Accounting Grd 11 Introducing Inventory Systems S3

Summary

In this lesson on inventory systems, two methods are explored: periodic and perpetual inventory systems. Key concepts include the use of a purchases account in the periodic system and a trading stock account in the perpetual system. The calculation of cost of sales involves adding opening stock, net purchases, and related expenses, then subtracting closing stock. Practical examples demonstrate these calculations, emphasizing the importance of understanding financial indicators such as gross profit on cost of sales and gross profit on turnover. The lesson concludes with tips for examination techniques and a motivational note to accounting students.

Takeaways

• 📚 The script discusses two inventory systems: Periodic and Perpetual Inventory Systems.
• 🛒 The Periodic Inventory System records all goods purchased in a 'Purchases Account'.
• 🔄 The Perpetual Inventory System records goods purchased in a 'Trading Stock Account'.
• 📈 The script provides a practical example to calculate the 'Cost of Sales' on the last day of an accounting period.
• 🔢 The formula for 'Cost of Sales' includes Opening Stock, Net Purchases, Purchases Expenses, and Closing Stock.
• 💼 Net Purchases are calculated by adjusting for creditors allowances, goods returned, donations, and drawings of stock.
• 📦 Purchases Expenses include costs like customs and import duties that increase the cost of goods.
• 🚫 'Carriage on Sales' is not included in the 'Cost of Sales' calculation but is an operating expense.
• 🔑 The script emphasizes the importance of showing calculations to avoid errors and potentially gain part marks.
• 📉 The 'Gross Profit' is calculated by subtracting the 'Cost of Sales' from 'Sales'.
• 📊 Financial indicators such as 'Gross Profit on Cost of Sales' and 'Gross Profit on Turnover' are used to find missing figures and assess profitability.
• 🌟 The script concludes with a motivational note encouraging accounting students to aim high in their studies.

Q & A

What are the two inventory systems discussed in the script?

The two inventory systems discussed are the periodic inventory system and the perpetual inventory system.

What is the main difference between the periodic and perpetual inventory systems?

The main difference is that the periodic system deals with a purchases account for all goods bought, while the perpetual system uses a trading stock account to record goods purchases.

What is the formula for calculating the cost of sales according to the script?

The formula for calculating the cost of sales is: Opening stock + Net purchases + Expenses on purchases - Closing stock.

What are the components of net purchases in the cost of sales calculation?

The components of net purchases include purchases less creditors allowances, goods returned, donations, and drawings of stock, if applicable.

Why is carriage on sales not included in the cost of sales calculation?

Carriage on sales is not included in the cost of sales calculation because it is considered a normal operating expense that goes to the profit and loss account.

What is the term used for the goods available for resale in the cost of sales calculation?

The term used is 'merchandise available for resale'.

How is the missing purchases figure calculated in the provided example?

The missing purchases figure is calculated by subtracting the carriage on purchases and the opening stock from the merchandise available for resale.

What is the cost of sales for the example given in the script?

The cost of sales for the example is 500,000 rand, calculated by subtracting the closing stock of 35,000 from the merchandise available for resale of 535,000.

What is the purpose of showing calculations in an examination setting?

Showing calculations helps in case of errors, as partial marks can be awarded for the correct steps taken in the calculation process.

How is the gross profit percentage on cost of sales calculated in the script's example?

It is calculated by dividing the gross profit by the cost of sales and expressing the result as a percentage.

What is the significance of financial indicators in the context of the script?

Financial indicators such as gross profit on cost of sales and gross profit on turnover are used to calculate certain figures and to find missing figures in accounting.

Outlines

00:00

📊 Overview of Inventory Systems

The video introduces the periodic and perpetual inventory systems, highlighting their key characteristics. The periodic system uses a purchases account to track goods, while the perpetual system uses a trading stock account. The segment aims to put theory into practice through an example, focusing on the calculation of cost of sales on February 29, 2020.

05:01

🔢 Calculating Cost of Sales

The script details the calculation of cost of sales, starting with the opening stock, adding net purchases (purchases minus returns, donations, and drawings), and adding expenses like customs duties. The total, minus the closing stock, gives the cost of sales. The script emphasizes the importance of excluding carriage on sales from this calculation and treating it as an operating expense.

10:02

📉 Practical Example: Missing Figures

A practical example is provided to calculate missing amounts and percentages from accounting records. The example includes finding unknown purchases and cost of sales, and emphasizes showing calculations in exams for partial credit. Detailed steps demonstrate the calculation of cost of sales from given figures, reinforcing the importance of understanding the layout of these calculations.

