External Examination 2011

2011 ACCOUNTING
FOR OFFICE
USE ONLY

SUPERVISOR
ATTACH SACE REGISTRATION NUMBER LABEL
CHECK
TO THIS BOX

RE-MARKED
Monday 14 November: 1.30 p.m.
Pages: 33
Time: 2 hours Questions: 4

Examination material: one 33-page question booklet

one SACE registration number label

Approved dictionaries and calculators may be used.

Instructions to Students

1. You will have 10 minutes to read the paper. You must not write in your question booklet or use a calculator during
this reading time but you may make notes on the scribbling paper provided.

2. This paper consists of four problem questions.

Answer all questions in the spaces provided in this question booklet.

3. The total mark is 115.

4. The financial analysis ratios are on page 3, which you may remove from this booklet before the examination
begins.

5. Remove the tear-out information sheets on pages 5, 11, 17, and 27 from the booklet, so that you can refer to
them when you write your answers.

6. Show all working in this booklet. (You are strongly advised not to use scribbling paper. Work that you consider
incorrect should be crossed out with a single line.)

7. Use only black or blue pens for all work other than calculations, for which you may use a sharp dark pencil.

8. Attach your SACE registration number label to the box at the top of this page.

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 STUDENT’S DECLARATION ON THE USE OF
CALCULATORS

By signing the examination attendance roll I declare that:

• my calculators have been cleared of all memory
• no external storage media are in use on these calculators.
I understand that if I do not comply with the above conditions
for the use of calculators I will:
• be in breach of the rules
• have my results for the examination cancelled or amended
• be liable to such further penalty, whether by exclusion from
future examinations or otherwise, as the SACE Board of
South Australia determines.

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to it when you write your answers.

FINANCIAL ANALYSIS RATIOS

Profitability (Return) Expressed as

For all entities:
net profit
Return on equity %
owner’s equity*

net profit  interest expense

Return on total assets %
total assets*

net profit
Net profit margin %
net sales
individual expenses
Expense %
net sales
gross profit
Gross profit margin %
net sales

For companies:
net profit for ordinary shareholders
Earnings per ordinary share $
number of ordinary shares
earnings per ordinary share
Earnings yield %
market price per ordinary share

total ordinary dividend

Dividend per ordinary share $
number of ordinary shares

dividend per ordinary share

Dividend yield %
market price per ordinary share

Financial Stability (Risk)

Short Term (Liquidity)
current assets – inventory
Quick asset (acid test)† ratio
current liabilities

current assets
Working capital ratio
current liabilities

net credit sales

Debtors’ turnover times
debtors*

cost of goods sold

Inventory turnover times
inventory*

Long Term (Solvency)

total liabilities
Total debt/total assets %
total assets

total liabilities
Debt/equity %
owner’s equity
net profit  interest expense
Times interest earned times
interest expense

*Averages are used for these values. However, the availability of information may necessitate the use of opening or closing
values.
†It is acceptable also to deduct bank overdrafts from current liabilities when calculating this ratio, as appears in some
textbooks and study guides.

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 1.

QUESTION 1
Meadows Garden Supplies is a business that sells plants and gardening equipment. It uses
subsidiary ledgers to record debtors and inventory. The following information was taken from the
journals of Meadows Garden Supplies on 30 June:

CASH RECEIPTS JOURNAL

Sales
Date Particulars Discount Debtors Cost Price Selling Price Bank

30 June Totals 120 4600 5400 11 800 16 400

CASH PAYMENTS JOURNAL

Date Particulars Wages Creditors Purchases Bank

30 June Totals 1650 2300 6950 10 900

SALES JOURNAL

Amount
Date Particulars Cost Price Selling Price

30 June Totals 2300 7450

SALES RETURNS JOURNAL

Amount
Date Particulars Cost Price Selling Price

30 June Totals 540 2100

PURCHASES JOURNAL

Date Particulars Amount

30 June Totals 3400

GENERAL JOURNAL

Date Particulars Debit Credit

30 June Bad debts 560

Debtors’ control — S. Smith 560
Debtors’ account written off as irrecoverable

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QUESTION 1

(a) Using the information on page 5, complete and formally balance the debtors’ control account.

Debtors’ Control Account

1 June Balance 4000

(6 marks)

(b) Using the information on page 5, complete and formally balance the inventory control
account. A physical stocktake on 30 June showed $9190 of inventory on hand.

