STATEMENT OF CASH FLOWS

NCEA LEVEL 3 ACCOUNTING
By Elizabeth Pitu
BOOK 3
STATEMENTS
INTERPRETATION
and the
FRAMEWORK
Answer Book

Notes, Examples and
Exercise Answers

YOUR TURN – Cash From Operating Activities – page 6
Accounts Receivable
Balance 18,000 Dr
Sales 420,000 438,000 Dr
Bad debts 2,000 436,000 Dr
CASH 414,000 22,000 Dr
Inventory
Balance 38,000 Dr
Cost of Goods Sold 250,000 212,000 Cr
Accounts Payable 252,000 40,000 Dr
Accounts Payable
Balance 22,000 Cr
Inventory 252,000 274,000 Cr
Discount Received 1,000 273,000 Cr
CASH 249,000 24,000 Cr
Accrued Expense
Balance 700 Cr
Wages 60,000 60,700 Cr
CASH 59,900 800 Cr
Prepayments
Balance 500 Dr
Insurance 5,000 4,500 Cr
CASH 4,900 400 Cr
Revenue in Advance
Balance 500 Cr
Rent 12,000 11,500 Dr
CASH 12,500 1,000 Cr
Little Books
Statement of Cash Flows (extract)
for the year ended 31 March 2004
Cash Flows from Operating Activities
Cash was provided from
Cash from customers 414,000
Cash from rent 12,500 426,500
Cash was applied to
Cash to suppliers 249,000
Cash to employees 59,900
Cash for insurance 4,900
Cash for interest 4,000
Cash for general expenses 36,000 353,800
Net Cash Inflow/Outflow from Operating Activities 72,700
Level 3 Accounting Cash Flow Statements – Answers page 1

YOUR TURN – Investing and Financing Activities – page 10
Big Books Ltd
Equipment
Balance 32,000 Dr
Cost of sold 6,000 26,000 Dr
Purchase CASH 30,000 56,000 Dr
Retained Earnings
Balance 43,300 Cr
Performance Summary (NSAT) 68,000 113,300 Cr
Dividends CASH 52,900 58,400 Cr
Note what each of the following changes indicate:
Loan raised a loan $5,000
Mortgage repaid mortgage $6,000
Paid-in capital issued shares $10,000
Calculate the amount received for the equipment sold
Carrying amount $4,000
Loss on sale $1,000
Cash received $3,000
Now complete the investing and financing sections of Big Books Ltd cash flow statement.
Big Books Ltd
Cash Flow Statement (extract)
For the year ended 31 March 2004
Cash Flows from Investing Activities
Cash was provided from
Sale of equipment 3,000
Cash was applied to
Purchase of equipment -30,000
Net Cash Inflow/Outflow from Investing Activities -27,000
Cash Flows from Financing Activities
Cash was provided from
Loan raised 5,000
Share issue 10,000 15,000
Cash was applied to
Repaid mortgage 6,000
Pay dividends 52,900 58,900
Net Cash Inflow/Outflow from Financing Activities -43,900
Level 3 Accounting Cash Flow Statements – Answers page 2

YOUR TURN – page 11
Dealing with a Share Repurchase
Equity 2003 2004
Paid in Capital 100,000 90,000
Retained Earnings 39,000 69,000
5,000 shares were repurchased at a fair value of $4.50.
Net surplus after tax was $70,000.
Reconstruct the retained earnings account to determine dividends paid:
01/04 Opening balance 39,000 Cr
31/03 Performance summary (NSAT) 70,000 109,000 Cr
Bank (repurchase of shares) 12,500 96,500 Cr
CASH for dividends 27,500 69,000 Cr
In the Statement of Cash Flows:
Cash Flows from Financing Activities
Cash was applied to
Repurchase shares 22,500
Pay dividends 27,500
Note the repurchase of shares is just one amount for the total paid to shareholders to repurchase the
shares.
Level 3 Accounting Cash Flow Statements – Answers page 3

Exercise One – Year One – page 13-14
PRACTICE EXERCISES
Tinies Toys 2001 Working Ledgers
Accounts Receivable
Balance 8,500 Dr
Sales 92,500 101,000 Dr
Cash 89,000 12,000 Dr
Inventory
Balance 9,800 Dr
Cost of goods sold 50,000 40,200 Cr
Accounts payable 50,600 10,400 Dr
Accounts Payable
Balance 5,000 Cr
Inventory 50,600 55,600 Cr
Cash 49,500 6,100 Cr
Accrued Expense
balance - Cr
general expenses 14,500 14,500 Cr
cash 13,000 1,500 Cr
Equipment
Balance 20,000 Dr
Cost of sale 4,000 16,000 Dr
Purchase 11,500 27,500 Dr
Equity
Balance 27,300 Cr
Profit for the year 22,200 49,500 Cr
Drawings 17,500 32,000 Cr
Loan raised
Opening balance 8,000
Closing Balance 10,500
cash 2,500
Level 3 Accounting Cash Flow Statements – Answers page 4

Tinies Toys
Statement of Financial Cash Flows
for year ended 31 March 2001
Cash from Operating Activities
Cash from customers 89,000
Less cash paid to suppliers (49,500)
Less cash paid for expenses (13,000)
Less cash paid for interest (1000)
Net cash from operating activities 25,500
Cash from Investing Activities
Sale of equipment 2000
Less purchase of equipment (11,500)
Net cash from investing activities (9,500)
Cash from Financing Activities
Loan raised 2,500
Cash drawings (17,500)
Net cash from financing activities (15,000)
Net cash inflow 1,000
Add Bank balance at beginning 6,000
Equals bank balance at end 7,000
Exercise One – Year Two – page 15-16
Tinies Toys 2002 Working Ledgers
Accounts Receivable
Balance 12,000 Dr
Sales 132,000 144,000 Dr
Discount Allowed 500 143,500 Dr
Cash 128,000 15,500 Dr
Inventory
Balance 10,400 Dr
Cost of goods sold 80,000 69,600 Cr
Accounts payable 81,600 12,000 Dr
Accounts Payable
Balance 6,100 Cr
Inventory 81,600 87,700 Cr
Cash 79,000 8,700 Cr
Accrued Expense
balance 1,500 Cr
general expenses 14,500 16,000 Cr
Transfer to Prepayments 13,500 2,500 Cr
Level 3 Accounting Cash Flow Statements – Answers page 5

Prepayments
balance 0 Dr
expenses 13,500 13,500 Cr
cash 15,500 2,000 Dr
Equipment
Balance 27,500 Dr
Cost of sale 4,500 23,000 Dr
Purchase 7,000 30,000 Dr
Loan repaid
bal beg 10,500
bal end 9,500
cash -1,000
Equity
Balance 32,000 Cr
Profit for the year 32,100 64,100 Cr
Drawings 28,600 35,500 Cr
Tinies Toys
Statement of cash flows
for the year ended 31 March 2002
Cash from operating activities
Cash from customers 128,000
Cash paid to suppliers -79,000
Cash paid for interest -900
Cash paid for expenses -15,500
Net cash from operations 32,600
Cash from investing activities
Sale of equipment 2,000
Purchase of equipment -7,000
Net cash from investing -5,000
Cash from financing activities
Loan repaid -1,000
Drawings -28,600
Net cash from financing -29,600
Net cash inflow -2,000
Add bank balance beginning 7,000
Equals bank balance end 5,000
Level 3 Accounting Cash Flow Statements – Answers page 6

Exercise One – Year Three – page 17-18
Tinies Toys 2003
Accounts Receivable
Balance 15,500 Dr
Sales 175,000 190,500 Dr
Disc All'd/Baddebts 2,200 188,300 Dr
Cash 170,500 17,800 Dr
Inventory
Balance 12,000 Dr
Cost of goods sold 95,000 83,000 Cr
Accounts payable 102,000 19,000 Dr
Accounts Payable
Balance 8,700 Cr
Inventory 102,000 110,700 Cr
Discount received 3,000 107,700 Cr
Cash 98,500 9,200 Cr
Accrued Expense
balance 2,500 Cr
general expenses 18,000 20,500 Cr
to prepaid 18,500 2,000 Cr
Prepayments
balance 2,000 Dr
expenses 18,500 16,500 Cr
cash 19,700 3,200 Dr
Equipment
Balance 30,000 Dr
Cost of sale 8,000 22,000 Dr
Purchase cost 10,000 32,000 Dr
Equipment purchase cash
Loan repaid
Cost of purchase 10,000 bal beg 9,500
less trade in 1,000 bal end 9,000
cash paid 9,000 cash (500)
Equity
Balance 35,500 Cr
Profit for the year 56,400 91,900 Cr
Drawings 39,400 52,500 Cr
Level 3 Accounting Cash Flow Statements – Answers page 7

Tinies Toys
Statement of cash flows
for the year ended 31 March 2003
Cash from operating expenses
Cash from customers 170,500
Cash paid to suppliers (98,500)
Cash paid for interest (700)
Cash paid for expenses (19,700)
Net cash from operations 51,600
Cash from investing activities
Purchase of equipment (9,000)
Net cash from investing (9,000)
Cash from financing
Loan repaid (500)
Drawings (39,400)
Net cash from financing activities (39,900)
Net cash inflow 2,700
Add bank balance beginning 5,000
Equals bank balance end 7,700
Exercise Two – page 19
Evergreen Ltd Workings
Accounts Receivable
Balance 65,000 Dr
Sales 825,000 890,000 Dr
Bad debts 0 890,000 Dr
Cash 790,000 100,000 Dr
Inventory
Balance 105,000 Dr
Cost of goods sold 500,000 395,000 Cr
Accounts payable 485,000 90,000 Dr
Accounts Payable
Balance 50,500 Cr
Inventory 485,000 535,500 Cr
Cash 477,000 58,500 Cr
Taxation payable
balance 2,000 Cr
taxation expense 45,000 47,000 Cr
cash 40,000 7,000 Cr
Level 3 Accounting Cash Flow Statements – Answers page 8

Buildings
Mortgage
Opening Balance 200,000 beg bal 100,000
Balance end 325,000 end bal 125,000
Purchase 125,000 raised 25,000
Retained earnings
Balance 135,000 Cr
Profit for the year 97,500 232,500 Cr
Dividends 30,000 202,500 Cr
Evergreen Ltd
Statement of cash flows
for the year ended 31 March 2004
Cash from operating activities
Cash was provided from:
Cash from customers 790,000
Cash was applied to:
Cash paid to suppliers -477,000
Cash paid for interest -12,000
Cash paid for expenses -148,000
Cash paid for tax -40,000
Net cash from operating activities 113,000
Cash from investing activities
Cash was applied to:
Purchase buildings -125,000
Net cash from investing activities -125,000
Cash from financing activities
Cash was provided from:
Mortgage raised 25,000
Cash was applied to:
Dividends -30,000
Net cash from financing activities -5,000
Net cash inflow -17,000
Add bank balance beginning 60,000
Equals bank balance end 43,000
Level 3 Accounting Cash Flow Statements – Answers page 9

Exercise Three – page 20
Spendit Ltd
Workings
Accounts Receivable $000 $000 $000
Balance 38 Dr
Sales 450 488 Dr
Bad debts 1 487 Dr
Cash 446 41 Dr
Inventory
Balance 91 Dr
Cost of goods sold 225 134 Cr
Accounts payable 218 84 Dr
Accounts Payable
Balance 24 Cr
Inventory 218 242 Cr
Discount received 2 240 Cr
Cash 208 32 Cr
Taxation payable
balance 4 Cr
taxation expense 35 39 Cr
cash 37 2 Cr
Accrued Expenses (wages)
Balance 6 Cr
wage expense 36 42 Cr
Cash 32 10 Cr
Prepayments
Balance 4 Dr
General expenses 33 29 Cr
cash 38 9 Dr
Property, Plant and Equipment
Balance 220 Dr
Cost of trade in 20 200 Dr
Purchase cost 55 255 Dr
Cash for purchase
Cost of purchase 55
Trade in allowance 4 (note $6,000 - $2,000)
Cash for purchase 51
Retained earnings
Balance 98 Cr
Profit for the year 89 187 Cr
Dividends 49 138 Cr
Level 3 Accounting Cash Flow Statements – Answers page 10

