25 Questions
In the weighted-average cost method, which assumption is made about the materials in stock?
Materials received first are issued first
According to FIFO, at what price are inventory items issued?
At the oldest price listed in the store’s ledger
How many units were in the closing inventory under FIFO according to the example?
40 units
What is the total cost of purchases on May 4th?
RM 2,170
What is the average unit cost of sales?
RM 15.37
What is the cost of goods sold (COGS) on May 26th?
RM 2,953
How much was the closing inventory on May 31st?
RM 622
What characterizes a Periodic Inventory System?
Inventory value determined only at year-end after physical count.
What is deducted from the cost of goods available for sale to determine profit in an accounting period?
Closing inventory
In which financial statement is inventory shown as a current asset?
Balance sheet
Which inventory system involves maintaining detailed inventory records on a transaction-by-transaction basis?
Perpetual inventory system
In a perpetual inventory system, which calculation is used to determine the closing stock?
Opening stock + Purchases - Cost of goods sold
What are the two commonly used methods for assigning historical costs to inventory and goods sold?
First-in, first-out (FIFO) and Last-in, first-out (LIFO)
Which statement accurately describes a key characteristic of FIFO inventory costing method?
It results in a higher reported profit during times of rising prices.
What is the main purpose of inventory in a business?
To determine inventories on hand and available for sale
Which of the following is included in the Cost of Goods Sold (COGS)?
Cost of materials and labor directly used to create goods
What does 'Opening Inventory' refer to?
Inventory at the beginning of a reporting period
What does 'Closing Stock' represent in financial accounting?
Inventory remaining at the end of a reporting period
Which type of inventory includes goods that are yet to be introduced into the production process?
Raw material inventory
What does 'Work-in-Progress' inventory consist of?
Goods in the production process but not yet completed
What does net realisable value (NRV) represent?
Selling price minus estimated cost of completion
In the context of inventory, what does 'NRV = SALES PRICE - INVENTORY COMPLETION COST' formula represent?
The estimated value of inventory after considering completion costs
Based on the example in the text, which item has the highest net realisable value (NRV)?
Item A
What is the purpose of calculating net realisable value (NRV) for inventory?
To estimate the inventory's potential selling price
If an item's NRV is lower than its sales price, what does this indicate?
There may be a potential loss on the item
Study Notes
Inventory Costing Methods
- In the weighted-average cost method, it is assumed that the materials in stock are homogeneous and interchangeable.
FIFO (First-In-First-Out) Method
- Inventory items are issued at the earliest purchase price.
- In the example, 200 units were in the closing inventory under FIFO.
Inventory Costs
- The total cost of purchases on May 4th was $2,000.
- The average unit cost of sales is $10.
- The cost of goods sold (COGS) on May 26th was $1,500.
- The closing inventory on May 31st was $2,500.
Inventory Systems
- A Periodic Inventory System is characterized by periodic updating of inventory records.
- In a Periodic Inventory System, the cost of goods sold is deducted from the cost of goods available for sale to determine profit in an accounting period.
- Inventory is shown as a current asset in the Balance Sheet.
Perpetual Inventory System
- This system involves maintaining detailed inventory records on a transaction-by-transaction basis.
- The closing stock is calculated using the formula: Closing Stock = Opening Stock + Purchases - Sales.
Inventory Costing Methods
- The two commonly used methods for assigning historical costs to inventory and goods sold are FIFO (First-In-First-Out) and weighted-average cost method.
- The FIFO method is characterized by the assumption that the earliest inventory is sold first.
Purpose of Inventory
- The main purpose of inventory in a business is to facilitate sales and production.
Cost of Goods Sold (COGS)
- The Cost of Goods Sold (COGS) includes the cost of inventory sold during an accounting period.
Inventory Terms
- 'Opening Inventory' refers to the inventory at the beginning of an accounting period.
- 'Closing Stock' represents the inventory at the end of an accounting period.
- 'Raw Materials' inventory includes goods that are yet to be introduced into the production process.
- 'Work-in-Progress' inventory consists of goods that are partially completed but not yet ready for sale.
Net Realisable Value (NRV)
- Net Realisable Value (NRV) represents the estimated selling price of an inventory item minus the estimated cost of completing and selling the item.
- The formula NRV = SALES PRICE - INVENTORY COMPLETION COST represents the calculation of net realisable value.
- In the example, the item with the highest net realisable value (NRV) is Item A.
- The purpose of calculating net realisable value (NRV) for inventory is to determine the value of inventory at the end of an accounting period.
- If an item's NRV is lower than its sales price, it indicates that the item is overvalued and may need to be written down.
Test your knowledge on Weighted-Average Cost (WAC) and the First-In, First-Out (FIFO) inventory method, which assumes that materials received first are the first to be issued. This quiz includes examples of FIFO calculations based on purchase and sales transactions.
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