Lecture 7

Question 1

inventories = ?

Answer 1

stock of goods for resale

Question 2

what is the type of inventories for retailers?

Answer 2

merchandise purchased

Question 3

what is the type inventories for manufacturers?

Answer 3

raw materials, work in process, finished goods

Question 4

what are the two ways entities can record inventory transactions?

Answer 4

perpetual inventory system
periodic inventory system

Question 5

what are the characteristics of a perpetual inventory system?

Answer 5

used by the vast majority of large entities

provides immediate updates about inventory on hand

inventory & COGS are impacted each time a trading transaction occurs

Question 6

what is the journal entry for a trading transaction with the perpetual inventory system?

Answer 6

when goods are purchased
- debit inventory
- credit cash/bank

when goods are sold
- debit cash/bank
- credit sales revenue
- debit COGS
- credit inventory

Question 7

at the end of the period, how are sales & cost of sales balances handled?

Answer 7

they’re transferred to the profit&loss statement

Question 8

what are the characteristics of a periodic inventory system?

Answer 8

more suitable to smaller entities

inventory purchased is recorded in temporary ‘purchases’ account

Question 9

what is the journal entry for a trading transaction with a periodic inventory system?

Answer 9

when goods are purchased:
- debit purchases
- credit cash/bank

when goods are sold:
- debit cash/bank
- credit sales revenue

Question 10

with the periodic inventory system, when are updates to COGS and inventory made?

Answer 10

at the end of the period

Question 11

with the periodic inventory system is the inventory account constantly updated?

Answer 11

no, it’s updated periodically

Question 12

how do you calculate COGS?

Answer 12

opening inventory + purchases - closing inventory

Question 13

how are accounts updated at the end of a period with the periodic inventory system?

Answer 13

• debit COGS (to increase it)
• credit inventory (to decrease it)
• debit COGS (to increase it)
• credit purchases (to close it off)
• debit inventory (to increase it)
• credit COGS (to reduce it)

Question 14

at the end of the period, with periodic inventory system, how do you handle the accounts?

Answer 14

close of the sales and the COGS account and transfer them to the profit&loss statement

Question 15

what are the different methods used in determining COGS and inventory?

Answer 15

specific identification

first in, first out (FIFO)

last in, first out (LIFO)

weighted average cost (AVCO)

Question 16

what does IAS2 state regarding inventory cost flow assumptions?

Answer 16

where inventories are dissimilar, specific identification should be used to measure inventories

Question 17

what policy must be applied to inventory cost flow assumptions?

Answer 17

consistency

same method must be used consistently