Accounting 3B
1
1
Companies
Introduction
In this chapter we will discuss a number of aspects of company accounting.
The company type of ownership was developed to enable a business to raise
a large amount of capital. Many company owners have no liability for
business debts. Also, people who have no business skills can become part
owners of major companies, such as, Woolworths Limited or JB Hi-Fi Limited.
Therefore, many people are willing to invest money in a company and become
company owners.
Definition of a Company
A company is an organisation established under the Corporations Act 2001
(Cth) as a separate legal entity. A company can enter into legal agreements
in its own name, can own property and can sue and be sued in its own name.
Corporations Act 2001
All aspects of company formation and certain aspects of company operation
are controlled by an Act of the Commonwealth Parliament known as the
Corporations Act 2001. This Act applies to companies in all the Australian
States and Territories.
Company Capital
The capital of a company is divided into parts known as shares. Each share
is given a small money value, such as, $1.00 or $2.00. People purchase
these shares and become the owners of the company. The owners of a
company are known as shareholders or members.
Example
The total capital of a company is $1,000,000. This capital could be divided
into 1,000,000 shares of $1.00 or 2,000,000 shares of $0.50 or 4,000,000
shares of $0.25 or any other possible combination.
2
Accounting 3B
Company Directors
The shareholders of a company elect or appoint people to act on their behalf.
These representatives of the shareholders are known as directors. The
directors, in turn, appoint managers who are responsible for the day-to-day
running of the company.
Powers of Directors
The directors supervise the management of a company including hiring and
dismissing senior managers and approving the issuing of shares or the
borrowing of money.
Duties of Directors
The directors of a company have the following responsibilities.
1
A director must carry out his or her duties with a reasonable level of skill
and care.
2
A director must act in the best interest of the company.
3
A director must inform the other directors of any conflict between their
personal interest and the interest of the company.
Example
A1 Furniture Limited owns 10 furniture stores. The directors of the
company are considering purchasing Computer Talk Pty Ltd, a company
that sells computers. Jane is a director of A1 Furniture Limited and is also
the main shareholder of Computer Talk Pty Ltd. Jane must inform the
other directors of A1 Furniture Limited of her shareholding in Computer
Talk Pty Ltd.
4
A director must not make improper use of their position.
Example
Bill is a director of Book World Limited, a company listed on the Australian
Securities Exchange. Bill has been informed that the profit made by the
company for the last 6 months is double the expected profit. The price of
shares in Book World Limited should significantly increase when this
information is made public. Bill cannot purchase shares in the company
before the information is made public.
Accounting 3B
3
Companies Limited by Shares
There are different types of companies. The most common type of company
is the company limited by shares.
A company limited by shares is one in which the liability of the shareholders
for company debts is limited to the amount owing on their shares.
A company limited by shares must have the word “Limited” or the letters “Ltd”
included in its name.
Example 1
Jason purchased 1,000 shares in Hot Limited, a company limited by shares.
Each share cost $2.00. Jason paid the full $2,000 ($2.00 x 1,000 shares) at
the time of purchase. This means that no matter how large the future debts of
the company become, Jason cannot be required to contribute any of his own
money towards settling these debts.
Example 2
Alana purchased 1,000 shares in Cold Limited, a company limited by shares.
The shares cost $1.00 each. Alana paid $0.60 per share. The company has
now closed down owing $3,000,000. Alana can only be required to pay a
maximum of $0.40 x 1,000 shares = $400 towards the debts of the company.
Proprietary and Public Companies
A company limited by shares can be either a proprietary or a public company.
Company Limited by Shares
Proprietary Company
Public Company
Proprietary Company
A proprietary company cannot raise money from the public.
A proprietary company must have at least 1 shareholder and a maximum of
50 non-employee shareholders.
A proprietary company must have at least 1 director.
A proprietary company must have the word “Proprietary” or “Pty” included in
its name, for example, WA Pty Ltd.
4
Accounting 3B
Small and Large Proprietary Companies
Proprietary companies can be divided into small and large types.
A large proprietary company is one that satisfies any two of the following
three conditions:
1
the total revenue, for a financial year, is $25 million or more
2
the total gross assets, on the last day of a financial year, is $12.5 million
or more
3
the company, at the end of a financial year, has 50 employees or more.
The financial year runs from 1 July of one year to 30 June of the next year.
A large proprietary company must lodge a financial report with the Australian
Securities and Investments Commission (ASIC) each year. This financial
report includes a statement of comprehensive income (a report that shows the
profit or loss), a statement of cash flows and a balance sheet. Also, the
accounting records of the company must be audited each year unless ASIC
grants an exemption.
Public Company
A public company is any company that is not a proprietary company.
A public company must have at least 1 shareholder and there is no upper limit
on the number of shareholders.
A public company can ask the public to purchase shares in the company and
can issue debentures to the public.
A public company must have at least 3 directors.
A public company limited by shares must have the word “Limited” or the
letters “Ltd” included in its name.
Public companies include Billabong International Limited and Telstra Limited.
Prospectus
A prospectus is a document, issued by a public company, inviting the public to
purchase the shares or debentures of that company. A prospectus must
contain all the information that an investor would reasonably expect it to
contain in order to make an informed assessment of matters, such as, the
future prospects of the company. It also contains an application form that
investors wishing to apply for the shares must complete and return to the
company.
Accounting 3B
5
Advantages of Companies Limited by Shares
1
Public companies listed on the Australian Securities Exchange can raise
large amounts of capital by issuing shares.
2
Public companies can borrow large amounts of money from the public.
3
Shareholders of companies limited by shares know that they have the
protection of limited liability.
The liability of shareholders for company debts is limited to the amount
owing on their shares. However, the directors of proprietary companies
will often be required to give a personal guarantee to repay any loan that
has been made to the company.
4
A company has a continuous existence.
The death of a shareholder does not end the company as it is a
separate legal entity.
5
A person who has no business skills can become a part owner of a
company listed on the Australian Securities Exchange. Also, the
shareholders in these companies can easily sell their shares.
Annual General Meeting
Every public company that has more than one shareholder must hold an
annual meeting of the shareholders and the directors. This meeting is known
as the annual general meeting.
The annual general meeting gives the shareholders the opportunity to question
the directors about the performance of the company over the previous 12
months. Also, at the annual general meeting the shareholders elect the
directors and, if required by the constitution of the company, approve a final
dividend recommended by the directors. Dividends are discussed in a later
section of this chapter.
Company Income Tax
A company, like a person, pays income tax on the profit that it makes.
Income tax is calculated annually by the company and is entered in the profit
and loss ledger account as an expense. The income tax expected to be paid
is also shown as a liability in the balance sheet.
6
Accounting 3B
Company Management
The rules for the management of a company are contained in either a
document known as the replaceable rules or in the company’s constitution.
Replaceable Rules
The Corporations Act contains a set of rules, known as replaceable rules,
which can be used to govern the management of a company.
A company can choose to have its own constitution or use the replaceable
rules or use a combination of its own constitution and one or more of the
replaceable rules.
The replaceable rules cover matters, including:
1
how directors are appointed
2
the powers of directors
3
how voting is carried out at a meeting of shareholders, that is, by a show
of hands unless a written vote is required
4
how many votes each type of shareholder has at a meeting.
Company Constitution
The constitution of a company is a set of rules for the management of a
company. The constitution can be used to modify or completely replace the
replaceable rules.
The constitution (and any replaceable rules that the company has chosen to
retain) is a contract between the company, the shareholders and the directors.
All parties agree to follow the rules set out in the constitution.
Preliminary Expenses
Preliminary expenses are the payments made to form a company, such as,
the fee payable to the Australian Securities and Investments Commission to
register a company and the legal fee to prepare a company constitution.
Preliminary expenses are written off to the profit and loss ledger account as
an expense.
Accounting 3B
7
Characteristic of Companies
Limited Liability (in a company limited by shares)
The liability of a shareholder for the debts of a company limited by shares is
restricted to the amount the shareholder owes on these shares.
Number of Owners
A public and a proprietary company must have a minimum of 1 shareholder.
There is no upper limit on the number of shareholders of a public company. A
proprietary company can have a maximum of 50 non-employee shareholders.
Number of Directors
A public company must have a minimum of 3 directors. A proprietary company
must have at least 1 director.
Continuity of Existence
The ownership of a company will change from time to time as shareholders
die or sell their shares but the company continues to exist until it is
deregistered.
Separate Legal Entity
A company is a separate legal entity. A company can own property and can
enter into contracts in its own name and can sue and be sued in its own
name.
Transfer of Ownership
A shareholder in a public company can sell their shares at any time, without
restriction. A shareholder in a proprietary company may be prevented by the
constitution of the company from selling their shares without the approval of
the other shareholders.
Separation of Ownership and Management
In a company there is a separation of ownership and management. The
owners of a company are the shareholders. The shareholders appoint
directors to supervise the management of the company. In a proprietary
company a person may be the only shareholder and the only director.
However, the role of a director is still separate from the role of a shareholder.
8
Accounting 3B
Types of Shares
A company can issue two main types of shares. These are preference shares
and ordinary shares.
Preference Shares
Preference shares have one or more rights attached to them that are not
attached to ordinary shares.
The usual right of preference shareholders is the right to receive a fixed rate
of dividend.
The Accounting 3B syllabus only requires students to record and report on
companies that issue ordinary shares.
Ordinary Shares
Ordinary share have no special rights attached to them. Ordinary shareholders
do not have a right to a dividend at a fixed rate.
Main Rights of Ordinary Shareholders
1
If the company is closed down, the ordinary shareholders are entitled
to the repayment of their capital after all the creditors have been paid.
The constitution of the company, however, may provide that the
preference shareholders are entitled to the repayment of their capital
before the ordinary shareholders.
2
The right to vote at meetings of shareholders and to elect the directors
of the company.
3
The right to receive a copy of the annual financial statements of the
company, including the statement of comprehensive income (showing
the profit or loss) and a balance sheet.
Accounting 3B
9
Recording the Issue of Shares
In this section of the chapter we will examine how the issue of ordinary shares
is recorded in the general journal and general ledger of a company.
Example
1 February 2019
Kalbarri Limited offered to the public 500,000 ordinary shares of $1.00 each
payable in full on application.
28 February 2019
The share issue closed fully subscribed. This means that the company
received application money for all the shares that it intended to issue.
17 March 2019
On this date the ordinary shares were allotted (that is issued) to the shareholders.
31 March 2019
The company paid $1,900 in share issue costs. The share issue costs were
closed off to the share capital ledger account.
Required
1
Prepare the general journal entries required to record the share issue.
2
Post the journal entries into the general ledger.
Solution
Step 1
The money received from the share issue is recorded in the general journal:
General Journal
Date
2019
Feb 28
Details
Cash at Bank
Application
Cash received from share issue.
Debit
Credit
500,000
500,000
10 Accounting 3B
Step 1 continued
Debit Entry:
Cash at bank is debited to increase this asset account.
Credit Entry:
An application account, a liability, is credited. The money received from the
investors must be held in trust until the shares are issued. That is, the
company cannot use the money for any purpose until the shares are issued.
Step 2
When the shares are issued the application account is closed and the money
is transferred to the share capital account:
General Journal
Date
2019
Mar 17
Details
Debit
Credit
500,000
Application
Share Capital
500,000
Issue of 500,000 $1.00 ordinary shares.
Step 3
The payment of the share issue costs is recorded in the general journal:
General Journal
Date
2019
Mar 31
Details
Share Issue Costs
Cash at Bank
Payment of share issue costs.
Debit
Credit
1,900
1,900
Accounting 3B
11
Step 4
The share issue costs are subtracted from (written off against) the capital raised:
General Journal
Date
2019
Mar 31
Details
Debit
Credit
1,900
Share Capital
1,900
Share Issue Costs
Write off of the share issue costs.
Step 5
The money received from the share issue is recorded in the general ledger:
A
+
E
L
=
+
EQ
+
I
Cash at Bank
2019
Feb 28
500,000
Application
Application
2019
Feb 28
Bank
500,000
Step 6
The application account is closed and the share capital account is opened
when the shares are issued:
A
+
E
=
L
+
EQ
+
I
Application
2019
Mar 17 Share Capital
2019
500,000 Feb 28
Bank
500,000
Share Capital
2019
Mar 17 Application
500,000
12 Accounting 3B
Step 7
The payment of the share issue costs is recorded in the general ledger and
the cash at bank account is balanced off:
Share Issue Costs
2019
Mar 31 Bank
1,900
Cash at Bank
2019
Feb 28
Application
2019
500,000 Mar 31
Share Issue Costs
Balance c/d
500,000
Apr 1
Balance b/d
1,900
498,100
500,000
498,100
Debit Entry:
Share issue costs is debited because it is a negative equity account.
Credit Entry:
Cash at bank is credited to reduce this asset account.
Step 8
The share issue costs are closed to the share capital account and the share
capital account is balanced off.
Share Issue Costs
2019
Mar 31
Bank
2019
1,900 Mar 31 Share Capital
1,900
Share Capital
2019
Mar 31 Share Issue Costs
Balance c/d
2019
1,900 Mar 17
Application
500,000
498,100
500,000
500,000
Apr 1
Balance b/d
498,100
Accounting 3B
The Statement of Comprehensive Income
The statement that sets out the profit or loss made by a company, under
AASB 101 Presentation of Financial Statements, is known as a statement of
comprehensive income.
Example 1: Trading Business
Boyanup Traders Limited information for the year ended 30 June 2024.
Sales
Cost of sales
$294,300
103,000
Interest received
3,700
Dividends received
4,300
Accounts Receivable
Allowance for doubtful debts
Motor Vehicles
Accumulated Depreciation of Motor Vehicles
Bad debts
37,100
2,400
61,000
3,000
900
Prepaid rent
49,000
Wages
70,200
Audit fees
9,200
Directors fees
4,800
Interest expense
6,500
Additional Information
a
Accrued interest income on balance date $200.
b
The allowance for doubtful debts is to be set at $2,100.
c
The motor vehicles are to be depreciated using the reducing balance
method at a rate of 25% per annum.
d
Prepaid rent on 30 June 2024 was $5,100.
e
Accrued wages on 30 June 2024 was $2,800.
f
Company income tax is 30% of the profit.
g
Land was revalued by $6,100 on 1 March 2024.
h
Income tax is 30% of the profit.
Required
Prepare a statement of comprehensive income of the company for the year
ended 30 June 2024.
13
14 Accounting 3B
Solution
Step 1
The interest income is calculated:
$3,700 interest received + $200 accrued interest income on 30 June 2024
=
$3,900 interest income.
The $3,900 of interest income and the $4,300 of dividend income are added
together as $8,200 of other income in the statement of comprehensive
income.
Step 2
The allowance for doubtful debts is adjusted in the following steps.
The allowance for doubtful debts account is opened:
Allowance for Doubtful Debts
Opening Balance
2,400
Step 3
The $900 of bad debts is transferred to the debit side of the account:
Allowance for Doubtful Debts
Bad Debts
900
Opening Balance
2,400
Step 4
The $2,100 new closing balance is entered on the debit side of the account:
Allowance for Doubtful Debts
Bad Debts
Closing Balance
900
2,100
Opening Balance
2,400
Accounting 3B
15
Step 5
The difference between the two sides of the account is the $600 of doubtful
debts expense.
Allowance for Doubtful Debts
Bad Debts
900
Closing Balance
2,100
Opening Balance
2,400
Doubtful Debts
3,000
600
3,000
Step 6
The motor vehicle depreciation expense is calculated:
($61,000 cost of motor vehicles – $3,000 accumulated depreciation) x 25%
=
$14,500 depreciation expense.
Step 7
The rent expense is calculated:
$49,000 prepaid rent during the year – $5,100 prepaid rent on 30 June 2024
=
$43,900.
Step 8
The wages expense is calculated:
$70,200 wages paid + $2,800 accrued wages on 30 June 2024
=
$73,000.
Step 9
AASB 101 Presentation of Financial Statements requires that finance expenses
must be disclosed separately in the statement of comprehensive income.
The only finance expense is the interest of $6,500.
Doubtful debts is a financial expense but it is not a finance expense.
16 Accounting 3B
Step 10
The expenses, except for cost of sales and interest, are grouped together as
other expenses.
The other expenses for the year ended 30 June 2024 are:
Doubtful debts
600
Depreciation of motor vehicle
14,500
Rent
43,900
Wages
73,000
Audit fees
9,200
Directors fees
4,800
Total Other Expenses
146,000
Step 11
The statement of comprehensive income can now be prepared.
Boyanup Traders Limited
Statement of Comprehensive Income
for the year ended 30 June 2024
Sales
Less Cost of Sales
Gross Profit
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
Less Income Tax Expense
Profit
294,300
(103,000)
191,300
8,200
(6,500)
(146,000)
47,000
(14,100)
32,900
Add Other Comprehensive Income
Gain on asset revaluation, net of income tax
Total Comprehensive Income for the Period
6,100
$39,000
The $14,100 income tax expense is 30% of the profit before tax.
Accounting 3B
17
Example 2: Service Business
A2B Couriers Limited income and expenses for the year ended 30 June 2026.
Fees
$173,000
Gain on Sale of Office Equipment
5,000
Dividends Received
1,300
Interest on Loan
7,400
Bad Debts
1,900
Wages
34,700
Preliminary Expenses
6,100
Rent
31,000
Advertising
24,800
Income tax (30% of the profit)
Land was revalued by $26,000 in April 2026.
Required
Prepare a statement of comprehensive income of the company for the year
ended 30 June 2026.
Solution
A2B Couriers Limited
Statement of Comprehensive Income
for the year ended 30 June 2026
Fees
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
Less Income Tax Expense
Profit
173,000
6,300
(7,400)
(98,500)
73,400
(22,020)
51,380
Add Other Comprehensive Income
Gain on asset revaluation, net of income tax
Total Comprehensive Income for the Period
26,000
$77,380
18 Accounting 3B
Dividends
A dividend is a distribution of the profits of a company to the shareholders.
Types of Dividends
Dividends can be divided into either final or interim dividends.
Dividends
Interim Dividend
Final Dividend
A final dividend is usually recommended by the directors, approved by the
shareholders at the annual general meeting and then paid out.
Annual General Meeting
Final dividend
recommended by
the directors
Final dividend approved
by the shareholders at the
AGM
Final dividend
paid to the
shareholders
An interim dividend is declared and paid by the directors without shareholder
approval. The authority to pay an interim dividend must be given to the
directors in the constitution of the company.
Annual General
Meeting
Annual General
Meeting
Interim dividend
declared by the
directors and paid to the
shareholders
Once a dividend has been approved for payment it is said to be declared.
Accounting 3B
19
Recording the Payment of Dividends
An example using a company known as Margaret River Traders Limited will
be used to demonstrate the recording of interim and final dividends.
Example
Margaret River Traders Limited
Share Capital on 30 June 2018
800,000 ordinary shares
$781,000
Year Ended 30 June 2018
The directors recommended a $61,000 final dividend. This dividend must be
approved by the shareholders before it can be paid.
1 November 2018
The final dividend was paid on this date.
5 March 2019
The directors paid a $0.04 per share interim dividend.
30 June 2019
The directors recommended that the shareholders be offered an 8 cents per
share final dividend.
This dividend has not yet been approved by the shareholders.
Required
1
Prepare the general journal entry to record the interim dividend and the
final dividend paid by the company.
2
Post the journal entry into the general ledger.
20 Accounting 3B
Solution
Step 1
Calculation of the Interim Dividend
$0.04 x 800,000 ordinary shares = $32,000
Step 2
The final and interim dividends paid are recorded in the general journal.
Final Dividend:
General Journal
Date
2018
Nov 1
Details
Final Dividend
Debit
Credit
61,000
Cash at Bank
61,000
Payment of dividend.
Interim Dividend:
General Journal
Date
2019
Mar 5
Details
Interim Dividend
Cash at Bank
Debit
Credit
32,000
32,000
Payment of dividend.
The final dividend, recommended by the directors for the year ended
30 June 2019, has not yet been approved by the shareholders. It does not
meet the Framework definition of a liability and, therefore, it is not included in
the accounting records. This recommended dividend is recorded as a note to
the balance sheet on 30 June 2019.
Accounting 3B
21
Step 3
The journal entries are posted into the general ledger:
General Ledger
A
+
E
=
L
+
EQ
+
I
Final Dividend
2018
Nov 1
Cash at Bank
61,000
Interim Dividend
2019
Mar 5
Cash at Bank
32,000
Cash at Bank
2018
Nov 1
2019
Mar 5
Final Dividend
61,000
Interim Dividend
32,000
Debit Entries:
The final dividend and interim dividend accounts are debited because they are
negative equity accounts, that is, they are drawings.
Credit Entry:
The cash at bank account is credited to reduce this asset account.
22 Accounting 3B
Recording the Distribution of a Profit
The Margaret River Traders Limited example will be used to demonstrate the
recording of the distribution of the profit of a company.
Example
Margaret River Traders Limited
Balance Sheet (extract)
as at 30 June 2018
Equity
Share capital
781,000
Retained earnings
33,500
Total Equity
$814,500
Margaret River Traders Limited paid the following dividends for the year
ended 30 June 2019:
Final dividend
$61,000
Interim dividend
32,000
For the year ended 30 June 2019 the company made a profit after tax of $159,000.
Required
Prepare the retained earnings ledger account for the year ended 30 June 2019.
Solution
Step 1
The $33,500 of retained earnings, on 1 July 2018, is entered on the credit
side of the retained earnings account:
Retained Earnings
2018
Jul 1
Balance b/d
33,500
Accounting 3B
23
Step 2
The $159,000 profit after tax is recorded in the account:
Retained Earnings
2018
Jul 1
2019
Jun 30
Balance b/d
Profit and Loss
33,500
159,000
Step 3
The dividends are recorded in the account and the account is balanced off:
Retained Earnings
2019
Jun 30
Final Dividend
61,000
Interim Dividend
32,000
Balance c/d
99,500
2018
Jul 1
2019
Jun 30
Balance b/d
Profit and Loss
192,500
33,500
159,000
192,500
Jul
1
Balance b/d
Step 4
The $99,500 of retained earnings is included in the equity section of the
balance sheet:
Margaret River Limited
Balance Sheet (extract)
as at 30 June 2019
Equity
Share capital
Retained earnings
Total Equity
781,000
99,500
$880,500
99,500
24 Accounting 3B
Reserves
A reserve is any equity item other than share capital. Retained earnings is a
reserve. The other reserves demonstrated in this textbook will be a:

general reserve, and an

asset revaluation reserve.
Creation of a General Reserve
A general reserve is created by transferring retained earnings (retained profits)
to a general reserve ledger account.
Example 1: Transfer to a General Reserve
Narrogin Traders Limited
Balance Sheet (extract)
as at 30 June 2018
Equity
Share capital
Retained earnings
Total Equity
900,000
20,000
$920,000
Additional Information
For the year ended 30 June 2019 Narrogin Traders Limited earned a profit
after tax of $31,000.
The directors decided to transfer $10,000 of these profits to a general reserve.
No dividends were paid that year.
Required
1
Prepare the general ledger entry to establish the general reserve.
2
Show how the general reserve is included in the equity section of the
balance sheet.
Accounting 3B
25
Solution
Step 1
The following ledger entry is made to create the general reserve:
Retained Earnings
2019
Jun 30 General Reserve
10,000
2018
Jul 1
2019
Jun 30
Balance b/d
20,000
Profit and Loss
31,000
General Reserve
2019
Jun 30
Retained Earnings 10,000
A general reserve can be used to fund a future dividend.
Step 2
The retained earnings ledger account is balanced off:
Retained Earnings
2019
Jun 30
General Reserve
10,000
Balance c/d
41,000
2018
Jul 1
2019
Jun 30
Balance b/d
20,000
Profit and Loss
31,000
51,000
51,000
Jul
1
Balance b/d
41,000
Step 3
The general reserve is included in the equity section of the balance sheet
under “reserves”:
Narrogin Traders Limited
Balance Sheet (extract)
as at 30 June 2019
Equity
Share capital
Reserves
Retained earnings
Total Equity
900,000
10,000
41,000
$951,000
26 Accounting 3B
Example 2: Transfer from a General Reserve
Narrogin Traders Limited
Balance Sheet (extract)
as at 30 June 2019
Equity
Share capital
900,000
Reserves
10,000
Retained earnings
41,000
Total Equity
$951,000
Additional Information
For the year ended 30 June 2020 Narrogin Traders Limited earned a profit
after tax of $52,000.
The directors decided to transfer $7,000 from the general reserve to retained
earnings.
No dividends were paid that year.
Required
Prepare the general reserve and retained earnings ledger accounts for the
year ended 30 June 2020.
Solution
General Reserve
2020
Jun 30 Retained Earnings
7,000
2019
Jul 1
Balance b/d
10,000
Balance b/d
41,000
Profit and Loss
52,000
Retained Earnings
2019
Jul 1
2020
Jun 30
General Reserve
Debit Entry:
General reserve is debited to reduce this equity account.
Credit Entry:
Retained earnings is credited to increase this equity account.
7,000
Accounting 3B
27
Creation of an Asset Revaluation Reserve
An asset revaluation reserve represents a gain made when a non-current
asset has increased in value over time.
Land, for example, can increase in value over time. It would be misleading to
show land in a balance sheet at its cost price of $50,000 if the current market
value of the land is $400,000.
Example
Capel Limited
Balance Sheet (extract)
as at 30 June 2017
Equity
Share capital
Retained earnings
Total Equity
500,000
10,000
$510,000
Additional Information
On 1 March 2015 Capel Limited purchased land for $70,000.
On 30 June 2018 the directors decided to revalue the land. On this date the
current market value of the land was $100,000.
Required
1
Prepare the general ledger entry to revalue the land.
2
Show how the asset revaluation reserve is included in the balance sheet.
28 Accounting 3B
Solution
Step 1
The general ledger entry to revalue the land is set out below:
Land
2015
Mar 1 Bank
2018
Jun 30 Asset Revaluation
70,000
30,000
Reserve
.
Asset Revaluation Reserve
2018
Jun 30 Land
30,000
Debit Entry:
The land account is debited to increase this asset to its current market value.
Credit Entry:
The asset revaluation reserve is credited as it is an equity account.
Step 2
The asset revaluation reserve is included in the equity section of the balance
sheet under “reserves”:
Capel Limited
Balance Sheet (extract)
as at 30 June 2018
Equity
Share capital
500,000
Reserves
30,000
Retained earnings
10,000
Total Equity
$540,000
Accounting 3B
29
The Statement of Changes in Equity
The statement of changes in equity is an accounting report prepared by a
company. This statement sets out the changes that have taken place in the
equity items of a balance sheet over an accounting period.
Example
The following information was supplied by Augusta Limited on 1 July 2018:
Share capital (40,000 ordinary shares)
$20,000
Asset revaluation reserve
7,000
General reserve
6,000
Retained earnings
5,000
Land
69,000
1 September 2018
Augusta Limited raised a further $15,000 in share capital. The share issue
costs were $1,000.
4 November 2018
A $3,000 final dividend that had been recommended by the directors for the
year ended 30 June 2018 was approved by the shareholders in October 2019
and paid on this date.
1 February 2019
The company paid a $5,000 interim dividend to the ordinary shareholders.
31 March 2019
The land was revalued to $80,000.
Year ended 30 June 2019
The company made a profit after tax of $26,000 for the year.
An amount of $2,000 was transferred to the general reserve.
Required
Prepare a statement of changes in equity for the year ended 30 June 2019.
30 Accounting 3B
Solution
Step 1
The $26,000 profit for the year ended 30 June 2019 is recorded in the statement.
The $11,000 gain on the revaluation of the land ($80,000 – $69,000) is added to
the profit to arrive at what is described as the $37,000 total recognised income
and expense for the period:
Augusta Limited
Statement of Changes in Equity
for the year ended 30 June 2019
Profit for the period
26,000
Changes in revaluation reserve during the period
11,000
Total recognised income and expense for the period
37,000
The $11,000 gain on the revaluation of the land is income but is not included
in the profit and loss ledger account as the land had not been sold.
AASB 116 Property, Plant and Equipment states that any gain on the
revaluation of an asset is to be credited to a revaluation reserve.
Step 2
The company has raised $15,000 in share capital. The share issue costs
were $1,000.
The change in the share capital is recorded in the statement:
Augusta Limited
Statement of Changes in Equity (extract)
for the year ended 30 June 2019
Share Capital
Ordinary Shares
Balance at start of period
20,000
Issue of share capital
Share issue costs
15,000
(1,000)
Total Share Capital
34,000
Accounting 3B
31
Step 3
The next section of the statement is the reserves.
The asset revaluation reserve increased by $11,000 and the general reserve
increased by $2,000.
These changes are recorded in the statement.
Augusta Limited
Statement of Changes in Equity (extract)
for the year ended 30 June 2019
Reserves
Asset Revaluation Reserve
Balance at start of period
Gain on revaluation
7,000
11,000
Balance at end of period
18,000
General Reserve
Balance at start of period
6,000
Transfer from retained earnings
2,000
Balance at end of period
8,000
Total Reserves
26,000
Step 4
The final section of the statement is the retained earnings.
The $26,000 profit for the year is added to the $5,000 opening balance of
retained earnings. The $2,000 transfer to the general reserve and the $8,000
of dividends paid ($3,000 final dividend + $5,000 interim dividend) are
subtracted to arrive at the $21,000 closing balance of retained earnings:
Augusta Limited
Statement of Changes in Equity (extract)
for the year ended 30 June 2019
Retained Earnings
Balance at start of period
5,000
Profit for the period
26,000
Total for the period
31,000
Transfer to general reserve
(2,000)
Dividends
(8,000)
Balance at end of period
21,000
32 Accounting 3B
Example continued
The complete statement of changes in equity is set out below:
Augusta Limited
Statement of Changes in Equity
for the year ended 30 June 2019
Profit for the period
26,000
Changes in revaluation reserve during the period
11,000
Total recognised income and expense for the period
37,000
Share Capital
Ordinary Shares
Balance at start of period
20,000
Issue of share capital
15,000
Share issue costs
(1,000)
Total Share Capital
34,000
Reserves
Asset Revaluation Reserve
Balance at start of period
7,000
Gain on revaluation
11,000
Balance at end of period
18,000
General Reserve
Balance at start of period
6,000
Transfer from retained earnings
2,000
Balance at end of period
8,000
Total Reserves
26,000
Retained Earnings
Balance at start of period
5,000
Profit for the period
26,000
Total for the period
31,000
Transfer to general reserve
(2,000)
Dividends
(8,000)
Balance at end of period
21,000
Accounting 3B
33
The Company Balance Sheet
In AASB 101 Presentation of Financial Statements, a balance sheet is known
as a statement of financial position. There is no prescribed format for a
company balance sheet. The entries in a company balance sheet are usually
a summary of the assets, liabilities and equity, with the detailed information
contained in a series of notes attached to the balance sheet.
Example
Moora Limited
After Closing Trial Balance
as at 30 June 2029
Ledger Account Title
Cash at Bank
Accounts Receivable
Debit
190,000
86,000
Allowance for Doubtful Debts
Inventory
Prepaid Expenses
Land
Buildings
2,000
150,000
4,000
100,000
90,000
Accumulated Depreciation of Buildings
Plant and Equipment
Credit
11,000
41,000
Accumulated Depreciation of Plant and Equipment
9,000
Accounts Payable
15,000
Accrued Expenses
1,000
Income Tax Payable
2,000
Debentures (repayable in 2014)
160,000
Share Capital (430,000 ordinary shares, fully paid)
420,000
Asset Revaluation Reserve
8,000
General Reserve
3,000
Retained Earnings
30,000
$661,000
$661,000
34 Accounting 3B
Example continued
From the information contained in the after closing trial balance the following
balance sheet can be prepared.
Moora Limited
Balance Sheet
as at 30 June 2029
Current Assets
Cash at bank
Accounts receivables
Less Allowance for Doubtful Debts
Inventory
Prepaid expenses
Total Current Assets
190,000
86,000
2,000
84,000
150,000
4,000
428,000
Non-Current Assets
Property, plant and equipment
211,000
Total Non-Current Assets
211,000
Total Assets
639,000
Current Liabilities
Accounts payable
15,000
Accrued expenses
1,000
Income tax payable
2,000
Total Current Liabilities
18,000
Non-Current Liabilities
Loan from bank
160,000
Total Non-Current Liabilities
160,000
Total Liabilities
178,000
Net Assets
$461,000
Equity
Share capital
420,000
Reserves
11,000
Retained earnings
30,000
Total Equity
$461,000
The $211,000 property, plant and equipment and the $11,000 reserves
entries in the balance sheet are explained in the next section.
Accounting 3B
35
Notes to the Company Balance Sheet
A series of notes is usually attached to the balance sheet of a public
company. These notes expand on the entries contained in the balance sheet.
The following notes to the balance sheet will be demonstrated in this textbook:

property, plant and equipment

share capital

Reserves

final dividends recommended by the directors.
Property, Plant and Equipment Note
The details of the property, plant and equipment of a company is set out in a
note to the balance sheet.
Example
The property, plant and equipment note to the balance sheet of Moora Limited,
on 30 June 2029, is set out below:
Property, Plant and Equipment
Land
100,000
Buildings
90,000
Accumulated depreciation
(11,000)
79,000
Plant and equipment
41,000
Accumulated depreciation
(9,000)
32,000
Total property, plant and equipment, at net book value
$211,000
The $211,000 value of the property, plant and equipment is included as a
single entry in the balance sheet:
Moora Limited
Balance Sheet (extract)
as at 30 June 2029
Non-Current Assets
Property, plant and equipment
211,000
36 Accounting 3B
Share Capital Note
The details of the share capital of a company are set out in a note to the
balance sheet.
Example
The share capital note of Moora Limited, on 30 June 2029, is set out below:
Share capital
430,000 ordinary shares, fully paid
$420,000
Reserves Note
The details of the reserves are set out in a note to the balance sheet.
Example
The reserves note of Moora Limited, on 30 June 2029, is set out below:
Reserves
Asset revaluation
8,000
General
3,000
$11,000
Final Dividends Recommended by the Directors Note
A final dividend that has been recommended by the directors but not yet
approved by the shareholders is shown as a note to the balance sheet.
Example
For the year ended 30 June 2029 the directors of Moora Limited recommended
that the shareholders receive a seven cents per share final dividend. This
dividend must be approved by the shareholders at the annual general meeting to
be held in November 2029 before it can be paid.
Final dividend recommended by the directors
The directors have recommended a final 7 cents per share dividend on
ordinary shares.
Accounting 3B
37
Issue of Bonus Shares
A company can issue bonus shares to the existing shareholders. The
advantage of issuing bonus shares is that cash is retained in the company.
The bonus share issue can be made out of a general reserve. In terms of the
accounting equation, an increase in share capital is balanced by an equal
decrease in the general reserve. Therefore, there is no change in the total
equity of the company.
Example
Erikin Limited
Balance Sheet (extract)
as at 30 June 2028
Equity
Share capital
298,000
Reserves
40,000
Retained earnings
11,000
Total Equity
$349,000
Share Capital on 30 June 2028
600,000 ordinary shares
Reserves on 30 June 2008
General reserve
40,000
Additional Information
On 1 March 2029 the shareholders received 1 fully paid, $0.50 bonus share
for every 10 now held. The bonus share issue was made from the general
reserve.
Required
1
Prepare the general journal entry to record the bonus share issue.
2
Post the journal entry into the general ledger.
3
Prepare the equity section of the balance sheet as at 30 June 2029.
38 Accounting 3B
Solution
Step 1
The bonus share issue is calculated as follows:
600,000 issued ordinary shares
10
=
60,000 new issued ordinary shares
The value of the share issue is:
60,000 new ordinary shares x $0.50 issue price = $30,000.
Step 2
The general journal entry to record the bonus share issue is set out below.
General Journal
Date
2029
Mar 11
Details
General Reserve
Share Capital
Debit
Credit
25,000
25,000
Issue of bonus shares.
Debit Entry:
A general reserve account is debited to reduce this equity account. The share
issue has been made out of the general reserve.
Credit Entry:
Share capital is credited to increase this equity account.
Accounting 3B
39
Step 3
The general journal entry is posted into the general ledger.
General Reserve
2029
Mar 11 Share Capital
30,000
2028
Jul 1 Balance b/d
40,000
Share Capital
2028
Jul 1 Balance b/d
2029
Mar 11 General Reserve
298,000
30,000
Debit Entry:
The general reserve account is debited to reduce this equity account.
Credit Entry:
The share capital account is credited to increase this equity account:
Step 4
The equity section of the balance sheet of the company on 30 June 2029 is
set out below:
Erikin Limited
Balance Sheet (extract)
as at 30 June 2029
Equity
Share capital
328,000
Other reserves
10,000
Retained earnings
21,000
Total Equity
$359,000
40 Accounting 3B

