inventory Flashcards
why do businesses keep inventories?
to avoid out-of-stock situations which result in loss of sales
how do businesses manage inventories?
- keeping proper records to track inventory
- keeping physical inventory in the warehouse
- buying insurance to insure inventory
identify cost of inventory purchased
includes purchase price of goods and all costs incurred to bring in and get them ready for sale
what is the method used for calculating cost of sales?
FIFO (First-In-First-Out method) used when calculating cost of sales. Goods that are purchased first are assumed to be sold first. Goods that are purchased last are assumed to remain in the business as the ending inventory.
how is inventory valued?
according to prudence theory, inventory is valued at lower of cost or net realisable value to ensure inventory is not overstated. when net realisable value falls below cost of inventory, the business must reduce the value of inventory and record the potential loss as impairment loss on inventory (expense).
effects of overstatement of inventory on gross profit/loss and profit/loss for current financial period
effect on gross profit: no effect
effect on profit for the year: overstated
effect on total current assets: overstated
journal entries for recording impairment loss on inventory
dr impairment loss on inventory
cr inventory
journal entries for recording insurance claim on damaged goods
dr insurance claim receivable
cr impairment loss on inventory
journal entries for purchased goods on credit from supplier
dr inventory
cr TP
journal entries for returned damaged goods to supplier
dr TP
cr inventory
journal entries for sold goods on credit to customer
dr cost of sales
cr inventory
journal entries for customer returned goods to business
dr inventory
cr cost of sales
journal entries for drawings of goods by owner for personal use
dr drawings
cr inventory
