External Examination 2014

2014 ACCOUNTING
FOR OFFICE
USE ONLY

SUPERVISOR
ATTACH SACE REGISTRATION NUMBER LABEL
CHECK
TO THIS BOX

RE-MARKED
Monday 17 November: 1.30 p.m.
Pages: 32
Time: 2 hours Questions: 4

Examination material: one 32-page question booklet

one SACE registration number label

Approved dictionaries and calculators may be used.

Instructions to Students

1. You will have 10 minutes to read the paper. You must not write in your question booklet or use a calculator during
this reading time but you may make notes on the scribbling paper provided.

2. This paper consists of four problem questions.

Answer all questions in the spaces provided in this question booklet.

3. The total mark is 120.

4. The financial analysis ratios are on page 3, which you may remove from this booklet before the examination
begins.

5. Remove the tear-out information sheets on pages 5, 11, 19, and 27 from the booklet, so that you can refer to
them when you write your answers.

6. Show all working in this booklet. (You are strongly advised not to use scribbling paper. Work that you consider
incorrect should be crossed out with a single line.)

7. Use only black or blue pens for all work other than calculations, for which you may use a sharp dark pencil.

8. Attach your SACE registration number label to the box at the top of this page.
 STUDENT’S DECLARATION ON THE USE OF
CALCULATORS

By signing the examination attendance roll I declare that:

• my calculators have been cleared of all memory
• no external storage media are in use on these calculators.
I understand that if I do not comply with the above conditions
for the use of calculators I will:
• be in breach of the rules
• have my results for the examination cancelled or amended
• be liable to such further penalty, whether by exclusion from
future examinations or otherwise, as the SACE Board of
South Australia determines.

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to it when you write your answers.

FINANCIAL ANALYSIS RATIOS

Profitability (Return) Expressed as

For all entities:
net profit
Return on equity %
owner’s equity*

net profit  interest expense

Return on total assets %
total assets*

net profit
Net profit margin %
net sales
individual expenses
Expense %
net sales
gross profit
Gross profit margin %
net sales

For companies:
net profit for ordinary shareholders
Earnings per ordinary share $
number of ordinary shares
earnings per ordinary share
Earnings yield %
market price per ordinary share

total ordinary dividend

Dividend per ordinary share $
number of ordinary shares

dividend per ordinary share

Dividend yield %
market price per ordinary share

Financial Stability (Risk)

Short Term (Liquidity)
current assets – inventory
Quick asset (acid test)† ratio
current liabilities

current assets
Working capital ratio
current liabilities

net credit sales

Debtors’ turnover times
debtors*

cost of goods sold

Inventory turnover times
inventory*

Long Term (Solvency)

total liabilities
Total debt/total assets %
total assets

total liabilities
Debt/equity %
owner’s equity
net profit  interest expense
Times interest earned times
interest expense

*Averages are used for these values. However, the availability of information may necessitate the use of opening or closing
values.
†It is acceptable also to deduct bank overdrafts from current liabilities when calculating this ratio, as appears in some
textbooks and study guides.

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 1.

QUESTION 1
Jeremy Gould and Renee Star own and operate Gold Star Cinemas. They want to have more
control over their cash and have decided to construct a cash budget for April. They provide the
following information:
• They determine that 80% of sales are cash and the remaining 20% are credit sales from group
bookings.
• Of the credit sales, 75% pay in the month after sale, 20% pay in the second month after sale,
and the remaining 5% are bad debts.
• Gold Star Cinemas also receives the following amounts of cash from candy bar sales:
 $5000 in January
 $2500 in February and in March
 $5000 estimated for April.
• They estimate that $300 in cash will be received from T-shirt sales in April.

Other Information
• The business pays $5600 per month for film rights.
• Cinema wages are $10 900 per month and are expected to increase by 10% in April.
• Electricity is $2200 per month.
• Depreciation on cinema chairs and equipment is $800 per month.
• Rent for the cinemas is $8000 per month.
• Jeremy and Renee plan to replace their popcorn machine in April, at a cost of $4400, and to
purchase a doughnut maker at a cost of $6000 at the same time.

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QUESTION 1

(a) Complete the collection from debtors schedule for April for Gold Star Cinemas.

GOLD STAR CINEMAS

Collection from Debtors Schedule for April

Month Total Sales Credit Sales April

January 25 000
February 13 000
March 12 000
April 19 000

Total

(3 marks)

(b) Prepare the cash budget for April for Gold Star Cinemas.

