maintain inventory records learner guide...fnsacc405 learner guide version no. 1.0 page 7 australian...

FNSACC405

Maintain Inventory Records

Learner Guide

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FNSACC405 – Learner Guide Version No. 1.0

Australian College of Business and Accounting

TABLE OF CONTENTS

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TABLE OF CONTENTS ............................................................ 2

LEARNER GUIDE ................................................................... 5

Description ............................................................................................. 5

This Learner Guide Covers ..................................................................... 5

1. INVENTORY .................................................................... 6

1.1 What is Inventory? ......................................................................... 6

1.1.1 Example -Inventory and Its importance ........................................ 7

1.1.2 Different types of Inventory .......................................................... 8

1.1.3 Retail/Merchandise Inventory ...................................................... 8

1.1.4 Manufacturers/Manufacturing Inventory .................................... 8

1.1.5 Service Based Inventory ................................................................. 9

1.1.6 Other Inventory Considerations .................................................... 9

1.1.7 Inventory – The Life Cycle of Inventory........................................ 11

1.1.8 Documentation Relevant to Maintaining Inventory Records ...... 12

1.1.9 The Inventory Cycle Outlined ...................................................... 18

1.1.9 Inventory – Markup vs. Margin ............................................... 20

Activity 1 ............................................................................................... 22

2. ACCOUNTING FOR INVENTORY ...................................... 24

2.1 Generally Accepted Accounting Principles .................................. 24

2.2 Goods and Services Tax (GST) and Inventory ............................. 27

2.3 Inventory Systems ......................................................................... 28

2.4 Systems of Accounting for Inventory ........................................... 29

2.4.1 Periodic inventory (stock) system ............................................... 29

2.4.2 Perpetual inventory method........................................................ 33

2.4.3 Barcode Inventory Management Systems ................................... 35

2.4.4 Radio Frequency Identification (RFID) Inventory Systems ....... 35

Activity 2 .............................................................................................. 37

3. VALUING INVENTORY .................................................. 38

3.1 Cost Flow Assumptions ................................................................. 38

3.2 Valuing Inventory – Standard Costs Method ................................ 38

3.3 Valuing Inventory – Perpetual Methods ........................................ 39

3.4 Perpetual Inventory – First In First Out (FIFO) Cost Method ... 40

3.5 Perpetual Inventory - Weighted Average Cost Method ............... 46

3.6 Retail Inventory Method of Accounting for Inventories .............. 51

3.7 Specific Identification ..................................................................... 52

3.8 LIFO (Last-in; First-out) ................................................................ 52

FNSACC405 Learner Guide Version No. 1.0


3.9 The Stock Take Stage of the Inventory Accounting Process ........ 52

3.10 Types of Inventory in a Manufacturing Industry ...................... 53

3.11 How to Reconcile Inventory...................................................... 54

3.12 Practical Reconciliations Conducted ............................................ 55

3.13 Common Errors ............................................................................ 56

Activity 3 .............................................................................................. 57

Activity 4 .............................................................................................. 58

4. MANAGING INVENTORY LEVELS ................................ 59

4.1 Effective Inventory Management ............................................. 60

4.2 Economic order quantity (EOQ) ............................................... 62

4.3 Just-In-Time Process ................................................................ 63

4.4 Inventory Turnover ................................................................... 63

4.5 ABC Analysis .................................................................................. 65

Activity 5............................................................................................... 66

5. PRACTICAL CASE STUDY OF INVENTORY ................... 67

Scenario ................................................................................................ 67

5.1 Account Opening Balances ......................................................... 68

5.2 Enter Historical Sales .................................................................. 69

5.3 Enter Historical Purchases ....................................................... 71

5.4 Enter Stock Items ........................................................................ 72

5.5 Enter Inventory Opening Stock ................................................... 77

5.6 Purchase Orders.......................................................................... 80

5.7 Sales Invoices .............................................................................. 82

5.8 Goods Received with an Invoice .................................................. 85

5.9 Goods Received Without an Invoice ........................................... 90

5.10 Sales Invoices ............................................................................ 92

5.11 Stock Purchase .......................................................................... 93

5.12 Sales Return .............................................................................. 94

5.13 Customer Receipts .................................................................... 97

5.14 Supplier Payments .................................................................. 100

5.15 Prepare A Bank Deposit .......................................................... 102

5.16 Removing Stock Items for Business Use ................................. 104

5.17 Convert Receive Items to Invoice ........................................... 107

5.18 Return of Item to a Supplier ................................................... 107

5.19 Inventory Reconciliation ......................................................... 109

5.20 Opening and Closing Stock Entries .........................................112

5.21 Project End of Period Reports .................................................113

5.22 FIFO Stock Card for This Assessment ........................................ 114

APPENDIX A – SOLUTIONS TO PRACTICAL SKILLS ACTIVITIES ......................................................................... 115

Printout 1 Accounts List [Summary] ................................................... 115

Printout 2 Aged Receivables [Summary] ........................................... 116



Printout 3 Aged Payables [Summary] ................................................ 116

Printout 4 Items List [Summary] ....................................................... 116

Printout 5 Cables-n-Things Order....................................................... 117

Printout 6 Itech Purchase Order ......................................................... 117

Printout 7 CDS Purchase Order ......................................................... 118

Printout 8 Big Byte Sales Invoice ....................................................... 118

Printout 9 Network Specialists Sales Invoice ..................................... 119

Printout 10 Office Supplies Sales Invoice........................................... 119

Printout 11 Sale Office Supplies ......................................................... 120

Printout 12 Purchase Cables ............................................................... 120

Printout 13 Office Supplies Credit .......................................................121

Printout 14 Bank Deposit ....................................................................121

Printout 15 Inventory Value Reconciliation ....................................... 122

Printout 16 All Journals ..................................................................... 122

Printout 17 Balance Sheet .................................................................. 123

Printout 18 Profit and Loss ................................................................ 124

Printout 19 Item Transactions ........................................................... 124

Printout 20 Open Bills and Orders .................................................... 125

Asset Register Card ............................................................................ 125

FIFO Stock Card ................................................................................. 125

ANSWERS TO ACTIVITIES .................................................. 126

Activity 1 ............................................................................................. 126

Activity 2 ............................................................................................ 128

Activity 3 ............................................................................................ 129

Activity 4 ............................................................................................ 130

Activity 5..............................................................................................131

Activity 6 ............................................................................................ 132



LEARNER GUIDE

Description

FNSACC405 –Maintain Inventory Records

This unit describes the performance outcomes, skills, and knowledge required to

comply with organisational inventory procedures, reconcile inventory records to

general ledgers, record inventory flows, prepare schedules, and produce ad hoc

reports.

It applies to individuals who use specialised financial knowledge and follow

procedures to ensure compliance with required standards when dealing with

inventory.

This Learner Guide Covers

Maintaining Inventory Records

1. Processing inventory purchases

2. Recording inventory flows

3. Reconciliation of inventory records to general ledgers

4. Preparing inventory schedules and ad hoc reports



1. INVENTORY

1.1 What is Inventory?

The word “inventory”, also referred to as “stock”, simply means the goods that a

business holds in stock ready for sale, production, or consumption in a production

process or the delivery of services.

Inventories are classed as assets which fall into a few basic groups depending on the

type of business and the goods it sells or produces:

1. Items held for sale in the ordinary course of business.

2. Items used in the production of goods to then make a sale.

3. Items in the form of materials or supplies to be consumed in the production

process or the provision of services.

Inventory is reported as a current asset on the company's balance sheet. The reason

for this is because for a business that buys and sells goods inventory forms a significant

part of economic and financial value of a business and thus need to be tracked.

Another way to look at inventory and its current asset classification is that stock, has

demand and supply in the market and can be easily realised for cash. This easy

realisation to cash is one of the core reasons inventories is a current asset.

The second is that inventory is generally turned over in a short period of time if the

businesses planning for stock levels is done correctly, this factor is discussed later

chapters.

Inventory is a significant asset that needs to be monitored closely. Why?

• Too much inventory can result in cash flow problems,

• Additional expenses on the business (e.g., storage, insurance),

• Losses if the items become obsolete or out of date,

• Too little inventory can result in lost sales and lost customers as they go

elsewhere.



1.1.1 Example -Inventory and Its importance

For example, let’s say your favourite café was up for sale, besides the general assets of

the business tables, chairs, coffee machine, there would be stock – the coffee! The let’s

say the café sale price is $100,000 plus SAV (Stock at Valuation). So, a stock take is

performed and the cost of inventory was $25,000.

That’s ¼ of the selling price added to pay for the business inventory- so its significant.

It means to purchase that café you would pay $125,000 to be its new owner.

On a balance sheet your inventory could be worth a large percent of your assets,

consider an online business for example, this is not to say, other inventory businesses

don’t have the same high portion of inventory investment (asset).

On line business will have very few other assets no buildings etc, so the stock the

business on sells will form a substantial portion of the Balance Sheet as per the table

below.

So, $50,000 + $20,000+$3,500 = $73,500 in Total Assets of the business.

$50,000 / $73,500 x 100 = 68%

This means that for this business 68% of its Total Assets are inventory.

Bringing it all together, inventory costs lots, and has major expense and income

implications for a business (for the goods it sells) even come end of year reporting.

It’s just as important as knowing how much cash the business has sitting in the bank

account.

Balance Sheet – Online SelleraRoo

As at 30 June 20xx

Current Assets

Cash at Bank 20,000

Accounts Receivable 3500

Inventory

Gadget 1 10,000

Gadget 2 25,000

Gadget 3 15, 000

Total Inventory 50,000 Figure 1 - Example of the inventory accounts of a manufacturing organisation



1.1.2 Different types of Inventory

Different types of business will require inventory and have different inventory and

classifications of inventory on the Balance depending on business preferences in the

Chart of accounts and type of business.

So, let’s explore this a little more closely,

1.1.3 Retail/Merchandise Inventory

This is called “merchandised” or merchandise inventory and is purchased by

merchandisers (retailers, wholesalers, distributors) for the purpose of being sold to

customers. The cost of the merchandise purchased but not yet sold is reported in the

account Inventory or Merchandise Inventory Account (as you know the business can

have a range of account names to suit their circumstances).

Because of the cost principle (GAAP), inventory is reported on the balance sheet at the

amount paid to obtain (purchase) the merchandise, and not at its selling price.

1-1300 Inventory

1-1310 Merchandise Inventory 50,000

1-1320 Perishable Inventory 5,000

TOTAL INVENTORY 55,000

Figure 2 - Example of the inventory accounts of a manufacturing organisation

Another name used in inventory would be Perishable Inventory think about your local

fruit market all of their inventory can spoil and therefore is perishable. You will find

that many businesses only keep just enough stock to avoid this spoilage and it becomes

very important to be monitoring and controlling your inventory (this is discussed

further during this learning guide later).

1.1.4 Manufacturers/Manufacturing Inventory

Manufacturing Inventory is one of the most significant assets of manufacturers. There

may be several different categories or types of inventory for manufacturers. In the

asset general ledger accounts these inventory categories or groups are usually recorded

in different accounts (see Table 1 below).

1-1300 Inventory

1-1310 Raw Materials 50,000

1-1320 Work in Progress 10,000

1-1330 Finished Goods 98,000

TOTAL INVENTORY 158,000 Figure 3 - Example of the inventory accounts of a manufacturing organisation



The example is indicative of business involved in the manufacturing of goods rather

than the purchasing of goods from a manufacturer for resale.

▪ Raw materials consist of the materials that have been purchased for use in the

manufacturing of goods for sale. (Example – Logs from trees in the forest cut

down and now sitting in the businesses warehouse).

▪ Work in progress also known as WIP consists of materials taken from raw

materials and combined with the labour to produce the goods that are not yet

finished. (Example – The logs have been worked on staff to turn into furniture,

been in machines might have been turned into table tops, legs etc but not put

together yet to make the finished table).

▪ Finished goods are ready for sale items that have been manufactured with the

use of the raw materials and the labour. (Example – The legs and table top

have been glued together and its ready to sell and put in your home).

For manufactures, they will account and in managing the business it becomes vital to

ensure enough stock is held of each in order to compete their goods.

Just think, if we didn’t have the logs to be making the tables, you have a whole team

of people, and a building that come to a standstill and there is no productive work,

this would cost the business millions if a large business. Even in the news you would

have heard of worksites or manufacturers having shut downs or other delays which

cost millions due to lost productivity.

1.1.5 Service Based Inventory

Service based inventory is a business that will buy parts from the manufacturer to

order to carry our repairs or sell the parts to various businesses. Great example of

this would be your Mechanic who buys in parts to service and fix your car.

1.1.6 Other Inventory Considerations

Where a business is not involved in the manufacturing of goods but rather purchases

ready-made goods (which are then offered for resale), the inventory accounts may look

something like this:

1-1300 Inventory

1-1310 Office supplies 138,000

1-1320 Office equipment 500,000

1-1330 Parts 22,000

TOTAL INVENTORY 660,000 Figure 4 - Example of the inventory accounts of a wholesaler or a retailer



If the inventory is large enough and diverse enough, the business may also divide the

inventory into various groups for various categories. In the example provided here (see

table 2 above), the inventory is broken down into three (3) categories that allow

management to identify its value better. This, in turn, will allows businesses to make

better informed decisions regarding order quantities and stock held, based on

turnover rates which may be vastly different for each group. Remember the most

important part of accounting is transparent and accurate information to make

economic and financial decisions upon.

If the inventory of a business is relatively small and turnover rates similar, then it may

simply be comprised of one general ledger account (see Table 3 below).

1-1300 Inventory 22,000 Figure 5 - Example of the single inventory accounts of a small business

The complexity or the simplicity of the asset inventory accounts is dependent on the

reporting needs of the individual business.

In summary, inventories take on one of three forms depending on the type of industry:

1. Wholesale and retail industry – inventories are for the purchase and sale of

products

2. Service industry – inventories include parts necessary to complete repairs

3. Manufacturing industry - inventories include raw materials, work in progress,

and finished goods for resale

Although Inventory is written at cost price (GAPP) it can hold a variety of values due

to a range of factors, and the common definitions of these values are provided below:

Fair value Fair value is the amount for which an asset could be

exchanged, or a liability settled, between knowledgeable,

willing partners in an arms-length transaction.

Net realisable

value

The net realisable value is the estimated selling price in the

ordinary course of business less the estimated costs of

completing the sale.

Inventories can be measured at the lower of cost price (fair value) and the net

realisable value. Measurement of inventories is usually done at cost price unless the

value has been diminished because of items being superseded or becoming obsolete or

inventory shrinkage. Cost price valuation methods will be discussed later in this text.



1.1.7 Inventory – The Life Cycle of Inventory

Given the types of inventory requirements for different businesses and systems

required to manage inventory there is always a process to follow. The below flow chart

is an example of the Inventory Purchase Cycle. The inventory cycles may be more

complex or simple based on the business’s needs.

For example, a small business may simply place the order, receive the stock, check

the stock, and pay the invoice. Where larger organisation will require closer to the

flow chart below, where a number of processes and approvals may take place.

Figure 6 - Example of the inventory cycle

The above chart is also termed the stock cycle or procurement cycle, whereas the

inventory cycle is the fluctuation of production caused by the purchase and the selling

of stocks/inventories (so both).

If production of stock is greater than demand, production will rise but companies will

also accumulate unsold stocks. This will encourage some companies to scale back

production, cutting even if demand remains constant in other words inventory is

highly impacted by customers and their demand for products.



An economic cycle is created (by a range of factors) and normally the inventory cycle

will amplify the existing economic cycle or conditions as stocks are accumulated in

good times and production is reduced in bad times.

1.1.8 Documentation Relevant to Maintaining Inventory Records

Below are some of the documents needed for maintaining inventory records:

▪ Quote – This is a document sent by a supplier or even online to get an estimated cost

of the goods. You might get multiple quotes or have preferred suppliers you do

business with to gain quotes.

In MYOB and most accounting software packages you are able to select the type of

document- Quote is selected below.

▪ Purchase requisition - It is a document used by a department (internally inside

the business) to request that the purchasing department order materials or

merchandise. In other words, this form is used by departments to notify the

purchasing department that raw materials are needed for production or merchandise

are needed for the sales floor.

For example, the Reception team member see that’s stationary suppliers are low or

as part of the monthly routine reviews stock, they would then generally fill out (in

larger companies especially) a Purchase requisition form or request this could be

different for each department or type of purchase as well, each company will have

its own systems for this. The requisition request then goes to the office manager to

approve, once approved the office manager would send the approval for the

reception team member to place

the order.

