Question

(a) The 2018 New Zealand Conceptual Framework states that “an asset is a present economic resource controlled by the entity as a result of past events.”

Discuss this statement in relation to inventory items that are in transit between the buyer and seller.

(b) Raymond Traders is a small business, and it undertakes periodical stock-takes to determine its inventory value. On 30 June 2020, Raymond Traders completed a physical stock-take, and inventory on hand as at 30 June 2020 had a cost of $39,600. However, some of the inventory items were deemed to be obsolete and Net Realisable value was determined to be $36,000.

(i)   Based on the information above, what inventory management system is Raymond Traders currently using? Outline one advantage and one disadvantage of the inventory management system.

(ii)   Advice Raymond Traders on the value of inventories to be shown in the Statement of Financial Position as at 30 June 2020, with reference to NZ IAS 2. Explain.

(iii)   In light of your answer (ii) above, prepare a journal entry to record any required adjustments on 30 June 2020.

(c)   NZ IAS 2, paragraph 36 requires companies to make disclosures to present inventory fairly in their financial statements. List six disclosures that companies must include in the financial statements as additional disclosures.

Answer 1

The term Goods in Transit (or Transit inventory) refers to inventory items that have been shipped by the seller, but not yet received by the buyer. Transit inventory is an important component of company’s inventory valuation.

GIT is booked in books of accounts on quarterly basis to ascertain true & fair view of financial statements.

Goods in transit is presented under CURRENT ASSETS under sub heading INVENTORY in statement of accounts.

Q- How to determine whether an inventory is transit inventory or not?

A-Legal title (ownership & risk of goods) of goods defines whether the inventory to be accounted as Goods in transit or not.

The shipping arrangement will help determining the point of time when ownership & risk of goods transferred from seller to the buyer.

Let us understand few terms: –

S.No	Delivery Terms	Interpretation	Transfer of Ownership & risk to buyer
1.	Free on Board- Destination	In goods shipped on FOB-Destination basis, Transportation cost is paid by seller.	After goods are received by buyer.
2.	Free on Board- Shipping	In free on board- shipping basis – Transportation cost is paid by buyer.	At point carrier/ transporter takes possession of goods.
3.	Free Alongside (FAS)	Seller who ships on FAS basis bears all the expenses & risk involved in delivery of goods to the dock next to (alongside) the vessel on which they are to be shipped.	At point carrier/ transporter takes possession of goods.
4.	Cost, Insurance & Freight (CIF)	Buyer agrees to pay lump sum cost of goods, insurance & freight charges. Seller deliver the goods to carrier/ transporter & pays loading expenses.	At point carrier/ transporter takes possession of goods.

Note- The cost of freight is to be included valuation of goods in transit.

Recognition of GIT only at the time when risk & rewards are transferred

(B)

A periodic inventory system is a form of inventory valuation where the inventory account is updated at the end of an accounting period rather than after every sale and purchase.

The method allows a business to track its beginning inventory and ending inventory within an accounting period.

Advantages of Periodic Inventory System

1. Since no permanent employee is required for physical counting of merchandise inventory under this system it is less expensive.
2. It is applicable for all business organizations large or small dealing with specific or a variety of goods.
3. Since stock taking is done at the end of a period under this system the normal activities of the business are not hampered.
4. Since the stock-taking of merchandise is done on a particular date the quantity of stock of merchandise is reliable.

Disadvantages of Periodic Inventory System

1. On the very day of the physical counting of merchandise stock, normal activities of business remain almost suspended.
2. The act of counting merchandise stock is to be completed hurriedly due to a shortage of time.
3. Under this system chance of fraud and forgery lies, because here continuous control over merchandise is absent.
4. Under this system on expiry of the particular period, the reasons for differences between merchandise at hand and merchandise shown in the books of accounts can hot be sorted out easily.
5. Under this system, the stock control device is very weak. Their employees get a chance to adopt corruption.

(ii)

Inventory has to be valued at lower of Cost or Net Realisable Value

Therefore inventory has to be valued at : $36,000

iii)

Date	Particulars		Debit ($)	Credit ($)
30-Jun-20	Profit and Loss A/C	Dr	$3,600
	To Inventory			$3,600
	Being Stock valued at net realisable value

iv) Disclosures as per IAS 2

The financial statements shall disclose:

(i)             the accounting policies adopted in measuring inventories, including the cost formula used;

(ii)            the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity;

(iii)           the carrying amount of inventories carried at fair value less costs to sell;

(iv)          the amount of inventories recognised as an expense during the period;

(v)           the amount of any write-down of inventories recognised as an expense in the period;

(vi)          the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period;

(vii)         the circumstances or events that led to the reversal of a write-down of inventories; and

(viii)        the carrying amount of inventories pledged as security for liabilities.