Inventory Valuation

Question 1

Categories of Inventory

Answer 1

1. Retail entity
   
   • goods for resale
   • consumables
2. Service entity
   
   • work-in-progress
   • consumables
3. Manufacturing entity
   
   • raw materials
   • work-in-progress
   • finished goods
   • consumables

Question 2

Valuation Rule

Answer 2

IAS 2 requires:

• inventories are valued at the lower of the purchase cost
  i. e. what a business paid for
• and the net realisable value (NRV)

Question 3

Net Realisable Value

Answer 3

estimated proceeds from the sales of inventory - cost to be incurred in marketing, selling and distributing

Question 4

Why might NRV < cost?

Answer 4

• obsolete, deteriorated or damages goods
• unexpected fall in market price
• loss leader goods
• bad buying decisions

Question 5

Purchase cost of goods for resale and raw materials

Answer 5

• invoice price, net of trade discounts and VAT
• import duties (if sourced in a foreign country) and other taxes that are not recoverable
• transport costs (delivery costs)
• handling costs
• any other costs that are directly attributed to obtaining the inventory

Question 6

What are “fungible” inventories?

Answer 6

substantially indistinguishable goods
-unable to identify the batch of goods that were purchased were sold and which are in inventory

cannot know actual cost of goods sold and goods left

Question 7

what is the perpetual inventory system?

Answer 7

a systematic method of valuing fungible inventory

-i.e. a continuous record of the quantity and value of inventory

Question 8

What are the cost flow assumption?

Answer 8

FIFO
LIFO
AVCO

Question 9

What is FIFO?

Answer 9

First In, First Out

• the oldest inventory sold first
• assumes physical movement of goods over time will have this sequence
• perishable goods

Question 10

What is LIFO?

Answer 10

Last In, First Out

• most recently purchased inventory is sold first
• physical movement of goods e.g. coals sand,

-justified in time of rising prices as cost of materials issued to production (and cost of sales) will reflect most recent prices, thus profit is realistic

Question 11

What is AVCO?

Answer 11

-cost of sales is the average cost of all the purchases of inventory

• physical movement of goods where they are stored together in a single container
• prices fluctuate as it will give a more representative ‘normal’ price, thus more comparable cost of sales figure

Question 12

How does rising prices affect valuation?

Answer 12

FIFO
-higher profit, and up to date value of inventories

LIFO
-lower profit and out of date value of inventories

AVCO
-average profit but the inventory valuation is not an actual purchase price

Question 13

Define window dressing

Answer 13

the selection of valuation technique and presentation that allows to portray the performance and financial position of an entity in a more favourable light