AA015 - CHAPTER 8

ACCOUNTING FOR INVENTORIES AA015
CHAPTER 8

financial accounting
aa015

CHAPTER 8

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ACCOUNTING FOR INVENTORIES AA015
CHAPTER 8

8.1 DEFINITION OF INVENTORIES
Ø An item that become a business merchandise or good for sale.

Ø This item is considered an inventory if it meets the following criteria:
ü Owned by business.
ü In the form ready for sale to customer.
ü Bought for the purpose of resale.

Ø Types of inventory:
(i)Raw Materials -raw materials that your business changes to
produce its goods and/or services. For example, if you manage an
ice cream business, raw materials inventory could include milk you
use to make ice cream.

(ii)Work in Process- any unfinished goods that your business has
made. If your business makes and sells chairs, work-in-process
inventory would include any unfinished chairs on hand that your
business has made.

(iii)Finished Goods - any finished goods that are ready to sell. If
you have a retail business that buys and sells toys, the toys you
buy would be finished goods inventory.

Ø Although the inventory for raw materials and work in process may
not yet be ready for sale, they are used to produce products for
resale purpose. Therefore, they are classified as an inventory in
manufacturing enterprise.

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8.2 INVENTORY SYSTEM

PERIODIC SYSTEM PERPETUAL SYSTEM
FIFO FIFO
LIFO LIFO

Weighted Average Method Moving Average Method

Differences Inventory System

Periodic System Perpetual System

§ No entry is made at the time of sale to § The ongoing physical flow of

record the cost of goods sold - inventory is monitored and cost of

Updates inventory records only the inventory items is maintained on

periodically. a continual basis.

§ A physical inventory count is taken at § The cost of goods sold and the

the end of the accounting period. balance of inventory are available

at all time.

§ Easier to manage and lower cost to

control. § Used by a business selling

expensive goods such as vehicle

§ Purchases inventory are recorded in and furniture.

a PURCHASES ACCOUNT.

§ Purchases inventory are recorded

in INVENTORY ACCOUNT.

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Differences in Journal Entries between the Systems

Periodic System Perpetual System

Purchase merchandise on credit/on account

Dr. Purchases XX Dr. Inventory XX

Cr. Accounts Payable XX Cr. Accounts Payable XX

(Record purchase of merchandise on (Record purchases of merchandise on

account) account)

Sell merchandise on credit purchase merchandise on credit

Dr. Account Receivable XX Dr. Account Receivable XX

Cr. Sales XX Cr. Sales XX

(Record sales of merchandise in (Record sale of merchandise on

account) account at sales price)

Dr. Cost of Goods Sold XX

Cr. Inventory XX

(Record sales of merchandise on

account at cost price)

Purchases Return

Dr. Account Payable XX Dr. Accounts Payable XX
Cr. Inventory XX
Cr. Purchase Return and Allowance XX
(Record purchases return)

(Record purchases return) XX Dr. Sales Return and Allowance XX
Sales Return XX
Dr. Sales Return and Allowance Cr. Account Receivable XX

Cr. Account Receivable (Record sales return)
(Record sales return)

Dr. Inventory XX

Cr. Cost of Goods Sold XX

(Record sales return at price cost)

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8.3 INVENTORY COSTING METHOD

Ø First-In-First-Out (FIFO)
• Inventory units purchased earlier (First-In) will be sold first
(First-Out).The ending inventory value is the cost of units
purchased later.
• The ending inventory value is the closest value to the market
value.

• The value of cost of goods sold is the value of inventory
purchased earlier.

Ø Last-In-First-out (LIFO)
• Newest items (IN) are assumed to be sold (OUT) first.
• Ending inventory consist of oldest items in inventory
• The cost of newest inventory items are charged to cost of
goods sold when goods are sold.
• The cost of the oldest inventory items remain in an ending
inventory.

Ø Weighted-Average
• Assumes the value of unit inventories sold (cost of goods sold)
and the ending inventory value is determined at average cost
per unit.
• Under the periodic system it is known as weighted average
method.
• Under the perpetual system it is known as moving average
method.

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FIFO Disadvantages

Advantages Matching concept of accounting is
violated because COGS does not
1. During inflation, net profit is match with current revenues.
high.

2. COGS is low.
3. Flow of costs tends to be

consistent with usual physical
flow of goods.

LIFO Disadvantages

Advantages 1. Inventory valuation is at older
1. Matches latest inventory costs cost.

with current revenues. 2. Inventory cost presented on
2. Produce lower profit during an the balance sheet is not fair.

inflation period; result in tax 3. Lower profit compared to FIFO
saving. method during an inflation
period.

