Accounting Theory

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Accounting Theory
2011-11-07 02:37:34
Accounting Theory accounting

Theory questions from Insight (book) practise exams
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  1. Explain why the Debit entries do not balance with the Credit entries in the subsidiary records.
    A double entry system is only used in the General Ledgener. A Subsidiary Ledger records individual transactions for each debtor or creditor on a single entry basis, and totals should correspond with the Control Account Balanacs.
  2. Referring to one Accounting Principle, explain the circumstances when Stock may be valued at an alternative to the cost price
    When the Net Reliasable Value of stock falls below the cost price, then stock should be valued at that NRV. This convervatively recognises the expense when probable and ensures assets are not overstate.
  3. Reffering to Interest Revenue in the profit varian report, explain how there have been the unfavourable variance in the Interest Revenue received
    Interest Revenue earned was $__ as expected in the Profit Variance Report, which Ted expeced to receive in the period. However, he has only received $150 and thus he must have $550 Accrued INterest Revenue owing at the end of the period
  4. Explain how a business could improve his Return on Assets (NP/Average Assets) if Asset Turnover (Sales/Average Assets) was to remain the same
    As the business's assets will generate the same percentage of sales dollars, he must focus on generateing more profit from those dollars. Thus, he must improve the Net Profit Ratio by increasing his mark-up or decreasing expenses relative to sales.
  5. List the different profitability ratios
    • Return on owner's investment
    • return on assets
    • assets turnover
    • gross profit ratio
    • net profit ratio
  6. Define Net Reliasable Value
    The estimated selling price of a stock item less any costs involved in its selling, marketing and distribution
  7. Explain why stakeholders may be unhappy with the profitability of the business even it is evaluated as excellent by accountants.
    • The hours worked to generate these returns may be very long and unstainable.
    • May need to emply another staff member which will decrease profitability and perhaps cause further complications to the business in the future
  8. Explain what is meant by the term 'eficiency' as it relates to ratio anaylsis
    The term eficiency measures the business's management ability to manage their debtors, stocks and creditors to achieve their liquidity and profitabiligy objectives.