Topic 6 Inventory
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Topic 6 Inventory

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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