Additional workings
Investments purchased $000 Debentures repaid $000
Opening Balance 0 Opening Balance 100
balance end 40 balance end 75
cash 40 cash -25
Issued capital
Opening Balance 120
balance end 140
cash - share issue 20
Spendit Ltd
Statement of cash flows
for the year ended 31 March 2005
Cash from operating activities $000 $000
Cash was provided from:
Cash from customers 446
Cash was applied to:
Cash paid to suppliers -208
Cash paid for wages -32
Cash paid for interest -7
Cash paid for expenses -38
Cash paid for tax -37
Net cash from operating activities 124
Cash from investing activities
Cash was applied to:
Cash paid to purchase investments -40
Purchase plant and machinery -51
Net cash from investing activities -91
Cash from financing activities
Cash was provided from:
Shares issued 20
Cash was applied to:
Debentures repaid -25
Dividends -49
Net cash from financing -54
Net cash inflow -21
Add bank balance beginning 13
Equals bank balance end -8
Level 3 Accounting Cash Flow Statements – Answers page 11

Exercise Four – page 21
Akarana
Workings
Accounts Receivable
Balance 67,000 Dr
Sales 810,000 877,000 Dr
Bad debts 3,000 874,000 Dr
Cash 804,000 70,000 Dr
Inventory
Balance 51,000 Dr
Cost of goods sold 460,000 409,000 Cr
Accounts payable 459,000 50,000 Dr
Accounts Payable
Balance 37,000 Cr
Inventory 459,000 496,000 Cr
Cash 463,500 32,500 Cr
Taxation payable
balance 9,500 Cr
taxation expense 49,500 59,000 Cr
cash 53,500 5,500 Cr
Accrued Expense interest
balance 3,000 Cr
interest expense 17,000 20,000 Cr
cash 14,000 6,000 Cr
Prepayments
balance 3,600 Dr
general expenses 153,500 149,900 Cr
cash 153,900 4,000 Dr
Equipment
Balance 330,000 Dr
Cost of sale 80,000 250,000 Dr
Purchase 100,000 350,000 Dr
Retained earnings
Balance 159,000 Cr
Profit for the year 95,000 254,000 Cr
Dividends 60,000 194,000 Cr
Cash received for equipment sold
Buildings Purchased
Carrying amount 6,000 bal beg 275,000
Loss on sale 1,000 bal end 380,000
Cash 5,000 purchase 105,000
Paid in Capital
Mortgage raised
Opening Balance 290,000 bal beg 100,000
balance end 340,000 bal end 200,000
cash - share issue 50,000 cash 100,000
Level 3 Accounting Cash Flow Statements – Answers page 12

Akarana Ltd
Statement of cash flows
for the year ended 31 March 2005
Cash from operating activities
Cash was provided from:
Cash from customers 804,000
Cash was applied to:
Cash paid to suppliers - 463,500
Cash paid for interest - 14,000
Cash paid for expenses - 153,900
Cash paid for tax - 53,500
Net cash from operating activities 119,100
Cash from investing activities
Cash was provided from:
Cash from sale of plant 5,000
Cash was applied to:
Purchase buildings - 105,000
Purchase equipment - 100,000
Net cash from investing activities - 200,000
Cash from financing activities
Cash was provided from:
Shares issued 50,000
Mortgage raised 100,000
Cash was applied to:
Dividends - 60,000
Net cash from financing activities 90,000
Net cash inflow 9,100
Add bank balance beginning 28,900
Equals bank balance end 38,000
Level 3 Accounting Cash Flow Statements – Answers page 13

Exercise Five – page 22
Alpha Ltd
Working ledgers
Accounts Receivable
Balance 53,000 Dr
Sales 540,000 593,000 Dr
Bad debts 3,700 589,300 Dr
Cash 519,300 70,000 Dr
Inventory
Balance 70,000 Dr
Cost of goods sold 279,000 209,000 Cr
Accounts payable 286,000 77,000 Dr
Accounts Payable
Balance 54,000 Cr
Inventory 286,000 340,000 Cr
Discount received 4,000 336,000 Cr
Cash 267,000 69,000 Cr
Taxation payable
balance 4,000 Cr
taxation expense 43,000 47,000 Cr
cash 44,500 2,500 Cr
Accrued Revenue (dividends)
Opening Balance 3,000 Dr
Dividends received 6,000 9,000 Dr
Cash 5,000 4,000 Dr
Accrued Expense interest
Opening Balance 3,000 Cr
expense 18,600 21,600 Cr
Cash 15,300 6,300 Cr
Prepayment
Opening Balance 2,000 Dr
Expense 78,200 76,200 Cr
Cash 79,200 3,000 Dr
Plant and Machinery
Balance 220,000 Dr
Cost of sale 25,000 195,000 Dr
Purchase 70,000 265,000 Dr
Level 3 Accounting Cash Flow Statements – Answers page 14

Machinery sold
Shares in KPR Ltd
Carrying amount 19,000 bal beg 30,000
gain on sale 3,000 bal end 40,000
Cash 22,000 purchase 10,000
Buildings
Opening Balance 200,000
balance end 340,000
purchase 140,000
Paid-in Capital
Debentures raised
Opening Balance 210,000 bal beg 100,000
balance end 250,000 bal end 210,000
issued shares 40,000 cash 110,000
Retained earnings
Balance 95,000 Cr
Profit for the year 102,500 197,500 Cr
Dividends 74,000 123,500 Cr
Alpha Ltd
Statement of Cash Flows
for the year ended 31 March 2005
Cash from operating activities
Cash was provided from:
Cash from customers 519,300
Cash from dividends received 5,000
Cash was applied to:
Cash paid to suppliers - 267,000
Cash paid for interest - 15,300
Cash paid for expenses - 79,200
Cash paid for tax - 44,500
Net cash from operating activities 118,300
Cash from investing activities
Cash was provided from:
Cash from sale of machinery 22,000
Cash was applied to:
Purchase machinery - 70,000
Purchase shares in KPR Ltd - 10,000
Purchase of buildings - 140,000
Net cash from investing activities - 198,000
Cash from financing activities
Cash was provided from:
Debentures raised 110,000
Shares issue 40,000
Cash was applied to:
Dividends - 74,000
Net cash from financing activities 76,000
Net cash inflow - 3,700
Add bank Opening Balance 1,000
Equals bank balance end - 2,700
Level 3 Accounting Cash Flow Statements – Answers page 15

Exercise Six – page 23
Chandlers Ltd
Working ledgers
Accounts Receivable
Balance 45,000 Dr
Sales 600,000 645,000 Dr
Bad debts 2,000 643,000 Dr
Cash 612,000 31,000 Dr
Inventory
Balance 41,000 Dr
Cost of goods sold 290,000 249,000 Cr
Accounts payable 304,000 55,000 Dr
Accounts Payable
Balance 43,000 Cr
Inventory 304,000 347,000 Cr
Discount received 3,000 344,000 Cr
Cash 295,000 49,000 Cr
Taxation payable
balance 8,000 Cr
taxation expense 50,000 58,000 Cr
cash 53,000 5,000 Cr
Accrued Revenue (dividends)
Opening Balance 4,000 Dr
Dividends received 10,000 14,000 Dr
Cash 8,000 6,000 Dr
Accrued Expense (interest)
Opening Balance 3,000 Cr
expense 4,000 7,000 Cr
Cash 2,000 5,000 Cr
Prepayment
Opening Balance 4,000 Dr
Expense 140,000 136,000 Cr
Cash 138,000 2,000 Dr
Property, Plant and Equipment
Balance 105,000 Dr
Cost of sale 25,000 80,000 Dr
Purchase 100,000 180,000 Dr
Level 3 Accounting Cash Flow Statements – Answers page 16

Property, Plant & Equipment sold Shares in FCA Ltd
Carrying amount 16,000 bal beg 50,000
Loss on sale -2,000 bal end 70,000
Cash 14,000 purchase 20,000
Paid-in Capital
Loan raised
Opening Balance 100,000 bal beg 47,000
balance end 124,000 bal end 60,000
issued shares 24,000 cash 13,000
Retained earnings
Balance 28,000 Cr
Profit for the year 106,000 134,000 Cr
Dividends 54,000 80,000 Cr
Chandlers Ltd
Statement of Cash Flows
for the year ended 30 June 2007
Cash from operating activities
Cash was provided from:
Cash from customers 612,000
Cash from dividends received 8,000
Cash was applied to:
Cash paid to suppliers -295,000
Cash paid for interest -2,000
Cash paid for expenses -138,000
Cash paid for tax -53,000
Net cash from operating activities 132,000
Cash from investing activities
Cash was provided from:
Cash from sale of property, plant & equipment 14,000
Cash was applied to:
Purchase of property, plant & equipment -100,000
Purchase shares in FCA Ltd -20,000
Net cash from investing activities -106,000
Cash from financing activities
Cash was provided from:
Loan raised 13,000
Shares issue 24,000
Cash was applied to:
Dividends -54,000
Net cash from financing activities -17,000
Net cash inflow 9,000
Add bank Opening Balance 5,000
Equals bank balance end $14,000
Level 3 Accounting Cash Flow Statements – Answers page 17

Exercise Seven – page 24
Parke Ltd Ltd
Working ledgers
Accounts Receivable
Balance 710,000 Dr
Sales 2,600,000 3,310,000 Dr
Bad debts 5,000 3,305,000 Dr
Cash 2,455,000 850,000 Dr
Inventory
Balance 500,000 Dr
Cost of goods sold 1,600,000 1,100,000 Cr
Accounts payable 1,810,000 710,000 Dr
Accounts Payable
Balance 690,000 Cr
Inventory 1,810,000 2,500,000 Cr
Cash 1,710,000 790,000 Cr
Taxation payable
balance 10,000 Cr
taxation expense 130,000 140,000 Cr
cash 120,000 20,000 Cr
Accrued Revenue (interest)
Opening Balance 5,000 Dr
Interest received 15,000 20,000 Dr
Cash 10,000 10,000 Dr
Accrued Expense
Opening Balance 50,000 Cr
expense 468,000 518,000 Cr
Transfer to prepayments 508,000 10,000 Cr
Prepayment
Opening Balance 80,000 Dr
Expense 508,000 428,000 Cr
Cash 468,000 40,000 Dr
Machinery
Balance 1,000,000 Dr
Cost of sale 25,000 975,000 Dr
Purchase 325,000 1,300,000 Dr
Level 3 Accounting Cash Flow Statements – Answers page 18

Machinery purchased
Buildings purchased
Cost of purchase 325,000 bal beg 150,000
Trade-in allowance 12,000 bal end 180,000
Cash paid for purchase 313,000 purchase 30,000
Paid-in Capital
Mortgage repaid
Opening Balance 1,120,000 bal beg 600,000
balance end 1,540,000 bal end 500,000
issued shares 420,000 cash 100,000
Retained earnings
Balance 425,000 Cr
Profit for the period 265,000 690,000 Cr
Dividends 100,000 590,000 Cr
Parke Ltd ‘000 ‘000
Statement of Cash Flows
for the year ended 31 March 2006
Cash from operating activities
Cash was provided from:
Cash from customers 2,455
Cash from interest received 10
Cash was applied to:
Cash paid to suppliers -1,710
Cash paid for interest -9
Cash paid for expenses -468
Cash paid for tax -120
Net cash from operating activities 158
Cash from investing activities
Cash was provided from:
Cash was applied to:
Purchase of Machinery -313
Purchase of Buildings -30
Net cash from investing activities -343
Cash from financing activities
Cash was provided from:
Shares issue 420
Cash was applied to:
Mortgage repaid -100
Dividends -100
Net cash from financing activities 220
Net cash inflow 35
Add bank Opening Balance 440
Equals bank balance end $475
Level 3 Accounting Cash Flow Statements – Answers page 19

