NCE LEVEL 3 CCOUNTING By Elizabeth Pitu (pril 2012) BOOK 3 STTEMENTS INTERPRETTION and the FRMEWORK Solutions
Notes, Examples and Exercise Solutions
YOUR TURN Cash From Operating ctivities page 6 ccounts Receivable Balance 18,000 r Sales 420,000 438,000 r Bad debts 2,000 436,000 r CSH 414,000 22,000 r Inventory Balance 38,000 r Cost of Goods Sold 250,000 212,000 Cr ccounts Payable 252,000 40,000 r ccounts Payable Balance 22,000 Cr Inventory 252,000 274,000 Cr iscount Received 1,000 273,000 Cr CSH 249,000 24,000 Cr ccrued Expense Balance 700 Cr Wages 60,000 60,700 Cr CSH 59,900 800 Cr Prepayments Balance 500 r Insurance 5,000 4,500 Cr CSH 4,900 400 Cr Revenue in dvance Balance 500 Cr Rent 12,000 11,500 r CSH 12,500 1,000 Cr Little Books Statement of Cash Flows (extract) for the year ended 31 March 2004 Cash Flows from Operating ctivities Cash was provided from Cash from customers 414,000 Cash from rent 12,500 426,500 Cash was applied to Cash to suppliers 249,000 Cash to employees 59,900 Cash for insurance 4,900 Cash for interest 4,000 Cash for general expenses 36,000 353,800 Net Cash Inflow/Outflow from Operating ctivities 72,700 Level 3 ccounting Cash Flow Statements Solutions page 1
YOUR TURN Investing and Financing ctivities page 10 Big Books Ltd Equipment Balance 32,000 r Cost of sold 6,000 26,000 r Purchase CSH 30,000 56,000 r Retained Earnings Balance 43,300 Cr Performance Summary (NST) 68,000 113,300 Cr ividends CSH 52,900 58,400 Cr Note what each of the following changes indicate: Loan raised a loan $5,000 Mortgage repaid mortgage $6,000 Paid-in capital issued shares $10,000 Calculate the amount received for the equipment sold Carrying amount $4,000 Loss on sale $1,000 Cash received $3,000 Now complete the investing and financing sections of Big Books Ltd cash flow statement. Big Books Ltd Cash Flow Statement (extract) For the year ended 31 March 2004 Cash Flows from Investing ctivities Cash was provided from Sale of equipment 3,000 Cash was applied to Purchase of equipment -30,000 Net Cash Inflow/Outflow from Investing ctivities -27,000 Cash Flows from Financing ctivities Cash was provided from Loan raised 5,000 Share issue 10,000 15,000 Cash was applied to Repaid mortgage 6,000 Pay dividends 52,900 58,900 Net Cash Inflow/Outflow from Financing ctivities -43,900 Level 3 ccounting Cash Flow Statements Solutions page 2
YOUR TURN page 11 ealing with a Share Repurchase Equity 2003 2004 Paid in Capital 100,000 90,000 Retained Earnings 39,000 69,000 5,000 shares were repurchased at a fair value of $4.50. Net surplus after tax was $70,000. Reconstruct the retained earnings account to determine dividends paid: 01/04 Opening balance 39,000 Cr 31/03 Performance summary (NST) 70,000 109,000 Cr Bank (repurchase of shares) 12,500 96,500 Cr CSH for dividends 27,500 69,000 Cr In the Statement of Cash Flows: Cash Flows from Financing ctivities Cash was applied to Repurchase shares 22,500 Pay dividends 27,500 Note the repurchase of shares is just one amount for the total paid to shareholders to repurchase the shares. Level 3 ccounting Cash Flow Statements Solutions page 3
Exercise One Year One page 13-14 PRCTICE EXERCISES Tinies Toys 2001 Working Ledgers ccounts Receivable Balance 8,500 r Sales 92,500 101,000 r Cash 89,000 12,000 r Inventory Balance 9,800 r Cost of goods sold 50,000 40,200 Cr ccounts payable 50,600 10,400 r ccounts Payable Balance 5,000 Cr Inventory 50,600 55,600 Cr Cash 49,500 6,100 Cr ccrued Expense balance - Cr general expenses 14,500 14,500 Cr cash 13,000 1,500 Cr Equipment Balance 20,000 r Cost of sale 4,000 16,000 r Purchase 11,500 27,500 r Equity Balance 27,300 Cr Profit for the year 22,200 49,500 Cr rawings 17,500 32,000 Cr Loan raised Opening balance 8,000 Closing Balance 10,500 cash 2,500 Level 3 ccounting Cash Flow Statements Solutions page 4
Tinies Toys Statement of Financial Cash Flows for year ended 31 March 2001 Cash from Operating ctivities Cash from customers 89,000 Less cash paid to suppliers (49,500) Less cash paid for expenses (13,000) Less cash paid for interest (1000) Net cash from operating activities 25,500 Cash from Investing ctivities Sale of equipment 2000 Less purchase of equipment (11,500) Net cash from investing activities (9,500) Cash from Financing ctivities Loan raised 2,500 Cash drawings (17,500) Net cash from financing activities (15,000) Net cash inflow 1,000 dd Bank balance at beginning 6,000 Equals bank balance at end 7,000 Exercise One Year Two page 15-16 Tinies Toys 2002 Working Ledgers ccounts Receivable Balance 12,000 r Sales 132,000 144,000 r iscount llowed 500 143,500 r Cash 128,000 15,500 r Inventory Balance 10,400 r Cost of goods sold 80,000 69,600 Cr ccounts payable 81,600 12,000 r ccounts Payable Balance 6,100 Cr Inventory 81,600 87,700 Cr Cash 79,000 8,700 Cr ccrued Expense balance 1,500 Cr general expenses 14,500 16,000 Cr Transfer to Prepayments 13,500 2,500 Cr Level 3 ccounting Cash Flow Statements Solutions page 5
Prepayments balance 0 r expenses 13,500 13,500 Cr cash 15,500 2,000 r Equipment Balance 27,500 r Cost of sale 4,500 23,000 r Purchase 7,000 30,000 r Loan repaid bal beg 10,500 bal end 9,500 cash -1,000 Equity Balance 32,000 Cr Profit for the year 32,100 64,100 Cr rawings 28,600 35,500 Cr Tinies Toys Statement of cash flows for the year ended 31 March 2002 Cash from operating activities Cash from customers 128,000 Cash paid to suppliers -79,000 Cash paid for interest -900 Cash paid for expenses -15,500 Net cash from operations 32,600 Cash from investing activities Sale of equipment 2,000 Purchase of equipment -7,000 Net cash from investing -5,000 Cash from financing activities Loan repaid -1,000 rawings -28,600 Net cash from financing -29,600 Net cash inflow -2,000 dd bank balance beginning 7,000 Equals bank balance end 5,000 Level 3 ccounting Cash Flow Statements Solutions page 6
