Industrial Engineering TOPIC: Inventory control Week3 Lecture1
Topic 6 Inventory
-
Upload
mandalina-landy -
Category
Technology
-
view
2.330 -
download
0
Transcript of Topic 6 Inventory
TOPIC 6
ACCOUNTING FOR INVENTORIES
ACCOUNTING FOR INVENTORIES
DEFINITION:FRS 102: Inventory is an asset that owned
by the business for the purpose of selling to the customer.
Managing inventory is done to determine:1. Inventory on hand2. Inventory available for
sale3. Cost of goods sold.
Inventory Control
1. Establishment of responsibility: every inventory counter is accountable by different person.
2. Segregation of duties: a person who records the inventories is not the same as the person who makes a count and also not the same with the person who distributes the inventories.
Inventory Control
3. Independent Internal Verification: make a second count and verify the balance by a different person.
4. Documentation Procedure: numbering tag or barcode is paste to the inventory and each sales is made using on-line basis.
5. Physical, mechanical and electronic control: make a physical stock count frequently.
Inventory Accounting System
There are two basic systems of accounting for inventories:
1. Perpetual Inventory system (Sistem Berterusan)
2. Periodic Inventory System (Sistem Berkala)
Differences between these two systems:
Perpetual Periodic
Detailed records of each inventory purchase and sale are maintained and continuously show inventory in hand
No attempt is made to keep detailed inventory records of goods on hand throughout the period
Keeps track of both quantities and costs
No record kept on both quantities and costs
The cost of goods sold is determined and recorded each time sales occur
The cost of goods sold only can be determined at the end of accounting period when physical stock count is taken.
Valuation of Inventory
1. First In First Out (FIFO)- first items purchase will be sold first.
2. Last In First Out (LIFO)- last item purchase will be sold first.
3. Weighted Average (WA)- make an average cost per unit purchase of the goods.
Example:The information below regarding an inventory
product name AIA for year 2006:
The physical stock counts on 31 Dec 2006 shows a balance of 400 units.
Date Unit Cost per unit (RM)
Selling Price (RM)
1 Jan Bal b/b 100 8 -
7Feb Purchase 400 10 -
3 Jun Sales 300 - 12
3 Aug Purchase 500 12 -
2 Oct Sale 400 - 14
5 Nov Sale 100 - 16
8 Dec Purchase 200 13 -
Total Stock (unit) - total Sales (unit) = Closing stock (unit)
[Opening stock + Purchase] – Total Sales = Closing Stock 100 unit + 1100 unit - 800 unit =
400 unit.
a) FIFO - Periodic:
Cost of Good Sold:Opening Inventory 800Add: Purchase 12,600
13,400Less: Closing Stock 5,000COST OF GOOD SOLD 8,400
Purchase (Aug 8)
200unit RM12 RM2,400
Purchase (Dec 8) 200 unit RM13 RM2, 600
Closing Inventory
400 unit RM5, 000
b) FIFO - PERPETUALFIFO STOCK CARD - AIA
Date Purchasing Selling Balance
2006 Unit Price RM Unit Price RM Unit Price RM
1-Jan 100 8 800
7-Feb
400 10 4000 100 8 800
400 10 4000
3-Jun
100 8 800
200 10 2000
200 10 2000
8-Aug
500 12 6000 200 10 2000
500 12 6000
2-Oct
200 10 2000
200 12 2400
300 12 3600
5-Nov
100 12 1200
200 12 2400
8-Dec
200 13 2600 200 12 2400
200 13 2600
Total Purchase
12600
COGS 8400
Closing Stock
5000
LIFO - Periodic:
Cost of Good Sold:Opening Inventory 800Add: Purchase 12,600
13,400Less: Closing Stock 3,800COST OF GOOD SOLD 9,600
Opening Balance
100 unit RM8 RM800
Purchase (7 Feb)
300 unit RM10 RM3,000
Closing Inventory
400 unit RM3,800
PERPETUAL LIFO – STOCK CARD - AIA
Date Purchasing Selling Balance
2006 Unit Price RM Unit Price RM Unit Price RM
1- Jan
100 8 800
7- Feb
400 10 4000 100 8 800
400 10 4000
3-Jun
300 10 3000 100 8 800
100 10 1000
8-Aug
500 12 6000 100 8 800
100 10 1000
500 12 6000
2-Oct
400 12 4800 100 8 800
100 10 1000
100 12 1200
5-Nov
100 12 1200 100 8 800
100 10 1000
8-Dec
200 13 2600 100 8 800
100 10 1000
200 13 2600
Total Purchase
12600
COGS 9000 Closing Stock
4400
WEIGHTED AVERAGEPeriodic
Weighted Average cost per unit =Opening Inventory + Purchases
Total unit available for sale
RM800 + RM12,600(100 + 1,100) unit
= RM11.17 per unit
Closing Inventory = 400 unit x RM11.17= RM4,468
COGS = 800 unit x RM11.17= RM8,932
Perpetual
Weighted Average – Stock Card - AIA
Date Purchasing Selling Balance
2006 Unit Price
RM Unit Price
RM Unit Price
RM
1-Jan
100 8 800
7-Feb
400 10 4, 000
500 9.6 4,800
3-Jun
300 9.6 2,880
200 9.6 1,920
8 Aug
500 12 6000 700 11.31
7,920
2-Oct
400 11.31
4,526
300 11.31
3,394
5-Nov
100 11.31
1,131
200 11.31
2,263
8-Dec
200 13 2,600
400 12.16
4,863
Total Purchase
12,600
COGS 8,537
Closing Stock
4,863
Effect of using different method:
1. InflationAssume that the purchase price is increasing:
FIFO:The lower price of the inventory will be taken out
first; this will lower down the cost of goods sold of the inventory. Thus
the profit will be increased.
