Bài giảng kế toán kiểm toán chapter 3 inventories

Outline Inventory concept  Internal control  Two accounting systems to record inventory  The cost of inventory  Inventory valuation  Chapter 3 Inventories 2 Inventory concept Inventory definition Definition  Types of inventory  Physical quantities included in inventory  Assets that:  held for sale in the ordinary course of business,  in the production process for sale in the ordinary course of business, and  in the form of materials or supplies to be consumed in the production process or in the rendering of services  Exclude? 3 4 1 Physical quantities included in inventory Types of inventory  Merchandising inventory   Goods in Transit  Goods on Consignment  Sales Returns  Purchase goods in finished form Manufacturing inventories Raw materials Work-in-process  Finished goods   5 6 Goods in Transit Goods on consignment Inventory shipped FOB shipping point is included in the purchaser’s inventory as soon as the merchandise is shipped.  Inventory shipped FOB destination (CIF) is included in the purchaser’s inventory only after it reaches the purchaser’s destination.   7 Goods held on consignment are included in the inventory of the consignor until sold by the consignee. 8 2 2. Internal control 2.1 Purchasing procedures 2.1 Purchasing procedures 2.2 Purchasing documentation Requisition Stores/production Identify supplier Purchasing Order goods Receive goods Stores Pay for goods Accounts 9 2.2 Purchasing documentation 1. 2. 3. 4. 5. 10 Dispatch Note We are pleased to inform you that your goods were sent today. (The goods are on their way) Purchase requisition form Order form Dispatch note Delivery note Goods received note We hereby inform you that your goods will be delivered tomorrow. (How long it is likely to take) We hope that the goods will arrive in perfect condition. We look forward to doing business with you again. 11 12 3 Goods received note Delivery note A written document from the seller to the buyer that accompanies a delivery of goods and specifies type of goods and quantity. A document produced when goods are received into the factory. It will usually accompany goods to any inspection and is used to check against invoices before payment (made by the buyer) 13 14 What is it? 2.4 Other inventory documents We have received your delivery. Your delivery arrived in perfect condition on … Thank you very much for executing our order professionally. The invoice  Material requisition  Bin card  Stores ledger account  15 16 4 Check the invoice Materials requisitions (a) That the goods have been delivered and are in satisfactory condition (check goods received note). (b) That the price and terms are as agreed (look at the purchase order). (c) That the calculations on the invoice are correct (including sales tax (or VAT)). A materials requisition will be completed when materials are needed from stores by the production department. An official from production will sign the form to authorize it  It is then used as a source document for: (a) Updating the bin card in stores; (b) Updating the stores ledger account in the costing department; and (c) Charging the job, overhead or department that is using the materials. (compare with Purchase requisitions)  17 Bin cards a. b. c. d. e. f. g. 18 Stores ledger accounts Description Inventory code Inventory units Bin number Issues to production Receipts Balance They carry all the information that a bin card does, but there are two important differences:  Cost details are recorded in the stores ledger account.  The stores ledger accounts are written up and kept separate from the stores by a clerk experienced in costing bookkeeping. 19 20 5 Two inventory accounting systems Perpetual inventory system Perpetual inventory system  Periodic inventory system   A perpetual inventory system continuously records both changes in inventory quantity and inventory cost. 21 22 Illustration  Periodic inventory system The Lothridge Wholesale Beverage Company purchases soft drinks from producers and then sells them to retailers. The company begins 2003 with merchandise inventory of $120,000 on hand. During 2003 additional merchandise is purchased on account at a cost of $600,000. Sales for the year, all on account, totaled $820,000. The cost of the soft drinks sold is $540,000. Lothridge uses the perpetual inventory system to keep track of both inventory quantities and inventory costs. A periodic inventory system adjusts inventory and records cost of goods sold only at the end of each reporting period  Cost goods sold equation Beginning inventory + Net purchases – Ending inventory = Cost of goods sold  23 24 6 Illustration  The cost of inventory The Lothridge Wholesale Beverage Company purchases soft drinks from producers and then sells them to retailers. The company begins 2003 with merchandise inventory of $120,000 on hand. During 2003 additional merchandise is purchased on account at a cost of $600,000. Sales for the year, all on account, totaled $820,000. The cost of the soft drinks sold is $540,000. Lothridge uses the periodic inventory system. Give your treatment with these costs: a. Manufacturing overhead b. Waste c. Storage cost d. Trade discount e. Handling cost f. Selling cost g. Interest cost h. Transportation cost  25 A comparison of two systems  26 The cost of inventory A perpetual inventory system provides more timely information but generally is more costly than a periodic inventory system.  27 Includes all necessary expenditures to acquire the inventory and bring it to its desired condition and location for sale or for use in the manufacturing process 28 7 Expenditures included in inventory Purchase Discounts Freight-In on Purchases (transportation-in)  Purchase Returns  Purchase Discounts   On October 5, 2003, the Lothridge Wholesale Beverage Company purchased merchandise at a price of $20,000. The repayment terms are stated as 2/10, n/30. Lothridge paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4. Lothridge employs a periodic inventory system. 