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Overview of session
1. Introduction definitions 2. Measurement 3. Recognition 4. Disclosure
5. Questions
Inventories
1. Introduction definitions
Definitions
Inventories are assets:
a) held for sale in the ordinary course of business; a) in the process of production for such sale; or a) in the form of materials or supplies to be consumed in the production process or in the rendering of services
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
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Inventories
2. Measurement
Measurement
Inventories are stated at the lower of cost of and net realisable value.
Cost
Cost of Production:
Cost of Purchase
Other Costs
Cost of Conversion
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Cost components
Cost of purchase comprises
i. purchase price
ii. import duties iii. transport and handling costs
Cost components
Cost of conversion comprises:
i. Costs, which are specifically attributable to units of production, that is direct labour, direct expenses and sub-contracted work.
ii. Production overheads: overheads incurred in respect of materials, labour or services for production, based on the normal level of activity, taking one year with another.
Cost components
Other costs may include overheads, attributable in the particular circumstances of the business to bringing the product or service to its present location and condition, e.g. design costs.
Excluded costs: Usually selling expenses, general administrative overheads, research and development costs and interest costs are not considered to relate to putting the inventories in their present location and condition.
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Cost Formulae
Specify the components attributable to the cost of inventory Cost formulae:
First in First Out (FIFO) formula Weighted Average Cost formula
Prohibited Treatment:
Last in First Out (LIFO) formula
Cost Formulae
FIFO: the calculation of the cost of inventories on the basis that quantities on hand represent the latest purchases or production. This method assumes that the oldest inventories are used up first. Weighted average cost: the calculation of inventories by using an average price computed by dividing the total cost of units by the total number of such items. An entity needs to use the same cost formula for all inventories of a similar nature and use to the entity
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Cost components
Which of the above cost categories do the following costs belong to? Cost Selling costs Direct labour Design of finished goods Import duties on raw material Fixed production overhead Purchase of raw material Abnormal amounts of wasted material
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Cost Category
Cost components
Answer Cost Selling costs Direct labour Design of finished goods Import duties on raw material Fixed production overhead Purchase of raw material Abnormal amounts of wasted material
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Cost Category Excluded Cost of conversion Other costs Cost of purchase Cost of conversion Cost of purchase Excluded
Cost Formulae
Question: ABC trades in chocolates and made the following purchases and sales in the period. There are 10 units left at balance sheet date. Calculate the cost of stock using FIFO and weighted average cost formulae
Transaction Purchase Purchase Sale Purchase Period June July August September Quantity 3 units 7 units 4 units 4 units
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Price $ 20 $ 30
Total $ 60 $ 210
WAC
$ 40
$160
Cost Formulae
Answer:
FIFO: 4 at $40 plus 6 at $30 = 160 plus 180 = $ 340 Weighted average:
Transaction Purchase Purchase Remaining Sale August Period June July Quantity 3 units 7 units 10 units 4 units Price $20 $30 Total $60 $210 $270 $27.0 $27.0 WAC
Remaining
Purchase Remaining September
6 units
4 units 10 units
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$162
$ 40 $160 $322
$27.0
$32.2
Selling Price
Trade Discounts Costs to Completion
X
(X) (X) (X) X
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C 12 12 12 300 3,600
Total
20 23 20 200 4,000
8800
Inventories
3. Recognition
Recognition
Inventory is a current asset Inventory is expensed when the related revenue is recognised
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Recognition
Inventory: Dr Cost of Sales 100 Cr Inventory Sale: Dr Cash Cr Sales Write-down to NRV Dr Profit and Loss Inventory write down Cr Inventory
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100
150 150
Inventories
4. Disclosures
Disclosures
Accounting policy
Balance Sheet
Income Statement
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Disclosures
Accounting policy:
identify cost formula used (FIFO or weighted average) Cost components Valuation (lower of cost or NRV)
Balance Sheet
Income Statement
Cost of inventories expensed in period Expense of inventory write-downs included under other operating expenses
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Inventories
5. Questions