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Sample/practice exam 1 April 2016, questions and answers

Business Reporting and Analysis (Australian National University)

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COPY OF:

First Semester Mid-semester Examination (2016)

BUSINESS REPORTING & ANALYSIS

(BUSN1001)

Writing period : 1 hour 30 minutes duration


Study period : 15 minutes duration

Permitted materials: The examination is closed book. Non-programmable calculators may be


used. Electronic dictionaries are not allowed. English/foreign language dictionaries for
which permission has been granted may be used.

INSTRUCTIONS:

This examination paper comprises 9 pages including this cover page.


Total mark is 100 marks. Total number of questions: Twenty (20) multiple choice
questions in Section A [20 x 3 marks = 60 marks], one (1) problem in Section B [30
marks], one (1) problem in Section C [10 marks].
Answer ALL Section A Multiple Choice Questions on the multiple choice answer
sheet provided.
On the Multiple Choice Answer Sheet, you are required to
- write your surname, other names (i.e. given names, etc), and course code
BUSN1001 in the boxes provided;
- write your student ID number in the boxes provided and then mark the oval
corresponding to the number in each column;
- use a 2B pencil to mark the ovals.
On the Script Book, you are required to
- write your student ID number in the boxes provided;
- Answer the questions in Section B and C on the provided script book(s).
This examination paper must be handed in upon completion.
No additional guidance will be provided. Please write any necessary assumptions
in the Script Book provided and proceed with the examination.

Page 1 of 9 - BUSINESS REPORTING & ANALYSIS (BUSN1001)


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SECTION A: Multiple Choice Questions (20 X 3 MARKS = 60 MARKS)

You are required to answer all the questions in this section. Identify the best response to the
questions and shade the corresponding letter on the multiple choice answer sheet provided.

Q1. During the year a new service company made cash sales of $ 300,000 and made credit
sales of $ 800,000 ($ 700,000 of which has been collected by year-end). The company
paid out a total of $ 600,000 for expenses incurred during the year. At the end of the year
the company still owes $ 100,000 for expenses incurred. What was the accrual profit for
the year?

A. $ 500,000
B. $ 400,000
C. $ 300,000
D. $ 600,000
E. None of the above

Use the information given below to answer the following 2 questions.


Hannah Arendt runs a company that commenced business on 1 January 2015. Below are some
of the balances in the 30 June 2015 trial balance. All amounts are in dollars.

$
Cash 4,000
Issued capital 12,000
Trade and other receivables 6,000
Accounts payable 4,000
Provisions 14,000
Plant and equipment 20,000
Inventories 4,000
Cost of sales 3,000
Finance costs 5,000
Deferred income 1,000
Revenues 10,000

Q2. What is the balance for total assets on the balance sheet?

A. $ 34,000
B. $ 28,000
C. $ 27,000
D. $ 48,000
E. None of the above.

Q3. What is the balance for total liabilities on the balance sheet?

A. $ 19,000
B. $ 4,000
C. $ 18,000
D. $ 24,000
E. None of the above.

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Q4. On 30 June 2016, Virginia Woolf Ltd, which uses accrual accounting, estimates that it
will incur warranty costs of $ 135,000 in the next financial year on products sold during
the year just ended. On 7 October 2016, the manufacturer pays $21 000 under the
warranty. What is the journal entry made by Virginia Woolf Ltd on 30 June 2016?

A. Dr Warranty liability Cr Cash


B. Dr Warranty liability Cr Warranty expense
C. Dr Warranty expense Cr Warranty liability
D. Dr Warranty expense Cr Cash
E. Ignore the transaction because the warranty payments will be made in 2016.

Q5. On 30 June 2016, Virginia Woolf Ltd, which uses accrual accounting, estimates that it
will incur warranty costs of $ 135,000 in the next financial year on products sold during
the year just ended. On 7 October 2016, the manufacturer pays $21 000 under the
warranty. What journal entry will be required by Virginia Woolf Ltd on 7 October
2016?