Exercise Eight – page 25
Rawlings Ltd
Workings
Accounts Receivable $000 $000 $000
Balance 370 Dr
Sales 3,000 3,370 Dr
Bad debts 10 3,360 Dr
Discount allowed 3 3,357 Dr
Cash 3,017 340 Dr
Inventory
Balance 360 Dr
Cost of goods sold 1,430 -1,070 Cr
Accounts payable 1,470 400 Dr
Accounts Payable
Balance 350 Cr
Inventory 1,470 1,820 Cr
Cash 1,410 410 Cr
Taxation payable/receivable
balance 4 Cr
taxation expense 210 214 Cr
cash 217 3 Dr
Accrued Expense
Opening Balance 14 Cr
expense 600 614 Cr
transfer to prepayment 596 18 Cr
Prepayment
Opening Balance 8 Dr
Transfer from accrued 596 588 Cr
Cash 593 5 Dr
Machinery
Balance 1,600 Dr
Cost of sale 80 1,520 Dr
Purchase 680 2,200 Dr
Machinery sold
Carrying amount 10
gain on sale 2
Cash 12
Retained earnings $000 $000 $000
Balance 500 Cr
Profit for the period 465 965 Cr
Repurchase of shares 10 955 Cr
Dividends 145 810 Cr
Level 3 Accounting Cash Flow Statements – Answers page 20

Rawlings Ltd ‘000 ‘000
Statement of Cash Flows
for the year ended 31 March 2005
Cash from operating activities
Cash was provided from:
Cash from customers 3,017
Cash was applied to:
Cash paid to suppliers -1,410
Cash paid for interest -34
Cash paid for expenses -593
Cash paid for tax -217
Net cash from operating activities 763
Cash from investing activities
Cash was provided from:
Cash from sale of machinery 12
Cash was applied to:
Purchase machinery -680
Net cash from investing activities -668
Cash from financing activities
Cash was provided from:
Debentures raised 80
Cash was applied to:
Shares repurchased -40
Dividends -145
Net cash from financing activities -105
Net cash inflow -10
Add bank Opening Balance 60
Equals bank balance end 50
Level 3 Accounting Cash Flow Statements – Answers page 21

Exercise Nine – page 26
Spiders Ltd (abbreviated workings)
Accounts Receivable
balance 370
sales 2800 3170
bad debts/discount allowed 9 3161
cash 2821 340
Inventory
balance 360
cost of goods sold 1200 -840
purchases 1240 400
Accounts Payable
balance 350
purchases 1240 1590
cash 1180 410
Expenses
performance 520
- prepaid beg -4
+ prepaid end 7
+ accrued beg 12
- accrued end -10
Cash for expenses 525
tax cash (210 +2 – 4) 208
Retained earnings
balance 500
Profit for the period 640 1140
bank 20 1120
dividends 450 570
Plant and Equipment
bal beg 1600
-traded in -100
bal end 2000
cost of purchase 500
less trade in allowance
(40-11) -29
cash paid 471
Level 3 Accounting Cash Flow Statements – Answers page 22

Spiders Ltd ‘000 ‘000
Statement of Cash Flows
for the year ended 31 March 2005
Cash from operating activities
Cash was provided from:
Cash from customers 2,821
Cash from dividends received 7
Cash was applied to:
Cash paid to suppliers -1,180
Cash paid for interest -25
Cash paid for expenses -525
Cash paid for tax -208
Net cash from operating activities 890
Cash from investing activities
Cash was provided from:
Cash was applied to:
Purchase of machinery -471
Net cash from investing activities -471
Cash from financing activities
Cash was provided from:
Debentures raised 80
Cash was applied to:
Shares repurchased -50
Dividends -457
Net cash from financing activities -427
Net cash inflow -8
Add bank Opening Balance 60
Equals bank balance end 52
Level 3 Accounting Cash Flow Statements – Answers page 23

Exercise Ten – page 27
Wastemot Ltd
(abbreviated workings)
Accounts Receivable ‘000 ‘000 ‘000
Balance 80 Dr
Sales 720 800 Dr
Bad debts 3 797 Dr
Cash 712 85 Dr
Inventory
Balance 91 Dr
Cost of goods sold 430 339 Cr
Accounts payable 423 84 Dr
Accounts Payable
Balance 24 Cr
Inventory 423 447 Cr
Cash 417 30 Cr
Expenses
Other Expenses 25
-prepayments beg -9
+prepayments end 5
Cash paid for other exps 21
Wages 45
-accrued expenses end -5
+accrued expenses beg 6
Cash paid for Wages 46
Tax (70+4-7) 67
Share repurchase
Change in paid in capital 20
Number of shares repurchased 10
Total value of share repurchase 24
Retained Earnings 4
Retained Earnings
Balance 198
Net surplus after tax 124 322
Bank 4 318
Dividends 80 238
Level 3 Accounting Cash Flow Statements – Answers page 24

Wastenot ‘000 ‘000
Statement of Cash Flows
for the year ended 31 March 2006
Cash from operating activities
Cash was provided from:
Cash from customers 712
Cash was applied to:
Cash paid to suppliers -417
Cash paid for interest -7
Cash paid for wages -46
Cash paid for expenses -21
Cash paid for tax -67
Net cash from operating activities 154
Cash from investing activities
Cash was provided from:
Cash from sale of plant 6
Cash was applied to:
Purchase of plant and machinery -35
Purchase of Land -40
Net cash from investing activities -69
Cash from financing activities
Cash was provided from:
Debentures raised 25
Cash was applied to:
Shares repurchased -24
Dividends -80
Net cash from financing activities -79
Net cash inflow 6
Add bank Opening Balance 3
Equals bank balance end $9
Level 3 Accounting Cash Flow Statements – Answers page 25

Exercise Eleven – page 28
Pacific Products
Working ledgers
Accounts Receivable
Balance 25,000 Dr
Sales 540,000 565,000 Dr
Bad debts 2,000 563,000 Dr
Cash 542,000 21,000 Dr
Inventory
Balance 41,000 Dr
Cost of goods sold 275,000 234,000 Cr
Accounts payable 279,000 45,000 Dr
Accounts Payable
Balance 30,000 Cr
Inventory 279,000 309,000 Cr
Cash 259,000 50,000 Cr
Taxation payable
balance 8,000 Cr
taxation expense 25,000 33,000 Cr
cash 28,000 5,000 Cr
Accrued Revenue (dividends)
Opening Balance 4,000 Dr
Dividends received 10,000 14,000 Dr
Cash 8,000 6,000 Dr
Accrued Expense (wages and salaries)
Opening Balance 10,000 Cr
expense 59,000 69,000 Cr
Cash 57,000 12,000 Cr
Investments held for trading
Opening Balance 50,000 Dr
Cost of sale 15,000 35,000 Dr
Purchase 25,000 60,000 Dr
Machinery and Equipment
Balance 105,000 Dr
Cost of sale 25,000 80,000 Dr
Purchase 70,000 150,000 Dr
Level 3 Accounting Cash Flow Statements – Answers page 26

Machinery sold
Paid in capital
Carrying amount 16,000 bal beg 100,000
Loss on sale -2,000 bal end 90,000
Cash 14,000 Share repurchase 10,000
Retained earnings
Balance 20,000 Cr
Profit for the period 75,000 95,000 Cr
Bank 15,000 80,000 Cr
Dividends 31,000 49,000 Cr
Pacific Products Ltd
Statement of Cash Flows
for the year ended 30 June 2007
Cash from operating activities
Cash was provided from:
Cash from customers 542,000
Cash from dividends received 8,000
Cash was applied to:
Cash paid to suppliers -259,000
Cash paid for interest -4,000
Cash paid for expenses -94,000
Cash paid for wages and salaries -57,000
Cash paid for tax -28,000
Net cash from operating activities 108,000
Cash from investing activities
Cash was provided from:
Cash from sale of machinery 14,000
Cash from sale of investments held for trading 20,000
Cash was applied to:
Purchase of machinery -70,000
Purchase of investments held for trading -25,000
Net cash from investing activities -61,000
Cash from financing activities
Cash was provided from:
Loan raised 31,000
Cash was applied to:
Repurchase of shares -25,000
Dividends -31,000
Net cash from financing activities -42,000
Net cash inflow 5,000
Add bank Opening Balance 8,000
Equals bank balance end $13,000
Level 3 Accounting Cash Flow Statements – Answers page 27

Exercise Twelve – page 29
Southgate Sports Ltd
Working ledgers
Accounts Receivable
Balance 47,000 Dr
Sales 900,000 947,000 Dr
Bad debts 5,000 942,000 Dr
Cash 885,000 57,000 Dr
Inventory
Balance 57,000 Dr
Cost of goods sold 380,000 323,000 Cr
Accounts payable 383,000 60,000 Dr
Accounts Payable
Balance 38,000 Cr
Inventory 383,000 421,000 Cr
Cash 379,000 42,000 Cr
Taxation payable
balance 9,000 Cr
taxation expense 49,000 58,000 Cr
cash 54,000 4,000 Cr
Accrued Revenue (commission received)
Opening Balance 4,000 Dr
Dividends received 72,000 76,000 Dr
Cash 70,000 6,000 Dr
Accrued Expense (wages and salaries)
Opening Balance 18,000 Cr
expense 133,000 151,000 Cr
Cash 127,000 24,000 Cr
Prepayment (general expenses)
Opening Balance 14,000 Dr
Expense 210,000 196,000 Cr
Cash 205,000 9,000 Dr
Equipment
Balance 58,000 Dr
Cost of sale 16,000 42,000 Dr
Purchase 23,000 65,000 Dr
Level 3 Accounting Cash Flow Statements – Answers page 28

Equipment sold
Buildings purchased
Carrying amount 13,000 bal beg 160,000
Loss on sale -8,000 bal end 200,000
Cash 5,000 purchase 40,000
Paid-in Capital
Mortgage raised
Opening Balance 170,000 bal beg 60,000
balance end 145,000 bal end 75,000
Shares repurchased 25,000 cash 15,000
Retained earnings
Balance 55,000 Cr
Profit for the period 160,000 215,000 Cr
Bank 22,000 193,000 Cr
Dividends 86,000 107,000 Cr
Southgate Sports Ltd
Statement of Cash Flows
for the year ended 31 March 2006
Cash from operating activities
Cash was provided from:
Cash from customers 885,000
Cash from commission received 70,000
Cash was applied to:
Cash paid to suppliers -379,000
Cash paid for interest -7,000
Cash paid for expenses -205,000
Cash paid for wages and salaries -127,000
Cash paid for tax -54,000
Net cash from operating activities 183,000
Cash from investing activities
Cash was provided from:
Cash from sale of equipment 5,000
Cash was applied to:
Purchase of equipment -23,000
Purchase of buildings -40,000
Net cash from investing activities -58,000
Cash from financing activities
Cash was provided from:
Mortgage raised 15,000
Cash was applied to:
Dividends -86,000
Share repurchase -47,000
Net cash from financing activities -118,000
Net cash inflow 7,000
Add bank Opening Balance 12,000
Equals bank balance end 19,000
Level 3 Accounting Cash Flow Statements – Answers page 29

Exercise Thirteen – page 30
Distinctive Furniture
Working ledgers
Accounts Receivable
Balance 525,000 Dr
Sales 9,750,000 10,275,000 Dr
Bad debts 363,000 9,912,000 Dr
Cash 9,312,000 600,000 Dr
Inventory
Balance 750,000 Dr
Cost of goods sold 2,925,000 2,175,000 Cr
Accounts payable 4,080,000 1,905,000 Dr
Accounts Payable
Balance 555,000 Cr
Inventory 4,080,000 4,635,000 Cr
Cash 3,900,000 735,000 Cr
Taxation payable
balance 18,000 Cr
taxation expense 360,000 378,000 Cr
cash 408,000 30,000 Dr
Accrued Expense (interest)
Opening Balance 57,000 Cr
expense 216,000 273,000 Cr
Cash 210,000 63,000 Cr
Prepayment
Opening Balance 15,000 Dr
Expense 3,354,000 3,339,000 Cr
Cash 3,369,000 30,000 Dr
Equipment
Balance 645,000 Dr
Cost of sale 150,000 495,000 Dr
Purchase 285,000 780,000 Dr
Level 3 Accounting Cash Flow Statements – Answers page 30

