AOS 2

Question 1

Fair Value

Answer 1

Estimate of an assets value when a second hand asset is contributed to the business

Question 2

Perpetual inventory cards

Answer 2

Is an accounting system whereby movements of inventory are recorded on a continuous basis throughout the reporting period. The balance of the inventory ledger account should be equal the total of the individual inventory cards.

Question 3

Methods of valuing inventory systems

Answer 3

1. Inventory cost method: identifies the actual cost of inventory when it is bought and also when it is sold.
2. First in first out (FIFO): the method assumes that the first goods purchased are the first goods sold.

Both methods are acceptable

Question 4

Why would FIFO be adopted by businesses?

Answer 4

1. It is physically impossible to identify the actual units being sold in some business. E.g Fuel in a petrol station
2. choose not to use labels or codes as it involves too much work

Question 5

The role of inventory cards

Answer 5

Inventory cards is used to record all movements of inventory, both in and out of a business
They use source documents that should be updated daily

Question 6

Advantages and disadvantages of perpetual inventory systems

Answer 6

adv- greater control over inventory to make more informed decisions, identifies speed of turnover easier due to perpetual inventory’s ability to show fast and slow moving lines of inventory, with stocktake can identify inventory loss or gain

disadvantage- additional record keeping that must be kept, additional costs such as purchasing a computer/software and training staff to use it, doesn’t replace physical stocktake