Help with Review QUestions from Chapter 9 Please :(

[hello_kitty]

3)   Explain how the Profit and Loss Summary account would be classified in the Balance Sheet


2)   Explain how the Reporting Period Principle assists in the calculation of profit.
The Reporting Period Principle allows the business to divide the life of their business into arbitrary periods in order to determine their profit. The owner can decide how often they want their profit to be determined.

3)   Explain how the Reporting Period Principle leads to Relevance in Accounting Reports
Because during the Reporting Period it is important that the calculation of profit only includes the businesses expenses and revenues that have occurred during that Reporting Period, this ensures Relevance in our reports, by including only information that is useful for decision making.

1)   Identify the three entries that will be recorded in the Profit and Loss Summary Account
•   Closing Revenue Accounts
•   Closing Expense Accounts
•   Transfer to Profit/Loss to the Capital Account

2)   Referring to Revenues and Expenses, Explain why the cross-reference in the Profit and Loss Summary account are not ledger account names
The cross-reference in the Profit and Loss Summary account are not ledger account names, because as with Revenues, there is no single account linked to the total expenses figure, therefore the cross-reference must be Expenses.

1)   State one reason why transactions with the owner are recorded separately in the Drawings account rather than directly into the Capital Account
One reason why transactions with the owner are recorded separately in the Drawings account rather than directly into the Capital Account is so that the owner’s transactions for a particular Reporting Period can be isolated.

2)   State one reason why the Drawings account is closed to the Capital Account
At the end of the Reporting Period, the balance of the Drawings account must be transferred to the Capital account so that the Capital account can reflect the net effect of all transactions with the owner.

3)   Referring to the definition of an expense, explain why the Drawings account is not closed to the Profit and Loss Summary Account
Transactions with the owner are expressly excluded from the definition of revenues and expense, and must not be counted in the calculation of profit.

1)   Explain why it is necessary to prepare a Profit and Loss Statement even when the profit figure is known
It is necessary to prepare a Profit and Loss Statement even when the profit figure is known so that the owner of the business is aware of how the profit was generated, detailing the revenues earned and expenses incurred during the period, and in the process shows both Gross Profit and Net Profit.

2)   Explain the relationship between the Profit and Loss Summary account and the Profit and Loss Statement
The relationship between the Profit and Loss Summary account and the Profit and Loss Statement, is that the Net profit reported in the Profit and Loss Statement should be the same as the figure determined in the Profit and loss Summary account, but the statement will show the reasons why that profit/loss occurred, giving the owner more information on which to base their decisions.

3)   Explain why the Profit and Loss Statement is titled for the period rather than as at a particular date
The P/L Statement is titled for the period rather than as at a particular date, because the information it reports is not confined to a single day, but covers a period of time.

4)   Explain the difference between Cost of Sales and Cost of Goods Sold
The difference between Cost of Sales and Cost of Goods Sold is that, Cost of Goods Sold is referring to all costs incurred in getting goods into a condition and location ready for sale, whereas, Cost of Sales is simply one of the items which may be reported under this heading.

Thanks so much

[eeps]

3)   Explain how the Profit and Loss Summary account would be classified in the Balance Sheet

For this question, I think it's a trick question? The actual account "Profit and Loss Summary account" isn't reported in the Balance Sheet. Only after the P/L Summary account has been closed off, then either a profit or a loss is recorded under Owner's Equity in the Balance Sheet. Besides that all your answers are good. Going well. Good luck for the mid-year exam!

[hello_kitty]

Ah thanks so much EPL for taking the time to read it!
thanks ill need the luck!
what do you suggest me to do for revision?
ive been going through all the chapters, and then starting practice exams..
should i start with the VCAA and VCTA? or the Neaps, etc??

[eeps]

Leave the VCAA exams till the end, especially last year's and 09'. Yeh, go through each chapter; be confident you know the material - theory and practical. Once you feel ready, do one or two practice papers un-timed, look back at your notes if need be. As you do more papers, then begin to time yourself like it's the real thing. There's no real particular order in which you should do practice papers; start with any company exam (i.e. NEAP, Insight etc.). Do as many practice exams as you like, until you feel ready and confident. Good luck! I'm sure you'll do well from what I've seen of you on VCENotes. Don't stress too much!

