a n d u

ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS

_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a [a [a
SESSION 5
t]i s b . ed u
h a n s ali/ S

n s a li 2 0 2
n
5
s a li 2 0 2 5

[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns
Inventory d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
S h a & 02 5 [a
a lin
B
a lin
B
li2 S h S h
Evaluating efficiency of operations
ha
n s a
d u
/
d u
/
B . e .e
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.1 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
Learning objectives a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
1. Explain the accounting basics for inventory i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
2. Apply inventory cost flow assumptions / S – LIFO, FIFO, h a average cost
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
3. Understand the principleisofb lower of cost or amarket n s a li a li
t] h n s n s
[a B h a h a
4. Learn techniques 0to25evaluate the efficiency a lin of operations _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
20 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.2 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
Inventory - meaning, need, and basic accounting a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
h n
B course of businesshaor items used in u u
▪ Inventory definition: goods held for sale in the normal
i n . ed . ed
l B
the manufacture of products that will be sold ha
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/S 2 2
. e a 2 0 2 0
▪ Need for inventory
s b n s ali a li
▪ By holding an inventory of ]i
tfinished product, a firm a
h can fill the orders more quickly s
n andan s
[a
5service B h a h
provide better customer 2 l i n B B
l i 20to be manufactured,Shinventories a
l i n_up thelin_
▪ When products have
s a / of raw material
h a
speed
h a
a n
process of satisfying customer demand d u l i/S ali/S
B h . e s a s
i n _ i s b a n a n
▪ h al of inventory [at]
Categories B h B h
S 2 5 l in l in
0 a a
▪ Merchandising company
a li2 - finished goods / S h
/ S h
▪ Manufacturingncompany s u u
i. raw B ha
material . ed .e d
l i n _
t ] i sb t]isb
ii. a work-in-progress (WIP) [a [a
S h 5 5
iii. finished goods 0 2 0 2
2 2
s ali s ali
h an han
_ B _B
li n li n
a a
5.3 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Basics of inventory accounting h n u u
n B h a ed ed
l i B . .
Illustration 1. h a
l i n_
t]i sb t]isb
/S h a
5 [a 5 [a
u
HM Corp. buys certain gift items fromda wholesaler and sells S
li/ them to customers at a202 202
. e a i
premium. Following purchase and]issale b transactions happened a ns in the month of June s al2020. s ali
[a t B h a n a n
i. What is the ending balance 25 of inventory? lin B h B h
2 0 h a n _ n _
ii. How do we accountalfor i this?
/ S ali a li
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a Units Price
[a Amount B B
5 lin lin
PurchaseS 2,000 02 10 20,000 a a
a l i2 S h S h
Sales 1,500 s 12 18,000 / /
n u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
20 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.4 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu hB . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
• Inventory is purchased and is capitalized and carriedlinon the balance sheet Bash an asset until it is sold. . ed . ed
Most often, inventory is purchased on credit – Accounts h a payable, AP l i n_
t] i sb t]isb
• When the inventory item is sold, its cost / Stransferred to costhaof goods sold on the income
is 5 [a 5 [a
d u li/ S 2 2
statement. . e a 2 0 2 0
s brevenue to yield gross n s a li a li
• Cost of goods sold is matched against t] i h a profit. n s n s
SALES – COGS = GROSS PROFIT [a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
Purchase a ns Inventory Dr 20,000 d u (A+) l i /S h
l i /S h
B h . e s a s a
n_ isb
AP Cr 20,000 (L+) n n
l i t] ha h a
h a [a B B
Sale S AR Dr
2 5 18,000 (A+) lin lin
0 a a
a li2 Revenue Cr 18,000 (R+ /→ShSE+) / Sh
a ns d u d u
Matching of costs Bh COGS Dr 15,000 (E+ → . eSE-) .e
n _ s b s b
a li Inventory Cr
at ]i
15,000 ]i
(A-)
a t
Sh 2 5[ 2 5[
l i 20 l i 20
n sa n sa
B ha Bha
l i n_ l i n_
h a h a
5.5 S S
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Costs included (capitalized) in inventory h n u u
n B h a ed ed
l i B . .
