AA015 TOPIC 8

FINANCIAL ACCOUNTING
AA015

KOLEJ MATRIKULASI
NEGERI SEMBILAN
SESSION 2020/2021

TOPIC 8:
ACCOUNTING FOR

INVENTORIES

LEARNING OBJECTIVES

Definition of Inventories
Inventory System
Inventory Costing Method
The Effect of Inventory Valuation on
Profit

DEFINITION

INVENTORY???

A current asset whose ending balance should report
the cost of a merchandiser's products awaiting to be
sold.
The inventory of a manufacturer should report the cost
of its raw materials, work-in-process, and finished
goods.

TYPES OF INVENTORY

Raw Material
Raw material is a type of inventory which acts as the basic component part of a
product. For example cotton is raw material for cloth production and plastic is raw
material for production of toys. Raw material is usually held by manufacturing
companies because they have to manufacture goods from raw material.

Work-In-Process
Work in process is a type of inventory that is in the process of production. This means
that work-in-process inventory is in the middle of production stage and it is partly
complete. Work-in-process account is used by manufacturing companies.

Finished Goods
Finished goods is a type of inventory which comes into existence after the production
process in complete. Finished goods is ready for sale inventory.

INVENTORY SYSTEM

1.The Periodic Inventory System
2.The Perpetual Inventory System

The Periodic Inventory System The Perpetual Inventory System

1.Updates inventory records only periodically. 1.Updates inventory records continuosly

2.A physical inventory count is taken to 2.The cost of goods sold

determine the balance of inventory and cost of and the balance of inventory are

goods sold at the end of the accounting available at all time

period

3.Purchases goods are recorded in a 3.Purchase of inventory recorded directly in
PURCHASE ACCOUNT. INVENTORY ACCOUNT.

JOURNAL ENTRY TO RECORD
INVENTORY TRANSACTIONS

PERIODIC PERPETUAL

Sold goods on account RM450000 (inventory cost RM270000)

Dr Account Receivable (RA) RM450000 Dr Account Receivable (RA) RM450000

Cr Revenues RM450000 Cr Revenues RM450000

Dr COGS RM270000
Cr Inventory RM270000

PERIODIC PERPETUAL

Return damage goods RM20000 to supplier.

Dr Account Payable RM20000 Dr Account Payable RM20000
Cr Purchase return & allowances RM20000
RM20000 Cr Inventory

Customer returned goods RM35,000 (costing RM30,000)

Dr Sales returns & allowances RM35000 Dr Sales returns & allowances RM35000
Cr Account Receivable RM35000
RM35000 Cr Account Receivable

Dr Inventory RM30000
Cr COGS RM30000

Inventory Costing Method

TABLE OF CONTENTS

First-in, First-out
Method (FIFO)

Last-in, First-out Method
(LIFO)

Weighted-Average
Cost Method

FIRST-IN, FIRST-OUT METHOD
(FIFO)

❖ The earliest goods purchased are the first to
be sold.

Weighted-Average Cost Method

❖This method assumed that the goods
available for sale have the same (average)
cost per unit

COMPUTATION OF COGS?

COGS = Beginning Inventory + Purchases – Ending inventory?

Depends on
the method and

system
used

PERIODIC INVENTORY SYSTEM

Steps
1. Ending Inventory Units

= Beginning Inventory Unit + Puchases (unit) – Units Sold
2. Ending Inventory Cost

= Ending Inventory Units x Cost per unit??

Cost per unit depends on the method used :
FIFO or Weighted-Average

3. COGS= Beginning Inventory + Purchases – Ending Inventory
4. Gross Profit = Sales - COGS

PERIODIC SYSTEM :
WEIGHTED-AVERAGE METHOD

Cost of Goods Available For Sale (COGAFS) :
= Purchase + Beginning Inventory Unit for sale

Average cost per unit:
= Cost of Goods Available For Sale

Units of Goods Available for Sale

Ending Inventory = Ending inventory unit x cost perunit

COGS :
Beginning inventory + Puchase – Ending Inventory = COGS
Gross Profit = Sales – COGS

S

PERPETUAL INVENTORY SYSTEM

Prepared in table format:

Date Purchases COGS Balance

❑ Average method also known as Moving Average.
❑ A new weighted-average unit cost will change due

to the changes in purchases.

WEIGHTED – AVERAGE
METHOD

PERIODIC SYSTEM – FIFO METHOD

L1 COMPUTE ENDING INVENTORY

Ending Inventory Units = Beginning Inventory Units + Purchases
Units – Sales Units

L2 COMPUTE ENDING INVENTORY - ASSUMPTION

FIFO = Used the latest purchases cost

L3 COMPUTE COGS

COSG = Beginning Inventory + Purchases – Ending Inventory

L4 COMPUTE GROSS PROFIT

Gross Profit = Sales - COGS

-

S

PERIODIC SYSTEM –
WEIGHTED-AVERAGE METHOD

L1 COMPUTE ENDING INVENTORY UNITS

Ending Inventory Units = Beginning Inventory Units + Purchases Units – Sales Units

L2 COMPUTE ENDING INVENTORY -ASSUMPTION

Average = Average Cost/unit
= COGAFS/ Total Unit AFS

L3 COMPUTE COGS

COSG = (Beginning Inventory + Purchases) – Ending Inventory

L4 COMPUTE GROSS PROFIT

Gross Profit = Sales - COGS

S

THE EFFECT OF INVENTORY
EVALUATION ON OPERATING

INCOME/PROFIT

The ending inventory value for FIFO
method is higher than weighted

average method because it is valued
at the current cost. COGS is lower
which result in highest profit.







THANK YOU