Unit 2 Chapter 11: Trading Firms and inventory

Question 1

Trading firms

Answer 1

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

Question 2

Inventory

Answer 2

Goods purchased by a trading firm for the purpose of resale at a profit

Question 3

Perpetual inventory system

Answer 3

System of accounting for inventory that involves the continuous recording of inventory movements in inventory cards

Question 4

Inventory cards

Answer 4

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 5

Gross profit

Answer 5

The profit earned purely from the purchase and sale of inventory, measured by deducting Cost of sales from Sales revenue

Question 6

Sales

Answer 6

The revenue earned by a trading firm from the sale of inventory

Question 7

Purchases

Answer 7

The inventory bought by a trading firm for the purposes of resale

Question 8

Cost of sales

Answer 8

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

Question 9

Identified cost

Answer 9

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

Question 10

First in, First out (FIFO)

Answer 10

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

Question 11

Physical count

Answer 11

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 12

Inventory loss

Answer 12

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

Question 13

Inventory gain

Answer 13

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

Question 14

Why is inventory crucial to the success of a trading business

Answer 14

Sale of inventory is the main source of revenue for a trading ifrm, and thus the key to its ability to earn profit

Question 15

What are ethical considerations regarding the sale of inventory

Answer 15

1. products must be of a certain quality
2. Products are sourced from suppliers who provide safe working conditions i.e fair wage
3. Products should be sustainably sourced

Question 16

Why has the LIFO method been banned

Answer 16

This method can have the effect, in times of rising prices of understating profit and inventory at the end of a reporting period

Question 17

What is the source document that recognises the return of goods

Answer 17

A credit note

Question 18

3 reasons why there may be a need to return goods

Answer 18

Incorrect item
Wrong colour
Items are damaged

Question 19

What is the purpose of a memo

Answer 19

To record drawings of inventory

Question 20

How many inventory cards would a typical trading firm require

Answer 20

The accounting system must include a separate inventory card for each particular line of inventory

Question 21

what are 2 details that are provided in inventory cards but not in journals or reports

Answer 21

The quantity or number of items of inventory
Cost price of each individual item

Question 22

why is the cost price not shown on the source document that provides the evidence of a sale

Answer 22

It could lead to customer dissatisfaction to see how much extra they are paying for their goods.

Question 23

5 reasons for an inventory loss

Answer 23

Oversupply to customers
Undersupply by supplier
Theft
Damage
Recording error

Question 24

3 Reasons for an inventory gain

Answer 24

Undersupply to customers
Oversupply from Suppliers
Recording error

Question 25

Why is an inventory gain classified as revenue

Answer 25

Because it increases assets (inventory) and results in an increase in owner’s equity

Question 26

Why would a business want to use identified cost instead of FIFO

Answer 26

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.

Question 27

why would a business use FIFO instead of Identified cost

Answer 27

Easier cost assignment method, meaning that the business does not have to label every individual inventory with their individual cost price.

Question 28

2 ways inventory cards assist in the management of inventory

Answer 28

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.