Unit 2 AOS 2

Question 1

How to record a credit purchase of inventory

Answer 1

1) Receipt of the inventory
2) Payment then made at a later date

Question 2

What is a settlement of accoutn

Answer 2

= the cash has been paid to an accounts payable

Question 3

What is an accounts payable record

Answer 3

= subsidiary record that records each individual transaction with each individual account payable + shows balance owing 2 account payable @ any point in time

Question 4

What is a settlement discount

Answer 4

= less in amount paid by a credit c’er in return for an early repayment

Question 5

What is discount revenue

Answer 5

= revenue in the form of less liabilities (A.P) + inc OE, earned when A.P are paid early + settlement discount is given by supplier

Question 6

What do these terms mean:

5/7 , n/60

Answer 6

-> 5% discount if paid for within/on 7 days or else just pay within 60 days for full amount owing

Question 7

What are benefits of discounts

Answer 7

• Need less cash 4 accounts payable
• Able 2 use saved cash 4 other areas of bus b/c inc net profit

Question 8

What are costs of discounts

Answer 8

• Can have +ve impact on liquidity b/c x able 2 pay off other debts
• Cash sales need 2 be generated more quickly

Question 9

What is a statement of accounts

Answer 9

= statement provided 2 credit c’er 2 given details of transactions that have occurred over a specific period of time and the resulting balance owing at the end

Question 10

What Q.C does a statement of account uphold

Answer 10

-> Verifiability = financial info should allow dif knowledgeable + independent observers to reach a consensus that an event is faithfully represented

Question 11

What are the benefits of using a subsidiary record for accounts payable

Answer 11

• Detection of errors
• Ease of reporting
• Management of accounts payable

Question 12

What is the effect credit sales of inventory has on the accounting equation

Answer 12

A- dec inv. ; inc A.R
L- inc gst P
OE- inc rev; inc expenses; inc N.P

Question 13

What is the effect of a receipt from accounts receivable on the accounting euqation

Answer 13

A- inc Bank ; dec A.R
L + OE - N/E

Question 14

What is an accounts receivable record

Answer 14

= subsidiary record that records each individual accounts receivable + shows the balance owed by accounts receivable @ any point in time

Question 15

What is an accounts receivable schedule

Answer 15

= listing of name and balance of each accounts receivable record

Question 16

What Q.C is supported by accounts receivable schedule

Answer 16

-> Faithful representation = financial info should be a faithful representation of the real world economic event it claims to represent, being complete, free from material error and neutral

Question 17

What are ethical considerations

Answer 17

• If good is faulty, damage / x “fit 4 purpose” the bus has a legal obligation 2 accept return ‘
• Bus needs 2 consider it’s Marketing and Advertising, is it misleading in anyway
• Financial implications of accepting a return

Question 18

What is a settlment discount

Answer 18

= decrease in amount paid by a credit c’er in return 4 an early repayment

Question 19

What is a discount expense

Answer 19

= expense in form of a decrease in assets + decrease in OE, which is x drawings, incurred when cash is received early from Accounts Receivable + a settlement discount is given by the bus.

Question 20

How to calculate accounts receivable

Answer 20

Opening balance
+ credit sales including GST
(total from A.R column [cash received + discounted])
(sales return inc GST)

Question 21

What are bad debts

Answer 21

= an expense incurred when a debt is written off b/c it is deemed 2 be irrecoverable (A.R is not going to pay back, they’re in liquidation, administration or been declared bankrupt)

Question 22

What Q.C does bad debts uphold

Answer 22

-> ensures faithful rep, when recorded, of the balance still owing + likely 2 be collected
-> in income statement, ensures relevance by providing all info that is capable of making a difference 2 decision making re profit

Question 23

What are benefits of discounts

Answer 23

• Cash recieved faster from A.R, bolstering liquidity of bus
• less chances of bad debts

