Week 8 Lecture Notes - Introduction to Inventory, Non-Current Assets and Contra Accounts

Week 8 Lecture Notes - Introduction to Inventory, Non-Current Assets and Contra Accounts

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AACT1501, Semester1 2011 Page 1 THE UNIVERSITY OF NEW SOUTH WALES School of Accounting ACCT 1501: Accounting and Financial Management 1A Week 8 Introduction to Inventory, Non-Current Assets, & Contra Accounts Student Handout Contents: 1. Introduction 2. Tutorial questions – Week 9 3. Lecture examples 4. Appendix 1 5. Lecture slides Lecturer: Trish Strong School of Accounting UNSW t.strong@unsw.edu.au Course website: http://telt.unsw.edu.au/
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AACT1501, Semester1 2011 Page 2 1. Introduction In the first half of this week’s lecture, we introduce one of the most important assets that a company has, that is, inventory – those goods purchased or manufactured for sale, resale or further use in operations. This week, we consider how to account for inventory by examining the different types of inventory systems and the different cost flow assumptions that underpin inventory valuation. You need to consider the cost of inventory (How much did it cost?) when reporting the balance of inventory in the balance sheet. However, it is not easy to be determined because, often, inventory purchases are made at various times during the year, where the price of these items may vary. Working out cost is only straight forward if you track items individually, and tracking items individually is only worth it if they are large items or expensive, like cars or jewellery. Individual tracking is known as the specific identification approach. If it’s not worth tracking individual items, then you have to make a cost flow assumption. For instance, when selling tennis balls, you don’t know whether the pack you just sold was the pack you bought recently, or the pack you bought a some time ago. So you have to make an assumption about the flow. Assumptions you might make are first-in first-out (FIFO), last-in first-out (LIFO) or average cost (AVGE). You’ve also got one other choice: do you keep track of every sale (the perpetual approach), or do you just keep track of purchases by counting your ending inventory, then deduce what you must have sold (the periodic approach)? So, if you also make cost flow assumptions, then you’ve six ways of coming up with cost: Periodic Perpetual FIFO A B LIFO C D AVGE E F
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AACT1501, Semester1 2011 Page 3 You might think that this can give you six different numbers – it’s actually only 5: A always equals B. Try it for yourself! After this you still have to compare cost to market value, and finally you can come up with a number for inventory on the Balance Sheet! In the second half this week’s lecture, we will explore the accounting for non-current assets. Non-current assets encompass a company’s fixed assets (also called tangible assets) as well as intangibles, goodwill, non-current investments, deferred income tax assets and other non-current assets such as non-current receivables. All these are examples of assets whose benefit is expected to be used up over a period longer than the entity’s operating cycle or 12 months.
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Week 8 Lecture Notes - Introduction to Inventory, Non-Current Assets and Contra Accounts

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