(5) Recording and analysing inventories Flashcards
Inventory cost flow methods Legal title - FOB shipping point, FOB destination LCNRV (lower cost and net realisable value)
Key features of a periodic inventory system
- Purchases a/c increases when inventory is purchased
- Increase in Purchase Returns & Allowances a/c when inventory is returned to the supplier
- No journal entry for when inventory is sold or returned by customer
- Cost of sales only emerges at the end of the accounting period in the Statement of Profit or Loss
What are the inventory cost flow methods?
Hint: there are 4
- Specific unit cost (Specific Identification): each inventory item is unique
- Average cost
- First-In, First-Out (FIFO): oldest units sold first
- Last-In, First-Out (LIFO): newest units sold first BUT not allowed in Australia
When the terms are FOB(free on board) shipping point….
Ownership of the goods passes to the buyer when the delivery entity accepts the goods from the seller.
Items are no longer included in the seller’s inventory.
When the terms are FOB destination….
Ownership of the goods remains with the seller until the goods reach the buyer.
The items is included in the seller’s inventory until it reaches the buyer.
How does the inventory valuation method selected affect the Statement of Profit or Lass?
In periods of increasing prices (inflation)….
- FIFO reports the highest income because COS was costed at the oldest (and lowest) prices
- LIFO records the lowest net income (therefore lower taxes)
- Average falls in the middle
How does the valuation method selected affect the Statement of Financial Position?
- FIFO will approximate current costs
- LIFO will provide inventory valuations based on the oldest purchases
Hence, can argue that LIFO provides a less ‘relevant’ accounting outcome
When valuing inventory, an overriding rule is the Lower of Cost and Net Realisable Value (LCNRV).
Explain LCNRV.
If the selling value of inventory falls lower than its cost, then the inventory item (NOT total inventory) must be written down to that lower selling value in the period in which the price decline occurs.
This is an exception to the cost principle.
How is the net realisable value (NRV) defined under the AASB 102?
NRV is defined as the estimated proceeds of sale less costs incurred in completing the sale
What are the two indicators for how quickly inventory is sold?
- Inventory turnover = Cost of sales / average inventory
- Days in inventory = 365 / inventory turnover
A higher inventory turnover or lower average days in inventory suggests that management is reducing the amount of inventory on hand, relative to sales
Which assumed inventory cost flow method usually parallels the actual physical flow of inventory?
First-In, First-Out (FIFO)
Which assumed inventory cost flow method assumes that goods available for sale during an accounting period are similar in nature?
Average cost flow method
Which assumed inventory cost flow method assumes that the latest units purchased are the first to be sold?
Last-In, First-Out (LIFO)
What is the main basis of accounting for inventories? What is the major objective in accounting for inventories?
The primary basis of accounting for inventories is cost in accordance with the cost principle. The
major objective for inventories is the proper determination of profit in accordance with the matching
principle.
What factor determines whether or not goods should be included in a physical count of inventory is?
Legal title
Westcoe Company Ltd’s goods in transit at 31 December include sales made (1) FOB destination and
(2) FOB shipping point. Which items should be included in Westcoe’s inventory at 31 December?
(1) only
