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Accounting Unit 2 > Chapters 11 and 12 > Flashcards

Chapters 11 and 12 Flashcards

1
Q

1 Explain the operations of a trading firm.

A

Trading firms purchase goods (known as ‘stock’) from suppliers/wholesalers and then sell them to customers at a higher price, with the difference between the cost price and the selling price earning them profit.

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2
Q

2 State two reasons why stock is important to a trading firm.

A
  • Sale of stock is the main source of revenue for a trading firm, and thus the key to its ability to earn profit.
  • Stock is likely to be one of the most significant assets in the Balance Sheet of a trading business.
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3
Q

3 Define the term ‘stock’.

A

Stock are the goods purchased by a trading firm for the purpose of resale at a profit.

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4
Q

4 Explain how stock is classified in the Balance Sheet.

A

Stock is classified as a current asset as it is a resource controlled by the business that will provide a future economic benefit (when it is sold) within the next 12 months.

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5
Q

1 Referring to the perpetual inventory system, explain the role of a:
• stock card
• stocktake

A
  • stock card – a stock card is a subsidiary accounting record that records each individual transaction involving the movement in and out of the business of a particular line of stock
  • stocktake – the stocktake is conducted to verify that the stock cards are accurate, and in the process detect any stock losses or gains.
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6
Q

2 Define the term ‘purchases’ as it applies to trading firms.

A

A purchase is the stock bought by a trading firm for the purpose of resale.

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7
Q

3 Explain how the sale of stock decreases an asset but increases an expense.

A

When the sale of stock occurs, stock is flowing out of the business. That is, the stock is no longer an asset that will provide future economic benefit, but rather an expense where an outflow of economic benefit occurs (the stock that has been sold) in the form of a decrease in assets (Stock), thus decreasing owner’s equity

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8
Q

1 Identify four details that will be provided in the top portion of a stock card but not in the Stock figure reported in the Balance Sheet.

A
  • Description of the item
  • Code of the item
  • Location of the item
  • Name of the supplier
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9
Q

2 Identify two details that are provided when transactions are recorded in the stock card but are not provided in the journals or reports.

A
  • Quantity or number of items of stock

* The cost price of each individual stock item (the unit cost)

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10
Q

3 State how many stock cards a typical trading firm would require.

A

The number of stock cards depends on the number of different lines of stock a business carries, including different styles, different colours and different sizes. Therefore, every business will have a different number of stock cards.

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11
Q

1 State the effect on the BALANCE of a transaction recorded in the:

  • IN column
  • OUT column
A
  • IN column – transactions will increase the balance

* OUT column – transactions will decrease the balance.

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12
Q

1 State the effect on the BALANCE of a transaction recorded in the:

  • IN column – transactions will increase the balance
  • OUT column – transactions will decrease the balance.
A

The cost price of stock is not revealed on the source document in order to protect the gross profit on the sale. (You don’t want the customers to know how much you are making on the sale.)

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13
Q

3 Explain how the stock card is used to determine the Cost of Sales for each transaction

A

Stock is recorded at its cost price in the stock card, so all sales recorded in the Out column of a stock card will use the oldest cost price in the Balance column (using the FIFO principle) in order to determine the Cost of Sales for a transaction.

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14
Q

4 Explain the FIFO (First In, First Out) assumption as it applies to stock cards.

A

FIFO is the assumption that stock that is purchased first will be sold first, so all transactions recorded in the OUT column must assume that the oldest stock is sold before the newer stock.

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15
Q

5 Identify four transactions to which the FIFO assumption must be applied.

A
  • Sales
  • Drawings
  • Advertising
  • Stock losses
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16
Q

1 Referring to one Qualitative Characteristic, explain the role of a physical stocktake.

A

The physical stocktake is compared against the stock cards to verify their accuracy, so that the stock figure reported in the Balance Sheet is free from bias (that is, Reliability is upheld) and in the process detect any stock loss or stock gain

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17
Q

2 Define the term ‘stock loss’.

A

Stock loss is an expense that occurs when the stocktake shows less stock than is shown in the stock cards.

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18
Q

3 State four reasons for a stock loss.

A 
•	Theft
•	Damage
•	An over-supply to customers
•	An under-supply by suppliers
•	A recording error in the stock cards or during the stocktake
 
19
Q

4 Explain how a stock loss is classified in the Income Statement.

A

Stock loss is classified as an expense in the Income Statement because it is an outflow of an economic benefit in the form of a decrease in assets (Stock) that results in a decrease in owner’s equity.

20
Q

6 Define the term ‘stock gain’.

A

A stock gain is a revenue that occurs when the stocktake shows more stock on hand than is shown in the stock card.

21
Q

7 State two reasons for a stock gain.

A
  • An undersupply to customers
  • An oversupply by suppliers
  • A recording error in the stock cards or during the stocktake
22
Q

8 Explain how a stock gain is classified in the Income Statement

A

A stock gain is classified as a revenue in the Income Statement because it is an inflow of an economic benefit in the form of an increase in assets (Stock) that results in an increase in Owner’s Equity.

