ch02 SM FA7e-1 (Doc - Wendoc.com)

http://doc.wendoc.
com/
ch02_sm_FA7e
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
financial statement &rpt exercise solutions

Solutions Manual
to accompany
Financial Accounting
7e
by
John Hoggett Lew Edwards John Medlin
Matthew Tilling
John Wiley & Sons Australia, Ltd

Chapter 2: Financial statements for decision making
http://doc.wendoc.com/
Page
DISCUSSION QUESTIONS SOLUTIONS

EXERCISE SOLUTIONS:
Exercise 2.1
Income statement and analysis

Exercise 2.4
2.3
Preparing a balance sheet
2.12
Exercise 2.3
Determining profit from equity balances 2.14
financial statements
information 2.17
2.16
Exercise 2.7
Exercise 2.8
of
Elements in
Assumptions and characteristics of
sheet
2.18
2.19
Exercise 2.9
Exercise
Exhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlplaining
transactions
2.21
Exercise 2.11
Recording transactions
Preparation of income statement and balance sheet 2.25

transactions on a balance sheet 2.27
financial statements 2.30
Exercise 2.14
Exercise 2.15
2.13
Exercise 2.5
Exercise 2.6
Business transactions
balance
Exercise 2.2
Analysis of equity
Operating, investing and financing activities 2.15
Preparation
2.10
2.10
accounting
2.22
Exercise 2.12
Exercise 2.13
Effect of
Effect of transactions on
Determination of profit by examining
equity changes 2.32

PROBLEM SOLUTIONS:
2.2
Problem 2.1
Preparing financial statements
elements in accounting
2.34
Problem 2.3
equation
2.35
transactions from balance sheet changes 2.36
Problem
Determining missing
Problem 2.4
Problem 2.5
Identifying
Preparation of
financial statements
2.37
2.39
Performance assessment from financial statements 2.41
Problem 2.7
Problem 2.8
2.43
Problem 2.6
2.33
Correction of financial statements
Recording transactions and preparing financial

Problem
2.9
Classifying
financhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlial
Problem 2.10
2.47
Problem 2.11
Problem 2.12
statements
items
statements
2.46
statements
Identifying transactions from balance sheet changes 2.49
for
statements
2.50
Problem 2.13
Correcting errors and preparing financial statements 2.53
Problem 2.14
Analysing financial statement elements 2.55
Preparation of financial statements
Problem 2.15
2.57
Solutions Manual to accompany Financial Accounting 7e by Hoggett et al
CASE STUDY SOLUTIONS

statements
Decision Case
Critical Thinking
Communication/
Case
Group Activity
Bribing government officials
Schutz Building Services financial

Sporting glory the great intangible
Preparing balance sheets
Financial Reporting
Case
Ethical Issues
David Jones Limited
2.59 2.61 2.62 2.64 2.65

Chapthttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmler
2:
Financial
statements for decision making

1.
Explain the basic differences between a sole trader (or single proprietorship),
a partnership and a company.
What factors need to be considered in selecting an
appropriate structure for Darren?s lawn-mowing business?

The three basic business structures are:
? Sole traders are where individuals conduct business in their own capacity.
They
would be contributing their own capital or equity to the business and would be
borrowing money in the name of the business in their own name.
They would be
liable to repay the outstanding debt of the business and, if unable to repay,
the bank, would have access to their own personal assets to repay the
outstanding debt.
This business structure is suitable for small operations with
small staff and turnover.

for
The sole trader has sole responsibility and control
the
business
operations
and
acthttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlivities.
This structure
is suitable for small businesses which require minimal capital to set up and
have relatively low running costs and risk. ?
A partnership is two or more persons in business together, operating under a
partnership agreement which may or may not be a formally written document.
Partnerships have the advantage over sole traders in that they have a larger
base
for
capital
contribution
and
are
able
to
responsibilities associated with running a business.
share
the
risks
and
The partnership is treated
as a separate entity for accounting purposes but is not a separate legal entity.
This means that the underlying assets and liabilities of a partnership belong to
the individual partners in the proportion agreed upon as part of the partnership
agreement.
Therefore if the business activities prove to be unsuccessful,
creditors have the right to access the personal assets of the individual
partners in the event http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlthe
business is unable to repay any outstanding debt.
For this reason, the
partnership structure is usually used where there is a low element of risk to

the business or where the law dictates that the business entity must be run by
the
individuals
providing
the
service.
For
example,
work
completed
by
professionals including accountants and lawyers.

The company is a separate legal entity with ownership of a company attributed to
shares held.
The owners of the company are known as shareholders.
The
advantage of this business structure is that, as a separate legal entity, the

assets and liabilities belong to the company.
In the event the business is
unable to repay its debt, the creditors only have access to company assets for
repayment of the debt.
limited
only
shareholder
to
the
pays
The investment in the company by its shareholders is

shareholders?
for
the
capital
contribution,
shares.
struchttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlture
i.e.
This
what
the
business
is
more
appropriate for entities requiring larger capital contribution, which have a
large number of overheads and employees and has a higher business risk.
The
disadvantages include higher set up and ongoing

?
costs and possible reduction in control over the business operations where
shareholders are not directly involved in the business operations.
2.
?Good planning is useless without good control?. Discuss Points to consider: ? ?
For a business to be successful careful planning is required to set appropriate
goals, and determine a course of action.
Control mechanisms are essential to ensure that the course of action decided on
is achieved. Management is required to ensure that the actual performance
compares favourably with the goals established in the planning function.
3.://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlpar
Discuss the meaning of ?performance? for both business entities and not-forprofit entities.
Is performance able to be expressed totally in financial
terms? ?
Performance for a business entity means its ability to use its assets
efficiently and effectively to achieve business goals.
Key indicators for
business financial goals include profit, total income and expenses, total assets
and liabilities.
Performance for not-for-profit entities may be the
achievement of a social or moral goal rather than maximisation of shareholders?

profit. To assess an entity?s performance would be to compare its activities or
transactions for the period compared to its stated goals or mission statement.
4.
The coach of the local football team was attempting to motivate the team before
a big match.
we
He said: ?Our team is like any organisation.
must
practise
the
usual
We must have goals,
management
functions,
anhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmld we must make use of all

relevant information.?
Do you agree with the coach? Explain your position. ?
The management of a sporting team must have goals, e.g. winning, putting up a
good performance, reputation, character-building of team members and recruitment
of new members.
The management of a sporting team must plan, organise, direct, and control the
team?s efforts and generally operate like any other business organisation. In
order to plan team performance, the coach would need some relevant available
information to plan performance, develop a game plan, direct play during the
match, and gather information so that an analysis of the game may lead to
improved future performance.
Some discussion could take place on how a team would operate without such
management principles being used.
? ?
?
5.
Define
the
terms,
assets,
liabilities,
and
equity.
Are
these
terhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlms related in any way? If