A. Dr Warranty expense Cr Warranty liability


B. Dr Warranty liability Cr Warranty expense
C. Dr Warranty liability Cr Cash
D. Dr Cash Cr Warranty liability
E. Dr Warranty expense Cr Cash

Q6. A basic accounting cycle could involve the following steps:


1. Source Documents
2. Prepare Journal Entries
3. Post to Ledgers
4.
5. Prepare adjusting journal entries
6. Closing Journal Entries
7. Post-closing Trial Balance
8. Prepare Financial Statements

Step 4 would best be described as:

A. Prepare adjusting journal entries


B. Prepare trial balance
C. Prepare draft financial statements
D. Prepare a pre-closing trial balance
E. Record last transactions

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Q7. Shareholders invest $ 100,000 in a business. Inventory of $ 80,000 was bought on credit and
damaged inventory that was purchased on credit for $ 10,000 was returned. Equipment
costing $ 200,000 was purchased, which was financed by a loan from the seller, repayable in
five years. The business paid $ 40,000 to accounts payable. Total assets increased by:

A. $ 100,000.
B. $ 170,000.
C. $ 300,000.
D. $ 330,000.
E. None of the above.

Q8. The balance in Lindgren Ltds provision for doubtful debts account at 30 June 2015 was
$1,250. As a result of a comprehensive analysis of the customers accounts, it was determined
that the new customers payment record had not been as good as in the past. It was therefore
determined that the 30 June 2015 balance for provision for doubtful debts should be increased
to $3,000. Show the adjustment required.

A. Increase bad debt expense $ 1,750; Increase Allowance for doubtful debts $ 1,750.
B. Increase bad debt expense $ 1,750; Decrease Accounts receivable $ 1,750.
C. Increase bad debt expense $ 3,000; Decrease Cash $ 3,000.
D. Increase bad debt expense $ 3,000; Increase Allowance for doubtful debts $ 3,000.
E. None of the above.

Q9. A business pays wages for a five day work week. The business pays wages of $ 50,000 on a
Thursday for five days work completed during the previous week (that ended on the previous
Friday). The adjusting entry necessary at the end of a financial period that ends on a
Wednesday is:

A. Decrease Wages Payable $ 30,000; Decrease Cash $ 30,000.


B. Increase Wages Expense $ 80,000; Increase Accrued wages $ 80,000.
C. Increase Wages Expense $ 30,000; Increase Accrued wages $ 30,000.
D. Decrease Wages Expense $ 30,000; Decrease Cash $ 30,000.
E. None of the above.

Q10. Enid Blyton Foods Ltd. had a balance of $ 100,000 in shareholders equity at 30 June 2014.
During the year ended 30 June 2015, the company recorded a net profit of $ 50,000;
distributed dividends of $ 30,000; and borrowed $10,000. What was the shareholders equity
at 30 June 2015?

A $ 100,000
B $ 180,000
C $ 220,000
D $ 110,000
E None of the above.

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Q11. A company buys short-term investments. The investments would appear on the balance sheet
under the heading of:

A. Assets.
B. Liabilities.
C. Retained profits.
D. Shareholders equity.
E. None of the above.

Q12. Judith Butler Ltd acquired short-term investments for $ 100,000 on 31 March, 2016. By 30
June 2016 (balance sheet date), the market value had slipped to $ 85,000. Judith Butler Ltd
uses the lower of cost or net realisable value rule.
How would the reduction in market value of $ 15,000 be recorded in the accounts for year
ended 30 June 2016 so as not to overstate the value reported?

A. As an item in other comprehensive income.


B. As a charge against retained profits.
C. As a reduction in share capital.
D. As an expense.
E. The transaction would not be recorded.

Q13. Which of the following is not a liability?

