accounting topics 12-15 2014

Study Guide 13-B5 Accounting

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ACCOUNTING

Study Guide 13-B5

UNITS 12-15 (2014 VERSION 1)



CONTENTS:

CONTENTS:

UNITS 12-15

Acknowledgement:

Mark Wilson has kindly given us permission to use some of the materials from his text

Accounting Alive for Study Guide purposes only.

Chapter Unit Title Page

1 12 Cash Budgets 3

2 13 Statement of Cash Flows 14

3 14 Analysis and Interpretation 31

4 15 Job Cost Systems 46



Chapter 1

Unit 12: Cash Budgets

Contents 12.1 Definition

12.2 Purposes of a Cash Budget

12.3 Preparation of a Cash Budget

12.4 Estimated Receipts from Credit Sales

12.5 Complete Cash Budget

12.6 Past Examination Questions

Cash Budgets 12.1 Definition:

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.

A cash budget is a plan of future receipts and payments.



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 February

$NZ $NZ

Cash Sales 45,000 24,000

Wages 2,000 2,000

Cash Purchases 22,200 24,900

Interest Received 3,000

Rent Expense 2,100 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.



Ex 12.3.1 Solution

RAWINI TAUPO Cash Budget

For January and February 20XX

January February

$NZ $NZ

Estimated Receipts

Estimated Payments

TOTAL ESTIMATED PAYMENTS

Surplus/Deficit

Bank Balance beginning

Bank Balance end



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 April

$NZ $NZ

Cash Sales 50,000 90,000

Wages 2,500 2,500


Interest Received 3,200 3,000

Motor Vehicle purchased 35,000

Rates 2,000

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 June

$NZ $NZ

Cash Sales 105,000 120,000


General expenses 15,000 16,000

Sale of Equipment 10,000

Wages 7,500 7,800

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 August September

Cash sales 85,000 65,000 70,000

Cash purchases 60,000 45,000 53,000

Depreciation 500 500 500

Rent received 2,000 2,000 2,000

General Expenses 15,000 15,000 15,000

Building Extensions 20,000

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



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 Percentage collected

1st month 70%

2nd

month 20%

3rd

month 7%

Bad Debts 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

Muriwai Trust

Schedule of Estimated Receipts from Credit Sales April to June 20XX

Month Credit Sales

April May June

$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



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.



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 Credit

January 30,000 90,000

February 56,000 110,000

March 42,000 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



12.6 Past Examinations

Rawhiti Hoko Ltd

Balance Sheet (extract)

as at 31 October 20X0

Current Assets Current Liabilities

Accounts Receivable 51,000 Accounts Payable 18,000

Inventory 25,000 Bank Overdraft 3,400

ESTIMATED INCOME AND EXPENSES:

November December January

Sales 44,000 50,000 60,000

Purchases 22,500 15,000 16,500

Wages 2,400 3,000 3,000

Asset maintenance (including Depreciation $100 per month)

900 1,000 850

Other Expenses (including Bad Debts)

2,500 2,750 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 October

Actual Sales 40,000 30,000 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:



Rawhiti Hoko Ltd

Schedule of Cash from Credit Sales

for the three months ending 31 January 20X1

Month Credit

Sales

20X0

November

20X0

December

20X1

January

Rawhiti Hoko Ltd

Cash Budget

for the three months ending 31 January 20X1

20X0

November

20X0

December

20X1

January

Estimated Receipts

Estimated Payments

Surplus/(Deficit)

Bank Balance Beginning

Bank Balance End



Exercise 12.6.2

Part A: Cash Budget (9 marks)

Ignore GST for this question.

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 November

$NZ December

$NZ

Cash Sales 112,500 106,350 116,175

Credit Sales 240,000 225,000 247,500

Credit Purchases 156,000 163,500 165,000

Wages paid in each month 40,200 41,775 42,420

Expenses paid in each month 25,500 26,100 26,550

Cash purchase of Equipment 9,000 252,000 16,500

Interim Dividend to be paid 37,500

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)



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 November December

Estimated Receipts

Total Estimated Receipts

Estimated Payments

Total Estimated Payments

Surplus/(Deficit)

Bank Balance beginning

Bank Balance end

(7 marks)



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 entity’s 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 Non-Current 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.



