CHAPTER 3 SUGGESTED SOLUTIONS SOLUTION TO MULTIPLE CHOICE QUESTIONS 3.1 3.2 3.3 3.4 3.5
(d) (b) (b) (a) (c)
3.6 3.7 3.8 3.9 3.10
(e) (d) (d) (b) (a)
END OF CHAPTER QUESTIONS
3.1 As with all systems analysis one would start by defining the output. OUTPUT: The output, if one wished to have a successful business, would be a well constructed, aesthetically pleasing swimming pool, in accordance with the customer's requirements. This would require defining the various parts, such as the casing, the steps, the surrounds and the filter in accordance with a certain standard of specification. INPUT: Having defined the output the next step is to determine what input is necessary in order to achieve the output. The input would comprise earth-digging and earth-removal equipment, as well as the materials to be used in the construction of the swimming pool. A filter plant and cleaning equipment will also be necessary. A consideration of the labour requirements will also be made at this stage. PROCESS: The process would entail the digging of a hole in the ground, the removal of the rubble, the structuring of the sides and bottom of the pool, painting the pool and installing a filter plant. FEEDBACK: This would entail measuring the structure of the pool, the effectiveness of the filter plant and the general appearance of the pool against the required standard. A decision would have to be made as to whether the pool had been timeously and effectively completed. Feedback would also be obtained from the customer, who would inspect the pool, check that the filter plant is operating and ensure that there are no apparent faults in the structure before making payment.
3.2 (a)
The Accounting System with its four major components
INPUT SOURCE DOCUMENTS
=
ASSETS
+ ADJUSTMENTS
OUTPUT
PROCESS EQUITY
-
-
DEBIT CREDIT
+ LIABILITIES
+
DEBIT CREDIT
-
BALANCE SHEET
+
DEBIT CREDIT
INCOME STATEMENT
THE GENERAL LEDGER FRAMEWORK
FEEDBACK b)
The diagram shows an accounting system designed to produce the primary financial statements, namely, the balance sheet and the income statement. To discuss the diagram from a functional perspective, we need to consider the functions performed at each stage of the system. As with all systems, the first element to identify is the output. The output of an accounting system is a statement of financial performance, which indicates whether the business made a profit or loss for the period under review and a statement of financial position, which indicates the present wealth of the business and the claims against that wealth. It is the reporting function that produces this information, which is then evaluated, analysed and compared by various users of the financial statements.
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FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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The input is the data that is required to produce the output. Such data must be identified, measured and captured on source documents. Source documents comprise all documents used in the process of buying and selling goods or conducting the financial affairs of the business. They would include for example cash slips, invoices, receipts and cheques. The process that is used to transform the data captured on the source documents into information useful for decision making involves further recording, classifying and summarizing the data further. This is achieved through the use of a General Ledger, which classifies all transactions into categories, known as accounts.
3.3 The term debit means the left-hand side of a General Ledger account drafted in the traditional T form. It has no other significant meaning. It is not to be confused with plus and minus, which is the logic of the system. Whether the + is on the left-hand side of an account, it is the Debit side. When a minus is on the left-hand side, it is still a debit. A credit is the right hand side. Only that and nothing more.
3.4 ASSETS
+
-
DEBIT CREDIT
=
EQUITY
-
+ LIABILITIES
+
DEBIT CREDIT
-
+
DEBIT CREDIT
THE GENERAL LEDGER FRAMEWORK
3.5 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Credit purchases invoice Cheque counterfoil Bank deposit slip Bank deposit slip/entry on bank statement Cash register roll/cash sales slip Credit sales invoice Credit purchases invoice Debit note Cheque counterfoil Cheque counterfoil/fixed deposit receipt
3.6
ASSETS (1) Purchase of office equipment on credit. (2) Shareholders acquire shares in the company. (3) Purchase of office furniture for cash. (4) Collection of amounts owing by debtors. (5) Payments to creditors. (6) The return of certain office equipment previously purchased on credit.
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=
EQUITY
+ LIABILITIES
+ + +&+&-
0 + 0 0 0
0 0 0 -
-
0
-
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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3.7 =
Assets 1 2 3 4 5 6 7 8 9 10
25,000 37,000 2,600 -2,600 1,550 -1,200 20,000 -5,000 -520 4,000 9,000 -1,900 9,000 -9,000
Equity
+
Liabilities
25,000 37,000 (Note 1) 1,550 -1,200 15,000
(Note 2) -520 (Note 3)
13,000 -1,900
(Note 4)
=
87,930
35,930 +
52,000
Notes 1. The purchase of consumable stores is treated as an asset. As the stores are used up/consumed, such amount will be shown as an expense. 2. The cost of the asset, which is R20 000, should be shown as an increase in assets. The payment of the deposit of R5 000 reduces the assets, as the bank balance will be reduced. After the deposit has been paid, the balance owing is R15 000, which should be recorded as an increase in liabilities. 3. Assets have increased by R4 000, which was received in cash, and by R9000, which is due from debtors. The equity has increased by the total of R13 000, which is the total charge for services rendered. 4. When a debtor pays, the asset 'debtors' decreases, and the asset 'bank' increases.
