Podcast
Questions and Answers
A company has 5 items in inventory, each with a different cost and NRV. The company should _____________.
A company has 5 items in inventory, each with a different cost and NRV. The company should _____________.
- Value each inventory item separately at the lower of cost and NRV. (correct)
- Ignore the NRV for each item and value each item at the cost because the cost represents the amount paid.
- Compare the total cost of all inventory items with their total NRV, and value the inventory at the lower amount.
- Calculate the average cost of all inventory items and value the inventory at the average cost.
A trader buys an item for CU100 and expects to sell it for CU140 with CU5 in selling expenses. The market slumps, and the expected selling price drops to CU95. What is the NRV of the item?
A trader buys an item for CU100 and expects to sell it for CU140 with CU5 in selling expenses. The market slumps, and the expected selling price drops to CU95. What is the NRV of the item?
- CU90 (correct)
- CU100
- CU95
- CU85
If a business has goods in inventory that are worth less than their original cost at the end of a reporting period, what should be done with the value of the inventories?
If a business has goods in inventory that are worth less than their original cost at the end of a reporting period, what should be done with the value of the inventories?
- The value should be written down to their original cost, regardless of their current market value.
- The value should be written down to their net realizable value if this is less than their original cost. (correct)
- The value should be left unchanged, as the original cost is still relevant.
- The value should be increased to reflect the current market value.
Why is it important to value inventory at the lower of cost and NRV?
Why is it important to value inventory at the lower of cost and NRV?
Why does the cost of inventory written off or written down not usually cause problems in calculating the gross profit of a business?
Why does the cost of inventory written off or written down not usually cause problems in calculating the gross profit of a business?
Which of the following are included in the cost of inventory?
Which of the following are included in the cost of inventory?
If the NRV of an inventory item is lower than the cost of the item, what impact will this have on the financial statements?
If the NRV of an inventory item is lower than the cost of the item, what impact will this have on the financial statements?
What are the reasons why a business might be unable to sell all the goods purchased?
What are the reasons why a business might be unable to sell all the goods purchased?
What is the net realizable value of an inventory item?
What is the net realizable value of an inventory item?
If Wagg had sold the fashion goods at a sale price of CU1,500 instead of CU400, how would this have affected the gross profit calculation?
If Wagg had sold the fashion goods at a sale price of CU1,500 instead of CU400, how would this have affected the gross profit calculation?
What is the cost of goods sold for Wagg for the year ended 31 March 20X6?
What is the cost of goods sold for Wagg for the year ended 31 March 20X6?
How would the write-down of the fashion goods affect the cost of goods sold?
How would the write-down of the fashion goods affect the cost of goods sold?
If the fashion goods were sold for CU1,000 instead of CU400, how would this affect the gross profit?
If the fashion goods were sold for CU1,000 instead of CU400, how would this affect the gross profit?
What is the gross profit for Wagg for the year ended 31 March 20X6?
What is the gross profit for Wagg for the year ended 31 March 20X6?
What is the impact of closing inventory on the calculation of cost of sales?
What is the impact of closing inventory on the calculation of cost of sales?
What type of entry is made to move opening inventory from the inventory account to the cost of sales account?
What type of entry is made to move opening inventory from the inventory account to the cost of sales account?
How does the formula for cost of sales represent the relationship between inventories and purchases?
How does the formula for cost of sales represent the relationship between inventories and purchases?
Which of the following accurately represents the adjustments made for opening inventories?
Which of the following accurately represents the adjustments made for opening inventories?
What is one complication that arises when calculating the cost of sales?
What is one complication that arises when calculating the cost of sales?
What is the main purpose of accounting for opening and closing inventories as described?
What is the main purpose of accounting for opening and closing inventories as described?
What entry is made when inventory is purchased?
What entry is made when inventory is purchased?
Which financial statement is affected by the opening inventory adjustment?
Which financial statement is affected by the opening inventory adjustment?
Why is it important for businesses to accurately manage inventory accounting?
Why is it important for businesses to accurately manage inventory accounting?
What is one of the three basic problems associated with inventory accounting as noted?
What is one of the three basic problems associated with inventory accounting as noted?
In the context of Clockers, which of the following would NOT be considered a cost of sales?
In the context of Clockers, which of the following would NOT be considered a cost of sales?
If Clockers had paid for the delivery of the clocks from its supplier in Switzerland, how would this have impacted its statement of profit or loss?
