Testimonals

 Below are 2 of my testimonials which were submitted by my ex students to me:)

Both Kathery and Yunchho were dilligent students who practiced their accounting questions dilligently and asked questions actively in my tuition class.

Both Kathery and Yunchho have passed and graduated from University at S'pore University of Social Science and is now working currently, for Yunchho he is studying towards his A level at the point of writing this page.

1. Student Yunchho - taught him POA in Sec 4 & 5 N & O levels. 

2. Student Kathery - taught her in SUSS modules -

1. Strategic Management Accounting 
2. Association Algoritam &
3.Strategic Financial Management. 

For POA O & A level tuition enquiries, pls whatsapp/call Ken Cai at 91786404.

Chapter 17 - Financial Statements Analysis

Ok, we are at the last chapter of the POA O level syllabus at mypoateacher.blogspot , this being said, this is definitely not the lease important😀. 

On the contrary, this chapter is sure to come out unless if something unexpected like Covid strikes again and this chapter may be eliminated out of O level which may not be a good thing 👎 Especially if you are sure score if you can understand this chapter reasonably well by its ratios and formulas. 💪✅💯

💨Having learnt on Income statement and the balance sheet elements, have you ever wondered, how users of these financial statements make compare and use to form meaningful information?

Yes, You are right, they use ratios. Ratio can show us the uptrend or downtrend of the business and they are able to convey information in the shortest time possible.

☝There are 3 categories of ratios to analyse a business: -

1. Profitability; 

2. Liquidity; &

3. Efficiency 

1. Profitability 

A business needs profit to carry on its ongoing trade. If a business has no profit, there will not be adequate funds for daily operational uses such as paying to suppliers for trading business  or paying employee salaries for a manufacturing firm let alone any funds for capital expenditure to purchase income generating assets. 

💨Profit measure the ability of a business to earn revenue and manage expenses. 

Gross profit = Net Sales Revenue - Cost of Goods sold ,  whereby 

*Net sales revenue is Total Sales revenue - Total Sales returns

Compare the Sales and gross profit of company 001 & 002, jus by looking at the sales revenue, it may appear company 001 has a larger increase of revenue (i.e around $700 to $800 increase/yr) compared to $300 of company 002.

👦However, when you analyse the gross profit margin, what did you see??

👉Did you see that Company 001 Gross profit margin is on a downward trend while company 002 Gross profit margin is on a upward trend. An investor who only sees the revenue will invest in Company 001 while by using Gross profit ratio, an investor may instead invest in Company 002 as its expenses are well managed as the years goes by.

☝How to improve Gross profit or Gross profit margin? 

Ans: Gross profit can be improved either by increasing sales 

(i) Have trade discount to customers to increase bigger or bulk purchase 

(ii) Purchase goods from a reliable supplier to lower sales returns from customers and thereby increasing Net Sales Revenue. 

Or reducing Cost of Sales

(iii) Attempt to ask for discount from suppliers 

(iv) Lower manufacturing overheads such as salaries and rental 

☝How do you interpret a gross profit of 20% for a business?

It means of every $1 the business made, the cost of sales of producing this product of $1 is $0.80 and thereby gross profit is $0.20 ($1.00 - $0.80)

There are 3 other profitability ratios which you have to understand, the first being (i) Mark- up on cost 

☝If the question say a product that is sold for $10/piece has a mark up of 20%, how much is the original costs?

Ans: For those who said $8.00, later you do 2 more POA questions haha, the answer is  $8.33  ($10/ 120% X 100%) The base for this $10 is 120% not 100%, since it is an increase or an mark up of 20% on the original price.

💨The 2nd profitability ratio is the return on equity ratio  

It means the amount of profit/return earn by the owner or investors for every dollar invested into the business. 

💨The 3rd profitability ratio is the profit margin ratio  

The profit margin is calculated by Profit / Total Net Sales revenue. similar to Gross profit margin, the same base of " Total Net Sales revenue"is used, the difference is that profit is used instead of gross profit. It take into accounts the variable overhead and the miscellaneous expenses such as depreciation expenses or non Cost of goods sold costs. 

