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Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
Inventory 1
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Inventory 1

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  • Transcript

    • 1. WELCOME BACK ...........................
    • 2. Where do we stand…? We are still half way!!!
    • 3. What Next?
    • 4. Accounting for Inventory Dr. C. P. Gupta
    • 5.  
    • 6. It is expected that after this chapter a student must be able to answer the following… <ul><li>Inventory? </li></ul><ul><li>Types of Inventory? </li></ul><ul><li>Inventory systems? </li></ul><ul><li>Inventory Valuation? </li></ul><ul><li>Impact of inventory valuation on Profit and Loss Account and Balance Sheet? </li></ul><ul><li>Presentation and Disclosures? </li></ul>In fact, you will be learning all necessary about Accounting for Inventory!!!
    • 7. So, let’s start with INVENTORY…
    • 8. What is Inventory?
    • 9. <ul><li>… are assets : </li></ul><ul><ul><li>Held for sale in the ordinary course of business. </li></ul></ul><ul><ul><li>Held in the process of such sale. </li></ul></ul><ul><ul><li>Being used in the production of goods to be sold. </li></ul></ul><ul><ul><li>Held in the form of materials or supplies that will be consumed in the production process, or in rendering services. </li></ul></ul><ul><ul><li>Packing material for packing goods to be sold. </li></ul></ul><ul><ul><li>Spares used in case of fixed assets whose use is not regular. </li></ul></ul>Inventory…
    • 10. <ul><ul><li>Held for sale in the ordinary course of business. </li></ul></ul><ul><ul><li>Held in the process of such sale. </li></ul></ul><ul><ul><li>Being used in the production of goods to be sold. </li></ul></ul><ul><ul><li>Held in the form of materials or supplies that will be consumed in the production process, or in rendering services. </li></ul></ul><ul><ul><li>Packing material for packing goods to be sold. </li></ul></ul><ul><ul><li>Spares used in case of fixed assets whose use is not regular. </li></ul></ul>Give an example of the following… LEARNING THROUGH EXAMPLES
    • 11. To be brief, inventory includes… <ul><li>Raw Material </li></ul><ul><li>Work-in Progress </li></ul><ul><li>Finished Goods </li></ul><ul><li>Spares </li></ul><ul><li>Consumables </li></ul><ul><li>Packaging Material </li></ul>
    • 12. Inventory Flow?
    • 13. Flows of Inventory …A Retailer or A merchandiser Merchandise Purchases Cost of Goods Sold Merchandise Inventory Merchandiser
    • 14. Flows of Inventory …A Producer or A Manufacturer Direct Labour Factory Overhead Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturer Raw Materials
    • 15. Where cost flows of Inventory have impacts?
    • 16. Balance Sheet… Raw Materials Work in Process Finished Goods Balance Sheet: Assets Side Manufacturing Overhead Labour
    • 17. Profit and Loss Account … Profit and Loss Account: Expenses Side Opening Stock Purchases and Production and Conversions Expenses Closing Stock COST OF GOODS SOLD Raw Materials Work in Process Finished Goods Raw Materials Work in Process Finished Goods
    • 18. Impact of Inventory Flow… Beginning Inventory Purchases for the Period Ending Inventory (Balance Sheet) Goods Available for Sale Cost of Goods Sold (Income Statement) + +
    • 19. When to record Inventory in books of accounts?
    • 20. The General Rule is … <ul><li>… purchases should be recorded by the buyer when the legal title to the goods passes to the buyer. </li></ul>But, in some cases, it is difficult to determine when the legal title is passed to the buyer?
    • 21. Exception to the General Rule… <ul><li>Goods in transit </li></ul><ul><li>Goods received on approval basis </li></ul><ul><li>Consigned goods </li></ul>
    • 22. Goods in Transit… <ul><li>In case of Goods in Transit, legal title depends upon the shipping terms. </li></ul><ul><li>Shipping terms : </li></ul><ul><ul><li>FOB (free-on-board) destination </li></ul></ul><ul><ul><ul><li>The seller is paying the shipping cost </li></ul></ul></ul><ul><ul><ul><li>The seller owns the inventory until it is delivered </li></ul></ul></ul><ul><ul><li>FOB shipping point </li></ul></ul><ul><ul><ul><li>The buyer is paying the shipping cost </li></ul></ul></ul><ul><ul><ul><li>The buyer owns the inventory during transit </li></ul></ul></ul>
