Inventory

Question 1

Inventory

Answer 1

Goods purchased by a trading firm for resale at a profit

Question 2

First-in, first-out (FIFO)

Answer 2

Assumption that the inventory that is purchased first will be sold first.
- Food, drinks

Question 3

Identified cost (IC)

Answer 3

Cost of each item of inventory is labelled

Question 4

Ethical considerations of inventory

Answer 4

• 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?

Question 5

Inventory card

Answer 5

A subsidiary record of the movement of inventory in and out of the business

Question 6

How to record inventory loss (FIFO)

Answer 6

Calculate the value of inventory lost using the older cost price of available inventory on hand as indicated in the inventory card

Question 7

How to record inventory gain (FIFO)

Answer 7

FIFO method would value the inventory gain using the latest cost price recorded in the IN column in the inventory card

Question 8

Cost of inventory

Answer 8

Includes all costs incurred in order to bring inventory into a condition and location ready for sale

Question 9

Examples of cost of inventory

Answer 9

• Supplier’s price
• Freight/cartage/delivery in
• Buying expenses
• Customs/import duties
• Modifications
• Packaging

Question 10

Product costing

Answer 10

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

Question 11

Period costing

Answer 11

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

Question 12

Lower of cost and net realisable value

Answer 12

Principle that states that inventory must be valued at its lowest value, cost, or NRV

Question 13

Why does inventory fall below its cost price?

Answer 13

• Damage
• Decrease of selling price (put items on sale)
• Decrease in demand
• Obsolescence

Question 14

Net realisable value (NRV)

Answer 14

Estimated selling price less any direct selling expenses (marketing, distribution, commissions)

When cost no longer provides a faithful representation, business should use the NRV.

Question 15

What does the NRV represent?

Answer 15

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

Question 16

Inventory write-down

Answer 16

An expense incurred when inventory is valued at its NRV instead of its cost

Business ensures they are reporting an accurate inventory value and net profit

= Cost - NRV