Bài giảng kế toán kiểm toán chapter 3 inventories

Outline
Inventory concept
 Internal control
 Two accounting systems to record inventory
 The cost of inventory
 Inventory valuation


Chapter 3
Inventories

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Inventory concept

Inventory definition

Definition
 Types of inventory
 Physical quantities included in inventory


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
 Exclude?
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Physical quantities included in
inventory

Types of inventory


Merchandising inventory




Goods in Transit
 Goods on Consignment
 Sales Returns


Purchase goods in finished form

Manufacturing inventories
Raw materials
Work-in-process
 Finished goods



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Goods in Transit

Goods on consignment

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

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2. Internal control

2.1 Purchasing procedures

2.1 Purchasing procedures
2.2 Purchasing documentation

Requisition

Stores/production

Identify supplier

Purchasing

Order goods

Receive goods

Stores

Pay for goods

Accounts

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2.2 Purchasing documentation
1.
2.

3.
4.
5.

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Dispatch Note
We are pleased to inform you that your goods were sent
today. (The goods are on their way)

Purchase requisition form
Order form
Dispatch note
Delivery note
Goods received note

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.

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Goods received note

Delivery note
A written document from the seller to the buyer
that accompanies a delivery of goods and
specifies type of goods and quantity.

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?

2.4 Other inventory documents

We have received your delivery.
Your delivery arrived in perfect condition
on …
Thank you very much for executing our order
professionally.

The invoice
 Material requisition
 Bin card
 Stores ledger account


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Check the invoice

Materials requisitions

(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)).

A materials requisition will be completed when
materials are needed from stores by the production
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.
b.
c.
d.
e.
f.
g.

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Stores ledger accounts

Description
Inventory code
Inventory units
Bin number
Issues to production
Receipts
Balance

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.

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Two inventory accounting systems

Perpetual inventory system

Perpetual inventory system
 Periodic inventory system




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

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Illustration



Periodic inventory system

The Lothridge Wholesale Beverage Company
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.

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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Illustration


The cost of inventory

The Lothridge Wholesale Beverage Company
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.

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


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A comparison of two systems


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The cost of inventory

A perpetual inventory system provides more
timely information but generally is more
costly than a periodic inventory system.



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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

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Expenditures included in inventory

Purchase Discounts

Freight-In on Purchases (transportation-in)
 Purchase Returns
 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 vs Net method

Inventory valuation

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.

Pricing techniques
 Inventory valuation





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Pricing techniques

IAS 2

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

(a) FIFO – First in, first out
(b) LIFO – Last in, first out
(c) Weighted average pricing method
(d) Specific cost

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 – First in, first out

FIFO - Advantages
It is logical as the oldest stock is likely to be
used first: Easy to understand and explain
 Closing stock is valued near replacement cost

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.



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FIFO - Disadvantages

(b) LIFO – Last in, first out

Cumbersome to 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

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 - Advantages

LIFO - Disadvantages
Cumbersome to 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

Issue at cost close to current market value
make it easy for decision making



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(c) Weighted average pricing method

LIFO/FIFO
Receipt

Date

17/08

Issue

Quant.

Price
($)

Value
($)

150

1.50

225

Quant.

18/08
19/08

1.75

1.50

82.50

210

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.


Balance ($)
Value
($)
150 x 1.50 = 225.00

55
120

Price
($)

95 x 1.50 = 142.50
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

31/08

Stock valuation

247.50
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Cumulative weighted average pricing

Periodic weighted average pricing

Receipt

Date

Quant Price
($)

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)

17/08

150

1.50

Issue
Value
($)

120

1.75

Price
($)

Value
($)

55

1.50

82.50

225

18/08
19/08

150 x 1.50 = 225.00

210

20/08

95 x 1.50 = 142.50
215 x 1.64 = 352.60
(W)

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31/08

Balance ($)

Quant

1.64

Stock valuation

114.80

145 x 1.64 = 237.80
237.80

Workings:
$
95 Stock units x $1.50 =

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142.50

120 Stock units x $1.75 =

210.00

215

352.50
$352.50/215 units =

1.64

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Pricing Inventory at
Lower of Cost or Market (LCM)

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

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
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

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LCM can be applied to individual inventory items,
to logical category of inventory, or to the entire of
inventory

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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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