Acca f3 Financial Accounting (int) Study Text
Part D Recording transactions and events
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132 8: Inventory Part D Recording transactions and events $ Purchases of goods for resale, on credit 4,300 Payments for trade accounts payable 3,600 Sales, all on credit 4,000 Payments from trade accounts receivable 3,200 Non-current assets purchased for cash 1,500 Other expenses, all paid in cash 900 The bank has provided an overdraft facility of up to $3,000. All 'other expenses' relate to the current year. Closing inventory is valued at $1,800. (Because this is the first year of the business, there are no opening inventories.) Ignore depreciation and withdrawals on account of profit. Required Prepare the ledger accounts, a trading, income and expense account for the year and a statement of financial position as at the end of the year. Answer
CASH $ $ Capital 2,000
Trade accounts payable 3,600
Trade accounts receivable 3,200
Non-current assets 1,500
Balance c/d 800
Other expenses 900
6,000 6,000
Balance b/d 800
CAPITAL $ $ Balance c/d 2,600
Cash 2,000
I & E a/c 600
2,600 2,600
Balance b/d 2,600
TRADE ACCOUNTS PAYABLE $ $ Cash 3,600
Purchases 4,300
Balance c/d 700
4,300 4,300
Balance b/d 700
PURCHASES ACCOUNT $ $ Trade accounts payable 4,300
Trading a/c 4,300
NON-CURRENT ASSETS $ $ Cash 1,500
Balance c/d 1,500
Balance b/d 1,500
Part D Recording transactions and events 8: Inventory 133 SALES
$ $ Trading a/c 4,000 Trade accounts receivable 4,000 TRADE ACCOUNTS RECEIVABLE $ $ Sales 4,000 Cash
3,200 Balance c/d 800 4,000
4,000 Balance b/d 800 OTHER EXPENSES $ $ Cash 900 I & E a/c 900 TRADING, INCOME AND EXPENSE ACCOUNT $ $ Purchases account 4,300 Sales
4,000 Gross profit c/d 1,500 Closing inventory (inventory a/c) 1,800 5,800
5,800 Other expenses 900 Gross profit b/d 1,500 Net profit (transferred to capital account) 600
1,500 1,500
Alternatively, closing inventory could be shown as a minus value on the debit side of the trading account, instead of a credit entry, giving purchases $4,300 less closing inventory $1,800 equals cost of goods sold $2,500. INVENTORY ACCOUNT $ $
1,800 Balance c/d 1,800 Balance b/d (opening inventory) 1,800
STATEMENT OF FINANCIAL POSITION AS AT THE END OF THE PERIOD $ $
Non-current assets 1,500
Current assets
Goods in inventory 1,800
Trade accounts receivable 800 2,600
Total assets 4,100
Capital and liabilities Capital
At start of period 2,000
Profit for period 600
At end of period 2,600
Current liabilities Bank
overdraft 800
Trade accounts payable 700 1,500
Total capital and liabilities 4,100
134 8: Inventory Part D Recording transactions and events Make sure you can see what has happened here. The balance on the inventory account was $1,800, which appears in the statement of financial position as a current asset. As it happens, the $1,800 closing inventory was the only entry in the inventory account – there was no figure for opening inventory. If there had been, it would have been eliminated by transferring it as a debit balance to the trading account, ie: DEBIT
Trading account (with value of opening inventory) CREDIT
Inventory account (with value of opening inventory) The debit in the trading account would then have increased the cost of sales, ie opening inventory is added to purchases in calculating cost of sales. Again, this is illustrated in Paragraph 2.1 above. So if we can establish the value of inventories on hand, the above paragraphs and exercise show us how to account for that value. That takes care of one of the problems noted at the beginning of this chapter. But now another of those problems becomes apparent – how do we establish the value of inventories on hand? The first step must be to establish how much inventory is held. 3 Counting inventories The
an annual counting exercise, or by a 'continuous' inventory court. Business trading is a continuous activity, but accounting statements must be drawn up at a particular date. In preparing a statement of financial position it is necessary to ' freeze' the activity of a business so as to determine its assets and liabilities at a given moment. This includes establishing the quantities of inventories on hand, which can create problems. In simple cases, when a business holds easily counted and relatively small amounts of inventory, quantities of inventories on hand at the reporting date can be determined by physically counting them in an
In more complicated cases, where a business holds considerable quantities of varied inventory, an alternative approach to establishing quantities is to maintain continuous inventory records. This means that a card is kept for every item of inventory, showing receipts and issues from the stores, and a running total. A few inventory items are counted each day to make sure their record cards are correct – this is called a 'continuous' count because it is spread out over the year rather than completed in one count at a designated time. One obstacle is overcome once a business has established how much inventory is on hand. But another of the problems noted in the introduction immediately raises its head. What value should the business place on those inventories? 4 Valuing inventories The value of inventories is calculated at the lower cost and net realisable value for each separate item or group of items. Cost can be arrived at by using FIFO (first in-first out) or AVCO (weighted average costing). 4.1 The basic rule There are
(a)
Inventories might be valued at their expected selling price. (b)
Inventories might be valued at their expected selling price, less any costs still to be incurred in getting them ready for sale and then selling them. This amount is referred to as the net realisable value (NRV) of the inventories. (c)
Inventories might be valued at their historical cost (ie the cost at which they were originally bought).
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