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.
Explain how the stock Write-down will affect the balance sheet of the business
Assets will decrease by $320, and the Stock Write-down expense will decrease Net Profit and therefore Owner’s Equity by $320.
Define the term “Net Realisable Value”
Estimated selling price of stock less any costs incurred in its selling, marketing or distribution
State 3 reasons that may explain why the NRV of the stock has fallen below its cost
Damaged
Out of date
No longer fashionable
Marketing ploy
State the effect on the accounting equation if the stock is not written down
Assets: Overstated
Liabilities: No Effect
Owners Equity: Overstated
Referring to 1 accounting principle, explain why it would incorrect to value the jacket at its predicted selling price
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).
Referring to 1 qualitative characteristic, explain why the jackets should no longer be valued at their historical cost
Relevance
The Net Realisable Value of the jackets has fallen below their Historical Cost so the Historical Cost is out of date and no longer useful for decision-making.
Explain your treatment of the discount for early payment
The discount is excluded from the valuation of stock in the stock card as it does not affect the cost of the stock purchased on 3 August 2015
Explain the effect on the balance sheet of the business if the tailoring costs had been treated as period costs
All tailoring costs would be reported as an expense when the suits were purchased, so Cost of Goods Sold would be overstated meaning Net Profit and Owner’s Equity would be understated by $120, Assets Stock Control would be understated by $120
Given that the discount and GST are both applied at a rate of 105, explain why the dollar amount of the discount is greater than the dollar amount of GST
The GST is levied only on the selling price of $3 200, whereas the discount is levied on the entire amount owing ($3 520), including the GST.
Explain your treatment of the cost of the sports kit
Included as a product cost as it is incurred to get the scooters into a condition and location ready for sale, and can be allocated to each scooter on a logical basis because it is charged per bike/scooter.
Referring to 1 accounting principle, explain why Memo 36 should be recognised in the financial reports of the business
Conservatism
The scooter is scratched so its Net Realisable Value has fallen below its Historical Cost. A stock write-down is necessary to ensure that losses are recognised when probable and assets (Stock Control) are not overstated.
State the effect on the balance sheet of the business if the cost of the sports kit had been treated as a period cost
Assets: Understated
Liabilities: No Effect
Owners Equity: Understated
Discuss whether the damaged scooter should be reported in a separate stock card
The scooter was purchased as an item from the same line of stock (scooters) and is therefore recorded in the same stock card as the other scooters.
However, because it is damaged it is identifiably different from the other scooters and should be therefore be recorded in a separate stock card as if it were a separate line of stock.
*Explain, with reference to the difference between product and period costs, how the $140 was calculated
The packing and labeling was added to the suppliers price of $120 as it could be allocated to the individual units of stock on a logical basis, therefore it was treated as a product cost of $20 per unit. This made a total cost per unit of $140.
the delivery charges covers many different lines of stock and cannot be directly linked to the golden strap back. Therefore as it cannot be logically allocated on a per unit basis, it should be treated as a period cost, and written off as an expense for the current reporting period
*Explain why the lower cost and Net Realisable Value was applied when valuating stock with accounting principle
Conservatism
Any expected losses should be recorded immediatley when expected. This is done to ensure profit is not overstated. it also ensures that assets and owners equity is not overstated in the balance sheet of the business
Narration for Stock Write Down
Write down to lower of cost and Net Realisable Value of 6 Fax Machines by $5 per unit
