Accounting Topics 12-15 2014

Study Guide 13-B5
Accounting
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NAME: STUDENT ID:
. .
ACCOUNTING Study Guide 13-B5

UNITS 12-15
(2014 VERSION 1)
You are learning from a Taylors Study Guide.
Study Guide 13-B5
Accounting
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CONTENTS:
CONTENTS:
UNITS 12-15 Chapter 1 2 3 4 Unit 12 13 14 15 Title Cash Budgets Statement of Cash Flows Analysis and Interpretation Job Cost Systems Page 3 14 31 46
Acknowledgement: Mark Wilson has kindly given us permission to use some of the materials from his text Accounting Alive for Study Guide purposes only.
Study Guide 13-B5
Accounting
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Chapter 1 Unit 12: Cash Budgets

Contents
12.1 12.2 12.3 12.4 12.5 12.6 Definition Purposes of a Cash Budget Preparation of a Cash Budget Estimated Receipts from Credit Sales Complete Cash Budget Past Examination Questions
Cash Budgets
12.1 Definition: A cash budget is a plan of future receipts and payments.
One of the major reasons for business failure is the lack of planning. Many businesses fail through a poor liquidity position, that is not being able to make payments when they fall due. Cash flow needs to be managed with care as many profitable businesses can become insolvent. Large amounts of cash need to be paid at critical times of the year. This includes: tax and GST payments wages loan and creditor payments purchasing property, plant and equipment. 12.2 Purposes of a Cash Budget: Planning and controlling business activities Avoid funds lying idle Solve cash flow problems before they happen Identify shortages and surpluses of cash Allow for seasonal fluctuations in cash flow Minimise interest payments on overdraft Allow for time lag between charging a customer and receipt of cash Set a target for employees Evaluate the performance of the business Promote efficiency in the business Ensure the business retains a good reputation with suppliers.
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Cash budgets should be regularly updated, compared with actual cash flow and should be linked to the goals of the business. A successful cash budget system will involve the following cycle:
Planning
Evaluation
Implementation
Cash Budgets meet the qualitative characteristic of relevance: They provide predictive value. They provide confirmatory value.
12.3 Preparation of a Cash Budget Exercise 12.3.1 From the following information about the business of Rawini Taupo, prepare a cash budget for January and February 20XX on the next page as a model for future reference. Estimated figures: January $NZ Cash Sales Wages Cash Purchases Interest Received Rent Expense 45,000 2,000 22,200 2,100 February $NZ 24,000 2,000 24,900 3,000 2,100
There is a debit bank balance at 1 January 20XX of $18,000. Provide Rawini with a brief explanation below the Cash Budget you prepare.
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Ex 12.3.1 Solution
RAWINI TAUPO
Cash Budget For January and February 20XX
January $NZ Estimated Receipts
February $NZ
Estimated Payments
TOTAL ESTIMATED PAYMENTS Surplus/Deficit Bank Balance beginning Bank Balance end
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Exercise 12.3.2 From the following information related to the business of Waikato Trust, prepare a cash budget for March and April 20XX with a brief explanation to accompany the budget. Estimated figures: March $NZ 50,000 2,500 32,000 3,200 35,000 April $NZ 90,000 2,500 40,000 3,000 2,000
Cash Sales Wages Cash Purchases Interest Received Motor Vehicle purchased Rates There is a debit bank balance at 1 March 20XX of $12,500.
Exercise 12.3.3 From the following information related to the business of Tauranga Trust, prepare a cash budget for May and June 20XX with a brief explanation to accompany the budget. Estimated figures: May $NZ 105,000 70,000 15,000 June $NZ 120,000 72,000 16,000 10,000 7,800
Cash Sales Cash Purchases General expenses Sale of Equipment Wages 7,500 There is a debit bank balance at 1 May 20XX of $2,500.
Exercise 12.3.4 From the following information related to the business of Oamaru Trust, prepare a cash budget for the months of July, August and September 20XX with a brief explanation to accompany the budget. July 85,000 60,000 500 2,000 15,000 August 65,000 45,000 500 2,000 15,000 20,000 September 70,000 53,000 500 2,000 15,000
Cash sales Cash purchases Depreciation Rent received General Expenses Building Extensions
The Oamaru Trust has a Bank Overdraft of $2,500 on 1 July 20XX.
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12.4 Estimated Receipts from Credit Sales

When a business sells its goods or services on credit, the cash is usually received in a different month from the sale. On the basis of an analysis of the pattern of payment from customers in the past, the business can predict the future rate of collection from customers. For example: This is the pattern of collection of receipts from customers for the Muriwai Trust. Time after sale 1st month 2nd month 3rd month Bad Debts Percentage collected 70% 20% 7% 3%
Credit sales for January to March 20XX were $12,000, $10,000 and $11,000 respectively. They estimate the sales for the next three months to be $12,000, $14,000 and $15,000. Prepare a Statement of Estimated Receipts from Credit Sales from April to June 20XX
Month
Muriwai Trust Schedule of Estimated Receipts from Credit Sales April to June 20XX Credit April May June Sales $NZ $NZ $NZ $NZ
January February March April May Total

Complete the analysis table below with the % collected from customers each month and use the table to help you to prepare the Schedule of Estimated Receipts above.
January
February
March
April
May
June
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Exercise 12.4.1 From the following information about the business of MangawhaiTrust, prepare a schedule of estimated receipts from credit sales for the months of March, April and May 20XX. Credit Sales $NZ January 62,000 February 45,000 March 70,000 April 72,000 May 65,000 70 per cent of accounts receivable were received in the month following sale and the other 30 per cent were collected in the next month. Exercise 12.4.2 Whenuapai Trust on the basis of past experience, has found that 75% of accounts receivable pay their accounts in the month following sale, 15% in the second month after sale and 10% in the third month after sale. Prepare a schedule of estimated receipts from credit sales for the months June, July and August 20XX. Credit sales $ March 28,000 April 38,000 May 25,000 June 58,000 July 62,000 August 77,000 Ex 12.4.3 Whangarei Trust estimates credit sales for the next three months September to November 20XX as follows: Credit Sales $ September 15,000 October 18,000 November 16,000 Credit sales for June were $28,000, $22,000 for July and $18,000 for August. Accounts receivable usually settle their accounts as follows: 60% in the month following sale. These are entitled to a 3% discount 30% in the second month following sale 10% in the third month following sale. Prepare a schedule of estimated receipts from credit sales for the three months ending November 20XX.
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12.5 Complete Cash Budget Exercise 12.5.1 Whanganui Trust sells goods for cash and on credit. Of the credit sales, 80% are usually collected in the month following sale and are granted a 2.5% discount. The remaining 20% are collected in the second month and do not receive a discount. The credit sales for November and December were $180,000 and $125,000 respectively. The estimated sales for the next three months are: Cash January February March 30,000 56,000 42,000 Credit 90,000 110,000 95,000
Rent received is $3,500 per month. All purchases are made on credit and are paid within thirty days from the last day of the month in which the purchase was made. This is to take advantage of a 2 per cent discount. The estimated purchases are: January $75,000 February $90,000 March $85,000 General Expenses amount to $18,000 per month and Wages amount to $11,000 per month. Rates $5,000 will be paid in January and that a Motor Vehicle costing $40,000 will be paid for in March. The balances of the following accounts on 1 January are: Bank $5,500 Dr; Accounts Payable $85,000 Cr Prepare a cash budget for the months of January, February and March 20XX. Write a paragraph to explain the information disclosed in the Cash Budget. Exercise 12.5.2 Prepare a monthly cash budget for the last two months of 20XX for the directors of the Keri Keri Trust. The business sells for cash and on credit. Of the credit sales 75% are usually collected within one of month of sale, the remaining 25% being collected in the following month. Credit sales for September and October 20XX were $80,000 and $50,000 respectively. Estimated sales for November and December 20XX are: November Cash $200,000 Credit $40,000 December Cash $150,000 Credit $70,000 All purchases are made on credit subject to a 3% discount if paid within thirty days from the last day of the month in which they are made, and this is always taken advantage of. Estimated purchases for November and December are $110,000 and $118,000 respectively. Estimated general expenses for November and December are $40,000 and $48,200 respectively. It is anticipated that new machinery costing $50,000 will be paid for in December. The balances of the following accounts on 1 November 20XX are: Cash $42,000 Dr Accounts Payable $90,000
Study Guide 13-B5 12.6 Past Examinations
Accounting
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Current Assets Accounts Receivable Inventory
Rawhiti Hoko Ltd Balance Sheet (extract) as at 31 October 20X0 Current Liabilities 51,000 Accounts Payable 25,000 Bank Overdraft
18,000 3,400
ESTIMATED INCOME AND EXPENSES: Sales Purchases Wages Asset maintenance (including Depreciation $100 per month) Other Expenses (including Bad Debts) November December 44,000 50,000 22,500 15,000 2,400 3,000 900 2,500 1,000 2,750 January 60,000 16,500 3,000 850 3,290
Additional information All Sales are on credit: - 70% of debtors pay in the month following sale - 20% of debtors pay in the second month following sale 8% of debtors pay in the third month following sale 2% of debtors are written off as bad debts at the end of the third month following the sale. Purchases are paid for on the 20th of the following month less a 5% discount. The business plans to buy Equipment worth $50,000 in November. In November a 20% deposit will be required with the balance payable in four equal instalments beginning in December. A Term Deposit of $25,000 matures in December 20X0. The directors plan to pay a dividend of $15,000 to shareholders in December 20X0. Wages and other expenses requiring payment are paid in the month incurred. The following data is available from past records: August September Actual Sales 40,000 30,000
October 34,000
REQUIRED: Prepare a Schedule of Estimated Receipts from Credit Sales and a Cash Budget on page 11 for the three months ended January 20X1. WORKING SPACE:
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Rawhiti Hoko Ltd Schedule of Cash from Credit Sales for the three months ending 31 January 20X1 Month Credit 20X0 20X0 Sales November December
20X1 January
Rawhiti Hoko Ltd Cash Budget for the three months ending 31 January 20X1 20X0 20X0 November December Estimated Receipts
20X1 January
Estimated Payments
Surplus/(Deficit) Bank Balance Beginning Bank Balance End
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Exercise 12.6.2 Part A: Cash Budget Ignore GST for this question. (9 marks)
Fletcher Biceps Ltd manufactures sports equipment. It has been experiencing a rapid increase in sales accompanied by a serious shortage of cash. The company is planning a major purchase of new equipment in November and seeks your advice as to whether it should or should not proceed with its plan. Estimates of October $NZ 112,500 240,000 156,000 40,200 25,500 9,000 November $NZ 106,350 225,000 163,500 41,775 26,100 252,000 December $NZ 116,175 247,500 165,000 42,420 26,550 16,500 37,500
Cash Sales Credit Sales Credit Purchases Wages paid in each month Expenses paid in each month Cash purchase of Equipment Interim Dividend to be paid Additional information: 1. Credit purchases during September 20X7 were $162,000. The business pays for these in the month following purchase in order to receive a 5% discount. 2. Collections from Accounts Receivable have been as follows in the past: In month of sale 15% In month following sale 70% In second month after sale 10% Bad Debts 5% Credit sales in August and September 20X7 were $234,000 and $243,000 respectively. 3. The bank balance at 30 September 20X7 was $8,000. REQUIRED: (a) Prepare a Schedule of Estimated Receipts from Credit Sales and a Cash Budget for the quarter ended 31 December 20X7. (b) From your analysis of the Cash Budget, provide advice to management regarding its plan to purchase the equipment in November and its cash situation over the three month period ended 31 December 20X7.
(2 marks)
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FLETCHER BICEPS LTD Schedule of Cash from Credit Sales For the three months ending 31 December 20X7 Month Credit Sales October November December
FLETCHER BICEPS LTD Cash Budget For the three months ending 31 December 20X7 October Estimated Receipts November December
Total Estimated Receipts Estimated Payments
Total Estimated Payments Surplus/(Deficit) Bank Balance beginning Bank Balance end (7 marks)
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Chapter 2 Unit 13: STATEMENT OF CASH FLOWS

