Accounting Question

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Year
Investing cash flows
Operating cash flows
Depreciation
Profit
Net Cash flows
Cumulative CF
PV
Discount Rate
Average Profit
Average Investment
ARR
Payback
NPV
0
-$ 1,500
$
$
$
-$ 1,500 $
-$ 1,500 -$
-$ 1,500 $
10%
90
825
10.91%
2.87
$ 63.12
$
$
Company A
1
2
650 $
270 $
380 $
650 $
850 -$
591 $
3
460
270
190
460
390
380
$
$
$
$
$
$
4
450 $
270 $
180 -$
450 $
60 $
338 $
5
190
270
80
190
250
130
$
$
$
-$
$
$
$
150
50
270
220
200
450
124
Year
Investing cash flows
Operating cash flows
Depreciation
Profit
Net Cash flows
Cumulative CF
PV
Discount Rate
Average Profit
Average Investment
ARR
Payback
NPV
0
-$ 1,500
Company B
1
2
$
470 $
$
270 $
$
200 $
-$ 1,500 $
470 $
-$ 1,500 -$ 1,030 -$
-$ 1,500 $
427 $
10%
106
825
12.85%
3.65
$ 65.51
$
$
3
550 $
270 $
280 $
550 $
480 -$
455 $
4
310 $
270 $
40 -$
310 $
170 $
233 $
5
260
270
10
260
90
178
$
$
$
$
$
$
$
150
290
270
20
440
530
273
Year
Investing cash flows
Operating cash flows
Depreciation
Profit
Net Cash flows
Cumulative CF
PV
0
-$ 1,500
Discount Rate
Average Profit
Average Investment
ARR
Payback
NPV
10%
90
825
10.91%
4.32
-$ 1.43
$
$
$
-$ 1,500 $
-$ 1,500 -$
-$ 1,500 $
$
$
Company C
1
2
750 $
270 $
480 -$
750 $
750 -$
682 $
3
180 $
270 $
90 -$
180 $
570 -$
149 $
4
180 $
270 $
90 -$
180 $
390 -$
135 $
5
180
270
90
180
210
123
$
$
$
$
$
$
$
150
510
270
240
660
450
410
AMD 22747 Lecture 12
Course Revision
REVISION LECTURE
2
Users of Accounting Information
External – First six lectures/topics (Financial Accounting)
Internal – Last five lectures/topics (Management Accounting)
Basis of all accounting is the recording of information
Transaction # 1
Circle Films issues shares to investors for $15,000 cash.
Assets
Cash
Prior Bal
=
Liabilities
=
+
Equity
Contributed
+
Capital
$0
$0
#1
+$15,000
+$15,000
New Bal
$15,000
$15,000
$15,000
$15,000
=
$0
+
Because Circle receives cash of $15,000, assets are increasing. Circle’s equity
is also increasing because investors have contributed cash for an ownership
interest in the company.
The Rules of Debit and Credit
Debit
+
Credit
–
Revenues &
Sharehol. Equity
Debit
–
+
Assets
&
Expenses
Liabilities,
Credit
+
JOURNAL ENTRY
Transaction # 1
Circle issued shares for $15,000.
General Journal
Transaction
#1
Account Names and Explanation
Debit
Cash
Contributed Capital
15,000
Credit
15,000
(Owners invest cash in business)
Cash
15,000
15,000
Contributed Capital
15,000
15,000
The trial balance presents a summary of the balances in the ledger.
Notice total debits equal total credits
Trial Balance June 30, 2020
Debit
Credit
Cash
$8,250
The account
Supplies
1,000
name comes
Equipment
18,000
from the
Unearned
Revenue
2,000
ledger A/c
Notes
Payable
9,000
and the
Contributed
Capital
15,000
amount is the
Service
Revenue
5,000
balance in
Advertising
Expense
250
the ledger
Wage
Expense
2,000
account
Dividends
1,500
Totals
$31,000 $31,000
From the Trial Balance we prepared the Financial Statements
From the trial balance we take the revenue and expenses and ‘copy’
them into the Income Statement
Trial Balance
Debit
Words
Cash
Supplies
Equipment
Unearned Revenue
Notes Payable
Contributed Capital
Service Revenue
Advertising Expense
Wage Expense
Dividends
Totals
$8,250
1,000
18,000
Credit
Amounts
2,000
9,000
15,000
5,000
250
2,000
1,500
$31,000
$31,000
Statement of (Comprehensive) Income
Circle Films
Income Statement
For the month ending June 30, 2020
Service Revenue
Advertising Expense
Wage Expense
Total Expenses
Profits (Income)
$5,000
$250
2,000
2,250
$2,750
Adjustments; e.g. deferred expense
After a physical count, Circle Films determined that it had $650 of supplies
remaining. Remember $1,000 was originally purchased and recorded as an
asset.
