FA C04 Inventories

8/12/2019 FA C04 Inventories

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Financial Accountingprof. Adriana Tiron Tudor- course

assist. Szilveszter Fekete- practice

att

Agenda course 4

1. Objectives

2. Assets definition and recognition

3. Inventories definition and classification

4. Recording system, costing and valuation

5. Recording transactions with inventories

That inventoriesplay an important role in the operating cycle of a businessentitymay represent a significant part of an entitys assetsare classified in different categories ( such as finished goods,components, materials, merchandise)

1. Objectives

After studying this chapter, you will understand:How to

record movements in inventoryinventory policies are disclosedestablish the cost of goods withdrawn from inventory

1. Objectives

What are- the difference between permanent and intermittentinventory system- the costing methods- the valuation methods


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An asset representsa source controlled by the entityas a result of past eventswhich is expected to generate future economic benefits for theentitywith a cost that can be credibly evaluated;

An asset is recorded in the balance sheet when:Future economic benefits are likely to be realized as a result of

keeping (storing), using, selling that certain asset;That certain asset has a cost or a value that can be evaluated

credibly.

2. Assets definition and recognision

The recognition of the assets in the balance sheetusually takes place along with the recognition of adebt or an income in the profit and loss account ( theprinciple of the connection between the expensesand incomes ).

Acquisition Asset = Supplier (2=4)

Internally constructed Asset = Capitalized costs (2=7)


In most counties of the Western Europe, thepatrimonial assets are presented in the reverseorder of liquidity, as follows:

Non-current assetsintangible assets

tangible assetsfinancial assets

Current assetsinventoryreceivableshort term investmentscash

Regulation assetspre-payments


Current assetscontain all the exploitation assets and thetreasury ones the liquidation period of which isbelow one year.

Are characterized by the following:dont last in a patrimonial entity , their rotation period isusually shorter than one year;are in continuous movement , changing their materialform and utility inside the estates economic circuit (rawmaterial, finished good, receivable, cash).



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IAS 1 states that an asset must beclassified as a current asset when:

It is expected to be realized or its held for sale orconsume during the normal exploitation cycle of theenterprise;Its held, mainly, to be commercialized or on short term

and it is expected to be realized in 12 months from the dateof the balance sheet;Represents cash or an equivalent of cash whichsutilization is unrestricted.

2. Assets definition and recognision The current assets

Current assetsdepending on their concrete form and destination

inside the exploitation cycle, are divided in:B.1. Inventory and production in progress;

B.2. Receivables or values in process of

reimbursement (settlement);B.3. The short term financial investments (theplacements);

B.4. Cash.


IAS 2 the inventory are material goods(assets):

Held for sale in the ordinary course of the activity;

In the process of production for such sale or ;

In the form of materials, or suppliers to be consumed in the

production process or service providing .


Depending by the enterprises activity theinventory is formed of:

Manufacturing /servicing activityraw materials, consumables, parts, componentsfinished products, semi-finished products,works and services in process;

Commercial activity (retail, wholesale ormerchandising)

commodities (goods purchased for resale)



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In the category of the inventories areincluded: (RO)

raw materials and consumableswork in progressproducts

held by third partiesanimalscommoditiespackaging


1. The raw materials constitute the main substance ofthe finished good , participate directly in the fabricationof the goods and are found integrally or partially in thefinished good, in their initial form of transformed .


2. The consumables participate in the fabrication orexploitation process without usually finding themselvesin the finished good.

The main consumables are:Auxiliary materialsFuelPackaging materialsSpare partsSeeds and saplingFodderOther consumables


The auxiliary materials:Are added to the raw materials in order to transform them;Contribute to the fabrication of the finished goods;Are used to ensure the necessary conditions for the normalcourse of the activity.

The fuel:

Fuel takes direct or indirect part in the processes that takeplace in a patrimonial unit.Depending on their role and destination , we distinguishbetween:

Technologic fuel;Energetic fuel;Household fuel.



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The spare parts:Spare parts serve for the replacement of machines and plantcomponents in order to repair them.

In the category of the consumables are also included: thepackaging materials the seeds and sapling, the fodder used in the

agricultural units activity, as well as other consumables .


