Chapter 15/16 Flashcards Preview

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Flashcards in Chapter 15/16 Deck (15)
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1
Q

Explain the purpose of a credit note

A

A credit not is used to acknowledge that goods have been returned. This can occur both when goods are brought from a supplier or sold to a customer.

2
Q

Four reasons why a credit note may be issued

A
  1. Goods were the wrong size or specification
  2. An incorrect style or colour was applied
  3. Goods were delivered late and no longer required
  4. Goods were damaged or faulty
3
Q

The double entry required when a credit note is received from a supplier of inventory

A
Debit:
- Creditors Control
Credit:
- Stock Control
- GST Clearing
4
Q

Why two double entries are required when a credit note is issued to a debtor by a trading firm using perpetual inventory

A

Under perpetual inventory two double entries are made when an item is sold to a debtor, one for selling price and one to record the cost price. This is the same for a return and so two double entries are required

5
Q

Two double entries required when a credit note is issued to a debtor by a trading firm

A
Debit:
- Sales Return
- GST Clearing
Credit:
- Debtors Control

Debit:
- Stock Control
Credit:
- Cost of Sales

6
Q

When goods are returned by customers, a debit could be made to sales or to sales return. Explain why the use of a sales returns account is preferred

A

A sales return account gives management more information abut customer satisfaction and is still used to calculate profit in the income statement. If only a net sales figure was reported at the end of the period, the income statement would not show the level of customer returns with out the sales return account

7
Q

Should a business owner be concerned if she has issued many credit notes in one reporting period? Explain your answer fully

A

Yes a business owner should be concerned if issuing many credit notes in one reporting period as it shows a low level of customer satisfaction with the goods that are being sold by the business

8
Q

How is the value of a purchase return determined?

A

The value of a purchases return is determined by taking the cost price AND the added GST charged on the credit purchase, they must both me on the credit note

9
Q

How is the cost price of a sales return determined by a business that applies the FIFO assumption of stock flow

A

The cost price of a sales return is determined by reversing FIFO by starting at the last stock issued and work your way backwards through the stock card to find cost price

10
Q

The cost price of a sales return is not shown on a source document. Do you agree with this statement?

A

Yes, as the selling price is the only thing present on the source document. The cost price is worked out using the FIFO assumption and going backwards to find the last cost price

11
Q

The features of the straight line method

A
  • Historical Cost
  • Useful Life
  • Residual (Scrap) Value
12
Q

Explain the workings of the reducing balance method of depreciation

A

Follows the principle that an asset produces more in its early life than it does later. If an asset is expected to produce more revenue in a particular period relevance demands that more depreciation should be allocated

13
Q

Outline the differences in cost allocation between the straight line method and reducing balance method of depreciation

A

Straight line method, is a fixed cost allocation and is used for assets which are expected to stimulate continuous revenue for its useful life. Reducing balance method uses a diminishing balance method that assumes that assets stimulate more revenue in their earlier years of useful life.

14
Q

On what basis should a depreciation method be selected

A

A depreciation method should be selected depending on the type of asset and how it is gonna be used during its useful life

15
Q

The link between depreciation methods and the reporting period

A

Consistent reporting methods must be used in consecutive reporting periods and so depreciation methods cannot change for assets over reporting periods without breaching comparability and consistency