($1,000 – $650 = $350 used)
Journal Entry
Date
Description
Debit
31 July Supplies Expense
350
Supplies on hand
350
(To record expense incurred)
Supplies on Hand
1 000
650
Supplies expense
0
350
Credit
350
350
Adjustments and N.C. Assets; e.g. Reducing-balance
depreciation
The depreciation rate is applied to the carrying amount of the
asset.
Year
ended
June 30
2018
2019
2020
2021
2022
2023
Calculation
(40%) * ($65 000)
(40%) * ($39 000)
(40%) * ($23 400)
Depreciation
expense
$26 000
$15 600
$8 400
$0
$0
Accumulated
depreciation
$0
$26 000
$41 600
$50 000
$50 000
$50 000
Carrying
amount
$65 000
$39 000
$23 400
$15 000
$15 000
$15 000
Journal Entry
Date
Description
2019
30 June Depreciation expense
Accumulated depreciation—Truck
Debit
Credit
26 000
26 000
Changes in depreciation estimates
Suying Supply purchased a machine for $90 000 on 1
January 2019, with a 10-year useful life and $10 000
residual value. Using straight-line, Suying records $8000
depreciation expense each year.
Changes in depreciation estimates
On 1 January 2023, Suying estimates that the machine will last
only eight years and has a residual value of $6000. The revision
(current and future) will not correct the first four years.
Step 1: Calculate carrying amount revision time.
Step 2: Calculate depreciable cost for future depreciation.
Step 3: Calculate revised depreciation expense.
Step 1: Calculate carrying amount revision time
Step 2: Calculate depreciable cost for future depreciation.
Step 3: Calculate revised depreciation expense.
Rules for calculating the gain or loss on
disposal
1. Record any necessary depreciation expense (possibly
for a partial period) to update the accumulated
depreciation account.
2. Calculate any gain or loss on the disposal by comparing
the asset’s carrying amount.
3. Prepare a journal entry that decreases the asset account
and its related accumulated depreciation account.
4. Record any gain or loss on the disposal.
Depreciation expense – example
st
• Tran Transport purchased a truck on the 1
of July 2016.
• The truck cost $65,000
• Estimated useful life: 5 years or 100,000
kms
• Estimated residual value: $15,000
AMD – Autumn 2018
15
Depreciation expense – straight-line
• Depreciable amount = $65,000 (cost) – $15,000 (residual)
= $50,000
• Depreciation expense = $50,000 / 5 = $10,000 per year
Period end
Calculation Depreciatio Accumulate
n expense
d
depreciatio
n
Carrying
amount
30 June
2017
$50,000 / 5
$10,000
$10,000
$55,000
30 June
2018
$50,000 / 5
$10,000
$20,000
$45,000
30 June
2019
$50,000 / 5
$10,000
$30,000
$35,000
30 June
2020
$50,000 / 5
$10,000
$40,000
$25,000
30 June
2021
$50,000 / 5
$10,000
$50,000
$15,000
AMD – Autumn 2018
16
Disposal of PPE – example
• At the end of 5 years, Tran sells the truck
for $12,000 cash.
• At that time the truck:
• Cost:
• Accumulated depreciation:
update)
• Carrying value:
$65,000
$50,000 (no need to
$15,000
Dr Cash
$12,000
Dr Accumulated depreciation $50,000
Dr Loss on sale
$ 3,000
Cr PPE – truck
AMD – Autumn 2018
$65,000
17
REVISION LECTURE
18
Cash Flow Statements
• The statement of cash flows is prepared with information collected from a variety of
sources, including the examination of the changes in all non-cash accounts.
• Information required:
• Statement of financial position (balance sheet) opening and closing balances
• Statement of profit and loss (Statement of comprehensive income)
• Additional information as necessary
•
• Statement has THREE parts:
• Operating (prepared using either the DIRECT or INDIRECT methods)
• Investing
• Financing
REVISION LECTURE
19
Indirect Method
When reporting operating cash flows under the indirect method,
companies calculate and report net cash flows from operating activities by
adjusting profits from an accrual basis to a cash basis. This requires many
adjustments, but they can be grouped into three main types:
• Non-cash effects on profits
• Gains and losses from investing activities
• Changes in current assets and current liabilities
Depreciation is typically the largest non-cash expense that must be
added back to profits to obtain cash-based income.