Inventory Control Account

1 June Balance 6000

(6 marks)

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(c) (i) Calculate the inventory turnover for June.

(3 marks)

(ii) The following table shows the inventory turnovers for the previous 5 months:

January February March April May June

2.6 times 2.7 times 2.9 times 2.0 times 1.4 times

(1) Name one possible cause of the trend in inventory turnover.

__________________________________________________________________________________________________

__________________________________________________________________________________________________

(1 mark)

(2) Explain whether or not the owners of Meadows Garden Supplies should be
concerned about this trend.

__________________________________________________________________________________________________

__________________________________________________________________________________________________

__________________________________________________________________________________________________

__________________________________________________________________________________________________

(2 marks)

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(d) Meadows Garden Supplies makes an allowance for doubtful debts of 10% of closing debtors.
Transfer the bad debt and then complete the allowance for doubtful debts account to reflect 10%
of current closing debtors.

Allowance for Doubtful Debts Account

1 June Balance 400

(3 marks)

(e) (i) Define the concept of prudence.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(ii) Explain how allowing for doubtful debts is an application of the concept of prudence in
the balance sheet.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

TOTAL: 25 marks

End of Question 1

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 2.

QUESTION 2
Ruby’s Formal Hire supplied the following information as at 30 June 2011:

RUBY’S FORMAL HIRE

Balance Sheet as at 30 June 2011

Owner’s Equity
Capital (V. Thomas) 50 000
Drawings (10 000)
Net profit 15 000 55 000

Current Assets
Bank 2 000
Debtors 3 000
Inventories 2 500 7 500

Non-current Assets
Motor vehicles 60 000
Less accumulated depreciation (6 000) 54 000
Office furniture 10 000
Less accumulated depreciation (5 000) 5 000 59 000

Total Assets 66 500

Current Liabilities
Creditors 2 000
Accrued wages 500 2 500

Non-current Liabilities
Loan 9 000

Total Liabilities 11 500

Net Assets 55 000

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QUESTION 2

(a) (i) Describe the concept of the accounting entity as it relates to this business.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(ii) State the name of the accounting entity of this business.

_______________________________________________________________________________________________________

(1 mark)

(iii) Describe the concept of the legal entity as it relates to this business.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(iv) State the name of the legal entity of this business.

_______________________________________________________________________________________________________

(1 mark)

(b) The balance sheet on page 11 shows that this business made a net profit of $15 000.
Why would management want to see an income statement when it already knows how much
profit was made?

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

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(c) The accounting process involves the collection, processing, and analysis of data, and the
reporting of information to users for planning, control, and decision-making.

(i) Name one external user of this accounting information.

_______________________________________________________________________________________________________

(1 mark)

(ii) Name one internal user of this accounting information.

_______________________________________________________________________________________________________

(1 mark)

(iii) State two decisions that an internal user could make as a result of using the balance
sheet on page 11.

(1) __________________________________________________________________________________________________

__________________________________________________________________________________________________

(2) __________________________________________________________________________________________________

__________________________________________________________________________________________________

(2 marks)

(iv) Describe how the balance sheet would be used in making each of the decisions you
stated in part (c)(iii).

(1) __________________________________________________________________________________________________

__________________________________________________________________________________________________

__________________________________________________________________________________________________

__________________________________________________________________________________________________

(2) __________________________________________________________________________________________________

__________________________________________________________________________________________________

__________________________________________________________________________________________________

__________________________________________________________________________________________________

(4 marks)

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(d) The motor vehicles:
• are recorded in the balance sheet at their historical cost of $60 000
• have a written-down value of $54 000
• have a replacement value of $90 000.

(i) Explain the purpose of depreciating motor vehicles.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(ii) Explain why the historical cost, rather than the replacement value, of the motor vehicles
has been used in the balance sheet.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

TOTAL: 20 marks

End of Question 2

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 3.

QUESTION 3
Jennifer Kane is the owner of the Outdoor Furniture Store. She has supplied the following income
statement for the year ended 30 June 2011 and the comparative balance sheets for 2010 and
2011 (on page 18) to be used in completing the statement of cash flows:

THE OUTDOOR FURNITURE STORE

Income Statement for Year Ended 30 June 2011

$ $ $

Sales
Cash 20 000
Credit 90 000
Sales returns 2 500 87 500 107 500

Cost of Goods Sold

Inventory (1.7.10) 8 000
Purchases 22 000
Cartage 1 500
31 500
Inventory (30.6.11) 12 000 19 500

Gross Profit 88 000

Discount received 2 200
90 200

Operating Expenses
Wages 50 000
Depreciation on office equipment 1 100
Depreciation on delivery vehicles 5 000
Insurance 4 500
General office expenses 7 100
Bad debts 4 000
Interest on mortgage 10 500 82 200

Net Profit 8 000

The information for Question 3 is continued on page 18.

