Accounting Grade 11-12: Inventory Systems
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Questions and Answers

How is the cost of sales determined in a perpetual stock system?

  • Monthly based on average cost calculations
  • Only at the end of the financial year
  • Continuously with every sale and return (correct)
  • Only during physical stock takes

What is credited when goods are returned in a periodic stock system?

  • Purchases account (correct)
  • Cost of sales account
  • Trading stock account
  • Inventory account

Which method is not used for determining stock value according to the content?

  • First-in-first-out method
  • Weighted average method
  • Specific identification method
  • Market value method (correct)

What happens to the Trading stock account when goods are bought?

<p>It is debited (D)</p> Signup and view all the answers

When is the cost of sales calculated in a periodic stock system?

<p>At the end of the financial year (B)</p> Signup and view all the answers

In which circumstances is the cost of sales not continuously determined?

<p>In a periodic stock system (C)</p> Signup and view all the answers

What impact does a return of goods have on the Purchases account in a periodic system?

<p>The Purchases account is credited (B)</p> Signup and view all the answers

Which of the following statements correctly describes the stock valuation at the end of the financial year?

<p>The average price is determined by all purchases made (B)</p> Signup and view all the answers

What is the primary characteristic of a perpetual inventory system?

<p>It records stock movement continuously. (D)</p> Signup and view all the answers

How are stock purchases treated in a perpetual inventory system?

<p>Recorded directly in the Trading Stock account. (C)</p> Signup and view all the answers

What is a key difference between the perpetual and periodic inventory systems regarding returns on stock purchases?

<p>Returns are credited in the Trading Stock account in the perpetual system. (D)</p> Signup and view all the answers

Which type of business is most likely to utilize a perpetual inventory system?

<p>A supermarket selling large quantities of low-value goods. (A)</p> Signup and view all the answers

What happens to the Trading Stock account when stock is donated in a perpetual inventory system?

<p>It is credited to reflect the donation. (C)</p> Signup and view all the answers

What is the balance of the Trading Stock account indicative of in a perpetual system?

<p>The amount of stock that should be on hand. (D)</p> Signup and view all the answers

What occurs in a periodic inventory system to determine the amount of stock on hand?

<p>Physical stocktaking conducted periodically. (C)</p> Signup and view all the answers

In a periodic inventory system, what account are purchases recorded in?

<p>Expenses account. (D)</p> Signup and view all the answers

What is a notable characteristic of the Specific Identification method?

<p>It assigns a unique cost price to each item sold. (D)</p> Signup and view all the answers

How does FIFO affect the gross profit in comparison to weighted average?

<p>FIFO can show a higher gross profit than the weighted average method. (A)</p> Signup and view all the answers

What is a major drawback of the Specific Identification method?

<p>It allows for the manipulation of cost prices. (A)</p> Signup and view all the answers

In the context of inventory accounting, what does FIFO stand for?

<p>First In, First Out (B)</p> Signup and view all the answers

Which stock valuation method generally results in the lowest gross profit during periods of rising prices?

<p>Weighted Average (C)</p> Signup and view all the answers

Which statement accurately describes the results of the FIFO method for the closing stock valuation?

<p>It is based on the oldest inventory costs. (B)</p> Signup and view all the answers

What challenge might arise when using the Specific Identification method for stock management?

<p>It could require extensive record-keeping and tracking. (C)</p> Signup and view all the answers

In what situation would using FIFO be more advantageous compared to Specific Identification?

<p>In environments with stable pricing and homogeneous inventory. (D)</p> Signup and view all the answers

What is a key characteristic of the perpetual stock system?

<p>Cost of sales is recorded every time a sale occurs. (B)</p> Signup and view all the answers

Which type of business is most likely to utilize the periodic stock system?

<p>A grocery store. (D)</p> Signup and view all the answers

How does theft detection differ between the perpetual and periodic stock systems?

<p>The perpetual system allows for quicker detection of theft. (B)</p> Signup and view all the answers

Which of the following is a disadvantage of the periodic stock system?

<p>There is insufficient control over stock levels. (B)</p> Signup and view all the answers

Which factor affects the choice between perpetual and periodic stock systems?

<p>Complexity in determining commodity pricing. (C)</p> Signup and view all the answers

What aspect of stock management is emphasized in the perpetual system?

<p>Daily updates of trading stock availability. (D)</p> Signup and view all the answers

What is a notable feature of the periodic stock system?

<p>Calculates cost of sales on a monthly basis. (D)</p> Signup and view all the answers

Which statement is true regarding the valuation of stock in businesses utilizing differing purchasing prices?