The example to the left is a general purchase requisition

form.

The one above might be used in the construction or

manufacturing industry for materials to complete a

product. These companies may also have a general

requisition form like on the left as well and use both in their

inventory management systems documentation.



▪ Purchase Order (For purchases)– This source

document used by the purchasing department to

actually place an order with the vendor or supplier of

the requested good. In other words, this is the contract

that a buyer drafts to purchase goods from a seller. In

this step and documentation in inventory it allows us to

know what is coming and potentially when as well.

Software systems allow us to see what is on order

(purchase order not order as below). A purchase order

is also known by the acronym PO.

▪ Purchase Order (For Sales) – This document is

received by the Sales department to accept the order

once received from the customer instead of your

organisation sending the purchase order when you

needed goods. Purchase orders in other words can be

inbound to the business (purchases of stocks and

goods) or outbound the goods we sell to a customer.

▪ Order – When the order is placed or shipped the purchase order turns into an

order this is inbound and outbound goods. Sometimes we may receive goods

while in the order stage because the order comes in over a few days and no

invoice is received. Once an invoice is received the order of stock would be

changed into an invoice.

Note: One again, this can

occur for both inbound and

outbound purchases (Sales

and Purchase of goods).



▪ Tax Invoice from supplier – An invoice is a record of a sale or shipment

made by a vendor to a customer that typically lists the customer’s name, items

sold or shipped, sales price, and terms of the sale (payment terms), ABN and

GST as applicable. For maintaining inventory records, invoices from suppliers

are required by Australian Tax Law and just common sense in business to keep

your records accurate and secure.

Requirements of tax invoices

For the purposes of GST and other tax

matters.

Tax invoices for taxable sales of less than

$1,000 must include enough information to

clearly determine the following seven details.

1. That the document is intended to be a tax invoice (ie Says Tax invoice not quote etc).

2. The seller's identity.

3. The seller's Australian business number (ABN) must be present on the invoice.

4. The date the invoice was issued.

5. A brief description of the items sold, including the quantity (if applicable) and the

price.

6. The GST amount (if any) payable – this can be shown separately or, if the GST

amount is exactly one-eleventh of the total price, such as a statement which says

'Total price includes GST'

7. The extent to which each sale on the invoice is a taxable sale (that is, the extent to

which each sale includes GST).



Tax invoices for sales of $1,000 or

more

Tax invoices for sales of $1,000 or more need

to show the buyer's identity or ABN on top of

the requirements listed previously. If your tax

invoices meet the requirements for sales of

$1,000 or more, you can also use them for

sales of lesser amounts.

Dealing with Taxable and non-taxable

sales (multiple GST codes)

A tax invoice that includes taxable and non-taxable items that are either GST-free or

input-taxed, must clearly show which items are taxable. In addition, the tax invoice

must also show:

• Each taxable sale

• The amount of GST to be paid

• The total amount to be paid.

Note: There is a difference in Tax Inclusive and tax Excusive but you end up with the

same total and meeting the requirements of a valid invoice.



Source and

Further Reading on Valid Tax Invoices

https://www.ato.gov.au/Business/GST/Tax-invoices/

https://www.ato.gov.au/Business/GST/Tax-invoices/



▪ Packing Slip/Picking Slip – This source document is used when goods a to

be taken off the “shelves” or “picked”, to match the order placed, it is also

normally sent with the items or a Dispatch Slip is created to be sent with invoice

and goods. These documents can be created in a variety of ways and filled out

manually or electronically depending on the organisations inventory systems.



1.1.9 The Inventory Cycle Outlined

1. Receiving and analysing purchase requisition

Purchase requisitions start at the department or person who will be the ultimate user of the purchased products. In thinking about materials or stock required it is planned, the planner releases a planned order based on requirements of the department etc.

This is sent to purchasing department to go ahead and process a purchase order once approved.

Generally, the minimum required information on a purchase requisition is

• Identity of originator

• Signed approval

• Account or Coding for the products (cost code in the chart of accounts)

• Materials Required

• Quantity of the product

• The unit of measure

• Required delivery date and place

• Any other information needed by the business

The above list is a general list; once again smaller businesses may not have the same detailed steps as the same person does multiple parts of the ordering or sale of stock.

2. Selection of Suppliers

The identifying and selecting suppliers is an important responsibility of the purchasing department. The processes and methods for supplier selection is almost its own qualification of study. Given the various factors for selection of suppliers which this unit does not cover, however in short.

Routine items purchased generally a list of approved suppliers is kept. If the item has

not been purchased before or no acceptable supplier considered by the business, a

search must be made in order to source the required items. If the order is of small

value or for standard items, a supplier can probably be found in a catalogue, trade

journal, or directory. Other items may require more detailed and extended processes,

approvals and investigation.

3. Requesting Quotes

It is common practise and usually required/desirable to obtain quotes to meet your business needs, this is especially for major items. This is a written inquiry that is sent to enough suppliers to be sure competitive and reliable quotes are received (remember accounting is about decisions). It is not a sales order, after the suppliers have completed and returned the quotes to the purchaser, the quotes are considered for price, compliance to business requirements, the terms and conditions of sale, delivery,



and payment terms. For items where specifications can be accurately describing as is generally the case for inventory items, the choice of supplier/s is generally made on price, delivery, and terms of sale. For items where such specifications are not as clear or define (for example services on a project or a court case), the quote will vary in how it appears.

The final choice of a quote in many cases is a compromise between desirable factors and price of the items to be purchased. In many companies both the purchasing user or department requiring the stock and purchasing department are jointly involved in the final choice and purchase decision.

4. Determining the right price

This is the responsibility of the purchasing department and is closely tied to the selection of suppliers. The purchasing department is also responsible for price negotiation and will try to obtain the best price from the supplier.

5. Issuing a purchase order

A purchase order is considered a legal offer to purchase a product. Once accepted by the supplier, it becomes a legal contract for delivery of the goods according to the terms and conditions specified in the purchase agreement.

The purchase order is prepared from the purchase requisition or the quote and from any other additional information needed or discussions held at the time of purchase. Copies of purchase orders are/should be retained by the purchasing department and are also sent to other departments such as accounting, the originating department, and sometimes also the receiving department in larger companies.

6. Delivery

The supplier is responsible for delivering the items ordered on time. The purchasing department is responsible for ensuring that suppliers do deliver on time. If there is doubt that delivery dates can be met, purchasing must find out in time to take action where possible. This might involve expediting transportation, alternate sources of supply, working with the supplier to solve its problems, or rescheduling production. The purchasing department is also responsible for working with the supplier on any changes in delivery requirements. Demand for items changes with time, and it may be necessary to expedite certain items or push delivery back on some others.

7. Receiving and accepting goods

When stock is received, the receiving department must inspect the goods to be sure the correct ones have been sent, are in the right quantity, and have not been damaged in transit. Using their copy of the purchase order and the bill of lading supplied by the carrier, the receiving department then accepts the goods and writes up a receiving report noting any variance. If stock is received damaged or not all items are received, the receiving department must advise the purchasing department. If all is well with the stock, it be sent to the originating department or to inventory (ie. placed in the warehouse or showroom floor as required).



A copy of a receiving report is sent to the purchasing department noting any variance or discrepancy against the purchase order/invoice. If considered complete, the receiving department closes out its copy of the purchase order and advises the purchasing department. If not, the purchase order is held open awaiting completion and investigate (an example of this would be items not received and thus on back order).

8. Approving supplier’s invoice for payment When the supplier invoice is received, there are three pieces of information that must agree: the purchase order, the receiving report, and the invoice. The items and the quantities should be the same on all; the prices, and extensions to prices, should be the same on the purchase order and the invoice.

All discounts and terms of the original purchase order are to be checked against the invoice. It is the job of the purchasing department to verify these and to resolve any differences or issues found. Once approved, the invoice is sent to accounts payable for payment.

1.1.9 Inventory – Markup vs. Margin

Let us consider mark-up and margin, and the difference between the two.

Mark-up is fairly often used in operations or sales departments in order to set prices,

the issue here is that not understanding the differences can causes issues in

understanding profit of a sale. As mark-up often overstates the profitability of the

transaction.

Mark-up

The mark-up value is the amount a products cost is increased to obtain the selling

price. Mark up can be expressed as a percentage, and this percentage is the percentage

added to purchase price (PP) of an item to arrive at the price at which it is sold (SP).

The formula for the calculation of the mark-up percentage is below including

examples;

Purchase Price

(PP)

Mark-up Percentage

(MP%)

Selling price

(SP)

Mark-up Value (MV)

$100 50% $150 $50

Given the above table, therefore,

https://strategiccfo.com/should-you-use-markup-or-margin-for-pricing/

https://strategiccfo.com/how-to-produce-realistic-sales-projections/

https://strategiccfo.com/setting-prices/

https://strategiccfo.com/what-do-you-do-with-unprofitable-customers/



Working Out Selling Price – Known Mark-up Percentage

PP x MP% = SP

$100 x 50% (.50) = $150 or $100+50% of $100 = 150

Working Out Mark Up Value

SP – PP = MV$

$150-$100 = $50

Working Out Mark Up Percentage

MV ÷ PP=MP

50÷100= 50% or .5 in decimal form

The differences between Mark- and Margin could easily get you into trouble deriving

prices for products if confusion persists about the meaning.

In short, if you want to obtain a certain margin, you have to mark-up a products cost

by a percentage greater than the amount of the margin. This is due to that the basis for

the mark-up calculation is cost, rather than revenue as seen in the margin formula.

This is because the cost figure should be lower than the revenue figure, the mark-up

percentage must be higher than the margin percentage in order to make money.

The mark-up calculation is more likely to be impacted by pricing changes in the

purchased goods over time, where a margin-based price is not as susceptible to price

changes as it is calculated on this item revenue as a percent instead of purchase price.

Another factor here is because the cost upon which the mark-up figure or its

calculation may vary, resulting in different costs which therefore, leads to different

selling prices.

Margin

The margin value (MV) which is also known as Gross Margin, can best be represented

by Sales less the Purchase Price. This also is expressed as a percentage of the selling

price (SP).

The formula for the calculation of the Margin is below including examples;

Purchase Price

(PP)

Margin Value

(MV)

Selling price

(SP)

Margin Percentage

(MP)

$100 $50 $150 33.33%

Working Out Margin Percentage %

MV ÷ SP = MP

https://www.accountingtools.com/articles/2017/5/4/cost

https://www.accountingtools.com/articles/2017/5/11/revenue



50 ÷ 150 = 33.33%

Working Out Margin Value

MP x SP = MV

150 x .3333 = $50 or $150 x 33.33% = $50

Determining Mark-up Percent from Margin

So let’s say you wanted to a $15 margin of revenue on a product, you know the product is $165 dollars to purchase.

Desired margin ÷ Purchase Price = Mark-up percentage

$15 ÷ $165 = .09

Determining Selling Price

Therefore, using the above example, to determine the selling price of the product with the require profit margin;

PP x MP% = SP

$165 x 1.090909 = $179.999985 or $165 x 10.90909% = $179.999985

So the mark-up value is $179.999985 (180.00) – 165 = $14.9999985 ($15)

In this you can see we have the desired margin of $15 (only $14.999985 due to decimals and would be rounded to 15 dollars).

Quick Guide – Margin vs Mark-Up

Mark up % Gross profit margin

15% 13.0%

20% 16.7%

25% 20%

30% 23.0%

33.3% 25.0%

40% 28.6%

43% 30.0%

50% 33.0%

75% 42.9%

100% 50.0%

Activity 1



1. Briefly explain the meaning of inventory and the differences between the

three industry-related forms.

2. Why is managing and maintaining control over inventory so important to a

business?

3. What form of inventory would you expect to find in a painter and decorator

business?

4. What form of inventory would you expect to find in a steel fabrication

business?

5. What is “net realisable value”?

6. Explain the differences between mark-up and margin.

1.

2.

3.

4.

5.

6.

To view the answers to this activity, click here.



2. ACCOUNTING FOR INVENTORY

2.1 Generally Accepted Accounting Principles

The Generally accepted accounting principles (GAAPs) are an international

convention of best practise and industry accepted accounting practices. It is based on

the following core principles. In some cases, particular types of accountants that

deviate from these principles can be held liable for the impacts where these GAAPs are

written into law:

▪ The Business Entity Concept

▪ The Continuing Concern Concept

▪ The Principle of Conservatism

▪ The Objectivity Principle

▪ The Time Period Concept

▪ The Revenue Recognition Convention

▪ The Matching Principle

▪ The Cost Principle

▪ The Consistency Principle

▪ The Materiality Principle

▪ The Full Disclosure Principle

Among these principles, those that are relevant to maintaining inventory records are

the matching principle, the cost principle, the consistency principle, the materiality

principle, and the full disclosure principle.

▪ The Matching Principle

The matching principle is an extension of the revenue recognition convention.

The matching principle states that each expense item related to revenue earned

must be recorded in the same accounting period as the revenue it helped to

earn. If this is not done, the financial statements will not measure the results of

operations fairly.

▪ The Cost Principle

The cost principle states that the accounting for purchases must be at their cost

price. This is the figure that appears on the source document for the transaction

in almost all cases. There is no place for guesswork or wishful thinking when

accounting for purchases.

The value recorded in the accounts for an asset is not changed until later if the

market value of the asset changes. It would take an entirely new transaction

based on new objective evidence to change the original value of an asset.



There are times when the above type of objective evidence is not available. For

example, a building could be received as a gift. In such a case, the transaction

would be recorded at fair market value which must be determined by some

independent means.

▪ The Consistency Principle

The consistency principle requires accountants to apply the same methods and

procedures from period to period. When they change a method from one period

to another, they must explain the change clearly on the financial statements.

The readers of financial statements have the right to assume that consistency

has been applied if there is no statement to the contrary.

The consistency principle prevents people from changing methods for the sole

purpose of manipulating figures on the financial statements.

▪ The Materiality Principle

The materiality principle requires accountants to use generally accepted

accounting principles except when to do so would be expensive or difficult, and

where it makes no real difference if the rules are ignored. If a rule is temporarily

ignored, the net income of the company must not be significantly affected, nor

should the reader’s ability to judge the financial statements be impaired.

▪ The Full Disclosure Principle

The full disclosure principle states that any and all information that affects the

full understanding of a company’s financial statements must be included in the

financial statements. Some items may not affect the ledger accounts directly.

These would be included in the form of accompanying notes. Examples of such

items are outstanding lawsuits, tax disputes, and company takeovers.



2.2 Australian Accounting Standard AASB 102

In Australia, the Financial Reporting Council (FRC) oversees the Australian

Accounting Standards Board (AASB). The AASB’s responsibilities include the

harmonisation of Accounting Standards and Generally Accepted Accounting

Principles (GAAP) and reporting in the public sector. The agency does this by

developing and setting accounting standards and interpretations in Australia.

AASB102 (Australian Accounting Standard 102) This standard applies to businesses

that report under the Corporations Act 2001 (Cth). The standard allows flexibility in

choosing the method for inventory valuation. However, it states that the method

adopted is to be consistently applied from year to year to allow for meaningful

comparisons of business information.

Some of the required practices and procedures outlined in the AASB 102 are provided

below. However, to gain a greater insight into this accounting standard, it is highly

suggested that you read the standard as published in full to apply the rules required

for inventory.

Measurement of Inventories

▪ Inventories shall be measured at the lower of cost and net realisable value.

▪ Notwithstanding paragraph 9 [the paragraph above], each not-for-profit entity

shall measure inventories held for distribution at cost, adjusted when

applicable for any loss of service potential.

Cost of Inventories

▪ The cost of inventories shall comprise all costs of purchase, costs of conversion

and other costs incurred in bringing the inventories to their present location

and condition.

▪ Notwithstanding paragraph 10 [the paragraph above], in respect of not-for-

profit entities, where inventories are acquired at no cost, or for nominal

consideration, the cost shall be the current replacement cost as at the date of

acquisition.

Costs of purchase

▪ The costs of purchase of inventories comprise the purchase price, import duties

and other taxes (other than those subsequently recoverable by the entity from

the taxing authorities), and transport, handling and other costs directly

attributable to the acquisition of finished goods, materials and services.



Costs of conversion

▪ The costs of conversion of inventories include costs directly related to the units

of production, such as direct labour.

