Hey guys,
I have a couple of questions:
With reference to one qualitative characteristic or accounting principle, discuss the importance of a physical stocktake (4 marks)
Explain the effect on the accounting reports of the business using the FIFO cost assignment method when suppliers prices are falling. (5 marks)
I have the basic idea of the questions but I'm not too sure how to answer them when they are worth this many marks.
Thanks 
With reference to one qualitative characteristic or accounting principle, discuss the importance of a physical stocktake (4 marks)This is how I would go around it!
1. Identify what is the physical stocktake and its purpose? (1 Mark) - Counting each individual item of stock and comparing it with the stock cards to detect any stock losses or gains.
2. Identify the principle or characteristic (I would go with Reliability, but you could also justify Conservatism) (1 Mark)
3. Explain how the characteristic links with the physical stock take (2 or 1 Marks)
Eg 1 - By a firm conducting a physical stocktake, it is ensured that the stockcards are
free from bias and/or material error, and will have a source document (a memo) as
verifiable evidence of the loss/gain.
Eg 2 - By conducting a physical stocktake, if the firm detects a stock loss it must be reported immediately, as according to the
Conservatism principle, all losses must be reported when they are
likely to occur. Hence, the firm's
assets (specifically Stock Control)
will not be overstated, and thus the reports (speicifically the Balance Sheet, current asset section) will be accurate.
To be honest I am surprised that this question is 4 marks, I would've thought 3 marks is more suitable.
Explain the effect on the accounting reports of the business using the FIFO cost assignment method when suppliers prices are falling. (5 marks)1. What is the FIFO cost assignment method? (1 mark) - The
assumption that the stock that enters the business first, is the first to leave the business.
2. Which accounting reports are affected? (1 mark) - The accounting report affected is primarily the Balance Sheet (stock control) and the Income Statement (stock losses or gains)
3. What is the effect? (3 marks)
Eg - If a firm uses the FIFO method whilst supplier prices are falling, then it is likely that a firm may
overstate their assets (stock control) and
overstate their expenses (Cost of Sales), and thereby
understate Owner's Equity (Net Profit). As FIFO is an assumption, the stock cards would state the
highest possible stock control and the
highest possible Cost of Sales. This breaches the
Conservatism principle, as the firm could possibly be overstating their assets, and understating their Profit, hence a physical stocktake
must be conducted to ensure the stockcards and accounting reports are free from bias and material error (thus upholding
Reliability). Therefore, the overall effect of using the FIFO assumption on reports of the business when supplier prices are falling is that the Current Asset section in the Balance Sheet may be overstated, and the Adjusted Gross Profit of the firm may be understated.
I hopefully think this would get you the 5 marks
hope I could help!
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