Hello, This is my sample mid sem exam I have in two days and I am so lost :(

UTS BUSINESS SCHOOL - ACCOUNTING UNIVERSITY OF TECHNOLOGY SYDNEY 22107 ACCOUNTING FOR BUSINESS DECISIONS A AUTUMN SESSION 2016 SAMPLE MID-SEMESTER EXAMINATION Released in Teaching Week 4 on UTSonline The examination will be held during your tutorial in the week commencing Monday 16th May 2016. Students will be given ONE HOUR to complete the examination. Please note that the exam is closed book. Two questions will be asked in the mid-semester examination. The first question will be an extended response question, similar in style to questions 1-4 in Part A (Theory) of this sample exam. It is not advisable to memorise word for word answers to questions 1-4 because while the style of the question in the mid-semester exam will be similar, the content will be different and could be combined or different elements of two or more of questions 1-4. The second question will be similar in style to the questions in Part B (Practical - Questions 5-10) of this sample exam. It is important to note that while the style of the exam question will be similar to questions in part B, the numbers in the question and information provided will differ. Accordingly, it is important to understand the process of completing the practical questions, because memorised answers will be of no value. Both in this sample exam and the actual exam, both questions (theory and practical) are of equal value - plan to devote equal time to the theory question and to the practical question. Therefore, the theory question should be 30 minutes of thoughtful writing, not a set number of words or pages. Remember to explicitly answer the question asked in your exam. Students are permitted to bring writing implements and a non-data storage/retrieval calculator to the exam. No notes, textbooks, notebooks, laptops, personal organisers, mobile phones, electronic, transmitting or receiving equipment will be permitted. The examination requires the knowledge of material covered in lectures 1-6 and tutorials 1-7. Students should be cautious of material placed on UTSonline by fellow students. Any information to be officially provided will be put on the \"Announcement\" page. Separate discussion boards for each question from this sample exam have been setup on UTSonline. Students are to use the correct folder when posting questions or comments and make sure they read the previous postings before asking a question. The mid-semester exam is compulsory for all students regardless of the assessment option chosen. Any questions of clarification should be asked on the Discussion Boards on UTSonline or in lectures. Only questions about student personal matters should be emailed directly to the Subject Coordinator, James Wakefield. Good Luck! Carin, Cheryl, Chris, Don, Ella, Fernando, James, Jon, Khalil, Kristina, Raechel, Stephen, Tia 1 PART A - THEORY Address all of the following points using examples where appropriate. Please make sure your answer is logically structured. Question 1 Financial statements are prepared for a range of different business entities. 1. Identify the different entities financial statements can be prepared for. 2. Identify the different financial statements and explain the type of information contained within each of the financial statements. 3. Explain the purpose of accounting information and how this purpose is linked to the needs of stakeholders involved with different entities. Question 2 Accounting information is guided by various principles, assumptions and qualitative characteristics. 1. Describe the process of generating accounting information. 2. Identify and describe the assumptions, qualitative characteristics and framework which guide the preparation of accounting information. 3. Explain why accountants have flexibility in accounting choices. 4. Explain how the assumptions and qualitative characteristics of accounting guide the choice of the following accounting methods. a. Revenue recognition b. Accounting for bad debts Question 3 Accountants have the ability to choose different ways to report accounting information, and this choice can have an impact on the reported financial performance and position of an entity. 1. Identify and describe in detail the different methods available when making reporting decisions for: a. Revenue recognition b. Accounting for uncollectible receivables (bad debts) 2. Explain the advantages and disadvantages of each method you have just described in part one of this question. 