Home appliances Ltd. Sells goods on hire purchase terms at a profit of 25%25 \% on hire purchase price. Following are the transactions for the year ended December 31, 2018.
Rs.
January
Stock out on hire at cost.
6,000
Stock on hand (at shop)
1,000
Installment due
600
Cash Received.
16,000
December 31
Stock out on hire (at cost)
6,900
Stock on hand (at shop)
1,400
Installment due
1,000
Rs.
January Stock out on hire at cost. 6,000
Stock on hand (at shop) 1,000
Installment due 600
Cash Received. 16,000
December 31 Stock out on hire (at cost) 6,900
Stock on hand (at shop) 1,400
Installment due 1,000| | | Rs. |
| :— | :— | :— |
| January | Stock out on hire at cost. | 6,000 |
| | Stock on hand (at shop) | 1,000 |
| | Installment due | 600 |
| | Cash Received. | 16,000 |
| December 31 | Stock out on hire (at cost) | 6,900 |
| | Stock on hand (at shop) | 1,400 |
| | Installment due | 1,000 |
Calculate the profit or loss on hire purchase under Debtors Method.
Answer:
To calculate the profit or loss on hire purchase under the Debtors Method for Home Appliances Ltd., we’ll follow these steps:
Calculate the Total Hire Purchase Sales: This includes the opening stock out on hire plus the cost of goods sold on hire purchase during the year, minus the closing stock out on hire.
Calculate the Cost of Goods Sold (COGS): This is the opening stock plus purchases during the year (if any) minus the closing stock.
Calculate the Gross Profit on Hire Purchase Sales: This is based on the profit percentage on the hire purchase price.
Calculate the Net Profit or Loss: This involves adjusting the gross profit by any outstanding installments and cash received.
Let’s start with the given data:
Opening stock out on hire at cost: Rs. 6,000
Stock on hand (at shop) at the beginning: Rs. 1,000
Installments due at the beginning: Rs. 600
Cash received during the year: Rs. 16,000
Closing stock out on hire (at cost): Rs. 6,900
Stock on hand (at shop) at the end: Rs. 1,400
Installments due at the end: Rs. 1,000
Step 1: Calculate Total Hire Purchase Sales
The total hire purchase sales are not directly given but can be inferred from the cash received and installments due. Typically, the sales figure is derived from the cost of goods sold plus the profit margin. In this case, we need to adjust our approach since the direct sales figure isn’t provided.
Given that purchases are not directly mentioned, we consider the stock out on hire as the goods sold. The opening and closing stocks at the shop are adjustments to the inventory.
Step 3: Calculate Gross Profit on Hire Purchase Sales
The gross profit is calculated based on the profit margin on the hire purchase price. However, without the total sales figure, we’ll focus on the profit from the cost side.
Step 4: Calculate Net Profit or Loss
To calculate the net profit or loss, we need to consider the cash received and the change in installments due.
Given the complexity and missing direct sales data, we’ll adjust our calculation to focus on the available information:
Opening and Closing Stock Adjustments: We’ll calculate the net stock (out on hire and at shop) adjustments.
Cash Received and Installments Due: These figures will help us infer the cash flow and potentially the sales figure.
Let’s substitute the values for the opening and closing stocks to calculate the net stock adjustments and infer the profit or loss.
Opening and Closing Stock Adjustments
“Net Stock Adjustment”=(“Opening Stock Out on Hire”+”Opening Stock at Shop”)-(“Closing Stock Out on Hire”+”Closing Stock at Shop”)\text{Net Stock Adjustment} = (\text{Opening Stock Out on Hire} + \text{Opening Stock at Shop}) – (\text{Closing Stock Out on Hire} + \text{Closing Stock at Shop})
This negative adjustment indicates more stock at the end than at the beginning, suggesting additional purchases or less sales than anticipated.
What are the qualitative characteristics of accounting information? Briefly explain.
Answer:
The qualitative characteristics of accounting information are fundamental attributes that enhance the usefulness of financial information presented to users, making it easier to understand, compare, and make decisions based on financial statements. These characteristics are divided into two main categories: fundamental qualitative characteristics and enhancing qualitative characteristics.
Fundamental Qualitative Characteristics
Relevance: Information is relevant when it can influence the decisions of users by helping them evaluate past, present, or future events or confirming/revising their past evaluations. It has two main components:
Predictive Value: Information that can be used as a basis to predict future outcomes.
Confirmatory Value: Information that provides feedback about previous evaluations.
Faithful Representation: Financial information must be a faithful representation of the phenomena it purports to represent. This means the information must be:
Complete: Nothing significant is omitted.
Neutral: It is unbiased, without any attempt to influence the decision-making process in a particular direction.
Free from Error: There are no material errors or omissions in the description of the phenomenon.
Enhancing Qualitative Characteristics
Comparability: Users must be able to compare the financial statements of an entity through time to identify trends in its financial position and performance. Comparability also allows users to compare financial statements of different entities to evaluate their relative financial position, performance, and changes in financial position.
Verifiability: Information is verifiable when different knowledgeable and independent observers can reach a consensus that a particular depiction is a faithful representation. Verifiability ensures that the information faithfully represents what it purports to represent.
Timeliness: Information is timely when it is available to decision-makers in time to be capable of influencing their decisions. Timely information helps users make decisions in a relevant time frame before it loses its capacity to influence decisions.
Understandability: Information is understandable when it is presented clearly and concisely. This means that users with a reasonable knowledge of business and economic activities can interpret the information, although this does not mean that all complexities must be removed. The information should be accessible to users who are willing to study the information carefully.
These qualitative characteristics work together to ensure that financial information is useful to a wide range of users, including investors, creditors, and others who rely on financial statements to make informed decisions.