LAYOUT OF A CASH FLOW STATEMENT

ABC LTD

Statement of Cash Flows

for the year ended 31 March 20X0

$NZ $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

XXX

XXX

XXX

(XXX)

(XXX)

(XXX)

(XXX)

NET CASH FROM OPERATING ACTIVITIES XXX

Cash Flows from Investing Activities Proceeds from sale of asset Purchase of asset

XXX

(XXX)

NET CASH USED IN INVESTING ACTIVITIES (XXX)

Cash Flows from Financing Activities Proceeds from issue of share capital Proceeds from long term borrowings Share repurchase Repayment of loan Dividends Paid

XXX

XXX

(XXX)

(XXX)

(XXX)

NET CASH USED IN FINANCING ACTIVITIES (XXX)

Net increase/(decrease) in cash Cash at the beginning of the period

XXX

XXX

Cash at the end of the period $XXX



PRACTICE EX 13.1 Books of D. Cent

20X0 20X1

Bank 3,000 4,000

Accounts Receivable 1,000 2,000

Inventories 5,000 6,000

Plant 10,000 15,000

Vehicles 12,000 14,000

Accounts Payable 2,000 3,000

Accrued Expenses - 1,000

Capital 29,000 37,000

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)



(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



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



EX 13.2 BOOKS OF C. SIDE

20X0 20X1

Bank 4,000 6,000



Plant 6,000 10,000


Accrued Expenses - 2,000

Capital 14,000 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


Bank 1,000 CR 600 DR

Accrued Expenses - 750



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



REVERALS/ADJUSTMENT COMPLICATIONS: EXAMPLE:

20X0 20X1

Expenses 14,000

Accrued Expenses 100 200

Prepayments 150 200


Step 1(c) Determine cash paid for operating expenses

Step 1(c) i. Determine noncash charges

Accumulated Depreciation

Step 1(c) ii. Determine Fund Expenses

Step 1(c) iii. Determine Cash paid for expenses

Expenses

PRACTICE:

20X0 20X1

Expenses 15,000


Prepayments 100 15




Ex 13.4

Books of R. Tickel - incorporates reversals/adjustments/non-cash

20X0 20X1


Bank 600 (300)




Prepayments - 300

Vehicles 40,000 50,000

Accumulated Depreciation

10,000 12,000

Loan 8,000 10,000

Capital 47,850 53,500

Income Statement For the year ended 31 March 20X1

Sales Revenue 50,000

Less Cost of Goods Sold 14,000

Gross Profit 36,000

Less Expenses 10,350

Profit $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.



ASSET SALE COMPLICATIONS

Example:

EX A. 20X0 20X1 PROOF

Expenses 10,000

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 year’s depreciation)

Determine Fund Expenses:



PRACTICE ASSET SALE COMPLICATIONS Exercise B

20X0 20X1 PROOF

Expenses 12,000

Plant 4,000 7,000


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 20X1 PROOF

Expenses 10,000

Plant 500 800

Accumulated Depreciation 200 300

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 20X1

Bank 2,000 5,000




Plant (cost) 10,000 12,000

Vehicles (cost) 30,000 30,000

Accumulated Depreciation on Plant 4,000 4,500

Accumulated Depreciation on Vehicles 4,000 5,000

Loan 10,000 -

Capital 36,000 51,500

Additional information: Sold plant during the year for $2,000 (cost $5,000), carrying amount $2,200.

Income Statement For the year ended 31 March 20X1



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.



Introduction to Companies Statement of Cash Flows

INFORMATION

20X0 20X1

Profit After Tax 50,000

Retained Earnings 5,000 20,000

Contributed Equity 100,000 200,000

WORKING

GENERAL LEDGER

Retained Earnings

520

Contributed Equity

510

A. Company Ltd


$NZ $NZ

Cash Flows from Financing Activities



COMPANY TAX PRACTICE 1:

20X0 20X1

$NZ $NZ

Tax Payable 3,000 3,500



Interim Dividend $20,000 Income Statement for the year ended 31 March 20X1

$NZ



Gross Profit 80,000


Profit before tax 45,000

Income Tax Expense 12,600

Profit after tax $32,400

COMPANY TAX PRACTICE 2:

