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Solutions Manual for Financial Accounting 8th Edition by Carlon, McAlpine, Lee, Mitrione ISBN: 9781394334001

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany

Financial Accounting: Reporting, analysis and decision making 8th edition by Carlon et al.

Financial Accounting 8e Carlon Solutions Manual

Chapter 1: An introduction to accounting

Copyright Notice & Terms of Use Wiley permits the following uses of these Wiley-provided instructors’ materials (the “Material”): • PowerPoints may be used and adapted by the instructor as presentation material in classroom lectures • Selected Test Bank materials may be included in instructor-created quizzes/tests/exams, hand-outs and/or assignments • Selected solutions may be made available to students for end of chapter questions that are set as homework • These materials should only be made available to students that are enrolled in the unit where the Wiley text is prescribed • They should be distributed through a secure, password-protected course website and be available for no longer than the duration of the course. The limited permission set out above does not extend in any other circumstance to the reproduction, transmission or display of Material in any other format or medium and for clarity, does not extend to inclusion in course packs or any saleable products, without written consent of Wiley. Neither the Solutions Manual or the Test Banks should ever be distributed in full or significant part. Please note that, in order to protect the integrity of problem material, permission to reproduce solutions in any format is not included in this grant of permission and will be reviewed by Wiley on a case-by-case basis.

1.1

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

Chapter 1: An introduction to accounting Assignment classification table Learning objectives 1. Explain the business context and the need for decision making.

Brief exercises

Exercises 1

Problems

Define accounting, describe the accounting process and define the diverse roles of accountants.

Explain the characteristics of the main forms of business organisation.

Understand the Conceptual Framework and the purpose of financial reporting.

Identify the users of financial reports and describe users’ information needs.

2A; 2B

Identify the elements of each of the four main financial statements.

4,5,6

1,2,3,4,5, 7, 8,9,10

3A,4A,5A,6A 7A,8A,3B,4B 5B,6B,7B,8B

Describe the financial reporting environment.

Explain the accounting assumptions, concepts, principles, qualitative characteristics and constraints underlying financial statements

3A, 3B

Calculate and interpret ratios for analysing an entity’s profitability, liquidity and solvency.

11,12,13

9A,10A 9B,10B

1A,1B

Financial Accounting 8e Carlon Solutions Manual

1.2

Chapter 1: An introduction to accounting

Solutions to questions 1.1.

Describe the decision-making process. The first step in the process of decision making is to identify the issue or the decision to be made. The next step is to gather the relevant information required for the analysis. Once gathered, you then identify the tool or technique that can provide the analysis of the issue so a decision may be made. The final step is to evaluate the results of the analysis and make the decision. The primary function of accounting is to relevant information to aid in making a business decision.

1.2.

What are some of the financial decisions owners need to make when running a new business? When running a business most of your actions require decisions. Beginning with deciding which is the most suitable business structure and where are you going to locate your business and are you going to have an online presence as well, how are you going to fund your activities (borrow or have equity investors), how many employees do you need and what level of inventory is required to name a few decisions. When starting a new business deciding on the suitable accounting system and information system is important. Are you intending to have EFTPOS? Are you going to have online sales? Etc.

1.3.

What are the advantages to a business of being formed as a company? What are the disadvantages? Advantages of company structure are limited liability (shareholders not being personally liable for corporate debts), indefinite life, easy transferability of ownership (through selling shares), and greater ability to raise funds. Disadvantages of a company are the establishment costs and ongoing fees and increased government regulations.

1.4.

Who are the external users of accounting data? Give examples. External users are those outside the business who have an interest in knowing about the activities of the entity as resource providers, recipients of goods or services or parties performing a review of oversight function. Examples include investors, creditors such as banks and suppliers, taxing authorities, regulatory agencies, trade unions and customers.

1.5.

Listed here are some items found in the financial statements of Ruth Weber Ltd. Indicate in which financial statement(s) each item would appear. (a) Sales revenue. (b) Office equipment. (c) Accounts receivable. (d) Interest expense. (e) Share capital. (f) Loan payable (a) (b) (c) (d)

Statement of profit or loss. Statement of financial position. Statement of financial position. Statement of profit or loss. © John Wiley and Sons Australia, Ltd 2026

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Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

(e) (f)

Statement of financial position. Statement of financial position.

1.6.

What is a conceptual framework and what purpose does it serve? The Conceptual Framework consists of a set of concepts to be followed by preparers of financial statements and standard setters. The Conceptual Framework provides guidance to preparers of financial information by defining who is required to report and who the users are likely to be.

1.7.

Why is it important to determine if a business entity is a reporting entity? Outline the three main indicators that determine if an entity is a reporting entity. It is important to determine if a business is a reporting entity as it is only reporting entities that are required to prepare general purpose financial reports in accordance with the accounting standards. Three main indicators determine which of the forms of business organisation fall into the category of a reporting entity. That is, an entity is more likely to be classified as a reporting entity if it is (1) managed by individuals who are not owners of the entity, (2) politically or economically important, and (3) sizable in any of the following ways — sales, assets, borrowings, customers or employees.

1.8.

What are the three main categories of the statement of cash flows? Why do you think these categories were chosen? The three categories in the statement of cash flows are operating activities, investing activities and financing activities. The categories were chosen because they represent the three principal types of business activity.

1.9.

What is retained earnings? What items increase the balance in retained earnings? What items decrease the balance in retained earnings? Retained earnings is the profit retained in a company. Retained earnings is increased by profit and is decreased by dividends and by losses.

1.10. What purpose does the going concern assumption serve? The going concern assumption lends credibility to the historical cost principle; otherwise items would be reported at liquidation value. By assuming the entity will continue to operate, assets can continue to be reported at cost because they are expected to bring benefits to the business through use even though they may have little or no resale value. 1.11. Shirl Lee, the managing director of Whitegoods Pty Ltd, is pleased. Whitegoods substantially increased its profit in 2025 while keeping its unit inventory relatively the same. Rose Ena, chief accountant, cautions Shirl Lee, explaining that since Whitegoods changed its method of inventory valuation, there is a comparability problem and it is difficult to determine whether Whitegoods is better off. Is Rose correct? Why or why not? Rose Ena is correct. Comparability means that financial statements can be compared between companies and over time. Using the same accounting principles and accounting methods from period to period with a company, facilitates comparability. When accounting methods are inconsistent, it is difficult to determine whether a company is better off, worse off or the same from period to period.

Financial Accounting 8e Carlon Solutions Manual

1.4

Chapter 1: An introduction to accounting

1.12. What is meant by the term operating cycle? A company’s operating cycle is the average time taken to acquire goods and services and convert them to cash in producing revenues. 1.13. (a) Tia Kim believes that the analysis of financial statements is directed at two characteristics of an entity: liquidity and profitability. Is Tia correct? Explain. (b) Are short-term creditors, long-term creditors, and shareholders mainly interested in the same characteristics of an entity? Explain. (a)

(b)

Tia is not correct. There are three characteristics: • liquidity • profitability • solvency. The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the business. In contrast, long-term creditors and shareholders are primarily interested in the profitability and solvency of the company. However, they may use the same financial statements as a source of information.

1.14. Holding all other factors constant, indicate whether each of the following signals generally good or bad news about an entity. (a) Increase in the profit margin. (b) Increase in the current ratio. (c) Decrease in the debt to total assets ratio. (d) Increase in the current cash debt coverage. (a) (b) (c) (d)

The increase in profit margin is good news because it means that a larger percentage of profit is generated for each dollar of net sales. An increase in the current ratio generally signals good news because the company improved its liquidity. The decrease in the debt to total assets ratio is good news because it means that the company has decreased the proportion of assets funded by creditors, thus reducing risk of being unable to repay debt. An increase in current cash debt coverage ratio is good news because it means that the company has increased its ability to meet short-term obligations. The higher the current cash debt coverage the more favourable is the liquidity of the business.

1.5

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

Solutions to brief exercises BE1.1 Explain the characteristics of the main forms of business organisation. (LO3) Match each of the following forms of business organisation with a set of characteristics: sole proprietorship (SP), partnership (P), company (C). (a) (b) (c)

P SP C

Shared control, increased skills and resources. Simple to set up and maintain control with founder. Easier to transfer ownership and raise funds, no personal liability.

BE1.2 Describe the financial reporting environment. (LO7) Indicate whether each statement is true or false. (a) Accounting standards are set by the Financial Reporting Council. (b) The ASX Listing Rules are only applicable to entities listed on the ASX. (c) The Corporations Act is administered by the ATO. (a) (b) (c)

False True False

BE1.3 Identify users of accounting financial reports and describe their information needs. (LO5) Match each of the following types of evaluation with one of the listed users of accounting information. 1.

Trying to determine whether the company complied with the Corporations Act.

Trying to determine whether the entity can pay its obligations.

Trying to determine whether a major investment proposal will be cost effective.

Trying to determine whether the company’s profit will result in a share price increase.

Trying to determine whether the entity should use debt or equity financing.

(a) (b) (c) (d) (e)

3 2 4 5 1

Executive directors Bank managers Shareholders Chief Financial Officer ASIC

Financial Accounting 8e Carlon Solutions Manual

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Chapter 1: An introduction to accounting

BE1.4 Prepared a statement of financial position. (LO6) In alphabetical order below are items for ABC Pty Ltd at 31 December. Prepare a statement of financial position following the format of figure 1.7.

