Accounting Building Business Skills Paul D. Kimmel Chapter Four: Inventories PowerPoint presentation by Christine Langridge Swinburne University of Technology, Lilydale 2003 John Wiley & Sons Australia, Ltd Learning Objectives Identify the differences between a service business and a merchandising business. Explain the recording of purchases under a perpetual inventory system. Explain the recording of sales revenues under a perpetual inventory system. Prepare a fully classified statement of financial position. 2 Learning Objectives Use ratios to analyse profitability. Understand the basic process and main features of the goods and services tax (GST). Complete journal entries to record GST. 3 1
Merchandising operations Merchandising businesses buy and sell inventory Profit measurement process: 4 Operating cycle 5 Inventory systems Perpetual System detailed inventory system in which the cost of inventory is maintained and the records continuously show the inventory that should be on hand Periodic system inventory system in which detailed records are not maintained and the cost of goods sold is determined only at end of accounting period 6 2
Recording Purchase of Inventory Recording using the perpetual system 7 Purchases Returns & Allowances return of goods from customer refund either in form of credit or cash Purchase allowance: where goods kept and a reduction in price granted example: goods costing $300 returned to PW Audio Supply Ltd. 8 Freight Costs Cost of freight to be added to the cost of inventory where cost charged to buyer Cost allocated to Freight-in account Example: Sauk Stereo pays We Deliver Freight Co. $150 for freight charges 9 3
Freight Costs Where freight cost incurred by the seller of the inventory Included as part of delivery or freight-out expenses Example: PW Audio paid freight charges $150 for goods sold 10 Purchase Discounts Settlement discounts Discount given for prompt payment of account Example: Sauk Stereo settles account outstanding of $3,500 and receives discount of $70 11 Purchase Discounts Trade Discounts % reduction in the list price of inventory sold Example: List price quoted is $5,000 and trade discount given of 10% 12 4
Recording Sales of Inventory Perpetual system: Example: PW Audio Supply Ltd made cash sale of $2,200. Cost of Goods sold $1,400 2 entries required Sale of the goods for $2,200 Cost of Goods Sold $1,400 reducing inventory on hand 13 Recording Sales of Inventory Perpetual system: 14 Sales Returns & Allowances Return of goods by a customer Example: PW Audio Supply Ltd. records credit for goods returned by customer two entries required: Sales Return at Selling Price $300 Return (increase) to Inventory at cost price $140 Note: perpetual system is being used 15 5
Sales Returns & Allowances 16 Sales Discounts Invoice amount less a discount for prompt payment given to customer Example: Sauk Stereo pays PW Audio Supply and receives a discount 17 Statement of Financial Performance Sales Revenue and Gross Profit 18 6
Statement of Financial Performance Operating Expenses Selling expenses: cost of making the sale e.g. advertising, delivery expenses Administration expenses: cost of operating activities of the general, accounting and personnel offices e.g. salaries, rent Financial expenses: costs of financing the business e.g. interest expense, discounts allowed 19 Statement of Financial Performance 20 Evaluating Profitability Gross Profit ratio Gross profit expressed as % of sales 21 7
Evaluating Profitability Operating Expenses to Sales Ratio % of operating expenses to sales 22 David Jones evaluate the profitability of David Jones Compare your solution with the suggested solution provided 23 Goods & Services Tax 24 8
Goods & Services Tax Taxable supplies: goods/services subject to G.S.T. G.S.T. free supplies: goods/services not subject to G.S.T. e.g. basic food, education, health services, exports 25 Goods & Services Tax G.S.T. input taxed supplies: no G.S.T. charged but no input credit allowed for G.S.T. paid for supplies e.g. resident rent, financial services 26 Goods & Services Tax - example 27 9
Accounting for G.S.T. Purchasing inventory Example: retailer purchases a table on credit from manufacturer for $440 (GST inclusive) Note: perpetual system being used 28 Accounting for G.S.T. Selling Inventory Example: retailer sells a table for cash $550 (G.S.T. inclusive) 29 Remitting GST to Taxation authority Where G.S.T.amount collected greater than G.S.T. paid difference to be remitted to A.T.O. Journal entry 30 10
Remitting GST to Taxation authority Where G.S.T.amount collected less than G.S.T. paid difference to be remitted to A.T.O. Journal entry 31 Remitting GST to Taxation authority Where one account used to account for G.S.T. collected & paid 32 11