Basic Principles of Accounting - Assignment Example

ACCT11079 Basic Principles of Accounting Question 1 Part A Dear Jane 1. In answer to your question, regarding the discrepancy between the net profit figure of $150,000 and the cash in bank net cash inflow of $40,000, the $40,000 represents the result of the difference between all cash inflows and all outflows. The cash inflows may include cash sales revenues account sales revenues or investments from the owners. The cash outflows include all payments for liabilities or cash purchases. On the other hand, net income of $150,000 is the balance after deducting the cost of sales and expenses from the net revenues. Likewise, there are bank deposits that increased and bank withdrawals that reduced the July 1, 2007cash balance of $5,000 to $45,000. In addition, revenues include sales on account which does not involve any cash inflows. Liabilities also include purchases on account which does not include cash outflows (Warren, 2002). 2. In terms of determining the amount to be debited to the furniture and fittings account when the amount paid is $56,000 and the fair market value is $65,000, the amount paid should be the amount used. International Accounting principles state that assets like furniture and fittings should be recorded at cost of purchase reduced by the annual depreciation. Thus the proper presentation would be to present furniture and fittings at $56,000. Then, accumulated depreciation is deducted from the cost of furniture to arrive at the book value (Warren, 2008). Further, in terms of depreciation and accumulated depreciation, depreciation is an expense which does not involve cash. It reduces the value of assets like Furniture and Fittings due to wear, tear, obsolescence or passing of time itself. In terms of having a separate accumulated depreciation account from the furniture and fittings account, it would be more useful to have two separate accounts. The readers of the financial statements will be more informed if they know the cost, the accumulated depreciation as well as the carrying (book) value of the depreciable asset. Further, recording business transactions does not prioritize on making the recording process easier. The main goal of the recording process is to comply with all tenets of the international accounting standards. Make the recording process easier is okay provided it does not violate any accounting principles (Warren, 2008). 3. In terms of the question, why has the insurance payment on June, 2008 not recorded as an expense in the income statement, the payment of $20,000 was recorded as an asset account, Prepaid Insurance. Since it is not recorded as Insurance expense when paid, it is correct that amount should not appear in the income statement. In addition, the insurance covers the next accounting period, July. Whereas, the financial statement prepared by the accountant is for the period of June, 2008 (Warren, 2008). However, even if the insurance expense was recorded as Insurance expense on during June 2008, an adjusting entry has to be made to present the amount actually used (expensed) for the month of June, 2008. The adjusting entry will show a credit to insurance expense of $20,000 and a debit to prepaid insurance of $20,000. This is because the insurance will be used effective August 1, 2008 yet. The financial statement presented represents financial activities for the month of June, 2008. 4. On your question, on my Income Statement there is a Gross Profit figure and a Net Profit figure. What is the difference between them? Which one is more important?, the gross profit figure is generated by deducted cost of sales or cost of revenues from net sales or net revenues. On the other hand, net income is the result after deducted marketing, operating, other income, and other expense amounts from the gross profit. This clearly shows that the net profit is normally lower than the gross profit (Warren 2008). Part B Dear Barry, In answer to your question, what exactly is the difference between a direct cost and an indirect cost? direct costs are amounts incurred specifically for the single cost objective. Examples are sales salaries are direct costs of marketing department. The materials (wood, nail, paint) used to produce the objective product (chair) are direct costs of the chair. Indirect costs are amounts paid for the benefit of more than one objective. The factory housekeeper’s salary is indirect cost because only the chair carpenter’s salary forms part of direct cost. In a job order cost setup, the janitor’s salary should be allotted to the different job orders because the janitor cleans the area where more than one job order is processed. Likewise, the supervisor’s job is to supervise several jobs and not just one job order. Thus, the supervisor’s salary has to be allocated to all the jobs under his or her supervision (Drury, 2005). In answer to your question, how does Manufacturing Overhead fit into this classification? manufacturing overhead is composed of all indirect costs of the manufacturing process. This includes the supervisor’s salaries, rent, electricity, water. The cost of production report reports the total manufacturing cost presented as follows: 1. direct materials, 2. direct labour, 3. manufacturing overhead. Using this formula, all indirect expenses are lumped directly under the manufacturing overhead account (Drury, 2005). In answer to your question, I see that there is $45 000 of beginning Work in Process and that ending Work in Process is $52 000. What is Work in Process? work in process represents the amount used