2021 Accounting Examination Solution

Accounting
1 2021
SOLUTION
Question booklet 1
• Section 1 (Questions 1 to 3) 70 marks
• Answer all questions
• Write your answers in this question booklet
• Allow approximately 80 minutes
Examination information
Materials
• Question booklet 1
• Question booklet 2
• Information booklet
• SACE registration number label
Instructions
• Use black or blue pen
• You may use a sharp dark pencil for calculations
• Show appropriate working for calculations
• Approved calculators may be used
Total time: 130 minutes
Total marks: 120
© SACE Board of South Australia 2021
Attach your SACE registration number label here

page 2 of 13
SECTION 1 (70 marks)
Question 1 (25 marks)

Refer to page 3 of the information booklet when answering Question 1.
(a) Outline one global ethical strategy that is relevant to Enduring Couture.
Enduring Couture are using resources that are renewable as they are recycling high-end fashion items.
This is a strategy and commitment to improve the sustainability of their business.
(1 mark)
(b) Identify one disadvantage of Tom and Tamzin operating their business as a partnership.
Tom and Tamzin will have to consider the opinions and preferences of their partner when coming to
decisions around management and operations of the business. This can lead to potential conflict in the
relationship between the two, which can make coming to decisions difficult and inhibit the performance
of the firm.
(1 mark)
(c) (i) Using the details provided on page 3 of the information booklet, complete the general
journal entries to record the adjustments as shown.
Date Details Debit Credit
Depreciation on Fixtures and Fittings 240

30/6/2021 Accumulated Depreciation on Fixtures and Fittings 240
Depreciation of fittings and fixtures
Advertising Expense 900

30/6/2021 Prepaid advertising expense 900
Prepaid advertising adjustment
(3 marks)
(ii) State one concept that Enduring Couture is implementing when it depreciates fittings and
fixtures.
Accrual Accounting. Accountants should realise in the financial statements the incurred expense
for allocation of cost of using the fixtures and fittings for 6 months, not the full 12 months.
Or
Consistency. Accountants will depreciate the fixtures and fittings in this period, as in future periods
using the same method of depreciation (straight line method) as to enhance reliability and
usefulness of financial records for decision making. (1 mark)
page 3 of 13 PLEASE TURN OVER

(d) Complete the allowance for doubtful debts ledger as at 30 June 2021. Formal balancing
is required.
Allowance for Doubtful Debt as at 30 June 2021

30/6/2021 Debtors 500 30/6/2021 Opening Balance 400
30/6/2021 Closing Balance 350 30/6/2021 Bad and Doubtful Debt 450
850 850
1/7/2021 Bal c/d 350 CR
(3 marks)
(e) Complete the balance sheet extract for Enduring Couture as at 30 June 2021.
Enduring Couture
Balance Sheet Extract as at 30 June 2021
$ $ $
Current Assets
Inventory 45,700
Debtors 3,500
AFDD (350) 3,150
Accrued Commission Revenue 250
Prepaid Advertising Expense 300 49,400
Non-Current Assets
Vehicle 21,000
Building 650,000
Fixtures and Fittings 12,000
Accumulated Depreciation on Fixtures and Fittings (240) 11,760 682,760
Total Assets 732,160
(6 marks)
page 4 of 13
(f) Complete the income statement extract for Enduring Couture for the year ended 30 June 2021.
Enduring Couture
Income Statement Extract for the period ended 30 June 2021
$ $ $
Gross Profit 13,800
Other Revenue
Higher Income 26,000
Commission Revenue 1,000 27,000
Expenses
Selling
Advertising Expense 900 900
Administrative
Rent 28,000
Internet & Phone Expense 1,000
Depreciation on Fixtures and Fittings 240
Office Wages 64,650 93,890
Financial
Bad and Doubtful Debt Expense 450
Interest Expense 11,300 11,750 (106,540)
Net Loss (65,740)
(4 marks)
(g) (i) Calculate the 2021 debt ratio for Enduring Couture.
Total Liabilities 603150

= = 82.38%
Total Assets 732,160
(2 marks)

(ii) Explain how the ratio in part (g)(i) could be used by an internal stakeholder.
The debt ratio will provide management of a business with information about the level of gearing
and solvency risk within their firm. Their debt ratio is 82.4%, indicating high gearing and high
solvency risk as 82.4% of assets are funded externally. This may impact the ability of Enduring
Couture to secure credit in the future and therefore management might seek to reduce this
solvency risk by injecting capital into the firm.
(2 marks)
(h) Tom and Tamzin are presented with the graph below.
Australian social plans in 2022
Attending a family barbecue
Dining out
Attending a formal indoor

wedding
0 20 40 60 80 100
% of Australians planning the above activities in 2022
How might this external information affect their decisions about the future direction of
their formal-wear business?
The information indicates that Australians are socializing at events which require less formal attire such
as barbeques and dining at restaurants more so than they are where formal suits/attire is necessary.
The owners of Enduring Couture may have to consider the addition of new fashionwear items in the
items they offer for hire that are more casual in nature to appeal to the dress themes of where their
customers are commonly socializing. This should act to increase the number of customers they have
and their sales. Failure to do so may result in declining sales, customers and profits in 2022. That said,
only 1 years of data is provided, 3 years of data would provide better information on trends as the
intentions of people’s socialization plans could still be COVID impacted.
(2 marks)
page 6 of 13
Refer to page 5 of the information booklet when answering Question 2.
(a) Complete the receipts from debtors schedule for Magnificent Mocktails.
Credit Cash Collected November-

