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Accounts Presentation

Inventory Accounting
and Physical Flow of Inventory
Presented by:
• Arpan A Mayura
• Ashima r Sharma
• Ashish Khandagale
• Ashish Kumar
• Ashish Makkar
• Ashish P Sawant
• Aushitosh maitrya
• Asmita Dalvi
• Ashwini Desai
• Is an ASSET
• Which a business buys
• To Re-sale
• During the normal everyday activity of the
• Else known as STOCK
• Stocktaking is when a business counts the
stock (inventory) that it owns
Define inventory

“Inventory”: goods that businesses

intend to sell to their customers or raw
materials or in-process items that will be
converted into salable goods

Define the key information needs of

decision makers regarding inventory.
Account for common inventory
Apply the four major inventory costing
Identify key control activities for inventory.
Compute the inventory turnover ratio and
the age of inventory.
Discuss key differences between the
periodic and perpetual inventory systems.
Estimate inventory using the gross profit
Inventory Errors . . . Financial
Statement Impact
Inventory errors can significantly distort
a company’s key financial statement data.
Inventory affects: current assets, total
assets, gross profit, net income, and
numerous financial ratios.
If inventory is misstated at the end of
one accounting period, the next period’s
beginning inventory will be misstated as
A misstatement of inventory typically
results in a much larger percentage error
in a company’s net income.
Flow Of Physical
Physical Inventory

Physical Inventory is physically counting
the individual items in stock at a
particular date and time .
Tool Helping In Physical

• Inventory services
• Inventory control system
• perpetual inventory
• Cycle counting,
Types of Physical

• As Required
• Cyclic
• Annual
Reasons For Conducting A
Physical Inventory

• 1.To verify or ascertain the physical count, condition, and

location of an inventory item and to ensure that it is
properly documented.

• 2. To identify, document, and add items to its inventory

list that are on-hand and meet qualifying criteria.

• 3.To ensure that legitimately transferred or disposed of

items are no longer carried on the inventory listing.

• 4. To identify any missing or damaged items that need to

be located, repaired, or replaced.
Flow Of Physical Inventory

Opening Purchase Semi Finished

Raw Processing Goods

Non Used
Finished Good Raw Materials

Closing Stock
Types Of Inventory System

• Perpetual Inventory System

• Periodic Inventory System

Define Perpetual Inventory
• “Perpetual Inventory is a method for tracking and
knowing the value of inventory and quantity of
merchandise on hand at any time by tracking sales,
returns and receipts with information systems”.

• “The recording as they occur of receipts issues and

resulting balance of individual items of stocks in either
quantity or quantity and value”.
What is Perpetual
Advantages Of Perpetual
• Easy stock taking.
• Facilitates production, planning and
• Facilitates Preparation of financial
• Reliable check.
• Efficient use of working capital.
• Proper flow of production.
Define Periodic Inventory

• “A periodic inventory is a method of

finding the value of merchandise at
periodic intervals by taking a
physical count of the stock”.
What is Periodic Inventory?
Perpetual vs. Periodic
Inventory Systems
1. Sales revenue and cost of 1. Sales revenues is booked
goods sold recorded when a sale is made . . . but
simultaneously when a not cost of goods sold
sale is made
2. A “perpetually” updated
2. Records documenting
record of the quantity of quantity and per unit cost of
individual inventory items individual inventory items
and their per unit costs is are typically not maintained
3. Key advantage:
“information availability” 3. Key advantage: low cost
4. Key disadvantage: cost . .
. but this disadvantage is
gradually fading away 4. Key disadvantage: lack of
readily available inventory
Accounting for Common Inventory
Transactions in a Perpetual Inventory
System . . . Debit This and Credit That
• Inventory purchases (Dr. Inventory, Cr. Accounts
• Purchase returns and allowances (Dr. Accounts Payable,
Cr. Inventory)
• Sales of inventory (Dr. Accounts Receivable, Cr. Sales;
Dr. Cost of Goods Sold, Cr. Inventory)
• Payment of delivery costs (Dr. Inventory, Cr. Cash)
• Sales returns (Dr. Sales Returns and Allowances, Cr.
Accounts Receivable; Dr. Inventory, Cr. Cost of Goods
• Payment of inventory purchases--within discount period
(Dr. Accounts Payable, Cr. Cash and Cr. Inventory)
(Unit cost is held constant to avoid the
necessity of a using a cost flow assumption)

• Beginning inventory 100 units @ Rs.6 = Rs.600

• Purchases 900 units @ Rs.6 = Rs.5,
• Sales 600 units @ Rs.12 =Rs.7, 200
• Ending inventory 400 units @ Rs.6 = Rs.2,
Perpetual Inventory Periodic Inventory
System System
Beginning inventory 100 units at Rs.600
Inventory account shows Inventory account shows
Rs.600 in inventory.
Rs.600 in inventory
Purchase of 900 units at Rs.6 per unit.
Inventory a/c …Dr 5,400 Purchases…Dr 5,400
To Acc.Payable To Acc.Payable
5,400 5,400
Sale of 600 units at a selling price of Rs.12 per unit
Acc. Receivable ….Dr 7,200 Acc. Receivable……Dr 7,200
To. Sales 7,200 To Sales
CoGS…..Dr 3,600 7,200
To Inventory 3,600 No entry
End-of-period entry for inventory adjustment.
No entry needed Inventory ….. Dr 1,800
Methods of Inventory
• Cost Price Method

1. Specific price method

2. First In First Out (FIFO)
3. Last In First Out (LIFO)
4. Base stock method
Methods continued

• Average price method

• Standard price method
• Market price method
• Gross margin method
• Retail inventory method
Financial Analysis of
Inventory management.
Analysing Inventory

• Inventory is often inevitable.

• It represent ideal funds on which
Business does not earn profit.
• It is necessary to optimize
investment in inventory.
• ITR = Cost of goods sold times
(Avg. inventory)/2

*Avg Invt= (Beg invt+End invt)/2

*cost of goods sold=2,40,000
*Beginning Inventories=10,000
*ending inventories=30,000
• Age of inventory or
• Avg invt holding prd= 1 * 12months
Key control activities.

• Fiscal security control.

• Periodic inventory counts.
• Inventory management system.
Inventory management.

• Perishable product inventory.

• Durable product inventory.
• Management of production.
• Management of semi-furnished