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Theory Questions

Question 1: Performance Measures


Organizational performance is a multidimensional concept, and organisations rely on
multiple measures of performance when gauging the success or failure of their performance.

Key performance indicators (KPIs) and metrics: KPIs and metrics provide a way to
measure how well companies, business units, projects or individuals are performing in
relation to their strategic goals and objectives.

Profit Organisations:

Financial Statements and Ratios: Using your company's financial statements to compute
common financial ratios can be an effective and simple way to assess company performance.

Return on Investment (ROI) Indicators: The percentage relationship between the profit
and the investment made in the company.

Balanced Scorecard: This approach combines quantifiable information, such as sales quotas
and budgetary requirements, with performance standards particular to the position. It utilizes
key performance indicators, or KPIs, to track how well the employee has reached short- and
long-term goals.

Benchmarking: Uses standard measurements in a service or industry for comparison with


other organizations in order to gain perspective on organizational performance.

Non-Profit Organisations

Triple Bottom Line: It refers to a method of measuring not only the economic and financial
results of a business, but also its social and environmental impacts. This approach has been
adopted by businesses globally, as many have found focussing on areas other than profit can
actually result in improved profitability. To phrase it in a slightly more memorable manner:
“people, planet and profit” or Social, Economic and Environment.

Customer measures: It assesses the performance relate to customer attraction, satisfaction,


and retention.

Question 2: Internal Control


Internal control, as defined in accounting and auditing, is a process for assuring achievement
of an organization's objectives in operational effectiveness and efficiency, reliable financial
reporting, and compliance with laws, regulations and policies.
Principles of Internal Control Systems
 Clearly established lines of responsibility
 Separation of record keeping and custodianship
 Division of responsibility for related transactions
 Mechanical and electronic devices
 Adequate insurance
 Internal auditing
 Programming controls
 Physical controls
 Other controls

Cash receipts
The area of cash receipts is a common target for the employee to commit fraud. This is
because of the ready and available nature of this method of payment, as well as the difficulty
of matching the cash with a particular transaction.

Deposit Slips
Use purchase orders. The payment, receipt and preparation of purchase orders should be
separate functions and handled by different individuals. Use serially pre-numbered purchase
orders and always verify incoming orders.

EFTPOS
These are only a few of the many internal control issues relating to the oversight and
processing of EFT and ACH transactions.

Reconciliation

Each day, the employee responsible for preparing the reconciliations should compare the
day's total from the cash receipts log with the daily bank deposits and the cash held in the
lockbox or safe.

Question 3: Account receivables Vs Bills Receivables


The three types of receivables are:
1) Account receivables includes
all accounts expected to be converted into money in the short-term,
all accounts that arise from the sale of goods/services.
2) Bills receivables includes
Commercial bills-are means to obtain finance.
terms of all bill up to 180 days
are treated as CA
Bill of exchange-a written order made by a debtor
Promissory notes-a written promise made by a debtor.

AR is what your customers owe you based on invoices you've issued to them. Bills receivable
are also known as notes receivable and they're more formal arrangements than AR. A note
receivable is a written promise from a client or customer to pay a definite amount of money
on a specific future date. Such notes can arise from a variety of circumstances, not the least of
which is when credit is extended to a new customer with no formal prior credit history. The
lender uses the note to make the loan more formal and enforceable. Such notes typically bear
interest charges. The maker of the note is the party promising to make payment, the payee is
the party to whom payment will be made, the principal is the stated amount of the note, and
the maturity date is the day the note will be due.
Question 4: Cash flow Analysis
Cash flow analysis is the examination of cash inflows and outflows of an entity. A company’s
cash flow statement provides a bond between the income statement and the balance sheet . It
allows an analyst to determine where the company’s cash was produced (inflows) and
dispersed (outflows) during a specific period of time (usually a year).
Cash flows
• Operating activities: Cash Flow from Operations measures the cash
generated from the core business or operations of the business.
• Investing activities: Cash Flow From Investing measures the purchases and
sales of long term investments including items such as capital expenditures,
acquisitions, or investments in other securities such as stock and bonds.
• Financing activities: Cash flow from Financing measures the activities that
fund the company and stakeholders (debt and equity holders). These activities
include issuing or buying back stock, issuing or repurchasing debt, and paying
dividends to shareholders.