Equipment sold
Carrying amount 90,000
Loss on sale 42,000
Cash 48,000
Paid-in Capital
Loan repaid
Opening Balance 990,000 bal beg 876,000
balance end 1,290,000 bal end 600,000
Shares repurchased -60,000 cash 276,000
issued shares 360,000
Retained earnings
Balance 564,000 Cr
Profit for the year 939,000 1,503,000 Cr
Bank 90,000 1,413,000
Dividends 165,000 1,248,000 Cr
Distinctive Furniture
Statement of Cash Flows
for the year ended 31 March 2006
Cash from operating activities
Cash was provided from:
Cash from customers 9,312,000
Cash was applied to:
Cash paid to suppliers -3,900,000
Cash paid for interest -210,000
Cash paid for expenses -1,386,000
Cash paid for wages and salaries -3,369,000
Cash paid for tax -408,000
Net cash from operating activities 39,000
Cash from investing activities
Cash was provided from:
Cash from sale of equipment 48,000
Cash was applied to:
Purchase of equipment -285,000
Net cash from investing activities -237,000
Cash from financing activities
Cash was provided from:
Shares issue 360,000
Cash was applied to:
Loan repaid -276,000
Share repurchase -150,000
Dividends -165,000
Net cash from financing activities -231,000
Net cash inflow -429,000
Add bank Opening Balance -150,000
Equals bank balance end -579,000
Level 3 Accounting Cash Flow Statements – Answers page 31

Exercise Fourteen – page 31
(for experts only)
Beta Ltd
Accounts Receivable $000 $000 $000
Balance 150 Dr
Sales 1,680 1,830 Dr
Bad debts 12 1,818 Dr
Cash 1,604 214 Dr
Inventory
Balance 90 Dr
Cost of goods sold 1,240 1,150 Cr
Accounts payable 1,276 126 Dr
Accounts Payable
Balance 27 Cr
Inventory 1,276 1,303 Cr
Cash 1,269 34 Cr
Taxation payable
balance 7 Cr
taxation expense 105 112 Cr
cash 103 9 Cr
Accrued Revenue (dividends)
Opening Balance 4 Dr
Dividends received 10 14 Dr
Cash 8 6 Dr
Revenue in Advance (rent)
Balance 6 Cr
Rent received 60 54 Dr
Cash 64 10 Cr
Plant and Machinery
Balance 324 Dr
Cost of sale(disposal) 24 300 Dr
Purchase 150 450 Dr
Accumulated depreciation - plant and machinery
Balance 36 Cr
Disposal 14 22 Cr
Depreciation expense 32 54 Cr
Disposal
Plant and Machinery 24 24 Dr
Accumulated depreciation 14 10 Dr
Cash 7 3 Dr
Loss on disposal 3 0
Accumulated depreciation - buildings
Opening Balance 18 Cr
Depreciation expense 9 27 Cr
Allowance for doubtful debts
Opening Balance 6 Cr
Doubtful debts 4 10 Cr
Level 3 Accounting Cash Flow Statements – Answers page 32

Beta Ltd continued
Overhead Expenses
Performance summary 196
Less non-cash items
Loss on disposal 3
Depreciation expense 32
Depreciation expense 9
Bad debts 12
Doubtful debts 4 60
cash expenses 136
Accrued Expense
Opening Balance 8 Cr
cash expenses 136 144 Cr
transfer to prepayment 128 16 Cr
Prepayment
Opening Balance 9 Dr
transfer from accrued expense 128 119 Cr
Cash 131 12 Dr
Buildings
Opening Balance 115
balance end 195
purchase 80
Paid-in Capital
Mortgage raised
Opening Balance 520 bal beg 72
balance end 590 bal end 100
issued shares 70 cash 28
Retained earnings
Balance 109 Cr
Net profit 220 329 Cr
Dividends 49 280 Cr
Level 3 Accounting Cash Flow Statements – Answers page 33

Beta Ltd
Statement of cash flows for the year ended 31 March 2005
Cash from operating activities $000 $000
Cash was provided from:
Cash from customers 1,604
Cash from dividends received 8
Cash from rent received 64
Cash was applied to:
Cash paid to suppliers -1,269
Cash paid for interest -9
Cash paid for expenses -131
Cash paid for tax -103
Net cash from operating activities 164
Cash from investing activities
Cash was provided from:
Cash from sale of machinery 7
Sale of land 45
Cash was applied to:
Purchase machinery -150
Purchase of buildings -80
Net cash from investing activities -178
Cash from financing activities
Cash was provided from:
mortgage raised 28
Share issue 70
Cash was applied to:
Dividends -49
Net cash from financing activities 49
Net cash inflow 35
Add bank balance beginning -8
Equals bank balance end 27
Level 3 Accounting Cash Flow Statements – Answers page 34

NOTES, EXAMPLES and
EXERCISE ANSWERS

Exercise One – page 49
Read the resource information relating to Frater Building and Forestry Ltd.
You are required to
(a) Calculate for each year
1999 1998
gross profit percentage 34.57% 35.91%
net profit percentage 2.22% 4.94%
percentage of interest to sales 5.62% 3.73%
return on total assets 2.61% 3.66%
return on average equity 1.26% 3.11%
(b) Comment on the profitability of the business and suggest reasons for the trends shown
The fall in gross profit percentage indicates a fall in prices as a result of less demand from Asian
countries. Sales also fell substantially for the same reason. The lower sales and lower gross margin
coupled with an increase in interest expense percentage, led to a much lower net profit and net profit
percentage. Interest expense percent has increased with some increase in term debt (more interest) and
lower sales. The falling net profit also led to decreasing returns on total assets and equity. Overall a
bad year profit wise for Frater Building due to a huge loss in sales to their main export markets – Asian
countries in a financial crisis and unable to purchase logs.
(c) Calculate for each year (answer to nearest whole number)
1999 1998
inventory turnover 3 times p.a 4 times p.a
accounts receivable turnover 41 days 38 days
(d) Comment on the management of inventory and accounts receivable.
Lower sales has meant slower inventory turnover – many Asian customers no longer buying. Since
inventory levels have decreased the business is aware it has suffered a loss of sales turnover and not
overstocked. Accounts receivable are taking slightly longer to pay, again may be many Asian customers
are slower paying or even more likely to become bad debts.
(e) Calculate for each year (to two decimal places)
1999 1998
current ratio 1.91:1 2.02:1
liquid ratio 0.97:1 0.99:1
equity ratio 0.58:1 0.59:1
(f) Comment on the liquidity and financial structure of the business.
Company should be able to meet current and immediate debts when due – there is little change in liquid
ratio, a slightly bigger fall in the current ratio from the decreased holdings of inventory.
Equity ratio indicates owners have financed a good proportion of the business assets. Long-term
financial stability is not in doubt. Most external finance is long term and costing the business more in
interest.
Level 3 Accounting Analysis and Interpretation – Answer page 37

NOTES, EXAMPLES AND
EXERCISE ANSWERS

Exercise One – page 72
PRACTICE EXERCISES
Short answer questions based on the notes and examples handout
1. Going concern is the underlying assumption that the business will continue to operate into the
foreseeable future. At each balance sheet date management is required to assess whether or not the
business is a going concern and provided there is nothing to suggest the business will be liquidated in the
next year, the financial statements are prepared on the going concern assumption.
2. The accrual basis reports the effects of transactions and other events in the periods to which they relate.
Both cash and credit transactions are reported in financial statements of the period to which they relate.
The accrual basis is used to report assets, liabilities, expenses and income so that users are informed of
both past transactions involving the payment and receipt of cash and of obligations to pay cash in the
future and of resources that represent cash to be received in the future. Financial statements prepared on
the accrual basis provide the type of information about past transactions and other events that is most
useful to users in making economic decisions.
3. (a) The information (in the general purpose financial statements) needs to be readily understandable to
users so that they are able to use it to make economic decisions. On the other hand, users can be
expected to have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information with reasonable diligence. Complex information that is relevant
to making economic decisions should not be left out on the grounds that it would be difficult for
users to understand.
(b) Information needs to be relevant to the economic decision making needs of users. Information
which is relevant helps users evaluate past, present or future events or is used to confirm or correct
their past evaluations. Users need information to help them make economic decisions about the
future so the information should be able to be used in this way. Information about past transactions
and present asset holding in financial statements can help users to predict the ability of the entity to
take advantage of opportunities as they arise. Information about past financial performance is often
used to predict future financial performance. To be relevant, information also needs to be material –
that is able to influence the decisions users will make based on the information. Users do not want
to have to wade through a whole range of immaterial information to find the key pieces they need to
make economic decisions. While not related to financial statements themselves, for example the
credit manager who wants to chase up slow payers does not need a list of all the debtors who
regularly pay on time. Information also needs to be timely or it will lose its relevance – information
which takes too long to arrive, will be of no use to users who have had to make decisions in the
mean time.
(c) Information needs to be able to be relied on to make accurate decisions about the future, so it needs
to be free from bias (or neutral) and it needs to represent the underlying or actual transactions which
occurred (eg capital and revenue expenditure should be correctly treated so assets and expenses are
correctly reported). The substance, rather than the legal form of the transaction needs to be reported
and the information should be complete with no material omissions.
(d) Information needs to be able to be compared from one period to the next within an entity and
between entities to determine similarities and differences between the information and the same
information in other reports. To allow comparability of information it needs to be prepared and
treated consistently from one period to the next.
4. An items materiality is determined by its ability to influence the economic decisions of users. If the item
is likely to influence users decisions based on the financial statements, either because of its nature and/or
its size, the item should be disclosed separately either in the financial statements or in the notes to the
financial statements.
5. (a) Relevant information is used to make economic decisions about the future – a considerable amount
of information such as that found in budgets, will be relevant for making decisions about the future,
but it may not be entirely reliable as it has not occurred yet and we don’t know what is going to
happen in the future.
Level 3 Accounting Conceptual Framework – Answers page 41

(b) Information is reliable when it is based on a past transaction as there is a source document which can
be verified, and is neutral and should reflect the underlying transaction. However, highly reliable
information such as how much our land and buildings cost 20 years ago when we purchased them,
may not be relevant as it is not assisting with making decisions about the future. The actual current
value of the land and buildings is likely to be significantly higher meaning the business has more
equity and is more likely to be able to raise debt finance than would appear if the reliable historical
cost was used. This means it is likely to be relevant to revalue the land and buildings rather than
keep them at historical cost.
6. Internally generated goodwill cannot be measured with reliability. This is because there is no way to
faithfully represent a transaction as no transaction has occurred. The measure would not be neutral as it
would not be free from bias – the business may well want to place a higher value on this goodwill than it
warrants, even if one could measure it reliably. So internally generated goodwill is not recognised in the
financial statements as it does not have a reliable measure so it fails one of the recognition criteria for
assets to be included in the financial statements. On the other hand, internally generated goodwill could
well be relevant to the decisions of users as users are often interested in such things as the quality of the
product, the quality of staff, the customer service likely to be provided, particularly post purchase with
big ticket items under warranty. Also if a considerable amount of goodwill exists in the business it
means that it does have the potential to continue to earn what in economics might be called super profits
so it would help predict future profitability. In the case of internally generated goodwill, balancing
reliability against relevance, reliability is followed so the goodwill is not recognised. The trade-off
favours reliability over relevance in this case.
7. (a) Budgets are an estimate of what you expect your expenses, revenues, cash inflows/outflows to be in
the future. While the information may not be reliable because it has not yet actually happened, it is
extremely relevant as budgets help you to make informed decisions about future cash flow
management, major purchases of assets etc.
(b) Historical cost refers to the cost of acquisition or transaction cost of assets, expenses, liabilities and
revenues – it is very reliable as it is based on past transactions for which there is a source document
that can be referred back to and represents an arms length transaction which is therefore neutral. It
will mostly also be relevant if it relates to expenses, income, assets and liabilities acquired in the
current period. It only becomes out of date, and possibly not relevant if you do not regularly revalue
assets like land and buildings, and ensure that the depreciated historical cost of other property, plant
and equipment is a good reflection of their fair value.
(c) Accountants should make general purpose financial statements understandable to shareholders,
potential investors and others who may be interested in doing business with the entity, however
simplification should not allow any material item of information to be omitted and accountants can
assume users will have a basic knowledge of financial statements and a reasonable knowledge of
business and economic activities.
(d) The company bears the cost of preparing the annual report while a large range of people receive
benefit from reading it such as shareholders, potential shareholders, sharebrokers, financial analysts,
creditors, employees, customers and others and these people do not pay for the preparation of the
financial reports, hence the statement is true.
(e) Allowing for doubtful debts meets the recognition criteria for assets which states that assets should
be reported at their probable future economic benefit which can be reliably measured. The probable
future economic benefit to flow to the entity in the form of cash from accounts receivable is the
historical cost of accounts receivable less allowance for doubtful debts. This is called their estimated
realisable value which is using the realisable value measurement base to report the accounts
receivable asset. The allowance for doubtful debts has a reliable measure based on past experience
of bad debts, the age of accounts receivable and the current economic climate.
Level 3 Accounting Conceptual Framework – Answers page 42

