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TOPIC 8

TOPIC 8. ACCOUNTING FOR INVENTORIES. ACCOUNTING FOR INVENTORIES. DEFINITION: FRS 102 : Inventory is an asset that owned by the business is for the purpose of selling to the customer. Managing inventory is done to determine: 1. Inventory in hand 2. Inventory available for sale

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TOPIC 8

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  1. TOPIC 8 ACCOUNTING FOR INVENTORIES

  2. ACCOUNTING FOR INVENTORIES DEFINITION: FRS 102: Inventory is an asset that owned by the business is for the purpose of selling to the customer. Managing inventory is done to determine: 1. Inventory in hand 2. Inventory available for sale 3. Cost of goods sold.

  3. Inventory Control • Establishment of responsibility: every inventory counter is accountable by different person. • Segregation of duties: a person who record the inventory are not the same as a person who make a count and also not the same person distribute the inventory. • Independent Internal Verification: make a second count and verify the balance by a different person. • Documentation Procedure: numbering tag or barcode is paste to the inventory and each sales is made using on-line basis. • Physical, mechanical and electronic control: make a physical stock count frequently.

  4. Inventory Accounting System There are two basic systems of accounting for inventories may be used: 1. Perpetual Inventory system (Sistem Berterusan) • Periodic Inventory System (Sistem Berkala) Differences between these two systems:

  5. Valuation of Inventory 1. First In First Out (FIFO) - first items purchase will be sold first. • Last In First Out (LIFO) - last item purchase will be sold first. • Weighted Average (WA) - make an average cost per unit purchase of the goods.

  6. Example: The information below regarding an inventory product name AIA for a year 2001: The physical stock counts on 31 Dec 2001 show a balance of 400 units.

  7. Total Stock (unit) - total Sales (unit) = Closing stock (unit) [Opening stock + Purchase] – Total Sales = Closing Stock 100 unit + 1100 unit - 800 unit = 400 unit. a) FIFO - Periodic: Cost of Good Sold: Opening Inventory 800 Add: Purchase 12,600 13,400 Less: Closing Stock 5,000 COST OF GOOD SOLD 8,400

  8. b) FIFO - PERPETUAL

  9. LIFO - Periodic: Cost of Good Sold: Opening Inventory 800 Add: Purchase 12,600 13,400 Less: Closing Stock 3,800 COST OF GOOD SOLD 9,600

  10. WEIGHTED AVERAGE Periodic Weighted Average cost per unit = Opening Inventory + Purchases Total unit available for sale RM800 + RM12,600 (100 + 1,100) unit = RM11.17 per unit Closing Inventory = 400 unit x RM11.17 = RM4,468 COGS = 800 unit x RM11.17 = RM8,932

  11. Perpetual

  12. Effect of using different method: • Inflation Assume that the purchase price is increasing: FIFO: The lower price of the inventory will be taken out first; this will lower down the cost of goods sold of the inventory. Thus the profit will be increased. LIFO: The higher price of the inventory will be taken out first; this will increase the cost of good sold of the inventory. Thus the profit will be decreased.

  13. Deflation: - deflation (lower price of the inventory) will give a reverse situation whilst using either FIFO, LIFO or WA.

  14. VALUING INVENTORY AT THE LOWER OF COST OR MARKET (LCM) Alternative method of valuing inventory in a situation of declining of value of inventory lower than cost (due to changes in technology or fashion) Conservatism: the best choice is to select the method that is least likely to overstate asset and net income. The method: The value of inventory should be written down from the cost price to market price in situations where market is below cost. Market price: • “Current replacement cost” not selling price. • A cost of purchasing the same goods at the present time from the usual supplier.

  15. Reporting in the Financial Statement: Cost of Goods Sold: Opening Inventory + Cost of Good Available for Sale - Closing Stock.

