ACCOUNTING UNIT 2
Unit 2 revision questions and tasks
Sasha Mildenhall
Taylors Lakes Secondary College
This VCE Accounting Unit 2 revision booklet includes a combination of both
theory-type questions and practical tasks. The booklet can be printed for
each student and the questions and tasks completed individually in class or
as homework, or they can be completed by the class as a whole. Solutions
are provided.
Disclaimer: This resource has been written by the author (Sasha Mildenhall) for use with students of VCE
Accounting. This does not imply that it has been endorsed by the Victorian Curriculum and Assessment Authority
(VCAA). While every care is taken, we accept no responsibility for the accuracy of information or advice
contained in Compak. Teachers are advised to preview and evaluate all Compak classroom resources before
using or distributing them to students.
VCTA © Sasha Mildenhall
Published October 2012
page 1
ACCOUNTING UNIT 2
Test your knowledge
Accounting Unit 2 revision 2012
Name: _______________________
VCTA © Sasha Mildenhall
Published October 2012
page 2
ACCOUNTING UNIT 2
Accounting system
Decisions
Made by users
Based on accounting
information
Determined by the
accounting system
INPUTS
Source documents
List the source
documents we have
used in this unit.







VCTA © Sasha Mildenhall
PROCESSING
OUTPUTS
Journals
Reports
List the journals we have used.




List the balance day
adjustments.
What are the three
major accounting
reports we complete?

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Published October 2012
page 3
ACCOUNTING UNIT 2
All are based on accounting principles and qualitative characteristics:
Conservatism
Historical cost
Entity
Reporting period
Monetary unit
Consistency
Going Concern
VCTA © Sasha Mildenhall
Comparability
Understandability
Relevance
Reliability
Published October 2012
page 4
ACCOUNTING UNIT 2
Accounting Elements
Current Asset
Non-current Asset


Controlled by the business
Future economic benefit within the next 12
months
 As a result of a past transaction



Controlled by the business
Future economic benefit for more than 12 months
As a result of a past transaction
Provide four examples.
Why is a Debtor an example of a current
asset?
Current Liability




Non-current Liability


Obligation owed by the business
A future economic sacrifice within the next 12
months
 As a result of a past transaction


Obligation owed by the business
A future economic sacrifice after the next 12
months
 As a result of a past transaction
Why is a Creditor an example of a current
liability?
Provide two examples.
Owner's Equity
Profit
= Assets – Liabilities
The residual interest in the business after
deducting the Liabilities
Example: Capital, Net Profit/Net Loss and
Drawings
Define Profit.
Revenue
Expenses






Inflows of economic benefits, e.g. Sales OR
Savings in outflows, e.g. Discount Revenue
 Assets or  Liabilities that OE
Other than capital contribution
Why is Sales considered to be revenue?






Outflows of economic benefits OR
Reductions in inflows
 Assets or  Liabilities that  OE
Other than Drawings
Why is Stock Loss considered an expense?
Note: The following accounts can be classified as either a Current Asset or Current Liability, depending
on which side the balance falls: Cash at Bank and GST Clearing.
VCTA © Sasha Mildenhall
Published October 2012
page 5
ACCOUNTING UNIT 2
Accounting Equation:
Assets = Liabilities + Owner’s Equity
Challenge time: How well do you know the accounting equation?
Credit sales of $2 000 plus GST (stock is marked up 100%)
Increase/Decrease/No change
Amount
Assets
Liabilities
Owner's Equity
Accounting Principles
Complete this table to show your understanding of the accounting principles.
Examples
What
H
When applied
When breached
Historical cost

E
Entity

R
Reporting period

M
Monetary unit

C
Conservatism

C
Consistency

G
Going concern

VCTA © Sasha Mildenhall
Published October 2012
page 6
ACCOUNTING UNIT 2
Proving the I-D-L response
Challenge time: Explain with reference to an accounting principle why a physical stocktake is
necessary.
Principle
Justification
Qualitative characteristics
Complete this table to show your understanding of the qualitative characteristics.
Examples
What
C
When applied
When breached
Comparability

