Chapter  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 1 ACCOUNTING FOR INVENTORIES LEARNING OUTCOME :  TO ACCOUNT FOR INVENTORIES 7

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 2 KEY TERMS  average costs  cost of goods sold  cost price  first in, first out (FIFO)  inventories  last in, first out (LIFO)  lower of cost or net realisable value  retail inventory  selling price  specific identification  standard cost

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 3 ACCOUNTING STANDARD AASB 1019  Inventories are defined as ‘Goods, other property and services’: Ùheld for sale in the ordinary course of entity’s business Ùin the process of production to be sold in the ordinary course of business, or Ùto be used in the production of goods, other property and services for sale, such as consumable stores and supplies

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 4 LOWER OF COST OR NET REALISABLE VALUE  ‘The estimated proceeds of sales less, where applicable, all further costs to the stage of completion and less all costs to be incurred in marketing, selling and distribution to customers … it should be measured on an item by item basis’

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 5 PHYSICAL INVENTORY METHOD  Essential features of a physical stocktake are: ÙAdequate preparation prior to stocktake to ensure cut-off point for sales/purchases ÙRecorded stock movement during stock count ÙProper instruction to employees ÙIsolation of obsolete stock

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 6 PERPETUAL INVENTORY METHOD  Provides continuous recording of stock movement and balances of units, unit cost and total value at cost price

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 7 PERPETUAL INVENTORY METHOD  Advantages include: ÙLosses and surpluses identified ÙFast- or slow-moving stocks highlighted ÙMore accurate financial reports ÙProfits and losses regularly calculated  Disadvantages include: ÙMore expensive to operate ÙPhysical stocktake still required ÙCannot be applied to all businesses

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 8 METHODS OF VALUING INVENTORIES  Standard costs  Specific identification method  Last in, first out (LIFO)  First in, first out (FIFO)  Stock card

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 9 METHODS OF VALUING INVENTORIES  STANDARD COSTS ÙPredetermined cost is calculated on the basis of what products will be produced with materials costs, labour and overheads applied to item of inventory  SPECIFIC IDENTIFICATION METHOD ÙActual cost clearly shown in inventory ÙNeeds ready identification e.g. stock serial number

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 10 METHODS OF VALUING INVENTORIES  FIRST IN, FIRST OUT (FIFO) ÙFirst goods purchased are recorded as first sold  STOCK CARD ÙMaintained for each stock item ÙCard identifies where stock is stored, maximum and minimum stocks, and reorder level

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 11 LEDGER ACCOUNTS  Ledger accounts at cost price: ÙInventories account ÙCost of goods sold account  Ledger accounts at selling price: ÙSales ÙSales returns

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 12 AVERAGE COST METHOD  Cost of inventory is the average cost of goods at hand at beginning of a period, plus all goods purchased during a period  Average cost is calculated by dividing the total cost of goods available for sale by the number of items

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 13 SUMMARY ACCOUNTING FOR INVENTORIES AT COST PRICE Perpetual inventory stock card First in, First out (The first units in are the first to be costed when stock is issued) Average cost (Number on hand divided into the total value to obtain unit cost) Inventories accountCost of goods sold account

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 14 SUMMARY OF CALCULATION OF GROSS PROFIT OR LOSS Cost of goods sold account (Cost price) Sales (Selling price) Sales returns (Selling price) Trading account (Gross profit/loss)

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 15 RETAIL INVENTORY METHOD OF ACCOUNTING FOR INVENTORIES  Can be used where: ÙPerpetual method is not practical due to large stock movements ÙHigh turnover of stock ÙStock can be grouped according to percentage markup ÙStandard markup can be applied

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 16 RETAIL INVENTORY METHOD OF ACCOUNTING FOR INVENTORIES  This method has: ÙOpening inventory and purchases converted to selling price ÙAlterations to normal selling prices as additional markups ÙMarkdowns for specials ÙEstimate for closing stock values at cost price