Topic 6 reporting analysing inventory PDF

accounting records & identify loss, theft or impairment PERIODIC INVENTORY SYSTEM • A physical stock take an actual count of inventory is required at end of period to update inventory a

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REPORTING & ANALYSING

TOPIC 6

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Topic 6 Part 1

Learning

Objective

On completion of this topic, you should be able to:

1 Determine cost of sales under a periodic inventory system.

2 Explain the basis of accounting for inventories and apply

the inventory cost flow methods under a perpetual

inventory system.

3 Explain the financial statement effects of each of the

inventory cost flow methods.

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ACCOUNTING FOR

INVENTORY

PERPETUAL INVENTORY SYSTEM

goods bought and sold

as inventory is sold

account is the ENDING inventory amount.

accounting records & identify loss, theft or impairment

PERIODIC INVENTORY SYSTEM

• A physical stock take (an actual count) of

inventory is required at end of period to update inventory and calculate COST OF SALES (COS)

Regardless of whether the inventory is

‘perpetually or ‘periodically’ updated the actual cost of each sale is recorded based on one of four ‘cost-flow assumptions’

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4 COST-FLOW ASSUMPTION

METHODS

The different inventory costing methods produce different amounts for ending

inventory and cost of sales

SPECIFIC-UNIT-COST

• The

specific-unit-cost method uses

the specific cost of

each unit of

inventory sold to

determine cost of

sales and ending

inventory

• Typically used for

low volume sales,

high prices

FIFO (in,

first-out)

• The FIFO (first-in,

first-out)

inventory costing method bases the cost of sales on the assumption

that the cost of the

first units acquired

that are held in the inventory are sold first.

LIFO (last-in,

first-out)

• Under the LIFO

(last-in, first-out)

inventory costing method bases the cost of sales on the assumption

that the cost of the

last units acquired

that are held in the inventory are sold first.

AVERAGE-COST

• Under the

average-cost inventory costing

method, the business calculates

a new average cost per unit after each purchase

• Weighted average ( periodic )

• Moving average

(perpetual )

Lets use the four cost-flow assumptions to calculate the cost of sales and the ending inventory value for the iTravs Kelly Cook eTravel P/L sells and compare the differences

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FIFO applied in the PERIODIC INVENTORY

SYSTEM

Opening Balance - 2 units @ $40 each $80

Add: Purchases

5 Aug - 6 units @ $45 each = $270

16 Aug – 9 units @ $47 each = $423 $693

Less : Cost of 3 units in the ending inventory

Revenue

Less Sales Returns & Allowances 0

Cost of sales (COS):

Inventory 1 August 2017 80 Plus Purchases 693

Less Inventory 31 August 2017 -141

GROSS PROFIT $ 488

Kelly Cook eTravel Pty Ltd EXTRACT from Statement of Financial Performance

(for August 2017 iTrav transactions)

Date Transaction

01-August-2017 Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40.

05-August-2017 Kelly Cook eTravel P/L purchases six iTravs for $45 each.

15-August-2017 Kelly Cook eTravel P/L sells four iTravs for $88 (inc GST) each (1 @ 40 & 3 @ 45).

16-August-2017 Kelly Cook eTravel P/L purchases nine iTravs for $47 each.

31-August-2017 Kelly Cook eTravel P/L sells ten iTravs for $88 (inc GST) each (4 @ 45 & 6 @ 47).

Kelly Cook eTravel Pty Ltd

Inventory Transactions for the month of August 2017

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Date Transaction

01-August-2017 Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40

05-August-2017 Kelly Cook eTravel P/L purchases six iTravs for $45 each

15-August-2017 Kelly Cook eTravel P/L sells four iTravs (1 @ 40 & 3 @ 45)

16-August-2017 Kelly Cook eTravel P/L purchases nine iTravs for $47 each

31-August-2017 Kelly Cook eTravel P/L sells ten iTravs (4 @ 45 & 6 @ 47)

Perpetual Inventory Record:Specific Identification

05-Aug-17

15-Aug-17

16-Aug-17

31-Aug-17

BALANCE (Inventory on hand)

BALANCE

BEGINNING INVENTORY

Cost of sales for August

Cost of ending inventory for August

$ 175

$ 598

$ 134

$ 639

$ 693

Sells 4 iTravs

Sells 10 iTravs

135 45

40 40

45

1 3 423

47

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Perpetual Inventory Record: FIFO

05-Aug-17

15-Aug-17

16-Aug-17

31-Aug-17

BALANCE

BEGINNING INVENTORY

15-August-2017 Kelly Cook eTravel P/L sells four iTravs for $88 (inc GST) each (1 @ 40 & 3 @ 45)

31-August-2017 Kelly Cook eTravel P/L sells ten iTravs for $88 (inc GST) each (4 @ 45 & 6 @ 47)

$ 180

$ 603

$ 141

$ 632

$ 693

Sells 4 iTravs

Sells 10 iTravs

423 47

9

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Perpetual Inventory Record: LIFO

05-Aug-17

15-Aug-17

16-Aug-17

31-Aug-17

BALANCE

BEGINNING INVENTORY

2 423

423 80

423

270 40

$ 350

$ 170

$ 593

$ 125

$ 648

$ 693

40 45 47 40 45

2 9 1 2

90 80 90

80 45 45

180

47

45

45 1

9

4

Sells 4 iTravs

Sells 10 iTravs

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Perpetual Inventory Record: Average Cost

