Inventory Valuation and Bank Reconciliation Flashcards

Vocabulary-style flashcards covering inventory valuation cost formulas (FIFO, AVCO, LIFO), IAS 2 standards, bank reconciliation procedures, and COSO internal control components.

Periodic Inventory System

A system in which the cost of sales is determined by a year-end physical count and a specific formula rather than updating after every transaction.

Perpetual Inventory System

A system that maintains a continuous record of inventory by updating quantities and values after every purchase and sale transaction.

FIFO (First-In, First-Out)

An inventory valuation method where the earliest items purchased are assumed to be the first sold, resulting in higher closing inventory and profit when prices are rising.

AVCO (Weighted Average Cost)

An inventory valuation method that calculates a mean cost for items in inventory, tending to provide smoother cost and profit trends.

LIFO (Last-In, First-Out)

An inventory valuation method prohibited under IAS 2 that results in lower profit during periods of rising prices.

IAS 2 Inventory Measurement

The accounting standard rule requiring that inventory be measured at the lower of cost and net realisable value.

Net Realisable Value (NRV)

The estimated selling price less the costs to complete and the costs to sell.

Inventory Write-down

Under IFRS, this is the accounting treatment for inventory where the reduction in value is shown as an expense in profit or loss.

Bank Reconciliation (BR)

A procedure that compares the cash balance in the entity’s accounting records (cash ledger) with the balance shown on the bank statement to identify and explain differences.

Unrecorded Items

Transactions processed by the bank (e.g., service charges, direct debits, or interest) but not yet recorded in the entity’s accounting system, requiring adjusting entries.

Outstanding Items (Timing Differences)

Transactions recorded by the entity but not yet processed by the bank at the reporting date, such as deposits in transit or outstanding payments.

Deposits in Transit (Unpresented Lodgments)

Cash receipts recorded in the entity’s accounting records but not yet credited on the bank statement.

Outstanding Payments (Unpresented Payments)

Payments issued by the entity but not yet cleared or presented through the banking system at the reconciliation date.

Bank-Recorded Receipts (Unrecorded Lodgments)

Amounts that appear on the bank statement but have not yet been entered in the entity’s system, such as direct deposits or interest income.

Bank-Recorded Payments (Unrecorded Payments)

Deductions processed by the bank but not yet recorded by the entity, such as bank service fees or direct debits.

Transposition Error

A posting error where digits are accidentally swapped, for example, recording $\pounds 189$ as $\pounds 198$.

Internal Control

A process maintained by management to safeguard assets, ensure reliable financial reporting, and provide assurance that operations are effective and compliant.

Control Environment

The component of internal control that deals with the ethical tone and accountability culture set by management.

Control Activities

The component of internal control consisting of policies and procedures like authorization, segregation of duties, and reconciliations.

Monitoring Activities

The component of internal control involving the ongoing review and improvement of the effectiveness of the control system.

Risk Assessment

The process of identifying and analysing potential risks of error or fraud within an organization.

Information and Communication

The internal control component focused on the accurate and timely flow of financial information.