Reference no: EM13973771 , Length:

Task 1:

Laura Prebble, the owner-manager of a small business, had carefully monitored her cash position over the past financial year, and was pleased to note at the end of the year that the cash position was strong, and had shown a healthy 50% increase over the year. When presented with the income statement for the year, she was dismayed to note that the profit earned in the last year had deteriorated significantly and had become a loss for the current period. In her anger, she accuses you of having made errors in the accounting since ‘such a silly situation could not possibly exist'.

Required

Draft a response to Laura.

Task 2:

‘A statement of cash flows is of limited use as a business needs to know if it will have sufficient cash to support its planned future activities.'

Required

Discuss the merit of this statement focusing on both the purpose and limitations of a statement of cash flows.

Task 3:

After calculating the current ratio for an entity and finding that the ratio's value was 5:1, a student analyst decided that the company was in a sound position for paying its liquid liabilities.

Required

Discuss the shortcomings of making such a conclusion.

Task 4:

The financial statements for the business of Trinh's Nail Supplies for the past two years are presented below.

TRINH'S NAIL SUPPLIES
Comparative Income Statements
for the year ended 30 June

	2016	2017
Sales	$ 400??000	$ 500??000
Cost of sales	350??000	458??000
GROSS PROFIT	50??000	42??000
Interest income	1??000	2??000
Loss on sale of fixtures	-	800
	51??000	43??200
Office supplies used	10??000	11??000
Other expenses	29??000	29??000
	39??000	42??000
Profit	$ 12??000	$ 3??200

TRINH'S NAIL SUPPLIES
Comparative Statements of Financial Position
as at 30 June

2016                          2017
ASSETS
Cash at bank	$ 4??400	-
Accounts receivable	42??000	$ 60??000
Inventory	80??000	40??000
Office supplies	2??000	5??000
Freehold property	60??000	80??000
Fixtures	40??000	46??000
Accumulated depreciation - fixtures	(16??000)	(20??200)
Investments	6??000	16??000
	$ 218??400	$ 226??800
LIABILITIES AND EQUITY
Bank overdraft	-	$ 4??000
Accounts payable	$ 26??000	40??000
Trinh, Capital	192??400	182??800
	$ 218??400	$ 226??800

Additional information

a. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash.

b. The bank overdraft is considered to be part of the entity's cash management function.

c. During the year ended 30 June 2017, the owner, Trinh, withdrew $12??800 in cash for personal use.

d. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost $4200 and had been written down to a carrying amount at the date of sale of $2000.

e. Depreciation of fixtures has been included in ‘other expenses' for the year ended 30 June 2017. All remaining other expenses were paid in cash.

Required

1. Prepare the statement of cash flows for Trinh's Nail Supplies for the year ended 30 June 2017, using the direct method.

2. Comment on the cash flow position of the entity as shown in the statement of cash flows.

Task 5:

Sunrise Ltd completed the following transactions during a given year:

Transaction	Ratio
1. Sold obsolete inventory at cost	Profit margin
2 Redeemed debentures by issuing ordinary shares	Return on ordinary equity
3. Issued a share dividend on ordinary shares	Earnings per share
4. Declared a cash dividend on ordinary shares	Dividend payout
5. Paid the GST owing to the tax office	Dividend yield
6. Purchased inventory on credit	Quick ratio
7. Sold inventory for cash	Current ratio
8. Wrote off a bad debt against Allowance for Doubtful Debts	Current ratio
9. Collected an account receivable	Receivables turnover
10 Sold inventory on credit	Inventory turnover
11 Issued additional ordinary shares for cash	Debt ratio
12 Paid trade accounts payable	Return on assets

Required

State and discuss whether each transaction would cause the ratio listed with the transaction to increase, decrease or remain unchanged.