<p>It is determined by taking the average of purchase prices. (B)</p> Signup and view all the answers

What is the main advantage of using the First-In-First-Out (FIFO) method in stock management?

<p>It ensures the oldest stock is sold first, helping reduce spoilage. (B)</p> Signup and view all the answers

When using the weighted average method, how is the average price of stock affected by larger purchases?

<p>It has a minor influence on the overall average price. (D)</p> Signup and view all the answers

In the calculation of closing stock using weighted average, what figure is used to represent the unit value?

<p>The average price calculated from all purchased units. (B)</p> Signup and view all the answers

Which scenario is most conducive to the usage of the FIFO method?

<p>Managing items that perish quickly. (C)</p> Signup and view all the answers

During which scenario will the weighted average price per item be undervalued?

<p>When only a few high-priced items are added to existing low-cost stock. (C)</p> Signup and view all the answers

What does the Prudence concept in stock valuation imply?

<p>Stock valuation should reflect the most current market prices. (A)</p> Signup and view all the answers

Which calculation embodies the weighted average price despite having multiple purchases?

<p>($20 + $25,000) ÷ 502 = $49.84$ per item. (D)</p> Signup and view all the answers

If 200 cans were sold and the average price is $1.12$, how much stock will be valued at the end?

<p>R224. (B)</p> Signup and view all the answers

Flashcards

Perpetual Inventory System

A system where stock movement is recorded continuously, providing a real-time view of inventory levels.

Periodic Inventory System

A system where inventory is only tracked at the end of a period, requiring a physical count to determine stock levels.

Stock Purchases in Perpetual System

In a perpetual system, stock purchases are recorded directly as an asset in the Trading Stock account.

Stock Returns in Perpetual System

In a perpetual system, stock returns are credited to the Trading Stock account, reducing the amount of inventory held.

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Cost of Sales in Periodic System

In a periodic system, there's no dedicated Cost of Sales Account, making it difficult to track sales cost throughout the year.

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Stock-take in Perpetual System

A physical count of inventory is conducted periodically to verify the accuracy of the Perpetual Inventory System.

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Stock Purchases in Periodic System

In a periodic system, stock purchases are recorded as expenses in a dedicated Purchases account.

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Stock-take in Periodic System

In a periodic system, a physical stock-take is conducted at the end of the period to determine the value of inventory on hand.

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Perpetual Stock System

The cost of sales is calculated on an ongoing basis, with each sale and return of goods impacting the calculation. This method uses the Trading Stock account to track inventory.

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Periodic Stock System

The cost of sales is only determined at the end of a specific period, usually a month or the fiscal year. This method uses the Purchases account to track inventory.

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First-In, First-Out (FIFO)

A method used to determine the cost of goods sold in a periodic inventory system. It assumes that the oldest inventory is sold first, meaning the earliest purchases are used to calculate cost of goods sold.

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Last-In, First-Out (LIFO)

A method used to determine the cost of goods sold in a periodic inventory system. It assumes that the newest inventory is sold first, meaning the latest purchases are used to calculate cost of goods sold.

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Weighted Average Method

A method used to determine the cost of goods sold in a periodic inventory system. It calculates a weighted average cost based on the total cost of all inventory and the total number of units available, then uses this average to calculate the cost of goods sold.

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Specific Identification Method

A method used to identify the cost of specific items sold in a periodic inventory system. This method tracks the individual cost of each item purchased.

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Cost of Sales in Perpetual System

The cost of selling goods is calculated each time goods are sold (either for cash or on credit).

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Computer System in Perpetual System

The perpetual system uses a computer to track stock movement, providing a real-time view of inventory levels.

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Stock Taking in Perpetual System

A physical count of inventory is done regularly to verify the accuracy of the perpetual system. This helps ensure that the recorded inventory levels are accurate.

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Perpetual Stock System for Unique Items

This method is suitable for businesses selling a small number of unique, high-value items, like cars or carpets.

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Theft Detection in Perpetual System

Theft is easier to detect in a perpetual system, as stock levels are monitored continuously.

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Periodic Stock System for Bulk Items

This method is suitable for businesses selling large quantities of items with similar costs, such as grocery stores.

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Stock Taking in Periodic System

Physical stock-taking is done at the end of each period (month or year) to count all remaining items and determine the current stock level.

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Specific Identification Stock Valuation

A stock valuation method where each individual item sold is tracked with its exact purchase price, regardless of purchase date. This method is useful when selling unique or high-value items like vehicles or machinery.