20X0 20X1

$NZ $NZ

Tax Payable 8,000 12,500



Interim Dividend $30,000 Income Statement for the year ended 31 March 20X1

$NZ



Gross Profit 380,000


Profit before tax 300,000

Income Tax Expense 84,000

Profit after tax $216,000



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

20X0 20X1

Assets $NZ $NZ Cash at bank - 4,000 Accounts Receivable 25,000 29,000 Inventory 25,000 37,000 Prepayments 1,000 3,000 Furniture 11,000 11,000 Less Accumulated Depreciation 1,000 10,000 2,000 9,000 Office Equipment 30,000 34,000 Less Accumulated Depreciation 6,000 24,000 6,000 28,000 $85,000 $110,000

Liabilities and Equity Bank Overdraft 6,000 - Accounts Payable 22,000 17,000 Loan 7,000 11,000 Contributed Equity (20,000 shares) 32,000 63,000 Retained Earnings 18,000 19,000 $85,000 $110,000

Jee Woo Park Ltd

Income Statement for the year ended 31 March 20X1

$NZ

Sales Revenue 90,000 Less Cost of Goods sold 31,000

Gross Profit 59,000 Less Expenses 27,000 Profit before tax 32,000 Less Income Tax Expense 10,000

Profit after tax $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.



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

Assets $NZ $NZ $NZ $NZ

Cash at Bank - 7,420


Inventory 49,920 36,780

Term Deposit 6,000 -

Vehicles 14,800 34,400

Less Accumulated Depreciation

7,900 6,900 10,000 24,400

Land 180,000 180,000

$260,180 $260,180

Liabilities and Equity

Bank Overdraft 1,760 -


Accrued Expenses 1,000 1,500

Debentures 18,000 15,000



$260,180 $260,180

Integrity Ltd

Income Statement

for the year ended 31 March 20X1 $NZ

Sales Revenue 150,000 Less Cost of Goods Sold 52,000

Gross Profit 98,000 Less Expenses 48,000 Profit before tax 50,000 Less Income Tax 15,625

Profit after tax $34,375 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



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) 1 250 000

Less Expenses

General Expenses 85 000

Wages and Salaries 440 000

Interest 21 000

Bad Debts 10 027

Loss on Sale of Equipment 12 000

Depreciation 42 973

Total Expenses 611 000

Profit before tax 639 000

Less Income Tax Expense 210 870

Profit after tax $428 130

The Balance Sheet contained the following information for Mobile Communications as at 31 March 20X1.

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.

20X0 31 March

20X1 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)



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)



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)



Mobile Communications Ltd




Chapter 3

Unit 14: Analysis and Interpretation

1. Liquidity Liquidity measures a firm’s ability to pay its debts in the short term. A business may be taken to court and placed 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.

Example:

30,000

20,000

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

Current Ratio = Current Assets

Current Liabilities : 1



Exercise 14.1: Final January Exam 2009 Polly Pacquin is the owner of Polly’s 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 -


Inventory 12,000 16,000

$50,000 $60,000

Current Liabilities

Bank Overdraft (secured up to $5,000) - 20,000


$20,000 $60,000

REQUIRED: From the information above calculate the following ratios for the year ended 30 September 20X1.

20X1

Working

Answer

CURRENT RATIO: Current Assets Current Liabilities

WORKING CAPITAL:

Current Assets -

Current Liabilities

ACID TEST RATIO:

Current Assets – (Inventory + Prepayments) Current Liabilities - bank overdraft (secured)

Write a comment about the results:



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.

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 20X1

$NZ Current Assets $NZ $NZ

5,600 Bank

29,000 Accounts Receivable 21,500

65,000 Inventory 137,000

2,900 Prepaid Rent 2,000

102,500 160,500

less Current Liabilities

Bank Overdraft (secured) 3,600

19,000 Accounts Payable 72,400

5,100 Tax payable 4,200

3,900 Accrued Expenses 5,800

28,000 86,000

20X0 20X1

Working Capital

Current Ratio

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.

Acid Test Ratio = Current Assets – (Inventory + Prepayments)

Current Liabilities less bank overdraft (secured) : 1



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

Akaroa

Butchers

Beaver

Transport

Current Assets Bank Inventory Accounts Receivable - Allowance for Doubtful debts Prepayments Current Liabilities Bank Overdraft (secured) Accounts Payable Accrued Expenses GST Payable

7,000

13,000 22,040

(580) 1420

6,000 2,100

700

6,000 560 (40) 180

240 3,150

410 300

320,000 (12,800)

25,000

174,000 103,000 31,000

8,000

b) Give some advice to help with the liquidity for each business.