Exercise Two – page 72
Short answer questions based on the New Zealand Framework paragraphs 9 – 21
1. The objective of financial statements to provide information about the financial position, performance
and changes in financial position of an entity that is useful to a wide range of users in making economic
decisions. Financial statements assist users in assessing the financial position, performance and cash
flows of the entity. Financial statements also allow users to make decisions regarding providing
resources to or doing business with the entity.
2. General purpose financial statements are prepared for a wide range of users and need to meet a range of
needs of those users. Normally, general purpose financial statements prepared for shareholders of a
company, as providers of risk capital, will meet most of the needs of other potential users of the financial
statements.
Special purpose financial statements are those prepared for users who are able to request specific
information to be included in the financial statements. For example special purpose financial statements
may be prepared for the government for tax purposes, and for lenders who are able to request specific
information useful for them to make judgements regarding whether or not to lend the entity debt finance.
Financial statements prepared for managers to make decisions about the future of the business are also
special purpose financial statements as they will include a lot more detail than general purpose financial
statements.
3. All users of financial statements require those financial statements to assist them in making economic
decisions regarding the future.
Relevance
If the information is not relevant it will not assist in the making of the decision – relevant information
assists in evaluating the past, present or future and allows decision makers to confirm or correct their
past evaluations. Material information needs to be included as information which can influence the
decision must be given or a wrong decision could be made. Information needs to be timely or it will lose
its relevance. Managers cannot make valid decisions to move the business forward, if the information
they have is not relevant to the business, up-to-date, and able to assist with the decisions they are
required to make.
Reliability
If the information is not reliable then the decisions made could be invalid. Reliable information will
represent faithfully the transactions or other events it is supposed to represent, it will be neutral so that it
is not biased towards some specified outcome, it will represent the substance of the transaction or event
rather than its legal form and it will be complete – all information necessary will have been included.
Understandable
If the information is not understandable by users who have a reasonable knowledge of the business and
economic activities they are not going to be able to use it at all as they will not know what it means.
Comparable
Decisions makers including management, need to be able to compare the information from one year to
the next for the same entity and with other entities so they need to know that the information has been
prepared in a consistent way. Managers in particular need to identify trends in income and expenses to
ensure that the business is continuing to remain profitable and the decisions they are making are allowing
the business to grow.
4. Accountability is the requirement of one party to account to another party for its actions. Management is
required to account to the shareholders as to how they have made the best use of the resources the
company has. Financial statements show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it. Financial statements show whether
sales/income/revenue is increasing, whether profit and return on assets/equity is improving, the ability of
the business to generate positive cash flows, the stability of the business all of which reflect management
ability to make to best use of the resources of the business.
Level 3 Accounting Conceptual Framework – Answers page 43

Those users who wish to assess the stewardship or accountability of management do so in order that they
may make economic decisions; these decisions may include, for example, whether to hold or sell their
investment in the entity or whether to reappoint or replace the management.
5. (a) a balance sheet provides information about the financial position of the business, including
information about the assets, liabilities and equity of the business at balance sheet date.
(b) an income statement provides information about the financial performance of the business, including
its income, expenses and profit over the year/period ended on balance sheet date
(c) a cash flow statement provides information about the various cash flows including cash flow
generated from operating activities, cash flow generated from investing activities and cash flow
generated from financing activities. It shows where the business has spent its cash and from where it
has received its cash. It provides users with information to determine the likely future ability of the
business to continue paying dividends, to continue operating and paying its suppliers and employees
and the ability to finance property, plant and equipment to allow the business to continue to grow.
6. Employees may be interested in the businesses future development, in what areas expansion is planned,
how the business contributes to the community the employees belong to. This information is often
included in the management commentary in the annual report and provides information for employees
regarding the business and its relationship to the community it operates in. Employees may also be
interested on how the business impacts on the environment particularly if those employees are keen to
work for a company which takes care of the environment and its waste
7. Customers are interested in whether or not the entity is a going concern, especially for example if they
have bought goods with a warranty or if they want to continue buying from the entity. Customers may
also be interested in the entity’s environmental and social responsibility goals and sponsorship
programmes
8. They would be interested in community sponsorship, community initiatives, whether or not the business
is likely to continue to operate and contribute to the community in terms of employment opportunities
and environmental issues.
Level 3 Accounting Conceptual Framework – Answers page 44

Exercise Three – page 73
Short answer questions on components and limitations of financial statements
1. Bad and doubtful debts are classified as an administrative expense, because the manager responsible for
allowing credit will be in the administrative department of the business – the credit manager works in
administration and makes decisions about who is allowed to have credit and it is administration that
sends out accounts to debtors and chases them up and monitors slow payers, hence bad debts and
doubtful debts stem from the administrative department/activities of the business so are classified as an
administrative expense.
2. The use of property, plant and equipment is often shared between various functions in the income
statement. For example the building may house the factory, administrative office and the retail space so
the depreciation on buildings is split between all three functions – the factory component goes to cost of
sales, the retail space goes to distribution costs and the office space goes to administrative expenses.
Depreciation on manufacturing plant needs to be included in cost of sales as it is a production cost – in a
manufacturing business it will be included in the cost of sales as part of production costs which become
cost of sales when the goods are sold. Depreciation on shop fittings and fixtures on the other hand is
included in distribution costs, while depreciation on office equipment is included in administrative
expenses.
3. Explain why inventory of a jeweller is classified as a current asset even if it may take more than one year
to sell some items. A current asset is defined as an asset which will be realised within the normal
operating cycle of the business – for a jeweller the normal operating cycle – the time taken to convert all
its inventory into cash – may be longer than one year.
4. The current portion of term debt is due for repayment/settlement within the next twelve months and a
current liability includes all those amounts which will be settled in the next year.
5. Explain how the following question from a company manager to his accountant illustrates a limitation of
the balance sheet: “our latest range of products have been a huge success with large numbers of new
customers, why can’t we report this in our balance sheet” This is internally generated goodwill and
there is no transaction which can be represented faithfully by this “huge success” so there is no reliable
measure of the goodwill – without a reliable measure the goodwill cannot be recognised as an asset in
the balance sheet.
6. Explain a limitation of the income statement related to the “latest range of products”. The income
statement only shows the dollar impact of the sales of the product, it does not show that they have been a
huge success with many new customers, although if income has increased substantially the reason
behind this will be the success of the new product. The explanation of the increase in sales is not shown
in the income statement, but the result of the increase in sales is. If the product were being sold at a
cheaper price than other products, thus attracting the many new customers, then the numbers in the
income statement may not have increased as much – the quantity may have increased without an equally
proportional increase in sales.
7. The main limitation of the statement of cash flow is that it is a historical statement showing what has
been received and what money has been spent on. It does not show the quality of that spending and it
does not show future cash commitments the business may have. A budget would be needed to see this
information.
Level 3 Accounting Conceptual Framework – Answers page 45

Exercise Four – page 73
Conceptual Basis of Accounting
Knights Catering Ltd
PART A
(a) Going concern
It is assumed Knights Catering will continue its present operations into the foreseeable future –
management has no intention of closing down or changing course and has not identified any reason to
believe Knights Catering Ltd is not a going concern. Hence the financial statements have been prepared
with going concern as an underlying assumption.
(b) Reporting period
The balance sheet date is 31 March 2006 – the balance sheet shows the financial position of Knights
Catering Ltd at that date and the income statement will have been prepared for the year ended on that
date. Preparation of annual financial statements is necessary to make comparisons of financial position
and financial performance and cash flows over time.
(c) Accrual basis
Under the accrual basis the effects of transactions and other events should be reported in the financial
statements of the periods to which they relate. Assets such as accounts receivable and liabilities such as
accounts payable and accrued expenses are reported in the balance sheet as they meet the recognition
criteria of assets/liabilities on balance sheet date – accounts receivable will provide future economic
benefit in the form of cash received when the debtors pay; accounts payable and accrued expenses will
require an outflow of cash in the future to settle the amounts owing. The related income and expenses
will have been included in the income statement for the current period as they were earned/incurred
during that period.
(d) Reliability
The information in the financial statements should faithfully represent the transactions which have
occurred including representing their substance rather than their legal form. The information should
also be neutral, and reflect a prudent evaluation of transactions/events. Reliable information has been
included in the use of historical cost for property, plant and equipment and investments as these costs
are based on transactions for which a neutral source document will indicate the cost. The substance of
these transactions will be that they resulted in assets with future economic benefit hence they are
reported as such.
Prudence has been applied to reporting accounts receivable at estimated realisable value after allowing
for doubtful debts so as to better reflect the probable future economic benefit to be received from
accounts receivable in the balance sheet. Prudence has been applied to inventory as it is reported at the
lower of cost and net realisable value. This means inventory will be reported at the probable future
economic benefit to be received from the inventory.
The balance sheet has not omitted any assets or liabilities so is a complete representation of the financial
position of Knights Catering Ltd as at balance sheet date.
(e) Materiality
All items likely to influence users decisions have been disclosed. Market value of investments and
current value of Land and Buildings are shown in the notes as they are significant and particularly with
land and buildings significantly larger than the cost, and will influence the decisions of users of the
financial statements
PART B
The Shares in KPR Ltd are reported as an asset because
(i) they were purchased in the past (past transaction exists)
(ii) only Knights Catering Ltd can benefit from the dividends received from the shares and from the
eventual sale of the shares so Knights Catering Ltd controls the benefits to be received from the shares
Level 3 Accounting Conceptual Framework – Answers page 46