GOLD STAR CINEMAS

Cash Budget for April

April

Estimated receipts

Total estimated receipts

Estimated payments

Total estimated payments

Surplus/deficit

Opening bank balance 5 200

Closing bank balance

(7 marks)

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(c) Gold Star Cinemas is intending to arrange a bank overdraft to ensure that it can make its
cash payments in April.

(i) What factors should be considered when deciding whether or not to arrange a bank
overdraft?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(ii) Suggest how Gold Star Cinemas could achieve a positive cash balance by reviewing its
cash budget for April.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iii) Suggest one other way to achieve a positive cash balance.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(d) Gold Star Cinemas purchased thirty T-shirts in March for $10 each to sell for $15 each as
part of a movie promotion. Ten T-shirts are left.

(i) What amount should be recorded in the balance sheet for the remaining T-shirts?

_______________________________________________________________________________________________________

(1 mark)

(ii) How has the concept of prudence been applied in part (d)(i)?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

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(e) Renee has provided the following bar graph of ticket sales to aid in decision-making:

Ticket Sales ($) for January to April

30 000

25 000

20 000

15 000

10 000

5 000

0
January February March April
(estimated)

Given that ticket sales have a downward trend from January to March, suggest two reasons why
increased ticket sales have been estimated for April.

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

(f ) Jeremy and Renee are planning to use the cinemas for corporate events and will need to
hire an events coordinator with a $50 000 annual wage. There will also be additional fixed
costs of $5000 per year for advertising and variable costs of $1000 per booking (for food).

(i) It is expected that $4000 per event will be received.

How many event bookings will be needed for the business to break even?

(2 marks)

(ii) If only twelve events per year (one a month) can be arranged, what profit or loss would
be made?

(2 marks)

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(iii) Considering your calculations in part (f )(i) and (ii) on page 9, and the cash budget
you prepared in part (b), would you advise Jeremy and Renee to use the cinemas for
corporate events? Give reasons for your advice.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(3 marks)

TOTAL: 25 marks

End of Question 1

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 2.

QUESTION 2
Heidi is the owner of HC’s Gourmet Cheese Shop, which sells high-quality local and imported
cheeses to the general public as well as to restaurants and cafes. The business has been
operating for the past 18 months and Heidi closely monitors its progress by producing monthly
reports. Subsidiary systems are used to record debtors and inventories.
The following information has been provided for October:

Cash Transactions
• Sales $23 500 (cost price $12 100).
• Purchases $9400.
• Purchases returns $500.
• Other payments made
 $4600 for customs duty
 $2300 for freight inwards
 $1900 for delivery of cheese to customers.

Debtors
• Sales $56 000 (cost price $19 800).
• Sales returns $4600 (cost price $750).
• $37 900 received from debtors and $2300 allowed in discount.
• One debtor (Brie’s Cafe) has informed HC’s Gourmet Cheese Shop that the business is
bankrupt and unable to pay its $9500 outstanding debt. This amount is to be written off as a
bad debt.
• Debtors were charged $1500 for delivery.

More Information
• Heidi withdrew stock for her own use — cost price $450, selling price $780.
• Credit purchases $15 000.

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QUESTION 2

(a) Using the information on page 11 (the tear-out sheet), complete the general journal entries to
record the drawings and the bad debt.

GENERAL JOURNAL

Date Particulars Debit Credit

Owner withdrew stock for own use

Bad debt written off

(3 marks)

(b) Using the information on page 11, complete the inventory control account. Formal balancing is
not required.

Inventory Control Account

1 October Opening Balance 64 500

(7 marks)

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(c) (i) Complete the table below by calculating the inventory turnover for October. Use the following
space for calculations.

August September October

0.42 times 0.48 times

(2 marks)

(ii) State the trend in inventory turnover for the past 3 months.

_______________________________________________________________________________________________________

(1 mark)

(iii) Ignoring the trend, give one reason the October result may concern Heidi.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(d) Complete the following extract from the income statement for HC’s Gourmet Cheese Shop for
the month ended 31 October.

HC’S GOURMET CHEESE SHOP

Extract from Income Statement for Month Ended 31 October

Revenue

Cost of Goods Sold

Gross Profit

(4 marks)

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(e) (i) What method of recording information about inventory has allowed HC’s Gourmet Cheese
Shop to prepare monthly reports without conducting a stocktake?

_______________________________________________________________________________________________________

(1 mark)

(ii) Describe one way HC’s Gourmet Cheese Shop would use technology to record the
movement of inventory.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iii) Name one advantage, apart from the ability to prepare monthly reports, that this business
gains from not having to conduct a stocktake.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iv) Why should a business that uses inventory cards conduct a stocktake before the
end-of-year financial reports are prepared?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(f ) Using the information on page 11 (the tear-out sheet), complete and formally balance the
debtors’ control account.

