Accounting for Inventory II and GST implications

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Learning objectives
1.
Describe how an entity determines its inventory on hand by
the way of a physical stocktake, and how the cost of
inventory is determined
2.
Determine the valuation of ending inventory and cost of sales
under alternative cost flow assumptions for the periodic
inventory system
3.
Present information on inventories in financial statements
4.
Apply the lower of cost and net realisable value, required by
accounting standards, for the valuation of inventory
5.
Understand the basic process and main features of the
goods and services tax (GST).
6.
Prepare journal entries related to inventory transactions,
taking into account the effects of GST. 3
Review on Inventory systems
Review on Inventory systems

•Cost of sales: Cost of sales: Beginning inventory + cost of goods purchase = costs of goods Beginning inventory + cost of goods purchase = costs of goods available for sale available for sale ––Ending inventoryEnding inventory
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LO1: Determining the cost of
LO1: Determining the cost of (ending) inventory on hand(ending) inventory on hand

•StocktakesStocktakes

–Periodic Inventory SystemPeriodic Inventory System

•Necessary to determine ending inventory and cost of Necessary to determine ending inventory and cost of salessales

–Perpetual Inventory SystemPerpetual Inventory System

•Used to verify accounting recordsUsed to verify accounting records

•Identifies loss, theft or deteriorationIdentifies loss, theft or deterioration 5
Firstly count physical inventory:
Firstly count physical inventory:

•assume 1,000 units were countedassume 1,000 units were counted
Secondly, determine the cost of counted inventory:
Secondly, determine the cost of counted inventory:

•Assumes the counted inventory were purchased at $10 per unit, the cost of Assumes the counted inventory were purchased at $10 per unit, the cost of ending inventory = 1,000 x $10 = $10,000ending inventory = 1,000 x $10 = $10,000
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LO1: Determining the cost of
LO1: Determining the cost of (ending) inventory on hand(ending) inventory on hand
TRANSFER OF OWNERSHIP
TRANSFER OF OWNERSHIP

•Goods in transit Goods in transit
-FOB (free on FOB (free on board)board)shipping pointshipping point
-FOB (free FOB (free on on board) board) destination.destination.

•Goods on consignmentGoods on consignment

–Agreement where ‘agent’ sells goods on behalf of Agreement where ‘agent’ sells goods on behalf of owner for a commissionowner for a commission
LO2: Assignment of cost to ending
LO2: Assignment of cost to ending inventoryinventory

•Four methods of inventory cost assignmentFour methods of inventory cost assignment

–Specific identificationSpecific identification

–FirstFirst–in, firstin, first–out (FIFO)out (FIFO)

–LastLast–in, firstin, first–out (LIFO)out (LIFO)

–Averaging methodAveraging method

•Weighted average (periodic inventory system)Weighted average (periodic inventory system)

•Moving average (perpetual inventory system)Moving average (perpetual inventory system)
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Assume physical units counted are 1,000 units and inventory were
Assume physical units counted are 1,000 units and inventory were purchased at $10 (Janpurchased at $10 (Jan–Apr), $11 (MayApr), $11 (May–Aug), $12 (SepAug), $12 (Sep–Dec) per unit.Dec) per unit.

•Cost of ending inventory = 1,000 x ? Cost of ending inventory = 1,000 x ?


LO2: Overview of cost flow
LO2: Overview of cost flow assumptionsassumptions
8

•Cost flow vs physical flow of inventoryCost flow vs physical flow of inventory
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10
What are the types of inventory systems?
What are the types of inventory systems?
What are the methods of inventory cost flow
What are the methods of inventory cost flow (inventory cost assignment)?(inventory cost assignment)?
What are inventory cost flow assumptions?
What are inventory cost flow assumptions?
Review
Review
Example
Example ––Inventory costing under Inventory costing under periodic inventory systemperiodic inventory system
11

•Cost of goods available for sale Cost of goods available for sale
=
Cost of sales + ending inventory
Cost of sales + ending inventory
Example
Example ––Specific Specific identification methodidentification method

•Units sold Units sold andandon hand are identified with a on hand are identified with a specific invoicespecific invoice

•If 18 units sold (per previous slide), assume:If 18 units sold (per previous slide), assume:

–1 unit from beginning inventory ($10)1 unit from beginning inventory ($10)

–12 units from 15 September purchase 12 units from 15 September purchase ($11)($11)

