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    Topic 6 Inventory Topic 6 Inventory Presentation Transcript

    • TOPIC 6
      ACCOUNTING FOR INVENTORIES
    • ACCOUNTING FOR INVENTORIES
      DEFINITION:
      FRS 102: Inventory is an asset that owned by the business for the purpose of selling to the customer.
      Managing inventory is done to determine:
      1. Inventory on hand
      2. Inventory available for sale
      3. Cost of goods sold.
    • InventoryControl
      Establishment of responsibility: every inventory counter is accountable by different person.
      Segregation of duties: a person who records the inventories is not the same as the person who makes a count and also not the same with the person who distributes the inventories.
    • InventoryControl
      Independent Internal Verification: make a second count and verify the balance by a different person.
      Documentation Procedure: numbering tag or barcode is paste to the inventory and each sales is made using on-line basis.
      Physical, mechanical and electronic control: make a physical stock count frequently.
    • Inventory Accounting System
      There are two basic systems of accounting for inventories:
      1. Perpetual Inventory system (Sistem Berterusan)
      Periodic Inventory System (Sistem Berkala)
    • Differences between these two systems:
    • Valuation of Inventory
      1. First In First Out (FIFO)
      - first items purchase will be sold first.
      Last In First Out (LIFO)
      - last item purchase will be sold first.
      Weighted Average (WA)
      - make an average cost per unit purchase of the goods.
    • Example:
      The information below regarding an inventory product name AIA for year 2006:
      The physical stock counts on 31 Dec 2006 shows a balance of 400 units.
    • Total Stock (unit) - total Sales (unit) = Closing stock (unit)
      [Opening stock + Purchase] – Total Sales = Closing Stock
      100 unit + 1100 unit - 800 unit = 400 unit.
      a) FIFO - Periodic:
      Cost of Good Sold:
      Opening Inventory 800
      Add: Purchase 12,600
      13,400
      Less: Closing Stock 5,000
      COST OF GOOD SOLD 8,400
    • b) FIFO - PERPETUAL
    • LIFO - Periodic:
      Cost of Good Sold:
      Opening Inventory 800
      Add: Purchase 12,600
      13,400
      Less: Closing Stock 3,800
      COST OF GOOD SOLD 9,600
    • WEIGHTED AVERAGE
      Periodic
      Weighted Average cost per unit =
      Opening Inventory + Purchases
      Total unit available for sale
      RM800 + RM12,600
      (100 + 1,100) unit
      = RM11.17 per unit
      Closing Inventory = 400 unit x RM11.17
      = RM4,468
      COGS = 800 unit x RM11.17
      = RM8,932
    • Perpetual
    • Effect of using different method:
      Inflation
      Assume that the purchase price is increasing:
      FIFO:
      The lower price of the inventory will be taken out first; this will lower
      down the cost of goods sold of the inventory. Thus the profit will be
      increased.
      LIFO:
      The higher price of the inventory will be taken out first; this will increase the cost of good sold of the inventory. Thus the profit will be decreased.
    • Deflation:
      - deflation (lower price of the inventory) will give a reverse situation whilst using either FIFO, LIFO or WA.
    • VALUING INVENTORY AT THE LOWER OF COST OR MARKET (LCM)
      An alternative method of valuing inventory in a situation of declining value of inventory : lower than cost
      (e.g due to changes in technology or
      fashion)
      To comply with accounting principle:
      Conservatism: the best choice is to select the method that is least likely to overstate asset and net income.
    • The method:
      The value of inventory should be written down from the cost price to market price in situations where market is below cost.
      Market price:
      • “Current replacement cost” not selling price.
      • A cost of purchasing the same goods at the present time from the usual supplier.
    • Reporting in the Financial Statement:
      Cost of Goods Sold:
      Opening Inventory + Cost of Good Available for Sale - Closing
      Stock.
    • Income Statement – Periodic System
      ________________________________________________________
      Opening Inventory 2, 000
      Add:
      Purchase 20,000
      Carriage Inward 2, 500
      Import Duty 1, 500
      24, 000
      (-) Return Outward (1, 000) 23, 000
      Cost of Goods Available for sale 25, 000
      (-) Closing Stock (5, 000)
      Cost of Good Sold 20, 000
    • Income Statement - Perpetual System
      ________________________________________________
      Sales xxx
      Less: Cost of Good Sold xx
      Less: Inventory Shortage xxxx
      Gross Profit xxx
    • EFFECT ON PROFIT: OVER/UNDERSTATE VALUE OF INVENTORY
    • Journal Entries for Purchasing of Goods
    • Journal Entries for Sales of Goods
    • OTHER CURRENT ASSET
      1. SHORT TERM INVESTMENT
      Definition:
      Investment made for a period of less than one year and very easy to
      change or convert it in the cash term.
      Example: investment in Marketable securities (Treasury Bill)
      The objective of investment is to earn interest and dividends.
      Types:
      - investment in government bond
      - investment in stock of large corporation
      Reasons:
      Stock and bonds traded on organized securities markets, such as
      Bursa Malaysia, are readily marketable because can be bought and sold daily. Therefore, easy to convert into cash when it is needed.
    • Accrued Revenue
      Prepaid Assets/Expenses
      Presentation in Financial Statement
      Current Asset
      Cash
      Bank
      Investment
      Accrued Revenue
      Prepaid Expenses.
    • Exercises on Inventory
      1. Berikut adalah belian dan jualan Syarikat Zamani dalam bulan September 20X6.
      Dikehendaki:
      Dengan menggunakan kedua-dua sistem iaitu berterusan dan berkala, kira nilai stok akhirnya mengikut kaedah:
      a) FIFO (MDKD)
      b) LIFO (MKKD)
      c) Kos Purata