Debtors’ Control Account

1 October Opening Balance 72 000

(4 marks)

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(g) (i) Name one method of screening debtors that may have prevented the large bad debt.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(ii) How may the use of debtors’ ageing analysis prevent future bad debts?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iii) Describe two impacts that creating an allowance for doubtful debts would have on the
financial statements for HC’s Gourmet Cheese Shop.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(iv) Outline how the closing balance in the allowance for doubtful debts account could be
determined.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(h) The accounting process involves the collection, processing, and analysis of data and the
reporting of information to users.
Using examples from the question, state how HC’s Gourmet Cheese Shop:

(i) collects financial data.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(ii) processes the data.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

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(iii) analyses the data.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iv) reports the information.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

TOTAL: 35 marks

End of Question 2

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You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 3.

QUESTION 3
Jim Cardio is the owner of Health and Fitness Supplements, a food and equipment store. As his
premises are larger than he needs, he arranged to rent one of his rooms to a naturopath from
1 June. The following trial balance (extract) as at 30 June 2014 has been provided to help in the
preparation of a balance sheet for the business:

HEALTH AND FITNESS SUPPLEMENTS

Trial Balance (extract) as at 30 June 2014

Account Debit Credit

Capital 298 290

Furniture 59 000
Accumulated depreciation on
30 000
furniture
Premises 410 000
Drawings 23 000
Inventory (1.7.13) 41 300
Mortgage 160 000
Interest on mortgage 8 000
Equipment 26 000
Accumulated depreciation on
7 500
equipment
Prepaid advertising 5 000
Cash on hand 2 000
Bad debts 1 850
Creditors 33 600
Debtors 47 000
Loan (due January 2015) 1 800
Overdraft 600
Insurance 9 000
Allowance for doubtful debts 2 000
Rental revenue 3 000

More Information at 30 June 2014

• Advertising expense for the period was $3600.
• Furniture was bought on 1 February 2014 for $9000. This transaction has already been
recorded.
• Furniture is depreciated at 8% per annum, using the straight-line method.
• Allowance for doubtful debts is to be adjusted to 5% of the closing debtors’ balance.
• The insurance expense was paid on 1 April for the following 12 months.
• Equipment is depreciated at 6% per annum, using the reducing-balance method.
• On 1 June the business received $3000 rent for June, July, and August.
• The closing inventory is $38 400.

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QUESTION 3

(a) (i) Show the calculation for the depreciation on furniture.

(2 marks)

(ii) Show the calculation for the depreciation on equipment.

(1 mark)

(b) Complete the general journal entries to record the following adjustments.

GENERAL JOURNAL

Date Particulars Debit Credit

Depreciation on furniture

Rent received in advance

(3 marks)

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(c) Complete and formally balance the allowance for doubtful debts account.

Allowance for Doubtful Debts Account

1 June Opening Balance 2 000

(3 marks)

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(d) Complete the balance sheet for Health and Fitness Supplements as at 30 June 2014.

HEALTH AND FITNESS SUPPLEMENTS

Balance Sheet as at 30 June 2014

OWNER’S EQUITY

Represented by:

ASSETS

Current

Non-current

TOTAL ASSETS

LIABILITIES

Current

Non-current

TOTAL LIABILITIES

NET ASSETS

(14 marks)

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(e) (i) Calculate the working capital ratio for the business, using the information from the
balance sheet on page 23.

(1 mark)

(ii) Comment on the results of the working capital ratio for the business.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(f ) The business has been considering investing in shares in a public company and is trying
to decide between two options: Custom Cycles Ltd and Joggers Life Ltd. The following
information has been provided for the two options:

Custom Cycles Ltd Joggers Life Ltd

Net profit $600 000 $2 800 000
Ordinary dividend $640 000 $2 500 000
Number of ordinary shares 400 000 900 000
Market price per ordinary share $7.50 $18.20
Earnings yield 20.0% 17.1%
Dividend yield 15.3%

(i) Calculate the dividend yield for Custom Cycles Ltd.

(3 marks)

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 (ii) State a reason for the different dividend yields for the two options listed on page 24.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(iii) What is the difference between dividend yield and earnings yield?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(2 marks)

(iv) How can the ordinary dividend be greater than the net profit for Custom Cycles Ltd?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(v) How would the issue of new shares by Custom Cycles Ltd affect the return to current
shareholders?

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(g) Health and Fitness Supplements follows a number of accounting concepts in completing the
financial statements.

