ch04 SM Carlon 5e

Solutions Manual
to accompany
Financial
Accounting:
Recording, Analysis
and Decision Making
Fifth Edition
Prepared by
Lorena Mitrione
John Wiley & Sons Australia, Ltd 2016

Chapter 4: Inventories
CHAPTER 4 – INVENTORIES
ASSIGNMENT CLASSIFICATION TABLE
Brief
Learning Objectives Exercises Exercises Problems
1. Identify the differences between a
service business and a merchandising
business.
2. Explain the recording of purchases 2 2,4,5,6 1A,2A,4A,

under a perpetual inventory system. 7A
1B, 2B,4B,
7B
3. Explain the recording of sales revenue 2,3 1,2,3,4 1A, 2A, 4A,
under a perpetual inventory system. 7A, 1B, 2B,
4B, 7B
4. Prepare a fully classified statement of 1,4,5 7,8,9,10 1A, 3A, 4A,

profit or loss. 5A, 6A, 7A
1B, 3B, 4B,
5B, 6B, 7B
5. Use ratios to analyse profitability. 6 7,8,9 1A, 3A, 7A

1B, 3B, 7B
6. Understand the basic process and

main features of the goods and
services tax (GST).
7. Complete journal entries to record 7,8 11,12,13 8A, 8B

GST.
© John Wiley and Sons Australia Ltd, 2016 4.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e
CHAPTER 4 – INVENTORIES
ANSWERS TO QUESTIONS
1. (a) Disagree. The steps in the accounting cycle are the same for both a
merchandising company and a service enterprise. See Chapter 3, Figure 3-26
page 179 Required Steps in the Accounting Cycle.
(b) The measurement of profit is conceptually the same. In both types of
companies, profit (or loss) is determined by subtracting expenses from
revenues.
2. (a) The profit measurement process is as follows:
Sales Cost of Gross Operating Net

Revenue Less Sales Equals Profit Less Expenses Equals Profit
(b) Profit measurement in a merchandising business differs from a service

business as follows:
(i) sales are the primary source of revenue; and
(ii) expenses are divided into two main categories:
 cost of sales, and
 operating expenses
3.
Net sales revenues $220,000
Cost of sales 154,000
Gross profit $66,000
4. Agree. In accordance with the revenue recognition principle, sales revenues are
generally recognised when the goods are transferred from the seller to the buyer.
Recognition of revenue is not dependent on the cash collection of credit sales.

5. (a) The primary source documents are:

(1) cash sales – cash register tapes, and
(2) credit sales – sales invoices.
(b) The entries for the perpetual method of accounting for inventories are:
Debit Credit
Cash sales - Cash xx

Sales xx
Cost of sales xx
Inventory xx
Credit sales - Accounts Receivable xx

Sales xx
Cost of sales xx
Inventory xx
6.
24 July Accounts Payable ($2,240 - 140) 2,100
Discount Received ($2,100 x 2%) 42
Cash ($2,100- 42) 2,058
7.
Gross profit $348,000
Less: Profit before tax (180,000)
Operating expenses $168,,000
8. (a) Businesses most likely to use a perpetual inventory system would include those
selling products which have a high unit-value such as automobile dealerships,
equipment supply companies. With computerisation, perpetual systems are
becoming increasingly cost-effective, for example, the use of optical scan cash
registers in supermarkets means that a perpetual system can be employed for
high turnover low unit cost items.
(b) Owners of small businesses such as cafes, restaurants and greengrocers are
more likely to use periodic inventory systems because for them, the costs of
using perpetual inventory systems may outweigh the benefits.
9. Factors affecting a company’s gross profit rate include selling products with a higher
(or lower) ‘mark-up’, increased competition that results in lower selling prices and price
increases from suppliers.
10. (a) False. GST may be paid on taxable supplies at each stage in the commercial
chain, however, it is the final consumer, not the first purchaser, who bears the
cost of the GST.
(b) True. The GST is a value-added tax, which means that tax is levied on the
value added by a business at each stage in the production and distribution
chain. The GST is not a tax on business income.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4.1

Felix Ltd
(a) Sales = $471,900 ($186,940 + $284,960)
(b) Cost of sales = $81,900 ($195,000 - $113,100)
(c) Gross profit = $111,800 ($280,800 - $169,000)
(d) Operating expenses = $85,020 ($113,100 - $28,080)
(e) Operating expenses = $35,100 ($111,800 - $76,700)
(f) Profit = $182,260 ($284,960 - $102,700)
BRIEF EXERCISE 4.2

Neo Ltd
Inventory 1 800
Accounts Payable 1 800
Gruff Ltd
Accounts Receivable 1 800
Sales 1 800
Cost of sales 1 200
Inventory 1 200
BRIEF EXERCISE 4.3
Simon Ltd
(a) 2 Mar Accounts Receivable 450,000

Sales 450,000
Inventory 300,000
(b) 6 Mar Sales Returns and Allowances 65,000

Accounts Receivable 65,000
Inventory 40,000
(c) 8 Mar Cash ($385,000 - $7,700) 377,300

Discount Allowed ($385,000x 2%) 7,700
Accounts Receivable ($450,000 - $65,000) 385,000

BRIEF EXERCISE 4.4

Aditya Ltd
Statement of Profit or Loss (Partial)
for the month ended 31 October 2015
Sales Revenues:
Sales ($363,000 + $121,000) $484,000
Less: Sales returns and allowances (24,200)
Net sales $459,800
BRIEF EXERCISE 4.5
These items and where they would appear in a fully classified statement of profit or loss are
listed below:
Item Section
Interest revenue Revenue or other income (below gross profit) it depends on the
type of business
Cost of sales Cost of sales
Depreciation expense Operating expenses. Depreciation expenses could be further
classified either as an administrative expense (e.g. depreciation
of office equipment) or a selling expense (e.g. depreciation of
store or warehouse equipment).
Sales returns and allowances Sales revenue.
Purchase returns and Under the periodic inventory system, purchase returns and
allowances allowances appears in the statement of profit or loss in the
calculation of cost of sales as part of the determination of gross
profit.
Under the perpetual inventory system, purchase returns and
allowances are recorded as a decrease in inventory and therefore
do not appear on the statement of profit or loss
Discount received Other income
Discount allowed Financial expenses

BRIEF EXERCISE 4.6

Long Pty Ltd
(a) $88,000
Return on assets =  14.5%
$550,000  $660,000  2
(b) Profit margin = 88,000 ÷ $275,000 = 32.0%
(c) Gross profit rate = ($275,000 - $110,000) ÷ $275,000 = 60.0%
(d) Operating expenses to sales ratio = $55,000 ÷ $275,000 = 20.0%
BRIEF EXERCISE 4.7
Maori Jewellery
Cash collected = NZ$28,750 ($25,000 + 15% x $25,000)
Revenue earned = NZ$25,000
BRIEF EXERCISE 4.8
These journal entries record the payment of GST to the taxation authority. Sellers Limited
has collected $100 GST on sales during the reporting period, and the amount of GST paid
on purchases is $90; the remaining balance is the amount of cash paid to the tax authority.

SOLUTIONS TO EXERCISES
EXERCISE 4.1
Unique Artworks Ltd
(a) (1) 7 Dec Accounts Receivable 792,000

Sales 792,000
Inventory 528,000
(2) 8 Dec Sales Returns and Allowances 33,000

(3) 13 Dec Cash ($759,000 - $15,180) 743,820

Discount Allowed [($792,000 - $33,000) x 2%] 15,180
(b) 2 Jan Cash 759,000

(c) The advantages associated with granting a discount for early payment are that the
purchaser saves money and the seller is able to shorten the operating cycle thereby
improving cash flow by converting accounts receivable to cash earlier.
The disadvantage to the seller is that there is a cost associated with offering a discount.