▪ The allocation of fixed production overheads to the costs of conversion is based

on the normal capacity of the production facilities.

Cost Formulas

• The costs of inventories bar exemptions outlined in AASB102 at paragraph 23

you must use FIFO or Weighted average cost formula when reporting

inventories in the financial reports.

• Businesses are required to apply the same cost formula to all inventories that

are similar ie, all types of pens the local newsagent sold would have the same

costing formula.

• Inventories are valued at the lower cost of realisable value.

Recognition as an Expense

• Although inventories on hand are considered an asset, when sold the value of

the sold inventories is to be recognised as an expense in that reporting period.

If I sell it this year it goes into the expenses on the Profit and Loss this year and

is removed as asset (the value of sold inventory) from the balance sheet.

While there are a range of rules for inventory, generally speaking electronic accounting

systems do this with little fuss or worry as you will see in this unit, this does not

discount the required knowledge of accounting practises and AASB; the software helps

collate information and are built to adhere to most principles across many industries

and accounting or transactional events.

2.2 Goods and Services Tax (GST) and Inventory

The purchase and selling prices of inventories must include GST unless there is an

exemption provided for under the Goods and Services Act (1999). To ensure that

correct entries are made to the accounting system, students are expected to be familiar

with this act and understand what is exempted under the categories of GST-free and

input taxed, and what makes these two groups so different.

Where goods are purchased for $2,200, the purchase price is shown and recorded into

inventory/purchases as $2,000, and the GST amount of $200 is recorded in liabilities

under the GST paid general ledger account, which is a tax offset against GST collected

on sales, thereby reducing the GST tax liability.



Where goods are sold, the sale price is recorded as $2,000, and the GST amount of

$200 is recorded in liabilities under the GST collected general ledger account. The

total of the GST collected less the total of the GST paid is a liability owing to the

Australian Taxation Office (ATO). The GST collected, and the GST paid entered in

liabilities do not form part of either the gross or net profit as shown on the trading

statement (or profit and loss statement).

2.3 Inventory Systems

Inventory control systems are technology solutions that integrate all aspects of an

organization’s inventory tasks, including shipping, purchasing, receiving, warehouse

storage, turnover, tracking, and reordering. So in other words good inventory systems

will take a holistic approach to the inventory and associated processes in order to meet

business and customer requirements.

You should use data from your business inventory in a range of ways. It can help you

estimate product demand, learn which products move only on a seasonal basis and

help in planning new inventory purchases. It is necessary to monitor inventory, even

if you have only a small business.

A inventory system can be defined as the collective group of policies and control

measures (including technology) in place to protect the asset, monitors and controls

inventory.

Inventory Management Systems Include;

- The level of inventory kept, ordered, and cycle of the inventory.

- Is able to produce reports which then assists in determining the what levels

should be kept, maintained, replenished and reordering.

Keeping track of inventory can range from a very simple to a complex process,

depending on the needs of the business. A simple system can involve just a single stock

count and valuation at the end of each financial year. More complex systems range

from monthly stock takes to account for the movement of each stock item and

comparing to electronic records (ie MYOB).

By using complex systems, such as barcode integration, every piece of inventory from

the smallest parts to the largest finished product can be tracked, observed, monitored

for planning and reporting purposes. Maintaining adequate control and safeguarding

inventories is very important to the business. Accountants, bookkeepers, and other

financial service personnel are required to monitor and enforce strict control over

inventory levels to prevent fraud or embezzlement of stocks.

Inventories (and their control) are central to the accounting process and can play a

significant role in the profit reported by a business. They can be a significant and

unwarranted drain on the business resources, as well as an indicator as to the

efficiency of managers and directors in a business.



2.4 Systems of Accounting for Inventory

There are two (2) main systems that are used to account for inventory in Australia.

Specifically, the periodic inventory system and the perpetual inventory system.

Under a periodic inventory system, stocks are counted and valued at the end of the

accounting period. The value is then, brought to account in calculating the cost of

materials used or the cost of goods sold (COGS expense accounts).

Under a perpetual inventory system, there is continuous recording of stock so that at

any time the value of stock on hand and the amount of stock on hand can be

determined. Physical stock takes are still necessary to check for stock discrepancies

from damage or theft. The stocktake objective is to check that the perpetual system is

operating efficiently and adjust as required for the types of errors any system can have.

2.4.1 Periodic inventory (stock) system

The term ‘periodic’ simply means at various intervals in time. In other words, when we

deal with inventory on a periodic basis, a business will complete a count of the stock it

holds, the value is based on its chosen value method, and adjust the accounting records

to suit.

The interval in time is usually the annual accounting period (1st July to 30th June).

However, this can be done biannually, quarterly, or even monthly, depending on the

needs of the business.

This means that small businesses value closing inventory by multiplying the number

of items counted by the latest purchase price at which the item was purchased, or as

per the AASB as required.

Example:

A business uses a periodic stock count to value inventory. Inventory on hand,

at 30 June, 201x, is 10 cartons @ $48 per carton, giving a total value of $480.

Purchases in the six (6) months to the end of December 201x are as follows:

17 July 40 cartons @$50 per carton

25 August 50 cartons @$55 per carton

10 October 45 cartons @$51 per carton

20 December 50 cartons @$53 per carton

Stock on hand on 31 December is 30 cartons.

Using the periodic stock method, the inventory at 31 December is valued at the

following:



30 cartons @ $53 per carton = $1,590.

Periodic inventory in action

The following is an example of how a periodic system works, including the inventory

adjustment entries at the end of the accounting period. The accounting period is

deemed to be one year: 1st July to 30th June the following year.

In this example, the business commences its accounting period on the 1st July with an

inventory valued at $22,000. This is reflected in the account opening balances on the

balance sheet that shows the value of inventory in the asset accounts as $22,000 (see

table 7 below).

Accounts as at 1st July 2018

Assets Cost of Goods Sold

1-1300 Inventory $22,000 5-1000 Opening Stock 0

Purchases 0

Closing Stock 0

Total Cost of Goods Sold 0

Table 7 - Example of the accounting for inventory on a periodic basis

Over the course of the year, the average monthly purchases were $25,000, which

amounts to a total inventory (stock) purchased for the year of $300,000. These

procurements are allocated to the Purchases account (listed beneath the Cost of Goods

Sold) each time they are made. The result, at 30th June 2014, is shown in Table 8 below.

Accounts as at 30th June 2019


1-1300 Inventory $22,000 5-1000 Opening Stock 0

5-1100 Purchases $300,000

5-1200 Closing Stock 0

Total Cost of Goods Sold 0


At a time after the business has closed its doors to trading on the 30th June 2019 (in

the financial year just completed), and before the commencement of trading on the 1st

July 2019 (in the new financial year), a stocktake is performed to count all stock still

on the shelves. This stocktake need only identify each stock item and the quantity of

each stock item remaining on the shelves so that costing can be performed at a later

point.

This stock count will identify and separate any stock items that are unsaleable due to

damage or spoilage so that they can be written off to expenses as stock losses. It is

important to identify any stock losses and report them to the expense accounts because

recording them as the closing stock will distort the cost of sales values and in turn the

gross profit figures. This is important because the gross profit figure indicates the true

gross profit percentage and mark-up percentages on stock when reporting for



inventory, as both ratios are necessary for the effective analysis of the performance of

the business.

Assume this stocktake has been valued using the current purchase prices of the stock

items and that value is showing as $20,000. This value now needs to be reflected in

the business accounts, and to do this we perform what is known as end of period

adjustments or end day adjustments. These adjustments take the form of two general

journal entries (this can be done as a batch entry as well and therefore only one GJ

entry.

The first general journal entry deals with the Assets Inventory account and the opening

stock value in the cost of goods sold (see table 9 below).

Date Folio Particulars Debit Credit

30th June 2019 1-1300 Inventory $22,000

5-1000 Opening Stock $22,000

Transfer of stock from inventory to opening stock

Table 9 - Example of the GJ transferring opening stock to COGS

The value of Inventory under Assets is the value that we started this accounting period

with and therefore the value transferred to the Opening Stock account under Cost of

Goods Sold. This first general journal entry will show the Inventory account in Assets

with a zero balance and the transferred balance of $22,000 in the Opening Stock

account under Cost of Goods Sold (see table 10 below).



1-1300 Inventory 0 5-1000 Opening Stock $22,000

5-1100 Purchases 300,000

5-1200 Closing Stock 0

Total Cost of Goods Sold $0


As you will recall, the stocktake performed and valued (called closing stock) on 30 June

amounted to $20,000, and this is the value that now needs to be shown against

Inventory in Assets and is also the value shown against closing stock in the cost of

goods sold. The general journal entry is presented in table 11:


30th June 2019 1-1300 Inventory $20,000

5-1200 Closing Stock $20,000

Transfer of stock from closing stock to inventory

Table 11 - Example of the GJ transferring opening stock to COGS

The result of this general journal entry on the general ledger accounts is that $20,000

is shown in the Assets Inventory account and a -$20,000 is shown against Opening

Stock in Cost of Goods Sold. This negative value is important to ensure that the total



cost of goods sold for the year is shown accurately - in this case, it is $302,000. The

final result of this entry can be seen in table 12.



1-1300 Inventory 20,000 5-1000 Opening Stock 22,000

5-1100 Purchases 300,000

5-1200 Closing Stock -20,000

Total Cost of Goods Sold 302,000


The essential features of a periodic or physical stock take include the following:

▪ Adequate preparation must take place prior to stocktake to ensure that

there is a clear cut-off point for sales and purchases.

▪ Unavoidable stock movements during the stock count are recorded.

▪ All employees are properly instructed.

▪ Obsolete or damaged stock must be isolated to avoid unnecessary

counting and must be accounted for.

During a stock take all merchandise is counted or weighed and the results are listed on

numbered stock sheets or cards. A unit cost price is later allocated to each item, and

the total value of these stock items is calculated. Numbered stock sheets are grouped

into appropriate classifications, e.g. accessories, paint, and tools), if there are separate

inventory groups shown on the balance sheet, such as those shown in Table 2. The

overall value is then calculated for each group and total inventory.

The advantages of this method of stock control include the following:

▪ It requires far less infrastructure to maintain than perpetual inventory.

▪ Stock can be updated with a minimal number of accounting processes.

▪ It is easier to understand.

▪ It only needs to be conducted once per year (during normal work hours, in many instances).

The disadvantages of this method of stock control include the following:

▪ There is very little if any control over stock theft and wastage (which may not be detected).

▪ Errors may occur in the physical count and the calculation of the final stock values.

▪ Stock valuation does not account for any variations in the purchase price, and the stock is only valued at the last purchase price, so may not necessarily reflect stock valuation accurately (this issue will be discussed later in the text).



2.4.2 Perpetual inventory method

The term perpetual simply means to account for on a never-ending basis continually.

What this means is that instead of accounting for inventory only at the end of a specific

period, it is accounted for every time an item is brought into stock or sold from stock.

As a result, the Assets Inventory account changes every time an item is either

purchased or sold, and the Cost of Goods Sold account changes with every item sold.

The perpetual inventory method provides a continuous recording of all stock

movements and balances regarding the number of units, the cost of each of the units

in stock, and calculates the value of the items and groups, and total value.

To provide a simplified demonstration of how this works, we will use one stock item

only, and show the movements in the general ledger accounts with each transaction.

You will notice that there is no opening stock and no closing stock used in the Cost of

Goods Sold accounts when applying perpetual inventory methods.

Imagine that our Inventory account starts off with a zero balance, and we buy 100

items for the stock at the cost of $12 each (see table 13 below).

Accounts as at 1st July 2018


1-1300 Inventory 1,200 5-1100 Purchases 0

Table 13 - Example of the accounting for the purchase of initial stock

The Inventory account shows the full value of the stock purchased as $1,200 because

this represents the total value of stock we have for resale. Behind-the-scenes, the

accounting package is keeping track of the fact that we have 100 items at $12 each.

Assuming that 50 items were sold to A. Able on Credit for $1200, a transfer of the value

of these 50 items (50 x $12 = $600) needs to occur from Inventory under Assets to

Purchases under Cost of Goods Sold, and we also need to need to account for the sale

of the assets (see table 14 below).

Transfer due to Sale

Date Folio Account DR CR

3/7/2018 5-1100 Purchases 600



1-1300

2-1000

4-1000

Cost of Goods Sold

Accounts Receivable

Sales

1090.90

600

1200

GST Collected 109.10

Table 14 - Example of the accounting for the sale of 50 items

We can also account for other expenses such a freight. The below is a similar journal

in MYOB, using the Perpetual inventory system to account for stock. This occurs when

you use the Sales Tab in MYOB and create an invoice for a Sale of stock or similar when

conducting a purchase of stock under the stock tab.

Table 15 - Example Sale Journal Perpetual MYOB

Accounts as at 3rd July 2018


1-1300 Inventory 600 5-1100 Purchases 600

Table 16 - Example of the accounting for the sale of 50 items

In perpetual, it can be seen clearly that the transfer of the stock’s value is only made at

the time of the sale. This process will continue every time an item of stock is either

bought or sold. So, we are recognising the expense of the stock in the period, and at

the time of sale/purchase (every stock) transaction instead of the yearly like the

periodic system.

The advantages of the perpetual inventory method include the following:

▪ Gross profit can be determined at any time

▪ Damaged, lost, or stolen stock can be identified quickly

▪ Reorder points for replenishing stock levels can be easily identified

▪ Fast or slow-moving stock can be highlighted quickly

▪ The total value of inventory can be determined at any time

▪ Accurate financial reports can be prepared

▪ Variations in purchasing price immediately adjust the unit costing



▪ Ability to investigate

▪ Ability to produce meaningful decision-making information

The disadvantages of a perpetual system are as follows:

▪ It is more expensive to set up

▪ A physical stocktake is still required

▪ It may not be suitable for all businesses or items

The results of a physical stocktake can be compared to the computer-generated

inventory report and any material differences investigated. If differences are

confirmed, the inventory records and general ledger accounts must be adjusted to

reflect the final physical stock count. A carefully controlled perpetual inventory system

should result in accurately recorded inventory balances.

Within the inventory methods, there are three main types of inventory management

systems; barcode systems and radio frequency identification (RFID) systems and

unique identification any of this will allow and are used in supporting the overall

inventory control process.

2.4.3 Barcode Inventory Management Systems

Inventory management systems which utilise barcoding technology are more accurate

and efficient than using manual processing of inventory. Using barcode

systems/technology as part inventory control, the inventory changes are recorded and

updated automatically once scanned at the point of sale, or evening receiving. Barcode

technology given its implications is linked to the perpetual inventory method.

There are a range of benefits using barcoding; using this technology;

• Always for accurate records of all inventory transactions

• Eliminates time-consuming data errors and data entry mistakes which occur with manual or paper inventory systems and processes

• General business productively is increase due to the ease and speed of scanning

• Updates on-hand inventory automatically

• All transaction history is recorded and it becomes much easier to determine minimum levels and reorder quantities

• Streamlined documentation and reporting on inventory

2.4.4 Radio Frequency Identification (RFID) Inventory Systems

Radio frequency identification (RFID) inventory systems uses both active and passive

technology in order to manage changes in inventory. The Active part RFID technology

uses fixed tag readers which are placed throughout the stock area. When RFID tags

pass the reader, the stock movement is recorded in the inventory software.



Given the instant nature, the use of Active systems typically works best for

organizations that require real-time inventory tracking or where inventory security is

required.

The passive RFID technology, requires the use of handheld readers to monitor

inventory movement like at your local store. When tags are read, the data is recorded

by the inventory software also known as POS systems.

The use of RFID inventory systems are not free of challenges.

• RFID tags are very expensive compared to barcode labels on items, and due to

this RFID is reserved for higher value goods.

• RFID tags also interference issues, due to various environmental factors. Using

RFID

• The costs to transition to RFID equipment are high, and requires your

suppliers, customers, and transportation companies to have required

equipment as well.

When considering an inventory control system for an organisation, you should decide

whether a perpetual inventory system or periodic inventory system is best suited to

the business needs and also the item. Then decide on the systems, processes, software

and controls required in order to have effective inventory management.

http://questsolution.com/blog/item/34-pros-and-cons-the-use-of-rfid-for-inventory-management



Activity 2

1. Briefly describe the periodic method of accounting for inventory.

2. Briefly explain GST in relation to inventory purchases.

1.

2.