3. Explain why accountants are able to choose different ways to report accounting information. In your answer you may like to discuss the advantages and disadvantages of being able to make different accounting choices with brief reference to the article Gowthorpe and Amat (2005), Creative Accounting: Some Ethical Issues of Macro- and Micro-Manipulation. 4. Explain how the choice of these accounting methods can be used by managers for earnings management. In your answer you may like to refer to how the assumptions and qualitative characteristics of accounting reduce earnings management. Question 4 Predicting future cash flows is important to determine the viability and value of a company. 1. Describe the different components of the cash flow statement and the information it provides to users. 2. Explain the relation between the following accruals and future cash flow as suggested by Barth, Cram and Nelson (2001). a. Accounts receivable b. Accounts payable c. Inventory d. Depreciation and amortization 2 PART B - PRACTICAL Question 5 The comparative income statement for the financial year ended June 30 for Fiona Flamingo Farms is as follows: Fiona Flamingo Farms Comparative statement of comprehensive income For the years ended 30 June Sales Revenue Less: Cost of Goods Sold Gross Profit 2016 $ 770,000 487,000 283,000 2015 $ 690,000 345,000 345,000 Selling Expenses Administrative expenses Finance Expenses Profit before income tax expense Income tax expense Profit after income tax expense 97,000 71,000 9,000 106,000 31,800 74,200 82,000 79,000 3,000 181,000 54,300 126,700 Required: A. Perform horizontal analysis and vertical analysis (for 2016 only) on the income statement. In your answer please remember to indicate if it is an INCREASE or (DECREASE) and round your findings to ONE decimal place [e.g. -32.996% is -33.0% or minus 33.0% or (33.0%). B. Comment on the significant changes disclosed by the comparative statement of comprehensive income. C. Prepare a statement of retained earnings for the year ended June 30, 2016. (Retained earnings at July 1, 2015 were $58,000, dividends declared and paid during the financial year were $37,000. D. Explain how profits for the year ended June 30, 2015 were $126,700 yet Retained Earnings at July 1, 2015 were only $58,000. 3 Question 6 The comparative balance sheet for the financial year ended June 30 for Radical Road Trips is as follows: Radical Road Trips Ltd. Comparative Statements of Financial Position As at 30/06/2016 $ Current Assets Cash Accounts Receivable Less: Allowance for Bad Debts Supplies Prepaid Insurance Total Current Assets Non-current Assets Vehicles Less: Accumulated Depreciation - Vehicles Total Non-current Assets TOTAL ASSETS 90,000 30,000 3,900 200 1,320 As at 30/06/2015 $ 85,000 40,000 2,400 300 1,200 117,620 60,000 10,000 124,100 40,000 4,000 50,000 167,620 Current Liabilities Accounts Payable Unearned Revenue Total Current Liabilities Non-current Liabilities Long Term Loan Total Non-current Liabilities TOTAL LIABILITIES 15,000 9,000 36,000 160,100 20,000 7,000 24,000 25,000 27,000 5,000 25,000 49,000 Shareholders' Equity Contributed Capital Retained Earnings Total Shareholders' Equity 50,000 68,620 Total Liabilities & Shareholders' Equity 5,000 32,000 40,000 88,100 118,620 128,100 167,620 160,100 Required: A. Perform horizontal analysis and vertical analysis (for 2016 only) on the comparative balance sheet. In your answer please remember to indicate if it is an INCREASE or (DECREASE) and round your findings to ONE decimal place [e.g. -32.996% is -33.0% or minus 33.0% or (33.0%). B. Calculate the current ratio for 2016. C. Assuming credit sales for 2016 were $300,000 calculate the receivables turnover ratio for 2016. D. Calculate the days in receivables ratio for 2016. E. Calculate the allowance ratio for 2016. F. Comment on the significant changes disclosed by the comparative balance sheet. In your analysis include: a. The main findings from the horizontal analysis and vertical analysis b. An interpretation of what each of the ratios mean for Radical Road Trips. c. The advantages and limitations of each of the ratios. 