Full Answers

for
Level 2 Accounting Learning Workbook

Anne Dick
Full Answers for Level 2 Accounting Learning Workbook
Anne Dick

ESA Publications (NZ) Ltd

ISBN 978-0-947504-80-9

Level 2 Accounting Learning Workbook first published in 2008 by ESA Publications (NZ) Ltd
Full Answers first published separately in 2009 by ESA Publications (NZ) Ltd
This edition published in 2017 by ESA Publications (NZ) Ltd
Copyright © ESA Publications (NZ) Ltd
Copyright © Anne Dick

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LY12ACAN3-1
 ANSWERS

Activity 1A: Analysing transactions (page 3)

1. Bank A Inventory A Loan L
Insurance Ex Rent received I Accounts receivable A
Shop wages Ex Accounts payable L Advertising Ex
Mortgage L Purchases Ex Drawings Eq
Sales I Vehicles A Fees received I
Interest on mortgage Ex Interest on term deposit I Depreciation on vehicles Ex
GST payable L Furniture A Accrued expenses L
Bank overdraft L GST receivable A Accountancy fees Ex
Prepayments A Goodwill A Capital Eq

2. a. Accounts Furniture/ Accounts

Bank receivable Equipment Expenses payable Loan Capital Income
i. +3 000 +1 000 +4 000
ii. –276 +276
iii. –300 +300
iv. +4 600 +4 600
v. +368 +368
vi. –500 –500
vii. –184 +184
viii. +92 +92
ix. +138 +138
x. –600 +200 –400
xi. –480 –500 +20
xii. +90 +90

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2 Full Answers for Level 2 Accounting Learning Workbook

b. Account name Element Increase/ Decrease Debit/ Credit Amount $

i. Bank Asset Inc Dr 3 000

Furniture Asset Inc Dr 1 000
Capital Equity Inc Cr 4 000

ii. Furniture Asset Inc Dr 240

GST Liability Dec Dr 36
Bank Asset Dec Cr 276

iii. Wages Expense Inc Dr 300

Bank Asset Dec Cr 300

iv. Bank Asset Inc Dr 4 600

GST Liability Inc Cr 600
Fees received Income Inc Cr 4 000

v. Supplies Expense Inc Dr 320

GST Liability Dec Dr 48
Accounts payable Liability Inc Cr 368

vi. Drawings Equity Dec Dr 500

Bank Asset Dec Cr 500

vii. Electricity Expense Inc Dr 160

GST Liability Dec Dr 24
Bank Asset Dec Cr 184

viii. Telephone Expense Inc Dr 80

GST Liability Dec Dr 12
Accounts payable Liability Inc Cr 92

ix. Accounts receivable Asset Inc Dr 138

GST Liability Inc Cr 18
Fees received Income Inc Cr 120

x. Loan Liability Dec Dr 400

Interest on loan Expense Inc Dr 200
Bank Asset Dec Cr 600

xi. Accounts payable Liability Dec Dr 500

Discount received Income Inc Cr 20
Bank Asset Dec Cr 480

xii. Dividends Income Inc Cr 90

Bank Bank Inc Dr 90

3. Transaction Capital Revenue

Purchase new cash register
Paid for installation of cash register
Paid shop assistant’s wages
Painted wall to remove graffiti
Paid for new shelves to display the books
Paid for monthly advertising
Paid for new sign for the front of the store

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 Answers 3

Activity 1B: Preparation of financial statements (page 10) Petra’s Picture Framing
1. Petra’s Picture Framing Statement of Financial Position
Income Statement as at 30 June 2020
for the year ended 30 June 2020 Assets
Revenue Current assets
Fees received 136 800 Accounts receivable 2 900
Other income Bank 3 000
Discount received 620 GST 3 218
137 420 Supplies on hand 1 500
Less Expenses Prepayments 240 10 858
Framing expenses
Advertising 1 260 Non-current assets
Wages – framers 35 500 Intangible assets
Supplies used 50 000 Goodwill 4 000
Depreciation on framing equipment 9 000 Property, plant and
39 650 43 650
Rent – framing 17 500 113 260 equipment (Note 1)
Total assets 54 508
Administrative expenses Less Liabilities
General expenses 800 Current liabilities
Electricity 650 Accounts payable 1 938
Insurance 900 Accrued expenses 500
Rent – office 7 500 Income in advance 3 200 5 638
Stationery 3 000
Telephone and fax 1 070 Non-current liabilities
Depreciation on office furniture 1 950 15 870 Loan 5 000 5 000
Total liabilities (10 638)
Finance costs Net assets $ 43 870
Interest on loan 1 100 1 100 Equity
Opening capital 45 680
Total expenses (130 230) + Profit for the year 7 190
Profit for the year $7 190 – Drawings (9 000)
Closing capital $ 43 870

Note 1 – Property, plant and equipment

Framing Office
equipment furniture Total
Cost 65 000 13 000 78 000
Accumulated depreciation (32 800) (5 550) (38 350)
Carrying amount 32 200 7 450 39 650

Depreciation is calculated on the straight-line basis at the following rates:

• Framing equipment $9 000 p.a.
• Office furniture at 15% of cost p.a.

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4 Full Answers for Level 2 Accounting Learning Workbook

2. Cross Town Couriers Cross Town Couriers

Income Statement Statement of Financial Position
for the year ended 31 March 2021 as at 31 March 2021
Revenue Current assets
Fees received 164 000 Accounts receivable 6 200
Other income Bank 4 130
Gain on sale of furniture 600 Supplies on hand 500
Dividends 420 1 020 Accrued income 120
165 020 Prepayments 540 11 490
Less Expenses
Courier expenses Non-current assets
Advertising 1 500 Intangible assets
Supplies used 20 000 Goodwill 2 000
Insurance – vehicles 6 450 Property, plant and
74 350
Petrol and oil 45 360 equipment (Note 1)

Wages – courier drivers 45 000 Investment assets

Depreciation on vehicles 9 600 127 910 Shares in Drivers Ltd 15 000 91 350
Total assets 102 840

Administrative expenses Less Liabilities

Electricity 1 110 Current liabilities

Insurance – general 2 150 Accounts payable 1 984

Telephone and fax 1 050 Accrued expenses 1 100

General expenses 2 500 GST 816 3 900

Discount allowed 1 000

Depreciation on furniture and fittings 800 Non-current liabilities

Depreciation on buildings 1 750 10 360 Mortgage 25 000 25 000

Total liabilities (28 900)

Finance costs Net assets $73 940

Interest on overdue account 150

Interest on mortgage 1 100 1 250 Equity
Opening capital 60 440

Total expenses (139 520) + Profit for the year 25 500

Profit for the year $ 25 500 – Drawings (12 000)

Closing capital $ 73 940

Note 1 – Property, plant and equipment

Furniture
Vehicles and fittings Buildings Total
Cost 48 000 8 000 35 000 91 000
Accumulated
(11 400) (3 500) (1 750) (16 650)
depreciation
Carrying
36 600 4 500 33 250 74 350
amount

Depreciation is calculated on the straight-line basis at the following rates:

• Vehicles – 20% p.a.
• Furniture and fittings – $800 per year
• Buildings – 5% of cost per year

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 Answers 5

3. Blooming Nice Flowers 3. Current liabilities are those liabilities which Daisy’s Garden Store will have
Cash Flow Statement to repay in the next financial year (12 months). Non-current liabilities are
for the month ended 30 September 2023 those liabilities that will still be outstanding beyond the next accounting
period (it will take longer than the next accounting year to repay them).
Receipts
4. a. To calculate the profit (deficit) of Daisy’s Garden Store for the
Interest received 150
accounting period – Daisy can then compare this figure with that of
Cash sales 12 000 last year to see if the profit improved or not.
Cash from debtors 1 850 14 000 b. The depreciation / doubtful debts is an estimate, and therefore the
profit for the period may not be accurate; or the Income Statement
does not include non-financial information (e.g. quality of staff,
Payments customer base).
Cash to suppliers 4 300 5. a. To calculate the assets, liabilities, and equity of Daisy’s Garden Store
Electricity 360 on the balance date.
b. The accumulated depreciation / allowance for doubtful debts is an
Wages 1 800
estimate, and therefore the carrying amounts of the assets may not
Drawings 3 000 be accurate; or the age of the assets is not included, therefore the
Van insurance 180 (9 640) decision being made may not be accurate; or the values of the assets
are based on historical cost, which might be out of date and not
reflect the current market value of the assets.
Net increase in cash 4 360
6. a. To report the sources of money received, and what money was spent
Opening bank balance 2 700 on during the period; the Cash Flow Statement also shows how the
Closing bank balance 7 060 change in bank balance occurred during the period, and what the
balance is on balance date.
Activity 2A: Accounting information (page 19) b. The Cash Flow Statement does not show credit transactions (e.g.
1. To communicate financial information to interested parties in order to credit purchases) or include non-cash items (e.g. depreciation); or the
help with decision making. Cash Flow Statement is based on past cash receipts and payments
and does not show current cash obligations.
2. a. Examples include: value of existing liabilities; liquid ratio; equity ratio;
current value of inventory; value of security; expected profit of café. 7. Café wages are a ‘distribution cost’ because they are paid to staff who
are involved in the promotion and selling of the inventory of Daisy’s
b. Examples include: existing customer base; existing café competition in
Garden Store/Café, whereas office salaries are an administrative cost
the area; length of time Daisy will have to close the garden store to
because they are paid to the employees who work in the office and
build the café; how long it will take to build the café.
perform the administrative tasks of the business.
c. ‘Security’ refers to the assets the business has, in relation to existing
8. The purpose of the Statement of Accounting Policies is to inform the
liabilities. This information is required in case the bank needs to
users of the financial statements how the statements have been prepared
secure the loan so that it will have the right to sell Daisy’s assets if
and what measurement basis and assumptions have been used. The
she doesn’t repay her loan on time.
bank manager will use this information to (for example) know that the
3. a. Non-financial information – the names and phone numbers of
assets are based on historical cost, not market value, and the Cash Flow
existing suppliers have nothing to do with money.
Statement will help the bank manager to decide whether to lend more
b. This information will enable Coffee Beans Co. to find out whether money to Patrick’s Plumbing.
or not Daisy’s Garden Store has a good credit history and repays its
debts on time. This will help it decide whether or not to give Daisy Activity 2C: Depreciation (page 25)
credit and what her credit limit will be. 1. The systematic allocation of the depreciable amount of the asset over its
c. Examples include: value of existing liabilities; how much profit the useful life.
business made last year; current ratio. 2. The diminishing-value method is used when the loss of the ‘future
economic benefit’ / economic benefit of the equipment is greater in the
Activity 2B: Financial statements (page 22) earlier years of its life and reduces as it ages; that is, the depreciation
1. Transaction Capital Revenue amount is biggest in the early years and gets progressively smaller.
Purchased new oven 3. The straight-line method is used when the loss of future economic benefit
of the furniture is consistent (the same) each year over the life of the
Paid for installation of oven furniture; that is, the depreciation amount is the same each year.
Paid café assistants’ wages 4. The units-of-use method is used when the loss of future economic benefit
Paid for advertising of the new café of the vehicles varies in direct proportion to how often the vehicles are
used. The more they are used, the more they depreciate, which reflects
Paid for the ingredients and food for the café the greater loss in economic benefit of the vehicles in the future.
2. a. The purchase of the fridge is a ‘one-off’ type expenditure, and the
Activity 3A: Accounting notions and assumptions
fridge is expected to be of benefit to the café for more than the
(page 27)
current accounting period, because Daisy’s Garden Store will use
1. The period reporting concept requires a business, such as Ruth’s Records
the fridge for several years to store drinks which will be sold to
and Relics, to divide its trading ‘life’ into equal periods. This means that
customers.
the profit for the year for Ruth’s Records and Relics can be calculated and
b. Insurance is an ongoing expense that the café will need to pay every
compared with that of previous years. This information will indicate, for
year, which does not create an asset. The benefit of the insurance
example, whether the business’s performance has improved.
premium is for the current year only.
2. The period reporting concept requires a business, such as Ruth’s Records
and Relics, to divide its trading ‘life’ into equal periods. By reporting the

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6 Full Answers for Level 2 Accounting Learning Workbook

business’s Statement of Financial Position on the same day each year, c. The most reliable valuation for the van is $18 000 because this is free
Ruth can compare the financial position of Ruth’s Records and Relics with from bias, and faithfully represents the transaction that took place
its position the previous year, and see whether the value of the equity, when the van was purchased. The evidence for this value is provided
assets or liabilities has increased or decreased. by the invoice (or receipt) issued when the van was purchased.
3. Ruth will need to record the business insurance $840 as a business
expense that will be reported in the Income Statement of Ruth’s Records Activity 3C: Elements of financial statements (page 33)
and Relics. The personal insurance needs to be recorded as ‘drawings’ 1. a. Ruth’s Records and Relics controls the use of the inventory and has
$600, and will appear in the equity section of the Statement of Financial exclusive rights to sell inventory and benefit from the proceeds.
Position. This is because the accounting entity concept requires Ruth b. Ruth’s Records and Relics purchased and paid for the inventory at
to keep her personal financial transactions separate from those of the some time in the past.
business. Doing this ensures that the Income Statement reports expenses c. Ruth’s Records and Relics will sell the inventory to customers at a
of only Ruth’s Records and Relics, and not the owner’s personal expenses. higher price than it paid for inventory, which generates revenue in
4. The monetary measurement concept requires Ruth to record the the form of sales.
inventory NZ$4 400 in New Zealand dollars, because this is the currency d. It is probable (that is, there is a greater than 50% chance) that the
of Ruth’s Records and Relics. inventory will generate sales and that cash will flow to Ruth’s Records
5. Either: In terms of the going concern concept, because Ruth has no and Relics when the customers pay for the inventory they buy.
intention of selling Ruth’s Records and Relics in the foreseeable future, the e. Ruth’s Records and Relics can measure the value of the inventory,
equipment should be recorded at its historical cost (that is, its original because Ruth will have an invoice or receipt as proof that the amount
purchase price) of $5 600. paid for the inventory was $12 000.
Or: In terms of the historical cost concept, all assets are required to be 2. a. The mortgage will require a future sacrifice of economic benefits in
recorded at their original acquisition cost, which means the equipment the form of decreasing the asset Bank, when the mortgage is repaid
must be recorded at $5 600. in the future.
6. The accrual basis concept requires transactions to be reported in the b. Ruth’s Records and Relics received the money from the mortgage in
financial statements of the period to which they relate. The money the past.
received for the orders has not yet been earned, so the amount of c. Ruth’s Records and Relics is currently obliged to repay the financial
‘sales’ must be reduced by $420 to report the amount actually earned institution because it has a legal obligation to do so in terms of the
in this period in the Income Statement. The amount received in advance mortgage agreement.
is recorded as the current liability ‘income in advance’ $420 in the d. It is probable (that is, there is a greater than 50% chance) that
Statement of Financial Position in order to report liabilities accurately on there will be an outflow of resources embodying economic benefits
balance date. because Ruth’s Records and Relics must use money in its bank account
to pay off the mortgage in the future.
Activity 3B: Qualitative characteristics of
e. The amount of the mortgage can be measured with reliability
Accounting (page 30)
because the mortgage document and bank statements will verify
1. The information may not be in a form that can be easily understood,
(prove) the amount that must be paid (currently this is $60 000).
therefore is not useful for decision making.
3. a. Sales are an increase in economic benefits for Ruth’s Records and
2. The concept of faithful representation has been met since the
Relics by increasing the asset, Bank, if they are cash sales; or
information is free from bias – the shoebox of receipts provides
increasing Accounts receivable, if the sales are made on credit.
independent verification (evidence/proof) that transactions took place
(i.e. the information is neutral) and that the information in the financial b. Sales increase the profit of Ruth’s Records and Relics for the period,
statements faithfully represents the events and transactions of this which increases equity.
financial year. c. Sales are not a contribution made by Ruth.
3. The concept of faithful representation might have been broken because d. The sales have taken place, either the asset, Bank, or the business’s
your friend has provided you with the information and the friend is Accounts receivable has increased in this period.
not independent and therefore not free from bias. Your friend might e. The value of the sales can be measured reliably because the amount
have deliberately left out information showing negative aspects of the can be verified by receipts or invoices, this year totalling $133 000.
business’s performance. 4. a. Electricity decreases economic benefits of Ruth’s Records and Relics
4. The concept of relevance requires information to be useful for decision by decreasing the asset, Bank, when the electricity account is paid
making. As the information is six months old, it is now out of date and (or by increasing the Accounts payable liability when the account is
will not be good for providing information to evaluate present or future received).
events. b. Electricity decreases the profit for the year, which in turn decreases
5. For comparability, it is important to have financial information from the equity.
previous financial year in order to identify trends and judge similarities c. The electricity is for Ruth’s Records and Relics and is not a distribution
in and differences between the business’s position then and now. The to the owner (that is, it is not drawings).
business should have provided financial statements with at least two d. The electricity has been used by Ruth’s Records and Relics in this
years’ information. accounting period and this has resulted in a decrease of the asset,
6. The concept of materiality allows the desk to be recorded as an expense Bank, when the electricity is paid for (or an increase in the Accounts
because the value of the desk, $120, is small and the desk is not payable liability when the account is received).
important in nature; therefore, how the desk is treated (recorded) will not e. The amount of the electricity can be proven because Ruth’s Records
influence the decisions being made by users of the accounting records. and Relics will have copies of the electricity statements totalling
7. a. The van should be recorded at $18 000 because this is the original $8 000.
acquisition cost of the vehicle. 5. a. The vehicle is an asset for Stacey’s Spik ’n Span because Stacey’s Spik
b. For the information to be most useful for decision making, the most ’n Span controls the use of the vehicle; has exclusive rights to use
up-to-date value ($3 000) should be recorded. This gives the most it, and decides how it is used. This is because Stacey’s Spik ’n Span
relevant information when evaluating present or future events. purchased and paid for the vehicle at some time in the past. Stacey’s

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 Answers 7

Spik ’n Span will use the vehicle to help provide cleaning services that ‘Prepayments’. This is because the insurance that hasn’t been used
customers will pay for, which generates revenue in the form of fees. belongs in the records of the next financial year, represented by this
It is probable (that is, there is a greater than 50% chance) that the asset. This is to ensure that transactions are recognised when they
vehicle be used to generate fees and that cash will flow to Stacey’s occur, and that assets and liabilities are reported in the financial
Spik ’n Span when the customers pay for the cleaning services. statements of the period to which they relate.
Stacey’s Spik ’n Span can measure the value of the vehicle because the c. Period reporting requires the life of the business to be broken up into
owner, Stacey, will have an invoice or receipt as proof of the amount periods of equal length for reporting purposes. The Income Statement
that was paid to purchase the vehicle. for PhotoCentre illustrates this idea as it shows the life of the business
b. The loan is a liability because it will require a future sacrifice of is broken up into one-year lengths, ending on 31 March each year.
economic benefits in the form of decreasing the asset, Bank, when This makes it possible for users of PhotoCentre’s Income Statement
the loan is repaid. Stacey’s Spik ’n Span received the loan in the past, to calculate its profit for the year and compare it with that of the
and it is currently obliged to repay the financial institution because previous year. This helps users make financial decisions.
the loan agreement states it must. It is probable (that is, there is a d. i. Units-of-use method.
greater than 50% chance) that there will be an outflow of resources ii. ‘Units of use’ depreciates the developing equipment in direct
embodying economic benefits, because Stacey’s Spik ’n Span must proportion to how much the equipment is used. The more photos
use money in its bank account to pay off the loan in the future. The that are developed, the greater the depreciation expense will
amount of the loan can be measured with reliability because the loan be. This is in line with the loss of future economic benefit (which
document and bank statements will verify (prove) the amount to be is in direct relation to how many photos are developed) and is
paid. therefore the best method to use.
c. Fees received increase economic benefits for Stacey’s Spik ’n Span iii. Depreciation on photo developing equipment is recorded as
by increasing the asset, Bank, if cash is paid for the cleaning jobs; an expense in PhotoCentre’s financial statements because the
or by increasing Accounts receivable, if the cleaning services are depreciation is a decrease in the property, plant and equipment
performed on credit. Fees received increase the profit of Stacey’s Spik assets of the business. The depreciation also decreases the
’n Span for the period, which increases equity. Fees received are not business’s profit, which in turn decreases equity. The depreciation
a contribution from the owner, Stacey. The fees have in fact been is not a distribution to the owner, Mark.
received, so the asset, Bank, or Accounts receivable of Stacey’s Spik
e. Faithful representation requires information to be free from bias, and
’n Span has increased in this period. The value of the fees can be
correct and neutral; therefore, using faithful representation would
measured reliably because the amount can be verified by receipts or
record the photo frames at a value of $2 000. This figure is reliable,
invoices.
as there is a source document (for example, a receipt) to prove it.
d. Supplies are an expense because they decrease the economic benefits Relevance requires information to help users evaluate and confirm
in the form of decreasing the asset, Bank, when the supplies are paid past events and make predictions about the future. The most relevant
for (or increasing the Accounts payable liability when the account value for decision making is the current value / net realisable value
is received) of Stacey’s Spik ’n Span. Buying supplies decreases the of $500, therefore a conflict arises. In this case it is more important
profit for the year, which in turn decreases equity. The supplies are to record the value of the photo frames at the lower of cost or net
for Stacey’s Spik ’n Span and are not a distribution to the owner realisable value, which is $500.
(that is, are not drawings). The supplies have been used by Stacey’s
f. The purchase of the new display cabinet is recorded as capital
Spik ’n Span in this accounting period to help generate the cleaning
expenditure in PhotoCentre’s accounting records because the
revenue. Purchasing supplies has decreased the asset, Bank, when
purchase is a one-off type purchase which will benefit (that is,
the supplies were paid for (or increased the Accounts payable liability
generate income for) the entity for more than one financial year
when the account was received). The amount of the supplies used
because PhotoCentre will use the cabinet to display cameras which
this year can be proven because Stacey’s Spik ’n Span will have copies
customers will buy for more than one accounting period.
of the receipts and invoices.
g. i. Accounts payable are a liability of PhotoCentre because they
6. The equipment is an asset for Stacey’s Spik ‘n Span because the business
represent a current obligation to repay the suppliers from
purchased it in the past, online from Australia. Stacey’s Spik ‘n Span
whom they purchased the cameras on credit in the past. There
has exclusive rights to use and control the cleaning equipment to clean
will be a future sacrifice of economic benefits in the form of
houses for customers who will pay for the service, generating future
decreasing the asset, ‘Bank’, when the Accounts payable are
economic benefit which increases the bank account and fees received.
repaid in the future.
It is probable, as a greater than 50% likelihood, that Stacey’s Spik ‘n
ii. The Accounts payable are reported in the Statement of Financial
Span will use the equipment to clean customers’ houses, or the business
Position because they meet the two recognition criteria. It is
would not have purchased the equipment. The value of $NZ4 400
probable that an outflow of resources embodying economic
can be measured reliably, because the credit card statement will show
benefits will result from the present obligation, because there is
this cost, and it is converted from Australian dollars into New Zealand
a contract between the two parties that PhotoCentre will want
dollars in accordance with the monetary measurement because Stacey’s
to meet, therefore having to ‘pay’ the Accounts payable in the
Spik ‘n Span is based in New Zealand and NZ$ is the common unit. The
future. The amount of the settlement can be measured with
cleaning equipment will be reported as a non-current, property plant and
reliability because there will be invoices / a contract as evidence
equipment asset because Stacey’s Spik ‘n Span intends to operate into the
of how much money is outstanding.
foreseeable future in accordance with the going concern concept.
2. Part A
Activity 4: (page 37) a. Karen will want to see the Income Statement to find out what the
1. a. The current and non-current liabilities as reported in the Statement profit (or income/expenses) was for the period, to help her judge
of Financial Position show the bank’s lending officer the value of whether or not it is a good business to buy.
PhotoCentre’s existing liabilities – both in the short term and in the b. i. Non-financial information – because the information has nothing
long term. If the existing liabilities are too high, the bank might not to do with money.
lend the money as PhotoCentre is not a good risk. ii. This will give her an idea of the customer base that already buys
b. The insurance paid in advance will be reported as the current asset, from the business, and help her assess whether or not there is

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8 Full Answers for Level 2 Accounting Learning Workbook

room to expand or a sufficient number of customers to cover probable that the shelves will generate this income because they are
regular expenses. already being used to display clothes, and the cost of the shelving
Part B $18 000 can be measured reliably because the historical cost of
a. i. The roasting equipment should be recorded in New Zealand the shelves can be evidenced by the invoices provided when the
dollars, at a value of $5 000. shelving was purchased. The shelving is classified as a non-current
asset because Corporate Clothing will continue to operate into the
ii. The roasting equipment will be reported in the Statement of
foreseeable future according to Going Concern.
Financial Position at the original acquisition cost to NZone Coffee
Supplies, which is $5 000. b. Depreciation is the systematic allocation of the depreciable amount
of an asset over its useful life; the shelving at $18 000 will be
b. The $6 000 for Accounts receivable after allowing for doubtful debts
depreciated at 8% every year. This straight-line method means the
is relevant because it is the amount that provides the best predictive
depreciation is the same amount every year, $1 440. This method
value of the amount of money that the business expects to receive
is the best method for shelving because the loss in future economic
from its debtors.
benefit from using the shelves is constant from year to year. The
c. The microwave can be written off as an expense (revenue
depreciation on the shelving is an expense for Corporate Clothing
expenditure) because the item itself (by its nature), and the amount
because it decreases the asset shelving (shop fittings) every year
of $200 (by its size) are not significant enough to influence the
through increasing the accumulated depreciation every year by
decisions being made by the users, and therefore do not need to be
$1 440. The shelving depreciation decreases the profit, which
disclosed separately / capitalised.
decreases the equity of Corporate Clothing this year. The depreciation
d. i. Depreciation is the systematic allocation of the depreciable is not a distribution to Caitlin the owner, and therefore is an expense
amount of the asset over its estimated useful life. for Corporate Clothing.
ii. The roasting equipment loses most of its ‘future economic Part C
benefit’ in the early years of its life, therefore it is most
a. The payment of the electricity is reported in two ways. According to
appropriate to depreciate it using the diminishing-value method,
the accounting entity concept, Caitlin must keep personal finances
because this method depreciates assets most in their early years.
separate from those of the business. For this reason the $120 for
3. Part A home electricity is reported in the Statement of Financial Position as
a. Corporate Clothing prepares an Income Statement to measure drawings because this is a personal expense. The $280 is reported
the income, expenses and profit for the year. Due to the life of as an expense in the Income Statement, thereby decreasing the profit
Corporate Clothing being broken into time periods of equal length, for this year because it is an expense of Corporate Clothing.
each year ending on 31 March, Caitlin and other users can use the b. One possible consequence of having all credit sales pay by the 10th
Income Statement to make decisions. Since the Income Statement’s of each month and making all payments on the 20th is that Corporate
information is for the year ended 31 March 2018, 2019, and 2020, Clothing might be missing out on discounts, especially as electricity
Caitlin can compare the results. The qualitative characteristic of has a discount if paid within 10 days, therefore Corporate Clothing
comparability ensures that statements are prepared in a consistent might be paying more than it needs to. A second consequence
manner so that trend, similarities and differences can be established. could be that it is likely that some debtors will not pay by the 10th,
As Corporate Clothing expanded in the recent year Caitlin can see especially if they have the 20th for their own payments, in the same
that the decision to sell sports uniforms was successful because there way as Corporate Clothing. This might mean that Corporate Clothing
was an increase in $50 000 sales from 2019, and $5 000 increase does not have enough money to meet its own payments, and
in profit. A non-financial reason for the increase in sales could be thereby misses out on discounts or is not allowed credit because of a
the large increase in advertising that was promoting the business poor payment history.
in addition to the new uniforms and the increased customer base
c. The accrual basis concept states that transactions must be recognised
generated from the increased product range.
when they occur, and reported in the financial statements of the
b. The recent inventory purchase is reported in NZ$ in accordance with period to which the transaction relates, regardless of whether or not
the monetary measurement concept. The price of the inventory is cash has changed hands. The wages for the 11 days worked this
converted from Indian rupees and reported as NZ$12 000 in the year must be reported in this year’s Income Statement because the
records statements of Corporate Clothing. The inventory is reported in workers did the work this period and the amount therefore belongs
the Statement of Financial Position as at 31 March 2020 at $18 100 to this year. Corporate Clothing must increase the wages in the trial
in accordance with the accounting policy for inventory, because the balance by $1 650 to be reported in this year’s Income Statement.
revaluation of the obsolete inventory reduces the inventory on hand, In the Statement of Financial Position, the current liability ‘accrued
being the lower of cost or market value. This will therefore increase expenses’ is created, totalling $1 650, because the employees will be
the cost of goods sold in the Income Statement by $3 000, thereby paid in the next financial year, specifically 20 April, therefore that is a
reducing the profit this year. current liability.
Part B 4. Part A
a. The shelving is a non-current asset for Corporate Clothing because a. The Statement of Financial Position reports Eat Pasifika’s assets,
the business will use the shelving beyond the current accounting liabilities and equity at a point in time, in this case 31 March 2020. This
period, and as the business will continue operating into the is important to the bank manager, because the manager can see that
foreseeable future, this is the correct classification. It also meets the equity is greater than the debt and therefore this is encouraging
capital expenditure by generating future economic benefit for more for an increase in the loan. The manager can also see the security of
than the current accounting period. The shelving is an asset because $1 240 000 in property, plant and equipment assets and the existing
it was purchased by Corporate Clothing in the past for $18 000 and mortgage of $600 000. The bank manager should give Iosefa the
Corporate Clothing controls the shelving because only this business $40 000 loan because the capital will still be greater than liabilities
will benefit from the use of the shelves, which are locked inside its ($646 500 compared with $643 500) / the business is very successful
building. The shelving will be used to generate future economic because Iosefa has increased his capital by more than six times the
benefit for Corporate Clothing by displaying clothes so that customers original amount in 10 years.
can see the uniforms easily, which increases sales and bank. It is
(You could give a ‘no’ answer but would need evidence.)

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 Answers 9

In addition to this financial information, the bank manager will also b. The concept of materiality states that information that will influence
want to know the income and expenses from the past two years the decisions of users should be disclosed, and this depends on
to establish the likelihood of covering the increase in the loan. One the size and the nature of the item. In this case, Iosefa deems ‘food
piece of non-financial information would be the expected customer sales’ and ‘bar sales’ as being important to disclose separately (e.g.
base in Christchurch / competition in Christchurch to establish in 2020, $190 000 in food sales, and $180 000 in bar sales). This
whether the loan can be serviced. It is important for the bank helps him make decisions regarding the success of each section. For
manager that the information is timely and up-to-date. The most example, bar sales have increased more than food sales – in fact
recent Statement of Financial Position meets this requirement and food sales decreased this year though total sales increased. If the
therefore helps increase the accuracy of the manager’s decision information were not separate he would not know this. (Another
making. decision example is possible.) The ‘other income’ can be lumped
b. The loan is a liability for Eat Pasifika because it received the $40 000 together because the nature of dividends and tips is not important
loan to expand. Eat Pasifika is presently obliged to repay the and the amount of $1 000 is small in relation to the total income of
loan over the next five years as stated in the loan agreement. Eat $371 000 in 2020.
Pasifika must sacrifice the asset bank in the future to meet the loan 5. Part A
repayments as required. It is probable that the loan will be repaid, a. Dave will report the business electricity as an expense of $65 000
as Eat Pasifika will not want to pay default fees and will want to in the Income Statement in accordance with the definition of an
retain a good credit history; and the amount of $40 000 is measured expense. The cost of business electricity would have decreased
reliably as it is the amount stated on the loan agreement, and will be Toptronics’ assets when the electricity was paid for because the bank
decreased as principal payments are made. Because it is clear that account would have decreased by $65 000. The cost of business
Eat Pasifika will continue to operate into the foreseeable future, the electricity decreased equity by decreasing profit for the year, and was
loan due in 5 years / 2025 is a non-current liability. In accordance not a distribution to Dave the owner. The cost of personal electricity
with Historical Cost, the loan of $40 000 is the original amount cannot be a business expense as it was a payment for Dave’s
borrowed and does not include the interest owed. personal use, and must therefore be recorded in the Statement of
Part B Financial Position as drawings of $3 000. This is in accordance with
a. The shop signage is capital expenditure because it is a one-off type the Accounting Entity concept that states that the financial affairs
payment that will benefit Eat Pasifika beyond the current accounting of Dave the owner must be separate from those of the business
period. That is why it is recorded as ‘Fittings $12 000’ in the Toptronics.
Statement of Financial Position. The monthly advertising is revenue b. The shop shelves are an asset for Toptronics because they were
expenditure because it is a regular payment of $529 including purchased by Toptronics in the past. Toptronics has present control
GST ($460 for the advertising) and it will benefit Eat Pasifika this over how the shop shelves are used by keeping them locked in its
year and be an expense in this year’s Income Statement. Faithful building and deciding how they are used; and the shop shelves will
representation requires information to be free from error, neutral and generate future economic benefit by attracting more customers into
complete. By reporting the signage as fittings and the advertising as the shop by displaying the tablets and televisions so that customers
an expense, the asset and expenses will be complete and free from can see them easily, which will increase sales and the bank account.
bias because the amounts are recorded on the suppliers’ independent The value of the shop shelves can be measured with reliability in
invoices. Materiality requires that information that will influence the Statement of Financial Position because Toptronics will have an
decisions be disclosed separately. The signage at $12 000 is of invoice to give evidence of the value. It is also probable that the
significant value and therefore must be disclosed as an asset; writing shelves will generate income as there is more than a 50% likelihood
it off as an expense would mislead users concerning the value of that customers will buy the electronics displayed on the shelves. The
profit. shelves are a non-current asset as they will generate future economic
b. The accrual basis states that transactions must be recognised when benefit for Toptronics for more than the next financial year / there is
they occur, and reported in the financial statements of the period no intention to sell them this year.
to which the transaction relates, regardless of whether or not cash Part B
has changed hands. The advertising invoice will be reported in a. The Cash Flow Statement will show Toptronics’ cash receipts (where
the Income Statement of Eat Pasifika by increasing the Advertising receipts came from and their value) and cash payments (what
expense by $460, which reduces this year’s profit. Because the money was spent on and how much was spent) for the year, and the
advertising has taken place this year it must be reported in this resulting increase or decrease in cash for the year and the resulting
year’s Income Statement, even though it has not yet been paid. In bank balance.
the Statement of Financial Position, the GST liability will decrease by Toptronics’ decision to expand online was successful as there was
$69 and the current liability accounts payable $529 will be created, an increase in cash receipts from sales, from $650 000 to $820 000
because this account will be paid in the next financial year. including $120 000 from online sales. As a result, the cash payments
Part C to suppliers increased from $400 000 to $500 000 because Toptronics
a. Food sales are an income for Eat Pasifika because it increases the needed to buy more inventory (iPads™, televisions and so on) to
asset bank when customers eat in the restaurant and pay for their sell to the increased customer base. Overall, the increase of receipts
meals. The food sales increase profit, which increases equity for was $70 000, largely as a result of the online sales which increased
the year. The food sales are not a contribution by Iosefa the owner, the closing bank balance. Having the online sales appears to have
but by customers eating in the restaurant. The food sales can be increased shop sales as well, as more people are aware of the
measured reliably, because there will be receipts as evidence of Toptronics business.
how much money was received from customers. It is more than The full success of the introduction of the online store would be more
probable that the food sales have been received because the evident when looking at the full Cash Flow Statement because many
receipts are proof, and food will continue to generate sales. The cash expenses would have increased with the online store. Toptronics
table breaking down the income for Eat Pasifika is a good example might have had to employ more staff to fill the orders, and also to
of understandability as it reports the two main incomes, food and set up and operate the online website. This resulting increase or
bar sales, and states other income for three years. It is easy to decrease in cash for the year would give a true judgement on the
understand and can be used to make decisions.