–5 units from 7 December purchase ($12)5 units from 7 December purchase ($12)
12
Cost of goods available for sale
Cost of goods available for sale ––37 units37 units
$412.00
$412.00
Less
Less: Cost of 19 units in the ending inventory: Cost of 19 units in the ending inventory
Date
Date
Units
Units
Unit Cost
Unit Cost
Total Cost
Total Cost
1/7
1/7
9
9
$10
$10
$ 90.00
$ 90.00
7/12
7/12
10
10
12
12
120.00
120.00
Cost of ending inventory
Cost of ending inventory ––19 units19 units210.00210.00
Therefore: Cost of sales
Therefore: Cost of sales ––18 units18 units
$202.00
$202.00
Example
Example ––Inventory costing under Inventory costing under periodic inventory systemperiodic inventory system
13
Example
Example ––FIRSTFIRST–IN, FIRSTIN, FIRST–OUT OUT (FIFO) Method(FIFO) Method
14

•FIFO method is based on the FIFO method is based on the assumptionassumptionthat the cost of the that the cost of the first units acquired is the cost of first units acquired is the cost of the first units soldthe first units sold
Example
Example ––Inventory costing under Inventory costing under periodic inventory systemperiodic inventory system
15
Example
Example ––LASTLAST–IN, FIRSTIN, FIRST–OUT OUT (LIFO) method(LIFO) method

•LIFO method is based on the LIFO method is based on the assumptionassumptionthat the cost of that the cost of the last units acquired is the the last units acquired is the cost of the first units soldcost of the first units sold
16
Example
Example ––Inventory costing under Inventory costing under periodic inventory systemperiodic inventory system
17
Example
Example ––WEIGHTED WEIGHTED AVERAGE methodAVERAGE method

•The weighted average The weighted average method calculates an average method calculates an average cost per unit and uses this to cost per unit and uses this to cost the ending inventorycost the ending inventory
18
Comparison of costing
Comparison of costing methodsmethods
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Note
Note: :

•Higher ending inventory Higher ending inventory →lower cost of saleslower cost of sales

•Lower ending inventory Lower ending inventory →higher cost of saleshigher cost of sales
Comparison of costing
Comparison of costing methodsmethods

•Specific IDSpecific ID

–Consistent with the actual movement of the inventoryConsistent with the actual movement of the inventory

–Offers room for manipulating profitOffers room for manipulating profit

•FIFOFIFO

–Reflects current prices in ending inventoryReflects current prices in ending inventory

–Does not permit manipulation of profitDoes not permit manipulation of profit

•LIFOLIFO

–Balance sheet values become outBalance sheet values become out–dateddated

–Profits can be manipulatedProfits can be manipulated

•Weighted average Weighted average

–Results in identical items being assigned the same valueResults in identical items being assigned the same value

–Tends to smooth out profit and inventory valuesTends to smooth out profit and inventory values
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Which method to select
Which method to select

❑Entity should choose based on a range of factorsEntity should choose based on a range of factors

❑Ideally specific identificationIdeally specific identification

❑LIFO LIFO notnotallowed under the accounting standardsallowed under the accounting standards

•ConsistencyConsistency

–Need to be consistentNeed to be consistent

–Must use the same accounting methods and Must use the same accounting methods and procedures from period to periodprocedures from period to period
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LO3&4 : Presentation in financial
LO3&4 : Presentation in financial statementsstatements
AASB 102 Inventories
AASB 102 Inventories

•Valuation basis must also be disclosed for each class Valuation basis must also be disclosed for each class of inventories of inventories
The lower of cost and net realizable value rule
The lower of cost and net realizable value rule

•Accounting standards require inventories to be Accounting standards require inventories to be valued at the lower of cost and net realisable valuevalued at the lower of cost and net realisable value

–Net realisable value is the estimated selling price in Net realisable value is the estimated selling price in the normal course of business less the estimated costs the normal course of business less the estimated costs of sale.of sale.
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Example:
Example:
If inventory is costed at $1,000, how much will be reported/valued in the balance sheet if ?
If inventory is costed at $1,000, how much will be reported/valued in the balance sheet if ?
a)
a)NRV is $1,100NRV is $1,100
b)
b)NRV is $950NRV is $950
LO5: Goods and Services Tax (GST)
LO5: Goods and Services Tax (GST)
23
The GST is a value
The GST is a value–added tax:added tax:

•i.e. tax is levied on the valued added by a business at each stage of production i.e. tax is levied on the valued added by a business at each stage of production and distribution chain.and distribution chain.
LO5: Understanding GST collected
LO5: Understanding GST collected
GST is collected by entities that:
GST is collected by entities that:

•are registered for GST are registered for GST

•when they make when they make taxable supplies taxable supplies in the course of their “enterprise” in the course of their “enterprise” (generally, a business).(generally, a business).
GST collected by a business on its sales is
GST collected by a business on its sales is remitted to the ATO.remitted to the ATO.
The amount of GST on a taxable supply is:
The amount of GST on a taxable supply is:

•10% of the value or GST exclusive price or10% of the value or GST exclusive price or

•1/11th of the GST inclusive price.1/11th of the GST inclusive price.
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Example:
Example:

•GST excusive GST excusive ––If the invoice price is $1,000 before GST. The amount of GST If the invoice price is $1,000 before GST. The amount of GST will be $100 ($1,000 x 10%)will be $100 ($1,000 x 10%)

•GST inclusive GST inclusive ––If the invoice price is $1,100 including GST. The amount of If the invoice price is $1,100 including GST. The amount of GST is $100 ($1,100 x 1/11)GST is $100 ($1,100 x 1/11)
LO5: Understanding GST collected
LO5: Understanding GST collected
GST
GST–free supplyfree supply

•No GST is collected on GST free sales.No GST is collected on GST free sales.

