Unit 3 AOS 1
What is the accounting equation?
Assets = Liabilities + Owner's Equity.
Calculate net profit if sales revenue is $80,000, cost of goods sold is $32,000 and other expenses are $28,000.
Gross profit = $80,000 − $32,000 = $48,000.
Net profit = $48,000 − $28,000 = $20,000.
What is depreciation?
The systematic allocation of the depreciable amount of a non-current asset over its useful life.
Which financial report shows revenue, expenses and profit for a reporting period?
The Income Statement.
A business owner asks the accountant to delay recording an expense to make this year's profit appear higher. Identify one ethical concern.
This could misrepresent the business's financial performance and breach the requirement to record expenses in the appropriate reporting period.
What is the purpose of a source document in accounting?
It provides evidence that a transaction has occurred and supports the recording of the transaction in the accounting records.
Explain why a business can report a profit but experience a cash shortage.
Profit is calculated using accrual basis accounting assumption, whereas cash depends on actual receipts and payments. For example, credit sales can increase profit before the cash is collected. Repayment of loan principal can also reduce cash without being an expense.
What is an ethical consideration in accounting?
An issue involving honest, fair and responsible preparation or use of accounting information, including avoiding misleading reports and conflicts of interest.
Gross profit increased, but the gross profit margin decreased. Give one possible explanation.
Sales revenue may have increased enough for gross profit dollars to rise, while cost of goods sold increased at a faster rate relative to sales revenue. This reduces the percentage of sales retained as gross profit.
Explain how an increase in credit sales may affect liquidity.
Credit sales may increase accounts receivable without an immediate cash inflow. If customers take longer to pay, the business may have difficulty meeting short-term obligations despite reporting higher sales revenue.
A business purchases inventory for $2,200 including GST. Calculate the value of inventory excluding GST and the GST amount.
Inventory= $2,200 ÷ 1.1 = $2,000.
GST payable = $2,200 − $2,000 = $200.
Distinguish between a bad debt and a doubtful debt.
A bad debt is an amount assessed as uncollectable. A doubtful debt is an amount that may not be collected, but the outcome is still uncertain.
Equipment has a carrying value of $14,000 and is sold for $11,500 cash. Calculate the gain or loss on disposal.
Loss on disposal = $14,000 − $11,500 = $2,500 loss.
A business has net profit of $24,000 and average owner's equity of $120,000. Calculate Return on Owner's Investment (ROI) and interpret it.
ROI=24000/120000X100%=20%
A business is considering a change in depreciation method. Explain one reason the change should be justified and disclosed where required.
A change should reflect a valid reason, such as a change in the expected pattern of consumption of the asset's benefits. Appropriate disclosure helps users understand changes in reported profit and compare financial information across periods.
A business purchases equipment for $12,000 plus GST. Explain the effect on the accounting equation.
Equipment (non current asset) increases by $12,000 and Bank (current asset) decreases by $13,200. GST Payable decrease 1,200. Total assets and owner's equity remain unchanged at the time of purchase, liability decrease 1,200.
Explain why revenue and expense accounts are closed at the end of the reporting period.
To transfer the period's revenue and expense balances to the appropriate summary or owner's equity account, reset temporary accounts for the next period, and determine the period's profit or loss.
Explain the effect of depreciation on profit and the carrying value of a non-current asset.
Depreciation expense reduces profit. Accumulated depreciation increases, reducing the asset's carrying value, calculated as its historical cost less accumulated depreciation.
A business sells inventory for $800 that originally cost $480. Calculate the gross profit and gross profit margin.
Gross profit = $800 − $480 = $320.
Gross profit margin = $320 ÷ $800 × 100 = 40%.
Opening inventory is $12,000, net cost of purchases is $38,000 and closing inventory is $9,000. Calculate cost of goods sold.
COGS=12,000+38,000-9,000
Cost of goods sold = $41,000.
A business records a credit sale of $5,500 including GST at 10%. Identify the relevant accounts and calculate the amounts recorded.
Debit Accounts Receivable: $5,500
Credit Sales: $5,000
Credit GST Clearing: $500
What is the difference between profit and cash flow?
Profit is calculated using revenue and expenses recognised for the reporting period. Cash flow concerns actual cash receipts and payments during the period.
Explain why the reducing balance method may be appropriate for a delivery van.
A delivery van may provide greater benefits and experience more depreciation in its earlier years. The reducing balance method allocates higher depreciation expense earlier and lower amounts in later years, potentially better matching the consumption of the asset's benefits.
Explain one limitation of using financial ratios to evaluate a business.
Ratios are based on historical financial information and may not reflect future conditions. They can also be affected by accounting policies and estimates, limiting comparability between businesses or periods.
Explain one advantage and one limitation of a perpetual inventory system.
Advantage: It provides more up-to-date inventory records, helping management monitor stock levels and identify potential shortages.
Limitation: It requires ongoing accurate recording of inventory movements, and discrepancies caused by theft, damage or recording errors may still require a physical stocktake.