3.8 Capital (1) (2) (3) (4) (5) (6) (7) (8) (9) Adjustments i ii
Assets 2,000,000 126,000 1,640,000 -1,640,000 215,000 -150,000 20,500 -20,500 -14,200 99,920 -1,000 400 -5,150
Profit for the month Projected profit for the year Return on Equity
Equity 2,000,000
+
Liabilities 126,000
65,000
-14,200 99,920 -800
-200 400
-5,150
-10,200 -100 -17,660 2,243,010
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=
-10,200 -100 -17,660
=
2,051,810
+
191,200
51,810 621,720 (R51 810 x 12) 31.1% (R621 720/R2 000 000)
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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(b)
The business has earned a profit of R51 810 in its first month of business; this represents a projected annual return on equity of 31%. This can be considered a positive start to the business and the shareholders should be satisfied at this point. The financial position of the business at the end of the month shows a net asset value (the value of the business to the shareholders) of R2 051 810. This comprises the original amount invested of R200 000, plus the profit earned during the month.
Notes (1)
This represents the original investment by the shareholders.
(2)
Calculated as follows: Fares earned Less: Expenses Wages and salaries Interest on loan Motor vehicle expenses (5150 + 10200) Stationery used Depreciation (1% of R1 7660 000) Net income
99 920 48 110 14 200 800 15 350 100 17 660 51 810
3.9 Quickprint (Pty) Ltd Assets account (1) 20,000 (3) 12,000 (2) 26,000 (4) 2,500 (3) 120,000 (5) 1,200 (4) 2,500 (7) 2,000 (6) 3,920 (9) 150 (8) 400 Adj 1,500 Adj 100 c/d 153,370 172,820 172,820 b/d 153,370 153,370
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=
Equity account (5) 1,200 (1) 20,000 (7) 1,900 (6) 3,920 (9) 150 Adj 1,500 Adj 100 c/d 19,070 23,920
=
+
23,920 b/d 19,070 19,070
Liabilities account (7) 100 (2) 26,000 c/d 134,300 (3) 108,000 (8) 400
134,400
+
134,400 b/d 134,300 134,300
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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3.10 (a)
Nadia Sereng's Company Impact of the transactions on the accounting equation ASSETS Registered a company investing R500 000
=
500,000
(1) Negotiated a 12% loan of R200 000 from Coronation Bank.
200,000
(2) Purchased equipment for cash: R126 700.
126,700
EQUITY
+ LIABILITIES
500,000 200,000
-126,700 (3) Purchased a vehicle on credit from Orbit Motors for R189 000.
189,000
(4) Purchased stocks of jaks and paid by cheque: R168 000.
168,000
189,000
-168,000 -27,000
(5) Purchased consumable stores by cheque for R27 000. (6) Paid rent for premises for the month R9 000 (7) Sold jaks with a cost of R78 000 for R110 000 cash. (8) Sold jaks with a cost of R70 000 for R94 000 on credit. (9) Paid general expenses by cheque: R5 200.
-27,000
-9,000
-9,000
-78,000
-78,000
110,000
110,000
-70,000
-70,000
94,000
94,000
-5,200
-5200
(10) Paid R14 000 on the account to Orbit Motors.
-14,000
(11) Debtors paid R20 000 off on their accounts.
-20,000
-14000
(12) Paid herself and her assistant their salaries R14 200.
