Chapter 7 - Inventory

Question 1

What is the IAS rule that relates to inventory in our accounts

Answer 1

IAS 2

Question 2

what is the double entry for making a closing inventory adjustment

Answer 2

Debit inventory - to show that it is a current asset
Credit Closing inventory

Question 3

What are the two T accounts that deal with inventory

Answer 3

one on the statement of profit or loss as part of the cost of sales
one on the statement of financial position as an asset

We debit the inventory account on the statement of financial position and show it as a current asset. we still own this inventory so it is as asset.

We credit the closing inventory account on the statement of profit or loss and reduce the purchases which was a debit entry

Question 4

what happens to opening inventory when it is not the first period of trade

Answer 4

the closing inventory from the previous year will start the next year with an asset.

Question 5

when does the cost of sales calculation need to be used

Answer 5

when we are faced with opening inventory at the start of the year and closing inventory at the end of the year.

Question 6

what is the calculation for cost of sales

Answer 6

cost of sales = opening inventory + purchases - closing inventory

Question 7

what is the closing inventory adjustment

Answer 7

debit inventory - statement of financial position
credit closing inventory - statement of profit or loss

Question 8

what is the opening inventory adjustment

Answer 8

debit opening inventory - statement of profit or loss
Credit inventory - statement of financial position

Question 9

what is the basic calculation for inventory

Answer 9

the basic calculation for inventory is quantity x valuation

Question 10

what is the valuation rule

Answer 10

IAS 2 - inventory is valued at the lower cost and net realizable value

Question 11

what is cost relating to inventory

Answer 11

cost is all the costs of bringing the goods to their present location and condition. This includes cost of purchase, import duties, delivery charges, production and conversion costs

Question 12

what is net realisable value

Answer 12

RV is the sale price of the inventory less any costs needed to complete the sale including any manufacturing or correction costs, sales and marketing costs

Question 13

what concept does valuing inventory consider

Answer 13

valuing inventory is an example of applying the prudence concept when we prepare accounts

Question 14

how is inventory valued is it is being sold at a profit

Answer 14

we value inventory at its cost and don’t anticipate any profit being made

Question 15

how is inventory valued if it is being sold at a loss

Answer 15

We value inventory at its net realisale value and show the loss immediately

Question 16

what are the 3 valuation methods when you don’t know the actual cost price of each item in inventory at year end

Answer 16

1. first in first out
2. last in first out
3. average cost (av co)

Question 17

how does the first in first out valuation method work

Answer 17

the first items that came into inventory will be the first ones sold.Therefore we assume the items in inventory are the most recent purchases so we use the most recent purchase prices.

Question 18

how does the last in first out valuation method work

Answer 18

the last items that come into inventory are the first ones to be sold. Therefore we assume the items in inventory are the oldest purchases so we use older purchase prices.

Question 19

which valuation method under IAS 2 is not recognised

Answer 19

Last in first out as it uses out of date costs to value inventory

Question 20

what is the main inventory reconciliation

Answer 20

Physical inventory check - compares the physical inventory to the inventory records held which confirms the actual quantities held at year end

Question 21

what are the errors that the business could make regarding inventory

Answer 21

• incorrect quantities may be entered into records
• inventory damaged but not recorded so inventory value shows too high
• inventory stolen which will remain in records but not be there
• inventory being sold but not dispatched. it is still on the premises but is not in records as has been sold

Question 22

are items which have been sold and are ready for dispatch be included in inventory

Answer 22

these are not included in the inventory valuation as the goods have been sold to a customer and the sale should be recognised in the profit or loss account for the period

Question 23

how can accounts be manipulated through inventory

Answer 23

profits can be manipulated by including an incorrect inventory figure. the year end inventory adjustment puts a credit to cost of sales therefore increasing profits. therefore if this figure is overstated a business can easily overstate profits for the year