Final_Assignment_Standard_2

ACCT11079 Basic Principles of AccountingFinal Assignment (Non-Accounting stream students) Instructions to students:This assignment consists of five (5) questions. You should attempt all questions.Each question is worth twenty (20) marks for a total of 100 marks.The final mark out of 100 will be reduced to a mark out of 50.Part AJane Lawler has recently started a small business that sells bedroom furnishings. She has hired you as her accountant as she admits that her knowledge of accounting is rather limited. At the end of her first year (30 June 2008), you have prepared the financial statements for her business and sent them to her. Shortly afterwards you receive an email from Jane with the following questions:1.My Income Statement shows a Net Profit for the year of $150 000. However, during theyear my Cash at Bank went from $5 000 on 1 July 2007 to $45 000 on 30 June 2008. This is an increase of $40 000. Shouldn’t the Net Profit for the year be the same as the increase in cash for the year?2.During the year I purchased some Furniture and Fittings for $56 000. I recently went intothe shop where I originally purchased these items and I saw that they are currently selling for $65 000. Shouldn’t the amount on my Balance She et be adjusted upwards to reflect this?3.Also in relation to the Furniture and Fittings there is Accumulated Depreciation of $5 600.What actually is depreciation? Why is there a separate Accumulated Depreciation account? Wouldn’t it be easier to just do t he credit directly to the asset account?4.During June 2008 I paid $20 000 cash for my insurance policy that runs from 1 August2008 to 31 July 2009. Why has this payment not been recorded as an expense on my Income Statement? How was this payment recorded?5.On my Income Statement there is a Gross Profit figure and a Net Profit figure. What is thedifference between them? Which one is more important?Required:Draft a reply to Jane that answers her questions. Remember that she has only limited accounting knowledge. Your answer should not exceed 250 words.Several points can be highlighted in response to Jane’s questions.1. Accrual accounting is the basic accounting standard used in computing the net profit.However, cash statement only reveals net changes in bank account. Revenue recognized and expenses paid in a particular fiscal year should be booked in income statement. But in some occasions, a portion of revenues and expenses are not received and paid in cash during the same fiscal year. As a result, the cash statement does not show such amount, which causes a difference between Net Profit for the year and change in cash2. All assets are recorded at acquisition cost. As office furniture is classified as fixedassets, it should be recorded in the balance sheet as purchase cost instead of current market value. This is the principle of conservatism in accounting.3. Doing the credit directly on asset will cost a problem. According to GAAP, assetshave to be recorded at acquisition cost. A separated Accumulated Depreciation account reports the amount of depreciation that has been taken from the time an asset was acquired until the date of the balance sheet. Depreciation is the transfer ofa percentage of the asset's cost from the balance sheet to the income statementduring each year of the asset's life.4. The insurance payment cannot be booked as an expense for this financial yearbecause the policy does not cover current financial year. As a result, it should be booked as prepaid insurance expenses ledger on the debit side and bank account on the credit side.5. Gross profit shows that how much company gained during the period on the salesafter reduction of all the direct costs. Net profit subtracts all the indirect expenses such as utilities, administrative expenses from the gross profit. Net profit shares a higher importance because it shows the net money the business can generate in an accounting year where gross profit only serves as a reference on how much the firm can make after direct costs.Part BAs the Chief Accountant for Red Scope Steel Ltd you have just completed the Cost of Goods Manufacturing Statement for the year ended 30 June 2008. Shortly afterwards you receive an email from Barry Downs, the Managing Director with the following questions:1.What exactly is the difference between a direct cost and an indirect cost? How doesManufacturing Overhead fit into this classification?2.I see that there is $45 000 of beginning Work in Process and that ending Work in Processis $52 000. What is Work in Process? How is this treated in the Balance Sheet?3.The notes to the statement indicate that Manufacturing Overhead was allocated at apredetermined rate of $40 per direct labour hour. How was this rate calculated?4.Before closing entries were done I noticed that the Manufacturing Overhead account hada Debit balance of $56 000. What does this amount represent? Where was this endingbalance closed off to?5.I notice in the notes you referred to fixed costs and variable costs. What do these termsmean? How do they relate to the categories of direct and indirect costs?Required:Draft a reply to Barry that answers his questions. Your answer should not exceed 250 words.Several points can be highlighted in response to Barry’s questions.1. Manufacturing overhead