Unit 2 Acc Chapter 11 Review Questions

Question 1

RQ 11.1 // Trading Firms & Stock Q1. Explain the operations of a trading firm.

Answer 1

Trading firms purchase goods (known as ‘stock’) from suppliers/wholesalers and then sell them to customers at a higher price, with the difference between the cost price and the selling price earning them profit.

Question 2

RQ 11.1 // Trading Firms & StockQ2. State two reasons why stock is important to a trading firm.

Answer 2

• Sale of stock is the main source of revenue for a trading firm, and thus the key to its ability to earn profit.• Stock is likely to be one of the most significant assets in the Balance Sheet of a trading business.

Question 3

RQ 11.1 // Trading Firms & StockQ3. Define the term ‘stock’.

Answer 3

Stock are the goods purchased by a trading firm for the purpose of resale at a profit.

Question 4

RQ 11.1 // Trading Firms & StockQ4. Explain how stock is classified in the Balance Sheet.

Answer 4

Stock is classified as a current asset as it is a resource controlled by the business that will provide a future economic benefit (when it is sold) within the next 12 months.

Question 5

RQ 11.2 // Accoutning for StockQ1. Referring to the perpetual inventory system, explain the role of a stock card and a stock take.

Answer 5

• stock card – a stock card is a subsidiary accounting record that records each individual transaction involving the movement in and out of the business of a particular line of stock• stocktake – the stocktake is conducted to verify that the stock cards are accurate, and in the process detect any stock losses or gains.

Question 6

RQ 11.2 // Accounting for StockQ2. Define the term ‘purchases’ as it applies to trading firms.

Answer 6

A purchase is the stock bought by a trading firm for the purpose of resale.

Question 7

RQ 11.2 // Accounting for StockQ3. Explain how the sale of stock decreases an asset but increases an expense.

Answer 7

When the sale of stock occurs, stock is flowing out of the business. That is, the stock is no longer an asset that will provide future economic benefit, but rather an expense where an outflow of economic benefit occurs (the stock that has been sold) in the form of a decrease in assets (Stock), thus decreasing owner’s equity.

Question 8

RQ 11.2 // Accounting for StockQ4. State the effect on each element of the accounting equation of a cash purchase of stock

Answer 8

Assets - Decrease (increase Stock, decrease Bank)Liabilities - Decrease (GST payable)Owner’s Equity - No effect

Question 9

RQ 11.2 // Accounting for StockQ4. State the effect on each element of the accounting equation of a cash sale of stock

Answer 9

Assets - Decrease (increase Stock, decrease Bank)Liabilities - Decrease (GST payable)Owner’s Equity - No effect

Question 10

RQ 11.3 // Stock CardsQ1. Identify four details that will be provided in the top portion of a stock card but not in the Stock figure reported in the Balance Sheet.

Answer 10

• Description of the item• Code of the item• Location of the item• Name of the supplier

Question 11

RQ 11.3 // Stock CardsQ2. Identify two details that are provided when transactions are recorded in the stock card but are not provided in the journals or reports.

Answer 11

• Quantity or number of items of stock• The cost price of each individual stock item (the unit cost)

Question 12

RQ 11.3 // Stock CardsQ3. State how many stock cards a typical trading firm would require. (Beware: this is a trick question!)

Answer 12

The number of stock cards depends on the number of different lines of stock a business carries, including different styles, different colours and different sizes. Therefore, every business will have a different number of stock cards.

Question 13

RQ 11.4 // Recording Transactions in Stock CardsQ1. State the effect on the BALANCE of a transaction recorded in the IN & OUT column.

Answer 13

• IN column – transactions will increase the balance• OUT column – transactions will decrease the balance.

Question 14

RQ 11.4 // Recording Transactions in Stock CardsQ2. Explain why the cost price is not shown on the source document that provides the evidence of a sale.

Answer 14

The cost price of stock is not revealed on the source document in order to protect the gross profit on the sale. (We don’t want the customers to know how much we are making on the sale.)

Question 15

RQ 11.4 // Recording Transactions in Stock CardsQ3. Explain how the stock card is used to determine the Cost of Sales for each transaction.

