Topic 6 reporting analysing inventory PDF

TOPIC REPORTING & ANALYSING INVENTORY – PART Topic Part Learning Objective On completion of this topic, you should be able to: Determine cost of sales under a periodic inventory system Explain the basis of accounting for inventories and apply the inventory cost flow methods under a perpetual inventory system Explain the financial statement effects of each of the inventory cost flow methods ACCOUNTING FOR INVENTORY • • • • PERPETUAL INVENTORY SYSTEM Maintains a continuous inventory record of all goods bought and sold COST OF SALES (COS) is ‘perpetually’ updated as inventory is sold As a result, the balance in the inventory account is the ENDING inventory amount A physical stock take is done to verify accounting records & identify loss, theft or impairment PERIODIC INVENTORY SYSTEM • A physical stock take (an actual count) of inventory is required at end of period to update inventory and calculate COST OF SALES (COS) Regardless of whether the inventory is ‘perpetually or ‘periodically’ updated the actual cost of each sale is recorded based on one of four ‘cost-flow assumptions’ | INVENTORY COSTING SYSTEMS – COST-FLOW ASSUMPTION METHODS SPECIFIC-UNITCOST FIFO (first-in, firstout) LIFO (last-in, firstout) • The specific-unitcost method uses the specific cost of each unit of inventory sold to determine cost of sales and ending inventory • Typically used for • The FIFO (first-in, first-out) inventory costing method bases the cost of sales on the assumption that the cost of the first units acquired that are held in the inventory are sold first • Under the LIFO (last-in, first-out) inventory costing method bases the cost of sales on the assumption that the cost of the last units acquired that are held in the inventory are sold first low volume sales, high prices AVERAGE-COST • Under the average-cost inventory costing method, the business calculates a new average cost per unit after each purchase • Weighted average (periodic) • Moving average (perpetual) The different inventory costing methods produce different amounts for ending inventory and cost of sales Lets use the four cost-flow assumptions to calculate the cost of sales and the ending | inventory value for the iTravs Kelly Cook eTravel P/L sells and compare the differences PERIODIC INVENTORY SYSTEM Kelly Cook eTravel Pty Ltd Date 01-August-2017 05-August-2017 15-August-2017 16-August-2017 31-August-2017 Inventory Transactions for the month of August 2017 Transaction Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40 Kelly Cook eTravel P/L purchases six iTravs for $45 each Kelly Cook eTravel P/L sells four iTravs for $88 (inc GST) each (1 @ 40 & @ 45) Kelly Cook eTravel P/L purchases nine iTravs for $47 each Kelly Cook eTravel P/L sells ten iTravs for $88 (inc GST) each (4 @ 45 & @ 47) FIFO applied in the PERIODIC INVENTORY SYSTEM Opening Balance - units @ $40 each $80 Add: Purchases Aug - units @ $45 each = $270 16 Aug – units @ $47 each = $423 $693 Cost of 17 units available for sale $773 Less: Cost of units in the ending inventory (from later purchases as FIFO used) Therefore: Cost of Sales of 14 units sold ($141) $632 Kelly Cook eTravel Pty Ltd EXTRACT from Statement of Financial Performance (for August 2017 iTrav transactions) Revenue Gross Sales Revenue 1,120 Less Sales Returns & Allowances Net Sales Revenue 1,120 Cost of sales (COS): Inventory August 2017 80 Plus Purchases 693 Cost of goods available for sale 773 Less Inventory 31 August 2017 -141 Cost of sales (COS): 632 GROSS PROFIT $ | 488 PERPETUAL INVENTORY SYSTEM Kelly Cook eTravel Pty Ltd Date 01-August-2017 05-August-2017 15-August-2017 16-August-2017 31-August-2017 Inventory Transactions for the month of August 2017 Transaction Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40 Kelly Cook eTravel P/L purchases six iTravs for $45 each Kelly Cook eTravel P/L sells four iTravs (1 @ 40 & @ 45) Kelly Cook eTravel P/L purchases nine iTravs for $47 each Kelly Cook eTravel P/L sells ten iTravs (4 @ 45 & @ 47) Perpetual Inventory Record:Specific Identification Date 01-Aug-17 05-Aug-17 BALANCE (Inventory on hand) Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost BEGINNING INVENTORY 270 45 15-Aug-17 16-Aug-17 COST OF SALES (COS) PURCHASES Quantity Unit Cost Total Cost Sells iTravs 40 135 40 45 31-Aug-17 Sells 10 iTravs $ 