Inventory Management, Ledger Entries, And Essay.

Advantages of Perpetual Inventory System Compared to Periodic System

1. Sale of FOB shipping point, freight prepaid.

Seller’s Ledger Entry

Buyer’s Ledger Entry

1. Sale – FOB destination

Seller’s Ledger Entry

Buyer’s Ledger Entry

1. Sale – FOB Shipping Point

Seller’s Ledger Entry

Buyer’s Ledger Entry

Describe the advantages of the perpetual inventory system compared with the periodic system with particular regard to the aspect of physical stocktaking.   

Inventory flow assumptions might include cost, net realisable value and calculations based on gross margins. If you were in a retail electronic business, which one of these methods would you select and explain your reasons for doing so

Use the retail inventory method to calculate the ending inventory for an organization which has:

• an opening inventory at cost of $750 000 and a retail value of $1 900 000
• purchases for the year totalled at cost $650 000 and the retail value of the purchases is $900 000
• sales for the year at retail price totalled $2 450 000

Reconcile the creditor journal to the supplier statement.

ABC Supplies

The statement from the ABC Supplies for April:

Statement

How much was paid on the March account?

3. What is the difference between the statement closing balance and the journal balance?
4. How can you explain the difference? (One sentence)

Create your own checklist to follow when you take receipt of goods. If appropriate, make it specific to a real situation. Your checklist should fit on one page.

All organizations need to have effective policies and procedures in place controlling the approval and authorization for purchasing assets. However, not all of these policies and procedures are the same.

Identify and explain why some organizations would have different policies and procedures to achieve the same results.

An ad hoc report is a report that is created as the need arises. It provides information, usually in a table or a chart, which is prepared as the result of a Question that has not already been codified in a standard report.

Describe a situation in which managers might require an ad hoc report.

Organizations use procedures and practices to meet their requirements in relation to maintaining inventory records. What areas might be subject to control in this fashion?

What are the key steps in the inventory management processes and relevant documentation and recording systems?

What is a ledger in relation to inventory management? Explain the process for entering data into systems or ledgers

Explain the five methods of inventory valuation.

Part 1

Using the inventory flow assumptions of weighted average, LIFO and FIFO calculate the inventory and cost of goods sold for an organization with the following transactions and records and use the information to develop an inventory report/ comparison report. Present your calculations and any relevant assumptions in a report format suited to the financial services industry.

The organization’s records show the inventory and the purchases to be:

The organization has an opening inventory of 350 units and a closing inventory of 650. Sales figures for the period were $108 000.

Part 2

Describe the procedures you would follow in a work organization, to determine and confirm work requirements, in particular those relevant to this task.

Make a verbal presentation of the inventory report/ comparison report you developed, to demonstrate your communication skills. Use language and concepts appropriate to cultural differences and demonstrate your ability to share information that is clear, concise and accurate. You can use Power Point slides, charts or any other presentation aids you require and you might choose to record your presentation.

Submit the report, the presentation notes and any visual aids you used.

A business uses the net realisable value method to value its inventory because the market is volatile. This is because it is dependent on fashion trends for its sales figures. The variability makes the selection of net realisable value a wiser choice for valuing inventory than the other options.

The business has four groups of items in their inventory.

Market trends have changed and the business realises that they have overestimated sales of some products. These will have to be discounted significantly.

Goods B have retained their value and are expected to still sell for the originally anticipated price of $70 per item.

Goods A are only likely to realise $15 per item, Goods C $10 per item and Goods D $40 per item.

Calculate the market value for the inventory.

Calculate the net realisable value providing explanation for your calculations.

