Question 1

a.

The 4 factors that one should consider before deciding on what form of
business structure to operate under are expenses, liabilities, money and competition.
An expense in accounting is the money spent or cost incurred in an entitys
efforts to generate revenue. Expenses represent the cost of doing business where
doing business is the sum total of the activities directed towards making a profit. A
business incurs expenses such as operating expenses, or selling, general and
administrative expenses, including marketing, rent, utilities and salaries. Interest on
any debt financing and income taxes also counted as expenses too.
A liability is an obligation and it is reported on a companys balance sheet.
Accounts payable is one of the common examples of liability. Liability is a source of
funds for a company, and the company will use the fund to enhance the business.
Liabilities are contractual obligations and companies are required to honor their
liability contracts face legal suits.
Money is also a key point before deciding what form of business structure
should be operated under. Revenue is the total amount of money received from selling
products or providing services. It is also called as sales and it is measured over a
specific period of time. Revenue shows how much money the business is making. The
cost of goods sold includes everything directly related to producing a product or
service such as raw materials, direct labour costs and overhead related to producing
the product. Total costs also play an important role in deciding business structure
before operating. They include direct costs and other business costs like taxes,
interests, administrative expenses, selling expenses and license fees. Lastly, how
much money the company keeps are very important before deciding the business
structure. Gross profit refers to the money the company still have, after subtracting
what it cost to produce the product or service, while net profit refers the money the
company holding, but after subtracting all the expenses. Nevertheless, profit margin
helps the company to see how much money the business is keeping. It tells that how
much the profit is for every dollar invested in the business.
Besides, competitions between companies are also important before deciding
the business structure. Competition is the rivalry among sellers trying to achieve goals
such as increasing profit, market share and sales volume by varying the elements of

the marketing mix: price, product, distribution and promotion. Competition leads to
innovation. It helps a business to improve by producing new products or services in
order to achieve a higher level of results than other competitors do.
b.

One of the major differences between a public company limited by shares and
a proprietary company is that a public company must have at least three directors
and at least one company secretary while proprietary companies must have at least
one director and need not have a company secretary. Besides, public companies must
hold an AGM once a year no later than five months after the end of the companys
financial year and a proprietary company has no obligation to hold an AGM unless
the constitution requires it. Lastly, proprietary companies are restricted to having no
more than 50 non-employee shareholders. Proprietary companies are also divided
into large and small companies. Companies that are not proprietary companies are
all limited or public companies. Public companies can be classified into the
following types: limited by shares, limited by guarantee, unlimited with shares or a
no liability company. A company limited by shares is a company formed on the
principle of having the liability of members limited to the amount (if any) unpaid on
the shares respectively held by them.

c.

From the information given in the balance sheet, the $125000 is not how much
the business worth. It is the owners equity of the business. Given that the business
has $200000 of assets and $75000 of liabilities, so $200000 - $75000 = $125000. So
from the accounting equation, $125000 represents the owners equity of the
business.
Other than that, he should ask the seller about the investments by the owner
because these investments may increase the owners equity. Besides, income is also
the gross increase in owners equity resulting from business activities entered into
for the purpose of earning profit. Other than the causes that increase the owners
equity, he should also ask about the causes that will decrease the owners equity.
One of the causes is the drawings. An owner may withdraw cash or other assets for
personal use. These withdrawals could be recorded as a direct decrease of owners
equity. Nevertheless, it is generally considered preferable to use a separate
classification called drawings to determine the total withdrawals for each accounting
period. Lastly, expenses also decrease owners equity. Expenses are the cost of assets
consumed or services used in the process of earning income. They are decreases in

owners equity that result from operating the business. Expenses represent the actual
or expected cash outflow.
In conclusion, owners equity is increased by an owners investments and by
income from business operations whereas owners equity is decreased by drawings
and expenses. These are the other important information that should be clearly
understood before any purchasing of a business made.

d. Should or should not?