15:02

💰 Gross Profit and Financial Indicators

The segment explains how to calculate gross profit as a percentage of cost of sales and turnover. Using an example, the video demonstrates calculating the gross profit percentage and markup, and emphasizes the importance of financial indicators in determining these values. The relationship between cost price, markup, and selling price is illustrated with a simple table.

🧮 Summarizing Inventory Calculations

The final summary recaps the key steps in calculating cost of sales using the periodic inventory system: starting with opening stock, adding net purchases and expenses, and subtracting closing stock. It stresses the need to understand and use financial indicators to find missing figures, reinforcing the lesson's main points. The segment closes with motivational remarks, encouraging viewers to aim high in their accounting studies.

Keywords

💡Inventory Systems

Inventory systems are methods used to track and manage the stock of goods held by a business. In the video, two types are discussed: periodic and perpetual inventory systems. The periodic system aggregates all inventory data at certain intervals, while the perpetual system tracks inventory in real-time. The script emphasizes the importance of understanding these systems for calculating cost of sales and managing business operations.

💡Periodic Inventory System

A periodic inventory system is an accounting method where inventory counts are conducted at specific times, such as at the end of an accounting period. The script explains that this system uses a purchases account to record all goods bought, which is key for calculating net purchases and, ultimately, the cost of sales.

💡Perpetual Inventory System

The perpetual inventory system is an alternative to the periodic system, where inventory levels are updated continuously as transactions occur. The script mentions that this system uses a trading stock account to record goods purchases, reflecting the real-time tracking of inventory.

💡Cost of Sales

Cost of Sales (CoS) is a critical financial metric representing the direct costs attributed to the production of the goods sold by a company. In the script, the calculation of CoS is detailed as a sum of opening stock, net purchases, and purchase-related expenses, minus closing stock, which is essential for determining gross profit.

💡Opening Stock

Opening Stock refers to the inventory of goods available at the beginning of an accounting period. The script uses opening stock as a starting point in the CoS calculation, emphasizing its importance in understanding the available merchandise for resale at the outset of the period.

💡Purchases Account

In the context of the periodic inventory system, the purchases account is where all transactions related to the acquisition of goods are recorded. The script explains that this account is central to calculating net purchases, which is a component of the CoS calculation.

💡Net Purchases

Net Purchases is the total amount spent on buying goods, adjusted for factors like returns, allowances, and donations. The script illustrates how net purchases are calculated by subtracting these factors from the total purchases, which affects the final CoS figure.

💡Carriage on Sales

Carriage on Sales refers to the transportation costs associated with the sale of goods. The script clarifies that while these costs are part of the overall expenses, they are not included in the CoS calculation but are instead considered a normal operating expense recorded in the profit and loss account.

💡Closing Stock

Closing Stock represents the inventory of goods remaining unsold at the end of an accounting period. The script describes how closing stock is subtracted from the total merchandise available for resale to arrive at the CoS, which is a crucial step in the financial accounting process.

💡Gross Profit

Gross Profit is the profit a company makes after deducting the CoS from its sales revenue. The script explains that understanding gross profit is essential for evaluating a company's profitability and pricing strategy, as it shows the markup percentage on cost of sales.

💡Gross Profit Percentage

The Gross Profit Percentage is a financial ratio that shows how much profit a company makes relative to its cost of sales. In the script, it is used to calculate the markup percentage on the cost of goods sold, indicating the efficiency of the company's pricing strategy.

Highlights

Introduction to two inventory systems: periodic and perpetual inventory systems.

Characteristics of the periodic inventory system, including dealing with a purchases account.

Characteristics of the perpetual inventory system, with a trading stock account for goods purchases.

Practical example to calculate the cost of sales using inventory information.

Explanation of the cost of sales calculation formula, including opening stock, net purchases, and expenses on purchases.

Clarification on not including carriage on sales in the cost of sales calculation.

Demonstration of calculating merchandise available for resale by adding opening stock, purchases, carriage, and customs duties.

Subtraction of closing stock from merchandise available to find the cost of sales.

Emphasis on showing calculations for examination purposes to gain part marks.

Business scenario with missing figures to be calculated from given accounting records.

Method to calculate missing purchases figure using available goods for sale, carriage, and opening stock.

Verification of calculated purchases figure through a reverse calculation.

