Inventory Adjustments Quiz

Which of the following is a reason for inventory adjustments?

• Misplaced items

• Change in GST rate

• Increase in sales

• Acquisition of new assets

Answer explanation

Misplaced items can lead to discrepancies in inventory counts, necessitating adjustments to accurately reflect stock levels. Other options do not directly cause inventory adjustments.

Balance Day adjustments are made to:

• Correct inventory discrepancies

• Ensure that revenues and expenses are recorded in the correct accounting period

• Reverse previous transactions

• Close temporary accounts

Answer explanation

Balance Day adjustments ensure that revenues and expenses are recorded in the correct accounting period, aligning with the accrual basis of accounting. This is crucial for accurate financial reporting.

Which of the following statements best describes a reversing entry?

• An entry made to correct an error in the accounting records

• An entry made to nullify a balance day adjustment in the next accounting period

• An entry made to adjust inventory levels

• An entry made to close temporary accounts

Answer explanation

A reversing entry is specifically made to nullify a balance day adjustment from the previous accounting period, allowing for easier recording of transactions in the new period.

The relationship between net profit based on accrual accounting and net cash from operating activities is primarily affected by:

• GST payments

• Depreciation and amortisation

• Inventory purchases

• Revenue recognition policies

Answer explanation

Depreciation and amortisation affect net profit under accrual accounting but do not impact cash flow, leading to differences between net profit and net cash from operating activities.

Describe the purpose of balance day adjustments in accrual accounting.

Answer explanation

Balance day adjustments ensure that revenues and expenses are recorded in the correct accounting period, reflecting the true financial position of a business. This aligns with the accrual accounting principle of matching income and expenses.

Explain how errors in accounting records can be corrected.

Answer explanation

Errors in accounting records can be corrected by identifying the mistake, making a journal entry to reverse the error, and then recording the correct entry. This ensures accurate financial reporting and maintains the integrity of the records.

What are some common reasons for inventory adjustments in a trading GST business?

Answer explanation

Common reasons for inventory adjustments in a trading GST business include stock discrepancies due to theft, damage, obsolescence, or errors in recording transactions, which necessitate accurate inventory management.

Describe the steps involved in the complete accounting process for a trading GST business.

Answer explanation

The complete accounting process for a trading GST business includes: 1. Recording transactions, 2. Posting to ledgers, 3. Preparing trial balance, 4. Adjusting entries, 5. Preparing financial statements, 6. Filing GST returns.

Balance Day adjustments are only necessary for cash-based accounting.

• True

• False

Answer explanation

Balance Day adjustments are necessary for both cash-based and accrual accounting. They ensure that financial statements reflect the true financial position, regardless of the accounting method used.

Closing entries are made at the end of the accounting period to close temporary accounts.

• True

• False

Answer explanation

True. Closing entries are necessary at the end of the accounting period to close temporary accounts, such as revenues and expenses, and transfer their balances to permanent accounts.