Gearing Ratio

Owners

Liabilities

Ex 14.3 (6.24)

Balance Sheet extract for Big Time Limited

As at 28 February 20X1

20X0 20X1

2,500 36,500 27,000 (1,000) 65,000

20,000 20,000

Current Assets

Bank

Inventory Accounts Receivable Less allowance for doubtful debts Less Current Liabilities Bank Overdraft (secured) Accounts Payable

18,200 (1,200)

28,000

17,000 45,000

4,700

25,300 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 terminology. 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 owner’s 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:

A. Equity Ratio: 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 This means for every $1 of assets owned by the business, the owners have invested 60 cents.

For Example:

60,000 100,000 =



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 20X1

Equity Current Assets Non-Current Assets Total Assets Current Liabilities Non-Current Liabilities Total Liabilities

102,500 16,500

28,000 19,000

72,000

119,000

47,000

160,500 18,700

86,000 9,000

84,200

179,200

95,000

20X0 20X1

Debt Ratio

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. 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. 2. Decreasing liabilities:

Sell the non-current asset that is the least productive to pay liabilities.

Don’t take on any more credit until situation has changed.

Exercise: Ex. 14.4 Complete the following table:

Business Equity Debt Equity Ratio Debt Ratio A B C D

50,000

62,000

29,000

14,410

50,000

24,000

16,190

0.38:1



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.

Averages how many times the “stock on the shelves” is sold within an accounting period. 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) Too Low (Turnover)

Lack of choice for customers Loss of sales Higher delivery costs

Extra storage costs Obsolete stock Items stolen Damaged stock Liquidity problems

Inventory Turnover =

= Cost of Goods Sold Average Inventory

Inventory Turnover Period = 12 Inventory Turnover

= months taken to sell average inventory 365 Inventory Turnover

= days taken to sell average inventory



e.g. Krazy Clothes Limited.

20X1 Income Statement

for the year ended 31 March 20X2 1,200,000 Sales 1,400,000

700,000 less Cost of Goods Sold 750,000

500,000 Gross Profit 650,000

Inventory balances for the last three years ending 31 March 20X2 include:

20X0 20X1 20X2

Inventory $42,000 $65,000 $137,000

20X1 20X2

Inventory Turnover

Inventory Period

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 Papas Bakery Dinah’s Desks

Sales (credit)

Less Cost of Goods sold Opening Inventory Purchases Less Closing Inventory Cost of Goods Sold Gross Profit

490,000

650 260,000

(450) 260,200

$229,800

490,000

34,000 310,000 (21,000) 323,000

$167,000

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.

Indicates the number of days it takes to collect the money after a credit sale.

Age of Accounts Receivable = = Average Accounts Receivable x 365 Credit Sales x 1.15 1



In the past, credit terms have been due on the 20

th 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 doesn’t 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 1,200,000 Sales Revenue 1,400,000

700,000 less Cost of Goods Sold 750,000

500,000 Gross Profit 650,000

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 20X2

Calculation

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 Sales Revenue – credit Cost of Goods sold Gross Profit

380,000 1,150,000

(1,120,000) 410,000

290,000 1,200,000 (995,000)

495,000

243,000 990,000

(830,000) 403,000

Balance Sheet extract

Current Asset (extract) 20X0 20X1 20X2 20X3

Inventory Accounts Receivable

54,000 44,000

68,000 32,000

75,000 39,000

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.



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 100 Average Equity 1 Ex.14.7 (6.140) Calculate the Rate of Return on Equity from the following information:

Business Jolly Jumpers Slims Cafe Dreamboats

20X0 20X1 20X0 20X1 20X0 20X1

Profit before tax

120,000 100,000 80,000 75,000 85,000 90,000

Contributed Equity

970,000 1,150,000 202,000 266,750 330,000 345,000

Assume Tax rate is 28%



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.

30/6/20X0 30/6/20X1 $NZ000 $NZ000 Sales Revenue 32,000 40,000 Opening Inventories 7,200 6,800 Cost of Goods Sold 21,000 28,800 Closing Inventories 6,800 12,000 Distribution Costs 1,972 4,450 Administrative Expenses 2,764 2,640 Finance Costs 864 2,140 Tax for year 2,160 800 Dividend for year 1,900 1,900 Bank (secured overdraft) 4,500 Dr 1,600 Cr Accounts Receivable 7,100 12,010 Plant 10,000 15,900 Land and Buildings 13,400 20,400 Accounts Payable 6,700 11,500 Debentures 7% 10,800 25,000 Contributed Equity 19,000 19,000 Retained Earnings 3,140 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.



