AA015 CHAP 8

Program Matrikulasi Satu Tahun Perakaunan

Chapter 8:

Accounting for Inventories

CONTENTS

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

Updates inventory records only Updates inventory records
periodically. continuosly

A physical inventory count is taken The cost of goods sold
to determine the balance of and the balance of inventory are
inventory and cost of goods sold at available at all time
the end of the accounting period

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

JOURNAL ENTRY TO RECORD
INVENTORY TRANSACTIONS

PERIODIC PERPETUAL

Purchased goods on account RM320000

Dr Purchase RM320000 Dr Inventory RM320000

Cr Account Payable RM320000 Cr Account Payable RM320000

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 Cr Inventory RM20000

PERIODIC PERPETUAL

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

Dr Sales returns & allowances RM35000 Dt Sales returns & allowances RM35000

Cr Account Receivable RM35000 Kt Account Receivable RM35000

Dt Inventory RM30000
Kt COGS RM30000

Inventory Costing Method

Table of contents

First-in, First-out
Method (FIFO)

Replace it with your original text.

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.

Last-in, First Out Method
(LIFO)

❖The latest 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

EXAMPLE :

In April, Syarikat Awal reports the following for the month of
April:

April 1 Inventory 100 units@ RM10 per unit
April10 Purchases 80 units @ RM11 per unit
April 20 Purchases 70 units @ RM12 per unit

April 18 Sales 90 units
April 27 Sales 50 units

Total sales of the month is RM2,800.
Determine:
1. The ending inventory UNIT.
2. Cost of goods available for sale (COGAFS)
3. Cost of goods sold (COGS)

PURATA MKKD MDKD PURATA MKKD MDKD

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 – FIFO Method

Ending Inventory 110 units
What is the cost???

70 unit s@ RM 12 RM 840
40 units@
110 units RM 11 RM 440

at the cost of RM 1,280

COGS for 140 units?
COGS = Beginning Inventory + Purchases – Ending

Inventory
= RM1,000 + RM1,720 – RM1,280
= RM1,440

Gross Profit = Sales – COGS
= RM2,800 - RM1,440
= RM1,360

S

Periodic System –

Weighted-Average Method

▪ Cost of Goods Available For Sale (COGAFS)= ( 1,000 + 1,720 )RM 2,720

▪ Unit for sale 250 units

So, Average cost per unit
= Cost of Goods Available For Sale

Units of Goods Available for Sale
= RM 2,720

250 units
= RM 10.88 per unit

▪ Ending Inventory = RM 10.88 X 110 units

= RM 1,196.80

COGS of 140 units ?
Beginning inventory + Puchase – Ending Inventory = COGS

RM1,000 + RM 1,720 - RM 1,196.80 = RM1,523.20

Gross Profit = Sales – COGS
= RM2,800 - RM1,523.20
= RM1,276.80

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.

Perpetual Inventory System _
FIFO Method

Date Purchases COGS Balance

Apr.1 100 x RM10 = RM1000
10
18 80 x RM 11 = RM880 100 x RM10 = RM1000
20 80 x RM 11 = RM880

27 90 x RM 10 = RM900 10 x RM10 = RM100
30 80 x RM 11 = RM880

70 x RM 12 = RM840 10 x RM 10 = RM100
80 x RM 11 = RM880
70 x RM 12 = RM840

10 x RM10 = RM100 40 x RM 11 = RM440
40 x RM 11 = RM440 70 x RM 12 = RM840

COGS = RM 1440 Ending Inventory =
RM1280

Gross Profit = Sales- COGS
= RM2,800 - RM1,440
= RM1,360

S

Perpetual Inventory System _

Weighted-Average Method

Date Purchases COGS Balance

Apr.1 100 x RM10 = RM1000

10 80 x RM 11 =RM880 180 x RM10.44 = RM1880

18 90 x RM10.44 90 x RM10.44 = RM940.40
20 70 x RM 12 =RM840 =RM939.60 160 x RM11.13= RM1780.40

27 50 x RM11.13 = 110 x RM11.13
RM556.50 =RM1223.90
Ending Inventory = RM
30 COGS = RM1,496.10 1223.90

Gross profit = Sales – COGS
= RM2800 - RM1496.10
= RM1303.90

S

PROBLEM FOR SELF-STUDY

▪ The beginning inventory at Sykt M on1st May shows 150 tone metrics
of bricks at the cost of RM90 /tone matrix. Total sales is RM7500

▪ Purchases :

Date Quantity (tone metrics) Cost (tone metrics)
May 7 300 RM100
May 14 100 RM110
May 25 90 RM120

▪ Sales:

Date Quantity (tone metrics)

May 12 270

May 17 130

May 24 110

▪ Instructions :

Determine the ending inventory and COGS under a periodic inventory
system using FIFO and Weighted – Average method.

