Stage 2 Accounting
Semester Break Work
Darwin High School
Preparation and Understanding of Management Accounting relating to:
Inventory Cards
Cash Flow Statements
Inventory
Inventories are the trading goods of a business. AASB 1019 defines inventory as:
•
•
•
Held for the purpose of sale in the ordinary course of operations
In production for such sale
To be used in the production for goods
To be classified as an inventory item, the item must at least meet one of the above criteria. As
businesses are trying to sell this item within twelve months they are classified as a current asset.
Inventories are by very nature different things to each individual business. Inventories in general
are “items held by the business and intended for sale in the normal operation of the business.”
Inventory Classification Exercise
A bookstore holds the two following assets: (tick the descriptions that apply)
Books
□Held for the purpose of sale in the ordinary
course of operations
□ In production for such sale
□ To be used in the production for goods
Bookshelf
□ Held for the purpose of sale in the ordinary
course of operations
□ In production for such sale
□ To be used in the production for goods
For Example;
A bookstores main inventory is books. Items such as cars, bookshelves and counters are classified
as non-current assets.
A car salesman main inventory is cars, where as items such as transport trucks, showrooms are
classified as non-current assets. For a majority of businesses, inventories represent a large
proportion of the owner’s investment in the business.
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 2
Control of Inventory
It is important to control assets, there are many issues that can occur it business do not take care
of their assets. Examples of issues that can arise are:
•
•
•
•
•
Theft
Destruction
Damage
Over/under ordering
Obsolesce
Internal control over inventory is critical to ensure that they are protected from the above issues.
Successful businesses take great care in protecting their inventory. Elements of good internal
control over inventory include:
1. Physically counting inventory at least once a year, regardless of the inventory accounting
system been used
2. Storing inventory to protect it against theft, damage and decay
3. Giving access to inventory only to personnel who do not have access to accounting
records
4. Keeping perpetual inventory records for high-unit-cost goods
5. Keeping enough inventory on hand to prevent shortage situations, which lead to lost
sales
6. Not keeping too large an inventory stockpiled, thus avoiding the expense of tying money
in unneeded items
7. Purchasing inventory in economical quantities
It is incredible important for firms to ensure that they do not have too much inventory as it ties
up too much cash into inventory when that money can be used to invest elsewhere, however in
an increasing competitive market firms also cannot have too little inventory on hand as the
customers will go to competitors. It can be very difficult for management to get the inventory
balance right. Firms try their hardest to adopt a just in time (JIT) inventory system. This requires
suppliers to deliver materials just in time to be used in the manufacturing process.
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 3
Inventory Records
To help keep track of inventory businesses can adopt inventory systems. There are two types of
inventory systems:
•
•
Periodical - A method of accounting for inventories that require a physical stock count
whenever the value of the closing inventories is required
Perpetual - A method of accounting for inventories that keeps a continuous record of all
inventories purchased and sold
To date we have been using the periodical method, you have been provided a value for closing
inventory. From this closing value you are able to determine the value of cost of goods sold.
Under the perpetual system, cost of goods sold is debited every time a sale is made. Depending
on the accounting system in use this can be quite easy or extremely difficult.
There are five valuation methods for valuing information into the inventory records, this is
because it can be difficult for businesses to purchase inventory at the same price. Ultimately the
method used will make no difference to the accounts in overall running of the business, however
depending on the method will have differences in yearly accounts. The accounts that this will
affect are Inventory and Cost of Goods Sold.
1. Weighted Average – takes an average cost of the inventory
2. FIFO (First In, First Out) 3. Specific Identification – allocates a cost to the actual item sold, this is easier to determine
when stock turnovers are low and/or unique products
4. LIFO (Last In, First Out)
5. Standard Cost
Stage 2 Accounting only requires you to prepare inventory records for FIFO and Standard
Identification. Under AASB 102, LIFO is not allowed to be used in Australia.
