909793
Description
Flashcards by Harshad Karia, updated more than 1 year ago
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Created by Harshad Karia
almost 10 years ago
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| Question | Answer |
| Describe the treatment of the unrealised profit in the financial statements [income statement (trading and profit and loss account) and balance sheet], for year ended 31 March 2010. Include any relevant calculations. Info. Inventory (Stock) 18 000 Unrealised profit (3 000) | In balance sheet in current assets (1) £ Inventory (Stock) 18 000 Less provision for unrealised profit (3 000) 15 000 . (1OF) In income statement (profit and loss account) increase in provision of £1000 (1OF) reduces (manufacturing) profit (1OF). Accept an answer where the impact of the candidate’s comment will be a reduction in profit (1). Reduce inventory by £3000 (1OF). |
| Explain why it is necessary to adjust for unrealised profit in the financial statements. | Prudence concept (1) states that should not anticipate profit ie account for profit until fully realised (1) so that profit and assets are not overstated (1). Unrealised profit may not actually be achieved (1). IAS2 (1) states that inventory (stock) is valued at the lower of cost or net realisable value (1). Realisation concept (1). True and fair view (1). Accept “would mean profits are inaccurate/wrong” (1). Accept “profits would be over-/understated”(1). |
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| Explain two benefits of using ABC? | Benefits of ABC are: • produces more accurate cost information as the cost driver which causes the cost is used to allocate the cost on a more objective basis (1) • does not require arbitrary apportionment of overheads (1) rather than based just arbitrarily on either labour hours or machine hours (1) • more accurate costs can lead to more accurate establishment of selling price (1) • this enables management to have a greater understanding of why costs are incurred (1) and how they are influenced by changes in production (1) • whereas absorption costing is useful where there is a narrow range of products (1) |
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