Inventory and tangible non-current assets

Question 1

Inventory: cost includes…

Answer 1

1. Purchase price
2. Delivery costs
3. Import taxes
4. Duties
5. Conversion costs (costs in converting raw materials into product eg, labour)

Question 2

Net realisable value represents…

Answer 2

Expected selling price - any costs to be incurred to make that sale

Question 3

Non-current asset =

Answer 3

Non-current asset = Any asset acquired on a long term basis to be used in providing a service to the business.

Question 4

Tangible non-current assets examples

Answer 4

• Land and buildings
• Motor vehicles
• Plant and machinery

Question 5

Cost of a tangible asset includes…

Answer 5

• All amounts incurred to acquire the asset
• Any amounts directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the way intended.

Question 6

Examples of directly attributable costs of an asset

Answer 6

• Purchase price
• Delivery costs
• Stamp duty, import duties
• Costs of preparing the site for installation and assembly for the asset
• Professional fees eg. legal/architects
• Cost of testing if the asset is functioning

Question 7

Items which can’t be included in the cost of property, plant and equipment…

Answer 7

• Training costs
• Wastage
• Administration
• General Overheads
• Repainting
• Repairs
• Renewals

Question 8

How we account for the assets cost:
If purchased with cash

Answer 8

• Increase non-current assets in statement of financial position
• Decrease current assets (cash + equivalents) in statement of financial position

Question 9

How we account for asset’s cost:
If purchased on credit

Answer 9

• Increase non-current assets in statement of financial position
• Increase current liabilities (trade and other payables) in statement of financial position

Question 10

Depreciation

Answer 10

Systematic allocation of the cost of an asset - its residual value over useful life

The cost of using the asset is matched to the income it generates over its useful life “accruals”

Question 11

Residual value

Answer 11

Estimated disposal value of the asset at the end of its useful life

Question 12

Useful life

Answer 12

Estimated number of years during which the business will use the asset

Question 13

Depreciation methods

Answer 13

• Straight-line
• Reducing balance

Question 14

Straight-line method

Answer 14

Depreciation charge for the period =
(cost-residual value)/useful life

Used when the pattern of use of an asset is consistent through its life
eg. buildings

Question 15

Reducing balance method

Answer 15

Depreciation charge for the period =
Rate of depreciation x carrying amount of the asset at the start of the period

Used to reflect the expectation that the asset will be used less as it ages eg. vehicles

Question 16

Carrying amount

Answer 16

“Book value”
Original cost of an asset - accumulated depreciation of the asset

Question 17

Inventory is valued at

Answer 17

The lower of cost and net realisable value