EXERCISE 4.2 STOKERS PTY LTD
(a) 1 Jul Inventory 20,000

Accounts Payable 20,000
10 Jul Accounts Payable 20,000

Cash 19,400
Discount Received 600
(b) 1 Jul Inventory 20,000

10 Jul Accounts Payable 20,000

Cash 19,400
Inventory 600
(c) In part (a), profit and assets will initially be $600 higher than in part (b). As inventory is
transferred to cost of sales, cost of sales will be higher in part (a) than part (b). By the
time all the inventory is sold the total profit and assets in part (a) and (b) will be the
same.
EXERCISE 4.3
QUEENSCLIFF PTY LTD
(a) 1 Jul Accounts Receivable 20,000

Sales 20,000
Inventory 12,000
(b) 10 Jul Cash 19,400

Discount Allowed 600

EXERCISE 4.4
Cambells Office Supplies
6 Sept. Inventory (80 x $22) 1,760

Cash 1,760
9 Sept. Freight In 88
Cash 88
10 Sept. Accounts Receivable 44

Inventory 44
12 Sept. Accounts Receivable (26 x $33) 858

Sales 858
Cost of sales (26 x $22) 572
Inventory 572
14 Sept. Sales Returns and Allowances 33

Accounts Receivable 33
Inventory 22
Cost of sales 22
20 Sept. Accounts Receivable (30 x $33) 990

Sales 990
Cost of sales (30 x $22) 660
Inventory 660
EXERCISE 4.5
Hampton Pty Ltd
(a) (1) 5 April Inventory 9,000

(2) 6 April Freight In 450

Cash 450
(3) 7 April Equipment 52,000

(4) 8 April Accounts Payable 1,500

Inventory 1,500
(5) 11 April Accounts Payable 7,500

($9,000- $1500)
[($9,000- $1500) x 2%]
Cash ($7,500 - $150) 7,350
(b) 4 May Accounts Payable ($9,000 - $1,500) 7,500

Cash 7,500

EXERCISE 4.6
Grand Accessories Ltd
(a) 10 June Inventory $5,400

Accounts Payable $5,400
(Terms 2/7, n/30)
11 June Freight In $270

Cash $270
12 June Accounts Payable $270

Inventory $270
17 June Accounts Payable ($5,400 - $270) $5,130

Discount Received ($5,130 x 2%) $103
Cash ($5,130 - $103*) $5,027
* to the nearest dollar
(b) Highend Distributors Ltd
10 June Accounts Receivable 5,400

Sales 5,400
Cost of sales 2,700

Inventory 2,700
11 June No entry (freight paid by the purchasing

company)
12 June Sales Returns and Allowances 270

Inventory 135
Cost of sales 135
19 June Cash ($5,130 - $103*) 5,027

Discount Allowed ($5,130 x 2%) 103
Accounts Receivable($5,400 - $270) 5,130
* to the nearest dollar
(c) Freight-in refers to freight costs paid by the purchaser. Freight-in forms part of the cost
of inventory but because of the difficulty of allocating freight costs to individual
inventory items when several items are delivered at the same time, a freight-in account
is often kept and the amount of freight-in is incorporated into cost of sales in the
statement of profit or loss.
Freight-out refers to freight costs paid by the seller. These costs appear under
operating expenses (selling and distribution expenses) on the statement of profit or
loss. Customers may be charged an additional amount to cover freight-out expenses.

EXERCISE 4.7
(a)
Dawson Ltd
Statement of Profit or Loss
for the month ended 31 January 2015
INCOME
Sales revenue:
Gross sales revenue $700,000
Net sales revenue $674,000
Less: Cost of sales (416,000)
GROSS PROFIT 258,000
Other income:
Discount received 14,000
Rent revenue 2,000 16,000
274,000
EXPENSES
Selling expenses:
Freight out 14,000
Rent expense – store space 20,000 34,000
Administrative expenses:
Insurance expense 12,000
Office salaries expense 61,000 73,000
Financial expenses:
Discount allowed 16,000
Bank charges 100 16,100
Total operating expenses 123,100
PROFIT BEFORE INCOME TAX 150,900

Less: Income tax expense (45,270)
PROFIT $105,630
(b)
Profit margin = 105,630
 15.7%
674,000
Gross profit rate = 258,000

 38.3%
674,000
Operating expenses to sales ratio =

123,1000
 18.3%
674,000

(c) It is often more useful to be able to compare financial ratios than to compare the actual
financial results. For example, knowing the gross profit rate gives a better indicator of
an entity’s profitability than knowing the dollar amount of the gross profit. Just knowing
the operating expenses is less useful than knowing the operating expenses to sales
ratio. Furthermore, ratios allow for meaningful comparisons than just using dollars. For
example, the gross profit ratio relates gross profit to sales and provides an indication
of mark-up on cost. Finally, using ratios enables analysts to compare the profitability
of entities of different sizes because ratios control for size whereas a dollar value does
not.
EXERCISE 4.8
Bright Ltd & Dull Ltd
(a)
Bright Ltd Dull Ltd
Sales $180,000 *$200,000

Sales returns *(18,000) (10,000)
Net sales $162,000 $190,000
Net sales $162,000 $190,000

Cost of sales (112,000) *114,000
Gross profit *$50,000 $76,000
Gross profit $50,000 $76,000

Operating expenses (30,000) *(46,000)
Profit *$20,000 $30,000
*Indicates missing amount.

(b)
Bright Ltd Dull Ltd
Profit margin $20,000 ÷ $162,000 = $30,000 ÷ $190,000 =

12.3% 15.8%
Gross profit rate $50,000 ÷ $162,000 = $76,000 ÷ $190,000 = 40%

30.9%
Operating expenses to $30,000 ÷ $162,000 = $46,000 ÷ $190,000 =

sales ratio 18.5% 24.2%

EXERCISE 4.9
(a)
Lulu Ltd
for the year ended 30 June 2016
OPERATING REVENUE
Net sales revenue: $1,410,000
GROSS PROFIT $816,600
Other operating revenue 27,000

843,600
OPERATING EXPENSES
Selling expenses 414,000
Administrative expenses 261,000
Financial expenses 42,000


PROFIT AFTER INCOME TAX $88,620
(b)
Profit margin = Profit after tax 88,620

Net sales 6.3%
1,410,000
Gross profit rate = Gross Profit 816,600

 57.9%
Net Sales 1,410,000
Operating expenses to sales ratio = Operating Expenses 717,000

 50.9%
Net Sales 1,410,000

EXERCISE 4.10
Snuffy Pty Ltd
Sales revenue:
Sales $585,000
Net sales $575,900
Note: Freight-out is a selling expense.

Discount allowed is a financial expense.
EXERCISE 4.11
Ezios Earthenware Ltd
(a) Dr Cash/Accounts Receivable $6,600

Cr GST Collected (liability) $600
Cr Sales $6,000
Dr Inventory $1,100
Dr GST Paid (asset) 110
Cr Cash/Accounts Payable $1,210
(b) Dr GST Collected $600

Cr GST Paid $110
Cr Cash $490
Alternatively a single GST clearing account can be used instead of GST Collected and
GST Paid accounts.

EXERCISE 4.12
Phams Pottery Ltd
(a) May 3 Dr Inventory 400

Dr GST Paid 40
Cr Cash/Accounts payable 440
May 10 Dr Cash/Accounts receivable 550

Cr Sales 500
Cr GST collected 50
Dr GST Collected 50
Cr GST Paid 40
Cr Cash 10
EXERCISE 4.13
Ezios Earthenware Ltd
(a) Dr Cash/Accounts Receivable 6,600

Cr GST Clearing 600
Cr Sales 6,000
Dr Inventory 1,100
Dr GST Clearing 110
Cr Cash/Accounts Payable 1,210
(b) Dr GST Clearing 490

Cr Cash 490

SOLUTIONS TO PROBLEM
SET A
PROBLEM SET A 4.1

(a)
Papermark Ltd
General Journal
Post
Date Particulars Ref. Debit Credit
May 2 Accounts Receivable 110 3,150

Sales 400 3,150
Cost of Sales 505 2,100
Inventory 120 2,100
3 Inventory 120 4,200

Accounts Payable 200 4,200
5 Accounts Payable 200 140

Inventory 120 140
9 Cash ($3,150 - $63) 100 3,087

Discount Allowed ($3,150 x 2%) 500 63*
Accounts Receivable 110 3,150
10 Accounts Payable ($4,200 - $140) 200 4,060

Discount Received 410 81
($4,060 x 2%)
Cash 100 3,979
11 Supplies 130 630

Cash 100 630

Cash 100 1,680
15 Cash 100 161

Inventory 120 161
May 20 Inventory 120 1,330

21 Freight Inwards 510 175

Cash 100 175
24 Cash 100 4,340

Sales 400 4,340
Inventory 120 3,038
25 Inventory 120 700


Post
Date Particulars Ref. Debit Credit
27 Accounts Payable 200 1,330

($1,330 x 2%)
Cash 100 1,303
29 Sales Returns and Allowances 405 70

Cash 100 70
Inventory 120 49
Cost of Sales 505 49
31 Accounts Receivable 110 1,120

