6. Inventory Flashcards
1
Q
- What are the two main postings for inventory?
2. Can you explain why this is the case?
A
- Opening inventory: Dr SOPL, Cr SOFP
Closing inventory Dr SOFP Cr SOPL - Opening inventory is a brought forward cost to the year.
Closing inventory is a cost incurred for next year.
This is due to the MATCHING CONCEPT.
2
Q
- How do we value inventory?
- Explain the two methods of valuation.
- What cannot be included in the cost of inventory? (4)
A
- At the lower of cost or net realisable value.
- Cost = purchase price.
Net realisable value = fair value - further costs. - Selling costs, storage costs, disposal of abnormal wastage, administrative overheads
3
Q
There are two accounting standards that relate to inventory - what are they? what do they state?
A
IAS1 - entities must disclose accounting policies adopted in preparing the financial statements.
IAS2 - excludes the following from costs:
- selling costs
- storage costs
- abnormal waste costs
- administrative overheads
4
Q
List the four methods of calculating cost of inventory. Briefly explain them.
A
Unit cost = actual cost.
FIFO (First in, first out): assumes first purchased = first sold.
AVCO (average cost) periodically: calculated at end.
AVCO (average cost) continuous: calculated as you go.
5
Q
- Cost of sales is made up of what? (3)
A
Dr opening inventory
Dr purchases
Cr closing inventory