Chapter 7- Inventory Flashcards
Double entry to record closing inventory
Dr Inventory (SFP) Cr Closing Inventory/ cost of sales (SPL)
closing inventory is shown on SFP as an…
asset
‘IAS 2 Inventories’ requires that inventory is included in the SFP at lower of…
cost or net realisable value
Cost of inventory includes…
all expenditure incurred in bringing the product/ service to its present location + condition.
Includes:
- Purchase of materials, import duties, freight
- Costs of conversions (direct costs + production overheads)
Net Realisable Value (NRV) of inventory is worked out by..
Expected revenue- (selling costs + modification costs)
If goods are stolen or destroyed they will have been include in…
purchases at cost + are given no value in closing inventory. Therefore cost is charged in CofS even though they were never sold. This distorts gross profit
If goods are stolen or destroyed you should…
Remove original cost from purchases (goods are now charged as an expense in SPL)
If goods were insured the amount from insurance company is income
LIFO
last in first out; assumes that the last goods purchased are the first goods to be sold (inventory is always valued at old prices)
FIFO
First in first out; first goods purchased are the first to be sold
AVCO
Average cost; a weighted average price for all units of inventory (new weighted average is calculated after every purchase of goods)
In times of rising prices FIFO provides the…
highest closing inventory value + highest gross profit value
In times of rising prices FIFO provides the…
highest closing inventory value + highest gross profit value
Double entry for drawings…
Dr Drawings (cost of inventory taken) Cr Purchases (cost of inventory taken)
If inventory is taken from the business…
minus that amount from purchases when working out cost of sales
Cost structure
Relationship between sales price, cost of sales and gross profit margin
