Principle of Accounts Chapter 9 Inventory

What is the definition of Inventory

Inventory refers to goods bought by businesses to sell to their customers

why do businesses keep inventory

A business buys sufficient goods to keep on hand to prevent a stock out situation which results in loss of sales

ways businesses manage inventory

1. Keep proper records to track inventory

2. Keep physical inventory in warehouse

3. Buy insurance to insure inventory

whats the Valuation rule for inventory

Inventory is to be valued at the lower of cost or net realisable value

What happens when the value of inventory falls below its costs

When the Net realisable value of inventory is below cost price, the business records the loss as an expense called impairment loss on inventory

What happens when impairment loss is not adjusted?

Effect on expense: understated

Effect on profit: Overstated

Effect on current asset: overstated

How is the cost of inventory purchased in calculated?

1. Cost price

2. All costs to bring them ready for sales( Transport/shipping, Taxes, Insurances for goods in transit, packing materials, wages for employees involved in repacking goods)

How is the cost of sales calculated

Using FIFO method

What is prudence theory

the accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses

to a relavant accounting theory explain why….

According to this, inventory is valued at the lower of cost or net realisable value to ensure that inventory is not overstated