Inventories

Question 1

inventories?

Answer 1

assets 1. held for sale in ordinary course of business, 2. in the process of production for such sale, and 3. in the form of raw materials/ consumables used in the production process/ in the rendering of services

Question 2

recognition as expense?

Answer 2

when inv sold, carrying amount should be recognised as expense in the period in which the related revenue is recognised

the amount of any inv write-offs and all losses (wastages) should also be recognised in the period in which the write-off/ loss occurs

the process of recognising the carrying amount of sold inventories as expenses results in the matching of costs and revenues

Question 3

recognition as asset?

Answer 3

carrying amount of unsold, unfinished and unused inv must be recognised as current asset

inv can also be apportioned to other assets e.g. inv used as compenent of PPE which are self-manufactured

–> inv apportioned in this way are included in cost price of that other inv and are recognised as expense as a result of useful life of that asset

Question 4

physical inv count?

Answer 4

held at end of financial year to determine quantity of inv on hand

most entities have regular inv counts throughout the year to support internal controls

Question 5

during inv count?

Answer 5

all inv that belong to entity are physically counted

therefore, all inv over which entity has right of ownership are counted

Question 6

right of ownership?

Answer 6

all goods of which the right of ownership has been transferred to the entity and where the entity has obligation to pay for the goods must be included as inventory

right of ownership usually vests in an entity when the seller delivers the goods to the entity

if right of ownership has vested, goods must be included in inv irrespective of whether or not the new inv items are physically on the premises of the entity

where right of ownership has already been transferred to client, goods should not be included in the count even if still on premises

Question 7

goods-in-transit?

Answer 7

goods-in-transit on the cut-off date should be evaluated according to the terms agreed upon with the supplier

if goods purchased FOB dispatching point -> ownership = transferred to the entity when supplier delivers goods at dispatching point

if purchased FOB arrival -> ownership = only transferred to entity on receipt at point of arrival

Question 8

inv that are property of entity (even if not physically in entity’s possession)?

Answer 8

• inv sent on consignment to agent
• inv of which ownership is transferred before it’s delivered to the entity
• inv purchased & delivered is delayed on request of the purchaser, but purchaser had already taken title over inv & accepted invoicing
• inv received on appro

Question 9

measuring inv?

Answer 9

initially measured at cost price on historical cost basis

inv shall be measured at the lower of cost and NRV

cost of inv shall comprise all costs of purchases, costs of conversion and other costs incurred in bringing inv to current location and condition

Question 10

cost price of merchandise?

Answer 10

not only its purchase price but also
-import costs
-freight to transport goods to entity
-insurance cost while goods are being transported
-etc

Question 11

cost price of manufactured goods?

Answer 11

comprises
-cost price of raw materials
-direct labour cost to manufacture inv
-manufacturing overheads/ carrying cost apportioned to each inventory item

Question 12

not form part of inv?

Answer 12

abnormal amounts of inv losses (wastages)
write-offs
storing costs
admin costs
sales costs

Question 13

registered for VAT?

Answer 13

if registered, cost price of inv is amount excluding VAT, since VAT paid on purchases can be claimed back from SARS

if not registered, cost price includes VAT

Question 14

journal for paying cash & receiving cash discount?

Answer 14

Dr inventory (bank)
Cr bank (inv and vat)

Question 15

receive trade discount & settlement discount journal?

Answer 15

1. trade discount:
   dr inventory (creditors)
   cr creditors (inv and vat)
2. settlement discount:
   dr creditors (bank)
   cr bank (creditors)

Question 16

perpetual inventory system?

Answer 16

-continuous record of inv on hand
-adjusted with every movement of inv
-costs of goods sold to date = always available
-physical inv count still performed at end of year
- comparison between result of physical inv count and inv balance per accounting records will indicate wastage in inv since last count
-uses inventory T account

Question 17

perpetual, purchasing goods journal?

Answer 17

dr inv (sfp)
cr creditors/ bank (sfp)

Question 18

perpetual, selling goods journal?

