Topics 1-3 Tutorial

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Assignments1 and 2

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 Topic 1:
Framework for Business and Financial statement Analysis

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How Capital Markets Function

Regulatory intermediaries

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Question 4
The Australian Securities Exchange (ASX) is an example of a/an:
Answer:
- Regulatory intermediary.
- Financial intermediary.
- Information intermediary.
- Both a regulatory and financial intermediary.

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Accounting Equation:

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Question 13
Mike Szabo Company engaged in the following transactions during the
month of June:
June 2 Make credit sales of $4,000 (accepted accounts receivable)
6 Made cash sales of $2,500
10 paid office salaries of $500
14 sold land that originally cost $2,200 for $3,000 cash
17 Paid $6,000 for equipment
21 Billed clients $900 for services (accepted accounts receivable)
24 Collected $1,200 on an account receivable
28 Paid an account payable of $700
Required Record the transactions, using T-account

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June 2 :Make credit sales of $4,000
(accepted accounts receivable)

Transactions analysis
Debit side (left) Credit side (right)
Direction Accounts Amount Direction Accounts Amount
Make Increase Account 4,000 Increase Sale 4,000
credit sales receivable revenue
of $4,000
(accepted
accounts
receivable)

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June 14: sold land that originally cost $2,200
for $3,000 cash

Transactions analysis
Debit side (left) Credit side (right)
Direction Accounts Amount Direction Accounts Amount
sold land Increase Cash 3,000 Increase Gain on 800
that Sale of
originally Land
cost $2,200
for $3,000 Decrease Land 2,200
cash
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June 28: Paid an account payable of $700

Transactions analysis
Debit side (left) Credit side (right)
Direction Accounts Amount Direction Accounts Amount
Paid an Decrease Account 700 Decrease Cash 700
account payable
payable of
$700

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 Topic 2:
Overview of Accounting Analysis

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Stockholders’ Equity
• Also called shareholders’ equity
• The residual ownership interest in the assets of
an entity that remains after deducting its
liabilities
• Paid-in capital
• Preferred
• Common

• Retained earnings

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Question 3
• For the issuing firm, redeemable preferred stock should be
classified where for analysis purposes?

• Answer:
• Marketable security
• Long-term investment
• Intangible
• Liabilities

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Cost of Goods Sold (Cost of Sales)
• The cost of goods that were sold to produce
revenue
Retailer Manufacturer
Beginning Inventory Beginning Inventory
+ Purchases + Cost of Goods Manufactured
− Ending Inventory − Ending Inventory
Cost of Goods Sold Cost of Goods Sold

• A service firm will not have cost of goods sold, but it will often have cost of services

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Question 7

Answer:
150,000
132,000
152,000
170,000

Retailer
Beginning Inventory
+ Purchases
− Ending Inventory
Cost of Goods Sold
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Question 8
“Extraordinary items are material events and transactions
distinguished by their unusual nature and by the infrequency of
their occurrence”

Which of the following would be classified as an extraordinary

item on the income statement?
Answer:
• Loss from bush fire
• Loss on disposal of a segment of business
• Write-down of inventory
• Loss from strike

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 Question 13
At the end of the 2019/20 financial year
bushfire destroyed your financial
records. Fortunately, your accountant
had kept certain statistical data related
to your income statement as follows:
-Cost of goods sold was $2 million.
-Administrative expenses were 20% of
the cost of sales but only 10% of sales.
-Selling expenses were 150% of
administrative expenses.
-Bonds payable were 1$ million, with an
average interest rate of 11%.
-The tax rate was 30%.
-50,000 shares of common stock were
outstanding for the entire year.

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 Topic 3:
Implementing Accounting Analysis and Basics
of Analysis

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Common-Size Analysis (Cont.)
• Vertical analysis
• All amounts of a year expressed as a percentage of a base amount of
the same year (e.g., net sales revenue, total assets)
• Focuses on the relationships between various financial/account items
on a financial statement.
• Gain insight into the relative importance or magnitude of various items
on the financial statements.

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Example: Vertical common size-balance
sheet
Assets 2019 2018
Cash 100 4.0% 100 5.0%
Accounts recievable 100 4.0% 200 10.0%
Inventory 100 4.0% 200 10.0%
Total current assets 300 12.0% 500 25.0%
Property plant & Equipment 2,200 88.0% 1,500 75.0%
Total assets 2,500 100.0% 2,000 100.0%

Liabilities and owner's equity

Account payable 500 20.0% 150 7.5%
Unearned revenue 250 10.0% 50 2.5%
Total current liabilities 750 30.0% 200 10.0%
Long-term liabilities 1,000 40.0% 800 40.0%
Shareholder's equity 750 30.0% 1,000 50.0%
2,500 100.0% 2,000 100.0%

Each financial statement element is presented as a percentage of a

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designated base which is total assets on the balance sheet
Question 13

• You have identified that the firm has incorrectly recorded a building as an expense in their income statement for
$15,000 in 2020 when the accounting standard required the firm to capitalise this as a building (long-term asset)
into the balance sheet. Assume that all long-term assets were to be depreciated over the next 10 years using
the straight-line method, and complete the worksheet for 2020.

2020 Assets Liabilities Equity

Capitalised Other Profit Other
Reported 20 000 50 ,000 25 ,000 15 ,000 30,000
Capitalisation +13 500 +13 500
Deferred tax +4 050 -4 050
Adjusted 33,500 50, 000 29,050 24,450 30 000

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 Question 14

• You identify that a firm has incorrectly recognised revenue on $20,000 worth of goods in the form of
receivables. You decide to reverse this sale and the associated inventory which has a value of
$12,000. Using the worksheet approach, what would be the adjusted total value of the asset
account?
2020 Assets Liabilities Equity
Reported ($) 90,000 20,000 70,000
A/R, Revenue
Inventory/Cost of
goods sold
Deferred tax
Adjusted

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