The Statement of Cash Flows shows the cash inflows and outflows of the business entity during a reporting period. The main purpose of a Statement of Cash Flows is to highlight the significant operating, investing and financing activities of the reporting entity during a reporting period. It is concerned with the movement of cash resulting from transactions with parties external to the reporting entity. The NZ IAS 7 requires the presentation of a statement containing information about entitys cash flows during reporting period and specifies the minimum disclosures in that statement. This report is a must for companies under the Companies Act 1993. The Statement of Cash Flows is useful for both internal and external users for decision making. When completing working papers, it is helpful to recreate three-column ledger accounts to find cash flows. Credit amounts = where the cash came from = positive flows = inflows (sources) Debit amounts = shows how the cash was used = negative flows = outflows (applications)
Different Sections of the Statement of Cash Flows:
Operating Activities
This is the core business of the firm. It results from the major source of income and the expenses incurred in gaining that income. The cash flow from operations should be positive otherwise the business is funding itself mainly from capital resources which is not sustainable. Note: Bad Debts and Discount Allowed must be credited to the Accounts Receivable account as these are non-cash expenses. Interest charged on overdue accounts must be debited to the Accounts Receivable account.
Cash Flow from Investing Activities

Investing activities include those activities associated with the buying and selling of NonCurrent Assets.
Cash Flow from Financing Activities

Financing activities involves all the transactions relating to obtaining finance from the owners and outside entities and repaying when the need arises. Distribution of profits in the form of drawings or dividends is included as an outflow within financing Activities.
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LAYOUT OF A CASH FLOW STATEMENT ABC LTD Statement of Cash Flows for the year ended 31 March 20X0 $NZ Cash Flows from Operating Activities Cash receipts from customers Dividends Received Interest Received Cash paid to suppliers Operating Expenses paid Interest paid Income tax paid NET CASH FROM OPERATING ACTIVITIES Cash Flows from Investing Activities Proceeds from sale of asset Purchase of asset NET CASH USED IN INVESTING ACTIVITIES Cash Flows from Financing Activities Proceeds from issue of share capital Proceeds from long term borrowings Share repurchase Repayment of loan Dividends Paid NET CASH USED IN FINANCING ACTIVITIES Net increase/(decrease) in cash Cash at the beginning of the period Cash at the end of the period XXX XXX XXX (XXX) (XXX) (XXX) (XXX) XXX $NZ
XXX (XXX) (XXX)
XXX XXX (XXX) (XXX) (XXX) (XXX) XXX XXX $XXX
Study Guide 13-B5 PRACTICE EX 13.1
Accounting Books of D. Cent 20X1 3,000 1,000 5,000 10,000 12,000 2,000 29,000 4,000 2,000 6,000 15,000 14,000 3,000 1,000 37,000
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20X0 Bank Accounts Receivable Inventories Plant Vehicles Accounts Payable Accrued Expenses Capital Additional information Sold vehicles for $10,000
Income Statement for the year ended 31 March 20X1 Sales Revenue 40,000 Less Cost of Goods sold 15,000 Gross Profit 25,000 Less Expenses 17,000 PROFIT $8,000
MODEL WORKING PAPERS FOR STATEMENT OF CASH FLOWS Exercise 13.1 D. CENT CASH FLOWS FROM OPERATING ACTIVITIES This refers to changes in Current Assets Step 1(a) Determine Cash received from selling goods Accounts Receivable/Sales (Calculate Cash receipts from customers)
Step 1(b) Determine cash paid to suppliers Inventories (Calculate total purchases)
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(ii) Accounts Payable/Purchases
(Calculate cash paid to suppliers)
Step 1(c) Determine cash paid for operating expenses Expenses
CASH FLOWS FROM INVESTING ACTIVITIES Step 2 Determine cash transactions with non-current assets. Plant
Vehicles
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CASH FLOWS FROM FINANCING ACTIVITIES: This refers to changes in non-current liabilities and equity. Step 3 Determine cash transactions with non-current liabilities Step 4: Determine cash transactions with equity Capital (for a sole proprietor find drawings)
Step 5: Complete the Statement of Cash Flows
D. Cent Statement of Cash Flows

for the year ended 31 March 20X1
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EX 13.2 Bank Accounts Receivable Inventories Plant Accounts Payable Accrued Expenses Capital
BOOKS OF C. SIDE 20X0 4,000 2,000 4,000 6,000 2,000 14,000
20X1 6,000 3,000 6,000 10,000 3,000 2,000 20,000
Income Statement for the year ended 31 March 20X1 Sales Revenue 35,000 Less Cost of Goods sold 10,000 Gross Profit 25,000 Less Expenses 7,000 PROFIT $18,000 REQUIRED: Prepare Statement of Cash Flow Statement working papers. Compete the Cash Flow Statement for the year ended 31 March 20X1.
Ex 13.3 BOOKS OF A. PREECOT - with non-cash charges 20X0 20X1 Accounts Payable 8,000 9,300 Bank 1,000 CR 600 DR Accrued Expenses 750 Inventories 18,000 22,500 Accounts Receivable 13,500 12,800 Prepayments 200 Office Furniture 6,000 9,000 Accumulated Depreciation 2,000 3,000 Loan 10,000 8,000 Capital 16,500 24,050 Income Statement for the year ended 31 March 20X1. Sales Revenue 40,000 Less Cost of Goods sold 12,000 Gross Profit 28,000 Less Expenses 8,450 PROFIT $19,550
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REVERALS/ADJUSTMENT COMPLICATIONS: EXAMPLE: 20X0 Expenses Accrued Expenses 100 Prepayments 150 Accumulated Depreciation 6,000 Step 1(c) Determine cash paid for operating expenses Step 1(c) i. Determine noncash charges Accumulated Depreciation
20X1 14,000 200 200 7,000
Step 1(c) ii. Determine Fund Expenses
Step 1(c) iii. Determine Cash paid for expenses Expenses
PRACTICE: 20X0 Expenses Accrued Expenses Prepayments Accumulated Depreciation 80 100 1,200 20X1 15,000 60 15 2,500
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Ex 13.4 Books of R. Tickel - incorporates reversals/adjustments/non-cash 20X0 20X1 Accounts Payable 9,300 Bank 600 Accrued Expenses 750 Accounts Receivable 12,800 Inventories 22,500 Prepayments Vehicles 40,000 Accumulated 10,000 Depreciation Loan 8,000 Capital 47,850 Income Statement For the year ended 31 March 20X1 Sales Revenue Less Cost of Goods Sold Gross Profit Less Expenses Profit
9,000 (300) 500 15,000 20,000 300 50,000 12,000 10,000 53,500
50,000 14,000 36,000 10,350 $25,650
STEPS TO TAKE WITH ASSET SALE COMPLICATIONS: 1. Complete proof for net debit/credit. 2. Asset account: A. Enter opening balance. B. Credit asset sold at cost to disposal account. C. Enter closing balance to determine any purchase of an asset. (A) 3. Complete Disposal account: A. Debit with the cost of the asset sold. B. Enter the carrying amount in the balance column and calculate the amount of Accumulated Depreciation on the asset sold. C. Credit the disposal account with the cash received on sale. (S) D. Close to record non-cash charges: Debit balance = loss on sale Credit balance = gain on sale 4. Accumulated Depreciation Account: A. Enter opening balance. B. Debit amount transferred to disposal account. C. Enter closing balance to determine Depreciation expense. (N/C) 5. Check proof. 6. Complete fund expenses. Use these steps to complete the Asset Sale Complications on page 22.
Study Guide 13-B5 ASSET SALE COMPLICATIONS Example: EX A. Expenses
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20X0
20X1 10,000
PROOF
Plant 1,400 1,500 Accumulated Depreciation 300 320 Additional Information: Sold plant which cost $1,000 and had a carrying amount of $800 for $700. Show working for fund expenses. Example Exercise A: Plant (Calculate any new plant purchased)
Disposal of Plant (Calculate non-cash charges or cash received)
Accumulated Depreciation on Plant (Calculate current years depreciation)
Determine Fund Expenses:
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PRACTICE ASSET SALE COMPLICATIONS Exercise B 20X0 20X1 PROOF Expenses 12,000 Plant 4,000 7,000 Accumulated Depreciation 2,000 3,000 Additional Information: Sold plant which cost $2,000 and had a carrying amount of $1,100 for $1,000. Show working for fund expenses. Exercise C 20X0 Expenses Plant 500 Accumulated Depreciation 200 Additional Information: Sold plant for $200 which cost $300 and had a carrying amount of $210. Show working for fund expenses. Ex 13.5 BOOKS OF HEREMAIA TAUPO 20X0 Bank 2,000 Inventories 12,000 Accounts Receivable 6,000 Accounts Payable 6,000 Plant (cost) 10,000 Vehicles (cost) 30,000 Accumulated Depreciation on Plant 4,000 Accumulated Depreciation on Vehicles 4,000 Loan 10,000 Capital 36,000 Additional information: Sold plant during the year for $2,000 (cost $5,000), carrying amount $2,200. 20X1 5,000 11,000 10,000 7,000 12,000 30,000 4,500 5,000 51,500 20X1 10,000 800 300 PROOF
Income Statement For the year ended 31 March 20X1 Sales Revenue 80,000 Less Cost of Goods Sold 45,000 Gross Profit 35,000 Less Expenses 9,500 Profit $25,500 REQUIRED: Prepare Statement of Cash Flow Statement working papers for the year ended 31 March 20X1.
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Introduction to Companies Statement of Cash Flows

