRATION NUMBER LABEL TO THIS BOX

2013 ACCOUNTING ATTACH SACE REGISTRATION NUMBER LABEL TO THIS BOX External Examination 2013 2013 ACCOUNTING FOR OFFICE USE ONLY SUPERVISOR CHECK ATTACH SACE REGISTRATION NUMBER LABEL TO THIS BOX RE-MARKED Wednesday 13 November: 1.30 p.m. Time: 2 hours Pages: 29 Questions: