Outcome 1C - Accounting For Stock Flashcards
What is the control account?
The control account provides a summary of all transactions with specific, detailed information relating to each individual transaction.
How would you classify stock?
Stock is classified as a current asset because it is a resource controlled by the entity, as a result of past events, from which future economic benefits (sales) are expected for a period of up to 12 months.
Define FIFO
First In First Out (FIFO) is an assumption which states that the stock which is purchased first will be sold first. It may be used when a business is physically unable to identity individual stock items which have different cost prices.
Define stock cards.
Stock cards are a subsidiary accounting record that records each individual transaction regarding the movement in and out of the business of a particular line of stock.
What is a stock take?
The stock take is a physical count of the number of units on hand of each line of stock.
Why do business’ stock take?
The process is to verify the accuracy of the stock card figures and detect any stock losses or gains at the same time.
Define stock loss.
Stock loss is an expense incurred by the business when the stocktake figure shows less stock on hand than the stock cars. (DR)
Define stock gain.
A stock gain is revenue earned when the stocktake shows a figure for stock on hand that is more than the balance shown in the stock card. (CR)
What are the benefits of perpetual system of stock recording?
- maintain continuous record of number of stock units on hand (so they don’t run out)
- stock losses and gains can be detected
- fast and slow moving lines of stock can be detected.
Explain the impact of FIFO on Cost of Sales and Net Profit in times of rising prices.
FIFO assumes that the older stock will be sold first, which is not always the case: when prices are rising this older stock will be cheaper, understating Cost of Sales and overstating Net Profit.
Explain how FIFO can overstate the value of stock on hand.
FIFO assumes the older stock will be sold first, and that the new stock will still be on hand. When prices rise, the newer stock will be more expensive, overstating stock on hand.
How would you value stock gain and identity one principle.
Conservatism. The stock gain would be valued at the lowest price on hand in the stock card ($650) so that revenues (Stock Gain) and assets (Stock Control) are not overstated.
How does the physical stocktake improve Reliability?
The physical stocktake will verify the stock on hand as recorded in the stock cards, and at the same time detect any stock loss or gain, thus ensuring the Stock Control figured reported in the Balance Sheet is free from bias and error.
Explain the effect FIFO will have on the accounting equation
FIFO assumes the older, cheaper stock is sold first, understating Cost of Sales and thus overstating Net Profit and Owner’s Equity. It assumes that the newer, more expensive stock is still on hand, overstating Stock Control and Assets.
