18 answers VCEAcc 12 - MACMILLAN ACCOUNTING VCE UNITS 1 & 2 Chapter 18 Check Your Understanding questions PDF

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MACMILLAN ACCOUNTING
VCE UNITS 1 & 2
Chapter 18 Check Your Understanding questions...

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MACMILLAN ACCOUNTING VCE UNITS 1 & 2 Chapter 18 Check Your Understanding questions Check Your Understanding 18.1 1

A memo may be used to note details of the following three events in relation to inventory: a b c

2

3

Drawings of inventory – the owner takes home inventory for their own use. Advertising – the business donates inventory to local groups as a form of advertising or uses some inventory in a store display, meaning it can’t be sold Inventory loss – the business conducts a physical stocktake and identifies that the figure counted is less than the amount of inventory shown in the inventory card.

Withdrawing inventory will reduce the assets of the business as Inventory decreases. Owner’s equity also decreases as Drawings (a negative owner’s equity account) increases, leading to a decrease in owner’s equity. Memos are documents used by the business to record internal transactions so a record is kept. This supports the characteristic of verifiability , which requires documentary evidence of all transactions so that records and reports are free from bias and can be relied upon for their accuracy.

Check Your Understanding 18.2 1

2

3

Gross profit is the profit earned by the business from the buying and selling of inventory. It is the selling price of inventory less the cost price of that inventory. Adjusted gross profit is the gross profit of the business, adjusted to account for inventory losses or gains. The cost of sales figure comes from the OUT column of the inventory card, representing the cost price of inventory sold. It is not all items in this column, since purchase returns, inventory losses and inventory used for advertising entries also appear in this column. The cost price of all sales in all inventory cards are added together to provide the cost of sales figure. Inventory gain is added to gross profit to determine adjusted gross profit. It is a form of revenue, so it increases the profit of the business.

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Check Your Understanding 18.3 1

2

3

4

Too much inventory can lead to inventory loss, as the inventory may be at greater risk of theft or damage in the storage area. This is an expense for the business and decreases profit. It is also an issue as too much cash may be tied up in inventory, which can be difficult to turn into cash quickly. Too little inventory can mean the business runs out of inventory when customers wish to purchase it. This can lead to a reduction in sales as customers may go elsewhere. Just-in-time ordering is a system where inventory is ordered and delivered to the business just as it is needed. This saves on storage costs as the business holds no inventory outside what is on shelves. It can also be costly; the business is relying on prompt deliveries so shelves don’t become empty. Inventory rotation ensures older inventory is sold promptly, as new inventory is placed at the back of a shelf. If businesses don’t rotate inventory, then inventory with use-by dates can expire; this inventory must either be discounted for sale or thrown out and recorded as a loss. Student responses will vary

Check Your Understanding 18.4 1

2

3

An inventory turnover of 30 days is a reasonable figure for many businesses; however, it is not appropriate for all businesses. Businesses that sell perishable goods, such as milk, fruit and vegetables, require a faster turnover, as these goods are at risk of perishing and having to be written off as lost. Some businesses also sell inventory that is expensive and not purchased regularly by customers; items such as cars are usually only purchased once every five or ten years. Turnover should be considered in terms of the inventory being sold, not against an arbitrary figure. Having a variety of items to sell is likely increase the customer base of a business and can lead to increased sales. The business could always have customers to deal with and there is always activity in the business. However, inventory turnover is still important. The different items sold will have different inventory turnover rates, and these should be monitored so too much or too little inventory isn’t being held. Inventory turnover refers to how often the business is able to sell (turnover) its average holdings of inventory. In selling inventory, a business will receive cash (either at the point of sale or when an account receivable settles their account), so the faster the inventory turnover, the faster cash is received by the business.

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Chapter 18 Exercise solutions 1 Drawings of inventory Inventory card:

a

Inventory item:

Valuation method: Identified cost IN

Date

Reference

01-Oct 02

b c

Qt y

Cost

OUT Value

Qty

Qty

Cost

Balance

5 25

24 26

770

Memo 54

5 23

24 26

718

2

Cost

BALANCE

26

Value

52

Value

Using the FIFO method, the figure for inventory withdrawn would be $48 (two units @ $24) as this inventory was the first inventory in the inventory card. The assets of the business will be lower as inventory is reduced. Owner’s equity would also be decreased as Drawings (a negative owner’s equity item) will decrease

2 Inventory used for advertising purposes a

Inventory card: Inventory item:

Date

Reference

30-Aug

Inv 415 Memo 85

b

c

Valuation method: FIFO OUT BALANCE

IN Qty Cost 20

90

Value

Qty

Cost

Value

1800 2 1

75 90

240

Qty

Cost

Value

2 20

75 90

1950

19

90

1710

Drawings is a reduction in owner’s equity as a result of the owner reducing their investment in the business. The donation of inventory to a school is a form of advertising, so is treated as an expense of the business. Expenses are decreases in assets that result in a decrease in owner’s equity, other than those relating to distributions to the owner. Expenses encompass losses, which is what has occurred here; the business has ‘lost’ the opportunity to sell the units of inventory donated.

