Camberwell Grammar School

UNIT 3 ACCOUNTING
2019 OUTCOME 2 ASSESSMENT

ANSWER BOOKLET

Student Name Solution

Teacher’s Initials : GSS/ JC/ MSC

Question One

a.
General Journal
Date Account Debit Credit
$ $
30 Jun Cash Sales 14 900
Credit Sales 15 200
Inventory Gain 2 130
Discount Revenue 345
Sales Returns 950
Profit & Loss Summary Account 31 625

-1 Per error
4 marks

b.

Accounting Assumption: Period Assumption / Going Concern

Explanation:
Closing entries are only required for revenue, expense and drawings as the values
For these accounts are only relevant to a particular reporting period in order to calculate profit
And/or compare results
Assets accounts have a balance that continues on to the next reporting period, hence they
are not closed as they continue to provide economic benefit into future reporting periods

3 marks
c.

Reason One:
Calculate profit/loss for a particular period of time

Reason Two:
Reset the accounts to zero for the next period of time.

2 marks
 d.

Profit & Loss Summary A/C

Date Cross-reference Amount Date Cross-reference Amount

30/6 Expenses 23 400 30/6 Revenues 31 625

Capital 8 225

31 625 31 625

Drawings
Date Cross-reference Amount Date Cross-reference Amount

30 Jun Bank 1 200 30 Jun Capital 5 200

Inventory 4 000

5 200 5 200

Capital
Date Cross-reference Amount Date Cross-reference Amount

30 Jun Drawings 5 200 1 Apr Balance 50 300

1 May Bank 5 000

15 Jun Equipment 4 000

30 Jun Profit & Loss Summary A.c 8 225

2 + 2+ 1+ 4 = 9 marks
Question Two
a. Tommy’s Toys
Income Statement for the month ending 30 April 2019
$ $
Revenue
Cash Sales 8 420
Credit Sales 11 960 20 380
Less Sales Returns 2 000
18 380
less Cost of Goods Sold
Cost of Sales 9 190
Cartage Inwards 540 9 730

Gross Profit 8 650

Less Inventory Writedown 500
Add Inventory Gain 420 (80)

Adjusted Gross Profit 8 570

add Other Revenue
Discount Revenue 121
8 691
less Other Expenses
Advertising 920
Electricity Expense 175
Discount Expense 143
Interest Expense 125
Rent expense 2 250
Wages 1 860 5 473

Net Profit (Loss) $ 3 218

9 marks
b.

Explanation:
Other revenues include discount revenue/interest revenue and do not relate directly to the selling
of inventory. (must mention this as the core activity of the business)
Any revenues other than sales revenues are reported after adjusted gross profit in order to
keep Gross Profit/Adjusted Gross Profit as a tool to measure the firm’s mark up.

2 marks
Question Three
a.
Verbosity
Cash Flow Statement for the month ending 31 May 2019

$ $

Cash Flows from Operating Activities

Cash Sales 21 000

Receipts from Accounts Receivable 15 752
GST Collected 2 100
GST Refund 2 300 41 152
Advertising Paid (1 500)
Cartage Inwards (740)
Cartage Outwards (350)
GST Paid (6 549)
Electricity Expense Paid (260)
Interest Paid (190)
Office Supplies (240)
Payments to Accounts Payable (23 234)
Purchase of Inventory (26 000)
Rent Paid (1 800)
Wages Paid (4 500) (65 363)

Net Cash Flows from Operations (24 211)

Cash Flows from Investing Activities

Purchase of Van (34 600)

Net Cash Flows from Investing Activities (34 600)

Cash Flows from Financing Activities

Capital Contribution 30 000

 Loan receipt – River Bank 45 000 75 000
Loan Repayments – River Bank (1 000)
Drawings (2 600) (3 600)
Net Cash Flows from Financing Activities 71 400

Net Increase / (Decrease) in Cash Position 12 589

Bank Balance at 1 May 2019 (5 000)

Bank Balance at 31 May 2019 7 589

b.

Explanation:
Cash flow from operations is the cash generated by the business on a day-to-day basis. The cash
generated from operations should be able to cover day-to-day cash payments (such as wages
purchase of inventory and payments to accounts payable) along with
repaying a loan, drawings and potentially purchasing a non-current asset. It is therefore
important that cash from operations is positive. Regarding Verbosity, there has been a significant
negative cash flow from operations. This means that cash must be raised by other means. This
can be highlighted by the capital contribution and the receipt of a loan. This is not sustainable
for the business, once again highlighting the importance of having a positive cashflow from
operating activities.

4 marks
c.

Discussion:
Ethical Considerations:
Purchasing inventory from overseas suppliers at a cheaper rate could mean that overseas suppliers
are making their employees work in substandard conditions and are paying them low wages. If
customers become aware of this, it could have a negative impact on sales as the business might
lose customers.

Financial Considerations:
The cost of inventory will be cheaper per item allowing for a lower cost of sales and a higher
profit margin to be earned if the owner chooses not to lower prices.
Alternatively, the owner might decide to lower the selling price while still maintaining a higher
gross profit margin, which could encourage a higher volume of sales.

Furthermore, the owner needs to consider that achieving higher profits and lower payments is at
the expense of people working in poor conditions.

(Accept a range of answers that focus on both financial and ethical considerations0

4 marks
d.
Must focus on items in Operating Activities, not the whole Cash Flow Statement.
In this example Williams business may have had a large number of Credit Sales, which does not
involve a flow of cash until Cash is received from Accounts Receivable. If those customers are
slow to pay their accounts the inflow of cash from Accounts Receivable will have a lower
increase in cash compared to credit sales which increases profit.
OR William has had large payments to Accounts Payable of $23,234 which may be higher than
Cost of Sales which is the corresponding expense in the Income Statement. Therefore the large
outflow of cash for Accounts Payable could be much higher than the cost of sales which is the
cost price of the inventory sold for the period therefore the expense reduces Net Profit by less
than payment to Accounts Payable reduces Cash.

Question Four
a.

Explanation:
The trend in the GPM shows that a greater percentage of each dollar of sales is being retained
As gross profit. This would indicate that the mark up percentage has increased as selling
Prices have increased.
The deteriorating trend in the inventory turnover could be due to the increased selling price of
Inventory meaning that fewer items of inventory are being sold.

2 marks
b.

Explanation:
To improve the Net Profit Margin without impacting on the Gross Profit Margin either
Inventory losses could be reduced by….. (better checking of deliveries, reducing theft by
installing
Cameras etc etc)
Or any strategy that reduces other expenses such as lower rent, wages etc etc

2 marks

c.

Explanation:
Possible answers could be budgeted, previous periods or competitiors NPM, GPM etc (1 mark)
With an explanation of how it could be used to assess profitability (1 mark)

2 marks
d.

Explanation:
Profit is a dollar value obtained by subtracting expenses incurred from revenues earned
Whereas profitability is an assessment of a business’ ability to generate a profit by comparing
Profit against a base number such as Sales.

2 marks
e.

State:
The number of sales/sales returns/ repeat customers etc etc

1 mark