Convert the calculation and the reasons for the calculations into an ad hoc report for your manager. Apply appropriate inventory valuation rules; make inventory flow assumptions and record inventory flows

1. Sale of FOB shipping point, freight prepaid.

Seller’s Ledger Entry

Particulars		Dr.	Cr.
29th  March	Accounts Receivable	$150,000
	Accounts Receivable- Freight	$5,000
	Sales		$150,000
	Cash		$5,000
	Total	$200,000	$200,000
	(Sold goods on account for $150,000, terms F.O.B shipping point, $5,000 freight prepaid)

Buyer’s Ledger Entry

Particulars		Dr.		Cr.
29th  March	Purchases		$150,000
	Freight-in		$5,000
	Accounts Payable				$150,000
	Accounts Payable- Freight				$5,000
	Total		$200,000		$200,000
	(Purchased goods on account for $150,000, terms F.O.B shipping point, $5,000 freight prepaid by the seller and is to be paid to the seller)

1. Sale – FOB destination

Seller’s Ledger Entry

Particulars		Dr.	Cr.
29th  March	Accounts Receivable	$150,000
	Freight-out Expenses	$5,000
	Sales		$150,000
	Cash		$5,000
	Total	$200,000	$200,000
	(Sold goods on account for $150,000, terms F.O.B destination, $5,000 freight prepaid by the seller and treated as expenses in his books)

Buyer’s Ledger Entry

Particulars		Dr.		Cr.
29th  March	Purchases		$150,000
	Accounts Payable				$150,000
	Total		$150,000		$150,000
	(Purchased goods on account for $150,000, terms F.O.B Destination, $5,000 freight paid by the seller and not to be repaid)

1. Sale – FOB Shipping Point

Seller’s Ledger Entry

Particulars		Dr.	Cr.
29th  March	Accounts Receivable	$150,000
	Sales		$150,000
	Total	$150,000	$150,000
	(Sold goods on account for $150,000, terms F.O.B shipping point, no freight to be paid by the seller)

Buyer’s Ledger Entry

Particulars		Dr.		Cr.
29th  March	Purchases		$150,000
	Freight-in		$5,000
	Accounts Payable				$150,000
	Cash				$5,000
	Total		$200,000		$200,000
	(Purchased goods on account for $150,000, terms F.O.B shipping point, $5,000 freight paid by the buyer on receipt of consignment)

The perpetual system is endowed with advantages as compared to periodic system that lies in the fact that purchase are considered the entire year and the counting of inventory is  not updated till the time the year gets over when counting of the physical inventory is done. When it comes to the perpetual system, the updation of the inventory happens in real time when purchases are done or the sale of an inventory is done (Drury, 2011). Hence, a perpetual scores over periodic system.

The inventory flow assumption method selection always varies from organizations to organizations and it is necessary to be selected while evaluating inventory because it determines appropriate balances of the ending inventory as well as the cost of goods sold (Vanderbeck, 2013). Being channelizing a retail electronic business, I would select the inventory flow assumption method as the First in First out method also known as FIFO, because I would like to let go the oldest inventory produced or bought, so that it does not unnecessarily get destroyed, backdated, or worn out. Therefore I would like to reclassify the oldest cost to cost of goods sold (Lanen et. al, 2008).

Calculation of Ending Inventory
		(Amount in $)
Particulars		At Cost Price	At Retail Price
Opening Inventory		7,50,000	19,00,000
Add : Purchases		6,50,000	9,00,000
Cost of Goods available for Sale		14,00,000	28,00,000
Less : Sales for the year			24,50,000
Ending Inventory at Retail Value			3,50,000
Calculations :
Cost to Retail Ratio = Cost of Goods at cost/ Cost of Goods at retail *100
	= 14,00,000 / 28,00,000 *100 = 50%
Ending Inventory at cost= Ending Inventory * Cost to Retail Ratio
	= 350,000 *50%= $ 175,000

1.Difference between the statement closing balance and the journal balance

2.Explanation of the difference.

Create your own checklist to follow when you take receipt of goods. If appropriate, make it specific to a real situation. Your checklist should fit on one page.

Create your own checklist to follow when you take receipt of goods. If appropriate, make it specific to a real situation. Your checklist should fit on one page.

Procedure to be followed on receipt of goods

1. Inspection of goods

All goods need to be inspected and it must be noted that is there any visible damage or shortage of any freight. A clean receipt should never be provided in any scenario of damage or shortage on goods packaging (Vanderbeck, 2013).

2. Claim against transport companies

The goods must be inspected soon after the process of receipt. When it comes to damage that is non-visible or shortage then the carrier must be held liable.

