Theory: Accounting for Inventories Flashcards
What is the difference between inventories and other assets?
Inventories are items held by the business that are intended for sale in the normal operations of the business. Assets are not intended for sale.
Do unit costs always stay the same? Why/why not?
No unit costs can change due to
- bulk buying and receiving discounts
- sale/discounts periods reduce cost
- inflation
- increase in wages and salaries
- increase in material costs
Explain and give an example of weighted average
Weighted average costing method is a method of assigning the total costs of inventory equally among the total like units. It is useful for inventory items that are not distinguishable, for example gas or fuel.
Explain and give an example of FIFO
FIFO is a method of costing inventories. It is especially suitable for individual inventory items that are not easily identifiable. FIFO is based on the assumption that the oldest inventories are sold first. Suitable inventories for this method would be muesli bars at a supermarket, nails at a hardware store etc.
Explain what the perpetual and periodic inventory systems are.
Periodic inventory system is a method of account for inventories that requires a physical stock count whenever the value of the closing inventories is required. It does not keep a running balance of inventories.
Perpetual inventory system keeps a continuous record of all items purchased and sold. All purchases are recorded at cost and sales price
STOCKTAKES
- what is a stocktake?
- why is a stocktake done?
A physical count of inventories
To identify how many stock are on hand in a periodic system, so cost of goods sold and inventories can be accurately reported in the financial statements
Stock continue
- necessary steps in stocktake
- measures to be taken to avoid errors
Arrange items for convenient counting, create stock sheets with names and number of items to be counted, provide accurate supervision and spot
Auditor, supervision, spot checks, organisation
What are inventories
Inventories are items held by the business that are intended for sale in the normal operation of the business.
What is Net Realisable Value (NRV)?
Is the estimated proceeds of sale less, where applicable, all further costs to the stage of completion and less all costs to be incurred in marketing, selling and distribution to customers. NRV can be lower than the recorded cost due to goods becoming obsolete, damaged etc.
