TOPIC 10.1.3

1. TOPIC 10.1.3 ACCOUNTING FOR INVENTORIES

2. ACCOUNTING FOR INVENTORIES DEFINITION: MASB 2: Inventory is an asset that owned by the business is for the purpose of selling to the customer. Managing inventory is done to determine: 1. Inventory in hand 2. Inventory available for sale 3. Cost of goods sold.

3. Inventory Control • Establishment of responsibility: every inventory counter is accountable by different person. • Segregation of duties: a person who record the inventory are not the same as a person who make a count and also not the same person distribute the inventory. • Independent Internal Verification: make a second count and verify the balance by a different person. • Documentation Procedure: numbering tag or barcode is paste to the inventory and each sales is made using on-line basis. • Physical, mechanical and electronic control: make a physical stock count frequently.

4. Inventory Accounting System There are two basic systems of accounting for inventories may be used: 1. Perpetual Inventory system (Sistem Berterusan) • Periodic Inventory System (Sistem Berkala) Differences between these two systems:

5. Valuation of Inventory 1. First In First Out (FIFO) - first items purchase will be sold first. • Last In First Out (LIFO) - last item purchase will be sold first. • Weighted Average (WA) - make an average cost per unit purchase of the goods.

6. Example: The information below regarding an inventory product name AIA for a year 2001: The physical stock counts on 31 Dec 2001 show a balance of 400 units.

7. Total Stock (unit) - total Sales (unit) = Closing stock (unit) [Opening stock + Purchase] – Total Sales = Closing Stock 100 unit + 1100 unit - 800 unit = 400 unit. a) FIFO - Periodic: Cost of Good Sold: Opening Inventory 800 Add: Purchase 12,600 13,400 Less: Closing Stock 5,000 COST OF GOOD SOLD 8,400

8. b) FIFO - PERPECTUAL

9. LIFO - Periodic: Cost of Good Sold: Opening Inventory 800 Add: Purchase 12,600 13,400 Less: Closing Stock 3,800 COST OF GOOD SOLD 9,600

10. LIFO - PERPETUAL

11. WEIGHTED AVERAGE Periodic Weighted Average cost per unit = Opening Inventory + Purchases Total unit available for sale RM800 + RM12,600 (100 + 1,100) unit = RM11.17 per unit Closing Inventory = 400 unit x RM11.17 = RM4,468 COGS = 800 unit x RM11.17 = RM8,932

12. Perpetual

13. Effect of using different method: • Inflation Assume that the purchase price is increasing: FIFO: The lower price of the inventory will be taken out first; this will lower down the cost of goods sold of the inventory. Thus the profit will be increased. LIFO: The higher price of the inventory will be taken out first; this will increase the cost of good sold of the inventory. Thus the profit will be decreased.

14. Deflation: - deflation (lower price of the inventory) will give a reverse situation whilst using either FIFO, LIFO or WA.

15. VALUING INVENTORY AT THE LOWER OF COST OR MARKET (LCM) Alternative method of valuing inventory in a situation of declining of value of inventory lower than cost (due to changes in technology or fashion) Conservatism: the best choice is to select the method that is least likely to overstate asset and net income. The method: The value of inventory should be written down from the cost price to market price in situations where market is below cost. Market price: • “Current replacement cost” not selling price. • A cost of purchasing the same goods at the present time from the usual supplier.

16. Reporting in the Financial Statement: Cost of Goods Sold: Opening Inventory + Cost of Good Available for Sale - Closing Stock.

17. Income Statement – Periodic System ________________________________________________________ Opening Inventory 2, 000 Add: Purchase 20,000 Carriage Inward 2, 500 Import Duty 1, 500 24, 000 (-) Return Inward (1, 000) 23, 000 Cost of Goods Available for sale 25, 000 (-) Closing Stock (5, 000) Cost of Good Sold 20, 000

18. Income Statement - Perpetual Inventory System; ________________________________________________ Sales xxx Less: Cost of Good Sold xx Less: Inventory Shortage xxxx Gross Profit xxx

19. EFFECT ON PROFIT: OVER/UNDERSTATE VALUE OF INVENTORY

20. Journal Entries for Purchasing of Goods

21. Journal Entries for Sales of Goods

22. Exercises on Inventory – Topic 10.1.3 1. Berikut adalah belian dan jualan Syarikat Zamani dalam bulan September 19X6. Dikehendaki: Dengan menggunakan kedua-dua sistem iaitu berterusan dan berjangka, kira nilai stok akhirnya mengikut kaedah: a) FIFO (MDKD) b) LIFO (MKKD) c) Kos Purata

23. 2. Belian dan jualan Syarikat Almi Berhad pada bulan Disember 19X7 adalah seperti berikut: Belian 1 Disember 19X7 700 unit @ RM7.00 5 500 unit @ RM8.00 20 400 unit @ RM7.50 30 600 unit @ RM8.50 Jualan 2 Disember 19X7 300 unit 8 700 unit 15 100 unit 25 50 unit 31 100 unit Dikehendaki: Dengan menggunakan kedua-dua sistem tunjukkan kiraaan nilai stok akhirnya mengikut kaedah: 1. FIFO 2. LIFO 3. Kos Purata

24. 3. Syarikat Jelapang Sdn Bhd mempunyai data tentang belian dan penggunaan bahan mentah dalam bulan Jun 19X2. Jan 1 Baki Inventori 1500 unit @RM1.50 Belian 30000 unit @ RM1.20 Penggunaan 8500 unit Jan 4 Pemulangan 1000 unit @ RM1.20 Jan 5 Penggunaan 15500 unit Belian 15000 unit @ RM1.24 Jan 7 Pemulangan 2200 unit @ RM1.24 Penggunaan 10000 unit Anda dikehendaki a) Dengan mengandaikan syarikat menggunakan sistem inventori berjangka kirakan nilai inventori penutup dengan menggunakan kaedah MDKD dan MKKD. b) Dengan mengandaikan syarikat menggunakan sistem inventori berterusan kirakan nilai inventori penutup dengan menggunakan kaedah MDKD dan MKKD.

25. Pop Quiz 1. Apakah yang dimaksudkan dengan peruntukan hutang ragu? Mengapakah perniagaan perlu membuat peruntukan ini? • Syarikat Jujur merekodkan baki akaun penghutang pada 1/12/2002 adalah RM45,000. Urusniaga yang berlaku sepanjang bulan 12 adalah seperti berikut: - Jualan kredit – RM32,000 - Kutipan dari penghutang – RM35,000 - Hutang Lapuk dihapuskira – RM550 - Diskaun diberi – RM400. Syarikat bercadang untuk membuat peruntukan hutang lapuk 5% dari baki akaun penghutang. Tunjukkan catatan untuk menghapuskira hutang lapuk dan peruntukan hutang lapuk.