U
Understandability

R
Relevance

R
Reliability

VCTA © Sasha Mildenhall
Published October 2012
page 7
ACCOUNTING UNIT 2
Challenge time: Explain the conflict between relevance and reliability using an example.
Goods and Services Tax
Calculating GST
GST is calculated at the rate of 10%.
If the price does not include GST
If GST is already included in the price
The GST is calculated as 10% of the cost price
Take the price and divide by 11 to get the GST
GST = Cost Price x 0.1
GST = Price (including GST) / 11
Cost Price = Price (including GST) – GST
When is GST used? Complete the table by providing three examples for each situation.
Items that attract GST
Items that don’t include GST






Common theory questions—use I-D-L response
Challenge time: Can you answer these questions?
Explain why GST can be classified as either a Current Asset or Current Liability.
VCTA © Sasha Mildenhall
Published October 2012
page 8
ACCOUNTING UNIT 2
Distinguish between GST on cash payments and GST paid to the ATO.
How is GST reported?
Cash Flow Statement
Income Statement
Balance Sheet
VCTA © Sasha Mildenhall
Published October 2012
page 9
ACCOUNTING UNIT 2
Completing Journals
Total amount received (incl. GST)
Cash Receipts Journal
Date
Mar.
1
Details
Rec
No.
Bank
Debtors
Sales
235
891
5
Debtor: S.
Bennie
236
750
9
Sales
237
16
Sales
19
Sales
Sundries
GST
810
81
3 333
3 030
303
238
1 815
1 650
165
Debtor: L.
San
239
1 400
23
Capital
240
12 000
26
Sales
241
1 254
Totals
31
$21 443
750
1 400
12 000
1 140
$2 150
$6 630
114
$12 000
$663
Items that don’t
occur regularly
Cash Payments Journal
Date
Mar.
1
Details
Chq
No.
Bank
Stock
Control
101
4 400
3
Loan:
ANZ
102
2 000
7
David’s
Disc
103
600
15
Wages
104
1 500
24
Stock
Control
105
2 750
28
Diana’s
Deals
106
500
30
Wages
107
1 500
31
Totals
$13 250
Creditors
Stock
Wages
Sundries
4 000
GST
400
2 000
600
1 500
2 500
250
500
1,500
$1 100
$6 500
$3 000
$2 000
$650
Items that don’t
Each item that occurs
occur regularly
regularly has its own column
VCTA © Sasha Mildenhall
Published October 2012
page 10
ACCOUNTING UNIT 2
Sales Journal
Date
Debtor
Mar. 1
Invoice
No.
Sales
GST
Total
Debtors
S. Bennie
A434
900
90
990
L. San
A435
1 800
180
1 980
13
S. Bennie
A436
750
75
825
16
R. Michaels
A437
1 500
150
1 650
19
L. San
A438
3 750
375
4 125
24
S. Bennie
A439
4 500
450
4 950
29
R. Michaels
A440
2 700
270
2 970
$15 900
$1 590
$17 490
4
Totals
31
Purchases Journal
Date
Creditor
Mar. 2
5
Invoice
No.
David’s Discounts
Diana’s Deals
Stock
GST
Total
Creditors
1440
2 200
220
2 420
445
3 100
310
3 410
11
David’s Discounts
1560
4 500
450
4 950
15
David’s Discounts
1589
1 900
190
2 090
19
Diana’s Deals
899
2 500
250
2 750
22
David’s Discounts
1642
3 000
300
3 300
$17 200
$1 720
$18 920
31
VCTA © Sasha Mildenhall
Totals
Published October 2012
page 11
ACCOUNTING UNIT 2
Using Stock Cards
By now you are probably thinking that you can successfully complete a Stock Card. Would
you be as confident if you were given one that was already completed and were asked some
questions about it? Try answering the following questions based on the Stock Card below.
Tickle Me Elmo
Item:
Method: FIFO
In
Out
Unit
Date
Details
Dec. 1
Balance
3
9
13
18
22
23
24
31
Qty
Price
Unit
Total
Rec. 476
INV. X391
35
Memo 242
Rec. 477
20
37
VCTA © Sasha Mildenhall
35
2 520
Qty
Price
Total
92
36
3 312
40
39
1 560
22
36
792
40
39
1 560
22
36
792
40
39
1 560
80
35
2 800
22
36
792
32
39
1 248
8
39
312
80
35
2 800
5
39
195
27
39
1 053
80
35
2 800
72
35
2 520
72
35
2 520
20
37
740
32
35
1 120
20
37
740
38
35
1 330
20
37
740
27
39
1 053
8
35
280
40
6
36
Total
740
Rec. 478
Memo 243
Price
Unit
2 800
INV. A0200
INV. 7432A
Qty
70
80
Balance
210
Published October 2012
35
1 400
page 12
ACCOUNTING UNIT 2
Challenge time:
a. Calculate the value of Tickle Me Elmo’s that would appear in the Balance Sheet on 30
November.
$
b. Calculate the value of Tickle Me Elmo’s that would appear in the Balance Sheet on 31
December.
$
c. Suggest one reason for each of the following Memos. Explain how and where it would
be reported.
i. Memo 242
ii. Memo 243
Memo 242
Reason
Reported
Memo 243
Reason
Reported
d. Calculate the value of Cash Sales, assuming that Elmo’s are sold for $77 (incl. GST).
$
VCTA © Sasha Mildenhall
Published October 2012
page 13
ACCOUNTING UNIT 2
e. Calculate the value of Credit Sales, assuming that Elmos are sold for $77 (incl. GST).
$
f.
Calculate the value of Cost of Sales for Elmo’s.
$
Stock losses:
Stock gains:
occur when the physical stocktake reveals an
amount of stock on hand that is less than the
amount shown in the Stock Card
occur when the physical stocktake reveals an
amount of stock on hand that is more than the
amount shown in the Stock Card
Stock losses are caused by:
Stock gains are caused by:







