Adjustments

Question 1

What is inventory

Answer 1

Cost of unsold goods

Question 2

Gross profit equation

Answer 2

Sales revenue - cost of sales

Question 3

Revenue equation

Answer 3

Units sold x unit price

Question 4

Closing inventory equation

Answer 4

Units unsold by end of year x unit cost

Question 5

Cost of sales equation

Answer 5

Units sold x unit cost

Question 6

cost of goods available

Answer 6

(Opening inventory + purchase costs) - closing inventory

Question 7

What is matching concept

Answer 7

Costs should be set against the revenue they generate (Cost of sales and revenue are matched together)

Question 8

What are the valuation issue of inventory

Answer 8

If goods are damaged or obsolete they may need to be sold at a price below cost

Question 9

What is prudence concept

Answer 9

Do not overstate assets and understand liabilities

Question 10

Relationship between inventory and net realisable value

Answer 10

Take the lower of Inventory and NRV

Question 11

What is net realisable value

Answer 11

Sale value - costs incurred in settling inventory

Question 12

What happens when goods are indistinguishable

Answer 12

When assets have changed over time businesses must estimate inventory costs

Question 13

What are the three assumptions about physical flow of inventories

Answer 13

FIFO, LIFO, AVCO

Question 14

What is FIFO

Answer 14

First in, first out

Question 15

What is LIFO

Answer 15

Last in, first out

Question 16

What is AVCO

Answer 16

weighted average, cost of sales comprises of an average cost of all purchases

Question 17

What is capital expenditure

Answer 17

Amount spent to acquire or improve a non-current, long-term asset such as equipment or buildings

Question 18

What is revenue expenditure

Answer 18

Amount that is expenses immediately so is matched with the revenues of current accounting period

Question 19

What is depreciation

Answer 19

The allocation of the cost of a non-current asset over the accounting periods that comprise its useful economic life to the business, reflecting the amount that I used up in these periods.

Question 20

What is the point of depreciation

Answer 20

To allocate the cost of each year with the years revenue

Question 21

What are reasons for depreciation

Answer 21

Wear and tear from use, passing of time, obsolescence

Question 22

What is a depreciation expense

Answer 22

The amount of an asset’s cost which is allocated from the SOFP to the SOPOL to match against the revenue the asset generates

Question 23

When is straight line depreciation applied

Answer 23

If the business believes asset is used evenly across useful life

Question 24

What is the straight line depreciation equation

Answer 24

(Historic cost - residual value) / Useful life in years

Question 25

What is reducing balance depreciation

Answer 25

Gives a decreasing annual amount, applied the asset depreciates faster in earlier years of life

Question 26

Reducing Balance equation

Answer 26

Rate % x NBV or asset at the start of the year

Question 27

How to commute depreciation steps

Answer 27

1. Which assets 2. Historical cost 3. Expected useful economic life 4. Estimated residual value 5. Method

Question 28

How to decide which assets should the business depreciate

Answer 28

1. Those expected to be used in more than one accounting period 2. Have a limited useful life 3. Are held for use in production/ supply of goods/ rental/ administrative purposes

Question 29

What is the historical cost

Answer 29

Cost of acquisition

Question 30

What is the expected useful economic life?

Answer 30

The period an asset is expected to be available for use by the entity

Question 31

What is estimated residual value at the end of its life

Answer 31

How much the entity would obtain from disposal of the asset after deducting costs of disposal

Question 32

What is closing inventory on the SOFP

Answer 32

Increase in Asset - DR

Question 33

What is closing inventory on the SOPOL as a calculation of gross profit

Answer 33

Decreased expense - CR

Question 34

What is depreciation on the SOFP

Answer 34

Decrease in assets CR

Question 35

What is depreciation on the SOPOL

Answer 35

Increased expense DR