SUGGESTED SOLUTION TO WEEK 5 TUTORIAL QUESTIONS

3.1 What is the major connection between the statements of financial position and
performance?
The statement of financial position summarises the transactions for the period
affecting income (revenues and other gains) and expenses. At the end of the
period these accounts are closed and the ‘profit or loss for the period’ is
transferred to the ‘Retained Profits’ account in the statement of financial
position (balance sheet).
Equity (end) = Equity (beg) + Profit for the period (or − Loss for the period) +
New equity contributions for the period − Equity distributions for the period.

3.19 LO4 Critically examine the following statements about depreciation.

(a) Depreciation is a valuation adjustment.
(b) Depreciation equals physical wear and tear.
(c) Depreciation provides funds for replacement.
(d) There is no point in depreciating buildings because their value is
increasing.
Assuming an accounting perspective:

(a) Depreciation represents ‘cost allocation’ rather than valuation

adjustment. It is the cost of the service potential used up for that period.

While this strictly is the position on depreciation, where assets have been
revalued, depreciation becomes a valuation allocation process.

(b) Physical wear and tear is only one component of depreciation. It also
arises from technological obsolescence (out of date) and commercial
obsolescence (out of favour).

(c) Depreciation does not directly provide funds as it is simply a book

entry. However, some may argue that funds could be indirectly provided in the
sense that cash profits can potentially exceed accrual profits by the
depreciation magnitude. However, whether there will be funds available for
replacement is a management rather than an accounting function.

(e) Buildings have a finite life. What is most likely increasing is the value
of the site rather than the building. For depreciation purposes we
should separate buildings from the non-depreciable land component.

AE3.1

For a restaurant, provide examples of expenses that relate to the following functions.

Cost of sales Selling and Administration and Financial

distribution general

Solution:

Examples of expenses related to the following functions for a restaurant.

Cost of sales Selling and Administration and Financial

distribution general
Meat Advertising Rent Interest
Vegetables Place mats Insurance Discount expense
Fish Food containers Licence fee Bad debts
expense
Fruit Sales delivery Rates
Milk Display fridges Repairs
Margarine Depreciation—delivery Stationery
vehicle
Condiments Wages—sales Depreciation—building
Oil Commission Taxation
Gas
Electricity
Chefs’ wages
Inwards freight
AE3.5

The following income statement information relates to a trading enterprise and covers four
independent situations. Calculate the missing figures.
(a) (b) (c) (d)
$ $ $ $
Net sales 200,000 600,000 800,000 ?
Opening inventory 54,000 120,000 ? 230,000
Net purchases 130,000 ? 500,000 ?
Available inventory 184,000 ? ? ?
Closing inventory 44,000 85,000 150,000 255,000
Cost of sales ? 390,000 ? 660,000
Gross profit 60,000 210,000 260,000 240,000
Operating expenses 70,000 165,000 205,000 ?
Net profit/(loss) ? ? ? (25,000)

(a) (b) (c) (d)

Net sales 200,000 600,000 800,000 * 900,000
Opening inventory 54,000 120,000 * 190,000 230,000
Net purchases 130,000 * 355,000 500,000 * 685,000
Available 184,000 * 475,000 * 690,000 * 915,000
Closing inventory 44,000 85,000 150,000 255,000
Cost of goods sold * 140,000 390,000 * 540,000 660,000
Gross profit 60,000 210,000 260,000 240,000
Operating expenses 70,000 165,000 205,000 * 265,000
Net profit/(loss) * (10,000) * 45,000 * 55,000 (25,000)