Chap 9

Question 1

FIFO

Answer 1

The goods purchased first are assumed to be sold out first. Hence, goods are purchased last are assumed to remain in the business as the ending inventory.

Question 2

Prudence theory

Answer 2

The accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses. When the net realizable value falls below the cost of inventory, the business must reduce the value of inventory and record the potential loss as an expense. This expense is known as an impairment loss on inventory. Hence, assets and profits are not overstated

Question 3

Valuation rule for inventory

Answer 3

Inventory is valued at the lower cost and net realisable value