Week 5 - Inventory and PPE Flashcards
What is a perpetual inventory system
Company keeps detailed record of each purchase and sale and determines COGS each time a sale occurs
What is a periodic inventory system
Companies do not keep a detailed record of everything, insteaad calculate COGS at the end
Cost of Sales formula
Opening inventory + Purchases - closing inventory = COGS
What is FIFO
First in First Out - goods bought or produced first are sold first
What is AVCO
Weighted average cost of inventory held
What is LIFO
Last in First Out - goods bought or produced last are sold first
Determine COS and end inventory using FIFO if beginning inventory wsa 3000T @10/T, purchases were 4000T @11/T and 7000T @12/T, sold 9000T
First 9000 tonnes are assumed to be the ones sold (FIFO), so 3000Tx10 + 4000Tx11 + 2000Tx12 = 98000 COS
End inventory = Beginning+purchases-Sold = 5000
Determine COS and end inventory using AVCO if beginning inventory was 3000T @10/T, purchases were 4000T @11/T and 7000T @12/T, sold 9000T
AVCO = total spent on inventory (3000x10 + 4000x11 + 7000x12) = 158k
divided by total tonnes bought = 14k
AVCO = 158/14 = 11.29 per tonne
so COS = 9000 sold x 11.29
Closing inv = 5000x11.29
What do FIFO LIFO and AVCO affecg based on which u use
COS and thus Gross Profit and Ending Inventory
What is the initial value/meaasurement of a PPE item
Cost of purchase and costs directly attributable to bring it to working condition eg installation, engineers, architects
What are extra subsequent measurements for PPE value
Routine repairs and maintanence costs (expense on IS)
Expenses extending useful life (added to cost of the asset on the BS)
what are the two models a company can use to determine value of PPE
Cost model - carried at cost less dep and impairments
Revaluation Model - carried at revalued fair amount less dep and impairments
What happens to BS if there is a revaluation gain of land costing 30k but valued at 40k
Dr land 40k (PPE up 40k)
Cr Revaluation reserve 40k (equity up 40k)
Which four factors are considered when calculating depreciation of an asset
cost or fair value of asset
useful life
residual value of asset (disposal value/scrap value)
method of depreciation
two depreciation methodss
straight line - constant charge over useful life
Reducing balance - decreasing charge over the life of the asset
what is depreciation expense formula for straight line depreciation
Dep Exp. = (initial cost-residual value)/useful life
how does reducing balance method work
dep exp = depreciation rate x NBV e.g. initial cost 40k, dep 60% Year 1 dep = 40k x 0.6 = 24000 Year 2 dep = NBV (40k-24k)x0.6 = 9600 Year 3 dep = NBV (Y2 NBV - 9600) x 0.6 = 3840 decreases over time
what is the double entry for depreciation
Dr depreciation expense (IS expense)
Cr accumulated depreciation (asset goes down)
what happens when useful life is reduced after a few years
calculate new depreciation expense (NBV previous year - residual value)/new useful life
what is the double entry if a car has NBV of 50k which is currently valued at 30k
Dr impairment loss (expense on IS of 20k) Cr PPE (Asset down 20k)
How do you calculate gain/loss on disposal of non current asset (formula)
Gain/Loss on disposal = Net disposal proceeds - NBV
A car was bought for 41k, depreciated for 2 years at 10k per year, and after 2 years was sold (disposal) for 27k. What is recorded on IS
41k-10k-10k = 21k = NBV after 2 years
27k-NBV (21k) = 6k gain on disposal
IS income of 6000
what are the step by step account changes for disposal (dr and cr)
- Dr disposal account, Cr noncurrent asset @ cost
- Dr accumulated depreciation (remove accum dep), Cr disposal account
- Dr cash (proceed from sale), Cr disposal account
- Move from disposal account to gains or losses on disposal so Dr disposal account, Cr gains on disposal
