The valuation of inventory

Inventory at 31 December BoughtSold 2011 January 10 at 30 each 300 April 10 at 34 each 340 October 20 at 40 each 800 =40 = May 8 for 50 each 400 November 24 for 60 each=1440 =32 =1840

First In, First Out method DateReceivedIssued Inventory after each transaction 2011 January 10 at 30 each10 at 30 each =300 April10 at 34 each 10 at 30 each = at 34 each =340 = 640 May8 at 30 each 2 at 30 each =60 10 at 34 each =340 =400 October20 at 40 each 2 at 30 each =60 10 at 34 each = at 40 each =800 =1200 November 2 at 30 each 10 at 34 each 12 at 40 each =24 8 at 40 each =320 (closing inventory)

Last In, First Out method DateReceivedIssued Inventory after each transaction 2011 January10 at 30 each10 at 30 each =300 April10 at 34 each 10 at 30 each = at 34 each =340 =640 May8 at 34 each 10 at 30 each =300 2 at 34 each =68 =368 October20 at 40 each 10 at 30 each =300 2 at 34 each =68 20 at 40 each =800 =1168 November 20 at 40 each 2 at 34 each 2 at 30 each =24 8 at 30 each =240 (closing inventory)

AVerage COst method DateReceivedIssued Average cost per unit of inventory held Number of units in inventory Total value of inventory 2011 January April May October November 10 at at at 40 8 at at * 32 37** (closing inventory) * (10 x 30 =300) + (10 x 34 =340)= /20=32 ** (12 x 32 =384) + (20 X 40 =800)= /32=37

Inventory valuation and the calculation of profits Trading Account for the year ending 31 December 2011 Purchases Closing inventory Cost of goods sold Gross profit FIFO 1440 (320) = =1840 LIFO 1440 (240) = =1840 AVCO 1440 (296) = =1840 Sales FIFO 1840 =1840 LIFO 1840 =1840 AVCO 1840 =1840

Reduction to net realisable value Saleable value - Expenses needed before sales (e.g. what it can be sold for) (e.g. costs of delivery) For example…

Trading Account section of the Income Statement for the year ending 31 December 2011 (a) (b) Sales Purchases Less: closing inventory (5100) (100) =(6000) =(11000) Gross profit =5500 =500 Assume that an art dealer has bought only two paintings during the financial year ended 31 December She started off the year ith out any inventory, and then buys a genuine masterpiece for 6000 and sells it later in the year for The other is a fake, but she does not realise this when she buys it for During the year she discovers that she made a terrible mistake and that its net realisable value is only 100. The fake remains unsold at the end of the year. (a)= inventory is valued at cost (b)= inventory is valued at net relisable value

Inventory groups and valuation Inventory at 31 December 2011 Item Different categories Cost Net relisable value AAABBBCCCAAABBBCCC (1) The category method-the same sort of items are put together in categories. Category Cost Net realisable value A = =630 B = =510 C = =1260 In this method, it uses the lowest cost as the total: Category A: 520 or 630 =520 B: 590 or 510 =510 C: 1190 or 1260 =1190 Inventory is valued for financial statement at =2220 (2) The item method-the lower of cost or net realisable value for each item is compared and the lowest figure taken. Item Valuation =2090

Tasks: (1) From the following figures calculate the closing inventory-in-trade that would be shown using (a) FIFO, (b) LIFO, (c) ACVO method. BroughtSold March 200 at 20 each September 100 at 22 each December 240 for 30 each DateReceivedIssuedInventory after each transaction March September December (a)

(b) DateReceivedIssuedInventory after transaction March September December (c) DateReceivedIssued Average cost per unit of inventory held Number of units in inventory Total value of inventory March20 September20.67* December20.67 *(200 x 20=4000) + (100 x 22=2200) = /300=20.67

(2) For question 1, draw up a tarading account part of the income statement for the year showing the gross profits that would have been reported using (a) FIFO, (b) LIFO, (c) AVCO method. Trading Account for the year ending 31 December Sales Less: Cost of sales Purchases Less: closing inventory Gross profit (a) FIFO(b) LIFO(c) AVCO

Answer: DateReceivedIssuedInventory after each transaction March200 at 20 each200 at 20 each =4000 September100 at 22 each 200 at 20 each at 22 each 2200 =6200 December200 at 20 each 40 at 22 each = at 22 each =1320 (closing inventory) (1a) (1b) DateReceivedIssuedInventory after transaction March 200 at 20 each 200 at 20 each =4000 September 100 at 22 each 200 at 20 each = at 22 each =2200 =6200 December100 at 22 each 140 at 20 each = at 20 each =1200 (closing inventory)

(1c) DateReceivedIssued Average cost per unit of inventory held Number of units in inventory Total value of inventory March200 at 20 each September100 at 22 each20.67* December *(200 x 20=4000) + (100 x 22=2200) = /300=20.67 Trading Account for the year ending 31 December Sales Less: Cost of sales Purchases Less: closing inventory Gross profit (a) FIFO (1320) =(4880) =2320 (b) LIFO (1200) =(5000) =2200 (c) AVCO (1240) =(4960) =2240 (2)