Week 3 - Analysis of Financial Statements

Question 1

What is inventory?

Answer 1

• Goods bought or manufactured for resale but unsold
  
  • Because: Timing difference between production capacity and customer demand

Question 2

How is inventory valued? (meaning: what is the rule according to IAS2)

Answer 2

• Valuation (IAS2) is the lower of cost or net realisable value
  
  • Effect on Income Statement & Statement of Financial Position

Question 3

What do the costs of inventory include?

Answer 3

Cost includes all costs of purchase or manufacture to bring inventory to its present location and condition

Question 4

What are the the three types of inventory? (in the manufactoring proces?

Answer 4

1. Raw materials – pre-production
2. Work in progress - uncompleted
3. Finished goods – manufactured or purchased and ready for sale

Question 5

This is the flow of costs in manufacturing. When does the first expense occur (in the income statement)? And what can the rest be described as?

Answer 5

The last movement (lower right corner) is the first (and only) expense. The rest is changes in assets

Question 6

What is the technique to calculate the costs for differentiated products? (e.g. a vehicle to a car dealer)

Answer 6

Actual cost for each item

Question 7

What are the techniques to calculate the costs for undifferentiated/similar products?

Answer 7

• Weighted average
• FIFO (first in, first out)
• LIFO (last in, first out) – no longer allowed in UK

Question 8

Calculate the cost of 6,000 units sold and the value of inventory.

1. using Weighted average
2. using FIFO

Answer 8

Question 9

When should Net Realisible Value be used?

What is the new value?

Give an example?

Answer 9

Answer should include three key ideas:

1. When for any reason company will no longer be able to sell existing stock or only be able to sell with a significant loss of value;
2. Maximum value for which stock can be sold, net of any expense required to be able to sell it
3. any numerical example is acceptable: 3 marks only if example includes expenses such as transport or marketing

Question 10

What does Net Realisble Value proceed of?

Answer 10

Proceeds of sale, less costs of disposal

Cost of product £15
Discounted sales price £12 but incurs transport cost of £2
Net realisable value: £10 – use this value as it is lower than cost

Cost of product £15
Scrap value £8 – use this value as it is lower than cost

Question 11

What are the types of Production Methods?

Answer 11

1. Custom: Unique, single products
2. Batch: A quantity of the same goods produced at the same time ( a production run)
3. Continuous (or process): Continuous production process of the same, indistinguishable goods
   4.

Question 12

What is Job Costing and Process Costing?

Answer 12

Cost of each job vs. Cost of running a process for x numbers of hours a day