CHAPTER 12 Maintain

inventory records
Learning outcome
Examining and working through different
methods of accounting for inventories

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-1
Concepts
1. The preparation of stock cards for:
• First in first out
• Weighted average
2. Ledger accounts for both cost and selling prices
3. A comparison of physical and perpetual inventory systems
4. The Retail Inventory method

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-2
KEY TERMS
• Cost of goods sold
• Cost price
• First in first out (FIFO)
• Inventories

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-3
KEY TERMS cont.
• Lower of cost and net realisable value
• Retail inventory
• Selling price
• Standard costs
• Weighted average costs

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-4
Inventories
‘Inventory’ is the term used for stock or goods bought
and sold by a trading business
• When acquired inventories are purchases
• When sold they are sales
• Those not yet sold are an asset, closing
inventories

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-5
Lower of cost and net realisable value
• Inventories are generally recorded at historical cost
• But, where it is considered that the sale price will
fall below the cost price, the business can reduce
the balance to reflect the lower value
For example:
• Obsolete computers and parts
• Where inventory deteriorates
• Reduced demand for the product
• Where there is excess supply in the market

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-6
Physical inventory method
Prior to stocktake:
• Need to ensure a clear cut-off point for sales and
purchases
• Employees completing the stocktake to be properly
instructed
• Obsolete stock isolated
Problems of annual stocktake:
• Disruptive to a business
• Short-term profit statements are difficult to prepare
during the year without a full stocktake
• Little control over what stock should be there
• Theft and waste may go undetected
PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-7
Perpetual inventory method
• This is a continuous recording of all stock
movements in and out, and the balance on
hand
• Unit costs are included, together with the
value of the closing stock on hand

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-8
Advantages and disadvantages of the perpetual
inventory method
Advantages
• Losses and surpluses are identified
• Stock re-order points are easily seen
• Fast- and slow-moving inventories are highlighted
• Total of all stock cards is the total value of stock on
hand
• Accurate and timely profit reports can be prepared
Disadvantages
• A physical stocktake is still required
• It can be costly to operate
• It cannot be applied to all businesses

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-9
Standard costs
A predetermined cost is calculated for a product being
manufactured. It is based on:
• materials costs
• labour rates
• overhead expenses

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-10
Inventory stock card
A stock card is maintained at cost price, for each different
stock item.
The stock card shows:
•the stock item
•where it is located
•maximum and minimum stock levels
•reorder points
•details of stock movements in and out, together with the
balance on hand

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-11
First in first out method (FIFO)
• The first units purchased are recorded as the first
ones sold irrespective of whether they are
allocated from the store in the same order
• It is about the flow of costs not the flow of goods
• The closing inventory value in the balance sheet
contains the latest prices paid for the goods

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-12
Weighted average cost method
This method shows:
• average costs at the start
• the average value of closing stock after each
purchase
• the average value of closing stock after each sale

The average cost is calculated by dividing the total

goods available for sale by the number of items on
hand

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-13
Summary of FIFO and average cost
methods
Accounting for inventories using the perpetual inventory method
Two of the acceptable methods: all items at cost price

AVERAGE COST FIRST IN FIRST OUT

( Number on hand divided (The first units in are the
into the total value to first to be costed when
obtain unit cost) stock is issued)

PERPETUAL INVENTORY STOCK CARD

INVENTORIES COST OF GOODS

ACCOUNT SOLD ACCOUNT

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-14
To calculate gross profit or loss
COST OF GOODS
SOLD ACCOUNT
(COST PRICE) SALES SALES RETURNS
(SELLING PRICE) (SELLING PRICE)

TRADING ACCOUNT
(GROSS PROFIT/LOSS)

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-15
Ledger accounts
These ledger accounts are recorded at ‘cost price’:
• Inventories account
• Cost of goods sold account
• There is no ‘Purchases account’ in inventory
accounting

These ledger accounts are recorded at ‘selling price’:

• Sales
• Sales returns

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-16
Retail inventory method
This method can be used where:
• stock movements are large
• there is a high turnover
• stock can be grouped to the same percentage mark-up
where a standard mark-up for a group of products can
be applied

Departmental stores and supermarkets are examples of

where the retail inventory method can be applied.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-17
Features of the retail inventory
method
• Opening inventories and purchases converted to
‘selling price’
• Alterations to selling prices as additional mark-ups
• Markdowns for ‘specials’
• An estimate of the closing stock values at ‘cost’ price

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 12-18