Chapter 9 (Inventories)

Question 1

What are inventories?

Answer 1

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

Question 2

Why businesses 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

What are the 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

What does FIFO mean?

Answer 4

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

Question 5

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

Answer 5

According to the Prudence theory, inventory is valued at the cost or net realisable value, whichever is lower to ensure that inventory is not overstated

Question 6

Suggest how a business can avoids buying insufficient inventory or too much inventory

Answer 6

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