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Australian School of Business

ACCT1501 Accounting and Financial Management 1A Session 2 2013


TUTORIAL WEEK 3 Solutions to Tutorial Questions
Tutorial Questions: v DQ 2.6, 2.10; Problems 2.7, 2.9, 2.11

DQ 2.6
a A balance sheet can indicate whether a company is financially sound by a comparison of the amount of finance raised by debt with the amount raised from owners. The higher the proportion raised by the debt, the higher the risk to the creditors. b The working capital, i.e. current assets less current liabilities indicates a companys ability to pay its bills on time. This assumes that the current assets can be readily turned into cash. c To declare a dividend a company must have adequate cash (or overdraft facilities) and adequate retained profits. The decision will be influenced by shareholder expectations. d The age of equipment can be ascertained by comparing cost of equipment to accumulated depreciation.

DQ 2.10
Your explanations will have been in your own words, perhaps something like the following: a Net profit is part of shareholders equity because the increase in resources earned as mentioned above belongs to the owners, who may withdraw it as dividends. Until they do withdraw it, it is part of their ownership interest. b Net profit could be reported on the balance sheet by just showing that shareholders equity has increased since the prior period. The income statement was developed to provide an explanation of the details of the change in owners equity and to separate that from any dividends withdrawn by the owners during the period. c Companies earn profits when their revenues are greater than the expenses incurred in earning those revenues. Dividends are a distribution of profit to shareholders, not an expense of running a business.

Problem 2.7
Finewines Limited Balance sheet as at 30 June 2012 $ Liabilities 4,340 Accounts payable 9,800 10,460 50,800 Shareholders equity Share capital Retained profits

Assets Cash Inventory of grapes Accounts receivable Kitchen equipment

$ 10,680 40,000 24,720

Total shareholders equity Total assets 75,400 Total liabilities and shareholders equity

64,720

75,400

Net profit for the year (which is not distributed as dividends) is technically called retained profits on the balance sheet, and is a type of shareholders equity. Accounts payable is a liability, not an asset. Accounts receivable is an asset, not a liability. Kitchen equipment is an asset, not shareholders equity nor a liability. Liabilities and share capital should be separately categorised. Individual totals for each of: assets, liabilities and owners equity should be calculated and displayed (unless there is only one or no items in a category, in which case the total is obvious). Totals for each side of the balance sheet should be calculated (to check it balances). Dollar signs should be displayed to indicate that the numbers represent dollars.

Problem 2.9
1 Century Cinemas Income Statement For the year ended 31 December 2012 $ $ Ticket revenue 81,700 Confectionary sales 12,300 Less Cost of confectionary sold (10,500) Gross profit 83,500 Less operating expenses Advertising expense 42,780 Rent expense 33,200 Electricity expense 5,090 (81,070) Net profit 2,430

Century Cinemas Statement of retained profits For the year ended 31 December 2012 Retained profits, 1 January 2012 Net profit for 2012 Retained profits, 31 December 2012 $ 59,720 2,430 62,150

3 Current assets Cash Accounts receivable Inventory Noncurrent assets Furniture & fittings Land & buildings Projection equipment Total assets

Century Cinemas Balance Sheet as at 31 December 2012 $ Current liabilities 4,610 Accounts payable 13,450 18,000 Noncurrent liabilities 36,060 Loan payable Total liabilities 34,000 Shareholders equity 60,000 Share capital 41,000 Retained profits 135,000 171,060 Total liabilities and shareholders equity

$ 13,910 35,000 48,910 60,000 62,150 122,150 171,060

Problem 2.11
1 2 3 4 5 6 7 8 9 Assets Increase Increase NE Increase NE Decrease NE Increase Increase Liabilities NE* Increase NE Increase NE Decrease NE Increase NE Shareholders equity Increase NE NE NE NE NE NE NE Increase Notes

Assets increased and decreased Assets increased and decreased Assets increased and decreased

*NE (no effect)