QUESTION ONE
a) The current ratio increase is a favourable indication as to liquidity, but alone tells little about the going
concern prospects of the client. From this ratio alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The decline in the quick ratio to 0.8 is an unfavourable indication as to
immediate liquidity, especially when the current-ratio increase is also considered. This decline is also unfavourable because it reflects a declining cash position and raises questions as to reasons for the increases in other current assets, such as inventories.
The cash debt coverage ratio is a solvency ratio that indicates a company’s ability to repay its liabilities from cash generated by operations. Since this ratio declined during 2013, it indicates that the company’s cash provided by operations decreased and/or its liabilities increased. The asset turnover and earnings per share ratio indicate profitability. Since both ratios are higher in 2013, it is likely that the company’s sales revenue is increasing. Increases in sales and profit are favourable for going-concern prospects. It is most likely that there has been no change in the number of issued ordinary shares (although more information is necessary to make this judgement). This, in turn, indicates that financing was not obtained through the issue of ordinary shares.
b) The collective implications of these data alone are that the client entity is about as solvent at the end of
the current year as it was at the beginning, although there may be a need for short-term operating cash. Creditors should however seek further information. The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the client’s competitive position, the public’s demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the client’s specific plans.
c) The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of
alternative accounting methods, atypical data at year-end, and the diversification of companies, making industry comparisons difficult. Different accounting methods affect the analysis of trends and comparisons with industry statistics or other companies within the industry.
QUESTION TWO (a)
Relax Ltd Statement of Cash Flows for the year ended 31 December 2011 Cash Flows from Operating Activities
Cash Receipts from Customers 1,914,000
Cash Payments to Suppliers (934,000)
Rent Paid (27,000)
Interest Paid (9,000)
Payment for Operating Expenses (559,000)
Net Cash Inflow from Operating Activities 385,000
Cash Flows from Investing Activities
Cash Proceeds from Sale of Office Equipment 42,000 Cash Purchases of Office Equipment (296,000)
Cash Purchases of Land (600,000)
Net Cash Outflow from Investing Activities (854,000)
Cash Flows from Financing Activities
Proceeds of Loan 100,000
Proceeds from Share Issue 500,000
Paid Dividends (75,000)
Net Cash Inflow from financing activities 525,000
Net Cash Inflow for the period 56,000
Cash at Bank at Start of Year 49,000
Cash at Bank at End of Year 105,000
Workings Accounts Receivable Opening 74,000 Bank 1,914,000 Sales 1,936,000 Closing 96,000 2,010,000 2,010,000 Inventory Opening 88,000 COGS 908,000 Purchases 943,000 Closing 123,000 1,031,000 1,031,000 Accounts Payable Bank 934,000 Open 28,000 Closing 37,000 Purchases 943,000 971,000 971,000
Prepaid Rent
Opening 9,000 Rent Exp 33,000
Bank 27,000 Closing 3,000
36,000 36,000
Interest Payable
Bank 9,000 Open 6,000
Closing 12,000 Inter. Exp 15,000
21,000 21,000
Office Equipment - cost
Open 254,000 Sold cost 80,000
Bank 296,000 Closing 470,000
550,000 550,000
Accum Depre – Office Equipment
Sold Acc 50,000 Open 105,000
Closing 220,000 Depre Exp 165,000
270,000 270,000
Land
Open 2,000,000 Sold cost 0
Bank 600,000 Closing 2,600,000
2,600,000 2,600,000
Dividend Payable
Bank 75,000 Opening 40,000
Interim Div 35,000
Closing 55,000 Final Div 55,000
130,000 130,000 Loan Closing 300,000 Opening 200,000 Bank 100,000 300,000 300,000 Share Capital Closing 2,400,000 Opening 1,900,000 Bank 500,000 2,400,000 2,400,000
Original cost of equipment sold 80,000 Less Acc Dep - Equipment sold - 50,000 WDV Equipment sold 30,000 Profit on sale of equipment 12,000
Bank 42,000
(b) A net loss means that accrual-based expenses exceeded accrual-based revenues for the period.
However, if you eliminate the effect of (add back) such non-cash expenses as depreciation and
(not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales this period) would also cause cash flow to be higher than related net income or loss.
QUESTION THREE
a)
1/01/2010 Equipment 600,000
Cash at Bank 600,000
31/12/2010 Depreciation Expense - Equipment
60,000 Accumulated Depreciation – Equipment 60,000 600,000*0.10= 60,000
31/12/2011 Depreciation Expense – Equipment
54,000 Accumulated Depreciation – Equipment 54,000 (600,000 – 60,000)*0.10 = 54, 000 01/01/2012 Cash at Bank 450,000 Accumulated Depreciation – Equipment 114,000
Loss on sale of equipment 36,000
Equipment 600,000
b) The four bases of measurement in financial statements:
i) Historical cost – assets recorded at amount paid and liabilities recorded at amounts expected to
ii) Current cost – assets recorded at amount that would have been paid if asset bought today.
Liabilities recorded at undiscounted amount needed to settle obligation today.
ii) Realisable value – assets recorded at current arms’ length price. Liabilities recorded at settlement
value.
iv) Present value – assets recorded at discounted value of future net cash flows. Liabilities recorded
at discounted value of future net cash flows required for settlement.