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10 Full Answers for Level 2 Accounting Learning Workbook

overall success of the online store – if the increase led to a greater c. Sales received in advance $2900 excluding GST
value of receipts than the result for 2018 then the online store was 31/3/20XX Sales 2 900
definitely a cash success, but if there was a deficit then the increased
costs outweighed the receipts and would not be a good thing for Income in advance 2 900
Toptronics. (Sales received in advance on balance
b. The historical cost concept states that assets must be reported at day)
their original acquisition cost. Toptronics is meeting this concept as
d. Insurance paid in advance $380 excluding GST
the shares in Telco Ltd are reported at $20 000 in the main body of
the Statement of Financial Position. 31/3/20XX Prepayments 380
The concept of relevance requires Toptronics to disclose information Insurance 380
that will influence the users’ decision and should help predict (Insurance paid in advance on balance
future events or confirm past ones. The current market value might day)
influence the users because in this case the shares have increased in
value by $4 000. This current market value of $24 000 is reported to e. Interest on term deposit owing $240
the users in the notes to the financial statements, providing users of 31/3/20XX Accrued income 240
the information with a more relevant figure for decisions if Toptronics
Interest received 240
decided to sell the shares.
Both figures are verifiable as there would be a receipt for $20 000, (Interest on term deposit owing on
which was the price paid for the shares; and the $24 000 is verifiable balance day)
as it is an independent valuation of the shares’ current value on the f. Invoices issued for fees received before balance day total $7 360
stock exchange and the value is published publicly. including GST
Part C
31/3/20XX Accounts receivable 7 360
a. The going concern concept states that Toptronics will continue to
operate into the foreseeable future, which means it currently has no GST 960
intention to close. This is important for the employees as it indicates Fees received 6 400
that there should be reasonable job security, especially when (Fees received owing on balance day)
considering the increase in sales growth over the past three years. The
growth in sales over the past three years indicates that the business g. Invoice received for furniture purchased on credit $2 760 including
is in a strong financial position with future sales expected to continue GST
and therefore the management has no intention to close the business 31/3/20XX Furniture 2 400
as there is no need to since the business is more profitable than in
GST 360
previous years.
b. i. The purchase of the new delivery van is capital expenditure Accounts payable 2 760
because it was a one-off type of purchase that created a new (Furniture purchased on credit on balance
non-current asset when Toptronics purchased it, and the firm day)
intends to use the vehicle to benefit the business for more
h. Invoice received for electricity dated 29 March $184 including GST
than the current financial year. The sign writing is also capital
expenditure as it is a one-off cost related to getting the van 31/3/20XX Electricity 160
ready for use by Toptronics. The vehicle is reported as an asset of GST 24
$84 000 in the Statement of Financial Position, not an expense,
Accounts payable 184
therefore it is capital expenditure.
ii. The diesel spent to fuel the vehicle is a revenue expenditure (Electricity invoice owing on balance day)
as it is recurring in nature / daily expenditure – it is likely that
2. a. 31/3/20XX Depreciation on furniture 1 008
Toptronics will have to spend approximately $300 every month
on diesel to operate the vehicle. This diesel will be reported in Accumulated depreciation on
1 008
the Income Statement as an expense which decreases profit, as it furniture
affects only the current year. Depreciation on furniture 8% p.a.
straight line
Activity 5A: Journal entries (page 54)
1. a. Depreciation on equipment $800 each year b. 31/3/20XX Prepayments 300
31/3/20XX Depreciation on equipment 800 Rates 300
Accumulated depreciation on Rates paid in advance $300
800
equipment
(Depreciation on equipment $800 c. 31/3/20XX Accrued income 240
straight line) Dividends 240
b. Wages owing on balance day $900 Dividends owing $240
31/3/20XX Wages 900
d. 31/3/20XX Accounts receivable 9 200
Accrued expenses 900
GST 1 200
(Wages owing on balance day)
Sales 8 000
Invoices issued for sales before balance
day total $9 200 including GST

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 Answers 11

31/3/20XX Cost of goods sold 3 000 31/3/2022 Cost of goods sold 720
Inventory 3 000 Inventory 720
Recording cost price $3 000 inventory
i. 31/3/2022 Accrued income 230
sold on credit.
Interest received 230
e. 31/3/20XX Interest on loan 750
Accrued expenses 750 Activity 5B: Preparing financial statements (page 62)
Interest on loan owing on balance day 1. a. Leigh’s Little Gifts 4U
$750 Income Statement
for the year ended 31 March 2024
f. 31/3/20XX Rent received 400 $ $ $
Income in advance 400 Revenue
Rent received in advance $400 Sales 260 000
Less Sales returns (3 000)
g. 31/3/20XX Furniture 560
Net sales 257 000
GST 84
Accounts payable 644
Less Cost of goods sold (135 000)
Invoice received for display table
purchased $644 including GST Gross profit 122 000

h. 31/3/20XX Telephone 120

Add Other income
GST 18
Dividends 420
Accounts payable 138
122 420
Invoice received for telephone dated
Less Expenses
26 March $138 including GST
Distribution costs
i. 31/3/20XX Depreciation on delivery van 1 920 Advertising 2 770
Accumulated depreciation on Shop wages 56 600
1 920
delivery van
Depreciation on shop
Depreciation on delivery van 12% p.a. 1 000
equipment
straight line
Insurance (Inventory) 560 60 930
3. a. 31/3/2022 Wages 290
Accrued expenses 290 Administrative expenses
Accountancy fees 1 200
b. 31/3/2022 Prepayments 520
Bad debts 200
Advertising 520
Doubtful debts 90
c. 31/3/2022 Depreciation on shop fittings 500 General expenses 9 760
Accumulated depreciation on shop Rates 1 500
500
fittings
Depreciation on buildings 4 000 16 750

d. 31/3/2022 Sales 1 900

Income in advance 1 900 Finance costs
Interest on mortgage 8 800 8 800
e. 31/3/2022 Depreciation on buildings 6 300
Accumulated depreciation on
6 300 Total expenses (86 480)
buildings
Profit for the year $35 940
f. 31/3/2022 Electricity 240
GST 36
Accounts payable 276

g. 31/3/2022 Interest on mortgage 1 700

Accrued expenses 1 700

h. 31/3/2022 Accounts receivable 2 300

GST 300
Sales 2 000

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12 Full Answers for Level 2 Accounting Learning Workbook

b. Leigh’s Little Gifts 4U

31/3/2022 Interest on loan 200
Statement of Financial Position
as at 31 March 2024 Accrued expenses 200
$ $ $
31/3/2022 Advertising 320
Current assets
GST 48
Accounts receivable (Note 1) 4 260
Accounts payable 368
Bank 3 600
Inventory 39 700 31/3/2022 Depreciation on vehicles 3 200
Prepayments 230 Accumulated depreciation on
3 200
vehicles
Accrued income 300 48 090
31/3/2022 Depreciation on shop fittings 1 400
Non-current assets Accumulated depreciation on shop
1 400
Investments (Note 2) fittings

Shares in Telestar Ltd 10 000 31/3/2022 Prepayments 70

Property, plant and Telephone 70
equipment (Note 3)
Total carrying amount 201 550 211 550 b. Steven’s Stereos and Extras
Income Statement
Total assets 259 640
for the year ended 31 March 2022
Less Liabilities
$ $ $
Current liabilities
Revenue
Accounts payable 2 584
Sales 465 000
GST 3 476
Less Sales returns (1 000)
Accrued expenses 4 600 10 660
Net Sales 464 000

Non-current liabilities
Less Cost of goods sold (225 000)
(Note 4)
Gross profit 239 000
Mortgage 120 000

Add Other income

Total liabilities (130 660)
Discount received 340
Net assets $128 980
239 340
Less Expenses
Equity
Distribution costs
Opening capital 96 540
Advertising 4 820
Plus Profit for the year 35 940
Shop rent 23 550
Less Drawings (3 500)
Stereo assistant wages 28 000
Closing capital $128 980
Depreciation on shop fittings 1 400
Notes to the Statement of Financial Position
Depreciation on vehicle 3 200 60 970
1. Accounts receivable
Accounts receivable 4 500
Administrative expenses
Less Allowance for doubtful debts 240
Telephone 1 130
$4 260
Bad debts 540
2. Investments
Doubtful debts 90
Investments comprise shares in Telestar Ltd. The current fair value
Electricity 1 600
of the shares is $11 200, which is their market value on balance
date. Stationery 700
4. Loan / Mortgage Insurance 560 4 620
The mortgage has an interest rate of 8% and a maturity date of
31 March 2030.
Finance costs
2. a. General journal entries
Interest on loan 4 800 4 800
31/3/2022 Prepayments 450
Shop rent 450
Total expenses (70 390)
Profit for the year $168 950

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 Answers 13

Depreciation is calculated on the following property plant and 2. Property, plant and equipment
equipment assets as follows: Shop
• Vehicles 20% p.a., straight-line method. Vehicles fittings Total
• Shop fittings 5% p.a., straight-line method. $ $ $
4. Loan / Mortgage
For year ended
The mortgage has an interest rate of 12% and a maturity date of
31 March 2022
31 October 2025.
Opening carrying amount 13 700 26 850 40 550
c. Steven’s Stereos and Extras
Statement of Financial Position Plus Additions 0 0 0
as at 31 March 2022 Less Disposals 0 0 0
$ $ $ Less Depreciation (3 200) (1 400) (4 600)
Current assets Closing carrying amount $10 500 $25 450 $35 950
Accounts receivable (Note 1) 3 640 As at 31 March 2022
GST 1 348 Cost 16 000 28 000 44 000
Inventory 178 200 Accumulated depreciation (5 500) (2 550) (8 050)
Prepayments 520 183 708 Carrying amount $10 500 $25 450 $35 950

Non-current assets Activity 6A: Depreciation (page 68)

1.

Depreciation $

depreciation $
Property, plant and

Accumulated
equipment (Note 2)

Method
Total carrying amount 35 950
Intangible assets Working Working
Goodwill 3 000 38 950
a. (16 000 – 2 000) × 20% 2 800 2 300 + 2 800 5 100

b. (16 000 – 2 300) × 20% 2 740 2 300 + 2 740 5 040

Total assets 222 658
Less Liabilities (16 000 – 2 000)
c. × 20 000 3 500 2 300 + 3 500 5 800
80 000
Current Liabilities
Accounts payable 2 768 2.

Depreciation $

depreciation $
Accumulated
Bank 4 500
Method

Accrued expenses 200 7 468

Working Working
Non-current liabilities
a. (24 000 – 4 000) × 8% 1 600 6 000 + 1 600 7 600
(Note 3)
Loan 40 000 b. (24 000 – 6 000) × 12% 2 160 6 000 + 2 160 8 160

(24 000 – 4 000)

c. × 1 600 1 600 6 000 + 1 600 7 600
Total liabilities (47 468) 20 000
Net assets $175 190
Activity 6B: Bad and doubtful debts (page 70)
1. a. Bad debts = $600 200 + 400 excluding GST.
Equity
b. Allowance for doubtful debts = $257 (5 600 – 460) × 5% = 257
Opening capital 36 240 Doubtful debts = $107 $257 – 150.
Plus Profit for the year 168 950 c. Note 1: Accounts receivable
Less Drawings (30 000) Accounts receivable 5 140
Closing capital $175 190 Less Allowance for doubtful debts (257)
Notes to the Statement of Financial Position 4 883
1. Accounts receivable 2. a. Bad debts = $160 $184 excluding GST.
Accounts receivable 3 800 b. Allowance for doubtful debts = $180 (7 380 – 184) × 2.5% = $180
Less Allowance for doubtful debts (160) Doubtful debts = $50 180 – 130 = $50
3 640 c. Note 1: Accounts receivable
Accounts receivable 7 200
Less Allowance for doubtful debts (180)
7 020

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14 Full Answers for Level 2 Accounting Learning Workbook

3. a. Bad debts = $120 $80 + $40 excluding GST. b. Pollyanna’s Plumbing

b. Allowance for doubtful debts = $25 (1 296 – 46) × 2% = $25 Statement of Financial Position
Doubtful debts = –$75 ($25 – 100) = –$75 as at 31 October 20XX
c. Note 1. Accounts receivable $ $ $
Accounts receivable 1 250 Current assets
Less Allowance for doubtful debts (25) Accounts receivable (Note 1) 5 860
1 225 Bank 1 890
Supplies on hand 23 000
Activity 6C: Inventory revaluation (page 72) Prepayments 80
1. Date Particulars Dr Cr Accrued income 120 30 950
31/3/24 Cost of goods sold 1 800 Non-current assets
Inventory 1 800 Investments (Note 2)
2. a. $9 100 Shares in XYZ Ltd 8 000
b. Date Particulars Dr Cr Property, plant and
equipment (Note 3)
31/3/24 Cost of goods sold 4 300
Total carrying amount 48 040
Inventory 4 300
Intangible assets
Activity 6D: Putting it all together (page 73) Goodwill 10 000 66 040
1. a. Pollyanna’s Plumbing Total assets 96 990
Income Statement Less Liabilities
as at 31 October 20XX
Current liabilities
$ $ $
Accounts payable 3 876
Revenue
GST 1 971
Fees received 236 540
Accrued expenses 200
Add Other income
Loan (Note 4) 22 000
Dividends received 360
Total liabilities (28 047)
236 900
Net assets $68 943
Less Expenses
Plumbing expenses
Advertising 3 600 Equity

Plumbing wages 32 500 Opening capital 21 440

Depreciation on plumbing Plus Profit for the year 69 503

1 400
equipment Less Drawings (22 000)
Cell phone expenses* 1 120 Closing capital $68 943
Supplies used 75 000
d. Notes to the Statement of Financial Position
Vehicle expenses 15 740 1. Accounts receivable
Depreciation on vehicles 9 160 138 520
Accounts receivable 6 041
Less Allowance for doubtful debts (181)
Administrative expenses
$5 860
Electricity 900
2. Investments
Bad debts 476
Investments consist of shares in XYZ Ltd. The current fair value
Doubtful debts 61 of the shares is $9 600, which is their market value on balance
Stationery 680 date, 31 October 20XX.
Insurance 560
Office rent 24 000 26 677

Finance costs
Interest on loan 2 200 2 200

Total expenses (167 397)

Profit for the year $69 503

*Note: Cell phone expenses could be regarded as an administrative

expense.
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 Answers 15

3. Property, plant and equipment Income Statement for Lucy’s Looks

2.
Plumbing for the year ended 31 March 20XX
Vehicles equipment Total Revenue
$ $ $ Sales 89 080
For year ended Less Sales returns (3 000)
31 October 20XX Net sales 86 080
Opening carrying Less Cost of goods sold (23 600)
45 800 12 800 58 600
amount
Gross profit 62 480
Plus Additions 0 0 0
Other income
Less Disposals 0 0 0
Rent received 19 400
Less Depreciation (9 160) (1 400) (10 560)
Less expenses 81 880
Closing carrying
$36 640 $11 400 $48 040 Distribution costs
amount
Advertising 4 500
As at 31 October
20XX Wages 36 800
Cost 56 000 14 000 70 000 Depreciation on shop 6 000
Accumulated Depreciation on shop fittings 2 220 49 520
(19 360) (2 600) (21 960)
depreciation Administration expenses
Carrying amount $36 640 $11 400 $48 040 Bad debts 170
Depreciation is calculated on the following property, plant and General expenses 16 282
equipment assets as follows: Insurance 3 500
• Vehicles 20% p.a., diminishing-value method.
Power and lighting 4 080
• Plumbing equipment 10% p.a., straight-line method.
Rates 2 600
4. Loan / Mortgage
Stationery 2 760
The mortgage has an interest rate of 10% and a maturity date of
31 July 2027. Telephone 2 030
c. Additional information (8) Doubtful debts 12 31 434
31/3/20XX Bad debts 160 Finance costs
GST 24 Interest on mortgage 6 120 6 120
Accounts receivable 184 Total expenses 87 074

Additional information (9) Loss for the year (5 194)

31/3/20XX Doubtful debts 61

Allowance for doubtful debts 61

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16 Full Answers for Level 2 Accounting Learning Workbook

Statement of Financial Position for Lucy’s Looks Depreciation in charged on the following assets at the following rates:
as at 31 March 20XX • Shop at 5% p.a. straight-line method
Current assets • Shop fittings 10% p.a. diminishing-value method
3. Mortgage
Bank 7 305
The mortgage is secured over the shop and has a maturity date of
Accounts receivable (1) 2 058
August 2038. It has an interest rate of 9% per year.
Inventory 13 700
Prepayments 50 23 113
Activity 7A: Balance-date adjustment journals (page 78)
1. a. Date Particulars Dr Cr
31/3/20XX Wages 600
Non-current assets
Accrued expenses 600
Intangibles
Goodwill 8 700 b. Date Particulars Dr Cr
Property, plant and equipment (2) 109 780 31/3/ 20XX Prepayments 230
118 480 Advertising 230
Total assets 141 593
c. Date Particulars Dr Cr
31/3/ 20XX General expenses 160
Current liabilities
GST 24
Accounts payable 4 576
Accounts payable 184
Accrued expenses 1 220
Income in advance 1 050 d. Date Particulars Dr Cr
GST 2 731 9 577 31/3/20XX Depreciation on buildings 4 500
Accumulated depreciation on
4 500
Non-current liabilities buildings

Mortgage 68 000
e. Date Particulars Dr Cr
Total liabilities (775 77)
31/3/20XX Depreciation on shop fittings 3 800
$ 64 016
Accumulated depreciation on
3 800
EQUITY shop fittings
Capital 105 410
f. Date Particulars Dr Cr
Loss for the year (5 194)
31/3/20XX Accrued income 300
Drawings (36 200)
Dividends 300
Closing capital $ 64 016
g. Date Particulars Dr Cr

Notes to the Statement of Financial Position 31/3/20XX Interest on mortgage 4 000

1. Accounts receivable Accrued expenses 4 000
Accounts receivable 2 100
h. Date Particulars Dr Cr
Less allowance for doubtful debts (42) 2 058
31/3/20XX Cost of goods sold 5 000
2. Property, plant and equipment Inventory 5 000
Shop
Shop fittings Total i. Date Particulars Dr Cr

$ $ $ 31/3/20XX Bad debts 400

For the year ended 31 March GST 60

20XX Accounts receivable 460
Opening carrying amount 95 800 22 200 118 000
j. Date Particulars Dr Cr
Depreciation expense (6 000) (2 220) 8 220
31/3/20XX Doubtful debts 20
Closing carrying amount 89 800 19 980 109 780
Allowance for doubtful debts 20
As at 31 March 20XX
Historical cost 120 000 26 400 146 400 k. Date Particulars Dr Cr
Accumulated depreciation (30 200) (6 420) (36 620) 31/3/20XX Accounts receivable 2 300
Closing carrying amount 89 800 19 980 109 780 GST 300
Fees received 2 000

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 Answers 17

2. a. Date Particulars Dr Cr
d. Date Particulars Dr Cr
31/3/20XX Prepayments 80
31/10/2022 Income summary 920
Telephone 80
Stationery 920
b. Date Particulars Dr Cr (Closing stationery on balance
31/3/20XX Interest on loan 800 day)

Accrued expenses 800 e. Date Particulars Dr Cr

Date Particulars Dr Cr 31/10/2022 Income summary 1 400

c.
31/3/20XX Advertising 320 Depreciation on office
1 400
equipment
GST 48
(Closing depreciation on office
Accounts payable 368 equipment on balance day)

d. Date Particulars Dr Cr Date Particulars Dr Cr

f.
31/3/20XX Depreciation on vehicles 6 000 31/10/2022 Fees received 236 000
Accumulated depreciation on Income summary 236 000
6 000
vehicles
(Closing fees received on balance
e. Date Particulars Dr Cr day)

31/3/20XX Depreciation on shop fittings 1 345

Accumulated depreciation on shop g. Date Particulars Dr Cr
1 345
fittings 31/10/2022 Income summary 1 120
Telephone expense 1 120
f. Date Particulars Dr Cr
(Closing telephone expense on
31/3/20XX Sales 540
balance day)
Income in advance 540
h. Date Particulars Dr Cr
g. Date Particulars Dr Cr
31/10/2022 Income summary 36 500
31/3/20XX Bad debts 160
Capital 36 500
GST 24
(Closing profit for the year on
Accounts receivable 184 balance day)

h. Date Particulars Dr Cr i. Date Particulars Dr Cr

31/3/20XX Allowance for doubtful debts 130 31/10/2022 Capital 22 000
Doubtful debts (recovered) 130 Drawings 22 000
(Closing drawings on balance
i. Date Particulars Dr Cr
day)
31/3/20XX Cost of goods sold 3 600
2. Businesses still control the assets and are obliged to repay their liabilities
Inventory 3 600
at the start of the next financial year, therefore these accounts are not
closed back to zero.
Activity 7B: Closing entries (page 81)
1. b. Date Particulars Dr Cr Activity 7C: Ledger accounts (page 86)
1. Interest on loan
31/10/2022 Income summary 3 600
Date Particulars Dr Cr Bal
Advertising 3 600
31/10/2022 Balance 2 000 dr
(Closing advertising on balance
day) Accrued expenses 200 2 200 dr
Income summary 2 200 0
c. Date Particulars Dr Cr
Accrued expense
31/10/2022 Dividends received 360
Date Particulars Dr Cr Bal
Income summary 360
31/10/2022 Interest on loan 200 200 cr
(Closing dividends received on
balance day) Telephone expense
Date Particulars Dr Cr Bal
31/10/2022 Balance 1 200 dr
Prepayment 80 1 120 dr
Income summary 1 120 0

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18 Full Answers for Level 2 Accounting Learning Workbook

Prepayments Date Particulars Dr Cr

b. i.
Date Particulars Dr Cr Bal 31/10/2XX Fees received 258 000
31/10/2022 Telephone 80 80 dr Income summary 258 000
Depreciation on furniture
ii. Date Particulars Dr Cr
Date Particulars Dr Cr Bal
31/10/2XX Income summary 24 000
Accumulated
31/10/2022 5 580 5 580 dr Office rent 24 000
depreciation on furniture
Income summary 5 580 0 Date Particulars Dr Cr
iii.
Bad debts 31/10/2XX Income summary 2 640
Date Particulars Dr Cr Bal Interest on loan 2 640
31/10/2022 Balance 320 dr
iv. Date Particulars Dr Cr
Accounts receivable 160 480 dr
31/10/2XX Income summary 1 120
Income summary 480 0
Cellphone expense 1 120
Allowance for doubtful debts
Date Particulars Dr Cr Bal v. Date Particulars Dr Cr

31/10/2022 Balance 120.00 cr 31/10/2XX Income summary 11 160

Doubtful debts 42.60 162.60 cr Depreciation on

11 160
vehicles
Drawings
Date Particulars Dr Cr B al vi. Date Particulars Dr Cr

31/10/2022 Balance 22 000 dr 31/10/2XX Capital 42 000

Capital 22 000 0 Drawings 42 000

Capital c. Dividends received

Date Particulars Dr Cr Bal Date Particulars Dr Cr Bal

31/10/2022 Balance 21 560 cr 31/10/20XX Balance 240 cr

Income summary 36 500 58 060 cr Accrued income 120 360 cr

Drawings 22 000 36 060 cr Income summary 360 0

2. a. Additional information (1) Accrued income

Date Particulars Dr Cr Date Particulars Dr Cr Bal

31/10/20XX Prepayments 80 31/10/20XX Dividends received 120 120 dr

Cellphone expense 80 Bad debts

Additional information (2) Date Particulars Dr Cr Bal

Date Particulars Dr Cr 31/10/20XX Balance 320 dr

31/10/20XX Interest on loan 640 Accounts receivable 160 480 dr

Accrued expenses 640 Income summary 480 0

Additional information (5) Accounts receivable

Date Particulars Dr Cr Date Particulars Dr Cr Bal

31/10/20XX Vehicle expenses 240 31/10/20XX Balance 5 684 dr

GST 36 Bad debts and GST 184 5 500 dr

Accounts payable 276 Prepayments

Additional information (7) Date Particulars Dr Cr Bal

Date Particulars Dr Cr 31/10/20XX Cellphone expense 80 80 dr

31/10/20XX Bad debts 160 Accumulated depreciation on vehicles

GST 24 Date Particulars Dr Cr Bal
Accounts receivable 184 31/10/20XX Balance 10 200 cr

Additional information (8) Depreciation on

11 160 21 360 cr
vehicles
Date Particulars Dr Cr
31/10/20XX Allowance for doubtful debts 155
Doubtful debts
155
(recovered)

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 Answers 19

Advertising Date Particulars Dr Cr

b.
Date Particulars Dr Cr Bal 31/3/XX Income summary 3 200
31/10/20XX Balance 3 600 dr Taxation advice expense 3 200
Income summary 3 600 0
Date Particulars Dr Cr
Allowance for doubtful debts
31/3/XX Fees received 196 400
Date Particulars Dr Cr Bal
Income summary 196 400
31/10/20XX Balance 320 cr
Doubtful debts 155 165 cr Date Particulars Dr Cr

Drawings 31/3/XX Dividends received 375

Date Particulars Dr Cr Bal Income summary 375

31/10/20XX Balance 42 000 dr Date Particulars Dr Cr

Capital 42 000 0 31/3/XX Capital 22 000

Date Particulars Dr Cr Drawings 22 000

3. a.
31/3/XX Dry-cleaning wages 560 Date Particulars Dr Cr
Accrued expenses 560 31/3/XX Income summary 1 829

Date Particulars Dr Cr Capital 1 829

31/3/XX Prepayments 2 000 Date Particulars Dr Cr

Shop rent 2 000 31/3/XX Income summary 20

Date Particulars Dr Cr Doubtful debts 20

31/3/XX Accrued income 135 Date Particulars Dr Cr

Dividend received 135 31/3/XX Income summary 43 060

Date Particulars Dr Cr Dry-cleaning wages 43 060

31/3/XX Interest on loan 3 100

Accrued expenses 3 100

Date Particulars Dr Cr
31/3/XX Bad debts 160
GST 24
Accounts receivable 184

Date Particulars Dr Cr
31/3/XX Doubtful debts 20
Allowance for doubtful debts 20

Date Particulars Dr Cr
31/3/XX Electricity 120
GST 18
Accounts payable 138

Date Particulars Dr Cr
31/3/XX Depreciation on vehicles 3 250
Accumulated depreciation on
3 250
vehicles

Date Particulars Dr Cr
Depreciation on dry-cleaning
31/3/XX 7 920
equipment
Accumulated depreciation on
7 920
dry-cleaning equipment

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20 Full Answers for Level 2 Accounting Learning Workbook

c. Dry-cleaning by David d. Dry-cleaning by David

Income Statement Statement of Financial Position
for the year ended 31 March 20XX as at 31 March 20XX
Revenue $ $ $ $ $ $
Fees received 196 400 Current assets
Accounts receivable (Note 1) 5 390
Add Other income GST 6 242
Dividend received 375 Accrued income 135
196 775 Supplies on hand 23 120
Less Expenses Prepayments 2 000 36 887
Dry-cleaning expenses
Advertising 8 600 Non-current assets
Dry-cleaning wages 43 060 Investments (Note 2)
Depreciation on dry-cleaning Shares in MNOP Ltd 8 000
7 920
equipment Property, plant and
Supplies used 75 000 equipment (Note 3)
Insurance – dry-cleaning 448 Total carrying amount 55 430
Shop rent 26 000 Intangible assets
Vehicle expenses 15 000 Goodwill 10 000 73 430
Depreciation on vehicles 3 250 179 278
Total assets 110 317
Administrative expenses Less Liabilities
Taxation advice expense 3 200 Current liabilities
Electricity 4 010 Accounts payable 5 818
Insurance (general) 112 Bank 1 950
Telephone and internet 1 886 Accrued expenses 3 660 11 428
Stationery 680
Bad debts 160 Non-current liabilities
Doubtful debts 20 10 068 Loan 56 000
Total liabilities (67 428)
Financial costs Net assets $42 889
Interest on loan 5 600 5 600
Total expenses (194 946) Equity
Profit for the year $1 829 Opening capital 63 060
Plus Profit for the year 1 829
Less Drawings (22 000)
Closing capital $42 889

Notes to the Statement of Financial Position

1. Accounts receivable
Accounts receivable 5 500
Less Allowance for doubtful debts (110)
5 390

2. Investments
Investments comprise shares in MNOP Ltd. The current fair value
of the shares is $9 200, which is current market value on balance
date.

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 Answers 21

3. Property, plant and equipment Drawings

Date Particulars Dr Cr Bal

Dry-cleaning
equipment
31/3/XX Balance 22 000 dr
Capital 22 000 0
Vehicles Total
Activity 8: Property, plant and equipment note to the
$ $ $
Statement of Financial Position (page 95)
For year ended 1. Property, plant and equipment
31 October 20XX

Fixtures and
Opening carrying amount 13 800 52 800 66 600

buildings
Land and

Delivery
Plus Additions 0 0 0

fittings
vehicle

Total
Less Disposals 0 0 0
Less Depreciation (3 250) (7 920) (11 170)
$ $ $ $
Closing carrying amount 10 550 44 880 55 430
For year ended
As at 31 October 20XX 31 March 2022
Cost 24 000 54 000 78 000 Opening carrying amount 264 000 15 800 10 900 290 700
Accumulated depreciation (13 450) (9 120) (22 570) Plus Additions 0 16 000 0 16 000
Carrying amount 10 550 44 880 55 430 Less Disposals 0 0 (800) (800)
Depreciation is calculated on the following property plant and Less Depreciation (9 600) (9 000) (1 010) (19 610)
equipment assets as follows: Closing carrying amount 254 400 22 800 9 090 286 290
• Vehicles: 50c per km using the units-of-use method.
As at 31 March 2022
• Dry-cleaning equipment: 15% p.a. using the diminishing-
Cost 320 000 64 000 18 000 402 000
value method.
4. Loan / Mortgage Accumulated depreciation (65 600) (41 200) (8 910) (115 710)
The loan has an interest rate of 10% and a maturity date of Carrying amount 254 400 22 800 9 090 286 290
31 October 2035.
• Land and buildings: 3% p.a., straight-line method.
e. Fees received
• Delivery van: 45 cents per kilometre using units-of-use method.
Date Particulars Dr Cr Bal • Fixtures and fittings: 10% p.a., diminishing-value method.
31/3/XX Balance 196 400 cr 2. Property, plant and equipment
Income summary 196 400 0
Buildings

Furniture

fittings
Vehicle

Dry-cleaning wages

Land

Total
and
Date Particulars Dr Cr Bal
31/3/XX Balance 42 500 dr $ $ $ $ $
Accrued expenses 560 43 060 dr For year ended
Income summary 43 060 0 31 December
20XX
Accrued income
Opening
Date Particulars Dr Cr Bal 71 200 19 200 6 100 65 000 161 500
carrying amount
31/3/XX Dividend received 135 135 dr Plus Additions 20 000 0 0 0 20 000
Shop rent Less Disposals 0 0 (500) 0 (500)
Date Particulars Dr Cr Bal Less Depreciation (4 800) (2 880) (700) 0 (8 380)
31/3/XX Balance 28 000 dr Closing carrying
86 400 16 320 4 900 65 000 172 620
Prepayments 2 000 26 000 dr amount

Income summary 26 000 0 As at

31 December
Prepayments 20XX
Date Particulars Dr Cr Bal Cost 120 000 32 000 9 000 65 000 226 000
31/3/XX Shop rent 2 000 2 000 dr Less
Accumulated (33 600) (15 680) (4 100) 0 (53 380)
Bad debts
depreciation
Date Particulars Dr Cr Bal
Carrying amount 86 400 16 320 4 900 65 000 172 620
31/3/XX Accounts receivable 160 160 dr
• Buildings: 4% p.a., straight-line method.
Income summary 160 0
• Vehicle: 15% p.a., diminishing-value method.
• Furniture and fittings: straight-line method,.at $700 p.a.