3. Reporting

The reporting should be made at once to the Cargo claims.

4. Damage limitation

Necessary steps should be taken to lessen the loss and stopping any further damage.

Selection of Inventory Flow Assumption Method for Retail Electronic Business

The effective policies and procedures vary from organization to organization to get the same level of achievement because of several factors in mind the first one is the size of the organization if a company has huge chain of business the policies and procedures have to be modified and progressed in a detailed manner whereas a smaller company would not require such expense in detailing and expanding a huge set of policies as brief polices, rules and regulations would be enough to manage the company’s internal assets and would in return provide the same result (Venanci, 2012). The policies and procedures also vary according to the type and nature of different organizations.

Ad hoc report is a great help to organizations in this competitive worldwide era because of its ability to save time, chose from many information’s charts and tables according to person to person preferences, it is a complete package in cutting a huge data into the exact point wise information. A manager if dealing with worldwide customer relationship would largely be benefited by Ad hoc report, since it would get a model developed data based on different types of customers in many form of tabular charts, graphs and other metadata information’s available. The developers of Ad hoc report does it such successful way that not only a manager can derive detailed information and analysis of customers but can also solve their variable queries through this report without in return having any query left by manager itself.

Organizations should maintain alert and strict regulations while maintaining inventory records. There are many areas in which control of inventory should be checked in order to increase the efficiency of inventory control management. Like delegating different staff each for finance and inventory maintenance, documentation area should be in detail and maintained properly to track all the inward and outward, purchase and sale of inventories. Auditing of inventory is vital area to be checked in order to prevent any malpractices and also check on inventory would be necessary to know if there is any loopholes in the system or security of stock to be improved or not.

The key steps in the inventory management processes starts with a respective stated authority collecting form the person in charge of inventory compilation a draft report of inventory along with a predefined in time budget as well the resources simultaneously. After this the person in charge of inventory compilation should request the data providers for necessary data’s needed, hence following the above the next step would be of data providers who would provide the raw data in order to estimate emissions (Horngren, 2011). The in charge of inventory compilation will now with the help of raw data provided estimate the emissions. The next vital step is preparing of a draft format for reporting along with inventory reports and hand over the same to the concerned authority. The concerned authority implementing the last step would sign and approves the draft report and inventory making it final and submitting the same to the Convention.

Calculation of Ending Inventory using Retail Inventory Method

A ledger is a system to record the numbered figure of accounts of organizations on everyday basis of all financial transactions done each time. These recorded accounting figures in form of ledger entry helps in preparing trial balance, financial statements and also it’s a source of information from where accounts of all liabilities and assets, earnings and expenditures of an organization or company keeps track of the activities (Maher, 2005). All financial transactions done on everyday basis or as and when it takes place is made entry of or posted in respective subheading accounts made in the ledger system. It is after this process an accountant generates a trail balance on basis of these entries, and then further adjustments are made by putting in wherever required additional account entries, after this process the ledger system enables to generate a proper financial statement.

The five methods of inventory valuation are namely the first one First in First out Method in short known as FIFO, in this method the producer or manufacturer of the goods sells the goods which are produced or manufactured first, therefore the cost incurred in producing the older goods are sold first to get the cost of goods sold and simultaneously the inventory which are produced are later stage are also sold later (Robinson & Last, 2009). The second method is Last In First Out Method in short known as LIFO, in this method the opposite is done compared to the above method which means that the latest or the freshly produced inventory are sold out at first place and the older manufactured inventories remain and is sold following the newest inventory. The third method that can be adopted for inventory calculation is Average Cost Method in short known as AVCO, which means the average cost of inventory is calculated, in this method the inventory cost is calculated on an average cost and not by the actual cost (Drury, 2011). It is done by two ways either on a perpetual basis or at periodical basis. On perpetual basis the valuation is done variable times that is every time of receipt of inventory, and when periodical basis inventory calculation is done one at the end of every accounting year. The other method of valuation is Highest in First Out in short known as HIFO. The last method is known as specific identification in this method the valuation is done on cost specific and identifiable goods or inventories that goes in or comes out on an individual capacity or way.

