Post on 03-Jun-2018
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Financial Accountingprof. Adriana Tiron Tudor- course
assist. Szilveszter Fekete- practice
att
Agenda course 4
1. Objectives
2. Assets definition and recognition
3. Inventories definition and classification
4. Recording system, costing and valuation
5. Recording transactions with inventories
That inventoriesplay an important role in the operating cycle of a businessentitymay represent a significant part of an entitys assetsare classified in different categories ( such as finished goods,components, materials, merchandise)
1. Objectives
After studying this chapter, you will understand:How to
record movements in inventoryinventory policies are disclosedestablish the cost of goods withdrawn from inventory
1. Objectives
What are- the difference between permanent and intermittentinventory system- the costing methods- the valuation methods
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An asset representsa source controlled by the entityas a result of past eventswhich is expected to generate future economic benefits for theentitywith a cost that can be credibly evaluated;
An asset is recorded in the balance sheet when:Future economic benefits are likely to be realized as a result of
keeping (storing), using, selling that certain asset;That certain asset has a cost or a value that can be evaluated
credibly.
2. Assets definition and recognision
The recognition of the assets in the balance sheetusually takes place along with the recognition of adebt or an income in the profit and loss account ( theprinciple of the connection between the expensesand incomes ).
Acquisition Asset = Supplier (2=4)
Internally constructed Asset = Capitalized costs (2=7)
2. Assets definition and recognision
In most counties of the Western Europe, thepatrimonial assets are presented in the reverseorder of liquidity, as follows:
Non-current assetsintangible assets
tangible assetsfinancial assets
Current assetsinventoryreceivableshort term investmentscash
Regulation assetspre-payments
2. Assets definition and recognision
Current assetscontain all the exploitation assets and thetreasury ones the liquidation period of which isbelow one year.
Are characterized by the following:dont last in a patrimonial entity , their rotation period isusually shorter than one year;are in continuous movement , changing their materialform and utility inside the estates economic circuit (rawmaterial, finished good, receivable, cash).
2. Assets definition and recognision
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IAS 1 states that an asset must beclassified as a current asset when:
It is expected to be realized or its held for sale orconsume during the normal exploitation cycle of theenterprise;Its held, mainly, to be commercialized or on short term
and it is expected to be realized in 12 months from the dateof the balance sheet;Represents cash or an equivalent of cash whichsutilization is unrestricted.
2. Assets definition and recognision The current assets
Current assetsdepending on their concrete form and destination
inside the exploitation cycle, are divided in:B.1. Inventory and production in progress;
B.2. Receivables or values in process of
reimbursement (settlement);B.3. The short term financial investments (theplacements);
B.4. Cash.
2. Assets definition and recognision
IAS 2 the inventory are material goods(assets):
Held for sale in the ordinary course of the activity;
In the process of production for such sale or ;
In the form of materials, or suppliers to be consumed in the
production process or service providing .
3. Inventories definition and classification
Depending by the enterprises activity theinventory is formed of:
Manufacturing /servicing activityraw materials, consumables, parts, componentsfinished products, semi-finished products,works and services in process;
Commercial activity (retail, wholesale ormerchandising)
commodities (goods purchased for resale)
3. Inventories definition and classification
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In the category of the inventories areincluded: (RO)
raw materials and consumableswork in progressproducts
held by third partiesanimalscommoditiespackaging
3. Inventories definition and classification
1. The raw materials constitute the main substance ofthe finished good , participate directly in the fabricationof the goods and are found integrally or partially in thefinished good, in their initial form of transformed .
3. Inventories definition and classification
2. The consumables participate in the fabrication orexploitation process without usually finding themselvesin the finished good.
The main consumables are:Auxiliary materialsFuelPackaging materialsSpare partsSeeds and saplingFodderOther consumables
3. Inventories definition and classification
The auxiliary materials:Are added to the raw materials in order to transform them;Contribute to the fabrication of the finished goods;Are used to ensure the necessary conditions for the normalcourse of the activity.
The fuel:
Fuel takes direct or indirect part in the processes that takeplace in a patrimonial unit.Depending on their role and destination , we distinguishbetween:
Technologic fuel;Energetic fuel;Household fuel.
3. Inventories definition and classification
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The spare parts:Spare parts serve for the replacement of machines and plantcomponents in order to repair them.