Mark-Up
Read questions carefully: Mark-up information is often provided as an additional note or in the blurb
at the start of the question. So look carefully and highlight the information as soon as you locate it.
Cost Price to Selling Price
Selling Price
Cost Price
50% Mark-up
100% Mark-up
200% Mark-up
$100
$250
VCTA © Sasha Mildenhall
Published October 2012
page 14
ACCOUNTING UNIT 2
Selling Price to Cost Price
Cost Price
Selling Price
50% Mark-up
100% Mark-up
200% Mark-up
$600
$900
Why is it important to ensure that a business maintains an adequate mark-up level?
Challenge task:
Explain the factors that may need to be considered when deciding on the level of mark-up for a
particular product?
Balance Day Adjustments
Accrual accounting: Requires that all revenue earned in a reporting period be matched against the
expenses incurred in the same period to accurately report Net Profit for the period. Balance day
adjustments are prepared and recorded on the last day of the reporting period.
Accounting principle
Reporting period—the business’s history is broken up into periods of time so that the performance of
the business can be determined. Revenue and expense amounts should relate only to the current
reporting period.
Qualitative characteristic
Relevance—the expenses and revenues included in the calculation of profit should relate to the
current reporting period.
VCTA © Sasha Mildenhall
Published October 2012
page 15
ACCOUNTING UNIT 2
How well do you know your balance day adjustments? Complete the following table.
Adjustment
Items and Effect
Cash Flow
Income Statement
Balance Sheet
Prepaid
Expenses
Accrued
Expenses
Depreciation
Stock Loss
Stock Gain
Cash Flow Statement
Operating Activities