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HOW TO COMPUTE?
Periodic Inventory System (FIFO)

1. Ending Inventory Units
= Beginning Inventory Units + Puchases Units – Sales Units

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

Perpetual Inventory System

Prepared in table format:

Date Purchases COGS Balance

q Weighted Average method also known as Moving Average
Method.

q A new weighted-average unit cost will change due to the
changes in purchases.

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8.4 EFFECT OF INVENTORY VALUATION ON PROFIT
Ø When inventory cost per unit increased, the value of FIFO ending
inventory is higher because it is valued at the current cost. COGS
is lower which result in higher profit.

EXAMPLE :

The beginning inventory at Syarikat Teraju Sdn. Bhd (STSB) on 1st
January 2019 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

15 Sales 1,200 @ RM4.00

23 Purchases 800 @ RM2.40

24 Purchases 1,000 @ RM2.60

28 Sales 1,200 @ RM4.20

30 Sales 500 @ RM4.50

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

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Solution :
PERIODIC SYSTEM – FIFO METHOD

STEP 1 (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 units

STEP 2 (Compute Ending Inventory – Assumption) :
FIFO = Used the latest purchases cost :
Ending Inventory Cost
= (1,000 units x RM2.60) + (100 units x RM2.40)
= RM2,840

STEP 3 (Compute COGS) :
COGS
= Beginning Inventory + Purchases – Ending Inventory
= [1,000 units x RM2.00] + [(1,200 x RM2.20) + (800 x RM2.40) + (1,000 x
RM2.60)] – RM2,840
= RM6,320

STEP 4 (Compute Gross Profit)
Gross Profit
= Sales – COGS
= [(1,200 x RM4.40) + (1,200 x RM4.20) + (500 x RM4.50)] – RM6,320
= RM5,770

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PERIODIC SYSTEM – WEIGHTED AVERAGE METHOD

STEP 1 (Compute Average Cost Per Unit)
COGAFS
= Beginning Inventory + Purchases
= [1,000 units x RM2.00] + [(1,200 x RM2.20) + (800 x RM2.40) + (1,000 x
RM2.60)]
= RM9,160

Average Cost Per Unit

= !"#$%&
'()*+ "- !"#$%&
!"#,%&'
= %,''' ) (%,+'' ) ,'' ) %,''')

= RM2.29

STEP 2 (Compute Ending Inventory – Assumption) :
Ending Inventory
= Average Cost Per Unit x Ending Inventory Units
= RM2.29 x 1,100 units
= RM2,519

STEP 3 (Compute COGS) :
COGS
= Average Cost Per Unit x Sales Units
= RM2.29 x (1,200 + 1,200 + 500)
= RM6,641

STEP 4 (Compute Gross Profit)
Gross Profit
= Sales – COGS
= [(1,200 x RM4.40) + (1,200 x RM4.20) + (500 x RM4.50)] – RM6,641
= RM5,929

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PERPETUAL SYSTEM – FIFO METHOD Balance (RM)
Date Purchases (RM) COGS (RM)
Jan 1,000 x RM2.00 =
1
2,000
1,200 x RM2.20 =
9 2,640 1,000 x RM2.00 =

15 1,000 x RM2.00 = 2,000
2,000
800 x RM2.40 = 200 x RM2.20 = 440 1,200 x RM2.20 =
23 1920
2,640
1,000 x RM2.60 =
24 2,600 1,000 x RM2.20 =

1,000 x RM2.20 = 2,200
28 2,200
1,000 x RM2.20 =
200 x RM2.40 = 480 2,200
800 x RM2.40 =
500 x RM2.40 = 1920
30 1,200 1,000 x RM2.20 =
2,200
COGS 800 x RM2.40 =
= 2,000 + 440 + 1920
2,200 + 480 + 1,200 1,000 x RM2.60 =
= 6,320
2,600

600 x RM2.40 =
1,440
1,000 x RM2.60 =
2,600
100 x RM2.40 =
240
1,000 x RM2.60 =
2,600
Ending Inventory
= 240 + 2,600
= 2,840

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PERPETUAL SYSTEM – WEIGHTED-AVERAGE METHOD

Date Purchases (RM) COGS (RM) Balance (RM)

Jan 1,000 x RM2.00 =

1 2,000

1,200 x RM2.20 = 1,000 x RM2.00 =

9 2,640 2,000

1,200 x RM2.20 =

2,640

2,200 x RM2.11 =

4,640

1,200 x RM2.11 = 1,000 x RM2.11 =

15 2,532 2,108

800 x RM2.40 = 1,000 x RM2.11 =

23 1920 2,108

800 x RM2.40 =

1,920

1,800 x RM2.24 =

4,028

1,000 x RM2.60 = 1,800 x RM2.24 =

24 2,600 4,028

1,000 x RM2.60 =

2,600

2,800 x RM2.37 =

6,628

1,200 x RM2.37 = 1,600 x RM2.37 =

28 2,844 3,784

500 x RM2.37 = 1,100 x RM2.37 =

30 1,185 2,599

COGS Ending Inventory

= 2,532 + 2,844 + = 2,599

1,185

= 6,561

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EXERCISES

Question 1

The following are related to the business transactions in Syarikat Mesra Selalu in
January 2020:

