Chapter 7 - Inventory Flashcards
What is the IAS rule that relates to inventory in our accounts
IAS 2
what is the double entry for making a closing inventory adjustment
Debit inventory - to show that it is a current asset
Credit Closing inventory
What are the two T accounts that deal with inventory
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
what happens to opening inventory when it is not the first period of trade
the closing inventory from the previous year will start the next year with an asset.
when does the cost of sales calculation need to be used
when we are faced with opening inventory at the start of the year and closing inventory at the end of the year.
what is the calculation for cost of sales
cost of sales = opening inventory + purchases - closing inventory
what is the closing inventory adjustment
debit inventory - statement of financial position
credit closing inventory - statement of profit or loss
what is the opening inventory adjustment
debit opening inventory - statement of profit or loss
Credit inventory - statement of financial position
what is the basic calculation for inventory
the basic calculation for inventory is quantity x valuation
what is the valuation rule
IAS 2 - inventory is valued at the lower cost and net realizable value
what is cost relating to inventory
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
what is net realisable value
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
what concept does valuing inventory consider
valuing inventory is an example of applying the prudence concept when we prepare accounts
how is inventory valued is it is being sold at a profit
we value inventory at its cost and don’t anticipate any profit being made
how is inventory valued if it is being sold at a loss
We value inventory at its net realisale value and show the loss immediately
what are the 3 valuation methods when you don’t know the actual cost price of each item in inventory at year end
- first in first out
- last in first out
- average cost (av co)
how does the first in first out valuation method work
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.
how does the last in first out valuation method work
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.
which valuation method under IAS 2 is not recognised
Last in first out as it uses out of date costs to value inventory
what is the main inventory reconciliation
Physical inventory check - compares the physical inventory to the inventory records held which confirms the actual quantities held at year end
what are the errors that the business could make regarding inventory
- 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
are items which have been sold and are ready for dispatch be included in inventory
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
how can accounts be manipulated through inventory
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
