[{"Name":"Introduction to Inventory","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Inventory in context","Duration":"4m 9s","ChapterTopicVideoID":26645,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/26645.jpeg","UploadDate":"2021-10-10T09:42:56.8730000","DurationForVideoObject":"PT4M9S","Description":null,"MetaTitle":"Inventory in context: Video + Workbook | Proprep","MetaDescription":"Inventory - Introduction to Inventory. Watch the video made by an expert in the field. Download the workbook and maximize your learning.","Canonical":"https://www.proprep.uk/general-modules/all/introduction-to-financial-accounting-and-reporting/inventory/introduction-to-inventory/vid28607","VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.280","Text":"Hello and welcome to this series of"},{"Start":"00:02.280 ","End":"00:06.975","Text":"video presentations on inventory brought to you by Proprep."},{"Start":"00:06.975 ","End":"00:08.880","Text":"By the end of the section,"},{"Start":"00:08.880 ","End":"00:13.826","Text":"you\u0027ll be able to: show some examples of inventory reporting,"},{"Start":"00:13.826 ","End":"00:18.705","Text":"present variation principles underlying the measurement of inventory,"},{"Start":"00:18.705 ","End":"00:22.380","Text":"explain how the cost of goods sold is calculate"},{"Start":"00:22.380 ","End":"00:27.146","Text":"and both the periodic and perpetual inventory systems,"},{"Start":"00:27.146 ","End":"00:33.885","Text":"finally, use 3 methods to approximate the physical flow of inventory units."},{"Start":"00:33.885 ","End":"00:38.685","Text":"In this video, we will focus on inventory in context."},{"Start":"00:38.685 ","End":"00:42.865","Text":"This slide shows the percentage that inventory,"},{"Start":"00:42.865 ","End":"00:46.220","Text":"intangibles, and PPE,"},{"Start":"00:46.220 ","End":"00:48.110","Text":"Property, Plant, and Equipment,"},{"Start":"00:48.110 ","End":"00:54.140","Text":"comprise of the total assets of a variety of companies."},{"Start":"00:54.140 ","End":"00:56.240","Text":"Looking firstly at Netflix,"},{"Start":"00:56.240 ","End":"01:01.685","Text":"you will see Netflix has no inventory typical of the top company it is,"},{"Start":"01:01.685 ","End":"01:08.540","Text":"but a very large percentage of its assets comprises of intangible assets."},{"Start":"01:08.540 ","End":"01:15.065","Text":"Contrast that to the 2 companies at the bottom, Next and H\u0026M."},{"Start":"01:15.065 ","End":"01:22.275","Text":"Next and H\u0026M are both large British clothing retailers."},{"Start":"01:22.275 ","End":"01:25.715","Text":"As you would expect for a clothing retailer,"},{"Start":"01:25.715 ","End":"01:29.570","Text":"the percentage of inventory of total assets,"},{"Start":"01:29.570 ","End":"01:37.540","Text":"you will see is 14 percent for Next and 21 percent of total assets for H\u0026M."},{"Start":"01:37.540 ","End":"01:40.655","Text":"Whereas the intangibles comprise"},{"Start":"01:40.655 ","End":"01:46.835","Text":"a relatively small amount of 1 percent, 10, respectively."},{"Start":"01:46.835 ","End":"01:51.680","Text":"Rolls-Royce, the motorcar and engine manufacturer,"},{"Start":"01:51.680 ","End":"01:57.170","Text":"also has a relatively large percentage of inventory at 13 percent,"},{"Start":"01:57.170 ","End":"02:01.670","Text":"yet only 17 percent as intangible assets."},{"Start":"02:01.670 ","End":"02:05.585","Text":"This slide, inputting imagery and context,"},{"Start":"02:05.585 ","End":"02:11.284","Text":"relates the total inventory of 2 very different companies."},{"Start":"02:11.284 ","End":"02:17.270","Text":"Rolls-Royce, the motor manufacturer and engine manufacturer and Next,"},{"Start":"02:17.270 ","End":"02:20.704","Text":"the large British clothing retailer."},{"Start":"02:20.704 ","End":"02:24.335","Text":"Now a company like Rolls-Royce, as a manufacturer,"},{"Start":"02:24.335 ","End":"02:29.955","Text":"you will see has 3 components of inventory: it has raw materials,"},{"Start":"02:29.955 ","End":"02:32.285","Text":"it has work in progress,"},{"Start":"02:32.285 ","End":"02:34.595","Text":"and it has finished goods."},{"Start":"02:34.595 ","End":"02:37.116","Text":"What then our raw materials?"},{"Start":"02:37.116 ","End":"02:42.710","Text":"Raw materials are the parts or the type of inventory that will"},{"Start":"02:42.710 ","End":"02:48.830","Text":"be used in the production process by a company like Rolls-Royce."},{"Start":"02:48.830 ","End":"02:52.669","Text":"In other words, the component parts that go into making"},{"Start":"02:52.669 ","End":"02:57.710","Text":"the engines and motor vehicles that Rolls-Royce manufacture."},{"Start":"02:57.710 ","End":"02:59.855","Text":"What is work in progress?"},{"Start":"02:59.855 ","End":"03:02.120","Text":"At year-end, in other words,"},{"Start":"03:02.120 ","End":"03:04.040","Text":"the financial state and date,"},{"Start":"03:04.040 ","End":"03:07.325","Text":"any manufacturing entity will have"},{"Start":"03:07.325 ","End":"03:12.169","Text":"some goods which have been started in the production process,"},{"Start":"03:12.169 ","End":"03:16.610","Text":"but for which the production process is not yet complete or"},{"Start":"03:16.610 ","End":"03:21.455","Text":"that type of inventory is known as work in progress."},{"Start":"03:21.455 ","End":"03:23.855","Text":"Finally, what is finished goods?"},{"Start":"03:23.855 ","End":"03:27.178","Text":"Finished goods, as the name implies,"},{"Start":"03:27.178 ","End":"03:30.560","Text":"are completed goods, in other words,"},{"Start":"03:30.560 ","End":"03:35.960","Text":"completed motor vehicles or maybe aircraft engines that Rolls-Royce has"},{"Start":"03:35.960 ","End":"03:42.905","Text":"manufactured and are now waiting to be supplied or sold to prospective purchases."},{"Start":"03:42.905 ","End":"03:45.320","Text":"On the other hand, looking at Next,"},{"Start":"03:45.320 ","End":"03:49.040","Text":"you\u0027ll see Next only has inventories on a statement"},{"Start":"03:49.040 ","End":"03:52.655","Text":"of financial position with no subclass of vacation,"},{"Start":"03:52.655 ","End":"03:53.900","Text":"no raw materials,"},{"Start":"03:53.900 ","End":"03:55.310","Text":"and work in progress,"},{"Start":"03:55.310 ","End":"03:59.015","Text":"which you would not expect to find in a retailer."},{"Start":"03:59.015 ","End":"04:03.290","Text":"The inventories and the retailer are in essence the same as"},{"Start":"04:03.290 ","End":"04:09.930","Text":"the finished goods and the manufacturer they are goods available to sell to customers."}],"ID":28607},{"Watched":false,"Name":"Exercise 1","Duration":"4m 28s","ChapterTopicVideoID":26356,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.729","Text":"We\u0027re going do the exercise ABC."},{"Start":"00:02.729 ","End":"00:06.525","Text":"ABC reports the following balances for 20X1,"},{"Start":"00:06.525 ","End":"00:10.755","Text":"we have an inventory beginning balance of 1,200."},{"Start":"00:10.755 ","End":"00:16.650","Text":"We then purchased 3,150 currency units worth of inventory."},{"Start":"00:16.650 ","End":"00:23.520","Text":"Then we\u0027re told that the inventory ending balance was valued at 1,820 currency units."},{"Start":"00:23.520 ","End":"00:30.990","Text":"The required asks us to calculate the cost of goods sold that ABC should report for 20X1."},{"Start":"00:30.990 ","End":"00:35.640","Text":"To answer this question, we\u0027re going to reconstruct our inventory asset account."},{"Start":"00:35.640 ","End":"00:40.545","Text":"As you can see, we start with our inventory beginning balance of 1,200,"},{"Start":"00:40.545 ","End":"00:41.845","Text":"which was given to us."},{"Start":"00:41.845 ","End":"00:48.800","Text":"To that we add the purchases we made during the period that 3,150 that was given to us,"},{"Start":"00:48.800 ","End":"00:54.035","Text":"that suggests that if we hadn\u0027t sold any inventory during the period"},{"Start":"00:54.035 ","End":"00:59.765","Text":"our closing balance ought to be 4,350 being the sum of those 2 figures."},{"Start":"00:59.765 ","End":"01:04.895","Text":"However, we are told that the inventory ending balance was valued at 1,820,"},{"Start":"01:04.895 ","End":"01:06.770","Text":"so we can see that there is a difference,"},{"Start":"01:06.770 ","End":"01:08.225","Text":"there is missing inventory."},{"Start":"01:08.225 ","End":"01:11.405","Text":"If we assume that all of the missing inventory was sold,"},{"Start":"01:11.405 ","End":"01:14.645","Text":"then we simply subtract the cost of goods sold,"},{"Start":"01:14.645 ","End":"01:18.665","Text":"being the difference, 2,530."},{"Start":"01:18.665 ","End":"01:22.730","Text":"Obviously in reality, not all goods may have been sold,"},{"Start":"01:22.730 ","End":"01:27.170","Text":"some may have been stolen, in which case,"},{"Start":"01:27.170 ","End":"01:30.440","Text":"the cost of goods sold will be slightly smaller,"},{"Start":"01:30.440 ","End":"01:37.400","Text":"and then you would have another separate expense to indicate losses due to theft."},{"Start":"01:37.400 ","End":"01:42.230","Text":"Many businesses include the losses due to theft within the cost of goods sold."},{"Start":"01:42.230 ","End":"01:44.690","Text":"It depends on the nature of the business."},{"Start":"01:44.690 ","End":"01:48.710","Text":"Now, this inventory asset account has been presented in"},{"Start":"01:48.710 ","End":"01:50.840","Text":"a columnar format and I\u0027ll show you how to"},{"Start":"01:50.840 ","End":"01:53.810","Text":"reconstruct it using the T-account format in a moment."},{"Start":"01:53.810 ","End":"01:55.640","Text":"But just to recap,"},{"Start":"01:55.640 ","End":"01:59.075","Text":"the inventory beginning balance because we\u0027re dealing with an asset,"},{"Start":"01:59.075 ","End":"02:04.805","Text":"is a debit of 1,200 because assets get bigger on the debit side,"},{"Start":"02:04.805 ","End":"02:07.550","Text":"when you increase your asset account is a set,"},{"Start":"02:07.550 ","End":"02:10.100","Text":"an essay which gets bigger on the debit side,"},{"Start":"02:10.100 ","End":"02:13.340","Text":"we would debited with a 3,150."},{"Start":"02:13.340 ","End":"02:15.440","Text":"Then if goods are sold,"},{"Start":"02:15.440 ","End":"02:18.470","Text":"they come out of your asset account and get expense,"},{"Start":"02:18.470 ","End":"02:22.190","Text":"so you would create your cost of goods sold and the other side of it would be we"},{"Start":"02:22.190 ","End":"02:26.440","Text":"would debit the cost of sales."},{"Start":"02:26.440 ","End":"02:30.340","Text":"Expense, account expenses get bigger on the debit side."},{"Start":"02:30.340 ","End":"02:33.920","Text":"The purchases where we debit this account with 3,150,"},{"Start":"02:33.920 ","End":"02:35.930","Text":"the other side of it would have been a credit to"},{"Start":"02:35.930 ","End":"02:40.130","Text":"bank or it would have been a credit to payables."},{"Start":"02:40.130 ","End":"02:42.560","Text":"If we hadn\u0027t paid for it in cash."},{"Start":"02:42.560 ","End":"02:47.030","Text":"That then means that our inventory ending balance is debit 1,820 and that\u0027s"},{"Start":"02:47.030 ","End":"02:51.830","Text":"because the debits exceeded the credits of 2,530."},{"Start":"02:51.830 ","End":"02:54.890","Text":"Now, looking at it using a T-account format,"},{"Start":"02:54.890 ","End":"02:57.335","Text":"we have an inventory asset account."},{"Start":"02:57.335 ","End":"03:00.830","Text":"We are told that the opening balances 1,200,"},{"Start":"03:00.830 ","End":"03:06.170","Text":"we then have purchases of 3,150."},{"Start":"03:06.170 ","End":"03:08.355","Text":"This is a transaction as opposed to balance."},{"Start":"03:08.355 ","End":"03:12.380","Text":"The there is another side to this entry that would go to an account"},{"Start":"03:12.380 ","End":"03:16.654","Text":"such as bank if we paid for in cash or a payable,"},{"Start":"03:16.654 ","End":"03:18.830","Text":"in other words, a liability account,"},{"Start":"03:18.830 ","End":"03:21.950","Text":"and that would\u0027ve been credited with 3,150."},{"Start":"03:21.950 ","End":"03:26.570","Text":"That then gives us 4,350,"},{"Start":"03:26.570 ","End":"03:28.540","Text":"which we take across to the other side,"},{"Start":"03:28.540 ","End":"03:30.440","Text":"and then as goods get sold,"},{"Start":"03:30.440 ","End":"03:32.210","Text":"we take it out of the inventory account."},{"Start":"03:32.210 ","End":"03:33.920","Text":"That would be the second entry,"},{"Start":"03:33.920 ","End":"03:37.895","Text":"and we worked it out to be 2,530."},{"Start":"03:37.895 ","End":"03:39.905","Text":"Cost of sales expense,"},{"Start":"03:39.905 ","End":"03:42.350","Text":"remember these get bigger on the debit side."},{"Start":"03:42.350 ","End":"03:47.255","Text":"Just like assets, they get bigger on the debit side, in other words the left-hand side."},{"Start":"03:47.255 ","End":"03:51.500","Text":"We\u0027re crediting the inventory with the 2,530 to"},{"Start":"03:51.500 ","End":"03:56.240","Text":"take the cost of the goods that were sold out of inventory asset account,"},{"Start":"03:56.240 ","End":"04:01.315","Text":"and we\u0027re putting it in on the debit side of our cost of sales expense,"},{"Start":"04:01.315 ","End":"04:03.420","Text":"that\u0027s our second journal."},{"Start":"04:03.420 ","End":"04:06.970","Text":"Then if you compare the 4,350,"},{"Start":"04:06.970 ","End":"04:10.370","Text":"which were taken across from the left-hand side to the right-hand side,"},{"Start":"04:10.370 ","End":"04:13.775","Text":"and we subtract the 2,530 being the credit entry."},{"Start":"04:13.775 ","End":"04:17.180","Text":"We get the closing balance of 1,820,"},{"Start":"04:17.180 ","End":"04:19.565","Text":"and that\u0027s the closing balance carried forward,"},{"Start":"04:19.565 ","End":"04:20.960","Text":"and we didn\u0027t bring it forward."},{"Start":"04:20.960 ","End":"04:25.775","Text":"Closing balance brought forward when 1,820."},{"Start":"04:25.775 ","End":"04:29.340","Text":"All right. I hope that helped."}],"ID":28608},{"Watched":false,"Name":"Lower or cost or NRV","Duration":"18m 24s","ChapterTopicVideoID":26646,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:01.400 ","End":"00:04.380","Text":"Hello and welcome to this series of"},{"Start":"00:04.380 ","End":"00:09.915","Text":"video presentations on Inventory brought to you by Proprep."},{"Start":"00:09.915 ","End":"00:14.535","Text":"In the section, we will focus on the valuation of inventories"},{"Start":"00:14.535 ","End":"00:19.650","Text":"using the lower of cost or NRV principle."},{"Start":"00:19.650 ","End":"00:25.545","Text":"What is the principle of the lower of cost or NRV?"},{"Start":"00:25.545 ","End":"00:34.385","Text":"Accounting standards tell us that inventory should be valued at the lower of 2 amounts."},{"Start":"00:34.385 ","End":"00:38.790","Text":"These amounts are the cost of the inventory,"},{"Start":"00:38.790 ","End":"00:44.525","Text":"and the net realizable value of that inventory."},{"Start":"00:44.525 ","End":"00:48.740","Text":"What then comprises the cost of inventory?"},{"Start":"00:48.740 ","End":"00:55.475","Text":"Accounting standards tells us that the cost of inventory comprises the costs of purchase,"},{"Start":"00:55.475 ","End":"00:59.060","Text":"which you will see now is simply not the purchase price,"},{"Start":"00:59.060 ","End":"01:01.775","Text":"but something more than the purchase price,"},{"Start":"01:01.775 ","End":"01:05.675","Text":"the cost of conversion of the inventory,"},{"Start":"01:05.675 ","End":"01:09.710","Text":"and also all other costs incurred in bringing"},{"Start":"01:09.710 ","End":"01:15.109","Text":"the inventories to what\u0027s known as their present location and condition."},{"Start":"01:15.109 ","End":"01:18.155","Text":"Let\u0027s look at all these terms 1-by-1."},{"Start":"01:18.155 ","End":"01:21.305","Text":"What comprises the cost of purchase?"},{"Start":"01:21.305 ","End":"01:27.455","Text":"Well, clearly the purchase price itself will be included in the cost of purchase."},{"Start":"01:27.455 ","End":"01:29.675","Text":"But more than the purchase price,"},{"Start":"01:29.675 ","End":"01:31.880","Text":"we also have to include here,"},{"Start":"01:31.880 ","End":"01:34.714","Text":"possibly any import duties."},{"Start":"01:34.714 ","End":"01:39.335","Text":"If the entity is buying its inventory from a foreign country,"},{"Start":"01:39.335 ","End":"01:44.465","Text":"there could probably and certainly will be import duties payable."},{"Start":"01:44.465 ","End":"01:47.705","Text":"In addition to the purchase price and import duties,"},{"Start":"01:47.705 ","End":"01:51.970","Text":"there could also be transport costs which are"},{"Start":"01:51.970 ","End":"01:57.550","Text":"incurred in getting the inventory to its present location and condition."},{"Start":"01:57.550 ","End":"02:01.120","Text":"What are the costs of conversion?"},{"Start":"02:01.120 ","End":"02:06.135","Text":"Cost of conversion typically relate to manufacturing entities,"},{"Start":"02:06.135 ","End":"02:09.820","Text":"and there\u0027s an example later on in this video of that."},{"Start":"02:09.820 ","End":"02:13.584","Text":"I\u0027m going to include such items as labor costs,"},{"Start":"02:13.584 ","End":"02:17.620","Text":"which might be incurred in converting raw materials to"},{"Start":"02:17.620 ","End":"02:21.619","Text":"work in progress and ultimately to finished goods,"},{"Start":"02:21.619 ","End":"02:29.335","Text":"and also maybe an allocation of the overheads which belong to that process."},{"Start":"02:29.335 ","End":"02:34.630","Text":"What are the other costs? The other costs are included only to the extent that they"},{"Start":"02:34.630 ","End":"02:40.325","Text":"are incurred in bringing the inventories to their present location and condition."},{"Start":"02:40.325 ","End":"02:47.525","Text":"Examples here could include costs of customizing goods for a customer."},{"Start":"02:47.525 ","End":"02:51.890","Text":"For example, a motor dealer may install"},{"Start":"02:51.890 ","End":"02:57.080","Text":"a particular type of sunroof or maybe a tow hitch to the motor vehicle."},{"Start":"02:57.080 ","End":"03:03.185","Text":"Also, the cost of storing any maturing inventories,"},{"Start":"03:03.185 ","End":"03:05.600","Text":"may be included here as well."},{"Start":"03:05.600 ","End":"03:12.395","Text":"Example, the cost of storing cheese and wine would be examples of other costs."},{"Start":"03:12.395 ","End":"03:18.605","Text":"The reference to present location and condition refers to getting the inventory,"},{"Start":"03:18.605 ","End":"03:24.080","Text":"in simple words, to the place ready for sale to the customer."},{"Start":"03:24.080 ","End":"03:26.300","Text":"Clearly all these costs,"},{"Start":"03:26.300 ","End":"03:29.330","Text":"the purchase price being the most obvious one,"},{"Start":"03:29.330 ","End":"03:31.250","Text":"but also the import duties,"},{"Start":"03:31.250 ","End":"03:34.234","Text":"the transport costs for manufacturer,"},{"Start":"03:34.234 ","End":"03:37.910","Text":"labor, and overheads, and for example,"},{"Start":"03:37.910 ","End":"03:42.500","Text":"if they are a maturing inventory costs such as storage costs,"},{"Start":"03:42.500 ","End":"03:45.650","Text":"these are all costs incurred in getting the inventory to"},{"Start":"03:45.650 ","End":"03:49.010","Text":"the point where they can be sold to the customer."},{"Start":"03:49.010 ","End":"03:54.370","Text":"Looking now at the NRV or net realizable value,"},{"Start":"03:54.370 ","End":"03:59.340","Text":"the NRV is the estimated selling price"},{"Start":"03:59.340 ","End":"04:02.585","Text":"of these goods in the ordinary course of business,"},{"Start":"04:02.585 ","End":"04:06.380","Text":"less 2 particular categories of costs;"},{"Start":"04:06.380 ","End":"04:09.980","Text":"the estimated costs of completion,"},{"Start":"04:09.980 ","End":"04:14.765","Text":"as well as the estimated costs to make the sale."},{"Start":"04:14.765 ","End":"04:17.285","Text":"What are the costs of completion?"},{"Start":"04:17.285 ","End":"04:22.400","Text":"Well, the cost of completion include any additional costs over and above"},{"Start":"04:22.400 ","End":"04:28.474","Text":"the original acquisition costs in getting the goods into a sellable condition."},{"Start":"04:28.474 ","End":"04:31.610","Text":"The cost to make the sale include"},{"Start":"04:31.610 ","End":"04:38.945","Text":"any additional selling expenses over and above any normal selling expenses."},{"Start":"04:38.945 ","End":"04:42.310","Text":"The net realizable value or NRV,"},{"Start":"04:42.310 ","End":"04:49.725","Text":"is thus expected cash flow relating to those items\u0027 inventory,"},{"Start":"04:49.725 ","End":"04:54.455","Text":"and so represents the value obtainable on the market."},{"Start":"04:54.455 ","End":"05:00.000","Text":"For this reason, the rule of the lower of cost or"},{"Start":"05:00.000 ","End":"05:06.744","Text":"NRV is sometimes referred to as the lower of cost or market."},{"Start":"05:06.744 ","End":"05:12.475","Text":"Looking to apply those lower of cost or NRV rule."},{"Start":"05:12.475 ","End":"05:16.745","Text":"If the inventory can be sold for more than its cost."},{"Start":"05:16.745 ","End":"05:23.554","Text":"In other words, the NRV is in fact greater than the cost,"},{"Start":"05:23.554 ","End":"05:29.435","Text":"then this profit is not recognized until it is actually realized."},{"Start":"05:29.435 ","End":"05:33.575","Text":"In other words, when the inventory is sold to the customer."},{"Start":"05:33.575 ","End":"05:37.160","Text":"On the other hand, if the inventory can only be"},{"Start":"05:37.160 ","End":"05:41.390","Text":"sold for less than its cost, in other words,"},{"Start":"05:41.390 ","End":"05:47.510","Text":"the NRV is in fact less than the cost of inventory,"},{"Start":"05:47.510 ","End":"05:53.735","Text":"then the loss is recognized immediately in the form of an impairment."},{"Start":"05:53.735 ","End":"05:57.529","Text":"Putting a few numbers into this scenario."},{"Start":"05:57.529 ","End":"06:06.506","Text":"If for example, the cost of the inventory is 100 and the NRV is 140,"},{"Start":"06:06.506 ","End":"06:08.870","Text":"in other words, the entity expects to"},{"Start":"06:08.870 ","End":"06:13.160","Text":"sell the inventory at a profit in the future period,"},{"Start":"06:13.160 ","End":"06:16.510","Text":"then there\u0027s no accounting entry."},{"Start":"06:16.510 ","End":"06:20.975","Text":"No accounting entry because the fact that"},{"Start":"06:20.975 ","End":"06:30.050","Text":"the profit will only be recognized when the goods are ultimately sold."},{"Start":"06:30.050 ","End":"06:35.005","Text":"If however, the cost of inventory is 100,"},{"Start":"06:35.005 ","End":"06:37.540","Text":"but the NRV is, for example,"},{"Start":"06:37.540 ","End":"06:41.275","Text":"90, then that loss,"},{"Start":"06:41.275 ","End":"06:42.715","Text":"as we\u0027ve just said,"},{"Start":"06:42.715 ","End":"06:45.860","Text":"must be recognized immediately."},{"Start":"06:45.860 ","End":"06:49.660","Text":"The accounting entry you will see will be a debit to"},{"Start":"06:49.660 ","End":"06:54.130","Text":"the impairment of inventory expense,"},{"Start":"06:54.130 ","End":"07:02.906","Text":"and the credit will go to the inventory asset account."},{"Start":"07:02.906 ","End":"07:07.050","Text":"We can now start applying this principle to an example."},{"Start":"07:07.050 ","End":"07:09.900","Text":"It is important to note that the comparison of the cost in"},{"Start":"07:09.900 ","End":"07:16.185","Text":"NRV should be undertaken on an item-by-item basis."},{"Start":"07:16.185 ","End":"07:20.129","Text":"In this example, the company has 3 products,"},{"Start":"07:20.129 ","End":"07:24.375","Text":"product X, product Y, and product Z."},{"Start":"07:24.375 ","End":"07:28.005","Text":"Looking at product X, the cost is 2,000,"},{"Start":"07:28.005 ","End":"07:33.945","Text":"the NRV 3,500 so therefore the cost is less than the NRV."},{"Start":"07:33.945 ","End":"07:35.835","Text":"Looking at product Y,"},{"Start":"07:35.835 ","End":"07:41.430","Text":"the cost is 1,500, and the NRV is only 1,000."},{"Start":"07:41.430 ","End":"07:44.685","Text":"Here, the cost is greater than the NRV."},{"Start":"07:44.685 ","End":"07:48.150","Text":"Or in other words, the NRV is less than the cost."},{"Start":"07:48.150 ","End":"07:51.885","Text":"For product Z, the cost is 5,500,"},{"Start":"07:51.885 ","End":"07:56.820","Text":"which is less than the expected NRV of 9,000."},{"Start":"07:56.820 ","End":"08:04.110","Text":"Note the total cost is 9,000 and the total NRV is 13,500."},{"Start":"08:04.110 ","End":"08:08.550","Text":"But we need to look at the per item basis and apply the"},{"Start":"08:08.550 ","End":"08:13.500","Text":"lower of cost or NRV principal on that basis."},{"Start":"08:13.500 ","End":"08:15.810","Text":"We\u0027ll take product X,"},{"Start":"08:15.810 ","End":"08:18.960","Text":"look at the lower of cost or NRV,"},{"Start":"08:18.960 ","End":"08:22.140","Text":"and that is an amount of 2,000."},{"Start":"08:22.140 ","End":"08:27.600","Text":"Look at product Y and pick up the lower of cost or NRV."},{"Start":"08:27.600 ","End":"08:32.250","Text":"Note importantly here NRV is lower than the cost."},{"Start":"08:32.250 ","End":"08:41.070","Text":"We include 1,000 as being the lower number of the NRV and cost in relation to product Y."},{"Start":"08:41.070 ","End":"08:43.500","Text":"Going back to product Z,"},{"Start":"08:43.500 ","End":"08:47.940","Text":"the 9,000 cost is less than the NRV."},{"Start":"08:47.940 ","End":"08:54.750","Text":"The total of these numbers comes to 8,500."},{"Start":"08:54.750 ","End":"08:56.685","Text":"It is the 8,500,"},{"Start":"08:56.685 ","End":"08:58.890","Text":"which is in fact,"},{"Start":"08:58.890 ","End":"09:07.185","Text":"that is the lower of the cost and the NRV on an item-by-item basis."},{"Start":"09:07.185 ","End":"09:14.540","Text":"The 8,500 will be reported on the balance sheet of this entity."},{"Start":"09:14.540 ","End":"09:16.895","Text":"Continuing with the same example,"},{"Start":"09:16.895 ","End":"09:21.120","Text":"if we assume that the NRV of product Y,"},{"Start":"09:21.120 ","End":"09:23.985","Text":"which we\u0027ve seen is an amount of 1,000,"},{"Start":"09:23.985 ","End":"09:31.065","Text":"has only recently fallen below its cost and the company believes this fall is permanent,"},{"Start":"09:31.065 ","End":"09:33.795","Text":"to reflect the fallen value,"},{"Start":"09:33.795 ","End":"09:39.359","Text":"an allowance for slow or obsolete inventory is created."},{"Start":"09:39.359 ","End":"09:41.850","Text":"This allowance is similar to"},{"Start":"09:41.850 ","End":"09:47.370","Text":"the contra asset account we created for accumulated depreciation."},{"Start":"09:47.370 ","End":"09:52.560","Text":"Looking at an extract from the accounting equation worksheet,"},{"Start":"09:52.560 ","End":"09:59.880","Text":"the amount you will see in the inventory accounts is the original cost of 9,000."},{"Start":"09:59.880 ","End":"10:05.280","Text":"Before taking into account the lower of cost or NRV principle."},{"Start":"10:05.280 ","End":"10:06.960","Text":"In the previous slide,"},{"Start":"10:06.960 ","End":"10:14.970","Text":"we determined that the total of the lower of cost or NRV was in fact 8,500."},{"Start":"10:14.970 ","End":"10:19.170","Text":"Therefore, we need an allowance of 500."},{"Start":"10:19.170 ","End":"10:24.885","Text":"This allowance is recorded as an expense on the income statement."},{"Start":"10:24.885 ","End":"10:32.070","Text":"We reduce equity by 500 and we create this contra asset account,"},{"Start":"10:32.070 ","End":"10:36.555","Text":"the allowance or the impairment for inventory of 500."},{"Start":"10:36.555 ","End":"10:43.380","Text":"The net result of these 2 accounts will show on the balance sheet of"},{"Start":"10:43.380 ","End":"10:51.600","Text":"the company the inventory at its lower of cost or NRV amount of 8,500."},{"Start":"10:51.600 ","End":"10:54.705","Text":"Continuing with the same example,"},{"Start":"10:54.705 ","End":"10:57.975","Text":"if that product Y is sold in the next period,"},{"Start":"10:57.975 ","End":"11:04.095","Text":"irrespective of whether it\u0027s sold above or below historical cost,"},{"Start":"11:04.095 ","End":"11:06.270","Text":"the allowance is reversed,"},{"Start":"11:06.270 ","End":"11:09.210","Text":"the reason being that the product is sold and"},{"Start":"11:09.210 ","End":"11:12.360","Text":"the allowance therefore is no longer required."},{"Start":"11:12.360 ","End":"11:15.120","Text":"For the purposes of this example,"},{"Start":"11:15.120 ","End":"11:22.015","Text":"let us assume that product Y is solve for 1,400 in the subsequent period."},{"Start":"11:22.015 ","End":"11:23.915","Text":"Just to remind you,"},{"Start":"11:23.915 ","End":"11:33.065","Text":"product Y had an original cost of 1,500 and the NRV was in fact 1,400."},{"Start":"11:33.065 ","End":"11:37.500","Text":"That decrease the 500 led to the inventory being"},{"Start":"11:37.500 ","End":"11:43.320","Text":"recorded at 8,500 net of the allowance on the balance sheet."},{"Start":"11:43.320 ","End":"11:46.605","Text":"What can we see here in the accounting equation worksheet?"},{"Start":"11:46.605 ","End":"11:51.270","Text":"I will put back the balance of 9,000 in the inventory account,"},{"Start":"11:51.270 ","End":"11:55.380","Text":"and also I will put back the balance of"},{"Start":"11:55.380 ","End":"12:00.615","Text":"500 in the allowance for the impairment of inventory."},{"Start":"12:00.615 ","End":"12:03.825","Text":"Remember that was the balance at the end of last period,"},{"Start":"12:03.825 ","End":"12:08.790","Text":"and therefore it is the opening balance at the beginning of this period."},{"Start":"12:08.790 ","End":"12:15.420","Text":"We have now said that product Y is sold for 1,400 in the current period."},{"Start":"12:15.420 ","End":"12:18.780","Text":"If it\u0027s sold for cash and assume it is sold for cash,"},{"Start":"12:18.780 ","End":"12:23.730","Text":"there will be an increase in the asset cash of 1,400,"},{"Start":"12:23.730 ","End":"12:28.094","Text":"and there will also be a recognition of income"},{"Start":"12:28.094 ","End":"12:34.320","Text":"of 1,400 within equity on the income statement."},{"Start":"12:34.320 ","End":"12:37.575","Text":"As you know, when inventory is sold,"},{"Start":"12:37.575 ","End":"12:40.950","Text":"we need to record the cost of sale as well."},{"Start":"12:40.950 ","End":"12:48.420","Text":"The cost we know is 1,500 from the table above."},{"Start":"12:48.420 ","End":"12:53.550","Text":"Therefore, I need to reduce the inventory asset by"},{"Start":"12:53.550 ","End":"12:58.215","Text":"its cost of 1,500 and at the same time,"},{"Start":"12:58.215 ","End":"13:06.180","Text":"recognize an expense for cost of sales of 1,500 as well."},{"Start":"13:06.180 ","End":"13:10.170","Text":"Now because the items being sold and as we\u0027ve said,"},{"Start":"13:10.170 ","End":"13:15.045","Text":"regardless of whether it was sold above or below the cost, in this case,"},{"Start":"13:15.045 ","End":"13:18.060","Text":"it was in fact sold 100 below the cost,"},{"Start":"13:18.060 ","End":"13:24.075","Text":"we need to reverse the allowance because the underlying inventory is in fact sold."},{"Start":"13:24.075 ","End":"13:26.340","Text":"To reverse the allowance,"},{"Start":"13:26.340 ","End":"13:32.265","Text":"we have to put a plus 500 in here and recognize the"},{"Start":"13:32.265 ","End":"13:40.710","Text":"500 as an income item on the income statement being the reversal of the allowance."},{"Start":"13:40.710 ","End":"13:44.580","Text":"The accounting entry for the reversal would clearly be"},{"Start":"13:44.580 ","End":"13:48.810","Text":"a debit to the impairments allowance account,"},{"Start":"13:48.810 ","End":"13:54.435","Text":"and a credit to an income account reversal of inventory impairment."},{"Start":"13:54.435 ","End":"13:57.240","Text":"Let us analyze what has happened over here."},{"Start":"13:57.240 ","End":"14:00.465","Text":"We had this inventory item product Y,"},{"Start":"14:00.465 ","End":"14:05.675","Text":"which was sold at a selling price of 1,400."},{"Start":"14:05.675 ","End":"14:11.860","Text":"This inventory had a cost price of 1,500,"},{"Start":"14:11.860 ","End":"14:15.700","Text":"so overall and therefore in total,"},{"Start":"14:15.700 ","End":"14:23.050","Text":"there was a loss incurred of 100 on the sale of this inventory item."},{"Start":"14:23.050 ","End":"14:26.575","Text":"How is this recorded from an accounting perspective?"},{"Start":"14:26.575 ","End":"14:29.230","Text":"Well, from an accounting perspective,"},{"Start":"14:29.230 ","End":"14:32.185","Text":"we need to look at what entries we recorded,"},{"Start":"14:32.185 ","End":"14:35.860","Text":"both in the prior and in the current year."},{"Start":"14:35.860 ","End":"14:38.260","Text":"Looking first to the prior,"},{"Start":"14:38.260 ","End":"14:40.630","Text":"you recall in the prior year,"},{"Start":"14:40.630 ","End":"14:47.015","Text":"we recorded a 500 expense when we recognized the impairment,"},{"Start":"14:47.015 ","End":"14:52.490","Text":"you write-down of the inventory from 9,000-8,500 in total,"},{"Start":"14:52.490 ","End":"14:57.260","Text":"or the individual product Y from 1,500 down to 1,000."},{"Start":"14:57.260 ","End":"15:00.305","Text":"In the current year however,"},{"Start":"15:00.305 ","End":"15:06.450","Text":"there have been 3 separate accounting entries which are high right now,"},{"Start":"15:06.450 ","End":"15:09.340","Text":"these 3 entries over here."},{"Start":"15:09.340 ","End":"15:11.900","Text":"Therefore, in the current year,"},{"Start":"15:11.900 ","End":"15:16.085","Text":"you see a income item of 1,400,"},{"Start":"15:16.085 ","End":"15:21.185","Text":"which was the income being recognized on the sale of inventory."},{"Start":"15:21.185 ","End":"15:28.845","Text":"There was also an income item being the reversal of the impairment from the prior year,"},{"Start":"15:28.845 ","End":"15:36.485","Text":"and there was an expense item recognizing the 1,500 cost of sales."},{"Start":"15:36.485 ","End":"15:41.330","Text":"Therefore, the net income or expense of"},{"Start":"15:41.330 ","End":"15:50.015","Text":"those 3 transactions is an income item or a net income amount of 400."},{"Start":"15:50.015 ","End":"15:55.505","Text":"Looking at the 2 accounting entries of the 2 sets of accounting entries together,"},{"Start":"15:55.505 ","End":"15:57.170","Text":"we see we are in fact,"},{"Start":"15:57.170 ","End":"15:59.270","Text":"from an accounting perspective,"},{"Start":"15:59.270 ","End":"16:04.245","Text":"also recording a loss when expense of 100."},{"Start":"16:04.245 ","End":"16:07.195","Text":"This demonstrates underlying accounting"},{"Start":"16:07.195 ","End":"16:11.915","Text":"represents the underlying reality of the transaction."},{"Start":"16:11.915 ","End":"16:14.240","Text":"This slide shows an extract from"},{"Start":"16:14.240 ","End":"16:19.175","Text":"the accounting policies or what\u0027s called the accounting principles note,"},{"Start":"16:19.175 ","End":"16:23.740","Text":"of the French retailer Carrefour."},{"Start":"16:23.740 ","End":"16:26.430","Text":"Carrefour is a French hypermarket chain,"},{"Start":"16:26.430 ","End":"16:31.669","Text":"and is in fact the world\u0027s second largest mega retailer after Walmart."},{"Start":"16:31.669 ","End":"16:34.400","Text":"What you see in the accounting policies note"},{"Start":"16:34.400 ","End":"16:38.255","Text":"is what you would expect and what you\u0027ve really learned about inventory."},{"Start":"16:38.255 ","End":"16:42.080","Text":"It tells you inventories are measured at the lower of"},{"Start":"16:42.080 ","End":"16:46.580","Text":"the cost and net realizable value or the NRV."