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Inventory
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The best way to deal with this is to prepare a schedule dealing with
transactions in date order as follows:
Date Transaction Units
Cost
Total
Cost
$
$
1 Jan X6 Op inventory
5
3.50
17.50
2 Jan X6 Purchase
5
4.00
20.00
––––
–––––
10
(37.50/10)
=
3.75
37.50
4 Jan X6 Purchase
5
5.00
25.00
––––
–––––
15
(62.50/15)
=
4.17
62.50
5 Jan X6
Sale at cost
(7)
4.17 (29.19)
––––
–––––
8
33.31
6 Jan X6 Purchase
5
$5.50
27.50
––––
–––––
–––––
7 Jan X6 Closing inventory
13
(60.81/13) =
4.68
60.81
––––
–––––
–––––
(b)
Statements of profit or loss
Statement of profit or loss using the FIFO method
$
$
Sales revenue (7 × $10.00)
70.00
Cost of sales
Opening inventory (5 × $3.50)
17.50
Purchases (5 × $4.00) + (5 × $5.00) + (5 × $5.50)
72.50
Less: Closing inventory (see part a)
(64.50)
–––––
(25.50)
–––––
Gross profit
44.50
–––––
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Statement of profit or loss using the periodic AVCO method
$
$
Sales revenue (7 × $10.00)
70.00
Cost of sales
Opening inventory (5 × $3.50)
17.50
Purchases (5 × $4.00) + (5 × $5.00) + (5 × $5.50)
72.50
Less: Closing inventory (see part a)
(58.50)
–––––
(31.50)
–––––
Gross profit
38.50
–––––
Statement of profit or loss using the continuous AVCO method
$
$
Sales revenue (7 × $10.00)
70.00
Cost of sales
Opening inventory (5 × $3.50)
17.50
Purchases (5 × $4.00) + (5 × $5) + (5 × $5.50)
72.50
Less: Closing inventory (see part a)
(60.81)
–––––
(29.19)
–––––
Gross profit
40.81
–––––
Test your understanding 9
A business commenced on 1 January and purchases are made as
follows:
Month
No of units
Unit price
Value
$ $
Jan 380
2.00 760
Feb 400
2.50
1,000
Mar 350
2.50 875
Apr 420
2.75
1,155
May 430
3.00
1,290
Jun 440
3.25
1,430
–––––
–––––
2,420
6,510
–––––
–––––
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In June, 1,420 articles were sold for $7,000.
What is the cost of closing inventory and gross profit for the period
using the FIFO method:
Closing
inventory
Gross
profit
$
$
A 2,690
3,180
B 2,310
2,800
C 3,077
3,567
Test your understanding 10
On 1 July 20X6 an entity, Pinto, had 10 items of inventory at a unit cost of
$8.50. Pinto then made the following purchases and sales during a six
month period to 31 December 20X6:
Purchases:
Date
Quantity
Unit cost
Total cost
$
$
14 Oct X6
15
9.00
135.00
22 Nov X6
25
9.20
230.00
13 Dec X6
20
9.50
190.00
––––––
––––––
60
555.00
––––––
––––––
Sales:
Date Quantity
Unit
Selling
price
Total cost
$
$
23 Aug X6
7
12.00
84.00
20 Oct X6
10
12.25
122.50
30 Nov X6
15
12.50
187.50
24 Dec X6
18
13.00
234.00
––––––
––––––
50
628.00
––––––
––––––
Required:
Based upon the available information, calculate the closing
inventory valuation at 31 December 20X6 using:
(a)
periodic weighted average cost
(b)
continuous weighted average cost.
Chapter 6
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Profit and statement of financial position
The impact of valuation methods on profit and the statement of
financial position.
Different valuation methods will result in different closing inventory
values. This impacts both profit and statement of financial position asset
value. For this reason it is important that once a method has been
selected it is applied consistently. It is not appropriate to keep switching
between methods to manipulate reported profits.
Similarly any incorrect valuation of inventory will impact the financial
statements.
If inventory is overvalued then:
•
assets are overstated in the statement of financial position
•
profit is overstated in the statement of profit or loss (as cost of sales
is too low),
If inventory is undervalued then:
•
assets are understated in the statement of financial position
•
profit is understated in the statement of profit or loss (as cost of
sales is too high).
Inventory
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Period-end vs continuous inventory records
Keeping inventory records
When preparing the financial statements, quantifying closing inventory
can be a major exercise for a business. Traditionally inventory is counted
and compared to inventory records at the year-end. This is referred to as
the 'period-end' or 'periodic' method of inventory counting.
Alternatively a business could count a sample of inventory items at each
week or month end and compare the results of those counts with the
inventory records at that time. Throughout the accounting period the idea
would be to count all lines of inventory at least once. This is referred to as
'continuous' inventory counting.
The merits of continuous inventory records are as follows:
•
There is better information for inventory control.
•
Excessive build-up of certain lines of inventory whilst having
insufficient inventory of other lines is avoided.
•
Less work is needed to calculate inventory at the end of the
accounting period.
The merits of period-end inventory records are as follows:
•
They are cheaper in most situations than the costs of maintaining
continuous inventory records.
•
Even if there is a continuous inventory record, there will still be a
need to check the accuracy of the information recorded by having a
physical check of some of the inventory lines.
Chapter 6
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Chapter summary
Inventory
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KAPLAN PUBLISHING
Test your understanding answers
Test your understanding 1
•
Gross profit is sales revenue less cost of sales.
•
We must match the 70 machines sold with the cost of those
machines and exclude from cost of sales the machines that are left
in inventory.
•
Opening inventory must be included in cost of sales as some of the
goods sold during the year come from the goods the trader started
off with at the beginning of the year.
•
We can calculate the gross profit as follows:
$
$
Sales revenue
215,000
Opening inventory
9,500
Purchases 150,000
–––––––
159,500
Less: Closing inventory
(7,500)
–––––––
Cost of sales
(152,000)
–––––––
Gross profit
63,000
–––––––
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