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ACCT1501

Semester2,2016
Week 8
Introduction to Inventory
and Non-Current Assets
Conor Clune

Topic8:LearningObjectives(LO)
LO1:Explainthedifferencebetweenperiodicandperpetual
inventorysystemsandpreparetheapplicablejournalentries
LO2:Describethethreecostflowassumptionsforinventory:
FIFO,LIFOandweightedaveragecost
LO3:Accountforthecostofacquisitionofnoncurrentassets
LO4: Explainandapplydifferentmethodsofdepreciationand
recordthesale/disposalofadepreciablenoncurrentasset
EssentialreadingforWeek8

TrotmanGibbins&CarsonChapter9pp.357374
TrotmanGibbins&CarsonChapter10pp.385398

GoodsandServices wearefocussingongoods
Services providedbydentists,accountants,lawyers
Goods(Products,Stock,Inventory)

Buyandsellreadymadeproducts
Manufactureandsellgoods/products

Inventory

Anasset!

Inventorycards perpetualinventorysystem
InventoryCard
Additions

Withdrawals

LO1

InventoryControlSystems

LO1

Arecordkeepingchoice!
1. Perpetualsystemmaintainscontinuousrecordsontheflow
ofunitsofinventoryforalltransactions(Balancesfor
InventoryandCOGSalwaysintheaccountingsystem)
2. Periodicsystemdeterminesinventorybyphysicalcountat
endofperiodandCOGSisdeterminedasopeninginventory
pluspurchaseslessclosinginventory(BalancesforInventory
andCOGSintheaccountingsystematperiodend)

1.PerpetualMethod

LO1

Continuousrecords:
Beginninginventorycost(oftensupportedbyaphysicalcount:internalcontrol)
+Inventoryacquiredduringtheperiod(fromtransactionrecords)
Costofinventorysold(COGSrecords)
=Endinginventorycost(supportedbyphysicalcount:internalcontrol)

Whatifthereisashortageofinventory???
Forexample

1.PerpetualMethod Example

LO1
$

Inventory (opening)

15 000

Add: Inventory acquired

60 000

Available for Sale

75 000

Less: Cost of goods sold

50 000

Inventory (closing)

25 000

Inventory on hand (physical count)

20 000

Inventory adjustment?

JournalEntry
Dr Inventoryshortageexpense5000
Cr

Inventory5000

1.PerpetualMethod ProsandCons
Providesbetterinternalcontrol
Stocklosseseasilydetermined
Howeveritscostlyandnotsuitableforalltypesof
goods,e.g.coal

LO1

1.PerpetualMethod RecordKeeping

LO1

Exampleacompanyboughtinventoryfor$100cash,thensold
itfor$500cash.
Purchases:
DrInventory
CrCash/Payable

$100
$100

AllsalesofinventoryrequireTWOentries:
Revenuefromsale
DrCash/Receivable
CrSales
Expensefromsale
DrCostofGoodsSold
CrInventory

$500
$500
$100
$100

2.PeriodicMethod
CalculatingCOGS
+Beginninginventory(count)
+ Purchases(companyrecords)
Endinginventory(count)
= Inventorysold(COGS)

10

LO1

2.PeriodicMethod RecordKeeping
COGSundertheperiodicmethod
+ Beginninginventory
Debit
+ Purchases
Debit
Credit
Endinginventory
Debit
= COGS

11

LO1

2.PeriodicMethod RecordKeeping

LO1

SalesofinventoryrequireonlyONEentry:
DrCash/Receivable
$500
CrSalesrevenue
$500
Notethedifferencecomparedtowhatyoureusedto
seeingwiththeperpetualinventorysystem.