4 Question 7 Carin owns and operates the Carin Consulting business. On August 1, 2016 her ledger showed the following account balances (Ignore GST). Cash Accounts Receivable Inventory Supplies Prepaid Insurance Computer Accumulated Depreciation Computer Equipment Accumulated Depreciation Equipment Motor Vehicle Accumulated Depreciation Motor Vehicle Land Accounts Payable Unearned Revenue Telephone Payable Notes Payable Mortgage Payable Contributed Capital Retained Earnings Consulting Service Revenue Sales Revenue Cost of Goods Sold Supplies Expense Advertising Expense Insurance Expense Telephone Expense Rent Expense Depreciation Expense Dividends TOTAL Debit $ 20,000 16,000 18,000 1,000 0 0 Credit $ 0 10,000 5,000 0 0 0 4,000 700 150 0 0 25,000 30,150 0 0 0 0 0 0 0 0 0 0 65,000 65,000 The following transactions occurred during August 2016: 1. The owner contributed an additional $2,000 cash and equipment valued at $5,000 to the business. 2. Purchased land for $260,000 by arranging a mortgage with the bank. 3. Paid $1,500 cash to purchase a computer for the business. 4. Purchased a motor vehicle for $36,000 by arranging a promissory note with a lender. 5. Paid $3,000 to creditor (Accounts Payable) for goods previously purchased in July. 5 6. Paid $150 for a telephone bill that related to charges incurred during July. An adjusting entry for $150 was made at the end of July to accrue this telephone expense. 7. Performed consulting services for a customer and received $6,000 cash. 8. Billed (invoiced) a client $9,000 for consulting services performed during August. 9. Received $4,000 cash from customers who had previously been billed (invoiced) for services performed during July. 10. Received and paid an invoice for $2,000 relating to August's advertising expense. 11. Distributed $7,000 cash dividends to the owner of the business. 12. Sold inventory on credit to a customer for $5,000. The inventory cost $3,000 and was recorded using the perpetual inventory system. 13. Received $1,000 cash for consulting services to be performed in September. The cash receipt was recorded as a liability. 14. Received $2,000 cash for consulting services to be performed in September. The cash receipt was recorded as revenue. 15. Purchased supplies on credit $700. The supplies purchased were recorded as an asset. 16. Paid $1,200 for a 12-month insurance policy. The insurance was recorded as an asset. 17. Paid $6,000 cash for rent for August, September and October. The business recorded the rent as an expense. Required: A. Record the above transactions in a general journal using only the ledger accounts given. B. Post to the ledger, (remembering first to enter the opening balances). 6 Question 8 For each of the following independent situations and from the information below record the adjusting entry (and only the adjusting entry - do not record the original transaction or opening balance) in the General Journal, being as precise with your account titles as possible, e.g. not using \"supplies\" but \"supplies expense\" or \"supplies on hand\". Please ignore GST. All calculations are to be worked out on a monthly (not daily) basis. Note: alternative versions of some of the questions are included. You are expected to know how to record both as you may be examined on either the question or the alternative version. Required: Record the Adjusting Entries i. Ella Auditors is conducting the audit on Swan Productions. It is normal practice not bill or invoice the client until the audit is completed. By the end of the financial year 43 hours have been spent on the audit. The average rate is $370 per hour. Record the adjusting entry for Ella Auditors. (Alternative: record the adjusting entry for Swan Productions) ii. Jon Ltd. invested $40,000 in a term deposit at Murray River Bank on 1 May 2016. Interest is received after one year and interest rates are 6%. Record the adjusting entry for Jon Ltd. when their financial year ends on 30 November 2016. (Alternative: record the adjusting entry for Murray River Bank) iii. On 1 March 2016, Martin Ltd. accepts a $15,000, five percent, ten month note receivable. Record the adjusting entry for Martin Ltd. when their financial year ends on 30 June 2016. iv. At Ian Industries salaries are paid and recorded weekly at the end of the week late on a Saturday evening for all work performed up to and including Saturday evening. The weekly salary bill is $36,000 for a six-day working week (Mon - Sat). Ian's accounting period ends on Tuesday evening. Record the adjusting entry. v. Jenny borrowed $120,000 from Eastpac Bank on 1 February 2016. Interest is paid after six months and interest rates are 8%. Record the adjusting entry for Jenny on 30 April 2016. (Alternative: record the adjusting entry for Eastpac Bank on 30 April) vi. Electricity expenses average $2,400 per year. The Electricity meter was last read exactly three months ago. The bill was received 2 months ago and paid last month. The financial