Chapter 10 Exercise Reviews Flashcards
Referring to an accounting principle, explain why some of the rent paid should be reported as an expense for the year ending 30 June
Reporting Period
The business will have the use of the premises for March–June 2015, and will therefore consume some of the rent in the Reporting Period ending 30 June 2015. The amount incurred will be reported as an expense. (The remaining rent for July and August will remain prepaid as at 30 June 2015.)
Explain why rent paid and rent expense are different amounts
Of the $3 300 rent paid, only the $2 700 that will be consumed/incurred in the current Reporting Period is considered to be Rent expense. The remaining $600 will not be incurred until the next Reporting Period: it is not part of the expense figure, but actually an asset – a future economic benefit.
Referring to one qualitative characteristic, explain why the advertising owing (accrued advertising) should be included in the advertising expense for the reporting period
Relevance
The advertising has been consumed in the year ending 31 December 2015 and so should be included as an expense in this Reporting Period to ensure that the reports include all information that is useful for decision-making.
Explain how Accured Advertising will be reported in the balance sheet
As a Current Liability: Accrued Advertising $3 000, it is a present obligation of the business that is expected to result in an outflow of economic benefits in the next 12 months (when the advertising owing is paid).
State 1 accounting principle that would have been breached if the adjustment for accrued expense was not made
Reporting Period
The expense must be recognised in the Reporting Period in which it was incurred (i.e. August 2015), regardless of when it is paid.
Referring to 1 accounting principle, explain why it is necessary to make balance day adjustments
Reporting Period
To ensure that profit is calculated accurately by comparing revenues earned against expenses incurred in the current Reporting Period
Explain how balance day adjustments ensures relevance in reports
By reporting revenues earned and expenses incurred in the current Reporting Period, balance day adjustments ensure that the Income Statement includes all information that is useful for decision-making.
Assessment of sales mark up
Maranelli Sports has applied an average mark-up of 100%, which has been high enough to cover its Other Expenses and provide for a Net Profit of $52 550 for just 6 months. (Whether this is sufficient depends on the expectations of the owner.)
