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Chapter Roundup


The cost of goods sold is calculated as: Opening inventory + purchases closing inventory.
Opening inventories brought forward in the inventory account are transferred to the trading account, and so at the end of the accounting year, the balance on the inventory account ceases to be the opening inventory value b/f, and becomes instead the closing inventory value c/f.

The value of closing inventories is accounted for in the nominal ledger by debiting an inventory account and crediting the trading account at the end of an accounting period. The inventory will therefore always have a debit balance at the end of a period, and this balance will be shown in the statement of financial position as a current asset for inventories. The quantity of inventories held at the year end is established by means of a physical count of inventory in an annual counting exercise, or by a 'continuous' inventory count. The value of these inventories is then calculated, taking the lower of cost and net realisable value for each separate item or group of inventory items. Inventory should be valued at the lower of cost and net realisable value.

Quick Quiz
1 2 When is an inventory account used? How is closing inventory incorporated in the financial statements? A Debit: income statement Credit: statement of financial position B Debit: statement of financial position Credit: income statement What is 'continuous' inventory counting? An item of inventory was purchased for $10. However, due to a fall in demand, its selling price will be only $8. In addition further costs will be incurred prior to sale of $1. What is the net realisable value? A $7 B $8 C $10 D $11 Why is inventory not valued at expected selling price? When valuing inventory at historical cost, the following methods are available. (1) FIFO (2) AVCO (3) LIFO (4) Standard cost Which methods are allowable under IAS 2 Inventories? A (1), (2), (3) B (1), (2), (3), (4) C (1) only D (1), (2) What is included in the cost of purchase of inventories according to IAS 2? A Purchase price less trade discount B Purchase price plus transport costs less trade discount C Purchase price less import duties less trade discount D Purchase price plus import duties plus transport costs less trade discount What type of costs should be recognised as an expense, not as part of the cost of inventory? What are the most likely situations when the NRV of inventories falls below cost?

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5 6

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Part D Recording transactions and events 8: Inventory

147

Answers to Quick Quiz


1 2 3 4 5 6 7 8 9 Only at the end of an accounting period. B DEBIT: Inventory in hand (statement of financial position) CREDIT: Closing inventory (trading account) A card is kept for every item of inventory. It shows receipts and issues, with a running total. A few inventory items are counted each day to test that the cards are correct. A Net realisable value is selling price ($8) less further costs to sale ($1), ie $7. Mainly because this would result in the business taking a profit before the goods have been sold. D Only FIFO and AVCO are allowed. D Purchase price plus import duties (and other taxes) plus transport costs less trade discount. See Paragraph 5.4.3. Increase in costs or a fall in selling price Physical deterioration of inventory Obsolescence Marketing strategy Errors in production or purchasing
Now try the questions below from the Exam Question Bank

Number

Level

Marks

Time

Q12
Q13

Examination
Examination

2
2

2 mins
2 mins

148

8: Inventory Part D Recording transactions and events

Working

Depreciation Property Opening balance Charge for the year (1.5% 120,000) Closing balance Equipment Opening balance Charge for the year (25% 42,000) Closing balance

$ 20,000 1,800 21,800 38,000 10,500 48,500 12,300

Depreciation charge in income statement (1,800 + 10,500)

Chapter Roundup

Capital expenditure is expenditure which results in the acquisition of non-current assets. Revenue expenditure is expenditure incurred for the purpose of the trade or to maintain non current assets.

The cost of a non-current asset, less its estimated residual value, is allocated fairly between accounting periods by means of depreciation. Depreciation is both:
Charged against profit; and Deducted from the value of the non-current asset in the statement of financial position.

Two methods of depreciation are specified in your syllabus: The straight line method The reducing balance method


When a non-current asset is revalued, depreciation is charged on the revalued amount. When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference between the net sale price of the asset and its carrying value at the time of disposal. IAS 16 covers all aspects of accounting for property, plant and equipment. This represents the bulk of items which are 'tangible non-current assets'. An asset register is used to record all non-current assets and is an internal check on the accuracy of the nominal ledger.

