Inventory

Question 1

The double entry for recording closing inventory

Answer 1

Dr Inventory (statement of financial position)
Cr inventory/ cost of sales (statement of profit or loss)

Question 2

2 ways to value inventory

Answer 2

The lower of the 2:

• cost (includes all expenditure incurred in bringing the product or service to current location e.g materials, import duties, freight, direct cost, production overheads)
• net realisable value (what you can sell the item for)

Question 3

Goods no longer in inventory (goods stolen or completely destroyed)

Answer 3

If goods are stolen or destroyed they have a value of 0. Record it as an expense so that it doesn’t distort gross profit

Question 4

Methods of calculating cost of inventory

Answer 4

FIFO- sold goods are valued at the cost of the most recently bought goods
AVCO- sold goods are valued at the average cost of the goods

Question 5

Drawings of inventory

Answer 5

Valued at their cost and taken away from the purchases figure

Question 6

Mark up and margin percentages

Answer 6

Margin percentages - where gross profit is expressed as a percentage of sales.
Cos + GP = sales gross profit margin of 40%
60 + 40 = 100 then can scale it up to the sales figure

Mark up - where gross profit is expressed as a percentage of cost of goods sold
Cos + GP = sales mark up of 30 %
100 + 30 = 130 then can scale numbers up