Sales 400 1,120
Inventory 120 784
*rounded to nearest dollar

(b)
Cash 100
May 1 Opening Bal. 3,500 May 10 Accounts. Payable 3,979
9 Accounts 3,087 11 Supplies 630
Receivable
15 Inventory 161 12 Inventory 1,680
24 Sales 4,340 21 Freight Inwards 175
27 Accounts Payable 1,303
29 Sales Returns 70
31 Closing Bal. 3,251
11,088 11,088
June 1 Opening. Bal. 3,251

May 2 Sales 3,150 May 9 Cash & Discount 3,150
31 Sales 1,120 31 Closing Bal. 1,120
4,270 4,270
June 1 Opening Bal. 1,120
Inventory 120
May 3 Accounts Payable 4,200 May 2 Cost of Sales 2,100
12 Cash 1,680 5 Accounts Payable 140
20 Accounts Payable 1,330 15 Cash 161
25 Accounts Payable 700 24 Cost of Sales 3,038
29 Cost of Sales 49 31 Cost of Sales 784
7,959 7,959
June 1 Opening Bal. 1,736
Supplies 130
May 11 Cash 630
Accounts Payable 200

May 5 Inventory 140 May 3 Inventory 4,200
10 Cash & Discount 4,060 20 Inventory 1,330
27 Cash & Discount 1,330 25 Inventory 700
31 Closing Bal. 700
6,230 6,230
June 1 Opening Bal. 700
Share Capital 300

May 1 Bal. 3,500
Sales 400
May 31 Closing Bal. 8,610 May 2 Accounts Receivable 3,150
24 Cash 4,340
31 Accounts Receivable 1,120
8,610 8,610
Sales Returns and Allowances 405

May 29 Cash 70

May 21 Closing Bal. 108 May 10 Accounts Payable 81
27 Accounts Payable 27
108 108

May 9 Accounts 63
Receivable
Cost of Sales 505

May 2 Inventory 2,100 May 29 Inventory 49
24 Inventory 3,038
31 Inventory 784 31 Closing Bal. 5,873
5,922 5,922
Freight Inwards 510

May 21 Cash 175

(c)
Papermark Ltd
for the month ended 31 May 2015
OPERATING REVENUE
Sales revenue:
Gross sales revenue 8,610
Less: Sales returns and allowances (70)
Net sales revenue 8,540
Less: Cost of sales 5,873
Freight inwards 175 (6,048)
GROSS PROFIT $2,492
(d)
Profit margin $2,492 (Gross P) - $980 (Op. 1,487

ratio = Profit after tax Exp.*) - $133 (Tax Exp.) + $108  17.4%
8,540
Net sales (Dis. Rec’d) =

Net Sales
 29.2%
8,540
* Note: Discount allowed included in operating expenses.

PROBLEM SET A 4.2

(a) The Novelty Bookstore
General Journal
June 2 Inventory (130 x $6) 780

(Terms 1/7, n/30)
Freight In 60
Cash 60
3 Accounts Receivable (140 x $12) 1,680

Sales 1,680
(Terms 2/7, n/30)
Cost of Sales (140 x $6) 840
Inventory 840
Inventory 60
9 Accounts Payable ($780 - $60) 720

Discount Received ($720 x 1%*) 7
Cash 713
15 Cash 1,680

Sales 1,440
(Term 2/7, n/30)
Inventory 720
20 Inventory (120 x $6) 720

(Term 2/7, n/30)
24 Cash 1,411
Discount Allowed ($1,440 x 2%*) 29

Discount Received ($720 x 2%*) 14
Cash 706

Sales 1,320

Inventory 660
30 Sales Returns and Allowances 180

Inventory 90
Cost of Sales 90
*to the nearest dollar

(b) The advantages for The Novelty Bookstore of using a perpetual inventory system as
opposed to a periodic inventory system are:
 Inventory is constantly updated every time a purchase or sale is made. This means
that The Novelty Bookstore will be aware of when to reorder items of inventory.
 Cost of sales is updated every time a sale is made so interim financial statements can
be prepared without having to conduct an inventory count.
 When The Novelty Bookstore does conduct an inventory count (which should be at
least annually), any inventory losses can be accurately determined.
 Using a perpetual inventory system would be a disadvantage for The Novelty
Bookstore if the business does not have a suitable computer system to maintain
inventory records.

PROBLEM SET A 4.3

(a) Harrots Department Store Pty Ltd
OPERATING
REVENUE
Sales revenue:
$1,301,30
Gross sales revenue 0
Less: Sales returns and
allowances (14,300)
Net sales revenue $1,287,000
Other operating
revenue:
Interest revenue 5,720 7,150
388,645
OPERATING EXPENSES
Selling expenses:
Dep’n expense – store equipment 13,585
Freight out 11,726
Rent expense – store space 12,870
Sales commissions expense 20,020
Sales salaries expense 100,100 158,301
Administrative
expenses:
Dep’n expense – office equipment 5,720
Electricity expense 15,158
Office salaries expense 57,200
Rent expense – office space 28,600
Rates and taxes expense 5,005 124,553
Financial expenses:
Interest expense 11,440 11,440

PROFIT AFTER INCOME TAX 66,037

Harrots Department Store Pty Ltd

Statement of Changes in Equity
Retained Earnings, 1 July 2014 $20,306

Add: Profit 66,037
86,343
Less: Dividends (17,160)
Retained Earnings, 30 June 2015 69,183
Harrots Department Store Pty Ltd

Statement of Financial Position
as at 30 June 2015
ASSETS
Current Assets:
Cash $11,440
Accounts receivable 16,830
Inventory 51,766
Prepaid Insurance 6,435
Total Current Assets $86,471
Non-Current Assets:
Property, plant and equipment
Store equipment 178,750
Less: Accum. dep’n – store equipment (59,774) 118,976
Office equipment 81,510
Less: Accum. Dep’n – office equipment (28,142) 53,368
Total Non-Current Assets 172,344
TOTAL ASSETS $258,815
LIABILITIES AND EQUITY

Current Liabilities:
Accounts payable 39,053
Income tax payable 28,314
Rates and taxes payable 5,005
Sales commissions payable 8,580
Total Current Liabilities 80,952
Non-Current Liabilities:
Bank loan 65,780
Total Liabilities 146,732
Equity
Share capital 42,900
Retained Earnings 69,183
Total Equity 112,083
TOTAL LIABILITIES AND EQUITY $258,815

(b)
Return on assets = Profit after tax 66,037
=  27.1%
Av total assets 243,808
Average total assets = (228, 800 + 258,815) /2 = 243,808
Profit margin = Profit after tax 66,037

=  5.1%
Net sales 1,287,000

  29.6%
Net Sales 1,287,000
Operating expenses to sales ratio = Operating Expenses 294,294

  22.9%
Net Sales 1,287,000
(c) A fully classified statement of profit or loss provides more information than a summary-
type statement. For instance, readers of the statement can ascertain how many sales
were returned, discounts allowed on sales, and discounts received on purchases.
Useful ratios such as the gross profit ratio and operating expenses to sales ratio can
also be calculated. If the operating expense ratio is high, a further breakdown of
expenses into categories can give insight as to which particular expenses were
excessive.

