Chapter 9 - Valuing and Managing Inventory Flashcards
What is the ‘cost of inventory’?
all costs incurred in order to bring inventory into a condition and location ready for sale
Product Cost Definition
a cost incurred in order to bring inventory into a condition and location ready for sale than can be allocated to individual units of inventory on a logical basis
Period Cost Defintion
a cost incurred in order to bring inventory into a condition and location ready for sale that cannot be allocated to individual units of inventory on a logical basis
Net Realisable Value (NRV) Defintion
the estimated selling price of inventory less any costs involved in its selling, marketing or distribution
How is NRV calculated
Estimated Selling Price less Direct selling expenses
Lower of ‘Cost’ and ‘Net Realisable Value’ rule meaning
inventory should be valued at either its Cost, or its NRV, using whichever is lower
What QC’s supports the Lower of ‘Cost’ and ‘NRV’ rule
Faithful Representation and Verifiability
Inventory Write-Down Defintion
the Expense incurred when the NRV of an item of inventory falls below it ‘Cost’ or original purchase price
How is inventory write-down presented in the inventory card and General Journal Entries
Represented in the OUT column
Inventory Write Down DR
Inventory CR
‘Write-down of 6 dishwashers to NRV due to release of new model (Memo 31)’
Where is an inventory-write down recorded in the Income Statement
Under ‘Gross Profit’ decreasing Adjusted Gross Profit
How do you calculate Inventory Turnover (ITO)
Average Inventory/Cost of goods Sold * 365
Is Fast Inventory Good? Explain
It’s good for profitability and liquidity, as it means you’ll have the funds to meet debts, but it being too fast could mean selling price is to low.
