Chapter 6 Inventory

Chapter 6

Inventory

Chapter learning objectives

• record the adjustments for opening and closing

inventory

• apply the principles of inventory valuation in

accordance with IAS 2 Inventories

• recognize the costs that should be included in

inventory

• calculate inventory costs using the FIFO and AVCO

methods

• understand and identify the impact of inventory

valuation on reported profits and assets.

Inventory impacts the financial statement in two ways

1. Statement of financial position: a potentially large balance within current assets

2. Statement of profit or loss: opening and closing inventory have a direct impact on cost of sales and therefor profits

Introduction

Inventory impacts the financial statement in two ways

1. Statement of financial position: a potentially large balance within current assets

2. Statement of profit or loss: opening and closing inventory have a direct impact on cost of sales and therefor profits

Introduction

1. Accounting adjustment

2. Its valuation

Introduction

Business must therefore ensure that their financial statements account for inventory accurately in terms of:

2. Period end inventory adjustments

A business may not sold all its inventory atyear end. The unused inventory should be removedfrom purchase cost, and the value of unusedinventory held at the end of the year is anasset and must be recorded in Statement ofFinancial Position.

1. Closing inventory

The double entry is:

Dr Inventory (SOFP)

Cr Cost of sales (P/L)

2. Period end inventory adjustments

2. Opening inventory:

Inventory brought forward from the previous year is

assumed to have been used to generate assets for

sale. It must be removed from inventory assets and

recognised as an expense in the year.

The double entry is:

Dr cost of sales (P/L)

Cr inventory (SFP)

Recap of statement of profit or loss

$ $

Revenue 300

Opening inventory 50

Plus: Purchase 200

Less: Closing inventory (150)

Cost of sales (COS) (100)

Gross profit 100

3. Inventory and cost of sales

Remember the purchases account is used to reflect all purchases of inventory.

The opening and closing inventory adjustments arise at the period end for the value of inventory not sold at the end of the period.

Cost of Sales (COS) = Opening inventory + Purchases – Closing

inventory

3. Inventory and cost of sales

4. Inventory valuation (IAS 2)

4. Inventory valuation (IAS 2)

4. Inventory valuation (IAS 2)

Net realisable value (NRV): the estimated selling price less any further costs required to make the sale.

Further costs include: cost of completion、selling cost ……

4. Inventory valuation (IAS 2)

4. Inventory valuation (IAS 2)

Cost of purchase

Material costs

Import duties

Insurance

Freight

Cost of conversion

Direct costs （wages of workers...）

Production overheads（depreciation...）

Selling costs/ storage costs

Abnormal waste of material, labour...

Administrative overheads

Costs must be excluded

Cost: all the expenditure incurred in bringing the

product or service to its present location and

condition.

4. Inventory valuation (IAS 2)

Cost of inventory-example

(生产班长的工资)

5. Methods of calculating the cost of inventory

First in first out method(FIFO)

Day buy in/ sell out

Quantity $

1 buy in 1 5

2 buy in 1 6

3 buy in 1 7

4 sell out 1 ?

? = $5

5. Methods of calculating the cost of inventory

5. Methods of calculating the cost of inventory

Average cost

Continuous weighted average cost (连续加权平均成本)

Periodic weighted average cost (期间加权平均成本)

5. Methods of calculating the cost of inventory

5. Methods of calculating the cost of inventory

5. Methods of calculating the cost of inventory

FIFO

5. Methods of calculating the cost of inventory

Periodic weighted average cost

5. Methods of calculating the cost of inventory

continuous weighted average cost

The Impact of valuation methods on profit and the

statement of financial position

Different valuation methods will result in different closing inventory value. This

impacts both profit and statement of financial position asset value.

In times of rising prices,

FIFO will tend to give higher profits and higher inventory value.

In times of reducing prices,

FIFO will tend to give lower profits and lower inventory value.

Quick quiz

The Impact of valuation methods on profit and the

statement of financial position

6. Continues inventory systems

期末盘存

Inventory counting

period-end/ periodic method

continuous method 永续盘存

There are two methods to keep and update inventory records：

Chapter summary

inventory

valuation

Lower of

cost

Unit cost FIFO WAC

Net Realisable value

Adjustments

opening closing