Maintain Assets and Inventory

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Learning Outcome: Comply with organisational asset

acquisition proceduresReconcile asset register and inventory

records to general ledgersRecord inventory flowsRecognise new assets and asset

categoriesPrepare schedules and ad hoc reportsRecord disposal of fixed assets

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Comply with organisational asset acquisition procedures

Approval and authorisation for purchase of assets is obtained

Quotes are obtained and other organisational purchase procedures are followed

All asset purchases documentation and invoices are reconciled.

Assets received are checked for compliance with the quantity and quality as per documentation

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Asset Any item of economic value owned by an

individual or corporation, especially that which could be converted to cash.

Example:Cash Securities Account receivable Inventory office equipment Real estate Car Other property

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Types of Assets Current Assets Non-current AssetsCurrent Assets: Asset that is to be converted

to cash within 12 months of the balance sheet date.

Non-Current Assets: Asset that is not to be converted to cash within

12 months of the balance sheet date.Resource that is not expected to be consumed

or sold within the normal operating cycle of a firm, such as equipment, machinery and plant.

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TANGIBLE AND NON TANGIBLE ASSETS Tangible Assets: Assets that have a physical existence,

or give the holders definite set of financial rights are classified as tangible assets, as opposed to intangible assets such as patents and goodwill. Examples of tangible assets include land, machinery, bank deposits and investments.

Intangible Assets: An asset that is not physical in nature. Corporate intellectual property (items such as patents,trademarks,copyrights,businessmethodologies),goodwill and brand recognition are all common intangible assets in today's marketplace

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RECONCILE ASSET REGISTER & INVENTORY RECORDS TO GENERAL LEDGERS

All asset expenditures are reconciled in accordance with organisation’s policies, procedures and practices to the accounting records.

Discrepancies are identified and actioned according to organisation’s policies, procedures and practices.

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Record inventory flowsPurchase of inventory is recorded in

subsidiary ledger Asset register is established and

maintained Periodic and perpetual records are

maintained Inventory flow assumptions are

applied as appropriate Inventory is valued using appropriate valuation rules

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Recognise new assets and asset categoriesNew asset categories are identified where

appropriate Proforma for input of asset details is

prepared and processed accurately and in a timely fashion

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Prepare schedules and ad hoc reports Spreadsheets/ ad hoc reports are

prepared as requested

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Record disposal of fixed assetsAssets are disposed of in accordance with

organisational procedures, relevant legislative requirements and under supervision of appropriate persons.

Disposal price data is obtained and entered into accounting records.

Accounting procedures are followed for the removal of assets from ledger and asset register

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Documentation

Purchase requisitions Purchase orders Quotes Delivery reports Invoice from suppliers

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Asset expenditures Inventory Materials Equipment Land and buildings Freight in Insurance in transit Installation and testing costs

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Organisation’s policies, procedures and practicesMaintenance of capital expenditure items Preparation of reconciliation reports Stock takes Inventory management

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Inventory valuation rules First in- first out Weighted average Specific identification

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Inventory flow assumptionsCost Net realisable value Calculations based on gross margins

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Ad hoc reportsDepreciation schedule Asset register Total purchase and disposals for a period Spreadsheets Output from dedicated fixed asset software Inventory turnover analysis

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Relevant legislation Consumer Credit Code Privacy Act Secrecy Laws Australian Consumer and Competition

Commission (ACCC) Financial Institutions (FI) Code Credit Reference Association of

Australia (CRAA) Australian Accounting Standards Stamp Duties Act Taxation Assessment Act Bills of Exchange Act

Electronic Funds Transfer (EFT) Code of Conduct Financial Transaction Reports Act Cheques and Payment Orders Act Corporate Law Commercial Tenancies Act Land Tax Assessment Act Prescribed Payments Act Payroll Tax Assessment Act

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Disposal price data

Cash Cost of removal Restoration expenses Trade-in amount Other costs associated with disposal

What Is Inventory?Stock of items kept to meet future demandPurpose of inventory management

how many units to orderwhen to order

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Types of InventoryRaw materialsPurchased parts and suppliesWork-in-process (partially completed)

products (WIP)Items being transportedTools and equipment

Inventory CostsCarrying costCarrying cost

cost of holding an item in inventorycost of holding an item in inventoryOrdering costOrdering cost

cost of replenishing inventorycost of replenishing inventoryShortage costShortage cost

temporary or permanent loss of sales temporary or permanent loss of sales when demand cannot be metwhen demand cannot be met

