Accounting for Inventory - ACCG611 Accounting for Inventory...

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Unformatted text preview: ACCG611 Accounting for Inventory DISCUSSION QUESTIONS SOLUTIONS 8. Why is the lower of cost and net realisable value rule required by accounting standards? Is it permissible to revalue inventories upwards? If so, when? Are there any limits to revaluation? The lower of cost and net realisable value rule is used in order to ensure that inventory is not overvalued. Based on the qualitative characteristic of faithful representation, it is considered suitable that if inventory cost is below net realisable value, the most faithfully representative valuation is cost, and if net realisable value is less than cost, the most faithfully representative valuation is net realisable value. Inventory cannot be valued at more that the entity would obtain from its sale. It is not permissible to revalue inventory upwards, above cost. For inventory valued at net realisable value, if this value rises and the circumstances for the original write-down no longer exist, the standard permits a reversal of the write-down, but only if the reversal does not exceed the original cost. Cost is the maximum value permitted to be placed on inventories. See IAS 2/AASB 102, as discussed in learning objective 5 of this chapter of the text. 9. If the ending inventory is understated because of an error, what is the effect on profit in that reporting year and in the next reporting year? What is the effect on the value of assets as reported in the statement of financial position at the end of each year? If ending inventory is understated, cost of sales in that reporting year will be overstated and hence, profits will be understated. This is so because cost of sales is calculated basically by the formula: Cost of sales = Beginning inventory + Net cost of purchases – Ending inventory In the balance sheet/statement of financial position, if inventory is understated at the end of the year, then obviously total assets are also understated. In the next year, assuming no additional errors, and assuming that the inventory is fully sold, there will be no error in the inventory balance at the end of that year. 1 Exercise 19.3 Lower of cost and net realisable value SLACK LTD Required: A. Determine the ending inventory value at 30 June 2013, applying the lower of cost and net realisable value rule to the individual items. B. What effect did application of the rule rather than cost have on the financial statements of the company? A. Inventory Item Units on Hand Cost per Unit Total Cost Net Realisable Value per Unit LC and NRV of Individual Items 3011 70 $3.00 $210.00 $2.60 $182.00 2507 30 7.00 210.00 8.50 210.00 601 18 30.00 540.00 27.00 486.00 4500 52 3.50 182.00 2.50 130.00 2825 45 6.00 270.00 7.00 270.00 $1 412.00 $1 278.00 B. Profit is reduced by $134 ($1 412 ‐ $1 278). In the balance sheet/statement of financial position, inventory, total assets and equity are all reduced by $134. 2 Exercise 19.6 FIFO and average cost flow methods – periodic and perpetual inventory systems POWER LTD Required: A. Using a periodic system and the weighted average method, calculate the cost of the 11 items in inventory on 30 June and the cost of sales for the year. B. Using a perpetual system and the moving average method, calculate the cost of the year-end inventory and the cost of sales. C. Using a periodic system and the FIFO method, determine the cost of the 11 items in inventory on 30 June and the cost of sales for the year. D. Using a perpetual system and the FIFO method, determine the cost of the year-end inventory and the cost of sales. E. Compare the results obtained under requirements A, B, C and D above. A. Weighted average method: Periodic Ending inventory = 11 x average cost $38.47 = $423.17 Average cost $280 $418 $400 $210 = $38.47 34 units Cost of sales B. = = 23 units x $38.47 = $884.81 Moving average method: Perpetual Purchases Sales Date Explanation Units Unit Cost 1/7 Beg. invent. 