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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
CHAPTER 12 Maintain inventory records
Learning outcomeExamining and working through different
methods of accounting for inventories
12-1
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Concepts1. The preparation of stock cards for:
• First in first out• Weighted average
2. Ledger accounts for both cost and selling prices3. A comparison of physical and perpetual inventory systems4. The Retail Inventory method
12-2
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
KEY TERMS• Cost of goods sold• Cost price• First in first out (FIFO)• Inventories
12-3
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
KEY TERMS cont.• Lower of cost and net realisable value• Retail inventory• Selling price • Standard costs• Weighted average costs
12-4
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Inventories‘Inventory’ is the term used for stock or goods bought and sold by a trading business• When acquired inventories are purchases• When sold they are sales• Those not yet sold are an asset, closing
inventories
12-5
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Lower of cost and net realisable value• Inventories are generally recorded at historical cost• But, where it is considered that the sale price will
fall below the cost price, the business can reduce the balance to reflect the lower value
For example:• Obsolete computers and parts• Where inventory deteriorates• Reduced demand for the product • Where there is excess supply in the market
12-6
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Physical inventory methodPrior to stocktake:• Need to ensure a clear cut-off point for sales and
purchases• Employees completing the stocktake to be properly
instructed• Obsolete stock isolatedProblems of annual stocktake:• Disruptive to a business• Short-term profit statements are difficult to prepare
during the year without a full stocktake• Little control over what stock should be there• Theft and waste may go undetected
12-7
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Perpetual inventory method• This is a continuous recording of all stock
movements in and out, and the balance on hand
• Unit costs are included, together with the value of the closing stock on hand
12-8
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Advantages and disadvantages of the perpetual inventory method
Advantages• Losses and surpluses are identified• Stock re-order points are easily seen• Fast- and slow-moving inventories are highlighted• Total of all stock cards is the total value of stock on
hand• Accurate and timely profit reports can be prepared
Disadvantages• A physical stocktake is still required• It can be costly to operate• It cannot be applied to all businesses
12-9
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Standard costsA predetermined cost is calculated for a product being manufactured. It is based on:• materials costs• labour rates • overhead expenses
12-10
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Inventory stock cardA stock card is maintained at cost price, for each different stock item.The stock card shows:•the stock item•where it is located•maximum and minimum stock levels•reorder points •details of stock movements in and out, together with the balance on hand
12-11
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
First in first out method (FIFO)• The first units purchased are recorded as the first
ones sold irrespective of whether they are allocated from the store in the same order
• It is about the flow of costs not the flow of goods• The closing inventory value in the balance sheet
contains the latest prices paid for the goods
12-12
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Weighted average cost methodThis method shows:• average costs at the start• the average value of closing stock after each
purchase • the average value of closing stock after each sale
The average cost is calculated by dividing the total goods available for sale by the number of items on hand
12-13
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Summary of FIFO and average cost methods
Accounting for inventories using the perpetual inventory methodTwo of the acceptable methods: all items at cost price
AVERAGE COST( Number on hand divided into the total value to obtain unit cost)
FIRST IN FIRST OUT(The first units in are the first to be costed when stock is issued)
PERPETUAL INVENTORY STOCK CARD
INVENTORIES ACCOUNT
COST OF GOODS SOLD ACCOUNT
12-14
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
To calculate gross profit or loss
COST OF GOODS SOLD ACCOUNT(COST PRICE) SALES
(SELLING PRICE)SALES RETURNS (SELLING PRICE)
TRADING ACCOUNT(GROSS PROFIT/LOSS)
12-15
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Ledger accountsThese ledger accounts are recorded at ‘cost price’:• Inventories account• Cost of goods sold account• There is no ‘Purchases account’ in inventory
accounting
These ledger accounts are recorded at ‘selling price’:• Sales • Sales returns
12-16
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Retail inventory methodThis method can be used where:• stock movements are large• there is a high turnover• stock can be grouped to the same percentage mark-up
where a standard mark-up for a group of products can be applied
Departmental stores and supermarkets are examples of where the retail inventory method can be applied.
12-17
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd
Features of the retail inventory method • Opening inventories and purchases converted to
‘selling price’• Alterations to selling prices as additional mark-ups• Markdowns for ‘specials’• An estimate of the closing stock values at ‘cost’ price
12-18