Lecture 6

Question 1

What are the main inventory recording systems?

Answer 1

1. Perpetual
2. Periodic

Question 1

How is ending inventory calculated under the perpetual system?

Answer 1

beginning inventory + inventory purchase = CoGS + ending inventory

Question 2

What is the perpetual inventory system?

Answer 2

Record sold amount, infer unsold amount

Question 3

What is the periodic inventory system?

Answer 3

Record unsold amount, infer sold amount

Question 4

How is inventory calculated under the periodic system?

Answer 4

(beginning inventory + inventory purchase) - ending inventory = CoGS

Question 5

Under the periodic inventory system, which accounts are used to record sales?

Answer 5

• Assets (cash or TR)
• Revenue (sales)

Question 6

Under the periodic inventory system, what happens at the end of the accounting period?

Answer 6

• Starting inventory & inventory purchase are removed from Assets
• Ending inventory is added to Assets
• CoGS is added to Expenses

Question 7

What are limitations of the perpetual inventory system?

Answer 7

Ending inventory is only inferred, may not be accurate

Question 8

At what value should inventory be recorded on the SoFP?

Answer 8

The lower of the acquisition cost & the NRV

Question 9

What does NRV stand for?

Answer 9

Net realisable value

Question 10

Which accounts change when performing inventory write down?

Answer 10

• Assets (inventory)
• Expenses (CoGS)

Question 11

When is inventory write down performed?

Answer 11

At the end of the accounting period, if NRV < acquisition cost

Question 12

Which accounts change when bad debts are written off?

Answer 12

• Assets (trade receivable)
• Expenses (bad debts expense/written off)

Question 13

True or false: bad debts expense is an operating expense

Answer 13

True

Question 14

What is another term for “allowance for trade receivables”?

Answer 14

Provision for doubtful debts

Question 15

Where is provision for doubt debts displayed on the SoFP?

Answer 15

Assets (contra-asset)

Question 16

Who sets the bad debt rates?

Answer 16

Company sets rates for itself

Question 17

What accounts change when provision for doubtful debt is increased?

Answer 17

• Assets (provision)
• Expenses (bad debt expense)

Question 18

What accounts change when provision for doubtful debt is reversed?

Answer 18

• Assets (provision for doubtful debt)
• Revenue (reversal of bad debt expense)

Question 19

What are some areas where firms can use their discretion in accounting?

Answer 19

• Depreciation (useful life, residual value)
• Inventory valuation (FIFO vs AVCO, NRV)
• Provision for doubtful debt

Question 20

Under the periodic inventory system, which accounts are used to record inventory purchase?

Answer 20

• Assets (Purchase)
• Assets (Cash) or Liabilities (Trade Payable)