2009 sp1 - unisa acg11 - assignment 2

UNIVERSITY OF SOUTH AUSTRALIA Open Universities Australia

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An Assignment cover sheet needs to be included at the front of each assignment. Please fill in all details clearly. Full name: Andrew Edward Cole Address: PO Box 9043 Deakin LPO ACT Postcode: 2600 UniSA student ID 1 1 0 0 2 0 0 7 1

Phone number: 0407 384 998 Email address: [email protected] Unit code: ACG11 Unit title: Accounting, Decisions and Accountability Due date (indicate if extension granted): 13th May, 2009 (1 Week Extension Granted) Assignment number: 2 Assignment topic as stated in the Unit information Assignment 2 I declare that the work contained in this assignment is my own, except where acknowledgement of sources is made. I authorise the University to test any work submitted by me, using text comparison software, for instances of plagiarism. I understand this will involve the University or its contractor copying my work and storing it on a database to be used in future to test work submitted by others. I understand that I can obtain further information on this matter at http://www.unisanet.unisa.edu.au/learningconnection/student/studying/integrity.asp Signed: Andrew Cole – 13 May 2009 Note: The attachment of this statement on any electronically submitted assignments will be deemed to have the same authority as a signed statement. Office use

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Question 1: Accounting Concepts

Part A: Define Income and Expenses as used by accountants by outlining the three (3) parts of the definitions concerned.

The Framework for the Preparation and Presentation of Financial Statements (The Framework) defines Income and Expenses as follows:

Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Expenses: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. (Hoggett et al, 2009, p. 78)

Income can be defined as an increase in the wealth of the owner(s) of an entity, whereas Expenses can be defined as a decrease in the same wealth.

Equity is the interest in the entity held by its owners. By considering the accounting equation in the following form:

Equity = Assets – Liability

It can be seen that any increase in the Assets of the entity, or any decrease in Liabilities of the same, would result in an increase in the Equity the owner(s) of the entity hold, resulting in an increase of the wealth of the owner(s). Conversely, any decrease in Assets or increase in Liabilities of the entity would result in a decrease in the wealth of the owner(s). Therefore income can be defined as any increase in the Assets or decreases in the Liabilities of an entity, whereas Expenses can be defined as a decrease in Assets or an increase in Liabilities.

Assets are resources or economic benefits held by the entity.

Liabilities are the obligation to pay out resources or economic benefits at a future date, resulting in a decrease of assets.

Therefore, Income can be defined as:

Any increase in resources or economic benefits held by the entity, or any decrease in obligations to pay out resources or economic benefits at a future date.

Following the same logic Expenses can be defined as:

Any decrease in resources or economic benefits, or any increase in obligations to pay out resources or economic benefits at a future date.

Part B: By comparing the following examples to the three parts of the definitions of the various elements, explain whether these are examples of Income, Expenses, Liabilities or Assets as at 30 June 2008 and at what amounts they would be recorded in the relevant financial statements.

i. The Adelaide Garden Shop paid two months shop rental in advance for $1,000 on 1 June 2008.

The initial payment of $1000 on the 1st of June 2008 resulted in a decrease in the amount of cash the entity held, and resulted in the continued use of the premises in question until the end of July 2008.

As of 30 June 2008 1 month worth of rent had been realised, and would be considered an expense, with the remaining month being an asset as a prepaid expense.

ii. The Adelaide Garden Shop received $100 in cash from a customer on 30 June 2008 for an orange tree with a sale price of $100. However, the orange tree was out of stock on that day and was only delivered to the customer on 4 July 2008 after a new shipment was received from a wholesale nursery.

The Adelaide Garden Shop entity received an increase in resources when it was paid the $100 cash by the customer, therefore this could be an example of an Income.

However, the fact that the orange tree the cash was received for was not available when the money was received resulted in an obligation on the entity to either deliver an orange tree to the customer, or to refund the money. As this delivery could not be made until the 4th of July 2008, this would be better considered as both an Income and a Liability as at the 30th of June 2008.

