VCE ACCOUNTING CLARIFICATION OF METHODS What terminology is going to be used in the June and November examinations in 2004?

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1 VCE ACCOUNTING CLARIFICATION OF METHODS What terminology is going to be used in the June and November eaminations in 2004? Terms to be used in eaminations Terms that will not be used in eaminations Debtors (Unit 3) Accounts receivable Debtors Control (Unit 4) Creditors (Unit 3) Accounts payable/suppliers Creditors Control (Unit 4) Discount epense Discount allowed Discount revenue Discount received Statement of Cash Flows Cash Flow Statement Statement of Financial Performance Profit and Loss Statement Statement of Financial Position Balance Sheet Gross profit Gross margin Reducing balance method depreciation Diminishing balance method depreciation Business Firm Non-current Deferred Sole proprietor Sole trader Advertising Donations Qualitative characteristics Concepts Fair value Current value Stock write down Anticipated loss on sale of stock Stock Inventory Reporting period Accounting period Perpetual inventory Continuous inventory Carrying cost method Owner s equity Proprietorship Are solutions available for the sample Unit 4 eamination question? The VCTA has published on their website a sample solution provided by a practicing Accounting teacher. These solutions are not endorsed by the VCAA, and are sample answers only. How do students post from the journals? When posting from the general journal and the sundries column of the Cash Payments Journal and Cash Receipts Journal into the ledger, the date shown should be the end date. Students should understand the concept of posting references the need for posting references and how to use them. In the eaminations, students will be specifically told if they need to record posting references.

2 When a transaction involves a non-trade creditor how is it treated? Teachers should differentiate between trade creditors and non-trade creditors. Transactions involving creditors are to be posted to a single creditor s account (page 21 of study design). This applies to trade creditors. Where questions involve transactions pertaining to non-trade creditors, individual accounts should be set up to record the necessary data. How will accounting reports be classified? Statement of Cash Flows Classified (operating, financing, investing) transaction approach The Cash Flow Statement in Unit 3 should show epenses and accrued epenses separately, but both as operating outflows. Statement of Financial Performance classified for gross profit, adjusted gross profit and net profit Statement of Financial Position classified for current and non-current Template for Statement of Financial Performance Revenue Cash Credit less Returns Less Cost of Goods Sold Cost of Cartage Inwards GROSS PROFIT less Stock loss Stock write down ADUSTED GROSS PROFIT Add Other Revenue Proceeds from sale Discount revenue Less Other Epenses Rent Office Epenses Interest Motor vehicle epenses Depreciation of motor vehicle Carrying cost of asset Discount epense Bad debts NET PROFIT

3 How are aliens treated in the eaminations? When undertaking questions involving the completion of reports, students should only include relevant items. In the eamination, marks will be deducted for any items that are incorrectly included (that is aliens ). Do students need to know the difference between accounting principles and qualitative characteristics of accounting reports? Students may be asked to state/identify/eplain an accounting principle or alternatively a qualitative characteristic of accounting reports. Students will be epected to know the difference between accounting principles and qualitative characteristics. Providing an accounting principle in response to a request for a qualitative characteristic, and vice versa, will not be regarded as a correct response. What is contained the Particulars column of a stock card? Information contained in the Particulars column of a stock card must reflect the relevant document number. What is contained in the narration for a General Journal entry? The narration should include details of the transaction being recorded. erence should be made to document numbers or source documents (including memos). Page 21 of the Accounting Study Design, bullet point 3 and page 26, bullet point 3 require students to use general journal entries to record various transactions. Do students need to know how to post these to the ledger? It is a logical flow on from recording in the general journal for students to be able to post the general journal entries to the general ledger and in Unit 4 to the subsidiary ledgers. Unit 3 What format will the special journals take in the June eamination? Purchases Journal Date Creditor Post. Invoice Amount Journal Date Debtor Post. Invoice Cost Selling Cash Receipts Journal Date Details Post. Rec. Bank Disc. Ep Debtors Cost Of * Sundries

