Chapter 10

Question 1

What is an inventory?

Answer 1

Inventories are goods produced or purchase and held for resale by a business

Question 2

Double entry: When businesses purchases an inventory

Answer 2

Dr Purchases
Cr Cash or Payables

NB: no entries are made in the inventories account at the time of the transaction

Question 3

Double entry: When businesses sell an inventories

Answer 3

Dr Cash or Receivables

Question 4

What is important to note about the double entry at the time of the transaction?

Answer 4

No entries are made in the inventories account at the time of the transaction

Question 5

A business may not have sold all of its inventory at year end - how is it thus treated?

Answer 5

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

Question 6

How is a period end inventory adjustment made?

Answer 6

Closing inventory value - found by performing a period end count (DE)
Remove opening inventory from the inventory account

Question 7

Double entry: closing inventory value

Answer 7

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

Question 8

Double entry: Remove opening inventory

Answer 8

Dr Statement of profit or loss
Cr Inventory (Statement of financial position)

Question 9

The entries for closing inventory value/removing opening inventory affect…

Answer 9

the cost of sales figure

Question 10

What is the cost of sales formula?

Answer 10

Cost of sales = opening inventory + purchases - closing inventory

Question 11

How is the purchases account relevant to inventory

Answer 11

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

Question 12

What is Net realisable value?

Answer 12

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

Question 13

What is cost?

Answer 13

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

Question 14

From NRV and cost - how shoul inventories be valued?

Answer 14

The lower of the two - so calculate both

Question 15

For a retail business what is cost normally?

Answer 15

The purchase price plus carriage inwards

Question 16

For a retail business cost what can be included in costs?

Answer 16

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

Question 17

What is the consequence of the valuation rule

Answer 17

-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

Question 18

Cost flow assumptions - what are the 3 main different assumptions in valuing closing inventories

Answer 18

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

Question 19

Consequences of 3 different assumptions

Answer 19

FIFO - Profit High, Closing inventory High
LAFO - Profit Low, Closing inventory low
WAC - profit middling, closing inventory middling

Question 20

Notation for sales of mixed inventory

Answer 20

10 @ 120
12 @ 100

Question 21

Define WAC?

Answer 21

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

Question 22

What are the two types of WAC?

Answer 22

Continuous weighted average
periodic weighted average

Question 23

What is the continuous weighted average

Answer 23

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

Question 24

What is periodic weighted average?

Answer 24

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 =

Question 25

Statements involved in inventory questions

Answer 25

Statement of financial position
statement of profit or loss

Question 26

Inventories: statement of financial position

Answer 26

Current assets
Inventory (30*$10) $100

Question 27

Inventories: Statement of Profit or Loss

Answer 27

Sales (320*$140) Cr 4480
Cost of sales
Opening inventory
Purchases
Closing inventory (from SoFP) (NEGATIVE)
Gross profit (sales - cost of sales)

Question 28

What is a continuous inventory system?

Answer 28

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

Question 29

Why should inventory counts still be carried out at regular intervals?

Answer 29

As a control to ensure that the value in the system is correct

Question 30

Continuous inventory systems: what to do if the count is not carried out at exact period end date?

Answer 30

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