Concepts and Principles
Question 1 – Concepts and Principles (4 marks)
You are the financial manager of LAKTA LTD, a company in the wine industry. The company has recently bought a building for $500,000 which has been represented in the statement of financial position. The Chief Executive Officer has noticed that the building was worth $515,000 but the company received a $15,000 discount on the purchase price. The CEO has asked you to reflect the $515,000in the financial statements but you have mentioned that accountants need to follow the concepts and principles.
⦁ Name and briefly explain all the concepts and principles of accounting. (3 marks)
⦁ Name the concept or principle that has not been followed in this case and explain how it has been breached? (1 mark)
Answer
a) Monetary principle – express accounting concepts in monetary terms
b) Acc entity concept – owners transaction are separated from firms transactions
c) Period concept – entity life is divided into periods and reports are also divided into those periods
d) Cost principle – all assets are recorded as their purchase price.
e) Full disclosure principle – all events that make difference to decision making process must be disclosed in the financial statements.
f) Going concern principle – business will remain in operation in the future.
b)
Cost principle has been breached because the CEO wants to say in financial statements it was bought for 515,000 but it was bought for 500,000 with 15,000 discount. The ceo does not want the asset to be recorded on its real purchase price.
Question 2 – Sustainability (6 marks)
The following is an extract from the Sustainability Report (2020) for JB Hi-Fi:
⦁ What is meant by the term sustainability? (1.5 marks)
⦁ Explain the 3 aspects of sustainability? Include an example for each (Do not use examples from JB Hi-Fi) (1.5 marks)
⦁ Based on the information from the sustainability report above, explain how JB Hi-Fi has met each of the 3 aspects of sustainability. (3 marks)
Answer
a) Sustainability means that for a business to be sustainable for the long term it has to focus on 3 main things and they are people , planet and profit.
b) People – means you care about the people and treat them with respect such as having proper and mutual respect with the employees and don’t deny or strip them away from their rights.
Planet – to make sure you don’t hurt the environment , ex: your business does not effect the environment
Profit – the business needs profit to be sustainable because a business cant run without profit or you will go bankrupt.
C) They managed to keep the stores open and having to take tests for customers that indicates they care about the people and profits and planet by making sure covid-19 does not spread and infect more people.
Question 3 – Financial statement analysis (9 marks)
The comparative financial highlights of Optus Inc and Vodafone Inc for 2020 and 2019 is provided.
Optus Vodafone
FY 2020 FY 2019 FY 2020 FY 2019
Current Assets 7,176 7,078 32,644 39,817
Non-Current Assets 41,779 41,837 133,917 103,276
Current Liabilities 10,579 8,794 32,456 25,523
Non-Current liabilities 11,562 10,311 72,036 53,894
Total Equity 26,814 29,810 62,625 63,445
Net Cash Provided by Operating Activities 5,817 5,368 17,379 12,980
Revenue 16,542 17,372 44,974 43,666
Net Profit 1,075 3,095 795 137
⦁ For financial year (FY) 2020, calculate the following ratios for Optus and Vodafone:
⦁ profit margin
⦁ working capital
⦁ current ratio
⦁ debt to total assets
⦁ cash debt coverage
⦁ return on assets
Ensure you show the formula and all your workings. You must use the same formula from lectures and text for this subject. (6 marks)