year ends today. Record the adjusting entry for the three months ended today. vii. Chang Ltd. records uncollectible receivables using the allowance method, calculating the amount of the adjustment using the percentage of receivables approach. At the end of the financial year the balance of the Accounts Receivable account of Chang Ltd. is $78,000 debit, the balance of the Allowance for Bad Debts account is $1,000 credit and estimates that 2% of its receivables balance will be uncollectible. Record the adjusting entry. (Alternative: record the adjusting entry assuming the balance of the Allowance for Bad Debts account is $1,000 debit) (Alternative: record the adjusting entry using the percentage of sales approach, assuming net credit Sales Revenue was $78,000 and 2% of credit sales revenue will not be collected) 7 viii. When supplies are purchased by Andrea they were recorded as an asset. Calculations after an end of period stock-take revealed a closing stock (balance) of $2,000. There was an opening balance of $3,000 and during the period $8,000 of supplies were purchased. Record the adjusting entry. (Alternative: record the adjusting entry assuming the supplies were recorded as an expense when purchased.) ix. Raechel pays her insurance of $24,000 annually in early September. The insurance policy covers all her claims from 12.01 a.m. on September 1. Insurance is recorded as an expense when paid and the financial year ends on December 31. Record Raechel's adjusting entry for the four months ended December 31. (Alternative: record the adjusting entry assuming the insurance was recorded as a prepayment (asset) when paid.) (Alternative: record the adjusting entry from the perspective of the insurance company assuming the insurance was recorded as a liability when received.) (Alternative: record the adjusting entry from the perspective of the insurance company assuming the insurance was recorded as revenue when received.) x. On 1 March, Ryan Rockclimbing paid $1,200 to the local rockclimbing magazine for a one-page advertisement for Ryan's rockclimbing skills courses. The advertisements will run each month for the next 12 months. Ryan initially recorded the advertising as a prepayment (asset). Record the adjusting entry for Ryan for the month of March. (Alternative: record the adjusting entry assuming the advertising was recorded as an expense when paid.) (Alternative: record the adjusting entry from the perspective of the magazine company assuming the advertising was recorded as a liability when received.) (Alternative: record the adjusting entry from the perspective of the magazine company assuming the advertising was recorded as revenue when received.) xi. When office photocopying paper is purchased it is recorded as an expense. An end of period stock-take (count) revealed a closing balance of $3,000. There was an opening balance of $1,000 and during the period $5,000 of photocopying paper was purchased. Record the adjusting entry. (Alternative: record the adjusting entry assuming the photocopying paper was recorded as an asset when purchased.) xii. xiii. James Limited received rent on the first day of November 2015, a total of $70,200 in advance for twelve months commencing on that day and records it as revenue. Record the adjusting entry for the year ending June 30, 2016 for James Limited. (Alternative: record the adjusting entry assuming the rent was recorded as a liability when received.) (Alternative: record the adjusting entry from the perspective of the tenant assuming the rent was recorded as an asset when paid.) (Alternative: record the adjusting entry from the perspective of the tenant assuming the rent was recorded as an expense when paid.) Adriel Construction received $500,000 in August 2015 for a new building project and recorded this initial cash receipt as a liability. The project is 75% complete at financial year-end. Record the adjusting entry for financial year ending June 30, 2016 for Adriel. (Alternative: record the adjusting entry assuming the initial cash receipt was recorded as revenue when received.) 