Chapter 9: Inventory Flashcards Preview

Foundations of Accounting > Chapter 9: Inventory > Flashcards

Flashcards in Chapter 9: Inventory Deck (19)
Loading flashcards...
1
Q

How do you calculate the cost of goods sold?

A

opening inventory + purchases - closing inventory

2
Q

Define cost of goods sold

A

The amount of inventory left over from a previous year plus what you purchased minus what you had left over. Calculates the costs of selling the inventory that you have sold and give you profit.

3
Q

What is carriage?

A

cost of transporting the goods from supplier to purchaser.

4
Q

Define carriage inwards

A

when the purchaser pays for transport, usually added to the cost of purchases in the SOPL

5
Q

Define carriage outwards

A

when the supplier pays for transport, is a selling and distribution expense in the SOPL

6
Q

What is an inventory account used for?

A

at the end of a financial year, a business will count all its inventory.

7
Q

What is the double entry for the recording of inventory at the end of the financial year?

A

Debit - inventory account (closing value)

Credit - Income and Expenses account

8
Q

What is the double entry for the recording of inventory at the beginning of the financial year?

A

Debit - income and expense account

Credit - Inventory account (value of opening inventory)

9
Q

How is the quantity of inventories held at the end of the year calculated? (2)

A

either (1) annual count or (2) a continuous count

10
Q

What are the ways of valuing inventory? (4)

A
  1. expected to sell price (not used as it creates profit before item is sold)
  2. expected selling price - cost of selling (Net realizable value) (not used as it creates profit before item is sold)
  3. Historical cost
  4. amount to replace them ( not a good one to use)
11
Q

Which was of valuing inventory is the best?

A

Historical cost

12
Q

What is the accounting rule around valuing inventory?

A

inventory is valued at the lower of either cost or net realizable value.

13
Q

When a business has lots of inventory why is a comparison of their at cost value and NRV carried out on each item as opposed to the total inventory?

A

If the comparison is made on the total value then the loss on some items may be masked by the profits on other items.

14
Q

When valuing inventory for a company with many inventory items how is this done?

A

by grouping similar items together and performing a comparison on those groups

15
Q

What are the two methods of determining purchase cost?

A
  1. FIFO (first in first out)

2, AVCO (average cost)

16
Q

What is FIFO?

A

First in first out: assume that components are used in the order in which they are received from suppliers

17
Q

What is AVCO?

A

Average cost: As purchase prices change with each new consignment the average price of the components in that bin is changed. all items are assumed to have been purchased at the average price of the componants

18
Q

What is the most common way average cost is calculated?

A

cumulative weighted average pricing method.

19
Q

What is the key feature of cumulative weighted average pricing?

A

a new weighted average price is calculated whenever a new delivery of materials is received.