1. Chapter 13

2.  Explain what the perpetual inventory system is?  Explain what the periodic inventory system is?  What is the purpose of a physical stock count if an entity uses a perpetual inventory system?  What is the purpose of a physical stock count if an entity uses a periodic inventory system?

3. 1. Provides correct detail about the status of inventory on an up to date basis. Keeps continual track of inventory balances in expense accounts for the relevant year 2. The system accumulates the purchase costs of trade inventories, as well as other costs incurred in bringing the trade inventories to its present condition and location in expense accounts for the relevant year 3. To verify the number of units on hand. 4. To determine the number of units on hand, then we can calculate the value of cost of sales

5. Perpetual inventory system During the year: 5 Purchase: Sale: & System can provide 1. the number and cost of inventory items that should be on hand at any time; 2. the COS of each sales transaction  Inventories balance & COS figure are always up-to-date Dr Trade Inventories (SFP) Dr Vat Input (SFP) Cr Trade payables/Bank (SFP) Dr Trade receivables/Bank (SFP) Cr Vat output (SFP) Cr Sales (P/L) Dr Cost of sales (P/L) Cr Trade Inventories (SFP) All purchase costs

6. Periodic inventory system During the year: 6 Purchase: & Sale: System CANNOT provide 1. the number and cost of inventory items that should be on hand at any time; 2. the COS of each sales transaction  Inventories balance & COS figure are NOT always up-to-date Dr Purchases (P/L) Dr Vat Input (SFP) Cr Trade payables/Bank (SFP) Dr Trade receivables/Bank (SFP) Cr Vat output (SFP) Cr Sales (P/L) Dr Delivery costs, etc. (P/L) Dr Vat Input (SFP) Cr Payables/Bank (SFP) Split purchase costs

7. Inventory systems Inventory balance at year end: 7 Physical stock count at Y/E will give actual number of inventory items on hand at Y/E

8. Example – Question A Entity purchased inventory with a total purchase price of R12 000 from a foreign supplier, import duties associated with the purchase of such inventory amounted to R8000. All costs have been settled in cash. A entity makes use of the periodic inventory system A Entity preformed a physical stock count, the value of inventory on hand was R3000 Required: Provide all the journals entries for the above transaction. Ignore VAT

9.  Example – Solution  During the year  Dr Purchases (P/L) 12 000  Dr Import duties (P/L) 8 000  Cr Bank (SFP) 20 000  Closing journal  Dr Cost of sales 20 000  Cr Purchases 12 000  Cr Import duties 8 000 Inventory on hand  Trading inventory(SFP) 3000  Cost of sales (P/L) 3000 THINK ASSET DEFINITION

10. Inventory systems Cost of sales figure for the year: 10 Calculation * Inventory balance at the end of the previous year = inventory balance at the beginning of the current year. Opening inventory*xxx + Purchases, etc.xxx - Closing inventory(xxx) = Cost of salesxxx Everything not left over is assumed to be sold.  If there were inv. shortages, are included in COS

11. Inventory systems Cost of sales figure for the year: 11 Under perpetual – have cost of sales figure for the year from inventory system Under periodic – don’t have the cost of sales figure at all Therefore only for periodic need to calculate Cost Of Sales!

12.  What are cost formulas?  Methods used to determine:  the cost of trade inventory on hand at the reporting date.  The cost of sales at the reporting date  Types of cost formulas?  FIFO cost formula  Weighted Average cost formula  Specific identification cost formula  NB:A cost formula is elected by an entity, it is part of the entities accounting policy.

13. Cost formulae 13 Categories of inventory: Specific identifiable inventory items Uniform interchangeable units per inventory item

14. Cost formulae 14 Specific identifiable inventory items Use the specific identification method – where all costs incurred on a specific item are allocated to that specific item to make up it’s cost.

15. Cost formulae 15 What is Uniform interchangeable units of inventory? Trade entities trade inventories that comprise a variety of different items. EXAMPLE: Pick ‘n Pay The entity elects either FIFO OR Weighted average  accounting policy

16. Cost formulae 16 If use perpetual inventory system – and 1.COS and cost of inventories on hand is calculated using the cost formula chosen If use periodic inventory system If use periodic inventory system 1.cost of inventories on hand is calculated using the cost formula chosen and 2.COS is calculated as the balancing figure on the COS account.