Investing Activities


Financing Activities




VCTA © Sasha Mildenhall
Cash received from Revenues
Cash paid for Expenses
Cash received from Current Assets
Cash paid for Current Liabilities
Cash received from the sale of Non-current Assets
Cash paid when purchasing Non-current Assets
Cash received from Non-current Liabilities
Cash paid for Non-current Liabilities
Cash Drawings
Cash Capital Contributions
Published October 2012
page 16
ACCOUNTING UNIT 2
BUSINESS NAME
Cash Flow Statement for the year ended 30 June 2012
Important bits
Cash Flows from Operating Activities
Cash Sales
40 000
Receipts from Debtors
35 000
GST Collected
Payments to Creditors
Total of the Cash Sales column
GST Column from CRJ
4 000
(15 000)
GST Paid
(5 000)
GST Column from CPJ
GST Paid to the ATO
(2 000)
GST from the Sundries column—this could
be replaced with GST received from the
ATO. Never have both in the one report
Wages Paid
(10 000)
Beware—do not include any accrued wages
Prepaid Rent
(9 000)
Beware—include all amounts paid, no BDAs
Interest Expense Paid
(2 000)
Cash Purchases of Stock
(3,000)
Never include Cost of Sales, Disc. Exp.
33 000
Net Cash Flows from Operating
Activities
Disc. Rev. or any BDAs (e.g. Stock Loss,
Depreciation) in the Cash Flow Statement
Cash Flows from Investing Activities
Cash Paid for New Vehicle
Cash Received from Sale of Vehicle
This could be the full amount or a deposit
paid at the time of purchase
(18 000)
4 000
(14 000)
Net Cash Flows from Investing
Activities
Cash Flow from Financing Activities
Instalment Loan: NAB
Drawings
Capital Contribution
Loan repayments paid during the year.
Never include interest here. Beware—
interest-only loans only go here when
finally paid
(6 000)
(15 000)
20 000
Net Cash Flows from Financing
Activities
(1 000)
Net Surplus/Deficit
18 000
Balance as at 1 July 2011
Balance as at 30 June 2012
VCTA © Sasha Mildenhall
5 500
Net Operating + Net Investing + Net
Financing
Usually found near the beginning of the
question. Beware—overdraft would be
shown in brackets
$23 500
Published October 2012
page 17
ACCOUNTING UNIT 2
Income Statement
BUSINESS NAME
Income Statement for the year ended 30 June 2012
Important bits
Revenue
Cash Sales
50 000
Credit Sales
60 000
These could be combined into one figure
110 000
Less Cost of Goods Sold
Cost of Sales
If no other buying expense, use Cost of
Sales as the heading
55 000
Cartage In
2 000
Customs Duties
1 000
Gross Profit
Other buying expenses that could exist
58 000
Buying Expense is anything to get stock
ready for sale
52 000
Less Stock Loss
2 000
Adjusted Gross Profit
OR plus Stock Gain—never both
50 000
Add Other Revenue
Discount Revenue
Commission revenue
Interest Revenue
These are some examples of other
revenue
500
If no other revenue in question, leave this
section out
2 000
500
3 000
53 000
Less Other Expenses
Advertising
Discount Expense
2 500
Depreciation of Vehicle
2 000
Delivery Expense
1 000
VCTA © Sasha Mildenhall
Discount to encourage Debtors to pay on
time
500
Wages
Net Profit
All expenses should be recorded
1 000
7 000
Delivery to customers—selling expense
not COS
$46 000
Don’t forget to label this line—either
Net Profit or Net Loss
Published October 2012
page 18
ACCOUNTING UNIT 2
Balance Sheet
BUSINESS NAME
Balance Sheet as at 30 June 2012
Important bits
Current Assets
Cash at Bank
May be a CL if an Overdraft and
would appear under CLs
3 000
Debtors Control
10 000
Stock Control
60 000
Prepaid Rent
2 000
75 000
Non-current Assets
Term Deposit
Vehicles
NCA is not due during next 12
months
20 000
40 000
Less Acc. Depn. of Vehicles
(10 000)
Equipment
120 000
Less Acc. Depn. of Equipment
(20 000)
30 000
100 000
Total Assets
150 000
225 000
Current Liabilities
Creditors Control
8 000
Accrued Wages
2 000
GST Clearing
4 000
Loan: NAB
20 000
May be a CA if the balance is on
the DR
34 000
Non-current Liabilities
Loan: NAB
Must be broken into current and
non-current components
90 000
Owner’s Equity
Capital
91 000
Plus Profit
46 000
Less Drawings
137 000
(36 000)
Total Equities
VCTA © Sasha Mildenhall
101 000
From Income Statement—Net
