INVENTORY

Definition of Inventory -Inventories are asset items that a company hold for sale in the ordinary course of business or goods that it will use or consume in the production of goods to be sold Classification on Inventory -Service company This company does not have inventory -Merchandise company The inventory is called merchandising inventory -Manufacturing company The inventory consists of : 1) raw materials inventory 2) work in process inventory 3) finished good inventory

Inventory Control Two primary objectives of internal control over inventory include: 1.Safeguarding the inventory - It includes developing and using security measurements to prevent damage or employee thievery. 2.Reporting properly in the financial statement -It uses a perpetual inventory system that the amount of each type of merchandise is always available immediately in a subsidiary inventory ledger -Ensuring the accuracy of the amount of inventory reported in the financial statement, it should take physical inventory

Types of internal control over inventory: 1. Preventive it is designed to prevent errors or occurring misstatement. 2. Detective it is designed to detect an error or misstatement after it has occurred.

What Cost Should be Included in Inventory? The cost of inventory includes cost of purchasing, conversion cost and others incurred until it reaches salable condition or to be used. The cost of purchasing includes purchase price, transportation cost, tax, and other cost that can be attributed to acquired it. The conversion cost includes direct or indirect cost used to process until finished goods

What Merchandise Should be Included in Inventory? (Physical Goods Included in Inventory)  All the merchandise owned by the business on the inventory date should be included. The party (the seller or the buyer) who has title to the merchandise on the inventory date is the owner. The shipping term will determine when title passes. There are two shipping term :  Consigned goods a.FOB Shipping point The title of inventory passes to the buyer when the are shipped. The inventory in transit recognized as inventory’s buyer. b. FOB Destination The title of inventory passes to the buyer when the goods are delivered to buyers. The inventory in transit recognized as inventory’s seller.

c. FOB Destination The title of inventory passes to the buyer when the goods are delivered to the buyers. The inventory in transit recognized as inventory’s seller  Consigned goods The unsold merchandise is part of the manufacturer’s (consignor’s) inventory, although the merchandise is in the hands of the retailers.

The Inventory Record - Keeping System Inventory records may be maintained on a perpetual periodic basis. A. Periodic Method/Physical Method The description of it is : 1.The merchandise inventory account is used to reflect the cost of available merchandise at the beginning of the accounting period 2.Additional purchases of merchandise are recorded (debited) in the separate account 3.Other elements of inventory cost determination are recorded in separate account: - Transportation on purchases - Purchases return and allowances - Purchase discount

4.At the end the accounting period, a physical count of available merchandise at the end of the period is made. Then the cost of the ending inventory is determined 5.Cost of Goods Sold is calculate as follows:

6.An adjusting journal entry is made to restate the merchandise inventory at its ending amount B. Perpetual Method The perpetual inventory system provides a continuous record of changes in both the Inventory account and the Cost of Goods Sold account. Accounting features of a perpetual inventory system are:

1.Purchase of mercahnadise for resale or raw materials for production are debited to Inventory. 2.Freight-in purchase, purchase return and allowances and purchase discounts are recorded in Inventory 3.Cost of Goods Sold is recognized for each sale by debiting the account, Cost of Goods Sold and Crediting Inventory 4.Inventory is a control account that is supported by a subsidiary ledger of individual inventory records. The subsidiary record shows the quantity and cost of each type of available inventory

Inventory Valuation and Inventory Costing Methods There are four methods in valuating inventory 1. Cost Base Methods 2. Market Base Methods 3. Lower Cost or Market which is Lower Cost Base Methods a.Specific Identification Method Every unit of inventory can be identified with a specific purchase (cost and date of acquisition. This methods have characteristic that flow of cost same as flow of physical inventory.

b. Cost Flow Assumption 1.FIFO (First in First Out) Cost flow is in the order in which the cost were incurred 2.LIFO (Last in First Out) Cost flow is in the reverse order in which the costs were incurred 3.Average Cost flow is an average of the cost

Ilustration 1: First In First Out (FIFO) Methods January ‘06 Purchaseses Purchasei 10 Rp ,- Sold 3 unit, unit cost Rp ,-/box Inventories 7 Unit X Rp ,- February ‘06 Sold 5, cost per unit Rp ,-/box Inventories 2 unit X Rp ,- Inventories 5 unit X Rp ,- March ‘06 Purchase embelian Purchasei 8 unit X Rp ,- Sold 6 consist of : 2 Rp ,-/box and 4 Rp ,-/box Inventory 1 unit X Rp ,- Inventory 8 unit X Rp ,- Purchase Purchasei 5 Rp ,-

Illustration 2 : Last In First Out (LIFO) Methods January ‘06 Purchase Purcahse i 10 unit X Rp ,- Sold 3 units, unit cost Rp ,-/box Inventories 7 Units X Rp ,- February ‘06 Sold 5 units, unit cost Rp ,-/box Inventories 7 Units X Rp ,- March ‘06 Purchase n Purcahse i 8 unit X Rp ,- Sold 6 units, unit cost Rp ,-/box Inventories units X Rp ,- Inventorries 2 units X Rp ,- Purchase Purcahse 5 unit X Rp ,-

Ilustration 3: Average Cost Method January ‘06 Purchase 10 unit X Rp ,- Sold 3 units, unit cost Rp ,-/box February ‘06 Sold 5 units, unit cost Rp ,-/box Inventories 7 Units X Rp ,- March ‘06 Purchase 8 units X Rp ,- Sold 6 units, unit cost Rp ,-/box Inventories 9 units X Rp ,- Purchase 5 units X Rp ,- Inventories 7 Units X Rp ,-

Example: Inventory Costing and Recording Podo Moro, Co has transactions related purchases and sells they merchandise inventories as follows: The ending inventory 31 January 2006 is 300 unit.

a. FIFO Methods (Physical) Units sold =Merchandise available to sold – ending inventory =1.000 units – 300 units = 700 units Cost of Goods Sold January, Rp ,- = Rp ,- January, Rp ,- = Rp ,- January, Rp ,- = Rp ,- Rp ,- Cost of ending inventories (January, 31, 2006) Jan, Rp ,- = Rp ,- Jan, Rp ,- = Rp , unit Rp ,-

Diagram of determination Cost of Goods Sold (+) Cost of Goods Sold Beginning Inventory Net Purchases Ended Inventory =(-) Cost of Goods Sold = Rp Rp Rp = Rp

b. FIFO Methods (Perpetual) Inventory Account : Product “ABC” Code : ………………..

Journal entries (FIFO) Physic General Journal Page:

Journal Entries (FIFO) Perpetual General Journal Page:

c. LIFO Methods (Physical) - Units sold = Merchandise available to sold – ending inventory = units – 300 units = 700 units - Cost of Goods Sold January, Rp ,- = Rp ,- January, Rp ,- = “ ,- January, Rp ,- = “ ,- 700 unit Rp ,- - Cost of ending inventories (January,31,2006) January, Rp ,- = Rp ,- January, Rp ,- = Rp , Rp ,-

d. LIFO Methods (Perpetual)

Journal Entry LIFO Method (Physical)

Average Methods (Physical) Unit cost = Total Cost unit = Rp ,- : = Rp ,- Cost of ending inventory = 300 unit x Rp ,- = Rp ,- Cost of Goods Sold = 700 unit x Rp ,- = Rp ,-

f. Average Methods (Perpetual) Inventory Account Product : “ABC”Account Numbers: Cost of ending inventory Rp. 1,046,664 Cost of Goods Sold (Rp. 1,133,320 + Rp. 969,996 = Rp. 2,103,316)

Journal Entry Average Method (Physical) (in rupiah) General Journal Page: