ACCT10002: Tutorial 1 Exercises

This tutorial provides exercises relating to the following areas of study:

Users of financial statements Statements of Financial Position and Performance

Conceptual Framework of Accounting Ratio analysis
Reporting entity Ethics
Accounting concepts and principles

The following exercises are required to be completed before coming to the

tutorial:
1.  (Question 1.7)

Why it is important to determine if a business entity is a reporting entity? Outline the three
main indicators that determine if an entity is a reporting entity.

2. (Question BE13.7)

Identify which of the following indicators is more likely to result in an entity being classified
as a reporting entity.

(a) The entity is owned and managed by the same individuals.

(b) The entity is politically or economically important.
(c) The entity is sizeable measured in relation to customer satisfaction.
(d) The entity is sizeable measured in relation to sales.
(e) The entity has a small number of assets.
(f) The entity has large borrowings.

3. (Exercise 1.9)

These financial statement items are for Christchurch Flooring Pty Ltd at year-end, 31 July
2015:
Cost of sales $30 000
Salaries expense 25 000
Other expenses 18 000
Building 70 000
Accounts payable 8 000
Sales revenue 62 000
Rent revenue 30 000
Rent revenue received in advance 2 000
Share capital 90 000
Cash 33 000
Bank loan 80 000
Accumulated depreciation 12 000
Land 80 000
Depreciation expense 4 000
Retained earnings (beginning of the year) 2 000
Inventory 26 000

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Required

(a) Prepare a statement of profit or loss for the year.

(b) Prepare a classified statement of financial position at 31 July 2015.

4. What does a complete set of financial statements comprise and which of the financial
statements is more important? Research AASB101 to find your answers.

The following exercises should be completed prior to the tutorial and may be
discussed during the tutorial:

5. (Question 1.6)
What is a conceptual framework and what purpose does it serve?

6. (Question 13.18, 20, 21)

(a) Define assets and explain the recognition criteria for assets as outlined in the Conceptual
Framework.

(b) Define liabilities and outline the recognition criteria for liabilities as outlined in the
Conceptual Framework.

(c) How is equity defined in the Conceptual Framework? Provide examples of transactions
or events that affect equity. Provide examples of transactions and events that do not affect
equity.

7. (PSA1.3)

Smart Travel Goods Pty Ltd was formed on 1 July 2014. At 30 June 2015, Mark Austin, the
managing director and major shareholder, decided to prepare a statement of financial position,
which appeared as follows:

SMART TRAVEL GOODS PTY LTD

Statement of Financial Position
as at 30 June 2015
Assets Liabilities and equity
Cash $30 000 Accounts payable $ 30 000
Accounts receivable 23 000 Notes payable 12 000
Inventory 40 000 Bank loan 350 000
Villa 450 000 Equity 151 000

Mark willingly admits that he is not an accountant by training. He is concerned that his
statement of financial position might not be correct. He has provided you with the following
additional information:
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1. The villa is on the Sunshine Coast and actually belongs to Mark, not to Smart Travel Goods
Pty Ltd. However, because he thinks he might allow executives to use it sometimes, he
decided to list it as an asset of the company. To be consistent he also listed as a liability of
the company his personal loan that he took out at the bank to buy the villa.

2. The inventory was originally purchased for $15 000, but due to a surge in demand Mark now
thinks he could sell it for $40 000. He thought it would be best to record it at $40 000.

3. Included in the accounts payable balance is $6000 that Mark owes for his personal telephone
account. Mark included this in the accounts payable of Smart Travel Goods Pty Ltd because
he will probably use a company cheque to pay for it.

Required

(a) Comment on the proper accounting treatment of the three items above.

(b) Provide a corrected statement of financial position for Smart Travel Goods Pty Ltd. (Hint:
To get the statement of financial position to balance, adjust equity.)

The following exercises may be discussed during the tutorial:

8. (Question 13.11)

Two qualitative characteristics that financial information should possess are relevance and
faithful representation. Explain these concepts and discuss whether you believe one is more
important than the other, or if are they equally important?

9. (Question 13.14)

General purpose financial reports are only one source of information for users when making a
variety of decisions. What other sources of information are available to users and why is it
important that they obtain them? Support your discussion with examples.

10. (Question 1.4)

Who are the external users of accounting data? Give examples.

11. (Ethics)

Jason Carlisle, was appointed the manager of Westbrook Properties, a recently formed
company that manages residential rental properties. Maria Fremont is the accountant. She
prepared a chart of accounts based on an analysis of the expenditures of the company. One of
the largest expense categories is Travel and Entertainment. Jason believes that it is important
to maintain a presence in the social life of the city. In this, he sharply differs from his father,
Thomas Carlisle. The elder Mr. Carlisle has set up Westbrook Properties in order to test his
son's management skills before allowing him to manage a more lucrative commercial
property business. Mr. Carlisle, Sr. provided the capital for Westbrook, and maintains close
contact with the company. He allowed his son, however, to hire his own employees.

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Jason has asked Ms. Fremont to rename the Travel and Entertainment account Property
Development. He hopes to deflect his father's attention away from the amount he has spent
on travel and entertainment until he has proven that his methods work. When Ms. Fremont
resisted, he reminded her that he, not his father, hired her. He also reminded her that she had
been enthusiastic about his business plans when she was hired.

Required:
1. Who are the stakeholders in this situation?
2. What is the intention of the change in name of the Travel and Entertainment account?
3. If Ms. Fremont agrees to the change in the Travel and Entertainment account to
Property Development what is the effect of such a change?
4. What are Ms. Fermont's options and consequences of these?

12. (PSB1.10)

Selected financial data (in thousands) of two competitors, New Ltd and Old Ltd, for 2015 are
presented here:
NEW Ltd OLD Ltd
Selected statement of profit or loss
data for year
Net sales $420 000 $350 000
Cost of sales 227 500 178 500
Borrowing costs (interest expense) 36 750 105 000
Income tax expense 49 000 14 000
Profit 56 000 17 500

Condensed statement of financial

position (end of year)
Current assets $115 500 $ 70 000
Non-current assets 444 500 612 500
Total assets $560 000 $682 500
Current liabilities $ 52 500 $ 35 000
Non-current liabilities 245 000 560 000
Total equity 262 500 87 500
Total liabilities and equity $560 000 $682 500

Beginning-of-year balances
Total assets $490 000 $542 500

Required

For each entity, calculate these values and ratios:

(a) Working Capital

(b) Current ratio.

(c) Debt to total assets ratio.

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(d) Return on assets.

(e) Profit margin.

(f) Compare the liquidity, solvency and profitability of the two entities.

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