Chapter 7

Question 1

What is the double entry to record closing inventory?

Answer 1

Dr Inventory
- statement of financial position

Cr Closing Inventory/cost of sales
- statement of profit or loss

Question 2

What does the double entry to record closing inventory allow?

Answer 2

make sure it is shown on the statement of financial position of an asset

not included in cost of sales

Question 3

When is inventory recorded in the accounting period?

Answer 3

at the end

Question 4

What may inventory include?

Answer 4

raw materials

work in progress - part manufactured goods

finished goods

Question 5

What do we look at when valuting inventory?

Answer 5

the lower value between
cost and net realisable value
for each product line of inventory on a line by line basis

Question 6

cost

Answer 6

all expenditure incurring in bringing the product or service to its present location and condition

Question 7

What does the cost include?

Answer 7

purchase and cost of conversion

Question 8

cost - purchase

Answer 8

materials

import duties

freight

Question 9

cost - costs of conversions

Answer 9

direct costs

production costs

Question 10

net realisable value

Answer 10

revenue expected to be earned in the future when the goods are sold less any selling costs or rectification/modification costs to enable safe

is the amount of money you expect to get from selling an asset, minus any costs to sell it. It helps in determining the value of an asset on financial statements.

Question 11

What does goods no longer in inventory (goods stolen or destroyed) mean?

Answer 11

if goods are stolen/destroyed in accident - then they will have no value

they will have to be included at purchase at cost

they are given no value in closing of inventory

therefore their cost is charged in cost of sales even though they have never been sold

this will distort accounting

Question 12

How can goods no longer in inventory (goods stolen or destroyed) distort accounting?

Answer 12

if goods are stolen/destroyed in accident - then they will have no value

they will have to be included at purchase at cost

they are given no value in closing of inventory

therefore their cost is charged in cost of sales even though they have never been sold

this will distort accounting

Question 13

What is the alternative method of accounting when goods are stolen or destroyed?

Answer 13

original cost of goods is removed from purchase

cost of goods is now charged as an expense in arriving at profit or loss

if the goods were insured, any receipt from the insurance company is treated as other income

Question 14

What dies LIFO stand for?

Answer 14

last in, first out

Question 15

What dies LIFO assume?

Answer 15

last goods purchased are always first to be sold

this assumption means that inventory in always valued at old (possibly out of date) prices

Question 16

Does IAS 2 allow LIFO?

Answer 16

no

Question 17

FIFO

Answer 17

first in first out

Question 18

What does FIFO assume?

Answer 18

first goods purchased are the first to be sold

this assumption means that inventory is always valued at up-to-date prices

Question 19

AVCO

Answer 19

average cost a weighted average price for all united in inventory is calculated.

Question 20

AVCO info

Answer 20

Issues are priced at the average cost and the balance of inventory remaining has the same united valuation

a new weighted average is calculated after every purchase of goods

Question 21

Is it normal for sole traders to take inventory from the business for personal use?

Answer 21

ye

Question 22

What happens to Dr when sole trader takes from inventory for personal uses?

Answer 22

drawings - with cost of inventory taken

Question 23

What happens to Cr when sole trader takes from inventory for personal uses?

Answer 23

with the cost of inventory taken

Question 24

When sole trader takes from inventory for personal uses, what does credit entry ensure?

Answer 24

the cost of inventory taken is not included as part of the cost of inventory sold in the statement of profit or loss

Question 25

What is gross profit?

Answer 25

the profit made after deducting the cost of goods sold

as per the top part of the statement of profit or loss

Question 26

What is gross profit percentage?

Answer 26

gross profit as a proportion of sales

Question 27

What is the relationship between sales price, cost of sales and gross profit margin known as?

Answer 27

cost structure

Question 28

What are the two ways cost structure can be?

Answer 28

1.
gross profit margin on sales
- where gross profit is expressed as percentage of sales

2.
mark-up costs
- where gross profit is expressed as a percentage of the cost of goods sold

Question 29

What can we use cost structure for?

Answer 29

to establish the cost of an item of inventory