Unit 4 Acc Chapter 13 Review Questions

Question 1

RQ 13.1 // Returns of Stock

Q1. Explain the difference between a purchase return and a sales return.

Answer 1

A purchase return occurs when stock is returned by our firm to a supplier; a sales return occurs when stock is returned to our firm by a customer.

Question 2

RQ 13.1 // Returns of Stock

Q2. State four reasons why stock may be returned to a supplier.

Answer 2

• The stock is faulty/damaged.
• The stock is the wrong size/colour/shape/model.
• Too many items of stock were purchased.
• The customers have simply changed their mind.

Question 3

RQ 13.1 // Returns of Stock

Q3. Explain one benefit that may be derived by accepting returns from customers who change their mind.

Answer 3

Businesses that accept returns from customers may actually generate greater sales, with customers more willing to buy if they know they can return the product if it turns out to be unsuitable.

Question 4

RQ 13.2 // Credit Notes

Q1. Referring to one qualitative characteristic, explain the importance of source documents in the accounting process.

Answer 4

Reliability states that in order for accounting reports to be free from bias, all transactions should be verified by use of a source document.

Question 5

RQ 13.2 // Credit Notes

Q2. State the five pieces of data that must be noted on a credit note.

Answer 5

• the type of stock returned
• the quantity of stock returned
• the name of the customer who is returning the stock
• the reason for the return - the unit cost

Question 6

RQ 13.2 // Credit Notes

Q3. Explain how the credit note can be used to distinguish a purchase return from a sales return.

Answer 6

The business returning the stock is identified in the middle of the credit note; the business receiving the stock as a return is identified at the top of the document.

Question 7

RQ 13.3 // Recording Purchase Returns to Creditors

Q1. Explain how the cost price of stock is determined when a purchase return is recorded in the stock card.

Answer 7

The credit note must identify the cost price of the stock that is being returned. Although it is recorded in the OUT column of a stock card, FIFO is not applied to purchase returns.

Question 8

RQ 13.3 // Recording Purchase Returns to Creditors

Q2. Show the General Journal entries necessary to record a purchase return.

Answer 8

Creditor’s Control

GENERAL LEDGER: Debit

SUBSIDIARY LEDGER : nothing

Creditor - Name

GENERAL LEDGER: nothing

SUBSIDIARY LEDGER : Debit

Stock Control & GST Clearing:

GENERAL LEDGER: Credit both

SUBSIDIARY LEDGER : nothing Tyres returned to supplier – wrong type (Cr. note x)

Question 9

RQ 13.3 // Recording Purchase Returns to Creditors

Q3. State one reason why the term ‘Purchase Return’ is not used as a cross-reference in the Creditors Control account.

Answer 9

There is no ledger account called ‘Purchase Return’, although this describes the transaction.

Rather the debit entry is a combination of ‘Stock Control’ and ‘GST Clearing’. We no longer owe the creditor for stock, and we no longer owe the creditor for the GST on that stock.

Question 10

RQ 13.3 // Recording Purchase Returns to Creditors

Q4. State the effect of a purchase return on the accounting equation.

Answer 10

ASSETS: Decrease (Stock Control)

LIABILITIES: Decrease (decrease Creditors Control, increase GST Clearing)

OWNER’S EQUITY: No effect

Question 11

RQ 13.3 // Recording Purchase Returns to Creditors Q5. Explain how a purchase return is reported in the financial statements.

Answer 11

Because a purchase return does not affect any revenue or expense items, and does not involve a cash flow, it will not be reported in either the Cash Flow Statement or the Income Statement. It will not be reported in the Balance Sheet but rather change the balances of Stock Control, GST Clearing and Creditors Control.

Question 12

RQ 13.4 // Recording Sales Returns From Trade Debtors Q1. Explain how the cost price of stock is determined when a sales return is recorded in the stock card.

Answer 12

A sales return should value stock at the cost price used in the most recent transaction in the Out column of the stock card. The key principle behind this recording is that the stock card would be returned to the position it would have been if the sale had never taken place.

Question 13

RQ 13.4 // Recording Sales Returns From Trade Debtors Q2. Show the General Journal entries necessary to record a sales return.

Answer 13

xxx

Question 14

RQ 13.4 // Recording Sales Returns From Trade Debtors Q3. Explain why a sales return leads to a reduction in the GST liability.

Answer 14

A sales return reduces the GST liability owed to the ATO as this is GST we will never receive (due to the decrease in amount owed by the debtor), and therefore now do not owe to the ATO.

Question 15

RQ 13.4 // Recording Sales Returns From Trade Debtors Q4. State the effect of a sales return on the accounting equation.

Answer 15

ASSETS: Decrease (decrease Debtors Control, increase Stock Control) LIABILITIES: Decrease (GST Clearing) OWNER’S EQUITY: Decrease (Sales return less Cost of Sales = less Net Profit)

Question 16

RQ 13.5 // Reporting Sales Returns Q1. Explain why Sales Returns are reported separately in the Income Statement.

Answer 16

Sales Returns are recorded in their own separate ledger account and reported separately in the Income Statement so the owner is made aware of the level of Sales Returns and can investigate the cause of a high Sales Return figure.

Question 17

RQ 13.5 // Reporting Sales Returns Q2. Suggest two reasons for high Sales Returns.

Answer 17

• goods are of inferior quality - customers have been provided with goods that did not suit their purpose

Question 18

RQ 13.5 // Reporting Sales Returns Q3. Show how Net Sales is reported in the Income Statement.

Answer 18

REVENUE: Sales : 51 000 Less Sales Return : 9000 Total: 50 910

Question 19

RQ 13.5 // Reporting Sales Returns Q4. Explain why the cost price of a sales return is not reported separately in the Income Statement.

Answer 19

The effect of any sales returns will be recorded directly in the Cost of Sales account, and accounted for in the figure closed to the Profit and Loss Summary account. Thus, the ‘net’ figure for Cost of Sales is reported in the Income Statement.