VCE Revision lecture 22 Oct 2023

VCE ACCOUNTING UNITS 3&4
MASTERCLASS
Neville Box & Matilda Education
Please note:
● - the masterclass will commence at 11.00 am
● - your microphone and camera must remain off
● throughout the session
● - this session will be recorded and circulated
● - there will be time for questions at the end of the
● masterclass. Please use the chat box at the
bottom of your screen to post your questions
● - the masterclass will conclude at 12:30 pm

VCE Accounting Units 3 & 4
Online Masterclass
Presented by: Neville Box – St Bernard’s
College
In conjunction with: Matilda Education
Sunday 22 October 2023

Exam Preparation
Four past exams are available: 2019, 2020, 2021 & 2022.
Be careful: Budgeting was removed from the 2020 exam
(due to Covid adjustments).
Timing: 1.2 minutes per mark: 10 marks = 12 minutes.
Use the answer books provided and ‘race the clock’.
Do NOT try to predict topics – you must know the lot!

Exam Preparation
• Reading time is planning time
• Scan the answer book
• Look for your favourite questions
• Do the easiest questions first
• Many errors made by students are reading errors
Read Think Write

Exam Technique
• Show all workings when space is provided
• Be aware of omissions that will cost you marks
- no dates
- no balancing of accounts
- no narrations
- no labelling of key items (gross profit, net profit, net
cash flows from operating activities)

Typical Exam Errors
• Not answering the question
• Insufficient detail: an ‘Explain’ question worth 2 marks
usually indicates that 2 distinct points should be
made. Do NOT repeat your first point
• Incorrect reporting period
• Incomplete or incorrect titles, especially in accounts
• Ignoring constraints
Sample question: Apart from theft, state two causes of
an inventory loss

A summary of the course:
The Accounting Framework:
- Accounting Assumptions: P A G E
- Qualitative Characteristics of Accounting: T U R F
C V
- Definition of Accounting Elements: A L OE R E
Reminders:- do not mix up QCs and Assumptions
- when asked for a QC or an assumption, state one only
- eliminate ‘clearly wrong’ answers and then select your
strongest answer

The Accounting Framework:
Sample questions:
1. Why do accountants classify balance sheets? Refer to
a Qualitative Characteristic in your answer.
2. Select an item from the balance sheet provided to
demonstrate entity and going concern.

Recording of financial transactions:
- Business documents – recording in the General
Journal
- General journal double entries – revise all standard
entries. Revise all cash and credit transactions,
including returns
- General ledger accounts
- Recording of the GST

Recording of financial transactions:
- Perpetual Inventory: product costs and purchases
- FIFO and Identified Cost – which one to use?
- Inventory cards: all transactions, including memos
- Inventory losses and gains
- Balance Day Adjustments
- Closing of the General Ledger (P & L Summary)

Reminders: Inventory cards using FIFO
Sales returns: reverse the entries in the OUT column. That
is, use the latest cost price used for inventory moving out
of the business
Purchases returns: nothing to do with FIFO. The cost price
is provided by the supplier and the goods being returned
will be identified in an exam question.
Inventory losses: apply FIFO
Inventory gains: use the last cost price recorded in the IN
column of the inventory card

Recording of financial transactions:
Sample questions:
1. Explain two reasons for using the FIFO method
when recording sales of inventory.
2. Explain why closing entries are done at the end of
a reporting period.

Inventory valuation:
- Product Cost versus Period Cost
- Lower of Cost and Net Realisable Value
Sample questions:
1. Justify the treatment of the delivery charge as a
product cost.
2. Does it really matter how delivery charges are
treated? Profit will be the same anyway. Do you
agree?

Accounting for Non-current assets
- What is included in the cost of an asset?
- Depreciation of Non-current assets: SLM & RBM
- Which method of depreciation to use? Always focus
on the revenue earning pattern of the asset.
- Disposal of Non-current assets
- Revise both general journal entries and ledger
accounts
- An asset may be sold for cash or as a trade-in. Be
prepared for both!
- When selling for cash, don’t forget the GST entry.

Accounting for Non-current assets
Disposal of van account
Van 40000 Acc depn of van 15000
Bank 20000
Loss on disposal
of van 5000
40000 40000
If the van was traded-in, the ‘Bank’ entry would simply be
replaced with ‘Van’. All other entries remain the same.

Accounting for Non-current assets
Sample questions:
1. Explain how depreciation affects the three reports:
Cash flows, Income statement and balance sheet.
2. Explain how a profit or loss occurs on a disposal of
a non-current asset.
3. Depreciation is said to cause a conflict between
verifiability and relevance. Explain how this
conflict occurs.