A. Provision for employee entitlements.


B. Accounts payable.
C. Provision for warranty costs.
D. Accrued expenses.
E. Allowance for doubtful debts.

Q14. A companys assets are differentiated from the managers assets. What assumption
or concept best describes this accounting approach?

A. Monetary unit
B. Accounting entity
C. Reliability
D. Faithful representation
E. Going concern

Q15. Atwood Ltd had repairs to their equipment in December 2015. The subcontractors have not
sent their invoice by the end of the year but when they do it will be payable by 30 January,
2016. The appropriate December 30, 2015 year-end adjustment is:

A. Increase Repair expenses; Increase Accrued expenses


B. Increase Accrued expenses; Increase Equipment
C. Decrease Accrued expenses; Increase Repair expense
D. No adjustment is required.

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Q16. Agatha Christie Ltd has a $ 200,000 balance in its unearned revenue account for services to
be delivered in future months. Where would this account appear in the financial statements:

A. Revenue in the income statement.


B. Current asset in the balance sheet.
C. Current liability in the balance sheet.
D. Shareholders equity.
E. None of the above is correct.

Q17. Agnelli Ltd has the following balances on 12 June: Accounts receivable $ 56,345 and
Allowance for doubtful debts $ 2,145. If an account for $ 1,000 is written off on 27 June as
uncollectible, what is the estimated net realizable value of accounts receivable that would be
shown on the balance sheet after the write-off?

A. $ 55,345.
B. $ 54,200.
C. $ 53,200.
D. $ 56,345.
E. None of the above.

Q18. Sada Abe Ltd paid a 12 month insurance premium for $ 48,000 on 1 June 2015, at the end of
the fiscal year on 30 June 2015, the accounts will show:

A. $ 44,000 expense in the income statement.


B. $ 48,000 asset in the balance sheet.
C. A prepayment of $ 44,000 in the balance sheet and insurance expense of $ 44,000 in the
income statement.
D. A prepayment of $ 44,000 in the balance sheet and insurance expense of $ 4,000 in the
income statement.
E. None of the above.

Q19. The best description of what the current ratio indicates is:

A. The value of current cash available to pay current debts as they fall due.
B. The value of current funds available to pay current obligations as they fall due.
C. An entitys ability to satisfy current obligations without selling inventory.
D. An entitys ability to satisfy its obligations.
E. An entitys ability to satisfy its obligations in the short term.

Q20. If a company manufactures and sells large metal butterflies, then the metal raw material used
to make the butterflies will be expensed in the accounting period in which:

A. The supplies of metal are ordered.


B. The supplies of metal were received from the supplier.
C. The supplies of metal were consumed in manufacturing the metal butterflies.
D. When the final product, the metal butterflies, are sold.
E. When the customer pays for the order.

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SECTION B. 30 MARKS

There is one problem in this section. Answer the problem in the script book provided.

Eric Carle runs Caterpillar Fashions Pty Ltd. The company buys and sells clothing with
caterpillar motifs. Its Balance Sheet at 30 June 2016 included the following:

Account: $
Share capital 300,000
Land (at cost) 100,000
Accrual employee salaries 5,000
Retained earnings 62,000
Cash 10,000
Inventory 150,000
Equipment 200,000
Accounts payable 105,000
Prepaid rent 2,000
Accumulated depreciation 190,000
Accounts receivable 200,000

During the month of July the following transactions occurred:

1. Credit Sales for the month were $ 690,000. The Cost of Goods Sold of these
sales amounted to $ 400,000.
2. Purchase of inventory on credit amounted to $ 415,000.
3. Creditors were paid $ 50,000.
4. Paid rent for two months in advance amounting to $ 4,000.
5. Employee salaries paid amounted to $ 65,000. This includes payment of
$5,000 for accrued salaries recognised last financial year.

