Inventory Flashcards
Inventory
Goods purchased by a trading firm for resale at a profit
First-in, first-out (FIFO)
Assumption that the inventory that is purchased first will be sold first.
- Food, drinks
Identified cost (IC)
Cost of each item of inventory is labelled
Ethical considerations of inventory
- Do they use an ethical labour force
- Are their workers paid a fair wage?
- Do they use ethically sourced and sustainable raw materials?
- Environmental impact of manufacturing inventory?
Inventory card
A subsidiary record of the movement of inventory in and out of the business
How to record inventory loss (FIFO)
Calculate the value of inventory lost using the older cost price of available inventory on hand as indicated in the inventory card
How to record inventory gain (FIFO)
FIFO method would value the inventory gain using the latest cost price recorded in the IN column in the inventory card
Cost of inventory
Includes all costs incurred in order to bring inventory into a condition and location ready for sale
Examples of cost of inventory
- Supplier’s price
- Freight/cartage/delivery in
- Buying expenses
- Customs/import duties
- Modifications
- Packaging
Product costing
All costs incurred in order to bring the inventory into a condition and location ready for sale that can be logically allocated to individual units of inventory
Period costing
All costs incurred in order to bring the inventory into a condition and location ready for sale that cannot be logically allocated to individual units of inventory
Reported under ‘Cost of goods sold’ in income statement
Lower of cost and net realisable value
Principle that states that inventory must be valued at its lowest value, cost, or NRV
Why does inventory fall below its cost price?
- Damage
- Decrease of selling price (put items on sale)
- Decrease in demand
- Obsolescence
Net realisable value (NRV)
Estimated selling price less any direct selling expenses (marketing, distribution, commissions)
When cost no longer provides a faithful representation, business should use the NRV.
What does the NRV represent?
NRV represents inventory’s worth if sold today. By valuing at its NRV, we are ensuring that it will still be sold for a profit
