2016 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 Tuesday 15 November: 1.30 pm Time: 2 hours Pages: 33 Questions: 4 Examination material: one 33-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 four 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, 13, 19, 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 2016

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 33

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 For companies: Earnings per ordinary share Earnings yield Dividend per ordinary share Dividend yield Financial Stability (Risk) Short Term (Liquidity) Quick asset (acid test) Working capital Debtors turnover Inventory turnover Long Term (Solvency) Total debt/total assets Debt/equity Times interest earned net pro t owner s equity* net pro t interest expense total assets* net pro t net sales individual expenses net sales gross pro t net sales net pro 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 current assets inventory current liabilities current assets current liabilities net credit sales debtors* cost of goods sold inventory* total liabilities total assets total liabilities owner s equity net pro t interest expense interest expense Expressed as % % % % % $ % $ % ratio ratio times times % % 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 33 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 Hung s Hardware is owned and operated by Hung. The store uses subsidiary ledgers to record debtors and inventory. During one week in September 2016, Hung s Hardware recorded the following transactions: 19 September Purchased goods on credit for $ September Sold goods to Theodora on credit for $580 (cost $220) and charged her $30 for delivery. 21 September $50 worth of goods (cost $32) returned by Theodora. Purchased office equipment; paid $2400 cash. 22 September Purchased goods for $750 cash. 23 September Returned goods, originally purchased for $95 cash, to supplier. Received $550 from Jerome, allowing $20 discount. 24 September Destroyed damaged stock with a selling price of $210 (cost $115). Sold goods for $795 cash (cost $280). page 5 of 33 PLEASE TURN OVER

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7 QUESTION 1 (25 marks) (a) Using the information on page 5 (the tear-out sheet), complete and formally balance the debtors control account for Hung s Hardware for September Debtors Control Account 19 September Balance 1450 (3 marks) (b) How can Hung verify the closing balance of the debtors control account? (1 mark) (c) Hung has been told that calculating a debtors turnover would help him to analyse the performance of his debtors. (i) Using the information from the debtors control account, calculate the debtors turnover for Hung. (1 mark) (ii) State one reason why the results of your calculation in part (c) (i) may not be helpful for Hung. (1 mark) page 7 of 33 PLEASE TURN OVER

8 (d) Using the information on page 5 (the tear-out sheet), complete and formally balance the inventory control account. Inventory Control Account 19 September Opening balance 4650 (4 marks) (e) Hung s Hardware records the following transaction: Sold goods on credit for $600 (cost $250). Show the effect of this transaction on the accounting equation, the income statement, and the statement of cash flows. Accounting Equation Assets Liabilities Owner s equity Income Statement Revenue Cost of goods sold Selling expenses Administrative expenses Financial expenses Statement of Cash Flows Operating activities Investing activities Financing activities (3 marks) page 8 of 33

9 Hung s Hardware has provided the following completed inventory card for wheelbarrows for May 2016: INVENTORY CARD Wheelbarrows Date Details In Out Balance Qty Cost Total Qty Cost Total Qty Cost Total 1 May Balance May Sales May Purchases (creditors) May Sales returns May Drawings May Sales More Information The selling price for each wheelbarrow is $750. (f ) With reference to the inventory card, complete the extract from the income statement for Hung s Hardware for the period ended 12 May 2016, using a perpetual inventory system. HUNG S HARDWARE Extract from Income Statement for Period Ended 12 May 2016 Revenue Cost of goods sold Gross profit (2 marks) page 9 of 33 PLEASE TURN OVER

10 (g) One inventory item (a hammer) was bought for $4.50. The store now stocks a better hammer, so the original inventory item can be sold for only $1.20. State how the original inventory item should be valued, and give a reason for your answer. (2 marks) (h) Hung s Hardware uses both the first-in first-out method and the specific identification method of recording inventory. (i) Identify one inventory item for which the first-in first-out method of recording inventory would be used. Give a reason for your answer. (2 marks) (ii) Identify one inventory item for which the specific identification method of recording inventory would be used. Give a reason for your answer. (2 marks) (iii) Identify which method of recording inventory first-in first-out or specific identification is the more accurate. Give a reason for your answer. (2 marks) page 10 of 33

