ACCT1501 2016 S2 Lecture Notes Week 8

ACCT1501
Semester2,2016
Week 8
Introduction to Inventory
and Non-Current Assets
Conor Clune
Topic8:LearningObjectives(LO)
LO1:Explainthedifferencebetweenperiodicandperpetual
inventorysystemsandpreparetheapplicablejournalentries
LO2:Describethethreecostflowassumptionsforinventory:
FIFO,LIFOandweightedaveragecost
LO3:Accountforthecostofacquisitionofnoncurrentassets
LO4: Explainandapplydifferentmethodsofdepreciationand
recordthesale/disposalofadepreciablenoncurrentasset
EssentialreadingforWeek8
TrotmanGibbins&CarsonChapter9pp.357374
TrotmanGibbins&CarsonChapter10pp.385398
GoodsandServices wearefocussingongoods
Services providedbydentists,accountants,lawyers
Goods(Products,Stock,Inventory)
Buyandsellreadymadeproducts
Manufactureandsellgoods/products
Inventory
Anasset!
Inventorycards perpetualinventorysystem
InventoryCard
Additions
Withdrawals
LO1
InventoryControlSystems
LO1
Arecordkeepingchoice!
1. Perpetualsystemmaintainscontinuousrecordsontheflow
ofunitsofinventoryforalltransactions(Balancesfor
InventoryandCOGSalwaysintheaccountingsystem)
2. Periodicsystemdeterminesinventorybyphysicalcountat
endofperiodandCOGSisdeterminedasopeninginventory
pluspurchaseslessclosinginventory(BalancesforInventory
andCOGSintheaccountingsystematperiodend)
1.PerpetualMethod
LO1
Continuousrecords:
Beginninginventorycost(oftensupportedbyaphysicalcount:internalcontrol)
+Inventoryacquiredduringtheperiod(fromtransactionrecords)
Costofinventorysold(COGSrecords)
=Endinginventorycost(supportedbyphysicalcount:internalcontrol)
Whatifthereisashortageofinventory???
Forexample
1.PerpetualMethod Example
LO1
$
Inventory (opening)
15 000
Add: Inventory acquired
60 000
Available for Sale
75 000
Less: Cost of goods sold
50 000
Inventory (closing)
25 000
Inventory on hand (physical count)
20 000
Inventory adjustment?
JournalEntry
Dr Inventoryshortageexpense5000
Cr
Inventory5000
1.PerpetualMethod ProsandCons
Providesbetterinternalcontrol
Stocklosseseasilydetermined
Howeveritscostlyandnotsuitableforalltypesof
goods,e.g.coal
LO1
1.PerpetualMethod RecordKeeping
LO1
Exampleacompanyboughtinventoryfor$100cash,thensold
itfor$500cash.
Purchases:
DrInventory
CrCash/Payable
$100
$100
AllsalesofinventoryrequireTWOentries:
Revenuefromsale
DrCash/Receivable
CrSales
Expensefromsale
DrCostofGoodsSold
CrInventory
$500
$500
$100
$100
2.PeriodicMethod
CalculatingCOGS
+Beginninginventory(count)
+ Purchases(companyrecords)
Endinginventory(count)
= Inventorysold(COGS)
10
LO1
2.PeriodicMethod RecordKeeping
COGSundertheperiodicmethod
+ Beginninginventory
Debit
+ Purchases
Debit
Credit
Endinginventory
Debit
= COGS
11
LO1
2.PeriodicMethod RecordKeeping
LO1
SalesofinventoryrequireonlyONEentry:
DrCash/Receivable
$500
CrSalesrevenue
$500
Notethedifferencecomparedtowhatyoureusedto
seeingwiththeperpetualinventorysystem.
12
Costofsalesisnotdeterminedforeverysalestransaction
Costofsalesisdeterminedintotalattheendoftheperiod
PerpetualorPeriodic?
Recordkeepingchoice,notareportingchoice
Natureofinventory
Computersystemtechnology
e.g.opticalscanners
Costbenefit
13
LO1
MCQ
1 Which of the following statements about the perpetual inventory
control method is NOT true?
A. When a sale is made, cost of goods sold is increased.
B. When inventory is purchased, it is treated as an expense.
C. A separate record is kept for each item of inventory.
D. An inventory count can reveal inventory losses.
2 Which of the following is NOT an advantage of the perpetual
inventory system over the periodic inventory system?
A. The perpetual inventory system discloses inventory shortages.
B. The perpetual inventory system is less costly to maintain.
C. The perpetual inventory system provides a continuous record of cost
of goods sold.
D. The perpetual inventory system provides better control of the asset
inventory.
14
Inventory measurementrule
LO1
Lowerofcostandnetrealisable value
Costcomprises:
Costofpurchase
Add:Purchase price+Import dutiesandothertaxes+
Inward transportandhandlingcosts+Any otherdirectly
attributablecostsofacquisition
Less: tradediscounts,rebatesandothersimilaritems
ConversionCosts(weeks1112) thisisifinventoriesare
manufacturedandincludescostofproduction
Notincluded inthecostofinventory:
15
Administrationcosts,sellingcosts &storagecosts
Untilnowwevedealtwithsimplecases
E.g.,Inventory=$100000.
Wehave10000units.
Weassumeapurchasepriceof$10perunit
However
16
Purchasesaremadethroughouttheyearandpricesmay
change
E.g.5000unitsat$9eachand5000unitsat$11each
Example:InventoryatcostandCOGS
Imaginewepurchasedthefollowing:
On30/1/15 3units@$15perunit
On30/5/15 3units@$20perunit
Soon30/6/15wehave
3unitsx$15=$45
3unitsx$20=$60
WhatistheCOGSifwethensell4units?
17
LO2
CostFlowAssumptions
LO2
Threemajortypesofcostflowassumptions
FirstIn,FirstOutmethod(FIFO)
LastIn,FirstOutmethod(LIFO)
WeightedAveragemethod(ormovingaverage)
Soincombination:
18
Cost Flow Assumption
Periodic control
Perpetual control
FIFO
FIFO
FIFO
LIFO
Periodic LIFO
Perpetual LIFO
Average
Weighted average
Moving average
Firstin,FirstOut(FIFO)
LO2
Assumesfirstunitspurchased=firstunitssold
Assumesendinginventorycontainsunitspurchasedmostrecently
Note FIFOresultsin:
Higherprofitlevelintimesofrisingprices(relativetoLIFOand
weightedaverage)
Closinginventorybalanceclosertocurrentcost(relativetoLIFO
andweightedaverage)
Suitableforperishableitems,electronics,etc
1st 3@$15/unit
19
2nd 3@$20/unit
LastIn,FirstOut(LIFO)
LO2
Assumeslastunitspurchased=Firstunitssold
Assumesendinginventorycontainsunitspurchasedearliest
Note:
Intimesofrisingprices,resultsinlowervalueofending
inventory,higherCOGS lowerprofit(nicetaximplication)
Oftendoesnotmatchphysicalflow
Closinginventorybalancemaynotberelevant
NotpermittedunderAustralianaccountingstandards
(permittedintheUnitedStates)
1st 3@$15/unit
20
2nd 3@$20/unit
WeightedAverage
LO2
Aweightedaveragecostiscalculated
($15x3)+($20x3)=$105
$105/6=$17.50perunit
Whenusingaperpetualinventorycontrolsystem,itis
referredtoasthemovingaveragemethod
Note:
Simpletoapplyandlesssubjecttoprofitmanipulation
Appropriateforsimilarproductsandnonexpiryitems
1st 3@$15/unit
21
2nd 3@$20/unit
FIFOvs.LIFOvs.WeightedAverage
LO2
Whenpricesarechanging,eachmethodwillprovideadifferent
endinginventoryandCOGSvalue
Butnotethatthesumofthesetwoitemswillalwaysbethesame,
nomatterwhatthemethod!
22
Acostcaneitherbeanassetoranexpense
TotalCost=asset+expense
Soattheendoftheperiod,TotalCost=Inventoryonhand+COGS
Important!Nomatterwhatcostflowassumptionismade.
Inventorythatwasavailabletosellduringtheyear=gone+stillhere
i.e.,Beginninginventory+Purchases=COGS+Endinginventory
$Value
1st 3@$15/unit
2nd 3@$20/unit
$(45+60)=$105
Imaginewesell4units
