Acca f3 Financial Accounting (int) Study Text

124

7: Sales tax   Part D  Recording transactions and events

7 

When a cash sale is made for $115.00 (including sales tax at 15%) the entries made are: 

 Debit 

........................................ 

account 

$................

 Credit 

........................................ 

account 

  $................ 

 Credit 

........................................ 

account 

  $................ 

8 

When a cash purchase of $115.00 is made (including sales tax at 15%) the entries are: 

A Debit Purchases 

115.00

 Credit 

Cash 

 

115.00 

B Debit Purchases 

100.00

 Debit 

Sales 

tax 

15.00

 Credit 

Cash 

 

115.00 

C Debit Cash 

100.00

 Debit 

Sales 

tax 

15.00

 Credit 

Purchases 

 

115.00 

D Debit Cash 

115.00

 Credit 

Purchases 

 

115.00 

9 

The sales tax paid to the tax authorities each quarter is the difference between ........................................ 

........................................ and ........................................ ........................................ 

Answers to Quick Quiz 

1 B Correct 

 

A 

Incorrect, the consumer has a choice as to whether or not to consume so sales tax is only 

chargeable when this choice is exercised. 

 

C 

Incorrect, sales tax is administrated by the tax authorities. 

 

D 

Only sales tax registered traders can charge sales tax. 

2 

B 

Sales tax is only due on taxable outputs. 

3 

B 

Correct the statement of financial position value will therefore include sales tax and the 

depreciation charge will rise accordingly 

 

A 

Incorrect, it must be added. 

 C Incorrect. 

 

D 

Incorrect, the motor car is a non-current asset not an expense, sales tax will form part of the 

depreciable amount of the asset. 

4 

A 

Correct, recoverable input tax is debited to the sales tax a/c and the purchases account is debited 

net of sales tax. 

 

B 

Incorrect, the sales tax has not been reclaimed. 

 

C 

Incorrect, the $500 is subject to sales tax. 

 

D 

Incorrect, reversal of the sales tax transaction has occurred. 

5 DEBIT:  PURCHASES 

$400 

  

SALES 

TAX 

$60

 

CREDIT: 

CASH or PAYABLES 

 

$460 

6 

Input sales tax is sales tax suffered on goods and services brought by a business, output sales tax is the 

sales tax collected on sales. 

7 DEBIT  Cash 

account 

$115.00 

 CREDIT Sales 

account 

  $100.00 

 

CREDIT 

Sales tax account 

 

$15.00 

8 B 

9 

The sales tax paid to the tax authorities each quarter is the difference between output sales tax collected 

on sales and input sales tax suffered on purchases and expenses. 

Now try the question below from the Exam Question Bank

Number

Level

Marks

Time

Q11

Examination

2

2 mins 

---

125

Inventory

Introduction

Inventory is one of the most important assets in a company's statement of 

financial position. As we will see, it also affects the income statement, having a 

direct impact on gross profit. 

So far you have come across inventories in the preparation of a simple 

statement of financial position. Here we will look at in the calculation of the cost 

of goods sold. This chapter also explores the 

difficulties of valuing 

inventories.

This is the first time that you will be required to consider the impact of the 

relevant International Accounting Standard on the valuation and presentation

of an item in the accounts: IAS 2 Inventories.

Topic list 

Syllabus reference 

1 Cost of goods sold 

D3(a)

2 Accounting for opening and closing inventories 

D3(a), (b) 

3 Counting inventories 

D3(f)

4 Valuing inventories 

D3(c), (g), (i) 

5 IAS 2 Inventories 

D3(d), (e), (h) 

---

126

8: Inventory   Part D  Recording transactions and events 

Study guide 

Intellectual level

D3 Inventory 

(a) 

Recognise the need for adjustments for inventory in preparing financial 

statements.

1

(b) 

Record opening and closing inventory 

1

(c) 

Identify the alternative methods of valuing inventory 

1

(d) 

Understand and apply the IASB requirements for valuing inventories 

1

(e) 

Recognise which costs should be included in valuing inventories 

1

(f) 

Understand the use of continuous and period end inventory records 

1

(g) 

Calculate the value of closing inventory using FIFO (first in, first out) and 

AVCO (average cost) 

1

(h) 

Understand the impact of accounting concepts on the valuation of inventory 

1 

(i) 

Identify the impact of inventory valuation methods on profit and on assets 

1

Exam guide 

You will definitely be examined on inventories. You might have to calculate closing inventory or cost of 

sales.

1 Cost of goods sold 

The

cost of goods sold is calculated as: 

Opening inventory + purchases – closing inventory. 

1.1 Unsold goods in inventory at the end of an accounting period 

Goods might be unsold at the end of an accounting period and so still be 

held in inventory. The purchase 

cost of these goods should not be included therefore in the cost of sales of the period. 

1.2 Example: Closing inventory 

Perry P Louis, trading as the Umbrella Shop, ends his financial year on 30 September each year. On 1 

October 20X4 he had no goods in inventory. During the year to 30 September 20X5, he purchased 30,000 

umbrellas costing $60,000 from umbrella wholesalers and suppliers. He resold the umbrellas for $5 each, 

and sales for the year amounted to $100,000 (20,000 umbrellas). At 30 September there were 10,000 

unsold umbrellas left in inventory, valued at $2 each. 

What was Perry P Louis's gross profit for the year? 

Solution

Perry P Louis purchased 30,000 umbrellas, but only sold 20,000. Purchase costs of $60,000 and sales of 

$100,000 do not represent the same quantity of goods. 

The gross profit for the year should be calculated by 'matching' the sales value of the 20,000 umbrellas 

sold with the cost of those 20,000 umbrellas. The cost of sales in this example is therefore the cost of 

purchases minus the cost of goods in inventory at the year end. 

FAST FORWARD

---