CHAPTER 2: ACCOUNTING OF INVENTORY (part 1)

LEARNING OUTCOMES
Students were able to:
2

1. Define inventory according to FRS102

2. List three types of inventory 3. Differentiate periodical and perpetual systems of inventory 4. Explain the basis of inventory valuation

DEFINITION OF INVENTORY
According to FRS 102:
1) Held for sale in the ordinary course of the business 2)In the process of production for such sale 3)In the form of materials or supplies to be consumed in the production process/ services to be available for sale

INVENTORY is
-The largest element of expenses in a business to earn profit
-Presented in income statement calculate COGS -Presented in balance sheet closing inventory in current assets

I N C O M E S T A T E M E N T

B A L A N C E S H E E T

TYPES OF INVENTORY
Raw materials

Work in progress
Finished goods/completed goods

SYSTEMS OF KEEPING TRACK OF INVENTORY

Periodical system Perpetual system

SYSTEMS OF KEEPING TRACK OF INVENTORY

PERIODICAL SYSTEM PERPETUAL SYSTEM

No detail record through the year In regular interval record & during stocktaking Required Low internal control

Maintanance of Detail record on every record transaction (purchase and sales) Determination Each time of sales of COGS occur Stocktaking Internal control Not required but encouraged to do so High internal control

PERIODICAL SYSTEM

PERPETUAL SYSTEM

-lack of large initial cost -simple recording and calculation

Advantages

-produce more accurate f/statement -closer management of inventory level (uncover lost/shortage/ excessive of inventory)

- Hardly detect lost/shortage/ excessive of inventory -have many types of inventory -high inventory turnover -low value per unit

Disadvantages - Involved high cost of implementation (system, human, time and resources) Types of business -do not have many types of inventory -high inventory turnover -high value per unit

BASIS OF INVENTORY VALUATION

LOWER OF COST AND NET REALISABLE VALUE
NRV = saleable price estimated cost of completion

Why the cost reduce to NRV?

1. physical deterioration 2. economic factor -obsolesces 3. reducing in market value 4. increasing in cost