The recordings in this chapter show students how to
1) Calculate cost of sales
2) Calculate value of inventory at the end of the accounting year
3) Prepare journal entries for sale of inventory (where cost of sales is found using FIFO)
4) Calculate cost of purchases and prepare relevant journal entries
5) Prepare inventory account
6) Prepare journal entries to adjust inventory to net realisable value
7) Prepare financial statements extracts
Cost of sales refers to cost price of units sold.
Using First In First Out (FIFO), inventory bought in first are assumed to be sold out first.
This refers to cost price of unsold inventory at the end of the accounting year.
At selling price,
Dr CAB/ CIH/ TR: <name of credit customer>
Cr Sales Revenue (+I)
At cost price (found using FIFO),
Dr Cost of sales (+E)
Cr Inventory (-A)
Cost of purchases refers to TOTAL cost price of inventory purchased and include 3 components:
1) Purchase price of inventory
2) Cost incurred to bring in the inventory
Transport e.g. shipping fees, air freight charges
Custom duties (i.e. tax paid to the government)
Insurance
3) Cost incurred to get the inventory ready for sale
Packing materials
Wages of employees involved in repacking goods
Begin and end inventory account with Bal b/d.
Balance in inventory account represents the cost price of unsold inventory.
Net realisable value refers to the estimated selling price of inventories, less than any costs of completion, disposal and transportation.
The journal entries are needed when net realisable value is LOWER than the cost price of inventory (in accordance to the Prudence concept).