Financial Accounting and Reporting III

CHAPTER 2 INVENTORY

JOHNATHAN FABIAN (UDE200027)

a. What are the criteria to recognize an asset as inventory?

Inventories are recognize an asset as inventory is held for sale in the course of
business. Next, it is considered as an asset when it is in the process of production for
such sale. Last but not least, when it is in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

b. How many types of inventories available in industry? Describe briefly about these
inventories.

Type of business Term Clarification Example

Retailer Merchandise The cost of goods Groceries in

inventory purchased for hypermarket
resale and still on
hand at the
reporting date

In manufacturer side they are three types of inventory which is raw material
inventory, work in progress inventory and finished product inventory. Raw material
inventory is the source of products that are required when manufacturing the
products for sale which is roll of silk in a cloth manufacturer factory. Next, work in
progress inventory which is partly complete inventory and held within the factory.
Example, trousers with no pocket or back pocket. Last but not least, finished product
inventory which is inventory which is ready for sale such as completed trousers and
shirts for distributions for retailers.

c. Stabilo Bhd purchased some merchandise from oversea. In addition to the purchase
price of the merchandise, it incurred some additional costs. The breakdown of the
costs is as follows:
RM
Purchase costs 220,000
Shipping costs 840
Import duties 4,800
Transportation cost to the warehouse 600
Transportation to the showroom from warehouse 400
Return merchandise due to damage condition 1,500
(return after 1 week received the
merchandise)
 Term of purchase: Payment due in 60 days or 3% discount
of the purchase price if the payment made within 3 weeks.

If the company took advantage of the discount, can you help the company to
determine the value of the inventory?

RM
Purchase Cost 220,000
3% Discount for the payment within 3 (6,600)
weeks
213,400
Shipping Cost 840
Import Duties 4,800
Transportation cost to warehouse 600
Return merchandise after one week (1,500)
218,140

d. Saya Bhd is a company specializes in marketing quality used cars in KL and SA.
Now it has trouble selling some of the cars. As a result the company transported
some of its inventory from KL Showroom 1 to KL Showroom 2.
Based on your understanding, which of the following expenses should be recorded
as inventory?

1 Advertising expenses

2 Transportation costs from one showroom to the next

3 Rent of the showroom

4 Cost of safety materials used during transportation

to showroom

None of the expenses listed above contribute in bringing the cars to their present
condition. The advertising costs are selling expenses. The transportation costs are
expensed because such costs are incurred merely to move the cars from one retail
location to the other. These transportation costs cannot be classified as
“transportation costs on purchases or carriage inwards.”

e. Kami Bhd is involved in the rental and retailing of motor vehicles. On 1 January 2013,
the company acquired 20 units of motor vehicles. 5 units were meant to be rented out
to customers, while the remaining units were meant for sale. The vehicles to be
rented out were estimated to generate income for a period of 10 years.

i) Are the motor vehicles to be rented out to customers assets? Briefly state
reasons for your answer. (5 Marks)

The motor vehicles to be sold are assets. They are physical resources
(rental and retailing of motor vehicles) purchased by Kami Bhd (past event)
to be used at the discretion of Kami Bhd to be rented out to customers of
which is expected to result in the flow of cash.

ii) Are the motor vehicles to be rented out to customers items of inventory?
Why? (4marks)
 Yes. Motor vehicles are held in for the sale in the ordinary course of
business. Next, in the process of production for such sale or etc. Last but
not least, in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

iii) Are the motor vehicles to be sold items of inventory? Why? (4marks)

No. The motor vehicles to be sold are assets. Inventories are recognizing an
asset as inventory is held for sale in the course of business. Next, it is
considered as an asset when it is in the process of production for such sale.
Last but not least, when it is in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

They are physical resources (rental and retailing motor vehicles) purchased by
Kami Bhd to be sold at the discretion of Kami Bhd. Such sales are expected to
result in the flow of cash which brings future economic benefit.

f. Which industry used LIFO as their inventory method? Give your opinion.

Retailers and automobile dealership. It can be advantageous for companies to use

LIFO because they can take advantage of lower taxes and it is used by companies
that have large inventories