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22 Full Answers for Level 2 Accounting Learning Workbook

3. Property, plant and equipment 5. Sportszone – Property, plant and equipment note

Machinery
Computer

equipment

equipment
furniture
Shop

Total

Office

Shop

Total
$ $ $ $ $ $ $
For year ended For year ended 31 March
31 March 20XX 2020
Opening carrying amount 0 13 000 15 000 28 000 Opening carrying amount 40 000 44 500 84 500
Plus Additions 8 000 17 500 0 25 500 Additions 0 4 500 4 500
Less Disposals 0 (2 000) 0 (2 000) Disposals 0 (4 000) (4 000)
Less Depreciation (2 000) (4400) (1 500) (7 900) Depreciation (10 000) (2 000) (12 000)
Closing carrying amount 6 000 24 100 13 500 43 600 Closing carrying amount 30 000 43 000 73 000
As at 31 March 20XX As at 31 March 2020
Cost 8 000 45 000 18 000 71 000 Cost 60 000 55 000 115 000
Less Accumulated Accumulated depreciation (30 000) (12 000) (42 000)
(2 000) (20 900) (4 500) (27 400)
depreciation
Closing carrying amount 30 000 43 000 73 000
Carrying amount 6 000 24 100 13 500 43 600
Depreciation is calculated on the following property, plant and equipment
• Shop furniture: 10% p.a., diminishing-value method. assets at the following rates:
• Computer: 25% p.a., straight-line method. • Depreciation on shop equipment, $2 000 p.a.
• Machinery: 40 cents per hour using the units-of-use method. • Depreciation on office equipment is straight-line based on a residual
4. Property, plant and equipment value of $10 000.
6. Casey’s Catering – Property, plant and equipment note
equipment
Furniture

Delivery
vehicle

equipment
Office

Total

Vehicles
Kitchen

Total
$ $ $ $
For year ended $ $ $
31 March 2023 For year ended 31 March
Opening carrying amount 10 870 6 000 8 400 25 270 2020
Plus Additions 630 0 4 000 4 630 Opening carrying amount 27 000 80 000 107 000
Less Disposals 0 0 (1 200) (1 200) Additions 12 000 44 000 56 000
Less Depreciation (575) (4 500) (1 440) (6 515) Disposals 0 (5 000) (5 000)
Closing carrying amount 10 925 1 500 9 760 22 185 Depreciation (5 850) (9 360) (15 210)
As at 31 March 2023 Closing carrying amount 33 150 109 640 142 790
Cost 18 000 9 000 12 000 39 000 As at 31 March 2020
Less Accumulated Cost 57 000 133 000 190 000
(7 075) (7 500) (2 240) (16 815)
depreciation Accumulated depreciation (23 850) (23 360) 47 210
Carrying amount 10 925 1 500 9 760 22 185 Closing carrying amount 33 150 109 640 142 790
• Delivery vehicle: 50 cents per kilometre using the units-of-use Depreciation is calculated on the following property, plant and equipment
method. assets at the following rates:
• Depreciation on office equipment: 12% p.a., straight-line method. • Depreciation on vehicles is 52 cents per kilometre per annum using
• Shop furniture: 5% p.a., diminishing-value method. units-of-use method.
• Depreciation on kitchen equipment 15% diminishing-value method
on closing historical cost balance.

Activity 9A: Calculating cash received from Accounts

receivable and cash paid to Accounts
payable (page 102)
1. a. $230 950 6 900 + 235 000 – 4 500 – 800 – 250 – 5 400 = 230 950
b. $63 310 2 300 + 65 000 – 1 200 – 240 – 110 + 360 – 2 800 =
63 310
2. a. $26 420 1 300 + 28 000 – 1 600 – 180 – 1 100 = 26 420
b. $159 270 4 600 + 165 000 – 5 300 – 480 + 450 – 5 000 =
159 270

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 Answers 23

3. a. Accounts receivable $183 040 2 600 + 186 000 – 2 100 – 400 – Tim’s Toy Barn
160 – 2 900 = 183 040 Cash Flow Statement
Accounts payable $111 250 1 850 + 115 000 – 3 300 – 350 + 250 for the month ended 30 September 2018
– 2 200 = 111 250
Receipts
b. Accounts receivable $24 140 5 550 + 24 000 – 40 – 110 – 5 260
= 24 140 Cash sales 36 000
Accounts payable $18 150 3 880 + 18 000 – 400 – 380 – 2 950 Accounts receivable 7 570
= 18 150 Capital 10 000

Activity 9B: Preparing the Cash Flow Statement Dividends 360

(page 104) 53 930
1. Workings: Payments
Accounts receivable $2 500 2 600 + 3 000 – 200 – 2 900 = 2 500 Accounts payable 12 200
Accounts payable $790 1 850 + 1 300 – 160 – 2 200 = 790
Wages 2 000
Jenny’s Junk U Want Drawings 580
Cash Flow Statement
for the year ended 30 June 2022 Electricity 150
Receipts Computer instalment 1 250
Cash sales 65 000 Cash purchases 5 600
Accounts receivable 2 500 Telephone 100
Dividends 120 Insurance 65
Total receipts 67 620 Mortgage 1 200
Payments (23 145)
Cash purchases 37 350 Net increase in cash 30 785
Accounts payable 790 Opening bank balance 2 300
Van deposit 4 000 Closing bank balance $33 085
Wages 12 000 3. Workings:
Drawings 8 000 Accounts receivable $67 620 4 200 + 68 000 – 980 – 3600 = 67 620
General expenses 30 000 Accounts payable $44 750 5 500 + 48 000 – 2 000 – 6 750 = 44 750
Opening bank balance $38 860 overdraft 3 500 – 42 360 = –38 860
Interest on loan 500
Shares in Telestar Ltd 8 000 Dylan’s Dentist
Cash Flow Statement
Loan 5 000 for the year ended 31 March 2018
Total payments (105 640) Receipts
Loan 6000
Net decrease in cash (38 020) Interest received 300
Opening bank balance 46 000 (Cash) fees received 220 000
Closing bank balance $7 980 Accounts receivable 67 620 293 920
2. Workings:
Accounts receivable $7 570 500 + 8 000 – 180 – 750 = 7 570 Payments
Accounts payable $12 200 1 200 + 12 000 – 1 000 = 12 200 Shares in Colgleans Ltd 6 000
Drawings 2 500
Wages 80 000
Advertising 4 500
Insurance 890
Electricity 2 800
General expenses 60 000
Drill purchase 35 000
Bank fees 120
Rent 15 000
Accounts payable 44 750
(251 560)
Net increase in cash 42 360
Opening bank balance (38 860) OD
Closing bank balance $3 500

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24 Full Answers for Level 2 Accounting Learning Workbook

Activity 10A: Reinforcement (page 108) c. Emma’s Emporium

1. a. Date Particulars Dr Cr Income Statement
for year ended 31 March 2023
31/3/23 Shop wages 960
Revenue $ $ $
Accrued expenses 960
Sales 315 200
Date Particulars Dr Cr Less Sales returns (1 000)
31/3/23 Prepayments 250 314 200
Rates 250 Less Cost of goods sold (235 000)
Gross profit 79 200
Date Particulars Dr Cr
Add Other income
31/3/23 Advertising 240
Dividends 410
GST 36
79 610
Accounts payable 276
Less expenses
Date Particulars Dr Cr Distribution costs
31/3/23 Bad debts 320 Advertising 6 240
GST 48 Shop wages 82 960
Accounts receivable 368 Depreciation on shop
860 90 060
equipment
Date Particulars Dr Cr
Administrative expenses
31/3/23 Doubtful debts 40
Accountancy fees 1 100
Allowance for doubtful debts 40
General expenses 15 690
Date Particulars Dr Cr Insurance (general) 760
31/3/23 Depreciation on buildings 6 500 Rates 2 250
Accumulated depreciation on Depreciation on buildings 6 500
6 500
buildings Bad debts 720

Date Particulars Dr Cr Doubtful debts 40 27 060

31/3/23 Depreciation on shop equipment 860 Finance costs

Accumulated depreciation on Interest on mortgage 11 790 11 790

860
shop equipment Total expenses 128 910
LOSS for the year $ (49 300)
Date Particulars Dr Cr
31/3/23 Accrued income 90
Dividends 90

Date Particulars Dr Cr
31/3/23 Interest on mortgage 1 790
Accrued expenses 1 790

b. Date Particulars Dr Cr
31/3/23 Income summary 6 240
Advertising 6 240

Date Particulars Dr Cr
31/3/23 Sales 315 200
Income summary 315 200

Date Particulars Dr Cr
31/3/23 Income summary 235 000
Cost of goods sold 235 000

Date Particulars Dr Cr
31/3/23 Capital 15 400
Drawings 15 400

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 Answers 25

d. Emma’s Emporium 3. Property, plant and equipment

Statement of Financial Position

equipment
as at 31 March 2023

Buildings
$ $ $

Shop

Land

Total
Current assets
Accounts receivable (Note 1) 6 720 $ $ $ $
Bank 3 200 For year ended
31 March 2023
Inventory 36 200
Opening carrying
Prepayments 250 7 250 117 700 60 000 184 950
amount
Accrued income 90 46 460
Plus Additions 0 0 0 0
Less Disposals 0 0 0 0
Non-current assets
Less Depreciation (860) (6 500) 0 (7 360)
Investments (Note 2)
Closing carrying
Shares in Flightways Ltd 7 000 6 390 111 200 60 000 177 590
amount
Property, plant and As at 31 March
equipment (Note 3) 2023
Total carrying amount 177 590 Cost 8 600 130 000 60 000 198 600
Intangible assets Accumulated
(2 210) (18 800) 0 (21 010)
Goodwill 8 000 192 590 depreciation
Carrying amount 6 390 111 200 60 000 177 590
Total assets 239 050 Depreciation is calculated on the following property, plant and
Less Liabilities equipment assets as follows:
Current liabilities • Building: 5% p.a. of cost, using the straight-line method.
• Shop equipment: 10% p.a. of cost, using the straight-line
Accounts payable 6 036
method.
GST 1 116 4. Loan / Mortgage
Accrued expenses 2 750 9 902 The mortgage has an interest rate of 9% and a maturity date of
31 March 2030.
Non-current liabilities e. Sales

Mortgage 131 000 Date Particulars Dr Cr Bal

Total liabilities (140 902) 31/3/23 Balance 315 200 cr

Net assets $98 148 Income summary 315 200 0

Shop wages
Equity Date Particulars Dr Cr Bal
Opening capital 162 848 31/3/23 Balance 82 000 dr
Less LOSS for the year (49 300) Accrued expenses 960 82 960 dr
Less Drawings (15 400) Income summary 82 960 0
Closing capital $98 148 Accrued expense
Notes to the Statement of Financial Position Date Particulars Dr Cr Bal
1. Accounts receivable 31/3/23 Shop wages 960 960 cr
Accounts receivable 7 000 Interest on mortgage 1 790 2 750 cr
Less Allowance for doubtful debts (280) Rates
6 720 Date Particulars Dr Cr Bal
2. Investments 31/3/23 Balance 2 500 dr
Investments consist of Shares in Flightways Ltd. The current fair Prepayments 250 2 250 dr
value of the shares is $6 400, which is the current market value
Income summary 2 250 0
on balance date.
Prepayments
Date Particulars Dr Cr Bal
31/3/23 Rates 250 250 dr

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26 Full Answers for Level 2 Accounting Learning Workbook

Bad debts
Date Particulars Dr Cr
Date Particulars Dr Cr Bal
31/3/XX Depreciation on shop equipment 885
31/3/23 Balance 400 dr
Accumulated depreciation on
Accounts receivable 320 720 dr 885
shop equipment
Income summary 720 0
b. Date Particulars Dr Cr
Allowance for doubtful debts
31/3/XX Income summary 9 600
Date Particulars Dr Cr Bal
General expenses 9 600
31/3/23 Balance 240 cr
Doubtful debts 40 280 cr Date Particulars Dr Cr
Accumulated depreciation on buildings 31/3/XX Income summary 1 200

Date Particulars Dr Cr Bal Bad debts 1 200

31/3/23 Balance 12 300 cr

Date Particulars Dr Cr
Depreciation on buildings 6 500 18 800 cr
31/3/XX Income summary 7 600
Capital Interest on mortgage 7 600
Date Particulars Dr Cr Bal
Date Particulars Dr Cr
31/3/23 Balance 162 848 cr
31/3/XX Capital 6 500
Income summary 49 300 113 548 cr
Drawings 6 500
Drawings 15 400 98 148 cr
Date Particulars Dr Cr
2. a. Date Particulars Dr Cr
31/3/XX Rent received 6 000
31/3/XX Prepayments 250
Income summary 6 000
Advertising 250

Date Particulars Dr Cr Date Particulars Dr Cr

31/3/XX Accounts receivable 736 31/3/XX Income summary 80 845

GST 96 Capital 80 845

Sales 640

Date Particulars Dr Cr
31/3/XX Cost of goods sold 300
Inventory 300

Date Particulars Dr Cr
31/3/XX Bad debts 400
GST 60
Account receivable 460

Date Particulars Dr Cr
31/3/XX Allowance for doubtful debts 90
Doubtful debts 90

Date Particulars Dr Cr
31/3/XX Interest on mortgage 1 600
Accrued expenses 1 600

Date Particulars Dr Cr
31/3/XX Rent received 500
Income in advance 500

Date Particulars Dr Cr
31/3/XX Depreciation on buildings 1 800
Accumulated depreciation on
1 800
buildings

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 Answers 27

c. Anureet’s Asian Supermarket Anureet’s Asian Supermarket

d.
Income Statement Statement of Financial Position
for the year ended 31 March 20XX as at 20XX
Revenue $ $ $ $ $ $
Sales 205 640 Current assets
Less Cost of goods sold (65 300) Accounts receivable (Note 1) 3 430
Gross profit 140 340 Bank 6 956
Add Other income Inventory 23 300
Rent received 6 000 Prepayments 250 33 936
Gain on sale of shop equipment 350 6 350 Non-current assets
146 690 Property, plant and
Less Expenses equipment (Note 2)

Distribution costs Total carrying amount 183 865 183 865

Advertising 3 250 Total assets 217 801

Wages 32 600 Less Liabilities

Depreciation on shop equipment 885 36 735 Current liabilities

Accounts payable 2 240

Administrative expenses GST 3 536

Accountancy fees 1 200 Income in advance 500

General expenses 9 600 Accrued expenses 1 600 7 876

Insurance (general) 560 Non-current liabilities

Rates 1 800 Mortgage (3) 95 000

Postage and stationery 5 000 Total liabilities (102 876)

Discount allowed 440 Net assets $114 925

Depreciation on buildings 1 800

Bad debts 1 200 Equity

Doubtful debts (90) 21 510 Opening capital 40 580

Plus Profit for the year 80 845

Financial costs Less Drawings (6 500)

Interest on mortgage 7 600 7 600 Closing capital $114 925

Total expenses 65 845 Notes to the Statement of Financial Position

Profit for the year $80 845 1. Accounts receivable
Accounts receivable 3 500
Less Allowance for doubtful debts (70)
3 430

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28 Full Answers for Level 2 Accounting Learning Workbook

2. Property, plant and equipment Allowance for doubtful debts

Date Particulars Dr Cr Bal

equipment

Buildings
31/3/XX Balance 160 cr

Shop

Land

Total
Doubtful debts 90 70 cr

$ $ $ $ Depreciation on buildings

For year ended Date Particulars Dr Cr Bal

31 March 20XX Accumulated
31/3/XX 1 800 1 800 dr
Opening carrying depreciation on buildings
10 850 57 700 120 000 188 550
amount Income summary 1 800 0
Plus Additions 0 0 0 0
Inventory
Less Disposals (2 000) 0 0 (2 000)
Date Particulars Dr Cr Bal
Less Depreciation (885) (1 800) 0 (2 685)
31/3/XX Balance 23 600 dr
Closing carrying
7 965 55 900 120 000 183 865 Cost of goods sold 300 23 300 dr
amount
As at 31 March Capital
20XX Date Particulars Dr Cr Bal
Cost 10 000 60 000 120 000 190 000 31/3/XX Balance 40 580 cr
Accumulated Income summary 80 845 121 425 cr
(2 035) (4 100) 0 (6 135)
depreciation
Drawings 6 500 114 925 cr
Carrying amount 7 965 55 900 120 000 183 865

Depreciation is calculated on the following property, plant and 3. a. Date Particulars Dr Cr

equipment assets as follows: 31/3/25 Office salaries 320
• Building: 3% p.a. of cost using the straight-line method. Accrued expenses 320
• Shop equipment: 10% p.a. using the diminishing-value
method. Date Particulars Dr Cr
3. Loan / Mortgage 31/3/25 Prepayments 120
The mortgage has an interest rate of 8% and a maturity date of Insurance 120
31 March 2030.
e. Gain on sale of shop equipment Date Particulars Dr Cr
Date Particulars Dr Cr Bal 31/3/25 Accrued income 80
31/3/XX Balance 350 cr Dividends received 80
Income summary 350 0
Date Particulars Dr Cr
Interest on mortgage 31/3/25 Interest on loan 220
Date Particulars Dr Cr Bal Accrued expenses 220
31/3/XX Balance 6 000 dr
Accrued expenses 1 600 7 600 dr Date Particulars Dr Cr
Income summary 7 600 0 31/3/25 Vans 12 000
GST 1 800
Accrued expense
Accounts payable 13 800
Date Particulars Dr Cr Bal
31/3/XX Interest on mortgage 1 600 1 600 cr Date Particulars Dr Cr
Sales 31/3/25 Bad debts 240

Date Particulars Dr Cr Bal GST 36

31/3/XX Balance 205 000 cr Accounts receivable 276

Accounts receivable 640 205 640 cr

Date Particulars Dr Cr
Income summary 205 640 0
31/3/25 Doubtful debts 48
Prepayments Allowance for doubtful debts 48
Date Particulars Dr Cr Bal
Date Particulars Dr Cr
31/3/XX Advertising 250 250 dr
31/3/25 Depreciation on vans 4 700
Accumulated depreciation on
4 700
vans

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 Answers 29

c. Tane’s Top-Notch Furniture

Date Particulars Dr Cr Income Statement
31/3/25 Depreciation on office furniture 2 000 for the year ended 31 March 2025
Accumulated depreciation on Revenue $ $ $
2 000
office furniture Sales 320 600

Date Particulars Dr Cr Less Cost of goods sold (169 140)

31/3/25 Cost of goods sold 1 140 Gross profit 151 460

Inventory 1 140
Add Other income
b. Date Particulars Dr Cr
Dividends received 400
31/3/25 Income summary 2 300
Gain on sale of office furniture 300 700
Advertising 2 300
152 160
Date Particulars Dr Cr Less Expenses
31/3/25 Sales 320 600 Distribution costs
Income summary 320 600 Advertising 2 300
Sales assistant wages 45 000
Date Particulars Dr Cr
Depreciation on vans 4 700
31/3/25 Gain on sale of office furniture 300
Shop rent 21 000
Income summary 300
Shop power and lighting 2 400 75 400
Date Particulars Dr Cr Administrative expenses
31/3/25 Dividends received 400 Office salaries 18 820
Income summary 400 Telephone 1 130
Insurance 3 780
Date Particulars Dr Cr
Postage and stationery 1 200
31/3/25 Capital 8 500
Discount allowed 120
Drawings 8 500
Depreciation on office furniture 2 000
Date Particulars Dr Cr Bad debts 480
31/3/25 Income summary 48 462 Doubtful debts 48 27 578
Capital 48 462 Financial costs
Interest on loan 720 720
Date Particulars Dr Cr
Total expenses 103 698
31/3/25 Income summary 480
Profit for the year $48 462
Bad debts 480

Date Particulars Dr Cr
31/3/25 Income summary 18 820
Office salaries 18 820

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30 Full Answers for Level 2 Accounting Learning Workbook

Tane’s Top-Notch Furniture 3. Property, plant and equipment

d.
Statement of Financial Position

furniture
as at 31 March 2025

Office

Total
Vans
$ $ $
Current assets
$ $ $
Accounts receivable (Note 1) 5 432
For year ended
GST 2 036 31 October 2025
Inventory 33 300 Opening carrying amount 23 500 14 000 37 500
Accrued income 80 Plus Additions 12 000 0 12 000
Prepayments 120 40 968 Less Disposals 0 (2 000) (2 000)
Non-current assets Less Depreciation (4 700) (2 000) (6 700)
Investments (Note 2) Closing carrying amount 30 800 10 000 40 800
Shares in HIJ Ltd 10 000 As at 31 October 2025
Property, plant and Cost 48 000 15 000 63 000
equipment (Note 3)
Accumulated depreciation (17 200) (5 000) (22 200)
Total carrying amount 40 800 50 800
Carrying amount 30 800 10 000 40 800
Total assets 91 768
Depreciation is calculated on the following property, plant and
Less Liabilities
equipment assets as follows:
Current liabilities
• Vans: 20% p.a. of cost, using the diminishing-value method.
Accounts payable 17 480 • Office furniture: $2 000 p.a., using the straight-line method.
Bank 1 106 4. Loan / Mortgage
Accrued expenses 540 The loan has an interest rate of 12% and a maturity date of
31 October 2035.
Loan (4) 6 000 25 126
e. Cost of goods sold
Total liabilities (25 126)
Date Particulars Dr Cr Bal
Net assets $66 642
31/3/25 Balance 168 000 dr
Cost of goods sold 1 140 169 140 dr
Equity
Income summary 169 140 0
Opening capital 26 680
Plus Profit for the year 48 462 Interest on loan

Less Drawings (8 500) Date Particulars Dr Cr Bal

Closing capital $66 642 31/3/25 Balance 500 dr
Accrued expenses 220 720 dr
Notes to the Statement of Financial Position
1. Accounts receivable Income summary 720 0

Accounts receivable 5 600 Accrued expenses

Less Allowance for doubtful debts (168) Date Particulars Dr Cr Bal
5 432 31/3/25 Interest on loan 220 220 cr

2. Investments Office salaries 320 540 cr

Investments consist of shares in HIJ Ltd. The current fair value Insurance
of the shares is $11 200, which is the current market value on
Date Particulars Dr Cr Bal
balance date, 31 March 2025.
31/3/25 Balance 3 900 dr
Prepayments 120 3 780 dr
Income summary 3 780 0

Accounts payable
Date Particulars Dr Cr Bal
31/3/25 Balance 3 680 cr
Van and GST 13 800 17 480 cr

Doubtful debts
Date Particulars Dr Cr Bal
Allowance for
31/3/25 48 48 dr
doubtful debts
Income summary 48 0

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 Answers 31

Capital Bank
Date Particulars Dr Cr Bal 1/4/2019 Balance 160 cr
31/3/25 Balance 26 680 cr Total receipts 269 580 269 740 dr
Income summary 48 462 75 142 cr Total payments 261 450 8 290 dr
Drawings 8 500 66 642 cr Part B
Inventory a. Ella’s Electrics
Property, plant and equipment Note (extract)
Date Particulars Dr Cr Bal

computer
31/3/25 Balance 34 440 dr

Vehicles

fittings

Office
Shop
Cost of goods sold 1 140 33 300 dr

4. Part A
$ $ $
a. Ella’s Electrics
Cash Flow Statement For the year ended
for the year ended 31 March 2020 31 March 2020

$ $ Opening carrying amount 26 160 7 700 740

Receipts Additions 0 8 000 2 000

Accounts receivable 44 780 Disposals 0 (900) (600)

Cash sales 210 000 Depreciation (5096) (1 332) (700)

Capital 10 000 Closing carrying amount 21 064 13 468 1 440

Commission received 3 000 As at 31 March 2020

Sale of shop fittings 1 700 Cost 62 000 18 600 2 000

Sale of computer 100 Accumulated depreciation (40 936) (5 132) (560)

Total receipts 269 580 Closing carrying amount 21 064 13 468 1 440

Payments Depreciation is calculated on the following property, plant and

equipment assets at the following rates:
Accounts payable 81 400
• Depreciation on vehicles is calculated using units-of-use method
Rent 36 000
at a rate of 26 c/km.
Insurance 5 250 • Depreciation on shop fittings is 9% diminishing value (based on
General expenses 3 250 closing balance).
Loan 9 600 • Depreciation on office computer is 28% straight line.

Interest on mortgage 1 100 b. i. 31/3/2020 Depreciation on shop fittings 1 332

Distribution costs 29 400 Accumulated depreciation
1 332
Wages 55 000 shop fittings

Drawings 28 950 (Recording depreciation on

shop fittings)
Computer 2 300
Shop fittings 9 200 ii. 31/3/2020 Wages 920
Total payments 261 450 Accrued expenses 920
Increase in cash for the year 8 130 (Recording wages owing on
Opening bank balance 160 balance day)
Closing bank balance 8 290
iii. Wages
Workings 31/3/2020 Balance 55 000 dr
Accounts receivable: 4 200 + 46 000 – 1 600 – 420 – 3 400 =
Accrued expenses 920 55 920 dr
44 780
Accounts payable: 7 800 + 81 000 – 1 800 – 5 600 = 81 400 Income summary 55 920 dr 0
Drawings: 32 000 – 3 050 = 28 950 iv. Accumulated depreciation on vehicles
Shop fittings: Receipt 900 + 800 = 1 700, Payment 9 200 – 5 000 1/4/2020 Balance 38 840 cr
= 4 200
Depreciation on
Computer: Receipt 600 – 500 = 100 5 096 40 936 cr
vehicles
b. Close the commission received account
31/3/2020 Commission received 3 000
Income summary 3 000
(Closing commission received)

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32 Full Answers for Level 2 Accounting Learning Workbook

Activity 10B: NCEA revision questions (page 122) 3. a. i. Date Particulars Dr Cr

1. a. Gifts for Living 31/3/20 Accrued income 1 800
Income Statement (extract)
for the year ended 31 March 2018 Dividends received 1 800

Distribution expenses ii. Date Particulars Dr Cr

Advertising 4 120 31/3/20 Interest on loan 600
Electricity – shop 5 400 Accrued expenses 600

Sales wages 36 750

iii. Date Particulars Dr Cr
Depreciation on shop fixtures and equipment 2 000 48 270 31/3/20 Prepayments 1 000

b. Insurance 1 000
Gifts for Living
Statement of Financial Position
as at 31 March 2018 iv. Date Particulars Dr Cr

Current assets 31/3/20 Depreciation on clinic vehicle 1 920

Inventory 24 000 Accumulated depreciation

1 920
on clinic vehicle
Accounts receivable (1) 12 250 36 250
Non-current assets v. Date Particulars Dr Cr
Property, plant and equipment 31/3/20 Bad debts 80
Total carrying amount (2) 140 000 GST 12
Total assets 176 250 Accounts receivable 92
Liabilities
vi. Date Particulars Dr Cr
Current liabilities
31/3/20 Doubtful debts 230
Accounts payable 10 868
Allowance for doubtful
Bank 2 500 230
debts
GST 2 916
vii. Date Particulars Dr Cr
Accrued expenses 1 350 17 634
31/3/20 Income summary 680
Non-current liabilities
Bad debts 680
Mortgage (3) 74 000 (91 634)
Net assets $84 616 viii. Date Particulars Dr Cr
Equity 31/3/20 Capital 16 000
Opening capital 88 600 Drawings 16 000
Profit for the year 31 016 b. Dividends received
Drawings (35 000)
Date Particulars Dr Cr Bal
Closing capital $84 616
31/3/20 Balance 600 cr
Notes to the Statement of Financial Position: Accrued income 1 800 2 400 cr
1. Accounts receivable Income summary 2 400 0
Accounts receivable 12 500
Accrued expenses
Allowance for doubtful debts (250)
Date Particulars Dr Cr Bal
12 250
31/3/20 Interest on loan 600 600 cr
2. Mortgage
The mortgage has an interest rate of 9%, and a maturity date of Allowance for doubtful debts
30 June 2025. Date Particulars Dr Cr Bal
2. a. Cash received from customers:
31/3/20 Balance 500 cr
Accounts receivable + invoices issued – bad debts – closing
Doubtful debts 230 730 cr
Accounts receivable
$42 000 + $265 000 – $200 – $46 000 = $260 800

b. Landscape Visions
Statement of Cash Flows (extract)
for the year ended 31 March 2018
Cash receipts
Cash from Accounts receivable / customers 260 800
Loan from BNZ 35 000
Sale of delivery van 2 000
Total receipts 297 800
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 Answers 33

4. Working g. Tour revenue received

Cash from Accounts receivable: 12 000 + 42 000 – 1 200 – 13 600 = Date Particulars Dr Cr Bal
$39 200
31/3/20 Balance 78 800 cr
Cash paid to Accounts payable: 3 400 + 54 000 – 3 900 = $53 500
Accounts receivable 2 400 81 200 cr
Quickshift Removals
Statement of Cash Flows Income summary 81 200 0
for the year ended 31 December 2022 6. Part A
Cash flows in
Martha’s Vehicle Repairs
Cash from Accounts receivable 39 200 a. Income Statement for the year ended 31 March 2019
Cash fees received / Removal fees 86 200 $ $
Sale of delivery van 13 000 Revenue
Loan 40 000 Repair income 351 200
Dividend from Van Lines Ltd 1 750 180 150
Less Cash flows out Other income
Cash paid to suppliers / Accounts payable 53 500 Interest received 1 250
Delivery van purchase 55 000 TOTAL INCOME 352 450
Advertising 4 500 Less Expenses
Insurance 6 200 Workshop and repair
Wages 27 000 expenses
Loan repayment 31 000 Mechanics’ wages 100 000
Interest 8 900 Workshop expenses 75 000
Donation 200 (186 300) Workshop rent 32 000
Net decrease in cash (6 150) Depreciation on workshop
20 000
equipment
Plus opening bank balance 1/1/22 10 000
Electricity 36 000
Closing bank balance 31/12/22 $3 850
263 000
5. a. Date Particulars Dr Cr Administrative expenses
31/3/20 Prepayments 80 Accountancy fees 12 000
Insurance 80 Bad debts 2 000

b. Date Particulars Dr Cr Electricity 9 000

31/3/20 Accounts receivable 2 760 Office insurance 4 000

Tour revenue received 2 400 Depreciation on office equipment 2 000

GST 360 Doubtful debts 294 29 294

c. Date Particulars Dr Cr
Finance costs
31/3/20 Bad debts 800
Interest on loan 4 500 4 500
GST 120
Accounts receivable 920
TOTAL EXPENSES 296 794

d. Date Particulars Dr Cr Profit (loss) for the year $55 656

31/3/20 Allowance for doubtful debts 40 b. i. 31/03/19 Accounts receivable 1 380

Doubtful debts 40
Repair income 1 200
e. Accumulated depreciation on tour vans GST 180
Date Particulars Dr Cr Bal
31/03/19 Income summary 294
1/04/19 Balance 13 000 cr
Doubtful debts 294
31/3/20 Depreciation on tour vans 5 400 18 400 cr
ii. Capital
f. Interest on loan
1/04/18 Balance 176 500 cr
Date Particulars Dr Cr Bal
Drawings 40 000 136 500 cr
31/3/20 Balance 720 dr
Income summary 55 656 192 156 cr
Accrued expenses 240 960 dr
Income summary 960 0

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34 Full Answers for Level 2 Accounting Learning Workbook

Part B Part C
a. i. Cash paid to suppliers: Best Fashion
Opening accounts payable $30 000 + invoices received $920 000 a. Statement of Financial Position (extract)
– discount received $8 000 – closing accounts payable $25 000 = as at 31 March 2019
$917 000
Current liabilities
Flash Furniture Accounts payable 48 300
ii. Cash Flow Statement (extract)
for the year ended 31 March 2019 Accrued expenses 2 500
$ $ Income in advance 3 000
Less Payments Loan 12 000
Cash to suppliers 917 000 Bank 20 000
Business expenses 65 000
Wages 120 000 Total current liabilities 85 800
Drawings 33 500 Non-current liabilities
Delivery van 69 000 Mortgage (due October 2030) 180 000
Total cash payments 1 204 500
Total non-current liabilities 180 000
b. Property, plant and equipment Note (extract) equipment Total liabilities 265 800
Net assets 205 000
Delivery

Equity
Shop
vans

Opening capital 200 000

$ $ Plus profit for the year 65 000
For the year ended 31 March 2019 Less Drawings (60 000)
Opening carrying amount 55 000 60 000
Plus Additions 60 000 0 Closing capital 205 000
Less Disposals (15 000) 0
b. i. 30/03/19 Wages 2 500
Less Depreciation (12 000) (6 000)
Accrued expenses 2 500
Closing carrying amount 88 000 54 000
As at 31 March 2019
Cost 140 000 80 000 30/03/19 Prepayments 600
Insurance 600
Less Accumulated depreciation (52 000) (26 000)
Closing carrying amount 88 000 54 000 30/03/19 Cost of goods sold 6 000
Inventory 6 000

ii. Depreciation office equipment

Accumulated
30/03/19 depreciation on office 3 000 3 000 Dr
equipment
Income Summary 3 000 0

Office equipment
1/04/18 Balance 50 000 Dr
31/03/19 Accounts payable 22 000 72 000 Dr

