SAC2

Identify four types of transactions that will decrease a GST liability owed to the ATO.

• Cash purchases • Credit purchases • Sales returns • GST settlement

Identify three types of transactions that will increase a GST liability owed to the ATO.

• Cash sales • Credit sales • Purchase returns

Explain how GST on a credit sale will affect:

• GST owed to the ATO GST on a credit sale is charged to the customer on behalf of the ATO, and therefore owed to the ATO, so it increases its GST liability. • the profit on the sale. GST does not affect the revenue earned or expense incurred on the sale, and therefore has no effect on profit.

State three negative consequences of exceeding the credit terms offered by suppliers.

• Strained relationships with suppliers • A reduction in the firm's credit rating (making it difficult to establish lines of credit in the future) and even • A loss of credit facilities (requiring a change of supplier or reliance on cash purchases only).

List five pieces of data that must be noted on the source document used to verify a purchase return.

• The name of the business or person returning the inventory • The type of inventory being returned • The quantity of inventory being returned • The reason for the return • The original purchase price (cost price) of the inventory.

Explain the circumstances in which a business:

• must accept a sales return A business must accept returns of damaged or faulty inventory (or more specifically, where the inventory is not fit for the purpose intended), provided the customer has the source document (such as the sales invoice) as proof of purchase, and the business is satisfied the fault lies with the product rather than with how it was used. • might accept a sales return. A business might accept returns from customers who have purchased the wrong items, or too many items, or simply changed their minds as this may actually generate greater sales, with customers more willing to buy if they know they can return the product if it turns out to be unsuitable.

Explain how GST on a credit purchase will affect:

• the value of the inventory purchased GST does not affect the economic benefit represented by the inventory, so will have no effect on the value of inventory purchased. • GST owed to the ATO. Any GST paid on a credit purchase will be returned from the ATO to the business in the form of a decrease to an existing GST liability.

paying AP early

C: - less time to generate cash from sales - cash is unavailable to make other payments B: - less cash is paid to AP is discount is offered (NP increased) - relationship with AP

Explain the importance of Accounts Receivable Turnover in managing Accounts Payable Turnover.

Cash must be generated fast enough from Accounts Receivable so that payments to Accounts Payable can be made (without putting a strain on cash reserves). Where Accounts Receivable Turnover is slow and cash is not available, Accounts Payable Turnover can suffer, with all the negative consequences this may cause, ranging from a loss of discounts to a loss of credit facilities.

Identify the source documents which might be used to verify cash received from an Account Receivable.

Cash received from an Account Receivable might be verified by a: • cash receipt (manual or electronic) • EFT receipt • Bank Statement (for a direct deposit).

Explain how cash received from an Account Receivable is reported in the Income Statement.

Cash received from an account receivable is not reported in the Income Statement as no revenue is earned when the cash is received. (The revenue is earned at the point of sale.)

Ethical considerations when buying and selling inventory

- the nature of the goods that are being sold (safe and of a fair price) - the customer's capacity to pay - purchase from socially responsible suppliers

Explain what is meant by the notation '5/7, n/30'.

A 5% discount is granted if payment is made within 7 days otherwise, the full amount must be paid within 30 days.

Explain what is shown in a Statement of Account.

A Statement of Account is a summary of the transactions a business has had with a particular Account Payable (or Account Receivable) over a certain period of time (usually a month). The Statement of Account also serves as a reminder of any debts outstanding, thereby encouraging payment.

Identify the source document used to verify a sales return.

A credit note.

Identify the source documents which might be used to verify a payment to an Account Payable.

A payment to an Account Payable could be verified by a cheque butt or an EFT receipt (issued by the Account Payable).

Identify the source document used to verify a purchase return.

A purchase return us verified by a Credit Note.

Explain the effect of a sales return on GST liability to the ATO.

A sales return reduces the GST liability owed to the ATO. Because the inventory has been returned, the seller will not receive GST from the customer and therefore does not owe this amount to the ATO.

