8. Inventory Flashcards
Give the double entries to record the purchase of inventory on credit.
Dr Inventory
Cr Trade Payable
Give the double entries to record the returns of inventory to credit supplier.
Dr Trade Payable
Cr Inventory
What becomes of inventory when they are sold?
They become cost of sales.
Give the double entries to record the cost of inventory sold.
Dr Cost of Sales
Cr Inventory
Give the double entries to record the cost of the inventory returned by credit customers.
Dr Inventory
Cr Cost of Sales
How does purchase of inventory on credit affect the accounting equation?
Assets (inventory) increase
Liabilities (trade payable) increase
How does sale of inventory costing $1 500 for $2 800 on credit affect the accounting equation?
Assets (inventory) decrease by $1 500
Equity (cost of sales) decrease by $1 500
Assets (trade receivable) increase by $2 800
Equity (sales revenue) increase by $2 800
State the basis of valuing inventory.
Cost price or net realisable value, whichever is lower.
Why is inventory valued at lower of cost or net realisable value?
Prudence principle requires business not to overstate assets and profits. If there is foreseen loss in inventory, it must be accounted for. However ,if there is profit to be earned on the inventory, it will not be accounted for until the inventory is sold.
The cost of inventory was $6000. It was found that these inventory had net realisable value of $4 600. Give the double entries to adjust the inventory value.
Dr Impairment loss on inventory $1 400
Cr Inventory $1 400
The cost of inventory was $8 400. Its NRV was $9 800. Which value should be reported in the balance sheet for inventory?
Cost of $8 400 since it is the lower between the two values.
The cost of inventory was $9 400. Its NRV was $8 200. The bookkeeper reported inventory at $9 400. Which principle was violated?
Prudence Principle.
The cost of inventory was $9 400. Its NRV was $8 200. The bookkeeper reported inventory at $9 400. How will this affect the gross profit and profit for this year?
Gross profit will not be affected [since the goods is still unsold].
Profit will be overstated by $1 200 [since the impairment loss expense was not reported in the income statement]
The cost of inventory was $9 400. Its NRV was $8 200. The bookkeeper reported inventory at $9 400. How will this affect the gross profit and profit for next year?
Gross profit will be understated by $1 200 [since the inventory brought down was too high and thus the cost of sales will also be high]
Profit will also be understated by $1 200 due to GP being understated.
The bookkeeper did not report an impairment loss on inventory of $400. How will this affect the financial statements?
Income statement: Gross profit no effect; expenses will be understated by $400 and profit will be overstated by $400.
Balance Sheet: Current assets (inventory) will be overstated by $400;
Equity (profit for the year) will be overstated by $400
