Question 1
Preparation of financial statements
Home Designs Ltd, a homewares manufacturing company, commenced operations on 1 July 2018. You are the company’s financial accountant.
The accounting records for the year ended 30 June 2019 showed the following accounts and balances:
| Home Designs Ltd | |
| Account balances at 30 June 2019 | |
| $ | |
| Advertising expense | 46,000 |
| Accounts payable | 56,300 |
| Accumulated depreciation – buildings | 20,000 |
| Accumulated depreciation – plant and equipment | 40,000 |
| Allowance for doubtful debts | 1,600 |
| Annual leave expense | 25,000 |
| Bank account | 143,000 |
| Bank loan | 200,000 |
| Buildings | 800,000 |
| Cost of goods sold | 780,000 |
| Current tax liability | 274,000 |
| Depreciation expense | 60,000 |
| Dividends paid | 200,000 |
| Doubtful debts expense | 2,000 |
| Finished goods inventory | 322,000 |
| Income tax expense | 274,000 |
| Interest expense | 22,000 |
| Interest income | 3,100 |
| Land | 609,000 |
| Other expenses | 36,000 |
| Plant and equipment | 900,000 |
| Provision for annual leave | 23,000 |
| Provision for warranty | 34,000 |
| Raw materials inventory | 126,000 |
| Salaries and wages | 286,000 |
| Sales revenue | 2,205,000 |
| Share capital | 2,000,000 |
| Trade receivables | 185,000 |
| Warranty expense | 41,000 |
Additional information:
- The bank loan is repayable over 10 years ($20,000 of the loan is repayable within the next 12 months).
- The provision for annual leave is payable within 12 months.
- The provision for warranty is in respect of 12-month warranties given on all products sold.
- Share capital consists of 1,000,000 ordinary shares, fully paid to $2.00 each.
- Home Designs Ltd is a reporting entity.
Required:
Enter the data shown above into a spreadsheet.
In your spreadsheet, prepare the balance sheet (statement of financial position) as at 30 June 2019, and income statement (statement of profit or loss and other comprehensive income) of Home Designs Ltd for the year ended 30 June 2019, using the line items and format that a listed company is likely to use. (Note: Enter the account balances shown above as your ‘data’, and use formulas to generate the figures in your income statement and balance sheet from this ‘data’). In the balance sheet, classify assets and liabilities as current or non-current.
Use the ‘IF function’ to check that the balance sheet balances.
Question 2
Accounting for inventory
Aussie Campers Ltd sells camping trailers. The beginning inventory of camping trailers on 1 July 2019 was 20 trailers, which had a cost of $1,200 each. Purchases and sales for July – September were as follows:
| Date | Transaction | Number of units | Purchase price per unit $ |
Selling price per unit $ |
| 5/07/2019 | Purchase | 4 | 1,250 | |
| 8/07/2019 | Sale | 6 | 2,900 | |
| 11/07/2019 | Sale | 2 | 2,900 | |
| 20/07/2019 | Purchase | 5 | 1,230 | |
| 4/08/2019 | Sale | 4 | 2,950 | |
| 7/08/2019 | Sale | 8 | 2,950 | |
| 20/08/2019 | Purchase | 10 | 1,260 | |
| 27/08/2019 | Sale | 2 | 2,950 | |
| 5/09/2019 | Sale | 6 | 2,990 |
| 12/09/2019 | Sale | 2 | 2,990 | |
| 16/09/2019 | Purchase | 12 | 1,300 | |
| 26/09/2019 | Sale | 3 | 2,990 |
Required:
Enter the data shown above into a spreadsheet.
(i) Prepare worksheets for July – September 2019, using each of the three inventory costing models (FIFO, LIFO and weighted average cost methods) to keep track of the number of trailers purchased, trailers sold, trailers on hand, cost of goods sold and gross profit made.
(ii) The directors of Aussie Campers Ltd have contacted you to ask two questions: Which of the three inventory costing methods best reflects the replacement cost of the inventory on the balance sheet on 30 September 2019? Which inventory costing method would be best for income tax purposes, and why?
Question 3
Analysis and interpretation of financial reports
Accor Australia Ltd, Marriott Australia Ltd and Mantra Australia Ltd are three major owners and managers of hotels and resorts in Australia.
The following information has been extracted from the income statement of each company, for the year ended 30 June 2019:
| Accor | Marriott | Mantra | |
| $ | $ | $ | |
| (in millions) | (in millions) | (in millions) | |
| Income from operations before interest and tax | 229 | 725 | 155 |
| Interest expense | (60) | (180) | (54) |
| Income before income tax | 169 | 545 | 101 |
| Income tax | (51) | (165) | (30) |
| Net income | 118 | 380 | 71 |
The following information has been extracted from the balance sheet of each company, as at 30 June 2019:
| Accor | Marriott | Mantra | |
| $ | $ | $ | |
| (in millions) | (in millions) | (in millions) | |
| Total liabilities | 2,600 | 6,400 | 2,128 |
| Total equity | 3,260 | 2,600 | 5,120 |
| Total liabilities and equity | 5,860 | 9,000 | 7,248 |
The average liabilities, average equity, and average total assets were as follows:
| Accor | Marriott | Mantra | |
| $ | $ | $ | |
| (in millions) | (in millions) | (in millions) | |
| Average total liabilities | 2,630 | 6,100 | 2,125 |
| Average total equity | 3,220 | 2,370 | 5,065 |
| Average total assets | 5,850 | 8,470 | 7,190 |
Required:
(i) Calculate the following ratios for each company:
- Return on total assets
- Return on equity
- Debt to equity ratio on 30 June 2019
(ii) Analyse and compare the three companies, using the information calculated in part (i)
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