-14,200
-14200
875,600 0
500,600 600 NET PROFIT
20,000
CHECK
375,000
Transaction (5), consumable stores, may also be treated the acquisition of an asset rather than a decrease in Equity. As treated above, we have assumed that all the stores have been used during the month and are therefore a legitimate expense for the period. (b)
(1) (2) (3) (4) (7) (8) (11)
b/d
Assets account 500,000 (3) 126,700 200,000 (4) 168,000 126,700 (5) 27,000 189,000 (6) 9,000 168,000 (7) 78,000 110,000 (8) 70,000 94,000 (9) 5,200 20,000 (10) 14,000 (11) 20,000 (12) 14,200 c/d 875,600 1,407,700 1,407,700 875,600
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(5) (6) (7) (8) (9) (12) c/d
Equity account 27,000 (1) 500,000 9,000 (7) 110,000 78,000 (8) 94,000 70,000 5,200 14,200 500,600
704,000
0
+
704,000 b/d 500,600
=
875,600 check
=
500,600 Net Profit
Liabilities account (10) 14,000 (1) 200,000 c/d 375,000 (4) 189,000
389,000
+
389,000 b/d 375,000 375,000
R 600
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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(c)
# 1 7 11
Bank account 500,000 2 126,700 200,000 4 168,000 110,000 5 27,000 20,000 6 9,000 9 5,200
=
Share Capital account # 500,000 Retained Income a/c
14,000
Consumable Expense a/c
12
14,200
5
126,700
27,000 Rent Expense a/c
6
9,000
Vehicles account 3
Sales Revenue a/c
189,000 Stock account
4
168,000
7
78,000
8
70,000
74,000
110,000
8
94,000
Cost of Sales account 7
78,000
8
70,000
Debtors account 94,000 11
7
204,000
20,000 8
Loan from Cor Bank a/c 1 200,000 Orbit Motors account 10 14,000 3 189,000 175,000
10
465,900 Equipment account 2
+
148,000
20,000
General expenses a/c 9
12
5,200 Salaries Expense a/c 14,200
(d) Trial Balance at month end Bank account 465,900 Equipment account 126,700 Vehicles account 189,000 Stock account 20,000 Debtors account 74,000 Share Capital account
500,000
Loan from Cor Bank a/c
200,000
Orbit Motors account Consumable Expense a/c Rent Expense a/c
175,000 27,000 9,000
Sales Revenue a/c
204,000
Cost of Sales account
148,000
General expenses a/c
5,200
Salaries Expense a/c
14,200 1,079,000
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1,079,000
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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(e) NADIA SERENG'S COMPANY GENERAL LEDGER: BALANCE SHEET ACCOUNTS BANK ACCOUNT – 01 Month Day Other account Sept # Share Capital 1 Loan from Cor Bank 2 Equipment 4 Stock 5 Consumables 6 Rent Expense 7 Sales Revenue 9 General Expenses 10 Orbit Motors 11 Debtors 12 Salaries
Fo Debit Credit Balance 02 500,000 500,000 05 200,000 700,000 03 126,700 573,300 05 168,000 405,300 10 27,000 378,300 11 9,000 369,300 12 110,000 479,300 14 5,200 474,100 06 14,000 460,100 08 20,000 480,100 15 14,200 465,900
SHARE CAPITAL – 02 Month Day Other account Sept # Bank EQUIPMENT – 03
Fo 01
Debit
Month Day Other account Sept 2 Bank VEHICLES – 04
Fo Debit Credit Balance 126,700 01 126,700
Month Day Other account Sept 3 Orbit Motors CORONATION BANK - 05
Fo Debit Credit Balance 189,000 01 189,000
Month Day Other account Sept 1 Bank ORBIT MOTORS - 06
Fo 01
Debit
Credit Balance 500,000 500,000 #
Credit Balance 200,000 200,000 #
Month Day Other account Fo Debit Credit Balance Sept 3 Vehicles 04 189,000 189,000 175,000 # 10 Bank 01 14,000 STOCK ACCOUNT - 07 Month Day Other account Fo Debit Credit Balance Sept 4 Bank 01 168,000 168,000 7 Cost of Sales 13 78,000 90,000 8 Cost of Sales 13 70,000 20,000 DEBTORS ACCOUNT - 08 Month Day Other account Fo Debit Credit Balance Sept 8 Sales 12 94,000 94,000 11 Bank 01 20,000 74,000 GENERAL LEDGER: INCOME STATEMENT ACCOUNTS CONSUMABLE EXPENSES - 10 Month Day Other account Fo Debit Credit Balance Sept 5 Bank 01 27,000 27,000 RENT EXPENSE- 11 Month Day Other account Fo Debit Credit Balance Sept 6 Bank 01 9,000 9,000 SALES REVENUE - 12 Month Day Other account Fo Debit Credit Balance Sept 7 Bank 01 110,000 110,000 8 Debtors 08 94,000 204,000 # COST OF SALES ACCOUNT - 13 Month Day Other account Fo Debit Credit Balance Sept 7 Stock 07 78,000 78,000 148,000 8 Stock 07 70,000 GENERAL EXPENSES - 14 Month Day Other account Fo Debit Credit Balance 5,200 Sept 9 Bank 01 5,200 SALARIES EXPENSE - 15 Month Day Other account Fo Debit Credit Balance 14,200 Sept 12 Bank 01 14,200
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FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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3.11 (a)
Shaw Agencies (Pty) Ltd Impact of Transactions on the Accounting Equation
