1.

‘Accounting is irrelevant in decision making because the information it provides

relates only to the past.’ Discuss.

Accounting is relevant to the decision-making process as it helps provide financial

information as to the most efficient use of available economic resources.
Although accounting provides financial information based on past financial
transactions, it is useful in giving details on how efficiently an organisation has
been using its available resources in the past. For example, financial statements
can provide information to determine what profit the entity has reported
historically based on the assets used? A reported profit of $50,000 where an entity
has total assets of $200,000 appears more favourable when compared to an entity
with the same reported profits, but which has total assets of $1,000,000.
Accounting information is useful in providing decision makers with information
about the outcomes of their past business decisions. Past performance also gives
insight to the likely future trends for the entity, which can be very useful in
making strategic decisions about the future of the entity. Accounting information
is also used as part of the budgeting process of a business entity, which provides
information on planned activities for the short term.

EXERCISE SOLUTIONS

Exercise 1.3 Information for decisions

RENEE CARTER
Required:
1. How useful is this information in arriving at a decision?
2. What additional information would Renee need before deciding whether or not to
buy this car?
3. Assume that Renee does purchase the car, and subsequently finds that the car has
mechanical problems that will require $2000 to fix. What should she do, given
that she does not have enough money to pay for the repairs?

1. Renee needs to buy a small car costing a maximum of $10 000. The information
in the advertisement identifies a car in this price range. Many of the features
listed appear to describe features that relate to personal taste. The information
provided describes the physical appearance of the car. The advertisement seeks
only to market or promote the car. The information is useful in that it establishes
that some of the features appear to meet with Renee’s requirements.

2. In her decision-making process, Renee needs to consider features beyond personal

taste or preference. In deciding to buy the vehicle, she needs to take into account
the age and mileage of the vehicle. Is the vehicle mechanically sound? How
many previous owners has the vehicle had? If it is sold by a dealer, is there any
 warranty? Has it been involved in any serious accidents that could affect its safety
or performance? She also needs to calculate the total expected ongoing costs
including petrol and oil, maintenance, registration and insurance. Further, are
there any alternative vehicles available in this price range? She should highlight
the advertisement for further investigation and compare it with other available
vehicles advertised in the paper or elsewhere.

3. If this situation arises, it is likely that she will have to pay for the repairs of $2
000 herself. She should establish whether there is a warranty attached to a
second-hand vehicle? If so, will this cost be passed on to the car dealer? If she
has insufficient funds to meet the unexpected expense, she will have to borrow the
money (loan from the family or borrow using a credit card). In fact, the car would
cost her $11 800 rather than $9 800.

Exercise 1.5 Making an economic decision

Refer to figure 1.1 “Steps in the decision-making process”.

1. What are you trying to achieve?

Discuss your personal preference for a DVD recorder/player including brand, make and model.
What DVD recorder/player do you think you need?
How will you use the system? Private use only?

2. What information do you need?

Investigate pricing.
What are the available models in the desired price range?
Identify features available for each model.
Compare warranty and after sales service.
Consider all possible alternatives.

3. What are the consequences of different choices?

Identify all the alternative options in your price range and identify your preferred choice.
Discuss the features which best appeal to you.
Discuss the likelihood that DVD recorders/players will become technologically obsolete in the near
future.
What is the worst case and best case scenario?

4. Which course of action will you choose?

Identify your choice and discuss why and how this particular model appealed to you.

Exercise 2.1 Preparing a balance sheet

JILL JORDAN’S EVENT MANAGEMENT SERVICES

Required:
Use these items to prepare a balance sheet similar to the one in figure 2.2. (Note that a major item is
missing in the list.)
Recast the statement to present it in narrative form as in figure 2.3.

A.
JILL JORDAN’S EVENT MANAGEMENT SERVICES
Balance Sheet
as at 31 March 2013
ASSETS LIABILITIES
Cash at bank $66 000 Accounts payable $64 000
Accounts receivable 72 000 Mortgage payable 580 000
Office supplies 18 000 644 000
Office equipment 120 000
Land 240 000 EQUITY
Building 600 000 Jill Jordan, Capital 472 000
$1 116 000 $1 116 000

B.

JILL JORDAN’S EVENT MANAGEMENT SERVICES

Balance Sheet
as at 31 March 2013
ASSETS
Cash at bank $66 000
Accounts receivable 72 000
Office supplies 18 000
Office equipment 120 000
Land 240 000
Building 600 000
TOTAL ASSETS $1 116 000

LIABILITIES
Accounts payable $64 000
Mortgage payable 580 000
TOTAL LIABILITIES 644 000
NET ASSETS $472 000

EQUITY
Jill Jordan, Capital $472 000
TOTAL EQUITY $472 000
Exercise 2.5 Operating, investing and financing activities

Required:
Classify each of the following activities as being either operating, investing or financing
for the purpose of preparing a statement of cash flows. Indicate whether there is an
inflow (I) or outflow (O) of cash:

1. sale of plant and equipment for cash

2. payment of rent for offices
3. withdrawal of cash by the owner
4. repayment of a bank loan
5. cash purchase of a truck by a manufacturing company
6. cash purchase of a fleet of motor vehicles by a car dealership
7. borrowing of money from a finance company on a long-term basis
8. cash collected from the customers of the business

(a) Investing [I]

(b) Operating [O]
(c) Financing [O]
(d) Financing [O]
(e) Investing [O]
(f) Operating [O]
(g) Financing [I]
(h) Operating [I]

Exercise 2.7 Assumptions and characteristics of information

Required:
Identify by letter the assumption or characteristic of information which best represents
the situations given.

A. - Accounting entity assumption

B. - Accrual basis assumption
C. - Going concern assumption
D. - Period assumption
E. - Relevance
F. – Reliability/Faithful representation
G. - Materiality
H. - Comparability
F. 1. The reporting of accounting information should be free from personal bias.
A. 2. In a single proprietorship, the owner’s house and car are not recorded in the
records of the business.
G. 3. The cost of stationery is not shown separately in the income statement.
B. 4. Services provided by a business entity are recorded before the receipt of cash.
E. 5. Machinery held by the business under a long-term lease arrangement is recorded
by the business as its own asset.
D. 6. An expense is recorded in the year in which an asset or benefit is consumed in
the process of carrying on the entity’s business.
C. 7. Assets are not recorded at liquidation prices.
H. 8. Consistent accounting policies and methods are used in the preparation of
financial statements from one year to another.

Exercise 2.9 Preparation of a balance sheet

NELSON PENNOCK, ACCOUNTANT

Required:
1. Determine the balance in Nelson Pennock’s Capital account at the end of each
month
2. Assuming that Nelson made no additional investments and did not withdraw any
money from the business during the three months, determine the profit for
November and December.
3. Prepare a balance sheet for the business at the end of December 2013. (The
heading should read: Nelson Pennock, Accountant.)

A.
Based on the accounting equation: Assets less Liabilities = Equity

31 October Capital Balance = $(18 200 + 32 200 + 1 400 + 59 600 + 82 000 + 6

000) – $(20 200 + 10 200 + 69 400) = $99 600

30 November Capital Balance = $(7 800 + 30 000 + 3 600 + 59 400 + 81 600 +

6 000) –$(6 200 + 8 200 + 68 600) = $105 400

31 December Capital Balance = $(6 000 + 16 100 + 3 200 + 78 600 + 81 200 + 6

000) –$(6 000 + 9 600 + 67 800) = $107 700

B.
Profit for November = $105 400 - $99 600 = $5 800
Profit for December = $107 700 - $105 400 = $2 300