Inventory Methods PDF

PERPETUAL STOCK SYSTEM ASSET FINA L  Perpetual inventory system Periodic Inventory System The movement of stock is recorded There is no continuous recording of the on an ongoing o...

PERPETUAL STOCK SYSTEM ASSET FINA L  Perpetual inventory system Periodic Inventory System The movement of stock is recorded There is no continuous recording of the on an ongoing or continuous basis. movement of trading stock. The exact quantities and types of The value of the trading stock on hand stock items on hand are shown by the cannot be worked out during the system at any point in time. financial year. Undertakings that are selling one It is used by businesses like type of commodity, like furniture, supermarkets that sell large quantities cars, or computers will make use of of trading stock with low value. the perpetual stock method. The value of the stock on hand at the The physical stocktaking is conducted financial year-end is calculated by doing to verify the stock on hand. a physical stocktaking.  COMPARISON BETWEEN PERPETUAL AND PERIODIC INVENTORY SYSTEMS PERPETUAL SYSTEM PERIODIC SYSTEM Stock purchases are recorded in the Stock purchases are recorded in the TRADING STOCK account – ASSET PURCHASES account – EXPENSE account account Carriage on purchases/ custom duties Carriage on purchases/ custom duties are recorded in the trading stock are recorded directly in the Carriage on account purchases / Custom duties account Returns on stock purchases are Returns on stock purchases are credited in the trading stock account credited in the Purchases account Donations of stock are credited in the Donations of stock are credited in the trading stock account Purchases account  COMPARISON BETWEEN PERPETUAL AND PERIODIC INVENTORY SYSTEMS PERPETUAL SYSTEM PERIODIC SYSTEM Drawings of stock are credited in the Drawings of stock are credited in the trading stock account purchases account The balance of the trading stock account is the amount of stock which should be on hand. A stock-take is conducted periodically to determine the amount of stock on hand A stock-take is conducted to verify this amount and determine stock losses / deficits THERE IS NO COST OF SALES ACCOUNT. The cost of sales is calculated on a A calculation is required to determine CONTINUOUS basis the cost of sales  IMPORTANT Perpetual stock system Periodic stock system The Trading stock account is used when The Purchases account is used when goods are bought. goods are bought When goods are returned the Trading When goods are returned the stock is credited. Purchases account is credited (recently changed) COST OF SALES IS CALCULATED WITH COST OF SALES IS NOT CALCULATED EVERY SALE AND RETURNS. WITH EVERY SALE OR RETURNS. In order to determine Cost of sales a calculation is required. Cost of sales is only determine at the end of the month or at the end of the financial year. PERPETUAL STOCK SYSTEM ASSET FINA L PERIODIC INVENTORY SYSTEM EXPENSE PERIODIC INVENTORY SYSTEM FINAL PERIODIC INVENTORY SYSTEM EXAMPLE 1 EXAM TIPS EXAM TIPS EXERCISE Complete Exercises 10.1-10.5 GRADE 11 TEXTBOOK INTRODUCTION Stock validation is how to validate and calculate inventories at the end of the financial year using the Specific Weighted identification average method method First-in-first- Last-in-first- out method out method (FIFO) (LIFO) METHODS OF DETERMINING THE STOCK VALUE During the financial year, an enterprise paid different prices for various purchases. Only a portion of the stock purchased during the year will be left at the end of the financial period. A decision has to be taken as to which of the various prices for the stock purchased during the year must be regarded as the purchase price for those items still on hand.  PERPETUAL STOCK SYSTEM PERIODIC STOCK SYSTEM ❑ Cost of sales is calculated when goods ❑ Cost of sales is NOT calculated during are sold. the year ❑ Cost of sales is calculated every time ❑ Cost of sales is only calculated at the cash or credit sales are recorded. end of a month or at the end of the year. ❑ Undertakings that are selling one type of ❑ Undertakings where it is a challenge commodity, like cars, or Persian carpets, to calculate the cost price of single or DvD’s, will make use of the perpetual articles, e.g. grocery stores, fresh stock method. produce, bakeries, etc. ❑ This system requires a computer system ❑ It is not so easy to determine the cost which can scan the barcode on the price of this type of stock. stock. ❑ They will know how much stock they ❑ This means that the Trading stock is have only when they do a physical updated on a daily basis so that they stock count at the end of the financial always know how much stock is year. available.  