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 Answers 35

7. Part A Current liabilities

Stationery Pad Accounts payable 20 299
Income Statement for the year ending 31 March 2018
GST 5 916
$ $ $
Accrued expenses 2 000
Revenue
Sales 990 000
Total current liabilities 28 215
Less Cost of goods sold (586 000)
Note 1 – Accounts receivable
Gross profit 404 000
$ $
Accounts receivable 9 655
Other income
Less Allowance for doubtful debts (500)
Rent received 24 000
9 155
428 000
Less Expenses b. i. 30/3/18 Prepayments 3 000
Distribution expenses Insurance 3 000
Advertising 11 000
ii. 30/3/18 Depreciation on trailers 4 000
Electricity 15 400
Accumulated depreciation
Insurance 3 500 4 000
on trailers
Sales staff salaries 126 000
iii. 30/3/18 Dividends received 2 000
Depreciation on buildings 9 200
Depreciation on shop fittings 4 100 169 200 Income summary 2 000

iv. Bad debts

Administrative expenses 30/3/18 Balance 1 600 dr
Accountancy fees 3 000 Accounts receivable 300 1 900 dr
Bad debts 2 000 Income summary 1 900 0
Electricity - Office 6 600
v. Accumulated depreciation – Delivery vehicles
Insurance – Office 1 500
30/3/18 Balance 20 000 cr
Office expenses 33 600
Depreciation on
Depreciation on office equipment 2 000 25 000 45 000 cr
delivery vehicle
Doubtful debts (200) 48 500
Part C
a. Cash from credit customers:
Finance costs
Opening accounts receivable $1 500 + invoices issued $3 000
Interest on mortgage 6 875 6 875 – credit notes issued $200 – bad debts $100 – closing accounts
receivable $2 000 = $2 200
Total expenses 224 575 b. Cash paid to fuel suppliers:
Opening accounts payable $900 + invoices received $1 200 –
Profit(loss) for the year $203 425
discount received $50 – closing accounts payable $750 = $1 300
Part B
Garden Life
a. Statement of Financial Position
(extract) as at 31 March 2018
Note $ $
Current assets
Accounts receivable 1 9 155
Bank 20 000
Inventory 74 000
Accrued income 1 500
Prepayments 3 000

Total current assets 107 655

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36 Full Answers for Level 2 Accounting Learning Workbook

Jetboat Fun • When check-out operators change over, a new till drawer is used so
c. Cash Flow Statement (extract) that each employee is responsible for his or her own drawer. In this
for the month ended 31 December 2018 way, any errors can be accounted for, and discrepancies can be traced
back to the person responsible.
$ $
• The money in the cash drawer is checked at the end of the shift to
Receipts
see if the amount matches the amount on the cash register printout.
Cash from accounts receivable 2 200 • Any refunds given or the correction of an incorrect ringing on the till
Cash from cash customers 4 000 have to be authorised by the supervisor. This prevents the possible
problem of the check-out operator giving friends ‘refunds’.
Interest received 150
3. Examples, which will vary depending on school canteen set-up, include (but
Sale of office equipment 500
are not limited to) the following.
Total receipts 6 850 a. Inventory strength
Less Payments • There is no inventory that is accessible to the students – it is all
Accounts payable / Fuel suppliers 1 300 kept behind a counter/screen. This prevents theft by customers.
• The canteen staff ensure that all new stock is put at the back
Advertising 400
of the fridges/shelves, so that the oldest stock is sold first. This
Rent 1 000 avoids the problem of stock becoming obsolete and having to be
Wages 1 800 discarded because it has passed its ‘best before’ date.
Business expenses 2 300 b. Cash receipt weakness
• No receipts are issued. This means there is no proof of how much
money the canteen has received for the day. This could mean that
Total payments (6 800) the staff might be undercharging, or possibly stealing money, and
Net increase (decrease) 50 there would be no documentation to help prove this.
Opening bank balance 2 000 in funds 4. If the employee who receives the money is also the person who prepares
the cash receipts and banks the money, that employee could easily steal
Closing bank balance $2 050
some of the money before it is deposited into the bank, then change the
(Note: Sale of equipment $600 is a foreign item.) records to cover this theft, by making the cash receipts journal match the
amount of money actually banked. The employee wouldn’t get caught,
Chapter 11 because no one else is involved in the process and so the error would
The answers provided are examples only. They indicate the depth of knowledge remain undetected.
required from students. Other responses are possible. 5. If the employee who receives the inventory when it is delivered is the
same person who ordered the inventory, he or she could easily order
Activity 11: Generic internal controls (page 144) stock for him- or herself, have the business pay for it, and take it home
1. a. Separation of duties is important to ensure that a person cannot when it arrives.
order books for him- or herself and get the bookshop to pay for the
order. Separation of duties would involve having one employee put Chapter 12
in orders for stock, and another deal with paying the invoices for the The answers provided are examples only. They indicate the depth of knowledge
stock purchases. This means that the orders are checked and that the required from students. Other responses are possible.
bookshop receives the stock ordered.
b. Authorisation means that someone in a position of responsibility Activity 12A: Inventory controls (page 148)
has the final say over whether stock is ordered. It is important that 1. The purchase order form provides evidence of, and ensures adequate
one person is in charge of ordering books (or at least checking and documentation for all the business’s orders. It means Campbell’s Camping
approving the orders) because this will prevent staff members from Supplies Store knows exactly what it has ordered and can later check
ordering books for themselves – each order will be checked to ensure this against the packing slip and invoice to make sure the business is
that the bookshop needs the items. Having an authorisation system receiving what it ordered.
in place also avoids the problem of double-ordering books, which 2. Having purchases authorised by one person prevents different members
could arise if two different staff members order the same item. of staff ordering the same stock, thus having overstocking of items in
c. By using the till roll on the cash register, adequate documentary some areas. This could lead to losses through stock becoming obsolete. If
evidence is created and kept of every ‘cash received’ transaction. This one person authorises all purchases, it should prevent this problem and
ensures that there is adequate documentation of money received. it will also prevent staff members from ordering goods for their personal
This will enable accurate journals to be prepared and ensure a check use and getting the business to pay for the goods.
against the money banked. It will also mean that at the end of the 3. a. Inventory objectives not being met:
day the manager can count the money in the till and check it against • Adequate records of inventory on hand are kept.
the till roll, to identify theft or inaccurate recording of transactions. • Inventory is kept secure and safe from theft and fraud.
d. Checking the bank statement against the cash journals is an • Minimum stock levels are maintained.
important control because the bank statement provides an
b. Two ‘easy fixes’ need to be implemented. Firstly, my parents need to
independent check on money received and paid by the bookshop,
change the combination lock. Only my parents and one or two other
and verifies the accuracy of this information. Discrepancies between
employees should know the combination. This will help ensure the
the journals and bank statement could indicate that theft has taken
stock is safe from employee theft, and narrow down suspects if some
place.
stock does go missing. There also need to be inventory records in
2. Examples include (but are not limited to) the following. the storeroom, where all inventory entering and leaving the store is
• All items are scanned and a receipt is produced for each transaction. recorded. The employee taking the stock must also sign for it. This
A copy of each receipt is kept in the cash register so the supermarket will help ensure that the inventory on hand is known, thus avoiding
can check the money received against the cash register tape at the running out of stock. It will also help ensure that inventory records
end of the day. are accurate, and can be checked by a stock-take.
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 Answers 37

4. a. Separation of duties is important to help lessen the opportunity prevent an employee being able to order clothes for themselves.
for employees to steal from the business and cover their tracks. This protects the business from having to pay for goods the business
Separation of duties is lacking in Nicholson and Company because does not receive. Another internal control is having the pre-printed
Sam orders the inventory, checks the inventory off when it arrives purchase order number. The number helps the business file the
and signs the packing slip for payment by Sue. Sam could easily document, and check that all have been used and filed numerically.
order inventory for himself, keep it when it arrives and then get the This allows the business to identify whether the business is missing
business to pay for it. Someone else should check the inventory off any order forms, which could indicate a staff member has tried to
when it arrives and put it on the shelves to make it harder for Sam to purchase inventory for themself.
steal it. 5. The use of the payment voucher, which required two authorising
b. It is important for businesses to keep adequate documentation, signatures, is a key internal control. It shows that two people agree
ideally consecutively pre-numbered. Nicholson and Company uses a that this account (for Clothing Galore) should be paid, and that it is
range of documents (order forms, invoices, packing slips and so on) a legitimate business payment. The payment voucher has reference
but does not keep enough of them. The order form is thrown out, identification of the original purchase order, packing slip and invoice so
so the business relies only on Sam’s signed packing slip to update the auditor (or owner, or anyone) can check the details to ensure they
the inventory records. When Tane makes the payment he does not match and are legitimate. Having these references also helps confirm
have a copy of the order or packing slip, so there is no proof that the that the business is paying only for goods it ordered and received, which
goods were ordered or received. (Could also discuss invoices and helps protect the business’s money.
receipts at point of sale, which is good.) 6. The amount of stolen inventory can be identified by comparing the
c. Authorisation is important so that only some people may do a task, amount of inventory that is actually on hand, as established by a stock-
therefore they are able to check for approval, and it also makes take, against the inventory cards, which show the amount of inventory
it easier to discover who is responsible if there is a problem. Sam the business thinks it should have (theoretical amount on hand). The
has the authority to order the inventory. This is a good example of difference is the amount that is missing, possibly stolen.
authorisation and prevents several people from ordering the same 7. Ensuring that inventory purchases are authorised is an important control
inventory and over-stocking. However, Jack should authorise all to ensure that the inventory is needed, and a legitimate business
payments and not just leave signed cheques. Leaving signed cheques purchase. Having someone in authority approve the purchase helps
means that Tane could write cheques out for himself or others, prevent employees purchasing inventory for personal use (fraud), which
effectively stealing from Nicholson and Company. protects the business’s cash flow and profit, as the business is not paying
for inventory it does not keep, and does not have obsolete stock from
Activity 12B: Elements of an inventory subsystem ordering too much inventory.
(page 153) 8. It is important that payments to Accounts payable are authorised by
1. The perpetual inventory system keeps a ‘theoretical’ running record someone not involved with the purchasing/ordering of the inventory,
of all inventory that should be on hand. The system requires the use otherwise it would be easy for the employee to order stock for
of inventory cards (or other ledger accounts) that record whenever themselves and pay the account with the business’s money. When the
inventory is bought or sold, to keep a record of the inventory the payment is authorised, it should be checked against the order form and
business should have by increasing or decreasing the inventory account. the packing slip to make sure the payment is legitimate.
In addition, it keeps a running record of cost of goods sold, sales, and
9. a. It is important to have a purchase order because it helps keep a
sales returns.
record of what has been ordered. This helps prevent ordering the
2. Advantages include the following. same inventory twice, which is a waste of money and can lead to
• The business can trace missing or stolen inventory. This is done wastage/obsolete stock. Having an order form allows the business to
by comparing the theoretical record of inventory on hand on the have a record of what was ordered, which it can check against the
inventory card with the total calculated after completing a stock-take. inventory when it arrives to make sure that it is the correct inventory
The difference identifies missing or unaccounted-for inventory. / can check against the invoice to make sure the business pays only
• The business can prepare regular financial statements without having for inventory that it ordered.
to do a stock-take each time, which saves the business money. Doing One internal control present on the purchase order form is the
so is possible because the perpetual system keeps a running record document number. This helps the business file the document, and
of inventory on hand, sales, and cost of goods sold. check that all have been used and filed numerically. This allows the
• The business can set reorder points and quantity so the business business to identify if the business is missing any order forms, which
does not run out of stock or carry too much stock. This is good could indicate a staff member has tried to purchase inventory for
because it should help maximise sales and profit since the customers themself. Another internal control is the requirement for the purchase
are kept happy by having sufficient inventory, and it minimises order to be authorised (signed). This is to ensure the inventory is
obsolete inventory. needed by Fitness World and to prevent employees being able to
3. A stock-take is the process of physically counting every item of stock on order goods for themselves. This protects the business from having to
a particular day. This often requires businesses to shut early or open late pay for goods the business does not receive.
in order for staff to complete this process. Normally all stock is counted b. Having a reorder point is important because it should prevent the
twice (by two different people) as a double check. A stock-take is needed business from running out of inventory. This means that customers
to verify the actual amount of inventory on hand and must be completed are kept happy by having inventory on hand and there will be
at the end of each financial year. increasing sales. Having a reorder quantity helps make the ordering
4. a. On 26 July 2020 Betty’s Boutique ordered on credit from Clothing process easier and quicker, and it should also mean the business
Galore 20 coats at $120 excluding GST and 10 dresses at $32 is avoiding over-ordering stock (leading to possible obsolescence).
excluding GST each, totalling $3 128 including GST. Purchase order Having optimum inventory levels helps maximise sales and profit.
number 2938426. This order was authorised by Betty, the owner. c. A reorder point is the level of inventory Fitness World has on hand at
b. The use of the purchase order, which required an authorising the time when it needs to order more. (The reorder quantity is how
signature, is a key internal control. The purchase order helps to many items should be ordered, which is printed out by the computer.)
ensure the inventory is needed by Betty’s Boutique and helps to The minimum stock level is the smallest amount of inventory Fitness

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38 Full Answers for Level 2 Accounting Learning Workbook

World is prepared to have before it risks running out and therefore

losing its good reputation with customers. The reorder point should
be above the minimum stock level and there should be a sufficient
quantity of stock to allow for more sales until the new order arrives
without reaching the minimum stock level.
d. When the inventory arrives, one of the shop assistants checks the
packing slip and passes it to the office manager. The office manager
receives the checked packing slip from the shop assistant and checks
it against the purchase order form. This is important for Fitness World
so that it does not receive unwanted goods it did not order, which
would mean it would spend money paying for goods it did not need
or receive. It also helps prevent Fitness World from running out of
inventory if what was ordered does not arrive. That could lead to
dissatisfied customers and a loss in sales, so it important to check
that the goods received match the goods ordered to prevent these
problems.
e. When the inventory arrives, one of the shop assistants checks the
packing slip and passes it to the office manager. The office manager
receives a copy of the purchase order form and matches it against
the invoice when the invoice arrives, before preparing payment.
This procedure ensures Fitness World pays only for goods that were
ordered. This is important because the business does not want to
spend money for goods that it does not need, which would be bad
for cash flow.

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 Answers 39

Activity 13A: Inventory cards (page 160)

1. The purpose of preparing an Inventory card is to record whenever
inventory arrives at or leaves the business. A different card is kept for each
inventory type. The balance column should match the Inventory ledger
account.
2. (240 + 240 + 420) = $900
3. a. FIFO
Inventory card
Name: Dining table Measurement base: FIFO
Inventory number: 80 Location: Shop
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Aug 1 Balance 15 220 3 300

3 Sales 2 220 440 13 220 2 860

5 Purchases 4 240 960 13 220 2 860

4 240 960

8 Returns out 1 220 220 12 220 2 640

4 240 960

14 Sales 12 220 2 640

3 240 720 1 240 240

15 Purchases 6 200 1 200 1 240 240

6 200 1 200

20 Sales 1 240 240

2 200 400 4 200 800

25 Purchases 5 280 1 400 4 200 800

5 280 1 400

26 Sales 4 200 800

1 280 280 4 280 1 120

31 Shortage 1 280 280 3 280 840

b. Weighted average
Inventory card
Name: Dining table Measurement base: Weighted average
Inventory number: 80 Location: Shop
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Aug 1 Balance 15 220.00 3 300.00
3 Sales 2 220 440 13 220.00 2 860.00
5 Purchases 4 240 960 17 224.71 3 820.00
8 Returns out 1 224.71 224.71 16 224.71 3 595.29
14 Sales 15 224.71 3 370.65 1 224.64 224.64
15 Purchases 6 200 1 200 7 203.52 1 424.64
20 Sales 3 203.52 610.56 4 203.52 814.08
25 Purchases 5 280 1 400 9 246.01 2 214.08
26 Sales 5 246.01 1 230.05 4 246.01 984.03
31 Shortage 1 246.01 246.01 3 246.01 738.02

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40 Full Answers for Level 2 Accounting Learning Workbook

4. a. FIFO
Inventory card
Name: Rimu Scotch chests Measurement base: FIFO
Inventory number: 25 Location: Shop and storage room
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Oct 1 Balance 10 320 3 200
5 336 1 680

3 Sales 4 320 1 280 6 320 1 920

5 336 1 680

5 Sales 6 320 1 920

2 336 672 3 336 1 008

8 Purchases 5 352 1 760 3 336 1 008

5 352 1 760

14 Sales 3 336 1 008

3 352 1 056 2 352 704

15 Purchases 8 368 2 944 2 352 704

8 368 2 944

20 Sales 2 352 704

1 368 368 7 368 2 576

22 Returns in 3 320 960 3 320 960

7 368 2 576

25 Purchases 5 336 1 680 3 320 960

7 368 2 576
5 336 1 680

26 Sales 3 320 960

2 368 736 5 368 1 840
5 336 1 680

31 Drawings 2 368 736 3 368 1 104

5 336 1 680

b. Weighted average
Inventory card
Name: Rimu Scotch chests Measurement base: Weighted average
Inventory number: 25 Location: Shop and storage room
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Oct 1 Balance 15 325.33 4 880.00
3 Sales 4 325.33 1 301.32 11 325.33 3 578.68
5 Sales 8 325.33 2 602.64 3 325.35 976.04
8 Purchases 5 352 1 760.00 8 342.01 2 736.04
14 Sales 6 342.01 2 052.06 2 341.99 683.98
15 Purchases 8 368 2 944.00 10 362.80 3 627.98
20 Sales 3 362.80 1 088.40 7 362.80 2 539.58
22 Returns in 3 325.33 975.99 10 351.56 3 515.57
25 Purchases 5 336 1 680.00 15 346.37 5 195.57
26 Sales 5 346.37 1 731.85 10 346.37 3 463.72
31 Drawings 2 346.37 692.74 8 346.37 2 770.98

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 Answers 41

5. a. FIFO
Inventory card
Name: Pine sea chests Measurement base: FIFO
Inventory number: 36 Location: Shop and storage room
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Jun 1 Balance 12 40 480
4 48 192
8 56 448

4 Sales 12 40 480
3 48 144 1 48 48
8 56 448

6 Purchases 8 40 320 1 48 48
8 56 448
8 40 320

10 Sales 1 48 48
7 56 392 1 56 56
8 40 320

18 Purchases 5 48 240 1 56 56
8 40 320
5 48 240

20 Sales 1 56 56
8 40 320
3 48 144 2 48 96

25 Drawings 2 48 96 0 0 0

27 Returns in 2 40 80 2 40 80

28 Purchases 5 56 280 2 40 80
5 56 280

29 Returns out 2 40 80 5 56 280

30 Shortage 2 56 112 3 56 168

30 Error – Scotch chests 4 52 208 3 56 168

4 52 208

b. Weighted average
Inventory card
Name: Pine sea chests Measurement base: Weighted average
Inventory number: 36 Location: Shop and storage room
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Jun 1 Balance 24 46.67 1 120
4 Sales 15 46.67 700.05 9 46.66 419.95
6 Purchases 8 40 320 17 43.53 739.95
10 Sales 8 43.53 348.24 9 43.52 391.71
18 Purchases 5 48 240 14 45.12 631.71
20 Sales 12 45.12 541.44 2 45.14 90.27
25 Drawings 2 45.14 90.27 0 0.00 0.00
27 Returns In 2 40 80 2 40.00 80.00
28 Purchases 5 56 280 7 51.43 360.00
29 Returns Out 2 51.43 102.86 5 51.43 257.14
30 Shortage 2 51.43 102.86 3 51.43 154.28
30 Error 4 52 208 7 51.75 362.28

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42 Full Answers for Level 2 Accounting Learning Workbook

Activity 13B: Inventory journals and ledgers (page 170) March 28 Owner took inventory which has a selling price of $1 840
1. March 3 Purchased inventory on credit costing $4 600 including GST including GST home for personal use. The inventory originally
cost $800 excluding GST when the business purchased it.
Date Particulars Debit Credit
Date Particulars Debit Credit
Mar 3 Inventory 4 000
Mar 28 Drawings 920
GST 600
GST 120
Accounts payable 4 600
Inventory 800
(Buying inventory on credit)
(Owner took stock for personal use)
March 5 Sold inventory which cost $2 000 excluding GST for $4 600
including GST March 31 The annual stock-take revealed that some inventory has gone
missing. The cost price of this inventory (excluding GST) is
Date Particulars Debit Credit
$320.
Mar 5 Cost of goods sold 2 000
Date Particulars Debit Credit
Inventory 2 000
Mar 31 Inventory shortage 320
(Recognising inventory sold at cost price)
Inventory 320
(Recognising inventory shortage)
Accounts receivable 4 600
GST 600
Cost of goods sold 320
Sales 4 000
Inventory shortage 320
(For sale of inventory on credit)
(Writing off inventory shortage to cost of
March 7 Returned inventory which cost $460 including GST, as it was goods sold)
faulty
2. a. Journals
Date Particulars Debit Credit Jan 3 Sold 4 bookcases at $230 including GST on credit, cost price
Mar 7 Accounts payable 460 $120 excluding GST
GST 60 Date Particulars Debit Credit
Inventory 400 Jan 3 Cost of goods sold 480
(Returned faulty stock on credit) Inventory – bookcase 480
March 12 Customer returned goods to us. They were sold for $276
including GST, and had a cost price of $138 including GST Accounts receivable 920
Date Particulars Debit Credit GST 120
Mar 12 Inventory 120 Sales 800
Cost of goods sold 120 Jan 5 Purchased 4 more bookcases each costing $130 excluding GST
(Sales return at cost price)
Date Particulars Debit Credit
Jan 5 Inventory – bookcase 520
Sales returns 240
GST 78
GST 36
Accounts payable 598
Accounts receivable 276
Jan 8 Returned 1 bookcase which cost $120 excluding GST, because it
(For sales return on credit) was faulty
Date Particulars Debit Credit
March 24 Some inventory has become damaged and needs to be Jan 8 Accounts payable 138
revalued. The inventory is to be decreased by $2 000 excluding
GST 18
GST.
Inventory – bookcase 120
Date Particulars Debit Credit
Write down of inventory/Cost of goods Jan 20 The owner took one bookcase home for daughter’s 21st
Mar 24 2 000 birthday gift. The bookcase is currently being sold for $184
sold
including GST, and it had a cost price of $138 including GST.
Inventory 2 000
Date Particulars Debit Credit
(Inventory revaluation)
Jan 20 Drawings 138
GST 18
Inventory – bookcase 120

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 Answers 43

Jan 24 One of the bookcases sold for $184 including GST (cost price Sales returns
$120 excluding GST) was returned Jan 24 Accounts receivable 160 160 dr
Date Particulars Debit Credit
3. a. Ledger accounts
Jan 24 Inventory – bookcase 120 Inventory – Gadgets
Cost of goods sold 120 Mar 1 Balance 11 200 dr
4 Accounts payable 1 728 12 928 dr
Sales returns 160 5 Cost of goods sold 4 480 8 448 dr
GST 24 6 Cost of goods sold 560 9 008 dr
Accounts receivable 184 8 Accounts payable 2 240 11 248 dr
Jan 31 Performed stock-take and found that 1 bookcase which cost 10 Cost of goods sold 1 680 9 568 dr
$120 excluding GST was missing.
12 Accounts payable 576 8 992 dr
Date Particulars Debit Credit 14 Accounts payable 3 504 12 496 dr
Jan 31 Inventory shortage 120 16 Shortage 560 11 936 dr
Inventory – bookcase 120 18 Write-down/COGS 2 160 9 776 dr
20 Inventory – widgets 560 10 336 dr
Cost of goods sold 120
Cost of goods sold
Inventory shortage 120
Mar 5 Inventory – gadgets 4 480 4 480 dr
Jan 31 Some of the bookcases are damaged and have lost retail 6 Inventory – gadgets 560 3 920 dr
value. The closing value of the inventory on hand is now
$2 230. 10 Inventory – gadgets 1 680 5 600 dr
16 Shortage 560 6 160 dr
Date Particulars Debit Credit
18 Write-down/Inventory 2 160 8 320 dr
Write-down of inventory/Cost of
Jan 31 210
goods sold Sales
Inventory – bookcase 210 Mar 5 Accounts receivable 13 440 13 440 cr
Jan 31 Recording error 10 Accounts receivable 6 000 19 440 cr

Date Particulars Debit Credit Accounts payable

Jan 31 Inventory – Bookcase 1 200 Inventory –
Mar 4 1 987.20 1 987.20 cr
gadgets and GST
Inventory – Sea chest 1 200
Inventory –
b. Ledgers 8 2 576 4 563.20 cr
gadgets and GST
Inventory – Bookcases
Inventory –
Jan 1 Balance 2 400 dr 12 662.40 3 900.80 cr
gadgets and GST
3 Cost of goods sold 480 1 920 dr Inventory –
14 4 029.60 7 930.40 cr
5 Accounts payable 520 2 440 dr gadgets and GST
8 Accounts payable 120 2 320 dr Accounts receivable
14 Cost of goods sold 960 1 360 dr Mar 5 Sales and GST 15 456 15 456 dr
15 Accounts payable 1 200 2 560 dr 6 Sales returns and GST 1 932 13 524 dr
20 Drawings 120 2 440 dr 10 Sales and GST 6 900 20 424 dr
24 Cost of goods sold 120 2 560 dr
Write-down of inventory
31 Shortage 120 2 440 dr
Mar 18 Inventory – gadgets 2 160 2 160 dr
31 Write-down of inventory 210 2 230 dr
COGS 2 160 0
31 Inventory – Sea chests 1 200 3 430 dr

Cost of goods sold

Jan 3 Inventory – bookcases 480 480 dr
14 Inventory – bookcases 960 1 440 dr
24 Inventory – bookcases 120 1 320 dr
31 Shortgage 120 1 440 dr

Sales
Jan 3 Accounts receivable 800 800 cr
14 Accounts receivable 1 280 2 080 cr

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44 Full Answers for Level 2 Accounting Learning Workbook

b. Date Particulars Debit Credit

Mar 4 Inventory – gadgets 1 728
GST 259.20
Accounts payable 1 987.20

Mar 10 Cost of goods sold 1 680

Inventory – gadgets 1 680

Accounts receivable 6 900

GST 900
Sales 6 000

Mar 16 Inventory shortage 560

Inventory – gadgets 560

Cost of goods sold 560

Inventory shortage 560

Mar 18 Write-down of inventory/COGS 2 160

Inventory – gadgets 2 160

Mar 20 Inventory – gadgets 560

Inventory – widgets 560

Note: In this topic Inventory write-down could be recorded against

Cost of goods sold.
4. Examples:
The perpetual inventory system provides a theoretical running total of
the inventory that should be on hand, so that interim reports can be
prepared and inventory levels monitored.
The perpetual inventory system has a theoretical running total of stock,
and the business can use this to maintain optimum stock levels and
ensure that it does not run out of stock. It can also introduce reorder
points using the data obtained from the perpetual inventory method.
Missing stock can be identified by the difference between the theoretical
balance for inventory that should be on hand and the amount of stock
that is on hand after carrying out the stock-take.
5. Missing stock can be identified as the difference between the theoretical
balance for inventory that should be on hand and the amount of stock
that is actually on hand after the stock-take has been carried out.
6. There is a continuous running balance of the inventory on hand, and
this amount can be used to prepare the Statement of Financial Position.
At the same time, the Cost of goods sold account is being updated
continuously so that this figure can be used in the Income Statement,
allowing a business to prepare interim reports.
7. Carrying out a physical stock-take is very important because it provides
an accurate count of the inventory actually on hand on the day of
the stock-take. This is the accurate figure, and the one that should be
used in the end-of-year financial statements. The amount can also be
compared with the running balance on the inventory card, and if there is
a difference between the two figures, this indicates that theft of stock has
taken place, or that the recording practices of the employees are poor.

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 Answers 45

8. a. FIFO
Inventory card
Name: Gift boxes Measurement base: FIFO
Inventory number: 18 Location: Shop
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Jan 1 Balance 500 6.00 3 000
100 6.40 640

3 Purchases 310 5.60 1 736 500 6.00 3 000

100 6.40 640
310 5.60 1 736

4 Sales 150 6.00 900 350 6.00 2 100

100 6.40 640
310 5.60 1 736

6 Returns out 50 6.00 300 300 6.00 1 800

100 6.40 640
310 5.60 1 736

7 Sales 300 6.00 1 800

50 6.40 320 50 6.40 320
310 5.60 1 736

8 Purchase 300 6.00 1 800 50 6.40 320

310 5.60 1 736
300 6.00 1 800

10 Sales 50 6.40 320

200 5.60 1 120 110 5.60 616
300 6.00 1 800

11 Returns in 30 6.00 180 30 6.00 180

110 5.60 616
300 6.00 1 800

12 Drawings 10 6.00 60 20 6.00 120

110 5.60 616
300 6.00 1 800

14 Shortage 20 6.00 120 110 5.60 616

300 6.00 1 800

16 Write-down 110 3.20 352

300 6.00 1 800

17 Error – Baskets 10 3.20 32 100 3.20 320

300 6.00 1 800

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46 Full Answers for Level 2 Accounting Learning Workbook

b. Journal entries
Date Particulars Debit Credit
Jan 6 Accounts payable 345
GST 45
Inventory – gift boxes #18 300

Jan 7 Cost of goods sold 2 120

Inventory – gift boxes #18 2 120

Accounts receivable 4 830

GST 630
Sales 4 200

Jan 8 Inventory – gift boxes #18 1 800

GST 270
Accounts payable 2 070

Jan 11 Inventory – gift boxes #18 180

Cost of goods sold 180

Sales returns 360

GST 54
Accounts receivable 414

Jan 12 Drawings 69
GST 9
Inventory – gift boxes #18 60

c. Weighted average
Inventory card
Name: Gift boxes Measurement base: Weighted average
Inventory number: 18 Location: Shop
IN OUT BALANCE
Unit Unit Unit
Date Particulars Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Jan 1 Balance 600 6.07 3 640.00
3 Purchases 310 5.60 1 736.00 910 5.91 5 376.00
4 Sales 150 5.91 886.50 760 5.91 4 489.50
6 Returns out 50 5.91 295.50 710 5.91 4 194.00
7 Sales 350 5.91 2068.50 360 5.90 2 125.50
8 Purchases 300 6.00 1 800.00 660 5.95 3 925.50
10 Sales 250 5.95 1487.50 410 5.95 2 438.00
11 Returns in 30 5.91 177.30 440 5.94 2 615.30
12 Drawings 10 5.94 59.40 430 5.94 2 555.90
14 Shortage 20 5.94 118.80 410 5.94 2 437.10
16 Write-down* 410 5.21 2 135.70
18 Inventory – baskets 10 5.21 52.10 400 5.21 2 083.60

*(110 × 5.94 = 653.40) – (110 × 3.20 = 352.00)

= 301.40 decrease in total inventory
$2 437.10 – $301.40 = 2 135.70

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 Answers 47

Activity 13C: Inventory interpretations (page 178)

1. a. SWEETS 4U has a reorder quantity of 22, as shown by the ordering of 22 bags of lollipops on 6 May and 20 May. SWEETS 4U also appears to order
every fortnight, because these purchases are two weeks apart.
b. The quantity of sales fluctuates a lot from none on some days, to five on 12 May and up to twelve on 30 May. This makes is difficult for SWEETS 4U to
carry enough stock without overstocking bringing the risk of carrying lollipops that are past their best-before date.
c. Average – shortage of three bags in one month is high if regular. There were two errors or mis-recordings in the month. Not at risk of running out of
lollipops, as the smallest amount of inventory on hand comprised 14 bags.
d. The recurring errors indicate that staff members are not careful when recording purchases and sales of inventory and they mix up the quantities and
items of the inventory. This can lead to over-ordering of some inventory, which is not good considering this is a short-dated item and food can date
quickly. Alternative – could have customers unhappy by running out of lollies they think are in stock.
e. The shortage is established when Lulu does a stock-take. She compares the physical stocktake against the theoretical inventory on hand, which is
on the inventory card. When the card shows more stock than SWEETS 4U has and it is not a recording error, then a shortage is found. In this case on
31 May the card stated 24 bags of lollipops, but the physical count showed 21 bags, therefore three bags were missing. Missing inventory increases
the cost of goods sold without providing any income, which reduces the gross profit for SWEETS 4U.
2. No answer provided. Discuss in class or ask teacher to mark. Use resource information and the inventory, as well as your notes from a. to e. to help you.

Activity 14A: Adapted NCEA examination questions (page 181)

1. a. Cool Clothes
Inventory card
Product: Hoodies
DATE PARTICULARS IN OUT BALANCE
2018 No. @ $ No. @ $ No. @ $
5 Sales 15 16.00 240.00

10 16.80 168.00 40 16.80 672.00

8 Purchases 20 17.20 344.00 40 16.80 672.00

20 17.20 344.00

9 Returns out 3 17.20 51.60 40 16.80 672.00

17 17.20 292.40

10 Drawings 2 16.80 33.60 38 16.80 638.40

17 17.20 292.40

b. 5/7/18 Cost of goods sold 408

Inventory – Hoodies 408

Accounts receivable – North Bridge Football Club 920

GST 120
Sales 800

c. 31/7/18 Write-down of Inventory / COGS 360

Inventory – Hoodies 360

d. Max can prepare an Income Statement without doing a stock-take because he has a ledger account for cost of goods sold which is updated after every
inventory transaction. This means he can calculate the business’s gross profit without a stock-take.
e. A minimum inventory (stock) level is a quantity of different types of inventory that is the point at which more inventory is ordered, to help prevent
the shop running out of inventory. Max should have a minimum stock level for his hoodies and other clothes so that Cool Clothes does not run out of
clothes that customers want, which would result in a loss of sales.
f. Max should make sure that there is separation of duties when ordering and receiving the inventory. One staff member should have responsibility for
ordering the new stock and another for receiving it and checking it off against the packing slip. This will help prevent someone ordering inventory for
themself and keeping it when it arrives.
Max should use a purchase order form to evidence all inventory that is ordered. The purchase order form should be authorised by Max or another
senior staff member. This will help ensure that the inventory is needed and is not a personal order. The order form should be checked against the
packing slip when the goods arrive.
g. It is important that Cool Clothes does not over-order its inventory because it might then have too much inventory and be unable to sell it all, and
might then need a discount sale, which would reduce the income from sales. In addition, clothes go out of fashion and can become obsolete within a
year, so if Cool Clothes over-orders, it might have to sell stock for less than it paid for the stock, which will reduce profit. Another reason is that if Cool
Clothes has too much inventory that is not selling, although the stock has been paid for the business is not receiving any money from sales, so it might
struggle to have cash-flow to pay expenses.