},{"Start":"16:46.580 ","End":"16:50.420","Text":"It then says that the cost of inventories corresponds to"},{"Start":"16:50.420 ","End":"16:55.520","Text":"the latest purchase price plus all other related expenses."},{"Start":"16:55.520 ","End":"16:59.300","Text":"Again, what you\u0027ve learned that the cost of inventory comprise of the cost"},{"Start":"16:59.300 ","End":"17:03.020","Text":"of purchase and the cost of conversion,"},{"Start":"17:03.020 ","End":"17:09.665","Text":"and all other costs which had been summarized here as all other related expenses."},{"Start":"17:09.665 ","End":"17:15.980","Text":"You will see also a reference to the first-in-first-out method of FIFO method."},{"Start":"17:15.980 ","End":"17:21.200","Text":"This we will learn about in a later video presentation."},{"Start":"17:21.200 ","End":"17:29.240","Text":"The policy note goes on to refer to the net realizable value or NRV and as you\u0027d expect,"},{"Start":"17:29.240 ","End":"17:35.750","Text":"it refers to the NRV as the estimated selling price in the ordinary course of business,"},{"Start":"17:35.750 ","End":"17:41.600","Text":"less the estimated additional costs necessary to make the sale."},{"Start":"17:41.600 ","End":"17:45.710","Text":"In the actual numerical part of the note,"},{"Start":"17:45.710 ","End":"17:47.120","Text":"you see, for example,"},{"Start":"17:47.120 ","End":"17:50.975","Text":"at 31 December of 2019,"},{"Start":"17:50.975 ","End":"17:57.720","Text":"the company had inventories at a cost of 6,052 million"},{"Start":"17:57.720 ","End":"18:06.690","Text":"euro as the asset and a contra asset of a 184 million euro as the impairment."},{"Start":"18:06.690 ","End":"18:11.160","Text":"The inventories at cost would be the asset accounts and"},{"Start":"18:11.160 ","End":"18:16.130","Text":"the impairment would be the negative asset or the contra asset account."},{"Start":"18:16.130 ","End":"18:24.940","Text":"The amount on the balance sheet would be shown as 5,867 million euro."}],"ID":28609},{"Watched":false,"Name":"Exercise 2","Duration":"11m 54s","ChapterTopicVideoID":26357,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.580","Text":"Today we\u0027re going to do the exercise involving ABD."},{"Start":"00:03.580 ","End":"00:07.390","Text":"ABD reports the following balances for 20X1,"},{"Start":"00:07.390 ","End":"00:12.240","Text":"there is an inventory beginning balance of 1,200 and allowance for"},{"Start":"00:12.240 ","End":"00:18.955","Text":"impaired inventory beginning balance of 130 guarantee units."},{"Start":"00:18.955 ","End":"00:23.700","Text":"Now, the fact that we have an allowance for impaired inventory separate"},{"Start":"00:23.700 ","End":"00:28.035","Text":"to the inventory account means that our inventory account was measured at cost."},{"Start":"00:28.035 ","End":"00:29.971","Text":"We\u0027ve got the cost,"},{"Start":"00:29.971 ","End":"00:33.965","Text":"and here we have the allowance for the impairment."},{"Start":"00:33.965 ","End":"00:37.830","Text":"What we must remember throughout this exercise is that"},{"Start":"00:37.830 ","End":"00:42.935","Text":"inventory is measured at the lower of cost and net realizable value."},{"Start":"00:42.935 ","End":"00:45.130","Text":"If ever our net realizable value,"},{"Start":"00:45.130 ","End":"00:47.630","Text":"and I\u0027ll go into what that actually means in a moment."},{"Start":"00:47.630 ","End":"00:50.930","Text":"But if ever our net realizable value is less than cost,"},{"Start":"00:50.930 ","End":"00:53.345","Text":"we have to impair our inventory,"},{"Start":"00:53.345 ","End":"00:56.880","Text":"so the impairment is being accumulated in a separate account here,"},{"Start":"00:56.880 ","End":"00:59.360","Text":"in the allowance for impaired inventory."},{"Start":"00:59.360 ","End":"01:02.705","Text":"Then we have purchases of 3,150."},{"Start":"01:02.705 ","End":"01:04.820","Text":"Those are always recorded at cost."},{"Start":"01:04.820 ","End":"01:08.555","Text":"Then we have our inventory ending balance of 1,820."},{"Start":"01:08.555 ","End":"01:12.155","Text":"Obviously, that\u0027s at cost because we\u0027ve got 2 inventory accounts now,"},{"Start":"01:12.155 ","End":"01:13.910","Text":"the inventory at cost."},{"Start":"01:13.910 ","End":"01:21.320","Text":"Then we have the allowance for impaired inventory ending balance of 165 currency units."},{"Start":"01:21.320 ","End":"01:27.020","Text":"Notice that the beginning balance for inventory doesn\u0027t have bracket,"},{"Start":"01:27.020 ","End":"01:29.870","Text":"which indicates that it is a debit balance."},{"Start":"01:29.870 ","End":"01:33.170","Text":"Then we have the allowance for impaired inventory,"},{"Start":"01:33.170 ","End":"01:34.610","Text":"which is in brackets,"},{"Start":"01:34.610 ","End":"01:36.935","Text":"both the beginning balance and ending balance."},{"Start":"01:36.935 ","End":"01:41.585","Text":"That indicates that the allowance account is a credit balance."},{"Start":"01:41.585 ","End":"01:45.500","Text":"In other words, the allowance for impaired inventory account"},{"Start":"01:45.500 ","End":"01:50.675","Text":"serves to reduce the value of the main inventory account,"},{"Start":"01:50.675 ","End":"01:53.390","Text":"the inventory account being at cost."},{"Start":"01:53.390 ","End":"01:56.239","Text":"We\u0027re told that any impairment loss on inventory"},{"Start":"01:56.239 ","End":"01:59.210","Text":"is to be included in the cost of goods sold."},{"Start":"01:59.210 ","End":"02:01.400","Text":"Now, depending on the nature of the business,"},{"Start":"02:01.400 ","End":"02:03.215","Text":"sometimes this is quite normal,"},{"Start":"02:03.215 ","End":"02:06.020","Text":"impairment losses get included in the cost of goods sold."},{"Start":"02:06.020 ","End":"02:09.500","Text":"Sometimes an impairment loss indicates something quite unusual."},{"Start":"02:09.500 ","End":"02:13.865","Text":"In which case the impairment loss would not be included in cost of goods sold,"},{"Start":"02:13.865 ","End":"02:15.890","Text":"so in this case, we are going to include"},{"Start":"02:15.890 ","End":"02:18.545","Text":"the impairment loss within the cost of goods sold."},{"Start":"02:18.545 ","End":"02:25.160","Text":"Now we are required to calculate the cost of goods sold that ABD should report for 20X1."},{"Start":"02:25.160 ","End":"02:28.010","Text":"To answer this question, we\u0027re going to reconstruct"},{"Start":"02:28.010 ","End":"02:33.020","Text":"our inventory asset account and we\u0027re going to present it as a net carrying amount."},{"Start":"02:33.020 ","End":"02:37.760","Text":"In other words, we\u0027re going to present it net of the allowance for impairment."},{"Start":"02:37.760 ","End":"02:39.920","Text":"Whereas the question gave us"},{"Start":"02:39.920 ","End":"02:44.780","Text":"the cost account and the allowance for impairment separately,"},{"Start":"02:44.780 ","End":"02:48.670","Text":"we\u0027re going to net the 2 off against each other and present it as"},{"Start":"02:48.670 ","End":"02:53.360","Text":"1 combined inventory asset account at its net carrying amount."},{"Start":"02:53.360 ","End":"02:56.930","Text":"The reason we\u0027re doing this is because we are told that"},{"Start":"02:56.930 ","End":"03:01.385","Text":"any impairment will be absorbed into the cost of the sales."},{"Start":"03:01.385 ","End":"03:03.230","Text":"At the end of the mini video,"},{"Start":"03:03.230 ","End":"03:08.480","Text":"I will present an alternative solution where the inventory cost account"},{"Start":"03:08.480 ","End":"03:13.930","Text":"is shown separately to the inventory impairment allowance account,"},{"Start":"03:13.930 ","End":"03:21.395","Text":"and you will see that the final answer is the same irrespective."},{"Start":"03:21.395 ","End":"03:26.120","Text":"The way we presenting it here just makes it easier for you to understand."},{"Start":"03:26.120 ","End":"03:29.300","Text":"The inventory beginning balance(net) in other words"},{"Start":"03:29.300 ","End":"03:33.230","Text":"cost less the allowance for impairment."},{"Start":"03:33.230 ","End":"03:35.720","Text":"Let\u0027s have a look. This is the question."},{"Start":"03:35.720 ","End":"03:38.300","Text":"We were told that the inventory beginning balance,"},{"Start":"03:38.300 ","End":"03:39.785","Text":"which was obviously a cost,"},{"Start":"03:39.785 ","End":"03:46.160","Text":"was 1,200, and then the allowance for the impaired inventory beginning balance was 130."},{"Start":"03:46.160 ","End":"03:54.110","Text":"Notice this is a debit of 1,200 opening balance and this is a 130 credit opening balance."},{"Start":"03:54.110 ","End":"03:58.670","Text":"It\u0027s 1,200 minus 113 loans for impairment."},{"Start":"03:58.670 ","End":"04:04.115","Text":"It gives us a net carrying amount for our inventory of 1,070."},{"Start":"04:04.115 ","End":"04:06.610","Text":"Then we do the same for our ending balance."},{"Start":"04:06.610 ","End":"04:09.915","Text":"Again, net of the impairment allowance."},{"Start":"04:09.915 ","End":"04:11.990","Text":"Going back to this as the question,"},{"Start":"04:11.990 ","End":"04:14.555","Text":"the inventory ending balance cost was"},{"Start":"04:14.555 ","End":"04:20.840","Text":"1,820 and the allowance for the impaired inventory ending balance is 165."},{"Start":"04:20.840 ","End":"04:24.950","Text":"Notice once again, the cost is shown as a debit balance,"},{"Start":"04:24.950 ","End":"04:28.775","Text":"but the allowance for the impairment is shown as a credit balance."},{"Start":"04:28.775 ","End":"04:32.450","Text":"Obviously, the inventory cost is shown"},{"Start":"04:32.450 ","End":"04:36.170","Text":"as a debit balance because we\u0027re dealing with inventory,"},{"Start":"04:36.170 ","End":"04:41.345","Text":"which is an asset and assets get bigger on the debit side."},{"Start":"04:41.345 ","End":"04:46.070","Text":"If you wanted to present an allowance for an impairment,"},{"Start":"04:46.070 ","End":"04:48.350","Text":"in other words, to reduce the value of your asset,"},{"Start":"04:48.350 ","End":"04:52.670","Text":"that account would obviously be on the credit side because"},{"Start":"04:52.670 ","End":"04:59.225","Text":"the purpose of the allowance for impairment is to reduce your assets value."},{"Start":"04:59.225 ","End":"05:00.830","Text":"There you see the 1,820,"},{"Start":"05:00.830 ","End":"05:04.910","Text":"which was the cost and we\u0027re subtracting the 165,"},{"Start":"05:04.910 ","End":"05:09.195","Text":"which is the allowance for impairment, that\u0027s 1,655."},{"Start":"05:09.195 ","End":"05:15.485","Text":"We then add the purchases which were 3,150 that was given to us in the question."},{"Start":"05:15.485 ","End":"05:20.255","Text":"Here you see the purchases that were given to us in the question, 3,150."},{"Start":"05:20.255 ","End":"05:26.180","Text":"Now if we take our inventory beginning balance and we add the purchases of 3,150,"},{"Start":"05:26.180 ","End":"05:29.945","Text":"that should give us a closing balance of 4,220,"},{"Start":"05:29.945 ","End":"05:34.190","Text":"assuming we hadn\u0027t sold any inventory during the period."},{"Start":"05:34.190 ","End":"05:36.080","Text":"But as you can see,"},{"Start":"05:36.080 ","End":"05:41.432","Text":"we were told that the inventory ending balance was 1,655,"},{"Start":"05:41.432 ","End":"05:45.950","Text":"so there is inventory that has gone missing, if you like."},{"Start":"05:45.950 ","End":"05:50.655","Text":"The missing amount is 2,565,"},{"Start":"05:50.655 ","End":"05:58.160","Text":"and we will treat that entire missing amount as if it had been inventory that was sold."},{"Start":"05:58.160 ","End":"06:08.560","Text":"Now including that 2,565 is the growth in the impairment loss allowance."},{"Start":"06:08.560 ","End":"06:13.385","Text":"If you have a look here at the inventory beginning balance,"},{"Start":"06:13.385 ","End":"06:16.470","Text":"we subtracted an amount of 130."},{"Start":"06:16.470 ","End":"06:19.370","Text":"Then if you look at the inventory ending balance,"},{"Start":"06:19.370 ","End":"06:23.030","Text":"we had subtracted an amount of 165."},{"Start":"06:23.030 ","End":"06:26.810","Text":"Now this was the allowance for impairment."},{"Start":"06:26.810 ","End":"06:34.100","Text":"You can see it grew by 35 to get to our closing balance of 165 in that account."},{"Start":"06:34.100 ","End":"06:39.215","Text":"Now that 35 is actually included in that 2,565,"},{"Start":"06:39.215 ","End":"06:41.555","Text":"and I\u0027ll prove it to you in a moment."},{"Start":"06:41.555 ","End":"06:45.530","Text":"I\u0027m going to now, by way of that proof,"},{"Start":"06:45.530 ","End":"06:49.220","Text":"present you the solution all over again,"},{"Start":"06:49.220 ","End":"06:52.160","Text":"but using the T-account format just so that"},{"Start":"06:52.160 ","End":"06:55.665","Text":"you\u0027ve got another way of calculating the same figures."},{"Start":"06:55.665 ","End":"06:59.960","Text":"I\u0027m going to show it to you using this alternative approach where we will show"},{"Start":"06:59.960 ","End":"07:07.000","Text":"the inventory cost separate to the inventory impairments allowance."},{"Start":"07:07.000 ","End":"07:11.970","Text":"We have an inventory cost account, that\u0027s an asset."},{"Start":"07:11.970 ","End":"07:14.450","Text":"Then I\u0027m going to show separately just"},{"Start":"07:14.450 ","End":"07:16.865","Text":"so that you have 2 different approaches to this question."},{"Start":"07:16.865 ","End":"07:20.750","Text":"Inventory impairment allowance."},{"Start":"07:20.750 ","End":"07:25.700","Text":"I\u0027m going to show it as a negative asset just because what it"},{"Start":"07:25.700 ","End":"07:31.615","Text":"is is an account that reduces the measurement of your asset account."},{"Start":"07:31.615 ","End":"07:33.825","Text":"Let\u0027s just deal with these 4 moments."},{"Start":"07:33.825 ","End":"07:36.570","Text":"We put in our opening balance."},{"Start":"07:36.570 ","End":"07:40.555","Text":"Here, our cost was 1,200,"},{"Start":"07:40.555 ","End":"07:47.520","Text":"and our closing balance of our cost account was 1,820."},{"Start":"07:47.520 ","End":"07:50.100","Text":"Let\u0027s do the inventory impairment allowance."},{"Start":"07:50.100 ","End":"07:53.240","Text":"Remember this is going to have a credit balance because the purpose of"},{"Start":"07:53.240 ","End":"07:57.430","Text":"this account is to reduce the measurement of the cost account."},{"Start":"07:57.430 ","End":"08:05.360","Text":"Here we have an opening balance of 130 and we have a closing balance of 165."},{"Start":"08:05.360 ","End":"08:10.175","Text":"We\u0027re told that we purchased 3,150."},{"Start":"08:10.175 ","End":"08:12.670","Text":"This is a journal entry,"},{"Start":"08:12.670 ","End":"08:15.270","Text":"so let\u0027s call this journal entry Number 1."},{"Start":"08:15.270 ","End":"08:21.020","Text":"The contra entry would have gone to bank or a payable account,"},{"Start":"08:21.020 ","End":"08:24.535","Text":"depending on whether we\u0027d paid cash or still owed this amount."},{"Start":"08:24.535 ","End":"08:28.325","Text":"We would have credited to this account with 3,150."},{"Start":"08:28.325 ","End":"08:32.030","Text":"You can see there\u0027s the debit and here\u0027s the credit."},{"Start":"08:32.030 ","End":"08:34.909","Text":"We add up the debits on our cost account,"},{"Start":"08:34.909 ","End":"08:39.670","Text":"we get 4,350,"},{"Start":"08:39.670 ","End":"08:43.430","Text":"take it across 4,350."},{"Start":"08:43.480 ","End":"08:48.545","Text":"We know that closing balances are carried forward and that\u0027s going come down here."},{"Start":"08:48.545 ","End":"08:51.110","Text":"We can see if we look on the credit side,"},{"Start":"08:51.110 ","End":"08:55.535","Text":"we\u0027ve got a 4,350 which is brought forward from the debit side."},{"Start":"08:55.535 ","End":"08:58.610","Text":"We\u0027ve got a closing balance of 1,820."},{"Start":"08:58.610 ","End":"09:01.295","Text":"That means there is a missing amount,"},{"Start":"09:01.295 ","End":"09:09.155","Text":"so if you subtract the 1,820 from the 4,350, you get 2,530."},{"Start":"09:09.155 ","End":"09:12.470","Text":"Now this we\u0027re going to assume is cost of sales."},{"Start":"09:12.470 ","End":"09:14.090","Text":"This is our second entry."},{"Start":"09:14.090 ","End":"09:17.315","Text":"We\u0027re going to put this straight into cost of sales."},{"Start":"09:17.315 ","End":"09:18.815","Text":"That\u0027s our missing inventory."},{"Start":"09:18.815 ","End":"09:20.420","Text":"We assume it\u0027s all sold,"},{"Start":"09:20.420 ","End":"09:23.425","Text":"so we\u0027re going to debit that to our cost of sales account."},{"Start":"09:23.425 ","End":"09:27.980","Text":"We have cost of sales and cost of sales is an expense."},{"Start":"09:27.980 ","End":"09:32.395","Text":"Just like assets, expenses get bigger on the debit side."},{"Start":"09:32.395 ","End":"09:36.005","Text":"That\u0027s an asset, it gets bigger on the debit side."},{"Start":"09:36.005 ","End":"09:38.855","Text":"Here the credit was 2,530."},{"Start":"09:38.855 ","End":"09:41.015","Text":"We\u0027re going to put this now,"},{"Start":"09:41.015 ","End":"09:46.925","Text":"the debit side and the cost of sales expense account 2,530."},{"Start":"09:46.925 ","End":"09:50.000","Text":"Our inventory cost account has been reconciled."},{"Start":"09:50.000 ","End":"09:54.095","Text":"Now let\u0027s look at our inventory impairments allowance account."},{"Start":"09:54.095 ","End":"09:57.800","Text":"We can see that the debit side is bigger than the credit side,"},{"Start":"09:57.800 ","End":"10:01.595","Text":"so you take the larger of the 2 across."},{"Start":"10:01.595 ","End":"10:09.200","Text":"165 minus 130 gives us a missing amount of 35."},{"Start":"10:09.200 ","End":"10:12.260","Text":"This is tunnel Number 3."},{"Start":"10:12.260 ","End":"10:15.340","Text":"This is an impairment loss."},{"Start":"10:15.340 ","End":"10:22.195","Text":"Impairment allowance has grown by 35 to give us this closing balance of 165."},{"Start":"10:22.195 ","End":"10:25.760","Text":"Just remember that closing balance of 165 on the debit side is"},{"Start":"10:25.760 ","End":"10:30.665","Text":"just a carried forward balance that gets brought forward on the credit side."},{"Start":"10:30.665 ","End":"10:33.590","Text":"Closing balance brought forward,165."},{"Start":"10:33.790 ","End":"10:37.550","Text":"Now remember, we\u0027re crediting our impairment loss of"},{"Start":"10:37.550 ","End":"10:41.230","Text":"35 being the increase in our impairment allowance,"},{"Start":"10:41.230 ","End":"10:44.630","Text":"so the debit side is going to go to an impairment loss."},{"Start":"10:44.630 ","End":"10:49.310","Text":"The impairment loss is another expense."},{"Start":"10:49.310 ","End":"10:52.850","Text":"The debit side to this entry Number 3,"},{"Start":"10:52.850 ","End":"10:55.880","Text":"where we credit to the impairment loss 35 is going to"},{"Start":"10:55.880 ","End":"10:59.630","Text":"the debit side of the impairment loss expense."},{"Start":"10:59.630 ","End":"11:00.890","Text":"Now in this question,"},{"Start":"11:00.890 ","End":"11:06.185","Text":"we were told that the impairment loss is going to be incorporated into our cost of sales."},{"Start":"11:06.185 ","End":"11:10.160","Text":"We would then take that 35 out of"},{"Start":"11:10.160 ","End":"11:16.100","Text":"that account by crediting it and debiting it to our cost of sales."},{"Start":"11:16.100 ","End":"11:20.130","Text":"You can see we have total cost of sales sin(2,565),"},{"Start":"11:21.010 ","End":"11:29.645","Text":"which is the same as we got by presenting the workings in this columnar format,"},{"Start":"11:29.645 ","End":"11:34.085","Text":"and using a net approach where we netted"},{"Start":"11:34.085 ","End":"11:40.970","Text":"the cost account against the impairment allowance account."},{"Start":"11:40.970 ","End":"11:42.770","Text":"You can do this."},{"Start":"11:42.770 ","End":"11:47.930","Text":"You can present your workings on a net basis if the impairment allowance is to be"},{"Start":"11:47.930 ","End":"11:54.900","Text":"included in your cost of sales expense. I hope that helped."}],"ID":28610},{"Watched":false,"Name":"Cost of goods sold","Duration":"12m 24s","ChapterTopicVideoID":26647,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.400","Text":"Hello, and welcome to this series of"},{"Start":"00:02.400 ","End":"00:07.800","Text":"video presentations on inventory brought to you by Proprep."},{"Start":"00:07.800 ","End":"00:13.995","Text":"In this video, we will focus on the concept of the cost of goods sold."},{"Start":"00:13.995 ","End":"00:15.795","Text":"The cost of goods sold,"},{"Start":"00:15.795 ","End":"00:17.685","Text":"as you should already know,"},{"Start":"00:17.685 ","End":"00:21.210","Text":"is the expense on the income statement that"},{"Start":"00:21.210 ","End":"00:24.524","Text":"is recognized with respect to the consumption,"},{"Start":"00:24.524 ","End":"00:28.380","Text":"in other words, the use of inventory during the year."},{"Start":"00:28.380 ","End":"00:33.525","Text":"We have so far focused on the perpetual inventory method,"},{"Start":"00:33.525 ","End":"00:39.925","Text":"in other words, where we are recording the cost of goods sold each time a sale is made."},{"Start":"00:39.925 ","End":"00:42.620","Text":"Under this method, the cost of goods sold is not"},{"Start":"00:42.620 ","End":"00:45.980","Text":"recorded for each transaction separately,"},{"Start":"00:45.980 ","End":"00:49.520","Text":"rather, that cost is inferred"},{"Start":"00:49.520 ","End":"00:53.870","Text":"by assessing the value of inventory at certain points in time."},{"Start":"00:53.870 ","End":"00:56.840","Text":"This could be once a month, once a quarter,"},{"Start":"00:56.840 ","End":"00:59.465","Text":"semiannually, or even in fact,"},{"Start":"00:59.465 ","End":"01:02.045","Text":"annually for very small business."},{"Start":"01:02.045 ","End":"01:09.485","Text":"The principle is based on the formula of the cost of goods sold is equal to"},{"Start":"01:09.485 ","End":"01:13.550","Text":"the opening inventory plus the purchases of"},{"Start":"01:13.550 ","End":"01:18.560","Text":"inventory less the closing inventory at the end of the period."},{"Start":"01:18.560 ","End":"01:22.310","Text":"To understand this formula, let\u0027s think firstly,"},{"Start":"01:22.310 ","End":"01:28.785","Text":"purely of a quantity of goods and not a currency amount."},{"Start":"01:28.785 ","End":"01:37.565","Text":"If for example, the entity had 5 apples on hand at the beginning of a period,"},{"Start":"01:37.565 ","End":"01:42.005","Text":"and the entity purchased 7 apples during the period."},{"Start":"01:42.005 ","End":"01:47.215","Text":"Clearly, this entity has 12 apples available for sale."},{"Start":"01:47.215 ","End":"01:51.875","Text":"Then counts a closing inventory of 4 apples."},{"Start":"01:51.875 ","End":"01:57.360","Text":"Clearly, 8 apples have been sold during the period."},{"Start":"01:57.500 ","End":"02:03.770","Text":"The same principle applies if we start adding a currency unit,"},{"Start":"02:03.770 ","End":"02:10.659","Text":"example, pounds or euros into the equation."},{"Start":"02:10.659 ","End":"02:17.060","Text":"For example, let\u0027s assume now that each of these apples,"},{"Start":"02:17.060 ","End":"02:18.485","Text":"and it could be anything,"},{"Start":"02:18.485 ","End":"02:21.140","Text":"each of these items costs in fact,"},{"Start":"02:21.140 ","End":"02:24.380","Text":"1 pound or 1 euro."},{"Start":"02:24.380 ","End":"02:32.820","Text":"Then we have an opening inventory of 5 pounds or euros or dollars,"},{"Start":"02:32.820 ","End":"02:39.510","Text":"and the cost of goods purchased is 7 pounds or euros or dollars."},{"Start":"02:39.510 ","End":"02:45.505","Text":"Therefore, the cost of goods available for sale is 12."},{"Start":"02:45.505 ","End":"02:52.490","Text":"If in the period, inventory or goods costing full on hand,"},{"Start":"02:52.490 ","End":"02:57.515","Text":"that therefore means the cost of sales is therefore 8."},{"Start":"02:57.515 ","End":"03:00.455","Text":"Here is an example to consider."},{"Start":"03:00.455 ","End":"03:05.045","Text":"Example tells us that on the 1st of January,"},{"Start":"03:05.045 ","End":"03:07.550","Text":"this company XYZ,"},{"Start":"03:07.550 ","End":"03:12.155","Text":"reported a cost of inventory of 100,"},{"Start":"03:12.155 ","End":"03:15.095","Text":"in other words, this must be the opening inventory."},{"Start":"03:15.095 ","End":"03:17.105","Text":"Then during January,"},{"Start":"03:17.105 ","End":"03:21.395","Text":"a purchase inventory at a cost of 330,"},{"Start":"03:21.395 ","End":"03:23.960","Text":"which is the purchases during the period."},{"Start":"03:23.960 ","End":"03:25.235","Text":"At the end of the month,"},{"Start":"03:25.235 ","End":"03:30.050","Text":"it counted inventory and found the cost is 145."},{"Start":"03:30.050 ","End":"03:33.725","Text":"That must TDB, therefore, the closing inventory."},{"Start":"03:33.725 ","End":"03:36.200","Text":"You told the company reports sales of"},{"Start":"03:36.200 ","End":"03:41.735","Text":"500 and asked now to compute the gross profit for January."},{"Start":"03:41.735 ","End":"03:44.705","Text":"Looking at the numbers in this example,"},{"Start":"03:44.705 ","End":"03:48.470","Text":"the cost of opening inventory is 100."},{"Start":"03:48.470 ","End":"03:53.780","Text":"The cost of purchases is an amount of 330,"},{"Start":"03:53.780 ","End":"03:59.225","Text":"and the cost of closing inventory is an amount of 145."},{"Start":"03:59.225 ","End":"04:05.160","Text":"Just please note, all these items are at cost not at selling price."},{"Start":"04:05.160 ","End":"04:08.130","Text":"It is the cost of the opening inventory,"},{"Start":"04:08.130 ","End":"04:10.295","Text":"the cost of the purchases,"},{"Start":"04:10.295 ","End":"04:12.925","Text":"and the cost of the closing inventory."},{"Start":"04:12.925 ","End":"04:17.615","Text":"Which therefore gives us the cost of the goods sold."},{"Start":"04:17.615 ","End":"04:22.820","Text":"The cost of goods sold here is therefore an amount of 285;"},{"Start":"04:22.820 ","End":"04:28.415","Text":"100 plus 330 less 145."},{"Start":"04:28.415 ","End":"04:34.010","Text":"Gross profit is sales less cost of sales."},{"Start":"04:34.010 ","End":"04:37.205","Text":"The sales are given to us at 500,"},{"Start":"04:37.205 ","End":"04:42.995","Text":"we have computed the cost of sales at an amount of 285,"},{"Start":"04:42.995 ","End":"04:49.730","Text":"and therefore the gross profit amounts to 215."},{"Start":"04:49.730 ","End":"04:52.610","Text":"Looking now at a second example,"},{"Start":"04:52.610 ","End":"04:55.700","Text":"this one not incorporating raw materials,"},{"Start":"04:55.700 ","End":"04:58.400","Text":"work in progress, and finished goods."},{"Start":"04:58.400 ","End":"05:05.580","Text":"The company ABC on the 1st of January had an inventory of 180."},{"Start":"05:05.580 ","End":"05:11.950","Text":"That 180 is therefore the opening inventory for the current period."},{"Start":"05:11.950 ","End":"05:16.415","Text":"It comprises these 3 component parts;"},{"Start":"05:16.415 ","End":"05:20.180","Text":"a raw materials of 100,"},{"Start":"05:20.180 ","End":"05:23.000","Text":"a work-in-progress of 50,"},{"Start":"05:23.000 ","End":"05:25.745","Text":"and finished goods of 30."},{"Start":"05:25.745 ","End":"05:30.605","Text":"You\u0027re then give them information about the transactions that occurred during the year."},{"Start":"05:30.605 ","End":"05:36.605","Text":"Now note there was a purchases of a further 120 of raw materials inventory."},{"Start":"05:36.605 ","End":"05:44.615","Text":"Then 135 was moved from raw materials into work-in-progress,"},{"Start":"05:44.615 ","End":"05:47.839","Text":"and in addition, there were labor costs"},{"Start":"05:47.839 ","End":"05:51.715","Text":"incurred which clearly add to the work-in-progress."},{"Start":"05:51.715 ","End":"05:56.180","Text":"Then you\u0027re told there is a transfer from work-in-progress"},{"Start":"05:56.180 ","End":"06:02.105","Text":"to finished goods of finished production amounting to 200."},{"Start":"06:02.105 ","End":"06:04.805","Text":"Bear in mind all these amounts,"},{"Start":"06:04.805 ","End":"06:08.250","Text":"remember, are at cost."},{"Start":"06:09.160 ","End":"06:14.220","Text":"At the end of the year is a count of finished goods,"},{"Start":"06:14.220 ","End":"06:18.735","Text":"and the cost of finished goods amounts to 48."},{"Start":"06:18.735 ","End":"06:21.330","Text":"Sales is 500,"},{"Start":"06:21.330 ","End":"06:25.130","Text":"and we are asked to compute firstly the gross profit,"},{"Start":"06:25.130 ","End":"06:28.475","Text":"and then as you\u0027ve seen at the beginning of year,"},{"Start":"06:28.475 ","End":"06:30.170","Text":"do a breakdown,"},{"Start":"06:30.170 ","End":"06:34.210","Text":"or prepare a breakdown of the inventory balances by class,"},{"Start":"06:34.210 ","End":"06:37.430","Text":"in other words, per raw materials, work-in-progress,"},{"Start":"06:37.430 ","End":"06:41.220","Text":"and finished goods, at the end of the year."},{"Start":"06:41.220 ","End":"06:43.515","Text":"In computing the cost of sales,"},{"Start":"06:43.515 ","End":"06:48.490","Text":"remember it is the cost of the finished goods that are going to be sold."},{"Start":"06:48.490 ","End":"06:55.683","Text":"The business will not sell its raw materials to a an outside party to its buyers,"},{"Start":"06:55.683 ","End":"06:58.485","Text":"and to tell you, its not going to sell work-in-progress either."},{"Start":"06:58.485 ","End":"07:02.885","Text":"Therefore, the cost of sales is based on the opening balance,"},{"Start":"07:02.885 ","End":"07:05.660","Text":"specifically of finished goods."},{"Start":"07:05.660 ","End":"07:07.775","Text":"What is the opening balance?"},{"Start":"07:07.775 ","End":"07:11.600","Text":"Well, I got here an extract from the question,"},{"Start":"07:11.600 ","End":"07:13.190","Text":"so we can see the numbers."},{"Start":"07:13.190 ","End":"07:18.250","Text":"We know the opening balance of finished goods is an amount of 30."},{"Start":"07:18.250 ","End":"07:22.250","Text":"What was added to the finished goods during the period?"},{"Start":"07:22.250 ","End":"07:25.100","Text":"Well, we were told in the question that there was"},{"Start":"07:25.100 ","End":"07:32.205","Text":"200 currency units moved from work-in-progress into finished goods."},{"Start":"07:32.205 ","End":"07:37.070","Text":"Therefore, the transfers from work-in-progress amounted to 200,"},{"Start":"07:37.070 ","End":"07:41.075","Text":"and in the normal computation of cost of sales,"},{"Start":"07:41.075 ","End":"07:45.650","Text":"the opening inventory plus not the purchases this time,"},{"Start":"07:45.650 ","End":"07:48.500","Text":"but the transfers from work-in-progress less this,"},{"Start":"07:48.500 ","End":"07:55.565","Text":"and the closing inventory of finished goods you\u0027re told is an amount of 48."},{"Start":"07:55.565 ","End":"08:03.860","Text":"Therefore we can compute the cost of sales of the business amounted to 182."},{"Start":"08:03.860 ","End":"08:05.870","Text":"Moving on to the gross profit,"},{"Start":"08:05.870 ","End":"08:08.180","Text":"we know gross profit is sales,"},{"Start":"08:08.180 ","End":"08:11.477","Text":"which is given to us at 500,"},{"Start":"08:11.477 ","End":"08:13.730","Text":"and the cost of sales,"},{"Start":"08:13.730 ","End":"08:17.475","Text":"which we\u0027ve just computed at 182."},{"Start":"08:17.475 ","End":"08:23.605","Text":"Therefore, we can compute the gross profit equaling 318."},{"Start":"08:23.605 ","End":"08:26.800","Text":"Now, pay close attention to the computation"},{"Start":"08:26.800 ","End":"08:30.745","Text":"of the balances of the component parts of ending inventory."},{"Start":"08:30.745 ","End":"08:33.220","Text":"The computation of the raw materials,"},{"Start":"08:33.220 ","End":"08:36.559","Text":"the work-in-progress, and the finished goods."},{"Start":"08:36.559 ","End":"08:42.095","Text":"I will use a different color to enable you to follow more closely what is happening."},{"Start":"08:42.095 ","End":"08:44.625","Text":"The raw materials first."},{"Start":"08:44.625 ","End":"08:46.780","Text":"We were told there is an opening balance of"},{"Start":"08:46.780 ","End":"08:51.070","Text":"100 in raw materials at the beginning of the period."},{"Start":"08:51.070 ","End":"08:58.270","Text":"We were told there are 120 cost of raw materials purchased during the period."},{"Start":"08:58.270 ","End":"09:02.575","Text":"Now we need to look at what amounts of"},{"Start":"09:02.575 ","End":"09:08.935","Text":"raw materials was transferred out of raw materials into work-in-progress."},{"Start":"09:08.935 ","End":"09:19.090","Text":"You are told there\u0027s 135 of goods transferred from raw materials into work-in-progress."},{"Start":"09:21.270 ","End":"09:26.650","Text":"Therefore subtract 135 and we arrive at the closing balance,"},{"Start":"09:26.650 ","End":"09:32.800","Text":"the ending inventory of raw materials to be an amount of 85."},{"Start":"09:32.800 ","End":"09:35.110","Text":"Looking at the work-in-progress,"},{"Start":"09:35.110 ","End":"09:40.285","Text":"you were told the opening balance of work-in-progress is an amount of 50."},{"Start":"09:40.285 ","End":"09:44.870","Text":"We need to add to that the amount of the cost of"},{"Start":"09:44.870 ","End":"09:49.865","Text":"goods transferred from raw materials into work-in-progress."},{"Start":"09:49.865 ","End":"09:56.930","Text":"So the same 135, which we can circle here in green as well, so plus 135."},{"Start":"09:56.930 ","End":"10:01.100","Text":"But also, remember there was 40 spent on"},{"Start":"10:01.100 ","End":"10:06.998","Text":"labor costs to convert those goods ultimately into finished goods."},{"Start":"10:06.998 ","End":"10:11.450","Text":"Therefore, we need to add on 40 here as well."},{"Start":"10:11.450 ","End":"10:17.515","Text":"Now, how much was transferred from work-in-progress up to finished goods?"},{"Start":"10:17.515 ","End":"10:20.220","Text":"That same 200 we saw before."},{"Start":"10:20.220 ","End":"10:26.355","Text":"So less 200 moved out of work-in-progress into finished goods,"},{"Start":"10:26.355 ","End":"10:31.954","Text":"equals the closing balance in work-in-progress,"},{"Start":"10:31.954 ","End":"10:34.595","Text":"which amounts to 25."},{"Start":"10:34.595 ","End":"10:37.415","Text":"We could then look at the finished goods themselves."},{"Start":"10:37.415 ","End":"10:41.075","Text":"Now we know from the computation of cost of sales,"},{"Start":"10:41.075 ","End":"10:42.770","Text":"and it\u0027s the same number,"},{"Start":"10:42.770 ","End":"10:47.830","Text":"the opening balance in finished goods is the amount of 30."},{"Start":"10:47.830 ","End":"10:54.538","Text":"Then in the same way as the 135 was moved from raw materials to work-in-progress,"},{"Start":"10:54.538 ","End":"10:58.370","Text":"the same 200 comes from work-in-progress,"},{"Start":"10:58.370 ","End":"11:00.785","Text":"but they are certainly got around that as well."},{"Start":"11:00.785 ","End":"11:07.145","Text":"The same 200 goes from work-in-progress into finished goods."},{"Start":"11:07.145 ","End":"11:09.710","Text":"Then think carefully about this,"},{"Start":"11:09.710 ","End":"11:12.400","Text":"from the formula at the top of the page,"},{"Start":"11:12.400 ","End":"11:16.925","Text":"we know that opening inventory plus purchases,"},{"Start":"11:16.925 ","End":"11:19.190","Text":"less closing inventory,"},{"Start":"11:19.190 ","End":"11:21.619","Text":"equals cost of sales."