17.  The cost of sales and Cost of inventory on hand at year end is calculated based on the assumption:  Units purchased FIRST are sold FIRST

18. DateDetailUnitsR/p.unit (excl VAT) 1 JanOpening Balance2000200 2 FebSales(1200) 5 AprPurchases3000240 15 JunSales(2000) 20 SeptPurchases1500300 21 DecSales(1500) 1) Calculate Cost of sales per sales transaction 2) Calculate Rand Value of inventory on Hand

19. DateDetailNo of unitsR per unitCalculationCost of Sales 1 JanOpening Balance 2000200 2 FebSales(1200)1200 x 200240 000 5 AprPurchases3000240 15 JunSales(2000)(800 x 200) + (1200 x 240) 448 000 20 SepPurchases1500300 21 DecSales(1500)1500 x 240360 000 1800 Rand Value Units on hand: (300 x 240) + (1500x300) = R522000

20. DateDetailUnitsR/p.unit (excl VAT) 1 JanOpening Balance2000200 2 FebSales(1200) 5 AprPurchases3000240 15 JunSales(2000) 20 SeptPurchases1500300 21 DecSales(1500) 1) Calculate Cost of sales per sales transaction 2) Calculate Rand Value of inventory on Hand- Physical stock count = 1800 units

21. DateAccountAmountDateAmount 1 JanTrade inventory 400 00031 DecTrade inventory 522 000 Dec 31Purchases1 170 00031 DecRetained Earnings 1 048 000 1570 000 COST OF SALES DR CR

22.  Under the periodic inventory system COS is a balancing figure calculated as  Opening stock + Purchases – Closing stock = COS

23.  The cost of sales amount is calculated at the weighted average cost per unit at the time of sale  The cost of inventory on hand at year end is calculated at the weighted average cost per unit at the reporting date  How to calculate  Rand value of Inventory (opening balance)+ Rand value of purchases Number of units = Weighted average cost per unit

24. DateDetailUnitsR/p.unit (excl VAT) 1 JanOpening Balance2000200 2 FebSales(1200) 5 AprPurchases3000240 15 JunSales(2000) 20 SeptPurchases1500300 21 DecSales(1500) 1) Calculate Cost of sales per sales transaction 2) Calculate Rand Value of inventory on Hand

25. DateDetailNo of unitsR per unitCalculationCost of Sales 1 JanOpening Balance 2000200 2 FebSales(1200)1200 x 200240 000 5 AprPurchases3000240 15 JunSales(2000)(800 x 200) + (3000 x 240)/ 3800= 231,58 231.58 x 2000 463 160 20 SepPurchases1500300 21 DecSales(1500)1800 x 231.58) + (1500 x 300))/ 3300 = 262.68 262.68 x 1500 394 020 1800 Rand Value Units on hand: (1800 x 262.68) = R472 824

26. DateDetailUnitsR/p.unit (excl VAT) 1 JanOpening Balance2000200 2 FebSales(1200) 5 AprPurchases3000240 15 JunSales(2000) 20 SeptPurchases1500300 21 DecSales(1500) 1) Calculate Cost of sales per sales transaction 2) Calculate Rand Value of inventory on Hand- Physical stock count = 1800 units

27.  Calculate Cost of Sales at the end of the year  Therefore calculated Weighted Ave cost per unit at year end  Calculation  Opening stock Rand Value+ Purchases Rand value/ Number of units  (400 000 + 720 000 + 450000)/ 6 500 = R241,54 per unit  241, 54 x 1800 = 434 772

28. DateAccountAmountDateAmount 1 JanTrade inventory 400 00031 DecTrade inventory 434 722 Dec 31Purchases1 170 00031 DecRetained Earnings 1 135 228 1570 000 COST OF SALES DR CR

29. Retail method 29 What is the retail method? A cost technique used to determine cost of inventory on hand Can only use if: have fairly constant gross profit margin cost as calculated approximates the actual cost selling prices of inventory on hand are available Ask yourself if the above applied to the scenario you are doing.

30. Cost is calculated by reducing sales price of the inventories with the gross profit Cost = Sales price – Gross profit Example: 13.7 page 492

31. Clothing Trade inventory on hand:R At normal sales prices9 800 000 Average gross profit margin on sales40% Determine the cost of trade inventory? Cost = Sales price – Gross profit

32.  Gross profit margin calculated on sales therefore  Selling price = 100%  Cost = Sales price – Gross profit Cost = 100% – 40% Cost = 60% R9800 000 (Selling price) x 60% = R5 880 000