ABC Pty Ltd Statement of financial position as at 31 December Assets Cash Accounts receivable Inventory Total assets Liabilities Accounts payable Net assets

$30 000 10 000 7 500 47 500 32 500 $15 000

Equity Share capital Total equity

15 000 $15 000

BE1.5 Determine the proper financial statement. (LO6) Indicate which statement you would examine to find each of the following items: statement of financial position (SFP), statement of profit or loss (P/L) or statement of cash flows (SCF). P/L (a) Revenues during the period. SFP (b) Accounts receivable at the end of the year. SCF (c) Cash received from borrowing during the period. SCF (d) Cash payments for the purchase of property, plant and equipment. BE1.6 Prepare the assets section of a classified statement of financial position. (LO6) A list of financial statement items for Swift Ltd includes the following: accounts receivable $15 000; prepaid rent $1000; cash $4500; supplies $2000; short-term investments $12 000; property, plant and equipment $40 000. Prepare the asset section of the statement of financial position, showing appropriate classifications.

1.7

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

Swift Ltd Statement of financial position (Partial) Current assets: Cash Short-term investments Accounts receivable Supplies Prepaid rent Total current assets Non-current assets: Property, plant and equipment Total non-current assets

$4,500 12,000 15,000 2,000 1,000 34,500 40,000 40,000

Total assets

$74,500

BE1.7 Calculate return on assets and profit margin. (LO9) The following information is available for Ware Ltd for 2025: sales revenue $7 840 000; cost of sales $3 528 000; profit $1 176 000; total equity $2 233 300; average total assets $5 113 000. Calculate the return on assets and profit margin for Ware Ltd for 2021. Ware Ltd Return on assets ratio

$1,176,000 Profit = 23% = Average total assets $5,113,000

Profit margin ratio

Profit Sales

$1,176,000 = 15% $7,840,000

Financial Accounting 8e Carlon Solutions Manual

1.8

Chapter 1: An introduction to accounting

Solutions to exercises E1.1 Match items with descriptions. (LO1, 3, 5, 6) Here is a list of words or phrases discussed in this chapter. 1. Auditor’s opinion 2. Accounts payable 3. Accounts receivable 4. Sole trader 5. Partnership 6. Decision 7. Company 8. Equity investors 9. Share capital Required Match each word or phrase with the best description of it. _______________ (a) An expression about whether financial statements are presented in a reasonable fashion. _______________ (b) Obligations to suppliers of goods. _______________ (c) The portion of equity that results from contributions from investors. _______________ (d) An entity that raises money by issuing shares. _______________ (e) Amounts due from customers. _______________ (f) People who make decisions to buy, hold, or sell shares. _______________ (g) A person operating and owning a business with no other owners. _______________ (h) A business that is owned jointly by two or more individuals but that does not issue shares. _______________ (i) A choice among alternative courses of action. (a)

Auditor’s opinion

(b)

Accounts payable

(c)

Share capital

(d)

Company

(e)

Accounts receivable

(f)

Equity Investors

(g)

Sole trader

(h)

Partnership

(i)

Decision

1.9

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

E1.2 Prepare a statement of profit or loss and a calculation of retained earnings. (LO6) This information relates to Ray’s Rentals Pty Ltd for the year.

Required After analysing the data, prepare a statement of profit or loss and a calculation of retained earnings for the year ending 31 December. Ray’s Rentals Pty Ltd Statement of profit or loss for the year ended 31 December $

Revenues: Hire revenue

70,000

Expenses: Advertising expense Electricity expense Rent expense Wages expense Total expenses Profit

1,800 2,400 10,400 28,000 42,600 $27,400

Ray’s Rentals Pty Ltd Calculation of retained earnings for the year ended 31 December $ 45,000 27,400 72,400 (7,000) $65,400

Retained earnings, 1 January Add: Profit Less: Dividends Retained earnings, 31 December

Financial Accounting 8e Carlon Solutions Manual

1.10

Chapter 1: An introduction to accounting

E1.3 Correct an incorrectly prepared statement of financial position. (LO6) Deanna Veale is the bookkeeper for Quality Products Ltd. Deanna has been trying to make the statement of financial position of Quality Products Ltd balance. It is finally balanced, but now she’s not sure it is correct.

Required Prepare a correct statement of financial position. Quality Products Ltd Statement of financial position as at 30 June Assets: Cash Accounts receivable Supplies Inventory Total assets

$15,000 6,000 5,600 28,400 55,000

Liabilities: Accounts payable Net Assets

15,000 $40,000

Equity: Share capital Retained earnings Total Equity

$25,000 *15,000

*$18,000 – $3,000

1.11

Financial Accounting 8e Carlon Solutions Manual

40,000 $40,000

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

E1.4 Identify financial statement components and calculate profit. (LO6) The following items were taken from White Ltd’s financial statements. (All dollars are in thousands.)

Required Perform each of the following. (a) In each case identify whether the item is an asset (A), liability (L), equity (Eq), revenue (R) or expense (Ex). (b) Calculate profit for White Ltd for the year ended 30 June. White Ltd (a)

(b)

Eq E E A L E E E L A R A Eq E Eq A

Retained earnings Cost of sales Wages expense Cash Current payables Interest expense Other expense Depreciation expense Non-current borrowings Inventories Sales revenue Accounts receivable Reserves Income tax expense Contributed equity Property and equipment

$2,000 55,700 18,300 11,200 14,500 8,000 10,300 1,800 22,000 4,500 144,000 12,000 8,000 13,700 30,000 20,000

Calculation of profit for White Ltd for the year ended 30 June $ Sales revenue Expenses: Cost of sales Wages expense Interest expense Other expense Depreciation expense Income tax expense Total expenses Profit

$ 144,000

55,700 18,300 8,000 10,300 1,800 13,700

Financial Accounting 8e Carlon Solutions Manual

107,800 $36,200

1.12

Chapter 1: An introduction to accounting

E1.5 Calculate missing amounts. (LO6) Here are incomplete financial statements for Road Ltd.

Required Calculate the missing amounts. Road Ltd Note to solve the missing amounts the student needs to decide the order to solve the missing amounts 1. The Statement of changes in equity shows the ending retained earnings as $45,000 which then can be substituted into the Statement of financial position so that (b) equals $45,000. 2. Now (a) Contributed equity can be calculated. Accounts payable + Contributed equity + Retained earnings = Total liabilities and equity. $26,000 + (a) + $45,000 = $106,000 (a) = $106,000 – $45,000 – $26,000 (a) = $35,000 3. Items (d) and (e) are the same figure. Therefore, solve (e) first in the Statement of changes in equity Beginning retained earnings + Profit – Dividends = Ending retained earnings $12,000 + (e) – $8,000 = $45,000 (e) = $45,000 – $12,000 + $8,000 (e) = $41,000 and also (d) equals $41,000 4. Lastly now item (c) can be calculated Revenue – Cost of sales – Administrative expenses = Profit

1.13

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

E1.6 Identify the concept or principle that has been violated. (LO8) Cheong Pty Ltd had three major business transactions during the year. (1) Merchandise inventory with a cost of $68 000 is reported at its market value of $100 000. (2) The owner of Cheong Pty Ltd, Cheong Kong, purchased a computer for personal use and charged it to his expense account. (3) Cheong Pty Ltd wanted to make its current year profit look better, so it added in sales that occurred on the first two days of the next year. Required In each situation, identify the assumption or principle that has been violated, if any, and discuss what should have been done. Cheong Pty Ltd (1)

This is a violation of the historical cost principle. The inventory was written up to its market value when it should have remained at cost.

(2)

This is a violation of the accounting entity concept. The treatment of the transaction treats Cheong Kong and Cheong Pty Ltd as one entity when they are two separate entities. The computer should not have been charged to the expense account. If paid for by the business, it should have been treated as a loan from the business to Cheong Kong.

(3)

This is a violation of the period concept. This concept states that the economic life of an entity can be divided into artificial time periods (months, quarters or a year). By adding two more days to the year, Cheong Pty Ltd would be misleading financial statement users. In addition, the year’s results would not be comparable to previous years’ results, and the problem would recur in the next year. The period should have been 52 weeks or 53 at the most. Retailers often use a complete number of weeks rather than an exact year. As a 365-day year consists of 52 weeks plus one day, many retailers use 52-week periods and then, approximately every 5 years, use a 53-week year. However, this is fully disclosed for comparative purposes. For example, Woolworths Limited.

Financial Accounting 8e Carlon Solutions Manual

1.14

Chapter 1: An introduction to accounting

E1.7 Classify items as current or non-current, and prepare assets section of statement of financial position. (LO6) The following items were taken from the 30 June current year consolidated statement of financial position of Maximum Energy Limited. (All dollars are in millions.)

Required Prepare the assets section of a classified statement of financial position.

Maximum Energy Limited Statement of financial position (Partial) as at 30 June $M Current assets: Cash and cash equivalents Receivables Inventories Other financial assets Other current assets Total current assets Non-current assets Receivables Inventories Investments (long term) Exploration and evaluation assets Oil and gas assets Property, plant and equipment Intangibles Deferred tax assets Other financial assets Other non-current assets Total non-current assets Total assets

421.5 2766.0 199.5 280.3 586.6 4253.90 70.9 43.8 49.6 523.5 742.6 7997.4 4724.1 1093.8 507.7 41.1 15794.50 $20048.40

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Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

E1.8 Classify items as current or non-current, and prepare the assets section of the statement of financial position. (LO6) The following items were taken from the 30 June consolidated statement of financial position of Field Limited. (All dollars are in millions.)

