ACCT10002 Chapter Notes - Chapter 4: Perpetual Inventory, Accounts Payable, Gross Profit
22 May 2018
School
Department
Course
Professor
Main source of revenues for merchandising businesses is the sale of inventory
-
sales revenue/sales
Expenses are divided into two categories
-
cost of sales and operating expenses
Cost of sales is the total cost of inventory sold during the period
Sales revenue
-
cost of sales = gross profit
-
Gross profit
-
operating expenses = net profit
-
Profit measurement process for a merchandising business:
Sales revenue
-
operating expenses = profit
-
Profit measurement process for a service business:
The operating cycle of a merchandising business is longer than that of a service business
Perpetual inventory system:
Detailed records of the cost of each inventory purchase and sale are maintained
Use of bar codes and optical scanners to keep a daily running record
Cost of sales is determined each time a sale occurs
Periodic inventory system:
Determine the cost of goods on hand at the beginning of the accounting period
1.
Add to it the cost of goods purchased
2.
Subtract the cost of goods on hand at the end of the accounting period
3.
Cost of sales is determined only at the end of the accounting period, when a physical inventory count
(stocktake) is taken to determine the quantity and cost of goods on hand
Computerised inventory systems keep up
-
to
-
the
-
minute records
Integrated inventory systems are linked with accounts payable and purchases and with accounts
receivable and sales to record the number of units purchased, number of units sold and quantities of
goods on hand
Having the most current inventory information assists managers in making decisions about when to
replenish and re
-
order inventory
Perpetual vs periodic:
Shortages can be investigated immediately
-
Perpetual provides better control
Perpetual requires additional clerical work and additional cost, but a computerised system can minimise
the cost
Small businesses may find it unnecessary or uneconomical to invest in a computerised perpetual
inventory system
Merchandising operations
Tuesday, 22 August 2017 4:16 PM
IFA Page 1
Cash purchases are recorded by an increase in inventory and a decrease in cash
States the quantity and cost of each item supplied, the total purchase price and the terms of
payment
-
Credit purchases are supported by a supplier's invoice which evidences the supplier's claim against the
purchaser
Credit purchases are recorded by an increase in inventory and an increase in accounts payable
Credit terms of 2/7, n/30 indicate a 2% discount if paid within 7 days, otherwise full invoice amount is
due in 30 days
A purchase return occurs when the purchaser returns the goods for credit or a cash refund
A purchase allowance occurs when the purchaser keeps the inventory if the seller is willing to grant an
allowance/a deduction from the purchase price
Freight
-
in costs occur when the buyer pays the transport costs and are considered part of the cost of
purchasing inventory
Freight
-
in costs are recorded by an increase in freight
-
in and a decrease in cash
Freight
-
out costs occur when the seller pays the transport costs on outgoing inventory
Freight
-
out costs are recorded by an increase in freight
-
out and a decrease in cash
Settlement discounts permit the buyer to claim a discount for prompt payment
Discounts are recorded by the buyer as revenue
Eg. decrease in accounts payable, decrease in cash, increase in discount received
Or decrease in accounts payable, decrease in cash, decrease in inventory
Trade discounts do not depend on early payment and are not recorded
Trade discounts are disclosed on the sales invoice as a percentage reduction in the list price of the
inventories sold
Eg. trade discount for buyers who purchase in large quantities
Recording purchases of inventories
Tuesday, 22 August 2017 4:16 PM
IFA Page 2
Document Summary
Main source of revenues for merchandising businesses is the sale of inventory - sales revenue/sales. Expenses are divided into two categories - cost of sales and operating expenses. Cost of sales is the total cost of inventory sold during the period. Sales revenue - cost of sales = gross profit. Gross profit - operating expenses = net profit. The operating cycle of a merchandising business is longer than that of a service business. Detailed records of the cost of each inventory purchase and sale are maintained. Use of bar codes and optical scanners to keep a daily running record. Cost of sales is determined each time a sale occurs. Cost of sales is determined only at the end of the accounting period, when a physical inventory count (stocktake) is taken to determine the quantity and cost of goods on hand. Determine the cost of goods on hand at the beginning of the accounting period.
