Current assets/ Cost of goods sold & inventory.

Question 1

What is inventory?It’s effects on F.S’s & concept.

Answer 1

Goods purchased for resale which havent been sold yet and valued at the end of the financial year.
On the SOP/L it’s credited as cost of sales while on the SOFP it’s debited as a current due to the accruals concept requiring the matching of income with expenses.

Question 2

What is the importance of inventory valuation?

Answer 2

The prudence concept(IAS2) states inventory should be valued at lower of cost & net realisabe value because if inventory is overvalued so are assets and profits but if they’re undervalued so are assets and profits.

Question 3

Name and explain the main 8 accounting concepts

Answer 3

1) Accruals- Every transaction is recorded.
2) Prudence- Ensure that assets/incomes are not overstated AND liabilities/expenses are not understated.
3) Going concern- The organisation will exist over the long term.
4) Separate Entity- The organisation and the owner’s financials are treated as separate.
5) Money Measurement- Accounts deal with where monetary value can be attributed.
6) Consistency- Financial statements can be compared from different periods.
7) Substance over form- Financial statements must give the full picture.
8) Materiality- All information must be disclosed.

Question 4

What is depreciation?

Answer 4

It is the cost of a non current asset recognised over it’s useful life and not just when it was purchased.

Question 5

Accrued expense Vs Prepaid expense

Answer 5

Prepaid expense- Transfer of charges over to the next period. (payment made in advance)
Accrued expense- Expenses incurred but not yet paid(e.g electricity)

Question 6

What is a deferred income

Answer 6

Income received in advance before service or product is rendered (e.g renter pays a month early