Teaching PowerPoint Slides - Accounting for Inventory.ppt

Lecture Notes

2. Accounting for Inventory
5

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–3
After studying this chapter, you should be able to:
Describe two causes of an increase in inventory
Describe two causes of a decrease in inventory
Explain the difference between cash and credit
purchases
Explain the difference between cash and credit sales
Record the increase in inventory in purchases and
returns inwards account
Record the decrease in inventory in sales and returns
outwards account
Learning Outcomes

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–4
Businesses are formed to make profits.
In a trading business, the primary source of revenue is
the sale of goods, often referred to as sales revenue or
sales.
Goods are usually sold at a higher price than cost price.
The difference between the selling price and the cost
price is the profit earned.
5.0 Introduction

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–5
FRS 102 defines inventory as assets owned by a
business for the purpose of selling to the customer.

Inventories are managed in order to determine
inventories at hand, inventories available for sale
and cost of goods sold (COGS).
5.1 Definition of Inventory

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–6
5.2 Movement of Inventory

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–7
Increase in Inventory
Caused either by:
–Purchases of goods from suppliers, or
–Returns inwards by customers into a business of goods
that have been previously sold.
Purchases of goods:
–Credit purchase
–Cash purchase
5.2 Movement of Inventory
(cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–8
Returns inwards:
–Credit sales
–Cash sales
5.2 Movement of Inventory
(cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–9
Decrease in Inventory
Caused either by:
–Sales of goods from suppliers, or
–Return of goods that have been previously purchased by
the business back to the supplier.
Sales of goods:
–Credit sales
–Cash sales
5.2 Movement of Inventory
(cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–10
Returns outwards (purchases returns):
–Credit purchase
–Cash purchase
The purchaser sends a debit note to indicate a debit
to creditor and a credit to returns outwards.
A seller issues a credit note to indicate a credit to
debtor and a debit to returns outwards.
5.2 Movement of Inventory
(cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–11
An accounting system tracks the movement and
flow of the inventory from the point of receipt to the
point of sale.
The common methods used by companies are the
perpetual and periodic inventory systems.
Choosing the method to be used is essential to a
business because each system has its own
advantages and disadvantages.
5.3 Accounting Systems for
Inventory

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–12
Features of the perpetual and periodic inventory systems:
5.3 Accounting Systems for
Inventory (cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–13
Inventory Valuation
To value the amount of inventory at the end of a period,
the formula to use is:
Three commonly used methods:
–First-in-first-out (FIFO)
•The oldest inventory items that were the first acquired
are assumed to be the first sold.
5.3 Accounting Systems for
Inventory (cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–14
•FIFO shows higher profits, higher inventory value in
the statement of financial position and reduces
obsolete inventories in accounting ledger.
5.3 Accounting Systems for
Inventory (cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
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Inventory Valuation (cont.)
–Last-in-first-out (LIFO)
•The most recently acquired items are assumed to be
the first sold.
•LIFO results in less inventory waste and lower tax
payment.
5.3 Accounting Systems for
Inventory (cont.)

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 5–16
Inventory Valuation (cont.)
–Weighted Average (WA)
•It calculates the average costs of all units available for sale
during the accounting period.
•It is suitable for manufacturing businesses for which inventories
are piled or mixed together and hard to differentiate.
5.3 Accounting Systems for
Inventory (cont.)