FACULTY OF COMMERCE

DEGREE PROGRAM: BACHELOR OF ACCOUNTANCY HONOURS DEGREE

COURSE: FINANCIAL ACCOUNTING 2 AC107

LECTURERS: MR HOVE

GROUP ASSIGNMENT

MEMBERS LIST

1. NYASHA MUDAPAKATI B1953680

ANSWERS

1a. Standard costing

-Standard Costing is a costing method, that is used to compare the standard costs and
revenues with the actual results, in order to arrive at the variances along with its
causes, to inform the management about the deviations and take corrective measures,
for its improvement.
Merits

 Improved cost control.

 More useful information for managerial planning and decision making.

 More reasonable and easier inventory measurements.

 Cost savings in record-keeping.

 Possible reductions in production costs.

Demerits

 Controversial materiality limits for variances.

 Non reporting of certain variances.

 Low morale for some workers.

1b. Retail method

-is an accounting method used to estimate the value of a store's merchandise. The retail
method provides the ending inventory balance for a store by measuring the cost of
inventory relative to the price of the merchandise. Along with sales and inventory for a
period, the retail inventory method uses the cost-to-retail ratio.

Merits

- does not require a physical inventory.

-only requires an organization to record the retail prices of inventory items.

- allows the organization to create an inventory value report for budgeting or the preparation
of financial statements.
Demerits

- is only accurate if all pricing across the board is the same and all pricing changes occur at
the same rate.

-this is not realistic in retail because of the many variations that exist in merchandise
pricing. For example, depreciation, markdowns, product damage and theft can affect the
price of the retail inventory. 

1c. AVCO

-Average cost method (AVCO) calculates the cost of ending inventory and cost of goods
sold for a period on the basis of weighted average cost per unit of inventory.

Merits

- it significantly simplifies calculation and record keeping and can easily process even if
entity has high frequency of inventory ordering.

-is much better method than FIFO or LIFO when it comes to goods that cannot be
separated or it is impossible to distinguish one batch of goods from the other for example,
earth produce like oil, wheat and iron ore.

-Cost of sales calculation will be much more consistent and less affected by prices changes
under AVCO method as compared to FIFO and LIFO.

Demerits

-Cost of ending inventory determined under AVCO method may be significantly different
from the prices prevailing for similar products at such date.

-If entity is using cost plus pricing strategy to price its products, then every time new
purchase is made at a different rate than previous it will cause price to change as well.

1d. FIFO

-First In, First Out, commonly known as FIFO, is an asset-management and valuation
method in which assets produced or acquired first are sold, used, or disposed of first.

Merits

-FIFO method saves money and time in calculating the exact cost of the inventory being
sold because the cost will depend upon the most former cash flows of purchases to be used
first.
 -It is a fairly practical approach to use, as sometimes it becomes difficult to identify the
costs of the products sold at the point of sale and FIFO rectifies the matter.

-It is a widely used and accepted approach of valuation which increases its comparability
and consistency.

Demerits

-FIFO will not be an appropriate measure if the materials/goods purchased have fluctuating
price patterns, because this can result in misstated profits for the same period as different
costs of same goods during that same period are recorded.

-FIFO pricing valuation method although easy to understand may get clumsy and
cumbersome to operate and extract the costs of goods, as substantial amount of data is
required thus resulting in clerical errors.

2.The concept of walk forward and walk backward inventory valuation.

-The concept for walk-forward testing is similar to using ‘in-sample’ and ‘out-of-sample’
testing periods. Instead of optimizing on twenty years of data and using the last four years of
data for testing, the optimization is done across ten years and the system is tested on the
eleventh. Once this test is completed, move the whole time window forward one year and run
the test-run on the next year. Find the optimum set of parameters for each of the 10-year
windows and use that set of parameters to trade for the next year. Move the time window
forward one year and run the test on the next year until all of the years in the data series have
been tested. Walk forward optimization is a method used in finance for determining the best
parameters to use in a trading strategy. The trading strategy is optimized with in-sample data
for a time window in a data series. The remaining data is reserved for out of sample testing. A
small portion of the reserved data following the in-sample data is tested with the results
recorded. The in-sample time window is shifted forward by the period covered by the out of
sample test, and the process repeated. At the end, all of the recorded results are used to assess
the trading strategy.

It means to get the most suitable/stable parameters of the system and run the system with
these parameters using another segment of data and these two segments of data do not
overlap each other. It is the culmination of the following methods and helps in creation of
robust systems.
4.Benefits of preparing cash flow.

