Day 3 - Chapter 7 Flashcards
Manufacturing business
raw materials, WIP and finished goods are all components of inventory in a manufacturing business
What is inventory?
its a current assets
- Statement of Financial Position
- Cost of Sales in SPL
What does FIFO stand for?
First in First Out
What does AVCO stand for?
Average Cost
Y/E Adjustment for Inventory
- Remove Opening Inventory - TB
DR Opening Inventory - COS, SPL
CR inventory - SFP
- Record Closing Inventory at YE - NOTE UNDER TB
DR Inventory - SFP
CR Closing Inventory - COS, SPL
Value of Closing Inventory is determined at year end
they go in for stock counts and value the closing inventory this way
How to calculate the stock value if the year end date has passed?
if the stock count is not performed at the y/e, factor in sales and purchases of goods between the y/e and the count date
do the opposite you would expect
What are the two types of ways to value inventory?
Cost and Net Realisable Value
What does cost mean?
all expenditure incurred in bringing the product or service to its present location and condition
includes:
PURCHASE
- materials
- import duties
- freight
COST OF CONVERSION
- direct costs - direct labour and material costs
- production overheads - depreciation on pipe used to make goods
What does NRV mean?
NRV = estimated selling price - selling costs
What are examples of selling costs in NRV?
eg. commission paid to agent
- repairs cost
- auctioneers fees
- commission paid
Which one do you use between NRV and cost when valuing inventory?
the one with the lower value
What happens if goods are no longer in inventory?
they will have been included in purchases at cost
they are given no value in closing inventory
therefore cost is charged in cost of sales even though they have never been sold
this will distort the profit figure
What is the alternative method of accounting that will be used for when there are goods that have been stolen or damaged?
original cost of goods is removed from purchases
we credit purchases
the cost of goods is now charged as an expense in p/l
we debit expense
What happens if goods that were lost or stolen were insured?
the receipt of income is treated as other income
What does FIFO assume?
First goods purchased are first to be sold. This assumption means that inventory is always valued at up to date prices
What does AVCO assume?
a weighted average price for all units in inventory is calculated RECALCULATED BEFORE EACH SALE
issues are priced at the average cost and balances of inventory remaining has the same unit valuation
What is the ACVO calculation?
total cost (before each sale) / total units (before each sale)
The difference between FIFO and AVCO
in times of rising prices, FIFO gives a higher closer inventory than AVCO
therefore FIFO will give a lower cost of sales figure than AVCO and give a higher gross profit
How does FIFO affect profit?
FIFO would increase the closing inventory value in times of rising prices. The most recent price will be higher.
This would decrease the cost of sales since closing inventory is bigger.
Therefore gross profit will be higher since the cost of sales is smaller
What is drawings of inventory?
When a sole trader takes inventory from the business for personal use
What is the double entry for drawings?
DR Drawings - with cost of inventory taken
CR Purchases - with cost of inventory taken
What do you debit/credit when dealing with inventory?
purchases
we only deal with inventory at year end
What is the cost of sales equation with drawings?
cos = opening inventory + purchases - drawing of inventory - closing inventory
What are the two cost structures of inventory?
mark-up and margin percentages
if we have missing info we can use this
What can the two cost structures be used to do?
these are used on how to price the goods they are selling - establish a cost of an item
What is gross profit margin?
where gross profit is expressed as percentage of sales
gross profit = gross profit % x sales
What is mark-up on cost?
where gross profit is expressed as a percentage of the cost of goods sold
gross profit = mark up % x cos
What is the rational behind working out gross profit margin? (assuming the gross profit margin is 25%)
gross profit = 25% x sales
sales is treated as 100%
cost of sales is treated as 75%
therefore the gross profit would be the remaining 25% -the difference between the two
What is the rational behind working out markup? (assuming the gross profit margin is 25%)
sales is treated as 125%
cost of sales is treated as 25%
therefore therefore the gross profit would be the remaining 25% -the difference between the two
Mark Up Exam Approach
- Calculate COS
mark up % x cos = sales - cos (GP)
sales is treated as 140%
cos is treated as 100%
GP = 40%
