Financial Accounting 2

AQ013-3-1

Valuation of Inventory
 Learning Outcomes

At the end of the topic, students will be able to:

•Record adjustments for opening and closing inventory
•Apply the principles of inventory valuation in accordance
with IAS 2
•Calculate inventory costs that should be included in
inventory
•Calculate inventory cost using FIFO, LIFO and WAC
•Understand and identify the impact of inventory valuation
on reported profits and assets

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Overview

Inventory
oInventory : merchandise/(goods) purchased by
the business for the purpose of selling to
customers.
oCurrent Assets (Debit +)
oThe movement of the inventory needs to be
adjusted to calculate costs of sales.

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 How Inventory is presented?

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 How Inventory is presented?

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Recording Opening & Closing
Inventories
1. BEGINNING of the period: To record the opening inventory

DR SPL: Cost of Sales (EXPENSE +) XXX

CR SOFP: Current Assets – Inventories (ASSETS -) XXX

2. END of the period: To record the closing inventory

DR SOFP: Current Assets – Inventories (ASSETS +) XXX

CR SPL: Cost of Sales – (EXPENSE -) XXX

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Example 1

On 1 January 2018, Utromarket has an opening inventory of RM5,000 at

the beginning of the year ended 31 December 2015. Purchases made
during the year was RM150,000. The closing inventory as at 31 December
2018 is RM4,000.

Required: Prepare the following accounts to record the transactions

(a)Inventory Accounts
(b)Cost of Sales (Expense) Account
(c)Show the Statement of Profits or Loss (Extract) and Statement of
Financial Position (Extract)

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Example 1: Solutions
Required: Prepare the following accounts to record the transactions
(a)Inventory Accounts (b) Cost of Sales (Expense) Account

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Example 1: Solutions
Required: (C) Financial Statements Extracts

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Example 1: Solutions
Required: (C) Financial Statements Extracts

Statement of Financial Positions (Extract) 31 December 2018

Current Assets RM
Closing inventory 4,000

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Inventory Valuation

According to IAS 2 Inventories, the inventory should be valued

at LOWER of Cost OR Net Realisable Value (NRV). (Either
ONE)
[Prudence / Conservatism Concept]

Cost:
All expenditure to bring the product or service to its present
location and condition.
To INCLUDE: Purchase cost, import duties, freight etc.
To EXCLUDE: Selling costs, storage costs, abnormal wastage,
admin costs.

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Inventory Valuation

Net Realisable Value:

NET AMOUNT for the expected revenue to be realised less any
further costs to make the sales.
 (Expected Selling Price – Costs to Sell)

Special Case: In what circumstances, when NRV < Costs???

Goods are slow-moving (sell very slow, not many people would
buy)
Damaged Goods
Obsolete (out-dated)

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Example 2
007 Speedmart sells three products, MILO, VICO,
OVALTINE. The following information was provided at
the year ended 31 December 2018:

Required:
Calculate the total value of the closing inventory for the
year ended 31 December 2018

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Example 2: Solutions

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Inventory Valuation Methods***

1) First-In-First-Out (FIFO)
2) Last-In-First-Out (LIFO)
3) Weighted Average Costs (WAC)

***JUST IGNORE THE SELLING

PRICE WHEN YOU CALCULATE
THE CLOSING INVENTORIES***

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 First-In-First Out (FIFO)

FIRST Items of inventory received assumed to be at FIRST ONES

sold. (1ST IN 1ST OUT) [Affecting the value during Sales]

EXAMPLE: The following inventory movement information provided for

year 2018:

Required:
Calculate the closing inventory at December 2018 using FIFO method

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 First-In-First Out (FIFO)

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Last-In-First Out (LIFO)

LAST Items of inventory received assumed to be at FIRST ONES

sold. (LAST IN 1ST OUT) [Affecting the value during Sales]

EXAMPLE: The following inventory movement information provided for

year 2018:

Required:
Calculate the closing inventory at December 2018 using LIFO method

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Last-In-First Out (LIFO)

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Weighted Average Cost (WAC)

Each goods receipts and the average costs need to be re-

calculated. [Affecting the value of subsequent purchased/receipts]

EXAMPLE: The following inventory movement information provided

for year 2018:

Required:
Calculate the closing inventory at December 2018 using WAC
method

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Weighted Average Cost (WAC)

(N1) Average Cost for inventory = [(100xRM10)+(220xRM14)] / 320

= RM12.75

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Impact of FIFO, LIFO, WAC on
profits and Assets
Let say, in year 2018: Sales is RM30,000 and Purchases is
RM20,000. Using the answers in earlier examples. Assuming no
opening inventory in 2018, [Closing Inventory: FIFO: RM2,380,
LIFO: RM1,980, WAC: RM2,168].

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Comparison FIFO, LIFO, WAC

 FIFO gives the highest inventory value,

lowest costs of sales, highest profits.
 LIFO gives the lowest inventory value,
highest costs of sales and lowest profits
 WAC gives the average value (middle) of
inventories, costs of sales and profits in
between of FIFO and LIFO.

FIFO < WAC < LIFO

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 Question and Answer Session

Q&A

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS

 What We Will Cover Next

Incomplete records

AQ013-3-1-FINANCIAL ACCOUNTING 2 CONTROL ACCOUNTS