INFORMATION 20X0 Profit After Tax Retained Earnings Contributed Equity WORKING GENERAL LEDGER Retained Earnings 520 5,000 100,000 20X1 50,000 20,000 200,000
Contributed Equity
510
A. Company Ltd Statement of Cash Flows for the year ended 31 March 20X1 $NZ
Cash Flows from Financing Activities
$NZ
Study Guide 13-B5

COMPANY TAX PRACTICE 1:
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20X0 $NZ Tax Payable Contributed Equity Retained Earnings Interim Dividend $20,000 Income Statement for the year ended 31 March 20X1 Sales Revenue Cost of Goods Sold Gross Profit Expenses Profit before tax Income Tax Expense Profit after tax $NZ 200,000 120,000 80,000 35,000 45,000 12,600 $32,400 3,000 40,000 15,000
20X1 $NZ 3,500 60,000 10,000
Less Less
COMPANY TAX PRACTICE 2: 20X0 $NZ Tax Payable Contributed Equity Retained Earnings 8,000 100,000 30,000 20X1 $NZ 12,500 200,000 32,500
Interim Dividend $30,000 Income Statement for the year ended 31 March 20X1 Sales Revenue Cost of Goods Sold Gross Profit Expenses Profit before tax Income Tax Expense Profit after tax $NZ 500,000 120,000 380,000 80,000 300,000 84,000 $216,000
Less Less
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Ex 13.6 From the following balance sheets and additional information, prepare a Statement of Cash Flows for the year ended 31 March 20X1. Jee Woo Park Ltd Balance Sheets as at 31 March 20X0 and 20X1 Assets Cash at bank Accounts Receivable Inventory Prepayments Furniture Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation 20X0 $NZ 25,000 25,000 1,000 11,000 1,000 30,000 6,000 10,000 24,000 $85,000 11,000 2,000 34,000 6,000 20X1 $NZ 4,000 29,000 37,000 3,000 9,000 28,000 $110,000
Liabilities and Equity Bank Overdraft Accounts Payable Loan Contributed Equity (20,000 shares) Retained Earnings
6,000 22,000 7,000 32,000 18,000 $85,000
17,000 11,000 63,000 19,000 $110,000
Jee Woo Park Ltd Income Statement for the year ended 31 March 20X1 Sales Revenue Less Cost of Goods sold Gross Profit Less Expenses Profit before tax Less Income Tax Expense Profit after tax $NZ 90,000 31,000 59,000 27,000 32,000 10,000 $22,000
Additional information Interim Dividend of $7,000 was paid during the year. Office equipment which had cost $6,000 was sold for $3,000 on December 31 20X0. The office equipment had a carrying amount of $4,000.
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Ex 13.7 Statement of Cash Flows. From the following Balance Sheet and additional information, prepare a Statement of Cash Flows for the year ended 31 March 20X1. Show working. Integrity Ltd Balance Sheet as at 31 March 20X0 and 20X1 20X0 20X1 $NZ $NZ $NZ $NZ 7,420 17,360 11,580 49,920 36,780 6,000 14,800 34,400 7,900 6,900 10,000 24,400 180,000 $260,180 1,760 12,340 1,000 18,000 210,000 17,080 $260,180 Integrity Ltd Income Statement for the year ended 31 March 20X1 Sales Revenue Less Cost of Goods Sold Gross Profit Less Expenses Profit before tax Less Income Tax Profit after tax $NZ 150,000 52,000 98,000 48,000 50,000 15,625 $34,375 180,000 $260,180 10,920 1,500 15,000 210,000 22,760 $260,180
Assets Cash at Bank Accounts Receivable Inventory Term Deposit Vehicles Less Accumulated Depreciation Land Liabilities and Equity Bank Overdraft Accounts Payable Accrued Expenses Debentures Contributed Equity Retained Earnings
Additional information During the year bad debts of $500 were written off. During the year a dividend of $10,500 had been paid A vehicle that had cost $10,000 was sold for $3,000 on 31 December 20X0. The vehicle had a carrying amount of $4,000. Complete Working papers before preparing a Cash Flow Statement for the year ended 31 March 20X1
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REVISION 2006 FINAL EXAM 2011 UPDATE:
This question relates to the Financial Statements of Mobile Communications Ltd, a reporting entity that specialises in providing a service for house hunters to download property information and details of recent nearby sales to their mobile phone. From the following Financial Statements and additional information, complete detailed working as indicated and prepare a Statement of Cash Flows
Mobile Communications Ltd Income Statement for the year ended 31 March 20X1 $NZ $NZ Revenue Fees (all on credit) Expenses General Expenses Wages and Salaries Interest Bad Debts Loss on Sale of Equipment Depreciation Total Expenses Profit before tax Income Tax Expense Profit after tax 1 250 000 85 000 440 000 21 000 10 027 12 000 42 973 611 000 639 000 210 870 $428 130
Less
Less
The Balance Sheet contained the following information for Mobile Communications as at 31 March 20X1. 20X0 20X1 31 March 31 March EQUITY AND LIABILITIES Contributed Equity 200 000 250 000 Retained Earnings 176 900 200 000 Mortgage 150 000 120 000 Accrued Expenses 12 000 10 000 Accrued Interest 2 200 2 500 Tax Payable 5 750 8 820 ASSETS Bank 5 000 7 700 Accounts Receivable 98 000 101 000 Equipment 150 000 210 449 Accumulated Depreciation - Equipment (49 150) (63 829) Building 350 000 350 000 Accumulated Depreciation Building (7 000) (14 000) Additional Information: The Loss on Sale of Equipment was incurred when Equipment which had cost the firm $65 000, was sold below its carrying amount of $43 706.
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WORKING PAPERS FOR CASH FLOW STATEMENT Accounts Receivable/Fees (Calculate Cash from Customers)
Expenses (Show cash paid for expenses excluding interest)
Interest
(Calculate interest paid)
Tax Payable
(Calculate Income tax paid)
Equipment (Show cash paid for equipment)
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Accumulated Depreciation on Equipment
Disposal of Equipment
(Calculate cash received on disposal)
Mortgage (Calculate Mortgage repaid)
Retained Earnings (Calculate Dividends paid)
Contributed Equity (Calculate cash received for shares issued)
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Mobile Communications Ltd Statement of Cash Flows

for the year ended 31 March 20X1
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Chapter 3 Unit 14: Analysis and Interpretation
1. Liquidity
Liquidity measures a firms ability to pay its debts in the short term. A business may be taken to court and plac ed into liquidation with a debt as small as $200 if it can not pay given appropriate notification. To prevent this problem, a firm should prepare cash budgets to enable it to foresee any cash flow difficulties and deal with them before they occur. Liquidity is measured through three calculations: A. Current ratio B. Working capital C. Acid Test ratio.
A. Current Ratio:
This measures how many times the current assets cover the current liabilities. It gives an indication whether the firm can cover its debts in the next accounting period. This ratio should be compared with industry averages and previous periods.
Current Ratio = Current Assets Current Liabilities
Example: 30,000 20,000
:1
This means that for every $1 of liabilities owing in the next reporting period, the business has
This ratio should be greater than 1.5:1 but not much higher than 2:1. Low current ratios indicate a risk of cash management problems in the future. High current ratios will mean that assets are not being invested as effectively as they should. The current ratio provides a broad indication of solvency. A current ratio should be read along side the cash budget, as it does not show the receipts and expenses expected in this time period.
B. Working Capital
This measures the funds which will be left to meet day-to-day running costs after current liabilities are paid in the next reporting period.
Working Capital = Current Assets Current Liabilities
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Exercise 14.1: Final January Exam 2009 Polly Pacquin is the owner of Pollys Pasta Ltd, a registered company which manufactures and retails fresh pasta products. The following information has been extracted from the Balance Sheet as at 30 September 20X0 and 20X1. 20X0 20X1 $NZ $NZ Current Assets Bank 2,000 Accounts Receivable 36,000 44,000 Inventory 12,000 16,000 $50,000 $60,000 Current Liabilities Bank Overdraft (secured up to $5,000) Accounts Payable
20,000 $20,000
20,000 40,000 $60,000
REQUIRED: From the information above calculate the following ratios for the year ended 30 September 20X1. 20X1 Working CURRENT RATIO: Current Assets Current Liabilities WORKING CAPITAL: Current Assets Current Liabilities Answer
ACID TEST RATIO: Current Assets (Inventory + Prepayments) Current Liabilities - bank overdraft (secured)
Write a comment about the results:
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C. Acid Test Ratio:

