Theory Questions

[TyErd]

Hey guys, accounting exams getting closer and closer and one thing that needs work on is theory. I remember we did a thread for theory questions for unit 3 where we posted a shit load of questions and answered them. That was really helpful for not only me but I'm sure you guys too. So I'm hoping we could do the same for Unit 4.

I'll start off:

1. Explain why a variance report should be prepared more than once a year.
2. State two bases that profit could be compared against in an assessment of profitability.
3. Explain how period costs understate net profit.
4. Explain why GST on the purchase of stock is not included in the calculation of the cost price of stock.
5. State two pieces of information that would be necessary to record the return of stock in the stock card.

[eeps]

Agreed. This is a great idea. =P

To start off - I'll only do a few:

1. Variance reports should be prepared more than once a year, so that problem areas and trends can be identified earlier of which the owner can take corrective action to fix.

2. Profit could be compared against the industry average or from the previous reporting period.

3. Period costs understate Net Profit, as the whole cost (of bring stock into a condition and location ready for sale) is expensed no matter the quantity of stock sold, thus overstating Cost of Goods Sold which results in Net Profit being understated.

[Aqualim]

4) This is because GST is neither a product or period cost but rather a reduction in the GST Clearing accounting i.e. debit entry, therefore reducing the amount of GSt owed to the ATO at the end of the financial year

5) Credit note? amount of stock? lol bit general

[eeps]

I'll add some questions:

1. Explain why the Cash Flow Ratio is better than the Working Capital Ratio as an indicator of business liquidity.

2. Explain why a stock write-down is recorded in the out column of a stock card.

3. Distinguish between Accrued Revenue and Debtors.

4. Explain why Sales Returns are shown separately in the Profit and Loss Statement.

[TyErd]

Hey guys, accounting exams getting closer and closer and one thing that needs work on is theory. I remember we did a thread for theory questions for unit 3 where we posted a shit load of questions and answered them. That was really helpful for not only me but I'm sure you guys too. So I'm hoping we could do the same for Unit 4.

I'll start off:

1. Explain why a variance report should be prepared more than once a year.
2. State two bases that profit could be compared against in an assessment of profitability.
3. Explain how period costs understate net profit.
4. Explain why GST on the purchase of stock is not included in the calculation of the cost price of stock.
5. State two pieces of information that would be necessary to record the return of stock in the stock card.

my answers were:

1. A variance report should be prepared more than once a year to allow for early/more frequent detection of trends or problem areas. This allows for corrective action to be taken without waiting until the end of the year.
2. level of assets/sales and owners investment
3. periods costs overstate COGS by including the entire expense in the period in which the stock is purchased when in fact this cost will not be incurred/consumed until the stock is actually sold.
4. The GST is a reduction in debt owed to the ATO, the economic benefit will not be recieved when the stock is sold but when the GST balance is determined and the settlement or refund occurs.
5. Line of stock returned and quantity of stock returned.

[TyErd]

I'll add some questions:

1. Explain why the Cash Flow Ratio is better than the Working Capital Ratio as an indicator of business liquidity.

2. Explain why a stock write-down is recorded in the out column of a stock card.

3. Distinguish between Accrued Revenue and Debtors.

4. Explain why Sales Returns are shown separately in the Profit and Loss Statement.

wow some really good questions there that I haven't come across. I don't know the answers too them though haha.

[Chavi]

My questions:

1. Other than Disc Exp, list 4 other alternatives to induce a decrease in Debtor's turnover.
2. State two principle reasons for Over-depreciation
3. Discuss the difference between Sundry creditors and Creditors control
4. How can a change of premises improve the Net Profit ratio?
5. Why is Quick Asset Ratio a better indicator of liquidity than Working Capital ratio.
6. Provide an advantage and a disadvantage for a negative trend in creditors turnover.

[Chavi]

I'll add some questions:

1. Explain why the Cash Flow Ratio is better than the Working Capital Ratio as an indicator of business liquidity.

2. Explain why a stock write-down is recorded in the out column of a stock card.

3. Distinguish between Accrued Revenue and Debtors.

4. Explain why Sales Returns are shown separately in the Profit and Loss Statement.

1. CFR measures the movement of cash from operating activities. The operating cash flow ratio can gauge a company's liquidity in the short term by using cash flow as opposed to base assets. Detailing the frequency of cash moving through the business is a better indicator of liquidity as cash is the principle liquid asset used to cover short term debts as they fall due.

2. Stock write down to Net realizeable value leads to a decrease in the value of stock below the historical cost price. As an outflow of economic benefit, it is recorded as an 'outflow' of stock in the Out column.

3. Debtors refer to trade buyers of stock that are summarized within a control account. Accrued revenue refers to goods or services earned but not yet received (like accrued interest revenue).

4. The level of sales returns are an important decision making factor for the owner. Determining it's value will allow the owner to asses customer satisfaction, suitability of stock, and by extent the firm's overall profitability.