At the end of July the following additional information has been discovered regarding
adjustments that need to be recorded:

6. Land was revalued to its fair value of $1.0 million.


7. The equipment is depreciated on a monthly basis using the straight- line
method assuming a five year useful life with no residual value.
8. A review of inventory identified inventory costing $ 10,000 that is obsolete
and this inventory is expected to be sold at a discount for $ 4,000.

Assume Caterpillar Fashions Pty Ltds taxable profit is equal to accounting profit before tax.
Assume that the income tax rate for the company is 20% of taxable profit payable in the
following month.

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Required:

(a) Complete the necessary journal entries including all end of period
adjustments. Please ensure that journals are neatly prepared and numbered
using the transaction numbers above. (12 marks)

(b) Post the journals to ledger accounts, or a tidy worksheet, to summarise the
changes in account balances. (4 marks)

(c) Prepare a statement of comprehensive income in good form for Caterpillar


Fashion Ltd for the month of July. (10 marks)

(d) Prepare a brief comment (one paragraph) for your manager explaining the
financial performance of Caterpillar Fashions Pty Ltd for July. (4 marks)

END OF SECTION B

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SECTION C. 10 MARKS

There are three questions in this section. Answer the questions in the script book
provided. Neatly written sentences are required to answer each question.

Required:

(a) Define a liability what are the essential characteristics of a liability? (3 marks)

(b) Enron declared bankruptcy in 2001. The loss in market value was in the order of US$
80 billion. One of their frauds was to overstate income by intentionally understating
liabilities and concealing debt.

If a company deliberately understates its liabilities which fundamental characteristic


of the AASB framework for the preparation and presentation of financial statements is
being violated? (One sentence, 3 marks)

(c) The Australian Securities and Investment Commission (ASIC) successfully sued the
directors of Centro Properties Ltd because the financial reports contained material
misstatements including that approximately $ 1.5 billion of interest bearing liabilities
were wrongly classified as non-current liabilities rather than current liabilities.

Explain the error in the Centro financial reports and the characteristics of high quality
accounting information that were not met when the liabilities were misclassified. (One
paragraph, 4 marks)

END OF SECTION C

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SOLUTION NOTES:

PART A 20 questions x 3 marks = 60

Q1 B 400,000 = 300 + 800 600 100 = 400

Q2 A 34,000 4,000 + 6,000 + 20,000 + 4,000 = 34,000


Q3 A 19,000 4,000+14,000+1,000 = 19,000
Q4 C Dr Warranty expense Cr Warranty liability
Q5 C Dr Warranty liability Cr Cash
Q6 B Prepare a trial balance

Q7 D 330,000
Q8 A Increase bad debt expense $ 1,750; Increase Allowance for doubtful debts $ 1,750.
Q9 B Month ends Wednesday so missing most recent pay for 5 days and Mon-Wednesday 3 days
so need to accrue 8 days Monday to Friday to Wednesday 50,000/ 5 = 10,000 per day x 8 =
80,000
Q10 E None of the above 100,000 + 50,000 30,000 = 120,000

Q11 A assets
Q12 D expense Difficult. Lower of cost 100,000 and net realizable value of 85,000 (less cost of
selling), a $15,000 loss in value. Accounting is conservative and the loss in value must be
recognised. Similar to inventory write-down you need to expense the loss in value and also
reduce the net realized value of the short-term investment shown on the balance sheet.

Q13 E Allowance for doubtful debts is a contra asset


Q14 B accounting entity
Q15 A Increase Repair expenses; Increase Accrued expenses

Q16 C Current liability - unearned revenue is a current liability


Q17 B 54,200 Difficult. Net realizable value is the gross amount of accounts receivable less the
allowance for doubtful debts as per mention of NRV and Woolworths example. Write off of
an account is needed: reduce receivable by 1,000, reduce allowance by 1,000; NRV of ARec
= (56,345 1,000) (2,145 1,000) = 55,345 1,145 = 54,200

Q18 D 48,000 for year is prepaid by 11 months, so 48,000 x 11/12 =44,000 is prepaid asset, 4,000
is expense
Q19 E Current ratio indicates an entitys ability to satisfy its obligations in the short term.

