2011 Accounting Written examination 2 - vcaa.vic.edu.au · PDF fileACCOUNTING Written examination 2 ... ii. the perpetual method of stock recording and the FIFO cost assignment method
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ACCOUNTINGWritten examination 2
Friday 11 November 2011 Reading time: 11.45 am to 12.00 noon (15 minutes) Writing time: 12.00 noon to 1.30 pm (1 hour 30 minutes)
Handy HandbagsLauraFitzgeraldownsandoperatesasmallbusiness,HandyHandbags,whichspecialisesinthesaleofleatherhandbags.Thebusinessusesthedoubleentryaccountingsystembasedontheaccrualmethodofaccountinganduses i. controlaccountsandsubsidiaryrecordsforDebtors,CreditorsandStock ii. theperpetualmethodofstockrecordingandtheFIFOcostassignmentmethod iii. a12-monthreportingperiodending31December.1.1 HandyHandbagssellsanumberofdifferentstockitems.Detailsofonelineofstock–thePrestigeBag
1.2 On 31 December Laura discovers 10 units of the Prestige Bag (cost price $90 plus $9 GST each) have been affected by water damage. She thinks the damaged bags will sell for $70 (plus $7 GST) each. She will have to spend $10 (plus $1 GST) per bag to have them cleaned and repackaged.
Required1.2.1 Calculate the total value of all the Prestige Bags to be reported in the Balance Sheet at 31 December
2011 if the ‘lower of cost and net realisable value’ rule is applied.2 marks
1.2.2 Explain why the ‘lower of cost and net realisable value’ rule is applied when valuing stock. Identify the accounting principle that supports its application.
2 + 1 = 3 marks
1.2.3 Prepare the General Journal entry required to write down the value of the stock of Prestige Bags on 31 December 2011 (Memo No. 79).
Narration is required.3 marks
1.3 In November 2011 Handy Handbags also purchased a new stock item known as the Golden Strap bag. It was purchased from the supplier in boxes, each containing 10 bags. Five boxes were delivered in November along with other stock purchases. Other details for the Golden Strap bags are as follows.
The November delivery charge of $180 (plus $18 GST) from the supplier covered all stock purchased for the month.
After considering this information the cost of each bag was correctly calculated to be $140.
Required1.3.1 Explain, with reference to the difference between product and period costs, how the $140 was
calculated.4 marks
Some of the Golden Strap bags purchased in November were still in stock on 31 December 2011. Laura’s decision to choose between treating packaging and labelling as a product cost or a period cost will
Fine FurnitureCharlesChambersownsandoperatesasmallbusiness,FineFurniture.Thebusinessuses thedoubleentryaccountingsystembasedontheaccrualmethodofaccountinganduses i. controlaccountsandsubsidiaryrecordsforDebtors,CreditorsandStock ii. theperpetualmethodofstockrecordingandtheFIFOcostassignmentmethod iii. a12-monthreportingperiodending30June.
For the purposes of Question 2.1 you are not required to consider GST.2.1 Toassistinthepreparationofbudgetsfortheyearending30June2012,Charlesprovidesthefollowing
Required2.1.5 Prepare the Liabilities andOwner’s Equity sections of theBudgetedBalance Sheet as at
30June2012fromtheinformationprovided.3marks
2011 ACCNT EXAM 2A 8
Question 2 – continued
2.2 The following information has been provided, showing trends in the liquidity of Fine Furniture over recent years.
Indicator 2009 2010 2011
Interest Cover 7 times 6 times 3 times
Cash Flow 3 times 3.5 times 4 times
Creditors Turnover 52 days 55 days 60 days
Required2.2.1 Explain the meaning of ‘trends in the liquidity’.
2 marks
2.2.2 State why the Cash Flow indicator is used as a measure of liquidity.1 mark
2.2.3 Discuss, using the information provided in the table above, whether the liquidity of Fine Furniture has improved over the three-year period.
3 marks
2.2.4 State one reason why the change in Creditors Turnover from 2010 to 2011 may not be of benefit to Fine Furniture.
1 mark
Charles is surprised that his accountant has not provided trends in the Working Capital ratio as he believes it is a good indicator of the liquidity of a business. The accountant says ‘the Working Capital ratio can be misleading as an indicator of business liquidity’.
Required2.2.5 Explain one weakness of using the Working Capital ratio as an indicator of liquidity.