Accounting Slides Topic 700000000(2).pptx

Financial Accounting

1. FINANCIAL ACCOUNTING I Inventory .

2. Inventory Introduction Inventories play a critical role in the operating cycle of many organizations. Inventories are still a reporting issue (despite the ‘ just in time ’ )

3. Inventory Wher e c a n y o u fin d i n v ento r y? ASSETS N o n -c u rr e n t a s se t s C u r r e n t a ssets In v en to ry A cc oun ts rec e i v a b l e C a s h a n d c ash equ i v a l e n ts

4. Inventory W h a t c a n y o u d o wit h in v en t or y? S el l i t an d m a ke m oney ! M ak e s o meth i n g ou t o f i t, a p r odu ct yo u ca n s e ll. U s e i t i n e ve r y - da y b u s i n e s s ( e .g . fu e l , pape r )

5. Inventory What is inventory Definition from IAS 2: https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/ As set s he l d f o r s al e i n th e o r d i n a r y c our s e of bu s ines s ( f i ni s h e d g o o d s) . A s set s i n t h e produ c t io n p r oces s f o r sa l e i n t he o r dina r y c o u rs e o f b u s ine s s ( w o r k i n pro c es s ) An d m a t er i al s an d suppl ie s t ha t a r e con s um e d i n p r oduc t i o n ( r a w m a t e r ia l s ) .

6. Inventory Clasification of inventory Retailers / Wholesalers: Inventory Manufacturing companies: Raw materials inventory Work in progress inventory Finished goods inventory

7. Inventory How to record – firm purchase inventory (Retailer firms) Periodic Purchase of merchandise (Dt) Accounts payables (Cash) (Ct) Perpetual Inventory (Dt) Accounts payables (Cash) (Ct)

8. Inventory Where does inventory go to? O n c e yo u se l l yo u r i n v en to r y , th e co st o f i n v en to r y i s pu t i n th e i nc o m e state m en t. C o s t o f goo d s so l d ( D t) In v en to ry ( C t) A t th e s a m e ti m e yo u r eco g n i z e r eve n u e a nd ac c oun ts r ec ei vab l e , w hi c h shou l d no r m a l l y b e g re a te r th a n th e c os t o f i n v en to r y . * Under perpetual inventory system

9. Inventory W h a t i s th e c o s t a t whi ch y ou recognize i n v ento r y? ● W h e n yo u de bi t th e i n v en to r y ac c oun t, r e c ogn izi n g a ne w p i e ce o f i nve nt or y , th e a m oun t s hou l d b e equa l t o [ IA S 2. 1 ]: – c o st s o f pu r cha s e ( i nc l u d in g t axe s , t ran s por t, and handl i ng ) n et o f t r ad e di s coun t s re c ei v e d c o st s o f c onve r s i o n (i nclud i n g f i x e d a n d va r i abl e manu f ac t u r in g o v erhead s ) and o t he r cos t s in c ur r e d i n b r ing i n g t h e in v e n to ri e s t o t he i r p r esen t l oca t io n an d c ondi t i on – –

10. Inventory How to determine the value which you put on the balance sheet? T h e e n din g b al a n ce s ho u l d c or r e sp o nd to th e n umb er o f un i ts i n en d in g in v entor y ti m es th ei r u n i t c o s t . B e gin n i ng b al a n c e o f in v e n tor y 1 3 P u r ch a ses 4 5 A v a i la b l e i n ve nt o r y 5 8 C o n su m p tio n - 42 E n din g b al a n ce o f in v e n tor y 1 6

11. Inventory Effect of market prices M a r ke t p r ic es on m y inventories c a n ch an ge over time . H ow do c h a ng es o f o i l p ric es fro m $ 60 to 1 20 a n d b ack to $ 3 a f f ect th e situ at i o n o f o i l c omp a nie s li k e Re ps o l ?

12. Inventory How to calculate the value of inventory ? FIFO: First in first out . LIFO: Last in first out . WAC: Weighted average cost .

13. Inventory FIFO First in, first out . The first goods purchased are the first used ( manufacturing ) or the first sold ( retail ) E nding inventory represents the most recent purchase . C OGS: Reports the oldest costs in the income statement . .

14. Inventory LIFO Last in, last out . The last goods purchased are the first used ( manufacturing ) or the first sold ( retail ) E nding inventory represent the cost of the oldest units . C OGS: Represent the cost of the most recent purchase on its income statement . .

15. Inventory WAC W eighted-average cost This method prices items in the inventory on the basis of the average costs of all similar goods avaliable furing the period . E nding inventory : Average cost of all the items . C OGS: Average cost of all the items . .