 2. Liquidity 

The next important category of ratio in this chapter is the liquidity ratio. Liquidity measures the ability of a business to meet its short term financial obligation, such as payment to supplier, salaries to employees, electricity bills or rental. 

Profitability does not necessary means liquidity

💨This may sound like a tagline for a movie😆, but a business which is profitable may not have liquidity, the business could sold most of its products on credit causing alot of trade receivables but no cash. 

The business may also have too many obligations such as loans whose interest are occupying a huge % of the cashflow of the business or simply holding too many illquid assets such as stocks or prepaying their suppliers early. 

One measure of liquidity is working capital, it is computed by: -

Working Capital = Current asset - Current liab 

Company 001 has an increasing Working capital over the 3 years while company 002 increased its working capital over Yr 1 to Yr 2 but decreased to $8,000 in year 3. This maybe due to Company 002 paying off its long terms liability loan which are not within the calculation and yet reducing the bank/cash in hand which result in a lower working capital of $8,000/-.

Next, we will touch on Working Capital Ratio,

The formula is given by Working Capital Ratio = Total Current Assets/ Total Current Liab

💨A working capital ratio of less than 1 means that the business current assets is lesser than its current liab. This is dangerous as it means that the business will not be able to meet its short term obligations such as paying to suppliers if need to. 

☝While a Working Capital ratio of more than 1 means that it has more current asset than current liab. An widely acceptable working capital ratio is 2. Any working capital ratio of more than 2 might means that the business is not effectively using its cash or liquid assets to increase shareholders return or returns on equity.

💨 As we all know the components of current assets within the balance sheet -----> Cash in hand, bank, trade receivables, inventory and prepayment. 

Of these items, the inventory and prepayment are the hardest or takes the longest to convert to cash when the need arises. 

Henceforth, quick ratio is there to taking into effect of inventory & prepayment:- 

Quick Ratio = Quick Asset/Total current liab

whereby Quick asset = Total current Assets - inventory - prepayments.  

The quick ratio is a clearer calculation/ ratio of the liquidity of a business since most prepayments cannot be convert to cash while to encash the whole batch of inventory does certainly requires a substantial amount of time. 

Comparing the Quick ratio of Company 001  & 002 , Company 001 quick ratio are on a 3 year downward trend while company 002 are on a 3 year upward trend. Company 001 quick ratio were higher than 002 in yr 1 but were lesser than 002 in Yr 2 & 3 whereby in Yr 3 company 002 had 2.13 times of current asset compared to current liab.  Company 001 could need to reduce its loan by increasing Owners or shareholders fund or hold more promotion/sales to increase its sales revenue. 

 3. Inventory Management 

💨Inventory are a double edged sword, holding too much of it will increase storage cost, insurance, possibility of inventory esp food turning bad or possibility of theft. 

Holding too little inventory might means rejecting potential customers who require high volume of goods. A business holding too little inventory will also need to incur more ordering costs and freight costs. Furthermore, the business might not enjoy trade discount since the amount of goods ordered is too little.

A ratio used for inventory management is the inventory turnover rate. 

Which is calculated by Cost of sales / Average inventory

Whereby Average inventory = (Opening inventory + Closing Inventory)/2 

Company 001 inventory turnover rate increased from 7 times in Yr 2 to 9 times in Yr 3 while Company 002 inventory turnover rate decreased from 6 times in Yr 2 to 4.5 times in Yr 3. It can be concluded that company 001 is managing its inventory better than company 002. 

☝Inventory turnover rate can be increased by reducing average inventory while increasing costs of sales 

such as :- 

(i) Not purchasing excessive inventory, a good hunch would be to purchased based on budgeted which are foremost pegged to historical sales trends & 

(ii) Selling more goods to increase cost of goods sold, having more sales promotion such as using mypoateacher.blogspot 😂 as an avenue for advertisements or other social media to increase sales

☝Test your understanding, Lets try one of the question on Financial statements analysis.