h a
l i n_
t] i sb t]isb
⚫ Capitalize all costs incurred to ready inventory / S for sale h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
⚫ Following are typically included i
t] in the inventory cost h a n s n s
[a B h a h a
⚫ purchase cost including 025 sales taxes a lin _ B _B
li 2 S h li n li n
⚫ freight-in a / a a
a ns d u l i /S h
l i /S h
⚫ all other h taxes and duties e a a
B . s s
l i
⚫ insurance n_ for goods in transit t ]isb ha n
h an
h a [a B B
⚫ Sstorage until good ready 5
2 to sale (but not after) alin lin
0 a
⚫ In manufacturing
a li2set up – cost of production/such S h as direct
/ S h labor, manufacturing
ns
overheads,adepreciation of factory & machinery,
d u etc.
d u
B h . e .e
l i n_ t ] isb t]isb
⚫ Exclude:
h a [a [a
S 2 5 2 5
⚫ selling costs
2 0 2 0
li
acustomers) ali
⚫ freight-out (delivery to
n s n s
⚫ storage for ready-to-sell h a h
goods
a
_ B _B
a lin a lin
5.6 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
Inventory cost flow assumptions a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n sa / S / S
B h a n u u
i n h . ed . ed
l B
• In the illustration 1 there was just one S ha
purchase transaction. l i _
nBut, goods are purchased t] isb t]isb
/ h a [a [a
and sold at various points of timedduring the year. li/ u S 2 5 2 5
. e a 2 0 20
s b n s a li a li
• At each time the price might
i
t] be different. Bh a n s n s
[a h a h a
025 a lin _ B _B
• Hence certain assumptions li 2 have to be S h to allocate cost between
made n
li ending n
li inventory
s a / h a h a
and COGS. an d u l i /S l i /S
B h . e s a s a
i n_are some common b
iscost a n an
• Following
a l a t] flow assumptions: h h
h 5 [ B B
S
02 a lin a lin
►
a li2
Specific identification
/ S h
/ S h
n s u u
►
B ha first-out (FIFO)
First-in, . ed .e d
l i n_ t ] isb t]isb Cost Flow
► ha Last-in, first-out (LIFO) [a [a Assumptions
S 2 5 2 5
2 0 2 0
► Average-cost
s ali s ali
h an han
_ B _B
li n li n
a a
5.7 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n a / S / S
Illustration 2 HM TV Company purchases threeBidentical ha 50-inch TVs a n s on different dates u u
i n h . ed . ed
at costs of $700, $750, and $800. During the year l HM sold two sets B at $1,200 each. These
h a
l i n_
t] i sb t]isb
facts are summarized below. /S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
Purchases t]i h a n s n s
[a B h a h a
February 3
025 1 TV
a linat $700 _ B _B
March 5 li 2 S1hTV at $750 li n li n
a / a a
May 22 a ns d u 1 TV at $800
l i /S h
l i /S h
Sales _Bh . e s a s a
l i n t]i sb a n
h($1,200Bx2) h a n
June
h a1 [a 2 TVs for $2,400 B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.8 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
Specific Identification i n h . ed . ed
l B
If HM Co. sold the TVs that were purchased h a
on February l
3 i n_
and May 22, then t] i sb t]isb
/S h a
5 [a 5 [a
cost of goods sold is $1,500 ($700.ed+ $800), and ending u S
li/ inventory is $750. 202 202
b s a li li
i s a n s a s a
[a t] B h a n a n
Cost of goods sold25= $700 + $800 = $1,500 lin B h B h
2 0 h a n _ n _
a li / S ali a li
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
Ending inventory = $750
i n _ i s b i s b
al at ] a t ]
h [ [
• ThisSpractice is relatively rare 0 25 025
a li2 a li2
n s n s
