INVENTORY

Definition of Inventory
- Inventories are asset items that a
company hold for sale in the ordinary
course of business or goods that it will use
or consume in the production of goods to be sold

Classification on Inventory
- Service company
This company does not have inventory
- Merchandise company
The inventory is called merchandising inventory
- Manufacturing company
The inventory consists of : 1) raw materials inventory
2) work in process inventory
3) finished good inventory
 Merchandising Company
UNIGA-MART
Balance Sheet
31-Des-08
Cash and cash equivalent $6.000
Account Receivable 1.250
Merchandise Inventory 28.000
Prepaid expenses 1.400
Total current assets 36.650
 Manufacturing Company
Natasa Food, Inc
Balance Sheet
31-Dec-08
Current assets (in million)
Cash and cash equivalent $3,000
Account Receivable 21,000
Inventories
Raw materials 1,600
Work in process 700
Finished Goods 2,220
Total inventories 4,520
Prepaid expenses 370
Total current assets 28,890
Inventory Control
• Two primary objectives of internal control over
inventory include:
1. Safeguarding the inventory
- It includes developing and using security
measurements to prevent damage or employee
thievery.
2. Reporting properly in the financial statement
- It uses a perpetual inventory system that the
amount of each type of merchandise is
always available immediately in a
subsidiary inventory ledger
- Ensuring the accuracy of the amount of
inventory reported in the financial statement , it
should take physical inventory
• Types of internal control over
inventory:

1. Preventive
it is designed to prevent errors or
occurring misstatement.

2. Detective
it is designed to detect an error or
misstatement after it has occurred.
What Cost Should be Included
in Inventory?

• The cost of inventory includes cost of

purchasing, conversion cost and others incurred
until it reaches salable condition or to be used.

• The cost of purchasing includes purchase price,

transportation cost, tax, and other cost that can
be attributed to acquired it.

• The conversion cost includes direct or indirect

cost used to process until finished goods
What Merchandise Should be Included in Inventory?
(Physical Goods Included in Inventory)
 All the merchandise owned by the business on the
inventory date should be included.
The party (the seller or the buyer) who has title to the
merchandise on the inventory date is the owner.
The shipping term will determine when title passes.
There are two shipping term :
 Consigned goods
a. FOB Shipping point
The title of inventory passes to the buyer when
the
are shipped. The inventory in transit recognized
as inventory’s buyer.
b. FOB Destination
The title of inventory passes to the buyer when
the goods are delivered to buyers. The inventory in
transit recognized as inventory’s seller.
c. FOB Destination
The title of inventory
passes to the buyer when the goods
are delivered to the buyers. The inventory in
transit recognized as inventory’s seller

 Consigned goods
The unsold merchandise is part of the
manufacturer’s (consignor’s) inventory,
although the merchandise is in the hands
of the retailers.
The Inventory Record -Keeping System
Inventory records may be maintained on a perpetual
periodic basis.
A. Periodic Method/Physical Method
The description of it is :
1. The merchandise inventory account is used to
reflect the cost of available merchandise at the
beginning of the accounting period
2. Additional purchases of merchandise are
recorded (debited) in the separate account
3. Other elements of inventory cost determination
are recorded in separate account:
- Transportation on purchases
- Purchases return and allowances
- Purchase discount
4. At the end the accounting period, a physical count
of available merchandise at the end of the period is
made. Then the cost of the ending inventory is
determined

5. Cost of Goods Sold is calculate as follows:

Beginning inventory xxx
Purchases xxx
Transportaion-on Purchases xxx
Purchases Return and Allowance(xxx)
Purchases Discount (xxx)
Net Purcahses xxx
Cost of Goods available for sale xxx
Cost of ending inventory (xxx)
Cost of Goods Sold xxx
 6.An adjusting journal entry is made to restate
the merchandise inventory at its ending
amount

B. Perpetual Method
• The perpetual inventory system provides a
continuous record of changes in both the
Inventory account and the Cost of Goods
Sold account.