Exercise One Year Three page 17-18 Tinies Toys 2003 ccounts Receivable Balance 15,500 r Sales 175,000 190,500 r isc ll'd/baddebts 2,200 188,300 r Cash 170,500 17,800 r Inventory Balance 12,000 r Cost of goods sold 95,000 83,000 Cr ccounts payable 102,000 19,000 r ccounts Payable Balance 8,700 Cr Inventory 102,000 110,700 Cr iscount received 3,000 107,700 Cr Cash 98,500 9,200 Cr ccrued Expense balance 2,500 Cr general expenses 18,000 20,500 Cr to prepaid 18,500 2,000 Cr Prepayments balance 2,000 r expenses 18,500 16,500 Cr cash 19,700 3,200 r Equipment Balance 30,000 r Cost of sale 8,000 22,000 r Purchase cost 10,000 32,000 r Equipment purchase cash Loan repaid Cost of purchase 10,000 bal beg 9,500 less trade in 1,000 bal end 9,000 cash paid 9,000 cash (500) Equity Balance 35,500 Cr Profit for the year 56,400 91,900 Cr rawings 39,400 52,500 Cr Level 3 ccounting Cash Flow Statements Solutions page 7
Tinies Toys Statement of cash flows for the year ended 31 March 2003 Cash from operating expenses Cash from customers 170,500 Cash paid to suppliers (98,500) Cash paid for interest (700) Cash paid for expenses (19,700) Net cash from operations 51,600 Cash from investing activities Purchase of equipment (9,000) Net cash from investing (9,000) Cash from financing Loan repaid (500) rawings (39,400) Net cash from financing activities (39,900) Net cash inflow 2,700 dd bank balance beginning 5,000 Equals bank balance end 7,700 Exercise Two page 19 Evergreen Ltd Workings ccounts Receivable Balance 65,000 r Sales 825,000 890,000 r Bad debts 0 890,000 r Cash 790,000 100,000 r Inventory Balance 105,000 r Cost of goods sold 500,000 395,000 Cr ccounts payable 485,000 90,000 r ccounts Payable Balance 50,500 Cr Inventory 485,000 535,500 Cr Cash 477,000 58,500 Cr Taxation payable balance 2,000 Cr taxation expense 45,000 47,000 Cr cash 40,000 7,000 Cr Level 3 ccounting Cash Flow Statements Solutions page 8
Buildings Mortgage Opening Balance 200,000 beg bal 100,000 Balance end 325,000 end bal 125,000 Purchase 125,000 raised 25,000 Retained earnings Balance 135,000 Cr Profit for the year 97,500 232,500 Cr ividends 30,000 202,500 Cr Evergreen Ltd Statement of cash flows for the year ended 31 March 2004 Cash from operating activities Cash from customers 790,000 Cash paid to suppliers -477,000 Cash paid for interest -12,000 Cash paid for expenses -148,000 Cash paid for tax -40,000 Net cash from operating activities 113,000 Cash from investing activities Purchase buildings -125,000 Net cash from investing activities -125,000 Cash from financing activities Mortgage raised 25,000 ividends -30,000 Net cash from financing activities -5,000 Net cash inflow -17,000 dd bank balance beginning 60,000 Equals bank balance end 43,000 Level 3 ccounting Cash Flow Statements Solutions page 9
Exercise Three page 20 Spendit Ltd Workings ccounts Receivable $000 $000 $000 Balance 38 r Sales 450 488 r Bad debts 1 487 r Cash 446 41 r Inventory Balance 91 r Cost of goods sold 225 134 Cr ccounts payable 218 84 r ccounts Payable Balance 24 Cr Inventory 218 242 Cr iscount received 2 240 Cr Cash 208 32 Cr Taxation payable balance 4 Cr taxation expense 35 39 Cr cash 37 2 Cr ccrued Expenses (wages) Balance 6 Cr wage expense 36 42 Cr Cash 32 10 Cr Prepayments Balance 4 r General expenses 33 29 Cr cash 38 9 r Property, Plant and Equipment Balance 220 r Cost of trade in 20 200 r Purchase cost 55 255 r Cash for purchase Cost of purchase 55 Trade in allowance 4 (note $6,000 - $2,000) Cash for purchase 51 Retained earnings Balance 98 Cr Profit for the year 89 187 Cr ividends 49 138 Cr Level 3 ccounting Cash Flow Statements Solutions page 10
dditional workings Investments purchased $000 ebentures repaid $000 Opening Balance 0 Opening Balance 100 balance end 40 balance end 75 cash 40 cash -25 Issued capital Opening Balance 120 balance end 140 cash - share issue 20 Spendit Ltd Statement of cash flows for the year ended 31 March 2005 Cash from operating activities $000 $000 Cash from customers 446 Cash paid to suppliers -208 Cash paid for wages -32 Cash paid for interest -7 Cash paid for expenses -38 Cash paid for tax -37 Net cash from operating activities 124 Cash from investing activities Cash paid to purchase investments -40 Purchase plant and machinery -51 Net cash from investing activities -91 Cash from financing activities Shares issued 20 ebentures repaid -25 ividends -49 Net cash from financing -54 Net cash inflow -21 dd bank balance beginning 13 Equals bank balance end -8 Level 3 ccounting Cash Flow Statements Solutions page 11
Exercise Four page 21 karana Workings ccounts Receivable Balance 67,000 r Sales 810,000 877,000 r Bad debts 3,000 874,000 r Cash 804,000 70,000 r Inventory Balance 51,000 r Cost of goods sold 460,000 409,000 Cr ccounts payable 459,000 50,000 r ccounts Payable Balance 37,000 Cr Inventory 459,000 496,000 Cr Cash 463,500 32,500 Cr Taxation payable balance 9,500 Cr taxation expense 49,500 59,000 Cr cash 53,500 5,500 Cr ccrued Expense interest balance 3,000 Cr interest expense 17,000 20,000 Cr cash 14,000 6,000 Cr Prepayments balance 3,600 r general expenses 153,500 149,900 Cr cash 153,900 4,000 r Equipment Balance 330,000 r Cost of sale 80,000 250,000 r Purchase 100,000 350,000 r Retained earnings Balance 159,000 Cr Profit for the year 95,000 254,000 Cr ividends 60,000 194,000 Cr Cash received for equipment sold Buildings Purchased Carrying amount 6,000 bal beg 275,000 Loss on sale 1,000 bal end 380,000 Cash 5,000 purchase 105,000 Paid in Capital Mortgage raised Opening Balance 290,000 bal beg 100,000 balance end 340,000 bal end 200,000 cash - share issue 50,000 cash 100,000 Level 3 ccounting Cash Flow Statements Solutions page 12
karana Ltd Statement of cash flows for the year ended 31 March 2005 Cash from operating activities Cash from customers 804,000 Cash paid to suppliers - 463,500 Cash paid for interest - 14,000 Cash paid for expenses - 153,900 Cash paid for tax - 53,500 Net cash from operating activities 119,100 Cash from investing activities Cash from sale of plant 5,000 Purchase buildings - 105,000 Purchase equipment - 100,000 Net cash from investing activities - 200,000 Cash from financing activities Shares issued 50,000 Mortgage raised 100,000 ividends - 60,000 Net cash from financing activities 90,000 Net cash inflow 9,100 dd bank balance beginning 28,900 Equals bank balance end 38,000 Level 3 ccounting Cash Flow Statements Solutions page 13
