Questions

Question 1

What are the benefits of control accounts and subsidiary ledgers?

Answer 1

Double checking allows detection of recording errors. Balance of control accounts can be checked against sum of the balances of subsidiary ledger accounts. Thus improving reliability.

Allocation of responsibility- separating the subsidiary ledger accounts from the general ledger means the sub ledgers can be allocated to employee. This greater accountability which improves effectiveness.

Ease of reporting- the single balance of all debtors or creditors means that the balance sheet need only report the balance of the control account, rather than listing every individual debtor or creditor. Greater relevance.

Question 2

Why is discount expense an expense?

Answer 2

Discount expense is a reduction in inflows of economic benefit (less cash received from debtor) that results in a decrease in assets (debtors control) which leads to a decrease in owners equity (lowers net profit)

Question 3

Discount revenue?

Answer 3

Discount revenue is a revenue as it is a savings in the outflow of economic benefits( less cash paid to creditors) in the form of a decrease in liabilities (creditors control) which leads to an increase in owners equity (increase in net profit)

Question 4

Benefits of having discount expense?

Answer 4

• debtors pay faster

- less likely to have bad debts

Question 5

Why is stock a current asset?

Answer 5

It represents a future economic benefit intended to be sold within the next 12 months

Question 6

What is the role of a stocktake?

Answer 6

To verify accuracy of the stock cards and in the process identify any stock losses or gains.

Question 7

Reason for stock loss

Answer 7

• theft
• damage/ breakages
• undersupply from suppliers
• oversupply to customers

Question 8

Benefits of the perpetual system?
(Recording stock transactions in stock cards,then conducting a physical stock take at the end of the reporting period to verify the balances of those stock cards)

Answer 8

• stock losses and gains can be detected by comparing the balances of the stock cards against the physical stocktake.
• fast and slow moving lines of stock can be identified, so that stock can be rotated or the stock mix adjusted. By examining frequency of sales recorded in the out column of each stock card, the owner can identify which lines are selling well.
• reordering of stock is adjusted by maintain continuous record of the number of units of stock on hand.

Question 9

Referring to one qualitative characteristic, explain the role of source documents?

Answer 9

Reliability. Source documents allow details relating tot he transaction to be verified which ensures that all transactions recorded can be proven and therefore the reports contain information relied on for decision-making as it is accurate and free from bias.

Question 10

Explain your treatment of customs duty. In income statement

Answer 10

Customs duty is a cost in getting the stock into a condition and locations ready to sell, therefore a cost of goods sold.

Question 11

Why is stockgain valued at the lowest cost price?

Answer 11

Conservatism. The stock gain must be valued at the lowest cost price of stock still on hand to ensure that assets are not overstated (stock control) and thus revenue is not overstated (stock gain)

Question 12

What is depreciation?

Answer 12

Depreciation is the allocation of the cost of a non-current asset over its useful life

Question 13

Why do we depreciate?

Answer 13

• depreciation ensure that an accurate profit is calculated, by comparing revenues earned against expenses incurred in the current reporting period
• relevance: includes all information that is useful for decision-making

Question 14

Uses of the income statement

Answer 14

To aid decision making about the firms tradig operations

• owner can assess the firms ability to earn revenue
• the adequacy of the firms mark up
• the firms ability to control expenses

To assess the firms performance in meeting its sales and expense targets. Compared against budgeted, or expected performance

To assist in planning for future activities. By providing a basis for the net budget, income statement will aid in the setting of future targets

Question 15

What is included in the cost of a non current asset

Answer 15

All costs involved in getting the asset into a location and condition ready for use, which will provide benefit for the life of the asset

• delivery cost
• modification cost
• the purchase price
• installation cost

Question 16

Refer to qualitative characteristic: why do we depreciate

Answer 16

Depreciation uses estimates, means reports will not be free from bias. To some extent this will undermine the reliability of the accounting reports.
Relevance. Depreciation ensures that the income statement includes all information that is useful for decision-making about profit by showing the consumption of a non-current asset in the current reporting period. Similarly by showing accumulated depreciation in balance sheet it ensure that assets are shown at their carrying value, which is vital for decision-making about their replacement

Relevance overrides reliability so that he accounting reports fulfil their function of providing useful information.

Question 17

What is an operating activity?