},{"Start":"11:21.619 ","End":"11:27.165","Text":"Therefore, we can also say opening inventory plus purchases,"},{"Start":"11:27.165 ","End":"11:31.670","Text":"less cost of sales equals the closing inventory,"},{"Start":"11:31.670 ","End":"11:33.620","Text":"in this case, the finished goods."},{"Start":"11:33.620 ","End":"11:37.460","Text":"If we take the opening inventory of 30, and we add the,"},{"Start":"11:37.460 ","End":"11:40.820","Text":"what would be the purchases in a retailer but is effectively"},{"Start":"11:40.820 ","End":"11:46.760","Text":"now the inventory transferred from work-in-progress to finished goods of 200,"},{"Start":"11:46.760 ","End":"11:52.930","Text":"less the cost of sales as computed of 182."},{"Start":"11:52.930 ","End":"11:57.410","Text":"That gives us the balance of finished goods at the end of the period,"},{"Start":"11:57.410 ","End":"11:59.690","Text":"which amounts to 48."},{"Start":"11:59.690 ","End":"12:01.640","Text":"Therefore, what is the amount of"},{"Start":"12:01.640 ","End":"12:07.340","Text":"the ending inventory that will sit on the balance sheet ending inventory?"},{"Start":"12:07.340 ","End":"12:11.255","Text":"Will be the ending inventory of the raw materials, 85,"},{"Start":"12:11.255 ","End":"12:14.195","Text":"of the work-in-progress of 25,"},{"Start":"12:14.195 ","End":"12:16.490","Text":"the finished goods of 48."},{"Start":"12:16.490 ","End":"12:25.140","Text":"Therefore on the balance sheet will sit a total inventory amount of 158."}],"ID":28611},{"Watched":false,"Name":"Exercise 3 - part 1","Duration":"3m 27s","ChapterTopicVideoID":26358,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.865","Text":"Today we\u0027re doing the exercise ABE."},{"Start":"00:02.865 ","End":"00:08.820","Text":"In this exercise, we\u0027re focusing on what constitutes the cost of inventory."},{"Start":"00:08.820 ","End":"00:12.405","Text":"ABE Limited, a retailer of office supplies,"},{"Start":"00:12.405 ","End":"00:16.320","Text":"purchased 10,000 staplers during 20X1."},{"Start":"00:16.320 ","End":"00:18.945","Text":"The supplier invoiced ABE,"},{"Start":"00:18.945 ","End":"00:21.580","Text":"1 currency unit per stapler,"},{"Start":"00:21.580 ","End":"00:26.065","Text":"that\u0027s 10,000 currency units for the total purchases for the year."},{"Start":"00:26.065 ","End":"00:32.035","Text":"The staplers were delivered in 2 equal-sized batches, 6 months apart."},{"Start":"00:32.035 ","End":"00:35.975","Text":"If it was 10,000 currency units for the total purchases for the year,"},{"Start":"00:35.975 ","End":"00:40.550","Text":"it means each batch cost 5,000 currency units."},{"Start":"00:40.550 ","End":"00:45.830","Text":"The cost of delivering each batch was 350 currency units,"},{"Start":"00:45.830 ","End":"00:51.305","Text":"and insurance in transit was 150 currency units for each delivery."},{"Start":"00:51.305 ","End":"00:54.084","Text":"Then for internal purposes,"},{"Start":"00:54.084 ","End":"01:02.250","Text":"ABE\u0027s cost allocation system then added 10 percent of these expenses, in other words,"},{"Start":"01:02.250 ","End":"01:05.960","Text":"10 percent of the total of the invoice delivery and"},{"Start":"01:05.960 ","End":"01:10.735","Text":"insurance costs to the cost of the stapler."},{"Start":"01:10.735 ","End":"01:14.560","Text":"Now I did this in order to include a share of"},{"Start":"01:14.560 ","End":"01:18.695","Text":"the marketing department\u0027s office-keeping and maintenance."},{"Start":"01:18.695 ","End":"01:24.640","Text":"Just to recap what we\u0027ve been told so far, we\u0027ve purchased staplers,"},{"Start":"01:24.640 ","End":"01:29.514","Text":"the actual staplers being our inventory purchased,"},{"Start":"01:29.514 ","End":"01:33.640","Text":"its currency units, 5,000 per batch."},{"Start":"01:33.640 ","End":"01:36.805","Text":"There were 2 batches making up the 10,000."},{"Start":"01:36.805 ","End":"01:41.055","Text":"To that we added our delivery cost,"},{"Start":"01:41.055 ","End":"01:51.550","Text":"delivery was 350 and then we add to that the insurance in transit of 150,"},{"Start":"01:51.550 ","End":"01:56.560","Text":"and that gives us 5,500 so far."},{"Start":"01:56.560 ","End":"02:00.685","Text":"That\u0027s the cost of buying the staplers and getting it"},{"Start":"02:00.685 ","End":"02:08.350","Text":"to our business in order that we can sell them,"},{"Start":"02:08.350 ","End":"02:10.150","Text":"and then we\u0027re told that for"},{"Start":"02:10.150 ","End":"02:13.510","Text":"internal purposes we have a cost allocation system that then added"},{"Start":"02:13.510 ","End":"02:17.350","Text":"10 percent of these expenses to the cost of"},{"Start":"02:17.350 ","End":"02:22.450","Text":"the stapler in order to include a share of the marketing department\u0027s office-keeping."},{"Start":"02:22.450 ","End":"02:28.550","Text":"It means we added 10 percent of 5,500 is 550."},{"Start":"02:28.550 ","End":"02:34.030","Text":"That gives us total of 6,050 per batch."},{"Start":"02:34.030 ","End":"02:38.254","Text":"That 550 was not a cost of the actual stapler,"},{"Start":"02:38.254 ","End":"02:42.860","Text":"it wasn\u0027t the cost of getting the stapler to business and it wasn\u0027t"},{"Start":"02:42.860 ","End":"02:47.895","Text":"a cost of getting the stapler into a condition that enabled it to be sold,"},{"Start":"02:47.895 ","End":"02:49.820","Text":"it\u0027s simply an allocation of"},{"Start":"02:49.820 ","End":"02:54.810","Text":"the marketing department\u0027s cost of office-keeping and maintenance."},{"Start":"02:54.820 ","End":"02:58.460","Text":"Just bear that in mind as we continue with the question."},{"Start":"02:58.460 ","End":"03:00.935","Text":"Using this cost education system,"},{"Start":"03:00.935 ","End":"03:06.905","Text":"ABE reports the inventory of staplers at the beginning and end of the year as follows."},{"Start":"03:06.905 ","End":"03:10.885","Text":"The beginning balance is 1,210 currency units."},{"Start":"03:10.885 ","End":"03:15.930","Text":"The ending balance is 1,540 currency units."},{"Start":"03:15.930 ","End":"03:20.945","Text":"We are required to determine the ending balance of inventory"},{"Start":"03:20.945 ","End":"03:27.509","Text":"and cost of goods sold that ABE needs to report in its external financial statements."}],"ID":28612},{"Watched":false,"Name":"Exercise 3 - part 2","Duration":"4m 54s","ChapterTopicVideoID":26359,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.884","Text":"In this question, we are focusing on the cost of inventory."},{"Start":"00:03.884 ","End":"00:06.990","Text":"Thus key to answering this question is"},{"Start":"00:06.990 ","End":"00:10.305","Text":"knowing what costs get included in the cost of inventory."},{"Start":"00:10.305 ","End":"00:15.840","Text":"Well, the cost of inventory includes all costs of getting the inventory to"},{"Start":"00:15.840 ","End":"00:21.825","Text":"the location and putting it into the condition that enables it to be sold."},{"Start":"00:21.825 ","End":"00:25.080","Text":"Office-related expenses are not expenses involved in"},{"Start":"00:25.080 ","End":"00:28.845","Text":"getting the staplers to the location and putting it into a condition,"},{"Start":"00:28.845 ","End":"00:30.585","Text":"that enables them to be sold."},{"Start":"00:30.585 ","End":"00:36.675","Text":"Thus, the 10 percent allocation that the company added must be excluded or reversed from"},{"Start":"00:36.675 ","End":"00:39.500","Text":"the cost of the inventory asset and thus must be"},{"Start":"00:39.500 ","End":"00:43.450","Text":"reversed from the related cost of goods sold expense."},{"Start":"00:43.450 ","End":"00:48.245","Text":"In other words, ABE\u0027s cost allocation system was incorrect."},{"Start":"00:48.245 ","End":"00:50.150","Text":"Now to answer this question,"},{"Start":"00:50.150 ","End":"00:54.185","Text":"we have to reconstruct our inventory asset account."},{"Start":"00:54.185 ","End":"00:58.820","Text":"This asset account is at cost and the reason I say so is that there is"},{"Start":"00:58.820 ","End":"01:04.895","Text":"no reference to impairments or impairment allowances in this question."},{"Start":"01:04.895 ","End":"01:12.765","Text":"We were given an inventory beginning balance of 1,210 currency units that\u0027s given to us."},{"Start":"01:12.765 ","End":"01:19.890","Text":"As we know, that includes the extra 10 percent allocation that we now need to reverse."},{"Start":"01:19.990 ","End":"01:29.105","Text":"The 1,210 effectively represents 110 percent of what it ought to represent."},{"Start":"01:29.105 ","End":"01:31.670","Text":"Since it\u0027s wrong, we\u0027re going to therefore,"},{"Start":"01:31.670 ","End":"01:36.125","Text":"divide the 1,210 by the 110 percent,"},{"Start":"01:36.125 ","End":"01:39.260","Text":"which represents and multiply it by what we\u0027re looking for,"},{"Start":"01:39.260 ","End":"01:48.089","Text":"which is 100 percent of the real costs or you simply divide by 1.1 and multiply by 1."},{"Start":"01:48.089 ","End":"01:51.210","Text":"That gives us 1,100."},{"Start":"01:51.210 ","End":"02:01.235","Text":"In other words, that 1,100 represents the cost of the staplers plus the delivery inwards."},{"Start":"02:01.235 ","End":"02:05.824","Text":"In other words, the cost of getting the staplers to premises"},{"Start":"02:05.824 ","End":"02:11.230","Text":"and the cost of insuring the staplers during the delivery process."},{"Start":"02:11.230 ","End":"02:19.445","Text":"That came to 1,100 and what the company had done was it added 10 percent of the 1,100,"},{"Start":"02:19.445 ","End":"02:25.280","Text":"which was 110 and that\u0027s how it got to the 1,210."},{"Start":"02:25.280 ","End":"02:29.219","Text":"That 110 was an office-related expense"},{"Start":"02:29.219 ","End":"02:33.065","Text":"and that\u0027s not to be included in the cost of the inventory."},{"Start":"02:33.065 ","End":"02:36.005","Text":"Moving on to the inventory closing balance,"},{"Start":"02:36.005 ","End":"02:38.979","Text":"we were told it was 1,540,"},{"Start":"02:38.979 ","End":"02:45.200","Text":"and once again, that represents 110 percent of what it ought to be presented at."},{"Start":"02:45.200 ","End":"02:51.950","Text":"It\u0027s wrong. It needs to be divided by 110 percent and multiply it by 100 percent."},{"Start":"02:51.950 ","End":"02:57.635","Text":"That gives us 1,400 as the corrected ending balance."},{"Start":"02:57.635 ","End":"03:02.180","Text":"We\u0027re then told that we purchased staplers during the year."},{"Start":"03:02.180 ","End":"03:03.935","Text":"There were 2 batches thereof."},{"Start":"03:03.935 ","End":"03:07.110","Text":"Each batch cost 5,000 or in other words,"},{"Start":"03:07.110 ","End":"03:09.995","Text":"10,000 for the total staplers over the year."},{"Start":"03:09.995 ","End":"03:18.145","Text":"Plus it was 350 delivery charge per batch plus there was the insurance of each batch."},{"Start":"03:18.145 ","End":"03:22.985","Text":"That gives us 5,500 per batch or 11,000 in total."},{"Start":"03:22.985 ","End":"03:26.135","Text":"If you add your beginning balance to your purchases,"},{"Start":"03:26.135 ","End":"03:30.530","Text":"you should get to a balance of 12,100."},{"Start":"03:30.530 ","End":"03:36.120","Text":"However, our closing balance is 1,400 so there is"},{"Start":"03:36.120 ","End":"03:42.800","Text":"missing inventory of the difference between those figures, 12,100 and 1,400."},{"Start":"03:42.800 ","End":"03:46.235","Text":"That difference of 10,700,"},{"Start":"03:46.235 ","End":"03:49.600","Text":"we show as the cost of goods sold."},{"Start":"03:49.600 ","End":"03:53.930","Text":"That was part of the answer because we were required to calculate the cost"},{"Start":"03:53.930 ","End":"03:57.950","Text":"of goods sold expense for the year, that\u0027s 10,700."},{"Start":"03:57.950 ","End":"04:05.160","Text":"Then the other part of the answer was to calculate inventories ending balance, 1,400."},{"Start":"04:05.160 ","End":"04:11.270","Text":"Just remember that that 10,700 is a credit to our inventory asset account."},{"Start":"04:11.270 ","End":"04:14.240","Text":"The inventory beginning balance was a debit,"},{"Start":"04:14.240 ","End":"04:17.510","Text":"the purchases were another debit, and therefore,"},{"Start":"04:17.510 ","End":"04:23.725","Text":"our ending balance was the 2 debits, 1,100 and 11,000."},{"Start":"04:23.725 ","End":"04:30.525","Text":"Those 2 added together exceeded our credits of 10,700 by an amount of 1,400."},{"Start":"04:30.525 ","End":"04:39.680","Text":"That 10,700 is a credit inventory and the debit side went to cost of sales expense."},{"Start":"04:39.680 ","End":"04:41.640","Text":"That is what we were asked for,"},{"Start":"04:41.640 ","End":"04:44.975","Text":"the cost of sale expense amount,"},{"Start":"04:44.975 ","End":"04:48.245","Text":"which is this 10,700."},{"Start":"04:48.245 ","End":"04:54.560","Text":"Then we were asked for the inventory asset ending balance, which was 1,400."}],"ID":28613},{"Watched":false,"Name":"Cost flow assumption - Introduction","Duration":"5m 14s","ChapterTopicVideoID":26648,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.820","Text":"Hello and welcome to this series of"},{"Start":"00:02.820 ","End":"00:07.870","Text":"video presentations on inventory brought to you by Propep."},{"Start":"00:07.870 ","End":"00:12.690","Text":"In this video, we will focus on the cost flow assumptions."},{"Start":"00:12.690 ","End":"00:14.610","Text":"Specifically in this video,"},{"Start":"00:14.610 ","End":"00:20.010","Text":"the cost flow assumptions using the periodic inventory method."},{"Start":"00:20.010 ","End":"00:25.365","Text":"The important point to bear in mind is that they are in fact assumptions."},{"Start":"00:25.365 ","End":"00:32.590","Text":"Assumptions is to how the costs associated with inventory flow through the entities."},{"Start":"00:32.590 ","End":"00:38.400","Text":"Keeping track of a physical flow of inventory can be very demanding and cumbersome."},{"Start":"00:38.400 ","End":"00:44.180","Text":"To illustrate, let\u0027s look at an example with these inventory transaction."},{"Start":"00:44.180 ","End":"00:47.360","Text":"It is worthwhile spending some time looking at"},{"Start":"00:47.360 ","End":"00:51.020","Text":"the details of this example because we will be using"},{"Start":"00:51.020 ","End":"00:54.300","Text":"the numbers and information in this example"},{"Start":"00:54.300 ","End":"00:58.955","Text":"for the next few solutions that follow after that."},{"Start":"00:58.955 ","End":"01:05.090","Text":"This entity has an opening stock or inventory of 1,000 units,"},{"Start":"01:05.090 ","End":"01:08.290","Text":"it purchases between January and June,"},{"Start":"01:08.290 ","End":"01:15.425","Text":"2,000 units and then it purchases again between July and December, 600 units."},{"Start":"01:15.425 ","End":"01:21.155","Text":"Note that cost per unit is increasing over the period of time."},{"Start":"01:21.155 ","End":"01:25.910","Text":"The opening inventory cost 5 pounds or euros per unit,"},{"Start":"01:25.910 ","End":"01:30.605","Text":"the January to June purchases cost 8 per unit,"},{"Start":"01:30.605 ","End":"01:34.850","Text":"and the July to December purchases cost 9 per unit."},{"Start":"01:34.850 ","End":"01:37.820","Text":"The fact that these costs are increasing will be"},{"Start":"01:37.820 ","End":"01:43.625","Text":"an important factor to take into account understanding some of the solutions."},{"Start":"01:43.625 ","End":"01:47.030","Text":"Remember this is purely at the moment quantities."},{"Start":"01:47.030 ","End":"01:52.170","Text":"These are unit, there are no currencies involved in the units."},{"Start":"01:52.220 ","End":"01:57.795","Text":"Starting off with 1,000 and purchasing 2,600,"},{"Start":"01:57.795 ","End":"02:05.315","Text":"this entity has 3,600 units and we can call that available for sale."},{"Start":"02:05.315 ","End":"02:08.180","Text":"Then between January and June,"},{"Start":"02:08.180 ","End":"02:11.305","Text":"there was sales of 800 units."},{"Start":"02:11.305 ","End":"02:13.849","Text":"Again from July to December,"},{"Start":"02:13.849 ","End":"02:16.790","Text":"sales of 700 units."},{"Start":"02:16.790 ","End":"02:24.280","Text":"The total sales units-wise comprised 1,500 units,"},{"Start":"02:24.280 ","End":"02:28.820","Text":"which therefore means that the closing balance of"},{"Start":"02:28.820 ","End":"02:33.815","Text":"inventory from purely a physical units perspective,"},{"Start":"02:33.815 ","End":"02:37.040","Text":"this is 2,100 units."},{"Start":"02:37.040 ","End":"02:44.190","Text":"Now, the problem we trying to solve over here is the same for these goods that were sold."},{"Start":"02:44.190 ","End":"02:47.235","Text":"We sold these 1,500 units,"},{"Start":"02:47.235 ","End":"02:50.940","Text":"what is the amount of the cost of sales?"},{"Start":"02:50.940 ","End":"02:55.535","Text":"For these 2,100 units on hand,"},{"Start":"02:55.535 ","End":"03:00.980","Text":"what is the amount of those units on hand in this case,"},{"Start":"03:00.980 ","End":"03:03.680","Text":"to go clearly into the balance sheet?"},{"Start":"03:03.680 ","End":"03:09.170","Text":"We set the selling price of the first batch of 800 as 10 per"},{"Start":"03:09.170 ","End":"03:15.665","Text":"unit and we set the selling price of the second batch of sales as 12 per unit."},{"Start":"03:15.665 ","End":"03:19.670","Text":"But it\u0027s important, as I say it, understand the problem."},{"Start":"03:19.670 ","End":"03:26.000","Text":"We don\u0027t know what is the cost of sales and we don\u0027t know as yet,"},{"Start":"03:26.000 ","End":"03:28.955","Text":"what is the amount of the imagery for the balance sheet."},{"Start":"03:28.955 ","End":"03:32.750","Text":"Now, how we compute that will be asked to do is,"},{"Start":"03:32.750 ","End":"03:37.220","Text":"to calculate the cost of the sales of"},{"Start":"03:37.220 ","End":"03:42.515","Text":"the 1,500 units and also calculate the ending balance inventory."},{"Start":"03:42.515 ","End":"03:46.505","Text":"Now, the answers that we will get will depend if we\u0027re using"},{"Start":"03:46.505 ","End":"03:51.215","Text":"a firstly periodic system or perpetual system."},{"Start":"03:51.215 ","End":"03:54.305","Text":"Here we\u0027re using a periodic system."},{"Start":"03:54.305 ","End":"03:58.580","Text":"Secondly, the answer will depend upon what"},{"Start":"03:58.580 ","End":"04:02.930","Text":"cost flow assumptions have been made in"},{"Start":"04:02.930 ","End":"04:08.180","Text":"the computation of the cost of sales and the closing inventory."},{"Start":"04:08.180 ","End":"04:12.725","Text":"Your 3 common assumptions used in accounting."},{"Start":"04:12.725 ","End":"04:17.885","Text":"The first is called the FIFO or first-in, first-out."},{"Start":"04:17.885 ","End":"04:22.595","Text":"The second is called the LIFO or last-in, first-out."},{"Start":"04:22.595 ","End":"04:25.670","Text":"The third is called the weighted average."},{"Start":"04:25.670 ","End":"04:28.790","Text":"In brief, FIFO or first-in,"},{"Start":"04:28.790 ","End":"04:37.160","Text":"first out simply says that in computing the cost of goods sold,"},{"Start":"04:37.160 ","End":"04:43.910","Text":"the first goods that came into the entity will be the first good to go out of the entity."},{"Start":"04:43.910 ","End":"04:46.290","Text":"Therefore, first to come in,"},{"Start":"04:46.290 ","End":"04:48.135","Text":"is the first to go out."},{"Start":"04:48.135 ","End":"04:50.730","Text":"The LIFO or last-in,"},{"Start":"04:50.730 ","End":"04:55.295","Text":"first out says in computing the cost of the sales,"},{"Start":"04:55.295 ","End":"04:58.000","Text":"the last goods to come in,"},{"Start":"04:58.000 ","End":"05:03.750","Text":"are assumed from a costing perspective to be the first goods to go out."},{"Start":"05:03.750 ","End":"05:05.855","Text":"You\u0027ll see in the computations,"},{"Start":"05:05.855 ","End":"05:08.765","Text":"the weighted average method takes"},{"Start":"05:08.765 ","End":"05:14.700","Text":"an average of those cost of the goods that were purchased."}],"ID":28614},{"Watched":false,"Name":"Cost flow assumption - periodic FIFO example Part 1","Duration":"5m 47s","ChapterTopicVideoID":26649,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.110 ","End":"00:02.940","Text":"Hello and welcome to this series of"},{"Start":"00:02.940 ","End":"00:08.220","Text":"video presentations on inventory brought to you by Proprep."},{"Start":"00:08.220 ","End":"00:11.925","Text":"When computing the cost of sales and closing inventory,"},{"Start":"00:11.925 ","End":"00:14.790","Text":"it is important to take very careful notes of"},{"Start":"00:14.790 ","End":"00:22.680","Text":"the cost-flow assumptions that are being used."},{"Start":"00:22.680 ","End":"00:26.220","Text":"Here, we are using the periodic inventory method"},{"Start":"00:26.220 ","End":"00:30.195","Text":"and specifically the cost-flow assumption of FIFO,"},{"Start":"00:30.195 ","End":"00:32.505","Text":"First in, first out."},{"Start":"00:32.505 ","End":"00:36.285","Text":"We need to compute firstly,"},{"Start":"00:36.285 ","End":"00:40.430","Text":"the cost of sales and we have to compute"},{"Start":"00:40.430 ","End":"00:46.410","Text":"also the closing inventory at the end of the period."},{"Start":"00:46.410 ","End":"00:48.720","Text":"Starting with the cost of sales,"},{"Start":"00:48.720 ","End":"00:51.995","Text":"and remember the whole time we\u0027re using FIFO."},{"Start":"00:51.995 ","End":"00:55.100","Text":"In other words, the first goods to come in,"},{"Start":"00:55.100 ","End":"00:57.710","Text":"are the first goods to go out."},{"Start":"00:57.710 ","End":"01:00.695","Text":"What was sold during the period?"},{"Start":"01:00.695 ","End":"01:03.005","Text":"What was sold during the period,"},{"Start":"01:03.005 ","End":"01:07.645","Text":"as we know, are 1,500 units."},{"Start":"01:07.645 ","End":"01:11.915","Text":"Now because we are using a periodic and perpetual system,"},{"Start":"01:11.915 ","End":"01:15.800","Text":"we\u0027re looking at this in total at the end of the period."},{"Start":"01:15.800 ","End":"01:20.505","Text":"Therefore, of these 1,500 units sold,"},{"Start":"01:20.505 ","End":"01:23.150","Text":"and thinking FIFO, first in,"},{"Start":"01:23.150 ","End":"01:30.035","Text":"first out, the first goods sold must come from the opening inventory,"},{"Start":"01:30.035 ","End":"01:32.810","Text":"from this inventory of 1,000 units."},{"Start":"01:32.810 ","End":"01:35.570","Text":"We can therefore say for the cost of sales,"},{"Start":"01:35.570 ","End":"01:39.845","Text":"of the 1,500 units sold,"},{"Start":"01:39.845 ","End":"01:44.660","Text":"1,000 will be costed at 5 per unit,"},{"Start":"01:44.660 ","End":"01:48.395","Text":"which gives us an amount of 5,000."},{"Start":"01:48.395 ","End":"01:52.250","Text":"Now I can therefore now delete the 1,000 because"},{"Start":"01:52.250 ","End":"01:56.405","Text":"I\u0027ve used that in the cash flow assumption process."},{"Start":"01:56.405 ","End":"02:03.920","Text":"Now we know in total there were 1,500 goods sold during the period."},{"Start":"02:03.920 ","End":"02:12.875","Text":"The next step is to go and compute the cost of the remaining 500 units sold."},{"Start":"02:12.875 ","End":"02:16.085","Text":"We then look based on FIFO,"},{"Start":"02:16.085 ","End":"02:19.265","Text":"which remember again is first in, first out."},{"Start":"02:19.265 ","End":"02:23.585","Text":"We go to the next batch of goods purchased."},{"Start":"02:23.585 ","End":"02:27.710","Text":"We\u0027ve costed out all the 1,000 and now therefore,"},{"Start":"02:27.710 ","End":"02:31.010","Text":"we have to take the cost of the 500 units from"},{"Start":"02:31.010 ","End":"02:34.625","Text":"the cost of the next batch are either is 2,000,"},{"Start":"02:34.625 ","End":"02:37.790","Text":"which we know it costs 8 pounds per unit,"},{"Start":"02:37.790 ","End":"02:43.490","Text":"so 500 times 8=4,000."},{"Start":"02:43.490 ","End":"02:52.770","Text":"Therefore, keeping track of the inventory of that 2,000 units purchased at 8."},{"Start":"02:52.770 ","End":"03:00.050","Text":"We now have 1,500 available to either cost out or will"},{"Start":"03:00.050 ","End":"03:03.530","Text":"become part of closing inventory in this case because we\u0027ve"},{"Start":"03:03.530 ","End":"03:08.285","Text":"now taken into account all 1,500 which had been sold."},{"Start":"03:08.285 ","End":"03:13.630","Text":"The total cost of sales therefore comes to 9,000."},{"Start":"03:13.630 ","End":"03:16.650","Text":"This is the currency units."},{"Start":"03:16.650 ","End":"03:21.125","Text":"Looking in a closing inventory and part of the bigger picture,"},{"Start":"03:21.125 ","End":"03:24.274","Text":"and thinking FIFO, first in,"},{"Start":"03:24.274 ","End":"03:30.505","Text":"first out we now have this 1,500 units,"},{"Start":"03:30.505 ","End":"03:36.025","Text":"which is been not costed out and therefore parts of closing inventory."},{"Start":"03:36.025 ","End":"03:43.650","Text":"Closing inventory will be the 1,500 units at the cost of 8,"},{"Start":"03:43.650 ","End":"03:52.410","Text":"which comes to the amount of 12,000 and the balance of 600 not yet"},{"Start":"03:52.410 ","End":"03:56.140","Text":"costed out will kill you also form part of"},{"Start":"03:56.140 ","End":"04:01.750","Text":"closing inventory and the 600 we know cost 9 per unit,"},{"Start":"04:01.750 ","End":"04:05.725","Text":"which gives a total of 5,400."},{"Start":"04:05.725 ","End":"04:12.425","Text":"Therefore the total closing inventory amounts to 17,400."},{"Start":"04:12.425 ","End":"04:19.310","Text":"Now remember here, the total quantity of closing inventory is 2,100,"},{"Start":"04:19.310 ","End":"04:23.940","Text":"which in fact is the opening inventory of 1,000"},{"Start":"04:23.940 ","End":"04:29.475","Text":"units plus the 2,000 purchased plus the 600 purchased,"},{"Start":"04:29.475 ","End":"04:33.215","Text":"less the 1,500 sold that in fact,"},{"Start":"04:33.215 ","End":"04:39.805","Text":"is the closing balance of inventory in terms of units of 2,100."},{"Start":"04:39.805 ","End":"04:44.629","Text":"That concludes the computation of cost of sales"},{"Start":"04:44.629 ","End":"04:49.845","Text":"and closing inventory on the periodic method and using the FIFO,"},{"Start":"04:49.845 ","End":"04:53.584","Text":"first in, first out cost-flow assumption."},{"Start":"04:53.584 ","End":"04:57.500","Text":"As you\u0027ve seen, FIFO assumes that goods are"},{"Start":"04:57.500 ","End":"05:02.020","Text":"used and therefore costed in the order in which they are purchased."},{"Start":"05:02.020 ","End":"05:03.705","Text":"FIFO first in,"},{"Start":"05:03.705 ","End":"05:06.830","Text":"first out and thus this method probably"},{"Start":"05:06.830 ","End":"05:10.955","Text":"provides the best approximation to actual cost-flow."},{"Start":"05:10.955 ","End":"05:14.465","Text":"Thinking of FIFO, which you know,"},{"Start":"05:14.465 ","End":"05:20.864","Text":"is first in, and then first out."},{"Start":"05:20.864 ","End":"05:24.830","Text":"The cost of sales represents"},{"Start":"05:24.830 ","End":"05:29.870","Text":"the allocation of the first in therefore, the earliest costs."},{"Start":"05:29.870 ","End":"05:33.545","Text":"The closing inventory or closing stock,"},{"Start":"05:33.545 ","End":"05:40.970","Text":"will represent the cost of the latest purchases because the first goods to come in,"},{"Start":"05:40.970 ","End":"05:44.060","Text":"were costed as part of cost of sales and therefore"},{"Start":"05:44.060 ","End":"05:48.599","Text":"the latest purchases become the closing inventory."}],"ID":28615},{"Watched":false,"Name":"Cost flow assumption - periodic LIFO example Part 2","Duration":"6m 12s","ChapterTopicVideoID":26650,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.490","Text":"Hello and welcome to the series of"},{"Start":"00:02.490 ","End":"00:07.725","Text":"video presentations on inventory brought to you by Proprep."},{"Start":"00:07.725 ","End":"00:11.505","Text":"Looking at the next example and as always paying"},{"Start":"00:11.505 ","End":"00:17.085","Text":"careful attention to the cost flow assumption we\u0027re still using the periodic method,"},{"Start":"00:17.085 ","End":"00:19.937","Text":"but now we\u0027re moving onto the LIFO;"},{"Start":"00:19.937 ","End":"00:23.834","Text":"last in, first out cost flow assumption."},{"Start":"00:23.834 ","End":"00:28.740","Text":"LIFO, remember the last goods to come in will be the first goods to"},{"Start":"00:28.740 ","End":"00:33.765","Text":"go out in terms of calculating cost of sales."},{"Start":"00:33.765 ","End":"00:39.510","Text":"It\u0027s important here as with the previous example to continually think in your mind,"},{"Start":"00:39.510 ","End":"00:41.625","Text":"LIFO, last in,"},{"Start":"00:41.625 ","End":"00:44.706","Text":"first out in computing cost of sales."},{"Start":"00:44.706 ","End":"00:46.725","Text":"The numbers are the same,"},{"Start":"00:46.725 ","End":"00:54.215","Text":"and therefore this entity is available for sale 3,600 units."},{"Start":"00:54.215 ","End":"00:57.259","Text":"Remember this is the units or the quantity."},{"Start":"00:57.259 ","End":"01:01.305","Text":"It has sold 1,500 units."},{"Start":"01:01.305 ","End":"01:03.695","Text":"As in the previous example,"},{"Start":"01:03.695 ","End":"01:09.590","Text":"the balance of units on hand at the end of the period is 2,100."},{"Start":"01:09.590 ","End":"01:17.890","Text":"What we need to do is compute the actual currency units amounts of the cost of sales;"},{"Start":"01:17.890 ","End":"01:22.925","Text":"the cost of these 1,500 units sold,"},{"Start":"01:22.925 ","End":"01:27.425","Text":"and compute the currency amount of the closing inventory"},{"Start":"01:27.425 ","End":"01:32.660","Text":"for the balance sheet of those 2,100 units."},{"Start":"01:32.660 ","End":"01:41.000","Text":"As before, we\u0027re going to compute the cost of sales of the 1,500 units and calculate"},{"Start":"01:41.000 ","End":"01:49.250","Text":"the balance sheet amount for the closing inventory of the 2,100 units."},{"Start":"01:49.250 ","End":"01:51.790","Text":"Looking at the cost of sales first,"},{"Start":"01:51.790 ","End":"01:54.133","Text":"and remember we\u0027re thinking LIFO;"},{"Start":"01:54.133 ","End":"01:56.074","Text":"last in, first out."},{"Start":"01:56.074 ","End":"02:01.200","Text":"The last goods to come in were these goods costing 9 pounds,"},{"Start":"02:01.200 ","End":"02:03.895","Text":"these 600 units at 9 pounds,"},{"Start":"02:03.895 ","End":"02:09.610","Text":"therefore the cost of sales will be computed as 600 multiplied by the 9."},{"Start":"02:09.610 ","End":"02:10.970","Text":"I\u0027ll say pounds,"},{"Start":"02:10.970 ","End":"02:12.995","Text":"it could be pounds, euros, or dollars."},{"Start":"02:12.995 ","End":"02:17.375","Text":"600 times 9 which is 5,400,"},{"Start":"02:17.375 ","End":"02:19.295","Text":"put your currency units."},{"Start":"02:19.295 ","End":"02:22.265","Text":"That 600 is now being costed out."},{"Start":"02:22.265 ","End":"02:30.320","Text":"Now remember, the total goods sold as in the previous example is 1,500."},{"Start":"02:30.320 ","End":"02:32.780","Text":"Now I need to compute the cost of"},{"Start":"02:32.780 ","End":"02:39.775","Text":"the remaining 900 goods which was sold during the period."},{"Start":"02:39.775 ","End":"02:41.700","Text":"Because it\u0027s LIFO;"},{"Start":"02:41.700 ","End":"02:43.320","Text":"last in, first out,"},{"Start":"02:43.320 ","End":"02:46.150","Text":"I now move to this 2,000,"},{"Start":"02:46.150 ","End":"02:51.755","Text":"the second latest batch of purchases which cost 8 pounds."},{"Start":"02:51.755 ","End":"02:54.710","Text":"We can compute the cost of sales of"},{"Start":"02:54.710 ","End":"03:03.348","Text":"the remaining 900 units at an amount of 8 which comes to 7,200,"},{"Start":"03:03.348 ","End":"03:10.215","Text":"therefore of that 2,000 units we\u0027ve costed out"},{"Start":"03:10.215 ","End":"03:18.875","Text":"900 and therefore there is 1,100 available to cost out if there were further sales."},{"Start":"03:18.875 ","End":"03:24.725","Text":"In this case, the 1,100 would go towards the closing inventory."},{"Start":"03:24.725 ","End":"03:27.455","Text":"In terms of the total cost of sales,"},{"Start":"03:27.455 ","End":"03:32.515","Text":"the total cost of sales here comes to therefore 12,600."},{"Start":"03:32.515 ","End":"03:35.175","Text":"Moving to closing inventory;"},{"Start":"03:35.175 ","End":"03:36.990","Text":"and remember it\u0027s last in,"},{"Start":"03:36.990 ","End":"03:40.419","Text":"first out, so we\u0027re working from the latest purchases."},{"Start":"03:40.419 ","End":"03:44.210","Text":"We\u0027ve costed out the 600,"},{"Start":"03:44.210 ","End":"03:48.455","Text":"we\u0027ve costed out 900 of the 2,000,"},{"Start":"03:48.455 ","End":"03:53.150","Text":"therefore in closing inventory we have the 1,100"},{"Start":"03:53.150 ","End":"03:59.745","Text":"balance of the 8 currency unit goods to include in closing inventory,"},{"Start":"03:59.745 ","End":"04:06.252","Text":"1,100 multiplied by the 8;"},{"Start":"04:06.252 ","End":"04:07.850","Text":"cost of those items,"},{"Start":"04:07.850 ","End":"04:12.340","Text":"gives us an amount of 8,800."},{"Start":"04:12.340 ","End":"04:16.270","Text":"That 11 is now being costed out."},{"Start":"04:17.990 ","End":"04:23.540","Text":"Remember there are 2,100 units on hand."},{"Start":"04:23.540 ","End":"04:30.305","Text":"The balance of the 2,100 and which the 1,000 not costed out yet,"},{"Start":"04:30.305 ","End":"04:37.079","Text":"that 1,000 it\u0027s cost of 5 to give a total of 5,000 and"},{"Start":"04:37.079 ","End":"04:45.230","Text":"therefore a total cost of closing inventory of 13,800."},{"Start":"04:45.230 ","End":"04:52.719","Text":"That then concludes the computation of the cost of sales using periodic LIFO,"},{"Start":"04:52.719 ","End":"04:57.635","Text":"cost of sales, 12,600,"},{"Start":"04:57.635 ","End":"05:04.570","Text":"and the costing of the closing inventory of 13,800."},{"Start":"05:04.570 ","End":"05:09.110","Text":"What we see looking at LIFO is LIFO disregards"},{"Start":"05:09.110 ","End":"05:14.620","Text":"the physical flow of goods as it is assuming that as we\u0027ve seen LIFO; last in,"},{"Start":"05:14.620 ","End":"05:18.290","Text":"first out, the most recent purchases was"},{"Start":"05:18.290 ","End":"05:22.285","Text":"drawn first or therefore the cost of sales first,"},{"Start":"05:22.285 ","End":"05:26.525","Text":"1 advantage is that the cost of sales better approximates"},{"Start":"05:26.525 ","End":"05:33.185","Text":"the replacement cost of stock because in times of inflation and rising prices,"},{"Start":"05:33.185 ","End":"05:40.385","Text":"the latest goods more clearly closely reflect the cost of future purchases."},{"Start":"05:40.385 ","End":"05:44.450","Text":"There\u0027s been much international divergence between standard setters."},{"Start":"05:44.450 ","End":"05:46.505","Text":"Looking at IFRS rules,"},{"Start":"05:46.505 ","End":"05:52.950","Text":"LIFO is not permitted for accounting purposes starting way back in 2005,"},{"Start":"05:52.950 ","End":"05:57.580","Text":"that is in terms of the accounting standard IAS 2."},{"Start":"05:57.580 ","End":"06:00.840","Text":"However, looking at US or American GAAP,"},{"Start":"06:00.840 ","End":"06:06.500","Text":"LIFO is allowed for accounting purposes provided the company also uses"},{"Start":"06:06.500 ","End":"06:13.110","Text":"LIFO for tax purposes which has its own complications and implications."}],"ID":28616},{"Watched":false,"Name":"Cost flow assumption - periodic WA example","Duration":"3m 51s","ChapterTopicVideoID":26651,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.200 ","End":"00:03.030","Text":"Hello and welcome to this series of"},{"Start":"00:03.030 ","End":"00:08.340","Text":"video presentations on inventory brought you by Proprep."