Unit 2 Acc Chapter 14 Review Questions Flashcards
RQ 14.1 // Accounting Reports & Credit TransactionsQ1. Explain the role of accounting reports.
The role of accounting reports is to provide the owner of the business with financial information in order to aid decision-making.
RQ 14.1 // Accounting Reports & Credit TransactionsQ2. Explain what is shown in each of the three general-purpose accounting
• Statement of Receipts and Payments – shows cash receipts and payments and the change in a firm’s bank balance over a reporting period• Income Statement – shows revenues earned and expenses incurred in a particular reporting period• Balance Sheet – shows assets, liabilities and owner’s equity at a particular point in time
RQ 14.1 // Accounting Reports & Credit TransactionsQ3. Name the source documents we studied so far, and the accounting records in which they would be recorded.
• Cash receipt – Cash Receipts Journal, Debtors record (receipts from debtors) and stock card (cash sales)• Cheque butt – Cash Payments Journal, Creditors record (payments to creditors) and stock card (cash purchases)• Purchase invoice – Purchases Journal, Creditors record and stock card• Sales invoice – Sales Journal, Debtors record and stock card.
RQ 14.1 // Accounting Reports & Credit TransactionsQ4. Explain the relationship between accounting records and accounting reports.
Once transactions (source documents) are recorded in the accounting records, the summarised data from these records becomes information presented in the accounting reports.
RQ 14.2 // The Statement of a Receipts & PaymentsQ1. Explain the role of the Statement of Receipts and Payments.
The Statement of Receipts and Payments shows total cash receipts and payments and the change in a firm’s bank balance over a reporting period.
RQ 14.2 // The Statement of a Receipts & PaymentsQ2. Explain the role of cash journals in the preparation of a Statement of Receipts and Payments.
The cash journals summarise the cash transactions for a particular reporting period allowing these totals to be reported in the Statement of Receipts and Payments.
RQ 14.2 // The Statement of a Receipts & PaymentsQ3. Explain how the following items are reported in the Statement of Receipts and Payments:•capital contribution•credit sales•payments to creditors•Cost of Sales
•capital contribution – cash receipt•credit sales – not reported in the Statement of Receipts and Payments, because they do not represent a movement of cash•payments to creditors – cash payment•Cost of Sales – not reported in the Statement of Receipts and Payments as it does not involve an outflow of cash, but rather the outflow of stock.
RQ 14.3 // The Income StatementQ1. Explain why credit sales is classified as revenue.
When a credit sale is made (and the goods are provided to the customer), an inflow of future economic benefit occurs, in the form of an increase in assets (Debtors), and this leads to an increase in owner’s equity.
RQ 14.3 // The Income StatementQ2. Referring to one Qualitative Characteristic, explain why credit sales must be included in the Income Statement.
As credit sales fits the definition of revenue, despite the fact that no cash is received on the day the sale is made, it must be reported in the Income Statement. Failing to include it would understate Net Profit and thus undermine the Relevance of the Income Statement, making it less useful for decision-making.
RQ 14.3 // The Income StatementQ3. Explain why receipts from debtors is not reported in the Income Statement.
When cash is received from a debtor, there is an inflow of economic benefits (in the form of cash), but it does not increase assets overall (Debtors decreases by the same amount). A receipt from a debtor is, in fact, just swapping one asset (Debtors) for another (Bank); there is no increase in owner’s equity, so it cannot be reported as revenue, and should be omitted from the Income Statement.
RQ 14.3 // The Income StatementQ4. Explain why credit purchases and payments to creditors are not classified as expenses.
Although credit purchases lead to an overall increase in liabilities (Creditors increase more than GST payable decreases), they also lead to an increase in assets (Stock), and so there is no effect on owner’s equity as is demanded by the definition of an expense. Similarly, payments to creditors does not affect owner’s equity, but will decrease assets (Bank) and also decrease liabilities (Creditors). Therefore, payments to creditors fails to meet the definition of an expense on two counts, and so must be omitted from the Income Statement.
RQ 14.3 // The Income StatementQ5. Define the term ‘accrual accounting’.
Accrual accounting is determining profit by recognising revenues as earned when the good/service is provided, and expenses as incurred when the benefit is consumed.
RQ 14.3 // The Income StatementQ6. Explain why GST charged on credit sales is not reported in the Income Statement.
GST charged on credit sales is excluded from the Income Statement as it does not increase owner’s equity but increases the GST payable to the ATO. This is because it is charged and eventually collected (from the debtor) on behalf of the government and will increase the GST liability to the ATO.
RQ 14.4 // The Balance SheetQ1. Show the formula to calculate the balance of Debtors at the end of the period.
Debtors balance at start (From the previous Balance Sheet)+ Credit sales including GST (From the Sales Journal)– Receipts from Debtors (From the Cash Receipts Journal)= Debtors balance at end (Goes into the next Balance Sheet as a current asset)
RQ 14.4 // The Balance SheetQ2. Show the formula to calculate the balance of Creditors at the end of the period.
Creditors balance at start (From the previous Balance Sheet)+ Credit purchases including GST (From the Purchases Journal)– Payments to creditors (From the Cash Payment Journal)= Creditors balance at end (Goes into the next Balance Sheet as a current liability)