so, how?
Assets are defined in the Framework as resources controlled by the entity as a
result of past events and from which future economic benefits are expected to
flow to the entity.
Liabilities are defined in the Framework as present obligations of an entity
arising from past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits. Liabilities
require future payments from assets, generally in the form of cash, or the
performance of services to cancel them.
Equity is the owner?s claim to (or the residual interest in) the assets of the
entity after deducting all its liabilities. The basic accounting equation
(Assets ? Liabilities ? Equity) indicates the relationship between assets,
liabilities
and
equity.
From
the
equation,
the
total
entithttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmly
assets
equal
of
the
the
total
claims against those assets by creditors and owners. Creditors? claims take
precedence over owners? claims, and owners are seen as the ultimate risk-takers
in the entity. Thus, equity is a residual claim on the assets of the entity
after liabilities are fully paid, and the basic accounting model which expresses
this idea clearly is:
Assets ? Liabilities ? Equity
6.
Why is it that, in an entity?s financial statements, assets leased by an entity
are sometimes shown on that entity?s balance sheet even though those assets are
not legally owned?
Accountants assume the economic substance of a business transaction applies to
the reporting of those transactions.
This means that when transactions are
examined, the economic reality of the transactions is reported as opposed to

their legal form.
the
Therefore if the business has exclusive use of an asset for
running
of
business
thhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmle
and
generation
for
of
its
profit, the economic substance of the transaction should record the asset as a
business asset.
In a leasing transaction, legal title to the asset does not
pass until the end of the relevant lease term when all the payments are made.
However, the entity has use of and earns economic benefits from
the asset for
this time period; hence, it should be recorded as a business asset of the entity
during the period of the lease term.
7.
A local restaurant is noted for its fine food, as evidenced by the large number
of customers.
A customer was heard to remark that the secret of the restaurant?
s success was its fine chef.

business?
Would you regard the chef as an asset of the
If so, would you include the chef on the balance sheet of the
business and at what value? Suggested topics of discussion: ?

Asset definition Assets are resources controlled by the entity as a result
of
past
events
andhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
which future economic benefits are expected to flow to the entity.
from
Does the
chef provide future economic benefits to the entity? Yes. Is the chef controlled
by the entity? In many cases, it is evident that he/she could not be controlled
by the entity (e.g. he/she can resign when he/she likes, can take sick days).
He/she cannot be acquired or sold by the business, i.e. they do not have
rights to possess him/her.
How would you value the chef as an asset?
Usually you have some idea of the
life of the asset, however, the restaurant would not know how long the chef
would be working for them (this argument relates back to controlling the asset).
?
8.
The local parkland is owned and maintained by the local government council.
Is
the parkland an asset of the council and should it be included on its balance
sheet? Suggested topics of discussion:
(This answer goes well beyond what is
expectehttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmld of students, but it

should provide thought for good discussion.) ?
AAS 27 Financial Reporting by Local Governments (still applicable at time of
writing) requires all assets, including those which yield their economic
benefits over long periods of time to be recognised in the balance sheet.
?
The criteria for recognition for assets in AAS 27 include that (a) it is
probable that the future economic benefits embodied in the asset will eventuate;
and (b) the asset possesses a cost or other value that can be measured reliably.
The local parkland represents a heritage asset, which is a physical asset
that a community intends on preserving because of cultural, historic or
environmental associations, and they are generally not perceived as assets in an
economic, financial or business sense.
When
herithttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlage
asset
is
applied to AAS 27, it has often failed to meet the criteria of asset recognition
because it is difficult to measure its value reliably.
assets have not been recorded.
Therefore, heritage
This is an area that, currently, is much
debated.
?
?
Possible solutions to recognition and measurement problems: 1. 2.

Heritage assets should initially be recognised at their cost or, where assets
previously acquired are to be recognised for the first time, at their current
cost; Heritage assets should, where control of heritage assets has been acquired
other than by an exchange (e.g. gift, grant etc.), be recognised at their fair
value;
Heritage assets should be systematically revalued to their current cost and
depreciated thereafter; and
Heritage assets that continue to provide operational services, should be
reported
as
part
of
its
generic
asset
group
beihttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlng
rather
included
than
under
heritage assets.
3. 4.
9.
Moonshine Enterprises hired an accountant at the rate of $1 000 per week.
person is to commence duty on 1 February.
The
On 1 February, does the business have
a liability in respect of the accountant?s salary?
Explain. Suggested topics
for discussion re Moonshine Enterprises: ?

On 1 February, the business does not have a liability because, at this stage,
they are not presently obliged to sacrifice future economic benefits (his/her
wage paid in cash), i.e. not until the expense has occurred, which isn?t
recognised until it is probable that the consumption has occurred and can be
measured reliably.
The contract remains unperformed by both parties until the work is completed by
the employee.
?
10.
Discuss the significance of the following assumptions in the preparation of an
entity?s
financial
statements:
(a)
ehttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlntity assumption
(b) accrual basis assumption (c) going concern assumption (d) period assumption
(a) Entity Assumption:
If the transactions of an entity are to be recorded, classified and summarised
into

financial statements, the accountant must be able to identify clearly the
boundaries of the entity being accounted for. Under the accounting entity
assumption, the entity is considered a separate entity distinguishable from its
owner and from all other entities. It is assumed that each entity controls its
assets and incurs its liabilities. The records of assets, liabilities and
business activities of the entity are kept completely separate from those of the
owner of the entity as well as from those of other entities.
The accounting entity assumption is important since it leads to the derivation
of the accounting equatiohttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmln.
(b) The Accrual Basis Assumption
Under the accrual basis of accounting, the effects of transactions and events
are recognised in accounting records when they occur, and not when the cash is
received
or
paid.
Hence,
financial
statements
report
not
only
on
cash
transactions but also on obligations to pay cash in the future and on resources
that represent receivables of cash in future. It is argued in the Framework that
accounting on an accrual basis provides significantly better information about
the transactions and other events for the purpose of decision making by users of
financial statements than does the cash basis.
(c) The Going Concern Assumption
According to the Framework, financial statements are prepared on the assumption
that the existing entity is expected to continue operating into the future.
It
is assumed that the assets of the entity will not be sold off and that the
entity
will
chttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlontinue
its
activities; hence, liquidation values (prices in a forced sale) of the entity?s
assets are not generally reported in financial statements, as this assumes that
an entity is to be wound up.
When management plans the sale or liquidation of the entity, the going concern
assumption is then set aside and the financial statements are prepared on the
basis of estimated sales or liquidation values. The significance of the going
concern assumption is in the valuation placed on the assets of an entity in the
entity?s financial statements. The statements should identify clearly the basis
upon which asset values are determined going concern? Or liquidation?
(d) The Period Assumption

For financial reporting purposes, it is assumed that the total life of an entity
can be divided into equal time intervals. Hence, the financial performance of
the
entity
can
be
determined
for
given
time
period,
andhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html the financial position

of the entity can be determined on the last day of that reporting period.
As a result of this assumption, profit determination involves a process of
recognising the income for a period and deducting the expenses incurred for that
same period. Together, the period assumption and accrual basis assumption lead
to the requirement for making balance day adjustments on the last day of the
reporting period.
11.
These adjustments will be considered in chapter 4.
What is meant by the terms relevance and reliability/faithful
representation in
the context of information to be included in financial statements?
Relevance
Relevance means that the information contained in financial statements is able
to influence the economic decisions made by users. For example, the information
may help users to predict future events, such as future cash flows, from
alternative
courses
of
achttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmltion under consideration.

