Cambridge Checkpoints VCE Accounting Units 1&2

393 Pages·2011·65.648 MB·English

by  Tim Joyce

Second Edition
CAMBRIDGE VCE
ACCOUNTING
Anthony Simmons & Richard Hardy
UNITS
1&2
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
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National Library of Australia Cataloguing in Publication data
Simmons, Anthony.
Cambridge VCE accounting units 1 & 2 / Anthony Simmons, Richard
Hardy.
2nd ed.
9781107640290 (pbk.)
Accounting—Textbooks.
Accounting—Problems, exercises, etc.
Accounting—Study and teaching (Secondary)—Victoria.
Hardy, Richard.
657.0712
ISBN 978-1-107-64029-0 Paperback
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ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
CONTENTS
Using Cambridge VCE Accounting Units 1 & 2 Second Edition viii
Acknowledgements xii
About the authors xiii
UNIT 1
ESTABLISHING AND OPERATING A SERVICE
BUSINESS
CHAPTER 1
THE NATURE AND ROLE OF ACCOUNTING IN SMALL BUSINESS 3
1.1 The need for accounting 4
1.2 The accounting process 6
1.3 Accounting Principles 7
1.4 Qualitative Characteristics 9
CHAPTER 2
THE ACCOUNTING EQUATION 15
2.1 Assets, liabilities and owner’s equity 16
2.2 The accounting equation 18
2.3 The Balance Sheet 18
2.4 Classification in the Balance Sheet 19
2.5 Transactions and the accounting equation 21
2.6 Performance indicators and the Balance Sheet 23
CHAPTER 3
SMALL BUSINESS 33
3.1 Small business 34
3.2 Becoming a small business owner 35
3.3 Alternatives to small business ownership 36
3.4 Resources required to establish a small business 39
3.5 Planning 41
3.6 Nature of business operations 41
3.7 Ownership structures 42
3.8 Starting versus buying 46
3.9 Reasons for success and failure 47
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
iv CONTENTS
CHAPTER 4
SOURCES OF FINANCE 53
4.1 Sources of finance 54
4.2 Guidelines for seeking external finance 57
4.3 Applying for a loan 58
4.4 Calculating interest 59
4.5 Debt Ratio and risk 63
4.6 Debt Ratio and Return on Owner’s Investment 64
CHAPTER 5
SOURCE DOCUMENTS 71
5.1 The role of source documents 72
5.2 Cash transactions 73
5.3 Cash payments and cheque butts 76
5.4 Other source documents 79
CHAPTER 6
CASH ACCOUNTING FOR SERVICE BUSINESSES 85
6.1 Service businesses and cash 86
6.2 Single-entry accounting 87
6.3 The Cash Receipts Journal 88
6.4 The Cash Payments Journal 91
6.5 The Statement of Receipts and Payments 93
6.6 GST payable and GST receivable 96

CHAPTER 7
CASH CONTROL 109
7.1 Internal control 110
7.2 Cash control 111
7.3 The bank statement 112
7.4 Bank reconciliation 113
7.5 The bank reconciliation process 115
7.6 Bank reconciliation example 116
7.7 Bank reconciliation issues 119
7.8 Bank reconciliation over consecutive periods 121
CHAPTER 8
INCOME STATEMENT 141
8.1 Calculating profit 142
8.2 The Income Statement 144
8.3 Cash versus profit 147
8.4 Reporting a Net Profit or Loss in the Balance Sheet 148
8.5 Uses of the Income Statement 150
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
CONTENTS vv
CHAPTER 9
BUDGETS 159
9.1 Budgeting 160
9.2 The budgeting process 161
9.3 Cash Budget 162
9.4 Cash Budget – consecutive periods 165
9.5 Budgeted Income Statement 167
9.6 Variance reports 169
UNIT 2
ACCOUNTING FOR A TRADING BUSINESS
CHAPTER 10
PRICE-SETTING STRATEGIES 185
10.1 Service versus trading firms 186
10.2 Pricing and profit 186
10.3 Pricing methods 187
10.4 Mark-up 188
10.5 Cost-volume-profit analysis 190
10.6 Applying cost-volume-profit analysis 195
CHAPTER 11
TRADING FIRMS AND STOCK 205
11.1 Trading firms and stock 206
11.2 Accounting for stock 206
11.3 Stock cards 208
11.4 Recording transactions in stock cards 210
11.5 The physical stocktake 213
11.6 Benefits of the perpetual system 216
CHAPTER 12
REPORTING AND MANAGING STOCK 223
12.1 Reporting for trading firms 224
12.2 Cost of Sales 224
12.3 Income Statement for trading firms 226
