BUSINESS 114

Assignment 03 S1 2025

Due: Friday 23 May 2025, 11:59pm (NZT)

Assignment 03 will be marked out of 60 marks and is worth 10% of your final grade.

Overall Presentation

Submission: Type your answers into the Answer booklet and submit your assignment by 11.59pm (NZT) on Friday 23 May 2025 via Canvas. Please keep a copy of your assignment in case there are technical issues with your submission.

A pdf or word document version of your assignment must be submitted on Canvas. Please follow the instructions below to submit your assignment.

1.  Save your assignment as a word document or pdf file.

2. Rename your assignment file name to your last name, followed by a comma and your first  name.  For example: Bloggs, Joe    A3. (The last name is Bloggs; A3 is Assignment 03).

3.  You can upload the file on Canvas by going to Assignments, then click on Assignment 03. You will see the Submit Assignment button on the right-hand side of the webpage. A message box will show up, and you need to click on the Choose File button to locate your assignment file, which you had renamed in the above steps, and click ok. The last step will be clicking the Submit Assignment button in the new message box to submit your file.

Note: If you want to replace the existing file you can simply repeat the step 3 above. You can do that any time before the due date.

Answer Booklet: Answers must be typed into the Answer Booklet using Calibri font style of at least size 10. If calculations or tables are required for an answer, they should be typed, set out neatly and labelled clearly in the Answer Booklet in the space provided.  Bullet point answers are acceptable only if the whole sentence makes sense. The size of each box can be expanded where necessary.

Disciplinary knowledge: The purpose of this assignment is to be able to demonstrate an understanding of the material covered in Modules 7 to 9 and apply appropriate methods to solve problems and explain the impact of events on business activity.

Solution seeking: For any calculation type questions, you should apply appropriate problem-solving processes systematically. Show all workings, no matter how trivial as marks are awarded for partial work. This is good practice for the exam.

Written  Communication: A   high  standard  of  written  expression  and   presentation   is  expected  of  your assignment. Correct spelling and grammar are essential. Discussions should be concise, structured in a logical order, and relevant to the question. Consider using the resources of the Learning Hub for extra support. https://www.learninghub.ac.nz/writing/paraphrasing-summarising-and-techniques/

Referencing: APA referencing is to be used where necessary. You DO NOT need to reference the assignment question or references provided in the question. However, you DO need to reference any text if you have QUOTED or PARAPHRASED it. Always answer the questions in your own words. (See the library course page for details on how to use APA referencing.)

Refer tohttps://www.library.auckland.ac.nz/subject-guides/bus/topicguides/apa_for_business.htm

If you feel you need to provide references – space is provided for your references to all the questions at the end of the answer book – this space can be expanded.

Questions                                                                                                                                               60 marks

Question 1 - Business Transactions

Paws & Whiskers Ltd is a business that offers pet care services (grooming, pet sitting, and dog training) and sells pet products (premium food, toys, and grooming supplies). The business serves both individual customers and corporate clients such as pet daycare centers.

The business purchases most of its inventory on credit from suppliers, and its standard credit terms are 30 days to settle accounts payable. For accounts receivable, the business allows credit customers 15 days to pay their outstanding balances. The owner, Emma Blake, ensures that the company actively collects outstanding payments from customers to maintain a healthy cash flow.

In early 2025, Paws & Whiskers Ltd took out a $60,000 long-term bank loan on 18 February 2025 to expand its operations. The loan accrues interest at 4% per annum, with monthly interest payments and quarterly principal repayments of $10,000.

Transactions for the month of May 2025 are:

(i)       1 May: Purchased $10,000 worth of pet supplies (food, toys, grooming products) from a supplier on credit. The supplier s credit terms are 30 days.

(ii)      4 May: Collected $6,000 from customers to settle outstanding accounts receivable from April.

(iii)      8 May: Sold pet products and grooming services for $45,000. The cost of sales was $20,000, and

$12,000 of the sales were on credit. The credit customers are expected to pay within 15 days.

(iv)       12 May: Paid $5,000 to suppliers for previous credit purchases made in April.

(v)       15 May: Paid $4,800 in wages to staff, including groomers and pet sitters.

(vi)       18 May: Made a quarterly repayment on the bank loan, paying $10,000 toward the principal and $200 in interest.

(vii)       22 May: A customer paid $2,500 in advance for a dog training program scheduled to start in June 2025.

(viii)       25 May: Donated $900 worth of pet supplies to a local animal shelter as part of the community outreach program.

(ix)       27 May: Received $9,000 from credit customers for credit sales made earlier in the month.

(x)       31 May: Recorded $1,000 in depreciation on the grooming equipment.