11 (i) The accounting process involves processing data and reporting information to users. State how, when dealing with inventory, Hung s Hardware has: (i) processed data. (1 mark) (ii) reported information. (1 mark) End of Question 1 page 11 of 33 PLEASE TURN OVER

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13 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 2. QUESTION 2 Ena Vashen owns We Deliver, a small transport business that delivers packages in the central business district and inner suburbs of the city. The business has been steadily growing, but is now facing increased competition from larger organisations. Ena is looking at new ways to maintain the growth of her business. Ena has provided the following information to help with the preparation of a cash budget for November 2016 and December In 2015 the business made 200 deliveries in November and 300 in December. For each delivery the business charges $150. Ena is planning to buy two new larger delivery vehicles at the beginning of November. This will allow the business to increase the number of deliveries made each month by 25%. All deliveries are made on credit, with 60% paid in the month of delivery and 40% paid in the month after delivery. The new delivery vehicles will cost Ena $ each and must be paid for in cash in November. Other expenses incurred by the business are: vehicle fuel and maintenance $40 per delivery depreciation on vehicles $3000 per month warehouse rent $ per year paid monthly drivers wages $2750 per month insurance $10 per delivery. page 13 of 33 PLEASE TURN OVER

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15 QUESTION 2 (25 marks) (a) Calculate the expected number of deliveries and the expected revenue for November 2016 and December Expected number of deliveries Expected revenue November December (2 marks) (b) Prepare the collection from debtors schedule and the cash budget for November 2016 and December WE DELIVER Collection from Debtors Schedule for November and December November October deliveries (actual 180) Expected November deliveries Expected December deliveries TOTAL December Estimated receipts WE DELIVER Cash Budget for November and December November December Estimated payments Receipts less payments Opening bank balance Closing bank balance (7 marks) page 15 of 33 PLEASE TURN OVER

16 (c) With reference to the cash budget that you completed in part (b) on page 15: (i) describe the predicted cash position of We Deliver at the end of November 2016 and at the end of December (1 mark) (ii) comment on what the predicted cash position might indicate for the future of the business. (2 marks) (d) Suggest two advantages that We Deliver will gain by paying cash for the two new delivery vehicles in November. (2 marks) page 16 of 33

17 (e) The 180 deliveries made in October 2016 allowed We Deliver to make a profit of $8250. In October the: selling price was $150 per delivery variable costs were $50 per delivery fixed costs were $9750 per month. If the new delivery vehicles are purchased, it is expected that fixed costs will increase by $ per month, and insurance costs will increase by $2 per delivery. In October 2016 the break-even point was 98 deliveries. Calculate the break-even point for November (2 marks) (f ) After receiving new information, We Deliver has reviewed the expected number of deliveries for November 2016 and December There are now expected to be 270 deliveries in November and 390 in December. Comment on these new figures in comparison with your result in part (e). (2 marks) (g) Considering all of the information in the cash budget on page 15 and your answer to part (e), would you recommend that Ena purchases the new delivery vehicles? Give reasons for your answer. (3 marks) page 17 of 33 PLEASE TURN OVER

18 (h) Ena has noticed that the total on the October bank statement for We Deliver does not match the balance in We Deliver s cash at bank ledger account. At the end of October Ena calculated the balance in the cash at bank ledger account as $ debit (this figure includes all the information from the October bank statement). The bank statement shows a balance of $ credit. Ena has found that three cheques, number 487 for $3350, number 489 for $720, and number 490 for $636, do not appear on the bank statement. An amount of $3458, which was recorded as being received by the business on 31 October, is also missing from the bank statement. (i) Prepare a bank reconciliation statement at 31 October. WE DELIVER Bank Reconciliation Statement at 31 October (3 marks) (ii) Give one reason apart from a bank or business recording error why a bank reconciliation statement may not reconcile. (1 mark) End of Question 2 page 18 of 33

