Week 17 - Inventory Valuation, SoCF Flashcards
Inventory definition and where it goes in the statements
Inventory is a Current Asset in the Balance Sheet
2 ways of valuing inventory
Net Realisable Value (NRV): Estimated selling price - estimated costs
Cost of inventory (FIFO or Average Cost)
2 ways of valuing cost of inventory
First in first out (FIFO) - assume first items recieved are first to be issued. This means that cost Valuation is at the actual bought prices and that Closing inventory value (in the Balance Sheet) is closest to recent prices)
However, a negative is that Cost of Sales (in the Income Statement) is valued at out of date prices
Average Cost: Reduced volatility, but means that valuation is not at the actual prices the items were bought
Inventory Valuation Questions and how to do them
Create a table
Columns: Date, Purchases, Sales, Balance (Within each of PS&B you should have 3 extra columns that say: Quantity, price per unit, value)
Balance column should measure the difference between purchases and sales.
Rows: Different dates. Cost of Sales and Closing Inventory at bottom
Summary: should be a summary table which includes: Cost of Sales, Closing Inventory, Sum of Debit Balance
Sum of debit balance should always be the same for LIFO, FIFO, Weighted Average
Inventory questions: FIFO, LIFO and Weighted Average
Do the table mentioned previously for whatever they ask you to do.
Summary: should be a summary table which includes: Cost of Sales, Closing Inventory, Sum of Debit Balance
Sun of debit balance should always be the same for LIFO, FIFO, Weighted Average
Statement of Cash Flows:
Two methods of calculating Operating Cash Flow
Direct Method: Subtract cash payments from cash receipts in the given period
Indirect: Take net income from the Income Statement and add back Depreciation & other non-cash expenses, + changes in working capital (current assets - current liabilities). If not given income statement, you should construct one from info given e.g. Balance Sheet
