Unit 2, test 1 Flashcards
Cash purchase of inventory (2000 of inventory)
A: Bank decrease 2200
Inventory increase 2000
L: GST payable decrease 200
OE: No effect
Credit purchase of inventory (2000 of inventory)
A: Inventory increase by 2000
L: Accounts payable increase by 2200
GST payable decrease by 200
OE: No effect
Cash sale of inventory (700 inventory, cost price of 500)
A: Inventory decrease by 500
Bank increase by 770
L: GST payable increase by 70
OE: Revenue increase by 700
Expense decrease by 500
Credit sale of inventory (700 inventory, cost price of 500)
A: inventory decrease 500
Accounts receivable increase by 770
L: GST payable increase by 70
OE: Revenue increase by 700
Expense decrease by 500
Purchase return on inventory (11 inventory)
A: inventory decrease by 11
L: Accounts payable decrease by 12.10
GST payable increase by 1.10
OE: no effect
Sales return on inventory (Inventory 55, selling price 175)
A: Inventory increase by 55
Accounts receivable decrease by 192.5
L: GST payable decrease by 17.50
OE: net profit decrease 120
Drawings of inventory (550)
A: Inventory decrease by 550
L: No effect
OE: Drawings decrease by 500
Advertising using inventory (22.50)
A: Inventory decrease by 22.50
L: No effect
OE: Net profit decrese
Cost assignment methods
1) FIFO - first in, first out
2) Identified cost (IC)
What is FIFO?
The assumption that the inventory that is purchased first will be sold first
Identified Cost
The actual cost price of the inventory that is purchased and sold is identified and recorded
Inventory count / 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 that is shown on the inventory cards
Inventory gain:
A revenue when the physical count shows more inventory on hand that is shown in the inventory card
Inventory loss reasons
Theft
Damage
Oversupply to customers
Undersupply by suppliers
Recording error
Inventory gain reasons
Undersupply to customer
Oversupply by suppliers
Recording error
Perpetual inventory system
A system of accounting for inventory that involves the continuous recording of inventory movements in inventory cards
Benefits of a perpetual inventory system
1) Assists in the reordering of inventory
2) Fast and slow-moving lines of inventory can be identifies
3) Inventory losses and gains can be detected
4) Interim reports can be prepared without the need for physical counts
Cost of sales
The expense incurred when inventory flows out of the business due to a sale
Costs of goods sold
The cost incurred when getting inventory into a condition and location ready to sell
Cost of goods sold examples
Freight in
Delivery in
Buying expenses
Packaging
Cost of sales
Income statement structure
Revenue
Net sales
Less cost of goods sold
Gross profit
Adjusted gross profit
Less other expenses
Net profit
Inventory turnover
an efficiency indicator that measures the average number of days it takes for a business to convert its inventory into sales
Inventory turnover
(average inventory x 365) / cost of goods sold
Faster ITO advantages and disadvantages
Advantages:
- Liquidity: fast conversion of inventory to cash via cash sales or receipts
- Profitability: increase level of net profit
Disadvantages:
- Delivery costs may be higher bc deliveries are more frequent
- Lose possibility of receiving discounts for buying in bulk
Slower ITO disadvantages
Liquidity: jeopardising ability to meet short term debts
Profitability: lower costs of net profit + increase storage costs + risk of inventory loss
Inventory management strategies
- Maintain appropriate inventory mix (ensure items sell fast and are well stocked, and those sell slow = discounted)
- Promote the sale of complementary goods
- Ensure inventory is up to date
- Rotate inventory
- Determine the appropriate level of inventory to have on hand
- Market strategically and effectively
- Appoint an inventory manager who is the responsibility it is to ensure inventory is ordered and discounted when required
GPM definition
Gross profit margin
A profitability indicator that measure the average mark-up by calculating the percentage of net sales revenue that is retained as gross profit
GPM equation
(gross profit / net sales) x 100
Strategies to improve GPM
Increase selling price, but maintain same sales volume however -> competition winning
Reduce cost price of inventory
- negotiate better deal
- buy in bulk
- seek new supplier
- decrease quality of inventory -> competition winning?
NPM equation and definition
A profitability indicator that indicates expense control by calculating the percentage of net sales revenue that is retained as net profit
(net profit / net sales) x 100
Strategies to improve NPM
Improve GPM
Increase sales volume while maintaining expense at same level
Using effective advertising to boost sales
If sales cant be increased identify expenses that can be reduced (e.g wages)
Product cost
A cost incurred in order to bring inventory into a condition and location ready for sale, which can be allocated to each individual units of inventory on a logical basis
Period cost
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
