Week 5

Question 1

Inventory

Answer 1

Inventory is a tangible resource that is held for resale in the normal course of operations.
The phrase ‘intended for resale’ differentiates inventory from other assets.
Following the cost principle, inventory is recorded at its acquisition cost. This includes all costs incurred to get the inventory delivered or prepared for resale.

Question 2

Examples of costs included in inventory

Answer 2

Items affecting the cost of inventory include, but are not limited to:
purchase price
any taxes or duties paid
costs for shipping the product and insurance during transit
labour required to assemble the product
returns and allowances
purchase discounts from the vendor (seller)

When you buy from eBay it the total cost of having it placed into your hands – cost plus postage or cost with ‘free postage’ whichever is cheaper.

Question 3

Types of inventory systems

Answer 3

Both the recording of inventory purchases and the cost of goods sold depends on a company’s inventory system.. Perpetual system and periodic system.

Question 4

perpetual

Answer 4

Under a perpetual system, cost of goods sold is updated each time inventory is sold (easily facilitated by barcodes).

Question 5

periodic

Answer 5

Under a periodic system, cost of goods sold is calculated and recorded only at the end of the period after a physical stocktake (therefore sometimes known as the physical inventory system).

Question 6

Purchase discount

Answer 6

Photo in favourites 17/8/18

Question 7

Summary of net purchases of inventory

Answer 7

Gross purchases

Add transportation in

Less: purchase returns and allowances
Purchase discounts

Net purchases

Question 8

Inventory costing methods

Answer 8

Calculate the cost of goods sold using different inventory costing methods.

To determine the cost of inventory sold, companies can use one of the following four inventory costing methods:
specific identification
first-in, first-out (FIFO)
last-in, first-out (LIFO)
moving average

Question 9

Calculating moving (weighted) average

Answer 9

The average called a moving average because a new weighted average cost is calculated after each new purchase rather than calculating a weighted average at the end of the period.
Therefore, average need to be calculated after each purchase.

Question 10

Calculating moving (weighted) average formula

Answer 10

Average unit cost = Cost of goods available for sale currently divided by Total No. of units available for sale
currently

Question 11

Comparing inventory costing methods

Answer 11

Understand the profit and loss and tax effects of inventory cost flow assumptions.

Question 12

When does specific identification not work

Answer 12

Specific identification isn’t possible if one item cannot be distinguished from another (e.g. all have the same bar code). Then we need to make one of the following inventory flow assumptions:

FIFO assumption
LIFO Assumption
Moving Average assumption

Question 13

FIFO assumption

Answer 13

The FIFO method assigns the costs of the first and, in this case, less expensive units purchased to cost of goods sold, thereby giving the lowest cost of goods sold. It also assigns the costs of the last and more expensive units to ending inventory, thereby yielding the highest ending inventory.

Question 14

LIFO Assumption

Answer 14

The LIFO method assigns the costs of the last, and in this case, more expensive units to cost of goods sold, resulting in the highest cost of goods sold. The costs of the first and less expensive units are assigned to ending inventory. We don’t use LIFO for reporting or tax in Australia.

Question 15

Moving average assumption

Answer 15

The moving average (weighted average) assigns the average costs of all units purchased to cost of goods sold. Therefore, it yields cost of goods sold and ending inventory that fall in between the FIFO and LIFO extremes.

Question 16

FIFO yields

Answer 16

highest Ending inventory

Lowest Cost of goods sold

Question 17

Moving average yields:

Answer 17

Middle Ending inventory

Lowest Cost of goods sold

Question 18

LIFO yields:

Answer 18

Lowest Ending inventory

Lowest Cost of goods sold

Question 19

Lower-of-cost-and-net-realisable-value

Answer 19

The cost principle requires that inventory be recorded at its cost.
Because of the principle of conservatism, accounting requires that inventory be reported at its net realisable value if the NRV is lower than the inventory’s cost.
This is known as the lower-of-cost-and-net-realisable-value LCNRV (sometimes called the lower-of-cost-or-market)
This is applied at the end of each accounting period.