Chapter 8 Exercise Review Flashcards
Why isn’t the total in the stock card reported in the balance sheet
It is only one line of stock. The balance sheet will report the total value of all lines of stock on hand
Explain the impact of GST on the recording of transactions in the stock cards
GST has no effect, GST does not affect the economic benefit represented by the stock, so stock cards only record the cost price of stock that is bought and sold.
Referring to your answer to part “a”, explain the application of FIFO method of stock evaluation
FIFO assumes that the stock that is purchased first will be sold first. In this example, the 4 units of stock valued at $290 are assumed to be sold before any of the units valued at $300.
Explain how the FIFO method of stock evaluation can overstate the value of stock on hand
FIFO assumes that the older stock is sold first, and that the newer stock is still on hand. When prices are rising, this newer stock will be more expensive, overstating stock on hand as it is possible some of the stock on hand is actually the older, cheaper stock.
Explain the impact of FIFO on Cost of Sales and Net Profit in times of rising prices
FIFO assumes that the older stock is sold first. When prices are rising this older stock will be cheaper, understating Cost of Sales and overstating Net Profit as it is possible some of the stock sold is actually the newer, more expensive stock.
Explain the role of the stock cards in the accounting system
Stock cards are subsidiary accounting records used to maintain a continuous/perpetual record of all movements of stock in and out of the business premises.
Referring to one qualitative characteristic, explain the role of the physical stocktake
Reliability:
The stocktake ensures that the figure for Stock Control reported in the Balance Sheet is free from bias and error, by verifying the balances in the stock cards and in the process detecting any stock loss or gain.
Apart from theft, suggest other possible reasons for stock loss
Damage
Oversupply to customer
Undersupply from supplier
Explain the effect of the stock loss on the balance sheet
Stock Control decreases, decreasing Current Assets by $???. Stock Loss expense decreases Owner’s Equity by $???, decreasing Net profit
Explain the effect on owners equity if memo 4 had not been recorded (stock taken home by owner worth $240)
No effect. Drawings would be understated by $240, but the loss of these units would be detected by the stocktake as a Stock Loss, reducing Net Profit by $240. Either way, Owner’s Equity would decrease by $240.
Reasons for stock gain
Oversupply by supplier
Undersupply to customer
Recording error in stock card
Counting error in stock take
Explain how the stock gain was valued. Identify one accounting principle to support your answer
Conservatism:
The stock gain is valued at the lowest price on hand in the stock card ($650) so that revenues (Stock Gain) and assets (Stock Control) are not overstated.
Explain how memo 41 would be reported in the income statement of the firm
Memo 41: “donated 1 system to local school fete”
As Advertising expense under the heading Other Expenses, as it is an outflow of an economic benefit in the form of a decrease in assets (Stock Control), which leads to a decrease in owner’s equity, but it occurs after the goods are ready for sale
Looking at a trial balance
Explain whether interest is a revenue or expense for the firm. Justify your answer
It is listed on the debit side of the trial balance = Expense
It is listed on the credit side of the trial balance = Revenue
Justify your treatment of customs duty in the income statement
Treated as part of Cost of Goods Sold as it is incurred to bring stock into a location and condition ready for sale.
Explain the importance of showing gross profit in the income statement of a trading firm
It is necessary to provide information about the average mark-up, so that the owner can take corrective action where necessary to improve profit. This could mean increasing the mark-up to generate greater profit per sale, or decreasing the mark-up to be more price competitive.
Explain your treatment of delivery to customers in the income statement
Treated as an Other Expense as it is incurred to deliver stock from the business to the customer only after the stock is already sold
Explain why Drawings is considered to be too high
It is higher than the Net Profit figure meaning Owner’s Equity will decrease
Identify the special journal in which:
Details: Inv.X70 - In column
would be recorded
Purchases Journal
IN column means it is a purchase. ‘Inv. X70’ means it is on credit.
State reasons for a transaction involving a memo in the stock cards
Advertising
Drawings
State 2 reasons why this figure will not be the figure reported as as costs of goods sold
It is only for one line of stock
It doesn’t include other Cost of Goods Sold, such as buying expenses, freight in.
Referring to one qualitative characteristic, explain the role of source documents in the accounting process
Reliability:
Source documents provide the verifiable evidence of each transaction to ensure that the information in the reports remains accurate and free from error and bias.
order form
Explain your treatment of document X
Not recorded as no transaction has occurred – it is simply an order form.
purchase of stock on credit for $1100 inc. GST
Explain the effect of document A on the balance sheet
It increases Stock Control and Current Assets by $1 000. It increases liabilities overall by $1 000: although Creditors Control increases by $1 100, GST Clearing decreases by $100.
Memo of stocktake saying stock loss
State the effect on the accounting equation if document D was not recorded
Assets:Overstated (Stock Control)
Liabilities: No effect
Owner’s Equity:Overstated (Understated Stock Loss expense overstates Net Profit)
Explain how a physical stocktake may improve reliability in reports
It will verify the stock on hand as recorded in the stock cards, and in the process detect any stock loss or gain, thus ensuring that the figure reported as Stock Control in the Balance Sheet is accurate and free from bias and error.
Explain how the use of the FIFO will affect the accounting equation in times of rising prices
FIFO assumes that the older, cheaper stock is sold first, understating Cost of Sales and thus overstating Net Profit and Owner’s Equity. It assumes that the newer, more expensive stock is still on hand, overstating Stock Control and therefore Assets.
