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ACCT2005 > Accounting > Flashcards

Accounting Flashcards

1
Q

Accounting policy decisions need to address four components

A

-defintion
-recognition
-measurement
-disclosure
and applies to both one-off and routine transactions

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2
Q

What are the two types of accounting theories?

A

Normative theories which prescribe what should happen

Positive theories which explain or predict activities

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3
Q

Positive accounting theory

A

attempts to explain accounting policy decisions by examining a range of relationships or contracts
Derived from the nexus of contracts view of the firm and agency theory

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4
Q

Nexus of contracts

A

Org is characterises as the centre of contractural relationships focusing on three relationships

  • managerial contracts
  • debt contracts
  • political contracts
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5
Q

What is the agency theory?

A

Und. relationships whereby a person or group of persons (the principal) employs the services of another (the agent) to perform some act on their behalf

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6
Q

Agency relatiosnhip

A

possible conflict of interest between the agent and the principal

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7
Q

Agency costs

A

Monitoring cost
Bonding cost
Residual loss

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8
Q

Residual loss

A

loss in value of entity resulting from separation of ownership and control, where marginal cost exceeds the exp benefit of add monitoring and bonding

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9
Q

Owner-manager agency relationships problems

A

Horizon problem- different time horizons imp to each party
Risk aversion- managers gen prefer less risk
Dividend retention- managers preference to hold onto funds

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10
Q

Renumeration contracts

A

help align the interests of managers with those of owners

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11
Q

Accounting infrotmation

A

used in such contracts to specify performance targets, monitor actual performance and determine the amount of rewards such as a bonus that managers receive

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12
Q

What is a debt covenant and why is it used in a lending agreement?

A

Lender agrees to provide funs to an entity there is a risk that the borrower may not honour obligation to repay all the borrowed funds with interest

Financial stmts used to monitor compliance with debt covenants

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13
Q

Problems which increase lenders risk:

A

excessive dividend payments to owners
asset substitution
claim dilution
underinvestment

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14
Q

Entities have political relationships

A

govts
trade unions
NGOs

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15
Q

Roles of accounting info in reducing agency problems

A

source of info about entity in political processes
monitor performance
give rise to incentives for acct policy

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16
Q

What are the implications of agency theory for acct policy choice?

A

bonus plan hypothesis- managers prefer acct policies which inc profit, acting in their own interest prefer more remuneration

debt hypothesis- managers of entities with high leverage prefer policies that inc profit and equity

political cost hypothesis- managers of larger entities are more likely to prefer acct policies that reduce profits

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17
Q

What are the two different hypothesis of acct in capital markets?

A

The mechanistic hypothesis- predicting that securities market reacts mechanistically to changes in acct numbers, inv assume to ignore differences in policies, implication that investors could be fooled by cosmetic changes in acct policies

The efficient markets hypothesis- proposition that markets are efficient, such that:
security prices make a rapid and unbiased adj to new info
so price fully reflects available info

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18
Q

What are the three forms of market efficiency?

A

Reflected in security prices:
weak: the security price reflects info contained in the seq of past prices
semi strong: the security price reflects all publicly available info
strong: reflects all public and private info

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19
Q

Capital markets theories attempt to explain the effects of acct policy choice

A

on share prices

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20
Q

Mechanistic hypothesis predicts that

A

Mechanistic hypothesis predicts that investors ignore differences in acct policy choice and fixate on reported numbers

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21
Q

The semi-strong form of the efficient market hypothesis predicts that

A

share price will rapidly impound all publicly available info inc choice of acct policy on acct numbers

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22
Q

The three key elements of fair value are

A
  1. the current exit price
  2. the asset is sold or the liability is transferred in an orderly transaction
  3. the transaction is between market participants
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23
Q

The current exit price

A

exit price is the price that would received to sell an asset or paid to transfer a liability

expectations about the future cash flows that will be generated by the asset subsequent to the sale of the asset or transfer of the liability.