Question 2: Analysis and interpretation

Part A: Calculate the following ratios for 2010 and 2011.

1. Profit Margin.

Profit Margin is calculated by dividing profit from continuing operations by revenues:

Profit Margin = Profit (after income tax) ÷ Revenues

For 2010:

Profit Margin = (Revenues (sales on credit) – Cost of sales – Other Expenses) ÷ Revenues = (55 000 – 35 200 – 15 000) ÷ 55 000 = 4 800 ÷ 55 000 = 0.872 or 8.72%

For 2011:

Profit Margin = (Revenues (sales on credit) – Cost of sales – Other Expenses) ÷ Revenues = (71 000 – 49 500 – 19 020) ÷ 71 000 = 2 480 ÷ 71 000 = 0.349 or 3.49%

2. Rate of return on proprietor’s capital.

Rate of return on proprietor’s capital is calculated by dividing the profit from continuing operations by the proprietor’s capital:

Rate of return On prop. cap. = Profit (after income tax) ÷ Prop. cap.

For 2010:

Rate of return On prop. cap. = Revenues (sales on credit) – Cost of sales – Other Expenses) ÷ Cath, Capital

= (55 00 – 35 200 – 15 000) ÷ 126 000

= 4 800 ÷ 126 000

= 0.0380 or 3.80%

For 2011:

Rate of return On prop. cap. = Revenues (sales on credit) – Cost of sales – Other Expenses) ÷ Cath, Capital

= (71 000 – 49 500 – 19 020) ÷ 100 000

= 2 480 ÷ 100 000

= 0.0248 or 2.48%

3. Current ratio.

Current Ratio is calculated by dividing the current assets by the current liabilities:

Current ratio = Current Assets ÷ Current Liabilities

For 2010:

Current ratio = (Cash & Equiv + Inventories + Trade Acc. Rec.) ÷ Trade Accounts Payable = (38 000 + 19 000 + 36 000) ÷ 27 000 = 93 000 ÷ 27 000 = 3.44

For 2011:

Current ratio = (Cash & Equiv + Inventories + Trade Acc. Rec.) ÷ Trade Accounts Payable = (40 000 + 24 000 + 59 000) ÷ 29 000 = 123 000 ÷ 29 000 = 4.24

4. Quick ratio.

Quick ratio is calculated by dividing the Cash assets and the Receivables by the Current liabilities:

Quick ratio = (Cash assets + Receivables) ÷ Current liabilities

For 2010:

Quick ratio = (Cash & Equiv + Trade Acc. Rec.) ÷ Trade Accounts Payable = (38 000 + 36 000) ÷ 27 000 = 74 000 ÷ 27 000 = 2.74

For 2011:

Quick ratio = (Cash & Equiv + Trade Acc. Rec.) ÷ Trade Accounts Payable = (40 000 + 59 000) ÷ 29 000 = 99 000 ÷ 29 000 = 3.41

5. Equity ratio.

Equity ratio is calculated by dividing the Total Equity by the Total Assets:

Equity ratio = Total Equity ÷ Total Assets

For 2010:

Equity ratio = Cath, Capital ÷ (Cash + Inventories + Trade Acc. Rec. + Non‐current assets) = 126 000 ÷ (38 000 + 19 000 + 36 000 + 60 000) = 126 000 ÷ 153 000 = 0.8235 or 82.35%

For 2011:

Equity ratio = Cath, Capital ÷ (Cash + Inventories + Trade Acc. Rec. + Non‐current assets) = 100 000 ÷ (40 000 + 24 000 + 59 000 + 87 000)

= 100 000 ÷ 210 000 = 0.4762 or 47.62%

6. Inventory turnover.

Inventory turnover is calculated by dividing the Cost of sales by the Average inventory balance:

Inventory turnover = Cost of sales ÷ Average Inventory Balance

The average days per turnover can be calculated by dividing the number of days in the year by the Inventory turnover:

