Valuation of Purchased Inventories
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Questions and Answers

What method is used to value contracts in progress when considering profit?

  • Full costing
  • Direct costing
  • Percentage of completion method (correct)
  • Completed contract method

    • Which valuation method is used for finished goods if the manufacturing price is lower than market value?

  • Full costing
  • Direct costing
  • Market value (correct)
  • Completed contract method

    • What happens to write-offs according to the outlined inventory valuation processes?

  • They can only be reversed once
  • Reversal of write-offs is not allowed
  • They are deducted from market value
  • They can be reversed (correct)

    • In which method is the gained profit added to the manufacturing price for contracts in progress?

    <p>Percentage of completion method</p> Signup and view all the answers

    What does 'work in progress' refer to in inventory valuation?

    <p>Inventory that is currently being manufactured</p> Signup and view all the answers

    What should be used when the market value is less than the cost of acquisition for inventory valuation?

    <p>Cost of acquisition</p> Signup and view all the answers

    Which inventory valuation method is NOT mentioned in the provided content?

    <p>Standard cost method</p> Signup and view all the answers

    When should write-offs be considered in the inventory valuation process?

    <p>When inventory is damaged or obsolete</p> Signup and view all the answers

    Which of the following statements about FIFO and LIFO is accurate?

    <p>LIFO assumes that the most recently purchased items are sold first.</p> Signup and view all the answers

    What is a primary advantage of using the weighted average method in inventory valuation?

    <p>It simplifies calculation of inventory costs.</p> Signup and view all the answers

    What is the cost of goods sold using the LIFO method?

    <p>3,100.00 EUR</p> Signup and view all the answers

    How much is the operating profit when using the weighted average price method?

    <p>1,140.00 EUR</p> Signup and view all the answers

    Which method shows the lowest operating profit?

    <p>LIFO method</p> Signup and view all the answers

    What is the amount for closing inventory calculated using the FIFO method?

    <p>1,600.00 EUR</p> Signup and view all the answers

    What is the total revenue for the academic year?

    <p>4,140.00 EUR</p> Signup and view all the answers

    Which inventory valuation method results in a decrease of 600.00 EUR in inventory?

    <p>FIFO method</p> Signup and view all the answers

    What is the total operating expenses reported?

    <p>2,800.00 EUR</p> Signup and view all the answers

    What is the value of the opening inventory?

    <p>€ 1 000,00</p> Signup and view all the answers

    What is the change in inventory for the overall weighted average price method?

    <p>-400.00 EUR</p> Signup and view all the answers

    Which valuation method resulted in a closing inventory amount of € 1 600,00?

    <p>FIFO-method</p> Signup and view all the answers

    What is the change in inventory calculated in the example?

    <ul> <li>€ 120,00</li> </ul> Signup and view all the answers

    What is the closing value of inventory according to the market value?

    <p>€ 1 120,00</p> Signup and view all the answers

    What is the cost of goods sold as shown in the example?

    <p>€ 1 260,00</p> Signup and view all the answers

    How much is the value of closing inventory listed in the balance sheet (BS)?

    <p>€ 1 120,00</p> Signup and view all the answers

    What would be the corresponding valuation method for a closing value of € 1 600,00?

    <p>FIFO-method</p> Signup and view all the answers

    Which value represents the market value for the closing inventory?

    <p>€ 1 120,00</p> Signup and view all the answers

    What happens to inventory accounts during the accounting period?

    <p>They are unaffected until the end of the period.</p> Signup and view all the answers

    Which account reflects the cost of goods sold at the end of an accounting period?

    <p>Expense account</p> Signup and view all the answers

    What must be done at the end of the accounting period regarding inventories?

    <p>Changes in inventories must be accounted for based on physical stock-taking.</p> Signup and view all the answers

    Where are inventories listed within the balance sheet?

    <p>Current assets</p> Signup and view all the answers

    What is the purpose of adjusting inventory values at the end of the accounting period?

