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ACC506 Accounting Fundamentals

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Question:

The 30 June 2017 stocktake revealed $7,500 worth of inventory (at cost) which included $300 of obsolete stock. Discrepency is assumed to be related to theft.
The next wages payment will occur on 9 July 2017. This payment will include wages of $3,250 for the four-week period indicated below.In addition, you are aware of the following organisational policies:
Assets are depreciated using the method that maximises the expense in the initial years (and minimises the expense in later years).
Office furniture is depreciated at a rate of 30%.
Doubtful debts are adjusted at 30 June each year, so that the provision equates to 5% of the accounts receivable balance at the end of the year. 

You have just received a query from E Ferguson, expressing some concerns the partners have about the business. These concerns include:
1. The partners are unhappy about the high costs of wages for their bookkeeper. E Furguson has asked you to explain whether it is necessary for the bookkeeper to prepare a bank reconciliation every month.
2. The partnership has been using a perpetual inventory system based on the average cost method of inventory valuation. The partners are concerned that this does not allow them to report their financial performance and position in the most ‘positive light’ (i.e. they feel another method may result in financial statements that are more attractive to future investors and lenders).
3. The partnership is considering making a substantial investment into manufacturing machinery which would allow them to manufacture their own inventory from rawmaterials, rather than purchase inventory ready-made. However, they are concerned about how much of their investment will be recorded as an asset and how much will be expensed. Details of the proposed purchase are as follows

a) Purchase price (before discount) $20,000
b) Trade discount ($3,000)
c) Freight $2,200
d) Installation costs $650
e) Initial training costs (for machine operator) $570
f) Initial testing costs $500
g) Costs to reorganise the company’s inventory department $6,000
4. In addition, the partners are also concerned that their businesses performance is not as good as that of their competitors: G Henderson, I Johnson & K Lairy who reported a current ratio of $1.60 (p.186), a gross grofit percentage of 48% (p.242), and a days in inventory ratio of 40 days. 
 
a)Prepare adjustment journal entries to account for the 6 dot points above (note: no adjustments are required for rent or advertising expenses; these costs relate entirely to the 2017 financial year).
d) Post the adjustment journal entries (which will include updating the ledger accounts you have previously prepared, and creating new accounts as required); you will also need to update the trial balance
e) Prepare closing journal entries (do not post these)
f) Prepare financial statements:
(1) Income Statement,
(2) Statement of Changes in Equity, and
(3) Balance Sheet).

g) Calculate the following financial ratios:
(1) Current ratio,
(2) Gross Profit percentage, and
(3) Days in inventory ratio (note: use ending inventory balance as average inventory for this calculation). 
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