8 xiv. A tennis club offered a special rate for upfront annual memberships at the start of the season. If patrons paid their 12 months' fees in advance they only had to pay $1,200. The tennis club recorded the fees received as \"Membership Revenue\Radical Road Trips Lts Comparative Statements of Financial Position 30/06/2016 30/06/2015 Current Assets Cash Accounts Receivable Less: Allowance for Bad Debts Supplies Prepaid Insurance Total Current Assets Non Current Assets Vehicles Less: Accumulated Depreciation Total Assets Current Liabilities Accounts Payable Unearned Revenue Non Current Liabilities Long Term Loan Total Liabilities Shareholder's Equity Contributed Capital Retained Earnings Total Shareholder's Equity Total Liabilities and Shareholder's Equity Verticle Analysis 30/06/2016 30/06/2015 Horizontal Analysis 30/06/2016 90000 30000 -3900 200 1320 117620 85000 40000 -2400 300 1200 124100 53.7% 17.9% -2.3% 0.1% 0.8% 70.2% 53.1% Increase 25.0% (Decrease) -1.5% (Decrease) 0.2% (Decrease) 0.7% Increase 77.5% (Decrease) 60000 -10000 50000 167620 40000 -4000 36000 160100 35.8% -6.0% 29.8% 100.0% 25.0% Increase -2.5% (Decrease) 22.5% Increase 100.0% 15000 9000 24000 20000 7000 27000 8.9% 5.4% 14.3% 12.5% (Decrease) 4.4% Increase 16.9% (Decrease) -25.0% (Decrease) 28.6% Increase -11.1% (Decrease) 25000 49000 5000 32000 14.9% 29.2% 3.1% Increase 20.0% Increase 400.0% Increase 53.1% Increase 50000 68620 118620 167620 40000 88100 128100 160100 29.83% 40.94% 70.77% 100.00% 24.98% Increase 55.03% (Decrease) 80.01% (Decrease) 100.00% F) Main findings from verticle and horizontal analysis Verticle Analysis i) Accounts receivables have decreased from 17.9% in 2016 to 25% in 2015 indicating an efficient collection by the management. ii) Owing to decrease in accounts payables the current assets have declined from 70.2% from 77.5%. iii) Accounts payable have decreased from 12.5% in 2015 to 8.9% in 2016 showing the squeezing credit of the company. iv) Retained earnings have declined indicating its use in business operations. Horizontal Analysis i) Cash of the company has increased during the year 2016 by 5.9% which indicates much efficient management of cash. ii) Accounts receivables have reduced by 25%. iii) Current assets have decreased by 5.2% due to decrease in accounts receivables. iv) Current liabilities and retained earnings have decreased by 11.1% and 22.11% respectively. 5.9% Increase -25.0% (Decrease) 62.5% Increase -33.3% (Decrease) 10.0% Increase -5.2% (Decrease) 50.0% Increase 150.0% Increase 38.9% Increase 4.7% Increase 25.00% Increase -22.11% (Decrease) -7.40% (Decrease) 4.70% Increase Radical Road Trips Lts Comparative Statements of Financial Position 30/06/2016 30/06/2015 Current Assets Cash Accounts Receivable Less: Allowance for Bad Debts Supplies Prepaid Insurance Total Current Assets Non Current Assets Vehicles Less: Accumulated Depreciation Total Assets Current Liabilities Accounts Payable Unearned Revenue Non Current Liabilities Long Term Loan Total Liabilities Shareholder's Equity Contributed Capital Retained Earnings Total Shareholder's Equity Total Liabilities and Shareholder's Equity Verticle Analysis 30/06/2016 30/06/2015 Horizontal Analysis 30/06/2016 90000 30000 -3900 200 1320 117620 85000 40000 -2400 300 1200 124100 53.7% 17.9% -2.3% 0.1% 0.8% 70.2% 53.1% Increase 25.0% (Decrease) -1.5% (Decrease) 0.2% (Decrease) 0.7% Increase 77.5% (Decrease) 60000 -10000 50000 167620 40000 -4000 36000 160100 35.8% -6.0% 29.8% 100.0% 25.0% Increase -2.5% (Decrease) 22.5% Increase 100.0% 15000 9000 24000 20000 7000 27000 8.9% 5.4% 14.3% 12.5% (Decrease) 4.4% Increase 16.9% (Decrease) -25.0% (Decrease) 28.6% Increase -11.1% (Decrease) 25000 49000 5000 32000 14.9% 29.2% 3.1% Increase 20.0% Increase 400.0% Increase 53.1% Increase 50000 68620 118620 167620 40000 88100 128100 160100 29.83% 40.94% 70.77% 100.00% 24.98% Increase 55.03% (Decrease) 80.01% (Decrease) 100.00% F) Main findings from verticle and horizontal analysis Verticle Analysis i) Accounts receivables have decreased from 17.9% in 2016 to 25% in 2015 indicating an efficient collection by the management. ii) Owing to decrease in accounts payables the current assets have declined from 70.2% from 77.5%. iii) Accounts payable have decreased from 12.5% in 2015 to 8.9% in 2016 showing the squeezing credit of the company. iv) Retained earnings have declined indicating its use in business operations. Horizontal Analysis i) Cash of the company has increased during the year 2016 by 5.9% which indicates much efficient management of cash. ii) Accounts receivables have reduced by 25%. iii) Current assets have decreased by 5.2% due to decrease in accounts receivables. iv) Current liabilities and retained earnings have decreased by 11.1% and 22.11% respectively. 5.9% Increase -25.0% (Decrease) 62.5% Increase -33.3% (Decrease) 10.0% Increase -5.2% (Decrease) 50.0% Increase 150.0% Increase 38.9% Increase 4.7% Increase 25.00% Increase -22.11% (Decrease) -7.40% (Decrease) 4.70% Increase