PROBLEM SET A 4.4
(a)
Alexander’s Tennis Pro Shop Pty Ltd
General Journal
Post
Date Particulars Ref Debit Credit
April 7 Inventory 115 3,060

8 Freight Inwards 505 144

Cash 100 144

Inventory 115 360

Sales 400 1,620

Inventory 115 1,134

Accounts Payable ($3,060 – $360) 200 2,700

Discount Received ($2,700 x 2%) 410 54
Cash 100 2,646

Inventory 115 108

Sales 400 1,260

Inventory 115 882
21 Accounts Payable ($1,188 - $108) 200 1,080

Discount Received ($1,080 x 1%) 410 11*
Cash 100 1069
27 Sales Returns and Allowances 405 108

Accounts Receivable 105 108
30 Cash 100 1,980

* rounded to nearest dollar

(b)
Cash 100
April 1 Opening Bal 4,500 April 8 Freight Inwards 144
April 14 Accounts Payable 2,646
30 Accounts 1,980 21 1,069
Receivable
6,480 6,480
May 1 Opening Bal. 2,621

April 10 Sales 1,620 April 27 Sales Returns & 108
Allowances
20 Sales 1,260 30 Cash 1,980
2,880 30 Closing Bal. 792
2,880
May 1 Opening Bal. 792
Inventory 115
April 1 Opening Bal. 6,300 April 9 Accounts Payable 360
7 Accounts Payable 3,060 10 Cost of sales 1,134
14 Accounts Payable 1,188 17 Accounts Payable 108
20 Cost of sales 882
10,548 10,548

April 9 Inventory 360 April 7 Inventory 3,060
17 Inventory 108
21 Cash & Discount 1,080
4,248 4,248
Share Capital 300

April 1 Opening Bal. 10,800
Sales 400
April 10 Accounts Receivable 1,620
2,880

April 27 Accounts 108
Receivable

April 14 Accounts Payable 54
65

Cost of Sales 500

May 10 Inventory 1,134
20 Inventory 882
2,016
Freight Inwards 505

April 8 Cash 144
(c)
Trial Balance
as at April 30, 2016
Debit Credit
Cash $2,621
Inventory 8,064
Accounts Payable -
Share Capital $10,800
Sales 2,880
Cost of Sales 2,016
Freight Inwards 144
$13,745 $13,745
(d)
for the month ended 30 April 2016
Sales revenues
Sales $2,880
Net sales $2,772
Freight inwards 144 2,160
Gross Profit $ 612

PROBLEM SET A 4.5

Peninsula Pty Ltd
OPERATING REVENUE
Sales revenue:
GROSS PROFIT $173, 250
Other operating revenue:

Rent revenue 4,400 13,200
Total operating revenue 186,450
OPERATING EXPENSES
Selling expenses:
Advertising 5,500
Freight out 16,500
Sales commissions expense (3300 + 2200) 5,500
Dep’n expense – office equipment 4,400
Rent expense – office space (13200-3300) 9,900
Electricity expense 6,600 41,250
Financial expenses:
Interest expense 1,100
Bank charges 550 6,050

PROFIT AFTER INCOME TAX $47,355

PROBLEM SET A 4.6

Rankins Ltd
(a)
Dec. 31 Depreciation Expense – Buildings 15,000

Accumulated Dep’n - Buildings 15,000
31 Depreciation Expense – Equipment 13,500

Accumulated Dep’n – Equipment 13,500
31 Interest Expense 10,500

Interest Payable 10,500
31 Income Tax Expense 37,260

Income Tax Payable 37,260
Note: The figure used for the income tax expense entry was derived after the Statement of Profit or
Loss in (d) was prepared.
(b)
Accumulated Depreciation – Buildings
Dec. 31 Balance 85,500
31 Depreciation Exp. 15,000
100,50
0
Accumulated Depreciation - Equipment

Dec. 31 Balance 63,600
31 Depreciation Exp. 13,500
77,100
Depreciation Expense – Buildings

Dec. 31 Accum. Depr. 15,000
Depreciation Expense – Equipment

Dec. 31 Accum. Depr. 13,500
Interest Expense
Dec. 31 Interest Payable 10,500
Interest Payable
Dec. 31 Interest Expense 10,50
0

(c)
Rankins Ltd
Adjusted Trial Balance
As at 30 June 2016
Debit Credit
Cash $50,100
Inventory 165,000
Land 138,000 -
Buildings 295,500
Accumulated Depreciation – Buildings $100,500
Equipment 125,250
Accumulated Depreciation – Equipment 77,100
Income Tax Payable 37,260
Bank Loan 75,000
Share Capital 300,000
Retained Profits 101,700
Interest Revenue 1,500
Dividends 15,000
Sales 1,381,650
Sales Returns and Allowances 1,500
Discount Allowed 5,400
Cost of Sales 1,064,850
Salaries Expense (Office) 82,500
Salaries Expense (Sales) 22,200
Utilities Expense 14,100
Repair Expense 13,350
Petrol & Oil Expense 10,800
Insurance Expense 5,250
Depreciation Expense – Buildings 15,000
Depreciation Expense – Equipment 13,500
Income Tax Expense 37,260
Interest Expense 10,500
Interest Payable
Totals $2,141,460 $2,141,460

(d)
Rankins Ltd
Statement of Financial Performance
for the Year Ended 30 June 2016
OPERATING REVENUE
Sales revenue:
Gross sales revenue $1,381,65
0
Less: Cost of sales (1,064,850)

Interest revenue 1,500
1,500
Total operating revenue 316,800
OPERATING EXPENSES
Selling expenses:
Dep’n expense – store equipment 13,500
Dep’n expense – buildings 15,000
Petrol and oil expense 10,800
Repair expense – computers 13,350
Utilities expense 14,100 141,000
Financial expenses:

NET PROFIT AFTER INCOME TAX $86,940
Rankins Ltd
Retained Profits, 1 January $101,700

Add: Net Profit 86,940
188,640
Less: Dividends (15,000)
Retained Profits, 31 December $173,640
Rankins Ltd

As at 30 June 2016
ASSETS
Current Assets:
Cash $50,100
Inventory 165,000
Total Current Assets $271,500
Non-Current Assets:
Property, plant and equipment
Land $138,000
Buildings $295,500
Less: Accum. dep’n – buildings 100,500 195,000
Store equipment 125,250
Less: Accum. Dep’n – store equipment 77,100 48,150
Total Non-Current Assets 381,150
TOTAL ASSETS $652,650
LIABILITIES AND OWNER’S EQUITY

Current Liabilities:
Bank loan (portion due in 2017) 22,500
Interest payable 10,500
Income tax payable 37,260
Total Current Liabilities 126,510
Non-Current Liabilities:
Bank loan 52,500
Total Liabilities 179,010
Owners’ Equity
Retained profits 173,640
Total Owners’ Equity 473,640
TOTAL LIABILITIES AND OWNERS’ EQUITY $652,650
(e) The statement of profit or loss is prepared for a period of time because it summarises
income and expenses for that period. The profit or loss then is used to update equity at the
end of that period. The statement of financial position shows the financial position, i.e., the
balances of assets, liabilities, and equity on the date the statement of financial position is
prepared.

PROBLEM SET A 4.7

(a)
Belle Boutique Fashion Pty Ltd
General Journal
April 4 Inventory 3,245


Sales 2,750
Cost of Sales 2,200

Inventory 2,200

Inventory 165
7 Freight Out 110

Cash 110
11 Accounts Payable ($3,245 - $165) 3,080

Cash 3,018
13 Cash 2,695
14 Inventory 2,420
Cash 2,420
16 Cash 275
Inventory 275
21 Inventory 3,150
22 Freight In 55
Cash 55
23 Cash 4,070
Sales 4,070
Cost of Sales 3,366

Inventory 3,366
26 Inventory 1,265
Cash 1,265

Cash 3,087

Cash 50
Inventory 38
Cost of Sales 38

Sales 2,035
Cost of Sales 1,650

Inventory 1,650
(b)
Cash
April1 Opening Bal. 4,950 April7 Freight Out 110
13 Accounts 2,695 11 Accounts Payable 3,018
Receivable
23 Sales 4,070 22 Freight In 55
26 Inventory 1,265
29 Sales Returns 50
$11,990 $11,990
Accounts Receivable
April6 Sales 2,750 April13 Cash & Discount 2,750
4,785 4,785
Inventory
April4 Accounts Payable 3,245 April6 Cost of sales 2,200
26 Cash 1,265 23 Cost of sales 3,366
29 Cost of sales 38 30 Cost of sales 1,650
10,118 10,118
Accounts Payable
April6 Inventory 165 April4 Inventory 3,245
6,395 6,395
Share Capital
April1 Opening Bal. 4,950
Sales
April6 Accounts Receivable 2,750
23 Cash 4,070
8,855
Sales Returns and Allowances

April29 Cash 50
Discount Received
April11 Accounts Payable 62
125
Discount Allowed
April13 Accounts 55
Receivable
Freight In
April22 Cash 55
Freight Out
April7 Cash 110
Cost of Sales
April 6 Inventory 2,200 April29 Inventory 38
23 Inventory 3,366 30 Closing Bal. 7,178
30 Inventory 1,650
7,216 7,216
(c)
Belle Boutique Fashion Pty Ltd
OPERATING REVENUE
Sales revenue:
Freight in (55) (7,233)
GROSS PROFIT $1,572
(d)
Profit margin ratio = GP 1,572 – 495 oper. 1,202
Profit Expen* + disc. rec’d $125  13.7%
8,805
Net sales
Gross profit ratio = Gross Profit

Net Sales 1,572 / 8,805  17.9%
*Note: It is assumed that discounts allowed and freight out are included in operating
expenses.