3. VALUING INVENTORY

3.1 Cost Flow Assumptions

In inventory valuing there are some general methods which are used to value and track

the expenses associated with inventory levels these are known as the cost flow

assumptions; these are necessary to determine cost of goods sold and ending

inventory.

Note the word "assumption", businesses make certain assumptions about which goods

are sold and which goods remain in inventory. This is for financial reporting and tax

purposes only and does not have to agree with the actual movement of goods. The only

requirement is: The total cost of goods sold plus the cost of the goods remaining in

ending inventory for financial and tax purposes is equal to the actual cost of goods

available.

Cost flow assumptions consider timing issues when dealing with inventory daily, this

means that the order in which costs are removed from inventory can be different from

the order in which the goods are physically removed from inventory.

The Cost Flow Assumptions

• First In, First Out (FIFO)

• Last In, First Out (LIFO)- this method is not acceptable in Australia

• Specific Identification

• Standard Cost

• Weighted Average

• Retail Method

3.2 Valuing Inventory – Standard Costs Method

Inventories are generally valued using a method that is centred on a unit’s historical

cost. In its simplest form, this means that that inventory is valued at the unit price for

which it was purchased. If, however, the stock is manufactured rather than purchased,

an alternate method is used to determine its unit price, this method is described as the

standard costs of the item.

The standard costs method is principally used where stock items are manufactured in-

house rather than being purchased. The standard costs method for valuing inventory

uses actual costs based on the batch manufacturing cost of the products, using the cost

of materials and labour, and the fixed and variable overhead costs applied to the

manufacturing of the items.



Example: Standard costs

We have manufactured 1,677 items for the month, with the associated costs

being the following:

▪ Direct materials $105,600

▪ Direct labour $49,500

▪ Factory overheads $39,400 (fixed and variable)

Total manufacturing costs being the sum of these three items: $194,500,

divided by the units-manufactured results in a standard cost of $115.98 per

unit.

A situation could arise where the stock, whether manufactured or purchased,

deteriorates, becomes obsolete, or is superseded by later releases or models. The

introduction of new technology creates a situation where it is considered that the sale

price will be lower than the cost price. In such circumstances, the business should

reduce the balance of its inventory to reflect the lesser value referred to as “net

realisable value”.

3.3 Valuing Inventory – Perpetual Methods

As has been discussed earlier, perpetual inventory seeks to account for individual

items of inventory as the stock is moved into the business through the purchasing

process as well as out of business through the sales process. This individual unit

accounting process can be achieved within a business using two methods.

The first of these methods is a manual stock item accounting process that uses stock

cards (an example is shown in Table 17 below). This system allows for variations in

item purchase prices over time and allocates to the Cost of Goods Sold Purchases

general ledger account values based on the actual purchase price of the goods. These

values and stock quantities are kept track of using stock cards, and this process is

identified as the FIFO (First In First Out) system of stock control. The cost of Goods

Sold is always allocated with the actual purchase price of the item being sold, even

when there are items being sold where items were purchased at different prices. Direct

examples of how this process works are shown below, under the heading ‘first in first

Out - FIFO cost method’.



Kleenit Pty Ltd - The stock card for the Heavy Duty Vacuum Cleaner.

Stock card: First in First out method (FIFO)

Item: Heavy Duty Vacuum Cleaner Main supplier: Morgans Cleaning Hardware

Minimum stock: 2 units Re-order point: 3 units

Date

July

Details Purchases Cost of Sales Balance

Qty Unit Cost $

Value$ Qty Unit Cost$

Value$ Qty Unit Cost $

Value$

1 Balance b/f

Table 17 - Example of a manual FIFO stock card used to account for a single item of inventory

The second method is through the use of a similar type of process regarding the

accounting for the stock as it is purchased and as it is sold, with the principal difference

being the way the cost of the items sold are accounted for in Cost of Goods Sold. Rather

than actual purchase costs being allocated, the stock cost price when items sold is

accounted for on what is termed a weighted average cost. Because the stock is

purchased at varying prices, the weighted average cost method removes the need to

keep track of the purchase price of what is being sold within the one sale. Direct

examples of how this process works are shown below under the heading ‘weighted

average cost method’.

3.4 Perpetual Inventory – First In First Out (FIFO) Cost Method

The FIFO method records the first units of goods purchased as the first units sold. The

physical flow of inventories from the store is required to be in the same order as they

were purchased. The closing inventory value in the balance sheet will show the value

of the most recently purchased items and will reflect the current actual cost of

purchase.

As an example of how a manual FIFO stock card operates, the card includes a brought

forward value of the item and shows the currently held quantity, the value at which

these items were purchased, and the total collective value of all of the stock (see table

18 below).

Date Details Purchases Cost of Sales Balance

July Qty Unit Cost $



Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

Table 18 - Example of a sale allocated to a manual FIFO stock card



In this example, the stock on hand is 50 items purchased at a value of $20 each, giving

a total value of $1,000 for the 50 items. On the 3 July, 30 items were sold, with the

cost of the items sold amounting to $600 (30 x $20). This would be the value recorded

in COGS. The remaining stock, consisting of the 20 remaining units at $20 each, is

then valued at $400.

On 5 July, more stock is purchased at an increased cost of $22 each. This purchase is

recorded on the stock card as shown in table 19 below, along with a revaluation of the

stock. The stock balance is brought down (along with its corresponding purchase price

and value) prior to entering the new items purchased. The current quantity held shows

70 items with a total value of $1,500.





Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Stock balance

Purchases

50

22.00

1,100

20

50

20.00

22.00

400.00

1,100.00

Table 19 - Example of purchase with a different item price allocated to a manual FIFO stock card

Assuming that on the 10th we sell another 40 items. Under the FIFO system, the oldest

stock is sold first, and then the remaining items are sold from the new stock, as shown

in Table 20 below. This provides a Cost of Sales value of $840, with 30 items remaining

with a total value of $660. Purchases and sales are recorded in date order, and costing

is progressive in the same manner as shown before.





Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Stock balance

Purchases

50

22.00

1,100

20

50

20.00

22.00

400.00

1,100.00

10/7 Sales 20

20

20.00

22.00

400

440

30

22.00

660.00

Table 20 - Example of a sale of differing purchase prices allocated on a manual FIFO stock card to produce the actual cost of the items sold

Next, we will look at the return of items of stock from a customer and then the return

of that stock to the supplier and how that affects the stock card.

On the 11th, there were 2 items sold on the 3rd that was returned for credit. These items

had a cost price of $20, and the return is shown in table 21 below. You will note that

the returned items have been listed first as they are the oldest stock items. The balance

now incorporates the total value of the returns plus the existing stock, giving a new

stock item value of $700.







Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Stock balance

Purchases

50

22.00

1,100

20

50

20.00

22.00

400.00

1,100.00

10/7 Sales 20

20

20.00

22.00

400

440

30

22.00

660.00

11/7 Sales Return

Stock balance

-2

20.00

-40

2

30

20.00

22.00

40.00

660.00

Table 21 - Example of a sale return allocated to a manual FIFO stock card

The final step demonstrated here will be the return of these two stock items to the

supplier on the 12th. The FIFO stock card should reflect these as shown in table 22

below.





Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Stock balance

Purchases

50

22.00

1,100

20

50

20.00

22.00

400.00

1,100.00

10/7 Sales 20

20

20.00

22.00

400

440

30

22.00

660.00

11/7 Sales Return

Stock balance

-2

20.00

-40

2

30

20.00

22.00

40.00

660.00

12/7 Purchase Return

Stock balance

-2 20 -40

30

22.00

660.00

Table 22 - Example of a purchase return allocated to a manual FIFO stock card

These stock cards were traditionally kept on cards within a card file. However, with

the advent of electronic record keeping, these can be easily kept using software such

as Excel that can provide an automatic calculation of values.

A physical stock take undertaken on 31 July showed only 29 units in stock. Therefore,

there is a loss of 1 unit. This loss needs to be recorded and valued on the stock card to

ensure our inventory records reconcile. This entry is shown in Table 23 below.





Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Stock balance

Purchases

50

22.00

1,100

20

50

20.00

22.00

400.00

1,100.00

10/7 Sales 20 20.00 400



20 22.00 440 30 22.00 660.00

11/7 Sales Return

Stock balance

-2

20.00

-40

2

30

20.00

22.00

40.00

660.00


Stock balance

-2 20 -40

30

22.00

660.00

31/7 Stock Adjustment

1 22 LOSS 29 22.00 638.00

Table 23 - Example of a stock adjustment allocated to a manual FIFO stock card

Now that the stock card has been adjusted for each of the stock movements, we can

take a moment to look at the general ledger account allocations that are created as a

result of each of these entries. To do this, a series of ledger accounts are shown in tables

24 through 33 below, which shows how account allocations are affected by these stock

movements.

The purchase prices associated with these transactions are known, but the sale price,

at this point, has not been identified. For the purpose of this demonstration, the sale

price we will use is $66 GST inclusive. The assumption is that all sales and purchases

are made for cash from the bank account, and the balancing account entry for the

opening balances on the Bank and the Inventory accounts is capital.

In each of the following ledger accounts, no account folio numbers are used though

each account is identified by its name, the group to which it belongs, and its default

nature.

Bank – Asset – Debit by nature

Date Details Debit Credit Balance

1/7 Balance b/f 20,000.00

3/7 Sales of 30 units 1,980.00 21,980.00

5/7 Purchase of 50 units 1,210.00 20,770.00

10/7 Sales of 40 units 2,640.00 23,410.00

11/7 Sales return of 2 units 132.00 23,278.00

12/7 Purchase return 2 units 44.00 23,322.00

Table 24 - Example of how the stock movements affect the entries to this general ledger bank account

Table 24 above shows the entries to and from the Bank based on the stock movements

shown on the FIFO stock card in table 39.

Inventory – Asset – Debit by nature


1/7 Balance b/f 1,000.00

3/7 Sales of 30 units 600.00 400.00


10/7 Sales of 40 units 840.00 660.00

11/7 Sales return of 2 units 40.00 700.00

12/7 Purchase return 2 units 40.00 660.00

31/7 Stock Adjustment 22.00 638.00



Table 25 - Example of how the stock movements affect the entries to this general ledger inventory account

Table 25 above shows the entries to and from the Inventory account based on the stock

movements shown on the FIFO stock card in table 18.

GST Collected – Liabilities – Credit by nature


1/7 Balance b/f 0.00

3/7 Sales of 30 units 180.00 180.00

10/7 Sales of 40 units 240.00 420.00


Table 26 - Example of how the stock movements affect the entries to this general ledger account

Table 26 above shows the entries to and from the GST Collected account based on the

stock movements shown on the FIFO stock card in table 23.

GST Paid – Liabilities – Credit by nature



3/7 Purchase of 50 units 110.00 -110.00

11/7 Purchase return 2 units 4.00 -106.00


Table 27 above shows the entries to and from the GST Paid account based on the stock


Sales – Revenue - Credit by nature



3/7 Sales of 30 units 1,800.00 1,800.00

5/7 Sales of 40 units 2,400.00 4,200.00


Table 28 above shows the entries to and from the Sales account based on the stock


Sales Returns – Revenue - Credit by nature



11/7 Sales return of 2 units 120.00 -120.00


Table 29 above shows the entries to and from the Sales Returns account based on the

stock movements shown on the FIFO stock card in table 23.



Purchases – COGS – Debit by nature



3/7 Sales of 30 units 600.00 600.00

10/7 Sales of 40 units 840.00 1,440.00


Table 30 above shows the entries to and from the Purchases account based on the stock


Purchases Returns – COGS – Debit by nature



11/7 Sales return of 2 units 40.00 -40.00


Table 31 above shows the entries to and from the Purchases Returns account based on

the stock movements shown on the FIFO stock card in table 23.

Stock Adjustments – Expenses – Debit by nature





Table 32 above shows the entries to and from the Stock Adjustments account based on

the stock movements shown on the FIFO stock card in table 23.

Trial Balance

Details Debit Credit

Bank 23,318.00

Inventory 638.00


GST Paid -106.00

Capital 21,000.00

Sales 4,200.00

Sales Returns -120.00

Purchases 1,440.00

Purchases Returns -40.00

Inventory Adjustment 22.00

TOTALS 25,382.00 25,382.00

Table 33 - Trial Balance to confirm general ledger account balance

Table 33 above shows the general ledger account balance to check the accuracy of the

above entries and verify a balance for all accounts affected by the stock movements

shown on the FIFO stock card in table 23.



3.5 Perpetual Inventory - Weighted Average Cost Method

For this method, the cost of inventory is the weighted average of the in-stock balance

adjusted at the next purchase. This means that the weighted average cost is adjusted

at every point where there is a stock exchange with a supplier. This may seem a little

confusing at this point, but an example of how this works in practice is provided below.

This cost flow assumption all goods of a certain type are assumed to be interchangeable

and the only difference is their purchase price. The reason for this changeable nature

is price differences are due to external factors (for example, inflation; a sudden cold

spell or flood affecting crop). Under the weighted average cost flow assumption all

costs are added and divided by the total number of units purchased. At the end of the

accounting period, the number of units sold (left in inventory) is then multiplied by

the average price per unit to determine cost of goods sold and ending inventory.

Let’s start with the same opening balance of $1,000 as we did in the FIFO valuation

method (see table 34 below).


July Qty Cost Value$ Qty Cost $ Value$ Qty Cost $ Value$

1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

Table 34 - Example of a stock adjustment using a weighted average system

To this, we added a purchase of 50 items at $22 each. As there is a change in the price

of this new stock, the weighted average cost changes the cost price to a new weighted

average value (see table 35 below).



1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Purchases 50 22 1,100 70 21.4286 1,500.00


For the purpose of this exercise, we will perform the weighted average calculations to

demonstrate the method of calculation.

20 items at $20 ea = $400.00 (existing stock calculations)

50 items at $22 ea = $1,100.00 (new stock calculations)

70 items of stock = $1,500.00 (total value of all stock)

1,500 ÷ 70 = $21.4286 (weighted average cost)



The weighted average cost is, as expected, higher than the original cost, but lower than

the purchase price of the new stock. The original and new stock have contributed to

the calculation of the new cost price weighted by the contributions of each in terms of

numbers and value; hence, the term weighted average cost. This weighted average cost

will continue to change at every exchange with the supplier or suppliers if the item is

purchased from more than one source.

The sale takes place, and the cost of the sale is calculated based on this new weighted

average cost (see table 36 below).



1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Purchases 50 22 1,100 70 21.4286 1,500.00

10/7 Sales 40 21.4286 857.1429 30 21.4286 642.86


The sale return takes place, and the cost of the return is again calculated based on the

same weighted average cost (see table 37 below).



1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Purchases 50 22 1,100 70 21.4286 1,500.00

10/7 Sales 40 21.42857 857.14 30 21.4287s 642.86

11/7 Sales Return

-2 21.42857 -42.86 32 21.4288 685.72


The purchase return takes place, and the cost of the return needs to be recalculated

based on this exchange with the supplier in the same way as before (see table 38

below).



1/7 Balance b/f 50 $20.00 1,000.00

3/7 Sales 30 $20.00 $600 20 $20.00 $400.00

5/7 Purchases 50 $22 $1,100 70 $21.4286 $1,500.00

10/7 Sales 40 $21.42857 $857.1429 30 $21.4286 $642.86

11/7 Sales Return

-2 $21.42857 -$42.86 32 $21.4286 $685.72


-2 $20 -$40 30 $21.524 $645.72




We will perform the weighted average calculations again to demonstrate the process.

32 items at $21.4286 ea = $685.72 (existing stock calculations)

-2 items at $20 ea = -$40.00 (returned stock calculations)

30 items of stock = $645.72 (total value of all stock)

645.72 ÷ 30 = $21.524 (new weighted average cost)

Last of all, the stock adjustment is completed (see table 39 below).



1/7 Balance b/f 50 20.00 1,000.00

3/7 Sales 30 20.00 600 20 20.00 400.00

5/7 Purchases 50 22 1,100 70 21.4286 1,500.00

10/7 Sales 40 21.4286 857.1429 30 21.4286 642.86

11/7 Sales Return

-2 21.4286 -42.86 32 21.4286 685.71


-2 20 -40 30 21.524 645.72

31/7 Stock Adjustment

1 21.524 LOSS 29 21.5241 624.20


Now that calculations for stock weighted average have been demonstrated for each of

the stock movements, we can take a moment to look at the effects on the general ledger

account allocations that are created as a result of each of these entries.