Determination of cost of sales by subtracting closing stock from goods available for sale.

Calculation of gross profit percentage on cost of sales using the formula.

Importance of using financial indicators such as gross profit on cost of sales and turnover.

Summary of inventory calculations and the use of financial indicators for missing figures.

Encouragement to aim high in accounting with a metaphorical reference to the moon.

Transcripts

[Music]

welcome

accounting boffins remember we're

dealing with

inventory systems a quick recap

the two systems that we are dealing with

will be one

your periodic inventory system

right and you always you've now noticed

that it has certain characteristics

and what are those characteristics one

the periodic system

deals with a purchases account where

everything regarding the goods that we

are buying

goes into my purchases account

right number two we also dealt with

the perpetual inventory system and

when we dealt with the perpetual

inventory system remember

we're dealing with a trading

stock account where everything regarding

the goods that we are buying

gets recorded in my trading stock

account okay now let's put into practice

what we have discussed so far let's do

an actual example

right here goes required

use the information

use the information to calculate the

cost of sales

on the last day of the accounting period

the 29th of february

2020 right now we've all

in our previous segment we had an

elaborate discussion

on the calculation of cost of sales

right let us just recap let's look at

the format remember i said

this format is something that you must

learn

what goes into the calculation of my

cost of sales number one opening stock

right to it you add your purchases

remember it is your net purchases in

other words

take your purchases figure less your

creditors allowances

goods that were returned less your

donations

if applicable less your drawings of

stock

if applicable so obviously those would

only be applicable if they

have taken place that will then give you

your net purchases what do we now do

we now add the expenses on purchases

like what

customs duties import duties any expense

that will lead to an

increase in the cost of my goods so

whenever i've purchased the goods

any cost that i that that would involve

me

bringing that good to my business

would increase the cost price of that

good okay

add all of that together less your

closing stock

will give you cost of sales what's the

look out here

the lookout is carriage on sales

if it is given it is not applicable

to my calculation of my cost of sales

and will therefore

not be used rather it's a normal

operating expense

that will go to my profit and loss

account

okay so there we go

we've got our stock at the beginning of

the year we've got our purchases we've

got

carriage on purchases we've got customs

duties

there's my opening stock there's my

purchases

there's my carriage and purchases

customs duties

and obviously my closing stock

look at my calculation you start off

with your opening stock

right let me just redo that

here we go here's my

opening stock

i add my purchases component to it

i add my carriage on purchases to it

i add my customs duties to it

all of these all of these components

when we add them together it gives us a

figure

which we call merchandise available

for resale in other words

what you see here is your goods

available for resale

is the 535 000 how did we get that

we took the 60 plus the 450 which is 510

plus the 20 which is 530 plus the five

which will give me

535 000. okay

you now subtract what you subtract

you subtract your closing stock

because remember that's the stock that's

still on our shelves

we didn't sell that goods those goods

are still available and remember what we

said early on

your closing stock of this year will

become your

opening stock of the following

calculation

next year's opening stock will now be 35

000. but for now

in this year's closing stock 535 000

minus your 35 000 will give you

your cost of sales figure as you can

clearly see

is 500 thousand rand

so what do you remember in this

calculation

you add that plus that

plus that plus that to be equal to your

merchandise available for resale

you only subtract your cost of sales

which is at the end sorry you only

subtract your closing stock

at the end of the year which will then

give you your

cost of sales now remember something

else

this purchases figure here

if there are calculations that you have

to show

then it is imperative that you draw up

a small calculation for yourself and you

show it as part of your answer

so if there was creditors allowances or

donations

or drawings of stock all of that would

be shown

in your bracket right so

as a as an examination technique

always show your calculations because

perchance if you make an error

you can get part marks for a final

answer

okay

we now come to a business and we are

told the following information

was taken from the accounting records of

a business

calculate the unknown amounts and

percentages

on the 29th of february 2019.

okay let's see what we have here

we have opening stock

purchases is an unknown

carriage and purchases is given your

goods available for sales is given

your closing stock is given right

obviously your cost of sales is another

required figure

your gross profit is given your sales is

given

your gross profit on cost of sales as a

percentage

is an unknown and your gross profit on

turnover

is a given figure so obviously

based on the information that you have

you now

have to calculate a missing figure now

remember

that initial calculation for cost of

sales

it is of utmost importance that you know

that component or you know the layout

as you will see just now so

we start off by saying let's take the

198

000 right which is my goods available

for

resale there's it right so

we take 198 000.

