AOS 1 PRACTICE QUESTIONS Flashcards
Discuss how the recognition of credit sales as revenue may contravene the accounting principle of Conservatism.
DEFINE CONSERVATISM.
EXPLAIN CREDIT SALES BEING RECORDED AS REVENUE BEFORE BENEFIT IS ACTUALLY RECEIVED Recording credit sales at the time of the sale rather than at the time of the receipt will lead to the reporting of this type of transaction as revenue earned during the period in which the sale was made.
DEBTORS NOT PAYING AND BANKRUPTCY If all debtors have not paid their accounts by balance day there is the possibility that assets and revenues will be overstated in the period in which the credit sale was recognised. If some debtors go bankrupt in the following reporting period and are unable to pay what they owe to the business this would result in a contravention of the principle of conservatism as revenues and assets would have been overstated in the previous period.
LEGAL OBLIGATION However, once a credit sale is made there is a legal obligation on the debtor to pay the account when it falls due and on this basis the revenue could be said to be earned at the time of sale when the obligation arises. Therefore, it can be argued that recognising a credit sale prior to the receipt does not contravene the principle of conservatism.
Explain the function of special journals
SUMMARISE• Special journals assist with the initial organisation of the recording process by allowing for transactions of a like nature, such as cash receipts, cash payments etc to be grouped together and for these like transactions to be initially recorded in journals specific to the nature of the transactions.
SEPARATION OF DUTIES• Allows for the separation of accounting record keeping duties by employees adding to internal control of the recording system by management.
• Recording in special journals simplifies recording in the General Ledger as it allows for column totals rather than individual transactions to be posted to the General Ledger accounts.
SIMPLIFIES • Recording of totals in General Ledger accounts removes unnecessary detail from these ledgers making them easier to manage and control.
MORE DETAILS • Specific information about individual transactions is provided in the special journals.
Referring to a qualitative characteristic justify the use of the agreed value rather than the original historical price.,
The qualitative characteristic of relevance states that for information to be useful to the decision making needs of users it should be relevant. The agreed value of $32 000 represents the value of the vehicle to the business entity as agreed to by the owner. It is this acquisition value which the users of the reports are therefore concerned with and would find most useful to their decision making needs. The $135 000 is the historical cost of the vehicle and represents the acquisition value of the vehicle to the owner personally but not is not at all relevant to the business. The historical cost in this situation would therefore not be useful to the decision making needs of business and so does not meet the report qualitative characteristic of relevance.
Alternative definition of owners equity
Owner’s equity is a residual value and represents the owner’s residual interest in the business assets once all business liabilities have been paid.
One advantage and one disadvantage of double entry accounting
Advantage Recording transactions so that debit entries equal credit entries allows for the preparation of a trial balance which will highlight any recording errors leading to more accurate and therefore reliable accounting records and the reports prepared from them.
Disadvantage The employment of a suitably qualified bookkeeper with the necessary double entry accounting skills could lead to an increase in expenses and decrease in profit.
Explain, with reference to one accounting principle and two qualitative characteristics, the issues involved in determining the value at which the computer system was recorded when commencing a double entry system.
Usually non-current assets are recorded at their historical cost, which is the original cost at the time of acquisition. However, this cost was paid by the owner when purchased privately and does not represent the value of the asset at the time it was contributed to the business. The future economic benefit of the asset should be taken into account, as this would be more relevant to decision-making than the item’s historical cost. Therefore, the agreed value should be used to satisfy relevance. Using agreed value would not, however, satisfy reliability, as this value cannot be verified by a source document and may be subject to personal opinion or bias.
With reference to the definition of a liability, explain how the bank overdraft facility would be treated.
A liability requires a present obligation of future outflow of economic benefits. As the bank overdraft has not yet been used, no present obligation exists at this point in time. The overdraft facility simply represents an ability to withdraw funds from the bank in the future if needed by the business.
Discuss arguments for and against Shade Designs operating with control account systems for both creditors and debtors.
They only have one supplier
DUPLICATION, TOTALS, CHECKING, SEPARATION By operating with control accounts, unnecessary detail is removed from the general ledger as there is just one account for each of total debtors and total creditors. These totals make preparation of the Balance Sheet easier as one total is ready for use, rather than many separate accounts. It also provides a checking mechanism that can be used to identify recording errors, as the balance of control accounts can be checked against the totals of the subsidiary ledgers via the Debtors Schedule and Creditors Schedule. This also allows for separation of duties among staff, which can also reduce the likelihood of fraud. However, Shade Designs has just one supplier, so using a control account for creditors would create unnecessary duplication of one creditor’s account and keeping two sets of records is not necessary.
The business uses the perpetual method of stock recording with the FIFO cost assignment method.
Explain why it is necessary for businesses to use a cost assignment method.
It may not be possible to identify the actual cost price of each stock item. Therefore, a cost assignment method is used in order to allocate a cost price to each sale. This is done in order to determine Cost of Sales for a reporting period so an accurate profit can be determined.
Explain the effects on the Income Statement for the month ended 30 June 2012 if Memo 9 were not recorded.
Memo 9: Stock given to local shopkeepers as a
promotion. Qty 45 Jazz 16 GB USB
If Memo 9 was omitted, the advertising expense account would be understated. However, the stock items have physically left the business, so at the time of the stocktake the goods will be missing and therefore stock loss for the period would be overstated. Therefore, net profit for the period would be unaffected as one expense is overstated (stock loss), which compensates for the other expense being understated (advertising).
With reference to one qualitative characteristic, explain how the Statement of Account could assist internal control for the receiver of the statement.
Qualitative characteristic: Reliability
Explanation: Playgrounds Galore could use this independently prepared document as a checking mechanism against the creditor’s subsidiary ledger for Lana’s Landscapes. If there are any discrepancies, they could then contact Lana’s Landscapes and check back through source documents to find the problem. This assists internal control by ensuring that Playgrounds Galore has accurate accounts and therefore does not pay too much to its creditor.