Answer 15

Stock is recorded at its cost price in the stock card, so all sales recorded in the Out column of a stock card will use the oldest cost price in the Balance column (using the FIFO principle) in order to determine the Cost of Sales for a transaction.

Question 16

RQ 11.4 // Recording Transactions in Stock CardsQ4. Explain the FIFO (First In, First Out) assumption as it applies to stock cards.

Answer 16

FIFO is the assumption that stock that is purchased first will be sold first, so all transactions recorded in the OUT column must assume that the oldest stock is sold before the newer stock.

Question 17

RQ 11.4 // Recording Transactions in Stock CardsQ5. Identify four transactions to which the FIFO assumption must be applied.

Answer 17

• Sales• Drawings• Advertising• Stock losses

Question 18

RQ 11.5 // The Physical StocktakeQ1. Referring to one Qualitative Characteristic, explain the role of a physical stocktake.

Answer 18

The physical stocktake is compared against the stock cards to verify their accuracy, so that the stock figure reported in the Balance Sheet is free from bias (that is, Reliability is upheld) and in the process detect any stock loss or stock gain.

Question 19

RQ 11.5 // The Physical StocktakeQ2. Define the term ‘stock loss’.

Answer 19

Stock loss is an expense that occurs when the stocktake shows less stock than is shown in the stock cards.

Question 20

RQ 11.5 // The Physical StocktakeQ3. State four reasons for a stock loss.

Answer 20

• Theft• Damage• An over-supply to customers• An under-supply by suppliers• A recording error in the stock cards or during the stocktake

Question 21

RQ 11.5 // The Physical StocktakeQ4. Explain how a stock loss is classified in the Income Statement.

Answer 21

Stock loss is classified as an expense in the Income Statement because it is an outflow of an economic benefit in the form of a decrease in assets (Stock) that results in a decrease in owner’s equity.

Question 22

RQ 11.5 // The Physical StocktakeQ5. Explain the effect of a stock loss on the accounting equation.

Answer 22

Assets - Decrease (Stock) Liabilities - No effect Owner’s Equity - Decrease (Stock loss expense decreases Profit)

Question 23

RQ 11.5 // The Physical StocktakeQ6. Define the term ‘stock gain’.

Answer 23

A stock gain is a revenue that occurs when the stocktake shows more stock on hand than is shown in the stock card.

Question 24

RQ 11.5 // The Physical StocktakeQ7. State two reasons for a stock gain.

Answer 24

• An undersupply to customers• An oversupply by suppliers• A recording error in the stock cards or during the stocktake

Question 25

RQ 11.5 // The Physical StocktakeQ8. Explain how a stock gain is classified in the Income Statement.

Answer 25

A stock gain is classified as a revenue in the Income Statement because it is an inflow of an economic benefit in the form of an increase in assets (Stock) that results in an increase in Owner’s Equity.

Question 26

RQ 11.5 // The Physical StocktakeQ9. Explain the effect of a stock gain on the accounting equation.

Answer 26

Assets - Increase (Stock) Liabilities - No effectOwner’s Equity - Increase (Stock gain revenue increases Profit)

Question 27

RQ 11.6 // Benefits of the Perceptual SystemQ1. Explain the benefits of the perpetual system of stock recording.

Answer 27

• It assists in the re-ordering of stock. The stock cards will show when the minimum stock levels have been reached so an order can be placed with the supplier.• Fast-moving and slow-moving lines of stock can be identified. The owner can examine the stock cards to identify the items that are selling well and those that are not and adjust stock purchases accordingly.• Stock losses and gains can be detected by comparing the balances of the stock cards against the physical stocktake.• Interim reports can be prepared without the need for a physical stocktake. The level of stock on hand and the amount of Cost of Sales can be determined from the stock cards (although the level of stock loss or gain will not be known).

Question 28

RQ 11.6 // Benefits of the Perceptual SystemQ2. Explain how ICT can improve the use of the perpetual inventory system.

Answer 28

The use of ICT allows goods to be scanned as they move in and out of the business with the software automatically updating the stock records, and even automatically reordering when stock levels are low. Information such as sales and stock levels can be determined quickly to allow the owner to make informed and timely decisions.