},{"Start":"00:08.340 ","End":"00:11.385","Text":"Today, now to the third of these examples,"},{"Start":"00:11.385 ","End":"00:14.280","Text":"we are still using the periodic system."},{"Start":"00:14.280 ","End":"00:19.845","Text":"But note now the cost flow assumption will be that of the weighted average."},{"Start":"00:19.845 ","End":"00:21.945","Text":"The numbers are the same,"},{"Start":"00:21.945 ","End":"00:30.795","Text":"and therefore we see the quantity of goods available for sale is the same, 3,600,"},{"Start":"00:30.795 ","End":"00:35.130","Text":"the same 1,500 goods are sold and"},{"Start":"00:35.130 ","End":"00:40.730","Text":"therefore the closing balance in inventory in terms of quantity,"},{"Start":"00:40.730 ","End":"00:45.940","Text":"is an amount of 2,100 units."},{"Start":"00:45.940 ","End":"00:54.155","Text":"All we need to do is compute the cost of sales again of those 1,500 units"},{"Start":"00:54.155 ","End":"00:57.110","Text":"and compute the amounts of"},{"Start":"00:57.110 ","End":"01:03.395","Text":"the closing inventory for the balance sheet of the 2,100 units."},{"Start":"01:03.395 ","End":"01:07.325","Text":"Because we\u0027re trying to work out a weighted average,"},{"Start":"01:07.325 ","End":"01:13.140","Text":"we need to compute the cost of each batch of inventory purchased."},{"Start":"01:13.140 ","End":"01:15.675","Text":"Therefore, the opening inventory,"},{"Start":"01:15.675 ","End":"01:20.260","Text":"1,000 units at 5 currency units,"},{"Start":"01:20.260 ","End":"01:23.780","Text":"lets put in here currency units,"},{"Start":"01:23.780 ","End":"01:26.495","Text":"has a cost of 5,000."},{"Start":"01:26.495 ","End":"01:28.160","Text":"Here again is important."},{"Start":"01:28.160 ","End":"01:32.300","Text":"This is the currency denomination, currency units."},{"Start":"01:32.300 ","End":"01:38.910","Text":"The 2,000 at 8 gives us 16,000 currency units,"},{"Start":"01:38.910 ","End":"01:45.845","Text":"and 600 at 9 gives us 5,400 currency units."},{"Start":"01:45.845 ","End":"01:49.970","Text":"Therefore, the total cost of"},{"Start":"01:49.970 ","End":"01:57.620","Text":"the opening inventory plus the goods purchased comes to 26,400."},{"Start":"01:57.620 ","End":"02:00.995","Text":"To compute the average cost per unit,"},{"Start":"02:00.995 ","End":"02:07.370","Text":"we simply take that 26,400 cost of the units"},{"Start":"02:07.370 ","End":"02:14.390","Text":"and we divide it by the quantity of 3,600 available for sale,"},{"Start":"02:14.390 ","End":"02:20.765","Text":"which gives us an average cost per unit of 7.333."},{"Start":"02:20.765 ","End":"02:27.485","Text":"We can therefore use that 7.333 to compute the cost of sales."},{"Start":"02:27.485 ","End":"02:31.925","Text":"Now we know that we sold 1,500 units."},{"Start":"02:31.925 ","End":"02:39.800","Text":"The cost of sales this turn was therefore simply 1,500 units multiplied by that currency,"},{"Start":"02:39.800 ","End":"02:44.915","Text":"7.333 per unit or per item,"},{"Start":"02:44.915 ","End":"02:51.350","Text":"which gives us a currency cost of sales of 11,000."},{"Start":"02:51.350 ","End":"02:53.885","Text":"For the closing inventory,"},{"Start":"02:53.885 ","End":"03:05.060","Text":"we take the 2,100 quantity of closing inventory multiplied by the same currency of 7.333,"},{"Start":"03:05.060 ","End":"03:15.065","Text":"and we get a closing inventory amount of 15,400 currency units."},{"Start":"03:15.065 ","End":"03:19.460","Text":"That concludes the computation of the cost of sales and"},{"Start":"03:19.460 ","End":"03:26.974","Text":"closing inventory on the periodic method using the weighted average cost flow assumption."},{"Start":"03:26.974 ","End":"03:32.525","Text":"The weighted average method you see disregards the physical flow of goods."},{"Start":"03:32.525 ","End":"03:39.350","Text":"Normally is applied only to items which are identical or near identical."},{"Start":"03:39.350 ","End":"03:44.960","Text":"Justification for this is that it is probably illogical to distinguish"},{"Start":"03:44.960 ","End":"03:51.780","Text":"between identical items simply because the timing of the purchases is different."}],"ID":28617},{"Watched":false,"Name":"Cost flow assumption - Concluding","Duration":"5m ","ChapterTopicVideoID":26652,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.280","Text":"Hello and welcome to this series of"},{"Start":"00:02.280 ","End":"00:07.680","Text":"video presentations on inventory brought you by Proprep."},{"Start":"00:07.680 ","End":"00:10.785","Text":"This slide now starts to compare"},{"Start":"00:10.785 ","End":"00:16.889","Text":"the computations and each of the cost flow assumptions of FIFO,"},{"Start":"00:16.889 ","End":"00:18.870","Text":"LIFO, and weighted average."},{"Start":"00:18.870 ","End":"00:22.560","Text":"Remember here you are using the periodic system."},{"Start":"00:22.560 ","End":"00:24.345","Text":"In order to understand this,"},{"Start":"00:24.345 ","End":"00:31.410","Text":"it\u0027s important to remember the cost per unit is increased over the period."},{"Start":"00:31.410 ","End":"00:36.095","Text":"The cost of the opening inventory was 5 per unit,"},{"Start":"00:36.095 ","End":"00:40.700","Text":"of the January to June purchases was 8 per unit,"},{"Start":"00:40.700 ","End":"00:45.340","Text":"and the July to December purchases was 9 per unit."},{"Start":"00:45.340 ","End":"00:47.840","Text":"That increasing costs, it\u0027s going to be important to"},{"Start":"00:47.840 ","End":"00:51.305","Text":"understanding of the numbers in this slide."},{"Start":"00:51.305 ","End":"00:54.905","Text":"Remember FIFO, first in,"},{"Start":"00:54.905 ","End":"00:59.450","Text":"first out, earliest in, earliest out."},{"Start":"00:59.450 ","End":"01:02.540","Text":"Therefore it makes sense to the cost of sales in"},{"Start":"01:02.540 ","End":"01:08.275","Text":"FIFO is in fact less than the cost of sales in LIFO."},{"Start":"01:08.275 ","End":"01:12.780","Text":"Because LIFO is last in, first out,"},{"Start":"01:12.780 ","End":"01:18.535","Text":"and because the cost of the goods, the latest goods,"},{"Start":"01:18.535 ","End":"01:23.020","Text":"were higher at the end of the year compared to"},{"Start":"01:23.020 ","End":"01:28.225","Text":"the beginning of the year and LIFO costs at the latest goods first,"},{"Start":"01:28.225 ","End":"01:31.780","Text":"it makes sense that the cost of sales,"},{"Start":"01:31.780 ","End":"01:36.270","Text":"looking at LIFO is in fact higher,"},{"Start":"01:36.270 ","End":"01:38.565","Text":"whereas looking at FIFO,"},{"Start":"01:38.565 ","End":"01:41.805","Text":"the cost of sales is in fact lower."},{"Start":"01:41.805 ","End":"01:43.830","Text":"With a weighted average,"},{"Start":"01:43.830 ","End":"01:48.880","Text":"you\u0027ll see the amount of the cost of sales is in fact in-between the"},{"Start":"01:48.880 ","End":"01:55.040","Text":"9,000 FIFO and the 12,600 LIFO cost of sales."},{"Start":"01:55.040 ","End":"01:59.340","Text":"Looking at the impact of the balance sheet, and again,"},{"Start":"01:59.340 ","End":"02:04.865","Text":"reminding ourselves that the cost per unit increased over the year,"},{"Start":"02:04.865 ","End":"02:07.985","Text":"and again thinking back to FIFO,"},{"Start":"02:07.985 ","End":"02:10.550","Text":"LIFO and weighted average."},{"Start":"02:10.550 ","End":"02:15.365","Text":"Remembering FIFO as you saw for the income statement,"},{"Start":"02:15.365 ","End":"02:17.270","Text":"the first goods in,"},{"Start":"02:17.270 ","End":"02:19.175","Text":"are the first goods out,"},{"Start":"02:19.175 ","End":"02:23.000","Text":"and therefore the closing inventory on"},{"Start":"02:23.000 ","End":"02:27.695","Text":"the balance sheet represents the cost of the latest goods."},{"Start":"02:27.695 ","End":"02:30.905","Text":"They have the closing inventory here on the balance sheet"},{"Start":"02:30.905 ","End":"02:34.460","Text":"is the cost of the latest goods,"},{"Start":"02:34.460 ","End":"02:35.930","Text":"whereas for LIFO,"},{"Start":"02:35.930 ","End":"02:42.445","Text":"the closing inventory in the balance sheet is in fact the cost of the earliest goods."},{"Start":"02:42.445 ","End":"02:49.285","Text":"That\u0027s why you see the balance sheet amount for LIFO is in fact lower,"},{"Start":"02:49.285 ","End":"02:55.180","Text":"and the balance sheet amount of the closing inventory for FIFO is in fact higher,"},{"Start":"02:55.180 ","End":"02:57.845","Text":"and weighted average as before,"},{"Start":"02:57.845 ","End":"03:00.685","Text":"sits between the 2 amounts."},{"Start":"03:00.685 ","End":"03:02.990","Text":"Finally, in summary,"},{"Start":"03:02.990 ","End":"03:07.640","Text":"remember the whole purpose of this exercise has been to allocate"},{"Start":"03:07.640 ","End":"03:14.330","Text":"costs related to inventory based on these cost flow assumptions."},{"Start":"03:14.330 ","End":"03:16.370","Text":"The total cost of inventory,"},{"Start":"03:16.370 ","End":"03:20.480","Text":"as you saw in the previous slide, was 26,400,"},{"Start":"03:20.480 ","End":"03:23.390","Text":"that is the cost of the opening inventory"},{"Start":"03:23.390 ","End":"03:27.365","Text":"plus the 2 batches of purchases during the period."},{"Start":"03:27.365 ","End":"03:30.545","Text":"The opening inventory cost 5,000."},{"Start":"03:30.545 ","End":"03:37.125","Text":"The first batch of purchases from January to June cost 16,000,"},{"Start":"03:37.125 ","End":"03:44.075","Text":"and the second batch of purchases from July to December cost 5,400."},{"Start":"03:44.075 ","End":"03:47.470","Text":"Total cost of 26,400."},{"Start":"03:47.470 ","End":"03:55.910","Text":"The objective of this exercise is to allocate that 26,400 to the cost of"},{"Start":"03:55.910 ","End":"04:04.745","Text":"sales related to the goods sold and to the closing inventory for the inventory on hand,"},{"Start":"04:04.745 ","End":"04:08.765","Text":"the cost of sales clearly and expense on the income statement,"},{"Start":"04:08.765 ","End":"04:13.145","Text":"and the closing inventory and assets on the balance sheet."},{"Start":"04:13.145 ","End":"04:19.235","Text":"What we\u0027ve done in the previous 3 computations is to allocate those 26,400."},{"Start":"04:19.235 ","End":"04:21.515","Text":"If you look at the FIFO method first,"},{"Start":"04:21.515 ","End":"04:29.360","Text":"we allocated 9,000 to cost of sales and we allocated 17,400 to closing inventory,"},{"Start":"04:29.360 ","End":"04:33.320","Text":"which allocated the full 26,400."},{"Start":"04:33.320 ","End":"04:35.300","Text":"When we went to LIFO,"},{"Start":"04:35.300 ","End":"04:42.800","Text":"we allocated 12,600 to cost of sales and 13,800 to inventory,"},{"Start":"04:42.800 ","End":"04:46.870","Text":"again, allocating the total 26,400."},{"Start":"04:46.870 ","End":"04:48.855","Text":"When it came to weighted the average,"},{"Start":"04:48.855 ","End":"04:52.125","Text":"we allocated 11,000 to cost of sales,"},{"Start":"04:52.125 ","End":"04:55.295","Text":"15,400 to closing inventory,"},{"Start":"04:55.295 ","End":"05:00.630","Text":"also allocating the full 26,400."}],"ID":28618},{"Watched":false,"Name":"Cost flow assumption - perpetual","Duration":"28m 11s","ChapterTopicVideoID":26653,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.550","Text":"Hello, and welcome to this series of"},{"Start":"00:02.550 ","End":"00:07.455","Text":"video presentations on inventory brought to you by Proprep."},{"Start":"00:07.455 ","End":"00:13.313","Text":"In this video, we continue our discussion of the cost flow assumptions,"},{"Start":"00:13.313 ","End":"00:17.640","Text":"this time focusing on the perpetual inventory method."},{"Start":"00:17.640 ","End":"00:23.550","Text":"Recall from the previous video that there are 3 common assumptions made when"},{"Start":"00:23.550 ","End":"00:29.384","Text":"looking at how to account for the flow of costs relating to inventory."},{"Start":"00:29.384 ","End":"00:32.400","Text":"These 3 assumptions, as you already know,"},{"Start":"00:32.400 ","End":"00:33.975","Text":"are the FIFO,"},{"Start":"00:33.975 ","End":"00:35.880","Text":"first-in, first out,"},{"Start":"00:35.880 ","End":"00:40.107","Text":"the first goods to come in are the first goods to be costed out,"},{"Start":"00:40.107 ","End":"00:43.110","Text":"LIFO, last-in, first out,"},{"Start":"00:43.110 ","End":"00:47.355","Text":"the last goods to come in are the first goods to be costed,"},{"Start":"00:47.355 ","End":"00:50.930","Text":"and then finally, the weighted average system."},{"Start":"00:50.930 ","End":"00:54.095","Text":"When we use a perpetual inventory system,"},{"Start":"00:54.095 ","End":"00:59.330","Text":"remember we record the sales transaction and at the same time,"},{"Start":"00:59.330 ","End":"01:02.479","Text":"we record the related cost of sales."},{"Start":"01:02.479 ","End":"01:08.180","Text":"This is different to the periodic system where the cost of sales is computed only at"},{"Start":"01:08.180 ","End":"01:14.695","Text":"the end of the period following a count of the inventory or stock on hand."},{"Start":"01:14.695 ","End":"01:17.285","Text":"This is a more cumbersome system,"},{"Start":"01:17.285 ","End":"01:24.020","Text":"especially applying the cost flow assumptions of either FIFO or LIFO, as you will see,"},{"Start":"01:24.020 ","End":"01:27.905","Text":"we need to make a calculation of the cost of sales"},{"Start":"01:27.905 ","End":"01:32.735","Text":"based on that particular assumption each time a sale is made."},{"Start":"01:32.735 ","End":"01:36.920","Text":"Clearly a computerized system would aid in this process."},{"Start":"01:36.920 ","End":"01:39.800","Text":"We\u0027re now going to take a look at an example,"},{"Start":"01:39.800 ","End":"01:42.950","Text":"applying the perpetual inventory system,"},{"Start":"01:42.950 ","End":"01:49.115","Text":"and firstly applying it to the FIFO cost flow assumption."},{"Start":"01:49.115 ","End":"01:52.940","Text":"What you see over here is the same information as you saw in"},{"Start":"01:52.940 ","End":"01:56.918","Text":"the earlier examples related to the periodic system."},{"Start":"01:56.918 ","End":"01:58.610","Text":"The 1st of January,"},{"Start":"01:58.610 ","End":"02:04.340","Text":"there was opening inventory of 1,000 units at a cost of £5 per unit."},{"Start":"02:04.340 ","End":"02:08.150","Text":"Because we are using a perpetual system and the cost of"},{"Start":"02:08.150 ","End":"02:12.170","Text":"sales needs to be computed each time a sale is made,"},{"Start":"02:12.170 ","End":"02:18.215","Text":"it is important to record the purchases and sales in a chronological order."},{"Start":"02:18.215 ","End":"02:24.185","Text":"Therefore, you will see between the 1st of January and 27th of February,"},{"Start":"02:24.185 ","End":"02:28.280","Text":"there are sales recorded of 600 units,"},{"Start":"02:28.280 ","End":"02:31.070","Text":"and then on the 28th of February,"},{"Start":"02:31.070 ","End":"02:34.750","Text":"there are purchases recorded of 2,000 units."},{"Start":"02:34.750 ","End":"02:36.360","Text":"Moving on to the next period,"},{"Start":"02:36.360 ","End":"02:38.820","Text":"from 1st of March to 30th of August,"},{"Start":"02:38.820 ","End":"02:41.160","Text":"there are sales being recorded."},{"Start":"02:41.160 ","End":"02:43.760","Text":"Again, on the 31st of August,"},{"Start":"02:43.760 ","End":"02:45.620","Text":"there are further purchases."},{"Start":"02:45.620 ","End":"02:49.235","Text":"Finally, between 1 September and 31 December,"},{"Start":"02:49.235 ","End":"02:51.050","Text":"there are further sales,"},{"Start":"02:51.050 ","End":"02:55.490","Text":"giving us the ending balance of 2,100 units,"},{"Start":"02:55.490 ","End":"03:01.190","Text":"the same number as we saw in the example using the periodic system."},{"Start":"03:01.190 ","End":"03:04.810","Text":"However, now we need to compute the cost of sales,"},{"Start":"03:04.810 ","End":"03:09.090","Text":"remember, on a perpetual system, and using FIFO."},{"Start":"03:09.090 ","End":"03:10.545","Text":"Because it\u0027s FIFO,"},{"Start":"03:10.545 ","End":"03:12.725","Text":"I\u0027m going to write here to remind ourselves,"},{"Start":"03:12.725 ","End":"03:17.240","Text":"FIFO is first-in and first out,"},{"Start":"03:17.240 ","End":"03:20.630","Text":"and that\u0027s going to be very important as we start computing the cost of"},{"Start":"03:20.630 ","End":"03:24.880","Text":"sales for every sales transaction."},{"Start":"03:24.880 ","End":"03:29.055","Text":"Let\u0027s start now. The first sales you see,"},{"Start":"03:29.055 ","End":"03:35.855","Text":"are these sales of 600 units between 1st January and 22nd February."},{"Start":"03:35.855 ","End":"03:38.690","Text":"Because we\u0027re using FIFO, first-in,"},{"Start":"03:38.690 ","End":"03:42.049","Text":"first out, to compute the cost of sales,"},{"Start":"03:42.049 ","End":"03:45.650","Text":"we compute the cost of the 600 units from"},{"Start":"03:45.650 ","End":"03:51.785","Text":"the initial opening balance of 1,000 at its cost of £5."},{"Start":"03:51.785 ","End":"03:58.220","Text":"Therefore, the cost of sales computation here will be 600 units multiplied by 5,"},{"Start":"03:58.220 ","End":"04:00.230","Text":"I\u0027ve said pounds, it could be euros or dollars,"},{"Start":"04:00.230 ","End":"04:02.030","Text":"5 currency units,"},{"Start":"04:02.030 ","End":"04:06.515","Text":"and the cost of sales amount to 3,000."},{"Start":"04:06.515 ","End":"04:09.080","Text":"Using a perpetual system,"},{"Start":"04:09.080 ","End":"04:13.280","Text":"it\u0027s important to keep track of which units have been costed out."},{"Start":"04:13.280 ","End":"04:17.450","Text":"We have costed out 600 of these 1,000 units."},{"Start":"04:17.450 ","End":"04:21.230","Text":"So we have 400 units available to cost"},{"Start":"04:21.230 ","End":"04:26.405","Text":"out the next time we need to record the cost of sales."},{"Start":"04:26.405 ","End":"04:28.960","Text":"Relation to the inventory balance,"},{"Start":"04:28.960 ","End":"04:31.670","Text":"you will recall the accounting entry to"},{"Start":"04:31.670 ","End":"04:34.865","Text":"record cost of sales as a debit to cost of sales,"},{"Start":"04:34.865 ","End":"04:36.815","Text":"to increase the expense,"},{"Start":"04:36.815 ","End":"04:40.430","Text":"and a credit to inventory to reduce the inventory balance."},{"Start":"04:40.430 ","End":"04:43.470","Text":"The inventory balance is reduced by 3,000,"},{"Start":"04:43.470 ","End":"04:47.235","Text":"and the balance now becomes 2,000 in inventory."},{"Start":"04:47.235 ","End":"04:49.035","Text":"Then on 28th February,"},{"Start":"04:49.035 ","End":"04:53.535","Text":"there were purchases of 2,000 units at 8 per unit."},{"Start":"04:53.535 ","End":"04:58.790","Text":"These purchases of 16,000 needs to be added to the inventory balance,"},{"Start":"04:58.790 ","End":"05:02.195","Text":"and inventory balance increases by 16,000,"},{"Start":"05:02.195 ","End":"05:06.240","Text":"and the balance therefore moves to 18,000."},{"Start":"05:06.240 ","End":"05:10.795","Text":"There\u0027s no cost flow assumption involved in that as such,"},{"Start":"05:10.795 ","End":"05:15.385","Text":"because those are simply the recording of the purchases of further inventory."},{"Start":"05:15.385 ","End":"05:19.814","Text":"We then move to the period from 1 March to 30 August,"},{"Start":"05:19.814 ","End":"05:23.430","Text":"and there are sales in this period of 500 units."},{"Start":"05:23.430 ","End":"05:27.110","Text":"Again, we need to think FIFO, first-in, first-out."},{"Start":"05:27.110 ","End":"05:33.700","Text":"The first units that have come in or available for sale needs to be costed out first."},{"Start":"05:33.700 ","End":"05:38.620","Text":"Looking back at the detailed workings in relation to the units,"},{"Start":"05:38.620 ","End":"05:43.865","Text":"we see we have 400 units available here to cost out."},{"Start":"05:43.865 ","End":"05:49.305","Text":"Therefore, in recording the cost of sales of these 500 units,"},{"Start":"05:49.305 ","End":"05:53.260","Text":"we need to first cost out from the opening stock,"},{"Start":"05:53.260 ","End":"05:55.365","Text":"which was 1,000,"},{"Start":"05:55.365 ","End":"05:57.960","Text":"and had 400 available to cost out."},{"Start":"05:57.960 ","End":"06:00.850","Text":"So I will delete that 400,"},{"Start":"06:00.850 ","End":"06:08.170","Text":"and recognize that I have not costed out those 400 units at an amount of 5 each,"},{"Start":"06:08.170 ","End":"06:10.365","Text":"which comes to 2,000."},{"Start":"06:10.365 ","End":"06:15.890","Text":"Recall or notice that the cell was for 500 units."},{"Start":"06:15.890 ","End":"06:19.325","Text":"We now need to cost out the remaining 100."},{"Start":"06:19.325 ","End":"06:25.415","Text":"The remaining 100 needs to come from the next batch of purchases of 2,000."},{"Start":"06:25.415 ","End":"06:29.025","Text":"I can put a line through the 2,000, and notes here,"},{"Start":"06:29.025 ","End":"06:35.167","Text":"a number of 1,900 as the units still available to cost out in the future,"},{"Start":"06:35.167 ","End":"06:37.880","Text":"and I can record that we have costed out,"},{"Start":"06:37.880 ","End":"06:40.640","Text":"as part of this cost of sales calculation,"},{"Start":"06:40.640 ","End":"06:43.920","Text":"100 units at an amount of 8 per unit,"},{"Start":"06:43.920 ","End":"06:45.900","Text":"which gives 800,"},{"Start":"06:45.900 ","End":"06:50.390","Text":"and therefore the cost of sales of this current batch of goods"},{"Start":"06:50.390 ","End":"06:54.935","Text":"being sold, amounts to 2,800."},{"Start":"06:54.935 ","End":"06:58.280","Text":"Again, a debit will increase the cost of sales,"},{"Start":"06:58.280 ","End":"07:00.920","Text":"a credit or reduction to inventory,"},{"Start":"07:00.920 ","End":"07:09.150","Text":"and the balance in inventory moves or drops down from 18,000 down to 15,200."},{"Start":"07:09.290 ","End":"07:11.670","Text":"Then on 31 August,"},{"Start":"07:11.670 ","End":"07:18.811","Text":"there are further purchases of 600 units at 9 per unit, which is 5,400."},{"Start":"07:18.811 ","End":"07:22.220","Text":"Added onto the 15,200 balance,"},{"Start":"07:22.220 ","End":"07:27.939","Text":"we now have a balance in inventory of 20,600."},{"Start":"07:27.939 ","End":"07:34.180","Text":"We were able to move to the final batch of sales."},{"Start":"07:34.180 ","End":"07:42.085","Text":"The final batch of sales is the sales from 1 September to 31 December of 400 units."},{"Start":"07:42.085 ","End":"07:46.705","Text":"Now again remember, and it\u0027s worthwhile thinking about this all the time,"},{"Start":"07:46.705 ","End":"07:50.890","Text":"we\u0027re using FIFO first-in, first out."},{"Start":"07:50.890 ","End":"07:53.650","Text":"We go back to the beginning and we see from the opening inventory,"},{"Start":"07:53.650 ","End":"07:55.675","Text":"this opening stock over here,"},{"Start":"07:55.675 ","End":"08:00.700","Text":"all 1000 will be costed out so there\u0027s nothing to cost out from there."},{"Start":"08:00.700 ","End":"08:05.755","Text":"We therefore go to the next batch of purchases or inventory,"},{"Start":"08:05.755 ","End":"08:11.470","Text":"which is the batch purchased at 8 pounds per unit and we see we\u0027ve"},{"Start":"08:11.470 ","End":"08:17.980","Text":"already costed out 100 of those so we have 1900 available to cost out now."},{"Start":"08:17.980 ","End":"08:23.455","Text":"I\u0027m going to take the 400 units that we need to cost out now"},{"Start":"08:23.455 ","End":"08:29.170","Text":"at the cost of the 8 pounds or 8 euros per unit."},{"Start":"08:29.170 ","End":"08:35.320","Text":"I need to remember to record that of this 1,900 units available to cost out,"},{"Start":"08:35.320 ","End":"08:38.770","Text":"I\u0027ve costed out a further 400 so in fact,"},{"Start":"08:38.770 ","End":"08:45.700","Text":"the balance now is 1,500 units of that batch available to cost out in the future."},{"Start":"08:45.700 ","End":"08:52.390","Text":"The cost of sales 400(8) amounts to 3,200."},{"Start":"08:52.390 ","End":"08:57.040","Text":"Again, that increases costs of sales and reduces inventory."},{"Start":"08:57.040 ","End":"09:00.860","Text":"The inventory balanced reduces to 17,400."},{"Start":"09:01.530 ","End":"09:04.390","Text":"By keeping track of"},{"Start":"09:04.390 ","End":"09:10.495","Text":"this inventory balance of purchases and recording costs of sales as we\u0027ve gone along,"},{"Start":"09:10.495 ","End":"09:17.050","Text":"we now see that the balance in the inventory account at the end of the period is 17,400,"},{"Start":"09:17.050 ","End":"09:21.745","Text":"which is the balance on inventory in"},{"Start":"09:21.745 ","End":"09:27.590","Text":"currency terms based on these 2,100 units in inventory."},{"Start":"09:27.720 ","End":"09:36.760","Text":"Think about it, can we in fact prove the computation or the makeup of the 17,400?"},{"Start":"09:36.760 ","End":"09:39.760","Text":"We will do this in the next slide but at"},{"Start":"09:39.760 ","End":"09:42.925","Text":"the moment you should be able to see and understand,"},{"Start":"09:42.925 ","End":"09:44.950","Text":"again based on FIFO,"},{"Start":"09:44.950 ","End":"09:47.650","Text":"that these 2,100,"},{"Start":"09:47.650 ","End":"09:50.639","Text":"the costing of that on a FIFO first-in,"},{"Start":"09:50.639 ","End":"09:52.480","Text":"first out basis,"},{"Start":"09:52.480 ","End":"09:59.290","Text":"will be based on the remaining 1,500 units here at 8 per units,"},{"Start":"09:59.290 ","End":"10:03.370","Text":"and the 600 units here at 9 per unit."},{"Start":"10:03.370 ","End":"10:06.790","Text":"We\u0027ll expand on this further in the next slide."},{"Start":"10:06.790 ","End":"10:12.220","Text":"Let us now formally note down the computation of"},{"Start":"10:12.220 ","End":"10:19.270","Text":"the cost of the balance of the 2,100 units on hand at the end of December."},{"Start":"10:19.270 ","End":"10:22.840","Text":"It is this 2,100 units we need to"},{"Start":"10:22.840 ","End":"10:27.070","Text":"establish or rather proof the cost because we\u0027ve already,"},{"Start":"10:27.070 ","End":"10:29.065","Text":"as you\u0027ve seen on the previous slide,"},{"Start":"10:29.065 ","End":"10:35.260","Text":"computed the cost of that closing inventory to be 17,400."},{"Start":"10:35.260 ","End":"10:37.870","Text":"Let\u0027s note it down formally."},{"Start":"10:37.870 ","End":"10:42.910","Text":"Remembering again, as we are using FIFO we need"},{"Start":"10:42.910 ","End":"10:47.703","Text":"to cost units i.e include them in the cost of sales on a first-in,"},{"Start":"10:47.703 ","End":"10:50.350","Text":"first out basis, and therefore,"},{"Start":"10:50.350 ","End":"10:55.780","Text":"the latest purchases are included in closing inventory."},{"Start":"10:55.780 ","End":"11:00.865","Text":"Looking back at the workings from the previous slide,"},{"Start":"11:00.865 ","End":"11:05.560","Text":"which I\u0027ve put into a small illustration at the top of this particular page,"},{"Start":"11:05.560 ","End":"11:09.925","Text":"we have clearly costed out all the opening stock."},{"Start":"11:09.925 ","End":"11:12.355","Text":"Looking at the opening stock over here,"},{"Start":"11:12.355 ","End":"11:15.400","Text":"this opening stock is all being costed out."},{"Start":"11:15.400 ","End":"11:21.715","Text":"Therefore, the next batch of inventory,"},{"Start":"11:21.715 ","End":"11:24.490","Text":"which is now clearly unsold,"},{"Start":"11:24.490 ","End":"11:30.505","Text":"is this 1,500 from the second batch of purchases."},{"Start":"11:30.505 ","End":"11:34.990","Text":"From the second batch of purchases on the 28th of February,"},{"Start":"11:34.990 ","End":"11:39.790","Text":"we have 1,500 units that have not been costed out,"},{"Start":"11:39.790 ","End":"11:44.215","Text":"and those inventory units cost 8 per unit,"},{"Start":"11:44.215 ","End":"11:52.210","Text":"giving us therefore a closing balance in inventory of 12,000."},{"Start":"11:52.210 ","End":"11:57.115","Text":"Then moving to the next batch of purchases,"},{"Start":"11:57.115 ","End":"12:01.510","Text":"all of these purchases at 9 per unit,"},{"Start":"12:01.510 ","End":"12:06.730","Text":"all of those 600 items have not been costed out and therefore,"},{"Start":"12:06.730 ","End":"12:11.785","Text":"we can take that second batch of purchases from the 31st of August,"},{"Start":"12:11.785 ","End":"12:17.005","Text":"which is 600 units and those cost 9 per unit,"},{"Start":"12:17.005 ","End":"12:21.130","Text":"giving a total of 5,400."},{"Start":"12:21.130 ","End":"12:26.400","Text":"Therefore, the total inventory at the end of the period,"},{"Start":"12:26.400 ","End":"12:30.150","Text":"we have proved to be costed on a 5 year basis,"},{"Start":"12:30.150 ","End":"12:35.615","Text":"being the cost of the latest purchases at 17,400."},{"Start":"12:35.615 ","End":"12:38.649","Text":"We now turn to the next example,"},{"Start":"12:38.649 ","End":"12:45.405","Text":"still using the perpetual system but now looking at the LIFO cost flow assumption."},{"Start":"12:45.405 ","End":"12:52.290","Text":"Remember LIFO stands for last-in, first out."},{"Start":"12:52.290 ","End":"12:57.400","Text":"Therefore, the cost of the latest inventory purchases will be"},{"Start":"12:57.400 ","End":"13:03.010","Text":"used to compute the cost of sales every time a sale is made."},{"Start":"13:03.010 ","End":"13:05.350","Text":"As with the previous example,"},{"Start":"13:05.350 ","End":"13:12.415","Text":"we start off with the 1,000 units of opening inventory at 5 pounds a unit,"},{"Start":"13:12.415 ","End":"13:16.165","Text":"which gives an opening inventory balance of 5,000."},{"Start":"13:16.165 ","End":"13:22.690","Text":"We then have sales from the 1st of January to 27th of February."},{"Start":"13:22.690 ","End":"13:26.350","Text":"These sales of 600 that you see sitting over"},{"Start":"13:26.350 ","End":"13:31.015","Text":"here need to be costed out on a last-in, first out basis."},{"Start":"13:31.015 ","End":"13:35.485","Text":"Now because this is the first sales of the period,"},{"Start":"13:35.485 ","End":"13:40.945","Text":"it clearly must come from all those units costing 5 pounds."},{"Start":"13:40.945 ","End":"13:47.185","Text":"In fact this is the same as we saw in the FIFO system being the first sale."},{"Start":"13:47.185 ","End":"13:54.430","Text":"We\u0027ll cost out these sales of 600 items at 5 per item,"},{"Start":"13:54.430 ","End":"13:59.005","Text":"giving a cost of goods sold of 3,000."},{"Start":"13:59.005 ","End":"14:03.505","Text":"Again, debit cost of sales increase expense cost of sales,"},{"Start":"14:03.505 ","End":"14:09.430","Text":"credit inventory, and inventory balance goes down to 2,000."},{"Start":"14:09.430 ","End":"14:13.930","Text":"Now again, it\u0027s very important here to keep track of which units have been"},{"Start":"14:13.930 ","End":"14:18.955","Text":"used for the purposes of computing cost of sales."},{"Start":"14:18.955 ","End":"14:23.935","Text":"We\u0027ve clearly used 600 of the first 1,000,"},{"Start":"14:23.935 ","End":"14:29.485","Text":"which leaves us 400 units available to cost out in the future."},{"Start":"14:29.485 ","End":"14:32.485","Text":"We then go to the next batch of purchases,"},{"Start":"14:32.485 ","End":"14:34.780","Text":"which is these purchases over here."},{"Start":"14:34.780 ","End":"14:40.480","Text":"2,000 units at 8 per unit, which is 16,000."},{"Start":"14:40.480 ","End":"14:45.355","Text":"That\u0027s get added and inventory balance increases to 18,000."},{"Start":"14:45.355 ","End":"14:48.610","Text":"We then come to the next batch of sales."},{"Start":"14:48.610 ","End":"14:56.845","Text":"The next batch of sales of 500 units from the 1st of March to the 30th of August."},{"Start":"14:56.845 ","End":"15:01.210","Text":"Now again, remember this is LIFO last-in, first out,"},{"Start":"15:01.210 ","End":"15:05.680","Text":"so we ignore those 400 units,"},{"Start":"15:05.680 ","End":"15:10.600","Text":"which is the balance after casting out the first batch of sales from opening inventory."},{"Start":"15:10.600 ","End":"15:12.235","Text":"But because it\u0027s LIFO,"},{"Start":"15:12.235 ","End":"15:19.525","Text":"we now need to turn to this batch over here of 2,000 units at 8 per unit."},{"Start":"15:19.525 ","End":"15:25.990","Text":"Therefore, the cost of sales of these 500 items sold from 1st March to 30 August,"},{"Start":"15:25.990 ","End":"15:31.210","Text":"will be 500 multiplied by 8, which is 4,000."},{"Start":"15:31.210 ","End":"15:34.765","Text":"4,000, will be the cost of sales,"},{"Start":"15:34.765 ","End":"15:42.850","Text":"increase the expense cost of sales and clearly the inventory balance decreases to 14,000."},{"Start":"15:42.850 ","End":"15:48.485","Text":"Now again, we have to keep track of what is happening so of this 2,000 units over here,"},{"Start":"15:48.485 ","End":"15:52.365","Text":"we have costed out 500 of them and therefore,"},{"Start":"15:52.365 ","End":"15:58.580","Text":"1,500 units remain to be costed out in the future."},{"Start":"15:58.580 ","End":"16:03.020","Text":"We then come to the next batch of purchases on 31 August."},{"Start":"16:03.020 ","End":"16:08.825","Text":"600 items at 9 per item, which is 5,400,"},{"Start":"16:08.825 ","End":"16:10.730","Text":"which we add to the balance of 14,000,"},{"Start":"16:10.730 ","End":"16:16.805","Text":"and the balance in inventory now becomes 19,400."},{"Start":"16:16.805 ","End":"16:19.490","Text":"Then we come to the last group of sales,"},{"Start":"16:19.490 ","End":"16:23.675","Text":"last batch of sales from 1st September to December 31."},{"Start":"16:23.675 ","End":"16:26.525","Text":"These 400 units over here."},{"Start":"16:26.525 ","End":"16:29.290","Text":"Again, LIFO, last-in, first out."},{"Start":"16:29.290 ","End":"16:31.825","Text":"I can\u0027t use at 400,"},{"Start":"16:31.825 ","End":"16:34.495","Text":"I can\u0027t use this 1,500."},{"Start":"16:34.495 ","End":"16:36.280","Text":"I must get the latest purchases,"},{"Start":"16:36.280 ","End":"16:38.680","Text":"I must use these purchases over here,"},{"Start":"16:38.680 ","End":"16:41.400","Text":"and therefore I\u0027ll cost out these purchases."},{"Start":"16:41.400 ","End":"16:46.880","Text":"These 400 items are costed out at 9 per item."},{"Start":"16:46.880 ","End":"16:51.155","Text":"The cost of sales is therefore 3,600."},{"Start":"16:51.155 ","End":"16:58.677","Text":"Increased expense cost of sales and decrease the inventory to 15,800."},{"Start":"16:58.677 ","End":"17:04.180","Text":"Again, I need to remember to keep track of what is happening,"},{"Start":"17:04.180 ","End":"17:08.860","Text":"so I put a line through that 600 and I\u0027ll make a note that I have"},{"Start":"17:08.860 ","End":"17:15.010","Text":"200 units of that batch of purchases available to cost out in the future."},{"Start":"17:15.010 ","End":"17:17.155","Text":"Coming to the end of the period,"},{"Start":"17:17.155 ","End":"17:23.365","Text":"we know and we see we have 2,100 units on hand,"},{"Start":"17:23.365 ","End":"17:34.060","Text":"and the total of these inventory units has a balance of 15,800 in the inventory account."},{"Start":"17:34.060 ","End":"17:39.730","Text":"We are costing the 2,100 units at 15,800."},{"Start":"17:39.730 ","End":"17:42.010","Text":"We will prove this on the next slide,"},{"Start":"17:42.010 ","End":"17:47.170","Text":"but you can see now and hopefully understand that that 15,800,"},{"Start":"17:47.170 ","End":"17:52.315","Text":"were made up of these 400 units at 5 pounds,"},{"Start":"17:52.315 ","End":"17:55.810","Text":"these 1,500 units at 8 pounds,"},{"Start":"17:55.810 ","End":"17:58.690","Text":"and these 200 units at 9 pounds."