Account for inventories

Question 1

What are inventories

Answer 1

Goods purchased with the intention for resale in the ordinary course of business. It is classified as an asset

Opening inventory - refers to the beginning of the year

Closing inventory - refers to the closing year

Question 2

Inventory valuation

Answer 2

Inventories shall be measured at the lower of cost and net realisable value (“NRV”). NRV is the worth of your inventory.

Cost = Purchase price + conversion price + other costs

NRV = Estimated selling price - Estimated cost to completion - Estimated selling cost.

Question 3

IFRS principle for inventories

Answer 3

1) Originally all inventories are recorded at the cost

2) If NRV is lower than the year-end adjustment is made :

Dr - COS - difference in the amount between NRV and cost

Cr - Inventory - difference in the amount between NRV and
cost

Question 4

Periodic system vs Perpetual system

Answer 4

Periodic system - Updates are made on a periodic basis. Relies on physical counting or estimates thus it is less expensive but can be inaccurate at times

Perpetual system - Keep track of inventory balances continuously. Relies on the general ledger to give real-time updates. More accurate but more expensive.

Question 5

COS formula

Answer 5

Opening inventories + Purchases - Closing inventories

Question 6

Gross profit formula

Answer 6

Sales revenue - COS = Gross profit

Question 7

Cost flow assumptions of FIFO, LIFO, WAC

Answer 7

FIFO assumes that goods sold are the first units purchased. Under FIFO, the closing inventories are assumed to consist of the most recent purchases. (i.e. Refer to date )

LIFO assumes that goods sold are the last units purchased. Under LIFO, the closing inventories are assumed to consist of the earliest purchases. (i.e. Refer to date on top )

WAC :

Total Inventory cost / Total units = Avg cost per unit.

Apply that cost to the cost of goods sold by multiplying it by the no of sales made and the remaining closing inventory