ACCOUNTING BOOKLET
, Inventory
Q.34, 34.2
With regards to the fixed selling price, what advice would you offer about price
fixing?
Reduce markup percentage to attract more customers
Have different markup percentages for latest stock that is in demand
Sell old in clearance sale
Q.34, 34.3
Give examples of the type of practices that take place in this industry (CD’s)
that results in unfair competition.
Coping of CD’s and selling them at the flea markets
Sale of illegal copies
Downloading off the internet and distributing
Q.35, 35.4
Stolen/damaged stock- How to rectify the problem?
Periodic inventory system used - Stock records only known when physical stock
count is done, therefore they would not be able to determine loss early
Change to perpetual inventory system
Do regular stock taking and compare with stock records
Q.35, 35.5
Owner wants to change from weighted average to FIFO method. What advice
would you offer?
Need to have valid reasons for changing stock valuation method. It must not
be to inflate /deflate gross profits for tax purposes.
Must disclose intention to SARS with motivation.
Unethical to change without permission.
Q.35, 35.6
Profit of business is decreasing over the years. Give reasons and provide
possible solutions.
Selling price remains constant over time while costs of sales is increasing possibly
due to inflation.
Adjust the selling price (markup) as costs increase – remain competitive.
Negotiate better prices with suppliers.
Take advantage of bulk discounts.
,Q.36, 36.1.1
Differences between the perpetual stock system and the periodic stock
system.
Perpetual stock system Periodic stock system
Cost of sales calculated at Cost of sales calculated at
point of sale end of financial period
Stock value can be Stock value
determined /identified at determined/identified by
any time stock count
Cost of sales account Purchases account used
used
Stock bought regarded as Stock bought regarded as
an asset an expense
Q.36, 36.2.3
Give advice to improve the internal control over stock.
Count stock regularly /randomly and check against stock records.
Order smaller quantities, but more frequently
Improve physical security, e.g. Controls at entrance/security cameras
Claim on insurance policy
Q.37, 37.3
The owner wants to change the stock valuation system from FIFO to weighted
average or specific identification. How would a change in policy impact the
financial reporting of the business?
May result in a different closing stock figure for the statement of financial
position.
Will result in a different gross profit figure for the statement of comprehensive
income.
May Impact on the amount of income tax payable/ may influence the EPS
Q.59, 59.1.4
Raw (direct) materials consists of wood in various sizes, screws, nails,
hinges, varnish and paint. All items obviously have different costs. Up to now
the business has used the FIFO method of valuing their stock of raw materials.
The manage is of the opinion that it would be more effective in this business to
make use of the weighted average method. Explain why you think he feels this
way by discussing how weighted average method could be more costs
effective to the FIFO method that they are using currently.
FIFO method would involve doing a stocktake of each individual item and
doing an allocation for each item according to the latest stock bought-
determining the price at which the final stock was bought, which could be
made up of various purchases.
, Weighted average would still involve doing a stocktake but this would then
be multiplied by the weighted average of all the good s bought divided by
the number of units bought. With the use of a computer this can easily be
calculated.
Due to the small nature of the items together with the number of items it
would be much quicker to multiply with an average.
The FIFO method would be more time consuming and therefore more
costly. Therefore the weighted average method would be more cost
effective in this situation.
Q.59, 59.2.3
The owner of the business instructed the accountant to switch between
weighted average and FIFO method when valuing the raw materials. Why do
you think the owner would give this instruction? Do you agree with him? Why?
To show a higher or lower profit depending on what the owner is trying to achieve.
No, it is unethical to switch. The business have to stick to one method in the interest
of comparison.
Q.61, 61.5.1
Briefly explain why you think that the Baa-Baa Blankets have made use of the
weighted average method for valuing their stock?
Not easy to distinguish one bale of wool from another.
Q.61, 61.5.3
Briefly explain an advantage for the business if they use the FIFO method.
Stock will be valued at current prices
More realistic
Q.61, 61.5.4
Do you think the owner should be concerned about the amount of wool that is
being used? Why? Explain what might be taking place.
Yes.