Profit. If loss, then less loss
instead
$225 000
Published October 2012
page 19
ACCOUNTING UNIT 2
Business Performance
Financial indicators
Ratio
Formula
What it measures?
Gross Profit
Margin
= Gross Profit x 100
Net Profit Margin
= Net Profit
The amount of each dollar of revenue that is left after
COGS and Stock Loss are taken into account. This
money is left to cover operating expenses and profit.
Measures the amount of profit earned compared to
revenue.
Sales
1
x 100
Sales
1
For every dollar of revenue, how many cents are
profit—17% would mean that 17 cents in every dollar
of sales is profit.
Return on Assets
= Net Profit
x
100
Avg Total Assets
Return on Owner’s
Investment
= Net Profit
1
x 100
Avg Capital
1
Shows how profitably the assets have been used by
the business.
Calculates the profit made by the business as a
percentage of the owner’s investment in the
business.
This ratio can be compared to other forms of
investment to assess whether it is beneficial to stay
in business or whether more money could be made
from other sources, e.g. shares, fixed-term
investments.
Asset Turnover
=
Sales
Average Total Assets
Shows how productively assets have been used by
the business to earn revenue.
= times per reporting period
Creditors Turnover
= Avg. Creditors x 365
Credit Purchases
= days
Debtors Turnover
= Avg. Debtors x 365
Credit Sales
= days
Stock Turnover
= Avg. Stock x 365
Cost of Goods Sold
Cash Flow Cover
The average number of days it takes the business to
pay its creditors. This must be compared to the credit
terms offered by suppliers.
Days—the average number of days it takes debtors
to pay their accounts. This should be compared to
the credit terms of the business.
The average number of days that stock sits on the
shelf before it is sold.
= days
The longer stock sits on the shelf, the longer cash is
tied up and, sometimes, the less likely stock will sell.
= Net Cash Flows from
Operating Activities
The ability of the business to generate day-to-day
cash flow in order to meet its short-term debts as
they fall due.
Average Current Liabilities
= times per reporting period
Quick Assets
Ratio
=
Current Assets—
(Stock Prepayments)
Current Liabilities—
Bank Overdraft
A more immediate measure than working capital
because it shows the quickest items to turn to cash. It
acknowledges that some current assets and liabilities
are not easily transferred to cash.
= quick assets : 1
VCTA © Sasha Mildenhall
Published October 2012
page 20
ACCOUNTING UNIT 2
Working Capital
=
Current Assets
The ability of a business to pay its short-term debts
(Current Liabilities) with the funds generated from its
short-term assets (Current Assets).
Current Liabilities
= Current Assets : 1
Debt Ratio
= Total Liabilities x 100
Total Assets
1
The percentage of a business’s liabilities compared
to its assets.
Complete the following tables for each of the ratios listed.
Occurs when?
A positive effect would be …
Occurs when?
A positive effect would be …
VCTA © Sasha Mildenhall
Effects?
Increased
Stock Turnover
A negative effect would be ….
Effects?
Decreased
Creditors Turnover
Published October 2012
A negative effect would be …
page 21
ACCOUNTING UNIT 2
Occurs when?
A positive effect would be …
Effects?
Increased Return on
I Owner’s Investment
A negative effect would be …
Can you interpret graphs? Try interpreting the following graph.
VCTA © Sasha Mildenhall
Published October 2012
page 22
ACCOUNTING UNIT 2
Describe the change in Debtors Turnover shown in the graph above and provide two possible
reasons for the change.
Description
Reason 1
Reason 2
Describe the change in the Debt Ratio Turnover shown in the following graph and outline one
positive and one negative effect of this change.
Description
Positive effect
Negative effect
VCTA © Sasha Mildenhall
Published October 2012
page 23
ACCOUNTING UNIT 2
Solutions to Accounting Unit 2 revisions questions and
tasks
Accounting System
Decisions
Made by users
Based on accounting
information
Determined by the
accounting system
INPUTS
Source documents
List the source
documents we have
used in this unit.