Measures how many times the quick assets (those that can be turned into cash in the next month), cover the quick liabilities (those that have to be paid in the next month). This ratio is often referred to as the Quick Asset Test or the Acid Test.
Acid Test Ratio = Current Assets (Inventory + Prepayments) Current Liabilities less bank overdraft (secured)
:1
Inventory and prepayments are not termed as quick assets as it is difficult to turn them into cash quickly. If inventory turnover was less than a month inventory could become part of the quick assets. Most bank overdrafts are secured and therefore they are not included in quick liabilities. The acid test ratio should be higher than 1.1:1, otherwise the firm will have difficulty paying back its immediate debts. If it is greater than 2:1, there are too many quick assets on hand that may be better utilised somewhere else in the business. The acid test ratio gives an indication of immediate solvency. Remember the financing rules: Cover short term financing needs with short term financing and long term financing needs with long term financing.
e.g. Krazy Clothes Limited 20X0 Current Assets $NZ 5,600 Bank 29,000 Accounts Receivable 65,000 Inventory 2,900 Prepaid Rent 102,500 less Current Liabilities Bank Overdraft (secured) 19,000 Accounts Payable 5,100 Tax payable 3,900 Accrued Expenses 28,000 20X0 Working Capital Current Ratio 20X1 $NZ 21,500 137,000 2,000 160,500 3,600 72,400 4,200 5,800 86,000 20X1 $NZ
Acid Test Ratio
The Acid Test Ratio for 20X1 only includes the accounts receivable figure as the other current assets are to be subtracted. The bank overdraft is not added to the current liabilities account as it is secured.
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Write a comment about the results:
Exercises:
Ex 14.2 (6.23) a) Calculate the Working Capital, Current Ratio and Acid Test Ratio for the following three businesses: Ace Electronics Current Assets Bank Inventory Accounts Receivable - Allowance for Doubtful debts Prepayments Current Liabilities Bank Overdraft (secured) Accounts Payable Accrued Expenses GST Payable b) 7,000 13,000 22,040 (580) 1420 Akaroa Butchers Beaver Transport
6,000 560 (40) 180
320,000 (12,800) 25,000
6,000 2,100 700
240 3,150 410 300
174,000 103,000 31,000 8,000
Give some advice to help with the liquidity for each business.
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Ex 14.3
(6.24) Balance Sheet extract for Big Time Limited As at 28 February 20X1
20X0 Current Assets Bank Inventory Accounts Receivable Less allowance for doubtful debts Less Current Liabilities Bank Overdraft (secured) Accounts Payable
20X1
2,500 36,500 27,000 (1,000) 65,000
28,000 18,200 (1,200) 17,000 45,000
4,700 20,000 25,300 20,000 30,000 Adjustments for 20X1: (ignore GST for this question) i) Management decided to write off $2,000 of obsolete stock. ii) Bad debts to be written off $1,200. iii) Allowance for doubtful debts to be adjusted to 4% of closing accounts receivable. iv) Advertising $420 and Insurance $480 are paid in advance. v) There is $1,400 of accrued expenses. Required: a) Prepare a new Balance Sheet extract to incorporate the adjustments. b) Prepare a table to show calculations for Working Capital, Current Ratio and Acid Test ratio. c) Prepare a report to management on the liquidity of the business.
2. Financial Stability
This is where gearing enters the business term inology. A firm can be financed through equity (Contributed Equity and Retained Profits) or through debt (Banks, creditors, debentures etc). The gearing is the proportion financed by each component. The gearing can be shown in a pie chart. This business has the owners contributing about 58% of the finance for the business and debt the other 42%. A business must make sure the gearing is dominant on the owners side, otherwise the creditors of a firm can start to take control, imposing restrictions on the firm. Financial Stability is made up of two components:
Gearing Ratio
A. Equity Ratio:
Owners Liabilities
This represents the proportion of the entity that has been funded by the owners of the entity. This should be at least 60% but varies from business to business. If it is lower the creditors can start to take control. If it is over 80% it represents a safe business in the long term, providing liquidity is satisfactory. This would place a company in either a good position to expand through taking on more debt or to reduce the shareholders funds to increase the earnings per share.
Equity Ratio = Equity Total Assets
For Example:
60,000 100,000
This means for every $1 of assets owned by the business, the owners have invested 60 cents.
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B. Debt Ratio:
This represents the proportion of the entity that has been funded by outside entities. It is not worth them taking on more of a risk than the owners have in the business. Banks and other creditors will examine the current Debt Ratio before lending more to the company. e.g. Krazy Clothes Limited 20X0 Equity Current Assets Non-Current Assets Total Assets Current Liabilities Non-Current Liabilities Total Liabilities 72,000 102,500 16,500 119,000 28,000 19,000 47,000 20X0 Debt Ratio 20X1 86,000 9,000 95,000 160,500 18,700 179,200 20X1 84,200
Equity Ratio
The Financial Stability of Krazy Clothes Limited is unsatisfactory as debt is higher than equity in 20X1. The creditors may start imposing restrictions on the business as to financial data they require and whether Krazy Clothes Limited is able to obtain any more credit. As proven in earlier sections, this company is very profitable but is not controlling its funding very well. Suggestions to improve this unsatisfactory situation include: 1. 2. Increasing Equity as compared to liabilities; Reduce cash dividend payouts in the short term to retain profit. Issue bonus shares to shareholders rather than cash dividends. Share issue on a pro rata basis to existing shareholders if purchasing further assets. Decreasing liabilities: Sell the non-current asset that is the least productive to pay liabilities. Dont take on any more credit until situation has changed.
Exercise:
Ex. 14.4 Complete the following table: Business Equity Debt Equity Ratio A 50,000 50,000 B 62,000 C 29,000 24,000 D 14,410 16,190 Debt Ratio 0.38:1
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3. Management Efficiency
The management efficiency ratios measure how quickly the managers have been able to convert the current assets into cash. It is important that this be compared with the volume of revenue and not taken on its own as it is easy to sacrifice profitability for efficiency.
A. Inventory Turnover
This indicates how long, on average, inventory is in the store before it is sold. Inventory Turnover = = Cost of Goods Sold Average Inventory Averages how many times the stock on the shelves is sold within an accounting period.
Inventory Turnover Period = 12 Inventory Turnover = months taken to sell average inventory 365 Inventory Turnover = days taken to sell average inventory
Averages how many days inventory stays in the shop before it is sold.
The ideal inventory turnover will depend on the type of business activity. A baker will have to have a daily turnover period otherwise the stock will become stale and worthless. A clothing company will hope for a longer period, otherwise they will keep running out of stock. Costs of incorrect inventory turnover includes: Too high (Turnover) Lack of choice for customers Loss of sales Higher delivery costs Too Low (Turnover) Extra storage costs Obsolete stock Items stolen Damaged stock Liquidity problems
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e.g. Krazy Clothes Limited.
20X1
Income Statement for the year ended 31 March 20X2

1,400,000 750,000 650,000
1,200,000 Sales 700,000 less Cost of Goods Sold 500,000 Gross Profit
Inventory balances for the last three years ending 31 March 20X2 include: 20X0 20X1 Inventory $42,000 $65,000 20X1 Inventory Turnover Inventory Period 20X2
20X2 $137,000
The average stock of clothes was sold 13.1 times in 20X1 and 7.4 times in 20X2. These figures have been converted into days. On average, from the time the item of clothing has entered the shop it took almost a month, 28 days, for it to be sold in 20X1 and it took closer to two months in 20X2 (50 days). This increase may cause problems for the business, as there is a high cost of storing the clothes. For example: Clothes being out of season and harder to sell (Obsolete), A crowded sales area being less attractive to customers, Harder to watch all stock leading to an increase shoplifting.
Ex. 14.5 (6.29) Calculate and comment on the inventory turnover for the following businesses. Trading Accounts for the year ended 31 March 20X0
Sales (credit) Papas Bakery 490,000 650 260,000 (450) 260,200 $229,800 Dinahs Desks 490,000 34,000 310,000 (21,000) 323,000 $167,000
Less Cost of Goods sold

Opening Inventory Purchases Less Closing Inventory Cost of Goods Sold Gross Profit
B. Accounts Receivable Turnover

This indicates the lead-time from when the credit sale is made until the money is received by the business. This can be measured as a turnover figure, but is more useful measured in days.
Age of Accounts Receivable =

= Average Accounts Receivable Credit Sales x 1.15 x 365 1
Indicates the number of days it takes to collect the money after a credit sale.
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In the past, credit terms have been due on the 20 of the month following the sale. Accounts should therefore be paid between thirty five and forty days. The lower the number of days it takes to collect, the better as the money the accounts receivable owes the business could be used by the business to generate further revenue. This is on the proviso that a tough credit policy stance doesnt deter sales. A high amount of days may indicate a poor collection policy or credit check at the point of sale leading to higher bad debts and doubtful debts in the future. GST needs to be added to the sales figure as it is exclusive of GST while the accounts receivable are inclusive. Where monthly figures are available, they should be used to calculate the average of accounts receivable rather than just the opening and closing accounts receivable for the year to give a more accurate figure. e.g.
20X1 $NZ
Income Statement for the year ended 31 March 20X2 $NZ

1,400,000 750,000 650,000
1,200,000 Sales Revenue 700,000 less Cost of Goods Sold 500,000 Gross Profit Notes to the Accounts : 25% of sales are on credit.
Accounts Receivable balances for the last three years ending 31 March 20X2 include: 20X0 20X1 20X2 Accounts Receivable $32,000 $29,000 $21,500 20X1 Calculation 20X2
Collection Period
Ex 14.6 (6.30) Pedro Hats Limited has the following information from their financial statements. (use 365 days per year.) Income Statement extract 20X1 20X2 20X3 Sales Revenue cash 380,000 290,000 243,000 Sales Revenue credit 1,150,000 1,200,000 990,000 Cost of Goods sold (1,120,000) (995,000) (830,000) Gross Profit 410,000 495,000 403,000 Balance Sheet extract 20X0 20X1 20X2 54,000 68,000 75,000 44,000 32,000 39,000
Current Asset (extract) Inventory Accounts Receivable
20X3 81,000 25,000
Required: Calculate the inventory turnover in days and the average collection period for Pedro Hats Limited for the years ending 20X1 to 20X3.
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Business Diseases
Businesses, in a lot of ways, are like people. They need care and attention to keep them well. They need feeding of inventory and skilled employees to enable them to generate the sales or fees. They also need a steady flow of money pumping around the system to keep all parts moving and strong. When there is too little or too much of either inventory or money, problems start occurring. It is our job as accountants: to take preventative measures to stop problems before they occur, to diagnose illness and treat it in appropriate ways.
4. Profit Earning Capacity