23
$Value
Important!Nomatterwhatcostflowassumptionismade.
1st 3@$15/unit
2nd 3@$20/unit
$(45+60)=$105
FIFOCOGS=3x$15+1x$20=$65
FIFOEndinginventory=2x$20=$40
Totalvalue=$105
Imaginewesell4units
LIFOCOGS=3x$20+1x$15=$75
LIFOEndinginventory=2x$15=$30
Totalvalue=$105
24
LectureExample
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total
Date
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15
LO2
Units
200
300
UnitCost TotalCost
$2
$3
$400
$900
250
500
$4
1000
DetermineCOGS andendinginventoryvalueunder
(1)periodic and(2)perpetualsystem:
(a)FIFO
(b)LIFO
(c)WeightedAverage
25
Units
Sold
$2000
$3300
400
650
LectureExample
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total
Date
LO2
Units
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15
Totalunitssold=650
Closinginventory=350
26
200
300
UnitCost TotalCost
$2
$3
Units
Sold
$400
$900
250
500
1000
$4
$2000
$3300
400
650
LectureExample Periodic
Details
Date
Openingstock
Purchased
Purchased
Total
1/1/15
15/1/15
28/1/15
Units
200
300
500
1000
LO2
Unit
Cost
$2
$3
$4
TotalCost
Units
27
Beginning Inventory
200
+ Purchases
800
Ending Inventory
350
= Inventory Sold
650
$400
$900
$2000
$3300
Units
sold
LectureExample 1(a)FIFOPeriodic
Sold650units
28
200@$2=400
300@$3=900
150@$4= 600
1900
LO2
Units
Unitcost
o/b200
$2
Purchased300
$3
Purchased 500
$4
Totalunits1000
$3300
COGS(650unitsasabove)
$1900
Endinginventory(350units@$4)
$1400
LectureExample 1(b)LIFOPeriodic
Sold650units
500@$4=2000
150@$3=450
2450
Units
Unitcost
o/b200
$2
Purchased300
$3
Purchased 500
$4
Totalunits1000
COGS(650unitsasabove)
Endinginventory(150@$3+200@$2)
29
LO2
$2450
$850
$3300
LectureExample 1(c)WeightedAveragePeriodic
TotalCost=$3,300
TotalUnits=1000
WAcost/unit=$3.30
Units
UnitCost TotalCost
200
300
500
1,000
$2
$3
$4
Sold650units
COGS(650x$3.30)
EndingInv(350x$3.30)
30
LO2
$2145
$1155
$400
$900
$2000
$3300
LectureExample:NowforthePerpetual method!
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total
Date
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15
Units
200
300
UnitCost TotalCost
$2
$3
Units
Sold
$400
$900
250
500
$4
1000
DetermineCOGS andendinginventoryvalueunder
(1)periodic and(2)perpetualsystem:
(a)FIFO
(b)LIFO
(c)WeightedAverage
31
LO2
$2000
$3300
400
650
LectureExample 2(a)FIFOPerpetual
Details
Openingstock
Purchased
Sold
Purchased
Sold
Total
32
Date
1/1/15
15/1/15
17/1/15
28/1/15
30/1/15
Units
200
300
LO2
UnitCost TotalCost
$2
$3
Units
Sold
$400
$900
250
500
1000
$4
$2000
$3300
400
650
Date
1/1
15/1
17/1
28/1
30/1
33
LO2
PURCHASES
COGS
ENDINGSTOCK/INV.
Units Unit Total Units Unit$ Total Units Unit$ Total
$
$
$
$
200
400
Date
1/1
15/1
34
LO2
PURCHASES
COGS
ENDINGSTOCK/INV.
$
$
$
$
300
900
200
200
300
2
2
3
400
400
900
Date
1/1
15/1
17/1
35
LO2
PURCHASES
COGS
ENDINGSTOCK/INV.
$
$
$
$
300
900
200
50
2
3
400
150
200
200
300
2
2
3
400
400
900
250
750
Date
1/1
15/1
PURCHASES
COGS
ENDINGSTOCK/INV.
$
$
$
$
300
900
17/1
28/1
30/1
36
LO2
500
200
50
2
3
400
150
250
150
3
4
750
600
2000
200
200
300
2
2
3
400
400
900
250
250
500
350
3
3
4
4
750
750
2000
1400
Date
1/1
15/1
PURCHASES
COGS
ENDINGSTOCK/INV.
$
$
$
$
300
900
17/1
28/1
30/1
TOTAL
37
LO2
500
200
50
2
3
400
150
250
150
3
4
750
600
1900
2000
200
200
300
2
2
3
400
400
900
250
250
500
350
3
3
4
4
750
750
2000
1400
1400
LectureExample 2(b) LIFOPerpetual

