VCE-ACCT-U34 6.3.2 📋 – Mock Exam 3: Q2-Q8 Concepts, Statements, Classification, Budget and Extended Response

Mock Exam 3 — Questions 2 and 3

Metro Interiors | Continue on paper

(a)3 marks

Priya paid for a personal holiday using the Metro Interiors bank account and recorded it as a business travel expense. With reference to the entity assumption, explain why this treatment is incorrect and state the accounting impact.

Tip: State entity assumption, apply to Priya’s personal holiday specifically, state the accounting impact (overstated expenses, understated net profit).

(b)3 marks

Explain why Metro Interiors records its equipment at $96,000 rather than its current resale value, with reference to the historical cost concept.

Tip: State historical cost, apply to the equipment specifically, explain why resale value is inappropriate (subjective, changes, not yet realised).

(c)3 marks

With reference to relevance as a qualitative characteristic, explain why Priya should prepare monthly rather than annual Income Statements.

Tip: State relevance (information must influence decisions). Monthly = timely. Annual = too late to respond to issues.

(d)3 marks

Explain how the consistency principle applies to Metro Interiors’ use of Identified Cost for inventory valuation.

Tip: State consistency (same methods each period). Apply to Identified Cost. Explain impact if changed (comparability lost, statements misleading).

(a)3 marks

Analyse Metro Interiors’ Net Profit Margin compared to the industry average. In your answer, identify two likely causes for the difference.

Tip: 16% vs 22% industry – adverse. Two causes: high depreciation from new January equipment adds monthly charge; AR turnover 32 vs 25 days = cash pressure.

(b)3 marks

Explain the apparent contradiction between Metro Interiors having a GPM above the industry average (50% vs 44%) yet a NPM below the industry average (16% vs 22%).

Tip: High GPM = strong pricing/low COGS. Low NPM = high other expenses consuming the GP. The gap (operating expenses as % of sales) is larger than industry.

(c)4 marks

Priya is considering offering a 3/15, n/45 discount to reduce the AR Turnover. With reference to financial and non-financial considerations, discuss this decision and make a recommendation.

Tip: Financial: discount cost (3% of credit sales) vs savings from faster collection (lower bad debts, better cash flow). Non-financial: customer relationships, admin complexity. Recommendation required.

(a)6 marks

Calculate the Gross Profit for April, showing Net Sales and Cost of Sales as separate line items.

Tip: Gross Profit = Net Sales − Cost of Sales = $81,600 − $40,800 = $40,800.

(b)4 marks

Prepare the Other Revenue and Expenses sections of the Income Statement, listing each item and its subtotal.

Tip: Other Revenue: Interest Revenue $220. Total Expenses: Wages $13,800 + Rent $3,200 + Depreciation $1,290 + Insurance $300 + Electricity $540 = $19,130.

(c)3 marks

Calculate Net Profit for April.

Tip: Net Profit = Gross Profit + Other Revenue − Total Expenses = $40,800 + $220 − $19,130 = $21,890.

(d)3 marks

With reference to the accrual basis of accounting, explain why Depreciation Expense ($1,290) and Insurance Expense ($300) are both recorded in April’s Income Statement even though no cash is paid for either item during April.

Tip: State the accrual basis (expenses are recognised when the economic benefit is consumed, not when cash is paid). Apply to depreciation (equipment’s cost allocated as it is used) and insurance (the portion of the annual cover used in April). State the impact if ignored (expenses understated, Net Profit and asset/prepayment values overstated).

(a)4 marks

With reference to faithful representation, explain why the $660 electricity liability recorded at 31 March must appear on Metro Interiors’ Balance Sheet even though the invoice had not yet been paid.

Tip: State faithful representation (reports must reflect what has actually occurred, complete and free from bias). Apply to the electricity liability specifically — the obligation exists once the electricity has been used and billed, regardless of when it is paid. State the impact if omitted (liabilities and expenses understated, profit overstated, not a faithful picture of Metro Interiors’ true position).

(b)4 marks

With reference to the going concern assumption, explain why Equipment is reported on the Balance Sheet at its carrying value ($65,910 — cost less accumulated depreciation) rather than at the amount it would sell for if the business closed down immediately.

Tip: State going concern (the business is assumed to continue operating into the foreseeable future). Apply to Equipment specifically — it is valued based on its ongoing use in generating revenue, not forced-sale value. State the impact if going concern did not apply (assets would need to be revalued at likely liquidation prices, typically far lower than carrying value).

(a)4 marks

Calculate the variance for Cash Receipts and for Cash Payments, stating whether each is favourable (F) or unfavourable (U).

Tip: Receipts: $58,000 − $52,000 = $6,000 U (less cash received than budgeted). Payments: $44,300 − $41,000 = $3,300 U (more cash paid than budgeted).

(b)4 marks

Explain one likely cause of the unfavourable Cash Receipts variance, with reference to information given earlier in this exam.

Tip: Link to the Accounts Receivable turnover of 32 days (versus a 25-day industry average) identified in Question 3 — if debtors are taking longer to pay than budgeted, cash that was expected to be collected in April is instead arriving later, reducing the actual cash received in the month.

(c)6 marks

Discuss how preparing a Cash Budget benefits Priya’s decision-making, and recommend one action she should take in response to the April variances.

Tip: Benefit: allows Priya to anticipate cash shortfalls and arrange finance in advance rather than being caught out. Recommendation: tighten credit terms (such as the 3/15, n/45 discount considered in Question 3) or follow up overdue debtors, and review the timing of supplier payments — justify with reference to both variances.

(a)6 marks

Discuss the financial implications of this investment, with reference to the information Priya currently relies on to prepare financial statements and assess business performance.

Tip: The $22,000 cost must be weighed against realistic savings from fewer recording errors and reduced staff time; more accurate Identified Cost records would also improve the reliability of the Cost of Sales and Gross Profit figures used in the Income Statement (Question 4) and the ratio analysis in Question 3, where Metro Interiors’ Net Profit Margin already trails the industry average.

(b)6 marks

Discuss the non-financial implications of this investment for Priya and her staff.

Tip: Staff will need training and there may be disruption while the new system is implemented. However, more accurate, real-time inventory data would reduce stock discrepancies, support faster and more informed decision-making, and could improve the customer checkout experience.

(c)4 marks

Make a recommendation to Priya, justified by reference to both the financial and non-financial considerations above.

Tip: A clear recommendation (“should” / “should not” invest) that weighs the $22,000 cost and implementation disruption against the value of more accurate, consistently recorded inventory data — referencing the consistency principle underpinning Metro Interiors’ use of Identified Cost — scores full marks.