Also, information is relevant if it is able to help decision makers evaluate
past decisions. The information may confirm that a previous
decision was correct, or it could show that the results of a previous decision
were
undesirable
and
that
new
decision
is
necessary.
Thus,
relevant
information is said to play a predictive role and a confirmatory or feedback

role.
A further aspect of relevance is that the information must be presented by the
accountant to the user (internal or external) in time for a decision to be made.
The
timeliness
of
information
is
an
important
factor
in
ensuring
that
information is relevant.
Reliability/Faithful representation
Reliability, as discussed in the current Framework, means that the user is
assured
that
the
information
presented
represents
faithfullyhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html, without bias or

undue error, the underlying transactions and events being reported in the
financial statements. Accountants require information to be reliable, which
means that the information reported represents economic reality as closely as
possible.
Note that the IASB Discussion Paper issued in March 2006, as discussed in the
text, has been replaced by the IASB Exposure Draft, An Improved Conceptual
Framework for Financial Reporting: Chapter 2: Qualitative Characteristics and
Constraints of Decision-useful Financial Reporting Information, issued in May
2008. In the Exposure Draft, the IASB proposed that, because the meaning of
reliability was not clear to constituents, it should be replaced by the concept
of faithful representation.
According to the Exposure Draft, faithful representation is attained when the
depiction of an economic event is complete, neutral, and free from material
error. Financial informathttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlion
that faithfully represents an economic phenomenon depicts the economic substance
of the underlying transaction, event or circumstances, which is not always the
same as its legal form.
Distinguish between the concepts of consistency and comparability?
Should the
same accounting method be always applied consistently in financial statements?

As mentioned in the IASB Exposure Draft, An Improved Conceptual Framework for
Financial Reporting: Chapter 2: Qualitative Characteristics and Constraints of
Decision-useful
Financial
Reporting
Information,
issued
in
May
2008.
Comparability is an enhancing characteristic of information i.e. it enhances the

usefulness of financial reporting information in making economic decisions.
Comparability is the quality of information that enables users to identify
similarities in and differences between two sets of economic data. Consistency
refers
to
use
of
the
same
accounting
policies
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmland procedures, either from

period to period within an entity or in a single period across entities. The
Exposure Draft argues that comparability is the goal, and that consistency of
policies and procedures is a means to an end that helps to achieve the goal.
However, it is nor satisfactory for policies and procedures to be applied
consistently if the information that they produce is no longer relevant or a
faithful representation of economic reality.
12.
13. When considering the characteristic of understandability in the preparation

of
financial statements, does this mean that financial statements should be simple
to understand? Discuss.
According to the IASB Exposure Draft, An Improved Conceptual Framework for
Decision-useful
Financial
Reporting
Information,
understandability
issued
in
May
2008,
is
the
qualihttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlty of information which

enables users who have a
reasonable
accounting,
knowledge
and
who
of
business
study
the
and
economic
information
with
activities
and
financial
reasonable
diligence,
to
comprehend its meaning. It should be clear that, even though it is desirable for
financial statements to be expressed in simple language, relevant information
should not be excluded merely because it may be too complex or difficult for
some untrained users to understand.
Understandability does not mean simplicity.
If users cannot understand the information contained in financial statements,

they should seek the help of a trained adviser.
Understandability
is
further
enhanced
when
information
is
classified,
characterised, and presented clearly and concisely.

14.
The concept of materiality relates to the extent to which information can be
omitted,
misshttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmltated
or
grouped with other information without misleading the report users when they are
making their economic decisions. Thus, the prices paid for insignificant items
are not shown separately in the financial statements because they could
clutter the financial statements with heaps of insignificant, or immaterial,
information in the overall context of the decision being made by the user.
However, it is important, when assessing materiality, to be aware of the
particular decision being made by the user. The same information may be material
for one decision and immaterial for another. Thus, considerable judgement is
needed in order to assess which information is material and which is immaterial
for the particular decision at hand.
According to the IASB Exposure Draft, An Improved Conceptual Framework for
Decision-useful
Financial
Reporting
Informhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlation, issued in May

2008,
materiality
must
be
considered
in
the
context
of
the
other
characteristics, especially relevance and faithful representation. Materiality

is viewed as a constraint on the information to be included in an entity?s
financial report, rather than as a separate characteristic of good information.
What is meant by the requirement that information to be included in financial
statements should be material?
15.
Explain
the
statements.
concept
of
double-entry
in
the
preparation
of
financial
As a result of adopting the entity assumption, the accounting
equation has been developed. This equation represents a statement of the entity?
s financial position at a point in time.
is:
Assets = Liabilities
One format of the accounting equation
Equity
The equation points out that when one of the entity?s elements e.g. assets, is
increased,
there
must
be
also
anohttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlther
change
element:
in
either
liabilities must increase or equity must increase, or another asset must

decrease.
The equation must always be in balance after recording every
transaction. This phenomenon, whereby a change in one element (asset) causes a

change in another (either liability or equity or another asset) is referred to
as double-entry. Double entry accounting is the name given to this dual
recording process, which is developed further in chapter 3.
ROB MUNDTS MARKETING SERVICE
Required: A. 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.]

B. Recast the statement to present it in narrative form as in figure 2.3.
A.
Preparing a balance sheet
Chapter
2:
Financial
statements
forhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html decision making

B.
Income statement and analysis

JOHNSON SERVICES
Required: A. Prepare an income statement for the year for Johnson Services. B.
Who made more out of the personnel business Johnson or her personal
assistant?
What action might Johnson take to increase the profitability of the business in
the year ended 30 June 2011?
A.
B. The personal assistant?s salary of $46 000 is greater than Johnson?s reported
profit
for the year.
Assuming the salary has been paid to the assistant, the assistant
has also taken out $46 000 cash from the operations of the business (as a
business expense).
We have no information on Johnson?s drawings from the
business, so we do not know how much cash Johnson has taken out of the business
for personal use.
However,http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
if the owner were to withdraw all of the profit, she would still not have
received as much as her personal assistant.
To improve profitability, Johnson needs to either increase income or decrease

expenses.
To increase income, Johnson would need to take on more clients and
hire more temporary workers (this would also increase her business expenses).
Increasing the charge out rate would also be another option.
This option would
need an examination of the increased income compared to the increased costs.

Alternatively, Johnson could decrease the hours of the personal assistant and
take a more active role, but she would need to consider her availability for the
extra hours.
Analysis of equity
SARAH HODGE
Required: A. If Sarah did not contribute to or withdraw from the business during
the year 20http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html09-10,
what was the profit/loss for the year?
B. If Sarah had withdrawn $12 000 during the year, calculate the profit/loss for
the
year.
C. If Sarah had contributed $15 000 and withdrawn $8 000, prepare a statement of
changes in equity for the year ended 30 June 2010.
Calculation of Equity as at 30 June 2009 is $16 500

(i.e. $37 500 - $21 000)
Calculation of Equity as at 30 June 2010 is $21 000
(i.e. $39 000 - $18 000)
year.
A. Capital Contributions and Drawings are nil for the
Ending Equity $21 000 Beginning Equity $16 500
= Profit of $4 500.
B. Capital Contributions nil and drawings $12 000 for the year.
Ending Equity $21 000 -- Beginning Equity $16 500 Drawings $12 000
= Net Profit $16 500.
C.
* Loss is the balancing item.
Solutions
Manual
accompanhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmly
to
Financial
Accounting 7e by Hoggett et al
IRVINES HOUSE WASHING SERVICES
Required:
Determine profit/loss earned by the business in each of the 2 years ended 30
June 2009 and
Determining profit from equity balances
30 June 2010.