[Students must briefly explain the measurement bases]
QUESTION FOUR
a)
Statement of Financial Position for Bruce Enterprises Ltd as at 30 June 2013 Shareholder’s Equity
Share Capital (1,100,000 x $6) 6,600,000
General Reserve 250,000
Retained Earnings [1,500,000 (profit for 2012) + 1,200,000 (profit for 2013)– (1,100,000 x $0.15) (final dividend) – 250,000 (transfer to general reserve)]
2,285,000
Total Equity 9,135,000
b) Companies generally issue share dividends to:
a) Satisfy shareholders’ dividend expectations without spending cash
b) Emphasise that a portion of equity has been permanently invested in the business and therefore is unavailable for cash dividends
QUESTION FIVE
a)
Cash at Bank
31 July 2012 Balance b/f 5,330 31 July 2012 Bank Charges 20 31 July 2012 Bank interest
received 15 31 July 2012 Cheque error 27
31 July 2012 Note receivable
(bank collection) 650 31 July 2012 Cash receipt error
202 31 July 2012 Balance c/f 5746 5,995 5,995 1 August 2012 Opening Balance 5746 Or Cash at Bank Date 2012 Particulars Debit $ Credit $ Balance $ DR/CR 31 July Balance 5,330 DR
July Bank charges 20 5,310 DR
July Bank interest received 15 5,325 DR
July Cheque error 27 5,298 DR
July Cash receipt error 202 5,096 DR
July Note Receivable (Bank collection) 650 5,746 DR
b)
Best Price Store
Bank Reconciliation Statement as at 31st March 2012
Balance as per bank statement 4,786 Cr
Add: Outstanding deposit 1,815
6,601
Deduct: Unpresented cheques (855)
Balance as per Cash at Bank ledger account 5,746 Dr
(c) Segregation of duties pertains to the assignment of responsibility so that i) related activities are
assigned to different people and ii) custody of assets is separated from the person who records the asset. In contrast, independent internal verification involves reviewing, comparing and reconciling data prepared by one or several employees.
QUESTION SIX
(a) Four enhancing qualitative characteristics:
- Comparability: Between different companies/ between different years of the same company - Verifiability: Faithful representation/independent observer consensus
- Timeliness: Information produced in timely manner before it ceases relevance/ capable of influencing decisions
- Understandability: able to be understood by proficient users/understandability depends on the capability of users
Students must provide brief discussion. (b)
-Decreases economic benefits during the accounting period in the form of decrease of the asset (accounts receivable)
- results in an decrease in equity
- is not a distribution to owners of Bina Ltd
- As customer made the payment within 7 days (discount requirement), it is probable that Bina Ltd would allow the discount
- the discount can be measured reliably at $36.
Therefore, discount allowed is consistent with expense definition and recognition criteria.
(c)
• The viewpoint expressed in the statement reflects the views of Milton Freedman.
• Shareholders invest in a business entity, and lenders/creditors lend to a business entity, with the objective of obtaining an economic return. Therefore, it can be argued that business entities only need to report to shareholders and lenders/creditors on their financial performance and risk, because this is only what shareholders and lenders/creditors are interested in.
• Alternatively, it can be argued that business entities have a responsibility to a broader group of stakeholders than just shareholders and lenders/creditors, including local communities,
customers, suppliers, employees, government and even future generations, because these stakeholders interact with the business entity, and/or affected by the actions of the business entity.
• It can be argued that business entities, (especially companies), are granted the right to exist and operate by the community, and therefore in return are accountable to the community/broad group of stakeholders for their social and environmental performance as well as their financial
performance.
• There is also a growing interest in ethical investment by investors/shareholders.
• If business entities are accountable for their social and environmental performance, it follows that business entities should report on their social and environmental performance.
• Traditional financial reporting is inadequate for reporting on a business entity’s social and environmental performance, because traditional financial reporting provides very limited information about a business entity’s social and environmental performance, (e.g. limited to provisions for site restoration and clean-up costs, which are heavily discounted to present value). • If the business entity is not directly involved in a transaction or event, it is not recognised in the
financial accounting system. The use and/or abuse, (e.g. contamination), of resources not controlled (owned/licenced) by the business entity is not recorded, because these resources do not have a cost to the entity.
• Social and environmental costs and liabilities may not be recorded and/or disclosed, because they are immaterial, or incapable of reliable measurement.
• However, a business entity’s social and environmental performance can represent a significant risk to the entity’s financial performance. Adverse reaction by stakeholders such as customers, employees, local communities, and local government, to a business entity’s poor social and/or environmental performance, can a significant adverse effect on a business entity’s reputation, and therefore its financial performance, (decline in sales, difficultly in retaining and attracting employees, additional restrictions and costs imposed by local government).
• Social and environmental reporting can be used by a business entity as a means to project an image of being a good corporate citizen concerned about social and environmental issues, (truthfully, or falsely), thereby seeking to legitimise the business entity, manage powerful stakeholders, and forestall the imposition of more stringent social and environmental laws, and disclosure requirements, with the ultimate objective of increasing the economic wealth of investors and lenders/creditors.
