Accounting adjusting entries
Accounting adjusting entries
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QUESTION 1: Accounting adjusting entries and financial statements
$ $
Bank Overdraft 11,000
Accounts Receivable 200,000
Inventory 100,000
Prepaid Rent 10,000
Property, Plant and Equipment 450,000
Accumulated Depreciation 200,000
Accounts Payable 60,000
Bank loan 50,000
Share Capital 310,000
Retained Profit at 1 July 2019 34,000
Sales revenue 450,000
Cost of Goods Sold 265,000
Interest Expense 5,000
Wages Expenses 80,000
Rent Expense 5,000
1,115,000 1,115,000
The following information is given which may give rise to year-end adjustments. The
effect of these transactions is not reflected in the account balances above.
i. Depreciation on Property, Plant and Equipment is $45,000 per annum.
ii. The balance in Prepaid Rent relates to the 12-month period from 1 January 2020 to
31 December 2020.
iii. Insurance worth $18,000 was prepaid on 1 June 2020 for the period 1 June 2020 –
30 November 2020. No journal entry had been recorded for this purchase.
iv. On 30 June 2020, the directors declared (payable) a dividend of $5,000,
which the shareholders authorised. The dividend is to be paid on 15 September
2020.
v. It is discovered that $10,000 cash received during the year and credited to sales are
actually related to services to be delivered in July 2020.
vi. $5,000 of wages relating to June 2020 have not been paid and need to be accrued.
DPBS1140: Sample Final Examination Questions
1
Note: Use question 1 as practice for units 1-4 and your final exam will include 10
multiple choice questions on units 1-4 inclusive. You can practice further using the
non assessable questions
Part A
Prepare journal entries for the necessary end of period adjustments
Account name Debit Credit
$ $
2
Part B
Prepare an Income Statement for the year ended 30 June 2020
Sydney Company
Income Statement for the year ended 30 June 2020
Sales revenue
Less: Cost of Goods Sold
= Gross Profit
Less other expenses:
Interest expense
Depreciation expense
Rent expense
Insurance expense
Wages expense
Total other expenses
= Net Profit
3
Part C
In the Balance Sheet as at 30 June 2020, what would be the closing balance of
retained profits? Show all workings
Opening Balance Retained Profits ___________
Plus Net Profit for Period _________
Less Dividends declared _________
= Closing Balance _________
4
FINANCIAL STATEMENT RATIOS
Return on Equity Operating Profit after Tax Shareholders' Equity
Return on Assets Operating Profit after Tax Total Assets
Gross Margin Gross Profit Sales
Profit Margin Operating Profit after Tax Sales Revenue
Earnings Per Share
Operating profit after tax – preference share dividends
Weighted Average Number of Ordinary Shares
Outstanding
Dividend Payout Ratio
Total Dividends declared
Operating profit after tax
Alternatively, to calculate the ratio per share:
Annual Dividends Declared per Share
Earnings per Share
Asset Turnover Sales Total Assets
Inventory Turnover COGS Closing Inventory
Debtors (Receivable)
Turnover
Credit Sales
Accounts Receivable
Current Ratio Current Assets Current Liabilities
Quick Ratio Cash + Accounts Receivable + Short-term investments Current Liabilities
Leverage Ratio Total Assets Total Shareholders’ Equity
Debt to Equity Ratio Total Liabilities Total Shareholders' Equity
Debt to Asset Ratio Total Liabilities Total Assets
Days in Inventory 365 Inventory Turnover
Days in Debtors (Receivables) 365 Debtors (Receivables) Turnover
Accounts payable
turnover
Total Inventory Purchased
Accounts Payable
Days in Payable 365 Payable Turnover
Days in Inventory 365 Inventory Turnover
Dividend Yield Ratio Annual Dividends Declared Per Share Share Price
Price/Earnings Ratio Market Price Per Share Earnings Per Share
P/E multiple
Market Price per share
Earnings per share
=
Market capitalization
Net Income
P/B multiple
Market capitalization
Book value of Equity
5
Term 2, 2021
P/S multiple Market capitalization
Sales Revenue
Enterprise Value (EV) MV of Debt + MV of Equity – Cash – Non-operating Assets
EV/EBITDA multiple Enterprise Value
EBITDA
EV/EBIT multiple Enterprise Value
EBIT
EV/SALES multiple Enterprise Value
Sales Revenue
Free Cash Flow:
(Indirect)
EBIT(1 – T) + Depreciation – Capex
– Chg NWC + Terminal Cash Flows
Free Cash Flow:
(Direct)
(Revenue – Cost)(1 – T) + (Depr)(T) – Capex
– Chg NWC + Terminal Cash Flows
Change in Net Working
Capital
(CAt – CLt) – (CAt-1 – CLt-1)
= (CAt – CAt-1) – (CLt – CLt-1)
6
QUESTION 2: Financial Statement Analysis
Retail Limited
Extracts from the Income Statements for the years ended 31 December 2020 and 2019
2020
$
2019
$
Revenue 850,000 800,000
Less: COGS 595,000 480,000
Gross Profit 255,000 320,000