(1) A business opened with a deposit of R24 000 (2) Purchased equipment for R1 800 paying cash of R1 000, with the balance on account. (3) Purchased supplies costing R120 for cash (4) Paid office rent for the month of R2 500. (5) Paid R300 to a creditor. (6) Earned sales commissions, cash of R1 400. (7) Paid car expenses for the month of R160 and miscellaneous expenses of R90 CHECK
(b)
EQUITY + LIABILITIES 24,000 1800 -1000 -120 -2500 -300 1,400 -160 -90 22,530 500 -1,470 NET LOSS
Transactions of Shaw Agencies (Pty) Ltd using only 3 General Ledger accounts
(1) (2) (6)
Assets account 24,000 (2) 1,000 1,800 (3) 120 1,400 (4) 2,500 (5) 300 (7) 160 (7) 90 c/d
b/d
= (3) (4) (7) (7)
Equity account 120 (1) 24,000 2,500 (6) 1,400 160 90
c/d
22,530
23,030 27,200
27,200 23,030
25,400 b/d
=
23,030 0
check (c)
ASSETS = 24,000 1,800 -1,000 -120 -2,500 -300 1,400 -160 -90 23,030 0
+
25,400 22,530 22,530
Liabilities account (5) 300 (2) 800 c/d 500
800 b/d
+
800 500 500
Net Profit/Loss -R 1,470
Full set of General Ledger accounts 1 6
Bank account 24,000 2 1,000 1,400 3 120 4
2,500
5
300
7
160
7
90
=
Share Capital account 1 24,000 Commission Income a/c 6
21,230 Equipment account 1,800
2 5
Creditor 1,000 2 300
1,800 500
1,400
Consumable Expense a/c 3
2
+
120 Rent Expense a/c
4
2,500 Vehicle Expenses a/c
7 160 Miscellaneous Expenses a/c 7
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90
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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Trial Balance of Shaw Agencies (Pty) Lt at 30 Sept 20.0 Bank account Equipment account
21,230 1,800
Share Capital account
24,000
Creditor Consumable Expense a/c Rent Expense a/c
500 120 2,500
Commission Income Vehicle Expense Miscellaneous expenses a/c
1,400 160 90 25,900
25,900
(e)
For three column ledger format, see question 3.11
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FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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3.12 (a)
Care Cleaners (Pty) Ltd Impact of transactions on the Accounting Equation ASSETS = 20,000 10,000 -3,000 24,000 -24,000 36,000 2,600 3,200 -130 9,300 -4,000 73,970
1 3 5 6 12 14 29 30 31
(c)
EQUITY + LIABILITIES 20,000 10,000 -3,000
36,000 2,600 3,200 -130 9,300 -4,000 25,370
48,600
General Ledger accounts
# # 14
Bank account 30,000 3 10,000 5 3,200 29 31 43,200
= 3,000 24,000 130 4,000 31,130
Share Capital account 30,000 #
12
Cleaning Materials 2,600
12,070 Equipment account 24,000 5
Rent Expense a/c 3,000
3
36,000
9,300
Porter Motors account 6 36,000
12
2,600
Fee Revenue a/c
Debtors account 30
Loan from SMB a/c # 10,000
Cleankem
Vehicles account 6
+
14
3,200
30
9,300 12,500
General expenses a/c 29
130 Salaries Expense a/c
31
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4,000
FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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(d) Trial Balance of Care Cleaners (Pty) Ltd at 31 March 20.1 Bank account Equipment account Vehicles account Stock account Debtors account
12,070 24,000 36,000 9,300
Share Capital account
30,000
Loan from SMB a/c Porter Motors account Cleankem (Creditor) Cleaning materials
10,000 36,000 2,600 2,600
Rent Expense a/c
3,000
Fee Revenue a/c Cost of Sales account General expenses a/c
12,500 130
Salaries Expense a/c
(e)
4,000 91,100 For three column ledger format, see question 3.11
91,100
(f)
The profit of R5370(3200+9300-3000-130-4000) represents a return on equity for the month of 26,9% which is very encouraging. It should be noted, however, that neither a salary for Richard Mc Ginty nor interest on the long term loan have been provided for. If a minimum salary of R2200 and interest of R150 (R10 000 x 18% x 1/12) are provided for, the profit is reduced to R3 020 (5370 - 2200 - 150), which represents a return on equity of 15,1% for the month. If this trend continues, his annual profit could be in the region of R36 000, which would represent an annual return on investment of over 100%. WOW!! As regards financial position, liabilities at 31 March amount to R48 600, whereas cash in the bank amounts to only R2 070. Whether this is serious or not depends on the repayment terms of the loan (R10 000) and the amount owed to Porter Motors (R36 000).
(g)
Future prospects for the business depend on, inter alia, the following:
The ability of the company to generate sufficient cash to pay the interest on the loan and to make capital repayments.
The amount of salary which Richard McGinty requires. The ability to recover money timeously from debtors. The efficient and optimal utilization of the company's resources. The ability to continue to generate the high profit earned for March 20.1
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FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS
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