Loss of wool means a loss of profit
Wastage
Theft by staff
Errors
, Inventory
Q.34, 34.2
With regards to the fixed selling price, what advice would you offer about price
fixing?
Reduce markup percentage to attract more customers
Have different markup percentages for latest stock that is in demand
Sell old in clearance sale
Q.34, 34.3
Give examples of the type of practices that take place in this industry (CD’s)
that results in unfair competition.
Coping of CD’s and selling them at the flea markets
Sale of illegal copies
Downloading off the internet and distributing
Q.35, 35.4
Stolen/damaged stock- How to rectify the problem?
Periodic inventory system used - Stock records only known when physical stock
count is done, therefore they would not be able to determine loss early
Change to perpetual inventory system
Do regular stock taking and compare with stock records
Q.35, 35.5
Owner wants to change from weighted average to FIFO method. What advice
would you offer?
Need to have valid reasons for changing stock valuation method. It must not
be to inflate /deflate gross profits for tax purposes.
Must disclose intention to SARS with motivation.
Unethical to change without permission.
Q.35, 35.6
Profit of business is decreasing over the years. Give reasons and provide
possible solutions.
Selling price remains constant over time while costs of sales is increasing possibly
due to inflation.
Adjust the selling price (markup) as costs increase – remain competitive.
Negotiate better prices with suppliers.
Take advantage of bulk discounts.
,Q.36, 36.1.1
Differences between the perpetual stock system and the periodic stock
system.
Perpetual stock system Periodic stock system
Cost of sales calculated at Cost of sales calculated at
point of sale end of financial period
Stock value can be Stock value
determined /identified at determined/identified by
any time stock count
Cost of sales account Purchases account used
used
Stock bought regarded as Stock bought regarded as
an asset an expense
Q.36, 36.2.3
Give advice to improve the internal control over stock.
Count stock regularly /randomly and check against stock records.
Order smaller quantities, but more frequently
Improve physical security, e.g. Controls at entrance/security cameras
Claim on insurance policy
Q.37, 37.3
The owner wants to change the stock valuation system from FIFO to weighted
average or specific identification. How would a change in policy impact the
financial reporting of the business?
May result in a different closing stock figure for the statement of financial
position.
Will result in a different gross profit figure for the statement of comprehensive
income.
May Impact on the amount of income tax payable/ may influence the EPS
Q.59, 59.1.4
Raw (direct) materials consists of wood in various sizes, screws, nails,
hinges, varnish and paint. All items obviously have different costs. Up to now
the business has used the FIFO method of valuing their stock of raw materials.
The manage is of the opinion that it would be more effective in this business to
make use of the weighted average method. Explain why you think he feels this
way by discussing how weighted average method could be more costs
effective to the FIFO method that they are using currently.
FIFO method would involve doing a stocktake of each individual item and
doing an allocation for each item according to the latest stock bought-
determining the price at which the final stock was bought, which could be
made up of various purchases.
, Weighted average would still involve doing a stocktake but this would then
be multiplied by the weighted average of all the good s bought divided by
the number of units bought. With the use of a computer this can easily be
calculated.
Due to the small nature of the items together with the number of items it
would be much quicker to multiply with an average.
The FIFO method would be more time consuming and therefore more
costly. Therefore the weighted average method would be more cost
effective in this situation.
Q.59, 59.2.3
The owner of the business instructed the accountant to switch between
weighted average and FIFO method when valuing the raw materials. Why do
you think the owner would give this instruction? Do you agree with him? Why?
To show a higher or lower profit depending on what the owner is trying to achieve.
No, it is unethical to switch. The business have to stick to one method in the interest
of comparison.
Q.61, 61.5.1
Briefly explain why you think that the Baa-Baa Blankets have made use of the
weighted average method for valuing their stock?
Not easy to distinguish one bale of wool from another.
Q.61, 61.5.3
Briefly explain an advantage for the business if they use the FIFO method.
Stock will be valued at current prices
More realistic
Q.61, 61.5.4
Do you think the owner should be concerned about the amount of wool that is
being used? Why? Explain what might be taking place.
Yes.
Loss of wool means a loss of profit
Wastage
Theft by staff
Errors