12.4 Balance Sheet for a trading business 229
12.5 Stock Turnover (STO) 230
12.6 Stock management 231
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
vi CONTENTS
CHAPTER 13
CREDIT TRANSACTIONS 241
13.1 Credit transactions 242
13.2 Recording credit purchases 245
13.3 Payments to creditors 247
13.4 Credit purchases and subsidiary records 249
13.5 Recording credit sales 252
13.6 Receipts from debtors 254
13.7 Credit sales and subsidiary records 256
13.8 Benefits of using subsidiary records for debtors and creditors 259
13.9 Statement of Account 259

CHAPTER 14
REPORTING AND MANAGING CREDIT TRANSACTIONS 271
14.1 Accounting reports and credit transactions 272
14.2 The Statement of Receipts and Payments 273
14.3 The Income Statement 275
14.4 The Balance Sheet 278
14.5 Managing debtors 280
14.6 Managing creditors 283
CHAPTER 15
BALANCE DAY ADJUSTMENTS – EXPENSES 295
15.1 Calculating profit 296
15.2 Prepaid expenses 297
15.3 Accrued expenses 300
15.4 Depreciation of non-current assets 302
15.5 Straight-line depreciation 303
15.6 Reporting depreciation 305
15.7 Depreciation – calculation issues 307
15.8 Comprehensive example 309
CHAPTER 16
THE CASH FLOW STATEMENT 321
16.1 The need to report for cash 322
16.2 The Cash Flow Statement 323
16.3 Cash versus profit 326
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
CONTENTS vii
CHAPTER 17
EVALUATING PERFORMANCE 337
17.1 Analysis and interpretation 338
17.2 Assessing profitability 341
17.3 Return on Owner’s Investment (ROI) 342
17.4 Return on Assets (ROA) 344
17.5 Earning revenue: Asset Turnover (ATO) 346
17.6 Controlling expenses: Net Profit Margin (NPM) 347
17.7 Gross Profit Margin (GPM) 349
17.8 Vertical analysis of the Income Statement 351
17.9 Assessing liquidity 352
17.10 Working Capital Ratio (WCR) 353
17.11 Quick Asset Ratio (QAR) 355
17.12 The speed of liquidity 357
17.13 Non-financial information 359
CHAPTER 18
ICT IN ACCOUNTING 371
18.1 Computerised accounting systems 372
18.2 ICT: Types and applications 373
18.3 Chart of accounts 375
18.4 Costs and benefits of computerised accounting systems 376
Glossary 381
Selected answers 387
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
USING CAMBRIDGE VCE ACCOUNTING UNITS 1 & 2
SECOND EDITION
Where are we headed?
After completing this chapter,
you should be able to:
• distinguish between internal
Chapter openers fiannadn ecxet ernal sources of
• describe the various forms
of finance available to small
wEaitchh a c hsuamptmera oryp oefn s •• fidlesbiensxiusteapsa knitldnhaicneveiengas asn teedthxasvetgae genrnsuta aiodglf eefi elsnian aacennhscd etf yo pr e of ••• taRlccioaanse tlldtacc utp uurhrepllneaadl yttoiuee nnfc of itoiOnnhrr tgeamwe rDlbnaoeeatesairlotbna’ snftn o I cRnnre aves etcilimosoeta spmanslnasee dr ny t
• explain the effect on the Debt
what is to come Ratio of internal and external
finance
• explain the relationship
(Where are we between the Debt Ratio, risk
and return.
headed?) as well as CHAPTER 4
SOURCES OF
a list of Key terms
FINANCE
for you to familiarise
yourself with.
KEY TERMS
After completing this chapter, you should be familiar with the
following terms:
• internal finance • lease
• capital contribution • lessee
• retained earnings • lessor
• external finance • interest-only loan
• trade credit • principal and interest loan
• creditor • Debt Ratio
• bank overdraft • simple interest
• term loan • reducing balance interest
• security • Return on Owner’s Investment (ROI)
• mortgage
Glossary terms and
definitions
All of the glossary
Use of colour
terms in each
chapter are defined Colour has been used to make it easy for you to follow
for you in the margin particular transactions through the accounting process.
and in the glossary You can simply track what impact a transaction had in the
at the end of the journals, the ledger and in various reports.