Accounting for Bad Debts:
Three processes to keep in mind
- The General Journal entry to establish an Allowance
for Doubtful Debts
- The General Journal entry to write off a bad debt
- The General Journal entry to adjust the Allowance
for Doubtful Debts

Accounting for Bad Debts:
1. The General Journal entry to establish an Allowance for
Doubtful Debts
On 30 June, the owner has decided to establish an allowance
for doubtful debts of 2% of net credit sales and has provided the
following information: Credit sales $104 000
Cash sales $140 000
Sales returns $ 4 000
Allowance = 2% of ($104 000 - $4 000) = $2 000
General Journal
Date Accounts Dr Cr
30 June Bad debts 2 000
Allowance for doubtful debts 2 000

Accounting for Bad Debts:
2. The General Journal entry to write off a bad debt.
An accounts receivable who owes $3 300 has been declared
bankrupt and is paying 20 cents in the dollar.
Calculations: Cash received = 0.20 x $3300 = $660
Amount still owing: $3300 - $660 = $2640
GST on the amount owing: $2640/11 = 240
Bad debt to be written off $2400
General Journal
Date Accounts Dr Cr
Bank 660
GST Clearing 240
Allowance for doubtful debts 2 400
Accounts receivable 3 300

Accounting for Bad Debts:
3. The General Journal entry to adjust the balance of the
allowance for doubtful debts.
As a result of the bad debts experienced by the business, it has
been decided to increase the allowance to $3 000.
Hint: In order to prepare the general journal entry, prepare the
allowance for doubtful debts account first:
Allowance for doubtful debts
Accounts receivable 2 400 Bad debts 2 000
Balance 3 000
5 400 5 400
Balance 3 000
Actual bad debt
written off
Estimate from last period
New balance required

Accounting for Bad Debts:
The last step is to record the adjusting entry in the Allowance for
doubtful debts account.
Allowance for doubtful debts
Accounts receivable 2 400 Bad debts 2 000
Balance 3 000 Bad debts 3 400
5 400 5 400
Balance 3 000
The general journal entry required is therefore as follows:
General Journal
Date Accounts Dr Cr
30 June Bad debts 3 400
Allowance for doubtful debts 3 400

Balance day adjustments
• Depreciation
• Inventory losses or gains
• Inventory write-downs
• Prepaid expenses
• Accrued expenses
• Bad debts
• Unearned revenue
• Accrued revenue
❖ REMEMBER: Always debit the expense!

Sample question: Balance day adjustments
4+3+3 = 10 marks
2016 Q3 Busnext pays insurance in advance in March each year for
12 months from 1 April to 31 March. Reporting period ends on 30
June. On 1 July 2015 the balance in the Prepaid Insurance account
was $2700. On 27 March 2016 the business paid the premium of
$4356, including GST. This included a price increase on the
previous year.
a Prepare the general journal entries to adjust and close the
relevant accounts on 30 June 2016. Narrations not required.
b Show how the Prepaid Insurance account would appear in the
general ledger at 30 June 2016 after all entries were completed.
c With reference to one accounting assumption, explain the
purpose of closing the general ledger.

Sample question: Balance day adjustments
General Journal
Date Accounts Dr Cr
30 June Insurance expense 3690
Prepaid insurance 3690
P&L Summary 3690
Insurance expense 3690
General Ledger
Prepaid Insurance
1 Jul Balance 2700 30 Jun Insurance expense 3690
27 Mar Bank 3960 30 Jun Balance 2970
6660 6660
1 Jul Balance 2970
Accounting assumption: Period
Closing entries have two purposes. The first one is to close off all revenues
and expenses in order to determine net profit in the P&L summary account.
The second purpose is to return all revenue and expense accounts back to
zero balances, in readiness for the next reporting period.

Income Statements
Watch out for:
- Cost of Goods Sold (as distinct from Cost of Sales)
- Inventory losses / gains
- Gross profit / Adjusted gross profit
- ‘Other revenues’ e.g. commission, interest, discount revenue
- Discount expense / Discount revenue
- Label your Net Profit
- Half statements / Full statements

Balance Sheets
Watch out for:
- Prepaid expenses
- Accumulated depreciation (add this year’s dep’n)
- Bank overdrafts
- Liabilities split between current and non-current
- Extracts of the report
Sample questions:
1. Prepare the current liabilities section of the balance sheet
(3 marks) How many items would you be looking for?
2. State the effect on Owner’s equity in the Balance Sheet if
drawings of inventory have not been recorded.

Cash Flow Statements
Three categories: Operating / Investing / Financing
Common errors to watch out for:
- Classification of interest (must be operating)
- Inclusion of credit items (CASH only)
- Inclusion of depreciation (non-cash item)
- Classification of capital (must be financing, NOT investing)
Also, know your definitions and always remember, profit is not cash!
Sample questions:
1. Explain what is meant by Investing Activities.
2. The owner is confused: although the business has earned a profit the
cash flow statement shows a decrease in the cash held by the
business. State and explain, two reasons to explain this situation.