8 $35.00 $280.00 14/8 Purchases 11 $38 $418 19 $36.74 $698.00 25/9 Sales 9 $36.74 $330.66 10 $36.74 $367.34 8/1 Purchases 10 $40 $400 20 $38.37 $767.34 3/3 Purchases 5 $42 $210 25 $39.09 $977.34 13/4 Sales 11 $39.09 $429.99 14 $39.09 $547.35 10/6 Sales 3 $39.09 $117.27 11 $39.09 $430.08 $877.92 Total Cost Units Unit Cost Balance Total Cost Units Unit Cost Total Cost Ending inventory $430.08 Cost of sales $877.92 3 C. FIFO: Periodic Ending inventory: 5 units @ $42.00 $210.00 6 units @ $40.00 $240.00 11 units $450.00 Cost of sales = $1 308 ‐ $450 = $858 8 units @ $35.00 $280.00 11 units @ $38.00 $418.00 4 units @ $40.00 $160.00 23 units $858.00 Cost of goods available for sale: $280 + $418 + $400 + $210 = $1 308 D. FIFO: Perpetual Purchases Sales Date Explanation Units 1/7 Beg. invent. 8 $35.00 $280 14/8 Purchases 11 $38 $418 8 $35.00 11 $38.00 $698 25/9 Sales 8 $35.00 $280.00 1 $38.00 $38.00 10 $38.00 $380 8/1 Purchases 10 $40 $400 10 $38.00 10 $40.00 $780 3/3 Purchases 5 $42 $210 10 $38.00 10 $40.00 5 $42.00 $990 13/4 Sales 10 $38.00 $380.00 9 $40.00 1 $40.00 $40.00 5 $42.00 $570 10/6 Sales 3 $40.00 $120.00 6 $40.00 Unit Cost Units Balance Total Cost Total Cost Unit Cost Units Unit Cost Total Cost 4 5 $42.00 $450 $858.00 Ending inventory $450.00 Cost of sales $858.00 E. FIFO reported the same ending inventory balance and cost of sales under the periodic and perpetual system. The reported ending inventory balance and cost of sales for all options only resulted in slight variations. The highest ending inventory balance was recorded using FIFO. The lowest inventory balance was recorded using the weighted average method (periodic). In all cases, the cost of sales is inversely related to ending inventory, i.e. the highest inventory balance corresponds with the lowest reported cost of sales and the lowest ending inventory balance corresponds with the highest cost of sales calculation. 5 Problem 19.7 FIFO method – perpetual inventory system ROUGH LTD Required: A. Using the FIFO method, prepare appropriate purchases and sales journals to record these events. B. Prepare an appropriate inventory record for Product EF5089 for June, and post the journals prepared in requirement A above to the appropriate general ledger accounts (assuming that product EF5089 is the only product bought and sold by Rough Ltd). C. Prepare an income statement for Rough Ltd for June. A. & B. Product Date Explanation 1/6 Balance 4/6 Purchases FIFO Method Purchases Unit Unit Cost Sales Total Cost Unit Unit Cost Balance Total Cost Unit Unit Cost Total Cost 6000 $2.20 $13 200 4500 $2.25 $10125 6000 $2.20 4500 $2.25 23 325 9/6 Sales 4000 $2.20 $8 800 2000 $2.20 4500 $2.25 14 525 12/6 Purchases 4000 $2.40 $9 600 2000 $2.20 4500 $2.25 4000 $2.40 24 125 21/6 Sales 2000 $2.20 4 400 3500 $2.25 1000 $2.25 2 250 4000 $2.40 17 475 14/6 Sales 2800 $2.25 6 300 4000 $2.40 700 $2.25 11 175 26/6 Purchases 3000 $2.50 7 500 700 $2.25 4000 $2.40 3000 $2.50 18 675 30/6 Sales 700 $2.25 1 575 2200 $2.40 1800 $2.40 4 320 3000 $2.50 12 780 $27 645 Sales Journal 6 Date 9/6 21/6 24/6 30/6 Account Sales Post Ref (4000 units @ $5) (3000 units @ $5) (2800 units @ $5) (2500 units @ $5) GST Collections $2 000 1 500 1 400 1 250 $6 150 $20 000 15 000 14 000 12 500 $61 500 (400) Receivable Cost of sales $22 000 16 500 15 400 13 750 $67 650 $8 800 6 650 6 300 5 895 27 645 (500) Purchases Journal Date 4/6 12/6 26/6 Account Post Ref (4500 units @ $2.25 (4000 units @ $2.40) (3000 units @ $2.50) Inventory GST Outlays $10 125 9 600 7 500 $27 225 (500) $1 013 960 750 $2 723 Payable $11 138 10 560 8 250 $29 948 GENERAL LEDGER Sales Date June 30 Date June 1 30 30 Explanation Balance Explanation Balance Purchases Cost of sales Post Ref. SJ Inventory Post Ref. PJ SJ Debit Credit $61 500 Debit Credit $27 225 27 645 No. 400 Balance $61 500 No. 500 Balance $13 200 40 425 12 780 c. ROUGH LTD Income Statement for the month ended 30 June INCOME Sales Less: Sales Returns and allowances Net sales Less: Cost of sales GROSS PROFIT LESS: EXPENSES PROFIT $61 500 Nil 