Chapter 8 - Inventories PDF

Academic year 2024-2025 Internal and External Financial Reporting Academic year 2024-2025  Vicky Ghijselinck  [email protected]  Office B05-11...

Academic year 2024-2025 Internal and External Financial Reporting Academic year 2024-2025  Vicky Ghijselinck  [email protected]  Office B05-11 1 Part 1a: Financial Accounting Financial Reporting Chapter 8: Inventories 2 Lecturer: V. Ghijselinck 1  Academic year 2024-2025  Chapter 1: The language of business  Chapter 2: Introduction to financial statements Internal  Chapter 3: The accounting process and External  Chapter 4: Accounting principles Financial  Chapter 5: Fundamental commercial transactions Reporting  Chapter 6: Adjusting entries and changes in Part 1a: Financial Accounting inventories Financial Reporting  Chapter 7: Receivables  Chapter 8: Inventories  Chapter 9: Intangible and tangible fixed assets  Chapter 10: Financial fixed assets  Chapter 11: Equity  Chapter 12: Provisions  Chapter 13: Amounts payable  Chapter 14: Preparing financial statements 3 Outline  Introduction  Valuation of purchased inventories  Valuation of manufactured inventories and contracts in progress 4 Lecturer: V. Ghijselinck 2  Academic year 2024-2025 Introduction Inventories  What? Inventories are assets held for sale in the ordinary course of the business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services 5 Introduction Accounting period Opening balance sheet with opening of accounts in journal and general ledger Financial statements Accounting of all transactions Balance sheet + Income statement + Notes in journal and general ledger Final trial balance 1st provisional trial balance Taxes Distribution of profit after tax 2nd provisional trial balance Inventory with determination of result before tax End-of-period entries in in journal and general ledger ledger 6 Lecturer: V. Ghijselinck 3  Academic year 2024-2025 Introduction End-of-period entries  During the accounting period All purchases are recorded on an expense account All sales are recorded on a revenue account The balance of the inventory account remains unaltered during the accounting period  At the end of the accounting period Account for changes in inventories based on physical stock-taking Correct value for inventory (asset) in the balance sheet Correct value for cost of goods sold (expense) in the income statement 7 Introduction Location in the balance sheet Previous Codes Period period CURRENT ASSETS 3/58.......... ………. Inventories and contracts in progress 3 ………. ………. Inventories 30/36 ………. ………. Raw materials and consumables 30/31 ………. ………. Work in progress 32 ………. ………. Finished goods 33 ………. ………. Goods for resale 34 ………. ………. Immovable property intended for sale 35 ………. ………. Advance payments 36 ………. ………. Contracts in progress 37 ………. ………. Amounts receivable within one year 40/41 ………. ………. Trade debtors 40 ………. ………. Other amounts receivable 41 ………. ………. Current investments 50/53 ………. ………. Own shares 50 ………. ………. Other investments 51/53 ………. ………. Cash at bank and in hand 54/58 ………. ………. Accruals and deferrals 490/1 ………. ………. TOTAL ASSETS 21/58 ………. ………. 8 Lecturer: V. Ghijselinck 4  Academic year 2024-2025 Introduction Location in the income statement Previous Codes Period period Operating revenues 70/76A ………. ………. Sales 70 ………. ………. Inventories of finished goods and work and contracts in progress increase (decrease) 71 ………. ………. Produced fixed assets 72 ………. ………. Other operating revenues 74 ………. ………. Non-recurring operating revenues 76A ………. ………. Operating expenses 60/66A ………. ………. Goods for resale, raw materials and consumables 60 ………. ………. Purchases 600/8 ………. ………. Inventories: decrease Inventories: decrease (increase) (increase) 609 ………. ………. Services and other goods 61 ………. ………. Remuneration, social security and pensions 62 ………. ………. Depreciation and amortisation of and other amounts written of on intangible and tangible fixed assets 630 ………. ………. Amounts written off on inventories, contracts in progress and trade debtors: additions (write-backs) 631/4 ………. ………. Provisions for liabilities and expenses: appropriations (uses and write-backs) 635/8 ………. ………. Other operating expenses 640/8 ………. ………. Non-recurring operating expenses 66A ………. ………. Operating profit (loss) 9901 ………. ………. 