5. accting for inventory 2 Flashcards
2 systems for stocktakes?
periodic and perpetual
periodic inventory system necesary to determine?
• Necessary to determine ending inventory and cost of sales
perpetual used to and identify?
- Used to verify accounting records
* Identifies loss, theft or deterioration
transfer of ownership:
– EXW (freight paid by buyer)
– DDP (freight paid by seller)
determining cost of inventory on hand:
goods on consignment?
– Agreement where ‘agent’ sells goods on behalf of
owner for a commission
cost of inventory includes/excludes:
– Includes all direct and indirect costs • Purchase costs
• Conversion costs • Other costs
– Excludes wastage, storage, administration etc.
Four methods of inventory cost assignment
– Specific identification
– First-in, first-out (FIFO)
– Last-in, First-out (LIFO)
– Averaging method
• Weighted average (periodic method)
• Moving average (perpetual method)
FIFO method is based on the
assumption that the cost of the first units acquired is the cost of the first units sold
LIFO method is based on the
assumption that the cost of the last units acquired is the cost of the first units sold
The weighted average method calculates
an average cost per unit and uses this to cost the ending inventory
Specific ID consistent with and offers room for?
– Consistent with the actual movement of the inventory
– Offers room for manipulating profit
FIFO reflects and does not permit?
– Reflects current prices in ending inventory
– Does not permit manipulation of profit
LIFO results in:
– Results in matching current COS with current revenue
– Balance sheet values become out-dated
– Profits can be manipulated
Weighted Average results in and tends to
– Results in identical items being assigned the same value
– Tends to smooth out profit and inventory values
how to decide which method to select?
– Entity should choose based on a range of factors
– Ideally specific identification
– LIFO not allowed under the accounting standards
entity when deciding which method needs to be?
– Need to be consistent
– Must use the same accounting methods and procedures from period to period
Costing methods in the perpetual inventory system
- Inventory record maintained for each item of inventory
- Inventory control account maintained in the general ledger
- Inventory records collectively constitute the inventory subsidiary ledger
- Provides continuous record of transactions
When the periodic and perpetual systems are compared
Specific ID and FIFO:
Specific Identification and FIFO methods will give the same cost of sales and ending inventory under each system
When the periodic and perpetual systems are compared
LIFO and average cost methods:
LIFO and average cost methods will give different cost of sales and ending inventory figures under each system - pattern of movement
• Timing of calculation of COS
The lower of cost and net realizable value rule is?
Accounting standards require inventories to be valued at the lower of cost and net realisable value
what is net realisable value?
is the estimated selling price in the normal course of business less the estimated costs of sale.
Presentation in financial statements
AASB 102 Inventories
– Disclose suitable subclassifications (relevant to
activities)
– Valuation basis must also be disclosed for each
GST collected:
GST is collected by entities that:
- are registered for GST
* when they make taxable supplies in the course of their “enterprise” (generally, a business).
GST collected: GST is collected by a business on its sales is…
remitted to the ATO.
