Inventories slides final

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 Inventories http://www.cc.cec/budg/ Overview of session Scope of application and key concepts Recognition and measurement Disclosures E.C specific implications Questions   Inventories Scope of application and key concepts Definition Inventories are assets: • held for sale in the ordinary course of business; or • in the process of production for such sale; or • in the form of materials or supplies to be consumed in the production process or in the rendering of services  Inventories Inventories include: • goods: commodities purchased and held for resale • supplies: raw materials • products: intermediate products, finished goods Raw Materials Work in Progress Finished Goods  Out of scope Not held for sale of for use in the production cycle: • Office supplies – expensed • Fixed assets – durable use for own activities • E.g Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed However, major spare parts and stand-by equipment qualify as property, plant and equipment when the enterprise expects to use them during more than one period or if they can be used only in connection with an item of property, plant and equipment and their use is expected to be irregular  IPSAS 12 Covers all inventories other than: • WIP under construction contracts • Financial instruments • Agricultural and forest products, mineral ores and biological assets   Inventories Recognition and measurement Inventories – Initial recognition • Initial recognition shall normally take place at the date of acquisition or date of entry shall correspond to the date on which the ownership of the inventories is transferred to the E.C., which generally corresponds to when delivery of the goods is accepted – • For simplification purposes this may during the year be when the invoice is received Cut-off and reporting at year-end: – If booking based on invoice, regularise any discrepancies between invoicing and delivery/transfer of ownership – Investigate specific contractual provisions determining title (e.g FOB terms: shipping or destination) – Consignment inventories (held by custodians)  Costs to be included All costs contributing to bring inventories to their present location and condition includes: - rebates - tax (customs/VAT) - transport - handling costs attributable to the acquisition Cost of Purchase Other Costs Any other costs that are incurred in bringing the inventories to their present location and condition Cost of Conversion Fixed & variable production overheads Direct costs, e.g direct labour 10  Cost Formulas • Specific identification: – for items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects • Global methods – First in First Out (FIFO) formula: assumes that the items of inventory that were purchased or produced first are sold first – Weighted Average Cost (WAC) formula: the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period • Consistency required across each type of inventory 12  Worked example – Inventory costing Inventory: + during year N Inventory: - during year n Date Q and (P) Cost Date Q Amount Beginning 100 units (320) 32,000 March 250 units (341) 85,250 April (230) ? July 200 units (343) 68,600 September (120) ? October 100 units (346) 34,600 November (100) ? December 50 units (347) 17,350 Total in 600 units 205,800 Total 700 units 237,800 (450) ? inventory Closing inventory: 250 units 13  Inventory costing - FIFO Inventory: + during year N Inventory: - during year n Date Q and (P) Cost Beginning 100 units (320) 32,000 250 units (341) 85,250 Date Q Amount April (230) 100*(320)+130 inventory March *(341) July 200 units (343) 68,600 September (120) 120*(341) October 100 units (346) 34,600 November (100) 100*(343) December 50 units (347) 17,350 Total in 600 units 205,800 Total 700 units 237,800 (450) 151,550 Closing inventory: 250 units = 86,250 14  Inventory costing - WAC Date Movements Inventories Q Cost/unit Value Q Cost/unit Value January 100 320 32,000 100 320 32,000 March 250 341 85,250 350 335 = 117,250/350 117,250 April (230) 335 (77,050) 120 335 40,200 July 200 343 68,600 320 340 = 108,800/320 108,800 September (120) 340 (40,800) 200 340 68,000 October 100 346 34,600 300 342 = 102,600/300 102,600 November (100) 342 (34,200) 200 342 68,400 December 50 347 17,350 250 343 = 85,750/250 85,750 Total out: 450 units 152,050 Closing inventory: 15 85,750  The debits and credits • Inventory is a current asset • Inventory is expensed… …when the related revenue is recognised What are the Dr and Cr involved in a purchase of inventory? 