•Example:Example:
o
obasic food (not processed food)basic food (not processed food)
o
ohealth goods and health serviceshealth goods and health services
o
oeducational material and serviceseducational material and services
o
ochildcare serviceschildcare services
o
ogoods exported from Australiagoods exported from Australia
o
osupplies of transport services to or from Australiasupplies of transport services to or from Australia
o
osupplies by inwards dutysupplies by inwards duty–free shopsfree shops

•GST paid by a business on its purchases is credited by the ATOGST paid by a business on its purchases is credited by the ATO
Input taxed supply
Input taxed supply

•Example: Example:
o
ofinancial supplies such as making loans, dealing in money and issuing financial supplies such as making loans, dealing in money and issuing securities securities
o
othe supply of residential (not commercial) premises for residential rent the supply of residential (not commercial) premises for residential rent egeg, , renting a flat to a tenantrenting a flat to a tenant
o
othe sale, or supply under a longthe sale, or supply under a long–term lease (generally for at least 50 years), of term lease (generally for at least 50 years), of existing residential premises (not if they are new)existing residential premises (not if they are new)..
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LO5: Understanding GST paid
LO5: Understanding GST paid

•GST paid by a business on its purchases is GST paid by a business on its purchases is credited credited back by the ATOback by the ATOas an as an input tax credit.input tax credit.

•The amount of the input tax credit is the amount of GST The amount of the input tax credit is the amount of GST paid on the thing acquired.paid on the thing acquired.

•A business is entitled to an input tax credit for their A business is entitled to an input tax credit for their creditable acquisitions.creditable acquisitions.
o
oA thing is acquired for a “creditable purpose” if it is A thing is acquired for a “creditable purpose” if it is acquired in carrying on the taxpayer’s enterprise.acquired in carrying on the taxpayer’s enterprise.

•An input tax credit cannot be claimed unless the taxpayer An input tax credit cannot be claimed unless the taxpayer holds a complying tax invoice.holds a complying tax invoice.
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LO5: Calculating net amount of GST
LO5: Calculating net amount of GST ––remittance of GST to ATOremittance of GST to ATO
When a GST registered business lodges a Business Activity Statement
When a GST registered business lodges a Business Activity Statement (BAS), the net amount of GST must be calculated:(BAS), the net amount of GST must be calculated:
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LO5: GST Example
LO5: GST Example ––remittance of GST to ATOremittance of GST to ATO

▪Marc runs a computer retail outlet and is registered for GST. Marc runs a computer retail outlet and is registered for GST.

▪Marc purchased a computer from a wholesaler for $880 (GST inclusive) and Marc purchased a computer from a wholesaler for $880 (GST inclusive) and receives a complying tax invoice. The GST paid on the purchase is $80, which receives a complying tax invoice. The GST paid on the purchase is $80, which is calculated as $880 x 1/11, and claimed as an input tax credit in Marc’s BAS.is calculated as $880 x 1/11, and claimed as an input tax credit in Marc’s BAS.

▪Marc then sells that computer for $2,200 (GST inclusive) to a customer. The Marc then sells that computer for $2,200 (GST inclusive) to a customer. The GST collected on the supply is $200, which is calculated as $2,200 x 1/11. The GST collected on the supply is $200, which is calculated as $2,200 x 1/11. The $200 is remitted to the ATO.$200 is remitted to the ATO.

