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Accounting for Stock

Accounting for Stock. Definition according to MASB 2. Inventory consists of: Assets owned and held for sale in the normal course of business activities Materials in the process of production and held for sale Direct materials held for production process. Two Types of Recording System.

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Accounting for Stock

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  1. Accounting for Stock

  2. Definition according to MASB 2 • Inventory consists of: • Assets owned and held for sale in the normal course of business activities • Materials in the process of production and held for sale • Direct materials held for production process

  3. Two Types of Recording System 1. Periodic System 2. Perpetual System Key difference between periodic and perpetual inventory…is the point at which the costs of goods sold is computed.

  4. Periodic system • ØCost of merchandise purchased during the year is debited to a purchase account, rather than to the inventory account. • When merchandising is sold, an entry is made to recognize the sales revenue, but no entry is made to reduce the inventory account or to recognize the cost of goods sold. • The inventory on hand and the cost of goods sold for the year are not determined until year-end • At the end of the year, all goods on hand are counted and priced at cost.

  5. Formula to calculates COGS • Stock at the beginning of the year…RM xxxxx Add: Purchases during the year……. RM xxxxx • Cost of goods available for sale … RM xxxxx Less: Stock at the end of the year….. RM xxxxx Cost of goods sold…...……….….. RM xxxxxx

  6. Perpetual system • the inventory account is up-dated every time when transaction-involving inventory happened. • When inventory items are received, it is added and recorded in inventory account. • When items are sold, they are deducted from inventory account. • There4, this system shows how many items are supposed to be on hand at any time. • Physical count at the end of each accounting period is not necessary but, is done only for control purposes • If a physical count of the inventory not equal with inventory record, the company knows that some have been lost or stolen, or that there has been an error in the records.

  7. Learning Goal Describe the accounting for the sale of goods. Link to word document

  8. Sales transaction…. On January 3 Online Solutions sells goods costing $1,200 for $1,800. The customer charges the purchase on a MasterCard. On January 12 Online Solutions sells goods costing $850 on account to Omega Tech for $1,500. Credit terms are 2/10, n/30. Payment is received on January 22. On January 13 Online Solutions issues a $2,000 credit memorandum to Krier Company for goods that was returned. The goods (cost $1,200) was sold on account

  9. On January 3 Online Solutions sells goods costing $1,200 for $1,800. The customer charges the purchase on a MasterCard. Transactions involving MasterCard or Visa are treated as cash sales.

  10. Jan. 3 Cash 1,800 Sales 1,800 This entry is made whether the company uses the periodic or perpetual system. An additional entry is made if the firm uses a perpetual inventory system to record COGS. Jan. 3 Cost of Goods Sold 1,200 Inventory/Stock 1,200

  11. The buyer is allowed a 2% discount if… …the account is paid within 10 days. The net (full) amount is due by the 30th day. Credit Sales with Credit Term for Discounts Credit Terms 2/10, n/30

  12. Credit Sales On January 12 Online Solutions sells goods costing $850 on account to Omega Tech for $1,500. Credit terms are 2/10, n/30. Payment is received on January 22. Periodic & Perpetual system Jan. 12 Debtor Accounts- Omega Tech 1,500 Sales 1,500 + Perpetual system 12 Cost of Goods Sold 850 Inventory/Stock 850

  13. Sales Discounts Jan. 22 Dt. Cash 1,470 Dt.Sales Discounts30 Cr. Debtor Accounts — Omega Tech. 1,500 What Is the Sales Discount Account? • Contra Revenue Accountto sales • Used to disclose amount of cash discounts taken by customers

  14. Sales Returns and Allowances On January 13 Online Solutions issues a $2,000 credit memorandum to Krier Company for goods that was returned. The goods (cost $1,200) was sold on account. Periodic & Perpetual system Contra (offsetting) account to Sales Jan. 13 Dt. Sales Returns and Allowances 2,000 Cr. Debtor Accounts — Krier Company 2,000 + Perpetual system 13 Dt. Stock a/c 1,200 Cr. Cost of Goods Sold 1,200

  15. Describe the accounting for the purchase of goods.

  16. On January 3 Online Solutions purchased $2,500 of goods for cash.. Periodic system Jan. 3 Dt. Purchases Account 2,500 Cr. Cash 2,500 Perpetual system Jan. 3 Dt. Inventory/Stock a/c 2,500 Cr. Cash 2,500

  17. If this transaction had been on account from Max Corporation (terms: 1/15, n/30), the entry would have been: Periodic system Jan. 3 Dt.Purchases Account 2,500 Cr.Creditor Accounts — Max Corporation 2,500 Perpetual system Jan. 3 Dt.Inventory/Stock 2,500 Cr. Creditor Accounts — Max Corporation 2,500

  18. Purchase Discounts Periodic system On January 17 Online Solutions pays Max Corporation the invoice amount (RM2,500) less 1% discount. Jan. 17 Dt.Creditor Accounts —Max Corp. 2,500 Cr. Purchase Discount 25 Cr. Cash 2475 Contra account to Purchases

  19. Purchase Discounts Perpetual system Jan. 17 Dt. Creditor Accounts —Max Corp. 2,500 Cr. Inventory/Stock 25 Cr. Cash 2475 The asset account is reduced

  20. Purchases Returns and Allowances On January 22 Online Solutions returns $5,000 of goods purchased from Quantum Inc. Perpetual system Jan. 22 Dt.Creditor Accounts —Quantum Inc. 5,000 Cr.Inventory/Stock 5,000 Periodic system Jan. 22 Dt. Creditor Accounts —Quantum Inc. 5,000 Cr.Purchase returns a/c 5,000 Contra account to purchases