Questions 1 to 4: share issue general journal and ledger entries
Question 1
1 March 2019
Couriers 2 Go Limited, a new company, offered 90,000 ordinary shares, of
$1.00 each, to the public. The shares were payable in full on application.
3I March 2019
The share issue closed fully subscribed. This means that completed application
forms and cheques were received for all the shares offered to the public.
28 April 2019
All the shares were allotted (that is, issued) to the shareholders.
30 April 2019
The company paid $1,500 in share issue costs. The share issue costs were
closed to share capital.
Required
1
Prepare the general journal and general ledger entries to record the share issue.
2
Prepare the equity section of the balance sheet on 30 April 2019.
Question 2
2 August 2021
Adare Limited offered 50,000 ordinary shares, of $1.00 each, to the public.
The shares were payable in full on application.
31 August 2021
The share issue closed fully subscribed.
9 September 2021
All the shares were allotted to the shareholders.
30 September 2021
The company paid $600 in share issue costs. The share issue costs were
closed to share capital.
Accounting 3B
41
Question 2 continued
Required
1
Prepare the general journal and general ledger entries to record the share issue.
2
Prepare the equity section of the balance sheet on 30 September 2021.
Question 3
On 1 April 2024 Southern Rivers Limited offered 1,000,000 $0.25 ordinary
shares to the public. The share issue closed fully subscribed on 30 April 2024.
On 14 May 2024 the shares were allotted. Share issue costs of $7,100 were
paid on 31 May 2024. On that date the share issue costs were closed to
share capital.
Required
Prepare the general journal and general ledger entries to record the share issue.
Question 4
On 9 February 2027 Eucla Limited issued a prospectus offering 660,000
$0.50 ordinary shares to the public. On 28 February 2027 the share offer
closed fully subscribed.
The shares were issued to the shareholders on 16 March 2027.
The company paid $5,410 in share issue costs on 29 March 2027. On that
date the share issue costs were closed to share capital.
Required
1
Prepare the general journal and general ledger entries to record the share issue.
2
Is Eucla Limited a proprietary company or a public company? Provide two
reasons to support your answer.
3
Compare the characteristics of public and proprietary companies in the
following areas:
4

liability of owners

number of members and directors

continuity of existence

legal entity

transferability of ownership

separation of ownership and management.
Describe the contents and purpose of a prospectus.
42 Accounting 3B
Questions 5 to 8 and 12: general journal and general ledger entries for
the payment of dividends and general ledger entries for the distribution of
the profit

Question 5
Arrino Limited Share Capital on 1 July 2026
191,800 ordinary shares
$93,700
Retained earnings on 1 July 2026
$3,000
9 December 2026
A 17 cents per share final dividend, recommended by the directors for the year
ended 30 June 2026, was approved by the shareholders at the annual general
meeting in November 2026 and paid on this date.
14 March 2027
A 6 cents per share interim dividend was paid.
Year ended 30 June 2027
The company made a profit after tax of $61,000.
The directors decided to transfer $5,000 of profits to a general reserve.
A 14 cents per share final dividend was recommended by the directors.
The shareholders will vote to accept or reject this dividend in November 2027.
Required
1
Prepare the general journal entry to record the payment of the final
dividend on 9 December 2026.
2
Prepare the following general ledger accounts to 30 June 2027:

final dividend

interim dividend

cash at bank

profit and loss

retained earnings

general reserve.
Accounting 3B
43
Question 6
Dwarda Traders Limited
Balance Sheet (extract)
as at 30 June 2028
Equity
Share capital (379,200 ordinary shares)
92,800
Retained earnings
47,900
Total Equity
$140,700
Events for the year ended 30 June 2029
On 3 December 2028 the shareholders were paid a 16 cents per share final
dividend that had been recommended for the year ended 30 June 2028.
On 26 February 2029 a 9 cents per share interim dividend was paid.
For the year ended 30 June 2029 the company made a $54,000 profit after tax.
The directors made the following decisions:

to recommend an 8 cents per share dividend

to transfer $6,000 of profits to a general reserve.
The shareholders have not yet voted to accept the final dividend.
Required
1
Prepare the general journal entry to record the payment of the interim
dividend on 26 February 2029.
2
Prepare the following general ledger accounts to 30 June 2029:
3

final dividend

interim dividend

cash at bank

profit and loss

retained earnings

general reserve.
Dwarda Traders Limited had retained earnings of $21,000 on 30 June 2029.
Does this mean that the company had $21,000 cash in its bank account?
Solution Check
Retained earnings on 30 June 2029 = $13,100
44 Accounting 3B
Question 7
Gnowangerup Limited
Trial Balance (extract)
as at 30 June 2025
Ledger Account Title
Debit
Share Capital ($0.50 ordinary shares less $5,000 of share issue costs)
Retained Earnings/(Losses)
Credit
714,100
11,600
1 July 2025 to 30 June 2026
On 15 April 2026 the directors of the company declared and paid a 9 cents
per share interim dividend.
Gnowangerup Limited
Income Statement
for the year ended 30 June 2026
Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
Less Income Tax Expense
Profit
$401,000
(6,000)
(171,000)
224,000
43,000
$181,000
On 30 June 2026 the directors decided to transfer $2,000 of profits to a
general reserve.
The directors offered the ordinary shareholders a 5 cents per share dividend.
The dividend recommendation will be voted on by the shareholders at the
annual general meeting to be held in November 2026.
Required
1
Prepare the general journal entry to record the payment of the interim dividend
on 15 April 2026.
2
Post the general journal entry into the general ledger.
3
Prepare the general ledger entries to record the distribution of the profit for the
year ended 30 June 2026.
Solution Check
Retained earnings on 30 June 2026 = $37,962
Accounting 3B
45
Question 8
General Ledger balances of Yundamindera Limited on 30 June 2025:
Share Capital (273,400 ordinary shares)
$65,350
Retained Earnings
19,502
General Reserve
11,000
18 October 2025
On this date the company issued a further 105,000 ordinary shares, fully paid,
at $0.50 per share.
Year ended 30 June 2026
The company made a loss of $9,370 and paid no dividends.
1 March 2027
The ordinary shareholders received an interim dividend of 5 cents per share.
Year ended 30 June 2027
The company made a profit after tax of $46,810.
The directors recommended a final dividend for the year ended 30 June 2027
of 14 cents per share. The shareholders will vote in November to approve or
reject this dividend.
The directors also decided to transfer $9,000 from the general reserve to
retained earnings.
Required
1
Prepare the general journal entry to record the payment of the interim
dividend on 1 March 2027.
2
Prepare the retained earnings ledger account of the company for the year
ended 30 June 2027.
3
Better One Pty Ltd has supplied the following information:

the total revenue was $26,000,000 for the year ended 30 June 2029

the total gross assets was $14,000,000 on 30 June 2029

the company had 40 employees on 30 June 2029.
Is Better One Pty Ltd a small or a large proprietary company? What are
large proprietary companies required to do under the Corporations Act?
46 Accounting 3B

Questions 9 to 11: retained earnings ledger account and the equity
section of a balance sheet
Question 9
Wagin Limited Share Capital on 30 June 2021
309,000 ordinary shares of $2.00 each fully paid less share
issue costs
$614,000
Reserves on 30 June 2021
Asset revaluation reserve
$32,000
General reserve
$19,000
Retained Earnings
Balance on 30 June 2021
$43,000
Additional Information
a
For the year ended 30 June 2021 the directors recommended that an eight
cents per share dividend be paid.
This dividend was approved by the shareholders in September 2021 and
paid on 11 October 2021.
b
On 5 May 2022 land was revalued from its cost price of $215,000 to its
current market value of $260,000.
c
For the year ended 30 June 2022 a profit after tax of $61,009 was made
by the company.
The directors transferred $11,000 of profits to the general reserve.
Required
1
2
Prepare the following ledger accounts for the year ended 30 June 2022:

retained earnings

general reserve

land

asset revaluation reserve.
Prepare the equity section of the balance sheet on 30 June 2022.
Solution Check
Retained earnings on 30 June 2022 = $68,289
Accounting 3B
47
Question 10
The following information was supplied by Balagundi Limited on 1 July 2024:
Share Capital
617,000 ordinary shares
General reserve
Asset revaluation reserve
Retained earnings
Land
$305,000
35,000
9,000
13,000
182,000
Additional Information
a
On 11 March 2025 the ordinary shareholders were paid an interim
dividend of 3 cents per share.
b
Land was revalued to $202,000 on 1 June 2025.
c
For the year ended 30 June 2025:

the company made a profit after tax of $72,400

$14,000 was transferred from the general reserve to retained earnings

the directors proposed a 7 cents per share final dividend. The
shareholders have not yet voted to approve this dividend.
Required
1
Prepare the retained earnings ledger account for the year ended
30 June 2025.
2
Prepare the equity section of the balance sheet on 30 June 2025.
Solution Check
Retained earnings on 30 June 2025 = $80,890
Total equity on 30 June 2025 = $435,890
48 Accounting 3B
Question 11
Binningup Limited
Trial Balance (extract)
as at 30 June 2021
Ledger Account Title
Debit
Share Capital
Credit
109,295
453,180 $0.25 ordinary shares
General Reserve
18,100
Retained Earnings
53,948
Office Equipment
22,000
Accumulated Depreciation of Office Equipment
Land
11,000
90,100
November 2021:
The shareholders were paid a 5 cents per share dividend.
December 2021:
The land was re-valued to $98,000.
April 2022:
The company issued a further 7,200 fully paid ordinary shares at $1.50 per share.
Share issue costs were $1,400.
Profit and loss information for the year ended 30 June 2022:

Sales of the company for the year were $127,300.

Cost of sales for the year was $37,900.

Wages paid for the year were $33,200. Accrued wages on 30 June 2022
were $1,650.

On 31 August 2021 a $3,000, 12 months insurance policy was paid.

The office equipment is depreciated at the rate of 15% per annum, reducing
balance method.

Advertising expense for the year was $41,800.

Income tax is charged at the rate of 30% on the profit for the year.
Accounting 3B
49
Question 11 continued
On 30 June 2022 a total of $2,000 was transferred from the general reserve to
retained earnings.
For the year ended 30 June 2022 the directors proposed that the ordinary
shareholders receive a 10 cents per share dividend. The shareholders will
vote to approve or reject this dividend proposal at the annual general meeting
in November 2022.
Required
1
Calculate the profit after tax for the year ended 30 June 2022 using the
following format:
Binningup Limited
Calculation of Profit after Tax
for the year ended 30 June 2022
Sales
Less Cost of Sales
Gross Profit
Less Other Expenses
Profit before tax
Less Income tax expense
Profit after tax (30% of profit before tax)
2
Prepare the retained earnings ledger account for the year ended
30 June 2022.
3
Prepare the equity section of the balance sheet on 30 June 2022.
4
The final dividend offered to the ordinary shareholders for the year
ended 30 June 2022 is:
a
$45,318
b
$46,038
Solution Check
Profit after tax = $6,020
Retained earnings on 30 June 2022 = $39,309
Total equity on 30 June 2022 = $268,504
c
$41,660
50 Accounting 3B
Question 12
Bolgart Trading Limited
Trial Balance (extract)
as at 30 June 2027
Ledger Account Title
Debit
Share Capital ($1.00 ordinary shares less share issue costs of $4,000)
Credit
914,500
Retained Earnings
2,550
General Reserve
Motor Vehicles
31,000
81,000
Accumulated depreciation of motor vehicles
29,000
Additional Information
a
On 4 April 2028 the shareholders were paid an $0.11 per share dividend.
b
Profit calculation information for the year ended 30 June 2028:
c

sales

rent payment for the year

prepaid rent on 30 June 2028
4,950

interest received during the year
1,720

accrued interest income on 30 June 2028

wages

accrued wages on 30 June 2028

cost of sales

income tax expense

15% depreciation of motor vehicles reducing balance method.
$904,741
51,300
220
114,810
9,282
451,490
82,100
For the year ended 30 June 2028 the directors decided to transfer
$13,000 from a general reserve to retained earnings.
Required
Prepare the retained earnings ledger for the year ended 30 June 2028.
Solution Check
Profit after tax = $194,849
Accounting 3B

51
Questions 13 to 18: the statement of changes in equity
Question 13
The following information was supplied by Perth Traders Limited on 1 July 2028:
Share capital (300,000 ordinary shares)
$290,000
Asset revaluation reserve
8,000
General reserve
2,000
Retained earnings
7,200
Land
80,000
October 2028
A 5 cents per share final dividend, recommended by the directors for the year
ended 30 June 2028, was approved by the shareholders in September 2028,
and paid this month.
February 2029
Perth Limited received $10,000 cash by issuing a further 20,000 ordinary
shares of $0.50 each. Share issue costs were $2,000.
30 June 2029
The company made a profit after tax of $62,000 for the last year.
The land was revalued to $91,000.
An amount of $6,000 was transferred to the general reserve.
Required
1
Prepare a statement of changes in equity of the company for the year
ended 30 June 2029.
2
Prepare the equity section of the balance sheet as at 30 June 2029.
Solution Check
Retained earnings on 30 June 2029 = $58,900
52 Accounting 3B
Question 14
Capel Limited
Trial Balance (extract)
as at 30 June 2028
Ledger Account Title
Debit
Share Capital (58,100 ordinary shares)
Credit
55,100
Retained Earnings
800
Asset Revaluation Reserve
2,000
General Reserve
4,000
Land and Buildings
71,000
The events below occurred, in order, during the year ending 30 June 2029:

An 8 cents per share final dividend, proposed by the directors for the year
ended 30 June 2028, approved by the shareholders in October 2028, was
paid in November 2028.

A total of 13,000 ordinary shares were issued to investors at a price of $1.25
per share. The share issue costs were $1,900.

The land and buildings were revalued to $80,000.

The company made a profit after tax for the year of $37,100.

The directors decided to transfer $2,400 to a general reserve.

The directors proposed a final dividend to the ordinary shareholders of four
cents per share. The shareholders are yet to vote on this proposal.
Required
1
Prepare a statement of changes in equity of the company for the year
ended 30 June 2029.
2
Describe three advantages that a public company limited by shares has
over a partnership or a sole trader.
Solution Check
Retained earnings on 30 June 2029 = $30,852
Accounting 3B
53
Question 15
Attain Limited
Balance Sheet (extracts) as at
Item
30 June 2028
30 June 2029
$11,700
$14,200
9,300
8,100
90,000
98,000
33,000
41,000
Asset Revaluation Reserve
2,000
10,000
General Reserve
4,700
6,200
Retained Earnings
1,000
500
Assets
Cash at Bank
Accounts Receivable
Land
Equity
Share Capital (ordinary shares)
Additional Information

In October 2028, at an annual general meeting, the ordinary shareholders
approved the final dividend of $2,400 recommended by the directors for
the year ended 30 June 2028.
The final dividend was paid to the shareholders in November 2028.

Land was revalued during the year ending 30 June 2029. No land was
purchased from 1 July 2028 to 30 June 2029.

On 1 February 2029 the directors declared and paid an $1,800 interim
dividend.

In April 2029 the company made a further issue of ordinary shares. The
cost of the share issue was $500.

The company made a profit after tax for the year ended 30 June 2029.

On 30 June 2029 the directors transferred $1,500 to a general reserve.
Required
Prepare a statement of changes in equity for the year ended 30 June 2029
and calculate the profit after tax.
54 Accounting 3B
Question 16
Oz Trading Limited was incorporated as a company in April 2027.
The company had the following transactions for the year ended 30 June 2028.
July 2027
The company issued 552,000 ordinary shares of $0.25 each to the public.
The cost of the share issue was $6,100.
31 August 2027
The company purchased land for $70,000 and plant and equipment for $51,000.
28 February 2028
The company paid an interim dividend of 4 cents per share.
30 June 2028
The company made a profit after tax of $29,000.
An amount of $5,000 was transferred to a general reserve.
The directors revalued the land to $83,000 and proposed that the shareholders
receive a final dividend of 10 cents per share.
The shareholders must approve the dividend before it can be paid out.
Required
1
Prepare a statement of changes in equity of the company for the year
ended 30 June 2028.
2
Complete the equity section of the balance sheet as at 30 June 2028:
Oz Trading Limited
Balance Sheet (extract)
as at 30 June 2028
Equity
Share Capital
Reserves
Retained Earnings
Total Equity
Accounting 3B
55
Question 17
Balbarrup Limited
Trial Balance (extract)
as at 30 June 2026
Ledger Account Title
Debit
Share Capital
Credit
255,900
(130,000 ordinary shares)
Retained Earnings
18,400
General Reserve
7,000
Asset Revaluation Reserve
Investments (shares in public companies)
15,000
37,000
The following events occurred during the year ending 30 June 2027.
August 2026
The company allotted a further 40,000 ordinary shares of $2.00 each, fully paid.
Share issue costs were $4,100.
February 2027
The directors declared and paid a 13 cents per share dividend.
30 June 2027
The company made a profit after tax of $14,500 for the last year. The directors of
the company made the following decisions:
a
the investments were to be revalued to $47,000.
b
$3,000 was to be transferred to retained earnings from the general reserve.
Required
Prepare a statement of changes in equity for the year ended 30 June 2027.
Solution Check
Retained earnings on 30 June 2027 = $13,800
56 Accounting 3B

Questions 18 and 22 to 25: the statement of comprehensive income
Question 18
Home Slice Bakeries Limited was incorporated on 1 September 2028. The
company started trading on 1 January 2029.
Cash Inflows from 1 September 2028 to 30 June 2029
Ordinary share capital
$2,100,000
Sales
692,000
Loan from bank
110,000
Dividends received
4,500
Interest income
2,900
Cash Outflows from 1 September 2028 to 30 June 2029
Preliminary expenses
$9,200
Share issue costs
31,400
Interest
5,200
Plant and equipment
437,000
Land
251,000
Inventory
382,000
Investments (shares in companies)
31,000
Advertising
26,700
Rent
255,100
Wages
81,400
Additional Information
a
Accrued interest income on 30 June 2029 was $900.
b
Prepaid rent on 30 June 2029 was $6,100.
c
Wages owing on 30 June 2029 was $5,400.
d
The plant and equipment has a useful life of 10 years and a residual
value of $68,000. On 1 January 2029 the asset was set-up ready to
use. The asset is to be depreciated using the straight line method.
e
Inventory on 30 June 2029 was valued at $109,200.
f
Income tax is payable at the rate of 30%.
g
Land was revalued in April 2029 to $288,000.
Required
Prepare a statement of comprehensive income for the six months ended
30 June 2029.
Accounting 3B

Questions 19: revision of balance day adjustments
Question 19
Transaction A
Baandee Traders Limited
Trial Balance (extract)
as at 30 June 2019
Ledger Account Title
Accounts Receivable
Debit
Credit
81,000
Allowance for Doubtful Debts
Bad Debts
1,300
6,200
Additional Information
The allowance for doubtful debts is to be set at $3,510.
Allowance for Doubtful Debts
Required
Complete the statement of comprehensive income (extract) below.
Workings: Calculation of Other Expenses
Advertising
$11,000
Doubtful Debts
Other Expenses
Baandee Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2019
Sales
Less Cost of Sales
92,000
(41,000)
Gross Profit
51,000
Less Finance Expenses
(6,100)
Less Other Expenses
Profit before Tax
57
58 Accounting 3B
Question 19 continued
Transaction B
Education Colleges Limited
Trial Balance (extract)
as at 30 June 2021
Ledger Account Title
Debit
Prepaid Insurance
6,000
Prepaid Rent
9,300
Credit
Additional Information
a
Insurance expense for the year ended 30 June 2021 was $5,300.
b
Prepaid rent on 30 June 2021 was $400.
Required
Record the balance day adjustments in the financial statement (extracts) below.
Calculation of Other Expenses
Insurance
Rent
Other Expenses
Education Colleges Limited
Statement of Comprehensive
Income (extract)
for the year ended 30 June 2021
Fees
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
82,000
3,000
(9,300)
Education Colleges Limited
Balance Sheet (extract)
as at 30 June 2021
Current Assets
Accounting 3B
Question 19 continued
Transaction C
General Ledger extract of the Oz Driving School Limited on 30 June 2025:
Wages
$21,000
Telephone Expense
9,300
Additional Information
a
Wages expense for the year was $24,000.
b
Unpaid telephone bill for June 2025 was $200.
Required
Record the balance day adjustments in the financial statements.
Calculation of Other Expenses
Wages
Telephone
Other Expenses
Oz Driving School Limited
Statement of Comprehensive
Income (extract)
for the year ended 30 June 2025
Fees
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
94,200
6,700
(8,200)
Oz Driving School Limited
Balance Sheet (extract)
as at 30 June 2025
Current Liabilities
59
60 Accounting 3B
Question 19 continued
Transaction D
General Ledger extract of A1 Couriers Limited on 30 June 2022:
Office Equipment
$6,000
Accumulated Depreciation of Office Equipment
1,000
Motor Vehicle
9,000
Accumulated Depreciation of Motor Vehicle
2,000
Additional Information
a
Depreciation office equipment is 10% per annum straight line method.
b
Depreciation motor vehicle is 20% per annum reducing balance method.
Required
Complete the missing entries in the statement of comprehensive income.
Calculation of Other Expenses
Depreciation office equipment
Depreciation motor vehicle
Wages
83,000
Other Expenses
A1 Couriers Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2022
Fees
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
92,000
1,700
(5,410)
Accounting 3B
Question 19 continued
Transaction E
General Ledger balances of Secure Storage Limited on 30 June 2027:
Unearned Fees Income
$69,000
Interest Income
3,500
Gain on Sale of Land
6,000
Additional Information
a
Unearned fees income on 30 June 2027 was $1,700.
b
Accrued interest income was $610.
Required
Record the balance day adjustments in the financial statements.
Interest
Gain on Sale of Land
6,000
Other Income
Secure Storage Limited
Statement of Comprehensive Income
(extract)
for the year ended 30 June 2027
Fees
Secure Storage Limited
Balance Sheet (extract)
as at 30 June 2027
Current Assets
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
(4,000)
(55,000)
Current Liabilities
61
62 Accounting 3B
Question 20
Transaction A
Goomalling Traders Limited
Trial Balance (extract)
as at 30 June 2022
Ledger Account Title
Bad Debts
Debit
Credit
1,800
Accounts Receivable
94,000
Allowance for Doubtful Debts
2,500
Additional Information
The allowance for doubtful debts is to be set at $4,200.
Allowance for Doubtful Debts
Required
Complete the statement of comprehensive income (extract) below:
Workings: Calculation of Other Expenses
Wages
Insurance
$82,100
9,200
Doubtful Debts
Other Expenses
Goomalling Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2022
Sales
167,000
Less Cost of Sales
(49,000)
Gross Profit
118,000
Less Finance Expenses
Less Other Expenses
Profit before Tax
(7,000)
Accounting 3B
Question 20 continued
Transaction B
Yuna Limited
Trial Balance (extract)
as at 30 June 2022
Ledger Account Title
Debit
Prepaid Advertising
16,000
Prepaid Rent
29,400
Credit
Additional Information
a
Prepaid advertising on 30 June 2022 was $700.
b
Rent expense for the year ended 30 June 2022 was $28,100.
Required
Record the balance day adjustments in the financial statements.
Calculation of Other Expenses
Advertising
Rent
Other Expenses
Yuna Limited
Statement of Comprehensive
Income (extract)
for the year ended 30 June 2022
Sales
Less Cost of Sales
Gross Profit
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
94,300
(35,000)
59,300
2,000
(8,600)
Yuna Limited
Balance Sheet (extract)
as at 30 June 2022
Current Assets
63
64 Accounting 3B
Question 20 continued
Transaction C
General Ledger extract of Equipment Hire Limited on 30 June 2025:
Electricity Expense
$9,200
Wages
28,000
Prepaid Insurance
7,400
Additional Information
a
Electricity consumed in June 2025 but not yet paid for $300.
b
Accrued wages on balance date $1,000.
c
Prepaid insurance on 30 June 2025 was $700.
Required
Record the balance day adjustments in the financial statements.
Calculation of Other Expenses
Electricity
Wages
Insurance
Other Expenses
Equipment Hire Limited
Statement of Comprehensive
Income (extract)
for the year ended 30 June 2025
Fees
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
86,100
Equipment Hire Limited
Balance Sheet (extract)
as at 30 June 2025
Current Assets
3,000
(4,300)
Current Liabilities
Accounting 3B
65
Question 20 continued
Transaction D
General Ledger extract of Mundijong Trading Limited on 30 June 2022:
Motor vehicle
17,000
Accumulated depreciation of motor vehicle
3,000
Office furniture
$5,000
Accumulated depreciation of office furniture
2,100
Additional Information
a
Depreciation motor vehicle is 25% per annum reducing balance method.
b
Depreciation office furniture is 10% per annum straight line method.
Required
Complete the missing entries in the statement of comprehensive income (extract).
Calculation of Other Expenses
Depreciation motor vehicle
Depreciation office furniture
Wages
74,000
Other Expenses
Mundijong Trading Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2022
Sales
193,000
Less Cost of Sales
(84,000)
Gross Profit
109,000
Add Other Income
11,000
Less Finance Expenses
(9,000)
Less Other Expenses
Profit before Tax
66 Accounting 3B
Question 20 continued
Transaction E
General Ledger extract of Here We Go Airlines Limited on 30 June 2029:
Unearned Income
126,000
Interest Income
5,100
Discount Received
3,000
Additional Information
a
Unearned fees income on 30 June 2029 was $2,000.
b
Accrued interest income was $800.
Required
Record the balance day adjustments in the financial statements.
Calculation of Other Income
Interest
Dividends received
Other Income
Here We Go Airlines Limited
Statement of Comprehensive Income
(extract)
for the year ended 30 June 2029
Fees
Here We Go Airlines Limited
Balance Sheet (extract)
as at 30 June 2029
Current Assets
Add Other Income
Less Finance Expenses
Less Other Expenses
Profit before Tax
(6,200)
(67,400)
Current Liabilities
Accounting 3B
67
Question 21
Clothes Warehouse Limited
Trial Balance (extract)
as at 30 June 2021
Ledger Account Title
Debit
Sales
172,000
Interest received
Bad debts
3,100
380
Cost of sales
81,000
Wages
29,400
Interest on loan
Prepaid rent
5,100
31,000
Loss on sale of office furniture
1,710
Directors fees
5,300
Accounts receivable
24,000
Allowance for doubtful debts
Land
Credit
200
345,000
Delivery vehicle
27,000
Accumulated depreciation of delivery vehicle
Office equipment
Accumulated depreciation of office equipment
9,000
9,400
1,000
Additional Information
a
Accrued interest income $400.
b
Accrued wages $700.
c
Unexpired rent $4,500.
d
Set the allowance for doubtful debts at $540.
e
Delivery vehicle depreciation: 25% per annum reducing balance method.
f
Office equipment depreciation: 10% per annum straight line method.
g
Company income tax rate 30%.
h
Land is to be revalued to $351,000.
Required
Prepare a statement of comprehensive income for the year ended 30 June 2021.
Solution Check
Profit after tax = $13,741
68 Accounting 3B
Question 22
Eulaminna Traders Limited
Trial Balance (extract)
as at 30 June 2025
Ledger Account Title
Land
Debit
Credit
405,000
Accounts receivable
21,500
Allowance for doubtful debts
Delivery vehicle
110
34,000
Accumulated depreciation of delivery vehicle
Directors fees
Prepaid rent
Interest expense
16,200
4,188
41,000
1,930
Advertising
11,450
Audit fees
4,131
Wages
Bad debts
Cost of sales
Electricity
34,900
170
83,538
2,510
Debentures
40,000
Sales
181,351
Commissions received
Loss on sale of office equipment
5,225
1,627
Additional Information
a
Delivery vehicle depreciation: 30% per annum reducing balance method.
b
Accrued commission income $1,626.
c
Set the allowance for doubtful debts at $370.
d
Unpaid electricity bill for June 2025 was $468.
e
Unexpired rent $10,150.
f
Company income tax rate 30%.
g
Land is to be revalued to $410,000.
Required
Prepare a statement of comprehensive income for the year ended 30 June 2025.
Solution Check
Profit after tax = $4,788
Accounting 3B
69
Question 23
Dwellingup Trading Company Limited
General Ledger balances (before adjusting entries) on 30 June 2029
Sales
$325,040
Gain on sale of motor vehicle
Cost of sales
2,794
128,319
Discount received
1,533
Prepaid insurance
5,150
Prepaid rent
37,300
Cartage outwards
6,104
Audit fees
4,694
Wages
52,945
Bad debts
2,520
Interest expense
6,782
Advertising
18,132
Accounts receivable
16,400
Allowance for doubtful debts
1,730
Telephone (calls)
4,714
Share capital
266,503
Cash at bank
21,500
Office furniture
9,540
Accumulated depreciation of office furniture
2,500
Land
286,000
Additional Information
a
Rent expense for the year was $29,452.
b
Prepaid insurance on 30 June 2029 was $1,380
c
Accrued telephone expense on balance date was $1,541.
d
Office furniture depreciation: 10% per annum straight line method.
e
Set the allowance for doubtful debts at $1,660.
f
Company income tax rate 30%.
g
Land is to be revalued to $307,000.
Required
Prepare a statement of comprehensive income for the year ended 30 June 2029.
Solution Check
Profit after tax = $48,685
70 Accounting 3B
Question 24
Marketing Consultants Limited
Trial Balance (extract)
as at 30 June 2028
Ledger Account Title
Debit
Unearned income
Interest on loan
Wages
Telephone
Credit
609,000
24,000
162,000
33,000
Prepaid insurance
25,000
Prepaid rent
Retained earnings
154,000
90,000
Additional Information
a
Unearned income on 30 June 2028 was $15,900.
b
Wages owing on balance date was $9,300.
c
Prepaid insurance on 30 June 2028 was $5,400.
d
Rent expense for the year was $147,000.
e
Other assets information:
Land
Shares in Companies
Office Equipment
Less Accumulated Depreciation
30 June 2027
210,000
30,000
30 June 2028
240,000
0
70,000
(10,000)
70,000
(13,000)
f
Proceeds of sale of shares in companies $51,000.
g
Land was revalued in March 2028 by $30,000.
h
Company income tax rate 30%.
i
A $67,000 interim dividend was paid to the shareholders in 2028.
j
$5,000 of profit was transferred to a general reserve.
Required
1
Prepare a statement of comprehensive income for the year ended
30 June 2028.
2
Prepare the retained earnings section of the statement of changes in
equity for the year ended 30 June 2028.
Solution Check
Profit after tax = $151,340
Accounting 3B

71
Questions 25 to 28: company balance sheet and accompanying notes
Question 25
On 30 June 2018 Pemberton Limited supplied the following information:
Share Capital
131,000 ordinary shares fully paid
128,200
Reserves
Asset Revaluation
General
10,000
4,000
Additional Information
a
In March 2019 the land was re-valued by $16,000.
b
For the year ended 30 June 2019 the directors proposed the following
final dividend:

6 cents per share.
The shareholders have not yet voted to accept this dividend.
c
On 30 June 2019 $5,000 of profit was transferred to the general reserve.
d
On 30 June 2019, after the calculation of the profit after tax, the balance
sheet items of the company included:
Land
400,000
Buildings
240,000
Accumulated Depreciation of Buildings
(13,000)
Plant and Equipment
120,000
Accumulated Depreciation of Plant and Equipment
(7,000)
Accounts Receivable
65,000
Allowance for Doubtful Debts
(4,000)
Prepaid Rent
29,000
Accrued Interest Revenue
5,000
Accrued Expenses
4,100
Unearned Revenue
22,000
72 Accounting 3B
Question 25 continued
Required
1
2
Prepare the following notes to the balance sheet on 30 June 2019:

property, plant and equipment

reserves

share capital

recommended final dividend.
Complete the attached balance sheet as at 30 June 2019.
Pemberton Limited
Balance Sheet
as at 30 June 2019
Current Assets
Cash at Bank
20,000
Inventory
40,000
Total Current Assets
155,000
Non-Current Assets
Total Non-Current Assets
Total Assets
Current Liabilities
Accounts Payable
Income Tax Payable
66,000
8,900
Total Current Liabilities
101,000
Non-Current Liabilities
Debentures
580,000
Total Non-Current Liabilities
580,000
Total Liabilities
Net Assets
Equity
Retained Earnings
Total Equity
50,800
Accounting 3B
73
Question 26
Reliance Limited
After Closing Trial Balance
as at 30 June 2029
Ledger Account Title
Debit
Share capital (910,000 ordinary shares fully paid)
Credit
900,000
Profit and loss (profit after tax)
33,000
Asset revaluation reserve
7,000
General reserve (balance on 1 July 2028)
9,000
Retained earnings (balance on 1 July 2028)
Interim dividend
Cash at bank
Accounts receivable
Accrued interest income
Inventory
Prepaid expenses
10,000
6,000
255,000
70,000
1,000
103,000
4,000
Land
267,000
Plant and equipment
170,000
Accumulated depreciation of plant and equipment
9,000
Goodwill *
40,000
Investments (shares in companies)
80,000
Accounts payable
8,000
Accrued expenses
3,000
Income tax payable
5,000
Unearned income
2,000
7% Debentures
10,000
$996,000
$996,000
Goodwill, under the accounting standard AASB 3 Business Combinations,
exists when one company purchases a business and pays for the good
customer relations of that business and for other qualities, such as, favourable
shop locations and capable management. Goodwill is a non-current asset.
74 Accounting 3B
Question 26 continued
Additional Information
a
$5,000 is to be transferred from the general reserve to retained earnings.
b
The investments (shares in companies) are expected to be owned for
more than 12 months.
c
$3,000 of the debentures are repayable within 12 months.
d
The directors, for the year ended 30 June 2029, have proposed that the
shareholders receive a 9 cents per share final dividend. The
shareholders will vote on this dividend recommendation at the annual
general meeting to be held on 5 November 2029.
Required
1
Prepare the following notes to the balance sheet on 30 June 2029:

property, plant and equipment

share capital

reserves

recommended final dividend.
2
Prepare a balance sheet for Reliance Limited as at 30 June 2029.
3
You have been given the following information about Excel Business
Colleges Limited for the year ended 30 June 2028.
a
The cash at bank balance on 1 July 2027 was ($200).
b
Cash was raised from the issue of 18,000 ordinary shares at a
price of $1.50 per share.
c
Fees income for the year was $319,000. Unearned fees income
on 30 June 2028 was $2,000.
d
Wages expense for the year was $93,700. Accrued wages on
30 June 2028 was $2,700.
e
Depreciation of office equipment for the year was $5,200.
f
Insurance expense for the year was $6,700. Prepaid insurance
on 30 June 2028 was $1,900.
g
Other cash expenses for the year were $137,400.
h
$49,000 of debentures was repaid in April 2028.
What is the cash at bank balance on 30 June 2028?
Accounting 3B
75
Question 27
National Car Parks Limited
Trial Balance
as at 30 June 2026
Ledger Account Title
Debit
Credit
Cash at bank
4,800
Car Parks (buildings)
660,000
Accumulated depreciation of car parks
46,000
Income Tax Payable
8,200
Loan from bank (repayable in March 2027)
32,000
Share capital
502,000
Retained earnings
67,000
$660,000
$660,000
Cash Inflows for year ended 30 June 2027
Fees from car parks
$378,640
Debentures (repayable in 2040)
210,000
Cash Outflows for year ended 30 June 2027
Loan from bank
32,000
Interim dividend
51,300
Insurance (paid on 1 November 2026 for 12 months)
5,100
Income tax paid
8,200
Other cash expenses
154,300
Additional Information
a
Car park depreciation: 10% per annum straight line method.
b
Accrued expenses on 30 June 2027 were $6,010.
c
On 30 June 2027 a total of 100 customers had paid $485 per person in
parking space fees in advance.
d
Income tax is payable at the rate of 30% of the profit.
Required
Prepare a balance sheet as at 30 June 2027.
76 Accounting 3B

