Chapter 10

Question 1

Purchase inventory double entry

Answer 1

Dr - purchases
Cr - cash or payables

Question 2

Sales inventory double entry

Answer 2

Dr - cash or receivables
Cr - sales

Question 3

When is an inventory double entry made

Answer 3

Only at the year end

The value of inventory is an asset in the SoFP

Question 4

Inventory - at year end double entry

Answer 4

Dr - inventory - asset so in SoFP
Cr - profit or loss account (expense)

Question 5

Inventory - day after year end dual entry

Answer 5

Made via a post trial balance journal entry
Must remove opening inventory from the inventory account also via a post trial balance journal

Dr - profit or loss account
Cr - inventory

Question 6

Cost of sales formula

Answer 6

COS = opening inventory + purchases - closing inventory

Question 7

The golden rule

Answer 7

Inventories should be valued at the lower of cost and net realisable value

Question 8

Cost for inventories

Answer 8

The fixed and variable costs of bringing inventories to their current location and condition

For retail - purchase price + carriage inwards
For manufacturers- depreciation, staff wages

Doesn’t include costs of inventory

Question 9

Net realisable value (NRV)

Answer 9

Selling price minus all further costs (future) to be incurred e.g. carriage outwards and sales commission

Identifies a loss early representing prudence concept

Question 10

3 cash flow assumptions

Answer 10

First on first out - FIFO
Weighted average cost - WAC
Last in first out (LIFO)

Question 11

FIFO

Answer 11

First in first out - good for perishable goods as newer inventory are always held as closing inventory

Profit is high and closing inventory is high

Question 12

LIFO

Answer 12

Last in first out - older items are held as closing inventory

Profit is low and closing inventory is low

Question 13

WAC

Answer 13

Weighted average basis - mean average all the costs and this will be inputted for every purchase

Profit middling, closing inventory middling