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3 Inventory cards to income statement Inventory card for standard model:

a

Inventory item: Standard model Date

Reference

Valuation method: FIFO

IN Qty Cost

OUT Value

Qty

Cost

BALANCE Value

Qty

Cost

Value

12 12 13

72

Rec 941

6 1 5

7 25 1 25

77

20

13

260

14

Inv 39

10

13

130

Inv 3727

18

Memo 34

1

13

13

20

EFT

3

13

39

25

EFT

1

13

13

31

Memo 102

4

13

52

13 13 15 13 15 13 15 13 15 13 15

130

17

10 10 30 9 30 6 30 5 30 1 30

01-Aug

Balance

03

Rec 939

11

30

15

450

Inventory item: Deluxe model Date

Reference

01-Aug

Balance

05 07

EFT Rec 940

09

Inv 39

14

Rec 942

23 25

Rec 943 EFT

28

Rec 944

31

Memo 102

b c d

OUT Value

Qty 3 5

25

1

20

20

409 337

580 567 528 515 463

Valuation method: FIFO

IN Qty Cost

12 13 12 13

Cost

BALANCE Value

18 18

54 90

500 90

Qty

Cost

Value

17

18

306

14 9

18 18

252 162

9 25

18 20

662

4 25

18 20

572

5 4 2 1

18 18 20

112

23

20

460

20

20

22

20

440

3

20

60

20

19

20

380

20

20

400

Stock adjustments are noted in red in inventory cards above. Standard chairs = $750; deluxe chairs = $850 Standard chairs = $344; deluxe chairs = $426

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e

Income statement extract: BELLA'S OUTDOOR FURNITURE

INCOME STATEMENT FOR THE MONTH ENDED 31 AUGUST 2023

$

$

Revenue Sales

1 600

Less: Cost of goods sold Cost of sales

770

Gross profit

830

Add: inventory gain

20

Less: inventory loss

-52

-32

Adjusted gross profit

798

4 Inventory cards to income statement a

Inventory cards:

Inventory item: Junior hockey sticks

Valuation method: FIFO

IN Date

Reference Qty

01-Sep 02

Cos t

OUT Value

Qty

Cost

BALANCE Value

Qty

45

5 17 2 17

Balance EFT

3

15

03

Inv 943

07

Inv 39

2 2

15 16

62

11

EFT

3

16

48

16

Rec 297

2

16

32

18

Rec 298

4

16

64

22

Memo 21

1

16

16

23

Rec 299

3

16

48

25

Rec 300 Memo 007

16 16 17

16

30

1 1 3

2 17 20 15 20 12 20 10 20 6 20 5 20 2 20 1 20

67

17

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20

17

340

Cost

Value

15 16 15 16 15 16 17 16 17 16 17 16 17 16 17 16 17 16 17 16 17 17

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347 302

642 580 532 500 436 420 372 356 289

Inventory item: Senior hockey sticks

Valuation method: FIFO

IN Date

Reference Qty

01-Sep

Cos t

OUT Value

Qty

Cost

BALANCE Value

Rec 294

4

446

5 10 3 10 1 10

24 23

350

1 10 15

24 23 25

629

47

9 15

23 25

582

46

7 15

23 25

536

23 25 23 25 23 25 25

24

96

EFT

2

24

48

09

Rec 96

2

24

48

Inv 933

16

15

25

375 1 1

Rec 297

20

EFT

24 23

2

23

22

Memo 21

1

23

23

23

Rec 299

2

23

46

6 15 4 15

28 30

Rec 301 Memo 007

3 1

23 23

69 23

1 15 15

b c d e

Value

24 23

05

14

Cost

9 10

Balance

04

Qty

24 23 24 23

302 254

513 467 398 375

Stock adjustments are noted in red in inventory cards above. Junior sticks = $564, senior sticks = $750 Junior sticks = $321, senior sticks = $423 Income statement extract: HILL'S HOCKEY HIDEOUT

INCOME STATEMENT FOR THE MONTH ENDED 30 SEPTEMBER 2023

$

$

Revenue Sales

1 314

Less: Cost of goods sold Cost of sales

744

Gross profit

570

Less: inventory loss Adjusted gross profit

f

g

90 480

An inventory loss was recorded for both lines of inventory, which suggests security may be poor. While the amounts lost were small, they both represented a reasonable percentage of the inventory held. The owner needs to implement strategies to better monitor and control his inventory. Strategies that Hill could adopt in this business to improve control over inventory include double counting inventory when purchased and delivered, and more frequent stocktakes.

