Unit 2 AOS 1 Flashcards
What is a trading firm
= bus which aims 2 generate a profit by purchasing goods + selling them @ higher price
What is a mark up
= cost x (1 + mark up) = selling price
What is inventory
= goods purchased by a trading firm 4 the purpose of resale at a profit
N.B-> can also be refered 2 as “merchandise” or “stock”
What would inventory be classified as in a classified balance sheet
Current Asset
What does double entry accounting refer to
= every transaction will change at least 2 items in the accounting equation h/r after those changes are recorded, accounting equation must still balance
-> A = L + OE
What impact on the accounting equation does Cash purchase of inventory have
A: Decrease bank, Inc inventory
L: Decrease GST pay
OE: N/E
What impact on the accounting equation does credit purchase of inventory have
A: Inc inventory
L: Inc accounts payable, Decrease GST payable
OE: N/E
What impact on the accounting equation does cash sales of inventory have
A: Inc bank, decrease inventory
L: Inc GST payable
OE: Inc
What impact on the accounting equation does credit sales of inventory have
A: Inc accounts receivable, decrease inventory
L: Inc GST payable
OE: Inc
What impact on the accounting equation does purchase return on inventory have
A: decrease inventory
L: decrease accounts payable, increase GST payable
OE: N/E
What impact on the accounting equation does sales return of inventory have
A: Inc inventory, decrease accounts receivable
L: decrease GST payable
OE: decrease
What impact on the accounting equation does drawings of inventory have
A: decrease inventory
L: N/E
OE: decrease
What impact on the accounting equation does advertising using inventory have
A: decrease inventory
L: N/E
OE: decrease
What are sales
= revenue, increase in assets (Bank), + increase in OE (profit) - recorded @selling price
What are costs of sales
= expenses incurred when inventory flows out of the bus due 2 sales
What is an inventory card
= subsidiary accounting record that records each individual transaction involving the movement in and out of a bus of a particular line of inventory
What is the perpetual inventory system
= system of accounting for inventory that involves the continuous recording of inventory movements in inventory cards
What are the 2 options of cost assignment methods
1) First in First out
2) Identified cost
What is first in first out
= used when it is x practical / possible 2 identify individual units of inventory e.g petrol station
What is Identified cost
= method requires bus 2 be able 2 track an individual item of inventory in a bus until it is sold
What is the gross profit formula
GP = sales - cost of sales
What is inventory count / physical count
= process of counting every item of inventory on hand 2 verify the accuracy of inventory cards + detect any inventory loss/gain
What is an inventory loss
= an expense that occurs when the physical count shows bus inventory that is shown on the inventory cards
What is inventory gain
= revenue that occurs when the physical count shows more inventory on hand that is shown on the inventory card
What are the reasons for an inventory loss
- Theft
- Damage
- Oversupply 2 c’ers
- Undersupply by suppliers
- Recording error
What is the impact inventory loss has on the accounting equation
A: less overall b/c less inventory
L: n/e
O.E: less overall b/c inc expense due 2 stock loss -> less net profit
What are the reasons for an inventory gain
- An undersupply 2 c’er
- An oversupply by supplier
- Recording error
What is the impact inventory gain has on the accounting equation
A: inc overall b/c inc inventory
L: n/e
O.E: inc overall b/c inc revenue due 2 stock gain -> inc net profit
What are the benefits of the perpetual inventory system
1) Assists in recording of inventory
2) Fast + slow-moving lines of inventory can be identified
3) Inventory losses + gains can be detected
4) Interim reports can be prepared without the need 4 physical counts
What is the cost of goods sold
= cost incurred when getting inventory into a condition 2 be ready 2 sell
What is an income statement
= accounting report that details revenue earned + expenses incurred during the reporting period
How to calculate net profit
Revenue
(sales returns)
(cost of goods sold)
(inventory loss) /or/+ inventory gain
(expenses)
= Net Profit
How to calculate net sales
-> net sales - sales return
\
How to calculate net sales
-> net sales - sales return
What is gross profit
-> net sales - cost of goods sold
What is adjusted gross profit
-> gross profit - inventory loss or + inventory gain
What is net profit
= revenue earned - expenses incurred
What is the inventory turnover equation
ITO = Av. inventory x 365 / cost of sales
What is inventory turnover
= av. number of days in takes 2 sell inventory / convert inventory into sales
What is profitability
= ability of bus 2 generate profit compared against a base of sales, assets or O.E
What is liquidity
= ability of bus 2 meet its S.T debts as they fall due
What is stability
= ability of bus 2 meet its debts + continue operations in the long term
What is gross profit margin
= profitability indicator that measures av. mark up by calculating the % of net sales revenue that is retained as gross profit
What is gross profit margin formula
GPM = gross profit / net sales x 100
t/f high is better
What is the possible cause of change in GPM
- Inc margin b/n selling + cost price caused by…
-> inc selling price h/r cost remains stable
-> dec cost price h/s selling price remains same
Strategies to improve GPM
- inc selling price h/r maintain same sales volume h/r dangerous b/c c’er could go elsewhere if comp has low prices still
- decrease cost of inventory e.g : negotiate price with suppliers; buy in bulk; seek new suppliers; less quality of inventory
What is net profit margin
= profitability indicator that indicates expense control by calculating % of net sales revenue that is retained from net profit
What is the net profit margin formula
NPM = Net profit / net sales x 100
What are strategies to improve NPM
- Inc sales volume whilst maintaining expenses
- Inc effective advertising
- Identify uneccessary expenses 2 dec cost from their removal
What is unit cost of inventory
= values of inventory at the original purchase price, ensuring verifiability -> inventory being faithfully rep in the firms Accounting Records
What is unit cost
= cost price of each individual unit of inventory / rather, amount of each unit of inventory has cost
Why is it important for unit cost to be accurate
- Used 2 determine value of inventory 2 be recorded on B.S
- Used 2 determine selling price via mark up %, an inaccurate unit cost -> selling price = 2 high / low
What are the 2 categories of cost of goods sold
- Period cost
- Product cost
What is product cost
= cost incurred in order 2 bring inventory into condition + location ready 4 sale, which can be allocated 2 individual units of inventory on a logical basis
What is period cost
= cost incurred in order 2 bring inventory into condition + location ready 4 sale that is x allocated 2 individual units of inventory b/c x logical basis 2 do so
What is the p.o.d between period and product cost
= degree of logical basis 2 apply 2 an individual unit of stock
