Lesson 2: Inventory and Services

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3 Sage Simply Accounting Premium 2012 Level 1 Lesson 2: Inventory and Services Lesson Objectives In this lesson, you will learn how to set up the Inventory and Services module of Simply Accounting. Upon successful completion of this lesson, you will be able to: create Inventory Accounts create Inventory Items create Service Items To Start This Lesson: 1. Open Sage Simply Accounting as outlined in Lesson 1. review Inventory Linked Accounts create Inventory Reports 2. In the Welcome to Sage Simply Accounting screen select Restore from backup and click OK. 3. In the Restore from Backup dialog box click Next. 4. Click Browse to locate the Harmony House Music - Student.cab file, double-click to select it, then click Next. 5. In the Confirm Backup File dialog box click Next. 6. Browse to the folder where the restored data file is to be stored. 7. Type: HHM Lesson 2 <your name> in the File name field to replace the word New and click Save. 8. In the New File Name dialog box click Next, then Finish. The data file will be restored and Simply Accounting will proceed to open it. 9. Change the Session Date to: 03/31/12 and click OK. If a warning is displayed regarding the date entered click OK. 10. Do not complete a backup. 11. Close the Daily Business Manager, the Checklists and the Getting Started window v1.00 CCI Learning Solutions Inc. 43

4 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 Inventory Accounts In Simply Accounting every inventory and service item type is uniquely recorded and tracked in your inventory. This capability enables you to: manage your inventory to an optimum level so that stockouts are prevented, while at the same time preventing you from having too much of your capital tied up in inventory. manage the price you charge for each item by monitoring the gross profit earned on these items. You then have more information when trying to decide on prices to be charged. run financial reports at any time to monitor your overall business profitability. calculate any inventory shrinkage at any time whenever a physical inventory count is done. be warned when the current level of stock of an inventory item falls below a specified minimum, and re-ordering is required. You need to understand that Simply Accounting uses the Average Cost Method or FIFO (First In First Out) in valuing inventory. Other inventory valuation methods (e.g., LIFO, Standard Cost) are not supported. The Average Cost Method means that: The book value cost of each item type is calculated as the average cost of each item type. For example, the inventory cost of a printer is calculated as the total cost of buying the printers currently in stock (e.g., $1,000) divided by the number of printers in stock (e.g., 10), which would then be $ The average cost moves because new stock purchased may affect the average cost. If the new stock costs more (e.g., $110) than the current average, then the new average cost will move higher. Conversely, if the new stock costs less, then the new average cost will move lower. The average cost is recalculated every time new stock is purchased or inventory adjustments are made. The current average cost is automatically used for the accounting transaction whenever goods are sold. The FIFO method means that: The first items added to inventory are the first items you sell. This method is very useful for calculating cost of goods sold, especially if you are unable to specifically identify items of inventory that you purchased at different times for different prices. It uses layers to keep track of an item s cost on its date of purchase or construction. Every time an item is purchased or built, a cost layer is created for that item. Creating Inventory and Service Items saves time because when you are buying or selling merchandise and selling services, Simply Accounting enters the items from a list so that you do not have to type in each item. Before you add an inventory item, you must create the different types of accounts associated with inventory items. The necessary accounts are Asset, Revenue and Expense. Other useful accounts are a Transfer Costs account, a Variance account, an Inventory Adjustment account and a Purchases Discount account. If Inventory items are used to assemble finished components, then an Item Assembly Costs account will also be required. Checking the Inventory Accounts A whole series of new accounts is needed for use in the inventory tracking procedure. Simply Accounting provides generic names for most of the accounts needed. These accounts have already been modified to our own requirements for the Harmony House Music store v1.00 CCI Learning Solutions Inc.

