Lecture Six Flashcards
What three things can inventory include
1- goods held for resale for customers
2- goods in progress of being produced ‘work in progress’
3- raw materials awaiting production
do services have inventory
no they dont
what type of inventory do car manufacters have
all 3 types
what does IAS stand for
International accounting standards
what must be put into place to ensure smooth running of accounting practices
standards, accountants to follow when preparing the financial statements
what does IAS 2 give guidance on
a - how to establish the cost of inventory
b - what to do if the resale value of inventory falls below the cost
What must the cost of inventory include
all costs associated with getting inventory to the place they r in now
1- cost of purchase: purchase price, import duties, carriage inward
2-cost of conversion: wages of staff making goods + share of production overheads
what about cost of purchases is an issue
cost of purchase still causes problem e.g. if price goes up and down across the year:
-the inventory u have left u don’t know at which price u bought them at: how do u know which ones are at the price. Hard to value
What are the two ways to value the remaining stock in a store using IAS2
FIFO and AVCO
what does fifo stand for
first in first out
what is the alternative acronym for FIFO and the meaning
LILO = last in last out
what does FIFO essentially mean
The last ones are the most recent arrivals
What does AVCO stand for
average cost
what does AVCO essentially say
a mixture of old and new stock was sold = a mixture is left
can businesses chose which to use can they switch
They have to chose one otherwise it can confuse stuff
is the avco or fifo right ? is it accurate?
no it is an assumption
how should u work out fifo?
by working backward, we want to identify how they shud be valued
under avco how do we determine the average cost
by calcuating a new average cost per unit each time a new bath of goods is received
what concept is when businesses must chose a method and stick
THE CONSISTENCY CONCEPT
What does NRV stand for
Net Realisable value
What does the NRV stand for
a current saleable value (- the expenses to finish the sale)
what can happen to inventory?
The resale value can be lower then the what it cost to buy- bc it can go out of sale/ damaged etc
what does ias2 state about NRV and what concept does it match
inventory must be valued in financial statement at the LOWER of cost and NRV - PREUDENCE concept
what is prudence concept
prudence concept = take within region a cautious view of figures, don’t overstate assets
-don’t want to make out business it better then it actually is
what are most sales made on in the uk
credit terms
what is meant when we state ‘credit terms’
customer can pay later or in instalments
what is double entry when the credit is sale
The invoice sent to customer and records:
DR Recieveables
CR sales
When the customer pays the invoice what happens to double entry
DR Cash at bank
CR Reciebables
What is the risk with credit sales
Some customers may never pay
what are the two situations to think of when discussing credit sales
Bad (irrecoverable) debts
Doubtful Debta
What is meant by bad/irrecoverable debts
highly unlikely that the debt WILL EVER be received. It should be REMOVED from the records.
What is meant by doubtful debts
Payment may be possible- but is doubt. The debt should remian in the account in case the customer actually pays - but shud be allowed for (may not get the money) (Prudence concept)
What happens to the double etnry and spl for bad debt
-If the debts are certainly irrecoverable = must be removed
DR Bad debt Expense (amount)
CR Recieverables (same amount)
-minus the recievable amount in the SPL e.g. if initally had total 6000, 300 is bad debt = 5700 recievable left
-bad debt expense will show in the SPL
Is the sales figure uneffected for a bad debt?
no, its unaffected
is bad debt an expense?
yes, bc it’s a running cost, cost of selling on credit
what is created for the doubtful debts and what does it do?
and allowance, it will be offset against the recieveables in the SPL
how may the allowance be determined
by the estimation of:
a- evaluating specific debts individually
b- analysing past experience to estimate the % which is unlikely to be paid
what is used to determine debt risk
aged receieveables report. Has past data of customers and when paid
Accounting for the allowance for doubtful debts - the scenarios
1- where an allowance is being set up for first time
-where the allowance increases in a subsequent year
2- where the allowance decreases in a subsquent year
how are bad debts recovered
if they r recovered maybe a year later the double entry is:
DR Cash at bank
CR Bad debts recovered
-recovered bd will show as a negative expensein SPL
-OR CAN CREDIT BANK DEBT EXPENSE