Exercise Five page 22 lpha Ltd Working ledgers ccounts Receivable Balance 53,000 r Sales 540,000 593,000 r Bad debts 3,700 589,300 r Cash 519,300 70,000 r Inventory Balance 70,000 r Cost of goods sold 279,000 209,000 Cr ccounts payable 286,000 77,000 r ccounts Payable Balance 54,000 Cr Inventory 286,000 340,000 Cr iscount received 4,000 336,000 Cr Cash 267,000 69,000 Cr Taxation payable balance 4,000 Cr taxation expense 43,000 47,000 Cr cash 44,500 2,500 Cr ccrued Revenue (dividends) Opening Balance 3,000 r ividends received 6,000 9,000 r Cash 5,000 4,000 r ccrued Expense interest Opening Balance 3,000 Cr expense 18,600 21,600 Cr Cash 15,300 6,300 Cr Prepayment Opening Balance 2,000 r Expense 78,200 76,200 Cr Cash 79,200 3,000 r Plant and Machinery Balance 220,000 r Cost of sale 25,000 195,000 r Purchase 70,000 265,000 r Level 3 ccounting Cash Flow Statements Solutions page 14
Machinery sold Shares in KPR Ltd Carrying amount 19,000 bal beg 30,000 gain on sale 3,000 bal end 40,000 Cash 22,000 purchase 10,000 Buildings Opening Balance 200,000 balance end 340,000 purchase 140,000 Paid-in Capital ebentures raised Opening Balance 210,000 bal beg 100,000 balance end 250,000 bal end 210,000 issued shares 40,000 cash 110,000 Retained earnings Balance 95,000 Cr Profit for the year 102,500 197,500 Cr ividends 74,000 123,500 Cr lpha Ltd Statement of Cash Flows for the year ended 31 March 2005 Cash from operating activities Cash from customers 519,300 Cash from dividends received 5,000 Cash paid to suppliers - 267,000 Cash paid for interest - 15,300 Cash paid for expenses - 79,200 Cash paid for tax - 44,500 Net cash from operating activities 118,300 Cash from investing activities Cash from sale of machinery 22,000 Purchase machinery - 70,000 Purchase shares in KPR Ltd - 10,000 Purchase of buildings - 140,000 Net cash from investing activities - 198,000 Cash from financing activities ebentures raised 110,000 Shares issue 40,000 ividends - 74,000 Net cash from financing activities 76,000 Net cash inflow - 3,700 dd bank Opening Balance 1,000 Equals bank balance end - 2,700 Level 3 ccounting Cash Flow Statements Solutions page 15
Exercise Six page 23 Chandlers Ltd Working ledgers ccounts Receivable Balance 45,000 r Sales 600,000 645,000 r Bad debts 2,000 643,000 r Cash 612,000 31,000 r Inventory Balance 41,000 r Cost of goods sold 290,000 249,000 Cr ccounts payable 304,000 55,000 r ccounts Payable Balance 43,000 Cr Inventory 304,000 347,000 Cr iscount received 3,000 344,000 Cr Cash 295,000 49,000 Cr Taxation payable balance 8,000 Cr taxation expense 50,000 58,000 Cr cash 53,000 5,000 Cr ccrued Revenue (dividends) Opening Balance 4,000 r ividends received 10,000 14,000 r Cash 8,000 6,000 r ccrued Expense (interest) Opening Balance 3,000 Cr expense 4,000 7,000 Cr Cash 2,000 5,000 Cr Prepayment Opening Balance 4,000 r Expense 140,000 136,000 Cr Cash 138,000 2,000 r Property, Plant and Equipment Balance 105,000 r Cost of sale 25,000 80,000 r Purchase 100,000 180,000 r Level 3 ccounting Cash Flow Statements Solutions page 16
Property, Plant & Equipment sold Shares in FC Ltd Carrying amount 16,000 bal beg 50,000 Loss on sale -2,000 bal end 70,000 Cash 14,000 purchase 20,000 Paid-in Capital Loan raised Opening Balance 100,000 bal beg 47,000 balance end 124,000 bal end 60,000 issued shares 24,000 cash 13,000 Retained earnings Balance 28,000 Cr Profit for the year 106,000 134,000 Cr ividends 54,000 80,000 Cr Chandlers Ltd Statement of Cash Flows for the year ended 30 June 2007 Cash from operating activities Cash from customers 612,000 Cash from dividends received 8,000 Cash paid to suppliers -295,000 Cash paid for interest -2,000 Cash paid for expenses -138,000 Cash paid for tax -53,000 Net cash from operating activities 132,000 Cash from investing activities Cash from sale of property, plant & equipment 14,000 Purchase of property, plant & equipment -100,000 Purchase shares in FC Ltd -20,000 Net cash from investing activities -106,000 Cash from financing activities Loan raised 13,000 Shares issue 24,000 ividends -54,000 Net cash from financing activities -17,000 Net cash inflow 9,000 dd bank Opening Balance 5,000 Equals bank balance end $14,000 Level 3 ccounting Cash Flow Statements Solutions page 17
Exercise Seven page 24 Parke Ltd Ltd Working ledgers ccounts Receivable Balance 710,000 r Sales 2,600,000 3,310,000 r Bad debts 5,000 3,305,000 r Cash 2,455,000 850,000 r Inventory Balance 500,000 r Cost of goods sold 1,600,000 1,100,000 Cr ccounts payable 1,810,000 710,000 r ccounts Payable Balance 690,000 Cr Inventory 1,810,000 2,500,000 Cr Cash 1,710,000 790,000 Cr Taxation payable balance 10,000 Cr taxation expense 130,000 140,000 Cr cash 120,000 20,000 Cr ccrued Revenue (interest) Opening Balance 5,000 r Interest received 15,000 20,000 r Cash 10,000 10,000 r ccrued Expense Opening Balance 50,000 Cr expense 468,000 518,000 Cr Transfer to prepayments 508,000 10,000 Cr Prepayment Opening Balance 80,000 r Expense 508,000 428,000 Cr Cash 468,000 40,000 r Machinery Balance 1,000,000 r Cost of sale 25,000 975,000 r Purchase 325,000 1,300,000 r Level 3 ccounting Cash Flow Statements Solutions page 18
Machinery purchased Buildings purchased Cost of purchase 325,000 bal beg 150,00 0 Trade-in allowance 12,000 bal end 180,00 0 Cash paid for purchase 313,000 purchase 30,000 Paid-in Capital Mortgage repaid Opening Balance 1,120,000 bal beg 600,000 balance end 1,540,000 bal end 500,000 issued shares 420,000 cash 100,000 Retained earnings Balance 425,000 Cr Profit for the period 265,000 690,000 Cr ividends 100,000 590,000 Cr Parke Ltd 000 000 Statement of Cash Flows for the year ended 31 March 2006 Cash from operating activities Cash from customers 2,455 Cash from interest received 10 Cash paid to suppliers -1,710 Cash paid for interest -9 Cash paid for expenses -468 Cash paid for tax -120 Net cash from operating activities 158 Cash from investing activities Purchase of Machinery -313 Purchase of Buildings -30 Net cash from investing activities -343 Cash from financing activities Shares issue 420 Mortgage repaid -100 ividends -100 Net cash from financing activities 220 Net cash inflow 35 dd bank Opening Balance 440 Level 3 ccounting Cash Flow Statements Solutions page 19