Questions 28 to 31: the statement of comprehensive income and the
balance sheet
Question 28
Australind Traders Limited
Trial Balance (extract)
as at 30 June 2027
Ledger Account Title
Debit
Share capital (ordinary shares)
Credit
53,000
Interim dividend
11,000
Motor vehicle
28,100
Accumulated depreciation of motor vehicle
4,100
Land
60,000
Inventory
19,200
Cash at bank
24,909
Bank fixed term deposit (maturing in 3 months)
11,000
Goodwill
10,000
Accounts receivable
14,500
Allowance for doubtful debts
100
Accounts payable
18,214
Debentures (repayable in 2031)
40,000
Wages
Bad debts
47,330
300
Advertising
6,500
Directors fees
2,800
Interest on debentures
1,300
Telephone
6,000
Cost of sales
64,200
Prepaid rent
22,600
Sales
184,030
Interest received
1,000
Retained earnings
19,295
General reserve
1,000
Asset revaluation reserve
9,000
$329,739
$329,739
Accounting 3B
77
Question 28 continued
Additional Information
a
Set the allowance for doubtful debts at $400.
b
Rent expense for the year $20,700.
c
Accrued telephone expense $1,400.
d
Accrued interest revenue $1,600.
e
Delivery vehicle depreciation: 20% per annum reducing balance method.
f
Company income tax rate 30% of profit before tax.
g
$7,000 of profits was transferred to a general reserve.
h
In September 2026 the land had been revalued from $61,000 to $70,000
Required
1
Prepare a statement of comprehensive income statement for the year
ended 30 June 2027.
2
Prepare the property, plant and equipment note on 30 June 2027.
3
Prepare a statement of financial position (balance sheet) as at 30 June 2027.
4
On 30 June 2024 Perth Limited had a $100,000 general reserve, while
Melbourne Limited had a $35,000 general reserve. If both of these
companies need to pay $60,000 to replace plant and equipment, which
company is in a better position to do so?
5
Emma purchased 1,000 shares of $1.00 each in a proprietary company
limited by shares. Emma has paid the full $1,000 owing on the purchase
of the shares. Emma owns 50% of the share capital of the company but is
not a director of the company.
The company has recently closed down and owes $8,000 to creditors.
Emma’s share of this loss is:
a
$8,000
b
$1,000
c
$4,000
d
Emma does not have to pay any money towards meeting the debts of
the company.
Solution Check
Profit after tax = $21,700
Total equity = $92,995
78 Accounting 3B
Question 29
Techno Traders Limited
Trial Balance
as at 30 June 2028
Ledger Account Title
Interest expense
Cost of sales
Debit
5,100
117,800
Bad debts
2,900
Electricity
2,861
Wages
88,380
Freight outwards
5,410
Loss on sale of delivery vehicle
1,000
Prepaid advertising
10,000
Interest revenue
1,995
Sales
Sales returns and allowances
247,100
900
Discount received
416
Cash at bank
Bank fixed term deposit (maturing in 4 months)
Interim dividend
Accounts receivable
9,205
77,200
9,640
79,011
Allowance for doubtful debts
Inventory
Land
Office equipment
Credit
3,400
66,029
110,000
14,100
Accumulated depreciation of office equipment
6,100
Asset revaluation reserve
17,690
General reserve
11,000
Debentures (repayable in 2035)
79,100
Retained earnings
24,190
Share capital (122,000 ordinary shares fully paid)
120,594
Accounts payable
69,541
$590,331
$590,331
Accounting 3B
79
Question 29 continued
Additional Information
a
It is expected that during the next 12 months $4,700 of debtors will
probably not be able to pay the amounts they owe.
b
Depreciation is charged on the office equipment at 25 percent per annum
using the reducing balance method.
c
Electricity expense owing $1,300.
d
Unexpired advertising on balance date $2,100.
e
Accrued interest revenue $1,840.
f
$7,000 was transferred from the general reserve to retained earnings.
g
Company income tax rate 30%.
h
In August 2027 the land was revalued from $105,000 to $110,000.
i
The directors have proposed the following final dividend, subject to
shareholder approval at the annual general meeting to be held in
October 2028: 5 cents per share.
Required
1
Prepare a statement of comprehensive income for the year ended
30 June 2028.
2
Prepare the following notes to the statement of financial position on
30 June 2028:

property, plant and equipment

share capital

reserves

final dividend recommended by the directors.
3
Prepare a statement of financial position as at 30 June 2028.
4
Describe four duties of a director of a company.
Solution Check
Profit after tax = $10,150
Total equity = $173,984
80 Accounting 3B
Question 30
VIP Business Colleges Limited
Trial Balance
as at 30 June 2024
Ledger Account Title
Debit
Salaries of Teachers
Credit
58,300
Electricity
2,500
Stationery Supplies (used by teachers)
15,200
Office Wages
29,000
Prepaid Insurance
1,300
Interest
3,700
Unearned Fees
151,000
Cash at Bank
52,000
Classroom Equipment
79,000
Accumulated Depreciation of Classroom Equipment
Land
6,000
143,000
Debentures
117,000
Share Capital
70,270
Interim Dividend
19,000
Retained Earnings
43,730
Asset Revaluation Reserve
15,000
$403,000
$403,000
Additional Information
a
Stationery on hand on 30 June 2024 was valued at $2,100.
b
Classroom equipment depreciation: 20% per annum reducing balance.
c
Office wages owing on balance date $500.
d
Insurance paid in advance on balance date $400.
e
Fees received in advance at the end of the accounting period $4,200.
f
Company income tax rate 30%.
g
Land had been revalued from $128,000 to $143,000 in April 2024.
Required
1
Prepare a statement of comprehensive income for the year ended
30 June 2024.
2
Prepare a balance sheet as at 30 June 2024.
Solution Check
Profit after tax = $16,940
Total Assets = $255,900
Accounting 3B

81
Questions 31 and 32: issue of bonus shares
Question 31
Eradu Limited
Balance Sheet (extract)
as at 30 June 2027
Equity
Share capital (400,000 ordinary shares)
Reserves
Retained earnings
Total Equity
194,000
72,000
11,000
$277,000
Reserves on 30 June 2027
Asset revaluation
10,000
General
62,000
6 December 2028
The shareholders received 1 fully paid $0.50 bonus share for every 8 now
held from the general reserve.
1 March 2029
The shareholders were paid a 14 cents per share interim dividend.
Required
1
Prepare the general journal and general ledger entry to record the bonus
share issue.
2
Complete the equity section of the balance sheet on 30 June 2028.
Eradu Limited
Balance Sheet (extract)
as at 30 June 2028
Equity
Retained earnings
16,000
Total Equity
3
Calculate the amount of the interim dividend paid in March 2029.
82 Accounting 3B
Question 32
Extract of the General Ledger balances of Sunshine Limited on 30 June 2026:
Share Capital
267,000
($0.50 ordinary shares, share issue costs $3,100)
Retained Earnings
84,500
Asset Revaluation Reserve
31,400
General Reserve
95,100
8 October 2026
A 15 cents per share dividend, declared by the directors for the year ended
30 June 2026, approved by the shareholders at their annual general meeting
in September 2026, was paid on this date.
1 February 2027:
The company made a bonus share issue, out of the general reserve, of 1 new
ordinary share fully paid at $0.80, for every 5 shares held.
March 2027:
The land owned by the company was increased in value by $19,000.
Year Ended 30 June 2027
The company made a profit after tax of $50,500.
The following profit appropriation decisions were made:

the directors recommended a final dividend of 9 cents per share be paid
to the shareholders

an amount of $10,000 was transferred to a general reserve.
Required
1
Prepare the general journal entry to record the payment of the final dividend.
2
Prepare the general journal entry to record the bonus share issue.
3
Prepare the retained earnings ledger account to 30 June 2027.
4
Prepare the equity section of the statement of financial position as at
30 June 2027.
5
Will the issue of bonus ordinary shares increase the total equity of a
company? Explain your answer using the accounting equation.
Accounting 3B

83
Question 33 onwards: test questions
Question 33
Extract of General Ledger balances of Dumbleyung Limited on 30 June 2027:
Share Capital
$114,000
($0.25 ordinary shares, share issue costs $2,000)
Retained earnings
6,210
General reserve
4,000
Asset revaluation reserve
8,000
On 10 December 2027 the company paid a 7 cents per share final dividend
for the year ended 30 June 2027.
On 1 February 2028 a further 30,000 ordinary shares were offered to the
public at a price of $0.90 per share. The share issue closed, fully subscribed,
on 24 February 2028. The shares were allotted on 13 March 2028 and share
issue costs, of $1,600, were paid on 31 March 2028. The share issue costs
were written off against share capital.
For the year ended 30 June 2028 Dumbleyung Limited made a $72,000 profit
after tax.
For the year ended 30 June 2028 the directors of the company declared a
5 cents per share dividend.
This dividend has not yet been approved by the shareholders.
An amount of $1,000 was transferred from the general reserve to retained
earnings and the asset revaluation reserve was increased by $7,000.
Required
1
Prepare the general journal entries to record the 2028 share issue.
2
Prepare the retained earnings ledger account to 30 June 2028.
3
Prepare the equity section of the balance sheet as at 30 June 2028.
Solution Check
Retained earnings on 30 June 2028 = $46,730
84 Accounting 3B
Question 34
Advanced Public Relations Limited
After Closing Trial Balance
as at 30 June 2028
Ledger Account Title
Debit
Cash at Bank
13,000
Accounts Receivable
62,000
Allowance for Doubtful Debts
700
Office Equipment
29,000
Accumulated Depreciation of Office Equipment
Land
Credit
15,000
141,000
Loan from Bank
42,000
Share Capital
159,000
Retained Earnings
28,300
245,000
245,000
Information for year ended 30 June 2029
a
Fees received during the year were $180,530. Unearned income on
balance date was $6,581.
b
Bank interest earned was $1,710.
c
9,000 shares were purchased in Advance Limited for $2.70 per share.
All the shares were sold in April 2029 for $3.20 per share.
d
Wages expense for the year was $39,100 and wages paid for the year
was $37,000.
e
Interest expense for the year was $5,400.
f
Other cash expenses were $60,000. On 30 June 2029 accrued expenses
were $2,000.
g
The office equipment is depreciated at the rate of 25% per annum using
the reducing balance method.
h
On 1 February 2029 a 12 months insurance policy costing $2,400 was
taken out.
i
Write off bad debts of $515. Set the allowance for doubtful debts at $814.
j
Income tax is 30% of the profit.
k
The land was revalued in May 2029 to $160,000.
Required
Prepare a statement of comprehensive income of the company for the year
ended 30 June 2028.
Accounting 3B
85
Question 35
True Blue Limited
Trial Balance (extract)
as at 30 June 2026
Ledger Account Title
Debit
Credit
Share Capital
($0.25 ordinary shares, share issue costs $2,000)
General Reserve
41,000
Retained Earnings
Land
19,200
Plant and Equipment
Accumulated Depreciation of Plant and Equipment
Loan
1,700
110,000
26,000
11,000
200,000
September 2026
The land was revalued to $145,100.
November 2026
The shareholders were paid a $0.06 per share dividend.
March 2027:
The company issued a further 7,200 fully paid ordinary shares at $1.50 per share.
Share issue costs were $1,400.
Profit and loss information for the year ended 30 June 2027:

sales of the company were $130,200

the cost of sales for the year was $32,000.

rent expense for the year was $27,100. Prepaid rent was $940.

wages paid $33,140. Accrued wages on 30 June 2027 were $710.

the plant and equipment is depreciated at the rate of 15% per annum,
straight line method.

advertising expense was $9,130.

interest expense was $7,970.

discount allowed $100.
Income tax is charged at the rate of 30% on the profit for the year.
86 Accounting 3B
Question 35 continued
Year Ended 30 June 2027:
The directors recommended an 11 cents per share final dividend. The
shareholders will vote to approve or reject the dividend in December 2027.
The balance of the general reserve was increased to $2,000.
Required
1
Prepare a statement of comprehensive income for the year ended
30 June 2027.
2
Prepare a statement of changes in equity for the year ended 30 June 2027
Solution Check
Profit after tax = $11,305
Retained earnings on 30 June 2027 = $19,885
Question 36
WA Fine Furniture Limited was incorporated in June 2026 and commenced
selling furniture to the public on 31 December 2026.
Cash Inflows to 30 June 2027
Ordinary Share Capital
Debentures (repayable in 2031)
Collections from Debtors
$119,000
99,000
235,800
Cash Outflows to 30 June 2027
Land
71,000
Plant and Equipment
83,000
Share Issue Costs
1,700
Preliminary Expenses
2,800
Inventory
115,000
Wages
73,000
Prepaid Insurance
20,000
Interim Dividend
9,300
Interest on Debentures
6,400
Accounting 3B
87
Question 36 continued
Additional Information
a
$7,000 was owing from debtors on 30 June 2027.
b
The inventory on 30 June 2027 was valued at $18,000.
c
Prepaid insurance on 30 June 2027 was $4,100.
d
Accrued wages on 30 June 2027 was $4,900.
e
On 31 December 2026 the plant and equipment was installed ready for
use. This asset is to be depreciated at the rate of 20% per annum using
the straight line method.
f
The directors of the company decided to transfer $3,000 of profits to a
general reserve and revalue the land to $92,000.
g
The company income tax rate is 30%.
h
The cash at bank balance was $39,600 on 30 June 2027.
Required
1
Prepare a statement of comprehensive income for the six months ended
30 June 2027.
2
Prepare a balance sheet of the company on 30 June 2027.
3
Describe two rights of the ordinary shareholders of a company.
4
Describe the purpose and content of the following documents associated
with company operation:
5

replaceable rules

constitution.
Describe the purpose and possible uses of the following reserves:

asset revaluation

general.
Solution Check
Profit after tax = $24,150
Total assets = $267,400
88 Accounting 3B
Question 37
Binnu Traders Limited
Share Capital on 30 June 2024
384,000 ordinary shares
$365,000
On 21 October 2024 the company issued 1 bonus share to the shareholders,
fully paid at $1.35, for every 6 shares that they currently own. The bonus
share issue was made out of a general reserve.
General ledger balances on 30 June 2025:
Sales
$782,691
Wages
331,780
Prepaid rent
101,330
Interest expense
39,410
Discount allowed
2,150
Cost of sales
252,500
Retained earnings
70,926
General reserve
43,000
Additional Information
●
Accrued interest expense on 30 June 2025 was $3,736.
●
Rent expense for the year ended 30 June 2025 was $92,421.
●
Wages expense for the year ended 30 June 2025 was $337,294.
●
Income tax is 30% of the profit.
●
No dividends were paid during the year ended 30 June 2025.
●
Land was revalued from $392,000 to $427,000.
Required
1
Prepare the general journal entry to record the bonus share issue.
2
Prepare a statement of comprehensive income of the company for the
year ended 30 June 2025.
3
Prepare the equity section of the balance sheet as at 30 June 2025.
Accounting 3B
2
89
The Statement of Cash Flows
Introduction
In this chapter we will examine the accounting report known as a statement of
cash flows.
A statement of cash flows shows the cash inflows and cash outflows of a
company for a period of time, such as, 12 months.
The accounting standard that sets out the rules for the contents of a statement
of cash flows is AASB 107 Statement of Cash Flows.
Purpose of a Statement of Cash Flows
A statement of cash flows, when used with other financial statements, such
as, a balance sheet and a statement of comprehensive income, can help
people to:

assess the ability of a company to generate net cash inflows from the
sale of products or the providing of services

check the accuracy of past assessments of the cash generating ability of
a company

compare the cash generating ability of different companies, and

assess the ability of a company to pay it short term and long term debts.
Definition of Cash and Cash Equivalents
AASB 107 Statement of Cash Flows states that cash inflows and outflows are
made up of cash and cash equivalents.
The word “cash” means notes and coins held on the business premises and
deposits held at call with a financial institution, such as, a bank. The term “at
call” means money that a business can withdraw from a financial institution at
any time.
The term “cash equivalents” means short-term investments that can be easily
converted into cash and have an insignificant risk of change in value. An
example is money held in a six months, fixed term bank deposit, with 90 days
to maturity (90 days to the end of the six months term).
A cash equivalent is usually convertible into cash within three months.
90 Accounting 3B
Example
On 1 July 2018 the cash and cash equivalents of Perth Limited were:
Cash held on the business premises
Cash in bank account
Bank fixed term deposit (30 days to maturity)
Cash and Cash Equivalents
$100
5,000
4,000
Cash
Cash
Cash Equivalent
$9,100
Format of a Statement of Cash Flows
A cash flow statement is made up of three sections:

cash flows from operating activities

cash flows from investing activities

cash flows from financing activities.
Cash Flows from Operating Activities
Cash flows from operating activities are the receipts and payments from the
main revenue raising activities of a business.
Cash inflows from operating activities include the following receipts:

sales of inventory

fees for services provided

interest (received).
Cash outflows from operating activities include the following payments:

inventory purchased

directors fees

wages

freight outwards

Advertising

audit fees

Insurance

electricity

interest (paid)

income tax.
If a company is to survive for a long period of time, the cash inflows from
selling inventory or providing a service must be greater than the cash outflows
to pay for expenses and inventory. Therefore, the net cash flow from
operating activities is a very important figure.
Accounting 3B
91
Cash Flows from Investing Activities
Cash flows from investing activities are cash transactions involving the purchase
or sale of non-current assets.
Cash inflows from investing activities include the proceeds of the sale of:

a motor vehicle

investments.
Cash outflows from investing activities include cash paid for:

office equipment

investments.
Cash Flows from Financing Activities
Cash flows from financing activities are the cash transactions that change the
share capital or loans of a company.
Cash inflows from financing activities include:

a loan from a bank

debentures

cash share capital.
Cash outflows from financing activities include:

the repayment of a loan

the repayment of debentures

dividends paid to shareholders.
Specific Disclosures
AASB 107 Statement of Cash Flows states that the following items must be
shown separately in a statement of cash flows:

income tax paid

interest received

dividends received

interest paid

dividends paid.
AASB 107 Statement of Cash Flows, paragraph 35, states that income tax
paid should be shown as an operating cash flow unless the income tax
payment can be specifically linked to financing or investing activities.
92 Accounting 3B
Specific Disclosures continued
AASB 107 Statement of Cash Flows, paragraph 33, states that interest
received, dividends received and interest paid can be included in the
operating cash flows section as these items are included in the calculation of
the profit. Alternatively, interest received and dividends received can be
shown in the investing cash flows section as they are a return on investment
and interest paid can be included in the financing cash flows section as
interest is the cost of obtaining a loan. In this textbook interest received and
paid and dividends received will be shown as an operating cash flow.
According to AASB 107 Statement of Cash Flows, paragraph 34, dividends
paid can be shown as either an operating cash flow or as a financing cash
flow. In this textbook dividends paid will be shown as a financing cash flow.
Preparation of a Statement of Cash Flows
A statement of cash flows is prepared from the information contained in two
consecutive balance sheets of a company and the income statement for the
most recent period.
Example
Go Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
85,000
Less Cost of Sales
31,000
Gross Profit
54,000
Add Other Income
Interest
800
Dividends
200
1,000
55,000
Less Other Expenses
Interest
Wages
3,000
18,000
Rent
7,000
Advertising
6,000
Depreciation of plant and equipment
2,000
Profit before Tax
Less Income Tax Expense
Profit
36,000
19,000
5,000
$14,000
Accounting 3B
93
Example continued
Go Traders Limited
Unclassified Balance Sheets as at
30 June 2018
30 June 2019
Assets
Cash at Bank
7,000
0
Inventory
14,000
16,000
Investments (shares in companies)
11,000
11,000
Plant and Equipment
30,000
62,000
Less Accumulated Depreciation
(4,000)
(6,000)
Total Assets
$58,000
$83,000
Liabilities and Equity
Bank Overdraft
0
1,000
6,000
5,000
0
14,000
Share Capital
41,000
59,000
Retained Earnings
11,000
4,000
$58,000
$83,000
Income Tax Payable
Loan from Bank
Total Equity
Additional Information
a
A total of $33,000 in inventory was purchased for cash during the year
ended 30 June 2019.
b
Plant and equipment was purchased for cash in February 2019.
c
Cash was raised from a share issue in November 2018.
d
A $21,000 dividend was paid to the shareholders in 2019.
Required
The management of Go Traders Limited is concerned that while the business
made a profit after tax of $14,000 in the last year, the cash at bank balance
has fallen from $7,000, at the start of the year, to a bank overdraft of $1,000 at
the end of the year.
Prepare a statement of cash flows to help explain why this has occurred.
94 Accounting 3B
Solution
Step 1
The first section of the statement is the cash inflows and outflows from
operating activities, that is, from the day-to-day business events.
The cash received from customers during the year is the first entry in the
statement of cash flows.
The income statement sets out the sales of Go Traders Limited:
Go Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2019
Sales
85,000
Less Cost of Sales
31,000
Gross Profit
54,000
There were no accounts receivable in the balance sheets of Go Traders Limited,
therefore, all the money owing from the sales must have been collected by
30 June 2019.
The $85,000 of cash received from sales is recorded in the statement of cash
flows as “receipts from customers”:
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
85,000
Step 2
The next entry in the statement of cash flows is the “payments to suppliers
and employees”. This is the amount of money paid to suppliers of inventory
and services, such as, electricity, telephone, wages and insurance. The
starting point in calculating the payments to suppliers and employees is the
expenses listed in the income statement.
Accounting 3B
95
Step 2 continued
The income statement of Go Traders Limited includes the expenses wages,
rent and advertising:
Go Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2019
Sales
85,000
Less Cost of Sales
31,000
Gross Profit
54,000
Add Other Income
Interest
800
Dividends
200
1,000
55,000
Less Other Expenses
Interest
Wages
3,000
18,000
Rent
7,000
Advertising
6,000
Depreciation of plant and equipment
2,000
36,000
There are no prepaid or accrued expenses in the balance sheets. Therefore,
the amount paid for wages, rent and advertising in the last year is equal to the
amount of the wages, rent and advertising expenses shown in the income
statement.
The payments to suppliers and employees is:
Wages
$18,000
Rent
7,000
Advertising
6,000
Purchases of inventory *
Payments to suppliers and employees
33,000
$64,000
* Cost of sales is an expense but is not a payment. The $33,000 paid for
inventory was given in additional information a.
Interest paid is not included in the payments to suppliers and employees.
Interest paid must be shown separately in the statement of cash flows.
The $2,000 of depreciation of plant and equipment is a non-cash expense and
is not included in the statement of cash flows.
96 Accounting 3B
Step 2 continued
The $64,000 of payments to suppliers and employees is a negative entry, an
entry in brackets, in the statement of cash flows:
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
85,000
Payments to suppliers and employees
(64,000)
Step 3
The remaining cash inflows from operating activities are the interest received
and the dividends received. The $800 of interest income and the $200 of
dividends income are set out in the income statement:
Go Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2019
Sales
85,000
Less Cost of Sales
31,000
Gross Profit
54,000
Add Other Income
Interest
800
Dividends
200
1,000
There is no accrued income in the balance sheets. Therefore, the interest
received and dividends received are equal to the interest income and
dividends income.
These receipts are recorded in the statement of cash flows:
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
85,000
Payments to suppliers and employees
(64,000)
Interest received
800
Dividends received
200
Accounting 3B
97
Step 4
One of the two remaining cash outflows from operating activities is interest paid.
The $3,000 of interest expense is set out in the income statement:
Go Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2019
Sales
85,000
Less Cost of Sales
31,000
Gross Profit
54,000
Add Other Income
Interest
800
Dividends
200
1,000
55,000
Less Other Expenses
Interest
3,000
Wages
18,000
Rent
7,000
Advertising
6,000
Depreciation of plant and equipment
2,000
Profit before Tax
36,000
19,000
There is no accrued interest expense in the balance sheets. Therefore, the
interest paid is equal to the interest expense.
The interest paid is a negative entry in the statement of cash flows:
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
85,000
(64,000)
Interest received
800
Dividends received
200
Interest paid
(3,000)
98 Accounting 3B
Step 5
The last cash outflow from operating activities is the income tax paid.
The balance sheet of 30 June 2018 includes $6,000 of income tax payable:
Go Traders Limited
Unclassified Balance Sheet (extracts) as at
30 June 2018
30 June 2019
Liabilities and Equity
Income Tax Payable
6,000
5,000
This $6,000 income tax liability was paid during the year ended 30 June 2019
and is a negative entry in the statement of cash flows:
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
85,000
(64,000)
Interest received
800
Dividends received
200
Interest paid
(3,000)
Income tax paid
(6,000)
The operating cash inflows and outflows are then totalled to arrive at a net
cash flow from operating activities.
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
85,000
(64,000)
Interest received
800
Dividends received
200
Interest paid
(3,000)
Income tax paid
(6,000)
Net cash from operating activities
13,000
The $13,000 net cash from operating activities means that the day-to-day
business operations have contributed $13,000 cash to the company.
Accounting 3B
99
Step 6
The second section of the statement is the cash flows from investing activities,
that is, the cash from the purchase and sale of non-current assets.
Go Traders Limited purchased plant and equipment for cash in 2019
(additional information b).
The amount of plant and equipment purchased can be found by subtracting
the $30,000 plant and equipment balance sheet entry on 30 June 2018 from
the $62,000 plant and equipment balance sheet entry on 30 June 2019:
Go Traders Limited
Unclassified Balance Sheet (extracts) as at
30 June 2018 30 June 2019
Assets
Plant and Equipment
30,000
Less Accumulated Depreciation
(4,000)

62,000
(6,000)
Plant and equipment costing $32,000 was purchased for cash during the year
ended 30 June 2019. The accumulated depreciation entries are ignored as
depreciation is a non-cash expense.
The $32,000 paid for the purchase of the plant and equipment is a negative
entry in the statement of cash flows.
The net cash from investing activities is then calculated.
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
85,000
(64,000)
Interest received
800
Dividends received
200
Interest paid
(3,000)
Income tax paid
(6,000)
Net cash from operating activities
13,000
Cash flows from investing activities
Payment for plant and equipment
(32,000)
Net cash from investing activities
(32,000)
100 Accounting 3B
Step 7
The third section of the statement is the cash flows from financing activities,
that is, the cash changes in the capital and loans of a company.
There are two cash inflows from financing activities.
Go Traders Limited borrowed $14,000 from a bank during the last year:
Go Traders Limited
Unclassified Balance Sheet (extracts) as at
30 June 2018 30 June 2019
Liabilities and Equity
Loan from Bank
0

14,000
This cash inflow is entered in the statement:
Go Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from financing activities
Loan from bank
14,000
Step 8
The second cash inflow from financing activities is additional share capital.
The share capital has increased by $18,000:
Go Traders Limited
Unclassified Balance Sheet (extracts) as at
30 June 2018 30 June 2019
Liabilities and Equity
Additional share capital
41,000

59,000
This cash inflow is entered in the statement:
Go Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from financing activities
Loan from bank
14,000
Additional share capital
18,000
Accounting 3B
101
Step 9
There is one other cash outflow from financing activities.
The shareholders, during the year ended 30 June 2019, received a $21,000
cash dividend, additional information d.
This cash outflow is entered in the statement of cash flows. The $1,000 net
cash from financing activities is then calculated.
Go Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from financing activities
Loan from bank
14,000
Additional share capital
18,000
Dividend paid
Net cash from financing activities
(21,000)
11,000
Step 10
The net increase or decrease in cash for the year is calculated. The $13,000
net cash from operating activities is added to the ($32,000) net cash from
investing activities and the $11,000 net cash from financing activities. The
result is an $8,000 net decrease in cash held for the last year.
Go Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from operating activities
Net cash from operating activities
13,000
Cash flows from investing activities
Net cash from investing activities
(32,000)
Cash flows from financing activities
Net cash from financing activities
Net decrease in cash held
11,000
(8,000)
102 Accounting 3B
Step 11
The ($8,000) net decrease in cash held is added to the $7,000 cash at bank
balance on 1 July 2018, leaving the $1,000 bank overdraft on 30 June 2019.
Go Traders Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
85,000
(64,000)
Interest received
800
Dividends received
200
Interest paid
(3,000)
Income tax paid
(6,000)
Net cash from operating activities
13,000
Cash flows from investing activities
Payment for plant and equipment
(22,000)
Net cash from investing activities
(22,000)
Cash flows from financing activities
Loan from bank
14,000
Additional share capital
18,000
Dividend paid
(21,000)
Net cash from financing activities
11,000
Net decrease in cash held
(8,000)
Cash and cash equivalents at start of period
7,000
Cash and cash equivalents at end of period
(1,000)
Step 12
The cash inflows and cash outflows of the company can be evaluated.
The main cash inflows were the $85,000 in receipts from customers and the
$14,000 bank loan. These cash inflows were mainly used to pay $64,000 to
the suppliers and employees, to purchase $22,000 of plant and equipment
and to pay a $21,000 dividend to the shareholders.
The cash inflows of the company were not enough to cover the cash outflows,
causing the cash at bank balance to descend into overdraft.
Accounting 3B
103
Reconstruction of Ledger Accounts
When answering a statement of cash flows question it will often be necessary
to reconstruct a number of ledger accounts to find missing cash flow amounts.
Dates are not required in the following ledger account reconstructions.
Reconstruction of Accounts Receivable
If the balance sheets in a question contain accounts receivable the sales in the
income statement will not be equal to the cash collected from customers. The
accounts receivable ledger account must be reconstructed to find the cash
collected from customers.
Example 1
VIP Traders Limited has supplied the following information:
VIP Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Sales Returns
254,000
4,000
250,000
Less Cost of Sales
131,000
Gross Profit
119,000
Less Other Expenses
Bad debts
6,000
Discount allowed
1,000
Other expenses
93,000
100,000
Profit before Tax
19,000
Less Income Tax Expense
$5,100
Profit
$13,900
VIP Traders Limited
Balance Sheet (extracts) as at
30 June 2018
30 June 2019
Current Assets
Accounts Receivable
9,000
10,000
Required
Calculate the cash collected from customers for the year ended 30 June 2019.
104 Accounting 3B
Solution
Step 1
Balance sheet extracts:
VIP Traders Limited
Balance Sheet (extracts) as at
30 June 2018
30 June 2019
Current Assets
Accounts Receivable
9,000
10,000
The opening balance of accounts receivable is $9,000. The opening balance of
any ledger account is entered on the side that it normally goes on. Therefore,
as accounts receivable is an asset, the opening balance is entered on the debit
side of this ledger account:
Accounts Receivable
Opening Balance
9,000
Step 2
The $10,000 closing balance is entered on the credit side:
Accounts Receivable
Opening Balance
9,000
Closing Balance
10,000
Step 3
The $254,000 of sales is recorded on the debit side of accounts receivable.
Accounts Receivable
Opening Balance
Sales
9,000
254,000
Closing Balance
The sales were obtained from the income statement.
10,000
Accounting 3B
105
Step 4
The $4,000 of sales returns, $6,000 of bad debts and the $1,000 of discount
allowed are entered on the credit side of accounts receivable:
Accounts Receivable
Opening Balance
Sales
9,000
254,000
Sales Returns
4,000
Bad Debts
6,000
Discount Allowed
1,000
Closing Balance
10,000
The sales returns, bad debts and discount allowed were obtained from the
income statement.
Step 5
The difference between the two sides of the ledger account is a missing figure.
Accounts Receivable
Opening Balance
Sales
9,000
254,000
Sales Returns
4,000
Bad Debts
6,000
Discount Allowed
1,000
Missing Figure
242,000
Closing Balance
10,000
263,000
263,000
This $242,000 missing figure is the amount of cash collected from the debtors
during the year ended 30 June 2019:
Accounts Receivable
Opening Balance
Sales
9,000
254,000
Sales Returns
4,000
Bad Debts
6,000
Discount Allowed
1,000
Bank
Closing Balance
263,000
242,000
10,000
263,000
106 Accounting 3B
Step 6
The $242,000 of receipts from customers is entered in the statement:
VIP Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
242,000
Example 2: Allowance for Doubtful Debts
Where a company has an allowance for doubtful debts it will be necessary to
reconstruct this ledger account to find the bad debts expense before the
accounts receivable ledger account can be reconstructed.
Augusta Traders Limited has supplied the following information:
Augusta Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2021
Sales
309,000
Less Cost of Sales
185,000
Gross Profit
124,000
Less Other Expenses
Doubtful debts
6,000
Other expenses
73,000
Profit before Tax
79,000
$45,000
Augusta Traders Limited
Balance Sheet (extracts) as at
30 June 2020
30 June 2021
Current Assets
Accounts Receivable
17,000
28,000
Less Allowance for Doubtful Debts
(2,000)
(3,000)
Required
Calculate the cash collected from customers for the year ended 30 June 2021.
Accounting 3B
107
Solution
Step 1
The $2,000 opening balance of the allowance for doubtful debts, a negative
asset, is recorded on the credit side of this ledger account:
Allowance for Doubtful Debts
Opening Balance
2,000
The opening balance was obtained from the balance sheet of 30 June 2020.
Step 2
The $3,000 closing balance of the account is recorded on the debit side:
Allowance for Doubtful Debts
Opening Balance
Closing Balance
2,000
3,000
This balance was obtained from the balance sheet prepared on 30 June 2021.
Step 3
The $6,000 of doubtful debts, obtained from the income statement, is recorded
on the credit side of the account.
Allowance for Doubtful Debts
Closing Balance
3,000
Opening Balance
2,000
Doubtful Debts
6,000
The difference between the two sides of the account is the $5,000 of bad
debts expense:
Allowance for Doubtful Debts
Bad Debts
5,000
Opening Balance
2,000
Closing Balance
3,000
Doubtful Debts
6,000
8,000
8,000
108 Accounting 3B
Step 4
The accounts receivable ledger account can now be reconstructed and the
$293,000 of receipts from customers is found:
Accounts Receivable
Opening Balance
Sales
17,000
309,000
Bad Debts
Bank
Closing Balance
5,000
293,000
28,000
326,000
326,000
Reconstruction of Inventory and Accounts Payable
If the balance sheets in a question contain accounts payable the inventory
and accounts payable ledger accounts must be reconstructed to find the
amount of cash that was paid to creditors during a year.
Example
Carnamah Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2020
Sales
200,000
Less Cost of Sales
140,000
Gross Profit
60,000
Add Other Income
Discount received
2,000
62,000
Carnamah Traders Limited
Balance Sheet (extracts) as at
30 June 2019
30 June 2020
Current Assets
Inventory
28,000
31,000
Current Liabilities
Accounts Payable
11,000
15,000
Additional information
Purchases returns for the year ended 30 June 2020 were $800.
Required
Calculate the amount paid to creditors during the year ended 30 June 2020.
Accounting 3B
109
Solution
Step 1
The inventory ledger account must be reconstructed to find the amount of
inventory purchased.
The opening and closing inventory balances are set out in the balance sheet:
Carnamah Traders Limited
Balance Sheet (extracts) as at
30 June 2019
Current Assets
Inventory
30 June 2020
28,000
31,000
The $28,000 opening balance is entered on the debit side of the inventory
ledger account. The $31,000 closing balance is entered on the credit side.
Inventory
Opening Balance
28,000
Closing Balance
31,000
Step 2
The $140,000 cost of sales, obtained from the income statement, is recorded on
the credit side of the account:
Inventory
Opening Balance
28,000
Cost of Sales
Closing Balance
140,000
31,000
Step 3
The $800 of purchases returns for the year, given in additional information, is
recorded on the credit side of the account:
Inventory
Opening Balance
28,000
Cost of Sales
Purchases Returns
Closing Balance
140,000
800
31,000
110 Accounting 3B
Step 4
The difference between the two sides of the inventory ledger account is the
$143,800 of inventory purchased:
Inventory
Opening Balance
Accounts Payable
28,000
143,800
Cost of Sales
140,000
Purchases Returns
Closing Balance
800
31,000
171,800
171,800
The $143,800 of inventory purchased will be entered on the credit side of the
accounts payable ledger account.
Step 5
The accounts payable ledger account can now be reconstructed.
The opening and closing balances of this account are set out in the balance
sheet:
Carnamah Traders Limited
Balance Sheet (extracts) as at
30 June 2019
Current Liabilities
Accounts Payable
30 June 2020
11,000
15,000
The $11,000 opening balance is recorded on the credit side of this liability
account. The $15,000 closing balance is entered on the debit side.
Accounts Payable
Opening Balance
Closing Balance
15,000
11,000
Accounting 3B
111
Step 6
The $143,800 of inventory purchased is recorded on the credit side of accounts
payable.
Accounts Payable
Opening Balance
Inventory
Closing Balance
11,000
143,800
15,000
Step 7
The $2,000 of discount received, found in the income statement, and the $800 of
purchases returns, are entered on the debit side of this account.
Accounts Payable
Discount Received
2,000
Purchases Returns
800
Closing Balance
Opening Balance
Inventory
11,000
143,800
15,000
Step 8
The difference between the two sides of accounts payable is the $137,000 of
cash paid for the purchase of inventory:
Accounts Payable
Discount Received
2,000
Purchases Returns
800
Bank
Closing Balance
Opening Balance
Inventory
11,000
143,800
137,000
15,000
154,800
154,800
The $137,000 paid for inventory is included in the calculation of the cash paid
to suppliers and employees.
112 Accounting 3B
Reconstruction of the Retained Earnings Ledger Account
The retained earnings ledger account will often have to be reconstructed to
find a cash dividend paid during the year.
Example 1: Transfer to a General Reserve
Yandanooka Traders Limited
Unclassified Income Statement
for the year ended 30 June 2025
Sales
220,000
Less Cost of Sales
130,000
Gross Profit
90,000
Less Other Expenses
Rent
26,000
Wages
41,000
Audit fees
5,000
Profit before Tax
72,000
18,000
Less Income tax expense
5,000
Profit
$13,000
Yandanooka Traders Limited
Balance Sheet (extracts) as at
30 June 2024
30 June 2025
Equity
Share Capital
41,000
41,000
General Reserve
2,000
6,000
Retained Earnings
9,000
7,000
$52,000
$54,000
Total Equity
Required
Calculate the cash dividend paid for the year ended 30 June 2025 by
reconstructing the retained earnings ledger account.
Accounting 3B
113
Solution
The retained earnings ledger account is reconstructed in the following steps.
Step 1
The opening and closing balances of retained earnings are set out in the
balance sheet:
Yandanooka Traders Limited
Balance Sheet (extracts) as at
30 June 2024
30 June 2025
Equity
Share Capital
41,000
41,000
General Reserve
2,000
6,000
Retained Earnings
9,000
7,000
The $9,000 opening balance of the retained earnings account, an equity account,
is entered on the credit side of this account.
The $7,000 closing balance is entered on the debit side:
Retained Earnings
Opening Balance
Closing Balance
9,000
7,000
Step 2
The $13,000 profit after tax, obtained from the income statement, is entered
on the credit side of retained earnings:
Retained Earnings
Closing Balance
7,000
Opening Balance
9,000
Profit and Loss
13,000
114 Accounting 3B
Step 3
The general reserve in the balance sheets has increased from $2,000 to $6,000:
Yandanooka Traders Limited
Balance Sheet (extracts) as at
30 June 2024
30 June 2025
Equity
General Reserve
2,000