Cash receipts
Cheque butts
Sales invoice
Purchase invoice
Bank statements
Memos
Statement of
Account
VCTA © Sasha Mildenhall
PROCESSING
OUTPUTS
Journals
Reports
List the journals we have used.
 Cash Receipts Journal
 Cash Payments Journal

Purchases Journal
 Sales Journal
List the balance day
adjustments




What are the three major
accounting reports we
complete?



Cash Flow
Statement
Income Statement
Balance Sheet
Depreciation
Stock loss and gain
Prepaid expenses
Accrued expenses
Published October 2012
page 24
ACCOUNTING UNIT 2
Accounting Elements
Current Assets
Non-current Assets


Controlled by the business
Future economic benefit within the next 12
months
 As a result of a past transaction
Why is a Debtor an example of a current asset?


Controlled by the business
Future economic benefit for more than 12
months
 As a result of a past transaction
Provide four examples.




A debtor is the result of a credit sale (past
transaction) that the business has made and should
be paid back within set credit terms, which will be
less than 12 months.
Current Liabilities
Equipment
Vehicle
Building
Machinery
Non-current Liabilities


Obligation owed by the business
A future economic sacrifice within the next 12
months
 As a result of a past transaction
Why is a Creditor an example of a current
liability?


Obligation owed by the business
A future economic sacrifice after the next 12
months
 As a result of a past transaction
Provide two examples.


A creditor is an entity that the business owes money
to as a result of buying stock on credit. The creditor
must be paid back within a specified time (credit
terms), which will be less than 12 months.
Mortgage
Loan
Owner’s Equity
Profit
= Assets – Liabilities
The residual interest in the business after
deducting the Liabilities
e.g. Capital, Net Profit/ Net Loss and Drawings
Define Profit.
Revenue
Expenses






Inflows of economic benefits—e.g. Sales OR
Savings in outflows—e.g. Discount Revenue
 Assets or  Liabilities that OE
Other than capital contribution
The excess or deficit of revenue over expenses
within a reporting period.




Outflows of economic benefits OR
Reductions in inflows
 Assets or  Liabilities that  OE
Other than Drawings
Why is Sales considered a revenue?
Why is Stock loss considered an expense?
It is an inflow of economic benefit in the form of an
increase in assets (Bank or Debtors) that increases
profits and therefore Owner’s Equity.
It is an outflow of economic benefit in the form of an
decrease in assets (Stock) that decreases profits
and therefore Owner’s Equity
Note: The following accounts can be classified as either a Current Asset or Current Liability, depending
on which side the balance falls: Cash at Bank and GST Clearing.
Accounting Equation: Assets =
Liabilities + Owners Equity
VCTA © Sasha Mildenhall
Published October 2012
page 25
ACCOUNTING UNIT 2
Challenge task: How well do you know the accounting equation?
Credit sales of $2 000 plus GST (stock is marked up 100%)
Increase/Decrease/No change
Amount
Assets
Increase
1 200
Liabilities
Increase
200
Owner’s Equity
Increase
1 000
Accounting Principles
Complete this table to show your understanding of the accounting principles.
Examples
What
H
When applied
Historical cost
To assets
When assets are not
recorded at their
original value
Drawings or Capital
contribution
The owner records
personal expenses as
business expenses
Balance day
adjustments for prepaid
and accrued expenses
When expenses are
recorded as being
incurred in the wrong
reporting period
To all journals and
reports
Any recording in a
currency other than $A
Stock loss/gains
If stocktakes are not
completed
Consistency
Depreciation, FIFO
The accounting methods used by the business
should be applied consistently from one
reporting period to another.
Analysis and
interpretation
If accounting methods
change from one
reporting period to the
next
Going concern
Balance day
adjustments
If it is assumed the
business will fail
All transactions are recorded at their original
value. Therefore, items are shown in the
accounting records at their historical (original)
price.
E
Entity
The business must be a separate accounting
entity from its owner and from other entities.
R
Reporting period
The ongoing life of a business is broken into
regular intervals of time for the preparation of
financial reports.
M
Monetary unit
In order to record financial events and
understand the meaning of reported
information, it is necessary to use a common
unit of measurement. Australian businesses
use Australian dollars.
C
Conservatism
It is acknowledged that gains will not be
recognised until earned and losses will be
recognised as soon as they are likely to occur.
C
G
When breached
It is assumed that the business will be
ongoing; that is, that it will have an indefinite
life.
VCTA © Sasha Mildenhall
Published October 2012
page 26
ACCOUNTING UNIT 2
Proving the I-D-L response
Challenge task: Explain with reference to an accounting principle why a physical stocktake is
necessary.
Principle:
Conservatism
Justification:
To recognise a stock loss or stock gain as soon as it occurs in order to not overstate
profit or the value of stock on hand.
Qualitative characteristics
Complete this table to show your understanding of the qualitative characteristics.
Examples
What
C
U
R
When applied
Comparability
FIFO
Users must be able to compare the
financial reports of an entity through
time in order to identify trends in its
financial position and performance.
Users must be able to compare reports
between different entities.
Depreciation
Understandability
Layout of reports
Incorrect report layouts
An essential quality of the information
provided in financial reports is that it is
readily understandable by users.
Analysis and interpretation
Analysis that is too difficult
for a non-accountant to
understand
Relevance
Prepaid and accrued
expenses
Information that does not
help evaluate past, present
or future events or relates to
another period
Information must be relevant to the
decision-making needs of users.
Information has the quality of relevance
when it influences the economic
decisions of users by helping them
evaluate past, present or future events
or confirming, or correcting, their past
evaluation.
R
When breached
Reliability
Analysis and interpretation
Different depreciation
percentage or figures used
for calculations between
periods
FIFO not followed
Important information omitted
Source documents
Not using source documents
Information has the quality of reliability
when it is free from material error and
bias and can be depended upon by
users to represent faithfully what has
actually occurred in the business.
VCTA © Sasha Mildenhall
Published October 2012
page 27
ACCOUNTING UNIT 2
Challenge task: Explain the conflict between relevance and reliability using an example.
Depreciation—reliability requires all information to be reliable and should be verified by a source
document. Depreciation is an estimate that can contain bias and there are no source documents, but
depreciation needs to be calculated and included for its relevance to aid decision-making.
Goods and Services Tax
Calculating GST
GST is calculated at the rate of 10%.
If the price does not include GST
If GST is already included in the price
The GST is calculated as 10% on the cost price
Take the price and divide by 11 to get the GST
GST = cost price x 0.1
GST = price (including GST) / 11
Cost Price = Price (including GST) – GST
When is GST used? Complete the table by providing three examples for each situation.
Items that attract GST
Items that don’t include GST