PROBLEM SET A 4.8

Kids + Kites Ltd
(a)
Cash/Accounts Receivable 70,700

GST Collected ($70,700/11) 6,427
Sales 64,273
(To record sales revenue and GST collected)

GST Collected ($1,400/11) 127
Inventory 25,964
GST Paid ($28,560/11) 2,596
(To record inventory purchase and GST paid)

GST Paid ($3,360/11) 305
Inventory 3,055
(To record purchase return and GST recovered)
GST Collected 6,300

GST Paid 2,291
Cash 4,009
(To record payment of GST to tax authority)
(b)

GST Clearing 6,427
Sales 64,273

GST Clearing 127
(To record sales returns and GST refunded)
Inventory 25,964
GST Clearing 2,596

GST Clearing 305
Inventory 3,055
GST Clearing 4,009

Cash 4,009

(c)
GST Collected ($28,560/11) 2,596
Sales 25,964
Inventory 64,273
GST Paid ($70,700/11) 6,427
Cash 3,831
GST Collected 2,596
GST Paid 6,427
(To record refund of GST from tax authority)
(d)
GST Clearing 2,596
Sales 25,964
(To record sales and GST collected)
Inventory 64,273
GST Clearing 6,427
Cash 3,831
GST Clearing 3,831
(To record GST refund from tax authority)

SOLUTIONS TO PROBLEM
SET B
PROBLEM SET B 4.1
Clucker Poultry Distributing Company

General Journal
April 4 Inventory 2,950


Sales 2,500
Cost of Sales 2,000

Inventory 2,000
7 Freight-out 100
Cash 100

Inventory 150
11 Accounts Payable ($2,950 - $150) 2,800

Cash 2,744
13 Cash 2,450
14 Inventory 2,200
Cash 2,200
16 Cash 250
Inventory 250
21 Inventory 2,100
22 Freight-In 50
Cash 50
23 Cash 3,700
Sales 3,700
Cost of Sales 3,060

Inventory 3,060
26 Inventory 1,150
Cash 1,150

Cash 2,058

Cash 45
Inventory 35
Cost of Sales 35

Sales 1,850
Cost of Sales 1,500

Inventory 1,500
(b)
Cash
April1 Opening Bal. 4,500 April7 Freight-Out 100
13 Accounts 2,450 11 Accounts Payable 2,744
Receivable
23 Sales 3,700 22 Freight-In 50
26 Inventory 1,150
29 Sales Returns 45
$10,900 $10,900
Accounts Receivable
April6 Sales 2,500 April13 Cash & Discount 2,500
4,350 4,350
Inventory
April4 Accounts Payable 2,950 April6 Cost of Sales 2,000
26 Cash 1,150 23 Cost of Sales 3,060
29 Cost of Sales 35 30 Cost of Sales 1,500
8,435 8,435
Accounts Payable
April8 Inventory 150 April4 Inventory 2,950
5,050 5,050
Share Capital
April1 Opening Bal. 4,500
Sales
April6 Accounts Receivable 2,500
23 Cash 3,700
8,050

April29 Cash 45
Discount Received
April11 Accounts Payable 56
98
Discount Allowed
April13 Accounts 50
Receivable
Freight-In
April22 Cash 50
Freight-Out
April7 Cash 100
Cost of Sales
April 6 Inventory 2,000 April29 Inventory 35
23 Inventory 3,060 30 Closing Bal. 6,525
30 Inventory 1,500
6,560 6,560
(c)
Clucker Poultry Distributing Company
OPERATING REVENUE
Sales revenue:
Freight in (50) (6,575)
GROSS PROFIT $1,430
(d)
Profit margin = Gross Profit 1,430 – 450 1,078
Profit oper. expen. + disc. rec’d  13.5%
8,005
net sales $98

 17.9%
Net Sales 8,005
Note: It is assumed that freight-out and discounts allowed are included in operating
expenses.
PROBLEM SET B 4.2

Wen Goh Warehouse

July 1 Inventory (50 X $15) 750
3 Accounts Receivable (40 X $25) 1,000

Sales 1,000
Cost of Sales (40 X $15) 600

Inventory 600

Discount received ($750 X 0.01) 8
Cash 742
9 Cash 990
Discounts allowed (1,000 x .01) 10
17 Accounts Receivable (30 X $25) 750

Sales 750
Cost of Sales (30 X $15) 450

Inventory 450
18 Inventory (60 X $15) 900

Freight-In 100
Cash 100

Inventory 150
21 Cash 742
Discounts allowed ($750 X .01) 8
22 Accounts Receivable (40 X $25) 1,000

Sales 1,000
22 Cost of Sales (40 X $15) 600

Inventory 600
30 Accounts Payable ($900 – $150) 750

Cash 750

Inventory 75
Cost of Sales 75
(b) The advantages for Wen Goh Warehouse of using a perpetual inventory system as
opposed to a periodic inventory system are:
 Inventory is constantly updated every time a purchase or sale is made. This means
that Wen Goh Warehouse will be aware of when to reorder items of inventory.
 Cost of sales is updated every time a sale is made so interim financial statements can
be prepared without having to conduct an inventory count.
 When Wen Goh Warehouse does conduct an inventory count (which should be at least
annually), any inventory losses can be accurately determined.
 Using a perpetual inventory system would be a disadvantage for Wen Goh Warehouse
if the business does not have a suitable computer system to maintain inventory
records.

PROBLEM SET B 4.3
(a) ENOTECA DEPARTMENT STORE

Operating revenue
Sales revenues
Less: Sales returns and allowances 8,800
Net sales revenue 682,000
Gross profit 228,030
Interest revenue 4,400
4,400
232,430
Operating expenses
Selling expenses:
Administrative expenses
Depreciation expense—equipment 14,630
Depreciation expense—building 11,440
Rates and taxes expense 5,280 86,570
Financial expenses:
Profit before income tax 34,210

ENOTECA DEPARTMENT STORE

Retained Earnings, 1 July 2014 $29,260

Add: Profit 34,210
63,470
Less: Dividends 30,800
Retained Earnings, 30 June 2015 $32,670
ENOTECA DEPARTMENT STORE

as at 30 June, 2015
Assets
Current assets
Cash $ 36,300
Inventory 82,500
Prepaid insurance 2,640
Total current assets 176,770
Non-current assets
Property, plant, and equipment
Building $209,000
Less: Accumulated depreciation—
building 57,750 $151,250
Equipment 110,000
Less: Accumulated depreciation—
equipment 47,190 62,810 214,060
Total assets $390,830
Liabilities and Equity

Current liabilities
Accounts payable $ 87,230
Mortgage payable 22,000
Rates and taxes payable 5,280
Sales commissions payable 3,850
Total current liabilities 127,160
Non-current liabilities
Mortgage payable – long term (due after 2016) 66,000
Total liabilities 193,160
Equity
Total equity 197,670
Total liabilities and equity $390,830
(b) Return on assets = profit after tax/average total assets = 34,210/371,415 = 9.2%
Note: average total assets = (352,000+390,830)/2 = 371,415
Profit margin = profit after tax/net sales = 34,210/682,000 = 5.0%
Gross profit rate = gross profit / net sales = 228,030/682,000 = 33.4%
Operating expenses to sales ratio = operating exp./net sales = 198,220/682,000 =

29.1%
(c) A fully classified statement of profit or loss provides more information than a summary-
type statement. For instance, readers of the statement can ascertain how many sales
were returned, discounts allowed on sales, and discounts received on purchases.
Useful ratios such as the gross profit ratio and operating expenses to sales ratio can
also be calculated. If the operating expense ratio is high, a further breakdown of
expenses into categories can give insight as to which particular expenses were
excessive.