9 Introduction Location in the chart of accounts Balance sheet accounts Income statement accounts Inventories and changes in inventories 30 Raw materials 6090 Changes in inventories of raw materials 31 Consumables 6091 Changes in inventories of consumables 32 Work in progress 6094 Changes in inventories of goods for resale 33 Finished goods 34 Goods for resale 631 Amounts written off inventories 632 Amounts written off contracts in progress 36 Advance payments 360 Advance payments 712 Changes in inventories of work in progress 369 Amounts written off (-) 713 Changes in inventories of finished goods 37 Contracts in progress 717 Changes in inventories of contracts in 370 Cost of acquisition progress 371 Attributed profit 7170 Cost of acquisition 379 Amounts written off (-) 7171 Attributed profit For account groups 30/34: 3…0 – Cost of acquisition 3…9 – Amounts written off 10 Lecturer: V. Ghijselinck 5  Academic year 2024-2025 Valuation of purchased inventories 11 Valuation of purchased inventories Introduction Raw materials and consumables Goods for resale Market value < Cost of acquisition? No Yes Cost of acquisition Specific identification method FIFO Market value LIFO Weighted average Write-offs Reversal of write-offs 12 Lecturer: V. Ghijselinck 6  Academic year 2024-2025 Valuation of purchased inventories Introduction  Cost of acquisition: cost of purchase + other costs (= additional costs, excluding refundable taxes)  Alternative methods to give substance to the cost of acquisition Specific identification method FIFO-method LIFO-method Weighted average price method  Market value (or net realisable value): estimated selling price minus estimed costs of completion and estimated costs of sale 13 Valuation of purchased inventories Inventory valuation methods Case study The following transactions took place during the accounting period of company OMEGA KAPPA plc for a specific item of goods for resale: Price Total Date Movement inventory Units (in EUR) (in EUR) 01/01/20X0 Opening inventory 100 10,00 1 000,00 15/02/20X0 Sale 60 16,00 960,00 29/03/20X0 Purchase 80 15,00 1 200,00 23/08/20X0 Sale 60 21,00 1 260,00 05/09/20X0 Purchase 100 20,00 2 000,00 21/12/20X0 Sale 80 24,00 1 920,00 14 Lecturer: V. Ghijselinck 7  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Case study Based on the aforementioned transactions, we find the following information in the T-accounts of OMEGA KAPPA plc: 340 Inventory of goods for resale D – Cost of acquisition C OB 1 000,00 604 Purchases 70x Sales D of goods for resale C D of goods for resale C (…) 1 200,00 960,00 (…) (…) 2 000,00 1 260,00 (…) 1 920,00 (…) 15 Valuation of purchased inventories Inventory valuation methods Case study  Inventory account ‘340 Inventory of goods for resale’ shows the opening balance  All purchases have been recorded on account ‘604 Purchases of goods for resale’  All sales have been recorded on account’70x Sales of goods for resale’  We need to determine the closing balance of inventory! 16 Lecturer: V. Ghijselinck 8  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods FIFO-method  What? First In, First Out Goods that were purchased first are considered to be sold first  Consequence: goods in inventory are considered to originate from last purchases FIFO 17 Valuation of purchased inventories Inventory valuation methods FIFO-method  Calculation number of units of closing inventory Opening inventory 01/01/20X0 100 units + Purchases 29/03/20X0 + 80 units 05/09/20X0 + 100 units - Sales 15/02/20X0 - 60 units 23/08/20X0 - 60 units 21/12/20X0 - 80 units = Closing inventory = 80 units 18 Lecturer: V. Ghijselinck 9  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods FIFO-method  Calculation value of closing inventory Goods in closing inventory are considered to originate from last purchases Value of closing inventory 80 units x € 20,00/unit € 1 600,00 Total € 1 600,00 19 Valuation of purchased inventories Inventory valuation methods FIFO-method  Determination of change in inventory Value of opening inventory € 1 000,00 Value of closing inventory € 1 600,00 Change in inventory + € 600,00  Accounting treatment 340 Inventory 6094 Changes of goods for resale in inventories D – Cost of acquisition C D of goods for resale C OB 1 000,00 600,00 600,00 20 Lecturer: V. Ghijselinck 10  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods FIFO-method Based on the aforementioned transactions, we find the following information in the T-accounts