VCE-ACCT-U34 9.6.2 📋 – Mock Exam 6: Q2-Q8 Income Statement, Balance Sheet, Concepts, Budget and Extended Response

Mock Exam 6 — Questions 2 and 3

Harbor Homewares | Continue on paper

(a)6 marks

Using the following data, prepare the Income Statement for Harbor Homewares for June 2026. Data: Sales $92,400; Sales Returns $3,300; COGS $55,440; Wages $14,200; Depreciation $2,100; Bad Debts Expense $800; Rent $4,500; Discount Received $780.

Tip: Net Sales = $92,400 − $3,300 = $89,100. GPM = ($89,100 − $55,440) ÷ $89,100 = 40%. Note: Discount Received is other income, added below Net Profit line or as revenue depending on school treatment. Most common: add to GP or show as other income.

(b)3 marks

With reference to the accrual basis and accounting period assumption, explain why Harbor Homewares recognises the Discount Received of $780 in June 2026 even though it relates to a payment for inventory purchased in a previous period.

Tip: Accrual: revenue/income recognised when earned (when right to receive arises – at time of payment). Period: assigned to June as that is when the discount was earned.

(c)3 marks

Explain the difference between a settlement discount (discount received) and an inventory write-down as methods of increasing gross profit margin.

Tip: Settlement discount reduces AP cost on payment – recorded as Discount Received (other income), does not affect GP. Inventory write-down reduces COGS (but is an expense). Neither directly increases GPM unless the original COGS is reduced.

(a)4 marks

Analyse the likely effects on Harbor Homewares of having an AP Turnover of 50 days compared to the industry average of 42 days.

Tip: Taking longer to pay suppliers than industry average. Two possible implications: deliberately managing cash (positive) or inability to pay (negative). Consequences: supplier relationship risk vs better cash retention.

(b)3 marks

Harbor Homewares has an AR Turnover of 35 days and an AP Turnover of 50 days. Explain the cash flow implication of this combination for the business.

Tip: Collecting from customers in 35 days but paying suppliers in 50 days = positive working capital cycle. Cash received before obligations due.

(c)3 marks

Nina is considering offering a 2/10, n/30 settlement discount to customers to improve AR Turnover. Discuss with financial and non-financial considerations and make a recommendation.

Tip: Financial: discount cost vs cash flow and bad debt reduction benefit. Non-financial: customer relationships, admin. Recommendation.

(a)4 marks

Prepare the General Journal entry to record depreciation of the Store Fittings for June 2026.

Tip: Annual depreciation = ($19,200 − $0) ÷ 8 = $2,400. Monthly depreciation = $2,400 ÷ 12 = $200. Dr Depreciation — Store Fittings $200, Cr Accumulated Depreciation — Store Fittings $200.

(b)3 marks

Prepare the General Journal entry to record the portion of the Insurance premium used up during June 2026.

Tip: Monthly insurance used = $2,400 ÷ 12 = $200. Dr Insurance Expense $200, Cr Prepaid Insurance $200.

(c)4 marks

Prepare the General Journal entry to adjust the Allowance for Doubtful Debts to the required balance at 30 June 2026.

Tip: Required allowance = 4% × $38,500 = $1,540. Increase required = $1,540 − $1,200 = $340. Dr Bad Debts Expense $340, Cr Allowance for Doubtful Debts $340.

(d)5 marks

With reference to the accrual basis, explain why Harbor Homewares records these three balance-day adjustments even though no cash is received or paid at 30 June for any of them.

Tip: State the accrual basis (expenses and revenues are recognised when incurred/earned, not when cash moves). Apply to at least two of the three adjustments (the Store Fittings and prepaid insurance are consumed over time; the doubtful debts increase reflects debts likely to become uncollectable even though not yet confirmed). State the impact if the adjustments were omitted (expenses understated, assets overstated, and net profit overstated, misrepresenting June’s performance).

(a)4 marks

With reference to relevance, explain why Harbor Homewares performs balance-day adjustments (such as those in Question 4) every month rather than only once a year.

Tip: State relevance (information must be capable of influencing decisions, which requires it to be timely). Apply to monthly adjustments for Nina. State the impact of only adjusting annually (Nina could not detect a problem, such as a rising doubtful debts trend, until months after it began).

(b)4 marks

With reference to faithful representation, explain why the Allowance for Doubtful Debts must be increased to $1,540, even though the specific customers who will default are not yet known.

Tip: State faithful representation (reports must reflect economic reality, complete and free from bias). Apply to the doubtful debts estimate specifically. State the impact of omitting it (Accounts Receivable and profit would be overstated, misleading Nina about the amount she can realistically expect to collect).

(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 − $52,300 = $5,700 U (less cash received than budgeted). Payments: $44,800 − $41,000 = $3,800 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 AR Turnover of 35 days (versus a 22-day industry average) from Question 3 — if debtors are taking longer than planned to pay, budgeted cash inflows for July will not arrive on schedule, producing a receipts shortfall.

(c)6 marks

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

Tip: Benefit: allows Nina to anticipate cash shortfalls and arrange finance or adjust spending in advance rather than being caught out. Recommendation: follow up overdue debtors more actively given the 35-day AR turnover, and review the timing of supplier payments (including early payments made to capture settlement discounts, as in Question 1) so they do not clash with periods of tight cash flow.

(a)6 marks

Discuss the financial implications of this change, with reference to the rising cost of cookware sets during 2026.

Tip: Under FIFO in a period of rising costs, Cost of Sales is based on the oldest, cheaper stock ($53 units), so Gross Profit and Inventory on the Balance Sheet are reported higher (closer to current replacement cost) than under weighted average, which blends old and new costs into one average figure. Switching to weighted average would therefore report a lower Gross Profit Margin and a lower Inventory valuation than FIFO for the same underlying transactions — this could affect the ratio analysis Nina relies on in Question 3.

(b)6 marks

Discuss the non-financial implications of this change for Nina and her staff.

Tip: Weighted average is generally simpler to calculate than tracking each FIFO batch individually, which could save staff time; however, Nina’s systems and staff are already set up for FIFO, so switching would require retraining and reconfiguring the inventory recording system, at least in the short term.

(c)4 marks

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

Tip: A clear recommendation (“should” / “should not” switch) that weighs the loss of the higher, more current FIFO-based Gross Profit Margin and Inventory valuation against any administrative simplicity gained, referencing Harbor’s specific rising-cost environment, scores full marks.