Week 7: Inventories Flashcards
What comprises stocks/inventories? (5)
1) Goods purchased for resale
2) Consumable stores
3) Raw materials purchased for incorporation into products for sale
4) Products and Services
5) Finished goods
Why is inventory figure so important?
1) Direct impact on determining profit and loss and the valuation of assets in the balance sheet
2) Necessary to determine cost of goods sold during period
What do the accounting standards say about closing stock? (2)
- Stock should be stated at lower of cost and net realisable value
- Comparison should be carried out for each item of stock or groups of similar items
What constitutes cost? (4)
1) Expenditure
2) Costs of Purchase
3) Costs of Conversion
What is included in purchase price? (3)
1) Import duties
2) Transport
3) Handling Costs
What’s included in Conversion Costs?
1) Labour
2) Direct expenses
3) Sub-contract
4) Production overhead
What constitutes NRV
1) Estimated sales price less costs to complete and sell
When might NRV be less than cost?
1) Increase in cost / fall in selling price
2) Obsolescence of production
3) Manufacture and sell products at a loss
4) Errors in production and purchasing
Periodic Valuation
Calculating closing stock and cost of sales at the end of accounting period
Perpetual
Keeping stock records to monitor movement of individual stock
What is FIFO
- Stands for “First in,First out”
- Assumes that the first items placed in inventory are the first sold
Cost of Goods Sold Equation
Beginning inventory + Purchases - Ending
What is LIFO
- Stands for “last in, first out”
- Last produced products as being those sold first
