Business Accounting

EMBA LECTURE 6

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Contents for Final Term

 Inventory

 Current receivables and payables

 Non-current Assets (Tangible and Intangible)

 Capital structure

 Adjusting and correcting entries

 Final Accounts

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Lecture Plan

 Inventories
Learning Areas

Detailed  Journal entries

 Costing methods (FIFO, Average cost)
Discussion  IAS 2 Valuation

Chapter 6
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Inventory

 Inventory cycle
 P&L  Balance Sheet  P&L
 Purchases  unsold/Unused  Closing Inventory  Sold  COGS

 Cost of Goods Sold

Opening inventory
+ Purchases
- Closing inventory

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Journal entries

 Recorded at the end of period

 Inventory carried forward from last accounting period
 Unsold inventory taken to next accounting period

 Practice question

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Cost of Inventories

 Cost
 Cost of purchase – material costs, import duties, freight
 Cost of conversion – direct costs and production overheads
 Other costs – incurred in bringing the inventories to their current location and condition'

 Exclusions - selling costs, storage costs, costs of abnormal wastage

 Costing methods
 FIFO – First In First Out
 Average Cost – Periodic or Moving Weighted Average

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Practice Question

 Invicta has closing inventory of 5 units at a cost of $3.50 per unit at 31 December
20X5. During the first week of January 20X6, Invicta entered into the following
transactions:

Purchases
• 2nd January – 5 units at $4.00 per unit
• 4th January – 5 units at $5.00 per unit
• 6th January – 5 units at $5.50 per unit

Invicta sold 7 units for $10.00 per unit on 5th January.

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Valuation of Inventories

 Lower of Cost and Net Realisable Value (NRV)

 Conditions that warrant comparison must exist
 Obsolescence, deterioration, damage etc.

 Net Realisable Value

 Fair value/Market value of the item
 Less any further costs that must be incurred in order to sell that item

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