If Clockers had paid for the delivery of the clocks from its supplier in Switzerland, how would this have impacted its statement of profit or loss?
Why is the cost of delivery inwards included in the calculation of cost of sales?
Why is the cost of delivery inwards included in the calculation of cost of sales?
Which of the following correctly represents the formula for calculating Gross Profit?
Which of the following correctly represents the formula for calculating Gross Profit?
What is the key difference in calculating the cost of sales for businesses selling products versus those providing services?
What is the key difference in calculating the cost of sales for businesses selling products versus those providing services?
Which of the following scenarios would necessitate a greater emphasis on managing delivery outwards costs?
Which of the following scenarios would necessitate a greater emphasis on managing delivery outwards costs?
In which of the following situations would the cost of delivery inwards be irrelevant in the calculation of cost of sales?
In which of the following situations would the cost of delivery inwards be irrelevant in the calculation of cost of sales?
If the initial trial balance includes opening inventory and purchases, what does this indicate about the accounting system?
If the initial trial balance includes opening inventory and purchases, what does this indicate about the accounting system?
What is the purpose of adjusting the initial trial balance for closing inventory?
What is the purpose of adjusting the initial trial balance for closing inventory?
What is a key difference between a perpetual inventory system and a periodic inventory system in regard to the initial trial balance?
What is a key difference between a perpetual inventory system and a periodic inventory system in regard to the initial trial balance?
Why is the initial trial balance adjusted to reflect the transfer of opening inventory to cost of sales?
Why is the initial trial balance adjusted to reflect the transfer of opening inventory to cost of sales?
What is the primary outcome of adjusting the initial trial balance for closing inventory and purchases?
What is the primary outcome of adjusting the initial trial balance for closing inventory and purchases?
The journal entry to adjust the initial trial balance for closing inventory and purchases typically involves debiting what account?
The journal entry to adjust the initial trial balance for closing inventory and purchases typically involves debiting what account?
Which of the following is NOT a reason why the initial trial balance needs to be adjusted for closing inventory?
Which of the following is NOT a reason why the initial trial balance needs to be adjusted for closing inventory?
How does the periodic inventory system affect the calculation of cost of goods sold?
How does the periodic inventory system affect the calculation of cost of goods sold?
The initial trial balance reflects opening inventory and purchases. Which of the following statements is TRUE?
The initial trial balance reflects opening inventory and purchases. Which of the following statements is TRUE?
What is the primary reason for adjusting the initial trial balance in the context of closing inventory?
What is the primary reason for adjusting the initial trial balance in the context of closing inventory?
Flashcards
Delivery Costs
Delivery Costs
The costs associated with moving goods from the supplier to the customer.
Delivery Outwards
Delivery Outwards
The costs associated with moving goods from a business to a customer.
Delivery Inwards
Delivery Inwards
The costs associated with moving goods from a supplier to a business.
Gross Profit
Gross Profit
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Distribution Costs
Distribution Costs
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Cost of Services
Cost of Services
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Service Organizations
Service Organizations
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Net Realizable Value (NRV)
Net Realizable Value (NRV)
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Lower of Cost and NRV
Lower of Cost and NRV
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Cost of Inventory
Cost of Inventory
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Valuing Inventory Items Separately
Valuing Inventory Items Separately
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Accountant's Responsibility for Inventory Valuation
Accountant's Responsibility for Inventory Valuation
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Opening Inventory
Opening Inventory
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Closing Inventory
Closing Inventory
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Purchases
Purchases
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Cost of Sales
Cost of Sales
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Transferring Opening Inventory
Transferring Opening Inventory
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Statement of Profit or Loss
Statement of Profit or Loss
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Statement of Financial Position
Statement of Financial Position
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Double Entry Bookkeeping
Double Entry Bookkeeping
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Inventory Management
Inventory Management
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Cost of Sales Ledger
Cost of Sales Ledger
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Net Realizable Value
Net Realizable Value
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Inventory Write-Down
Inventory Write-Down
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Inventory Write-Off
Inventory Write-Off
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Inventory
Inventory
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Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS)
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Direct Labor Cost
Direct Labor Cost
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Direct Material Cost
Direct Material Cost
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Activity-Based Costing (ABC)
Activity-Based Costing (ABC)
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Initial Trial Balance
Initial Trial Balance
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Adjusting Entry
Adjusting Entry
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Cost of Sales Line
Cost of Sales Line
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Closing Inventory Valuation
Closing Inventory Valuation
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Adjusting Initial Trial Balance
Adjusting Initial Trial Balance
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Updated Trial Balance
Updated Trial Balance
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Study Notes
Chapter 7: Cost of Sales and Inventories
- Introduction: Learning outcomes, syllabus links, and examination context are provided.