Debt financing is where you borrow money from a lender that you’ll eventually pay back,
plus interest. If you’ve ever taken out a loan, you’ve financed something with debt.

 Sources: Financial Institutions, Suppliers, Retailers, Finance Companies, Friends and


Family

Equity financing is where you trade ownership of your business to angel investors or venture
capitalists -- in return for their capital.

 Sources: Self Funding, Friends and Family, Government, Private Investors, Venture
Capitalists, Crowd funding,

Question 5: Ratios: Liquidity and Profitability

Solution
The ROA and Gross margin are calculated to evaluate the company’s profitability. ROA =
profit/assets, which convey information about how the company has performed, mostly as to
profit, relative to the size of its assets. Whilst Gross margin = gross profit /sales, it is another
type of profitability ratio to evaluate the business ability of earning profit from its sales.
Quick Ratio KPI measures your organization's ability to utilize its highly liquid assets to
immediately meet your business's short-term financial responsibilities. This is the
measurement of your company’s wealth and financial flexibility. It is understood as a more
conservative evaluation of a business's fiscal health than the Current Ratio, because
calculation of the Quick Ratio excludes inventories from assets.

This Quick Ratio KPI has the popular nickname of "Acid Test”. It is a quick and easy way of
assessing the wealth and health of your company. If you’ are a new adopter of KPIs, the
Quick Ratio KPI is a good approach to getting a quick view of your business’s overall health.

Calculations:

Question 1: Debentures
A written promise to pay a principal amount at a specified time and interest on the principal
at a specified rate per period
Types of debentures

 Mortgage debentures
 Debentures
 Unsecured notes
Accounting for debentures
Example:
On 15 May Jordan’s Ltd issued 1000, $100, 8% debentures for 5 years, payable in full on
application

 Allotted on 30 June
 Interest payable half-yearly
June 30 Cash trust 100,000
Application – Debentures 100,000
Money received on application

June 30 Cash at bank 100,000


Cash trust 100,000
Transfer of cash on allotment

June 30 Application – Debentures 100,000


Debentures 100,000
Allotment of 1000 @ $100 per debenture

December 31 Debenture interest expense 4,000


Cash at bank 4,000
Paid half yearly interest on 8% debentures

Redemption
Debentures (cont.)
June 30 Debentures 100,000
Debenture holders 100,000
Redemption of $100,000 8% debentures

June 30 Debenture holders 100,000


Cash at bank 100,000
Payment to debenture holders

Question 1
On 1 November 2015, Kangaroo Ltd released an application offer document to the public for
the issue of $2,000,000 of 5%p.a., 3 year debentures with an issue date of 1 January 2016.
Interest is payable yearly on 31 December each year.
Required:
Prepare the journal entries to record:
 the issue of debenture (3 marks)
 the 31 December 2016 interest payment (1 marks)
On 1 November 2015, Holmes Institute Limited released an application offer document to
the public for the issue of $2,000,000 of 5%p.a. 3 year debentures with an issue date of 1
January 2016. Interest is payable yearly on 31 December each year. (6 marks)

Required:
Prepare the journal entries to record:

 the issue of debenture


 the 31 December 2016 interest payment
 the 31 December 2017 interest payment

A3.