  16. Income Statement – Periodic System ________________________________________________________ Opening Inventory 2, 000 Add: Purchase 20,000 Carriage Inward 2, 500 Import Duty 1, 500 24, 000 (-) Return Inward (1, 000) 23, 000 Cost of Goods Available for sale 25, 000 (-) Closing Stock (5, 000) Cost of Good Sold 20, 000

  17. Income Statement - Perpetual System; ________________________________________________ Sales xxx Less: Cost of Good Sold xx Less: Inventory Shortage xxxx Gross Profit xxx

  18. EFFECT ON PROFIT: OVER/UNDERSTATE VALUE OF INVENTORY

  19. Journal Entries for Purchasing of Goods

  20. Jan. 1 InventoryStock . . . . . . . . . . . . . . . . 100 Accounts Payable. . . . . . . 100 Purchased 10 hats @ $10. Jan. 1 Purchases . . . . . . . . . . . . . . . 100 Accounts Payable. . . . . . . 100 Purchased 10 hats @ $10. Example: Journal Entriesfor Purchases Harper purchased 10 hats at $10 each on January 1.Record the entries for both perpetual and periodic systems. PERPETUAL PERIODIC

  21. Mar. 1 Creditor/Accounts Payable (or Cash) 45 Inventory/stock . . . . . . . . . . . . . . 45 Returned 3 hats @ $15. Mar. 1 Creditor/Accounts Payable (or Cash) 45 Purchase Returns/Return Outward. . . 45 Returned 3 hats @ $15. Example: Journal Entriesfor Purchase Returns Of the 15 hats delivered on March 1, three were defective and Harper returned them the same day.Record the entries for both the perpetual and the periodic inventory systems. PERPETUAL PERIODIC

  22. Mar. 1 Inventory/stock . . . . . . . . . . . . . . . . 10 Cash. . . . . . . . . . . . . . . . . . 10 Delivery charge on 15 hats. Mar. 1 Freight In/Carriage Inward. . . . . . . . . 10 Cash. . . . . . . . . . . . . . . . . . 10 Delivery charge on 15 hats. Example: Journal Entriesfor Transportation Cost Harper hired a trucking company to deliver its March 1 purchase of 15 hats. The trucking company charged $10.Record the entries for both the perpetual and the periodic systems. PERPETUAL PERIODIC

  23. May 2 Accounts Payable (or Cash) 200 Inventory . . . . . . . . . . . . . . 4 Cash . . . . . . . . . . . . . . . . . . 196 Purchase discount on 10 hats. May 2 Accounts Payable (or Cash) 200 Purchase Discounts . . . . . 4 Cash . . . . . . . . . . . . . . . . . . 196 Purchase discount on 10 hats. Example: Journal Entriesfor Purchase Discounts On May 2, Harper purchased 10 hats at $20 each. The supplier offered terms of 2/10, n/30. Record the entries for both the perpetual and the periodic inventory systems. PERPETUAL PERIODIC

  24. Journal Entries for Sales of Goods

  25. Jun. 30 Debtor/Accounts Receivable (or Cash) 500 Sales . . . . . . . . . . . . . . . . . . . . 500 Sold 20 hats @ $25. Jun. 30 Cost of Goods Sold . . . . . . . . . . 250 Inventory/stock (10 @ $10; 10 @ $15) 250 Record cost of goods sold. Jun. 30 Debtor/Accounts Receivable (or Cash) 500 Sales . . . . . . . . . . . . . . . . . . . . 500 Sold 20 hats @ $25. No entry. Example: Journal Entriesfor Sales In June, Harper’s Hats sold 20 hats for $25 each (selling the old ones first).Record the entries for both the perpetual and the periodic systems. PERPETUAL PERIODIC