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FIFO or First-In, First-Out

A stock valuation method where the oldest inventory is assumed to be sold first. This means the cost of goods sold reflects the cost of the earliest purchases.

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Weighted Average Stock Valuation

A stock valuation method where a weighted average cost is calculated based on the total cost of all inventory divided by the number of units available. This average cost is then used to determine the cost of goods sold.

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Specific Identification - Closing Stock Value

If the stock price is determined using specific identification, the value of each item will match its original cost price.

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FIFO - Closing Stock Value

If using FIFO, the closing stock value will reflect the more recent purchase prices, leading to a slightly higher value than an average cost method.

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Specific Identification - Gross Profit

The cost of goods sold recorded with the specific identification method will accurately reflect the exact price of each item sold.

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FIFO - Gross Profit

Using FIFO will result in a higher gross profit due to lower costs of goods sold when older, lower priced inventory is assumed to be sold first.

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Weighted Average - Gross Profit

The weighted average method can result in a lower gross profit compared to FIFO if recent purchases have higher costs, leading to a higher cost of goods sold.

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FIFO (First-In, First-Out)

A method of inventory valuation where the oldest stock (purchased first) is sold first, and the remaining inventory reflects the most recent purchases.

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When is FIFO used?

This method is suitable for perishable goods with a short shelf life, ensuring older stock is sold before it expires.

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How is the Weighted Average Cost Calculated?

The weighted average cost is determined by dividing the total cost of inventory by the total number of units.

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When is the Weighted Average Method useful?

This method is beneficial when a large quantity of inventory is acquired in smaller batches, providing a more consistent cost allocation.

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What is a potential issue with the Weighted Average Method?

With this method, the average price will be significantly influenced by large, recent purchases, potentially understating the cost of earlier purchases.

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How does FIFO benefit year-end inventory valuation?

This method ensures that the inventory value at the end of the year is based on the most recent purchases.

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What accounting principle does FIFO adhere to?

This method is used to follow the 'prudence concept' - valuing assets conservatively and avoiding overstating profits.

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Study Notes

Inventory Systems

  • Accounting Grade 11 and 12 cover inventory systems encompassing perpetual and periodic methods.
  • A key concept is "inventory," referring to goods held for sale in the ordinary course of business.
  • The image includes examples of trading stock accounts and calculations to illustrate these systems.
  • Differences exist in how and when cost of sales is calculated in perpetual versus periodic systems.
  • Perpetual inventory systems track stock continuously, updating records for every purchase and sale. Periodic methods only record stock at the end of the specified period (e.g., month, year) and use calculations to determine the cost of sales.

Perpetual Inventory System

  • The trading stock account is used when items are bought.
  • When goods are returned the trading stock is credited.
  • Cost of sales is calculated with every sale and every return of goods.

Periodic Inventory System

  • The purchases account is used when goods are purchased.
  • When goods are returned, the purchases account is credited.
  • Cost of sales is not calculated with every sale or return.
  • A calculation is needed to determine the cost of sales, usually done at the end of the month or financial year.
  • Stock takes are conducted periodically to determine the amount of stock on hand

Comparison of Perpetual and Periodic Systems

  • Perpetual: Stock purchases are recorded in the trading stock account (asset). Includes carriage on purchases, returns, and donations in the trading stock account.
  • Periodic: Stock purchases are recorded in the purchases account (expense). Includes carriage on purchases, returns, donations, in the purchases account. Drawings of stock are credited in the purchases account.

Stock Valuation Methods

  • Specific Identification: This method assigns a unique cost to each inventory item, often employed for high-value, unique goods.
  • First-In, First-Out (FIFO): Assumes the first items purchased are the first ones sold, matching the order of purchase to the order of sale,
  • Weighted Average: Calculates a weighted average cost per unit, factoring in all purchases and their costs during the period.

Cost of Sales Calculations

  • Periodic: Opening stock, plus net purchases, plus carriage on purchases and custom duties, minus closing stock equals the cost of sales.
  • Perpetual: Methods calculate cost of sales on a continuous basis.

Exam Tips

  • Memorize calculations for opening stock, net purchases, carriage, duties, and closing stock to determine cost of sales and gross profits.
  • Use the trading account to record and calculate inventory details.

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Inventory Methods PDF

Description

This quiz focuses on inventory systems for Grade 11 and 12 accounting, covering both perpetual and periodic methods. It provides insights into managing trading stock accounts, calculating costs of sales, and the key differences between these inventory systems. Test your understanding of how inventory is tracked and recorded in a business environment.

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