Chapter 7 (Perpetual inventory) Flashcards
7:1
Define inventory
Inventory is defined as the goods purchased by a trading business intended to be re-sold by that same business for a superior price to earn a profit.
Inventory is classified as a current asset under a business’s balance sheet.
7:1
What is a physical stocktake
A physical stocktake takes place at the end of a period and entails a business counting the total quantity of an inventory item they have on hand.
7:2
Define “Perpetual inventory.”
This is a system of recording regular movements of inventory continuously throughout a reporting period.
7:2
List some strengths of the prepatual inventory system.
: It allows the management of a business greater control of its operations involving inventory.
: It provides a means of identifying inventory gains and losses that will occur during reporting periods.
: It can help identify the speed of a business’s inventory turnover, which provides essential information to owners about how a certain item is selling.
7:2
List some weaknesses of the perpetual inventory system.
: This doesn’t eliminate the need to conduct a physical stock-take at the end of a period, as inventory gains and losses still occur frequently.
: This will result in additional costs for the business to maintain this system of inventory recording.
: This system requires additional record-keeping that a business must maintain to fully take advantage of perpetual inventory, which includes the need to constantly update inventory cards.
7:4
Describe the identified cost method of recording sales costs.
The identified cost method involves a business recording the actual cost of each inventory item that is sold by a business. This can be done via many methods.
7:4
Describe the FIFO method of recording sales costs.
FIFO standing for First-In-First-Out, is a method of recording cost prices that follows an assumption that the first inventory purchased by a business will be the first inventory that the business will sell, even if this isn’t true in reality.
7:5
Describe the purpose of an inventory card
An inventory card is a subsidiary record that records all movements of a particular inventory item during a period for a business.
If a business has multiple lines of inventory, they’ll maintain multiple inventory cards to record movements during a period.
7:6
Define an “inventory loss.”
An inventory loss occurs when the total quantity of an inventory item revealed in a physical stock take at the end of a period is less than what’s stated in that item’s inventory card. Hence, an adjustment in that inventory card, as well as in the general journal and ledger must be made to address this event at the end of the period.
7:6
Define an “inventory gain.”
An inventory gain occurs when the total quantity of an inventory item revealed in a physical stock take is greater than what’s stated in that item’s inventory card. Hence, an adjustment must be made at the end of the period in that inventory card, and in the general journal/ledger to address this event at the end of a period.
8:1
Define a “credit note.”
A credit note verifies that a return of goods has occurred from a credit sale.
8:2
Define a “purchase return.”
A purchase return occurs when a business returns inventory they’ve purchased back to a supplier.
A business in this situation will be issued a credit note from their supplier verifying the return of goods.
8:3
Define a “sales return.”
A sales return occurs when a customer returns goods to a business that they bought on credit.
9:1
Define an “inventory cost.”
An inventory cost is a cost associated with goods being brought into a business where they are in a condition and location ready for sale.
9:1
Define a “product cost.”
An additional cost involved in bringing an inventory item into a location and condition ready for sale in a business, where this additional cost can be isolated and logically allocated to each unit of an inventory item. Essentially, it forms its cost price.