(iii) the shares provide future economic benefit as cash flows to the entity when dividends are received and
eventually if they are sold there will be a cash flow to Knights Catering Ltd for the sale price.
(iv) it is probable that KPR will pay dividends so the future economic benefit from the shares in the form of
dividends is likely. Eventually if the shares are sold it is probable they will be sold for at least their
cost so this represents the eventual future economic benefit to be received
(v) there is a reliable measure of the cost of the shares on the source document which records their
purchase by Knights Catering Ltd.
PART C
(a) the income in advance is classified as a current liability
(b) it is a current liability as it will be settled in the next month – which is easily within the operating
cycle/next year for Knights Catering
(c) the income in advance will be reported as $1,500 as this is the amount of the future outflow of
resources from Knights Catering Ltd
(d) Knights Catering Ltd will have a (current) liability of $1,500 representing the present obligation to
provide catering for the wedding as a result of a past transaction – receiving the $2,000 – which will
require a future outflow of resources costing $1,500 – the cost of catering for the wedding which is not
going to be cancelled. The reliable and probable amount of the future outflow of resources is $1,500
not $2,000, so the liability income in advance will be reported at $1,500.
PART D
(a) The historical cost measurement base is very reliable – for example assets are recorded at their cost of
acquisition which is usually based on a transaction with an external party so there is a reliable measure
which is neutral or free from bias by reference to the source document recording the purchase showing
what the asset cost (not an opinion as to its value). The transaction will be reported to faithfully
represent the substance of the transaction – if an asset has been purchased providing future economic
benefit then it will be reported as an asset, if there is a decrease in economic benefit then an expense
will be reported.
(b) Realisable value has been used to report accounts receivable and inventory
(c) The current values are relevant to the decision making needs of the users of the financial statements.
The current value of land and buildings and investments is reported in the notes as the amounts
(particularly for land and buildings) are significantly different to their historical cost reported in the
balance sheet. These amounts are likely to influence users decisions based on the balance sheet, hence
they are disclosed in the notes so users can make informed judgements and decisions particularly
regarding the ability of the business to acquire debt finance in the future.
PART E
(a) Advantages include
ii. the owners have limited liability for the business debts to the extent of their investment and any
personal guarantees they have given over the company’s debt, beyond this they are not personally
liable for the company’s debts,
iii. the business can easily gain more capital by attracting additional shareholders,
iv. the business has a perpetual life – continues despite any change in ownership
v. the company can issue debentures to assist with additional finance
(b) Disadvantages include
• must follow the legal requirements of the Companies Act 1993 and the Financial Reporting Act 1993,
• must be registered, and file annual reports with the registrar of companies
• legal and other formation costs involved in registration can add up
• tax on profit is 33c in every $ compared to spitting profit among partners and each partner being taxed
individually where rates are lower on the first $38,000, the same on the next $22,000 then higher (but
average rates tend to be lower than the flat company rate),
• partnership is simpler to form and useful for small business or business with a defined and limited life
(eg for the life of a contract)
Level 3 Accounting Conceptual Framework – Answers page 47

(c) Knights Catering Ltd is small – total assets are less than $450,000 and turnover must have been less than
$1million. The shareholders are all directors.
(d) A Constitution
(e) In a partnership the entire profit must be shared between the partners and this is usually done based on
clauses in a Partnership Agreement – no profit is retained by the partnership as the partnership is not a
separate legal entity from the owners, when partners withdraw money for themselves it is treated as
drawings not a business expense – each partner may retain profit in the business via a credit balance in
their current account.
In a company profit may be either distributed to owners as a dividend, or shares may be repurchased, or
the profit can be retained in the company as retained earnings. The company can retain profit in its own
right as it is a separate legal entity. This also allows the company to employ its shareholders and pay
them a wage/salary for work they do in the company – this is a legitimate business expense deducted in
the Income Statement before profit is calculated and taxed. The amount of profit retained and the
amount distributed is up to the directors.
Exercise Five – Adapted from Bursary 1997 – page 75
(a) General purpose financial statements are used by external parties unable to contract for detailed
financial information, for making economic decisions. For sound decisions to be made there needs to be
an assurance that the statements are prepared on a consistent basis following accepted principles and
practice so comparisons can be made - requirement for information to be comparable. It is also
important that the information is relevant and reliable so that valid judgements can be made.
(b) (i) A financial element is recognised when there is a reliable measure of the amount of future
economic benefit likely to flow to or from the entity. The reliable measure of the amount of future
economic benefit in terms of cash likely to be received from accounts receivable is the historical
cost of accounts receivable less the allowance for doubtful debts which is based on past experience
with bad debts, the age of accounts receivable and the current economic climate providing a
measure of the amount of accounts receivable unlikely to be realised in cash therefore faithfully
representing the transaction and other events surrounding it.
(ii) Accounts receivable should be recognised in the balance sheet at its probable future economic
benefit. The recognition that accounts receivable will include a certain proportion of debts which
are likely to become bad debts reduces the probable future economic benefit likely to flow to the
entity in the form of cash from accounts receivable. It is this probable future economic benefit
which is reported, provided it can be reliably measured – see above.
(iii) Accrual basis means recognising transactions and other events when they occur and reporting them
in the financial reports of the periods to which they relate. Accrual basis requires that we account
for (recognise) doubtful debts as an expense of the current period as it relates to the current periods
sales and represents a decrease in economic benefit during the current period - the amount of
accounts receivable we are unlikely to receive.
(c) (i) Historical cost requires recording transactions and assets at their acquisition cost which in the case
of some assets, notably land and buildings, means that the value recorded is totally out of line with
the asset's current value. Businesses needing to make decisions about the future need relevant,
timely information which is up to date - not values from the past which will have little bearing on
these decisions. Judging the ability of the business to raise debt finance for example needs to be
based on the current value of land and buildings and not their historical cost.
(ii) When land and buildings are revalued the credit should go to the Land and Buildings Revaluation
Reserve. The increase is reported in the statement of changes in equity rather than the income
statement, and it is then included in total recognised income and expenses for the year.
Level 3 Accounting Conceptual Framework – Answers page 48

(d) (i) Materiality - this law suit cannot be recorded as a liability as we do not have the recognition criteria
met - it is not probable and there is no reliable measure - but it is likely to influence decisions users
will make based on the statements so it is required to be disclosed in the financial report by way of
a note.
(ii) It is a contingent liability (dependent on the outcome of the court case) which should be disclosed
by way of a note to the balance sheet.
(e) (i) The accounting entity concept is applied when recording transactions by recording business
transactions separately to personal transactions of the owner. Personal expenses of the owner when
paid with business money, or personal use of business assets, is recorded as drawings and not in the
income statement as an expense as expenses do not include distributions to owners.
(ii) This is correct treatment of the vehicle expenses for an employee when these are part of the
employment contract as this is part of the running costs of the business which when the person acts
as an employee - regardless of whether they are a shareholder - they are treated as any other
employee, as the company is a separate legal entity.
Exercise Six – page 76
Concepts Question based on Taihape Adventure Tours Ltd
(a) Kay and Bob have limited liability for the company debts meaning they are not personally liable for
company debts, provided they have not given any personal guarantees or they are not negligent in their
directorship of the company and they have paid for their shares in full.
(b) (i) A constitution so they can get the best advantage from the clauses in the Companies Act like
limiting directors powers and who can own shares, allowing for share repurchase
(ii) In a partnership the entire profit is shared between the two partners based on their profit sharing
agreement whereas in a company the profit may be kept/retained for expansion or distributed to
shareholders by way of dividend based on the number of shares owned
(c) Taihape Tours is an exempt company because it has less than $450,000 in assets and less than $1 million
in revenue.
(i) The entity
• Is not an issuer or shares or debt securities to the public – Taihape Tours Ltd has two shareholders
who are also directors so it does not have public accountability (it would also not have issued any
debentures to the public to qualify as not an issuer)
• is not large – the company has less than $20m in revenue, less than $10m in assets and less than 50
employees
• owners are members of governing body – Kay and Bob are the only shareholders and directors
• owners have not requested full compliance with NZ GAAP – Kay and Bob will prefer to use
differential reporting as it costs less to prepare their general purpose financial statements
(ii) Full compliance with financial reporting standards in the preparation of financial statements would
add a cost greater than the benefit to be gained from the financial statements as the shareholders are
also directors and already have considerable knowledge of the company– differential reporting
allows for some exemptions from full compliance with financial reporting standards such as not
being required to prepare a statement of cash flows
(d) (i) Generally accepted accounting practice is the term used to describe the basis on which general
purpose financial reports are normally prepared.
The term encompasses:
(a) specific rules, practices and procedures relating to particular circumstances; and
(b) broad concepts and principles of general application.
Level 3 Accounting Conceptual Framework – Answers page 49

New Zealand equivalents to IFRSs and FRSs are the primary indicators of NZ GAAP. Conformity
with generally accepted accounting practice means:
(a) compliance with all New Zealand equivalents to IFRSs and FRSs applicable to the entity; and
(b) in relation to matters for which no provision is made in New Zealand equivalents to IFRSs or
FRSs and that are not subject to any applicable rule of law, adopting accounting policies that:
(i) are appropriate to the circumstances of the entity; and
(ii) have authoritative support within the accounting profession in New Zealand.
(ii) The objectives of general purpose financial statements include
The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of users in
making economic decisions.
Information in financial statements should assist users to
(a) assess the performance, financial position and cash flows of the entity;
(b) assess the entity’s compliance with legislation, regulations, common law and contractual
arrangements, as they relate to the assessment of the entity’s performance, financial position
and cash flows; and
(c) make decisions about providing resources to, or doing business with, the entity.
(iii) The NZIFRS provide guidelines and rules for preparers of general purpose financial statements in
relation to the recognition, measurement and disclosure of transactions and other events in the
financial statements, and accompanying notes where applicable, so that those financial statements
comply with NZGAAP and will present a true and fair view or fair presentation of the financial
position, financial performance and cash flows of the entity. NZIFRS also assist in providing for
consistency of treatment of items by different entities, including entities from different countries, to
allow comparisons to be made.
(e) (iv) Investors, lenders, suppliers, government, employees, customers, general public
(v) Investors or shareholders want to ensure their investment is safe so they are interested in the long
term stability of the business and also the ability of the business to pay dividends in the mean
time/on an annual basis
Lenders want to ensure they will be paid back, including any interest owing
Suppliers are interested in a more short term ability to meet amounts owing – often in the next month
or two
Government wants to ensure correct taxes are paid and that the business is meeting its legal
obligations
Employees are interested in the ability of the business to pay their wage/salary and other
employment benefits and in the stability of the business in terms of their job security
Customers are interested in whether the business will continue to serve their needs and in particular
if they have goods under warranty, that the warranty will be honoured if need be
General public are interested in the contribution of the entity to the local community including
employment opportunities, donations and sponsorship programmes
(vi) Users may also be interested in interpretive comment and explanations as to some of the key changes
in the financial statements. They may also be interested in prospective information regarding the
direction the business is heading. A number of users are also interested in environmental and social
responsibility issues (eg environmental impact reports, “triple bottom line reports”) and the entity’s
contribution to the wider community and the “clean, green, image”. Non-financial information
might also focus on identifying and describing the key business, operational and strategic factors
facing an entity. Key value driver information can encompass a broad range of measures including
sales growth, profit, client satisfaction, measures of the quality of goods and services, and supplier
relationships.
Level 3 Accounting Conceptual Framework – Answers page 50

(f) The petrol on hand does not be recorded as an asset as it is immaterial – the amount is too small to be
treated as an asset even though the petrol will provide future economic benefit to the business when it is
used in the vans for tours. The $100 will not affect any decisions made on the financial statements –
therefore it can be recorded as an expense of the current period as there has been a decrease in economic
benefits when the petrol was paid for and it won’t last very long into the next year.
OR The petrol could be argued is an asset as it will provide future benefit when the petrol is used in the
vehicles taking clients on tours which is probable, it has been purchased, is in the control of the
entity and the amount can be measured reliably.
OR accrual basis would suggest the expense relates to the next period when the petrol will be used so
should be recorded as an expense in that period – hence an asset now.
(g) (i) Depreciation on vehicles and kayaks and equipment is a decrease in economic benefit via a depletion
of the assets vehicles and kayaks and equipment resulting in a decrease in the assets. There is also a
decrease equity by less profit and is clearly depreciation is not a distribution to the owners. It is
probable that the vehicles, kayaks and equipment have worn out somewhat over the year through
their use by the tour company and the amount has a reliable measure based on experience with the
expected economic life and pattern of use of the assets.
(ii) Diminishing value depreciation better reflects the consumption of future benefits of vehicles as they
provide most benefit with little maintenance in early periods, and usually more maintenance when
the vehicles are older and depreciation is less; thus spreading the total cost of the vehicles relatively
evenly over their useful lives. Straight line depreciation is appropriate for kayaks and equipment as
they provide equal benefit in each year they are used.
(h) (i) 0.6*8,000 = 4,800 therefore the amount of liability $4,800.
(ii) The amount of the liability is the future outflow of resources that can be reliably measured and is
probable. The future outflow for these tours which cannot be cancelled is the cost of providing the
tours – at most – and the company has a present obligation to provide these tours as they have
already been paid for. No refunds are available and it is probable the tours will proceed. Hence a
liability of $4,800 exists.
(i) “Inventories shall be measured at the lower of cost and net realisable value” (NZIAS2). Therefore the
clothing inventory should be measured at $25,700 which includes cost for most of the inventory and net
realisable value in relation to the $9,000 which is now only likely to net $5,000. $25,700 is a better
reflection of the probable future economic benefit to be derived from inventory and it means that the asset
is not overstated.
(j) (i) The reliable piece of information is the $12,000 paid for the gear as this is based on an actual (past)
transaction where there would be an invoice confirming the amount.
(ii) Money in the bank to pay for it or working/liquid capital indicating ability to meet the payments.
(iii) The cost of the new equipment, the possible trade-in value of the old gear as this would influence
how much they can afford to purchase/what type of equipment they can afford to buy.
(iv) Health and safety regulations regarding the new gear; quality of the new gear; range of sizes needed
for lifejackets for example etc.
Level 3 Accounting Conceptual Framework – Answers page 51

