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26 Cards in this Set
- Front
- Back
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What is profit
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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
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What is the main purpose of P&L Account
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Is to show the results of the transformation process over a given period
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The result of (profit) of the entire process of transformation process can be viewed as the difference between ---?
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1) Measure of Accomplishment
2) Measurement of Effort |
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What is measure of accomplishment
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Sales revenue for the period under review
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What is the measure of effort
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the cost incurred making the sales
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How is the accomplishment measured
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for a given period under review it is the number of units shipped and invoiced to customers
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What conditions need to be satisfied before accomplishment for a product can be measured
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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 |
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Why is shipping and invoicing a good justification of accomplishment
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this is the point in the cycle where all three conditions are met
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What conventions underlay the measure of accomplishment
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1) Realization convention
2) Accruals convention |
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What is the realization convention
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Only realized sales are measured, only good sold, not good completed and not sold or partially completed goods
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What is the accruals convention
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Cash does not have to received to add value. An obligation from a credit worthy customer is enough to recognize a sale.
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What conventions cover the measurement of effort
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1) Matching convention
2) Allocation convention 3) Cost convention |
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What is the matching convention of the measurement of effort
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Profits are arrived at by matching the efforts(costs) with the units shipped and invoiced (realization convention) to customer (sales) with a given period
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Why can identifying the costs of units sold not so easy as it sounds
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Because the volume of units produced in a period seldom matches the units sold
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Give some examples of when costs are not easily identifiable
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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 |
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How does a company deal with under production or over production in P&L
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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 |
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What is the allocation convention
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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 |
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What is the cost convention
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Accounts use aquisation or historical costs for different means of production. The price pay for them by the business when they where bought
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How do you determine the use of raw materials in an accounting period
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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)
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When determining the consumption of means of production what would an accountant be looking at
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1) Raw materials used
2) Labour 3) Depreciation of fixed Assets 4)power |
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How would the depreciation of a fixed asset be included in the measurement of effort
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Fixed decline when used and this is recognized as depreciation of the fixed asset.
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What three factors does depreciation take into consideration
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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 |
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What three methods are used to calculate depreciation
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1) Straight-line method
2) Reducing balance method 3) consumption method |
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How does straight line depreciation work
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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 |
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How does reducing balance depreciation work
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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
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How does consumption Method of depreciation work
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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 |
