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Cambridge VCE Accounting Units 3 & 4 Teacher CD-ROM

Exercise 1.1

Accounting principles

a.
Accounting principle
Explanation

Entity

The owner and the business are considered to be separate accounting entities,
and their records should be kept on this basis.
The orthodontists fees are an expense of the owner, not an expense of the
business, and should be recorded as Drawings.

b.
Accounting principle
Explanation

Consistency

The same accounting methods should be applied from one period to the next so
that reports can be compared between periods.
The owner will be unable to identify any changes in repair or vehicle expenses.

c.
Accounting principle
Explanation

Monetary unit

Transactions should be recorded in the currency of the country in which the

reports are prepared.
In Australia, all transactions should be recorded in Australian dollars.

d.
Accounting principle
Explanation

Reporting period

The life of the business is divided into arbitrary periods to allow for reports to be
prepared, and the accounting records should reflect the period in which a
transaction occurs. The transaction should be recorded as revenue when it is
earned in the year ended 30 June 2008.

e.
Accounting principle
Explanation

Historical cost

Transactions should be recorded at their original purchase price as this value is

verifiable by a source document.
The revaluation is subject to subjectivity, and not verifiable.

Simmons, Hardy 2006

Cambridge University Press

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f.
Accounting principle
Explanation

Going concern

The life of the business is assumed to be continuous, and its records are kept on
this basis.
The mortgage should be reported as a non-current liability, as it is assumed that
the business will still be operating 10 years into the future.

g.
Accounting principle
Explanation

Reporting period

The life of the business is divided into arbitrary periods to allow for reports to be
prepared, and the accounting records should reflect the period in which a
transaction occurs. According to tax requirements, reports must be prepared at
least yearly.

Exercise 1.2

Bon Wilhelm

a.
Explanation

The business is assumed to be an accounting entity separate from the owner and
other businesses, and its records should be kept on this basis.
The holiday is an expense of the owner, not an expense of the business.

b.
Explanation

The reports will not contain all the information that is useful for decision-making
because they will not show the owners Drawings.

Simmons, Hardy 2006

Cambridge University Press

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Cambridge VCE Accounting Units 3 & 4 Teacher CD-ROM

Exercise 1.3

Larkin Lighting

a.
Accounting principle
Explanation

Historical cost

Stock should be valued at its original purchase price as this value is verifiable
by a source document.

OR
Accounting principle
Explanation

Conservatism

Revenues should be recognised only when certain so that assets and revenues
are not overstated. There is no guarantee that the stock will be sold for its selling
price, so using the selling price would recognise the revenue before it is certain
and overstate sales revenue and the value of the stock (an asset).

b.
Explanation

Because the selling price is not verifiable by reference to a source document, it

will mean the information in the reports is not free from bias.

Simmons, Hardy 2006

Cambridge University Press

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Cambridge VCE Accounting Units 3 & 4 Teacher CD-ROM

Exercise 1.4

Erica Carr

a.
Accounting principle
Explanation

Conservatism

Expenses should be recognised when probable so that expenses and liabilities

are not understated.
The damages should be recognised in order to present to the owner a prudent or
cautious picture of the firms financial position.

b.
Qualitative characteristic Relevance
Explanation

The reports should include all information which is useful for decision-making.
The probable expense of damages may affect decisions the owner makes about
both profit and available cash.

Exercise 1.5

Coolick Refrigerators

a.
Consistency

The same accounting methods should be applied from one period to the next so
that reports can be compared between periods.

b.
Qualitative characteristic Comparability
Explanation

Reports should be comparable over time, and between different companies

through the use of consistent accounting procedures.

Simmons, Hardy 2006

Cambridge University Press

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Cambridge VCE Accounting Units 3 & 4 Teacher CD-ROM

Exercise 1.6

Rad Mags

a.
Accounting principle
Explanation

Reporting period

The life of the business is divided into arbitrary periods to allow for reports to be
prepared, and the accounting records should reflect the period in which a
transaction occurs. Not all the cash was earned in the Reporting period in which
it was received, as it applies to two years (and two different Reporting periods).

b.
Qualitative characteristic Relevance
Explanation

The reports will include some information that is not useful for decision making
about profit for the current Reporting period (i.e. the revenue that has been
received will not be earned until the next Reporting period).

c.
Explanation

The inflow of economic benefits (cash) increases assets, but also increases
liabilities; as a result there is no increase in Owners equity.

