CHAPTER 8 Flashcards
Trading firm
A firm that purchases goods in order to resell them at a profit.
Stock
Goods purchased by a trading firm for the purpose of resale at a profit. Stock is a current asset as it is a resource controlled by the business as a result of a past event (the purchase of the stock) that is expected to result in future economic benefits (sale of stock for profit) within the next twelve months.
The importance of stock
For a trading firm, stock is of paramount importance. First, stock is its main source of revenue, and thus the key to its ability to earn profit. A trading firm that cannot sell its stock will not survive. Second, stock is likely to be one of the most significant assets the firm controls. Despite the, perhaps immense, value of property and premises, it is still possible for stock to be the largest single asset listed in the firm’s Balance Sheet.
The stock control account
All movements of stock are summarised in the Stock Control account, with stock ‘in (primarily through purchases) recorded on the debit side, and stock out (mainly through
Stock cards
a subsidiary record that records each individual transaction involving the movement in and out of the business of a particular line of stock.
Why are stock cards needed
Although the Stock Control account in the General Ledger provides an important summary of all movements of stock in and out of the firm, this account alone will not provide sufficient information to manage stock effectively. Most trading firms will carry a number of different lines of stock: different items, different colours, different sizes. It is vital that the owner has detailed information relating to each line of stock, from basics
(such as its description, location in the warehouse and supplier) to financial information (such as the cost price of each unit, the number of units purchased and sold, and the
number of units on hand at any point during the period).
This information must also be recorded, and this must be done in far more detail than
the Stock Control account can provide.
Cost price,
The original purchase price of the stock.
Identified cost
To physically mark or label each pot in some way (such as a sticker with a co|our code, letter code or bar code) and then keep a record of the cost price that relates to that code. In this way, the business could simply match the code on the item to the price in its records to identify the exact cost price ( such as$60 or $70) of every item. However, not all businesses will identify the cost price of their stock in this way, for a variety of reasons so FIFO is used.
Why identified cost isn’t always used and why FIFO is used
IMPOSSIBLEFirst, there will be some types of stock for which it is not possib/e tolabel every item to identify its cost. In this category would be petrol at a service station, which may be
bought at different cost prices, but mixes in the same tank and is therefore impossible to label.
IMPRACTICAL Second, for other items of stock it may be possible, but not practical a fruit shop could label every grape, but this is unlikely to be the best use of the staff’s skills and.time, especially since grapes are sold by the bunch, rather than individually.
RESOURCES Third, even where identifying the cost is both possible and practical, the owner may still decide it is not worth the time, effort and, perhaps most importantly, cost to label every item of stock, and then record each code and cost price in the accounting records. This appears to be the case in the example, where there is no code, label or marker to identify the cost price of each pot.
FIFO
Where stock is not labelled or marked - because it is impossible or impractical, or deemed by the owner to be not worth the time, effort and cost - the cost price cannot be identified. Therefore, when the stock is sold, an assumption must be made about its cost price. Under the assumption, we assume that the stock that was purchased first will be sold first, even though we have no way of knowing for certain.
Is FIFO accurate, if not, why is it still used.
FIFO must be applied to all transactions recorded in the Out column (including sales, drawings, advertising and stock losses) but it is an assumption only; it may not match the actual flow of goods, and customers may buy the pots that were purchased more recently, rather than those that were first in. Without marking stock, there is no way of knowing the cost price of the stock that has been sold, making FIFO an acceptable and necessary assumption.
Perpetual system and stocktake
Because the stock cards are updated after every transaction, they provicle a continuous (or perpetual) recorcl of stock on hand. That is, at any stage, the number of units shown in
the Balance column should reflect the quantity of stock on hand in the shop, showroom or warehouse. However, just because the stock card says there shoulcl be a certain number of items on hand does not mean this will be the case. Therefore, the number of units on hand shoulcl be checked perioclically by conducting a physical . A stocktake involves a physical count of the number of units of each line of stock on hand. This count can then be compared against the balances in the stock cards to check their accuracy, and detect any stocklosses or gains.
Role of the stocktake
The role of the stocktake is to verify the accuracy of the stock cards and, in the process detect any stock losses and Stock Gains.
Stock loss
An expense occurred when the stocktake shows a figure for stock on hand that is jess than the balance shown in the stock card. This may be for a variety of reasons, including theft, damage/breakages, undersupply from a supplier, a supplier has delivered less stock than has been charged for, oversupply to a customer, stock has been supplied to customers in excess of what they have been charged for.
Stock gains
A revenue earned when the stocktake shows a figure for stock on hand that is more than the balance shown in the stock card. This may be due to oversupply from a supplier, a supplier has sent us stock for which we have not been charged, undersupply to a customer; we have charged a customer for stock that we have not delivered (and the customer has not realised).
