Explain one advantage and one disadvantage of using a FIFO system of stock recording.
Advantage: Using the FIFO system, we can calculate cost of sales by assuming that the first stock we purchase is the first stock sold. We therefore have a figure for cost of sales for all our journals and ultimately the profit loss statement. If we did not use FIFO then it would be extremely hard to keep track of the selling price of each different stock item.
Disadvantage: In reality our first stock may not always be sold first, the stock we purchased later, possibly the more expensive stock may be sold first. Therefore we think we are selling the cheaper stock when in actual fact we are selling the more expensive stock. As a result Stock control can be overstated, as the value of stock may be less, and Net Profit overstated as cost of sales may be understated.
Why is GST not part of the historical cost of an asset?
When you purchase an asset you usually pay the cost price and the GST. Under the ATO requirements the GST component must be shown clearly and listed seperately. This is because GST is not actually part of the historical cost of the asset, but rather a 10% tax on all goods and services. On purchases it represents a reduction in GST liabilities to the ATO, rather than part of the price of the asset.
Explain 2 disadvantages of offering discounts.
1. Less Cash is being received from debtors, as the amount they owe (in terms of cash) has been reduced.
2. Net profit is reduced, the business recognises the debtors balance has decrease by the amount they have paid plus any discount however this discount must be reported somewhere. It is an expense and represents a reduction in an inflow of economic benefit from debtors and a decrease in net profit
A business prepares its reports each quater (i.e. in March, June, September and December). On the 1st of February the business purchases new equipment valued at $55,000 (GST Inclusive). The equipment requires delivery costing $2530 (GST inclusive), installation costing $4400 (GST inclusive), and insurance for 12 months valued at $1200 (GST Exclusive). The owner believes the equipement can be sold in 3 years time for $20,000 (GST exclusive). What would be the depreciation expense reported in the profit and loss statement at 31st March?
Cost of the Asset= 50 000 (actual equipment ex GST) + 2300 (delivery costs) + 4000 (installation) , note insurance is an annual recurring expense so is not part of the cost of the asset
Cost of the asset = 56300, Life of the asset is 3 years, Residual Value is 20000 (ex gst)
depreciation expense(PA) = 56300-20000/3 = $12100 per annum, now we need to adjust for 2 months depreciation
depreciation expense as at 31st march= 12100 x (2/12) = $2016
noted edited, sorry bout the mistake
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