Accounting Concepts and inventory valuation

Question 1

Definition of Accounting concept

Answer 1

Underlies the preparation of financial statements

Question 2

Definition of Business entity concept

Answer 2

Financial statements record and report on the actvities of one particular business

Question 3

Materiality concept

Answer 3

Items with a low value are not worthwhile recording in the accounts separately

Question 4

cost concept

Answer 4

Assets and liabilities are recorded in the financial statements at historical cost.

Question 5

Going concern concept

Answer 5

The presumption that the business to which the financial statements relate will continue to trade in the foreseeable future.

Question 6

Accurals concept

Answer 6

Expenses and income for goods and services are matched to the same time period.

Question 7

Consistency concept

Answer 7

When a business adopts particular accounting policies, it should continue to use such policies consistently.

Question 8

Purdence concept

Answer 8

Financial statements should always, where there is any doubt, report a conservative figure for profit or the valuation of assets.

Question 9

Realisation concept

Answer 9

Business transactions are recorded in the financial statements when the legal title (ownership) passes between buyer and seller.

Question 10

Duality concept

Answer 10

each financial transaction is recorded by means of two opposite accounting entries

Question 11

Net realisble value

Answer 11

The selling price of goods, less any expenses incurred in getting the inventory into a saleable condition

Question 12

Valuation

Answer 12

The usual valuation for inventory is at the lower of cost and net realisable value.

Question 13

Formula for Inventory value

Answer 13

number of items held x inventory valuation per item