January 1 Inventory balance of 80 units at a cost of RM 1.50 per unit
6 Buy 240 units at a price of RM 1.60 per unit

10 Sell 200 units at a price of RM 4.00 per unit
15 Buy 300 units at a price of RM 1.70 per unit
21 Sell 250 units at a price of RM 4.30 per unit
26 Buy 200 units at a price of RM 1.90 per unit
28 Sell 220 units at a price of RM 4.50 per unit

Nota: Syarikat Mesra Selalu is using First In First Out method (FIFO).

REQUIRED:
a) Evaluate the cost of ending inventory as at January 31st, 2020 and calculate the

cost of goods sold and gross profit for the month using:
i) perpetual inventory system.
ii) periodic inventory system.

b) Give three (3) different use of periodic inventory system with perpetual inventory
system.

Question 2

Syarikat Chang Wei update their inventory records at the end of each accounting

period. Here is information about the inventory: -

Date Item Unit Cost per unit Total cost
(RM) (RM)

Jan 1 Opening inventory 100 4 400

Jan 20 Purchases 400 5 2000

Mei 25 Purchases 200 6 1200

Sept 27 Purchases 300 7 2100

Jumlah 1000 5700

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Based on the calculation of physical inventories as at December 31st, 2020, it was
found that there were 400 units inventory available in the storage.

REQUIRED:
a) Compute the ending inventory at December 31st, 2020 if the company uses the

method:
i) First In First Out
ii) Weighted Average

b) Determine the difference of the total cost of which will be reported by the company if
the company is using FIFO method compared with the weighted method. Which
method will yield more? Please indicate the reason.

Question 3

Syarikat Jamil Abdullah update inventory records each time a transactions occurs.
The followings are the sales and purchases on March 2020:

Purchases Sales

Date Item Unit Cost per unit Unit Price per unit
(RM) (RM)

Mac 1 Beginning 100 50
Inventory
Mac 3 Purchases 60 60 100
Mac 4 Sales 70 110
Mac 10 Purchases 110
Mac 16 Sales 200 70
Mac 19 Purchases 80
Mac 25 Sales
40 80
130

REQUIRED:
Compute the ending inventory, cost of goods sold and gross profit for the month ended
March 31, 2020 using the method:
a) First In First Out
b) Weighted average (2 decimal places).

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Question 4

1. Syarikat Ai Din is using the periodic system that have long used the FIFO method
to value the inventories but commencing the current year, the company plans to use
the FIFO method or LIFO method, it depends on the decision of which method had
shown a higher profit. The following inventory transactions have been recorded for
the month of June 2020:
Purchases

7 Jun 2020 2000 Units @ RM 350 per unit
Sales

27 Jun 2020 1750 units @ RM 500 per unit

Inventory balance as at 1st June 2020 is 500 units @ RM 300 per unit.

REQUIRED:
a) Compute the ending inventory balance as at June 30th, 2020 if the company is

using FIFO method.

2. Perniagaan Zaini has a beginning inventory balance of RM 600,000 at the beginning
of 2020. The business has made a purchase of RM 880,000 during the year 2020
and had to return defective goods purchased amounting RM 80,000. The annual
sales amounted to RM 1,600,000. The physical inventory count at the end of
accounting year showed the value at RM 400,000.

REQUIRED:
Prepare journal entries for the sales transactions, purchase and inventory returns by
perpetual inventory system and periodic inventory system separately.

Question 5

Syarikat Komputer Sally Yacop (SKSY) has prepared an inventory record for January

2020 as follows:

Date Item Quantity Cost per unit Sales price per
unit

Jan 1 Opening inventory 100 RM 8

6 Purchases 60 RM 9

13 Sales 70 RM 20

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21 Purchases 150 RM 9

24 Sales 210 RM 22

27 Purchases 90 RM 10

30 Sales 30 RM 25

From the company's accounting records for the month of January, the company had

spent operations expenditure of RM1900. Assume that the company uses a periodic

inventory system.

REQUIRED:
a) Prepare a separate Statement of Profit or Loss using FIFO method and Weighted

Average method.
b) As the Finance Director of SKSY, suggest methods of inventory valuation that

enables the company's goal to be achieved for:
i) Minimizing tax
ii) Report the highest operating revenue

Question 6

The following information obtained is about the FM product in August 2020. This
business uses the periodic inventory method.