The fair value in both cases is based on the expected cash flows of the entity

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24
Q

Market participants

A

a. be independent from each other
b. be knowledgeable about the asset or liability
c. have the ability to enter into the transaction
d. not be forced or compelled

25
Q

fair value is

A

the price that would be received to sell an asset or paid to transfer a liability in orderly transaction between market participants at the measurement date

26
Q

current exit price: entry price

A

the amount (trans price) paid by the entity to acquire an asset or assume a liability in an exchange trans

27
Q

current exit price: exit price

A

the fair value of the acquired asset or assumed liability is the price that would be received by the entity when it sold the asset or paid to transfer the liability to another entity

28
Q

orderly transactions:

A

the entity will make observations about current markets containing transactions

factors that indicate NON ORDERLY transactions are:

  • the seller is near or in bankruptcy
  • the seller was forced to sell to meet regulatory or legal requirements

if the trans is not orderly the amount paid will not necessarily equal the fair value of the asset

29
Q

What factors does an entity need to consider specific to the transaction?

A
  • the actual asset or liability being measured
  • the principal market for the A/L
  • the market participants to whom the entity would enter into a transaction in that market
30
Q

What are transactional costs

A

the costs to sell an asset or transfer liability in the principal market for the A/L that are directly attributable to the disposal of the asset or the transfer of the liability

31
Q

Trans costs must meet:

A
  • they result directly from and are essential to the trans
  • they would not have been incurred by the entity had the decision to sell the asset or transfer the liability had not been made
32
Q

Steps to make a fair value measurement for a non financial asset

A
  1. Determine the particular asset that is the subject of the measurement
  2. For a non-financial asset, determine the valuation premise that is appropriate for measurement.
  3. Determine the principal (or most advantageous) market for the asset.
  4. Determine the valuation technique(s) appropriate for the measurement.
33
Q

An entity shall disclose info that helps users of its financial stmts access both of the following

A

a. for A+L that are measure at f.v. on a recurring or non recurring basis in the stmt of fin position after initial recognition the valuation tech and inputs used to dev those measurements
b. for recurring f.v. measurements using signification unobservable inputs (level 3) the effect of the measurements on profit or loss or other income for the period

34
Q

AASB 102 Inventories defines inventories as assets that are:

A

(a) held for sale in the ordinary course of business
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services

35
Q

What are the three categories of inventories

A
  1. finished goods
  2. work in progress
  3. raw materials
36
Q

Inventories must only be initially recognised under AASB 102 when:

A
  • it is probable that future economic benefits will arise from their sale or use
  • when cost can be reliably measured
37
Q

The rule for inventory valuation is that

A

inventory should be valued at cost or net reallsable value (NRV) whichever is lowest of the two

38
Q

Stock write down is the difference between

A

the valuation of cost and net reallsable value (NRV)

39
Q

Para 10 of AASB 102 requires that the costs of inventories comprise

A

(a) cost of the purchase
(b) cost of conversion
(c) other costs incurred in bringing the inventories to their present location and condition

40
Q

Paragraph 11 of AASB 102 states cost of purchase comprise

A
  • purchase price
  • import duties and other taxes
  • transport and handling costs
  • trade discounts
  • supplier rebates
  • settlement discounts
41
Q

Costs of conversion include:

A

direct labour
systematic allocation of fixed and variable production overheads
-fixed overheads: indirect costs , constant regardless of volume of prod, allocated to the cost of inventories on the basis of normal prod capacity
- variable overheads: indirect costs, vary directly with vol of prod, allocated to each unit of prod on the basis of actual use of prod facilities

42
Q

para 15 of AASB 102 requires other costs be inc in the cost of inventories only if they

A

are incurred in bringing the inventories to their present location and condition
e.g. costs of specific design inc in prod tailor-made goods for ind customers

43
Q

what are the two methods of record keeping for inventory control?

