accounting for inventories
TRANSCRIPT
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FINANCIAL ACCOUNTINGPRESENTATION
PREPARED BY: UMESH TIBREWAL
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ACCOUNTING FORINVENTORIES
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DEFINITION OF INVENTORIES(AS-2)
Inventories are assets held:1. For sale in the ordinary course of business2. In the process of production for such sale3. In the form of materials or supplies to be
consumed in the production process or in the rendering of services
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Types of InventoryInventory comes in many
shapes and sizes such as:◦ Raw materials – purchased
items or extracted materials transformed into components or products
◦ Components – parts or subassemblies used in final product
◦ Work-in-process – items in process throughout the plant
◦ Finished goods – products sold to customers
◦ Distribution inventory – finished goods in the distribution system
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Accounting Principles Related to Inventory
ConsistencyCompanies should use same inventory
method from period to period Disclosure
Companies should disclose inventory method used
ConservatismCompanies should “write down” inventory if
market price falls below cost
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COST OF INVENTORYAll expenditures incurred to
bring the item to its existing condition and
location
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Net cost of purchasesPurchase price
+ Freight-in
- Purchase returns
- Purchase Discounts
= Net cost of purchases
- Purchase allowances
Transportation costs
Unsuitable goodsreturned to seller
Reduction in amount owed
For early payment
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Net SalesSales revenue
- Sales returns
- Sales Discounts
= Net Sales
- Sales allowances
Unsuitable goodsreturned to company
Reduction in amount owed
For early payment
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• Invoice cost• Shipping• Cash discounts• Purchases allowances
Cost of Inventory includes
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HOW TO ACCOUNT FOR INVENTORY PURCHASES, SALES AND REPORTING?
Applying either the periodic inventory system or the perpetual inventory system and select a cost flow assumption to determine the value of inventories.
Both inventory systems require a physical count of inventory at the end of a period to determine the units which can be included in the inventory count.
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Inventory Systems - Periodic
Compute inventory balance at end of each accounting period
Compute cost of goods sold at the end of accounting period
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Inventory Systems - Perpetual
Compute cost of goods sold at each sale
Compute new inventory balance at each sale
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Perpetual vs. Periodic Inventory System
Perpetual system Periodic System At purchase Inventory xxx Purchases xxxA/P xxx A/P xxx
At sale: CGS xxx None Inventory xxxA/R xxx A/R xxxSales xxx Sales xxx
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Cost Flow Assumptions
Only with specific identification do we attempt to match the actual movement of product through the business with the movement of costs through the accounting system
With other inventory cost methods, we make an assumption of the movement of costs through the accounting system.
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Cost Flow Assumptions(Contd.)
This "flow" of costs through the system need not match the movement of product through the business
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COST FLOW ASSUMPTIONS
FIRST-IN, FIRST-OUT(FIFO) Earliest goods assumed to be first
units sold Inventory made up of latest goods
acquired
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Purchased goods
Purchased goods
Sold goods
Sold goods
Cost Flow AssumptionsCost Flow Assumptions
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First-in, First-out (FIFO) Method
Step 1: Assign the cost of the beginning inventory to cost of goods sold.
1stin
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First-in, First-out (FIFO) Method ALLOCATE TO Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 300 $11
4/8 400 $12
9/5 200 $13
12/12 100 $14
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First-in, First-out (FIFO) Method Step 2: Continue to work forward until you
assign the total number of units sold during the period to cost of goods sold. Allocate the remaining costs to ending inventory.
2nd3rd etc.
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First-in, First-out (FIFO) Method
ALLOCATE TO Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 300 $11 3,300
4/8 300 / 100 $12 $3,600 1,200
9/5 200 $13 2,600
12/12 100 $14 1,400
TOTALS $7,600 $9,500
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COST FLOW ASSUMPTIONS
LAST-IN, FIRST-OUT(LIFO) Newest goods assumed to be first
units sold Inventory made up of earliest goods
acquired
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Purchased goods
Purchased goodsSold
goods
Sold goods
Cost Flow AssumptionsCost Flow Assumptions
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Last-in, First-out (LIFO) Method
Step 1: Assign the cost of the last units purchased to cost of goods sold.
1stin
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Last-in, First-out (LIFO) Method ALLOCATE TO
Ending Cost ofUnits Cost Inventory Goods
Sold
1/1 500 $10
1/20 300 $11
4/8 400 $12
9/5 200 $13
12/12 100 $14 $1,400
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1stin
Step 2: Work backwards until you assign the total number of units sold during the period to cost of goods sold (allocate the remaining costs to ending inventory).
Last-in, First-out (LIFO) Method
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Last-in, First-out (LIFO) Method
ALLOCATE TO Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 100 / 200 $11 1,100 $ 2,200
4/8 400 $12 4,800
9/5 200 $13 2,600
12/12 100 $14 1,400
TOTALS $6,100 $11,000
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COST FLOW ASSUMPTIONS
AVERAGE COST Cost of items sold is the weighted
average of costs incurred Inventory is the weighted average of
costs incurred
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Purchased goods
Purchased goods
Sold goods
Sold goods
Cost Flow AssumptionsCost Flow Assumptions
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Weighted Average Method
Step 1: Calculate the cost of goods available for sale.
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Weighted Average Method
Date purchased Units Cost Total cost Beg. inventory 500 $10 $ 5,000 1/20 300 11 3,300 4/8 400 12 4,800 9/5 200 13 2,600 12/12 100 14 1,400 Cost of goods available for sale 1,500 $17,100
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Weighted Average Method
Step 2: Divide the cost of goods availablefor sale by the total units todetermine the weighted averagecost per unit.
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Weighted Average Method
Cost of Goods Available for SaleUnits Available for Sale
$17,100 1,500 = $11.40/unit
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Weighted Average Method
Step 3: Calculate ending inventory and cost of goods sold by multiplying the weighted average cost per unit by the number of units in ending inventory and the number of units sold.
×Avg.Cost
No. ofUnits
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Weighted Average Method
ALLOCATE TO Ending Cost of Inventory Goods
SoldUnits on hand 600 Units sold 900Weighted average cost × $11.40 $ 11.40Total cost of goods available of $17,100 allocated: $6,840 $10,260
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Comparison of Costing Methods
Cost of GoodsSold
Ending Inventory
11,000
6,840
7,600
10,260
9,500
17,100
17,000
17,100
WeightedAverage
FIFO
LIFO
Goods Available for Sale
6,100
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Inventory Costing MethodsInventory Costing Methods
40%
30%
20%
10%
0%
43%
34%
19%
4%
Fifo Lifo Average Other
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THANK YOU