[TyErd]

Some more guys:

1. Explain how the application of FIFO affects the recording of a sales return in the stock card.
2. Given that discount and GST are both applied at a rate of 10%, explain why the dollar amount of the discount is greater than the dollar amount of GS.
3. Define the term cost as it applies to non current assets.
4. Explain how increasing selling prices could lead to an increase in gross profit rate but a decrease in gross profit.
5. Explain why the owners plan of action ( increasing advertising) will not lead to an improvement of Gross Profit Rate.

[Chavi]

Some more guys:

1. Explain how the application of FIFO affects the recording of a sales return in the stock card.
2. Given that discount and GST are both applied at a rate of 10%, explain why the dollar amount of the discount is greater than the dollar amount of GS.
3. Define the term cost as it applies to non current assets.
4. Explain how increasing selling prices could lead to an increase in gross profit rate but a decrease in gross profit.
5. Explain why the owners plan of action ( increasing advertising) will not lead to an improvement of Gross Profit Rate.

1. Reverse FIFO is used for sales returns. (i.e. LOFI - last out first in). In this sense FIFO doesn't affect Sales returns per se

2. Ambiguous (standalone?) question. Obviously, you would have been provided with some more info for this, but I'm assuming that the answer has something to do with the GST liability is decreased by credit purchases and sales returns during the period.

3. Any expense associates with bringing the NCA into a marketable revenue-earning position that will benefit the Asset over it's useful life.

4. It will lead to an increase in markup, which increasing the ratio of sale to gross profit (GPR), but may lead to a decrease in the frequency of Sales (as prices are too high), thus decreasing Gross Profit in net dollar terms.

5. Gross Profit rate is simply a ratio that measures markup. Regardless of the increase in frequency of sales due to advertising, if MArk-up remains constant, GPR will not change.

[mumakai]

My questions:

1. Other than Disc Exp, list 4 other alternatives to induce a decrease in Debtor's turnover.
2. State two principle reasons for Over-depreciation
3. Discuss the difference between Sundry creditors and Creditors control
4. How can a change of premises improve the Net Profit ratio?
5. Why is Quick Asset Ratio a better indicator of liquidity than Working Capital ratio.
6. Provide an advantage and a disadvantage for a negative trend in creditors turnover.

1. -send out reminders that the business has to pay, make visits to the business, suspend credit if they go over terms

2. the estimated scrap value was believed to be less than the real selling value, ?the business wanted to claim as much as possible as an expense to reduce tax?

3.sundry creditors is the account used to record the purchase of a non current asset where as creditors control is the summary account of all subsidary creditors in the purchase of stock

4. the premise may be more suitable for the selling of the said good, therefore sales would increase

5. the quick asset ratio measures liquidity better than working capital because it takes the amount of assets that can be used instantly in an effort to meet the obligations as they fall due. where as capital does not take this properly into account.

6. a negative trend in creditors turnover, means that we will be paying the creditors earlier than before which could mean we would be taking the offered discounts which could be an advantage. however, it could be a disadvantage as the longer you take to pay the more money you would have for alternative uses

[eeps]

I'll add some more questions:

1. With reference to two Accounting Principles explain why ratio comparisons with industry averages can be misleading.

2. Provide four reasons why it may be necessary to use the Net Realisable Value on stock.

3. Identify four expense items from the P/L Statement that are not cash transactions.

[eeps]

I was wondering if you could give the answer, TyErd... to the second question:

2. Given that discount and GST are both applied at a rate of 10%, explain why the dollar amount of the discount is greater than the dollar amount of GST.

I don't know the answer and I didn't really get Chavi's explanation either. =S

Thanks.

[Chavi]

I'll add some more questions:

1. With reference to two Accounting Principles explain why ratio comparisons with industry averages can be misleading.

2. Provide four reasons why it may be necessary to use the Net Realisable Value on stock.

3. Identify four expense items from the P/L Statement that are not cash transactions.

1. Monetary Unit - International Industry averages may be conducted in separate currencies.
Consistency - Other firm's may use different accounting methods, and thus, ratios cannot be compared between firms

2. Conservatism - recognizing a loss when likely so as not to overstate assets/gains. Relevance - the owner should have all information on the up-to-date value of stock for decision making - the Historical cost may be irrelevant. The stock will be sold at a loss, ad this should be recorded as it affects Net profit.

3. cost of sales, depreciation, discount revenue/expense, Stock loss/gain, stock write down, credit sales

[eeps]

1. Monetary Unit - International Industry averages may be conducted in separate currencies.
Consistency - Other firm's may use different accounting methods, and thus, ratios cannot be compared between firms

2. Conservatism - recognizing a loss when likely so as not to overstate assets/gains. Relevance - the owner should have all information on the up-to-date value of stock for decision making - the Historical cost may be irrelevant. The stock will be sold at a loss, ad this should be recorded as it affects Net profit.

3. cost of sales, depreciation, discount revenue/expense, Stock loss/gain, stock write down, credit sales

My answers were:

1. The business may have different reporting periods from another business and this would be misleading to compare with another business (i.e. Reporting Period). Another reason is that one business may use different accounting methods from another business, thus comparing ratios would be useless (i.e. Consistency).

2. Stock may be: damaged, out of demand, obsolete or not in good physical deterioration. These are four reasons why the lower of cost and NRV may be used on stock.

3. It was pretty much what you had.