book. The glossary
is also marked with
page references for
88 CAMBRIDGE VCE ACCOUNTING UNITS 1&2 CHAPTER 6 CASH ACCOUNTING FOR SERVICE BUSINESSES 89
ease of use. Reports: Statement of Receipts and Payments Figure 6.2 Recording in the Cash Receipts Journal STUDY TIP
The penultimate (second last) stage is the preparation of accounting reports to
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• Statement of Receipts and Payments. 2 Bank
The amount of cash received is entered in the Bank column to allow calculation of the
within each chapter, 6.3 THE CASH RECEIPTS JOURNAL 3tGo o t ag lh Ccsla’a sPshsai ifinrectcianetgiiov Sened cr vofiolcure m trhneecs e(riPevapeidonr t$tiin5ng g2 1Fp0ee e(rcsioa, dsGh. S)T Tdh)uisri nCga sMha Rrcehc e2i0p1t6s .Journal shows that
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Painting Service comes from Painting Fees ($4 100 in total) and the GST on those fees
yreovuire wun adnedrs rteainndfoinrcge EXAMPLE fRsM opylaealorcncwi ahJil onisng81ee slsi si nto RR pwoineeafn tccicnseeea triiGisivvnoheeogr ddg r ae( hR$$ncse11de’ c iP16pe. 00axt5si00tn) e ft(proiiinnlorucg rMsl u Sp$adea1riricn6nvhg0tic i 2ne$G0g,1 S1.a0 T6R 0s :y fmGraoanSml Tlh )ba Efusr. s opAinmrpoe lvsAinsid. tfeShodtare ttph hoheeu nses twA4(ippt$h eano4ii ssi ryu1n f onle0trSdieorx)nu ,mcat bgn esmsne dofi ep epro aciet‘lnebPseese sl,as’et sihtRn faouatytro tinaydn c nageg(to rtai ecoerFio nnrpeimun eommlfdirssneo’sa eqsiryabe pu wnl oleeiidhntn!n i)flc pt‘oyt Ghao sr nmihS anseoTrtuaeeiu’tmn adilbogd mwen ofbc aaneioesrfeei mstp srehc erei eoocnt ylrovtcua oirodcmnd lois‘uennIaunmdg;cl td tehnmii nroo fi houonwterrhsrete a ehPtv dhc eeasiaarrniu ,nst gcn htaolisd.an c.srs gcismAeu ifFs ray bel ocltue onhbssllei’uuyn i msareo innsrnnedse,c c sebt‘esEh.e i paxIocntttwae stuj.rnuh isoIesienstrr Tywlahihokneheeuyriec wrst h.hkuh iendet cdrojehure ieneesnkSnsls T ’d–ectU ro gaagDlnouwoYy mee tThsrn Iii iPnnnisg
as you work through for fence painting (Rec. 6) case, the $700 Capital contribution made by the owner is (hopefully) infrequent.
19 Ryan contributed $700 cash to the business (Rec. 7)
26 Received $1 650 (including $150 GST) from J.Tran for Double-checking mechanism
the book. house painting (Rec. 8) At the end of the period, each column in the Cash Receipts Journal should be totalled.
As a double-checking mechanism, the total of the Bank column should equal the sum
In order to classify and summarise these cash receipts, they are recorded in a multi- of the totals of the other (classification and sundries) columns.
column Cash Receipts Journal, as is shown in Figure 6.2.
viii
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
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USING CAMBRIDGE VCE ACCOUNTING ix
60 CAMBRIDGE VCE ACCOUNTING UNITS 1&2 CHAPTER 4 SOURCES OF FINANCE 61
STUDY TIP Figure 4.4 Equal instalments off the principal STUDY TIP
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Figure 4.3 Instalments = $200 per month tlsohimaannp lstehh aointu tcledhr eabsregt elloodaw noe.nr a Study tips
Each $260 monthly instalment will include some of the principal, and some interest. Note that this figure is lower than the instalment calculated in Figure 4.3, because it
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Total interest charge = $12 000 × 6% × 10 years Figure 4.5 Reducing balance interest
T otal repayable == $$172 2 00000 + $7 200 YYeeaarr 12 $$1 29 060000 ×× 66%% ×× 11 yyeeaarr == $$752706 included in the
= $19 200 Year 3 $ 7 200 × 6% × 1 year = $432
Instalments = 1 2 p e $r 1y9e a2r0 ×0 10 years YYeeaarr 54 $$ 24 480000 ×× 66%% ×× 11 yyeeaarr == $$124848 margin to draw
= $ 1 912 200 0 Total Interest Charge = $2 160
= $160 per month Note that it is the frequency at which the loan is reducing that determines the attention to
number of interest calculations and the amount of interest on the loan, not the number
outR oavtehre r1 0th yaena rresp raaythinegr t$h2a6n0 5 p yeera mrso:nth for 5 years, this option allows the business to opfa yrmepeanytms aernet sm. aTdhee. number of repayments shows how much and how often loan particular issues,
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can repay per month, and then set the term of the loan accordingly. Yearly 1 1 provide a technique
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EXAMPLE Hawkesburn Fencing has agreed to borrow $12 000 from Yarra Bank, Quarterly 4 41 or remembering
wreiptha iidn toevreesr t5 c yheaargrse.d at 6% p.a. reducing yearly. The loan will be Monthly 12 112
an element of the
In this example, ‘reducing yearly’ means that interest will be calculated on the
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balance owing at the end of every year. Assuming the borrower makes equal repayments
off the principal (as well as paying off the interest for that year):
End-of-chapter
196 CAMBRIDGE VCE ACCOUNTING UNITS 1&2 CHAPTER 10 PRICE-SETTING STRATEGIES 197 sections
The Income Statement
The information generated by a cost-volume-profit analysis can be presented as an WHERE HAVE WE BEEN?
