Unit 2, test 1

Question 1

Cash purchase of inventory (2000 of inventory)

Answer 1

A: Bank decrease 2200
Inventory increase 2000

L: GST payable decrease 200

OE: No effect

Question 2

Credit purchase of inventory (2000 of inventory)

Answer 2

A: Inventory increase by 2000

L: Accounts payable increase by 2200
GST payable decrease by 200

OE: No effect

Question 3

Cash sale of inventory (700 inventory, cost price of 500)

Answer 3

A: Inventory decrease by 500
Bank increase by 770

L: GST payable increase by 70

OE: Revenue increase by 700
Expense decrease by 500

Question 4

Credit sale of inventory (700 inventory, cost price of 500)

Answer 4

A: inventory decrease 500
Accounts receivable increase by 770

L: GST payable increase by 70

OE: Revenue increase by 700
Expense decrease by 500

Question 5

Purchase return on inventory (11 inventory)

Answer 5

A: inventory decrease by 11

L: Accounts payable decrease by 12.10
GST payable increase by 1.10

OE: no effect

Question 6

Sales return on inventory (Inventory 55, selling price 175)

Answer 6

A: Inventory increase by 55
Accounts receivable decrease by 192.5

L: GST payable decrease by 17.50

OE: net profit decrease 120

Question 7

Drawings of inventory (550)

Answer 7

A: Inventory decrease by 550

L: No effect

OE: Drawings decrease by 500

Question 8

Advertising using inventory (22.50)

Answer 8

A: Inventory decrease by 22.50

L: No effect

OE: Net profit decrese

Question 9

Cost assignment methods

Answer 9

1) FIFO - first in, first out
2) Identified cost (IC)

Question 10

What is FIFO?

Answer 10

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

Question 11

Identified Cost

Answer 11

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

Question 12

Inventory count / physical count

Answer 12

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 13

Inventory loss:

Answer 13

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

Question 14

Inventory gain:

Answer 14

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

Question 15

Inventory loss reasons

Answer 15

Theft

Damage

Oversupply to customers

Undersupply by suppliers

Recording error

Question 16

Inventory gain reasons

Answer 16

Undersupply to customer

Oversupply by suppliers

Recording error

Question 17

Perpetual inventory system

Answer 17

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

Question 18

Benefits of a perpetual inventory system

Answer 18

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

Question 19

Cost of sales

Answer 19

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

Question 20

Costs of goods sold

Answer 20

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

Question 21

Cost of goods sold examples

Answer 21

Freight in
Delivery in
Buying expenses
Packaging
Cost of sales

Question 22

Income statement structure

Answer 22

Revenue
Net sales
Less cost of goods sold
Gross profit
Adjusted gross profit
Less other expenses
Net profit

Question 23

Inventory turnover

Answer 23

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

Question 24

Inventory turnover

Answer 24

(average inventory x 365) / cost of goods sold

Question 25

Faster ITO advantages and disadvantages

Answer 25

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

Question 26

Slower ITO disadvantages

Answer 26

Liquidity: jeopardising ability to meet short term debts

Profitability: lower costs of net profit + increase storage costs + risk of inventory loss

Question 27

Inventory management strategies

Answer 27

• 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

Question 28

GPM definition

Answer 28

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

Question 29

GPM equation

Answer 29

(gross profit / net sales) x 100

Question 30

Strategies to improve GPM

Answer 30

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?

Question 31

NPM equation and definition

Answer 31

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

Question 32

Strategies to improve NPM

Answer 32

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)

Question 33

Product cost

Answer 33

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

Question 34

Period cost

Answer 34

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