Valuation of Inventory (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
1/150Still learning
Know0
Define the net realisable value of inventory.
Was this flashcard helpful?
Cards in this collection (15)
Define the net realisable value of inventory.
The net realisable value is the amount a business expects to receive from selling the goods, after the costs of selling them.
It is the selling price minus any selling expenses, such as repairs to damaged goods.
Complete the sentence about the cost of inventory:
The cost of inventory is the purchase cost of the goods plus the cost of
.The completed sentence is:
The cost of inventory is the purchase cost of the goods plus the cost of carriage inwards.
At what value is inventory shown in the financial statements?
At the lower of its cost and its net realisable value.
This follows the principle of prudence, so that neither the asset nor the profit is overstated.
True or False?
Inventory is normally valued at its net realisable value.
False.
For most inventory the cost is the lower of the two figures, so the cost is what is normally used. Net realisable value takes over only in particular cases.
When is the net realisable value lower than the cost?
When goods have been damaged and need repair before they can be sold, when they are close to their expiry date, or when they are being sold cheaply to promote a new product.
An item cost $15 plus $3 delivery, and after $8 of repairs it could be sold for $24. What is its inventory value?
$16.
The cost is $15 + $3 = $18 and the net realisable value is $24 − $8 = $16, and inventory takes the lower of the two.
How do you value an inventory made up of several different items?
Compare the cost and the net realisable value for each item separately, take the lower figure, and multiply it by the number of units.
Adding those item totals together gives the valuation of the whole inventory.
How does the value of the closing inventory affect the profit?
A higher closing inventory gives a higher profit.
The closing inventory is subtracted from the cost of sales, so a larger figure makes the cost of sales smaller.
How does the value of the opening inventory affect the profit?
A higher opening inventory gives a lower profit.
The opening inventory is added to the cost of sales, so a larger figure makes the cost of sales bigger.
Complete the sentence about an error in the inventory:
If the closing inventory is overvalued, the gross profit and the profit for the year are both
.The completed sentence is:
If the closing inventory is overvalued, the gross profit and the profit for the year are both overstated.
True or False?
An error in the opening inventory affects the assets in the statement of financial position.
False.
The opening inventory does not appear in the statement of financial position at all. Only the closing inventory does, under current assets.
The opening inventory has been undervalued. What is the effect on the profit for the year?
Both the gross profit and the profit for the year are overstated.
Too little has been added to the cost of sales, so the cost of sales comes out too low.
The closing inventory has been overvalued. What is the effect on the statement of financial position?
Both the assets and the capital are overstated.
The closing inventory is a current asset, and the profit it has overstated is carried into the capital.
True or False?
An inventory error changes the gross profit and the profit for the year by the same amount.
True.
The error sits in the cost of sales, which feeds into both figures, so the two move in the same direction and by the same amount.
Why does an error in the opening inventory leave the capital at the end of the year unaffected?
Because the same figure was the previous year's closing inventory, so it distorted that year's profit in the opposite direction.
The two errors cancel, and the closing capital is correct even though each year's profit was wrong.
Sign up to unlock flashcards
or