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 THE OUTDOOR FURNITURE STORE
Comparative Balance Sheets as at 30 June 2010 and 30 June 2011

2011 2010

Current Assets
Cash at bank — 3 400
Debtors 4 900 5 000
Inventories 12 000 8 000
Prepaid insurance 1 750 18 650 900 17 300

Non-current Assets
Delivery vehicles 40 000 40 000
Less accumulated depreciation (35 000) (30 000)
Office equipment 35 000 35 000
Less accumulated depreciation (6 600) (5 500)
Premises 400 000 433 400 400 000 439 500

Total Assets 452 050 456 800

Current Liabilities
Bank overdraft 4 000 —
Creditors 1 850 1 500
Accrued wages 800 6 650 900 2 400

Non-current Liabilities
Mortgage on premises 316 000 326 000

Total Liabilities 322 650 328 400

Net Assets 129 400 128 400

Owner’s Equity
Capital 128 400 80 000
Less drawings (7 000) (2 000)
Add net profit 8 000 50 400

Total Equity 129 400 128 400

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QUESTION 3

Statement of Cash Flows

(a) Complete the following calculations, which you will need in order to prepare the statement of
cash flows for the Outdoor Furniture Store.

Cash received from customers.

Cash paid to suppliers.

Cash paid for wages.

Cash paid for insurance.

Any other calculations you may need.

(8 marks)

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(b) Complete the operating activities section of the statement of cash flows for the Outdoor
Furniture Store and calculate the net increase or decrease in cash held for the year ended
30 June 2011.

THE OUTDOOR FURNITURE STORE

Statement of Cash Flows for Year Ended 30 June 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash flows from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Inflows
Nil
Outflows
Nil

Net cash flows from investing activities Nil

CASH FLOWS FROM FINANCING ACTIVITIES

Inflows
Nil
Outflows
Mortgage (10 000)
Drawings (7 000)

Net cash flows from financing activities (17 000)

NET INCREASE/DECREASE IN CASH HELD

CASH AT BEGINNING OF PERIOD

CASH AT END OF PERIOD

(5 marks)

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(c) Why is it important for the operating activities of the business to have a positive figure?

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

Question 3 continues on page 22.

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 Cash Budget

Jennifer provides the following information to help in the preparation of a cash budget for the
Outdoor Furniture Store for August 2011:
• Estimated cash sales are $1500 for July and $1700 for August.
• Credit sales are expected to be $7000 in July and $8000 in August.
• The collection pattern for credit sales as of July 2011 is 40% in the month of sale, 55% in the
month after sale, and 5% bad debt. Debtors who pay in the month of sale receive 5% discount.
• All purchases are made on credit and are paid for in the month after purchase to take
advantage of a 10% discount.
• Estimated purchases are $2500 for July and $2000 for August.

Other Information
• Old office equipment is to be sold for $2000 cash.
• General office expenses are $700 per month.
• Interest on the mortgage is $10 500 per annum, payable monthly.
• The wages expense for August is expected to be $4000. There is expected to be $500 of
accrued wages at the end of July. There are expected to be no accrued wages at the end of
August.
• Depreciation is calculated at $1600 per month.
• $2500 for 6 months’ registration and insurance for the delivery vehicles is to be paid at the
beginning of August.
• On 1 August Jennifer plans to purchase a new delivery vehicle at a cost of $55 000, to be paid
in cash.
• Jennifer intends to withdraw $5000 for her personal use.

(d) Complete the collection from debtors schedule for the Outdoor Furniture Store for
August 2011.

THE OUTDOOR FURNITURE STORE

Collection from Debtors Schedule for August 2011

Month of Sale Credit Sales August

July 7 000
August 8 000
Total 15 000

(3 marks)

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(e) Prepare the cash budget for the Outdoor Furniture Store for August 2011.

