Inventory Management OZ Assignment

Inventory Management OZ Assignment

Inventory Management OZ Assignment

Task 1 - Theory Assessment
Question 1:

(h)The preparation of spreadsheets and ad hoc reports on inventory status involves the proper recording of inventories in a company (Wellmeret al., 2015). It helps in allowing its users to build their periodic and perpetual maintain inventory reports in an enhanced manner. It involves the recording the exact and proper information about the inventories in a company by tracking and monitoring the inventories and the flows in and out of the company. It also helps in the proper maintenance and management of the supply chain in a company. It displays the value of the goods and inventories in a company along with helping in the determination of the turnover of inventories in a company.

(i)Maintaining proper records of inventories is important for every company. The proper maintenance of inventory records helps companies in the proper valuation of inventories, maintenance of supply chain, tracking the flow of inventories, etc. However, there are different policies and practices to be adopted for maintaining proper inventory records. According to Wild (2017), the practices and policies of an organization that helps in maintain inventory records are as follows –

  1. Maintenance of a well-maintained and well-organized warehouse
  2. Establishment of a good inventory labeling and naming practices
  3. Defining and following efficient receipt and storage policies and processes
  4. Use cycle counting
  5. Limiting and tracking the access to inventories
  6. Use of technology such as software for inventory management

(j)The inventories of a company require to be maintained as per the rules and procedures mentioned under GAAP (generally accepted accounting principles) (Chatfield and Vangermeersch, 2014). The GAAP sets various rules for the accounting of inventories, including the inventory accounting procedures and methods. The procedure for inventory accounting under GAAP considers an intangible personal property, which is intended to be sold as an inventory. The GAAP also mentions two different systems for the preparation and maintenance of inventory accounts, which are the periodic inventory system and the perpetual inventory system (Gordon, Raedy and Sannella, 2016). The two systems have different treatment and different journal entries of the transactions of the inventories. The principles under GAAP also suggest two different methods that help in the valuation of inventories – LIFO and FIFO.

(k)There are different processes for inventory management and each inventory management process comprises of key steps (Axsater, 2015). The steps in almost all process of inventory management along with the relevant recording and documentation systems to be used for implementing the stated processes are as follows –

  • Researching the existing periods in which the inventories were not in sync with the demand of the inventories. This can be recorded in the form of a spreadsheet by the preparation of a report in MS Excel.
  • Assessing inventory costs and supply costs. This can also be documented in the same recording system mentioned above.
  • Evaluating the performance and supplies made by the supplier over the previous financial year. This can be recorded in a separate report.
  • Adopting a good inventory management software can be helpful and a key step for proper management of inventories.
  • Set as well as refine the target for the management of inventory. This can be documented in the software adopted by the company for inventory management.

(l)The process of entering data related to the inventories of a company into the systems or ledgers can be done from the derivation of information from the source documents prepared by the company (Nastase, Calin and Margina, 2016). For example, the journal of the company gives important information about the inventories and the transaction of inventories in the company, as it records the transactions of a company centrally. The general journal of a company contains the debit and credit balances of a company, which is another process of entering data into the systems and ledgers for inventory management.

(m)The rules and processes of reconciliation for inventory valuation have different features (Persons, 2014). The key feature of the rules and processes of rules and processes of reconciliation of inventory valuation involves comparing the inventory counts with the actual inventory amounts in the shelves of the warehouses of a company. The feature involves figuring out the difference between the inventory counts and actual amounts along with making adjustments in order to adjust the records of the inventories.
Task 2 - Case Study and Practical Assessment
Part 1 - Accounting for Inventory

Stock items

Units in hand

Unit cost ($)

Unit net realizable value ($)

Purple Chidgets

50

8.00

12.50

Yellow Chadgits

40

12.00

18.00

Black Chuggets

30

7.50

5.00

Total Inventory

120

27.50

35.5

Similar to all other assets, inventories are reported and recorded at cost in the books of accounts following the principle of historical costs (Brooks, 2015). The LIFO, FIFO, and AVCO are the commonly used methods of inventory valuation. However, another method for measuring the value of inventories is the lower of cost and net realizable value method. As per normal circumstances, the cost of inventories is always lower than the net value the business can earn by selling the inventories. Common sense says that the cost is required to be lower than the net realizable value for making the profit. However, as per the concept of ‘conservatism’, even if the NRV is higher the cost of inventory, the value of the inventory is kept at cost and the gain is not recognized until the inventory is actually sold (Wilson, 2013).

