HI 5001 Accounting for Business Decisions Trimester 1 Holmes Institute
Instructions:
Materials allowed:
QUESTION 1 (10 marks) ‘Why are adjusting entries necessary? Surely they cause too much delay in preparing financial statements, and the financial effect of any entries made is immaterial in the long run.’ Respond to this criticism.”
QUESTION 2 (10 marks) ABC Publishing Ltd sells a monthly political journal on credit. The accounting records at 30th June 2010 revealed the following:
Accounts receivable $ 323 500
Allowance for Doubtful Debts 1 500
The following analysis was obtained with respect to the accounts receivable:
Balance % uncollectable Accounts not yet due $ 173 600 ½ Accounts overdue: 10-30 days 60 000 2 31-60 days 42 000 10 61-120 days 26 400 25 121 days & over 21 500 40 $ 323 500
Required
QUESTION 3 (10 marks) The following information has been extracted from the records of Good Stationery about one of its popular products. Good Stationary uses the moving average (or “weighted average cost”) method under a perpetual inventory system. Its annual reporting date is 31st December. Ignore GST.
2010 No of Units Unit Cost Jan 1 Beginning inventory 900 $7.00 6 Purchases 400 7.05 Feb 5 Sales @ $12.00 per unit 1 000 March 17 Purchases 1 100 7.35 April 24 Purchases returns 80 7.35 May 4 Sales @ $12.10 per unit 700 June 26 Purchases 8 400 7.50 July 11 Sales @ $13.25 per unit 1 800 Aug 19 Sales returns @$13.25 per unit 20 Sept 11 Sales @ $13.50 per unit 3 500 Oct 6 Purchases 500 8.00 Dec 11 Sales @ $15.00 per unit 3 100
Required
a) Prepare full inventory records (ie a “stock card”) to show the cost of sales for the year and the cost of the closing inventory, using this format:
Date | Explanation | Purchases | Sales | Balance | |||
Units | Unit Total Cost Cost | Units | Unit Cost | Total Cost | Units | Unit Cost | Total Cost |
1/1 | Beg inv | 900 | $7.00 | $6 300 |
(b) Show the effect of this inventory item on Good Stationary’s Income statement in the following format (answer in work book, not on this page):
GOOD STATIONERY
Income Statement for the year ended 31 December 2010 |
INCOME
Sales Less : Sales Returns and allowances Net sales Less : Cost of sales GROSS PROFIT |
QUESTION 4 (10 marks) KLM Ltd purchased new equipment on 1st January 2010, at a cost of $420 000 net of GST. The company estimated that the equipment had a useful life of 5 years and a residual value of $45 000.
Required
Assuming a financial year ending 30th June, calculate the amount of depreciation expense for each year ending 30th June 2010 through to 30th June 2015, with each of the following methods:
QUESTION 5 (10 marks) Discuss the general limitations of financial statement analysis.
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