INVENTORY CLASSIFICATIONS
Opening WEEK 3
- Inventory : These are stocks of materials that are in the store to start a fresh production
- Closing Inventory: These are stocks of materials that are in the store for the best accounting period.
Cost of goods sold is therefore determined by adding opening inventory to the purchases to get cost of goods available for sales then deduct closing inventory to arrive at COGS.
PURCHASES
These are cost of materials bought for production purposes but excluding assets that are for business uses.
Related adjustments on purchases will include;
Purchase discount: This is discount given due to bulk purchases of materials
Purchase Returns: This is those items return to seller of the material due to one reason or the other
Purchase allowances: This is a form of reduction given as advantage to buyer when a certain precondition given by the seller is met.
Carriage Inwards: These are the cost of transport of the purchased raw materials.
Carriage outwards: These are cost incurred in making delivery to the customers
Stock theft and other losses: These are to be removed from value of goods sold. The treatment of losses involves two accounts – the trading aspect i.e. trading accounts and the statement of comprehensive income i.e. the profit or loss account.
Example:
BKB Enterprises commenced business on 1/1/2019 when materials worth #600,000 was purchased. During the year ended 31/12/2019, no sales was made but goods worth #10,000 were stolen.
TREATMENT OF THE STOLEN VALUE.
Trading account as at 31/12/2019
# #
Purchases 600,000
SCI (Goods stolen) 10,000
Closing inventory 590,000
600,000 600,000
Statement of Comprehensive Income as at 31/12/2019
# #
Trading Account 10,000 Net loss 10,000
10,000 10,000
Thus, the inventory should be valued at the lower of cost price and net realizable value for inclusion in the statement of financial position as at the end of the period.
Format of a Statement of comprehensive income;
There are two methods that are allowed by the accounting standards
- Horizontal format (T- Method)
- Vertical Method
Horizontal Method format SCI
# #
Opening Inventory xx Sales xx
Purchases xx less: Return Inwards (XX)
XX
Add: Carriage Inwards xx
XX
Less: Return Outwards xx XX
COGAS XX
Less: Closing Inventory (xx)
COGS XX
Gross Profit c/d xx
XX XX
Less Expenses:
Rents xx Gross Profit b/d xx
Rates xx Discount Received xx
Wages xx
Sundry Expenses xx
Net Profit xx
XX XX
VERTICAL FORMAT OF SCI
# #
Sales XX
Less: Return Inward (xx)
Opening Inventory xx
Purchases xx
Add: Carriage Inwards xx
XX
Less: Return Outwards (xx) XX
COGAS XX
Less: Closing Inventory (xx)
COGS XX
Gross Profit c/d xx
XX XX
Discount Received xx
Less Expenses: Rents xx Rates xx
Wages xx
Sundry Expenses xx
Net Profit xx
XX
FORMAT OF STATEMENT OF FINANCIAL POSITION
# #
Non - current assets: Equipment xx
Motor Vehicles xx
Current Assets: Inventory xx
Receivables xx
Cash xx xx
Total Assets XXX
Equity xx
Add (Net profit from SCI) xx
Net equity XX
Add Payables x
Other payable xx
XX
ILLUSTRATIVE EXAMPLE:
DO IT YOURSELF Ltd. Manufacture Shoes and the company has the following balances as at 31/12/2019.
# Furniture & Fittings 73,500
Bank Overdraft 4,800
Drawings 6,750
Machinery 328,400
Office Equipment 85,630
Cash in hand 2,760
Delivery Van 124,500
Salaries & Wages 98,140
Inventory on 1/1/2018: Raw Materials 22,610
Work-in-Progress 17,300
Finished Shoes 156,400
Equity 727,500
Factory Wages 68,130
Provisions for bad debts 2,510
Factory Insurance 4,900
Administrative Expenses 16,470
Payables 223,920
Factory Repairs & Maintenance 34,690
Bad Debts 5,330
Land & Building 467,200
Receivables 89,490
Purchase of raw materials 215,820
Lighting & Cooling 28,350
Selling Expenses 19,040
Turnover of shoes 975,220
Stationeries 47,180
Repair of Delivery Van 21,370
The following information is also given:
1. A debt of N130 is considered irrecoverable and should be written off.
2. Stationery of N570 is unused.
3. Lighting and cooling is to be allocated to factory and office in the ratio of 5:1
4. Provision for bad debt is to be adjusted to 2.5 percent of the new balance of sundry receivables.
5. Factory wages of N1, 870 are yet to be paid.
6. Depreciation is to be written off the machinery is 5 percent and all other fixed (non- current) assets except land and buildings at 10 percent.
7. Inventory on 31/12/2018 were: #
Raw Materials 36,620
Work-in-Progress 12,750
Finished Shoes 181,340
You are required to prepare:
1. Manufacturing account
ii. Statement of comprehensive income as at 31/12/2019
iii. Statement of financial position as at 321/12/2019
SOLUTION
DO IT YOURSELF IMITED
(i) Manufacturing Account As at 31/12/2019
|
# Inventory as at 1/1 2018 22610 Add; Purchase of raw materials 215820 Raw materials available for use 238430 Less inventory at 31/12/2018 36620 Cost of raw material used 201 810 Add wages (Note 1) 70000 Prime cost 271810 Add; factory overhead 4900 Repairs and maintenance 34690 Light & Cooling 23625 Depreciation: Machinery 16420 351445 Add Work in progress 1/12018 17300 368745 Less; w.i.p as at 31/12/2018 2750 Cost of Production 355995 |
# Cost of goods produced 355995
355995 |
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(ii) Statement of Comprehensive Income as at 31/12/2019
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# Opening stock of finished goods 156400 Add; Cost of production 355995 512395 Less; closing inventory 181340 Cost of goods sold 331055 Gross profit c/d 644165 975220 Less expenses: Sal.& Wages 98140 Admn. 16470 Bad debts (2) 5640 Light and cooling 4725 Selling exp. 19040 Stationeries (3) 46610 Repairs of del. Vehicles 21360 Depreciation; Equipment 8563 Delivery Van 12450 F&F 735 Net profit 404273 6 44441 |
# Sales/ Turnover 975, 220
975220 Gross profit b/d 644165 Bad debts 276
644441 |
(iii) Statement of Financial Position as at 31/12/2019
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# Equity 727500 Add: Net profit 404273 1131773 Less: Drawings 6750 1125023 Current liabilities: Payables 223920 Bank O/D 4800 Factory Wages 1870
1355613 |
Land and buildings 467200 Machinery 328400 Depreciation 16420 3 311980 Furniture and fitting 73520 Depreciation 7350 66150 Delivery van 124500 Depreciation 12450 1 112000 Office equipment 85630 Depreciation 2563 77067 Current assets: Inventories: Raw materials 36620 W.I.P 12750 Finished goods 181340 Stationery 570 Receivables 893 Less: Provisions 2234 87126 Cash in hand 2760 1355613
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WORKINGS:
(1) Factory wages: #
Trial balance figure 68130
Unpaid wages 1870
To manufacturing account 70000
#
(2) Bad debt as per trial balance 5330
Debt written off 130
To profit and loss account 5460
(3) Stationery #
Trial balance figure 47100
570
46610
(4) Provision for bad debts #
New 2 ½% of 2234
Old provision 2150
Take to profit and loss account (276)