Week 5

Question 1

Inventories are

Answer 1

Assets.

Question 2

Inventories are assets that

Answer 2

(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Question 3

What is recorded when the sale of goods occurs?

Answer 3

• the sales transaction itself

- the Cost of Sales (COS)

Question 4

Profit =

Answer 4

Income - Expenses

Question 5

Gross profit -

Answer 5

Sales Income - Cost of Sales

Question 6

Profit =

Answer 6

Gross Profit - Expenses

Question 7

What is the definition of the Perpetual Inventory System?

Answer 7

A perpetual inventory system involves a CONTINOUS record of

1. the physical quantities and costs of inventory on hand, and
2. the physical quantities and costs of inventory sold.

The cost of inventory purchased is recorded as an asset at the date of purchase.

When the inventory is sold, the
cost expires and is recorded as cost of sales expense

Question 8

Per the Perpetual Inventory System, what is recorded when inventory is purchased?

Answer 8

The cost of inventory purchased is recorded as an asset at the date of purchase.

Question 9

Per the Perpetual Inventory System, what is recorded when inventory is sold?

Answer 9

When the inventory is sold, the cost expires and is recorded as the cost of sales expense.

Question 10

What is the definition of the Periodic Inventory System?

Answer 10

In a periodic inventory system, a CONTINOUS record of the:
1. cost of inventory purchased is maintained.

The cost of sales is then determined by deducting the cost of ending
inventory from the cost of goods available for sale. A physical stock take isneeded

Question 11

Periodic Inventory System: What is the formula for Cost of Goods Available for Sale?

Answer 11

COGS = Purchases + O/B Inventory

The total purchases are added to the cost of opening inventory to determine the cost of goods available for sale.

Question 12

Periodic Inventory System: What is the formula for Cost of Sales?

Answer 12

COS = COGS - C/B Inventory

The cost of sales is then determined by deducting the cost of ending inventory from the cost of goods available for sale.

Question 13

Periodic Inventory System: Is a stock take needed? Why (not)?

Answer 13

A physical stock take is needed to determine the C/B Inventory, which is needed to calculate COS.

Question 14

When is the Periodic Inventory System generally used?

Answer 14

1. Large volume low-cost inventory

2. Cost of maintaining a perpetual system would be relatively high

Question 15

What is the COS calculation for Periodic Inventory System?

Answer 15

COS = O/B Inventory + Purchases - C/B Inventory
COS = COGS - C/B Inventory

Question 16

What is the Cost of Beginning Inventory?

Answer 16

Inventory asset account at the beginning of the period.

Question 17

What is the Cost of Purchases?

Answer 17

Cost of Purchases is accumulated during the period in a temporary expense account.

Question 18

What is the Cost of Ending Inventory? How is it determined in the Periodic Inventory System?

Answer 18

Inventory asset account at the end of the period.

Per the Periodic Inventory System, the Cost of Ending Inventory is determined by physical stocktake at the end of the period x cost price.

Question 19

Perpetual Inventory System: Is a stock take needed? Why (not)?

Answer 19

Yes, to verify ending inventory

Question 20

What are 3 key features of the Perpetual Inventory System?

Answer 20

1. CONTINUOUS RECORD of INVENTORY ON HAND and COS
2. Physical stock take ONLY to VERIFY ending inventory
3. a COS account.

Question 21

What are 3 key features of the Periodic Inventory System?

Answer 21

1. a PHYSICAL STOCK TAKE is required
2. a PURCHASES account
3. the COS is a RESIDUAL AMOUNT

Question 22

Which inventory system uses a PURCHASES account?

Answer 22

Periodic Inventory System

Question 23

Which inventory system uses a COS account?

Answer 23

Perpetual Inventory System

Question 24

What is the definition of COS?

Answer 24

The costs of acquiring goods and placing them in a condition suitable for sale.

Question 25

What is the definition of Gross Profit?

Answer 25

The difference between NET SALES and the COST OF GOODS SOLE. The term gross indicates that this is the amount available to meet all other expenses and to provide for profit.

Question 26

What are Selling and Distribution expenses?

Answer 26

Expenses resulting from efforts to store, sell and deliver goods to customers.

Question 27

What are Administration expenses?

Answer 27

Outlays associated with the general administration of the entity. Frequently, expenses that are common to both administrative and selling activities are apportioned between the two. But, where this is considered too expensive, or impracticable, the particular item is usually classified as administrative

Question 28

What are Finance and Other expenses?

Answer 28

Expenses incurred in relation to the financing of the enterprise, collecting debts and running the credit department.

Question 29

In a fully classified Income Statement, what are the 3 expense categories?

Answer 29

1. Selling and Distribution 2. Administration 3. Finance and Other

Question 30

What are cash (settlement) discounts?

Answer 30

An incentive to encourage prompt payment • terms indicated on sales invoice eg. 2/10, n/30 • usually deducted by the purchaser on payment

Question 31

Summarise the Perpetual Inventory System

Answer 31

1. Involves keeping a running record of each purchase and sale 2. The inventory account and COS account is updated after every purchase or sale 3. As a result, the balance in the inventory account is the ending inventory amount. 4. A stocktake is performed to verify the accuracy of this recorded ending inventory 5. If the recorded inventory and the stocktake differ, then an entry to record the correct amount needs to be processed.

Question 32

Summarise the Periodic Inventory System

Answer 32

1. No running record of each purchase and sale 2. Additional inventory purchased is recorded in the “Purchases” account, instead of the Inventory account (Perpetual) 3. The balance in the inventory account, therefore, does not change until the end of the accounting period 4. A stocktake is performed to determine the closing inventory balance 5. This closing balance is then used to determine the Cost of Sales

Question 33

If you are using a Periodic system, you will have a ________________ account in your Trial Balance

Answer 33

Purchases

Question 34

If you are using a Perpetual system, you will have a _________ account in your Trial Balance

Answer 34

Cost of Sales (COS/COGS)