PURCHASES
COGS
Date Units Unit Total Units Unit Total
cost cost
cost
cost
1/1
15/1
300
900
17/1
28/1
500
250
750
400
1600
2350
2000
30/1
TOTAL
38
LO2
ENDINGSTOCK/INV.
Units
Unit Totalcost
cost
200
200
300
200
50
200
50
500
200
50
100
2
2
3
2
3
2
3
4
2
3
4
400
400
900
400
150
400
150
2000
400
150
400
950
LectureExample 2(c) MovingAveragePerpetual

Date
1/1
15/1
PURCHASES
COGS
Units Unit Total Units Unit Total
cost cost
cost
cost
300
900
LO2
ENDINGINV.
Units Unit
Total
cost
cost
200
2
400
*500
2.60
1300
($400+$900)/(200+300)
= $2.60/unit
17/1
28/1
250
500
2.60
650
2000
250
2.60
650
*750
3.53
2650
($650+$2000)/(250+500)
= $3.53/unit
30/1
400
TOTAL
39
3.53 1413.33
2063.33
350
3.53 1236.63
1236.67
ComparetheResults
LO2
Periodic
FIFO
40
LIFO
Perpetual
WA
FIFO
LIFO
MA
COGS
1900
2450
2145
1900
2350
2063
Ending
Inv
1400
850
1155
1400
950
1237
TOTAL
3300
3300
3300
3300
3300
3300
ACCT1501
Semester2,2016
10 Minute Break
NonCurrentAssets
Heldbycompanyformorethan12months
Usedtogeneraterevenue
Examples
42
Property,plant,andequipment
Intangibleassets
Longterminvestments
LO3
Property,PlantandEquipment(PPE)
LO3
Property,plantandequipmentaretangible itemsthat:
(a) Areheldforuseintheproductionorsupplyofgoodsor
services,forrentaltoothers,orforadministrative
purposes,and
(b) Areexpectedtobeusedduringmorethanoneperiod.
43
PPE Mainpointsofinterest
1.
2.
3.
4.
44
InitialcostofPPE
Depreciationofassets
Additionalexpenditureonassetsafteracquisition
Recordingthedisposalofassets
LO3
1.
InitialCostofPPE
LO3
Costatacquisition:
RecordedintheBalanceSheetatcost
Costincludes:
45
Purchaseprice
Anycostsdirectlyattributabletobringingtheassettothe
locationandconditionnecessaryforittobeusedinthe
mannerintendedbymanagement
Estimateofcostsassociatedwithdismantlingandremoving
theitemand/orrestorationcosts
1.
46
InitialCostofPPE Examples
Invoicepriceofmachinery
Purchase(andother)taxes
Freight(deliverycosts)
Installationcosts
Setupcosts
Architectsfees
LO3
Example
A used machine with a purchase price of $100 000, requiring an

