nd
2 year
Financial Accounting Seminar 4
th
5 week: 27.10-31.10.2014
Inventories 1
Definition: Inventories are assets (IAS 2, par. 6, OMPF 3055/2009, art.152-1):
a) Held for sale in the ordinary course of business (commodities and goods/products);
b) In the process of production for such sale (production in progress/work in progress); or
c) In the form of materials or supplies to be consumed in the production process or in the rendering of services.
1)a. Perpetual/Permanent inventory system. Under this system/method, a continuous record of changes in the
inventory quantities and values (entries as well as withdrawals) is maintained in the inventory account. The general
equation of the system is: CB = OB + I - D
Inventory account (under Permanent/Perpetual inventory system)
OB: Beginning inventory
I: Purchases (cost of goods purchased) or additions to
the inventory (cost of goods manufactured)
D: Withdrawals from inventory (cost of goods sold or cost
of goods consumed in the next downstream segment of
the ‘manufacturing ’ process)
CB: Ending inventory = OB + I - D
1)b. Periodic inventory system. The method is minimalist. It follows the general requirement that at least once every
period (month / year) a business physically counts what is really in inventory. The Periodic inventory system relies on
the required physical counting to establish the quantities in the ending inventory so that they can be valued. The
general equation of the system is: D = OB + I - CB
Inventory Expense Account (under Periodic inventory system)
1) Beginning inventory assumed consumed
2) Purchases (cost of goods purchased) or additions to
3) Ending inventory measured/counted
the inventory (cost of goods manufactured) assumed
consumed
4) Withdrawals from inventory (cost of goods sold or cost
of goods consumed in the next downstream segment of
the ‘manufacturing ’ process = OB + I - CB
2)a. Specific identification. Items that are not ordinarily interchangeable or fungible, will keep their specific cost when
carried/recorded in inventory. This means that their cost upon withdrawal is identical to the one they had when
entering in inventory.
2)b. Special costing methods are used for fungible and semi-fungible items for which the trace of cost of
acquisition/production is quasi-impossible. As a consequence entities make assumptions about the timing sequence
according to which inventory items enter and leave an inventory account. There are three possibilities for time-ordering
withdrawals:
1. First-In-First-Out (FIFO). Goods withdrawn are valued batch by batch in the order they entered inventory;
2. Last-In-First-Out (LIFO). Goods withdrawn are valued batch by batch in the reverse order from the one they
followed when entering inventory;
3. Weighted Average Cost (WAC). Goods withdrawn are valued at the average cost of available goods.
Course: Prof.univ.dr. Adriana TIRON-TUDOR, e-mail: [email protected], office: 222
Seminar: Lect.univ.dr. Vasile CARDOŞ,
e-mail: [email protected], office: 226, web: www.econ.ubbcluj.ro/~vasile.cardos
Application 1 –perpetual recording system, FIFO
Considering the following elements for Delman Llc.: shared capital 10.000, materials 10.000 (1.000 units x 10 unit price).
A Draw up the Initial Balance Sheet
B Record in the General Journal and General Ledger the following transactions occurred in October:
1.
2.
3.
4.
5.
03.10 Purchase from a supplier (on account) of materials, 500 units, unit price 11;
05.10 Purchase from a supplier (on account) of materials, 700 units, unit price 9;
08.10 Consumption of 1.200 units. Delman uses FIFO to establish the cost of materials consumed/withdrawn;
12.10 Purchase from a supplier (on account) of materials, 800 units, unit price 8;
14.10 Consumption of 1.500 units.
C. Close the expense account and draw up the Final Balance Sheet
GENERAL JOURNAL
No
Modifications
BS
IS
Details
A
L
Eq
Ex
ACCOUNTS
DEBIT
R
AMOUNT
CREDIT
Calculations:
FIFO08.10 =
FIFO14.10 =
GENERAL LEDGER
D
D
„Materials”
„Materials expense”
A
C
A
C
D
Initial Balance Sheet
E&L
D
„Suppliers”
C
“Profit or loss”
C
D
„Shared capital”
C
Final Balance Sheet
P/L (Income)
TOTAL ASSETS
TOTAL EQUITIES & LIABILITIES
Page 2
Eq&L
Application 2 – perpetual/permanent and periodic inventory systems
2.1 Perpetual/permanent inventory system
Sitex Llc. has an OB balance for the Raw material account in amount of 5.000 lei (500 units x 10 lei/unit).Record the
transactions presented below knowing that Sitex Llc. uses the perpetual/permanent recording system and FIFO to
establish the cost of materials consumed.