61 500 27 645 33 855 Nil $33 855 7 Problem 19.8 Cost of sales – FIFO and moving average SAMMY’S STATIONERY Required: A. Calculate the cost of inventory on hand at 31 December 2013 and the cost of sales for the year ended 31 December 2013, assuming: the FIFO cost flow assumption the moving average cost flow assumption (round average unit costs to the nearest cent, and total cost amounts to the nearest dollar). B. Prepare the income statement to gross profit for the year ended 31 December 2013, assuming: the FIFO cost flow assumption the moving average cost flow assumption A. FIFO Cost assumption: perpetual Product FIFO Method Date Explanatio n 1/1 Balance 6/1 Purchases Purchases Unit Unit Cost Sales Total Cost Unit Unit Cost Balance Total Cost Unit Unit Cost Total Cost 900 $7.00 $6 300 400 $7.05 $2 820 900 $7.00 400 $7.05 9 120 5/2 Sales 900 $7.00 $6 300 100 $ 7.05 705 300 $7.05 2 115 17/3 Purchases 1100 7.35 8 085 300 $7.05 1100 $7.35 10 200 24/4 Purch retns (80) 7.35 (588) 300 $7.05 1020 $7.35 9 612 4/5 Sales 300 $7.05 2 115 400 $7.35 2 940 620 $7.35 4 557 26/6 Purchases 8400 7 50 63 000 620 $7.35 8400 $7.50 67 557 11/8 Sales 620 $7.35 4 557 1180 $7 50 8 850 7220 $7.50 54 150 19/8 Sales ret’ns (20) $7.50 (150) 7240 $7 50 54 300 11/9 Sales 3500 $7.50 26 250 3740 $7.50 28 050 6/10 Purchases 500 8.00 4 000 3740 $7.50 500 8.00 32 250 11/12 Sales 3100 7.50 23 250 640 7.50 500 8 00 8 800 $74 817 8 Moving average method: Perpetual Purchases Date Explanatio n 1/1 Beg. invent. 6/1 Purchase 5/2 Sales 17/3 Units Unit Cost Sales Total Cost Units Unit Cost Balance Total Cost Units Unit Cost Total Cost 900 $7.00 $6 300 400 $7.05 $2 820 1300 $7.02 9 120 1000 $7.02 $7020 300 $7.02 2 100 Purchase 1100 $7.35 8 085 1400 $7.28 10 185 24/4 Purchase Ret’n (80) $7.35 (588) 1320 $7.27 9 597 4/5 Sale 700 $7.27 5 089 620 $7.27 4 508 26/6 Purchase 8400 7.50 63 000 9 020 $7.48 67 508 11/8 Sale 1800 $7.48 13 472 7 220 $7.48 54 036 19/8 Sale return (20) $7.48 (150) 7 240 $7.48 54 186 11/9 Sale 3 500 $7.48 26 195 3 740 $7.48 27 991 6/10 Purchase 500 8.00 4 000 4 240 $7 55 31 991 11/12 Sale 3 100 $7.55 23 390 1 140 $7.55 8 601 $75 016 B. FIFO SAMMY’S STATIONERY Income Statement for the year ended 31 December 2013 INCOME Sales* Less: Sales Returns and allowances Net sales Less: Cost of sales GROSS PROFIT $137 820 (265) 137 555 74 817 $62 738 Sales = 1 000 x $12 + 700 x $12.10 + 1800 x $13.25 + 3 500 x 13.50 + 3100 x $15 = $137 820 9 MOVING AVERAGE SAMMY’S STATIONERY Income Statement for the year ended 31 December 2013 INCOME Sales* Less: Sales Returns and allowances Net sales Less: Cost of sales GROSS PROFIT $137 820 (265) 137 555 75 016 $62 539 10 Problem 19.11 Income statements – periodic inventory system Part A LANGER LTD Required: For product JINX‐87, calculate May 2014’s cost of sales and cost of inventory on hand at 31 May 2014, using an inventory record. FIFO: Perpetual Purchases Date Explanation 1/5 Beg. invent. 7/5 Purchases Units Unit Cost Sales Units Total Cost Balance Total Cost Unit Cost Units Unit Cost Total Cost 50 $10 $500 20 $11 $220 50 $10 20 $11 $720 11/5 Sales 50 $10 $500 4 $11 $44 16 $11 $176 17/5 Purchases 30 $12 $360 16 $11 30 $12 $536 21/5 Purchase (10) $11 $(110) 6 $11 Return 30 $12 $426 24/5 Sales 6 $11 $66 24 $12 $288 6 $12 $72 29/5 Sales (8) $12 $(96) Return 14 $12 $168 $802 Ending inventory $168 Cost of sales $802 11 Part B Required: Prepare any journal entries required on 30 June 2014 to correct error(s) and to adjust the inventory account (Use the general journal). General Journal Date 2014 Particulars Debit Credit June 30 Sales $100 10 GST Collections Reverse error in recording sales of item on DDP shipping terms Inventory Include items “sold” back into inventory (inventory ledger account balance is now equal to $7 650 + $87 = $7 737 Corrected physical balance = $7 578 + $87 + $90 – $140 = $7 615 Inventory Shortage Expense Inventory lost or missing. Accounts Receivable $110 87 Cost of Sales Inventory 87 122 122 12 ...
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