In the category of the consumables are also included: thepackaging materials the seeds and sapling, the fodder used in the
agricultural units activity, as well as other consumables .
3. Inventories definition and classification
3. The materials in form of inventory items
The materials in form of inventory items representthe goods which either have a smaller value thanthe limit settled to be considered tangible assets,regardless of their utilization period, or have autilization period smaller than one year, regardless oftheir value.
3. Inventories definition and classification
4. Production in process(Work in process, unfinishedproduction)
goods in process oftransformation , which occupy anintermediary position , eitherbetween the raw material andsemi-finished good , or betweensemi-finished good and finishedgood.
3. Inventories definition and classification
5. The semi-finished goodsare the goods that:
Went through a number of technologic phases, suffered acertain level of handling andWere received, are supposed to be handled further in theunit or sold to the third parties.
can be obtained from own production or acquisitioned fromoutside and destined to the internal consume or to the resale .
6. The residual productsare rejections , recoverable materials and waste products.
3. Inventories definition and classification
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goods which:- went through al the phases ofthe technological process,- match the quality standards,- were receipted and- documents of delivery to thewarehouses were made.
Manufactured items that arecomplete and ready for sale.
7. Finished goods
3. Inventories definition and classification
8. The commodities (merchandise)goods purchased from the third parties in order to be resold as they are
or fabricated in the unit and passed in their own retail shops.Ex. computers, cars, books, telephones, food,
9. The packaginggoods used to protect other goods, during the transportation, handling or
storage.The packaging are classified in:
Circulation packaging: sacs, boxes, containers, recipients, bottles,Production packaging: cans, tubes for the toothpaste, vials for
medicines, perfumes etc.
3. Inventories definition and classification
10. The animals and birdsborn or acquisitioned and the young ones of any kind
(calves, lambs, sucking pigs, colts etc.) bred and usedfor reproduction, wool, milk, meet, furs, animals andbirds for fattening, bees colonies.
There are not included in this category the workinganimals , contained in the category of the tangibleassets.
3. Inventories definition and classification
Questions/Discussion ConcerningOwnership
Do all the goods included inthe count belong to thecompany?Does the company own anygoods not included in thecount?
.
3. Inventories definition and classification
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In the category of the inventory are also included (11) thegoods held in custody , for handling or in consignation atthe third parties.
These are recorded differently in accounting, on inventory
categories.
Consigned GoodsGoods of others you hold that you dont pay for untilthey are sold The company does not have theownership.
3. Inventories definition and classification
Expenses represent value consumedconsumption of value the firm incurred
Revenues represent value created
creation of value during the period
3. Inventories definition and classification
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3. Inventories definition and classification
Specificidentification
Specialcosting
methods
Specificidentification
Specialcosting
methods
Recording system Costing methods Valuation methods
Permanentinventorysystem
Periodicinventorysystem
Cost based
Market based
4.Recording system, costing and valuation
Class 3: Groups of accounts for inventoriesand for production in progress
30 - Inventory of raw materials and consumables33 - Work in progress34 Products35 Inventories held by third parties36 Animals37 Commodities
38 Packaging39 Adjustment for impairment of inventories and work in
progress
30-38 - Asset accounts- inventories accounts- price differences accounts: A 308,348, 368,388 and L 378
39 Adjustments: Liability accounts( with inverse accounting function)
acc
Group 30. Inventory of raw materials and consumables301 Raw materials302 Consumables
3021 Auxiliary materials 3022 Fuel3023 Pac kag ing mater ials 3024 Spar e par ts3025 Seeds and sapling 3026 Fodder3028 Other consumables
303 Materials in the form of inventory items308 Price differences on raw materials and consumables
Group 33. Work in progress331 Goods in progress 332 Works and services in progress
Group 34. Products341 Semi-finished products 345 Finished products346 Residual products 348 Price differences on products
4.1. Accounts
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Group 35. Inventories held by third parties351 Raw materials and consumables at third parties354 Products at third parties 356 Animals at third parties357 Commodities at third parties 358 Packaging at third parties
Group 36. Animals361 Animals and birds 368 Price differences on animals and birds
Group 37. Commodities371 Commodities 378 Price differences on commodities
Group 38. Packaging381 Packaging 388 Price differences on packaging
Group 39. Adjustment for impairment of inventories and work inprogress
4.1. AccountsGeneral functioning rules for
asset accounts
present only debit closingbalance and represent theexistences of assets at acertain time;
debit - the initial existencesof asset, undertaken from theinitial balance sheets asset;
debit - the asset increasesdetermined by the economicoperations, inscribed in the
supporting documents;
credit - the asset decreasesdetermined by the economicoperations, inscribed in the
supporting documents;
D Inventories Asset C
General functioning rules foradjustment of asset
present only credit closingbalance and represent theexistences at a certain t ime;
credit - the initial existencesundertaken from the initialbalance sheets asset;
credit - the increases
determined by the economicoperations, inscribed in thesupporting documents;
debit - the decreases
determined by the economicoperations, inscribed in thesupporting documents;
D Adjustment C
4.2.Costing methods
IAS 2 states: t he cost of inventories shall comprise all costs ofpurchase, and other costs incurred in bringing the inventories to theirpresent condition and location ( I.e. historical cost of acquisition)
Cost of goods manufactured ( production cost) is t he sum of theacquisition cost of raw materials, components and suppliedconsumed, labor cost , and a reasonable proportion of productionsupport and infrastructure costs ( overheads).