12

Costofsalesisnotdeterminedforeverysalestransaction
Costofsalesisdeterminedintotalattheendoftheperiod

PerpetualorPeriodic?
Recordkeepingchoice,notareportingchoice
Natureofinventory
Computersystemtechnology

e.g.opticalscanners

Costbenefit

13

LO1

MCQ
1 Which of the following statements about the perpetual inventory
control method is NOT true?
A. When a sale is made, cost of goods sold is increased.
B. When inventory is purchased, it is treated as an expense.
C. A separate record is kept for each item of inventory.
D. An inventory count can reveal inventory losses.
2 Which of the following is NOT an advantage of the perpetual
inventory system over the periodic inventory system?
A. The perpetual inventory system discloses inventory shortages.
B. The perpetual inventory system is less costly to maintain.
C. The perpetual inventory system provides a continuous record of cost
of goods sold.
D. The perpetual inventory system provides better control of the asset
inventory.

14

Inventory measurementrule

LO1

Lowerofcostandnetrealisable value
Costcomprises:

Costofpurchase
Add:Purchase price+Import dutiesandothertaxes+
Inward transportandhandlingcosts+Any otherdirectly
attributablecostsofacquisition
Less: tradediscounts,rebatesandothersimilaritems
ConversionCosts(weeks1112) thisisifinventoriesare
manufacturedandincludescostofproduction

Notincluded inthecostofinventory:

15

Administrationcosts,sellingcosts &storagecosts

Untilnowwevedealtwithsimplecases
E.g.,Inventory=$100000.

Wehave10000units.
Weassumeapurchasepriceof$10perunit

However

16

Purchasesaremadethroughouttheyearandpricesmay
change
E.g.5000unitsat$9eachand5000unitsat$11each

Example:InventoryatcostandCOGS
Imaginewepurchasedthefollowing:

On30/1/15 3units@$15perunit
On30/5/15 3units@$20perunit

Soon30/6/15wehave

3unitsx$15=$45
3unitsx$20=$60

WhatistheCOGSifwethensell4units?

17

LO2

CostFlowAssumptions

LO2

Threemajortypesofcostflowassumptions

FirstIn,FirstOutmethod(FIFO)
LastIn,FirstOutmethod(LIFO)
WeightedAveragemethod(ormovingaverage)

Soincombination:

18

Cost Flow Assumption

Periodic control

Perpetual control

FIFO

FIFO

FIFO

LIFO

Periodic LIFO

Perpetual LIFO

Average

Weighted average

Moving average

Firstin,FirstOut(FIFO)

LO2

Assumesfirstunitspurchased=firstunitssold
Assumesendinginventorycontainsunitspurchasedmostrecently
Note FIFOresultsin:
Higherprofitlevelintimesofrisingprices(relativetoLIFOand
weightedaverage)
Closinginventorybalanceclosertocurrentcost(relativetoLIFO
andweightedaverage)
Suitableforperishableitems,electronics,etc

1st 3@$15/unit
19

2nd 3@$20/unit

LastIn,FirstOut(LIFO)

LO2

Assumeslastunitspurchased=Firstunitssold
Assumesendinginventorycontainsunitspurchasedearliest
Note:
Intimesofrisingprices,resultsinlowervalueofending
inventory,higherCOGS lowerprofit(nicetaximplication)
Oftendoesnotmatchphysicalflow
Closinginventorybalancemaynotberelevant
NotpermittedunderAustralianaccountingstandards
(permittedintheUnitedStates)

1st 3@$15/unit
20

2nd 3@$20/unit

WeightedAverage

LO2

Aweightedaveragecostiscalculated
($15x3)+($20x3)=$105
$105/6=$17.50perunit
Whenusingaperpetualinventorycontrolsystem,itis
referredtoasthemovingaveragemethod
Note:
Simpletoapplyandlesssubjecttoprofitmanipulation
Appropriateforsimilarproductsandnonexpiryitems

1st 3@$15/unit
21

2nd 3@$20/unit

FIFOvs.LIFOvs.WeightedAverage

LO2

Whenpricesarechanging,eachmethodwillprovideadifferent
endinginventoryandCOGSvalue
Butnotethatthesumofthesetwoitemswillalwaysbethesame,
nomatterwhatthemethod!

