Chapter 6 - Inventory

Question 1

What is the double entry to record closing inventory?

Answer 1

Dr Closing inventory (SFP)

Cr Closing inventory (SPL)

Question 2

When is inventory recorded in the accounting system?

Answer 2

At the end of the accounting period

Question 3

What is included in inventory?

Answer 3

• Raw materials
• Work in process
• Finished goods

Question 4

How is the value of inventory calculated?

Answer 4

You take the lower of either:

• Cost of each product
• Net realisable value

Question 5

What is net realisable value?

Answer 5

How much you are going to sell a product MINUS any costs left to enable the sale

Question 6

What happens if goods are stolen or destroyed?

Answer 6

They have no value in closing inventory but were included in purchases at cost.

To remedy this, the original cost of goods is removed from purchases.

The cost of goods is now charged as an expense

Question 7

What are the methods of calculating inventory cost?

Answer 7

• FIFO (first in, first out) - Assumes that first goods purchased are first goods to be sold. This means that inventory is always priced at up to date prices.
• AVCO (average cost) - Weighted average price for all units in inventory is calculated. Note: A new weighted average is calculated after every purchase of goods.
• LIFO (last in, first out) - Assumes that last goods purchased are first goods to be sold. This means that inventory is always priced at old (out of date) prices.

Question 8

What happens if a sole trader takes inventory from their business for their own use, i.e. Pizza?

Answer 8

Dr Drawings

Cr Purchases