of OMEGA KAPPA plc: 604 Purchases 70x Sales D of goods for resale C D of goods for resale C (…) 1 200,00 960,00 (…) (…) 2 000,00 Cost of goods sold 1 260,00 (…) in IS: 2 600,00 EUR 1 920,00 (…) 6094 Changes 340 Inventory in inventories of goods for resale D of goods for resale C D – Cost of acquisition C OB 1 000,00 Value closing inventory 600,00 600,00 in BS: 1 600,00 EUR 21 Valuation of purchased inventories Inventory valuation methods FIFO-method  Income statement Income statement EXPENSES REVENUES 60/66A Operating expenses 2 600,00 70/76A Operating revenues 4 140,00 60 Goods for resale … 2 600,00 70 Sales 4 140,00 600/8 Purchases 3 200,00 Cost of goods sold 609 Inventories: decrease - 600,00 in IS: 2 600,00 EUR (increase) Operating profit (loss): 1 540,00 22 Lecturer: V. Ghijselinck 11  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods LIFO-method  What? Last In, First Out Goods that were purchased last are considered to be sold first  Consequence: goods in inventory are considered to originate from first purchases LIFO 23 Valuation of purchased inventories Inventory valuation methods LIFO-method  Calculation number of units of closing inventory Opening inventory 01/01/20X0 100 units + Purchases 29/03/20X0 + 80 units 05/09/20X0 + 100 units - Sales 15/02/20X0 - 60 units 23/08/20X0 - 60 units 21/12/20X0 - 80 units = Closing inventory = 80 units 24 Lecturer: V. Ghijselinck 12  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods LIFO-method  Calculation value of closing inventory Price Total Date Movement inventory Units (in EUR) (in EUR) 01/01/20X0 Opening inventory 100 → 40 10,00 1 000,00 15/02/20X0 Sale 60 16,00 960,00 29/03/20X0 Purchase 80 → 20 15,00 1 200,00 23/08/20X0 Sale 60 21,00 1 260,00 05/09/20X0 Purchase 100 → 20 20,00 2 000,00 21/12/20X0 Sale 80 24,00 1 920,00 25 Valuation of purchased inventories Inventory valuation methods LIFO-method  Calculation value of closing inventory Goods in closing inventory are considered to originate from first purchases Attention: make intermediate calculations with LIFO method! (at each sale, check what company still has in inventory) Value of closing inventory 40 units x € 10,00/unit € 400,00 20 units x € 15,00/unit € 300,00 20 units x € 20,00/unit € 400,00 Total € 1 100,00 26 Lecturer: V. Ghijselinck 13  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods LIFO-method  Determination of change in inventory Value of opening inventory € 1 000,00 Value of closing inventory € 1 100,00 Change in inventory + € 100,00  Accounting treatment 340 Inventory 6094 Changes of goods for resale in inventories D – Cost of acquisition C D of goods for resale C OB 1 000,00 100,00 100,00 27 Valuation of purchased inventories Inventory valuation methods LIFO-method Based on the aforementioned transactions, we find the following information in the T-accounts of OMEGA KAPPA plc: 604 Purchases 70x Sales D of goods for resale C D of goods for resale C (…) 1 200,00 960,00 (…) (…) 2 000,00 Cost of goods sold 1 260,00 (…) in IS: 3 100,00 EUR 1 920,00 (…) 6094 Changes 340 Inventory in inventories of goods for resale D of goods for resale C D – Cost of acquisition C OB 1 000,00 Value closing inventory 100,00 100,00 in BS: 1 100,00 EUR 28 Lecturer: V. Ghijselinck 14  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods LIFO-method  Income statement Income statement EXPENSES REVENUES 60/66A Operating expenses 3 100,00 70/76A Operating revenues 4 140,00 60 Goods for resale … 3 100,00 70 Sales 4 140,00 600/8 Purchases 3 200,00 Cost of goods sold 609 Inventories: decrease - 100,00 in IS: 3 100,00 EUR (increase) Operating profit (loss): 1 040,00 29 Valuation of purchased inventories Inventory valuation methods Weighted average price method  What? Weighted average purchase price is calculated for inventory  Important remark: weighted average purchase price can be calculated In general/overall: weighted average purchase price is calculated over all purchases Moving average: average purchase price is calculated after each purchase transaction 30 Lecturer: V. Ghijselinck 15  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Overall weighted average price method  Calculation number of units of closing inventory Opening inventory 01/01/20X0 100 units + Purchases 29/03/20X0 + 80 units 05/09/20X0 + 100 units - Sales 15/02/20X0 - 60 units 23/08/20X0 - 60 units 21/12/20X0 - 80 units = Closing inventory = 80 units 31 Valuation of purchased inventories Inventory valuation methods Overall weighted average price method  Calculation value of closing inventory Value of closing inventory is calculated based on weighted average purchase price Value of closing inventory Opening inventory 100 units € 1 000,00 Purchases + 180 units € 3 200,00 Total 280 units € 4 200,00 Weighted average purchase price € 15,00/unit Value of closing inventory 80 units x € 15,00/unit = € 1 200,00 32 Lecturer: V. Ghijselinck 16  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Overall weighted average price method  Determination of change in inventory Value of opening inventory € 1 000,00 Value of closing inventory € 1 200,00 Change in inventory + € 200,00  Accounting treatment 340 Inventory 6094 Changes of goods for resale in inventories D – Cost of acquisition C D of goods for resale C OB 1 000,00 200,00 200,00 33 Valuation of purchased inventories Inventory valuation methods Overall weighted average price method Based on the aforementioned transactions, we find the following information in the T-accounts of OMEGA KAPPA plc: 604 Purchases 70x Sales D of goods for resale C D of goods for resale C (…) 1 200,00 960,00 (…) (…) 2 000,00 Cost of goods sold 1 260,00 (…) in IS: 3 000,00 EUR 1 920,00 (…) 6094 Changes 340 Inventory in inventories of goods for resale D of goods for resale C D – Cost of acquisition C OB 1 000,00 Value closing inventory 200,00 200,00 in BS: 1 200,00 EUR 34 Lecturer: V. Ghijselinck 17  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Overall weighted average price method  Income statement Income statement EXPENSES REVENUES 60/66A Operating expenses 3 000,00 70/76A Operating revenues 4 140,00 60 Goods for resale … 3 000,00 70 Sales 4 140,00 600/8 Purchases 3 200,00 Cost of goods sold 609 Inventories: decrease - 200,00 in IS: 3 000,00 EUR (increase) Operating profit (loss): 1 140,00 35 Valuation of purchased inventories Inventory valuation methods Moving weighted average price method  Calculation number of units of closing inventory Opening inventory 01/01/20X0 100 units + Purchases 29/03/20X0 + 80 units 05/09/20X0 + 100 units - Sales 15/02/20X0 - 60 units 23/08/20X0 - 60 units 21/12/20X0 - 80 units = Closing inventory = 80 units 36 Lecturer: V. Ghijselinck 18  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Moving weighted average price method  Calculation value of closing inventory Average purchase price is calculated after each purchase transaction Value of closing inventory: see next slide 37 Valuation of purchased inventories Inventory valuation methods 01/01/20X0 Opening inventory 100 units 10,00 EUR/unit 1 000,00 EUR 15/02/20X0 Sale 60 units 10,00 EUR/unit 600,00 EUR Inventory 40 units 10,00 EUR/unit 400,00 EUR 29/03/20X0 Purchase 80 units 15,00 EUR/unit 1 200,00 EUR Inventory 120 units 13,33 EUR/unit 1 600,00 EUR 23/08/20X0 Sale 60 units 13,33 EUR/unit 800,00 EUR Inventory 60 units 13,33 EUR/unit 800,00 EUR 05/09/20X0 Purchase 100 units 20,00 EUR/unit 2 000,00 EUR Inventory 160 units 17,50 EUR/unit 2 800,00 EUR 21/12/20X0 Sale 80 units 17,50 EUR/unit 1 400,00 EUR Inventory 80 units 17,50 EUR/unit 1 400,00 EUR 38 Lecturer: V. Ghijselinck 19  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Moving weighted average price method  Determination of change in inventory Value of opening inventory € 1 000,00 Value of closing inventory € 1 400,00 Change in inventory + € 400,00  Accounting treatment 340 Inventory 6094 Changes of goods for resale in inventories D – Cost of acquisition C D of goods for resale C OB 1 000,00 400,00 400,00 39 Valuation of purchased inventories Inventory valuation methods Moving weighted average price method Based on the aforementioned transactions, we find the following information in the T-accounts of OMEGA KAPPA plc: 604 Purchases 70x Sales D of goods for resale C D of goods for resale C (…) 1 200,00 960,00 (…) (…) 2 000,00 Cost of goods sold 1 260,00 (…) in IS: 2 800,00 EUR 1 920,00 (…) 6094 Changes 340 Inventory in inventories of goods for resale D of goods for resale C D – Cost of acquisition C OB 1 000,00 Value closing inventory 400,00 400,00 in BS: 1 400,00 EUR 40 Lecturer: V. Ghijselinck 20  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Overall weighted average price method  Income statement Income statement EXPENSES REVENUES 60/66A Operating