PROBLEM SET B 4.4
RACQUETS ‘R’ US TENNIS SHOP

(a) General Journal
Date Account Titles Debit Credit

Apr. 6 Inventory 1,260
7 Freight-In 60
Cash 60

Sales 1,350
Cost of Sales 900

Inventory 900
Inventory 60
11 Inventory 450
Cash 450
13 Accounts Payable ($1,260 – $60) 1,200

Discount received ($1,200 X 3%) 36
Cash 1,164
14 Inventory 750
15 Cash 75
Inventory 75
17 Freight-In 45
Cash 45

Sales 1,350
Cost of Sales 795

Inventory 795
20 Cash 750

Discount received ($750 X 2%) 15
Cash 735

30 Cash 750
(b)
Cash
Opening balance 3,750 7-Apr Freight-In 60
15-Apr Inventory 75 11-Apr Inventory 450
20-Apr Accounts receivable 750 13-Apr Accounts payable 1,164
30-Apr Accounts receivable 750 17-Apr Freight-In 45

21-Apr Accounts payable 735
Closing balance 2,871

5,325 5,325
1-May Opening balance 2,871
Accounts Receivable
8-Apr Sales 1,350 20-Apr Cash 750
18-Apr Sales 1,350 27-Apr Sales returns 45
30-Apr Cash 750
2,700 2,700
Inventory
Opening balance 2,550 8-Apr COGS 900
6-Apr Accounts payable 1,260 10-Apr Accounts payable 60
11-Apr Cash 450 15-Apr Cash 75
14-Apr Accounts payable 750 18-Apr COGS 795
5,010 5,010
Accounts Payable
10-Apr Inventory 60 6-Apr Inventory 1,260
13-Apr Discount and cash 1,200 14-Apr Inventory 750
21-Apr Discount and cash 750
30-Apr Closing balance 0
2,010 2,010
1-May Opening balance 0
Share Capital
Opening balance 6,300
Sales
8-Apr Accounts receivable 1,350
18-Apr Accounts receivable 1,350
2,700


27-Apr Accounts receivable 45
Discount Received
51
Cost of Sales
8-Apr Inventory 900
18-Apr Inventory 795
1,695
Freight-In
7-Apr Cash 60
17-Apr Cash 45
105
(c)
Trial Balance
As at 30 April, 2016
Debit Credit
Cash 2,871
Inventory 3,180
Accounts payable
Share capital 6,300
Sales 2,700
Sales returns and allowances 45
Cost of sales 1,695
Freight-In 105
Discount received 51
9,051 9,051
(d)
for the Month Ended 30 April, 2016
Sales revenues
Sales ................................................................................................. $2,700
Less: Sales returns and allowances .................................................. 45
Net sales............................................................................................ $2,655
Cost of sales (Cost of sales + Freight-In)..................................................... 1,800
Gross profit.................................................................................................. $ 855

(e) The chart of accounts lists all the accounts in the general ledger and serves as an
index of accounts. Each ledger account has a title and unique number. The chart of
accounts is helpful for recording transactions because it identifies which accounts
should be used.
PROBLEM SET B 4.5

Sirimon Ltd
for the year ending 30 June 2016
OPERATING REVENUE
Sales revenue:
Gross sales revenue (1,053,000 - $1,038,00
15,000) 0
Less: Sales returns and allowances 0
0
Less: Cost of Sales (705,000)

Interest revenue 7,950 7,950
340,950
OPERATING EXPENSES
Selling expenses:
Advertising 15,000
Depreciation expense - store equip 11,250
Freight out 15,000
Insurance expense (10,500-1,800) 8,700
Rent expense – office space 24,000
73,200
Financial expenses:
Interest expense 6,000
Bank charges 1,500 24,450

PROFIT AFTER INCOME TAX 54,810

PROBLEM SET B 4.6

Daniela’s Fashion House
(a) June. 30 Store Supplies Expense 1,000
Store Supplies 1,000
30 Depr. Expense—Store Equipment 4,500
Accumulated Depreciation—
Store Equipment 4,500
30 Depr. Expense—Office Equipment 3,500
Office Equipment 3,500
30 Interest Expense 5,500
(b)
Store Supplies
30/6 Bal. 2,750 30/6 Supplies expense 1,000
30/6 Bal. 1,750
Store Equipment
30/6 Bal. 19,000
30/6 Deprec exp – SE 4,500
30/6 Bal 23,500
Office Equipment
30/6 Bal. 3,000
30/6 Deprec exp – OE 3,500
30/6 Bal. 6,500
Store Supplies Expense
30/6 Supplies 1,000
Depreciation Expense—Store Equipment

30/6 Accu. Deprn store
equipment 4,500
Depreciation Expense—
Office Equipment
30/6 Accu. Deprn office equip 3,500
Interest Expense
30/6 Interest payable 5,500
Interest Payable
30/6 Interest expense 5,500
30/6 Bal. 5,500
(c)
DANIELA’S FASHION HOUSE

Adjusted Trial Balance
30 June 2017
Debit Credit
Cash $ 18,350
Inventory 22,500
Store Supplies 1,750
Store Equipment 42,500
Accumulated Depreciation—Store
Equipment $ 23,500
Office Equipment 19,000
Accumulated Depreciation—Office
Equipment 6,500
Notes Payable 20,500
Share Capital 40,000
Dividends 6,000
Sales 373,600
Cost of Sales 253,700
Salaries Expense
Administrative Staff 50,000
Sales Staff 15,000
Advertising Expense 13,200
Electricity Expense 7,000
Repair Expense 6,050
Freight Out 8,350
Rent Expense 12,000
Store Supplies Expense 1,000
Depreciation Expense—Store
Equipment 4,500
Depreciation Expense—Office
Equipment 3,500
Interest Expense 00,00115500
Interest Payable ,0005500 5,500
Totals $508,850
$508,850

(d)
OPERATING REVENUE
Sales revenue:
Less: Sales returns and (2,100)
allowances
Other operating revenue: 0

117,800
OPERATING EXPENSES
Selling expenses:
Advertising 13,200
Depreciation expense - store 4,500
equip
Freight out 8,350
Store supplies expense 1,000
Depreciation exp - office 3,500
equipment
Repair expense 6,050
Rent expense - office space 12,000
78,550
Financial expenses:
Interest 5,500 5,500
PROFIT(LOSS) BEFORE INCOME TAX (8,300)

(Ignore income tax)


Retained Earnings, July 1, 2016 $15,000)

Less: Loss $8,300
Dividends 6,000 ( 14,300))
Retained Earnings, June 30, 2017 $ 700)

as at 30 June 2017
Assets
Current assets:
Cash $ 18,350
Inventory 22,500
Store supplies 1,750
Total current assets 59,450
Non-current assets:
Property, plant, and equipment
Store equipment $42,500
Accumulated depreciation—
store equipment 23,500 $19,000
Office equipment 19,000
Accumulated depreciation—
Office equipment 6,500 12,500 31,500
Total assets $90,950
Liabilities and Equity

Current liabilities:
Notes payable due in 2018 $ 15,000
Total current liabilities 44,750
Long-term liabilities
Notes payable due after 2018 5,500
Total liabilities 50,250
Equity
Retained Earnings 700
Total equity 40,700
Total liabilities and equity $90,950

(e) The statement of profit or loss is prepared for a period of time because it summarises
income and expenses for that period. The profit or loss then is used to update equity at the
end of that period. The statement of financial position shows the financial position, i.e., the
balances of assets, liabilities, and equity on the date the statement of financial position is
prepared.

PROBLEM SET B 4.7
(a)
Fixit Hardware Pty Ltd
Date Details Post Debit Credit

Ref
May 2 Accounts Receivable 110 2,250
Sales 400 2,250
Inventory 120 1,500

May 5 Accounts Payable 200 100

Inventory 120 100
May 9 Cash 100 2,205

Discount Allowed 500 45
May 10 Accounts Payable 200 2,900

Cash 100 2,842
May 11 Supplies 130 450

Cash 100 450

Cash 100 1,200
May 15 Cash 100 115

Inventory 120 115
May 20 Inventory 120 950

May 21 Freight Inwards 510 125

Cash 100 125
May 24 Cash 100 3,100

Sales 400 3,100
Inventory 120 2,170
May 25 Inventory 120 500

May 27 Accounts Payable 200 950

Cash 100 931
May 29 Sales Returns and Allowance 405 50

Cash 100 50
Inventory 120 35
May 31 Accounts Receivable 110 800

Sales 400 800
Inventory 120 560
(b)
Cash 100
May 1 Opening Balance 2,500 May 10 Accounts Payable 2,842
9 Accounts 2,205 11 Supplies 450
Receivable
24 Sales 3,100 21 Freight Inwards 125
29 Sales Returns and 50
Allowances
______ 31 Closing Balance 2,322
7,920 7,920
Jun 1 Opening Balance 2,322