05-Aug-17

15-Aug-17

16-Aug-17

31-Aug-17

BALANCE

BEGINNING INVENTORY

Calculation for average 5 August = (2 x 40) + (6 x 45) = 350 then

divide by 8 = 43.75

Calculation for average 16 August = (4 x 43.75) + (9 x 47) = 598 then divide by 13 = 46

9

43.75

4

175

46 10

Sells 4 iTravs

Sells 10 iTravs

$ 350

$ 175

$ 598

$ 138

$ 635

$ 693

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INVENTORY COSTING SYSTEMS –

Compare 4 methods (PERPETUAL

SYSTEM)

SPECIFIC UNIT COST

AVERAGE-COST

Sales Revenue

GROSS PROFIT $ 481 $ 488 $ 472 $ 485

AASB 102 Inventory

• Must disclose inventory costing method used in the notes to the accounts

• LIFO not acceptable under AASB 102, allowed under US GAAP

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REPORTING & ANALYSING

TOPIC 6

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Topic 6 Part 2

Learning

Objective

On completion of this topic, you should be able to:

1 Explain the lower of cost and net realisable value basis of

accounting for inventories.

2 Indicate the effects of inventory errors on the financial

statements.

3 Calculate and interpret inventory turnover.

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ACCOUNTING FOR

INVENTORY

• Maintains a continuous inventory record of all goods bought and sold

• COST OF SALES (COS) is ‘perpetually’ updated as inventory is

sold

• As a result, the balance in the inventory account is the ENDING inventory amount

• A physical stock take is done to verify accounting records &

identify loss, theft or impairment

• A physical stock take (an actual count) of inventory is

required at end of period to update inventory and

calculate COST OF SALES (COS)

SPECIFIC-UNIT-COST

•The specific-unit-cost method uses

the specific cost of each unit of inventory sold to determine cost of sales and ending inventory

• Typically used for low volume sales, high prices

FIFO (in, first-out)

•The FIFO (first-in, first-out)

inventory costing method bases the cost of sales on the

assumptionthat

the cost of the first

units acquired that are held in the inventory are sold first.

LIFO (last-in, first-out)

•Under the LIFO (last-in, first-out)

inventory costing method bases the cost of sales on the

assumptionthat

the cost of the last

units acquired that are held in the inventory are sold first.

AVERAGE-COST

•Under the

average-cost inventory costing

method, the business calculates

a new average cost per unit after each purchase

•Weighted average ( periodic )

•Moving average (perpetual )

Revenue

Gross Sales Revenue 1,120

Less Sales Returns & Allowances 0

Net Sales Revenue 1,120

Cost of sales (COS):

Cost of goods available for sale 773

Less Inventory 31 August 2017 -141

Cost of sales (COS): 632

GROSS PROFIT $ 488

EXTRACT from Statement of Financial Performance

(for August 2017 iTrav transactions)

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Lower-of-cost-and-net-realisable-value rule (NRV)

 Inventory is typically a significant current asset for a

merchandising business

 AASB 102 requires that inventory be reported in the

financial statements at whichever is lower :

1 the historical cost of the inventory, or

2 the net realisable value (NRV) of the inventory

Example: Kelly Cook eTravel

P/L had purchased 50 pairs of

fashion sunglasses at a total

cost $250 in January At the

end of the reporting period in

June, the assessed market

value was $50 How should

Kelly Cook eTravel P/L’s

accountant report this

inventory?

30-Jun Cost of Sales 520 200

(adjust for NRV of stock)

GENERAL JOURNAL ADJUSTING ENTRIES

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INVENTORY ERRORS

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ANALYSING FINANCIAL

STATEMENTS FOR

DECISION MAKING

INVENTORY TURNOVER RATIO indicates is sold and

replaced during the year DAYS IN INVENTORY indicates

the average number of days inventory is held by the

business Both indicate how quickly a business sells its

goods,

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ANALYSING FINANCIAL

STATEMENTS FOR

DECISION MAKING

2017

Kelly Cook 2018

Inventory Turnover

Ratio

Cost of Sales 14,230

Average Inventory 1,460

Inventory Turnover Ratio 9.75

Revenue

Gross Sales Revenue 48,500

Less Sales Returns & Allowances -1260

Net Sales Revenue 47,240

Less Cost of sales (COS) -14,230

Operating Expenses

Advertising Expense 6,100

Depreciation Expense 1,000

Electricty Expense 420

Rent expense 6600

Salaries Expense 7200

NET PROFIT $ 11,690

Kelly Cook eTravel Pty Ltd Statement of Financial Performance

for 6 month period December 2017

Current Assets

Accounts Receivable 4,160 Inventory 1,460 Prepaid rent 1,100

Total Current Assets 28,993 Non-current Assets

Less Acc Dep 1,333

Totsl Non-current Assets 8,667

Liabilites

Accounts Payable 840 Unearned Revenue 650 Salaries Payable 300

Total Current Liabilites 1,790

Equity

Capital 30,000 Retained Earnings 5,870

as at 30 December 2017 Kelly Cook eTravel Pty Ltd Statement of Financial Position

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