Chp 9: Inventories Flashcards
Explain why businesses keep inventories.
Business needs to prevent a stock –out situation and may result in a loss of sales
If business keeps too much inventory and is unable to sell them, it will incur higher storage cost and risk the goods becoming obsolete.
Explain the valuation of inventory in relation to prudence theory
Prudence theory states that the accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses.
According to prudence theory, inventory is valued at the lower of cost and net realisable value, to ensure that inventory is not overstated.
Cost price of inventory is $100. Net realizable value is $80.
How much is to be shown in the statement of financial POSITION?
Current Asset _ Inventory $80
Cost price of inventory is $100. Net realizable value is $80.
What would be shown in the statement of financial PERFORMANCE
Impairment loss on INVENTORY $20
Cost price of inventory is $100. Net realizable value is $80.
State the journal entry for the $20.
Cost price of inventory is $100. Net realizable value is $80.
Dr Impairment loss on inventory $20
Cr Inventory $20
State the effect of this adjustment on profit and current asset
Profit will DECREASE (because more expense)
Current Asset_ Inventory will DECREASE
Cost price of inventory is $100. Net realizable value is $80.
Dr Impairment loss on inventory $20
Cr Inventory $20
State the effect if the adjustment IS NOT MADE on profit and current asset
Profit will BE OVERSTATED (because TOO LITTLE expense)
Current Asset_ Inventory will BE OVERSTATED
Describe transaction on Feb 4.
Business sold inventory costing $100.
Describe transaction on Feb 6.
Business returned $200 of inventory previously bought on credit to Tan
Describe transaction on Feb 6.
Business returned $200 of inventory previously bought on credit to Tan
Describe transaction on Feb 7.
Cost of inventory was reduced by $20 to it net realizable value of $x
Cost of inventory includes the PURCHASE PRICE of goods and
All cost incurred to bring in and get them ready for sale.
Give 2 examples
- Tansport eg shipping fees, air freight charges
- Custom duties
- Insurance for goods in transit
- Packing materials
- Wages for employees involved in repacking goods.
To calculate the Cost of inventory, business needs to include the wages of employees involved in selling the inventory.
True or False?
False