THE OUTDOOR FURNITURE STORE

Cash Budget for July and August 2011

July August

$ $

Estimated Receipts

Cash sales 1 500

Receipt from debtors 6 235

Total Estimated Receipts 7 735

Estimated Payments

Payment to creditors 1 665

General office expenses 700

Interest on mortgage 875

Wages 4 200

Total Estimated Payments (7 440)

Excess receipts/payments 295

Opening cash balance (4 000)

Closing bank balance (3 705)

(8 marks)

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(f ) Using the information from the cash budget you prepared on page 23:

(i) give two reasons why Jennifer’s projected cash position is so poor.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(ii) explain how the preparation of this cash budget will help Jennifer in her decision-making.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(3 marks)

(g) A business can use the statement of cash flows and the cash budget to control its cash.
The statement of cash flows reflects the past and the cash budget indicates the future.
Explain how each of these statements can be used to control cash.

(i) Statement of cash flows.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(ii) Cash budget.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

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(h) Name one other statement (apart from the statement of cash flows and the cash budget) that
can be used to control cash.

____________________________________________________________________________________________________________

(1 mark)

(i) Give two reasons why the cash at bank figure in the business records would be different from
the figure that would appear on the bank statement for the same date.

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

(j) Why would the bank statement for the business account show a credit balance whereas the
business records would show a debit balance?

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

TOTAL: 40 marks

End of Question 3

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 4.

QUESTION 4
Ronaldo Sánchez is the owner of Beetle Control Products. Ronaldo uses the perpetual method for
recording inventory. The following trial balance for the business was prepared at 30 June 2011:

BEETLE CONTROL PRODUCTS

Trial Balance at 30 June 2011

Debit Credit

Bad debts 3 500

Cost of goods sold 102 400
Debtors 46 200
Mortgage 250 000
Creditors 51 800
Sales 263 000
Bank 13 100
Prepaid advertising 16 000
Delivery vehicle 75 000
Accumulated depreciation on delivery vehicle 6 000
Capital 222 800
Electricity 5 000
Sundry expenses 2 200
Interest on loan 4 100
Rent revenue 13 000
Cartage out 1 900
Inventory (30.6.2011) 38 000
Loan (due 2020) 60 000
Drawings 21 500
Equipment 45 000
Accumulated depreciation on equipment 11 000
Sales returns 2 700
Buildings 420 000
Office salaries 81 000

Other Information
• At 30 June $2100 was owing for electricity.
• Rent revenue includes a payment of $3000 for a 3-month period that began on 1 May.
• The delivery vehicle is depreciated using the units-of-use method. The vehicle is estimated
to have a useful life of 250 000 kilometres. It travelled 30 000 kilometres during the current
accounting period.
• Equipment was purchased for $5000 on 1 March. This transaction has already been recorded.
• Equipment is depreciated at 15%, using the straight-line method.
• Advertising expense for the period was $14 500.
• A physical stocktake on 30 June revealed $36 300 of inventory on hand.

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QUESTION 4

(a) Show calculations for depreciation on:

(i) the delivery vehicle.

(1 mark)

(ii) equipment.

(3 marks)

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(b) Complete the general journal entries to record the following adjustments.

GENERAL JOURNAL

Date Particulars Debit Credit

30 June

Recording depreciation on equipment

30 June

Recording advertising expense

30 June

Recording inventory adjustment

(5 marks)

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(c) Complete the balance sheet for Beetle Control Products as at 30 June 2011.

BEETLE CONTROL PRODUCTS

Balance Sheet as at 30 June 2011

OWNER’S EQUITY

ASSETS

Current

Non-current

LIABILITIES

Current

Non-current

NET ASSETS

(12 marks)

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(d) (i) Calculate the return on equity ratio for Beetle Control Products.

(2 marks)

(ii) What does the return on equity ratio measure?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iii) The results for the return on equity ratio for Beetle Control Products in previous years
are shown in the table below:

2008 2009 2010

Return on equity 19.8% 21.2% 9.8%

With reference to the ratio you calculated in part (d)(i) and to the table of results from
previous years, comment on the trend for the business.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(iv) How could the business improve the result for the return on equity ratio?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

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(e) Complete the income statement (extract) for Beetle Control Products for the period ended
30 June 2011. The business records any inventory adjustment in order to determine
gross profit.

BEETLE CONTROL PRODUCTS

Income Statement (Extract) for Period Ended 30 June 2011

Revenue

Cost of Goods Sold

Gross Profit

(2 marks)

TOTAL: 30 marks

End of Question 4

© SACE Board of South Australia 2011

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