Equals bank balance end $475 Exercise Eight page 25 Rawlings Ltd Workings ccounts Receivable $000 $000 $000 Balance 370 r Sales 3,000 3,370 r Bad debts 10 3,360 r iscount allowed 3 3,357 r Cash 3,017 340 r Inventory Balance 360 r Cost of goods sold 1,430-1,070 Cr ccounts payable 1,470 400 r ccounts Payable Balance 350 Cr Inventory 1,470 1,820 Cr Cash 1,410 410 Cr Taxation payable/receivable balance 4 Cr taxation expense 210 214 Cr cash 217 3 r ccrued Expense Opening Balance 14 Cr expense 600 614 Cr transfer to prepayment 596 18 Cr Prepayment Opening Balance 8 r Transfer from accrued 596 588 Cr Cash 593 5 r Machinery Balance 1,600 r Cost of sale 80 1,520 r Purchase 680 2,200 r Machinery sold Carrying amount 10 gain on sale 2 Cash 12 Retained earnings $000 $000 $000 Balance 500 Cr Profit for the period 465 965 Cr Repurchase of shares 10 955 Cr ividends 145 810 Cr Level 3 ccounting Cash Flow Statements Solutions page 20
Rawlings Ltd 000 000 Statement of Cash Flows for the year ended 31 March 2005 Cash from operating activities Cash from customers 3,017 Cash paid to suppliers -1,410 Cash paid for interest -34 Cash paid for expenses -593 Cash paid for tax -217 Net cash from operating activities 763 Cash from investing activities Cash from sale of machinery 12 Purchase machinery -680 Net cash from investing activities -668 Cash from financing activities ebentures raised 80 Shares repurchased -40 ividends -145 Net cash from financing activities -105 Net cash inflow -10 dd bank Opening Balance 60 Equals bank balance end 50 Level 3 ccounting Cash Flow Statements Solutions page 21
Exercise Nine page 26 Spiders Ltd (abbreviated workings) ccounts Receivable balance 370 sales 2800 3170 bad debts/discount allowed 9 3161 cash 2821 340 Inventory balance 360 cost of goods sold 1200-840 purchases 1240 400 ccounts Payable balance 350 purchases 1240 1590 cash 1180 410 Expenses performance 520 - prepaid beg -4 + prepaid end 7 + accrued beg 12 - accrued end -10 Cash for expenses 525 tax cash (210 +2 4) 208 Retained earnings balance 500 Profit for the period 640 1140 bank 20 1120 dividends 450 570 Plant and Equipment bal beg 1600 -traded in -100 bal end 2000 cost of purchase 500 less trade in allowance (40-11) -29 cash paid 471 Level 3 ccounting Cash Flow Statements Solutions page 22
Spiders Ltd 000 000 Statement of Cash Flows for the year ended 31 March 2005 Cash from operating activities Cash from customers 2,821 Cash from dividends received 7 Cash paid to suppliers -1,180 Cash paid for interest -25 Cash paid for expenses -525 Cash paid for tax -208 Net cash from operating activities 890 Cash from investing activities Purchase of machinery -471 Net cash from investing activities -471 Cash from financing activities ebentures raised 80 Shares repurchased -50 ividends -457 Net cash from financing activities -427 Net cash inflow -8 dd bank Opening Balance 60 Equals bank balance end 52 Level 3 ccounting Cash Flow Statements Solutions page 23
Exercise Ten page 27 Wastemot Ltd (abbreviated workings) ccounts Receivable 000 000 000 Balance 80 r Sales 720 800 r Bad debts 3 797 r Cash 712 85 r Inventory Balance 91 r Cost of goods sold 430 339 Cr ccounts payable 423 84 r ccounts Payable Balance 24 Cr Inventory 423 447 Cr Cash 417 30 Cr Expenses Other Expenses 25 -prepayments beg -9 +prepayments end 5 Cash paid for other exps 21 Wages 45 -accrued expenses end -5 +accrued expenses beg 6 Cash paid for Wages 46 Tax (70+4-7) 67 Share repurchase Change in paid in capital 20 Number of shares repurchased 10 Total value of share repurchase 24 Retained Earnings 4 Retained Earnings Balance 198 Net surplus after tax 124 322 Bank 4 318 ividends 80 238 Level 3 ccounting Cash Flow Statements Solutions page 24
Wastenot 000 000 Statement of Cash Flows for the year ended 31 March 2006 Cash from operating activities Cash from customers 712 Cash paid to suppliers -417 Cash paid for interest -7 Cash paid for wages -46 Cash paid for expenses -21 Cash paid for tax -67 Net cash from operating activities 154 Cash from investing activities Cash from sale of plant 6 Purchase of plant and machinery -35 Purchase of Land -40 Net cash from investing activities -69 Cash from financing activities ebentures raised 25 Shares repurchased -24 ividends -80 Net cash from financing activities -79 Net cash inflow 6 dd bank Opening Balance 3 Equals bank balance end $9 Level 3 ccounting Cash Flow Statements Solutions page 25
Exercise Eleven page 28 Pacific Products Working ledgers ccounts Receivable Balance 25,000 r Sales 540,000 565,000 r Bad debts 2,000 563,000 r Cash 542,000 21,000 r Inventory Balance 41,000 r Cost of goods sold 275,000 234,000 Cr ccounts payable 279,000 45,000 r ccounts Payable Balance 30,000 Cr Inventory 279,000 309,000 Cr Cash 259,000 50,000 Cr Taxation payable balance 8,000 Cr taxation expense 25,000 33,000 Cr cash 28,000 5,000 Cr ccrued Revenue (dividends) Opening Balance 4,000 r ividends received 10,000 14,000 r Cash 8,000 6,000 r ccrued Expense (wages and salaries) Opening Balance 10,000 Cr expense 59,000 69,000 Cr Cash 57,000 12,000 Cr Investments held for trading Opening Balance 50,000 r Cost of sale 15,000 35,000 r Purchase 25,000 60,000 r Machinery and Equipment Balance 105,000 r Cost of sale 25,000 80,000 r Purchase 70,000 150,000 r Level 3 ccounting Cash Flow Statements Solutions page 26
Machinery sold Paid in capital Carrying amount 16,000 bal beg 100,000 Loss on sale -2,000 bal end 90,000 Cash 14,000 Share repurchase 10,000 Retained earnings Balance 20,000 Cr Profit for the period 75,000 95,000 Cr Bank 15,000 80,000 Cr ividends 31,000 49,000 Cr Pacific Products Ltd Statement of Cash Flows for the year ended 30 June 2007 Cash from operating activities Cash from customers 542,000 Cash from dividends received 8,000 Cash paid to suppliers -259,000 Cash paid for interest -4,000 Cash paid for expenses -94,000 Cash paid for wages and salaries -57,000 Cash paid for tax -28,000 Net cash from operating activities 108,000 Cash from investing activities Cash from sale of machinery 14,000 Cash from sale of investments held for trading 20,000 Purchase of machinery -70,000 Purchase of investments held for trading -25,000 Net cash from investing activities -61,000 Cash from financing activities Loan raised 31,000 Repurchase of shares -25,000 ividends -31,000 Net cash from financing activities -42,000 Net cash inflow 5,000 dd bank Opening Balance 8,000 Equals bank balance end $13,000 Level 3 ccounting Cash Flow Statements Solutions page 27
