7: Cost of sales and inventory

Question 1

What is carriage inwards vs outwards?

Answer 1

Carriage inwards is delivery costs to recieve goods from suppliers and is added to cost of purchases (therefore COS) in the statement of P/L.

Carriage outwards is delivery costs to distribute goods to customers and is treated as an expense below the gross profit line.

Question 2

What is the equation for cost of sales

Answer 2

Opening inventory + Purchases + Carriage inwards - Closing inventory

Question 3

Give examples of cost of sales for service organisations

Answer 3

Direct labour costs
Sales commission
Materials used

Question 4

What is the double entry journal for closing inventories and opening inventories?

Answer 4

Closing:
Dr Inventories (Current asset) account
Cr Cost of sales expense

Opening:
Dr Cost of sales expense
Cr Inventories (Current asset) account

Question 5

How must inventories be valued?

Answer 5

At the lower of cost (historic cost of purchasing goods) and Net realisable value (NRV - the expected sale price less any further direct costs before sale)

Question 6

What are the two costing methods used in financial accounting

Answer 6

FIFO and AVCO

Question 7

In a period of rising prices, how does this affect profits and closing inventory if FIFO or AVCO is used?

Answer 7

Fifo profit> AVCO profit
FIFO closing inventory > AVCO closing inventory

And vice versa for falling prices

Question 8

What is a mark up vs margin? Which is 100% when calculating?

Answer 8

Mark up is calculated on cost - cost =100%
Margin is calculated on sales = sales =100%

Question 9

What are the double entries for writing off inventories, insurance payout, owner drawings from inventory?

Answer 9

Lost inventory through damage/theft
Dr other expenses
Cr purchases

Insurance payout:
Dr Cash/receievables
Cr Other income

Owner takes from inventory
Dr Drawings
Cr purchases