Unit 2 Chapter 11: Trading Firms and inventory Flashcards
Trading firms
A business that aims to generate profit by purchasing goods and then selling them at a higher price
Inventory
Goods purchased by a trading firm for the purpose of resale at a profit
Perpetual inventory system
System of accounting for inventory that involves the continuous recording of inventory movements in inventory cards
Inventory cards
A subsidiary accounting record that records each individual transaction involving the movement in and out of the business of a particular line of inventory
Gross profit
The profit earned purely from the purchase and sale of inventory, measured by deducting Cost of sales from Sales revenue
Sales
The revenue earned by a trading firm from the sale of inventory
Purchases
The inventory bought by a trading firm for the purposes of resale
Cost of sales
The expense incurred when inventory flows out of the business due to a sale
Identified cost
The actual cost price of the inventory that is purchased and sold is identified and recorded
First in, First out (FIFO)
The assumption that the inventory that is purchased first will be sold first
Physical count
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
Inventory loss
An expense that occurs when the physical count shows less inventory than is shown on the inventory cards
Inventory gain
A revenue that occurs when the physical count shows more inventory on hand than is shown in the inventory card
Why is inventory crucial to the success of a trading business
Sale of inventory is the main source of revenue for a trading ifrm, and thus the key to its ability to earn profit
What are ethical considerations regarding the sale of inventory
- products must be of a certain quality
- Products are sourced from suppliers who provide safe working conditions i.e fair wage
- Products should be sustainably sourced
Why has the LIFO method been banned
This method can have the effect, in times of rising prices of understating profit and inventory at the end of a reporting period
What is the source document that recognises the return of goods
A credit note
3 reasons why there may be a need to return goods
Incorrect item
Wrong colour
Items are damaged
What is the purpose of a memo
To record drawings of inventory
How many inventory cards would a typical trading firm require
The accounting system must include a separate inventory card for each particular line of inventory
what are 2 details that are provided in inventory cards but not in journals or reports
The quantity or number of items of inventory
Cost price of each individual item
why is the cost price not shown on the source document that provides the evidence of a sale
It could lead to customer dissatisfaction to see how much extra they are paying for their goods.
5 reasons for an inventory loss
Oversupply to customers
Undersupply by supplier
Theft
Damage
Recording error
3 Reasons for an inventory gain
Undersupply to customers
Oversupply from Suppliers
Recording error
Why is an inventory gain classified as revenue
Because it increases assets (inventory) and results in an increase in owner’s equity
Why would a business want to use identified cost instead of FIFO
The identified cost method identifies the exact cost price of the inventory leaving the business. The alternative method, FIFO, is an assumption only, and may not match the actual flow of goods.
why would a business use FIFO instead of Identified cost
Easier cost assignment method, meaning that the business does not have to label every individual inventory with their individual cost price.
2 ways inventory cards assist in the management of inventory
Help identify fast and slow moving lines of stock to assist in decision making
Helps the business track inventory levels, prompting them to purchase more when inventory levels are low.