▪How much GST should be remitted to (or refunded by) ATO?How much GST should be remitted to (or refunded by) ATO?
Net GST collected by Marc is $200 on supply
Net GST collected by Marc is $200 on supply –$80 on acquisition = $120$80 on acquisition = $120
Net $120 is remitted to the ATO
Net $120 is remitted to the ATO
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Record the general journal entries for the following June 2015
Record the general journal entries for the following June 2015 transactions for City Management Services:transactions for City Management Services:
Jane Morris deposited $240 000 cash into an account opened for the
Jane Morris deposited $240 000 cash into an account opened for the management services businessmanagement services business
Dr Cash
Dr Cash240 000240 000
Cr J. Morris, Capital
Cr J. Morris, Capital 240 000240 000
Purchased building for $300 000 plus GST.
Purchased building for $300 000 plus GST.
Dr Building
Dr Building 300 000300 000
Dr GST Paid (an asset account)
Dr GST Paid (an asset account)30 00030 000
Cr Cash
Cr Cash 330 000330 000
LO5: GST IN PRACTICE: Illustrative example
LO5: GST IN PRACTICE: Illustrative example
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LO6: GST IN PRACTICE:
LO6: GST IN PRACTICE:
Illustration of a perpetual inventory system
Illustration of a perpetual inventory system
Retailer A purchased a table on credit from its
Retailer A purchased a table on credit from its manufacturer for $440 (GST inclusive)manufacturer for $440 (GST inclusive)
Inventory
Inventory400400
GST Paid (an asset account)
GST Paid (an asset account)4040
Accounts Payable
Accounts Payable440440
Retailer A sells the table for cash $550 (GST inclusive).
Retailer A sells the table for cash $550 (GST inclusive).
Cash
Cash550550
GST Collected (a liability account)
GST Collected (a liability account)5050
Sales
Sales500500
Cost of sales
Cost of sales400400
Inventory
Inventory400400
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Record general journal entries for the following transactions for David
Record general journal entries for the following transactions for David Jeans Ltd:Jeans Ltd:
David Jeans purchased 400 Jeans @ $25 each plus GST on credit
David Jeans purchased 400 Jeans @ $25 each plus GST on credit from the manufacturer, Jest Jeans Ltd. (Term 2/10, n/30; Invoice date: 15 from the manufacturer, Jest Jeans Ltd. (Term 2/10, n/30; Invoice date: 15 Oct)Oct)
Dr Purchases
Dr Purchases 10 00010 000
Dr GST paid
Dr GST paid1 0001 000
Cr Accounts payable
Cr Accounts payable 11 00011 000
David Jeans paid freight cost of $230 plus GST on inventory purchased
David Jeans paid freight cost of $230 plus GST on inventory purchased
Dr Freight in
Dr Freight in 230230
Dr GST paid
Dr GST paid 23 23
Cr Cash
Cr Cash 253253
LO6: GST IN PRACTICE:
LO6: GST IN PRACTICE:
Illustration of a periodic inventory system
Illustration of a periodic inventory system
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David Jeans sold 50 jeans for $100 each plus GST on credit (Term 2/10,
David Jeans sold 50 jeans for $100 each plus GST on credit (Term 2/10, n/30; Invoice date: 21 Oct)n/30; Invoice date: 21 Oct)
Dr Accounts Receivable
Dr Accounts Receivable 5 5005 500
Cr GST Collected
Cr GST Collected 500500
Cr Sales
Cr Sales 5 000 5 000
David Jeans returned 100 jeans to Jest Jeans on 22 October
David Jeans returned 100 jeans to Jest Jeans on 22 October
Dr Accounts payable
Dr Accounts payable 2 7502 750
Cr GST Paid
Cr GST Paid 250250
Cr Purchase Returns & Allowance 2500
Cr Purchase Returns & Allowance 2500
Note: 100 x $25 = $2500 purchase return plus GST paid (10%) = $250
Note: 100 x $25 = $2500 purchase return plus GST paid (10%) = $250
LO6: GST IN PRACTICE:
LO6: GST IN PRACTICE:
Illustration of a periodic inventory system
Illustration of a periodic inventory system
32
Lecture exercise 1
Lecture exercise 1
Assume that
Assume that Merryland’sMerryland’sMarkets had an inventory balance of $32Markets had an inventory balance of $32570 at the close of the 570 at the close of the last accounting period. The following sales and purchase transactions are for the last accounting period. The following sales and purchase transactions are for the current period:current period:
1.
1.Purchased goods on account for $27Purchased goods on account for $27190.190.
2.
2.Returned part of the above purchase that had an original purchase price of $1590.Returned part of the above purchase that had an original purchase price of $1590.
3.
3.Paid for the balance of the purchase in time to receive a 2% discount.Paid for the balance of the purchase in time to receive a 2% discount.
4.
4.Sold goods costing $24Sold goods costing $24900 for $49900 for $49820. Cash of $23820. Cash of $23000 was received, with the balance due on 000 was received, with the balance due on account.account.
5.
5.Goods sold on credit for $2020 (cost $1010) were returned.Goods sold on credit for $2020 (cost $1010) were returned.
All the above amounts are GST exclusive.
All the above amounts are GST exclusive.
Required:
Required:
Taking into account the effects of GST, prepare general journal entries assuming:
Taking into account the effects of GST, prepare general journal entries assuming:
1.
1.a periodic inventory system is useda periodic inventory system is used
2.
2.a perpetual inventory system is useda perpetual inventory system is used

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