To do this, a series of ledger accounts are shown below in Tables 35 through 42, which

shows how account allocations are affected by these stock movements. The purchase

prices associated with these transactions are known; the weighted average cost has

been calculated, and the sale price remains the same as the last FIFO examples at $66

GST inclusive. The assumption is that all sales and purchases are made for cash from

the bank account, and the balancing account entry for the opening balances on the

bank and the inventory is again capital.

In each of the following ledger accounts, no account folio numbers are used though

each account has been identified by its name, the group to which it belongs, and its

default nature. The sales returns general ledger account is not shown because, as in

an electronic accounting system, the returns are more easily allocated back to their

original general ledger account. Likewise, the purchases returns general ledger

account is not shown because, as in an electronic accounting system, the returns are

more easily allocated back to their original general ledger account.



Bank – Asset – Debit by nature


1/7 Balance b/f 20,000.00

3/7 Sales of 30 units 1,980.00 21,980.00


10/7 Sales of 40 units 2,640.00 23,410.00


12/7 Purchase return 2 units 44.00 23,322.00


Table 39 above shows the entries to and from the Bank based on the stock movements

shown in table 40.

Inventory – Asset – Debit by nature


1/7 Balance b/f 1,000.00

3/7 Sales of 30 units 600.00 400.00


10/7 Sales of 40 units 857.14 642.86


12/7 Purchase return 2 units 40.00 645.72



Table 41 above shows the entries to and from the Inventory account based on the

stock movements shown in table 39.

GST Collected – Liabilities – Credit by nature



3/7 Sales of 30 units 180.00 180.00

10/7 Sales of 40 units 240.00 420.00



Table 42 above shows the entries to and from the GST Collected account based on the


GST Paid – Liabilities – Credit by nature



3/7 Purchase of 50 units 110.00 -110.00

11/7 Purchase return 2 units 4.00 -106.00


Table 43 above shows the entries to and from the GST Paid account based on the




Sales – Revenue - Credit by nature



3/7 Sales of 30 units 1,800.00 1,800.00

5/7 Sales of 40 units 2,400.00 4,200.00



Table 44 above shows the entries to and from the Sales account based on the stock

movements shown in table 39.

Purchases – COGS – Debit by nature



3/7 Sales of 30 units 600.00 600.00

10/7 Sales of 40 units 857.14 1,457.14



Table 45 above shows the entries to and from the Purchases account based on the


Stock Adjustments – Expenses – Debit by nature





Table 46 above shows the entries to and from the Stock Adjustments account based

on the stock movements shown in table 39.

Table 47 below shows the general ledger account balances to check the accuracy of the

above entries and verify a balance for all accounts affected by the stock movements via

a Trial balance. The sales returns general ledger account has not been shown because,

as in an electronic accounting system, the returns are more easily allocated back to

their original general ledger account.

Trial Balance

Details Debit Credit

Bank 23,322.00

Inventory 624.20


GST Paid -106.00

Capital 21,000.00

Sales 4,080.00

Purchases 1,414.28

Inventory Adjustment 21.52



TOTALS 25,488.00 25,488.00


3.6 Retail Inventory Method of Accounting for Inventories

Where there is a wide variety of inventories sold, it is difficult to account for individual

costs. An example of the type of business that may use the retail inventory method is

a supermarket or similar organisation. The retail inventory method can be used by

retailers to estimate the value of inventories.

The method is best used when the following conditions apply:

▪ Stock movements are large and using the perpetual method is not practical

▪ There is a high turnover of stock

▪ Stock can be grouped according to a percentage or mark-up

▪ A standard mark-up is applied

In the retail sector, stocktaking is very time consuming if each item is not barcoded.

The retail inventory method provides a way of costing inventory without having to

complete a regular stock take, particularly where inventory reporting and accounting

is required monthly. For this method, cost and selling prices need to be separated, and

the percentage increase in cost needs to be constant for the particular grouping of stock

items.

Example:

Chows Supermarket has a standard 40% markup on the cost price but also

applies additional markups and mark-downs for special items.

The COGS is as follows:

Item Cost Price Retail Value

Opening inventory 20,000 28,000

Purchases 12,000 16,800

Freight in 600

Cost of goods available for sale 32,600 44,800


The cost to retail ratio can now be calculated 32,600

44,800 = .7276



Item Cost Price Retail Value

Cost of goods available for sale 32,600 44,800

LESS Sales 35,000

Ending Inventory 9,800

X Cost to retail ratio 0.7276

Current estimated inventory 7,130


3.7 Specific Identification

Under Specific identification inventory methods, the specific items “one of a kind

codes” is used and each time a sale is made, the actual cost of the item is determined

and charged as cost of goods sold. This is primarily appropriate in the case of items

that can be clearly differentiated, have high value and sales low volume. A good

example of this would be jewellery items, in which case when the Jeweller sells a

specific ring the code is attached to the item and its associated cost. You can have a

perfect stock account in theory under this as the unique item codes is either sold or on

hand.

3.8 LIFO (Last-in; First-out)

This cost flow assumption is no longer used or allowed in Australia for financial

reporting, but is the opposite to FIFO. Under LIFO the goods in inventory at the

beginning of the period is assumed to remain in the ending inventory, the how we track

items is whatever is last in of purchases and the price is used as the first items out

when sold. Obviously, this does not actually happen. Remember, this is an

assumption only and we are simply valuing inventory.

3.9 The Stock Take Stage of the Inventory Accounting Process

Many methods exist for completing the actual stock take count. The stock should be

counted by two (2) independent teams and the figures reconciled. The count should

be carried out as close to the end of the accounting period as possible. While the stock

count is in progress, no stock should be received, and no stock sold or issued to

production. If stock movements are allowed, then the accuracy and integrity of the

stocktake and subsequent costing are compromised.

Serially numbered tags are attached to each inventory item with two (2) perforated

sections at the bottom of each tag. A team of two (2) people makes the first count, and

this count is recorded in the first perforated section at the bottom of the tag. A second

team independently counts the same items, and this second count is recorded on the

second perforated section of the tag. Both counts are compared, and any differences

investigated and rectified.



Materials Control

An example of an effective inventory count is one undertaken every six (6) months in

December and June and takes place over the last weekend in each period.

Once the count is complete and stock quantities established, the costing phase can

commence. The quantities counted must be multiplied by the established cost per unit

to determine the dollar value of inventory. The unit quantities and values are then

reconciled to existing records with any necessary adjustments being made within the

accounting system to realign both the quantities and values to the actual stock count.

3.10 Types of Inventory in a Manufacturing Industry

In a manufacturing business system, there are three (3) main inventory items and we

would look at using standard cost generally:

▪ Raw materials – the supplies of materials that will be used directly in the

manufacture of a product as well as indirect materials and supplies.

▪ Work-in-progress – the value of goods along with the labour expended for

goods that are partly completed at any specific point in time.

▪ Finished goods – the value of products that have been fully manufactured and

are ready for sale. This value accounts for all costs contributing to the cost of

manufacture, including the following:

o Raw materials

o Indirect materials

o Fixed and variable overheads attributed to the manufacturing process

o Labour cost

The inventory flow for a manufacturer is as follows:

Finished goods

In-direct materials

Work

In

Progress

Raw Materials

Attributed Overheads

Labour Costs



The corresponding accounts for the flow of inventories that would generally appear in

the Balance Sheet for valuation and tracking purposes are the following:

▪ Materials control

▪ Work in progress

▪ Finished goods

3.11 How to Reconcile Inventory

You reconcile inventory when you compare the inventory counts in your records to the

actual amounts on the warehouse shelves, figure out why there are differences between

the two amounts, and make adjustments to your records to reflect this analysis.

Inventory reconciliation is an extremely important part of cycle counting since the

warehouse staff uses it to update the accuracy of its inventory records continually.

Inventory record accuracy is needed to ensure that replacement items are ordered

promptly, that inventory is properly valued, and that parts are available for sale or

production when needed.

The following are the steps you can undertake to reconcile inventory:

▪ Recount the inventory. It is entirely possible that someone incorrectly

counted the inventory. If so, have a different person count it again (since the

first counter could make the same counting mistake a second time). Further, if

the physical count appears to be significantly lower than the book balance, it is

quite possible that there is more inventory in a second location - so look around

for a second cache of inventory. Recounting is the most likely reason for a

variance, so consider this step first.

▪ Match the units of measure. Are the units of measure used for the count

and the book balance the same? One might be in individual units (known as

“eaches”), while the other might be in dozens, or boxes, or pounds, or

kilograms. If you have already conducted a recount and there is still a difference

that is orders of magnitude apart, it is quite likely that the units of measure are

the problem.

▪ Verify the part number. It is possible that you are misreading the part

number of the item on the shelf or guessing at its identification because there is

no part number at all. If so, get a second opinion from an experienced

warehouse staff person, or compare the item to the descriptions in the item

master records. Another option is to look for some other item for which there is

a unit count variance in the opposite direction - that could be the part number

that you are looking for.

▪ Look for missing paperwork. This is an unfortunately large source of

inventory reconciliation issues. The unit count in the inventory records may be

incorrect because a transaction has occurred, but no one has yet logged it. This

is a massive issue for cycle counters, who may have to root around for unentered



paperwork of this sort before they feel comfortable in making an adjusting entry

to the inventory records. Other examples of this problem are receipts that have

not yet been entered (so the inventory record is too low) or issuances from the

warehouse to the production area that have not been entered (so the inventory

record is too high).

▪ Examine scrap. Scrap can arise anywhere in a company (especially

production), and the staff may easily overlook its proper recordation in the

accounting records. If you see a modest variance where the inventory records

are always just a small amount higher than the physical count, this is a likely

cause.

▪ Investigate possible customer ownership. If you have no record of an

inventory item at all in the accounting records, there may be a very good reason

for it, which is that the company does not own it - a customer does. This is

especially common when the company remodels or enhances products for its

customers.

▪ Investigate possible supplier ownership. To follow up on the last item,

it is also possible that you have items in stock that are on consignment from a

supplier, and which are therefore owned by the supplier. This is most common

in a retail environment, and highly unlikely anywhere else.

▪ Investigate backflushing records. If your company uses backflushing to

alter inventory records (where you relieve inventory based on the number of

finished goods produced), then the bill of materials and the finished goods

production numbers had better both be in excellent condition, or the

reconciliation process will be painful. Backflushing is not recommended unless

your manufacturing record keeping is superb.

▪ Accept the variance. If all forms of investigation fail, then you have no

choice but to alter the inventory record to match the physical count. It is

possible that some other error will eventually be found that explains the

discrepancy, but for now, you cannot leave a variance; when in doubt, the

physical count is correct.

(Source: Accounting Tools)

3.12 Practical Reconciliations Conducted

• Does the maths agree? – Add up total purchases to opening stock less sales

should equal closing inventory values.

• Prepare in MYOB or other software inventory reconciliation report this allows

us to see if the entries in the system match and goods have placed into the

system correctly and against correct codes.



• The Inventory reconciliation report should match your manual counts if not

they you have to go looking for the range of errors that can occur and adjust as

required.

3.13 Common Errors

Below is the list of common errors that can occur in stock valuations and counts,

effective inventory management requires having controls, training, policies and

procedures and automation where possible in order to reduce these, in other

words good practises and good systems reduce errors (this holds true for all

accounting).

• Miscounting

• Entering values incorrectly from invoices

• Entering items against wrong codes into the inventory software

• Not up dating systems when exchanges happen or reporting damage stock

during the year to account for it (ie you get to the counter at a store and

something was wrong, and the staff member just gets another ones off the

shelf for you and does not record the damage stock so your count would be

out 1 already).

• Transposition errors and misreading stock forms

• Swapping/Override – This error in inventory occurs when you at the

checkout and something didn’t scan and it is overridden for the price and

does not account for the actual good like a miscellaneous stock code.

Another example is scanning an item that is the same price. For example,

you buy a bottle of soft drink 1 and it didn’t scan but you have a second bottle

and the staff member scans the bottle twice but now you are out because soft

drink 1 is actually not affected and soft drink 2 is overstated in sales by 1.



Activity 3

1. In what business environment would the standard cost method be used to

value inventory?

2. Briefly explain the weighted average method of accounting for inventory.

3. Briefly explain a FIFO method of accounting for inventory.

4. Identify the two most common perpetual inventory accounting methods.

5. Why should there be no stock movements allowed while the stocktake is in

progress?

1.

2.

3.

4.

5.




Activity 4

1. Work in progress is made up of a number of costs associated with the

manufacture of a stock item, what are these costs?

2. Define the term work in progress.

3. What are the inventory accounts used in a manufacturing industry?

1.

2.

3.




4. MANAGING INVENTORY LEVELS

Compared to larger organizations with more physical space, in smaller companies, the

goods may go directly to the stock area instead of a receiving location, and if the

business is a wholesale distributor, the goods may be finished products rather than

raw materials or components. The goods are then pulled from the stock areas and

moved to production facilities where they are made into finished goods. The finished

goods may be returned to stock areas where they are held prior to shipment, or they

may be shipped directly to customers.

This leads us to having to manage and report on inventory as a large and important

asset in the business as discussed earlier. There are a range of systems and methods

used to manage inventory as you have seen previously now we move on to the

management and reporting side of inventory here, the information to make decision

from.



4.1 Effective Inventory Management

Inventory is a resource, and the amount of inventory held at any one time depends on

the type of business, the demand for the item, and the required period of time for

restocking. It is necessary to decide how much inventory to have on hand because

money tied up in inventory may be more profitably used elsewhere in the business.

It is also necessary to use storage space economically because storage space

contributes to overhead costs. If insufficient inventory is held, however, it may result

in shortages, delays, dissatisfied customers, and valuable business may be lost. This

will hurt sales and of course profits. Efforts should be made to minimise handling

costs, pilferage, and obsolescence.

In a manufacturing business, a shortage of raw materials may hold up production. The

inventory level must be such that the minimum possible amount is held concerning

the following:

▪ The cost of the inventory

▪ Ordering costs

▪ Storage costs

▪ The risk of running out of inventory

Ordering costs include the cost of producing the order and getting it to the supplier, as

well as responding to any queries and order adjustments. The storage costs include the

cost of the space used to store the stock items and any associated handling costs.

Inventories are a major component of working capital, representing a significant cost

for all types of businesses, in particular for manufacturers. For both wholesalers and

retailers, inventory consists of finished stock, purchased from either a manufacturer

or a wholesaler, that is ready for resale to either customers or retailers. For a service

organisation, inventory may include work in progress that could account for items

such as office supplies, spare parts, and other materials that have not yet been billed

to the client but for which payment has already been made to the employee performing

the service or to the supplier of the items used in performing the service. For trading

companies (merchandising and manufacturing), the major inventory items will be

work in progress, labour already performed, and office supplies used.



The size of an inventory and its monetary value can make inventory management very

important for a company. Costs are associated with both holding inventory and

running out of stock. The costs of holding inventory may include the following:

▪ The interest paid on cash borrowed to purchase inventory

▪ The interest lost on cash tied up in inventory rather than earning interest

▪ Storage costs

▪ Insurance and other costs associated with holding inventory

▪ Loss through theft or damage

▪ Obsolescence as a result of having too much stock on hand that may deteriorate

physically or become obsolescent

The primary objective of a business is to make a profit through the sale of stock items

and the utilisation of production equipment and staff to maximum advantage.

Inventory shortages may include the loss of profit or an increase in costs due to delays

in production and the inability to use production equipment. Other costs include the

following:

▪ The loss of sales due to an inability to supply goods

▪ The loss of customers or client goodwill

▪ Stoppages in production equipment

▪ Increased staffing costs for downtime

▪ Increased purchase costs of obtaining stock at short notice

For a retailer, wholesaler, or manufacturer, it is possible to determine inventory

management models that indicate the most economical order quantities to ensure that

optimum inventory levels are maintained.

Some key steps to inventory management include the following:

Demand forecasting. This refers to estimating a firm’s expected level of sales

based on a chosen strategy and demand history.

Inventory control. This process is employed to maximise a company’s use of

inventory. The idea is to generate the maximum profit from the least amount of

inventory investment without compromising customer satisfaction levels.

Supply chain management. This involves streamlining the movement and

storage of raw materials, work-in-process inventory, and finished goods to

maximise customer value and to gain a competitive advantage in the marketplace.