minus the carriage on purchases

of 8 000 minus the 8 000

right as you can see i'm i'm i'm working

here

with the carriage on purchases as the

first calculation

so i'm working with a reverse operation

i'm taking my 198 000

minus the 8000 right

and then i say minus the opening stock

of sixty thousand so there i'm bringing

in my opening stock figure

which is a sixty thousand minus the

sixty thousand

right and that will be equal to a

hundred and

thirty thousand so my missing figure

here will be

my purchases figure of

a hundred and thirty thousand in other

words

if you now look at it here you can

clearly see

and let me show you this operation so

that you know what i'm talking about

watch sixty thousand plus the hundred

and thirty thousand

plus the eight thousand will give me a

hundred and

ninety eight thousand let's check that

on the calculator

so we know absolutely we know we know

what we are doing is correct

so we go 60 000 right

plus 130 000

plus 8 000

will give me 198 000 and that's the

figure

that was given to me so in this way i

calculated

my missing component and my missing

component there

was my purchases figure which was denoit

which was denoted

as a right okay

moving on the next calculation

we've done this one here is i have to

now calculate let's see what was it

i needed the cost of sales figure right

so this was my calculation now

so obviously obviously based on our

previous format

what do we remember your merchandise

available for resale

which is the goods available for resale

198 000

minus the cost the closing stock figure

of 55 000 ran remember the stock that is

unsold

at the end of the year amounts to 55

000 grand so taking my calculator once

again

i've got my 198 000 minus

the 55 000 and that will give me a

figure of

143 000 rent so in other words you can

see here

143 000 rent

will be my cost of sales and

if i now look at it there's my

calculation 198

000 minus the 55 000 to give me

a hundred and forty three thousand ran

watch

in my calculation i can clearly see

their closing stock was subtracted

and that's the operation that you must

take into consideration

that you subtract your closing stock at

the

end of your financial year okay

now moving forward we are asked to also

calculate

c now what is c c says

gross profit on cost of sales remember

this is

we want to calculate a percentage year

therefore what are we going to be doing

now right

the indicator says gross profit on

cost of sales let's identify

what is my gross profit my gross profit

is 71

500 okay so my gross profit

is 71 500 they want it expressed as a

percentage of

cost of sales and

your cost of sales is something that you

have calculated

to be a hundred and forty three thousand

rand

okay so now watch my calculation

i start off by saying

take your gross profit

over your cost of sales and express it

as a

percentage right let's identify

gross profit 71 500

therefore 71 500

over my cost of sales let's identify

cost of sales 143 000

clearly you can see over 143 000

multiplied as a percentage let's do that

on our calculators

so what do we do it is

71 500

times a hundred

divided by a hundred and forty three

thousand

this will now give me my markup

percentage

of fifty percent

right so if i look at this year now

i can see that i took my

there we go i took my cost of sales

over my my sorry i took my gross profit

over my cost of sales times 100 over 1

and there i got my answer of 50 so in

other words

this business is marking up its goods by

50 percent on cost in other words

remember the table that you always draw

up i've always asked you to draw up this

table

what is a stable year it will look like

the following cost price

is equal to a hundred your markup

is equal to 50 therefore your selling

price

is equal to 150 okay

now if we look at this information here

you can see that your gross profit

percentage on turnover

is given to you as 33

right so depending on what the question

asks for you must be able to use

financial indicators to also calculate

certain figures and that is why

it's important to be one calculate the

girl's profit

number two see whether it ties in with

your

with your financial indicator here i'm

referring to

the gross profit percentage as a cost of

sales and

your gross profit on turnover as well

okay let us now summarize what we have

done

in this very important segment on

inventories

one periodic inventory you have to do a

calculation

for your cost of sales and what is that

calculation

it is your opening stock plus

your net purchases plus

you add all your expenses on your

purchases that will then give you

your merchandise available for resale

you subtract your closing stock

and that then gives you your cost of

sales figure

once you've determined your cost of

sales figure it will be your sales

less your cost of sales to give you your

gross profit also remember that

in this section as well you must be able

to use

your financial indicators the two that

we dealt with here were

your gross profit on cost of sales and

your gross profit on

turnover you must be able to calculate

them and

you must be able to use them to find

missing figures

that's it from today's lesson accounting

boffins out there

from me ashraf and the team like we

always say

aim for the moon perchance if you don't

get there you definitely will be

an accounting shining star until the

next time

be good

[Music]

[Music]

you