General Flashcards
One advantage of operating a partnership would include
a) Limited Liability for all partners
b) Being able to raise capital through Share issues
c) Access to a larger amount of initial capital
d) Greater power than a sole trader for decision making
c) Access to a larger amount of initial capital
What does SOFA stand for
Statement of Financial Activities
What does GAAP stand for
Generally Accepted Accounting Principles
What does FRS Stand for
Financial Reporting Standards
Define lower or net realisable value of stock
The value of stock should not be over stated or understated and the net realisable value reflects the selling price less any selling costs to complete and sell the goods
Name several methods of stock take
First in First Out FIFO
Last in First Out
Average Cost
How is stock valued on the First In First Out Method
Stock is based on the last quantities purchased on the assumption that the stock purchased earlier has been sold. In inflationary times this gives a higher closing stock value than Last in First Out.
How is stock valued on in the Last In First Out Method
Closing stock is valued on the basis of the earliest stock purchased i.e. assuming all the newer stock sold recently. In times of inflation this gives the effect of lowering the value and depressing the profits
How is the stock valued on the Average Cost Method
Taken as the average price at which units have been purchased over a period. The total cost of units in stock is divided by the total number of units in stock. This method is a compromise between LIFO and FIFO and gives a more realistic figure. Common in computerised systems where the computer normally calculates a new value for a stock item each time an issue or purchase is made. Rarely used in manual systems
Goodwill may or not be recorded in the books. What happens if goodwill is recorded
Goodwill account is opened and is debited with the amount of goodwill. The partners already in the business then have this credited to their capital accounts a proportion of the goodwill according to their profit sharing ratio at the time the goodwill is created
What happens if goodwill is not recorded
No goodwill account is opened. The amount of the goodwill is first divided between the partners as to their profit sharing agreement. It is then reapportioned on the basis of the new agreement. THE DIFFERENCE BETWEEN THE TWO APPORTIONMENTS IS ENTERED IN THE CAPITAL ACCOUNTS
What does the entity concept mean
The business is regarded as a separate entity distinct form its owner owners.
What does the materiality concept mean
A disproportionate amount of time should not be spent recording trivial or minor items. For example the cost of a pen would be treated as a revenue expense in the year it was purchased even though it may still be in use in subsequent years because spreading the cost over the period of use would not be worth the trouble
What does the prudence concept mean
a conservative approach should be applied in preparing information for profit and loss items and that where there are areas of doubt it is always advisable to understate profits rather than potentially overstate them and to overstate losses rather than run the risk of understating them. This cautious approach will ensure that financial statements do not give an over-optimistic view of a business financial performance and position
What is the matching concept
All relevant expenses should be matched against all income which they relate
Describe what is meant by error of ommission
entry has been completely omitted from the ledger. There is no Dr or Cr on Trial Balance for example an invoice not received for input
Describe what is meant by error of original entry
When in the original entry into the ledger is incorrect both in the debit and credit section eg entering 54 instead of 45. When error comes to light adjusted on both sides
Describe what is meant by error of commission
Where the correct amount is entered but to the wrong account eg Debiting D White instead of L white
Describe what is meant by error of principle
When entries are made to the wrong type of account eg motor car brought for 2000 but posted to motor vehicle expenses as opposed to motor vehicle accounts. Doesn’t affect trial balance
Describe what is meant by compensating errors
Where the ledger contains two or more errors which by chance cancel each other out For example a customers account is credited 10 when it should have been debited resulting in the ledger being overstated
Describe what is meant by error of duplication
When the same entry is entered in twice
In a Trading Profit and Loss account where is the bank interest received shown
After Gross Profit ie Sales 124300 Opening Stock 8250 Purchases 92800 Good Returned 1320 Closing Stock 8580 Cost of Goods Sold 91150 Gross Profit 33150 Bank Interest Received 230 Cash Discount Received 30 Profit 33410
Where is Cash discount allowed showed
Within the expenses section of the Trading Profit and Loss
Where is Carriage inward shown in the Trading Profit and Loss
Within the Cost of Goods Sold Calculation Opening Stock 31500 Purchases 221800 Carriage Inwards 1200 Purchases Returns -3260 Closing Stock -33500 Cost of Goods Sold 217740
Which of the following concepts would apply to the accounts of a sole trader:
Accruals, entity, prudence, consistency, limited liability
All of them except the limited liability
What does AVCO stand for and does a calculation have to be made after each entry
Average Cost Method on stock valuation
e.g. Balance 10 @ 30 purchased 10 * 34 average is 32 (300 plus 340=640/20)then purchased another 40 average would then be average of 1920/60
What is Capital employed
Capital Employed = TOTAL ASSETS LESS CURRENT LIABILITIES
Long term Liabilities are excluded
What are gross and net profit margins measures of
Profitability
What is the return of capital employed a measure of
Profitability
What is referred to as a realisation account in partnerships
Realisation account is opened when a partnership is dissolved to ascertain the net gain or loss on realisation of the assets and to apportion the balance between the partners in their profit sharing ratio.
Define Shareholders Equity
Issued Ordinary Share Capital plus the Reserves that represent the investment in the company by the ordinary shareholders
x + profit = Sales
What is x
x+25=125
Cost of Sales
100 + 25 = 125
When profit is expressed as a percentage of sales what would that be regarded as
Profit Margin 25/125 = 20% or Selling Price 100% less Profit 25% Cost of Sales 80% Selling Price always 100%
Define provision under financial reporting standards 12 “provisions contained in liabilities and contingent assets”
A provision arises when there is an obligation as a result of the past event, it is probable that transfer of economic benefits will be required to settle obligation and a reliable estimate can be made of the accounts of the obligation a provision must be recognised i.e. provided for in the accounts
Define contingent liability under the financial reporting standards 12 “provisions contingent liabilities and contingent assets”
A contingent liability arises from an event where it is possible but not probable that the transfer of the economic benefits will be required to settle the obligation and a reliable estimate of the liability is not possible. Such liability should not be provided in the accounts as such but it maybe disclosed and the notes to the accounts
Define Carriage Inwards and would they be a D or a C in profit and loss
A charge for delivery of goods purchased
Debit
Define Carriage Outwards and would they be a D or a C in balance sheet
A charge for goods sent out to a customer
Debit
Define Returns Inwards and would they be a D or C in profit and loss
Goods returned by customers
Debit
Define Returns Outwards and would they be a D or C in balance sheet
Goods returned to Suppliers
Debit
Which of the following statements best describes a Trial balance
a) It checks the arithmetic accuracy of double entry transactions
b) it is always prepared by an accountant
c) it is correct if the two sides balance
d) it is essential statement for users
a) It checks the arithmetic accuracy of double entry transactions
Stock previously cost 750 and sold for 1000 - it was damaged and can now sell for 600 and it will cost 50 to prepare stock for sale what is the net realisable value
550
When does capital expenditure occur
When a business purchase non current assets or adds value to existing non-current assets - this does not include repairs and maintenance
