Inventory

Question 1

What is inventory

Answer 1

Inventory refers to goods purchased or manufactured for resale by a business. (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 2

How is closing inventory valued

Answer 2

Closing inventory should be valued at the lower of cost and net realisable value (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 3

Value of cost of inventory

Answer 3

Cost includes all costs in purchasing inventory and bringing it to its present location and condition.

Cost includes:
• Purchase price

• Import duties
• Carriage in
• Manufacturing costs such as labour, a proportion of overheads etc (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 4

Net realisable value ( NRV ) ?

Answer 4

The net realisable value of an item of inventory is its expected selling price, less:

• Costs to complete the manufacture of the item
• Any costs necessary to make the sale. (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 5

What is the prudence concept in this case?

Answer 5

The valuation of inventory at the lower of cost and net realisable value is an example of the application of prudence.

Prudence is an accounting concept which in simple terms means to err on the side of caution when recording transactions.

In the case of inventory, measurement at the lower of cost and NRV will ensure that the asset is not overvalued. (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 6

Ways of valuing inventory

Answer 6

• Inventory may be valued according to:

– FIFO (first-in-first-out)

– AVCO (average cost)

– LIFO (last-in-first-out – not an acceptable method under IAS) (D3c, D3g) (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 7

Impact on profit

Answer 7

When considering the impact on profit as a result of an inventory adjustment, debits to the statement of profit or loss will reduce profit/increase a loss whereas credits to the statement of profit or loss will increase profit/reduce a loss. (D3i) (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 8

In order to account for cost of inventory at closing date. Few assumptions are made..

Answer 8

• First in first out (FIFO) – the first items purchased are assumed to be the first items sold and therefore closing inventory is made up of the most recently purchased items.
• Last in first out (LIFO) – the most recent items purchased are assumed to be the first items sold and therefore closing inventory is made up of the oldest items

• Average cost (AVCO) – a weighted average cost per unit is attributed to the number of units of closing inventory

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 9

Which assumption is problematic and why?

Answer 9

Of these three assumptions, LIFO is problematic: It would result in an out-of-date inventory valuation, and for this reason it is disallowed by IAS 2.

(LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 10

What is the impact of different assumptions on the financial statements

Answer 10

A higher closing inventory valuation

• Higher net assets value
• Higher profits

A lower closing inventory valuation

• Lower net assets value
• Lower profits.

As with any accounting estimate, however, a business may not change its assumption from period to period simply because it gives better results. (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 11

Recording purchases of goods for resale

Answer 11

Dr Purchases

Cr Cash or payables (LSBF)

LSBF. ACCA F3 Study Manual 2017/18. London School of Business and Finance, 20170501. VitalBook file.

Question 12

Period end inventory records

Answer 12

Debit purchases(spol) following each purchase of goods for resale

At year end count inventory value inventory and record the following journal

Dr inventory(asset) - sofp
Cr closing inventory - sopl

Journal for opening inventory at start of next acc period would be
Dr opening inventory ( sopl) and cr inventory(sofp)

Question 13

Continuous inventory records

Answer 13

Real time records

As each item of inventory is sold the applicable cost to purchase that item is then allocated to cost of sales

Dr cost of sales  (sopl)
Cr inventory(asset) - sofp

Question 14

Inventory and accruals concept

Answer 14

Sales revenue is matched with the cost of goods sold during the period

Question 15

Learn

Answer 15

Cost of inventory can include (less trade discount)
Carriage inwards
Overheads
Depreciation of plant or equip

General admin overheads are admin expenses and should not be counted in cost of sales
Carriage out is a distribution expense

Question 16

Periodic method of calculating avco

Answer 16

Average cost = (total value/total units) * units unsold

Question 17

Cost of inventory should include

Answer 17

Purchase price
Import duries
Less any trade discounts received

Question 18

Cost of inventory must invlude

Answer 18

production overheads