Chpt 9

Question 1

Define inventories

Answer 1

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

Question 2

How business manages inventories

Answer 2

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

Question 2

Difference between inventories and non-current assets

Answer 2

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

Thus, whether an item is recorded as inventory or non-current asset depends on what the business is trading in and how that item is being used.

Question 3

How the cost of inventory purchased is determined

Answer 3

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

Question 4

Cost of purchase includes

Answer 4

• Purchase price of goods
• Transport
• Custom duties / Import tax
• Insurance for goods in transit
• Packing materials
• Wages for employees involved in repacking goods

Question 5

FIFO method

Answer 5

The First-In-First-Out (FIFIO) 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 6

Explain net realisable value

Answer 6

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

Question 7

How inventory is valued

Answer 7

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

Question 8

Accounting theory for how inventory is valued

Answer 8

Inventory is valued at cost or net realisable value, whichever is lower. This is in line with prudence theory, which states …..

Question 9

Accounting theory that is applied to valuation of inventory when the net realisable value falls below its cost

Answer 9

The prudence theory states that …… 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 assets and profits are not overstated and losses are not understated.