29 30 Gross method vs Net method Inventory valuation By either method, net purchases is reduced by discount taken.  Discount not taken are included as purchases using the gross method and as interest expense using the net method. Pricing techniques  Inventory valuation   31 32 8 Pricing techniques IAS 2 For items that are not interchangeable, specific cost are attributed to the specific individual items of inventories (a) FIFO – First in, first out (b) LIFO – Last in, first out (c) Weighted average pricing method (d) Specific cost For items that are interchangeable , IAS 2 allows the FIFO and weighted average cost formulas The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the enterprise 33 34 (a) FIFO – First in, first out FIFO - Advantages It is logical as the oldest stock is likely to be used first: Easy to understand and explain  Closing stock is valued near replacement cost Values issues at the price of the oldest items in inventory at the time the issues were made. The remaining inventory thus will be valued at the price of the most recent purchases.  35 36 9 FIFO - Disadvantages (b) LIFO – Last in, first out Cumbersome to operate because of the need to identify each batch of material separately  Variety of price for the same material may make it difficult to compare cost and make decision the opposite of FIFO. Issues will be valued at the price of the most recent purchases; hence the remaining inventory will be valued at the price of the oldest items.  37 38 LIFO - Advantages LIFO - Disadvantages Cumbersome to operate because of the need to identify each batch of material separately: Difficult to explain as it is opposite to what is physically happening  Variety of price for the same material may make it difficult to compare cost and make decision Issue at cost close to current market value make it easy for decision making  39 40 10 (c) Weighted average pricing method LIFO/FIFO Receipt Date 17/08 Issue Quant. Price ($) Value ($) 150 1.50 225 Quant. 18/08 19/08 1.75 1.50 82.50 210 Cumulative weighted average pricing: calculating average cost whenever a new delivery is received  Periodic weighted average pricing: calculating average cost at the end of a given period.  Balance ($) Value ($) 150 x 1.50 = 225.00 55 120 Price ($) 95 x 1.50 = 142.50 95 x 1.50 = 142.50 120 x 1.75 = 210.00 20/08 70 1.50 105.00 25 x 1.50 = 37.50 120 x 1.75 = 210.00 31/08 Stock valuation 247.50 41 42 Cumulative weighted average pricing Periodic weighted average pricing Receipt Date Quant Price ($) Issue price = (Cost of all receipts in the period + Cost of opening inventory)/(Number of units received in the period + Number of units of opening inventory) 17/08 150 1.50 Issue Value ($) 120 1.75 Price ($) Value ($) 55 1.50 82.50 225 18/08 19/08 150 x 1.50 = 225.00 210 20/08 95 x 1.50 = 142.50 215 x 1.64 = 352.60 (W) 70 31/08 Balance ($) Quant 1.64 Stock valuation 114.80 145 x 1.64 = 237.80 237.80 Workings: $ 95 Stock units x $1.50 = 43 142.50 120 Stock units x $1.75 = 210.00 215 352.50 $352.50/215 units = 1.64 44 11 Pricing Inventory at Lower of Cost or Market (LCM) Inventory Evaluation Inventories might be valued at 1.Expected selling price 2.Net realizable value (NRV) (= expected selling price – cost incurred in getting them ready for sale and then selling them) 3.Historical cost 4.Current replacement cost LCM requires that when the market price of inventory falls below historical cost, the inventory is written down to the lower value and a loss is recorded In US, “market” for LCM purpose can be defined as replacement cost which should not: - Exceed the net realizable value - Be less than net realizable value reduced by an allowance for an approximately normal profit margin 45 LCM can be applied to individual inventory items, to logical category of inventory, or to the entire of inventory 46 Disclosure Accounting policy for inventories  Carrying amount of inventories pledged as security for liability  Amount of any write-down of inventories recognized as an expense in the period  47 12 [...]... x 1.50 = 225.00 210 20/08 95 x 1.50 = 142.50 215 x 1.64 = 35 2.60 (W) 70 31 /08 Balance ($) Quant 1.64 Stock valuation 114.80 145 x 1.64 = 237 .80 237 .80 Workings: $ 95 Stock units x $1.50 = 43 142.50 120 Stock units x $1.75 = 210.00 215 35 2.50 $35 2.50/215 units = 1.64 44 11 Pricing Inventory at Lower of Cost or Market (LCM) Inventory Evaluation Inventories might be valued at 1.Expected selling price 2.Net... can be applied to individual inventory items, to logical category of inventory, or to the entire of inventory 46 Disclosure Accounting policy for inventories  Carrying amount of inventories pledged as security for liability  Amount of any write-down of inventories recognized as an expense in the period  47 12 ... average cost at the end of a given period  Balance ($) Value ($) 150 x 1.50 = 225.00 55 120 Price ($) 95 x 1.50 = 142.50 95 x 1.50 = 142.50 120 x 1.75 = 210.00 20/08 70 1.50 105.00 25 x 1.50 = 37 .50 120 x 1.75 = 210.00 31 /08 Stock valuation 247.50 41 42 Cumulative weighted average pricing Periodic weighted average pricing Receipt Date Quant Price ($) Issue price = (Cost of all receipts in the period + Cost... Inventory Evaluation Inventories might be valued at 1.Expected selling price 2.Net realizable value (NRV) (= expected selling price – cost incurred in getting them ready for sale and then selling them) 3. Historical cost 4.Current replacement cost LCM requires that when the market price of inventory falls below historical cost, the inventory is written down to the lower value and a loss is recorded In ... 1.64 = 35 2.60 (W) 70 31 /08 Balance ($) Quant 1.64 Stock valuation 114.80 145 x 1.64 = 237 .80 237 .80 Workings: $ 95 Stock units x $1.50 = 43 142.50 120 Stock units x $1.75 = 210.00 215 35 2.50 $35 2.50/215... the 20 03 revision of IAS 2, is no longer allowed The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the enterprise 33 34 (a)...   On October 5, 20 03, the Lothridge Wholesale Beverage Company purchased merchandise at a price of $20,000 The repayment terms are stated as 2/10, n /30 Lothridge paid $ 13, 720 ($14,000 less the