Ultimately at the end of the day it doesn’t matter which system is adopted by the business as all
the systems will at the end of the day produce the same overall result, however individual years
may differ depending on the method used.
FIFO (First In, First Out)
This system assumes that the oldest stock is sold first. It is quite a simply non complex system. It
is less time consuming than specific identification and the products don’t need to be unique.
The system can’t assume that new stock is stock first even when this isn’t necessarily true. For
example you are at the grocery store, you have a choice between two identical milk products, and
the only difference is the use by date. Most people will of course choose the one that will last
longer. When in a customer buys the newer product although the cost maybe different it is
assumed that the inventory value for cost of goods sold is the first purchased milk. Not the actual
cost as it is too difficult and costly to the business to work out. This is an example of LIFO (Last in,
First Out) however under Australian accounting standards business are not allowed to used LIFO
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 4
as it can severely reduce inventory figures and increase cost of goods sold resulting in significant
tax benefits.
Specific Identification
Under this method of accounting the business can directly identify which product is sold and
purchased. This is generally done when products are unique or easily distringable.
Examples of such inventories are:
•
•
•
•
Motor Vehicles
Real estate
Fine arts and antiques
Pedigree dogs and cats
This system is only appropriate when the individual stock item can be identified in some way, and
where turnover volumes do not make stock recording too time consuming.
An advantage of using this system of inventory valuation is that the value of Cost of Goods Sold
and Stock on Hand can be more accurately calculated. This results in the income statement and
balance better reflecting true and fair value.
Stocktake- Inventory Adjustment
As the business should know how much stock should be on hand, it is possible for the business to
determine if there has been theft, damage etc. At intervals, businesses still perform a stock take
to check the stock levels. If stock levels disagree, it is assumed that stock has been stolen.
Under Australian Taxation law, all trading businesses must undertake a physical stocktake at least
once a year to satisfy taxation requirements.
Stock Cards
Stock cards are necessary for the records of the perpetual system. This is because it keeps a
record of the quantity and value of a specific inventory at any point of time.
Stock cards keep track of inventory for only one stock item – not multiple.
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 5
Example for Specific Identification
Watches are sold by J T Williams Jewellers.
Stock Card
Item
Specific Identification
Watches
Date
Particulars
July
Qty
In
Unit
Cost
Total
Qty
Out
Unit
Cost
Total
1 Balance
8 Sales
1 (C109)
10 Purchases
1 (C121)
1 (C122)
700
1200
1000
15 Sales
1 (C117)
COGS → 1000 + 700 + 800 = $2 500
Stock on Hand → 300 + 1200 = $1 500
700
800
1 (C105)
1 (C109)
1 (C117)
1 (C105)
300
1000
800
300
300
1000
800
300
1 (C117)
1 (C105)
1 (C117)
1 (C121)
1 (C122)
1 (C105)
1 (C117)
800
300
800
700
1200
300
800
800
300
800
700
1200
300
800
1 (C122)
1 (C105)
1200
300
1200
300
1 (C122)
1200
1200
1000
700
1200
1 (C121)
Qty
Balance
Unit
Cost
Total
700
800
Example for FIFO
Stock Card
Item
Date
Sept
FIFO (First In, First Out)
Watches
Particulars
In
Unit
Cost
Qty
Total
Out
Unit
Cost
Qty
Total
1 Balance
5 Sales
6 Purchase Returns
15 Purchases
21 Sales
24 Sales Returns
31 Stock Loss
4
(1)
5
(100)
120
100
400
Balance
Unit
Cost
Total
Qty
5
2
100
110
500
220
1
2
100
110
100
220
2
110
220
2
5
110
120
220
600
4
120
480
1
4
110
120
110
480
4
120
480
(100)
600
2
1
110
120
220
120
(1)
110
110
1
110
110
Note that it isn’t stated which particular sale item was returned on the 24th. The unit cost figure of $110 has been used to record this sales return. This is
from the most recent lot of sales, which was on the 21st, and uses the older of the two unit cost figures from that date. Use this approach in any exercise in
which you are not specifically told which sale was returned.