• Accounting features of a perpetual inventory

system are:
1. Purchase of mercahnadise for
resale or raw materials for
production are debited to Inventory.
2. Freight-in purchase, purchase return and
allowances and purchase discounts are recorded
in Inventory
3. Cost of Goods Sold is recognized for each sale by
debiting the account, Cost of Goods Sold and
Crediting Inventory
4. Inventory is a control account that is supported
by a subsidiary ledger of individual inventory
records. The subsidiary record shows the
quantity and cost of each type of available
inventory
Inventory Valuation and
Inventory Costing Methods
• There are four methods in valuating
inventory
1. Cost Base Methods
2. Market Base Methods
3. Lower Cost or Market which is Lower
• Cost Base Methods
a. Specific Identification Method
Every unit of inventory can be identified
with a specific purchase (cost and date of
acquisition. This methods have
characteristic that flow of cost same as flow
of physical inventory.
b. Cost Flow Assumption

1.FIFO (First in First Out)

Cost flow is in the order in which the
cost were incurred

2.LIFO (Last in First Out)

Cost flow is in the reverse order in
which the costs were incurred

3.Average
Cost flow is an average of the cost
 Ilustration 1: First In First Out (FIFO) Methods

Purchaseses

January ‘06 Purchasei

10 unitt @
Rp. 320.000,-

Sold 3 unit, unit cost Rp.

320.000,-/box

Purchase
Inventories 7 Unit X Purchasei
February ‘06 Rp. 320.000,- 5 unit @ Rp. 340.000,-

Sold 5, cost per unit Rp.

320.000,-/box

Purchase
March ‘06 Inventories 2 unit X embelian Purchasei
Rp320.000,- 8 unit X
Inventories 5 unit X Rp. 360.000,-
Rp. 340.000,-

Sold 6 consist of : 2 unit @ Rp. 320.000,-/box

and 4 unit @ Rp. 340.000,-/box

Inventory 1 unit X
Rp. 340.000,-
Inventory 8 unit X
Rp. 360.000,-
 Illustration 2 : Last In First Out (LIFO) Methods

Purchase
Purcahse i
January ‘06 10 unit X
Rp. 320.000,-

Sold 3 units, unit cost Rp.

320.000,-/box

Purchase
Inventories 7
Purcahse
Units X
5 unit X
Rp. 320.000,-
February ‘06 Rp. 340.000,-

Sold 5 units, unit cost Rp.

340.000,-/box

Inventories 7 Purchase n
March ‘06 Purcahse i
Units X
8 unit X
Rp. 320.000,-
Rp. 360.000,-

Sold 6 units, unit cost Rp.

360.000,-/box

Inventories units X
Rp. 320.000,-
Inventorries 2 units X
Rp. 360.000,-
 Ilustration 3: Average Cost Method

Purchase
Purchase
January ‘06 10 unit X
Rp. 320.000,-

Sold 3 units, unit cost Rp.

320.000,-/box

Purchase
Inventories 7 Purchase
Units X 5 units X
February ‘06 Rp. 320.000,- Rp. 340.000,-

Sold 5 units, unit cost Rp.

330.000,-/box

Inventories 7 Purchase
March ‘06 Purchase
Units X
8 units X
Rp. 330.000,-
Rp. 360.000,-

Sold 6 units, unit cost Rp.