Ex 14.9

The following information relates to Lucky Ltd: LUCKY LIMITED

BALANCE SHEET AS AT 30 JUNE 20X1

$NZ $NZ

Equity

Contributed Equity 200 000

Retained Earnings 35 000

$235 000

Current Assets

Petty Cash 50

Accounts Receivable 73 000

Inventory 128 000

Prepayments 3 950 205 000

Current Liabilities

Bank Overdraft (secured) 40 000

Accounts Payable 70 000

Accrued Expenses 4 000 114 000

Non Current Assets

Property, Plant and Equipment 220 000

Intangible Assets 20 000 240 000

Non Current Liabilities

Mortgage 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



LUCKY LIMITED WORKSHEET FOR ANALYSIS FOR THE YEAR ENDED 30 JUNE 20X1

Working Capital

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.



Summary of Ratios and Percentages: Ratio Purpose and Evidence for

concern

Cause for concern

and Remedy

Liquidity and financial stability 1. Working Capital: Current Assets – Current Liabilities

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.

Cause: Credit terms too easy, non- current asset financed with current liability, repayment of non-current liability.

Remedy: use stricter credit control, finance non-current assets with non-current liabilities.

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

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.

3. Acid Test Ratio or Quick Assets Ratio: Current Assets –(Inventories & Prepayments)

Current Liabilities –(Secured Bank Overdraft)

To test the ability of the business to pay its debts immediately.

Evidence for concern: less than 1.2:1 or decreasing.

Cause: as above plus poor budgeting.

Remedy: urgently action above, collect cash from customers, reduce mark-up percentage to clear slow moving lines.

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

Cause: Too high: failure to use debt finance to purchase non-current assets.

Remedy: obtain a non-current loan.

Cause: Too low: excessive drawings, reliance on debt finance.

Remedy: Issue more shares or owner contribute more cash.

Management Efficiency 1. Inventory Turnover Cost of Goods Sold Average Inventories = Times p.a.

In days:

365 Inventory Turnover = Days

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.

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.

2. Age of Accounts Receivable = Average Accounts Receivable x 365 Credit Sales x 1.15 1

To calculate how long it takes the business to collect debts and how well credit policies are working. Evidence for concern: > 40 days.

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.



Ratio Purpose and Evidence for

concern

Cause and Remedy

Profitability 1. % Change in Net Sales (Turnover)

To measure trends in sales performance. Evidence for concern: Decrease.

Cause for decrease in % Increased competition.

Remedy: Market research. Implement marketing campaign. Investigate competitors’ strategies.

2. Mark Up%

Gross Profit x 100 Cost of Goods Sold 1

To check if standard mark-up % has been maintained.

Evidence for concern: If it increases or decreases.

Cause for decrease: Overstocking, competition, inventory out-of-date, change in sales mix.

Remedy: Investigate purchasing policy. Upskill purchasing staff.

3. Gross Profit %

Gross Profit x 100 Net Sales Revenue 1 (Turnover)

To calculate the gross profit per dollar of sales. Evidence for concern: If either increasing or decreasing it should be investigated.

Causes for change:

Mark up% has changed.

Inaccurate stock taking.

Stealing of inventory.

Failure to take discounts.

Inaccurate recording.

Theft of cash.

4. Expense % Expense type x 100 Net Sales Revenue 1

Distribution Costs and Finance Costs should remain constant. Administrative Expense % should decrease Evidence for concern: Distribution Costs and Finance Costs % increase. Administrative Expense % increase.

Causes for change: Ineffective advertising campaign, ineffective sales staff. Increased interest rates.

Remedy: Distribution Costs % Improve marketing strategies Finance Cost % Owner contribute more cash.

5. Profit % For Sole trader & Partnership: Profit x 100 Net Sales 1 For company: Profit (before tax) x 100 Net Sales 1

To test of effectiveness of managerial policies. Evidence for concern: Decrease.

Causes for change: Mark-up% decreases. Ineffective management.

Remedy: Investigate pricing Control expenses.

6. Return on Equity Profit x 100 Average Equity 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.



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.