1) Purchase, from a supplier (on account), of raw materials: 400 units, 12 lei/unit, VAT 24%;
2) Consumption of 700 units.
Establish the CB for the Raw material account. CB = OB + I – D =
Accounts to be used 301 “Raw materials” A
4426 “Imput VAT” A
401 “Supplier” L
601 “Expenses with raw materials”
GENERAL JOURNAL
No
Modifications
BS
IS
Details
A
L
Eq
Ex
ACCOUNTS
R
AMOUNT
DEBIT
CREDIT
2.2 Periodic inventory system
Sitex Llc. has an OB balance for the Raw material account in amount of 5.000 lei (500 units x 10 lei/unit).Record the
transactions presented below knowing that Sitex Llc. uses the periodic recording system.
1) The initial inventory is recorded as consumed (we presume that the inventory will be consumed in the current
period);
2) Purchase, from a supplier (on account), of raw materials: 400 units, 12 lei/unit, VAT 24%;
3) After the end-of-the-month’s physical count / stocktaking there are 200 units identified (the allocated unit price
is the unit price of the last purchase).
Establish the quantity and value of the consumed raw materials. D = OB + I –CB
Accounts to be used 301 “Raw materials” A
4426 “Imput VAT” A
401 “Supplier” L
601 “Expenses with raw materials”
GENERAL JOURNAL
No
Modifications
BS
IS
Details
A
L
Eq
Ex
ACCOUNTS
R
AMOUNT
DEBIT
CREDIT
GENERAL LEDGER
D
Perpetual/Permanent
inventory system
„Raw materials”
Periodic inventory system
C
D
„Raw materials”
Page 3
C
D
„Raw materials’ expense”
C
Application 3 – materials in the form of inventory items, purchase and giving in use (dare în folosinţă)
Record the following transactions for Davos Inc.:
1) Purchase (on account) of a scanner in amount of 1.500 lei, VAT 24%;
2) The debt is settled by bank transfer;
3) The scanner is given in use for a period of 2 years;
4) After 2 years the scanner is removed from the books (scos din evidenţa extracontabilă).
Acc.
303 “Mat. in the form of inventory items” A
5121 “Cash at bank” A
401 “Supplier” L
603 “Expenses with …inventory items”
4426 “Imput VAT” A
8035 “Mat. in the form of inventory items – in USE”
GENERAL JOURNAL
No
Modifications
BS
IS
Details
A
L
Eq
Ex
ACCOUNTS
R
DEBIT
AMOUNT
CREDIT
Application 3 – employee working equipment, purchase and distribution
Venus Inc. is a construction company which purchases, periodically, working equipment for its employees. The
employees bear/support (suportă) half of the acquisition cost and corresponding VAT of the received working
equipment. The amount beared/supported by the employees is retained from their salary in 2 month. Record the
following transaction:
1) Purchase, from a supplier (on account), of working equipment, in amount of 2.000 lei, VAT 24%;
2) The debt is settled in petty cash;
3) The equipment is distributed to the employees, the receivable from the employees being recorded;
4) The VAT beared/supported by the employees is recorded;
5) Personnel salaries in amount of 5.000 lei are recorded;
6) Retaining the settlement of the receivable from the employees’salaries.
Acc.
303 “Mat. in the form of inventory items” A
4282 “Other personnel receivables” A
401 “Supplier” L
5311 “Petty cash” A
4426 “Imput VAT” A
603 “Expenses with …inventory items”
4427 “Output VAT” L
7588 “Other operational expenses”
GENERAL JOURNAL
No
Modifications
BS
IS
Details
A
L
Eq
Ex
ACCOUNTS
R
Page 4
DEBIT
AMOUNT
CREDIT