},{"Start":"17:58.690 ","End":"18:03.790","Text":"Let\u0027s now go and formally write down the composition of"},{"Start":"18:03.790 ","End":"18:10.254","Text":"the balance of the 2,100 units of closing inventory and how these are costed,"},{"Start":"18:10.254 ","End":"18:12.220","Text":"remembering on a LIFO,"},{"Start":"18:12.220 ","End":"18:14.650","Text":"last-in, first out basis."},{"Start":"18:14.650 ","End":"18:17.350","Text":"Because it is LIFO and"},{"Start":"18:17.350 ","End":"18:22.360","Text":"the last goods in where costed out first for the cost of sales perspective,"},{"Start":"18:22.360 ","End":"18:29.095","Text":"the closing inventory will be based on and including earlier purchases."},{"Start":"18:29.095 ","End":"18:35.140","Text":"Therefore, looking at the image of the slide from the previous page,"},{"Start":"18:35.140 ","End":"18:39.760","Text":"we can see that the first batch of inventory to be included in the"},{"Start":"18:39.760 ","End":"18:46.060","Text":"2,100 is this batch of opening inventory over here."},{"Start":"18:46.060 ","End":"18:50.155","Text":"For the first of January, the opening balance,"},{"Start":"18:50.155 ","End":"18:54.535","Text":"which now you will see has only 400 units available"},{"Start":"18:54.535 ","End":"18:59.815","Text":"because 600 were costed out as part of the first sale,"},{"Start":"18:59.815 ","End":"19:08.275","Text":"that 400 at 5 per unit gives us 2,000 of the closing inventory balance."},{"Start":"19:08.275 ","End":"19:11.830","Text":"We then move to the next batch of purchases,"},{"Start":"19:11.830 ","End":"19:17.470","Text":"which we\u0027ll see is this batch of purchases over here from the 28th of February."},{"Start":"19:17.470 ","End":"19:20.350","Text":"Of that 2,000 units,"},{"Start":"19:20.350 ","End":"19:25.945","Text":"we now have 1,500 from this batch of purchases,"},{"Start":"19:25.945 ","End":"19:30.070","Text":"1,500, which will not costed out at the time."},{"Start":"19:30.070 ","End":"19:34.435","Text":"Those purchases cost as 8 per unit, and therefore,"},{"Start":"19:34.435 ","End":"19:39.865","Text":"this gives us 12,000 of the balance of the closing inventory."},{"Start":"19:39.865 ","End":"19:46.359","Text":"Finally, we go to this second batch of purchases on the 31st of August,"},{"Start":"19:46.359 ","End":"19:49.885","Text":"and those purchases you\u0027ll see of the 600,"},{"Start":"19:49.885 ","End":"19:52.330","Text":"400 have been costed out."},{"Start":"19:52.330 ","End":"19:56.080","Text":"Therefore, they are 200 available and"},{"Start":"19:56.080 ","End":"20:01.870","Text":"therefore included as part of closing inventory of 9 per unit,"},{"Start":"20:01.870 ","End":"20:04.675","Text":"which amounts to 1,800."},{"Start":"20:04.675 ","End":"20:07.990","Text":"Therefore, the total of the inventory balance,"},{"Start":"20:07.990 ","End":"20:16.045","Text":"we can prove it to be 15,800 on a LIFO perpetual inventory system basis."},{"Start":"20:16.045 ","End":"20:22.135","Text":"We now turn to the third and last example using the perpetual inventory system,"},{"Start":"20:22.135 ","End":"20:25.510","Text":"this time looking at the calculations based on"},{"Start":"20:25.510 ","End":"20:29.155","Text":"the cost flow assumption of the weighted average."},{"Start":"20:29.155 ","End":"20:32.005","Text":"As in the previous 2 examples,"},{"Start":"20:32.005 ","End":"20:36.250","Text":"the opening balance of inventory is the 1,000 units."},{"Start":"20:36.250 ","End":"20:38.320","Text":"I\u0027m going to put in"},{"Start":"20:38.320 ","End":"20:42.355","Text":"a currency amount here because the currency is going be quite important in this example,"},{"Start":"20:42.355 ","End":"20:45.550","Text":"not that it was not important in other examples,"},{"Start":"20:45.550 ","End":"20:48.730","Text":"of 5 pounds per unit and therefore,"},{"Start":"20:48.730 ","End":"20:52.045","Text":"the inventory balance is a total of"},{"Start":"20:52.045 ","End":"20:56.485","Text":"5,000 and this is the currency which we will call pounds."},{"Start":"20:56.485 ","End":"20:58.705","Text":"We then come to the first sale,"},{"Start":"20:58.705 ","End":"21:02.050","Text":"the first sale of 600 units."},{"Start":"21:02.050 ","End":"21:05.200","Text":"Now remember, as we\u0027re using a weighted average,"},{"Start":"21:05.200 ","End":"21:09.250","Text":"we will cost out the cost of sales at"},{"Start":"21:09.250 ","End":"21:15.175","Text":"the weighted average of the cost of the inventory at that point in time."},{"Start":"21:15.175 ","End":"21:18.870","Text":"In this case, it\u0027s pretty obvious the weighted average cost"},{"Start":"21:18.870 ","End":"21:22.215","Text":"must be the 5 pounds, but for completeness,"},{"Start":"21:22.215 ","End":"21:25.890","Text":"we will do the calculation so that we can see how it will be"},{"Start":"21:25.890 ","End":"21:31.000","Text":"done in later purchases and later sales."},{"Start":"21:31.000 ","End":"21:40.210","Text":"The calculation here will be the 5,000 pounds in inventory divided by the 1,000 units,"},{"Start":"21:40.210 ","End":"21:46.675","Text":"which gives us a weighted average cost of 5 pounds per unit."},{"Start":"21:46.675 ","End":"21:49.030","Text":"It\u0027s that 5 pounds per unit,"},{"Start":"21:49.030 ","End":"21:54.025","Text":"which we\u0027ll use to multiply by the 600 pounds to give 3,"},{"Start":"21:54.025 ","End":"21:56.845","Text":"000 as the cost of sales."},{"Start":"21:56.845 ","End":"21:59.770","Text":"As before, the accounting entry,"},{"Start":"21:59.770 ","End":"22:01.300","Text":"a debit to cost of sales,"},{"Start":"22:01.300 ","End":"22:03.805","Text":"increased cost expense, cost of sales,"},{"Start":"22:03.805 ","End":"22:07.465","Text":"and a credit or decrease in inventory balance."},{"Start":"22:07.465 ","End":"22:09.340","Text":"The balance in inventory,"},{"Start":"22:09.340 ","End":"22:11.875","Text":"after the sale has taken place,"},{"Start":"22:11.875 ","End":"22:15.100","Text":"there\u0027s an amount of 2,000."},{"Start":"22:15.100 ","End":"22:17.875","Text":"Now because we\u0027re using the weighted average,"},{"Start":"22:17.875 ","End":"22:21.790","Text":"it is clear that this balance of 400 units on"},{"Start":"22:21.790 ","End":"22:27.130","Text":"hand must be costed out at the same amount of 5 pounds."},{"Start":"22:27.130 ","End":"22:36.280","Text":"We can in fact prove the 2,000 pound balance by saying 400 units multiplied by 5 pounds,"},{"Start":"22:36.280 ","End":"22:42.235","Text":"in fact, gives the same balance or the balance we see over here of 2,000."},{"Start":"22:42.235 ","End":"22:45.040","Text":"That in fact is the same amount."},{"Start":"22:45.040 ","End":"22:47.785","Text":"We then come to the next batch of purchases."},{"Start":"22:47.785 ","End":"22:52.120","Text":"We purchased 2,000 items at 8 pounds,"},{"Start":"22:52.120 ","End":"22:54.205","Text":"which is 16,000 pounds."},{"Start":"22:54.205 ","End":"23:02.239","Text":"Edit the 2,000 pounds balance gives us a balanced now 18,000 in inventory."},{"Start":"23:02.400 ","End":"23:05.997","Text":"Then we turn to the next sale,"},{"Start":"23:05.997 ","End":"23:09.744","Text":"the next sale of 500 items."},{"Start":"23:09.744 ","End":"23:16.300","Text":"We need to establish the weighted average cost of the inventory on hand at that point,"},{"Start":"23:16.300 ","End":"23:21.310","Text":"so look carefully at this calculation."},{"Start":"23:21.310 ","End":"23:24.655","Text":"We go back to latest balance, the last balance,"},{"Start":"23:24.655 ","End":"23:28.930","Text":"which is in fact over here after the last sale."},{"Start":"23:28.930 ","End":"23:37.495","Text":"Therefore, the weighted average cost of inventory on hand now will be those 400 units,"},{"Start":"23:37.495 ","End":"23:47.050","Text":"which we know were costed at 5 pounds and to that we add the purchases of 2,000 units,"},{"Start":"23:47.050 ","End":"23:50.515","Text":"which we know cost us 8 pounds."},{"Start":"23:50.515 ","End":"23:54.100","Text":"We divide that by the quantity of units,"},{"Start":"23:54.100 ","End":"23:57.205","Text":"which we know is the balance of 400"},{"Start":"23:57.205 ","End":"24:02.215","Text":"plus the units purchased in the last purchase of 2,000."},{"Start":"24:02.215 ","End":"24:07.090","Text":"We do the calculation of 400 multiplied by 5 pounds plus"},{"Start":"24:07.090 ","End":"24:12.445","Text":"2,000 multiplied by 8 pounds divided by 2,400,"},{"Start":"24:12.445 ","End":"24:20.050","Text":"we get a weighted average cost at the stage of 7.50 Pounds per unit."},{"Start":"24:20.050 ","End":"24:22.480","Text":"It\u0027s that 7.50 pounds,"},{"Start":"24:22.480 ","End":"24:26.530","Text":"which is used to cost out the 500 cost of sales, so therefore,"},{"Start":"24:26.530 ","End":"24:33.805","Text":"500 multiplied by 7.50 pounds gives us a cost of sales of 3,750."},{"Start":"24:33.805 ","End":"24:38.110","Text":"Again, increase will debit the cost of sales expense,"},{"Start":"24:38.110 ","End":"24:41.410","Text":"and credit would reduce the inventory,"},{"Start":"24:41.410 ","End":"24:45.860","Text":"and the inventory balance is now 14,250."},{"Start":"24:46.350 ","End":"24:55.345","Text":"Now, as before, note the balance in inventory after second sale is 1,900."},{"Start":"24:55.345 ","End":"25:01.180","Text":"The 1,900 we can cost or we do cost out at"},{"Start":"25:01.180 ","End":"25:06.730","Text":"the current weighted average of 7.50 pounds."},{"Start":"25:06.730 ","End":"25:11.395","Text":"We can prove the balance of 1900 unit"},{"Start":"25:11.395 ","End":"25:17.485","Text":"multiplied by the weighted average cost of 7.50 pounds."},{"Start":"25:17.485 ","End":"25:22.105","Text":"That in fact does give us the 14,250"},{"Start":"25:22.105 ","End":"25:27.175","Text":"would in fact it\u0027s the same balance as number just above it."},{"Start":"25:27.175 ","End":"25:30.760","Text":"Then go to the next batch of purchases."},{"Start":"25:30.760 ","End":"25:38.185","Text":"The purchases of 600 units at 9 pounds per unit, which is 5,400,"},{"Start":"25:38.185 ","End":"25:45.700","Text":"which therefore increases the inventory balance from 14,250 up to 19,650,"},{"Start":"25:46.890 ","End":"25:51.355","Text":"which then brings us onto the final sale, the sales,"},{"Start":"25:51.355 ","End":"25:56.605","Text":"which took place from 1 September to 31 December, these 400 units."},{"Start":"25:56.605 ","End":"25:59.575","Text":"Again, we need to compute a weighted average."},{"Start":"25:59.575 ","End":"26:04.660","Text":"We start then with the last weighted average after the last sale."},{"Start":"26:04.660 ","End":"26:09.070","Text":"We take therefore the 1,900 units,"},{"Start":"26:09.070 ","End":"26:15.085","Text":"which we know were costed out at a weighted average cost of that point of 7.50 pounds,"},{"Start":"26:15.085 ","End":"26:20.185","Text":"and that we add the next batch of purchases."},{"Start":"26:20.185 ","End":"26:23.500","Text":"These purchases here of 600,"},{"Start":"26:23.500 ","End":"26:30.770","Text":"which we know cost 9 pounds per unit and we divide all of that by the quantity,"},{"Start":"26:30.770 ","End":"26:34.650","Text":"which is going to be the 1,900"},{"Start":"26:34.650 ","End":"26:40.745","Text":"units plus the additional 600 units purchased in the last batch of purchases."},{"Start":"26:40.745 ","End":"26:44.515","Text":"If we now take the computation of 1900,"},{"Start":"26:44.515 ","End":"26:47.350","Text":"multiplied by 7.50 pounds,"},{"Start":"26:47.350 ","End":"26:50.845","Text":"add 600 multiplied by 9 pounds,"},{"Start":"26:50.845 ","End":"26:55.285","Text":"divided by 1,900 plus 600,"},{"Start":"26:55.285 ","End":"27:01.480","Text":"you get a weighted average cost of 7.86 pounds."},{"Start":"27:01.480 ","End":"27:10.585","Text":"It\u0027s that 7.86 pounds which we use to cost out the current batch of sales."},{"Start":"27:10.585 ","End":"27:20.785","Text":"Therefore, 400 multiplied by 7.86 pounds gives us a cost of sales of 3,144."},{"Start":"27:20.785 ","End":"27:24.880","Text":"As before, increased cost of sales, debit,"},{"Start":"27:24.880 ","End":"27:32.590","Text":"reduce inventory credit, and the inventory balance now reduces to 16,506."},{"Start":"27:33.750 ","End":"27:37.315","Text":"As before, we can look at the closing balance."},{"Start":"27:37.315 ","End":"27:40.860","Text":"The closing balance of 2,100 items,"},{"Start":"27:40.860 ","End":"27:48.580","Text":"which now must be costed out at the current weighted average of 7.86 pounds."},{"Start":"27:48.580 ","End":"27:53.035","Text":"We can prove that 2,100 units costed"},{"Start":"27:53.035 ","End":"27:58.375","Text":"out at the weighted average cost of 7.86 pounds per unit,"},{"Start":"27:58.375 ","End":"28:05.290","Text":"does in fact, equal the balance to the balance of 16,506."},{"Start":"28:05.290 ","End":"28:11.900","Text":"That balance which we saw in the or we do see in the inventory account."}],"ID":28619},{"Watched":false,"Name":"Exercise 4 - Introduction","Duration":"1m ","ChapterTopicVideoID":27440,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.730","Text":"Today\u0027s exercise is ABF."},{"Start":"00:02.730 ","End":"00:04.800","Text":"At the end of 20X1,"},{"Start":"00:04.800 ","End":"00:08.220","Text":"the managers of ABF reviewed the information they had"},{"Start":"00:08.220 ","End":"00:13.725","Text":"gathered regarding the cost of its inventory and its net realizable value."},{"Start":"00:13.725 ","End":"00:16.755","Text":"The information is summarized in the table below."},{"Start":"00:16.755 ","End":"00:18.450","Text":"We have 5 products,"},{"Start":"00:18.450 ","End":"00:23.400","Text":"A-E. We\u0027re given the number of units on hand for each of these products."},{"Start":"00:23.400 ","End":"00:28.845","Text":"We are then given the cost per unit and the expected selling price per unit,"},{"Start":"00:28.845 ","End":"00:32.580","Text":"as well as the additional expense that we would need to"},{"Start":"00:32.580 ","End":"00:36.885","Text":"incur in order to carry out a sale or per unit."},{"Start":"00:36.885 ","End":"00:43.905","Text":"We\u0027re required to assess the balance of ABF\u0027s ending inventory on the basis of its cost."},{"Start":"00:43.905 ","End":"00:47.045","Text":"In other words, ignoring any impairment."},{"Start":"00:47.045 ","End":"00:50.155","Text":"And then, as part 2 of the required,"},{"Start":"00:50.155 ","End":"00:56.059","Text":"we are to calculate the closing balance on its allowance for slow and obsolete inventory."},{"Start":"00:56.059 ","End":"01:00.930","Text":"In other words, the impairment allowance for the inventory."}],"ID":28620},{"Watched":false,"Name":"Exercise 4 - part 1","Duration":"1m 27s","ChapterTopicVideoID":26360,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.870","Text":"There were 2 parts required in this question."},{"Start":"00:03.870 ","End":"00:06.015","Text":"The first part is to asses the balance of"},{"Start":"00:06.015 ","End":"00:10.230","Text":"ABF\u0027s ending inventory on the basis of its cost,"},{"Start":"00:10.230 ","End":"00:12.705","Text":"thus ignoring any impairment."},{"Start":"00:12.705 ","End":"00:16.890","Text":"Ignoring impairments, ABF would measure its closing inventory at"},{"Start":"00:16.890 ","End":"00:21.205","Text":"its cost of 49,460 currency units."},{"Start":"00:21.205 ","End":"00:23.765","Text":"This is calculated as follows."},{"Start":"00:23.765 ","End":"00:26.485","Text":"We have 5 products, A to E,"},{"Start":"00:26.485 ","End":"00:30.040","Text":"and we\u0027re told the number of units that we have on hand,"},{"Start":"00:30.040 ","End":"00:31.845","Text":"so we list those."},{"Start":"00:31.845 ","End":"00:37.775","Text":"We\u0027re also told what the cost per unit is of each one of those units on hand."},{"Start":"00:37.775 ","End":"00:40.400","Text":"That gives us our total cost."},{"Start":"00:40.400 ","End":"00:40.910","Text":"If we"},{"Start":"00:40.910 ","End":"00:50.970","Text":"take product A,"},{"Start":"00:50.970 ","End":"00:52.830","Text":"which has 1,000 units on hand,"},{"Start":"00:52.830 ","End":"00:55.965","Text":"and multiply it by the 10.2 currency units,"},{"Start":"00:55.965 ","End":"01:03.395","Text":"we get the total carrying amount of product A of 10,200 currency units."},{"Start":"01:03.395 ","End":"01:06.275","Text":"B, we have 800 units on hand,"},{"Start":"01:06.275 ","End":"01:10.095","Text":"each unit costs 7.5 currency units,"},{"Start":"01:10.095 ","End":"01:14.600","Text":"and thus the carrying amount at cost for B is 6,000."},{"Start":"01:14.600 ","End":"01:16.910","Text":"We do the same for C, D,"},{"Start":"01:16.910 ","End":"01:24.190","Text":"and E. If we then add the total cost of each of those products A to E,"},{"Start":"01:24.190 ","End":"01:28.370","Text":"we get to 49,460."}],"ID":28621},{"Watched":false,"Name":"Exercise 4 - part 2","Duration":"10m 49s","ChapterTopicVideoID":26361,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.805","Text":"Exercise ABF has 2 parts."},{"Start":"00:02.805 ","End":"00:05.460","Text":"Part 2 requires us to calculate"},{"Start":"00:05.460 ","End":"00:09.749","Text":"the closing balance on its allowance for slow, and obsolete inventory."},{"Start":"00:09.749 ","End":"00:15.654","Text":"Another name for this account is the inventory impairment allowance account."},{"Start":"00:15.654 ","End":"00:18.800","Text":"When measuring inventory, we compare the cost with"},{"Start":"00:18.800 ","End":"00:24.200","Text":"a net realizable value and we measure at the lower of these 2 amounts."},{"Start":"00:24.200 ","End":"00:27.450","Text":"We were given that we have 5 products, A-E,"},{"Start":"00:27.450 ","End":"00:32.075","Text":"we were given the number of units that we have of each one of these products on hand,"},{"Start":"00:32.075 ","End":"00:33.920","Text":"and we were given the cost per unit."},{"Start":"00:33.920 ","End":"00:38.335","Text":"The total cost of our inventory was calculated in Part 1."},{"Start":"00:38.335 ","End":"00:41.510","Text":"We were then also given the expected selling price per unit,"},{"Start":"00:41.510 ","End":"00:46.105","Text":"and the additional expense needed to carry out a sale per unit."},{"Start":"00:46.105 ","End":"00:49.760","Text":"The difference between these 2 columns expected selling price,"},{"Start":"00:49.760 ","End":"00:53.750","Text":"and additional expense needed to carry out a sale is the net realizable value."},{"Start":"00:53.750 ","End":"00:57.995","Text":"In other words, net realizable value is expected selling price,"},{"Start":"00:57.995 ","End":"01:01.370","Text":"less expected selling costs."},{"Start":"01:01.370 ","End":"01:04.730","Text":"Put in a column for net realizable value per unit."},{"Start":"01:04.730 ","End":"01:06.815","Text":"Let\u0027s look at product A."},{"Start":"01:06.815 ","End":"01:10.310","Text":"The expected selling price per unit is 12.5,"},{"Start":"01:10.310 ","End":"01:15.355","Text":"the additional expense needed to carry out that sale is 0.5."},{"Start":"01:15.355 ","End":"01:18.939","Text":"So the net realizable value per unit of A, is 12."},{"Start":"01:18.939 ","End":"01:20.597","Text":"Then look at B."},{"Start":"01:20.597 ","End":"01:24.925","Text":"We expect to sell it for 7.8 per unit,"},{"Start":"01:24.925 ","End":"01:31.419","Text":"and expect to incur 0.5 in order to make that sale."},{"Start":"01:31.419 ","End":"01:35.912","Text":"We expect to recover 7.3 net."},{"Start":"01:35.912 ","End":"01:39.352","Text":"We do the same for C,"},{"Start":"01:39.352 ","End":"01:40.552","Text":"D, and E. We then have to determine whether the product is impaired or not."},{"Start":"01:40.552 ","End":"01:44.210","Text":"In this regard, we compare the cost with the net realizable value."},{"Start":"01:44.210 ","End":"01:49.400","Text":"If the net realizable value is bigger than the cost, it\u0027s not impaired."},{"Start":"01:49.400 ","End":"01:53.495","Text":"In other words, we\u0027re expecting to make a profit when we make a sale."},{"Start":"01:53.495 ","End":"01:59.570","Text":"However, if the cost is bigger than the net realizable value,"},{"Start":"01:59.570 ","End":"02:01.160","Text":"then it is impaired,"},{"Start":"02:01.160 ","End":"02:03.605","Text":"because we\u0027re expecting to make a loss."},{"Start":"02:03.605 ","End":"02:06.860","Text":"The impairment itself is calculated as"},{"Start":"02:06.860 ","End":"02:12.035","Text":"the cost minus the net realizable value. Let\u0027s look at A."},{"Start":"02:12.035 ","End":"02:14.290","Text":"The cost is 10.2,"},{"Start":"02:14.290 ","End":"02:17.300","Text":"and the net realizable value is 12."},{"Start":"02:17.300 ","End":"02:21.350","Text":"The question is, is this product impaired or not?"},{"Start":"02:21.350 ","End":"02:24.020","Text":"Well, we\u0027re expecting to recover 12,"},{"Start":"02:24.020 ","End":"02:26.180","Text":"which is bigger than it cost us."},{"Start":"02:26.180 ","End":"02:29.185","Text":"That\u0027s good. Therefore, it\u0027s not impaired."},{"Start":"02:29.185 ","End":"02:31.755","Text":"We put down there, no."},{"Start":"02:31.755 ","End":"02:36.005","Text":"The cost is less than the net realizable value,"},{"Start":"02:36.005 ","End":"02:40.115","Text":"and therefore it is not impaired. Let\u0027s look at B."},{"Start":"02:40.115 ","End":"02:42.800","Text":"B, cost is 7.5."},{"Start":"02:42.800 ","End":"02:46.280","Text":"We\u0027re expecting to recover only 7.3."},{"Start":"02:46.280 ","End":"02:49.775","Text":"That means we\u0027re expecting to make a loss of 0.2."},{"Start":"02:49.775 ","End":"02:51.905","Text":"Yes, this is impaired."},{"Start":"02:51.905 ","End":"02:55.625","Text":"The cost is bigger than the net realizable value."},{"Start":"02:55.625 ","End":"02:59.833","Text":"Next, look at C. 11.1 is our cost,"},{"Start":"02:59.833 ","End":"03:02.795","Text":"and we\u0027re expecting to recover 12.5."},{"Start":"03:02.795 ","End":"03:05.930","Text":"That\u0027s good. Therefore, it\u0027s not impaired."},{"Start":"03:05.930 ","End":"03:12.440","Text":"Looking at D, we\u0027re expecting to recover 6.7 as our net realizable value."},{"Start":"03:12.440 ","End":"03:15.370","Text":"The cost is 6.7."},{"Start":"03:15.370 ","End":"03:20.840","Text":"Therefore, the cost and the net realizable value are equal and it\u0027s not impaired."},{"Start":"03:20.840 ","End":"03:25.930","Text":"It\u0027s only ever impaired if the net realizable value is less than cost."},{"Start":"03:25.930 ","End":"03:29.235","Text":"Then E, cost is 15.3,"},{"Start":"03:29.235 ","End":"03:33.665","Text":"net realizable value is less than that, 13.5."},{"Start":"03:33.665 ","End":"03:36.860","Text":"Therefore, E is impaired."},{"Start":"03:36.860 ","End":"03:41.660","Text":"Once we\u0027ve identified which of the products are impaired and which are not,"},{"Start":"03:41.660 ","End":"03:43.100","Text":"we can then move to the next step,"},{"Start":"03:43.100 ","End":"03:45.799","Text":"which is measuring each of these products."},{"Start":"03:45.799 ","End":"03:49.265","Text":"Now remember inventory is measured at the lower of cost,"},{"Start":"03:49.265 ","End":"03:51.505","Text":"and net realizable value."},{"Start":"03:51.505 ","End":"03:53.610","Text":"Looking at A,"},{"Start":"03:53.610 ","End":"03:56.910","Text":"you can see we said it was not impaired."},{"Start":"03:56.910 ","End":"03:59.790","Text":"If it\u0027s not impaired, we measure it at cost."},{"Start":"03:59.790 ","End":"04:01.800","Text":"Looking at B, on the other hand,"},{"Start":"04:01.800 ","End":"04:03.450","Text":"we said it is impaired."},{"Start":"04:03.450 ","End":"04:05.785","Text":"See the Y, meaning yes, it\u0027s impaired."},{"Start":"04:05.785 ","End":"04:08.420","Text":"That means we\u0027re going to measure it at the lower amount,"},{"Start":"04:08.420 ","End":"04:10.550","Text":"which was the net realizable value."},{"Start":"04:10.550 ","End":"04:14.145","Text":"Let\u0027s go back to A. A is not impaired,"},{"Start":"04:14.145 ","End":"04:15.750","Text":"so we measure it at cost."},{"Start":"04:15.750 ","End":"04:19.860","Text":"We\u0027ve got 1,000 units multiply by 10.2."},{"Start":"04:19.860 ","End":"04:25.425","Text":"That gives us measurement of A of 10,200."},{"Start":"04:25.425 ","End":"04:28.600","Text":"Looking at B, we said it was impaired."},{"Start":"04:28.600 ","End":"04:32.185","Text":"That means we\u0027re going to measure it at net realizable value."},{"Start":"04:32.185 ","End":"04:37.850","Text":"The number of units are 800 and the net realizable value is 7.3."},{"Start":"04:37.850 ","End":"04:41.045","Text":"That gives us 5,840."},{"Start":"04:41.045 ","End":"04:44.390","Text":"Then C is not impaired."},{"Start":"04:44.390 ","End":"04:52.255","Text":"It\u0027s 1,100 units at the cost of 11.1 per unit, giving us 12,210."},{"Start":"04:52.255 ","End":"04:54.862","Text":"D is not impaired,"},{"Start":"04:54.862 ","End":"04:59.285","Text":"so we take the number of units and multiply by cost of 6.7,"},{"Start":"04:59.285 ","End":"05:02.495","Text":"and that gives us 13,400."},{"Start":"05:02.495 ","End":"05:04.920","Text":"E is impaired,"},{"Start":"05:04.920 ","End":"05:07.850","Text":"so we measure this one at net realizable value."},{"Start":"05:07.850 ","End":"05:10.970","Text":"It\u0027s 500 units times 13.5,"},{"Start":"05:10.970 ","End":"05:13.670","Text":"which gives us 6,750."},{"Start":"05:13.670 ","End":"05:19.325","Text":"The last tip is to total measurement of each of those 5 products."},{"Start":"05:19.325 ","End":"05:22.535","Text":"That comes to 48,400."},{"Start":"05:22.535 ","End":"05:26.675","Text":"That is a mixture of cost and net realizable value."},{"Start":"05:26.675 ","End":"05:29.030","Text":"It\u0027s the lower of the cost,"},{"Start":"05:29.030 ","End":"05:30.740","Text":"or the net realizable value."},{"Start":"05:30.740 ","End":"05:34.025","Text":"In part, when we calculated the cost of the inventory,"},{"Start":"05:34.025 ","End":"05:35.780","Text":"and we\u0027ll just quickly run through that,"},{"Start":"05:35.780 ","End":"05:37.490","Text":"A was 10,200,"},{"Start":"05:37.490 ","End":"05:38.600","Text":"B was 6,000,"},{"Start":"05:38.600 ","End":"05:40.345","Text":"12,210 for C,"},{"Start":"05:40.345 ","End":"05:41.970","Text":"13,400 for D,"},{"Start":"05:41.970 ","End":"05:43.725","Text":"7,650 for E,"},{"Start":"05:43.725 ","End":"05:46.965","Text":"and that gave us 49,460."},{"Start":"05:46.965 ","End":"05:50.690","Text":"Our inventory account is always measured at the cost."},{"Start":"05:50.690 ","End":"05:54.965","Text":"Our inventory account is going to show 49,460."},{"Start":"05:54.965 ","End":"05:57.020","Text":"Yet in our balance sheet,"},{"Start":"05:57.020 ","End":"05:59.255","Text":"we need to show the lower of the cost,"},{"Start":"05:59.255 ","End":"06:01.055","Text":"or the net realizable value,"},{"Start":"06:01.055 ","End":"06:05.135","Text":"which is, as we\u0027ve just calculated, 48,400."},{"Start":"06:05.135 ","End":"06:06.560","Text":"If you compare those 2 amounts,"},{"Start":"06:06.560 ","End":"06:08.150","Text":"you can see we have a difference."},{"Start":"06:08.150 ","End":"06:11.720","Text":"The difference is 1,060."},{"Start":"06:11.720 ","End":"06:19.475","Text":"The cost is bigger than the lower of cost or net realizable value by 1,060."},{"Start":"06:19.475 ","End":"06:23.600","Text":"That 1,060 needs to be in the account called"},{"Start":"06:23.600 ","End":"06:31.235","Text":"the impairment allowance account so that what appears in the balance sheet is the 48,400."},{"Start":"06:31.235 ","End":"06:36.515","Text":"In other words, if you would look at your ledger accounts and T-account format,"},{"Start":"06:36.515 ","End":"06:41.779","Text":"we have an inventory asset account measured at cost."},{"Start":"06:41.779 ","End":"06:46.805","Text":"This is an asset and then we\u0027re going to have an impairment allowance account."},{"Start":"06:46.805 ","End":"06:52.595","Text":"We have an inventory impairment allowance,"},{"Start":"06:52.595 ","End":"06:57.170","Text":"which is like a negative asset because the purpose of"},{"Start":"06:57.170 ","End":"06:59.375","Text":"this account is to reduce"},{"Start":"06:59.375 ","End":"07:03.185","Text":"the measurement value of inventory on the face of the balance sheet."},{"Start":"07:03.185 ","End":"07:08.230","Text":"Let\u0027s assume that we purchased our inventory for cash."},{"Start":"07:08.230 ","End":"07:14.645","Text":"Let us assume that the entire inventory that we own was purchased in 1 transaction."},{"Start":"07:14.645 ","End":"07:18.000","Text":"It\u0027s highly unlikely, but let\u0027s just,"},{"Start":"07:18.000 ","End":"07:19.890","Text":"for purposes of explanation."},{"Start":"07:19.890 ","End":"07:26.595","Text":"Let\u0027s imagine I purchase the entire amount of 49,460 in 1 transaction."},{"Start":"07:26.595 ","End":"07:30.975","Text":"We credited our bank with 49,460."},{"Start":"07:30.975 ","End":"07:35.950","Text":"We would\u0027ve then debited inventory with 49,460."},{"Start":"07:36.190 ","End":"07:40.340","Text":"Then we realize that our balance sheet needs"},{"Start":"07:40.340 ","End":"07:43.940","Text":"to reflect the lower of cost and net realizable value."},{"Start":"07:43.940 ","End":"07:49.190","Text":"Our balance sheet needs to show 48,400 and not the 49,460,"},{"Start":"07:49.190 ","End":"07:52.130","Text":"which is currently in our inventory cost account."},{"Start":"07:52.130 ","End":"07:55.710","Text":"For our balance sheet to show 48,400,"},{"Start":"07:55.710 ","End":"08:01.070","Text":"we need to show in our impairment allowance account a balance of 1,060."},{"Start":"08:01.070 ","End":"08:03.350","Text":"If our opening balance,"},{"Start":"08:03.350 ","End":"08:07.160","Text":"let\u0027s say, was 0 in the impairment allowance account,"},{"Start":"08:07.160 ","End":"08:12.330","Text":"then we need the impairment allowance account to show 1,060 at end of the year,"},{"Start":"08:12.330 ","End":"08:16.690","Text":"that means we need to put in an amount of 1,060."},{"Start":"08:16.690 ","End":"08:23.314","Text":"Journal number 2 would be to credit the impairment allowance account and debit"},{"Start":"08:23.314 ","End":"08:30.455","Text":"the impairment of inventory expense with 1,060."},{"Start":"08:30.455 ","End":"08:34.010","Text":"In this question, what we were asked for is for"},{"Start":"08:34.010 ","End":"08:39.500","Text":"the closing balance on the inventory impairment allowance account."},{"Start":"08:39.500 ","End":"08:42.605","Text":"The answer is 1,060."},{"Start":"08:42.605 ","End":"08:48.350","Text":"However, you do need to read the question very carefully because the question might"},{"Start":"08:48.350 ","End":"08:53.990","Text":"have asked you for the impairment expense relating to the inventory,"},{"Start":"08:53.990 ","End":"08:56.150","Text":"in which case you\u0027d have to establish what"},{"Start":"08:56.150 ","End":"09:00.280","Text":"that opening balance was in the inventory impairment allowance."},{"Start":"09:00.280 ","End":"09:03.000","Text":"Hypothetically, our opening balance,"},{"Start":"09:03.000 ","End":"09:05.340","Text":"let\u0027s say might\u0027ve been 60."},{"Start":"09:05.340 ","End":"09:07.759","Text":"If the opening balance had been 60,"},{"Start":"09:07.759 ","End":"09:11.845","Text":"and we\u0027ve just established that the closing balance ought to be 1,060."},{"Start":"09:11.845 ","End":"09:18.140","Text":"Had we been asked what the impairment of inventory expense was,"},{"Start":"09:18.140 ","End":"09:23.465","Text":"and not the closing balance of the inventory impairments allowance,"},{"Start":"09:23.465 ","End":"09:27.560","Text":"then our answer would have been adjustment."},{"Start":"09:27.560 ","End":"09:32.210","Text":"In other words, would\u0027ve been to credit the inventory impairment allowance of 1,000"},{"Start":"09:32.210 ","End":"09:37.810","Text":"and debit the impairment of inventory expense with 1,000."},{"Start":"09:37.810 ","End":"09:40.305","Text":"Our answer would have then been that 1,000."},{"Start":"09:40.305 ","End":"09:44.780","Text":"In this question, we were asked what the closing balance would be of"},{"Start":"09:44.780 ","End":"09:49.095","Text":"the inventory impairment allowance is."},{"Start":"09:49.095 ","End":"09:52.300","Text":"The answer to that was 1,060."},{"Start":"09:52.300 ","End":"09:57.530","Text":"Had we been asked what the impairment expense was,"},{"Start":"09:57.530 ","End":"10:01.670","Text":"we\u0027d need to know what the opening balance was on the inventory impairment allowance."},{"Start":"10:01.670 ","End":"10:03.650","Text":"We weren\u0027t given that in this question."},{"Start":"10:03.650 ","End":"10:07.790","Text":"But hypothetically, if we were told that the opening balance was 60,"},{"Start":"10:07.790 ","End":"10:10.400","Text":"we know the closing balance has to be 1,060."},{"Start":"10:10.400 ","End":"10:16.515","Text":"Then the answer would have been the impairment expense is 1,000."},{"Start":"10:16.515 ","End":"10:21.020","Text":"Just be careful whether you\u0027re being asked for the closing balance of"},{"Start":"10:21.020 ","End":"10:24.050","Text":"the impairment allowance account or whether you\u0027re"},{"Start":"10:24.050 ","End":"10:27.865","Text":"being asked for the impairment expense."},{"Start":"10:27.865 ","End":"10:32.720","Text":"This is the impairment balance and that\u0027s the adjustment,"},{"Start":"10:32.720 ","End":"10:36.410","Text":"the 1,000 is the impairment allowance adjustment"},{"Start":"10:36.410 ","End":"10:40.905","Text":"and that is reflected as the impairment expense."},{"Start":"10:40.905 ","End":"10:44.240","Text":"The adjustment is determined by comparing"},{"Start":"10:44.240 ","End":"10:50.010","Text":"the closing balance with the opening balance in that impairment allowance account."}],"ID":28622},{"Watched":false,"Name":"Measuring inventory without physical count","Duration":"11m 14s","ChapterTopicVideoID":26654,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.440 ","End":"00:04.650","Text":"Hello and welcome to another video presentation in"},{"Start":"00:04.650 ","End":"00:08.760","Text":"the series on inventory brought to you by Proprep."},{"Start":"00:08.760 ","End":"00:15.435","Text":"In this video, we will focus on measuring inventory without a physical count."},{"Start":"00:15.435 ","End":"00:20.670","Text":"There may be some situations whereby a physical count cannot take place."},{"Start":"00:20.670 ","End":"00:24.240","Text":"This, for example, could occur if there\u0027s a fire"},{"Start":"00:24.240 ","End":"00:27.960","Text":"in the inventory warehouse and the inventory is clearly"},{"Start":"00:27.960 ","End":"00:31.420","Text":"destroyed and therefore management needs to estimate"},{"Start":"00:31.420 ","End":"00:36.325","Text":"the closing inventory at that point in time for an insurance claim."},{"Start":"00:36.325 ","End":"00:42.710","Text":"Also companies with many locations and they sell similar small value products,"},{"Start":"00:42.710 ","End":"00:45.875","Text":"may opt not to do a physical count."},{"Start":"00:45.875 ","End":"00:48.290","Text":"There are 2 methods commonly used,"},{"Start":"00:48.290 ","End":"00:50.990","Text":"1 is referred to as the gross profit method,"},{"Start":"00:50.990 ","End":"00:54.935","Text":"and the second 1 referred to as the retail inventory method."},{"Start":"00:54.935 ","End":"00:59.735","Text":"We will focus on examples and explanations of both of these methods."},{"Start":"00:59.735 ","End":"01:03.530","Text":"The gross profit method is based on the principle"},{"Start":"01:03.530 ","End":"01:07.745","Text":"that there\u0027s a relationship between the cost of the goods,"},{"Start":"01:07.745 ","End":"01:10.505","Text":"the mark up added to the cost,"},{"Start":"01:10.505 ","End":"01:13.430","Text":"which gives us clearly a selling price."