2 Inventories CHAPTER 2.0 INTRODUCTION 2.1 WHAT IS INVENTORY? LEARNING OUTCOMES

Transcription

1 CHAPTER 2 Inventories LEARNING OUTCOMES At the end of this chapter, students should be able to: determine the inventory cost differentiate and calculate inventory using the Periodic and Perpetual systems determine the ending inventory value by using First In First Out (FIFO), Last In First Out (LIFO) and Average Cost (AVCO) methods identify the effects of using the FIFO, LIFO and AVCO methods on profit and loss determine the ending inventory value by using item, category and aggregate methods 2.0 INTRODUCTION Inventory or stock is business goods bought by a trading company for the purpose of resale. Accurate accounting of inventory is important to determine whether a company earns profit or loss from business transactions made, in addition to functioning as a control measure to avoid mistakes or inventory theft. 2.1 WHAT IS INVENTORY? According to MFRS 102, inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale, or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Based on the definitions given above, inventory is business goods bought for the purpose of resale and is an important asset in ordinary business transactions.

2 52 Last In First Out (LIFO) Perpetual System Solution 2(e): Date Dec 1 Purchases 2 12 Cost of Goods Sold RM RM RM RM RM5.60 a 22 5 RM a b c Balance RM RM RM RM Unit (a) is the last inventory balance/final purchase. Thus, unit (a) will be sold first. 14 Dec.; sell unit (a), followed by (b) and (c) to complete the 19 units sale.

3 INCOMPLETE RECORDS 137 Example 5.11 Sample Exam Question Aiman is the owner of ABC Retail Shop, who does not keep a complete record of his business. He needs your help to determine his business financial standing and operation result. The following information was found from the available records and from the investigation carried out. (i) Business Assets and Liabilities on 1 January 2010: Premises RM65,000, equipment (net value) RM8,400, inventories RM11,450, accounts receivable RM12,900, accounts payable RM7,800, cash and bank RM8,800, insurance prepaid RM450 and accrued utility expense RM270. (ii) Cash book kept showed the following receivables and payments during year 2010: Cash Book Receivables Payment Accounts Receivable 56,880 Accounts Payable 34,690 Sales 13,600 Purchases 9,200 Salary 6,320 Insurance 3,640 General expenses 510 Utility expenses 2,560 Drawings 11,230 Purchase equipment 3,600 Premise repair expenses 4,600 (iii) Aiman brought in an equipment that is worth RM1,200 from his home for business use at the beginning of year He drew inventory that is worth RM620 for personal use. (iv) Bad debt of RM640 occurred and written off in the book of the business. (v) The book showed a total returns outwards of RM280 and total returns inwards of RM330. (vi) Total discount received was RM1,120 and total discount allowed was RM1,380. (vii) 20% from utility expense was used by part of his family residence. (viii) Assets and liabilities on 31 December 2010: Equipment (net value) RM11,200, inventories RM13,500, accounts receivable RM13,400, accounts payable RM9,450, prepaid insurance RM440 and accrued utility expenses RM410. You are required to prepare: (a) Statement of Comprehensive Income for the year ended 31 December 2010 (b) Satement of Financial Position on that date

4 142 SUMMARY 1 Incomplete record refers to a bookkeeping system which does not follow the double-entry system. 2 Incomplete record is also known as single-entry system because transactions are recorded only once. 3 This situation usually occurs in small businesses such as retail shop. 4 The main weakness when a record is incomplete is that the profit or loss cannot be calculated accurately and mistakes cannot be detected because financial statement cannot be prepared. 5 There are two methods to solve incomplete record problem: (a) Comparison method (b) Analysis method 6 In the comparison method, the difference between ending capital and beginning capital of a business, in consideration with additional capital and owner s drawings, is the net profit. 7 In the analysis method, analysis will be made on account books such as: (a) Cash/Bank book (b) Accounts Receivable book (c) Accounts Payable book (d) Other income books (e) Expenditure books 8 After all relevant accounting information is found, a Statement of Comprehensive Income is prepared to determine profitability or loss. 9 A Statement of Financial Position is prepared to find out about the business financial standing. QUESTIONS Section A Answer all the questions below. Choose one correct answer. 1 Incomplete business records will affect financial records in the following ways, except. A business profits cannot be determined accurately because entries for income or expenditure are not made B confusion arises between personal records and business records because the owner lacks knowledge in accounting C statements of financial position will not give a true

5 146 Section C Answer all the questions below. 1 For situation (i) to (ix) below, calculate the value of X using the comparison method in Profit and Loss Statement. The financial year is 1 January until 31 December. Capital on 1 January Capital on 31 December Additional Capital Total Drawings Net Profit i. 36,900 46,800 8,550 3,450 X ii. 41,700 42,750 7,200 4,500 X iii. 45,150 X 11,850 7,440 13,350 Net Loss iv. 44,850 X 11,310 9,450 5,520 v. X 66,330 11,670 6,360 12,420 vi. X 52,500 7,050 5,610 4,740 vii. 44,640 58,110 5,970 X 8,250 viii. 49,320 51,750 X 11,520 5,340 ix. 53,250 58,110 15,750 X 3,450 2 Calculate the capital for each business owner below by taking into consideration all additional information given. Asset and Liability Nana Nani Laila Laily Vehicle 24,000 42,000 30,000 30,000 Equipment & furniture 7,200 12,600 10,500 9,000 Inventories 9,700 15,750 14,220 9,240 Accounts receivable 6,600 11,520 8,580 7,480 Accounts payable 5,780 7,620 9,330 3,680 Cash 500 7, ,160 Bank overdraft 2,880 3,750 Prepaid expenditure Accrued expenditure Prepaid income Accrued income Business capital