3. The materials in form of inventory items

The materials in form of inventory items representthe goods which either have a smaller value thanthe limit settled to be considered tangible assets,regardless of their utilization period, or have autilization period smaller than one year, regardless oftheir value.


4. Production in process(Work in process, unfinishedproduction)

goods in process oftransformation , which occupy anintermediary position , eitherbetween the raw material andsemi-finished good , or betweensemi-finished good and finishedgood.


5. The semi-finished goodsare the goods that:

Went through a number of technologic phases, suffered acertain level of handling andWere received, are supposed to be handled further in theunit or sold to the third parties.

can be obtained from own production or acquisitioned fromoutside and destined to the internal consume or to the resale .

6. The residual productsare rejections , recoverable materials and waste products.



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goods which:- went through al the phases ofthe technological process,- match the quality standards,- were receipted and- documents of delivery to thewarehouses were made.

Manufactured items that arecomplete and ready for sale.

7. Finished goods


8. The commodities (merchandise)goods purchased from the third parties in order to be resold as they are

or fabricated in the unit and passed in their own retail shops.Ex. computers, cars, books, telephones, food,

9. The packaginggoods used to protect other goods, during the transportation, handling or

storage.The packaging are classified in:

Circulation packaging: sacs, boxes, containers, recipients, bottles,Production packaging: cans, tubes for the toothpaste, vials for

medicines, perfumes etc.


10. The animals and birdsborn or acquisitioned and the young ones of any kind

(calves, lambs, sucking pigs, colts etc.) bred and usedfor reproduction, wool, milk, meet, furs, animals andbirds for fattening, bees colonies.

There are not included in this category the workinganimals , contained in the category of the tangibleassets.


Questions/Discussion ConcerningOwnership

Do all the goods included inthe count belong to thecompany?Does the company own anygoods not included in thecount?

.



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In the category of the inventory are also included (11) thegoods held in custody , for handling or in consignation atthe third parties.

These are recorded differently in accounting, on inventory

categories.

Consigned GoodsGoods of others you hold that you dont pay for untilthey are sold The company does not have theownership.


Expenses represent value consumedconsumption of value the firm incurred

Revenues represent value created

creation of value during the period



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Specificidentification

Specialcosting

methods

Specificidentification

Specialcosting

methods

Recording system Costing methods Valuation methods

Permanentinventorysystem

Periodicinventorysystem

Cost based

Market based

4.Recording system, costing and valuation

Class 3: Groups of accounts for inventoriesand for production in progress

30 - Inventory of raw materials and consumables33 - Work in progress34 Products35 Inventories held by third parties36 Animals37 Commodities

38 Packaging39 Adjustment for impairment of inventories and work in

progress

30-38 - Asset accounts- inventories accounts- price differences accounts: A 308,348, 368,388 and L 378

39 Adjustments: Liability accounts( with inverse accounting function)

acc

Group 30. Inventory of raw materials and consumables301 Raw materials302 Consumables

3021 Auxiliary materials 3022 Fuel3023 Pac kag ing mater ials 3024 Spar e par ts3025 Seeds and sapling 3026 Fodder3028 Other consumables

303 Materials in the form of inventory items308 Price differences on raw materials and consumables

Group 33. Work in progress331 Goods in progress 332 Works and services in progress

Group 34. Products341 Semi-finished products 345 Finished products346 Residual products 348 Price differences on products

4.1. Accounts


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Group 35. Inventories held by third parties351 Raw materials and consumables at third parties354 Products at third parties 356 Animals at third parties357 Commodities at third parties 358 Packaging at third parties

Group 36. Animals361 Animals and birds 368 Price differences on animals and birds

Group 37. Commodities371 Commodities 378 Price differences on commodities

Group 38. Packaging381 Packaging 388 Price differences on packaging

Group 39. Adjustment for impairment of inventories and work inprogress

4.1. AccountsGeneral functioning rules for

asset accounts

present only debit closingbalance and represent theexistences of assets at acertain time;

debit - the initial existencesof asset, undertaken from theinitial balance sheets asset;

debit - the asset increasesdetermined by the economicoperations, inscribed in the

supporting documents;

credit - the asset decreasesdetermined by the economicoperations, inscribed in the

supporting documents;