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:
(a) sale of land and buildings for cash (b) payment of wages to employees (c)
withdrawal of cash by the owner (d) repayment of a bank loan
(e) cash purchase of a truck by a manufacturing company
(f)
cash
purchase
of
fleet
of
bhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmly
motor
car
vehicles
dealership
(g)
borrowing of money from a finance company on a long-term basis (h) cash

collected from the customers of the business
[O] (c) Financing
(g) Financing
[O] (d) Financing
[I] (h) Operating
(a) Investing
[O] (e) Investing
[I] (b) Operating
[O] (f) Operating
[O]
[I]
HIP AND HOP
Required:
Indicate whether these items would appear in Hip and Hop?s balance sheet, income
statement, statement of changes in equity and/or statement of cash flows.
For
those items included in the cash flow statement, indicate whether the item
relates to operating activities, investing activities, or financing activities.
[Hint:
Some items may appear in more than one financial statement.]
(a)
Balance sheet, statement of changes in equity, and statement of cash flows

(Financing
treated
as
cohttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlntribution of capital)
(b) Balance sheet only (c) Income statement and statement of cash flows
(Operating) (d) Income statement and statement of cash flows (Operating) (e) Not
reported in the financial statements as not part of the accounting entity Hip
and
Hop
(f) Income statement and statement of cash flows (Operating) (g) Balance sheet
(reduction of capital), statement of cash flows (Financing as part of
owner?s drawings of capital from the business), statement of changes in equity
(h) Balance sheet and statement of cash flows (cash or cash equivalent balance).
(i) Balance sheet and statement of cash flows (Financing for loan amount),
(Investing
for purchase of building)
Elements in financial statements

Assumptions and characteristics of information
Required:
://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlarIdentify
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
benefihttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlt 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.
Business transactions
For each of the following, describe a transaction that would have the stated
effect on the accounting equation:
1. Increase an asset and increase a liability 2. Increase one asset and decrease
another asset 3. Decrease an asset and decrease equity 4. Increase an asset and
increase equity 5. Decrease a liability and decrease an asset.
1.
3.
Purchase an asset on credit 2.
Purchase an asset for cash
Owner withdraws cash from the business for personal use. 4.
contributes
cashttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlh
business. 5.
The business pays cash to its creditors.
Owner
to
the
Students may have many other possible examples in each of 1-5.

Preparation of a balance sheet

DAVE KRAMER, SOLICITOR
Required: A. Determine the balance in Dave Kramer?s Capital account at the end
of each month B. Assuming that Mr Kramer made no additional investments and did
not withdraw any
money from the business during the three months, determine the profit for
November and December.
C. Prepare a balance sheet for the business at the end of December 2010. (The
heading
should read: Dave Kramer, Solicitor)
A.
Based on the accounting equation: Assets less Liabilities = Equity
31 October Capital Balance = $(9 100
$(10
100
16 100
700
29 800
100
34
41 000
700)
3 000)
=
$49
80http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html0
30 November Capital Balance = $(3 900
000) $(3 100
4 100
15 000
29 700
40 800
34 300) = $52 700
31 December Capital Balance = $(3 000
8 050
$(3 000
B.
4 800
1 800
33 900) = $53 850
1 600
39 300
40 600
3 000)
Profit for November = $52 700 - $49 800 = $2 900 Profit for December = $53 850 $52 700 = $1 150
C.

Explaining accounting transactions
MAXINE WALKER
Required:
The
following
schedule
shows
the
effect
of
several
transactions
on
the
accounting equation of Maxine Walker and the balance of each item in the
equation after each transaction. Write a sentence to explain the nature of each
transaction.
1.
Maxine
Walker
invested
$20
000
businhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmless.
office equipment for cash $7 000.
2.
the
Purchased
3. Maxine Walker invested a further $2 000
into the business, OR sold services for cash.

clients for $6 000.
into
4. Performed services and billed
5. Office supplies of $3 000 were bought on credit.
6. $4
000 was received from clients for amounts owed (accounts receivable).
7. Maxine
Walker withdrew $8 000 from the business, or expense paid in cash.
8. $2 000
worth of office supplies were used.
9. Paid accounts payable $3 000 owed to
them.
Recording transactions
MALS MOWER REPAIRS
Required:
A. Prepare a schedule. List the following assets, liabilities and equity as
column headings: Cash at Bank; Supplies; Equipment; Loan Payable; Accounts
Payable; M. Mitchell, Capital.
B.
Show
the
effects
of
each
of
the
transactions
lishttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlted.
on
the
Indicate
accounts
totals
after each transaction and complete the schedule.

C. Prepare an income statement and a statement of changes in equity for the
month ended 31 August 2010, and a balance sheet as at 31 August 2010.
A and B.
Cash at Bank
Assets
Supplies
1 370
1 370
Equipment
=
Liabilities
Accounts
Loan Payable
1 370
1 370
0
1 370
-1 370
0
Equity
Mal
Mitchell,
Capital
Payable
$25 000
25 000 3 000 28 000 1 200 26 800
26 800 770 26 030
26 030 640 25 390
(1) (2)
000
(3)
-1 200
(4)
16 800
(5)
(6)
(7)
(8)
$25 000
- 10 000
16 800
- 770
16 030
-1 370
14 660
14 66http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html0
=
$15 000
15 000 =
15 000 =
15 000 =
15 000 =
15 000 =
15 000 =
15 000 =
$5 000
5 000
- 5 000
5 000
15 000
3 000
18
5 000
- 5 000
5 000
- 5 000
1 370
1 370
640
730

C.

Preparation of income statement and balance sheet
BEAUT BEACH CARAVAN PARK

A. Prepare an income statement for Beaut Beach Caravan Park for the year ended
30
June 2010.
B. Prepare a balance sheet for the business as at 30 June 2010.
C. Explain why you have used a particular valuation for the buildings in the
balance://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlpar
sheet.
A.

B.
* Normally, separate capital accounts are maintained for each partner in the
business, but the question does not say whether they both contributed equally to
the partnership, nor how they were sharing profits between themselves.
C.
Even though the market value of the buildings had risen to $500 000 by 30 June
2010, the valuation placed on the buildings in the balance sheet is their
purchase price. This assumes that the business is a going concern and that the
owners are not going to sell up and close the business down (going concern
assumption). Hence, there is no need to reflect the current selling price in the
balance sheet.
Nevertheless, if the owners wanted to revalue the buildings to $500 000, they
could.
The
revaluation
of
buildings
in
the
accounts
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlof an entity is discussed in

a later chapter.
Effect of transactions on a balance sheet
NAOMIS MANICURE SERVICE

Required
Show the effects of business transactions on a balance sheet by preparing a new
balance sheet for Naomi?s Manicure Service after EACH transaction has occurred.
A.
Capital investment by owner, $350 000
B. Purchase of premises for $180 000 cash
C. Purchase of equipment $60 000 for cash and $20 000 bank loan
D. Manicure services to customers, for $12 000 cash and $2 000 on credit

