3: Inventories, Accruals and Prepayments

Question 1

Closing inventory is a ____ in the statement of financial position and a ____ in the statement of profit or loss.

Answer 1

Closing inventory is a debit in the statement of financial position and a credit in the statement of profit or loss

SOFP - Inventory is an asset, thus a debit

SOPL - DR Expense, CR Inventory

Question 2

In a period of rising prices, would using the FIFO method to determine the cost of inventories give a lower gross profit figure than the average cost (AVCO) method?

Answer 2

NO

If prices are rising, the charge to cost of sales will be higher if AVCO is used. Gross profit will therefore be lower under this method.

FIFO - cost of closing inventory is higher, so COS is lower, so GP is higher

Question 3

What the acrruals concept?

Name 3 ways it is seen in the FS.

Answer 3

The accruals concept means the effects of transactions are recognised when they occur - not simply when the cash is paid.

Expenses are matched against their income.

1. Accruals and prepayments
2. Depreciation
3. Accrued and deferred income

Question 4

Which two of the following may be included when arriving at the cost of finished goods inventory, for inclusion in the FS for a manufacturing company?

a) Delivery Inwards

b) Delivery Outwards

c) Depreciation of delivery vehicles

d) Finished goods storage costs

e) Production line wages

Answer 4

a & e

b & C are distribution costs, d is not incurred when arriving at the cost of finished goods

Question 5

Which of the following accounting treatments derive from the accrual concept?

a) Writing down a non current asset

b) Opening and closing inventory adjustments

c) Capitalisation and amortisation of development expenditure

Answer 5

b & c