A
  • periodic method
  • perpetual method
    result in different amounts for cost of sales and the cost of inventories on hand at the end of the period
44
Q

Briefly explain the periodic method

A
  • inventories on hand is det periodically
  • purchases of inventories and inwards freight costs for the period are posted directly to expense accounts
  • purchase returns for the period may be recognised separately
  • cost of sales is det. for the period
  • overall, cost effective.
45
Q

Briefly explain the perpetual method

A
  • inventories on hand can be determines at any point of time from the accounting records
  • purchases of inventories and purchase returns are recognised using the inventories account
  • cost of sales is recorded at point of sale such that each sale is associated with a revenue and an expense
  • up to date information is always available
46
Q

How do the inventories physical count differ between inventories methods

A

the period method inventories are counted at the end of each accounting period to determine the balance of closing inventories whereas the perpetual method counts are made to verify the accuracy of recorded quantities for each inventory item

47
Q

what are cut off procedures

A

both the periodic and perpetual methods require cut off procedures
ensures the accounting records reflect the physical count
includes all transactions relevant to the accounting period

48
Q

Goods in transit depend on the terms of trade - if goods are purchased on

(a) FOB shipping terms
(b) FOB destination terms

A

(a) goods belong to the purchaser from the time of shipping, inc in inv/acc payable at acct date, purchases in transit identified by an adj journal entry
(b) belong to the entity until they arrive at the customers premises , adjustment required

49
Q

Consignment arrangement:

A

agent sells goods on behalf of the consignor on a commission basis
transfer of goods to the consignee is not a legal sale/ purchase trans
legal ownerships remains with consignor until sold to third party
goods on consignment not inc in physical count

50
Q

control account / subsidiary ledger reconciliation

A
  • perpetual method:
    general ledge acc balance must be reconciled with the total of the subsidiary ledger
  • not req under the periodic method
  • recording errors and omissions will cause the reconciliation process to fail
51
Q

What are the two rules for determining the cost of inventories sold:

A

Specific cost- inventories spec identified and assigned an individual cost

Assigned cost: specific cost cannot be determines
Cost is assigned by either -
(A) first in first out cost formula: assumes that items of inventory purchases or produced first are sold first
Items remaining in inv are those most recently purchased or produced
Most recent purchase assigned to inventories asset account
Older cost assigned to cost of sales expense account

(B) weighed average cost formula: 
The cost of each item is determined from the cost of similar items purchased or produced during the period 
Average may be calculated by the 
- periodic weighted average method
- moving weighted average method
52
Q

Periodic weighted average method

A

The cost of inv on hand at the beginning of period
+ all inv purchased during the period
/ the total number of items available for sale during the period

= produces cost per unit

53
Q

Weighted average cost formula

A

Average unit cost recalculated each time there is an inventories purchase or purchase return

54
Q

Define net realisable value NRV and explain reasons why it may fall below cost

A

The net amount that an entity expects to realise from the sale of inventories in the ordinary course of business

It may fall below cost:

  • fall in selling price
  • physical deterioration of inv
  • product obsolescence
  • miscalculations or other errors in purchasing or production
  • increases in the estimates costs of completion or making the sale
55
Q

Estimating NRV is based on and must include

A

Based on the most reliable evidence available at the time of the estimate and must include

  • expected selling price
  • estimated costs of completion (if any)
  • estimated selling costs.
56
Q

NRV: materials and other supplies

A

Not written down below cost in the finished goods are expected to be sold at or above cost

Written down to the NRV if the finished goods are not expected to recover the costs :

Sometimes replacement cost of the materials or other supplies may be the best measure if the NRV

57
Q

Written down to NRV

A

Inv are usually written down to NRV on an item by item basis

Not appropriate to write :
Inventories down on the basis of classification of inventories
All the inv in a particular industry or geographical segment

If the NRV increases the amount a precious write down can be reversed e.g. an item of inventory is written down due to falling sales prices
Or inventory is still on hand at the end of the subsequent period or selling price has since recovered

58
Q

Para 34 AASB 102 the following items must be recognised as expenses

A
  • carrying amount of inventories in the period in which the related revenue is recognised in other words CoS
  • write down of inventories to NRV
  • all losses of inventories
59
Q

Exception to the rule of recognition as an expense

A

Inventories used by an entity as components in self constructed property, plant or equipment

The cost of these items is capitalised and recognised as an expense via depreciation

ACCT2005 (2 decks)

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