D Inventories Asset C

General functioning rules foradjustment of asset

present only credit closingbalance and represent theexistences at a certain t ime;

credit - the initial existencesundertaken from the initialbalance sheets asset;

credit - the increases

determined by the economicoperations, inscribed in thesupporting documents;

debit - the decreases

determined by the economicoperations, inscribed in thesupporting documents;

D Adjustment C

4.2.Costing methods

IAS 2 states: t he cost of inventories shall comprise all costs ofpurchase, and other costs incurred in bringing the inventories to theirpresent condition and location ( I.e. historical cost of acquisition)

Cost of goods manufactured ( production cost) is t he sum of theacquisition cost of raw materials, components and suppliedconsumed, labor cost , and a reasonable proportion of productionsupport and infrastructure costs ( overheads).

Inflows historical cost of acquisitionstandard cost (RO)invoice cost (RO)

Outflows non fungible goods: specific identification- fungible goods: special costing methods:

FIFOLIFOWAC


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4.2.Costing methods standard cost (RO) acquisitions production

Ex: standard cost 100 , real cost 90 ( invoice) standard cost 100 , real cost 90% = suppliers 90 % = Revenue 90

materials 100 products 100differences 10 differences 10

Ex: standard cost 100, real cost 105 (invoice)% = suppliers 105

materials 100differences 5

invoice cost (RO)

Ex: invoice cost 100, transport 10% = suppliers 110

materials 100differences 10

4.2.Costing methods

The price differences

Correct through sum or subtraction the valueof the current assets , respectively of theinventory .

Appear due to the use for the recording of theinventory of other values called recording(registration) values , other than the real ones(the acquisition cost or the production cost).

4.2.Costing methods


For instance , the standard cost , the presetproduction cost , the retail price are used.

The distribution of the price differences overthe value of the output goods and over theinventory is realized with the aid of a certaincoefficient which is calculated as follows:

4.2.Costing methods


The ini tial balance of + the price differences relatedtoThe d istributio n the p rice d if ference s the e ntr ies d uring t he p erio d

coefficient = _______________________________________________________ x 100The ini tial balance ofthe + the value oftheentries during

inventoryat registrationprice the periodat registration price


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ExampleA SC uses standard cost, has an inventory of auxiliary materials of 200 kg withan acquisition cost of 20 lei/kg, price differences 200 lei. Later it buys 500 kg atan invoice price of 21 lei/kg+ VAT. It consumes 600 kg.

Acquisition of auxiliary materials 500 kg% = 401 124953021 10000308 500 (21-20)*5004426 1995

Consumption of auxiliary materials6021 = 3021 12000Coefficient of price differenceK= (IB308+CDA308)/(IB3021+CDA3021)=0.05

Price differences for the consume 12000*0.056021= 3021 600

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Specific Identification

An actual physical flow costing method in which items still ininventory are specifically costed to arrive at the total cost ofending inventory.

Cost of goods sold = $700 + $800

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What Is Wrong with SpecificIdentification?

COST BENEFIT -EXPENSIVE TO SET-UP ANDMAINTAIN

4.2.Costing methods

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What Is a Cost Flow Assumption ? ?To presume the order in which goods are sold.

4.2.Costing methods

What Makes Cost Flow Assumptions Necessary ?

Changing Prices


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4.2.Costing methods

Cost Flow AssumptionsFIFO- First-in, First-Out- earliest goods purchasedare the first to be soldLIFO- Last-in,First-Out- latest goods purchasedare the first to be soldAverage Cost Method- costs are charged on thebasis of weighted average unit cost

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The FIFO method assumes the earliestgoods purchased are the first to be sold.

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The LIFO method assumes the latest goods purchased are the first to be sold.

SC, VAT payer, it has an initial inventory of 200 kg with the acquisition costof 8 lei/kg, later it buys 600 kg with 10 lei/kg VAT 19%, expenses withtransport 600 lei + VAT 19%.It consumes 700 kg and it uses LIFO method.

