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4 (a) The ASB’s Statement of Principles for Financial Reporting requires financial statements to be prepared on the
basis that they comply with certain accounting concepts, underlying assumptions and (qualitative) characteristics. Five of these are: Matching/accruals Substance over form Prudence Comparability Materiality Required: Briefly explain the meaning of each of the above principles/concepts. (5 marks) (b) For most entities, applying the appropriate concepts/assumptions in accounting for stock is an important element in preparing their financial statements. Required: Illustrate with examples how each of the principles/concepts in (a) may be applied to accounting for stock. (10 marks) (15 marks) 本部分内容设定了隐藏,需要回复后才能看到 (b) Accounting for stock, by adjusting purchases for opening and closing stocks is a classic example of the application of the accruals principle whereby revenues earned are matched with costs incurred. Closing stock is by definition an example of goods that have been purchased, but not yet consumed. In other words the entity has not yet had the ‘benefit’ (i.e. the sales revenue they will generate) from the closing stock; therefore the cost of the closing stock should not be charged to the current year’s profit and loss account. Consignment stock is where goods are supplied (usually by a manufacturer) to a retailer under terms which mean the legal title to the goods remains with the supplier until a specified event (say payment in three months time). Once the goods have been transferred to the retailer, normally the risks and rewards relating to those goods then lie with the retailer. Where this is the case then (in substance) the consignment stock meets the definition of an asset and the goods should appear as such (stock) on the retailer’s balance sheet (along with the associated liability to pay for them) rather than on the balance sheet of the manufacturer. At the year end, the value of an entity’s closing stock is, by its nature, uncertain. In the next accounting period it may be sold at a profit or a loss. Accounting standards require stock to be valued at the lower of cost and net realisable value. This is the application of prudence. If the stock is expected to sell at a profit, the profit is deferred (by valuing stock at cost) until it is actually sold. However, if the goods are expected to sell for a (net) loss, then that loss must be recognised immediately by valuing the stock at its net realisable value. There are many acceptable ways of valuing stock (e.g. average cost or FIFO). In order to meet the requirement of comparability, an entity should decide on the most appropriate valuation method for its stock and then be consistent in the use of that method. Any change in the method of valuing (or accounting for) stock would break the principle of comparability. For most businesses stock is a material item. An error (omission or misstatement) in the value or treatment of stock has the potential to affect decisions users may make in relation to financial statements. Therefore (correctly) accounting for stock is a material event. Conversely there are occasions where, on the grounds of immateriality, certain ‘stocks’ are not (strictly) accounted for correctly. For example, at the year end a company may have an unused supply of stationery. Technically this is stock, but in most cases companies would charge this ‘stock’ of stationery to the profit and loss account of the year in which it was purchased rather than show it as an asset. Note: other suitable examples would be acceptable. |
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