},{"Start":"01:13.430 ","End":"01:20.635","Text":"Therefore, the cost of the goods is 100 and the business adds a 25 percent markup so,"},{"Start":"01:20.635 ","End":"01:27.425","Text":"25 over 100, which equals 25 percent mark up,"},{"Start":"01:27.425 ","End":"01:31.595","Text":"the selling price must be equal to 125."},{"Start":"01:31.595 ","End":"01:37.250","Text":"We can take the same information and swing it around and say if the selling price,"},{"Start":"01:37.250 ","End":"01:41.600","Text":"which becomes a sales, is 125,"},{"Start":"01:41.600 ","End":"01:48.364","Text":"the cost which becomes the cost of sales is 100 and therefore,"},{"Start":"01:48.364 ","End":"01:54.635","Text":"the sales is cost of sales equals the gross profit of 25."},{"Start":"01:54.635 ","End":"02:01.115","Text":"The gross profit percentage is the gross profit divided by the sales."},{"Start":"02:01.115 ","End":"02:03.175","Text":"This example over here,"},{"Start":"02:03.175 ","End":"02:12.950","Text":"25 divided by 125=20 percent and 20 percent therefore,"},{"Start":"02:12.950 ","End":"02:15.875","Text":"is the gross profit percentage."},{"Start":"02:15.875 ","End":"02:21.215","Text":"Now note the same 25 appears in both of my calculation."},{"Start":"02:21.215 ","End":"02:24.920","Text":"What is important to realize is that when we are"},{"Start":"02:24.920 ","End":"02:29.415","Text":"looking at the 25 in relation to the 100,"},{"Start":"02:29.415 ","End":"02:35.050","Text":"that refers to a markup on cost and"},{"Start":"02:35.050 ","End":"02:41.025","Text":"the markup on cost here is equal to 25 over 100,"},{"Start":"02:41.025 ","End":"02:45.290","Text":"which we said was the 25 percent but when we take"},{"Start":"02:45.290 ","End":"02:50.705","Text":"the same number and look at it in relation to the selling price,"},{"Start":"02:50.705 ","End":"02:58.385","Text":"the 25 divided by the 125 becomes the gross profit percentage."},{"Start":"02:58.385 ","End":"03:01.910","Text":"We can then go back to the principles that"},{"Start":"03:01.910 ","End":"03:09.995","Text":"opening inventory plus purchases less closing inventory"},{"Start":"03:09.995 ","End":"03:14.190","Text":"is equal to the cost of sales."},{"Start":"03:14.420 ","End":"03:19.480","Text":"In the case where closing inventory is not counted,"},{"Start":"03:19.480 ","End":"03:21.880","Text":"it is this closing inventory,"},{"Start":"03:21.880 ","End":"03:24.610","Text":"which in fact is the missing figure."},{"Start":"03:24.610 ","End":"03:28.165","Text":"Now we will know the opening inventory from last period,"},{"Start":"03:28.165 ","End":"03:33.220","Text":"we will know the purchases in the current period and we can determine"},{"Start":"03:33.220 ","End":"03:38.110","Text":"the cost of sales with the gross profit method because we can"},{"Start":"03:38.110 ","End":"03:42.970","Text":"take the sales amount and multiply it by"},{"Start":"03:42.970 ","End":"03:49.390","Text":"the relationship between the cost of sales and the selling price."},{"Start":"03:49.390 ","End":"03:55.065","Text":"Sales multiplied by 100 over 125."},{"Start":"03:55.065 ","End":"03:59.379","Text":"This example will give us the cost of sales."},{"Start":"03:59.379 ","End":"04:03.280","Text":"Looking at an example of the gross profit method,"},{"Start":"04:03.280 ","End":"04:09.310","Text":"this company BDE, reports an annual sales of 16,400 currency units."},{"Start":"04:09.310 ","End":"04:16.345","Text":"Note importantly, it has an estimated 25 percent gross profit margin."},{"Start":"04:16.345 ","End":"04:21.235","Text":"It has a beginning balance of inventory of 5,000 currency units"},{"Start":"04:21.235 ","End":"04:27.040","Text":"and during the year purchased 21,400 of further inventory."},{"Start":"04:27.040 ","End":"04:30.670","Text":"The first step in trying to compute the amount of"},{"Start":"04:30.670 ","End":"04:34.875","Text":"closing inventory is to look at the relationship between sales,"},{"Start":"04:34.875 ","End":"04:37.190","Text":"cost of sales and gross profit."},{"Start":"04:37.190 ","End":"04:39.040","Text":"So we write down the relationship;"},{"Start":"04:39.040 ","End":"04:42.245","Text":"Sales, less cost of sales,"},{"Start":"04:42.245 ","End":"04:49.025","Text":"we know equals a gross profit and the relationship in this case, we are told,"},{"Start":"04:49.025 ","End":"04:54.105","Text":"is a 25 percent gross profit margin,"},{"Start":"04:54.105 ","End":"04:59.180","Text":"25 percent is equal to gross profit divided by sales."},{"Start":"04:59.180 ","End":"05:03.140","Text":"We know therefore, that the relationship must"},{"Start":"05:03.140 ","End":"05:07.895","Text":"be 1 where sales is 100 and the cost of sales is 25."},{"Start":"05:07.895 ","End":"05:15.040","Text":"So 25 divided by 100 equal to 25 percent gross profit margin."},{"Start":"05:15.040 ","End":"05:23.230","Text":"Therefore, the cost of sales must be in percentage terms, 75."},{"Start":"05:23.230 ","End":"05:26.650","Text":"You can therefore go to the formula of"},{"Start":"05:26.650 ","End":"05:35.605","Text":"opening inventory plus purchases less closing inventory"},{"Start":"05:35.605 ","End":"05:38.020","Text":"is equal to cost of sales."},{"Start":"05:38.020 ","End":"05:44.619","Text":"Remember it is the closing inventory which is the missing figure in this scenario."},{"Start":"05:45.000 ","End":"05:55.655","Text":"We know the opening inventory is an amount of 5,000 and we know the purchases are 21,400."},{"Start":"05:55.655 ","End":"05:58.245","Text":"The closing inventory as we said,"},{"Start":"05:58.245 ","End":"06:02.335","Text":"is the missing figure and what is the cost of sales?"},{"Start":"06:02.335 ","End":"06:05.380","Text":"Or we can determine the cost of sales by looking at"},{"Start":"06:05.380 ","End":"06:11.515","Text":"the sales because we know here the sales are 16,400."},{"Start":"06:11.515 ","End":"06:16.720","Text":"What is the relationship between the cost of sales and sales?"},{"Start":"06:16.720 ","End":"06:19.715","Text":"It is 75-100."},{"Start":"06:19.715 ","End":"06:23.590","Text":"Therefore, 16,400 multiplied by"},{"Start":"06:23.590 ","End":"06:31.810","Text":"75 over 100 gives us a cost of sales amount of 12,300."},{"Start":"06:31.810 ","End":"06:35.560","Text":"Then a matter of going back to the formula and"},{"Start":"06:35.560 ","End":"06:39.670","Text":"saying opening inventory of 5,000 plus purchases of"},{"Start":"06:39.670 ","End":"06:45.755","Text":"21,400 less our missing item for closing inventory"},{"Start":"06:45.755 ","End":"06:54.980","Text":"equals 12,300 and you can determine the amount of closing inventory as 14,100."},{"Start":"06:54.980 ","End":"06:57.710","Text":"The retail inventory method use"},{"Start":"06:57.710 ","End":"07:02.420","Text":"the same fundamental or underlying logic as the gross profit method."},{"Start":"07:02.420 ","End":"07:03.920","Text":"Take a look at this."},{"Start":"07:03.920 ","End":"07:12.200","Text":"The cost of goods is 100 and the entity applies a markup on cost of 25."},{"Start":"07:12.200 ","End":"07:16.025","Text":"We know the selling price is 125."},{"Start":"07:16.025 ","End":"07:21.830","Text":"We can then look at the relationship between the cost and the selling price,"},{"Start":"07:21.830 ","End":"07:26.750","Text":"which is clearly 100 over 125."},{"Start":"07:26.750 ","End":"07:32.660","Text":"We can look at also the relationship between the retail selling price back to"},{"Start":"07:32.660 ","End":"07:39.075","Text":"the cost and this is clearly 125 over 100."},{"Start":"07:39.075 ","End":"07:40.859","Text":"We can, as before,"},{"Start":"07:40.859 ","End":"07:42.650","Text":"swing this around and take"},{"Start":"07:42.650 ","End":"07:47.300","Text":"the selling price to equal the sales and using the same numbers,"},{"Start":"07:47.300 ","End":"07:49.430","Text":"sales are 125,"},{"Start":"07:49.430 ","End":"07:51.335","Text":"take the cost price,"},{"Start":"07:51.335 ","End":"07:54.130","Text":"which is the cost of sales and again,"},{"Start":"07:54.130 ","End":"07:56.734","Text":"using the same number is 100,"},{"Start":"07:56.734 ","End":"08:01.025","Text":"that gives us the gross profit clearly of 25."},{"Start":"08:01.025 ","End":"08:03.605","Text":"The same relationships come out of this."},{"Start":"08:03.605 ","End":"08:10.775","Text":"The relationship of cost to selling price is again, 100 over 125,"},{"Start":"08:10.775 ","End":"08:19.655","Text":"or the relationship of the retail selling price that the cost is 125 over a 100."},{"Start":"08:19.655 ","End":"08:22.970","Text":"It is these relationships that we will use in order to"},{"Start":"08:22.970 ","End":"08:26.930","Text":"determine any missing number for closing inventory."},{"Start":"08:26.930 ","End":"08:29.240","Text":"Taking a look at an example,"},{"Start":"08:29.240 ","End":"08:31.820","Text":"the company here, CDE Incorporated,"},{"Start":"08:31.820 ","End":"08:34.640","Text":"has sales of 16,400."},{"Start":"08:34.640 ","End":"08:39.620","Text":"The beginning balance of inventory is 5,000 and you\u0027re told"},{"Start":"08:39.620 ","End":"08:44.990","Text":"it purchased 21,400 of inventory during the period."},{"Start":"08:44.990 ","End":"08:52.370","Text":"Importantly, here, you are told it sells its merchandise at a cost plus 30 percent."},{"Start":"08:52.370 ","End":"08:54.895","Text":"Now we have a relationship."},{"Start":"08:54.895 ","End":"08:59.235","Text":"We can write down the cost of 100."},{"Start":"08:59.235 ","End":"09:01.725","Text":"The markup on cost,"},{"Start":"09:01.725 ","End":"09:09.470","Text":"you\u0027re told is cost plus 30 percent add-on 30 to give us a selling price of 130."},{"Start":"09:09.470 ","End":"09:14.375","Text":"This enables us to determine the relationship between the cost and the selling price."},{"Start":"09:14.375 ","End":"09:17.720","Text":"The cost of selling price relationships is clearly"},{"Start":"09:17.720 ","End":"09:25.850","Text":"100 over 130 and the retail selling price to cost relationship"},{"Start":"09:25.850 ","End":"09:29.780","Text":"is clearly 130 over 100."},{"Start":"09:29.780 ","End":"09:36.500","Text":"We can now use this information to determine the value of closing inventory."},{"Start":"09:36.500 ","End":"09:40.340","Text":"What then is the retail price of"},{"Start":"09:40.340 ","End":"09:44.810","Text":"the inventory available for sale and the inventory available for"},{"Start":"09:44.810 ","End":"09:48.530","Text":"sale at cost price is the opening inventory of"},{"Start":"09:48.530 ","End":"09:53.805","Text":"5,000 plus the inventory purchased or sold at cost price."},{"Start":"09:53.805 ","End":"09:58.645","Text":"Remember all inventory started at cost 21,400."},{"Start":"09:58.645 ","End":"10:03.410","Text":"To restate this, at the retail selling price,"},{"Start":"10:03.410 ","End":"10:09.485","Text":"I will apply that relationship of 130 over 100 to give"},{"Start":"10:09.485 ","End":"10:18.935","Text":"a retail price of the inventory available for sale of 34,320."},{"Start":"10:18.935 ","End":"10:28.025","Text":"The sales for the period which must be at selling price is given at 16,400."},{"Start":"10:28.025 ","End":"10:33.065","Text":"This thing gives me a ending inventory at selling price."},{"Start":"10:33.065 ","End":"10:34.910","Text":"Where at the retail price,"},{"Start":"10:34.910 ","End":"10:46.505","Text":"selling price or retail price of 34,320 less 16,400 gives us an amount of 17,920."},{"Start":"10:46.505 ","End":"10:50.450","Text":"All that matters now is to convert that into a cost price."},{"Start":"10:50.450 ","End":"10:57.830","Text":"Therefore, the 17,920 multiplied by the relationship of cost to selling price,"},{"Start":"10:57.830 ","End":"11:00.305","Text":"100 over 130,"},{"Start":"11:00.305 ","End":"11:08.090","Text":"gives us a ending inventory at cost price and that number amounts to,"},{"Start":"11:08.090 ","End":"11:14.130","Text":"in this case, 13,784."}],"ID":28623},{"Watched":false,"Name":"Exercise 5 - part 1","Duration":"1m 17s","ChapterTopicVideoID":26362,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.880","Text":"Today we\u0027re doing the exercise ABG."},{"Start":"00:02.880 ","End":"00:10.215","Text":"Consider the information below regarding ABG Inc.\u0027s inventory transactions during 20X1."},{"Start":"00:10.215 ","End":"00:14.070","Text":"We\u0027re given information for each of the 4 quarters of the year."},{"Start":"00:14.070 ","End":"00:18.030","Text":"In this regard, we\u0027re told what the sales are in units,"},{"Start":"00:18.030 ","End":"00:20.820","Text":"what the purchases are in units,"},{"Start":"00:20.820 ","End":"00:23.490","Text":"and what to purchase price per unit was,"},{"Start":"00:23.490 ","End":"00:25.440","Text":"we\u0027re then told to assume that"},{"Start":"00:25.440 ","End":"00:28.995","Text":"all the purchases took place on the last day of the quarter."},{"Start":"00:28.995 ","End":"00:32.940","Text":"In other words, there were no purchases made during the quarter."},{"Start":"00:32.940 ","End":"00:38.160","Text":"We\u0027re then told to assume that no sales took place on the last day of the quarter,"},{"Start":"00:38.160 ","End":"00:41.524","Text":"which means that by contrast to the purchases,"},{"Start":"00:41.524 ","End":"00:44.780","Text":"all the sales took place during the quarter."},{"Start":"00:44.780 ","End":"00:49.085","Text":"In summary, if all the purchases took place on the last day of the quarter,"},{"Start":"00:49.085 ","End":"00:52.280","Text":"purchases take place at the end of the quarter."},{"Start":"00:52.280 ","End":"00:55.055","Text":"If no sales take place on the last day of the quarter,"},{"Start":"00:55.055 ","End":"00:59.240","Text":"it means that all the sales took place during the quarter."},{"Start":"00:59.240 ","End":"01:02.310","Text":"They were 1,000 units at the beginning of the year,"},{"Start":"01:02.310 ","End":"01:06.440","Text":"and the cost of each of these units is 9.2 currency units."},{"Start":"01:06.440 ","End":"01:11.320","Text":"We are required to calculate the ending inventory and the cost of goods sold,"},{"Start":"01:11.320 ","End":"01:13.975","Text":"under the periodic FIFO method."},{"Start":"01:13.975 ","End":"01:18.140","Text":"FIFO stands for first in, first out."}],"ID":28624},{"Watched":false,"Name":"Exercise 5 - part 2","Duration":"10m 58s","ChapterTopicVideoID":26363,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.670","Text":"To answer this question, we need to understand what"},{"Start":"00:02.670 ","End":"00:06.120","Text":"goes through an inventory asset account."},{"Start":"00:06.120 ","End":"00:11.160","Text":"If we reconstruct our inventory asset account using a T-Account format,"},{"Start":"00:11.160 ","End":"00:13.410","Text":"we must remember that assets get bigger on"},{"Start":"00:13.410 ","End":"00:17.490","Text":"the debit side and they get smaller on the credit side."},{"Start":"00:17.490 ","End":"00:20.880","Text":"Bearing that in mind, we would have an opening balance of"},{"Start":"00:20.880 ","End":"00:23.925","Text":"inventory on the left-hand side, the debit side,"},{"Start":"00:23.925 ","End":"00:28.920","Text":"we would add to this opening balance any inventory that we purchased during the year,"},{"Start":"00:28.920 ","End":"00:31.230","Text":"and then if we got rid of any of our inventory,"},{"Start":"00:31.230 ","End":"00:34.150","Text":"which is what we refer to as a cost of a sale,"},{"Start":"00:34.150 ","End":"00:36.690","Text":"we would credit the account."},{"Start":"00:36.690 ","End":"00:38.330","Text":"Any goods that are sold,"},{"Start":"00:38.330 ","End":"00:40.850","Text":"we take the cost of those goods out of"},{"Start":"00:40.850 ","End":"00:44.450","Text":"this account and we take it out on the credit side."},{"Start":"00:44.450 ","End":"00:48.265","Text":"That would then give us our closing balance, carried forward,"},{"Start":"00:48.265 ","End":"00:50.550","Text":"a little balance going on there,"},{"Start":"00:50.550 ","End":"00:54.090","Text":"and we\u0027d bring it down here closing balance brought forward."},{"Start":"00:54.090 ","End":"00:56.625","Text":"The contra entry to the purchases,"},{"Start":"00:56.625 ","End":"00:58.500","Text":"its called Journal Number 1,"},{"Start":"00:58.500 ","End":"01:00.500","Text":"would be to, for example,"},{"Start":"01:00.500 ","End":"01:04.310","Text":"the bank account if we paid for those purchases or it could be"},{"Start":"01:04.310 ","End":"01:09.065","Text":"to a liability account such as a payables account."},{"Start":"01:09.065 ","End":"01:11.900","Text":"This entry here, cost of sales on the credit side of"},{"Start":"01:11.900 ","End":"01:16.755","Text":"our inventory account is called this Journal Number 2 the other side to that entry,"},{"Start":"01:16.755 ","End":"01:21.070","Text":"would be to debit to the cost of sales expense."},{"Start":"01:21.070 ","End":"01:24.225","Text":"We would debit the cost of sales expense."},{"Start":"01:24.225 ","End":"01:28.530","Text":"Notice that we\u0027re taking it out of the asset and we\u0027re expensing it."},{"Start":"01:28.900 ","End":"01:31.489","Text":"That\u0027s the background."},{"Start":"01:31.489 ","End":"01:34.370","Text":"Now let\u0027s work with the actual figures."},{"Start":"01:34.370 ","End":"01:37.055","Text":"Let\u0027s start with our opening balance."},{"Start":"01:37.055 ","End":"01:39.875","Text":"As you can see, we are told in the 3rd bullet point,"},{"Start":"01:39.875 ","End":"01:42.290","Text":"there were 1,000 units at the beginning of the year,"},{"Start":"01:42.290 ","End":"01:46.865","Text":"and the cost of each of these units is 9.2 currency units."},{"Start":"01:46.865 ","End":"01:49.820","Text":"Our inventory opening balance is 1,000,"},{"Start":"01:49.820 ","End":"01:51.260","Text":"and this is the units here."},{"Start":"01:51.260 ","End":"01:56.235","Text":"The currency per unit is 9.2,"},{"Start":"01:56.235 ","End":"02:01.415","Text":"so 9.2 pounds or dollars per unit of inventory."},{"Start":"02:01.415 ","End":"02:04.100","Text":"Any currency you like,"},{"Start":"02:04.100 ","End":"02:09.965","Text":"1,000 units times 9.2 currency units gives you 9,200."},{"Start":"02:09.965 ","End":"02:13.130","Text":"That\u0027s the cost of our opening balance of inventory."},{"Start":"02:13.130 ","End":"02:15.365","Text":"We then add our purchases."},{"Start":"02:15.365 ","End":"02:16.730","Text":"Going back to the question,"},{"Start":"02:16.730 ","End":"02:18.560","Text":"we can see that in Quarter 1,"},{"Start":"02:18.560 ","End":"02:26.380","Text":"our purchases were 700 units and those purchases costs us 9 currency units per unit."},{"Start":"02:26.380 ","End":"02:28.605","Text":"Quarter 2 was 1,000,"},{"Start":"02:28.605 ","End":"02:31.470","Text":"and those cost us slightly cheaper at 880."},{"Start":"02:31.470 ","End":"02:33.745","Text":"Quarter 3 was 1,100,"},{"Start":"02:33.745 ","End":"02:35.930","Text":"that cost us 8.6 a unit,"},{"Start":"02:35.930 ","End":"02:37.715","Text":"getting cheaper every time."},{"Start":"02:37.715 ","End":"02:42.750","Text":"Quarter 4 is 800 at 8.4 per unit."},{"Start":"02:42.750 ","End":"02:47.200","Text":"We pop that in, 700 units at 9,"},{"Start":"02:47.200 ","End":"02:50.780","Text":"gives us currency units or 6,300."},{"Start":"02:50.780 ","End":"02:52.595","Text":"Then during Quarter 2,"},{"Start":"02:52.595 ","End":"02:58.385","Text":"1,000 units at 8.8 per unit gives us a cost of 8,800."},{"Start":"02:58.385 ","End":"03:00.690","Text":"Purchase during Quarter 3,"},{"Start":"03:00.690 ","End":"03:07.250","Text":"1,100 units at 8.6 per unit gives us a cost of 9,460."},{"Start":"03:07.250 ","End":"03:09.770","Text":"Then purchases during Quarter 4,"},{"Start":"03:09.770 ","End":"03:14.070","Text":"there were 800 units and the cost per unit was 8.4."},{"Start":"03:14.070 ","End":"03:18.495","Text":"The total cost of that purchase was 6,720."},{"Start":"03:18.495 ","End":"03:27.305","Text":"We have 4 purchases plus the opening balance and that gives us 40,480 currency units."},{"Start":"03:27.305 ","End":"03:29.180","Text":"If we look at it in terms of units,"},{"Start":"03:29.180 ","End":"03:32.360","Text":"we have now 4,600 units."},{"Start":"03:32.360 ","End":"03:34.610","Text":"That includes the opening balance."},{"Start":"03:34.610 ","End":"03:37.760","Text":"Then we have the inventory that\u0027s sold."},{"Start":"03:37.760 ","End":"03:41.960","Text":"We\u0027re told in the question that we sold 800 units in Quarter 1,"},{"Start":"03:41.960 ","End":"03:43.535","Text":"then 600 in Quarter 2,"},{"Start":"03:43.535 ","End":"03:45.245","Text":"900 in Quarter 3,"},{"Start":"03:45.245 ","End":"03:48.145","Text":"and 800 in Quarter 4."},{"Start":"03:48.145 ","End":"03:50.040","Text":"Remember those figures, 800,"},{"Start":"03:50.040 ","End":"03:52.170","Text":"600, 900, 800."},{"Start":"03:52.170 ","End":"03:55.805","Text":"That\u0027s a total of 3,100 units over the year."},{"Start":"03:55.805 ","End":"03:57.950","Text":"Using the first-in, first-out method,"},{"Start":"03:57.950 ","End":"04:01.400","Text":"pop that into the total at the bottom,"},{"Start":"04:01.400 ","End":"04:04.130","Text":"3,100 units were sold."},{"Start":"04:04.130 ","End":"04:06.635","Text":"Now using the first-in, first-out method,"},{"Start":"04:06.635 ","End":"04:08.975","Text":"we sell the oldest stock first."},{"Start":"04:08.975 ","End":"04:11.810","Text":"We had 1,000 units at the beginning of the year,"},{"Start":"04:11.810 ","End":"04:15.310","Text":"so that\u0027s obviously our oldest stock,"},{"Start":"04:15.310 ","End":"04:19.560","Text":"and therefore that\u0027s the stock we\u0027re going to assume we sold first."},{"Start":"04:19.560 ","End":"04:23.345","Text":"We say 1,000 units were sold."},{"Start":"04:23.345 ","End":"04:26.480","Text":"Then the next oldest stock was the inventory that"},{"Start":"04:26.480 ","End":"04:29.770","Text":"we purchased during Quarter 1, 700 units."},{"Start":"04:29.770 ","End":"04:33.750","Text":"The next oldest stock was the purchases we made during Quarter 2."},{"Start":"04:33.750 ","End":"04:36.825","Text":"Now we\u0027re getting close to the 3,100."},{"Start":"04:36.825 ","End":"04:40.935","Text":"If we add that up, that comes to 2,700 units."},{"Start":"04:40.935 ","End":"04:43.830","Text":"Now we sold 3,100,"},{"Start":"04:43.830 ","End":"04:47.190","Text":"so we\u0027ve got another 400 units to go"},{"Start":"04:47.190 ","End":"04:51.230","Text":"before we\u0027ve accounted for all the units that we sold."},{"Start":"04:51.230 ","End":"04:54.725","Text":"Now, that means that the purchase during Quarter 3,"},{"Start":"04:54.725 ","End":"04:57.205","Text":"was only partially sold."},{"Start":"04:57.205 ","End":"05:01.665","Text":"All of the purchases during Quarter 1 and all the purchases during Quarter 2,"},{"Start":"05:01.665 ","End":"05:06.005","Text":"plus the entire opening balance that was all disposed of during the year."},{"Start":"05:06.005 ","End":"05:08.150","Text":"But the purchase that we made in Quarter 3,"},{"Start":"05:08.150 ","End":"05:10.550","Text":"was partially sold and we never got to"},{"Start":"05:10.550 ","End":"05:13.720","Text":"sell any of the purchases that we made during Quarter 4."},{"Start":"05:13.720 ","End":"05:18.645","Text":"400 must have been sold out of our Quarter 3 purchases,"},{"Start":"05:18.645 ","End":"05:22.485","Text":"and that makes up our 3,100."},{"Start":"05:22.485 ","End":"05:29.420","Text":"That therefore means that we didn\u0027t sell any of the purchases made during Quarter 4."},{"Start":"05:29.420 ","End":"05:32.450","Text":"The next step is to calculate the cost of the sales,"},{"Start":"05:32.450 ","End":"05:36.695","Text":"so if we\u0027re assuming that we sold oldest stock first,"},{"Start":"05:36.695 ","End":"05:41.990","Text":"that means that those 1,000 units that we sold from our opening balance,"},{"Start":"05:41.990 ","End":"05:46.550","Text":"where the opening balance costs us 9.2 per unit,"},{"Start":"05:46.550 ","End":"05:52.115","Text":"it means that the cost of that sale was 9,200 currency units."},{"Start":"05:52.115 ","End":"05:57.110","Text":"It\u0027s 1,000 units times the cost of 9.2 per unit."},{"Start":"05:57.110 ","End":"06:01.170","Text":"Then the 700 units that we sold next,"},{"Start":"06:01.170 ","End":"06:04.495","Text":"they cost 9 currency units each."},{"Start":"06:04.495 ","End":"06:06.460","Text":"If you multiply those 2 figures together,"},{"Start":"06:06.460 ","End":"06:08.935","Text":"you get a cost of 6,300."},{"Start":"06:08.935 ","End":"06:14.340","Text":"Then the next 1,000 units we sold came from the purchase we made during Quarter 2,"},{"Start":"06:14.340 ","End":"06:17.190","Text":"where those units cost 8.8 each."},{"Start":"06:17.190 ","End":"06:21.785","Text":"The cost of those goods sold came to 8,800."},{"Start":"06:21.785 ","End":"06:25.955","Text":"Then finally the 400 units out of our Quarter 3 purchase,"},{"Start":"06:25.955 ","End":"06:28.180","Text":"they cost us 8.6."},{"Start":"06:28.180 ","End":"06:33.520","Text":"If you multiply those 2 figures together, you get 3,440."},{"Start":"06:33.520 ","End":"06:35.875","Text":"If we add all of those up,"},{"Start":"06:35.875 ","End":"06:37.290","Text":"those 4 figures,"},{"Start":"06:37.290 ","End":"06:40.825","Text":"you get to 27,740."},{"Start":"06:40.825 ","End":"06:43.870","Text":"That\u0027s the cost of the goods that were sold."},{"Start":"06:43.870 ","End":"06:49.640","Text":"That will get taken out of the inventory account and will get expensed as cost of sales."},{"Start":"06:49.640 ","End":"06:53.345","Text":"Now we need to know what the inventory on hand is."},{"Start":"06:53.345 ","End":"06:55.820","Text":"To calculate the inventory on hand,"},{"Start":"06:55.820 ","End":"06:59.690","Text":"we need to look at what inventory we had acquired during the year,"},{"Start":"06:59.690 ","End":"07:03.260","Text":"plus obviously the opening balance that we already had in stock,"},{"Start":"07:03.260 ","End":"07:06.680","Text":"and compare it with the inventory units that we sold to"},{"Start":"07:06.680 ","End":"07:10.520","Text":"calculate the number of units that we have on hand at the end of the year."},{"Start":"07:10.520 ","End":"07:15.935","Text":"Let\u0027s look at the 9.2 stock being our opening balance."},{"Start":"07:15.935 ","End":"07:18.530","Text":"Originally had 1,000 units on hand,"},{"Start":"07:18.530 ","End":"07:21.125","Text":"we assume that we sold those first."},{"Start":"07:21.125 ","End":"07:24.325","Text":"That means we\u0027re assuming we\u0027ve got none of that stock left."},{"Start":"07:24.325 ","End":"07:29.210","Text":"Then if we look at the inventory that cost us 9 per unit, well,"},{"Start":"07:29.210 ","End":"07:31.145","Text":"we had 700 purchased,"},{"Start":"07:31.145 ","End":"07:34.535","Text":"but we sold all 700 so nothing was left."},{"Start":"07:34.535 ","End":"07:36.350","Text":"The purchase during Quarter 2,"},{"Start":"07:36.350 ","End":"07:38.120","Text":"which had cost us 8.8,"},{"Start":"07:38.120 ","End":"07:41.765","Text":"we\u0027d bought 1,000 but we\u0027d sold all of them,"},{"Start":"07:41.765 ","End":"07:43.190","Text":"so we have none left."},{"Start":"07:43.190 ","End":"07:45.440","Text":"Then the purchase during Quarter 3,"},{"Start":"07:45.440 ","End":"07:47.285","Text":"we bought 1,100,"},{"Start":"07:47.285 ","End":"07:51.160","Text":"we sold 400 so we have 700 left."},{"Start":"07:51.160 ","End":"07:53.400","Text":"Then the purchase during Quarter 4,"},{"Start":"07:53.400 ","End":"07:59.965","Text":"we purchased 800 and we assume we haven\u0027t sold any of those so we\u0027ve got 800 left."},{"Start":"07:59.965 ","End":"08:03.330","Text":"We are looking at 1,500 units,"},{"Start":"08:03.330 ","End":"08:06.630","Text":"left 700 from the Quarter 3 purchase"},{"Start":"08:06.630 ","End":"08:11.125","Text":"and all of our Quarter 4 purchases are still on hand."},{"Start":"08:11.125 ","End":"08:17.635","Text":"If you have a look here, we\u0027ve got the purchases in units with 4,600 units."},{"Start":"08:17.635 ","End":"08:25.755","Text":"We\u0027ve sold 3,100 units and that\u0027s where we get our 1,500 units leftover."},{"Start":"08:25.755 ","End":"08:29.345","Text":"But what is the cost of that inventory on hand?"},{"Start":"08:29.345 ","End":"08:32.695","Text":"Well, we\u0027ve got none of the 9.2 stock,"},{"Start":"08:32.695 ","End":"08:34.825","Text":"none of the 9 stock,"},{"Start":"08:34.825 ","End":"08:36.785","Text":"none of the 8.8 stock,"},{"Start":"08:36.785 ","End":"08:40.955","Text":"we\u0027ve got 700 units of the 8.6 Stock."},{"Start":"08:40.955 ","End":"08:45.095","Text":"If you multiply the 700 units by the cost per unit of 8.6,"},{"Start":"08:45.095 ","End":"08:54.375","Text":"you get to a cost of 6,020 and then we have 800 units from our Quarter 4 purchase,"},{"Start":"08:54.375 ","End":"09:01.235","Text":"which had cost us 8.4 and so all of that is still in stock, 6,720."},{"Start":"09:01.235 ","End":"09:03.565","Text":"If you add those 2 figures up,"},{"Start":"09:03.565 ","End":"09:08.655","Text":"6,020 and the 6,720, you get 12,740."},{"Start":"09:08.655 ","End":"09:11.450","Text":"There are the 2 answers that we were looking for."},{"Start":"09:11.450 ","End":"09:13.310","Text":"What was the cost of the sale?"},{"Start":"09:13.310 ","End":"09:16.265","Text":"Was 27,740."},{"Start":"09:16.265 ","End":"09:19.175","Text":"What was the inventory on hand at the end of the year?"},{"Start":"09:19.175 ","End":"09:21.815","Text":"12,740."},{"Start":"09:21.815 ","End":"09:23.360","Text":"If you have a look at this table,"},{"Start":"09:23.360 ","End":"09:27.235","Text":"there\u0027s opening balance in our inventory account."},{"Start":"09:27.235 ","End":"09:30.095","Text":"If we add the 4 purchases together,"},{"Start":"09:30.095 ","End":"09:32.615","Text":"which comes to 31,280,"},{"Start":"09:32.615 ","End":"09:34.190","Text":"that would also go on the debit side of"},{"Start":"09:34.190 ","End":"09:36.770","Text":"our inventory account as the purchases for the year,"},{"Start":"09:36.770 ","End":"09:39.500","Text":"then we\u0027ve got the 27,740,"},{"Start":"09:39.500 ","End":"09:43.595","Text":"that\u0027s our cost of sales for the and that gives us a closing balance."},{"Start":"09:43.595 ","End":"09:45.560","Text":"It would look something like this."},{"Start":"09:45.560 ","End":"09:47.885","Text":"Inventory asset account."},{"Start":"09:47.885 ","End":"09:52.895","Text":"We have our opening balance, 9,200."},{"Start":"09:52.895 ","End":"09:56.870","Text":"Just putting in all the purchases as a summary transaction."},{"Start":"09:56.870 ","End":"10:03.350","Text":"Obviously, this is not realistic because we\u0027d recognize each transaction separately,"},{"Start":"10:03.350 ","End":"10:05.810","Text":"but I\u0027m putting them through as 1 total."},{"Start":"10:05.810 ","End":"10:09.650","Text":"Then I would take out the cost of the sales and once again,"},{"Start":"10:09.650 ","End":"10:14.075","Text":"I\u0027m showing it to you as a summary transaction."},{"Start":"10:14.075 ","End":"10:21.185","Text":"That then gives us our closing balance of 12,740 both the totaling goes up,"},{"Start":"10:21.185 ","End":"10:26.020","Text":"but our closing balance brought down 12,740."},{"Start":"10:26.020 ","End":"10:27.920","Text":"There cost of sales,"},{"Start":"10:27.920 ","End":"10:29.390","Text":"you\u0027ll see it\u0027s in brackets here because we\u0027re"},{"Start":"10:29.390 ","End":"10:32.210","Text":"showing the calculations from the perspective of"},{"Start":"10:32.210 ","End":"10:35.420","Text":"our inventory account and that is in"},{"Start":"10:35.420 ","End":"10:39.620","Text":"brackets because it\u0027s on the credit side of our inventory asset account,"},{"Start":"10:39.620 ","End":"10:43.300","Text":"but it does go on the debit side,"},{"Start":"10:43.300 ","End":"10:48.200","Text":"we recognize the other side of the entry, 27,740."},{"Start":"10:48.200 ","End":"10:52.515","Text":"We were asked to calculate what the cost of sales expense was,"},{"Start":"10:52.515 ","End":"10:59.040","Text":"27,740 and what the inventory closing balance was, 12,740."}],"ID":28625},{"Watched":false,"Name":"Goods in transit and on consignment","Duration":"8m 40s","ChapterTopicVideoID":26644,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.890 ","End":"00:04.920","Text":"Hello and welcome to another video presentation in"},{"Start":"00:04.920 ","End":"00:08.925","Text":"this series of inventory brought to you by Proprep."},{"Start":"00:08.925 ","End":"00:16.150","Text":"In this video, we will focus on goods in transit and goods under consignment."},{"Start":"00:16.370 ","End":"00:24.645","Text":"Think about a manufacturer or producer who ships inventory or merchandise to a customer."},{"Start":"00:24.645 ","End":"00:27.630","Text":"Now this could take a long period of time and"},{"Start":"00:27.630 ","End":"00:31.120","Text":"the goods could be in transit at the balance sheet date."},{"Start":"00:31.120 ","End":"00:32.990","Text":"Look at this scenario."},{"Start":"00:32.990 ","End":"00:38.420","Text":"If he has a timeline and we assume that the balance sheet date is,"},{"Start":"00:38.420 ","End":"00:41.675","Text":"for example, the 31st of December."},{"Start":"00:41.675 ","End":"00:45.200","Text":"Now sometime before that, for example,"},{"Start":"00:45.200 ","End":"00:47.990","Text":"on the 1st of December,"},{"Start":"00:47.990 ","End":"00:51.035","Text":"the seller ships these goods."},{"Start":"00:51.035 ","End":"00:55.340","Text":"These goods are in transit for a period of time."},{"Start":"00:55.340 ","End":"00:59.345","Text":"They early arrive at the bias premises."},{"Start":"00:59.345 ","End":"01:02.120","Text":"For example, on the 1st of February."},{"Start":"01:02.120 ","End":"01:03.920","Text":"The question comes about,"},{"Start":"01:03.920 ","End":"01:05.495","Text":"on balance sheet date,"},{"Start":"01:05.495 ","End":"01:08.630","Text":"who should include this inventory in"},{"Start":"01:08.630 ","End":"01:13.160","Text":"transit or these goods in transit as closing inventory?"},{"Start":"01:13.160 ","End":"01:17.600","Text":"Should it be in the accounting records and therefore the balance sheet of the seller?"},{"Start":"01:17.600 ","End":"01:23.525","Text":"Or should it be in the accounting records or the balance sheet of the buyer?"},{"Start":"01:23.525 ","End":"01:25.475","Text":"Looking at goods and consignment."},{"Start":"01:25.475 ","End":"01:32.270","Text":"Think about a manufacturer who supplies goods under consignment."},{"Start":"01:32.270 ","End":"01:37.310","Text":"Manufacturer produces, sells his products through a third party,"},{"Start":"01:37.310 ","End":"01:40.265","Text":"a retailer, typically for a commission."},{"Start":"01:40.265 ","End":"01:43.685","Text":"Again, who should report this inventory?"},{"Start":"01:43.685 ","End":"01:47.540","Text":"In this situation, the time is not the issue,"},{"Start":"01:47.540 ","End":"01:54.305","Text":"but the issue is in whose inventory should the goods on consignment be recorded?"},{"Start":"01:54.305 ","End":"01:58.640","Text":"The seller, typically, a manufacturer will"},{"Start":"01:58.640 ","End":"02:03.320","Text":"send the goods to the buyer typically a retailer."},{"Start":"02:03.320 ","End":"02:05.285","Text":"Now, the issue is,"},{"Start":"02:05.285 ","End":"02:08.390","Text":"these goods are physically sitting over here."},{"Start":"02:08.390 ","End":"02:13.130","Text":"Here\u0027s the inventory, sitting at the premises of the buyer."},{"Start":"02:13.130 ","End":"02:17.960","Text":"But the inventory has not yet been sold to the buyer."},{"Start":"02:17.960 ","End":"02:22.665","Text":"The buyer simply holding it on behalf the seller."},{"Start":"02:22.665 ","End":"02:24.920","Text":"Again, the question comes about,"},{"Start":"02:24.920 ","End":"02:28.865","Text":"should this inventory sit in the counting records of the seller"},{"Start":"02:28.865 ","End":"02:33.875","Text":"or should the inventory sit in the counting records of the buyer?"