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5 Inventory turnover a

b

Inventory turnover = Average inventory x 365 / Cost of goods sold = (28 000 + 33 000 / 2) x 365 / 152 500 = 30 500 x 365 / 152 500 = 11 132 500 / 152 500 = 73 days The turnover calculated appears to be high, but there is limited information available. To accurately assess the efficiency of the turnover, it is important to know the type of stock being sold, the age of the business and other circumstances. For example, the business may have large holdings of inventory, as they took advantage of a discount for buying in bulk.

6 Inventory turnover a

b

c

Inventory turnover = Average inventory x 365 / Cost of goods sold = (22 000 + 27 000 / 2) x 36 5/ 90 000 = 24 500 x 365 / 90 000 = 8 942 500 / 90 000 = 99 days The owner has not met her target; turnover is 99 days, rather than 90. This is likely due to her buying new lines of inventory occasionally, rather than developing a regular pattern of purchasing. The owner is unpredictable in her approach to purchasing inventory. Buying new lines when available to keep current is a valid approach, but the owner should consider holding less inventory in other areas so she is able to achieve the turnover she wants and not have too much cash tied up in inventory.

7 Comparisons of inventory turnover a

b c

d

Sam’s Sports seems to have managed their inventory better. Their inventory turnover had improved by 2 days over the period; compared to Carol’s Chocolates which has slowed by 7 days. As a result, Sam’s Sports now has a faster turnover. The owner of Carol’s Chocolates should be concerned as the inventory turnover has slowed; given her inventory is perishable, she should work to speed up the turnover. FIFO is an assumption that the first inventory purchased is the first inventory sold, and this should be a valid assumption. It is assumed that employees will rotate inventory but this is not always the case; employees may be in a hurry, lazy or not thinking about the concept. The business is selling inventory faster, which should result in the business receiving cash quicker so it can pay expenses, meet financial commitments and avoid having to borrow money or go into overdraft. A faster turnover also reduces the risk of perishable inventory going ‘off’ and having to be discarded and reported as an inventory loss.

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Case study a

Value of the inventory loss:

Stock item

Qty on inventory card

Qty as per stocktake

Inventory loss/gain

17 1 20 3 12

16

-1

110

110

-1

300

300

Skyranger Comet drone Black Phantasm Total b

Total

21 14

410

Value of inventory on hand: Units on hand

Item Skyranger drone Comet drone Black Phantasm drone

Cost price

Total

16

110

1 760

1

200

200

20 2

205 300

4 100 600

12

310

3 720

Total

c

Cost price

10 380

Statement of receipts and payments: RANDOM ACCESS ROBOTICS

STATEMENT OF RECEIPTS AND PAYMENTS FOR THE MONTH ENDED 31 OCTOBER 2023

$

$

Cash receipts Sales - Skyrangers

2 400

Sales - Comets

5 600

Sales - Black Phantasms

5 400

GST collected

1 340 14 740

Less: Cash payments Inventory Advertising

2 200 300

Wages

1 650

Drawings

1 200

Computer

4 030

Loan

3 000

Cleaning Electricity

120 100

GST paid

675 13 275

Excess of receipts over payments

14 740

13 275 1 465

Bank balance (1 October 2023)

4,300

Bank balance (31 October 2023)

5,765

d

Income statement:

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RANDOM ACCESS ROBOTICS INCOME STATEMENT FOR THE MONTH ENDED 31 OCTOBER 2023

$

$

Revenue Sales - Skyrangers

2 400

Sales - Comets

5 600

Sales - Black Phantasms

5 400 13 400

13 400

6 680

(6 680)

Less: Cost of goods sold Cost of sales Gross profit

6 720

Less: Stock loss

(410)

Adjusted gross profit Less: Expenses Advertising Wages

6 310 300 1 650

Cleaning

12

Electricity

100 2 062

Net profit

e

f

g h

i

(2 062) 4 248

Skyranger drones = $200 Comet drones = $400 Black Phantasm drones = $300 The owner’s price-setting strategy seems random; if the selling price has remained unchanged, there has been no consideration given to changes in the cost price of inventory. The business should consider applying a consistent mark-up on inventory; this will allow the business to cover expenses and keep its profit margin the same during times of rising cost prices. One benefit for this business buying some of its inventory on credit is that the business is able to defer payment until cash is received from sales. Offering credit to customers is a means of increasing sales, as customers who can’t afford to pay cash for an item will often seek to use credit. If credit is ...