Chapter 9 Inventory - Accounting Notes PDF

Ch 9 - INVENTORIES  2 At the end of this chapter, students are able to evaluate which inventory to purchase by considering both accounting and non-accounting information. explain why businesses keep inventories Accountin...

Ch 9 - INVENTORIES  2 At the end of this chapter, students are able to evaluate which inventory to purchase by considering both accounting and non-accounting information. explain why businesses keep inventories Accounting theory explain the valuation of inventory in relation to prudence theory.  3 At the end of this chapter, students are able to Accounting calculate: ✓ cost of inventory purchased; ✓ cost of sales; ✓ impairment loss on inventory; and ✓ ending inventory. use perpetual inventory system and the FIFO method to prepare journal entries to record: ✓ purchase of inventory; ✓ cost of sales; and ✓ impairment loss on inventory. prepare the inventory account without adjustments for impairment loss on inventory.  4 At the end of this chapter, students are able to Analysis interpret the inventory account with adjustments for impairment loss on inventory. state how profit for the period and current assets will be overstated or understated when impairment loss on inventory is not adjusted. state whether profit for the period and current assets will increase or decrease when impairment loss on inventory is adjusted.  5 At the end of this chapter, students are able to Presentation prepare an extract of the statement of financial performance, showing the presentation of: ✓ cost of sales; and ✓ impairment loss on inventory. prepare an extract of the statement of financial position, showing the presentation of: ✓ ending inventory; and ✓ insurance claim receivable.  What is Inventory Goods bought by business to sell to their customers at a profit Inventory 7  For For resale use Inventory or Office equipment? Current asset or non-current asset? 8 Business dealing with computers Inventory = Computer 9  resale use in the business to generate income 10 what the business is trading in how that item is being used 11  12 Textbook Pg 147 Example 9.1 13  Perpetual Inventory System Quantity and availability of inventories are updated on a continuous 14 basis 15  But what is the value / COST of inventory?  + 17 18 19  Double-Entries Related To Inventory Dr Cr a. Bought inventory from credit suppliers +A- Dr Inventory - L+ Cr Trade payable -I+ Inventory A + - C+ Trade payable + +E-  Double-Entries Related To Inventory Dr Cr Return inventory to credit suppliers +A- Dr Trade payable - L+ Cr Inventory -I+ Inventory A - - C+ Trade payable - +E-  Double-Entries for CREDIT SALE b. Sale of inventory to credit customers Dr Cr At selling price +A- Dr Trade receivable Cr Sales revenue - L+ Trade receivable A + -I+ Sales revenue I + - C+ +E-  Double-Entries for CREDIT SALE a. Credit sale of inventory Dr Cr At cost price +A- Dr Cost of sales - L+ Cr Inventory -I+ - C+ Inventory A - Cost of sales + +E-  Double-Entries for SALES RETURNS b. Return of inventory by credit customer Dr Cr +A- At selling price - L+ Dr Sales returns -I+ Cr Trade receivable - C+ Trade receivable A - Sales returns opp I +E-  Double-Entries for SALES RETURNS b. Return of inventory by credit customer Dr Cr At cost price +A- - L+ Dr Inventory Cr Cost of sales -I+ - C+ Inventory A + Cost of sales - +E- 26 28 29 What are the transactions related to INVENTORY? 