},{"Start":"02:33.875 ","End":"02:35.689","Text":"For goods in transit,"},{"Start":"02:35.689 ","End":"02:37.999","Text":"there are 2 accounting options."},{"Start":"02:37.999 ","End":"02:43.820","Text":"Ownership can be transferred to the buyer at the premises of the seller, in other words,"},{"Start":"02:43.820 ","End":"02:46.655","Text":"when the goods leave the sellers premises,"},{"Start":"02:46.655 ","End":"02:51.580","Text":"or ownership can be transferred to the buyer at the premises of the buyer,"},{"Start":"02:51.580 ","End":"02:55.520","Text":"in other words, when the goods arrive at the premises of the buyer."},{"Start":"02:55.520 ","End":"03:00.140","Text":"The first arrangement is often called FOB,"},{"Start":"03:00.140 ","End":"03:02.795","Text":"free onboard shipping point."},{"Start":"03:02.795 ","End":"03:06.470","Text":"As I said, the transfer of ownership of"},{"Start":"03:06.470 ","End":"03:11.840","Text":"these goods happens at the premises of the seller at the shipping point."},{"Start":"03:11.840 ","End":"03:16.945","Text":"In this case, the buyer typically arranges and pays for transportation,"},{"Start":"03:16.945 ","End":"03:20.180","Text":"insurance and transit, and other expenses."},{"Start":"03:20.180 ","End":"03:23.210","Text":"This is because the ownership has transferred"},{"Start":"03:23.210 ","End":"03:27.320","Text":"at the point of shipping at the seller\u0027s premises."},{"Start":"03:27.320 ","End":"03:32.495","Text":"The second arrangement is often called FOB destination."},{"Start":"03:32.495 ","End":"03:35.059","Text":"Let\u0027s take a look at an example."},{"Start":"03:35.059 ","End":"03:38.345","Text":"On December 31 of the 20X1 year,"},{"Start":"03:38.345 ","End":"03:42.934","Text":"this company ABD incorporated counts physical inventory,"},{"Start":"03:42.934 ","End":"03:46.465","Text":"and the inventory had a cost of 10,000."},{"Start":"03:46.465 ","End":"03:53.485","Text":"Note that inventory excludes merchandise which costs 1,000,"},{"Start":"03:53.485 ","End":"03:55.580","Text":"and this merchandise was sold to"},{"Start":"03:55.580 ","End":"04:04.990","Text":"a customer FOB shipping point and it is in transit on 31 December 20X1."},{"Start":"04:04.990 ","End":"04:12.830","Text":"Also, the count excludes a shipment of goods purchased by the company ABD,"},{"Start":"04:12.830 ","End":"04:18.035","Text":"from a foreign supplier and its purchase FOB destination."},{"Start":"04:18.035 ","End":"04:21.020","Text":"The cost of these goods is 2,000."},{"Start":"04:21.020 ","End":"04:24.385","Text":"Let us think about how we need to treat"},{"Start":"04:24.385 ","End":"04:29.045","Text":"the inventory in transit in both these situations."},{"Start":"04:29.045 ","End":"04:32.375","Text":"The first batch of goods in transit on fact,"},{"Start":"04:32.375 ","End":"04:34.355","Text":"owned by the customer."},{"Start":"04:34.355 ","End":"04:38.105","Text":"This is because the goods have been shipped, as you\u0027re told."},{"Start":"04:38.105 ","End":"04:43.260","Text":"They\u0027d been shipped FOB shipping point and therefore ownership"},{"Start":"04:43.260 ","End":"04:48.710","Text":"transferred when the good\u0027s left the premises of ABD incorporated."},{"Start":"04:48.710 ","End":"04:52.989","Text":"Therefore, these goods were included in the closing inventory"},{"Start":"04:52.989 ","End":"04:58.865","Text":"of the purchaser and not of the seller in this case ABD."},{"Start":"04:58.865 ","End":"05:03.955","Text":"The second batch of goods are still owned by the foreign supplier."},{"Start":"05:03.955 ","End":"05:05.790","Text":"Why is this the case?"},{"Start":"05:05.790 ","End":"05:08.115","Text":"Well, we were told the second bachelor goods,"},{"Start":"05:08.115 ","End":"05:15.835","Text":"these been shipped FOB destination and they have not yet arrived at our destination."},{"Start":"05:15.835 ","End":"05:19.310","Text":"ABD has not yet taken possession of"},{"Start":"05:19.310 ","End":"05:23.180","Text":"the goods and because the goods are shipped FOB destination,"},{"Start":"05:23.180 ","End":"05:27.530","Text":"they will be included in the inventory of the seller,"},{"Start":"05:27.530 ","End":"05:29.675","Text":"in this case, the foreign supplier."},{"Start":"05:29.675 ","End":"05:32.540","Text":"Therefore, our company ABD,"},{"Start":"05:32.540 ","End":"05:37.115","Text":"simply reports an ending inventory of 10,000."},{"Start":"05:37.115 ","End":"05:42.560","Text":"Both the goods in transit out from ABD and"},{"Start":"05:42.560 ","End":"05:48.575","Text":"the goods in transit into ABD are both excluded for the reasons already stated."},{"Start":"05:48.575 ","End":"05:50.990","Text":"Turn into goods on consignment."},{"Start":"05:50.990 ","End":"05:56.330","Text":"These goods are physically located at the premises of the third party."},{"Start":"05:56.330 ","End":"05:59.440","Text":"As I\u0027ve said before, often a retailer."},{"Start":"05:59.440 ","End":"06:03.320","Text":"The third party doesn\u0027t assume full ownership,"},{"Start":"06:03.320 ","End":"06:07.130","Text":"the goods are therefore still owned the manufacturer."},{"Start":"06:07.130 ","End":"06:13.475","Text":"Therefore, these goods must be reported as closing inventory in the manufacturers books."},{"Start":"06:13.475 ","End":"06:16.715","Text":"Looking at an example of goods on consignment."},{"Start":"06:16.715 ","End":"06:19.550","Text":"We have a company called OBD limited,"},{"Start":"06:19.550 ","End":"06:23.150","Text":"an importer of precision measurement instruments."},{"Start":"06:23.150 ","End":"06:29.130","Text":"In this scenario, OBD is known as the consignor."},{"Start":"06:30.140 ","End":"06:38.015","Text":"The consignor OBD contracted with a company called ELO to sell its products."},{"Start":"06:38.015 ","End":"06:43.205","Text":"In this scenario, ELO is known as the consignee."},{"Start":"06:43.205 ","End":"06:47.740","Text":"So noted consignor and consignee."},{"Start":"06:47.740 ","End":"06:54.260","Text":"We\u0027re told that ELO can return any unsold goods at any time to OBD."},{"Start":"06:54.260 ","End":"06:56.600","Text":"The ownership of the inventory,"},{"Start":"06:56.600 ","End":"07:00.819","Text":"is clearly sitting with the consignor or OBD."},{"Start":"07:00.819 ","End":"07:03.015","Text":"During the 20X1 year,"},{"Start":"07:03.015 ","End":"07:10.870","Text":"the consignor OBD shipped 10,000 identical units costing 120,000 currency units."},{"Start":"07:10.870 ","End":"07:16.490","Text":"At this point, we can look at this and consider the total costs of these goods."},{"Start":"07:16.490 ","End":"07:18.845","Text":"There\u0027re 10,000 units,"},{"Start":"07:18.845 ","End":"07:22.160","Text":"at a cost of a 120,000 currency."},{"Start":"07:22.160 ","End":"07:24.140","Text":"At this point, before we move on,"},{"Start":"07:24.140 ","End":"07:29.780","Text":"we can look at this and say if the currency cost is a 120,000,"},{"Start":"07:29.780 ","End":"07:32.660","Text":"and they are 10,000 units,"},{"Start":"07:32.660 ","End":"07:38.255","Text":"this clearly equals a unit cost of 12 per unit."},{"Start":"07:38.255 ","End":"07:41.580","Text":"The question then asks us for 2 numbers."},{"Start":"07:41.580 ","End":"07:47.600","Text":"How much should OBD the consignor report for its cost of"},{"Start":"07:47.600 ","End":"07:49.970","Text":"goods sold in relation to these goods"},{"Start":"07:49.970 ","End":"07:53.855","Text":"clearly and what is the balance of ending inventory,"},{"Start":"07:53.855 ","End":"07:56.630","Text":"again, in relation to these goods only?"},{"Start":"07:56.630 ","End":"07:58.525","Text":"What is the cost of sales?"},{"Start":"07:58.525 ","End":"08:02.430","Text":"The cost of sales must therefore be the 6,000 units."},{"Start":"08:02.430 ","End":"08:09.305","Text":"These 6,000 units which are sold multiplied by the cost per unit of 12,"},{"Start":"08:09.305 ","End":"08:14.155","Text":"which gives a cost of sales totaling 72,000."},{"Start":"08:14.155 ","End":"08:19.215","Text":"Ending inventory will be the 4,000 units,"},{"Start":"08:19.215 ","End":"08:24.045","Text":"which is the 10,000 units delivered to the consignee,"},{"Start":"08:24.045 ","End":"08:26.295","Text":"less the 6,000 units sold,"},{"Start":"08:26.295 ","End":"08:31.920","Text":"4000 units on hand at the same cost of 12 per unit."},{"Start":"08:31.920 ","End":"08:40.560","Text":"Therefore, the ending inventory will be reported at a total of 48,000 currency units."}],"ID":28626},{"Watched":false,"Name":"Exercise 6 - part 1","Duration":"1m 14s","ChapterTopicVideoID":26364,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.300","Text":"Today we\u0027re doing exercise ABH."},{"Start":"00:03.300 ","End":"00:10.245","Text":"Consider the information below regarding ABH Inc.\u0027s inventory transactions during 20X1."},{"Start":"00:10.245 ","End":"00:15.210","Text":"We\u0027re given information for Quarters 1 through to 4 for the year."},{"Start":"00:15.210 ","End":"00:18.270","Text":"In that regard, we\u0027re given the sales in units,"},{"Start":"00:18.270 ","End":"00:20.250","Text":"the purchases in units,"},{"Start":"00:20.250 ","End":"00:23.700","Text":"and the purchase price per unit."},{"Start":"00:23.700 ","End":"00:29.670","Text":"We are to assume that all purchases took place on the last day of the quarter."},{"Start":"00:29.670 ","End":"00:34.725","Text":"We\u0027re also to assume that no sales take place on the last day of the quarter."},{"Start":"00:34.725 ","End":"00:38.670","Text":"In other words, the sales take place during the quarter."},{"Start":"00:38.670 ","End":"00:43.100","Text":"We are then told that there were 1,000 units at the beginning"},{"Start":"00:43.100 ","End":"00:47.890","Text":"of the year and the cost of each of these units is 9.2."},{"Start":"00:47.890 ","End":"00:52.820","Text":"ABH reports quarterly and so uses the perpetual system on"},{"Start":"00:52.820 ","End":"00:57.950","Text":"a quarterly basis and uses First-In, First-Out."},{"Start":"00:57.950 ","End":"01:02.240","Text":"We are to calculate the ending inventory and the cost of goods"},{"Start":"01:02.240 ","End":"01:08.105","Text":"sold for each quarter and on an annual basis."},{"Start":"01:08.105 ","End":"01:11.630","Text":"Remember to use the company\u0027s quarterly perpetual system"},{"Start":"01:11.630 ","End":"01:14.940","Text":"and the First-in, First-out method."}],"ID":28627},{"Watched":false,"Name":"Exercise 6 - part 2","Duration":"6m 49s","ChapterTopicVideoID":26365,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.540","Text":"This is the solution to exercise ABH."},{"Start":"00:03.540 ","End":"00:05.430","Text":"Now before we start,"},{"Start":"00:05.430 ","End":"00:12.510","Text":"I\u0027d like to first compare the previous exercise ABG with this exercise ABH."},{"Start":"00:12.510 ","End":"00:14.625","Text":"The figures are identical,"},{"Start":"00:14.625 ","End":"00:19.485","Text":"so it\u0027s important to identify what the difference is between these two solutions."},{"Start":"00:19.485 ","End":"00:24.670","Text":"The following table represents the solution to exercise ABG."},{"Start":"00:24.670 ","End":"00:27.675","Text":"Now, in exercise ABG,"},{"Start":"00:27.675 ","End":"00:30.135","Text":"we were reporting annually."},{"Start":"00:30.135 ","End":"00:32.325","Text":"Although as you can see from the table here,"},{"Start":"00:32.325 ","End":"00:33.810","Text":"we\u0027ve got our opening balance,"},{"Start":"00:33.810 ","End":"00:37.305","Text":"and then we know what the purchases were in each of the quarters."},{"Start":"00:37.305 ","End":"00:41.610","Text":"The cost of the sales was worked out in total and"},{"Start":"00:41.610 ","End":"00:46.355","Text":"thus we do not know what the cost of the sales were per quarter."},{"Start":"00:46.355 ","End":"00:49.610","Text":"We\u0027ve got 9,200, but that was not quarter 1."},{"Start":"00:49.610 ","End":"00:52.335","Text":"We\u0027ve got 6,300 that was not quarter 2."},{"Start":"00:52.335 ","End":"00:57.420","Text":"We got 8,800 is not quarter 3 and the 3,440 was not quarter 4."},{"Start":"00:57.420 ","End":"01:01.970","Text":"Instead, those amounts were simply the values of"},{"Start":"01:01.970 ","End":"01:06.950","Text":"the oldest stock that we assume we sold through to the newest stocks."},{"Start":"01:06.950 ","End":"01:09.140","Text":"Remember, when you use first-in,"},{"Start":"01:09.140 ","End":"01:12.635","Text":"first-out you\u0027re assuming that you\u0027re selling your older stock first."},{"Start":"01:12.635 ","End":"01:17.930","Text":"The oldest stock that we had was the 1,000 units that we had on hand at the beginning of"},{"Start":"01:17.930 ","End":"01:24.795","Text":"the period which was 9.2 currency units per unit of inventory that gave us at 9,200."},{"Start":"01:24.795 ","End":"01:28.090","Text":"Then we went to the next older stock,"},{"Start":"01:28.090 ","End":"01:29.330","Text":"in other words, slightly newer,"},{"Start":"01:29.330 ","End":"01:35.855","Text":"700 units at 9 currency units per unit of inventory that gave us 6,300."},{"Start":"01:35.855 ","End":"01:39.230","Text":"Then we went on to the next newest stock,"},{"Start":"01:39.230 ","End":"01:44.820","Text":"which was 1,000 units at a cost of 8.8 currency units per unit of inventory,"},{"Start":"01:44.820 ","End":"01:47.745","Text":"that give us 8,800 currency units."},{"Start":"01:47.745 ","End":"01:51.980","Text":"Then to make up the 3,100 units that we had actually sold,"},{"Start":"01:51.980 ","End":"01:56.725","Text":"we then only needed to sell 400 units of"},{"Start":"01:56.725 ","End":"02:04.910","Text":"1,100 units of inventory that we had purchased at 8.6 currency units per unit,"},{"Start":"02:04.910 ","End":"02:08.240","Text":"that gave us a 3,440."},{"Start":"02:08.240 ","End":"02:11.480","Text":"These currency units that you see under the cost of"},{"Start":"02:11.480 ","End":"02:15.905","Text":"sales column are not the cost of sales per quarter."},{"Start":"02:15.905 ","End":"02:18.800","Text":"In order for us to do the solution to ABH,"},{"Start":"02:18.800 ","End":"02:22.714","Text":"which is where we\u0027re going to be recording quarterly,"},{"Start":"02:22.714 ","End":"02:26.360","Text":"we need to know in which quarter each of those cells"},{"Start":"02:26.360 ","End":"02:30.820","Text":"occurred and that was not taken into account in this table here."},{"Start":"02:30.820 ","End":"02:33.050","Text":"Let me just read through this for you."},{"Start":"02:33.050 ","End":"02:36.755","Text":"Thus, we did not need because we were reporting annually,"},{"Start":"02:36.755 ","End":"02:42.250","Text":"we did not need to take careful note of in which quarter a sale occurred."},{"Start":"02:42.250 ","End":"02:45.165","Text":"In an exercise ABH however,"},{"Start":"02:45.165 ","End":"02:51.530","Text":"where we are now reporting quarterly we will need to know how many units were sold in"},{"Start":"02:51.530 ","End":"02:54.980","Text":"each quarter and that\u0027s so that we can calculate the cost of"},{"Start":"02:54.980 ","End":"03:00.370","Text":"the sales and the inventory closing balance for each of those quarters."},{"Start":"03:00.370 ","End":"03:02.550","Text":"Let\u0027s look at just quarter 1,"},{"Start":"03:02.550 ","End":"03:05.930","Text":"to begin with we\u0027ve got a column there for the opening balance and"},{"Start":"03:05.930 ","End":"03:10.280","Text":"the purchases and sales in units of our inventory."},{"Start":"03:10.280 ","End":"03:14.210","Text":"We start with an opening balance of 1,000 units."},{"Start":"03:14.210 ","End":"03:18.050","Text":"The next transaction that took place or the first transaction that"},{"Start":"03:18.050 ","End":"03:21.725","Text":"took place in quarter 1 was the sales."},{"Start":"03:21.725 ","End":"03:24.215","Text":"If you have a look in the question,"},{"Start":"03:24.215 ","End":"03:27.035","Text":"you can see that the sales take place during the quarter."},{"Start":"03:27.035 ","End":"03:29.990","Text":"We\u0027re told this in a roundabout way because"},{"Start":"03:29.990 ","End":"03:33.065","Text":"we told that the sales do not take place in the last day of the quarter."},{"Start":"03:33.065 ","End":"03:36.060","Text":"That means it happens during the quarter,"},{"Start":"03:36.060 ","End":"03:39.830","Text":"and that then leaves us with 200 units leftover."},{"Start":"03:39.830 ","End":"03:42.830","Text":"Then the next transaction that we know takes place is"},{"Start":"03:42.830 ","End":"03:46.070","Text":"the purchases and we know that it\u0027s chronologically"},{"Start":"03:46.070 ","End":"03:50.450","Text":"the second transaction that takes place in the quarter because we are told"},{"Start":"03:50.450 ","End":"03:55.870","Text":"that the purchases for quarter 1 take place on the last day of quarter 1."},{"Start":"03:55.870 ","End":"04:01.250","Text":"That then brings us to the end of quarter 1 we got 900 units in stock."},{"Start":"04:01.250 ","End":"04:04.175","Text":"Then we take into account the unit cost."},{"Start":"04:04.175 ","End":"04:08.810","Text":"Now the reason we put the unit cost in is because we are trying to work out the cost of"},{"Start":"04:08.810 ","End":"04:14.075","Text":"the purchases across to the goods sold and then the cost of our inventory balance."},{"Start":"04:14.075 ","End":"04:19.250","Text":"If you look at the equation you\u0027ll see that we\u0027ve got 1,000 units on hand at"},{"Start":"04:19.250 ","End":"04:21.860","Text":"the beginning of quarter 1 and each of those units have been"},{"Start":"04:21.860 ","End":"04:24.785","Text":"purchased for 9.2 currency units."},{"Start":"04:24.785 ","End":"04:30.290","Text":"That means that our inventory opening balance was measured at 9,200 currency units."},{"Start":"04:30.290 ","End":"04:33.845","Text":"The next transaction that took place was the sale of inventory,"},{"Start":"04:33.845 ","End":"04:36.715","Text":"there were 800 units that were sold."},{"Start":"04:36.715 ","End":"04:38.970","Text":"Now, we\u0027re using first-In,"},{"Start":"04:38.970 ","End":"04:41.835","Text":"first-out we\u0027ve only got one stock,"},{"Start":"04:41.835 ","End":"04:47.575","Text":"the entire stoke is 9.2 currency unit stock."},{"Start":"04:47.575 ","End":"04:52.550","Text":"It was a simple case of calculating the cost of sales the 800 units were"},{"Start":"04:52.550 ","End":"04:58.710","Text":"clearly purchased originally at 9.2 so the cost of the sale was 7,360."},{"Start":"04:58.710 ","End":"05:03.980","Text":"That then means we\u0027ve got 200 units leftover at 9.2 each meaning that"},{"Start":"05:03.980 ","End":"05:09.995","Text":"our inventory balance at this moment in time after the sales was 1,840."},{"Start":"05:09.995 ","End":"05:12.395","Text":"Then on the last day of the quarter 1,"},{"Start":"05:12.395 ","End":"05:15.350","Text":"we purchased 700 units and if you look at the question,"},{"Start":"05:15.350 ","End":"05:20.765","Text":"you\u0027ll see that we bought 700 units at 9 currency units per unit."},{"Start":"05:20.765 ","End":"05:26.405","Text":"That means that the cost of the purchases was 6,300."},{"Start":"05:26.405 ","End":"05:31.190","Text":"Now if we look at the inventory balance immediately before the purchase,"},{"Start":"05:31.190 ","End":"05:38.565","Text":"it was 1,840 and we\u0027ve just purchased 6,300 worth of inventory."},{"Start":"05:38.565 ","End":"05:45.155","Text":"We add those two amounts together and we get a figure of 8,140,"},{"Start":"05:45.155 ","End":"05:47.210","Text":"so that is our closing balance."},{"Start":"05:47.210 ","End":"05:52.040","Text":"If you look carefully our balance is made up of the 200 units that we had purchased for"},{"Start":"05:52.040 ","End":"05:58.850","Text":"9.2 plus the further 700 units that we had bought for 9."},{"Start":"05:58.850 ","End":"06:05.070","Text":"There it is the 200 units at 920 and the 700 units times 9."},{"Start":"06:05.120 ","End":"06:08.810","Text":"Now that was just part of question because we are asked to"},{"Start":"06:08.810 ","End":"06:11.600","Text":"calculate not only the inventory balance at"},{"Start":"06:11.600 ","End":"06:14.030","Text":"the end of quarter 1 but also the cost of goods"},{"Start":"06:14.030 ","End":"06:17.785","Text":"sold that would appear in our quarter 1 financial statements."},{"Start":"06:17.785 ","End":"06:19.370","Text":"The cost of the goods sold,"},{"Start":"06:19.370 ","End":"06:22.400","Text":"you can see in the second to last column here is"},{"Start":"06:22.400 ","End":"06:27.440","Text":"7,360 so I\u0027m just going to put the total answers at the bottom."},{"Start":"06:27.440 ","End":"06:29.570","Text":"End of quarter 1,"},{"Start":"06:29.570 ","End":"06:33.765","Text":"we\u0027ve got the cost of sales of 7,360,"},{"Start":"06:33.765 ","End":"06:36.585","Text":"that\u0027s what we would show in the income statement,"},{"Start":"06:36.585 ","End":"06:40.160","Text":"and here is our inventory closing balance at the end of"},{"Start":"06:40.160 ","End":"06:45.330","Text":"quarter 1 and this would appear in the end of quarter 1 balance sheet."},{"Start":"06:45.370 ","End":"06:49.540","Text":"Let\u0027s move on now to quarter 2."}],"ID":28628},{"Watched":false,"Name":"Exercise 6 - Part 3","Duration":"4m 4s","ChapterTopicVideoID":26366,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.445","Text":"Now let\u0027s look at quarter 2."},{"Start":"00:02.445 ","End":"00:08.955","Text":"Our opening balance in quarter 2 is going to be the quarter 1 closing balance."},{"Start":"00:08.955 ","End":"00:11.613","Text":"Let\u0027s start with that as our phase line item,"},{"Start":"00:11.613 ","End":"00:16.405","Text":"and then let\u0027s go back to quarter 1 to pick up the figures of the closing balance."},{"Start":"00:16.405 ","End":"00:22.235","Text":"The closing balance at the end of quarter 1 was 7360 for the cost of goods sold,"},{"Start":"00:22.235 ","End":"00:26.080","Text":"and was 8140 for the inventory balance."},{"Start":"00:26.080 ","End":"00:33.275","Text":"We put that in as our quarter 1 closing balance being our quarter 2 opening balance."},{"Start":"00:33.275 ","End":"00:36.035","Text":"Notice how in the inventory balance,"},{"Start":"00:36.035 ","End":"00:41.060","Text":"we don\u0027t simply record the opening balance at 8140."},{"Start":"00:41.060 ","End":"00:42.815","Text":"We show the detail,"},{"Start":"00:42.815 ","End":"00:45.890","Text":"and this is because we are using the first-in, first-out method,"},{"Start":"00:45.890 ","End":"00:48.680","Text":"so when next we sell inventory,"},{"Start":"00:48.680 ","End":"00:53.360","Text":"we have a record of which is the oldest stock and which is the newest."},{"Start":"00:53.360 ","End":"00:55.805","Text":"I\u0027ve written the oldest stock first,"},{"Start":"00:55.805 ","End":"01:04.130","Text":"the 200 units at 9.2 and the 700 units which had cost us 9 currency units each."},{"Start":"01:04.130 ","End":"01:08.090","Text":"That was in chronological order from left to right."},{"Start":"01:08.090 ","End":"01:11.765","Text":"Then the next thing that happened in quarter 2 with the sales,"},{"Start":"01:11.765 ","End":"01:13.925","Text":"we sold 600 units."},{"Start":"01:13.925 ","End":"01:16.130","Text":"Because we\u0027re using first-in and first-out,"},{"Start":"01:16.130 ","End":"01:19.370","Text":"we would have sold 200 units first,"},{"Start":"01:19.370 ","End":"01:21.020","Text":"because that was our oldest stock."},{"Start":"01:21.020 ","End":"01:24.530","Text":"Then bearing in mind we selling 600,"},{"Start":"01:24.530 ","End":"01:29.780","Text":"so we\u0027ve sold 200 of the oldest stock which had cost us 9.2 each."},{"Start":"01:29.780 ","End":"01:32.300","Text":"We\u0027re still looking for 400 units,"},{"Start":"01:32.300 ","End":"01:35.600","Text":"which would have come out of the second oldest stock,"},{"Start":"01:35.600 ","End":"01:40.880","Text":"which was purchased at 9 currency units per unit of inventory."},{"Start":"01:40.880 ","End":"01:43.340","Text":"You can see how we worked on our cost of sales,"},{"Start":"01:43.340 ","End":"01:45.439","Text":"200 units at 9.2,"},{"Start":"01:45.439 ","End":"01:48.785","Text":"that was the old stock and then of the newest stock,"},{"Start":"01:48.785 ","End":"01:51.620","Text":"we sold 400 units."},{"Start":"01:51.620 ","End":"01:54.695","Text":"That\u0027s how we get to the 5440,"},{"Start":"01:54.695 ","End":"02:00.730","Text":"200 by 9.2 plus 400 by 9."},{"Start":"02:00.730 ","End":"02:04.700","Text":"Our closing balance at the moment is 300 units"},{"Start":"02:04.700 ","End":"02:10.145","Text":"and the closing balance in terms of currency units is 2,700,"},{"Start":"02:10.145 ","End":"02:13.060","Text":"that\u0027s the opening balance of 8140,"},{"Start":"02:13.060 ","End":"02:17.410","Text":"list 5440 in terms of our customer sales."},{"Start":"02:17.410 ","End":"02:23.390","Text":"Alternatively, you can work it out as follows: where we had 200 units at 9.2,"},{"Start":"02:23.390 ","End":"02:26.000","Text":"but we\u0027ve sold all of that stocks and we don\u0027t"},{"Start":"02:26.000 ","End":"02:29.975","Text":"have any further inventory that had costs us 9.2."},{"Start":"02:29.975 ","End":"02:35.460","Text":"Then of the stock of inventory that had cost us 9 currency units per unit,"},{"Start":"02:35.460 ","End":"02:38.450","Text":"we had 700 units of those originally,"},{"Start":"02:38.450 ","End":"02:40.250","Text":"but we sold 400 of them."},{"Start":"02:40.250 ","End":"02:43.670","Text":"That means 700 minus the 400,"},{"Start":"02:43.670 ","End":"02:50.940","Text":"we now have only 300 of those units that had cost us 9 currency units each."},{"Start":"02:50.940 ","End":"02:54.795","Text":"Three hundred by 9 gives you the 2700."},{"Start":"02:54.795 ","End":"02:57.860","Text":"There are 2 ways of calculating that balance."},{"Start":"02:57.860 ","End":"03:00.860","Text":"The next transaction that happened chronologically was"},{"Start":"03:00.860 ","End":"03:04.040","Text":"the purchases that happened on the last day of the quarter."},{"Start":"03:04.040 ","End":"03:09.125","Text":"We were told we purchased 1,000 units at 8.8 each,"},{"Start":"03:09.125 ","End":"03:12.920","Text":"so that cost us 8,800 currency units in total so"},{"Start":"03:12.920 ","End":"03:17.570","Text":"our closing balance is now 11,500 currency units,"},{"Start":"03:17.570 ","End":"03:20.795","Text":"1,300 in unit terms."},{"Start":"03:20.795 ","End":"03:23.900","Text":"The 11,500 is calculated as"},{"Start":"03:23.900 ","End":"03:31.070","Text":"the previous inventory balance plus the purchases that gives us 11,500."},{"Start":"03:31.070 ","End":"03:38.070","Text":"Alternatively, you look at here we have 300 units at 9 currency units each."},{"Start":"03:38.070 ","End":"03:42.930","Text":"Now, we\u0027ve purchased a further 1,000 units at 8.8 each."},{"Start":"03:42.930 ","End":"03:48.230","Text":"We show that one separately and consecutively as well,"},{"Start":"03:48.230 ","End":"03:51.710","Text":"that\u0027s very important because we need to know which one is the oldest stock and which is"},{"Start":"03:51.710 ","End":"03:56.105","Text":"the newest stock so that we can determine the cost of the next sale."},{"Start":"03:56.105 ","End":"03:59.445","Text":"The 300 at 9 is the oldest stock,"},{"Start":"03:59.445 ","End":"04:02.190","Text":"and then the 1,000 at 8.8,"},{"Start":"04:02.190 ","End":"04:04.480","Text":"is the newest stock."}],"ID":28629},{"Watched":false,"Name":"Exercise 6 - Part 4","Duration":"4m 27s","ChapterTopicVideoID":26367,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.355","Text":"Now let\u0027s look at Quarter 3."},{"Start":"00:02.355 ","End":"00:08.505","Text":"Quarter 3\u0027s opening balance is Quarter 2\u0027s closing balance. Let\u0027s pop that in."},{"Start":"00:08.505 ","End":"00:13.710","Text":"Quarter 2 closing balance and then go back to Quarter 2 to pick those figures up."},{"Start":"00:13.710 ","End":"00:16.560","Text":"At the bottom, you can see Quarter 2 closing balance."},{"Start":"00:16.560 ","End":"00:21.920","Text":"We had 1,300 units that cost 11,500,"},{"Start":"00:21.920 ","End":"00:27.940","Text":"and our cost of goods sold had accumulated to this point to 12,800."},{"Start":"00:27.940 ","End":"00:30.770","Text":"We put those figures in the 1,300 units,"},{"Start":"00:30.770 ","End":"00:36.020","Text":"the 11,500, which is the cost of those units, and the 12,800."},{"Start":"00:36.020 ","End":"00:39.260","Text":"Notice that the detail regarding the inventory balance of"},{"Start":"00:39.260 ","End":"00:44.700","Text":"11,500 being made up of the 300 units purchased at 9 currency units,"},{"Start":"00:44.700 ","End":"00:51.945","Text":"each and 1,000 units at the 880 currency units each must be documented."},{"Start":"00:51.945 ","End":"00:57.394","Text":"Chronologically, the next transaction is a sale."},{"Start":"00:57.394 ","End":"01:00.745","Text":"We sold 900 units in Quarter 3."},{"Start":"01:00.745 ","End":"01:02.340","Text":"Now using first-in,"},{"Start":"01:02.340 ","End":"01:05.520","Text":"first-out, we take the oldest stock first."},{"Start":"01:05.520 ","End":"01:08.780","Text":"We had 300 units at 9 currency units each."},{"Start":"01:08.780 ","End":"01:10.475","Text":"That is our oldest stock."},{"Start":"01:10.475 ","End":"01:15.275","Text":"We assume that those older units are sold first."},{"Start":"01:15.275 ","End":"01:20.735","Text":"That means that the remaining 600 units to make up the 900 units that were sold,"},{"Start":"01:20.735 ","End":"01:26.300","Text":"must come out of the 1,000 units that we\u0027d purchased at 880 each."},{"Start":"01:26.300 ","End":"01:32.260","Text":"That means our cost of our goods sold is 300 at the 9."},{"Start":"01:32.260 ","End":"01:37.170","Text":"Currency units each and the 600 at the 880 each."},{"Start":"01:37.170 ","End":"01:38.885","Text":"If you add that up,"},{"Start":"01:38.885 ","End":"01:43.040","Text":"you get 7,980 as our cost of sales."},{"Start":"01:43.040 ","End":"01:46.460","Text":"If we had 1,300 units and we sold 900,"},{"Start":"01:46.460 ","End":"01:50.525","Text":"it means we now have 400 units in stock."},{"Start":"01:50.525 ","End":"01:54.215","Text":"Now, in terms of what is the value of the stock leftover?"},{"Start":"01:54.215 ","End":"01:58.130","Text":"Well, we have had 300 units at 9 each,"},{"Start":"01:58.130 ","End":"01:59.840","Text":"but we\u0027ve sold those now."},{"Start":"01:59.840 ","End":"02:04.355","Text":"Those don\u0027t exist and of the 1,000 units at 880 each,"},{"Start":"02:04.355 ","End":"02:06.730","Text":"we\u0027ve sold 600 of those."},{"Start":"02:06.730 ","End":"02:10.740","Text":"That must mean that we\u0027ve got 400 left over."},{"Start":"02:10.740 ","End":"02:16.430","Text":"The 400 units are the 400 units at 880 each,"},{"Start":"02:16.430 ","End":"02:19.235","Text":"and that gives us 3,520."},{"Start":"02:19.235 ","End":"02:23.525","Text":"You can also work out the 3,520 by taking the"},{"Start":"02:23.525 ","End":"02:29.045","Text":"11,500 and subtracting the 7,980 cost of sales."},{"Start":"02:29.045 ","End":"02:32.569","Text":"The second transaction that happens in Quarter 3 is the purchase."},{"Start":"02:32.569 ","End":"02:35.990","Text":"The purchase takes place on the last day of Quarter 3."},{"Start":"02:35.990 ","End":"02:40.260","Text":"We were told we purchased 1,100 units at 860 each."},{"Start":"02:40.260 ","End":"02:44.930","Text":"That comes to 9,460 being the cost of the purchase."},{"Start":"02:44.930 ","End":"02:49.580","Text":"That means we now have 1,500 units in stock,"},{"Start":"02:49.580 ","End":"02:53.890","Text":"which is the 400 we had before the purchase plus the purchase of 1,100."},{"Start":"02:53.890 ","End":"02:59.480","Text":"Our inventory closing balance is now sitting at 12,980. How do we get that?"},{"Start":"02:59.480 ","End":"03:02.240","Text":"Well, that\u0027s the 400 at 880 that we had before we"},{"Start":"03:02.240 ","End":"03:08.360","Text":"purchased and we now add the 1,100 that we purchased at 860."},{"Start":"03:08.360 ","End":"03:12.185","Text":"If you add those 2 together, you get 12,980."},{"Start":"03:12.185 ","End":"03:20.135","Text":"Alternatively, the 12,980 can be calculated by taking 3520 plus 9460."},{"Start":"03:20.135 ","End":"03:23.435","Text":"That gives us 12,980."},{"Start":"03:23.435 ","End":"03:27.260","Text":"Now that 12,980 is the solution to part of"},{"Start":"03:27.260 ","End":"03:28.880","Text":"this question because we were asked for"},{"Start":"03:28.880 ","End":"03:32.150","Text":"the inventory balance at the end of Quarter 3 will that is it,"},{"Start":"03:32.150 ","End":"03:35.560","Text":"but we\u0027re also asked for the cost of goods sold for Quarter 3."},{"Start":"03:35.560 ","End":"03:39.770","Text":"The cost of goods sold for Quarter 3 is 7,980."},{"Start":"03:39.770 ","End":"03:42.920","Text":"That is the cost of the sales for Quarter 3."},{"Start":"03:42.920 ","End":"03:45.410","Text":"However, if you\u0027re recording the cost of"},{"Start":"03:45.410 ","End":"03:49.100","Text":"sales that had accumulated to the end of Quarter 3,"},{"Start":"03:49.100 ","End":"03:53.120","Text":"it would be 20780 being the"},{"Start":"03:53.120 ","End":"03:56.060","Text":"12,800 cost of sales at"},{"Start":"03:56.060 ","End":"04:01.490","Text":"the beginning of Quarter 3 plus the Quarter 3\u0027s cost of sales of 7,980,"},{"Start":"04:01.490 ","End":"04:08.135","Text":"giving us the running total of the cost of sales to date of 20780."},{"Start":"04:08.135 ","End":"04:12.680","Text":"Our inventory balance of the inner Quarter 3 is 12,980."},{"Start":"04:12.680 ","End":"04:16.885","Text":"The cost of goods sold in Quarter 3 is 7,980,"},{"Start":"04:16.885 ","End":"04:21.200","Text":"but the cost of goods sold that it accumulated to the end of Quarter 3,"},{"Start":"04:21.200 ","End":"04:25.280","Text":"if you are reporting that would be 20,780."},{"Start":"04:25.280 ","End":"04:27.990","Text":"Now let\u0027s try Quarter 4."}],"ID":28630},{"Watched":false,"Name":"Exercise 6 - Part 5","Duration":"4m 33s","ChapterTopicVideoID":26351,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.430","Text":"Now let\u0027s look at quarter 4."},{"Start":"00:02.430 ","End":"00:07.695","Text":"The opening balance in quarter 4 is the closing balance at the end of quarter 3."},{"Start":"00:07.695 ","End":"00:11.190","Text":"We pop that in, quarter 3 closing balance"},{"Start":"00:11.190 ","End":"00:14.985","Text":"and then we go back to quarter 3 to pick up the figures."},{"Start":"00:14.985 ","End":"00:21.255","Text":"Here\u0027s the quarter 3 table and here are the closing balances: 1,500 units,"},{"Start":"00:21.255 ","End":"00:27.375","Text":"20,780 being our cost of goods sold cumulatively to the end of quarter 3,"},{"Start":"00:27.375 ","End":"00:31.155","Text":"and then we have our inventory balance of 12,980."},{"Start":"00:31.155 ","End":"00:36.990","Text":"The detail of what makes up that 12,980 in terms of the old stock,"},{"Start":"00:36.990 ","End":"00:38.160","Text":"the 400 units,"},{"Start":"00:38.160 ","End":"00:39.585","Text":"and the newest stock,"},{"Start":"00:39.585 ","End":"00:44.395","Text":"the 1,100 units, is very important to carry forward as well."},{"Start":"00:44.395 ","End":"00:50.650","Text":"You put all that information in the 1,500 units, the 20,780,"},{"Start":"00:50.650 ","End":"00:53.945","Text":"cost of goods sold cumulatively to date,"},{"Start":"00:53.945 ","End":"00:59.630","Text":"and then we have the inventory balance of 12,980 with the very important detail."},{"Start":"00:59.630 ","End":"01:04.040","Text":"That detail obviously is important because we\u0027re using first-in-first-out."},{"Start":"01:04.040 ","End":"01:06.769","Text":"The next transaction that happened was sales."