QS – Syarikat Teraju SB

▪ The beginning inventory at Syarikat Teraju Sdn. Bhd (STSB) on 1st
January 2015 is 1,000 units at the cost of RM2.00 per unit

▪ In January, Syarikat Teraju Sdn. Bhd (STSB) reports the following for
the month of January:

Date Purchases/Sales Quantity/Cost
January 9 Purchases 1,200 @ RM2.20
Sales 1,200 @ RM4.00
15 Purchases
23 Purchases 800 @ RM2.40
24 Sales 1,000 @ RM2.60
28 Sales 1,200 @ RM4.20
30
500 @ RM4.50

▪ Instructions : FIFO
Determine ending inventory and COGS under a periodic inventory
system and perpetual inventory system using FIFO and Weighted –
Average method.

WA FIFO WA

Perpetual System – FIFO
Method

Date Purchases COGS Balance

Jan 1 1,000 x RM2.00= 2,000

9 1,200 x RM2.20= 2,640 1,000 x RM2.00= 2,000
1,200 x RM2.20= 2,640

15 1,000 x RM2.00= 2,000 1,000 x RM2.20= 2,200
200 x RM2.20= 440

23 800 x RM2.40= 1,920 1,000 x RM2.20= 2,200
800 x RM2.40= 1,920

24 1,000 x RM2.60= 2,600 1,000 x RM2.20= 2,200
800 x RM2.40= 1,920

1,000 x RM2.60= 2,600

1,000 x RM2.20= 2,200 600 x RM2.40= 1,440
28 200 x RM2.40= 480 1,000 x RM2.60= 2,600

30 500 x RM2.40= 1,200 100 x RM2.40= 240
1,000 x RM2.60= 2,600

COGS 6,320 Ending Inv. 2,840

G/Profit = Sales - COGS Sales = (1,200xRM4)+(1,200xRM4.20) +(500xRM4.50)
= 12,090 - 6,320 =5,770
= 12,090 S

WEIGHTED – AVERAGE
METHOD

Date Purchases COGS Balance

Jan 1 1,000 x RM2.00= 2,000
9 1,200 x RM2.20= 2,640
1,000 x RM2.00= 2,000
15 1,200 x RM2.11= 2,532 1,200 x RM2.20= 2,640
23 800 x RM2.40= 1,920
24 1,000 x RM2.60= 2,600 2,200 RM2.11 4,640

1,000 x RM2.11 = 2,108

1,000 x RM2.11 = 2,108
800 x RM2.40= 1,920

1,800 x RM2.24= 4,028
1,800 x RM2.24= 4,028
1,000 x RM2.60= 2,600
2,800 x RM2.37= 6,628

28 1,200 x RM2.37= 2,844 1,600 x RM2.37= 3,784

30 500 x RM2.37= 1,185 1,100 x RM2.37= 2,599

COGS 6,561 Ending Inv. 2,599
S
G/Profit = Sales - COGS
= 12,090 - 6,561
= 5,529

Periodic System – FIFO Method

L1 COMPUTE ENDING INVENTORY

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

= 1,000 + (1,200 + 800 + 1,000) –(1,200+1,200+500)

= 1,100

L2 COMPUTE ENDING INVENTORY - ASSUMPTION RM

FIFO = Used the latest purchases cost 1,000 x RM2.60 = 2,600

100 x RM2.40 = 240

L3 COMPUTE COGS Ending Inv. 2,840

COSG = Beginning Inventory + Purchases – Ending Inventory

=(1,000xRM2.00) +((1,200xRM2.20)+(800xRM2.40)+(1,000xRM2.60) - 2,840
= 6,320

L4 COMPUTE GROSS PROFIT

Gross Profit = Sales - COGS

= ((1,200xRM4.00)+(1,200xRM4.20)+(500xRM4.50) - 6,320
= 5,770

S

Periodic System –
Weighted-Average Method

L1 COMPUTE ENDING INVENTORY UNITS

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

= 1,000 + (1,200 + 800 + 1,000) –(1,200+1,200+500)

= 1,100

L2 COMPUTE ENDING INVENTORY -ASSUMPTION RM

Average = Average Cost/unit RM9,160 / 4,000 units = 2.29/unit
= COGAFS/ Total Unit AFS 1,100 x RM2.29 = 2,519

L3 COMPUTE COGS

COSG = (Beginning Inventory + Purchases) – Ending Inventory
= [(1,000xRM2.00) +(1,200xRM2.20)+(800xRM2.40)+(1,000xRM2.60)] - 2,519
= 6,641

L4 COMPUTE GROSS PROFIT

Gross Profit = Sales - COGS

= ((1,200xRM4.00)+(1,200xRM4.20)+(500xRM4.50) - 6,641
= 5,449

S

The Effects of Inventory Valuation On Profit
(Perpetual System)

Sales FIFO WEIGHTED-
(-) COGS AVERAGE
Profit 12,090
Ending Inventory 6,320 12,090
5,770 6,561
2,840 5,529
2,599

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.

The Effects of Inventory Valuation On Profit

Ending Inventory FIFO WEIGHTED-
Cost of good sold AVERAGE
Net profit Increase Decrease
Decrease
Increase Increase
Decrease

Program Matrikulasi Satu Tahun Perakaunan