[hello_kitty]

Ah okay thanks!!
im just worried about the theory questions mostly!
i have a question, how would i explain discount revenue and expenses,

Discount Revenue
Is a Revenue because it is a saving in inflows of economic benefits that is going to decrease liabilities and increase owner’s equity

Why would it be 'saving in inflows' and 'decrease liabilities' and 'increase owner's equity'

and also Discoutn Expense
I''m not sure what a good definition for why its a revenue


I get a bit confused on using the appropriate words like increase/decrease liabilities, assets, owners equity?
is there a way to get myself to understand it more??


Thanks!!

[luffy]

Ah okay thanks!!
im just worried about the theory questions mostly!
i have a question, how would i explain discount revenue and expenses,

Discount Revenue
Is a Revenue because it is a saving in inflows of economic benefits that is going to decrease liabilities and increase owner’s equity

Why would it be 'saving in inflows' and 'decrease liabilities' and 'increase owner's equity'

and also Discoutn Expense
I''m not sure what a good definition for why its a revenue


I get a bit confused on using the appropriate words like increase/decrease liabilities, assets, owners equity?
is there a way to get myself to understand it more??


Thanks!!

Discount Revenues are savings in outflows of economic benefit that is going to decrease liabilities (creditors) more than the decrease in assets (i.e. bank), which will result in an increase in owner's equity (profit).

Discount Expenses are reductions in inflows of economic benefit that will decrease assets (i.e debtors decreases more than bank increases), which will result in a decrease in owner's equity (profit).

To answer your question regarding why is it a "savings in outflows" and "decrease liabilities", I'll simply explain what the discounts are:

Discount Expense:
Eg. Lets have a situation where you have sold stock on credit for $100, with terms stating that if they repay the money within 7 days, they get a 10% discount.
So, when you sell the stock, debtors control will increase by $100. Thus, the debtor owes you $100.
However, because they pay within 7 days, they receive the 10% discount. As a result, they only repay you $90. Now, look at what happens to the accounting elements. Debtors must decrease by $100 (even though they only paid $90) because they no longer owe you any money. Bank must increase by $90. However, this equation would no longer balance. Thus, owner's equity must decrease by $10, which is an expense.
-> Therefore, discount expense is a reduction in an inflow, because you have still received money, but less than you were meant to get.

Discount Revenue:
It is a very similar case for discount revenue, except you have paid creditors less money than you owe them due to the credit terms.
E.g. You have purchased stock on credit for $100, with terms stating that if you repay the money within 7 days, you get a 10% discount.
When you purchased the stock, creditors control will increase by $100. (you owe the creditor $100).
However, if you repay the money within 7 days, you will get the 10% discount, and will only pay $90. As a result, creditors control decreases by $100 (you no longer owe the creditor any money) and bank decreases by $90. Consequently, as the accounting equation would no longer balance, profit increases by $10, which is a revenue.
-> Therefore, it is a savings in outflow (because you have paid the creditors less money than you were meant to), which decreases liabilities (creditors) by more than the decrease in assets (bank), which results in an increase in owner's equity.

Tell me if you need better explanations. Hope I helped.

[hello_kitty]

thank you so much! that made a lot of sense!
what other things would an expense be increase liabilities, and revenue be decrease liabilities?

thanks again!

[hello_kitty]

Also, i just want to clarify
so saving in outflows - basically means you're saving the money that is going out
and reduction in inflows - less money is coming into the business?

[luffy]

thank you so much! that made a lot of sense!
what other things would an expense be increase liabilities, and revenue be decrease liabilities?

thanks again!

Honestly, I can't think of anything other than discount expense/revenue, which will decrease liabilities (as a revenue) and decrease assets (as an expense). There might be a few more expenses/revenues we discover in unit 4, but I haven't got to the second half of the year yet xD.

Also, i just want to clarify
so saving in outflows - basically means you're saving the money that is going out
and reduction in inflows - less money is coming into the business?

Yep, that is 100% correct, except VCAA examiners probably want more formal definitions of the terms.

[nacho]

thank you so much! that made a lot of sense!
what other things would an expense be increase liabilities, and revenue be decrease liabilities?

thanks again!

lol i think that is a question so
- interest expense/revenue

[luffy]

thank you so much! that made a lot of sense!
what other things would an expense be increase liabilities, and revenue be decrease liabilities?

thanks again!

lol i think that is a question so
- interest expense/revenue

He meant what what other revenues will decrease liabilities (instead of increase assets i.e. savings in outflows). As of accounting unit 3, there are no other expenses/revenues other than discounts, which have this property.