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26 Cards in this Set

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What is profit
Is the difference between the sales which the enterprise has made during the period under review and the costs incurred to bring the goods sold to the market place ready for sale
What is the main purpose of P&L Account
Is to show the results of the transformation process over a given period
The result of (profit) of the entire process of transformation process can be viewed as the difference between ---?
1) Measure of Accomplishment
2) Measurement of Effort
What is measure of accomplishment
Sales revenue for the period under review
What is the measure of effort
the cost incurred making the sales
How is the accomplishment measured
for a given period under review it is the number of units shipped and invoiced to customers
What conditions need to be satisfied before accomplishment for a product can be measured
1) The product has been made and delivered against a firm order
2) All costs that are necessary to create the revenue have been incurred or if not a small or can be predicted within a acceptable level of accuracy
3) The amount of collectable cash can be estimated with an acceptable level of error
Why is shipping and invoicing a good justification of accomplishment
this is the point in the cycle where all three conditions are met
What conventions underlay the measure of accomplishment
1) Realization convention
2) Accruals convention
What is the realization convention
Only realized sales are measured, only good sold, not good completed and not sold or partially completed goods
What is the accruals convention
Cash does not have to received to add value. An obligation from a credit worthy customer is enough to recognize a sale.
What conventions cover the measurement of effort
1) Matching convention
2) Allocation convention
3) Cost convention
What is the matching convention of the measurement of effort
Profits are arrived at by matching the efforts(costs) with the units shipped and invoiced (realization convention) to customer (sales) with a given period
Why can identifying the costs of units sold not so easy as it sounds
Because the volume of units produced in a period seldom matches the units sold
Give some examples of when costs are not easily identifiable
1) When production volumes do not match sales volume, the efforts during the period do not match the sales
2) when sales volumes exceeds the volume of units produced
How does a company deal with under production or over production in P&L
1) Under production - COGS will have finished goods added
2) Over production - COGS will have finished goods taken
away
Also Work in progress - goods started but not yet finished
What is the allocation convention
1) Determination of how much means of production was used in money terms in the accounting period
2) how much of the means of of production should be matched to sales revenue and how much should be matched to the WIP
What is the cost convention
Accounts use aquisation or historical costs for different means of production. The price pay for them by the business when they where bought
How do you determine the use of raw materials in an accounting period
1) by deducting the physical quantity of raw materials at the end of the year from the opening inventory raw materials and the purchases during the year - Determining the means of consumption (allocation convention)
When determining the consumption of means of production what would an accountant be looking at
1) Raw materials used
2) Labour
3) Depreciation of fixed Assets
4)power
How would the depreciation of a fixed asset be included in the measurement of effort
Fixed decline when used and this is recognized as depreciation of the fixed asset.
What three factors does depreciation take into consideration
1) Actual cost of the item including installation (acquisition cost)
2) the estimate net residual amount should the business dispose of the asset
3) the estimate of the useful of the asset to the present owner
What three methods are used to calculate depreciation
1) Straight-line method
2) Reducing balance method
3) consumption method
How does straight line depreciation work
An equal portion of the aquisition cost less the estimated residual value is allocated to each accounting period during the assets life
AQ cost = 1250
Residual vaule - 50
Life of asset = 3 years
= 1250-50/3 = 400 would be taken of the book value every year until three years
How does reducing balance depreciation work
is based on the idea that more depreciation should be taken early in the asset life and smaller amount later, hence you take a annual %. a bigger amount of depreciation is taken earlier in assets life
How does consumption Method of depreciation work
it based on the number of running hours - the greater the running hour the greater ware and tear
= Annual running hours/total number of running hours * Net cost