22

Acostcaneitherbeanassetoranexpense
TotalCost=asset+expense
Soattheendoftheperiod,TotalCost=Inventoryonhand+COGS

Important!Nomatterwhatcostflowassumptionismade.
Inventorythatwasavailabletosellduringtheyear=gone+stillhere
i.e.,Beginninginventory+Purchases=COGS+Endinginventory
$Value

1st 3@$15/unit

2nd 3@$20/unit

$(45+60)=$105
Imaginewesell4units

23

$Value

Important!Nomatterwhatcostflowassumptionismade.

1st 3@$15/unit

2nd 3@$20/unit

$(45+60)=$105

FIFOCOGS=3x$15+1x$20=$65
FIFOEndinginventory=2x$20=$40
Totalvalue=$105

Imaginewesell4units

LIFOCOGS=3x$20+1x$15=$75
LIFOEndinginventory=2x$15=$30
Totalvalue=$105

24

LectureExample
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total

Date
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15

LO2

Units
200
300

UnitCost TotalCost
$2
$3

$400
$900
250

500

$4

1000

DetermineCOGS andendinginventoryvalueunder
(1)periodic and(2)perpetualsystem:
(a)FIFO
(b)LIFO
(c)WeightedAverage
25

Units
Sold

$2000
$3300

400
650

LectureExample
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total

Date

LO2

Units

1/1/15
15/1/15
17/1/15
28/1/15
30/1/15

Totalunitssold=650
Closinginventory=350

26

200
300

UnitCost TotalCost
$2
$3

Units
Sold

$400
$900
250

500
1000

$4

$2000
$3300

400
650

LectureExample Periodic
Details

Date

Openingstock
Purchased
Purchased
Total

1/1/15
15/1/15
28/1/15

Units
200
300
500
1000

LO2

Unit
Cost
$2
$3
$4

TotalCost

Units

27

Beginning Inventory

200

+ Purchases

800

Ending Inventory

350

= Inventory Sold

650

$400
$900
$2000
$3300

Units
sold

LectureExample 1(a)FIFOPeriodic
Sold650units

28

200@$2=400
300@$3=900
150@$4= 600
1900

LO2

Units
Unitcost
o/b200
$2
Purchased300
$3
Purchased 500
$4
Totalunits1000

$3300

COGS(650unitsasabove)

$1900

Endinginventory(350units@$4)

$1400

LectureExample 1(b)LIFOPeriodic
Sold650units

500@$4=2000
150@$3=450
2450

Units
Unitcost
o/b200
$2
Purchased300
$3
Purchased 500
$4
Totalunits1000

COGS(650unitsasabove)
Endinginventory(150@$3+200@$2)

29

LO2

$2450
$850

$3300

LectureExample 1(c)WeightedAveragePeriodic
TotalCost=$3,300
TotalUnits=1000
WAcost/unit=$3.30

Units

UnitCost TotalCost

200
300
500
1,000

$2
$3
$4

Sold650units
COGS(650x$3.30)
EndingInv(350x$3.30)

30

LO2

$2145
$1155

$400
$900
$2000
$3300

LectureExample:NowforthePerpetual method!
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total

Date
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15

Units
200
300

UnitCost TotalCost
$2
$3

Units
Sold

$400
$900
250

500

$4

1000

DetermineCOGS andendinginventoryvalueunder
(1)periodic and(2)perpetualsystem:
(a)FIFO
(b)LIFO
(c)WeightedAverage
31

LO2

$2000
$3300

400
650

LectureExample 2(a)FIFOPerpetual
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total

32

Date
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15

Units
200
300

LO2

UnitCost TotalCost
$2
$3

Units
Sold

$400
$900
250

500
1000

$4

$2000
$3300

400
650

LectureExample 2(a)FIFOPerpetual

Date
1/1
15/1
17/1
28/1
30/1

33

LO2

PURCHASES
COGS
ENDINGSTOCK/INV.
Units Unit Total Units Unit$ Total Units Unit$ Total
$
$
$
$
200