23
Q

1 Explain the benefits of the perpetual system of stock recording.

A
  • It assists in the re-ordering of stock. The stock cards will show when the minimum stock levels have been reached so an order can be placed with the supplier.
  • Fast-moving and slow-moving lines of stock can be identified. The owner can examine the stock cards to identify the items that are selling well and those that are not and adjust stock purchases accordingly.
  • Stock losses and gains can be detected by comparing the balances of the stock cards against the physical stocktake.
  • Interim reports can be prepared without the need for a physical stocktake. The level of stock on hand and the amount of Cost of Sales can be determined from the stock cards (although the level of stock loss or gain will not be known).
24
Q

2 Explain how ICT can improve the use of the perpetual inventory system.

A

The use of ICT allows goods to be scanned as they move in and out of the business with the software automatically updating the stock records, and even automatically reordering when stock levels are low. Information such as sales and stock levels can be determined quickly to allow the owner to make informed and timely decisions.

25
Q

1 Define the term ‘Cost of Sales’.

A

Cost of Sales is the expense incurred when stock flows out of the business due to a sale.

26
Q

2 Explain how the stock cards can be used to determine Cost of Sales.

A

Cost of Sales is determined by adding together the value of each sale recorded in the OUT column section of the stock cards.

27
Q

3 State three items that might be recorded in the OUT column of a stock card, but are not included in the calculation of Cost of Sales.

A
  • Drawings of stock
  • Advertising of stock
  • Stock loss
28
Q

1 Define the term ‘Cost of Goods Sold’.

A

Cost of Goods Sold is a heading used in the Income Statement for all costs incurred to bring the stock into a location and condition ready for sale.

29
Q

2 State four expense items that may be reported as part of Cost of Goods Sold.

A
  • Cost of Sales
  • Freight/cartage/delivery inwards
  • Import duties
  • Custom duties
  • Modifications
  • Packaging
  • Buying expenses.
30
Q

3 Explain why purchase of stock is not reported as an expense.

A

The purchase of stock does not involve an outflow of economic benefit but rather has future economic benefit. The cash purchase of stock also does not decrease assets overall as it is swapping one asset (Bank) for another (Stock), and it also does not decrease owner’s equity.

31
Q

4 Explain why it is important to identify Gross Profit in the Income Statement of a trading business.

A

The owner must be able to assess whether the selling price is high enough (has sufficient mark-up) to cover the cost of the stock and all the firm’s other expenses, and still provide for Net Profit. This is why the Income Statement identifies Gross Profit.

32
Q

5 Explain how a stock loss or gain is determined.

A

A stock loss or gain is determined by comparing the stock card figures to the physical stocktake.

33
Q

6 Explain why stock loss and gain are reported separately in the Income Statement.

A

They are reported separately in order for the owner to identify problems with stock management so that corrective action can be taken.

34
Q

7 State the effect on Adjusted Gross Profit of a:

  • stock loss
  • stock gain
A
  • stock loss – decreases Adjusted Gross Profit

* stock gain – increases Adjusted Gross Profit.

35
Q

1 Explain how stock is classified in the Balance Sheet

A

Stock is classified as a current asset because it is a resource controlled by the business from which future economic benefits are expected (when the stock is sold) in the next 12 months.

36
Q

2 Referring to one Qualitative Characteristic, explain why the Balance Sheet does not list the balance of every line of stock

A

2 Referring to one Qualitative Characteristic, explain why the Balance Sheet does not list the balance of every line of stock

37
Q

3 Explain the role of a stock sheet.

A

A stock sheet is a listing of the quantity and value of each line of stock on hand and is used to determine the single figure for stock on hand in the Balance Sheet.

38
Q

1 State two ways stock cards can be used to manage stock.

A
  • Individual lines of stock can be monitored so that fast-moving and slow-moving lines can be identified
  • Reorder points can be identified so that stock never runs out and lost sales can be minimised.
39
Q

2 State what is measured by Stock Turnover (STO).

A

Stock Turnover is an efficiency indicator that measures the average number of days it takes for a business to convert its stock into sales.
 

40
Q

3 Show the formula to calculate Stock Turnover.

A

Stock Turnover = Average stock x 365 / Cost of Goods Sold

41
Q

4 Explain why fast Stock Turnover is beneficial for liquidity.

A

It is vitally important that a firm sells its stock quickly so it has the cash to meet its short-term obligations in time, and so that it can purchase more stock to generate more sales.

42
Q

5 State three benchmarks that could be used to assess Stock Turnover.

A
  • Past figures for Stock Turnover – established trends
  • Budgeted Stock Turnover – predicted figures or targets that were hoped to be achieved
  • Stock Turnover of similar businesses or industry averages
43
Q

6 State two actions that could be implemented to improve Stock Turnover

A
  • Increasing the level of sales to increase Cost of Goods Sold
  • Decreasing stock holdings to reduce the amount of stock on hand
44
Q

Explain the strategies that could be employed to manage stock.

A
  • Set minimum and maximum stock levels
  • Rotate stock
  • Ensure stock is up to date
  • Maintain an appropriate stock mix
  • Promote the sale of complementary goods
  • Effective marketing

Accounting Unit 2 (7 decks)

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