Module 4: Inventories Flashcards
What are inventories?
Inventories (or ‘stock’) are current assets (<12 months):
- held for sale in the ordinary course of business;
- in the process of production;
- in the form of materials or supplies to be consumed in the production process or in the rendering of services.
What is the JE when an entity recognises the cost of inventories purchased on credit?
Dr P&L – purchases (temporary expense)
Cr Trade creditors (liability)
being credit purchases.
Why are purchases a temporary expense?
They are later transferred to cost of sales at the period end.
How are inventories measured/valued?
They are measured/valued at the lower of i. cost (purchase price) and ii. net realisable value (net figure inventory can be sold for).
Which two methods are used for assigning cost of inventories?
- First-in, first-out
- Weighted average cost
(rounded to the nearest pound).
First-in, first-out (FIFO)
Assumes that the items of inventory that were purchased or produced first are sold first and
consequently the items remaining in inventory at the end of the period are those most recently purchased or
produced.
Weighted Average Cost
The weighted average cost method divides the cost of goods available for sale by the number of units available for sale.
What is Net Realisable Value (NRV)?
The estimated selling price in the ordinary course of business - the estimated
costs of completion - the estimated costs necessary to make the sale.
When might the cost of inventories not be recoverable?
- If those inventories are damaged;
- If they have become wholly or partially obsolete;
- If their selling prices have declined
Cost of Sales
When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period
in which the related revenue is recognised.
How do we calculate cost of sales?
Cost of sales = Opening inventories + Purchases - Closing inventories
We calculate the cost of closing inventories (items not sold) via FIFO or WAC to find the COS.
What is the JE for when an entity recognises Cost of Sales and a movement in inventories?
Dr P&L – cost of sales (expense)
Dr/Cr Inventories (increase/decrease - current asset)
Cr P&L – purchases (empty temporary expense account)
being recognition of cost of sales and change in value of inventories.
Debit Inventory for an increase in inventories (asset) and credit for a decrease.
If we have to write-down inventories, what value do we use?
We write down any inventories to their NRV. The amount of the write-down and all losses of inventories are recognised as an expense in the period they occur.
Write-down of inventories to NRV - JE
Dr P&L – cost of sales (expense)
Cr Inventories (asset)
being write-down of inventoriesWhat two ratios are used when interpreting the relationship between sales, cost of sales and gross profit?
Margin and Markup