Inventory Control SystemsContinuous system (fixed-order-Continuous system (fixed-order-

quantity)quantity)constant amount ordered when constant amount ordered when

inventory declines to inventory declines to predetermined levelpredetermined level

Periodic system (fixed-time-Periodic system (fixed-time-period)period)

order placed for variable amount order placed for variable amount after fixed passage of timeafter fixed passage of time

Merchandising Operations

Cost of goodssold

$$$

Merchandise Inventory

Purchases C/G/Sold

Inventory Cost Flows

Flow of Costs through Manufacturing and

Merchandising Companies

Inventory control is important for:1. Ensuring availability of inventory items2. Preventing excessive accumulation of

inventory items

The perpetual system maintains a continuous record of inventory changesThe periodic system updates inventory records only periodically

Inventory Control

Purchases are debited to Inventory account

Freight-in, Purch. R & A and Purch. Disc. are recorded in Inventory account.

Debit COGS and credit Inventory account for each sale.

Purchases are debited to Purchases account.

Freight-in, Purch. R & A and Purch. Disc. are recorded in their respective accounts.

COGS is computed only periodically:

COGAS- Ending Inventory

COGS

Perpetual Method Periodic Method

Inventory Systems

Legal title to goods typically determines inclusion.The following goods are included in “seller’s” inventory:

1. Goods in transit (FOB Destination)2. Goods on consignment with consignee3. Goods, sold under buy back agreements 4. Goods, sold with high rates of return5. Installment sales (if bad debts can not be

estimated)

Items to be Included in Inventory

Generally accounted for on a cost basis.Product costs are “inventoriable” costs,

whereasPeriod costs are not inventoriable costs

Abnormal inventory costs are accounted for as period costs

Costs Included in Inventory

The objective is to most clearly reflect periodic income.Cost flow assumptions need not be consistent with physical flow of goods.The cost flow assumptions are:

1 Specific identification 2 Average cost3 First-in, first-out (FIFO) and 4 Last-in, first-out (LIFO)

Cost Flow Assumptions

Susieworld reports the following transactions for 2004:

Date Purchases Purchase CostMay 12 100 units $1,000Aug 14 200 units 2,200Sep 18 120 units 1,800

420 units $5,000On December 31, the company had 20 units on hand and uses the periodic inventory system. What are the cost of goods sold and the

cost of ending inventory?

Cost Flow Assumptions: Example

Given Data:Date Purchases CostMay 12 100 units $1,000

Aug 14 200 units $2,200

Sep 18 120 units $1,800420 units $5,000

Steps:

1. Calculate per unit average cost: $5,000/420 = $11.905

2. Apply this per unit average cost to units sold to get COGS: 400 x $11.905 = $4,762

3. Apply the per unit average cost to units remaining in inventory to determine Ending inventory: 20 x $11.91 = $238

Average (Weighted) Method

Given data: Date Purchases CostMay 12 100 units @ $10$1,000Aug 14 200 units @ $11$2,200Sep 18 120 units @ $15$1,800 420 $5,000

Cost of goods sold $4,700

20 * $15 = $300Ending inventory$5,000

Cost of goodsavailable

Cost of goods sold (FIFO)$1,000 (100 sold)$2,200 (200 sold)$1,500 (100 sold; 20 end inv)$4,700

First-In, First-Out (FIFO) Method

Cost of goods sold $4,800

20 * $10 = $200Ending inventory$5,000

Cost of goodsavailable

Cost of goods sold (LIFO)$ 800 (80 sold; 20, end inv)$2,200 (200 sold)$1,800 (120 sold)$4,800

Given data: Date Purchases CostMay 12 100 units @ $10$1,000Aug 14 200 units @ $11$2,200Sep 18 120 units @ $15$1,800 420$5,000

Last-In, First-Out (LIFO) Method

The ending inventory in units is the same in all three methods: the cost is different.

The cost of goods sold and the cost of ending inventory are different, but

The cost of goods available is the same in all three methods.