Rate of Return on Equity
Rate of Return on Equity measures how effectively funds invested by the owner/s are employed. In order to determine whether the rate of return is adequate, compare it with current interest rates. = Profit After Tax x Average Equity 100 1
Ex.14.7 (6.140) Calculate the Rate of Return on Equity from the following information: Business Profit before tax Contributed Equity Jolly Jumpers 20X0 20X1 120,000 100,000 970,000 1,150,000 Slims Cafe 20X0 20X1 80,000 75,000 202,000 266,750 Dreamboats 20X0 20X1 85,000 90,000 330,000 345,000
Assume Tax rate is 28%
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Ex.14.8 (15.5) The following figures have been taken from the final accounting reports of the Wharenui Company Ltd, a shoe wholesaler for the years ended 30 June 20X0 and 30 June 20X1. Assume all sales are on credit. For age of accounts receivable use only the final balance of Account Receivable for 20X0 but the Average Accounts Receivable for 20X1.
Sales Revenue Opening Inventories Cost of Goods Sold Closing Inventories Distribution Costs Administrative Expenses Finance Costs Tax for year Dividend for year Bank (secured overdraft) Accounts Receivable Plant Land and Buildings Accounts Payable Debentures 7% Contributed Equity Retained Earnings
30/6/20X0 $NZ000 32,000 7,200 21,000 6,800 1,972 2,764 864 2,160 1,900 4,500 Dr 7,100 10,000 13,400 6,700 10,800 19,000 3,140
30/6/20X1 $NZ000 40,000 6,800 28,800 12,000 4,450 2,640 2,140 800 1,900 1,600 Cr 12,010 15,900 20,400 11,500 25,000 19,000 2,410
REQUIRED: 1 Present the data above in the form of a comparative Income Statement and Balance Sheet as at 30 June 20X1. 2 Prepare a worksheet which provides a full analysis of the accounts using appropriate ratios and percentages 3 Prepare a report to Wharenui Ltd giving an interpretation of the accounts prepared.
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Ex 14.9
The following information relates to Lucky Ltd: LUCKY LIMITED BALANCE SHEET AS AT 30 JUNE 20X1 $NZ Equity Contributed Equity 200 000 Retained Earnings 35 000
$NZ
$235 000 Current Assets Petty Cash Accounts Receivable Inventory Prepayments Current Liabilities Bank Overdraft (secured) Accounts Payable Accrued Expenses Non Current Assets Property, Plant and Equipment Intangible Assets Non Current Liabilities Mortgage
50 73 000 128 000 3 950
205 000
40 000 70 000 4 000 220 000 20 000
114 000
240 000 96 000
1. Prepare a new Balance Sheet to comply with current presentation requirements.
2. Complete the following worksheet providing the formulae and calculations and enter your answers in the schedule of ratios below the worksheet. The first one is done for you as an example. Additional Information: Sales on credit for the year totalled $620 500 Cost of Goods Sold during the year was $504 000 Opening inventory was valued at $96 000 Opening accounts receivable was valued at $75 000
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Working Capital
LUCKY LIMITED WORKSHEET FOR ANALYSIS FOR THE YEAR ENDED 30 JUNE 20X1 Current Assets-Current Liabilities 205 000-114 000
Current Ratio
Quick Assets Ratio Age of Accounts Receivable Inventory Turnover Equity Ratio
LUCKY LIMITED SCHEDULE OF RATIOS FOR THE YEARS ENDED 30 JUNE 20X0 20X1 Working Capital $49 000 $91 000 Current Ratio 1.5:1 Liquid Ratio 1.3:1 Age of Accounts Receivable 42 days Inventory Turnover 5.2 times Equity Ratio .55:1 Write a report to management under the following headings: 1. Working Capital 2. Current Ratio 3. Quick Assets Ratio 4. Age of Accounts Receivable 5. Inventory Turnover 6. Equity Ratio Explain the meaning of each calculation. Explain if the trend is satisfactory or unsatisfactory. Write a summary paragraph with recommendations for improvement.
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Summary of Ratios and Percentages:

Ratio
Liquidity and financial stability

1. Working Capital: Current Assets Current Liabilities
Purpose and Evidence for concern To show how much money is available to meet day-to-day running costs after liabilities have been paid in the next reporting period. Evidence for concern: Negative.
2. Current Ratio: Current Assets Current Liabilities
To test the ability of a business to pay its debts as they fall due in the next reporting period. Evidence for concern: Too high - >2:1 (Underutilisation of resources) Too low - <1.4:1 see next column To test the ability of the business to pay its debts immediately. Evidence for concern: less than 1.2:1 or decreasing.
Cause for concern and Remedy Cause: Credit terms too easy, noncurrent asset financed with current liability, repayment of non-current liability. Remedy: use stricter credit control, finance non-current assets with non-current liabilities. Too low: Cause: poor credit control. Equipment purchased with bank overdraft, repayment of loan. Remedy: use stricter credit control, finance non-current assets with non-current liabilities. Cause: as above plus poor budgeting. Remedy: urgently action above, collect cash from customers, reduce mark-up percentage to clear slow moving lines. Cause: Too high: failure to use debt finance to purchase noncurrent assets. Remedy: obtain a noncurrent loan. Cause: Too low: excessive drawings, reliance on debt finance. Remedy: Issue more shares or owner contribute more cash. Cause: Poor salesmanship or merchandising, too much competition, prices too high, insufficient advertising. Wrong goods purchased by the business. Remedy: Improve merchandising, staff training and incentives, reduce mark-up %, advertise, investigate purchasing policy. Cause: Poor credit policies, easy credit terms. Remedy: Use stricter credit policies, use a vigorous debt collection policy. Offer discounts for prompt payment or charge interest on overdue accounts.
3. Acid Test Ratio or Quick Assets Ratio: Current Assets (Inventories & Prepayments) Current Liabilities (Secured Bank Overdraft)
4. Equity Ratio: Equity Total Assets
To calculate how much of the business is financed by the owner/s. Evidence for concern: Too high - >0.75:1 Too low - <0.5:1
Management Efficiency
1. Inventory Turnover Cost of Goods Sold Average Inventories = In days: Times p.a.
To show how quickly the inventory turns into cash. Evidence for concern: Depends on the type of business. Food should be fast. Jewellery may be slow. Decreasing trend.
365
Inventory Turnover = Days
2. Age of Accounts Receivable = Average Accounts Receivable Credit Sales x 1.15
x 365 1
To calculate how long it takes the business to collect debts and how well credit policies are working. Evidence for concern: > 40 days.
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Ratio Profitability 1. % Change in Net Sales (Turnover)
Purpose and Evidence for concern To measure trends in sales performance. Evidence for concern: Decrease.
Cause and Remedy Cause for decrease in % Increased competition. Remedy: Market research. Implement marketing campaign. Investigate competitors strategies. Cause for decrease: Overstocking, competition, inventory out-of-date, change in sales mix. Remedy: Investigate purchasing policy. Upskill purchasing staff. Causes for change: Mark up% has changed. Inaccurate stock taking. Stealing of inventory. Failure to take discounts. Inaccurate recording. Theft of cash. Causes for change: Ineffective advertising campaign, ineffective sales staff. Increased interest rates. Remedy: Distribution Costs % Improve marketing strategies Finance Cost % Owner contribute more cash. Causes for change: Mark-up% decreases. Ineffective management. Remedy: Investigate pricing Control expenses.
2. Mark Up% Gross Profit Cost of Goods Sold
x 100
1
To check if standard mark-up % has been maintained. Evidence for concern: If it increases or decreases.
3. Gross Profit % Gross Profit Net Sales Revenue (Turnover)
100 1
To calculate the gross profit per dollar of sales. Evidence for concern: If either increasing or decreasing it should be investigated. Distribution Costs and Finance Costs should remain constant. Administrative Expense % should decrease Evidence for concern: Distribution Costs and Finance Costs % increase. Administrative Expense % increase.
4. Expense % Expense type Net Sales Revenue
x 100 1
5. Profit % For Sole trader & Partnership: Profit x 100 Net Sales 1 For company: Profit (before tax) x 100 Net Sales 1 6. Return on Equity Profit Average Equity
To test of effectiveness of managerial policies. Evidence for concern: Decrease.
x 100 1
Use Profit after tax for a company.
To test how effectively funds invested by the owners are being employed. Evidence for concern: Decrease or insignificant difference between current interest rates.
Causes for change: Unsuccessful trading year. Remedy: Increase dividends. Repurchase shares.
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Chapter 4 Unit 15: JOB COSTING

