Solutions Manual - Accounting 9th Edition Hoggett Solutions Manual...

Solutions Manual to accompany Accounting 9e by John Hoggett Lew Edwards John Medlin Keryn Chalmers Andreas Hellmann Claire Beattie Jodie Maxfield

© John Wiley & Sons Australia, Ltd 2015 Accounting 9th Edition Hoggett Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 2: Financial statements for decision making

© John Wiley & Sons Australia, Ltd 2015 2.1

CHAPTER 2

FINANCIAL STATEMENT S FOR DECISION MAKING

DISCUSSION QUESTIONS

SOLUTIONS

• Explain the basic differences between a sole trader (or single proprietorship), a

partnership and a company. Discuss the factors that need to be considered in selecting an appropriate structure for Cynthia’s beauty services business.

The three basic business structures are:

Sole traders are where individuals conduct business in their own capacity. They would be contributing their own capital or equity to the business and would be borrowing money in the name of the business in their own name. They would be liable to repay the outstanding debt of the business and, if unable to repay, the bank, would have access to their own personal assets to repay the outstanding debt. This business structure is suitable for small operations with small staff and turnover. The sole trader has sole responsibility and control for the business operations and activities. This structure is suitable for small businesses which require minimal capital to set up and have relatively low running costs and risk.A partnership is two or more persons in business together, operating under a partnership agreement which may or may not be a formally written document. Partnerships have the advantage over sole traders in that they have a larger base for capital contribution and are able to share the risks and responsibilities associated with running a business. The partnership is treated as a separate entity for accounting purposes but is not a separate legal entity. This means that the underlying assets and liabilities of a partnership belong to the individual partners in the proportion agreed upon as part of the partnership agreement.Therefore if the business activities prove to be unsuccessful, creditors have the right to access the personal assets of the individual partners in the event the business is unable to repay any outstanding debt. For this reason, the partnership structure is usually used where there is a low element of risk to the business or where the law dictates that the business entity must be run by the individuals providing the service. For example, work completed by professionals including accountants and lawyers.The company is a separate legal entity with ownership of a company attributed to shares held.The owners of the company are known as shareholders. The advantage of this business structure is that, as a separate legal entity, the assets and liabilities belong to the company. In the event the business is unable to repay its debt, the creditors only have access to company assets for repayment of the debt. The investment in the company by its shareholders is limited only to the shareholders’ capital contribution, i.e. what the shareholder pays for the shares.This business structure is more appropriate for entities requiring larger capital contribution, which have a large number of overheads and employees and has a higher business risk. The disadvantages include higher set up and ongoing costs and possible reduction in control over the business operations where shareholders are not directly involved in the business operations.

Solutions Manual to accompany Accounting 9e by Hoggett et al

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Factors that Cynthia needs to consider in selecting an appropriate structure for her business

include:

 simplicity in setting up the business Sole traders and small partnerships are easier to set up compared to companies. establishment costs Companies are more expensive to establish compared to sole traders and partnerships. liability issues Sole traders and partnerships have unlimited liability, which means owners and partners are personally liable for their business’ debts, including those resulting from lawsuits or the actions of other partners. If unlimited liability is a concern, then Cynthia may want to consider setting up a company instead of being a sole trader or partnership. tax Tax reporting requirements for companies are far greater than for sole traders and partnerships. control of the business As an owner of a sole trader, Cynthia would have a complete control over her business.If she chooses to partner with someone through a partnership, she will need to discuss business matters with her partner. If Cynthia decides to set up a company and employs a management team, she may not have as much control in running the business as it will be the responsibility of the management team. access to capital The access to finance for a sole trader is limited to the owner’s resources. On the other hand, a partnership has greater access to capital from resources of all partners, and a company has even far greater access to capital from various shareholders.

• Oxfam is a ‘not-for-profit’ entity. Discuss what it means to be a ‘not-for-profit’

entity.The Australian accounting standards define a not-for-profit entity as ‘an entity whose principal objective is not the generation of profit’ (AASB 136 para. Aus6.2). This means that a not-for-profit entity can still generate profits, however any profit generated by the entity must be used to further the entity’s objectives rather than serve the interests of the members or owners. For example, Oxfam is a not-for-profit entity as any surplus or profit made from its operations will be used to achieve its purpose, which is to create lasting solutions in order to free people from poverty.For tax purpose, not-for-profit entities in Australia can be categorised as charities (such as Oxfam), income tax exempt funds, and other not-for-profit organisations (such as sporting clubs and community service groups). Performance of not-for-profit entities can be assessed by comparing their activities to their stated goals for the period.

• Entities are expected to perform in the spheres of profit, people and the planet. List

some key performance indicators applicable to each sphere.

The sphere of profit relates to financial performance and business strategies of the entities.

Examples of key performance indicators under the profit sphere include:

 profit margin;  profit after tax;  return on assets;  return on equity;  asset turnover;

Chapter 2: Financial statements for decision making

© John Wiley & Sons Australia, Ltd 2015 2.5  EPS growth;  sales growth

The sphere of people relates to the entities’ employees and involvement in the community.

Examples of key performance indicators under the people sphere include:

 employee turnover rate;  employee absenteeism;  number of work place accidents;  percentage of female employees;  donations to charities;  programs run by the entities for the community.

The sphere of planet relates to the impact of the entities’ operations on the environment.

Examples of key performance indicators the planet sphere include:

 carbon gas emissions;  water and electricity usage;  recycling program;  waste management.

• The coach of the local football team was trying to motivate the team before a big

match. He said: ‘Our team is like any organisation. We must have goals, we must practise the usual management functions, and we must make use of all relevant information’. Do you agree with the coach? Explain your position.

The management of a sporting team must have goals, e.g. winning, putting up a good performance, reputation, character-building of team members and recruitment of new members.The management of a sporting team must plan, organise, direct, and control the team’s efforts and generally operate like any other business organisation.In order to plan team performance, the coach would need some relevant available information to plan performance, develop a game plan, direct play during the match, and gather information so that an analysis of the game may lead to improved future performance.Some discussion could take place on how a team would operate without such management principles being used.

• Analyse why the cash received from the sale of a good is income yet the cash

contributed by the owner is not income.

The Conceptual Framework defines income as ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’ (para. 70(a)). In other words, for an item to be classified as income, there must be increases in economic benefits which result in increases in equity, and the increases in economic benefits must not come from owners. Both cash from sale of a good and cash contributed by owner are increases in economic benefits which increase equity. However, cash contributed by the owner is not income as it is a form of contributions from equity participants (i.e. the owner), whereas cash from sale of a good is income as it does not come from the owner but from customers.