Acquisition of raw materials 600kg% = 401 7140301 60004426 1140

Expenses with transport% = 401 714

301 6004426 114

Acq. Cost/unit= 6600/600=11

Consumption of raw materials601 = 301 7400600*11+100*8


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The average cost method assumes thatgoods available for sale are the same.

The allocation of the cost of goods availablefor sale is made on the basis of the weighted

average unit cost incurred.

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The average cost method assumes thatgoods available for sale are homogeneous.

Illustration 6-10

The average cost method assumes thatgoods available for sale are similar in

nature.

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Factors Used in Selecting an InventoryCost Method

Income statement effects

Balance sheet effectsTax effects

pag. 310-313

4.2.Costing methods

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Income Statement EffectsIn periods of increasing prices

FIFO reports the highest net incomeLIFO the lowest

average cost falls in the middle.In periods of decreasing prices

FIFO will report the lowest net incomeLIFO the highestaverage cost falls in the middle.

4.2.Costing methods


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5353

Balance Sheet Effects

In a period of increasing prices costs allocated

to ending inventory using:

FIFO will approximate current costs

LIFO will be understated

4.2.Costing methods

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Tax Effects

Why do companies use LIFO?

Lower Income Taxes

Higher cost of goods soldLower net income

4.2.Costing methods

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Consistency

Whatever cost flow method a companychooses, it must use it consistently

ORDisclose the change and its effects on net

income in the financial statement.

4.2.Costing methods

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The Lower of Cost or Market Basis ofAccounting for Inventories

When the value of inventory is lower than its cost, the

inventory is written down to its market value by valuing the

inventory at the lower of cost or market (LCM) in the period in

which the price decline occurs.

4.3.Valuation methods


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5756

Lower of Cost or Market (LCM)

departure from cost principle

follows conservatism concept

can be used only after one of the cost flowmethods ( Specific Identification FIFO,LIFO, or Average Cost)


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Market Is...

CURRENT REPLACEMENTCOST


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How Much Inventory Should aCompany Have?

Only enough for sales needsExcess inventory costs:

storage costsinterest costsobsolescence - technology, fashion

4.3.Valuation methods 4.4.Inventory recording system

A. Permanent inventory system

A continuous record of changes in inv entory quantities and values(entries and withdrawals) is maintained in the inventory account.

All movements are recorded in inventory account.Purchases are recorded as increases of inventory assets

Withdrawals and consumption are reductions of the inventory assetsProvide a continuous record of the balances in both

the inventory account and inthe cost of goods sold account

Beginning inv. + Purchases or additions Withdrawals = Ending inv.200 900 800 X


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4.4.Inventory recording system

debit closing balance andrepresent ending inventory(the existences of assets ata certain time);by deduction

SI beginning inventory

debit asset increasepurchases ( cost of goodpurchased) or additions tothe inventory (cost of goodsmanufacturated)

credit - asset decreasesdetermined by withdrawalsfrom inventory-- cost of goods sold or-- cost of good consumed inthe next step of productionprocess

D Permanent inventory account C

Example: Permanent inventory system

SC VAT payer, keeps the evidence of the inventories using PI. It buys 10measurement devices with 800 lei/piece+ VAT 19%. 4 devices are given forconsume, which, after the utilisation period expires, it will be discharge.

Acquisition of materials in the form of inventory items% = 401 9520301 80004426 1520

Giving the devices into use603 = 303 3200Extra accounting evidence of the devices

\ D8039 Inventories in the form of inventory items 3200C8039 Inventories in the form of inventory items 3200


B. Periodic inventory system (intermittent)

Follows the general requirement that at least once every period abusiness physically counts and attest to what is really in inventory.

All beginning inv.and additions to inv.(through manufacturing ofpurchase) are in a first step presumed consumed and recorded directly

as an expense in the income statement

In a second step, the presumed consumption cost is adjusted at the

end of the period by deducting the independently measured ending inv .

Beginning inv. + Purchased or additions Ending inv = Withdrawals200 900 300 X

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Take a Physical Inventory

Determine inventory quantities by counting, weighting ormeasuring each type of inventory.Determine ownership of goods, including goods in transit,

consigned goods.Quantity of each kind of inventory is listed on inventory summarysheets where unit costs are applied.