Exercise 15.1 Complete the following table:

Direct Materials

Direct Labour Prime Cost Factory Overhead

Cost of Production

A 20,000 32,000 8,000

B 25,000 49,000 66,500

C 52,000 75,000 162,000

D 21,000 56,000 12,250

Exercise 15.2 Distinguish between Direct and Indirect Materials Cake Factory

Materials Direct/Indirect

Flour

Oven gloves

Sugar

Eggs

Cleaning materials

Oil to grease the trays

Carpet Layer

Materials Direct/Indirect

Knee pads

Carpet

Carpet Cleaner

Staples

Pliers

Underlay

Exercise 15.3 Distinguish between Direct and Indirect Labour Cake Factory

Labour Direct/Indirect

Cleaning

Mixing

Supervisor

Baking

Slicing

Security on factory

Carpet Layer

Labour Direct/Indirect

Cleaning

Supervising

Consulting Customer

Cutting

Laying

Ordering

http://jimthecarpetguy.com/yahoo_site_admin/assets/images/ist2_320062_the_carpet_layer.75210650_std.jpg



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: 1

st 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 1.4.X0 30.4.X0

Materials 500 200

Work in Progress 0 300

Finished Goods 300 450

Cash Transactions: Cash Sales $4,000 Purchases 1,000 Wages: Direct 1,500 Indirect 500 Overhead 200 Issues to production: Direct materials 1,200 Indirect materials……………………..? Overhead charged at 50% Direct Labour Cost.

Exercise 15.6


Materials 300 280


Finished Goods 500 400

Cash Transactions: Cash Sales $5,000 Purchases 1,200

Wages: 3,000 Direct Wages 2,000 Indirect Wages ? Overhead 610



Issues to production: Direct materials 830 Indirect materials ? Overhead charged at 90% Direct Labour Cost. Exercise 15.7


Materials 700 750


Finished Goods 1,000 750

Cash Transactions Sales $7,000 Purchases 2,000

Wages: 3,500 Direct Wages 2,500 Indirect Wages ? Overhead 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 $26,000 Estimated Direct Labour Hours 2,080 Rate per Direct Labour Hour = Example Job No 1

Direct Material $200

Direct Labour

5 hours at $35/hour

Prime Cost

Overhead

COST OF PRODUCTION



Cost Driver 2: Direct Labour Cost e.g. Estimated Overhead for the year $26,000 Estimated Direct Labour Cost $72,800 Rate per Direct Labour $ = Example Job No 1


Direct Labour

5 hours at $35/hour 175

Prime Cost 375

Overhead

COST OF PRODUCTION

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 10 persons Department B 5 persons 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 Total

$ $ $

Direct Materials 50.00

50.00

100.00

Direct Labour

Overhead

TOTAL

Total Manufactured Cost:



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 Labour


Prime Cost 375

Overhead

COST OF PRODUCTION

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 Labour


Prime Cost 375

Overhead (29 machine hours)

COST OF PRODUCTION

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 $ 41,808

Estimated Output 624 units Rate per Unit:

Example: Job No 1


Direct Labour


Prime Cost 375

Overhead (2 units)

COST OF PRODUCTION



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

Department

Finishing

Department

Machining

Department

Finishing

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 company’s 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


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?



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

Machining and Assembly Department

Direct labour hours 120,000 80,000

Machine hours 2,000 44,000

Direct Labour Costs $480,000 $400,000

Indirect Labour costs $20,000 $40,000

Depreciation $12,000 $40,000

Miscellaneous factory overhead costs $64,000 $120,000

The following information is for Job 863 a suitcase.

Design Department

Machining and Assembly Department

Material used $1,600 $200

Direct Labour Cost $800 $400


Machine Hours 4 60

(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 $500,000

Direct Labour Hours 125,000

Indirect Labour cost $30,000

Depreciation $12,000

Miscellaneous factory overhead costs $70,000



(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 140

20X8

Jul 1 Balance b/f 6,000 Dr

Work In Progress Control 141




Finished Goods Control 142


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 pre-numbered.