to manufacture or process a job order which is unfinished as of the balance sheet data. The work in process is composed of three major costs. The costs are direct materials, direct labour, and manufacturing overhead. In the example given, the work in process represents is $ 52,000. This represents the amount of work that is unfinished or in process. Thus, the work in process end represents the work in process. The work in process beginning is not shown in the balance sheet because the prior period’s processing generally has been completed during the current month. This means that the job order had been transferred to the finished goods inventory where they are sold or are being displayed to the general public (Drury, 2005). In answer to your question, how is this treated in the Balance Sheet? the work in process end is treated as part of the current assets in the balance sheet. This is lumped together with the raw materials ending inventory and finished goods ending inventory. In terms of your question, how is the predetermined $40 per direct labour hour manufacturing overhead calculated, generally, this is computed by dividing the estimated manufacturing overhead by estimated total direct labour hours (or machine hours) to manufacture the products. For example, estimated total manufacturing overhead is $100,000. The total estimated hours to produce the product in one accounting period is 50,000 hours. The predetermined rate is arrived at by dividing $100,000 by 50,000 hours. The resulting $2 per machine hour is then multiplied by the actual hours worked in one accounting period. For example, the actual hours worked on job 232 reached 25 hours. The applied manufacturing overhead is $464 = $2 x 232 hours (Drury, 2005). In answer to your question, before closing entries were done I noticed that the Manufacturing Overhead account had a Debit balance of $56 000. What does this amount represent? this represents under applied manufacturing overhead because the actual manufacturing overhead is higher than the applied manufacturing overhead. In terms of your question, where was this ending balance closed off to? the ending balance is closed off to cost of goods sold as follows: Cost of Goods Sold $56,000 Manufacturing overhead Control $56,000 In answer to your question, I notice in the notes you referred to fixed costs and variable costs. What do these terms mean? fixed costs do not change whenever there is a change in the volume of production. For example, factory building rent does not increase if chair production triples. Variable costs increases as production volume increases and decreases when production volume decreases (Drury, 2005). In answer to the question, how do they relate to the categories of direct and indirect costs? this can be clarified with examples. For example, carpenters paid by the hours to manufacture the chairs are direct labour cost classified as variable expense. Carpenters paid on $ 25 a day for 8 days is a fixed cost direct labour expense. Direct materials used are always a variable cost because it varies according to units products. Rent is an indirect cost that is fixed despite increases or decreases in production volume (Drury, 2005). Question 2 Required: 1. Cost of Goods Manufactured for the year ended 30 June 2008. Axel Industries Cost of Goods Manufactured Direct Materials Beg Inventory 22,000.00 Net purchases (including freight charges) 53,000.00 Raw Materials Available 75,000.00 Less: Materials end 20,000.00 Raw materials transferred to production 55,000.00 Direct Labor 35,000.00 Factory Overhead Indirect materials 10,000.00 Indirect labour 15,000.00 Factory Utilities Factory depreciation 25,000.00 Property Rates - Factory 20,000.00 Plant and Equipment Depreciation 15,000.00 Factory Insurance 20,000.00 Maintenance plant and Equipment 50,000.00 Factory electricity 55,000.00 Administration cost (factory share) 60,000.00 270,000.00 Total Manufacturing Cost 360,000.00 Beginning Work in Process 60,000.00 Total Placed In Process 420,000.00 Less Ending work in Process 67,000.00 Cost of Goods Manufactured 353,000.00 2. During 2008, 2 000 shower units were manufactured. Calculate the Inventoriable unit cost of each shower unit. $ 353,000 / 2,000 units = $176.50 per unit 3. In terms of the managers of Axel industries offering advice regarding Axel’s competitors being able to sell similar shower units at a selling price of $350 each, the following computation has been made: Cost of Goods Manufactured 353,000.00 Less nonmanufacturing expenses: Sales Commission 56,000.00 Advertising 49,000.00 Rental of Retail Shops 151,000.00 Administrative cost (40%) 40,000.00 Salaries of Sales Staff 59,000.00 355,000.00 Total cost 708,000.00 Divide by 2000 units. 354 It would be advisable to sell the product at more $354 per unit. Selling the product at $350 per unit would generate a loss for the company. On the other hand, selling the product at $354 per unit would not generate a profit for the company (Drury, 2005). 