Unit 2, test 2

Question 1

Impact of credit purchase of Inventory on the accounting equation

Answer 1

A: Inventory increase

L: Decrease in GST payable and increase in accounts payable

OE: No effect

Question 2

Impact of a payment to an account payable on the accounting equation

Answer 2

A: Bank decrease

L: Accounts payable decrease

OE: no effect

Question 3

Impact of a purchase return on the accounting equation

Answer 3

A: Inventory decrease

L: Accounts payable decrease and GST payable increase

OE: No effect

Question 4

Formula for accounts payable

Answer 4

Accounts payable at the start
+ credit purchase including GST
- payments to accounts payable
- purchase returns including GST
Accounts payable balance at end

Question 5

Discount revenue

Answer 5

Is a discount as there is a decrease in present obligation of the business to its accounts payable (a liability) that will lead to an increase in owner’s equity, that is not a capital contribution.

Question 6

Impact of payment for accounts payable with a discount revenue

Answer 6

A: Bank decrease

L: Accounts payable decrease

OE: Net profit increase

Question 7

Benefits of discounts

Answer 7

Need lesh cash to settle AP

Dicount revenue increases net profit

Question 8

Cons of discounts

Answer 8

Paying AP can have negative impact on liquidity as cash is unavailable to make other payments

Paying AP fast means cash sales have to be generated quickly

Question 9

Statement of accounts

Answer 9

A statement provided to a credit customers to give details of transactions that have occurred over a specific period of time and the resulting balance owing at the end of that period

Question 10

Benefits of subsidiary records for accounts payable

Answer 10

Detection of errors
- being able to compare balances in the schedule of accounts payable against the accounts payable formula and the subsidiary records for each account payable against the statement of accounts

Ease of reporting
- the total from schedule of AP can be used to report in the balance sheet

Management of accounts payable
- records of individual accounts payable ensure better management

Question 11

Impact of a credit sale of inventory on the accounting equation

Answer 11

A: Inventory decrease by 1120
Accounts receivable increase by 1232

L: GST payable increase by 112

OE: Revenue increase
Expense increase
Net profit increase

Question 12

Impact of a receipt from an account receivable on the accounting equation

Answer 12

A: Bank increase by 1000
Accounts receivable decrease by 1000

L: N/E

OE: N/E

Question 13

Impact of a receipt, including a discount on the accounting equation

Answer 13

A: Accounts receivable increase
Bank increases

L: No effect

OE: Expenses increase
(net profit decrease)

Question 14

Discount expense

Answer 14

An expense in the form of a decrease in assets (as this is a reduction in the potential inflow of an economic resource in the form of the amount paid in cash by a accounts receivable) and a decrease in owner’s equity, which is not drawings

Question 15

Accounts receivable formula

Answer 15

Accounts receivable balance at the start
+ Plus credit sales including GST
- Minus sales returns, including GST
- Minus accounts receivable including discount
Minus bad debts including GST

Question 16

Bad debt

Answer 16

An expense incurred when a debt is written off because it is deemed to be irrecoverable

Irrecoverable = the AR is never going to pay it back, they are in liquidation, administration or have been declared bankrupt

Question 17

Impact of bad debt on the accounting equation

Answer 17

A: Accounts receivable decrease

L: GST payable decrease

Owner’s equity: Expense (bad debt) increase
(Overall net profit decreases)

Question 18

Accounts payable formula

Answer 18

AP balance at the start
+ Credit purchases, including GST
- Payments to AR
- Purchase returns, including GST

Question 19

Accounts receivable formula

Answer 19

AR balance at the start
+ Credit sales, including GST
- Receipts from AR
- Sales return, including GST
- Bad debts including GST

Question 20

GST payable balance

Answer 20

GST balance at the start
+ GST received
- GST paid
+ GST received from credit sales
- GST paid to credit purchases
+ GST on purchase returns
- GST on sales return
- GST on bad debts
- GST settlement OR + GST refund

Question 21

What is the accounts payable turnover (APTO) definition

Answer 21

An efficiency indicator that measures the average number of days it takes for a business to pay its accounts payable

Question 22

Accounts payable turnover equation

Answer 22

(Average accounts payable / Net credit purchases plus GST) x 365

Question 23

Benchmarks for APTO AND ARTO

Answer 23

Previous periods
Budgeted performance
Similar businesses or industry averages

Question 24

Strategies for managing accounts payable

Answer 24

1) Develop a strong relationship with each supplier to access good prices, better credit terms and good-quality of inventory

2) Pay within, but as close as possible to credit terms

3) Pay early to earn a discount (i.e discount revenue)

4) Appoint an accounts payable officer/clerk

5) Communicate in a timely fashion

Question 25

What is the account payable turnover (ARTO) definition?

Answer 25

An efficiency indicator that measures the average number of days it takes a business to collect cash from its accounts receivable

Question 26

Account receivable turnover equation

Answer 26

(Average accounts receivable/net credit sales plus GST) x 365

Question 27

Strategies for managing accounts receivable

Answer 27

1) Offer a discount for a quick settlement

2) Send invoices promptly

3) Conduct extensive credit checks

4) Send reminder notices

5) Threaten legal action

6) Employ a debt collection agency

7) Deny access to credit facilities

8) Appoint an accounts receivable officer/clerk