Bài giảng kế toán kiểm toán chapter 3 inventories

Chapter 3Inventories Outline Inventory concept Internal control Two accounting systems to record inventory The cost of inventory Inventory valuation 2 Inventory concept Definition

Chapter 3

Inventories

Outline

Inventory concept

Internal control

Two accounting systems to record inventory

The cost of inventory

Inventory valuation

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Inventory concept

Definition

Types of inventory

Physical quantities included in inventory

Inventory definition

Assets that:

held for sale in the ordinary course of business,

in the production process for sale in the ordinary course of business, and

in the form of materials or supplies to be consumed in the production process or in the rendering of services

Types of inventory

Merchandising inventory

Purchase goods in finished form

Manufacturing inventories

Raw materials

Work-in-process

Finished goods

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Physical quantities included in

inventory

Goods in Transit

Goods on Consignment

Sales Returns

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Goods in Transit

Inventory shipped FOB shipping point is

included in the purchaser’s inventory as soon as

the merchandise is shipped

Inventory shipped FOB destination (CIF) is

included in the purchaser’s inventory only after

it reaches the purchaser’s destination

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Goods on consignment

Goods held on consignment are included in the inventory of the consignor until sold by the consignee

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2 Internal control Internal control

2.1 Purchasing procedures

2.2 Purchasing documentation

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2.1 Purchasing 2.1 Purchasing procedures procedures

Requisition

Identify supplier

Order goods

Receive goods

Pay for goods

Stores/production

Stores

Accounts Purchasing

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2.2 Purchasing documentation

1 Purchase requisition form

2 Order form

3 Dispatch note

4 Delivery note

5 Goods received note

Dispatch Dispatch Note Note

We are pleased to inform you that your goods were sent

today (The goods are on their way)

We hereby inform you that your goods will be delivered

tomorrow (How long it is likely to take)

We hope that the goods will arrive in perfect condition

We look forward to doing business with you again

Delivery note

A written document from the seller to the buyer

that accompanies a delivery of goods and

specifies type of goodsand quantity

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Goods received note

A document produced when goods are received into the factory It will usually accompany goods

to any inspection and is used to check against invoices before payment

(made by the buyer)

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What is it?

We have received your delivery

Your delivery arrived in perfect condition

on …

Thank you very much for executing our order

professionally

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2.4 2.4 Other inventory documents Other inventory documents

The invoice

Material requisition

Bin card

Stores ledger account

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Check the invoice

(a) That the goods have been delivered and are in

satisfactory condition(check goods received

note)

(b) That the price and terms are as agreed (look

at the purchase order)

(c) That the calculations on the invoice are

correct (including sales tax (or VAT))

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Materials requisitions

department An official from production will sign the form to authorize it

 It is then used as a source document for:

(a) Updating the bin card in stores;

(b) Updating the stores ledger account in the costing department; and

(c) Charging the job, overhead or department that is using the materials

(compare with Purchase requisitions)

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Bin cards

a. Description

b. Inventory code

c. Inventory units

d. Bin number

e. Issues to production

f. Receipts

g. Balance

Stores ledger accounts

They carry all the information that a bin card does, but there are two important differences:

Cost details are recorded in the stores ledger account

The stores ledger accounts are written up and kept separate from the stores by a clerk experienced in costing bookkeeping

Two inventory accounting systems

Perpetual inventory system

Periodic inventory system

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Perpetual inventory system

A perpetual inventory system continuously records both changes in inventory quantity and inventory cost

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Illustration

purchases soft drinks from producers and then sells

them to retailers The company begins 2003 with

merchandise inventory of $120,000 on hand During

2003 additional merchandise is purchased on account

at a cost of $600,000 Sales for the year, all on

account, totaled $820,000 The cost of the soft drinks

sold is $540,000 Lothridge uses the perpetual

inventory system to keep track of both inventory

quantities and inventory costs.

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Periodic inventory system

A periodic inventory system adjusts inventory and records cost of goods sold only at the end

of each reporting period

Cost goods sold equation Beginning inventory + Net purchases – Ending inventory = Cost of goods sold

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purchases soft drinks from producers and then sells

them to retailers The company begins 2003 with

merchandise inventory of $120,000 on hand During

2003 additional merchandise is purchased on account

at a cost of $600,000 Sales for the year, all on

account, totaled $820,000 The cost of the soft drinks

sold is $540,000 Lothridge uses the periodic inventory

system

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The cost of inventory

Give your treatment with these costs:

a. Manufacturing overhead

b. Waste

c. Storage cost

d. Trade discount

e. Handling cost

f. Selling cost

g. Interest cost

h. Transportation cost 26

A comparison of two systems

A perpetual inventory system provides more

timely information but generally is more

costly than a periodic inventory system

The cost of inventory

Includes all necessary expenditures to acquire

the inventory and bring it to its desired condition and location for sale or for use in the manufacturing process