Average days/turnover =Days in year ÷ Inventory turnover

For 2010:

Inventory turnover = Cost of sales ÷ (Inventories 2010 + Inventories 2009 ÷ 2) = 35 200 ÷ (19 000 + 20 000 ÷ 2) = 35 200 ÷ 19 500 = 1.81

Average days/turnover = 365 ÷ 1.81 = 201.65

For 2011:

Inventory turnover = Cost of sales ÷ (Inventories 2011 + Inventories 2010 ÷ 2) = 49 500 ÷ (24 000 + 19 000 ÷ 2) = 49 500 ÷ 21 500 = 2.30

Average days/turnover =365 ÷ 2.30 = 158.70

Part B: Write a short report to the owner in relation to the profitability and financial stability of the business.

Summary of ratios:

30 June 2010 30 June 2011 Profit Margin: 8.72% 3.49 Rate of return on proprietor’s capital: 3.80% 2.48% Current Ratio: 3.44 4.24 Quick Ratio: 2.74 3.41 Equity Ratio: 82.35% 47.62% Inventory Turnover: 1.81 2.30

Inspecting the above ratios, the following can be determined:

The two ratios that measure the ability of the business’s ability to pay its debts in the short term, the Current Ratio and the Quick Ratio, are both well above the industry average (Hoggett et al, 2009, p. 940). This indicates that the liquidity position of the business is good.

However, when considering the Equity Ratio, which measures the proportion of the business financed by equity holders (as opposed to the proportion of the business financed by debt, or the debt ratio), it is shown that the equity holders portion of the business has dropped substantially. This shows that more of the business is being financed by debt.

While the Inventory Turnover of the business has improved somewhat over the last 12 months (an increase from 1.81 to 2.3, which indicates that stock is being sold quicker), the profit margin has also dropped substantially.

The long term financially stability of this business would be questionable, due to the increase of debt and the decrease of profit. It would be good for management to consider methods to improve the profit margin, and consider paying off some of the debt generated over the last 12 months.

Longer term analysis (i.e. further than the last 12 months) might show different results.

Question 3: Statement of Cash Flows

Part A: Prepare a cash flow statement in the format required by applicable accounting standard. Show all calculations or no marks will be awarded.

i. Cash and cash equivalents at beginning of period.

Cash and cash equivalents is calculated by adding Cash on Hand to Cash at Bank, then subtracting Bank Overdraft:

Cash on Hand $ 4 000Add: Cash at Bank ‐Less: Bank Overdraft (12 000)Cash and cash equivalents at beginning of period (8 000)

ii. Cash and Cash equivalents at end of period.

Cash and cash equivalents is calculated by adding Cash on Hand to Cash at Bank, then subtracting Bank Overdraft:

Cash on Hand $ 3 500Add: Cash at Bank 86 160Less: Bank Overdraft ‐Cash and cash equivalents at end of period 89 660

iii. Cash flow from operating activities

Receipts from Customers

Receipts from Customers is calculated by recreating the Accounts Receivable GL Account, as shown below, utilising the opening and closing balances from the comparative balance sheet, the discounts allowed (none in this case) and the bad debts expense from the income statement, and the Net Sales from the income statement. The amount that makes the account balance must be the Receipts from Customers:

Accounts Receivable

Date Details $ Date Details $ 1/1/2008 Balance b/d 75 000 In year Receipts from Customers 629 900 In year Sales 625 000 Discounts Allowed ‐ Bad Debts Expense 2 100 Balance c/d 68 000 700 000 700 000 31/12/2008 Balance b/d 68 000

This can also be calculated as follows:

Net Sales: $ 625 000 Less: Discounts Allowed ‐ Less: Bad Debts (2 100) Add: Opening Balance 75 000 Less: Closing Balance (68 000) Receipts from Customers $ 629 900

Payments to suppliers

The Purchases made during the year is calculated by recreating the Inventory GL account, as shown below, utilising the opening and closing balances from the comparative balance sheet, and the Cost of Sales (COS) from the income statement. The amount that makes the account balance must be the Purchases made during the year.