4 Cash Payments Journal Date Details Post Chq Bank *Headings to be based on scenario Disc Rev. Creditors Stock * * Sundries General Journal Date Particulars Post. DR CR Are accruals in subsequent periods the same as reversing entries? The method for accounting for accruals in subsequent periods differs from reversing entries. The VCE Accounting Study Design, Advice for teachers, page 40, provides details and eamples on the treatment of accruals in subsequent periods. How are debtors and creditors going to be treated in Unit 3? For Unit 3, transactions involving debtors and creditors should be posted to a single debtor or creditor account. The account names could be: Debtor or Creditor Individual debtor/creditor name How is stock of materials treated? The asset approach is to be used when dealing with stock of materials. How is depreciation recorded? When charging the depreciation epense (that is, Depreciation DR, Accumulated Depreciation CR), the asset type must be shown. For eample: Depreciation on Equipment DR Accumulated Depreciation on Equipment CR In Unit 3, what depreciation methods must be used for the Analysis of Accounting Issues? The issue of depreciation alternatives must be looked at in terms of the impact on financial reports (financial performance and financial position). In order to meet this requirement, students must be able to calculate depreciation using the reducing balance method, as well as the straight line method. How is the revaluation of an asset treated? Non-current asset valuation may reflect a revaluation (upwards) or a devaluation (downwards). When an asset is revalued upwards, the Asset Revaluation Reserve should be used. When an asset is devalued, it is debited against the Asset Revaluation Reserve, with any additional amount being epensed. Asset valuation may require students to record in the general journal and the general ledger.

5 Are students epected to close off to the Profit and Loss Account and then to the Profit and Loss Summary Account? When closing accounts from the general ledger, students are epected to prepare the Profit and Loss Summary Account (page 21 of the study design). Unit 4 How are debtors and creditors going to be treated in Unit 4? For Unit 4, transactions involving debtors and creditors should be posted to the Debtors Control Account or the Creditors Control Account. Using Debtors Account or Creditors Account as titles is not acceptable. What format will the special journals take in the November eamination? Unit 4 Purchases Journal Date Creditor Post. Invoice Amount GST Total Creditors Journal Date Debtor Post. Invoice Cost Selling GST Total Debtors Cash Receipts Journal Date Details Post. Rec. Bank Disc. Ep Debtors Cost Of GST * Sundries Cash Payments Journal Date Details Post Chq Bank *Headings to be based on scenario Disc Rev. Creditors Stock * * GST Sundries General Journal Date Particulars Post. General Ledger Subsidiary Ledger DR CR DR CR Do students need to be able to calculate ratios for analysis and interpretation in the November eamination? In order for students to best answer analysis questions in the November eamination, they should have an understanding of what the ratios listed below involve and the formulas attached to them. Students will be epected to know how ratios are calculated, but in the eamination setting students will not be epected to make those calculations. Teachers can use a broad range of ratios for analysis and interpretation using the Advice for teachers section of the study design or current tets. The ratios listed in the study design (and reproduced below) are the ratios that may be eamined.

6 Profitability Ratio Calculation Return on Owner s Net Profit (before deducting interest) Investments Average Capital Return on Assets Return on or Net Profit Ratio (Asset) Turnover Gross Profit Ratio Adjusted Gross Profit Ratio Operating Epense Ratio Net Profit ( before deducting interest) Average for Total Assets Net Profit ( before deducting interest) Average for Total Assets Gross Profit Adjusted Gross Profit Total Operating Epenses Efficiency Debtors Turnover Average Debtors X 365 Credit Stock Turnover Average Stock X 365 Cost of Goods Sold Cash Cycle Debtors Turnover + Stock Turnover Creditors Turnover Average Creditors X 365 Credit Purchases Liquidity Working Capital Current Assets Current Liabilities Quick Asset Current Assets (stock + prepayments) Current Liabilities bank overdraft Cash Flow Cash Flow Operations Average Current Liabilities Stability Gearing Liabilities Total Assets Interest Cover Net Cash Flow from Operations (before interest) Interest Is the section on the Du Pont theory in the Advice for teachers to be included when analysing profitability? The Advice for teachers section of the study design provides a wide range of advice/information/methods to teachers that can be used when teaching the course. Teachers are able to choose (within the requirements of the study design) how they teach Decision making (Area of Study 2, page 27) Could clarification please be provided with the reporting and recording of GST? Is it the intention that we teach GST on sales and purchases only? For the purpose of the study design, the impact of recording for the GST deals with the special journals only (CRJ, CPJ, sales, purchases) and the preparation of the GST Clearing Account. The impact of GST on reporting for Statement of Cash Flows and Statement of Financial Position is also considered. The amount of GST for each transaction will be stipulated.

