Accounting Business Reporting for Decision Making

254 Accounting: Business Reporting for Decision Making

why the profit is relatively low compared to the increase in the cash at bank during the reporting

period. Prepare a report for the CEO offering some suggestions that would explain this.

6.23  LO 6

Categorise each of the following expenses into one of the expense types listed at the top of the

columns.

Cost of

sales

Selling and

distribution

Administration

and general Finance

Purchases

Depreciation of office equipment

Sales commission

Interest expense

Lease charges

Sales staff salaries

General staff salaries

Advertising

Freight charges on purchases

Bank charges

Utility expenses

6.24  LO2, 4

In its first year of operations, Benson Pty Ltd earned $160 000 in services revenue, $24 000 of

which was on account and still outstanding at the end of the reporting period. The remaining

$136 000 was received in cash from customers. The company paid expenses of $40 000 in cash.

Included in the $40 000 paid is $15 000 for insurance coverage that will not be used until the

second year. Additionally, there is $22 000 still owing on account at the end of the reporting period.

Required

a. Apply cash accounting to calculate the first year profit of Benson Pty Ltd.

b. Apply accrual accounting to calculate the first year profit of Benson Pty Ltd.

c. Debate which basis of accounting you think is more useful for decision making.

6.25   LO2, 4

a. Compare the adjustments necessary on the accounts (income or expense only) of Julie Durkin

to reflect (1) a cash-based and (2) an accrual-based accounting system (assume the accounting

period is for 12 months ending on 31 December 2015):

i. Accrued wages and salaries of $800 are due to be paid on 1 January 2016.

ii. Julie depreciates her business computer purchased on 1 January 2014 over three years at

$600 per annum.

iii. Insurance premium of $12 000 for one year was paid on 1 December 2015.

iv. A client paid Julie $5000 on 1 September 2015 for work not yet done.

v. A client owes $2000 for work started and completed in October 2015.

vi. Julie has tendered for work totalling $2400 on 4 December 2015. She hadn’t heard whether

or not she had been successful by 31 December 2015.

vii. Julie paid her quarterly electricity bill of $400 on 30 September 2015.

b. Discuss why the profit for the period is different depending on whether a cash- or accrual-based

accounting system is used. Justify the preference to use accrual-based accounting.

6.26   LO2, 4

The accountant at AppsGalore, a technology business, has determined that the following

adjustments should be made in the entity’s accounts for the year ended 30 June using an accrual-

based system:

1. income earned but not invoiced totalling $21 000


2. unpaid wages and salaries of $1150