Inventory

Date Details $ Date Details $ 1/1/2008 Balance b/d 82 500 In year Cost of Sales 375 000 In year Purchases 369 100 Balance c/d 76 600 451 600 451 600 31/12/2008 Balance b/d 76 600


Cost of Sales: $ 375 000Add: Closing Inventory 76 600Less: Opening Inventory 82 500Purchases 369 100

Then we calculate the Payments to suppliers by reconstructing the Accounts Payable GL account, as show below, utilising the opening and closing balances from the comparative balance sheet, the purchase returns and discounts received (none in this case) from the income statement, and the previously calculated Purchases figure:

Accounts Payable

Date Details $ Date Details $ In year Payments to

suppliers 373 100 1/1/2008 Balance b/d 62 000

Purchase Returns ‐ Purchases 369 100 Discounts Received ‐ 31/12/2008 Balance c/d 58 000 431 100 431 100 31/12/2008 Balance b/d 58 000


Purchases $ 369 100Less: Closing Balance 58 000Less: Purchase Returns ‐Less: Discounts Received ‐Add: Opening Balance 62 000Payments to suppliers 373 100

Payments to employees and others

The payments to employees and others is the sum of payments made to Prepaid Expenses and Accrued Expenses during the current year.

Prepaid Expenses paid in the current year is calculated by recreating the Prepaid Expenses GL Account, as shown below, utilising the opening and closing balances from the comparative balance sheet, and assuming the opening balance of expenses will expire during the period.

Prepaid Expenses

Date Details $ Date Details $ 1/1/2008 Balance b/d 4 200 1/1/2008 Expiration of

PP Expenses 4 200

In year Cash 3 500 Balance c/d 3 500 7 700 7 70031/12/2008 Balance b/d 3 500

Accrued Expenses paid in the current year is calculated by recreating the Accrued Expenses GL Account, as shown below, utilising the opening and closing balances from the comparative balance sheet, and assuming the opening balance of expenses will expire during the period.

Accrued Expenses

Date Details $ Date Details $ In year Cash 3 600 1/1/2008 Balance b/d 3 600 31/12/2008 Accrual exp. at year

end 4 500

31/12/2008 Balance c/d 4 500 8 100 8 100 31/12/2008 Balance b/d 4 500

Expenses incurred and paid for in the current year is calculated by recreating the Selling & Admin Expenses GL Account, as shown below, utilising the Accrued Expenses and Prepaid Expenses paid in the current year figures calculated above, and the Selling & Admin Expenses figure from the Income Statement.

Selling & Admin Expenses

Date Details $ Date Details $ 1/1/2008 Expiration of PP

Expenses 4 200

31/12/2008 Accrual exp. at year end

4 500 31/12/2008 Selling & Admin Expense

130 000

31/12/2008 Cash 121 300 130 000 130 000

These three figures are added together to arrive at a single figure for Payments to Employees and Others:

Prepaid Expenses $ 3 500Add: Accrued Expenses 3 600Add: Selling & Admin Expense 121 300Payments to Employees and Others 128 400


Selling & Admin Expense $ 130 000Less: Opening Prepaid Expense 4 200Add: Closing Prepaid Expense 3 500Add: Opening Accrued Expenses 3 600Less: Closing Accrued Expenses 4 500Payments to Employees and Others 128 400

Payments to suppliers & employees

Payments to suppliers & employees can be determined by adding the previously calculated Payments to Suppliers figure to the Payments to Employees & Other figure:

Payments to Employees and Others $ 128 400Add: Payments to suppliers 373 100Payments to suppliers & employees 501 500

Interest Paid

Interest Paid could be calculated by recreating the Interest Payable GL account, utilising the Interest Expense from the Income Statement, and the opening and closing balance. However as no Interest Payable account is shown on the comparative balance sheet the opening and closing balances are assumed to be nil; therefore the entire amount of Interest Expense is cash paid during the year. This figure is simply copied from the Income Statement to the Cash Flow Statement.

