Chapter 9 - inventories

Question 1

1. What are inventories?

Answer 1

Inventories refer to goods bought by businesses to sell to their customers.

Question 2

2. Explain why business keep inventory?

Answer 2

A business buys inventory to keep on hand to prevent a stock-out situation, which will result in loss of sales.

Question 3

3. What are costs that are included into the cost of inventory?

Answer 3

Costs incurred to bring in goods and get them ready for sale e.g. transport, custom duties, insurance for goods in transit, packing materials, wages for employees involved in repacking of goods

Question 4

4. What does FIFO mean?

Answer 4

First-In-First-Out method in which goods purchased first are assumed to be sold first.

Question 5

5. How are inventory valued?/ State the valuation rule for inventory?

Answer 5

According to the Prudence theory, inventory is valued at lower of cost and net realisable value to ensure that inventory is not overstated.

Question 6

6, Suggest how a business can avoid buying insufficent inventory or too much inventory

Answer 6

A business can use the perpetual inventory system to keep track of changes in inventory balances to maintain just enough inventories to meet customer demand.