6,000
This $4,000 change was caused by a transfer of profits from retained earnings.
Retained Earnings
General Reserve
4,000
Opening Balance
Profit and Loss
Closing Balance
9,000
13,000
7,000
Step 4
The difference between the two sides of the ledger account is the $11,000 cash
dividend paid during the year ended 30 June 2025:
Retained Earnings
General Reserve
Dividend
4,000
11,000
Closing Balance
Opening Balance
Profit and Loss
13,000
7,000
22,000
22,000
Step 5
The dividend paid is recorded in the statement of cash flows:
Yandanooka Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2025
Cash flows from financing activities
Dividend paid
9,000
(11,000)
Accounting 3B
115
Example 2: Transfer from a General Reserve
Yandanooka Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2026
Profit (after tax)
$21,000
Yandanooka Traders Limited
Balance Sheet (extracts) as at
30 June 2025
30 June 2026
Equity
Share Capital
41,000
41,000
General Reserve
6,000
5,000
Retained Earnings
7,000
13,000
$54,000
$59,000
Total Equity
Required
Calculate the cash dividend paid for the year ended 30 June 2026.
Solution
Step 1
The opening and closing balances of retained earnings and the profit after tax
are recorded in the retained earnings ledger account.
Retained Earnings
Opening Balance
Closing Balance
13,000
Profit and Loss
7,000
21,000
Step 2
The decrease in the balance of the general reserve, from $6,000 to $5,000,
means that $1,000 has been transferred to retained earnings. The $1,000
transfer is recorded on the credit side of the retained earnings account. The
missing figure is the $16,000 dividend paid.
Retained Earnings
Dividend
16,000
Opening Balance
Closing Balance
13,000
Profit and Loss
General Reserve
29,000
7,000
21,000
1,000
29,000
116 Accounting 3B
Reconstruction of the Prepaid Expense Ledger Account
If the balance sheets in a question include a prepaid expense there will be a
difference between the expense in the income statement and the amount of cash
paid for this expense. The prepaid expense account must be reconstructed.
Example
Australian Business College Limited
Income Statement (extract)
for the year ended 30 June 2022
Fees
109,000
Less Expenses
Rent
Wages
11,000
32,000
Advertising
5,000
Profit before Tax
48,000
$61,000
Australian Business College Limited
Balance Sheet (extracts) as at
30 June 2021
30 June 2022
Current Assets
Prepaid Rent
2,000
700
Required
Calculate the amount of rent paid during the year ended 30 June 2022.
Solution
The prepaid rent ledger account is reconstructed in the following steps.
Step 1
The $2,000 of prepaid rent on 30 June 2021, the opening balance, is an asset.
Therefore, it is entered on the debit side of the prepaid rent ledger account.
The $700 closing balance is entered on the credit side of the account:
Prepaid Rent
Opening Balance
2,000
Closing Balance
700
Accounting 3B
117
Step 2
The rent expense for the year is shown in the income statement:
Australian Business College Limited
Income Statement (extract)
for the year ended 30 June 2022
Fees
109,000
Less Expenses
Rent
11,000
Wages
Advertising
32,000
5,000
Profit before Tax
48,000
$61,000
The $11,000 of rent expense is entered on the credit side of the prepaid rent
account.
Prepaid Rent
Opening Balance
2,000
Rent (expense)
11,000
Closing Balance
700
The $11,000 of rent expense will be transferred to the debit side of the rent
expense account and, from there, to the debit side of the profit and loss
account.
Step 3
The difference between the two sides of the ledger account is the $9,700 of rent
paid during the year ended 30 June 2022:
Prepaid Rent
Opening Balance
2,000
Rent (expense)
Bank
9,700
Closing Balance
11,700
11,000
700
11,700
The $9,700 of rent paid is included in the payments to suppliers and employees.
118 Accounting 3B
Reconstruction of the Accrued Expense Ledger Account
If the balance sheets in a question include an accrued expense there will be a
difference between the expense in the income statement and the amount of cash
paid for this expense. The expense account must be reconstructed.
Example
Kondinin Traders Limited
Income Statement (extract)
for the year ended 30 June 2028
Sales
110,000
Less Cost of Sales
60,000
Gross Profit
50,000
Less Other Expenses
Wages
21,000
Advertising
13,000
Profit before Tax
34,000
$16,000
Kondinin Traders Limited
Balance Sheet (extracts) as at
30 June 2027
30 June 2028
Current Liabilities
Accrued Wages
4,000
1,000
Required
Calculate the amount of the wages paid for the year ended 30 June 2028.
Solution
We will assume that Kondinin Traders Limited reverses its accrued expense
balance day adjustments on the day after balance date.
Step 1
The $4,000 of accrued wages on 30 June 2027 is entered on the credit side of
the wages ledger account.
Wages
Accrued Wages
4,000
Accounting 3B
119
Step 2
The 1,000 of accrued wages on 30 June 2028 is recorded on the debit side of
the wages account:
Wages
Accrued Wages
Accrued Wages
4,000
1,000
Step 3
The $21,000 of wages expense, found in the income statement, is entered on
the credit side of the wages account.
Wages
Accrued Wages
1,000
Accrued Wages
4,000
Profit and Loss
21,000
The wages expense will be transferred to the debit side of the profit and loss
ledger account.
Step 4
The $24,000 missing figure, on the debit side of the wages account, is the wages
paid during the year ended 30 June 2028:
Wages
Bank
Accrued Wages
24,000
1,000
25,000
Accrued Wages
Profit and Loss
4,000
21,000
25,000
The wages paid is included in the payments to suppliers and employees.
120 Accounting 3B
Reconstruction of the Unearned Income Ledger Account
If the balance sheets in a question include unearned income there will be a
difference between the fees in the income statement and the amount of cash
received from fees. The unearned income account must be reconstructed.
Example
Australian Business College Limited
Income Statement (extract)
for the year ended 30 June 2028
Fees
Less Expenses
171,000
Rent
Wages
24,000
72,000
Advertising
8,000
Profit before Tax
104,000
$67,000
Australian Business College Limited
Balance Sheet (extracts) as at
30 June 2027
30 June 2028
Current Liabilities
Unearned Income
21,000
35,000
Required
Calculate the amount of fees received during the year ended 30 June 2028.
Solution
Step 1
The $21,000 of unearned income on 30 June 2027, the opening balance, is a
liability. It is entered on the credit side of the unearned income ledger account.
The $35,000 of unearned income on 30 June 2028, the closing balance, is
entered on the debit side of the account:
Unearned Income
Opening Balance
Closing Balance
35,000
21,000
Accounting 3B
121
Step 2
The $171,000 of fees income, found in the income statement, is entered on
the debit side of the account.
Unearned Income
Fees Income
Closing Balance
171,000
Opening Balance
21,000
35,000
The $171,000 of fees income will be transferred to the credit side of a fees
income account and, from there, to the credit side of the profit and loss
account.
Step 3
The difference between the two sides of the unearned income account is the
$185,000 of fees received during the year ended 30 June 2028:
Unearned Income
Fees Income
Closing Balance
171,000
35,000
Opening Balance
Bank
206,000
21,000
185,000
206,000
Step 4
The $185,000 of fees received is the receipts from customers in the statement
of cash flows:
Australian Business College Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2028
Cash flows from operating activities
Receipts from customers
185,000
122 Accounting 3B
Reconstruction of the Accrued Income Ledger Account
If the balance sheets in a question include accrued income, such as, accrued
interest income, there will be a difference between the interest income in the
income statement and the amount of interest received. The interest income
account must be reconstructed.
Example
Nullagine Traders Limited
Income Statement (extract)
for the year ended 30 June 2025
Sales
91,000
Less Cost of Sales
48,000
Gross Profit
43,000
Add Other Income
Interest
6,000
Discount received
2,000
8,000
51,000
Nullagine Traders Limited
Balance Sheet (extracts) as at
30 June 2024
30 June 2025
Current Assets
Accrued Interest Income
4,000
1,000
Required
Calculate the amount of interest received for the year ended 30 June 2025.
Solution
We will assume that Nullagine Traders Limited reverses its accrued income
balance day adjustments on the day after balance date.
Step 1
The $4,000 of accrued interest income, on 30 June 2024, is entered on the
debit side of the interest income account:
Interest Income
Accrued Income
4,000
Accounting 3B
123
Step 2
The $1,000 of accrued interest income, on 30 June 2025, is recorded on the
credit side of the interest income account:
Interest Income
Accrued Income
4,000
Accrued Income
1,000
Step 3
The $6,000 of interest income, set out in the income statement, is entered on
the debit side of the account.
Interest Income
Accrued Income
4,000
Profit and Loss
6,000
Accrued Income
1,000
The $6,000 of interest income will be transferred to the credit side of the profit
and loss account.
Step 4
The difference between the two sides of the ledger account is the $9,000 of
interest received during the year ended 30 June 2025:
Interest Income
Accrued Income
4,000
Bank
9,000
Profit and Loss
6,000
Accrued Income
1,000
10,000
10,000
Step 5
The $9,000 of interest received is included in the statement of cash flows:
Nullagine Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2025
Cash flows from operating activities
Interest received
9,000
124 Accounting 3B
Sale of a Depreciable Asset Reconstructions
In some questions it will be necessary to reconstruct three ledger accounts
involved in the sale of a depreciable asset to find missing figures that will be
entered in the statement of cash flows.
Example 1
Education Services Limited
Income Statement (extract)
for the year ended 30 June 2019
Fees
Less Expenses
80,000
Loss on sale of motor vehicle
7,000
Depreciation of motor vehicles
Other expenses (all cash)
6,000
62,000
Profit before Tax
$5,000
Education Services Limited
Unclassified Balance Sheets (extracts) as at
30 June 2018
30 June 2019
Assets
Motor Vehicles
Less Accumulated Depreciation
20,000
(3,000)
17,000
30,000
(4,000)
26,000
Additional Information
During the last year a motor vehicle was sold for $3,000 cash.
Required
Prepare the investing activities section of the statement of cash flows for the
year ended 30 June 2019.
Accounting 3B
125
Solution
The income statement in this question includes a loss on the sale of a motor
vehicle. Therefore, as a depreciable asset has been sold the following ledger
accounts will have to be reconstructed.
Motor Vehicles
Accumulated Depreciation of Motor Vehicles
Sale of Asset
These ledger accounts are reconstructed in the following manner.
Step 1
The motor vehicles ledger account is opened.
The opening and closing balances are entered into this account:
Motor Vehicles
Opening Balance
20,000
Closing Balance
30,000
An asset ledger account has a debit balance. Therefore, the $20,000 opening
balance of the motor vehicles account is entered on the debit side of this
account. The $30,000 closing balance is entered on the credit side.
126 Accounting 3B
Step 2
The accumulated depreciation of motor vehicles ledger account is opened.
Accumulated depreciation of motor vehicles is a negative asset, therefore, this
account has a $3,000 credit opening balance.
The $4,000 closing balance is entered on the debit side.
Accumulated Depreciation of Motor Vehicles
Opening Balance
Closing Balance
3,000
4,000
Step 3
The depreciation of motor vehicles expense for the year ended 30 June 2019
was $6,000 (shown in the income statement).
The $6,000 depreciation expense is entered on the credit side of the accumulated
depreciation of motor vehicles account:
Accumulated Depreciation of Motor Vehicles
Closing Balance
4,000
Opening Balance
3,000
Depreciation
6,000
Step 4
The difference between the two sides of the ledger account is the $5,000 of
accumulated depreciation of motor vehicle sold.
Accumulated Depreciation of Motor Vehicles
Sale of Asset
5,000
Opening Balance
3,000
Closing Balance
4,000
Depreciation
6,000
9,000
9,000
The $5,000 of accumulated depreciation of motor vehicle sold is transferred to
the credit side of a sale of asset account:
Sale of Asset
Accumulated
Depreciation
5,000
Accounting 3B
127
Step 5
The $3,000 of cash received from the sale of the motor vehicle (additional
information) is entered on the credit side of the sale of asset account:
Sale of Asset
Accumulated
Depreciation
5,000
Bank
3,000
Step 6
The $7,000 loss on the sale of the motor vehicle (income statement) is also
entered on the credit side of this account:
Sale of Asset
Accumulated
Depreciation
5,000
Bank
3,000
Profit and Loss
7,000
Step 7
The difference between the two sides of the ledger account is the $15,000 cost
price of the motor vehicle sold:
Sale of Asset
Motor Vehicles
15,000
Accumulated
Depreciation
5,000
Bank
3,000
Profit and Loss
7,000
15,000
15,000
The $15,000 cost price of the motor vehicle sold is entered on the credit side
of the motor vehicles account.
Motor Vehicles
Balance (opening)
20,000
Sale of Asset
15,000
Balance (closing)
30,000
128 Accounting 3B
Step 8
The difference between the two sides of the motor vehicles account is the
$25,000 cash paid for the motor vehicle purchased:
Motor Vehicles
Balance (opening)
20,000
Sale of Asset
15,000
Bank
25,000
Balance (closing)
30,000
45,000
45,000
Step 9
The cash flows from investing activities can now be prepared.
Education Services Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from investing activities
Proceeds of sale of motor vehicle
3,000
Payment for motor vehicle
(25,000)
Net cash from investing activities
(22,000)
The $3,000 proceeds of the sale of the motor vehicle is a cash inflow and was
given in additional information.
The $25,000 cash paid for the motor vehicle was found in the reconstructed
motor vehicles ledger account.
The difference between the cash inflow and outflow is the ($22,000) net cash
from investing activities.
Accounting 3B
129
Example 2
In example 2 the depreciation of office equipment expense and the loss on the
sale of office equipment have been hidden in the $13,470 “other expenses”
entry in the income statement.
Wagin Traders Limited
Income Statement (extract)
for the year ended 30 June 2025
Sales (all cash)
95,000
Less Cost of Sales
43,000
Gross Profit
52,000
Less Other Expenses
Wages
20,000
Other expenses
13,470
Profit before Tax
33,470
18,530
Less Income tax expense
5,000
Profit
$13,530
Wagin Traders Limited
Unclassified Balance Sheets (extracts) as at
30 June 2024
30 June 2025
Assets
Office Equipment
Less Accumulated Depreciation
17,000
(8,100)
8,900
19,000
(5,000)
14,000
Additional Information
a
Office equipment was sold in April 2025.
b
The cost price of the office equipment sold was $6,100.
c
The carrying amount of the office equipment sold (book value) was $2,700.
d
The proceeds of the sale of the office equipment was $920.
e
During the year ended 30 June 2025 inventory costing $34,000 was
purchased for cash.
Required
Prepare the cash flows from operating and investing activities for the year
ended 30 June 2025.
130 Accounting 3B
Solution
It is stated in additional information a that office equipment has been sold
during the last year. Therefore, it will be necessary to reconstruction the
ledger accounts involved in the sale of a depreciable asset.
Step 1
The office equipment, accumulated depreciation of office equipment and sale
of asset ledger accounts are opened:
Office Equipment
Opening Balance
17,000
Closing Balance
19,000
Accumulated Depreciation of Office Equipment
Opening Balance
Closing Balance
8,100
5,000
Sale of Asset
Step 2
The $6,100 cost price of the office equipment sold (additional information b) is
entered on the credit side of the office equipment account and the debit side
of the sale of asset account:
Office Equipment
Opening Balance
17,000
Sale of Asset
Closing Balance
Sale of Asset
Office Equipment
6,100
6,100
19,000
Accounting 3B
131
Step 3
The difference between the two sides of the office equipment account is the
$8,100 cash paid for the purchase of the new office equipment:
Office Equipment
Opening Balance
Bank
17,000
8,100
Sale of Asset
Closing Balance
25,100
6,100
19,000
25,100
Step 4
The accumulated depreciation of the office equipment sold has not been
given in the question but can be calculated as follows:
–
Carrying Amount
(or book value)
of Asset Sold
=
Accumulated
Depreciation of the
Asset Sold
–
$2,700
=
$3,400
Cost of Asset
$6,100
Additional information b
Additional information c
Step 5
The $3,400 accumulated depreciation of office equipment sold is entered on
the debit side of the accumulated depreciation of office equipment account
and the credit side of the sale of asset account:
Accumulated Depreciation of Motor Vehicles
Sale of Asset
3,400
Closing Balance
5,000
Opening Balance
8,100
Accumulated
Depreciation
3,400
Sale of Asset
Office Equipment
6,100
132 Accounting 3B
Step 6
The difference between the two sides of the accumulated depreciation of
office equipment account is the $300 depreciation expense for the year ended
30 June 2025:
Accumulated Depreciation of Motor Vehicles
Sale of Asset
3,400
Opening Balance
Closing Balance
5,000
Depreciation
8,400
8,100
300
8,400
Step 7
The $920 proceeds of the sale of the office equipment (additional information d )
is entered on the credit side of the sale of asset account:
Sale of Asset
Office Equipment
6,100
Accumulated
Depreciation
Bank
3,400
920
Step 8
The difference between the two sides of the sale of asset account is the $1,780
loss on the sale of office equipment:
Sale of Asset
Office Equipment
6,100
Accumulated
Depreciation
Bank
Loss on Sale of
Asset
6,100
3,400
920
1,780
6,100
Accounting 3B
133
Step 9
The $13,470 of other expenses, in the income statement, includes the non-cash
expenses, the $300 depreciation of office equipment and the $1,780 loss on the
sale of the office equipment.
These non-cash expenses must be subtracted from the other expenses to find
the cash other expenses:
Calculation of Cash Other Expenses
Other expenses
13,470
Less:
Depreciation of office equipment
(300)
Loss on sale of asset
Cash Other Expenses
(1,780)
$11,390
Step 10
The payments to suppliers and employees is:
Other expenses
11,390
Wages
20,000
Purchases of inventory
34,000
$65,390
The wages paid was obtained from the income statement. The cash paid for
the inventory was given in additional information e.
Step 11
The cash flows from operating activities section can now be prepared.
Wagin Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2025
Cash flows from operating activities
Receipts from customers
Cash paid to suppliers and employees
Net cash from operating activities
95,000
(65,390)
29,610
134 Accounting 3B
Step 12
The cash flows from investing activities section can now be prepared.
Wagin Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2025
Cash flows from investing activities
Proceeds of sale of office equipment
920
Purchase of office equipment
(8,100)
Net cash from investing activities
(7,180)
Analysis of a Statement of Cash Flows
The following approach can be used to evaluate a statement of cash flows.
1
Comment on the net cash from operating activities.
A positive net cash from operating activities is a healthy indicator for a
business.
A business cannot survive, in the medium to long term, unless it
generates positive cash flows from operating activities.
2
3
Comment on the net cash from investing activities by answering the
following questions.

Has the business purchased non-current assets that can be used to
generate income in the future? This is a positive indicator for a
business.

Has the business sold non-current assets to finance a negative net
cash from operating activities? This is a negative indicator for a
business.
Comment on the net cash from financing activities by answering the
following questions.

Did the business have to borrow money or raise additional share
capital to pay for a negative net cash from operating activities? This
is a negative indicator for a business.

Has the business used short term sources of finance, such as, a
short term loan, to purchase non-current assets? Non-current assets
should be purchased using either long term loans or equity.

Is any dividend paid to the shareholders larger than the net cash
from operating activities? This may indicate excessive drawings.
Accounting 3B
Example
Below is a statement of cash flows of the Alpha Business College Limited.
The Alpha Business College Limited has been in existence for 6 years.
Alpha Business College Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Net cash from operating activities
61,000
(150,000)
(89,000)
Cash flows from investing activities
Proceeds from sale of land
50,000
Net cash from investing activities
50,000
Cash flows from financing activities
Additional share capital
33,000
Net cash from financing activities
33,000
Net decrease in cash held
(6,000)
Cash and cash equivalents at start of period
1,000
Cash and cash equivalents at end of period
(5,000)
Required
Comment on the pattern of cash flows of this company.
135
136 Accounting 3B
Solution
An analysis of the statement of cash flows should include the following points.
1
Comments about the cash from operating activities of the company.
Alpha Business College Limited had a ($89,000) net cash from operating
activities for the year ended 30 June 2019.
This unsatisfactory result may have been caused by:

a lack of demand for the services of the company

competition from rival businesses

high expense payments.
A company cannot survive, in the medium to long term, unless it generates
positive cash flows from operating activities.
The business must increase the cash inflow from fees or reduce the
amount it is paying in expenses or find alternative sources of income.
2
Comments about the cash from investing activities of the company.
Alpha Business College Limited has sold land and raised $50,000 to help
finance the cash deficit from operating activities.
The business cannot continue, indefinitely, to finance a negative net cash
from operating activities by selling property, plant and equipment.
3
Comments about the cash from financing activities of the company.
The shareholders have contributed $33,000 in capital to help pay for the
cash deficit from operating activities.
There is a limit to the amount of capital that shareholder can contribute to
the company.
Accounting 3B
137
Question 1
The following statement of cash flows was supplied by Cargo Couriers
Limited.
Cargo Couriers Limited
Statement of Cash Flows
for the year ended 30 June 2019
Cash flows from operating activities
Receipts from customers
73,000
Payments to suppliers and employees
(97,000)
Interest paid
(1,000)
Net cash from operating activities
(25,000)
Cash flows from investing activities
Proceeds of sale of motor vehicles
27,000
Net cash from investing activities
27,000
Cash flows from financing activities
Additional share capital
14,000
Dividend paid
(3,000)
Net cash from financing activities
11,000
Net increase in cash held
13,000
Cash and cash equivalents at start of period
(10,000)
Cash and cash equivalents at end of period
$3,000
Required
1
Comment on the financial health of Cargo Couriers Limited on 30 June 2019.
2
Define the terms “cash” and “cash equivalents”.
3
On 30 June 2028 Westco Limited had the following current assets:
Accounts receivable
Bank term deposit (2 months to maturity)
Cash in the bank account
$7,000
1,000
3,000
Cash held on the business premises
Bank term deposit (10 months to maturity)
50
4,000
The cash and cash equivalents of Westco Limited on 30 June 2028 are:
a
$3,050
b
$8,050
c
$4,050
138 Accounting 3B
Question 2
Video Hits Limited operates a chain of DVD rental shops. The company has
supplied you with the following information.
Video Hits Limited
Statement of Cash Flows
for the year ended 30 June 2024
Cash flows from operating activities
Receipts from customers
60,000
Payments to suppliers and employees
(81,000)
Net cash from operating activities
(21,000)
Cash flows from investing activities
Purchase of office equipment
(400)
Net cash from investing activities
(400)
Cash flows from financing activities
Loan from bank
Additional share capital
10,000
9,000
Net cash from financing activities
19,000
Net decrease in cash held
(2,400)
Cash and cash equivalents at start of period
1,000
Cash and cash equivalents at end of period
(1,400)
Required
1
The negative net cash flow from operating activities may have been caused
by (you can tick more than one answer):
a
a fall in the demand for the renting of DVD’s
b
increased competition
c
an increase in the demand for the renting of DVD’s
d
a decrease in the expenses paid by the business during the year
e
an increase in the expenses paid by the business during the year
f
the purchase of non-current assets for cash
Accounting 3B
139
Question 2 continued
2
3
4
Video Hits Limited financed the ($21,000) net cash from operating
activities from:
a
the sale of non-current assets
b
a loan
c
additional share capital
d
a combination of a loan and additional share capital
e
a combination of a loan and the sale of non-current assets
Which one of the following comments is appropriate?
a
Video Hits Limited is unlikely to survive in the medium to
long term unless it can generate positive, annual net cash
flows from its operating activities.
b
Video Hits Limited has had a successful year
On 30 June 2025 We Trade Limited had the following current assets:
Bank term deposit (12 months to maturity)
Cash holdings
$15,000
9,000
Prepaid rent
11,000
Inventory
17,000
Accounts receivable
21,000
Bank term deposit (30 days to maturity)
4,000
The cash and cash equivalents of We Trade Limited on 30 June 2025 are:
a
$13,000
b
$28,000
c
$39,000
140 Accounting 3B

Questions 3 to 8: Preparation of a simple statement of cash flows
Question 3
WA Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
59,000
Less Cost of Sales
Gross Profit
Add Other Income
17,000
42,000
Interest revenue
Dividend revenue
700
300
1,000
43,000
Less Other Expenses
Interest
Rent
Wages
Depreciation of plant and equipment
Profit before Tax
Less Income tax expense
2,000
16,000
11,000
4,000
Profit
33,000
10,000
3,000
$7,000
WA Traders Limited
Simplified Balance Sheets as at
30 June 2018
30 June 2019
Assets
Cash at Bank
Inventories
Investments (Shares in Companies)
Property, Plant and Equipment
100
8,000
10,000
121,000
0
9,000
10,000
150,000
Total Assets
139,100
169,000
Bank Overdraft
Loan from Bank
Income Tax Payable
0
54,100
4,000
1,900
61,000
3,000
Total Liabilities
58,100
65,900
$81,000
$103,100
61,000
20,000
79,000
24,100
$81,000
$103,100
Liabilities
Net Assets
Equity
Share Capital
Retained Earnings
Total Equity
Accounting 3B
141
Question 3 continued
Additional Information
A
During the year ended 30 June 2019:
i
$18,000 was paid for the purchase of inventory
ii
a motor vehicle was purchased for cash, and
iii
Cash was raised from a share issue in April 2019.
iv
a $2,900 dividend was paid to the shareholders of the company. The
retained earnings ledger account does not have to be reconstructed.
B
Property, plant and equipment:
30 June 2018
30 June 2019
110,000
110,000
40,000
73,000
(29,000)
(33,000)
11,000
40,000
121,000
150,000
Land
Plant and Equipment
Less Accumulated Depreciation
Total Property, Plant and Equipment
Required
1
Prepare a statement of cash flows for the year ended 30 June 2019.
2
Explain why the company has made a profit after tax of $7,000 for the
year ended 30 June 2019 yet the cash at bank balance has declined and
is now a $1,900 overdraft.
3
What are the advantages to the shareholders of a public company of
receiving an annual statement of cash flows?
4
Name two cash inflows that AASB 107 Statement of Cash Flows states
must be disclosed separately in a statement of cash flows.
Solution Check
Net cash from operating activities = $9,000
142 Accounting 3B
Question 4
Work Hard Limited
Unclassified Income Statement
for the year ended 30 June 2025
Sales
Less Cost of Sales
84,100
26,000
Gross Profit
Add Other Income
Dividend revenue
Interest revenue
58,100
900
800
1,700
59,800
Less Other Expenses
Wages
Interest
Rent
Insurance
Depreciation of office equipment
15,800
2,400
10,600
5,200
4,000
Profit before Tax
Less Income tax expense
38,000
21,800
6,000
Profit
$15,800
Work Hard Limited
Simplified Balance Sheets as at
30 June 2024
30 June 2025
Assets
Cash at Bank
2,600
2,000
11,000
7,300
81,000
15,900
7,300
104,600
101,900
129,800
Loan from Bank
Income Tax Payable
37,000
4,000
39,000
6,000
Total Liabilities
41,000
45,000
$60,900
$84,800
53,800
7,100
78,600
6,200
$60,900
$84,800
Inventories
Investments (Shares in Companies)
Property, Plant and Equipment
Total Assets
Liabilities
Net Assets
Equity
Share Capital
Retained Earnings
Total Equity
Accounting 3B
143
Question 4 continued
Additional Information
A
Property, plant and equipment:
30 June 2024
30 June 2025
Land
73,000
73,000
Office Equipment
10,000
37,600
Less Accumulated Depreciation
(2,000)
(6,000)
8,000
27,600
81,000
104,600
Total Property, Plant and Equipment
B
During the year ended 30 June 2025:
i
$30,900 of inventory was purchased for cash
ii
office equipment was purchased for cash, and
iii
a cash share issue was made in March 2025.
iv
a $16,700 dividend was paid to the shareholders of the company.
Required
1
Prepare a statement of cash flows for the year ended 30 June 2025.
2
What were the main sources of finance of the company in the last year?
3
How did the company use the money it raised during the last year?
4
Name three payments that AASB 107 Statement of Cash Flows states
must be disclosed separately in a statement of cash flows.
Solution Check
Net cash from operating activities = $16,900
144 Accounting 3B
Note to Students
Loan Repayment
In question 5 there is a loan repayment instead of a loan taken out.
A loan repayment is shown as a negative entry in the cash flows from financing
activities section of the statement of cash flows.
Example
Bunbury Traders Limited
Balance Sheet (extracts) as at
30 June 2026
30 June 2027
Current Liabilities
Accounts Payable
9,000
7,000
Loan from Bank
4,000
0
13,000
7,000
Total Current Liabilities
Required
Show how the loan repayment will be presented in a statement of cash flows.
Solution
This loan repayment is set out in the statement of cash flows as follows:
Bunbury Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2027
Cash flows from financing activities
Loan repayment
(4,000)
Net cash from financing activities
(4,000)
Accounting 3B
145
Question 5
Kalgoorlie Traders Limited supplied the following list of general ledger balances:
30 June 2026
109
30 June 2027
21,068
Inventory
Land
21,831
80,000
25,288
90,000
Shares in Companies
Office Furniture
31,500
4,670
31,500
6,140
Accumulated Depreciation – Office Furniture
Motor Vehicles
Accumulated Depreciation – Motor Vehicles
1,730
38,400
19,500
2,510
51,900
24,100
Loan from Bank
Current Income Tax Liability
5,000
26,740
2,550
19,836
Share Capital
Asset Revaluation Reserve
118,400
3,400
141,000
13,400
1,740
22,500
Cash at Bank
Retained Earnings
Kalgoorlie Traders Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
337,804
Less Cost of Sales
216,310
Gross Profit
Add Other Income
121,494
Dividend revenue
Interest revenue
4,000
2,000
6,000
127,494
Less Other Expenses
Advertising
Interest
4,140
1,673
Telephone
Electricity
5,330
4,694
Wages
Depreciation of office furniture
Depreciation of motor vehicles
Profit before Tax
Less Income tax expense
Profit
39,500
780
4,600
60,717
66,777
19,836
$46,941
146 Accounting 3B
Question 5 continued
Additional Information
a
Cash purchases of inventory during the last year $219,767.
b
A $26,181 dividend was paid to the shareholders of the company during
the last 12 months.
c
Non-current assets were purchased for cash during the last 12 months.
d
Land was revalued by $10,000 in 2027.
e
A cash share issue was made in 2027.
Required
Prepare a statement of cash flows for the year ended 30 June 2027.
Solution Check
Net cash from operating activities = $41,960
Question 6
Inept Couriers Limited
Income Statement
for the year ended 30 June 2019
Fees
69,000
Less Expenses
Rent
Wages
9,000
31,000
Interest
Petrol
8,000
15,000
Depreciation of motor vehicles
Profit before Tax
Less Income tax expense
Profit
2,000
65,000
4,000
1,500
$2,500
Accounting 3B
147
Question 6 continued
Inept Couriers Limited
Unclassified Balance Sheets as at
30 June 2018
30 June 2019
Assets
Cash at Bank
Motor Vehicles
Less Accumulated Depreciation
1,000
40,000
(1,000)
Total Assets
39,000
3,000
77,000
(3,000)
74,000
$40,000
$77,000
1,000
1,500
0
33,000
40,000
33,000
6,000
2,500
$40,000
$77,000
Liabilities and Equity
Income Tax Payable
Loan
Share Capital
Retained Earnings
Total Liabilities and Equity
Additional Information
a
All the motor vehicles purchased during the year ended 30 June 2019
were paid for in cash.
b
A cash dividend of $6,000 was paid to the shareholders in March 2019.
c
The loan is repayable in 2020.
Required
1
Prepare a statement of cash flows for the year ended 30 June 2019.
2
Comment on the way the company has financed the purchase of the
motor vehicles.
Solution Check
Net cash from operating activities = $5,000
148 Accounting 3B
Question 7
Couriers 2 Go Limited
Income Statement
for the year ended 30 June 2027
Fees
78,000
Add Other Income
Dividend revenue
3,000
81,000
Less Expenses
Petrol
9,000
Interest on loan
Rent
5,000
13,000
Wages
Advertising
Depreciation of motor vehicles
30,000
7,000
1,000
65,000
Profit before Tax
16,000
Less Income tax expense
4,700
Profit
$11,300
Couriers 2 Go Limited
Unclassified Balance Sheets as at
30 June 2026
30 June 2027
Assets
Cash at Bank
Investments (shares in companies)
Motor Vehicles
30,000
Less Accumulated Depreciation
(4,000)
Total Assets
4,000
3,000
5,000
3,000
50,000
26,000
(5,000)
45,000
$33,000
$53,000
4,000
0
4,700
10,000
22,000
7,000
31,000
7,300
$33,000
$53,000
Liabilities and Equity
Current Income Tax Liability
Loan from Bank
Share Capital
Retained Earnings
Total Liabilities and Equity
Accounting 3B
Question 7 continued
Additional Information
a
All the motor vehicles purchased during the year ended 30 June 2027
were paid for in cash.
b
An $11,000 cash dividend was paid in the year ended 30 June 2027.
c
The loan from bank will be repaid in 2035.
Required
1
Prepare a statement of cash flows for the year ended 30 June 2027.
2
Comment on the way the company has financed the purchase of the
motor vehicles.
Solution Check
Net cash from operating activities = $13,000
Question 8
Education Colleges Australia Limited
Unclassified Income Statements for the years ended
30 June
30 June
2020
2021
Fees
92,720
91,000
1,500
2,400
94,220
93,400
Rent
9,000
11,000
Audit fees
Electricity
1,700
2,400
2,000
3,000
72,000
1,900
68,000
1,500
Depreciation of office equipment
1,000
1,000
Profit before Tax
Less Income tax expense
6,220
6,900
4,820
1,860
$1,400
$5,040
Add Other Income
Interest income
Less Other Expenses
Wages
Interest
Profit
149
150 Accounting 3B
Question 8 continued
General ledger balances of Education Colleges Australia Limited:
30 June 2020
30 June 2021
53,100
78,320
Office Equipment
4,670
6,590
Accumulated Depreciation
1,500
2,500
Loan from Bank
3,400
1,400
Current Income Tax Liability
4,820
1,860
39,150
68,250
8,900
10,900
Cash at Bank
Share Capital
Retained Earnings
Additional Information
a
During the year ended 30 June 2021 a $3,040 dividend was paid to the
shareholders of the company.
b
Office equipment was purchased for cash in 2021.
Required
1
Prepare a statement of cash flows for the year ended 30 June 2021.
2
The accounting report known as a balance sheet is referred to in AASB
101 Presentation of Financial Statements as a:
3
a
statement of financial position
b
statement of financial performance
c
statement of assets, liabilities and equity.
Name three items that will be recorded in an income statement but not in
a statement of cash flows.
Solution Check
Net cash from operating activities = $3,080
Accounting 3B

