Chapter 11: Inventory

Question 1

Inventories

Answer 1

Assets that:

• Are held for sale in the ordinary course of business (trading inventory)
• Are in the process of production for such sale (work in progress)
• Or are in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials and consumables)

Question 2

How is inventory measures

Answer 2

• Historical cost basis at the lowest of cost

- Net realisable value

Question 3

Cost price of inventory will include

Answer 3

• import cost
• freight to transport goods to the entity
• insurance cost while inventory is in transit, etc.

Question 4

Net realisable value

Answer 4

The estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.

Question 5

Examples of inventories that are the property of an enterprise (even though not physically in the enterprise’s possession):

Answer 5

• Inventory sent on consignment to an agent of the entity
• Inventory of which the right of ownership is transferred before the inventory is delivered to the entity (purchaser).
• Inventory purchased of which delivery is deferred at the request of the purchaser, but the purchaser has already taken title and accepted invoicing.

Question 6

Two types of inventory systems

Answer 6

Perpetual or periodic

Question 7

Periodic inventory system

Answer 7

An inventory system that only gives an indication of the inventory on hand once a physical inventory count has been done.

Question 8

Periodic inv. journal entry:

The purchasing of goods

Answer 8

Dt - Purchases

Cr - Bank/Creditors

Question 9

Periodic inv. journal entry:

The sale of goods

Answer 9

Dt - Bank/Debtors

Cr - Sales

Question 10

Periodic inv. journal entry:

Recording of closing inventory

Answer 10

Dt - Inventory

Cr - Cost of sales

Question 11

Periodic inv. journal entry:

Purchase returns

Answer 11

Dt - Bank/Creditors
Cr - Purchase returns

Dt - Purchase returns
Cr - Purchases

Question 12

Periodic inv. journal entry:

Sales returns

Answer 12

Dt - Sales returns
Cr - Banks/Debtors

Dt - Sales
Cr - Sales returns

Question 13

Periodic inv. journal entry:

Closing of opening inventory

Answer 13

Dt - Cost of sales

Cr - Inventory

Question 14

Periodic inv. journal entry:

Closing of purchases

Answer 14

Dt - Cost of sales

Cr - Purchases

Question 15

Periodic inv. journal entry:

Closing of cost of sales

Answer 15

Dt - Trade account

Cr - Cost of sales

Question 16

Periodic inv. journal entry:

Closing of sales

Answer 16

Dt - Sales

Cr - Trade account

Question 17

Periodic inv. journal entry:

Normal inventory losses

Answer 17

No entry is recorded.
Since actual physical closing inventories are used, inventory losses are automatically taken into consideration in the calculation of cost of sales in the cost of sales account.

Question 18

Periodic inv. journal entry:

Abnormal inventory losses

Answer 18

Dt - Inventory loss

Cr - Cost of sales

Question 19

Advantages of periodic inventory system

Answer 19

Simplicity and low cost

Question 20

Disadvantages of periodic inventory system

Answer 20

Doesn’t indicate physical inventory losses

Question 21

Perpetual inventory system

Answer 21

An inventory system that will always show the physical inventories on hand in the accounting records.
The inventory account is adjusted for every movement in inventory.

Question 22

Perpetual inv. journal entry:

The purchase of goods

Answer 22

Dt - Inventory

Cr - Bank / Creditors

Question 23

Perpetual inv. journal entry:

The sale of goods

Answer 23

Dt - Bank / Debtors
Cr - Sales (sales price)

Dt - Cost of sales
Cr - Inventory (cost price)

Question 24

Perpetual inv. journal entry:

Recording of a normal inventory loss

Answer 24

Dt - Cost of sales

Cr - Inventory

Question 25

Perpetual inv. journal entry:

Recording of an abnormal inventory loss

Answer 25

Dt - Inventory loss

Cr - Inventory

Question 26

Perpetual inv. journal entry:

Purchase returns

Answer 26

Dt - Bank / Creditors
Cr - Purchase returns

Dt - Purchase returns
Cr - Inventory

Question 27

Perpetual inv. journal entry:

Sales returns

Answer 27

Dt - Sales returns (sales price)
Cr - Bank/Debtors

Dt - Sales
Cr - Sales returns (sales price)

Dt - Inventory (cost price)
Cr - Cost of sales

Question 28

Perpetual inv. journal entry:

Closing of cost of sales

Answer 28

Dt - Trade account

Cr - Cost of sales

Question 29

Perpetual inv. journal entry:

Closing of sales

Answer 29

Dt - Sales

Cr - Trade account

Question 30

Accounting policy: Inventories are valued at…

Answer 30

the lowest of cost and net realisable value (in other words the deviation from historical cost prices is mentioned)

Question 31

Accounting policy:

The specific cost formula used on consumables:

Answer 31

Consumables are measured according to the weighted average cost method.

Question 32

Accounting policy:

The specific cost formula used on trading stock:

Answer 32

Trading stock is measured on the FIFO basis.