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Accounting for Inventory
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Accounting for Inventory

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Understand the various aspects of maintain inventory records, that handles your two principal financial statements ie Income Statement and Balance Sheet. …

Understand the various aspects of maintain inventory records, that handles your two principal financial statements ie Income Statement and Balance Sheet.

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  • 1. Importance ImportanceInventory appears in two principal financial statements. ► Income Statement ► Balance Sheet
  • 2. Importance ImportanceInventory appears in two principal financial statements. ► Income StatementAs an expense ► Balance SheetAs a current asset
  • 3. Importance ImportanceInventory appears in two principal financial statements. ► Income StatementAs an expense it is the largest item of expense in income statement ► Balance SheetAs a current asset it is the largest item of current assets in balance sheet
  • 4. Importance ImportanceCost of Goods SoldCost of Goods Sold is deducted from revenue to arrive at Gross Profit.
  • 5. Importance ImportanceCost of Goods Sold is calculated byBeginning Inventory + Purchases = Goods Available. &Goods Available – Ending Inventory= Cost of Goods Sold
  • 6. Inventory Systems Inventory Systems Inventory balances are monitored following two principal types of inventory systems -► Periodic System► Perpetual System
  • 7. Inventory Systems Inventory Systems Inventory balances are monitored following two principal types of inventory systems -Periodic System – useful for inexpensive goods where need for accurately tracking inventory does not exist.
  • 8. Inventory systems Inventory systems Inventory balances are monitored following two principal types of inventory systems -Periodic SystemPerpetual System - provides detailed record of inventory throughout year and hence, used by most companies.
  • 9. Methods of Inventory Costing Methods of Inventory Costing GAAP provide for a number of acceptable inventory costing methods including –• Specific Identification.• Average Cost• FIFO (First-in First-out)
  • 10. Methods of Inventory Costing Methods of Inventory Costing GAAP provide for a number of acceptable inventory costing methods including –• Specific Identification - The inventory is valued at actual cost of each unit of inventory identified. Is used in case of high value inventory where identification is possible
  • 11. Methods of Inventory Costing Methods of Inventory Costing GAAP provide for a number of acceptable inventory costing methods including –Specific Identification.• Average Cost – Here the value of inventory is taken on average cost. All costs incurred in respect of stock in inventory are added up and then divided by the number of units in stock.
  • 12. Methods of Inventory Costing Methods of Inventory Costing GAAP provide for a number of acceptable inventory costing methods including –Specific Identification.Average Cost• FIFO (First-in First-out) under FIFO, the first units acquired are assumed to be first units sold.
  • 13. Methods of Inventory Costing Methods of Inventory Costing FIFO (First-in First-out)advantages – ► Reports current cost for Ending Inventory ► Reports higher Net Income.
  • 14. Methods of Inventory Costing Methods of Inventory Costing FIFO (First-in First-out)disadvantages – ► Violates the matching Principle ► Results in higher taxes & lowercash flows. ► Does not adjust Cost of Goodssold for the effect of inflation.
  • 15. Methods of Inventory Costing Methods of Inventory CostingThere is one more method usedcalled LIFO (Last-in First-out) Under the LIFO method last units acquired are assumed to be the first units sold.
  • 16. Methods of Inventory Costing Methods of Inventory Costing There is one more method used called LIFO (Last-in First-out) Advantages► Always matches expense and revenues.► Results in lower taxes and higher cash flow.
  • 17. Methods of Inventory Costing Methods of Inventory Costing There is one more method used called LIFO (Last-in First- out) Disadvantages► Reports lower net income.► Reports understated ending inventory.► Can be used to manipulate income
  • 18. Methods of Inventory Costing Methods of Inventory Costing There is one more method used called LIFO (Last-in First- out) Disadvantages► Reports lower net income.► Reports understated ending inventory.► Can be used to manipulate income► Hence frowned upon by GAAP
  • 19. Closing Stock Valuation Closing Stock ValuationBroad Guidelines – Interest & other borrowing costs Abnormal costs of wasted materials or labour Storage costs, unless required by production process distribution, selling and administrative costs are not considered in valuation of inventory.
  • 20. Closing Stock Valuation Closing Stock ValuationBroad Guidelines – Closing stocks of finished goods are generally valued at“ cost of market value, whichever is lower”
  • 21. Closing Stock Valuation Closing Stock ValuationBroad Guidelines – Closing stocks of finished goods are generally valued at “ cost of market value, whichever is lower” except when a company is in the business of mining industry ; where companies value closing stock at net realizable value.
  • 22. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleDisclosure PrincipleMateriality PrincipleConservatism Principle
  • 23. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency Principle The same accounting methods and procedures must be used period-to-period.
  • 24. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleThe same accounting methods and procedures must be used period-to-period. Once the entity opts for a certain methodof inventory costing, it is not to be changed.
  • 25. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleThe same accounting methods and procedures must be used period-to-period.Once the entity opts for a certain method of inventory costing, it is not to be changed. Only valid & compelling reasons can justify such change “and effect of change on net results must be disclosed”
  • 26. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleDisclosure Principle – The entity should disclose all important information that would enable financial statement users to make informed decisions about the entity.
  • 27. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleDisclosure PrincipleMateriality Principle – An entity must perform strictly proper accounting only for items and transactions that are significant to its financial statements.
  • 28. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleDisclosure PrincipleMateriality PrincipleConservatism Principle – an entity should use the least favorable figure when preparing its financial statements.
  • 29. Inventory -- Accounting Principles Inventory Accounting PrinciplesConsistency PrincipleDisclosure PrincipleMateriality PrincipleConservatism Principle – an entity should use the least favorable figure when preparing its financial statements. Lower of cost or market rule for ending inventory valuation is one of the applications of this principle
  • 30. “ Accounting for Inventory is critical as inventory values ◘ appear on two principal financial statements – income statement & balance sheet ◘ are generally largest item of expenses in income statement & largest item of current assets on balance sheet.Accounting for inventory is vital for the business of the company.”