As per the calculation of the total inventory at cost and net realizable value, the total inventory held at unit cost is $ 27.50 and at the net realizable value is $ 35.5. Hence, as per the measurement rule of the lower of cost and net realizable value, the total value of the inventory in hand will be $ 27.50, since it is lower than the net realizable value.
 
Part 2: (a) Calculation of the cost of one DVD player:

Particulars

Amount($)

Purchase price of 50 DVD players @ $120 each

6000

Freight and insurance

800

Payment of customs duty

340

Wharfage

200

Freight expenses from the wharf to the shop

100

Total invoice

7440

Therefore, the cost of each DVD = Total invoice or costs / Total number of units purchased = 7440 / 50 = $ 148.8. Hence, the cost of each DVD is $ 148.80.

(b) Preparation of journal entries for recording the purchase made above assuming the perpetual inventory system

In the books of Retrotronics

Journal Entries

Date

Particulars

L / F

Debit ($)

Credit ($)

August 12

Inventories A/C

To Accounts payable A/C

 

60000

 

6000

August 12

Inventories A/C

To Accounts Payable A/C

 

800

 

800

August 12

Customs Duty A/C

To Bank A/C

 

340

 

340

August 12

Inventories A/C

To Accounts Payable A/C

 

200

 

200

August 12

Inventories A/C

To Accounts Payable A/C

 

100

 

100

 

Part 3:

Stock card of Double U –

 

 

IN

OUT

BALANCE

Date

Details

Qty.

Unit Cost

Value

Qty.

Unit Cost

Value

Qty.

Unit Cost

Value

1 May

Balance of stock on hand

 

 

 

 

 

 

25

$18.00

$450.00

6 May

Purchase

25

$18.40

$460.00

 

 

 

50

$27.20

$1,360.00

 

 

 

 

 

 

 

 

 

 

 

10 May

Sale (Invoice no. 661 $576)

 

 

 

20

$27.20

$544.00

30

$27.20

$816.00

 

 

 

 

 

 

 

 

 

 

 

20 May

Purchase

30

$19.20

$576.00

 

 

 

60

$36.80

$2,208.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21 May

Purchase return (from purchase 20 May)

 

 

 

10

$36.80

$368.00

50

$36.80

$1,840.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29 May

Sale (Invoice no. 672 $432)

 

 

 

15

$36.80

$552.00

35

$36.80

$1,288.00

 

 

 

 

 

 

 

 

 

 

 

30 May

Sale return (Credit note no. 205 $144)

5

$36.80

$184.00

 

 

 

40

$36.80

$1,472.00

Part 4: (a) (I) Inventory valuation of Koals Ltd. under the FIFO method –

 

 

IN

OUT

BALANCE

Date

Details

Qty.

Unit Cost

Value

Qty.

Unit Cost

Value

Qty.

Unit Cost

Value

31 Dec

Opening stock

 

 

 

 

 

 

50

$40

$ 2000

18 Feb

Purchases

100

$ 40

$ 4000

 

 

 

100

$ 40

$ 4000

 

 

 

 

 

 

 

 

50

$ 40

$ 2000

20 Apr

Purchases

80

$ 42

$ 3360

 

 

 

50

$ 40

$ 2000

 

 

 

 

 

 

 

 

100

$ 40

$ 4000

 

 

 

 

 

 

 

 

80

$ 42

$ 3360

12 Jun

Purchases

100

$ 41.7

$ 4170

 

 

 

50

$ 40

$ 2000

 

 

 

 

 

 

 

 

100

$ 40

$ 4000

 

 

 

 

 

 

 

 

80

$ 42

$ 3360

 

 

 

 

 

 

 

 

100

$ 41.7

$ 4170

 

Cash sales

 

 

 

 

 

 

 

 

$ 18370

30 Jun

Closing stock

 

 

 

 

 

 

60

$ 41.7

$ 2502

(II) Inventory valuation of Koals Ltd. under weighted average costing method –

 

 

IN

OUT

BALANCE

Date

Details

Qty.