Quick Quiz
1 Which of the following statements regarding non-current asset accounting is correct? A All non-current assets should be revalued each year. B Non-current assets may be revalued at the discretion of management. Once revaluation has occurred it must be repeated regularly for all non-current assets in a class. C Management can choose which non-current assets in a class of non-current assets should be revalued. D Non-current assets should be revalued to reflect rising prices. Which of the following statements regarding depreciation is correct? A All non-current assets must be depreciated. B Straight line depreciation is usually the most appropriate method of depreciation. C A change in the chosen depreciation method is a change in accounting policy which should be disclosed. D Depreciation charges must be based upon the carrying value of an asset (less residual value if appropriate).
181

Part D Recording transactions and events 9: Tangible non-current assets

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What is an asset's carrying value? A Its cost less annual depreciation B Its cost less accumulated depreciation C Its net realisable value D Its replacement value Give two common depreciation methods. A non-current asset (cost $10,000, depreciation $7,500) is given in part exchange for a new asset costing $20,500. The agreed trade-in value was $3,500. The income statement will include? A A loss on disposal $1,000 B A profit on disposal $1,000 C A loss on purchase of a new asset $3,500 D A profit on disposal $3,500 What details about a non-current asset might be included in an assets register? Why might the assets register not reconcile with the non-current assets? A Asset stolen or damaged B New asset, not yet recorded in the register C Errors in the register D All of the above

Answers to Quick Quiz


1 B Correct. A Non-current assets may be revalued, there is no requirement to do so in IAS 16. C Incorrect, all non-current assets in a class must be revalued. D Incorrect, non-current assets may be reduced in value as well as being increased. D Correct, carrying value is another name for net book value. A Incorrect, some non-current assets are not depreciated eg land. B Incorrect, management should choose the most appropriate method. C Incorrect, a method change is not a change in accounting policy. B Its cost less accumulated depreciation. Straight-line and reducing balance. $ B 2,500 Carrying value at disposal (10,000 7,500) 3,500 Trade-in allowance 1,000 Profit Date of purchase Description Original cost Depreciation rate and method Accumulated depreciation to date Date and amount of any revaluation D Other reasons include an asset that is obsolete and so scrapped or improvements not yet recorded in the register.
Now try the questions below from the Exam Question Bank

3 4 5

Number

Level

Marks

Time

Q14 Q15 Q16 Q17

Examination Examination Examination Examination

2 2 2 1

2 mins 2 mins 2 mins 1 min

182

9: Tangible non-current assets Part D Recording transactions and events

Chapter Roundup

Expenditure on research must always be written off in the period in which it is incurred.
Development costs are also usually written off. However, if the criteria laid down by IAS 38 are satisfied, development expenditure can be capitalised as an intangible asset. If it has a finite useful life, it should then be amortised over that life.

Quick Quiz
1 What is the required accounting treatment for expenditure on research? A Write off as an expense in the period it is incurred B Capitalise and carry forward as an asset Which of the following items is an intangible asset? A Land B Patents C Buildings D Van Research expenditure is incurred in the application of knowledge for the production of new products. Is this statement A True B False XY Co has development expenditure of $500,000. Its policy is to amortise development expenditure at 2% per annum. Accumulated amortisation brought forward is $20,000. What is the charge in the income statement for the year's amortisation? A $10,000 B $400 C $20,000 D $9,600 Given the facts in 4 above, what is the amount shown in the statement of financial position for development expenditure? A $500,000 B $480,000 C $470,000 D $490,000

Answers to Quick Quiz


1 2 3 4 5 A B B A C Research expenditure is always written off as it is incurred. All the others are tangible assets. False. This is a definition of development expenditure. 2% $500,000 = $10,000. Deferred development expenditure b/f is $480,000 (cost $500,000 accumulated depreciation $20,000), then deduct annual depreciation of $10,000 to give figure c/f of $470,000.

Now try the question below from the Exam Question Bank

Number

Level

Marks

Time

Q18

Examination

2 mins

190

10: Intangible non-current assets Part D Recording transactions and events