1What is inventory?
It refers to goods bought by businesses to sell to their customers and is recorded at cost price and under current asset
2Why is it important for businesses to keep sufficient inventories?
To prevent stockout situations that result in loss of sales
3How is inventory managed?
By keeping proper records of inventory to keep track of available goods for sale & storing them in proper warehouses to prevent spoilage and theft
4How does the business determine the cost of sales?
Using FIFO - First In First Out
5What is FIFO
It assumes that the goods purchased earliest are sold first and what is left in inventory are goods purchased last.
6How is inventory valued
It is valued / recorded at the lower of cost and net realisable value aka market price in accordance to the prudence theory
7What is the prudence theory
It states that the accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities or losses
8What are some reasons for net realisable value of a product to be reduced
Physical loss or damage of inventory recorded as impairment loss on inventory, goods becoming obsolete/outdated & nearing its expiry date
9How is loss of net realisable value recorded?
Debit impairment loss on inventory (Exp+) and Credit Inventory (A-)
10How is an insurance claim that is processed but the amount has not been received yet recorded
Debit insurance claim receivable (CA+) and Credit Impairment loss on inventory (Exp-)
11How is an insurance claim that is processed and the amount has been received recorded
Debit cash at bank (CA+) and Credit Insurance claim receivable (CA+)