Types of Cost Accounting 1. Job Order Costing A system used in non-repetitive (one-off) production situations for accumulating the direct material direct labour and expense incurred for each job or unit of output. An account is opened for each individual job to accumulate a record of these costs with these accounts often forming a subsidiary ledger within the accounting system with a Work in Progress control account in the General Ledger. Used for printing, garage workshops, designer clothes. 2. Process Costing A method of costing products where costs are computed on the basis of total costs divided by equivalent units of work performed. Used in high-volume, similar product situations, eg tinned food, refining oil, refining sugar.
Types of Costs: Direct Materials: Direct materials are those materials which are readily traceable to the manufacture of a particular product. Eg in the manufacture of wooden furniture, wood is a direct material. Direct Labour: Direct Labour is the labour which is readily traceable to the manufacture of a particular product. Eg. The cost of employing people working on the actual production line is direct labour. Indirect Costs or Overheads: Factory overhead includes all the expenses other than direct materials and direct labour which are necessary to keep the factory operating. Eg Indirect Material in the manufacture of wooden furniture would include sandpaper, oils, cleaning materials. They are necessary to production. Indirect Labour is labour employed in carrying out jobs in the factory which are only indirectly associated with actual production, eg factory supervisors, cleaners, security personnel, or factory office staff. Manufacturing Expenses such as factory light and power, depreciation of factory plant and machinery, repairs and maintenance, factory insurance etc are Indirect costs or overheads.
Prime Cost = Direct Materials + Direct Labour Cost of Production = Prime Cost + Factory Overhead.
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Exercise 15.1 Complete the following table: Direct Materials A 20,000 B C 52,000 D 21,000
Direct Labour 32,000 25,000 75,000
Prime Cost
Factory Overhead 8,000
Cost of Production 66,500 162,000
49,000 56,000 12,250
Exercise 15.2 Distinguish between Direct and Indirect Materials Cake Factory Materials Flour Oven gloves Sugar Eggs Cleaning materials Oil to grease the trays Carpet Layer Materials Knee pads Carpet Carpet Cleaner Staples Pliers Underlay Exercise 15.3 Distinguish between Direct and Indirect Labour Cake Factory Labour Cleaning Mixing Supervisor Baking Slicing Security on factory Carpet Layer Labour Cleaning Supervising Consulting Customer Cutting Laying Ordering
Direct/Indirect
Direct/Indirect
Direct/Indirect
Direct/Indirect
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JOB COST SUBSYSTEM STEPS TO TAKE WHEN RECORDING IN THE GENERAL LEDGER: Open Account balances (Determine Capital) Complete bank account double entries Record Production a. Direct Materials b. Direct Labour TRANSFER TO WORK IN PROGRESS c. Indirect Costs: 1st transfer to overhead control 2nd transfer to Work in Progress at a specified rate d. Transfer Finished Goods out of Work In Progress e. Transfer Cost of Goods sold out of Finished Goods f. Record Sales g. Complete Trial Balance REQUIRED: (For Ex 15.5-15.7) 1. Prepare general ledger accounts for Materials Control, Work in Progress Control, Finished Goods Control, Wages and Factory Overhead Control 2. Prepare an Income Statement extract to determine Gross Profit. 3. Consider the treatment of the balance of Factory Overhead Control Account. Exercise 15.5 Balances Materials Work in Progress Finished Goods Cash Transactions: Cash Sales Purchases Wages: Direct Indirect Overhead 1.4.X0 500 0 300 30.4.X0 200 300 450
$4,000 1,000 1,500 500 200
Issues to production: Direct materials 1,200 Indirect materials..? Overhead charged at 50% Direct Labour Cost. Exercise 15.6 Balances Materials Work in Progress Finished Goods Cash Transactions: Cash Sales Purchases Wages: Direct Wages Indirect Wages Overhead 1.4.X0 300 0 500 30.4.X0 280 630 400
$5,000 1,200 3,000 2,000 ? 610
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Issues to production: Direct materials 830 Indirect materials ? Overhead charged at 90% Direct Labour Cost.
Exercise 15.7 Balances Materials Work in Progress Finished Goods Cash Transactions Sales Purchases Wages: Direct Wages Indirect Wages Overhead
1.4.X0 700 0 1,000
30.4.X0 750 650 750
$7,000 2,000 3,500 2,500 ? 100
Issues to production: Direct materials 1,150 Indirect materials ? Overhead charged at 50% Direct Labour Cost.
Cost Drivers:
Pre-determined overhead rates: To work out an overhead rate the manufacturer must: Estimate the business overhead expenses for the year Choose a cost driver or base to apportion the overheads: a labour-intensive product would suit a Direct Labour base, a machine-intensive process would suit a machine hour rate. Labour Intensive Jobs: Cost Driver 1: Direct Labour Hours e.g. Estimated Overhead for the year Estimated Direct Labour Hours Rate per Direct Labour Hour Example Job No 1 Direct Material Direct Labour 5 hours at $35/hour Prime Cost Overhead COST OF PRODUCTION
$26,000 2,080 =
$200
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Cost Driver 2: Direct Labour Cost e.g. Estimated Overhead for the year Estimated Direct Labour Cost Rate per Direct Labour $ Example Job No 1 Direct Material Direct Labour 5 hours at $35/hour Prime Cost Overhead COST OF PRODUCTION
$26,000 $72,800 =
$200 175 375
ILLUSTRATION BASED ON DIRECT LABOUR HOURS: Anticipated Overhead Department A $120,000 Department B $117,000 Estimated Number of Direct Labour Hours in each department: Based on 45 hours pw 50 weeks pa Department A Department B Therefore: Department A Department B Job Order 1 5 hours of labour at $15 an hour in Department A 2 hours of labour at $16 an hour in Department B) Department A Department B $ $ Direct Materials 50.00 50.00 Direct Labour Overhead TOTAL Total Manufactured Cost: 10 persons 5 persons
Total $ 100.00
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Cost Driver 3: Direct Material Cost Suitable method where the overhead is mainly associated with the amount of direct materials involved in each job. Example: Estimated Overhead for year $ 63,000 Estimated Direct Material Cost $157,500 Rate per Direct Material $ Example: Job No 1 Direct Material Direct Labour 5 hours at $35/hour Prime Cost Overhead COST OF PRODUCTION
$200 175 375
Cost Driver 4: Machine Hours Suitable method where the overhead is mainly associated with the amount of direct materials involved in each job. Example: Estimated Overhead for year $ 42,000 Estimated Machine Hours 10,500 Rate per Machine Hour: Example: Job No 1 Direct Material Direct Labour 5 hours at $35/hour Prime Cost Overhead (29 machine hours) COST OF PRODUCTION
$200 175 375
Cost Driver 5: Units of Output Suitable method where the overhead is mainly associated with the amount of direct materials involved in each job. Example: Estimated Overhead for year Estimated Output Rate per Unit: $ 41,808 624 units
Example: Job No 1 Direct Material Direct Labour 5 hours at $35/hour Prime Cost Overhead (2 units) COST OF PRODUCTION
$200 175 375
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Ex 15.8 Matariki Ltd uses a job order system incorporating predetermined overhead rates for applying overhead to jobs. Production occurs in two departments Machining Department, where the driver for the predetermined overhead rate is machine hours, and Finishing Department where the driver for the predetermined overhead rate is direct labour cost. Estimated and actual costs and operating data for all jobs is given below. Estimate for year Actual results for year Machining Finishing Machining Finishing Department Department Department Department Overhead $150,000 $216,000 $153,000 $116,000 Direct Labour Cost $80,000 $180,000 $89,000 $97,000 Direct Labour Hours 20,000 45,000 22,000 24,000 Direct Machine Hrs 60,000 90,000 61,000 47,500 Cost and operating data for Job A246 which was commenced and completed during the reporting period: Machining Department Finishing Department Direct Labour Hours 30 40 Direct Machine Hours 74 164 Materials used $1,000 $600 Direct Labour Cost $1,200 $1600 REQUIRED: 1. Compute the predetermined overhead rate for the Machining Department and Finishing Department. 2. Complete a Job Cost Sheet for Job A246. 3. What are the advantages and disadvantages of using predetermined rates for applying overhead to individual jobs? Ex 15.9 The following figures have been extracted from the accounts of Tiki Ltd. All jobs pass through the companys two departments. Design Department Construction Department Materials Used $3,000 $36,000 Direct Labour $9,000 $18,000 Factory overheads $7,200 $10,800 Direct Labour Hours 10,000 24,000 Machine Hours 4,000 20,000 The following information relates to Job Z 888 Design Department Construction Department Materials Used $60 $720 Direct Labour $150 $390 Direct Labour Hours 140 530 Machine Hours 50 510 Complete the table below showing the rates for each department using 4 different cost rivers. Cost Drivers Design Department Construction Department
Machine Hours Direct Labour Hours Direct Labour Cost Direct Material Cost
Prepare a statement showing the different costs that result for Job Z 888 for each of the rates calculated. What factors should be considered when choosing the method to use?
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Past Exam Question Original 03 Job Cost Accounting Han Limited is a manufacturer of exclusive, monogrammed suitcases and luggage. Each suitcase is made to order. The company has two cost centres: Design Department and Machine and Assembly Cost Department. Overheads are applied on the basis of direct labour hours in the Design department, and machine hours in the Machining and Assembly department. At the beginning of the year, the following predictions were made: Design Department Direct labour hours 120,000 Machine hours 2,000 Direct Labour Costs $480,000 Indirect Labour costs $20,000 Depreciation $12,000 Miscellaneous factory overhead costs $64,000 The following information is for Job 863 a suitcase. Design Department $1,600 $800 200 4 Machining and Assembly Department $200 $400 100 60
Machining and Assembly Department 80,000 44,000 $400,000 $40,000 $40,000 $120,000
Material used Direct Labour Cost Direct Labour Hours Machine Hours
(a) Calculate the predetermined overhead rates for each department of Han Limited. Show your calculations. Design Department:
Predetermined Overhead rate = Machining and Assembly Department:
Predetermined Overhead rate = (b) What is the total manufacturing cost of Job 863? Show your workings.
(c) Total manufacturing cost: $
(2 marks)
The following are the actual results recorded for the Design Department at the end of the financial year. Materials Cost $960,000 Direct Labour Cost Direct Labour Hours Indirect Labour cost Depreciation Miscellaneous factory overhead costs $500,000 125,000 $30,000 $12,000 $70,000
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(d) Complete the table below to determine over- or under-applied overhead for the Design Department. Actual Factory Overhead Applied Factory Overhead Over-applied Factory Overhead Under-applied Factory Overhead (e) What is the most likely reason that the two departments use different cost drivers?
JOB COST ACCOUNTING J/A 2008
(10 marks)
You should ignore GST in this question.