• Cost flow assumption a should a be consistent with the physical movement of
B h B h
goods n _ n _
a li a li
5.9 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Illustration 3. Data for HM Mart is as follows Bh h a n d u d u
l i n B . e . e
h a
l i n_
t] i sb t]isb
HOUSTON ELECTRONICS /S h a
5 [a 5 [a
u
Astrod Condensers li/ S 2 2
. e a 2 0 2 0
Date Explanation s b Units n s Unit Cost Total Cost a li a li
t] i h a n s n s
Jan-01 Beginning inventory [a B
100 $10 h a
$1,000 h a
025 a lin _ B _B
Apr-15 Purchaseli2 S h 200 11 li n li
2,200 n
a / a a
Aug-24 a ns
Purchase
d u 300 12 /Sh
l i l i /S h
3,600
Nov-27 B h
Purchase . e 400 s a
13 s a 5,200
_ s b n n
a lin Total units available a t ]i for sale 1,000 ha h a $12,000
5[ B B
Sh 2 450 ali
n lin
Units in ending
i2 0 inventory
h h a
Units ssolda l S
/550 / S
a n d u d u
B h . e .e
n _ s b s b
a li at ]i a t ]i
Sh
Determine ending inventory and
2 5[ COGS 2 5[ using
i. FIFO method l i 20 l i 20
a sa
ii. LIFO method ans n
B h B ha
iii. Average cost
i n _ method i n_
a l a l
5.10 S h S h
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n sa / S / S
First-In, First-Out (FIFO) B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
◆ Costs of the earliest goods purchased / S are the first tohabe recognized in 5 [a 5 [a
determining cost of goods sold. d u li/S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
◆ Think of a conveyor belt. [a B a a
25 lin B h B h
2 0 h a n _ n _
◆ FIFO cost flow assumption a li often parallels
/ S actual physical flow a a li
li of merchandise.
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ 27-Nov 24-Aug
t]isb 24-Aug 15-Apr
ha n
1-Jan
h an Physical Flow
a [a B B
Sh 2 5 l i n l i n of Goods

l i 20 S ha Sha In
a / /
Unitsa ns 400 50 250d u 200
d u 100
B h . e .e Out
l i n_Price $13 $12 ]isb$12 ]isb $11 $10
a t
[a $3,000 t
[a $2,200 $1,000
Sh Amount $5,200 $600
2 5 2 5
2 0 2 0
s ali s ali
Ending
h anInventory
h an Cost of goods sold Total
_
UnitsB _B 450 Units 550 1,000
i n i n
h al Amount h al $5,800 Amount $6,200 $12,000
5.11 S S
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Last-In, First-Out (LIFO) h n u u
n B h a ed ed
l i B . .
◆ Costs of the latest goods purchasedhare a the first to beinrecognized
l
_ in t]i sb t]isb
determining cost of goods sold. /S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
◆ Think of a cookie jar. t]is
b a ns s ali s ali
[a B h a n a n
25 coincides withaactual lin B h B h
◆ Note that this seldom 2 0 h physical flow of n _
merchandise. n _
a li / S a li a li
Exceptions include
a ns goods stored
d u in piles, such as coal or
l i /S hhay. Sh
l i/
B h . e s a a
s Physical Flow of
i n _ i s b a n a n
Date al Units Price Amount [a t] Cost of goods soldBh Ending
B h Inventory Goods
h 5
S
27-Nov 400 13 025,200 Units a lin
550 a lin
a l i2 Amount S h
$7,000 S h Out
24-Aug 150 s12
n
1,800 / / In
h a 12 d u d u
24-Aug 150 B 1,800 . e .e
n _ s b s b
15-Apra li 200 11 2,200 at ]i Ending
a t ]i Inventory

S h 5 [ Units
5 [ 450
1-Jan 100 10 1,000 02 Amount 0 2 $5,000
l i 2 l i 2
n sa n sa
h a h a Total
_ B _B 1,000
i n i n
h al h al $12,000
5.12 S S
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Average Cost h n u u
n B h a ed ed
l i B
asale on the basisin_of weighted-average ]isb . .
