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Chapter 12: Inventory and Cost of Sales, image - Coggle Diagram
Chapter 12: Inventory and Cost of Sales
Methods of valuing inventory
FIFO
(First In, First Out)
assumes that the first units acquired are the first units sold
cost of sales is represented by the cost of the
earliest
purchases
closing inventory is represented by the cost of the
latest
purchases
Weighted Average cost
based on the cost flow assumption of the weighted average of the cost of similar items purchased at the beginning of the period and the cost of similar items purchased during the period
Weighted average cost per item = (Cost of inventory on hand at beginning of the period + cost of inventory purchased during the period) ÷ total number of units available for sale
In times of rising prices:
cost of sales is reported at an amount above the FIFO amount and closing inventory is reported at an amount below the FIFO amount
Cost of inventory is recorded as an
asset
using the
perpetual inventory system
or in the
temporary purchases account
using the
periodic system
and transferred to SOPL as it is sold
Mark-up on cost =
GP ÷ CP
Expected gross profit %
= GP ÷ SP
Calculating Cost of sales from Mark up on cost:
Sales amount * 100/100+MarkUp%
Calculating Cost of sales from GP%
Sales amount * (100-GP%)/100
see pg371
Cost price + Mark up (%of cost) = Selling price
Selling price - GP%(selling price) = Cost price
Selling price * 100/100+Markup% = Cost price
(think of calculating cost price in tax...)
Selling price * GP% = gross profit/mark up on cost
(Selling price - cost price)/cost price = Markup%
Costs of inventory
VAT
If VAT is non recoverable, it becomes an extra cost to the entity
Transport costs
Transport inwards
is the cost of transporting the inventory from the supplier to the purchaser's premises
cost is included in the cost of inventory asset in SOFP
Transport outwards
is the cost of delivery of sold goods to a customer
cost is recorded as a selling expense in SOPL
cost of delivering goods after sale is not recorded under inventory!
see pg374
Goods in transit
if control has not been passed to buyer: goods remain asset of seller & do not affect statements of buyer
-
if has been passed to buyer:
goods that have been delivered:
included in physical count of inventory
goods that have not been delivered
• not included in physical count of inventory
•need to be recorded as a goods in transit asset with a corresponding liability
Inventory shortages
Periodic system
compare actual GP% with expected GP%
difference between these values is the inventory shortage (loss to theft etc) and needs to investigated
cost of inventory shortage is included in cost of sales
Perpetual system
cost of closing inventory according to the physical count is compared to inventory count in general ledger
inventory account is adjusted to show inventory shortage (debit inventory shortage expense account (which is closed off to cost of sales) and credit inventory account)
Adjustment to be made to inventory if selling price is less than cost
Cost of inventory is written down to net realisable value
NRV = estimated selling price - costs of completion - costs to make sale
If NRV is less than costs of inventory
Cost of inventory must be written down to represent the expected reduction and an expense recognised
If NRV is higher than costs of inventory
No adjustment is required
if beginning inventory is understated, your cost of goods sold will be understated by the error amount. Then, since cost of goods sold is understated, your net income and gross profit are overstated. & vice versa
Cost of sales
Formula:
Opening inventory + purchases - closing inventory = Cost of Sales
"Cost of goods available for sale" is
opening inventory + purchases
Periodic Inventory system:
records purchases of inventory during a period in a temporary account (closed off at end of period) called '
purchases'
account is only correct at end of period when it is updated with physical count of inventory
Cost of sales = opening inventory + purchases - closing inventory
THE COST OF GOODS SOLD AFTER A SALE IS NOT RECORDED. ONLY USE FORMULA TO CALC THIS VALUE/LEDGER AT END OF PERIOD
Perpetual inventory system:
records inventory purchased during a period in the inventory asset account
account is always correct, keeps track of inventory at any time
Closing inventory = opening inventory + purchases - cost of sales
NB when printing these notes! find in documents under "Accounting"