Less:
Total expenses 170,000 200,000
Net profit 85,000 120,000
Retail Limited
Extracts from the Balance Sheets as at 31 December 2020 and 2019
2020
$
2019
$
Total non-Current Assets 325,000 350,000
Current Assets
Accounts receivable 155,000 70,000
Inventory 100,000 30,000
Cash 200,000 250,000
Total Current Assets 455,000 350,000
Total Assets 780,000 700,000
Current Liabilities
Accounts Payable
Dividend Payable
Total current liabilities
100,000
40,000
140,000
75,000
-
75,000
Non-Current Liabilities
Long term loan
Total Liabilities
210,000
350,000
150,000
225,000
Shareholders’ Equity
Share Capital 300,000 200,000
Retained Earnings 130,000 275,000
Total Shareholders’ Equity 430,000 475,000
7
Based on the above extracts from the financial statements of Retail Limited for the years
ended 31 December 2020 and 2019, you are required to answer the following:
1. Drawing on any two profitability ratios, comment on the financial performance of the
company (3 marks)
Explanation:
2. Drawing on any two relevant pieces of evidence from the balance sheet, explain
whether the company’s liquidity improved or worsened during year 2020 (3 marks)
Explanation:
3. Drawing on any two relevant ratios, explain whether the company’s solvency
improved or worsened during the year (3 marks)
Explanation:
4. Evaluate the Investment potential of the business in the short term ie 1 year? (1 mark)
ROE
ROAA
Gross margin
Net Profit Margint profit
margin
Quick ratio
Current ratiock
ratio
Cu rent ratio
Debt to equity
Debt to assets
Leverage
o equity Debt
to assets
Leverage ratio
8
QUESTION 3: Financial Statement Analysis
You are required to indicate the effect of the transactions listed below on the ratio listed
opposite it. For each transaction, state whether the ratio would increase, decrease, or have no
effect. You are also required to provide a brief explanation for your answer.
Transaction Ratio
1 Acquired a bank loan of $750,000 Debt-to-assets ratio
2 Inventory worth $30,000 was sold for $45,000 cash Return on equity
3 Declared a dividend of $500,000 Profit margin
4
Received a deposit from a customer of $10,000 for
a project that will commence in the next Leverage Ratio
financial period
5 Collected $30,000 from a customer Asset Turnover
Note:
Treat each transaction independently.
The current ratio for the period was 2.4.
The debt-to-asset ratio was 0.67.
The return on equity ratio was 4%.
All other ratios were positive.
Effect Explanation
1
2
3
4
5
9
QUESTION 4: Audit Independence Threats
Describe and explain what type of independence threat each of the following situation
provides:
1. The client of an audit firm asked the audit partner to promote their shares for a
stock exchange listing. (2 marks)
2. The husband of an auditor holds $23,000 worth of shares in the audit client. (2
marks)
3. The client manger engaging has a dominant personality and seeks to influence the
decision making of junior staff. (2 marks)
4. Due to a recent audit controversy, the audit firm has lost several clients. This
means AZ Bank represents 25% of the audit firm’s earnings. (2 marks)
10
QUESTION 5: Audit Opinions
A. Describe the role of an external auditor (2 marks)
B. What type of audit opinion would be offered in the following situation? (4 marks)
A problem with the client’s IT systems has meant that the audit team are unable to review
important sales receipts to confirm the recording of revenue and expense receipts to confirm
all expenditures. This means that the audit team were unable to determine whether proper
books of account had been kept.
C. Briefly describe any other type of audit opinion (2 marks)
11
QUESTION 6: Audit Opinions
“John is a recent graduate from UNSW and has successfully applied for a job in a
medium sized accountancy firm, Thompson & Smith, as a junior auditor. John is part
of the team that audits the annual financial statements of XYZ Limited. The audit for
XYZ Limited is nearing its completion and the audit team are considering what type of
audit opinion can be issued. The audit partner has held some difficult meetings with the
management team of XYZ Limited, disagreeing with how management have calculated
depreciation of buildings. The audit partner believes that the manner in which
depreciation has been calculated is incorrect and represents a material misstatement to
the financial statement. The audit partner has also told John that all other areas of XYZ
Limited’s financial statements are correctly prepared. Unfortunately, XYZ Limited’s
management are unwilling to follow the audit partner’s advice and won’t change how
they have calculated deprecation for buildings. The audit partner has asked John to
think about how this will affect the audit opinion.”
