Week 4| Inventories

Question 1

What are inventories and stocks?

Answer 1

inventories or stocks are goods acquired in the ordinary course of a business for resale
retailers: businesses selling inventories directly

Question 2

What is the source to merchandising income for businesses?

Answer 2

The source of merchandising incomes for business is the sale of inventory
- sales revenue
Two expenses for a merchandising operation:
-cost of sales- total cost of inventory sold during the period
- operating expenses

Question 3

What are the operating cycles for accounts receivable and inventories?

Answer 3

Accounts receivable -> send invoice -> customer pays -> receive cash
Inventories-> (sell inventories) -> accounts receivable-> send invoice -> receive cash ->cash (buy inventory) -> return back to first place started from

Question 4

What are the purposes of inventory systems and what are the types of inventory systems a business holds?

Answer 4

Helps merchandising system determine how much inventory is left, what is sold and what is available for sale
Perpetual system:
-details of the cost of each inventory purchase and sale are documented
-it has its name keep accounting process just occurs continuously
-shows the quantity and cost of inventory that should be on hand at any time
-cost of sales is determined each time a sale occurs

Periodic system:
detailed inventory records of the goods on hand are not kept throughout the period
cost of sales only determined at the end of the period, hence its name- periodic
How to determine cost of the sales:
1. determine price of cost of goods on hand at the beginning of the accounting period
2. Add to cost of good purchased
3. subtract the cost of good on hand at end of the period

Computer inventory system: -
An integrated inventory system is linked with accounts payable and purchases and with accounts receivable and sales to record number of units purchased, on hand and sold

• Additional considerations
• Perpetual system provides better control over inventories than a periodic system since the records should show the inventory that should be on hand.
• If the inventory in hand does not agree with the record, it can be investigated immediately

Question 5

How would recording purchases of inventories on the perpetual system work?

Answer 5

• Purchases of inventories may be made for cash or on credit
• cash ones are those more paid for when goods are delivered - which can be cash, cheque, by credit card or electronic funds transfer
• credit purchases are those that are paid after delivery of goods, common credit purchases are between 7 and 30 days from the date of the invoices
• Purchases normally recorded when goods are measured
• Every purchase should be supported by source document that provides written evidence of transaction
• Cash purchases should be supported by cheque payment, a cash receipt and/or a supplies invoice indicating the items purchased and amounts paid
• Cash purchases: inventory increases; cash decreases
• Credit purchase supported by a supplier’s invoice (is a document evidencing the supplier’s claim against the purchaser and states the quantity and the cost of each item supplied, total purchase price and terms of payment)