theory questions Flashcards
why cost price
valued at cost price:
Verifiability states that assets should be valued at a price which is evidenced by a source document.
satisfy elements of Faithful Representation, as the source document can eliminate potential areas of bias and a lack of accuracy in estimating the assets fair value.
fair value
Faithful Representation states that financial information must accurately reflect economic events and values. The fair value presents a more accurate reflection of the motor vehicles future economic benefit to the business at the time of contribution.
Relevance of reported information and can assist the business owner in managing their Non-Current Assets. For instance, Assets with a low value might prompt an owner to look at replacing a Non-Current Asset.
Entity Assumption demands that the asset must reflect the future economic benefit to the business excluding the benefit already consumed by the owner.
Trial balance
is a list of all of the ledger accounts and their balances. It’s a checking mechanism to ensure that total debits equal total credits.
Detect potential recording errors.
trial balance can detect
2 entries recorded on the same side of the ledger
single as opposed to double entry
different amounts on each side
triabl balance cannot detect
entry has been ommitted
debit and credit entries have been reversed
transaction has been recorded in the wrong ledger account
incorrect amount recorded on both sides of the ledger account
advantages of the perpetual inventory system
greater control
identifies speed and turnover
more efficient reordering - can order new inventory when levels are low
identifications of inventory gains/losses
disadvantages of the perpetual inventory syste
additional record keeping
additional costs- wages and training
does not replace the physical stocktake
physical inventory count
commonly conducted at the end of the reporting period to double check perpetual inventory records and recognises potential inventory gains/losses
perpetual inventory system is subject to recording errors
Why is FIFO used ?
- physically impossible to identify the actual units being sold in some businesses
- management prefers not to use labels or codes as it involves too much work. Instead simply choose to assume that first goods purchased are first goods sold.
- when they sell larger volumes of lower priced inventory and therefore management may not decide to use labels/ codes to identify each individual cost as it may be too much time/effort due to training and wages. The benefit of accuracy may not be worth additional record-keeping and costs.
why identified cost
if smaller number of higher priced inventory items and can be more easily specifically identified using the Identified Cost method
may be more appropriate to record the actual cost of each inventory item making the profit calculation more accurate.
product cost
any cost incurred in bringing inventory into a condition and location ready for sale which can be logically allocated to each unit of inventory on a logical basis
period cost
any cost incurred in bringing inventory into a condition and location ready for sale which CANNOT be logically allocated to each unit of inventory on a logical basis
net realisable value
estimated selling price less direct selling expenses
how do businesses achieve positive cash flows but net loss?
credit sales vs receipts from accounts receivable
cost of sales vs payments to accounts payable/cash purchases
operating activities
cash flows that relate to day to day trading activities