Required:

(a)     Complete the worksheet by recording the impact of each transaction for the month of May 2025 on the accounting equation and identifying the cash flow category as either Operating Inflow/Outflow, Investing Inflow/Outflow, or Financing Inflow/Outflow. If there is no effect on the cash flow, indicate this by stating “No Impact”. The opening balances from the previous month have already been entered into the worksheet.   (10 marks)

(b)     Using the worksheet, prepare a Balance Sheet in vertical format for Paws & Whiskers Ltd as at 31 May 2025. (9 marks)

(c)      Using the Balance Sheet prepared in part (b) of this question, discuss the level of debt and equity in the business. Does Paws & Whiskers Ltd rely more on borrowings, or does it have a strong equity capital base? In your response, consider how the figures in the Balance Sheet reflect the company’s financial position. Support your answer with relevant figures from the Balance Sheet.    (3 marks, max 150 words)

(Total: 22 marks)

Question 2 - Transaction analysis and financial accounting

Coastal Kayaks Ltd (CKL) sells custom kayaks and offers repair services. The company s financial year ends on 31 March 2025. Below is CKL s draft Income Statement, which contains three errors:

Coastal Kayaks Ltd - Draft Income Statement as at 31 March 2025

Account                               Amount ($)

Revenue                                     85,000

Cost of Sales                             (45,000)

Equipment Purchase                  (15,000)

Wages Expense                         (20,000)

Interest Expense                           (500)

Profit                                           4,500

Additional Information:

•     CKL purchased equipment for $15,000 in cash during the financial year.

•     The $500 Interest Expense relates to previous short-term borrowings that were repaid before year-end.

CKL has also experienced cash flow issues during the financial year due to slow customer payments and the recent equipment purchase. To improve cash flow, CKL s management is considering two options:

1.   Offer customers a 5% discount if they pay their outstanding invoices within 7 days.

2.   Take out a short-term loan of $10,000 on 1 April 2025, payable in six months with a 5% interest rate.

Required:

(a)   Review CKL s draft Income Statement:

(i)     Identify the three errors.

(ii)    Explain the correct accounting treatment of these errors.

(iii)   Provide an explanation as to why it is an error.                                        (6 marks, max 300 words)

(b)   CKL s newly purchased equipment has an estimated useful life of 5 years. The company applies the straight-line method for depreciation.

(i)   Calculate the annual depreciation expense for the equipment.    (1 mark)

(ii)  Explain how recording this depreciation would affect CKL s financial statements, specifically its

Income Statement, Balance Sheet, and Cash Flow Statement at year-end (31 March 2025).

(3 marks, max 150 words)

(c)  Compare the impact of Option 1 (customer discount) and Option 2 (six-month short-term loan) on

CKL’s Cash Flow Statement over the six-month period. How would each option affect cash inflows

and outflows during this time? Additionally, discuss any potential financial consequences beyond

the six months, if applicable. Support your analysis with numerical reasoning where possible.          (3 marks, max 150 words)

(d)  Based on your cash flow analysis in part (c) of this question, which option would you recommend to CKL’s management? Justify your answer by considering its impact on cash flow over the six-month period and any potential financial consequences after the loan repayment or discount strategy has   been implemented.            (2 marks, max 100 words)

(e) To prepare for the upcoming summer kayaking season in New Zealand, CKL placed a large order for  high-quality fiberglass and marine-grade paint, which is used to paint kayaks that they manufacture, from a supplier in Auckland. On 15 March 2025, CKL purchased $15,000 worth of these paint supplies on credit, with payment due in 30 days.

Before the financial year end on 31 March 2025, CKL used $5,000 worth of the paint supplies for kayak production, but the remaining $10,000 were unused. The company has not yet paid the supplier.

(i)   Explain how the transaction on 15 March 2025 should be recorded in CKL’s financial statements.

Which financial statement(s) does it affect or not affect, and how?                 (2 marks, max 100 words)

(ii) At year end (31 March 2025), how do the used and unused paint supplies affect or not affect CKL’s Income Statement, Balance Sheet, and Cash Flow Statement?                     (2 marks, max 100 words)

Total: 19 marks

Question 3 - Financial Statement Analysis

Assume you have $50,000 to invest in three New Zealand transport and logistics companies listed on the NZX. You can choose to invest in one, two, or all three companies, but you must justify your decision based on their financial performance and industry position. Your goal is to create a balanced portfolio that maximizes returns while managing risk.

The three companies under consideration are:

1. Mainfreight Limited (MFT) - Global logistics and freight forwarding company. Access their 2024 Annual Report via their Investor Centre.

2. KiwiRail Holdings Limited - Rail freight and passenger services operator.

Find their KiwiRail Integrated Report 2024 on their Reports and Reviews page.

3. South Port New Zealand Limited (SPN) - Port operator providing cargo handling and warehousing services.

Download their 2024 Annual Report from their Communication Centre.

Your task is to conduct a financial analysis using their 2024 annual reports and make an investment recommendation.

The following industry averages for the New Zealand Transport and Logistics Sector are provided for comparison:

•     Return on Equity (ROE): 15%

•     Profit Margin: 10%

•     Current Ratio: 1.2

•     Debt Ratio: 50%

Required:

(a)        Calculate the following ratios for each company for the 2024 financial year: Return on Equity  (ROE), Profit Margin, Current Ratio, and Debt Ratio. Show all workings. Round to two decimal places. Use the formulae on the sheet provided — no other formulae will be accepted. Note:

Treat any other income (except for finance income) as part of revenues.    (9 marks)

(b)        Decide how you would allocate your $50,000 investment across the three companies. You may choose to invest in one company, split the funds between two, or diversify across all three. For each company you choose to invest in, provide a justification based on their financial performance, risk profile, and long-term potential. If you decide not to invest in a company, briefly explain your reasoning.            (6 marks, max 300 words)

(c)        Assume that six months after your investment, one of the companies in your portfolio issues a profit warning due to rising operating costs. How would this development affect your investment decision? Would you adjust your portfolio allocation, hold your position, or increase your investment? Justify your response with financial reasoning.    (4 marks, max 200 words)

(Total: 19 marks)