Inventory and revenue

Question 1

What is classed as inventory?

Answer 1

Raw materials, any working progresses, finished goods ready for resale.

Question 2

What are inventories valued at?

Answer 2

Valued at the lower cost or net realisable value.

Question 3

What is cost?

Answer 3

The cost of bringing an item to its present location and condition (purchasing and conversion costs)

cost of purchase = purchase price
+ directly attributable costs (import/delivery costs)

Question 4

What is net realisable value?

Answer 4

selling price - any completion costs - selling costs

basically (actual/estimated selling price less all costs to complete the sell)

Question 5

What are conversion costs?

Answer 5

Costs directly related to producing inventory units (labour, material and allocation of overheads)

Question 6

What are overheads based on?

Answer 6

Variable overheads are based on actual units of production.

Fixed production overheads are based on budgeted normal levels of production.

Question 7

What are actual unit costs?

Answer 7

The actual cost of purchasing identifiable units of inventory.

• only used when individually distinguishable and of high value.

Question 8

What is FIFO?

Answer 8

first in first out.
When a sale is made, the costs of sales is cost of oldest goods purchased.
inventory should be made up of most recently delivered.

Question 9

What is AVCO?

Answer 9

Average cost
Cost of an item of inventory is calculated by taking the average of all inventories held.
Can be calculated at end of month/year or every time a sale is made.

Question 10

Why would net realisable value be lower than the cost?

Answer 10

it shouldn’t be but could be due to:
- damage
- obsolescence
- increase in material/labour/overhead cost
- exchange rate movements
- seasonal reason
-loss leader strategy

Question 11

What are the disclosure requirements?

Answer 11

• state what accounting policy used
• total carrying amount
• number of inventories carried at NRV
• number of inventories recognised as expense
• details of any circumstances that have led to the write-down of inventories to their NRV

Question 12

What are some ethical issues regarding revenue?

Answer 12

• scandals, can be manipulated and incorrectly inflated.
• largely an issue of timing (accounting periods)
• cut off errors are the most common errors

Question 13

How to identify revenue?

Answer 13

1) identify the contract
2) identify separate performance obligations (is installation included?)
3) Determine the transaction price
4) allocate the transaction price to performance obligation
5) recognise revenue as or when a performance obligation is satisfied

Question 14

How to identify the contract?

Answer 14

This is an agreement between 2 parties creating rights/obligations.

revenue from contract can only be accounted for if
- party has approved contract
- each parties rights identified
- payment terms identified
- contract has a commercial substance (clearly business)
- probable that selling the entity will receive consideration.

Question 15

How to identify performance obligations?

Answer 15

• promise to transfer distinct goods/services to a customer.
• can only be distinct if sold separately and has a distinct function.
• may be that another party is involved in providing the goods/service (entity must determine the nature of the performance obligation.

Question 16

when is the entity a principal and when is it an agent?

Answer 16

Entity is a principal if they are providing the good/service itself and controls delivery.

Entity is a agent if arranges the goods/service to be provided by another party and only recognise commission as revenue.

Question 17

What should warranties be classified as?

Answer 17

If warranty is an extra service it falls within the scope of IRFS 15 and should be treated as a separate performance obligation.

A warranty that only provides assurance that the item will work as intended (guaranteeing a repair) is recognised as a provision.

Question 18

How to determine the transaction price?

Answer 18

transaction price is the consideration the selling entity receives after fulfilment of its performance obligations.

Can use variable consideration or financing

Question 18

What is financing?

Answer 18

Only required if payment is expected to occur greater then 12 months later. This is when the entity adjusts the promised amount of consideration for the effects of time value of money.

Question 18

what is variable consideration?

Answer 18

Measured as an estimate the entity expects to receive. Only if it is highly probable that a significant reversable in the amount of revenue will not occur after the event.

Question 19

How should you value non-cash considerations?

Answer 19

Valued at fair value.

Question 20

How to allocate the transaction price?

Answer 20

It needs to be allocated between different performance obligations.

if the standard price is not directly observable then it must be estimated.

Any discount must be evenly allocated.

Question 21

When should you recognise revenue?

Answer 21

• when an entity satisfied a performance obligation by transferring the good/service to the customer.
• if performance obligation is satisfied over time, revenue must be recognised over time.
• if performance obligation is satisfied at a particular time, revenue must be recognised at the point the control passes.

Question 22

What is a consignment sale?

Answer 22

Effectively ‘sale or return’ where by the original seller only recognises sale when the buyer sells good to third party.

Question 23

What is bill and hold arrangements?

Answer 23

When the entity bills the customer but delays delivery. entity must determine whether the control has been transferred to customer.

Question 24

What is sales with a right to return (refunds)?

Answer 24

When you recognise revenue for goods transferred and a liability for refunds.

Question 25

What are warranties?

Answer 25

if a warranty has been separately purchased by the customer or provides a service, it should be recognised as a separate performance obligation.