P3

Question 1

PAS 2

Answer 1

Inventories

Question 2

Assets which are held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services

Answer 2

Inventories

Question 3

Classes of inventory

Answer 3

Raw materials inventory
Work in process “
Finished goods “
Supplies

Question 4

Consist of basic materials purchase from other firms to be used in the production of goods or product

Answer 4

Raw materials inventory

Question 5

Consist of basic materials purchase from other firms to be used in the production of goods or product

Answer 5

Raw materials inventory

Question 6

Consist of partially finished goods requiring additional work before they become wholly completed

Answer 6

Work in process inventory

Question 7

Consist if completely manufactured goods that are not yet sold

Answer 7

Finished good inventory

Question 8

Materials that are regularly used by the company but do not form part of the finished goods sold

Answer 8

Supplies

Question 9

Importance of inventory management

Answer 9

Decoupling function
Storing resources
Irregular supply and demand
Quantity discounts
Avoiding stock outs and shortage

Question 10

If the firm does not store up for a good inventory, there can be many delays and inefficiencies

Answer 10

Decoupling function

Question 11

In a manufacturing process, raw materials can be stored by themselves, or included in the work-in-process or the finished goods inventory

Answer 11

Storing resources

Question 12

When the supply or demand for an inventory item is irregular, storing certain amounts in hand can be important

Answer 12

Irregular supply and demand

Question 13

Purchasing in large quantities can substantially reduce the cost of products; however, this may result to higher cost due to spoilage, damage stock, theft, insurance, so on, and less availability of cash for other investments

Answer 13

Quantity discounts

Question 14

If a company is repeatedly out-of-stock, customers will likely go elsewhere to satisfy their needs

Answer 14

Avoiding stock-outs and shortages

Question 15

Ways in managing invetories

Answer 15

Monitor inventory ratios
Maintain inventory at its optimum level
Hedge
Examine the degree of spoilage
Examine the quantity of inventory with respect to sales
Eliminate slow moving inventories
Watch out for inventory risks
Forecast the price of materials needed

Question 16

Types of inventory cost

Answer 16

Ordering cost
Carrying cost

Question 17

Also known as purchase cost or set up cost, this is the sum of the fixed cost that are incurred each tine an ite is ordered.

Answer 17

Order cost

Question 18

Formula of TOTAL ORDERING COST

Answer 18

number of orders× OC (ordering cost per order

Question 19

Also called holding cost, associated with having the inventory on hand. It is primarily made up of cost related to the inventory investment and storage. For the purpose of the inventory in hand, it should not be included in the carrying cost

Answer 19

Carrying cost

Question 20

EOQ (economic order quantity) formula

Answer 20

Carrying cost is the average number of units of inventory for the period×carrying cost per unit

Question 21

Total Carrying Cost formula

Answer 21

(Q or Quantity or EOQ÷2)×CC or carrying cost per unit

Question 22

Components of the carrying cost

Answer 22

Interest
Insurance
Taxes
Storage costs

Question 23

An essential accounting formula that determines the point at which the combination of order costs and inventory carrying costs is the least

Answer 23

Economic order quantity

Question 24

Results to the most cost-effective quantity to order

Answer 24

Economic order quantity

Question 25

Required number of times a firm or company orders in a given period; on the assumption that the inventory will be used at the constant rate throughout the period

Answer 25

Optimum numbers of order

Question 26

The inventory level at which an order should be places to replenish the inventory; computed by multiplying the lead time by the normal lead time usage

Answer 26

Reorder point

Question 27

Used only under condition of certainty, meaning the lead time and lead time usage don't fluctuate

Answer 27

Reorder point

Question 28

The time it normally takes to receive the delivery of inventory after the order has been placed

Answer 28

Lead time

Question 29

Refers to the number of units to be used during the lead time

Answer 29

Lead time usage

Question 30

Formula of Reorder Point or ROP

Answer 30

Lead time × lead time usage

Question 31

Additional inventory on hand used to cushion uncertainties during the lead time and lead time usage

