Module 4 Inventory and VAT

Question 1

Define Inventory

Answer 1

Inventory consists of assets which are either:

1) Held for sale in ordinary course of business (ie Finished goods & Goods for resale)
2) In the process of production for such sale (ie work in progress)
3) In the form of materials or supplies to be consumed in the production process or the rendering of services (ie raw materials and consumables)

Inventories are CURRENT ASSETS

Question 2

What costs are included in the cost of inventory?

Answer 2

1) Purchase cost
- Purchase price of materials
- Irrecoverable import duties and other taxes
- Transport and handling directly attributable to the acquisition of the goods
- Less any trade discounts, rebates and subsidies

2) Cost of conversion (Production cost)
- Direct costs related to units of production (eg direct labour)
- Indirect fixed and variable overheads incurred in converting materials into finished goods

Question 3

What costs are excluded from the cost of inventory?

Answer 3

• Non manufacturing overheads (e.g admin costs)
• Storage costs
• Selling costs
• Abnormal wastage costs

Question 4

What is the correct JE to account for the initial purchase of inventory on credit?

Answer 4

Dr SPL- Purchases (Expense up)
Cr Trade Payables (Liability up)
Journal entry to record credit purchases

Question 5

What is NRV?

Answer 5

Net resalable value

Is the estimated selling price minus estimated costs of completion and minus estimated costs necessary to make the sale

Question 6

How is closing inventory measured?

Answer 6

Closing inventory = Lower of (Cost, NRV)

Cost > NRV = No adjustment

Cost < NRV = Write down to NRV

Question 7

What is the formula for cost of sales?

Answer 7

Cost of sales = opening inventory + purchases - closing inventory

Question 8

What is the formula for AVCO?

Answer 8

    Total number of items available for sale