Question

In week 5, Allison determines the cost of merchandise sold during the year by adding up the payments made per a review of the bank statement and cancelled cheques. This is reflective of the cost of merchandise purchased but not the cost of merchandise sold. What standard do you use to evaluate this?

a) IFRS only
b) ASPE only
c) Generally Accepted Accounting Principles (GAAP)
d) International Accounting Standards (IAS)

Answer 1

Option (c), We use Generally Accepted Accounting Principles (GAAP) to evaluate Allison's method for determining the cost of merchandise sold, which incorrectly relies on payments made rather than the cost of actual merchandise sold.

Step-by-step explanation:

To evaluate Allison's method of determining the cost of merchandise sold during the year by adding up the payments reflected in the bank statement and cancelled cheques, we would use the Generally Accepted Accounting Principles (GAAP).

These principles provide the framework for reporting financial information and would suggest that instead of using payments made to suppliers, the cost of goods sold should be calculated based on the cost of merchandise that was actually sold during the year, which accounts for beginning inventory, purchases during the year, and ending inventory. To accurately calculate the merchandise balance and the current account balance, adjustments must be made for inventory changes, as the mere sum of payments does not accurately represent the cost of goods sold.