4.2 Economic order quantity (EOQ)

The following formula has been developed to indicate the most cost-effective

quantities in each order. The economic order quantity (EOQ) formula is as follows:

EOQ = 2AP C

Where:

A = annual product demand

P = the cost of placing one order

C = cost of storing one unit of inventory for one year

Example:

A business produces 2,000 products annually. The cost of placing one order is

$5. The carrying cost of one unit is 20¢.

A = 2,000 units

P = $5 per order

C = 0.20 cents per unit

EOQ = (2 2000 5) 0.2x x

EOQ = 20,000 0.2

EOQ = 100,000

EOQ = 316

= 316 units

With an economic order quantity of 316 and an annual stock turnover of 2000, we

would be placing an order 6.329 times per year: 2,000 ÷ 316, or every 57 days: 365 ÷

6.329.

This, of course, then needs to be weighed up against the likelihood of obsolescence or

perishability of the item, and the convenience of having the money tied up in the stock

for this 57-day period.



4.3 Just-In-Time Process

A just-in-time inventory system is based on the idea of ordering and receiving or

manufacturing the stock just before existing stocks are exhausted or sold out. This

process helps to reduce the amount of cash tied up in stock and the associated storage

cost of inventory.

In manufacturing, the just-in-time production method reduces the value of finished

goods and work-in-progress inventory, since this production method is based on the

principle that production reflects the demand for goods and not the tendency to stock

up for future sales. This method reduces the inventory of raw materials by purchasing

them only when they are required and therefore saving on storage costs. This method

works on the assumption that the exact quantity required will be received from the

suppliers on time, with no items damaged or in need of replacement.

Inventory is often the biggest investment a business needs to make, and every effort

should be made not to tie up funds unnecessarily. Care should also be taken to ensure

that stock shortages do not occur. For this reason, the just-in-time method and the

EOQ technique should only be used and applied where appropriate. These methods do

not replace the necessity for the business management team to think through the

issues that may be unique to them and apply the inventory control method that best

suit their needs.

4.4 Inventory Turnover

Inventory turnover refers to the number of times the chosen stock item storage

quantities can on average be sold per annum. In the example used in section 5.2, we

need to replace the stock sold, during the elapsed period from the placement of the last

order, 6.329 times per year (or every 57 days).

The inventory turnover rate is obtained by dividing the cost of goods sold by the

average inventory; this is the value of the inventory held at the beginning of the year

plus the value of the inventory held at the end of the year, divided by 2.

Inventory turnover rate formula is 365 ÷𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

An example of this is provided in Table 50 below.



Item 30/6/xxx1 30/6/xxx2

Inventory 1,350 1,500

Cost of Goods Sold 15,000

Inventory Turnover Rate = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Inventory Turnover Rate = 15,000

(1,350+1,500)÷2


2,850÷2


1,425

Inventory Turnover Rate = 10.53 times per year

Inventory turnover days = 365 ÷ 10.53 = 35 days

Table 50 - Example of calculation of stock turnover rate, times, and days

A high figure for this ratio indicates that the stock is selling quickly, and this will give

the business a good cash flow. It also indicates that there is a comparatively low danger

of stock becoming obsolete. A high figure for the ratio also indicates that less cash is

tied up in inventory and the working capital is being more effectively used.

Where the COGS figure is not available an approximate value can be obtained for the

inventory turnover by using the sales value instead of the COGS figure. If the opening

inventory is not known, e.g. the balance sheet for the previous period is not available,

the closing inventory is the average inventory used.

Example 1:

The closing inventory for a business is $26,000. Sales are $50,000.

Inventory turnover = $50,000/$26,000 = 1.92

The figure of 1.92 indicates the inventory level is well managed and the

inventory is turned over regularly. This will allow the business a good cash flow,

and there is less danger of the stock becoming obsolete. Also, a lower amount

of capital is tied up in inventory, and working capital is used effectively.

Analysing inventory turnover helps a business to plan at all levels of their income

statement. It allows one to better forecast the cash likely to be required to reinvest in

inventory in the coming months based on past performance. It allows one to identify

underperforming sales lines and products so that those products can be moved more

quickly, either via specials or a focus on those products which may have previously

been neglected. This in turn will free up cash flow and shelf space for higher volume

or better performing products.



4.5 ABC Analysis

ABC analysis is a technique of sorting of inventories into 3 categories. The

categorization of the inventory under the ABC analysis is done according to how well

the inventory can sell and how much it will cost to hold. Always Better Control

technique (ABC) analysis classifies inventory into three categories namely: A, B, and

C.

Category Inventory Specification

A Best-selling items that don't partake in warehouse space or cost

B Mid-range selling items, these items are sold regularly but it cost more than

category 'A' items to hold

C This inventory is excluding categories 'A' and 'B' that makes up the bulk of

inventory costs

This inventory management technique helps an organization to keep working capital

costs low because it identifies the line items that need frequent reorder and need not

be stocked often. Resulting in reduced obsolete inventory and optimizing the inventory

turnover ratio.

https://cleartax.in/s/abc-analysis



Activity 5

1. Why is it important to select a minimum amount of an item to keep in inventory

that will trigger the purchase of more?

2. What issues are involved in running out of stock?

3. How can a business determine if inventory levels are well managed?

4. Give one (1) disadvantage of using the just-in-time method for ordering inventory.

5. A business produces 3,000 products annually. The cost of one order is $10. The

carrying cost of one unit is 50¢. What is the EOQ?

1.

2.

3.

4.

5.




5. PRACTICAL CASE STUDY OF INVENTORYL SKILLS

LEARNING ACTIVITY

Scenario

You are employed as a bookkeeper with Comserve Pty Ltd (Australian Business

Number 23 456 789 123), a small wholesale supplier of computer products to the

computer industry. You have been provided with the newly created MYOB file, and are

required to maintain the following inventory records using this accounting file. Please

look through the data file to familiarise yourself with the chart of accounts, the current

financial year, the suppliers, and the customers. You will process entries for June only

in the financial year that you have chosen below. The tasks outlined throughout this

chapter describe the process for entering data into systems or ledgers.

All inventory items are kept on a perpetual inventory basis. Some are recorded and

tracked within MYOB on a weighted average cost basis. One item is being tracked using

a FIFO inventory cost method and updates the ledger accounts on a periodic basis.

You will find the FIFO stock card on the last page of this learning activity.

The business started a new accounting system on the 1st of July 2013, so this exercise

is written in the financial year 2014, and the month for all of your entries is to be July

2013.

Staying Organised

Create a directory where all of the files generated while completing this activity will be

stored. It is important that you do not generate multiple files of the same thing as this

will make it difficult to find and analyse problems you may encounter.

Most importantly, it is essential that transactions are entered in date order. While

incorrect dates may not create quite as much of an impact on your results as would

occur in other accounting files, the effects of incorrect dates in a file that is maintaining

a perpetual inventory system is immediate and ongoing and may not be able to be

corrected simply by changing the incorrectly recorded date on a transaction.

Cute PDF writer or other PDF Printer

For ease of printing some or all of your printouts, invoices, etc. directly from MYOB,

you should download and install the Cute PDF Writer or other PDF Printer software

compatible with MYOB.



5.1 Account Opening Balances

The first task is to enter the account opening balances (shown below) into the file for

Comserve Pty Ltd. Step-by-step instructions are provided below.

Che qu e A c c o u nt A N Z 3 21 4 86 4 5 ,000. 00

A c c o u nt s Rec e iva bl e 3 3 ,5 7 0.00

Inve nt o ry P erp et u a l 1 1 ,800 .00

Inve nt o ry F IF O 65 .00

F u rni t u re a nd F i x t u re s a t Co s t 4 3 ,000. 00

1 925 *F u rn i t u re a nd F ix t u res A c c u m. De p. - 1 1 ,1 5 0.00

O f f ic e E qu i pm ent a t Co s t 3 4 ,000. 00

O f f ic e E qu i pm ent A c c u m. D ep . -6 ,2 00.00

Bu s ines s Cred i t Ca rd 1 ,3 5 0.00

A c c o u nt s P a y a bl e 7 ,625 .00

GS T Co l l ec t ed 0 .00

GS T P a id 0 .00

Ca p i t a l 1 6 ,000. 00

Ret a ined Ea rn ings 1 25 ,1 1 0 .00

To enter these general ledger account

opening balances, click on “Setup”, then

“Balances”, followed by “Account Opening

Balances”.

This will open the “Account

Opening Balances” window to allow

for the entering of the general

ledger account balances.

The rectangle indicates where each

ledger account balance is entered.

These balances can hold a negative

balance where necessary, such as

accumulated depreciation and GST

Paid, just to name two such

accounts. Enter the balances you have been provided above, and check that the

“Amount left to be allocated” equals $0. If it doesn’t, then you have made an error and

will need to find and correct it before moving on.



5.2 Enter Historical Sales

The next task to perform is the entering of the outstanding customer invoices. The

details of these outstanding invoices are provided below, followed by the instructions

on how they are entered into MYOB.

Customer Opening Balances

Name: Big Byte Systems

Date: 18th June 2013

Invoice No.: 1025

Total Inc GST: $6,850

Name: Network Specialists

Date: 21st June 2013

Invoice No.: 1048


Name: Office Supplies


Invoice No.: 1059


To enter these outstanding customer

invoices, click on “Setup”, then select

“Balances”, followed by “Customer

Balances”.

This will open up the Customer Balances

window to allow for the entering of these

opening balances.



All the customers are

listed on the left of this

window. The controls are

identified by the arrows

and are used when

entering the outstanding

customer balances.

The “Customer Detail”

and the “Customer

Summary” selections

determine how the data

entered is to be displayed. In detail view, the individual invoices entered against each

customer can be easily viewed. One customer may have multiple outstanding invoices,

and the list can then be checked in this view.

The “Customer Summary” view only displays the total owed by that customer,

regardless of how many invoices have been entered separately for the customer.

The “Add Sale” button will open the “Historical Sale” window to allow for the entry of

any outstanding invoices. There may be multiple outstanding invoices for a single

customer, so this process will need to be repeated for each unpaid invoice that is

brought into the new system.



The Historical Sale window contains the following elements (indicated in red, above):

1. This is the invoice number of the outstanding invoice.

2. This is the date of the outstanding invoice.

3. This is the total value of the outstanding invoice, including GST.

4. This is the tax code applied to the invoice.

5.3 Enter Historical Purchases

Enter the following outstanding supplier invoices. The entering of the supplier

invoices follows the same pattern as the entering of the customer invoices.

Supplier Opening Balances

Name: Computer Data Systems (CDS)

Date: 6th June 2013

Invoice No.: 6752


Name: Cables-n-Things


Invoice No.: 3621

Total Inc GST: $275

Name: Itech Computer Imports (ICI)


Invoice No.: 8824




5.4 Enter Stock Items

The next step is to enter the

stock items into the

accounting system and set up

the parameters for sales,

purchasing, and stock

management. Care needs to

be taken to ensure that the

correct general ledger

allocation codes are used.

From the Inventory command centre, select “Items List” to open the item list window.

This window displays all

recorded stock items,

providing the item

number, item name,

quantity on hand, last

cost and current selling

price. To add a new

stock item, click on the

“New” button. This will

open the “Item

Information” window to

allow for the entering of

the first item.

When clicking on the Profile tab the following elements are shown (indicated in red,

below):

1. The Item Number is a unique identifier for the item. Care should be taken when

choosing this identifier to make it easy enough to guess what it is when looking

for it. In this instance, we are looking for a 1-gigabit modem router (1GBMR).



2. This contains the long Name of the item, which is how it is typically identified.

3. These set the preferences for how this item is to be treated within MYOB and

how it is to be accounted for when purchased and sold:

a. I Buy This Item. I may buy an item, but it will not be sold, and nor will it

be accounted for it in the inventory. An example of this may be a

consumable stationery item, such as a replacement toner cartridge for

the photocopier. The item is purchased, but it is not inventory that is

tracked but rather an expense.

b. I Sell This Item. I may sell an item that will not be purchased or counted

in inventory. A classic example of this is the hourly charge out rate for

services that are provided to clients

c. I Inventory This Item. This means that the item will be sold and counted

in the stocktake process. It also tells MYOB that it must keep track of

weighted average costs on stock movements and transfer the required

values from the asset inventory to the cost of goods sold account when

the item is sold.

4. This identifies the general ledger account that will receive the transfer from the

inventory account in assets when the item is sold.

5. This identifies the general ledger account that will record the sale value of the

item when it is sold.

6. This identifies the general ledger account that will receive the value of the stock

when it is purchased and will also be where the cost value of the items sold are

transferred from to be posted to (see point 4).



Other buying and selling information also need to be set up to assist in the

management of the inventory item. Click on the “Buying Details” tab to enter the first

of the required stock management information for this item.

1. Last Purchased Price will show the value paid for this item on the latest

purchase invoice. This cannot be entered by the user and is the price that will

be used by the system when calculating the weighted average cost of the item.

A value will only appear here once the item has been purchased on an item

invoice and processed into the system.

2. The standard cost is what we anticipate will be paid for the item and the value

from which the mark-ups and margins have been calculated. This can be

compared to the actual cost to determine if and when a sales price needs to be

adjusted to maintain the required markup and margins

3. This ties together with item 4 as well and needs to be seen together. The Buying

Unit Of Measure tells MYOB whether it needs to add a single unit to stock or

multiple values. As an example, we may buy an item in boxes of twelve. This

means that when we order the item, we are buying one box, which is what my

supplier is expecting as they only sell it by the box. When I sell the items though

I sell them by the individual unit, not by the box, and therefore there needs to

be 12 items added to the inventory count, not one.

4. This item ties into item 3 and needs to be understood in joint context.

5. This identifies the default GST code that will be applied to this item when

purchased, which could be different to that applied to the sale.

6. This represents the lowest quantity of stock the business should hold so as not

to run out of stock before the order and supply process is completed.

7. This is the name of the preferred supplier though does not tie the business to

purchasing from any one supplier at any time.



8. The item number allocated to this item by the supplier, which is often different

to that used by the business.

9. The minimum number of items that must be ordered when an order is placed.

This is often determined by the supplier’s minimum supply quantity of the unit

though sometimes it can be a quantity determined by management as an

economic order quantity.

Click on the

“Selling Details”

tab to enter the

remainder of

the required

stock

management

information for

this item.

1. “Base Selling Price” is the standard price (without any discount rates) at which

the item will be sold.

2. “Selling Unit of Measure” identifies how the item will be packaged for sale, i.e.,

individual units or multiple units, e.g. a twin pack.

3. Identifies the quantity the stock level will be altered by when sold.

4. Identifies the default tax code to be applied to the item when sold.

5. Identifies whether the Base Selling Price is inclusive or exclusive of GST.



Stock Items

Item No.: 1GBMR

Item Name: ADSL 1Gb Modem Router

Std Cost Inc GST $110

Min Stock Level: 10

Supplier: Computer Data Systems (CDS)

Selling Price Inc GST: $275.00

Item No.: PC7000A

Item Name: Personal Computer 7000A


Min Stock Level: 20

Supplier: Itec Computer Imports (ICI)

Selling Price Inc GST: $1,925

Item No.: LC9500

Item Name: Laptop Computer 9500

Std Cost Inc GST $1,100

Min Stock Level: 10

Supplier: Itec Computer Imports (ICI)


Item No.: USB1EC

Item Name: USB Extension Cable (1m)

Std Cost Inc GST $5.50

Min Stock Level: 15

Supplier: Cables-n-Things




Item No.: 8P1GBS

Item Name: 8 Port 1Gb Switch


Min Stock Level: 10

Supplier: Computer Data Systems (CDS)

Selling Price Inc GST: $110

5.5 Enter Inventory Opening Stock

The following are the opening stock quantities and values, tax exclusive as at 1st July

2013. These will now be entered into MYOB (instructions below) and the FIFO stock

card (at the bottom of this activity).

Item Name Qty Price

1GBMR ADSL 1Gb Modem Router 10 $275

8p1GBS 8 Port 1Gb Switch 5 $110

LC9500 Laptop Computer 9500 5 $2,750

PC7000A Personal Computer 7000A 8 $1,925

USB1EC USB Extension Cable (1m) 20 $6.00

The process for entering the opening stock values into MYOB is as follows:

Choose the “Inventory

command centre” and then

choose “Count Inventory”.

This will open the window

ready to accept the stock

values that you have in stock.



