theory questions Flashcards
(28 cards)
why cost price
valued at cost price:
Verifiability states that assets should be valued at a price which is evidenced by a source document.
satisfy elements of Faithful Representation, as the source document can eliminate potential areas of bias and a lack of accuracy in estimating the assets fair value.
fair value
Faithful Representation states that financial information must accurately reflect economic events and values. The fair value presents a more accurate reflection of the motor vehicles future economic benefit to the business at the time of contribution.
Relevance of reported information and can assist the business owner in managing their Non-Current Assets. For instance, Assets with a low value might prompt an owner to look at replacing a Non-Current Asset.
Entity Assumption demands that the asset must reflect the future economic benefit to the business excluding the benefit already consumed by the owner.
Trial balance
is a list of all of the ledger accounts and their balances. It’s a checking mechanism to ensure that total debits equal total credits.
Detect potential recording errors.
trial balance can detect
2 entries recorded on the same side of the ledger
single as opposed to double entry
different amounts on each side
triabl balance cannot detect
entry has been ommitted
debit and credit entries have been reversed
transaction has been recorded in the wrong ledger account
incorrect amount recorded on both sides of the ledger account
advantages of the perpetual inventory system
greater control
identifies speed and turnover
more efficient reordering - can order new inventory when levels are low
identifications of inventory gains/losses
disadvantages of the perpetual inventory syste
additional record keeping
additional costs- wages and training
does not replace the physical stocktake
physical inventory count
commonly conducted at the end of the reporting period to double check perpetual inventory records and recognises potential inventory gains/losses
perpetual inventory system is subject to recording errors
Why is FIFO used ?
- physically impossible to identify the actual units being sold in some businesses
- management prefers not to use labels or codes as it involves too much work. Instead simply choose to assume that first goods purchased are first goods sold.
- when they sell larger volumes of lower priced inventory and therefore management may not decide to use labels/ codes to identify each individual cost as it may be too much time/effort due to training and wages. The benefit of accuracy may not be worth additional record-keeping and costs.
why identified cost
if smaller number of higher priced inventory items and can be more easily specifically identified using the Identified Cost method
may be more appropriate to record the actual cost of each inventory item making the profit calculation more accurate.
product cost
any cost incurred in bringing inventory into a condition and location ready for sale which can be logically allocated to each unit of inventory on a logical basis
period cost
any cost incurred in bringing inventory into a condition and location ready for sale which CANNOT be logically allocated to each unit of inventory on a logical basis
net realisable value
estimated selling price less direct selling expenses
how do businesses achieve positive cash flows but net loss?
credit sales vs receipts from accounts receivable
cost of sales vs payments to accounts payable/cash purchases
operating activities
cash flows that relate to day to day trading activities
investing activities
cash flows related to the purchase or sale of non-current assets
financing activities
cash flows related to the changes in the financial structure of the business.
does improving inventory turnover lead to increase in gross profit?
No, not necessarily while improving inventory turnover may lead to an increase in sales this does not display the amount of sales returns that may have occurred. The amount of sales returns may have increased in addition with the amount of inventory sold over the period, thus offsetting any increase in Gross Profit.
Additionally, selling price/markup affects the amount of revenue that business earn when selling inventory. A low markup/selling-price may not lead to an increase in Gross Profit as Cost of Goods Sold incurred may offset this.
Cash cycle
process of turning inventory into sales and sales into cash.
cash cycle is slower - less cash on hand at a slower rate
faster - more cash on hand at a faster rate
how to improve inventory turnover
- ## physically rotating inventory on hand (older goods placed on display so they are sold first
inventory turnover
average inventory/ cost of goods sold x 365
indicates how quickly a business can turn it’s inventory into sales by measuring the number of days it takes to sell inventory
inventory too slow
inventory too fast
slow: business will struggle to generate cash quickly enough to meet its short term debts as they fall due
implement strategies to increase sales
maintain lower levels of inventory
fast:
selling price may be too low
inventory level may be too low
strategies to improve ARTO
conduct extensive credit checks
offering discounts for quick settlement
send invoices promptly or send reminder notices (statement of accounts) to overdue accounts
refuse credit sales to select customers (allows the business to prevent incurring further debts from slow/non paying customers
Accounts Receivable Turnover
average accounts receivable/net credit sales (plus gst) x 365
measures the average time taken by accounts receivables to settle their accounts