4. In terms of the question All of Axel’s factories allocated manufacturing overhead on the basis of direct labour cost; do you think that this allocation base is appropriate here? Why or why not? it is proper to use the direct labour hours as a basis for establishing the applied manufacturing overhead account. For one, this will make the cost accountant’s job of allocating the manufacturing overhead easier. For example, the manufacturing overhead can be established to be 75% of direct labour. If the direct labour cost is $100,000, the manufacturing overhead is 75% of direct labour, $75,000. Using the direct labour as the basis for establishing the manufacturing overhead is more appropriate than using machine hours if the manufacturing process is labour -intensive. However, the use of machine hours in establishing the manufacturing overhead is a more appropriate alternative than the labour hours if the manufacturing process is machine –intensive. For example, projected manufacturing overhead is pegged at $4 per machine hour. The manufacturing overhead is arrived at by multiplying this figure by the actual hours worked during one accounting period. Using 250 hours in one accounting period, the manufacturing overhead is $1,000 = 250 hours x $4 per hour (Drury, 2005). Question 3 Required: 1. Prepare the Bank Reconciliation Statement as at 31 January 2008 (Gowthorpe, 2005). R Gordon, Real Estate Bank Reconciliation Bank Book 24,663.00 19,882.00 Unadjusted Balance (680.00) Insurance (50.00) BSC 4076 Deposit in transit (1,940.00) outstanding check (493.00) outstanding check (4,534.00) outstanding check (882.00) Insufficient fund (525.00) 1,250.00 Customer deposit 2,000.00 Collection (273.00) Error recording ($8525 - $8252) 21,247.00 21,247.00 - 2. Schedule of necessary adjustments to give the correct balance of the Cash at Bank account as at 31 January 2008. Journal entries to record the adjustments are NOT required. Unadjusted Balance 19,882.00 Insurance -680 BSC -50 Insufficient fund -882 Customer deposit 1,250.00 Collection 2,000.00 Error recording ($8525 - $8252) -273 Adjusted balance 21,247.00 Question 4 In the following independent cases (1) identify the internal control weakness or weaknesses and (2) propose a course of action that could be taken to overcome the weakness or weaknesses. 1. In the case where Jeanette is the only accountant working in a small retail shop who, each afternoon, she goes down to the sales area and removes the cash from the two cash registers, counts the money and prepares a Cash Summary Form showing the cash received, takes the cash to the local bank and deposits it into the business bank account, records the cash received in the Cash Receipts Journal, and finally posts the amounts to the General Ledger, the internal control weakness is that the accountant (recording function) and depositing function (custody) should not be focused on one person. This is to prevent the accountant from pocketing the money and making a falsely recording the deposit. It is highly recommended that the cashier should deposit the amount in the bank. The accountant should only be shown the deposit slip as proof that the cashier deposited the day’s cash receipts (Gay, 2006). 2. In the situation where the employees at A1 Cleaning are often hired on a casual basis, the cleaning supervisor at each site hires the necessary employees as needed and sends details to the business headquarters where accounting staff open a new employee file, and the time sheets for the employees are filled out by the Supervisor who then faxes them to the Accounting Department. The weakness includes the time should not be filled up by the supervisor but by the employees themselves. There is a strong probability that the supervisor could commit an error in the filling up of the employees’ time record. This would result to the employees’ complaining about errors in the errors in their time card. It is highly recommended that the supervisor should only approve the time sheet that had been filled up and signed by the employees to improve internal control. This way, the employee is assured that the correct time appearing on the time card is true and accurate because it was the employee who personally filled up the time record. The supervisor reduces any false time inputs by checking the time card for discrepancies in the employees’ time ins and time outs (Gay, 2006). 3. In terms of the situation where Ace Ltd is an online retailer where in the course of their business they collect personal information (name, address, etc) as well as credit card details from their customers, the danger of loss of data due to hard disc crash or being infected with viruses is higher than when two or more computers are used. The personal information is stored on a single computer located in the Accounting Department may be corrupted or erased beyond retrieval access. The file is password protected with only those staff deemed necessary having access to it. The computer is also used by staff to deal with emails from customers as well as to browse the internet there is no trace as to who performed the errors or fraud because all employees use the same computer. A spam filter has been installed and the business relies on the firewall that came installed with their computer operating system However, some antivirus software cannot stop virus or spam infiltration, especially if they are not updated. Likewise, there is only one computer that accesses the internet and, in the course of their business, collects personal information (name, address, etc) as well as credit card details from their customers. All employees access this one computer (Gay, 2006). It is highly recommended that two or more computers will be used in the recording of business transactions. The second computer will serve as backup in case one computer crashes. Likewise, one computer should not have an internet in order to prevent viruses from infecting and gathering confidential information from the computer. Hacking occurs when spam software can be secretly downloaded from the internet. Here, the hacker gathers vital information from the company’s computer such as names, address, and credit card numbers. The second computer can be used by the staff to email to friends (personal use). The second computer should not include the accounting records to avoid online spamming or online hacking. Each employee should also have a unique password when they login to the computer. This is to ensure the trailing who was responsible for the errors or fraud committed in the recording of business transactions on the computer (Gay, 2006). 