5 Inventory and Services Lesson 2 Learn the Skill In this exercise, you will learn how to check the inventory accounts. 1 Select the Company module, then click the Chart of Accounts icon. Find the accounts as shown in the table below: Number Name Number Name Number Name 1520 Strings 4020 Sales Strings 5020 Strings Cost 1530 Brass 4030 Sales Brass 5030 Brass Cost 1540 Percussion 4040 Sales Percussion 5040 Percussion Cost 1550 Wind Instruments 4050 Sales Wind Instruments 5050 Wind Instruments 1560 Accessories 4060 Sales Accessories 5060 Accessories Where a business has separate departments or divisions (as is the case for this company), Asset, Revenue and Expense accounts are often set up for each department. Note that the Asset Accounts all have a corresponding Revenue and Cost of Goods account (COGS). When a Purchase or a Sale is made of any inventory item, these accounts will be used to record/track such transactions. In the Revenue area of the Chart of Accounts additional accounts exist which will track Sales of Service items, such as Repair of Musical Instruments (4090 Sales-Repair Service) and the Sale of Music Instruction (4200 Sales-Music Instruction). These Service items are carried in the Inventory area but are considered soft inventory items (not stored on a shelf) Other accounts dealing with Inventory exist in the Expense area of the Chart of Accounts: 5100 Inventory Variance (Expense) 5120 Item Assembly Costs (Expense) 5130 Adjustment Write-off 5240 Early Payment Purchase Discounts We will require one new account for a new Service Harmony House Music intends to implement: Guitar Rentals. 2 Create a new Group Account 4210 Rental Revenue, Class: Operating Revenue. 3 Close the Chart of Accounts window. Creating Inventory Items The total value of all the inventory items entered in the Inventory Ledger has to match the same value shown in the balance of the inventory asset account(s) in the General Ledger. This is part of the procedure to set up data files, and is discussed in the Level 2 courseware. To accurately track inventory, each type/piece of merchandise that is stocked as inventory must be listed as a separate item in the Inventory Ledger. Each item must have its own unique reference number, consisting of up to 14 letters, digits, or a combination of these. Each company will create its own numbering system, based upon specific volumes and needs v1.00 CCI Learning Solutions Inc. 45

6 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 Learn the Skill In this exercise, you will learn how to create new inventory items. As these are new inventory items, there are no previous purchases, so no Year-to-Date or Last Year transactions to record. Leave the fields in the Statistics tab blank. 1 On the left side of the Home window, click the Inventory & Services module and click Inventory & Services in the Tasks pane. 2 If necessary, click View, Name on the menu bar, or click (Display by name) on the toolbar to change the Inventory & Services window view. 3 Click (Create). 4 In the Item Number field, type: B 120 (each inventory item should have a number) and press. 5 In the Description field, type: Brass Trombone Mouthpiece (a short description will be needed for each of the item numbers) and press. 6 For Type, ensure the Inventory option button is selected v1.00 CCI Learning Solutions Inc.

7 Inventory and Services Lesson 2 Two choices are available: Inventory and Service. A simple way of differentiating between these is to remember that a service is not stocked on the shelf, and cannot be verified by physical count. Make sure that the correct one is chosen, because each one will produce a different set of options to set. 7 Select the Quantities tab. 8 In the Show Quantities in field, the default Each is displayed. (This box specifies the unit of measure for this item. Possible choices: Each, dozen, pair, box, package, etc.). 9 In the Minimum Level field, type: 5 as the desired minimum level of inventory. Simply Accounting will flag any inventory levels that fall below the specified minimum, and indicate how much should be ordered. On Hand Quantity and value currently on hand. Pending Orders Number on Purchase Order or Sales Order. Inactive Item Click the checkbox at the bottom of the Inventory & Services Record window if you no longer buy or sell this item. 10 All other items are not accessible because we do not have any stock on hand. Click the Pricing tab. 11 Click in the Price per Selling Unit for Regular, type: and press. After keying in the Regular price, the Preferred and Web Price will default automatically v1.00 CCI Learning Solutions Inc. 47

8 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 12 Click the Linked tab. This screen identifies the accounts to be used when an inventory item appears in a transaction. Asset The Asset account where Simply Accounting should account for this inventory item. This Balance Sheet account will increase as inventory is purchased, and decrease when inventory is sold. Revenue The Revenue account where Simply Accounting should account for this inventory item when the item is sold. COGS Cost of Goods Sold the Expense account against which Simply Accounting uses to account for this inventory item when the item is sold. Variance The Expense account for any discrepancies found in the inventory, e.g., shrinkage or breakages. It is also used to track inventory items if you allow them to go below zero. If your company has the Allow inventory levels to go below zero turned on (Setup, Settings, Inventory & Services, Options), you should have an Expense account to track this amount. You must ensure that you select the correct accounts for each inventory item because Simply Accounting will use these accounts for every purchase and sales transaction made. If you are uncertain, you should consult your accountant. 13 Fill in the necessary linked accounts as shown here: 14 Click the Build tab. The main function of this tab is to assemble or build inventory items from components; Simply Accounting can track both the components and the assembled items. For example, assume you keep a supply of cases, power supplies, motherboards, etc. to build computers. You can enter a new item: High End Computer, provided that all constituent parts for the item you are building have been entered into Simply Accounting before you proceed. This function will be dealt with in the Level 2 courseware. Similarly this feature can be used in any retail outlet combining a package of everyday inventory items currently being carried by the store but combined as an attractive package at a special price, less than the sum of the individual components v1.00 CCI Learning Solutions Inc.