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48 Full Answers for Level 2 Accounting Learning Workbook

h. Date Particulars Debit Credit

Inventory – Hoodies 640
Inventory – T-shirts 640
i. Some advantages of using the perpetual inventory system for Cool Clothes are the following.
• Max can identify if inventory has gone missing / been stolen as he can compare the inventory cards stating how much inventory should be on
hand, against the stock-take – the difference measures the value of stolen or missing inventory.
• Max has a running record of the inventory that should be on hand and cost of goods sold from the year so far, so he can prepare interim financial
statements for Cool Clothes without needing to do a stock-take.
• Max can manage the inventory of Cool Clothes more efficiently by having reorder points and quantities so the business does not run out of
inventory and lose sales, or carry too much inventory and end up losing profit by holding obsolete stock.
2. a. First in, first out.

b. NZ4U – Inventory Card

Product: Paua Necklaces
DATE PARTICULARS IN OUT BALANCE
2018 No. @ $ No. @ $ No. @ $
May 22 Sales 30 4.24 127.20
5 4.40 22.00 35 4.40 154.00

May 23 Drawings 4 4.40 17.60 31 4.40 136.40

May 28 Returns in 3 4.00 12.00 3 4.00 12.00

31 4.40 136.40

May 30 Purchases 10 5.60 56.00 3 4.00 12.00

31 4.40 136.40
10 5.60 56.00

May 31 Error – MoP 1 4.00 4.00

2 4.00 8.00 31 4.40 136.40

10 5.60 56.00

c. NZ4U General Journal

20/5/18 Inventory – Paua necklaces 176.00
GST 26.40
Paua Works / Accounts payable 202.40

d. The perpetual inventory system can help manage inventory levels in two main ways – ensuring the inventory does not run out by having a reorder
point so when stock levels reach the pre-arranged quantity the business should order more inventory. It should also prevent the business having too
much inventory, because staff know how much inventory (e.g. paua necklaces) they should have on hand so they do not order more just because they
think they need to. They should have a set quantity to reorder that they know (from past experience) can sell in a reasonable time.
e. The perpetual inventory system has enabled Timu to discover that scenic books have gone missing because he can compare the theoretical balance
in his scenic books inventory card or ledger account against the actual amount from the physical stock-take. If the stock-take quantity is less than the
theoretical balance, this indicates that some of the books have gone missing.
f. i. Purchase order – it is important to check inventory when it arrives against the purchase order form to make sure that NZ4U receives all the
inventory it is supposed to and to make sure NZ4U is not sent stock (which it will have to pay for) that it did not order.
ii. Packing slip – it is important to check the inventory against the packing slip in case the supplier missed putting some inventory in the order, but
says the inventory was sent. This helps prevent NZ4U paying for inventory that it did not receive. It also helps prevent running out of inventory
NZ4U thinks it should have, but has never arrived.
g. NZ4U should complete a stock-take at least once a year. They do this by counting every item of inventory on hand on a specific date and recording this
(usually two people count each item as a double check). They should then compare the counted stock against the amount that the inventory cards/
ledgers state they should have on hand. The difference will indicate stolen and missing inventory. This will indicate whether they need to tighten
inventory controls or check staff and customers more carefully. Having counted inventory makes the inventory on hand in the Statement of Financial
Position and the profit in the Income Statement more accurate than just relying on inventory cards.
h. i. The office manager orders the inventory, not the shop assistants, because the shop assistants could easily order inventory for themselves and keep
it when it arrives. Filling out the requisition form provides documentation of inventory requested and who requested it, and it is then approved by
the manager when the order is placed.
ii. The purchase requisition form is used to request that more inventory is ordered. It is a good control over inventory because it provides evidence, as
well as helping ensure separation of duties (so staff do not order inventory for themselves) because it is used by someone else to place the order.
Internal controls that should be present on the purchase requisition form include the following.
• Purchase requisition number – so NZ4U can identify if documents have gone missing.

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 Answers 49

• Authorisation signature – the person requesting the inventory has to sign the form, so they are accountable for requesting the inventory. If
inventory goes missing or is not needed, the matter can be followed up.
• The form will have quantity and description of the inventory being requested so there is proof if the manager is unsure later.
i. i. Timu views each of these documents before making the payment because they each have a different purpose. He checks the purchase order to make
sure he is paying for inventory NZ4U ordered. He checks the packing slip to make sure he is paying for goods that have arrived in the shop already, and
he checks the invoices to make sure the totals on all three documents agree and are legitimate inventory costs for NZ4U.
ii. Timu makes the payment, not the office manager, to help ensure separation of duties. The office manager orders the inventory so should not pay
for it as well, otherwise it would be easy for the office manager to order inventory for him- or herself, remove it from the shelves at some stage,
and then pay for it from the business bank account. Having separation of duties prevents this happening.

Activity 14B: Golf Galore (page 187)

1. Source documents include the following.
• Purchase requisition – to evidence what stock the warehouse manager wants ordered. This provides two signatures – those of the warehouse manager
and the purchasing clerk – as proof of who has ordered the inventory in case there is a problem or over-ordering occurs.
• Packing slip – to evidence what goods have been delivered. This is signed by the person receiving the inventory so if the inventory does not appear on
the shelves that staff member is accountable.
• Purchase order – to evidence what inventory has been ordered by the business. This document is pre-numbered and can be checked to see if any
documents go missing. If so, it could indicate that the purchasing clerk has ordered some inventory for him- or herself.
• Invoice – to outline the amount owed for the inventory purchased on credit and to detail what inventory is being charged for. This document should
have the purchase order number written on it so Jane can check that the invoice is for inventory that Golf Galore ordered.
2. a. Control strengths include the following.
• The purchase of inventory is authorised by the purchasing officer. This is a strength because it prevents the warehouse manager ordering stock for
himself and keeping it when it arrives.
• There is separation of duties in that the person ordering the inventory is not the person who receives the inventory. This prevents the purchasing
officer ordering stock for himself and keeping it when it arrives.
• The warehouse manager checks the goods against the packing slip when they arrive. This ensures that the goods that were sent have arrived so
the business does not have to pay for them later when they might not have received them.
• The accounts clerk checks the invoice against the purchase order before authorising payment. This should prevent Golf Galore paying for goods it
did not order or has not received, thus protecting its cash.
• The purchase order is pre-numbered so that all orders can be traced and accounted for. If an order form was missing it would be noticed by the
accounts clerk and could indicate poor records and/or theft by the purchasing officer.
b. Control weaknesses include the following.
The purchase requisition is not filed and is not given to the accounts clerk. This means that the purchasing manager could order different stock from
what is on the requisition form, so he could order stock for himself, or leave stock out, which could lead to a shortage and loss of sales.
When the stock arrives, the packing slip is not compared against the requisition form. This means that the warehouse manager is not sure that he has
received what he requested, and does not know if the purchasing clerk changed the order.

Activity 14C: Music Mania (page 188)

1. Inventory card
Name: T-shirts Measurement base: FIFO
Inventory number: 7 Location: Shop

IN OUT BALANCE
Unit Unit Unit
DATE PARTICULARS Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Aug 1 Balance 15 10.00 150.00

5 Sales 10 10.00 100.00 5 10.00 50.00

6 Purchases 20 9.40 188.00 5 10.00 50.00

20 9.40 188.00

14 Sales 5 10.00 50.00

7 9.40 65.80 13 9.40 122.20

20 Drawings 2 9.40 18.80 11 9.40 103.40

24 Sales 6 9.40 56.40 5 9.40 47.00

25 Purchases 20 9.80 196.00 5 9.40 47.00

20 9.80 196.00

28 Sales poster error 5 9.40 47.00 20 9.80 196.00

31 Shortage 2 9.80 19.60 18 9.80 176.40

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50 Full Answers for Level 2 Accounting Learning Workbook

Inventory card
Name: Posters Measurement base: FIFO
Inventory number: 8 Location: Shop
IN OUT BALANCE
Unit Unit Unit
DATE PARTICULARS Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
Aug 1 Balance 22 5.00 110.00
3 Sales 2 5.00 10.00 20 5.00 100.00

5 Purchases 10 5.50 55.00 20 5.00 100.00

10 5.50 55.00

8 Returns out 1 5.00 5.00 19 5.00 95.00

10 5.50 55.00

17 Sales 19 5.00 95.00

6 5.50 33.00 4 5.50 22.00

18 Purchases 26 5.70 148.20 4 5.50 22.00

26 5.70 148.20

20 Sales 4 5.50 22.00

3 5.70 17.10 23 5.70 131.10

22 Returns in 2 5.00 10.00 2 5.00 10.00

23 5.70 131.10

25 Purchases 6 4.60 27.60 2 5.00 10.00

23 5.70 131.10
6 4.60 27.60

26 Sales 2 5.00 10.00

3 5.70 17.10 20 5.70 114.00
6 4.60 27.60

28 Error – T-shirts 2 5.00 10.00 2 5.00 10.00

3 5.70 17.10 23 5.70 131.10
6 4.60 27.60

31 Shortage 2 5.00 10.00

2 5.70 11.40 21 5.70 119.70
6 4.60 27.60

2. (Examples but not limited to)

One main advantage for Music Mania of using the perpetual inventory system is that it helps identify missing inventory. This is because the perpetual
inventory system keeps a theoretical balance of the amount and cost of inventory that should be on hand. When Music Mania carried out the stock-take on
August 31, staff identified that 4 posters and 2 T-shirts were missing. This indicates that stock control needs to be tightened to minimise future shortages
because an increase in theft reduces profit in the long run.
Another main advantage is that Music Mania can prepare financial statements without having to do a stock-take to calculate the inventory on hand or the
cost of goods sold, since running records of these amounts are kept. In this case, if it had not done the stock-take it would have recorded T-shirt inventory
at $196.00 and posters at $168.70, which would have enabled it to prepare the Statement of Financial Position; and the Income Statement could be
prepared, because the cost of goods sold is calculated at $188.10 for posters and $319.20 for T-shirts. Although the shortages that were found would give
different results, they would be immaterial and unlikely to influence the decisions of users of the financial statements.
3. A minimum stock level is a quantity of inventory that Music Mania has established to be the point at which inventory is re-ordered. Often the maximum
quantity of inventory is also set. This helps the business avoid running out of stock and putting off customers. It also helps to ensure the business does
not carry too much stock, which can become obsolete, so profit decreases. It appears that Music Mania has a minimum stock level for T-shirts of 5 T-shirts,
because every time the stock on hand reached this quantity the business ordered 20 more the next day. However, the posters do not appear to have a re-
order quantity or minimum point. The difference is possibly due to which group is popular at the time. The value of this inventory is not so great, so perhaps
it is not so important. Having the re-order point for T-shirts helps make ordering easier, and keeps customers happy.
4. Optimum stock level is the theoretical idea that a business needs to have sufficient inventory to meet customer demand while at the same time not
over-stocking, which leads to a slow inventory turnover and can lead to obsolete stock. Overstocking can also mean the business has to have discount

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 Answers 51

sales to clear the stock and get cash-flow, which decreases the mark-up and profit in the future. It appears that Music Mania has a good level of inventory,
especially with a re-order point and quantity for T-shirts. Music Mania should try to implement the same concept for posters, which should help avoid
having to write-down out-of-date posters and prevent ordering randomly. Music Mania is often carrying about 30 posters and most orders appear to be for
fewer than 8 (except for the school).
5. During a stock-take, employees of Music Mania count every item of inventory to have an accurate record of the quantity and value of inventory on hand.
This is important in order to prepare accurate financial statements. In addition to this a stock-take can help identify weakness in internal control – possibly
employee theft, poor record keeping, and other missing inventory. This allows Music Mania to investigate the cause of the discrepancies between the
inventory card and physical stock-take. In this case, the stock-take identified 2 missing T-shirts and 4 posters. If this was for a year it would probably be
acceptable, but if this is a monthly count and it happens regularly, there is a costly problem with inventory control. This will lead to a decrease in profit and
puts a strain on cash-flow if not addressed.
6. The manager of Music Mania counts the inventory that is ordered when it arrives in the store to check that all the goods the packing slip states are in the
delivery are actually there; otherwise Music Mania might be charged for inventory it did not receive. It is important that the manager did not place the
order, because it would be easy to order for himself and keep the inventory when it arrives. He, or someone else, should also check that the inventory that
arrives is what was ordered, to avoid receiving and paying for inventory that is not wanted.

Activity 14D: Super Sports Supplies (page 192)

Inventory card
1.
Name: Tennis racquets Measurement base: Weighted average
IN OUT BALANCE
Unit Unit Unit
DATE PARTICULARS Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
July 1 Balance 45 76.00 3420.00
3 Sales 5 76.00 380.00 40 76.00 3040.00
5 Purchases 10 60.00 600.00 50 72.80 3640.00
8 Returns out 2 72.80 145.60 48 72.80 3494.40
17 Sales 25 72.80 1820.00 23 72.80 1674.40
18 Purchase 20 74.00 1480.00 43 73.36 3154.40
20 Drawings 2 73.36 146.72 41 73.36 3007.68
25 Sales 15 73.36 1100.40 26 73.36 1907.28
Purchases 20 80.00 1600.00 46 76.25 3507.28
28 Error purchase – cricket bats 4 40.00 160.00 50 73.35 3667.28
31 Shortage 1 73.35 73.35 49 73.35 3593.93

Inventory card
Name: Cricket bats Measurement base: Weighted average
IN OUT BALANCE
Unit Unit Unit
DATE PARTICULARS Qty price $ Total $ Qty price $ Total $ Qty price $ Total $
July 1 Balance 15 40.00 600.00
5 Sales 8 40.00 320.00 7 40.00 280.00
14 Sales 5 40.00 200.00 2 40.00 80.00
18 Purchase 10 44.00 440.00 12 43.33 520.00
20 Sales 4 43.33 173.32 8 43.34 346.68
22 Returns in 1 40.00 40.00 9 42.96 386.68
25 Sales 4 42.96 171.84 5 42.97 214.84
28 Error tennis racquets 4 40.00 160.00 1 54.84 54.84

2. a. (Examples but not limited to – reason to improve integrated in answer)

It does not appear that Super Sports Supplies has a re-order policy for cricket bats or a minimum stock level. The cricket bat quantity was allowed to
get very low, in one case with only two bats left, before the bats were re-ordered. Two bats would be sold easily before the new order arrived. The
re-order amount does not seem sufficient to cover the demand for the bats, unlike the tennis racquets, which are always re-ordered after sales to
maintain a good stock level. Super Sports Supplies needs to implement a minimum stock level of probably eight to ten bats and a reorder quantity of
between 10 and 15, definitely in the spring and summer months.
Poor record keeping is another reason for Super Sports Supplies running out of bats. The computer inventory card said there were five bats, but in
reality there was only one, because the tennis racquets’ purchase had been recorded incorrectly. This gave the shop a false understanding of the

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52 Full Answers for Level 2 Accounting Learning Workbook

number of bats on hand, which would be why it could not find them. It is important that inventory purchases and sales are recorded correctly;
otherwise, stock levels cannot be fixed.
b. It appears that tennis racquets are re-ordered whenever there is a sale, and that the quantity is usually 20 (although 10 were ordered once). This
could lead to Super Sports Supplies holding a large number of racquets and needing to have a discount clearance sale, which would decrease profits.
The current minimum quantity appears to be more than 20, which seems quite high. I recommend that this be reduced to about 12 and that the re-
order quantity be 15 to 20, which should help maintain a good supply of racquets without having too much excess stock. This should meet customer
demand and keep sales up, improving profits.
c. (Examples, not limited to)
By changing to the perpetual inventory system Mike has a theoretical record of the amount of inventory he should have on hand. This enables him to
calculate shortages and possibly identify stolen stock if there is a difference between the physical stock count and the inventory card. This happened
when the tennis racquet count was one less than the card, identifying one missing racquet. The periodic system would not identify a missing item.
If there is a continual trend of missing stock then Mike could investigate his employees for theft, or might need to make his record-keeping more
accurate, because that could also be the problem.
Another advantage is that Mike can now set a re-order point and a minimum stock level for all his inventory, which should help prevent his running out of
stock, or becoming over-stocked, both of which have a negative effect on the business. If he keeps running out of inventory, customers will get annoyed and
go elsewhere, resulting in lost sales and a decrease in potential profits. If he carries too much stock, he has spent the money paying his suppliers but has
not recovered it through sales, and will often have to reduce the price to clear the stock. The decrease in price will decrease mark-up and possibly the final
profit as well.
d. By allowing only the two full-time staff to order the inventory, Mike is implementing the internal control of authorisation. Ensuring that ordering is
authorised and carried out by only those staff should avoid inventory being ordered twice, by different people, or not being ordered because the
part-time staff all think the others are doing it. This will also allow for separation of duties, because when the inventory arrives it should be a part-time
worker who checks it off, to prevent the person doing the ordering keeping stock for himself when the order arrives. Separation of duties does not
currently take place in this way, but it should.
e. It is very important to check the inventory against the packing slip when the inventory arrives, to make sure the order is complete and nothing is
missing. Otherwise, Super Sports Supplies could be charged and pay for inventory it never received, which would be a waste of money. Currently this
procedure has a strength and a weakness. It is good it is checked off and the packing slip given to the office manager to check against the order form
and invoice before paying the account. However, it should not be the full-time staff who check the goods when they arrive, because they could order
something for themselves, keep it, sign the packing slip and the manager will pay for it later.
f. The reason Super Sports Supplies carries out a stock-take is to count and have an accurate record of the amount of inventory actually on hand at a point
in time. By doing the stock-take the employees physically count every item of stock and record it, often being double-checked by a second worker.
Once the count is complete, the office manager or Mike can check the count against what the inventory cards show Super Sports Supplies should have.
This will highlight discrepancies, which could be from human recording error, or indicate a customer or employee theft problem. By doing a stock-
take and using the perpetual system, discrepancies can be monitored and investigated. A stock-take also provides the business with more accurate
inventory records, because the missing stock identified is adjusted against the cost of goods sold, which means the gross profit and final profit for the
year are more accurate. The stock-take also gives an accurate value for the inventory for reporting in the Statement of Financial Position.

Activity 14E: Formative assessment – Tops-n-Tees (page 195)

Part A
Inventory card – Tops-n-Tees
Inventory number: Location: Shop/
Name: White cotton tee shirt Size 12 Measurement Base: Weighted average
12WCT Storeroom
IN OUT BALANCE
Date Particulars Qty @$ Total $ Qty @$ Total $ Qty @$ Total $
Aug 1 Balance 8 6.50 52.00
3 Sales 4 6.50 26.00 4 6.50 26.00
7 Purchases 15 6.90 103.50 19 6.82 129.50
8 Purchase returns 2 6.82 13.64 17 6.82 115.86
9 Sales 6 6.82 40.92 11 6.81 74.94
10 Sales returns 1 6.50 6.50 12 6.79 81.44
15 Sales 10 6.79 67.90 2 6.77 13.54
16 Purchases 8 9.20 73.60 10 8.71 87.14
21 Purchases 15 6.80 102.00 25 7.57 189.14
22 Error (14WCT) 4 6.30 25.20 29 7.39 214.34
26 Drawings 3 7.39 22.17 26 7.39 192.17
30 Sales 5 7.39 36.95 21 7.39 155.22
31 Shortages 4 7.39 29.56 17 7.39 125.66

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 Answers 53

Part B • At the end of each week, the accounts clerk collects the invoice
No answer supplied because this is a formative assessment. Your teacher book from the shop assistant and updates the Accounts receivable
will discuss in class or mark. Check that you have written about stocktakes ledger. At the end of each month, she prepares monthly statements
and shortages, ordering quantities and frequency, stock levels, customer and sends them to the customers. This helps ensure that all debtor
satisfaction, profit margins and impact on profit, separation of duties, records are up-to-date and accurate. Sending monthly accounts helps
authorising, checking orders, errors, and having adequate documentation. ensure debtors pay promptly.
Make sure you have linked to evidence from the case study and the inventory 6. Important features include the following.
card you prepared. Make sure you have discussed that this is about white • The invoice should be pre-numbered – so the business can check
tee shirts. Is this a clothing item that will date easily or not? Is there a risk of to make sure none have gone missing. If any are missing, it could
obsolescence? highlight that a staff member has given credit to someone who
should not have credit, or even to themselves.
Chapter 15 • The invoice should have a signature to authorise the credit being
The answers provided are examples only. They indicate the depth of knowledge given. This approval of the reason for the credit being given protects
required from students. Other responses are possible. the potential cash-flow of the business.
• The invoice should have the name and contact details of the
Activity 15: Accounts receivable subsystem (page 201) customer (possibly a customer number as well) so the business
1. • The potential customer’s income – to establish his/her ability to repay
knows who and where to follow up if there are problems or the
the amount of credit.
account is not paid, and is to be able to transfer the details on the
• Job – to establish if the person is in stable employment, or whether document to the correct debtors ledger account.
the work is likely to be seasonal. This helps determine whether the
7. The issuing of the credit note meets the internal control of adequate
person will be able to repay debt.
documentation, because the note provides evidence that the return has
• What other liabilities the person has – is he or she overcommitted taken place, and of what was returned, why it was returned and what
already and perhaps not able to handle any more debt? the value was. Because there is a signature on the credit note, there is
• Does the potential customer own or rent the house in which he/she the additional internal control of authorisation being met, because the
lives – this indicates financial security and whether the person is a person signing the document has approved the credit to ensure it is
‘flight risk’. legitimate.
• Credit history / credit rating (names of previous creditors) – to 8. A credit limit is the maximum amount of credit that an Accounts
establish whether the person has been a good debtor in the past and receivable can be in debt for in total at any one time. The amount is
has a good history of repaying debts. important, since not all debtors have the same limit – they have varying
2. The customer may not have paid off previous credit accounts and may creditworthiness. Having a limit is important because it provides an
have a lot of debt outstanding. The risk if they buy more on credit is amount that should be checked before a credit sale to ensure the
that it is unlikely that the business will receive the money from them, customer has not exceeded their limit, in which case it would be doubtful
increasing the value of their bad debt and reducing the business assets they would be able to repay the extra amount.
and profit. 9. A check of a customer’s current credit situation is important because
3. This ensures that shop assistants in Sarah’s Superstore cannot give many debtors do not pay their accounts on time, and even if they are not
credit to their friends. It also means that the manager will check to at their limit, they might be at high risk of not paying. (A debtor could
see if customers are up to date with their repayments before allowing have a small amount outstanding from two months ago, in which case
them more credit. This reduces the likelihood of bad debts, or overdue it would not be a good idea to sell to them on credit again until this
accounts. It increases the likelihood that the business will receive the amount is paid off.)
money owing to it from each credit sale. 10. Bad debts are those debts that the business knows it will not get the
4. This report shows how long the debt owed by each debtor has been money back from. Often a letter is received informing the business
outstanding. It allows Sarah’s Superstore to stop credit if debts are that the person will not be repaying the debt. Doubtful Debts are an
outstanding over a certain period of time and can also indicate if debts estimation made to meet the qualitative characteristic of relevance to
are likely to become ‘bad’. If credit is stopped on overdue debtors then ensure that the amount of ‘debtors’ and ‘profit’ is not overstated. This
they won’t get more credit and the amount of potential bad debts should amount is based on experience that not all debtors will pay in full and is
be reduced. It also signals how long debts have remained unpaid, so usually a percentage of the current Accounts receivable total.
after a certain period, reminder letters can be sent and debt collectors 11. If a credit check is not done before selling on credit the debtor might
can be used to recover the debt. not be suitable and might never pay their accounts. This could mean the
5. Processes: business has effectively had inventory stolen (not paid for), which will
• When a customer phones through an order, the office manager reduce the business’s profit. Because the business had to pay for the
takes the order and fills out a duplicate order received slip. She then inventory when it bought the inventory and is not getting cash from the
passes the top copy of the order received slip to the shop assistant sale, its cash-flow will also struggle if the amounts are large, making it
who fetches the goods and prepares a triplicate invoice. The shop difficult for the business to repay its own creditors and expenses.
assistant then passes the goods, with the top two copies of the
invoice and order received slip to the manager. This ensures that Activity 16A: Subsidiary ledger (page 207)
Charlie’s Cookware has accurate documents and records for Accounts 1. The total of the list of Accounts receivable should equal the balance in
receivable. the Accounts receivable control account in the general ledger. If these
totals don’t balance, it indicates that an error has been made.
• The manager checks that the order is correct, authorises the
invoice, then files the second copy of the invoice and the order 2. If the business does not keep good control over its debtors, then it may
received slip together alphabetically. The manager then sends the not have enough money to pay its liabilities and other expenses. This will
goods and invoice to the customer. Authorising the credit sale should put the business’s own credit rating at risk. / The business has sold the
help minimise bad debts and prevent selling to people with bad inventory to the debtors and must now get payment for it. If it doesn’t,
credit. then the business has lost a lot of inventory and might not get the money
back – this will increase its bad debts and decrease its profit.

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54 Full Answers for Level 2 Accounting Learning Workbook

3. a. Accounts receivable subsidiary ledger b. It is important to check the Schedule of Accounts receivable against
J. Parker the Accounts receivable control account in the general ledger
because, although they are prepared by different people, the balance
Date Particulars Debit Credit Balance
should be the same for each. If the balance is not the same, it
Oct 1 Balance 330 dr highlights a mistake in posting or an employee making changes to
10 Sales and GST 414 744 dr the accounts, which could result in less cash being received by the
business.
12 Sales returns and GST 160 584 dr
4. a. Accounts receivable subsidiary ledger
28 Sales and GST 230 814 dr
W Alk
28 Bank 300 514 dr
Date Particulars Debit Credit Balance
L. Malone Mar 1 Balance 430 dr
Date Particulars Debit Credit Balance 5 Fees received and GST 126 556 dr
Oct 1 Balance 650 dr 10 Bank 430 126 dr
5 Sales and GST 736 1 386 dr 31 Bank 110 16 dr
15 Bank 650 736 dr 31 Discount allowed and GST 16 0
L. Ko T Ramp
Date Particulars Debit Credit Balance Date Particulars Debit Credit Balance
Oct 1 Balance 520 dr Mar 1 Balance 540 dr
24 Sales and GST 515 1 035 dr 10 Fees received and GST 630 1 170 dr
26 Sales returns and GST 230 805 dr 25 Bank 700 470 dr
S. Adams 25 Discount allowed and GST 40 430 dr
Date Particulars Debit Credit Balance 28 Fees received and GST 630 1 060 dr
Oct 1 Balance 820 dr H Utt
12 Sales and GST 138 958 dr Date Particulars Debit Credit Balance
14 Freight and GST 46 1 004 dr Mar 1 Balance 120 dr
18 Bank 560 444 dr 8 Bank 80 40 dr
T. Walsh 12 Fees received and GST 428 468 dr
Date Particulars Debit Credit Balance 20 Overdue fees and GST 10 478 dr
Oct 1 Balance 710 dr T Rees
30 Bad debts and GST 710 0 Date Particulars Debit Credit Balance
V. Adams Mar 1 Balance 460 dr
Date Particulars Debit Credit Balance 31 Bank 120 340 dr
Oct 19 Sales and GST 549 549 dr 31 Bad debts and GST 340 0

P Ath

Schedule of Accounts receivable Date Particulars Debit Credit Balance

as at 31 October 2024 Mar 1 Balance 320 dr
J. Parker 514 15 Bank 320 0
L. Malone 736 19 Fees received and GST 149 149 dr
L. Ko 805 28 Fees received and GST 215 364 dr
S. Adams 444 28 Bike hire and GST 18 382 dr
V. Adams 549
Schedule of Accounts receivable
Total 3 048 as at 31 October 20XX
General ledger T Ramp 1 060
Accounts receivable control account H Utt 478
Date Particulars Debit Credit Balance P Ath 382
Oct 1 Balance 3 030 dr
14 Freight and GST 46 3 076 dr Total 1 920
30 Bad debts and GST 710 2 366 dr
31 Sales and GST 2 582 4 948 dr
31 Sales returns and GST 390 4 558 dr
31 Bank 1 510 3 048 dr

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 Answers 55

General ledger T Tait

Accounts receivable control account Date Particulars Debit Credit Balance
Date Particulars Debit Credit Balance Sept 1 Balance 1150 dr
Mar 1 Balance 1 870 dr 10 Bad debts and GST 1 150 0
20 Overdue fees and GST 10 1 880 dr
B Jones
28 Bike hire and GST 18 1 898 dr
Date Particulars Debit Credit Balance
31 Bad debts and GST 340 1 558 dr
Sept 1 Balance 1 200 dr
31 Bank 120 1 438 dr
30 Overdue fees and GST 18.40 1 218.40
31 Fees received and GST 2 178 3 616 dr
K Seaward
31 Bank, discount and GST* 1 696 1 920 dr
Date Particulars Debit Credit Balance
* or Bank credit 1 640
Discount allowed and GST 56 cr Sept 1 Balance 260 dr
b. Striders Tours should keep a subsidiary ledger to hold all its 3 Bank 230 30 dr
Accounts receivable together in one place making it easy to find 15 Sales and GST 414 444 dr
the information, assist with customer inquiries, and produce debtor
statements. Removing the individual debtors and having the control C Harris
account in the general ledger is also a good way to reduce clutter Date Particulars Debit Credit Balance
in the general ledger. In addition, having one person prepare the
Sept 1 Balance 506 dr
control account and one the subsidiary ledger and then ensuring that
the balances of the control account and the Schedule of accounts 30 Bank 460 46 dr
receivable are equal provides a double check on debtors’ records. 30 Discount allowed and GST 46 0

Activity 16B: Processing transactions (page 215) M Davidson

1. Accounts receivable subsidiary ledger Date Particulars Debit Credit Balance
A Perry
15 Sales and GST 138 138 dr
Date Particulars Debit Credit Balance 30 Sales returns and GST 23 115 dr
Sept 3 Sales and GST 460 460 dr
K Jackson
9 T Vousden – error 92 368 dr
Date Particulars Debit Credit Balance
T Vousden
Sept 1 Balance 376 dr
Date Particulars Debit Credit Balance
Sept 1 Balance 200 dr
Schedule of Accounts receivable
1 Sales and GST 736 936 dr
as at 30 September
8 Sales returns and GST 92 844 dr
A Perry 368.00
9 A Perry – error 92 936 dr
T Vousden 1 022.40
22 Bank 200 736 dr
R Parkin 805.00
26 Sales and GST 345 1 081 dr
B Jones 1 218.40
27 Freight and GST 41.40 1 122.40 dr
K Seaward 444.00
30 Bank 100 1 022.40 dr
M Davidson 115.00
R Parkin K Jackson 376.00
Date Particulars Debit Credit Balance
Sept 1 Balance 573 dr Total 4 348.80
3 Sales and GST 828 1 401 dr
4 Discount and GST 23 1 378 dr
18 Bank 550 828 dr
18 Discount allowed and GST 23 805 dr

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56 Full Answers for Level 2 Accounting Learning Workbook

General ledger General journal

Accounts receivable control account Date Particulars Debit Credit
Date Particulars Debit Credit Balance Nov 13 Bad debts 200
Sept 1 Balance 4 265.00 dr GST 30
4 Discount and GST 23.00 4 242.00 dr Accounts receivable – S Kirk 230
9 A Perry – error 92.00 4 150.00 dr
9 T Vousden – error 92.00 4 242.00 dr 27 K McDonald – Accounts receivable 230
10 Bad debts and GST 1 150.00 3 092.00 dr F Gull – Accounts receivable 230
27 Freight and GST 41.40 3 133.40 dr
30 Sales and GST 2 921.00 6 054.40 dr 27 Accounts receivable – H Halket 23
30 Sales returns and GST 115.00 5 939.40 dr GST 3
30 Bank, discount and GST 1 609.00 4 330.40 dr Freight received 20
30 Overdue fees and GST 18.40 4 348.80 dr

2. Sales journal 30 Discount allowed 40

Accounts GST 6
Date Particulars receivable GST Sales Accounts receivable – L Whale 46
Nov 2 M Kirby 437 57 380
3. P Rabbit
16 F Gull 230 30 200
Date Particulars Debit Credit Balance
L Whale 276 36 240
Feb 1 Balance 460.00 dr
23 D Loper 598 78 520
2 Sales and GST 414.00 874.00 dr
S Swinter 506 66 440
13 Sales and GST 644.00 1 518.00 dr
26 H Halket 414 54 360
22 Freight and GST 27.60 1 545.60 dr
28 J Castle 644 84 560
27 Sales returns and GST 92.00 1 453.60 dr
L Soper 276 36 240
28 Bank 310 1 143.60 dr
3 381 441 2 940
28 Discount allowed and GST 15 1 128.60 dr
Sales returns journal
H Hare
Accounts Sales
Date Particulars receivable GST returns Date Particulars Debit Credit Balance
Nov 8 M Kirby 92 12 80 Feb 4 Sales and GST 644.00 644.00 dr
29 J Castle 69 9 60 L Lamb
Date Particulars Debit Credit Balance
161 21 140 Feb 1 Balance 184.00 dr
Cash receipts journal (extract) 7 Bank 184.00 0
13 Sales and GST 253.00 253.00 dr
20 Error – P Cat 253.00 0
receivable
Accounts
Discount
allowed

