Chapter 11: Inventory Flashcards
Inventories
Assets that:
- Are held for sale in the ordinary course of business (trading inventory)
- Are in the process of production for such sale (work in progress)
- Or are in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials and consumables)
How is inventory measures
- Historical cost basis at the lowest of cost
- Net realisable value
Cost price of inventory will include
- import cost
- freight to transport goods to the entity
- insurance cost while inventory is in transit, etc.
Net realisable value
The estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.
Examples of inventories that are the property of an enterprise (even though not physically in the enterprise’s possession):
- Inventory sent on consignment to an agent of the entity
- Inventory of which the right of ownership is transferred before the inventory is delivered to the entity (purchaser).
- Inventory purchased of which delivery is deferred at the request of the purchaser, but the purchaser has already taken title and accepted invoicing.
Two types of inventory systems
Perpetual or periodic
Periodic inventory system
An inventory system that only gives an indication of the inventory on hand once a physical inventory count has been done.
Periodic inv. journal entry:
The purchasing of goods
Dt - Purchases
Cr - Bank/Creditors
Periodic inv. journal entry:
The sale of goods
Dt - Bank/Debtors
Cr - Sales
Periodic inv. journal entry:
Recording of closing inventory
Dt - Inventory
Cr - Cost of sales
Periodic inv. journal entry:
Purchase returns
Dt - Bank/Creditors
Cr - Purchase returns
Dt - Purchase returns
Cr - Purchases
Periodic inv. journal entry:
Sales returns
Dt - Sales returns
Cr - Banks/Debtors
Dt - Sales
Cr - Sales returns
Periodic inv. journal entry:
Closing of opening inventory
Dt - Cost of sales
Cr - Inventory
Periodic inv. journal entry:
Closing of purchases
Dt - Cost of sales
Cr - Purchases
Periodic inv. journal entry:
Closing of cost of sales
Dt - Trade account
Cr - Cost of sales
Periodic inv. journal entry:
Closing of sales
Dt - Sales
Cr - Trade account
Periodic inv. journal entry:
Normal inventory losses
No entry is recorded.
Since actual physical closing inventories are used, inventory losses are automatically taken into consideration in the calculation of cost of sales in the cost of sales account.
Periodic inv. journal entry:
Abnormal inventory losses
Dt - Inventory loss
Cr - Cost of sales
Advantages of periodic inventory system
Simplicity and low cost
Disadvantages of periodic inventory system
Doesn’t indicate physical inventory losses
Perpetual inventory system
An inventory system that will always show the physical inventories on hand in the accounting records.
The inventory account is adjusted for every movement in inventory.
Perpetual inv. journal entry:
The purchase of goods
Dt - Inventory
Cr - Bank / Creditors
Perpetual inv. journal entry:
The sale of goods
Dt - Bank / Debtors
Cr - Sales (sales price)
Dt - Cost of sales
Cr - Inventory (cost price)
Perpetual inv. journal entry:
Recording of a normal inventory loss
Dt - Cost of sales
Cr - Inventory
Perpetual inv. journal entry:
Recording of an abnormal inventory loss
Dt - Inventory loss
Cr - Inventory
Perpetual inv. journal entry:
Purchase returns
Dt - Bank / Creditors
Cr - Purchase returns
Dt - Purchase returns
Cr - Inventory
Perpetual inv. journal entry:
Sales returns
Dt - Sales returns (sales price)
Cr - Bank/Debtors
Dt - Sales
Cr - Sales returns (sales price)
Dt - Inventory (cost price)
Cr - Cost of sales
Perpetual inv. journal entry:
Closing of cost of sales
Dt - Trade account
Cr - Cost of sales
Perpetual inv. journal entry:
Closing of sales
Dt - Sales
Cr - Trade account
Accounting policy: Inventories are valued at…
the lowest of cost and net realisable value (in other words the deviation from historical cost prices is mentioned)
Accounting policy:
The specific cost formula used on consumables:
Consumables are measured according to the weighted average cost method.
Accounting policy:
The specific cost formula used on trading stock:
Trading stock is measured on the FIFO basis.
