RECENT ASSIGNMENT

TASK 1:
Laura Prebble, the owner-manager of a small business, had carefully monitored her cash
position over the past financial year, and was pleased to note at the end of the year that the
cash position was strong, and had shown a healthy 50% increase over the year. When
presented with the income statement for the year, she was dismayed to note that the profit
earned in the last year had deteriorated significantly and had become a loss for the current
period. In her anger, she accuses you of having made errors in the accounting since ‘such a
silly situation could not possibly exist’.
Required
Draft a response to Laura.
TASK 2:
‘A statement of cash flows is of limited use as a business needs to know if it will have
sufficient cash to support its planned future activities.’
Required
Discuss the merit of this statement focusing on both the purpose and limitations of a
statement of cash flows.
TASK 3:
After calculating the current ratio for an entity and finding that the ratio’s value was 5:1, a
student analyst decided that the company was in a sound position for paying its liquid
liabilities.
Required
Discuss the shortcomings of making such a conclusion
TASK 4:
The financial statements for the business of Trinh’s Nail Supplies for the past two years are presented below.
TRINH’S NAIL SUPPLIES
Comparative Income Statements
for the year ended 30 June
2016 2017
Sales $ 400 000 $ 500 000
Cost of sales 350 000 458 000
GROSS PROFIT 50 000 42 000
Interest income 1 000 2 000
Loss on sale of fixtures — 800
51 000 43 200
Office supplies used 10 000 11 000
Other expenses 29 000 29 000
39 000 42 000
Profit $ 12 000 $ 3 200

TRINH’S NAIL SUPPLIES
Comparative Statements of Financial Position
as at 30 June
2016 2017
ASSETS
Cash at bank $ 4 400 —
Accounts receivable 42 000 60 000
Inventory 80 000 40 000
Office supplies 2 000 5 000
Freehold property 60 000 80 000
Fixtures 40 000 46 000
Accumulated depreciation – fixtures (16 000) (20 200)
Investments 6 000 16 000
$ 218 400 $ 226 800
LIABILITIES AND EQUITY
Bank overdraft — $ 4 000
Accounts payable $ 26 000 40 000
Trinh, Capital 192 400 182 800
$ 218 400 $ 226 800
Additional information
a. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash.
b. The bank overdraft is considered to be part of the entity’s cash management function.
c. During the year ended 30 June 2017, the owner, Trinh, withdrew $12 800 in cash for personal use.
d. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost
$4200 and had been written down to a carrying amount at the date of sale of $2000.
e. Depreciation of fixtures has been included in ‘other expenses’ for the year ended 30 June 2017. All remaining other expenses were paid in cash.
Required
1. Prepare the statement of cash flows for Trinh’s Nail Supplies for the year ended 30 June 2017,
using the direct method.
2. Comment on the cash flow position of the entity as shown in the statement of cash flows.
TASK 5:
Sunrise Ltd completed the following transactions during a given year:
Transaction Ratio
1. Sold obsolete inventory at cost
Profit margin
2 Redeemed debentures by issuing ordinary shares
Return on ordinary equity
3. Issued a share dividend on ordinary shares
Earnings per share
4. Declared a cash dividend on ordinary shares
Dividend payout
5. Paid the GST owing to the tax office
Dividend yield
6. Purchased inventory on credit
Quick ratio
7. Sold inventory for cash
Current ratio
8. Wrote off a bad debt against Allowance for Doubtful Debts Current ratio
9. Collected an account receivable
Receivables turnover
10. Sold inventory on credit
Inventory turnover
11. Issued additional ordinary shares for cash
Debt ratio
12. Paid trade accounts payable
Return on assets

Required
State and discuss whether each transaction would cause the ratio listed with the transaction to increase, decrease or remain unchanged.