Unit 2 Acc Chapter 12 Review Questions

Question 1

RQ 12.2 // Cost of SalesQ1. Define the term ‘Cost of Sales’.

Answer 1

Cost of Sales is the expense incurred when stock flows out of the business due to a sale.

Question 2

RQ 12.2 // Cost of SalesQ2. Explain how the stock cards can be used to determine Cost of Sales.

Answer 2

Cost of Sales is determined by adding together the value of each sale recorded in the OUT column section of the stock cards.

Question 3

RQ 12.2 // Cost of SalesQ3. State three items that might be recorded in the OUT column of a stock card, but are not included in the calculation of Cost of Sales.

Answer 3

• Drawings of stock• Advertising of stock• Stock loss

Question 4

RQ 12.3 // Income Statement for Trading FirmsQ1. Define the term ‘Cost of Goods Sold’.

Answer 4

Cost of Goods Sold is a heading used in the Income Statement for all costs incurred to bring the stock into a location and condition ready for sale.

Question 5

RQ 12.3 // Income Statement for Trading FirmsQ2. State four expense items that may be reported as part of Cost of Goods Sold.

Answer 5

• Cost of Sales• Freight/cartage/delivery inwards• Import duties• Custom duties• Modifications• Packaging• Buying expenses.

Question 6

RQ 12.3 // Income Statement for Trading FirmsQ3. Explain why purchase of stock is not reported as an expense.

Answer 6

The purchase of stock does not involve an outflow of economic benefit but rather has future economic benefit. The cash purchase of stock also does not decrease assets overall as it is swapping one asset (Bank) for another (Stock), and it also does not decrease owner’s equity.

Question 7

RQ 12.3 // Income Statement for Trading FirmsQ4. Explain why it is important to identify Gross Profit in the Income Statement of a trading business.

Answer 7

The owner must be able to assess whether the selling price is high enough (has sufficient mark-up) to cover the cost of the stock and all the firm’s other expenses, and still provide for Net Profit. This is why the Income Statement identifies Gross Profit.

Question 8

RQ 12.3 // Income Statement for Trading FirmsQ5. Explain how a stock loss or gain is determined.

Answer 8

A stock loss or gain is determined by comparing the stock card figures to the physical stocktake.

Question 9

RQ 12.3 // Income Statement for Trading FirmsQ6. Explain why stock loss and gain are reported separately in the Income Statement.

Answer 9

They are reported separately in order for the owner to identify problems with stock management so that corrective action can be taken.

Question 10

RQ 12.3 // Income Statement for Trading FirmsQ7. State the effect on Adjusted Gross Profit of a stock loss and stock gain.

Answer 10

• stock loss – decreases Adjusted Gross Profit• stock gain – increases Adjusted Gross Profit.

Question 11

RQ 12.4 // Balance Sheet for a Trading BusinessQ1. Explain how stock is classified in the Balance Sheet.

Answer 11

Stock is classified as a current asset because it is a resource controlled by the business from which future economic benefits are expected (when the stock is sold) in the next 12 months.

Question 12

RQ 12.4 // Balance Sheet for a Trading BusinessQ2. Referring to one Qualitative Characteristic, explain why the Balance Sheet does not list the balance of every line of stock.

Answer 12

Relevance dictates that there is no need to report the balance of each individual line of stock, as this information will not be useful for the types of decisions that are informed by the Balance Sheet. Instead, a single figure for stock will be reported

Question 13

RQ 12.4 // Balance Sheet for a Trading BusinessQ3. Explain the role of a stock sheet.

Answer 13

A stock sheet is a listing of the quantity and value of each line of stock on hand and is used to determine the single figure for stock on hand in the Balance Sheet.

Question 14

RQ 12.5 // Stock Turnover (STO)Q1. State two ways stock cards can be used to manage stock.

Answer 14

• Individual lines of stock can be monitored so that fast-moving and slow-moving lines can be identified• Reorder points can be identified so that stock never runs out and lost sales can be minimised.

Question 15

RQ 12.5 // Stock Turnover (STO)Q2. State what is measured by Stock Turnover (STO).

Answer 15

Stock Turnover is an efficiency indicator that measures the average number of days it takes for a business to convert its stock into sales.

Question 16

RQ 12.5 // Stock Turnover (STO)Q3. Show the formula to calculate Stock Turnover.

Answer 16

Stock Turnover = Average stock x 365 ———————————— Cost of Goods Sold

Question 17

RQ 12.5 // Stock Turnover (STO)Q4. Explain why fast Stock Turnover is beneficial for liquidity.

Answer 17

It is vitally important that a firm sells its stock quickly so it has the cash to meet its short-term obligations in time, and so that it can purchase more stock to generate more sales.

Question 18

RQ 12.5 // Stock Turnover (STO)Q5. State three benchmarks that could be used to assess Stock Turnover.

Answer 18

• Past figures for Stock Turnover – established trends• Budgeted Stock Turnover – predicted figures or targets that were hoped to be achieved• Stock Turnover of similar businesses or industry averages

Question 19

RQ 12.5 // Stock Turnover (STO)Q6. State two actions that could be implemented to improve Stock Turnover.

Answer 19

• Increasing the level of sales to increase Cost of Goods Sold • Decreasing stock holdings to reduce the amount of stock on hand

Question 20

RQ 12.6 // Stock ManagementQ1. Explain the strategies that could be employed to manage stock

Answer 20

• Set minimum and maximum stock levels – A minimum stock level ensures the business has enough stock to meet demand and avoid lost sales. It also assists in reordering when stock levels are getting low. Setting maximum stock levels ensures that the business does not have too much of a particular item, which may lead to additional storage costs, spoilage, obsolescence or being out of fashion.• Rotate stock – Rotating stock so that the older stock is moved to the front avoids spoilage and wastage, particularly for perishable stock.• Ensure stock is up to date – Items affected by fashion or technology must be the most current version available. Older and out-of-date versions should be discontinued for quick sale.• Maintain an appropriate stock mix – By examining the stock cards the owner will be able to identify those lines that are selling well and those that are not. The owner would be wise to expand those lines that are selling well and to discontinue/discount those stock lines that are not.• Promote the sale of complementary goods – These are ‘add-on sales’ that are generated to support the original item sold. For example, a business selling tents may also position sleeping bags, inflatable mattresses and gaslights nearby to encourage more sales.• Effective marketing – Strategies such as advertising and other promotions will hopefully lead to increased sales and faster Stock Turnover.