30 Summary of Terms 31 Buy & business return Sell & Customers return 33 34 Bal b/d 35 1150 36 37 FIFO 38 39 40 41  Sep 7 X 7600 = 1000 + 5600 X + X 1000 Cost of sales on Sep 7 = $1500 + $9000 + $1230 = $11730 42 43 Sep 22 X 9500 = 5000 + 4500 X X X X Cost of sales on Sep 22 = $8000 + $6750 = $14750 44  X X X X X Ending inventory = $4650 45 46 47  Start with “Balance b/d” Buy Inventory 48 49  Ending inventory 50 51  1 X Start with “Balance b/d” 2 3X X 4 5 X Ending inventory 6 52 53 Impairment loss on Inventory  Value of inventory when it falls below its cost ﹡ In the accounts, inventory is recorded at cost ﹡ When inventory falls below the cost, the business must follow the prudence concept to reduce the cost of the inventory. ﹡ Therefore, inventory must be valued at cost and net realisable value , whichever is lower. LCM ﹡ Net realisable value refers to potential amount receivable. Net realisable value refers to potential amount receivable selling price of the inventory less the additional cost to sell the inventory 56 57  $200 58  - $50 - Inventory (A) $150 - Cr Inventory Expense Inventory 59  - $50 - Inventory (A) $150 - Cr Inventory Impairment loss on inventory Inventory 60  Double-Entries for IMPAIRMENT LOSS Impairment loss on inventory Dr Cr Dr Impairment loss on inventory Cr Inventory +A- - L+ -I+ - C+ Impairment loss on inventory E + Inventory A - +E- $15000 $15000 $6400 $12000 62 Buy insurance Make an insurance claim to seek compensation 63  Double-Entries for INSURANCE CLAIM Insurance claim (not received yet) on damaged goods Dr Cr Dr Insurance claim receivable +A- Cr Impairment loss on inventory - L+ -I+ Insurance claim receivable A + - C+ Impairment loss on inventory (offset the previous loss as not a loss now +E- - Last time Dr, now Cr)  Double-Entries for INSURANCE CLAIM Collection of insurance claim (received money) Dr Cr Dr Cash at bank / Cash in hand Cr Insurance claim receivable +A- - L+ -I+ Insurance claim receivable A - - C+ CAB / CIH A + +E- Cost NRV LCM = $3000 66 67 Ending inventory = NRV 68  Cost NRV = 36700 Initial loss = $3300 But insurance = $1100 Real loss = $2200 = Impairment loss on inventory 69 Impairment loss on inventory 2 200 Insurance claim receivable (A+) 1 100 Inventory 3 300 70 Less : other expenses Impairment loss on inventory 2 200 71 Current assets Inventory 36 700 Insurance claim receivable 1100 72  Effects of Impairment loss on Inventory  Impairment loss on inventory 1 650 Inventory 1 650 74  Expenses too little X → Profit too much X 75  X Keep at original cost of $4650 → Inventory too much 76 overstated overstated 77  1 650 No effect Impairment loss no effect on gross profit overstated understated overstated 1 650 78 79  A + - 80  A + - Inventory - , decrease because of Trade payable Inventory - , decrease because of Trade payable 81 19 July : The business returned $90 worth of goods previously bought on credit from Charles Story. 82  A + - Inventory decrease because of impairment loss of $20 83 19 July : The business returned $90 worth of goods previously bought on credit to Charles Story. 31 July : The ending inventory value was written down from $990, by $20 to $970. 84 85 86  A + - 87  A + - Inventory + , increase because of Trade payable & Cash at bank 88 6 November : Lock Lin Hardware purchased goods, $260 from Hari Trading on credit. 9 November : Lock Lin Hardware purchased goods, $450 and issued a cheque for the goods. 89  A + - Inventory - , decrease because of Cost of sales 90 6 November : Lock Lin Hardware purchased goods, $260 from Hari Trading on credit. 9 November : Lock Lin Hardware purchased goods, $450 and issued a cheque for the goods. 14 November : Lock Lin Hardware sold goods costing $845. 91  A + - Inventory - , decrease because of Drawings 92 6 November : Lock Lin Hardware purchased goods, $260 from Hari Trading on credit. 9 November : Lock Lin Hardware purchased goods, $450 and issued a cheque for the goods. 14 November : Lock Lin Hardware sold goods costing $845. 26 November : The owner of the Lock Lin Hardware withdrew $120 worth of goods for personal use. 93 Lock Lin Hardware realized that the net realisable value of the inventory in 30 November 20X5 was $2 700. Calculate the amount of impairment loss on inventory on this date. A + - 3 440 Dr 3 890 Dr 3 045 Dr 2 965 Dr 3 010 Dr 2 890 Dr ? = $190 2 700 Dr 94 2 700 Dr