M Pie
Sales
Bank

GST

Date Particulars Date Particulars Debit Credit Balance

Nov 4 Sales 207 27 180 Feb 1 Balance 414.00 dr
5 F Gull 184 184 9 Bad debts and GST 414.00 0
22 Sales 345 45 300 L Lizard
25 M Kirby 276 276
Date Particulars Debit Credit Balance
28 W Quirter 40 640 (6) 686
Feb 20 Sales and GST 828.00 828.00 dr
30 D Loper 20 500 (3) 523
25 Sales and GST 690.00 1 518.00 dr
E Dewer 246 246
28 Bank 184.00 1 334.00 dr

P Cat
60 2 398 63 1 915 480
Date Particulars Debit Credit Balance
Feb 20 L Lamb sales error 253.00 253.00 dr

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 Answers 57

D Dog E Conomy
Date Particulars Debit Credit Balance Date Particulars Debit Credit Balance
Feb 25 Sales and GST 230.00 230.00 dr Mar 1 Balance 930 dr

B Bunny 10 Sales and GST 1 380 2 310 dr

Date Particulars Debit Credit Balance 18 Interest 93 2 403 dr

Feb 1 Balance 265.00 dr 31 Bank 1 023 1 380 dr

18 Sales and GST 644.00 909.00 dr H Hope

20 Sales returns and GST 115.00 794.00 dr Date Particulars Debit Credit Balance
24 Bank 250.00 544.00 dr Mar 1 Balance 1 130 dr
24 Discount allowed and GST 15.00 529.00 dr 10 Bank 500 630 dr

K Frog 12 Sales and GST 138 768 dr

14 Freight and GST 19 787 dr
Date Particulars Debit Credit Balance
D Turn
Feb 18 Sales and GST 276.00 276.00 dr
Date Particulars Debit Credit Balance
28 Discount allowed and GST 23.00 253.00 dr
Mar 1 Balance 1 840 dr
S Snake
25 Bank 1 700 140 dr
Date Particulars Debit Credit Balance
25 Discount allowed and GST 140 0
Feb 1 Balance 256.00 dr
D Pression
25 Bank 200.00 56.00 dr
Date Particulars Debit Credit Balance
Accounts receivable subsidiary ledger Mar 1 Balance 1 610 dr
Schedule of Accounts receivable 12 Sales returns and GST 160 1 450 dr
as at 28 February
15 Bank 1 000 450 dr
P Rabbit 1 128.60
19 Sales and GST 549 999 dr
H Hare 644.00
S Nurse
L Lizard 1 334.00
Date Particulars Debit Credit Balance
P Cat 253.00
Mar 1 Balance 340 dr
D Dog 230.00
30 Bad debts and GST 340 0
B Bunny 529.00
R Cession
K Frog 253.00
Date Particulars Debit Credit Balance
S Snake 56.00
Mar 28 Sales and GST 1 230 1 230 dr
Total 4 427.60
31 Bank 1 000 230 dr
General Journal
31 Discount allowed and GST 100 130 dr
20/2/20xx Accounts receivable – P Cat 253.00
Accounts receivable – L Lamb 253.00 Schedule of Accounts receivable
as at 31 March
(Correction of error, sales 13 Feb)
U Swing 2 705
20/2/20xx Discount allowed 20.00 E Conomy 1 380
GST 3.00 H Hope 787
Accounts receivable – K Frog 23.00 D Pression 999
(Recording K Frog discount) R Cession 130

4. a. Accounts receivable subsidiary ledger

U Swing Total 6 001
Date Particulars Debit Credit Balance
Mar 1 Balance 2 420 dr
5 Sales and GST 736 3 156 dr
8 Bank 700 2 456 dr
8 Discount allowed and GST 36 2 420 dr
24 Sales and GST 515 2 935 dr
26 Sales returns and GST 230 2 705 dr

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58 Full Answers for Level 2 Accounting Learning Workbook

General ledger
7. a. Serious Services
Accounts receivable control account Aged debtors report
as at 30 November 2019
Date Particulars Debit Credit Balance
Mar 1 Balance 8 270 dr

4 or more
1 month

2 month

3 month

months
Current
14 Freight GST 19 8 289 dr

Total
18 Interest 93 8 382 dr Name
30 Bad debts and GST 340 8 042 dr XYZ Kindy 230 200 30
31 Sales and GST 4 548 12 590 dr Georgia Harris 450 450
31 Sales returns and GST 390 12 200 dr Best Meat 420 420
31 Bank and discount and GST 6 199 6 001 dr Franks Fitness 685 235 450

b. No, because E Conomy had an overdue account, which is why Bright Future 340 340
E Conomy was charged interest on 18 March. Ready Steady 530 450 80
John Jones 920 920
Activity 16C: Aged debtors report (page 226)
1. Advantage: It encourages debtors to pay their accounts quickly. This, Hone Weka 176 120 56
in turn, ensures that the business has sufficient money to meet its own Total 3 751 2 030 110 476 235 900
financial obligations.
Disadvantage: The discount is an expense which is increasing. This b. Serious Services has a poor credit policy because it has $900 (24%) of
means that profit will be less than it would have been if the debtors its Accounts receivable more than four months overdue, which is very
repaid the full amount owing, without receiving a discount. It also might poor. In addition, it continues to sell on credit to debtors who have
mean the business receives less money overall from its sales as credit debts that are outstanding (Hone Weka).
customers are getting a discount that cash customers might not be 8. a. Better Books
receiving. Aged debtors report
2. The purpose of the aged debtors report is to show the business the as at 30 June 2019
length of time individual debtors’ accounts have been outstanding (it

3–5 month

6 or more
does NOT show how long it takes them to pay, because they haven’t paid

1 month

2 month

months
Current
yet). Each person’s debt is broken down into different time frames so that
Total
the business knows how much of the debt is current and how much has Name
been outstanding for a longer period. It can also show if the business
LMNOP
has sold beyond the credit limit, which should not happen. It enables 980 380 600
Preschool
the business to ‘stop credit’ for individual customers until the debts are
cleared. Learning
380 380
Works
3. Trouble Inn’s credit policy is not very good because it keeps giving credit
to people who have debts outstanding for longer than three months and First Steps 530 530
selling to people over their credit limit as is the case with H Harrison. High Hope
This means that people can keep buying on credit and they don’t have 985 220 765
Learning
to repay Trouble Inn – which is not good for the business’s cash flow
Bright
situation. 340 340
Futures
4. The owners of Trouble Inn can offer a discount if the clients repay the
entire amount in a week, or can start charging interest on their accounts. High Five 1 130 1 130
Both of these measures would be incentives for Y Ping and S Smithson to Happy Days
750 350 400
pay their accounts quickly. The owners should also make phone calls and High School
send reminder letters to follow up this debt. Kia Ora
5. The owners of Trouble Inn need to stop credit for H Harrison. This will Welcome 1 138 1 020 118
act as an incentive for him to pay his outstanding debt if he wants to Preschool
keep shopping at Trouble Inn. That may not be enough to collect the
Total 6 233 2 500 1 530 883 980 340
outstanding debt, however; so they also need to send reminder letters
and perhaps look at getting a debt collector to chase up this debt, b. Learning Works and High Five have different credit limits because
because of the value of the debt and the length of time it has been they have different credit risk ratings based on their income and
outstanding. stability. High Five has a higher credit limit because it is less of a
6. Yes, the advice was different, because the debt owing by Y Ping risk and has a high rating from being able to pay back $2 000 each
and S Smithson is smaller than that owing by H Harrison. Even more month if needed, whereas Learning Works has a lower rating and is
important is the fact that their debt is still quite recent. Sending a allowed only a $400 credit limit. In addition, Learning Works might
reminder or giving the customers an incentive to repay the debt should have had its limit reduced because of the overdue account.
be all that is needed. On the other hand, H Harrison’s debt has been c. Better Books has a very high age of Accounts receivable (62 days)
outstanding for a lot longer and is a much larger amount, so recovering because it has a large amount of money owed to it by a debtor for
this debt requires more drastic measures. more than 3 months ($1 320) and an additional $883 over 2 months,
contributing to the high age of debtors. It also does not help that
Better Books continues to sell on credit when businesses have debts
outstanding for more than a month (e.g. Kia Ora Welcome Preschool,
LMNOP Preschool).

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 Answers 59

d. Better Books needs to stop giving credit to debtors with accounts Mystery Getaways Ltd
outstanding for more than the previous month. Better Books needs Date Particulars Debit Credit Balance
to check this regularly and not keep selling on credit if accounts are
unpaid. Better Books should also send out reminder letters and go June 1 Balance 828.00 dr
door knocking to collect the outstanding debts. 24 Bank 220.00 608.00 dr

9. a. Tony’s Truckstop 30 Bank 100.00 508.00 dr

Aged debtors report Carworld
As at 31 March 2020
Date Particulars Debit Credit Balance

3 or more
2 months
1 month
June 1 Balance 414.00 dr

months
Current
Total

26 Overdue fees and GST 41.40 455.40 dr

Name
HealthWorkx
Big Red 320 320
Date Particulars Debit Credit Balance
Tall Timber 410 90 320
June 1 Balance 460.00 dr
Jonsee 290 90 70 130
9 Sales and GST 207.00 667.00 dr
Rubber Duckie 685 175 510
Big Wheels 290 290 Realty 4U

Smilie 530 530 Date Particulars Debit Credit Balance

Jack Knife 130 130 June 1 Balance 460.00 dr

Total 2 655 1 030 680 435 510 17 Sales and GST 207.00 667.00 dr
30 Bank 460.00 207.00 dr
b. Tony’s Truckstop would have carried out a credit check on Jonsee.
The check would have included finding out about his job and income Jackson HR
(whether they are reliable and stable, and what sized credit limit he Date Particulars Debit Credit Balance
could afford to repay). It would also want to know if Jonsee rents
June 1 Balance 276.00 dr
or owns his house, because this gives an indication of ‘flight-risk’.
It might also have asked for names and numbers of other liabilities 11 Bad debts and GST 276.00 0
Jonsee has, to check up on his credit history with other businesses. Fitness First
c. Tony’s Truckstop needs to get the money Rubber Duckie owes it because
Date Particulars Debit Credit Balance
it has been outstanding for more than three months and offering
discounts is not appropriate. Tony’s Truckstop needs to make phone calls June 29 Your Fitness – error 230.00 230.00 dr
and send reminder letters to encourage payment. If that does not work,
it should consider a debt-collection service. In the meantime, it needs
to cancel any further credit so Rubber Duckie does not become an even Schedule of Accounts receivable for
bigger risk. Meli’s Melting Moments
d. The total of ‘debtors’ in the report should be the same total as as at 30 June 20XX
the closing balance of the Accounts receivable control account in HLP Consulting 2 484.00
the general ledger and the Schedule of Accounts receivable in the Your Fitness 437.00
subsidiary ledger.
Mystery Getaways Ltd 508.00
Activity 17A: Meli’s Melting Moments (page 232) Carworld 455.40
1. a. Accounts receivable subsidiary ledger
HealthWorkx 667.00
HLP Consulting
Realty 4U 207.00
Date Particulars Debit Credit Balance
Fitness First 230.00
June 1 Balance 184.00 dr
1 Sales and GST 414.00 598.00 dr
Total $ 4 988.40
5 Bank 174.80 423.20 dr
5 Discount and GST 9.20 414.00 dr
23 Sales and GST 1 840.00 2 254.00 dr
Cleaning fees
30 230.00 2 484.00 dr
received and GST
Your Fitness
Date Particulars Debit Credit Balance
June 1 Balance 230.00 dr
4 Bank 184.00 46.00 dr
9 Sales and GST 230.00 276.00 dr
25 Sales and GST 391.00 667.00 dr
29 Fitness First – error 230.00 437.00 dr

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60 Full Answers for Level 2 Accounting Learning Workbook

Meli’s Melting Moments approve each credit transaction to try to reduce the risk of bad debts.
Aged debtors report The invoice has an invoice number, which in this case is #162.
as at 30 June Having invoices pre-numbered is a good control because it makes
b.
invoices easy to trace and to identify if any are missing. If there is

2 months

3 months

4 months
1 month
an invoice missing, it could indicate a transaction that has not been

Current
recorded and therefore a decrease in potential cash flow and profit.

Total
Name It is important to have accurate records of each transaction and the
HLP invoice helps achieve this goal. Ensuring that the invoice has the
2 484.00 2 484.00 debtor’s name and address makes it easy to follow up payment and
Consulting
send reminder statements if needed. The invoice is used to accurately
Your
437.00 391.00 46.00 prepare the sales journal and update debtors’ records.
Fitness
c. Before offering credit to a new personal customer, Meli needs to do
Mystery a thorough credit check and then set a small credit limit. She needs
Getaways 508.00 508.00 to research the potential debtor’s income, job, ownership or rental
Ltd of home, how long the person has been in the job and house, and
Carworld 455.40 41.40 414.00 so on, to establish ‘flight-risk’ and ability to repay the debt. Once the
Health customer has been allowed credit, Meli needs to become stricter on
667.00 207.00 368.00 92.00 repayment and enforce a one-month policy, charging interest as soon
Workx
as the account is overdue. This will help reduce the risk of bad debts
Realty 4U 207.00 207.00
and help increase profit. The credit situation should be checked every
Fitness time a credit transaction takes place so any debtor with an overdue
230.00 230.00
First account is not allowed more credit.
Total 4 988.40 3 560.40 554.00 368.00 92.00 414.00 d. (Examples, but not limited to)
• The debtor’s name and contact details, so the debtor can check
c. One main advantage of keeping an Accounts receivable subsidiary
that the account is theirs and that they are not being charged for
ledger is that it keeps all the individual debtors accounts together,
someone else’s transactions. This is also important for Meli, to
which makes it very easy to access and from it answer any enquiries
make sure she has sufficient details to follow up late accounts.
debtors might have. It also means that the general ledger will be
• The amount owed is very important, so Meli knows how much
less cluttered and there will be just the one control account, which
the debtor owes her and so the debtor knows how much they
acts as a check against the Schedule of accounts receivable. This
owe and the date by which they have to pay. The statement
will highlight any errors in debtors’ records. Meli’s Melting Moments
might also state how much is current and how much is overdue,
uses the subsidiary ledger to keep the accounts together, and it also
warning the debtor of any future penalties and of what they
facilitates the preparation of the Aged debtors report.
need to pay urgently.
d. There does not appear to be a stop-credit policy for Meli’s Melting
• A description of the transaction or source document references is
Moments, or not until an account is more than three months overdue.
needed so the customer can check the accuracy of the transaction
This is evidenced by the fact that HealthWorkx was given credit
on their account for the month and so that they can agree that
despite having an overdue payment from two months prior to the
the transactions are theirs. For example, HLP Consulting will be
start of June. It appears that overdue fees are charged only when the
able to check that the payment it made was deducted and the
account has been unpaid for more than three months, which does
current charges are for the private function, other sales, and as
not provide a big incentive to pay earlier. On the whole, the stop-
a cleaning fee. The amounts should match the amounts on the
credit policy is not effective, because several accounts are overdue
original documents.
but the customers can still buy on credit. In addition to this, bad
debts are written off, which decreases the profit of Meli’s business.
Activity 17B: Petra’s Petstore (page 237)
2. a. Invoice 162 Meli’s Melting Date June 23 20XX 1. Accounts receivable subsidiary ledger
Moments Monique Mouse
27 High St, Auckland
GST Number: Date Particulars Debit Credit Balance
11-889-425
Oct 1 Balance 430.00 dr
Sold to: HLP Consulting 5 Bank 110.00 320.00 dr
Address 98 North Rd, Auckland Lucy Lizard – sales and GST
Description Unit Price Total 6 110.00 210.00 dr
– error
Café booked for private function catering 1 600.00 1 600.00
17 Sales and GST 276.00 486.00 dr

Subtotal 1 600.00 Suzie Stalk

GST 240.00 Date Particulars Debit Credit Balance
GST 1 840.00 Oct 1 Balance 720.00 dr
Inclusive
1 Sale and GST 414.00 1 134.00 dr
Authorised by: Meli 11 Sales returns and GST 80.50 1 053.50 dr
Please pay by the 20th of next month
17 Sales and GST 207.00 1 260.50 dr
b. The invoice is signed by Meli, which proves the credit transaction
19 Bank 684.00 576.50 dr
was authorised and approved by Meli. This prevents other employees
issuing credit. It also means that if there are any issues with the 19 Discount allowed and GST 36.00 540.50 dr
invoice, Meli knows she approved it herself. It is important to

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 Answers 61

Barry Bear
2. Petra’s Petstore
Date Particulars Debit Credit Balance Aged debtors report
As at 31 October
Oct 1 Balance 490.00 dr

3 or more
2 months
4 Sales and GST 230.00 720.00 dr

1 month

months
Current
Total
17 Bank 100.00 620.00 dr
29 Sales returns and GST 46.00 574.00 dr Name
Monique Mouse 486.00 276.00 210.00
Lucy Lizard
Suzie Stalk 540.50 540.50
Date Particulars Debit Credit Balance
Barry Bear 574.00 184.00 290.00 100.00
Oct 1 Balance 530.00 dr
Lucy Lizard 640.00 110.00 530.00
6 Monique Mouse – sales error 110.00 640.00 dr
Caylee Cat 1 203.00 828.00 175.00 200.00
Caylee Cat
Katie Kitten 391.00 391.00
Date Particulars Debit Credit Balance
Total 3 834.50 2 329.50 500.00 705.00 300.00
Oct 1 Balance 575.00 dr
Note: Sales returns are usually credited to the current month’s sales,
4 Sales and GST 828.00 1 403.00 dr although different businesses have differing policies on this.
19 Bank 200.00 1 203.00 dr 3. a. It is important to carry out a credit check before allowing a customer
to buy on credit in order to assess their credit risk, and to set a
Darryl Dog
realistic limit, because if Petra’s Petstore sells on credit to a bad risk
Date Particulars Debit Credit Balance the business will not receive its money, which worsens cash flow and
Oct 1 Balance 290.00 dr decreases profit by the writing off of bad debts. Common information
includes income/payslip to assess the credit limit that can be given.
25 Bank 290.00 0
Whether or not the customer’s job is full time or part time and
George Guinea what the work is, affects the security of job and income, and has an
Date Particulars Debit Credit Balance influence on credit risk. A higher income and a full-time secure job
provide less risk than does part-time work. Petra will also consider
Oct 1 Balance 330.00 dr
the housing situation – if someone owns their house and has lived in
26 Bad Debts and GST 330.00 0 the town for a long time, they are less likely to leave town without
paying their debts than is someone who rents. Petra should also try
Katie Kitten
to find out about past credit history from previous creditors to find
Date Particulars Debit Credit Balance out if the customer is a good payer. Currently Petra either doesn’t do
Oct 25 Sales and GST 391.00 391.00 dr a very good credit check or is quite lenient about the customers she
gives credit to, because she has a large number of debts owed to her,
22 Cartage and GST 23.00 414.00 dr
and several outstanding for more than one month.
30 Sales returns and GST 23.00 391.00 dr b. After preparing the Schedule of Accounts receivable and the Accounts
receivable control account in the general ledger, Petra can check to
Schedule of Accounts receivable see if the balances are the same. By ensuring that they agree, and
for Petra’s Petstore
by having different employees prepare each account, errors can be
as at 31 October 20XX
found. The accounts will also highlight any discrepancies that might
Monique Mouse 486.00 have arisen.
Suzie Stalk 540.50 c. It is important to authorise credit transactions because there can be
Barry Bear 574.00 large amounts of money tied up in Accounts receivable and Petra
wants to make sure she will receive the money. Currently Petra has
Lucy Lizard 640.00
$3 834.50 debtors, which is a lot, and if she has to write many off
Caylee Cat 1 203.00 as bad debts, it will reduce her profit. Petra’s current procedure is
Katie Kitten 391.00 not very effective. Despite authorising the transaction, she does not
check how much the debtor already has outstanding. In October,
Petra sold to three debtors who already had accounts outstanding
Total $ 3 834.50 for more than two months, which is not good practice. She needs to
‘stop credit’ on those accounts and not allow more credit until the
accounts are paid.
d. Keeping a Debtors subsidiary ledger for Petra’s Petstore allows Petra
to keep all the individual debtors together, which makes it very easy
to access and from it answer any enquiries debtors might have. It
also means that the general ledger will be less cluttered and just
have the one control account, which acts as a check against the
Schedule of Accounts receivable. This will highlight any errors in
debtors’ records. Petra’s Petstore uses the subsidiary ledger to keep
the accounts together, and it also facilitates the preparation of the
Aged debtors report, and of the monthly statements.

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62 Full Answers for Level 2 Accounting Learning Workbook

Activity 17C: Mickey’s Mechanics (page 243) Schedule of Accounts receivable for
1. Accounts receivable subsidiary ledger Mickeys’ Mechanics
Hone Harrison as at 30 April 20XX
Date Particulars Debit Credit Balance Hone Harrison 414.00
April 1 Balance 460.00 dr Ted Thompson 878.60
5 Bank 420.00 40 dr Ashleigh Miles 506.00
5 Discount allowed and GST 40 0 Terry Monk 425.60
17 Sales and GST 414.00 414.00 dr Rebecca Hay 1 822.00
Nellie Avia 230.00
Ted Thompson
Tayla Nguyen 736.00
Date Particulars Debit Credit Balance
April 1 Balance 1 380.00 dr
Total 5 012.22
1 Sales and GST 460.00 1 840.00 dr
4 Sales returns and GST 41.40 1 798.60 dr 2. General Journal

19 Bank 1 352.40 446.20 dr 20/4/20xx Accounts receivable T Nguyen 138.00

19 Discount allowed and GST 27.60 418.60 dr Accounts receivable – A Miles 138.00
30 Sales and GST 460.00 878.60 dr (Correction of error, sales 8 April)

Ashleigh Miles 5/4/20xx Discount allowed 34.78

Date Particulars Debit Credit Balance GST 5.22
April 1 Balance 644.00 dr Accounts receivable – H Harrison 40.00
8 Sales and GST 138.00 782.00 dr (Recording H Harrison)
17 Bank 138.00 644.00 dr
3. Mickey’s Mechanics
20 Error – Tayla Nguyen 138.00 506.00 dr
Aged debtors report
Kaitlin O’Connor as at 30 April

Date Particulars Debit Credit Balance

3 or more
2 months
1 month

months
Current
April 1 Balance 920.00 dr
Total

12 Bad debts and GST 920.00 0 Name

Terry Monk Hone Harison 414.00 414.00

Date Particulars Debit Credit Balance Ted Thompson 878.60 878.60

April 1 Balance 414.00 dr Ashleigh Miles 506.00 506.00

2 Sales and GST 230.00 644.00 dr Terry Monk 425.60 211.60 214.00

5 Sales returns and GST 18.40 625.60 dr Rebecca Hay 1 822.00 322.00 690.00 810.00

19 Bank 200.00 425.60 dr Nellie Avia 230.00 230.00

Tayla Nguren 736.00 736.00
Rebecca Hay
Date Particulars Debit Credit Balance
5 012.20 2 562.20 1 426.00 810.00 214.00
April 1 Balance 1 840.00 dr
4. (Examples of possible answers.)
14 Sales and GST 276.00 2 116.00 dr
a. Credit limits are the maximum amount of credit a debtor should have
15 Overdue fees and GST 46.00 2 162.00 dr
at any time. These should be different depending on the potential
25 Bank 340.00 1 822.00 dr credit risk. Mickey’s Mechanics has different limits; for example, Ted
Thompson is deemed low risk with a $1 500 limit while Terry Monk
Nellie Avia
is a higher risk with only a $600 limit. However, Mickey’s Mechanics is
Date Particulars Debit Credit Balance not sticking to these limits, so there is a risk of the business incurring
April 1 Balance 230.00 dr further bad debts, and this also indicates poor management of
debtors at point of sale.
b. It appears that Mickey’s Mechanics does not check the credit limit at
Tayla Nguyen the time of sale, because Rebecca Hay and Kaitlin O’Connor have
both been allowed to go over their limit on the opening balances, and
Date Particulars Debit Credit Balance
R Hay continues to be sold to during this month. They therefore might
April 20 A Miles – error 138.00 138.00 dr not be able to pay the money owing. This was shown to be the case
23 Sales and GST 621.00 759.00 dr – K O’Connor was declared a bad debt and because she was allowed
to buy over her limit – profit fell by more than it should have, which is
26 Sales returns and GST 23.00 736.00 dr
not good. At points of sale the mechanic should check both the credit
limit and how long debts have been outstanding before giving credit.

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 Answers 63

c. Documentation is important to give proof of transactions. Mickey’s Awesome Action Learning

Mechanics uses invoices at the time of the job, providing proof of Date Particulars Debit Credit Balance
who did the job and how much is owed. The invoice is followed up
with a statement, and any returns are documented on a credit note. July 1 Balance 368.00 dr
This is good, because it allows Mickey to check any enquiries; an 10 Bank 230.00 138.00 dr
example being when Ashleigh Miles complained that she had been 21 Sales and GST 414.00 552.00 dr
wrongly charged on 20 April.
24 Cartage and GST 18.40 570.40 dr
d. Bad debts are an expense that lessens Mickey’s Mechanics’ profit. This
month K O’Connor’s money owing was written off as a bad debt Absolute Toys and Games
totalling $920 including GST; therefore $800 was deducted from Date Particulars Debit Credit Balance
profit, $104.35 more than would have been deducted if the business
had stuck to the credit limit. July 1 Balance 276.00 dr
e. Making errors is bad for customer relations. Ashleigh Miles would
not be happy to be charged for someone else’s job. In addition,
ACDC Toys
errors can mean you sell over the limit to the correct person, in this
case Tayla Nyugen. Because T Nyugen did not have the $138 on her Date Particulars Debit Credit Balance
statement she did not pay it – and it would take at least an extra July 16 Sales and GST 644.00 644.00 dr
month to receive the money from her, making it more difficult for
28 Sales and GST 644.00 1 288.00 dr
Mickey’s Mechanics to pay its own expenses and suppliers.
f. It is not very effective. Only H Harrison and T Thompson paid in time Schedule of Accounts receivable for
for a discount, so the incentive is not very effective. The other five did Tony’s Toy Warehouse
not pay in time for the discount and had outstanding amounts from a as at 31 July 20XX
month or more.
ABC Books 1 081.00
Activity 17D: Tony’s Toy Warehouse (page 247) Abacus Toys 161.00
1. Accounts receivable subsidiary ledger A to Z Learning 736.00
ABC Books
Action Fun 322.00
Date Particulars Debit Credit Balance Awesome Action Learning 570.40
July 1 Balance 644.00 dr Absolute Toys and Games 276.00
2 Sales and GST 437.00 1 081.00 dr ACDC Toys 1 288.00
Abacus Toys
Date Particulars Debit Credit Balance Total 4 434.40
July 1 Balance 460.00 dr
2. 6/7/20xx Discount allowed 31.00
20 Sales and GST 276.00 736.00 dr
GST 4.65
23 A to Z Learning – error 276.00 460.00 dr
Accounts receivable – Action Fun 35.65
29 Sales returns and GST 69.00 391.00 dr
(Recording Action Fun discount)
30 Bank 230.00 161.00 dr

A to Z Learning 23/7/20xx Accounts receivable – A to Z Learning 276.00

Accounts receivable – Abacus Toys 276.00
Date Particulars Debit Credit Balance
(Correction of error, sales 8 April)
July 1 Balance 575.00 dr
5 Bank 115.00 460.00 dr 30/7/20xx Discount allowed 20.00
23 Abacus Toys – error 276.00 736.00 dr GST 3.00
Angela’s Toys Accounts receivable – Action Fun 23.00

Date Particulars Debit Credit Balance (Recording Action Fun discount)

July 1 Balance 420.00 dr 31/7/20xx Bad debts 365.22

31 Bad debts and GST 420.00 0 GST 54.78
Action Fun Accounts receivable – Angela’s Toys 420.00
Date Particulars Debit Credit Balance (Recording H Harrison)
July 1 Balance 713.00 dr
6 Bank 677.35 35.65 dr
Discount and GST 35.65 0
8 Sales returns and GST 69.00 69.00 cr
16 Sales and GST 414.00 345.00 dr
30 Discount and GST 23.00 322.00 dr

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64 Full Answers for Level 2 Accounting Learning Workbook

Tony’s Toy Warehouse than four months, and only $184 over three months (and that debtor
3.
Aged debtors report has endeavoured to repay some money during the month) reducing
as at 31 July the risk. This indicates that Tony sells to businesses that do try to pay
their debts.

3 or more

4 or more
2 months
1 month
d. i. Tony’s Toy Warehouse staff members sign the packing slip when

months

months
Current
Total
they package the goods as a way of authorising the credit sale
Name and therefore being accountable for the transaction if that sale
ABC Books 1 081.00 437.00 460.00 184.00 should not have proceeded. This is a good internal control, as
the staff member is responsible and identifiable, and therefore is
Abacus more inclined to check credit limits before sales are processed.
161.00 161.00
Toys
ii. The packing slip should be pre-numbered, which helps track
A to Z the documents and identify if any go missing. The number
736.00 276.00 460.00
Learning aids in filing, but more importantly if any are missing it could
Action Fun 322.00 322.00 indicate staff fraud and/or inappropriate sales. The packing
slip also lists all the items being sold, which helps ensure the
Awesome
invoice is accurate and thus the journal, ledgers, and debtors’
Action 570.40 432.40 138.00
Learning accounts should be accurate. This will help ensure that Tony’s
Toy Warehouse receives all the money it should from its sales,
Absolute which will help cash flow and profit. It will also mean the Income
Toys and 276.00 230.00 46.00
Statement and Statement of Financial Position are accurate.
Games
e. Keeping an Accounts receivable subsidiary ledger for Tony’s Toy
ACDC Toys 1 288.00 1 288.00 Warehouse allows Tony to keep all the individual debtors’ accounts
together, which makes it very easy to access and from it answer any
enquiries debtors might have. It also means that the general ledger
4 434.40 2 755.40 1 288.00 207.00 184.00 0 is less cluttered and there will be just the one control account, which
4. (Examples include, but not limited to) acts as a check against the Schedule of accounts receivable. This will
highlight any errors in debtors’ records. In this case, the accounts
a. One reason Tony has difficulty with overdue accounts while still selling
manager is responsible for updating debtors’ accounts and preparing
to the debtors on credit is that the existing system allows this to
their statements. She should not be responsible for preparing the
happen. The employee checks only whether the transaction and current
journals, or any of the debtors’ ledgers. The subsidiary ledger should
balance are under the credit limit, not how long the account has been
be prepared by an accounts clerk, and another person should prepare
outstanding. This means the sale goes ahead even if the outstanding
the control account. This separation of duties ensures that the
amount is several months old. For example, in April, ABC Books was
accounts manager cannot change the debtors’ accounts to cover up
allowed to purchase $437 despite having $184 that was three months
any dishonesty by her or other staff.
overdue. One ‘easy fix’ is to stop credit whenever the account is more
than one month overdue. The computer system could provide an alert,
Activity 17E: Formative assessment – Art Supplies
or the employee would need to bring up the full account or check
(page 252)
the last month’s Aged debtors report before authorising credit, which
Part A
should prevent at-risk debtors from getting further in debt. This will
prevent bad debts increasing and help reduce them in total, which will a. Artzworkz
have a positive effect on profit. Although this might decrease sales as Date Particulars Debit Credit Balance
some customers will not purchase, that is better than selling inventory July 1 Balance 2 500 dr
and never receiving the cash from the sales, which would reduce profit
8 Sales and GST 630 3 130 dr
by more in the long run.
b. A credit limit is the maximum amount of credit an individual debtor 17 Sales and GST 460 3 590 dr
is allowed to have in total at a point in time. The limit will vary Delivery and GST 27 3 617 dr
depending on the ‘risk’ of each person/business, which is based on
20 Sales returns and GST 92 3 525 dr
their income, stability and assessed ability to repay. A credit limit is
important, because without one, debtors could run up huge bills in 28 Overdue fees and GST 42 3 567 dr
the first month and then never pay – with no ability to make them Canvas World
pay. By having a limit, the risk is lower. Action Fun, which has a
high limit, is obviously deemed a good risk and this is confirmed by Date Particulars Debit Credit Balance
its having no outstanding accounts at the start of April. In contrast, July 1 Balance 1 438 dr
Angela’s Toys had a smaller limit of $600, which was prudent, 13 Bank 538 900 dr
because that business was written off as a bad debt in April.
24 Sales and GST 900 1 800 dr
c. Tony carries out a credit check, which is a useful procedure. It
includes checking a potential debtor’s income and job, to help assess Learning Solutions
the likelihood of the debtor paying the debts and to help work out a Date Particulars Debit Credit Balance
credit limit. In addition, Tony rings previous creditors of the potential
debtors, which is a good thing to do. He can ask these businesses July 1 Balance 1 980 dr
about the customer’s current reputation, if they owe money, how 4 Bank 900 1 080 dr
quickly they repay and so on. Doing this research should minimise 8 Error – Memories 4 Ever 180 900 dr
the risk of bad debts, although it is not a guarantee against having
12 Sales and GST 810 1 710 dr
bad debts. Currently, Tony’s policy seems to be working reasonably
well, because at the end of April there were no debts owed for more 14 Sales returns and GST 50 1 660 dr

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 Answers 65

Make and Mould

Date Particulars Debit Credit Balance
July 1 Balance 1 166 dr
22 Sales and GST 320 1 486 dr
23 Administration and GST 23 1 509 dr
30 Bank 850 659 dr

Memories 4 Ever
Date Particulars Debit Credit Balance
July 1 Balance 3 800 dr
8 Error – Learning Solutions 180 3 980 dr
21 Sales and GST 276 4 256 dr

Photos Forever
Date Particulars Debit Credit Balance
July 1 Balance 920 dr
28 Bad debts and GST 920 0

Scrapbooking Creations
Date Particulars Debit Credit Balance
July 1 Balance 780 dr
6 Discount and GST 32 748 dr
10 Bank 741 7 dr
Discount allowed and GST 39 32 cr
11 Sales and GST 540 508 dr

Schedule of Accounts receivable

as at 31 July
Artzworkz 3 567
Canvas World 1 800
Learning Solutions 1 660
Make and Mould 659
Memories 4 Ever 4 256
Scrapbooking Creations 508

Total 12 450

b. General Journal
6/7/2018 Discount allowed 27.83
GST 4.17
Accounts receivable – Scrapbooking
32.00
Creations
(Recording Action Fun discount)

8/7/2018 Accounts receivable – Memories 4 Ever 180.00

Accounts receivable – Learning
180.00
Solutions
(Correction of error, 28 June)

10/7/2018 Discount allowed 33.91

GST 5.09
Accounts receivable – Scrapbooking
39.00
Creations
(Recording Action Fun discount)

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66 Full Answers for Level 2 Accounting Learning Workbook

c. Age of Accounts Receivable Report, 31 July 2018

July June May April Mar
Debtor Credit limit Balance 0–30 days 31–60 days 61–90 days 90+ days 120+ days
Artzworkz 3 400 3 567 1 067 240 1840 420
Canvas World 1 800 1 800 900 460 440
Learning Solutions 3 500 1 660 760 900
Make and Mould 1 600 659 343 316 0 0
Memories 4 Ever 6 000 4 256 276 980 1 600 1 400
Scrapbooking Creations 1 500 508 508
Total 12 450 3 854 1 996 4 780 1 400 420

Part B
No answer supplied, as this is a formative assessment. Your teacher will discuss in class or mark. Check that you have written about credit checking originally and at
point of sale, linking to evidence, bad debts, separation of duties, documentation, incentives, authorisation, accuracy of records, and so on. Link these ideas to
the resource and your answers. Make sure you discuss the impact on Art Supplies in relation to cash flow, profit, and customer satisfaction. Discuss initial credit
checking and consider that these are businesses, not people.

