Chapter 10 Flashcards
What are inventories?
Short-term, current, tangible, physical assets which are meant to be sold or transforrmed during the process.
What is merchandising business?
Buying items to resell, they dont have a production process.
What is manufacturing business?
They use inputs to make outputs, they produce and have work-in-progress inventory.
How is ending inventory reported in the balance sheet?
as an asset
Šta sve spada u cost of goods sold?
Cost of all raw materials, all finished goods, so all the goods that we produced and we sold.
Periodic inventory system
At the end of the year, at the end of the year we take physical account of how many materials we got left
Perpetual inventory system
Used during the year, when we make a sale we credit(decrease) inventory(asset) account cause we got less inventory to sell in the future. It counts up usage during the year but leaves closing inventory as a residual figure. Inventory account is updated for each purchase and sale of inventory.
Koji value koristimo da valuiramo inventory koji ostao neprodan na kraju godine?
We need to calculate the lower of cost and net realisable value. The cost is the price at which we have purchased the inventory from our suppliers(invoice cost). For finished goods is a bit harder to calculate the cost cause we gotta include the production process too.
What is a direct production cost?
Raw material and direct labour, we know exactly how much we used for one product
What are production overheads?
We do not know how much we have used in order to make one product(npr. electricity)
How is profit connected to inventory?
The valuation of inventory which is still in the company at the end of the accounting period(the closing inventory) also directly affects the profit of any individual year.
What is the most common basis for evaluation of inventory?
The input basis of historical cost
Describe Unit Cost
- We identify the actual physical units of production that have moved in or out
- In order to use this method each product should be distinguishable e.g. by having a serial number
- We simply add up the recorded costs of those units that have been sold to give cost of sales and those units left in the factory to give closing inventory
these different ways of calculating(such as unit cost, weighted average cost…) are based on which application?
They are based on strict application of the historical cost principle.
Ways of measuring exit value:
- Discounted money receipts
2.Current selling prices(fair value)
3.Net Realizable Value(NRV)
Discounted money receipts
They can be used when there is defenite amount and time of the receipt
Current selling prices(fair value)
They may be used when there is a defenite price and no significant selling costs or delays
Net realizable value(NRV)
Is the estimated selling price in the ordinary course of business, less costs of completion and less costs to be incurred in marketing, distibuting and selling but without deduction for general administration of profit(profit would be taken before the inventory was sold). NRV je exit value.
kako se još naziva closing inventory account i where it will be reported?
It is also called contra-expense account and it will be reported in the Income Statement and contribute to the costs of goods sold.
What is inventory cost equal to i šta sve spada u to?
=cost of production. U ovo ukljucujemo direct production costs+production overheads.Selling and administrative expenses are not included.
What technique we use for interchangable inventories?
FIFO, Weighted average cost, LIFO
Jel historical cost entry or exit value?
Entry value
What is happening when net realizable value is higher than cost of inventory?
No adjustment is made
What happens when purchase costs of inventory regulary rise?
1.FIFO reports the lowest costs of goods sold and the highest cost of ending inventory
2.LIFO reports the highest cost of goods sold and the lowest cost of ending inventory
3.Weighted Average yields results between FIFO and LIFO
