1. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd CHAPTER 12 Maintain inventory records Learning outcome Examining and working through different methods of accounting for inventories 12-1

2. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Concepts 1. The preparation of stock cards for: First in first out Weighted average 2. Ledger accounts for both cost and selling prices 3. A comparison of physical and perpetual inventory systems 4. The Retail Inventory method 12-2

3. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd KEY TERMS Cost of goods sold Cost price First in first out (FIFO) Inventories 12-3

4. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd KEY TERMS cont. Lower of cost and net realisable value Retail inventory Selling price Standard costs Weighted average costs 12-4

5. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Inventories ‘Inventory’ is the term used for stock or goods bought and sold by a trading business When acquired inventories are purchases When sold they are sales Those not yet sold are an asset, closing inventories 12-5

6. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Lower of cost and net realisable value Inventories are generally recorded at historical cost But, where it is considered that the sale price will fall below the cost price, the business can reduce the balance to reflect the lower value For example: Obsolete computers and parts Where inventory deteriorates Reduced demand for the product Where there is excess supply in the market 12-6

7. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Physical inventory method Prior to stocktake: Need to ensure a clear cut-off point for sales and purchases Employees completing the stocktake to be properly instructed Obsolete stock isolated Problems of annual stocktake: Disruptive to a business Short-term profit statements are difficult to prepare during the year without a full stocktake Little control over what stock should be there Theft and waste may go undetected 12-7

8. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Perpetual inventory method This is a continuous recording of all stock movements in and out, and the balance on hand Unit costs are included, together with the value of the closing stock on hand 12-8

9. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Advantages and disadvantages of the perpetual inventory method Advantages Losses and surpluses are identified Stock re-order points are easily seen Fast- and slow-moving inventories are highlighted Total of all stock cards is the total value of stock on hand Accurate and timely profit reports can be prepared Disadvantages A physical stocktake is still required It can be costly to operate It cannot be applied to all businesses 12-9

10. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Standard costs A predetermined cost is calculated for a product being manufactured. It is based on: materials costs labour rates overhead expenses 12-10

11. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Inventory stock card A stock card is maintained at cost price, for each different stock item. The stock card shows: the stock item where it is located maximum and minimum stock levels reorder points details of stock movements in and out, together with the balance on hand 12-11

12. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd First in first out method (FIFO) The first units purchased are recorded as the first ones sold irrespective of whether they are allocated from the store in the same order It is about the flow of costs not the flow of goods The closing inventory value in the balance sheet contains the latest prices paid for the goods 12-12

13. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Weighted average cost method This method shows: average costs at the start the average value of closing stock after each purchase the average value of closing stock after each sale The average cost is calculated by dividing the total goods available for sale by the number of items on hand 12-13

14. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Summary of FIFO and average cost methods Accounting for inventories using the perpetual inventory method Two of the acceptable methods: all items at cost price AVERAGE COST ( Number on hand divided into the total value to obtain unit cost) FIRST IN FIRST OUT (The first units in are the first to be costed when stock is issued) PERPETUAL INVENTORY STOCK CARD INVENTORIES ACCOUNT COST OF GOODS SOLD ACCOUNT 12-14

15. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd To calculate gross profit or loss COST OF GOODS SOLD ACCOUNT (COST PRICE) SALES (SELLING PRICE) SALES RETURNS (SELLING PRICE) TRADING ACCOUNT (GROSS PROFIT/LOSS) 12-15

16. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Ledger accounts These ledger accounts are recorded at ‘cost price’: Inventories account Cost of goods sold account There is no ‘Purchases account’ in inventory accounting These ledger accounts are recorded at ‘selling price’: Sales Sales returns 12-16

17. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Retail inventory method This method can be used where: stock movements are large there is a high turnover stock can be grouped to the same percentage mark-up where a standard mark-up for a group of products can be applied Departmental stores and supermarkets are examples of where the retail inventory method can be applied. 12-17

18. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd Features of the retail inventory method Opening inventories and purchases converted to ‘selling price’ Alterations to selling prices as additional mark-ups Markdowns for ‘specials’ An estimate of the closing stock values at ‘cost’ price 12-18