LIFO:The higher price of the inventory will be taken out
first; this will increase the cost of good sold of the inventory. Thus the profit will be decreased.
FIFO LIFO WA
Sales 10,800 10,800 10,800
COGS 8,400 9,000 8,573
PROFIT 2,400 1,800 2,227
2. Deflation:- deflation (lower price of the inventory) will give a reverse situation whilst using either FIFO, LIFO or WA.
• An alternative method of valuing inventory in a situation of declining value of inventory : lower than cost
(e.g due to changes in technology or fashion)
• To comply with accounting principle:Conservatism: the best choice is to
select the method that is least likely to overstate asset and net income.
VALUING INVENTORY AT THE LOWER OF COST OR MARKET (LCM)
The method:
The value of inventory should be written down from the cost price to market price in situations where market is below cost.
Market price:- “Current replacement cost” not
selling price.- A cost of purchasing the same
goods at the present time from the usual supplier.
Reporting in the Financial Statement:Cost of Goods Sold:
Opening Inventory + Cost of Good Available for Sale - Closing
Stock.
Cost Market LCM
Video equipment
48, 000 45, 000 45, 000
Recorders 15, 000 14, 000 14,000
Movies 63, 000 59, 000 59,000
Consoles 60, 000 55, 000 55, 000
Portables 45, 000 52, 000 45, 000
Total Inventory
168, 000 166, 000 159, 000
Income Statement – Periodic System
________________________________________________________ Opening Inventory 2, 000
Add:Purchase 20,000Carriage Inward 2, 500Import Duty 1, 500
24, 000(-) Return Outward (1, 000)
23, 000Cost of Goods Available for sale 25, 000(-) Closing Stock (5, 000)Cost of Good Sold 20, 000
Income Statement - Perpetual System________________________________________________
Sales xxxLess: Cost of Good Sold xxLess: Inventory Shortage xx xx
Gross Profit xxx
• EFFECT ON PROFIT: OVER/UNDERSTATE VALUE OF INVENTORY
Inventory Error COGS Net Profit
Opening Understated
Understated
Overstated
Opening Overstated Overstated Understated
Closing Understated
Overstated Understated
Closing Overstated Understated
Overstated
Journal Entries for Purchasing of Goods
Transaction Periodic Perpetual
Purchase goods on credit/cash
Dt Purchase Cr Trade Creditor/ Cash
Dt Stock Cr Trade Creditor /Cash
Return Outward/ purchase return
Dt Trade Creditor Cr Return Outward/purchase return
Dt Trade Creditor Cr Stock
Carriage Inward/ freight-in
Dt Carriage Inward Cr Cash
Dt Stock Cr Cash
Payment to supplier/ creditor
Dt Trade Creditor Cr Cash
Dt Trade Creditor Cr Cash
Journal Entries for Sales of GoodsTransactions Periodic Perpetual
Sales Goods on Credit / Cash
Dt Debtor/Cash Cr Sales
Dt Debtor / Cash Cr Sales
No entry to be made
Dt Cost of Goods Sold Cr Stock
Return Inward/ sales return
Dt Return Inward Cr Debtor
Dt Return Inward Cr Debtor
No entry to be made
Dt Stock Cr Cost of Good Sold
Collections Dt CashDt Sales Discount Cr Debtor
Dt CashDt Sales Discount Cr Debtor
If there is inventory shortage
No record to be made because it directly charge to COGS
Dt Inventory Shortage expense Cr Inventory
1. SHORT TERM INVESTMENTDefinition:Investment made for a period of less than one year
and very easy tochange or convert it in the cash term.Example: investment in Marketable securities
(Treasury Bill)The objective of investment is to earn interest and
dividends.
Types:- investment in government bond - investment in stock of large corporation
Reasons:Stock and bonds traded on organized securities
markets, such asBursa Malaysia, are readily marketable because can
be bought and sold daily. Therefore, easy to convert into cash when it is needed.
OTHER CURRENT ASSET
2. Accrued Revenue
3. Prepaid Assets/Expenses
Presentation in Financial StatementCurrent AssetCashBankInvestmentAccrued RevenuePrepaid Expenses.
Exercises on Inventory 1. Berikut adalah belian dan jualan Syarikat
Zamani dalam bulan September 20X6.
Dikehendaki:Dengan menggunakan kedua-dua sistem iaitu
berterusan dan berkala, kira nilai stok akhirnya mengikut kaedah:
a) FIFO (MDKD)b) LIFO (MKKD)c) Kos Purata
Tarikh Belian (unit)
Jualan (unit)
RM
1 September
200 - 2.00
8 ‘’ - 50 -
15 “ 60 - 2.50
20 “ - 200 -
30 “ 80 - 3.00