Inflows historical cost of acquisitionstandard cost (RO)invoice cost (RO)
Outflows non fungible goods: specific identification- fungible goods: special costing methods:
FIFOLIFOWAC
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4.2.Costing methods standard cost (RO) acquisitions production
Ex: standard cost 100 , real cost 90 ( invoice) standard cost 100 , real cost 90% = suppliers 90 % = Revenue 90
materials 100 products 100differences 10 differences 10
Ex: standard cost 100, real cost 105 (invoice)% = suppliers 105
materials 100differences 5
invoice cost (RO)
Ex: invoice cost 100, transport 10% = suppliers 110
materials 100differences 10
4.2.Costing methods
The price differences
Correct through sum or subtraction the valueof the current assets , respectively of theinventory .
Appear due to the use for the recording of theinventory of other values called recording(registration) values , other than the real ones(the acquisition cost or the production cost).
4.2.Costing methods
The price differences
For instance , the standard cost , the presetproduction cost , the retail price are used.
The distribution of the price differences overthe value of the output goods and over theinventory is realized with the aid of a certaincoefficient which is calculated as follows:
4.2.Costing methods
The price differences
The ini tial balance of + the price differences relatedtoThe d istributio n the p rice d if ference s the e ntr ies d uring t he p erio d
coefficient = _______________________________________________________ x 100The ini tial balance ofthe + the value oftheentries during
inventoryat registrationprice the periodat registration price
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ExampleA SC uses standard cost, has an inventory of auxiliary materials of 200 kg withan acquisition cost of 20 lei/kg, price differences 200 lei. Later it buys 500 kg atan invoice price of 21 lei/kg+ VAT. It consumes 600 kg.
Acquisition of auxiliary materials 500 kg% = 401 124953021 10000308 500 (21-20)*5004426 1995
Consumption of auxiliary materials6021 = 3021 12000Coefficient of price differenceK= (IB308+CDA308)/(IB3021+CDA3021)=0.05
Price differences for the consume 12000*0.056021= 3021 600
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Specific Identification
An actual physical flow costing method in which items still ininventory are specifically costed to arrive at the total cost ofending inventory.
Cost of goods sold = $700 + $800
4345
What Is Wrong with SpecificIdentification?
COST BENEFIT -EXPENSIVE TO SET-UP ANDMAINTAIN
4.2.Costing methods
4445
What Is a Cost Flow Assumption ? ?To presume the order in which goods are sold.
4.2.Costing methods
What Makes Cost Flow Assumptions Necessary ?
Changing Prices
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4544
4.2.Costing methods
Cost Flow AssumptionsFIFO- First-in, First-Out- earliest goods purchasedare the first to be soldLIFO- Last-in,First-Out- latest goods purchasedare the first to be soldAverage Cost Method- costs are charged on thebasis of weighted average unit cost
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The FIFO method assumes the earliestgoods purchased are the first to be sold.
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The LIFO method assumes the latest goods purchased are the first to be sold.
SC, VAT payer, it has an initial inventory of 200 kg with the acquisition costof 8 lei/kg, later it buys 600 kg with 10 lei/kg VAT 19%, expenses withtransport 600 lei + VAT 19%.It consumes 700 kg and it uses LIFO method.
