Prepare business income statement for the period

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Reference no: EM134797

Question1:

Amanda White has started a domestic cleaning business Spotless View Cleaning (SVC).She started the business on 1st May 2013, it is now 30th June and she has asked for your assistance in preparing her financial statements. On 1st May Amanda deposited $5,000 into a new bank account opened in the name of the business. The $5,000 consisted of a $2,400 interest free loan from her father and $2,600 of her own money.

Amanda rented some equipment from Barry's Equipment Hire. On 1st May, she signed a four-month rental agreement on cleaning equipment (vacuum cleaners and a floor polishing machine) and paid $400 for the four month rental period. On the same day Amanda also purchased (for $3,000) an old van to be used exclusively for the business. She believes that the van has three years of useful life and then will have a resale value of $300.

Amanda has made a note in her diary whenever she has taken items from the business for her personal use. At 30th June she consults her diary and calculates that she has taken $950 cash and $20 worth of cleaning supplies during the period.

The loan made by her father is to be repaid in twenty four equal repayments. Each repayment is made on the last business day of the calendar month. Normally all of the work done by SVC is performed on account but one domestic customer insisted in paying in cash at the time the work was done. The customer paid $120 and Amanda decided that it was not worth producing an invoice for an amount which had already been received. All work done during the period has been invoiced. Invoices totalling $8,300 had been issued.   

At 30thJuneAmanda's customers owe her $900. Herdiary records list payments for supplies totalling $380, and at the end of the period she still has supplies that cost $60 on hand. She paid her employees $2,900, and still owes them $320 for their final week of work. Throughout June Amanda paid her mobile telephone bill of $280 from her personal bank account. She estimates that 60% of the calls made were for the business purposes. She also has an unpaid bill for $125 from Keen Maintenance for a repair made to her floor polishing machine.

 

Required:

You have to clearly show how you have calculated each amount exposed on the statements, either by writing it next to the account name, for example Sales ($5 x 2,000) or by referencing the amount using a, b c etc. and putting your calculations for each of these at the bottom of the statement. For example, Sales (a) and then at the bottom of the statement put (a) and your calculation. Statements provided without explanations will receive no marks.

 a)        Prepare business Income Statement for the period.                                        

 

b)         Prepare Statement of Changes in Equity for the period.                                   

 

c)             Prepare classified Balance Sheet at the end of the period.                             

 

Question 2

 

Mary is a student and also operates a part time business called Jano Enterprises. She sells imported marker pens to various retail office and stationery supply shops. Business commenced in May 2012.Mary conducts all of the business' operations (she works alone and has no employees).

Mary purchases pens for 60c each and sells them for $2.50 each. These amounts have not changed since Mary started operations.

At 1st July 2012 an amount of $1,500 appears as inventory in the trial balance.

Throughout the year ended 30thJune 2013, Mary made the following unit purchases and sales.

 

Date

Purchases

Sales

 

@60cea

@$2.50ea

July 11

 

1,000

Aug 3

 

600

Sept 12

2,000

 

Sept 30

 

1,300

Dec 2

1,500

 

Dec 6

 

400

Feb 3

 

700

Mar 22

1,500

 

April 19

 

2,300

May 26

 

800

TOTAL

5,000

7,100

 

On 30thJune 2013(the end of the accounting period), Mary counted 370 pens remaining on hand.

 

Required:

a)      Compute the Gross Profit for the year ended 30th June 2013 under both the (i) perpetual and (ii) periodic methods of inventory recording by providing a correctly formatted extract (up to gross profit only) from Jano Enterprises income statement. You must also provide explanations and calculations for each amount shown on the statement extracts. Present this information below your statement extract. Statements provided without calculations and explanations will not receive marks.

 

(HINT: Since you are being asked to calculate under both methods in this question, you have been given complete data in regard to inventory flow. Not all of this data is needed for each method; therefore ensure that you only use the data that you need for each method).

 

b)      Of the two methods used in 1. Above, which method (if any):

 

 i.        Provides higher Gross Profit figure?

 ii.       Provides the most information for control purposes, and how?

 iii.     Considering the circumstances, which inventory method, would be the most appropriate for Mary's business? Explain the reason.

 

Question 3

Tamara Nice set up a secretarial services business (TN Services) on 1 July 2013. Usually, Tamara collects $20 per hour for services provided on the completion of each day's work and pays for the maintenance of her computer equipment with cash. Tamara did an accounting subject at secondary school and so has kept her own accrual-based accounting records. At the end of the first year, Tamara produced following unadjusted trial balance:

 

Cash at Bank

$2,550

 

Accounts Receivable

40

 

Computer Equipment

3,000

 

Motor Vehicle

24,000

 

Tamara Nice, Capital

 

$19,000

Tamara Nice, Drawings

17,570

 

Income

 

38,400

Telephone Expense

2,300

 

Supplies Expense

4,840

 

Repairs & Maintenance

2,560

 

Other Expenses

540

 

 

 

 

 

 

 

 

The next adjustments were required at the year-end:

  • Supplies on hand at year-end, $230.
  • An account was received for repairs done to Tamara's computer equipment before year-end but not recorded, $270.

