chapter 6 Flashcards
Inventory
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
Retail business operations
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
Condensed income statement for a retailer
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’)
Selling and Distribution Expenses
associated w/ operating the
general office, accounting systems, personnel
Administrative Expenses
efforts to sell inventory (storage
costs, advertising, salaries)
Finance Expenses
expenses of financing business operations,
collecting debts and running credit department
Retailing and the goods and services tax
- 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
Tax invoices
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
Additional requirement for tax invoices where total payable is
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
Additional requirement for tax invoices where total payable is >$1000
- > 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
Adjustment/credit notes
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
Sales returns and allowances
- The selling price of inventory returned by customers or adjustments made to the sales prices
Trade discounts
- A percentage reduction granted to a customer from the normal list price
Condensed income statement for a retailer
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
Perpetual inventory system
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
Periodic inventory system
- 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
Contrasting the two methods
- 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