},{"Start":"01:06.769 ","End":"01:10.040","Text":"The sales in quarter 4 were 800 units."},{"Start":"01:10.040 ","End":"01:13.820","Text":"To work out which units were sold,"},{"Start":"01:13.820 ","End":"01:16.415","Text":"we look at the oldest stock first."},{"Start":"01:16.415 ","End":"01:19.850","Text":"We sold 400 units of the oldest stock,"},{"Start":"01:19.850 ","End":"01:22.510","Text":"which was purchased at 880 each,"},{"Start":"01:22.510 ","End":"01:26.245","Text":"and then the remaining 400 must have come from the newest stock,"},{"Start":"01:26.245 ","End":"01:29.375","Text":"which was purchased at 860 each."},{"Start":"01:29.375 ","End":"01:31.020","Text":"This is how we worked it out,"},{"Start":"01:31.020 ","End":"01:36.640","Text":"400 at 80 and then the 400 at 8.6."},{"Start":"01:36.640 ","End":"01:40.870","Text":"That gives us the 6,960 cost of goods sold."},{"Start":"01:40.870 ","End":"01:44.260","Text":"We had 1,500 units in stock, we\u0027ve sold 800."},{"Start":"01:44.260 ","End":"01:46.945","Text":"That means we\u0027ve got 700 units leftover."},{"Start":"01:46.945 ","End":"01:51.730","Text":"Now, to work out the balance of our inventory in terms of currency,"},{"Start":"01:51.730 ","End":"01:58.315","Text":"we could take the 12,980 and subtract the cost of goods sold, the 6,960."},{"Start":"01:58.315 ","End":"02:02.835","Text":"We subtract the two and we get to 6,020."},{"Start":"02:02.835 ","End":"02:06.560","Text":"However, that 6,020, we need to know what the detail is."},{"Start":"02:06.560 ","End":"02:09.635","Text":"Well, we had 400 units at 880,"},{"Start":"02:09.635 ","End":"02:10.850","Text":"which we\u0027ve now sold,"},{"Start":"02:10.850 ","End":"02:16.575","Text":"so that\u0027s gone, and then we did have 1,100 that we had purchased at 860 each."},{"Start":"02:16.575 ","End":"02:18.600","Text":"We\u0027ve sold 400 of those,"},{"Start":"02:18.600 ","End":"02:27.444","Text":"so that means we\u0027ve got 1,100 minus 400 gives us 700 units of the 860 stock leftover."},{"Start":"02:27.444 ","End":"02:30.020","Text":"If you multiply those two figures together,"},{"Start":"02:30.020 ","End":"02:32.570","Text":"you should get the 6,020."},{"Start":"02:32.570 ","End":"02:34.985","Text":"The next transaction was the purchase,"},{"Start":"02:34.985 ","End":"02:37.760","Text":"which took place in the last day of quarter 4."},{"Start":"02:37.760 ","End":"02:42.530","Text":"There was 800 units and we were told we had purchased those for 840 each."},{"Start":"02:42.530 ","End":"02:48.345","Text":"800 by 8.4 gives us 6,720."},{"Start":"02:48.345 ","End":"02:53.015","Text":"That means at the end of quarter 4 and end of the year,"},{"Start":"02:53.015 ","End":"02:57.725","Text":"we have a closing inventory balance of 12,740,"},{"Start":"02:57.725 ","End":"03:04.475","Text":"which was the previous balance of 6,020 plus the purchase of 6,720."},{"Start":"03:04.475 ","End":"03:07.820","Text":"That gives us the 12,740."},{"Start":"03:07.820 ","End":"03:10.675","Text":"However, we must also put the detail in."},{"Start":"03:10.675 ","End":"03:18.660","Text":"It was the 700 units at 860 that we did have plus the 800 at the 8.4 cost,"},{"Start":"03:18.660 ","End":"03:25.610","Text":"so we add those two figures together and that should also give us the 12,740."},{"Start":"03:25.610 ","End":"03:32.020","Text":"That\u0027s the value of the 1,500 units that we have at the end of the year."},{"Start":"03:32.020 ","End":"03:34.580","Text":"We were asked for the inventory balance at"},{"Start":"03:34.580 ","End":"03:41.100","Text":"the end of quarter 4 and we were also asked for the cost of goods sold for quarter 4."},{"Start":"03:41.100 ","End":"03:46.650","Text":"The 6,960 is the cost of the goods sold in quarter 4."},{"Start":"03:46.650 ","End":"03:50.160","Text":"The 6,960, I\u0027ll write this one again,"},{"Start":"03:50.160 ","End":"03:57.680","Text":"is the quarter 4 cost of sales and the 12,740 is the quarter 4\u0027s closing balance."},{"Start":"03:57.680 ","End":"04:02.870","Text":"However, we were asked for the annual figures as well."},{"Start":"04:02.870 ","End":"04:07.100","Text":"The annual figures would then be the 12,740"},{"Start":"04:07.100 ","End":"04:10.850","Text":"is obviously also the annual inventory closing balance,"},{"Start":"04:10.850 ","End":"04:13.385","Text":"not just the quarter 4 closing balance,"},{"Start":"04:13.385 ","End":"04:18.755","Text":"and the annual cost of goods sold is the 27,740."},{"Start":"04:18.755 ","End":"04:22.485","Text":"That\u0027s annual, and this is quarter 4."},{"Start":"04:22.485 ","End":"04:25.730","Text":"This is not only quarter 4\u0027s inventory balance,"},{"Start":"04:25.730 ","End":"04:30.605","Text":"but obviously also the annual inventory balance."},{"Start":"04:30.605 ","End":"04:33.870","Text":"I hope that\u0027s helped."}],"ID":28631},{"Watched":false,"Name":"Exercise 7 - part 1","Duration":"1m 38s","ChapterTopicVideoID":26352,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.775","Text":"Today\u0027s exercise is ABI."},{"Start":"00:02.775 ","End":"00:09.765","Text":"Consider the information below regarding ABI Inc.\u0027 s inventory transactions during 20X1."},{"Start":"00:09.765 ","End":"00:13.245","Text":"We\u0027re given information for 4 quarters of the year."},{"Start":"00:13.245 ","End":"00:16.965","Text":"In this regard, we\u0027re told what the sales are in terms of units,"},{"Start":"00:16.965 ","End":"00:22.720","Text":"but the purchases are in terms of units and what the purchase prices per unit."},{"Start":"00:22.720 ","End":"00:28.630","Text":"We\u0027re then asked to assume that all purchases take place on the last day of the quarter."},{"Start":"00:28.630 ","End":"00:33.490","Text":"In other words, there are no purchases that take place during the quarter."},{"Start":"00:33.490 ","End":"00:39.290","Text":"We\u0027re then asked to assume that no sales take place on the last day of the quarter."},{"Start":"00:39.290 ","End":"00:43.370","Text":"In other words, all the sales are taking place during the quarter,"},{"Start":"00:43.370 ","End":"00:45.470","Text":"but just not on the last day."},{"Start":"00:45.470 ","End":"00:49.610","Text":"There were 1,000 units at the beginning of the year and the cost of"},{"Start":"00:49.610 ","End":"00:54.010","Text":"each of these units is 9.2 currency units."},{"Start":"00:54.010 ","End":"00:58.250","Text":"The required asks us to calculate the ending inventory"},{"Start":"00:58.250 ","End":"01:02.585","Text":"and cost of goods sold under the weighted average method."},{"Start":"01:02.585 ","End":"01:08.060","Text":"Now here, we\u0027re asked to assume that we calculate the weighted average once a year."},{"Start":"01:08.060 ","End":"01:12.245","Text":"Now in reality, and in most computerized systems,"},{"Start":"01:12.245 ","End":"01:17.165","Text":"the weighted average would be recalculated after every purchase."},{"Start":"01:17.165 ","End":"01:20.510","Text":"In this particular case is 1 purchase a year."},{"Start":"01:20.510 ","End":"01:23.740","Text":"The weighted average would, in reality,"},{"Start":"01:23.740 ","End":"01:31.125","Text":"or normally would have been recalculated after each of the purchases."},{"Start":"01:31.125 ","End":"01:34.760","Text":"But in this question, we\u0027re simplifying it and we\u0027re going to assume that"},{"Start":"01:34.760 ","End":"01:38.940","Text":"we calculate the weighted average once a year."}],"ID":28632},{"Watched":false,"Name":"Exercise 7 - part 2","Duration":"7m 26s","ChapterTopicVideoID":26353,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.110","Text":"This is a solution to ABI."},{"Start":"00:04.110 ","End":"00:08.759","Text":"ABI uses the weighted-average method to measure its inventory."},{"Start":"00:08.759 ","End":"00:15.300","Text":"We were asked to assume that we were calculating the weighted average only once a year."},{"Start":"00:15.300 ","End":"00:19.709","Text":"Normally, a weighted average would be calculated after each purchase."},{"Start":"00:19.709 ","End":"00:22.500","Text":"By calculating the weighted average once a year,"},{"Start":"00:22.500 ","End":"00:26.460","Text":"you might like to call it a periodic weighted average method."},{"Start":"00:26.460 ","End":"00:30.330","Text":"The calculation involves a very simple table."},{"Start":"00:30.330 ","End":"00:36.490","Text":"We\u0027re going to have an inventory movement column depicting the movement in units,"},{"Start":"00:36.490 ","End":"00:39.860","Text":"then we\u0027ll have a column for the currency per unit."},{"Start":"00:39.860 ","End":"00:45.835","Text":"In other words, how much our inventory has been measured at or how much it has cost us."},{"Start":"00:45.835 ","End":"00:52.850","Text":"Then we convert the inventory movement from a unit figure into a currency figure."},{"Start":"00:52.850 ","End":"00:55.520","Text":"Let\u0027s start with the opening balance."},{"Start":"00:55.520 ","End":"01:00.020","Text":"Equation tells us that we have 1,000 units on hand at the beginning of"},{"Start":"01:00.020 ","End":"01:06.920","Text":"the year and that these were measured at 9.2 currency units per unit of inventory."},{"Start":"01:06.920 ","End":"01:14.610","Text":"That means that the inventory opening balance is measured at 9,200 currency units."},{"Start":"01:15.760 ","End":"01:21.040","Text":"We\u0027re then told that we purchased 700 units in quarter 1 and"},{"Start":"01:21.040 ","End":"01:26.000","Text":"that these 700 units cost 9 currency units per unit."},{"Start":"01:26.000 ","End":"01:30.605","Text":"That\u0027s a total cost of 6,300 currency units."},{"Start":"01:30.605 ","End":"01:32.330","Text":"Then in quarter 2,"},{"Start":"01:32.330 ","End":"01:35.660","Text":"we purchased 1,000 units at a slightly cheaper price"},{"Start":"01:35.660 ","End":"01:39.485","Text":"of 8.8 currency units per unit of inventory,"},{"Start":"01:39.485 ","End":"01:45.215","Text":"giving us a total cost of the purchase of 8,800 currency units."},{"Start":"01:45.215 ","End":"01:46.950","Text":"During quarter 3,"},{"Start":"01:46.950 ","End":"01:49.880","Text":"we purchased 1,100 units at"},{"Start":"01:49.880 ","End":"01:54.245","Text":"an even cheaper price of 8.6 currency units per unit of inventory,"},{"Start":"01:54.245 ","End":"01:59.765","Text":"giving us a total cost of the purchase of 9,460 currency units."},{"Start":"01:59.765 ","End":"02:01.130","Text":"Then in quarter 4,"},{"Start":"02:01.130 ","End":"02:07.865","Text":"we purchased 800 units at an even cheaper price of 8.4 currency units per unit,"},{"Start":"02:07.865 ","End":"02:14.095","Text":"giving us a total purchase price of 6,720 currency units."},{"Start":"02:14.095 ","End":"02:20.973","Text":"That means that we\u0027ve had during the year available inventory of 4,600 units."},{"Start":"02:20.973 ","End":"02:24.500","Text":"1,000 was available from the prior year that had not yet been"},{"Start":"02:24.500 ","End":"02:29.102","Text":"sold and then we purchased further inventory during quarter 1,"},{"Start":"02:29.102 ","End":"02:30.260","Text":"2, 3, and 4."},{"Start":"02:30.260 ","End":"02:33.020","Text":"The total cost of this available inventory is"},{"Start":"02:33.020 ","End":"02:38.660","Text":"40,480 currency units and that includes the opening balance."},{"Start":"02:38.660 ","End":"02:41.525","Text":"Now, when using the weighted average method,"},{"Start":"02:41.525 ","End":"02:48.155","Text":"we then calculate the weighted average cost of all the inventory that is available to us."},{"Start":"02:48.155 ","End":"02:53.254","Text":"We\u0027ve got 40,480 currency units worth of inventory,"},{"Start":"02:53.254 ","End":"02:56.630","Text":"and that equates to 4,600 units."},{"Start":"02:56.630 ","End":"02:58.714","Text":"This is not an average,"},{"Start":"02:58.714 ","End":"03:00.544","Text":"but a weighted average."},{"Start":"03:00.544 ","End":"03:04.610","Text":"We\u0027re taking the total of the currency that it has cost us"},{"Start":"03:04.610 ","End":"03:09.470","Text":"40,480 and divide by the 4,600 units."},{"Start":"03:09.470 ","End":"03:10.880","Text":"If it was an average,"},{"Start":"03:10.880 ","End":"03:14.270","Text":"we would take the currency units per unit,"},{"Start":"03:14.270 ","End":"03:16.370","Text":"9.2, we\u0027d add the 9,"},{"Start":"03:16.370 ","End":"03:17.570","Text":"add the 8.8,"},{"Start":"03:17.570 ","End":"03:19.130","Text":"add the 8.6,"},{"Start":"03:19.130 ","End":"03:21.070","Text":"add the 8.4, and divide by 5."},{"Start":"03:21.070 ","End":"03:23.060","Text":"That\u0027s an average. We\u0027re not doing that."},{"Start":"03:23.060 ","End":"03:24.545","Text":"We\u0027re not finding the average cost."},{"Start":"03:24.545 ","End":"03:26.270","Text":"We\u0027re finding the weighted average cost."},{"Start":"03:26.270 ","End":"03:30.920","Text":"We\u0027ve bought certain quantities at each of these currency units per unit."},{"Start":"03:30.920 ","End":"03:33.155","Text":"That\u0027s why it\u0027s called the weighted average."},{"Start":"03:33.155 ","End":"03:36.980","Text":"The weighted average is 8.8 per unit."},{"Start":"03:36.980 ","End":"03:42.125","Text":"Now, we\u0027re going to use that to measure our sales and our closing inventory."},{"Start":"03:42.125 ","End":"03:44.765","Text":"Just to recap, the purchases of 9,"},{"Start":"03:44.765 ","End":"03:46.070","Text":"8.8, 8.6,"},{"Start":"03:46.070 ","End":"03:52.775","Text":"and 8.4, those were all measured originally at the actual cost of each purchase."},{"Start":"03:52.775 ","End":"03:54.470","Text":"Those figures there that are highlighted,"},{"Start":"03:54.470 ","End":"03:56.590","Text":"they\u0027re the actual costs."},{"Start":"03:56.590 ","End":"04:00.665","Text":"The 9.2 that you see as your opening balance,"},{"Start":"04:00.665 ","End":"04:07.595","Text":"that might be an actual cost if that 1,000 units had been purchased for 9.2."},{"Start":"04:07.595 ","End":"04:10.370","Text":"More likely, however, that 9.2 is"},{"Start":"04:10.370 ","End":"04:15.935","Text":"the weighted average cost of the prior year\u0027s purchases."},{"Start":"04:15.935 ","End":"04:20.090","Text":"In other words, that 1,000 units is more likely to have"},{"Start":"04:20.090 ","End":"04:24.559","Text":"been purchased by way of a number of purchases at varying prices,"},{"Start":"04:24.559 ","End":"04:28.010","Text":"in which case, at 9.2 is the weighted average of"},{"Start":"04:28.010 ","End":"04:32.780","Text":"all those prior purchases rather than an actual purchase price."},{"Start":"04:32.780 ","End":"04:35.120","Text":"Nevertheless, the point is,"},{"Start":"04:35.120 ","End":"04:40.040","Text":"and the purchases are originally recorded at their actual cost and then at some stage,"},{"Start":"04:40.040 ","End":"04:42.770","Text":"and in this question, it\u0027s once a year,"},{"Start":"04:42.770 ","End":"04:48.230","Text":"we calculate the weighted average cost of our units of inventory,"},{"Start":"04:48.230 ","End":"04:50.480","Text":"and our weighted average is 8.8."},{"Start":"04:50.480 ","End":"04:56.630","Text":"We then use that to measure the cost of our sales and the closing balance."},{"Start":"04:56.630 ","End":"04:59.070","Text":"So what are the sales during the years?"},{"Start":"04:59.070 ","End":"05:01.540","Text":"In other words, how many units did we sell?"},{"Start":"05:01.540 ","End":"05:04.940","Text":"Well, we were told that we sold 800 units in quarter 1,"},{"Start":"05:04.940 ","End":"05:06.560","Text":"600 in quarter 2,"},{"Start":"05:06.560 ","End":"05:08.090","Text":"900 in quarter 3,"},{"Start":"05:08.090 ","End":"05:09.575","Text":"800 in quarter 4,"},{"Start":"05:09.575 ","End":"05:12.605","Text":"we add that up, comes to 3,100 units."},{"Start":"05:12.605 ","End":"05:15.440","Text":"We subtract the 3,100 units from"},{"Start":"05:15.440 ","End":"05:20.030","Text":"the inventory movement units column because that\u0027s in units."},{"Start":"05:20.030 ","End":"05:23.278","Text":"Then we measure it at 8.8 per unit."},{"Start":"05:23.278 ","End":"05:28.955","Text":"Our cost of our sales is going to be 27,280 currency units."},{"Start":"05:28.955 ","End":"05:31.940","Text":"That gets credited to the inventory asset account."},{"Start":"05:31.940 ","End":"05:35.600","Text":"You can see it\u0027s in brackets indicating that this is going to be a credit."},{"Start":"05:35.600 ","End":"05:38.570","Text":"Remember all of these without brackets, these were debits."},{"Start":"05:38.570 ","End":"05:42.470","Text":"Remember, an asset gets bigger on the debit side,"},{"Start":"05:42.470 ","End":"05:44.020","Text":"gets smaller on the credit side."},{"Start":"05:44.020 ","End":"05:48.890","Text":"The 27,280 is coming out of the inventory asset account and it\u0027s going to"},{"Start":"05:48.890 ","End":"05:55.355","Text":"be debited to the cost of sales expense with 27,280."},{"Start":"05:55.355 ","End":"05:58.760","Text":"Once we subtracted the sales or the cost of the sales,"},{"Start":"05:58.760 ","End":"06:01.410","Text":"if you like, we then get the closing balance."},{"Start":"06:01.410 ","End":"06:08.060","Text":"4,600 units minus 3,100 units gives us 1,500 units."},{"Start":"06:08.060 ","End":"06:13.835","Text":"We measure those at 8.8 and that gives us 13,200."},{"Start":"06:13.835 ","End":"06:18.260","Text":"You can also check that 13,200 by checking to see that"},{"Start":"06:18.260 ","End":"06:25.685","Text":"40,480 minus 27,280 equals 13,200."},{"Start":"06:25.685 ","End":"06:26.900","Text":"Otherwise, of course,"},{"Start":"06:26.900 ","End":"06:32.930","Text":"it\u0027s 1,500 units multiplied by 8.8 per unit equals 18,200."},{"Start":"06:32.930 ","End":"06:35.780","Text":"Just to recap the available inventory,"},{"Start":"06:35.780 ","End":"06:38.090","Text":"the sales during the year and the closing balance are all"},{"Start":"06:38.090 ","End":"06:41.510","Text":"measured at 8.8 being the weighted average."},{"Start":"06:41.510 ","End":"06:44.330","Text":"Now the question asked us to calculate the cost of"},{"Start":"06:44.330 ","End":"06:47.405","Text":"the sales to be reflected in the annual financial statements."},{"Start":"06:47.405 ","End":"06:51.080","Text":"Always recap your solution for your marker."},{"Start":"06:51.080 ","End":"06:55.760","Text":"You can see the 27,280 in your column but just indicate to"},{"Start":"06:55.760 ","End":"07:00.815","Text":"the person looking at your solution that you know that that is cost of sales."},{"Start":"07:00.815 ","End":"07:05.375","Text":"Then we were asked to calculate what the closing inventory balance was."},{"Start":"07:05.375 ","End":"07:07.625","Text":"Once again, we can see it in our table."},{"Start":"07:07.625 ","End":"07:11.990","Text":"But just recap it for the person looking at your solution to"},{"Start":"07:11.990 ","End":"07:16.940","Text":"make sure they know that you know that that is the closing inventory balance."},{"Start":"07:16.940 ","End":"07:21.350","Text":"The cost of sales will appear on our income statement and the"},{"Start":"07:21.350 ","End":"07:27.060","Text":"13,200 inventory closing balance appears in our balance sheet."}],"ID":28633},{"Watched":false,"Name":"Exercise 8 - part 1","Duration":"1m 18s","ChapterTopicVideoID":26354,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.910","Text":"Today\u0027s exercise is ABJ."},{"Start":"00:02.910 ","End":"00:09.570","Text":"Consider the information below regarding ABJ Inc\u0027s inventory transactions during 20X1."},{"Start":"00:09.570 ","End":"00:13.470","Text":"We\u0027re given information for Quarter 1 through to Quarter 4,"},{"Start":"00:13.470 ","End":"00:16.935","Text":"and this information includes the sales in units,"},{"Start":"00:16.935 ","End":"00:21.510","Text":"purchases in units, and the purchase price per unit."},{"Start":"00:21.510 ","End":"00:26.580","Text":"We\u0027re told to assume that all purchases take place on the last day of the quarter."},{"Start":"00:26.580 ","End":"00:32.415","Text":"That means that there are no purchases that take place during the quarter."},{"Start":"00:32.415 ","End":"00:37.945","Text":"We\u0027re then asked to assume that no sales take place on the last day of the quarter,"},{"Start":"00:37.945 ","End":"00:41.975","Text":"which means that all sales take place during the quarter,"},{"Start":"00:41.975 ","End":"00:44.980","Text":"with exception of the very last day of the quarter."},{"Start":"00:44.980 ","End":"00:47.940","Text":"There were 1,000 units at the beginning of the year,"},{"Start":"00:47.940 ","End":"00:52.730","Text":"and the cost of each of these units is 9.2 currency units."},{"Start":"00:52.730 ","End":"00:56.060","Text":"We are required to calculate the ending inventory and"},{"Start":"00:56.060 ","End":"00:59.870","Text":"cost of goods sold under the Last-in-First-Out method,"},{"Start":"00:59.870 ","End":"01:02.860","Text":"sometimes referred to as the LIFO method."},{"Start":"01:02.860 ","End":"01:06.050","Text":"We\u0027re then asked to assume that the company uses"},{"Start":"01:06.050 ","End":"01:09.484","Text":"the periodic system and reports annually."},{"Start":"01:09.484 ","End":"01:15.365","Text":"Just incidentally, if you are to follow the International Financial Reporting Standards,"},{"Start":"01:15.365 ","End":"01:19.350","Text":"the LIFO method is not an allowed method."}],"ID":28634},{"Watched":false,"Name":"Exercise 8 - part 2","Duration":"9m 16s","ChapterTopicVideoID":26355,"CourseChapterTopicPlaylistID":254926,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.490","Text":"This is the solution to ABJ."},{"Start":"00:02.490 ","End":"00:05.535","Text":"The solution involves a very simple table."},{"Start":"00:05.535 ","End":"00:08.355","Text":"Let\u0027s start with the first column,"},{"Start":"00:08.355 ","End":"00:12.450","Text":"which shows the inventory that\u0027s available to us during the year in terms of units."},{"Start":"00:12.450 ","End":"00:16.200","Text":"We then have another column showing us the cost per unit of inventory,"},{"Start":"00:16.200 ","End":"00:19.995","Text":"so that\u0027s currency unit per unit of inventory."},{"Start":"00:19.995 ","End":"00:24.590","Text":"Then the third column is the inventory available at the cost thereof,"},{"Start":"00:24.590 ","End":"00:27.270","Text":"so it\u0027s denoted in terms of currency units."},{"Start":"00:27.270 ","End":"00:29.190","Text":"Let\u0027s start with the opening balance."},{"Start":"00:29.190 ","End":"00:30.885","Text":"We need to go back to the question."},{"Start":"00:30.885 ","End":"00:32.010","Text":"Looking at the question,"},{"Start":"00:32.010 ","End":"00:34.770","Text":"it says there were 1,000 units at the beginning of the year,"},{"Start":"00:34.770 ","End":"00:38.730","Text":"and the cost of each of these units is 9.2 currency units."},{"Start":"00:38.730 ","End":"00:45.545","Text":"We put that information in 1,000 units at 9.2 currency units per unit of inventory,"},{"Start":"00:45.545 ","End":"00:50.360","Text":"giving us a total cost of 9,200 currency units."},{"Start":"00:50.360 ","End":"00:56.014","Text":"The next step is to add the purchases that we made during each of those 4 quarters."},{"Start":"00:56.014 ","End":"00:57.770","Text":"Let\u0027s go back to the question."},{"Start":"00:57.770 ","End":"01:02.870","Text":"In the question you see we have the purchases given to us per quarter in units,"},{"Start":"01:02.870 ","End":"01:05.795","Text":"and also the purchase price per unit."},{"Start":"01:05.795 ","End":"01:08.390","Text":"Let\u0027s put that information into our table."},{"Start":"01:08.390 ","End":"01:12.455","Text":"The next step is to multiply these 2 columns together."},{"Start":"01:12.455 ","End":"01:14.830","Text":"Looking at quarter 1,"},{"Start":"01:14.830 ","End":"01:16.310","Text":"if we look at quarter 1,"},{"Start":"01:16.310 ","End":"01:22.535","Text":"it was 700 units at 9 currency units per unit of inventory."},{"Start":"01:22.535 ","End":"01:26.160","Text":"That gives us 6,300 currency units,"},{"Start":"01:26.160 ","End":"01:28.160","Text":"so that\u0027s the cost of the first purchase."},{"Start":"01:28.160 ","End":"01:31.610","Text":"The second purchase which happened in quarter 2 was 1,000"},{"Start":"01:31.610 ","End":"01:35.660","Text":"units at 8.8 currency units per unit of inventory,"},{"Start":"01:35.660 ","End":"01:39.800","Text":"so the cost of that purchase was 8,800 currency units."},{"Start":"01:39.800 ","End":"01:44.285","Text":"Repeat that process for quarter 3s purchase and quarter 4s purchase."},{"Start":"01:44.285 ","End":"01:48.470","Text":"Now if we add to those purchases the opening balance,"},{"Start":"01:48.470 ","End":"01:53.630","Text":"we see we\u0027ve got 4,600 units that were available to us during the course of the year,"},{"Start":"01:53.630 ","End":"01:59.780","Text":"and the cost of those 4,600 units was 40,480."},{"Start":"01:59.780 ","End":"02:05.570","Text":"In other words, that cost of 40,480 includes the 4 purchases we made during the year,"},{"Start":"02:05.570 ","End":"02:10.715","Text":"plus the cost of the inventory that was still in stock at the beginning of the year."},{"Start":"02:10.715 ","End":"02:14.885","Text":"The next step is to look at the sales that we made during the year."},{"Start":"02:14.885 ","End":"02:19.060","Text":"Looking at the question, we see we are given the sales in terms of units."},{"Start":"02:19.060 ","End":"02:24.320","Text":"Now the total of those sales during the year comes to 3,100."},{"Start":"02:24.320 ","End":"02:27.460","Text":"Now, we can work with a total sales figure,"},{"Start":"02:27.460 ","End":"02:33.424","Text":"and the reason for that is because we\u0027re using a periodic system and reporting annually."},{"Start":"02:33.424 ","End":"02:37.385","Text":"If we were using a periodic system and reporting every quarter,"},{"Start":"02:37.385 ","End":"02:40.805","Text":"we\u0027d have to take into account the sales per quarter."},{"Start":"02:40.805 ","End":"02:43.070","Text":"Because we\u0027re working annually,"},{"Start":"02:43.070 ","End":"02:45.590","Text":"we can add the sales in each of"},{"Start":"02:45.590 ","End":"02:50.300","Text":"those 4 quarters together and work with a total of 3,100 units."},{"Start":"02:50.300 ","End":"02:53.120","Text":"We put the 3,100 units into"},{"Start":"02:53.120 ","End":"03:00.950","Text":"the total in the inventory sold column."},{"Start":"03:00.950 ","End":"03:05.690","Text":"Now, using the last in first out principle,"},{"Start":"03:05.690 ","End":"03:10.760","Text":"what we\u0027re doing is we\u0027re assuming that we sold the newest stock first."},{"Start":"03:10.760 ","End":"03:15.535","Text":"In other words, we\u0027re selling the most recently acquired stock first."},{"Start":"03:15.535 ","End":"03:21.730","Text":"The most recently acquired stock was the stock we purchased in quarter 4."},{"Start":"03:21.730 ","End":"03:25.275","Text":"We bought 800 units in quarter 4,"},{"Start":"03:25.275 ","End":"03:28.940","Text":"so we assume we sold all 800 units."},{"Start":"03:28.940 ","End":"03:34.190","Text":"Then the next most recent stock was the stock we purchased in quarter 3."},{"Start":"03:34.190 ","End":"03:37.910","Text":"We purchased 1,100 units in quarter 3,"},{"Start":"03:37.910 ","End":"03:41.660","Text":"so we assume we sold all of those units as well."},{"Start":"03:41.660 ","End":"03:45.275","Text":"Then now if you have a look here,"},{"Start":"03:45.275 ","End":"03:51.365","Text":"we are up to 1,900 units and we sold 3,100 units."},{"Start":"03:51.365 ","End":"03:53.540","Text":"Therefore, we need to move on."},{"Start":"03:53.540 ","End":"03:58.200","Text":"Quarter 2 was the next most recent stock,"},{"Start":"03:58.200 ","End":"04:00.525","Text":"and we purchased 1,000 units."},{"Start":"04:00.525 ","End":"04:05.070","Text":"So we must have sold all 1,000 units,"},{"Start":"04:05.070 ","End":"04:07.080","Text":"and if we add those 3 together,"},{"Start":"04:07.080 ","End":"04:09.525","Text":"we get 2,900 units."},{"Start":"04:09.525 ","End":"04:12.810","Text":"But we sold 3,100 units,"},{"Start":"04:12.810 ","End":"04:16.355","Text":"so we\u0027re still looking for another 200 units."},{"Start":"04:16.355 ","End":"04:21.700","Text":"The 200 units must have come out of the stock that we purchased in quarter 1."},{"Start":"04:21.700 ","End":"04:24.710","Text":"Quarter 1 we had purchased 700 units,"},{"Start":"04:24.710 ","End":"04:27.190","Text":"so we\u0027re only needing 200 of those,"},{"Start":"04:27.190 ","End":"04:32.015","Text":"so we put in there that we sold 200 of the quarter 1 stock."},{"Start":"04:32.015 ","End":"04:35.330","Text":"That brings us to 3,100 units,"},{"Start":"04:35.330 ","End":"04:38.075","Text":"which is what we actually did indeed sell."},{"Start":"04:38.075 ","End":"04:41.630","Text":"That means we didn\u0027t manage to sell any of the stock that we"},{"Start":"04:41.630 ","End":"04:45.290","Text":"had in our opening stock at the beginning of the year."},{"Start":"04:45.290 ","End":"04:51.320","Text":"The next step is to measure the value of those goods sold,"},{"Start":"04:51.320 ","End":"04:53.869","Text":"we call that the cost of sales."},{"Start":"04:53.869 ","End":"04:57.100","Text":"We didn\u0027t sell any of our opening stock,"},{"Start":"04:57.100 ","End":"05:02.165","Text":"so is 0 units of the opening balance was sold,"},{"Start":"05:02.165 ","End":"05:06.815","Text":"200 units of the purchase in quarter 1 were sold,"},{"Start":"05:06.815 ","End":"05:13.475","Text":"and the quarter 1 purchase was at 9 currency units per unit of inventory,"},{"Start":"05:13.475 ","End":"05:16.535","Text":"so 9 currency units per unit of inventory,"},{"Start":"05:16.535 ","End":"05:18.605","Text":"multiply it by the 200 units,"},{"Start":"05:18.605 ","End":"05:22.940","Text":"gives us a cost of sales of 1,800."},{"Start":"05:22.940 ","End":"05:26.090","Text":"In other words, the 200 units that we sold"},{"Start":"05:26.090 ","End":"05:31.585","Text":"cost 1,800 in terms of this last-and-first-out principle."},{"Start":"05:31.585 ","End":"05:36.420","Text":"The 1,000 units that we sold out of our quarter 2 purchase, well,"},{"Start":"05:36.420 ","End":"05:40.250","Text":"the quarter 2 purchase had cost us 8.8 currency units per unit,"},{"Start":"05:40.250 ","End":"05:42.880","Text":"so the cost of sales 8,800."},{"Start":"05:42.880 ","End":"05:48.350","Text":"Then the 1,100 units that we sold out of the quarter 3 purchase,"},{"Start":"05:48.350 ","End":"05:53.755","Text":"those had cost 8.6 currency units per unit, so that\u0027s 9,460."},{"Start":"05:53.755 ","End":"05:58.850","Text":"Then finally, we\u0027ve got 800 units that were purchased out of our quarter 4 stock,"},{"Start":"05:58.850 ","End":"06:04.470","Text":"and the quarter 4 stock had cost us 8.4 currency units per unit of inventory."},{"Start":"06:04.470 ","End":"06:11.885","Text":"So 8.4 currency units multiplied by 800 units gives us a cost of sale of 6,720."},{"Start":"06:11.885 ","End":"06:15.695","Text":"If we add all of those cost of sales together,"},{"Start":"06:15.695 ","End":"06:19.115","Text":"that comes to 26,780."},{"Start":"06:19.115 ","End":"06:24.410","Text":"Now we had inventory available during the year of 40,480."},{"Start":"06:24.410 ","End":"06:28.850","Text":"That was the opening balance plus the full purchases we made during the year,"},{"Start":"06:28.850 ","End":"06:32.435","Text":"so that\u0027s the total cost of all the inventory that we had available."},{"Start":"06:32.435 ","End":"06:38.780","Text":"We are now saying the cost of the goods that we sold was 26,780."},{"Start":"06:38.780 ","End":"06:42.830","Text":"That then means that if we subtract the one from the other,"},{"Start":"06:42.830 ","End":"06:47.915","Text":"we should get to our inventory closing balance at the end of the year."},{"Start":"06:47.915 ","End":"06:51.830","Text":"The inventory at the end of the year is 13,700."},{"Start":"06:51.830 ","End":"06:59.240","Text":"As I say, that\u0027s the 40,400 less the 26,780 being the cost of the goods that we sold."},{"Start":"06:59.240 ","End":"07:03.935","Text":"Now, let\u0027s work out what the inventory on hand is in terms of units."},{"Start":"07:03.935 ","End":"07:07.880","Text":"The 13,700, of course, is currency units."},{"Start":"07:07.880 ","End":"07:10.625","Text":"So how many units do we actually have on hand?"},{"Start":"07:10.625 ","End":"07:13.970","Text":"Well, we had inventory available at the beginning of the year,"},{"Start":"07:13.970 ","End":"07:18.550","Text":"4,600 that includes the opening balance plus the 4 purchases."},{"Start":"07:18.550 ","End":"07:22.155","Text":"We then sold 3,100 units."},{"Start":"07:22.155 ","End":"07:27.755","Text":"That means we have 1,500 units at the end of the year."},{"Start":"07:27.755 ","End":"07:29.615","Text":"Now we need to value that,"},{"Start":"07:29.615 ","End":"07:32.555","Text":"which we have already done at 13,700."},{"Start":"07:32.555 ","End":"07:35.675","Text":"But let\u0027s look at the detail of the opening balance."},{"Start":"07:35.675 ","End":"07:37.430","Text":"Had 1,000 units,"},{"Start":"07:37.430 ","End":"07:38.975","Text":"we sold none of those,"},{"Start":"07:38.975 ","End":"07:41.105","Text":"so we have 1,000 of them leftover."},{"Start":"07:41.105 ","End":"07:46.865","Text":"Of the 700 units that we purchased in quarter 1 we sold 200,"},{"Start":"07:46.865 ","End":"07:49.070","Text":"we now have 500 leftover."},{"Start":"07:49.070 ","End":"07:52.325","Text":"Of the goods that we purchased in quarter 2, there were 1,000,"},{"Start":"07:52.325 ","End":"07:54.680","Text":"we believe we sold all 1,000 of those,"},{"Start":"07:54.680 ","End":"07:56.510","Text":"so we have none of that stock left."},{"Start":"07:56.510 ","End":"07:58.080","Text":"Similarly, quarter 3,"},{"Start":"07:58.080 ","End":"08:00.225","Text":"we purchased 1,100,"},{"Start":"08:00.225 ","End":"08:01.620","Text":"we sold all of those,"},{"Start":"08:01.620 ","End":"08:02.895","Text":"so we have none of that left."},{"Start":"08:02.895 ","End":"08:05.175","Text":"Quarter 4, we\u0027d purchased 800 units,"},{"Start":"08:05.175 ","End":"08:07.335","Text":"we sold all of those, we have none of those left."},{"Start":"08:07.335 ","End":"08:10.335","Text":"That\u0027s where we get our 1,500 units from."},{"Start":"08:10.335 ","End":"08:13.650","Text":"Now to measure the 1,000 units, well,"},{"Start":"08:13.650 ","End":"08:20.175","Text":"the 1,000 units was measured at 9.2 currency units per unit, so that\u0027s 9,200."},{"Start":"08:20.175 ","End":"08:26.355","Text":"Then the 500 came from stock that had cost us 9 currency units per unit,"},{"Start":"08:26.355 ","End":"08:29.925","Text":"so 9 by 500 gives us 4,500."},{"Start":"08:29.925 ","End":"08:34.050","Text":"That\u0027s where we get our 13,700,"},{"Start":"08:34.050 ","End":"08:38.160","Text":"so 9,200 plus the 4,500."},{"Start":"08:38.160 ","End":"08:44.090","Text":"The 13,700 is our inventory closing balance at the end of the year,"},{"Start":"08:44.090 ","End":"08:46.430","Text":"so that\u0027s going to appear in our balance sheet,"},{"Start":"08:46.430 ","End":"08:52.535","Text":"and the 26,780 is our customer sales which appears in our income statement."},{"Start":"08:52.535 ","End":"08:54.580","Text":"That\u0027s actually what we were asked for."},{"Start":"08:54.580 ","End":"08:57.575","Text":"But just to tie it up nicely for you,"},{"Start":"08:57.575 ","End":"09:03.890","Text":"the total cost of the inventory that had been available to us was 40,480."},{"Start":"09:03.890 ","End":"09:05.105","Text":"You can see clearly now,"},{"Start":"09:05.105 ","End":"09:06.690","Text":"we had that available to us,"},{"Start":"09:06.690 ","End":"09:14.920","Text":"we sold the 26,780 and thus we have 13,700 leftover in the balance sheet."},{"Start":"09:14.920 ","End":"09:17.570","Text":"I hope that has helped you."}],"ID":28635}],"Thumbnail":null,"ID":254926}]

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