Chapters 6 and 7

1. What does the term “current asset” mean? 2. What is the difference between reporting date and approval date? 3. What is the review process? 4. What happened if a journal has been omitted in Feb for a reporting period end of December? 5. What happened if an error was discovered after reporting date but before approval date?

As part of the year-end review process, the following has to be ensured in respect of trade inventories:  that trade inventories which were taken by the owner for personal use, have every time been recognised as drawings;  that write-downs to net realisable value have been recognised, where necessary; and  that all inventory shortages (in respect of the perpetual inventory system) have been recognised.

Perpetual inventory system Perpetual inventory system –  provides correct detail of the status of trade inventories on a up to date (day to day) basis  Purchases of inventory are debited against an asset account – Trade inventories and credit either Trade payables or bank.  Perpetual system accounts for changes in inventory per transaction

 Periodic system  Less sophisticated compared to the periodic system  Trade inventories purchased are recognised as an expense by debiting the purchase account and crediting either trade payables or bank.  Trade inventories sold are recognised by debiting the bank account or the specific trade receivable’s account and crediting the sales account. The cost of sales is not recognised simultaneously with the individual sales transaction.  When is cost of sales accounted for?  At the end of the reporting period.  Therefore this system accounts for changes in inventory only at year end

Example Opening inventories R Purchases R Closing inventories (R40 000) R = Cost of salesR = Only by way of a stock count

Step 1: To get rid of prior year inventories (assume sold first): Dr Cost of salesR Cr Inventories (opening inv)R Step 2: Close off purchases account (temporary account) to cost of sales) Dr Cost of salesR Cr PurchasesR Step 3: Inventory count at ye shows R of inventory is on hand/not sold Dr Inventories (closing)R Cr Cost of saleR Therefore cost of sales is?

 Drawings of the owner can either take the form of:  Withdrawal of cash from the entity or  Withdrawal of inventory from the entity.  NB: when the owner takes something from the entity for personal use- its considered as drawings

 On 31 Dec, the inventory system indicated that the owner withdrew trade inventories with a cost of R NrDrCr 31 Dec Drawings (SCE) Trade inventories Recognise the withdrawel of trade inventories (at cost price (Why?) by the owner

 The system will indicate the number of units of inventory that should be on hand at year end.  The entity preforms stock counts at year end.  The number of units counted in the stock count are compared to the number of units indicated by the system.  If the number of units counted is less than the number of units indicated by the system- there is an inventory shortage.  Inventory shortage could also be a result of inventory becoming obsolete, theft etc  Therefore process a transaction to account for such shortage/loss

Recognition of inventory shortages 11 On 31 December the inventory system indicated that obsolete and damaged trade inventory items with a cost of R should be written off. The owner authorised the write-off NrDrCr 31 Dec Loss with inventory shortages(P/L) Trade inventories (SFP) Recognise the write off of obsolete and damaged inventories = Will end up in Cost of Sales (how?)

 Initial recognition of inventory:  Historic cost price  Subsequent measurement:  Lower of:  Cost and  Net realisable value  What is net realizable value?  The estimated selling price that can be obtained for such inventory

 Why would cost exceed the selling price (NRV)?  If cost exceeds the selling price- we need to write the cost down to its selling price and recognise an impairment loss through P/L

Recognition of write-down of inventory items to net realisable value 14 On 31 December the inventory system indicated that certain inventory items cost is R more than the estimated sales price. Owner authorised the write down NrDrCr 31 Dec Loss with write down of inventories to NRV(P/L) Trade inventories (SFP) Recognise the write down of the cost of certain inventory items to the NRV thereof = it is a temporary account and will be closed off against cost of sales.

 Income, expenses and drawings are not accumulated directly against retained earnings during the reporting period, but are accumulated in appropriate accounts for individual income- items, individual expense-items and drawings. temporary accounts.  Income and expense accounts are temporary accounts.  These temporary accounts must be closed off to P/L (retained earnings) at year end