Expenditures included in inventory

Freight-In on Purchases (transportation-in)

Purchase Returns

Purchase Discounts

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Purchase Discounts

On October 5, 2003, the Lothridge Wholesale Beverage Company purchased merchandise at a price of $20,000 The repayment terms are stated as 2/10, n/30 Lothridge paid $13,720 ($14,000 less the 2% cash discount) on October

14 and the remaining balance of $6,000 on November 4 Lothridge employs a periodic inventory system

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Gross method

Gross method vs vs Net method Net method

By either method, net purchases is reduced by

discount taken

Discount not taken are included as purchases

using the gross method and as interest expense

using the net method

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Inventory valuation

Pricing techniques

Inventory valuation

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Pricing techniques

(a) FIFO – First in, first out

(b) LIFO – Last in, first out

(c) Weighted average pricing method

(d) Specific cost

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IAS 2

For items that are not interchangeable, specific cost are attributed to the specific individual items of inventories

For items that are interchangeable , IAS 2 allows the FIFO and weighted average cost formulas

The LIFO formula, which had been allowed prior to the

2003 revision of IAS 2, is no longer allowed

The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the enterprise

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(a) FIFO

(a) FIFO – – First in, first out First in, first out

Values issues at the price of the oldest items

in inventory at the time the issues were

made

The remaining inventory thus will be valued

at the price of the most recent purchases

FIFO FIFO Advantages Advantages

It is logicalas the oldest stock is likely to be used first: Easyto understand and explain

Closing stock is valued near replacement cost

FIFO

FIFO Disadvantages Disadvantages

Cumbersometo operate because of the need to

identify each batch of material separately

Variety of price for the same material may

make it difficult to compare cost and make

decision

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(b) LIFO (b) LIFO – – Last in, first out Last in, first out

the opposite of FIFO Issues will be valued

at the price of the most recent purchases ; hence the remaining inventory will be valued at the price of the oldest items

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LIFO

LIFO Advantages Advantages

Issue at cost close to current market value

make it easy for decision making

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LIFO LIFO Disadvantages Disadvantages

Cumbersometo operate because of the need to identify each batch of material separately:

Difficult to explain as it is opposite to what is physically happening

 Variety of price for the same material may make it difficult to compare cost and make decision

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Date Receipt Issue Balance ($)

Quant Price

($)

Value ($)

Quant Price ($)

Value ($) 17/08 150 1.50 225 150 x 1.50 = 225.00

18/08 55 1.50 82.50 95 x 1.50 = 142.50

19/08 120 1.75 210 95 x 1.50 = 142.50

120 x 1.75 = 210.00 20/08 70 1.50 105.00 25 x 1.50 = 37.50

120 x 1.75 = 210.00

LIFO/FIFO

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(c) Weighted average pricing method

Cumulative weighted average pricing:

calculating average cost whenever a new delivery is received

Periodic weighted average pricing: calculating average cost at the end of a given period

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Periodic weighted average

Periodic weighted average pricing pricing

Issue price = (Cost of all receipts in the period +

Cost of opening inventory)/(Number of units

received in the period + Number of units of

opening inventory)

Cumulative weighted average pricing Date Receipt Issue Balance ($) Quant Price

($)

Value ($)

Quant Price ($)

Value ($) 17/08 150 1.50 225 150 x 1.50 = 225.00 18/08 55 1.50 82.50 95 x 1.50 = 142.50 19/08 120 1.75 210 215 x 1.64 = 352.60

(W) 20/08 70 1.64 114.80 145 x 1.64 = 237.80

Workings:

$

95 Stock units x $1.50 = 142.50

120 Stock units x $1.75 = 210.00

Inventory Evaluation

Inventories might be valued at

1 Expected selling price

2 Net realizable value (NRV)

(= expected selling price – cost incurred in getting

them ready for sale and then selling them)

3 Historical cost

4 Current replacement cost

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Pricing Pricing Inventory at Inventory at

Lower of Cost or Market (LCM)

In US, “market” for LCM purpose can be defined as replacement cost which should not:

- Exceed the net realizable value

- Be less than net realizable value reduced by an allowance for an approximately normal profit margin

LCM requires that when the market price of inventory falls below historical cost, the inventory is written down to the lower value and a loss is recorded

LCM can be applied to individual inventory items,

to logical category of inventory, or to the entire of

Disclosure

Accounting policy for inventories

Carrying amount of inventories pledged as

security for liability

Amount of any write-down of inventories

recognized as an expense in the period

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