Questions 9 to 12: Reconstruction of Accounts Receivable
Question 9
Badgebup Limited
Balance Sheet (extracts) as at
30 June 2026
30 June 2027
1
3
Current Assets
Accounts Receivable
Badgebup Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
95
Less Sales Returns
5
90
Less Cost of Sales
40
Gross Profit
50
Less Other Expenses
Bad debts
Discount allowed
8
2
Wages
30
40
Profit before Tax
10
Less Income tax expense
3
Profit
$7
Accounts Receivable
The receipts from customers for the year ended 30 June 2027 was:
a
$80
b
$76
c
$78
151
152 Accounting 3B
Question 10
Broome Traders Limited
Statement of Financial Position (extracts) as at
30 June 2028
30 June 2029
6
5
Current Assets
Accounts Receivable
Broome Traders Limited
Unclassified Income Statement
for the year ended 30 June 2029
Sales
86
Less Sales Returns
3
83
Less Cost of Sales
50
Gross Profit
33
Less Other Expenses
Discount allowed
Bad debts
1
7
Wages
22
30
Profit before Tax
3
Less Income tax expense
1
Profit
$2
Accounts Receivable
The receipts from customers for the year ended 30 June 2029 was:
a
$73
b
$74
c
$76
Accounting 3B
Question 11
Narrogin Traders Limited
Balance Sheet (extracts) as at
30 June 2025
30 June 2026
26
33
Current Assets
Receivables (Accounts Receivable)
Narrogin Traders Limited
Unclassified Income Statement
for the year ended 30 June 2026
Sales
71
Less Sales Returns
4
67
Less Cost of Sales
24
Gross Profit
43
Less Other Expenses
Telephone
Discount allowed
Insurance
9
2
1
Bad debts
Wages
5
20
37
Profit before Tax
Less Income tax expense
6
2
Profit
$4
Receivables
The receipts from customers for the year ended 30 June 2026 was:
a
$58
b
$61
c
$53
153
154 Accounting 3B
Question 12
Harvey Traders Limited
Statement of Financial Position (extracts) as at
30 June 2028
30 June 2029
29
43
Current Assets
Receivables
Harvey Traders Limited
Unclassified Income Statement
for the year ended 30 June 2029
Sales
98
Less Sales Returns
6
92
Less Cost of Sales
31
Gross Profit
61
Less Other Expenses
Electricity
Bad debts
Discount allowed
8
4
1
Wages
Telephone
30
9
52
Profit before Tax
Less Income tax expense
9
3
Profit
$6
Receivables
The receipts from customers for the year ended 30 June 2029 was:
a
$73
b
$78
c
$80
Accounting 3B

Questions 13 to 16: Reconstruction of Accounts Payable
Question 13
Esperance Traders Limited
Balance Sheet (extracts) as at
Current Assets
Inventories
Current Liabilities
Accounts Payable
30 June 2018
30 June 2019
21
18
9
7
Esperance Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Cost of Sales
Gross Profit
Add Other Income
Discount received
135
74
61
1
62
Less Other Expenses
Wages
Rent
Telephone
Profit before Tax
Less Income tax expense
Profit
17
15
2
34
28
10
$18
Additional Information
Purchases returns for the year ended 30 June 2019 were $11.
Inventories
Accounts Payable
The cash paid to creditors for the year ended 30 June 2019 was:
a
$86
b
$72
c
$78
155
156 Accounting 3B
Question 14
Geraldton Traders Limited
Balance Sheet (extracts) as at
Current Assets
Inventories
Current Liabilities
Accounts Payable
30 June 2024
30 June 2025
7
3
14
16
Geraldton Traders Limited
Unclassified Income Statement
for the year ended 30 June 2025
Sales
Less Cost of Sales
204
91
Gross Profit
Add Other Income
113
Discount received
3
116
Less Other Expenses
Advertising
Wages
Electricity
14
51
9
74
Profit before Tax
Less Income tax expense
42
13
Profit
$29
Additional Information
Purchases returns for the year ended 30 June 2025 were $4.
Inventories
Accounts Payable
The cash paid to creditors for the year ended 30 June 2025 was:
a
$89
b
$84
c
$82
Accounting 3B
Question 15
Collie Traders Limited
Balance Sheet (extracts) as at
Current Assets
Inventories
Current Liabilities
Accounts Payable
30 June 2021
30 June 2022
155
169
74
62
Collie Traders Limited
Unclassified Income Statement
for the year ended 30 June 2022
Sales
Less Cost of Sales
540
Gross Profit
Add Other Income
247
Discount received
15
293
262
Less Other Expenses
Interest
Wages
22
73
Electricity
Rent
25
41
161
Profit before Tax
Less Income tax expense
101
Profit
$67
34
Additional Information
Purchases returns for the year ended 30 June 2022 were $24.
Inventories
Accounts Payable
The cash paid to creditors for the year ended 30 June 2022 was:
a
$304
b
$331
c
$324
157
158 Accounting 3B
Question 16
Dandaragan Limited
Statement of Financial Position (extracts) as at
30 June 2028
30 June 2029
Current Assets
Inventories
83
64
Current Liabilities
Accounts Payable
55
51
Dandaragan Limited
Unclassified Income Statement
for the year ended 30 June 2029
Sales
Less Cost of Sales
601
247
Gross Profit
Add Other Income
354
Discount received
5
359
Less Other Expenses
Electricity
21
Wages
Rent
95
48
164
Profit before Tax
Less Income tax expense
195
60
Profit
$135
Additional Information
Purchases returns for the year ended 30 June 2029 were $22.
Inventories
Accounts Payable
The cash paid to creditors for the year ended 30 June 2029 was:
a
$227
b
$251
c
$249
Accounting 3B

159
Questions 17 to 20: Reconstruction of Retained Earnings
Question 17
Oz Traders Limited
Balance Sheet (extracts) as at
30 June 2018
30 June 2019
Equity
General Reserve
1
5
Retained Earnings
3
6
Oz Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Cost of Sales
277
61
Gross Profit
Less Other Expenses
216
Wages
Rent
84
73
Insurance
26
183
Profit before Tax
Less Income tax expense
33
9
Profit
$24
Additional Information
A cash dividend was paid to shareholders during the year ended 30 June 2019.
Retained Earnings
The dividend paid during the year ended 30 June 2019 was:
a
$19
b
$18
c
$17
160 Accounting 3B
Question 18
Donnybrook Traders Limited
Balance Sheet (extracts) as at
30 June 2020
30 June 2021
General Reserve
21
27
Retained Earnings
11
20
Equity
Donnybrook Traders Limited
Unclassified Income Statement
for the year ended 30 June 2021
Sales
Less Cost of Sales
310
90
Gross Profit
Less Other Expenses
220
Freight outwards
14
Wages
Advertising
81
32
127
Profit before Tax
Less Income tax expense
93
25
Profit
$68
Additional Information
A cash dividend was paid to shareholders during the year ended 30 June 2021.
Retained Earnings
The dividend paid during the year ended 30 June 2021 was:
a
$53
b
$54
c
$55
Accounting 3B
161
Question 19
Esperance Traders Limited
Balance Sheet (extracts) as at
30 June 2028
30 June 2029
General Reserve
279
331
Retained Earnings
554
522
Equity
Esperance Traders Limited
Unclassified Income Statement
for the year ended 30 June 2029
Sales
Less Cost of Sales
994
533
Gross Profit
Less Other Expenses
461
Wages
115
Insurance
Rent
64
73
252
Profit before Tax
Less Income tax expense
209
35
Profit
$174
Additional Information
A cash dividend was paid to shareholders during the year ended 30 June 2029.
Retained Earnings
The dividend paid during the year ended 30 June 2029 was:
a
$154
b
$159
c
$165
162 Accounting 3B
Question 20
Augusta Limited
Statement of Financial Position (extracts) as at
30 June 2021
30 June 2022
91
80
115
110
Equity
General Reserve
Retained Earnings
Augusta Limited
Unclassified Income Statement
for the year ended 30 June 2022
Sales
Less Cost of Sales
513
270
Gross Profit
Less Other Expenses
243
Advertising
50
Wages
Interest
113
21
184
Profit before Tax
Less Income tax expense
59
20
Profit
$39
Additional Information
A cash dividend was paid to shareholders during the year ended 30 June 2022.
Retained Earnings
The dividend paid during the year ended 30 June 2022 was:
a
$45
b
$65
c
$55
Accounting 3B
163
Question 21
General Ledger balances of Perth Traders Limited as at:
Cash at Bank
Accounts Receivable
Inventories
Investments (shares in companies)
Land
Office Equipment
Accumulated Depreciation of Office Equipment
Accounts Payable
Debentures
Income Tax Payable
Share Capital
Asset Revaluation Reserve
General Reserve
Retained Earnings
30 June 2018
3,500
1,000
7,000
10,000
204,000
13,400
8,500
6,000
0
7,000
178,400
20,000
8,000
11,000
30 June 2019
6,300
9,000
6,000
10,000
221,000
22,600
10,300
4,000
16,000
4,200
183,400
37,000
11,000
9,000
Perth Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Sales Returns
84,000
2,000
Less Cost of Sales
82,000
37,000
Gross Profit
Add Other Income
45,000
Discount received
Interest income
3,000
700
Dividend received
1,300
5,000
50,000
Less Other Expenses
Insurance
Bad debts
Discount allowed
Wages
2,000
3,000
1,000
19,000
Interest
Depreciation of office equipment
1,000
1,800
Electricity
3,000
Profit before Tax
Less Income tax expense
Profit
30,800
19,200
4,200
$15,000
164 Accounting 3B
Question 21 continued
Perth Traders Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2019
Profit
15,000
Add Other Comprehensive Income
Gain on asset revaluation, net of income tax
17,000
Total Comprehensive Income for the Period
$32,000
Land was revalued in 2019.
Additional information
Purchases returns for the year ended 30 June 2019 were $5,000.
Required
Prepare a statement of cash flows for the year ended 30 June 2019.
Solution Check
Net cash from operating activities = $5,000
Question 22
General Ledger balances of Gudarra Limited as at:
Cash Holdings
30 June 2021
4,300
30 June 2022
4,330
Receivables
6,010
5,250
Inventories
11,330
9,400
8,000
8,000
166,000
169,000
17,100
48,500
Accumulated Depreciation of Motor Vehicles
9,200
11,370
Accounts Payable
5,100
3,780
Loan from Bank
2,000
0
Current Income Tax Liability
8,400
7,220
169,640
197,300
Investments (shares in companies)
Land
Motor Vehicles
Share Capital
Asset Revaluation Reserve
General Reserve
Retained Earnings
0
3,000
16,000
18,000
2,400
3,810
Accounting 3B
Question 22 continued
Gudarra Limited
Unclassified Income Statement
for the year ended 30 June 2022
Sales
Less Sales Returns
132,000
4,100
Less Cost of Sales
127,900
67,200
Gross Profit
Add Other Income
Interest
Dividends
Discount revenue
60,700
600
1,500
740
2,840
63,540
Less Other Expenses
Discount allowed
Advertising
Bad debts
Wages
Interest
Depreciation of motor vehicles
Rent
Profit before Tax
Less Income tax expense
Profit
400
3,500
7,300
21,400
300
2,170
8,200
43,270
20,270
7,220
$13,050
Additional information
a
Purchases returns for the year ended 30 June 2022 were $4,000.
b
Land was revalued by $3,000 in 2022.
Required
Prepare a statement of cash flows for the year ended 30 June 2022.
Solution Check
Net cash from operating activities = $15,410
165
166 Accounting 3B
Question 23
Jerramungup Limited
Unclassified Income Statement
for the year ended 30 June 2026
Sales
Less Sales Returns
400,200
2,600
397,600
109,000
Less Cost of Sales
Gross Profit
Add Other Income
Discount received
Dividend received
Interest income
Less Other Expenses
Wages
Discount allowed
Bad debts
Interest
Rent
Audit fees
Depreciation of motor vehicles
288,600
2,500
2,900
800
61,000
5,800
7,000
2,800
29,000
5,200
4,000
Profit before Tax
Less Income tax expense
6,200
294,800
114,800
180,000
61,000
Profit
$119,000
Additional Information
A
Property, plant and equipment:
30 June 2025
81,000
30 June 2026
86,000
Motor Vehicles
13,400
25,000
Less Accumulated Depreciation
(2,000)
(6,000)
11,400
19,000
92,400
105,000
Land
Total Property, Plant and Equipment
During the year ended 30 June 2026 a motor vehicle was purchased for cash
and land was revalued by $5,000.
Accounting 3B
167
Question 23 continued
Additional Information
B
The reserves of the company consisted of:
Asset revaluation reserve
General reserve
30 June 2025
5,000
13,000
30 June 2026
10,000
5,000
C
Purchases returns for the year ended 30 June 2026 were $5,100.
Jerramungup Limited
Simplified Balance Sheets as at
30 June 2025
30 June 2026
Assets
Cash at Bank
89,400
161,800
3,800
8,200
3,400
7,300
11,000
92,400
11,000
105,000
204,800
288,500
Accounts Payable
18,400
14,300
Debentures
Income Tax Payable
25,000
64,000
20,800
61,000
Total Liabilities
107,400
96,100
Net Assets
$97,400
$192,400
Share Capital
Reserves
47,900
18,000
93,100
15,000
Retained Earnings
31,500
84,300
$97,400
$192,400
Accounts Receivable
Inventories
Investments (Shares in companies)
Property, Plant and Equipment
Total Assets
Liabilities
Equity
Total Equity
Required
Prepare a statement of cash flows for the year ended 30 June 2026.
Solution Check
Net cash from operating activities = $117,200
168 Accounting 3B

Questions 24 to 26: Reconstruction of Prepaid Expenses
Question 24
Marketing Services Limited
Balance Sheet (extracts)
30 June 2018
30 June 2019
3
5
Current Assets
Prepaid Rent
Marketing Services Limited
Income Statement (extract)
for the year ended 30 June 2019
Less Expenses
Rent
Other Expenses (all cash)
19
22
41
Prepaid Rent
The rent paid for the year ended 30 June 2019 was:
a
$21
b
$29
c
$22
Payments to Suppliers and Employees
Rent
Other Expenses (all cash)
Total
The payments to suppliers and employees for the year ended 30 June 2019 was:
a
$41
b
$43
c
$42
Accounting 3B
169
Question 25
Child Minding Centres Limited
Balance Sheet (extracts)
30 June 2024
30 June 2025
7
8
Current Assets
Prepaid Rent
Child Minding Centres Limited
Income Statement (extract)
for the year ended 30 June 2025
Less Expenses
Rent
Wages
Interest
Advertising
59
71
8
15
153
Prepaid Rent
The rent paid for the year ended 30 June 2025 was:
a
$60
b
$69
c
$64
Payments to Suppliers and Employees
Rent
Total
The payments to suppliers and employees for the year ended 30 June 2025 was:
a
$171
b
$146
c
$158
170 Accounting 3B
Question 26
Esperance Traders Limited
Balance Sheet (extracts)
30 June 2026
30 June 2027
9
8
Current Assets
Prepaid Insurance
Esperance Traders Limited
Income Statement (extract)
for the year ended 30 June 2027
Sales
81
Less Cost of Sales
27
Gross Profit
54
Less Other Expenses
Insurance
Other expenses (all cash)
11
40
51
Cash paid for inventory during the year ended 30 June 2027 was $22.
Prepaid Insurance
The insurance paid for the year ended 30 June 2027 was:
a
$11
b
$9
c
$10
The payments to suppliers and employees for the year ended 30 June 2027 was:
Payments to Suppliers and Employees
Total
a
$72
b
$78
c
$84
Accounting 3B

171
Questions 27 to 29: Reconstruction of Wages Expense
Question 27
Northam Traders Limited
Statement of Financial Position (extracts)
30 June 2018
30 June 2019
5
2
Current Liabilities
Accrued Wages
Northam Traders Limited
Income Statement (extract)
for the year ended 30 June 2019
Sales
70
Less Cost of Sales
31
Gross Profit
Less Other Expenses
39
Wages
Electricity
32
5
37
Additional information
$20 of inventory was purchased for cash during the year ended 30 June 2019.
Wages
The wages paid for the year ended 30 June 2019 was:
a
$31
b
$39
c
$35
The payments to suppliers and employees for the year ended 30 June 2019 was:
a
$60
b
$35
c
$55
172 Accounting 3B
Question 28
Ajana Traders Limited
Balance Sheet (extracts)
30 June 2021
30 June 2022
4
9
Current Liabilities
Accrued Wages
Ajana Traders Limited
Income Statement (extract)
for the year ended 30 June 2022
Sales
85
Less Cost of Sales
21
Gross Profit
64
Less Other Expenses
Interest
5
Wages
Directors fees
39
8
Advertising
3
55
Additional information
$14 of inventory was purchased for cash during the year ended 30 June 2022.
Wages
The wages paid for the year ended 30 June 2022 was:
a
$33
b
$34
c
$35
The payments to suppliers and employees for the year ended 30 June 2022 was:
a
$46
b
$51
c
$59
Accounting 3B
173
Question 29
Pinjarra Traders Limited
Statement of Financial Position (extracts)
30 June 2024
30 June 2025
7
4
Current Liabilities
Accrued Electricity
Pinjarra Traders Limited
Income Statement (extract)
for the year ended 30 June 2025
Sales
254
Less Cost of Sales
93
Gross Profit
161
Less Other Expenses
Audit fees
Telephone
11
9
Electricity
Stationery
13
5
Directors fees
4
42
Additional information
$52 of inventory was purchased for cash during the year ended 30 June 2025.
Electricity
The electricity paid for the year ended 30 June 2025 was:
a
$13
b
$18
c
$16
The payments to suppliers and employees for the year ended 30 June 2025 was:
a
$91
b
$97
c
$93
174 Accounting 3B

Questions 30 to 32: Reconstruction of Prepaid and Accrued Expenses
Question 30
A1 Business Colleges Limited has provided you with the following information:
Balance Sheet information
30 June 2018
30 June 2019
Cash at Bank
Prepaid Insurance
19
5
22
3
Office Equipment
Accumulated Depreciation
30
(3)
33
(6)
Assets
Total Assets
$51
$52
9
2
5
10
1
0
24
11
28
13
$51
$52
Liabilities and Equity
Income Tax Payable
Accrued Wages
Loan
Share Capital
Retained Earnings
Total Liabilities and Equity
A1 Business Colleges Limited
Unclassified Income Statement
for the year ended 30 June 2019
Fees
Less Expenses
Insurance
Wages
Telephone
Depreciation of office equipment
70
6
28
1
3
38
Profit before Tax
Less Income tax expense
32
10
Profit
22
Required
Prepare a statement of cash flows for the year ended 30 June 2019.
Solution Check
Net cash from operating activities = $27
Accounting 3B
175
Question 31
Bencubbin Traders Limited
Unclassified Income Statement
for the year ended 30 June 2025
Sales
Less Cost of Sales
655,000
281,000
Gross Profit
Less Other Expenses
Depreciation of plant and equipment
Interest
Discount allowed
Rent
Bad debts
Wages
Advertising
Profit before Tax
Less Income tax expense
Profit
374,000
2,000
1,541
6,100
61,859
18,200
115,090
68,210
273,000
101,000
30,300
$70,700
Inventory purchased for cash during the year ended 30 June 2025 was $311,366.
Bencubbin Traders Limited
Unclassified Balance Sheets as at
30 June 2024
Assets
Cash at Bank
Accounts Receivable
Inventories
Prepaid Rent
Plant and Equipment
Less Accumulated Depreciation
Total Assets
30 June 2025
31,390
21,710
10,000
4,000
40,000
(1,000)
Liabilities and Equity
Accrued Wages
Income Tax Payable
Loan from Bank
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
39,000
$106,100
58,584
29,450
40,366
3,000
77,000
(3,000)
6,000
24,010
0
70,000
3,100
2,990
$106,100
Required
Prepare a statement of cash flows for the year ended 30 June 2025.
Solution Check
Net cash from operating activities = $37,884
74,000
$205,400
2,000
30,300
40,000
84,000
7,600
41,500
$205,400
176 Accounting 3B
Question 32
Couriers 4 U Limited
Unclassified Income Statement
for the year ended 30 June 2027
Fees
Add Other Income
Bank interest
77,000
3,000
80,000
Less Expenses
Petrol
Interest on loan
Rent
Wages
Directors fees
Depreciation of motor vehicles
9,000
5,000
13,000
30,000
7,000
1,000
Profit before Tax
Less Income tax expense
65,000
15,000
4,500
Profit
$10,500
Couriers 4 U Limited
Unclassified Statements of Financial Position as at
30 June 2026
30 June 2027
Assets
Cash at Bank
Prepaid Rent
Motor Vehicles
Less Accumulated Depreciation
17,800
3,000
30,000
(4,000)
Total Assets
Liabilities and Equity
Accrued Wages
Loan from Bank (repayable in 2038)
Income Tax Payable
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
26,000
24,000
1,000
51,000
(5,000)
46,000
$46,800
$71,000
5,000
0
9,200
28,100
3,100
1,400
2,000
15,800
4,500
42,000
1,300
5,400
$46,800
$71,000
Required
1
Prepare a statement of cash flows for the year ended 30 June 2027.
2
Comment on the way the company has financed the purchase of the
motor vehicles.
Solution Check
Net cash from operating activities = $5,800
Accounting 3B

Questions 33 to 35: Reconstruction of Unearned and Accrued Income
Question 33
Marketing Services Limited
Balance Sheet (extracts)
30 June 2024
30 June 2025
5
4
33
29
Current Assets
Accrued Interest Income
Current Liabilities
Unearned Income
Marketing Services Limited
Income Statement (extract)
for the year ended 30 June 2025
Fees
Add Other Income
95
Interest
10
Unearned Income
The receipts from customers for the year ended 30 June 2025 was:
a
$91
b
$85
c
$94
Interest Income
The cash received from interest for the year ended 30 June 2025 was:
a
177
$13
b
$11
c
$14
178 Accounting 3B
Question 34
Advanced Education Services Limited
Balance Sheet (extracts)
Current Assets
Accrued Interest Income
Current Liabilities
Unearned Income
30 June 2026
30 June 2027
25
41
161
173
Advanced Education Services Limited
Income Statement (extract)
for the year ended 30 June 2027
Fees
Add Other Income
692
Interest
83
Unearned Income
The cash received from customers for the year ended 30 June 2027 was:
a
$711
b
$704
c
$698
Interest Income
The cash received from interest for the year ended 30 June 2027 was:
a
$71
b
$69
c
$67
Accounting 3B
Question 35
Hotel Booking Services Limited
Balance Sheet (extracts)
30 June 2028
30 June 2029
Current Assets
Accrued Interest Income
17
11
Current Liabilities
Unearned Income
83
66
Hotel Booking Services Limited
Income Statement (extract)
for the year ended 30 June 2029
Fees
Add Other Income
332
Interest
48
Unearned Income
The cash received from customers for the year ended 30 June 2029 was:
a
$315
b
$311
c
$324
Interest Income
The cash received from interest for the year ended 30 June 2029 was:
a
$55
b
$54
c
$49
179
180 Accounting 3B
Question 36
Dynamo Business Colleges Limited provided the following information:
Balance Sheet information
30 June 2018
30 June 2019
Assets
Cash at Bank
95
98
Accrued Interest Income
Office Equipment
9
170
7
218
Accumulated Depreciation
(33)
(42)
Total Assets
$241
$281
116
10
121
13
Debentures
Share Capital
0
79
27
79
Retained Earnings
36
41
$241
$281
Liabilities and Equity
Unearned Income
Income Tax Payable
Total Liabilities and Equity
Income Statement data for the year ended 30 June 2019
Fees
681
Add Other Income
Bank interest
Less Expenses
Profit before Tax
Less Income tax expense
Profit
30
711
664
47
13
$34
Additional Information
a
In March 2019 a $29 dividend was paid to the shareholders of the company.
b
The expenses include depreciation of office equipment.
Required
Prepare a statement of cash flows for the year ended 30 June 2019.
Solution Check
Net cash from operating activities = $53
Accounting 3B
181
Question 37
Outback Airlines Limited
Unclassified Income Statement
for the year ended 30 June 2026
Fees
Add Other Income
Interest
815,000
1,900
816,900
Less Expenses
Fuel
Maintenance and repairs
Advertising
Interest
Wages
Insurance
Depreciation of aircraft
271,000
64,000
51,000
3,110
254,038
22,020
17,000
682,168
Profit before Tax
Less Income tax expense
134,732
43,019
Profit
$91,713
Outback Airlines Limited
Unclassified Balance Sheets as at
30 June 2025
Assets
Cash Holdings
Short Term Deposits (3 months)
Prepaid Insurance
Accrued Interest Income
Aircraft
290,000
Less Accumulated Depreciation
(51,000)
Total Assets
30 June 2026
31,850
41,060
7,400
6,150
6,800
8,430
900
700
450,000
239,000
(68,000)
382,000
285,300
438,990
5,000
10,000
Income Tax Payable
Loan from Bank
32,000
84,000
43,019
177,000
Share Capital
General Reserve
96,000
21,000
116,000
1,000
Retained Earnings
47,300
91,971
285,300
438,990
Liabilities and Equity
Unearned Income
Total Liabilities and Equity
182 Accounting 3B
Question 37 continued
Additional Information
In March 2026 a $20,000 issue of bonus shares was made from the general
reserve.
Required
Prepare a statement of cash flows for the year ended 30 June 2026.
Solution Check
Net cash from operating activities = $122,652

Questions 38 to 40: Reconstruction of Sale of Asset Ledger Accounts
Question 38
Alkimos Traders Limited
Balance Sheet (extracts)
30 June 2018
Assets
Motor Vehicles
20
Accumulated Depreciation
(5)
30 June 2019
21
15
(3)
Alkimos Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Cost of Sales
Gross Profit
Add Other Income
Gain on sale of motor vehicle
Less Other Expenses
Depreciation of motor vehicles
Wages
Profit before Tax
Less Income tax expense
Profit
84
21
63
3
66
4
54
58
8
2
$6
18
Accounting 3B
183
Question 38 continued
Additional Information
The amount of cash received from the sale of the motor vehicle was $5.
Required
Reconstruct the three ledger accounts below and complete the statement of
cash flows extract.
Motor Vehicles
Accumulated Depreciation of Motor Vehicles
Sale of Asset
Alkimos Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2019
Cash flows from investing activities
Proceeds of sale of motor vehicle
Payment for motor vehicle
Net cash from investing activities
The net cash from investing activities for the year ended 30 June 2019 is:
a
($6)
b
($8)
c
($4)
184 Accounting 3B
Question 39
Balagundi Traders Limited
Balance Sheet (extracts)
30 June 2021
Assets
Motor Vehicles
Accumulated Depreciation
35
(11)
30 June 2022
34
(9)
24
25
Balagundi Traders Limited
Unclassified Income Statement
for the year ended 30 June 2022
Sales
Less Cost of Sales
95
50
Gross Profit
Add Other Income
45
Gain on sale of motor vehicle
3
48
Less Other Expenses
Depreciation of motor vehicles
Wages
Rent
3
27
10
Profit before Tax
Less Income tax expense
Profit
40
8
3
$5
Additional Information
$6 cash was received from the sale of the motor vehicle.
Required
Reconstruct the three ledger accounts involved in the sale of the motor vehicle
and complete the statement of cash flows extract on the following page.
Accounting 3B
Question 39 continued
Motor Vehicle
Accumulated Depreciation of Motor Vehicle
Sale of Asset
Balagundi Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2022
Cash flows from investing activities
Proceeds of sale of motor vehicle
Purchase of motor vehicle
Net cash from investing activities
The net cash from investing activities for the year ended 30 June 2022 is:
a
($3)
b
($5)
c
($1)
185
186 Accounting 3B
Note to Students
In question 40 the business has made a loss on the sale of a depreciable asset.
A loss on the sale of a depreciable asset is recorded on the credit side of the
sale of asset ledger account:
Sale of Asset
Loss on Sale of Asset
2
Question 40
Boddington Traders Limited
Balance Sheet (extracts)
30 June 2026
Assets
Office Furniture
22
Accumulated Depreciation
(4)
30 June 2027
19
18
(2)
17
Boddington Traders Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
Less Cost of Sales
110
59
Gross Profit
Less Other Expenses
Loss on sale of office furniture
Depreciation of office furniture
Advertising
Wages
51
2
3
9
21
35
Profit before Tax
Less Income tax expense
16
7
Profit
$9
Additional Information
The amount of cash received from the sale of the office furniture was $4.
Required
Reconstruct the three ledger accounts involved in the sale of the office furniture
and complete the statement of cash flows extract on the following page.
Accounting 3B
Question 40 continued
Office Furniture
Accumulated Depreciation of Office Furniture
Sale of Asset
Boddington Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2027
Cash flows from investing activities
Proceeds of sale of office furniture
Purchase of office furniture
Net cash from investing activities
The net cash from investing activities for the year ended 30 June 2027 is:
a
($4)
b
($5)
c
($2)
187
188 Accounting 3B
Question 41
Australia Wide Transport Limited
Unclassified Balance Sheets as at
30 June 2018
30 June 2019
8
10
Assets
Cash at Bank
Motor Vehicles
Less Accumulated Depreciation
20
(4)
Office Equipment
Less Accumulated Depreciation
3
(2)
Total Assets
Liabilities and Equity
Income Tax Payable
Loan from Bank
Share Capital
Retained Earnings
Total Liabilities and Equity
16
30
(2)
28
1
5
(3)
2
$25
$40
2
0
14
9
4
9
14
13
$25
$40
Australia Wide Transport Limited
Unclassified Income Statement
for the year ended 30 June 2019
Fees
Less Expenses
70
Loss on sale of motor vehicle
Depreciation of motor vehicles
Depreciation of office equipment
Other expenses (all cash)
2
4
1
52
59
Profit before Tax
Less Income tax expense
11
4
Profit
$7
Additional Information
a
A motor vehicle was sold for $1 cash in 2019.
b
A motor vehicle was purchased for cash in 2019.
c
A $3 cash dividend was paid in February 2019.
Required
Prepare a statement of cash flows for the year ended 30 June 2019.
Solution Check
Net cash from operating activities = $16
Accounting 3B
189
Question 42
Success Business Colleges Limited
Unclassified Income Statement
for the year ended 30 June 2027
Fees
Less Expenses
210
Loss on sale of office equipment
21
Depreciation of office equipment
Depreciation of motor vehicles
Interest
11
19
1
Other expenses (all cash)
72
Profit before Tax
Less Income tax expense
124
86
24
Profit
$62
Success Business Colleges Limited
Unclassified Statements of Financial Position as at
30 June 2026
30 June 2027
Assets
Cash at Bank
Office Equipment
300
Less Accumulated Depreciation
(80)
Motor Vehicles
Less Accumulated Depreciation
105
(31)
47
Total Assets
310
220
(84)
226
74
160
(50)
110
$341
$379
29
24
11
216
0
237
85
118
$341
$379
Liabilities and Equity
Income Tax Payable
Debentures
Share Capital
Retained Earnings
Total Liabilities and Equity
43
Additional Information
a
Office equipment was sold for $13 cash in November 2026.
b
Office equipment was purchased for cash in 2027.
c
A $29 cash dividend was paid in March 2027.
Required
Prepare a statement of cash flows for the year ended 30 June 2027.
Solution Check
Net cash from operating activities = $108
190 Accounting 3B
Question 43
Yelbeni Traders Limited
Unclassified Balance Sheets as at
30 June 2018
Assets
Cash at Bank
Accounts Receivable
Prepaid Advertising
Inventories
Motor Vehicles
Less Accumulated Depreciation
30 June 2019
0
7,300
100
39,000
49,704
(2,400)
Total Assets
Liabilities and Equity
Bank Overdraft
Accounts Payable
Accrued Wages
Income Tax Payable
Loan from Bank
Share Capital
Retained Earnings
Total Liabilities and Equity
47,304
7,380
2,500
500
33,000
52,000
(4,600)
$93,704
$90,780
1,300
3,404
400
1,700
49,000
32,900
5,000
0
3,100
200
1,900
45,000
36,000
4,580
$93,704
$90,780
Yelbeni Traders Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Cost of Sales
Gross Profit
Add Other Income
Interest
Gain on sale of motor vehicle
Less Other Expenses
Bad debts
Interest
Wages
Rent
Freight Outwards
Advertising
Depreciation of motor vehicles
Profit before Tax
Less Income tax expense
Profit
47,400
110,000
61,000
49,000
2,004
13,000
1,800
6,400
34,100
7,400
304
2,000
6,200
15,004
64,004
58,204
5,800
1,900
$3,900
Accounting 3B
Question 43 continued
Additional Information
a
During the last year a motor vehicle was sold for $27,000 cash.
b
A motor vehicle purchased in 2019 was paid for in cash.
c
A cash dividend was paid to shareholders in 2019.
Required
Prepare a statement of cash flows for the year ended 30 June 2019.
Solution Check
Net cash from operating activities = $7,196
Question 44
Swan River Tours Limited
Balance Sheet information
30 June 2028
Assets
Cash at Bank
Term Deposit (maturing in 30 days)
Land
Plant and Equipment
Accumulated Depreciation
Total Assets
13,038
0
98,000
34,900
(10,100)
30 June 2029
22,811
2,000
103,000
41,300
(9,720)
$135,838
$159,391
Liabilities and Equity
Unearned Revenue
Accrued Wages
1,500
610
3,400
670
Income Tax Payable
Loan from Bank
4,724
3,100
5,811
0
114,790
6,000
136,800
11,000
5,114
1,710
$135,838
$159,391
Share Capital
Asset Revaluation Reserve
Retained Earnings
Total Liabilities and Equity
191
192 Accounting 3B
Question 44 continued
Swan River Tours Limited
Income Statement information for the year ended 30 June 2029
Fees
Interest revenue
$80,900
640
81,540
Less Expenses
Loss on sale of asset
Depreciation of plant and equipment
Wages
Directors fees
Audit fees
Profit before Tax
730
500
53,280
2,710
4,950
62,170
19,370
Less Income tax expense
Profit
5,811
$13,559
Swan River Tours Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2029
Profit
13,559
Add Other Comprehensive Income
Gain on asset revaluation, net of income tax
Total Comprehensive Income for the Period
5,000
$18,559
Land was revalued in 2029.
Additional Information
Plant and equipment with an historical cost of $2,600 was sold in August 2028.
Required
Prepare a statement of cash flows for the year ended 30 June 2029.
Solution Check
Net cash from operating activities = $17,836
Accounting 3B

