Inventory

Question 1

Define cost of purchases.

Answer 1

Refers to the value of the cost of the purchased goods that is recorded in the inventory account.

Question 2

Name and explain the method used for calculating cost of sales.

Answer 2

First-In-First-Out(FIFO) method is used when calculating cost of sales. It assumes that goods that are purchased first will be sold first.

Question 3

Explain,with a relevant accounting principle, how inventory is valued.

Answer 3

Inventory is valued at the lower of cost or net realisable value.
This is in accordance to the prudence concept, which states that a business must report and adjust for losses that it is likely to incur so that income and assets are not overstated.