Chapter 7 - Inventory Flashcards
What is the accounting entries for closing inventories?
Dr Inventory
Cr Closing inventory/cost of sales (statement of profit or loss)
- Ensures that closing inventory is shown on financial statement as an asset
- Not included in cost of sales
What does the Valuation of inventory contain?
Raw Materials
Work in progress
Finished goods
IAS2 inventories require that inventory is included in the statement of financial position at either cost or NRV
That’s all!
What is included in calculating the cost?
- Purchases, materials, import duties, freight
- Costs of conversion: Direct costs, production overheads
What happens to goods if they’re stolen ?
Valued at 0
- Included in purchases at cost
- Not given value at closing inventory
- Therefore their cost is charged in cost of sales even though they’ve never been sold
- Distorts gross profit
What is the alternative method of accounting used for inventory valued at 0
Cr Cost of Goods [Purchases]
Dr Cost of Goods [Expense]
If insured and receipt from the insurance company is
Cr Income
What is FIFO?
First in First out
Assumes that goods purchased are the first to be sold. This assumption means that inventory is always valued at up-to-date prices
What is AVCO
Average Cost
Weighted average price for all units in inventory is calculated.
Issue prices at the average cost and the balance of inventory remaining has the same unit valuation
New weighted average is calculated after every purchase of goods
What are credit entries for drawings of inventory?
Dr - Drawings
Cr - Purchases
[using cost of inventory taken]
What is Gross profit?
Profit after deducting costs of the goods sold, as per top part of statement of profit or loss
The gross profit percentage is the gross profit as a proportion of sales
What is the relationship between Sale Price, Cost of Sales and gross profit?
Stated in two ways
- Gross profit margin on sales - where gross profit is expressed
- Mark-up cost - where gross profit is expressed as a percentage of the cost of goods sold
