Question

(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

I) Raymon Traders Using Periodic Inventory System. Periodic Inventory System is a method of ascertaining inventory by way of physical counting of all item of inventory on a particular date. Under this system to findout the cost of goods sold, inventory account is adjusted at the end of the accounting period. The cost of goods sold is determined as follows:

Begining Inventory Plus Purchases Minus Physically counted ending inventory.

Periodic inventory system is a simple and less expensive system than the perpetual inventory system.

Physical iventory system has the following limitations

a) if the entity wants to prepare interim financial statement eg Monthly, quartely, half yearly etc, physcial verification on all such dates will be expensive.

b) The business operation has to be closed for counting the inventory.

c) The loss on account of fraud, damage or pilferage is not determined or accounted, since the cost of goods sold is determined as a residual figure as Begining Inventory Plus Purchases Minus Physically counted ending inventory.

d) The value of inventory will be known only after the completion of physical verification.

e) The planning of operations like when to manufaure, how much to produce, when to order inventory etc will be difficult under this system, since the books of accounts willnot show the inventory amount.

f) Control over inventory is less under this sytem

II) Invetory to be valued as under

Lower of Cost and Net Realiable vale

The cost of Inventory is $ 39600

The Net Realisable Value of the Inventory is $ 36000

Lower of the above is Net Realiable value ie $ 36000

and therefore inventory should be valued at $ 36000

ii) The Journal entry for recording inventory after verification of inventory is as follows

Inventory Debit 36000

Purchase Credit 36000

No adjustment entries are required for obsolete loss. Since the cost of goods sold is determined as a residual figure as Begining Inventory Plus Purchases Minus Physically counted ending inventory.

B) The following disclouses may be made in the financial statements

a) Inventories are stated at Lower of cost and Net Realisable Value

b) Cost is determined under FIFO method

c) Net Realisable value is the estimated selling price minus estimated cost of completion and estimated cost necessary to make such sale

d) The entiity follow periodic invetory system for valuing the inventory

f) Cost of inventory includes: Cost of purchase, cost of conversion and other cost incurred in bringing the inventory to the present location and condition.

g) Cost of goods sold is determined as residual figure