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Week+3 - FINANCIAL ACCOUNTING(ACC1006S SUGGESTED SOLUTIONS...

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FINANCIAL ACCOUNTING (ACC1006S) SUGGESTED SOLUTIONS TUTORIALS HANDED IN ON 17 AUGUST 200 9 TUTORIAL 7 (solution) Theory A 002 Note: As theory questions by nature leave room for different approaches, this solution lists all the points that deserve marks, subject to a maximum of the total marks allocated to each part. 1. Item 1 (10 marks maximum) No, Jimbob should not wait to credit income. Income is not equivalent to cash. Income is defined as an increase in net asset value (NAV) through business operations i.e. not due to transactions with the owner. On 3 February 2006, assets (inventory) decrease by R30 000. Liabilities are not affected. Net asset value decreases due to business operations i.e. not due to transactions with owner. This decrease is an expense i.e. cost of sales. On the same date, assets (accounts receivable) increase. Liabilities are not affected. Net asset value increases due to business operations i.e. not due to transactions with owner. This increase is an income item i.e. sales. These transactions result in a net increase in net asset value of R70 000 (profit). Recording income when the risks and rewards of the goods are transferred from the seller to the buyer is in accordance with the accrual concept. Income is recorded when it has been earned and not only when cash is received. A trade receivable asset is recognised on 3 February 2006 because the accounting framework asset definition and recognition criteria are met as follows on this date: the customer’s debt is a resource controlled by the business as the risks and rewards have passed, arising from a past event - the transfer of ownership of the jeans on 3 February (as it was FOB destination), from which future economic benefits (cash) will flow to the business when the debtor pays for the purchase of the inventory.
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