ACCT1501 Lecture Notes - Lecture 8: Inventory Control, Perpetual Inventory, Income Statement
18 May 2018
School
Department
Course
Professor
Thursday, 4 May 2017
Accounting & Financial Management 1A
Introduction to Inventory & Non-Current Assets
-Inventory Control Systems:
•Perpetual System: Maintains continuous records on flow of units of inventory for all
transactions
-Balances for inventory & COGS always in accounting system
-Easy to identify shortage of inventory
-Provides better control
-Stock losses/ shortage of inventory easily determined
-However, is costly & not suitable for all types of goods (e.g. coal)
•Periodic System: Determines inventory by physical count at end of period
-COGS = Opening inventory + Purchases - Closing Inventory
-Balance for inventory & COGS in accounting system at period end
-Shortage of inventory is ignored
-Sales of inventory require only ONE entry
•Measurement rule - lower of cost & net realisable value
-Cost comprises:
•Cost of purchase
•ADD: Purchase price + import duties & other taxes + inward transport &
handling costs + any other directly attributable costs of acquisition
•LESS: Trade discounts, rebates & other similar items
•Not included - administration costs, selling costs & storage costs
-Cash Flow Assumption:
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Thursday, 4 May 2017
•First In, First Out:
-Assumes first units purchased = first units sold
-Assumes ending inventory contains units purchased most recently
-Results in:
•Higher profit level in times of rising prices (relative to LIFO & weighted average)
•Closing inventory balance closer to current cost (relative to LIFO & weighted
average)
•Suitable for perishable items, electronics etc
•Last In, First Out:
-Assumes last units purchased = first units sold
-Assumes ending inventory contains units purchased earliest
-Results in:
•In time of rising prices, lower value of ending inventory (higher COGS —> lower
profit —> nice tax implication)
•Often does not match physical flow
•Closing inventory balance may not be relevant
•NOT permitted under Australian accounting standards but permitted in the
United States
•Weighted Average:
-When using perpetual inventory control system, referred to as moving average
-Note:
•Simple to apply & less subject to profit manipulation
•Appropriate for similar products & ‘non-expiry’ items
•When prices are changing, each method will provide different ending inventory &
COGS value
•Sum of these two items will always be the same, no matter what the method
-Cost can either be an asset or an expense
-Total cost = asset + expense
-So at the end of the period: Total cost = inventory on hand + COGS
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Document Summary
Inventory control systems: perpetual system: maintains continuous records on ow of units of inventory for all transactions. Balances for inventory & cogs always in accounting system. Stock losses/ shortage of inventory easily determined. However, is costly & not suitable for all types of goods (e. g. coal: periodic system: determines inventory by physical count at end of period. Cogs = opening inventory + purchases - closing inventory. Balance for inventory & cogs in accounting system at period end. Sales of inventory require only one entry: measurement rule - lower of cost & net realisable value. Thursday, 4 may 2017: first in, first out: Assumes rst units purchased = rst units sold. Assumes ending inventory contains units purchased most recently. Assumes last units purchased = rst units sold. Assumes ending inventory contains units purchased earliest. When using perpetual inventory control system, referred to as moving average.