19 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 Jim Page owns and manages a business called Heavenly Hallway Furniture. He has provided the following comparative balance sheets for 2015 and 2016, as well as an income statement for the years ended 30 June 2015 and 30 June 2016 (on page 20), to be used in preparing a statement of cash flows for the year ended 30 June 2016: HEAVENLY HALLWAY FURNITURE Comparative Balance Sheets as at 30 June 2016 and 30 June Owner s Equity Capital Additional capital Drawings (20 000) (25 000) Profit Total Owner s Equity Current Assets Cash at bank Debtors Inventory Prepaid rent Non-current Assets Vehicles Less accumulated depreciation (7 650) (6 150) Equipment Machinery Investments Total Assets Current Liabilities Creditors Accrued wages Non-current Liabilities Loan Total Liabilities Net Assets The information for Question 3 is continued on page 20. page 19 of 33 PLEASE TURN OVER

20 HEAVENLY HALLWAY FURNITURE Income Statement for Years Ended 30 June 2016 and 30 June Revenue Sales Cost of Goods Sold Opening inventory Purchases Freight Closing inventory (34 000) (52 000) Gross Profit Other Revenue Discount revenue Commission revenue Other Expenses Insurance Rent Depreciation Telephone and internet Wages Interest Discount allowed Profit More Information All sales and acquisitions of non-current assets were paid for in cash. $6000 in cash was received for the investments sold. All drawings and capital contributions were made in cash. page 20 of 33

21 QUESTION 3 (35 marks) (a) Give a specific example of where each of the following concepts is being used in the comparative balance sheets for Heavenly Hallway Furniture on page 19 (the tear-out sheet). Prudence. Accrual accounting. Going concern. Historical cost. (2 marks) (b) (i) State one advantage of using the concept of historical cost in the comparative balance sheets for Heavenly Hallway Furniture. (1 mark) (ii) State one disadvantage of using the concept of historical cost in the comparative balance sheets for Heavenly Hallway Furniture. (1 mark) (c) Name the document that guides accountants in the standards and procedures of compiling financial statements for sole traders and partnerships. (1 mark) (d) A statement of cash flows is one process used to control and monitor cash. Name two other processes that help to control and monitor cash. (1 mark) page 21 of 33 PLEASE TURN OVER

22 (e) Complete the following calculations in order to prepare a statement of cash flows for Heavenly Hallway Furniture for the year ended 30 June Cash received from debtors. Cash paid to suppliers. Cash paid for rent. Cash paid for wages. (6 marks) Use the space below for other calculations. page 22 of 33

23 (f ) Prepare a statement of cash flows for Heavenly Hallway Furniture for the year ended 30 June HEAVENLY HALLWAY FURNITURE Statement of Cash Flows for Year Ended 30 June 2016 CASH FLOWS FROM OPERATING ACTIVITIES Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Net cash flows from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net cash flows from financing activities NET INCREASE/DECREASE IN CASH HELD CASH AT BEGINNING OF YEAR CASH AT END OF YEAR (10 marks) page 23 of 33 PLEASE TURN OVER

24 (g) (i) Describe the impact of the net cash flow from investing activities for Heavenly Hallway Furniture, and comment on whether or not this is of concern. (2 marks) (ii) Analysing the statement of cash flows, discuss the appropriateness of business decisions made in the past 12 months. (3 marks) (h) Jim is considering buying shares in another company. He has been looking at two options Lead N Steel Ltd and Zep Balloons Ltd. The following information has been provided by each company as at 30 June 2016: Lead N Steel Ltd Zep Balloons Ltd Net profit $ $ Ordinary dividend $ $ Number of ordinary shares Market price per ordinary share $11.50 $10.20 Earnings yield 17.2% Dividend yield 13.9% 14.7% (i) Calculate the earnings yield for Lead N Steel Ltd as at 30 June (2 marks) page 24 of 33

25 (ii) Which company should Jim invest in? Give a reason for your answer. (1 mark) (iii) Why is the calculation of the earnings yield an important aspect of the decision-making process for a potential investor? (1 mark) (iv) Zep Balloons Ltd is proposing to expand its operations and is considering releasing new shares. (1) State one advantage that a release of new shares has for an existing shareholder. (1 mark) (2) State one disadvantage that a release of new shares has for an existing shareholder. (1 mark) (i) Jim the owner of sole trader business Heavenly Hallway Furniture decides to buy shares in Zep Balloons Ltd. Explain the legal entity as it applies to: (i) Heavenly Hallway Furniture. (1 mark) (ii) Zep Balloons Ltd. (1 mark) End of Question 3 page 25 of 33 PLEASE TURN OVER

