ACCOUNTING FOR INVENTORIES

MFRS 102
INVENTORIES

State the nature of inventory under MFRS 102
(MPERS: Section 13)

Discuss the recognition and measurement of
inventories

Compute the measurement of profit and value
of closing inventories

Identify the presentation of inventories in
financial statements

INVENTORIES EFFECT ON PROFIT

SCOPE OF INVENTORIES Identify effect on profitability

DEFINITION FIFO & AVCO

Define inventories Cost of Formula used.
Compute the value of closing
CATEGORY OF inventories.
INVENTORIES

Identify the categories of
inventories

MEASUREMENT PERIODIC & PERPETUAL SYSTEM

Cost, NRV and Conversion Cost Explain the system

Definition and Inventories are assets
Classification
of Inventories (a) held for sale in the ordinary
course of business

(b) in the process of production

(c) in the form of materials or
supplies to be consumed in
the production process or in
the rendering of services.

01 It expects to realize the asset or Example An entity purchases
intends to sell or consume it in its flour for its biscuit
normal operating cycle. factory.

Inventories are 02 It holds the asset primarily for the Solution
classified as purpose of trading.
current assets in The flour is raw material
the financial purchased by the entity and
statements when: used in the production of biscuit
in the factory. The raw material
03 It expects to realize it within is an inventory at current assets
twelve months after the reporting in the financial statements
period. because it expects to sell the
biscuits in its normal operating
cycle within twelve months after
the reporting period.

Initial Recognition and Measurement of Inventories

Measurement COST

Inventories should be measured at Cost of the inventory includes all
the lower of cost and net realisable costs incurred to bring the inventory
value. to its present location and condition. It
will include all costs of purchase,
Example conversion costs and all other costs.

An entity purchases 200 units of
finished goods from supplier costing of
RM3,000 for resale to its customers.
The net realizable value of the
inventories is RM3,200.

Solution The following costs should be

The finished goods are inventories excluded as inventories costs:
because they are purchased for the • Abnormal amount of wastage
purpose of trading and the inventory,
RM3,000 is measured at cost. including material, labour and

Answer overhead
• Storage cost
• Administrative cost
• Selling cost

The cost of inventories would be:

Debit: Inventories/purchase A/c 3,000

Credit: Bank A/c 3,000

NET REALIZABLE COST OF
VALUE (NRV) CONVERSION

Net realizable value is the Costs of conversion are those
estimate selling price in the costs directly related to the
ordinary course of business unit of production, including
• Direct labour
less the estimate costs of • Variable overheads
completion and the • Fixed overheads
• Other costs
estimated costs necessary
to make the sales

Details of Inventory
Valuation Principle

Inventory valued at
the lower of cost
and NRV

Concept Of Cost In Valuation Of Inventory

INVENTORY SYSTEM INVENTORY METHODS

PERIODIC SYSTEM FIRST IN FIRST OUT (FIFO)
Inventory is evaluate based on total sales and purchase for certain
Assumes that items of inventory purchased/produced first are
period such as after six month or a year according to accounting sold first. Items remaining in inventory are those most recently
period. Inventory quantity and value will be determined through purchased/produced
physical calculation at the end of the period and inventory value
AVERAGE COST (AVCO)
cannot be determined before the period ends.
The cost of each itemis dete rmined from the cost of
PERPETUAL SYSTEM similar items purchased during the period. Maybe a
Inventory will always be evaluate from time to time and weighted average or a moving average
recorded in stock cards. Inventory value can be determined at

any time because this card records the movements of
inventory all the time without having to wait for the
accounting period to end.

Example 1:

1 December 2019 Opening balance is 10 units@ RM3.50 each

Date Purchase Sales
Dec 2 12 @ RM3.40 10 @ RM6.00

6 10 @ RM2.50 19 @ RM9.50 Using the periodic system, show
10 8 @ RM 4.45 the differences in ending inventory
11 9 @ RM8.00 value using:
14 18 @ RM3.90 11 @ RM10.00 a) First In First Out (FIFO)
19 5 @ RM5.60 b) Weighted Average (AVCO)
20 8 @ RM9.90
22 10 @ RM3.48 c) State the profit or loss for two
4 @ RM3.35
23 methods above.
24
25
29

TOTAL PURCHASE TOTAL SALES

Solution:
Periodic System (FIFO)

1 Find the ending 2 Calculate cost of 3 Determine gross

inventory (units) ending inventory profit

= Beginning inventory (units) = ([email protected]) + ([email protected]) Sales Gross Profit
+ Purchase (units) - Sales (units) + ([email protected]) + ([email protected]) = RM60.00 + RM180.50 + RM72 + = Sales – COGS
= RM501.70 – RM202.70
= 10 + (12+10+8+18+5+10+4) – = RM13.40 + RM34.80 + RM28 + RM110 + RM79.20 = RM299
(10+19+9+11+8) 3.90 = RM501.70
= RM80.10
= 10+67-57
= 20 units Cost of goods sold (COGS)
= Beginning Inventory + Purchase

– Ending Inventory
= RM35.00 + RM247.80 – RM80.10
= RM202.70

Solution:
Periodic System (AVCO)

Calculate cost per unit of A Find the ending inventory B Calculate cost of ending C Determine gross profit D
inventory (units) inventory (RM)

= Beg.Inv (RM) + Purchase (RM) = Beginning inventory (u) = 20 units x RM3.67 Sales
Beg.Inv (u) + Purchase (u) + Purchase (u) - Sales (u) = RM73.40 = RM60.00 + RM180.50 + RM72 +

= RM35.00 + RM247.80 = 10 + (12+10+8+18+5+10+4) RM110 + RM79.20
10 + 67 units – (10+19+9+11+8) = RM501.70