193
Questions 45 and 46: Cash expenses hidden in other expenses
Question 45
1
Merredin Limited
Balance Sheet (extracts)
30 June 2021
Assets
Motor Vehicles
Accumulated Depreciation
64
(19)
30 June 2022
65
(18)
45
47
Merredin Limited
Unclassified Income Statement
for the year ended 30 June 2022
Sales (all cash)
Less Cost of Sales
148
55
Gross Profit
93
Less Other Expenses
Wages
27
Rent
Other expenses
13
19
Profit before Tax
Less Income tax expense
Profit
59
34
9
$25
Additional Information
a
A motor vehicle was sold in 2022.
b
The cost price of the motor vehicle sold was $26.
c
The carrying amount of the motor vehicle sold (book value) was $15.
d
The cash proceeds from the sale of the motor vehicle were $10.
Required
Calculate the net cash from operating and investing activities for the year ended
30 June 2022.
194 Accounting 3B
Question 45 continued
Cost of Asset
–
Carrying Amount
(or book value)
of Asset Sold
–
=
Accumulated
Depreciation of the
Asset Sold
=
Motor Vehicles
Accumulated Depreciation of Motor Vehicles
Sale of Asset
Payments to Suppliers and Employees
Inventory
48
Wages
27
Rent
13
Other expenses
Less non-cash expenses
Depreciation of motor vehicles
Loss on sale of motor vehicle
Total
19
Accounting 3B
Question 45 continued
Merredin Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2022
Cash flows from operating activities
Receipts from customers
148
Payments to suppliers and employees
Income tax paid
(21)
Net cash from operating activities
Cash flows from investing activities
Proceeds of sale of motor vehicle
Payment for motor vehicle
Net cash from investing activities
The net cash from operating activities for the year ended 30 June 2022 is:
a
$35
b
$29
c
$21
The net cash from investing activities for the year ended 30 June 2022 is:
a
($22)
b
($14)
c
2
Tick each item that will be included in an income statement:
Loan from bank
Interest on loan from bank
Office equipment
Insurance
Prepaid rent
Freight outwards
($17)
195
196 Accounting 3B
Question 46
Como Traders Limited
Balance Sheet (extracts)
30 June 2027
Assets
Office Furniture
Accumulated Depreciation
31
(9)
30 June 2028
26
(8)
22
18
Como Traders Limited
Unclassified Income Statement
for the year ended 30 June 2028
Sales (all cash)
193
Less Cost of Sales
78
Gross Profit
Less Other Expenses
115
Rent
Directors fees
51
8
Other expenses
34
Profit before Tax
Less Income tax expense
Profit
93
22
8
$14
Additional Information
a
Office furniture was sold in 2028.
b
The cost price of the office furniture sold was $9.
c
The book value of the office furniture sold was $6.
d
The cash proceeds from the sale of the office furniture was $5.
Required
Calculate the net cash from operating and investing activities for the year ended
30 June 2028.
Solution Check
Net cash from investing activities = $1
Accounting 3B
Question 46 continued
Office Furniture
Accumulated Depreciation of Office Furniture
Sale of Asset
Payments to Suppliers and Employees
Inventory
Rent
65
51
Directors fees
Other expenses
Less non-cash expenses
8
34
Depreciation of office furniture
Loss on sale of office furniture
Total
Como Traders Limited
Statement of Cash Flows (extract)
for the year ended 30 June 2028
Cash flows from operating activities
Receipts from customers
193
Payments to suppliers and employees
Income tax paid
Net cash from operating activities
Cash flows from investing activities
Proceeds of sale of office furniture
Payment for office furniture
Net cash from investing activities
(9)
197
198 Accounting 3B
Question 47
Business Training Services Limited, for the year ended 30 June 2028, made a
profit after tax of $16,500.
The company has supplied the following summary of the income and expenses
for this accounting period.

Fees

Dividend revenue

Interest expense

Other expenses
$90,300
1,500
600
71,000
Business Training Services Limited
Unclassified Balance Sheets as at
30 June 2027
30 June 2028
Cash at Bank
Cash on Hand
35,020
270
38,950
100
Investments (shares in companies)
Plant and Equipment
8,000
11,000
8,000
17,000
Accumulated Depreciation
(9,000)
(6,000)
1,400
5,000
3,700
4,100
31,000
4,100
31,000
8,300
3,790
10,950
Assets
Liabilities and Equity
Income Tax Payable
Loan from Bank
Share Capital
General Reserve
Retained Earnings
Additional information

Plant and equipment was sold in October 2027.

The book value of the plant and equipment sold was $4,300.

The historical cost of the plant and equipment sold was $9,100.

The cash proceeds from the sale of the plant and equipment was $3,580.
Required
Prepare a statement of cash flows for the year ended 30 June 2028.
Solution Check
Net cash from operating activities = $21,320
Accounting 3B
199
Note to Students
In question 48 the proceeds of the sale of a depreciable asset has not been
given but can be calculated as follows:
Proceeds of Sale of
Asset
less
Carrying Amount of
Asset Sold
=
Gain on Sale of
Asset
?
less
Given
=
Given
Question 48
Boyanup Limited
Unclassified Income Statement
for the year ended 30 June 2025
Sales
Less sales returns
91,591
3,000
88,591
Less Cost of Sales
50,000
Gross Profit
38,591
Add Other Income
Interest
Discount received
Gain on sale of motor vehicle
3,709
170
500
4,379
42,970
Less Other Expenses
Depreciation of office furniture
Wages
100
21,039
Advertising
Telephone
1,700
3,800
Interest
Doubtful debts
2,000
300
Discount allowed
Other expenses
200
7,400
36,539
Profit before Tax
6,431
Less Income tax expense
1,713
Profit
$4,718
200 Accounting 3B
Question 48 continued
Boyanup Limited
Unclassified Statements of Financial Position as at
30 June 2024 30 June 2025
Assets
Cash at Bank
Accounts Receivable
0
2,681
462
4,050
Less Allowance for Doubtful Debts
Inventories
(150)
4,100
(310)
8,100
Investment ( shares in Eneabba Limited)
Property, Plant and Equipment
0
147,380
25,000
182,100
$154,011
$219,402
Bank Overdraft
Accounts Payable
380
6,934
0
4,921
Accrued Telephone Expense
Income Tax Payable
462
3,911
322
1,713
0
133,554
4,220
27,400
158,554
3,500
3,000
1,550
21,000
1,992
$154,011
$219,402
Total Assets
Liabilities and Equity
Debentures
Share Capital
General Reserve
Asset Revaluation Reserve
Retained Earnings
Total Liabilities and Equity
Additional Information
A
Property, plant and equipment:
Land
Office Furniture
Less Accumulated Depreciation
Motor Vehicles
Less Accumulated Depreciation
Total Property, Plant and Equipment
Land was revalued in 2025.
30 June 2024
132,000
30 June 2025
150,000
8,450
(2,000)
11,400
(2,100)
6,450
9,300
14,030
(5,100)
30,200
(7,400)
8,930
22,800
147,380
182,100
Accounting 3B
201
Question 48 continued
B
In 2025 Boyanup Limited purchased all of the shares in Eneabba Limited in
exchange for $25,000 of shares in Boyanup Limited.
C
The carrying amount of the motor vehicle sold, at the date of sale, was $6,300. The
accumulated depreciation of the motor vehicle sold, at the date of sale, was $1,600.
Required
Prepare a statement of cash flows for the year ended 30 June 2025.
Solution Check
Net cash from operating activities = ($1,342)
Question 49
Joondalup Traders Limited
Balance Sheet (extracts)
30 June 2025
Assets
Office Equipment
Accumulated Depreciation
211
(49)
162
30 June 2026
272
(35)
237
Joondalup Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2026
Sales
Less Cost of Sales
374
221
Gross Profit
Add Other Income
Gain on sale of office equipment
153
11
Additional Information
a
The accumulated depreciation of the office equipment sold was $36.
b
The book value of the office equipment sold was $17.
Required
Prepare the cash flows from investing activities for the year ended 30 June 2026.
Solution Check
Net cash from investing activities = ($86)
202 Accounting 3B

Questions 50 and 51: Reconstruction of Allowance for Doubtful Debts
Question 50
Yalgoo Traders Limited
Balance Sheet (extracts) as at
30 June 2027
Current Assets
Accounts Receivable
30
Less Allowance for Doubtful Debts
(2)
30 June 2028
41
28
(6)
Yalgoo Traders Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2028
Sales
83
Less Sales Returns
4
Less Cost of Sales
79
30
Gross Profit
Less Other Expenses
Doubtful debts
Discount allowed
49
7
1
8
Profit before Tax
$41
Allowance for Doubtful Debts
Accounts Receivable
Required
The receipts from customers for the year ended 30 June 2028 was:
a
$66
b
$64
c
$68
35
Accounting 3B
Question 51
Kondinin Limited
Balance Sheet (extracts) as at
30 June 2024
30 June 2025
Current Assets
Accounts Receivable
Less Allowance for Doubtful Debts
71
(4)
68
(5)
67
Kondinin Limited
Unclassified Income Statement (extract)
for the year ended 30 June 2025
Sales
Less Sales Returns
110
6
104
Less Cost of Sales
22
Gross Profit
Less Other Expenses
82
Advertising
Discount expense
11
7
Doubtful debts
Wages
6
29
Profit before Tax
53
$29
Allowance for Doubtful Debts
Accounts Receivable
Required
The receipts from customers for the year ended 30 June 2025 was:
a
$73
b
$84
c
$95
63
203
204 Accounting 3B

Question 52 to 62: Test questions
Question 52
Site and Seen Travel Limited
Unclassified Income Statement
for the year ended 30 June 2029
Fees
Add Gain on sale of plant and equipment
95,100
8,000
103,100
Less Expenses
Interest
Rent
580
19,320
Stationery
Wages
Other expenses
1,730
33,900
32,470
Profit before Tax
Less Income tax expense
88,000
15,100
4,500
Profit
$10,600
Site and Seen Travel Limited
Unclassified Balance Sheets as at
30 June 2029
30 June 2028
Assets
Cash Holdings
Prepaid Rent
Stationery Supplies
Plant and Equipment
Accumulated Depreciation
Total Assets
4,770
650
490
98,400
(6,100)
2,150
780
210
110,890
(3,700)
$98,210
$110,330
400
700
610
8,150
330
4,500
0
74,000
8,600
79,000
6,000
9,050
1,000
16,200
$98,210
$110,330
Liabilities and Equity
Unearned Income
Accrued Wages
Income Tax Payable
Loan from Bank
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
Accounting 3B
205
Question 52 continued
Additional Information
a
Plant and equipment was purchased for $26,550 cash in March 2029.
The accumulated depreciation of the plant and equipment sold, at the date
of sale, was $3,410.
b
A $5,000 bonus share issue was made from the general reserve in 2029.
c
The shareholders received a cash dividend in November 2028.
Required
Prepare a statement of cash flows for the year ended 30 June 2029.
Solution Check
Net cash from operating activities = $130
Question 53
Gunyidi Traders Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
Less Cost of Sales
119,280
21,340
Gross Profit
Add Other Income
97,940
Interest income
Dividends received
1,300
4,830
6,130
104,070
Less Other Expenses
Interest
Rent
Audit fees
Wages
Doubtful debts
Insurance
Loss on sale of office equipment
Other expenses
Profit before Tax
Less Income tax expense
Profit
2,168
8,050
2,140
19,780
2,600
5,830
2,500
34,842
77,910
26,160
7,839
$18,321
206 Accounting 3B
Question 53 continued
Gunyidi Traders Limited
Unclassified Statements of Financial Position as at
30 June 2026
30 June 2027
Assets
Cash at Bank
Short Term Deposits
Accounts Receivable
55,810
8,350
17,910
62,020
5,240
19,200
Less Allowance for Doubtful Debts
Prepaid Insurance
(3,240)
1,550
(4,370)
1,810
Inventory
Land
11,500
125,400
9,400
125,400
Office Equipment
Less Accumulated Depreciation
29,000
(8,340)
32,420
(9,188)
Intangible Assets
10,000
10,000
$247,940
$251,932
Current Income Tax Liability
Debentures
8,210
26,700
7,839
14,740
Share Capital
Asset Revaluation Reserve
110,850
18,910
121,660
8,100
29,860
53,410
48,550
51,043
$247,940
$251,932
Total Assets
Liabilities and Equity
General Reserve
Retained Earnings
Total Liabilities and Equity
Additional Information

A $10,810 bonus share issue was made from the asset revaluation reserve
in April 2027.

Office equipment was sold for cash in January 2027.

The book value of the office equipment sold was $7,200 on the date of sale.

The accumulated depreciation of the office equipment sold, on the date of
sale, was $3,890.

The short term deposits will mature in 60 days.
Required
Prepare a statement of cash flows for the year ended 30 June 2027.
Solution Check
Net cash from operating activities = $26,868
Accounting 3B
207
Question 54
Boulder Traders Limited
Unclassified Income Statements
for the years ended
30 June 2025
30 June 2024
Sales
Less Cost of Sales
134,582
51,914
126,704
46,303
Gross Profit
82,668
80,401
Less Other Expenses
Loss on sale of investments
Advertising
Wages
Other expenses
Profit before Tax
Less Income tax expense
1,305
3,722
42,594
26,737
8,310
2,492
0
2,400
49,110
20,960
7,931
1,978
Profit
$5,818
$5,953
Boulder Traders Limited
Unclassified Balance sheets as at
30 June 2025
30 June 2024
Assets
Cash at Bank
Inventory
Investments (shares in companies)
Plant and Equipment
Accumulated Depreciation
Total Assets
51,915
11,083
13,510
127,941
(39,708)
$164,741
51,535
11,678
10,370
121,915
(35,900)
$159,598
Liabilities and Equity
Accounts Payable
Accrued Wages
Income Tax Payable
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
5,910
3,003
2,492
95,214
30,805
27,317
$164,741
8,900
3,834
1,978
82,041
21,520
41,325
$159,598
Additional Information
The investments sold had been purchased for $11,408. The investments had
been sold for cash.
Required
Prepare a statement of cash flows for the year ended 30 June 2025.
Solution Check
Net cash from operating activities = $8,219
208 Accounting 3B
Question 55
Get Smart Tours Limited
Unclassified Income Statement
for the year ended 30 June 2028
Fees
Add Other Income
Interest
Gain on sale of motor vehicle
840
54
37
Less Expenses
Wages
Depreciation of motor vehicles
Advertising
480
70
160
91
931
710
Profit before Tax
Less Income tax expense
221
128
Profit
$93
Get Smart Tours Limited
Unclassified Balance Sheets as at
30 June 2027
30 June 2028
Assets
Cash at Bank
Accrued Interest Income
Motor Vehicles
Accumulated Depreciation
Land
Total Assets
124
25
260
(59)
621
$971
9
27
291
(68)
731
$990
Liabilities and Equity
Accrued Wages
Income Tax Payable
Debentures
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
31
125
258
420
77
60
$971
7
128
250
480
17
108
$990
Additional Information
a
A motor vehicle that had been purchased for $41 was sold for cash in 2028.
b
A $60 bonus share issue was made in 2028 out of the general reserve.
Required
Prepare a statement of cash flows for the year ended 30 June 2028.
Solution Check
Net cash from operating activities = $103
Accounting 3B
Question 56
Astro Traders Limited
Unclassified Income Statement
for the year ended 30 June 2026
Sales
Less Cost of Sales
90,214
30,703
Gross Profit
59,511
Add Other Income
Gain on sale of motor vehicle
Interest income
1,400
130
1,530
61,041
Less Other Expenses
Interest expense
Depreciation of motor vehicles
Discount allowed
Wages
Rent
Profit before Tax
Less Income tax expense
285
592
210
30,220
20,642
51,949
9,092
2,924
Profit
$6,168
Astro Traders Limited
Unclassified Statements of Financial Position as at
30 June 2026
30 June 2025
Assets
Cash at Bank
Cash on Hand
Receivables
Inventory
Prepaid Rent
Accrued Interest Income
Motor Vehicles
Accumulated Depreciation
Total Assets
1,308
50
9,027
7,900
833
260
30,700
(9,300)
$40,778
6,315
73
5,450
6,221
910
319
55,200
(5,900)
$68,588
Liabilities and Equity
Accounts Payable
Income Tax Payable
Loan from Bank
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
4,240
2,655
400
29,800
600
3,083
$40,778
4,805
2,924
8,500
47,200
200
4,959
$68,588
209
210 Accounting 3B
Question 56 continued
Additional Information
The cost price of the motor vehicle sold was $5,050.
Cash was raised from a share issue in 2026.
Required
1
Prepare a statement of cash flows for the year ended 30 June 2026.
2
What were the company’s main sources and uses of cash during the year
ended 30 June 2026?
Solution Check
Net cash from operating activities = $11,314
Question 57
General ledger account balances of Carnamah Traders Limited:
30 June
2028
Cash at Bank
30 June
2029
21,663
21,509
3,291
6,973
Accounts Receivable
42,541
37,110
Allowance for Doubtful Debts
(1,940)
(2,160)
Inventory
22,624
26,381
1,530
1,650
Investments (shares in companies)
14,300
29,470
Office Equipment
31,500
35,010
Accumulated Depreciation of Office Equipment
(6,428)
(8,161)
1,679
2,455
16,262
15,940
5,000
20,000
89,530
93,430
4,820
7,320
11,790
8,637
Term Deposit (maturing in 2 months)
Accrued Interest Revenue
Accrued Electricity Expense
Income Tax Payable
Debentures
Share Capital
General Reserve
Retained Earnings
Accounting 3B
Question 57 continued
Carnamah Traders Limited
Unclassified Income Statement
for the year ended 30 June 2029
Sales
167,229
Less Sales returns
4,370
Less Cost of Sales
162,859
67,046
Gross Profit
95,813
Add Other Income
Interest
3,172
98,985
Less Other Expenses
Discount allowed
Loss on sale of investments
Depreciation of office equipment
Doubtful debts
Wages
Interest
Electricity
622
1,480
1,733
684
31,459
740
9,134
Profit before Tax
Less Income tax expense
Profit
45,852
53,133
15,940
$37,193
Additional Information
Investments purchased for cash in 2029 totalled $19,110.
Required
Prepare a statement of cash flows for the year ended 30 June 2029.
Solution Check
Net cash from operating activities = $42,634
211
212 Accounting 3B
Question 58
Bejoording Traders Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
Less Sales Returns
893
3
Less Cost of Sales
890
271
Gross Profit
Add Other Income
619
Interest
33
652
Less Other Expenses
Rent
Wages
Discount allowed
97
218
22
Interest
Doubtful debts
17
61
Other expenses
183
Profit before Tax
Less Income tax expense
Profit
598
54
16
$38
Bejoording Traders Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2027
Profit
38
Add Other Comprehensive Income
Gain on asset revaluation, net of income tax
Total Comprehensive Income for the Period
Land was revalued in 2027.
11
$49
Accounting 3B
213
Question 58 continued
Bejoording Traders Limited
Unclassified Statements of Financial Position as at
30 June 2026
30 June 2027
Assets
Cash at Bank
115
191
Cash on Hand
Accounts Receivable
Less Allowance for Doubtful Debts
16
74
(13)
9
67
(10)
Prepaid Rent
Inventory
51
124
49
117
Investments (shares in companies)
Land
0
188
30
199
Motor Vehicles
Accumulated Depreciation – Motor Vehicles
255
(37)
210
(11)
Total Assets
$773
$851
40
11
30
16
Debentures
Accounts Payable
54
110
80
97
Share Capital
Revaluation Reserve
508
10
588
21
40
19
$773
$851
Liabilities and Equity
Accrued Wages
Current Income Tax Liability
Retained Earnings
Total Liabilities and Equity
Additional Information
a
The business sold a motor vehicle during the year ended 30 June 2027
for $10 cash.
b
The motor vehicle sold had originally been purchased for $93. The motor
vehicle had a book value of $51 on the date of sale.
Required
Prepare a statement of cash flows for the year ended 30 June 2027.
Solution Check
Net cash from operating activities = $90
214 Accounting 3B
Question 59
Dundas Trading Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
95,420
Less Cost of Sales
22,640
Gross Profit
Add Other Income
72,780
Interest
2,898
Dividends
1,611
4,509
77,289
Less Other Expenses
Interest
Rent
2,400
14,217
Electricity
Wages
3,259
15,811
Discount allowed
Insurance
73
1,340
Doubtful debts
Other expenses
400
34,910
72,410
Profit before Tax
4,879
Less Income tax expense
1,453
Profit
$3,426
Dundas Trading Limited
Statement of Comprehensive Income
for the year ended 30 June 2027
Profit
3,426
Add Other Comprehensive Income
Gain on asset revaluation, net of income tax
Total Comprehensive Income for the Period
Land was revalued during the year ended 30 June 2027.
14,000
$17,426
Accounting 3B
Question 59 continued
Dundas Trading Limited
Unclassified Statements of Financial Position as at
30 June 2027
30 June 2026
Assets
Cash at Bank
Accounts Receivable
26,558
9,200
Allowance for Doubtful Debts
Prepaid Insurance
Land
Inventory
Shares in Companies
Motor Vehicles
Less Accumulated Depreciation
Total Assets
37,320
9,518
(430)
110
155,000
9,400
6,105
45,100
(9,100)
(270)
490
141,000
11,500
5,400
28,000
(7,100)
$241,943
$225,858
110
10,310
321
8,100
1,453
9,200
1,911
11,000
198,140
20,000
185,040
6,000
Liabilities and Equity
Accrued Electricity
Accounts Payable
Income Tax Payable
Debentures
Share Capital
Asset Revaluation Reserve
General Reserve
Retained Earnings/Losses
1,000
1,730
Total Liabilities and Equity
$241,943
14,100
(614)
$225,858
Additional Information

Shares in companies were sold for cash in 2027. The cost price of the
shares sold was $2,500. The proceeds of the sale of the share were
$2,100 cash.

A $13,100 issue of bonus shares was made from the general reserve.
Required
Prepare a statement of cash flows for the year ended 30 June 2027.
Solution Check
Net cash from operating activities = $10,325
215
216 Accounting 3B
Question 60
You are a bank manager. Two companies have approached you each asking for a
$200,000 loan.
You have been presented with the following statements of cash flows of each
company for the year ended 30 June 2029.
VIP Business Colleges Limited
Statement of Cash Flows
for the year ended 30 June 2029
Cash flows from operating activities
Receipts from customers
Payments suppliers and employees
Net cash from operating activities
Excel Business Colleges Limited
Statement of Cash Flows
for the year ended 30 June 2029
Cash flows from operating activities
917,400
(981,600)
(64,200)
Cash flows from investing activities
Receipts from customers
985,900
Payments to suppliers and employees
913,100
Net cash from operating activities
72,800
Cash flows from investing activities
Proceeds of sale of investments
224,600
Purchase of office equipment
(186,000)
Net cash from investing activities
224,600
Net cash from investing activities
(186,000)
Cash flows from financing activities
Loan repayment
Cash flows from financing activities
(51,000)
Additional share capital
190,000
Dividends paid
(37,900)
152,100
Net cash from financing activities
(51,000)
Net cash from financing activities
Net increase in cash held
109,400
Net increase in cash held
38,900
Cash and cash equivalents at start of period
(97,800)
Cash and cash equivalents at start of period
25,100
Cash and cash equivalents at end of period
11,600
Cash and cash equivalents at end of period
64,000
Required
1
What were the main sources of cash, for each company, during the last year?
2
What was the single most important use of cash, for each company, during
the last year?
3
Based solely on the above statements of cash flow, which company is in a
better position to obtain the loan? Justify your answer.
4
What additional information would you, as a bank manager, like to see about
these companies to help you make this decision?
Accounting 3B
217
Question 61
Australia Wide Tours Limited
Unclassified Income Statement
for the year ended 30 June 2026
Fees
Add Other Income
Interest
451
21
472
Less Expenses
Wages
Stationery
Directors fees
Other expenses
Profit before Tax
Less Income tax expense
159
68
25
126
378
94
27
Profit
$67
Australia Wide Tours Limited
Unclassified Balance Sheets as at
30 June 2025
Assets
Cash at Bank
Accrued Interest Revenue
Stationery Supplies
Plant and Equipment
Accumulated Depreciation
Total Assets
Liabilities and Equity
Unearned Income
Income Tax Payable
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
30 June 2026
106
5
18
427
(28)
122
6
17
505
(34)
$528
$616
103
37
296
38
54
91
27
394
35
69
$528
$616
Additional information
Plant and equipment was sold in April 2026 for $22 cash. The book value of
the plant and equipment sold was $39. The plant and equipment had originally
been purchased for $84.
Required
Prepare a statement of cash flows for the year ended 30 June 2026.
Solution Check
Net cash from operating activities = $113
218 Accounting 3B
Question 62
Education Land Limited
Unclassified Income Statement
for the year ended 30 June 2028
Fees
Add Dividends
165,100
4,584
169,684
Less Expenses
Advertising
11,933
Wages
Other expenses
88,374
15,943
116,250
Profit before Tax
Less Income tax expense
53,434
16,110
Profit
$37,324
Education Land Limited
Unclassified Balance Sheets as at
30 June 2028
30 June 2027
Assets
Cash at Bank
35,295
24,261
Prepaid Advertising
Shares in Companies
0
80,864
1,972
126,861
$116,159
$153,094
2,781
8,150
93,000
3,942
16,110
114,000
4,000
8,228
3,000
16,042
$116,159
$153,094
Total Assets
Liabilities and Equity
Unearned Income
Income Tax Payable
Share Capital
General Reserve
Retained Earnings
Total Liabilities and Equity
Additional Information
a
Shares in companies were purchased in March 2028 for $64,185. Shares
in companies were sold in November 2027 for $16,861.
b
The shareholders received a cash dividend in April 2028.
Required
Prepare a statement of cash flows for the year ended 30 June 2028.
Solution Check
Net cash from operating activities = $45,800
Accounting 3B
3
219
Ratio Analysis
Introduction
Ratio analysis is a method of evaluating the health and performance of a business.
In this chapter we will examine 11 ratios in five areas of analysis:

liquidity

stability

profitability

efficiency, and

market (that is, the stock market’s perception of the future performance
of a company).
Liquidity Ratios
The word liquidity means the ability of a business to pay its debts as they are
due for payment.
Two ratios that are widely used to evaluate the liquidity of a business are the:

current ratio or working capital ratio, and the

quick asset ratio.
Current Ratio or Working Capital Ratio
The current ratio or the working capital ratio is a measure of the ability of a
business to pay its short term debts, that is, debts payable within 12 months.
The formula for the current ratio is:
Current Assets
Current Liabilities
x
100
1
220 Accounting 3B
Example
Westco Limited has supplied the following information:
Westco Limited
Balance Sheet (extract)
as at 30 June 2018
Current Assets
Accounts Receivable
15,400
Less Allowance for Doubtful Debts
(400)
Inventory
15,000
13,000
Prepaid Expenses
2,000
Accrued Interest Income
1,000
Total Current Assets
31,000
Current Liabilities
Bank Overdraft
1,000
Accounts Payable
13,000
Income Tax Payable
5,000
Accrued Expenses
1,000
Total Current Liabilities
20,000
Required
Calculate the current ratio on 30 June 2018.
Solution
The current ratio of Westco Limited on 30 June 2018 is:
$31,000
$20,000
=
x
100
1
155%
This ratio means that Westco Limited, on 30 June 2018, had $1.55 of current
assets available to pay every $1.00 of its current liabilities.
You should note that the net accounts receivable (the accounts receivable
less the allowance for doubtful debts) is used in the calculation of the current
ratio. The net accounts receivable is the amount of cash that is expected to be
collected from the debtors.
Accounting 3B
221
Actual Current Ratios
Set out below are 2009 current ratios of five companies listed on the
Australian Securities Exchange (ASX).
Company
Industry
Current Ratio
Woolworths Limited
Supermarkets
76%
The Reject Shop Limited
Household Products
87%
Harvey Norman Limited
Household Products
111%
Fantastic Holdings Limited
Furniture Retailer
180%
Macquarie Radio Network
Radio Stations
202%
Interpretation of a Current Ratio
Set out below are guidelines for interpreting the current ratio.
Current Ratio of less than 100%
A current ratio of less than 100% indicates either that a business may find it
difficult to pay its short term debts or that the business is operating in an
industry in which money is collected from sales very quickly.
Current Ratio of between 100% and 200%
A current ratio of between 100% and 200% indicates that a business should
be able to pay its short term debts.
Current Ratio of more than 200%
A current ratio of more than 200% indicates that a company should be able to
comfortably pay its short term debts or that a company has an excessive level
of current assets and is not making the best use of its resources to generate
revenue.
Quick Asset Ratio
The quick asset ratio is a measure of the ability of a business to pay its short
term debts (excluding any bank overdraft) using only its more liquid current
assets.
222 Accounting 3B
Quick Asset Ratio continued
The formula for the quick asset ratio is:
Current Assets except for Inventory and Prepaid Expenses
Current Liabilities except for Bank Overdraft
x
100
1
The inventory and prepaid expenses are left out of the calculation of the quick
asset ratio because they usually have a low level of liquidity.
Inventory is likely to be difficult to sell quickly, in large quantities, at its normal
selling price.
Prepaid expenses are excluded because it may be difficult to recover money
paid in advance.
Example
Westco Limited has supplied the following information:
Westco Limited
Balance Sheet (extract)
as at 30 June 2018
Current Assets
Accounts Receivable
Less Allowance for Doubtful Debts
Inventory
15,400
(400)
15,000
13,000
Prepaid Expenses
2,000
Accrued Interest Income
1,000
Total Current Assets
31,000
Current Liabilities
Bank Overdraft
Accounts Payable
1,000
13,000
Income Tax Payable
5,000
Accrued Expenses
1,000
Total Current Liabilities
Required
Calculate the quick asset ratio on 30 June 2018.
20,000
Accounting 3B
223
Solution
The quick asset ratio of Westco Limited on 30 June 2018 is:
$15,000 + $1,000
$13,000 + $5,000 + $1,000
=
x
100
1
84%
This ratio means Westco Limited had, on 30 June 2018, $0.84 of highly liquid
current assets available to pay every $1.00 of its current liabilities except for
the bank overdraft.
Actual Quick Asset Ratios
Set out below are 2009 quick asset ratios of five companies listed on the
Australian Securities Exchange.
Company
Industry
Quick Asset
Ratio
David Jones Limited
Household Products
13%
JV Fi Hi Limited
Home Electronic Products
31%
Fantastic Holdings Limited
Furniture Retailer
37%
Wotif.com Holdings Limited
Internet Hotel Bookings
76%
New Corporation Limited
Newspapers
121%
Interpretation of the Quick Asset Ratio
There is no one ideal quick asset ratio.
Quick Asset Ratio of 100% or more
A quick asset ratio of 100% or more indicates that a business should be able
to pay its short term debts.
Quick Asset Ratio of less than 100%
A quick asset ratio of less than 100% indicates that, in an emergency, a
business may not be able to pay its short term debts.
A retail company, such as, a supermarket chain, is likely to have a quick asset
ratio of much lower than 100% because inventory will make up a large
proportion of its current assets.
224 Accounting 3B
Stability Ratios
A business can purchase assets using borrowed money (debt finance), share
capital or from the cash generated from the profit (equity finance).
Stability ratios measure the medium to long term survival prospects of a
business based on the extent of the borrowings of that business.
Gearing or leverage is the term used to describe the extent of the borrowings
of a business.
A highly geared business has large interest and loan re-payments and has an
increased risk of failure.
Two ratios that can be used to evaluate the stability of a business are the:

