chapter 6 inventory
TRANSCRIPT
Chapter 6
Inventory
Chapter learning objectives
• record the adjustments for opening and closing
inventory
• apply the principles of inventory valuation in
accordance with IAS 2 Inventories
• recognize the costs that should be included in
inventory
• calculate inventory costs using the FIFO and AVCO
methods
• understand and identify the impact of inventory
valuation on reported profits and assets.
Inventory impacts the financial statement in two ways
1. Statement of financial position: a potentially large balance within current assets
2. Statement of profit or loss: opening and closing inventory have a direct impact on cost of sales and therefor profits
Introduction
Inventory impacts the financial statement in two ways
1. Statement of financial position: a potentially large balance within current assets
2. Statement of profit or loss: opening and closing inventory have a direct impact on cost of sales and therefor profits
Introduction
1. Accounting adjustment
2. Its valuation
Introduction
Business must therefore ensure that their financial statements account for inventory accurately in terms of:
2. Period end inventory adjustments
A business may not sold all its inventory atyear end. The unused inventory should be removedfrom purchase cost, and the value of unusedinventory held at the end of the year is anasset and must be recorded in Statement ofFinancial Position.
1. Closing inventory
The double entry is:
Dr Inventory (SOFP)
Cr Cost of sales (P/L)
2. Period end inventory adjustments
2. Opening inventory:
Inventory brought forward from the previous year is
assumed to have been used to generate assets for
sale. It must be removed from inventory assets and
recognised as an expense in the year.
The double entry is:
Dr cost of sales (P/L)
Cr inventory (SFP)
Recap of statement of profit or loss
$ $
Revenue 300
Opening inventory 50
Plus: Purchase 200
Less: Closing inventory (150)
Cost of sales (COS) (100)
Gross profit 100
3. Inventory and cost of sales
Remember the purchases account is used to reflect all purchases of inventory.
The opening and closing inventory adjustments arise at the period end for the value of inventory not sold at the end of the period.
Cost of Sales (COS) = Opening inventory + Purchases – Closing
inventory
3. Inventory and cost of sales
4. Inventory valuation (IAS 2)
4. Inventory valuation (IAS 2)
4. Inventory valuation (IAS 2)
Net realisable value (NRV): the estimated selling price less any further costs required to make the sale.
Further costs include: cost of completion、selling cost ……
4. Inventory valuation (IAS 2)
4. Inventory valuation (IAS 2)
Cost of purchase
Material costs
Import duties
Insurance
Freight
Cost of conversion
Direct costs (wages of workers...)
Production overheads(depreciation...)
Selling costs/ storage costs
Abnormal waste of material, labour...
Administrative overheads
Costs must be excluded
Cost: all the expenditure incurred in bringing the
product or service to its present location and
condition.
4. Inventory valuation (IAS 2)
Cost of inventory-example
(生产班长的工资)
5. Methods of calculating the cost of inventory
First in first out method(FIFO)
Day buy in/ sell out
Quantity $
1 buy in 1 5
2 buy in 1 6
3 buy in 1 7
4 sell out 1 ?
? = $5
5. Methods of calculating the cost of inventory
5. Methods of calculating the cost of inventory
Average cost
Continuous weighted average cost (连续加权平均成本)
Periodic weighted average cost (期间加权平均成本)
5. Methods of calculating the cost of inventory
5. Methods of calculating the cost of inventory
5. Methods of calculating the cost of inventory
FIFO
5. Methods of calculating the cost of inventory
Periodic weighted average cost
5. Methods of calculating the cost of inventory
continuous weighted average cost
The Impact of valuation methods on profit and the
statement of financial position
Different valuation methods will result in different closing inventory value. This
impacts both profit and statement of financial position asset value.
In times of rising prices,
FIFO will tend to give higher profits and higher inventory value.
In times of reducing prices,
FIFO will tend to give lower profits and lower inventory value.
Quick quiz
The Impact of valuation methods on profit and the
statement of financial position
6. Continues inventory systems
期末盘存
Inventory counting
period-end/ periodic method
continuous method 永续盘存
There are two methods to keep and update inventory records:
Chapter summary
inventory
valuation
Lower of
cost
Unit cost FIFO WAC
Net Realisable value
Adjustments
opening closing