Based on the above information, please answer the following questions:
1. Explain the purpose of an external audit? (2 marks)
2. Justify the type of audit opinion that would likely be issued in the above
situation? (4 marks)
3. Outline any two other types of audit opinions that auditors provide? (2
marks)
12
QUESTION 7: Internal Controls
For each of the following situations, evaluate the segregation of duties implemented by the
company and indicate the following:
1. Any deficiency in the segregation of duties described. Indicate “None” if no
deficiency is present.
2. The potential financial statement misstatements that might occur because of the
inadequate segregation of duties.
3. Additional controls that might mitigate potential misstatements.
Situation A (4 marks):
Nick’s is a small family-owned restaurant in a northern resort area whose employees are
trusted. When the restaurant is very busy, any of the servers have the ability to operate the cash
register and collect the amounts due from the customer. All orders are tabulated on “tickets.”
Although each ticket has a place to indicate the server, most do not bother to do so, nor does
management reconcile the ticket numbers and amounts with total cash receipts for the day.
Situation B (4 marks):
A sporting goods store takes customer orders via a toll-free phone number. The order taker sits
at a terminal and has complete access to the customer’s previous credit history and a list of
inventory available for sale. The order clerk has the ability to input all the customer’s requests
and generate a sales invoice and shipment with no additional supervisory review or approval.
13
QUESTION 8: Cash Flow Statement and Analysis
1. Describe what information the cash flow statement adds above and beyond the
accrual-based financial statements
2. Mention two items that are accounted for in the income statement, but not the cash
flow statement;
Also mention two items that are accounted for in the cash flow statement, but not
in the income statement
3. Assume that a company has positive cash flow from operations and financing, but
negative cash flow from investing. What does this cash flow pattern indicate?
14
QUESTION 9 Cash Flow Statement and Analysis
Retail Limited
Extracts from the Income Statements for the years ended 31 December 2020 and 2019
2020
$
2019
$
Revenue 850,000 800,000
Less: COGS 595,000 480,000
Gross Profit 255,000 320,000
Less:
Total expenses 170,000 200,000
Net profit 85,000 120,000
Retail Limited
Extracts from the Balance Sheets as at 31 December 2020 and 2019
2020
$
2019
$
Total non-Current Assets 325,000 350,000
Current Assets
Accounts receivable 155,000 70,000
Inventory 100,000 30,000
Cash 200,000 250,000
Total Current Assets 455,000 350,000
Total Assets 780,000 700,000
Current Liabilities
Accounts Payable
Dividend Payable
Total current liabilities
100,000
40,000
140,000
75,000
-
75,000
Non-Current Liabilities
Long term loan
Total Liabilities
210,000
350,000
150,000
225,000
Shareholders’ Equity
Share Capital 300,000 200,000
Retained Earnings 130,000 275,000
Total Shareholders’ Equity 430,000 475,000
15
Retail Limited
Extracts from the Cash Flow Statement for the years ended 31 December 2020 and
2019
2020
$
2019
$
Cash Flow from Operating Activities
Receipts from Customers 510,000 565,000
Payments to Suppliers and Employees (490,000) (495,000)
Interest Paid (22,000) (10,000)
Income Tax Paid (18,000) (25,000)
Net Cash from Operating Activities (20,000) 45,000
Cash Flow from Investing Activities
Purchase of PPE 0 (30,000)
Net Cash from Investing Activities 0 (30,000)
Cash Flow from Financing Activities
Issued Share Capital 100,000 0
Borrowed Debt 60,000 45,000
Dividend Paid (190,000) (20,000)
Net Cash from Financing Activities (30,000) 25,000
Net Increase/Decrease in Cash (50,000) 40,000
Cash Balance Beginning 250,000 210,000
Cash Balance Ending 200,000 250,000
Based on the above extracts from the financial statements of Retail Limited for the years
ended 31 December 2020 and 2019, you are required to answer the following:
1. Based on the financial statement information above, calculate
a. the amount of credit sales of Retail Limited in 2020.
b. the inventory purchases of Retail Limited in 2020.
2. Retail Limited’s management is concerned about its cash flow from operations in
2020. In 2019, the number of days to convert investments in inventory into cash flows
from sales was 71. Calculate the number of days it took Retail Limited to convert its
investments in inventory into cash flows from sales in 2020. Assume that accounts
payable days were 55 in 2020. Comment on the change and provide two possible
reasons for this change. Suggest two ways through which Retail Limited could
improve cash generation.
Hint: you can use information that you calculated in question 2 above.