concepts - merit & excellence Flashcards
Jo imported two piano’s to sell in Jo’s Music store. They cost $1000 US dollars each. Explain how the monetary concept is applied to this transaction?
Jo’s music store would convert the two piano’s purchased at $1000 US Dollars each to New Zealand currency?
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses.
Therefore if a transaction cannot be expressed in money values, backed up with a source document, it will not be recorded in the accounting records. For example the number of years operating or the location of the business will not appear in the Financial Statements of the business.
This is a limitation of the Financial Statements – they do not record non-financial information.
Looking at the Income statement of Jo’s music store, how is the monetary concept applied?
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses. Only financial transactions are shown in $ amounts.
This is seen by the $ signs on each column of the report of Jo’s music store.
Jo’s music store’s financial reports are divided into accounting periods. Explain to Jo how the Period reporting concept is applied to her business?
(A)The lifetime of the business is divided into nominated time periods of equal length, usually a year.
This allows Jo and users to make comparisons of financial performance and position of Jo’s music store from one period to another. Jo can identify financial trends to assist in decision-making. e.g. is there enough profit to expand the business, Jo’s music store.
Jo’s music store has purchased a computer for $5000. Jo has had the computer revalued at $1000 as it is now quite old. what value will he shown in the financial statement?
(A)The financial reports are prepared on the assumption that the life of the business is expected to continue to operate into the foreseeable future.
Hence assets for Jo’s music store, particularly Plant Property and Equipment, are valued at historical cost in the Statement of Financial Position. The Computer will be recored at it historical cost $5000.
Users will know for certain what they were purchased for. They can make their own decisions on their market value.
How does recording prepaid insurance $500 in Jo’s Music Store meet the accruals concept?
Prepaid Insurance is recognised when it occurs and is recorded and reported in the financial reports of Jo’s music store to the period to which it relates.
Prepaid Insurance is added as a current asset in the statement of financial position.
In the income statement, administration expenses, Insurance will decrease by $500. This is because it relates to the next accounting period.
Jo’s music store is owed dividends of $300 which will be recieved next financial years. How will the accruals basis be applied to this example?
Dividends received owing $300 is recognised when it occurs and is recorded and reported in the financial reports of Jo’s music store to the period to which it relates.
Dividends owing $300 is recorded as an Accrued Income increasing a current asset in the statement of the financial position.
In the Income statement , other income , dividends recieved will increase by $300. This is because it relates to this accounting period.
How will Jo’s music store deal with shop wages owing $300 using the accruals concept?
Shop wages owing $300 is recognised when it occurs and is recorded and reported in the financial reports of Jo’s music store to the period to which it relates.
Shop wages owing $300 is added as a current liability in the statement of financial position, as a accrued expense
In the Income statement, distribution expenses will increase shop wages by $300. This is because it relates to this accounting period.
Jo’s music store rents part of its store to a piano tuner. The piano tuner has paid $600 rent in advance.
Rent received in advance $600 is recognised when it occurs and is recorded and reported in the financial reports of Jo’s music store to the period to which it relates.
Rent received in advance is increased as a current liability in the statement of financial position called income received in advanced.
In the Income statement, other income, rent received decrease by $600. This is because it relates to this accounting period.