overhaul costing $8000, installation costs of $4000, delivery costs
of $2000, would have a cost base of:
A. $104 000.
B. $108 000.
C. $112 000.
D. $114 000.
47
LO3
1.
2.
3.
4.
48
InitialcostofPPE
LO3
2.
Depreciation
LO4
PPEusuallyhasalimitedusefullife:
Reductioninusefulnessingeneratingrevenue
Valueatcostdepreciatesovertime
Depreciation=systematicallocationoftheusefulnessofanasset
overitslife
Remember
Dr DepreciationExpense
CrAccumulatedDepreciation
Depreciationexpenseisaone
periodconsumptionofbenefits
Acc Depn accountshowsall
depreciationchargedagainst
assettodate
Thecarryingvalueorbookvalueofanasset
=Initialcost accumulateddepreciation
49
2.Chargingdepreciation
Accumulateddepreciation(B/S)showsall depreciation
chargedagainstanassettodate.
Depreciationexpense(I/S)showsonlythisyears allocation
E.g.Juicerboughtforbusinessatthebeginningof2013
Cost$200,wewilldepreciateit$50everyyear
(usefor4years,$0attheendof2016)
Whatwouldthejournalentrybeeach year?
50
Dr Depn Expense
$50
CrAccumulatedDepn
$50
2.Chargingdepreciation 2015financialyear
Juicer atcost
Bal. b/d
200
Bal. c/d
DepreciationExpense
200
Accum Depn 50
Accum Depn Juicer