All calculations must be shown. Solutions provided without calculations will not receive marks.

Overlook the GST in your answers.

 

Required:

 

a)      Prepare an income statement for year ended 30th June 2013 using accrual accounting.

b)      Prepare an income statement for year ended 30th June 2013 using cash accounting.

c)       Tamara was not sure whether she could use cash accounting rather than accrual accounting for her business records. From the information provided, decide whether Tamara should use accrual or cash accounting, and clarify to her the reasons for your decision.

 

Question 4

 

The following values relate to various ratios determined for a sole trader, Ben Bournemouth, for the year ended 30 June 2013. At that date, the total assets in the Balance Sheet were $900 000. The ratios relate to the accounts either in respect of the 12-month period or at the date of Balance Sheet for the end of the period.

 

Gross Profit to Total Sales

=

25%

Current Ratio

=

2.5:1

Quick (acid test) Ratio

=

2:1

Credit Sales to Total Sales

=

75%

Non-current Assets to Current Assets

=

10%

Profit to Total Assets

=

15%

Accounts Payable to Purchases

=

40%

Profit Margin

=

10%

Profit to Equity (start of period)

=

30%

Credit Sales to Accounts Receivable

=

7.5:1

 

Required:

Assume that there are no prepaid expenses and that accounts payable are the only liability, and rounding answers to the nearest dollar, prepare:

 

a)      A detailed Income Statement for the year ended 30 June 2013, including an itemised cost of sales calculation (assuming a periodic inventory system).

b)      The business' Balance Sheet as at 30 June 2013. 

Solutions provided without calculations will not receive marks.

There are two options to answering Question 5; write an essay or create a short video. These options are explained below.

Regardless of whether you choose to write an essay or create a video as your answer, the grading of the question will be exactly the same. See the following rubric which gives guidance on the marking criteria for this question.

 

Question 5 Grading Rubric -

 

Task

Excellent

Adequate

Poor

Grade

1.     

Concept and argument

All concepts have been introduced. The argument is fluid,reasoned, and wellsupported. It showsdepth, and uses pertinentquotations / references from multiple sources. It uses morethan one type of appeal.

Some concepts have been introduced. The argument isadequate. Somereasoning may belacking, but generallythe discussion leaves nomajor objections orchallenges.

There may be nodiscernibleargument, or theargument maybe severelylogically flawed.

 

2.     

Organisation

The organisation is fluid,and features smoothtransitions. The discussion isfresh and invites reading / listeningwith varied sentencestructure, strong voiceand appropriate tone.

The organisation isadequate. Transitionsmay be slightlyawkward, but thereader / listener is able to followthe discussion easily. The discussion is clear.

The organizationmay be difficultor Impossible tofollow.There may seemto be little to nostructure to the discussion.

 

3.     

Grammar / Spelling (essay)

Articulation / clarity (video)

There are only insignificant grammatical / articulation errors, ifany.

There are no serious grammatical / articulation problems.

There may be seriousgrammatical / articulation errors thatprevent thereader / listener fromunderstanding oridentifying theideas in the discussion.

 

4.     

Length

The essay / video does not exceed or fall short by 5% of the requirements. The composer haswritten / saidjust enough to fully arguetheir point.

The essay / video does not exceed or fall short 10% of the requirements. But the discussion isstill complete, andattempts to fully argueits point.

The essay / video maynot be theassigned length,or may be partlyor whollyplagiarized.

 

 

 

Option 1:

Write a 350 - 400 word essay on ONE of the 5 topics listed below. Your essay should be an original made by you successfully discussing topic of your choice covering the key components of the topic and it should include references. See link above for referencing guidance.

Write down your essay in the space below.

 

Option 2:

Make a 3 minute video that answers your choice of one of the 5 topics listed below. The video must be an original made by you successfully discussing the topic of your choice covering the key components of the topic and it should include references.

Use whatever means you have available, eg camera or smart phone. You may create a video whichever way you like, for example, you may like to pretend you are a newsreader, or go to your local shopping centre as a 'journalist' and interview people, or have somebody interview you. The choice is entirely up to you. You will have two files to load as your submission for this assignment, your answers to Part A of this document and your video file.

Topics to choose from:

1.Discuss how, in choosing the accounting methods below, the following ratios can be affected -

(i) rate of return on assets, (ii) quick ratio, (iii) profit margin, (iv) asset turnover:

 

a) A change in accounting method for depreciation from straight line to reducing balance

 

b) Revaluation of a non-current asset upwards at the beginning of the current year

 

c) Providing for an expected loss through obsolescence of certain items of merchandise inventory.

 

2.Discuss the general limitations of financial statement analysis.

 

3."Employees often fail to appreciate the true cost of their employment". Evaluate and discuss this statement.

 

4.With growing importance of computerised accounting systems, which inventory system (perpetual or periodic) has become more popular?  Explain why.

 

5.You overhear a conversation between two Accounting for Business students. One student comments that "the effect of adjusting entries is either immaterial or non-existent over time" is this correct? If so why should accountants bother with the extra 'work' involved with the adjusting process? Why do accountants process adjusting journal entries?

Reference no: EM134797

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