Q20 D When the final product, the metal butterflies are sold. Difficult. Recognise expenses for cost of
goods sold in the accounting period in which the sale occurs page 58. (The metal is first recorded in raw
materials inventory, then in work-in-process inventory during manufacturing, then in inventory when the
goods are ready for sale, but is not recognised as an expense until debited to Cost of Goods Sold, credit
Inventory when the butterflies are sold.)

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SECTION B. 30 MARKS

Account: $
Share capital 300,000 SHE
Land (at cost) 100,000 Asset
Accrual employee salaries 5,000 Liability
Retained earnings 62,000 SHE
Cash 10,000 Asset
Inventory 150,000 Asset
Equipment 200,000 Asset
Accounts payable 105,000 Liability
Prepaid rent 2,000 Asset
Accumulated depreciation 190,000 Contra-asset
Accounts receivable 200,000 Asset

Journal entries to record the transactions:


1a.
Dr Accounts receivable 690,000
Cr Sales 690,000
(record credit sales)
1b.
Dr Cost of Goods Sold 400,000
Cr Inventory 400,000
(record cost of goods sold)

2.
Dr Inventory 415,000
Cr Accounts payable 415,000
(record purchase of inventory)

3.
Dr Accounts Payable 50,000
Cr Cash 50,000
(record payment of creditors)

4.
Dr Prepaid Rent 4,000
Cr Cash 4,000
(record prepayment of rent also see adjustment below)

5.
Dr Salaries Expense 60,000
Dr Accruals salaries 5,000
Cr Cash 65,000
(paid salaries some accrued as expense in previous years)

6.

Dr Land 900,000
CR Revaluation surplus 900,000
(revalued land difficult, e.g. see textbook page 401, tutorial 5. We just wanted an item to go on
under comprehensive income.)

7.
Dr Depreciation 3,333

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Cr Accumulated depreciation 3,333


(end of period adjustment for one month depreciation) (200,000 / 60 months= 3,333)

8.
Dr Inventory write-down expense (or Obsolete inventory or Cost of sales) 6,000
Cr Inventory 6,000
(Obsolete inventory need to write-down inventory to net realizable value to ensure that inventory is not
overstated on the balance sheet. An example mentioned in a lecture. So need to reduce inventory and increase
expenses. Inventory cost 10,000 but now the NRV is 4,000 so the write-down needed is 6,000. Some flexibility
on the name used for the expense.)

A1.
Dr Rent Expense 2,000
CR Prepaid rent 2,000
(if recorded rent as above then need end of period adjustment)
A2.
Dr Tax 43,733
CR Tax Payable 43,733
(record the tax at the end of the period)

(b) Post the journals to ledger accounts, or a tidy worksheet, to summarise the changes in
account balances. (4 marks)

Either T accounts or worksheet approach is acceptable.

Student gets 4 marks if there is a reasonable audit trail from journals to ending
account balances.

Student gets 2 marks if attempt at accounts but full of errors.

No journals - IF direct to income statement or leaves out all balance sheet accounts
then 0/4.

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Worksheet OR T accounts
Cash Inventory Accounts Prepaid Land EquipmentAccumulated Accounts Accruals Tax Share Reserves Retained Income
Receivable Rent Depreciation Payable Payable Capital Earnings
Balances10,000 150,000 200,000 2,000 100,000 200,000 -190,000 = 105,000 5,000 300,000 62,000
1a 690,000 690,000 Sales
1b -400,000 -400,000 Cost of Goods
2 415,000 415,000
3 -50,000 -50,000
4 -4,000 4,000
5 -65,000 -5,000 -60,000 salaries
6 900,000 900,000 revaluation surplus
7 -3,333 -3,333 depreciation
8 -6,000 -6,000 obsolete inventory
A1 -2,000 -2,000 rent

