Week 6 Flashcards
(22 cards)
Q: What is inventory in accounting terms?
A: Goods held for sale or for use in production that provide future economic benefit.
Q: When does inventory become an expense?
A: When it is sold — then it’s recorded as Cost of Sales in the Income Statement.
Q: What are the three types of inventory?
A: 1) Raw Materials, 2) Work-in-Progress, 3) Finished Goods.
Q: What’s the issue with double-entry bookkeeping in tracking inventory?
A: It records values but not quantities or movement of inventory.
Q: Name the two inventory recording systems.
A: 1) Periodic (physical count), 2) Perpetual (real-time system).
Q: What are the three inventory cost flow assumptions?
A: FIFO, LIFO, and AVCO (Weighted Average Cost).
Q: Describe FIFO.
A: First In, First Out – oldest inventory is sold first.
Q: Describe LIFO.
A: Last In, First Out – newest inventory is sold first. Not allowed under IAS 2.
Q: Describe AVCO.
WAC
A: Assumes all units sold are from a mix of purchases.
Formula:
TotalCost
TotalUnitsAvailable
WAC=
TotalUnitsAvailable
TotalCost
Q: Inventory must be valued at the lower of what two amounts?
A: Cost and Net Realisable Value (NRV).
Q: What is NRV?
A: Estimated selling price – costs to complete and sell.
Q: What’s the journal entry to record closing inventory?
A:
Dr Inventory
Cr Cost of Sales
Q: What is a trade receivable?
A: Amount owed by a customer for goods/services sold on credit.
Q: What is a credit sale?
A: Sale where the customer receives goods/services now and pays later.
Q: What is a bad debt?
A: An amount owed by a customer that is confirmed to be uncollectible.
Q: What is the journal entry to write off a bad debt?
A:
Dr Credit Loss Expense
Cr Trade Receivables
Q: What is a doubtful debt?
A: A receivable that might not be collected — uncertainty exists.
Q: What is an allowance for credit loss?
A: A provision to cover expected future losses from doubtful debts.
Q: What are the two types of allowance for doubtful debts?
A: 1) Specific – for identified risky customers
2) General – % estimate based on past experience
Q: Why is an allowance for credit loss considered a contra-asset?
A: Because it reduces the trade receivables total on the balance sheet.
Q: Which accounting concepts are involved in credit loss provisions?
A: Prudence (anticipating losses early) and Matching (loss in same period as revenue).
Q: What’s the journal entry for creating a new allowance?