693 40 80 $ 80 40 80 45 270 $ 350 40 45 40 135 $ 175 40 40 45 135 47 423 $ 598 40 40 94 $ 134 423 47 45 135 47 329 $ Cost of sales for August 639 BALANCE 47 Cost of ending inventory for August | PERPETUAL INVENTORY SYSTEM Kelly Cook eTravel Pty Ltd Date 01-August-2017 05-August-2017 15-August-2017 16-August-2017 31-August-2017 Inventory Transactions for the month of August 2017 Transaction Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40 Kelly Cook eTravel P/L purchases six iTravs for $45 each Kelly Cook eTravel P/L sells four iTravs for $88 (inc GST) each (1 @ 40 & @ 45) Kelly Cook eTravel P/L purchases nine iTravs for $47 each Kelly Cook eTravel P/L sells ten iTravs for $88 (inc GST) each (4 @ 45 & @ 47) Perpetual Inventory Record: FIFO Date 01-Aug-17 05-Aug-17 BEGINNING INVENTORY 270 45 Sells iTravs 15-Aug-17 16-Aug-17 COST OF SALES (COS) BALANCE (Inventory on hand) Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost PURCHASES Quantity Unit Cost Total Cost 40 80 45 90 423 47 Sells 10 iTravs 31-Aug-17 $ 693 180 282 45 47 $ Cost of sales for August 632 40 80 40 45 80 BALANCE $ 80 270 $ 350 45 180 $ 180 45 47 180 423 $ 603 47 141 $ 141 Cost of ending inventory for August | PERPETUAL INVENTORY SYSTEM Kelly Cook eTravel Pty Ltd Date 01-August-2017 05-August-2017 15-August-2017 16-August-2017 31-August-2017 Inventory Transactions for the month of August 2017 Transaction Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40 Kelly Cook eTravel P/L purchases six iTravs for $45 each Kelly Cook eTravel P/L sells four iTravs for $88 (inc GST) each (1 @ 40 & @ 45) Kelly Cook eTravel P/L purchases nine iTravs for $47 each Kelly Cook eTravel P/L sells ten iTravs for $88 (inc GST) each (4 @ 45 & @ 47) Perpetual Inventory Record: LIFO Date 01-Aug-17 05-Aug-17 COST OF SALES (COS) PURCHASES Quantity Unit Cost Total Cost BALANCE (Inventory on hand) Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost BEGINNING INVENTORY 270 45 Sells iTravs 15-Aug-17 180 45 423 47 16-Aug-17 Sells 10 iTravs 31-Aug-17 $ 423 45 47 45 $ 693 Cost of sales for August 648 40 80 80 40 45 2 40 45 90 40 80 45 90 47 423 40 45 80 45 270 BALANCE $ 80 $ 350 $ 170 $ 593 $ 125 80 Cost of ending inventory for August | PERPETUAL INVENTORY SYSTEM Kelly Cook eTravel Pty Ltd Inventory Transactions for the month of August 2017 Transaction Kelly Cook eTravel P/L begins August with two iTravs in the shop that cost them $40 Kelly Cook eTravel P/L purchases six iTravs for $45 each Kelly Cook eTravel P/L sells four iTravs for $88 (inc GST) each (1 @ 40 & @ 45) Kelly Cook eTravel P/L purchases nine iTravs for $47 each Kelly Cook eTravel P/L sells ten iTravs for $88 (inc GST) each (4 @ 45 & @ 47) Date 01-August-2017 05-August-2017 15-August-2017 16-August-2017 31-August-2017 Perpetual Inventory Record: Average Cost COST OF SALES (COS) PURCHASES Quantity Unit Cost Total Cost Date 01-Aug-17 05-Aug-17 BEGINNING INVENTORY 270 45 Sells iTravs 15-Aug-17 16-Aug-17 BALANCE (Inventory on hand) Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost 47 43.75 175 423 Sells 10 iTravs 31-Aug-17 $ 693 10 460 46 $ 40 BALANCE 80 $ 80 43.75 350 $ 350 43.75 175 $ 175 13 46 598 $ 598 46 138 $ 138 635 Calculation for average August = (2 x 40) + (6 x 45) = 350 then divide by = 43.75 Calculation for average 16 August = (4 x 43.75) + (9 x 47) = 598 then divide by 13 = 46 | INVENTORY COSTING SYSTEMS – Compare methods (PERPETUAL SYSTEM) SPECIFIC UNIT COST FIFO LIFO AVERAGECOST Sales Revenue (14 x $80) $ 1,120 $ 1,120 $ 1,120 $ 1,120 Less Cost of Sales $ 639 $ 632 $ 648 $ 635 GROSS PROFIT $ 481 $ 488 $ 472 $ 485 GROSS PROFIT % 42.95% 43.57% 42.14% 43.30% Ending Inventory $ $ $ $ 134 141 125 138 AASB 102 Inventory • Must disclose inventory costing method used in the notes to the accounts • LIFO not acceptable under AASB 102, allowed under US GAAP | 10 TOPIC REPORTING & ANALYSING INVENTORY – PART Topic Part Learning Objective On completion of this topic, you should be able to: Explain the lower of cost and net realisable value basis of accounting for inventories Indicate the effects of inventory errors on the financial statements Calculate and interpret inventory turnover ACCOUNTING FOR INVENTORY • • • • Kelly Cook eTravel Pty Ltd EXTRACT from Statement of Financial Performance (for August 2017 iTrav transactions) Revenue Gross Sales Revenue 1,120 Less