Exercise Twelve page 29 Southgate Sports Ltd Working ledgers ccounts Receivable Balance 47,000 r Sales 900,000 947,000 r Bad debts 5,000 942,000 r Cash 885,000 57,000 r Inventory Balance 57,000 r Cost of goods sold 380,000 323,000 Cr ccounts payable 383,000 60,000 r ccounts Payable Balance 38,000 Cr Inventory 383,000 421,000 Cr Cash 379,000 42,000 Cr Taxation payable balance 9,000 Cr taxation expense 49,000 58,000 Cr cash 54,000 4,000 Cr ccrued Revenue (commission received) Opening Balance 4,000 r ividends received 72,000 76,000 r Cash 70,000 6,000 r ccrued Expense (wages and salaries) Opening Balance 18,000 Cr expense 133,000 151,000 Cr Cash 127,000 24,000 Cr Prepayment (general expenses) Opening Balance 14,000 r Expense 210,000 196,000 Cr Cash 205,000 9,000 r Equipment Balance 58,000 r Cost of sale 16,000 42,000 r Purchase 23,000 65,000 r Level 3 ccounting Cash Flow Statements Solutions page 28
Equipment sold Buildings purchased Carrying amount 13,000 bal beg 160,00 0 Loss on sale -8,000 bal end 200,00 0 Cash 5,000 purchase 40,000 Paid-in Capital Mortgage raised Opening Balance 170,000 bal beg 60,000 balance end 145,000 bal end 75,000 Shares repurchased 25,000 cash 15,000 Retained earnings Balance 55,000 Cr Profit for the period 160,000 215,000 Cr Bank 22,000 193,000 Cr ividends 86,000 107,000 Cr Southgate Sports Ltd Statement of Cash Flows for the year ended 31 March 2006 Cash from operating activities Cash from customers 885,000 Cash from commission received 70,000 Cash paid to suppliers -379,000 Cash paid for interest -7,000 Cash paid for expenses -205,000 Cash paid for wages and salaries -127,000 Cash paid for tax -54,000 Net cash from operating activities 183,000 Cash from investing activities Cash from sale of equipment 5,000 Purchase of equipment -23,000 Purchase of buildings -40,000 Net cash from investing activities -58,000 Cash from financing activities Mortgage raised 15,000 ividends -86,000 Share repurchase -47,000 Net cash from financing activities -118,000 Net cash inflow 7,000 dd bank Opening Balance 12,000 Equals bank balance end 19,000 Level 3 ccounting Cash Flow Statements Solutions page 29
Exercise Thirteen page 30 istinctive Furniture Working ledgers ccounts Receivable Balance 525,000 r Sales 9,750,000 10,275,000 r Bad debts 363,000 9,912,000 r Cash 9,312,000 600,000 r Inventory Balance 750,000 r Cost of goods sold 2,925,000 2,175,000 Cr ccounts payable 4,080,000 1,905,000 r ccounts Payable Balance 555,000 Cr Inventory 4,080,000 4,635,000 Cr Cash 3,900,000 735,000 Cr Taxation payable balance 18,000 Cr taxation expense 360,000 378,000 Cr cash 408,000 30,000 r ccrued Expense (interest) Opening Balance 57,000 Cr expense 216,000 273,000 Cr Cash 210,000 63,000 Cr Prepayment Opening Balance 15,000 r Expense 3,354,000 3,339,000 Cr Cash 3,369,000 30,000 r Equipment Balance 645,000 r Cost of sale 150,000 495,000 r Purchase 285,000 780,000 r Level 3 ccounting Cash Flow Statements Solutions page 30
Equipment sold Carrying amount 90,000 Loss on sale 42,000 Cash 48,000 Paid-in Capital Loan repaid Opening Balance 990,000 bal beg 876,000 balance end 1,290,000 bal end 600,000 Shares repurchased -60,000 cash 276,000 issued shares 360,000 Retained earnings Balance 564,000 Cr Profit for the year 939,000 1,503,000 Cr Bank 90,000 1,413,000 ividends 165,000 1,248,000 Cr istinctive Furniture Statement of Cash Flows for the year ended 31 March 2006 Cash from operating activities Cash from customers 9,312,000 Cash paid to suppliers -3,900,000 Cash paid for interest -210,000 Cash paid for expenses -1,386,000 Cash paid for wages and salaries -3,369,000 Cash paid for tax -408,000 Net cash from operating activities 39,000 Cash from investing activities Cash from sale of equipment 48,000 Purchase of equipment -285,000 Net cash from investing activities -237,000 Cash from financing activities Shares issue 360,000 Loan repaid -276,000 Share repurchase -150,000 ividends -165,000 Net cash from financing activities -231,000 Net cash inflow -429,000 dd bank Opening Balance -150,000 Equals bank balance end -579,000 Level 3 ccounting Cash Flow Statements Solutions page 31
Exercise Fourteen page 31 (for experts only) Beta Ltd ccounts Receivable $00 0 $00 0 $00 0 Balance 150 r Sales 1,680 1,830 r Bad debts 12 1,818 r Cash 1,604 214 r Inventory Balance 90 r Cost of goods sold 1,240 1,150 Cr ccounts payable 1,276 126 r ccounts Payable Balance 27 Cr Inventory 1,276 1,303 Cr Cash 1,269 34 Cr Taxation payable balance 7 Cr taxation expense 105 112 Cr cash 103 9 Cr ccrued Revenue (dividends) Opening Balance 4 r ividends received 10 14 r Cash 8 6 r Revenue in dvance (rent) Balance 6 Cr Rent received 60 54 r Cash 64 10 Cr Plant and Machinery Balance 324 r Cost of sale(disposal) 24 300 r Purchase 150 450 r ccumulated depreciation - plant and machinery Balance 36 Cr isposal 14 22 Cr epreciation expense 32 54 Cr isposal Plant and Machinery 24 24 r ccumulated depreciation 14 10 r Cash 7 3 r Loss on disposal 3 0 ccumulated depreciation - buildings Opening Balance 18 Cr epreciation expense 9 27 Cr llowance for doubtful debts Opening Balance 6 Cr oubtful debts 4 10 Cr Level 3 ccounting Cash Flow Statements Solutions page 32
Beta Ltd continued Overhead Expenses Performance summary 196 Less non-cash items Loss on disposal 3 epreciation expense 32 epreciation expense 9 Bad debts 12 oubtful debts 4 60 cash expenses 136 ccrued Expense Opening Balance 8 Cr cash expenses 136 144 Cr transfer to prepayment 128 16 Cr Prepayment Opening Balance 9 r transfer from accrued expense 128 119 Cr Cash 131 12 r Buildings Opening Balance 115 balance end 195 purchase 80 Paid-in Capital Mortgage raised Opening Balance 520 bal beg 72 balance end 590 bal end 100 issued shares 70 cash 28 Retained earnings Balance 109 Cr Net profit 220 329 Cr ividends 49 280 Cr Level 3 ccounting Cash Flow Statements Solutions page 33
