Primary Users and Professional Ethics in Accounting

Question 1 (10 marks)
a) Identify the primary users and their uses of financial information as outlined in the Conceptual Framework. (5 marks)
[Answer here]
Investors- Current and potential investors seek a return on their investors after providing capital through investing in the firm.
Lenders- the lenders are mostly banks and different providers of credit who seek to determine he credit risk and whether the entity can pay the short-term and long-term obligations
Creditors- These include trade suppliers or vendors who provide goods and services noncredit
b) What does the word ‘ethics’ mean? Explain what is considered ethical behaviour for an accountant. Use your own example to explain your point. (5 marks)
[Answer here]
Ethics refers to behaviour and actions that are socially accepted principles and values and result in positive outcomes. Ethical conduct is based on a professional code of conduct where there are professional’s duties and rights. Professional ethics in the accounting field are regulated by professional bodies. Accounting ethics reflect the set of high-quality principles, duties, and ethical standards that guide the practice of accountants. For instance, there is professional competence and diligence, which refers to maintaining knowledge and competence at the levels necessary to ensure that clients and entities receive high-quality professional services
Question 2 (20 marks)
The comparative statements of ABC Ltd are presented here:
ABC Ltd, Income Statement (extract), for years ended 30 June 2018
2018 2017
$ $
Net Sales 3,637,000 3,501,000
Cost of sales 2,011,000 1,992,000
Gross Profit 1,626,000 1,509,000
Selling and administrative expenses 1,012,000 958,000
Finance costs 36,000 38,000
Profit before income tax 578,000 513,000
Income tax expense 173,400 154,000
Profit for the period 404,600 359,000
ABC Ltd, Statement of Financial Position, as at 30 June 2018
2018 2017
Assets $ $
Current assets
Cash 129,800 128,400
Marketable securities 500,000 400,000
Accounts Receivable (net) 300,000 205,600
Inventory 400,000 231,000
Total current assets 1,329,800 965,000
Non-current assets
Property, plant and equipment (net) 1,250,600 1,040,600
Total assets 2,580,400 2,005,600
Liabilities and Equity
Current liabilities
Accounts payable 300,000 290,800
Income taxes payable 87,000 84,000
Total current liabilities 387,000 374,800
Non -current liabilities
Notes payable 720,000 700,000
Total liabilities 1,107,000 1,074,800
Equity
Share capital ($10 each) 900,000 600,000
Retained earning 573,400 330,800
Total Equity 1,473,400 930,800
Total Liabilities and Equity 2,580,400 2,005,600
All sales were on account. Net cash provided by operating activities for the year ended 30 June 2018 was $760,000. The weighted average number of shares is 150 274.
Net Sales

3,637,000

3,501,000

Cost of sales

2,011,000

1,992,000

Gross Profit

1,626,000

1,509,000




Selling and administrative expenses

1,012,000

958,000

Finance costs

36,000

38,000




Profit before income tax

578,000

513,000

Income tax expense

173,400

154,000




Profit for the period

404,600

359,000

Required:
1. Calculate the following ratios for the 2018 financial year. (14 marks) Marks will be deducted if no workings are shown. Please type your answers in the table/template provided.
a) Current ratio (2 marks) e) Average days in inventory (2 marks)
b) Receivables turnover (2 marks) f) Quick ratio (2 marks)
c) ) Average collection period ( 2 marks) g) Return on Assets (2 marks)
d) Inventory turnover (2 marks)
[Answer and show workings here]
a) Current ratio
Current Ratio = Total Current Assets / Total Current Liabilities
2018 Current Ratio = $1,329,800/ $387,000= 3.44
b) Receivables turnover
Receivables turnover = Net Credit Sales / Average Accounts Receivable
2018 Receivables turnover=3,637,000/ (300,000 +205,600)/2= 14.39
c) Average collection period
Average collection period or Days Sales Outstanding = Receivables/ (Annual sales/365) or 365 days/ Receivables turnover
2018 Average collection period = 300,000/ (3,637,000/ 365) =30.11 days
d) Inventory turnover
Inventory turnover ratio = Sales/ Inventories
2018 Inventory turnover ratio 3,637,000/ 400,000= 9.09 times per year.
e) Average days in inventory
Average days in inventory= average inventory/ Average daily cost of goods sold OR 365/ inventory turnover
2018 Average days in inventory= 365/ 9.09=40.11
f) Quick ratio
Quick Ratio = (Total Current Assets - Total Inventories) / Total Current Liabilities
2018 Quick Ratio = (1,329,800-400,000) / 387,000= 2.4
g) Return on Assets
Return on total assets (ROA)= Net income available to common stockholders/ Total assets
Return on total assets= 15.68%
2. Comment on the liquidity of the company using the ratios you calculated in (1). (6 marks)
[Answer here]
Liquidity ratios indicate the ability to pay the short-term obligations within the short term and generating cash through converting the assets into liquidity. The current ratio was 3.44 and the quick ratio was 2.4, and liquidity ratios higher than 1 indicate the liquid assets covers the current liabilities and there are no problems on liquidity. The average collection period (ACP) was determined as 30.11 days and indicates the firm is waiting 31 days after making a sale before receiving cash. The receivables turnover ratio indicates the firm takes 14 days extending credit as well as collecting debts. Based on the return on assets the profits increased by $ 0.15 for each dollar investment in the assets.
Question 3 (15 marks)
Bailey Furniture Ltd is a manufacturer of wooden furniture. The following accounts and amounts are extracted from the records as of 30 June 2019.
Account $
Finished goods inventory, 30 June 2019 28 700
Depreciation – factory machinery 14 500
Depreciation – office equipment 7 600
Direct labour 82 000
Raw material inventory, 1 July 2018 4 980
Administration expense 15 600
Finished goods inventory, 1 July 2018 16 000
Sales commissions 14 500
Factory supplies 5 600
Work in process, 1 July 2018 7 650
Factory electricity 6 000
Raw material purchases 45 000
Sales revenue 264 000
Indirect labour 32 500
Work in process, 30 June 2019 9 880
Insurance expense - Factory 3 600
Rent – office building 48 000
Raw material inventory, 30 June 2019 7 920
Required:
Prepar...