includes the costs incurred in the factory other than thecosts of direct materials, direct labour. Therefore it is often classified as an indirect product cost.Direct costs are costs that can be easily tracked to a certain cost object under consideration. An indirect cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration.2. T he term “work in process”, carries the meaning of a manufacturer’s inventory that isnot yet completed. Work in process as the goods that are on the factory of a manufacturer. The amount of Work in Process Inventory would be reported along with Raw Materials Inventory and Finished Goods Inventor y on the manufacturer’s balance sheet as a current asset.3. The allocation base is used to compute "predetermined overhead rate" in thefollowing formula or equation. The formula of calculating the predetermined overhead rate can be stated as:Predetermined Overhead Rate = Estimated total manufacturing overhead cost /Estimated total units in the allocation base4. The debit balance in manufacturing overhead account represents the manufacturingoverhead cost for the fiscal year is $56,000. The ending balance will be booked to the inventory account in the balance sheet.5. The cost is fixed if the total amount of the cost stays the same as volume changes. Ifthe total cost changes in proportion to the change in the activity or volume, it is avariable cost. Costs can be direct and indirect depending on the cost object: product, department, and others such as division, customer, and geographic market. Direct costs, such as direct labour and direct material, are often treated as variable costs.Indirect costs, such as depreciation of machinery, are often treated as fixed costs.However, with the advance of technology and higher degree of automation,machinery costs are more often variable nowadaysAxel Industries manufactures a range of bathroom fittings. The following information relates to the manufacture and sale of shower units for use in domestic bathrooms. These shower units are manufactured in an automated factory located in an industrial zone on the outskirts of Sydney. Because of the high degree of automation, only minimal numbers of employees are required to operate the equipment. The shower units are sold from a shop attached to the factory as well as from a retail outlet in the city.(1)It is estimated that 60% of this amount relates to the factory; the remaining 40% relatesto the retail shops.Required:1.Prepare the Schedule of Cost of Goods Manufactured for the year ended 30 June 2008.2.During 2008, 2 000 shower units were manufactured. Calculate the Inventoriable unitcost of each shower unit.3.If Axel’s competitors are able to sell similar shower units at a selling price of $350 each,what advice would you give to the managers at Axel Industries?4.All of Axel’s factories allocate manufacturing overhead on the basis of direct labour cost.Do you think that this allocation base is appropriate here? Why or why not? What might be a more appropriate allocation base?Question 21 Axel IndustriesSchedule for the cost of goodsmanufacturedFor the year ended Jun 30,2008$ DirectLabour 35,000 DirectMaterialsBeginning raw materials, Jul 122,000Plus: Freight charges on purchase of materials5,000Net purchases of raw materials48,000 Raw materialsavailable 75,000Less: ending raw materials inventory, Jun 3020,000Raw materials transferred to production55,000 Factory overheadcostsAdministrative costs60,000factory depreciation25,000 Factoryelectricity 55,000factoryinsurance 20,000factory propertyrates 20,000indirectlabour 15,000indirectmaterials 10,000 205,000 Totalmanufacturingcosts295,000Beginning work in process inventory, Jul 1,200767,000362,000Less: Ending work in process, Jun 30, 200860,000Cost of goods manufactured302,0002 Inventoriable unit cost = cost of goods manufactured / total shower units manufacturedTherefore, inventoriable unit cost = $302000 / 2000 = $151 per unit3 Offer the selling price of the product lower than $350 per unit and sell them in factories.4 Axel's production relies heavily on machinesand labour costs are no longer main factors to total manufacturing costsThe connection between direct labor and manufacturing overhead in Axel's business model are no longer high.Therefore, it is not appropriate to allocate manufacturing as direct labour cost.A better allocation base is to allocate manufacturing overhead on the basis of machine hours instead of direct labor hours.The following information relates to the business of R. Gordon, Real Estate as at 31 January 2008.1.The Bank Statement balance as at 31 January 2008 was $24 663 CR.2.There was an EFT payment of $680 for insurance made on 15 January 2008.3.The Bank Service Charge for January was $50. This included $10 for the account fee, $15for printing cheque books and $25 for the establishment of a temporary overdraft facility.4. A comparison between the Bank Statement and the Cash Payments Journal reveals thatthe following cheques have not yet been presented for payment:Chq no. 1520 $1 940Chq no. 1522 $ 493Chq no. 1525 $4 5345.