400

LectureExample 2(a)FIFOPerpetual

Date
1/1
15/1

34

LO2

PURCHASES
COGS
ENDINGSTOCK/INV.
Units Unit Total Units Unit$ Total Units Unit$ Total
$
$
$
$
300

900

200
200
300

2
2
3

400
400
900

LectureExample 2(a)FIFOPerpetual

Date
1/1
15/1
17/1

35

LO2

PURCHASES
COGS
ENDINGSTOCK/INV.
Units Unit Total Units Unit$ Total Units Unit$ Total
$
$
$
$
300

900
200
50

2
3

400
150

200
200
300

2
2
3

400
400
900

250

750

LectureExample 2(a)FIFOPerpetual

Date
1/1
15/1

PURCHASES
COGS
ENDINGSTOCK/INV.
Units Unit Total Units Unit$ Total Units Unit$ Total
$
$
$
$
300

900

17/1
28/1
30/1

36

LO2

500

200
50

2
3

400
150

250
150

3
4

750
600

2000

200
200
300

2
2
3

400
400
900

250
250
500
350

3
3
4
4

750
750
2000
1400

LectureExample 2(a)FIFOPerpetual

Date
1/1
15/1

PURCHASES
COGS
ENDINGSTOCK/INV.
Units Unit Total Units Unit$ Total Units Unit$ Total
$
$
$
$
300

900

17/1
28/1
30/1
TOTAL

37

LO2

500

200
50

2
3

400
150

250
150

3
4

750
600
1900

2000

200
200
300

2
2
3

400
400
900

250
250
500
350

3
3
4
4

750
750
2000
1400
1400

LectureExample 2(b) LIFOPerpetual


PURCHASES
COGS
Date Units Unit Total Units Unit Total
cost cost
cost
cost
1/1
15/1

300

900

17/1
28/1

500

250

750

400

1600
2350

2000

30/1
TOTAL
38

LO2

ENDINGSTOCK/INV.
Units
Unit Totalcost
cost
200
200
300
200
50
200
50
500
200
50
100

2
2
3
2
3
2
3
4
2
3
4

400
400
900
400
150
400
150
2000
400
150
400
950

LectureExample 2(c) MovingAveragePerpetual


Date
1/1
15/1

PURCHASES
COGS
Units Unit Total Units Unit Total
cost cost
cost
cost
300

900

LO2

ENDINGINV.
Units Unit
Total
cost
cost
200
2
400
*500
2.60
1300
($400+$900)/(200+300)
= $2.60/unit

17/1
28/1

250
500

2.60

650

2000

250

2.60

650

*750

3.53

2650

($650+$2000)/(250+500)
= $3.53/unit

30/1

400
TOTAL

39

3.53 1413.33
2063.33

350

3.53 1236.63
1236.67

ComparetheResults

LO2

Periodic
FIFO

40

LIFO

Perpetual
WA

FIFO

LIFO

MA

COGS

1900

2450

2145

1900

2350

2063

Ending
Inv

1400

850

1155

1400

950

1237

TOTAL

3300

3300

3300

3300

3300

3300

ACCT1501
Semester2,2016

10 Minute Break

NonCurrentAssets
Heldbycompanyformorethan12months
Usedtogeneraterevenue
Examples

42

Property,plant,andequipment
Intangibleassets
Longterminvestments

LO3

Property,PlantandEquipment(PPE)

LO3

Property,plantandequipmentaretangible itemsthat:

(a) Areheldforuseintheproductionorsupplyofgoodsor
services,forrentaltoothers,orforadministrative
purposes,and
(b) Areexpectedtobeusedduringmorethanoneperiod.

43

PPE Mainpointsofinterest

1.
2.
3.
4.

44

InitialcostofPPE
Depreciationofassets
Additionalexpenditureonassetsafteracquisition
Recordingthedisposalofassets

LO3

1.

InitialCostofPPE

LO3

Costatacquisition:

RecordedintheBalanceSheetatcost

Costincludes:

45

Purchaseprice
Anycostsdirectlyattributabletobringingtheassettothe
locationandconditionnecessaryforittobeusedinthe
mannerintendedbymanagement
Estimateofcostsassociatedwithdismantlingandremoving
theitemand/orrestorationcosts

1.