Net Realisable Value
Accounting standards state that inventories need to be valued at either cost or net realisable value,
whichever is lower.
Cost – reflects the historical value of the purchased inventory
Net Realisable Value – reflects the anticipated selling price
Why would a business value inventory below the original purchase, consider the following:
•
•
•
•
•
•
Goods are no longer in peak condition
Goods are obsolete or out of date
Goods are made unsellable by new government regulations
Demand has fallen
Excess supply
Management adopts a policy to underprice, to increase market share
Items of
Inventory
Qty
Cost/Unit
Total Cost
NRV/Unit
Total Cost
Reporting Value
A1
1000 $
8.00
$ 8,000.00 $
9.25 $
9,250.00
$ 8,000.00
B2
600 $
8.60
$ 5,160.00 $
8.00 $
4,800.00
$ 4,800.00
C3
525 $
5.00
$ 2,625.00 $
4.89 $
2,567.25
$ 2,567.25
D4
862 $
10.00
$ 8,620.00 $
8.00 $
6,896.00
$ 6,896.00
E5
1500 $
13.25
$ 19,875.00 $
Inventory
Value
$ 44,280.00
Particulars
Inventory Adjustment
Inventory Control
16.00 $ 24,000.00 $ 19,875.00
$ 47,513.25 $ 42,138.25
Debit
Credit
2141.75
2141.75
(Balance Day Adjustment cost)
Total Cost - Reporting Value
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 8
Inventory Exercises
Complete the following questions in your accounting books for stockcard template
1) Another name for inventories is:
a. Depreciation
b. Stock
c. Amortisation
d. Services
2) An important advantage that the perpetual inventory system has over the periodic inventory
system is that:
a. It reduces time and effort in recording entries dealing with inventories
b. It allows a physical stocktake to be carried out each month
c. It increases control over inventories because the business knows the value of
inventories that should be on hand at any point of time
d. It hides the value of lost, stolen or spoiled goods in the cost of goods sold figure
3) Inventories should be valued at:
a. Cost
b. The lower of cost and net realisable value
c. Either cost or net realisable value
d. The lower of cost and market value
4) Which of the following is not an inventory accounting system:
a. FIFO
b. Accounted cost
c. LIFO
d. Specific identification cost
5) What is a physical stocktake? Why is it important for businesses to conduct a stocktake?
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Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 9
6) T Lee sells a range of bottled milk, the businesses uses FIFO method of accounting for
inventory. You are to prepare an inventory card for business from the following products
that have been bought and sold
Dec 1 Balance
350 Units @ $2 per unit
4 Sold
200 Units
5 Sold
100 Units
10 Purchased
150 Units @ $2.40 per unit
12 Sold
100 Units
21 Purchased
70 Units @ $2.30 per unit
24 Sold
110 Units
7) Y Timms is a owner operator of a car yard and sells new and used cars, what type of
inventory accounting method could Y Timms use? Why is this type of inventory accounting
method appropriate to Y Timms.
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8) You are to now prepare an inventory card for Y Timms for the following purchases and sales:
Inventory on hand – 1 red Holden commodore (rego 453 564), 1 blue Ford
Laser (rego 245 675), 1 blue Holden commodore (rego 643 657), 1 white
Toyota Landcruiser (rego 543 235)
Sold the red Holden commodore
Purchased a yellow Mazda 3 (rego 433 654)
Purchased blue Toyota Yaris (rego 542 634)
Sold silver Toyota landcruiser
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 10
9) You are to prepare an inventory card for H Williams, for the following stock item product x,
(you are to assume that you are using FIFO method)
Jan 1 Balance
120 Units @ $4 per unit
4 Bought
200 Units @ $3.90 per unit
5 Sold
150 Units
15 Sold
80 Units
21 Bought
100 Units @ $4.10 per unit
22 Bought
200 Units @ $4.15 per unit
24 Sold
250 Units
28 Sold
100 Units
10) You are to determine the reporting value for the following inventory and make the
necessary journal entry for the valuation of inventory
Item of Inventory
A1
1000
Cost/unit
$
8.00
B2
600
8.60
8.00
C3
525
5.00
4.89
D4
862
10.00
8.00
E5
1500
13.25
16.00
Stage 2 Accounting
Teacher Mr N Smith
Qty
NRV/Unit
$
9.25
Darwin High School
Page 11
11) Under Australian Accounting standards, LIFO is not and yet however FIFO is. What is the
primarily difference between LIFO and FIFO and why does this allow FIFO to be used under
Australian Accounting standards.