$4 076 was deposited into the bank account on 30 January 2008. The Bank Statementdoes not show this deposit.6. A cheque for $882 was dishonoured by the bank due to insufficient funds in thecustomer’s account.7.On 13 January 2008 the bank deposited $525 into the business bank account. Thisamount should have been deposited into the account of R. Lordon.8.There were two EFT collections made during the month as follows:3 January $1 250 Customer deposit7 January $2 000 Collection of Bill Receivable which included $244 of interest9.Cheque number 1531 has been recorded in the Cash Payments Journal as $8 252. Thecorrect amount, which is the amount that recorded on the Bank Statement is $8 525.10.The Cash at Bank balance as at 31 January 2008 is $19 882 DR.Required:1.Prepare the Bank Reconciliation Statement as at 31 January 2008.2.Prepare a schedule of the necessary adjustments to give the correct balance of the Cashat Bank account as at 31 January 2008. Journal entries to record the adjustments are NOT required.1 Balance per cash at bank account on Jan. 31, 200819,882Less:Deposits in transit(4,076) Bank service charges(50) Dishonoured checks(882) EFT payment (680) Error in cash account (273) Add:EFT deposit 3,250 Bill Receivable collected by bank525 Outstanding checks6,967 Balance per bank statement on Jan 31 200824,6632 Balance per cash at bank account on Jan. 31, 200819,882Adjustments:Bank service charges(50) Dishonoured checks(882) EFT payment (680) Error in cash account (273) EFT deposit 3,250 Bill Receivable collected by bank525Corrected balance per cash at bank account on Jan 31 21,772In the following independent cases (1) identify the internal control weakness or weaknesses and (2) propose a course of action that could be taken to overcome the weakness or weaknesses.1.Jeanette is the only accountant working in a small retail shop. Each afternoon she goesdown to the sales area and removes the cash from the two cash registers. She counts the money and prepares a Cash Summary Form showing the cash received. She then takes the cash to the local bank and deposits it into the business bank account. Upon returning to her office, she records the cash received in the Cash Receipts Journal and posts the amounts to the General Ledger.2.Employees at A1 Cleaning are often hired on a casual basis. The cleaning supervisor ateach site hires the necessary employees as needed and sends details to the business headquarters where accounting staff open a new employee file. Time sheets for the employees are filled out by the Supervisor who then faxes them to the Accounting Department. The Accounting Department then prepares the payroll which is paid by electronic funds into the employees’ bank accounts.3.Ace Ltd is an online retailer. In the course of their business they collect personalinformation (name, address, etc) as well as credit card details from their customers. This personal information is stored on a single computer located in the Accounting Department. The file is password protected with only those staff deemed necessary having access to it. The computer is also used by staff to deal with emails from customers as well as to browse the internet. A spam filter has been installed and the business relies on the firewall that came installed with their computer operating system.4.Joe Brown is the warehouse manager for a business that sells furniture. Joe is responsiblefor receiving inventory once it has been inspected and counted by the Inwards Goods Department, storing the inventory and arranging delivery to customers when he receives an authorised Sales Order. When inventory in the warehouse is identified as being too damaged to be sold, a form is filled out by the warehouse staff and authorised by Joe. The inventory is then taken to the local rubbish dump.5.The IT Department of ABC Trading involves over 40 computer operators entering datareceived from the other departments in the organisation. Backup copies of the data are made on a regular basis and stored in a locked filing cabinet in the office of the IT Department manager. To improve efficiency, the computer programmers have automatic access to all the computer programs that are used by the business and are encouraged to make any changes that they deem necessary to the computer programs.In case 1, daily sales are not recorded. The cash receipt journal records the daily cash received only instead of the total sales. This is a major internal control weakness. That will cost omission of some revenue paid by other payment method. Remedial measures include: 1) record the daily sales figure after business day ends, 2) separate cash receipt journal and a ledger for sales paid by other payment methods, such as credit cardFor case 2, the internal weakness is that the supervisor can intentionally overstate the working hours of employees in the time sheet. No cross checks from another department are performed. One of the remedial measures can be done by installing an additional machine to record employees’ worki ng time, which it is directly linked to the accounting department, without the involvement of the manager.For case 3, there has no backup for all the personal information collected from clients. It is lack of internal control. In case there has an IT system issue on that computer, all data will be lost. To improve the situation, IT / accounting department should back up the data regularly, for instance, once a week. The backup file should be stored in a separate place. Only authorized personnel can have access to that server. Information can be