Chapter 10 Flashcards
What is an inventory?
Inventories are goods produced or purchase and held for resale by a business
Double entry: When businesses purchases an inventory
Dr Purchases
Cr Cash or Payables
NB: no entries are made in the inventories account at the time of the transaction
Double entry: When businesses sell an inventories
Dr Cash or Receivables
What is important to note about the double entry at the time of the transaction?
No entries are made in the inventories account at the time of the transaction
A business may not have sold all of its inventory at year end - how is it thus treated?
The value of an inventory held is an asset and must be recorded in the statement of financial position?
A period end inventory adjustment must occure
How is a period end inventory adjustment made?
Closing inventory value - found by performing a period end count (DE)
Remove opening inventory from the inventory account
Double entry: closing inventory value
Dr Inventory (a current asset account in the statement of financial position)
Cr Statement of profit or loss
This entry will be made via a post trial balance journal entry
Double entry: Remove opening inventory
Dr Statement of profit or loss
Cr Inventory (Statement of financial position)
The entries for closing inventory value/removing opening inventory affect…
the cost of sales figure
What is the cost of sales formula?
Cost of sales = opening inventory + purchases - closing inventory
How is the purchases account relevant to inventory
The purchases account is used to reflect all purchase of inventory
The opening and closing inventory adjustments arise at the period end for the value of inventory not sold at the end of the period
What is Net realisable value?
Estimated selling price less the estimate costs of completion and the estimated costs necessary to make the sale
Selling costs include carriage outwards and sales commission
What is cost?
All purchase costs, costs of conversion and other costs incurred, including irrecoverable taxes and duties in bringing the inventories to their present location and condition
Cost includes fixed and variable overheads allocated on a normal level of production
From NRV and cost - how shoul inventories be valued?
The lower of the two - so calculate both
For a retail business what is cost normally?
The purchase price plus carriage inwards
For a retail business cost what can be included in costs?
cost may include costs such as factory plant depreciation and costs ‘attributable production overheads’ and factory stagg wages ‘ direct labour’ costs.
Note that the cost of storing finished goods cannot be included in the cost of inventory
What is the consequence of the valuation rule
-most businesses would be valued at cost or ‘historical cost’, since they would hope to sell their goods for more than cost. However, in some circumstances, inventories would be valued at net realisable value
e.g. a new business trying to gain customers may sell goods for less than cost to encourage customers to try their product, therefore their inventories would be valued at NRV so they are not overstated
Cost flow assumptions - what are the 3 main different assumptions in valuing closing inventories
First in First out - FIFO
Weighted average cost WAC - using either the periodic or continuous method
Last in first out - LIFO (this is not allowed in the preparation of financial statements
Consequences of 3 different assumptions
FIFO - Profit High, Closing inventory High
LAFO - Profit Low, Closing inventory low
WAC - profit middling, closing inventory middling
Notation for sales of mixed inventory
10 @ 120
12 @ 100
Define WAC?
Weighted average cost
Where inventory is valued on a weighted average basis - taking into account changes in purchase price of goods over time, best for commodities where prices fluctuate regularly
What are the two types of WAC?
Continuous weighted average
periodic weighted average
What is the continuous weighted average
Calculated by taking the weighted average cost before each sale transaction to give the cost of sales.
This leaves a residual inventory figure at the end of the period
After purchase - 160 at 1880
sale (150) - 150/160*1880
What is periodic weighted average?
Calculated by taking the weighted average cost of opening inventories and all purchases to give cost of sales and inventory, ignoring the timings of sales during the period
opening inventory + purchases = x units total value of XXX
cost =
Statements involved in inventory questions
Statement of financial position
statement of profit or loss
Inventories: statement of financial position
Current assets
Inventory (30*$10) $100
Inventories: Statement of Profit or Loss
Sales (320*$140) Cr 4480
Cost of sales
Opening inventory
Purchases
Closing inventory (from SoFP) (NEGATIVE)
Gross profit (sales - cost of sales)
What is a continuous inventory system?
When some companies use computer systems to track inventory quantities and values in real time
-here it is not necessary to perform a period end count to determine the value to be included in the SoFP
Why should inventory counts still be carried out at regular intervals?
As a control to ensure that the value in the system is correct
Continuous inventory systems: what to do if the count is not carried out at exact period end date?
Can determine the period end value by adjusting for transactions posted between the period end and the count dates.
e.g. if period end is 31/12 and count takes place on 03/01 the totals are adjusted by adding back the cost/NRV of all items sold between this period and deducting the cost of items purchased during that period