REVISION LECTURE
20
Indirect Method
Adjustments for gains and losses from investing activities
Profit may include a gain or loss arising from the sale of equipment.
The entire cash inflow associated with the transaction will be reported as an investing cash flow.
The effect of the gain or loss must be removed from net income so that operating cash flows are
not affected by the transaction.
REVISION LECTURE
21
Indirect Method
Format for the Operating cash flows
Adjustments for
noncash revenues,
expenses, gains
and losses
Adjustments for
changes in noncash
current operating
assets and current
operating liabilities
Add (+) or Subtract (-)
From Net Income
Net Income ……………………………………………………………. $ #
Add: Depreciation/amortisation………………………………………… +
Loss from sale of assets…………………………………………… +
Gain from sale of assets…………………………………………… Adjust for changes in current operating assets
Subtract increases in current operating assets…………………….. . Add decreases in current operating assets…………………………. +
Adjust for changes in current operating liabilities
Add increases in current operating liabilities……………………… +
Subtract decreases in current operating liabilities………………….. ___
Net Cash flow from operating activities…………………………… $ #
===
REVISION LECTURE
22
Indirect Method Example
The following information was reported by Petrulis Imports Company for the financial
year ended June 30:
2022
2021
Accounts receivable
$55,000
$47,000
Inventory
35,000
45,000
Prepaid insurance
12,000
10,000
Accounts payable
22,000
15,000
Income tax payable
10,000
14,000
Interest payable
12,000
9,000
Profits
45,000
Depreciation expense
25,000
Prepared the operating activities section of the statement of cash flows using the
indirect method.
REVISION LECTURE
23
Indirect Method Solution
Petrulis Imports Company
Statement of cash flows
For the year ended 30 June, 2022
Cash flows from operating activities
Net income
$45,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Add depreciation expense
$25,000
Increase in accounts receivable
(8,000)
Decrease in inventory
10,000
Increase in prepaid insurance
(2,000)
Increase in accounts payable
7,000
Decrease in income taxes payable
(4,000)
Increase in interest payable
3,000
31,000
Net cash provided by operating activities
$76,000
REVISION LECTURE
24
Direct Method Example
Using the following information to prepare a statement of cash flows under the direct
method:
Cash balance, end of 2022
$12,000
Cash paid to employees and suppliers
148,000
Cash received from sale of land
40,000
Cash paid to acquire treasury stock (share buy-back) 10,000
Cash balance, beginning of 2022
16,000
Cash received as interest
6,000
Cash paid as income taxes
11,000
Cash paid to purchase equipment
89,000
Cash received from customers
194,000
Cash received from issuing bonds payable
30,000
Cash paid as dividends
16,000
STATEMENT OF CASH FLOWS
FOR YEAR ENDED 31th December, 2022
Cash Flows from Operating Activities
Cash Received from Customers
Cash Received as Interest
Cash Paid to Employees and Suppliers
Cash Paid as Income Taxes
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Sale of Land
Purchase of Equipment
Net Cash Used by Investing Activities
Cash Flows from Financing Activities
Issuance of Bonds Payable
Acquisition of Treasury Stock
Payment of Dividends
Net Cash Provided by Financing Activities
Net Decrease in Cash
Plus Cash at Beginning of Year
Equals Cash at End of Year
REVISION LECTURE
26
Direct Method Solution
STATEMENT OF CASH FLOWS
FOR YEAR ENDED 31 December, 2022
Cash Flows from Operating Activities
Cash Received from Customers
$194,000
Cash Received as Interest
6,000
Cash Paid to Employees and Suppliers
148,000
Cash Paid as Income Taxes
11,000
Net Cash Provided by Operating Activities
$200,000
(159,000)
41,000
Cash Flows from Investing Activities
Sale of Land
40,000
Purchase of Equipment
(89,000)
Net Cash Used by Investing Activities
(49,000)
Cash Flows from Financing Activities
Issuance of Bonds Payable
30,000
Acquisition of Treasury Stock
(10,000)
Payment of Dividends
(16,000)
Net Cash Provided by Financing Activities
4,000
Net Decrease in Cash
(4,000)
Cash at Beginning of Year
Cash at End of Year
16,000
$ 12,000
REVISION LECTURE
27
Financial Statement Analysis Tools
Three common tools used to conduct financial analysis are:
• Horizontal analysis is a comparison of a company’s financial results across time.
• Vertical analysis is a comparison of financial balances to a base account from the
same company and/or compare against other companies in the same industry.