Total Sales Cash Sales Sales January
August-October 166,000 16,600 149,400 44,820
November-January 232,400 23,240 209,160 146,412
Totals 398,400 39,840 358,560 191,232
(3 marks)
(b) Complete the cash budget for the November 2021 to January 2022 quarter.
November-January
Cash Sales 23,240
Receipts from Debtors 191,232
Cash Received 214,472

TOTAL RECEIPTS 214,472
Special Event Costs 15,000

Cash Purchases 127,820
Electricity 6,000
Shop Rent 10,000
Advertising 1,626
Wages 45,000
Cash Paid 205,446

TOTAL PAYMENTS 205,446
Opening Bank 2,650
Receipts less Payments 9,026
Closing Bank 11,676
(8 marks)

(c) Beau has been thinking about replacing some of the equipment for Magnificent Mocktails, at
an expected cost of approximately $30 000.
Advise Beau on whether this should be done in January or at a different time, referring to the cash
budget you prepared in part (b).
Beau should not proceed with the purchase of the new equipment worth $30,000. Based on current
predictions, without the equipment purchase he will achieve a surplus cash flow of $9,026 and a
closing cash balance of 11,676 DR. At his most busy time of the year where sales are at its highest,
purchasing the equipment in cash would result in a deficit cash flow of 20,974 and a bank overdraft in
the same quarter of $18,324. If he were to do this, the interest costs associated with running a bank
overdraft account would be substantial and the pressure on the business’ short term liquidity would be
significant, making it harder to meet any short term obligations with cash in the coming quarters.
Purchasing the equipment in later months will only further act to worsen his liquidity position because
as stated above this period is the busiest for the business in terms of sales, and even still the
equipment purchase would create significant liquidity purchase. Paying for the equipment by another
source of finance other than cash would be advisable.
(3 marks)
(d) Beau is also investigating the introduction of a new style of drink for summer, the ‘Mint
Fauxito’. Based on some research, he expects to sell 200 of these drinks for $26 each over the
next
3 months. The cost to make each drink is $7 for the ingredients and $5 for the bottle. In addition,
Beau would need to hire an extra mixing and bottling machine at a cost of $1500 for the 3-
month period. He has told you that it would only be worthwhile producing the drink if it made a
profit of
$1200 for the period.
Advise Beau whether or not he should introduce this new drink, using the information provided
to support your advice. Show your calculations.
(FC + Profit Target) / (SP-VC) 1500 + 1200

= 193 drinks
to make profit
26--12 target
Rev
Sales 200 x26 5200
Exp
Fixed Costs -1500
Variable Costs 200 x12 -2400
1300
Beau needs to sell 108 drinks to break even and make $0 profit. Given Beau has a profit target of
$1,200 for the month, and his expected quantity of drinks sold will be 200 which is almost double
the break-even quantity, he will exceed his profit target by $100 and make $1,300 in profit. He
should therefore proceed with the new style of drink.
(4 marks)
page 8 of 13
(e) In addition to completing a cash budget, Beau has also asked you to confirm that the $2650
debit figure in the cash at bank ledger is correct. He is concerned because his last bank
statement, dated 31 October, showed a $1580 credit balance.
Beau is sure the ledger is up to date, but when reviewing the bank statement could not find the
following items:
• $2300 cash received from a customer on 29 October (The money is still in the safe, as
Beau has not had time to deposit it in the bank.)
• a cheque for $500 written out to pay for advertising in October
• a cheque for $730 to pay for some inventory purchased on 28 October.
Prepare a bank reconciliation statement, using the details above.
MAGNIFICENT MOCKTAILS
Bank reconciliation statement as at 31 October 2021
Balance as per Bank Statement 1580 CR
Unpresented Deposits 2300 CR
Unpresented Cheques 1230 DR
Balance as per cash at bank account 2650 DR

(2 marks)

Refer to pages 6 and 7 of the information booklet when answering Question 3.
(a) Perform the following calculations for Sunny Bank Batteries, to assist in the preparation of
a statement of cash flows for the year ended 30 June 2021.
Cash received from debtors.

Note: Says "debtors", not
customers. Include cash
sales if it were to say
Debtors customers
Opening Balance 90,000 Sales Returns 26000
Credit Sales 780,000 Bank ?? 728,000
Discount Allowed 19000
Bad Debts 0 = 728,000
Closing Balance 97,000
870,000 870,000
Cash paid to creditors.
Creditors
Purchases Returns 11,000 Opening Balance 70,000
Bank ?? 273,000 Credit Purchases 290,000
Discount Received 0 =273,000
Closing Balance 76,000
360,000 360,000
Cash paid for insurance.
= 6000 + 4200 – 3800 = 6,400
Cash received for commission revenue.
= 5000 +21,000 – 19,000 = 7,000
(6 marks)
Use the space below for other calculations.
page 10 of 13
(b) Prepare a statement of cash flows for Sunny Bank Batteries for the year ended 30 June 2021.
CASH FLOWS FROM OPERATING ACTIVITIES
Inflows
Receipts from Debtors 728,000
Commission Received 7,000 735,000
Outflows
Payments to Creditors 273,000
Customs Duty 1,000
Insurance 6,400
General Expenses 88,000
Interest on Loan 15,000
Rent 25,000
Wages 185,000 593,400 141,600
CASH FLOWS FROM INVESTING ACTIVITIES