 

  

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)

Chapter 16 - Equity in a Sole Proprietor and Company

 All right, final last 2 chapters of this mypoateacher.blogspot blog😁

☝Lets move on to accounting for Equity in this chapter.  This chapter mainly tests us the various components in the Equities Components in a balance sheet. 

We know that: 

Ending Equity = Opening Equity + Additional Capital - Drawings + Net profit - Net loss - Dividends( for Companies only) 

💨Henceforth lets dive in greater details to how the equities components are adjusted:)

1.Additional Capital

When the owner of the Company contribute additional capital to the business for eg, cash of $5,000, the journal entry is 

Dr Cash at bank  $5,000

Cr Capital                        $5,000

Being contribution of Cash $5,000 to the business 

☝However, when the owner contribute $10,000 in trade receivables to the business, how is this accounted? You may ask is trade receivables transferrable? Yes it is in fact alot of companies transfer their trade receivables to bank in return for a mortgage from the bank in what we termed as factoring.

Back to the transfer of trade receivable, the journal will be as such below:-

Dr Trade Receivable   $10,000

Cr Capital                                    $10,000

2.Drawings

☝When the owner takes out $5,000 cash in the business for his own personal usage, how is this accounted?

We will pass the following journal entry:-

Dr Drawings $5,000 and Cr cash $5,000 

Have you wondered how are the Drawings account closed at the end of the period and transfer to capital?

Dr Capital Cr Drawings 

3.Profit & losses from Income Statement

💨All losses and profits from the Profit & loss account are transferred to the capital account of a sole proprietor & retained earnings of a company. 

Since profit increases the capital/retained earnings while losses reduces the capital/retained earnings account

When it is transfer of profit, the capital/retained earnings account has to be Credited while if it is the transfer of losses, the capital/retained earnings account has to be Debited.

Therefore, transfer of Profit:- 

Dr Profit & Loss 

Cr Capital/retained earnings

Therefore, transfer of Loss:- 

Dr Capital/retained earnings

Cr Profit & Loss

4.Dividends(only for companies)

Normally there are 3 steps when a dividend is announced for a company: -

1. Declaring the dividend; 

2.Transfering the dividend to the retained earnings account and 

3. Payment of the dividend

💨For declaring the dividend, a company would usually declare its dividend close to the end of the year around Oct or Nov if the year end is 31 Dec. 

1. Once a company declare dividend, the journal entry will be:-

Dr Dividends 

Cr Dividends Payable 

2. Transferring the dividend to the retained earnings account and 

A company having passed the 1st declare dividend entry above would need to shift the dividend expense from the income statement to the retained earnings account, this is because dividend are not business/trading expenses and should not be reflected in the income statement. The journal entry will be

Dr Retained earnings  

Cr Dividends

3. Payment of the dividend - A company usually pay the dividend after the financial year end unless its for interim dividend or quarterly dividends. Interim dividends are dividends which are paid mid way through the financial year, the payment entry will be as such:

Dr Dividends Payable

Cr Cash at bank 

💥💥💥 Important !Things to note: 

1. Share capital account and retained earnings account add up to form the " Shareholders Equity"component in the balance sheet. 

2. In Issued Share capital account, it only contains the 1.number of shares issued & any 2.additional shares issued normally or through a rights issue. Dividends declared & profits for the year should not be added to issued share capital.

3. In Retained earnings account, only these 2 items are within the account, 1. Profit & Loss transferred & 2. Dividends, any additional issue of shares should not affect the retained earnings account.

A high % of students cannot extinguish the transactions affecting both accounts henceforth often loses mark. Drawings are not applicable to retained earnings as the owner(s) of a company are usually its shareholders and the only way for shareholder returns are the dividends or the share price appreciation. 

