VCE Accounting Question Thread!

[BoredSatan]

So i've done my first practice exam (2007) and came across a question we covered in class about, why assets and liabilities are classified in balance sheet with reference to one qualitative characteristic.

I understand that understandability is a relevant answer because "it helps readers with little knowledge to understand the basics of the report." (as stated in the examiners report http://www.vcaa.vic.edu.au/vce/studies/account/assessreports/2007/accounting1_assessrep_07.pdf question 1.1.3) The examiners report also stated that the question was poorly answered as a lot of student gave relevance with the explanation of how it helps classify the owner's equity.

 My answer consisted of 'relevance' but for a different reason: "Classifying assets and liabilities as current and non-current allows the business to calculate its short term liquidity"
This links in with the fact that relevance states that all useful information that is useful for decision making should be included in reports.

Right or wrong?

not the best answer as liquidity isnt studied until unit 4..

i would stick with understandability

[jaketownley]

not the best answer as liquidity isnt studied until unit 4..

i would stick with understandability
[/quote]

but we learnt it in unit 2 last year? or are we only allowed to comment on what's learnt in the current unit?

[luffy]

So i've done my first practice exam (2007) and came across a question we covered in class about, why assets and liabilities are classified in balance sheet with reference to one qualitative characteristic.

I understand that understandability is a relevant answer because "it helps readers with little knowledge to understand the basics of the report." (as stated in the examiners report http://www.vcaa.vic.edu.au/vce/studies/account/assessreports/2007/accounting1_assessrep_07.pdf question 1.1.3) The examiners report also stated that the question was poorly answered as a lot of student gave relevance with the explanation of how it helps classify the owner's equity.

 My answer consisted of 'relevance' but for a different reason: "Classifying assets and liabilities as current and non-current allows the business to calculate its short term liquidity"
This links in with the fact that relevance states that all useful information that is useful for decision making should be included in reports.

Right or wrong?

not the best answer as liquidity isnt studied until unit 4..

i would stick with understandability

I don't think that is the reason its wrong. 

I remember I had a VERY SIMILAR issue to you last year when I did accounting. I asked my teacher and she told me that if we are trying to calculate liquidity, accountants could always classify them outside of the balance sheet, and then present that data to owners. After all, the owner only needs to know the actual numbers, rather than how we calculated the number.

The questions asks why we classify assets and liabilities IN the balance sheet. Accountants don't really need the reports when calculating liquidity because they already have the ledger accounts, or any other records that they require. I think for this question, both Relevance and Understandability were "correct" - but Understandability was deemed more correct.

The purpose of actually separating current and non-current in the balance sheet is not so that we can calculate profitability/liquidity ratios. Its so that owners can better comprehend the information accountants present to them.

Having said all of this, I do agree with you. I argued almost the exact same case last year, but my teacher (who was an examiner) told me that although I wasn't completely incorrect, I would gain 1/3 marks.

Hope I helped.

[Flying Emu]

Just a quick verification on the terms 'balance sheets' and 'financial information' (are the below definitions true?).

Financial information is simply a list of financial data, having being classified into time periods, etc.

Balance sheets record the overall revenues and expenses (from the financial information) which is calculated into the net income/loss.

And are balance sheets a form of financial information?

I'm a bit unclear on these definitions, and was wondering ig anyone could add any information I've missed or misunderstood.
Thanks in advance.

**Edit**
One more thing, what's the difference between a balance sheet and an income statement?

[Tragesty]

Balance sheets record the assets, liabilities and owner's equity information of the business (and will be classified as current assets, non current assets/current liabilities and non current liabilities, as well as an 'Owners Equity section which will include any net profit/loss, drawings, capital).

An income statement won't include assets or liabilities or information relating to owner's equity (except profit) - it will include all revenues and expenses of the business, which will allow the owner to determine whether they have a net profit or loss. This profit/loss will go into the balance sheet under 'Owners Equity'.

Balance Sheet = Assets, Liabilities, Owners Equity
Income Statement = Revenues, Expenses

Probably not the best explanation of all time, but figured I'd try.

 

[Flying Emu]

Thanks Trag for the explanation.

