chap 5 and 6 flashcards
(57 cards)
1
Q
What is a credit transaction?
A
A transaction that involves the exchange of goods and services on one date, followed by the exchange of cash at a later date
2
Q
What is a credit purchase?
A
A transaction that involves buying inventory on credit with the exchange of inventory on one date followed by the exchange of cash at a later date
3
Q
What is accounts payable?
A
A supplier from whom goods (usually inventory) or services have been purchased on credit, and the amount is still owing for those purchases
4
Q
How to substantiate purchase invoice?
A
- it will have other business name on top
- it will have amount paid and amount owing
- it will have credit terms
5
Q
Credit terms meaning (eg. 5/7, n/60)
A
- has 60 days to settle the net amount of the debt
- but if payment is made within 7 days, a 5% discount will be applied to the total amount
6
Q
How AA supports accounts payable?
A
- going concern: business continue to operate in the future and thus assumes business will still be operating to repay accounts payable
- accrual basis: elements of the reports are to be recognised when they satisfy definitions regardless of whether cash flowed or not (thus credit purchase despite no cash flow allows for inventory to be reported as asset and creates liability-A/P)
7
Q
How QC supports accounts payable?
A
Relevance:
* all info (amount owed to A/P and amount of inventory) that can directly influence decision making must be reported
8
Q
Why does GST on a credit purchase not affect the value of inventory purchased?
A
Because it does not affect the economic benefit of the inventory
9
Q
ethical considerations- cost price
A
(need to find balance between quality and price)
low cost price could mean:
* lower SP which could mean high sale volume
* higher markup which leads to higher GP
however low cost price could mean lower quality:
* more sales returns due to dissatisfaction
* shop elsewhere
10
Q
ethical purchasing-positives
A
- may be market advantage in purchasing items from socially and environmentally responsible suppliers (customers more willing to purchase items even sometimes at higher price)
- may be willing to buy from businesses that are regarded as honest and ethical
- this can increase both sales revenue and thus profit
11
Q
ethical purchasing-negatives
A
- social considerations- exploitations of employees (not meeting legal and industry standards)
- environmental considerations- damage to environment in production
12
Q
What is a purchase return?
A
The return to a supplier (Accounts payable) of inventory bought on credit
13
Q
Reasons for a purchase return?
A
- inventory is faulty/damaged
- inventory is wrong shape/size/colour/model
- too many items of inventory purchased
- business simply changed its mind about what inventory it intends to sell
14
Q
Features of a credit note
A
- name of person/business returning inventory (not at the top)
- original purchase price (cost price) of inventory
- quantity & type of inventory being returned (include in narration)
- reason for return (include in narration!)
15
Q
ethical considerations- purchase returns
A
- consider where damage was caused (eg. unfair to return goods where damage occured after it was received)
- consider reason for return (eg. if they returned simply cuz of change of mind)
- purchase returns can cause relationship damage
- supplier doesn’t have to accept purchase return (only has to if damage/faulty)
16
Q
What is settlement discount and why?
A
- a reduction in amount paid by a credit customer in return for early payment
- incentive offered by a supplier to get businesses to pay account early
17
Q
benefits of discount revenue
A
- less cash paid to A/P (some cash retained for other expenses)
- net profit increased
- builds stronger relationship with supplier
18
Q
costs of discount revenue
A
- cash is paid to A/P faster (may be less time to generate cash from sales)
- thus cash unavailable to make other payments
19
Q
What is a statement of account?
A
A summary of transactions a business has had with particular A/P or A/R that has already occured
20
Q
Purpose of statement of account
A
- Double checking mechanism (check with own records)
- reminder notice-encourages payments
21
Q
Statement of account- QC
A
- verifiability: allows for checking of each transaction and amount owed to Accounts payable
- faithful rep: thereby ensures records are complete and accurate and provide faithful rep of balance owed to each account payable
22
Q
What is liquidity?
A
Ability of the business to meet its short-term debts as and when they fall due
23
Q
What is accounts payable turnover?
