Corporate Finance and Valuation - Assignment Example

ACCT 1008 Accounting for Business Assignment – Trimester 1, 2015 DUE DATE: 14TH May (Class 1) 15th May (Class 2 and 3) Student Name: Student ID Class Number 1._______________________________________________ ________________ ________ 2._______________________________________________ ________________ ________ All questions are to be completed in this template. QUES 1 QUES 2 QUES 3 TOTAL PLEASE DO NOT WRITE IN THESE BOXES – THESE ARE USED TO RECORD YOUR MARKS FOR EACH QUESTION Question 1 a. HARRY’S HARDWARE, END OF PERIOD WORKSHEET - YEAR ENDED 30 JUNE 2015 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Account Name Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 6 000 (6) 100 6 100 6 100 Accounts Receivable 36 000 (2) 1080 34 920 34 920 Inventory (1 July 2014) 43 000 (7) 3250 46 250 46 250 Prepaid Rent 1 800 1 800 1 800 Warehouse Shelving 16 000 16 000 16 000 Acc’d Depreciation – Warehouse. 3 200 (3) 1500 4 700 4 700 Point of Sale Equipment 4 000 4 000 4 000 Acc’d Depreciation – Equipment 2 000 (3) 800 2 800 2 800 Accounts Payable 32 250 32 250 32 250 H. Smith, Capital (1 July 2014) 58 000 58 000 58 000 H. Smith, Drawings 12 500 12 500 Sales 207 800 (1) 300 207 800 207 800 Sales Returns & Allowances 2 250 2 250 2 250 Discount Allowed 400 400 400 Purchases 140 200 140 200 140 200 Discount Received 900 900 900 Freight Inwards 2 150 2 150 2 150 Freight Outwards 1 200 1 200 1 200 Sales Staff Wages Expense 24 000 (5) 500 24 500 24 500 Local Government Rates Expense 800 800 800 Insurance Expense 3 500 (4) 750 2 750 2 750 Advertising Expense 3 750 3 750 3 750 Rent Expense 6 600 6 600 6 600 Sales Payable (1) 300 300 300 Bad Debt (2) 1080 1 080 1 080 Depreciation – Equipment (3) 800 800 800 Depreciation – Warehouse (3) 1500 1 500 1 500 Prepaid Insurance (4) 750 750 750 Sales Staff Wages Payable (5) 500 500 500 Interest Income (6) 100 100 100 Inventory Recount Adjustment (7) 3250 3250 304 150 304 150 310 300 310 300 187 200 208 800 110 900 98 550 Profit/Loss 25 550 25 550 208 800 208 800 110 900 110 900 Question 1 Part (b) Prepare a fully classified Income Statement for the period. Amount Amount Sales 207 800 Sales Returns & Allowances (2 250) Cost of Goods Sold Opening Inventory 43 000 Purchases 140 200 Closing Inventory (46 250) (136 950) Gross Profit 68 600 Discount Received 900 Interest Income 100 Expenses Freight Inwards 2 150 Freight Outwards 1 200 Sales Staff Wages Expense 24 500 Local Government Rates Expense 800 Insurance Expense 2 750 Advertising Expense 3 750 Rent Expense 6 600 Depreciation – Equipment 800 Depreciation – Warehouse 1 500 (44 050) Net Profit 25 550 Question 1 Part (c) Prepare a Statement of Changes in Equity for the period and a fully classified Balance Sheet as at the end of the period. Amount Amount Assets Current Assets Cash 6 100 Accounts Receivable 34 920 Inventory (30 June 2015) 46 250 Prepaid Rent 1 800 Bad Debt 1 080 Prepaid Insurance 750 90 900 Fixed Assets Warehouse Shelving 16 000 Point of Sale Equipment 4 000 20 000 Total Assets 110 990 Liabilities Current Liabilities Accounts Payable 32 250 Sales Owings 300 Sales Staff Wages Payable 500 33 050 Owner’s Equity H. Smith, Capital (1 July 2014) 58 000 Net profit 25 500 Drawings 12 500 13 000 Total Liabilities and Owner’s Equity 110 990 Question 2: Under the going concern principle, it is assumed that a business entity will carry on with its operations into the future with no desire or purpose to liquidate it or interfere with its operations. And so, it is expected that the entity will realize its assets and settle its obligations under the normal business operations. An asset is any valuable thing that a business entity owns that is expected to bring in some economic benefit in future. The new equipment bought represents an item that is disposed to earn an economic benefit for the supermarket. The value of an asset changes every now and then. The business must make provisions for the lost value as an expense item. An expense is a cost to the business as it conducts its operations. Therefore, only the depreciation should be recorded as an expense while the equipment itself is recorded as an asset. Assets are usually depreciated over time to capture the losses in form of wear and tear. Depreciation