Question 24

What are costs of discounts

Answer 24

• less cash received from A.R
• net profit lessened by discount expense

Question 25

How does bad debt affect the accounting equation

Answer 25

A: less A.R L: less GST p OE: inc expense (debt) t/f less N.P

Question 26

What is an income statement

Answer 26

= an accounting report that details the revenue earned and expenses incurred during the reporting period

Question 27

What accounting assumption is recognised by an income statement

Answer 27

= accrual basis assumption -> revenues recognised when earned + expenses recognised when incurred + profit is calculated by subtracting revenue from expenses incurred

Question 27

How is a cash sale a revenue

Answer 27

= inc in bank (A) -> OE + x a capital contribution so @ point that inventory is provided 2 c'er the revenue is earned

Question 28

How is a credit sale a revenue

Answer 28

= inc A.R (A) -> inc OE (sales) + x a capital contribution so @ point that inventory is provided 2 c'er the revenue is earned

Question 29

Where is a sales return recorded in the income statement

Answer 29

= -ve revenue t/f dec revenue earned

Question 30

How is cost of sales an expense

Answer 30

= expense incurred when economic resource (inventory) is converted 2 cash or consumed t/f recognised as a cost of sales

Question 31

How is a credit purchase of inventory not an expense

Answer 31

= dec bank (A) -> dec A.P (L) + will x impact on OE t/f x expense incurred + should x appear on income statement

Question 32

What are the headings on an income statement

Answer 32

Revenue Less cost of goods sold Gross profit Adjusted gross profit Add other expenses Net profit (loss)

Question 33

What is the formula for inventory turnover

Answer 33

I.T (number of days) = Average inventory x 365 / cost of sales

Question 34

How to calculate average inventory

Answer 34

(Inventory @ start + inventory @ end) / 2

Question 35

What does inventory turnover measure

Answer 35

= average number of days it takes for businesses to convert inventory into a sale

Question 36

What is accounts payable turnover

Answer 36

= efficiency indicator that measures average number of days it takes for business 2 pay it's A.P

Question 37

What is accounts payable turnover formula

Answer 37

= Av AP x 365 / (net credit purchases (+gst))

Question 38

How to calculate average accounts payable

Answer 38

(AP @ start + AP @ end) / 2

Question 39

What terms to use when determining AP turnover

Answer 39

= faster or slower -> generalise that turnover = faster / slower

Question 40

What are strategies for managing accounts payable

Answer 40

1) develop strong relationship with each supplier 2 access good prices, better credit terms + good quality inventory 2) pay within, but as close as possible 2 credit terms 3) pay early 2 earn a discount 4) appoint an accounts payable officer 5) communicate in a timely fashion

Question 41

What is accounts receivable turnover

Answer 41

= an efficiency indicator that measures the average number of days it takes a bus 2 collect cash from its AR

Question 42

What is the accounts receivable formula

Answer 42

Av AR x 365 / (net credit sales (+gst))

Question 43

How to calculate average accounts receivable

Answer 43

(AR @ start + AR @ end) / 2

Question 44

What are strategies for managing accounts payable

Answer 44

1) offer discount 4 quick settlement 2) send invoices promptly 3) conduct extensive credit checks 4) send reminder notices 5) threaten legal action 6) employ a debt collection agency 7) deny access 2 credit facilities 8) appoint an accounts receivable officer

Question 45

What are strategies for managing inventory

Answer 45

1) maintain appropriate inventory mix (high of fast selling and discount slow selling) 2) promote sale of contemporary goods 3) ensure inventory is up to date 4) rotate inventory 5) determine appropriate lvl of inventory on hand 6) market strategically + effectively / ethically 7) appoint an inventory manager responsible 4 ordering + discounting inventory

Question 46

What is the cash / trading cycle

Answer 46

APTO > ITO + ARTO

Question 47

What is the objective of the cash cycle / what does it point out

Answer 47

-> we want ITO + ARTO, which is money going in, to be faster than the rate at which we pay back AP (APTO), money going out money going in needs to be faster than money going out to be viable