- Learning Topics: IAS 2, Inventories, Cost of sales, Accounting for opening and closing inventories, Adjusting the initial trial balance, Counting inventories, Valuing inventories, Using mark-up/margin percentages to establish cost, Inventory drawings, Summary and further question practice.
- Introduction (Page 2): Learning outcomes detail recording transactions and events, identifying statement components, preparing financial statements (statement of financial position, statement of profit or loss, statement of changes in equity, and statement of cash flows), and providing specific syllabus learning outcomes. Syllabus links show related Accounting topics. Examination context information includes question types, double-entry, specified components of calculations, and accounting principles for inventory.
- IAS 2, Inventories (Page 3): Objective is to provide accounting treatment for inventories. Inventories are defined as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process. Includes various categories of inventory, such as finished goods, work in progress, and raw materials.
- Cost of Sales (Page 4): Cost of sales is a key figure in financial statements, calculated by subtracting opening inventory, plus purchases and delivery inwards, less closing inventory from revenue. Unsold goods at the end of a reporting period are not included in cost of sales.
- Worked Example (Page 4): The scenario explains how gross profit for the year is calculated for the Umbrella Shop example, noting purchase details, sales, closing inventory, and related costs.
- Inventory written off or written down (Page 8): A business may be unable to sell all goods because losses, theft, damage, or obsolescence may occur. The cost of these items is written down to either zero or their net realizable value if the latter is lower than their original cost. This adjustment to the cost of sales doesn't affect gross profit calculation.
- Inventory Written Off/Written Down (Page 9): Explanation of scenarios where inventory is written off due to loss, theft, damage, or obsolescence. The cost of the inventory is removed from gross profit in cost of goods sold.
- Delivery Costs (Page 6): Delivery costs are categorized as delivery outwards or outwards. Delivery costs paid by the supplier are deducted whilst those paid by the customer are added to the cost of purchases.
- Cost of Sales for Service Organisations (Page 7): Cost of sales in service organizations differs from merchandise companies, which don't include opening/closing stock. Direct labour, sales commission are included.
- Inventory Accounting (Page 11): Journal entries for opening and closing inventory and adjustments to the trial balance. Opening inventory, which is transferred in the opening inventory account, is carried out after calculation or after the initial trial balance.
- Inventory Drawings (Page 28): Details accounting for inventory drawings as business owner's drawings in a business is recorded as drawings (debit), debit drawings and credit cost of sales as a cost of sales .
- Summary (Page 29): Flowcharts of the accounting for inventories with opening and closing inventory, purchases, and cost of sales.
- Further Question Practice (Page 30): Knowledge diagnostic questions regarding cost of sales calculations, journal entries, stock count types, acceptable cost estimation techniques, and margin/markup calculations.
- Self-Test Questions (Page 31): Questions to assess understanding of cost of sales calculation, inventory calculation, FIFO and LIFO methods, and general accounting entries.
- Valuing Inventories (Pages 19, 20): Inventory is valued at the lower of cost or net realizable value, and examples of determining this value for different scenarios, including those involving a comparison of cost and net realizable value (NRV) of an item.
- Using Mark-up/Margin percentages to Establish Cost (Page 27): Standard gross profit percentages help estimate cost from selling price, and a detailed explanation of calculation process.
- Inventory Valuation and Profit (Page 24): Applying various inventory valuation methods (FIFO and AVCO) and their different impacts on profitability. FIFO assumes the cost of goods sold reflect the earliest inventory purchases whilst AVCO is the weighted average of all inventory costs. Worked example provides specific values and calculation steps for costing inventory under these methods.
- Inventory Drawings (Page 28): Inventory drawings are debits against drawings and credit against cost of sales.
- Interactive Questions (Pages 15 to 16, 20 to 21, 27, 31 to 32): Interactive questions to assess student comprehension on inventory valuation using FIFO and AVCO.
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Description
Dive into Chapter 7, focusing on the Cost of Sales and Inventories. This quiz covers key concepts such as IAS 2, the accounting for inventories, and the adjustment of trial balances. Prepare to enhance your understanding and practical application of financial statement preparation related to inventory management.
