chapter 17

Question 1

how to find sales, purchases and inventory figures in the statement of profit or loss

Answer 1

To find sales, purchases and inventory figures the trading part of the statement of profit or loss could be created. Information that is known can be inserted into the structure and then knowledge of how those figures relate to each other can be used to find the other items.

Question 2

margin

Answer 2

the gross profit expressed as a percentage or fraction of selling price or total revenue

Question 3

markup

Answer 3

the gross profit expressed as a percentage or fraction of the sales cost

Question 4

calculation of margin percentage

Answer 4

gross profit/selling price * 100

Question 5

calculation of mark up percentage

Answer 5

gross profit/cost of sales * 100

Question 6

using margin to find cost of sales

Answer 6

the sales figure is 100% or 1/1
therefore,
the margin can be subtracted from the sales figure

Question 7

using mark ups to find missing figures

Answer 7

If the business is using a mark-up, the approach to finding missing figures is exactly the same as for margins. The only difference is that it is the cost of sales figure that is 100% and the sales figure will be 100+ the mark-up percentage.

Question 8

how to record inventory lost in fire or by theft

Answer 8

The methods used for preparing accounts from incomplete records are also used to calculate the value of inventory lost in a fire or by theft when detailed inventory records have not been kept (or have been destroyed by the fire).

Question 9

ways in which inventory may be valued

Answer 9

cost price
selling price
what it is considered to be worth

Question 10

why is considering the worth not a good way of valuing inventory

Answer 10

it completely contradicts the ‘money measurement’ concept. ‘worth’ is also a matter of opinion. using selling price also has its problems because using it can contradict several important accounting concepts

Question 11

net realizable value

Answer 11

the selling price of a product minus any cost incurred in bringing it to a saleable condition and/or actually selling it

Question 12

replacement cost

Answer 12

the amount that a business would have to pay to replace an asset according to its current worth

Question 13

how is inventory valued at cost

Answer 13

In most situations, inventory is valued at cost. The inventory-take establishes the quantity of each item, the business has paperwork to identify the cost per unit, and the two are multiplied together to find the total value for each product held as inventory.

Question 14

principle of inventory valuation set out in international accounting standard 2

Answer 14

states that ‘inventories should be valued at the lower of cost and net realizable value’

Question 15

net valuable value varies: wholesaling or retailing

Answer 15

where a business buy a product, adds a markup or margin and sells at a higher price. in this case selling price is the net realizable value

Question 16

net valuable value varies: manufacturing

Answer 16

where the business is making a product involving a combination of material, labour and other costs. As the product goes through the various processes, the costs will grow. In this case, net realizable value is the selling price minus all future costs that will be incurred to complete it.

Question 17

net valuable value varies: repair or modification

Answer 17

where the business has a damaged item or one that is going to need to be changed to make it saleable. In this case, net realizable value is the selling price minus all future costs that will be incurred in making it saleable.

Question 18

what does IAS 32.2 state

Answer 18

if the business is not going to recover the cost of finished products (the net realizable value is lower), it can use replacement cost to value the materials used in this context, the raw materials used in the manufacture of a product.

Question 19

advantages of keeping full accounting records

Answer 19

It allows the financial statements to be prepared quickly and soon after the year end.

It allows for the financial statements to be prepared more often than once a year, which can help the manager run their business more efficiently.

It helps to provide some protection against errors and possible fraud by employees.

If financial statements are prepared regularly, inventory losses or cash losses can be picked up earlier and corrective action taken. The accuracy of the records kept can be improved.

There may be a legal requirement to keep certain records.

Question 20

disadvantages of keeping full accounting records

Answer 20

The time it takes to set them up and maintain them.

Cost-the purchase of a computer package for accounting can be expensive business owner may have to go on a training course. and the business owner may have to go on a training course

Often business owners lack the knowledge of how to prepare double-entry accounts, so they employ a specialist. This adds to the business costs.