E. Wages paid to an employee $1 000 in cash
Solutions
Manhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlual
to
accompany Financial Accounting 7e by Hoggett et al
Effects of
transactions on financial statements
Indicate the effect of each of the following transactions upon any or all of the
four financial statements of a business. Apart from indicating the financial
statement(s)
involved,
use
appropriate
phrases
such
as
increase
total
assets, decrease equity, increase income, decrease cash flow to

describe the transaction concerned.
1. Purchase equipment for cash
2. Provide services to a client, with payment to be received within 40 days 3.
Pay a liability
4. Invest additional cash into the business by the owner 5. Collect an account
receivable in cash 6. Pay wages to employees
7. Receive the electricity bill in the mail, to be paid within 30 days 8. Sell a
piece of equipment for cash
9.
Withdraw
cash
by
the
owner
for
private
usage.
10.
Borrow
mhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmloney on a long-term basis

from a bank
1.
2.
3.
4.
5.
6.
7.
8.
In the balance sheet, increase an asset, equipment; decrease an asset, cash.
In
the statement of cash flows, decrease cash flow (from investing activities). In
the balance sheet, increase an asset, receivables; increase equity.
income statement, increase income.
In the
In the statement of changes in equity, increase equity.
In the balance sheet, decrease an asset, cash; decrease a liability.
In
the
statement
of
cash
flows,
decrease
cash
(probably
from
operating
activities). In the balance sheet, increase an asset, cash; increase equity.

In the statement of cash flows, increase cash (from financing activities).
In
the statement of changes in equity, equity is increased.

In the balance sheet, increase an asset, cash; decrease an asset, accounts
receivable.
In
the
statement
of
cash
cashttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlh
flows,
increase
(from
operating
activities). In the balance sheet, decrease an asset, cash; decrease equity.
In
the income statement, increase expenses.

In the statement of cash flows, decrease cash (from operating activities).
In
the statement of changes in equity, decrease equity.

In the balance sheet, decrease equity; increase a liability, accounts payable.
In the income statement, increase expenses.
In the statement of changes in equity, decrease equity.
In the balance sheet, increase an asset, cash; decrease an asset, equipment,
increase equity (if a profit was made on the sale).
In the income statement, increase income (if a profit was made on the sale). In
the statement of cash flows, increase cash (from investing activities).
In the statement of changes in equity, increase equity (if a profit was made on
the sale).
Ihttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmln
decrease equity, decrease an asset, cash.
the
balance
sheet,
In the statement of cash flows, decrease cash (from financing activities). In
the statement of changes in equity, decrease equity.
In the balance sheet, increase an asset, cash; increase a liability, loan
payable.
In
the
statement
of
cash
flows,
increase
cash
(from
financing
activities).
9.
10.
Determination of profit by examining equity changes
RICHARD ALBANY
Required
By analysing the changes in equity each year, calculate the profit (loss) made
by the business for each year ending 30 June, assuming the following events also
occurred:
1. On 1 January, 2010, Richard withdrew $40 000 in cash from the business for
personal use
2.
On
28
August
2010,
Richard
invested
additional
cash
of
$70
000http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html into the business. 3. On

31 July 2011, Richard invested additional cash of $50 000 into the business. 4.
On 28 January 2012, Richard withdrew $30 000 in cash for personal use.
* Assets minus liabilities at the end of each year
SAFETY HIRE
Required:
Prepare an income statement for the month of June and a balance sheet in account
format for Safety Hire at 30 June 2009.
NAOKOS INTERIOR DECORATING
Required:
A. Prepare an income statement for the business for the year ended 30 June 2010
B. Prepare a balance sheet in narrative format as at 30 June 2010
A.
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlB.
Determining missing elements in accounting equation
Required:
Calculate the two missing amounts for each independent case.
Identifying transactions from balance sheet changes

ALLANS CAFE
Required:
Describe the nature of each of the four transactions that took place in June.
1. On 4 June 2010, Allan Hopes invested $75 000 into the business, Allan?s Caf.
2. On 13 June 2010, equipment was purchased by the business for cash, $29 000.
3. On 18 June, 2010, land and a building were purchased for a total of $60 000.
A loan
payable of $40 000 and cash of $20 000 were given in exchange.
4.
On
26
June
2010,
food
supplies
of
$18
000
were
purchased
by
thhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmle business on credit.

DAWSON INDUSTRIES
Required:
A. Prepare an income statement for Dawson Industries for the year ended 31
December
2011.
B. Prepare a balance sheet as at 31 December 2011. C. Prepare a statement of
changes in equity for 2011.
A.
B.
C.
Correction of financial statements

GRANTS SWIMMING SCHOOL
Required: A. Prepare a corrected income statement for the year ended 30 June
2009. B. Prepare a corrected balance sheet in narrative form as at 30 June 2009.
C.
Prepare
statement
of
changes
in
equityhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html for the year ended 30

June 2009.
A.
B.
C.
*Beginning balance of capital is found by working backwards, namely,

$44 600
$11 200 - $30 050.
This assumes that the owner did not make a capital
contribution during the year.

Performance assessment from financial statements

THE MARKETING STORE
Required: A. Prepare an income statement for The Marketing Store for the year
ended 31
December 2010.
B. Prepare a statement of cash flows for The Marketing Store for the year ended
31
December 2010.
C. Can a business operate profitably and still have a net cash outflow for the
year?
Which
do
you
believe
is
better
indicator
of
perforhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlmance
cash flow?
the
entity?s
profit
or
Explain.
A.
B.
C.
Yes.
In accrual accounting, cash flows do differ from income and expenses.
For
example, cash flows from investing and financing activities will affect cash
outflows but are not income and expenses counted in calculating profit.
Most
cash flows from operating activities also result in income or expenses, but in
different time periods.
Many cash flows from investing and financing activities
never result in income or expenses e.g. cash increases from borrowings.
In
terms of profitability, profit is more important in the long run if profits

are not made, the business will fail.
However, liquidity can also cause major
problems and cash flow is also important.

flows
while
trading
at
loss
in
A business can have positive cash
the
short
term,
but
in
the
long
tehttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlrm, profits and positive

cash flows are both important.
Recording transactions and preparing financial statements

SACHIN MEHRA
Required: A. List the 30 June balances for assets, liabilities and equity in
table form as shown
below.
B. Record the effects of each transaction.
Show the total of each column after
recording each transaction.

C. Prepare an income statement, a statement of changes in equity and a statement
of
cash flows for the month ended 31 July 2009, and a balance sheet account format
as at 31 July 2009.
A. and B.
Cash at Bank
Assets
Accounts
Office
$15 000
-8 000
Receivable
Supplies
7 000
7 000
7 000
6 300
13 300
13 300
13 300
://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlr13 300
13 300
Equipment
1 500
1 500
1 500
1 500
375
1 875
1 875
1 875
-900
975
24 000 =
24 000 =
8 100
32 100 =
32 100 =
32 100 =
32 100 =
32 100 =
32 100 =
Liabilities
Accounts
3 500
Loans Payable
- 1800
1 700
1 700
1 700
2 075
375
2 075
Payable $3 500
2 075
2 075
12 000
12 000
5 100
17 100
17 100
17 100
17 100
17 100
17 100
Equity Sachin Mehra, Capital $36 000
36 000
36 000
36 000
6 300 42 300
42 300 -2 925 39 375 -2 000 37 375 -900 36 475