Inflows
- 0 0
Outflows
Computer Equipment 25000
Plant + Equipment 100,000 125,000 -125,000
CASH FLOWS FROM FINANCING ACTIVITES

Inflows
Loan 100,000
Contributions 30,000 130,000
Outflows
- 0 0 130,000
NET INCREASE/DECREASE IN CASH HELD 146,600
CASH AT BEGINNING OF YEAR 25,000
CASH AT THE END OF YEAR 171,600
(8 marks)

(c) Provide an example of how accrual accounting affects the preparation of the statement of
cash flows.
Accrual accounting is the concept that involves recording revenues when earned, and expenses
when incurred for reporting in the income statement. When preparing a cash flow statement,
expenses paid for in cash and revenues received in cash are recorded in the period in which the
cash is paid and received, so requires adjustment for any revenues/expenses paid in advance
from when they are earned and incurred, such as the insurance expense for Sunny Bank
Batteries. Insurance expense incurred was $6,000 however cash paid for insurance was $6,400
in the period, so that is what is recorded in the cashflow statement.
(1 mark)
(d) Identify the link between the balance sheet and the statement of cash flows.
The change in closing cash balance from 2020-2021 ($146,000) should equal the net increase/decrease
in cash held for the business over the year ($146,000). The cash flow statement provides the detail as to
how and why the cash balance changed over the period from the business operating, investing and
financing activities, whereas the balance sheet just shows the change in cash at bank figures from one
year to the next.
(1 mark)
(e) Describe how the statement of cash flows is used as a management tool, with reference to
the statement you prepared in part (b).
The cash flow statement provides the detail as to how and why the cash balance for Sunny’s
Bank Batteries changed over the period from the business’ operating, investing, and financing
activities. This allows to management to determine two important aspects; firstly, to analyse the
short term liquidity position the business that finds itself in for next period, and for this business,
having a surplus cash flow of $146,600 and a final cash balance of $171,600 leaves them well
positioned to meet short term debt. Secondly, it can allow management to determine whether
the source of cash inflows for the business are sustainable in the longer term. Given Sunny’s
Car Batteries has a positive net cash flow from operating activities of $141,600 this shows
provided that the business continues in this way, cash flow can sustainably be sourced from the
day to day operations of the firm. Investing and Financing cash inflows cannot be relied upon
because the business cannot continue to sell non-current assets as it will run out eventually, or
rely on external financing as gearing will get too high, and additionally cannot rely on the owner
contributing cash on a constant basis.
(3 marks)
(f) As the operator of Sunny Bank Batteries, Connie is considering using her excess cash to
purchase shares in Kwiker Charge Ltd, a business that charges electric vehicles. The
following information has been provided as at 30 June 2021.
KWIKER CHARGE LTD
Industry average (benchmark) earnings per ordinary share $2.50

Industry average (benchmark) earnings yield 15%
Profit for ordinary shareholders $623 700
Number of ordinary shares 330 000
Market price per ordinary share $28
(i) Calculate the earnings yield for Kwiker Charge Ltd as at 30 June 2021.
623,700/330000 = 1.89 1.89/28 x100 = 6.75%
page 12 of 13
(2 marks)

(ii) Advise Connie whether or not she should invest in Kwiker Charge Ltd, based on the result in
part (f)(i). Give your reasons.
The total return on investment for owners of shares of Kwiker Charge Ltd at the current
market price is 6.75%. Given that the industry average 15% for total return on investment for
similar business’ in the industry, this is a comparatively low return. In addition earnings per
share or profits per number of shares is also higher in other business’ in the industry
indicating stronger earnings of business competitors. Connie should look for an alternative
investment for her idle cash, perhaps in shares in the rival business of Kwiker Charge Ltd.
(2 marks)
(g) State the accounting entity for:
(i) Sunny Bank Batteries Sunny Bank Batteries (1 mark)
(ii) Kwiker Charge Ltd Kwiker Charge Ltd (1 mark)
page 13 of 13 — end of question booklet

page 14 of 13
Accounting
2021
Question booklet 2
Section 2 (Questions 4 and 5) 50 marks
• Answer all questions
• Write your answers in this question booklet
• Allow approximately 50 minutes
Copy the information from your SACE label here
CHECK
SEQ FIGURES LETTER BIN
page 2 of 11
SECTION 2 (50 marks)