Details Unit Price per unit
(RM)
Aug 1 Balance
2 Purchases 70 21
5 Sales 90 20
8 Purchases 80
Sales 60 21
14 Purchases 40
15 Sales 50 23
20 Sales 60
23 Purchases 50
27 80 22

REQUIRED:
Compute the ending inventory and cost of goods sold using the following methods:

a) First in First Out (FIFO).

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Question 7

Satu Dua Satu Sdn Bhd (SDSSB) sell products 4U and the following information is about

the product on February.

Details Unit Price per unit

(RM)

Feb 1 Balance 20 40

10 Purchases 50 45

15 Sales 50

20 Purchases 40 47.50

25 Sales 40

27 Purchases 30 50.00

SDSSB use the periodic inventory system. On February 28th, SDSSB make physical
inventory count and found 50 units are in their possession.

REQUIRED:
Calculate the ending inventory and cost of goods sold using the following methods:
a) First in First Out (FIFO)

b) Weighted Average

Question 8

On June 1, 2020, Lagun Biru Sdn. Bhd. (LBSB) have balances of inventories amounted

to 40 units at a cost of RM80 per unit. Purchases during the month of June are as

follows.

Date Purchases

Unit Cost (RM)

June 2 70 90

5 50 100

10 30 110

24 100 120

LBSB practices periodic inventory system. A total of 150 units were sold in June.

REQUIRED:
Determine the cost of inventory on June 30th and cost of goods sold for the month of
June by using the following methods:
a) First in First Out (FIFO)

b) Weighted Average

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Question 9

Morten Enterprise (ME) sells and distributes cameras in Melaka. The sales and

purchases transactions of Zoom 80U Score camera for March 2020 are as follows:

Date Details Unit Price per unit

(RM)

March 1 Opening balance 12 350

8 Sales 3-

14 Purchases 15 340

23 Sales 10 -

27 Sales 4-

31 Purchases 6 330

REQUIRED:
Calculate the closing inventory value and total cost of goods sold on March 31st if the
perpetual inventory system and inventory valuation methods, First In First Out (FIFO)
method is applied.

Question 10
Widuri Enterprise is doing selling mobile phones business in Bandar Baru Uda. The sales
and purchases transactions for the month of April 2020 are as follows:

Date Details Unit Price per unit
(RM)
April 1 Opening balance
4 Purchases 12 550
7 Sales 10 580
Purchases 11 670
13 Sales 6 560
19 Sales 8 670
26 2 670

All transactions are in cash and the Widuri Enterprise adopts perpetual inventory system.

REQUIRED:
(i) Determine the value of ending inventory at the April 30th if the inventory recording

system is using periodic inventories and inventory valuation method is First In First
Out (FIFO).
(ii) Based on the information in (i), determine the value of gross profit for the month of
April 2020.

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Question 11

Perniagaan Malim (PM) is using the perpetual inventory system. The following information
is the purchases and sales of inventory made for 2020.

Date Purchases Sales Price per unit
(Unit) (Unit) (RM)
Jan 1 450 50
Apr 2 600 900 55
June 30 85
July 30 750 1500 58
Nov. 2 1050 2400 60
Dec 1 85
Dec 30 750 66
Total 3600

REQUIRED:
Compute the ending inventory and cost of goods sold using the First In, First Out method
(FIFO).

Question 12

Below is the information on opening inventory, purchases and sales for the month of May

2020 for Salim Maju Enterprise (SME). SME had used perpetual system for their

inventory valuation method.

Date Opening inventory 50 unit @ RM6

May 5 Sales 20 unit RM8.50

Sales price per unit

8 Purchases 45 unit @ RM7

15 Sales 22 unit RM8.50

Sales price per unit

20 Purchases 40 unit @ RM8

24 Sales 35 unit RM9.00

Sales price per unit

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REQUIRED:
(i) Calculate the cost of goods sold and ending inventory cost using the following format

if the SME is using First In First Out (FIFO) method.

Purchases Cost of goods sold Balance
(RM) (RM) (RM)

Opening balance

(ii) Determine the cost of ending inventory using the weighted average method if the
business uses the periodic inventory system.

Question 13

Rekod Perniagaan Amanah (PA) showed the opening inventory of 1,000 units at a

price of RM2.50 per unit. The transactions of the business and purchases for the

month of February 2020 are as follows:

Date Details Unit Price per unit (RM)

February 5 Sales 750 4.00

9 Purchases 5,000 2.50

12 Sales 4,000 4.00

16 Purchases 7,500 2.60

24 Purchases 3,250 2.70

28 Sales 11,000 4.00

All transactions are in cash and the PA adopts the perpetual inventory system.

REQUIRED:
Calculate the value of ending inventory as at February 28th, 2020 by using the First In,

First Out (FIFO) method.

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