Acquisition of raw materials 600kg% = 401 7140301 60004426 1140
Expenses with transport% = 401 714
301 6004426 114
Acq. Cost/unit= 6600/600=11
Consumption of raw materials601 = 301 7400600*11+100*8
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The average cost method assumes thatgoods available for sale are the same.
The allocation of the cost of goods availablefor sale is made on the basis of the weighted
average unit cost incurred.
50
The average cost method assumes thatgoods available for sale are homogeneous.
Illustration 6-10
The average cost method assumes thatgoods available for sale are similar in
nature.
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Factors Used in Selecting an InventoryCost Method
Income statement effects
Balance sheet effectsTax effects
pag. 310-313
4.2.Costing methods
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Income Statement EffectsIn periods of increasing prices
FIFO reports the highest net incomeLIFO the lowest
average cost falls in the middle.In periods of decreasing prices
FIFO will report the lowest net incomeLIFO the highestaverage cost falls in the middle.
4.2.Costing methods
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5353
Balance Sheet Effects
In a period of increasing prices costs allocated
to ending inventory using:
FIFO will approximate current costs
LIFO will be understated
4.2.Costing methods
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Tax Effects
Why do companies use LIFO?
Lower Income Taxes
Higher cost of goods soldLower net income
4.2.Costing methods
5554
Consistency
Whatever cost flow method a companychooses, it must use it consistently
ORDisclose the change and its effects on net
income in the financial statement.
4.2.Costing methods
5655
The Lower of Cost or Market Basis ofAccounting for Inventories
When the value of inventory is lower than its cost, the
inventory is written down to its market value by valuing the
inventory at the lower of cost or market (LCM) in the period in
which the price decline occurs.
4.3.Valuation methods
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5756
Lower of Cost or Market (LCM)
departure from cost principle
follows conservatism concept
can be used only after one of the cost flowmethods ( Specific Identification FIFO,LIFO, or Average Cost)
4.3.Valuation methods
5857
Market Is...
CURRENT REPLACEMENTCOST
4.3.Valuation methods
5958
How Much Inventory Should aCompany Have?
Only enough for sales needsExcess inventory costs:
storage costsinterest costsobsolescence - technology, fashion
4.3.Valuation methods 4.4.Inventory recording system
A. Permanent inventory system
A continuous record of changes in inv entory quantities and values(entries and withdrawals) is maintained in the inventory account.
All movements are recorded in inventory account.Purchases are recorded as increases of inventory assets
Withdrawals and consumption are reductions of the inventory assetsProvide a continuous record of the balances in both
the inventory account and inthe cost of goods sold account
Beginning inv. + Purchases or additions Withdrawals = Ending inv.200 900 800 X
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4.4.Inventory recording system
debit closing balance andrepresent ending inventory(the existences of assets ata certain time);by deduction
SI beginning inventory
debit asset increasepurchases ( cost of goodpurchased) or additions tothe inventory (cost of goodsmanufacturated)
credit - asset decreasesdetermined by withdrawalsfrom inventory-- cost of goods sold or-- cost of good consumed inthe next step of productionprocess
D Permanent inventory account C
Example: Permanent inventory system
SC VAT payer, keeps the evidence of the inventories using PI. It buys 10measurement devices with 800 lei/piece+ VAT 19%. 4 devices are given forconsume, which, after the utilisation period expires, it will be discharge.
Acquisition of materials in the form of inventory items% = 401 9520301 80004426 1520
Giving the devices into use603 = 303 3200Extra accounting evidence of the devices
\ D8039 Inventories in the form of inventory items 3200C8039 Inventories in the form of inventory items 3200
4.4.Inventory recording system
B. Periodic inventory system (intermittent)
Follows the general requirement that at least once every period abusiness physically counts and attest to what is really in inventory.
All beginning inv.and additions to inv.(through manufacturing ofpurchase) are in a first step presumed consumed and recorded directly
as an expense in the income statement
In a second step, the presumed consumption cost is adjusted at the
end of the period by deducting the independently measured ending inv .
Beginning inv. + Purchased or additions Ending inv = Withdrawals200 900 300 X
6433
Take a Physical Inventory
Determine inventory quantities by counting, weighting ormeasuring each type of inventory.Determine ownership of goods, including goods in transit,
consigned goods.Quantity of each kind of inventory is listed on inventory summarysheets where unit costs are applied.
