Unit 3 Acc Chapter 08 Review Questions Flashcards
RQ 8.1 // Trading Firms & Stock
Q1. Define the term ‘trading firm’.
A trading firm is a firm that purchases goods in order to resell them at a profit.
RQ 8.1 // Trading Firms & Stock
Q2. Define the term ‘stock’.
Stock refers to goods purchased by a trading firm for the purpose of resale at a profit.
RQ 8.1 // Trading Firms & Stock
Q3. Explain how stock should be classified in the Balance Sheet.
Stock should be classified as a current asset because it is a resource controlled by the entity from which future economic benefit is expected to flow to the entity within the next 12 months.
RQ 8.1 // Trading Firms & Stock
Q4. State two reasons why stock is important to a trading firm.
● Stock is a firm’s main source of revenue, and thus the key to its ability to earn profit.
● Stock is likely to be one of the most significant assets the firm controls.
RQ 8.1 // Trading Firms & Stock
Q5. State three reasons why stock is considered to be a vulnerable asset.
Stock is considered a vulnerable asset as it can be: ● damage ● spoilage ● theft ● changes in tastes and fashions.
RQ 8.2 // The Stock Control Account
Q1. Explain the role of the Stock Control account.
The Stock Control account summarises all movements of stock in a firm in the General Ledger.
RQ 8.2 // The Stock Control Account
Q2. Identify two transactions that would appear on the debit side of the Stock Control account.
● cash purchases
● credit purchases
● stock gain
RQ 8.2 // The Stock Control Account
Q3. Identify four transactions that would appear on the credit side of the Stock Control account.
● cash sales ● credit sales ● drawing of stock ● advertising of stock ● stock loss
RQ 8.3 // Stock Cards
Q1. Explain the relationship between the Stock Control account and the stock cards.
The Stock Control account is used to summarise all transactions affecting stock, with information relating to individual lines of stock, including details of stock transactions, recorded in stock cards.
RQ 8.3 // Stock Cards
Q2. Identify four details that will be provided in the top portion of a stock card but not in the Stock Control account.
● a description of the item
● the stock code
● the location of the item
● the name of the supplier
RQ 8.3 // Stock Cards
Q3. Identify three details that are provided when transactions are recorded in the stock card but are not provided in the Stock Control account.
● the source document
● the quantity of stock
● the unit cost of stock
RQ 8.3 // Stock Cards
Q4. State how many stock cards a typical trading firm would require. Beware: This is a trick question!
A typical trading firm would require a stock card for every line of stock, including one for every different colour and for every different size.
Therefore, the number of stock cards depends on how many lines of stock a trading firm possesses.
RQ 8.4 // Recording Transactions in Stock Cards
Q1. Explain why GST does not affect the valuation of a stock purchase.
GST does not affect the valuation of stock because it does not affect the economic benefit gain from the stock.
Instead, the GST is an additional amount collected or paid on behalf of the ATO and will only affect the GST owed to the ATO.
RQ 8.4 // Recording Transactions in Stock Cards
Q2. State the effect on the balance of a transaction recorded in the:
- in column
- out column
● In column – increases the balance
● Out column – decreases the balance.
RQ 8.4 // Recording Transactions in Stock Cards
Q3. Explain why the cost price is not shown on the source document that provides the evidence of a sale.
The cost price is not revealed as this protects the gross profit on the sale; customers who are aware of the mark-up have a tendency to haggle harder for price reductions.
RQ 8.4 // Recording Transactions in Stock Cards
Q4. Explain how the stock card is used to determine the Cost of Sales for each transaction.
The amount recorded in the ‘Out’ Cost Value column represents the cost of sales for the transaction.
This is determined by applying the First In, First Out (FIFO) approach using the cost price of the units remaining in the Balance column of the previous transaction.
RQ 8.4 // Recording Transactions in Stock Cards
Q5. State three reasons why a small business might choose to value its stock using the FIFO (First In, First Out) assumption.
● It is not possible for some types of stock to label every item to identify its cost price; for example, petrol.
● For other items of stock it may be possible, but not practical: a fruit shop would find it impractical to label each grape, for example.
● Even where identifying the cost is both possible and practical, the owner may still decide it is not worth the time, effort and cost to label every item of stock.
RQ 8.4 // Recording Transactions in Stock Cards
Q6. Explain the FIFO assumption as it applies to stock cards.
Under this assumption, the business assumes that the stock that was purchased first will be sold first, even though the business may have no way of knowing for certain.
Without marking stock, there is no way of knowing the cost price of the stock that has been sold, making FIFO an acceptable and necessary assumption.
RQ 8.4 // Recording Transactions in Stock Cards
Q7. Identify three transactions to which the FIFO assumption must be applied.
● sales
● drawings (of stock)
● advertising (of stock)
● stock losses
RQ 8.5 // Stock Cards & Journals
Q1. Explain the importance of stock cards when sales are recorded in the special journals.
The amounts in the Value column of the Out section of the stock card represent the cost price of the sale. These amounts represent the Cost of Sales and they will be recorded in the Cost of Sales column in the special journals.
RQ 8.5 // Stock Cards & Journals
Q2. Explain the importance of stock cards when purchases are recorded in the special journals.
The amounts in the Value column of the In section of the stock card represent the cost price of the purchase. These amounts will be recorded in the special journals.