16. Inventory S ol v in g e x er c i s e s f o r i n v ento r y U n i ts Un i t C ost T ota l C ost B e gi n n i n g B a la n ce 1 00 32 = 3 , 2 00 P u rcha s e 1) 2 35 = 7 P u rcha s e 2) 5 37 = 1 , 8 50 P u rcha s e 3) 1 5 39 = 5 8 5 T ota l a v ai l ab l e 1 85 - 6, 3 35 E n di n g b a l a nce 2 5 ? ? C on s umpti o n 1 8 5- 2 5 = 1 6 0 ? ? W A C Uni t C o s t = 6 , 3 3 5 /1 8 5 = 3 4 . 24 , so E B = 25 * 3 4.24 = 856 C o n s u m p tio n = 6 , 3 3 5 – 8 56 = 5479 FI FO EB = 1 5 * 39 + 10 * 3 7 = 5 8 5 + 3 7 = 9 5 5 , C o n s umpti o n = 5, 3 8 LI FO E B = 2 5 * 32 = 8 , Co ns umpt i o n = 5 , 5 3 5 Giv e n : r e s ul t o f c o u n t

17. Inventory EXAMPLE XYZ a wholesaler company do the following operations : Have a begining balance of 1000 units at 1 euros Buy 2000 units at 0,9 euros Sell 500 units at 2 euros Buy 2000 units at 0,85 euros Sell 2000 units at 2 euros What is the value of the ending inventory ? What is the value of the COGS? What is the gross profit ?

18. Inventory FIFO - PERPETUAL Number Account Debit Credit Notes 1 Inventory 1800 Accounts payables 1800 2 Accounts receivables 1000 Sales 1000 COGS 500 500*1 (BB) Inventory 500 3 Inventory 1700 Accounts payables 1700 4 Accounts receivables 4000 Sales 4000 COGS 1850 * Inventory 1850

19. Inventory Inventory BB 1000 1800 (2) 500 (3) 1700 (4) 1850 2150 COGS (2) 500 (4) 1850 2350 Sales 5000 -COGS -2350 =Gross margin 2650

20. Inventory FIFO - PERIODIC Number Account Debit Credit Notes 1 Purchases 1800 Accounts payables 1800 2 Accounts receivables 1000 Sales 1000 3 Purchases 1700 Accounts payables 1700 4 Accounts receivables 4000 Sales 4000 Ending inventory ? Change in inventory ?

21. Inventory N Type Inputs Outputs (at aquisition price ) Inventory Vol Price Total V*P Vol Price Total V*P Vol Price Total V*P BB 1.000 1 1.000 1.000 1 1.000 (1) P 2.000 0,90 1.800 1.000 2.000 1 0,90 1.000 1.800 (2) S 500 1 500 500 2.000 1 0,90 500 1.800 (3) P 2.000 0,85 1.700 500 2.000 2.000 1 0,90 0,85 500 1.800 1.700 (4) S 500 1500 1 0,90 500 1350 500 2.000 0,90 0,85 450 1.700 31-12- EB 2350 2500 2150

22. Inventory FIFO - PERIODIC Number Account Debit Credit Notes Adj Inventory 1150 Change in inventory 1150 Ending inventory = 2150 Change in inventory = 2150 – 1000 = 1150 COGS = 2350* Sales 5000 -COGS -2350 =Gross margin 2650

23. Inventory LIFO - PERPETUAL Number Account Debit Credit Notes 1 Inventory 1800 Accounts payables 1800 2 Accounts receivables 1000 Sales 1000 COGS 450 500*0,9 (BB) Inventory 450 3 Inventory 1700 Accounts payables 1700 4 Accounts receivables 4000 Sales 4000 COGS 1700 * Inventory 1700

24. Inventory Inventory BB 1000 1800 (2) 450 (3) 1700 (4) 1700 2350 COGS (2) 450 (4) 1700 2150 Sales 5000 -COGS -2150 =Gross margin 2850

25. Inventory LIFO - PERIODIC Number Account Debit Credit Notes 1 Purchases 1800 Accounts payables 1800 2 Accounts receivables 1000 Sales 1000 3 Purchases 1700 Accounts payables 1700 4 Accounts receivables 4000 Sales 4000 Ending inventory ? Change in inventory ?

26. Inventory N Type Inputs Outputs (at aquisition price ) Inventory Vol Price Total V*P Vol Price Total V*P Vol Price Total V*P BB 1.000 1 1.000 1.000 1 1.000 (1) P 2.000 0,90 1.800 1.000 2.000 1 0,90 1.000 1.800 (2) S 500 0,9 450 1.000 1.500 1 0,90 1.000 1.350 (3) P 2.000 0,85 1.700 1.000 1.500 2.000 1 0,90 0,85 1.000 1.350 1.700 (4) S 2000 0,85 1,700 1.000 1.500 1 0,90 1.000 1.350 31-12- EB 2150 2500 2350

27. Inventory LIFO - PERIODIC Number Account Debit Credit Notes Adj Inventory 1350 Change in inventory 1350 Ending inventory = 2350 Change in inventory = 2350 – 1000 = 1350 COGS = 2150 Sales 5000 -COGS -2150 =Gross margin 2850

28. Inventory WAC - PERPETUAL Number Account Debit Credit Notes 1 Inventory 1800 Accounts payables 1800 2 Accounts receivables 1000 Sales 1000 COGS 465 * Inventory 465 3 Inventory 1700 Accounts payables 1700 4 Accounts receivables 4000 Sales 4000 COGS 1780 ** Inventory 1780

29. Inventory Inventory BB 1000 1800 (2) 465 (3) 1700 (4) 1780 2255 COGS (2) 465 (4) 1780 2245 Sales 5000 -COGS -2245 =Gross margin 2755

30. Inventory WAC - PERIODIC Number Account Debit Credit Notes 1 Purchases 1800 Accounts payables 1800 2 Accounts receivables 1000 Sales 1000 3 Purchases 1700 Accounts payables 1700 4 Accounts receivables 4000 Sales 4000 Ending inventory ? Change in inventory ?

