Unit 2 Outcome 1 -

Calculate the selling price using mark up. - only add GST if question saids.

= cost price x ( 1 + (mark up / 100) )

Funk Fashions purchased 200 hats for $30 each, and whshes to sell them at 50% mark up. Calculate the market up and selling price including GST.

$45

$45 + $4.50 = $49.50

Calculate the cost price from a selling price, using a mark-up percentage

Selling price / (1 + (% mark up /100))

Explain the operations of a trading business.

• Trading firms purchase goods form suppliers/wholesalers and

• then sell them to customers at a higher price,

• with the difference between the cost price and the selling price earning them profit.

State two reasons why inventory is important to a trading firm.

-        Sale of inventory is the main source of revenue for a trading firm, alls profit to be earned.

-        Inventory is an important assets in the balance sheet of a trading business.

Define the term ‘Inventory’

Are goods held by a trading firm for the purposes of resale.

Explain the perpetual inventory system. ( 3 marks )

• Continuous recording of inventory transactions on inventory cards.

• The business will then conduct a physical stocktake to verify that the inventory cards are accurate, and in the process detect any inventory losses or gains.

• Separate inventory card maintained for each individual line of inventory.

Explain the benefits of the perpetual system of inventory recording.

-        Inventory losses and gains can be detected by comparing the balances of the inventory cards against the physical stocktake.

-        Assists in the re-ordering of inventory. The inventory cards will show when the minimum inventory levels have been reached so an order can be placed with the supplier.

-        Fast and slow moving lines of inventory can be identified. The owner can examine the inventory cards to identify the items which are selling well and those that are not and adjust inventory purchases accordingly.

FIFO

·       First In, First Out (FIFO) is the assumption that the inventory that is purchased first will be sold first.

·       FIFO must be applied to all transactions recorded in the OUT column including sales, drawings, advertising and inventory losses, but it is an assumption only; it may not match the actual flow of goods.

Identified Cost

identifies the actual cost of the inventory item when it is purchased and when it is sold. This method requires the ability to be able to track an individual item of inventory in the business until it is sold.

Explain how the FIFO method can provide different figures for the financial reports as compared to using Identified Cost in times of increasing prices.

Explain how FIFO and Identified Cost method differ in recording an Inventory gain/lost in the inventory card.

Referring to two Qualitative characteristics, explain the role of a physical count.

A physical stocktake is 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.

• The role of an inventory is thus to verify the accuracy of the inventory cards so that the inventory figure reported in the Balance Sheet is free from bias, faithful representation (i.e. Verifiable and a Faithful representation), and in the process, detect any inventory loss or inventory gain.

Identify Inventory losses

Inventory loss is an expense that occurs when the stocktake shows less inventory than is shown on the inventory cards

 This can occur because of:

-        Theft

-        Damage        

-        An over-supply to customers

-        An under-supply by suppliers

-        A recording error in the inventory cards or during the stocktake.

·       The result of the inventory will be recorded on a memo, an internal accounting document, and passed to the accounting department so that the records can be updated.

·       After recording the inventory loss, the inventory card will show the actual number of units on hand, and an accurate value of inventory on hand can be reported in the Balance Sheet.

·       Inventory loss itself is classified as an expense because it is an outflow of an economic benefit in the form of a decrease in assets (inventory) that results in a decrease in Owner’s Equity.

Decrease (Inventory) Liabilities No effect Owner’s equity Decrease (Increase Inventory loss expense, decreases Profit)

Identify Inventory losses

·       Inventory gain is a revenue that occurs when the physical stocktake shows more inventory on hand than is shown in the inventory card.

This can occur because of:

-        An under-supply to customers

-        An over-supply by suppliers

-        A recording error in the inventory cards or during the stocktake.

·       An inventory gain is classified as revenue because it is an inflow of economic benefit in the form of an increase in assets (inventory) that results in an increase in Owner’s Equity.

Explain how an inventory loss is classified in the Income Statement.