Accepting/ not accepting returns

Accepting: C -reduction in profit and inability to resell B -higher goodwill, higher future sales Not accepting: C -lower good will, possible legal consequences B -retention of profit, no extra inventory management costs

Strategies to improve ARTO/APTO

ARTO: - send reminder notices (should be sent immediately, copy of the invoice) - threaten to deny access to credit facilities (refuse credit facilities until payment is received) APTO: - Develop a strong relationship with AP (lenience) - pay within but as close to the credit terms as possible

Limitation of APTO/ARTO

ARTO: ARTO is an average and it is likely that some AR will be paying faster or slower than others in this figure APTO: APTO is an average and it is likely that some AP will be paying faster or slower than others in this figure

Explain how the recording of credit purchases ensures Relevance in the Balance Sheet.

All transactions relevant to the entity and period must be recorded, irrespective of their cash receipt or payment. By including credit purchases in the Balance Sheet, the report contains all information capable of making a difference to decision making, specifically about the amount of inventory on hand and the amount owed to the Account Payable.

Explain how the Accounting Assumptions support the recognition of Accounts Payable.

Credit purchases and the recognition of Accounts Payable are supported by the Going concern and Accrual basis assumptions. Going concern assumes that the life of a business is continuous and thus the business will still be operating sometime in the future when the repayment to the Account payable is due to be made. The Accrual basis assumption states that the elements of the reports are recognised when they satisfy the definitions and recognition criteria, regardless of whether cash has been exchanged or not. A credit purchase of inventory, despite not involving a cash flow, recognises the purchase of an asset (inventory) and the creation of a liability (account payable).

Explain why the cross-references in an Account Receivable account may not match the details provided in the Statement of Account.

Cross-references in the General Ledger must refer to account names, whereas the Statement is more Understandable if it uses more straightforward descriptions

Explain why a discount received for an early payment to an Account Payable is classified as revenue.

Discount Revenue is a savings in an outflow of economic benefits (less cash is paid to the Account Payable), in the form of a decrease in liabilities (Account Payable) that increases Owner's Equity.

Explain why discounts given to Accounts Receivable are classified as expenses.

Discount expense decreases assets (Accounts Receivable) and decreases Owner's equity by the amount not received from the Account Receivable.

Explain the effect of a credit purchase on the accounting equation.

EOAC: A credit purchase of inventory will result in an increase in assets due to the increase in inventory and an overall increase in liabilities due to the increase in Accounts payable and the decrease in GST Clearing. There would be no effect on Owner's equity. NARRATION: Credit Purchase of xX from X

Payment to an Account Payable

EOAC: A payment to an Account Payable will result in a decrease in assets due to the decrease in bank and a decrease in Liabilities due to the decrease the Accounts Payable balance. There would be no effect on Owner's equity. NARRATION: payment to account payable - X

Payment to an Account Payable with discount revenue.

EOAC: For a Payment to an Account Payable with discount revenue, there is a $ decrease in assets due to the decrease in bank. There is a $ decrease in liabilities due to the decrease in account payable. For owner's equity, there is a $ increase due to the increase in discount revenue. NARRATION: Cash payed to X to settle debt with % discount for early payment.

Credit sale

EOAC: For a credit sale, there is an overall increase of assets ($) due to the $ increase in accounts receivable but a $ decrease in inventory. For liabilities, there is a $ increase due to the increase in GST clearing. For owner's equity, there is an overall increase ($) due to the $ increase in sales and the $ increase in the cost of sales. NARRATION: credit sale of xX to X

Sales Return

EOAC: For a sales return, there is an overall decrease in assets ($), due to a $ increase in inventory but a $ decrease in account receivable. For liabilities, there is a $ decrease due to a decrease in GST clearing. For owner's equity there is an overall decrease ($) due to a $ decrease in sales return and a $ decrease in cost of sales. NARRATION: sales return from X for xX due to (reason) on (date of purchase)

Cash received from an Account Receivable.

EOAC: For cash received from an account receivable, there is no overall effect on assets, due to a $ increase in bank but a $ decrease in accounts receivable. There is no effect on both liabilities and owner's equity. NARRATION: cash received from account receivable - X

Purchase return

EOAC: The purchase return will result in a decrease in assets due to the decrease in Inventory. Liabilities will decrease overall due to the decrease in accounts payable and the increase in GST Clearing. There would be no effect on Owner's equity. NARRATION: purchase return to X of xX - reason

Receipt with discount.

For a receipt from accounts receivable with a discount, there is an overall decrease in assets ($) due to the $ decrease in bank but the $ decrease in accounts receivable. there is no effect on liabilities. For owner's equity there is a decrease of ($) due to the the decrease of discount expense. Narrations.

