8. Inventory Flashcards
What is inventory?
Inventory refers to goods that a business buys from suppliers and sells to customers.
Why is inventory regard as current asset?
Inventory is meant for resale purpose, it is not meant to be kept in the business for more than one accounting period. Hence it is classified as current asset.
How to calculate the cost of inventory / cost of purchase?
Cost of inventory (cost of purchases)
= Cost price of inventory + expenses incurred to get the Inventory ready for sales
What are examples of expenses incurred to get the inventory ready for sales
- Transport expenses (e.g. Freight and delivery charges, shipping fees, air freight charges)
- Import duties/taxes/custom duties
- Insurance for transporting the goods over
- Packing materials to repack goods for resale
- Salaries for workers for repacking of goods
What is the double entry to record cost of inventory
e.g cost of bags $1000
Insurance for shipping of bags $700.
Dr Inventory 1700
Cr Cash at bank/Trade payable 1700
What is the double entries to returns to goods bought to supplier?
Dr Cash at bank (+)/ Trade payable (-) Cr Inventory (-)
What is the double entry to record the goods sold?
Dr Cost of sales (+) Cr Inventory (-)
What is the double entry to record the goods returned by customers?
Dr Inventory (+) Cr Cost of Sales (-)
How is cost of sales calculated?
Using FIFO method.
What is FIFO method?
It stands for “First-in-first-out”. It means that goods that are purchased earliest are sold first.
What is the valuation rule for inventory?
Inventory is valued at the LOWER of cost and net realizable value (NRV) to ensure that inventory is not overstated.
What is net realizable value?
NRV is the selling price less any selling expenses to be incurred.
Explain with an accounting theory, how is inventory valued.
According to the prudence concept, business cannot overstate assets and profit and understate liabilities and losses. Thus, business should record inventory at the lower of cost and net realizable value so that assets and profits will be not overstated.
What is the double entries to record loss of inventory
Dr Impairment loss of inventory (+) Cr Inventory (-)
What is the double entries if business is covered with insurance (e.g 10% of the loss).
Dr Impairment loss of inventory 90%
Dr Insurance claim receivable 10%
Cr Inventory 100%