Most sales
Purchase of stock
Purchase of Non-current Assets


Fresh food
Financial services
Most education services
Common theory questions: use I-D-L response
Challenge time: Can you answer these questions?
Explain why GST can be classified as either a Current Asset or a Current Liability.
It will depend on whether the business has collected more GST from sales (on behalf of the
government) than it has paid to suppliers.
If GST from sales is greater, the business owes this to the government and therefore it is a Current
Liability.
If GST paid to suppliers is greater than GST collected from sales, the government will owe the
business this amount and therefore it will be classified as a Current Asset.
VCTA © Sasha Mildenhall
Published October 2012
page 28
ACCOUNTING UNIT 2
Distinguish between GST on cash payments and GST paid to the ATO.
GST on cash payments has been paid to a supplier for goods or services in the current reporting
period, whereas GST paid to the ATO is for the settlement of the amount owed to the ATO or GST
payable for the previous reporting period.
How is GST reported?
Cash Flow Statement Cash flows from Operating Activities
Income Statement Not reported in this report
Balance Sheet As either a Current Asset or Current Liability, depending on whether the business
owes the ATO (CL) or the ATO owes the business (CA)
Using Stock Cards
Challenge time:
a. Calculate the value of Tickle Me Elmo’s that would appear in the Balance Sheet on 30
November.
3 312 + 1 560
$ 4 872
b. Calculate the value of Tickle Me Elmo’s that would appear in the Balance Sheet on 31
December.
1 330 + 740
$ 2 070
VCTA © Sasha Mildenhall
Published October 2012
page 29
ACCOUNTING UNIT 2
c. Suggest one reason for each of the following Memos? Explain how and where it would
be reported.
i.
Memo 242
ii.
Memo 243
Memo 242
Reason Drawings, advertising—do not accept stock loss as this memo is during the
reporting period
Reported Drawings—Balance Sheet
Advertising—Income Statement
Memo 243
Reason Stock gain
Reported Income Statement
d. Calculate the value of Cash Sales, assuming that Elmo’s are sold for $77 (incl. GST).
(70 + 27 + 8 + 40) * 70
$ 10 150
e. Calculate the value of Credit Sales, assuming that Elmo’s are sold for $77 (incl. GST).
(22 + 8) * 70
$ 2 100
VCTA © Sasha Mildenhall
Published October 2012
page 30
ACCOUNTING UNIT 2
f. Calculate the value of Cost of Sales for Elmo’s.
2 520 + 792 + 312 + 1 053 + 280 + 1 400
$ 6 357
Stock losses:
Stock gains:
occur when the physical stocktake reveals an
amount of stock on hand that is less than the
amount shown in the Stock Card
occur when the physical stocktake reveals an
amount of stock on hand that is more than the
amount shown in the Stock Card
Stock losses are caused by:
Stock gains are caused by:





