Inventory

Question 1

Inventory (3 main types)

Answer 1

• they are assets
• raw materials
• work-in-progress
• finished goods - held for sale

Question 2

What impacts can the inventory figure have on financial statements?

Answer 2

• potentially large balance in current assets
• opening/closing inventory have direct impact on costs of sales and so profit

Question 3

What two ways must businesses ensure they accurately account for inventory?

Answer 3

• with the accounting adjustments open/close
• the valuation

Question 4

Two Different ways to count/record inventory

Answer 4

Period end inventory records
- traditional method
- end of period physically counted
Continuous Inventory Records
- keep track of inventory in/out and records continuously updated
- use automated inventory system

Question 5

Why does closing inventory need to be removed from SoP/L as Expense

Answer 5

it does not have any sales to match against the purchase so taken back to SoP/L as opening inventory in next period when will be matched with sales revenue produced from sale

Question 6

Cost of Sales =

Answer 6

opening inventory + purchases (cost of production if manufacturing industry) - closing inventory

Question 7

Where is cost of sales formula shown in statements?

Answer 7

Trading A/c
Opening Inventory
+costs of purchases/production
-closing inventory
cost of sales

Question 8

How is the opening Inventory accounted for via journal?

Answer 8

Dr cost of sales Expense (SoP/L)
Cr Inventories Asset (SoFP)
The inventory is no longer asset of entity but will form part of cost of sales yo be matched against sales revenue.

Question 9

How is the Closing inventory accounted for via a journal?

Answer 9

Dr Inventories Asset (SoFP)
Cr Cost of Sales Expense (SoP/L)\
At end of year remaining inventory is an asset that can be sold next yr.
CI must also be a deduction within cost of sales as not got a sale matched to

Question 10

Inventory = (and how each obtained)

Answer 10

Quantity (inventory count) x Valuation (more subjective, guidance in IAS 2, lower of Costs vs NRV)

Question 11

What is the basic rule for valuation per IAS2?

Answer 11

Inventories should be measured at the lower of cost and net reliable value.
Example of prudence

Question 12

What are some situations where NRV is likely to be less than cost?

Answer 12

• increase in costs/fall in selling price
• physical deterioration
• obsolescence of products
• part of marketing strategy (January sale/new competitor)
• errors in production/purchasing

Question 13

If inventory is expected to be sold at profit:

Answer 13

• value at cost
• do not anticipate profit

Question 14

If inventory is expected to be sold at a loss:

Answer 14

• value at NRV
• Do provide for future loss

Question 15

What makes up cost of item of inventory?

Answer 15

• Cost of Purchase
• Costs of Conversion
• Other costs to get to current/present location and condition

Question 16

What can be included in Cost of Purchase?

Answer 16

• purchase price
• import duties
• transport/handling
• less any trade discounts/rebates

Question 17

What can be included in Costs of Conversion?

Answer 17

• relating to production
  costs directly related to units of production
• direct labour
  Fixed/Variable production overheads incurred to convert into finished, allocated on systemic basis
• allocation of fixed overheads (electricity)

Question 18

Fixed Production Overheads

Answer 18

• indirect costs of production that remain relatively constant
• regardless of volume of production
• factory management/admin

Question 19

Variable Production Overheads

Answer 19

• indirect costs vary directly with volume of production
• indirect materials/labour

Question 20

What Other Costs included in Cost of inventory item?

Answer 20

• carriage inwards
• NOT carriage outwards that is selling/distribution expense

Question 21

Costs not to be included in cost of inventory item

Answer 21

• abnormal amounts of wasted material/labour
• storage unless necessary before next production stage
• selling costs
• admin overheads not contributing to get inventory to present condition/location

Question 22

Net Realisable Value

Answer 22

estimated selling price
less estimated costs of completion
less estimated selling/distribution costs

Question 23

Why is the cost of each item in inventory sometimes hard to find?

Answer 23

• rule should be applied on an item-by-item basis
• but if various batches purchased at different times/prices hard to determine aboveW

Question 24

What methods can be used to approximate cost of inventories?

Answer 24

• First in, First Out (FIFO)
• Average Cost (AVCO)
  Last in, first out - not permitted by IAS 2

Question 25

What is assumed under FIFO:

Answer 25

- first goods purchased/produced fist to be sole - remaining inventories are from most recent purchases

Question 26

How to work out Closing Inventory using FIFO?

Answer 26

Purchases along x axis, sale down y - sales come out of first purchase and so on - once all sales accounted for, prices put in for inventory left and calculated

Question 27

What are the two types of Average Cost to be calculated?

Answer 27

- Periodic AVCO cost of all purchases during year divided by total number of units purchased Can't be used for IAS 2 - Continuous weighted AVCO- weighted average of cost of similar items, recalculated each time new item is purchased

Question 28

How to work out Closing Inventories with AVCO continuous weighted?

Answer 28

Across X axis- units, cost, average unit cost, total cost, cost of sales purchases/sales filled in on y axis Every time new purchase average cost is worked out from other columns Each sale is put in with current average unit cost total cost column on any sale is cost of sales

Question 29

How should FIFO/AVCO be evaluated against each other?

Answer 29

- has to match way business operates - FIFO more realistic value on SoFP if that is the way company operates - AVCO can be complex as has to be weighted average- can be good if selling liquids/petrol

Question 30

How would rising prices affect cost and profit with different inventory valuation methods?

Answer 30

- FIFO would produce higher closing inventory figure - so a lower cost of sales figure - therefor higher profit figure than AVCO

Question 31

What are some methods to work out costs where inventory items are not interchangeable and so FIFO/AVCO can't be used?

Answer 31

Standard Costs - takes into account normal levels of materials/suppliers/labour/efficiency/capacity utilisation - regularly reviewed/revised Retail Method - measure large number of rapidly changing items with similar margins - cost of inventory = sales value - %gross margin

Question 32

When should inventory items be written off/down?

Answer 32

if become - lost/stolen - damaged/thrown away - obsolete - out of fashion -sold at lower priceH

Question 33

How should inventory items be written off/down?

Answer 33

end of period any of these items value should be: a) nothing if worthless b) NRV, if less than original cost means loss reported soon as foreseen and included in cost of sales as closing inventory