A
The average number of days it takes for a business to pay its account payable (measure of firm’s liquidity)
24
Q
benchmarks to compare APTO to?
A
- industrial average/ competitors
- budgets
- performance in previous periods
- credit terms
25
words to describe trend
* is it faster/slower than benchmark?
* state if its satisfactory/unsatisfactory
26
Effect of unsatisfactory APTO?
* poor relationship with suppliers
* reduction in credit rating of business (making it difficult to gain credit in future)
* loss of credit facilities (forced to change supplier or pay cash in future)
* late payment fees
27
APTO: average?
* because it is an average, you need to check individual A/P to check where issue is
28
benefits: purchasing on credit
* business can obtain inventory which it can then sell to generate profit and cash, even if it has little (or no) cash on hand.
* payment terms allow the business time to sell the inventory, and collect cash from customers, before payment (to the Accounts Payable) is required, ensuring the business is able to meet this debt as it falls due.
29
disadvantages of losing credit facilities
* forced to use cash to purchase inventory, reducing its cash on hand and leaving it with no time to make sales and collect cash before making payments.
* Need to look for other suppliers willing to offer credit (change in inventory-possible not liked by customers)
30
strategies for managing A/P
* **Develop a strong relationship** with each supplier (Better prices? Better Credit Terms? Better Quality Inventory?)
* **pay within, but also as close as possible to, credit terms** (give urself time to generate cash & also allow u to settle other short term debts)
* **pay early, to earn discount revenue** (if available and affordable)
* **Check each Statement of Account against the Accounts Payable ledger accoun**t (verify what is owed)
* **appoint A/P officer/clerk** (May cost more wages, but might cause you greater benefits by having all of your
A/P under control.)
* **consider non-financial info** (personal relationship, demand for product supplier sells etc.)
* **communicate** (eg. difference in what you think you owe v supplier or unable to pay) **in a timely fashion** (maintains relationships)
31
Cash cycle
1. Credit purchase of inventory
2. Credit sale
3. Receipt from Accounts receivable
4. Payment to Accounts payable (ideally happens after cash received)
32
What is accounts receivable?
A customer to whom inventory has been sold on credit, and the amount still owing for those sales.
33
What is a credit sale?
Credit sale is a transaction that involves selling inventory on credit, with the provision of inventory on one date followed by a receipt of cash at a later date
34
AA: Credit sales
* **Accrual basis** assumption states that the Elements of the reports are recognised when they satisfy the definitions and recognition criteria so that profit is calculated by deducting expenses incurred from revenues earned in a particular Period. (credit sales, revenue is recognised as earned, even though the cash has not been received, because at the point of sale assets (Accounts Receivable) and owner’s equity increase)
* **Going concern**: the amount yet to be received from the Account Receivable can be recognised as an
asset because the Going Concern assumption assumes the business will still be operating in the future when the cash is due to be received.
35
QC: credit sale
* **relevance**: information capable of making a difference to decision-making (specifically, the Sales revenue earned and the amount owed to the business by the Account Receivable) is included in the financial statements.
36
Sales invoice
A source document used to verify a credit sale of inventory to
an accounts receivable (this is issued to the customer)
37
Why does sales invoice not include cost price?
Seller does not want to disclose to its customers the mark-up it has applied for fear that the customers will feel empowered to negotiate vigorously for a lower selling price.
38
How GST on credit sale affects GST owed to ATO?
GST on a credit sale is charged to the customer on behalf of the ATO, and therefore owed to the ATO, so it increases its GST liability.
39
ethical considerations- selling inventory on credit
* **Nature of goods its selling**: recognising legal and ethical obligations to provide goods for sale that are safe and socially/environmentally responsible. (product itself and production) can generate sales & profit
* **customer's capacity to pay**: customers who cannot make repayments may negatively affect cash received and profit but also lead to bigger problems in society and the economy itself.
40
Sales return
The return by a customer (Account Receivable) of inventory sold on credit
41
Why does sales return have its own ledger?
