Incomplete Records

Question 1

What is the equation for closing capital?

Answer 1

Closing capital = Opening capital + profit - Drawings

Question 2

As net assets = Capital we can also say…

Answer 2

Increase in net assets = Capital introduced + profit - drawings

Question 3

If there are no records relating to credit sales we can calculate them using the…

Answer 3

Opening and closing trade receivables balance, and the cash we have received from our customers.

The best way to do this is by using a receivables account.

Question 4

If we do not have a purchase. Figure for the year we can…

Answer 4

Use opening and closing trade payables with payments to suppliers to calculate purchases.

Remember when dealing with receivables and payables we are dealing with an asset and liability rather than income and expense.

Question 5

Gross profit equation

Answer 5

Gross profit = Revenue - cost of sales

Question 6

Cost of sales equation

Answer 6

Cost of sales = Opening inventory + purchases - Closing inventory

Question 7

Describe a cost structure

Answer 7

A cost structure explains the relationship within the trading account.

If we know a cost structure then we can calculate sales, cost of sales, or gross profit if we only know one of these numbers.

Question 8

What are the 2 types of cost structures?

Answer 8

1. Margin
2. Mark up

Question 9

Describe the margin cost structure

Answer 9

• Gross profit margin is calculated as follows:

(gross profit/revenue) x 100 = profit margin

• When calculating margins using a cost structure, sales equals 100%
• If the profit margin is 40%, this means profit is 40% of sales (thus cost of sales would be 60%.

Question 10

Describe the mark up cost structure

Answer 10

• A mark up shows the profit you will make based on cost price.

(Gross profit/cost of sales) x 100 = Profit mark up

• When calculating mark ups using a cost structure, cost of sales is 100%.
• If mark up is 40%, this means profit is 40% of cost of sales, so..
  • Sales = 140%, Cost of sales = 100%, Gross profit = 40%.

Question 11

We may have inventory destroyed and you will be asked to…

Answer 11

Find value of that inventory

Question 12

If inventory is uninsured, how do we account for inventory being destroyed?

Answer 12

• We have to show this as an expense in the P/L account

Dr Stolen/destroyed inventory (expense in the P/L)
Cr Cost of sales would

Question 13

If inventory is insured, how do we account for inventory being destroyed?

Answer 13

• If it is insured then the business will receive the value of the inventory from the insurance company and therefore does not record an expense in the P/L.

Dr Insurance claim (other receivables on SFP)
Cr Cost of sales

Question 14

The ___ ___ (money in the till) is separate from the ___ ___ (money in the bank) when dealing with retail, for example.

Answer 14

• Cash account
• Bank account

Question 15

Describe a ‘float’

Answer 15

• In order to ensure there is enough money to give change and purchase incidental items a float is usually kept in the till.
• From info given in a question about the value of the float, the amount of cash bankers and any incidental expenses, it is possible to derive the sales value in any period.

Question 16

Is a float a brought forward or carried down position?

Answer 16

Both as it is always maintained

Question 17

A bank statement always shows the balance in the bank from the ___ POV (i.e., the money you deposit into the bank account is owed to you by the bank and therefore a credit balance to them)

Answer 17

• Bank’s

Question 18

If an assessment question says the bank account is in credit, this means…

Answer 18

There is money in the bank account, i.e., a debit balance from our POV of the business when drawing up the bank account.

Question 19

If an assessment question says the bank account is overdrawn this means…

Answer 19

This is money the business owes to the bank, i.e., a credit balance for the business when drawing up the bank account.

Question 20

Describe drawings in terms of cash/bank

Answer 20

Money taken out by the proprietor of the business and could be cash from the till or money from the bank.

Question 21

It is important to check for ___ of figures even when using sophisticated software package.

Answer 21

Reasonableness

Question 22

Describe professional scepticism

Answer 22

An accountant using their own professional judgement and applying a questioning mind to information they have been given.