Lecture Six

Question 1

What three things can inventory include

Answer 1

1- goods held for resale for customers
2- goods in progress of being produced ‘work in progress’
3- raw materials awaiting production

Question 2

do services have inventory

Answer 2

no they dont

Question 3

what type of inventory do car manufacters have

Answer 3

all 3 types

Question 4

what does IAS stand for

Answer 4

International accounting standards

Question 5

what must be put into place to ensure smooth running of accounting practices

Answer 5

standards, accountants to follow when preparing the financial statements

Question 6

what does IAS 2 give guidance on

Answer 6

a - how to establish the cost of inventory
b - what to do if the resale value of inventory falls below the cost

Question 7

What must the cost of inventory include

Answer 7

all costs associated with getting inventory to the place they r in now

1- cost of purchase: purchase price, import duties, carriage inward

2-cost of conversion: wages of staff making goods + share of production overheads

Question 8

what about cost of purchases is an issue

Answer 8

cost of purchase still causes problem e.g. if price goes up and down across the year:

-the inventory u have left u don’t know at which price u bought them at: how do u know which ones are at the price. Hard to value

Question 9

What are the two ways to value the remaining stock in a store using IAS2

Answer 9

FIFO and AVCO

Question 10

what does fifo stand for

Answer 10

first in first out

Question 11

what is the alternative acronym for FIFO and the meaning

Answer 11

LILO = last in last out

Question 12

what does FIFO essentially mean

Answer 12

The last ones are the most recent arrivals

Question 13

What does AVCO stand for

Answer 13

average cost

Question 14

what does AVCO essentially say

Answer 14

a mixture of old and new stock was sold = a mixture is left

Question 15

can businesses chose which to use can they switch

Answer 15

They have to chose one otherwise it can confuse stuff

Question 16

is the avco or fifo right ? is it accurate?

Answer 16

no it is an assumption

Question 17

how should u work out fifo?

Answer 17

by working backward, we want to identify how they shud be valued

Question 18

under avco how do we determine the average cost

Answer 18

by calcuating a new average cost per unit each time a new bath of goods is received

Question 19

what concept is when businesses must chose a method and stick

Answer 19

THE CONSISTENCY CONCEPT

Question 20

What does NRV stand for

Answer 20

Net Realisable value

Question 21

What does the NRV stand for

Answer 21

a current saleable value (- the expenses to finish the sale)

Question 22

what can happen to inventory?

Answer 22

The resale value can be lower then the what it cost to buy- bc it can go out of sale/ damaged etc

Question 23

what does ias2 state about NRV and what concept does it match

Answer 23

inventory must be valued in financial statement at the LOWER of cost and NRV - PREUDENCE concept

Question 24

what is prudence concept

Answer 24

prudence concept = take within region a cautious view of figures, don’t overstate assets
-don’t want to make out business it better then it actually is

Question 25

what are most sales made on in the uk

Answer 25

credit terms

Question 26

what is meant when we state 'credit terms'

Answer 26

customer can pay later or in instalments

Question 27

what is double entry when the credit is sale

Answer 27

The invoice sent to customer and records: DR Recieveables CR sales

Question 28

When the customer pays the invoice what happens to double entry

Answer 28

DR Cash at bank CR Reciebables

Question 29

What is the risk with credit sales

Answer 29

Some customers may never pay

Question 30

what are the two situations to think of when discussing credit sales

Answer 30

Bad (irrecoverable) debts Doubtful Debta

Question 31

What is meant by bad/irrecoverable debts

Answer 31

highly unlikely that the debt WILL EVER be received. It should be REMOVED from the records.

Question 32

What is meant by doubtful debts

Answer 32

Payment may be possible- but is doubt. The debt should remian in the account in case the customer actually pays - but shud be allowed for (may not get the money) (Prudence concept)

Question 33

What happens to the double etnry and spl for bad debt

Answer 33

-If the debts are certainly irrecoverable = must be removed DR Bad debt Expense (amount) CR Recieverables (same amount) -minus the recievable amount in the SPL e.g. if initally had total 6000, 300 is bad debt = 5700 recievable left -bad debt expense will show in the SPL

Question 34

Is the sales figure uneffected for a bad debt?

Answer 34

no, its unaffected

Question 35

is bad debt an expense?

Answer 35

yes, bc it’s a running cost, cost of selling on credit

Question 36

what is created for the doubtful debts and what does it do?

Answer 36

and allowance, it will be offset against the recieveables in the SPL

Question 37

how may the allowance be determined

Answer 37

by the estimation of: a- evaluating specific debts individually b- analysing past experience to estimate the % which is unlikely to be paid

Question 38

what is used to determine debt risk

Answer 38

aged receieveables report. Has past data of customers and when paid

Question 39

Accounting for the allowance for doubtful debts - the scenarios

Answer 39

1- where an allowance is being set up for first time -where the allowance increases in a subsequent year 2- where the allowance decreases in a subsquent year

Question 40

how are bad debts recovered

Answer 40

if they r recovered maybe a year later the double entry is: DR Cash at bank CR Bad debts recovered -recovered bd will show as a negative expensein SPL -OR CAN CREDIT BANK DEBT EXPENSE