1 November 2015
DR Cash Trust 2,000,000
CR Application - debentures 2,000,000
(to record receipt of application monies)

1 January 2016
DR Cash at bank 2,000,000
CR Cash Trust 2,000,000
(to record transfer of application monies on allotment)

DR Application - debentures 2,000,000


CR Debentures (liability) 2,000,000
(to record allotment of debentures)

31 December 2016
DR Debenture interest expense 100 ,000
CR Cash at bank 100 ,000
(to record interest payment = 5% x 2,000,000)

31 December 2017
DR Debenture interest expense 100 ,000
CR Cash at bank 100 ,000
(to record interest payment = 5% x 2,000,000)

Redemption
Debentures (cont.)
June 30 Debentures 2,000,000
Debenture holders 2.000,000
Redemption of $2,000,000 5% debentures

June 30 Debenture holders 100,000


Cash at bank 100,000
Payment to debenture holders
Question 2: Bank Reconciliation
Solution
Balance per books rarely agrees with balance as per bank statement
Differences include:
 Outstanding cheques
 Deposits in transit
 Other transactions
• Service and bank charges
• Charges for dishonoured cheques
• Interest
• EFT transactions
Reconciliation procedure
• Need to have
 Last bank reconciliation
 Cash receipts and cash payments journals for the period
 Cash at bank ledger account
 Bank statement for the period since the last reconciliationZ QA

Sandy Bottom (finance advisor) receives her bank statement (as at 30/6/15) with a
credit balance of $95,024. Her “Cash at bank” account shows $90,902 as at the
same date. The following information will assist you to prepare a bank reconciliation:
1. 30/6/15 receipts for $3,640 not deposited
2. Cheque Nos 856: $2,200, 861: $1,894, 863: $576 and 864: $2,266 not
presented
3. Cheque for $624 returned as dishonoured (I Pore)
4. $1,500 deposit by S. Beach incorrectly credited to S. Bottom account
5. Bank fees amount to $50
Solution
The following information is available for Darren’s Surfboards for the month ended 30 June
2016:

 The adjusted ledger bank balance $10,713.28 Dr.


 Balance as per bank statement $8,779.54 Cr.
 Cheque 599 was correctly recorded on the bank statement for $420 but incorrectly
recorded in the cash payments journal for $240.
 Unpresented cheques:
608 $1,940.52
612 $1,688.00

 A deposit of $5,562.26 had not yet been recorded by the bank.


 Included on the bank statement was a dishonoured cheque written by T. Rafter to
Darren’s Surfboards for $279.
 A bank statement credit on 21 June indicated an electronic transfer of $1,975 for a
loan repayment (includes interest revenue of $75).
 The bank statement showed account fees of $35.

Required:

a) Prepare a bank reconciliation statement at 30 June 2016 to reconcile the adjusted


ledger bank balance with the bank statement balance. (5 marks)

a)
Bank Reconciliation Statement as at 30 June 2013

Balance as per bank statement $8,779.54 Cr


Add: Outstanding deposit 5,562.26
$14,341.80

Less: Unpresented cheques:


608 $1,940.52
612 1,688.00 3,628.52
Balance as per cash at bank account $10,713.28 Dr

Question 3: Bad Debts


Solution
Highlight Advertising has a balance in the allowance for doubtful debts account of $430 Cr,
before the adjustment at the year ended 30th June 2016 for debts not expected to be
recovered.

Aged Schedule of accounts receivable at 30th June 2016


Accounts Estimated %
Receivable Uncollectable
Not yet due $60,000 1.0 %
1 - 30 days overdue 100,000 1.5 %
31 – 60 days overdue 45,000 2.0 %
Over 60 day overdue 8,200 15.0 %

Required:
a) Calculate estimated bad debts from the above information. (3 marks0
b) Prepare a general journal entry to provide for doubtful debts (ignore GST). (2 marks)

a) Estimated bad debts. (3 marks)

Aged Schedule of accounts receivable at 30th June 2013


Accounts Estimated % Estimated
Receivable Uncollectable Bad debts
Not yet due $60,000 1.0 % $600
1 - 30 days overdue 100,000 1.5 % 1,500
31 – 60 days overdue 45,000 2.0 % 900
Over 60 day overdue 8,200 15.0 % 1,230
$213,200 $4,230

b) General Journal (2 marks)


Highlight Advertising

2013 $ $

June Bad debts expense 3,800


30

Allowance for doubtful debts 3,800

Adjustment allowance for doubtful as per


aged balance. $4,230 – $430.