Refer to pages 9 to 11 of the information booklet when answering Question 4.
(a) Refer to the inventory card for vinyl cleaning kits on page 11 of the information booklet.
(i) State which method of valuing inventory is being used. Provide a reason for your answer.
The First in – First Out method of stock valuation is being used. This can be determined because on
each of the dates Lindsey’s Vinyl Revival sold the vinyl cleaning kits, the oldest stock was sold first,
indicated by the top row of each transaction being the first stock to be taken from inventory levels for
the sale.
(2 marks)
(ii) Calculate the inventory turnover for vinyl cleaning kits for the month of June.
COGS 296
Average Inventory (130 + 154) / 2 2.1 Times per month
COGS = 56+14+30-30+60+50+50+66
=296
(2 marks)
(b) Lindsey’s Vinyl Revival has experienced an increase in sales over the past 2 years. As a
result, Lindsey wants to move from a physical/periodic inventory system to the perpetual
method of recording inventory, via computer.
(i) Discuss some of the recording and reporting processes that would change for the business
if this plan went ahead.
If Lindsey decides to move to a perpetual stock system, a number of changes would be

needed. They would need a computerized stock system and use barcodes and barcode
scanners to record stock-based transactions (purchases and sales of stock etc). A number
of accounts also need to change, including the creation of a stock control ledger, a cost of
goods sold ledger and a stock loss ledger. The business will also need to discontinue the
use of purchases and the purchases returns ledger.
(4 marks)
(ii) State which accounting concept or convention would be violated by changing the
inventory recording method.
Consistency Concept (1 mark)

(c) Lindsey’s Vinyl Revival uses subsidiary ledgers for inventory and debtors.
Identify three advantages for a business of using subsidiary ledgers and control accounts.
Using subsidiaries ledgers provides an additional cross check of transactions related to debtors and
creditors, and this minimizes chances of any errors being made in the recording process. Subsidiary
ledgers also act to remove unnecessary detail from the control accounts to summarize transactions
related to debtors and creditors. Having an additional cross check of financial records also minimizes any
chance of mismanagement of large data sets involving debtors/creditors.
(3 marks)
(d) Lindsey has supplied their debtors ageing analysis for 30 June 2021, as shown below.
LINDSEY’S VINYL REVIVAL

Debtors ageing analysis at 30 June 2021
1–30 days 31–60 days 60+ days

Debtor Current Balance
overdue overdue overdue
P Smith 700 700
A Morrow 300 300 400 1000
N Lee 500 320 820
B Richards 1000 150 1150
T Harris 200 550 750
H Johnson 240 1100 1340
TOTAL 2200 1200 860 1500 5760
The standard credit terms for Lindsey’s Vinyl Revival is 30 days.

Discuss any concerns you have with the business’s control of debtors, based on the information
contained within the debtors ageing analysis.
Lindsey’s Vinyl Revival has a number of issues with their debt management. Only 38% of outstanding
debtors ($2200) are within the credit terms issued by the business. In addition, over a quarter (26% or
$1500) of outstanding debtors are likely uncollectable as they are more than 2 months overdue and in
addition 41% of outstanding debtors ($860 + 1500) have accounts that are 1 month of more overdue.
Based on this, current control procedures to management debtor repayment frequency are either
inadequate or poorly managed and action should be taken to correct this.
(3 marks)
page 4 of 11
(e) (i) Calculate the working capital ratio for Lindsey’s Vinyl Revival for 30 June 2021.
Current Assets 50,600

Current Liabilities 22610 = 2.24:1
(1 mark)
(ii) Using the ratio result calculated in part (e)(i) — and relevant details from the balance sheet
on page 10 of the information booklet — discuss the impact of this result for Lindsey’s
Vinyl Revival.
A result of 2.24:1 indicates that the business has $2.24 of current assets for every $1 of short
term debt held. This is a good liquidity position and indicates that for the next 12 months, the
firm will have able short-term assets to meet current obligations. That said, the quick ratio of
the business is 0.58:1, as the majority of the business’ current assets are in non-highly liquid
form (inventory and pre-paid expenses). This indicates that in the immediate term, the
business does not have enough highly liquid assets (cash and receivables) to meet short
term debt (only 0.58c for every $1 of debt).
(3 marks)
(iii) The total inventory turnover ratio for Lindsey’s Vinyl Revival was 7.16 times for the
year ended 30 June 2021.
Discuss this inventory turnover result — and the turnover calculated for the cleaning kits in
part (a)(ii) — compared with the industry average of 5.35 times per year.
The inventory turnover measures how many times per the business sells it’s average stock
holding. The inventory turnover measured for the vinyl cleaning kits was a record of the
turnover for the month of June. This was 2.1 times per month, or selling the average stock
held every 14.3 days. It is clear therefore that this result is far and above the industry
average, and the frequency to which other stock types are sold within Lindsey’s Vinyl
Revival. This is a good result as a higher result in times means the business will generate
strong cash flow from sales of inventory, and this leads to improved liquidity. A result above
the industry average is therefore a positive result for the firm.
(3 marks)

(f) Lindsey is exploring various sources of finance to help purchase their chosen computer
inventory system, including additional capital, leasing, and loans.
Calculate the following ratios for 2021, in preparation for choosing possible sources of finance.
Debt/equity.
Total Liabilities 167,610

