Chapter 9 Inventory - Level 2

Select the best statement out of the 3 shown below:

*Hint: Read all options carefully.

• Impairment loss on inventory is an expense.

• Inventory is a current asset.

• Both of the above statements are true.

The set of journal entries for impairment loss is:

• Dr Impairment loss on inventory

  Cr Inventory

• Dr Inventory

  Cr Impairment loss on inventory

• Dr Sales revenue

  Cr Inventory

• Dr Impairment loss on Inventory

  Cr Trade payable

What is FIFO method?

• Goods purchased last are assumed to be sold first. The inventory left are goods that are purchased first.

• Goods purchased first are assumed to be sold first. The inventory left are goods that are purchased first too.

• Goods purchased earliest are assumed to be sold first. The inventory left are goods that are purchased last.

Use Calculator if required, 3 mins is given for this qns.

Joy Ltd is a trading business that buys and sells Machinery units. It has an opening balance of 40 units of inventory costing $10,000 as at 1 Aug 2019.

Aug 3 - Purchased 40 units for $12,000

Aug 5 - Purchased 40 units for $14,000

Aug 6 - Sold 80 units at selling price of $44,000

What is the cost of sales on 6 Aug?

• 10,000

• 26,000

• 24,000

• 22,000

Among the statement of financial position, Inventory is an account that falls under:

• Current liability

• Owner's equity

• Expenses

• Current asset

If impairment loss on inventory is not recorded for the year, what is the effect on current assets?

Journal entry for impairment loss:

Dr Impairment loss on inventory

Cr inventory

• Overstate Current assets

• Understate Current assets

• No effect.

• Unable to predict.

State the accounting theory in valuation of inventory:

• Going concern theory

• Historical cost theory

• Consistency theory

• Prudence theory

Which of the following best explains Prudence concept? Choose all applicable options.

• Impairment loss on inventory is recorded in order not to overstate assets and profits.

• Expenses incurred is to be matched against revenue earned from selling of the inventory.

• Inventory is valued at lower of cost and net realisable value.

• Goods purchased first are assumed to be sold first.

Choose applicable option(s):

Which of the following scenario should you record impairment loss on inventory?

• Fire destroyed 20% of inventories

• Cotton inventories cost $10,000 and is now only worth $8,000 in the market

• Computer inventories that cost $8000, was selling for $20,000 last month. They can only be sold for $15,000 now.

• Machinery units that cost $10,000 each can now be sold for $20,000