Aussie Combustion Stoves Pty Ltd had the following information at 30 th June 2016. Accounts
receivable balance $160,500 (including the balance of J. Cannon’s account). Allowance for
doubtful debts is $10,200 Cr.
Transactions for the month ending 30 June 2016 were as follows
June 16
Received $3,000 of the account balance of J. Cannon Ltd of $12,000 and wrote off the
balance as a bad debt.
June 30
Estimated bad debts expense for the year to be 2% of net credit sales of $750,000.
Required:
a) Prepare general journal entries for the above transactions (ignore GST). (3 marks)

b) Assuming that this is the only bad debt written off for the year and this is the only
adjustment to the allowance for doubtful debts account, show the information that
will appear in the income statement for the year ended 30th June 2016 as a result of
the above transactions. (1 mark)

c) Show how accounts receivable will appear in the balance sheet as at 30 th June 2016.
(2 marks)

Solution
a) 4 marks
$ $
2016 Accounts Dr. Cr.
June 16 Bank 3,000
Accounts receivable J. Cannon 3,000
Collected 25% of amount owing

Allowance for doubtful debts 9,000


16
Accounts receivable J. Cannon 9,000
Wrote off the balance of account as a bad debt

30 Bad debt expense 15,000


Allowance for doubtful debts 15,000
Allowed for bad debts at 2% of credit sales of
$750,000.

b) (1 mark)

Aussie Combustion Stoves Pty Ltd


Income Statement
for the year ended 30 June 2016

Expenses:
Bad debts expense
$15,000

c) (1mark)

Aussie Combustion Stoves Pty Ltd


Balance Sheet
as at 30 June 2016

Current Assets:
Accounts receivable 148,500
Less: Allowance for doubtful debts 16,200 132,300

Question 4: Depreciation
Solution
Vietnam Pty Ltd purchased a truck for cash for $52,000 plus 10% GST on January 1, 2010. At
the time of purchase it was estimated that the useful life of the vehicle would be 100,000
kilometres and it was expected that it would travel that distance over four years. At the end
of four years of useful life it was calculated that the truck could be sold for $12,000. The
accounting period for Vietnam Pty Ltd is the financial year.
The actual distance covered by the truck was as follows:

Year ending 30 June:


2010 10,000 kilometres
2011 25,000 kilometres
2012 30,000 kilometres
2013 22,000 kilometres
2014 8,000 kilometres

Required:

a) Calculate depreciation for the years ending 30th June 2010 to 30 June 2014 using the
units of production method. (2 marks)

b) Prepare general journal entries to record the depreciation, using the straight-line
method, for the period 1 January 2010 to 30 June 2012. (3 marks)

a) Units of production 2 marks (6 items 1/3 marks ea.)


Depreciation per kilometre = Cost – residual value
Estimated life in kilometres

= $52,000 - $12,000
100,000 kilometres

= 40c per kilometre.

Year ended 30 June $


2010 10,000 km x 40c 4,000
2011 25,000 km x 40c 10,000
2012 30,000 km x 40c 12,000
2013 22,000 km x 40c 8,800
2014 8,000 km x 40c 3,200
38,000

b) (3 marks)
General journal
2010 $ $
June 30 Depreciation vehicle 5,000
Accumulated depreciation vehicle 5,000
($52,000 - $12,000)/4 = $10,000 x 6/12.

2011
June 30 Depreciation vehicle 10,000
Accumulated depreciation vehicle 10,000

2012
June 30 Depreciation vehicle 10,000
Accumulated depreciation vehicle 10,000

Question 5: Inventory
Solution
• Units sold and on hand are identified with a specific invoice
• If 18 units sold (per previous slide), assume:
• 1 unit from beginning inventory ($10)
• 12 units from 15 September purchase ($11)
• 5 units from 7 December purchase ($12)

Cost of Goods Sale: FIFO Method


Gross Profit

Net sales revenue 2,100


Cost of sales* 1,720
GROSS PROFIT $ 380