VCAA Accounting Preparing and interpreting accounting reports

Drawings represent a withdrawal of equity and are closed directly to the Capital account (or Retained Earnings), not the Profit or Loss Summary.

Asset accounts are permanent (real) accounts; their balances carry forward to the next accounting period and are not closed.

The Profit or Loss Summary account represents net income or loss and is closed to the Capital account (or Retained Earnings) to update equity, not to the Cash account.

This answer incorrectly treats 'Accumulated depreciation' (＄6,800) as an expense. Accumulated depreciation is a contra-asset account on the balance sheet, whereas only the current period's 'Depreciation' (＄3,400) should be deducted as an expense.

This result likely stems from calculating profit without the depreciation expense (＄46,000) and then incorrectly subtracting the accumulated depreciation balance (＄6,800) instead of drawings.

This figure represents the Net Profit (＄42,600) but fails to account for Drawings. Drawings (＄4,500) represent a withdrawal of capital by the owner and must be subtracted from Net Profit to find the final increase in owner's equity.

GST payable is a liability account reported on the Balance Sheet and is not included in the calculation of Gross Profit in the Income Statement.

Cartage on sales (freight outwards) is an operating expense deducted from Gross Profit to arrive at Net Profit, rather than a component used to calculate Gross Profit.

Commission revenue is considered 'other revenue' and is added to Gross Profit to determine Net Profit; it does not reduce the Sales figure used to calculate Gross Profit.

This calculation incorrectly adds Income Tax (＄41,940) to Net Profit Before Tax (＄139,800). Since the starting profit figure is already before tax, adding the tax expense again is a double-counting error.

This result is obtained by incorrectly adding Income Tax to Net Profit Before Tax and failing to add back the depreciation on delivery vehicles (＄8,000) to the earnings figure.

This option incorrectly excludes the Amortisation of goodwill (＄4,000) from the EBITDA calculation. EBITDA requires adding back Interest, Tax, Depreciation, and Amortisation to the Net Profit.

An increase in the cost of goods sold would typically lower the gross profit ratio, which contradicts the scenario stating that profit ratios are above industry benchmarks.

Dividend payments are generally classified as financing activities, not operating activities, so they would not cause a decrease in net cash flows from operating activities.

If cash inflows increased proportionally more than outflows, the net cash flow would increase, which contradicts the statement that net cash flows have decreased.

While the calculated amount (＄594.25) is correct, the journal entry is reversed. Revenue accounts have a credit balance, so they must be debited to close them, not credited.

This option presents an incorrect total amount. The correct figure is ＄594.25, calculated by adding the ＄34.25 commission earned in the current quarter to the existing ＄560 balance.

This option incorrectly adds the full sales value (＄137) to the balance instead of the 25% commission portion, and the journal entry direction is reversed.

This calculation ignores the inventory adjustment for lower Net Realizable Value (NRV). It subtracts only the standard COGS from Net Sales ($＄270,000 - ＄85,000$), failing to account for the $＄4,500$ write-down expense.

This option incorrectly adds the inventory adjustment to the profit instead of deducting it as a cost. The calculation performed was likely Net Sales minus COGS plus the adjustment ($＄270,000 - ＄85,000 + ＄4,500$).

This figure uses Gross Sales instead of Net Sales and excludes the inventory adjustment. It fails to deduct Sales Returns ($＄10,000$) and the inventory write-down ($＄4,500$) from the calculation.

Undercapitalisation refers to having insufficient funds to support operations. An increasing ROE indicates improved efficiency or profitability, not necessarily a capital shortage that requires further investment.

While the trend is positive, claiming the owner has "maximised" profit is a definitive conclusion that cannot be drawn from a single year's increase. The metric simply shows improvement, not necessarily that the maximum potential has been reached.

Overcapitalisation typically results in a lower or decreasing ROE because excess capital is not being used efficiently to generate profit. An increasing ROE suggests the opposite: that capital is being utilized more effectively.

Comparing a small sole trader to large public companies listed on the ASX is not useful because of the vast differences in scale, capital structure, and operational complexity.

Comparing a local sole trader to global entities with "world's best practice" is unrealistic, as the sole trader lacks the purchasing power and economies of scale to match those costs.

Clothing retailers primarily earn income through sales revenue rather than commission revenue, making this comparison irrelevant to the business model.

While the gross profit ratios are identical, the high level of sales returns suggests customers are dissatisfied with the product itself rather than the price.

Although both companies have the same 30% gross profit ratio, the absolute gross profit amounts differ (＄25,500 for A vs. ＄27,750 for B) because Company A has lower net sales.

Both companies have the same Cost of Goods Sold percentage (70%), indicating that Company A's purchasing costs relative to sales are comparable, not superior, to Company B's.

While a decreasing shareholder equity ratio implies the company is becoming more leveraged (relying more on debt), the statement 'has a high level of debt' is a static observation. The decrease in the ratio is a trend best explained by performance factors like falling profitability.

Issuing more shares increases the company's equity capital. This would increase the numerator in the shareholder equity ratio ($\frac{\text{Total Equity}}{\text{Total Assets}}$), causing the ratio to rise, not fall.

Reducing the final dividend means the company pays out less cash to shareholders and keeps more as Retained Earnings. This increases Shareholder Equity, which would cause the ratio to increase.

This describes current liabilities; the debt ratio considers total debt (both short-term and long-term) relative to total assets, not just what is due immediately.

The debt ratio measures the percentage of assets funded by creditors, not the specific portion of debt that owners are personally liable to cover.

This refers to owner's equity or capital; the debt ratio focuses on external financing (liabilities) rather than the investment made by the owners.

This option is incorrect. It does not match the result derived from the standard long-term debt coverage ratio formula, which focuses on operating cash flows available after dividends relative to long-term obligations.

This result is obtained by dividing the adjusted cash flow (＄785,000) by Total Liabilities (＄759,000). This is incorrect because the ratio should only consider non-current (long-term) liabilities, excluding current liabilities like taxation and trade creditors.

This value incorrectly excludes the bank loan from the denominator, using only the mortgage balance ($\frac{＄785,000}{＄400,000} = 1.96$). Both the bank loan (due 2030) and the mortgage (due 2026) are long-term debts.