Unit Cost

Value

Qty.

Unit Cost

Value

Qty.

Unit Cost

Value

31Dec

Opening stock

 

 

 

 

 

 

50

$ 40

$ 2000

18 Feb

Purchases

100

$ 40

$ 4000

 

 

 

150

$ 40

$ 6000

 

 

 

 

 

 

 

 

 

 

 

20 Apr

Purchases

80

$ 42

$ 3360

 

 

 

230

$ 41

$ 9430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Jun

Purchases

100

$ 41.7

$ 4170

 

 

 

330

$ 41.35

$ 13645.5

 

Cash sales

 

 

 

 

 

 

 

$ 41.35

$ 18370

30 Jun

Closing stock

 

 

 

 

 

 

60

$ 41.35

$ 2481

(b) Assuming that Koals Ltd. adopts the periodic inventory valuation method, the general journal to record the current stock take valuation at 30 June using the weighted average method is as follows –

Cost of goods sold A/C … 270 (debit)

Inventory A/C … 10 (debit)

To Purchases A/C … 280 (credit)

Part 5 (a) Stock card using FIFO method –

 

 

IN

OUT

 

 

BALANCE

Date

Details

Qty

Unit Cost

Value

Qty

Unit Cost

Value

Qty

Unit Cost

Value

1-Jun

Balance of stock in hand

 

 

 

 

 

 

30

$25.00

$750.00

6-Jun

Credit purchases of stock

50

$25.40

$1,270.00

 

 

 

30

$25.00

$750.00

 

 

 

 

 

 

 

 

50

$25.40

$1,270.00

15-Jun

Credit sale (customer invoiced for $1520)

 

 

 

30

$25.00

$750.00

 

 

 

 

 

 

 

 

10

$25.40

$254.00

40

$25.40

$1,016.00

19-Jun

Credit purchase

70

$26

$1,820

 

 

 

40

$25.40

$1,016.00

 

 

 

 

 

 

 

 

70

$26

$1,820

25-Jun

Credit sale (customer invoiced for $1900)

 

 

 

40

$25.40

$1,016.00

 

 

 

 

 

 

 

 

10

$26

$260

60

$26

$1,560

(b) Journal entries of Creek Enterprises as on 30th June are as follows –

1. Total purchases

Inventories account $ 3090 (debit)

To Accounts payable $ 3090 (credit)

2. Total sales

Accounts receivableaccount $ 2280(debit)

To sales account$ 2280 (credit)

3. Cost of goods sold

Cost of goods sold accounts $2280 (debit)

To inventories account $ 2280 (debit)

4. Stock-take adjustment on 30 June

Cost of goods sold A/C … 115 (debit)

Inventory A/C … 25 (debit)

To Purchases A/C … 140 (credit)

(c)Preparation of inventory control account in the general ledger

Stock Control A/c

Particulars

Amount (Debit)

Particulars

Amount (Credit)

By purchases

$3,090.00

To sales

$2,280

By gain on sale of stock

3420

To balance c/d

$4,230

 

$6,510.00

 

$6,510.00

 

 

 

 

 Statement of reconciliation –

 Reconciliation Statement

Opening inventory

$750

Inventory purchased

$3,090.00

Total inventory sold

$2,280

Ending inventory

$1,560.00

(d) Long-form of trading statement of June

 Trading Statement

Sales

$3,090.00

Less - Cost of goods sold

$2,280.00

Gross profit

$810.00

Part 6

(a) As per the retail inventory method, the closing inventory can be found out by the following formula –

Cost price of closing inventory = Cost of goods available for sale - Cost of sales during the period (Gaur, Kesavan and Raman, 2014)