☝Lets try one of the question on Dividends since dividend is more complex while the rest of the equity components are more on transfer to the capital account at the end of the year😀

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)

Chapter 15 - Incomplete records

 Lets move to another major topic of mypoateacher.blogspot.com :- Incomplete records.

💨Basically, there are 3 methods under this method:-

1. Capital comparison method;

2. Account analysis method ;& 

3. Financial ratios analysis method.

💨In incomplete records, the question will give you bits & pieces of information such as cash at bank acc, the opening capital, sales returns, to find figures such as net profit , Total inventory purchase , Total Sales amount and cost of sales. 

1. Capital Comparison method

💥Let us all understand more on Capital comparison method. we all know that Capital is also termed as Owner's Equity which can be calculated by :-

Capital/Owner's Equity = Total Assets - Total Liabilities 

And for Capital/Owner's Equity, we can further break it down by:- 

Ending Capital/owner's Equity = Opening Capital/Owner's equity + Additional Capital contributed by owners + Net profit - net loss - drawings for the period.

Using the capital formula, we can then calculate the net profit/(loss) for the periods:- 

if we have these 3 elements :-

• Opening & Ending Capital
• Drawngs
• Additional contributed by owners into the business

☝Lets try it with a question :-

 

2. Account analysis method , the question will normally ask you to find out total purchases or total sales amount.

💨As we have learned under the previous chapter on trade receivable & payable control accounts, we are able to find the Total credit Sales & purchase figure from the Trade receivable & payable control accounts.

**Note: Remenber to add total cash purchase or Total cash sales to your credit purchase or credit sales in order to derieve the Total Sales/purchase for the period. 

Total Sales Revenue = Total Credit Sales + Total Cash Sales

Total purchases = Total Credit Purchases + Total Cash purchases

☝Let's try a question to find out the Total Credit Sales amount:- 

Total Net Sales Revenue =  $32,000 + $20,000 - $3,000 

        = $49,000

**Note: for Sales returns, the sales revenue is not affected  only the sales returns account and Trade receivable account are adjusted. This is a common mistake which a lot of students make!

Therefore in finding net sales revenue, we need to deduct the sales returns for the period.

☝Similarly, for total purchase, we can find the credit purchase from the total trade payable account 

 

Total Net purchases = $23,500 + $20,000 - $3,000

=$40,500 

*Remember: the few tips when doing the question, Debtor is Debit side and Creditors are Credit side, do not put wrongly the sides of debtors and creditors when doing a trade payable or trade receivable account. 

**For Sales returns & Purchases returns, pls deduct from total purchases & Sales amount to find the net amount:)

Apart from Sales & Purchases figures, the exam may also test on total expenses for the period by giving you a prepaid expenses or accrued expenses acc. 

☝Lets try one on Prepaid acct also on mypoateacher Pte Ltd:-

Note: 

1. The ending balance for the expenses and revenue account has to be nil. 

2. For the balance transfer on the 1 Jan 21, it is a prepaid amount for the previous period but the expenses are paid for the current period which is $2,000, therefore when it transfer down, it is a Debit balance.

3. Financial ratios analysis method.

💨Next we move on to the next method- the financial ratios analysis method which is using financial ratio to find missing amounts: -

For e.g. we all know that Inventory turnover ratio is given by : Cost of Sales / Average inventory 

& Average inventory is calculated by (opening + closing inventory)/2,

☝Qns: If Company A Inventory turnover for Yr 2020 is 5 times and its Average inventory is $30,000 for the same period, can we find the cost of sales?

Since Inventory turn over ratio = Cost of sales/ average inventory, we can substitute the figures into the formula 

Ans:  Inventory turnover = 5 times

Average inventory = $30,000

Therefore, Cost of sales = Inventory Turnover ratio X average inventory 

= 5 times X $30,000

= $150,000 

☝Qns:Using the cost of sales figure calculated, if we have have the Gross profit margin, we are able to find the Net Sales amount too.

