Chapter 5: Accounts Payable Part 1

Question 1

What do credit transactions involve?

Answer 1

An exchange of goods or services on one date, followed by the exchange of cash at a later date

Question 2

What is a credit purchase?

Answer 2

A transaction that involves buying inventory on credit, with the exchange of inventory on one date, followed by the exchange of cash at a later date

Question 3

What is an account payable?

Answer 3

A supplier from whom goods or services have been purchased on credit, and the amount is still owing for these purchases

Question 4

What is a purchase invoice?

Answer 4

A source document used to verify a credit purchase

Question 5

Why will invoice numbers on purchase invoices not be in sequence?

Answer 5

Purchase invoices are issued by the supplier, who will be supplying other customers in between

Question 6

What are credit terms?

Answer 6

Information that details how many days a business has to pay for a credit transaction, and any applicable settlement discount

Question 7

What is the affect of a credit purchase of inventory on the accounting equation?

Answer 7

Increases the assets (inventory) and liabilities (account payable less GST Clearing) by the same amount

Question 8

How will purchasing inventory at low prices affect ethical considerations?

Answer 8

It will allow business to achieve higher sales volume and a better mark-up, but it could mean customers are dissatisfied and return items

Question 9

What are the most common source documents to an account payable?

Answer 9

Cheque butts and EFT transfer

Question 10

Why is there no GST to account for when a payment is made to an account payable?

Answer 10

GST was already recognised at the time that the credit purchase was recognised

Question 11

How does a payment to settle an account payable affect the accounting equation?

Answer 11

It decreases assets (inventory) and decreases liabilities (account payable) by the same amount

Question 12

What is a purchase return?

Answer 12

A return to a supplier of inventory bought on credit

Question 13

What are some common reasons for returning inventory?

Answer 13

Faulty/damaged inventory, incorrect models, too many items or a the business changing its mind

Question 14

What is a credit note?

Answer 14

The source document that verifies the return of inventory

Question 15

How does GST on a purchase return affect GST liability?

Answer 15

It undoes the decrease in GST liability caused by a credit purchase

Question 16

How does a purchase return affect the accounting equation?

Answer 16

It decreases assets (inventory) and decreases liabilities (account payable less GST clearing) by the same amount

Question 17

What is an invoice?

Answer 17

The source document for a credit transaction

Question 18

When does a credit sale occur?

Answer 18

When a business sells inventory on credit

Question 19

What must a credit note identify?

Answer 19

The name of the business returning the inventory, the type/quantity of inventory returned and the reason for return

Question 20

How does a purchase return affect the balance sheet?

Answer 20

It only changes the values of accounts payable, inventory and GST clearing

Question 21

How does the accrual basis assumption support the recognition of accounts payable?

Answer 21

It states that elements are recored when they are earned or incurred at the point of sale, rather than when cash is received

Question 22

What does the going concern assumption allow for?

Answer 22

Inventory to be recognised as an asset and account payable as a liability