FAC Learning Unit 3

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Questions and Answers

A company using a perpetual inventory system purchases goods. How is the inventory account immediately affected?

The cost of goods sold is decreased.
No change is made until the end of the accounting period.
The inventory account is updated continuously. (correct)
The inventory account is updated at the end of the accounting period.

During a period of sustained inflation, which inventory valuation method would typically result in the highest reported net income?

Specific Identification
First-In, First-Out (FIFO) (correct)
Weighted-Average Cost
Last-In, First-Out (LIFO)

A company switches from a periodic to a perpetual inventory system. What is one significant change in accounting procedures?

Inventory records are updated continuously for purchases and sales. (correct)
Cost of goods sold is calculated only at the end of each period.
The formula for calculating the cost of sales becomes Opening Inventory - Purchases + Closing Inventory
A physical count of inventory is required more frequently.

How does the choice between a periodic and perpetual inventory system affect the frequency of physical inventory counts and why?

Both systems benefit from periodic physical counts, but perpetual systems can identify discrepancies in real-time, prompting immediate investigation. (D) Signup and view all the answers

A company using the straight-line method depreciates an asset for three years. They then realize the asset will be useful for five more years. How does this change affect future depreciation calculations?

The accumulated depreciation affects the remaining depreciable base, which is then spread over the new estimated useful life. (D) Signup and view all the answers

What is the primary limitation of using the straight-line depreciation method for assets that provide higher utility in their early years?

It results in a constant depreciation expense that does not match the asset's usage pattern. (C) Signup and view all the answers

How does the reducing balance method of depreciation impact a company's financial statements in the later years of an asset's life, and why?

It typically results in a lower depreciation expense, potentially increasing net income, as the asset's carrying value decreases. (A) Signup and view all the answers

In a scenario where a company initially uses the straight-line depreciation method and then switches to the reducing balance method, what immediate impact should one anticipate on the depreciation expense?

The depreciation expense will likely increase in the periods immediately following the change, then decrease over time. (D) Signup and view all the answers

A South African company purchases equipment for R57,500 VAT inclusive. If the company can claim back the input VAT, what is the cost of the equipment recorded in the company's books, excluding VAT?

R50,000 (A) Signup and view all the answers

A retailer in South Africa makes a cash sale of goods priced at R2,300 (VAT exclusive). How much VAT must the retailer collect from the customer, and what is the total amount the customer pays?

VAT: R345, Total: R2,645 (D) Signup and view all the answers

If a business incorrectly calculates and overpays its output VAT to SARS, how does this error affect the business's accounting equation?

Assets decrease, and equity increases. (A) Signup and view all the answers

How does the timing of input VAT claims impact a company's cash flow management, and what strategies can a company employ to optimize this?

Promptly claiming input VAT refunds enhances cash flow by recovering funds sooner. (A) Signup and view all the answers

In the context of bank reconciliation, what is the potential long-term impact of consistently neglecting to reconcile bank statements?

It may lead to undetected fraud, inaccurate financial reporting, and poor financial decision-making. (C) Signup and view all the answers

A company's book balance shows an overdraft of R5,000. There are outstanding checks totaling R1,500 and deposits in transit of R800. What is the adjusted bank balance after considering these items?

R5,700 Overdraft (C) Signup and view all the answers

A company's bank statement shows a balance of R10,000. However, there's an unrecorded bank charge of R50 and an outstanding deposit of R1,000. What actions are necessary to reconcile the company's cash records?

Subtract R50 from company's cash records and add R1,000 to bank statement. (A) Signup and view all the answers

How does the segregation of duties benefit the bank reconciliation process, and what roles should be separated to ensure effective control?

It reduces the risk of fraud and errors; cash handling, record-keeping, and reconciliation should be performed by different individuals. (A) Signup and view all the answers

How would outstanding checks affect the reconciliation of a bank statement?

Decrease the bank balance during reconciliation. (B) Signup and view all the answers

How would the deposits in transit affect the reconciliation of a bank statement?

Increase the bank balance during reconciliation. (D) Signup and view all the answers

What steps should a company take to ensure that bank reconciliations are thoroughly reviewed and validated, and why is this validation critical for financial governance?

Reviews should be validated by an independent person to detect risk and fraud. (B) Signup and view all the answers

What inherent challenges can arise in maintaining accurate perpetual inventory records in a large retail environment, and what strategies can mitigate these challenges?

The challenges are human error, system glitches, and theft; can be mitigated through regular audits and employee training. (C) Signup and view all the answers

Flashcards

Perpetual Inventory System

Continuously updates inventory records with each purchase and sale.

Periodic Inventory System

Updates inventory records only at the end of an accounting period.