Current assets Flashcards
What will we be looking at in this flashcard case?
Accounting for inventory ( IAS 2)
What is inventory?
assets held for sale in the ordinary course of business or to be consumed in the production process or in the rendering of services.
How does IAS 2 require inventory to be measured at?
It requires inventory to be measured at the lower of cost and net realisable value.So as we see there is conservatism here as your making a loss. If circumstances change then we need to do a reverse in write down so that the inventory is recognised at the lower of cost or revised NRV. ( also goes into the expense account.
What is the net realisable value?
is the value of an asset that can be realised upon its sale, minus a reasonable estimation of the costs involved in selling it ( like packaging costs).
What does fair value mean?
fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset.
What is the difference between NRV and fair value?
fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset.
* a fair value is what is referred to as an non - entity - specific value , since it is determined by market forces ; whereas * a net realisable value is what is referred to as an entity - specific value because it is affected by how the entity plans to sell the asset .
On the income statement how do we recognise the sale of inventory?
The carrying amount of sold inventory ( cost of goods sold) is to be recognised as an expense in the period revenue is recognised
What doesn’t IAS 2 apply to?
1) Biological assets
2) Financial instruments
3) Work in progress arising under construction contracts.
The cost of inventory consists of 3 elements
1) cost of purchase ( e.g. purchase price, import duties, transportation and handling costs and we deduct trade discounts and similar items )
2) Cost of conversion ( the total of direct labor and factory overhead costs. They are combined because it is the labor and overhead together that convert the raw material into the finished product.)
3) Other costs ( other costs which are incurred in bringing the inventory into their present location excluding things like SG&A)
As we can see Inventories are so important but what is COGS?
It is the total amount your business paid as a cost directly related to the sale of production ( Beginning inventory + Purchases in the current period - Ending inventory) or it is
What is cost of goods available to sale?
BINV + purchases = COGAS. = The amount of inventory that could potential be sold. The ones that are sold go to the COGS and those that are not go into ending inventory.
The higher ending value of inventory means what?
The lower of COGS, hence higher OI and higher RNOA.
What are the 2 methods that make assumptions of the physical flow of inventory used to determine the cost of goods sold and the ending inventory balance. This goes against perpetual system that tracks units sold directly ( timely), so this is a periodic system ( estimation).
First in first out ( assumes that the oldest products in a company’s inventory have been sold first)
Last in last out ( assumes that the most recent products in a company’s inventory have been sold first).
Remember when you sell inventory you always split what?
You always split into Cost ( DR COGS and CR inventory) and Selling price ( Dr Cash Cr sales )
What are the debits and credits for when 1) inventories are sold 2) Write down of inventories ( when NRV< COST) 3) Reversal of write down( when Cost becomes higher than NRV)? Where is right down recorded?
Write down of inventory ( can either be recorded in the COGS or as a separate line item on the income statement.)
1)How do we deal with this?
Dr Inventory (+10,000)
Cr Cash (-10,000)
5) Finally, just before the closing of the fiscal year,
ClimbingHills manages to sell 400 ropes at £80 per unit.( Hint end of year)
Dr COGS (-18,000; -22,000; -20,000)
Cr Inventory (-18,000; -22,000; -20,000)
Create a reformulated BS and IS for all the adjustments from 1 to 5 and what is larger for LIFO AND FIFO for RNOA and PM? where would WAC be?
Remember this firm is a fully equity financed firm.
RNOA fifo > RNOA lifo as COGS tends to be lower hence HIGHER OI.
The WAC will be in the middle of the 2.
So if we recall the EndINv equation = BegInv + Purchases - COGS
And rearrange this to get purchases for LIFO and FIFO ( assuming purchases are the same What is the difference in COGS between Lifo and Fifo?
First of all find the expected total cost for each stage and the % complete.
The questions says 25% of all plants shown to be high quality, 50 % medium quality and 25% low quality, so we want to work out expected profit of each stage taking into account gram yield and the rest above., calculate this.
Now we want to find the present value of each stage then find PV in total.
The daily discount rate is 45% ( we make assumption here which can have valuation effects)
Days in the market for vegetative stage = 42 + 56+ 7 = 105
105 - 21 ( mid stage) = 84
Flowering = 84-21-28 = 35
Drying = 35-28-3 = 4 days .
Total the expected profit each stage ( high medium and low
( total time it takes to the market - half the length of the current cycle)
Now calculate Percentage of completion method ( mutiply total fair value estimates by % of completion)