= RM282.80 = 10+67-57 Cost of goods sold (COGS)
77 units = 20 units = Beginning Inventory + Purchase

= RM3.67 per unit – Ending Inventory
= RM35.00 + RM247.80 – RM73.40
= RM209.40

Gross Profit
= Sales – COGS
= RM501.70 – RM209.40
= RM292.30

Use Example 1, by perpetual Solution:
Perpetual System (FIFO)
system, calculate
a) Ending inventory by First In DATE PURCHASE COGS BALANCE 1
Dec 1 12 @ RM3.40 10 @ RM3.50 2
First Out (FIFO) 10 @ RM3.50
b) Ending inventory by Weighted 2 1
10 @ RM3.50 2
Average (AVCO) 12 @ RM3.40 3
c) Profit or loss for two methods
12 @ RM3.40
above.
12 @ RM3.40
6 Sold = 10 10 @ RM2.50
10 10 @ RM2.50
12 @ RM3.40
11 8 @ RM4.45 10 @ RM2.50
8 @ RM4.45
14 Sold =19 12 @ RM3.40
7 @ RM2.50 3 @ RM2.50
8 @ RM4.45
19 18 @ RM3.90
3 @ RM2.50
8 @ RM4.45
18 @ RM3.90

Cont.. PURCHASE COGS BALANCE 1
5 @ RM5.60 2
DATE 3 @ RM2.50 3 @ RM2.50 3
20 6 @ RM4.45 8 @ RM4.45 4
2 @ RM4.45 18 @ RM3.90 1
22 Sold = 9 9 @ RM3.90 5 @ RM5.60 2
23 Sold =11 3
8 @ RM3.90 2 @ RM4.45
24 10 @ RM3.48 RM202.70 18 @ RM3.90 1
2
25 4 @ RM3.35 5 @ RM5.60 3
4
9 @ RM3.90
29 Sold = 8 5 @ RM5.60

RM247.80 9 @ RM3.90
5 @ RM5.60
10 @ RM3.48

9 @ RM3.90
5 @ RM5.60
10 @ RM3.48
4 @ RM3.35

1 @ RM3.90
5 @ RM5.60
10 @ RM3.48
4 @ RM3.35

ENDING INV
= RM80.10

Solution:
Perpetual System (AVCO)

DATE PURCHASE COGS BALANCE
Dec 1 10 @ RM3.45 10 @ RM3.50
12 @ RM3.40 19 @ RM3.40 22 @ RM3.45
2 12 @ RM3.45
6 10 @ RM2.50 22 @ RM3.02
10 8 @ RM4.45 30 @ RM3.40
11 11@ RM3.40
14 18 @ RM3.90 29@ RM3.71
19

Units = 10 + 12 Cost per unit = Total inv (RM)
= 22 units Total inv (units)

= (10x 3.50)+(12x3.40)
10+12

= RM75.80/22
= RM3.45/unit

Cont.. PURCHASE COGS BALANCE
5 @ RM5.60 34@ RM3.99
DATE 9 @ RM3.99 25 @ RM3.99
20 10 @ RM3.48 11 @ RM3.99 14 @ RM3.99
22 4 @ RM3.35 24 @ RM3.78
23 8 @ RM3.72 28 @ RM3.72
24 RM247.80 RM208.66 20 @ RM3.72
25
29 ENDING INV =
RM74.40

Solution:
Find the profit/ loss

Income Statement

Sales FIFO AVCO
-) COGS 501.70 501.70
Profit/Loss (202.70) (208.66)
299.00 293.04

CONCLUSION

PERIODIC PERPETUAL

FIF0 CLOSING STOCK 80.10 80.10
PROFIT/LOSS 299.00 299.00

AVCO CLOSING STOCK 73.40 74.40
PROFIT/LOSS 292.30 293.40

Perpetual System – high value items
Periodic System – Low value items

STOCK VALUE COST Vs. NET REALISABLE VALUE

Inventory is valued at the lower cost between cost price and NRV, which means an inventory
should be value at either the cost price or NRV.

NRV – MFRS 102
Is the estimated selling price less the estimated cost of completion
and the estimated cost necessary to make sale

NRV = SALES PRICE – INVENTORY COMPLETION COST

Example 2: NRV (RM) SALES PRICE (RM)
810 1,200
ITEM COST (RM) 740 900
A 850 980 1,200
B 650 985 1,000
C 1,110
D 990 NRV (RM) SALES PRICE (RM)
810 √ 1,200
Calculate ending inventory. 740 900
980 √ 1,200
Solution: COST (RM) 985 √ 1,000
850
ITEM 650 √
A 1,110
B 990
C
D

Ending Inventory = 810 + 650 + 980 + 985
= RM3,425

3 METHODS TO DETERMING ENDING INVENTORY UNDER NRV

ITEM CATEGORY AGGREGATE

Example 3:

Product Cost(RM) NRV(RM)
410 500
Television TV 21” 1,150 980
300 350
TV 29” 750 715

Washing Manual
Machine Automatic

Solution :

METHOD OF EVALUATION (COST VS. NRV)

PRODUCT COST NRV ITEM CATEGORY AGGREGATE
(RM) (RM) (RM)
(RM) (RM)
410 500
Television TV 21” 1,150 980 410
1,560 1,480
TV 29” 300 350 980
750 715
Total 1,050 1,065 1,480
2,610 2,545
Washing Manual 300
Machine Auto
715

Total 1,050

Total 2,545

Inventory Value 2,405 2,530 2,545

CONCLUSION

Inventory Methods Stock Value
• FIFO • Cost Vs NRV
• AVCO • Inventory base

02 on lower value

03

Inventory systems Inventory value
• Periodic
• Perpetual 01 base on NRV:

04 • Item
• Category

• Aggregate

Thank You

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