is a non-cash expense that allows the business to report the correct income realised from the business. It is an allowance made for wear and tear, obsolescence or deterioration of an asset. Written down value of an asset represents the net value of an asset after taking away the depreciation and amortisation of the asset. On the other hand, market value of an asset is the price that the asset will fetch in the market. Management problem is the internal problem that is encountered in reporting financial operation. The information is used in decision making but it may be inaccurate or invalid. Question 3: a YORK LTD Cash Flow Statement For the year ended 31 December 2015 Cash Flows from Operating Activities $ $ Profit before tax 12 260 Depreciation expense 5 400 Interest expense 2 400 EBITD 20 060 Working Capital Movements Increase in inventory (2 000) Increase in accounts receivable (net) (700) Increase in prepaid expenses (850) Increase in bank overdraft 5 660 Increase in accounts payable 200 Discount received 400 Decrease in expenses payable (10) Decrease in tax payable (480) 2 220 Cash flow from operating activities 22 080 Cash Flows from Investing Activities Interest received 60 Payment for equipment (10 000) Cash flow from investing activities (9 940) Cash Flows from Financing Activities Proceeds from Share Issue 4 000 Decrease in retained earnings (4 920) Net cash from financing activities (920) Net increase / decrease in cash held Cash at the beginning of the year 5 200 Cash at the end of the year 1 500 Question 3: (Students must show ALL calculations for question 3 or no marks will be awarded for this question) Calculations Accounts receivable (net) Closing inventory 5 200 – Opening inventory 4 500 = 700 Inventory Closing inventory 20 000 – Opening inventory 18 000 = 2 000 Prepaid expenses Closing prepaid expenses 1 650 – Opening prepaid expenses 800 = 850 Bank overdraft Closing bank overdraft 5 660 – Opening bank overdraft 0 = 5 660 Accounts payable Closing accounts payable 4 000 – Opening accounts payable 3 800 = 200 Expenses payable Closing expenses payable 780 – Opening expenses payable 790 = -10 Tax payable Closing tax payable 720 – Opening tax payable 1 200 = -480 Share capital Closing share capital 30 000 – Opening share capital 26 000 = 4 000 Retained earnings Closing retained earnings 18 190 – Opening retained earnings 23 110 = -4 920 Question 3: b The cash flow statement is prepared based on the cash method. It records the actual amount of money that the company received or spent in the reporting period. The profit is determined based on the accrual method. The profit indicates a company's ongoing sustainability whereas cash-flow measures the company's capability to pay its bills as they become due. That’s why the cash-flow is the closing cash balance realised after taking away the cash paid from the cash received. The profit is the amount left after taking away the period’s expenses from the period’s revenue.  Question 3: c The cash flow statement shows the exact sources of a company's cash and the manner in which the money was used in the reporting period. The other statements do not show the sources of cash, they just indicate the value of items at the end reporting period. Also, the cash flow statement records the company’s financial position like earnings and disposals/sale of the asset. On the other hand, the income statement indicates the company's revenues, gains, expenses and losses but does not include cash receipts or cash disbursements. The balance sheet often includes what might be called the theoretical money such as money that is owed to the company but not yet collected, while the cash flow statement reports money actually received or paid. The statement of changes on equity shows the capital changes. References Deegan, C. 2009, Financial accounting theory, 3rd edn, McGraw-Hill, North Ryde. Jackling, B. Raar, J. and McDowall, T. 2010, Accounting: A Framework for Decision Making, 3rd edn, McGraw-Hill. Marshall, D.H. McCartney, J.P. vanRhyn, D. McManus, W.W. and Viele,D.F. 2009, Accounting: What the numbers mean, 2nd ed. (revised), McGraw-Hill. Ryan, R. 2006, Corporate Finance and Valuation, Thomson Learning, London. Steven, M.B. 2006, Financial Analysis: A Controller's Guide, 2nd edn, Wiley. Read More