Exercise Seven – page 78
Conceptual Basis adapted from Bursary 1999
Part A
• Matt has limited liability for the company debts provided, as director he does not act negligently or make
a distribution to shareholders when the company does not meet the solvency test
• Matt can sell some of his shares in the company and gain some personal cash for himself.
• As a small company, the directors are likely to want to restrict who can own shares, they may want to
modify other requirements of the Companies Act 1993, allow for repurchase of shares to retain family
ownership, restrict powers of the directs etc
Part B
Issue One
(a) the car is a personal asset which is separate from the business assets for accounting purposes according
to the notion of accounting entity; or the car is not under the control of the company and therefore does
not qualify as an asset of the company; or the car produces little future economic benefit to the firm and
therefore should not be included as a company asset
(b) as a dividend/loan to a director/as a profit distribution/as a reduction in retained earnings
Issue Two
(i) the revaluation of land and buildings makes the statements less reliable as they are no longer based on
historical cost and past transaction evidence such as the purchase contract for the land and buildings; the
registered valuation, while independent, is still based on an opinion of a valuer as to the current value of
the land and buildings – unless they are actually sold we don’t know their true market value
(ii) the revaluation makes the statements more relevant as better decisions can be made based on the up-todate
(timely) value of the land and buildings, which is significantly greater than their historical cost –
revaluing the land and buildings adds to the equity of the business so it is seen to offer better security for
further debt finance should this be required. The amount of the revaluation is material so therefore
should be reported as it is relevant to the decision making needs of the users of the financial statements.
Issue Three
(a) accrual basis
(b) $100 is a small amount which will not make any difference to the decisions made based on the financial
statements so it does not need to be included in the assets even though it will be used by/will benefit the
business in the future
Issue Four
(a) Shareholders – to provide information of the financial performance, position and cash flows of the
company or to provide financial information for decision making purposes or to inform shareholders of
how their funds have been invested
(b) The asset should be recorded at the lower of depreciated historical cost and fair value. The amount of
future economic benefit embodied in the asset stems form its historical cost and expected useful life and
pattern of use/wearing out which has to be assumed has resulted in the 15% DV depreciation being
applied. This rate should not be changed unless the pattern of use of the asset has changed from being
diminishing value (higher loss of benefit in early years) to straight line – the same/equal use/benefit
gained in each year or the assets future economic benefit may be understated as the 30% rate would
result in a higher accumulated depreciation and a lower carrying amount for the asset thus understating
the asset’s probable future economic benefit.
(c) In the notes to the property, plant and equipment there should be reference to the change in the estimate
of depreciation from 15% diminishing value to 30% straight line so that comparisons can be made (note
this is NOT a change in accounting policy – it is just a change in an accounting estimate).
Level 3 Accounting Conceptual Framework – Answers page 52

Issue Five
This inventory needs to be written off as an expense for the period of $7,500 and not carried forward as an
asset as there is no future economic benefit to be gained from it so it cannot be recorded as part of the
inventory asset in the Balance Sheet. The flea collars need to be valued at their estimated net realisable
value when this is below cost, so in this case zero for inventory. The inventory in the Balance Sheet would
be reduced by $75,00. The cost of sales or expenses will increase via the write down of inventory, thus
decreasing net profit by $7,500 – and hence equity.
Exercise Eight – Adapted from Bursary 2000 – page 79
Alex and Anita’s partnership
PART A
Q. No Evidence Code
Shareholder knows the financial statements
• comply with NZ generally accepted accounting practice
• comply with NZIFRS
(a)
• meet legal requirements of the Financial Reporting Act 1993
• show a true and fair view/fair presentation of the financial position, financial
performance and cash flows of the entity
Judgement
- any one D
Policies stating how assets, liabilities, income and expenses have been measured are
necessary for users to make sound decisions based on the financial statements, for example
users need to know that land and buildings are revalued annually in order to make sound
decisions based on the balance sheet; they also need to know the measurement bases
(b)
adopted so as to be able to compare the financial statements with previous years and other
(similar) entities
Judgement
− answer just refers to understanding the financial statements for decision making
D
− answer identifies measurement bases needing to be known for decision making and
gives an appropriate example
A
The accrual basis says transactions should be reported in the financial statements of the
periods to which they relate.
By expensing bad debts when they are recognised, you are reporting the expense in the
(c) income statement in the period in which the bad debt actually occurred
Judgement
definition of accrual basis (NOT with only recording)
answer links bad debts to expenses being reported in the period incurred
D
A
Office furniture and equipment is an asset because
• it has been purchased in the past (there is a past transaction)
• only New Zealand Consultancy Company Limited can use the office furniture and
equipment to administer their business (they have present control of the office furniture
and can exclude others from using it)
(d) (i) • in the future office furniture and equipment like computers will be used to write up
consultancy reports which earn income for the business – hence future economic
benefit as the cash will be received from the income earned
Judgement
− Refers only to the characteristics or does not make a valid link to office equipment
− Makes a valid link to each of the characteristics (note office equipment provides future
D
A
economic benefit is NOT a valid link)
Level 3 Accounting Conceptual Framework – Answers page 53

(d) (ii)
(e)
(f)
(g) (i)
(g) (ii)
(h)
(i)
It is probable that the office furniture and equipment will be used in the future for
consultancy work, thus it is probable that the future economic benefit exists
There is a reliable measure of the office furniture and equipment by reference to the
purchase invoice which is neutral/free from bias/and faithfully represents the fact an asset
was purchased
Judgement
− Makes a valid link to both recognition criteria (repeating the criteria without a valid link
to office furniture and equipment is wrong)
Depreciation on office furniture and equipment is an expense because it is a consumption
of the future economic benefit of the asset office furniture and equipment which reduces
the asset and reduces equity by less net profit and it is not a distribution to owners
Judgement
− Refers to consumption of future economic benefit/service potential, reducing of the
asset and reducing of the equity
Straight line depreciation is used because the (pattern of) consumption of future economic
benefit of the assets is the same in each period/year they are used by the business
Judgement
− Refers to consumption of future economic benefit/service potential being the same from
one year to the next for the assets
Historical cost is reliable because this is the transaction cost which is neutral by reference
to the source document (eg invoice) recording the transaction and the transaction can be
assumed to be represented faithfully as an asset when an asset is purchased providing
future economic benefit or as income when income has been received increasing economic
benefits and increasing equity etc
Judgement
− Just defines reliability as neutral and faithful representation of the transaction
− Links historical cost to transaction cost and source document being neutral/faithful
representation of the transaction
Historical cost provides a consistent measurement of transactions and assets so it is easier
to compare results from one period to the next/from one company to another
Judgement
− Answer gives idea of historical cost giving a consistent measurement allowing for
comparability to occur between periods/businesses
Land and buildings are more likely to have a current value which is materially/significantly
different from their historical cost and current value gives a more relevant and timely
measure of these assets in terms of their probable future economic benefit/predictive value
as land and buildings are likely to be relatively significant in size/appreciate in value/have
a much longer economic life compared to office equipment for which historical cost is
relevant
Judgement
− Answer explains current value of land and buildings as relevant with a valid reason for
using current value compared to office equipment for which historical cost is relevant –
must refer to both land and buildings and office equipment
The probable future economic benefit to be received from receivables is their estimated
realisable value after allowing for doubtful debts and this should be shown as the amount
for the asset as it is a reliable measure of the amount of cash likely to flow to the business
from accounts receivable and also so as not to overstate the asset’s future economic benefit
(prudence, a component of reliability requires that assets are not overstated)
Judgement
− Answer must link estimated realisable value to probable future economic benefit and
reliable measure of cash to flow to the business
E
A
A
D
E
E
E
E
Level 3 Accounting Conceptual Framework – Answers page 54

Part B
(a)
(b)
(c)
(d)
James can withdraw some capital/share the workload now he is older/take more time
off/semi retire/work more flexible hours
Judgement
− Any valid reason from James perspective
Judy will benefit from being a partner in an established business/can learn from James
experience/will receive a share of the profits/shares the risk of being in business for herself
Judgement
− Any valid reason from Judy’s perspective
To recognise the different contributions each partner makes otherwise they are treated
equally/to allow for profit sharing clauses so profit can be shared other than equally)/to
formalise decision making in the partnership so that the partnership can operate effectively
Judgement
− Any valid reason for having a Partnership Agreement
− Any valid reason explained (ie so that… because… used to explain the reason given)
To gain access to limited liability – so he would not be personally liable for the business
debts once his shares were paid for/provided he didn’t give personal guarantees for the
company debts/did not act negligently as a director
Judgement
− reference to limited liability or other valid reason
− addition of not personally liable once shares paid for
− addition of exceptions
D
D
D
A
D
A
E
(e) (i) Constitution D
To modify the requirements of the Companies Act such as restricting the powers of
directors/restricting share issue/allowing for repurchase of shares
(e) (ii)
(f)
Judgement
− Answer just says modify companies act
− Addition of valid example
In a partnership all the profit is shared out between the partners based on clauses in the
partnership agreement (or equally if no agreement)
In a company profit may be distributed as a dividend or retained in the business – the
shareholders receive a dividend based on the number of shares owned – not all the profit
needs to be distributed as the company is a separate legal entity to its owners
Judgement
− Answer just mentions dividends for company, drawings for partnership
− Answer refers to both partnership and company
− Answer clearly distinguishes the two (all profit shared in partnership,some can be
retained in a company)
D
A
D
A
E
Level 3 Accounting Conceptual Framework – Answers page 55

Exercise Nine – page 81
Adapted from Bursary 2001 and updated to reflect NZIFRS
Part A
(a)
(b) (i)
(b) (ii)
(b) (iii)
Objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of
users in making economic decisions or
To assess the entity’s financial performance/financial position/cash flows or
To assist users to make decisions regarding doing business with the entity
Judgement
− Answer must state “assess” or refer to users making economic decisions
Nordical Ltd is an issuer of shares to the public as it is listed on the NZX
Nordical Ltd issues debentures to the public
Judgement
− Either or valid alternative but must be non-financial
Nordical Ltd has assets of approx. $23m which is considerably greater than $10m which
qualifies the company as large
Nordical Ltd must complete its general purpose financial statements within five months of
balance sheet date; Nordical Ltd must complete general purpose financial statements that
fully comply with NZGAAP meaning full compliance with NZIFRS; an valid disclosure
requirement (eg must include accounting policies, must show donations, directors fees etc
D
D
(b) (iv)
(c) (i)
(c) (ii)
(c) (iii)
- Any one valid obligation D
See NZ Framework paragraph 9 or Taihape Tours Ltd answer (e) (iv) and (v)
Both the following two tests apply after the dividend is paid
• Balance sheet test – assets are greater than liabilities after dividends are paid
• Liquidity test – the company is able to pay its debts as they fall due in the ordinary
course of business after the dividend is paid
Judgment
− States one test accurately or gives both without reference to after dividend paid
D
− States both tests including after dividend paid
A
The assets are greater than the liabilities in the Balance Sheet
There is a positive working capital indicating broadly that the business should be able to
meet its debts in the ordinary course of business
Judgement
− Gives one piece of evidence
D
− Explains both pieces of evidence
A
The expense definition clearly states an expense is “not a distribution to owners”
A dividend is a distribution to the owners hence it is not an expense of Dynamic Physio
Ltd.
Judgement
Just defines expense/says dividends is a distribution to owners
D
Makes a clear link from the “not a distribution to owners” aspect of the expense definition
to the dividends being a distribution so not an expense
E
Level 3 Accounting Conceptual Framework – Answers page 56