46

InitialCostofPPE Examples

Invoicepriceofmachinery
Purchase(andother)taxes
Freight(deliverycosts)
Installationcosts
Setupcosts
Architectsfees

LO3

Example

A used machine with a purchase price of $100 000, requiring an


overhaul costing $8000, installation costs of $4000, delivery costs
of $2000, would have a cost base of:
A. $104 000.
B. $108 000.
C. $112 000.
D. $114 000.

47

LO3

PPE Mainpointsofinterest

1.
2.
3.
4.

48

InitialcostofPPE
Depreciationofassets
Additionalexpenditureonassetsafteracquisition
Recordingthedisposalofassets

LO3

2.

Depreciation

LO4

PPEusuallyhasalimitedusefullife:

Reductioninusefulnessingeneratingrevenue
Valueatcostdepreciatesovertime

Depreciation=systematicallocationoftheusefulnessofanasset
overitslife
Remember
Dr DepreciationExpense
CrAccumulatedDepreciation

Depreciationexpenseisaone
periodconsumptionofbenefits
Acc Depn accountshowsall
depreciationchargedagainst
assettodate

Thecarryingvalueorbookvalueofanasset
=Initialcost accumulateddepreciation
49

2.Chargingdepreciation
Accumulateddepreciation(B/S)showsall depreciation
chargedagainstanassettodate.
Depreciationexpense(I/S)showsonlythisyears allocation
E.g.Juicerboughtforbusinessatthebeginningof2013
Cost$200,wewilldepreciateit$50everyyear

(usefor4years,$0attheendof2016)

Whatwouldthejournalentrybeeach year?

50

Dr Depn Expense
$50
CrAccumulatedDepn

$50

2.Chargingdepreciation 2015financialyear
Juicer atcost
Bal. b/d

200

Bal. c/d

DepreciationExpense
200
Accum Depn 50

Accum Depn Juicer


Bal. c/d

150

Bal. b/d

100

Depn Exp 50

Bookvalueofthejuiceratendof2015=$200$150=$50

2.

Depreciation Calculation

Depreciationshouldbebasedontheassets

52

Usefullife
Residualvalue(saleorscrap)
Patternofflowofbenefitsovertheusefullife.

LO4

2.

Depreciation Usefullife

LO4

Theperiodoftimeoverwhichanassetisexpectedtobe
availableforuse
Usefullifemaydifferfromphysicallifeoftheasset
becauseoftechnicalobsolescence

53

E.g.laptopcomputer

2.

Depreciation ResidualValue

LO4

Theestimatedamountthatanentitywouldobtainfrom
disposaloftheassetattheendofitsusefullife
Scrapvalue
fullydepreciated
DepreciableAmount=AssetCost ResidualValue

54

E.g.Cost110,Scrapvalue10
Depreciableamount=100

2.FlowofBenefitsfromAsset

LO4

3methodsofdepreciationbasedonwhenbenefitsoccur

(1)Straightline(2)Reducingbalance(3)Unitsofproduction

Consistentuseorbenefitoverusefullife

Straightline,e.g.Warehouse

Moreuse/benefitnowthanlater

Reducingbalance,e.g.Computer

Moreuse/benefitlaterthannoworinconsistentpattern

55

Unitsofproduction,e.g.Miningequipment,truck

2.Straightlinedepreciation

LO4

Declineinvalueisexpectedtobeuniformacrossthelifeof
theasset
Assumesbenefitsflowinequal amountsovertheusefullife
oftheasset

samedepreciationexpenseeachyear.