debt to equity ratio, and the

times interest earned.
Debt to Equity Ratio
The debt to equity ratio measures the extent of the gearing of a business.
The formula for the debt to equity ratio is:
Total Liabilities
Equity (end)
x
100
1
Example
Westco Limited
Balance Sheet (extract)
as at 30 June 2018
Total Assets
142,000
Total Liabilities
58,000
Total Equity
84,000
Required
Calculate the debt to equity ratio on 30 June 2018.
Accounting 3B
225
Solution
The debt to equity ratio of Westco Limited on 30 June 2018 is:
$58,000
x
$84,000
=
100
1
69%
Actual Debt to Equity Ratios
Below are 2009 debt to equity ratios of five companies listed on the Australian
Securities Exchange.
Company
Industry
Debt to Equity Ratio
Harvey Norman Limited
Household Products
29%
David Jones Limited
Household Products
64%
Woolworths Limited
Food and Grocery
142%
Telstra Limited
Communications
215%
Navitas Limited
Education Colleges
222%
Interpretation of the Debt to Equity Ratio
There is no one acceptable figure for the debt to equity ratio.
A debt to equity ratio of below about 40% would be considered by many
investors to be conservative and a debt to equity ratio of more than 100%
would be considered as high.
It should be pointed out that the debt level of a company must be considered
in relation to the profit made by the company, that is, how the company has
used its debt finance to generate income.
226 Accounting 3B
Times Interest Earned
The times interest earned ratio is the number of times that the interest of a
company is covered by the profit before tax.
The formula for the times interest earned ratio is:
Profit before Tax + Interest Expense
Interest Costs (expensed and capitalised)
Interest paid is, almost always, an expense in the period in which the interest
satisfies the two Framework expense recognition criteria. An exception to this
rule is contained in AASB 123 Borrowing Costs. This standard requires that
interest costs must be capitalised, that is, added to the cost price of an asset,
where a company borrows money to construct a building that will take more
than one year to complete.
Example
Westco Limited
Income Statement (extract)
for the year ended 30 June 2018
Sales
150,000
Less Cost of Sales
90,000
Gross Profit
60,000
Less Other Expense
Interest
1,900
Other Expenses
Profit before Tax
Less Income Tax Expense
Profit
37,100
39,000
21,000
6,900
$14,100
Capitalised interest cost
$3,500
Required
Calculate the times interest earned for the year ended 30 June 2018.
Accounting 3B
227
Solution
The times interest earned of Westco Limited for the year ended 30 June 2018 is:
$21,000 + $1,900
$1,900 + $3,500
$22,900
$5,400
=
4.2 times
The profit before tax of Westco Limited, for the year ended, 30 June 2018,
plus the interest expense, is sufficient to cover the annual interest cost of the
company more than 4 times.
Interpretation of the Times Interest Earned Ratio
A widely held view is that a times interest earned ratio of between 3 and 4
times offers a good safety margin for a company.
Profitability Ratios
Two ratios that can be used to measure profitability are the:

profit margin ratio, and the

rate of return on assets.
Profit Margin Ratio
The profit margin ratio shows the percentage of profit after income tax that is
contained in each dollar of sales.
The formula for the profit margin ratio is:
Profit (after income tax)
Net Sales
x
100
1
The profit after tax is used as this is the profit available to the shareholders.
228 Accounting 3B
Example
Westco Limited
Income Statement (extract)
for the year ended 30 June 2018
Sales
150,000
Less Cost of Sales
90,000
Gross Profit
60,000
Less Other Expense
Interest
1,900
Other Expenses
37,100
Profit before Tax
39,000
21,000
Less Income Tax Expense
6,900
Profit
$14,100
Required
Calculate the profit margin ratio for the year ended 30 June 2018.
Solution
The profit margin ratio of Westco Limited for the year ended 30 June 2018 is:
$14,100
$150,000
=
x
100
1
9.4%
For every $1.00 of sales made by Westco Limited for the year ended
30 June 2018, a total of 9.4 cents is profit after tax.
This year’s profit margin ratio should be compared with the profit margin ratio
in previous years or with an industry average.
Interpretation of the Profit Margin Ratio
An increase in the profit margin ratio may be caused by:

a reduction in expenses

an increase in the selling prices of the products of the company greater
than any increase in the cost of sales, or

or a cheaper supplier of inventory has been found.
Accounting 3B
229
Interpretation of the Profit Margin Ratio continued
A decrease in the profit margin ratio may be caused by:

expense increases that are not being fully passed on to consumers in
the form of increased selling prices

or increased competition causing the business to lower its selling prices.
Rate of Return on Assets
The rate of return on assets measures how efficiently a business has used its
assets to generate a profit.
The formula for the rate of return on assets is:
Profit before Tax + Interest Expense
Average Total Assets
x
100
1
Assets are financed through equity (share capital and retained earnings) or
debts (loans). Equity finance is interest free. Debt finance carries an interest
expense. The interest expense is added back to the profit before tax to
cancel out the cost of financing the assets.
Example
Westco Limited
Income Statement (extract)
for the year ended 30 June 2018
Sales
Less Cost of Sales
150,000
90,000
Gross Profit
Less Other Expense
Interest
Other Expenses
60,000
1,900
37,100
Profit before Tax
Less Income Tax Expense
39,000
21,000
6,900
Profit
$14,100
Total assets of Westco Limited on:
30 June 2017
30 June 2018
$137,000
$142,000
Required
Calculate the rate of return on assets for the year ended 30 June 2018.
230 Accounting 3B
Solution
The average assets of Westco Limited for the year ended 30 June 2018 was:
$137,000 + $142,000
2
=
$139,500
The return on assets of Westco Limited for the year ended 30 June 2018 was:
$21,000 + $1,900
$139,500
=
x
100
1
16.4%
This ratio should be compared to the rate of return on assets achieved in
previous years or to an industry average.
Market Ratios
Market ratios are used by investors to review the performance of public companies
listed on the Australian Securities Exchange.
Three important market ratios are the:

earnings per ordinary share

price earnings ratio, and the

dividend yield.
Earnings per Ordinary Share
The earnings per ordinary share ratio is the portion of a company's annual
profit after tax and preference dividends allocated to each issued ordinary
share.
The earnings per ordinary share ratio is found by using the following formula:
Profit After Tax less Preference Dividends
Weighed Average Number of Ordinary Shares Issued
Accounting 3B
231
Example
Westco Limited share capital on 1 July 2017.
62,000 ordinary shares of $0.50 each fully paid less share
issue costs
$30,000
10,000 8% preference shares of $3.00 each fully paid
less share issue costs
$27,000
4 December 2017
The following dividend was paid to the preference shareholders:
Preference dividend
$2,400
1 April 2018
The company issued a further 11,000 ordinary shares.
30 June 2018
The profit after tax of Westco Limited for the year was $14,100.
Required
Calculate the earnings per ordinary share for the year ended 30 June 2018.
Solution
The process of calculating the earnings per share of a company is covered in
accounting standard AASB 133 Earnings per Share.
Step 1
Westco Limited issued 11,000 ordinary shares during the year ended
30 June 2018.
AASB 133 Earnings per Share, paragraph 20, requires that the number of
days in a year for which the ordinary shares have been issued must be
calculated.
Westco Limited, in the year ended 30 June 2018, has issued:
62,000 ordinary shares for a total of 243 days (1/7/17 to 31/3/18), and
73,000 ordinary shares for 122 days (1/4/18 to 30/6/18).
232 Accounting 3B
Step 1 continued
The total weighted average number of issued ordinary shares is:
274
365
91
365
x
x
62,000 ordinary shares
=
46,542 shares
=
18,200 shares
=
64,742 shares
1
73,000 ordinary shares
1
Total weighted average number of issued ordinary shares
Step 2
The earnings per ordinary share of Westco Limited for the year ended
30 June 2018 was:
$14,100 – $2,400
64,742
$0.18 per ordinary share
A shareholder will want to see the earnings per share increasing each year.
The earnings per ordinary share of Westco, for the last three years, is set out
below.
Year ended
30 June 2016
Year ended
30 June 2017
Year ended
30 June 2018
$0.11 per ordinary share
$0.14 per ordinary share
$0.18 per ordinary share
The earnings per ordinary share, in the last two years, have grown by:
more than 21% growth in earnings per share in 2017:
[($0.14 – $0.11) / $0.14] x 100%
and more than 22% growth in earnings per share in 2018:
[($0.18 – $0.14)/$0.18] x 100%.
This growth rate would be strongly approved of by the shareholders.
Accounting 3B
Price Earnings Ratio
The price earnings ratio is the number of times earnings per ordinary share
that an investor is prepared to pay to purchase an ordinary share in the
company.
The price earnings ratio is found by using the following formula:
Market Price per Ordinary Share
Earnings per Ordinary Share
The price earnings ratio is the stock market’s assessment of the value of an
ordinary share of a company.
Example
Westco Limited
Market price of an ordinary share on 30 June 2018
$2.52
Earnings per ordinary share on 30 June 2018
$0.18
Required
Calculate the price earnings ratio on 30 June 2018.
Solution
The price earnings ratio for Westco Limited, on 30 June 2018, is:
$2.52
$0.18
=
14 times
The ordinary shares of Westco Limited are currently selling for 14 times the
earnings per share of the company.
233
234 Accounting 3B
Interpretation of the Price Earnings Ratio
A high price earnings ratio (when compared to the industry average) indicates
that investors believe that the future growth in the profit of the company is
likely to be very good. However, this does not mean that this belief is soundly
based. The investors may be over-confident about the future profitability of
the company.
A low price earnings ratio (when compared to an industry average) indicates
that investors believe that the company has poor profit growth prospects.
However, investors may have underestimated the profit potential of the
company.
Dividend Yield
The dividend yield shows how much a company has paid out in dividends in a
year relative to its share price.
The formula for the dividend yield is:
Annual Dividend per Ordinary Share
Market Price per Ordinary Share
x
100
1
An investor can compare the dividend yield of a company with the interest
received from investing in a fixed term bank deposit.
Example
Alan has $3,000 that he wants to invest either by purchasing shares in
Westco Limited or by depositing the money in a one year, fixed term bank
deposit.
Alan wants to find out the dividend yield of Westco Limited so that he can
compare this likely cash return with bank interest.
Westco Limited provided the following information on 30 June 2018.
Annual dividend per ordinary share
$0.16
Market price per ordinary share
$2.52
One Year Fixed Term Bank Deposit
Interest Rate
6% per annum
Required
Calculate the dividend yield of Westco Limited for the year ended 30 June 2018.
Accounting 3B
235
Solution
The dividend yield of Westco Limited for the year ended 30 June 2018 is:
$0.16
x
$2.52
=
100
1
6.3%
If Alan purchased shares in Westco Limited on 30 June 2018 and held these
shares for the next 12 months, and if the dividend paid remained the same, Alan
would receive a cash return of 6.3%. This return is higher than the 6% return on
the 12 months, fixed term bank deposit.
This analysis ignores capital growth or capital loss, that is, the future increase or
decrease in the market price of the shares.
Efficiency Ratios
The efficiency ratios evaluate the performance of the management of a company
in the areas of inventory and accounts receivable.
The ratios that will be considered in this section are:

debtors collection period, and

inventory turnover.
Debtors Collection Period
The debtors collection period measures how quickly a business collects the
money owing from credit sales.
The gross debtors’ amount is used in the calculation of this ratio. The gross
debtors is the debtors total before subtracting the allowance for doubtful debts.
The formula for the debtors collection period is:
Average Debtors
Net Credit Sales
x
365
1
236 Accounting 3B
Example
Westco Limited
Income Statement (extract)
for the year ended 30 June 2018
Sales (all credit)
150,000
Less Cost of Sales
90,000
Gross Profit
60,000
Gross accounts receivable of Westco Limited on:
30 June 2017
30 June 2018
$16,900
$15,400
Required
Calculate the debtors collection period for the year ended 30 June 2018.
Solution
Step 1
The average debtors of the company for the year ended 30 June 2018 is:
$16,900 + $15,400
2
=
$16,150
Step 2
The average number of days that credit sales were uncollected for the year
ended 30 June 2018 was:
$16,150
$150,000
=
X
365
1
39 days
This means that on average Westco Limited are taking 39 days to collect the
money owing from their credit sales.
Accounting 3B
237
Interpretation of the Debtors Collection Period
An increase in the debtors collection period could be caused by any of the
following reasons:
1
poor debt collection procedures. The business may not be quickly
following up overdue customer accounts
2
the slow processing of sales invoices. The business may be taking a
long time to send out sales invoices to customers
3
failing to check the credit rating of new customers before selling them
products or services on credit
4
a business may offer longer credit terms to potential customers to
increase sales.
A decrease in this ratio would indicate that the credit control and collection
procedures have improved.
Inventory Turnover
The inventory turnover measures how many times each year a business
replaces its inventory.
The formula for the inventory turnover ratio is:
Cost of Sales
Average Inventory
The average inventory figure is equal to:
Opening Inventory + Closing Inventory
2
The cost of sales is used in this ratio because this figure is the actual amount
of inventory sold during the period.
An average inventory amount is used because this figure is likely to be more
representative of the amount of inventory held during the year than the closing
inventory figure.
238 Accounting 3B
Example
Westco Limited
Income Statement (extract)
for the year ended 30 June 2018
Sales
150,000
Less Cost of Sales
90,000
Gross Profit
60,000
Inventory of Westco Limited on:
30 June 2017
30 June 2018
$26,000
$14,000
Required
Calculate the inventory turnover for the year ended 30 June 2018.
Solution
Step 1
The average inventory for the year ended 30 June 2018 was:
$26,000 + $14,000
2
=
$20,000
Step 2
The inventory turnover of Westco Limited for the year ended 30 June 2018 was:
$90,000
$20,000
=
4.5 times per year
This means that Westco Limited is replacing its inventory 4.5 times per year or
about once every 2.6 months.
This ratio should be compared to an industry average or to the inventory
turnover ratio calculated in previous years.
Accounting 3B
239
Interpretation of the Inventory Turnover
An increasing inventory turnover ratio may mean that the products sold by the
company (the inventory) are popular with consumers.
A decreasing inventory turnover ratio may indicate that the inventory
management policy of the company is inefficient, that is, the business has
ordered too much inventory and may be left with an excessive amount of slow
moving or obsolete inventory.
Limitations of Ratio Analysis
1
Ratios do not identify the causes of problems.
Example
The profit margin ratio has fallen from 15% to 11%. What is the cause of
the decrease in this ratio?
2
Ratios, by themselves, are usually only of limited value. They often need
to be compared to an industry average.
3
Limited disclosure of information makes it impossible to calculate some
ratios.
Example
The credit sales are required to work out the debtors collection period.
4
It is not always possible to compare ratios between businesses as
different accounting policies may have been chosen that will affect ratio
calculations, such as, different depreciation or inventory valuation
methods.
Diversification of Investments
An important principle that any investor on the stock market should follow is to
diversify their investments.
A share market investor should not invest all of his or her money in the shares
of one company. An investor should investor in a number of companies
across a range of industries. Any downturn in one industry, resulting in a drop
in profit, may be offset by a strong performance in another industry, resulting
in an improved profit performance.
240 Accounting 3B

Question 1 to 11: current ratio and quick asset ratio
Current Ratio Formula
Current Assets
Current Liabilities
X
Quick Asset Ratio Formula
Current Assets except for
Inventory and Prepaid Expenses
100
1
Current Liabilities except for
Bank Overdraft
X
Question 1
Ardath Traders Limited supplied the following information on 30 June 2019:
Assets
Motor Vehicle
21,000
Accounts Receivable
15,000
Less Allowance for Doubtful Debts
1,000
14,000
Prepaid Rent
2,000
Accrued Interest Income
1,000
Inventory
7,000
Liabilities
Bank Overdraft
2,000
Accounts Payable
5,000
Accrued Expense
1,000
Unearned Income
4,000
Income Tax Payable
3,000
Debentures (repayable in 2024)
17,000
Loan from Bank (repayable in 2019)
1,000
The current ratio of Ardath Traders Limited on 30 June 2019 is:
a
192%
b
150%
c
160%
The quick asset ratio of Ardath Traders Limited on 30 June 2019 is:
a
107%
b
93%
c
118%
100
1
Accounting 3B
241
Question 2
The current ratio of Ardath Traders Limited indicates that the company:
a
may find it difficult to pay its short term debts or is operating in an industry
in which money is collected from sales very quickly
b
should be able to pay its short term debts
c
should be able to comfortably pay its short term debts but may have an
excessive level of current assets and may not be efficiently using these
assets to generate revenue
Question 3
The quick asset ratio of Ardath Traders Limited indicates that the company:
a
may, in an emergency, find it difficult to pay its short term debts
b
should be able to pay its short term debts.
Question 4
Traders 4 U Limited supplied the following information on 30 June 2022:
Assets
Inventory
$58,100
Accounts Receivable
66,200
Less Allowance for Doubtful Debts
4,700
61,500
Office Furniture
34,000
Prepaid Insurance
5,000
Liabilities
Debentures (repayable in 2022)
21,000
Income Tax Payable
8,100
Accrued Expenses
5,900
Bank Overdraft
62,000
Accounts Payable
34,000
Loan from Bank (repayable in 2025)
51,000
The current ratio of Traders 4 U Limited on 30 June 2022 is:
a
95%
b
160%
c
127%
The quick asset ratio of Traders 4 U Limited on 30 June 2022 is:
a
118%
b
105%
c
89%
242 Accounting 3B
Question 5
The current ratio of Traders 4 U Limited indicates that the company:
a
may find it difficult to pay its short term debts or is operating in an industry
in which money is collected from sales very quickly
b
should be able to pay its short term debts
c
should be able to comfortably pay its short term debts but may have an
excessive level of current assets and may not be efficiently using these
assets to generate revenue
Question 6
The quick asset ratio of Traders 4 U Limited indicates that the company:
a
may, in an emergency, find it difficult to pay its short term debts
b
should be able to pay its short term debts.
Question 7
Information extracted from Qantas Airways Limited financial statements:
30 June 2009
$M
Current Assets
Cash and Cash Equivalents
$3,617
Receivables
1,054
Other
1,295
Total Current Assets
5,966
Current Liabilities
Payables
1,833
Revenue Received in Advance
3,109
Interest bearing liabilities
608
Other
1,164
Total Current Liabilities
6,714
Required
1
Calculate the current ratio of the company on 30 June 2009.
2
Why do you think Qantas Airways Limited could operate very successfully in
2009 with a current ratio of less than 100%?
Accounting 3B
243
Question 8
Yandanooka Traders Limited information provided on 30 June 2028:
Assets
Accrued Interest Income
$6,020
Office Equipment
37,924
Prepaid Rent
22,681
Accounts Receivable
67,469
Less Allowance for Doubtful Debts
6,110
Inventory
61,359
125,402
Cash at Bank
55,331
Liabilities
Unearned Income
20,515
Income Tax Payable
13,190
Accounts Payable
40,540
Mortgage Loan (repayable in September 2028)
9,200
Accrued Expenses
11,355
Debentures (repayable in March 2029)
9,000
Ratio
Industry Averages
Current Ratio
131%
Quick Asset Ratio
104%
Required
1
Calculate the current ratio on 30 June 2028.
2
Calculate the quick asset ratio on 30 June 2028.
3
Comment on the current liquidity position of Yandanooka Traders Limited.
244 Accounting 3B
Question 9
Set out below are financial statement extracts of two companies listed on the
Australian Securities Exchange.
Woolworths
David Jones
30 June 2009
30 June 2009
$M
$M
Current Assets
Cash and Cash Equivalents
$762.6
13.6
197.7
8.8
3,292.6
244.8
606.3
26.7
4,859.2
293.9
15.9
1.9
Other
6,398.7
302.3
Total Current Liabilities
6,414.6
304.2
Prepayments (prepaid expenses)
Inventories
Other
Total Current Assets
Current Liabilities
Bank Overdraft
Required
1
Calculate the quick asset ratio of each company.
2
Why is it very unlikely that a business that operates a chain of retail shops,
such as, Woolworths or David Jones, will have a quick asset ratio of 100%
or more?
Question 10
Furniture Land Limited supplied the following information on 30 June 2028:
Current ratio of Furniture Land Limited
Industry average current ratio
91%
115%
The current ratio of Furniture Land Limited indicates that the business:
a
may, in an emergency, find it difficult to pay its short term debts
b
should be able to pay its short term debts
c
should be able to comfortably pay its short term debts but may have an
excessive level of current assets and may not be efficiently using these
assets to generate revenue.
Accounting 3B
Question 11
Match each current ratio on 30 June 2024 with the appropriate statement.
151%
240%
83%
A
The company may find it difficult to pay its short term debts or is
operating in an industry in which money is collected from sales very
quickly
B
The company should be able to pay its short term debts
C
The company should be able to comfortably pay its short term debts
but may have an excessive level of current assets and may not be
efficiently using these assets to generate revenue
Question 12
High Low Limited supplied the following information on 30 June 2021:
Assets
Motor Vehicles
$71,400
Cash at Bank
9,100
Bank Term Deposit (maturing in 2021)
Prepaid Rent
Accounts Receivable
5,000
2,700
Less Allowance for Doubtful Debts
7,400
900
6,500
Inventory
41,900
Accrued Interest Income
1,400
Liabilities
Loan from Bank (repayable in 2026)
Accrued Wages Expense
Accounts Payable
7,000
2,000
15,000
Debentures (repayable in 2021)
9,800
The quick asset ratio of High Low Limited on 30 June 2021 is:
a
68%
b
73%
c
82%
245
246 Accounting 3B

Questions 13 to 16: debt to equity ratio and times interest earned
Debt to Equity Formula
Total Liabilities
Equity (end)
100
X
1
Times Interest Earned Formula
Profit before Tax + Interest Expense
Interest Costs (expensed and capitalised)
Question 13
Household Products Limited
Balance Sheet (extract)
as at 30 June 2019
Total Liabilities
$174,000
Equity (end)
$691,000
Household Products Limited
Income Statement (extract)
for the year ended 30 June 2019
Sales
Less Cost of Sales
545,000
110,000
Gross Profit
Less Other Expenses
435,000
Interest
Wages
17,000
148,000
Other expenses
115,000
Profit before Tax
Less Income tax expense
Profit
280,000
155,000
34,000
$121,000
Additional Information
Household Products Limited constructed a building that is being used as a
retail shop and administration centre.
The building took more than 12 months to construct. The construction of the
building was financed by a loan. The interest on the loan has been
capitalised, that is, added to the cost of the building as required by accounting
standard AASB 123 Borrowing Costs. The capitalised interest cost, for the
year ended 30 June 2019, has been calculated at $3,000.
Accounting 3B
247
Question 13 continued
Ratio
Industry Average
Debt to Equity
29%
Ratio
Industry Average
Times Interest Earned
5 times
Required
1
The debt to equity ratio of Household Products Limited on 30 June 2019 is:
a
2
4
b
48%
c
162%
The times interest earned of Household Products Limited for the year
ended 30 June 2019 is:
a
3
25%
8.6 times
b
2.7 times
c
5.4 times
The debt to equity ratio of Household Products Limited indicates that the
company is:
a
not highly geared with a debt to equity ratio well below the industry
average.
b
highly gearing with a debt to equity ratio much higher than the
industry average. The company faces high interest payments and
high loan repayments.
The times interest earned of Household Products Limited shows that:
a
the number of times the profit before tax covers the interest cost is
above the often quoted appropriate safety margin of 3 or 4 to 1 and
is well above the industry average of 5 times.
b
the number of times the profit before tax covers the interest cost is
below the often quoted appropriate safety margin of 3 or 4 to 1 and is
well below the industry average of 5 times.
248 Accounting 3B
Question 14
English Language Colleges Limited
Balance Sheet (extract)
as at 30 June 2025
Total Liabilities
$591,000
Equity (end)
$332,000
English Language Colleges Limited
Unclassified Income Statement
for the year ended 30 June 2025
Fees
Less Expenses
254,040
Advertising
17,300
Wages
Interest
98,400
41,000
Depreciation of building
3,500
160,200
Profit before Tax
93,840
Less Income tax expense
31,955
Profit
$61,885
Additional Information
The company owns a building that took more than 12 months to construct. The
building is being used for classrooms and administration offices. The building
was financed by a loan. The capitalised interest cost of the loan, for the year
ended 30 June 2025, was $21,000.
Ratio
Industry Average
Debt to Equity
41%
Ratio
Industry Average
Times Interest Earned
6.8 times
Required
1
Calculate the debt to equity ratio on 30 June 2025.
2
Calculate the times interest earned for the year ended 30 June 2025.
3
Comment on the current level of gearing of the company.
Accounting 3B
249
Question 15
Auto Parts Limited
Balance Sheet (extract)
as at 30 June 2027
Equity (end)
$613,000
Total Liabilities
1,339,000
Auto Parts Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
Less Cost of Sales
940,400
514,000
Gross Profit
Less Other Expenses
426,400
Wages
Advertising
167,000
31,000
Interest
Rent
42,000
118,000
358,000
Profit before Tax
68,400
Less Income tax expense
19,152
Profit
$49,248
Additional Information
The senior management of the company intends to expand the business by
opening new shops in five locations in Western Australia at a cost of $2,500,000.
Two sources of financing this plan are being considered, the issue of debentures
or a new share issue.
Required
1
Calculate the debt to equity ratio of the company on 30 June 2027.
2
Calculate the times interest earned of the company for the year ended
30 June 2027.
3
Which method of financing the expansion plan would you recommend?
Justify your decision.
250 Accounting 3B
Question 16
High Low Limited
Balance Sheet information as at 30 June 2029
Total Assets
690,000
Total Liabilities
431,000
High Low Limited
Income Statement information for the year ended
30 June 2027
30 June 2028
30 June 2029
600,000
550,000
472,000
Less Interest Expense
37,000
34,000
33,000
Less Other Expenses
509,000
489,000
425,000
Profit before Tax
54,000
27,000
14,000
Less Income Tax Expense
13,000
7,000
6,000
Profit after Tax
41,000
20,000
8,000
Revenue
Ratio
Industry Average
Debt to Equity
49%
Ratio
Industry Average
Times Interest Earned
10.4 times
Required
1
Calculate the debt to equity ratio of the company on 30 June 2029.
2
Calculate the times interest earned of the company for the year ended
30 June 2029.
3
Discuss the long term survival prospects of the company.
Accounting 3B

251
Question 17: current ratio, debt to equity ratio and times interest earned
Question 17
Summer Traders
Limited
30 June 2027
Winter Traders
Limited
30 June 2027
$48,000
$17,000
Non-Current Assets
67,000
111,000
Current Liabilities
50,000
10,000
Non-Current Liabilities
35,000
15,000
Equity
30,000
103,000
Current Assets
Summer Limited
year ended 30 June 2027
Winter Limited
year ended 30 June 2027
Profit before Tax
$15,400
$34,000
Interest Expense
11,000
4,100
Additional Information
Both companies have applied for a $200,000 bank loan to finance the purchase
of new plant and equipment.
Industry Averages
Current Ratio
140%
Debt to Equity Ratio
31%
Times Interest Earned
3.7 times
Required
1
Calculate the following ratios for each company:
•
•
•
2
current ratio
debt to equity ratio
times interest earned.
On the basis of the ratios that you have calculated, which company has
a better chance of obtaining the loan?
252 Accounting 3B

Questions 18 to 23: profit margin ratio and rate of return on assets
Profit Margin Ratio Formula
Profit after Tax
Net Sales
X
Rate of Return on Assets Formula
100
Profit before Tax + Interest Expense
1
Average Total Assets
X
100
1
Question 18
Stationery Land Limited
Income Statements
for the years ended
Item
30 June 2018
30 June 2019
Sales
Less Sales Returns
$134,000
4,000
$206,000
2,000
Net Sales
Less Cost of Sales
130,000
204,000
78,000
122,400
Gross Profit
Less Other Expenses
52,000
81,600
Interest
Other Expenses
4,000
27,000
5,100
59,500
Profit before Tax
Less Income tax expense
21,000
6,300
17,000
5,100
Profit
14,700
11,900
Total assets on 1 July 2018
Total assets on 30 June 2019
$400,000
430,000
Required
1
Calculate the profit margin ratio for the year ended 30 June 2018 and the
year ended 30 June 2019.
2
Calculate the rate of return on assets for the year ended 30 June 2019.
3
Explain why the net sales of the company have increased from $130,000
in 2018 to $204,000 in 2019 yet the profit after tax has fallen from
$14,700 to $11,900.
4
What does the profit margin ratio suggest about the performance of the
senior management of the company?
5
The industry average rate of return on assets is 11%. Is the rate of
return on assets of Stationery Land Limited acceptable?
Accounting 3B
253
Question 19
Jubuk Traders Limited
Unclassified Income Statement
for the year ended 30 June 2021
Sales
471,300
Less Sales Returns
1,000
Net Sales
Less Cost of Sales
470,300
279,770
190,530
Gross Profit
Less Other Expenses
Insurance
Rent
9,184
37,390
Interest
Wages
8,550
66,734
Depreciation of motor vehicles
5,250
127,108
Profit before Tax
63,422
Less Income tax expense
14,028
Profit
$49,394
Total assets on 1 July 2020
Total assets on 30 June 2021
$652,000
740,000
Jubuk Traders Limited
30 June 2020
Profit Margin Ratio
6.8%
Required
1
Calculate the profit margin ratio for the year ended 30 June 2021.
2
Suggest possible reasons for the change in the profit margin ratio.
3
Calculate the rate of return on assets for the year ended 30 June 2021.
4
The industry average rate of return on assets is 9%. Is the return on
assets of Jubuk Traders Limited acceptable?
5
Outline three limitations of ratio analysis.
254 Accounting 3B
Question 20
Below is information taken from the financial statements of Woolworths Limited
for the year ended 30 June 2009.
$M
Revenue from the sale of goods
35,607.0
Profit after income tax expense
1,448.3
Required
Calculate the profit margin ratio of the company for the year ended 30 June 2009.
Question 21
Fridge and Washer World Limited data for the year ended 30 June 2026:
Sales
285,294
Sales returns
3,100
Cost of sales
129,114
Prepaid Rent on 1 July 2025
50,330
Wages
27,841
Office equipment
78,300
Electricity
5,840
Audit fees
8,346
Additional Information
a
Unexpired rent on 30 June 2026 was $7,900.
b
Accrued wages on 30 June 2026 was $1,993
c
The office equipment is depreciated using the straight line method. The
office equipment has a scrap value of $13,500 and a useful life of 9
years.
d
The company income tax rate is 30%.
e
The profit margin ratio for the year ended 30 June 2025 was 9.1%.
Required
1
Calculate the profit margin ratio for the year ended 30 June 2026.
2
Suggest one possible reason for the improvement in the profit margin ratio.
Solution Check
Profit after tax = $41,601
Accounting 3B
255
Question 22
Illawong Trading Limited
Unclassified Income Statement
for the year ended 30 June 2019
Sales
Less Cost of Sales
542,143
213,511
328,632
Gross Profit
Less Other Expenses
Rent
Wages
65,810
89,351
Interest
Audit fees
11,540
9,139
Depreciation of office equipment
2,470
178,310
Profit before Tax
150,322
Less Income tax expense
45,094
Profit
$105,228
Total assets on 1 July 2018
$810,000
Total assets on 30 June 2019
830,000
Required
The rate of return on assets for the year ended 30 June 2019 was:
a
13.1%
b
16.5%
c
19.7%
Question 23
The average rate of return on assets for the type of company operated by
Illawong Trading Limited is 15%.
The rate of return on assets of Illawong Trading Limited indicates that this
company:
a
has efficiently used its assets to generate profits.
b
has not efficiently used its assets to generate profits.
256 Accounting 3B

Questions 24 to 27: earnings per ordinary share
Earnings per Ordinary Share Formula
Profit after Tax – Preference Dividends
Weighted Average Number of Ordinary Shares Issued
Question 24
Information provided by the directors of Varley Traders Limited.
Share Capital on 30 June 2018
60,000 ordinary shares of $1.00 each fully paid less share
issue costs
$59,000
10,000 9% preference shares of $2.00 each fully paid
less share issue costs
$18,000
9 December 2018
The following final dividends for the year ended 30 June 2018 were paid:
Preference dividend
$1,800
Ordinary dividend
$7,300
1 April 2019
30,000 fully paid, ordinary shares were issued at a price of $1.40 per share.
Year ended 30 June 2019
The company made a profit after tax of $16,100.
Additional Information
Number of Days Ordinary Shares Issued
60,000 ordinary shares
90,000 ordinary shares
274 days
91 days
The earnings per ordinary share of Varley Traders Limited for the year ended
30 June 2017 was $0.14 per share and 30 June 2018 was $0.17 per share.
Required
1
Calculate the earnings per ordinary share for the year ended 30 June 2019.
2
Would a shareholder in Varley Traders Limited be pleased with the change
in the earnings per ordinary share of the company since 2017?
Accounting 3B
Question 25
Information provided by Katanning Traders Limited.
Share Capital on 30 June 2026
73,000 ordinary shares of $1.00 each fully paid less share
issue costs
$71,000
14,000 6% preference shares of $2.00 each fully paid
less share issue costs
$27,000
24 November 2026
The following final dividends for the year ended 30 June 2026 were paid:
Preference dividend
$1,680
Ordinary dividend
$7,200
1 May 2027
25,000 fully paid, ordinary shares were issued at a price of $1.50 per share.
Year ended 30 June 2027
The company made a profit after tax of $18,691.
Additional Information
Number of Days Ordinary Shares Issued
73,000 ordinary shares
98,000 ordinary shares
304 days
61 days
Required
Calculate the earnings per ordinary share for the year ended 30 June 2027.
Solution Check
Earnings per ordinary share = $0.22 per share
257
258 Accounting 3B
Question 26
Badgebup Traders Limited
Balance Sheet (extract)
as at 30 June 2024
Equity
Share capital
58,000
Reserves
Retained earnings
9,000
11,000
Total Equity

$78,000
Share Capital on 30 June 2024
6,000 11% preference shares of $5.00 each fully paid
less share issue costs
$28,000
62,000 ordinary shares of $0.50 each fully paid less
share issue costs
$30,000
The following events occurred in the order listed below.
a
Final dividends for the year ended 30 June 2024 were paid to the
shareholders in December 2024:
8% to the preference shareholders
3 cents per share to the ordinary shareholders.
b
On 1 December 2024 the company issued 21,000 fully paid ordinary
shares at an issue price of $0.90 per share.
c
For the year ended 30 June 2025 a profit after tax of $32,830 was made
by the company.
Additional Information
Number of Days Ordinary Shares Issued
62,000 ordinary shares
83,000 ordinary shares
153 days
212 days
Required
Calculate the earnings per ordinary share for the year ended 30 June 2025.
Solution Check
Earnings per ordinary share = $0.41 per share
Accounting 3B

259
Questions 27 to 30: price earnings ratio
Price Earnings Ratio Formula
Market Price per Ordinary Share
Earnings per Ordinary Share
Question 27
You are considering purchasing shares in one of two companies listed on the
Australian Securities Exchange.
Alpha Limited and Omega Limited both operate a chain of supermarkets. That
is, they operate in the same industry.
Alpha Limited
Number of Issued Shares
Current Market Price
Earnings per Ordinary Share
100,000 ordinary shares
$1.90 per share
$0.38 per share
Omega Limited
Number of Issued Shares
Current Market Price
Earnings per Ordinary Share
600,000 ordinary shares
$1.60 per share
$0.08 per share
Industry Average
Price Earnings Ratio
16 times
Required
1
Calculate the price earnings ratio of each company.
2
What does the price earnings ratio suggest about the market’s view of the
future earnings growth of each company?
260 Accounting 3B
Question 28
Information provided by Faulty Traders Limited on 30 June 2019.
Market price of an ordinary share in Faulty Traders Limited
$2.40
Earnings per ordinary share of Faulty Traders Limited
$0.30
Industry Average
Price Earnings Ratio
17 times
Required
1
Calculate the price earnings ratio of the company.
2
What does the price earnings ratio suggest about the market’s view of the
future earnings growth of this company?
Question 29
Information provided by Dongara Traders Limited on 30 June 2025.
Market price of an ordinary share in Dongara Traders Limited
$5.10
Earnings per ordinary share of Dongara Traders Limited
$0.34
Industry Average
Price Earnings Ratio
11 times
Required
1
Calculate the price earnings ratio of the company.
2
What does the price earnings ratio suggest about the market’s view of the
future earnings growth of this company?
Accounting 3B