Activity 18A: Calculations (page 256)

2019 2020

Analysis measure Working Answer Working Answer

Mark-up % (392 000 ÷ 408 000) × 100 96.1% (446 500 ÷ 503 500) × 100 88.7%
Gross profit % (392 000 ÷ 800 000) × 100 49% (446 500 ÷ 950 000) × 100 47%
Profit % (128 000 ÷ 800 000) × 100 16% (133 000 ÷ 950 000) × 100 14%
Distribution costs % (144 000 ÷ 800 000) × 100 18% (190 000 ÷ 950 000) × 100 20%
Finance cost % (40 000 ÷ 800 000) × 100 5% (38 000 ÷ 950 000) × 100 4%
Percentage change (800 000 – 720 000) (950 000 – 800 000) × 100
× 100 11.1% 18.8%
in sales 720 000 800 000
Percentage change (128 000 – 130 000) (133 000 – 128 000)
× 100 –1.5% × 100 3.9%
in profit for the year 130 000 128 000
128 000 × 100 133 000 × 100
Return on equity 47.4% 31.6%
(170 000 + 370 000) ÷ 2 (370 000 + 473 000) ÷ 2
Return on total (128 000 + 40 000) × 100 (133 000 + 38 000) × 100
34.0% 28.9%
assets (450 000 + 537 500) ÷ 2 (537 500 + 647 000) ÷ 2
Current ratio 21 000 ÷ 10 500 2:1 27 000 ÷ 45 000 0.60:1
21 000 – 12 000 27 000 – (19 250 + 750)
Liquid ratio 0.86:1 0.88:1
10 500 – 0 45 000 – 37 000
Equity ratio 370 000 ÷ 537 500 0.69:1 473 000 ÷ 647 000 0.73:1
Age of Accounts (2 300 + 4 500) ÷ 2 4.5 days (4 500 + 7 000) ÷ 2 6.4 days
× 365 × 365
receivable 0.3 × 800 000 × 1.15 = 5 days 0.3 × 950 000 × 1.15 = 7 days
408 000 503 500
Inventory turnover 37.1 times 32.2 times
(10 000 + 12 000) ÷ 2 (12 000 + 19 250) ÷ 2

Activity 18B: Profitability (page 261)

1. a. Mark-up percentage in 2019 was 60%; and in 2020 it is 67%.
i. This means that in 2020 the business increased the cost price of its inventory by 67% of the cost price to get its selling price, which is a greater
increase than in the previous year. For example, if a good cost $100 to buy, the business will sell it for $167.
ii. This is a good trend, providing the increase does not scare customers away due to too high pricing. If customers continue to buy, the business is
making more profit for each item sold than it did in the previous year.
iii. One reason for this trend is that the business has deliberately increased the selling price of its inventory, which has caused an increase in the mark-
up percentage. Another reason could be that the business has sourced cheaper inventory and kept the selling price the same, which would also
cause an increase in the mark-up on inventory sold.
iv. If the increase in mark-up percentage is deemed too high, the best way to fix the problem is to lower the selling price. This reduces the profit
margin on each item sold and therefore decreases the mark-up percentage.
b. Gross profit percentage in 2019 was 45%, and in 2020 it was 40%.
i. This means that in 2020 the business has generated a gross profit of 40 cents in every dollar of sales. This means that 40% of sales is left in the
business to cover the operating expenses and make a profit.

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 Answers 67

ii. This is a poor trend because there is a smaller percentage of sales ii. This is a good trend because a greater percentage of sales
left in the business to cover its operating expenses than there remains in the business as profit.
was last year. iii. One possible reason for this trend is that the business might
iii. An increase in the cost of purchasing the inventory while keeping have increased its mark-up percentage, resulting in an increase
the selling price the same could be responsible for the trend. in profit margin and profit for the year. Alternatively, the business
Alternatively, deliberately reducing the selling price to attract might have found ways to better manage its expenses, and this
more customers and increase the market share could be the has resulted in a fall in expense percentages and an increase in
cause. These would increase sales and increase gross profit. the profit percentage.
iv. To improve this percentage, the business must increase its mark- g. Percentage change in profit in 2019 was 8%, and in 2020 it is 12%.
up percentage either by finding a cheaper inventory supplier i. This means that in 2020 the profit increased by 12% over the
while keeping the selling price the same, or by increasing the profit from 2019.
selling price of the inventory, which would increase the gross ii. This is a good trend because the business has generated more
profit and gross profit percentage. profit in dollars than it did last year.
c. Administration costs percentage in 2019 was 18%, and in 2020 it is iii. One reason for this trend is that the business might have
22%. increased its mark-up percentage, and this has resulted in an
i. This means that in 2020 the business spent 22% of its sales (or increase in profit margin and profit. Alternatively, the business
22 cents in every dollar of sales) on administration expenses, might have found ways to manage its expenses better, resulting
such as electricity used in the office, and rates. in a fall in expense percentages and an increase in the net profit
ii. This is a poor trend because the business has spent a larger percentage.
proportion of sales on administration expenses than it did last h. Percentage change in sales in 2019 was 25%, and in 2020 it is 23%.
year, indicating poor management of expenses in the past year. i. This means that in 2020 the business increased the sales it made
iii. One possible reason for this trend is that the business has had to last year by 23%.
spend more on office electricity due to the increase in electricity ii. This is a good trend as the business has generated nearly a
prices over the past year, which increased administrative quarter more sales dollars than it did in the previous year. This
expenses and their percentage. trend means that the business should also make a greater profit.
iv. To improve this percentage the business needs to reduce its iii. One reason for this trend might be that the business increased its
spending on administration expenses. For example, it could mark-up percentage, resulting in an increase in sales dollars, OR
find a cheaper insurance supplier, or switch from printing and it might have decreased its selling price to attract more customers
posting monthly invoices to emailing them, thus reducing the and therefore increase sales. Alternatively, the business might
administration expenses which in turn will decrease (improve) the have increased its advertising, attracting more customers and
administration expenses percentage. increasing the number of sales made.
d. Finance cost percentage in 2019 was 6%, and in 2020 it is 4%. 2. a. Best Meat spent 11% of its sales on administration expenses, such as
i. This means that in 2020 the business has spent 4% of its sales rent. This is an improvement in the figure over that of last year.
on interest (finance costs), which is an improvement on the same b. The business made sure not to increase its administration expenses
figure from last year. very much ($63 000 in 2020 compared with $66 000 in 2021).
ii. This is a good trend because it leaves a greater amount in the Because sales increased by so much (43%), the administration
business as profit. expenses percentage decreased. Although the business might have
iii. One reason for this trend could be that the business repaid cut back on some expenses, such as stationery, overall there was an
large amounts of loans or its mortgage which would reduce the increase in administration expenses.
amount of interest that had to be paid this year. Alternatively, the c. In 2021, 7% of sales remained as profit in Best Meat, after all
interest rates at the bank may have fallen, which has resulted in expenses were accounted for. This figure was down from that of the
less interest being paid, which reduced finance cost percentage. previous year.
e. Distribution cost percentage in 2019 was 22%, and in 2020 it is d. The main reason for this trend is the increase in Cost of goods sold
25%. expenses, indicating that inventory is more expensive to buy and that
i. This means that in 2020 the business spent 25 cents for every the business hasn’t increased its selling prices to account for this. This
dollar of sales on distribution expenses, such as petrol and has resulted in a smaller gross profit and therefore smaller profit for
advertising, which was a greater percentage than was spent on the year. There was also a large increase in distribution costs, which
distribution in 2019. led to a decrease in profit for the year.
ii. This is a poor trend because a smaller percentage of sales e. 2020: Cost of goods sold = 60%, then gross profit must = 40%.
remains as profit in the business. 2021: Cost of goods sold = 65%, then gross profit must = 35%.
iii. One reason for this trend is that the business increased its spending f. This means that 35% of every sales dollar remains in Best Meat as
on items such as advertising/petrol/wages, which resulted in gross profit, after accounting for cost of goods sold. This is to cover
increased distribution expenses. (Perhaps the business opened the business’s operating expenses and, it is hoped, to make a profit.
another store.) g. Best Meat should try to decrease its distribution costs by, for example,
iv. This trend can be improved by cutting back on some of the using less shop electricity. It could also change from advertising on
distribution expenses, for example by reducing the number of the radio, which is really expensive, to advertising in the newspaper
deliveries the business makes, or changing from colour to black- – providing that this change will not have detrimental effects on
and-white advertising, which is less expensive. This will reduce customer numbers. This will decrease distribution costs and the
the distribution costs and in turn improve the distribution cost distribution cost percentage.
percentage. h. This means that Best Meat has generated a return of 4% on the
f. Profit percentage in 2019 was 12%, and in 2020 it is 16%. money and other assets that Baxter has invested into the business.
i. This means that in 2020 the business has 16% of sales left in the This figure is quite low, and currently he would be better off investing
business as profit after accounting for all expenses. This is higher his money in the bank at 5% interest, which is less risky.
than the same figure for last year, which is pleasing.

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68 Full Answers for Level 2 Accounting Learning Workbook

i. No, because this figure is quite low, and currently Baxter would be 5. The business must have reasonably high current and liquid liabilities,
better off investing his money in the bank (at 5% interest). such as an unsecured bank overdraft and Accounts payable, and possibly
j. Best Meat should try to increase its profit for the year. The business low current and liquid assets, such as bank and inventory.
could do this by increasing the mark-up percentage, or by decreasing 6. 1. The business might have to borrow money from the bank to ensure
expenses (for example, using less stationery or electricity) which that it has enough money to repay its creditors and expenses as they
would increase the profit. This would, in turn, lead to an increase in fall due. This will result in increased interest payments in the future.
the return on equity percentage. 2. If the business is unable to meet its liquid debts it will develop a
poor credit rating and the Accounts payable might stop giving the
Activity 18C: Liquidity (page 269) business credit. This would mean that it might not be able to buy
1. a. Current ratio in 2020 was 2.46:1; and in 2021 it is 1.89:1. enough inventory to sell and therefore struggle to keep making a
i. This means that in 2021 the business has $1.89 of current assets profit.
to repay every $1 of current liabilities. This is a good result, as it
means that it should be able to repay its short-term debts in the Activity 18D: Financial stability (page 271)
normal course of business as they fall due in the next accounting 1. a. Equity ratio in 2020 was 0.62:1, and in 2021 it is 0.75:1.
period. i. This means that in 2021 the owner has financed (funded/
ii. Although the result is good, the trend is poor, since the amount invested) 75 cents for every $1 of total assets (or 75% of total
of current assets to repay every $1 of current liabilities has fallen. assets) in the business. The business is financially stable, since
Therefore the business has less ability to repay these short-term the owner has contributed well over half the assets, and there is
debts than it did last year. room to borrow if necessary.
iii. One possible reason for the trend could be a large decrease in ii. This is a good trend.
the cash at bank, caused by the purchasing of new equipment, iii. One reason for this trend is that the owner might have
or the repayment of a loan. Alternatively, the owner might have contributed more cash or assets into the business during 2021, or
taken a large amount of cash drawings this year. The decrease in alternatively the business might have repaid a large amount of its
bank decreased current assets and the current ratio. non-current liabilities.
iv. If the owner ever needs to improve this ratio, he/she should iv. The owner should always invest money into the business
invest more money in the business. This means that the cash to improve this ratio (providing he or she wants to keep the
at bank will increase, which increases the current assets and business). By increasing his or her cash investment in the
therefore increases the current ratio. Alternatively, the business business, the owner is increasing the assets and the capital –
could borrow money in the form of a long-term loan (however, which increases proportion of assets the owner has funded.
this option would worsen the equity ratio – usually this is not Alternatively, if possible, the owner should repay liabilities such
ideal). as loans. To do this, however, the owner will often have to
b. Liquid ratio in 2020 was 0.96:1 and in 2021 it is 1.25:1. contribute the money first. (The owner could also try to increase
i. This means that in 2021 the business has $1.25 of liquid assets profit, but this would not be as reliable a method as contributing
to repay every $1 of liquid liabilities. This is a good result as it money.)
should be able to repay its immediate debts in the normal course b. Equity ratio in 2020 was 0.62:1 and in 2021 it is 0.48:1.
of business, as they fall due. i. This means that in 2021 the owner has financed (funded/
ii. This is a good trend, as the amount of liquid assets to repay invested) 48 cents for every $1 of total assets in the business.
every $1 of liquid liabilities has increased. Therefore the business This means the business is financially unstable as the owner has
now has the ability to repay its immediate debts as they fall due. funded far less than half of the business’s assets.
iii. One possible reason for the trend is that the business might ii. This is a poor trend because the figure has decreased since the
have repaid some of its Accounts payable. This would have previous year and is now below half of total equity.
been possible if the business got a loan, or the owner invested iii. One reason for this trend is that the owner might have taken out
more money in the business. This would have decreased large amounts of drawings this year, thus reducing the proportion
liquid liabilities and the liquid ratio. Alternatively, the Accounts of assets his or her capital has funded. Alternatively, the business
receivable or bank account might have increased greatly due to might have purchased large property, plant and equipment assets
increased sales, which increased current assets and liquid ratio. and funded this by borrowing more money from the bank – for
iv. If the owner ever needs to improve this ratio, he/she should example, by increasing its loan or mortgage.
invest more money in the business. This means that the cash iv. The owner should always invest money in the business to
at bank will increase, which will increase the liquid assets and improve this ratio (providing he or she wants to keep the
therefore also the liquid ratio. Alternatively, the business could business). By increasing their cash investment in the business, the
borrow money as a long-term loan (but this would worsen the owner is increasing the assets and the capital, which increases
equity ratio, which is usually not ideal). the proportion of assets the owner has funded. Alternatively, if
2. The business might have high inventory, as this would help contribute to possible, the owner should repay liabilities such as loans. To do
high current assets and therefore a high current ratio, but the inventory is this, however, the owner will often have to contribute the money
excluded from the liquid assets meaning the value of liquid assets is very first.
low. 2. 1. The business must be paying a large amount of interest because of
3. The business might have high Accounts receivable and/or a high bank the large proportion of assets being funded by liabilities, which in
account, meaning that both its current and its liquid assets are high turn will reduce the business’s profit.
enough for it comfortably to be able to cover the current liabilities. 2. The business will be unable to borrow more money if it needs to. It
4. This could be because of a high secured bank overdraft. This will have to repay the debts each year, which will put strain on its
increases the current liabilities which causes the low current ratio. cash flow.
However, it is excluded from the liquid ratio, thus ensuring that the liquid
assets are comfortably able to cover the low liquid liabilities.

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 Answers 69

Activity 18E: Management effectiveness (page 274) 2. a. Current ratio – the current ratio will now decrease back to what it
1. a. Age of Accounts receivable in 2020 was 42 days, and in 2021 it is was before the cash investment, because the money in the bank will
36 days. decrease, which decreases current assets and the current ratio.
i. In 2021 it took the Accounts receivable, on average, 36 days to b. Finance cost percentage – the finance cost percentage should
repay their debts, which is an improvement on the situation in improve, because repaying the loan should decrease the amount of
2020. interest being paid by Sarah’s Sofas. This will decrease the finance
ii. This is a good trend as the business is receiving its money faster cost and the finance cost percentage.
from Accounts receivable. c. Equity ratio – this will improve the equity ratio further because the
iii. The business might have tightened its credit policy by reducing repayment of the loan decreases liabilities, which increases the
the amount of credit people are allowed. Alternatively, it might proportion of total assets funded by the owner, which increases the
have sent reminder letters and started to charge interest on equity ratio.
overdue accounts which has resulted in debtors paying more 3. a. Age of Accounts receivable – the loosening of the credit policy is
quickly. likely to lead to an increase in credit sales and possibly debtors
taking longer to pay their debts. This will increase the age of
iv. The business could offer discounts for early payment which
Accounts receivable, which is a poor trend.
should encourage debtors to pay their accounts faster.
Alternatively, it could charge penalty interest on overdue b. Liquid ratio – the liquid ratio is likely to increase/improve because the
accounts. Accounts receivable balance will be higher, which increases the liquid
assets and the liquid ratio.
b. Inventory turnover in 2020 was 5 times, and in 2021 it is 3.5 times.
c. Bank balance / liquidity – this is likely to worsen because, although
i. This means that in 2021 the inventory on hand was sold, on
the Accounts receivable are not paying as quickly as previously,
average, 3.5 times, which is a deterioration from last year.
Sarah’s Sofas still has to pay its expenses and other debts so its bank
ii. This is a poor trend, because inventory is being sold more slowly balance will decrease.
this year than it sold last year.
4. a. Mark-up percentage – mark-up percentage will increase, because the
iii. One reason for this is that the business might have increased the increase in selling price will increase the difference between sale and
mark-up percentage too much, by increasing the selling price cost price of inventory.
and making it too expensive for customers to buy its inventory. b. Gross profit percentage – due to the increase in selling price, and
Alternatively, it might have purchased a lot more inventory this therefore increase in mark-up percentage, the profit margin has
year because it wasn’t carrying enough last year. This would increased, which leads to an increase in gross profit, which increases
mean that the business has more inventory which makes it gross profit percentage.
logical that inventory turnover will take longer.
c. Percentage change in sales – the percentage change in sales should
iv. Decrease the selling price by having a sale to clear the excess increase, because Sarah’s Sofas does not need to sell as many sofas to
stock – especially that which is at risk of becoming obsolete. get the same sales dollars as last year. However if the price increase
This will decrease the stock on hand and therefore increase the scares off many customers, it might fall.
turnover. It is important also to check the purchasing policies to d. Inventory turnover – generally an increase in selling price will
ensure the business is buying the stock that customers want, and lead to a decrease in the number sofas being sold, which will
not too much of it. decrease/worsen the inventory turnover. Because the sofas are more
2. 1. The business is not receiving the money its debtors owe it, therefore expensive, fewer are sold.
it might not have enough money itself to repay its Accounts payable e. Current ratio – this is likely to cause an increase in inventory since
and other monthly expenses, resulting in a poor credit reputation or fewer sofas are sold, which will lead to an increase in current assets
incurring late fees. and the current ratio. Alternatively, for each sofa sold, the Accounts
2. The business will face having to write Accounts receivable off as bad receivable or bank is increasing by more than it would have last year,
and doubtful debts. This will reduce profit. which also increases current assets and the current ratio.
3. This means that the business is not making as many sales as it should be.
It could indicate that it has large amounts of obsolete stock or is carrying
far too much stock – which could lead to obsolescence in the future if not
currently. It might indicate that its inventory is too expensive and that for
this reason the business is missing out on sales and therefore profit.
4. This indicates that the business is either selling its goods too cheaply
or, alternatively, that it is missing out on sales because it is not carrying
enough stock. Both of these situations would have a negative impact on
the business’s prospective profit.

Activity 18F: Linkages (page 276)

1. a. Equity ratio – the equity ratio should increase/improve because there
will be an increase in capital, which increases equity and equity ratio.
b. Current ratio – the current ratio will improve/increase because the
loan will cause an increase in Sarah’s Sofas’ bank account, which will
increase current assets and the current ratio.
c. Liquid ratio – the liquid ratio will improve/increase because the loan
will cause an increase in Sarah’s Sofas’ bank account, which will
increase the liquid assets and the liquid ratio.

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70 Full Answers for Level 2 Accounting Learning Workbook

Activity 19: Analysis and interpretation (page 279)

1. a. 2019 2020
Analysis measure Answer Working Answer
Mark-up % 114.3% (319 500 ÷ 360 500) × 100 88.6%
Gross profit % 53.3% (319 500 ÷ 680 000) × 100 47.0%
Profit for year % 18.3% (52 000 ÷ 680 000) × 100 7.6%
Distribution costs % 20% (155 000 ÷ 680 000) × 100 22.8%
Finance cost % 3.3% (37 000 ÷ 680 000) × 100 5.4%
Percentage change in sales 7.1% ((680 000 – 600 000) ÷ 600 000) × 100 13.3%
Percentage change in profit for
22.2% ((52 000 – 110 000) ÷ 110 000) × 100 –52.7%
the year
Return on equity 20.3% (52 000 ÷ ((583 800 + 691 000) ÷ 2)) × 100 8.2%
Return on total assets 19.7% ((52 000 + 37 000) ÷ ((722 800 + 896 000) ÷ 2)) × 100 11.0%
Current ratio 2.73:1 56 000 ÷ 25 000 2.24:1
Liquid ratio 0.40:1 (56 000 – 49 000) ÷ 25 000 0.28:1
Equity ratio 0.81:1 691 000 ÷ 896 000 0.77:1
Age of Accounts receivable 6.48 days = 7 days ((1 000 + 3 300) ÷ 2) / (0.1 x 680 000 x 1.15) × 365 10.04 days = 11 days
Inventory turnover 8.75 times 360 500 ÷ ((28 000 + 49 000) ÷ 2) 9.36 times

b. Analysis
measure Meaning of the 2020 results Trend
Mark-up % In 2020, Music Magic increased the This was a poor trend because the decrease in price contributed to the decrease in gross
cost price of its inventory by 88.6% and net profit.
to calculate the selling price. The reason for the trend was lowering the selling prices and having to pay increased costs for
purchasing the inventory. The increases weren’t passed on to the customers. This decreased
the profit margin on each item sold.
Gross profit In 2020, Music Magic had 47% This is a poor trend because the business has generated a smaller gross profit percentage
% of its sales left in the business as than it did last year.
gross profit to cover its operating The main reason for this trend is the decrease in mark-up percentage which is probably
expenses and generate a profit. caused by decreased selling prices as the inventory turnover increased.
Profit for In 2020, Music Magic had 7.6 cents This is a poor trend as the actual profit and profit as a percentage of sales have decreased.
year % in every dollar of sales to keep in The main reason for this trend is the large increase in expenses, which is likely to have
the business after accounting for all been caused by opening the five new stores, thus generating a lot of one-off set-up costs,
expenses. and increased wages.
Distribution In 2020, Music Magic used 22.8% of This is a poor trend because the expenses have increased and are using up a greater
costs % sales on distribution expenses. percentage of sales than they did last year.
The main reason for this trend is opening the new shops. This would require increased staff
wages to be paid as well as a large increase in advertising. These expenses would increase
the distribution costs greatly.
Finance In 2020, Music Magic used 5.4% of This is a poor trend because the increase in finance costs as a percentage of sales
cost % sales in interest expenses. contributes to the decrease in net profit percentage.
The main reason for the trend is the increase in interest due to having to borrow more
money to finance the opening of the five new shops. Non-current liabilities increased by
$53 000 which explains the increase in finance costs.
Percentage In 2020, Music Magic generated This is a good trend as the business has generated more sales to cover the operating
change in 13.3% more sales than it did in expenses and make a profit.
sales 2019. The reason for this trend is the opening of the new shops which attracted more customers
and generated more sales. The decrease in mark-up would have also contributed to the
trend as the cheaper prices encouraged the customers to buy more.
Percentage In 2020, Music Magic generated This is a poor trend because the business should be trying to increase its profit.
change in 52.7% less profit than it did last The main reason for the decrease is the larger increase in expenses, especially distribution
profit for year. and finance costs. This is to be expected as a result of opening the five new shops,
the year increased borrowing and the increase in rent or rates, shop electricity and advertising.
Return on In 2020, Music Magic generated a This is a poor trend because Music Magic has generated a smaller return on equity this year
equity 8.2% return on the funds invested than it did last year.
by Sam. The reason for this is the decrease in profit caused by the increase in expenses, such as
set-up costs. The capital that Sam invested during the year has also increased the equity
and therefore reduced the return.

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 Answers 71

Return on In 2020, Music Magic generated an This is a poor trend because last year there was a 19.7% return which means the business
total assets 11% return on total assets, which is using its assets less effectively now.
means it isn’t using the asset as The reason for this is the purchase of a lot more assets to open the five new shops. Because
effectively as it did last year. they haven’t been open for a whole year, they haven’t had the opportunity to generate
profit to their full capacity yet.
Current ratio In 2020, Music Magic had $2.24 of This is a poor trend as the ability to repay short-term debts has fallen. However, it is still at
current assets to repay every $1 a safe level.
of current liability. This means that The reason for this trend is the large increase in current liabilities, especially Accounts
Music Magic should be able to repay payable, which has more than doubled. This would have possibly been a result of
its short-term debts as they fall due. purchasing some equipment for the new shops on short-term credit.
Liquid ratio In 2020, Music Magic had 28 cents This is a very poor trend as the ability to repay immediate debts has fallen and is now at a
of liquid assets to repay every $1 of critical level.
liquid liability. This means that Music The reason for this trend is the large increase in liquid liabilities, especially Accounts
Magic will struggle to repay its payable, which has more than doubled. This would have been to help fund the inventory
immediate debts as they fall due. for the new shops. Also, the increase in interest payments and increased drawings would
have contributed to the decrease in Bank.
Equity ratio In 2020, Sam has financed 77% of This is a good trend as the business is relying less on Sam and has increased its debt
the total assets in Music Magic. financing, thus making it possible to expand its stores, while maintaining a safe level of
equity.
The reason for this trend is the large increase in non-current liabilities to finance the new
property, plant and equipment needed to set up the five new shops. This is despite the
increase in capital by Sam during the year.
Age of In 2020, it took Music Magic on This is a poor trend because it is taking longer this year to recover outstanding debt.
Accounts average 11 days to receive money However, it is at such a good level in real terms that there is no reason to worry about it.
receivable from its credit sales / Accounts The reason for this trend is the increase in Accounts receivable due to new debtors at the
receivable. new shops. The business might also have loosened its credit policy allowing more people
to buy on credit with less favourable criteria.
Inventory In 2020, Music Magic sold its This is a good trend because it is selling the inventory more quickly than it did last year,
turnover inventory on hand on average meaning there is less chance of obsolete stock in the future.
9.4 times a year. The main reason for this trend is the decrease in mark-up percentage which means the
stock was cheaper so more people bought more music.

c. i. Gross profit percentage. Increase the selling price of the inventory to generate a higher mark-up percentage and therefore a higher gross profit
margin on each item of inventory sold, which increases the gross profit percentage.
ii. Administration expenses percentage. Decrease the administration expenses by finding a cheaper electricity supplier and ensuring that lights
and computers are switched off each night. This will reduce the office expenses and in turn the administration expense percentage.
iii. Current ratio. Sam should invest more money into Music Magic as this will increase the bank account which is a current asset. This will therefore
improve the current ratio. This money could be used to repay Accounts payable which would decrease the current liabilities and therefore improve
the current ratio even further.
iv. Equity ratio. Sam should invest more money into Music Magic as this will increase the capital, and then the equity as a percentage of total assets
will also increase.
v. Inventory turnover. Sam needs to ensure that Music Magic carries the right amount of inventory, and inventory that the customers want to buy.
This will avoid the problem of obsolete stock. In addition, the selling price can be decreased to attract more customers, but it is to be hoped that
this measure will not be needed. By carrying less stock and stock people want to buy, the business can help improve its turnover. Music Magic also
needs to reduce the stock on hand, if possible, in order to make it easier to sell the equivalent of the inventory on hand.

2. a. 2021 2022
Analysis measure Answer Working Answer
Profit % 31.7% (42 500 ÷ 150 000) × 100 28.3%
Gardening costs % 58.3% (95 000 ÷ 150 000) × 100 63.3%
Administration expenses % 6.7% (9 500 ÷ 150 000) × 100 6.3%
Finance cost % 3.3% (3 000 ÷ 150 000) × 100 2%
Return on equity 231.7% (42 500 ÷ ((25 700 + 22 800) ÷ 2)) × 100 175.3%
Return on total assets 94.6% (42 500 + 3 000) ÷ ((54 800 + 50 200) ÷ 2) × 100 86.7%
Current ratio 2.40:1 5 200 ÷ 2500 2.08:1
Liquid ratio 2.40:1 (5 200 – 750) ÷ 2 500 1.78:1
Equity ratio 0.42:1 25 700 ÷ 50 200 0.51:1
Age of Accounts receivable 7.5 days = 8 days ((1 300 + 1 600) ÷ 2 ÷ (0.6 ×150 000 × 1.15) × 365 5.1 days = 6 days

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72 Full Answers for Level 2 Accounting Learning Workbook

b.
Analysis
measure Meaning of the 2022 result Trend
Profit for the In 2022, GreenFingers Garden Services had This is a poor trend as the profit as a percentage of fees revenue has decreased.
year % 28.3 cents in every $1 of fees revenue to The main reason for this trend is the large increase in expenses, especially
keep in the business after accounting for all gardening expenses – possibly due to the increase in petrol prices over the past
expenses. year. The increase in expenses was proportionately greater that the increase in
revenue, which led to a decrease in profit percentage.
Gardening In 2022, GreenFingers Garden Services This is a poor trend because the gardening expenses have increased and are
costs % used 63.3% of fees revenue on gardening using up a greater percentage of fees revenue than they did last year. The
expenses. main reason for this is likely to be the increase in petrol prices, and possibly
more travelling that needs to be done for new customers, as fees received has
increased a lot.
Administration In 2022, GreenFingers Garden Services used This is a good trend because the decrease in administration expenses as a
expenses % 6.3% of fees revenue in administration percentage on fees revenue can contribute to an increase in profit.
expenses. The main reason for the trend is that the increase in fees revenue is greater
than the increase in administration expenses. Despite the increase in fees
revenue, Garry has managed his administration expenses well.
Finance cost % In 2022, GreenFingers Garden Services used This is a good trend because the decrease in finance costs as a percentage of
2% of fees revenue in interest expenses. fees revenue contributes to an increase in net profit.
The main reason for the trend is the decrease in interest needing to be paid
because the business repaid a lot of its liabilities (for example, $8 000 off non-
current loans), which decreased finance costs.
Return on In 2022, GreenFingers Garden Services This is a poor trend because GreenFingers Garden Services has generated a
equity generated a 175.3% return on the funds smaller return on equity this year than it did last year. The reason for this is the
invested by Garry. increase in average equity this year, which has made it difficult to improve the
return, despite the increase in profit. Nevertheless, this is a very high return on
equity.
Return on total In 2022, GreenFingers Garden Services This is a poor trend because last year it had a 94.6% return which means the
assets generated an 86.7% return on total assets. business is using its assets less efficiently now.
One reason for this is the very small average total assets from 2020 to 2021, so
it is expected to fall. It is still, however, a very good result.
Current ratio In 2022, GreenFingers Garden Services had This is a poor trend as the ability to repay short-term debts has fallen – but it is
$2.08 of current assets to repay every still at a safe level.
$1 of current liabilities. This means that The reason for this trend is the increase in current liabilities, especially Accounts
GreenFingers Garden Services should be able payable, and the decrease in the bank account caused by the large amount of
to repay its short-term debts as they fall due. drawings, and the repayment of a loan of $8 000. This caused an increase in
current liabilities and a decrease in current assets, which decreased the current
ratio.
Liquid ratio In 2022, GreenFingers Garden Services had This is a poor trend as the ability to repay immediate debts has fallen but it is
$1.78 of liquid assets to repay every $1 of still at a satisfactory level. The reason for this trend is the increase in current
liquid liabilities. This means that GreenFingers liabilities, especially Accounts payable, and the decrease in bank – caused by
Garden Services should be able to repay its repaying some of the loan, which increased liquid liabilities and decreased
immediate debts as they fall due. liquid assets, overall resulting in a decrease in liquid ratio.
Equity ratio In 2022 Garry has financed 51% of the total This is a good trend as the business has improved the proportion of the assets
assets of GreenFingers Garden Services. funded by Garry. This has been caused by the decrease in assets, as well as by
the repayment of $8 000 off the loan. This is still at a low level because Garry
continues to take out large amounts of drawings ($39 600).
Age of In 2022 it took GreenFingers Garden Services This is a good trend because it is taking the business less time to receive money
Accounts on average 6 days to receive its money from from its debtors than it did last year.
receivable its credit sales. This is especially pleasing because there has been an increase in the Accounts
receivable balance. The reason for the improvement is that the increase in
debtors’ balance is a smaller percentage than the increase in credit fees,
indicating a tighter credit policy. Possibly the business is offering a discount for
payment received within seven days.

