Concepts with Merit and Excellence Flashcards
Jo imported two piano’s to sell in Jo’s music store. They cost $1000 each. Explain how the monetary concept is applied to this transaction.
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses. Jo’s music store would convert the currency of the two pianos purchased at $1000 USD each to NZD.
Looking at the Income Statement of Jo’s music store how is the monetary concept applied?
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses. Only financial transactions shown in $ amounts. This is seen by the $ signs at the top of 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.
The lifetime of the Jo’s Music Store 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.
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 be shown in the financial statement.
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, particularly Plant Property and Equipment, are valued at historical cost in the Statement of Financial Position. The computer will be recorded at its historical cost, $5000. Users will know for certain what they were purchased for. They can make their own decisions on their market value.
What would happen to the assets of Jo’s Music Store if the Going Concern concept did not apply.
If Jo’s Music Store is not a Going Concern then the Historical Cost Concept does not apply. Assets must be valued at Market Value. All the assets will all be classified as Current Assets. There will be no Non-Current Assets, as the business will close very soon and stop trading – well within a year. The computer will be valued at $1000 its market value not $5000 its historical cost.
How does recording prepaid insurance $500 in Jo’s Music Store meet the accruals concept?
Prepaid Insurance of $500 is recognised when it occurs and is recorded and reported in the financial reports of the period of Jo’s Music Store to which is relate.
Prepaid Insurance of $500 is added as a current asset in the statement of financial position.
In the income statement administrative expenses 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 received next financial year. How will the accruals basis be applied to this example?
Dividends owing of $300 are recognised when it occur and are recorded and reported in the financial reports of the period of Jo’s Music Store to which it relates.
Dividends owing of $300 is recorded as an Accrued Income increasing a current asset in the Statement of financial position.
In the income statement, other income, dividends received increased 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 the period of Jo’s Music Store to which is relate.
Shop Wages owing of $300 is added as a current liability in the statement of financial position as an accrued expense.
In the income statement distribution expenses shop wages will increase 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 advanced.
Rent in Advance of $600 is recognised when it occurs and is recorded and reported in the financial reports of the period of Jo’s Music Store to which is relate.
Rent in Advance of $500 is added as a current liability in the statement of financial position as income received in advance.
In the income statement other income rent received will decrease by $600. This is because it relates to the next accounting period.