Owner's Equity 314990 = 53.2%
Quick ratio.
Cash + Receivables 5760 + 1200 + 6240

Current Liabilities 22610 = 0.58:1
Return on equity.
Net Profit 54,930

Average Owners Equity (293,060 + 314,990)/2 = 18.1%
(3 marks)
page 6 of 11
Refer to pages 9 to 11 of the information booklet when answering Question 5.
Write a letter, report, or email to Lindsey that provides detailed accounting advice on the following:
• the current position and performance of Lindsey’s Vinyl Revival, with reference to the
financial statements and relevant ratios calculated (5 marks)
• two possible sources of finance that could be used to obtain the computerised
inventory system (10 marks)
• the advantages and disadvantages of implementing a new computer inventory
system within the business. (5 marks)
Credit will be given for answers that demonstrate clear and concise communication,
and contain only relevant information. Advice may be provided as dot points. (5 marks)
There is space on page 11 for any calculations that you may wish to do to support your advice.
Report to Lindsey Ords

Owner and Manager of Lindsey’s Vinyl Revival
30/6/2021
Thank you for engaging the services of A.N Accounting & Advisory to provide accounting advice on the
current financial position and performance of the business. In addition to this analysis, advice is
provided regarding Lindsey’s inquiry about the sources of finance available to purchase the
computerised stock system as well as the advantages and disadvantages of the decision to record
stock based transactions electronically using a computerised inventory system.
Current Position & Performance

Profitability
The Return on Equity (ROE) shows the return on the owner’s investment in the business. Lindsey
should be pleased to see the ROE increases from 15.7% in 2020 to 18.1% in 2021. This means that for
every dollar of capital in the firm, there was an increase of 2.6 cents return in 2021 which is a positive
result for the business. This occurred largely due to the $10,070 increase in net profit from 2020,
generated from the sharp increase in Vinyl Sales and likely having access to more customers from
offering new lines of inventory types.
Liquidity
The business’ short-term liquidity is reasonably pleasing. The business’ working capital ratio result has
decreased from 2.8:1 in 2020 to 2:24:1. This ratio assess’ the ability of the business to meet their debts
in the next 12 months by comparing current assets held for every dollar of short-term debt due in the
next 12 months. There is some cause for concern given this result has decreased and a large
proportion of the current assets the business holds are in inventory and prepaid expenses. Whilst the
firms inventory turnover results are above industry average, they are still only clearing their stock levels
once in every 51 days, so inventory can not necessarily be relied upon to be converted to cash very
quickly in the case of an emergency.
The quick ratio of the firm demonstrates this concern where the result was 0.58:1. This indicates for
every dollar of short term debt, the firm only holds $0.58 in highly liquid assets. Paying off short term
debt in the immediate term (1-2months) will become difficult for the firm and should look to be improved
upon in future periods.
That said, the cashflow statement provided some good news with respect to liquidity concerns. The
business’ ending cash balance is low at the end of the period, only $7,740 up from $5,250 the previous
period. Whilst a low cash balance contributes to the liquidity pressure the business is facing as
discussed above, the main cause of this cash balance being low is far less of an issue for future
periods. The firm has a positive cash a positive net cash flow from operating activities of $57,790 and
this shows that provided that the business continues in this way, cash flow can sustainably be sourced
from the day-to-day operations of the firm. The main source of their cash outflows were generally for
productive purposes other than the drawings, which were the purchasing non-current assets ($19,600
outflow), or paying off debt ($11,000) and both of these will either assist in future revenue and cash
generation, or minimising interest costs in future. Perhaps letting the cash balance build up from
operations next period would be an advisable course of action to improve the firms liquidity position.
Solvency
The business is in a stable risk position in terms of gearing. There is considerably more internal
financing in the business than external, as for every $1 of equity, there is $0.53 of debt showed by the
debt/equity ratio of 53.2% which is a decrease from the 2020 result of 57.4%. This leaves the firm well
positioned to take on debt for an expansion or asset purchase if required, but they should be mindful if
the near term liquidity stress they might face in the next 3-6 months.
Sources of Finance for the Computer Inventory System

Lindsey has multiple sources of finance available to purchase the inventory system. Leasing is an
option, whereby the business would “rent” the software and hardware used in the inventory system,
such as barcode scanners, point of sale systems and the operating software to manage inventory
based transactions. This form of finance would ease liquidity stress on the business, as no large outlay
of cash upfront would be required, and instead and ongoing lease cost would be paid, likely on a
monthly basis for use of the software/hardware. A further advantage of this system is that at the end of
the lease term the business can have the option to upgrade/extend the lease and potentially gain
access to the next version or new technology the lessee issues and exchange and replace the old
operating software. This can improve the overall efficiency in management of stock too.
A disadvantage of leasing is that the business does not technically own the asset, they are renting it.
Therefore, the business cannot legally have the asset on their balance sheet and therefore cannot
depreciate it. Depreciating assets allows the business to allocate cost of using an asset, and record an
expense on the income statement (that is not paid for in cash) and therefore reduce net profit and thus
tax payable on net profit. This is a significant advantage of owning assets that is foregone when
leasing.
An alternative source of finance available would be seeking the $8000 cash needed for the system via
a contribution from the owner. There is a significant advantage to this source of finance in that the
business does not need to sacrifice any cash upfront for the asset, and can use the cash contributed
for the owner for the inventory system. This also is not required to be paid back, and incurs no interest
cost. Ultimately this is the most advisable option because the business does face some liquidity stress
in the short term next period, so avoiding any cash outlay where possible would be ideal. The only
limiting factor to this is Linsey’s willingness to contribute this cash amount to the firm and the slightly
downward impact it will have on the firms Return on Equity result. She may not be willing or able to do
contribute the cash, or impact her ROE, but if possible we would advise doing so.
Advantages/Disadvantages of the Computerised Stock System