Question 2
a)
1. Revenue
2014
$115750
135.14%

2013
$117564
137.26%

2012
$88263
103.05%

2011
$93575
109.25%

2010
$ 85651
100.00%

2. Profit before tax and finance costs

2014
$30032
120.89%

2013
$33785
135.99%

2012
$23079
92.90%

2011
$24592
98.99%

2010
$24843
100.00%

3. Profit after tax

2014
$18222
124.50%

2013
$20885
142.70%

2012
$14860
101.53%

b)
Profit
Average assets

1. Return on assets =

$ 18222
($ 161985+ $ 148168)/2

= 11.8%
2. Inventory turnover =

Cost of sales
Average inventory
$ 60750
($ 24625+$ 18454 )/2

= 2.82 times
365
Average days to sell the inventory = 2.82
= 129 days

2011
$15660
107.00%

2010
$14636
100.00%

Current assets
Current liabilities

3. Current ratio =

$ 71333
$ 54050

= 1.32 times

Profit before income taxesinterest ex pense

Interest expense

4. Interest coverage ratio =

$ 30032
$ 8500

= 3.53 times
5. Profit margin =

Profit
Net sales

$ 18222
$ 115750

= 15.7%
6. Asset turnover =

Net sales
Average assets
$ 115750
($ 161985+ $ 148168)/2

= 0.75 times
7. Receivables turnover =

Net credit sales

Average receivables
$ 115750
($ 21750+$ 23675)/2

= 5.1 times

Average days to collect money from customers =

365
5.1

= 72 days
8. Creditors turnover =

Net credit purchase

Average trade creditors
$ 113825
($ 28450+$ 22642)/2

= 4.46 times
Average days to pay its supplier =

365
4.46

= 82 days

c)
Liquidity ratios measure the short-term ability of the entity to pay its maturing
obligations and to meet unexpected needs for cash. How quickly an entity can convert its
current assets into cash is a measure of liquidity. Current ratio, receivables turnover,
inventory turnover and creditors turnover has been calculated from the information given.
Current ratio is a liquidity ratio that measures a companys ability to pay short-term
obligations. Vintage Wines Ltd has a current ratio of 1.32:1 means that for every dollar of
current liabilities, it has $1.32 of current assets. The ratio used to assess the liquidity of the
receivables is receivable turnover. It measures the number of times, on average;
receivables are collected during the period. Vintage Wines Ltd has a receivable turnover of
5.1; the average day for the company to collect money from its customers is 72 days.
Inventory turnover measures the number of times on average the inventory is sold during
the period. It provides insight into the liquidity of the inventory. Vintage Wines Ltd has an
inventory turnover of 2.82, the average days to sell inventory is 129 days. So, the cash or
operating cycle is therefore 201 days. It means from the date an item of inventory arrives
in the warehouse, it takes an average of 201 days to convert the inventory into cash.
Creditors turnover measures the time it takes to make payment following the credit

purchase of inventory. Vintage Wines Ltd has a creditors turnover of 4.46, the average
days to pay back its supplier is 82 days.
Solvency ratios measure the ability of an entity to survive over a long period of time.
Vintage Wines Ltd has showed the interest coverage ratio. Interest coverage ratio provides
an indication of the entitys ability to meet interest payments as they full due. It is
calculated by dividing profit before interest expense and income taxes by interest expense.
Vintage Wines Ltds profit before income taxes and interest expense covers its interest
expense 3.53 times.
Profitability ratios are a class of financial metrics that are used to assess a businesss
ability to generate earnings as compared to its expenses and other relevant costs incurred
during a specific period of time. Having a higher value relative to a competitors ratio or
the same ratio from a previous period is indicative that the company is doing well. Asset
turnover, profit margin and return on assets are calculated from the information given.
Return on assets (ROA) is a measure of managements efficiency in managing the assets
of the business. It shows the entity every $1 of assets, how much is its return. Vintage
Wines Ltds return on assets is 11.8%. For every dollar carrying amount of Vintage Wines
Ltds assets, the company generated 11.8 cents of profit. Profit margin is a measure of the
percentage of each dollar of sales that results in profit. Its profit margin is 15.7%. Vintage
Wines Ltd generated 15.7 cents of profit for every dollar of net sales. Asset turnover
measures how efficiently a company uses its assets to generate sales. It shows the dollars
of sales produced by each dollar invested in assets. Asset turnover shows that Vintage
Wines Ltd generated sales of $0.75 for each dollar it had invested in assets. It means that
the entity is not efficiently using the assets to generate profit.

