Chapter 14 Exercise Review Flashcards
Explain why the GST on the purchase is not included in the calculation of the cost price of stock
It does not affect the value of/economic benefit represented by the stock; it reduces the GST liability owed to the ATO.
Explain your treatment of “cartage in”
It is included as a product cost, as it is a cost incurred to get the stock into a condition and location ready for sale, and can be allocated to each individual barbecue on a logical basis
Referring to one accounting principle, explain why the asset cannot be valued at their selling
- Historical Cost
The selling price is not the original purchase price, and cannot be verified by a source document. - Conservatism
There is no guarantee that the stock will be sold, so using the selling price will recognise a gain before it is certain, and therefore overstate the value of assets (Stock).
Explain your treatment of advertising campaign
Not included as it is incurred after the goods are ready for sale so it will be reported as an Other Expense
Explain why the modification costs should be treated as product costs
As they are incurred to get the stock into a location and condition ready for sale, and can be allocated to each individual washer/dryer on a logical basis because they are charged ‘per unit’.
Explain why the insurance of stock must be treated as a period cost
Although incurred to get stock into a condition and location ready for sale, there is no logical basis on which to allocate the cost to each individual washer/dryer because the insurance is incurred ‘per month’.
Referring to 1 qualitative characteristic, explain why ti is important that the cost price of stock is calculated accurately
Relevance
It is useful for decision-making, specifically the setting of selling prices so that they are sufficient/high enough to cover costs and provide for a profit.
Explain your treatment of the cost of sign writing
It is included as a product cost, as it is a cost incurred to get the stock into a condition and location ready for sale, and can be allocated to each individual bike on a logical basis as it relates (only) to the 10 new bikes
State the effect on the valuation of stock if the cost of sign writing had been treated as a period cost
Understated
Under period costing, the value of stock on hand does not include any signwriting, so the 8 bikes on hand are valued at $140 each rather than $157 each..
Explain your treatment of freight
The freight cannot be allocated to individual units of stock on a logical basis as it is incurred for both televisions and stereos. It must be treated as a period cost and recorded in a separate ledger account
Explain how period costs can understate profit
Period costing includes the entire cost as an expense in the period in which stock is purchased. If not all stock is sold, this will overstate Cost of Goods Sold and thus understate profit
Discuss the accountants decision to treat the cost of attaching the brand badges as a period cost
The cost of the brand badges could be treated as a product cost as it is incurred to get stock ready for sale, and can be allocated to individual units of stock on a logical basis (one badge per pair of goggles).
However, Relevance allows this cost to be treated as a period cost as 80c per pair of goggles is too small to affect decision-making.
Explain your treatment of insurance of stock
The insurance is a period cost as it cannot be allocated to individual units of stock on a logical basis because it is incurred per annum.
State the effect on the accounting equation of the business if the packaging and delivery had been treated as a period cost
Assets: Understated
Liabilities: No effect
Owner’s Equity: Understated
Referring to 1 accounting principle, explain why the plates should be valued at the lower of cost and NRV
Conservatism
Losses should be recognised when probable so that assets (in this case, Stock Control) are not overstated. The plates must be written down as their Net Realisable Value has fallen below their Historical Cost.