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• When costs are well-defined and the owner knows the return he or she wants to achieve
TERRY’S BIRD HOUSES on a product then a mark-up can be applied to the cost price.
Income Statement for first week of March 2016 • The relationship between selling prices, cost prices, and the volume of sales (the quantity a chapter summary
sold), is reflected in a cost-volume-profit analysis, which can be used to determine the
Sales revenue ($33 per birdhouse × 50 bird houses sold) $1 650 quantity of products a business may need to sell, or the selling price it must charge, to
VLeasrisa tboleta pl vroarfiiat b($le1 c8o pstesr (b$1ir5d hpoeur sbeir d×h 5o0u sbei×rd 5h0o ubsiredsh sooulsde)s sold) 970500 • Vbareriaakb elev econ.sts vary directly with the volume of sales; fixed costs do not. (Where have we
L ess HFRieixrneetd oo fcf o mfsaatcsrtkoerty sstpaallc e 30600 • aTchceo uinnftoinrmg aretipoonr t gceanlleedra atend I nbcoy mae cSotastt-evmoleunmt ea-npdr othfiits caanna layslsiso bcaen r ebpere spernetseedn tine da garsa pahn. been?) and exam-style
Transport costs 40 400
T he variaNbelet pPrroofifit,t o(or Gr rLoossss P) rofit, can be determined either as the dif ference $ b5e0t0ween EPXERECRECNISTEA 1G0E. 1MARK-UP WB page 148 EXERCISES Exercises, each of which
the sales revenue ($1 650) and the total variable costs ($750), or the contribution margin Crosstown Tyres has just purchased some stock which it will fit to customers’ cars. The
apnesrw iteerm. ($18) multiplied by the number of items sold (50). Both should derive the same t•y reAs 1a6n dM tahxeiiGr rciops t prices are liste$d1 2b0e low.plus $12 GST each is linked with an icon
• Roadrunner 1600 99 inclusive of GST each
Combining methods • Mudrunner 2400 154 including $14 GST each
It is clear that there is no one price-setting method that can guarantee success, so each Required to the corresponding
owner has to take into account a variety of pricing options when determining selling a Calculate the selling price of each type of tyre if a mark-up is applied at:
prices. A business may use a specific mark-up as a starting point for certain products; • 40%
ahto wtheev ecro, nthdeityio nwso uinld t hthee mn ahrakevetp tlaoc ec oannsdid eard jwushta tt hceoirm ppreicteitso rasc acorer dcinhgarlyg.i nAg ,b ousr inloeosks •• 5100%0% workbook pro-forma.
conducting a cost-volume-profit analysis would face a similar situation. The aim is to (You may wish to present this information as a table.)
set a price that will attract as many customers as possible, and generate as much profit b State two reasons why it may be necessary to apply a different percentage mark-up
per item as possible, to cover expenses and provide for enough net profit to satisfy the to each line of stock.
owner’s objective.
REVIEW QUESTIONS 10.6 EPXERECRECNISTEA 1G0E. 2M ARK-UP WB page 149
12 ES•••ca hxlpocstvouawlaaltlraeia inahtsle bo vwrdlewaeh:rv iapeeatnabr oiuclsefih er t ec.oopfso ttrhstee dfo inll oawn iInngc ofimguer Setsa itne mtheen tIn.come Statement is •••A rctVB Yiceilei tnSiw dkbmie oGrao jseattsace rkr ehgtaoss g pgrloevsi d ed SSpCtheelouellslls iitfnn o$pgg2llr o0ippcw reGriici cn$Seeg1T $ 6)i$8n530f oi3 npr0cml uluiasns tc$iivol8uen d G orienfS lgTGa tS(i$mnT3g,a 0m rt koGa- ursSkpoT- um6 p(0ec % 4oo0s)ft% itp.s rsictoec k$.200
3 Using at least two examples, explain why it is usual to use more than one Required
pricing method. a Calculate the cost price of Viewmaster goggles.
4 Explain why GST is not included in the cost-volume-profit calculation and b Calculate the percentage mark-up applied to Blinder jackets.
Income Statement. c Calculate the selling price of Yeti boots that include GST.
d Explain why not all businesses can use a percentage mark-up to set selling prices.
ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.
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ISBN 978-1-107-65709-0 © Anthony SImmons, Richard Hardy 2012 Cambridge University Press
Photocopying is restricted under law and this material must not be transferred to another party.