Beta Ltd Statement of cash flows for the year ended 31 March 2005 Cash from operating activities $000 $000 Cash from customers 1,604 Cash from dividends received 8 Cash from rent received 64 Cash paid to suppliers -1,269 Cash paid for interest -9 Cash paid for expenses -131 Cash paid for tax -103 Net cash from operating activities 164 Cash from investing activities Cash from sale of machinery 7 Sale of land 45 Purchase machinery -150 Purchase of buildings -80 Net cash from investing activities -178 Cash from financing activities mortgage raised 28 Share issue 70 ividends -49 Net cash from financing activities 49 Net cash inflow 35 dd bank balance beginning -8 Equals bank balance end 27 Level 3 ccounting Cash Flow Statements Solutions page 34
NOTES, EXMPLES and EXERCISE NSWERS
Exercise One page 53 Read the resource information relating to Frater Building and Forestry Ltd. You are required to (a) Calculate for each year 1999 1998 gross profit percentage 34.57% 35.91% net profit percentage 2.22% 4.94% percentage of interest to sales 5.62% 3.73% return on total assets 2.61% 3.66% return on average equity 1.26% 3.11% (b) Comment on the profitability of the business and suggest reasons for the trends shown The fall in gross profit percentage indicates a fall in prices as a result of less demand from sian countries. Sales also fell substantially for the same reason. The lower sales and lower gross margin coupled with an increase in interest expense percentage, led to a much lower net profit and net profit percentage. Interest expense percent has increased with some increase in term debt (more interest) and lower sales. The falling net profit also led to decreasing returns on total assets and equity. Overall a bad year profit wise for Frater Building due to a huge loss in sales to their main export markets sian countries in a financial crisis and unable to purchase logs. (c) Calculate for each year (answer to nearest whole number) 1999 1998 inventory turnover 3 times p.a 4 times p.a accounts receivable turnover 41 days 38 days (d) Comment on the management of inventory and accounts receivable. Lower sales has meant slower inventory turnover many sian customers no longer buying. Since inventory levels have decreased the business is aware it has suffered a loss of sales turnover and not overstocked. ccounts receivable are taking slightly longer to pay, again may be many sian customers are slower paying or even more likely to become bad debts. (e) Calculate for each year (to two decimal places) 1999 1998 current ratio 1.91:1 2.02:1 liquid ratio 0.97:1 0.99:1 equity ratio 0.58:1 0.59:1 (f) Comment on the liquidity and financial structure of the business. Company should be able to meet current and immediate debts when due there is little change in liquid ratio, a slightly bigger fall in the current ratio from the decreased holdings of inventory. Equity ratio indicates owners have financed a good proportion of the business assets. Long-term financial stability is not in doubt. Most external finance is long term and costing the business more in interest. Level 3 ccounting nalysis and Interpretation Solutions page 37
NOTES, EXMPLES N EXERCISE NSWERS
Exercise One PRCTICE EXERCISES Short answer questions based on the notes and examples handout 1. Going concern is the underlying assumption that the business will continue to operate into the foreseeable future. t each balance sheet date management is required to assess whether or not the business is a going concern and provided there is nothing to suggest the business will be liquidated in the next year, the financial statements are prepared on the going concern assumption. 2. The accrual basis reports the effects of transactions and other events in the periods to which they relate. Both cash and credit transactions are reported in financial statements of the period to which they relate. The accrual basis is used to report assets, liabilities, expenses and income so that users are informed of both past transactions involving the payment and receipt of cash and of obligations to pay cash in the future and of resources that represent cash to be received in the future. Financial statements prepared on the accrual basis provide the type of information about past transactions and other events that is most useful to users in making economic decisions. 3. (a) Information needs to be relevant to the economic decision making needs of users. Information which is relevant helps users evaluate past, present or future events or is used to confirm or correct their past evaluations. Users need information to help them make economic decisions about the future so the information should be able to be used in this way. Information about past transactions and present asset holding in financial statements can help users to predict the ability of the entity to take advantage of opportunities as they arise. Information about past financial performance is often used to predict future financial performance. To be relevant, information also needs to be material that is able to influence the decisions users will make based on the information. Users do not want to have to wade through a whole range of immaterial information to find the key pieces they need to make economic decisions. While not related to financial statements themselves, for example the credit manager who wants to chase up slow payers does not need a list of all the debtors who regularly pay on time. Information also needs to be timely or it will lose its relevance information which takes too long to arrive, will be of no use to users who have had to make decisions in the mean time. (b) Information needs to be faithfully represented meaning it is (i) (ii) (iii) complete meaning all necessary details explaining the information is provided neutral meaning there is no bias in selecting or presenting the information free from error meaning there is no error or omission in the descriptions of the information so it can be used for decision making with confidence (c) The information in the general purpose financial statements needs to be readily understandable to users so that they are able to use it to make economic decisions. On the other hand, users can be expected to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. Complex information that is relevant to making economic decisions should not be left out on the grounds that it would be difficult for users to understand. (d) Information needs to be able to be compared from one period to the next within an entity and between entities to determine similarities and differences between the information and the same information in other reports. To allow comparability of information it needs to be prepared and treated consistently from one period to the next. 4. n items materiality is determined by its ability to influence the economic decisions of users. If the item is likely to influence users decisions based on the financial statements, either because of its nature and/or its size, the item should be disclosed separately either in the financial statements or in the notes to the financial statements. 5. Internally generated goodwill cannot be faithfully represented. Neutrality is an important component of faithful representation. The measure would not be neutral as it would not be free from bias the business may well want to place a higher value on this goodwill than it warrants. No market transaction occurs in Level 3 ccounting Conceptual Framework Solutions page 41