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Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 12
Cash Flow Statements
The purpose of the statement of cash flows is to assist the user in assessing the ability of the
business to:
•
•
•
•
•
Generate a positive cash flow where inflows are greater than outflows
Service its debts (pay the interest on any borrowings)
Fund any desired future expansion or changes
Acquire external funds when necessary (loans or debentures if a companies)
Pay drawings (if a sole trader) or dividends (if a company)
The statement of cash flows provides a link between the Income Statement and Balance
Sheet. Businesses can be considered very profitable, yet maybe cash poor. There can be
various reasons for businesses been cash poor:
•
•
•
Money is tied up in inventory
The business has too many assets
Money from accounts receivable might be been paid late or not received
Categorisation of Cash
In the preparation of cash flow statements there are there general categories of activity.
AASB107 stipulates that the movement of cash should be classified as one of the following
three classifications, these are:
1. Operating
2. Investing
3. Financing
In each category there are inflows (cash received) and outflows (cash paid).
Operating
These are cash flows that relate to the day-to-day operations of a business. These are
generally Income Statement Items. They involve a movement of cash that relates to:
•
•
•
•
•
The sale and purchase of goods and services
Interest paid or received
Dividends received
Taxes paid
Rent, wages, advertising, and payments for other expenses
Investing Activities
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 13
These are cash flows that result from the purchase or sale of assets for cash. They generally
involve Non Current Assets. They involve a movement of cash that relates to:
•
•
Acquisition and disposal (purchase and sale) of non current assets and investments
Lending money to other entities and repayments of those loans back to the business
Financing Activities
These are cash flows that correspond to changes in the financial structure of the business.
They are generally Non Current Liabilities and Equity Loans. Finance can be obtained from
external sources (a mortgage) or internally (owner’s personal funds)
Cash flows in and out of the business through financing activities will generally occur
through the following:
•
•
•
•
•
Sale, issue, buy-back shares
Issuing and redemption of debentures
Contribution or withdraw of capital
Money borrowed, or repayment of loan
Dividends and distributions paid to shareholders
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 14
Preparation and Structure of Cash Flow Statement
A statement of cash flows is prepared from using information from two successive Balance
Sheets and a current Income Statement.
Ensure that you do not include any non cash items such as depreciation, bad debts, doubtful
debts, profit/loss on sale of asset. It is about the net cash movements for each period.
Comparative Balance Sheets for Ms U King as at 30 June 2011
Year 2011
Current Assets
Bank
Debtors
Stock
Non Current Assets
Motor Vehicle
Equipment
Total Assets
Current Liabilities
Creditors
Non Current Liabilities
Loan
Owner's Equity
Capital
Total Equities
13000
8500
2400
10000
20000
23900
30000
53900
3600
16000
Year 2010
8000
4000
1600
10000
10000
13600
20000
33600
3200
19600
10000
34300
53900
13200
20400
33600
Income Statement for Ms U King for year ending 30 June 2011
Revenue
Sales (cash)
Sales (credit)
Less Cost of Goods Sold
Opening Stock
Purchases (cash)
Purchases (credit)
Less Closing Stock
Gross Profit
Less Expenses
Wages
Promotion
Net Profit
19000
5000
1600
6000
2000
9600
2400
2000
600
24000
7200
16800
2600
14200
Additional Information:
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 15
•
•
•
New Equipment was purchased on 1 December for $10 000 with a new loan
The owner took drawings of $300
All expenses were paid with cash
Debtors will need to be reconstructed to determine receipts from customers.
