Unit 2 AOS1

Question 1

Trading Firms

Answer 1

A business which aims to generate a profit by purchasing goods and then selling them at a higher price.

Question 2

Inventory

Answer 2

A good purchased by a trading firm for the purpose of resale at a profit.

Question 3

Accounting Equation

Answer 3

Assets= Liabilities + Owner’s Equity

Question 4

Cost of sale

Answer 4

The expense incurred when Inventory flows out of the business due to a sale.

Question 5

Purchase return of inventory

Answer 5

Purchase returns occur when inventory when inventory is returned by the business to its supplier.

Reasons:
- Incorrect item / colour / size
- Damaged in transit

Question 6

Sales return of inventory

Answer 6

Sales returns occur when inventory is returned to the business by the customer and is verified by a credit note.

Reasons:
- Incorrect item / colour / size
- Damaged in transit

Question 7

Sourcing inventory ethically

Answer 7

-From local suppliers to support local community and economy, reduces carbon emissions associated with transport.

• From suppliers that provide safe working conditions and fair wages

-Products that meet required safety standards.

-Products are made from environmentally friendly and sustainable parts.

-Products that are sustainably sourced

Question 8

Inventory card

Answer 8

a subsidiary Accounting record that records each individual transaction involving the movement in and out of the business of a particular line of inventory.

Question 9

Perpetual inventory system

Answer 9

a system of Accounting for inventory that involves the continuous recording of inventory movements in inventory cards.

Benefits:

1. Assists in the reordering of inventory
2. Fast and slow-moving lines of inventory can be identified
3. Inventory losses and gains can be detected
4. Interim reports can be prepared without the need for physical counts.

Question 10

First In First Out (FIFO)

Answer 10

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

Question 11

Identified Cost (IC)

Answer 11

The actual cost price of the inventory that is purchased and sold is identified and recorded.

Question 12

Gross profit

Answer 12

Gross profit=Sales-Cost of Sales

Question 13

Inventory count/ Physical count

Answer 13

The process of counting every item of inventory on hand to verify the accuracy of the inventory cards and detect any inventory loss or gain.

Question 14

Inventory Loss

Answer 14

An expense that occurs when the physical count shows less inventory that is shown on the inventory cards.

Reasons:
-Theft. -undersupply by suppliers
-Damage. -recoding error
-6oversupply to cust.

Question 15

Inventory gain

Answer 15

A revenue that occurs when the physical count shows more inventory on hand that is shown in the inventory card.

Reasons:
-Undersupply to cust.
-Oversupply by suppliers
-Recoding error

Question 16

Cost of Goods Sold

Answer 16

The cost incurred when getting inventory into a condition and location ready to sell.

Question 17

Income Statement

Answer 17

An Accounting report that details revenues earned and expenses incurred during the reporting period.

Question 18

Inventory Turnover

Answer 18

An efficiency indicator that measures the average number of days it takes for a business to convert its inventory into sales.

Inventory @ start + Inventory @ end /2

Question 19

Inventory Turnover Formula

Answer 19

Inventory Turnover = Avg. inventory x 365/CoGS

Question 20

Inventory management strategies

Answer 20

• Maintain an appropriate inventory mix – this involves ensuring those items that sell fast are well stocked and those that sell slow are discounted.
• Promote the sale of complementary goods
• Ensure inventory is up to date / latest version not old or obsolete
• Rotate inventory
• Determine an appropriate level of inventory on hand
• Market strategically and effectively / ethically
• Appoint an inventory manager whose responsibility it is to ensure inventory is ordered and discounted when required amongst other duties.

Question 21

Gross Profit Margin (GPM)

Answer 21

A profitability indicator that measures the average mark-up by calculating the percentage of Net sales revenue that is retained as Gross Profit.

Question 22

Strategies to improve GPM

Answer 22

• Increase selling price, but must maintain same sales volume, however this is a challenging strategy as customers could go elsewhere if competition maintain lower prices.

• Reduce cost price of Inventory:

• Negotiate better deal with existing supplier

• Buy in bulk to take advantage of lower pricing

• Seek a new supplier who can offer lowering prices,

• Decrease quality of Inventory however this can lead to problems with increased sales returns and complaints

Question 23

Net Profit Margin (NPM)

Answer 23

A profitability indicator that indicates expense control by calculating the percentage of Net sales revenue that is retained as Net Profit.

Question 24

NPM Formula

Answer 24

NPM= Net Profit/ Net Sales x 100

Question 25

Benchmarks

Answer 25

1. Results from previous periods.
2. Budgeted results
3. Industry averages / competitors performance

Question 26

Product Cost

Answer 26

A cost incurred in order to bring inventory into a condition and location ready for sale, which can be allocated to individual units of Inventory on a logical basis.

Question 27

Period Cost

Answer 27

A cost incurred in order to bring inventory into a condition and location ready for sale that is not allocated to individual units of Inventory because there is no logical basis to do so.