Inventory

• What is the purpose of inventory in a business?

  To manage stock and avoid overstocking.
• What does IAS 2 state regarding inventory valuation?

  Inventory should be valued at the lower of cost and net realizable value (NRV).
• What are the components included in the cost of purchases for inventory?

  Import duties, freight, and cost of conversion.
• What does NRV stand for in inventory valuation?


  Net realizable value.
• What is the formula for calculating the cost of inventory?

  Cost of inventory = Cost of purchases + Import duties + Freight + Cost of conversion.
• What is the significance of the FIFO method in inventory management?

  FIFO assumes the oldest inventory items are sold first.
• What does the term "CIF" refer to in inventory purchases?

  CIF stands for Cost, Insurance, and Freight.
• How does the weighted average cost method (AVCO) differ from FIFO?

  AVCO calculates an average cost for all inventory items, while FIFO sells the oldest items first.
• What is the formula for calculating the gross profit margin?

  Gross profit margin = (Gross profit / Selling price) * 100.
• What should be recorded as a separate expense if inventory is destroyed?


  The cost of the destroyed inventory should be recorded as a separate expense.
• What are the methods of calculating the cost of inventory?

  • FIFO (First In, First Out)
  • LIFO (Last In, First Out)
  • AVCO (Average Cost)
• What is the impact of market conditions on NRV?

  Market conditions can affect the net realizable value of inventory.
• What should be done with drawings of inventory not sold?

  Drawings of unsold inventory should be recorded as a reduction in purchases.
• How does the cost of inventory affect the financial statements of a business?

  The cost of inventory affects the cost of goods sold and ultimately the net profit reported on financial statements.
• What is the significance of the term "drawings" in relation to inventory?

  Drawings refer to the withdrawal of inventory by the owner for personal use.
• What is the relationship between selling price and cost in determining gross profit?

  Gross profit is calculated as the difference between selling price and cost of inventory.
• What is the total cost of purchases if the purchases amount to £100,000 and CIF is £2,000?

  Total cost of purchases = £100,000 + £2,000 = £102,000.
• What is the effect of overstocking on inventory management?

  Overstocking can lead to increased holding costs and potential waste of perishable goods.
• How can businesses manage their inventory effectively?

  Businesses can manage inventory effectively by maintaining accurate records and using appropriate valuation methods.