Accounting Business Reporting for Decision Making

252 Accounting: Business Reporting for Decision Making

SOLUTION TO 6.3

a.

Income

Cost of

sales

Other

expenses Profit

Total

assets

Total

liabilities

Share

capital

Retained

earnings

325 000 260 000 45 000 20 000 180 000 15 000 120 000 45 000

550 000 350 000 125 000 75 000 1 000 000 80 000 600 000 320 000

207 500 115 000 81 000 11 500 510 000 33 500 230 000 246 500

498 000 400 000 60 000 38 000 848 500 68 500 380 000 400 000

244 000 138 000 32 000 74 000 320 000 70 000 125 000 125 000

b. The gross profit for each of the independent cases above is: $65 000; $200 000; $92 500;

$98 000; and $106 000. The gross profit margin is gross profit divided by sales and represents

the percentage of a sales dollar that ends up as gross profit. As such, an entity’s gross profit is

impacted by its pricing decisions, discounting decisions and purchasing prowess.

Comprehension questions

6.4 Describe the users who would be interested in the financial position and performance of

an entity and explain their interest. LO1

6.5 Explain if the following statements are true or false for an entity using the accrual

method of accounting. LO1, 2

a. Statements of profit or loss are used only by users external to the entity.

b. Revenue from sales is included in the statement of profit or loss when it is received, not when it is

earned.

c. At the end of the reporting period, accrued expenses need to be included in the profit

or loss determination.

d. At the end of the reporting period, revenue received for services not yet provided needs

to be excluded from the profit or loss determination.

6.6 Discuss the difference between profit or loss and comprehensive income. LO10

6.7 Explain the three methods of depreciation. LO3

6.8 When comparing the profit of entities, discuss why accounting policy choices need to be

considered. LO3

6.9 Explain how you would determine if an income or expense item is material. LO4

6.10 Discuss the importance of showing profit or loss from continued operations separately

from the profit or loss from discontinued operations. LO8

6.11 Describe the items that are likely to be present in a statement of changes in equity. LO10

6.12 Items of income and expense may be included in the statement of profit or loss only

if they can be measured with certainty. Discuss. LO3, 7

6.13 If an entity uses an asset evenly over its useful life, predict the method of depreciation

the entity would use. LO3, 4, 7

6.14 Explain the difference between income and revenue. LO5

6.15 Explain the difference between profit or loss, gross profit and EBIT. LO9

Exercises

 BASIC |   MODERATE |    CHALLENGING

6.16  LO5

Consider each of the following transactions and examine whether they satisfy the income definition

criteria using the accrual method of accounting:

a. Received cash for services to be provided in the next reporting period

b. Borrowed money from a bank

c. Credit sale of goods