Question 3
a. This is not a business transaction. It has not resulted in an exchange of goods
occurring between the business entity and an outside entity. It is just a negotiation
at this stage. If the entity decides to go ahead with the lease, then the correct entry
will be to record the asset and the associated present value of the future lease
payments.
b. This is a business transaction. It has resulted in an exchange of goods occurring
between the business entity and outside entity. The sole trader will receive the
stock which will be recorded as an asset and also will record the purchase as
reduction in cash at bank.
c. This is not a business transaction. It is just a contract at this stage and has not
resulted in an exchange of goods occurring between the business entity and an
outside entity. Once the director commences employment and wages expense has
been incurred or paid then a business transaction can be recorded.
d. This is a business transaction. There is an exchange of goods between the business
entity and the internet provider. The business entity has consumed the internet and
has now incurred a debt associated with this usage.
e. This is a business transaction. There is an exchange of goods between the business
entity and the internet service provider. In this transaction the entity is paying the
provider the outstanding debt.
f. This is a business transaction. This event results in a change in the entitys
financial position as the withdrawal of office equipment reduces the entitys equity.
It also reduces the assets of the entity.
g. This is not a business transaction. It is a negotiation between two parties. It will
remain unrecorded by the entity until the discount has actually been applied to
goods or services.
h. This is not a business transaction because the personal funds are used by the
business partner. It does not impact on the entitys accounting equation or financial
position.

Question 4
a.
Schedule of Receipts from Debtors
Quarter
Accounts receivable, 31/12/11
First quarter ($600000)
Second quarter ($700000)
Third quarter ($800000)
Fourth quarter ($850000)
Total collections

1
$150000
420000

$570000

2
$180000
490000
$670000

$210000
560000

$240000
595000
$835000

$770000

b.
Database Ltd
Cash Budget
for the year ending 31 December 2012
Quarter
Beginning cash balance
Add: Receipts
Receipts from debtors
Total available cash
Less: Disbursements
Purchases
Marketing and administration expense
Occupancy expense
Depreciation expense
Total disbursements
Ending cash balance

1
$ 18260

2
$ -27240

3
2260

4
$ 151760

570000
588260

670000
642760

770000
772260

835000
986760

385000
150000
68000
12500
615500

410000
150000
68000
12500
640500

390000
150000
68000
12500
620500

420000
175910
68000
12500
676410

$ -27240

$ 2260

$ 151760

$ 310350

Question 5
a.

Activity
Orders processing
Returns processing
Delivery
Rush orders
Sales visits

Overhead
$200000
50000
100000
70000
20000

Numbers of drivers
450 orders
100 returns
700 deliveries
50 rush orders
100 visits

Cost per drivers

$444.44 per order
$500 per return
$142.86 per delivery
$1400 per rush order
$200 per visit

b.
Supermarket customer 1

Orders processing
Returns processing
Delivery
Rush orders
Sales visits

300 @ $444.44
50 @ $500
400 @ $142.86
10 @ $1400
50 @ $200
Total Cost:

$133332
$25000
$57144
$14000
$10000
$239476

Supermarket customer 2
Orders processing
Returns processing
Delivery
Rush orders
Sales visits

100 @ $444.44
25@ $500
200 @ $142.86
20 @ $1400
25 @ $200
Total Cost:

$44444
$12500
$28572
$28000
$5000
$118516

Supermarket customer 3
Orders processing
Returns processing
Delivery
Rush orders
Sales visits

50 @ $444.44
25 @ $500
100 @ $142.86
20 @ $1400
25 @ $200
Total Cost:

c. Customer 1
$300000 - $ 239476 = $60524

$22222
$12500
$14286
$28000
$5000
$82008

Customer 2
$150000 - $118516 = $31484
Customer 3
$200000 - $82008 = $117992

d. advise the management of the Pua cheesecake company as to whether any changes should
be made in its relationships with customers