topic8 year end adjustments: inventory valuation and inventory adjustments

Question 1

accounting for inventory

Answer 1

-inventory is important for many businesses as it affects both profit and liquidity measures

Question 2

valuation of inventory

Answer 2

-inventory is valued at the lower of cost or net realisable value(NRV)
-reason for valuing at the lower of the two amounts is to apply the accounting concept of prudence
cost:
-includes: purchase price plus incidentals
-could be valued using LIFO, FIFO, WAC or standard cost
-may use full or marginal cost
-cost is after trade discounts but before early settlement discounts
net realisable value:
-actual or estimated selling price
less:
-cost of getting goods into saleable condition, includes all other costs to completion and remedial work such as repainting
-any direct cost associated with selling the goods e.g delivery expenses

Question 3

double entry for inventory

Answer 3

accounted for as a current asset on SFP and a deduction to cost of sale in P or L:
-DR inventory(increase asset on SFP), CR closing inventory(decrease costs on P or L)

closing inventory effectively appears as two ledger accounts:
-SFP asset(debit entry)
-P or L reduction of costs of sales(credit entry)