Required Prepare the assets section of a classified statement of financial position. Field Limited Statement of financial position (Partial) as at 30 June $M Current assets: Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax receivable Other current assets Assets held for sale Total current assets Non-current assets Receivables Investments in jointly controlled entities Property, plant and equipment Deferred tax assets Intangible assets Other non-current assets Total non-current assets Total assets

Financial Accounting 8e Carlon Solutions Manual

603.1 182.9 138.9 0.1 8.1 16.6 1.9 951.6 0.9 6.5 521.5 57.1 1410.5 1.0 1997.5 $2949.1

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Chapter 1: An introduction to accounting

E1.9 Prepare financial statements. (LO6) These financial statement items are for Wellington Wall Coverings Pty Ltd at year-end, 31 July.

Required (a) Prepare a statement of profit or loss for the year. (b) Prepare a classified statement of financial position at 31 July. (a) Wellington Wall Coverings Pty Ltd Statement of profit or loss for the year ended 31 July $ Revenues: Sales revenue Less: Cost of sales Gross profit Other revenue Rent revenue Expenses: Salaries expense Depreciation expense Other expenses Total expense Profit

$ 100,000 60,000 40,000 50,000

40,000 7,000 38,000 (85,000) $5,000

Calculation of retained earnings for the year ended 31 July $ Retained earnings, 1 August Add: Profit Retained earnings, 31 July

3,000 5,000 $8,000

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Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

(b) Wellington Wall Coverings Pty Ltd Statement of financial position as at 31 July $ Current assets: Cash Inventory Total current assets

$ 25,000 20,000 45,000

Non-current assets: Land Building Less: Accumulated depreciation Total non-current assets

120 000 140,000 (14,000)

126,000 246,000

Total Assets

291,000

Current liabilities: Accounts payable Rent received in advance Total current liabilities Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets

11,000 2,000 13,000 110 000 110,000 123 000 $168 000

Equity Share capital Retained earnings Total equity

Financial Accounting 8e Carlon Solutions Manual

160,000 8,000 $168,000

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Chapter 1: An introduction to accounting

E1.10 Identify financial statement components and calculate profit. (LO6) These financial statement items are for Bear Pty Ltd at year-end, 30 June.

Required (a) Prepare a statement of profit or loss for the year. (b) Prepare a calculation of retained earnings for the year. (c) Prepare a classified statement of financial position at 30 June. (a) Bear Pty Ltd Statement of profit or loss for the year ended 31 July $ Revenues: Sales revenue Less: Cost of sales Gross profit Other revenue Rent revenue Expenses: Salaries expense Depreciation expense Other expenses Total expense Profit

$ 140,000 84,000 56,000 70,000

56,000 9,800 53,200 119,000 $ 7,000

(b) Bear Pty Ltd Calculation of retained earnings for the year ended 30 June $ Retained earnings, 1 July © John Wiley and Sons Australia, Ltd 2026

4,200 1.19

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

Add: Profit Retained earnings, 30 June

7,000 $11,200

Current assets: Cash Inventory Total current assets

$ 35,000 28,000 63,000

Non-current assets: Land Building Less: Accumulated depreciation Total non-current assets Total Assets

196,000 (19,600)

Current liabilities: Accounts payable Rent received in advance Total current liabilities

15,400 2,800

168,000

Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets Equity Share capital Retained earnings Total equity

176,400 344,400 407,400

18,000 154,000

Financial Accounting 8e Carlon Solutions Manual

154,000 172,200 $235,200 224,000 11,200 $235,200

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Chapter 1: An introduction to accounting

E1.11 Calculate liquidity ratios and compare results. (LO9) Retail Ltd operates stores in numerous states. Selected financial statement data (in thousands of dollars) for the year ended 30 June are as follows.

For the year, net sales revenue was $1 109 934 and cost of sales was $628 197 (in thousands). Required (a) Calculate the working capital and current ratio at the beginning of the year and at the end of the current year. (b) Did Retail Ltd’s liquidity improve or worsen during the year? Retail Ltd (a)

(b)

Working capital = current assets – current liabilities Beginning of year $53,764,000

= $223,313,000 – $169,549,000

End of year: $78,485,000

= $208,426,000 – $129,941,000

Current ratio

= current assets/current liabilities

Beginning of year: 1.32:1

= $223,313,000 / $169,549,000

End of year: 1.60:1

= $208,426,000 / $129,941,000

These measures indicate that Retail Ltd’s liquidity improved during the year.

1.21

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

E1.12 Calculate and interpret solvency ratios. (LO9) The following data were taken from the 2027 financial statements of Energy Limited. (All dollars in millions.)

Required Perform each of the following. (a) Calculate the debt to assets ratio for each year. (b) Calculate the cash debt coverage for each year. (Note: Total liabilities at yearend 2020 were $7804 million.) (c) Discuss Energy Limited’s solvency in 2027 versus 2026. (d) Discuss Energy Limited’s ability to finance its investment activities with cash provided by operating activities, and how any deficiency would be met. Energy Limited 2027 $M (a) Debt to assets ratio

(b) Cash debt coverage ratio

$9026.8

0.675 3

2026 $M or

67.53 %

$8605.5

$13367.8

$15738.4

$621.8 = 0.070 ($9027 + $8606) /2

$467.5 ($8606 + $7804) /2

0.546 8

0.057

o r

54.68 %

(c) The ratio of debt to total assets decreased, indicating decreased reliance on debt, and, Energy Ltd’s cash flows from operating activities increased and the coverage of total liabilities increased marginally. (d) In 2027 Energy’s cash provided by operations ($621.8.0M) was sufficient to cover the cash used in investing activities ($559.6M). In 2026 as the net investing activities ($532.3M) was more than the cash generated from operating activities, there was a cash deficiency. Energy Limited, being a publicly listed company, could raise more money from the public through the issue of shares or borrow funds. © John Wiley and Sons Australia Ltd, 2026

Financial Accounting 8e Carlon Solutions Manual

1.22

Chapter 1: An introduction to accounting

E1.13 Calculate and interpret solvency ratios. (LO9) The following data were taken from the 2027 financial statements of Oldfield Limited. (All dollars in millions.)

Required Perform each of the following. (a) Calculate the debt to assets ratio for each year. (b) Calculate the cash debt coverage for each year. (Note: Total liabilities at yearend 2025 were $1405 million.) (c) Discuss Oldfield Limited’s solvency in 2027 versus 2026. (d) Discuss Oldfield Limited’s ability to finance its investment activities with cash provided by operating activities, and how any deficiency would be met. Oldfield Limited 2027 $M (a) Debt to assets ratio

(b) Cash debt coverage ratio

0.480 4

$1324.5 2756.8

$188.7

= 0.142

($1325 + $1329) / 2

2026 $M or

48.04 %

$1328.7 $2694.8

0.493 1

49.31 %

$130 = 0.095 ($1329 + $1405) / 2

(c) The ratio of debt to total assets decreased from 49% to 48%, indicating a slight decrease in the reliance on debt. The net cash flows from operations increased and the cash coverage of total liabilities increased, indicating a better solvency position. (d) The cash flows from operating activities in both years is greater than required for investing activities in both years.

1.23

Financial Accounting 8e Carlon Solutions Manual

Solutions manual to accompany Financial Accounting: Reporting, analysis and decision making 8e. Not for distribution in full.

Solutions to Problem Set A PSA1.1 Determine forms of business organisation. (LO3) Presented below are five independent situations. (a) Three information systems lecturers have formed a business to improve the speed of information transfer over the internet for securities exchange transactions. Each has contributed an equal amount of cash and knowledge to the venture. Although their approach looks promising, they are concerned about the legal liabilities that their business might confront. (b) Sarah and Andrew wish to purchase a taxi licence. One has a suitable motor vehicle and the other has enough cash to buy the licence. (c) Robert Steven and Tom Cheng each owned separate shoe manufacturing businesses. They have decided to combine their businesses. They expect that within the coming year they will need significant funds to expand their operations. (d) Darcy Becker, Ellen Sweet and Meg Dwyer recently graduated with marketing degrees. They have been friends since childhood. They have decided to start a consulting business focused on marketing sporting goods over the internet. (e) Anthony Troy wants to rent CD players and CDs in airports across the country. His idea is that customers will be able to rent equipment and CDs at one airport, listen to the CDs on their flights, and return the equipment and CDs at their destination airport. Of course, this will require a substantial investment in equipment and CDs, as well as employees and locations in each airport. Anthony has no savings or personal assets. He wants to maintain control over the business. Required In each case explain what form of organisation the business is likely to take — sole proprietorship, partnership or company. Give reasons for your choice. (a)

The concern over legal liability would make the limited liability company form a better choice over a partnership. Also, the corporate form will allow the business to raise cash more easily which may be of importance in a rapidly growing industry.

(b)

Sarah and Andrew should adopt the partnership form because it facilitates bringing together the contribution of skills and resources. Also, there does not appear to be any expected needs for further fund in the near future.

