Topics: Inventory, Trade Receivables

Question 1

Explain the First-In-First-Out (FIFO) method.

Answer 1

Goods which are purchased the earliest should be sold first when calculating cost of sales.

Question 2

Explain the inventory valuation rule.

Answer 2

Inventory should be valued at cost or net realisable value, whichever is lower.

Question 3

Define net realisable value

Answer 3

The net realisable value of goods is the estimated market value of the goods.

Question 4

Define inventory

Answer 4

Inventory is a current asset recording goods bought from suppliers for resale to customers.

Question 5

Define impairment loss on inventory

Answer 5

Impairment loss on inventory is an expense which records drops in the value of inventory when the net realisable value falls below the cost price of goods.

Question 6

Define trade receivables

Answer 6

Trade receivables are a current asset which records the amount owed by credit customers for goods sold on credit.

Question 7

Define allowance for impairment of trade receivables

Answer 7

Allowance for impairment of trade receivables is a negative current asset which records the amount of trade receivables which is estimated to be uncollectible.

Question 8

Define impairment loss on trade receivables

Answer 8

Impairment loss on trade receivables is an expense which records the loss in value of net trade receivables

Question 9

State the accounting theory applied when recording impairment loss on inventory.

Answer 9

Prudence theory

Question 10

State the two accounting theories applied when recording an allowance for impairment of trade receivables.

Answer 10

Prudence theory and accrual theory

Question 11

How do you calculate net trade receivables?

Answer 11

Trade receivables - Allowance for impairment of trade receivables = net trade receivables

Question 12

If the cost price of inventory is $100, and the net realisable value is $70. What is the value of inventory on the balance sheet?

Answer 12

$70 (lower of cost or NRV)

Question 13

Define cost of purchases

Answer 13

Cost of purchases is the cost price of goods and all costs that are directly related to the buying of the goods (e.g. freight, insurance, etc.)

Question 14

Calculate Cost of Purchases:
Cost price - $500
Salesman's salary - $2000
Shipping (Freight) - $100
Wages for workers to repack the goods - $300

Answer 14

$500+$100+$300 = $900