CHAPTER 9 inventories Flashcards
why does business keep inventory
business usually buys inventory to keep sufficient goods to prevent stock- out situations which may result in loss of sales
too much inventories
1) high storage cost
2) risk of goods becoming obsolete
explain cost of inventory purchased
cost of inventory includes purchase price and costs incurred to bring in goods and get them ready for sales
give examples of inventory purchase cost
- transportation fee
- insurance fee
- packaging fee
- employee salary
- cost of goods
- custom taxes
what is FIFO
first in first out is assuming that goods purchased first are sold first and goods purchased last are assumed to remain in the business as ending inventory
what is insurance claim on damage inventory
business buy insurance to manage risk of potential loss caused by damaged inventory
what is valuation of inventory
inventory is recorded in the cost based on the amount incurred to purchase the inventory
what is NRV
NRV is net realisable value which is the selling price of the inventory less any additional costs to sell the inventory
how should NRV be listed
net realisable value should be more then the inventory value
what is the accounting theory for valuation of inventory
prudence theory
when is the cost of inventory higher than then NRV
1)when goods are damaged
2) goods have become obsolete
what is impairment loss on inventory
impairment loss on inventory is the potential loss when the cost of inventory is higher then its net relisable value
what account does impairment loss on inventory fall under
impairment loss of inventory = expense
what happens to the profit when the impairment loss on inventory is adjusted
profit for the period will decrease
what happens to the profit for the period when the impairment loss on inventory is not adjusted
profit for the period will be overstated
