6. Inventory Flashcards

1
Q
  1. What are the two main postings for inventory?

2. Can you explain why this is the case?

A
  1. Opening inventory: Dr SOPL, Cr SOFP
    Closing inventory Dr SOFP Cr SOPL
  2. 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.
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2
Q
  1. How do we value inventory?
  2. Explain the two methods of valuation.
  3. What cannot be included in the cost of inventory? (4)
A
  1. At the lower of cost or net realisable value.
  2. Cost = purchase price.
    Net realisable value = fair value - further costs.
  3. Selling costs, storage costs, disposal of abnormal wastage, administrative overheads
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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
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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.

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5
Q
  1. Cost of sales is made up of what? (3)
A

Dr opening inventory
Dr purchases
Cr closing inventory

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