Cash Flow Statements
Sample question:
Consider the following cash transactions:
- Interest on overdraft
- Additional capital
- Repayment of a loan
Complete the table below to show how these three items would be
classified in a cash flow statement.
Interest
Capital
Loan Repayment
Item Operating / Investing /
Financing
Inflow / Outflow

Know your templates #1
Accounts Receivable
Balance
Bank / Discount expense
Sales / GST Clearing Sales returns / GST Clearing
Allowance for doubtful debts /
GST Clearing
Balance

Know your templates #2
Accounts Payable
Bank / Discount revenue Balance
Inventory / GST Clearing Inventory / GST Clearing
Balance

Know your templates #3
Balance
Bank
Accounts payable
Cost of sales
Capital
Inventory gain
Inventory
Cost of sales
Accounts payable
Drawings
Advertising
Inventory writedown
Inventory loss
Balance

Know your templates #4
GST Clearing
Bank
Balance
Bank
Bank
Accounts payable
Accounts payable
Accounts receivable Accounts receivable
Balance OR Balance

Know your templates #5
Drawings
Capital
Balance
Bank
P & L Summary
Expenses
Capital
P & L Summary
Revenues

Sample question:
The owner’s equity section of a balance sheet is shown below:
$ $
Owner’s equity
Capital 58000
Plus Net profit 22000 80000
Less Drawings 16000
64000
Revenues for the period were $38500. Prepare the P&L Summary
account.
P&L Summary
Expenses 16500 Revenues 38500
Capital 22000
38500 38500

Budgeting:
- Purpose of budgeting: planning and control
- Reconstruction of general ledger accounts: missing data?
- Types of Budgets
- Preparation of budgets
- Budget Variance reports
- Favourable and Unfavourable variances
Sample question:
Accounts receivable balance: 1/1/22 (actual) $8000
Accounts receivable balance 31/12/22 (budgeted) $9000
Budget predictions for 2022:
Discount expense $800
Credit sales $12000, plus GST
Cash sales $15000, plus GST
How much cash is expected to be received in 2022?

Reconstruction of accounts:
Accounts receivable
Balance 8000 Sales returns 200
Sales 12000 GST Clearing 20
GST Clearing 1200 Discount expense 800
Bank 11180
Balance 9000
21200 21200
Balance 9000
Budgeted cash collections from Accounts receivable $11180

Budgeting: Sample questions
2010
Explain how budgets can be used to facilitate control during
the budget period.
2017
Explain how budgeting improves control within a business.
Variance reports: Sample questions
2004
Explain why cash budgets should be prepared more frequently
than on a yearly basis.
2007
Explain why a variance report should be prepared more than
once a year.

Evaluation of Performance:
- Financial indicators: no calculations required!
- Difference between Profit and Profitability
- Liquidity
- Financial Stability
- Benchmarks
- Non-financial indicators
Sample question: a business which buys its inventory on 30
days credit has determined the following results for its
accounts payable turnover:
2021 2022 2023
24 days 32 days 40 days
Is the trend shown above Favourable or Unfavourable?

The Du Pont Formula
- A summary of the Inter-relationships between indicators
Return on assets
Net profit margin 10% ROA 2t Asset turnover
20%
6% 24% 4t
Gross profit margin
Account receivables
turnover
Expense ratios
Inventory turnover
Sample question:
2009 Explain how the Return on Assets can improve despite a fall in the Net Profit
Margin.
2010 Explain how the Return on assets can increase while the Asset Turnover can
decrease.

Evaluation and ‘Discuss’ questions: Example #1: Discuss
2013 Q5 Discuss, using the information from the graph below, the owner’s
assessment of positive business performance.
Budgeted cash flows for December 2013
(6 marks)

Valid points could include:
- Positive result in financing activities – loans and capital
injections?
- Positive result in investing activities – sold off assets?
- These sources of cash are not sustainable
- Operating activities predicted to be negative – not a good
sign!
- Budget only looks at cash – what about revenue
earned / expenses incurred?
41

Valid points could include:
- Budget is for one month only – what about the other
11 months?
- Consider historical data, not just budgeted data
- Book shops should be busy in December – not a good
sign!
- Extend the budget period to beyond one month to get a
better idea of where the business is heading
42