Interest Paid $ 8 300

Interest Received

Interest Received could be calculated by recreating the Interest Receivable GL account, utilising the Interest Revenue from the Income Statement, and the opening and closing balance. However as no Interest Receivable account is shown on the comparative balance sheet the opening and closing balances are assumed to be nil; therefore the entire amount of Interest Received is cash received during the year. This figure is simply copied from the Income Statement to the Cash Flow Statement.

Interest Received $ 1 200

Tax Paid

Tax Paid is calculated by recreating the Tax Payable GL account, as shown below, utilising the opening and closing balances from the comparative balance sheet, and the Income Tax Expense from the income statement. The amount that makes the account balance must be the Tax paid during the year.

Tax Payable

Date Details $ Date Details $ In year Tax Paid 23 640 1/1/2008 Balance b/d 18 000 Income Tax Expense 22 14031/12/2008 Balance c/d 16 500 40 140 40 140 31/12/2008 Balance b/d 16 500


Income Tax Expense $ 22 140Add: Opening Balance 18 000Less: Closing Balance 16 500Tax Paid 23 640

iv. Cash Flow from Investing Activities

Proceeds from Sale of Equipment is calculated from the figure given in the Additional Information in the Income Statement.

Proceeds from Sale of Equipment

Date Details $ Date Details $ 31/12/2008 Profit and Loss

Summary 20 000 31/12/2008 Cash 20 000

20 000 20 000

The Accumulated Depreciation GL Account is recreated utilising the opening and closing balances from the comparative balance sheet, as well as the Depreciation Expense from the Income Statement. The amount required to balance this account is the amount of depreciation incurred during the year.

Accumulated Depreciation

Date Details $ Date Details $ In year Plant &

Equipment 25 000 1/1/2008 Balance b/d 135 000

Balance c/d 142 000 31/12/2008 Depreciation Expense 32 000 167 000 167 000 31/12/2008 Balance b/d 142 000

The Plant & Equipment GL Account is recreated utilising the opening and closing balances from the comparative balance sheet, the carrying amount of Equipment sold during the year from the Additional Information to the Income Statement, and the above calculated Accumulated Depreciation figure. As this account balances with no further adjustments it can be assumed that no further Plant & Equipment purchases were made during the year.

Plant & Equipment

Date Details $ Date Details $ 1/1/2008 Balance b/d 325 000 In year Carrying Amount of

Equipment Sold $25 000

Accum. Depreciation $25 000 Balance c/d 275 000 325 000 325 000 31/12/2008 Balance b/d 275 000

v. Cash Flow from Financing Activities

Dividends Paid

Dividends Paid is calculated by recreating the Retained Earnings GL Account, as shown below, utilising the opening and closing balances from the comparative balance sheet, and the Profit from the Income Statement. The amount that makes the account balance must be the Dividends Paid.

Retained Earnings

Date Details $ Date Details $ In Year Dividend Paid 35 000 1/1/2008 Balance b/d 110 100 31/12/2008 Profit 51 66031/12/2008 Balance c/d 126 760 161 760 161 760 31/12/2008 Balance b/d 126 760


Opening Balance $ 110 100Add: Profit 51 660Less: Closing Balance 126 760Dividend Paid 35 000

Proceeds from share issue

Proceeds from share issue is calculated by recreating the Capital GL Account, as shown below, utilising the opening and closing balances from the comparative balance sheet. The amount that makes the account balance must be the Proceeds from share issue.

Capital

Date Details $ Date Details $ 1/1/2008 Balance b/d 100 000 In year Cash received 20 00031/12/2008 Balance c/d 120 000 120 000 120 000 31/12/2008 Balance b/d 120 000


Closing Balance $ 120 000Less: Opening Balance 100 000Proceeds from share issue 20 000

Proceeds from borrowing – debentures

Proceeds from borrowing – debentures is calculated by recreating the Debentures GL Account, as shown below, utilising the opening and closing balances from the comparative balance sheet. The amount that makes the account balance must be the Proceeds from borrowing – debentures.