Main features of the Main features of the perpetual system: periodic system ✓ Better control over stock ✓ The system is cost effective. ✓ All movements in stock is recorded ✓ It is not necessary to calculate cost of on a daily/ regular basis sales ✓ Theft are quickly detected ✓ Theft will not be easily detected. ✓ A computer system is required and ✓ A comparison must be drawn up can be expensive between the target and the actual mark-up. ✓ This system is used when the commodity’s cost price is not easily determined ✓ Businesses like Pick a Pay, Clicks, Spar will make use of this stock system. STOCK VALUATION METHODS The price of stock always changes. Shops do not always wait until they are completely sold out before ordering more stock, so, on the shelves at any time will be, for example, the same cans of condensed milk with different purchasing prices. When we do stock taking, at what price are we going to value the products?  STOCK VALUATION METHODS TOPIC SPECIFIC IDENTIFICATION FIFO WEIGHTED AVERAGE ❑ The stock will be at ❑ The stock will work ❑ The stock will not When the the exact cost out at a slightly actually be the cost of value of price that the higher price any goods bought the stock was bought assuming that the and may be low if closing therefore the stock latest price for the goods have not been stock is will be valued at goods is the bought recently calculated the original cost highest price of price. the year ❑ The gross profit ❑ The Gross profit ❑ Can be lower will be as is. will be higher than ❑ The gross profit can the gross profit of show a smaller profit Gross weighted average than FIFO profit method in the current financial period  1. SPECIFIC IDENTIFICATION METHOD This is the simplest form of stock validation, where every item is assigned a specific cost price. This system is relevant when large commodities are sold and every unit has its own cost price, e.g. vehicles, machinery, etc. That means that this system requires that the cost price must be identified of every commodity sold or when stocktaking is done. Specific identification is a more manually intensive method in managing the stock. So every item in stock will be recorded at the specific price originally bought.  1. SPECIFIC IDENTIFICATION METHOD The disadvantage of this method is that the price of e.g. a vehicle can be manipulated. A red Ford 1.6 was bought at the beginning of the year for R100 000 and during the year the dealer bought a white Ford 1.6 at an increased cost price of R130 000. When the red car got sold the dealers can manipulate the price by recording the cost price as R130 000. So the profit was manipulated by showing a smaller profit than the true profit. The dealers can do the opposite as well when they want to show a higher profit.  2. FIRST-IN-FIRST-OUT The stock that was bought first is sold first, and the stock on hand at stock taking, will be the stock that you recently bought. So you sell the goods in the order that you bought the stock. The system can be used for any type of business The trader that stocks products that do not have a long life (short/ limited shelf life) will preferably use this method. Proper packing and display is essential - “old” stock should be in the front and “new” stock at the back. The Prudence concept is in used. The value of the stock at the year- end is realistic because the stock is valued at the most recent prices. 2. FIRST-IN-FIRST-OUT  3. WEIGHTED AVERAGE METHOD Weighted average method is used when lots of stock is bought in small quantities. The average price gives a good composite picture of the cost of the goods. The influence on the average price will be minimal when only a few items are bought. (You had 500 in stock at an average price of R10 (R5000) and you bought 2 at R50 (R100) Calculation 5 000 + 100 = 5100 5 100 ÷ 502= R10.20 weighted average price per item (However, the price of the 2 items bought for R50 each will be undervalued at R10, 20 each!)  3. WEIGHTED AVERAGE METHOD However when you had 2 in stock at an average price of R10 (R20) and you purchase 500 at R50 (25 000), the average price will be considerable. But the price of R50 per item is now showing as R49, 84. Calculation 20 + 25 000 = 25 020 25 020 ÷ 502 = R49, 84 weighted average per item (therefore the stock purchasing value decreased) 3. WEIGHTED AVERAGE METHOD At the end of the year when the closing stock value is determined, the average price will be used to calculate the value of the closing stock; Calculation of the closing stock 100 units in stock x R49, 84 = R4 984 3. WEIGHTED AVERAGE METHOD The average cost of a product is calculated by dividing the cost of the units by the total number of the units. Weighted means that the more stock you buy the greater the influence on the answer. e.g. Bought 100 cans @ R1 = R100 Bought 150 cans @ R1,20 = 180 = 250 cans = R280 Therefore the calculation is R280 / 250 cans = R1,12 per unit If 200 cans were sold, 50 cans will be in stock and will be valued @ R1, 12 per unit. The value of the closing stock is 50 x R1,12 = R56 INTERNAL CONTROL OF STOCK GAAP ETHICAL BEHAVIOUR SEE NOTES HANDED OUT BY TEACHER EXAM TIPS EXAM TIPS