Chapter 7: Cost of Sales and Inventory
1. Inventory (hàng tồn kho) ∈ current asset
- For retail(bán lẻ) business: Inventory is goods purchased and held for resale
- For manufacturing business:
(unfinished good)
2. Cost of Sales
Cos = opening + purchase + inwards -closing inventory
- Goods might be unsold at the end of a reporting period and so still be held in
inventory.
- Under the accrual concept, the cost of these goods should not be included in cost
of sales, instead it should be carried forward and matched against revenue in
subsequent periods.
Note 1: Delivery inward and Delivery outwards
- ‘Delivery’ refers to the cost of transporting purchased goods from the supplier
to the premises of the business which has bought them.
- The cost of delivery inwards is added to the cost of purchases, and is therefore
included in the calculation of cost of sales and gross profit.
- The cost of delivery outwards is a distribution cost deducted from gross profit
in the statement of profit or loss.
Note 2: Inventory written off or written down
- If, at the end of a reporting period, a business still has goods in inventory
which are either worthless or worth less than their original cost, the value of
the inventories should be written down to:
+ Nothing, if they are worthless, or
+ Their net realisable value, if this is less than their original cost.
Note 3: Inventory destroyed or stolen and subject to an insurance claim
- Where a material amount of inventory has been stolen or destroyed:
- Purchases will include the cost of goods that could not be sold, so the accrual
principle is broken, yet they are not in closing inventory either, so it will
look as if the business's gross margin on sales has
fallen catastrophically.
- There may be an amount of income as a result of an insurance claim, which cannot
be included in cost of sales under the 'no offsetting‘ principle.
=> These problems are overcome by taking the cost of goods stolen or destroyed out
of purchases, and including it under expenses. The insurance claim is treated as
other income in calculating net profit; if it has not yet been received in the form
of cash it is disclosed as 'other receivables' on the statement of financial
position.
Note 4: Inventory drawings
- If an onwer takes items of inventory from business as drawings, we reduce the
cost of sales with the cost of items withdrawn
Dr Drawings
Cr Cost of sales
3. Accounting for Opening and Closing inventory
- In each reporting period, opening inventory is added to cost of sale or is an
expense in the statement of profit or loss:
Dr Cost of Sales
Cr Inventory (opening inventory)
- Closing inventory is deducted from cost of sales in the reporting period, so it
can be carried forward and matched against the revenue it earns in the next
period:
Dr Inventory (closing inventory)
Cr Cost of Sales
The inventory account is only used at the end of a reporting period when
business counts and values closing inventory
- Purchase of inventories is added to cost of sale
Dr Cost of Sales
Cr Purchases
- The cost of sales account is finally transfered to P&L account to calculate the
profit at the end of period
Dr Profit and loss account
Cr Cost of Sale
4. Counting Inventory
- To determine the quantity of inventories held in the end of the reporting period
- In very small businesses => physically counting inventory (người đếm) in one
count at a designated time
- In large businesses with varied inventory => computerised to maintain continuous
inventory records. Some line of inventories are counted daily => continuous count
5. Valuing inventory
Compare between the historical cost of inventory (the cost at which the inventory
was originally bought) and the Net reaslisable value (NPV)
a) Cost of inventory
Cost of inventory (historical cost) = cost of purchase + cost of conversion
- Cost of purchase: material costs, import tax, duties, freight, delivery inwards,
less trade discount received (if any)
- Cost of conversion : production wages and production overheads
+ Production wages : such as direct labor cost
+ Production overheads (fixed and variable): factory heating and light, salary of
supervisor, depreciation of equipment
b) The Net realisable value (NRV)
The NRV = the expected selling price – any cost still to be incurred in getting the
inventory ready for sale
- The NRV may less than (historical) cost of inventory because:
• Inventories are damaged or become obsolete;
• Cost to completion have increased in order to make the sale
• In increase in cost or fall in selling price;
• A physical deterioration in the condition of inventory
• Obsolescence of products
• A decision as part of the company’s marketing strategy to manufacture and sell
products at a loss
• Errors in production or purchasing.
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