expenses 2 800,00 70/76A Operating revenues 4 140,00 60 Goods for resale … 2 800,00 70 Sales 4 140,00 600/8 Purchases 3 200,00 Cost of goods sold 609 Inventories: decrease - 400,00 in IS: 2 800,00 EUR (increase) Operating profit (loss): 1 340,00 41 Valuation of purchased inventories Inventory valuation methods Summary Weighted average price method FIFO-method LIFO-method Overall Moving Sales 4 140,00 4 140,00 4 140,00 4 140,00 Cost of goods sold 2 600,00 3 100,00 3 000,00 2 800,00 Purchases 3 200,00 3 200,00 3 200,00 3 200,00 Changes in inventory - 600,00 - 100,00 - 200,00 - 400,00 Operating profit 1 540,00 1 040,00 1 140,00 1 340,00 Closing inventory 1 600,00 1 100,00 1 200,00 1 400,00 42 Lecturer: V. Ghijselinck 21  Academic year 2024-2025 Valuation of purchased inventories Inventory valuation methods Remarks  Companies must choose a method and consistently apply it  The adopted method does not have to correspond to the actual flow of goods 43 Valuation of purchased inventories The market test What?  The lower of cost or market rule If market value of inventory falls below its cost of acquisition (according to the valuation method adopted), inventory shoud be value at market value Induced by prudency principle  Accounting treatment Always compare value of closing inventory according to cost of acquisition versus market value The lowest value always prevails! 44 Lecturer: V. Ghijselinck 22  Academic year 2024-2025 Valuation of purchased inventories The market test 31/12/20X0: continuing the example. Company OMEGA KAPPA plc has an opening inventory valued at 1 000,00 EUR. Suppose company OMEGA KAPPA plc has chosen the FIFO-valuation method: the closing value of inventory amounts to 1 600,00 EUR (see supra). The inventory shows that the market price of goods at the end of the accounting period is only 14,00 EUR/unit.  Determination of change in inventory Value of opening inventory € 1 000,00 Value of closing inventory Cost of acquisition: FIFO-method € 1 600,00 Market value € 1 120,00 Change in inventory + € 120,00 45 Valuation of purchased inventories The market test 31/12/20X0: continuing the example. Company OMEGA KAPPA plc has an opening inventory valued at 1 000,00 EUR. Closing value of inventory according to the FIFO-valuation method: 1 600,00 EUR (see supra). Closing value of inventory according to the market value: 1 120,00 EUR. 604 Purchases 70x Sales D of goods for resale C D of goods for resale C (…) 1 200,00 960,00 (…) (…) 2 000,00 Cost of goods sold 1 260,00 (…) in IS: 3 080,00 EUR 1 920,00 (…) 6094 Changes 340 Inventory in inventories of goods for resale D of goods for resale C D – Cost of acquisition C OB 1 000,00 Value closing inventory 120,00 120,00 in BS: 1 120,00 EUR 46 Lecturer: V. Ghijselinck 23  Academic year 2024-2025 Valuation of purchased inventories The market test 31/12/20X0: continuing the example. Company OMEGA KAPPA plc has an opening inventory valued at 1 000,00 EUR. Closing value of inventory according to the FIFO-valuation method: 1 600,00 EUR (see supra). Closing value of inventory according to the market value: 1 120,00 EUR. No. Accountno. Description D C 31/12/20X0 x 340 Inventory of goods for resale – Cost of acquisition 120,00 6094 @ Changes in inventories of goods for resale 120,00 DIV 20X0/… – Change in inventory 47 Valuation of purchased inventories Write-offs What?  Decrease in value  Induced by various causes: obsolescence, physical deterioration …  Accounting treatment Value of inventories ↓: 3…9 Inventory of … – Amounts written off (-) Operating expenses ↑: 6310 Amounts written off inventories – Increase 48 Lecturer: V. Ghijselinck 24  Academic year 2024-2025 Valuation of purchased inventories Write-offs 31/12/20X0: in company VICTORIA plc, on the closing date of the accounting period, the following data are known regarding the goods for resale: opening inventory 150 000,00 EUR and closing inventory 200 000,00 EUR (applying the weighted average price method). The market value is determined at 185 000,00 EUR. In the near future, a further price decrease to 160 000,00 EUR is expected. 49 Valuation of purchased inventories Write-offs 31/12/20X0: in company VICTORIA plc, on the closing date of the accounting period, the following data are known regarding the goods for resale: opening inventory 150 000,00 EUR and closing inventory 200 000,00 EUR (applying the weighted average price method). The market value is determined at 185 000,00 EUR. In the near future, a further price decrease to 160 000,00 EUR is expected.  