chapter 17 Flashcards
how to find sales, purchases and inventory figures in the statement of profit or loss
To find sales, purchases and inventory figures the trading part of the statement of profit or loss could be created. Information that is known can be inserted into the structure and then knowledge of how those figures relate to each other can be used to find the other items.
margin
the gross profit expressed as a percentage or fraction of selling price or total revenue
markup
the gross profit expressed as a percentage or fraction of the sales cost
calculation of margin percentage
gross profit/selling price * 100
calculation of mark up percentage
gross profit/cost of sales * 100
using margin to find cost of sales
the sales figure is 100% or 1/1
therefore,
the margin can be subtracted from the sales figure
using mark ups to find missing figures
If the business is using a mark-up, the approach to finding missing figures is exactly the same as for margins. The only difference is that it is the cost of sales figure that is 100% and the sales figure will be 100+ the mark-up percentage.
how to record inventory lost in fire or by theft
The methods used for preparing accounts from incomplete records are also used to calculate the value of inventory lost in a fire or by theft when detailed inventory records have not been kept (or have been destroyed by the fire).
ways in which inventory may be valued
cost price
selling price
what it is considered to be worth
why is considering the worth not a good way of valuing inventory
it completely contradicts the ‘money measurement’ concept. ‘worth’ is also a matter of opinion. using selling price also has its problems because using it can contradict several important accounting concepts
net realizable value
the selling price of a product minus any cost incurred in bringing it to a saleable condition and/or actually selling it
replacement cost
the amount that a business would have to pay to replace an asset according to its current worth
how is inventory valued at cost
In most situations, inventory is valued at cost. The inventory-take establishes the quantity of each item, the business has paperwork to identify the cost per unit, and the two are multiplied together to find the total value for each product held as inventory.
principle of inventory valuation set out in international accounting standard 2
states that ‘inventories should be valued at the lower of cost and net realizable value’
net valuable value varies: wholesaling or retailing
where a business buy a product, adds a markup or margin and sells at a higher price. in this case selling price is the net realizable value
net valuable value varies: manufacturing
where the business is making a product involving a combination of material, labour and other costs. As the product goes through the various processes, the costs will grow. In this case, net realizable value is the selling price minus all future costs that will be incurred to complete it.
net valuable value varies: repair or modification
where the business has a damaged item or one that is going to need to be changed to make it saleable. In this case, net realizable value is the selling price minus all future costs that will be incurred in making it saleable.
what does IAS 32.2 state
if the business is not going to recover the cost of finished products (the net realizable value is lower), it can use replacement cost to value the materials used in this context, the raw materials used in the manufacture of a product.
advantages of keeping full accounting records
It allows the financial statements to be prepared quickly and soon after the year end.
It allows for the financial statements to be prepared more often than once a year, which can help the manager run their business more efficiently.
It helps to provide some protection against errors and possible fraud by employees.
If financial statements are prepared regularly, inventory losses or cash losses can be picked up earlier and corrective action taken. The accuracy of the records kept can be improved.
There may be a legal requirement to keep certain records.
disadvantages of keeping full accounting records
The time it takes to set them up and maintain them.
Cost-the purchase of a computer package for accounting can be expensive business owner may have to go on a training course. and the business owner may have to go on a training course
Often business owners lack the knowledge of how to prepare double-entry accounts, so they employ a specialist. This adds to the business costs.
