Question 1

Convenient Book Store (CBS) is a neighbourhood bookstore. It was founded by the father of Michael Chong, the current owner. CBS sells stationeries and school textbooks. The company has the following transactions during the last month of 20X5. CBS uses the perpetual inventory system.

• Purchased goods on account $45,000.
• Sold merchandise costing $56,250 to customers for cash $75,000 and on credit for $3,750.
• Paid $9,000 to sponsor a SG60 event organised by the local town council.
• Paid $37,500 to creditors.
• Collected $5,250 in advance for the sales of textbooks to a neighbourhood school in the following month.
• Paid insurance of $2,700 for six months, with this month being the first month.
• Signed a contract to supply stationeries worth $3,000 to the local town council office for the next 12 months. The stationeries are estimated to cost $1,950.
• Received a utility bill of $315. Arrangement has been made to pay the bill on the third working day of the following month via giro transfer.
• Paid $13,500 for CBS’s other operating expenses for the month.
• Paid in advance three months’ salaries amounting to $9,000 to an employee as an interest-free loan.
• Incurred $1,500 depreciation expense and $19,500 other operating expenses. The operating expenses will be paid early next month.
• A physical count of inventory showed $22,500 of stock on hand. This tallied with the balances shown in the stock cards.     

Required:

(a) For each of the above transactions, identify the types of accounts affected (assets, liabilities, equity, revenue or expense) and indicate the increasing or decreasing amount. List separately if more than one of the same types of account is affected.

The first transaction has been completed as an example:

(27 marks)

 

(b) Report the profit for the year, given the revenue and expenses for the past 11 months were $825,000 and $808,500, respectively. The expenses include an extraordinary repair cost of $49,500 due to a fire in June. This amount has been fully paid.

(8 marks)

(c) Give the balance of the total assets at the year end, assuming the beginning balance of total assets for the month was $142,500.

(8 marks)
Students need to show clear workings for part (b) and (c).

(d) Michael approached his rich friend, Albert Fong to invest in CBS. Albert’s required return on assets (ROA) is 15%. Using ROA as Net Profit/Total Assets at the end of the year, discuss CBS’ performance.

(7 marks)

 (e) Give five (5) other factors that Albert should consider before making the investment decision.

(10 marks)

(f) You have also asked Albert to request from Michael the latest set of financial statements of CBS. Identify the key financial statements. Describe the information reported in each of the financial statements and explain how they can help Albert in his investment decision.

Answers word count should not exceed 350 words.

(25 marks)   

(g) To improve CBS’s net profit, Michael instructed the accountant to record the sponsorship expense to next year even though it was incurred this year. Was Michael correct do so? Explain and discuss the consequences of this action.

Answers word count should not exceed 200 words.

(15 marks)

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