Custom Made Enterprises had the following inventories as at the year ended 30 June 2008. $ Raw Materials Inventory 6,000 Work In Progress Inventory 7,000 Finished Goods Inventory 14,000 During the first month of the current year, the following transactions occurred: Purchased materials on credit $15,200 Requisitioned direct materials of $12,250 and factory supplies of $6,750. Incurred factory payroll $42,000. Assigned factory payroll, of which $2,000 was considered indirect labour. Manufacturing overhead incurred $15,000. Applied factory overhead on the basis of 60% Direct Labour cost. Cost of jobs completed $80,000. Cost of jobs sold $82,000. (a) Complete the General Ledger control accounts for Raw Materials, Work in Progress, Payroll, Factory Overhead, and Finished Goods for the month ended 31 July 20X8. (8 marks)
Custom Made Enterprises General Ledger

Raw Materials Control 20X8 Jul 1 Balance b/f 140 6,000 Dr
Work In Progress Control Jul 1 Balance
141 b/f 7,000 Dr
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Finished Goods Control Jul 1 Balance
b/f
142 14,000 Dr
Payroll Control
720
Factory Overhead Control
730
(b) Custom Made Enterprises uses a consecutively pre-numbered materials requisition form to issue materials to production. Explain the purpose of the Materials Requisition document, and why it is prenumbered.
(2 marks)
JOB COST ACCOUNTING J/A 2007
(8 marks)
Ice Hockey Enterprises manufacture clothing and equipment for players of ice hockey. The business has two departments machining and finishing. Overhead is applied on the basis of machine hours in the machining department and on the basis of direct labour cost in the finishing department. The following information relates to the year ended 30 June 20X7. 1. Estimated and actual costs and operating data for all jobs for the year ended 30 June 20X7. Estimates for year Machining Finishing 40,000 20,000 $150,000 $300,000 $250,000 $126,000 Actual results for year Machining Finishing 39,000 18,000 $165,000 $295,000 $255,000 $118,000
Direct Machine Hours Direct Labour Cost Overheads
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2. The following information is for Job 181, the production of 750 hockey sticks, completed in July 20X7. Machining Finishing Materials used $4,500 $1,050 Direct Labour $1,200 $3,000 Direct Machine Hours 400 25 REQUIRED: (a) Calculate the predetermined overhead rate for each department of Ice Hockey Enterprises. Show your calculations: Machining Department:
Finishing Department:
(b) Calculate the total manufactured cost of Job 181. Show your calculations. Machining Finishing
Total
Total Manufactured Cost:
$ ____________________
(2 marks)
(c) Calculate the under- or over-applied overhead in each department for the year: Overhead Actual Department Rate Difference Applied Overhead
Under/Over Applied
Machining Finishing
(d) Prepare General Journal entries for under- or over-applied overhead transferred to cost of goods sold on 30 June 20X7. (2 marks) Ice Hockey Enterprises General Journal GJ81
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Practice Exercise: AXIS Trial Balance as at 1 March 20X2 $NZ Bank 2 200 Raw materials inventory control 5 200 Work in progress inventory control 4 510 Motor vehicle (cost) 16 000 Accumulated depreciation for motor vehicle Accounts Payable Capital $27 910
$NZ
1 200 3 200 23 510 $27 910
Work in progress at 1 March 20X2 was: Job no Direct Material $NZ 113 116 1 010 980 Direct Labour $NZ 300 240 Factory Overhead $NZ 1 300 680
The following information relates to the operation of the business for the month of March 20X2: $NZ Raw materials purchased on credit 2 360 Labour costs incurred 3 500 Factory electricity and telephone 2 500 Factory rent 2 600 Factory general expenses 900 Depreciation on Motor Vehicle to be charged at 8 % per annum on cost (rounded to nearest $)
Raw material issued: Job no. 113 Job no. 116 Job no. 117 Indirect Material Labour costs charged Job No 113 Job No 116 Job No 117 Indirect Labour
$NZ 400 1 300 1 100 200 $NZ 200 560 1 360 1 380
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Factory overhead costs are charged to jobs at the rate of 200% of direct labour costs Job numbers 113 and 116 were completed during the month of April and delivered to customers. Required: 1. Using the table given below calculate the costs of production for jobs processed during March.
Job Numbers
Direct Material $NZ
Direct Labour $NZ
Factory Overhead $NZ
Total $NZ
Job no.113 2012 Mar 1 Balance Mar 31
Job no. 116 2012 Mar 1 Balance Mar 31
Job no.117 Mar 31
(b) Complete the following control accounts as they would appear in the General Ledger after all the transactions have been posted for the month.
AXISS General Ledger

Raw Materials Control 20X2 Mar 1 Balance 31 b/f 140 5 200 Dr
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Work In Progress Control 20X2 Mar 1 Balance 31 b/f
141 4 510 Dr
Payroll Control Mar 31
720
Factory Overhead Control Mar 31
730
Note: FACTORY OVERHEAD UNDER AND OVER-APPLIED: 1. If the Factory Overhead Account has a debit balance at the end of the year, it means that the overhead is under-applied. The Factory Overhead Account can be closed to the Cost of Goods Sold Account if the amount is immaterial. Cost of Goods Sold will increase. 2. If the Factory Overhead Account has a credit balance at the end of the year, it means that the overhead is over-applied. The Factory Overhead Account can be closed to the Cost of Goods Sold Account if the amount is immaterial. Cost of Goods Sold will decrease. 3. If the amount of under or over-applied overhead is material, the Factory Overhead Account should be closed by apportioning the amount between Cost of Goods Sold Account, Work-in-Progress Control Account and Finished Goods Control Account.
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Objectives of a Job Cost Subsystem: 1. Ensure prompt processing of quotes and job orders. 2. Ensure prompt invoicing of job orders. 3. Maintain adequate inventory levels. 4. Maintain accurate inventory records. 5. Maintain adequate internal control to prevent errors and fraud. 6. Allocate costs to the correct job order. 7. Apply an appropriate Overhead rate. Consecutively pre-numbered source documents in a Job Cost Subsystem: Materials Requisition Records the materials issued to production Time Card Records the hours workers spend on each job Job Cost Card Records all the costs incurred in production Invoice Charges the client with the total costs on job completion Reasons for consecutively pre numbered source documents: The number provides a reference for tracing a document through the accounting system. All documents must be accounted for. If any documents are missing or invalid numbers appear, an internal auditor would have to discover the reason as there could be a possibility of fraudulent actions by a staff member. Consecutively prenumbered source documents are essential to a good internal control system. Note: A quotation is a control document, not a source document. Quotation Provides an estimate of the cost of the job
OBJECTIVES OF INTERNAL CONTROL S A M E Safeguard Assets Ensure Accuracy of Accounting information Ensure Managerial policy is carried out Promote Efficiency
METHODS TO ACHIEVE INTERNAL CONTROL S A N E Separation of duties Authorisation of transactions Consecutively pre-numbered multi-copy documents Employees ability commensurate with responsibility
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Internal Controls:
Internal Controls necessary to ensure the proper functioning of the job cost subsystem. Separation of the duties of Recording, Custody, Authorisation. 1. The store person of materials should not be responsible for taking orders from customers. 2. The person who makes the goods should not be able to remove materials from the store without receiving authorisation. 3. A copy of the job cost card should be filed numerically in the factory files. 4. Time sheets should be used to record hours worked in the factory. 5. Written quotes should be given to the customer and copies kept. 6. An internal check system should be in place. The range of duties carried out by each person should be limited in such a way that errors or dishonest practices will come under the scrutiny of other members of the firm. Staff members should not work in isolation from each other. 7. Rotation of duties enables dishonest practices to be discouraged. Links between the Job Cost subsystem and the Accounts Receivable subsystem: The invoice which records the sale is written up from the job cost sheet.
Input
The data or source documents used in the production process. Typically they include: purchase order job cost card materials requisition form invoice timesheets
Process
The job cost process involves keeping careful records of all inventories and posting data to the ledger accounts. These include: Raw materials
raw materials overhead control finished goods
payroll work in progress cost of goods sold.
The job cost card will record any changes in these accounts as the jobs progress through being produced.
Output
The main outputs of the job cost subsystem are:
completed job cost cards cost of production
inventory records cost of sales/services
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The Fraud Triangle:
Exercise 15.10: Identify which feature of internal control is ignored in each of the following situations and explain how the situation creates an opportunity for fraud to occur. 1. Hemi who has the main responsibility for reconciling the bank account, is also the companys accountant who does the daily banking. Feature of internal control ignored:
How the situation creates an opportunity for fraud to occur:
2. Atawhai has worked by herself at the same counter in a large store for many years. Her reputation is high with her employers and although her counter is always extremely busy, she never asks for assistance from other staff. She never takes a holiday claiming that her customers will miss her special service. Feature of internal control ignored:
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3. In order to save money spent on order forms and to reduce the time spent on keeping track of them at the end of each day, a local restaurant does not buy pre-numbered order books. Feature of internal control ignored:
4. Pierre Papa owns and operates a dairy on Queens Street in the Auckland City. He is concerned that though the shop seems to be busy on most days, the profits over the past few months are not as expected. Outlined below are some of the shop procedures. There are two cash registers which the staff operate using their personal passwords. Both registers are accessible with either password. All refunds are done from the cash register by the staff. In the evenings, staff can access inventory from the store room for displays. There usually are two staff members present; sometimes, however, only one is present when the other goes on break. The shop is fitted with video surveillance cameras, operational Monday through Friday. As a fringe benefit, and with Piere Papas approval, staff are allowed to take home damaged stock. If, however Piere Papa is unavailable, then staff are allowed to take home the damaged stock if they leave him a note. List three weaknesses in the internal control system of
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Symbols of a Job Order Cost Flowchart system. Item Symbol Meaning Source Evidence of cost incurred. In Document system they represents the:
the job cost
1 Filing of a source document
Temporary
Process
Accounting Document
Physical Goods
Purchase order Job Order Card Timesheet Materials Requisition form Job cost card. Where there are multiples, they are numbered and stacked behind each other. The end point of the source documents. Source documents are usually filed in Numerical order in the originating department, Date order in the custodial departments and in Alphabetical order in departments that deal directly with customer inquiries. The letter D,N or A are placed in the triangle depending on how the document is to be filed. A temporary file is shown as an upside down permanent file. A Process is a check done before the next step can proceed. They are important internal controls. In the job cost subsystem they include: Signing materials requisition form Checking Job cost Card with the Goods Accounting documents are the summarising of the data and record that need updating. In the Job cost card, they include the Raw Materials Inventory ledger and the Finished Goods Inventory Ledger. The trolley faces in the direction of the movements of the goods. The goods are transferred from: Raw materials to the factory Factory to the foreperson when finished After being checked against the Job Cost Card, and Job Order Card the finished goods are sent to the Finished Goods Department (Shop floor).
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Process of the Job Order Cost Subsystem

Scrub a Dub Panel Beaters.
1. Customer sends in a purchase order to the Factory Manager. The factory manager will write out three copies of the Job Order from the Purchase Order, then staple the Purchase Order to the bottom copy and file it alphabetically in a temporary file. The top copy is sent to the customer as a quote and the second copy the factory so they can start work.
to
2. The factory will prepare Timesheets for its staff which are used to update the Job Cost Card. They send the top copy of the timesheet to Accounts and file the bottom copy in date order. The factory will order the materials required for the job from the Raw Materials Store with two copies of a Materials Requisition Form. The Store will authorise the release of the materials by signing the Materials Requisition Form. The top copy is used to update the Raw Materials Inventory ledger and is filed in date order. The second copy is sent along with the goods back to the factory and filed in numeric order in the factory. The goods are sent to the factory from the raw materials store. 3. The Factory prepares three copies of the Job Cost Card with details from the Materials Requisition Form and their personal Timesheets. The bottom copy is combined with the Job Order Card and filed numerically in the factory with the remaining two copies going to the Factory manager with the Finished Goods. 4. The factory manager checks the Job Cost Card and Job Order from the temporary file, and the goods to see the job is completed to a satisfactory standard. The overhead is added on at the required rate. The second copy of the Job Cost Card and the Job Order are filed in alphabetical order. The top copy of the Job Cost Card is sent to accounts where the finished goods are updated and the goods are sent to the Shop as Finished Goods.
Scrub a Dub Panel Beaters Job Order Cost System Flowchart appears on the next page
Study Guide 13-B5