The inventory values are entered into the counted column. Once this is done, click on

the “Adjust Inventory” button. Remember that the USB cables are entered on to the

FIFO inventory card at the end of this activity.

Click the continue button and then click on the opening balances button.

At this point, we need to enter a general ledger account number into the default

account column because we are currently entering opening balances. A general ledger

account number will be entered here when we make stock adjustments (at a later

point).

The FIFO card should

now also be completed,

and look something like

the one shown here.



The unit cost values (tax exempt) are entered into this column in the Adjust Inventory

window (see below).

1. The total values of the units held in stock are displayed in the Amount column.

2. The account needs to be considered carefully. If there is more than one

inventory account, these will need to be checked to ensure that each item is

allocated to its correct inventory account.

3. Make sure that the memo identifies that this adjustment is for inventory count

opening balances.

To complete the entry process, click on the record button to return to the Inventory

command centre.

Reports:

The following reports need to be printed and compared to those in Appendix A

(Solutions).

Report Name Save as Filename

Accounts List [Summary] ACC405 Printout 1 Accounts List [Summary]

Aged Receivables [Summary] ACC405 Printout 2 Aged Receivables [Summary]

Aged Payables [Summary] ACC405 Printout 3 Aged Payables [Summary]

Items List [Summary] ACC405 Printout 4 Items List [Summary]



5.6 Purchase Orders

This business issues a purchase order to suppliers when ordering stock. The

following purchase orders were issued on 2nd July 2013.

Qty Item Price Tax Supplier

20 USB Extension Cables (1m) $6.60 Inclusive Cables-n-Things

30 Personal Computer 7000A $797.50 Inclusive Itech Computer Imports

20 Laptop Computer 9500 $1,127.50 Inclusive Itech Computer Imports

50 1Gb ADSL Modem Router $49.50 Inclusive Computer Data Systems

30 1Gb 8 Port Switch $121.00 Inclusive Computer Data Systems

Reports:

Print the purchase orders as pdf documents using the Cute PDF Writer and use the

following names:


Cables-n-Things Purchase Order ACC405 Printout 5 Cables Order

Itech Purchase Order ACC405 Printout 6 Itech Order

Computer Data Systems Order ACC405 Printout 7 Computer Data Order

The step-by-step instructions for entering a purchase order are as follows:

▪ Select Purchases

command centre.

▪ Select Enter Purchases.



The Purchases – New Item window will appear so that your orders can be placed.

1. From the top left-hand corner choose “ORDER”.

2. From the bottom centre of the window choose “Layout” and then select “Item”.

1. Select the supplier.

2. Ensure that Tax Inclusive is selected.

3. Enter the quantity to be ordered.

4. Select the item code number.

5. Enter the purchase price that we will be paying for this order.

The remaining orders for Itech Computer Imports and Computer Data Systems are

to be entered in the same way.



5.7 Sales Invoices

The following sales were made on the 3rd July 2013. The next Invoice Number is

1685.

Big Byte Systems Network Supplies

Qty Item Qty Item

30 1Gb Modem Router 15 1Gb Modem Router

12 Laptop Computer 15 Laptop Computer

5 Personal Computer 20 Personal Computer

10 1Gb 8 Port Switch 8 1Gb 8 Port Switch

5 USB extension cables (1m) 3 USB extension cables (1m)

Office Supplies

Qty Item

10 1Gb Modem Router

2 Laptop Computer

1 Personal Computer

10 1Gb 8 Port Switch

8 USB extension cables (1m)

Reports:

Print the Sales invoices as pdf documents using the Cute PDF Writer and use the

following names:


Big Byte Invoice ACC405 Printout 8 Big Byte Sales Invoice

Network Supplies Invoice ACC405 Printout 9 Network Supplies Sales Invoice

Office Supplies Invoice ACC405 Printout 10 Office Supplies Sales Invoice



The step-by-step instructions for entering sales invoices are as follows:

▪ Select Sales command

centre.

▪ Select Enter Sales.

The Sales – Edit Item window will appear so that your invoices can be created.

In the top left-hand corner choose “INVOICE”. At the bottom centre of the window

choose “Layout” and then select “Item.”

1. Select the customer.

2. Ensure that Tax Inclusive is selected.

3. Enter the quantity to be supplied.

4. Select the item code number.

5. Enter the price.



Updating the FIFO card:

The important thing to remember is that the FIFO stock card also needs to be updated

with the sales of the USB cards on each of these three sales invoices. On each invoice,

we take the quantity of USB cables that have been supplied and place them on the stock

card so that stock adjustments can be made.

The FIFO card (to the

right) shows each of the

three sales and the

quantities sold on each of

those invoices, and also

shows the balance of

stock remaining.

The remaining sales invoices for Network Specialists and Office Supplies are to be

entered in the same way.



5.8 Goods Received with an Invoice

The goods that were ordered on the 2nd, along with the invoices, were received from

the following suppliers (below) on the 6th July, 201x. Remember the orders entered

on the 2nd now need to be found and processed into actual bills. The prices shown

on the invoice (if different to the order price) are correct. Be sure to update the stock

card.

The step-by-step transaction entry instructions are provided on the next page.

Invoice No.: 6927

Ship to: Date: 6-7-201x

Ship Item Price Disc % Total Tax

20 6.00 120.00 GST

Total GST Exclusive 120.00

Terms: GST 12.00

Total GST Inclusive 132.00

Cables-n-ThingsPO Box 3040, Mt Gravatt Qld 4122

ABN: 21 434 124 612

Comserv Pty Ltd

460 Rikon Road

SALISBURY QLD 4107

Description

30 days from EOM

USB Extension Cable (1m)

Invoice No.: 8368

Ship to: Date: 6-7-201x


30 725.00 21,750.00 GST

20 1,025.00 20,500.00 GST

Total GST Exclusive 42,250.00

Terms: GST 4,225.00

Total GST Inclusive 46,475.00

ABN: 32 146 219 432

PO Box 185, Springwood Qld 4127

Comserv Pty Ltd

460 Rikon Road

Laptop Computer 9500

30 days from EOM

SALISBURY QLD 4107

Description

Personal Computer 7000A

Itech Computer Imports



Updating the FIFO card

▪ Bring down the balance of remaining stock quantity and pricing left over from

the previous entry.

▪ Enter the purchase date.

▪ Provide any details of the purchase.

▪ Enter the number of items purchased.

▪ Provide the unit cost (tax exempt).

▪ Enter the total value of the purchase (tax exempt).

▪ Add the purchase to the balance columns.

▪ The two values in the balance column equal the total value of the remaining

stock held.

Converting orders to invoices

First, select the “To Do List” and then “Orders” from the dropdown list.



For this example, the Itech Computer Imports order has been selected. Up to this point

in time, no general ledger accounts have been affected by the orders that have been

placed in the file.

The process of converting from order to a bill places the appropriate values into the

general ledger accounts that are affected by this purchase, and also adjusts the

inventory values based on the quantities purchased.

MYOB will also do an internal calculation to adjust the average cost on the stock item

card to the weighted average value for the item. (For more detail on how this is

calculated, please refer to section 3.4.) MYOB will also update the “Last Purchase

Price” field on the stock item card.



With the order now in front of you need to check the following points.

1. Check again to be sure that Tax Inclusive has not been selected because the

prices provided on the supplier invoice are shown as tax exclusive. If the prices

shown on the supplier invoice are tax inclusive, then you should leave the tax

inclusive checkbox ticked.

2. You now need to update the Date field to show the supplies invoice date. This is

important because if there are discounts available, then these discounts are

based on the supplies invoice date and not our order date. Correct ageing of the

invoice is also based on this date.

3. You now need to enter the supplier invoice number shown on their invoice, as

this will allow us to search and identify using this reference.

4. The next thing to do is to click on Bill at the bottom of the screen to convert this

to a purchase invoice for the supplier.

Now we will focus on the bill that is presented to us. The first thing that you will notice

is that the window colour has changed from yellow. MYOB uses a colour-coded system

where quotes are orange in colour; orders, cash receipts, and cash payments are

yellow; and invoices are blue. You will note that anything to do with credit purchases

or credit supplies will also have a blue window. This colour coding gives us a visual

reference, alerting us to the possibility of an incorrect data entry point.



1. The final stage is to check that the quantities that have been received are the

quantities that were ordered. If they are not, why not? Some items may be short

supplied when the supplier does not have sufficient quantities to meet the

order, and these may need to be recorded under the backorder column.

2. The prices shown on the invoice are as we expect them to be, but if they are not,

check their accuracy and update them if necessary.

3. Finally, we need to check to ensure that the GST coding recorded against each

item is correct. Once all this has been done, we can now click the record button

to make this a permanent record.

If you haven’t already done so, now is the time to complete the conversion of orders to

bills.



5.9 Goods Received Without an Invoice

Sometimes goods can be received into a business without an invoice. This can be a

problem when the goods received are required immediately for sale. Fortunately,

MYOB provides an option that enables us to receive these goods into stock, recording

data to a temporary general ledger account until the invoice is received and the final

figures can be checked and recorded.

This account is found in Liability and is shown here before we receive the goods

without an invoice so you can see that the account balance at this point is zero. We will

take a look at it again once we have received the goods into stock without the invoice,

and you’ll see that it holds the temporary value for the goods instead of being recorded

in the accounts payable account for the supplier.

On the 6th of July, the goods ordered from Computer Data Systems arrived without

an invoice.

These items need to be received into stock so that they can be sold if needed.



Click on the “Receive Items” button to start.

1. Make sure that you’ve got the current receipt date entered.

2. Make sure that you have recorded only the item quantities that have been

received.

Click on the record button.

If we now recheck the liability account we looked at prior to receiving these goods into

stock without an invoice, we can see that this account now holds the $5,550 which is

the total value of the invoice. When the invoice is finally received from the supplier,

this value will transfer to accounts payable liability account and also to the suppliers’

subsidiary ledger account.



5.10 Sales Invoices

On the 10th of July 2013, a sale of 14 USB Cables was made to Office Supplies. (Hint

– don’t forget the FIFO card.)

Print the sale as ACC405 Printout 11 Sale Office Supplies.

The FIFO card now needs to be updated with this sale.

1. Four (4) of the

total items can be

taken from old

stock as there are

four left.

2. Ten (10) of the

total items will

need to be taken

from new stock.

3. The remaining items consist of 10 of the new items at six dollars each, leaving

a stock total of $60.



5.11 Stock Purchase

Purchase was made on 13th July 2013, and the goods were picked up from the

supplier Cables-n-Things to restock the USB cables. The invoice is shown here. Use

the following file name for a printout of the purchase: ACC405 Printout 12 purchase

Cables.

The FIFO card now needs to be updated with this purchase.

1. Fourteen (14) items are added to the purchaser’s quantity column, and the

pricing completed.

2. The 10 items remaining after the previous transaction are brought down along

with its pricing.

3. The purchase data is now brought across to the balance column indicating a

new balance consisting of 24 items valued at $137.

Invoice No.: 7121

Ship to: Date: 13/07/2013


14 5.50 77.00 GST

Total GST Exclusive 77.00

Terms: GST 7.70

Total GST Inclusive 84.70

Cables-n-ThingsPO Box 3040, Mt Gravatt Qld 4122

ABN: 21 434 124 612

Comserv Pty Ltd

460 Rikon Road

SALISBURY QLD 4107

Description

30 days from EOM

USB Extension Cable (1m)



5.12 Sales Return

One of the USB cables purchased on the 6th and sold on the 10th to Office Supplies

has been returned on 21st July 2013 for credit. Create the credit invoice and print

this invoice and label it ACC405 Printout 13 office supplies credit.

You will need to apply this credit back to the original sales invoice.

The FIFO card now needs to be updated with this purchase:

1. A negative one (-1) is entered into the sales quantity column, and the cost is

shown as a negative value for this item. This is important because it will subtract

one item from the total quantity of items sold and will also subtract its value

from the total value of the total sale costs.

2. The returned item is added back to the total quantity and cost of items in the

$6.00 group.

3. The balance of the items purchased for $5.50 is also added at this point to

indicate total items held in the stock of 25 with a total value of $143.



Applying the credit to the original invoice

▪ From the Sales command centre, choose “Sales Register”.

▪ Select the “Returns and Credits” tab.

▪ Select the credit to be applied to the original invoice.

▪ Click on the “Apply to Sale” button.



1. Make sure the correct date is entered.

2. Apply the credit to the correct invoice, in this instance the invoice for the 10th

July.

3. Click on the record button.



5.13 Customer Receipts

Enter the following customer receipts in payment of outstanding invoices. Receipt

these values to un-deposited funds until such time as you are ready to prepare your

bank deposit.

Date: 19 July 2013

Customer: Big Byte Systems

Payment received: $6,850

BSB and account No: 499:799 - 328531

Cheque number: 4576

Date: 22 July 2013

Customer: The Network Specialists



Cheque number: 6491

Date: 22 July 2013

Customer: Office Supplies



Cheque number: 1832

Detailed explanations of how these entries are made in MYOB are included on the

following pages.



From the Sales

command centre, select

“Receive Payments” and

the “Receive Payments”

window will be

presented.

The first thing that needs to be chosen is the account to which the payment will be

received too. In this instance, the account will be “Undeposited Funds” as the cheque

will be held until the banking is prepared and taken to the bank.

1. Select the customer who the payment has been received from.

2. Enter the payment date.

3. Enter the value of the payment that has been received.

4. Enter the payment method and click on the “Details” button which will open

the “Applied Payment Details” window. (This window will be discussed in the

next section.)

5. Describe the payment.

6. Enter any applicable discount.

7. Enter the value of the payment.




Applied payments details

1. Enter the banks BSB number as

shown on the cheque.

2. Enter the name of the payer as


3. Enter the account number as


4. Enter the cheque number.

5. Enter any relevant information

that relates to the payment.

Click on the OK button.



5.14 Supplier Payments

Enter the following supplier payments made in payment of outstanding invoices.

Date: 19 July 2013

Supplier: Computer Data Systems

Payment sent: $3,200

Invoice No: 6752

Cheque number: EFT

Date: 23 July 2013

Supplier: Itech Computer Imports

Payment sent: $4,150

Invoice No: 8824

Cheque number: EFT

Date: 24 July 2013

Supplier: Cables-n-Things

Payment sent: $275

Invoice No: 3621

Cheque number: EFT

Detailed explanations of how these entries are made in MYOB are included on the

following pages.



From the Purchases

command centre, select

“Pay Bills” and the “Pay

Bills” window will be

presented.

The first thing that needs to be chosen is the account from which the payment will be

made. In this instance, the account will be “Cheque Account ANZ 231486”.

The supplier’s invoice number can also be seen for ease of identification.

1. Enter “EFT” for the Cheque No. to indicate that this was paid via an electronic

funds transfer.

2. Enter the payment date.

3. Enter the value of the payment that is being made.

4. Select the supplier who the payment is to be made to.

5. Provide a description of the payment.

6. Enter any applicable discount.

7. Enter the value of the payment being applied to any and each invoice being paid.



Click on the record button. Repeat this process for each of the suppliers being paid.

5.15 Prepare A Bank Deposit

On 25th July a bank deposit was made to deposit the cheques received from

customers. Please prepare this deposit and print out one deposit slip and label it

ACC405 Printout 14 Bank Deposit.

From the Banking command centre, choose “Prepare Bank Deposit”, and the prepare

bank deposit window will be displayed.

Check first that the account to be deposited to is the cheque account ANZ.

1. Select the deposit date and the available deposits will be listed within the

window.



2. Enter the transaction memo.

3. The receipted payments can be seen based on their receipt date and also their

receipt value.

4. Select the amounts that you will deposit to the ANZ account in this deposit.

5. The total value of the deposit will be shown at the bottom of the window with

the number of items this deposit contains to the left of the deposit value.

Click on the print button to print the deposit slips that will be taken to the bank for

stamping and receipt acknowledgement.

A confirmation window will be displayed to confirm your

readiness to record this transaction and commit it to the

data file. Click on the OK button to proceed.

In this instance, click on the CutePDF Writer and select the “Print” button to print

the deposit slip as a pdf document.

As mentioned earlier in this text, please name this file ACC405 Printout 14 Bank

Deposit.



5.16 Removing Stock Items for Business Use

On 25th July, the business decided to remove one (1) Laptop Computer 9500 from

inventory for use within the business. The entries relating to this transaction need

to be created. An asset register is required, and the following information is

provided for the processing of this transaction. (An asset register is provided at the

end of this learner guide.)