Let say Company A has a gross profit margin of 20%,  given cos of sales of $150,000 , can you find the net sales amount?

Yes, Since we know Gross profit margin is 20% therefore the cost of sales margin has to be (100%-20%) 80%, 

therefore if $150,000 represents 80% being cost of sales, can we find 20% which is the nett sales revenue?

Nett Sales Revenue : $150,000/80% X 20% 

= $37,500

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)

Chapter 14 - Correction of Errors

Let's move onto corrections of errors😀

💨This topic if it comes out would be most probably in the form of a question on itself:- 

Errors not revealed by a trial balance means that the trial balance still ties which is Debit = Credit, but there are errors due to :- posting of wrong amount or wrong account or on the wrong side of the account (Dr/Cr). 

There are 6 errors not revealed by a trial balance namely: -

1. Error of omission 

2. Error of commission

3. Error of principle 

4. Error of original entry

5. Error of complete reversal

6. Compensating Errors

Lets elaborate more on the 6 errors below:- 

💥1. Error of omission 

Error of omission means that the transaction is not recorded at all. 

💥2. Error of commission 

Error of commission means that the transaction is recorded on the correct side with the right amount but under wrong account of the same class.

For e.g. Trade receivable - Mypoateacher paid $1,000 to settle his outstanding amount. However, when passing the transaction journal entry, the account clerk  Dr Bank Cr Trade Receivable Mr Squid instead. From here you can see that the Dr portion which is Debit bank is corret but Cr portion, he should have Cr Trade Receivable - Mypoatacher instead of Cr Trade Receivable - Mr Squid. 

💥3. Error of principle

Error of principle means that the transaction is recorded on the correct side with the right amount but under wrong account of the different class.

A transaction for the purchase of inventory on cash of $500, the account clerk could Debit Trade Creditor $500 Cr Cash at bank $500, when the correct transaction should be Dr Inventory $500 Cr Cash at bank $500, henceforth the Debit is correct side and the Debit $500 is correct amount, it is jus the wrong account of the different class.  

**What separates an 3. Error of principle from an 2. Error of commission is that error of principle involves posting to a wrong account of the correct/same class while error of principle refers to posting to a wrong account of a different class, the amount and the sides are correct. 

💥4. Error of original entry 

Error of original entry means that when the transaction is first recorded, it is recorded on the correct side, under correct account of the same class but Wrong amount. 

An drawing transaction which the owner takes $500 cash for his own use from his business - instead of passing Dr Drawings $500 Cr Cash at bank $500, the owner pass Dr Drawings $50 Cr Cash at bank $50, the side/class and accounts are correct except the amount is wrong.

💥5. Error of Complete reversal 

Error of complete reversal means the correct accounts and correct amounts are posted except is made on the wrong side of the both accounts.

For e.g. A Sales returns from trade receivable Mr Mypoateacher for $200, the account clerk passes the transaction - Dr Trade receivable - Mr Mypoateacher $200 Cr Sales Returns $200 instead of Dr Sales Returns $200 Cr Trade receivable - Mr Mypoateacher $200. The amount and class are correct just that the account to be debited are credited and account to be credited are debited  - complete opposite of the correct entry. 

💥6. Compensating error 

Compensating error occurs when there are 2 errors made and the 2 errors cancel each other out. 

For e.g.  A trade receivable debit balance was written as $300 whose correct amount should be $500, shortfall of $200 while a trade payable credit balance was written as $1,000 whose correct amount should be $1,200, also a shortfall of $200. The shortfall Debit side of $200 cancel the shortfall of $1,000 henceforth it compensate for each other.

💨How then can the above be translated to helping us answer the questions? That is very easy:- just need to have 3 columns 1. What is the transaction posted? 2. What is the correct entry to be posted & 3. What is the adjusting journal entry?

