SAC 1B revision

Question 1

How can a statement of account be used to maintain Verifiability and Faithful Representation?

Answer 1

The statement of account can be checked against the records of the business, to ensure that all transactions are the same. If not, the business can contact the supplier to rectify the error in order to ensure that the records of the business are complete, free from bias and material error, and all knowledgeable and independent observers can come to the same conclusion that it is faithfully represented.

Question 2

Main reasons for returns

Answer 2

Faulty goods, Damaged in transit, too many ordered, item does not match description, wrong size/type etc.

Question 3

What would sales returns be classified as?

Answer 3

Sales returns are recorded as a negative revenue, as they are an decrease in assets (accounts receivable) that leads to a decrease in owner’s equity

Question 4

Why is it important to report sales returns separately?

Answer 4

Sales returns are an important indicator of quality and suitability of inventory, but in order to investigate the cause of returns, the owner must first know the level. Recording it in a separate ledger allows it to be reported separately in the income statement. They are also an indicator of the level of customer satisfaction.

Question 5

sales returns: financial, legal and ethical considerations

Answer 5

Financially, Sales returns decrease profit, so there is an inscentive to keep sales returns to a minimum, by providing good quality products to customers. Legally, Damaged or faulty inventory MUST be accepted for return, provided the customer has proof of purchase.
Ethically, accepting returns due to an order of wrong items, or too many items, or simply a change of mind is up to the business. Accepting returns may lead to greater sales in the future as customers know they can rely on a return if the product is unsuitable.

Question 6

Cost of accepting sales return

Answer 6

Reduction in profit, extra inventory management costs e.g. repackaging.

Question 7

Benefit of accepting sales return

Answer 7

Higher goodwill –> higher future sales

Question 8

Cost of not accepting sales return

Answer 8

Lower goodwill –> lower future sales, possible legal consequences

Question 9

Benefit of not accepting sales return

Answer 9

Retention of profit, no extra inventory management costs

Question 10

Cost of paying Accounts Payable early

Answer 10

Cash is unavailable to make other payments.
Cash is paid to Accounts Payable faster, meaning less time to generate cash from sales

Question 11

Benefit of paying Accounts Payable early

Answer 11

Can utilise discount - less cash paid to the account payable means more cash on hand to make other payments. Net profit is increased

Question 12

..Cost of offering discount

Answer 12

Less cash is received from the account receivable, resulting in less cash on hand. Net profit decreased

Question 13

Benefit of offering discount

Answer 13

Cash is recieved faster –> available to use for other payments
Sales may increase, as customers may be more willing to buy from somewhere that offers discounts
Bad debts may decrease as customers are incentivised to pay early

Question 14

ARTO

Answer 14

The average number of days it takes to receive cash from Accounts Receivable

Question 15

APTO

Answer 15

The average number of days it takes to pay Accounts Payable

Question 16

Impact of slow ARTO on APTO

Answer 16

If cash is not available from Accounts Receivable, APTO can suffer, which may lead to the negative consequences of slow APTO, ranging from loss of discounts to loss of credit facilities

Question 17

Impact of slow ARTO on liquidity

Answer 17

If ARTO is slow, cash may not be available to meet short term debts as they fall due

Question 18

Impact of fast APTO on liquidity

Answer 18

If APTO is too fast, cash is paid sooner, and may not be available to meet short term debts as they fall due

Question 19

Main Benchmarks

Answer 19

Credit terms, Past performance, industry average, budget expectations

Question 20

Strategies to manage Accounts Receivable

Answer 20

Offer discounts - encourages to pay early, but means less cash is received
Threaten legal action - makes them more likely to pay early, however often a long and costly process
Employ Accounts receivable Clerk - leaves responsibliity to follow up with accounts receivable to a person, however we must pay them a wage, decreasing net profit