Inventories DETERMINING INVENTORY ON HAND DETERMINING COST OF INVENTORY. Chapter 19. Perpetual system. Periodic system. Transfer of ownership

Transcription

1 Chapter 19 Inventories PowerPoint presentation by Anne Abraham University of Wollongong 2009 John Wiley & Sons Australia, Ltd DETERMINING INVENTORY ON HAND Perpetual system Detailed records required Periodic system Stock-take required Transfer of ownership EXW DDP Goods on consignment 2 DETERMINING COST OF INVENTORY Refer AASB 102 Inventories Inventories Assets held for sale in the ordinary course of business raw materials work in progress finished goods supplies awaiting use in production 3 1

2 ASSIGNMENT OF COST TO ENDING INVENTORY AND COST OF SALES Four methods Specific identification First-in, first-out (FIFO) Last-in, last-out (LIFO) Average cost weighted average system moving average system periodic perpetual 4 ASSIGNMENT OF COST TO ENDING INVENTORY AND COST OF SALES No. Unit Total Date of units cost cost 1 Jul Beginning Inventory 10 $10 $100 Purchases made in current period 15 Sep Purchase Dec Purchase Total purchases Goods available for sale Sales made in current period 20 Sep Sales 8?? 12 Jan Sales 10?? Total cost of sales 18? 30 June Ending Inventory 19? 5 Specific identification method periodic Units sold and on hand are identified with a specific invoice If 18 units sold (per previous slide), assume: 1 unit from beginning inventory ($10) 12 units from 15 September purchase ($11) 5 units from 7 December purchase ($12) 2

3 Specific identification method periodic Remaining inventory: 9 units Beginning $ 10 $ units 7 December Cost of Ending Inventory $ 210 Cost of goods available for sale $ 412 Less ending inventory 19 units 210 Cost of Goods Sold 18 units $ First-in, first-out (FIFO) method periodic Remaining inventory: 4 units 15 $ 11 $ units 7 December Cost of Ending Inventory $ 224 Cost of goods available for sale $ 412 Less ending inventory 19 units 224 Cost of Goods Sold 18 units $ FIFO 9 3

4 Last-in, first-out (LIFO) method periodic Remaining inventory: 10 units Beginning $ 10 $ units 15 September Cost of Ending Inventory 199 Cost of goods available for sale $ 412 Less ending inventory 19 units 199 Cost of Goods Sold 18 units $ Weighted average method periodic Average cost per unit of ending inventory = Total cost of goods available for sale Number of units available for sale = $412 / 37 units = $11.14 per unit Remaining inventory: 19 $11.14 $ Cost of Ending Inventory $ Cost of goods available for sale $ Less ending inventory 19 units Cost of Goods Sold 18 units $ Comparison of costing methods Specific FIFO LIFO Weighted ID Average Sales $360 $360 $360 $360 Beginning inventory Purchases Goods available for sale less: Ending inventory Cost of Goods Sold Gross Profit Less: expenses Net Profit $ 38 $ 52 $ 27 $ 40 Ending Inventory in Balance Sheet $210 $224 $199 $

5 FIFO/LIFO 13 Comparison of costing methods Specific ID Consistent with the actual movement of the inventory Offers room for manipulating profit FIFO Reflects current prices in ending inventory Does not permit manipulation of profit 14 Comparison of costing methods LIFO Results in matching current COS with current revenue Balance sheet values become outdated Profits can be manipulated Weighted average Results in identical items being assigned the same value Tends to smooth out profit and inventory values 5

6 Comparison of costing methods Which method? Consistency Need to be consistent Must use the same accounting methods and procedures from period to period AASB 102 requirements COSTING METHODS IN THE PERPETUAL INVENTORY SYSTEM Inventory record maintained for each item of inventory Inventory control account maintained in the general ledger Inventory records collectively for the inventory subsidiary ledger Provides continuous record of transactions 17 COSTING METHODS IN THE PERPETUAL INVENTORY SYSTEM Item Sandwich Toaster Code B1800 Location Store Display Minimum Stock 10 Maximum Stock 30 Purchases Cost of sales Balance Unit Total Unit Total Unit Total Date Explanation Units cost cost Units cost cost Units cost cost 1/7 Beginning bal /9 Purchases /9 Sales /12 Purchases FIFO Method 6

7 COSTING METHODS IN THE PERPETUAL INVENTORY SYSTEM First-in, first-out (FIFO) Last-in, last-out (LIFO) Moving Average New average cost calculated after each purchase 19 Comparison of inventory systems Specific ID and FIFO Same amount of cost assigned to ending inventory and COS Units identified as sold are the same under both systems LIFO Different results due to the timing of the calculation of COS 20 LOWER OF COST AND NET REALISABLE VALUE RULE Where selling price of inventory is lower than the cost price, the selling price is to be used as the basis for valuation AASB 102 Net realisable value 21 7

8 SALES RETURNS AND PURCHASE RETURNS (Perpetual) FIFO Purchase returns recorded at price negotiated with supplier Sales returns are brought in at the latest price attached to the relevant sale Moving average Purchase returns recorded as price negotiated with supplier 22 INVENTORY ERRORS Perpetual inventory Physical stock take made to confirm perpetual records Difference may be due to theft, damage or inaccurate recording Periodic inventory Counting and pricing errors 23 ESTIMATING INVENTORIES Two methods Retail inventory method Gross method Need to estimate inventory when full count is inappropriate: Monthly reporting Destruction of records As a reasonable check To detect theft 8

9 Retail inventory method Used by businesses in the retail environment For interim reporting In lieu of stock-take Need to maintain records of the following: Beginning inventory at cost and retail Purchases at cost and retail sales for each month Retail inventory method Estimate ending inventory as follows: COGAS (retail and cost) = beginning inventory + purchases Ending inventory at retail = COGAS (retail) net sales Ending inventory at cost = ending inventory retail x ratio of cost to retail = COGAS (cost) / COGAS (retail) Retail Inventory Method 27 9

10 Retail inventory method Cost Retail Beginning inventory $ $ Net purchases Add: Additional mark-ups Less: Mark-up cancellations (800) Staff discounts (3 000) Mark-downs (1 800) Add: Mark-down cancellations 300 Goods available for sale $ $ Ratio of cost to retail: $60 000/ $ = % Less: Net Sales (excluding GST) Estimate of ending inventory at retail Cost ratio x % Ending inventory at cost 28 $ Gross profit method Assumes that: The rate at which gross profit earned in the previous year is the same for current year Historical position applied to current period We know that: Gross Profit = Net Sales - COS Net Sales = 100% GP Rate = 40% Therefore, COS = 60% Gross profit method Once the GP% is known, ending inventory can be estimated as follows: Determine COGAS Estimate Gross Profit using GP% from previous periods Determine estimated COS by deducting Gross Profit from sales Deduct COS from COGAS to determine estimated ending inventory 30 10

11 Gross Profit Method 31 Gross profit method SALES REVENUE $ Less: Sales returns and allowances Net sales revenue % Cost of Sales: Beginning inventory $ Purchases $ Less: Purchases R&A (2 500) Add: Freight inwards 700 Net purchases Goods available for sale Less: Estimated ending inventory? Estimates cost of sales ($ x 0.60) % ESTIMATED GROSS PROFIT ($ x 0.40) $ % 32 PRESENTATION IN FINANCIAL STATEMENTS AASB 102 Sub-classifications Valuation basis 33 11

12 EFFECT OF COSTING METHODS ON DECISION MAKING Gross profit ratio = Profit margin = Gross Profit Net Sales Profit Net Sales Inventory turnover = Cost of Sales Average inventory