(1)
(2)
(3)
(4)
(5)
(http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html7)
$11 000
8 000
19 000
- 1 800
17 200
-3 000
(8)
14 200
(6)
14 200
14 200
-2 925
11 275
-2 000
9 275
9 275
$1 500
$24 000 = $12 000
C.
SACHIN MEHRA Statement of Cash Flows for the month ended 31 July 2009
CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $8 000
paid to suppliers and employees (1)
(4 725)
Net cash from operating activities
$3 275 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment

cash used in investing activities
Drawings by owner
(2 000)
decrease in cash held

year
Cash
(3 000)
Net
(3 000) CASH FLOWS FROM FINANCING ACTIVITIES
Net cash from financing activities
(1 725) Cash at beginning of year
(2 000) Net
11 000 Cash at end of
(1)
$9 275
Paid
Accounts
800http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
$4 725
Payable
$1
Cash Expenses $2 925 =
Classifying items for financial statements

WILLS MENS WEAR
A. and B. 1.
For the business, this is the initial investment by the owner. In
the balance
sheet of the business, cash increases and the equity of the owner increases.
Store equipment. Shown in the balance sheet as an asset.
2.
3. There is no
building asset for the business here. The building does not belong
to the business.
In the balance sheet, an asset for Prepaid Rent would be
recorded if the rent is paid by the business each month in advance.
4. Men?s
wear items are Inventory to the business. In the balance sheet inventory
is recorded as an asset.
5.
Accounts payable.
Appears in the balance
shehttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlet as a liability.
Prepaid insurance. Shown in the balance sheet as an asset.
6.
7. Drawings. Shown
in the balance sheet as a reduction in equity, against Will?s

capital account.
8. Wages Expense. Does not appear in the balance sheet as a
separate item but

reduces owner?s equity by reducing the net profit.
9. Long-term Loan Payable.
Shown in the balance sheet as a liability, and the

cash received as an asset, Cash.
appear in the balance sheet as a
10. Income or Revenue from Sales. Does not
separate item but increases owner?s equity by increasing net profit.
11. Cash
on hand. Shown in the balance sheet as an asset.

Recording transactions and preparing financial statements
HO MING WEE, SOLICITOR
Required: A. List the 30 June balances for assets, liabilities and equity in
table form. B. Rhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlecord the
effects of each transaction.
Show the total of each column after
recording each transaction as illustrated in the text.

C. Prepare an income statement and a statement of changes in equity for the
month and
a balance sheet in account format as at 31 July 2010.
A. and B.
Assets
Cash at
000
Accounts
-2 360
11 540
5 640
Office
7 400
Office Bank
13 040
Receivable
-1 500
11 540
Supplies
Equipment $8
11 540
-4 650
6 890
-7 400
5 850
6 890
$13 250
13 250
5 850
5 820
11 670
11 670
11 670
- 11 670
6 750
4 920
4 920
$1 000
1 000
1 000
1 000
1 000
340
1 340
1 340
720
620
620
620
= Liabilities
Ahttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlccounts
Payable
$2 425
65
- 2 360
65
65
65
340
405
405
405
405
405
Equity Ho Ming Wee, Capital
30 950
30 950
30 950 5 820 36 770
36 770 4 650 32 120 720 31 400
31 400 600 30 800
. (1) (2) (3)
(4)
(5)
$19 875 =
19 875 =
19 875 = 6 200
26 075 =
26 075 =
(6)
(7)
Loan
Payable
26 075 =
26 075 =
26 075 =
26 075 =
26 075 =
$8 750
$30 950
8 750
8 750
4 700
13 450
13 450
13 450
- 13 450
- 13 450
13 450
- 13 450
(8)
6 750 -
(9)
13 640
-600
13 040
C.
Chapter
2:
Finahttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlncial
statements for decision making

Identifying transactions from balance sheet changes
N. KLEIN PHYSIOTHERAPIST
Required:
Write an appropriate statement describing each of the five transactions that
occurred during July 2010.
the business.
000.
1. On 1 July, 2010, N. Klein invested $85 000 in
2. On, 8 July, the business purchased land and building for $95
This was financed
with a cash payment of $35 000 and a loan payable of $60 000.
3. On 15 July, the business bought office supplies on credit, $3 500.
July, the business repaid $5 000 on the loan payable.
4. On 22
5. On 31 July, the
proprietor, N. Klein, withdrew $4 000 cash for her own use or paid
expenses of $4 000.
Recording
transactions
and
preparing
financial
statements
Shttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlHOE REPAIRS
DANS
Required:
A. Prepare a schedule. List the following assets, liabilities and equity as
column headings:
Cash at Bank; Supplies; Equipment; Loan Payable; Accounts Payable; D. O?Hare,
Capital. B. Show the effects of each of the transactions on the accounts listed.
Indicate totals after
each transaction and complete the schedule. C. Prepare an income statement, a
statement of cash flows and a statement of changes in
equity for the month ended 31 August 2010.
D. Prepare a balance sheet as at 31
August 2010.
A. and B.
(1) (2) (3)
Cash at Bank
-1 200
15 800 -
(4)
(5)
(6)
$24 000
(7)
(8)
-10 000
14 000
3 000
17 000
15 800
750
15 050 -
1 700
13 350
13 350
Assets
Supplies
700
700
1 700 280
1
1 420
700
=
Equipment
=
16 000
16 000
16 000
16 000
16 000
16 000
16 000
16 000
= =
Liabilities Loan
000
payable
6 000
6 000
6 000
-
6 000
Accounts Payable
0
1 700
1 700
-
1 700 1 700 0
-
6 000
6 000
6 000
Equity D. O?Hare,
Capital $24 000
24 000
3 000
25 800
-750
25 050
280
27 000
1 200
25 800
25 050
24 770

C.
* Cash paid to suppliers = $1 200
$500
$250
$1 700

D.

Correcting errors and preparing financial statements BAKERS BREAD SHOP
Required:
A. Assuming that the amounts above are correct, prepare a corrected balance
sheet in narrative form.
B. Determine the amount of profit (loss) made by the business during the period
of its first few weeks of existence, assuming that the owner had invested an
additional $20 000 into the business just before the amounts were calculated by
the record-keeper.
C. Prepare a statement of changes in equity for the period.
A.
* Capital contribution of $150 000, less drawings of $36 000.

B. and C.
Profit calculation determined in the statement of changes in equity, as
belhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlow.