Lindsey’s firm is already managing a perpetual stock system, and the move to a computerised system
of stock management would be highly advisable.
Running a computerised stock system will allow the firm to operate and manage a just in time ordering
system, so that stock levels at all times are easily known and re-order points can be set automatically
to ensure that sufficient (not excessive) stock is on hand to meet customer demand.
page 8 of 11
This will have flow on effects such as reducing incidence of stock obsolescence which can occur if the
business is holding too much stock, or it stays in storage for long amounts of time. It can also assist in
minimising costs of storing stock which for vinyls would include regular cleaning and maintenance of
records etc. Too little stock on hand could potentially create issues with customer relationships and lost
sales if the newest vinyls being released were not available to customers or sold out quickly.
A computerised stock system also allows business’ to produce financial statements quickly at the press
of a button because assuming the software is aligned with accounting software, key indicators like
Gross profit and Gross profit margins are able to calculate as cost of goods sold is known. Other
financial ratios involving or affected by inventory are also easily accessible and this will ultimately
improve the decision making and management of users if the information is used well.
The only major disadvantages include the general costs of set up of the system (training), its purchase
and general maintenance costs. The $8000 payment for the system is not a small amount, but if the
appropriate source of finance can be secured the firm should proceed. Wages spent on training staff to
use and manage the system would be considerable in the short term and potentially extra staff may
need to be utilised during the training days or weeks. There also may be some on-going costs related
to software upgrades/fees that may need to be considered as well as the occasional hardware upgrade
to point of sale systems like computers and barcode scanners, but again the cashflow of the business
is stable in the long term, and these costs are not likely to be overly material in influencing decision
making. Users should also be informed in the notes of the financial statements that transactions related
to inventory movement are being changed in the way the firm monitors its sales and purchases.
Based on the reasons above, the move to a new computerised stock system would be strongly
advised.
Kind Regards,
A.N Accountant
A.N Accounting & Advisory

You may use the space below for any calculations that you may wish to do to support your answer to
Question 5; however, these calculations will not be assessed.
page 11 of 11 — page 10 question

end of of 11 booklet
Accounting
2021
Information booklet
• Refer to the information in this booklet, where appropriate, when answering Questions 1 to 5
• Write your answers in the question booklets
INFORMATION

Refer to the following information, where appropriate, when answering Questions 1 to 5.
FINANCIAL ANALYSIS RATIOS
Name Calculation Expressed as
Profitability (return)
For all entities:
profit
Return on equity %
owner’s equity*
profit + interest expense

Return on total assets %
total assets*
profit
Profit margin %
revenue†
individual expenses
Expense %
revenue†
gross profit
Gross profit margin %
revenue†
For companies:
profit for ordinary shareholders
Earnings per ordinary share $
number of ordinary shares
earnings per ordinary share

Earnings yield %
market price per ordinary share
total ordinary dividend

Dividend per ordinary share $
number of ordinary shares
dividend per ordinary share

Dividend yield %
market price per ordinary share
Financial stability (risk)

Short term (liquidity)
cash assets + receivables
Quick ratio (acid test) ratio
current liabilities
current assets
Working capital (current ratio) ratio
current liabilities
net credit sales

Debtors turnover times
debtors*
cost of goods sold

Inventory turnover times
inventory*
Long term (solvency)

total liabilities
Debt ratio %
total assets
total liabilities
Debt/equity %
owner’s equity
profit + interest expense

Times interest earned times
interest expense
*Averages are used for these values. However, the availability of information may necessitate the use of opening or closing values.
†Net sales should be used, except in the case where a business only provides service.
page 2 of 11
SECTION 1
Question 1
Tom and Tamzin Stewart are twins who own a formal-wear business called Enduring Couture. This
partnership recycles high-end fashion, making pre-owned items available to customers for hire or
purchase. The partners have provided the following trial balance.
ENDURING COUTURE
Trial balance as at 30 June 2021
Account Debit Credit

Cash at bank 5 800
Debtors 4 000
Inventory 1 July 2020 63 500
Creditors 6 700
Shop fittings and fixtures 12 000
Commission revenue 750
Vehicle 21 000
Rent expense 28 000
Sales 109 200
Hire income 26 000
Sales returns 3 600
Purchases 74 000
Prepaid advertising 1 200
Office wages 64 000
Building 650 000
Mortgage on building 590 000
Drawings 23 500
Internet and phone 1 000
Allowance for doubtful debts 400
Interest expense 11 300
Capital 218 250
TOTAL 957 100 957 100
Additional information
• The closing inventory was determined through a stocktake on 30 June 2021 as being $45 700.
• The vehicle and building were purchased in late June 2021, and no depreciation is required to
be recorded.
• Fittings and fixtures were purchased on 1 January 2021, and are depreciated using the straight-
line method at 4% per annum.
• Bad debts of $500 are yet to be written off, and the allowance for doubtful debts should have a
final balance of 10% of closing debtors.
• Prepaid advertising was for the 12 months from 1 October 2020.
• Commission of $250 has been earned but will not be received until July.
• Office wages of $650 had not been paid or recorded as at 30 June 2021.