Debentures

Date Details $ Date Details $ In year Cash paid 5 000 1/1/2008 Balance b/d 50 000 In year Cash received ‐31/12/2008 Balance c/d 45 000 50 000 50 000 31/12/2008 Balance b/d 45 000


Closing Balance $ 45 000Less: Opening Balance 50 000Proceeds from borrowing – debentures (5 000)

GLEAM ‘N’ CLEAN LTD STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2008

$ $ Cash flows from operating activities Cash receipts from customers 629 900 Cash paid to suppliers & employees (501 500) Dividends received ‐ Interest received 1 200 Interest paid (8 300) Income tax paid (23 640) 97 660 Cash Flow from Investing Activities Payment for equipment ‐ Payment for land ‐ Payment for building additions ‐ Payment for investments ‐ Proceeds from sale of investments 20 000 20 000 Cash Flows from Financing Activities Proceeds from share issue 20 000 Proceeds from borrowing – debentures (5 000) Dividends paid (35 000) (20 000) Increase (Decrease) in cash held 97 660 Cash at beginning of year (8 000) Cash at end of year 89 660

Part B: The owner of Gleam ‘n’ Clean Limited, Angela Anderson, cannot understand why there is such a difference between the profit for the period and the total cash flows. Briefly explain to Angela what some of the factors causing this difference are.

Cash flow is simply the cash and cash equivalents flowing in to, and out of, the business, whereas Profits is the difference between the amounts spent producing (or making available for sale) a product, and the amount made by selling that product.

Cash flow does not include long term investments, like paying down debt, or purchasing plant or machinery. A high cash flow does not indicate a company that is doing well, nor does a low cash flow indicate one that is doing badly. Other aspects need to be considered; all financial reports should be considered as a whole, not in isolation.

Part C: Comment on which one has a healthier cash flow situation and justify your answer by explaining the significance of each of the three types of cash flows for each business.

While at first glance the King Products appears to have a healthier cash flow ($1 700 increase over the last 12 months compared to $1 650), a more thorough investigation is wise.

Cash flow from operating activities for the two businesses is vastly different, with Navibass making $1 340 of its increase from operating activities. Operating activities are defined as the primary money making exercise the business is involved in, so strong cash flows of this type indicate a company that is doing well at its primary task.

Cash flow from investing activities can include the selling and purchasing of shares or other long term goods, or the selling and purchasing of plant and machinery. A negative cash flow of this type can be an indication of a business that is investing in the stock market, or a business that has purchased additional equipment during the year. A business that makes the majority of its cash flow from this activity could be considered to be unstable in the long term.

Cash flow from Financing activities primarily concerns itself with the selling and purchasing of shares or equity in the business itself. A positive cash flow from this category indicates a business that people are putting money into, either the business owner (through owners equity) or the general public (through a share purchase). A negative flow from this category could indicate a company that investors have lost confidence in, and are ‘cashing out’ off.

Given these three categories, the fact that Navibass made the majority of its cash flow from its Operating Activities, and appears to be investing in either long term investments or plant and machinery for its use, indicates that Navibass is in the stronger situation.

King Product’s use of Investing activities for the majority of its cash flow could indicate a company in trouble, selling off its investments or selling its plant and machinery in order to have a positive cash flow.

However, evaluation of a company based solely on its cash flow is ill advisable, consideration should be made of other financing reports, as well as the general situation the company is in.

