Inventory

Question 1

What is the international accounting standard which gives the rules showing how to deal with inventory in our accounts?

Answer 1

IAS 2

Question 2

Describe inventory

Answer 2

• Inventory is goods that have been purchased or manufactured but not yet sold.
• They include goods for resale, raw materials, work in progress and finished materials.
• Sometimes referred to as stock in the workplace.

Question 3

What is the double entry for when a business purchases inventory items?

Answer 3

Dr Purchases
Cr Cash/Payables

Question 4

What is the double entry for when a business self items of inventory?

Answer 4

• Dr Cash/Receivables
• Cr Sales

Question 5

We do not purchase items and record them as inventory and then…

Answer 5

Take them out of inventory when we make the sale

Question 6

Inventory is a __ __ __

Answer 6

Period end adjustment

Question 7

What is the period end adjustment for inventory referred to as?

Answer 7

Closing inventory adjustment

Question 8

Describe the double entry for closing inventory

Answer 8

Dr Inventory (SFP) - It shows a current asset, we still own this inventory so it as asset to the business
Cr Closing inventory (P/L) - Effectively reduces purchases

Question 9

In the first period of trade we only need to be concerned with adjusting for the __ inventory. There would be no __ inventory as trading has only just started.

Answer 9

• Closing
• Opening

Question 10

It is unlikely we would have the __ goods in inventory at the end of next period. We would expect the __ inventory to be sold during the year and our __ inventory and our __ inventory to be different goods.

Answer 10

• Same
• Opening
• Closing

Question 11

Cost of sales formula

Answer 11

Cost of sales = Opening inventory + purchases - closing inventory

Question 12

What is the closing inventory adjustment?

Answer 12

Dr Inventory (SFP)
Cr Closing inventory (P/L)

Question 13

What is the opening inventory adjustment?

Answer 13

Dr Opening inventory (P/L)
Cr Inventory (SFP)

Question 14

What is the basic calculation for inventory?

Answer 14

Inventory = Quantity x Valuation, e.g., 10 calculations valued at £9 means inventory is valued at £90

Question 15

What is inventory valued at?

Answer 15

Inventory is valued at the lower of cost and net realisable value

Question 16

Describe ‘cost’ in terms of inventory

Answer 16

Cost is all the costs of bringing the goods to present location and condition, including cost of purchase, import duties, delivery charges, production, and conversion costs.

Question 17

Describe ‘net realisable value’ in terms of inventory

Answer 17

• NRV is the sales price of the inventory less any costs needed to complete the sales including any manufacturing or correction costs, sales and marketing costs.

Question 18

What concept is being applied by valuing inventory at the lower of cost and net realisable value?

Answer 18

Prudence concept

Question 19

What do we value inventory at if it is being sold at a profit?

Answer 19

At its cost and we do not anticipate any profit being made

Question 20

What do we value inventory at if it is being sold at a loss?

Answer 20

Net realisable value and we show the loss immediately

Question 21

When valuing inventory using the ‘lower of cost and net realisable value rule’ you must value inventory on a ___ by ___ basis, i.e., …

Answer 21

• Line by line
• You must value each inventory item separately, you cannot look at the total value of cost and total value of NRV.

Question 22

What is the issue when you purchase the same inventory items at different times of the year at different prices?

Answer 22

• When you put inventory in your storeroom it’s unlikely that you will identify which purchase date and purchase belongs to each item in your storeroom.
• This means you won;t know the actual cost price of each item in inventory at the year end.

Question 23

What are the 3 valuation methods?

Answer 23

1. FIFO - First In First Out
2. LIFO - Last In First Out
3. Av Co - Average Cost

Question 24

Describe FIFO (FIrst In First Out)

Answer 24

• This assumes that the first items that came into inventory will be the first ones sold.
• Therefore we assume the items in inventory are the most recent purchases so we use the most recent purchase price

Question 25

Describe LIFO (Last in First Out)

Answer 25

• This assumes the last items that come into inventory are the first ones that will be sold.
• Therefore we assume the items in inventory are the oldest purchases so we use the older purchase prices.

Question 26

Describe Av Co (Average Cost) valuation

Answer 26

• This involves calculation the average cost of the items bought during the year and valuing inventory using the average cost.

Question 27

Which of the 3 inventory valuation methods are allowed under IAS2?

Answer 27

FIFO and AvCo, LIFO is not allowed to be used in the preparation of financial statements as it uses out of date costs to value inventory.

Question 28

A reconciliations referees to a process that…

Answer 28

Compares two sets of records to make sure they are in agreement.

Question 29

A reconciliations referes to a process that…

Answer 29

Compares two sets of records to make sure they are in agreement.

Question 30

What is the main reconciliation to be carried out in relation to inventory?

Answer 30

Physical inventory check which compares the physical inventory to the inventory records held. This confirms the actual quantities held at the year end.

Question 31

What errors may occur when businesses keep records of their inventory that are updated throughout the year (4)?

Answer 31

1. Incorrect quantities may be entered into the inventory record, i.e., entering quantities which do not agree to the physical units received.
2. Inventory being damaged but not being recorded so the inventory valuation shows too high in the inventory records. Inventory may have been scrapped so is no longer physically held.
3. Inventory being stolen, therefore reminding in our records but not physically there.
4. Inventory has been sold but not despatched, it is still physically on our premises but is not in our records as it has been sold to a customer and is waiting to be dispatched.

Question 32

What will the physical inventory check give you?

Answer 32

Actual quantities and inventory records that can be amended for the results of the actual inventory counted. By doing this we are able to reconcile the actual inventory to the inventory records and ensure they are in agreement.

Question 33

If there are items on a business’s premise that have been sold and are ready for despatch do we include them in the inventory valuation?

Answer 33

No — they’ve already been sold to a customer, and the sale and purchase should be recognised in the profit and loss account for the period.

Question 34

Costs of storage for finished goods and selling expenses ___ be included in the inventory valuation. Purchase costs, delivery, and conversion ___ included.

Answer 34

• Cannot
• Are

Question 35

How might computerised accounting software treat inventory?

Answer 35

Instead of treating inventory as a period end adjustment, software can track movements in and out of inventory in real time.
- Automating the tracking of inventory can be useful for the smooth running of the business, as well as making the accounting process more efficient.
- Similarly, it will be helpful to be able to see a real time cost for each product line when making pricing decisions.

Question 36

What sort of accounting manipulation would include inventory?

Answer 36

• An easy way to manipulate profits is by including an incorrect inventory figure.
• Year end inventory adjustments puts a credit to the costs of sales therefore increasing profits.
• If this figure is overstated then a business can easily overstate its profits for the year.