Chapter 9: Inventory

Question 1

How do you calculate the cost of goods sold?

Answer 1

opening inventory + purchases - closing inventory

Question 2

Define cost of goods sold

Answer 2

The amount of inventory left over from a previous year plus what you purchased minus what you had left over. Calculates the costs of selling the inventory that you have sold and give you profit.

Question 3

What is carriage?

Answer 3

cost of transporting the goods from supplier to purchaser.

Question 4

Define carriage inwards

Answer 4

when the purchaser pays for transport, usually added to the cost of purchases in the SOPL

Question 5

Define carriage outwards

Answer 5

when the supplier pays for transport, is a selling and distribution expense in the SOPL

Question 6

What is an inventory account used for?

Answer 6

at the end of a financial year, a business will count all its inventory.

Question 7

What is the double entry for the recording of inventory at the end of the financial year?

Answer 7

Debit - inventory account (closing value)

Credit - Income and Expenses account

Question 8

What is the double entry for the recording of inventory at the beginning of the financial year?

Answer 8

Debit - income and expense account

Credit - Inventory account (value of opening inventory)

Question 9

How is the quantity of inventories held at the end of the year calculated? (2)

Answer 9

either (1) annual count or (2) a continuous count

Question 10

What are the ways of valuing inventory? (4)

Answer 10

1. expected to sell price (not used as it creates profit before item is sold)
2. expected selling price - cost of selling (Net realizable value) (not used as it creates profit before item is sold)
3. Historical cost
4. amount to replace them ( not a good one to use)

Question 11

Which was of valuing inventory is the best?

Answer 11

Historical cost

Question 12

What is the accounting rule around valuing inventory?

Answer 12

inventory is valued at the lower of either cost or net realizable value.

Question 13

When a business has lots of inventory why is a comparison of their at cost value and NRV carried out on each item as opposed to the total inventory?

Answer 13

If the comparison is made on the total value then the loss on some items may be masked by the profits on other items.

Question 14

When valuing inventory for a company with many inventory items how is this done?

Answer 14

by grouping similar items together and performing a comparison on those groups

Question 15

What are the two methods of determining purchase cost?

Answer 15

1. FIFO (first in first out)

2, AVCO (average cost)

Question 16

What is FIFO?

Answer 16

First in first out: assume that components are used in the order in which they are received from suppliers

Question 17

What is AVCO?

Answer 17

Average cost: As purchase prices change with each new consignment the average price of the components in that bin is changed. all items are assumed to have been purchased at the average price of the componants

Question 18

What is the most common way average cost is calculated?

Answer 18

cumulative weighted average pricing method.

Question 19

What is the key feature of cumulative weighted average pricing?

Answer 19

a new weighted average price is calculated whenever a new delivery of materials is received.