7 When a business sells goods or services a ta of 1/11th of the selling prices is collected as GST. This is a liability payable to the Australian Taation Office. To avoid collecting the ta twice, the amounts of GST paid to other businesses reduces the GST liability obligations of the business. Businesses settle their GST obligations either monthly or quarterly. Eample On 15 June, a trading business sells goods for $110 inclusive of GST to Smith. These goods were purchased on 2 June from Brown, a GST registered supplier for $55 inclusive of GST. On 15 June, the business pays selling epenses of $11 (inclusive of GST) to registered GST providers. In the journals of the business, the following entries would be made: Purchases Journal Date Creditor Post. Invoice Amount GST Total Creditors 2 June Brown Journal Date Debtor Post. Invoice Cost Selling GST Total Debtors 15 June Smith Cash Payments Journal Date Details Post 15 June Selling Ep. Chq Bank Disc Cred. Stock Selling GST Sundries Rev. Ep In the general ledger a GST Clearing Account is introduced: GST CLEARING ACCOUNT 2 June Creditors 5 15 June Debtors 10 Bank 1 Balance The balance of the GST Clearing Account is reported as a current liability at balance date. Recording of the GST in the Statement of Cash Flows for the purchase of a noncurrent asset: The GST will be reported as an operating outflow. For eample, if a motor vehicle were purchased for $ cash, with GST of $2000. The $ would be an investing outflow, with the $2000 GST being reported as an operating outflow.

8 How are subsidiary ledgers treated? Information contained in the particulars column of subsidiary ledgers (e.g. debtors and creditors) should reflect the titles used in the relevant control account. In a cash budget how are prepayments, payments of an epense, repayment of a loan and payment of interest treated? When preparing cash budgets, the distinction should be made between the payment of an epense and the prepayment of an epense. Distinction should also be made between the repayment of a loan and the payment of interest on the loan. Do students need to use a classified format for a cash budget or simply a Budgeted Statement of Receipts and payments? The study design requires a Budgeted Statement of receipts and payments (page 28). How are sales and purchase returns treated? To be consistent with the First-In, First-Out (FIFO) assumption, sales returns should be recorded at the most recent cost price. The cost of purchase returns will be identified as the FIFO assumption only applies to the selling of stock. In Area of Study 2, Unit 4 (page 27) lists managing and controlling cash the importance of the cash cycle, does this mean bank reconciliation statements? No, bank reconciliation statements are not required as part of Unit 4. School assessed Coursework Outcome 1 What does full scope refer to in relation to the School-assessed Coursework assessment task involving the double entry accounting computer package? Page 21 of the Accounting Assessment Handbook states the full scope of the double entry accounting computer package is used to accurately record the financial information relating to 20 transactions and three different balance-day adjustments. The intention is that transactions are entered into the appropriate journals (CRJ, CPJ, Journal, Purchases Journal and General Journal), not just entered in the General journal. General Questions Is there an up-to-date list of resources available for VCE Accounting? The up to date list is available on the Accounting page in Suitable resources Update at:

9 What is the relationship between the Assessment Handbook and Advice for teachers section of the study design? The Assessment Handbook 2004 contains up to date assessment information for both school-based assessment and eaminations in Accounting. The Advice for teachers section of the study design contains advice on course design and teaching and learning activities. Teachers should be aware of the information contained within the Sample Eamination material contained on the VCAA website. If teachers have any further questions or issues that they would like clarified please contact Jennifer Quick, Manager, SOSE Business Studies on (03) or on