Kaplan ACCA Financial Accounting Notes

Course Overview

  • ACC Financial Accounting (FA/FFA) covers essential accounting principles, especially focusing on inventory management and valuation.

IFRS Standards and Copyright

  • The course references IFRS® Standards and IAS® Standards from the International Accounting Standards Board and the 2019 IFRS Standards Red Book.

Inventory Valuation

  • Inventory Valuation: It is fundamental to report inventory accurately.
  • Lower of Cost and Net Realisable Value (LCNRV) as per IAS 2: Items must be measured at the lower of their cost and net realizable value.

Inventory in Financial Statements

  • Recording Inventory: Only recorded at the end of the accounting period. Sales and purchases recorded throughout the year, except inventory movements.

  • Gross Profit Calculation:

    • Formula:

      Revenue - ext{Cost of Goods Sold} = ext{Gross Profit}
    • Cost of sales includes:
    • Opening Inventory
    • Plus Purchases
    • Less Closing Inventory

Example Calculation of Gross Profit

  • Starting inventory: 1,5001,500
  • Purchases: 21,00021,000
  • Sales: 25,00025,000
  • Ending inventory: 3,0003,000
  • Gross Profit:

    25,000 - (1,500 + 21,000 - 3,000) = 5,500

Recording Adjustments for Inventory

  • Adjustment Entries:
    1. Opening Inventory:

      Dr. Cost of sales
      Cr. Inventory Assets
    2. Closing Inventory:

      Dr. Inventory Assets
      Cr. Cost of sales

Periodic vs. Perpetual Inventory Systems

  • Periodic Inventory System:

    • Inventory updated at year-end through a physical count.
    • Uses purchase accounts and computes cost of goods sold at end.

  • Perpetual Inventory System:

    • Continually updates inventory accounts in real-time with every transaction (sales and purchases).

Inventory Valuation Methods

  1. FIFO (First-In, First-Out): Assumes the oldest inventory is sold first.
  2. Weighted Average Cost (AVCO): Calculates a weighted average cost of inventory purchased throughout the accounting period.
NRV Calculation
  • Net Realisable Value (NRV) calculation involves expected selling price minus costs to complete the sale.

Impact of Inventory Valuation Methods on Financial Statements

  • Overstate Inventory:
    • Higher profit and asset values reported.
  • Understate Inventory:
    • Lower profit and asset values reported.

IAS 2 Inventories Principles

  • Includes:
    • Cost of Purchase: All costs needed to bring inventory to location and condition.
    • Costs excluded: Selling costs, storage costs, and costs of abnormal wastage.

Financial Position Statement and Gross Profit Visibility

  • Closing inventory appears as an asset in the statement of financial position, affecting profitability and asset valuation.

Practical Application in the Ledger

Example: Adjusting for year-end inventory
  • Ledger entries for costs, sales, and inventory adjustments help reflect accurate financial health of a business.

Test Your Understanding Activities

  • Apply knowledge through case studies to ensure comprehension of inventory valuation and financial reporting processes.
  • Track the results using varied methods to consolidate learning.

Key Learning Objectives

  • Record inventory adjustments accurately.
  • Apply principles of IAS 2 Inventories.
  • Identify costs included in inventory.
  • Calculate costs using FIFO and AVCO methods.
  • Understand the impact of inventory valuation on reported profits and assets.