345.000,-/box

Inventories 9 units
X
Rp. 345.000,-
Example: Inventory Costing and Recording

Podo Moro, Co has transactions related

purchases and sells they merchandise
inventories as follows:
Date Description Unit Unit Cost Total Cost
2006 1 Balance 200 Rp. 2.500,- Rp. 500.000,-
Januari 10 Purchases 400 “ 3.000,- “ 1.200.000,-
25 Purchases 300 “‘ 3.500,- “ 1.050.000,-
30 Purchases 100 “ 4.000,- “ 400.000,-
Available to sold 1000 Rp. 3.150.000,-

The ending inventory 31 January 2006 is 300 unit.

a. FIFO Methods (Physical)
• Units sold
= Merchandise available to sold – ending inventory
= 1.000 units – 300 units
= 700 units

• Cost of Goods Sold

January, 1 200 units @ Rp. 2.500,- = Rp. 500.000,-
January, 10 400 units @ Rp. 3.000,- = Rp. 1.200.000,-
January, 25 100 units @ Rp. 3.500,- = Rp. 350.000,-
Rp. 2.050.000,-

• Cost of ending inventories (January, 31, 2006)

Jan, 25 200 unit @ Rp. 3.500,- = Rp. 700.000,-
Jan, 30 100 unit @ Rp. 4.000,- = Rp. 400.000,- +
300 unit Rp. 1.100.000,-
Diagram of determination Cost of Goods Sold

Beginning
Inventory

Cost of = (+) (-) Ended

Goods Sold Inventory

Net
Purchases

Cost of Goods Sold = Rp.500.000 + Rp.2.650.000 - Rp. 1.100.000

= Rp. 2.050.000
b. FIFO Methods (Perpetual)
Inventory Account : Product “ABC”
Code : ………………..
Purchases Cost of Merchandise Sold Inventory
Date Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost
1 Januari 200 2.5 500 200 2.5 500
10 400 3 1.200.000 200 2.5 500
400 3 1.200.000
15 200 2.5 500 200 3 600
200 3 600
25 300 3.5 1.050.000 200 3 600
300 3.5 1.050.000
28 200 3 600 200 3.5 700
100 3.5 350
30 100 4 400 200 3.5 700
100 4 400

HPP Ended Inventory

• Journal entries (FIFO) Physic

General Journal
Page:
Date Description Reff Debit Kredit
10,January Purchases 1.200.000
Cash 1.200.000
(400 x Rp 3.000 = Rp 1.200.000)
15 Account Receivable 1.800.000
Sales 1.800.000
(400 x Rp 4.500 = Rp1.800.000)
25 Purchases 1.050.000
Cash 1.050.000
(300 x Rp 3.500 = Rp 1.050.000
28 Account Receivable 1.350.000
Sales 1.350.000
(300 x Rp 4.500 = Rp1.350.000)
30 Purchases 400
Cash 400
(100 x Rp 4.000 = Rp 400.000
• Journal Entries (FIFO) Perpetual

General Journal Page:

Date Description Reff Debit Kredit
10,January Merchandise Invent ory 1.200.000
Cash 1.200.000
(400 x Rp 3.000 = Rp 1.200.000)
15 Account Receivable 1.800.000
Sales 1.800.000
(400 x Rp 4.500 = Rp1.800.000)
Cost of Goods Sold 1.100.000
Merchandise Invent ory 1.100.000
(200 x Rp 2.500 = Rp 500.000)
(200 x Rp 3.000 = Rp 600.000)
25 Merchandise Invent ory 1.050.000
Cash 1.050.000
(300 x Rp 3.500 = Rp 1.050.000)
28 Account Receivable 1.350.000
Sales 1.350.000
(300 x Rp 4.500 = Rp1.350.000)
Cost of Goods Sold 950
Merchandise Invent ory 950
(200 x Rp 3.000 = Rp 600.000)
(100 x Rp 3.500 = Rp 350.000)
30 Merchandise Invent ory 400
Cash 400
(100 x Rp 4.000 = Rp 400.000)
c. LIFO Methods (Physical)

- Units sold
= Merchandise available to sold – ending inventory
= 1.000 units – 300 units
= 700 units

- Cost of Goods Sold

January, 30 100 units @ Rp. 4.000,- = Rp. 400.000,-
January, 25 300 units @ Rp. 3.500,- = “ 1.050.000,-
January, 10 300 units @ Rp. 3.000,- = “ 900.000,-
700 unit Rp. 2.350.000,-