31. Inventory N Type Inputs Outputs (at aquisition price ) Inventory Vol Price Total V*P Vol Price Total V*P Vol Price Total V*P WAC BB 1.000 1 1.000 1.000 1 1.000 1 (1) P 2.000 0,90 1.800 1.000 2.000 1 0,90 1.000 1.800 0,933 (2) S 500 0,933 466,7 2500 0,933 2333 0,933 (3) P 2.000 0,85 1.700 2.500 2.000 0,93 0,85 2333 1.700 0,896 (4) S 2000 0,896 1780 2500 0,896 2241 0,896 31-12- EB 2259 2500 0,89 2241*

32. Inventory WAC - PERIODIC Number Account Debit Credit Notes Adj Inventory 1236 Change in inventory 1236 Ending inventory = 2236 Change in inventory = 2236 – 1000 = 1236 COGS = 2259 Sales 5000 -COGS -2245 =Gross margin 2755

33. Inventory Impact on net income and ending inventory Impact on income and ending inventory of the three methods in the context of rising or falling costs of acquisition Why?

34. Inventory Tricks for remembering FIF O : E a t th e o l d e st a pp l e s fir s t, othe r w is e th e y rot . LI F O : Y o u a l w a y s pi c k up fr om th e to p o f th e pil e .

35. Inventory The LIFO prohibition ● IA S 2 p ro h ib i t s t h e us e of LI FO – LIF O ca u ses t h e ba l a n ce she e t v a lu e o f i n ventory t o be tota l l y m e a n i n gl e ss ( o l d p u rch a ses). U n d e r L I F O i n ve n t o ry i s u n d ersta t e d , m aki n g t u rn o v e r r a t i o s a p p e a r m o r e a t t ra c t i v e. – ● I n t h e US A ( U S GAAP ) L I F O i s allo w e d – S i nc e U S o i l com p an i e s do m in a t e th e i nd u s t r y , o i l com p an i e s f r o m E U w i l l a l l pro v id e a d d i t i o n al i nformati on a b ou t L I F O n umb e rs. I n t h e b a la n ce sh e e t th e y u s e W A C . –

36. Inventory Royal Dutch Shell Report In c o m e i s ca lc u la te d u s i n g W A C. T he C C S ear n i n g s i n i n co m e c a l cu la te d using L IFO. T h e y c a l l i t CC S (Curr e n t Co s t o f S u p p lie s ) a nd pl ace it i n th e un a u d it ed r esu lt s be c au s e o f th e pro h i b itio n . T he C C S numbe rs a r e i m p o r ta n t fo r c omp a rin g w i th E x x on . Q1 20 17 Q4 2 01 6 Q1 2 01 6 %1 I n c o m e / ( l o s s ) a tt r i bu t a b l e to s ha r eho l de r s 3 5 3 8 15 41 48 4 63 1 C C S ea r n i ng s a tt r i bu t a b l e to s ha r eho l de r s 3 3 8 1 10 32 81 4 31 5

37. Inventory Price changes affect results

38. Inventory Price changes and results ● W h e n p r i ce s o n th e cos t s id e i n cr eas e: – L I FO gi v e s you t h e h i ghes t C OG S ● W h e n p r i ce s o n th e cos t s id e de cr eas e: – F I FO gi v e s y o u t h e highes t C OG S ● W A C i s a l w a y s i n th e m i d dl e . W h ic h acco untin g m e th od pr o d uces th e h ig h e s t p r o fi t s i n a n inf l at i o n eco nom y? W h ic h m e th o d a ll o w s co m p a ni es to save on in co m e ta x e s w h e n th e r e i s i n fl a tio n?

39. Inventory Price changes and results ● W h e n p r i ce s o n th e cos t s id e i n cr eas e: – L I FO gi v e s you t h e h i ghes t C OG S ● W h e n p r i ce s o n th e cos t s id e de cr eas e: – F I FO gi v e s y o u t h e highes t C OG S ● W A C i s a l w a y s i n th e m i d dl e . W h ic h acco untin g m e th od pr o d uces th e h ig h e s t p r o fi t s i n a n inf l at i o n eco nom y? W h ic h m e th o d a ll o w s co m p a ni es to save on in co m e ta x e s w h e n th e r e i s i n fl a tio n?