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 Answers 73

c. i. Net profit percentage. Increase the fees to generate short-term debts. If Kerry’s Kingdom does not receive the money from
more revenue by charging more for the services, or decrease inventory sold, it cannot pay its own current liabilities.
administration expenses by reducing stationery expenses and c. If the turnover does not improve, Kerry’s Kingdom might be left with
using more email. Both of these will increase the profit for the a lot of money tied up in inventory. It might have to have a discount
year, and in turn the net profit percentage. sale to clear stock, which will result in a smaller profit margin. It
ii. Gardening cost percentage. For this business this will be could also get left with a lot of stock that is obsolete and can’t be
difficult. If possible, find a cheaper petrol supplier or try to find sold, and needs to be written off. This will decrease the gross profit
mowers that are more economical to run. Perhaps advertise less and profit for the year, both of which will have a negative impact on
or on less expensive paper to decrease the gardening expenses the business’s performance. The cash flow will be insufficient to pay
and in turn improve the gardening costs percentage. Accounts payable on time, as stock is being sold, thus causing the
iii. Return on equity percentage. This can be improved by business to incur late payment fees.
increasing the profit for the year by either generating more fees d. The business could have a discount sale to clear stock. This will mean
or decreasing expenses. This will then increase the profit in more stock is sold, as customers will buy more when it is cheaper.
relation to the equity in the business. Kerry’s Kingdom also needs to stop buying as much stock and, if
iv. Liquid ratio. This can be improved by increasing the cash at possible, have optimum stock level and reorder points to prevent
bank to increase the liquid assets and therefore improve the overstocking in the future. These measures, when combined, will
liquid ratio. This could be done if Garry invested more money in decrease inventory on hand and thus improve inventory turnover.
the business. (Note: NOT get a bank loan, since the equity ratio is 5. It appears that Kerry’s Kingdom lowered its selling prices or had many
not good enough to obtain a loan.) discounts sales to clear its stock. This would contribute to the lower
v. Age of Accounts receivable. This can be improved by mark-up percentage since a smaller profit margin was used, and would
tightening the credit policy, offering discounts to encourage improve the inventory turnover because more items of stock were
people to pay quickly, or charging interest on overdue accounts. being sold – in general, people will buy more if goods are cheaper.
These measures will encourage people to pay quickly, and in turn This illustrates the link between the mark-up percentage and inventory
this will improve the age of Accounts receivable. However, this is turnover: the lower the mark-up percentage, the higher the inventory
not really an issue for this business so it is likely that it has some turnover.
of these measures in place already. 6. a. Equity ratio: This would improve (increase) the equity ratio because
3. a. A poor age of Accounts receivable can have a positive effect on the equity has increased as a percentage of the total assets through
the liquid ratio because it will have resulted in a high amount of the increase in capital, especially as the money was used to repay
Accounts receivable. As this is a liquid asset, it will help contribute to some of the mortgage, as liabilities also decreased.
a good liquid ratio, as the liquid assets are greater than they would b. Finance cost percentage: This would improve (decrease) the
have been. finance cost percentage as the interest expense should fall – due
b. Because the liquid ratio is high, Kerry’s Kingdom believes it can meet to a smaller mortgage. This would require less interest to be paid,
its immediate debts easily. However, since it is taking the debtors decreasing finance costs.
more than 6 weeks (2 months / 8 weeks) to pay, the business will c. Liquid ratio: This would improve the liquid ratio, as some of the
not have received the money it is relying on in time to pay its liquid money is being used to repay the mortgage, and the rest is being
liabilities, therefore it might not be able to meet its immediate debts used to increase the bank account, therefore liquid assets are
on time. increasing, which in turn increases the liquid ratio.
c. If Kerry’s Kingdom does not improve its age of Accounts receivable, d. Profit percentage: This should improve the profit percentage
the business might not be able to meet its own debts and therefore because the decrease in interest expenses should result in an
incur interest penalties, get a bad credit rating, and might no longer increase in the profit for the year, consequently increasing the profit
be able to buy on credit. If the credit policy is really bad, then the percentage.
business might also have to write off many bad debts which will e. Return on equity percentage: The equity percentage could
decrease its profit. increase or decrease. In the current year it is likely to decrease
d. Kerry’s Kingdom needs to offer incentives to get debtors to pay their because of the large increase in equity that the profit has to be
accounts faster. This should improve the Age of Accounts receivable spread over. It is unlikely that the decrease in interest costs will be
in the long run. In the short term, it needs to make sure that it sends greater than the $45 000 invested by the owner.
reminder letters to the holders of overdue accounts and makes phone 7. a. Equity ratio: The equity ratio would decrease (worsen) because
calls to start getting back that money. It could also consider stopping there is less capital in the business, and the liabilities will now have
credit so customers with overdue accounts can’t buy on credit without funded a greater proportion of the business assets than the owner
repaying the existing debt first. The business should also look at the has funded.
criteria it has for giving credit and should make it harder for people b. Return on total assets: This transaction is likely to improve the
to get credit. All of these measures should encourage debtors to pay return on total assets, as the net profit is unaffected and the total
their accounts faster, which will decrease (that is, improve) the age of assets will have decreased due to Richie taking money out of the
Accounts receivable. business for his personal use, thus decreasing the bank account.
4. a. The slow inventory turnover indicates that high amounts of inventory c. Current ratio: This transaction is likely to decrease or worsen the
are being kept in the shop. This increases the value of current assets current ratio. Because money has been withdrawn from the business,
– which contributes to the good current ratio. The stock remains on there is less cash at bank, therefore fewer current assets to share over
the shelf for longer, therefore building up the current assets value, the current liabilities. This lowers the current ratio.
and the current ratio.
d. Return on equity percentage: This transaction is likely to improve
b. The current ratio indicates that Kerry’s Kingdom should be able to the return on equity percentage. Because Richie has withdrawn a
repay its short-term debts easily. However, to do this it is relying large amount of equity, the average equity will have fallen. This
on the inventory to be sold, but as the poor inventory turnover means that the profit for the year doesn’t have to be shared over as
indicates, this is not happening as quickly as it should – therefore much equity – which will improve this result. The equity ratio will
the business has a falsely positive view of its current ability to repay be falling and the business might not be able to borrow money if it
needs to.

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74 Full Answers for Level 2 Accounting Learning Workbook

8. Although this increase is a pleasing result, the reason that it occurred is also have a low turnover. Alternatively, the business might have
not pleasing. It occurred because of large drawings. If Richie continues purchased a lot of stock that people don’t want to buy. This high
to take drawings, the equity ratio will fall and the business will be less inventory results in a low inventory turnover.
stable. In addition, there will be an increase in interest payments if the f. HairSprayArt has a very good credit policy which enables it to check
business has to borrow to meet repayments and to be able to fund the thoroughly whether potential debtors will be able to pay their
owner’s high level of drawings. accounts. This will allow the business to receive payment more
9. This high ratio indicates that the business might not be investing its quickly, especially if it has good incentives in place – for example, it
funds wisely. It might have too large a percentage of its funds tied up in might offer prompt-payment discounts or charge interest on overdue
the cheque account when the funds could be placed more beneficially in accounts. HairSprayArt might not have as big a proportion of its sales
a term investment or could be invested in more equipment. Alternatively, on credit as the industry average which would also help improve the
the ratio could be the result of a high debtors’ figure – which, unless the age of debtors.
debtors are paying their accounts quickly, is not a good thing. It could be g. On the whole, HairSprayArt’s liquidity is not as good as the industry
caused by too high an inventory balance – which could lead to obsolete average, because its liquid ratio is worse, despite the current ratio
stock that has to be written off. (However, it is unlikely that there is being better. The current ratio shows that HairSprayArt has $2.60 of
inventory in this context.) Richie needs to determine what is contributing current assets to repay every $1 of current liabilities, which leaves it
to the high current ratio and consider investing the business’s funds more in a more comfortable position than the industry average at $2.10 to
effectively. repay its short-term debts. However, the liquid ratio of $1.10 liquid
Industry assets to every $1 liquid liability shows that HairSprayArt should be
10. a.
Analysis measure average HairSprayArt Result able to repay its immediate debts, but not as comfortably as others in
the industry. This measure is the more important of the two, because
Mark-up % 100% 90% worse
it reflects the business’s ability to repay liquid debts as they fall due
Gross profit % 50% 47% worse in the next 4–6 weeks.
Net profit % 8% 10% better 11. a. i. This means that, in order to calculate the selling price of his
Distribution costs % 9% 12% worse inventory, Marcus increases the cost price of his inventory by 100%
(that is, he doubles the cost price). For example, if Marcus buys an
Finance cost % 3% 5% worse item for $100, he will sell it for $200. This mark-up percentage is a
Administration expenses % 30% 20% better smaller one than was used last year.
Return on equity % 18% 16% worse ii. The decision to reduce the mark-up percentage was successful
because the sales dollars increased by $200 000 (and increased
Return on total assets % 13% 14% better
profit), meaning that more people were prepared to buy the
Current ratio 2.1:1 2.6:1 better inventory at lower prices – sufficient to cover the decrease in
Liquid ratio 1.35:1 1.10:1 worse mark-up.
Equity ratio 0.65:1 0.85:1 better b. i. This means that, in 2023, Sparkz Electrical had 7.5% (or 7.5 cents)
in every dollar of sales remaining in the business as profit after
Age of Accounts receivable 32 days 28 days better
accounting for all expenses. This is a decrease from last year.
Inventory turnover 7 times 5.2 times worse ii. By changing its telephone and internet provider, Sparkz Electrical
b. HairSprayArt calculates selling price by adding 90% of the cost price is trying to reduce its administration expenses. By reducing these
to the cost price of its inventory. For example, if an item cost $10, expenses, the business will generate a greater profit for the year,
the business would sell it for $19. This mark-up percentage is less which in turn will improve the net profit percentage.
than the industry average which means that the business might not c. The main reason for this decrease is the large increase in total assets
be making as much profit on each item sold as it could be – it might ($280 000), mainly due to the $250 000 refurbishment which was
deliberately be undercutting its competition to try to sell more. finished during the year, and which has increased the average assets.
c. HairSprayArt is selling its products at cheaper prices than the These assets have not yet had time to start generating profit for a
competition, and so it has a lower mark-up percentage. One reason whole year, so hopefully this percentage will improve again next
it might want to do this is to increase sales volume and perhaps year. OR: Sparkz Electrical might have had to shut the shop for the
increase market share in order to try to eliminate competition. duration of the refurbishments, which would have decreased its
Another reason could be that it is a smaller business and therefore profit potential in the short term.
it costs the business more to buy its inventory, so it needs to have 12. a. i. Mighty Cycles’ current ratio can be used to assess the business’s
a lower mark-up percentage to still be able to sell the products at ability to repay its short-term debts. Samantha is relying on the
similar prices to those charged by the competition. business’s Accounts receivable to enable it to do this. Because
d. The reason that HairSprayArt has a lower gross profit percentage the Age of Accounts receivable is 58 days (nearly two months),
is that its mark-up is lower than the industry average. However, Samantha might have problems paying her Accounts payable
HairSprayArt also has a lower expenses percentage, especially the and expenses in the coming month because the business hasn’t
administration expense percentage which is 10% of sales lower than received the money from its debtors in time for her to pay her
the average. This means it has better control over its administration debts as they fall due.
expenses than the industry average. By having a lower expense ii. One of:
percentage of sales, the business has compensated for the slightly – The business could take out a long-term loan and use this
lower gross profit percentage, resulting in a higher profit for the year, money to repay the Accounts payable (current debts). This
and giving it a better-than-average net profit percentage. would decrease current liabilities, which would help improve
e. HairSprayArt might be a small business in comparison with other the business’s current ratio.
businesses in the industry. This means it can’t take advantage of bulk – Samantha should invest more money in the business. This
buying and has to have a smaller mark-up percentage because of money will increase the cash on hand that can then be used
the higher cost of its purchases. A consequence of having to buy a to repay the current debts, because the cash at bank has
lot of stock which isn’t selling very well is that the business would increased.

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 Answers 75

– Samantha could offer discounts to her Accounts receivable to be able to repay the Accounts payable and expenses as they fall
encourage them to pay their debts faster. This will increase due. He has needed to extend his overdraft to make sure that his
the cash flow in the business and can be used to repay the debts are paid on time.
current debts. ii. Example:
b. i. This means that Samantha has funded 65% (or 65 cents in every – Handy Haven could offer discounts to its debtors if they pay
dollar) of the business’s total assets. This means that the business their accounts early (for example, within two weeks) – this
is financially stable as she has funded over half the business would mean that more people, wanting to receive the
assets, which is more than the liabilities, and she can borrow to discount, will pay earlier and this will reduce the age of
expand the business in the future if she wants to. Accounts receivable.
ii. Samantha repaid some of the loan and mortgage. To do this, she – Handy Haven could send out reminder letters and make
cashed in some of the business’s investments. This repayment phone calls to all those who are overdue in paying their
decreased the amount of liabilities, which in turn increased the accounts. This should make some pay faster and improve the
proportion of the business assets that have been funded by age of debtors.
Samantha, therefore increasing the equity ratio. – Handy Haven should stop giving credit to all debtors who
Samantha repaid some of the loan and in doing so she invested have overdue accounts. This will make them pay up if
more money in the business. This decreased the amount they want to buy more. The business then needs to ensure
of liabilities, which in turn increased the proportion of the that debtors pay on time, by charging interest on overdue
business assets that have been funded by Samantha, therefore accounts in the future. Because the debtors will want more
increasing the equity ratio. Because she has increased her capital credit and not want to pay extra, they should pay faster, thus
investment, this has also increased the equity which has led to the improving Handy Haven’s age of Accounts receivable.
improvement in the equity ratio. 15. The financial expenses percentage for 2020 tells Extreme Sports that
13. a. i. One way to reduce Comfy Couches’ closing inventory is to have 8% (or 8 cents in every dollar) of sales is taken up by paying interest
a discount sale. This should encourage more people to buy expenses (finance costs). This is higher than the industry average
furniture, consequently increasing the inventory turnover and the (double, in fact) and is therefore a concern.
closing inventory balance (providing Dileepa doesn’t replace all It is important that Extreme Sports improve this percentage because it is
the inventory he sells). a lot worse than the industry average. This means that Extreme Sports is
A second way to increase sales in order to reduce the closing spending a bigger proportion of money from sales on interest than other
balance of inventory is to have a big advertising campaign. More sports shops spend. A consequence is that a smaller proportion is left in
advertising will ensure that more people know about the shop the business as profit. To increase the profit in the future the business’s
and this should encourage more people to visit the shop, and to financial expenses percentage needs to be reduced.
buy more furniture, thus reducing the amount of inventory on To achieve a reduction in the finance cost percentage, the business needs
hand. to pay off some of its term liabilities (by the owner investing more cash).
ii. Example: Doing so will ensure that less interest will have to be paid, therefore
One consequence if the inventory turnover does not improve is the company will have less finance costs and a smaller finance cost
that the inventory might become very dated and unpopular, and percentage. Another way to reduce the interest expenses (and therefore
could end up being obsolete. This will cause a decrease in profit the finance cost percentage) is by restructuring and finding a bank that
if the stock has to be written off. will charge a lower interest rate.
Another possible consequence is that the business might have
trouble repaying its current debts (Accounts payable) because the Activity 20: Modified NCEA examination questions
inventory is not selling fast enough and there is not enough cash (page 292)
coming into the business. This will result in bad credit rating and 1. Analysis Answer
loss of suppliers. measure Working (for 2023)
b. i./ii.It is important that Dileepa changes his ordering policies. He can Distribution
do this by reducing the reorder point at which more stock must (60 000 ÷ 600 000) × 100 10%
costs %
be reordered, and by reducing the reorder quantities. This will
Profit for the
ensure that the business is not carrying too much stock, and as (GP – Exp) (120 000 ÷ 600 000) × 100 20%
year %
a result the inventory turnover should improve. Even if the stock
isn’t selling, there won’t be as much on hand, therefore reducing Current ratio (215 000 ÷ 250 000) 0.86:1
the inventory turnover risk. Equity ratio (400 000 ÷ 800 000) 0.50:1
OR:
Age of Accounts (30 000 + 40 000) ÷ 2 × 365 22.2 =
It is important that Dileepa has stock that people want. He needs receivable 23 days
(500 000 × 1.15)
to make sure that he doesn’t have much stock on hand so that
he can replace sold stock with the latest fashions that people will Inventory
400 000 ÷ (145 000 + 175 000) ÷ 2 2.5 times
want to buy. This will reduce the amount of stock on hand and turnover
increase the chances of selling what stock there is. This will, in 2. Part A: Analysing Cleaning Supplies’ liquidity
turn, improve the inventory turnover.
a. i. This tells Sara that Cleaning Supplies has 60 cents of liquid assets
14. a. The business has loosened its credit policy, allowing more people to repay every $1 of liquid liabilities. This means that it is unlikely
to buy on credit and for greater amounts. This has resulted in more that the business will be able to repay its immediate debts as
inventory being sold, which has increased the inventory turnover. they fall due, and that the business has less ability to repay debts
The business might have changed its inventory mix to sell stock than it did last year.
that was more in demand, in order to increase sales and inventory ii. The most likely reason for the decline in the liquid ratio is the
turnover. large increase in Accounts payable – due to the increased
b. i. As the Accounts receivable are taking longer to repay their debts, purchases of inventory and because it was used to help fund
the business is not receiving the money fast enough for Tim to

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76 Full Answers for Level 2 Accounting Learning Workbook

the increase in property, plant and equipment. The increase in 2. Sara could charge interest on overdue accounts, which is another
Accounts payable increases liquid assets and, in turn, decreases way to encourage people to pay on time. For example, any
the liquid ratio. In addition, the owner has taken large amounts account more than a month old will incur an interest penalty. This
of drawings, which has decreased the positive bank account into will encourage people to pay more quickly and therefore improve
overdraft. This decrease in bank has decreased the liquid assets the age of Accounts receivable.
and has worsened the liquid ratio. It could have been caused by Sara needs to ring all the debtors whose accounts are overdue
the $12 000 cash drawings. and send them reminder letters. She should also stop their credit
b. i. If Sara does not improve the liquid ratio of her business, she until they have paid their overdue accounts. This will encourage
might be unable to repay her Accounts payable and other people to pay their debts faster and in turn improve the age of
expenses as they fall due. This might mean that she will be Accounts receivable.
charged interest on her accounts, thus decreasing the business’s 3. Part A
profit. Her creditors might also stop the business’s credit which a. Gross profit percentage = 40.5%
will mean that Sara can’t buy more inventory, leading to a
Distribution cost percentage = 18.1%
possible loss in sales.
b. i. The finance cost percentage of 2.8% in 2013 tells Carl that Carl’s
ii. Sara should invest more cash ($25 000 so the liquid ratio is at
Furniture has spent 2.8 cents of every dollar of sales on interest
least 1:1) in the business. This will increase the Bank account
expenses (2.8% of sales), which is more than last year and which
back to positive, which will increase the business’s liquid assets
is a poor trend.
and in turn the liquid ratio. Alternatively, the business could
ii. The reason for the increase in finance cost percentage is that
borrow more money from the bank on a five-year loan (about
Carl’s Furniture increased the amount spent on interest from
$30 000) and use it to pay off most of the Accounts payable. This
$3 000 in 2022 to $16 000 in 2023. The reason for the increase
will decrease the Accounts payable (which is a liquid liability)
was the large increase in mortgage taken out to purchase the
and improve the liquid ratio. (Note – This isn’t very advisable in this
new showrooms, from $45 000 to $210 000. The increase in
particular case due to the poor equity ratio and therefore it might
mortgage has led to the increase in the finance costs.
not be accepted as an appropriate answer.) Alternatively, Sara
could sell some property, plant or equipment for cash. This will iii. Carl might not be concerned by the increase in finance cost
increase the bank account, and consequently also increases liquid percentage as it is still very low and Carl’s Furniture is still making
assets and liquid ratio. a profit. The reason for the increase is due to borrowing to
purchase a non-current asset – a new salesroom. This is expected
Part B
to increase the number of customers and increase sales and Carl
a. i. This ratio means that Sara has financed 45% (or 45 cents in every
should be able to repay the mortgage over time, reducing the
dollar) of total assets in Cleaning Supplies. This means that the
finance cost when the sales continue to increase.
business is not very stable and that it would be unlikely to be
c. The distribution cost percentage has increased from 15.2% to 18.1%,
able to borrow more money until this ratio increases to above
which is not a good trend. The main reason for the increasing trend
0.50:1 (that is, more than half).
is the increase in advertising, primarily full-page advertisements in
ii. Cleaning Supplies has borrowed more money as non-current
the local newspaper and new radio advertisements. This increase is
liabilities have increased, and this money has probably been used
expected because the new salesroom has to be promoted to attract
to purchase more property, plant and equipment as these assets
new customers.
have also increased.
Recommend that Carl’s Furniture reduce the amount spent on
OR: The business has increased its inventory levels by purchasing
advertising next year by using black-and-white paper advertisements
larger amounts of inventory on credit (that is, Accounts
rather than colour / half-page not full-page advertisements. This will
payable has increased). This both increases the proportion of
decrease the distribution costs and the distribution cost percentage
assets funded by liabilities and reduces the equity proportion.
and increase profit percentage. So long as some advertising
b. Sara needs to invest more cash or assets in the business. This will continues, the firm should not lose customers, especially with the
increase her capital, which increases the total equity and the equity new salesroom which is a promotion in itself.
ratio. Sara could then use some of this money to repay the Accounts
Alternatively Carl’s Furniture could reduce its shop electricity use by
payable or loan – which will decrease the liabilities and increase the
ensuring the lights are turned off when not needed and by using
equity ratio even further.
fewer of them. Using energy-saving light bulbs will also help.
The business could sell off any old and inefficient assets and use the This will reduce the cost of shop electricity, which decreases the
money from the sale to repay the liabilities, such as the loan. This distribution cost and distribution cost percentage and increases profit
will decrease the liabilities, therefore improving the equity ratio. percentage. It should not cause a reduction in sales as customers
Part C will still visit the new showroom and there will continue to be
a. i. This tells Sara that it takes her business 65 days on average to advertising.
receive the money from her Accounts receivable. This means that Part B
Cleaning Supplies does not have good credit control because it is a. The equity ratio in 2023 tells Carl that he, the owner, has invested
taking longer to recover debts than the expected period of one 38 cents for every $1 of total assets into Carl’s Furniture. This is a
month. decrease from 2022 as a result of borrowing more, i.e. increasing the
ii. This trend tells Sara that her credit policy has been improving mortgage to finance the new salesroom. The increase in liabilities has
over the past year because her debtors are paying her more meant that Carl’s Furniture is using greater debt financing. This has
quickly, on average, than they were last year. Although this result increased the total assets but has not increased the equity, which is
is still poor, the time taken to receive the money is improving. why the equity ratio decreased.
b. 1. Sara could offer a discount for those debtors who pay their This low equity ratio of well below 50% means that Carl’s Furniture
accounts within two weeks. Many would want to take advantage will struggle to borrow more in the future until it repays some of
of the discount and therefore they would pay quickly. This would the mortgage or Carl invests more money into the business, as the
mean that the debtors, on the whole, would be taking less time business would be seen as not very financially stable by lenders.
to pay their debts, therefore improving the age of debtors. Therefore Carl needs to finance any new expansion by investing
money himself.

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 Answers 77

b. Rate of return on average total assets = 11.1%. 4. Part A

c. i. In 2022 the return on total assets for Carl’s Furniture was 14.2%. a. Gross profit per centage = 60%
This means that the assets were used by Carl’s Furniture to Administrative expense percentage = 20%
generate an average return of 14.2 cents for every $1 average Profit for the year percentage = 8%
total assets.
Percentage change in sales = –17% (17% decrease)
ii. The trend in return on total assets decreased from 14.2% to
b. i. K D Carpets’ increase in mark-up % from 130% in 2021 to 150%
11.1%, which is a poor trend. The main reason for the trend is the
in 2022 would have resulted in an increase in the selling price
large increase in assets from $176 300 to $452 000, due to the
of the carpet. In 2021 the carpet which cost $200/m would have
new salesroom and greater inventory, due to the need to put more
sold for $460/m (plus GST), whereas in 2022 the carpet with the
furniture in the salesroom. As the salesroom was opened only
same cost would have sold for $500/m.
in June there wasn’t a full year to generate sales from it, so next
ii. Examples: Consequence 1 – Decrease in sales by 17%
year’s return on assets should be improved. Carl’s Furniture also
lost sales in the first few months of the financial year due to the Explanation 1 – As a result of K D Carpets increasing its mark-up
building noises, which are no longer happening. The loss of sales and therefore selling price there was a decrease in sales from
would have decreased the profit for the year. These are reasons $960 000 in 2021 to $800 000 in 2022, which is shown by the
that Carl shouldn’t be too disappointed in the lower return in 17% decrease in percentage change in sales. This was made worse
2023. Because the new salesroom will now be open for 12 months because of the new competitor which, along with the increased
in 2024 and there will be no building noises, there should be an prices, has meant customers have been lost, and therefore sales.
increase in customers and therefore in sales and profit, which will Consequence 2 – Decrease in profit for the year
increase the return on total assets next year. Explanation 2 – In 2021 K D Carpets’ profit for the year was
Part C $84 000, while in 2022 this had dropped to $60 000, one reason
a. Age of accounts receivable = 29 days (always round up) being the decrease in sales caused by the increase in mark-up
scaring away some of the customers to the new competitor. As
b. i. In 2022 the average length of time it took Carl’s Furniture debtors
a result of not reducing administration expenses and an increase
to pay their accounts was 20 days from the date of sale.
in finance costs, the reduced sales revenue resulted in an overall
ii. In 2023 the age of accounts receivable increased from 20 days
decrease in profit.
to 29 days, which is a worsening trend. One main reason for
Consequence 3 – Increase in loan and finance cost
the increase in age is the increase in sales made in 2023, as a
result of the new salesroom and the carrying of more inventory. Explanation 3 – Due to the increase in mark-up % (and selling
Another reason could be that the new accounts clerk has not prices) and the loss of customers and therefore sales receipts,
been proactive in chasing the debts to pay within the 15-day there was pressure put on the cash flow and bank balance of
terms / has not sent reminder letters. When the accounts clerk K D Carpets. As a result, it had to increase its loan by $39 000,
was appointed Carl was too busy to go through this with him. which increased the finance costs and decreased the profit. (Also
the decrease in bank balance – similar answer.)
iii. Because the debtors are taking longer to repay their debts there
is less cash coming into Carl’s Furniture as quickly, yet Carl’s Part B
Furniture still has to pay its expenses and purchases on time. This a. i. The trend in distribution cost percentage for K D Carpets is
can put strain on the bank account and as a result it is currently decreasing, which is an improvement. This means that there has
in overdraft because recently the payments have been greater been a decrease in the amount of distribution expenses (e.g.
than the receipts so the business might need a bigger overdraft, sales wages, advertising) in relation to the total sales received.
or arrange to pay suppliers later, thus incurring interest. ii. One reason for the decrease in distribution cost percentage was
c. i. Bill should charge interest for all debtors who haven’t paid in the the fact that K D Carpets did not renew the regional television
15 days that Carl’s Furniture seeks to achieve. advertising, which meant fewer sales, but a large decrease in the
ii. This will increase the speed at which debtors repay their accounts amount of advertising expenses for 2022, which contributed to
because they will not want to pay extra on top of what they the decrease in the distribution costs from $310 000 to $248 000,
owe. This increase in payment receipts will decrease the total and as a result a decrease in distribution cost percentage from
Accounts receivable on hand at a time, which decreases the age 32% to 31%.
of Accounts receivable. This will in turn improve the cash flow iii. As a result of not having television advertising in 2022, there
because the debtors will repay faster, increasing the bank balance was less exposure for K D Carpets, and as a result fewer
and the ability to get the bank account out of overdraft. customers because they went to competitors, which contributed
OR to the fall of 17% in sales.
i. Bill could offer a small discount for those who pay within 7 days b. One of:
to encourage debtors to pay their accounts faster. Examples:
ii. This would result in some debtors paying faster, although it Recommendation: Karina needs to ensure that her staff are well trained
is unlikely that all will, so the increase in discount expenses and needs to have an excellent after-sales service.
shouldn’t be too great. The fact that debtors will repay faster to Justification: By ensuring the carpet is laid to a high standard,
take advantage of paying less in total should decrease the age K D Carpets will generate a good reputation and increase sales. It
of Accounts receivable. This will improve the short-term cash will also ensure that no time is lost having to fix up jobs (which
flow position, as receipts will increase faster because debtors means Karina is paying her workers twice for the same job and
are paying more quickly. This will help Carl’s Furniture to pay which decreases her profit). Doing the job properly the first time will
expenses and improve the bank balance. A little less cash now increase profit, and also means her workers are available to do more
is better than not receiving it at all or very late. In the long term, installations more quickly than before. This means she should be able
less cash will be received, but if this is built into the mark-up, it to do more jobs than her competitor.
will not be too detrimental to the overall cash flow. Recommendation: Karina should increase her advertising and
definitely follow up on the radio jingle mentioned on the ‘sticky’
notes.

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78 Full Answers for Level 2 Accounting Learning Workbook

Justification: By increasing her advertising, Karina will have a Part D

lot more exposure and more potential customers will hear the a. Current ratio 2021 = 2.93 : 1, Inventory turnover 2022 = 5.77 times
advertisement and visit her shop. By increasing the customer b. i. This means that in 2022 K D Carpets has $1.90 in current assets
exposure, K D Carpets should be able to increase its sales and, as to repay every $1 of current liabilities. As a result K D Carpets
a result, its profit for the year and profit percentage. If K D Carpets should be able to meet its current / short-term debts as they fall
advertises that it is well established and that it provides excellent due in the normal course of business; however, its ability to meet
service, this will help it compete against the new business. debts has fallen from the previous year.
Part C ii. Inventory turnover of 5.77 times means that, on average,
a. Equity ratio 2022 = 0.67 : 1 K D Carpets sells the equivalent to the inventory on hand
b. i. This means that in 2022 Karina has invested/financed 67 cents 5.77 times per year. This is a good level (all inventory is sold
for every $1 assets in K D Carpets which means that K D Carpets nearly every two months); however, considering this has nearly
is reasonably stable because the owner has financed a greater halved from last year, this is an unfavourable result.
proportion of the assets than the liabilities, despite the increasing Examples of reasons for the trend in inventory turnover
loan balance. decreasing are:
ii. One main reason for the decreasing trend in equity ratio from • The increase in mark-up % from 130% to 150% which led to
0.74 : 1 to 0.67 : 1 is the large increase in the loan, which an increase in selling price, fewer customers and fewer sales.
has been used to finance the increase in property, plant and This meant that less inventory was sold so there is more kept
equipment that K D Carpets purchased. This has increase the total as inventory this year ($61 000 compared with $50 000 last
assets from $478 000 to $525 000, increasing the liabilities, which year). As a result, the carpet is getting older and harder to sell.
in turn has decreased the closing equity and equity ratio. • The new competitor that has opened up has led to more
Another reason for the decrease in equity ratio was the increase competition and therefore fewer customers and fewer sales.
in drawings from $37 000 to $66 000. Because the amount of This meant that less inventory was sold so there is more kept
drawings was greater than this year’s profit there was a decrease as inventory this year ($61 000 compared with $50 000 last
in equity. This decrease, along with the increase in assets, year). As a result the carpet is getting older and harder to
resulted in a decrease in the equity ratio for K D Carpets for the sell.
year ended 31 March 2022. • The low inventory turnover will put pressure on K D Carpets’
iii. The trend of the decreasing equity ratio is a concern. However, ability to repay its current debts because it is relying on the
the level is still very stable, and given the cause of the fall, it inventory to be sold to repay those debts. Given that it takes
is not a big problem. The increase in the loan is an expected more than two months to sell the inventory (on average) this
consequence of the large increase in property, plant and is not good because many of K D Carpets’ current debts will
equipment, and is acceptable, given the high equity ratio of need to be paid in the next 4–6 weeks (as measured in the
K D Carpets. It will, however, put pressure on the finance costs liquid ratio). In addition, the inventory is 57% of the current
and profit in the future. assets, making it an important asset in the repayment of
Karina can easily reduce her drawings and this will help increase current debts. Therefore the lower inventory turnover makes
the equity ratio of K D Carpets, providing her drawings are less it more difficult than it was last year to meet current debts.
than the profit for the year. With the measures to increase sales
this should also improve in the upcoming year so is not a major
concern.

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