(c)

The fact that the combined business expects that it will need to raise significant funds in the near future makes the company form more desirable in this case.

(d)

It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the firm. Service firms, like consulting businesses, are frequently formed as partnerships. Alternatively, they may prefer the company form to simplify subsequent expansion and take advantage of limited liability, but they would need to consider the additional regulation that it would involve.

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(e)

One way to ensure control would be for Anthony to form a sole proprietorship. However, in order for this business to thrive, it will need a substantial investment of funds early. This would suggest the company form of business. In order for Anthony to maintain control over the business, he would need to own more than 50 percent of the voting power. In order for the business to grow, he may have to be willing to give up some control.

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PSA1.2 Identify users and uses of financial statements. (LO5) Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently. (a) North Sales Ltd is considering extending credit to a new customer. The terms of the credit would require the customer to pay within 30 days of receipt of goods. (b) An investor is considering purchasing shares in Giorgina’s. The investor plans to hold the investment for at least 5 years. (c) Otago Bank is considering extending a loan to a small company. The company would be required to make interest payments at the end of each year for 5 years, and to repay the loan at the end of the fifth year. (d) The finance director of Pacific Pipes Ltd is trying to determine whether the company is generating enough cash to increase the amount of dividends paid to investors in this and future years, and still have enough cash to buy plant and machinery as needed. Required Although the decision makers should refer to all financial statements, for each situation, state whether the decision maker would be most likely to place the main emphasis on information provided by the statement of profit or loss, statement of financial position or statement of cash flows. In each case provide a brief justification for your choice. Choose only one financial statement in each case. (a)

In deciding whether to extend credit for 30 days you would be most interested in the Statement of financial position because it shows the assets on hand that would be available for settlement of the debt in the near-term.

(b)

In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Giorgina’s. The statement of profit or loss provides the most useful information for predicting future performance.

(c)

In extending a loan for a relatively long period of time, the bank is most interested in the probability that the company will generate sufficient income to meet its interest payments and repay its principal. The bank would therefore be interested in predicting future profit using the statement of profit or loss. It should be noted, however, that the lender would also be very interested in both the Statement of financial position and the Statement of cash flows — the Statement of financial position would show the amount of debt the company has already incurred, as well as assets that could be liquidated to repay the loan. And the bank would be interested in the Statement of cash flows because it would provide useful information for predicting the company’s ability to generate cash to repay its obligations.

(d)

The finance director would be most interested in the Statement of cash flows since it shows how much cash the company generates and how that cash is used. The Statement of cash flows can be used to predict the company’s future cash-generating ability.

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PSA1.3 Comment on proper accounting treatment and prepare a corrected statement of financial position. (LO6, 8) Ultimo Travel Goods Pty Ltd was formed on 1 July 2026. At 30 June 2027, Mark Austin, the managing director and major shareholder, decided to prepare a statement of financial position, which appeared as follows.

Mark willingly admits that he is not an accountant by training. He is concerned that his statement of financial position might not be correct. He has provided you with the following additional information: 1.

The villa is on the Gold Coast and actually belongs to Mark, not to Ultimo Travel Goods Pty Ltd. However, because he thinks he might allow executives to use it sometimes, he decided to list it as an asset of the company. To be consistent he also listed as a liability of the company his personal loan that he took out at the bank to buy the villa.

The inventory was originally purchased for $10 000, but due to a surge in demand Mark now thinks he could sell it for $30 000. He thought it would be best to record it at $30 000.

Included in the accounts payable balance is $5000 that Mark owes for his personal telephone account. Mark included this in the accounts payable of Ultimo Travel Goods Pty Ltd because he will probably use company funds to pay for it.

Required (a)

Comment on the proper accounting treatment of the three items above.

(b)

Provide a corrected statement of financial position for Ultimo Travel Goods Pty Ltd. (Hint: To get the statement of financial position to balance, adjust equity.) Ultimo Travel Goods Pty Ltd

(a)

1. The accounting entity concept states that economic events can be identified with a particular unit of accountability. Since the Gold Coast villa is the personal property of Mark Austin — not Ultimo Travel Goods Pty Ltd — it should not be reported on the company’s Statement of financial position. Likewise, the loan is a personal loan of Mark Austin — not a liability of the company. 2. The historical cost principle dictates that assets are recorded at their original cost. Therefore, reporting the inventory at $30,000 would be improper and violates the cost principle. The inventory should be reported at $10,000. 3. Including the personal telephone account payable is a violation of the accounting entity concept. The $5,000 payable is not a liability of Ultimo Travel Goods Pty Ltd. If the company pays the telephone account on behalf of Mark Austin, it © John Wiley and Sons Australia, Ltd 2026

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should be accounted for as a loan to Mark. (b) Ultimo Travel Goods Pty Ltd Statement of financial position as at 30 June 2027 $

Assets Cash Accounts receivable Inventory Total assets

20 000 55 000 10 000 85,000

Liabilities Accounts payable ($40,000 – $5,000) Notes payable Total liabilities Net Assets

35,000 15,000 50,000 $35,000

Equity Total equity

35,000 $35,000

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PSA1.4 Prepare financial statements. (LO6) CSI Pty Ltd was started on 1 October with an investment of $45 000 cash. Following are the assets and liabilities of the company on 31 October, and the revenues and expenses for the month of October, its first month of operations.

No further shares were issued in October, but a dividend of $1500 in cash was paid. Required Prepare a statement of profit or loss and a calculation of retained earnings for the month of October, and prepare a statement of financial position as at 31 October. CSI Pty Ltd Statement of profit or loss for the month ended 31 October $ Revenues: Service revenue

$ 10,000

Expenses: Advertising expense Fuel expense Insurance expense Rent expense Repair expense Total expenses Profit

900 3,400 400 1,500 500 6,700 $3,300

CSI Pty Ltd Calculation of retained earnings for the month ended 31 October $ Retained earnings, 1 October Add: Profit

0 3,300 3,300 (1,500) $1,800

Less: Dividends Retained earnings, 31 October

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CSI Pty Ltd Statement of financial position as at 31 October $

Assets: Current assets Cash Accounts receivable

7,800 11,400 19,200

Non-current assets Equipment Total assets

60,000 79,200

Liabilities: Current liabilities Accounts payable Non-current liabilities Bank loan Total liabilities Net Assets

2,400 30,000 32,400 $46,800

Equity: Share capital Retained earnings Total equity

45,000 1,800

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$46,800

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PSA1.5 Determine items included in a statement of cash flows and prepare the statement. (LO6) Presented below are selected financial statement items for Daisy Ltd for 31 December.

Required Determine which items should be included in a statement of cash flows, and then prepare the statement for Daisy Ltd. Daisy Ltd Daisy Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers Cash received from share issue Daisy Ltd Statement of cash flows for the year ended 31 December Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$264,000 (195,000) 69,000

Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Cash received issue of shares Dividends paid Net cash used in financing activities Net increase in cash

(35,000) (35,000) 10,000 (15,000) (5,000) $29,000

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PSA1.6 Prepare financial statements. (LO6) Ultra Pty Ltd was started on 1 May with an investment of $75 000 cash. Following are the assets and liabilities of the company on 31 May, and the revenues and expenses for the month of May, its first month of operations.

No further shares were issued in May, but a dividend of $2000 in cash was paid. Required Prepare a statement of profit or loss and statement of changes in equity for the month of May, and prepare a statement of financial position as at 31 May. Ultra Pty Ltd Statement of profit or loss for the month ended 31 May $

Revenues: Service revenue

42 800

Expenses: Advertising expense Fuel expense Insurance expense Rent expense Repair expense Total expenses Profit

800 3 600 2 600 12 500 1 800 21 300 $21 500

Ultra Pty Ltd Calculation of retained earnings for the month ended 31 May $ Retained earnings, 1 May Add: Profit

0 21 500 21 500 (2 000) $19 500

Less: Dividends Retained earnings, 31 May

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Ultra Pty Ltd Statement of financial position as at 31 May $ Assets: Current assets Cash Accounts receivable

$ 30 500 25 400 55 900

Non-current assets Equipment Total assets

87 000 142 900

Liabilities: Current liabilities Accounts payable Non-current liabilities Bank loan Total liabilities Net Assets

8 400 40 000 48 400 $94 500

Equity: Share capital Retained earnings Total equity

75 000 19 500 $94 500

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PSA1.7 Determine items included in a statement of cash flows and prepare the statement. (LO6) Presented below are selected financial statement items for Pod Ltd for 30 June.

Required Determine which items should be included in a statement of cash flows, and then prepare the statement for Pod Ltd. Pod Ltd Pod Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers

Pod Ltd Statement of cash flows for the year ended 30 June Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$296 000 (170 000) 126 000

Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Dividends paid Net cash used in financing activities Net increase in cash

Financial Accounting 8e Carlon Solutions Manual

(50 000) (50 000) (18 000) (18 000) $58 000

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PSA1.8 Prepare a classified statement of financial position. (LO6) The following items are taken from the 30 June statement of financial position of Cement Ltd (in millions).

