Unit 2 AOS1 Flashcards
(27 cards)
Trading Firms
A business which aims to generate a profit by purchasing goods and then selling them at a higher price.
Inventory
A good purchased by a trading firm for the purpose of resale at a profit.
Accounting Equation
Assets= Liabilities + Owner’s Equity
Cost of sale
The expense incurred when Inventory flows out of the business due to a sale.
Purchase return of inventory
Purchase returns occur when inventory when inventory is returned by the business to its supplier.
Reasons:
- Incorrect item / colour / size
- Damaged in transit
Sales return of inventory
Sales returns occur when inventory is returned to the business by the customer and is verified by a credit note.
Reasons:
- Incorrect item / colour / size
- Damaged in transit
Sourcing inventory ethically
-From local suppliers to support local community and economy, reduces carbon emissions associated with transport.
- From suppliers that provide safe working conditions and fair wages
-Products that meet required safety standards.
-Products are made from environmentally friendly and sustainable parts.
-Products that are sustainably sourced
Inventory card
a subsidiary Accounting record that records each individual transaction involving the movement in and out of the business of a particular line of inventory.
Perpetual inventory system
a system of Accounting for inventory that involves the continuous recording of inventory movements in inventory cards.
Benefits:
- Assists in the reordering of inventory
- Fast and slow-moving lines of inventory can be identified
- Inventory losses and gains can be detected
- Interim reports can be prepared without the need for physical counts.
First In First Out (FIFO)
The assumption that the inventory that is purchased first will be sold first.
Identified Cost (IC)
The actual cost price of the inventory that is purchased and sold is identified and recorded.
Gross profit
Gross profit=Sales-Cost of Sales
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.
Reasons:
-Theft. -undersupply by suppliers
-Damage. -recoding error
-6oversupply to cust.
Inventory gain
A revenue that occurs when the physical count shows more inventory on hand that is shown in the inventory card.
Reasons:
-Undersupply to cust.
-Oversupply by suppliers
-Recoding error
Cost of Goods Sold
The cost incurred when getting inventory into a condition and location ready to sell.
Income Statement
An Accounting report that details revenues earned and expenses incurred during the reporting period.
Inventory Turnover
An efficiency indicator that measures the average number of days it takes for a business to convert its inventory into sales.
Inventory @ start + Inventory @ end /2
Inventory Turnover Formula
Inventory Turnover = Avg. inventory x 365/CoGS
Inventory management strategies
• Maintain an appropriate inventory mix – this involves ensuring those items that sell fast are well stocked and those that sell slow are discounted.
• Promote the sale of complementary goods
• Ensure inventory is up to date / latest version not old or obsolete
• Rotate inventory
• Determine an appropriate level of inventory on hand
• Market strategically and effectively / ethically
• Appoint an inventory manager whose responsibility it is to ensure inventory is ordered and discounted when required amongst other duties.
Gross Profit Margin (GPM)
A profitability indicator that measures the average mark-up by calculating the percentage of Net sales revenue that is retained as Gross Profit.
Strategies to improve GPM
• Increase selling price, but must maintain same sales volume, however this is a challenging strategy as customers could go elsewhere if competition maintain lower prices.
• Reduce cost price of Inventory:
• Negotiate better deal with existing supplier
• Buy in bulk to take advantage of lower pricing
• Seek a new supplier who can offer lowering prices,
• Decrease quality of Inventory however this can lead to problems with increased sales returns and complaints
Net Profit Margin (NPM)
A profitability indicator that indicates expense control by calculating the percentage of Net sales revenue that is retained as Net Profit.
NPM Formula
NPM= Net Profit/ Net Sales x 100