Explain the effect of a purchase return on GST liability to the ATO.

GST on a purchase return 'undoes' the decrease in the GST liability caused by a credit purchased, effectively reinstating (increasing) the liability.

State one reason why the term 'Purchase Return' is not used as a cross-reference in the Accounts Payable account.

General Ledger cross-references can only be the names of actual ledger accounts. 'Purchase Return' is not a ledger account but rather, a descriptive term only.

Explain what action should be taken if discrepancies are detected between a Statement of Account and the firm's General Ledger.

In the case of a discrepancy between a Statement of Account and the firm's General Ledger, all differences should be communicated to the supplier or, alternatively, corrected in the records of the business

Explain how the cost price of a sales return is determined.

In this course, sales returns will identify the cost price of the inventory returned by identifying the sale from which they came.

Explain how the source document used to verify a credit purchase can be distinguished from other tax invoices.

Like all source documents, the name of the seller appears on the top. The name of the business making the credit purchase appears lower down. If our business name is not at the top of the document, then the document is a Purchase Invoice and evidence of a credit purchase by our business to an external entity.

Define the term liquidity and explain how purchasing inventory on credit can help a business to manage its liquidity.

Liquidity is the ability of a business to meet its short-term debts as they fall due. The ability to make credit purchases means that a business can obtain inventory, which it can then sell to generate profit and cash, even if it has little (or no) cash on hand. The payment terms allow the business time to sell the inventory, and collect the cash from the customer, before payment (to the Accounts Payable) is required, ensuring the business is able to meet this debt as it falls due. This also means the business does not have to use its existing cash on hand, meaning this cash can be used to meet other payments as they fall due.

Explain how ethical considerations and personal relationships can be useful in the effective management of Accounts Payable.

Maintaining a solid working relationship with suppliers of inventory is crucial to the long-term viability of a business. It may prompt suppliers to offer special deals or discount rates, or even extend payment terms if required. In all of these dealings, acting in an ethical manner - particularly by acting with integrity and being honest (and open, within the bounds of commercial confidentiality) - remains essential, as it does in all business decision making.

State how many Statements of Account a business will receive in a month. Justify your answer.

One per Account Payable. The Statement of Account is not evidence of a single transaction with a particular Account Payable but rather a summary of transactions that have already occurred.

Accounts Payable.

REPORTED An amount owed resulting from the credit purchase of Inventory represents a present obligation to transfer an economic resource as a result of a past event, with this obligation expected to be settled within the next 12 months.

Account Receivable

REPORTING It represents a present economic resource controlled by the seller as a result of past events, which has the potential to produce future economic benefits within the next 12 months.

Explain how ethical decision-making regarding credit sales can improve business performance.

Recognising legal and ethical obligations to provide goods for sale that are safe and 'socially and environmentally responsible' (both in terms of the product itself and how it is produced) can generate sales and profits. Further, the customer's ability to repay is an important consideration, as credit sales made to customers who cannot make repayments may negatively affect cash received and profit, but also lead to bigger problems in society and the economy itself.

Explain how the recording of credit sales ensures Relevance in the Balance Sheet.

Recording credit ensures Relevance in the reports because all information capable of making a difference to decision-making (specifically, the Sales revenue earned and the amount owed to the business by the Account Receivable) is included in the financial statements.

Explain why a sales return is reported separately in the Income Statement.

Sales returns can be an important indicator of the quality and suitability of the inventory that is being sold, but in order to investigate the cause/s the owner must first know the level of sales returns in a given Period. Recording a sales return in its own separate ledger account allows this information to be reported separately in the Income Statement, and thus assessed and managed by the owner.

Explain how the Accounting assumptions support the recognition of credit sales.

The Accrual basis assumption states that the Elements of the reports are recognised when they satisfy the definitions and recognition criteria so that profit is calculated by deducting expenses incurred from revenues earned in a particular Period. For credit sales, revenue is recognised as earned, even though the cash has not been received, because at the point of sale assets (Accounts Receivable) and owner's equity increase. Further, the amount yet to be received from the Account Receivable can be recognised as an asset because the Going Concern assumption assumes the business will still be operating in the future when the cash is due to be received.