  21. Companies that use periodic inventory syatem take a physical count to... • determine ending inventory • compute cost of goods sold Companies that use perpetual inventory system must take a physical inventory to check accuracy of “book inventory” to actual inventory. 32

  22. Taking a Physical Inventory • Determining inventory quantities by counting, weighting or measuring each type of inventory. • Determining ownership of goods, including goods in transit,consigned goods. • Quantity of each kind of inventory is listed on inventory summary sheets where unit costs are applied. 33

  23. Income Statement Presentation The income statement for a merchandising company is the same whether a periodic or perpetual inventory system is used, except for the cost of goods soldsection. 40

  24. Illustration 5-3 ABC. INC. Income Statement (Perpetual)For the Year Ended December 31, 2001 Sales revenues Sales $ 480,000 Less: Sales returns and allowance $12,000 Sales discounts 8,000 20,000 Net sales 460,000 Cost of goods sold 316,000 Gross profit $144,000 Operating expenses Selling expenses: Store salaries expense $45,000 Advertising expense 24,000 Freight-out 7,000 Total selling expenses $76,000 Administrative expenses Salaries expense $19,000 Utilities expense 17,000 Insurance Expense 2,000 Total administrative expenses 38,000 Total operating expenses 114,000 Income from operations $ 30,000

  25. Income Statement (Periodic) Illustration 6-6 Sales revenues Sale $ 480,000 Less: Sales returns and allowance $12,000 Sales discounts 8,000 20,000 Net sales460,000 Cost of goods sold Stock, January 36,000 Purchases $ 325,000 Less: Purchase returns and allowances $10,400 Purchase discounts 6,800 17,200 Net Purchases 307,800 Add: Freight-in 12,200 Cost of goods purchased 320,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000 Cost of goods sold 316,000 Gross profit 144,000 Operating expenses 114,000 Net Income $ 30,000

  26. Inventory Costing • Specific Identification method • Cost Flow Assumptions • FIFO- First-in, First-Out- earliest goods purchased first to be sold • LIFO- Last-in,First-Out- latest goods purchased the first to be sold • Average Cost Method- costs are charged on the basis of weighted average unit cost 44

  27. The FIFO method assumes the earliest goods purchased are the first to be sold.

  28. The LIFO method assumes the latest goods purchased are the first to be sold.

  29. The average cost method assumes that goods available for sale are homogeneous.The allocation of the cost of goods available for sale is made on the basis of the weighted average unitcost incurred.

  30. The average cost method assumes that goods available for sale are homogeneous.

  31. Exercise

  32. Income Statement Effects • In periods of increasing prices • FIFO reports the highest net income • LIFO the lowest • average cost falls in the middle. • In periods of decreasing prices • FIFO will report the lowest net income • LIFO the highest • average cost in the middle. 52

  33. Balance Sheet Effects In a period of increasing prices costs allocated to ending inventory using: • FIFO will approximate current costs • LIFO will be understated 53

  34. The Lower of Cost or Market Basis of Accounting for Stock When the value of inventory is lower than its cost, the inventory is written down to its market value by valuing the inventory at the lower of cost or market (LCM) in the period in which the price decline occurs. • Lower of Cost or Market (LCM) • departure from cost principle • follows conservatism concept 55

  35. Describe the accounting for merchandise shrinkage.

  36. When a company uses a perpetual inventory, a physical count is taken at the end of the accounting period to determine the accuracy of the perpetual records and to record any inventory shrinkage.

  37. Online Solutions’ inventory records indicate that $63,950 of goods should be available for sale on December 31, 2007. The physical inventory taken on that date indicates that only $62,150 of merchandise is available for sale. Inventory shrinkage is $1,800 Dt.Cost of Merchandise Sold or, Loss from inventory shrinkage 1,800 Cr. Merchandise Inventory 1,800

  38. Learning Goal Describe and illustrate the effects of inventory misstatements on the financial statements.

  39. Effects of Stock Misstatements Income Statement Effects Stock Shrinkage Misstated Cost of Goods Sold Misstated Gross Profit Misstated Physical Stock Misstatement Net Income Misstated Balance Sheet Effects Net Income Misstated Retained Earnings Misstated Adjusted Stock Misstated Current Assets Misstated Total Assets Misstated Physical Stock Misstatement

  40. Balance Sheet as of December 31, 2007: Inventory $(10,000) Current assets (10,000) Total assets (10,000) Total stockholders’ equity (retained earnings) (10,000) Income Statement for Year Ended December 31, 2007: Cost of goods sold $10,000 Gross profit (10,000) Net income (10,000) On December 31, 2007, Sapra Company incorrectly counted its physical inventory as $115,000 instead of $125,000. Amount of Misstatement Overstated (Understated) 2007 Financial Statements

  41. Balance Sheet as of December 31, 2008: Inventory Correct Current assets Correct Total assets Correct Total stockholders’ equity (retained earnings) Correct Income Statement for Year Ended December 31, 2008: Cost of goods sold $(10,000) Gross profit 10,000 Net income 10,000 On December 31, 2007, Sapra Company incorrectly counted its physical inventory as $115,000 instead of $125,000. Amount of Misstatement Overstated (Understated) 2008 Financial Statements

  42. How Much Inventory Should a Company Have? • Only enough for sales needs • Excess inventory costs: • storage costs • interest costs • obsolescence - technology, fashion 58

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