May 1 Opening Balance 0 May 9 Cash and Discount 2,250
Allowed
2 Sales 2,250 31 Closing Balance 800
31 Sales 800 3,050
3,050
Jun 1 Opening Balance 800
Inventory 120
May 3 Accounts Payable 3,000 May 2 Cost of Sales 1,500
20 Accounts Payable 950 15 Cash 115
25 Accounts Payable 500 24 Cost of Sales 2,170
29 Cost of Sales 35 31 Cost of Sales 560
5,685 31 Closing Balance 1,240
5,685
Jun 1 Opening Balance 1,240
Supplies 130
May 11 Cash 450 May 31 Closing Balance 450
450 450


May 5 Inventory 100 May 1 Opening Balance 0
10 Cash and Discount 2,900 3 Inventory 3,000
Received
27 Cash and Discount 950 20 Inventory 950
Received
31 Closing Balance 500 25 Inventory 500
4,450 4,450
Share Capital 300

May 1 Opening Balance 2,500
Sales 400
May 2 Accounts Receivable 2,250
24 Cash 3,100
31 Accounts Receivable 800
6,150

May 29 Cash 50

May 10 Accounts Payable 58
77

May 9 Accounts 45
Receivable
Cost of Sales 505

May 2 Inventory 1,500 May 29 Inventory 35
24 Inventory 2,170
31 Inventory 560
4,195
Freight Inwards 510

May 21 Cash 125 May 31 Closing Balance 125
125 125

(c)
Fixit Hardware Pty Ltd
For the month ended May 31
Operating Revenue
Sales Revenue
Gross Sales Revenue 6,150
Less: Sales Returns and Allowances (50)
Net Sales Revenue 6,100
Gross Profit 1,905
(d)
Profit margin = Profit/Net Sales Profit: 1,905 Gross 1,282/6,100

Profit + (58 + 19) = 21.02%
Discount Received –
700 Operating
Expense = 1,282
Gross profit ratio = Gross Profit/Net 1,905/6,100
Sales = 31.23%

PROBLEM SET B 4.8
Nguyen Electronics Ltd

(a)
GST Collected ($50,500/11) 4,591
Sales 45,909

GST Collected ($1,000/11) 91
(To record sales revenue and GST returned)
Inventory 18,546
GST Paid ($20,400/11) 1,854

GST Paid ($2,400/11) 218
Inventory 2,182
GST Collected 4,500

GST Paid 1,636
Cash 2,864

(b)
GST Clearing 4,591
Sales 45,909

GST Clearing 91
(To record sales returns and GST refunded)
Inventory/Purchases 18,546
GST Clearing 1,854

GST Clearing 218
Inventory 2,182
GST Clearing 2,864

Cash 2,864
(c)
GST Collected ($20,400/11) 1,854
Sales 18,546
Inventory 45,909
GST Paid ($50,500/11) 4,591
Cash 2,737
GST Collected 1,854
GST Paid 4,591
(To record refund of GST from tax authority)
(d)
GST Clearing 1,854
Sales 18,546
(To record sales and GST collected)
Inventory 45,909
GST Clearing 4,591
Cash 2,737
GST Clearing 2,737
(To record GST refund from tax authority)

BUILDING BUSINESS SKILLS
FINANCIAL REPORTING AND ANALYSIS
BUILDING BUSINESS SKILLS 4.1 FINANCIAL REPORTING PROBLEM
Domino’s Pizza Enterprises Limited
(a) Percentage change in revenue from sale of goods:
2012 to 2013 ($182,000,000 - $162,337,000) ÷ $162,337,000= 12.1%
Percentage change in profit after tax:
2012 to 2013 ($28,657,000 – $26,936,000) ÷ $26,936,000 = 6%

There has been a 6% increase in profit from 2012 to 2013
(b) Operating expenses to sales ratio:
2012 $151,725,000 ÷ $162,337,000 = 93.5%

2013 $172,539,000 ÷ $182,000,000 = 94.8%
The operating expenses to sales ratio has increased marginally between 2012 and
2013, which indicates that expenses have risen in a slightly larger proportion than
sales.
Note: Analysis of trend typically involves a longer period. Trend analysis is covered
in Chapter 12.

BUILDING BUSINESS SKILLS 4.2 COMPARATIVE ANALYSIS PROBLEM
Nike vs. Adidas Group
The analysis is based on the 2013 reports
(a)
Nike Adidas
($’000,000) ($’000,000)
(1) Profit margin $2,464 $790

$25,313 = 9.7% $14,492 = 5.5%
(2) Gross profit (000’s) $11,034 $7,140

($25,313-$14,279) ($14,492–$7,352)
(3) Gross profit rate $11,034 $7,140 = 49.3%

$25,313 = 43.6% $14,492
(4) Profit after tax $2,464 $790
(5) Percent change in $2,464-$2,269 = 8.6% $790–$524 = 50.7%

Profit after tax $2,269 $524
(6) Operating expenses $7,780 $6,227** = 43%

to sales ratio $25,313= 30.7% $14,492
**($6,133 + $94)
(b) Nike’s higher profit margin suggests that it was better at turning sales dollars into profit.
The gross profit rate is better for Adidas, suggesting that Adidas can command a
higher mark-up on its goods and/or lower product costs. Alternatively, the difference
could reflect different accounting policies between the two companies. Adidas’s
operating profit increased substantially between 2012 and 2013. Although Nike has a
lower gross profit margin, it achieved a higher profit margin because it had a lower
operating expense to sales ratio ie: better control of its operating expenses. However,
we should be careful not to read too much into a comparison based on only one year’s
data.

BUILDING BUSINESS SKILLS 4.3 COMMUNITY AND SOCIAL PERSPECTIVE
(a) Some of the benefits to businesses that make donations of excess inventory include:
 Freeing up storage space from excess, overstocked, obsolete or outdated

inventory;
 The business can claim a tax deduction for the market value of merchandise
donated;
 Enhance the business’ corporate image by donating excess items to a good cause,
rather than dumping or liquidating the items;
 Avoid sending the wrong message to customers that a liquidation sales may bring;
 Avoid disrupting the business’ distribution or sales channels with excessive
inventory that are becoming obsolete.
(b) The procedures for making donations of excess inventory with Charity Link Australia
are:
 The donor company completes a Product Donation Agreement which contains
relevant information about the products being donated, including description,
quantity, configuration, timing, inventory location and fair market value of the
inventory.
 The charity organisation will confirm receipt of the Product Donation Agreement
and collect or arrange transfer of the donated inventory.
 Charity Link Australia will warehouse the donations until requested by welfare
organisations that are qualified and meet the registration criteria. Where
possible, the requested donations will be delivered directly to the welfare
organisations or the families in need.
 Charity Link Australia will provide tax documentation to the donor company in
accordance with the Australian Taxation Office requirements and valuations.

BUILDING BUSINESS SKILLS 4.4 A GLOBAL FOCUS
Woolworths vs. Wal-Mart
(a)
Woolworths Wal-Mart
AUS$ US$
(in millions) (in millions)
Gross profit rate 15,762 115,007

26.94% 24.31%
58,517 473,076
Operating expense sales 12,825 93,688

21.92%  19.80%
58,517 473,076
Based on these ratios and assuming consistent accounting policies, it would appear that
Woolworths is able to command a higher mark-up than Wal-Mart, but that Wal-Mart is
better at controlling its operating costs. It is possible, however, that some of this difference
is due to a difference between the two companies in the way that they report expenses,
e.g. what one company includes in cost of sales, the other company reports as an operating
expense.
(b)
Woolworths Wal-Mart
AUS$ US$
Return on assets 2,255 16,695

10.29% 8.19%
21,916 203,928
Profit margin 2,255 16,695

3.85%  3.53%
58,517 473,076
Woolworths’ return on assets is greater than that of Wal-Mart which indicates it is more
efficient in generating profit from its assets. Also, from the data we observe that the
profit margin for Woolworths is also greater than Wal-Mart which indicates that
Woolworths generates more profit from each dollar of sales..