Question 4: Budgeting

Part A: Prepare a Budgeted Income Statement for the quarter ended 30 June, 2009

INDIGO LTD SALES BUDGET

For the quarter ended 30 June, 2009

April May June Total Cash (50%) 7 500 8 500 5 000 21 000 Credit (50%) 7 500 8 500 5 000 21 000 Total 15 000 17 000 10 000 42 000

INDIGO LTD PURCHASES BUDGET


April May June Total Purchases 8 2501 9 3502 5 5003 23 100

1. 15 000 x 55% 2. 17 000 x 55% 3. 10 000 x 55%

INDIGO LTD INVENTORY AND COST OF GOODS SOLD BUDGET


Inventory at Start 21 800 Purchases 23 100 Available for Sale 44 900 Inventory at End 23 200 Cost of Sales 21 700

INDIGO LTD EXPENSES BUDGET


April May June Total Depreciation Equipment1 225 255 255 675 Plant2 675 675 675 2 025 Rent 3 000 3 000 Wages 5 000 5 000 5 000 15 000 Electricity 400 400 400 1 200 Interest 180 180 180 540 Cleaning 200 200 200 600 Loan Principal ‐ ‐ 2 000 2 000

1. 27 000 x 10% / 12 2. 54 000 x 15% / 12

INDIGO LTD BUDGETED INCOME STATEMENT

For the quarter ended 30 June 2009

Sales 42 000 Less: COS 21 700 Gross Profit 20 300 Less: expenses Depreciation (2025 + 675) 2700 Rent 3 000 Wages 15 000 Electricity 1 200 Interest 540 Cleaning 600 Loan Principal 2 000 25 040 Net Profit (Loss) (4 740)

Part B: Calculate the balances of the following items as they would appear in the Budgeted Balance Sheet as at 30 June, 2009.

i. Plant & Machinery

INDIGO LTD PLANT & MACHINERY


Date Details $ Date Details $ 1/4/2009 Balance b/d 54 000 30/6/2009 Purchase 10 000 30/6/2009 Balance c/d 64 000 64 000 64 000 1/7/2009 Balance b/d 64 000

The balance of this account would appear on the Budgeted Balance Sheet as at 30 June, 2009 as $64 000.

ii. Accumulated Depreciation – Plant & Machinery

INDIGO LTD ACCUMULATED DEPRECIATION – PLANT & MACHINERY


Date Details $ Date Details $ 1/4/2009 Balance b/d (4 600) 30/4/2009 Depreciation 675 31/5/2009 Depreciation 675 30/6/2009 Depreciation 675 30/6/2009 Closing Balance (6 625) (4 600) (4 600) 1/7/2009 Balance b/d (6 625)

The balance of this account would appear on the Budgeted Balance Sheet as at 30 June, 2009 as $(6 625).

iii. Retained Earnings

INDIGO LTD RETAINED EARNINGS


Date Details $ Date Details $ 1/4/2009 Balance b/d 8 600 30/6/2009 Loss 4 740 30/6/2009 Dividend Paid 4 000 30/6/2009 Closing Balance (140) 8 600 8 600 1/7/2009 Balance b/d (140)

The balance of this account would appear on the Budgeted Balance Sheet as at 30 June, 2009 as $(140).

Part C: How might the specific income statement that you prepared in part A, above, be used to assist the management of Indigo Ltd to:

i. Plan:

Planning is the first function a budget provides for. The budget should be used as a guide to the future performance of the business. In this particular case, as the budget indicates a loss, the management of Indigo Ltd should ensure that their cash surplus is sufficient to cover the loss; else they should investigate financing options. Also it would be worthwhile investigating the business to see if costs could be reduced, or revenue increase, to minimise the loss.

ii. Control:

Control is the second function a budget provides for. Once the quarter ended 30 June 2009 has been completed and the financial reports compiled management of Indigo Ltd should compare budgeted performance to actual performance, through the creation of a Budget Performance report. A Budget Performance Report will highlight any variances.

Any significant variances highlighted in the Budget Performance Report should be investigated, unfavourable ones to determine why performance was less than expected and to determine if corrective action should be taken, and positive ones to ensure that the assumptions made during the budget process where correct.

References Hoggett, J & Edwards, L& Medlin, J & Tilling, M 2009, Accounting, 7th edn, John Wiley & Sons, Milton

2009 sp1 - unisa acg11 - assignment 2

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