relation to internally generated goodwill so while not necessary, it is difficult to provided a fair value for the goodwill. 6. (a) Historical cost refers to the cost of acquisition or transaction cost of assets, expenses, liabilities and revenues it will faithfully represent a market transaction as there will be a source document that can be referred back to which is neutral when the market transaction has taken place between two independent parties. It will mostly also be relevant if it relates to expenses, income, assets and liabilities acquired in the current period. It only becomes out of date, and possibly not relevant if you do not regularly revalue assets like land and buildings, and ensure that the depreciated historical cost of other property, plant and equipment is a good reflection of their fair value. (b) ccountants should make general purpose financial statements understandable to shareholders, potential investors and others who may be interested in doing business with the entity, however simplification should not allow any material item of information to be omitted and accountants can assume users will have a basic knowledge of financial statements and a reasonable knowledge of business and economic activities. (c) llowing for doubtful debts meets the recognition criteria for assets which states that assets should be reported at their probable future economic benefit which can be reliably measured. The probable future economic benefit to flow to the entity in the form of cash from accounts receivable is the historical cost of accounts receivable less allowance for doubtful debts. This is called their estimated realisable value which is using the realisable value measurement base to report the accounts receivable asset. The allowance for doubtful debts has a reliable measure based on past experience of bad debts, the age of accounts receivable and the current economic climate. Exercise Two Short answer questions based on the New Zealand Framework paragraphs 9 21 1. The resource providers for whom general purpose financial statements are prepared are current and potential shareholders, investors, creditors and lenders of finance to the entity. 2. The objective of financial statements to provide information about the financial position, performance and changes in financial position of an entity that is useful to resource providers in making economic decisions. Financial statements assist resource providers in assessing the financial position, performance and cash flows of the entity. Financial statements also allow resource providers to make decisions regarding providing resources to or doing business with the entity. 3. ll users of financial statements require those financial statements to assist them in making economic decisions regarding the future. Relevant If the information is not relevant it will not assist in the making of the decision relevant information assists in evaluating the past, present or future and allows decision makers to confirm or correct their past evaluations. Material information needs to be included as information which can influence the decision must be given or a wrong decision could be made. Information needs to be timely or it will lose its relevance. Managers cannot make valid decisions to move the business forward, if the information they have is not relevant to the business, up-to-date, and able to assist with the decisions they are required to make. Faithfully represented If the information is not faithfully represented then the decisions made could be invalid. Faithfully represented information will be complete so users know they have been given all the explanations they need to make decisions based on the information; neutral so that it is not biased towards some specified outcome; and it will be free from error ensuring the information has been correctly described so decisions can be made. Understandable If the information is not understandable by users who have a reasonable knowledge of the business and economic activities they are not going to be able to use it at all as they will not know what it means. Level 3 ccounting Conceptual Framework Solutions page 42
Comparable ecisions makers including management, need to be able to compare the information from one year to the next for the same entity and with other entities so they need to know that the information has been prepared in a consistent way. Managers in particular need to identify trends in income and expenses to ensure that the business is continuing to remain profitable and the decisions they are making are allowing the business to grow. 4. ccountability is the requirement of one party to account to another party for its actions. Management is required to account to the shareholders as to how they have made the best use of the resources the company has. Financial statements show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Financial statements show whether sales/income/revenue is increasing, whether profit and return on assets/equity is improving, the ability of the business to generate positive cash flows, the stability of the business all of which reflect management ability to make to best use of the resources of the business. Those users who wish to assess the stewardship or accountability of management do so in order that they may make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the entity or whether to reappoint or replace the management. 