Flashcards
Chapter 2/3
Cards in this deck (11)
- 1D - Debit E - Expenses A - Assets D - DrawingsC - Credit
L - Liabilities
I - Income
C - Capital - 2Cost of sales = Opening inventory + purchases + carriage inwards - closing inventory.Inventory adjustments
Opening inventory
Dr Cost of Sales Cr Inventories
Closing inventory
Dr Inventories Cr Cost of Sales - 3Valuation of inventories Quantity x valuation Q = Inventory count V= Subjective estimate.Inventories measured at the lower of cost and NRV.
Inventory sold @ profit - Cost value
Inventory sold @ loss - NRV - 4NRV - net selling proceeds after all costs incurred to sell item have been deducted. Estimated selling price - costs of completion - selling & distribution costs Don't net off - each item cost vs NRV.Estimating cost - FIFO vs LIFO vs AVCO
FIFO - First in First Out - First goods sold are first purchased. Remaining inventory are most recent purchases.
LIFO - Last In Last Out - Don't Use. - 5AVCO - Weighted average cost Weighted average cost of similar items is recalculated each time a new item is purchased/produced (increased inventory).Pros and cons
FIFO + More realistic value on SOFP.
- In times of rising prices tends to give higher inventory values and profits.
AVCO - Can be complex.
+ Not affected as much by rising prices. - 6Mark-up Profit/Cost x 100 Profit as a percentage of cost. Margin Profit/Sales x100 Profit as a percentage of sales.Inventory written off/down when:
Lost or damaged.
Damaged or worthless.
Obsolete or out of fashion.
Write down to nothing or to NRV if less than cost. - 7Insurance claims If a material amount of inventory unusable can affect profitability. Take cost out of purchases and put under expenses. Insurance treated as other income. If received under cash otherwise other receivables.Inventory drawings
If owner takes inventory from the business treat as a drawing.
Dr Drawings
Cr Purchases (lower cost of sales) - 8Accruals and prepayments Gross profit calculated by matching revenue and cost of sales and then charging expenses. Not all income/expenses incurred in a period are paid in that period. Use the accrual principle.Accruals - expenses charged against profit for particular period but not yet paid for.
Dr Expense
Cr Accruals
Included in current liabilities. - 9Prepayments - expenses paid in one accounting period but relate to a later period. Dr Prepayment Cr Expense Included in current assets.Reverse accrual:
Dr Accruals
Cr Expense
Reverse prepayment:
Dr Expense
Cr Prepayments - 10Accrued income - relates to income earned in one period but not invoiced or received. Dr Accrued income Cr Income Shown as a current asset.Deferred income - relates to income received in advance of being earned.
Dr Income
Cr Deferred income
Shown as a current liability. - 11—
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- Flashcards on Chapter 2/3, created by Sam Dillon on 05/09/2015.
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- Sam Dillon
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