Assessment Information – Trimester 3, 2015

Assessment Information – Trimester 3, 2015 3 Trimester 2015 - ASSIGNMENT Page 2 of 4 QUESTION 1 (3 x 10 marks each = 30 marks) Consider the following independent situations: A. Laura Prebble, the owner-manager of a small business, had carefully monitored her cash position over the past financial year, and was pleased to note at the end of the year that the cash position was strong, and had shown a healthy 50% increase over the year. When presented with the income statement for the year, she was dismayed to note that the profit earned in the last year had deteriorated significantly and had become a loss for the current period. In her anger, she accuses you of having made errors in the accounting since ‘such a silly situation could not possibly exist’. REQUIRED: Draft a response to Laura. B. Wayne Deng is reviewing the statement of cash flows for his technology business. The statement has been provided by his accountant. He is dismayed that the statement shows net cash outflows for investing activities. REQUIRED: Discuss if Wayne should be concerned by this. C. After calculating the current ratio for an entity and finding that the ratio’s value was 5:1, a student analyst decided that the company was in a sound position for paying its liquid liabilities. REQUIRED: Discuss the shortcomings of making such a conclusion. BUS 103 Accounting for Managers 3 Trimester 2015 - ASSIGNMENT Page 3 of 4 QUESTION 2 (15 + 10 = 25 marks) The financial statements for the business of Trinh’s Nail Supplies for the past two years are presented below. TRINH’S NAIL SUPPLIES Comparative Income Statements: for the year ended 30 June 2016 2017 Sales $ 400 000 $ 500 000 Cost of sales 350 000 458 000 Gross profit 50 000 42 000 Interest income 1 000 2 000 Loss on sale of fixtures — 800 51 000 43 200 Office supplies used 10 000 11 000 Other expenses 29 000 29 000 39 000 42 000 Profit $ 12 000 $ 3 200 TRINH’S NAIL SUPPLIES Comparative Statements of Financial Position as at 30 June 2016 2017 ASSETS Cash at bank $ 4 400 — Accounts receivable 42 000 $ 60 000 Inventory 80 000 40 000 Office supplies 2 000 5 000 Freehold property 60 000 80 000 Fixtures 40 000 46 000 Accumulated depreciation – fixtures (16 000) (20 200) Investments 6 000 16 000 $ 218 400 $ 226 800 LIABILITIES AND EQUITY Bank overdraft — $ 4 000 Accounts payable $ 26 000 40 000 Trinh, Capital 192 400 182 800 $ 218 400 $ 226 800 Additional information I. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash. II. The bank overdraft is considered to be part of the entity’s cash management function. III. During the year ended 30 June 2017, the owner, Trinh, withdrew $12 800 in cash for personal use. IV. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost $4200 and had been written down to a carrying amount at the date of sale of $2000. V. Depreciation of fixtures has been included in ‘other expenses’ for the year ended 30 June 2017. All remaining other expenses were paid in cash. REQUIRED: A. Prepare the statement of cash flows for Trinh’s Nail Supplies for the year ended 30 June 2017, using the direct method. B. Comment on the cash flow position of the entity as shown in the statement of cash flows. BUS 103 Accounting for Managers 3 Trimester 2015 - ASSIGNMENT Page 4 of 4 QUESTION 3 (18 + 4 + 3 = 25 marks) The following information relates to the business of Chef One. The owner is concerned about the profitability and financial structure of his business at 30 June 2017, especially since the bank is requiring repayment of the business’s overdraft. 30 June 2017 30 June 2016 Revenue (sales on credit) Cost of sales Other expenses Cash and cash equivalents Inventories Trade accounts receivable (net) Non-current assets (net) Trade accounts payable K. Pastry, Capital Non-current liabilities $140 000 99 500 36 500 (32 000) 54 500 50 000 77 000 18 500 108 000 23 000 $105 000 68 500 28 000 28 000 37 000 28 000 46 000 19 000 120 000 — Inventory at 1 July 2016 was $22 500. REQUIRED: A. Calculate the following ratios for 2016 and 2017: i. profit margin ii. return on capital iii. current ratio iv. quick ratio v. equity ratio vi. inventory turnover B. Write a short report to the owner in relation to the profitability and financial stability of the business. C. Identify the cash flow ratios that would be useful to calculate to assist the owner to more fully understand the financial health of the business.