Stock Flashcards
Trading firm
A firm that buys stock with the intention of reselling it for profit.
Stock
Goods purchases by a trading firm for the purpose of resale at a profit.
Stock card
A subsidiary accounting record that records each individual transaction involving the movement in and out of the business of a particular line of stock.
Stock card and control account
The control account provides a summary of all transactions, with specific, detailed information relating to each individual transaction recorded in the subsidiary records.
Identified cost
FIFO (First in First Out) may be used when a business is physically unable to identify individual stock items which have different cost prices. Management may elect to adopt the FIFIO assumption rather than having to label every item with its cost price. It is therefore an easier method of cost allocation.
When is fifo used
Must be applied to all transactions recorded in the out column including sales, drawings, advertising and stock losses.
FIFO is an assumption, it may not match the actual flow of goods.
Stock card and journals
The selling price of each sale is detailed on the invoice/receipt.
The cost price of each sale is determined in the stock card.
The stock cards are a vital source of information when transactions are recorded in the journals, because it is the stock card that will determined the cost price of each sale.
Stocktake
To ensure stock cards are correct a physical stocktake should take place. A stocktake is a physical count of the number of units of each line of stock on hand. The role of the stocktake is to verify the accuracy of the stock card and in the process detect any stock losses or gains. If the stocktake and stock card differ assume the stocktake is correct.
Stock loss
Recorded in the stock card in the out column. FIFO must app,y to stock loss just as it applies to sales. If there is more than one cost price listed in the stock card, the earliest should be assumed to be lost. Stock loss is recorded in the General journal.
Stock gain
A revenue earned when the stocktake shows a figure for stock on hand that is more than the balance shown in the stock card. It is a revenue as it is an inflow of an economic benefit (stock) in the form of an increase in assets (stock control) leading to an increase in owners equity. There are a range of reasons for stock gain including oversupply from supplier that was uncharged, undersupply to a customer who was charged but did not receive the stock.
Stock gain, stock card, conservatism
Stock gains are recorded in the stock card and the General journal. In order to satisfy the demands of conservatism, any stock that must be put back into the stock card must be valued at the lowest cost price still on hand. This ensures the asset (stock control) and the revenue (stock gain) are not overstated.
Using stock for advertising
Stock can be taken out of store to be used for display purposes, or donated to a local community group. If this is the case stock must be recorded in the out column of the stock card and in the General journal. In the stock card use FIFO to determine the cost price.
Reporting for stock 5 items
- Balance sheet - the balance from the stock control ledger account will be reported in the balance sheet. Relevance says that there is little point in identifying the quantity of every line of stock as this level of detail will not affect decision making
- Income Statement — Sale of stock will be the main source of revenue for a trading firm. This figure must be reported separately to other revenues.
- Cost of Goods Sold - all costs incurred in getting stock into a condition and location ready for sale.
- Gross Profit — difference between the sales revenue and cost of goods sold. This figure allows the owner to assess the adequacy of their mark-up.
- Adjusted Gross Profit — any stock loss is deducted from Gross Profit and any stock gain is added. Showing these figures allows the owner to develop strategies to address any problems that are identified.
Perpetual system
Recording stock transactions in stock cards, then conducting a physical stocktake at the end of the reporting period to verify the balances of those stock card.
3 benefits of the perpetual system
Reordering of stock
Stock losses and gains can be detected
Fast and slow moving lines of stock can be identified.