Required Prepare a statement of financial position, appropriately classified, for Cement Ltd as at 30 June. Cement Ltd Balance Sheet as at 30 June $’m Current assets: Cash and cash equivalents Cash on deposit Receivable Inventories Other financial assets Other current assets Total current assets

249.9 80.6 877.8 620.0 21.6 32.8 1882.7

Non-current assets: Receivables Inventories Investments accounted for using equity method Other financial assets Property, plant and equipment Intangible assets

26.8 13.6 44.6 13.5 3367.1 859.9

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Deferred tax asset Other non-current assets Total non-current assets Total assets Current liabilities: Payables Loans and borrowings Current tax liabilities Other financial liabilities Provisions Total current liabilities Non-current liabilities: Payables Loans and borrowings Other financial liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities NET ASSETS Equity: Issued Capital Reserves Retained earnings Total parent entity interest Non-controlling interests TOTAL EQUITY

Financial Accounting 8e Carlon Solutions Manual

153.7 58.5 4537.7 6420.4 761.1 136.9 29.1 66.1 242.1 1235.3 8.4 1639.6 35.5 58.6 146.5 1888.6 3123.9 $3296.5 2533.8 75.4 588.0 3197.2 99.3 $3296.5

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PSA1.9 Calculate liquidity, solvency and profitability ratios. (LO9) Here are the comparative statements of City Sales Pty Ltd.

The cash provided by operating activities for the current year was $260 000. Required Calculate these values and ratios for the current year: (a) Working capital. (b) Current ratio. (c) Current cash debt coverage. (d) Debt to total assets ratio. (e) Cash debt coverage. (f) Profit margin. (g) Return on assets. City Sales Pty Ltd (a) (b)

Working capital

= $474,500 – $250,000 = $224,500

Current ratio

$474,500 = 1.9 : 1 $250,000

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(c)

(d)

(e)

(f)

(g)

Current cash debt coverage ratio

Debt to total assets ratio

Cash debt coverage ratio

Profit margin ratio

$260,000 $250,000 + $100,000  = 1.5 times 2

$460,000 = 0.453 : 1 or 45.3% $1,014,800 $260,000 $460,000 + $300,000  = 0.7 times 2

$115,000 = 0.052 : 1 or 5.2 % $2,200,000

Return on assets ratio = $115,000 $115,000 = = 0.127 : 1 OR 12.7%  $790,800 + $1,014,800  $902,800   2 .

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PSA1.10 Calculate ratios and compare liquidity, solvency and profitability for two entities. (LO9) Selected financial data (in thousands) of two competitors, AKA Ltd and UFO Ltd, are as follows.

Required For each entity, calculate these values and ratios: (a) Working capital. (b) Current ratio. (c) Debt to total assets ratio. (d) Return on assets. (e) Profit margin. (f) Compare the liquidity, solvency and profitability of the two entities. AKA Ltd and UFO Ltd Ratio

AKA (All dollars are in thousands)

(a)

Working capital

$33,000 – $15,000 = $18,000

$20,000 – $10,000 = $10,000

(b)

Current ratio

2.2:1 ($33,000 ÷ $15,000)

2.0:1 ($20,000 ÷ $10,000)

(c)

Debt to total assets ratio

53.1% [($15,000 + $70,000) ÷ $160,000]

87.2% [($10,000 + $160,000) ÷ $195,000]

(d)

Return on assets

10.7% =

$16,000 ($160,000 + $140,000 ) / 2

2.9% =

$5,000 ($195,000 + $155,000 ) / 2

(e)

Profit margin ratio

13.3% =

$16,000 $120,000

5.0% =

$5,000 $100,000

UFO

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(f)

The comparison of the two companies shows the following: Liquidity — AKA’s current ratio of 2.2:1 is better than UFO’s 2.0:1. AKA also has higher working capital than UFO. Solvency — AKA’s debt to total assets ratio is lower than that of UFO, indicating that AKA has better solvency. Profitability — AKA has a higher return on assets and profit margin ratio than UFO, indicating that it is more profitable than UFO. Note that UFO’s higher borrowing costs, resulting from its greater reliance on debt, has reduced its profitability.

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Solutions to Problem Set B PSB1.1 Determine forms of business organisation. (LO3) Presented below are five independent situations. (a) Fiona has just graduated with a media and communications degree and wants to start an events management business. She has some savings and her family is willing to support her in her endeavours. Although she has had offers to work for several established businesses, Fiona wants to try it on her own and she wants to maintain control over the business. (b) Mark has been operating as a sole trader for a number of years. Profits are slowly increasing and he expects his gross profit before income tax this year to be around $200 000. Mark also has an opportunity to expand operations and will need to borrow larger sums from a bank or similar financial institution. (c) Maurice, Jacob and Emily have all just graduated with commerce degrees, one in accounting, another in IT and the third in marketing. They want to combine their skills and start a business selling goods over the internet. (d) Amanda and Jessica have been friends since school and want to make a go of their hobby of jewellery making. They already have fashion stores interested in stocking their product, plus they have a web site and sell goods over the internet. (e) Michael Murphy and Steve Elks each own separate printing businesses. They have decided to combine their businesses. They expect that within the coming year they will need significant funds to expand their operations. Required In each case explain what form of organisation the business is likely to take — sole proprietorship, partnership or company. Give reasons for your choice. (a)

One way to ensure control would be for Fiona to form a sole proprietorship. However, in order for this business to thrive, it will need a substantial investment of funds early. This would suggest the company form of business. In order for Fiona to maintain control over the business, she would need to own more than 50 percent of the voting power. In order for the business to grow, she may have to be willing to give up some control, maybe her family would also invest or loan the business funds in the early stages of establishment.

(b)

Mark should incorporate the business to minimise tax plus he will need to prepare financial forecast to present to the financial institutions to borrow funds. It is likely Mark would not immediately have the advantage of limited liability as the financial institutions would usually require a personal guarantee from Mark for the debt borrowings.

(c)

It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the business. Alternatively, they may prefer the company form to simplify subsequent expansion and take advantage of limited liability, but they would need to consider the additional regulation that it would involve.

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(d)

Amanda and Jessica should adopt the partnership form because it facilitates bringing together the contribution of skills and resources. Also there does not appear to be any expected needs for further fund in the near future.

(e)

The fact that the combined business expects that it will need to raise significant funds in the near future makes the company form more desirable in this case.

PSB1.2 Identify users and uses of financial statements. (LO5) Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently. (a) The finance director of Organic Products Ltd is trying to determine whether the company is generating enough cash to buy new equipment for the business without borrowing and still have enough left to pay dividends to investors. (b) An investor is considering purchasing shares in Woolworths Limited. The investor plans to hold the investment for at least 4 years. (c) Datt Ltd is considering extending credit to a new customer. The terms of the credit would require the customer to pay within 30 days of receipt of the goods. (d) Intrigue Finance is considering extending a loan to a company. The company would be required to make interest payments at the end of each year for 8 years, and to repay the loan at the end of the eighth year. Required Although the decision makers should refer to all financial statements, for each situation, state whether the decision maker would be most likely to place the main emphasis on information provided by the statement of profit or loss, statement of financial position or statement of cash flows. In each case provide a brief justification for your choice. Choose only one financial statement in each case. (a)

(b)

In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Woolworths’. The statement of profit or loss provides the most useful information for predicting future performance.

(c)

(d)

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PSB1.3 Comment on proper accounting treatment and prepare a corrected statement of financial position. (LO6, 8) Saturn Pty Ltd was formed on 1 July 2026. At 30 June 2027, Mary Eagle, the managing director and major shareholder, decided to prepare a statement of financial position, which appeared as follows.

Mary willingly admits that she is not an accountant by training. She is concerned that her statement of financial position might not be correct. She has provided you with the following additional information. 1.

The villa is in Foster and actually belongs to Mary, not Saturn Pty Ltd. However, because she thinks she might allow executives to use it sometimes, she decided to list it as an asset of the company. To be consistent, she also listed, as a liability of the company, her personal loan that she took out at the bank to buy the villa.

The inventory was originally purchased for $50 000, but due to a surge in demand Mary now thinks she could sell it for $150 000. She thought it would be best to record it at $150 000.

Included in the accounts payable balance is $4000 that Mary owes for her personal electricity account. Mary included this in the accounts payable of Saturn Pty Ltd because she will probably use company funds to pay for it.

Required (a)

Comment on the proper accounting treatment of the three items above.

(b)

Provide a corrected statement of financial position for Saturn Pty Ltd. Saturn Pty Ltd

(a)

1. The accounting entity concept states that economic events can be identified with a particular unit of accountability. Since the Port Macquarie villa is the personal property of Mary Eagle — not Saturn Pty Ltd — it should not be reported on the company’s Statement of financial position. Likewise, the loan is a personal loan of Mary Eagle — not a liability of the company. 2. The historical cost principle dictates that assets are recorded at their original cost. Therefore, reporting the inventory at $150,000 would be improper and violates the cost principle. The inventory should be reported at $50,000. 3. Including the personal electricity account payable is a violation of the accounting entity concept. The $4,000 payable is not a liability of Saturn Pty Ltd. If the company pays the electricity account on behalf of Mary Eagle, it should be accounted for as a loan to Mary.

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(b) Saturn Pty Ltd Statement of financial position as at 30 June 2027 $

Assets Cash Accounts receivable Inventory Total assets

112 000 168 000 50 000 330 000

Liabilities Accounts payable ($130,000 – $4,000) Notes payable Total liabilities Net Assets

126 000 60 000 186 000 $144 000

Equity Total equity

144 000 $144 000

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PSB1.4 Prepare financial statements. (LO6) Evans Ltd was started on 1 July 2026 with an investment of $150 000 cash. Following are the assets and liabilities of the company on 30 June 2027, and the revenues and expenses for the year of operations.