Cost of sales, Explain how the inventory cards can be used to determine Cost of Sales

Sales that is made it results in an outflow of inventory, creating an expense called cost of sales.

Cost of Sales is determined by adding together the value of each sale (credit sale not including purchase returns/credit note and memos )recorded in the OUT section of the inventory cards. ONLY minus or add memos from physical stocktake.

Memo

A memo could be drawings of inventory for personal use, or perhaps a donation as a form of advertising

Gross profit

Gross profit= sale revenue - cost of goods sold

Adjusted Gross profit

·       Gross profit less inventory loss or plus inventory gain equal to adjusted gross profit

·       Reporting the inventory loss or gain separately allows the owner to identify problems with inventory management so that corrective action can be taken

State the classification cash flows under which inventory is reported.

Therefore, any movement of inventory that causes a cash flow will be recorded as an Operating Cash Flow because it is in the ordinary course of business.

Explain why Cost of Sales is not reported in the Cash Flow Statement.

The expense ‘Cost of Sales’ that we just identified above will not be recorded in the Cash Flow Statement as it involves a movement of inventory, not a movement of cash.

Explain how inventory is classified in the Balance Sheet.

·       inventory will be reported as a current asset. This is because it is a present economic resource controlled by the business that has the potential to provide a future economic benefit within the next 12 months.

·       Relevance indicates that there is no need to report the balance of each individual line of inventory, as this information will not be useful for the types of decisions that are informed by the balance sheet.

·       Instead, a single a listing of all the inventory line, the number of units on hand, and the value of those units.

 

Drawings of inventory is the owner taking inventory home for personal use and must be recorded as such to support the Accounting entity assumption.

Advertising using inventory

Advertising occurs when a business gives inventory to another entity, to support such events as a school fete or a charity. This could be seen as a donation; however, businesses do this to get their name out in the community, for example, ‘proudly supported or donated by Hardy and Co.’, so it is a form of marketing and therefore will be recorded as Advertising (not Cost of Sales).

State the transactions that could be recorded in the ‘IN’ column of an inventory card.

State the transactions that could be recorded in the ‘OUT’ column of an inventory card.

Cash / credit purchases, Sales returns, Inventory gains

Cash / credit sales Purchase returns Drawings Advertising Inventory loss

State how many inventory cards a typical trading firm would require.

Cost price change

Frequently, the cost price charged by the supplier will change during the period. That is, the items on hand may have the same selling price and be identical in the eyes of the customer but may have different cost prices. These differing cost prices must be recorded in the inventory cards.

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

Explain how the inventory card is used to determine the Cost of Sales for each transaction

Explain the Identified Cost method as it applies to inventory cards.

Explain why purchase of inventory is not reported as an expense. Explain where a cash purchase is reported.

Explain why it is important to identify Gross Profit in the Income Statement of a trading business.

Explain how an Inventory loss or gain is determined.

Explain why Inventory loss and gain are reported separately in the Income Statement.

9 State the effect on Adjusted Gross Profit of an: • Inventory loss • Inventory gain.

Explain how inventory is classified in the Balance Sheet.

Referring to one Qualitative characteristic, explain why the Balance Sheet does not list the balance of every line of inventory.

Inventory - current asset

Relevance dictates that there is no need to report the balance of each individual line of inventory, as this information will not be useful for the types of decisions that are informed by the Balance Sheet. Instead, a single figure for inventory will be reported, and this figure will be determined by using an inventory sheet. An inventory sheet is simply a listing of all the inventory lines, the number of units on hand, and the value of those units.

Explain three strategies that could be employed to manage inventory.

Rotate inventory - older products must be stocked in front so that they are taken first. Otherwise, inventory may remain unsold, resulting in spoilage and wastage.

Explain one reason for the difference between the physical count and the balance shown on the inventory card.

Oversupply by a supplier: the quantity supplied due to a purchase was greater than recorded in the inventory card. Undersupplying to a customer: the quantity delivered due to a sale was less than recorded in the inventory card.