Customer
Purchase Order
Accounting
Factory Raw Materials Store Accounts Shop
Page 68
Factory Manager
Purchase Order
Job Order 2 Quote Job Order
D
Timesheet 1 Timesheet
A
Materials Requisition Materials Requisition
Payroll
Materials 2 Requisition
Authorise and sign
D N
Job Cost Card Raw Materials Inventory Ledger
Job Cost Card
A
N
Reconciles with goods and adds overhead Job Cost 1 Card Job Cost 1 Card
Finished Goods Ledger
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Final January April Exam 2005 QUESTION 5: SYSTEMS (12 marks) You have been asked to visit a factory and prepare an assignment on the Job Cost Subsystem. You prepare the document flow chart on page 69 after conducting the interview below. REQUIRED: (a) Complete the following interview that may have taken place between you and the manager of Sewing Machine Repairs Ltd before you prepared the document flow diagram on the next page. Interviewer: Manager: Response 1 Interviewer: Manager: Response 2 Interviewer: Manager: Response 3 Interviewer: Manager: Response 4 Interviewer: Manager: Response 5 How many copies are there of this document? What document do you prepare when you receive a sewing machine to be repaired?
What do you do with the copies?
Do the repairmen prepare any other documents?
Do the repairmen keep copies of documents?
Interviewer: Manager: Response 6
Are records kept of materials used to fix the sewing machines?
Interviewer: Manager: Response 7
What happens when the job is finished?
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JOB COST SUBSYSTEM SEWING MACHINE REPAIRS LTD
Customer
Manager
Repairmen
Store
Job 1 Order
Job 1 Order
update
Job 1 Order
Job 1 Order
Job 1 Order
Inspects, signs and adds mark-up
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(b) The Manager has asked you to identify four areas of weakness in his current Job Cost System and to provide him with a recommendation for an improvement for each weakness you name. 1st Weakness
Improvement Suggested
2nd Weakness
3rd Weakness
4th Weakness
(c) Write a paragraph to explain to the Manager features of a good internal control system.
Study Guide 13-B5

JOB COST SYSTEMS January April Exam 2012
Accounting
Page 72
Equipment Ltd PO Box 246 AUCKLAND Phone & Fax 64 09 256 8291
Invoice to: Johns Ltd PO Box 921 AUCKLAND
Invoice 295 31 June 2012 GST Reg No 27-902-891
Supply equipment as per quote as requested
$19,200.00 Plus GST 20,880.00 TOTAL $22,080.00
Payment can be direct debit to bank A/C no 06 78 0114338 00 Thanks you for your business
Imagine you work in the Accounts Payable department of Johns Ltd and you discover the above invoice included in the accounts for payment. Suggest two reasons why you might suspect it is a fake invoice.
(2 marks)
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Final September Exam 2006 REQUIRED: (a) Complete the objectives of the job order cost system, documents 1-4 and calculation of the predetermined overhead rate in the following report to Timothy to help him to establish his job order cost system: TAYLORS COLLEGE 75 Karangahape Road AUCKLAND
DATE: 12 June 20X6 ( no marks given for date) Report for CD PLUS LTD Owner/Manager Timothy Francis JOB COST ORDER SYSTEM: Your Job Order Cost System should enable you to meet the following objectives: 1 2 3 4 5 6 I have included sample pre-numbered forms for you to use as source documents in your business: (to provide an estimate of the Document 1. cost of the job). Document 2. Document 3 Document 4 (to record all the costs incurred in the production of the CD). (to record the hours spent on each job)
(to charge the client with the total costs on job completion) I recommend you get your clients to sign Document 1 and it can become a contract to ensure you will get paid for the work done. I also recommend for all jobs undertaken, the client pays 20% before work is commenced.
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As you will need to charge overheads to products as they are being produced, I recommend you use predetermined rates. You will need to estimate all the overheads you expect to incur for the year. I suggest you use direct labour hours to allocate the overheads to jobs. For example Estimated Overheads for year: Estimated Hours for year: Depreciation $40 000 5 000 Direct Labour Hours Rates $ 3 000 Advertising $4 000 Electricity $3 000 Insurance $5 000 The following calculation shows you how much overhead you would need to charge the client for every direct labour hour. Calculation: Formula: Working:
Predetermined Overhead rate: Allow 1 mark for working, 1 mark for correct answer. I will be visiting Wellington in the next month and I will arrange a time that is convenient for you as I would like to assist you in the implementation of your job cost system. Kindest regards
Student
(9 marks)
(b) Give one reason why consecutively pre-numbered source documents are an essential part of any good internal control system. (1 mark)
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QUESTION 5: SYSTEMS
Dr Gou Pengyou is a veterinarian who has set up the Vet-to-Pet business to visit sick dogs and cats in their homes. He treats illnesses such as skin problems, minor wounds and abscesses. Vaccinations and lab screening tests are also administered. His services have been so popular that he has had to employ three additional vets and one office lady called Keely. He comes to you for advice as he feels concerned that his accounting system has some weaknesses. Dr Gou Pengyou provides you with a summary of how his current accounting system operates. When clients phone in with a problem, Keely writes their name, address and phone number on a telephone pad that she keeps by the phone. She then telephones the vets, who are out on calls, to check which one can visit the client and writes the vets name alongside the clients name on the pad. There is a standard call out charge of $80 that can be paid by the client in cash at the time of the consultation. If any client pays by cash, Dr Gou Pengyou sometimes uses some to buy his lunch and has told his staff they also have the right to use some cash provided they refund money borrowed at a later date. Each vet keeps a duplicate pad in his vehicle and writes down the date, time and client s details for each consultation. Any additional drugs or bandages that are used in the medical procedures are added to the call out charge. If the customer pays cash, the vet writes paid on the page, removes the top copy from the pad and leaves it wit h the client as a receipt. On his return to the office, the vet removes the current days pages from the pad and leaves them in Keelys intray. The next day Keely prepares a numbered invoice and notes the number on the telephone pad alongside the clients contact details with the total amount of the invoice. This will be ticked off when the customer pays later. The vets give Keely any remaining cash they have received with a note if they took some for their lunch. Keely puts the money in the safe ready to bank the next day. When the veterinarians need to restock their vans, they ask Keely for the key to the storeroom and take enough supplies that should last them for the next week. If the supplies in the storeroom are running low, they ask Keely to phone the supplier for a new order. Before the 20th of each month, Keely prepares cheques for payment for invoices received during the previous month. Dr Gou Pengyou signs the cheques ready for Keely to post the next day.
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REQUIRED: (a) Explain two objectives of an internal control system.
(b) Identify two weaknesses in the accounting system for Dr Gou Pengyous business. For each weakness, explain the aspects of internal control that have been overlooked and the action he should take to ensure his accounting system will function effectively in the future. Weakness 1:
Weakness 2:
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QUESTION 4: SYSTEMS Internal Control Case Study
(10 marks)
Most white collar crime involves false documents often false or stolen identities or false entries in ledgers or forged cheques. Fraudsters are mainly in their early 40s, and 80 per cent are male, many with prior criminal records. High-risk areas include failure to segregate staff duties or to notice employees living beyond their means. More than half are first-time offenders, relatively well-educated, mostly directors or employed in accounting duties, a high proportion at top management level. Many are professionals and long-term employees. Surprisingly, computers are used in 20 per cent of the crimes only. Most are caught by internal audit. nzherald.co.nz 25 June 2003
Required: Read the Internal Control Case Study above and answer the questions below. (a) The article states that many fraudsters have prior criminal records. What internal control procedures should a business take regarding the employment of new staff.
(b) Suggest why directors or those employed in accounting duties make up a significant proportion of offenders. (2 marks)
(c) What internal controls should be in place to avoid false documents being issued?
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(d) The case study identifies failure to segregate staff duties as a high -risk area. List the duties that should be separated in an internal control system for the Inventory subsystem. Provide an example for each duty listed. (3 marks)
(e) Briefly explain how using computerised accounting software can help businesses to improve their internal control. (2 marks)
Acknowledgement: Materials taken from from Accounting Alive, Mark Wilson (with permission for Study Guide use only).

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Study Guide 13-B5

NAME: STUDENT ID:

ACCOUNTING Study Guide 13-B5

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Study Guide 13-B5

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Chapter 1 Unit 12: Cash Budgets

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January $NZ Estimated Receipts

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The Oamaru Trust has a Bank Overdraft of $2,500 on 1 July 20XX.

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12.4 Estimated Receipts from Credit Sales

January February March April May Total

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Study Guide 13-B5 12.6 Past Examinations

Current Assets Accounts Receivable Inventory

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Surplus/(Deficit) Bank Balance Beginning Bank Balance End

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Total Estimated Receipts Estimated Payments

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Chapter 2 Unit 13: STATEMENT OF CASH FLOWS

Different Sections of the Statement of Cash Flows:

Cash Flow from Investing Activities

Cash Flow from Financing Activities

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Study Guide 13-B5

XXX (XXX) (XXX)

XXX XXX (XXX) (XXX) (XXX) (XXX) XXX XXX $XXX

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Study Guide 13-B5 PRACTICE EX 13.1

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(ii) Accounts Payable/Purchases

(Calculate cash paid to suppliers)

Step 1(c) Determine cash paid for operating expenses Expenses

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Step 5: Complete the Statement of Cash Flows

D. Cent Statement of Cash Flows

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BOOKS OF C. SIDE 20X0 4,000 2,000 4,000 6,000 2,000 14,000

20X1 6,000 3,000 6,000 10,000 3,000 2,000 20,000

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20X1 14,000 200 200 7,000

Step 1(c) ii. Determine Fund Expenses