16  Two methods of accounting • Stock ledgers – each movement in or out is accounted for individually; the level of inventories is known at each precise moment in time • Periodic stock counts – inventories get adjusted based on periodic counts of physical inventory 17  Stock ledgers   Using the FIFO method # ins # Dt : 6# Dt : 3# Purchases of goods (economic outturn account) : Ct : 4# Suppliers 205 800 Inventories (balance sheet) 205 800 Ct : 6# Movement in inventories (economic outturn account) # payment of suppliers # Dt : Suppliers Ct : 5# Cash # outs # Dt : 6# 205 800 205 800 205 800 205 800 Movement in inventories (economic outturn account) Ct : 3# Inventories (balance sheet) 18 151 550 151 550  Periodic stock counts Throughout the year : # ins # Dt : 6# Purchase of goods (economic outturn account) : Ct : 4# Suppliers # payment of suppliers # Dt : 4# Suppliers Ct : 5# Cash 205 800 205 800 205 800 205 800 At year end : # reversal of beginning balance # Dt : 6# Movement in inventories (economic outturn account) Ct : 3# Inventories (balance sheet) 32 000 # recording of final balance # Dt : 3# Inventories (balance sheet) 86 250 Ct : 6# Movement in inventories (economic outturn account) 19 32 000 86 250  Inventories – Subsequent measurement Measure inventories at lower of: Cost and Net Realisable Value • Cost may not be recoverable when: – damaged – obsolete – increased costs of completion – selling price is reduced 20  Net Realisable Value Net Realisable Value Selling price Trade discounts The estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale X (X) Costs to completion (X) Marketing, selling and distribution costs (X) Net realisable value X Use replacement cost when the economic benefits Or service potential cannot be acquired in the market 21   Inventories Disclosures Key disclosures • Accounting policies (including cost formula used) • Balance sheet – Carrying amount of inventories (on face of BS) – Analyse inventories by classification (e.g raw materials, finished goods etc…) • Economic outturn account – Cost of inventories expensed in period • Other 23   Inventories E.C specific implications Current accounting V IPSAS Compliance issue Current accounting policy Revised accounting policy Nature and definition of inventory items Held for sale or for internal use Differentiate between inventories, fixed assets and expenses Office supplies Inventories Expenses Other consumables Expenses Material for building maintenance Inventories Scientific material Inventories Publications Inventories EAGGF inventories Do not belong to the E.C Pricing at year end Latest purchase price, except: FIFO Publications (1/3 of sales price) Fissile matters (cost of acquisition) NRV: Goods for sale Lower of cost or market Goods to be distributed for free Lower of cost or NRV Lower of cost or replacement cost 25   Inventories Questions http://www.cc.cec/budg/ [...]... beginning balance # Dt : 6# Movement in inventories (economic outturn account) Ct : 3# Inventories (balance sheet) 32 000 # recording of final balance # Dt : 3# Inventories (balance sheet) 86 250 Ct : 6# Movement in inventories (economic outturn account) 19 32 000 86 250  Inventories – Subsequent measurement Measure inventories at lower of: Cost and Net Realisable Value • Cost may not be recoverable... Nature and definition of inventory items Held for sale or for internal use Differentiate between inventories, fixed assets and expenses Office supplies Inventories Expenses Other consumables Expenses Material for building maintenance Inventories Scientific material Inventories Publications Inventories EAGGF inventories Do not belong to the E.C Pricing at year end Latest purchase price, except: FIFO Publications... be acquired in the market 21   Inventories 3 Disclosures Key disclosures • Accounting policies (including cost formula used) • Balance sheet – Carrying amount of inventories (on face of BS) – Analyse inventories by classification (e.g raw materials, finished goods etc…) • Economic outturn account – Cost of inventories expensed in period • Other 23   Inventories 4 E.C specific implications... individually; the level of inventories is known at each precise moment in time • Periodic stock counts – inventories get adjusted based on periodic counts of physical inventory 17  Stock ledgers   Using the FIFO method # ins # Dt : 6# Dt : 3# Purchases of goods (economic outturn account) : Ct : 4# Suppliers 205 800 Inventories (balance sheet) 205 800 Ct : 6# Movement in inventories (economic outturn... Movement in inventories (economic outturn account) Ct : 3# Inventories (balance sheet) 18 151 550 151 550  Periodic stock counts Throughout the year : # ins # Dt : 6# Purchase of goods (economic outturn account) : Ct : 4# Suppliers # payment of suppliers # Dt : 4# Suppliers Ct : 5# Cash 205 800 205 800 205 800 205 800 At year end : # reversal of beginning balance # Dt : 6# Movement in inventories. .. 1 (100) 100*(343) December 1 50 units (347) 17,350 Total in 600 units 205,800 Total 700 units 237,800 (450) 151,550 Closing inventory: 250 units = 86,250 14  Inventory costing - WAC Date Movements Inventories Q Cost/unit Value Q Cost/unit Value January 1 100 320 32,000 100 320 32,000 March 1 250 341 85,250 350 335 = 117,250/350 117,250 April 1 (230) 335 (77,050) 120 335 40,200 July 1 200 343 68,600... or other production costs • Storage costs – Unless those costs are necessary in the production process prior to a further production stage • Administrative overheads that do not contribute to bringing inventories to their present location and condition • Selling costs 11  Cost Formulas • Specific identification: – for items that are not ordinarily interchangeable and goods or services produced and... (1/3 of sales price) Fissile matters (cost of acquisition) NRV: Goods for sale Lower of cost or market Goods to be distributed for free Lower of cost or NRV Lower of cost or replacement cost 25   Inventories 5 Questions http://www.cc.cec/budg/
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