Inventory_and_Bad_Debts_Lecture_PowerPoints_2024-25

ACFI101 Overview

• Topic 6: The Valuation of Inventory and Bad & Doubtful Debts

• Attendance Code: 1

Previous Topics Covered in ACFI101

• Established the ‘double entry rule’ for recording transactions (

  • Acronym: DEADCLIC)

• Balanced off the T accounts at the end of a period

• Prepared a Trial Balance (list of balances)

• Made adjustments for:

  • Depreciation & disposals

  • Accruals and prepayments

• Prepared core financial statements:

  • Statement of Profit or Loss (SPL)

  • Statement of Financial Position (SFP)

• New Areas of Focus:

  • Adjustments for Inventory

  • Bad & Doubtful Debts

Valuation of Inventory

• Nature of Inventory:

  • Includes:

    • Goods held for resale

    • Goods in production (work in progress)

    • Raw materials

  • Examples:

    • Sportswear retailer

    • Car manufacturer

    • Advertising agency

IAS 2 Inventories

• Uniform accounting practices are guided by standards (e.g., IAS and IFRS)

• IAS 2 provides guidance on:

  • Establishing inventory costs

  • Accounting for declines in resale value of inventory

Cost of Inventory

• Components of inventory cost:

  • Cost of purchase:

    • Purchase price, import duties, carriage inwards

  • Cost of conversion:

    • Wages, overheads

• Focus herein is on non-manufacturers

Determining Cost of Inventory: Example

• Rex's Eco-light bulbs:

  • June Imports:

    • 10 bulbs at £1.80 each

    • 10 bulbs at £2.30 each

    • 10 bulbs at £2.50 each

Inventory Valuation Methods

FIFO Method

• Assumption: Oldest stock sold first

• Calculation:

  • Closing inventory: 10 bulbs at £2.50 = £25

  • SPL:

    • Sales: £100

    • COGS: £41

    • Gross Profit: £59

AVCO Method

• Assumption: Mixture of older/newer stocks

• Calculation:

  • Average cost per bulb = £66 / 30 = £2.20

  • Closing inventory: 10 bulbs at £2.20 = £22

  • SPL:

    • Sales: £100

    • COGS: £44

    • Gross Profit: £56

Key Points on FIFO and AVCO

• FIFO allows identification of stock at period end

• AVCO requires recalculating average with new batches

• LIFO (Last In, First Out) is not permitted by IAS 2

Net Realisable Value (NRV)

• Inventory may lose resale value due to damage or obsolescence

• Valued at the lower of cost and NRV (Prudence Concept)

• Assess costs in detail wherever possible

Bad and Doubtful Debts

Introduction

• Credit sales involve sending invoices, recorded as:

  • Dr Receivables

  • Cr Sales

• Risk: Some customers may never pay

Situations

1. Bad Debts: Irrecoverable debts must be removed

   • Example: Meg’s business loses £3,000 in debts

2. Doubtful Debts: Debts may still be recoverable but should be allowed for

   • Generate an allowance for such debts based on past experience

Allowance for Doubtful Debts Calculation

• Aged receivables report helps evaluate risky debts

• Different scenarios for adjusting allowances include establishing, increasing, and decreasing

Summary of Allowance Changes

1. First-time Allowance: Calculate percentage based on estimates

2. Increasing Allowance: Adjust and account for increase

3. Decreasing Allowance: Recognize reduced requirement and adjust accounts accordingly

Questions Review

• Numerous end-of-topic questions assess understanding of FIFO, AVCO, cost vs NRV, and bad debts

• Questions / scenarios provided for practice yield clarity on accounting policies

Essential Private Study

• Engage with lecture content, complete quizzes, practice past tests

• Refer to specific textbook sections for deeper comprehension