Answer 31

Safety stock

Question 32

Factors to be considered in maintaining safety stocks

Answer 32

Demand Lead time Cost of stock outs

Question 33

Higher the risk associated with the perceived demand in the inventory, the higher the safety stock to be required by the company

Answer 33

Demand

Question 34

The higher the risk of not receiving the goods needed, the higher the risk of stock out or out of stock

Answer 34

Lead time

Question 35

Safety stock is maintained to avoid risk of losing sales

Answer 35

Cost of stock out

Question 36

Formula to get Reorder point with safety stock

Answer 36

(lead time × usage per day) + safety stock

Question 37

What basis the firm may use to determine the required safety stock

Answer 37

Maximum usage basis Frequency distribution basis

Question 38

Firms safety stock is determined by identifying the normal usage during lead time and deducting it from maximum usage during lead time

Answer 38

Maximum usage basis

Question 39

Uses a series of historical data sorted into classes with their corresponding frequencies of occurence

Answer 39

Frequency distribution basis

Question 40

Statistical tool applied to historical data is used to arrive at the desired level of safety stock

Answer 40

Frequency distribution basis

Question 41

Part of the total production concept that often interfaces with a total quality control program

Answer 41

Just in time inventory

Question 42

JIT or Just in time program's 3 basic requirements

Answer 42

Quality production that continually satisfies customers requirement Close ties between suppliers, manufacturers and customers Minimization level of inventory

Question 43

Requires close cooperation with the vendors regarding the quality of the output and design-for-manufacturing (DFM) issues to assure ease in manufacturing, quality, realibility, and ease of the service which are built into the product from the design stage

Answer 43

Lean production

Question 44

As presented in the balance sheet, consist of all current liabilities

Answer 44

Short term financing

Question 45

Criteria provided by the revised PAS no. 1 for a liability to be considered current

Answer 45

Expected to be settled in the entity's normal operating cycle Held primarily for the purpose of being traded Due to be settled within 12 months after the balance sheet date Entity does not have an unconditional right to defer the payments of the liability for at least 12 months after the balance sheet date.

Question 46

Advantages of short term financing

Answer 46

Easier to arrange Less expensive Afford the borrower more flexiblity

Question 47

Disadvantages of short term financing

Answer 47

Interest rate fluctuates more often Refinancing is frequently needed Delinquent payment may be detrimental to the credit rating to the credit rating of the borrower

Question 48

Sources of the short term financing

Answer 48

Trade credit Stretching payable Accruals Short term bank loan Banker's acceptance Commercial finance company loans Commercial paper Receivable financing Inventory financing

Question 49

An agreement between the buyer and the seller

Answer 49

Trade credit

Question 50

The buyer received the invoice sent by the seller specifying the goods purchased, the purchase price, the total amount to be paid, and the term of purchase

Answer 50

Trade credit

Question 51

Term if purchase is the cheapest way of obtaining a short term loan and is considered to be the largest source if short term funds

Answer 51

Trade credit

Question 52

advantages of trade credit

Answer 52

Immediately available from suppliers Collateral is not needed No interest is charged, although there is an implicit cost if the discount is forgone Can be easily paid off Easily to obtain Trade creditors are usually generous or supportive in the event of financial difficulty

Question 53

Disadvantages of trade credit

Answer 53

Possibility of not availing of the discount dus to financial problems Buyer avails of the discount but at a disadvantage due to lower implicit cost as compared with a higher cost of the bank credit Not paying within the discount period may lead the firm to a lower credit rating

Question 54

Factors to be considered

Answer 54

Market conditions Financial stability Competitiveness Nature of the product Nature of the demand and supply

Question 55

Formula of average account payable

Answer 55

(annual purchase ÷ 360) × credit period

Question 56

Formula cost of discount forgone

Answer 56

(discount÷100%) - discount 100%] × (360/ final due date - discount period)

Question 57

Mean paying the obligation later than expected; helps the company reduce the cost of discount

Answer 57

Stretching payable

Question 58

Expenses already incurred but not yet paid off by the company; with the discrepancy, the company is able to benefit fron the short term financing

Answer 58

Accruals

Question 59

The company has the power to use the funds for other operating activities until such time that it needs to release payment

Answer 59

Accruals