Determination of change in inventory Value of opening inventory € 150 000,00 Value of closing inventory Cost of acquisition: WAP-method € 200 000,00 Market value € 185 000,00 Change in inventory + € 35 000,00 50 Lecturer: V. Ghijselinck 25  Academic year 2024-2025 Valuation of purchased inventories Write-offs 31/12/20X0: DIV 20X0/… regarding the recording of the change in inventory. (entry x) 340 Inventory of goods for resale Inventory of goods for resale A + D – Cost of acquisition 6094 Changes in inventories Change in inventory E - C of goods for resale 340 Inventory 6094 Changes of goods for resale in inventories D – Cost of acquisition C D of goods for resale C OB 150 000,00 (x) 35 000,00 35 000,00 (x) No. Accountno. Description D C 31/12/20X0 x 340 Inventory of goods for resale – Cost of acquisition 35 000,00 60940 @ Changes in inventories of goods for resale 35 000,00 DIV 20X0/… – Change in inventory 51 Valuation of purchased inventories Write-offs 31/12/20X0: DIV 20X0/… regarding the recording of the write-off on inventory. (entry y) 6310 Amounts written off inventories Write-off E + D – Increase 349 Inventory of goods for resale Inventory of goods for resale A - C – Amounts written off (-) 6310 Amounts written off 349 Inventory of GFR D inventories – Increase C D – Amounts written off (-) C (y) 25 000,00 25 000,00 (y) Nr. Ver. Rek.nr. Omschrijving D C 31/12/20X0 y 6310 Amounts written off inventories – Increase 25 000,00 349 @ Inventory of GFR – Amounts written off (-) 25 000,00 DIV 20X0/… – Write-off on inventory 52 Lecturer: V. Ghijselinck 26  Academic year 2024-2025 Valuation of manufactured inventories and contracts in progress 53 Valuation of manufactured inventories and CIP Introduction Finished goods Contracts in progress Work in progress Manufacturing price Manufacturing price or market value if lower (+ gained profit) Manufacturing price Direct costing Full costing Gained profit Percentage of completion method Completed contract method Write-offs Reversal of write-offs 54 Lecturer: V. Ghijselinck 27  Academic year 2024-2025 Valuation of manufactured inventories and CIP Inventory valuation methods Finished goods, work in progress and contracts in progress  Manufacturing price: direct costing versus full costing Direct costing: only direct production costs are included in the manufacturing price Full costing: both direct and indirect production costs are included in the manufacturing price For concrete examples: see textbook p. 205-208 55 Valuation of manufactured inventories and CIP Inventory valuation methods XXX = direct and indirect produc on costs → Full cos ng XXX = direct produc on costs → Direct cos ng Finished goods, work in progress and contracts in progress 320 Inventory of work in progress 712 Changes in inventories D – Cost of acquisition C D of work in progress C XXX XXX 330 Inventory of finished goods 713 Changes in inventories D – Cost of acquisition C D of finished goods C XXX XXX 370 Inventory 7170 Changes in inventories of contracts in progress of contracts in progress D – Cost of acquisition C D – Cost of acquisition C XXX XXX 56 Lecturer: V. Ghijselinck 28  Academic year 2024-2025 Valuation of manufactured inventories and CIP Inventory valuation methods Contracts in progress  Gained profit Percentage of completion method: profit is recognised in manufacturing price based on the proportion of work completed Completed contract method: profit is only recognised at the end of the contract (at the moment of delivery) For concrete examples: see textbook p. 208-213 57 Valuation of manufactured inventories and CIP Inventory valuation methods Percentage of completion method Contracts in progress Completed contract method 370 Inventory 7170 Changes in inventories of contracts in progress of contracts in progress D – Cost of acquisition C D – Cost of acquisition C XXX XXX 371 Inventory 7171 Changes in inventories of contracts in progress of contracts in progress D – Attributed profit C D – Attributed profit C XXX XXX 58 Lecturer: V. Ghijselinck 29  Academic year 2024-2025 Exercises  Exercise 1 (p. 219): PINA COLADA  Exercise 2 (p. 220): MARGARITA  Exercise 3 (p. 221): BELLINI  Exercise 4 (p. 222): COSMOPOLITAN 59 Lecturer: V. Ghijselinck 30