AOS 4

Question 1

Closing Ledger accounts

Answer 1

Assets, liabilities and owner’s equity accounts should be balanced in preparation for the balance sheet.
Revenue and expense accounts should be closed off to the P&L summary account.

Question 2

Why close ledger accounts

Answer 2

The P&L summary account uses the revenue and expense accounts to determine the net profit or loss for the period.
Revenue and expense accounts are returned to zero balances, ready for the new reporting period. This ensures that this period’s revenues and expense are not counted again in the subsequent period.

Question 3

Income statement

Answer 3

The basic function of the income statement is to report on the revenues earned and the expenses incurred for the current period. This is done to determine profit under the accrual accounting assumption.

Question 4

Why do income statement and of P and L Summary?

Answer 4

A formal report should always be prepared, even if the P&L summary has been finalised. The data in the P&L summary account is very limited; in order to satisfy the requirements of understandability, a formal income statement should always be prepared.

Question 5

Link between income statement and balance sheet

Answer 5

The income statement determines the net profit for the period. This result is then included in the balance sheet as part of owner’s equity.

Question 6

4 measures of profit in income statement

Answer 6

• the trend over consecutive periods
• budgeted or expected profit
• industry averages
• financial indicators.

Question 7

What is trend analysis and how can it assist in evaluating profit

Answer 7

Trend analysis allows management to measure performance over a number of periods to identify improvements or decline in profit outcomes.

Question 8

Distinguish between cost of sales and cost of goods sold?

Answer 8

Cost of sales is the cost price of goods sold in a given period. Cost of goods sold is a classification used in an income statement, which includes cost of sales, plus any other costs incurred in getting inventory into the business, putting it on display and preparing it for sale.

Question 9

Things included in cost of goods sold:

Answer 9

Cost of sales
Cartage inwards
Customs duty
buying expenses
DO NOT INCLUDE CARTAGE OUTWARDS

Question 10

Is a decrease in net profit indicate poor expense control

Answer 10

Poor expense control may bring about a decrease in net profit. However, profit can also decrease if suppliers’ prices increase and management does not adjust selling prices. Of course, a cause of a decrease in profit may simply be that the business has had a significant decrease in the number of units sold during a period.

Question 11

Purpose of cash flow statement

Answer 11

The purpose of the cash flow statement is to provide a summary of all cash flows for a given period. It does so by classifying cash flows into three categories: operating, investing and financing cash flows.

Question 12

What cash means when it is used in relation to a cash flow statement

Answer 12

Cash means all short-term cash investments that can be turned into cash in a short period.

Question 13

Describe the three classifications used within a cash flow statement

Answer 13

Operating activities: cash flows from the day-to-day operations of the business.

Investing activities: cash flows relating to the selling or buying of non-current assets.

Financing activities: cash flows relating to changes in the financial structure of the business. This includes loans and loan repayments, capital injections and drawings.

Question 14

4 different types of cash flow in relation to GST

Answer 14

• GST collected on cash sales: Operating inflow
• GST paid on cash purchases or expenses: Operating outflow
• GST settlement: Operating outflow whereby the business is paying off their GST obligation to the ATO
• GST refund: Operating inflow whereby the business receives a refund because it has paid more GST than it has received.

Question 15

why monitor businesses inventory

Answer 15

• items are not going past their use-by-date
• slow moving lines of inventory are identified and possible eliminated
• fast moving lines are identified and re-ordered promptly
• all items are presented well and are not damaged or shop-soiled.

Question 16

security measures to protect inventory

Answer 16

• security cameras in the store
• security tags on all products
• security personnel patrolling the store and/or standing at exits
• two-way mirrors, allowing management to monitor the store from another room
• dye bombs being tagged on inventory items (for example, clothing).

Question 17

What is inventory turnover

Answer 17

Inventory turnover is a measure of the number of days it takes a business to turn its average level of inventory into sales

Question 18

Procedures management should follow before granting credit to consumers

Answer 18

Before granting credit to customers, management should complete a thorough credit check. This may involve checking with references, requesting a credit rating or reviewing financial statements provided by the customer.

Question 19

What is the purpose of age analysis of accounts receivable

Answer 19

An age analysis of accounts receivable classifies the amounts owing according to the age of their debts. Categories such as 0-30 days and 31-60 days provides information to management to help evaluate their collection procedures.

Question 20

What does account receivable evaluate

Answer 20

Accounts receivable turnover determines the average time taken by credit customers to settle their accounts.

Question 21

tactics to speed up account receivable turnover

Answer 21

• offering discounts for prompt settlements
• sending regular statements to all accounts receivable
• sending reminders to all overdue accounts
• threatening legal action to overdue accounts.

Question 22

What is cash cycle

Answer 22

The cash cycle is the total time taken to turn inventory into accounts receivable and then into cash. This time is determined by adding the inventory turnover (in days) to the accounts receivable turnover (in days).

Question 23

Problems with slow cash cycle

Answer 23

If the cash cycle increases in days, this indicates that the cycle is getting slower over time. This may cause a range of problems, the first being a fall in liquidity. If a business is taking longer to receive its cash, liquidity problems may result as they may have difficulty meeting its debts on time. Other issues may also result, as the slower cash cycle may be the result of poor inventory turnover. This may indicate that goods are past their use-buy-date, have gone out of fashion or have become technologically obsolete.

Question 24

Factors when evaluating accounts payable turnover

Answer 24

Accounts payable turnover will often be affected by both inventory turnover and accounts receivable turnover. If a business is having difficulty getting cash in from their customers, their own accounts payable turnover may become slower and slower.

Question 25

Implications of fast accounts payable turnover

Answer 25

If accounts payable turnover is very fast, a business may simply run out of cash. Sometimes business owners are attracted to discounts for prompt payments and may save 2% or 3% on all accounts. However, if they pay all accounts quickly they may run out of cash and the result may well be a bank overdraft. This may result in interest on overdraft being incurred, which could be greater than the discounts received.

Question 26

Implications of slow accounts payable turnover

Answer 26

A slow accounts payable turnover may result in credit being refused by a supplier. If a business defaults on a debt, this can also affect their credit rating, which may make credit more difficult to obtain in the future.