    <p>To ensure the correct value for inventory and cost of goods sold.</p> Signup and view all the answers

    Which of the following accounts is NOT impacted by an adjustment to inventory at the end of the accounting period?

    <p>Accounts payable</p> Signup and view all the answers

    What action is performed to ensure the correct value of inventories on the balance sheet?

    <p>Physical stock-taking.</p> Signup and view all the answers

    Which type of inventory consists of unfinished goods?

    <p>Work in progress</p> Signup and view all the answers

    Study Notes

    Valuation of Purchased Inventories

    • Inventory is valued at the end of the accounting period based on physical stock-taking.
    • The correct value for inventory is needed for the balance sheet.
    • The correct value for the cost of goods sold is needed for the income statement.
    • Inventory is recorded in the balance sheet under current assets.
    • Inventory accounts include: raw materials and consumables, goods for resale, work in progress, and finished goods.
    • The cost of acquisition is the price paid for the inventory.
    • Market value is the current price for the inventory.
    • If the market value is less than the cost of acquisition, the inventory is written down to the lower value.
    • Reversal of write-offs occurs if the market value subsequently increases above the cost of acquisition.
    • The specific identification method values inventory based on the specific cost of each item.
    • The FIFO (First-In, First-Out) method assumes that the oldest inventory is sold first.
    • The LIFO (Last-In, First-Out) method assumes that the newest inventory is sold first.
    • The weighted average method calculates the average cost of all inventory items.
    • The weighted average method includes the overall weighted average price method and the moving weighted average price method.

    Determination of Change in Inventory

    • The change in inventory is the difference between the opening inventory and the closing inventory.
    • If the opening inventory has a value of €1,000 and the closing inventory has a value of €1,600, the change in inventory is €600.

    Market Test

    • This test is used to determine if the market value of the inventory is less than the cost of acquisition.
    • The company OMEGA KAPPA plc has an opening inventory of €1,000.
    • Using the FIFO method, the closing inventory is €1,600.
    • Using the market value, the closing inventory is €1,120.
    • In this case, the market value is less than the cost of acquisition.
    • The inventory is written down to the market value of €1,120.

    Inventory Valuation Methods

    • Common inventory valuation methods include FIFO, LIFO, and weighted average.
    • FIFO values inventory based on the principle that the oldest inventory is sold first.
    • LIFO values inventory based on the principle that the newest inventory is sold first.
    • The weighted average method calculates the average cost of all inventory items.

    Valuation of Manufactured Inventories and Contracts in Progress

    • Manufactured inventories and contracts in progress are valued using the manufacturing price.
    • The manufacturing price is the cost of producing the goods or services.
    • If the market value is less than the manufacturing price, the inventory is written down to the lower value.
    • Direct costing includes only direct manufacturing costs in the cost of goods sold.
    • Full costing includes both direct and indirect manufacturing costs in the cost of goods sold.
    • Contracts in progress are valued using the percentage of completion method or the completed contract method.
    • The percentage of completion method recognizes revenue and profit as work progresses on the contract.
    • The completed contract method recognizes revenue and profit only when the contract is complete.

    Introduction to End-of-Period Entries

    • All purchases are recorded on an expense account during the accounting period.
    • All sales are recorded on a revenue account during the accounting period.
    • The balance of the inventory account remains unchanged during the accounting period.
    • At the end of the accounting period, the inventory account is adjusted for changes in inventory.
    • Physical stock-taking is used to determine the value of inventory on hand.
    • Inventory is valued at the lower of cost or market value.
    • The cost of goods sold is calculated using the inventory valuation method chosen.

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    Related Documents

    Chapter 8 - Inventories PDF

    Description

    This quiz covers the essentials of inventory valuation at the end of the accounting period. It explains various methods such as FIFO and LIFO, and the importance of correctly assessing inventory for financial statements. Test your understanding of inventory accounts and valuation processes.

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