Asset Category: Computer Equipment at Cost

Serial Number: ZVP953EZB120H

Effective Life: 3 Years

Depreciation Method: Straight Line

Asset Number: 125



Processing this transaction

When thinking about this transaction, we realise that it can be broken down into two

(2) basic processes:

1. The removal of the stock item from inventory and

transferring it to the asset accounts; and

2. the entry of the item into the asset registers.

The first part that we will deal with is the removal of the stock item from Inventory.

1. Enter the date of the transaction.

2. Enter an appropriate description of this transaction.

3. Select the inventory code for this item.

4. Select a negative quantity. A negative number entered here ensures that the

stock count will be reduced rather than added to, which is what we need as there

is one less item now in our inventory.

5. Once this has been done, you will notice that the unit cost and the amount are

automatically calculated and entered. The unit cost is drawn directly from the

inventory item card (the weighted average cost). If you open up the inventory

item card, you will see the weighted average cost displayed.

6. The next thing we need to do is select the asset item account to which this item

will be allocated. In this instance, it is “Computer Equipment at Cost.”

A further descriptive memo could be added here, but in this instance, it is not required,

so we will just click on the Record button.



The second part of this transaction is to record this information onto the asset register

card.

All the information on this card, apart from those marked, are drawn from the

information provided to you.

1. The depreciable cost is drawn from the journal that you created above to adjust

your inventory.

2. The depreciation percentage is based on the fact that this item has appreciated

on a straight-line value across three years, this equates to a depreciation

percentage of 33.33%.

The line highlighted in yellow is the first entry on the card awaiting the depreciation

calculation at 30th of June.



5.17 Convert Receive Items to Invoice

On 25th July, we have received the invoice from Computer Data Systems for the

goods received into stock without the invoice. We now need to change this order to

a bill. The invoice received shows no changes to be made on order before converting

it to a bill, apart from the date.

5.18 Return of Item to a Supplier

On 26th July, the USB cable returned to us on 24th July has been returned to the

supplier. Enter this return into the data file, apply the credit to its original invoice

and update the FIFO stock card.

A detailed description of how this occurs is provided below.

Select Purchases command centre and then choose enter purchases, and you’ll be

presented with the Purchases - New Item window.



1. Select the name of the supplier.

2. Enter the transaction date.

3. Enter the quantity being returned; this must be a negative number.

4. Select the inventory code.

5. In the Journal Memo, we need to identify the original supplier invoice for this

item.





5.19 Inventory Reconciliation

Inventory, like debtors and creditors, needs to be reconciled on a regular basis.

Inventory kept on a periodic basis does not need a reconciliation process as such,

because at the end of the year, when the stocktake is completed, and the journal

transfers for opening and closing stock have been made, any lost or damaged stock will

be absorbed into the Cost of Goods Sold accounts.

When using perpetual inventory, as is the situation here, there is a requirement for

reconciliation to take place on both FIFO cards and on the weighted average inventory

that MYOB keeps. An end of month stocktake has been completed and shows the

figures listed below.

Check these values against those shown in MYOB and also on the manual FIFO

card, and make any appropriate adjustments to the accounts.

STOCKTAKE

Item Count Item Count

ADSL 1Gb Modem Router 54 Personal Computer 7000A 34

8 Port 1Gb Switch 30

Laptop Computer 9500 35 USB Extension Cable (1m) 23

A detailed explanation of how this is done is shown below. The adjustment that we

make first is in MYOB.

Select the Inventory control

centre, and then choose

Count Inventory.

The Count Inventory window

will now be displayed.



1. In the Count Inventory window, the actual count for each item is recorded.

2. The stock quantity variations are shown in the Difference column.

3. Then click on the Adjust Inventory button, and it’s done.

The Adjustment Information window will then

be presented.

1. The Stock Written Off expense account

needs to be selected to allocate this write

off to. Click on the Continue button to

display the Adjust Inventory window.

When this window is open, there are a few things that you need to check or do before

you go on:

1. make sure that the Date is the transaction date,

2. make sure that the Memo entry is appropriately descriptive, and

3. add any additional notes that you may need to clarify what this entry is and why

it occurred.




When checking the inventory count against the manual FIFO stock card, we find a

difference of one unit. There are two (2) issues that need to be addressed here to ensure

that we update our records correctly and adequately:

1. An update of the FIFO card needs to take place and is shown below in detail

with a description of what is being done.

2. A Journal entry needs to be created in our accounting system to account for this

adjustment.

The first thing we need to do is to make the adjustments to the manual FIFO card.

1. The first point is to make sure that the date of this transaction is recorded, in

this instance the 31st July.

2. In the details column, we note that there was a stock loss of one cable. This

means that of the 10 remaining items, the number brought down is reduced by

one and the value recalculated by removing the item cost of $6, giving a total

value of $54.

3. The value of the new stock is also brought down along with its calculated values.

From the stock card, we can now see that the total value of the stock is $131. This value

is calculated by adding together the sum of the 9 units of old stock at $6 each (totalling

$54) and the sum of the 14 units at $5.50 (totalling $77).



The Journal entry

The Journal entry (shown below) will make an adjustment between “Purchases

Cables” in Cost of Goods Sold and “Stock Written off” in expenses. This entry into the

accounting system can be very easily overlooked. If there is no GST included in the

Purchases Cables, then there is no GST adjustment to be made.


31st July 6-400 Stock Written Off 6.00

5-2020 Purchases Cables 6.00

Stock adjustment - Stocktake

5.20 Opening and Closing Stock Entries

At the end of each period, which could be monthly, quarterly, or annually, transfers

need to be made to ensure that the opening and closing stock values reflect what they

actually are at these points in time.

As this is the first monthly period, the adjustment will take place by transferring the

opening stock account to Cost of Goods Sold. The opening value of the stock is shown

in its asset account (see below).


31st July 5-2010 Opening Stock - Cables 100.00

1-4500 Inventory FIFO 100.00

Transfer to opening stock from Inventory

This first entry will return the asset account for inventory FIFO to a zero balance with

its value transferred to opening stock cables in Cost of Goods Sold.


31st July 1-4500 Inventory FIFO 131.00

5-2030 Closing Stock - Cables 131.00

Accounting for Closing Stock

This second entry will pick up the value of the closing stock and place it into the

inventory FIFO account. This closing stock will also be represented in the Cost of

Goods Sold closing stock cables account.



5.21 Project End of Period Reports

Now that the project has been completed we need to print out the reports for July 2013.

These are listed below with the names to save them as.


Inventory Value Reconciliation ACC405 Printout 15 - Inventory value reconciliation

General Journal (All Journals) ACC405 Printout 16 - All Journals

Balance Sheet ACC405 Printout 17 - Balance Sheet

Profit and Loss ACC405 Printout 18 - Profit and Loss

Item Transactions ACC405 Printout 19- Item Transactions

Open Bills and Orders ACC405 Printout 20 - Open Bills and Orders

Learner Guide FNSACC405 Version No. 2.1 Produced 17 August 2018 © Compliant Learning Resources

5.22 FIFO Stock Card for This Assessment

Comserv Pty Ltd - The stock card for the USB cables.

Stock card: First in First out method (FIFO)

Item: USB Cables (1 meter) Main supplier: Cables-n-Things

Minimum stock: 3 units Re-order point: 5 units

Date Details Purchases Sales Balance




Value$

1 Balance b/f

End of Practical Tasks


APPENDIX A – SOLUTIONS TO PRACTICAL SKILLS ACTIVITIES

Printout 1 Accounts List [Summary]

Comserv Pty Ltd

460 Rikon Road

SALISBURY QLD 4107

Accounts List

[Summary]

Account

Current

Balance Assets $150,085.00

Current Assets $90,435.00

Cheque Account ANZ 321486 $45,000.00

Undeposited Funds $0.00

Electronic Clearing Account $0.00

Payroll Cheque Account $0.00

Cash on Hand $0.00

Accounts Receivable $33,570.00

Deposits with Suppliers $0.00

Inventory - Perpetual $11,800.00

Inventory - FIFO $65.00

Non-Current Assets $59,650.00

Computer Equipment $31,850.00

Furniture & Fixtures at Cost $43,000.00

Furniture & Fixtures Accum Dep ($11,150.00)

Office Equipment $27,800.00

Office Equipment at Cost $34,000.00

Office Equipment Accum Dep ($6,200.00)

Liabilities $8,975.00

Current Liabilities $8,975.00

Business Credit Card $1,350.00

Accounts Payable $7,625.00

A/P Accrual - Inventory $0.00

GST Liabilities $0.00

GST Collected $0.00

GST Paid $0.00

Payroll Liabilities $0.00

Default Payroll Liabilities $0.00

Equity $141,110.00

Capital $16,000.00

Retained Earnings $125,110.00

Current Earnings $0.00

Historical Balancing Account $0.00

Income $0.00

Sales - Computers $0.00

Sales - Computer Peripherals $0.00

Sales - Cables $0.00

Interest Received $0.00

Freight Collected $0.00

Cost Of Sales $0.00

COS - Computers $0.00

COS - Computer Peripherals $0.00

COS - Cleaning Hardware $0.00

Open Stock - Cables $0.00

Purchases Cables $0.00

Closing Stock Cables $0.00

Freight Paid $0.00

Expenses $0.00

Advertising $0.00

Bank Charges $0.00

Cleaning $0.00


Depreciation $0.00

Electricity $0.00

Interest Paid $0.00

Office Supplies $0.00

Stock Written Off $0.00

Telephone $0.00

Payroll Expenses $0.00

Wages & Salaries $0.00

Default Employment Expenses $0.00

Printout 2 Aged Receivables [Summary]

Printout 3 Aged Payables [Summary]

Printout 4 Items List [Summary]


Printout 5 Cables-n-Things Order

Printout 6 Itech Purchase Order


Printout 7 CDS Purchase Order

Printout 8 Big Byte Sales Invoice


Printout 9 Network Specialists Sales Invoice

Printout 10 Office Supplies Sales Invoice


Printout 11 Sale Office Supplies

Printout 12 Purchase Cables


Printout 13 Office Supplies Credit

Printout 14 Bank Deposit


Printout 15 Inventory Value Reconciliation

Printout 16 All Journals


Printout 17 Balance Sheet


Printout 18 Profit and Loss

Printout 19 Item Transactions


Printout 20 Open Bills and Orders

Asset Register Card

FIFO Stock Card


ANSWERS TO ACTIVITIES

Activity 1

1. Briefly explain the meaning of inventory and the differences between the

three industry-related forms.

2. Why is managing and maintaining control over inventory so important to a

business?

3. What form of inventory would you expect to find in a painter and decorator

business?

4. What form of inventory would you expect to find in a steel fabrication

business?

5. What is “net realisable value”?

6. Explain the differences between markup and margin.

1. The word “inventory”, also referred to as “stock”, simply means the goods that a

business holds in stock ready for sale, production, or consumption in a production

process or the delivery of services.

The three (3) industry-related forms are:

▪ wholesale and retail industry – inventories are for the purchase and sale of

products;

▪ service industry – inventories include parts necessary to complete repairs;

and

▪ manufacturing industry - inventories include raw materials, work in

progress, and finished goods for resale.

2. Inventories are very important for business because they generate revenue, must

be kept in good condition, must be turned over regularly, are one of the largest costs

for business, are prone to theft and damage, and affect the profitability of business.

3. Since a painter and decorator business offers a service, its form of inventory would

follow that of the service industry, which would include parts necessary to complete

repairs.


4. A steel fabrication business follows the inventory form of the manufacturing

industry which includes raw materials, work in progress, and finished goods for

resale.

5. The net realisable value is the estimated selling price in the ordinary course of

business less the estimated costs of completing the sale.

6. Markup is the percentage that the purchase price (PP) of an item has been

increased by to arrive at the price at which it is sold (SP). Margin, on the other hand,

is the margin value (MV) as a percentage of the selling price (SP).


Activity 2

1. Briefly describe the periodic method of accounting for inventory.

2. Briefly explain GST in relation to inventory purchases.

1. The term ‘periodic’ simply means at various intervals in time. In other words, when

we deal with inventory on a periodic basis, a business will complete a count of the

stock it holds, value is based on its current purchase price, and adjust the

accounting records to suit. The interval in time is usually the annual accounting

period (1st July to 30th June). However, this can be done bi-annually, quarterly, or

even monthly, depending on the needs of the business.

2. The purchase and selling prices of inventories must include GST unless there is an

exemption provided for under the Goods and Services Act (1999). The total of the

GST collected less the total of the GST paid is a liability owing to the Australian

Taxation Office (ATO). The GST collected, and the GST paid entered in liabilities

do not form part of either the gross or net profit as shown on the trading statement

(or profit and loss statement).


Activity 3

1. In what business environment would the standard cost method be used to

value inventory?

2. Briefly explain the weighted average method of accounting for inventory.

3. Briefly explain a FIFO method of accounting for inventory.

4. Identify the two (2) most common perpetual inventory accounting methods.

5. Why should there be no stock movements allowed while the stocktake is in

progress?

1. The standard costs method is principally used where stock items are manufactured

in-house rather than being purchased.

2. For this method, the cost of inventory is the weighted average of the in-stock

balance adjusted at the next purchase. This means that the weighted average cost

is adjusted at every point where there is a stock exchange with a supplier.

3. The FIFO method records the first units of goods purchased as the first units sold.

The physical flow of inventories from the store is required to be in the same order

as they were purchased. The closing inventory value in the balance sheet will show

the value of the most recently purchased items and will reflect the current actual

cost of purchase.

4. The first of these methods is a manual stock item accounting process that uses stock

cards. The second method is through the use of a similar type of process regarding

the accounting for the stock as it is purchased and as it is sold, with the principal

difference being the way the cost of the items sold are accounted for in Cost of

Goods Sold.

5. There should be no stock movements while the stocktake is in progress because if

stock movements are allowed, then the accuracy and integrity of the stocktake and

subsequent costing are compromised.


Activity 4

1. Work in progress is made up of a number of costs associated with the

manufacture of a stock item, what are these costs?

2. Define the term work in progress.

3. What are the inventory accounts used in a manufacturing industry?

1. Work in progress is made up of the following costs: materials control attributed

overheads and labour costs.

2. Work in progress is the value of goods along with the labour expended for goods

that are partly completed at any specific point in time.

3. The inventory accounts used in a manufacturing industry are materials control,

work in progress, and finished goods.


Activity 5

1. Why is it important to select a minimum amount of an item to keep in

inventory that will trigger the purchase of more?

2. What issues are involved in running out of stock?

3. How can a business determine if inventory levels are well managed?

4. Give one (1) disadvantage of using the just-in-time method for ordering

inventory

5. A business produces 3,000 products annually. The cost of one order is $10.

The carrying cost of one unit is 50¢. What is the EOQ?

1. It is important to select only a minimum amount of an item because the money tied

up in inventory may be more profitably used elsewhere in the business. However,

in deciding the minimum amount of an item, the cost of the inventory, ordering

and storage should be considered, and the business should make sure that the

inventory level will not lead to stock shortage/running out of inventory.

2. If a business runs out of stock, it may result in shortages, delays, dissatisfied

customers, and valuable business may be lost. This will hurt sales and of course

profits.

3. A business can determine if computing well manages inventory levels for the

inventory turnover. A high figure for this ratio indicates that the stock is selling

quickly, and this will give the business a good cash flow. It also indicates that there

is a comparatively low danger of stock becoming obsolete. A high figure for the ratio

also indicates that less cash is tied up in inventory and the working capital is being

more effectively used.

4. Sample answers may include but are not limited to:

▪ It may lead to a stock shortage.

▪ This method could lead to stocks that are not received on time.

▪ It may lead to delays in the business.

5. 346 units


Activity 6

1. Identify 3 items that you see as being the most effective communication

skills to develop.

2. Identify 2 items that you see as being the most powerful indicators to show

that you are listening to a client.

3. Identify 2 items that you see as being the greatest barriers to effective

communication.


▪ Giving the person your attention.

▪ Being aware of the other person’s needs.

▪ Keeping an open mind.

▪ Active questioning

▪ Active listening


▪ Paying attention.

▪ Showing the person you are listening.

▪ Providing feedback.

▪ Deferring judgment.

▪ Responding appropriately.


▪ Cultural differences

▪ Speaking too fast or too softly

▪ Noise

▪ Idioms

▪ Language that is too technical

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