Acc U3 Flashcards
Steps to write theory questions
Identify → State the term (Assumption, Characteristic, element etc;)
Define the term → Write the full definition
Link your response to back to the context of the question → “Why does it relate to the specific scenario?”
Explain how the use of source documetnts supports an accounting qualitative characteristic?
Verifiability states that financial information should be able to be evidences so that different users can reach the same conclusion that the information is faithfully represented. The use of sources documents as evidence supports this.
Explain why sales is reported as revenue? Refer to one Accounting Assumption.
Answer: Accural Basis Assumption
The Accural Basis Assumption states that that revenue must be recognised when earned and expensed must be recognised when incurred. Sales meets the criteria of a revenue, according to the defention (increase in assets that leads to an increawse in OE). Thus, sales must be reported as revenue so that profit is accurate.
General Ledger (what is the position of debit nd Credit)
Gen Ledger
Debit Credit
What Increases On debit side and what increases on Credit Side?
Debit - (ADE)
Assets
Drawings
Expenses
Credits - (CRL)
Capital
Revenue
Liability
What is meant by Plus GST?
GST needs to be added
Price x 1.1
What is meant by Including GST?
The price given already includes GST
Price w/out GST = price/1.1
What is the Pre-Adjustment Trial Balance?
- Prepred at the end of each period
- List of all accounts in the general ledger and their balances
- CREDIT = DEBITS
How do you total a Ledger Account?
- Total all debs and creds
- Larger Amt- Smaller Amt
- Write the final balance on the side of the larger total and circle
What is inventory?
Inventory is the main source of revenue for the business → most important Asset
What is the inventory Turnover Rate?
The ITO is the average number of sales it takes the business to convert inventory into sales
ITO = Avg Inventory x 365/ cost of goods sold
What does a Slow ITO indicate?
A slow ITO indicates that a business takes too long to convert inventory into sales
→ The business will have less cash to meet debts → Worsens Liquidity
→ May impact profitabilty as the business is earning less sales revenue
Addressing a Slow ITO → Increase Sales or decrease inventory held
What does a Fast ITO indicate?
A fast ITO indicates that a business is converting it’s inventory into sales too quick
→ Business may be losing potential revenue
→ Business may have too little inventory on hand
Addressing a fast ITO → Bulk Buying, changing selling price (it is way too low), rearrange inventory, offer Discounts
What Is Accounts receivable turnover (ARTO)?
→ Financial Indicator
→ Avg no days it takes business to collect cash from Acc Rec
ARTO = (Avg Acc Rec x 365)/Net Credit Sales (Plus GST)
What does a Slow ARTO indicate?
A slow ARTO indicates that a business is waiting too ong to receive cash from acc receivable
→ May Face difficulties meeting short-term debts
→ Chance of bad debts is higher (Potentially reducing profitablilty)
→ The business may not have enough cash to purchase inventory
Addressing A slow ARTO →
→ Offer Discounts
→ Invoice Promptly
→ Hire Debt Collection agency
What does it mean if ARTO is higher than Credit Terms?
If the ARTO is higher than credit terms indicates that most accounts rec, on avg, aren’t repaying the business on Time
What is the Accounts Payable Turnover (APTO)?
Financial Indicator → Avg No of days the business takes to repay Acc Payable
APTO = (Avg Acc Pay x 365)/Net Credit Purchase (Plus GST)
What does a slow APTO indicate?
A Slow APTO indicates that a business takes too long to repay Accounts Payable
→ May lose their credit facilities (and Credit Rating)
→Incur deferral costs or miss out on discounts
→ Increase chance of bankruptcy or legal action
What are the elements of Ethical Consideration?
- Integrity
→ Accounts must honest and straightforward in all relationships
→ Reports prepared must not contain false information - Impartiality
→ Must remain professional in Terms of behaviour
→ Follow relevant laws and regulations - Objectivity
→ Must avoid; bias, conflict of interest or influence of others
→ Should not perform a service if they cannot be objective - Confidentiality
→ MUST NOT disclose information received from business to third Parties
→ Consider financial, social and environmental implications
What do errors in a Trial Balance Reveal?
→ Two entries recorded on the same side
→ Only one entry having being recorded
→ A different amount recorded on each side
What is the product cost? and THEN what is the period cost?
A product cost is any cost incurred in bringing inventory into a condition and location ready for sale (before sale).
E.g
Condition