  26. Jul. 3 Sales Returns/Return Inward . . . . . . . . . 25 Debtor/Accounts Receivable. . . . . . . 25 1 hat returned from June purchase. Jul. 3 Inventory/stock. . . . . . . . . . . . . . . . . . . 15 Cost of Goods sold . . . . . . . . 15 Placed returned hat back into inventory. Jul. 3 Sales Returns/retutn Inward. . . . . . . . . . 25 Debtor/Accounts Receivable. . . . . . . 25 1 hat returned from June purchase. No entry. Example: Journal Entriesfor Sales Returns On July 3, one hat was returned from a late June purchase.Record the entries for both the perpetual and the periodic inventory systems. PERPETUAL PERIODIC

  27. OTHER CURRENT ASSET 1. SHORT TERM INVESTMENT Definition: Investment made for a period of less than one year and veryeasy to change in the cash term. Example ; investment in Marketable securities (Treasury Bill) The objective of investment is to earn interest and dividends. Types: - investment in government bond - investment in stock of large corporation Reasons: Stock and bonds traded on organized securities markets, such as Bursa Malaysia, are readily marketable because can be bought and sold daily. Therefore, easy to convert into cash when it is needed.

  28. Accrued Revenue • Prepaid Expenses • Presentation in Financial Statement • Current Asset • Cash • Bank • Investment • Accrued Revenue • Prepaid Expenses.

  29. Types of Adjustment Entries – Accruals • Accruals represent the amount owe to or from other party (must be added to the final account) • Accrued Expenses-CL • -Expenses incurred but not yet paid or recorded at the statement date are accrued expenses. • -accrued expense is shown as current liability on the balance sheet • -Example: interest, salaries, taxes. • Accrued Revenues-CA •     -Revenues earned but not yet received in cash are accrued revenues. • -Revenues earned but not yet recorded at the statement date are accrued revenues. • -Example: interest, rent, commissions

  30. Accrued Revenue  accrued revenue is included as revenue in the income statement and shown as a current asset on the balance sheet. • Example: Anna owns a shop and prepares account to 31 December each year. She was renting the shops lot of RM300 per month.The amounts of rent received from the tenant during the year to 31 Dec 2003 are RM3300. • On 31 Dec 2003 – expected rent received - RM3600 • ( RM300 x 12) • Rent actual received – RM3300 • Accrued Rent Revenue – RM300

  31. Journal entries 31 Dec 2003 Dt Accrued Rent Revenue 300 Cr Rent Revenue 300 (Being rent owes by the tenant)  Ledger Accounts Rent Revenue a/c 31/12/03 Cash 3,300 31/12/03 P & L 3,600 31/12/03 Accrued Rent 300 3600 3600 Accrued Rent Received Account 31/12/03 Rent Revenue 300 31/12/03 Bal c/d 300 31/12/03 Bal b/d 300

  32. Types of Adjustment Entries • Prepayments- represent the amount paid or amount received in advance (deducted from final account) • 2 types of prepayment: •  prepaid expenses (amount paid in advance)-CA •  prepaid revenue (amount received in advance)CL

  33. Prepaid Expense 2 ways in recording prepaid expense: • All the amount paid is recorded as an expense. At the end of the accounting year, the unused amount will be adjusted as a prepayment and is shown as a current asset on the balance sheet • example: insurance, advertising  Initial entry: Dt Expense xx Cr Cash xx  Adjusting entry: Dt Prepaid Expense xx Cr Expense xx

  34. Prepaid Expense 2) Expense paid in cash are recorded as an asset before they are used or consumed; A recognition of expense is done when they expire with the passage of time or through use and consumption. Example: purchase of supplies  Initial entry: Dt Supplies Account (Prepaid Expense) xx Cr Cash xx  Adjusting entry: Dt Supplies Expense xx Cr Supplies Account (Prepaid Expense) xx

  35. Example: On 1st July 2003 Pointer Advertising Agency paid RM6000 for the one year insurance policy. The effective date of coverage is on 1 July 2003. The account is prepared until 31 Dec 2003. Accounting period – Start 1 Jan 2003 and closed 31 Dec 2003 Insurance Period - 1 July 2003 until 30 June 2004 Therefore Insurance Expense- 6 months (RM3000) i.e.1July to 31 Dec 2003 Prepaid Insurance – 6 months (RM3000) i.e. 1Jan 2004 to 30 June 2004.

