POA chapter 9 (Inventory)

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Questions and Answers

What is non-accounting information most commonly associated with in a business context?

Market competition analysis
Product features and customer preferences (correct)
Financial performance analysis
Investment strategies

Which of the following best describes the nature of a product?

The production costs associated with it
The seasonal demand fluctuations for it
The overall sales strategy used to promote it
A feature, attribute, or quality of the product (correct)

In what way does non-accounting information contribute to product assessment?

By offering insights on profitability
By determining fixed operational costs
By providing detailed sales reports
By affecting storage capabilities (correct)

Which of the following is NOT considered non-accounting information?

Supplier credit terms (B) Signup and view all the answers

Why are inventories different from non-current assets?

Inventories are bought for resale. Non-current assets are bought for use in the business to generate income. Signup and view all the answers

How does a business use perpetual inventory system?

A business has to strike a balance between buying too little and too many goods, maintaining just enough inventories to meet customer demand. To do so, a business should keep proper computerised records to track changes in inventory balances using the perpetual inventory system. Signup and view all the answers

Define perpetual inventory system

Quantity and availability of inventories are updated on a continuous basis Signup and view all the answers

When a company purchases inventory from credit suppliers:

Dr inventory. Cr Trade payable Signup and view all the answers

When inventory is RETURNED to credit suppliers

Dr Trade payable. Cr Inventory. Signup and view all the answers

SALE of inventory to credit customers:

At cost price: Cost of Sales, Cr Inventory. Selling price: Dr Trade receivable, Cr Sales revenue Signup and view all the answers

When credit customers RETURN inventory:

At the selling price: Dr Sales return, Cr Trade receivable. At cost price: Dr Inventory, Cr Cost of Sales. Signup and view all the answers

Costs such as shipping fees, custom duties, and insurance for goods in transit are included in the ______ of inventory purchased.

Cost Signup and view all the answers

What is the core principle behind valuing inventory at the lower of cost and net realizable value, and why is this principle important in accounting?

The core principle is the prudence concept, which prevents overstating assets and profits. It's important for providing a more realistic view of a company's financial position. Signup and view all the answers

Describe a scenario where the net realizable value of inventory might fall below its original cost. Provide at least two different reasons for this decline.

Obsolescence of goods or a decline in market demand coupled with a decrease in selling price could cause net realizable value to fall below cost. Signup and view all the answers

Company A has inventory with a cost of $50,000. They estimate the selling price to be $60,000, but anticipate $15,000 in selling costs. What value should the inventory be recorded at? Explain your answer.

The inventory should be recorded at $45,000. Net realizable value ($60,000 - $15,000 = $45,000) is lower than the cost ($50,000), so the lower of cost and net realizable value is used. Signup and view all the answers

Define Net realisable value

The selling price of the inventory less the additional cost to sell the inventory Signup and view all the answers

What could a business do to manage the risk of potential loss caused by damaged goods?

<ul> <li>Buy Insurance</li> <li>Make an insurance claim</li> </ul> Signup and view all the answers

Insurance claim on damaged goods:

Dr Insurance claim receivable. Cr Impairment loss on inventory Signup and view all the answers

COLLECTION of insurance claim

Dr Cash at bank. Cr Insurance claim receivable Signup and view all the answers

What is the initial journal entry a company makes when recognizing an insurance claim for damaged inventory?

Debit Insurance Claim Receivable, Credit Impairment Loss on Inventory (D) Signup and view all the answers

A company has damaged inventory and has successfully filed an insurance claim. Which account is credited when the company receives the cash settlement from the insurance company?

Insurance Claim Receivable (A) Signup and view all the answers

Which of the following strategies directly addresses the prevention of losses due to damaged goods, rather than merely compensating for such losses?

Improving inventory handling procedures (A) Signup and view all the answers

A company anticipates potential damage to its inventory. What is the most proactive approach to take?

Purchasing insurance while improving handling and storage (A) Signup and view all the answers

Which account is debited when a company receives cash as a settlement for a previously recognized insurance claim on damaged inventory?

Cash at Bank (B) Signup and view all the answers

Flashcards

Non-accounting Information

Information about a business not found in financial records.

Nature of Product

Features or qualities that define a product.