Chapter 7 Flashcards
These are those that are being sold by an entity in their normal operations.
Inventories
Why do entities sell inventories?
To earn gross profit
What PAS covers all about inventories?
PAS 2 Inventories
What comprises the cost of inventories?
Costs of purchase
Costs of production
Other costs incurred in bringing inventories to present location
Non-recoverable taxes are part of costs of purchase. How are recoverable taxes accounted for?
Recoverable taxes are excluded from costs of purchase and are included in another section of assets aside from inventories.
is freight out considered as transport costs under costs of purchase?
No. It is considered as a selling expense and are excluded from transport costs.
How are trade discounts and rebates in the purchase of inventories accounted for?
They are deducted.
How are basket price of inventories allocated?
Using the relative sales value method.
How are abnormal amounts of wasted materials, storage costs, administrative overhead, and selling costs accounted for?
They are outright expenses.
What storage costs are excluded and are included in the costs of conversion?
Storage costs for RM and WIP goods are included.
Storage costs for FG are excluded.
This is an entity that buys finished goods from another entity (manufacturer) for resale.
Trader or merchandiser
What is the only type of inventories that merchandisers or traders have?
Merchandise Inventory
How do we arrive at the cost of goods sold?
Beginning Inventory
Add: Net Purchases
Total goods available for sale
Less: Ending Inventory
Cost of Goods Sold
What are the types of inventories that a manufacturer maintains?
Raw materials
Work-in-process
Finished goods
Factory Supplies
These represent the physical aspect of an inventory item.
Raw materials
These are raw materials which can be easily traced to the finished product.
Direct Materials
These are raw materials which cannot be economically attributed to the finished product.
Indirect Materials
These inventories represent cost of unfinished products as of a reporting date.
Work-in-process inventory
These inventories represent cost of fully transformed products ready for sale.
Finished Goods
This represent costs which are paid to personnel who are directly involved in the production process.
Direct Labor
This represents costs which are not directly traceable to the finished product but still necessary costs of production.
Manufacturing Overhead
These are indirect costs of production that remain relatively constant regardless of the volume of production.
Fixed factory overheads
These are indirect costs of production that vary directly with the volume of production such as indirect materials and indirect labor.
Variable factory overheads
How are office supplies accounted for?
It is to be expensed as supplies expense.
This method is used when the inventory is of high-value and the turnover is slow.
Perpetual Inventory method
This method is used when the inventory is of low-value and the turnover is fast.
Periodic Inventory Method
What are included in prime costs?
Direct Materials + Direct Labor
What are included in conversion costs?
Direct Labor + Factory Overhead
How are unallocated overheads accounted for?
They are expensed in the period they are incurred.
How is fixed factory overhead allocated?
Based on the normal capacity of the production facilities.