Answer 18

dr cost of sales (p/l)
cr inv (spf) (cost price)

dr debtorts/ bank (sfp)
cr sales (p/l) (selling price)

Question 19

perpetual, closing COS and sales journal?

Answer 19

dr trade account (p/l)
cr cost of sales (p/l)

dr sales (p/l)
cr trade account (p/l)

Question 20

closing perpetual inventory accounts?

Answer 20

not necessary -> inv account represents inv figure on SFP, balancing figure in trade account is the gross profit and = transferred to the p/l account

Question 21

periodic inv system?

Answer 21

-only indicates inv on hand once physical inv count has been done
-physical inv figure, with adjustments, = used as closing inv balance
-uses cost of sales T account

Question 22

periodic, cost of inventories sold calc?

Answer 22

opening inv + purchases - abnormal wastages - closing inv = cost of sales

Question 23

periodic, purchasing goods journal?

Answer 23

dr purchases (p/l)
cr bank/ creditors (sfp)

Question 24

periodic, selling goods journal?

Answer 24

dr debtors/ bank (sfp)
cr sales (p/l)

Question 25

periodic, recording closing entries journals?

Answer 25

recording closing inv:
dr inv (sfp)
cr cost of sales (p/l)

closing opening inv:
dr cost of sales
cr purchases
cr inventory

closing cost of sales & sales (amount includes sales, normal wastages & NRV adjustment):
dr trade account
cr cost of sales

dr sales
cr cost of sales

Question 26

advantages of periodic system?

Answer 26

simplicity and low cost

Question 27

disadvantages of periodic system?

Answer 27

does not point out physical inv wastages

Question 28

losses or wastages?

Answer 28

finished goods: wastage
work-in-progress and raw materials: losses

Question 29

normal wastages?

Answer 29

arise from normal business operations

in perpetual:
dr cost of sales
cr inventory

no entries made for periodic, since actual physical closing inv = used and inc wastages = automatically taken into consideration in calc of cost of sales

Question 30

abnormal wastages?

Answer 30

wastage suffered that’s not part of normal business operations

in perpetual:
dr inv wastage (p/l)
cr inv

in periodic:
dr inv wastage (p/l)
cr cost of sales

Question 31

insuring inv wastages calc?

Answer 31

insured amount/ total val of inv at time of wastage x val of inv lost

Question 32

insurance of abnormal wastage journal?

Answer 32

perpetual & periodic:
dr insurance debtor (sfp)
cr insurance income (p/l)
cr VAT (sfp)

Question 33

insurance output received for abnormal wastages journal?

Answer 33

perpetual & periodic:
dr bank
dr insurance income (p/l)
dr vat
cr insurance debtor (sfp)

Question 34

gross profit mark-up?

Answer 34

on cost price

wat jy soek/ wat jy het

Question 35

gross profit margin?

Answer 35

on selling price or on transaction (default when only gross profit % is given)

wat jy soek/ wat jy het

Question 36

discounted sales?

Answer 36

• reduces selling price
• cost price is fixed

Question 37

specific identification?

Answer 37

cost of items that are not usually interchangeable and goods/ services produced and segregated for specific projects

Question 38

disclosed in accounting policy note?

Answer 38

• fact that inv = valued at lowest of cost and NRV
• specific cost formula applied to every inventory classification

Question 39

determining cost price if results aim at historical cost prices?

Answer 39

standard cost and retail methods

Question 40

FIFO?

Answer 40

units purchased first will be sold first

Question 41

NRV?

Answer 41

estimated selling price in the ordinary course of business LESS the estimated costs of completion and the estimated costs necessary to bring about the sale

if entity is registered for vat, then NRV is the price before vat

Question 42

AVCO?

Answer 42

each time sales transaction is concluded, the weighted average cost must be calculated

Question 43

NVR calc?

Answer 43

normal SP - trade discount -advertisements - other costs = NRV

CP - NRV = adjustment amount

Question 44

NRV journal?

Answer 44

perpetual (CP - NRV):
dr cost of sales
cr inventory

periodic:
write-off is automatically taken into account as part of balancing figure (trade account amount)