Exercise 1.7

Plastic Cups Emporium

a.
Qualitative characteristic Understandability
Explanation

Reports should be presented in a manner which makes it easy for the user to
comprehend their meaning.
As the workers have no accounting knowledge, the reports will not fulfil their
function of providing information.

b.
Technique

Use of graphs
Plain language reports
Explanatory notes / presentation sessions

Simmons, Hardy 2006

Cambridge University Press

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Cambridge VCE Accounting Units 3 & 4 Teacher CD-ROM

Exercise 1.8

Frosty Fridges

a.
Accounting principle
Explanation

Historical cost

Assets and liabilities will be reported in the Balance Sheet at their original
purchase price as these values are verifiable by a source document.
The market value, on the other hand, represents what a potential buyer is
prepared to pay for the assets.

Exercise 1.9

Maxs Mart

a.
Explanation

As a non-current asset as it is a resource controlled by the business from which a

future economic benefit is expected to flow to the business for more than 12 months.

b.
Accounting principle
Explanation

Historical cost

The shelving should be valued at $12 500, as this is the original purchase price
paid by Maxs Mart.
(The $15 000 was paid by a different entity.)

c.
Qualitative characteristic Reliability
Explanation

There is no guarantee that the shelving can be sold for its resale value, so using
this figure will mean that the information in the reports is not free from bias.

Simmons, Hardy 2006

Cambridge University Press

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Cambridge VCE Accounting Units 3 & 4 Teacher CD-ROM

Exercise 1.10
Item
a. Debtors

b. Loan principal

Elements of the reports

Report /
classification

Definition

Balance Sheet /

a resource controlled by the business which is expected to

Asset

provide a future economic benefit (when the cash is received)

Balance Sheet /

a present obligation which is expected to result in an outflow of

Liability

economic benefits sometime in the future (when the loan is

repaid)

c. Interest on loan

Profit and Loss

an outflow of an economic benefit in the form of a decrease in

Statement /

assets (Bank) which leads to a decrease in Owners equity

Expense
d. Stock loss

Profit and Loss

an outflow of an economic benefit in the form of a decrease in

Statement /

assets (Stock) which leads to a decrease in Owners equity

Expense
e. Cash sales

Profit and Loss

an inflow of an economic benefit in the form of an increase in

Statement /

assets (Bank) which leads to an increase in Owners equity

Revenue
f. Wages incurred

Profit and Loss

an outflow of an economic benefit in the form of a decrease in

Statement /

assets (Bank) which leads to a decrease in Owners equity

Expense
g. Wages owing

Balance Sheet /

a present obligation which is expected to result in an outflow of

Liability

economic benefits sometime in the future (when the employees

are paid)

h. Discount revenue

Simmons, Hardy 2006

Profit and Loss

a saving in an outflow of economic benefits in the form of a

Statement /

reduction in a liability (Creditors) which leads to an increase in

Revenue

Owners equity

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Exercise 1.11

Hard Utes

a.
Explanation

If the vehicle was purchased as stock and was intended for resale, it would be a
resource controlled by the business which is expected to provide a future economic
benefit in the next 12 months (when it is sold).

b.
Explanation

If the vehicle was purchased for use within the business, it would be a resource
controlled by the business which is expected to provide a future economic benefit
for more than 12 months.

c.
Explanation

If the vehicle was sold, it would create an expense called Cost of sales relating to
the outflow of an economic benefit in the form of a decrease in assets (Stock),
leading to a decrease in Owners equity.

d.
Explanation

Both represent an economic benefit, but whereas an asset represents a resource

controlled by the entity which is expected to provide a future economic benefit, an
expense represents an outflow or consumption of an economic benefit.

Exercise 1.12:

Fine Fashions

a.
Explanation

The goodwill represents a resource controlled by the business which is expected to

provide a future economic benefit (.ie. further sales).

Simmons, Hardy 2006

Cambridge University Press