No further shares were issued during the year, but a dividend of $20 000 in cash was paid. Required Prepare a statement of profit or loss, a calculation of retained earnings for the year, and a statement of financial position as at 30 June 2027. Evans Ltd Statement of profit or loss for the year ended 30 June 2027 $ Revenues: Service revenue

$ 250 000

Expenses: Advertising expense Depreciation expense Insurance expense Office expense Rent expense Repair expense Total expenses Profit

16 500 30 000 24 000 68 000 37 500 700 176 700 73 300

Evans Ltd Calculation of retained earnings for the year ended 30 June 2027 $ Retained earnings, 1 July 2026 Add: Profit

0 73 300 73 300 (20 000) $53 300

Less: Dividends Retained earnings, 30 June 2027

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Evans Ltd Statement of financial position as at 30 June 2027 $

Assets: Current assets Cash Accounts receivable

155 100 43 000 198 100

Non-current assets Equipment Total assets

120 000 318 100

Liabilities: Current liabilities Accounts payable Non-current liabilities Bank loan Total liabilities Net Assets

24 800 90 000 114 800 $203 300

Equity: Share capital Retained earnings Total equity

150 000 53 300

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$203 300

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PSB1.5 Determine items included in a statement of cash flows and prepare the statement. (LO6) Presented below are selected financial statement items for Buzzy Bee Ltd for 31 December.

Required Determine which items should be included in a statement of cash flows, and then prepare the statement for Buzzy Bee Ltd. Buzzy Bee Ltd Buzzy Bee Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers Cash received from share issue

Buzzy Bee Ltd Statement of cash flows for the year ended 31 December Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$509 200 (301 500) 207 700

Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Cash from share issue Dividends paid Net cash provided in financing activities Net increase in cash

(210 000) (210 000) 50 000 (15 000) 35 000 $32 700

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PSB1.6 Prepare financial statements. (LO6) Frankie Ltd was started on 1 May with an investment of $120 000 cash. Following are the assets and liabilities of the company on 31 May, and the revenues and expenses for the month of May, its first month of operation.

No further shares were issued in May, but a dividend of $1500 in cash was paid. Required Prepare a statement of profit or loss and calculate retained earnings for the month of May and prepare a statement of financial position as at 31 May. Frankie Ltd Statement of profit or loss for the month ended 31 May $

Revenues: Service revenue

60 000

Expenses: Advertising expense Office expense Insurance expense Rent expense Repair expense Total expenses Profit

4 000 16 400 2 400 7 600 1 200 31 600 $28 400

Frankie Ltd Calculation of retained earnings for the month ended 31 May $ Retained earnings, 1 May Add: Profit

0 28 400 28 400 (1 500) $26 900

Less: Dividends Retained earnings, 31 May

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Frankie Ltd Statement of financial position as at 31 May $ Assets: Current assets Cash Accounts receivable

$ 76 700 29 600 106 300

Non-current assets Equipment Total assets

126 000 232 300

Liabilities: Current liabilities Accounts payable Non-current liabilities Bank loan Total liabilities Net Assets

5 400 80 000 85 400 $146.900

Equity: Share capital Retained earnings Total equity

120 000 26 900 $146.900

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PSB1.7 Determine items included in a statement of cash flows and prepare the statement. (LO6) Presented below are selected financial statement items for Spoon Ltd as at 30 June.

Required Determine which items should be included in a statement of cash flows, and then prepare the statement for Spoon Ltd. Spoon Ltd Spoon Ltd should include the following items in its Statement of cash flows: Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers

Spoon Ltd Statement of cash flows for the year ended 30 June Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities

$515 000 (205 000) 310 000

Financial Accounting 8e Carlon Solutions Manual

(105 000) (105 000) (77 000) (77 000) $128 000

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PSB1.8 Prepare financial statements. (LO6) An extract from the general ledger of Retail Limited for the year ended 30 June 2027 appears as follows.

Additional information: • Cash paid to suppliers $84 500 • All other expenses were paid in cash • Cash received from customers $172 350 • Cash paid to purchase equipment $36 000 • The bank loan was taken out in the current year and is repayable in May 2029. Required (a) Prepare a statement of profit or loss for the year ended 30 June 2027. (b) Prepare a calculation of retained earnings for the year ended 30 June 2027. (c) Prepare a statement of financial position as at 30 June 2027. (d) Prepare a statement of cash flows for the year ended 30 June 2027. (e) Calculate the cash account balance at 1 July 2026 (i.e. the opening balance). (a) Retail Ltd Statement of profit or loss for the year ended 30 June 2027 $ Revenues: Sales revenue Less: Cost of sales Gross profit Expenses: Salaries expense Advertising expense Insurance expense Rent expense Repairs expense Other expenses Total expense Profit

$ 167 420 82 000 85 420

35 000 5 000 1 300 2 500 15 000 6 250 (65 050) $20 370

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(b) Retail Ltd Calculation of retained earnings for the year ended 31 July 2027 $ 12 500 20 370 32 870 7 800 $25 070

Retained earnings, 1 July 2026 Add: Profit Less: Dividend Retained earnings, 30 June 2027 (c) Retail Ltd Statement of financial position as at 30 June 2027 $ Current assets: Cash Accounts receivable Inventory Total current assets Non-current assets: Equipment Intangibles Total non-current assets Total Assets Current liabilities: Accounts payable Total current liabilities Non-current liabilities Bank loan Total non-current liabilities Total liabilities Net Assets

$ 24 250 8 320 21 500 54 070

83 000 6 300 89 300 143 370 3 300 3 300 15 000 15 000 18 300 $125 070

Equity Share capital Retained earnings Total equity

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(d) Retail Ltd Statement of cash flows for the year ended 30 June 2027 Cash flows from operating activities: Cash received from customers Cash paid operating expenses Cash paid to suppliers Net cash provided by operating activities

$172 350 (65 050) (84 500) 22 800

Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Cash from borrowing Dividends paid Net cash provided in financing activities Net decrease in cash

(36 000) (36 000) 15 000 (7 800) 7 200 ($6 000)

(e) Calculate the Cash account balance at 1 July 2026 (i.e.) the opening balance). Opening cash balance = Closing balance + decrease in cash = $24 250 + $6 000 = $30 350

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PSB1.9 Calculate liquidity, solvency and profitability ratios. (LO9) Here are the comparative statements of Nixon Pty Ltd.

The cash provided by operating activities for the current year was $375 000. Required Calculate these values and ratios for the current year: (a) Working capital. (b) Current ratio. (c) Current cash debt coverage. (d) Debt to total assets ratio. (e) Cash debt coverage. (f) Profit margin. (g) Return on assets. Nixon Pty Ltd (a) (b)

Working capital $336 750 Current ratio

= $711 750 – $375 000 =

$711 750 = 1.9 : 1 $375 000

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(c)

(d)

(e)

(f)

(g)

Current cash debt coverage ratio

Debt to total assets ratio

Cash debt coverage ratio

Profit margin ratio

$375 000 $375 000 + $150 000 = 1.43 times 2

$690 000 = 0.453 : 1 or 45.3% $1 522 200 $375 000 $690 000 + $450 000  = 0.66 times 2

$172,500 = 0.052 : 1 or 5.2 % $3,300,000

Return on assets ratio = $172,500 $172 500 = = 0.127 : 1 OR 12.7%  $1522200 + $11862000  $1354200   2   .

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PSB1.10 Calculate ratios and compare liquidity, solvency and profitability for two entities. (LO9) Selected financial data (in thousands) of two competitors, NEW Ltd and OLD Ltd, are as follows.

NEW Ltd (All dollars are in thousands)

OLD ltd

(a)

Working capital

$115 500 – $52 500 = $63 000

$70 000 – $35 000 = $35 000

(b)

Current ratio

2.2:1 ($115 500 ÷ $52 500)

2.0:1 ($70 000 ÷ $35 000)

(c)

Debt to total assets ratio

53.1% [($52 500 + $245 000) ÷ $560 000] 87.2% [($35 000 + $560 000) ÷ $682 500]

(d)

Return on assets

10.7% =

$56000 ($560000 + $490000) / 2

2.9% =

$17500 ($682500 + $542500) / 2

(e)

Profit margin ratio

13.3% =

$56000 $420000

5.0% =

$17500 $350000

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(f)

The comparison of the two companies shows the following: Liquidity — NEW’s current ratio of 2.2:1 is better than OLD’s 2.0:1. NEW also has higher working capital than OLD. Solvency — NEW’s debt to total assets ratio is lower than that of OLD, indicating that NEW has better solvency. Profitability — NEW has a higher return on assets and profit margin ratio than OLD, indicating that it is more profitable than OLD. Note that OLD’s higher borrowing costs, resulting from its greater reliance on debt, has reduced its profitability.