Analysing financial statement elements
JK TUTORING
Required: A. Without preparing formal financial statements, calculate the
following:
1. profit/loss for the year
2. total assets at the end of the year 3. total liabilities at the end of the
year
4. James Kennett?s capital balance at the end of the year 5. net cash
inflow/outflow for the year.
B. If James had withdrawn $3 000 in cash during the year, what effect would this
have
(increase, decrease, no change) on the figures you calculated in requirement A.
A. 1. Profit = Income Expenses
Total Income = Tutoring Income $9 750.
Expenses = Office supplies expense $840

vehicle expense $330
Profit
Telephone expense $255
Motor
Advertising expense $510 = $1 935
$9
750
$1
$7http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html 815
Office supplies $1 500
$8 445
Total
Accounts receivable $1 500
935
2. Total Assets =
Cash at bank
Computer equipment $8 250 = $19 695
Total Assets = $19 695
3. Total liabilities = Bank loan $7 500
payable $1 080 = $8 580

Opening capital $3 300
Total Liabilities = $8 580
4. Closing Capital =
Additional contributions $0
Profit $7 815 Drawings $0 = $11 115
Closing Capital = $11 115
Inflow/(Outflow) = Cash flow from operations

activities
Accounts
5. Net Cash
Cash flow from investing
Cash flow from financing activities
Initial contribution
Cash flow from operations = Tutoring receipts $8 250 Payment to suppliers
$2355
= $5 895
Cash flow from investing activities = Purchase of equipment ($8 250)
Cash flow
from financing activities = Bank loan received $9 000 Bank loan

repayment $1 500 = $7 500
Net
Cash
Inflow/(Outflow)
fromhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
Cash
operations
flow
$5
895
Cash flow from

investing activities ($8 250)
Cash flow from financing operations $7 500
Initial contribution $3 300 = $8 445

Net Cash Inflow/(Outflow) = $8 445
B. 1.
2.
3.
4.
5.
No change.
Profit = $9 750 - $1 935 = $7 815
Change.
Total Assets = Office supplies $1 500
bank $5 445
Accounts receivable $1 500
Cash at
Computer equipment $8 250 = $16 695 Total Assets = $16 695
No change.
Total liabilities = Bank loan $7 500
Accounts payable $1 080 = $8 580 Total
Liabilities = $8 580
Change.
Closing capital = Opening capital $3 300
Additional contributions $0
Net
Profit $7 815 Drawings $3 000 = $8 115 Closing Capital = $8 115.

Change.
Net
Cash
Inflow/(Outflow)
Cash
operationshttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
investing
activities
Cash
flow
from
financing
flow
from
Cash flow from
activities
Initial
contribution
Cash flow from operations = Tutoring receipts $8 250 Payments to suppliers
$2 355 = $5 895.
Cash flow from investing activities = Purchase of equipment ($8 250)
Cash flow from financing activities = Bank loan received $9 000 Bank loan
repayment $1 500 Drawings $3 000 = $4 500
Net Cash Inflow/(Outflow) = Cash flow from operations $5 895
investing activities ($8 250)
Cash flow from
Cash flow from financing activities $4 500
Initial contribution $3 300 = $5 445

Net Cash Inflow/(Outflow) = $5 445
ALICIAS PET GROOMING SERVICE
Required: A. Prepare an income statement for Alicia?s Pet Grooming Service for
the three-month
period from 1 November http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html2010
to 31 January 2011
B. Prepare a balance sheet as at 31 January 2011 and a statement of changes in
equity
for the three-month period.
C. What other information would you need to determine how well Alicia had done
during the three-month period?
A.
C. Several additional items would be useful to determine how well Alicia had
done in the
three-month period: 1. The useful life of the grooming equipment so that an
expense could be
determined for depreciation
2. The amount of interest that Alicia could have earned on the $5 000 if she had
invested it in an alternative manner
3. The amount Alicia could have earned during the three-month period if a job
were
available
4.
The
current
value
of
the
assets
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlof the business as a whole

on 31 January 2011.
Schutz Building Services financial statements
SCHUTZ BUILDING SERVICES
Required A.
Using the information, provide an income statement and a balance
sheet in narrative
form for Schutz Building Services for the current period.
B. How would the financial statements you produce help the supplier of building
materials decide whether or not to trade with Johan?
What parts of the
financial statements would be positive indicators that Schutz Building Services

would pay for supplies on time and what items may cause some concern for the
supplier?
A.
B.
The total equity of $168 800 compared to total liabilities of $33 500 is
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmla good indication of the net
position of the business, i.e. Net assets = Total assets Total liabilities =
$168 800.
Current assets of $102 300 well exceed the liabilities of $33 500.
The only real concern could be with the level of accounts receivable that may
suggest that Johan is not very diligent about collecting amounts from his
customers.
The supplier would need more information on the entity?s ability to pay for
materials in addition to the total net assets.
A statement of cash flows would provide details on cash flows from operations,
cash flows from investing activities and cash flows from financing activities.
This would assist the supplier in assessing the firm?s ability to pay for
materials.

Sporting glory the great intangible
Required:
Discuss
whether
rugby
players
are
?valuable
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlassets? of an organisation,
or an expense.
Use the definitions of assets and expenses to show which of the
elements of the financial statements human resources should be classified

under.
?Human resources? refers to the people employed by a business and includes their
talent, knowledge, intelligence, experience, understanding of the organisation?s
culture and its history.
Assets are defined as resources controlled by an
entity as a result of past events and from which future economic benefits are
expected to flow to the entity.
Human resources such as rugby players could
certainly be said to provide future economic benefits through the future gate
receipts obtained by the organisation.
The employment and training of such
players would also constitute a valid past event.
However, are rugby players
controlled by the entity, as a result of some contract? Are the players able
to
leave
whenever
they
(unleshttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmls
they
like
are
slaves)?
Hence, human resources, if not controlled, do not meet the definition of an

asset.
Further, even if rugby players do meet the definition of an asset, it
would be difficult to measure the cost or other value of the players, and
therefore to record them as assets.
An expense is a decrease in equity (apart from drawings) representing decreases
in economic benefits in the form of an outflow or depletion of assets or the
incurrence of liabilities in the form of reductions in assets or increases in
liabilities.
Expenditure on salaries and wages fall within this definition as
cash or other benefits have had to be paid for the work of the players.
Expenditure on human resources therefore is therefore usually classified as an
expense.
Preparing balance sheets
Required:
In groups of thhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlree or four,
consider the following people and their situations:
? A student who has just completed secondary school and started at University
and is
living at home with parents ? An adult who works full time.
For each situation, prepare a list of assets the person would typically own, and
estimate the cost of each asset in dollars.
Then prepare a list of liabilities
and estimate the cost of each liability in dollars.
Using the accounting
equation, calculate the equity of each of the two people and draw up a statement
of financial position for each.
Display them on overhead transparencies and compare them with those developed by
the other groups in your class.
Below are examples of the types of assets and liabilities that students or
adults might typically have. The amounts for each will vary significantly
depending on the city they live in, socio-economic group etc.
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlof
the
exercise
The idea
is
to
demonstrate the accounting equation to students and to highlight the fact that
once assets, liabilities and equity are defined the way they are by accountants
it is not possible for the accounting equation not to hold, even for an
individual.
Student at University
Typical Assets:
? Text books ? Clothes
? CDs/DVDs/iPods ? Mobile phone ? Guitar ? Computer ? Used car
Typical Liabilities
? Loan from parents ? Mobile phone Account
? Higher Education Contribution Scheme (HECS) debt ? Credit card
? Loan from a financial institution
Student?s equity = typical assets typical liabilities