Example #2: Discuss. 2021 Question 5
The accountant has stated that the data below indicates that liquidity problems
need to be addressed. The owner disagrees and states that liquidity is
satisfactory because WCR is on budget. Note: actual sales are on target to meet
budget.
Discuss both statements.
Budget Actual
Accounts receivable 23000 29000
Inventory 14000 27000
Accrued wages 5000 10000
Accounts payable 20000 35000
Bank (10000) (18000)
WCR 0.8:1 0.8:1
QAR 0.46:1 0.39:1
43

Example #2: Discuss. 2021 Question 5
Discuss both statements.
Responses could include comments such as:
- Although WCR is on budget it is still less than 1:1 which could still
indicate a liquidity problem
- QAR did not achieve budgeted levels: liquidity problem?
- The bank account was budgeted to be $10000 overdrawn. It is now
$18000 overdrawn
- Accounts receivable is $6000 over budget which could indicate poor
collection procedures which will adversely affect liquidity
44

Example #2: Discuss (cont.)
- Accrued wages was budgeted to be $5000. It has blown out to $10000. Has the
business paying wages on time? Or have they simply employed excessive staff
members
- Accounts payable was expected to be $20000 – it is now $35000. The business
looks as if it is struggling to pay debts on time. It appears that inventory has
been expanded well beyond budgeted levels. The business appears to have
purchased far too much inventory and now may not meeting obligations to
accounts payable.
45

Evaluation and ‘Discuss’ questions: Example #3
2020 Q3
2018 2019 2020
Gross profit margin 60% 64% 68%
Net profit margin 33% 33% 31%
The owner states that as sales have remained constant over
the 3 year period, this shows that the business has achieved
favourable profitability.
Using the information provided, discuss whether the owner’s
statement is justified.
6 marks

Evaluation and ‘Discuss’ questions: Example #4
2018 Q4
2017 2018
Working capital ratio 2.4:1 3.1:1
Quick asset ratio 1.7:1 1.5:1
Accounts receivable t/o 58 days 52 days
Inventory t/o 91 days 111 days
Accounts payable t/o 27 days 23 days
a. Using the data above, discuss why the business may be
experiencing a shortage of cash every month. 6 marks
b. Suggest and justify two strategies to improve Inventory
turnover.
4 marks

Evaluation of financial stability and the Debt ratio
Why do business owners borrow funds?
- through necessity, as capital is limited to personal resources
- to increase the owner’s ROI
Changes in the debt ratio – implications?
• the higher the debt ratio, the higher the risk
• the higher the risk, the more likely a business will collapse
• more debt = higher repayments = greater risk of collapse
• more debt = high interest expense = lower profit
• more debt = greater pressure on liquid resources

Evaluation of financial stability and the Debt ratio
Sample questions:
2016 Explain the implications of having a debt ratio that is
significantly higher than industry average. 4 marks
2015 The Debt ratio of a business has increased from 40% to 70% over
the past two years.
Explain one positive effect and one negative effect that this increase
could have on the business.
4 marks

Non-financial indicators
These may include:
- Customer satisfaction surveys
- Quality assurance programs
- The number of times customers returned goods
(not sales returns in $)
- Staff satisfaction surveys
- Staff absenteeism rates
- Number of hits on the business website
- Postcode surveys of customers (growth?)
- General economic conditions

Ethical considerations (usually a Discuss type question)
There is never only ONE correct response!
• Discuss the issue at hand, giving different viewpoints of the argument
• Support your statements with explanations or evidence
• Do NOT simply state your personal opinion. Be open to both sides
• Consider the financial implications of the decision or issue. This could
also cover financial benefits and financial costs
• To make sure you cover both sides, use ‘However’ to make the
opposite argument

Modelling questions – a feature of the last few exams!
There may be a number of option presented and there may not be
only ONE correct response!
• Consider the options presented and make up your mind which one is
your preferred response.
• Support your statements with logical explanations and/or accounting
based evidence
• Consider the financial implications of the decision or issue, but also
consider any other relevant factors.
• Refer to Question 9c , 2022 exam for a sample question.

Good luck for the exam period!
Question time
nevillebox@gmail.com

Available now for instant download
from matildaeducation.com.au
Macmillan Accounting VCE Units 3&4 Student Digital Access
●
●
●
●
●
●
●
- Digital textbook authored by Neville Box
- Study tips, advice and exam success strategies
- Clear language, explanations and worked examples
- “Mr Box on Demand” video series
- PowerPoint presentations, comprehensive chapter
reviews, content summaries as well as case studies,
ethical scenarios and research activities

Information for teachers only:
Kim Lowe
(North and West Vic)
0409 124 272
kimlowe@matildaed.com.au
Book a virtual meeting: https://calendly.com/kimalowe
Katrina Tucker
(South and East Vic)
0449 875 445
katrinatucker@matildaed.com.au
Book a virtual meeting:https://calendly.com/katrinatucker