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Building business skills Financial reporting and analysis BBS1.1 Financial reporting problem: Giorgina’s Pizza Enterprises Ltd Giorgina’s 2026 financial statements were provided earlier in this chapter in figures 1.14, 1.16 and 1.17. Required Use Giorgina’s financial data to answer these questions: (a) What were Giorgina’s total assets at 30 June 2026? 1 July 2025? (b) How much inventory did Giorgina’s have on 30 June 2026? (c) What amount of accounts payable (payables) did Giorgina’s report on 30 June 2026? on 1 July 2025? (d) What were Giorgina’s sales in 2026? in 2025? (e) What is the amount of the change in profit before tax from 2025 to 2026? (f) The accounting equation is: Assets = Liabilities + Equity. Replacing the words in that equation with dollar amounts, give Giorgina’s accounting equation at 30 June 2026. (g) What were the current liabilities on 1 July 2025? (a)

Giorgina’s total assets at 30 June 2026 were $142,312,000 and at 1 July 2025 were $131,491,000

(b)

Giorgina’s had $5,014,000 of inventory at 30 June 2026.

(c)

Giorgina’s had Trade and other payables totalling $28,541,000 at 30 June 2026 and $25,629,000 on 1 July 2025.

(d)

Giorgina’s reported sales in 2026 of $141,473,000 and in 2025 of $126,350,000.

(e)

Giorgina’s profit before tax decreased by $1,656,000 from 2025 to 2026, from $32,228,000 to $30,572,000.

(f)

Giorgina’s accounting equation is: Assets = $142,312.00

(g)

Liabilities + $65,378.00

Equity $76,934.00

Giorgina’s has current liabilities of $38,708,000 at 1 July 2025.

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BBS1.2 Comparative analysis problem: Giorgina’s Pizza Enterprises Ltd Extracts from the 2026 financial statements of Classic Food Ltd (a hypothetical company) are presented below, and Giorgina’s 2026 financial statements are in figures 1.14, 1.16 and 1.17.

Required (a) For each entity calculate the return on assets and profit margin. (b) Which entity appears to have stronger profitability? (c) For each entity calculate working capital and the current ratio. (d) Which entity appears to have stronger liquidity? (e) What additional information would you require to make a better decision about the future profitability and liquidity of the two companies?

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Giorgina’s Pizza Enterprises Ltd vs. Classic Food Ltd (a)

(Amounts in thousands)

Giorgina’s Pizza Enterprises Ltd

Classic Food Ltd

1. Return on Total $21,400/ [($142,312+$131,491)/2] $23,552/[($364,227+$170,296)/2] assets = 15.63% = 8.8% 2. Profit Margin $21,400 / $141,473 = 15.12% $23,552 / $650,738 = 3.6% Ratio* * Sales Revenue from the statement of profit or loss was used here for the profit margin. (b)

The ratios indicate that Giorgina’s has a stronger profitability because both its return on total assets and profit margin ratio are greater than those of Classic’s. Overall Giorgina’s is a stronger performer although Classic is a larger entity.

(c)

Working capital Current ratio

(d)

Giorgina’s appears to have better liquidity because it has a higher current ratio and more working capital. Classic Food has negative working capital.

(e)

In order to make an informed assessment of the two companies’ performances you would require industry information as a benchmark. You would also need as full set of accounts including the notes to the accounts. Classic Food has doubled in size during last twelve months. So details of any acquisitions and new share issues. Information about the companies from their web pages or media releases

$6,807 ($45,286 – $38,479) 1.177:1 ($45,286 / $38,479)

–$20,300 ($174,700 – $195,000) 0.90:1 ($174,700 / $195,000)

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BBS1.3 Interpreting financial statements Tick Tock Technology Ltd launched its latest wireless communications product in the current year. The company spent much of the prior year developing and testing software so that its equipment could operate seamlessly in the public switched telephone network. Information from the company’s statement of cash flows for the year ended 31 December follows.

The most significant source of cash generation was borrowing in the prior year and share issues in the current year. Despite delays, management has expressed confidence that the company is now positioned with a considerable competitive advantage. Required Use the information provided to answer each of the following. (a) If you were a creditor of Tick Tock Technology, what reaction might you have to the current year and prior year statements of cash flows? (b) If you were a shareholder of Tick Tock Technology, what reaction might you have to the cash flows in the current year? (c) If you were evaluating the company as either a creditor or a shareholder, what other information would you be interested in reviewing? Tick Tock Technology Ltd (a)

Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. During current year and the prior year Tick Tock Technology’ operating activities used cash instead of generating it, which is not uncommon in start-up companies in this industry. The company has been reliant on borrowing and contributions from shareholders to meet its investing cash needs and provide cash for operations. Creditors may also be concerned about reduced cash holdings which occurred in both years. Creditors may be reluctant to lend to the company without having some additional assurance of repayment. Although details were not provided in the question as to when the company was to generate cash inflows from operating activities it was disclosed that Tick Tock Technology had not received any cash from customers in the current year or the prior year.

(b)

Shareholders are interested in the long-term performance of a company and how that translates into its share price. Shareholders may be concerned that the company’s operations have continued to drain cash flows in the current year. However, this may be reasonably expected during the start-up phase of a communications company. There was a new share issue during the current year so investor/shareholders must believe in the future viability of the technology the company is developing.

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(c)

More detailed information about the components of operating, financing and investing cash flows would be useful to determine how cash is being used and in particular, why investing cash flows were a net inflow in the current year. The Statement of cash flows reports information on a cash basis. An investor cannot get the complete story without looking at the statement of profit or loss and statement of financial position as well. A copy of the prospectus used to raise the capital would provide useful information about the elected future cash flows of Tick Tock Technology.

BBS1.4 Financial analysis on the web Purpose: This exercise is an introduction to some large accounting firms. Addresses: Deloitte www.deloitte.com/au and www.deloitte.com/nz Ernst & Young www.ey.com/au/en/home KPMG www.kpmg.com.au PricewaterhouseCoopers www.pwc.com.au or www.pwc.co.nz Steps: Go to the homepage of a firm that is of interest to you. Required Answer the following questions. (a) Name two services provided by the firm. (b) What countries or regions does it operate in? (c) Does it provide information for students? If so, briefly describe the type of information. (d) Summarise one recent news item discussed on the firm’s web site. Answers to this question will differ over time and depending on the accounting forms chosen by the student, choice of services (part b) and choices of news item (part d). We provide the following solution for Deloitte as at September 2025. (a)

Deloitte Australia:

Audit Assurance Business Process Solutions Customer Cyber Deloitte Private Economics Engineering, AI & Data Enterprise Technology & Performance Global Employer Services Human Capital Strategy & Transactions Sustainability

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International Specialist Services Legal Operate Risk, Regulatory & Forensic Strategy & Transactions Tax

(b)

Deloitte operates in over 150 locations around the world including Albania, Argentina, Armenia, Algeria, Australia, Austria, Bahamas, Bahrain, Belarus, Belgium, Brazil, Bermuda, Brunei Darussalam, Bulgaria, Canada, Cayman Islands, Chile, China, Costa Rica, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, Ethiopia, Finland, France, Germany, Gibraltar, Greece, Guatemala, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Korea, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Moldova, Morocco, Mozambique, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Sweden, Syria, Taiwan, Thailand, Turkey, United Kingdom, United States, Uruguay, Vietnam, Yemen.

(c)

Australia: Careers information and student programs. Deloitte run a graduate program for new university graduates but also operate student programs (listed below). The advantage of the student programs is that ‘those who participate in our student programs often secure a Deloitte graduate position well before their peers.’ The student programs are: Summer Vacation Program: spend three to eight weeks of paid internship, in one of the business units, with the prospect of obtaining a graduate position. The Summer Vacation Program is open for students in their penultimate (second last) year of study. Graduate Program: provides the tools and training to ensure ‘graduates can achieve success through mentoring, peer support and e-learning’.

(d)

Australia: June 2025: “AI can help avoid approximately US$70 billion annually in direct natural disaster costs by 2050: Deloitte Global report” New analysis reveals AI's transformative potential to enhance infrastructure planning, response, and recovery, offering a strategic path to minimizing future natural disaster costs.

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Critical thinking BBS1.5 Group decision case Permanent Press provides laundry services to hotels and hospitals. In a recent annual report, Permanent Press chronicled its contributions to community services over the past 10 years. The following excerpts illustrate the variety of services provided. 1. At a local festival, Permanent Press sponsored the event by providing T-shirts, stationery and office decorations featuring the company’s name and logo. 2. In support of the ‘Clean Up Australia’ campaign in 2026, the company donated, and its employees planted, grevillea gardens in cities across Australia. 3. The company held a competition in which customers throughout Australia and New Zealand nominated their favourite children’s charities. Winning charities in the draw received a monetary donation from Permanent Press in the name of the customer. 4. Permanent Press executives often volunteer their time and resources to serve as role models and mentors to young people in Auckland. Required With the class divided into groups, answer the following. (a) The entity assumption requires that a company keep the personal expenses of its employees separate from business expenses. Which of the activities listed above were expenses of the business, and which were personal expenses of the employees? Be specific. If part of the donation is business and part is personal, note which part is each. (b) For those items that were business expenses, state whether the expense was probably categorised as an advertising expense, employee wages expense, grounds maintenance expense, or charitable contribution expense. You may use any or all of the categories. Explain your answer. Permanent Press (a)

(1) (2)

(3) (4) (b)

(1) (2)

This is an expense of the business because Permanent Press has provided its stationery, T-shirts and office decorations. The donation of the grevilleas was an expense of the business; the planting of the gardens was likely on the employees’ own time and therefore a personal donation of time by the employees. If Permanent Press paid wages and salaries to its personnel for planting the gladiolas, that would be an expense of Permanent Press. This is a business expense since the payment is made by Permanent Press to the charity. As the executives are volunteering their own time, this is not an expense of Permanent Press. It is a personal cost to the executives. Advertising expense is the most likely category of those listed because the name, Permanent Press, and the company logo were on all the gifts. Charitable contribution expense is the most likely account. It is not Grounds Maintenance Expense because the grounds maintained are not those of the company. If the employees were paid wages while planting grevilleas, the cost would be recorded as wages expense. © John Wiley and Sons Australia Ltd, 2026

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(3) (4)

This is a Charitable contribution expense. Not recorded in the company’s financial records at all.