(i) Define the materiality concept.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(ii) Define the consistency concept.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

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 (iii) Give an example of a limitation when applying the consistency concept.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(h) (i) For each of the following expenses, identify the appropriate category: selling, administrative,
or finance expenses.

• Bad debts: _______________________________________________________________________________________

• Interest on loan: _________________________________________________________________________________

• Depreciation on delivery vehicle: ______________________________________________________________

• Rates and taxes: ________________________________________________________________________________

(2 marks)

(ii) State one benefit of using classifications in the financial statements.

_______________________________________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

TOTAL: 40 marks

End of Question 3

26
You may remove this page from the booklet by tearing along the perforations, so that you can
refer to the following information when you write your answers to Question 4.

QUESTION 4
Silvano Oliveri runs Cleaning Up Your Mess, a waste disposal company. Silvano is keen to
expand his business but is unsure if this is a good idea, given last year’s loss. Silvano has
supplied the following comparative balance sheets for 2013 and 2014, as well as an income
statement for the year ended 30 June 2014 (on page 28), to be used in preparing a statement of
cash flows for the year ended 30 June 2014:

CLEANING UP YOUR MESS

Comparative Balance Sheets as at 30 June 2014 and 30 June 2013

2014 2013

Current Assets
Cash 35 400 15 500
Debtors 25 000 12 500
Inventory 26 000 28 000
Prepaid electricity 13 000 12 000

Non-current Assets
Buildings 185 000 155 000
less accumulated depreciation 35 000 150 000 25 000 130 000
Vehicles 80 000 80 000
less accumulated depreciation 14 000 66 000 7 000 73 000
Land 220 000 200 000

Total Assets

Current Liabilities
Creditors 6 000 15 000
Accrued wages 4 400 6 000

Non-current Liabilities
Bank loan 250 000 150 000

Total Liabilities

Net Assets

Equity
Capital 300 000 300 000
Drawings (5 000) (5 000)
Profit/Loss (20 000) 5 000
275 000 300 000

More Information
• All acquisitions of non-current assets were paid for in cash.
• All drawings were paid for in cash.

The information for Question 4 is continued on page 28.

27 PLEASE TURN OVER

 CLEANING UP YOUR MESS
Income Statement for Year Ended 30 June 2014

2014

Revenue
Waste disposal services 190 000
Sales 200 000 390 000
Opening inventory 28 000
Purchases 123 000
less purchases returns 3 400
Closing inventory 26 000 121 600

Gross Profit 268 400

Other Revenue
Discount received 1 600

Expenses
Vehicle running costs 76 000
Depreciations 17 000
Waste dumping costs 50 000
Wages 85 000
Bad debts 6 000
Interest 24 000
Electricity 32 000 290 000

Loss (20 000)

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QUESTION 4

(a) Complete the following calculations, which you will need in order to prepare a statement of
cash flows for Cleaning Up Your Mess.

Receipts from customers

Payments to suppliers

Payments for electricity

Payments for wages

(7 marks)

Use this space to make other calculations needed in preparing a statement of cash flows.

29 PLEASE TURN OVER

(b) Prepare a statement of cash flows for Cleaning Up Your Mess for the year ended
30 June 2014.

CLEANING UP YOUR MESS

Statement of Cash Flows for Year Ended 30 June 2014

CASH FLOWS FROM OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES

INCREASE/DECREASE IN CASH HELD

CASH AT BEGINNING OF YEAR

CASH AT END OF YEAR

(6 marks)

30
(c) With reference to the information on pages 27 and 28 (the tear-out sheet), and to the
statement of cash flows that you have prepared in part (b) on page 30, outline why the
statement of cash flows shows an increase in cash whereas the income statement reported a
loss.

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

(d) Silvano’s decision to expand his business meant a large outflow for investing activities.
Is a large outflow for investing activities positive or negative for a business? Give reason(s) for
your answer.

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(2 marks)

(e) Silvano is keen to expand his business further and is considering taking on a partner named
Mei Fong.
If Silvano and Mei formed a partnership to run Cleaning Up Your Mess, the:

(i) accounting entity would be ________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

(ii) legal entity would be _______________________________________________________________________________

_______________________________________________________________________________________________________

(1 mark)

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(f ) Silvano’s potential new partner, Mei, has made a suggestion to improve the business’s profit.
Instead of paying to have the waste disposed of properly, they could find a remote location
and dump the rubbish themselves, saving about $50 000.
Comment on the social, ethical, and/or environmental impacts of this plan.

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

____________________________________________________________________________________________________________

(1 mark)

TOTAL: 20 marks

End of Question 4

© SACE Board of South Australia 2014

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