Week 5 - Inventory and PPE

Question 1

What is a perpetual inventory system

Answer 1

Company keeps detailed record of each purchase and sale and determines COGS each time a sale occurs

Question 2

What is a periodic inventory system

Answer 2

Companies do not keep a detailed record of everything, insteaad calculate COGS at the end

Question 3

Cost of Sales formula

Answer 3

Opening inventory + Purchases - closing inventory = COGS

Question 4

What is FIFO

Answer 4

First in First Out - goods bought or produced first are sold first

Question 5

What is AVCO

Answer 5

Weighted average cost of inventory held

Question 6

What is LIFO

Answer 6

Last in First Out - goods bought or produced last are sold first

Question 7

Determine COS and end inventory using FIFO if beginning inventory wsa 3000T @10/T, purchases were 4000T @11/T and 7000T @12/T, sold 9000T

Answer 7

First 9000 tonnes are assumed to be the ones sold (FIFO), so 3000Tx10 + 4000Tx11 + 2000Tx12 = 98000 COS
End inventory = Beginning+purchases-Sold = 5000

Question 8

Determine COS and end inventory using AVCO if beginning inventory was 3000T @10/T, purchases were 4000T @11/T and 7000T @12/T, sold 9000T

Answer 8

AVCO = total spent on inventory (3000x10 + 4000x11 + 7000x12) = 158k
divided by total tonnes bought = 14k
AVCO = 158/14 = 11.29 per tonne

so COS = 9000 sold x 11.29
Closing inv = 5000x11.29

Question 9

What do FIFO LIFO and AVCO affecg based on which u use

Answer 9

COS and thus Gross Profit and Ending Inventory

Question 10

What is the initial value/meaasurement of a PPE item

Answer 10

Cost of purchase and costs directly attributable to bring it to working condition eg installation, engineers, architects

Question 11

What are extra subsequent measurements for PPE value

Answer 11

Routine repairs and maintanence costs (expense on IS)

Expenses extending useful life (added to cost of the asset on the BS)

Question 12

what are the two models a company can use to determine value of PPE

Answer 12

Cost model - carried at cost less dep and impairments

Revaluation Model - carried at revalued fair amount less dep and impairments

Question 13

What happens to BS if there is a revaluation gain of land costing 30k but valued at 40k

Answer 13

Dr land 40k (PPE up 40k)

Cr Revaluation reserve 40k (equity up 40k)

Question 14

Which four factors are considered when calculating depreciation of an asset

Answer 14

cost or fair value of asset
useful life
residual value of asset (disposal value/scrap value)
method of depreciation

Question 15

two depreciation methodss

Answer 15

straight line - constant charge over useful life

Reducing balance - decreasing charge over the life of the asset

Question 16

what is depreciation expense formula for straight line depreciation

Answer 16

Dep Exp. = (initial cost-residual value)/useful life

Question 17

how does reducing balance method work

Answer 17

dep exp = depreciation rate x NBV
e.g. initial cost 40k, dep 60%
Year 1 dep = 40k x 0.6 = 24000
Year 2 dep = NBV (40k-24k)x0.6 = 9600
Year 3 dep = NBV (Y2 NBV - 9600) x 0.6 = 3840
decreases over time

Question 18

what is the double entry for depreciation

Answer 18

Dr depreciation expense (IS expense)

Cr accumulated depreciation (asset goes down)

Question 19

what happens when useful life is reduced after a few years

Answer 19

calculate new depreciation expense (NBV previous year - residual value)/new useful life

Question 20

what is the double entry if a car has NBV of 50k which is currently valued at 30k

Answer 20

Dr impairment loss (expense on IS of 20k)
Cr PPE (Asset down 20k)

Question 21

How do you calculate gain/loss on disposal of non current asset (formula)

Answer 21

Gain/Loss on disposal = Net disposal proceeds - NBV

Question 22

A car was bought for 41k, depreciated for 2 years at 10k per year, and after 2 years was sold (disposal) for 27k. What is recorded on IS

Answer 22

41k-10k-10k = 21k = NBV after 2 years
27k-NBV (21k) = 6k gain on disposal
IS income of 6000

Question 23

what are the step by step account changes for disposal (dr and cr)

Answer 23

1. Dr disposal account, Cr noncurrent asset @ cost
2. Dr accumulated depreciation (remove accum dep), Cr disposal account
3. Dr cash (proceed from sale), Cr disposal account
4. Move from disposal account to gains or losses on disposal so Dr disposal account, Cr gains on disposal