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Financial Accounting > Inventory > Flashcards

Inventory Flashcards

1
Q

Inventory (3 main types)

A
  • they are assets
  • raw materials
  • work-in-progress
  • finished goods - held for sale
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2
Q

What impacts can the inventory figure have on financial statements?

A
  • potentially large balance in current assets
  • opening/closing inventory have direct impact on costs of sales and so profit
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3
Q

What two ways must businesses ensure they accurately account for inventory?

A
  • with the accounting adjustments open/close
  • the valuation
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4
Q

Two Different ways to count/record inventory

A

Period end inventory records
- traditional method
- end of period physically counted
Continuous Inventory Records
- keep track of inventory in/out and records continuously updated
- use automated inventory system

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5
Q

Why does closing inventory need to be removed from SoP/L as Expense

A

it does not have any sales to match against the purchase so taken back to SoP/L as opening inventory in next period when will be matched with sales revenue produced from sale

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6
Q

Cost of Sales =

A

opening inventory + purchases (cost of production if manufacturing industry) - closing inventory

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7
Q

Where is cost of sales formula shown in statements?

A

Trading A/c
Opening Inventory
+costs of purchases/production
-closing inventory
cost of sales

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8
Q

How is the opening Inventory accounted for via journal?

A

Dr cost of sales Expense (SoP/L)
Cr Inventories Asset (SoFP)
The inventory is no longer asset of entity but will form part of cost of sales yo be matched against sales revenue.

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9
Q

How is the Closing inventory accounted for via a journal?

A

Dr Inventories Asset (SoFP)
Cr Cost of Sales Expense (SoP/L)\
At end of year remaining inventory is an asset that can be sold next yr.
CI must also be a deduction within cost of sales as not got a sale matched to

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10
Q

Inventory = (and how each obtained)

A

Quantity (inventory count) x Valuation (more subjective, guidance in IAS 2, lower of Costs vs NRV)

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11
Q

What is the basic rule for valuation per IAS2?

A

Inventories should be measured at the lower of cost and net reliable value.
Example of prudence

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12
Q

What are some situations where NRV is likely to be less than cost?

A
  • increase in costs/fall in selling price
  • physical deterioration
  • obsolescence of products
  • part of marketing strategy (January sale/new competitor)
  • errors in production/purchasing
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13
Q

If inventory is expected to be sold at profit:

A
  • value at cost
  • do not anticipate profit
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14
Q

If inventory is expected to be sold at a loss:

A
  • value at NRV
  • Do provide for future loss
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15
Q

What makes up cost of item of inventory?

A
  • Cost of Purchase
  • Costs of Conversion
  • Other costs to get to current/present location and condition
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16
Q

What can be included in Cost of Purchase?

A
  • purchase price
  • import duties
  • transport/handling
  • less any trade discounts/rebates
17
Q

What can be included in Costs of Conversion?

A
  • relating to production
    costs directly related to units of production
  • direct labour
    Fixed/Variable production overheads incurred to convert into finished, allocated on systemic basis
  • allocation of fixed overheads (electricity)
18
Q

Fixed Production Overheads

A
  • indirect costs of production that remain relatively constant
  • regardless of volume of production
  • factory management/admin
19
Q

Variable Production Overheads

A
  • indirect costs vary directly with volume of production
  • indirect materials/labour
20
Q

What Other Costs included in Cost of inventory item?

A
  • carriage inwards
  • NOT carriage outwards that is selling/distribution expense
21
Q

Costs not to be included in cost of inventory item

A
  • abnormal amounts of wasted material/labour
  • storage unless necessary before next production stage
  • selling costs
  • admin overheads not contributing to get inventory to present condition/location
22
Q

Net Realisable Value

A

estimated selling price
less estimated costs of completion
less estimated selling/distribution costs

23
Q

Why is the cost of each item in inventory sometimes hard to find?

A
  • rule should be applied on an item-by-item basis
  • but if various batches purchased at different times/prices hard to determine aboveW
24
Q

What methods can be used to approximate cost of inventories?

A
  • First in, First Out (FIFO)
  • Average Cost (AVCO)
    Last in, first out - not permitted by IAS 2
25
Q

What is assumed under FIFO:

A
  • first goods purchased/produced fist to be sole
  • remaining inventories are from most recent purchases
26
Q

How to work out Closing Inventory using FIFO?

A

Purchases along x axis, sale down y
- sales come out of first purchase and so on
- once all sales accounted for, prices put in for inventory left and calculated

27
Q

What are the two types of Average Cost to be calculated?

A
  • Periodic AVCO cost of all purchases during year divided by total number of units purchased
    Can’t be used for IAS 2
  • Continuous weighted AVCO- weighted average of cost of similar items, recalculated each time new item is purchased
28
Q

How to work out Closing Inventories with AVCO continuous weighted?

A

Across X axis- units, cost, average unit cost, total cost, cost of sales
purchases/sales filled in on y axis
Every time new purchase average cost is worked out from other columns
Each sale is put in with current average unit cost
total cost column on any sale is cost of sales

29
Q

How should FIFO/AVCO be evaluated against each other?

A
  • has to match way business operates
  • FIFO more realistic value on SoFP if that is the way company operates
  • AVCO can be complex as has to be weighted average- can be good if selling liquids/petrol
30
Q

How would rising prices affect cost and profit?

A
  • FIFO would produce higher closing inventory figure
  • so a lower cost of sales figure
  • therefor higher profit figure than AVCO
31
Q

What are some methods to work out costs where inventory items are not interchangeable and so FIFO/AVCO can’t be used?

A

Standard Costs
- takes into account normal levels of materials/suppliers/labour/efficiency/capacity utilisation
- regularly reviewed/revised
Retail Method
- measure large number of rapidly changing items with similar margins
- cost of inventory = sales value - %gross margin

32
Q

When should inventory items be written off/down?

A

if become
- lost/stolen
- damaged/thrown away
- obsolete
- out of fashion
-sold at lower priceH

33
Q

How should inventory items be written off/down?

A

end of period any of these items value should be:
a) nothing if worthless
b) NRV, if less than original cost

means loss reported soon as foreseen and included in cost of sales as closing inventory

Financial Accounting (12 decks)

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