When inventory is bought on deferred settlement terms containing a financing element, the difference between the cash price and the total payment is generally treated as:
Correct answer: A. A finance expense over the credit period
- A. A finance expense over the credit period
- B. An inventory purchase discount
- C. A direct addition to closing inventory
- D. A reduction of the quantity purchased
Explanation
The inventory is initially recorded at its cash price equivalent. The excess arising from deferred payment is recognized as interest or finance expense over the financing period, rather than being included in inventory cost.
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About Inventory Valuation
Inventory valuation determines the cost of unsold goods and its effect on cost of sales and profit. The work covers inventory counts, included costs, FIFO and weighted-average costing, and the rule that inventory is reported at the lower of cost and net realisable value, not simply at its expected selling price.
Practise Inventory Valuation
34 free Inventory Valuation MCQs from Accounting, each with the correct answer and an explanation. Unlimited attempts, no account needed.
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