chapter 6

Question 1

Inventory

Answer 1

an asset (goods or property) that is purchased and:

a) held for sale in the ordinary course of business;
b) in the process of production for such a sale
c) in the form of materials or supplies to be consumed in the production process of in the rendering of services

Question 2

Retail business operations

Answer 2

the average length of time it takes for the business to acquire inventory, sell that inventory to customers and collect cash from customers

• aquire inventory -> collect cash -> sell inventory ->repeat

Question 3

Condensed income statement for a retailer

Answer 3

Differences to non-retail income statement:
-> • Income (revenue) is first item reported in both cases - Sales is most important revenue in retail

• Cost of Sales shows total cost of the inventory sold during the period - Net sales revenue - cost of sales = gross profit on sales
• Expenses grouped by function
• > Selling and Distribution Expenses
• > Administrative Expenses
• > Finance Expenses

(Other expenses added to finance expenses and reported under ‘Finance and other expense’)

Question 4

Selling and Distribution Expenses

Answer 4

associated w/ operating the

general office, accounting systems, personnel

Question 5

Administrative Expenses

Answer 5

efforts to sell inventory (storage

costs, advertising, salaries)

Question 6

Finance Expenses

Answer 6

expenses of financing business operations,

collecting debts and running credit department

Question 7

Retailing and the goods and services tax

Answer 7

• retailer must register for ABN if sales >75,000
• Must also register for GST
• Must issue tax invoices and collect GST
• Can claim input credits on purchases of inventories and services (GST outlays)
• Must ensure that adequate records of GST payable and receivable are kept

Question 8

Tax invoices

Answer 8

Required for all sales in excess of $75
- All tax invoices must have…
• ‘tax invoice’ stated prominently on the invoice
• ABN of entity issuing invoice
• Date of issue
• Name of supplier
• Description of items being supplied
• If invoice is for a taxable supply and either GST-free or input-taxed supply, invoice mush show each
supply, GST payable on each supply and total amount payable on the invoice as a whole

Question 9

Additional requirement for tax invoices where total payable is

Answer 9

where the total GST amount is exactly 1/10 of the total price,

-> show either a statement “the total price includes GST’ or the amount of GST

Question 10

Additional requirement for tax invoices where total payable is >$1000

Answer 10

• > name of the recipient of the invoice
• > ABN or the address of the recipient
• > quantity of the goods or extent of the services being supplied
• > show either a statement “the total price includes GST’ or the amount of GST

Question 11

Adjustment/credit notes

Answer 11

Used when...
• all or part of goods sold are returned
• an allowance (discount) is given
• the price of supply or acquisition is changed • part or full amount owing is written off
• retailer cannot pay a debt

• ‘Negative income’ —> reduces sales/reduces cost of purchase
• Adjustment usually results in increase/decrease in net GST amount payable/refundable

Question 12

Sales returns and allowances

Answer 12

• The selling price of inventory returned by customers or adjustments made to the sales prices

Question 13

Trade discounts

Answer 13

• A percentage reduction granted to a customer from the normal list price

Question 14

Condensed income statement for a retailer

Answer 14

Accounting for inventory involves…
- Recording cost of purchased inventories

• Determining which part of inventory can be allocated to
• > Cost of sales — must be known in order to determine gross profit of all inventory transactions
• > Ending inventory — must be known in order to prepare balance sheet
• Two different inventory sheets:
• > perpetual inventory systems
• > periodic inventory systems

Question 15

Perpetual inventory system

Answer 15

Involves keeping current and continuous records of all inventory transactions

• Inventory and COS account updated after every purchase or sale
• Balance in inventory account is ending inventory amount
• Stocktake only performed to verify accuracy of recorded ending inventory
• Correcting entry made if recorded inventory and stocktake differ
• Separate card or computer file kept for each inventory item
• Running inventory balance

Question 16

Periodic inventory system

Answer 16

• Beginning balance of inventory not changed until end of period
• No running record of each purchase and sale
• Additional inventory purchased recorded in ‘purchases’ account (instead of “Inventory)
• Only one entry made for sales to record selling price of goods
• Ending balance in inventory account determined by stocktake at end of accounting period
• Closing balance used to determine COS

Question 17

Contrasting the two methods

Answer 17

• cost of sales
• > alrdy recorded under perpetual.
• > must be calculated for periodic
• inventory
• > recorded with each sale under perpetual
• > inventory acc replaced by purchases and purchase return in periodic
• stocktake
• > perpetual -> used only to verify accuracy
• > periodic -> determine ending inv. balance
• general
• > Perpetual — more work, more detail/control
• > periodic - less work, less detail / control