Inventory Cards & FIFO

Question 1

what is FIFO?

Answer 1

The assumption that the inventory that is purchased first will be sold first.

Question 2

when recording inventory what characteristics do we have to adhere to?

Answer 2

verifiability, faithful representation.

Question 3

how does verifiability relate to inventory?

Answer 3

Verifiability is maintained by retaining source documents that can be checked through auditing or cross-checking. Inventory should be valued at its cost price which is verified by source document evidence from suppliers.

Question 4

what is identified cost?

Answer 4

Identified cost is a method of valuing inventory by physically marking each item in some way so that its individual cost price can be identified.

Question 5

what are some reasons for inventory loss?

Answer 5

theft, damage, undersupply from supplier

Question 5

what is a reason for an inventory gain?

Answer 5

oversupply from a supplier, recording error

Question 6

what are two benefits using FIFO?

Answer 6

1. can be applied to all inventory types
2. cost less to administer than identified cost.

Question 7

a disadvantages of FIFO?

Answer 7

NP is not accurate as it would be with identified cost. Due to knowing exactly which products are sold, identified cost can determine the most accurate NP for each sale.
can breach faithful representation

Question 7

what are two benefits of the perpetual inventory system?

Answer 7

identifies fast and slow-moving lines of inventory
inventory loss/ gain can be identified

Question 7

what is the perpetual inventory system?

Answer 7

refers to the recording inventory movements after every transaction in inventory cards.

Question 8

what are two ethical considerations for inventory purchases?

Answer 8

• ensuring products are sourced from suppliers that provide safe working conditions and fair wages
• ensuring purchases from local suppliers to support the local community/ suppliers.

Question 9

why do businesses use memo’s?

Answer 9

the document is used to verify internal transactions that occur within a business
Such as: withdrawal of inventory
donations of inventory for advertising.

Question 10

which qualitative characteristics does a physical inventory count

Answer 10

Faithful representation is upheld because the balance sheet is free from bias and material error.

Question 11

what is cost of goods sold?

Answer 11

defined as all cost incurred to bring inventory into a location and condition ready for sale

Question 12

what are two strategies to improve NPM?

Answer 12

• increase advertising
• manage wages efficiently

Question 13

what is GPM?

Question 14

what are two ways to improve GPM?

Answer 14

• increase selling price
• change to a cheaper supplier

Question 15

what are some benchmarks to compare NPM and GMP?

Answer 15

• previous periods
• budgeted performance
• competitors

Question 16

what is ITO?

Answer 16

Inventory Turnover – an efficiency indicator that measures the average number of days it takes for a business to convert its inventory into sales

Question 17

whats a advantage and disadvantage of a fast inventory turnover?

Answer 17

• enhance the businesses ability to generate cash from the sale of inventory and assist in it liquidity
• business keeps low amount of inventory= delivery cost being higher due to frequent orders.

Question 18

whats a advantage and disadvantage of a slow inventory turnover?

Answer 18

• low levels of sales = high selling price
• saving delivery fees by ordering in bulk.

Question 19

what are some inventory management strategies?

Answer 19

• rotate inventory
• advertising

Question 20

what is the process of the inventory count?

Answer 20

A physical inventory count determines the actual quantity of items on hand on a specific date
compared to the expected quantity as per the inventory card.

Question 21

how are cost of sales calculated?

Answer 21

credit and cash sale- sales return.

Question 22

How is Gross Profit calculated?

Answer 22

net sales - cost of sales