9 Inventory and Services Lesson 2 15 Click the Units tab. Stocking Unit of Measure Selling Units Buying Units 16 Click the Detailed Desc. tab. Long Description Picture Thumbnail 17 Click the Statistics tab. How the items are stocked and counted (each, box, pack etc.). Units in which the item is sold. Is this the same unit for buying? Units in which the item is bought. Is this the same unit for selling? More detailed description of item (if required). A scanned image of the item (if available). A thumbnail image of the item (if available) v1.00 CCI Learning Solutions Inc. 49

10 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 Year To Date Last Year Date of Last Sale No. of Transactions, Units Sold, Amount Sold, Cost of Goods Sold. No. of Transactions, Units Sold, Amount Sold, Cost of Goods Sold. Enter the most recent date of sale for this inventory item; this field is used to determine the inventory s turnover rate. 18 This item is not in stock yet, so no statistics can be entered. Click the Taxes tab. Tax Tax Exempt Apply to purchases of this item. Identify all sales taxes (i.e. HST, GST and/or QST) that may be charged on these purchases. Is the item exempt from any Sales Tax(es)? There are no exemptions for this product. This is an item which is often misunderstood by students/beginning users, who read this screen to mean what taxes are to be applied to the item and mistakenly change the Tax Exempt status from No to Yes. 19 Click the Additional Info tab. Field1 to 5 20 Click Create Another. Extra fields which can be named and used if required v1.00 CCI Learning Solutions Inc.

11 Inventory and Services Lesson 2 Learn the Skill The next set of steps will demonstrate an inventory item that uses a selling unit smaller than the buying and stocking unit. 1 Enter the following information for this new inventory item: Number S-119 Description Dava Nickel Silver Pick Quantities Minimum Level 30 Pricing Regular Selling Price 2.90 Preferred Selling Price 2.90 Web Price 2.90 Linked Asset 1560 Accessories Revenue 4060 Sales Accessories C.O.G.S Accessories Variance 5100 Inventory Variance Now specify the buying, stocking, and selling units of measure. 2 Click the Units tab. Fill in as shown here: 3 Click the Quantities and the Statistics tabs. You can see that the new stocking unit of measure is now used in these tabs. 4 Click Save and Close v1.00 CCI Learning Solutions Inc. 51

12 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 Creating Service Items Service items are like inventory items in that they are sold to customers. The primary difference is that services generally cannot be kept on the shelf or in storage until they are sold, or be verified by physical count. Examples of services are the labour required for mechanical repairs, consulting services, or moving furniture. Other types of services include towing cars, hotel room rentals, and dry cleaning. The common factor is that there are a fixed number of resources available (e.g., staff, mechanics, tow trucks, hotel rooms) that will earn nothing if not purchased by a customer but will incur costs (e.g., staff salaries, gas for tow trucks) in any case. Also, you cannot sell more than you have available unless overtime is used. To differentiate a service item from an inventory item, the Inventory & Services Records window contains different information that you must enter. Only the differences are covered here. The Units tab is used to describe the unit of measure for this service item. Most services will use a time (e.g., minutes, hours, days) or count (e.g., each, service call) dimension as a unit of measure. This tab only has one field: Unit of Measure. The Linked tab links this service item to various accounts in the general ledger. Because services cannot be stored for later sale, or verified by physical count, there is no asset or cost of goods sold account link. Revenue Expense You must ensure that you select the correct accounts for each service item because Simply Accounting will use these accounts for every sales transaction made. If you are uncertain in any way, you should consult your accountant. The revenue account to be credited when this item is sold to customers. This is optional as you may not have incurred any costs directly with the service provided. Examples of costs may include hotel room cleaning costs, shop supplies for mechanical repairs, or subcontract labour costs. Learn the Skill In this exercise, you will learn how to create a new service item. 1 In the Inventory & Services window, click (Create) on the toolbar. 2 Click the Service option button v1.00 CCI Learning Solutions Inc.

13 Inventory and Services Lesson 2 The Inventory & Services window will now change to accommodate a service item. 3 Enter the following information for this new service item: Number X 102 Description Guitar Rental The Rental charge for guitars will be $25.00 per Day. (Unit of Measure) 4 Click the Pricing tab. Type: for Regular Price. Ignore the preferred price or Web Price. 5 Click the Linked tab. From the Revenue list box, select the 4210 Rental Revenue account. There is no variable expense associated with this service item. 6 Click Save and Close. Changing Inventory & Service Data You can change some of the information about an inventory or service item at any time, except for most of the fields in the Quantities, Units and Statistics tabs. You can, therefore, change the description or the price of an item whenever necessary. Learn the Skill In this exercise, you will learn how to update inventory and service items. 1 In the Inventory & Services window, select A-104 and click (Edit) on the toolbar. You can also double-click on the inventory name to open the Details window. 2 If necessary, click the Quantities tab. 3 Ensure the For Location field shows Primary location and then select the Reorder Quantities field, and replace the current value with: Press to jump to another field, which records the change or click (Go to the next inventory item in the list) on the toolbar. When you change a value, be sure to use Accounting may not update that change. 5 Repeat steps 3 and 4 for the following inventory items: Inventory Item B-101 Cornet 2 B-115 Trumpet 5 Reorder Quantities to move to another field. If you stay in the field, Simply 6 Close the Inventory & Services Ledger. 7 In the Inventory & Services window, select X-100 Music Lessons and click (Edit) on the toolbar. 8 If necessary, click the Units tab. 9 In the Unit of Measure field, replace the current value with: Hour. 10 Click Save and Close and then close the Inventory & Services window v1.00 CCI Learning Solutions Inc. 53

