Topic 6 Inventory

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Topic 6 Inventory

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

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