Explain why there is no GST to account for when a payment is made to an Account Payable.

The GST was originally recognised and recorded at the point of purchase; to record it again would be double counting.

Explain how a Statement of Account can be used to ensure reports provide a Faithful representation of a firm's financial events.

The Statement of Account is not a source document that must be recorded, but it does allow for the checking of each transaction and the final balance owed to the Accounts Payable. This supports the Verifiability of the firm's records, and thereby ensures that the reports are complete and accurate and provide a Faithful representation of the balance owed to each Account Payable.

State what is measured by Accounts Receivable Turnover (ARTO).

The average number of days it takes for a business to receive cash from its Accounts Receivable

List three benchmarks that can be used to assess Accounts Payable Turnover.

The credit terms provided by suppliers, plus the APTO from: • Last year (performance in previous periods) • Expected (budgeted performance) or • Its competitors (performance of similar businesses, sometimes reflected in an industry average).

List three benchmarks that can be used to assess Accounts Receivable Turnover.

The credit terms provided to customers, plus the ARTO from: • Last year (performance in previous periods) • Expected (budgeted performance) or • Its competitors (performance of similar businesses, sometimes reflected in an industry average).

Describe the importance of 'credit terms' when assessing Accounts Payable Turnover.

The most significant benchmark for assessing Accounts Payable Turnover is the credit terms offered by suppliers which sets the maximum number of days for the business to pay. If the Accounts Payable Turnover exceeds the credit terms allowed this is unsatisfactory and may lead to ongoing problems in the future.

Describe the importance of 'credit terms' when assessing Accounts Receivable Turnover.

The most significant benchmark for assessing Accounts Receivable Turnover is the credit terms offered to customers which sets the maximum number of days for the customers to pay. If the Accounts Receivable Turnover exceeds the credit terms allowed this is unsatisfactory and may lead to ongoing problems in the future.

Explain how a credit note can be used to distinguish between a purchase return and a sales return.

The name of the seller is identified at the top of the document. In the case of a return, the seller is also the business that is receiving the inventory as a return.

Explain how a Statement of Account provided to an Account Receivable can be used to ensure Faithful representation in the reports of the supplier.

The process of sending a Statement can be a prompt for payment of outstanding amounts, and also invites each Account Receivable to check their own records and notify the business about any discrepancies

Define the term 'sales return'.

The return by a customer (account receivable) of inventory sold on credit.

Explain why the cost price of inventory sold is not shown on the source document used to verify a credit sale.

The sales invoice does not identify the cost price of the inventory as the seller does not want to disclose to its customers the mark-up it has applied for fear that the customers will feel empowered to negotiate vigorously for a lower selling price.

Identify the source document used to verify a credit purchase.

The source document used to verify a credit purchase is a Purchase Invoice.

Identify the source document used to verify a credit sale.

The source document used to verify a credit sale is a sales invoice.

Explain why there is no GST to account for when cash is received from an Account Receivable.

There is no GST to account for when cash is received from an Account Receivable as it was already recognised at the point of sale.

Explain how a credit purchase is reported in the Income Statement.

There is no revenue earned or expense incurred from a credit purchase, so there is no effect on profit and thus this transaction is excluded from the Income Statement.

Explain how a payment to an Account Payable is reported in the Income Statement.

There is no revenue earned or expense incurred from a payment an Account Payable, so there is no effect on profit and thus this transaction is excluded from the Income Statement.

Explain how ethical purchasing decisions can improve business performance.

There may be a market advantage in purchasing items from socially and environmentally responsible suppliers, with consumers more willing to purchase these items (and sometimes at a higher price) and from businesses that are regarded as being honest and ethical, and socially and environmentally responsible. This can increase both sales revenue and therefore profit.

Explain how ethical considerations and non-financial information can inform the management of Accounts Receivable.

These factors might prompt the business to adopt a more 'flexible' approach than that afforded to most customers, especially if the customer is experiencing short-term hardship, or if the business has made significant sales to a particular customer over a long period. Acting in an ethical manner also remains essential, as it underpins the financial and personal relationships between the business and its customers, which can sustain both through difficult periods. Having said that, a strong personal relationship should not be asked to substitute for good financial and business relations.

Ageing analysis

a listing of the amount a proportion of AR according to length of time they are owing.