4.4.Inventory recording system
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debit closing balance andrepresent ending inventory(the existences of assets ata certain time, measured);
SI beginning inventory
credit beginning inv.assumed consumed
D Intermitent inventory account C
4.4.Inventory recording system
Example: intermitent inventorysystem
SC, VAT payer, keeps the evidence of the inventories using II and it has an initialinventory of 200 kg with an acquisition cost of 8 lei/kg, later he buys 600 kg with10 lei/kg VAT 19%, expenses with transport 600 lei+ Vat. At the final stocktakingit has a surplus of 100 kg. (LIFO)Including the initia l inventory in the expenses 601 = 301 1600Acquisition of raw materials 600 kg % = 401 7140
601 60004426 1140
Expenses with transport % = 401 714601 600
4426 114Acq. Cost/ unit=6600/600=11Registering the final inventory 601=301 or -800
301=601 800
Raw materials: beginning inv. 200, purchases 900,withdrawals 800,ending inv 300
PIM IIM1. Withdr. beg.inv expense = inventory 200
a.purchases inventory = supplier 900b.withdrawals expense = inventory 800
2. Purchases/withdr. expense = inventory 9003. Ending inv. Inventory = expense 300
Comparison PIM, IIM
4.4.Inventory recording system
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Record Revenue andCost of Goods Sold
Compute Costof Goods Sold
Perpetual
Periodic
Perpetual
Item Sold
End ofPeriod
Comparing Periodic andPerpetual Inventory Systems
Inventory Purchased
Record Purchase of Inventory
End ofPeriod
No Entry
Record Purchase of Inventory Record Revenue Only
Inventory Purchased Item Sold
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Practical example1. Acquisition of raw materials 200 units, 110 lei/unit, VAT 19%,
transport expenses 8.000 lei, VAT 19%.,the payment beingdue later. A half is consumed.
- acquisition cost ?????raw materials 200 x 110 = 22.000transport 8.000
2. Purchase on commercial credit of commodities, 400 units, unitprice 200 lei,, commercial discount 2%, VAT 19%
- acquisition cost ?????commodities 200 x 400 = 80.000discount 2% 1.600
3. Selling merchandise, 300 units, (using FIFO), unit price 240,VAT 19%. Beginning inv. 30 units x 210 lei/unit.
5. Recording the transactions
GENERAL JOURNALOp
Explanation Corresponding Accounts SUMSD C
1 1 Acquisition of rawmaterials
% = 401 Suppliers301 Raw materials...4426 Input VAT
30.0005.700
35.700
1 2 Raw materialsconsumptions
601 = 301Expenses with raw mat Raw materials
15.000 15.000
2 3 Acquisition ofcommodities
% = 401 Suppliers371 Commodities4426 Input VAT
78.40014.896
93.296
3 4 Sale of commodities 4111 = %Customers 707
Sales of commodities
4427 Output VAT
85.68072.00013.680
3 5 Evidence discharging 607 = 371Commodities expenses Commodities
59.220 59.220
5. Recording the transactions
FIFO
Beginninginv. 30uni ts x 210 lei /uni t. = 6.300Purchase 400 units x 196 lei/unit. = 78.400
Sale 300 units 50.220
30uni ts x 210 lei /uni t. = 6.300270 units x 196 lei/unit. = 52.920
5. Recording the transactions
GENERAL JOURNAL
Op
Explanation Corresponding Accounts SUMS
D C
4 6 Finished goods are
obtained
% = 711 Variation in inventory
345 Finished products348 Differences
25.0001.000
24.000
5 7 Sale of finishedgoods
4111 = %Customers 701
Sales of finished goods
4427 Output WATT
9.9968.4001.596
7 8 Evidencedischarging
711 Variation in inventory = %345 Finished products348 Differences
7.2007.500
300
4. Obtaining finish goods 200 units, standard cost 125 lei/unit, real cost 120 lei5. Selling finished goods 60 units, unit price 140 lei VAT 19%.
5. Recording the transactions
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Key points
Valuation methods
Definitionrecognition Acquisition cost
Production cost
recording systems:PRM, IRM
Costing methods
Inventoriesassets