◆ Allocates cost of goods available for h l t t] i sb
/S h a
5 [a 5 [a
unit cost incurred. d u li/ S 2 2
. e a 2 0 20
s b n s a li a li
t] i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t] isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
Cost aper
_
lin Unit Ending t ] isbInventoryt ] isb Cost of Goods Sold
h [ a [ a
S
$12,000/1,000 units 0 25450 units 025 × $12 $12,000 - $5,400
l i 2 l i 2
= $12 per unit n sa n sa = $5,400 = $6,600
h a h a
B B
l i n_ l i n_
h a h a
5.13 S S
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Financial statement impact of cost flow assumptions h n u u
n B h a ed ed
l i B . .
HOUSTON HMELECTRONICS
Mart h a
l i n_
t] i sb t]isb
/ S h a While the sales, opening
[a [a
Income Statement
Condensed Income Statements u S 5 5
. ed ali/ inventory, and purchases
2 0 2
2 0 2
Explanation FIFO b LIFO n s Cost are same in allalthe
Avg. i three a li
t]i s a
h $18,500 s s
Sales revenue [a
$18,500 $18,500 B cases, ending a n inventory,a n
25 lin h
Band hence h
B profit
Beginning inventory 2 0 1,000 h a
1,000 1,000 COGS, n _ n _
a li / S ali a li
Purchases
a ns 11,000 u
d
11,000 11,000
l i
isShgoing S
/ l i /
tohbe different.
Cost of goods available B h sale
for 12,000 . e 12,000 12,000 s a s a
l i n_ t]i sb ha n
h
But an
are they really
Less: Endingh ainventory [a5,800 5,000 5,400
B B
Cost of goodsS sold 5
2 6,200 7,000 lin 6,600alin different?
i2 0 h a h
Gross profit a l 12,300 11,500 / S / S
11,900
n s u u
Operating expenses Bha 9,000 . d
9,000
e .e d 9,000
i n_ taxes 3,300 t]is 2,500
b isb
Income before income
a l a a t ] 2,900
Sh (30%)
Income tax expense 99025[ 2 5[ 750 870
0 0
Net income li2
$2,310
a a li2 $1,750 $2,030
s s
h an han
_ B _B
li n li n
a a
5.14 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu hB . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n
a(opposite if pricesnare a
s decreasing) / S / S
• If prices are increasing, then the following are true B h a u u
i n h . ed . ed
• LIFO will show lower profit as more hrecent l B
a costs are matched
l i n _ to sales
t] i sb t]isb
S
/values a [a [a
• LIFO will show lower inventory u because itS h
reflects older market prices. 5 5
Hence, LIFO is permitted only.eunder d US GAAP.sal
i/ 0 2 0 2
b n li 2 li 2
i s a s a s a
[a t] B h a n a n
25 lin B h h
Bcosts,
• Since LIFO ending inventories 2 0 can be a
significantly
h lower than _
replacement
n n _
companies using LIFO a li are required to/ disclose S the amount at a
which
li
li the ainventories
a ns u
dused FIFO method. The adifference l i /S h
i /S h
l between these
would have been B h had the company . e s s a
two methods l i n_is called the LIFO t] isbreserve. ha n
h an
h a [a B B
S FIFO Inventory 2 5 - LIFO Inventory =linLIFOlireserve n
0 a a
a li2 / S h
/ S h
s
• LIFO reserve cananbe viewed as an ‘unrealized u holding u gain’ – a gain that results from
h e d e d
holding inventory _ B as prices are rising b. b .