Now things actually start making sense >.<

[jaketownley]

"With reference to one accounting principle, explain why Office Furniture should be depreciated."
Going concern or reporting period? and why please:)

[BoredSatan]

You can use either..

Reporting period because part of the office furniture was consumed thus resulting in an outflow of economic benefit .......etc

Going Concern because we assume that the office furniture will be used up in the future reporting periods thus it must be depreciated to reflect the amount consumed in the current reporting period

obviously im just being general here.. in the exam be more specific and remember to link back to office furniture (or whatever item it is)

[link125]

Thomas Wright is concerned about his ability to complete his Stock Cards using the FIFO method of cost assignment. A recent rearrangement of his storeroom by staff has meant that he is no longer able to determine which items of stock were first to arrive at the store.

Thomas' accountant tells him that he is still able to provide a relevant value of stock for the balance sheet even though it may not be the most reliable value. Discuss
4 marks

Sample answer:
First In First Out is an assumption to assign cost to outflows of stock. It is not an attempt to identify stock movements physically. It is not relevant to know which were the first items in.

For four marks what would you say? I don't think the sample answer really cuts it...

[Flying Emu]

What's the difference between source documents and financial data? 

[splash.of.colour]

Hi all, i was wondering if someones could help me with the following two questions:

1.  on 21 September 2011, the business paid $3300 (including $300 GST) to renew the annual insurance policy due to expire on 30 September 2011 (chq. 538). The payment was correctly recorded in the Prepaid insurance account. On June 30 2012, before any adjusting entries, the balance of the Prepaid insurance was $3720. Prepare the necessary journal entries to record the balance day adjustment for the year ending 30 June 2012 
- the answers have debited insurance expense by $2970, and credited the profit/loss summary
- i understand the credit and debits, just not how they got to that figure 

2. Discuss how using the FIFO method of stock recoring will impactGross Profit suring a period when cost prices of stock are falling i got the first part of the answer right, but the next part confused me. They said:
- if a set $ amount or fixed % is added to cost price, then as cost price falls, selling price will also fall. This means the margins will remain unchanged and the $ figure of gross profit per unit will fall
- if the business maintains a set selling price regardless of cost price then as cost falls the margin on sales will increase, leading to higher gross profit

so if someone could explain that, that would be really helpfull haha

sorry for all the questions :/

[ANILBALA]

1. The business has paid $3000 just for insurance expense which relates to 1 Oct 2011 to 31st Sept 2012. $3000/12 =$250 p/month
So at June 30 2012, the business has consumed 9 months worth of insurance. (1 Oct 2011 to June 30 2012)
So 3 * 250 = $750 should be the actual balance of the prepaid insurance at 30 June 2012.
Thus, insurance expense for the year ending 30 June 2012 is 3720 - 750 = $2970

2. I thought it was juts that gross profit was lower, as cost of sales would be relatively higher (more expensive stock will be sold first) and the stock on hand will be lower (assets go down) since stock on hand is relatively cheaper. Im not too sure about this one, if someone else can explain this plz. Thanks

[Somye]

Well, If your prices of stock are steadily falling with a set selling price, gradually you're costing out cheaper and cheaper stock. Therefore, If you have gradually decreasing cost with a fixed revenue, you will have a gradual increase in gross profit (same proportion as the falling stock prices). Your stock on hand however would be lower as you are initially costing out the more expensive stock, and hence have more and more cheaper stock on hand.

[luke_rulz94]

Currently doing a practice exam..

the question says...

1. Complete the general journal entry to close the revenues and expenses to the P/L summary.

additional information :
equipment of 12000 is depreciated at 10% per annum using the straight line method.
the business prepares reports monthly.

I worked out the depreciation of the equipment to be $100, however the solutions say $90.

I did:
12000 x 0.1 = 1200 per year.
1200/12 = $100

am i missing something?

[link125]

Currently doing a practice exam..

the question says...

1. Complete the general journal entry to close the revenues and expenses to the P/L summary.

additional information :
equipment of 12000 is depreciated at 10% per annum using the straight line method.
the business prepares reports monthly.

I worked out the depreciation of the equipment to be $100, however the solutions say $90.

I did:
12000 x 0.1 = 1200 per year.
1200/12 = $100

am i missing something?

What exam is it in?
I have most of them so I should be able to check it out