* can be important indicator of the **quality** and **suitability** of inventory being sold.
* thus owner must first know the level of sales returns in a given Period.
* Recording a sales return in its own separate ledger account allows this information to be reported separately in the Income Statement, and thus assessed and managed by the owner
42
How to minimise sales returns?
By maintaining customer satisfaction:
* selling good quality products
* providing accurate info to customers (via good signage and well trained and knowledgeable staff)
43
When is business legal obligated to accept sales return?
* Damaged or faulty inventory (product not fit for intended purpose) must be accepted for return, provided the customer has the source document as proof of purchase, and business is satisfied the fault lies with the product rather than with how it was used.
44
Cost v benefits: accepting sales returns
Costs:
* reduction in profit
* extra inventory management costs (eg. repacking)
* inability to re-sell (at current price)
benefits:
* higher 'goodwill' from future and current customers
* higher future sales
45
Cost v benefits: NOT accepting sales returns
Costs:
* lower goodwill from future and current customers
* lower future sales
* costs of dealing with ongoing complaints
* possible legal consequences
Benefits:
* retention of profit
* no extra inventory management costs
46
relationship b/w sales & purchase returns
* if item damaged, may return to supplier
* not all items returned to supplier
* require separate credit note from supplier
47
Discount expense
* an expense in the form of a decrease in assets (Accounts Receivable) and owner’s equity (net profit)
* incurred when cash is received early from Accounts Receivable
48
Benefits- settlement discount
* Cash is received faster from Accounts Receivable, making it available for use to make other payments (and take advantage of any discounts offered by Accounts Payable)
* Sales may increase as customers may be more willing to buy from a business that offers discounts.
* Bad debts may decrease as customers pay early rather than leave debts unpaid for long periods of time.
49
Costs- settlement discount
* Less cash is received from Accounts Receivable because the discount reduces the amount the Account Receivable has to pay.
* Net Profit is decreased
50
Purpose of statement of account (AR)
* It can be checked against the original source documents & general ledger which provide evidence of the transactions thus helps internal control
* also helps prompt payment
51
QC- statement of account (AR)
* invites each Account Receivable to check their own records and notify the business about any discrepancies, providing its own form of Faithful representation.
* the supplier is able to verify that the amount reported as an Account Receivable is complete and free from material error or bias.
52
What is ARTO?
* average number of days it takes for a business to receive cash from its Accounts Receivable
53
Most significant benchmark?
* credit terms offered to customers which sets the maximum number of days for the customers to pay.
* If the Accounts Receivable Turnover exceeds the credit terms allowed, this is unsatisfactory and may lead to ongoing problems in the future.
54
If ARTO unsatisfactory?
* not enough cash available to meet payments, such Accounts Payable, wages and other expenses
* an increased possibility of bad debts, as the longer a debt remains unpaid the more likely it is that will never be paid.
55
Strategies to prevent problems arising from AR?
* Act in an **ethical manner**
* **Appoint an Accounts Receivable Officer /Clerk** (Record keeping and liaising with each Account Receivable to ensure that they pay on time.)
* **Offer discounts for quick settlement** (encourage early payment but decrease net profit)
* **Conduct extensive credit checks** (Only offering credit to customers who have a proven record will increase the chances that cash will be received on time)
* **Develop a strong relationship** with each customer
* **Send invoices promptly** (Invoices should be sent with the goods so that the customer is immediately aware of the amount owing. otherwise wont even think of payment)
* Consider **non-financial information** (personal circumstances and significance of relationship)
56
Strategies for Account Receivables exceeding credit terms:
* Send **reminder notices** (sent immediately to remind payment is overdue, progressing from friendly reminders to threatening legal action eg statement of account)
* **Deny access to credit facilities**
* **Threaten legal action** (threat of court action can sometimes prompt payment, but legal action can be a long and costly process)
* Employ a **debt collection agency**
57
Limitations of ARTO
* it is an average
* likely some accounts paying faster and some slower so check each individual timing of receipts
