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F3 ACCA > Recording Transactions And Events > Flashcards

Recording Transactions And Events Flashcards

Inventory

1
Q

IAS2 states that inventory should be value at the lower of cost and NRV. Which of the following concepts is this in accordance with?
A. Accruals
B. Prudence

A

B. Prudence

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2
Q

IAS2 Inventory, which two of the following cost should be included in valuing the inventories of a manufacturing company?

  1. Depreciation of factory plant
  2. Carriage inwards
  3. Carriage outwards
  4. General administrative overheads
A
  1. Depreciation of factory plant

2. Carriage inwards

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3
Q

Which of the following statements about the treatment of inventory and work in progress in financial statements are correct?

  1. Inventory should be valued at the lowest of cost, NRV and replacement cost.
  2. In valuing work in progress, materials costs, labour costs and variable and fixed production overheads must be included.
  3. Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.
  4. A company’s financial statements must disclose the accounting policies used in measuring inventories.
A

2, 3 and 4 is correct.

  1. Incorrect because inventory is not valued at the replacement cost
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4
Q

Justin’s inventory valuation excludes goods held by customers on a sale or return basis. The goods have a cost to the company of $1200 and a selling price to customers of $1700. They have not been invoiced to customers.
The effect on Justin’s profit of excluding this inventory is that:
A. Profits is understated by $500
B. Profits is understated by $1200
C. Profits is understated by $1700
D. Profits is stated correctly

A

B. Profits is understated by $1200

Inventory decrease by 1200 therefore cost of sales increase by 1200 therefore gross profit decrease by 1200

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5
Q

Capital vs Revenue Expenditure

A
  • Capital Expenditure: (In S.Financial Position / depreciation/ land does not depreciate)
    Increase the value of non-current assets & improves the earning capacity of an asset
  • Revenue Expenditure: ( In P & L / expenses)
    Maintains the existing capacity of an asset, includes regular expenditure and repairs and maintenance.
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6
Q

Cost of an asset includes

A

Initial delivery and handling costs
Installation and assembly costs
Costs of testing whether the asset is working properly
Professional fees

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7
Q

Capitalize means?

A

Total amount capital expenditure included in statement financial position for an asset. It excludes Revenue Expenditure as it’s maintenance cost which goes to P&L

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8
Q

Disposal of non-current assets

A

For cash

Part-exchange for a new asset

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9
Q

To find the profit or loss on disposal

A

NBV (or carried value) of asset before sold - cash proceeds/part-exchange allowance

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10
Q

Accounting profit & loss on disposal of an asset

A 
Debit = profit
Credit = loss
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11
Q

Revaluation of an Asset

A

Cost Model: a cost less accumulated depreciation and accumulated impairment losses

Revaluation Model: At fair value, Dr Asset account, Dr Accumulated depreciation account
Cr Revaluation Reserve

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12
Q

Lands and buildings

A

Not depreciation/ unlimited useful life

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13
Q

Asset Register

A

Non current assets: date of purchases, location, description, useful life, ect detail of non currents asset are recorded to check it against ledger accounts.

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14
Q

An organization asset register shows a carrying value of 135600. The non-current account in the nominal ledger shows a carrying value of 125600. Which of the following disposals, if not deducted from the asset register could for the difference?
A. Asset A with disposal proceeds of 15000 and a profit on disposal of 5000.
B. Asset B with disposal proceeds of 15000 and a carrying value of 5000
C. Asset C with disposal proceeds of 15000 and a loss on disposal of 5000
D. Asset D with disposal proceeds of 5000 and a carrying value of 5000.

A

A. Is correct. Carrying value is 10000 and profit 5000

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15
Q

Which of the following statements are correct?

  1. Capitalised development expenditure must be amortised over a period not exceeding 5 years
  2. Capitalised development costs are shown in the statement of financial positions under the heading of non-current assets
  3. If certain criteria are not met, research expenditure must be recognise as an intangible asset
A

Only 2.
Capitalised development expenditure is amortised over the period it is expected to generate economic benefits
Research expenditure is always written off as an expenses to profit or loss.

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16
Q

How much should Juan capitalised as non-current asset in relation to the computer purchase?
Computer:890, memory 95, delivery 10, installation 20, maintenance one year 25, sales tax 17.5% total 1222

A

Only 1015. Computer + memory+ delivery+ installation

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17
Q

Depreciation is an expense

2 method

A

Straight line = cost - residual value/ useful life
Or
(Cost - Residual value) × %

Residual Value = Scrap proceeds

Reducing balance method= NBV (cost - accul depreciation) ×Depreciation rate%. In this case we ignore residual value.

18
Q

Depreciation Expenses goes to

A

P&L

19
Q

NBV goes to

A

Statement of Financial position or BS

20
Q

Accounting depreciation

A

Dr Depreciation Expenses (P&L)

Cr Accumulated Depreciation (SOFP)

21
Q

A company uses the reducing balance method to depreciate its non-current assets.the annual rate is 20%. After three years the proportion of the original cost still depreciated will be:
A. 51.2%
B. 48.8%
C. 40.0%
D. Impossible to determine. It depends on the estimated residual value.