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BBS1.6 Communication activity Stefani Leotta is the trainee accountant for GaGa Fashions Ltd. Stefani has finally got the company’s statement of financial position to balance, but as she’s still completing her business degree, she isn’t sure that it’s correct. Before sending the statement to the board of directors, she asks you to check it and prepare a report.

Required Unfortunately, Stefani has made some fundamental errors. Prepare a report for Stefani using the following structure. (a) An explanation of the purpose and structure of your report and an overview of the initial findings. (b) A discussion of the purpose of a statement of financial position and definitions for each of the elements. (c) The identification of each of the errors in the statement of financial position with an explanation of why they are incorrect and how they can be corrected. (d) A correct statement of financial position (e) A discussion of why it is important that the statement of financial position is faithfully represented. (f) Provide examples of decisions users make, based on the information in general purpose financial statements. (a) Gaga Fashions Ltd Date: DD/MM/YY Brief Report on Gaga Fashions Financial Statements (a) Introduction and overview The purpose of this brief report is to provide feedback on my review of the statement of financial position of Gaga Fashions Ltd as at 30 June. The review revealed that there are some fundamental gaps in your understanding of the nature, purpose and elements in the statement of financial position which has lead to a number of errors in the statement of financial position of Gaga Fashions Ltd as at 30 June. The remainder of this report is structured as follows: (b) Purpose of the statement of financial position and definition of the elements;

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(c) List of errors in the Statement, why they are incorrect and how to correct them, and; (d) A corrected statement of financial position for Gaga Fashions Ltd as at 30 June 2026. (e) Why it is important that the statement of financial position is faithfully represented. (f) Examples of decisions that four external users make based on general purpose financial statements.

Part (b) The purpose of a Statement of financial position is to report a company’s assets, liabilities and equity at a point in time. It reports what the company controls (assets) and what it owes (liabilities) and the net amount attributed to owners (equity). Assets are formally defined in the Conceptual Framework as a 'present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits' (paragraphs 4.3 and 4.4). Liabilities are formally defined in the Conceptual Framework as a 'present obligation of the entity to transfer an economic resource as a result of past events' (paragraph 4.26). Equity is defined in the Conceptual Framework as 'the residual interest in the assets of the entity after deducting all of its liabilities' (paragraph 4.63). Part (c) A number of items in this Statement of financial position are not correctly reported. Errors include: 1.

The Statement of financial position should be dated as at a specific date not for a period of time. Therefore, it should be stated ‘as at 30 June’.

Assets are generally listed in order of liquidity. Equipment is therefore usually listed below Supplies on the Statement of financial position. In a classified Statement of financial position, Supplies would be shown as a current-asset and Equipment it would be shown as a non-current asset.

Accounts receivable would be shown as an asset and in order of liquidity, is usually reported between Cash and Supplies on the Statement of financial position. In a classified Statement of financial position, Accounts receivable would be shown as a current asset.

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Inventory should be shown as an asset on the Statement of financial position. In order of liquidity, inventory is usually reported below Cash and Accounts receivable. In a classified Statement of financial position, Inventory would be shown as a current asset.

Liabilities and shareholders’ equity should be shown separately on the Statement of financial position. Contributed equity, Retained earnings and Dividends are not liabilities.

Contributed equity, Retained earnings and Dividends are part of shareholders’ equity. The Dividends account is not reported on the Statement of financial position but is subtracted from Retained earnings to arrive at the ending balance. Part (d) A corrected Statement of financial position is as follows. Gaga Fashions Ltd Statement of financial position as at 30 June $

Assets Cash Accounts receivable Inventory Supplies Equipment Total assets

14 400 30 000 7 200 1 680 36 900 $90 180

Liabilities: Accounts payable Total liabilities

$25 980 $25 980

Equity: Contributed equity Retained earnings Total liabilities and equity

48 000 *16 200

* Retained earnings Less: Dividends Ending retained earnings

$20 400 (4 200) $16 200

64 200 $90 180

Part (e) The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders and other © John Wiley and Sons Australia Ltd, 2026

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creditors in making their decisions about providing resources to the entity. This definition highlights the primary users of general purpose financial reports to be existing and potential shareholders, lenders and other creditors. External users can only make sound decisions when allocating their resources if the information they are using to base their decisions on is faithfully presented. Part (f) The following table provides a list of external users and the decisions they make using general purpose financial reports External Users

Decisions

Investors

Whether to invest based on future profitability, return or capital growth Whether to grant credit based on risks and ability of the entity to repay debts

Creditors Customers Employees and trade unions Government authorities Regulatory agencies

Whether an entity will continue to honour product warranties and support its product lines Whether the entity has the ability to pay increased wages and benefits, and offer job security Determine the amount of tax owing and whether the entity complies with tax laws Determine whether the entity is operating within prescribed rules

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BBS1.7 Sustainability The following is an extract from the AGL Energy Limited web site. At AGL, sustainability means thinking about our long-term responsibilities towards our customers, our people, our investors and to our community, and to the environment in which we all work and live. We’re focused on delivering affordable, reliable, lower-carbon and innovative energy solutions for all of our customers, including those experiencing financial hardship. To accomplish this, we need to support our people and the communities in which we live and work. We do this by reinvesting in the communities we operate in, and by celebrating and developing our safe, diverse and inclusive workforce. As an essential service provider in a highly regulated industry, we have a responsibility to engage with governments at all levels on energy and related policies. We are also committed to taking a conscientious approach to the environment by actively working to reduce greenhouse gas emissions and manage our environmental footprint. These complex issues — and the actions we are taking — shape our sustainability strategy. We’re always listening, learning and reviewing our approach, and measure our performance through our transparent sustainability reporting. Source: AGL Energy Limited, www.agl.com.au/about-agl/sustainability. Required What is meant by the term sustainability? Access AGL Energy Limited’s latest sustainability responsibility report and: 1.

outline the company’s approach to sustainability

summarise AGL’s achievements in health and safety and the environment for the current period. Include a discussion of how these achievements are measured.

The term sustainability is about making decisions considering environmental, social, governance and economic issues and trade-offs. Sustainable development must not just be about economic growth but also environmental quality and social equity. AGL sustainability report Background for the lecturer: From 2018 AGL no longer produce a stand alone sustainability report but the information is contained on their website and in their annual report. There is also a climate report. Student answers will differ.

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1. AGL Approach AGL state on their website that they aim at “Embracing ESG in everything we do”. “At AGL, our purpose and values reflect our commitment to providing reliable energy solutions for millions of homes and businesses as we play our role in Australia’s energy transition. Embracing ESG means thinking about the responsibilities we have to our people, customers, investors, communities and the environment in which we operate. We’re embedding ESG considerations into the work we do and the decisions we make, recognising that our future success is shaped and measured by the social and environmental consequences our decisions and actions have for all our stakeholders.” (https://www.agl.com.au/about-agl/sustainability) 2. AGL’s achievements: results and how measured. For health and safety and the environment only. Health and safety: Please refer to website as well as annual report (e.g. 2025 annual report p.33-35) Environment: Please refer to website, annual report (e.g. 2025 annual report p. 38-40 and 64-88) and climate statement.

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BBS1.8 Ethics case As the chief financial officer of Mobile Phones Pty Ltd, you discover a significant misstatement that overstated assets in this year’s financial statements. The misleading financial statements are contained in the company’s annual report, which is about to be issued to banks and other creditors. After much thought about the consequences of telling the managing director, Jack Frost, about this misstatement, you gather your courage to tell him. Jack says, ‘What they don’t know won’t hurt them. But just so we set the record straight, we’ll adjust next year’s financial statements for this year’s misstatement. We can fix it next year when we make more profit. Just don’t make that kind of mistake again.’ Required (a)

Who are the stakeholders in this situation?

(b)

What are the ethical issues?

(c)

What would you do as the chief financial officer? Mobile Phones Pty Ltd

(a)

The stakeholders in this case are: You, as chief financial officer Jack Frost, managing director Users of the company’s financial statements.

(b)

The ethical issue is the continued circulation of significantly misstated financial statements. As chief financial officer, you have contributed to the preparation of misleading financial statements. Jack Frost and any other directors are responsible for the preparation of the financial statements issued by Mobile Phones Pty Ltd. You have acted ethically by telling the company’s managing director. The managing director has reacted unethically by allowing the misleading financial statements to continue to circulate.

(c)

As chief financial officer, you have a professional ethical responsibility to attempt to persuade the managing director not to issue misleading financial statements (they would mislead users, cause damage to the company’s reputation and possibly incur fines). Other actions that may be considered include reporting the matter to other directors and resigning. If the statements are audited, the matter may be referred to the auditors.

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