SAC 1C Revision

Question 1

Explain why GST does not affect the valuation of inventory

Answer 1

It does not affect the economic benefit derived from the inventory, instead it decreases any GST liability owed to the ATO.

Question 2

Transactions in the IN column

Answer 2

Cash/Credit purchase, sales return, inventory gain

Question 3

Transactions in the OUT column

Answer 3

Cash/Credit sale, purchase return, inventory loss, drawings/advertising

Question 4

Costs of using Identified Cost/ why would a buisness use FIFO instead of IC

Answer 4

It may not be possible to use: inventory is unable to be labelled.
May not be practical: may have too many items to label, but would be a waste of time and skills
Time, effort and cost: need to mark or label each individual item of inventory
Increased costs: labels/stickers and having to pay staff to label every item (decreases profit)

Question 5

Explain the operation of the Identified cost method of valuing inventory

Answer 5

Each item is physically marked or labelled, through the use of stickers/price tags/labels etc. and checked against a record of which cost price relates to that code

Question 6

Benefits of Identified cost

Answer 6

requires each item to be marked or labelled and coded against the specific purchase price, it is accurate and neutral, thus providing a faithful representation of its value. this ensures that the reports include info that is Relevant and can be used to make a difference to decision making (gross profit, net profit and value of inventory on hand)

Question 7

Explain the operation of the FIFO assumption as it applies to inventory cards

Answer 7

assumes that the first items purchased are the first sold, and values inventory sold using the earliest cost price on hand

Question 8

Explain how FIFO affects the valuation of Cost of sales and inventory on hand in times of rising prices.

Answer 8

Assumes that older, cheaper inventory is sold first –>
- lowest possible cost of sales
- highest possible valuation of inventory on hand

Question 9

Explain the role of an inventory count. Identifiy one qualitative characteristic

Answer 9

The role of an inventory count is to verify the accuracy of the inventory cards and, in the process detect any inventory losses and gains. This ensures the reports provide a Faithful representation of the amount of inventory on hand.

Question 10

Identify the posssible reasons for an inventory loss

Answer 10

Theft
Damage
Undersupply from supplier
Oversupply to customer

Question 11

possible reasons for inventory gains

Answer 11

oversupply from supplier
undersupply to customer

Question 12

Define cost of goods sold

Answer 12

all costs incurred in getting goods into a condition and location ready for sale

Question 13

Reasons why Cost of Goods sold may be greater than Cost of Sales

Answer 13

It may include other costs incurred, such as customs/import duties
freight in/delivery
modifications
packaging
buying expenses

Question 13

Reasons why Cost of Goods sold may be greater than Cost of Sales

Answer 13

It may include other costs incurred, such as customs/import duties
freight in/delivery
modifications
packaging
buying expenses

Question 14

Why is it important to identify gross profit in the income statement

Answer 14

To allow the owner to assess the adequacy of mark-up, as gross profit expresses the relationship between selling prices and cost pricesm

Question 15

Why is it important to identify Adjusted gross profit in the income statement

Answer 15

to allow the owner to isolate the inventory loss or gain and bring it to the attention of the owner, so that strategies may be developed to address any problems that are identified

Question 16

Perpetual system of inventory recording

Answer 16

Recording individual inventory transactions in inventory cards as they occur, then conducting a physical inventory count at the end of the period to verify the balances of the inventory cards, in the process detecting any inventory losses or gains

Question 17

Benefits of the perpetual system

Answer 17

Reordering of inventory
- can inform owner when levels of inventory are low. timely info –> can lead to better decisions, such as reordering inventory before it runs out
Inventory losses and gains can be detected
- ensures that info is verifiable and provides a faithful representation of the firms inventory
Fast and slow moving lines of inventory can be identified
- can be moved, or mix of inventory can be adjusted to include more high-selling lines of inventory, and less of the inventory that is not selling.

Question 18

Costs of the perpetual system

Answer 18

Staffing
- need to record or monitor. increased expenses, less profit
Training
- increased expenses
Technology
- costly to set up and maintain

Question 19

FIFO:
Sales returns

Answer 19

Last items out are the items returned

Question 20

FIFO:
Inventory gain

Answer 20

Most recent value in IN column

Question 21

Referring to one QC, why should inventory be valued at its original purchase price

Answer 21

Verifiable by reference to a source document and provides a faithfl representation of the firm’s inventory because it is neutral and free from error or bias

Question 22

Product cost

Answer 22

A cost incurred in order to bring inventory into a conditiona and location ready for sale, which ccan be allocated to individual units of inventory on a logical basis and is of a significant value

Question 23

Period cost

Answer 23

A cost incurred in order to bring inventory into a condition and location ready for sale that is not allocated to individual units of inventory because there is no logical basis to do so.

Question 24

Explain the effect on profit if period costing is used instead of product costing

Answer 24

Because the entire period cost is recognised as being incurred in the period in which the inventory is purchased, regardless of whether or not the inventory is sold, this will lead to a higher Cost of Goods Sold and lower Net Profit. Under product costing, if all units purchased in the period are not sold, only the additional cost associated with the units sold is recognised resulting in a lower Cost of Sales figure and a higher Net Profit