(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 Actual results for year

Machining Finishing Machining Finishing

Direct Machine Hours 40,000 20,000 39,000 18,000

Direct Labour Cost $150,000 $300,000 $165,000 $295,000

Overheads $250,000 $126,000 $255,000 $118,000



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:

Department Rate Overhead Applied

Actual Overhead

Difference 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



Practice Exercise:

AXIS

Trial Balance

as at 1 March 20X2

$NZ $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 1 200

Accounts Payable 3 200

Capital 23 510

$27 910 $27 910

Work in progress at 1 March 20X2 was:

Job no Direct Material

$NZ

Direct Labour

$NZ

Factory

Overhead

$NZ

113 1 010 300 1 300

116 980 240 680

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: $NZ Job no. 113 400 Job no. 116 1 300 Job no. 117 1 100 Indirect Material 200

Labour costs charged $NZ Job No 113 200 Job No 116 560 Job No 117 1 360 Indirect Labour 1 380



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.

AXIS’S

General Ledger Raw Materials Control 140

20X2

Mar 1 Balance b/f 5 200 Dr

31



Work In Progress Control 141

20X2

Mar 1 Balance b/f 4 510 Dr

31

Payroll Control 720

Mar 31

Factory Overhead Control 730

Mar 31

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.



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

S Safeguard Assets

A Ensure Accuracy of Accounting information

M Ensure Managerial policy is carried out

E Promote Efficiency

S Separation of duties

A Authorisation of transactions

N Consecutively pre-numbered multi-copy documents

E Employee’s ability commensurate with responsibility

OBJECTIVES OF INTERNAL CONTROL

METHODS TO ACHIEVE INTERNAL CONTROL



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 payroll

overhead control work in progress

finished goods 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 inventory records

cost of production cost of sales/services



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 company’s

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.





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.



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 Papa’s 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



Symbols of a Job Order Cost Flowchart system.

Item Symbol Meaning

Source Document

1

1

Evidence of cost incurred. In the job cost system they represents the:

Purchase order

Job Order Card

Timesheet

Materials Requisition form

Job cost card. Where there are multiples, they are numbered and stacked behind each other.

Filing of a source document

Temporary

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.

Process

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 Document

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.

Physical Goods

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).



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 to the factory so they can start work.

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



Customer Factory Manager

Factory Raw Materials Store

Accounts Shop

Purchase Order

Purchase Order

Job Order Quote

Job Order 2

Materials Requisition

Materials Requisition

Authorise and sign

D

Raw Materials Inventory Ledger

Materials 2 Requisition

N

Job Cost Card

N

Reconciles with goods and adds overhead

Job Cost 1 Card

A

Job Cost 1 Card

A

Timesheet

Timesheet 1

Job Cost Card

Finished Goods Ledger

A

Payroll

A

D

A



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: What document do you prepare when you receive a sewing machine to be repaired?

Manager:

Response 1

Interviewer: How many copies are there of this document?

Manager:

Response 2

Interviewer: What do you do with the copies?

Manager:

Response 3

Interviewer: Do the repairmen prepare any other documents?

Manager:

Response 4

Interviewer: Do the repairmen keep copies of documents?

Manager:

Response 5

Interviewer: Are records kept of materials used to fix the sewing machines?

Manager:

Response 6

Interviewer:

What happens when the job is finished?

Manager:

Response 7



JOB COST SUBSYSTEM

SEWING MACHINE REPAIRS LTD

Customer Manager Repairmen Store

Job 1 Order

Job 1 Order

D

Job 1 Order

update

Job 1 Order

Inspects, signs and adds mark-up

Job 1 Order



(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.



JOB COST SYSTEMS January April Exam 2012 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)

Equipment Ltd

PO Box 246

AUCKLAND

Phone & Fax 64 09 256 8291

Invoice to: Johns Ltd Invoice 295 PO Box 921 31 June 2012 AUCKLAND 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



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:

Document 1. (to provide an estimate of the cost of the job).

Document 2. (to record all the costs incurred in the production of the CD).

Document 3 (to record the hours spent on each job)

Document 4 (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.



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)



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 vet’s name alongside the client’s 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 with the client as a receipt. On his return to the office, the vet removes the current day’s pages from the pad and leaves them in Keely’s intray. The next day Keely prepares a numbered invoice and notes the number on the telephone pad alongside the client’s 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 20

th 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.



REQUIRED:

(a) Explain two objectives of an internal control system.

(b) Identify two weaknesses in the accounting system for Dr Gou Pengyou’s 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:



QUESTION 4: SYSTEMS (10 marks) Internal Control Case Study

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?

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



(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).

accounting topics 12-15 2014

Documents

receipt of cash

surpluses of cash

cash purchases

complete cash budget

cash budget exercise

accounting study guide

cash budgets contents

nz cash sales