Sales Returns & Allowances Net Sales Revenue 1,120 Cost of sales (COS): Inventory August 2017 80 Plus Purchases 693 Cost of goods available for sale 773 Less Inventory 31 August 2017 -141 Cost of sales (COS): 632 GROSS PROFIT $ 488 PERPETUAL INVENTORY SYSTEM Maintains a continuous inventory record of all goods bought and sold COST OF SALES (COS) is ‘perpetually’ updated as inventory is sold As a result, the balance in the inventory account is the ENDING inventory amount A physical stock take is done to verify accounting records & identify loss, theft or impairment • PERIODIC INVENTORY SYSTEM A physical stock take (an actual count) of inventory is required at end of period to update inventory and calculate COST OF SALES (COS) SPECIFIC-UNITCOST FIFO (first-in, firstout) LIFO (last-in, firstout) • The specific-unitcost method uses the specific cost of each unit of inventory sold to determine cost of sales and ending inventory • Typically used for • The FIFO (first-in, first-out) inventory costing method bases the cost of sales on the assumption that the cost of the first units acquired that are held in the inventory are sold first • Under the LIFO (last-in, first-out) inventory costing method bases the cost of sales on the assumption that the cost of the last units acquired that are held in the inventory are sold first low volume sales, high prices AVERAGE-COST • Under the average-cost inventory costing method, the business calculates a new average cost per unit after each purchase • Weighted average (periodic) • Moving average (perpetual) | 13 Lower-of-cost-and-netrealisable-value rule (NRV)  Inventory is typically a significant current asset for a merchandising business  AASB 102 requires that inventory be reported in the financial statements at whichever is lower: the historical cost of the inventory, or the net realisable value (NRV) of the inventory Example: Kelly Cook eTravel P/L had purchased 50 pairs of fashion sunglasses at a total cost $250 in January At the end of the reporting period in June, the assessed market value was $50 How should Kelly Cook eTravel P/L’s accountant report this inventory? Date 30-Jun GENERAL JOURNAL Particulars Post Ref ADJUSTING ENTRIES Cost of Sales 520 Inventory 140 (adjust for NRV of stock) DEBIT CREDIT 200 | 200 14 INVENTORY ERRORS | 15 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING INVENTORY TURNOVER RATIO indicates is sold and replaced during the year DAYS IN INVENTORY indicates the average number of days inventory is held by the business Both indicate how quickly a business sells its goods, | 16 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING Kelly Cook eTravel Pty Ltd Statement of Financial Performance for month period December 2017 Revenue Gross Sales Revenue Less Sales Returns & Allowances Net Sales Revenue Less Cost of sales (COS) GROSS PROFIT Operating Expenses Advertising Expense Depreciation Expense Electricty Expense Rent expense Salaries Expense Total operating Expenses NET PROFIT 48,500 -1260 47,240 -14,230 33,010 6,100 1,000 420 6600 7200 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 30 December 2017 Current Assets Cash 22,273 Accounts Receivable Inventory Prepaid rent Total Current Assets 4,160 1,460 1,100 28,993 Non-current Assets PPE Less Acc Dep Totsl Non-current Assets 10,000 1,333 8,667 TOTAL ASSETS 37,660 Liabilites Accounts Payable Unearned Revenue Salaries Payable 840 650 300 Total Current Liabilites 1,790 NET ASSETS 21,320 $ 11,690 35,870 Equity Capital Retained Earnings 30,000 5,870 35,870 EQUITY RATIO Inventory Turnover Ratio Days In Inventory FORMULA $ Cost of Sales 14,230 Average Inventory 1,460 365 365 Inventory Turnover Ratio 9.75 Kelly Cook 2017 Kelly Cook 2018 9.75 14.8 37.5 24.7 | 17 ... $ 11 ,69 0 35,870 Equity Capital Retained Earnings 30,000 5,870 35,870 EQUITY RATIO Inventory Turnover Ratio Days In Inventory FORMULA $ Cost of Sales 14,230 Average Inventory 1, 460 365 365 Inventory. .. 4, 160 1, 460 1,100 28,993 Non-current Assets PPE Less Acc Dep Totsl Non-current Assets 10,000 1,333 8 ,66 7 TOTAL ASSETS 37 ,66 0 Liabilites Accounts Payable Unearned Revenue Salaries Payable 840 65 0... Sales $ 63 9 $ 63 2 $ 64 8 $ 63 5 GROSS PROFIT $ 481 $ 488 $ 472 $ 485 GROSS PROFIT % 42.95% 43.57% 42.14% 43.30% Ending Inventory $ $ $ $ 134 141 125 138 AASB 102 Inventory • Must disclose inventory