(Total Assets or Total Revenue).
• Ratio analysis is a comparison of different balances from the financial
statements. Ratios are grouped together to assess a company’s profitability,
ability to pay debts, and survival in the long term.
The financial statements for Kusaba Kreche are presented below
Balance Sheet
as at June 30
Income statement
For the year ended 30 June
2020
2019
Sales
$760,000
700,000
Cost of goods sold
390,000
Depreciation expense
Interest expense
Other expenses
2020
2019
2018
Cash
40,000
24,000
20,000
405,000
Accounts receivable
120,000
45,000
48,000
50,000
60,000
Inventory
80,000
75,000
62,000
40,000
75,000
Equipment (net)
90,000
70,000
50,000
Motor vehicles (net)
603,000
400,000
360,000
Total assets
$933,000
$614,000
$540,000
Accounts payable
98,000
75,000
70,000
Long-term loan
250,000
75,000
65,000
Total liabilities
348,000
150,000
135,000
Ordinary shares ($1 each)
400,000
400,000
400,000
Retained earnings
185,000
64,000
5,000
Total equity
585,000
464,000
405,000
Total liabilities and equity
$933,000
614,000
540,000
100,000
95,000
Profit before tax
180,000
65,000
Income tax expense
55,000
20,000
Net income
125,000
45,000
For 2019, 2020 calculate:
Profit margin, Return on assets
Return on equity, Earnings per share
Price earnings ratio, Current ratio, Receivables turnover
Inventory turnover, Debt to equity, Times interest earned
The share price at the end of June 2020 and 2019 respectively are $6.40 and $0.80
Given in the Final Exam (when there is a FSA Question)
Gross Margin
Profit Margin
Return on Equity
Return on Assets
Earnings Per Share
Price Earnings Ratio
Current Ratio
Quick Ratio
Receivable Turnover Ratio
Inventory Turnover Ratio
Debt to Assets
Debt to Equity
Times Interest Earned
Gross profit / Revenue
Net profit / Revenue
Net profit / Average total equity
Net profit / Average total Assets
Net profit / Average number of ordinary shares
Current share price / Earnings per share
Current assets / Current liabilities
(Current assets – inventory) / Current liabilities
Revenue / Average accounts receivable
Cost of goods sold / Average inventory
Total liabilities / Total assets
Total liabilities / Total equity
Earnings before interest and tax / Interest expense
2020
2019
Profit margin (net income / sales revenue)
0.06
Return on assets (average assets)
7.8%
Return on equity (again average equity)
10%
Earnings per share (net income / # shares)
0.11c
Price earnings ratio ( Share Price / EPS)
7.1
Current ratio (considered easiest ratio)
1.92
Receivables turnover (credit sales / ave A/cs Rec)
15.1 times
Inventory turnover (COGS / ave inv)
5.9 times
Debt to equity (total liabilities / total owners equity)
0.32
Times interest earned (earnings before int & tax / int)
1.87
Comment on Kusaba’s: Profitability, Liquidity and Solvency
Cost Behaviour
Costs are either Variable or Fixed
Variable Costs change in direct proportion to the level of activity
Fixed Costs remain constant
(All within the ‘relevant range’)
High – Low (production)
Change in cost must be Variable Cost
(Regression is better but too complicated for an exam environment.)
Using either the highest or lowest production
What is not variable cost is Fixed Cost
31
• Highest output
• 1200 units, cost $1930
• Lowest Output
• 750 units,
cost $1490
• Difference in output and cost
• 450 units (1200 – 750) and $440 ($1930 – $1490)
• VC = $440 / 450 = $0.977
• At 750 units total cost is $1490 – V.C $733 (750 x .97778) = FC of $757 (rounded to
nearest $)
REVISION LECTURE
33
Cost-Volume-Profit (CVP) Analysis and
Contribution Margin
Contribution margin =
Selling price minus (all) Variable Costs
Break Even =
Fixed Costs / Contribution margin
Contribution Margin: first it contributes to fixed costs and once fixed costs are covered it
contributes to profits
REVISION LECTURE
34
CVP Example
Lighting town sells light fittings. The following data is supplied:
Variable data per unit:
Annual Fixed Costs:
Sales price
$40/unit
Rent
$20,000
Product costs
$9/unit
Salaries
$50,000
Sales commissions
$1/unit
Advertising
$ 5,000
The tax rate is 30%
Required:
(a) Calculate the Contribution Margin (CM) and the CM Ratio?
(b) Calculate the annual break-even point in unit sales and dollar sales.