- Cost of ending inventories (January,31,2006)

January, 1 200 units @ Rp. 2.500,- = Rp. 500.000,-
January, 10 100 units @ Rp. 3.000,- = Rp. 300.000,- +
300 Rp. 800.000,-
d. LIFO Methods (Perpetual)
Inventory Account
Product : “ABC” Account Numbers:
Date Purchases Cost of Merchandise Sold Inventory
Quantity Unit Cost Total Cost Quantity Unit Total Cost Quantity Unit Total Cost
1 Januari 200 2.5 500 Cost 200 Cost 2.5 500
10 400 3 1.200.000 200 2.5 500
400 3 1.200.000
15 400 3 1.200.000 200 2.5 500
25 300 3.5 1.050.000 200 2.5 500
300 3.5 1.050.000
28 300 3500 1.050.000 200 2.5 500
30 100 4 400 200 2.5 500
100 4 400

HPP Persediaan Akhir

• Journal Entry LIFO Method (Physical)
General Journal Page:
(in rupiah)
Date Description Reff Debit Kredit
Januariy,10 Purchases 1.200.000
Cash 1.200.000
(400 x Rp 3.000 = Rp 1.200.000)
15 Account Receivable 1.800.000
Sales 1.800.000
(400 x Rp 4.500 = Rp1.800.000)
25 Purchases 1.050.000
Cash 1.050.000
(300 x Rp 3.500 = Rp 1.050.000
28 Account Receivable 1.350.000
Sales 1.350.000
(300 x Rp 4.500 = Rp1.350.000)
30 Purchases 400
Cash 400
(100 x Rp 4.000 = Rp 400.000
• Average Methods (Physical)
Date Description Unit Unit Cost Total Cost
2006 1 Balance 200 Rp. 2.500,- Rp. 500.000,-
Januari 10 Purchases 400 “ 3.000,- “ 1.200.000,-
25 Purchases 300 “‘ 3.500,- “ 1.050.000,-
30 Purchases 100 “ 4.000,- “ 400.000,-
Available to sold 1 Rp. 3.150.000,-
• Unit cost = Total Cost
unit
= Rp. 3.150.000,- : 1.000
= Rp. 3.150,-
• Cost of ending inventory
= 300 unit x Rp. 3.150,-
= Rp. 945.000,-
• Cost of Goods Sold
= 700 unit x Rp. 3.150,-
= Rp. 2.205.000,-
 f. Average Methods (Perpetual)
Inventory Account
Product : “ABC” Account Numbers:
Purchases Cost of Merchandise Sold Inventory
Date Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost
January, 1 200 2.5 500 200 2.5 500
10 400 3 1.200.000 600 2.833,3 1.700.000
15 400 2.833,3 1.133.320 200 2.833,3 566.66
25 300 3.5 1.050.000 500 3.233,32 1.116.600
28 300 3.233,32 969.996 200 3.233.32 646.664
30 100 4 400 300 3.488,9 1.046.664
HPP Persediaan Akhir
• Cost of ending inventory Rp. 1,046,664
• Cost of Goods Sold
(Rp. 1,133,320 + Rp. 969,996 = Rp. 2,103,316)
• Journal Entry Average Method (Physical)

(in rupiah) General Journal Page:

Date Description Reff Debit Kredit
January,1 Purchases 1.200.000
0 Cash 1.200.000
(400 x Rp 3.000 = Rp 1.200.000)

15 Account Receivable 1.800.000

Sales 1.800.000
(400 x Rp 4.500 = Rp1.800.000)

25 Purchases 1.050.000
Cash 1.050.000
(300 x Rp 3.500 = Rp 1.050.000

28 Account Receivable 1.350.000

Sales 1.350.000
(300 x Rp 4.500 = Rp1.350.000)

30 Purchases 400
Cash 400
(100 x Rp 4.000 = Rp 400.000