retrieved from the backup server if the mainframe computer failsIn case 4, there have no filings on the quantity of inventories that have been grouped as being too damaged to be sold. The portion of damaged inventories cannot be estimated. Besides, there has no guideline for classifying inventories as damaged. Warehouse staff may have their own standards of classification which may incur additional costs. Two measures can be taken to improve. First of all, a guideline should be distributed to all warehouse staff on classifying damaged inventories. Secondly, quantity of damaged inventories should be recorded on a daily basis and sent to accounting department for record-keeping.In case 5, the excessive access right of computer programmers can cause a problem. They can access some sensitive information that they have no authorizations to access. Moreover, they can make changes on the program, which can cause improper transfer of confidential information. To improve the existing internal control weakness, every staff should be given access rights related to their job function only. Computer programmers should only have access rights to authorized programs and data and changes made on programs should be approved by senior management with the consent of other departments, if necessary.You are provided with the Income Statement and Balance Sheet of Mary Consulting as at 31 August 2009.Mary ConsultingIncome StatementFor the Month Ended 31 August 2009IncomeSales and Service RevenueEvent Planning Fees $100,839Invitation Sales $12,040Total Income $112,879Cost of SalesCost of Goods Sold $4,310Total Cost of Sales $4,310Gross Profit $108,569ExpensesEvent Costs $75,555Insurance $3,382Depn - Equipment $609Depn - Motor Vehicles $1,785Depn - Furniture $386Bad Debts Expense $1,477Supplies Expense $2,112Advertising $3,655Wages & Salaries $17,200Electricity $2,836Telephone $773Repairs and Maintenance $750Rent $3,061Software Expenses $255Internet Access $1,612Travel & Accommodation $1,018Equipment Hire $10,273Interest Expense $253Total Expenses $126,991Operating Profit -$18,422Other IncomeInterest Income $19Total Other Income $19Net Profit / (Loss) -$18,403Mary ConsultingBalance SheetAs at 31 August 2009Current AssetsCash at Bank $205,629Accounts Receivable $92,278Less Prov'n for Doubtful Debts -$4,521Supplies $6,285Prepaid Insurance $34,472Prepaid Rent $3,060Prepaid - Other -$234Inventory $2,760Bill Receivable $6,450Interest Receivable $19Total Current Assets $346,198Non-current AssetsEquipmentEquipment at Cost $43,391Equipment Accum Dep'n -$19,622Total Equipment $23,769Motor VehiclesMotor Vehicles at Cost $150,200Motor Vehicles Accum Dep'n -$1,785Total Motor Vehicles $148,415Furniture at CostFurniture at Cost $51,096Furniture Accum Dep'n -$20,571Total Furniture $30,525Total Non-current Assets $202,709Total Assets $548,907Current LiabilitiesAccounts Payable $86,850Electricity Payable $3,120Telephone Payable $764Interest Payable $172Unearned Revenue $9,091Wages and Salaries Payable $2,150GST LiabilitiesGST Collected $31,038GST Paid -$21,921Total GST Liabilities $9,117Fuel Tax Credits Accrued $37,500Payroll LiabilitiesPayroll Accruals Payable $5,888Total Current Liabilities $154,652Total Liabilities$154,652EquityOwners' EquityOwners' Capital $447,658Owners' Drawings -$35,000Total Owners' Equity $412,658Current Year Net Profit -$18,403Total Equity $394,255Total Liabilities and Equity $548,907 Required:a.Calculate current ratio, inventory turnover ratio, debt ratio and gross profit percentage(8 marks).b.Explain what you can imply from these ratios (12 marks).(a)Current ratio = current assets / current liabilities$346,198/$154,652 = 2.24Inventory turnover ratio = cost of goods sold / Inventory$4,310/$2,760 = 1.56Gross profit percentage = gross profit / sales= $108,569 / $112,879 = 96.2%Debt ratio = total liabilities / total assets$154,652/$548,907 = 0.28(b)Mary consultancy can fulfil near-term operating needs sufficiently with a current ratio of 2.24. A current ratio of 1.5 or greater can meet near-term operating needs sufficiently. However, this ratio has to be compared to other companies with similar business modelsGross profit percentage of Mary consultancy is very high and it is close to 1. It shows that the business does not focus on selling of tangible goods but services. Thus, majority of operating costs involved in offering services are treated as indirect costs and they are not included in the calculation of the gross profit.Inventory turnover ratio measures the number of times a company sells its inventory during the year. The inventory turnover ratio of Mary’s consultancy is higher than 1. It means that the company takes less than 1 year to sell its inventory. Low turnover is a sign of inefficiency. A high inventory turnover ratio indicated that the product is selling well. However, comparing this ratio to its peers or past trend is still useful for financial analysis. Debt ratio represents the degree of leverage the company is currently applying. Companies with debt ratios lower than 0.5 mean that more equity is used to finance the business than debt. Mary’s consultancy has a debt ratio of 0.28. That means 28% of the firm’s assets are financed by borrowing. A high ratio signifies more debt and a low ratio signifies more equity in terms of financing.。