LIFO would result in the smallest reported net income (with rising prices).

Cost Flow Assumptions: Notes

Cost of Goods Sold (COGS)Beginning Inventory + Cost of additional

Inventory manufactured or purchased during the year – Ending Inventory.

For Example: $14,000 cost of inventory at beginning of year+ $8,000 cost of additional inventory purchased during year- $10,000 ending inventory= $8,000 cost of goods sold.

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LIFO METHODLIFO, which stands for "last-in-first-out," is

an inventory costing method which assumes that the last items placed in inventory are the first sold during an accounting year.

Thus, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year, rather than at the end. LIFO is one method used to determine Cost of Goods Sold for a business

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Example : lifo method Batch 1: Quantity 2,000 pieces, Cost to produce $8000 Batch 2: Quantity 1500 pieces, Cost to produce $7000 Batch 3: Quantity 1700 pieces, Cost to produce $7700 Let's say you sold 4000 units during the year, out of the 5200 produced.

Then calculate the unit costs for each batch:Batch 1: 8000/2000 = 4

Batch 2: 7000/1500 = 4.667 Batch 3: 7700/1700 = 4.529

So, of the 4000 units sold, using LIFOThe first 1700 units sold from the last batch cost $4.529 per unitThe next 1500 units sold from the second batch cost $4.667 per unit

And the last 800 units sold from the first batch cost $4. The cost of the remaining 1200 units from the first batch is $4 each. These units will start off

the next year.

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FIFO METHODFIFO, which stands for "first-in-first-out," is an inventory

costing method which assumes that the first items placed in inventory are the first sold.

Thus, the inventory at the end of a year consists of the goods most recently placed in inventory. FIFO is one method used to determine Cost of Goods Sold for a business.

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EXAMPLE: FIFO METHOD Batch 1: Quantity 2,000 pieces, Cost to produce $8000 Batch 2: Quantity 1500 pieces, Cost to produce $7000 Batch 3: Quantity 1700 pieces, Cost to produce $7700 Let's say you sold 4000 units during the year, out of the 5200 produced.

Then calculate the unit costs for each batch:Batch 1: 8000/2000 = 4

Batch 2: 7000/1500 = 4.667 Batch 3: 7700/1700 = 4.529

So, of the 4000 units sold, using FIFOThe first 2000 units sold from the first batch cost $4 per unit.

The next 1500 units sold from the second batch cost $4.667 per unit.

And the last 500 units sold from the third batch cost $4.529. The cost of the remaining 1200 units from the third batch is $4.529. These units will start off

the second year.40

PERPETUAL METHOD OF INVENTORY Any business that keeps real-time information on inventory levels and that tracks inventory on

an item-by-item basis is using the perpetual method. For example, retail locations that use barcodes and point-of-sale scanners are utilizing the perpetual inventory method.

Advantage:

First, it allows a business to see exactly how much inventory they have on hand at any given moment, thereby making it easier to know when to order more.

Second, it improves the accuracy of the company’s financial statements because it allows very accurate recordkeeping as to the cost of goods sold over a given period. (CoGS will be calculated, quite simply, as the sum of the costs of all of the particular items sold over the period.

Disadvantage:The primary disadvantage to using the perpetual method is, of course, the

cost of implementation.

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Periodic Method of InventoryThe periodic method of inventory is a system in

which inventory is counted at regular intervals (at month-end, for instance). Using this method, a business will know how much inventory it has at the beginning and end of every period, but it won’t know precisely how much inventory is on hand in the middle of an accounting period.

A second drawback of the periodic method is that the business won’t be able to track inventory on an item-by-item basis, thereby requiring assumptions to be made as to which particular items of inventory were sold

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Assets Register An Assets Register is a management tool

used to record the description of the asset, location, ownership details, quantity, condition and certain financial information relating to the asset valuations.

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Asset AcquisitionA buyout strategy in which key assets of the target

company are purchased, rather than its shares.

This is particularly popular in the case of bankrupt companies, who might otherwise have valuable assets which could be of use to other companies, but whose financing situation makes the company unattractive for buyers (an asset acquisition strategy may be pursued in almost any case where the potential target company has an unattractive financing structure.

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