Random Accounting Revision Questions

[costargh]

This thread is for little "test yourself" style questions.

Explain with reference to a qualitative characteristic of accounting, why Traditional Interiors should conduct a physical stocktake despite having perpetual stock records available. (3 marks)- Exambusters

[ben4386]

Heres a longish answer

Relevance-, Although the business has perpetual stock records they may not show a true indication of stock on hand. The business may have more stock on hand from an oversupply by a supplier indicating a stock gain, or less stock on hand perhaps due to theft or damage. Traditional interiors should therefore conduct a physical stocktake to check the perpetual records accuracy and to detect a stock loss or stock gain. The business would then have an accurate figure for stock and be able to include a stock gain revenue or stock loss expense in the profit and loss statement which will be of use to the businessl for decision making.

[elaine]

lol I thought it may have been reliability.
man i suck

[jamesdrv]

Why is there a conflict between different qualitative characteristics when recognizing depreciation?

Business Pty Ltd want to buy a vehicle valued at $50,000 (GST Exclusive). They pay a deposit of 10%, and pay the rest the following week. How would this appear in the cash flow statement (assume all transactions are for cash)?

Business Pty Ltd contracts with another business to supply 500 chairs for $100 each at some point before the end of the month. How would this affect the accounting equation?

[costargh]

Edit: Answer for first question

The answer is most certainly relevance and for the reasons stated by Ben.

This is sorta like a trick question because for many people, including myself you think that by doing a physical stock take you will be double checking on the stock cards and therefore making the stock control value more reliable.

But you have to remember that reliability refers to having accounting reports free from bias and having a source document available to verify the accuracy/authenticity of the reports.

It is therefore relevance because by conducting a physical stocktake (thereby identifying any stock losses or gains) we are including all information in the accounting reports (profit and loss statement) that could aid decision making. The inclusion of all information that affects profit allows the owner to make decisions with the most accurate information possible, therefore increasing the chances of making a decision that could achieve the best outcome.

[costargh]

Why is there a conflict between different qualitative characteristics when recognizing depreciation?

There is a conflict between reliability and relevance when depreciating non current assets. This is because the historical cost is the reliable value which is verifiable by a source document. This ensures that the value reported in the balance sheet is free from bias. However, this value may not be the best value to be reported because its value may be outdated. This value could lead to bad decision making based on an overstated non current asset value. That is why depreciation occurs. To include the "carrying value" in the balance sheet ensures that the most 'relevant' value is reported in the balance sheet, thus increasing the chances of making the best decision for the business.

[elaine]

also, depreciating assets relies on estimates that are not supported by source document evidence.

[costargh]

Business Pty Ltd want to buy a vehicle valued at $50,000 (GST Exclusive). They pay a deposit of 10%, and pay the rest the following week. How would this appear in the cash flow statement (assume all transactions are for cash)?

Um wow. Lol never had a question like this.... but I would assume that the entire 50 000 would be reported as a Financing activity cash outflow because its the purchase of a non-current asset.

Although it could be a trick question and the 10 000 could be reported as an operating activity cash outflow and the 40000 as finacning.... hmm

[costargh]

Business Pty Ltd contracts with another business to supply 500 chairs for $100 each at some point before the end of the month. How would this affect the accounting equation?

No effect?

... wait. Are we assuming that the transaction has gone ahead or not? Or if they jut had a contract and it was expected that the transaction would occur.

[elaine]

Business Pty Ltd want to buy a vehicle valued at $50,000 (GST Exclusive). They pay a deposit of 10%, and pay the rest the following week. How would this appear in the cash flow statement (assume all transactions are for cash)?

Um wow. Lol never had a question like this.... but I would assume that the entire 50 000 would be reported as a Financing activity cash outflow because its the purchase of a non-current asset.

Although it could be a trick question and the 10 000 could be reported as an operating activity cash outflow and the 40000 as finacning.... hmm

yeah i took one look at that and i thought- woah. i am dead. for the exam anyway lol.

but it's good to get those kind of questions, you can never get enough of those tricky ones.

where is it from?

[costargh]

Business Pty Ltd want to buy a vehicle valued at $50,000 (GST Exclusive). They pay a deposit of 10%, and pay the rest the following week. How would this appear in the cash flow statement (assume all transactions are for cash)?

Um wow. Lol never had a question like this.... but I would assume that the entire 50 000 would be reported as a Financing activity cash outflow because its the purchase of a non-current asset.

Although it could be a trick question and the 10 000 could be reported as an operating activity cash outflow and the 40000 as finacning.... hmm

yeah i took one look at that and i thought- woah. i am dead. for the exam anyway lol.

but it's good to get those kind of questions, you can never get enough of those tricky ones.

where is it from?

Yeh well its awesome to get these tricky questions when we ARENT in an exam situation so if we come across similar ones, we would have encountered them before =)

thanks jamesdrv

[elaine]

Business Pty Ltd contracts with another business to supply 500 chairs for $100 each at some point before the end of the month. How would this affect the accounting equation?

No effect?

... wait. Are we assuming that the transaction has gone ahead or not? Or if they jut had a contract and it was expected that the transaction would occur.

i think they contract itself has no effect on the equation. but once economic benefit leaves the entity, i.e. the stock, then it would increase assets (debtors) and increase OE.

i'm not really sure

[jamesdrv]

Business Pty Ltd want to buy a vehicle valued at $50,000 (GST Exclusive). They pay a deposit of 10%, and pay the rest the following week. How would this appear in the cash flow statement (assume all transactions are for cash)?

Um wow. Lol never had a question like this.... but I would assume that the entire 50 000 would be reported as a Financing activity cash outflow because its the purchase of a non-current asset.

Although it could be a trick question and the 10 000 could be reported as an operating activity cash outflow and the 40000 as finacning.... hmm

yeah i took one look at that and i thought- woah. i am dead. for the exam anyway lol.

but it's good to get those kind of questions, you can never get enough of those tricky ones.

where is it from?

I just made those questions up, lol. First of all, if you ever see "(GST Exclusive)" it means that GST is included in the transaction, but not in the value given. If you see "(GST Exempt)", the transaction does not involve GST. The answer is that $50,000 would be reported as an investing outflow (under something like "Purchase of vehicle"), and $5,000 would be reported as an operating outflow for the GST component. I don't think examiners really try to trick you with GST though, so I wouldn't worry about it too much.

Edit: sorry, that last question was poorly worded and just bad in general. It wouldn't have any effect on liabilities as there is no present obligation as a result of past events. In accounting terms, nothing has actually happened.

[costargh]

Yeh the contract has no effect which is what I interpretted the question to mean firstly.

But then yeh after the transaction occurs stock will decrease, an asset (debtors control or bank depending on cash or credit transaction) will increase, and due to sales increasing, net profit will increase, thus increasing OE.
And I noticed that no GST was mentioned in the question... if it was 10% extra GST then their would be a an increase on the credit side of the GST Clearing ledger.

[elaine]

I just made those questions up, lol. First of all, if you ever see "(GST Exclusive)" it means that GST is included in the transaction, but not in the value given. If you see "(GST Exempt)", the transaction does not involve GST. The answer is that $50,000 would be reported as an investing outflow (under something like "Purchase of vehicle"), and $5,000 would be reported as an operating outflow for the GST component. I don't think examiners really try to trick you with GST though, so I wouldn't worry about it too much.

lol you made em up? haha that's awesome

but i'm glad you don't write the exams

thanks for the tip about GST exclusive