  36. Method 1: record as an expense Initial entry 1 July 03 Dt Insurance Expense 6,000 Cr Cash 6000 (Being the insurance paid in advance) Adjusting entry 31 Dec 03 Dt Prepaid Insurance 3,000 Cr Insurance Expense 3000 (Being the insurance paid in advance)

  37.  Ledger Accounts Insurance Expense Account 1/07/03 Cash 6,000 31/12/03 Prepaid Insurance 3,000 31/12/03 P & L 3,000 6,000 6,000 Prepaid Insurance Expense Account 31/12/03 Insurance exp. 3000 31/12/03 Bal c/d 3000 1/1/04 Bal b/d 3000

  38. Exercises on Inventory 1. Berikut adalah belian dan jualan Syarikat Zamani dalam bulan September 19X6. Dikehendaki: Dengan menggunakan kedua-dua sistem iaitu berterusan dan berjangka, kira nilai stok akhirnya mengikut kaedah: a) FIFO (MDKD) b) LIFO (MKKD) c) Kos Purata

  39. Total Stock (unit) - total Sales (unit) = Closing stock (unit) [Opening stock + Purchase] – Total Sales = Closing Stock 0 unit + 340 unit - 800 unit = 90 unit. a) FIFO - Periodic: Cost of Good Sold: Opening Inventory 0 Add: Purchase 790 790 Less: Closing Stock 490 COST OF GOOD SOLD 300

  40. 2. Belian dan jualan Syarikat Almi Berhad pada bulan Disember 19X7 adalah seperti berikut: Belian 1 Disember 19X7 700 unit @ RM7.00 5 500 unit @ RM8.00 20 400 unit @ RM7.50 30 600 unit @ RM8.50 Jualan 2 Disember 19X7 300 unit 8 700 unit 15 100 unit 25 50 unit 31 100 unit Dikehendaki: Dengan menggunakan kedua-dua sistem tunjukkan kiraaan nilai stok akhirnya mengikut kaedah: 1. FIFO 2. LIFO 3. Kos Purata

  41. 3. Syarikat Jelapang Sdn Bhd mempunyai data tentang belian dan penggunaan bahan mentah dalam bulan Jun 19X2. Jan 1 Baki Inventori 1500 unit @RM1.50 Belian 30000 unit @ RM1.20 Penggunaan 8500 unit Jan 4 Pemulangan 1000 unit @ RM1.20 Jan 5 Penggunaan 15500 unit Belian 15000 unit @ RM1.24 Jan 7 Pemulangan 2200 unit @ RM1.24 Penggunaan 10000 unit Anda dikehendaki a) Dengan mengandaikan syarikat menggunakan sistem inventori berjangka kirakan nilai inventori penutup dengan menggunakan kaedah MDKD dan MKKD. b) Dengan mengandaikan syarikat menggunakan sistem inventori berterusan kirakan nilai inventori penutup dengan menggunakan kaedah MDKD dan MKKD.

  42. Pop Quiz 1. Apakah yang dimaksudkan dengan peruntukan hutang ragu? Mengapakah perniagaan perlu membuat peruntukan ini? • Syarikat Jujur merekodkan baki akaun penghutang pada 1/12/2002 adalah RM45,000. Urusniaga yang berlaku sepanjang bulan 12 adalah seperti berikut: - Jualan kredit – RM32,000 - Kutipan dari penghutang – RM35,000 - Hutang Lapuk dihapuskira – RM550 - Diskaun diberi – RM400. Syarikat bercadang untuk membuat peruntukan hutang lapuk 5% dari baki akaun penghutang. Tunjukkan catatan untuk menghapuskira hutang lapuk dan peruntukan hutang lapuk.

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