Chapter 9 Inventory

Question 1

Define the term inventories

Answer 1

-Inventories are goods bought by businesses to sell to their customers.

Question 2

Describe how a business manages inventories

Answer 2

-Keeping proper records to track inventory
-Keep physical inventory in the warehouse
-Buying insurance to insure the inventory

Question 3

Explain the First-in-First-out method

Answer 3

-The First-In-First-Out(FIFO) method assumes that the goods that are purchased first are to be sold first. Hence, what are left in inventory are goods that are purchased last.

Question 4

State how inventory is valued

Answer 4

-Inventory is valued at cost or net realisable value, whichever is lower.

Question 5

Explain the accounting theory applicable to the valuation of inventory

Answer 5

-Inventory is valued at cost or net realisable value, whichever is lower. This is in line with the prudence theory which states that assets and profits should not be overstated, and expense and losses should not be understated.

Question 6

Explain the term net realisable value

Answer 6

-Net realisable value refers to the selling price of the inventory less the additional cost to sell the inventory.

Question 7

Name and explain one account theory that is applied to the valuation of inventory when the net realisable value falls below its cost.

Answer 7

-The prudence theory states that assets and profits should not be overstated, and expenses and losses should not be understated. Hence, when the net realisable value falls below the original cost, the business must reduce the value of inventory and record at the net realisable value. At the same time to record the potential loss as an expense known as impairment loss on inventory. This is to ensure that current assets and profit are not overstated.