(c)
Woolworths Wal-Mart
AUS$ US$
Current ratio 6,226 61,185

0.90 : 1 0.88 : 1
6,886 69,345
Debt to total assets ratio 12,950 123,412

58.2%  60.3%
22,250 204,751
Both companies report low current ratios. Both are less than 1. This is not surprising
since it is the retail industry which has a quick turnaround of inventory and mostly cash
sales, limiting the amount of current assets that they hold. However, further
investigation as to the cause would be worthwhile. The debt to total assets ratio of
both companies are comparable in the range of 58 – 60%.
(d) Ratios improve our ability to compare these two companies that report financial
information using different currencies. However, other factors can still reduce our
ability to compare them. As noted in part (a), the two companies might classify items
quite differently. Also, different accounting standards in the two countries might result
in dramatically different results under the same circumstances. Besides, differences
in laws, such as insolvency laws, can affect the results. For example, if Australian
insolvency laws favour shareholders more than US insolvency laws, then Australian
companies may rely more on debt financing than US companies. Finally, the data for
comparison is just one year. It would be more useful to compare the trend over a
number of years.
(Note to lecturer: Trend analysis is covered in Chapter 12 of the textbook.)

BUILDING BUSINESS SKILLS 4.5 FINANCIAL ANALYSIS ON THE WEB
Answers will vary depending on the company and article chosen by student.

CRITICAL THINKING
BUILDING BUSINESS SKILLS 4.6 GROUP DECISION CASE
(a) (1)
Groove Music Store
Projected Statement of Profit or Loss
Net sales [$700,000 + ($700,000 x 6%)] $742,000

Cost of sales ($742,000 x 75%)* 556,500
Gross profit ($742,000 x 25%)** 185,500
Operating expenses:
Selling expenses $100,000
Finance expenses 5,000
Profit $60,500
*75% = ($546,000/700,000) –3%; Alternatively: Net sales $742,000 – gross profit,

$185,500
**25% = ($154,000 ÷ $700,000) + 3%
(a) (2) Groove Music Store

Net sales $700,000

Operating expenses:
Selling expenses* $72,000
Finance expenses 5,000 97,000
Profit $57,000
*$100,000 - $30,000 – ($30,000 x 40%) + ($700,000 x 2%) = $72,000

(b) Fiona’s proposed changes will increase profit by $31,500. Frank’s proposed changes
will reduce operating expenses by $28,000 and result in a corresponding increase in
profit. Thus, if the choice is between Fiona’s plan and Frank’s plan, Fiona’s plan should
be adopted. While Frank’s plan will increase profit, it may also have an adverse effect
on sales personnel. Under Frank’s plan, sales personnel will be taking a cut of $16,000
in compensation {$60,000 – ($30,000 + $14,000)}. In some circumstances, a
commission may be expected to motivate staff to try to make more sales, although this
has been assumed not to be the case for the Groove Music Store.
(c)
Groove Music Store
Net sales $742,000

Operating expenses:
Selling expenses* $72,840
Finance expenses 5,000 97,840
Profit $87,660
*$72,000 + 2% x ($742,000 - $700,000) = $72,840.
If both plans are implemented, profit will be $58,660 ($87,660 - $29,000) higher than
the 2015 results. This is an increase of over 200%.
(d) A variety of factors might be presented by the student. For example, increasing the
quantity of inventory purchased will increase warehousing and other costs of inventory.
It will also increase the risk of holding obsolete or out-of-fashion inventory. Reduced
store deliveries may anger customers, especially if competitors provide more frequent
service. Staff morale may be affected by the lower salaries which are not fully offset
by commissions. Given the size of the increase, Frank’s plan to compensate sales
personnel might be modified so that they would not have to take a pay cut. For
example, if sales commissions were 3%, the compensation cut would be reduced to
$7,740 [$60,000 – ($30,000 - $742,000 x 3%)]. Cutting salespersons’ salaries and
making them more dependent on commissions might actually be viewed favourably by
the sales staff if they have the potential to increase their total compensation.

BUILDING BUSINESS SKILLS 4.7 ETHICS CASE
Fine Foods
(a) Sonya Packovski, as a new employee, is placed in a position of responsibility and is

pressured by her supervisor to continue an unethical practice previously performed by
him. The unethical practice is taking undeserved cash discounts. Her dilemma is
either follow her boss’ unethical instructions or offend her boss and maybe lose the job
she just assumed.
(b) The stakeholders (affected parties) are:

Sonya Packovski, the assistant accountant
Adam Fox, the accountant
Delicacy Foods, the company
Creditors of Delicacy Foods (suppliers)
Mail room employees (those assigned the blame)
The Post Office (also assigned blame).
(c) Sonya’s alternatives:
1. Tell the accountant (her boss) that she will attempt to take every allowable cash
discount by preparing and mailing cheques within the discount period – the
ethical thing to do. This will offend her boss and may jeopardise her continued
employment.
2. Join the team and continue the unethical practice of taking undeserved
settlement discounts.
3. Go over her boss’s head and take the chance of receiving just and reasonable
treatment from an officer superior to Adam. The company may not condone
this practice. Sonya definitely has a choice, but probably not without
consequence. To continue the practice is definitely unethical. If Sonya submits
to this request, she may be asked to perform other unethical tasks. If Sonya
stands her ground and refuses to participate in this unethical practice, she
probably won’t be asked to do other unethical things – if she isn’t fired. Maybe
nobody has ever challenged Adam’s unethical behaviour and his reaction may
be one of respect rather than anger and retribution. Being ethically
compromised is no way to start a new job.

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Solutions Manual

John Wiley & Sons Australia, Ltd 2016

ASSIGNMENT CLASSIFICATION TABLE

2. Explain the recording of purchases 2 2,4,5,6 1A,2A,4A,

4. Prepare a fully classified statement of 1,4,5 7,8,9,10 1A, 3A, 4A,

5. Use ratios to analyse profitability. 6 7,8,9 1A, 3A, 7A

6. Understand the basic process and

7. Complete journal entries to record 7,8 11,12,13 8A, 8B

© John Wiley and Sons Australia Ltd, 2016 4.1

2. (a) The profit measurement process is as follows:

Sales Cost of Gross Operating Net

(b) Profit measurement in a merchandising business differs from a service

© John Wiley and Sons Australia Ltd, 2016 4.2

5. (a) The primary source documents are:

Cash sales - Cash xx

Credit sales - Accounts Receivable xx

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4.1

(a) Sales = $471,900 ($186,940 + $284,960)

(b) Cost of sales = $81,900 ($195,000 - $113,100)

(c) Gross profit = $111,800 ($280,800 - $169,000)

(d) Operating expenses = $85,020 ($113,100 - $28,080)

(e) Operating expenses = $35,100 ($111,800 - $76,700)

(f) Profit = $182,260 ($284,960 - $102,700)

BRIEF EXERCISE 4.2

BRIEF EXERCISE 4.3

(a) 2 Mar Accounts Receivable 450,000

(b) 6 Mar Sales Returns and Allowances 65,000

(c) 8 Mar Cash ($385,000 - $7,700) 377,300

© John Wiley and Sons Australia Ltd, 2016 4.4

BRIEF EXERCISE 4.4

BRIEF EXERCISE 4.5

© John Wiley and Sons Australia Ltd, 2016 4.5

BRIEF EXERCISE 4.6

(c) Gross profit rate = ($275,000 - $110,000) ÷ $275,000 = 60.0%

(d) Operating expenses to sales ratio = $55,000 ÷ $275,000 = 20.0%

BRIEF EXERCISE 4.7

BRIEF EXERCISE 4.8

© John Wiley and Sons Australia Ltd, 2016 4.6

(a) (1) 7 Dec Accounts Receivable 792,000

(2) 8 Dec Sales Returns and Allowances 33,000

(3) 13 Dec Cash ($759,000 - $15,180) 743,820

(b) 2 Jan Cash 759,000

© John Wiley and Sons Australia Ltd, 2016 4.7

EXERCISE 4.2 STOKERS PTY LTD

(a) 1 Jul Inventory 20,000

10 Jul Accounts Payable 20,000

(b) 1 Jul Inventory 20,000

10 Jul Accounts Payable 20,000

QUEENSCLIFF PTY LTD

(a) 1 Jul Accounts Receivable 20,000

(b) 10 Jul Cash 19,400

© John Wiley and Sons Australia Ltd, 2016 4.8

6 Sept. Inventory (80 x $22) 1,760

10 Sept. Accounts Receivable 44

12 Sept. Accounts Receivable (26 x $33) 858

14 Sept. Sales Returns and Allowances 33

20 Sept. Accounts Receivable (30 x $33) 990

(a) (1) 5 April Inventory 9,000

(2) 6 April Freight In 450

(3) 7 April Equipment 52,000

(4) 8 April Accounts Payable 1,500

(5) 11 April Accounts Payable 7,500