☝Illustrate the above with the question below :-

The errors for above are :-

• (a) Error of Commission
• (b) Error of Principle
• (c ) Error of Omission 

Hope that the above has allowed you to understand better the 6 types of errors not revealed by the trial balance, in order to do the 3 error columns, you need to know the original entry, correct entry and the adjusting/correcting entry to be able to do that😀

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)

Chapter 13 - Control Accounts

 Let's start on control accounts:)

Have you ever wondered when you see Trade debtors & Trade creditors in a balance sheet, why is it consolidated as 1 amount/item when the business has 30+ debtors or creditors, finish this chapter and you will know why!

If control accounts comes out in exam,I will be laughing till (maybe) tears comes out😁. It is not difficult.

💨A business has control accounts to totalize or summary the total individual accounts.

☝There are 2 control accounts namely:-

💥Trade Receivables control account &

💥Trade Payables control account.

The purposes of control accounts are:

💥Act as a check of all/total the balances of individual trade receivable and trade payable accounts.

💥Control Accounts helps to facilitate the preparation of trial balance & balance sheet and income statement.

💥If the 2 persons preparing the trade receivable control and individual receivable accounts are different,the person preparing the control account can check and review the person who post into the individual ledger accounts

💨Okay, having know the rationale behind the preparation of Trade Receivable & Payable control accounts let us identify the items inside the accounts and the source of such items.

💨 Its important to identify the source such as the purchase ledger providing the information of the control account. This question may come out either as a question in control account topic or in Special journal topic. 

** Do note that the source for Discount allowed and Discount received can only be taken from Cash book as the difference between the amount settled and paid and what the debtor/creditor owes will be the Discount allowed from Debtor and Discount received from creditor. 

💨Important* if you still cant gasp the concept of control account ---- just think of the control account as a summary of all the individual debtors account for Trade Receivable Control and individual Creditors for Trade Payable control.... When I adjust one of the individual account let say payment from a debtor, this receipt has to be shown in the Trade Receivable control account too. 

Try to relate the above diagram to your understanding, a control account just combines all individual ledger account, thats it!

☝Test your understanding,try this question below:-

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)

Chapter 12 - Trade Payables and Long term Borrowings

 Now lets move to Trade payables and long term borrowings😀.

☝What are the difference between a short term borrowing/trade payable and a long term borrowing?

Ans:

💥Classification - A Short term borrowings is presented as a current liability in the balance sheet. While a long term borrowing is presented as a non current liab in the balance sheet. 

💥Duration - A long term borrowing is usually taken up by the business to buy non current assets or to have capital to expand the business. While a short term borrowings helps a company overcome a temporary cash shortage.

💥Interest- Short term borrowings do not have interest to the loan while a long term borrowing has. 

💨Items that impact a trade creditor account

• Trade Discount ( not recorded)
• Cash Discount
• Return Outwards 

☝Lets try a question below to understand the 3 items

Having understood the trade payable and their various items, lets move on to long term borrowings😀

A long term borrowings has 2 components namely the 1. Principal and 2. Interest.

1.Principal

When a Company takes up a bank loan, the journal entry is as such:-

Dr Cash at bank

Cr Long term borrowing

When a Company repays a bank loan, the journal entry is as such:-

Dr Long term borrowing

Cr Cash at bank

In the balance sheet, you need to split the principal sum to 1. Current and 2. Non current portion. 

Current portion would means that the loan amount is paid by the end of the next financial period, while non current would means it will be paid only after the end of the financial period. 

☝Lets try the below question on Long term borrowings - Principal

💨Now lets go onto interest expenses:)

💨On a long term borrowing, the company who is the borrower is expected to pay interest on the principal amount at an interest rate agreed upon the loan agreement.

The formula will be: :- 

Interest for the whole year: Principal X interest rate 

💡When a business pays interest the journal entry are as below:-

Dr Interest expenses

Cr Cash at bank

💡For interest which are not paid but incurred at the year end

Dr Interest expense

Cr Accrued Interest expense

** it is this accrued interest expenses calculations which normally confuses a lot of mypoateacher students.

Lets try on a question on Long-term borrowings - Interest: 

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)