Theft
Over-supply to customers
Under-supply by suppliers
Recording error


Under-supply to customers
Over-supply by suppliers
Recording error
Mark-Up
Read questions carefully: Mark-up information is often provided as an additional note or in the blurb
at the start of the question. So look carefully and highlight the information as soon as you locate it.
Cost Price to Selling Price
Selling Price
Cost Price
50% Mark-up
100% Mark-up
200% Mark-up
$100
150
200
300
$250
375
500
750
VCTA © Sasha Mildenhall
Published October 2012
page 31
ACCOUNTING UNIT 2
Selling Price to Cost Price
Cost Price
Selling Price
50% Mark-up
100% Mark-up
200% Mark-up
$600
400
300
200
$900
600
450
300
Why is it important to ensure that a business maintains an adequate mark-up level?
To ensure that predetermined profits are maintained so that other expenses are covered and a net
profit is achieved.
Challenge task:
Explain the factors that may need to be considered when deciding on the level of mark-up for a
particular product.
The profit the business wishes to be made
The expenses that must be covered
VCTA © Sasha Mildenhall
Published October 2012
page 32
ACCOUNTING UNIT 2
Balance Day Adjustments
How well do you know your balance day adjustments? Complete the following table.
Adjustment
Items and Effect
Cash Flow
Income Statement
Balance Sheet
Prepaid
Expenses
Prepaid expenses
(Assets) increase
Operating outflow
Not included
Current Asset
No effect
Expenses increase
Current Liability
No effect
Expenses increase
Owner’s Equity
decreases
No effect
Expenses increase
Owner’s Equity
decreases
No effect
Revenues increase
Owner’s Equity
increases
Bank (Asset) decreases
Accrued
Expenses
Expenses increase
Depreciation
Expenses increase
Liability increases
Non-current Assets
decrease
Stock Loss
Expenses increase
Current Assets decrease
Stock Gain
Revenue increases
Current Assets increase
Business Performance
Complete the following tables for each of the ratios listed.
Occurs when?
Effects?
Stock is sold at a quicker rate
Profits—Owner’s Equity
Current Assets—Stock
Increased
A positive effect would be …
Stock Turnover
Increased profits if stock is being
sold at faster rate as long as mark-up is being
maintained
A negative effect would be ….
Added costs to constantly reorder stock
Better liquidity
VCTA © Sasha Mildenhall
Published October 2012
page 33
ACCOUNTING UNIT 2
Occurs when?
Effects?
Pay creditors more quickly
Current Liabilities—Creditors
When there is a decrease in stock and Debtors
Turnover
Current Assets—Bank
A positive effect would be …
The business may be eligible
for a discount
Decreased
Creditors Turnover
A negative effect would be …
If the Creditors Turnover is less than the
creditor’s terms, the business could be using the
money within its business to generate more
profits
Occurs when?
Effects?
Profits increase
Owner’s Equity
Decrease in Capital
A positive effect would be …
The owner would be extremely
happy making more money
VCTA © Sasha Mildenhall
Increased Return on
I Owner’s Investment
A negative effect would be …
The owner may still be able to earn more in
another form of investment
Published October 2012
page 34
ACCOUNTING UNIT 2
Can you interpret graphs? Try interpreting the following graph.
Describe the change in Debtors Turnover shown in the graph above and provide two possible
reasons for the change.
Description The number of days it takes Debtors to pay has decreased slightly from 2010 to 2011
but there was a large decrease of four days from 2011–2012.
Reason 1 Better follow-up by the business in relation to slow-paying Debtors
Better screening of potential Debtors
Reason 2 Discounts offered to encourage early payment
Describe the change in the Debt Ratio Turnover shown in the following graph and outline one
positive and one negative effect of this change.
VCTA © Sasha Mildenhall
Published October 2012
page 35
ACCOUNTING UNIT 2
Description The percentage of liabilities to assets has increased over the three years and the
business is now in a worse position with regard to stability—just over 10% in 2010 and up to 60% in
2012.
Positive effect The debt may be due to an expansion of the business and in the long-term will make
the business more profitable.
Negative effect The business is relying more heavily on external sources to fund the business,
which will result in Interest expense that will decrease Net Profit,
VCTA © Sasha Mildenhall
Published October 2012
page 36