Checklist for Receiving Goods

part1

Valuation of Closing Stock
FIFO Method - the closing stock will comprise of the items purchased in the end
	250 units - purchased on 21st April @ $ 35  = $		8,750
	400 units - purchased on 17th Feb @ $ 28  = $		11,200
		Value of 650 units of closing stock = $	19,950

LIFO Method - the closing stock will comprise of the items lying in opening stock and purchased in the beginning.

Particulars		Date of	Units	Rate per	Total
		Purchase		Unit	Cost ($)
Op. Stock			350	25	8,750
Purchases		1/12.	300	30	9,000
		17/2.	500	28	14,000
		21/4.	250	35	8,750
	Total		1,400		40,500
	Weighted Average Cost = Total Cost/ Total Units
			= 40500/1400= $ 28.93 per unit

Closing Inventory Value = 650 units * @ 28.93 = $ 18,804 (approx)

Calculation of Cost of Goods Sold
		FIFO Method	LIFO Method	Weighted Avg
Opening Stock		8,750	8,750	8,750
Purchases		9,000	9,000	9,000
		14,000	14,000	14,000
		8,750	8,750	8,750
	Total	40,500	40,500	40,500
Less : Closing Stock as calculated above		19,950	17,750	18,804

Part 2

1. Describe the procedures you would follow in a work organization, to determine and confirm work requirements, in particular those relevant to this task.

Identification of the task that needs safe work procedure

When the task is provided it must be ascertained in a proper manner that will help in knowing the work procedure that is needed. Once it is identified it can be easily defined and better steps can be taken.

Prioritization of the task

Task priority helps in knowing the task to be performed and the priority that needs to be set. This helps in getting the work done with ease and flexibility.

Development of work procedure

Once the work procedure is known it becomes easy to master the work and adhere to the requirement of the work.

Evaluation of the work procedure

If the work procedure is evaluated then it comes easy to confirm to the requirements of the work. This is due to the fact that it becomes easy to know the pros and cons.

Calculation of Market Value of Inventory by Net Realisable Value Method :
Goods		Units	Realisable		Total
			Value per		Market
		(A)	Unit ($) (B)		Value ($) (A- B)
A		500	15
B		300	70
C		400	10
D		200	40
				Total

Net Realizable Value of an asset is the method used to calculate the value of asset that will be recovered a t the time of its sale or disposal, while it is still in the inventory. The estimated costs to be incurred for the disposal of the asset shall be deducted from the estimated realizable value of the asset. The balance denotes the Net Realizable Value of the asset (Larry & Christopher, 2012).

The formula used for calculating Net Realizable Value is

Sales Value or Market Value of Inventory minus Estimated Cost of Disposal of asset.

There is always a need to assess the value of inventory from time to time so that its cost can be reduced in case there has been any damage, spoilage, or any other such factor. Further, writing down of the value of stock to its realizable value helps the organization in preventing the carry forward of losses for being recognized in any future period (Needles, 2011).

Hence, the organization in Question has taken a very appropriate step by bringing the value of inventory t o its net realizable value.

References

Drury, C. (2011). Cost and management accounting. Andover, Hampshire, UK: South-Western Cengage Learning.

Horngren, C T  &  Foster, G. (2008).  Cost Accounting: A Managerial Emphasis. United States Edition

Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.

Lanen, W. N, Anderson, S & Maher, M. W. (2008). Fundamentals of cost accounting. NY: Hang Loose press.

Maher, L. (2005).  Fundamentals of Cost Accounting. McGraw-Hill

Larry M. W & Christopher J. S 2012, Managerial and Cost Accounting, Pearson Pres

Needles, S. C. (2011). Managerial Accounting, USA: South-Western Cengage Learning .

Robinson, M., & Last, D. (2009). Budgetary Control Model: The Process of Translation. Accounting, Organization, and Society. NY Press

Vanderbeck, E J. (2013).  Principles of Cost Accounting. Oxford university press

Venanci, D. (2012). Financial Performance Measures and Value Creation.  State of art . New York: Springer