Chapter 9 : Inventory

Question 1

Define the term inventories

Answer 1

Inventories are goods bought by businesses to sell to their customers

Question 2

State the difference between inventories and non-current assets

Answer 2

Inventories are bought to be sold, while non-current assets are bought to be used within the business to generate income

Question 3

State how a business manages inventories

Answer 3

• Keep proper records to track inventory
• Keep physical inventory in the warehouse
• buying insurance to insure the inventory

Question 4

Explain how the cost of inventory purchased is determined

Answer 4

The cost of inventory purchased includes the purchase price of goods and all costs incurred to bring in and get them ready for sale

Cost of purchase includes :
- purchase price of goods
- transport e.g shipping fees, air freight charges
- Custom duties / import tax
- Insurance for goods in transit
- Packing materials
- Wages for employees involved in repacking goods

Question 5

Explain the first-in-first-out method

Answer 5

The first-in-first-out method assumes that inventory that are bought first, are to be sold first. Hence, whatever is left in inventory are goods that were purchased last.

Question 6

Define the term net realisable value

Answer 6

Net realisable value refers to the selling price of the inventory purchased less the additional costs to sell the inventory

Question 7

State how inventory is valued

Answer 7

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

Question 8

Using an accounting theory, state how inventory is valued

Answer 8

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 while liabilities and losses should not be understated.

Question 9

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

Answer 9

The prudence theory states that assets and profits should not be overstated while liabilites and losses should not be understated.
Hence, when the net realisable value falls below the orignal cost of the inventory, 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 assets and profits are not overstated and liabilities and losses are not understated