Part B
(a)
(b)
(c)
It has been assumed Nordical Limited will carry on into the foreseeable future.
Management do not see any reason why Nordical Ltd is not a going concern (having
assessed this) – ie Nordical Ltd has no reason or plans to liquidate – as they have not
reported assets at liquidation values or given any other indication that Nordical Ltd is not a
going concern so the balance sheet has been prepared based on the going concern
assumption
Assets and liabilities have been identified as current and non-current – non-current assets
and liabilities have an expected “life” of more than one year/operating cycle of the
business so the business must be planning to continue into the foreseeable future/clearly
Judgement
− Definition of going concern only provided
− Answer refers to Nordical Ltd’s management having assessed the business as a going
concern and prepared the financial statements accordingly
Comparability – enables comparisons to be made between different periods
Judgement
− Identifies qualitative characteristic
− Explains the characteristic in relation to comparative figures – refers to comparing time
periods
Understandability – assists with the user’s understanding/comprehension of the financial
statements
Reliability – notes give more information about actual events to assist/ensure transactions
and other events are represented faithfully, are based on neutral information, represent
substance rather than legal form, and the financial statements are complete (nothing
material to a proper understanding has been omitted)
Judgement
− Identifies qualitative characteristic
− Explains the characteristic in relation to the notes
D
A
D
A
D
A
Level 3 Accounting Conceptual Framework – Answers page 57

Part C
(a)
(b)
(c)
(d)
(e)
1. recognition criteria for assets/probable future economic benefit/reliable
measure/prudence
2. Inventory is measured at the lower of cost and net realisable value to ensure the
probable future economic benefit of the inventory is reliably measured as to the amount
of benefit likely to flow to the entity. This amount should not be overstated (prudence
part of reliability)
Judgement
− Identifies an appropriate concept
− Refers to measurement of inventory in relation to the concept identified
− Links the measurement of inventory to the amount of benefit likely to flow to the entity
1. Materiality –
2. assets of less than $200 could be added to assets but will not influence the user’s
decisions bout the value of the firm’s assets where the firm’s assets total nearly $23m
Judgement
− Identifies and/or simply defines materiality
− Adds reference to a $200 asset not being likely to influence decisions
− Adds a comparison to the total assets
1. Current value measurement base/relevance/materiality
2. Land and Buildings tend to appreciate over time so current value gives a more
relevant/up-to-date/timely measure of the future economic benefit of the land and
buildings enabling better decisions to be made regarding the stability of the business
and its ability to raise finance in the future
Land and Buildings have a long useful life so differences between their
acquisition/historical cost and current value can be significant and likely to influence
users of the financial statements so materiality indicates the current value should be
disclosed
Judgement
− Identifies and/or simply defines a concept
− Refers also to land and buildings and current value being relevant or material
− Makes a link to some aspect of relevance or materiality
1. Historical cost
2. other items of property, plant and equipment are recorded at their acquisition/purchase
cost as this is reliable being verifiable by reference to the source document/invoice
detailing their purchase
Judgement
− Identifies and/or simply defines historical cost
− Refers to other items… and recording
− Links historical cost to some aspect of reliability
1. Asset/reliability
2. there is no past transaction relating to when this “extra” goodwill was acquired / the
goodwill does not faithfully represent a transaction or past event, and the amount of
probable future economic benefit cannot be measured with reliability as it is not
neutral/free from bias hence it fails to meet the recognition criteria for an asset so
cannot be recognised in the balance sheet
Judgement
− Identifies and or simply defines asset/reliability
− Refers to goodwill and recognises no past transaction/does not faithfully represent a
past transaction/event
− Links measurement of amount to not being able to be measured reliably hence fails the
criteria for recognition as an asset
D
A
E
D
A
E
D
A
E
D
A
E
D
A
E
Level 3 Accounting Conceptual Framework – Answers page 58

(f)
1. Liability
2. the law suit may or may not involve a future outflow of resources/money and at present
the amount (of the future outflow of resources) cannot be measured with reliability – it
would not be free from bias so it cannot be recorded as a liability in the balance sheet
or
1. materiality
2. the law suit must be disclosed in the notes to the balance sheet as a contingent liability
as it is likely to influence the decisions of users of the financial statements because of its
nature (the firm may have acted illegally) or its potential amount $100,000 is significant
Judgement
− Identifies and/or simply defines liability or materiality
− Refers to the law suit
− Links liability to not being able to be recorded because of no reliable measure or
materiality to influencing decisions because of either the nature or significant amount (if
the firm lost the case)
D
A
E
Part D
(a)
Limited liability does not apply if you have given personal guarantees over the debts of
the business and banks and suppliers have indicated they would require these
Judgement – answer must refer to context
A
(b) Jim will have the majority voting rights or Jim will maintain control over the company D
(c)
(d)
Allows for modification of the Companies Act by allowing for shares to be repurchased –
helps keep control in the hands of a few shareholders – limits the powers of directors –
limits the sale of shares
Judgement
− Just says can modify companies Act
− Adds a valid example of a modification that would be relevant in the circumstances
• Less expensive to set up
• Fewer compliance costs
Judgement – any valid reason
D
A
D
Level 3 Accounting Conceptual Framework – Answers page 59

Exercise Ten – NCEA 2004 Adapted – page 83
Evidence Statement
Part A
Q
Evidence
(a) (i) Constitution D
(a) (ii)
(a) (iii)
• so Dave and Rose can take full advantage of the Companies Act 1993
• so they can limit who they sell shares to
• so they can keep the company small
• so they can limit their powers as directors etc.
Any one reason.
In the partnership the entire profit was shared between Dave and Rose based on the clauses
in their agreement.
In the company they will receive a dividend based on the number of shares they own as
their share of the profit while the remaining profit will be retained in the company.
– Answer just refers to drawings/dividends.
– Answer refers to clauses in a partnership agreement and/or dividend based on number of
shares and/or some profit retained.
(b) (i) Dave and Rose are not personally liable for the company debts. D
(b) (ii)
(c) (i)
(c) (ii)
Once they have paid their shares in full (award A if included in (i) above and not also stated
here).
• provided they have not given any personal guarantees
• they do not act negligently as directors
• they do not make a distribution to owners when the company fails the solvency test.
Any one of these three.
Objectives are:
• to provide information about the financial position, performance and changes in
financial position of an entity that is useful to a wide range of users in making economic
decisions.
• assessing the entity’s financial (and service) performance, financial position and cash
flows
• making decisions about providing resources to, or doing business with, the reporting
entity.
Any one
Purposes are:
• NZIFRS establish requirements for recognising, measuring and disclosing transactions
and other events in general purpose financial statements
Or
• Financial reporting standards are the primary indicators of generally accepted
accounting practice (which reporting entities must follow in the preparation of general
purpose financial statements).
Either one at a basic level
– FRS are rules used in the preparation of financial statements.
Either one at the explained level
– refers to measuring transactions/assets/liabilities etc or refers to GAAP
D
D
A
A
E
D
D
A
Level 3 Accounting Conceptual Framework – Answers page 60

(c) (iii)
(c) (iv)
• it is not publicly accountable – it is not an issuer
• it is not large (does not have more than $20m income, $10m assets, 50 employees)
• Rose and Dave are the sole shareholders and directors
• The annual turnover is $2.7m which is less than $20m (and greater than exempt total);
total assets are $1.2m which is less than $10m (and greater than exempt total) allowing
it to qualify under size criteria
First two with no reference to Northern Maintenance Ltd
Next two – links to some aspect of Northern Maintenance Ltd
• The cost of producing full general purpose financial statements would outweigh the
benefits to shareholders who are also directors since they will already know a
considerable amount about the company and do not need as much information as
shareholders who do not have this position.
• Discussion of the size criteria leading to it being more costly to fully comply with FRS
than benefits to be gained as smaller companies will have less people interested in their
financial statements
– for costs of doing something should not outweigh benefits
– the cost of producing general purpose financial reports should not outweigh the benefits
to readers of those reports
– where discussion links costs and benefits to the director/ shareholder situation or the size
situation as per evidence.
D
A
D
A
E
Part B
(a)
(b) (i)
Equipment is (initially) stated at cost of acquisition in the accounting records.
– Answer simply says historical cost is purchase/original or acquisition cost
– refers to equipment and cost of acquisition or purchase and recording/stating (in
accounting records/financial statements).
Historical cost is the cost of acquisition or purchase so it is based on a transaction for which
there is usually a source document which provides evidence of the cost – this is neutral (free
from bias) and represents the transaction faithfully provided if it is an asset it has been
reported as an asset
– defines reliability
– clearly links historical cost to providing a reliable measure
(b) (ii) Land and buildings D
D
A
D
A
(b) (iii)
The current value of land and buildings is a more relevant (up-to-date/timely) measure of the
value of the land and buildings as it represents the future economic benefit of the land and
buildings so allows for better decisions to be made regarding the stability of the business and
its ability to access debt finance in the future – assists better with making economic
decisions regarding Northern Maintenance Ltd
Answer must cover all aspects, refer to land and buildings, current value and link to
relevance for making decisions/relevance of future economic benefit
E
Level 3 Accounting Conceptual Framework – Answers page 61

(c)
(d) (i)
(d) (iii)
Operating revenue includes amounts received and receivable for industrial machinery
maintenance services provided to customers – it reports these amounts in the current
period as revenue, as they have been earned in this period and recognises an asset –
accounts receivable/accrued revenue on balance sheet date.
Important note: use of the word recorded alone is wrong /“recorded in the financial
statements” is ok
– Answer only defines accrual basis (but must not use only recording) eg – accrual basis is
reporting revenue/transactions in the period to which it relates
– include reference to amounts received and receivable being reported as revenue in the
current period and/or amounts receivable being reported as an asset, (Accounts
Receivable) on balance day.
– includes both reported as revenue and reporting of asset
Note the term income may replace the term revenue.
Accounts Receivables have been stated at estimated realisable value (after allowing for
debts where collection is doubtful).
This is so we are faithfully representing the event that some accounts receivable will
ultimately not be received
– Simply restates the policy
– provides a valid link to reliability
The probable future economic benefit to be received from accounts receivable is their
estimated realisable value and this should be shown as the amount for the asset. The amount
of cash likely to flow to the business is the estimated realisable value (not the historical cost)
because of the potential bad debts included in accounts receivable
Answer must link probable future economic benefit to estimated realisable value and/or
accounts receivable less allowance for doubtful debts.
D
A
E
D
A
E
Part C
(a)
(b)
When employees use the vehicle to go to jobs to provide maintenance of machinery in the
future this provides future income/revenue for Northern Maintenance Ltd from which cash
will be received either when the job is done (cash job) or later (credit job)
– provides a valid link from the vehicle to how the future economic benefit arises from its
use by employees to get to jobs which then earn income/revenue.
The vehicles are only used for three years and each year will provide equal amounts of
benefit to the business or the consumption of the (future economic) benefit of the vehicles in
each of the three years will be the same so charging the same amount of depreciation is
appropriate.
– must refer to the vehicle and explain that its pattern of use/consumption of future
economic benefit is the same from year to year – hence straight-line depreciation. (note
not approximately the same)
A
A
Level 3 Accounting Conceptual Framework – Answers page 62