(c) How many units need to be sold in order to earn a Profit Before Tax of $30,000?
.
(d) How much sales revenue in dollars is required to earn a Profit After Tax of $77,000?
REVISION LECTURE
35
CVP Example
a) Contribution margin: $40 – $9 – $1 = $30
Contribution margin ratio: $30 / $40 = 75%
(b)
Fixed costs = $75,000
Breakeven point in units: $75,000 / $30 = 2500 units
Breakeven point in sales dollars: $75,000 /.75 = $100,000
(c)
($75,000 + $30,000) / $30 = 3500 units
(d)
Convert after tax profit into before tax profit: $77,000 / (1 – 0.3) = $ 110,000
Sales dollars required: ($75,000 + $110,000) / 0.75 = $ 246,667
REVISION LECTURE
36
Alternative Choice: Special Orders
Deciding whether to accept a special order is a short-run decision.
Management must decide:
What sale price is appropriate for one-time customers ?
Does the company have excess capacity ?
Can it produce additional units with existing resources ?
REVISION LECTURE
37
Special Order Example
Zheng & Zhang have a maximum capacity of 25,000 units and expect the 2020 financial year to
look like this:
Sales (20,000 units @ $25)
$500,000
Manufacturing costs
Variable
$10 per unit
Fixed
$180,000
Marketing and Admin
(S&A)
Variable
$5 per unit
Fixed
$20,000
1. Calculate expected profit?
2. Should they accept a special order of 1,000 units @ $20 if variable S&A will be $2 per unit?
Effect on profits?
3. What if other customers knew about the special order price?
4. What about a special order for 12,000 units @ $19 if no variable S&A expenses and
assuming only 5000 units of excess capacity (loss of 7,000 existing customer units)?
REVISION LECTURE
38
Special Order Example
1.
Expected level of operating profit:
Sales
$500 000
Variable manufacturing costs (20 000 × $10)
200 000
Fixed manufacturing costs
180 000
Variable marketing & admin. costs (20 000 × $5) 100 000
Fixed marketing & admin. costs
Net income
20 000
$
0
2. Yes, accepting the special order would increase profits by $8 000:
Increase in incremental revenue (1000 × $20)
$20 000
Increase in incremental costs (1000 × $12*)
$12 000
Increase in profit
$ 8000
*VC per unit = $10 manufacturing + $2 S&A
REVISION LECTURE
39
Special Order Example
3. Considering the impact of special orders on existing customers is always an important
qualitative consideration. If regular customers are aware that others are buying at a lower price,
they may become angry and take their business elsewhere.
4. Accepting this special order would increase profits by $38 000 as follows:
Incremental revenue (12,000 × $19)
$228 000
Incremental costs (12,000 × $10)
$120 000
Incremental profit
$108 000
BUT – loss on current customers
7,000 units x $10*
$ 70,000
Better off by only
$ 38,000
* $10 (Selling price $25 – Var. man. $10 – Var. S&A $5) which is the contribution margin of
current customers. Fixed costs are irrelevant as they are the same regardless.
REVISION LECTURE
40
Capital Budgeting
Hall Investments is considering between three independent investment opportunities. Each of
the three projects requires a $1.5 million initial investment, runs for 5 years and each has a
salvage value of $150,000 at the end of the project life.
The expected net operational cash flows (in $’000s) from the projects are as follows:
Project
Year 1 Year 2 Year 3 Year 4 Year 5
A
650
460
450
190
50
B
470
550
310
260
290
C
750
180
180
180
510
Hall Investments have a required rate of return of 10%.
Required:
1.
Calculate the three investment appraisal measures for each project.
2.
How sensitive is the NPV measure to changes in the required rate of return?
3.
Rank the projects and advise which project, if any, should be taken?
REVISION LECTURE
41
Final Exam Structure
All final exams can cover the entire subject content but with emphasis on the material not
covered in the Online Quiz (i.e., topics 1-4). The best guide to the final exam questions are the
tutorial exercises, self-study questions and in-class lecture exercises and this revision lecture.
The following information applies to the main and rescheduled final examinations only (it does
not necessarily apply to the Alternate, Supplementary or Special Exams): The time given is an
indication of how much time you should spend on each question: Cash flows (approximately 36
minutes); Financial statement analysis (approx. 18 minutes); Non-Current Assets (approx. 18
minutes); Capital budgeting (approx. 24 minutes); CVP analysis (approx. 24 minutes). Most
questions require calculations and some written responses.
No further information or clarification about the final exam will be provided.
Thank
you

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