SAC 2 Part 2

Question 1

What is inventory defined as?

Answer 1

Goods purchased by a trading firm and held for the purpose of resale at a profit

Question 2

What is the importance of inventory?

Answer 2

It is the main source of revenue and key to earn profit, as well as one of the most significant assets the business controls

Question 3

In the inventory ledger account, what can be represented in the debit side? (Cross-Reference/Transaction)

Answer 3

Balance = Inventory on hand at start of period
Bank = Cash purchase of inventory
Accounts Payable = Credit purchase of inventory
Cost of Sales = Sales return of inventory

Question 4

In the inventory ledger account, what can be represented in the credit side? (Cross-Reference/Transaction)

Answer 4

Cost of Sales = Cash/Credit sale of inventory
Accounts Payable = Purchase return of inventory
Advertising/Drawings = Inventory used for advertising or as drawings
Balance = Inventory on hand at the end of the period

Question 5

What is an inventory card?

Answer 5

A subsidiary accounting record that records each individual transaction involving the movement in and out of the business of a particular line of inventory

Question 6

What does the cost price refer to?

Answer 6

The original purchase price of each individual item of inventory

Question 7

What are the two accounting mechanisms used to value inventory at the time of sale?

Answer 7

Identified Cost and FIFO method

Question 8

What does comparability require in terms of the identified cost or FIFO methods?

Answer 8

They need to be used consistently from one period to the next in order to compare similarities and differences

Question 9

What is the identified cost method?

Answer 9

A method of valuing inventory by physically marking each item in some way so that its individual cost price can be identified

Question 10

How does the identified cost method uphold faithful representation?

Answer 10

It is accurate and neutral, thus providing a faithful representation of real-world economic events, that is free from error and without bias

Question 11

Why may businesses choose not to use the identified cost method?

Answer 11

It is not always possible to mark or label individual items of inventory, as well as administration costs involved in labelling individual items and recording cost prices

Question 12

What is an inventory count?

Answer 12

A physical count of the number of units of each line of inventory on hand

Question 13

When is an inventory count most likely to be done?

Answer 13

At the end of a reporting period, just before the reports are prepared

Question 14

What is an inventory loss?

Answer 14

An expense incurred when the inventory count shows a figure for inventory on hand that is less than the balance shown in the inventory card

Question 15

What are some reasons for inventory loss occurring?

Answer 15

Theft, damage, undersupply from a supplier, oversupply to a customer

Question 16

What must the narration state for an inventory loss or gain?

Answer 16

Inventory loss/gain of … revealed by a physical inventory count (Memo …)

Question 17

What is the effect on the accounting equation for an inventory loss?

Answer 17

Assets decrease (inventory decreases)
Owners equity decrease (inventory loss expense decreases net profit)

Question 18

What is an inventory gain?

Answer 18

A revenue earned when the inventory count shows a figure for inventory on hand that is more than the balance shown in the inventory card

Question 19

What are some reasons for inventory gain occurring?

Answer 19

Oversupply from a supplier or undersupply to a customer

Question 20

What is the effect on the accounting equation for an inventory gain?

Answer 20

Assets increase (inventory increases)
Owners equity increase (Inventory gain revenue increase net profit)