Depreciation
expenses

56

Cost Residualvalue
Usefullife

2.Straightlinedepreciation example
Cost:
Usefullife:
Residualvalue:

$40000
5years
$5000

Usingthestraightline depreciationmethod,
Calculatedepreciationexpensefortheyear
Depreciationexpense=(40000 5000)/5=$7000

Writethejournalentryfordepreciationinyear1
Dr Depn Expense$7000
CrAccumulatedDepn

57

$7000

LO4

2.ReducingBalanceDepreciation example

LO4

Assumesbenefitsareusedmoreinearlieryears
UsesaDepreciationrate
Expenseisnotthesameeveryyear
DepreciationExpense=CarryingAmount Depreciationrate
E.g.,InitialCostofPPE:
Depreciationrate: 25%

$40000
Year1

Year2

Year3

Dep Exp

10 000

7500

5625

AccDep

10 000

17 500

23 125

Book ValueofPPE

30 000

22 500

16 875

58

2.UnitsofProductionDepreciationmethod

LO4

Mostcommonactivitybasedmethodofapportioningcosts
Depreciationperunit= (Cost residualvalue)
Estimatedtotal#ofunitsofprodn overlife

Theoreticallythemostcorrect

59

Problems?

2.UnitsofProductionDepreciation example

CostofMotorVehicle:
$40000
ResidualValue:
$5000
Estimatednumberofkilometrestobedriven:200000
Depreciationperkm=($40000 5000)/200000=0.175

IfinYear1,MotorVehicletravels20000km

Depreciationexpense=20000kmx$0.175=$3500
Depreciationexpense=20/200x$35000=$3500

Depreciateuntilkm=200,000
60

LO4

Example

A.
B.
C.
D.

61

On 1 January 2015, a new motor vehicle with a useful life of four years and an
estimated trade-in value of $12 000 was purchased by a business for $54 000.
The straight-line method is employed and the financial year ends on 31
December. What was the depreciation expense for year ended 31 December
2016?
$5250
$10 500
$13 500
$21 000

LO3

PPE Mainpointsofinterest

1.
2.
3.
4.

62

InitialcostofPPE
Depreciationofassets
Additionalexpenditureonassetsafteracquisition
Recordingthedisposalofassets

LO4

3.

AdditionalExpenditure

LO4

Shouldbeaddedtothecostoftheassetifthedefinition
andrecognitioncriteriaforassetsaremet

Otherwisetreatasanexpense

BettermentversusMaintenanceofPPE

Bettermentrelatestoincreaseinexpectedeconomic
benefits,e.g.productivity,efficiency,outputquality
Repairrelatestomaintainingexpectedeconomicbenefits

Basedonjudgement!
63

PPE Mainpointsofinterest

1.
2.
3.
4.

64

InitialcostofPPE
Depreciationofassets
Additionalexpenditureonassetsafteracquisition
Recordingthedisposalofassets

LO4

4.

DisposalofPPE

LO4

PPEmaybe:
Scrapped:theassetisworthlessandhasnoresale/residualvalue

Sold
Exchangedforanotherasset(tradein)

65

4.

DisposalofPPE

LO4

Recorddepreciationupuntilthedateofdisposal
Recordgainorlossfromthesaleoftheasset
Removethenoncurrentassetfromthecompanysbooks

66

4.DisposalofaMachine Example
Asof30June2015
Originalcost
=$50,000
Accumulateddepreciation
=$24,000
Bookvalue
=$26,000
Straightlinedepreciation
=$12,000peryear
Soldon1August2015for$21,000cash

Preparethenecessaryjournalentries

67

LO4

4. DisposalofaMachine Example
Recorddepreciationupuntilthedateofdisposal
DrDepreciationExpense
$1000
CrAccumulatedDepreciation
$1000

Calculategainorlossfromthesaleoftheasset

68

On1August,Bookvalueofmachine =$25000
Receivedcashinexchangefor$21,000
GainorLoss?

LO4

Example DisposalofaMachine(cont.)

LO4

Removethenoncurrentassetfromthecompanysbooks
On1August
Machine

50 000

DR

Accumulated Depreciation

25 000

CR

25 000

DR

DrCash21000
DrAccumulateddepn 25000
DrLossonsale4000
CrMachine(cost)50000

69

Nextlecture:

Week9
FinancialReportingPrinciples,AccountingStandards
andAuditing

70