-Cash flow statement or Statement of Cash flow mainly focuses on the cash transactions and cash
equivalents. Even though these statements do not reflect the financial assets of a firm but play a
crucial role in the functioning of a business. The benefits are that , Cash Flow Statement helps in
knowing the exact figure of cash inflows and outflows from various operations of the
business. It helps in comparing the cash budgets of past assessments with the present to assess
the future requirements of the cash. It gives the accurate information about the cash-based
transactions in the business. Cash flow statement majorly used in preparing the cash budget
for future needs and helps in knowing the periodical requirement of cash in the business. It
reveals the key changes required for the financial positioning of the business and prioritizes
important activities to the management. It provides the information about various investing
and financing cash transactions takes place during the year and helps in evaluating the
financial structure of the business. Cash Flow statement helps in identifying the profitability of
the business when it compared with the ratio analysis. cash flow information provided in the
statement of cash flows can be beneficial, for example, Cash flow information is harder to
manipulate as it just reflects cash in and cash out, it isn’t affected by accounting policies or
accruals. The statement of cash flows provides information about all cash inflows and
outflows, from all sources. Cash flow information can provide more detail about the quality
of the entity’s revenue, for example, whether customers are (in general) paying their bills.
Cash accounting methods used in the statement of cash flows can be easier for non-
accountants to understand.

5a. Causes of goodwill

-Goodwill is a long-term (or noncurrent) asset categorized as an intangible asset. Goodwill

arises when a company acquires another entire business. The amount of goodwill is the cost
to purchase the business minus the fair market value of the tangible assets, the intangible
assets that can be identified, and the liabilities obtained in the purchase.

The amount in the Goodwill account will be adjusted to a smaller amount if there is an
impairment in the value of the acquired company as of a balance sheet date. (Private
companies may opt to amortize goodwill generally over a 10-year period and thereby
minimize the cost and complexity involved with testing for impairment.
5b. Negative goodwill

-In business, negative goodwill (NGW) is a term that refers to the bargain purchase amount
of money paid, when a company acquires another company or its assets for significantly less
their fair market values. Negative goodwill generally indicates that the selling party is
distressed or has declared bankruptcy, and faces no other option but to unload its assets for a
fraction of their worth. Consequently, negative goodwill nearly always favors the buyer.
Negative goodwill is the opposite of goodwill, where one company pays a premium for
another company's assets. Once it is confirmed that resultant is negative goodwill than
the resulting gain should be recognized in the profit and loss at the acquisition date in the
books of acquirer that is it will be taken as a gain in the consolidated income statement of the
acquirer. All of the gain should be attributed to the acquirer.

5f.(i) Articles of association

-Articles of association form a document that specifies the regulations for a company's
operations and defines the company's purpose. The document lays out how tasks are to be
accomplished within the organization, including the process for appointing directors and the
handling of financial records.

(ii) Memorandum of association.

- is a legal document prepared in the formation and registration process of a limited liability
company to define its relationship with shareholders. The MOA is accessible to the public
and describes the company’s name, physical address of registered office, names of
shareholders and the distribution of shares. 

(iii) Issued and paid up capital

-Paid-up capital is the amount of money a company has received from shareholders in
exchange for shares of stock. Paid-up capital is created when a company sells its shares on
the primary market directly to investors, usually through an initial public offering (IPO) and
Issued capital is a part of the Authorized capital, offered by the company for the subscription. 
(iv) Preference shares and Ordinary shares

Preference shares, more commonly referred to as preferred stock, are shares of a company’s
stock with dividends that are paid out to shareholders before common stock dividends are
issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from
company assets before common stockholders. Most preference shares have a fixed dividend,
while common stocks generally do not. Preferred stock shareholders also typically do not
hold any voting rights, but common shareholders usually do and Ordinary shares, a synonym
of common shares, represent the basic voting shares of a corporation. Holders of ordinary
shares are typically entitled to one vote per share and only receive dividends at the discretion
of the company’s management.

(v) Premium shares and Bonus shares

-Share Premium is the difference between the issue price and the par value of the stock and is
also known as securities premium. The shares are said to be issued at a premium when the
issue price of the share is greater than its face value or par value. This premium is then
credited to the share premium account of the company and a bonus issue, also known as a
scrip issue or a capitalization issue, is an offer of free additional shares to existing
shareholders. A company may decide to distribute further shares as an alternative to
increasing the dividend payout. For example, a company may give one bonus share for every
five shares held.