ACCT1501 Lecture 8 - inventory and non-current assets

Inventory control systems Two internal control systems for inventory - Perpetual system - make continuous records on the flow of units of inventory for ALL transactions Buying inventory and selling inventory - make records of all of them - Periodic system - do not make continuous records Makes records on the purchases of inventory Calculate the sales based on beginning inventory and the final inventory - Perpetual system Beginning of period (number of units on hand) - Inventory purchased during the period (purchased number of units) - Inventory sold (sold number of units) - End of period (number of units left on hand) If you started with 3, bought 2 and sold 2, and was left with only 2, you would know you lost inventory - If we have a loss of $5000 lost, Journal entry for inventory adjustment Dr inventory shortage expense 5000 Cr inventory 5000 - Provides better internal control and easy to see stock losses and shortage of inventory - But is time consuming and not suitable for all types of good (e.g. Coal) - Journal entry for revenue and then COGS is only suitable for perpetual method - Periodic method The step where you record the inventory sold is omitted - COGS is calculated at the end of the period using beginning inventory + purchases - ending inventory - Record keeping: Sales of inventory only require ONE journal entry: recognise the revenue At the end of the period, COGS is recorded all at once - Perpetual or periodic? Record-keeping choice, not a reporting choice - If there is no inventory lost then there is no difference in COGS - Dependent on the nature of your inventory - coal, liquid etc. makes it difficult to use the perpetual system - Technologies, e.g. Optical scanners make it easier to implement perpetual - Inventory - measurement rule Lower of m and net realisable value - Cost comprises: Cost of purchase ADD import duties and other taxes + inward transport + handling cost + any other costs of acquisition LESS trade discounts, rebates and other similar items - NOT including administration costs, selling costs and storage costs - costs are not counted after they arrive at your warehouse. Any other costs are other expenses. - Net realisable value is the sales price of your inventory - Usually net realisable value is higher than the cost of the inventory, so the lower of cost and net realisable value is usually cost - Lecture 8 - inventory and non-current assets Wednesday, 15 April 2020 2:49 PM ACCT1501 Page 1
net realisable value is usually cost 3 cost flow assumptions Imagine we purchased 3 units @ $15 each 3 units @ $20 each We sold 2 units. What is the COGS? - FIFO (first in first out method) We assume we sell the inventory purchased first So when we sell 4 units we sell the 3 $15 ones first and then one of the $20 ones Results in higher profit level in times of rising prices (compared to LIFO and weighted average) Closing inventory balance closer to current cost (compared to LIFO and weighted average) Suitable for perishable items, electronics, etc. - LIFO (last in first out method) We assume we sell the inventory that we just purchased When we sell 4 units we sell the 3 $20 ones and then 1 $15 one In times of rising prices, this results in lower value of ending inventory Often does not match physical flow (people usually want to sell older goods first) Closing inventory balance may not be relevant (since price has already risen) NOT permitted under Australian accounting standards - Weighted average method (or moving average) Weighted average price of all the inventory at hand Average price of each unit of inventory - total cost is $105, and divide by 6 - $17.5 is the average cost COGS would just be 4 x $17.5 = $70.00 Simple to apply and less subject to profit manipulation Appropriate for similar products and 'non-expiry' items - When prices are changing each method will provide a different ending inventory - Property. plant and equipment (PPE) Tangible items that are Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and Expected to be used during more than one period - Main points of interest Cost of PPE - Depreciation of assets - Additional expenditure on assets after acquisition - Recording the disposal of assets - 1 - initial cost of PPE Recorded in the balance sheet 'at cost' - Cost includes Purchase price Any costs directly attributable to bringing the asset to the location and condition necessary for it to be used in the manner intended by management Estimation of costs associated with dismantling and removing the item and/or restoration costs E.g. Invoice price of machinery Installation cost Architects fees These are all part of the value of the assets - ACCT1501 Page 2
These are all part of the value of the assets 2 - depreciation Limited useful life - Value at cost depreciates over time - Book value or carrying value of an asset = initial cost - accumulated depreciation - Should be based on the asset's Useful life Residual value (sale, salvage, scrap value) The estimated amount that an entity would obtain from disposal of the asset at the end of its useful life Pattern of flow of benefits over the useful life 3 methods: Straight line (linear depreciation) Reducing balance (more use/benefit now than later) Units of production (consumed according to its output) - Straight line depreciation Decline in value is expected to be uniform across the life of an asset - Depreciation expense = (cost - residual value)/useful life - Reducing balance depreciation Depreciation rate - Depreciation expense = carrying amount x depreciation rate - Needs to be calculated every year - For example: initial PPE cost of $40000 Depreciation rate: 25% Year 1 the depreciation expense is $10000 with a carrying amount of $30000 Year 2 the depreciation expense is $7500 with a carrying amount of $22500 - Unit of production Most common activity-based method of apportioning costs - Depreciation per unit (cost - residual value) = estimated total # of units of production over life E.g. Cost of motor vehicle is $40000 Residual value of $5000 Estimated number of kilometres to be driven is 200,000km Depreciation per km = (40000 - 5000)/200000 = 0.175 In year 1, motor vehicle travels 20000km Depreciation expense = 20000 x $0.175 = $3500 - 3 - additional expenditure Should be added to the cost of the asset if the definition and recognition criteria for assets are met Otherwise it is an expense - 'Betterment' vs 'maintenance' of PPE Betterment relates to increase in expected economic benefits, e.g. Productivity, efficiency, output quality Add to the book value of the PPE Debit PPE, credit cash Maintenance/repair relates to maintaining expected economic benefits Should be expensed - debit maintenance expense, credit cash - 4 - disposal of PPE PPE may be strapped - Sold - Exchanged for another asset - What do we need to record? Depreciation up until the date of deposal - ACCT1501 Page 3
Page1of 4
Uploaded by UltraNeutronQuetzal7 on