Topic 5: Inventory & Stock Cards

Question 1

What are the consequences if firms purchase more stock than it can sell?

Answer 1

• Tie up cash

- Additional costs in urgent buying of stock

Question 2

What is the Physical Inventory method?

Answer 2

Stock account is inactive
Buying stock - purchases
Selling stock - sales
Stock value is only determined by physical count

Question 3

What is the Perpetual Inventory method?

Answer 3

Stock account is active - Stockcards

Records all movement of stock going in and out from the business

Question 4

What is the Physical Inventory method used for?

Answer 4

High number of stock lines
High turnover (sales)
Examples: Hardware stores, Supermarkets

Question 5

What is the Perpetual Inventory method used for?

Answer 5

Low turnover (sales)
Examples: Car yards, Jewellery stores, Furniture stores

Question 6

What are the advantages of using the Perpetual Inventory method?

Answer 6

Theft can be determined

Easier to determine Cogs and Gross profit calculations

Question 7

What are the disadvantages of using the Perpetual Inventory method?

Answer 7

Can be a costly investment (buying technology)

Staff must be trained and have time to correctly enter stock coming in (Increase in staff wages)

Question 8

What are the changes in the recording process for using the Perpetual Inventory method?

Answer 8

• Use of stockcards to record stock movement
• Stock account is active
• Purchases and Purchases Returns Ledgers are no longer used/needed
• Stock losses/gains can be determined

Question 9

What is the First In, First Out Method (Perpetual)?

Answer 9

Old Stock is brought to the front of the shelf and the newest stock is stacked behind
* Only accurate when staff and customers follow the rules*

Question 10

What is the First In, First Out Method best used for?

Answer 10

• High turnover and low cost items
• Hard to identify individual items
• Examples: milk, fruit and veggies

Question 11

What is the Identified Cost Method (Perpetual)?

Answer 11

Stock items are tagged, coloured and coded to determine particular purchase price and date.

Question 12

What is the Identified Cost Method best used for?

Answer 12

• Low turnover and high cost items
• Items that are more easily identified
  Examples: Jewellery, cars, TVs

Question 13

How do Stock losses generally occur?

Answer 13

Theft from customers or staff

• Stock Losses is DEBIT entry
• Inventory is CREDIT entry

Question 14

How do Stock gains generally occur?

Answer 14

Recording errors

• Inventory is DEBIT entry
• Stock Gains is CREDIT entry

Question 15

What are the rules when recording stockcards into a Stock/Inventory Ledger?

Answer 15

IN Column of Stock Card - DEBIT SIDE (Left side)
OUT Column of Stock Card - CREDIT SIDE (right side)
Sales & Sales Returns = COGS
Purchases & Purchases Returns = Creditors/Bank
*Everything is recorded at COST PRICE

Question 16

What are the rules when recording stockcards into a COGS ledger?

Answer 16

Sales - DEBIT (Left)

Sales Returns - CREDIT (right)

Question 17

What is the Net Realisable value?

Answer 17

Market price stock is estimated to be sold for less any costs incurred in selling that item.

Question 18

What is the concept of ‘the lower of cost or net realisable value’?

Answer 18

Based of Prudence assumption, where given a choice the lowest value of stock will be chosen to take a careful and cautious valuation of business assets.

Question 19

What is the Inventory Turnover Ratio? And What is the acceptable result?

Answer 19

Expressed as a number of times.
Looks at how quickly the business is turning its stock levels over.
Acceptable Result: The quicker the business turns over its stock levels the better it is, as it increases cash flow and keeps stock lines fresh.

Question 20

How is Breakeven calculated?

Answer 20

Footy Club (Fixed Costs) / Some Person (Selling Price) - Vice Captaincy (Variable Cost)

Question 21

What are Fixed Costs in Breakeven?

Answer 21

Expenses which occur regardless of how many products are sold or produced.
Examples: Rent, Wages

Question 22

What is Selling Price in Breakeven?

Answer 22

Actual price that the product is sold for.

Question 23

What are Variable Costs in Breakeven?

Answer 23

Expenses associated with actual production of the product.