Inventory Valuation

Question 1

What is an Inventory?

Answer 1

• A composition of Assets
• Assets held for resale, assets in the production process & assets in material form

Question 1

Why is Inventory Valuation important?

Answer 1

• Affects Profits and therefore Income Statement (COGS)
• Affects Strength and therefore SOFP (Counted as a current asset)

Question 2

What are the 3 different ways that a valuation could occur (NOT FIFO/LIFO/WAVCO)

Answer 2

• What it could be sold for before
• What it was bought for
• What it can now be sold for

Question 3

Define Net Realisable Value

Answer 3

• Estimated proceeds from the sale of items minus the cost of selling these items
• Equation: Future Benefit - (Selling Cost X Quantity)

Question 4

What is the Cost Flow Assumption?

Answer 4

• That low Inventory flows through the organisation (not an exact science)

Question 5

What are the 3 Cost Flow Assumptions?

Answer 5

• FIFO (First-In-First-Out)
• LIFO (Last-In-First-Out)
• WAVCO (Weighted Average Cost)

Question 6

What is the equation for Cost of Goods Sold?

Answer 6

• COGS = Sum of the cost of units purchased by the firm to sell
• COGS = Opening + Purchases - Closing

Question 7

What is the equation for Gross Profit?

Answer 7

• Gross Profit = Sales - COGS