14 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 Inventory Module Linked Accounts To ensure that full integration takes place when posting is carried out, Simply Accounting must have certain account linking set up. This is done when a set of data files is created, but may be reviewed as follows: Learn the Skill 1 Click Setup, Settings, Inventory & Services, Linked Accounts on the Home window menu bar, and review the window that displays. Item Assembly Costs: Harmony House Music does not do any assembly and the field not be needed. Adjustment Write-off: Note the 5130 Adjustment Write-Off account has already been entered. 2 No change is made in this window. Click Cancel to close the Settings window and return to the Home window. Inventory Reports A key component of successfully running your business is in the inventory management. Even if you have superb abilities in marketing, finance, or other areas of expertise, you must manage your inventory of goods and employees to meet customer demands for your products and services, and at prices that will produce reasonable profits for your business. Learn the Skill In this exercise, you will learn how to display various inventory and services reports. 1 Click Report Centre, Inventory & Services, Inventory and Services List. 2 Click Display v1.00 CCI Learning Solutions Inc.

15 Inventory and Services Lesson 2 3 Close the report. 4 In the Report Centre window, click Price Lists and then click Display to generate the report. The Inventory and Services Price Lists report will now display. This report can be used as a price list for your sales staff to use. 5 Close the report. 6 In the Report Centre window, click Quantity and then click Display. The Inventory Quantity report now displays. Use this report regularly to check the quantity on hand, on a purchase or sale order, and the quantity to be ordered immediately v1.00 CCI Learning Solutions Inc. 55

16 Lesson 2 Sage Simply Accounting Premium 2012 Level 1 You can also obtain more detail about an inventory item by double-clicking on that item. 7 Move the cursor to point to the B-101 Cornet line, and double-click anywhere on that line. 8 Close the Inventory and Services Transaction Detail Report. 9 Close the Inventory Quantity report and the Report Centre window. Review Exercises The following additional exercises cover many of the items covered in Lesson 2. They are included here as extra practice and may be completed by the students in class or on their own. Omission of these exercises will not affect future lessons. Your instructor has access to the Answer Key for these exercises. 1 Add the following Inventory items: P-111 Hammond XK3C Organ, Selling Price: $ 2, for all. Buying & Selling Unit: Each; Linked Accounts: 1540 / 4040 / 5040/ A-113 Planet Waves Tuning Fork, Selling Price $11.50 for all. Stocking Unit: Box, Selling Unit: Each, 10 Each per Box. Buying Unit: Same as Stocking Unit. Linked Accounts: 1560 / 4060 / 5060 / Add the following Service Item into Inventory: X-103 Group Music Classes, Pricing $ for Regular, delete Preferred and Web Price Selling Unit: Course; Linked: Sales Music Instruction Backing Up Simply Accounting Data Files Backups should be made every time you complete a work session in which you have made changes to the Simply Accounting data. 1 Backup the company file as HHM Lesson 2 backup. 2 Exit from Simply Accounting. Lesson Summary In this lesson, you learned how to set up the Inventory and Service Items in Simply Accounting. In particular, you learned how to: create Inventory Accounts create Inventory Items create Service Items review Inventory Linked Accounts create Inventory Reports v1.00 CCI Learning Solutions Inc.

17 Inventory and Services Lesson 2 Review Questions 1. Which three accounts are needed in the Chart of Accounts to work with inventory in Simply Accounting? 2. What does the abbreviation COGS mean? 3. What is the difference between an inventory and service item? 4. What is the purpose of the Minimum Level field in the Inventory Ledger? 5. If you create inventory and service items, you do not have to type in full details of these items when inputting purchases and sales. a. True b. False 6. Which report will show the Quantity and Value of inventory currently on hand? 7. Which report will show the Year-To-Date sales and cost of inventory items? 8. Service items are linked to revenue or expense accounts as they cannot be stored for later sale. a. True b. False 9. How is an item cost calculated by Simply Accounting? v1.00 CCI Learning Solutions Inc. 57

18 Lesson 2 Sage Simply Accounting Premium 2012 Level v1.00 CCI Learning Solutions Inc.