4. In terms of Joe Brown situation, the weakness includes having the authorization function and custody function placed on the shoulders of only one person, Joe Brown. Joe Brown receives the furniture once the inventory has been inspected and counted by the Inwards Goods Department, storing the inventory and arranging delivery to customers when he receives an authorised Sales Order. After the inventory in the warehouse is classified as being too damaged to be sold, a form is filled out by the warehouse staff and authorised by Joe. After which, the inventory is then taken to the local rubbish dump. It is highly recommended that Joe Brown be retained with the custody function. However, another person should be given the responsibility of approving or authority to classify an inventory item as obsolete or damage so that they can be disposed off in the local rubbish dump (Gay, 2006). 5. In terms of the IT Department of ABC Trading involving over 40 computer operators entering data received from the other departments in the organisation, backup copies of the data are made on a regular basis and stored in a locked filing cabinet in the office of the IT Department manager, the computer programmers having automatic access to all the computer programs that are used by the business, and are encouraged to make any changes that they deem necessary to the computer programs, the weakness includes the programmers being given backup copies of data made on a regular basis and stored in a locked filing cabinet in the office of the IT Department manager. Another weakness is that the computer programmers have automatic access to all the computer programs that are used by the business and are encouraged to make any changes that they deem necessary to the computer programs. It is highly recommended that the back up copies of the data should be locked in a filing cabinet in the office of the persons encoding the data into the computer program. Further, the programmers should not be allowed access to the programs because they could manipulate the data to illegally change some of the data. There should be a separation of duty from the creation of the programs [programmers] to the access or manipulation of data encoded in the computer program [computer operators] (Gay, 2006). Question 5 Mary Consulting Based on August 31, 2009 financial statement. Current Ratio = Current Assets   Current Liabilities       = 346,198.00   154,652.00         = 2.24 The above computation shows that current assets are 2.24 times higher than the current liabilities. This shows that the company’s current assets are enough to pay for the current liabilities. This eliminates the company’s need to borrow money to pay for the currently maturing payables. The excess of the current assets (1.24 times the current liabilities) will provide enough buffers for the creditors to feel comfortable that the company will not evade the payment of its liabilities. A company with a higher current ratio has a better picture as compared to the company with a lower current ration. In short, the excess current assets will provide a buffer to pay for possible losses during times of uncertainty (Hansen, 2006). Inventory turnover ratio = Cost of Goods Sold   Inventory       = 4,310.00   2,760.00         = 1.56 The above computation shows that the speed of converting inventory to sales is 1.56 times. A company with a higher inventory turnover ratio has a better financial statement picture than a company with a lower financial statement ratio. Normally, the average inventory is used as the denominator. Since there is no beginning inventory available, the current year ending inventory, $2,760 was used to generate the inventory turnover ratio (Hansen, 2006). debt ratio = Total Liabilities   Total Assets       =     Total liabilities 154,652.00   Total Assets 548,907.00         = 0.28 The above computation shows that the company’s total liabilities portion is only twenty -eight times the total assets. This means that the company has more than enough assets to cover the liabilities of the company. A company with the higher debt ratio has a better financial picture than a company with a lower debt ratio (Hansen, 2006). Gross profit ratio = Gross profit   Net Sales       = 108,569.00   112,879.00         = 0.96 The above computation shows that the company generated a 96 percent gross profit ratio. A company with a higher gross profit ration has a better financial statement picture than a company with a lower gross profit ratio. The ratio above shows that the company did well for this particular accounting period. A company that generates a net loss has a higher probability of closing shop (Hansen, 2006). REFERENCES Drury, C. (2005). Management Accounting . Sydney: Thompson Press. Gay, G. (2006). Auditing and Assurance Services in Australia. Sydney: McGraw -Hill Press. Gowthorpe, C. (2005). Business Accounting and Finance for Non -Specialists. Sydney: Thompson Press. Hansen, D. (2006). Management Accounting . Sydney: Thompson Press. Warren, C. (2002). Financial and Managerial Accounting . Sydney: Cengage Press. Warren, C. (2008). Survey of Accounting. Sydney: Cengage Press. Read More