Random Accounting Revision Questions

[costargh]

Ok cool. Thanks for that!!! What lecture did u go to today if u dont mind me asking?
Im going to Vic Uni one on saturday and Access Education on Weds at Monash Clayton

[ben4386]

yer i went to access last night in the City at ACU, anthony simmons was the presenter, he was really good, there are two other presenters that also do accounting for access, so I dont know who will be doing monash clayton

[ben4386]

heres another question,

referring to one accounting principle, explain one disadvantage of using the FIFO system of stock recording

[gta007]

One disadvantage of the FIFO system of stock recording, is the inexistance of the proof of the cost price of the sales occurred, which goes against the historical cost principle, where the original purchase price of the item should be recorded and reported in accounting reports.

I hope this is right....

[jamesdrv]

One disadvantage of the FIFO system of stock recording, is the inexistance of the proof of the cost price of the sales occurred, which goes against the historical cost principle, where the original purchase price of the item should be recorded and reported in accounting reports.

I hope this is right....

Think about the implications for profit (and the asset of stock) by recognizing stock purchased earlier as the stock that has been sold. In a time of rising prices, would stock purchased earlier be cheaper or more expensive?

[costargh]

Conservatism? When the FIFO system of stock recording is used, if the cheapest item in a line of stock is sold at the highest price to the consumer. This could undermine the conservatism principle because profits would be artificially inflated and could adversely affect decision making for the owner.

[jamesdrv]

Conservatism? When the FIFO system of stock recording is used, if the cheapest item in a line of stock is sold at the highest price to the consumer. This could undermine the conservatism principle because profits would be artificially inflated and could adversely affect decision making for the owner.

You could also be overstating your assets because you're assuming the cheapest stock is sold first.

[ben4386]

yer its the conservatism principle and you were quite right.

Using FIFO we assum that the stock we purchase first is the stock that we sell first. Usually the stock we purchase and sell first is our cheaper stock. In reality we might sell the more expensive stock first, but calculate cost of sales as if the cheaper stock was sold. Therefore we overstate stock on hand as in reality our value for stock control is less than stated. Our net profit profit is overstated as our cost of sales expense is understated. The conservatism principle states that losses should be recorded when probable and gains only when certain, so that assets and revenues are not overstated and liabilities/expenses not understated. Therefore by using FIFO, sometimes are are in direct breach of the conservatism principle.

[ben4386]

just another thing I was thinking about from Yr 11 accounting, we always used to value stock at its purchase price and not sale price, not selling price due to the historical cost principle,

i was doing a practice exam before and it asked with reference to one accounting principle state why the stock should be valued at $x (this was the purchase price) and not $y (this was the sale price) in the balance sheet. The answer did state historical cost and gave the usual definition and explanation and then the final line said "so we are not in breach of the conservatism principle."

I see how the conservatism principle works in this situation, if u record it as sales price you are overstating your assets, as you are recording a gain when uncertain, the stock might not even sell let alone for the sale price.

So my question is what do you guys think is right?

I'm leaning to historical cost because its something that Ive been using for a year and a half, but its another one of these, it can be either one kind of questions, unfortunately in an exam only one can be correct and the difference can be up to 3 marks.

i appreciate your input

ben

[costargh]

I'd def say Historical cost.

[sheepz]

i'd go with historical cost as well

[jamesdrv]

It depends on what the question is asking. If the question specifically mentions selling price compared to purchase price, then I would say conservatism. There is no guarantee that stock can be sold, or that it can be sold at a specific selling price, so conservatism implies that it should be reported at purchase price (only recognize gains when certain, etc). If the question asks "Why should stock be reported at the purchase price and not the selling price", you can reasonably infer that they want you to talk about why you should not recognize uncertain gains. It's fairly difficult to interpret.

VCAA have accepted multiple answers before, and there's a good possibility they would accept both here. The only mark I lost last year (unit 3) was because there were two possibilities for an accounting principle, and I said the one they weren't really looking for. I think they gave 2 marks for a correct justification, but didn't give us the mark for the accounting principle. I would have said conservatism here, but only because the textbook I used last year (the red Cambridge one) had this exact question in it.

[elaine]

Ok here's another one that I couldn't get:

Equipment costing $100 000 was purchased and installed on 1 January 2007. The accumulated depreciation was $45 000 on 30 June 2008. The equipment was depreciated using the straight-line method.

What is the adjustment that needs to be made?

btw, has anyone done the 'sample questions' from VCAA yet?
they don't have solutions

How would you go about answering this one:

"Explain how the use of a Stock Control Account and Stock Cards assist in the managing of stock."

It depends on what the question is asking. If the question specifically mentions selling price compared to purchase price, then I would say conservatism. There is no guarantee that stock can be sold, or that it can be sold at a specific selling price, so conservatism implies that it should be reported at purchase price (only recognize gains when certain, etc). If the question asks "Why should stock be reported at the purchase price and not the selling price", you can reasonably infer that they want you to talk about why you should not recognize uncertain gains. It's fairly difficult to interpret.

VCAA have accepted multiple answers before, and there's a good possibility they would accept both here. The only mark I lost last year (unit 3) was because there were two possibilities for an accounting principle, and I said the one they weren't really looking for. I think they gave 2 marks for a correct justification, but didn't give us the mark for the accounting principle. I would have said conservatism here, but only because the textbook I used last year (the red Cambridge one) had this exact question in it.

omg- you only lost one mark? wow wow wow. lol you're my hero

was the question you lost one mark on the one about closing revenues and expenses? (i just did last years paper)

so by losing one mark, what kind of study score are we looking at?

[costargh]

I don't think there is enough information in your example to form an answer. They don't tell you how long the reporting period is (ie. how often they do balance day adjustments)

[sheepz]

yeah elaine for ur BDA ques when r we doing the adjusting entry for? im thinking though that the monthly depreciation would be $2500 (assuming there is no residual value so (acc dep)/18 months) but the ques is like kinda left hanging...

"Explain how the use of a Stock Control Account and Stock Cards assist in the managing of stock."
The stock cards show a business the fast and slow moving stock lines, thereby the business can make better decisions whether to discontinue selling a particular stock type. Stock cards would also indicate which stock needs to be reordered due to low stock on hand. Stock control sums up all the current stock on hand and can be used as a double-checking mechanism against the total of the stock cards (is there such thing as a stock schedule? o.0), thus eliminating simple errors and enhance the management of stock.

lol sounds like such a crap answer >.< any other suggestions on how to answer it?

here's some from prav's notes which i think the answers are a bit weird...
1) Explain the operation of the perpetual system of stock recording.
2) Explain the importance of stock cards when sales are recorded in the special journals.