261
Questions 30 and 31: dividend yield
Dividend Yield Formula
Annual Dividend per Ordinary Share
Market Price per Ordinary Share
x
100
1
Question 30
The date is 30 June 2019. Jane has $30,000 available for investment. Jane
wants to receive an annual cash return. Jane has chosen two investment
options. Option 1 is to purchase shares in Gunyidi Traders Limited, a company
listed on the Australian Securities Exchange. Option 2 is to place the money in
a one year, fixed term bank deposit.
Jane wants to know the dividend yield of Gunyidi Traders Limited for the last 12
months. She can then compare the likely cash return from purchasing shares in
this company with the return offered by a bank.
Jane has gathered the following information.
Year ended 30 June 2019
Dividend per ordinary share of Gunyidi Traders Limited
$0.17
On 30 June 2019
Market price per ordinary share of Gunyidi Traders Limited
$2.00
One Year Fixed Term Bank Deposit
Interest rate
6% per annum
Required
1
Calculate the dividend yield of Gunyidi Traders Limited for the year ended
30 June 2019.
2
Which investment is likely to give Jane the higher cash return, the purchase
of the shares in Gunyidi Traders Limited or the one year, fixed term bank
deposit?
3
Describe at least one weakness of the analysis in required 2?
4
Should Jane place the whole $30,000 in only one form of investment?
262 Accounting 3B
Question 31
The following information has been extracted from the 2009 financial
statements of two companies listed on the Australian Securities Exchange.
Company A
David Jones Limited
2009
Market Price of an Ordinary Share on 30 June
$4.55
David Jones Limited
2009
Annual Dividend (cents per share)
$0.28
Woolworths Limited
2009
Market Price of an Ordinary Share on 30 June
$26.36
Woolworths Limited
2009
Annual Dividend (cents per share)
$1.04
Company B
Required
1
Calculate the dividend yield of David Jones Limited and Woolworths Limited
for the year ended 30 June 2009.
2
Assume that you had $10,000 available to invest on 1 July 2009.
You want a cash return on your investment at the end of 12 month.
You can purchase shares in one of the two above companies or place the
money into a 12 months, fixed term bank deposit, at a rate of 5%.
Which investment would have given you the highest cash return assuming
that both companies paid the same dividends in 2010?
Accounting 3B

263
Questions 32 to 34: debtors collection period and inventory turnover
Debtors Collection Period Formula
Average Debtors
Net Credit Sales
Inventory Turnover Formula
365
X
Cost of Sales
1
Average Inventory
X
100
1
Question 32
City Traders Limited
Unclassified Balance Sheets as at
30 June 2027
30 June 2028
30 June 2029
Assets
Accounts Receivable
Less Allowance for Doubtful Debts
Inventory
6,900
(200)
7,300
6,700
11,000
(1,300)
9,700
6,000
(700)
15,000
9,000
17,000
Sales (all credit)
82,000
81,400
84,000
Cost of sales
38,000
37,800
59,200
Required
1
Calculate the debtors collection period for the years ended 30 June 2028
and 30 June 2029.
2
The change in the debtors collection period from 2028 to 2029 could be
caused by which of the following factors:
a
poor debt collection procedures. The business may not be quickly
following up overdue customer accounts
b
improved credit control and collection procedures.
3
Calculate the inventory turnover for the years ended 30 June 2028 and
30 June 2029.
4
The change in the inventory turnover ratio in 2029 may indicate that:
a
the inventory of the business is more popular with customers
b
the inventory of the business is less popular with customers and the
business has an increased risk of being left with obsolete inventory.
264 Accounting 3B
Question 33
Commerce Traders Limited has supplied you with the following information:
Item
Accounts Receivable
Less Allowance for Doubtful Debts
Net Accounts Receivable
Sales (all credit)
30 June
2025
30 June
2026
30 June
2027
$11,300
$14,700
$15,100
(300)
(1,000)
(1,000)
11,000
13,700
14,100
134,000
128,000
169,000
Required
1
Calculate the debtors collection period of the business for the years
ended 30 June 2026 and 30 June 2027.
2
Suggest reasons for the change in the debtors collection period from
2026 to 2027.
Question 34
Biz Traders Limited has supplied you with the following information:
Item
30 June 2027
30 June 2028
30 June 2029
Inventory
$11,300
$16,100
$14,200
Item
Year ending 30 June 2028
Year ending 30 June 2029
Cost of Sales
37,000
27,000
Required
1
Calculate the inventory turnover for the years ended 30 June 2028 and
30 June 2029.
2
Comment on the change in the inventory turnover ratio for 2029.
Accounting 3B

Question 35 onwards: test questions
Question 35
Furniture World Limited
Unclassified Income Statement
for the year ended 30 June 2027
Sales
Less Cost of Sales
351,890
186,922
Gross Profit
Less Other Expenses
164,968
Rent
Interest
30,324
11,351
Wages
Depreciation of office equipment
65,824
3,700
Advertising
22,450
Profit before Tax
Less Income tax expense
133,649
31,319
8,450
Profit
$22,869
Total Assets
30 June 2026
30 June 2027
$610,000
$638,000
Share Capital on 30 June 2026
197,000 ordinary shares of $1.00 each fully paid less
share issue costs
$194,000
10,000 6% preference shares of $4.00 each fully paid
less share issue costs
$38,000
On 31 March 2027 the company issued a further 19,000 ordinary shares
(issued for 91 days in the year).
Preference dividend paid for year ended 30 June 2027
$2,400
265
266 Accounting 3B
Question 35 continued
The market price of an ordinary share in Furniture World Limited was $0.84 on
30 June 2027.
Ratio
2026 Ratios
Industry Ratios
Profit margin ratio
4%
11%
Rate of return on assets
5%
14%
Earnings per ordinary share
$0.09
$0.14
Price earnings ratio
6 times
13 times
Current ratio
73%
151%
Required
1
Calculate the following ratios:
•
•
•
•
2
profit margin ratio
rate of return on assets
earnings per ordinary share
price earnings ratio.
Comment on the profitability and market ratios of the company for the
year ended 30 June 2027.
Question 36
The Shoe Place Limited
Ratio
Year ended 30 June 2028
Industry Average
Current Ratio
90%
130%
Profit Margin Ratio
1%
8%
Inventory Turnover
2 times
5 times
Rate of Return on Assets
2%
10%
Required
Comment on the liquidity, profitability and inventory management of The Shoe
Place Limited. Suggest ways that the company can improve its performance.
Accounting 3B
267
Question 37
You have been supplied with the following financial ratios of Kitchenware
Traders Limited and industry ratios for the year ended 30 June 2029:
Ratio
Kitchenware
Traders Limited
Industry Average
Current Ratio
162%
154%
Inventory Turnover
5 times
5 times
Profit Margin Ratio
6%
10%
Return on Assets
7%
10%
Required
Comment on the performance of Kitchenware Traders Limited.
Question 38
Home Product Retailers Limited
Ratio
30 June
2025
30 June
2026
30 June
2027
Industry
Average
Return on Assets
24%
27%
29%
18%
Price Earning Ratio
17.4 times
18.3 times
19.1 times
13.4
Debt to Equity
33%
34%
36%
28%
Times Interest Earned
13 times
15 times
16 times
10 times
Share Price
$15.14
$16.10
$17.21
NA
Dividend Yield
5.4%
4.6%
3.5%
4.7%
Required
Comment on the performance of the company in the following areas:
•
•
•
profitability
market, and
gearing.
268 Accounting 3B
Question 39
Balance Sheets
as at 30 June 2029
Red Traders
Limited
Purple Traders
Limited
Current Assets
Cash at Bank
11,000
0
Accounts Receivable
21,000
40,000
Inventory
46,000
50,000
Total Current Assets
78,000
90,000
Plant and Equipment
140,000
792,000
Total Non-Current Assets
140,000
792,000
Total Assets
218,000
882,000
Non-Current Assets
Current Liabilities
Bank Overdraft
0
24,000
24,000
22,000
Income Tax Payable
6,000
8,000
Loan from Bank
4,000
10,000
34,000
64,000
Debentures
55,000
529,000
Total Non-Current Liabilities
55,000
529,000
Total Liabilities
89,000
593,000
$129,000
$289,000
Accounts Payable
Total Current Liabilities
Non-Current Liabilities
Net Assets
Equity
Share Capital
Retained Earnings
Total Equity
105,000
254,000
24,000
35,000
$129,000
$289,000
Accounting 3B
269
Question 39 continued
On 1 July 2028
Red Traders
Limited
Purple Traders
Limited
Total Assets
$214,000
$884,000
Accounts Receivable
$18,000
$30,000
Inventory
$40,000
$68,000
Credit Terms
30 days
30 days
Income Statements
for the year ended 30 June 2029
Red Traders
Limited
Purple Traders
Limited
229,000
137,000
260,000
150,000
Gross Profit
Less Other Expenses
92,000
110,000
Interest
Other Expenses
4,000
61,000
27,000
54,000
Profit before Tax
Less Income tax expense
28,000
7,000
29,000
10,000
$21,000
$18,000
Sales (all credit)
Less Cost of Sales
Profit
Required
1
Calculate the following ratios for each company:
Industry Average
•
•
•
•
•
•
current ratio
180%
debt to equity ratio
74%
times interest earned
profit margin ratio
6 times
8%
debtors collection period
33 days
inventory turnover ratio
2.8 times
2
Compare the performance of Red Traders Limited or Purple Traders
Limited in the areas of liquidity, stability, profitability and efficiency.
3
What other information would you want to know about these businesses
before deciding to invest in either company?
270 Accounting 3B
4
Accounting 3B Theory
Corporate Social Disclosure
A company listed on the Australian Securities Exchange is required to
describe, each year, its financial performance, by preparing a statement of
comprehensive income, a balance sheet and other accounting reports.
Today, many people are interested in the performance of a large company in
other areas, such as, their effect on the environment, how well they treat their
employees and their contribution to society. This area of reporting on the
performance of a company is known as corporate social disclosure.
Corporate social disclosure can be defined as:
‘‘. . .the process of communicating the social and environmental effects of an
organisation’s economic actions to particular interest groups within society
and to society at large’’ [1]
Corporate social disclosure in Australia is largely voluntary. A 2005 report by
KPMG found that only 23 of Australia’s top 100 companies produced a
corporate social responsibility report.
There is no common structure in Australia for a report that sets out a
company’s social impact. A public company listed on the Australian Securities
Exchange may choose to include social disclosure information in its annual
financial report or in a separate document or on its website.
The list of persons or entities who are likely to be interested in a company’s
social disclosure information includes:

employees

shareholders

customers

suppliers

the media, such as, newspapers, television and radio stations, and

the local and regional community.
Public interest in social disclosure, at an international level, was measured by,
Environics International, in partnership with a number of other organisations,
in 1999. A survey was conducted to determine ‘‘. . .global public opinion on
the role of companies in society.’’ The survey population was 1,000 people,
from 23 countries and living on six continents.
Accounting 3B
271
Corporate Social Disclosure continued
Environics conluded that:
“About three-quarters of the people across all countries surveyed think that
large companies should be held completely responsible for protecting the
health and safety of workers, treating all employees and job applicants fairly,
and not participating in bribery or corruption. About seven in ten people
expect corporations to be completely responsible for ensuring that their
products and operations do not harm the environment and that their
operations and suppliers do not use child labor.”
The benefits to a public company in implementing a policy of corporate social
disclosure may include:

increase employees satisfaction with the company

attracting more customers, and

improved relationships with the local community.
Use of Key Performance Indicators
The directors of a public company can use a range of indicators to measure
the performance of the management team.
Example
Fantastic Holdings Limited is a company listed on the Australian Securities
Exchange. The company operates the Fantastic Furniture chain of stores.
The directors of Fantastic Holdings Limited use key performance indicators,
including the following, in assessing the performance of the management of
the company:
•
•
•
•
•
•
•
•
•
gross profit margin by store and by product
profit as a percentage of sales
expenses as a percentage of sales
sales per square metre of floor space
return on assets
earnings per share
product return rates
inventory turnover
staff turnover.
272 Accounting 3B
AASB Accounting Standards
The AASB accounting standards are a set of rules that companies listed on
the Australian Securities Exchange and some other organisations must follow
when they prepare accounting reports for their owners. These rules are
issued by the Australian Accounting standards Board.
An organisation that must follow the AASB standards is known as a reporting
entity. A reporting entity prepares what are known as general purpose
financial reports, such as, a balance sheet and a statement of comprehensive
income. An organisation is a reporting entity if there is a group of people
who have to rely on the general purpose financial reports prepared by this
organisation when deciding if they will invest money in the organisation.
Example
Ben is considering buying shares in the Commonwealth Bank Limited. Ben
would like to know how much profit the company expects to make in the next
12 months. Ben cannot obtain this information from the Commonwealth Bank
and must, like the owners of the company, rely on a statement of
comprehensive income issued by the Commonwealth Bank that shows how
much profit the company made in the last 12 months. The Commonwealth
Bank Limited, therefore, is a reporting entity.
The advantages of the AASB accounting standards are that they:
1
protect the users of general purpose financial reports by ensuring that
the financial reports prepared by reporting entities contain the
information needed to accurately assess the performance of the
company
2
assist the directors of companies in performing their duties. The
director of a reporting entity must take reasonable steps to ensure that
the financial statements accurately reflect the performance of a
company. The
3
give confidence to investors that they can invest their money on the
Australian Securities Exchange.
The Conceptual Framework of Accounting
The conceptual framework of accounting is a body of theory. It is made up of
three documents. These documents are titled the Statement of Accounting
Concepts 1 (SAC1), the Statement of Accounting Concepts 2 (SAC2) and the
Framework for the Preparation and Presentation of Financial Statements
(known for short as the Framework).
Accounting 3B
273
The Conceptual Framework of Accounting continued
SAC1 defines and explains what is meant by the term reporting entity. The
conceptual framework only applies to reporting entities, such as, companies
listed on the Australian Securities Exchange.
SAC2 sets out the reason why a reporting entity prepares accounting reports.
The reason is to assist people to decide how they should invest their money.
The Framework for the Preparation and Presentation of Financial Statements,
among other matters, sets out the qualities of a good accounting report and
defines the following accounting terms: assets; liabilities; equity; income and
expenses.
Qualitative Characteristics of Accounting Reports
The Framework for the Preparation and Presentation of Financial Statements
has identified the following qualitative characteristics (qualities) that should be
present in accounting reports.
Relevance
Relevance is a quality of information that exists when information assists
users to make economic decisions by helping them evaluate past, present or
future events or confirm or change past evaluations.
The relevance of information is affected by materiality.
Materiality
Information is material if the omission of this information from an accounting
report could influence the investment decisions of the users of this report.
An accounting report should contain all the material information.
Example
Alpha Limited is a public company with thousands of shareholders. Alpha
Limited purchased land in 2016 for $400,000. In 2028 the land was valued at
$900,000. In the balance sheet of Alpha Limited, on 30 June 2028, the land
was shown at its current market value of $900,000. Showing the land in the
balance sheet at its current market value provides the shareholders of the
company (the owners of the company) with relevant information about the
value of an important asset of the company.
274 Accounting 3B
Reliability
Reliability is a quality of information that exists when information is free from
significant errors and bias and can be depended upon by users to present
faithfully that which it either claims to represent or could reasonably be
expected to represent.
Example
Alpha Limited, on 30 June 2028, included $189,000 of accounts receivable in
its balance sheet. This amount shown in the balance sheet is reliable, that is,
accurate, because there is documentary evidence that the $189,000 is owing
to the company (in the form of purchase orders received from customers and
copies of sales invoices sent to customers) and the company records all credit
sales transactions in a proper accounting system that is supervised by a
qualified accountant.
To be reliable information must contain:

faithful representation

neutrality

substance over form

prudence

completeness.
Faithful Representation
Information must faithfully (honestly or truly) represent the transactions that it
claims to represent.
Neutrality
The information contained in accounting reports must be neutral, that is, free
from bias.
Accounting 3B
275
Substance over Form
In a situation where there is a difference between the substance and the legal
form of a transaction, the substance of the transaction should be reported
instead of the legal form.
Prudence
Prudence is the exercising of a degree of caution in the preparation of
accounting reports.
Completeness
Accounting reports should provide users with all the information that they
need to make sound investment decisions.
Comparability
The measurement and display of identical transactions, in the accounting
reports of a business, should be consistent over time.
Example
The depreciation of motor vehicle expense, for an accounting period, can be
measured (that is, calculated) by using the straight line method or the
reducing balance method of depreciation. Once the depreciation expense
has been measured it is recorded in a statement of comprehensive income. A
business should not use the straight line method of depreciating a motor
vehicle in one accounting period and then switch, without a sound reason, to
the reducing balance method of depreciation in the following period.
Understandability
Understandability exists when the users of financial statements are able to
comprehend the meaning of these statements.
Example
Financial statements, such as, the balance sheet, should be set out with the
assets and liabilities sub-divided into current and non-current types as this
increases understandability.
276 Accounting 3B
The Development of Accounting Standards
A number of organisations are involved in the development of the Australian
accounting standards that apply to reporting entities.
Financial Reporting Council
The role of the Financial Reporting Council (FRC) is to supervise the work of
the Australian Accounting Standards Board. The FRC:
1
monitors the process of adopting international accounting standards
2
gives advice to the Federal Treasurer on the standard setting process
3
gives advice to the Australian Accounting Standards Board.
International Accounting Standards Board
The International Accounting Standards Board is responsible for the
development of a set of international accounting standards. If all countries
have a common set of accounting standards then investors can compare the
performance of major companies in different countries.
Australian Accounting Standards Board
The role of the Australian Accounting Standards Board is to:
1
develop and amend accounting standards
2
to assist in the development of a set of world wide accounting standards.
Australian Securities and Investments Commission
The role of the Australian Securities and Investments Commission is to:
1
administer the Corporations Act and a number of other laws
2
enforce the AASB accounting standards
3
interpret accounting standards and issues these interpretations in
documents known as regulatory guides.
Accounting 3B
277
Australian Securities Exchange
The role of the Australian Securities Exchange (ASX) is to to ensure that
companies listed on the ASX follow a set of standards known as Listing Rules.
The Listing Rules set out the information that must be disclosed to the public
and how often each year the information must be disclosed.
Example
A company listed on the ASX must disclose, every six months, the amount
and percentage change up or down from the previous six month period, of
revenue from ordinary activities.
Lobby Groups
The role of lobby groups is to influence the development and or content of the
accounting standards in ways that favour their views.
Role of External Auditors
The external auditor is responsible for checking the accuracy of the financial
statements of a public company.
The external auditor is an accountant who is not an employee of the company
and, therefore, can make an independent assessment of the company.
The audit process gives investors confidence that the financial statements of a
company are accurately reflect the performance of the company.
The external auditor is appointed by the shareholders and reappointed at the
annual general meeting.
278 Accounting 3B
The Elements of an Accounting Report
The Framework for the Preparation and Presentation of Financial Statements
contains definitions of the elements of accounting reports.
These elements are:

assets

liabilities

equity

income

expenses.
Assets
An item is included in a balance sheet as an asset when it satisfies both the
Framework definition of an asset and the Framework asset recognition
criteria.
Asset

Framework Definition


Framework Recognition Criteria
Criteria 1

Criteria 2


included in a Balance Sheet
Accounting 3B
279
Definition of Assets
An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
Asset Recognition Criteria
There are two asset recognition criteria.
1
It is probable that an inflow of future economic benefits will occur.
and
2
The value of the asset can be measured reliably.
Example
On 24 June 2028 City Couriers Limited purchased a motor vehicle for the
amount of $29,000 cash.
Question
Should the motor vehicle be included as an asset in the balance sheet of City
Couriers Limited on 30 June 2028?
Answer
Step 1
The definition of an asset is made up of a number of key words.
•
"An asset is a resource controlled by the entity …."
An asset is “controlled” by a company. The managers of a company can
decide how the asset is used.
The managers of City Couriers Limited can direct that the motor vehicle be
used to perform tasks, such as, delivering parcels.
•
"… as a result of past events …"
The words "past events" means that the asset was acquired by a company on
a date in the past.
City Couriers Limited purchased the motor vehicle six days ago.
280 Accounting 3B
Example continued
•
"… from which future economic benefits are expected to flow to the entity."
The words “future economic benefits” means something of value to a
business. A future economic benefit contributes to the flow of cash into a
company or reduces the size of a cash outflow.
The motor vehicle purchased by City Couriers Limited will be used to deliver
parcels in exchange for a cash fee.
The cash fee is a future economic benefit that will be received by City Couriers
Limited.
Conclusion
The motor vehicle is an asset of City Couriers Limited.
Step 2
Asset Recognition Criteria 1
It is probable that an inflow of future economic benefits will occur.
The motor vehicle should produce future economic benefits. It should generate
future cash inflows for City Couriers Limited from the fees that are charged for
delivering parcels.
Asset Recognition Criteria 2
The value of the asset can be measured reliably.
The motor vehicle was purchased for $29,000.
Conclusion
As the motor vehicle owned by City Couriers Limited satisfies both the
Framework definition of an asset and the Framework asset recognition criteria
it should be included as an asset in the balance sheet of City Couriers Limited.
City Couriers Limited
Balance Sheet (extract)
as at 30 June 2028
Non-Current Assets
Motor Vehicle
9,000
Accounting 3B
281
Liabilities
An item is included in a balance sheet as a liability when it satisfies both the
Framework definition of a liability and the Framework liability recognition
criteria.
Liability

Framework Definition


Framework Recognition Criteria
Criteria 1

Criteria 2


included in a Balance Sheet
Definition of Liabilities
Liabilities are the future sacrifices of economic benefits that the entity is
presently obliged to make to other entities as a result of past transactions or
other past events.
Liability Recognition Criteria
There are two liability recognition criteria.
1
It is probable that an outflow of future economic benefits will occur.
and
2
The value of the liability can be measured reliably.
282 Accounting 3B
Example
On 1 March 2028 City Couriers Limited borrowed $170,000 from the State
Bank. The loan is due to be paid back in August 2031.
Question
Should the $170,000 loan be included as a liability in the balance sheet of City
Couriers Limited on 30 June 2028?
Answer
Step 1
The definition of a liability is made up of a number of key words.
•
". . . future sacrifices of economic benefits . . ."
A liability can be settled by a company paying money in the future.
City Couriers Limited must pay $170,000 to the State Bank in August 2031.
This is a future sacrifice of economic benefits.
•
". . . that the entity is presently obliged to make . . ."
A liability is an obligation that exists at the present time.
On 30 June 2028, the present date, City Couriers Limited has an obligation (a
legal requirement) to pay $170,000 to the State Bank.
•
". . . as a result of past transactions or other past events."
A liability today arose out of a transaction that took place some time in the
past.
City Couriers Limited borrowed $170,000 on 1 March 2028.
Conclusion
On 30 June 2028 the $170,000 loan is a liability of City Couriers Limited.
Accounting 3B
283
Step 2
Liability Recognition Criteria 1
It is probable that an outflow of future economic benefits will occur.
City Couriers Limited must pay back the $170,000 loan or the company is
likely to be sued in court for the non-payment of the debt.
Liability Recognition Criteria 2
The value of the liability can be measured reliably.
The value (amount) of the loan from the bank is $170,000.
Conclusion
As the loan from the bank satisfies both the Framework definition of a liability
and the Framework liability recognition criteria it should be included as a
liability in the balance sheet of City Couriers Limited.
City Couriers Limited
Balance Sheet (extract)
as at 30 June 2028
Non-Current Liabilities
Loan from Bank
2,000
Definition of Equity
Equity is the residual (that is, remaining) interest in the assets of the entity
after deducting all its liabilities.
Equity, therefore, is found as follows:
Assets  Liabilities = Equity.
284 Accounting 3B
Income
An item is included in a statement of comprehensive income as income when
it satisfies both the Framework definition of income and the Framework
income recognition criteria.
Income

Framework Definition


Framework Recognition Criteria
Criteria 1

Criteria 2


included in a statement of comprehensive Income
Definition of Income
Income is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result
in increases in equity, other than those relating to contributions from equity
participants.
Income Recognition Criteria
There are two income recognition criteria.
1
It is probable that an inflow of future economic benefits will occur.
and
2
The value of the income can be measured reliably.
Accounting 3B
285
Example
On 1 June 2028 City Couriers Limited delivered a parcel and received a $300
cash fee.
Question
Should the $300 fee be included as income in the statement of comprehensive
income of City Couriers Limited for the year ended 30 June 2028?
Answer
Step 1
The definition of income is made up of a number of key words.
•
"... increases in economic benefits … in the form of inflows or enhancements
(improvements) of assets or decreases of liabilities …."
An income transaction results in a flow of assets into a company.
The action of City Couriers Limited in delivering the parcel has increased the
cash at bank balance by $300.
•
"… that result in increases in equity ..."
Assets  Liabilities = Equity.
An income transaction results in an increase in equity.
The effect of City Couriers Limited receiving $300 cash for delivering a parcel
is to increase an asset, cash at bank, by $300:
Assets

+ $300

Liabilities
=
=
Equity
286 Accounting 3B
Answer continued
There has been no change in the liabilities of City Couriers Limited:
Assets

Liabilities
=
+ $300

$0
=
Equity
Therefore, since A – L = EQ, the equity has increased by $300:
•
Assets

Liabilities
=
Equity
+ $300

$0
=
+ $300
"… other than those relating to contributions from equity participants."
An “equity participant” is an owner of a business. Capital contributed by the
shareholders of a company is not income.
The $300 cash was received from a customer not from a shareholder.
Conclusion
The $300 fee received by City Couriers Limited for delivering the parcel is income.
Step 2
Income Recognition Criteria 1
It is probable that an inflow of future economic benefits will occur.
The cash at bank account of City Couriers Limited has increased by $300.
Income Recognition Criteria 2
The value (amount) of the income can be measured reliably.
The value of the income is $300.
Accounting 3B
287
Conclusion
As the $300 fee satisfies both the Framework definition of income and the
Framework income recognition criteria it should be included as income in the
statement of comprehensive income of City Couriers Limited for the year
ended 30 June 2028.
City Couriers Limited
Statement of Comprehensive Income (extract)
for the year ended 30 June 2028
Fees
300
Expenses
An item is included in a statement of comprehensive income as an expense
when it satisfies both the Framework definition of an expense and the
Framework expense recognition criteria.
Expense

Framework Definition


Framework Recognition Criteria
Criteria 1

Criteria 2


included in a statement of comprehensive Income
Definition of Expenses
Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating to distributions to equity
participants.
288 Accounting 3B
Expense Recognition Criteria
There are two expense recognition criteria.
1
It is probable that an outflow of future economic benefits will occur.
and
2
The value of the expense can be measured reliably.
Example
On 30 June 2028 City Couriers Limited paid $5,000 of wages to the employees
for work carried out in June 2028.
Question
Should the $5,000 of wages be included as an expense in the statement of
comprehensive income of City Couriers Limited for the year ended 30 June 2028?
Answer
Step 1
The definition of an expense is made up of a number of key words.
•
"... decreases in economic benefits … in the form of outflows or depletions
(consumptions) of assets or incurrences of liabilities ..."
An expense causes a decrease in an asset or an increase in a liability.
The wages payment has resulted in a decrease in an asset, cash at bank, by
the amount of $700.
•
" … that result in decreases in equity…"
Assets  Liabilities = Equity.
An expense results in a decrease in equity.
Accounting 3B
289
Answer continued
The effect of City Couriers Limited paying $5,000 in wages is to decrease an
asset, cash at bank:
Assets

− $5,000

Liabilities
=
Equity
=
This transaction has not changed the liabilities of the business:
Assets

Liabilities
=
− $5,000

$0
=
Equity
Therefore, as the assets have decreased by $5,000 and the liabilities have not
changed, there has been a decrease in equity.
•
Assets

Liabilities
=
Equity
− $5,000

$0
=
− $5,000
"… other than those relating to distributions to equity participants."
The definition of an expense excludes drawings made by an owner.
The $5,000 payment was made to the employees and not to the shareholders.
Conclusion
The $5,000 of wages paid by City Couriers Limited is an expense.
290 Accounting 3B
Step 2
Expense Recognition Criteria 1
It is probable that an outflow of future economic benefits will occur.
The wages were paid by City Couriers Limited. The cash at bank account of
the company has decreased by $5,000.
Expense Recognition Criteria 2
The value of the expense can be measured reliably.
The amount of wages paid is exactly $5,000.
Conclusion
As the $5,000 of wages satisfies both the Framework definition of an expense
and the Framework expense recognition criteria it should be included as an
expense in the statement of comprehensive income of City Couriers Limited
for the year ended 30 June 2028.
[1]
Gray, R, Owen, D and Adams C (1996). ‘Accounting and Accountability:
changes and challenges in corporate social and environmental
reporting’. Prentice Hall, London, page 3.
Accounting 3B
291
Question 1
A company purchased land for $300,000 in the year 2000.
In the balance sheet of 30 June 2028 the land was shown at cost, that is, at a
value of $300,000.
On 30 June 2028 the land had a current market value of $500,000.
Required
The decision to record the land at cost of $300,000, in the balance sheet
prepared on 30 June 2028, breaches which quality of accounting reports?
a
Relevance
b
Reliability
c
Competence
Question 2
The CEO (chief executive officer) of Try Hard Traders Limited believes that
the 30 employees are one of the best assets of the business.
The CEO has asked the accountant of Try Hard Traders Limited to place a
monetary value on the employees and include the employees as an asset in
the balance sheet prepared on 30 June 2029.
The accountant refused to carry out this request on the grounds that the value
of the employees could not be accurately measured.
Required
The decision of the accountant is consistent with which of the following
qualities of accounting reports:
a
Relevance
b
Reliability
c
Believability
292 Accounting 3B
Question 3
Furniture Hire 4 U Limited purchased a motor vehicle on 1 July 2026.
The motor vehicle depreciation expense, in the statements of comprehensive
income, for the next three years was:
Year Ended
Depreciation Expense
Method of Depreciation
30 June 2027
$2,000
Straight line
30 June 2028
$3,000
Reducing balance
30 June 2029
$2,000
Straight line
Required
Which qualitative characteristic of accounting reports has been breached in
the preparation of the statement of comprehensive income for the year ended
30 June 2028?
a
Relevance
b
Reliability
c
Comparability
Question 4
Dance World Pty Ltd had the following transactions.

On 1 March 2028 Dance World Pty Ltd paid $600 for a 12 months motor
vehicle insurance policy.

On 30 June 2028 Dance World Pty Ltd received $900 in fees for lessons
that will be given in August 2028.

On 5 July 2028 Dance World Pty Ltd received a $500 electricity bill for
June 2028. The company will not pay this bill until 1 August 2028.
Required
Explain how each of the above items, included in a balance sheet, satisfies
the Framework definition of an asset or a liability and the Framework asset or
liability recognition criteria.
Accounting 3B
293
Question 5
Books Galore Pty Ltd had the following transactions for June 2029.

On 28 June 2029 Books Galore Pty Ltd received an order from Excel
High School for a particular textbook. The value of the order was $3,000.
Books Galore Pty Ltd did not have any copies of this textbook available
for sale and, in turn, ordered copies of the textbook from the publisher.
By 3 July 2029 the publisher had not replied.

On 30 June 2029 Books Galore Pty Ltd sold $7,000 of textbooks to a
customer and will receive the money owing from the sale in 30 days.
Required
Explain, using the Framework definition of income and the Framework income
recognition criteria, if the above events should be recorded as income in the
statement of comprehensive income of Books Galore Pty Ltd for the year
ended 30 June 2029.
Question 6
On 5 July 2029 a business received a $2,100 telephone bill for June 2029.
Required
Explain why this $2,100 telephone bill is included as an expense in the
statement of comprehensive income for the 12 months ended 30 June 2029.
Apply the Framework definition of an expense and the Framework expense
recognition criteria in your answer.
294 Accounting 3B
Index
AASB accounting standards, 272
Australian Accounting Standards Board, 276
Australian Securities and Investments
Commission, 276
Australian Securities Exchange, 277
Companies
accounting for issue of shares, 9 – 12
advantages of, 5
annual general meeting, 5
balance sheet, 33 – 34
notes to balance sheet, 35 – 36
bonus shares, 37 – 39
characteristics of, 7
company capital, 1
constitution, 6
Corporations Act, 1
defined, 1
directors, 2
duties of directors, 2
powers of directors, 2
distribution of profit, 22 – 23
dividends, 18 – 21
accounting for, 19 – 21
final, 18
Directors, 2
duties of directors, 2
powers of directors, 2
Development of accounting standards
Australian Accounting Standards Board,
276
Australian Securities and Investments
Commission, 276
Australian Securities Exchange, 277
Financial Reporting Council, 276
International Accounting Standards
Board, 276
Lobby groups, 277
Diversification of investments, 239
External auditor, 277
Elements of accounting reports, 278 – 283
asset, 278 – 280
equity, 283
expense, 287 – 290
income, 284 – 287
liability, 281 – 283
Financial Reporting Council, 276
International Accounting Standards Board, 276
interim, 18
income tax, 5
Key performance indicators, 271
large proprietary company, 4
limited by shares, 3
Ratio analysis, 219 – 239
preliminary expenses, 6
proprietary company, 3
prospectus, 4
public company, 4
replaceable rules, 6
reserves, 24 – 28
asset revaluation reserve, 27 – 28
general reserve, 24 – 26
rights of ordinary shareholders, 8
shares, 8
ordinary shares, 8
preference shares, 8
small proprietary company, 4
statement of changes in equity, 29 – 32
statement of comprehensive income, 13 – 17
Conceptual framework of accounting, 272 – 273
Corporate social disclosure, 270 – 271
efficiency ratios, 235 – 239
debtors collection period, 235 – 237
inventory turnover, 237 – 239
limitations of ratio analysis, 239
liquidity ratios, 219 – 223
current ratio, 219 – 221
quick asset ratio, 221 – 223
market ratios, 230 – 235
dividend yield, 234 – 235
earnings per ordinary share, 230 –
232
price earnings ratio, 233 – 234
profitability ratios, 227 – 230
profit margin ratio, 227 – 229
rate of return on assets, 229 – 230
stability ratios, 224 – 227
debt to equity ratio, 224 – 225
times interest earned, 226 – 227
Accounting 3B
295
Index continued
Qualitative characteristics of accounting
reports, 273 – 275
comparability, 275
completeness, 275
faithful representation, 274
materiality, 273
neutrality, 274
prudence, 275
relevance, 273
reliability, 274
substance over form, 275
understandability, 275
Statement of cash flows, 89 – 136
analysis of a statement of cash flows, 134 – 136
cash and cash equivalents, defined, 89
cash flows from financing activities, 91
cash flows from investing activities, 91
cash flows from operating activities, 90
items to be separately disclosed in, 91 – 92
preparation of, 92 – 102
purpose of, 89
reconstruction of ledger accounts, 103 – 134
accounts receivable, 103 – 108
accrued expenses, 118 – 119
accrued income, 122 – 123
inventory and accounts payable, 108 – 111
prepaid expenses, 116 – 117
retained earnings, 112 – 115
sale of a depreciable asset, 124 – 134
unearned income, 120 – 121