FRK opsommings
CHAPTER 2: INVENTORY
Calculate the value of closing inventory according
to the first-in-first-out (FIFO) and weighted average
(WA) methods
Inventory is a current asset (Dr Inventory)
Different stages of production are also regarded as current assets (Raw
materials, Work in progress, Finished goods)
Other terms you may have seen:
- Trading stock
- Merchandise
- Trading goods
IFRS – Important terminology!
- Trading stock/Inventory = MERCHANDISE
- Inventory = collective term for merchandise and consumables
Inventories are assets held for sale in the ordinary course of business
Assets in the process of production for such sale (WIP); or
Assets in the form of materials or supplies to be consumed in the
production process (raw materials) or in rendering of services
(consumables).
, Measurement of closing inventory (par 2.2)
Value of inventory at year-end is important for financial statements
Physical stock taking done to:
- Determine inventory deficit
- Determine unaccounted transactions (e.g. delivered but not yet
recorded)
- Determine value of inventory on hand for disclosure in SFP
Choose the lowest value of cost and net realisable value (NRV)
Cost of inventory includes:
- Cost of purchase (less discounts)
- Cost of conversion (e.g. raw materials into finished goods)
- Location and condition cost
Cost of inventory excludes:
- Abnormal wastage (of materials, production costs or labour)
- Storage costs (unless necessary during production process)
- Administrative overheads that do not contribute to bringing
inventory to current location and condition
- Selling costs, e.g. marketing or carriage on sales (delivery charges
for delivery to customers)
Interchangeable vs Segregated for specific use
INTERCHANGEABLE SPECIFIC USE
• Similar goods, e.g. tinned food • Unique characteristics / custom made
• Bought/sold in batches • e.g. jewellery
,Valuation methods (calculation of closing value)
IFRS for SMEs:
Interchangeable items
- First-in-First-Out method (FIFO)
- Weighted average method
Specific use items
- Specific identification method
Other methods:
- Retail method
- Standard cost
1. FIRST-IN-FIRST-OUT METHOD (fifo)
Example 2.1:
Calculate the coat of inventory on hand on 31 Jan 20.4 using First in first
out method.
Additional information:
1. Inventory on 1 January 20.4 was 86 items @ R28 each.
2. Sales: 476 items during January 20.4
3. The periodic inventory system was used.
, ANSWER: Feeders
Number of items on 31 Jan 20.4 (513 - 476) 37
Items available for sale (86+123+100+67+122+15) 513
Items sold (476)
Inventory on 31 January 20.4 using first-in-first-out method:
Number of items Price per item Value
R R
15 50 750
22 46 1012
1762
2. Weighted Average Method:
Formula:
Total value of available units x Units on hand = WAP
Total number of available units 1
Total value of available units = Opening inventory (Rand value) +
Total Purchases (Rand value)
CHAPTER 2: INVENTORY
Calculate the value of closing inventory according
to the first-in-first-out (FIFO) and weighted average
(WA) methods
Inventory is a current asset (Dr Inventory)
Different stages of production are also regarded as current assets (Raw
materials, Work in progress, Finished goods)
Other terms you may have seen:
- Trading stock
- Merchandise
- Trading goods
IFRS – Important terminology!
- Trading stock/Inventory = MERCHANDISE
- Inventory = collective term for merchandise and consumables
Inventories are assets held for sale in the ordinary course of business
Assets in the process of production for such sale (WIP); or
Assets in the form of materials or supplies to be consumed in the
production process (raw materials) or in rendering of services
(consumables).
, Measurement of closing inventory (par 2.2)
Value of inventory at year-end is important for financial statements
Physical stock taking done to:
- Determine inventory deficit
- Determine unaccounted transactions (e.g. delivered but not yet
recorded)
- Determine value of inventory on hand for disclosure in SFP
Choose the lowest value of cost and net realisable value (NRV)
Cost of inventory includes:
- Cost of purchase (less discounts)
- Cost of conversion (e.g. raw materials into finished goods)
- Location and condition cost
Cost of inventory excludes:
- Abnormal wastage (of materials, production costs or labour)
- Storage costs (unless necessary during production process)
- Administrative overheads that do not contribute to bringing
inventory to current location and condition
- Selling costs, e.g. marketing or carriage on sales (delivery charges
for delivery to customers)
Interchangeable vs Segregated for specific use
INTERCHANGEABLE SPECIFIC USE
• Similar goods, e.g. tinned food • Unique characteristics / custom made
• Bought/sold in batches • e.g. jewellery
,Valuation methods (calculation of closing value)
IFRS for SMEs:
Interchangeable items
- First-in-First-Out method (FIFO)
- Weighted average method
Specific use items
- Specific identification method
Other methods:
- Retail method
- Standard cost
1. FIRST-IN-FIRST-OUT METHOD (fifo)
Example 2.1:
Calculate the coat of inventory on hand on 31 Jan 20.4 using First in first
out method.
Additional information:
1. Inventory on 1 January 20.4 was 86 items @ R28 each.
2. Sales: 476 items during January 20.4
3. The periodic inventory system was used.
, ANSWER: Feeders
Number of items on 31 Jan 20.4 (513 - 476) 37
Items available for sale (86+123+100+67+122+15) 513
Items sold (476)
Inventory on 31 January 20.4 using first-in-first-out method:
Number of items Price per item Value
R R
15 50 750
22 46 1012
1762
2. Weighted Average Method:
Formula:
Total value of available units x Units on hand = WAP
Total number of available units 1
Total value of available units = Opening inventory (Rand value) +
Total Purchases (Rand value)
