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Inventory Accounting
 

The process of inventory accounting and its needs is explained in this PPT presentation. An Inventory appears in two principal financial statements. They are Income Statement and Balance Sheet. ...

The process of inventory accounting and its needs is explained in this PPT presentation. An Inventory appears in two principal financial statements. They are Income Statement and Balance Sheet. “Financial Accounting” lesson bought to you by Welingkar’s Distance Learning Division.

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    Inventory Accounting Inventory Accounting Presentation Transcript

    • Welingkar’s Distance Learning Division Financial Accounting CHAPTER-6. Accounting for Inventory We Learn – A Continuous Learning Forum
    • Financial Accounting Accounting for Inventory Chapter Six Importance Inventory appears in two principal financial statements. ► Income Statement ► Balance Sheet
    • Financial Accounting Accounting for Inventory Chapter Six Importance Inventory appears in two principal financial statements. ► Income Statement As an expense ► Balance Sheet As a current asset
    • Financial Accounting Accounting for Inventory Chapter Six Importance Inventory appears in two principal financial statements. ► Income Statement As an expense it is the largest item of expense in income statement ► Balance Sheet As a current asset it is the largest item of current assets in balance sheet
    • Financial Accounting Accounting for Inventory Chapter Six Importance Cost of Goods Sold Cost of Goods Sold is deducted from revenue to arrive at Gross Profit.
    • Financial Accounting Accounting for Inventory Chapter Six Importance Cost of Goods Sold is calculated by Beginning Inventory + Purchases = Goods Available. & Goods Available – Ending Inventory = Cost of Goods Sold
    • Financial Accounting Accounting for Inventory Chapter Six Inventory Systems Inventory balances are monitored following two principal types of inventory systems - ► Periodic System ► Perpetual System
    • Financial Accounting Accounting for Inventory Chapter Six 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.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory systems Inventory balances are monitored following two principal types of inventory systems - Periodic System Perpetual System - provides detailed record of inventory throughout year and hence, used by most companies.
    • Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing GAAP provide for a number of acceptable inventory costing methods including – • Specific Identification. • Average Cost • FIFO (First-in First-out)
    • Financial Accounting Accounting for Inventory Chapter Six 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
    • Financial Accounting Accounting for Inventory Chapter Six 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.
    • Financial Accounting Accounting for Inventory Chapter Six 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.
    • Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing FIFO (First-in First-out) advantages – ► Reports current cost for Ending Inventory ► Reports higher Net Income.
    • Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing FIFO (First-in First-out) disadvantages – ► Violates the matching Principle ► Results in higher taxes & lower cash flows. ► Does not adjust Cost of Goods sold for the effect of inflation.
    • Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing There is one more method used called LIFO (Last-in First- out) Under the LIFO method last units acquired are assumed to be the first units sold.
    • Financial Accounting Accounting for Inventory Chapter Six 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.
    • Financial Accounting Accounting for Inventory Chapter Six 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
    • Financial Accounting Accounting for Inventory Chapter Six 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
    • Financial Accounting Accounting for Inventory Chapter Six Closing Stock Valuation Broad 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.
    • Financial Accounting Accounting for Inventory Chapter Six Closing Stock Valuation Broad Guidelines – Closing stocks of finished goods are generally valued at “ cost of market value, whichever is lower”
    • Financial Accounting Accounting for Inventory Chapter Six Closing Stock Valuation Broad 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.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle Disclosure Principle Materiality Principle Conservatism Principle
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle The same accounting methods and procedures must be used period-to-period.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle The 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.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle The 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”
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle Disclosure Principle – The entity should disclose all important information that would enable financial statement users to make informed decisions about the entity.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle Disclosure Principle Materiality Principle – An entity must perform strictly proper accounting only for items and transactions that are significant to its financial statements.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle Disclosure Principle Materiality Principle Conservatism Principle – an entity should use the least favorable figure when preparing its financial statements.
    • Financial Accounting Accounting for Inventory Chapter Six Inventory - Accounting Principles Consistency Principle Disclosure Principle Materiality Principle Conservatism 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
    • Financial Accounting Accounting for Inventory Chapter Six “ 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.”