SAC 2 Part 1

Question 1

What does the fair value of an asset represent?

Answer 1

The price that would be received if the asset was sold at the time it was acquired by the business

Question 2

How does the fair value of an asset uphold faithful representation?

Answer 2

Financial information should be a faithful representation of real-world economic events which is free from error and without bias. The asset must be valued at what it is worth to the business at the time it is acquired.

Question 3

What is a memo?

Answer 3

An internal source document used to verify a transaction that does not involve cash, and is not a sale, purchase or return of inventory

Question 4

What are some examples of transactions verified by a memo?

Answer 4

Non-cash drawings, correction of errors, inventory loss/gain

Question 5

What effect will the contribution of any asset from the owner of a business have on the accounting equation?

Answer 5

Assets increase- (Vehicle)

Owners Equity increase- Capital

Question 6

What effect does a non-cash drawing by the owner have on the accounting equation?

Answer 6

Assets decrease- (Office Furniture)

Owners Equity decrease- Capital

Question 7

What is a commencing entry?

Answer 7

A general journey entry to establish double-entry records by entering existing assets, liabilities and owners equity balances in the general ledger

Question 8

What is a correcting entry?

Answer 8

A general journal entry to correct an error in the way a transaction is recorded in the general journal or ledger

Question 9

How do you correct an entry in the general journal?

Answer 9

Undo any incorrect entries by reversing them, and record the entry as it should have been recorded

Question 10

What is an order form?

Answer 10

A document issued by a business requesting the supply of inventory or other goods

Question 11

What is an order confirmation?

Answer 11

A document issued by the supplier confirming the receipt of an order for inventory

Question 12

What is a shipping confirmation?

Answer 12

A document issued by the supplier confirming that inventory has been dispatched and is being shipped to the business

Question 13

What is a delivery docket?

Answer 13

A document issued by the supplier to accompany a delivery, listing the type and quantity of all items delivered

Question 14

What does the going concern assumption state?

Answer 14

The business will continue to operate in the future, and its records are kept on that basis

Question 15

What does the accounting entity assumption state?

Answer 15

The records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities

Question 16

What does the period assumption state?

Answer 16

Reports are prepared for a particular period of time, such as a month or year, in order to obtain comparability of results

Question 17

What does the accrual basis assumption state?

Answer 17

Revenues are recognised when earned and expenses are recognised when incurred, so profit is calculated as revenue earned in a particular period less expenses incurred in that period

Question 18

What does relevance state?

Answer 18

Financial information must be capable of making a difference to the decisions made by users

Question 19

What does materiality refer to?

Answer 19

The size or significance of financial information, determined by considering whether omitting it or misstating it from the reports could influence decisions that users make

Question 20

What does verifiability state?

Answer 20

Financial information should allow different knowledgeable and independent observers
to reach a consensus (agree) that an event is faithfully represented

Question 21

What does comparability state?

Answer 21

Financial information should be able to be compared with similar information about other entities and with similar information about the same entity for another period or another date