    • 23. Ownership Transfer for Goods in Transit Ownership Transfer <ul><li>FOB Shipping Point </li></ul><ul><li>Buyer owns goods in transit </li></ul><ul><li>Ownership changes at shipping point </li></ul>Seller Buyer <ul><li>FOB Destination </li></ul><ul><li>Seller owns goods in transit </li></ul><ul><li>Ownership changes at destination </li></ul>
    • 24. Goods received on Approval Basis <ul><li>… as soon as the buyer informs his/her intention to buy to the seller, the purchases are to be recorded and he/she takes the legal title of the goods. </li></ul>SELLER BUYER Ownership Transferred Intention to buy communicated
    • 25. Consigned Goods… <ul><li>Dealer holds and sells merchandise on the behalf of the supplier/consignor </li></ul><ul><ul><li>Has possession but not asset </li></ul></ul><ul><li>Merchandise owned by supplier </li></ul><ul><ul><li>Has asset but not possession/consignor </li></ul></ul><ul><li>Dealer does not pay for the inventory unless it is sold; and the dealer remits the money after deducting his expenses and commission from the sale proceeds. </li></ul>
    • 26. What costs to be included in inventory?
    • 27. General Rule… <ul><li>The cost of inventories should comprise all costs of purchase , costs of conversion and other costs incurred in bringing the inventories to their present location and condition. </li></ul>
    • 28. COSTS OF PURCHASE… <ul><li>It includes… </li></ul><ul><ul><li>Purchase Price </li></ul></ul><ul><ul><li>Duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities) </li></ul></ul><ul><ul><li>Inward freight and Insurance for goods-in-transit </li></ul></ul><ul><ul><li>Other expenditure directly attributable to the acquisition. </li></ul></ul>Cost of purchases includes all those expenses that are incurred to bring the raw material at the desired location.
    • 29. COSTS OF PURCHASE… <ul><li>What it does not include… </li></ul><ul><ul><li>Trade Discounts and rebates. </li></ul></ul><ul><ul><li>Duty Drawbacks, Duties and taxes subsequently recoverable by a firm from the taxing authorities. </li></ul></ul>
    • 30. COSTS OF CONVERSION … <ul><li>It includes all those expenses that are incurred to convert raw material into work-in-progress and finally, into finished goods. Such a cost is generally called CONVERSION COST. </li></ul><ul><li>Conversion Cost includes… </li></ul><ul><ul><li>Direct Labour Cost </li></ul></ul><ul><ul><li>Indirect Labour Cost (Production) </li></ul></ul><ul><ul><li>Other fixed production overheads – Fixed or Variable. </li></ul></ul>
    • 31. COSTS OF CONVERSION … <ul><li>Costs of Conversion do not include… </li></ul><ul><li>Storage Costs , unless those costs are necessary in the production process prior to a further production stage. </li></ul><ul><li>Administrative Overheads that do not contribute to bringing the inventories to their present location and condition. </li></ul><ul><li>Selling and Distribution Costs. </li></ul>
    • 32. OTHER COSTS … <ul><li>Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. </li></ul>
    • 33. Testing Understanding … Suggest which of the following will not be considered for the inventory costs… <ul><li>Cost of Insurance of warehouse. </li></ul><ul><li>Cost of Spares used in production process. </li></ul><ul><li>Cash Discount. </li></ul><ul><li>Transportation costs to bring goods to warehouse. </li></ul><ul><li>Insurance of goods-in-transit. </li></ul><ul><li>VAT paid on the purchase of raw material. </li></ul><ul><li>Paid to workers for packing of goods. </li></ul><ul><li>Expenses related to heating of factory. </li></ul><ul><li>Salary paid to CEO of the firm. </li></ul><ul><li>Cost of issuing cheques to the vendors. </li></ul>
    • 34. What are inventory systems?
    • 35. The issue of Inventory System is … … should we record transactions related to inventory INSTANTANEOUSLY or PERIODICALLY ?
    • 36. If we record transactions related to inventory INSTANTANEOUSLY, then we are using a System of Inventory which is known as … PERPETUAL INVENTORY SYSTEM
    • 37. And, if we are recording transactions related to inventory periodically then, it is called … PERIODIC INVENTORY SYSTEM .
    • 38. Overview of Perpetual and Periodic Systems <ul><li>Perpetual system </li></ul><ul><ul><li>Inventory records are updated whenever a purchase or a sale is made. </li></ul></ul><ul><ul><li>Advances in information technology have made the cost of using this system practical. </li></ul></ul><ul><li>Periodic system </li></ul><ul><ul><li>Inventory records are not updated when a sale is made. </li></ul></ul>

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