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debit closing balance andrepresent ending inventory(the existences of assets ata certain time, measured);

SI beginning inventory

credit beginning inv.assumed consumed

D Intermitent inventory account C


Example: intermitent inventorysystem

SC, VAT payer, keeps the evidence of the inventories using II and it has an initialinventory of 200 kg with an acquisition cost of 8 lei/kg, later he buys 600 kg with10 lei/kg VAT 19%, expenses with transport 600 lei+ Vat. At the final stocktakingit has a surplus of 100 kg. (LIFO)Including the initia l inventory in the expenses 601 = 301 1600Acquisition of raw materials 600 kg % = 401 7140

601 60004426 1140

Expenses with transport % = 401 714601 600

4426 114Acq. Cost/ unit=6600/600=11Registering the final inventory 601=301 or -800

301=601 800

Raw materials: beginning inv. 200, purchases 900,withdrawals 800,ending inv 300

PIM IIM1. Withdr. beg.inv expense = inventory 200

a.purchases inventory = supplier 900b.withdrawals expense = inventory 800

2. Purchases/withdr. expense = inventory 9003. Ending inv. Inventory = expense 300

Comparison PIM, IIM


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Record Revenue andCost of Goods Sold

Compute Costof Goods Sold

Perpetual

Periodic

Perpetual

Item Sold

End ofPeriod

Comparing Periodic andPerpetual Inventory Systems

Inventory Purchased

Record Purchase of Inventory

End ofPeriod

No Entry

Record Purchase of Inventory Record Revenue Only

Inventory Purchased Item Sold


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Practical example1. Acquisition of raw materials 200 units, 110 lei/unit, VAT 19%,

transport expenses 8.000 lei, VAT 19%.,the payment beingdue later. A half is consumed.

- acquisition cost ?????raw materials 200 x 110 = 22.000transport 8.000

2. Purchase on commercial credit of commodities, 400 units, unitprice 200 lei,, commercial discount 2%, VAT 19%

- acquisition cost ?????commodities 200 x 400 = 80.000discount 2% 1.600

3. Selling merchandise, 300 units, (using FIFO), unit price 240,VAT 19%. Beginning inv. 30 units x 210 lei/unit.

5. Recording the transactions

GENERAL JOURNALOp

Explanation Corresponding Accounts SUMSD C

1 1 Acquisition of rawmaterials

% = 401 Suppliers301 Raw materials...4426 Input VAT

30.0005.700

35.700

1 2 Raw materialsconsumptions

601 = 301Expenses with raw mat Raw materials

15.000 15.000

2 3 Acquisition ofcommodities

% = 401 Suppliers371 Commodities4426 Input VAT

78.40014.896

93.296

3 4 Sale of commodities 4111 = %Customers 707

Sales of commodities

4427 Output VAT

85.68072.00013.680

3 5 Evidence discharging 607 = 371Commodities expenses Commodities

59.220 59.220


FIFO

Beginninginv. 30uni ts x 210 lei /uni t. = 6.300Purchase 400 units x 196 lei/unit. = 78.400

Sale 300 units 50.220

30uni ts x 210 lei /uni t. = 6.300270 units x 196 lei/unit. = 52.920


GENERAL JOURNAL

Op

Explanation Corresponding Accounts SUMS

D C

4 6 Finished goods are

obtained

% = 711 Variation in inventory

345 Finished products348 Differences

25.0001.000

24.000

5 7 Sale of finishedgoods

4111 = %Customers 701

Sales of finished goods

4427 Output WATT

9.9968.4001.596

7 8 Evidencedischarging

711 Variation in inventory = %345 Finished products348 Differences

7.2007.500

300

4. Obtaining finish goods 200 units, standard cost 125 lei/unit, real cost 120 lei5. Selling finished goods 60 units, unit price 140 lei VAT 19%.



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Key points

Valuation methods

Definitionrecognition Acquisition cost

Production cost

recording systems:PRM, IRM

Costing methods

Inventoriesassets

FA C04 Inventories

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