10. INVENTORIES

Question 1

What is the double entry for the purchase of inventory?

Answer 1

Dr Purchases
Cr Cash or Payables

(NO ENTRIES ON THE INVENTORY ACCOUNT AT PURCHASE)

Question 2

What is the double entry for the sale of inventory?

Answer 2

Dr Cash or Receivables
Cr Sales

(NO ENTRIES ON THE INVENTORY ACCOUNT AT SALE)

Question 3

Where does the value of inventory sit on the SFP?

Answer 3

Current Asset

Question 4

When do we record for inventory?

Answer 4

Period End

Question 5

What is the double entry for recording the closing inventory value??

Answer 5

Dr Inventory
Cr COS (P&L)

Question 6

Why do we credit COS with the period end inventory?

Answer 6

To offset the purchases that we have not sold

Question 7

What is the double entry for recording the opening inventory value?

Answer 7

Dr COS (P&L)
Cr Inventory

Question 8

What is the calculation for Cost of Sales?

Answer 8

COS = Opening Inventory + Purchases - Closing Inventory

Question 9

What should inventories be valued at?

Answer 9

The lower of cost and net realisable value (IAS2)

Question 10

What cannot be included in cost?

Answer 10

Cost of storage and carriage outwards (transportation costs that a seller must pay when it sells merchandise)

Question 11

Define net realisable value:

Answer 11

The estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale (carriage outwards and sales commission)

Question 12

What is the weighted average cost method of inventory valuation??

Answer 12

Inventory is valued on a weighted average basis, taking into account changes in purchase price of goods over time

Question 13

In times of rising prices, the FIFO cost formula for inventories
cost, when compared with the average cost method, will usually
produce:

a. a higher profit and a lower closing inventory value
b. a higher profit and a higher closing inventory value
c. a lower profit and a lower closing inventory value
d. a lower profit and a higher closing inventory value

Answer 13

B.

The closing inventory figure reduces the cost of goods sold figure,
which in turn increases the gross profit.
Therefore, a higher closing inventory figure means a lower cost of
goods sold figure, and hence a higher gross profit. In times of rising
prices, the FIFO cost formula will produce higher closing inventory
values, and therefore a higher gross profit figure.