page 4 of 11
Question 2
Beau Voss is the owner of a small drinks business, Magnificent Mocktails, which makes
exclusive beverages for special events. Beau wants you to prepare a cash budget for the
business for the 3 months from November 2021 to January 2022.
He has provided you with the following information:

• The November to January quarter is normally the busiest of the year. Sales for the remainder of
the year are expected to be much lower. Expenses remain roughly the same year-round.
• For the August to October 2021 quarter, actual sales totalled $166 000.
• Sales are expected to increase by 40% for the November 2021 to January 2022 quarter.
• Ten per cent of sales are cash sales. Of credit sales, 70% are collected in the quarter they are
made, with the remainder collected in the following quarter.
• To try to improve sales, Beau will be running three special events in December at a cost of
$6000 each. A deposit of $1000 for each event was paid in October, with the balance due in
November.
• Purchases of inventory are equal to 55% of the expected sales for the November 2021 to
January 2022 quarter, and are made in cash.
• Expenses for the November 2021 to January 2022 quarter are expected to be:
– electricity $6000
– shop rent $12 000, of which $2000 will be accrued at the end of January. No amounts
were accrued at the end of October
– advertising $600 in November, decreasing by 10% each month
– wages $15 000 per month
– depreciation $1240.
• The cash at bank ledger had a $2650 debit balance on 31 October 2021.

Question 3
The market for electric car batteries has dramatically increased over the past few years. Connie
Nguyen, a sole trader operating Sunny Bank Batteries, has asked you to provide some advice on how
the business is using its cash. To enable you to produce a statement of cash flows, you have been
given the following financial statements.
SUNNY BANK BATTERIES

Income statement for the year ended 30 June 2021
Revenue
Sales 780 000
Sales returns (26 000)
Discounts allowed (19 000) 735 000
Cost of goods sold

Opening inventory 25 000
Purchases 290 000
Purchase returns (11 000)
Customs duties 1 000 280 000
Closing inventory (22 000) (283 000)
Gross profit 452 000
Other revenue
Commission revenue 5 000
Expenses
Insurance 6 000
Depreciation on plant and equipment 22 125
Depreciation on computer equipment 16 000
General expenses 88 000
Interest on loan 15 000
Rent 25 000
Wages 185 000 357 125
Profit 99 875
page 6 of 11
Comparative balance sheets as at 30 June 2021 and 30 June 2020
2021 2020
ASSETS
Current assets
Cash at bank 171 600 25 000
Debtors 97 000 90 000
Inventory 22 000 25 000
Prepaid insurance 4 200 3 800
Non-current assets
Plant and equipment 350 000 250 000
Less accumulated depreciation (62 125) 287 875 (40 000) 210 000
Computer equipment 125 000 100 000
Less accumulated depreciation (33 000) 92 000 (17 000) 83 000
Total assets 674 675 436 800
LIABILITIES
Current liabilities
Creditors 76 000 70 000
Unearned commission revenue 21 000 19 000
Non-current liabilities
Loan 100 000 0
Total liabilities 197 000 89 000
EQUITY 477 675 347 800

Statement of changes in equity for years ended 30 June 2021 and 30 June 2020
2021 2020
Opening capital, Connie Nguyen 347 800 302 800
Profit 99 875 55 000
Additional capital 30 000 0
Drawings 0 (10 000)
Closing capital 477 675 347 800
• All sales and purchases are on credit.
• All capital contributions and drawings were made in cash.
• All acquisitions and disposal of non-current assets were paid for in cash.

page 8 of 11
SECTION 2
Questions 4 and 5
Lindsey Ords owns a small business called Lindsey’s Vinyl Revival, dealing primarily with buying and
selling second-hand compact discs and vinyl records. The business, which grew from their hobby, has
been operating for 10 years. Although it has always generated a healthy cash flow, the business has
experienced a sharp increase in vinyl sales in the past 2 years. At the same time, credit sales have
increased significantly.
Lindsey has expanded the lines of inventory in the past 12 months. Lindsey’s Vinyl Revival now sells
new vinyl records, as well as record accessories such as cleaning kits and turntable needles. The
business is in the suburbs on a main road leading into the city. Its renovated premises are in good
condition, with sufficient space to display and store inventory as needed.
As a result of the increase in demand, Lindsey would like to purchase a computer system to catalogue
and record all inventory movement electronically. After some research, they have found a system for
$8000 that appears suitable.
Lindsey has provided financial statements from the past 2 years for you to advise on how to best
purchase the computer inventory system. They believe the business has insufficient cash to make
this purchase, because it must maintain a cash surplus to buy second-hand compact discs and vinyl
records from customers.