A

A. 51.2%

22
Q

What is the purpose of charging depreciation in the accounts?
A. To allocate the cost of a non-current asset over the accounting periods expected to benefit from its use
B. To ensure that funds are available for the eventual replacement of the asset
C. To reduce the cost of the asset in the balance sheet to its estimated market value
D. To comply with the prudence concept

A

Matching/accrual concept.

A. To allocate the cost of a non-current asset over the accounting periods expected to benefit from its use

23
Q

Intangible Asset is?

A

An identifiable, non-monetary asset without physical substance. Example: goodwill, development expenditure, patents, licences, copywriting software, …

24
Q

Research and development

A

Research: Stage when we’re carrying out investigations, tried to get new knowledge in a particular area.
Development: when we’re going to apply the findings during the research stage.
Research is a stage before development.

Research is always an expenses (P&L)
Development are All criteria met

25
Q

Development ALL Criteria met?

PIRATE

A 
Probable future economic benefits
Intention to complete and use or sell asset
Resources and adequate and available
Ability to use or sell the asset
Technical feasibility to complete asset
Expenditure can be measured reliably
26
Q

Development expenditure

A

If all criteria are met = INTANGIBLE ASSET = SOFP
if one criteria is not meet = EXPENSE = P&L

AMORTIZATION begins when the asset is available for use/sale

27
Q

Which 2 of the following items must be disclosed in the note to the financial statement for intangible assets?

  1. The useful lives of the intangible assets capitalised in the financial statements
  2. A description of the development projects that have been undertaken during the period.
  3. A list of all intangible assets purchased or developed in the period
  4. Impairment losses written off intangible assets during the period
A

1 and 4 correct.

28
Q

During the year ended 31 March 2007, expenditure happens:
15000 pure research
40000 Applied research
70000 Development expenditure
50000 Machinery for research
How much of the above expenditure can be capitalized as non-current asset?

A

£120000 = 70000 development expenditure + 50000 Machinery

29
Q

Which of the following best describes an accrued expenses?

  1. An expense that will be incurred in the next accounting period but that has been paid for in this accounting period.
  2. An expense that has been incurred in this accounting period but that was paid for in the last accounting period.
  3. An expense that has been incurred in this accounting period but will be paid for in the next accounting period
  4. An expense that will be incurred and paid for in the next accounting period
A
  1. An expenses incurred in this period but will be paid for in next period
30
Q
  1. Accrual goes to BS as ?

2. Prepayment goes to BS as?

A
  1. Current liability

2. Current asset

31
Q

Credit Limit

A

A tool in credit control, customers will be given a credit limit which cannot be exceeded. Credit limit is the maximum amount that a firm is willing to risk in an account.

32
Q

Irrecoverable debts = bad debt

A

Debts which are definitely irrecoverable. We are not going to receive that money. Ej bankrupt. It is an expenses so goes to P&L

DR Bad debts expenses
CR Trade receivables

33
Q

Irrecoverable Debts Recovered

A

Debt which was considered Irrecoverable Debt, but at the end it’s recovered. So we receive a payment.

DR Cash
CR Trade receivables

DR Trade receivables
CR Bad debts recovered

34
Q

Allowance for receivable

A

Provision for for bad debts

35
Q

Doubtful debt

A

Debts which are possibly irrecoverable.

DR Doubful debt expenses (P&L)
CR Allowance for receivable (BS or SFP) Under current asset _ (Trade receivables - allowances for receivable).

36
Q

Types of Allowances: specific and general

A

-Specific Allowance: An allowance against a particular receivable. 2 situations:
Original: DR Doubt debts (P&L), CR Allowance for debts (BS)
1. Customer pays outstanding amount. DR Cash, CR Trade receivables // DR Allowance for receivable, CR doubt debts recov (P&L)

  1. Customers goes Bankrupt. DR Allowance for receivable (BS) CR Trade receivables (BS).

In these 2 situations, allowance for receivables is not longer required: DR allowance in both situations

-General Allowance: A percentage allowance for all debts.

37
Q 
A company receives news that a major customer has been declared bankrupt. The double entry required to write off the debts is:
A. DR Bad debts
     CR Receivables 
B. DR Allowance for receivables 
    CR Receivables
A

A. DR Bad debt (expense in P&L)

CR Receivables

38
Q

Provision

A

When ALL of the following apply:

  1. An entity has a present obligation (it is a liability)
  2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
  3. A reliable estimate can be made of the amount of the obligation.
DR Expenses  (P&L)
CR Provision (BS)
39
Q

Contingent Liability

A

When we do have a provision because there are not all criteria met;

  1. Present obligation.
  2. Probably future economic benefits
  3. Reliable estimate

Disclose note in the financial statement
unless there Is the possibility of any outflow is remote so in this case we do nothing ( no note or accounting)

40
Q

Contingent Asset

A

Possible asset that arise from past event

Disclose in the financial statements if it is PROBABLE that there will be an inflow

If the inflow is virtually CERTAIN, recognise in the financial statements

If it is Not probable- Do NOTHING

F3 ACCA (5 decks)

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