1. Practice and Revision

2. Practice Activities
Complete Exercise pg 147.

6. Reversing Entries

7. Practice Activities Now calculate: Gross Profit Ratio Net Profit Ratio
Return on Owners' Equity Ratio
Make sure you show all working.
Now you need to:
Write a report to the owner of the business
Make a comment on each ratio in regard to last year's results (if available) and the industry average
Provide recommendations as to how the business could improve

8. Practice Activities Report: Comments:
From the calculation of ratios, it is clear that there is a significant problem in terms of earning capacity and subsequent returns from the business.
The gross profit ratio is just below the industry average. The relationship between sales and cost of goods sold needs to be looked at to help the business in the future.
The net profit ratio is also below the industry average and much greater efforts will need to be taken to ensure costs and expenses are controlled or reduced.
Return on owners equity is almost half the industry average, due to net profit declining. This does not represent good use of the capital employed compared with competing businesses. It is a poor return when compared to alternative uses of funds available.

9. Practice Activities Report: Recommendations:
The major problem in the gross profit area is the high value of cost of goods sold. It is recommended that the business try to cut costs by better purchasing arrangements (cheaper suppliers)m, reducing storage costs and increasing turnover rates, and reducing theft or wastage where possible.
Net profit is still below the industry average, and expenses such as Advertising, vehicles and sales salaries need investigation and possible reductions.
If net profit can be increased, this will lead to an increase in owners' equity. To increase net profit, it may be worthwhile looking at price changes to try and increase sales. You must be careful not to withdraw too much money from the business, especially if profits are not increasing.

10. Practice Activities
Exercise 4.40 on page 156

11. Practice Activities

12. Practice Activities

13. Practice Activities

14. Practice Activities

15. Practice Activities

16. Practice Activities

17. Revision Questions Balance Day Adjustments
Complete Activity Questions:
4.4, 4.5, 4.6 and 4.7 on page 112

18. Revision Questions- Balance Day Adjustments
Accrued revenues and prepaid expenses are assets because both of these balance day adjustments mean that money is owing to the business by some other organisation.
Accrued revenues are revenues that have been earned in the current accounting period but have not yet been received or recorded. At balance day, they are owing to the business, and will be received at some later time (i.e. assets).
Prepaid expenses are expenses that have been paid and recorded in the current accounting period but will not be incurred until a future accounting period. At balance day, they would be owed (back) to the business, and their benefits will occur in some future accounting period (i.e. insurance is paid upfront at start of year. By the time June 30 comes around, only part of this amount would have been used up).
Accrued revenues and prepaid expenses are therefore clearly assets at balance date

19. Revision Questions- Balance Day Adjustments
Accrued expenses and unearned revenues are liabilities because both of these balance day adjustments mean that money is owed by the business to some other organisation.
Accrued expenses are expenses incurred in the current accounting period but not yet paid or recorded. At balance date, they are owed by the business, and will have to be paid at some later time (i.e. liabilities).
Unearned revenues or revenues received in advance are revenues that have been received and recorded in the current accounting period, but which will not be earned until a future accounting period. At balance date, and until such time as they are
actually earned, they are owed (back) to another organisation (i.e. such as rent received in advance).
Accrued expenses and unearned revenues are therefore clearly liabilities at balance date

20. Revision Questions- Balance Day Adjustments

21. Revision Questions- Balance Day Adjustments
1500
1500

22. Revision Questions- Balance Day Adjustments
Question 4.9 on page 118
What is the difference between the gross profit and the net profit for a business?
Gross profit (or loss) is the difference between the revenue earned from the sale of inventories and the cost of goods sold. A gross profit will result if the revenues from (net) sales are greater than the cost of goods sold expense.
Net profit (or loss) is the final profit (or loss) made by a business after taking into account all revenues and expenses for an accounting period. A net profit will result if all revenues earned by the business are greater than all expenses incurred for the
period.

23. Revision Questions- Income Statements
Complete Question 4.22 on page 125 of text
- Think about the additional information provided and what this might mean when preparing the statement!!!!

24. Revision Questions- Income Statements

25. Revision Questions- GST Clearing Entries
Question 4.24 (a) on page 128 of text
Explain the purpose of a GST Clearing account
The purpose of preparing a GST clearing account is to:
determine the net amount of GST that is payable or refundable for a period
to clear the GST collected and GST credits received accounts, so they are ready to begin the next accounting period
and to show the net amount payable or refundable for GST as one figure in the statement of financial position.

26. Revision Questions-

27. Revision Questions-

28. Revision Questions- What are Reversing Entries?
4.30
Reversing entries are entries that are the reverse of adjusting entries made at the end of an accounting period for prepayments and accruals.
A reversing entry needs to be made at the beginning of the new accounting period, following any adjustments.
Reversing entries are made for two reasons:
• to ensure that ‘correct’ amounts for revenue and expenses are taken into account in the period to which they actually refer
• to cancel the temporary asset and liability accounts created on balance day by balance day adjustments (i.e. prepayments and
accruals).

29. Revision Questions- What do each of the ratios show?
Gross Profit Ratio
The gross profit ratio is the ratio or percentage of gross profit to net sales
It indicates the margin of profit available to cover expenses
A high gross profit ratio allows the business to cover all expenses, earn a reasonable net profit and provide a satisfactory return to investors.
Net Profit Ratio
The net profit ratio is the ratio or percentage of net profit to net sales
It shows how much of each dollar of sales represents net operating profit
It clearly indicates the margin of profitability of the firm

30. Revision Questions- What do each of the ratios show?
Rate of Return on Owner's Equity Ratio
The rate of return on owner's equity is the ratio or percentage of net profit to average owner's equity over the period.
The ratio indicates the rate of return on owner's equity invested in the business.
Return on owner's equity should be considered relative to current interest rates, and the degree of risk, in order to evaluate profitability.