Income statement for the year ended 30 June
2021 2020
Revenue
Sales 440 350 390 280
Sales returns (3 000) (4 080)
Cost of goods sold 209 100 190 500

Stock loss 2 200 800
Gross profit 226 050 194 900
Expenses
Wages 126 650 116 680
Rates and taxes 9 000 8 800
Insurance 4 500 4 300
Depreciation 3 000 3 000
General expenses 14 340 9 250
Bad debts 8 280 2 390
Interest on loans 5 350 5 620
Profit 54 930 44 860
• Average inventory turnover for the industry is 5.35 times per year.
• Credit sales are 10% of net sales.

Statement of changes in equity
for the years ended 30 June 2021 and 30 June 2020
2021 2020
Opening capital, Lindsey Ords 293 060 279 200

Drawings (33 000) (31 000)
Profit 54 930 44 860
Closing capital 314 990 293 060

Balance sheet as at 30 June
2021 2020
ASSETS
Current assets
Inventory 33 400 25 000
Debtors 5 760 2 500
Prepaid expenses 4 000 1 700
Cash in hand 1 200 1 000
Cash at bank 6 240 50 600 4 250 34 450
Non-current assets
Fixtures and fittings 50 000 42 000
Less accumulated depreciation (38 000) (35 000)
Land and buildings 420 000 432 000 420 000 427 000
Total assets 482 600 461 450
LIABILITIES
Current liabilities
Creditors 13 110 10 690
Accrued expenses 1 500 1 700
Loan 8 000 22 610 0 12 390
Non-current liabilities
Mortgage 145 000 145 000 156 000 156 000
Total liabilities 167 610 168 390
Net assets 314 990 293 060
page 10 of 11
Statement of cash flows for the year ended 30 June 2021
Cash flows from operations

Inflows 425 810
Outflows (368 020) 57 790
Cash flows from investing

Inflows 0
Outflows (19 600) (19 600)
Cash flows from financing

Inflows 8 000
Outflows (44 000) (36 000)
Net change in cash 2 190
Cash at beginning of year 5 250
Cash at end of year 7 440

Inventory card for vinyl cleaning kits
In Out Balance
Date Details
Qty Cost Total Qty Cost Total Qty Cost Total
1 June Balance 5 14 70
4 15 60
3 June Sales 4 14 56 1 14 14
4 15 60
8 June Purchases 5 25 100 5 25 125
11 June Sales 1 14 14
2 15 30 2 15 30
5 25 125
13 June Sales returns 2 15 30 4 15 60
5 25 125
18 June Purchases 15 22 330 15 22 330
20 June Purchases returns 3 22 66 4 15 60
5 25 125
12 22 264
2 25 50 3 25 75
12 22 264
26 June Drawings 1 25 25 2 25 50
12 22 264
3 22 66 9 22 198
30 June Stock loss 2 22 44 7 22 154
page 11 of 11 — end of booklet

2021 Accounting Examination Solution

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Accounting

Total time: 130 minutes

Total marks: 120

© SACE Board of South Australia 2021

Attach your SACE registration number label here

Question 1 (25 marks)

Date Details Debit Credit

Depreciation on Fixtures and Fittings 240

Depreciation of fittings and fixtures

Advertising Expense 900

Prepaid advertising adjustment

page 3 of 13 PLEASE TURN OVER

Allowance for Doubtful Debt as at 30 June 2021

1/7/2021 Bal c/d 350 CR

Total Assets 732,160

Net Loss (65,740)

Total Liabilities 603150

page 5 of 13 PLEASE TURN OVER

Australian social plans in 2022

Attending a family barbecue

Attending a formal indoor

% of Australians planning the above activities in 2022

Refer to page 5 of the information booklet when answering Question 2.

Credit Cash Collected November-

Cash Received 214,472

Special Event Costs 15,000

Cash Paid 205,446

page 7 of 13 PLEASE TURN OVER

(FC + Profit Target) / (SP-VC) 1500 + 1200

Prepare a bank reconciliation statement, using the details above.

Balance as per Bank Statement 1580 CR

Unpresented Deposits 2300 CR

Unpresented Cheques 1230 DR

Balance as per cash at bank account 2650 DR

page 9 of 13 PLEASE TURN OVER

Refer to pages 6 and 7 of the information booklet when answering Question 3.

Cash received from debtors.

Cash paid to creditors.

Cash paid for insurance.

= 6000 + 4200 – 3800 = 6,400

Cash received for commission revenue.

= 5000 +21,000 – 19,000 = 7,000

Use the space below for other calculations.

CASH FLOWS FROM OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITES

page 11 of 13 PLEASE TURN OVER

KWIKER CHARGE LTD

Industry average (benchmark) earnings per ordinary share $2.50

623,700/330000 = 1.89 1.89/28 x100 = 6.75%

page 13 of 13 PLEASE TURN OVER

(g) State the accounting entity for:

(i) Sunny Bank Batteries Sunny Bank Batteries (1 mark)

(ii) Kwiker Charge Ltd Kwiker Charge Ltd (1 mark)

page 13 of 13 — end of question booklet

© SACE Board of South Australia 2021

Copy the information from your SACE label here

Question 4 (25 marks)

If Lindsey decides to move to a perpetual stock system, a number of changes would be

page 3 of 11 PLEASE TURN OVER

LINDSEY’S VINYL REVIVAL

1–30 days 31–60 days 60+ days

P Smith 700 700