li n t ]i s t ]i s
a a a
Sh 2 5[ 2 5[
l i 20 l i 20
n sa n sa
B ha Bha
l i n_ l i n_
h a h a
5.15 S S
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
Lower of cost or market rule h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
h n u u
When the market value of inventory is lower thanliits n Bcost, companiesBhave ha to “write down” . ed . ed
the inventory to its market value in the periodSin hawhich the price decline l i n_ occurs. Example of t]isb t]isb
/ h a [a [a
conservatism. u S 5 5
. ed ali/ 2 0 2
20 2
s b n s a li a li
i
t] worth $100,000. AtBthe a
h end of the fiscal year, it becomes n s n s
Illustration 4. HM Corp has inventory [a h a h a
clear
that due to certain change in market 025 trends those goodsalcan in only be sold at $90,000. How _ B would _BHM
2
lini the value of inventory? S h li n li n
Corp account for this change a / a a
a ns d u l i /S h
l i /S h
Inventory writedown B h Dr 10,000 (E+ →.eSE-)
loss s a s a
Allowance l i n_ inventory writedown
for t]isbCr 10,000 (XA+) ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.16 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
What happens if the value of the inventory B h rebounds? a n u u
i n h . ed . ed
l B is eventually sold isb
• Under US GAAP – do nothing. The gain will hbe a realized when the iinventory
l n _
t] t] i sb
• Under IFRS and Ind AS – The allowance that / S was earlier created h acan be reversed, but only to the
5 [a 5 [a
d u li/ S 2 2
extent of the existing allowance . e a 2 0 20
s b n s ali a li
• For example continuingafrom
i a
t] Illustration 4, ifBath the end of year 2, when theabook s
n value s
n of
[ h h a
inventory is $90,000,25the market value increases lin to $105,000, there is a B potentialB$15,000
i 2 0 a
hallowance is only $10,000, lonly i n _ i n_ can be
gain on the value a l increase. But as
/
the
S a l
$10,000
a
reversed ans u h
i/S ali/S
h
h . ed a l
_ B b n s n s
Allowancei n for inventory
t]i s
writedown Dr 10,000 (XA-) a a
h al Gain on reversal of[aallowance Cr 10,000 (R+ →SE+) B h B h
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.17 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
lin ]i a
Footnotes relating to inventory /S h a
5 [a t
i n B h
2 l
s ali l i2 0 h a h
n
a– Page 310 s a / S / S
Refer the following – (i) Note 2.9 – Page 330, (iii) Note 1.3(i) B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.18 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.19 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n
a the year? Is this a significant sa / S / S
Q1. How much inventory does the company hold at the end B h
of a n amount? u u
i n h . ed . ed
l B
h a
l i n_
2022 2023
t] i sb t]isb
Total inventory /S h a 50,884 48,670 5[a 5 [a
d u li/S 2 2
Total assets . e a 297,469 322,851 2 0 2 0
s b n s a li a li
Total inventory / Total assets t]i h a 17.11% s
n15.07%an s
5 [a B h a h
2 l i n B B
Q2. Why and how much did lthe i 20company record an a
hinventory write-down? Is thisliansignificant _ i n_ amount?
S a a l
n sa / h h
h a ed u
a l i/S 2022 a l i/S 2023
B . s s
Write-down lin_ t]isb ha n
h a n
4,584 4,869
a [a B B 215,452
Sales Sh 2 5 l i n l i n 246,697
Write-down / Sales l i 20 S ha Sha 2.13% 1.97%
s a / /
n u u
B ha . ed .e d
Q3. What method n_ does the company use to isvalue
b its
isbinventory?
a l i t ] t ]
Weighted average
h method 5 [a 5 [a
S 2 2
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.20 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
Evaluate the efficiency of operations halin 5 [a t ]i
B h a
/S 2 l i n
s ali l i2 0 h a h
a n a
s goods to / S / S
1. Purchase of raw material / 2. Efficiently process the
B h 3. Sale of finished
a n u u
goods from suppliers raw material to produce i n customers (typically h on credit)
. ed . ed
l B
a
finished hgoods
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
Supplier d u
Retail or li/ S 2 2
. e a Customer 2 0 2 0
s bmanufacturingans ali a li
t]i h n s n s
5 [a firm B h a h a
5. The firm pays back 02its a lin 4. Customer pays back _ B the _B
li 2 S h firmali
n l in
suppliers
s a / h h a
a n d u l i /S l i /S
B h . e s a s a
Ideally, weliwant n_ to t]isb h a n
h a n
h a [a B B
• SellSthe inventory fast 2 5 lin lin
0 a a
• Get money from customers a li2 quickly
/ S h
/ S h
• Pay to the suppliers n s in time u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.21 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
1. Receivable days = 365 / Receivables turnover
a lin a t ]i h a
where, receivables turnover = Sales / Average Account Receivables h 5 [ n B
/S 2 l i
• Receivable days indicates the average days taken by the firm
s ali to collect its dues l i2 0from customers. h a h
Higher turnover and lower days indicate efficient credit n
a and collection policies sa / S / S
h
B it might indicate any n
a of the following- (i) ed u u
• If receivables turnover is deteriorating over time, n h ed
l i B
_ current period sales, (iii)isb . .
