Workbook Chapter 11 Flashcards
For each of the following transactions, state the effect on each element of the accounting equation:
a Paid $100 plus $10 GST for the purchase of stock.
b Sold stock for $550 including $50 GST. (The stock had a cost price of $200.)
c Cash purchase of stock for $330 (inclusive of GST).
d Stock purchased for $400 was sold for $715 including $65 GST.
A)ASSETS AND LIABILITIES DECREASE BY 10
B) ASSETS INCREASE BY 350, LIABILITIES INCREASE BY 50, OWNERS EQUITY INCREASES BY 300
C) ASSETS AND LIABILITIES DECREASE BY 30
D) ASSETS INCREASE BY 315, LIABILITIES INCREASE BY 65, OWNERS EQUITY INCREASES BY 250
Why isn’t every cheque recorded in a stock card
Cheques would be used for other payments too (not just this line of stock) such as wages / other expenses / other stock lines
Explain why the GST on purchases of stock is not recorded in the stock card.
The GST does not affect the valuation of the stock:
it does not affect the economic benefit represented by the stock. (Rather, any GST on purchases decreases any GST liability.)
Explain how the sale of stock creates an expense.
When a watch is sold, the cost of the watch is recognised as an expense (Cost of Sales): this represents an outflow of economic benefits (stock) which decreases assets (Stock on hand) and decreases Owner’s equity.
Referring to one Qualitative Characteristic, explain the role of a physical stocktake.
Reliability. A stocktake verifies the stock records (stock cards) of the business, in the process detecting any stock losses or gains, to ensure that the information provided is accurate and free from bias.
State two reasons for a potential difference between the stock cards and the stocktake.
Reason 1
Theft OR Damage
Reason 2
Oversupply to customer OR undersupply by supplier
Apart from the detection of stock loss or gain, state one benefit of recording transactions in stock cards.
Identifying fast-moving or slow-moving stock
Identifying the need to reorder stock
Identifying the cost price of stock sold (Cost of Sales)
Explain why stock loss is classi ed as an expense.
Stock loss is the consumption of an economic benefit
that causes a decrease in assets (stock) and
results in a decrease in owner’s equity (and it is not Drawings).
Explain one way in which stock cards can be used to improve the management of stock.
Stock cards can improve the management of stock by indicating which lines of stock are fast selling and which are slow selling. The business could alter its stock mix to ensure it held more of those items that sell quickly and phase out the items that do not, thus allowing it to improve its stock turnover.
Referring to one Accounting Principle, explain why the desks are not recorded in the stock card at their selling price.
Historical Cost. The selling price is not the original purchase price, and cannot be verified by a source document.
Explain one way stock cards could be used to reduce stock loss.
Stock cards provide an indication of what stock should be present in the business and allows for spot checks to be carried out on a regular basis to highlight quickly if any stock is missing.
State two benefits of recording transactions in stock cards.
Identifying fast-moving or slow-moving stock
identifying the need to reorder
Referring to one Accounting Principle, explain why owner drawings of stuck must be recorded in the stock card.
Entity. The business and the owner are separate accounting entities and thus transactions between them must be recorded.
Gia took business stock home for her own personal use. Therefore, this transaction must be recorded in the records of Lucchetti Paints.
Explain the effect on Owner’s Equity if drawings of stock wasn’t reported in the stock cards.
There would be no overall effect on owner’s equity if this transaction was not recorded as it would be picked up by the physical stock take as a stock loss. Therefore, instead of being recorded as drawings it would be recorded as stock loss, which would also have the same negative effect on owner’s equity.