Schedule of calculating closing inventory of M-Kart is as follows –

Calculation of ending inventory

Beginning inventory at cost

 

$ 62196

Purchases at cost

 

$ 509180

Goods available for sales

 

$ 571376

Sales

 

$ 474219.2

Ending inventory

 

$ 97156.8

(b) Calculation of the approximate actual inventory on hand at the cost prices –

Actual inventory on hand at the cost prices = $ 62196 + $ 509180 - $ 474219.2 = $ 97156.8

Hence, the cost price of the actual inventory of M-Kart on hand = $ 97156.8
Part 7:

Calculation of cost of goods sold

Opening inventory

$64,960

Add - Purchases

$380,455

Less - Ending inventory

$70,200

Cost of goods sold

$375,215

Calculation of Inventory turnover

 

Cost of goods sold

$375,215

Average inventory (Opening inventory + Closing inventory / 2)

$ 100060

Inventoryturnover (Cost of goods sold / Average Inventories)

3.75 times

Thus, the inventory turnover per annum is 3.75 times.
Part 8:

Stock item

Units on hand

Cost

$

Selling price

$

Selling expenses

$

Item AB1

10

40

54

2

Item EF

20

18

17

3

Item EG

20

31

32

4

As per the above table, the total value of inventory on hand in accordance with accounting standards would be $ 1380.  This is because as per the accounting standards, the total value of inventory on hand is always valued on cost price and not on selling price (Deegan, 2013). The reason behind this is that selling prices differ from time to time. Thus, the value of inventory on hand = 10 * $ 40 + 20 * $ 18 + 20 * $ 31 = $ 1380.

Part 9:
(I) Journal entries under periodic inventory system

Date

Particulars

L / F

Debit ($)

Credit ($)

November 2

Purchases A/C           

To Accounts Payable A/C                     

 

100000

 

100000

November 2

Purchases A/C

To Accounts Payable A/C

 

2000

 

2000

November 2

Customs Duty A/C

To Bank A/C

 

2400

 

2400

November 2

Wharfage A/C

To Bank A/C

 

800

 

800

November 2

Freight Costs A/C

To Accounts payable A/C

 

400

 

400

(II) Journal entries under perpetual inventory system

Date

Particulars

L / F

Debit ($)

Credit ($)

November 2

Inventories A/C           

To Accounts Payable A/C                     

 

100000

 

100000

November 2

Inventories A/C

To Accounts Payable A/C

 

2000

 

2000

November 2

Customs Duty A/C

To Bank A/C

 

2400

 

2400

November 2

InventoriesA/C

To Accounts Payable A/C

 

800

 

800

November 2

Inventories A/C

To Accounts Payable A/C

 

400

 

400

Reference list:

1.Axsater, S. (2015). Inventory control (Vol. 225). Springer.
2.Brooks, R. (2015). Financial management: core concepts. Pearson.
3.Chatfield, M., & Vangermeersch, R. (2014). The history of accounting (RLE accounting): an international encyclopedia. Routledge.
4.Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
5.Gaur, V., Kesavan, S., & Raman, A. (2014). Retail Inventory. California Management Review56(2), 55-76.
6.Gordon, E. A., Raedy, J. S., & Sannella, A. J. (2016). Intermediate Accounting. Pearson.
7.Nastase, G., Calin, A. M., & Margina, O. (2016). INTERNATIONAL ACCOUNTING STANDARD NO. 16 8.TANGIBLE ASSETS AND ITS PRACTICAL IMPLEMENTATION. Calitatea17(S1), 285.
9.Persons, O. (2014). A Principles-Based Approach to Teaching International Financial Reporting Standards (IFRS). Journal of Instructional Pedagogies13.
10.Wellmer, J., Urbach, H., Knake, S., & Wormann, F. (2015). Report on the Activity of the Ad-hoc Commission" Structural Imaging" 2014.
11.Wild, T. (2017). Best practice in inventory management. Routledge.
12.Wilson, G. D. (2013). The concept of conservatism. The Psychology of Conservatism (Routledge Revivals), 3.