BSB110 Lecture Notes - Lecture 6: Gross Profit, Current Asset, Weighted Arithmetic Mean
Accounting – Inventories
Operating cycles
- Longer for retail then service business
- Need time to buy stock and have it delivered and then sell it
- Inventory is the most significant current asset
Retail businesses
- Main revenue from sales of goods
- Main expenditure is cost of sales
- How is the cost determined?
- Inventory – goods held for resale e.g. clothes, food, petrol, electrical goods
Merchandising Operations
- Sales revenue – cost of sales = gross profit
- Gross profit – operating expenses = profit (loss)
Management of inventory
- Efficient handling of inventory
oAs minimal as possible
oToo little may lead to loss
oToo much is expensive and ties up cash
- Safeguarding stock
oHow do businesses make sure customers are paying the right amount for the right
product?
oSelf-checkout
oStocktake
- Fire-sale of inventory
oSell quickly and under normal cost
oDone when businesses are in danger of bankruptcy
oPoor management can lead to losses and eventual collapse e.g. Dick Smith
Inventory Systems
- Two types
- Periodic
oDetailed records are not maintained
oNot a running record
oCost of sales is determined at the only of the accounting period by a physical
inventory account
oUpdated periodically e.g. once a month (depends of the size of the business)
oUsed by small businesses e.g. sole proprietorships
- Perpetual
oKeeping continuous record of movement
oLarge companies e.g. supermarkets, department stores
oBar codes and optical scanners
Recording purchases of inventories in a periodic inventory system
- Purchases account used to record cost of all inventory purchased
- When buying things from suppliers
oExpense – Dr account
oJournal entry
Dr to expense
Cr to liability
om/n – If you pay within n amount of days, you get m% off (e.g. 2/7 – pay within 7
days, get 2% off)
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Document Summary
Need time to buy stock and have it delivered and then sell it. Inventory goods held for resale e. g. clothes, food, petrol, electrical goods. Sales revenue cost of sales = gross profit. Gross profit operating expenses = profit (loss) Efficient handling of inventory: as minimal as possible, too little may lead to loss, too much is expensive and ties up cash. Safeguarding stock: how do businesses make sure customers are paying the right amount for the right product, self-checkout, stocktake. Fire-sale of inventory: sell quickly and under normal cost, done when businesses are in danger of bankruptcy, poor management can lead to losses and eventual collapse e. g. dick smith. Perpetual: keeping continuous record of movement, large companies e. g. supermarkets, department stores, bar codes and optical scanners. Recording purchases of inventories in a periodic inventory system. Purchases account used to record cost of all inventory purchased. When buying things from suppliers: expense dr account, journal entry.