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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 4. QUESTION 4 Florence Hurricane owns and operates Scentimental, an online store that sells candles. She has provided the following information for the preparation of a balance sheet and an income statement for Scentimental for the 6 months ended 30 June 2016: SCENTIMENTAL Trial Balance for 6 Months Ended 30 June 2016 Account Debit Credit Capital Drawings Investments Cash at bank Inventory (1 January 2016) Debtors Computers Accumulated depreciation on computers Equipment Accumulated depreciation on equipment Creditors Premises Mortgage Interest revenue Sales revenue Sales returns and allowances Purchases Freight inwards expense Freight outwards expense Office wages Administrative expenses Bad debts expense 600 Website maintenance expense Insurance More Information as at 30 June 2016 Closing inventory is $ The computers are depreciated at 10% per annum, using the diminishing-balance method. The equipment is depreciated using the units-of-use method. It has a residual value of $8000 and a useful life of units. It was used to produce units this accounting period. The insurance expense was paid on 1 January 2016 for 12 months. Florence took out the mortgage on 1 June Interest on the mortgage needs to be paid monthly and charged at 5% per annum. The first payment is due on 30 June Florence has a number of slow-paying debtors. An allowance for doubtful debts at 5% of debtors needs to be created. page 27 of 33 PLEASE TURN OVER

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29 QUESTION 4 (35 marks) (a) Show the calculation for the depreciation on equipment. (2 marks) (b) Show the calculation for the accrued interest. (2 marks) (c) Complete the general journal entries to record the adjustments shown. GENERAL JOURNAL Date Particulars Debit Credit Recording depreciation on computers Adjusting prepaid insurance Creating allowance for doubtful debts at 5% of debtors (6 marks) page 29 of 33 PLEASE TURN OVER

30 (d) (i) Complete the owner s equity section of the balance sheet for Scentimental as at 30 June SCENTIMENTAL Balance Sheet as at 30 June 2016 Owner s Equity Current Assets Cash at bank Inventory Debtors Less allowance for doubtful debts (740) Prepaid insurance Non-current Assets Computers Less accumulated depreciation (5 775) Equipment Less accumulated depreciation (20 540) Investments Premises Total Assets Current Liabilities Creditors Accrued interest Non-current Liabilities Mortgage Net Assets (3 marks) page 30 of 33

31 (ii) Complete the income statement for Scentimental for the 6 months ended 30 June SCENTIMENTAL Income Statement for 6 Months Ended 30 June 2016 Revenue Cost of Goods Sold Gross Profit Other Revenue Expenses Selling Administrative Financial Profit/Loss (9 marks) page 31 of 33 PLEASE TURN OVER

32 (e) Florence chose the units-of-use method to calculate the depreciation on equipment. (i) Was the units-of-use method an appropriate choice for this calculation? Give a reason for your answer. (2 marks) (ii) How did the depreciation on computers affect the balance sheet? (2 marks) (f ) Florence has received an inheritance and is thinking of investing it in the business. (i) Calculate the return on equity ratio at 30 June (2 marks) (ii) On the basis of your answer to part (f )(i), would you advise Florence to invest her inheritance in the business, or to put it in her bank where it will attract 2.5% interest? Give a reason for your answer. (2 marks) (iii) Suggest a qualitative reason why Florence might decide not to invest more capital in Scentimental. (1 mark) page 32 of 33

33 (g) Suggest two advantages of running an online business. (2 marks) (h) On its website, Scentimental advertises that its products are made in Australia. However, as local suppliers are unable to keep up with demand, Florence has decided to import 90% of the candles she sells. (i) Identify one ethical issue relating to Florence s decision. (1 mark) (ii) Identify one social issue relating to Florence s decision. (1 mark) End of Question 4 page 33 of 33 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: