Inventories

Question 1

How do you calculate cost of sales?

Answer 1

Cost of Sales = Opening Inventory + Purchases + Delivery Inwards - Closing Inventory.

Question 2

How do you calculate gross profit?

Answer 2

Revenue - Cost of Sales

Question 3

What equation is used to value inventories?

Answer 3

Quantity x Valuation

Question 4

What is the basic rule when it comes to valuing inventories?

Answer 4

Inventories should be valued at the lower of cost or net realisable value.

Question 5

Define the cost of an item of inventory.

Answer 5

The cost of an item of inventory is all costs associated with bringing inventory to its current location and condition.

Question 6

Define net realisable value.

Answer 6

Net realisable value is the selling proceeds minus all costs of completion (could be modification or repairs) and any selling and distribution costs.

Question 7

What are the theoretical methods of estimating cost?

Answer 7

First in, first out (FIFO)
Last in, last out (LIFO)
Average Cost (Simple and Weighted)

Question 8

What is FIFO?

Answer 8

First in, first out. The first goods purchased will be the first sold so remaining inventories are the most recent purchases/production.

Question 9

What is LIFO?

Answer 9

Last in, first out. The last goods purchased/produced will be the first to be sold so remaining inventories are the older production/purchases.

Question 10

What does simple average cost mean?

Answer 10

The cost of all purchases/production during the year is divided by the total number of units purchased/produced.

Question 11

What does weighted average cost mean?

Answer 11

The weighted average of the cost of similar items is recalculated each time a new item is purchased/produced during the period.

Question 12

When the purchase prices are rising what and why happens with FIFO?

Answer 12

The profit will usually be higher due to the value of closing inventory being higher, so cost of sales will be lower compared to that of the weighted average.

Question 13

What is profit margin?

Answer 13

Profit margin represents profit as a percentage of sales. Sales is the 100% figure.

Question 14

What is the equation for profit margin?

Answer 14

Margin = Profit / Sales x 100

Question 15

What is profit mark-up?

Answer 15

Profit mark-up represents profit as a percentage of cost. Cost is the 100% figure.

Question 16

What is the equation for profit mark-up?

Answer 16

Mark-up = Profit / Cost x 100

Question 17

Why may inventory be written down?

Answer 17

Lost or stolen.
Damaged and therefore worthless.
Be obsolete or out of fashion.

Question 18

Why may inventories be written down?

Answer 18

If they are worthless or if their net realisable value is less than their original cost.

Question 19

Explain how you would process an insurance claim on any damaged or stolen goods.

Answer 19

Stolen or damaged goods are taken out of purchases and recorded under other expenses. The insurance claim is treated as other income and if it has not yet been received in the form of cash it is disclosed as an other receivable on the statement of financial position.

Question 20

What would the journal entries for inventory drawings be?

Answer 20

Debit Drawings - Increasing them.

Credit Purchases - Decreasing cost of sales.

Question 21

What does opening stock appear as on the trial balance?

Answer 21

A debited figure.