Accounting U3 AOS1

Question 1

Fair value

Answer 1

estimated value, used when a second-hand asset is contributed to a business

Question 2

Characteristics relating to fair value

Answer 2

Relevance: this value is more relevant than the original cost, as it acknowledges some of the asset’s economic benefit has already been used up

Faithful rep - fair value is the price that would be received if the asset was sold at the time it was transferred to the business, in the absence of a professional valuation, a market value estimate would be appropriate as the amount would be deemed to be free of material error

Verifiability: no source doc, doesn’t uphold

Question 3

Purpose of trial balance

Answer 3

-Check that debits and credits in the ledgers and general journal equal each other
-Allow corrective action to be made (adjusting entries etc)
-Ensure mathematical accuracy

Question 4

FIFO rules

Answer 4

Inventory gain – latest cost price in IN

Inventory loss – oldest cost of available inventory

Sales returns – latest cost price in OUT column

Purchase returns – amount on credit note

Question 5

Product cost

Answer 5

• costs added to the cost of each unit of inventory that can be logically allocated
• incurred in getting the inventory ready for sale

Question 6

Characteristics relating to Lower of cost and NRV

Answer 6

Faithful representation - must recognise losses on inventory, otherwise profit and inventory will be overstated

Relevance - if business has inventory that will realise less than they cost, this loss is relevant to decisions, helps users evaluate extent of problem

Question 7

Period costs

Answer 7

costs written off as an expense at the end of the period, cannot be logically allocated