Bal. c/d
150
Bal. b/d
100
Depn Exp 50
Bookvalueofthejuiceratendof2015=$200$150=$50
2.
Depreciation Calculation
Depreciationshouldbebasedontheassets
52
Usefullife
Residualvalue(saleorscrap)
Patternofflowofbenefitsovertheusefullife.
LO4
2.
Depreciation Usefullife
LO4
Theperiodoftimeoverwhichanassetisexpectedtobe
availableforuse
Usefullifemaydifferfromphysicallifeoftheasset
becauseoftechnicalobsolescence
53
E.g.laptopcomputer
2.
Depreciation ResidualValue
LO4
Theestimatedamountthatanentitywouldobtainfrom
disposaloftheassetattheendofitsusefullife
Scrapvalue
fullydepreciated
DepreciableAmount=AssetCost ResidualValue
54
E.g.Cost110,Scrapvalue10
Depreciableamount=100
2.FlowofBenefitsfromAsset
LO4
3methodsofdepreciationbasedonwhenbenefitsoccur
(1)Straightline(2)Reducingbalance(3)Unitsofproduction
Consistentuseorbenefitoverusefullife
Straightline,e.g.Warehouse
Moreuse/benefitnowthanlater
Reducingbalance,e.g.Computer
Moreuse/benefitlaterthannoworinconsistentpattern
55
Unitsofproduction,e.g.Miningequipment,truck
2.Straightlinedepreciation
LO4
Declineinvalueisexpectedtobeuniformacrossthelifeof
theasset
Assumesbenefitsflowinequal amountsovertheusefullife
oftheasset
samedepreciationexpenseeachyear.
Depreciation
expenses
56
Cost Residualvalue
Usefullife
2.Straightlinedepreciation example
Cost:
Usefullife:
Residualvalue:
$40000
5years
$5000
Usingthestraightline depreciationmethod,
Calculatedepreciationexpensefortheyear
Depreciationexpense=(40000 5000)/5=$7000
Writethejournalentryfordepreciationinyear1
Dr Depn Expense$7000
CrAccumulatedDepn
57
$7000
LO4
2.ReducingBalanceDepreciation example
LO4
Assumesbenefitsareusedmoreinearlieryears
UsesaDepreciationrate
Expenseisnotthesameeveryyear
DepreciationExpense=CarryingAmount Depreciationrate
E.g.,InitialCostofPPE:
Depreciationrate: 25%
$40000
Year1
Year2
Year3
Dep Exp
10 000
7500
5625
AccDep
10 000
17 500
23 125
Book ValueofPPE
30 000
22 500
16 875
58
2.UnitsofProductionDepreciationmethod
LO4
Mostcommonactivitybasedmethodofapportioningcosts
Depreciationperunit= (Cost residualvalue)
Estimatedtotal#ofunitsofprodn overlife
Theoreticallythemostcorrect
59
Problems?
2.UnitsofProductionDepreciation example
CostofMotorVehicle:
$40000
ResidualValue:
$5000
Estimatednumberofkilometrestobedriven:200000
Depreciationperkm=($40000 5000)/200000=0.175
IfinYear1,MotorVehicletravels20000km
Depreciationexpense=20000kmx$0.175=$3500
Depreciationexpense=20/200x$35000=$3500
Depreciateuntilkm=200,000
60
LO4
Example
A.
B.
C.
D.
61
On 1 January 2015, a new motor vehicle with a useful life of four years and an
estimated trade-in value of $12 000 was purchased by a business for $54 000.
The straight-line method is employed and the financial year ends on 31
December. What was the depreciation expense for year ended 31 December
2016?
$5250
$10 500
$13 500
$21 000
LO3
1.
2.
3.
4.
62
InitialcostofPPE
LO4
3.
AdditionalExpenditure
LO4
Shouldbeaddedtothecostoftheassetifthedefinition
andrecognitioncriteriaforassetsaremet
Otherwisetreatasanexpense
BettermentversusMaintenanceofPPE
Bettermentrelatestoincreaseinexpectedeconomic
benefits,e.g.productivity,efficiency,outputquality
Repairrelatestomaintainingexpectedeconomicbenefits
Basedonjudgement!
63
1.
2.
3.
4.
64
InitialcostofPPE
LO4
4.
DisposalofPPE
LO4
PPEmaybe:
Scrapped:theassetisworthlessandhasnoresale/residualvalue
Sold
Exchangedforanotherasset(tradein)
65
4.
DisposalofPPE
LO4
Recorddepreciationupuntilthedateofdisposal
Recordgainorlossfromthesaleoftheasset
Removethenoncurrentassetfromthecompanysbooks
66
4.DisposalofaMachine Example
Asof30June2015
Originalcost
=$50,000
Accumulateddepreciation
=$24,000
Bookvalue
=$26,000
Straightlinedepreciation
=$12,000peryear
Soldon1August2015for$21,000cash
Preparethenecessaryjournalentries
67
LO4
4. DisposalofaMachine Example
Recorddepreciationupuntilthedateofdisposal
DrDepreciationExpense
$1000
CrAccumulatedDepreciation
$1000
Calculategainorlossfromthesaleoftheasset
68
On1August,Bookvalueofmachine =$25000
Receivedcashinexchangefor$21,000
GainorLoss?
LO4
Example DisposalofaMachine(cont.)
LO4
Removethenoncurrentassetfromthecompanysbooks
On1August
Machine
50 000
DR
Accumulated Depreciation
25 000
CR
25 000
DR
DrCash21000
DrAccumulateddepn 25000
DrLossonsale4000
CrMachine(cost)50000
69
Nextlecture:
Week9
FinancialReportingPrinciples,AccountingStandards
andAuditing
70

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ACCT1501

Add: Inventory acquired

Available for Sale

Less: Cost of goods sold

Inventory on hand (physical count)

Cost Flow Assumption

LectureExample 2(b) LIFOPerpetual

LectureExample 2(c) MovingAveragePerpetual

A used machine with a purchase price of $100 000, requiring an

Accum Depn Juicer

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