2010 Bal b/d
Sales
2011 Bal b/d
Debtors Control a/c
4000
Cash
5000
Bal c/d
9000
500
8500
9000
8500
Creditors will need to be reconstructed to determine payments to suppliers.
2010 Cash
Bal c/d
Creditors Control a/c
1600
Bal b/d
3600
Purchases
5200
2011 Bal b/d
Stage 2 Accounting
Teacher Mr N Smith
3200
2000
5200
3600
Darwin High School
Page 16
Ms U King
Statement of Cash Flows for the year ended 30 June 2011
Cash Flows from Operating Activities
Inflow
Cash Receipts
Receipts from Debtors
Outflow
Payment to Creditors
Cash Purchases
Payment to Employees
Other Operating Expenses
Net Cash from operating activities
19000
500
19500
1600
6000
2000
600 (10200)
9300
Cash Flows from Investing Activities
Outflow
Equipment
Net Cash from Investing Activities
(10000)
(10000)
Cash Flows from Financing Activities
Inflow
Loan
Outflow
Drawings
Net Cash from Financing Activities
Net Increase in cash
Cash balance at beginning
Cash balance at end
Stage 2 Accounting
Teacher Mr N Smith
6000
(300)
5700
5000
8000
13000
Darwin High School
Page 17
Cash Flow Statement Exercises
1. Explain the importance of a Statement of Cash Flows:
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2. Classify the following items as they would appear in the Statement of Cash Flows
Wages and Salaries
Loan to an Employee
Drawings
Bad Debts
Rent Revenue
Depreciation
Repayment of Loan
Advertising Expense
Payment from Accounts Receivable
3.
How can a business that is making huge profits still be considered cash poor. Explain
with at least two examples
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Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 18
3.
Create a cash flow statement for Pet Store NAU from the following information.
Comparative Balance Sheet for Pet Store NAU as at 30 June 11
Year 2011
Current Assets
Bank
Debtors
Stock
Non Current Assets
Motor Vehicle
Less Acc Dep'n on Motor Vehicle
Fixtures & Fittings
Motor Vehicle on Fixtures &
Fittings
Premises
Shares
Total Assets
Current Liabilities
Bank Overdraft
Creditors
Non Current Liabilities
Loan
Owner's Equity
Capital
Total Equities
Stage 2 Accounting
Teacher Mr N Smith
0
30100
101000
131100
Year 2010
8000
45250
98000
48000
-8000
75000
48000
-4000
50000
-43000
290000
0
-38000
160000
55000
24500
50200
362000
493100
74700
0
23400
151250
271000
422250
23400
100000
174700
100000
123400
318400
493100
298850
422250
Darwin High School
Page 19
Income Statement for Pet Store NAU for the year ended 30 June 11
Revenue
Sales (cash)
Sales (credit)
Less Cost of Goods Sold
Opening Stock
Purchases (cash)
Less Closing Stock
Gross Profit
Add Operating Revenue
Interest Revenue
Less Other Operating Expenses
Advertising
Sales Wages
Depreciation on Motor Vehicle
Administrative Costs
Depreciation on Fixtures & Fittings
Insurance
Finance Expenses
Bad Debts
Interest on Mortgage
Net Profit
500000
220000
95000
570000
665000
96000
720000
569000
151000
1550
152550
16000
72000
4000
92000
5000
3000
8000
6000
20000
26000
126000
26550
Additional Information
• All acquisitions and disposals of non current assets were for cash
• Coles Myers shares were sold at cost price
Stage 2 Accounting
Teacher Mr N Smith
Darwin High School
Page 20