difficulties in collection, (ii) company extended h a credit terms to increase
l i n t] t] i sb
unsatisfied customers are refusing to settle/ S A/R due to poor product h a / service quality [a [a
u S 5 5
. ed ali/ 2 0 2
20 2
2. Inventory days = 365 / Inventory s bturnover n s a li a li
i
t] / Average Inventory h a n s n s
where, inventory turnover = [COGS a B h a h a
• Higher turnover and lower 025days indicate fast moving a lin inventory _ B _B
li 2 S h n n
lidue toalitechnological
• Low inventory turnover a indicates slow / moving inventory possible a
obsolescence or a ns in consumer dpreferences
change u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
3. Payable h adays = 365 / Payable[aturnover B B
5
S Payable turnover =2 COGS / Average Account payable
where, lin lin
0 a a
• Low turnover would a li2indicate (i) trouble in making / S h payments;
/ S h or (ii) the company enjoying
n s its supplier and hence extending u u
bargaining power
h a over
ed e d payment terms
• high turnover _ B rate might imply (i) suppliers b. .
unwilling
b to offer credit (i.e., insist on cash
i n ] i s ] i s
payment);
h al or(ii) the suppliers’ cash discounts [ at [ for
a t prompt payments are too good to pass up and
henceS the company is paying them2quickly. 5 25
0 0
a li2 a li2
4. Working capital days = Receivables n s n sdays + Inventory days – Payable days
• This indicates the number B ha of days
B hacash is stuck in the operating cycle
_ n_ liquidity purposes
• Generally, lowerathe lin betteralifor
5.22 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
ACTIVITY RATIOS
a lin
2022 2023
a t ]i h a
Sales h2,15,452 2,46,697 5 [ n B
/S 2 l i
s ali l i2 0 h a h
Net AR a n 66,818 s72,485
a / S / S
B h n
a 69,652 u u
Avg AR i n 58,289 h . ed . ed
l B
AR days [ 365 / (SALES /AVG AR)] Sh
a 99 l i n_ 103 t] isb t]isb
/ h a [a [a
u S 5 5
. ed ali/ 2 0 2
20 2
COGS i s b a n s 1,00,551 1,06,536sali s a li
a t] B h a n a n
Total inventory [ 50,884 48,670 h h
025 a lin _ B _B
Avg inventory li 2 S h 48,148 li 49,777
n li n
a / a a
Inventory days a n[s365 / (COGS/AVG d u INVENTORY)] 175 i/Sh 171
l l i /S h
B h . e s a s a
l i n_ t ] isb a n
h 1,00,551 a n
h 1,06,536
COGS h a [a B B
S 5 lin 22,662 lin
Accounts payable i202 h a h a 22,684
l S S
Avg AP n sa u
/
u
/ 20,386 22,673
a
h (COGS / Avg AP) ed e d
AP days =_B 365/ b . b . 74 78
li n t ]i s t ]i s
a a a
S h
2 5[ 2 5[
Inventory Day (1) 20 20 175 171
l i l i
AR Days (2) n sa n sa 99 103
AP Days (3) B ha Bha 74 78
_ _
WC DAYS (1)a+ lin(2) - a(3)
lin 200 196
5.23 S h S h
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
Coming up l i n B h . ed . ed
• Next session – PP&E h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
5.24 Sh Sh