5. (a) a statement of financial position provides information about the financial position of the business, including information about the assets, liabilities and equity of the business at balance sheet date. (b) a statement of comprehensive income statement provides information about the financial performance of the business, including its income, expenses and profit over the year/period ended on balance sheet date and items of other comprehensive income such as increases in revaluation surpluses of land and buildings so the assets are reported at fair value. (c) a cash flow statement provides information about the various cash flows including cash flow generated from operating activities, cash flow generated from investing activities and cash flow generated from financing activities. It shows where the business has spent its cash and from where it has received its cash. It provides users with information to determine the likely future ability of the business to continue paying dividends, to continue operating and paying its suppliers and employees and the ability to finance property, plant and equipment to allow the business to continue to grow. 6. Employees may be interested in the businesses future development, in what areas expansion is planned, how the business contributes to the community the employees belong to. This information is often included in the management commentary in the annual report and provides information for employees regarding the business and its relationship to the community it operates in. Employees may also be interested on how the business impacts on the environment particularly if those employees are keen to work for a company which takes care of the environment and its waste 7. Customers are interested in whether or not the entity is a going concern, especially for example if they have bought goods with a warranty or if they want to continue buying from the entity. Customers may also be interested in the entity s environmental and social responsibility goals and sponsorship programmes 8. They would be interested in the company s impact on the environment so would want to see environmental and/or sustainability reports and other information regarding how the business has acted as a responsible citizen in terms of managing scarce and/or endangered natural resources and contributed to preserving the Level 3 ccounting Conceptual Framework Solutions page 43
Exercise Three page 77 Short answer questions on components and limitations of financial statements 1. Bad and doubtful debts are classified as an administrative expense, because the manager responsible for allowing credit will be in the administrative department of the business the credit manager works in administration and makes decisions about who is allowed to have credit and it is administration that sends out accounts to debtors and chases them up and monitors slow payers, hence bad debts and doubtful debts stem from the administrative department/activities of the business so are classified as an administrative expense. 2. The use of property, plant and equipment is often shared between various functions in the income statement. For example the building may house the factory, administrative office and the retail space so the depreciation on buildings is split between all three functions the factory component goes to cost of sales, the retail space goes to distribution costs and the office space goes to administrative expenses. epreciation on manufacturing plant needs to be included in cost of sales as it is a production cost in a manufacturing business it will be included in the cost of sales as part of production costs which become cost of sales when the goods are sold. epreciation on shop fittings and fixtures on the other hand is included in distribution costs, while depreciation on office equipment is included in administrative expenses. 3. Explain why inventory of a jeweller is classified as a current asset even if it may take more than one year to sell some items. current asset is defined as an asset which will be realised within the normal operating cycle of the business for a jeweller the normal operating cycle the time taken to convert all its inventory into cash may be longer than one year. 4. The current portion of term debt is due for repayment/settlement within the next twelve months and a current liability includes all those amounts which will be settled in the next year. 5. Explain how the following question from a company manager to his accountant illustrates a limitation of the balance sheet: our latest range of products have been a huge success with large numbers of new customers, why can t we report this in our balance sheet? This is internally generated goodwill and there is no transaction which can be represented faithfully by this huge success so there is no reliable measure of the goodwill without a reliable measure the goodwill cannot be recognised as an asset in the balance sheet. 6. Explain a limitation of the income statement related to the latest range of products. The income statement only shows the dollar impact of the sales of the product, it does not show that they have been a huge success with many new customers, although if income has increased substantially the reason behind this will be the success of the new product. The explanation of the increase in sales is not shown in the income statement, but the result of the increase in sales is. If the product were being sold at a cheaper price than other products, thus attracting the many new customers, then the numbers in the income statement may not have increased as much the quantity may have increased without an equally proportional increase in sales. 7. The main limitation of the statement of cash flow is that it is a historical statement showing what has been received and what money has been spent on. It does not show the quality of that spending and it does not show future cash commitments the business may have. budget would be needed to see this information. Level 3 ccounting Conceptual Framework Solutions page 44