Answer 17

Label as either operating inflow or outflow

Cash flows related to day-today trading activities

-receipts form debtors
-payment to creditors
-prepaid expense
-interest expense
-wages
-gst paid/ fat received
Etc etc

Question 18

Investing activities?

Answer 18

State whether it’s inflow or outflow

Cash flows related to the purchase and sale of a non current asset

Non current asset
-including proceeds from sale of non-current asset

Question 19

Financing activities

Answer 19

State whether inflow or outflow

Cash flows related to changes in the financial structure of the firm

• loan
• capital contribution
• drawings
• loan receipts
• loan repayment

Question 20

Net profit but suffer a decrease in cash

Answer 20

Cash outflows that decrease cash but not expenses so do not affect profit

• cash drawings
• loan repayments
• cash payment for NCA
• overall more gst paid than received(include fat settlement)

Stock gain

Credit sales greater than receipts from debtors

Cost of sales less than payments for stock
Other expenses occurred less than paid

Question 21

What is the purpose of a trial balance

Answer 21

Preparing trial balance ensures that the total debit entries equal the total credit entires in the general ledger accounts. This helps to ensure that the double entry process has been done accurately and identifies if any recording errors have been made. Such errors can be rectified

Question 22

Argument of the inclusion of depreciation

Answer 22

Breeches reliability—> supports relevance and reporting period

Depreciation breeches reliability. It required an estimation of both the useful life and the residual value of a non current asset. These are only estimates and cannot be verified by source documents. This may lead to an inaccurate expense amount for depreciation, which may result in either a profit or loss on disposal of the non-current asset when it is eventually sold.
However, an asset helps the business to earn revenue during its useful life and relevance would suggest that the asset should be expensed over its life. Since depreciation is useful for decision making it ensure that an accurate net profit figure is calculated by matching revenues earned and expenses incurred in that reporting period.

Question 23

Why is GST excluded from the calculation of depreciation.

Answer 23

As it is not part of the cost of the asset but represents a reduction in the GST liability owed to the ATO. GST does not provide future economic benefit to the business.

Question 24

Depreciation

Answer 24

The allocation of the cost of a non-current asset over its useful life

Question 25

Why do we use straight line method of depreciation

Answer 25

Assumes that non-current assets contribute evenly to revenue, thus the non-current asset is consumer evenly over its useful life, so the depreciation expense each year.

Question 26

Uses of the cash flow statement?

Answer 26

To aid decision making about the firms cash activities by detailing the sources and uses of cash in a particular period.

To assess the firms performance in meeting its cash targets. The cash flow statement can be compared against a budgeted (or expected) performance.

To assist in planning for future cash activists. By providing a basis for the next budget, the cash flow statement will aid in the setting of targets for the future.

Question 27

Why do we do closings entries?

Answer 27

Closing the revenues and expenses allows for calculation of net profit or lose for the reporting period. It also returns expense and revenue accounts to zero balance for next period.

Question 28

What is carrying value

Answer 28

It is made up of two components. The first components is The amount of depreciation yet to be written of as an expense during the remaining useful life of the asset. The second components it’s the original estimate of the assets residual value, which will not be depreciated over the useful life of the asset

Question 29

Accounting principle for agreed value?

Answer 29

Conservatism: the business ensures that its losses are recorded immediately but gains only when certain. The vehicle is a few years old and has been used by privately by the owner. Recognise this loss.

Question 30

With reference to qualitative characteristics discuss why we the van should be at agreed value.

Answer 30

Relevance: business ensure all reports contain information that is useful for decision making. The agreed value of the vehicle is more useful to the users as it takes into consideration the age of the vehicle and the affects of previous use.

however it undermines reliability as this value is not verifiable by source document evidence.

Question 31

Why do we use a Post adjustment trial balance

Answer 31

Use it to prepare income and balance sheet

No use for cash flow statement

Question 32

Depreciation definition

Answer 32

Depreciation is the allocation of the cost of a non-current asset of its useful life

Question 33

Why do we close the ledgers

Answer 33

• to transfer revenues and expenses to the profit and loss summary account in order to calculate profit for the current reporting period
• reset reset revenue and expense account to zero in preparation for the next reporting period

Question 34

What rule does NRV uphold

Answer 34

Upholds conservatism by recognising a loss on the stock as soon as probable, it ensures that stock is not overstated and relevance is upheld as info will be more useful for decision making.