chapter 9: inventory systems

chapter 9: inventory systems

1. trading cycle

   • gross profit: sales-cost of sales

2. perpetual inventory system

   • - large amount of record keeping - records updated each time - uses inventory account - calculates mark-up on cost

3. periodic inventory system

   • -requires an inventory count at year end -requires less recording -inventory on hand - uses a purchases account

4. inventory is bought and sold with the aim of making a profit

5. two common bases used:

   • FIFO method which is first-in-first-out calculating inventory at the cost price at the particular time
   • weighted average method is when inventory is calculated on average and remains the WA cost up until a new inventory purchase is made

6. when inventory has been bought but not yet arrived on premises then an adjustment is made in inventory in transit bc the inventory is not physically there

7. inventory losses should be claimed if a policy is in existence. if inventory losses are revealed, it should be charged to cost of sales.

8. there is no book record of what the inventory on hands should be (periodic) so it is not possible to detect unusual inventory shortage unless the business has a constant mark up