Section 2.6

Question 1

When non-current assets are disposed of for an amount different from their book value, how should the gain or loss be reflected?

Answer 1

Should be reflected for the year and disclosed separately if material

Question 2

What are the two categories of current assets?

Answer 2

inventories and trade receivables

Question 3

When do trade receivables arise?

Answer 3

When a company sells goods or services to a customer but the customer is given time to pay.

Question 4

What are the three categories of inventories?

Answer 4

Raw materials - inventory purchased but not yet converted into final saleable form.

Work in progress - raw materials partly converted into final saleable form

Finished goods - items fully converted into final saleable form

Question 5

What happens to an inventory when it is sold?

Answer 5

Converted from being a current asset and transferred to the income statement as the item ‘costs of goods sold’

Question 6

What does UK GAAP and IFRS required from the value of the inventory on the balance sheet?

Answer 6

that it is valued at the total of the lower of cost and net realisable value of the separate items of inventory or groups of similar items.

Question 7

When may problems arise with valuing inventory?

And what is the solution to this?

Answer 7

When products are brought or produced in batches and where some batches have a different price to others.

The solution is to make an assumption about the physical flow of inventory in a business?

Question 8

What are the three assumptions of inventory physical flow?

Answer 8

1) First-in-first-out (FIFO)
2) Last-in-first-out (LIFO)
3) Weighted average method

Question 9

What is FIFO

Answer 9

assumes that when an item of inventory is sold, that the item is the oldest one held.

Ie. the items that came into stores first should be the first to go out.

Question 10

What is LIFO?

Answer 10

more common in the USA

allows goods to be charges at the latest price they could have come into store.

older, lower value items left in stock

Question 11

What is weighted average?

Answer 11

inventory sold is assumed to be drawn proportionately from the units held at the time of sale.

Question 12

which assumption of inventory physical flow can not be used under FRS 102 or IFRS? and why?

Answer 12

LIFO

In a period of rising prices LUFO shows a higher cost of goods sold compared to FIFO and consequently a lower profit figure.