Adult working full time
Typical Assets:
? Clothing
? Furniture, including electrical goods ? Car ? House ? Shares
?
Superannuationhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.html
Typical Liabilities
? HECS debt
? Credit card debts
? Loan from financial institution e.g. bank ? Mortgage
Adult equity = typical assets typical liabilities
scheme
Bribing government officials
Required: A. In the article, who are the stakeholders in this situation? B. What
are the ethical issues (if any) involved? C. If it is normal business practice
to bribe officials in a country that you are dealing
with but not in your country, do you believe it is ethical to do so?
Are you
aware of any legal ramifications in your own country for bribing someone in
another country?
D. Do you believe one country has the right to impose its values on another?
Consider
how you would feel if another country tried to impose its values on your country
and consider if thttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlhere are
overriding human rights issues such as slavery.
A. The stakeholders in this situation are Matthew Sim who wrote the book the
article is
based upon, Singapore?s businesspeople to whom the book is addressed, the
government of Singapore and the people and government of Myanmar (Burma).
B. The ethical issues involved are:
? Singapore has strict laws governing corruption but has allowed the publication
of this book
? ? ? ? ?
C.
The book explains how to bribe government officials, money-launder, procure
prostitutes and avoid prosecution in fatal traffic accidents.
It suggests either paying off the relatives or paying someone else to take the
blame for a fatal accident but never to try to argue the case in court/ It
advises business people to go along with official corruption. It details ways to
obtain paid sex
It
provides
advice
on
how
to
bribhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmle effectively.
The answer to this will depend on the student?s own ethical stance. In Australia
it is illegal to bribe someone either in Australia or when an Australian company
does business in another country. If an Australian or Australian company is
caught bribing anywhere in the world then they may be liable for prosecution
under Australian laws. This question attempts to get students to consider the
other side of the ethical argument. Just because a particular action, such as
bribery, may be considered unethical in Australia, do we have the right to
impose our beliefs on another country or culture or should we take the line
when in Rome, do as the Romans do? Encourage students to think about how
they would feel if another country considered certain activities that we believe
are acceptable to be unethical (e.g. women showing their heads, men and women
swimming
together,
unmarried
couples
living
together).
Does
another
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlcountry have the right to

tell us what is or is not ethical? Therefore, do we have the right to impose our
ethical beliefs on another country?
D.

David Jones Limited
Required: 1. Does David Jones Limited use historical cost accounting or some
other basis? 2. What were the total assets at the end of the financial year? 3.
What were the total liabilities at the end of the financial year? 4. What was
the total amount of equity? 5. State the accounting equation for David Jones
Limited in dollar figures at reporting
date for the end and beginning of the last financial year.
6. Did the current assets increase or decrease over the year? By how much? 7.
Did the current liabilities increase or decrease over the year? By how much? 8.
Did non-current assets increase or decrease over the year? By how much? 9. What
changehttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmls have occurred in the
company?s non-current liabilities over the year?
Explain these changes.
10. Does the change in total assets equal the change in total liabilities plus
the change in
total equity? Explain.
The solution below is based on the David Jones Limited Annual Report for 2008,
available on the David Jones website: .
1.
2.
3.
4.
5.
The first note to the financial statements indicates that David Jones Limited
uses the historical cost basis of accounting. However, there are exceptions in
the case of derivative financial instruments, where fair values are used.
See
Note 1(b) p. 64. From the balance sheet (statement of financial position), total
consolidated assets of the group at the end of the 2008 financial year were $1
529 645 000.
Total liabilities of the consolidated group at the end of the 2008 financial
year were $909 855 000.
Total
http://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlequity
of
the
consolidated group at the end of the 2008 financial year amounted to $619 790
000.
Accounting equation: A L = E
In 2008, consolidated equity calculated as: $1 529 645 000 -- $909 855 000 =
$619 790 000
In 2007, consolidated equity calculated as: $1 634 643 000 -- $1 121 347 000 =
$513 296 000 Current assets of the consolidated group decreased from $858 359
000 in 2007 to $747 305 000 in 2008, a decrease of $111 054 000.
Current liabilities of the consolidated group decreased from $730 833 000 in
2007 to $603 533 000 in 2008, a decrease of $127 300 000.
Non-current assets of the consolidated group increased slightly from $776 284
000 in 2007 to $782 340 000.
6.
7.
This represents an increase of $6 056 000.
8.
9.
Non-current
liabilities
of
the
group
also
dechttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlreased from $$390 514 000

in 2007 to $306 322 000 in 2008, a decrease of $84 192 000.
To see why these
liabilities have decreased, the major cause as shown in the balance sheet is a
reduction of interest-bearing liabilities. This is discussed further in Note 17,
where there is disclosed a decrease in an unsecured bank bridging loan for $350
000 000, which existed as a result of the company changing its long-term leasing
arrangements.
This loan has been repaid and a new unsecured bank loan for $270
000 000 has been established. See note 17 for further details.
The decrease in total assets ($1 634 643 000 - $1 529 645 000 = $104 998 000)
minus the decrease in total liabilities ($1 121 347 000 - $909 855 000 = $211
492 000) or $(104 998 000) $(211 492 000) = $106 494 000 equals the change in
total equity calculated as $619 790 000 - 513 296 000 = $106 494 000.
This must
be
We
are
taking
the
so
because
of
the
accounting
equation.
effehttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlctively
difference in the financial position of the entity at two points in time,

expressed
in
terms
of
either
the
net
assets
(Total
Assets
less
Total
Liabilities), or the equity of the entity.

10.
word

ch02 SM FA7e-1 (Doc - Wendoc.com)

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

ch02 SM FA7e-1 (Doc - Wendoc.com)

Enviado por

Direitos autorais:

Formatos disponíveis

http://doc.wendoc.

financial statement &rpt exercise solutions

John Hoggett Lew Edwards John Medlin

John Wiley & Sons Australia, Ltd

DISCUSSION QUESTIONS SOLUTIONS

Income statement and analysis

Determining profit from equity balances 2.14

Assumptions and characteristics of

Preparation of income statement and balance sheet 2.25

Operating, investing and financing activities 2.15

Determination of profit by examining

equity changes 2.32

Preparing financial statements

Preparing financial statements

transactions from balance sheet changes 2.36

Performance assessment from financial statements 2.41

Correction of financial statements

Recording transactions and preparing financial

Recording transactions and preparing financial

Identifying transactions from balance sheet changes 2.49

Recording transactions and preparing financial

Correcting errors and preparing financial statements 2.53

Analysing financial statement elements 2.55

Preparation of financial statements

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

CASE STUDY SOLUTIONS

Bribing government officials

Schutz Building Services financial

Preparing balance sheets

David Jones Limited

2.59 2.61 2.62 2.64 2.65

statements for decision making

What factors need to be considered in selecting an

appropriate structure for Darren?s lawn-mowing business?

This business structure is suitable for small operations with

small staff and turnover.

The sole trader has sole responsibility and control

responsibilities associated with running a business.

The partnership is treated

Therefore if the business activities prove to be unsuccessful,

For this reason, the

partnership structure is usually used where there is a low element of risk to

professionals including accountants and lawyers.

The owners of the company are known as shareholders.

advantage of this business structure is that, as a separate legal entity, the

In the event the business is

The investment in the company by its shareholders is

appropriate for entities requiring larger capital contribution, which have a

disadvantages include higher set up and ongoing

Is performance able to be expressed totally in financial

Key indicators for

Performance for not-for-profit entities may be the

achievement of a social or moral goal rather than maximisation of shareholders?

He said: ?Our team is like any organisation.

We must have goals,

anhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmld we must make use of all

Do you agree with the coach? Explain your position. ?

terhttp://doc.wendoc.com/b4de0fe4194d5cc5da8fde28f.htmlms related in any way? If

This means that when transactions are

examined, the economic reality of the transactions is reported as opposed to

Therefore if the business has exclusive use of an asset for

In a leasing transaction, legal title to the asset does not

the asset for