Accounts Preperation Flashcards
In closing inventory valuation, how is the method applicable of cost determined?
The lower out of cost and net realisable value per item of inventory
What accounting concept is considered in cost valuation, when using the lower amount of cost or net realisable value?
Prudence
In purchase price of closing inventory valuation, what three methods are there that can be used?
FIFO - First in, first out
LIFO - Last in, first out
AVCO - Average weighted cost
In closing inventory valuation, how is cost method calculated?
Amount it was bought from supplier for, less any trade discounts, plus any conversion costs (direct production costs and production overheads, including those to bring the product to its present location and condition)
How does the FIFO method of inventory valuation work?
Earliest purchased items in inventory are the first to be used
How does the LIFO method of inventory valuation work?
Most recent purchased items in inventory are the first to be used
How does the AVCO method of inventory valuation work?
Total purchase price of inventory issued divided by the number of units of inventory
In closing inventory valuation, how is net realisable value method calculated?
By subtracting selling costs from selling price
How is the cost of sales for a period calculated?
Opening inventory (previous periods closing inventory) plus cost of sales - purchases for the period less closing inventory at end of period
Open inventory + Purchases - Closing inventory = cost of sales
How do opening and closing inventory appear on balance sheet and profit and loss?
Opening inventory is part of cost of sales in profit and loss and closing inventory is a current asset on balance sheet
Why is opening and closing inventory listed in cost of sales on a profit and loss statement?
Because cost of sales is an expense and inventory change is a component of cost of sales
Why is closing inventory listed on a balance sheet statement but not opening inventory?
Closing inventory is this periods current asset for inventory, however opening inventory was the asset from the previous period which has been used during this period and generated sales revenue
What is an irrecoverable debt?
An amount owed to the entity by a customer in which the customer has been deemed with certainty that they are unable to repay the debt
What is a doubtful debt?
An amount owed to the entity by a customer in which the customer has been deemed potentially unable to repay the debt
How are irrecoverable debts handled in the ledgers?
Credit the debtors account and debit the irrecoverable debt expense account in P&L.
This therefore transfers and classifies the debt as an expense for the period rather than an asset