-109,000 159,000 890,000 4,000 1,000,000 200,000 -193,333 0 470,000 0 0 300,000 900,000 62,000 218,667
11 43,733 -43,733 Tax
-109,000 159,000 890,000 4,000 1,000,000 200,000 -193,333 0 470,000 0 43,733 300,000 900,000 62,000 174,934
12 174,934 -174,934 closing
-109,000
Balances 159,000 890,000 4,000 1,000,000 200,000 -193,333 0 470,000 0 43,733 300,000 900,000 236,934 0

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(c) Prepare a statement of comprehensive income in good form for Caterpillar


Fashion Ltd for the month of July. (10 marks)

Format is per solution to tutorial problem 5.2. Other reasonable formats


(i.e. used in the textbook) are acceptable.

Caterpillar Fashions Pty


Statement of
comprehensive income for
year ended 30 June 2019

($)
Sales revenue 690,000
Cost of sales (406,000)
Obsolete inventory expense ( 6,000)
Gross profit 278,000
Rent expense (2,000)
Salaries expense (60,000)
Depreciation expense (3,333)
Profit before income tax expense 218,667
Income tax expense (43,733)
Profit after income tax expense 174,934
Other comprehensive income:
Unrealised gain on revaluation of land 900,000
Total comprehensive income for the
year 1,074,934

OK to include cost of obsolete inventory as an operating expense further down the


income statement rather than with cost of sales.

Bonus mark: Even better solution is to include the expense for obsolete inventory
write-down in the cost of sales and then provided footnote disclosure of the write-
down. If you did that then go direct to the CPA exam.

(d) Prepare a brief comment (one paragraph) for your manager explaining the
financial performance of Caterpillar Fashions Pty Ltd for July. (4 marks)

Notice that the question asks for a comment on financial performance rather than financial
position. No marks for discussing financial position.
The marks are for quality of interpretation: adequate 4 marks, partial 2 marks, incomplete 0.

An example paragraph for the manager could be:

We should compare the level of sales to last year to better assess our performance. The gross
profit margin was 40.2% of sales revenue which was sufficient to cover our salaries and other
costs leaving a profit after tax of $174,934. For each dollar of sales the business earned
25.3% (= 174,934/690,000).

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Another approach might be:

The total comprehensive income for the year was $ 1,074,934 but only $ 174,934 arose from
our trading operations. Most of the comprehensive income arose from revaluing the land
owned by the business.

Another good answer was:

On average there was $ 1.2 million in total assets invested in the business
[(472,000+1950667)/2]. The return on total assets was only 14.4 % (174,934 / 1,211,334 ).
This return appears to be reasonable given current market conditions, but it may still be low
for a business in an industry with high risk such as fashion retailing.

SECTION C. 10 MARKS

(a) Define a liability what are the essential characteristics of a liability? (3 marks)

Pages 46-47, 1 mark each, minimal partial credit as straightforward definition:

Present obligations of the entity,


arising from past transactions,
the settlement of which is expected (to result in the outflow of resources).

(b) Identification of concept

Page 20 Key issue is Faithful representation (partial credit reliability)

Could make an argument for other fundamental characteristic (e.g. relevance) but
need to explain why.

(c) Application of concept


Two parts needed in the answer (2 marks each).
Challenging question with little partial credit.

Include the meaning of materiality. Page 18 materiality is explained significance


Materiality is concerned with assessing whether omission, misstatement or non-
disclosure of a piece of information would affect the decisions of users of the
accounting report. In this case, the misclassification of the liabilities as non-current is
misleading and is misleading potential investors as to the liquidity of the company.

The obvious choice is to discuss the lack of faithful representation of the liabilities by
including non-current liabilities in the current liabilities section of the balance sheet.
Choice of characteristics that were violated in this context. Characteristics can be
primary or secondary but need to explain the application to this issue.

Alternate high quality analysis was acceptable.

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