OUA Group Assignment Cover Sheet Page 1 of 1 Current October 2009 CRICOS Provider No. 00121B

OUA Group Assignment Cover Sheet

A Group Assignment Cover Sheet needs to be included at the front of each assignment submitted.Details of one group member is to be provided – this is where your group assignment will be returned once marked

Address details

Full name: ANDREW COLE

Address: PO BOX 9043

DEAKIN LPO ACT Postcode: 2600

Assignment details

Unit code: ACG27 Unit name: Financial Accounting 2

Assignment no. 1 Due date: 04/01/2010

Assignment topic (as stated in the Unit Information Booklet):

AASB 102 Inventories.

Student names UniSA email ID

1. ANDREW COLE COLAY009 @students.unisa.edu.au

2. PATRICIA PATERSON PATPP002 @students.unisa.edu.au

3. MICKAEL RENOU RENMY006 @students.unisa.edu.au

4. @students.unisa.edu.au

5. @students.unisa.edu.au

Student Declaration

We declare the work contained in this assignment is our own, except where acknowledgement of sources is made. We authorise the University to test any work submitted by us, using text comparison software, for instances of plagiarism. We understand that this will involve the University or its contractor copying our work and storing it on a database to be used in future to test work submitted by others. We understand that we can obtain further information on this matter at http://www.unisa.edu.au/ltu/students/study/integrity.asp Note: The attachment of this statement on any electronically submitted assignments will be deemed to have the same authority as a signed statement.

Signed Date

1. ANDREW COLE 21/12/2009

2. PATRICIA PATERSON 21/12/2009

3. MICKAEL RENOU 21/12/2009

4.

5.

LODGING YOUR ASSIGNMENT If you are submitting the assignment in hardcopy please staple this sheet to the front of the assignment. If you are submitting the assignment online via AssignIT on your myUniSA course page please ensure this cover sheet is included at the start of your document, rather than a separate attachment.

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AASB 102AASB 102InventoriesInventories

Andrew Cole 110020071

Mickael Renou 110019465

Patricia Paterson 110021755

IntroductionIntroductionIntroductionIntroduction

Supersedes AASB 1019 and AAS 2 Supersedes AASB 1019 and AAS 2

Objective of the Standard:

◦ Accounting treatment for inventories◦ Guidance on determination of cost and its Guidance on determination of cost and its

recognition as an expense◦ Guidance on cost formulas◦ Guidance on cost formulas

Measurement of InventoriesMeasurement of InventoriesMeasurement of InventoriesMeasurement of Inventories

Inventories are assets purchased or manufactured for eventual sale.

“I i h ll b d h “Inventories shall be measured at the lower of cost and net realisable value.”(AASB102, para 9)

Calculating Costs of InventoriesCalculating Costs of InventoriesCalculating Costs of InventoriesCalculating Costs of Inventories

Inventory cost is the combination of:◦ Costs of Purchase◦ Costs of ConversionCosts of Conversion

S l d d Some costs are excluded

Calculating Costs of Inventories Calculating Costs of Inventories Calculating Costs of Inventories Calculating Costs of Inventories

Techniques for the measurement of costs◦ Standard Cost Method◦ Retail MethodRetail Method

Calculating Costs of Inventories Calculating Costs of Inventories Calculating Costs of Inventories Calculating Costs of Inventories

Cost Formulas

◦ Specific Identification◦ FIFO ◦ FIFO ◦ Weighted Average

Net Net RealisableRealisableValue (NRV)Value (NRV)Net Net RealisableRealisableValue (NRV)Value (NRV)

“the estimated selling price in the g pordinary course of business less the estimated costs of completion and the estimated costs of completion and the estimated costs necessary to make the sale”sale(AASB102, para 6)

Measurement ProcessMeasurement ProcessMeasurement ProcessMeasurement Process

Cost of Item NRVCarrying Amount

Recognition as an ExpenseRecognition as an ExpenseRecognition as an ExpenseRecognition as an Expense

“When inventories are sold the carrying When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised.”g(AASB102, para 34)

Disclosure on Financial ReportsDisclosure on Financial ReportsDisclosure on Financial ReportsDisclosure on Financial Reports

Financial statements must disclose:◦ The accounting policies used◦ Total carrying amount of inventoriesy g◦ Carrying amount of Inventories recognised as

an expense during the periodan expense during the period◦ Write-downs and reversals of write-downs

ConclusionConclusionConclusionConclusion What have we learnt?What have we learnt?

Questions?

References: ◦ AASB 2009, ‘AASB 102 – Compiled’, Australian Accounting Standards Board,

Melbourne, Vic.,

◦ CPA 2009, ‘AASB 102 Inventories Factsheet’ CPA Australia, Melbourne , Vic.

◦ Chartered Accountants 2008, ‘AASB 102 – Inventories’, Chartered Accountants viewed 21 December 2009 Accountants, viewed 21 December, 2009 <http://www.charteredaccountants.com.au/A121996945>

1

PRESENTATION PLAN OF AASB 102 Inventories

OBJECTIVE:

STRUCTURE: Time Introduction : Slide

1.5 minutes

Other standards (AASB 1019 and AAS 2) were in place before but AASB 102 supersedes them today. This standard provides a better assessment of the cost of inventories. Inventories are assets so need to be standardizing for better record and control. This standard is a guide to assist accountants in meeting the Australian Accounting Standard board rules. 3 key points covered in this presentation. For the clarity of this presentation, not for profit entities will not be covered in this presentation.

Slide 2: introduction

1 minute

Little reminder: Inventories are assets that gather raw materials, work in progress and finished goods. The net realisable value or market cost translate that inventories are valued at their original cost or the cost in today’s market, whichever is less! Cost of inventories sum up all cost such as: Purchase, conversion and other costs.

Slide 3: measurement of

inventories

1. Technical Skills: provide a guide on how to determine the cost of an inventory using formulas utilised to assign cost to inventories.

2. Knowledge: how to account for inventories under this standard

3. Personal and professional development: have an understanding of the actual standard

regarding the treatment of inventories.

Topic: AASB 102 Inventories Outcomes: the aim of this lesson is to deliver to the intended audience an understanding of the principle and key features and requirements and coverage of the standard.

2

Time Main Content: Slide

3 minutes

In the cost of purchase there is:

1. Purchase price 2. Import duties and other taxes 3. Transport 4. Handling 5. Costs of acquisition of finished good

In the cost of conversion there is:

1. Direct cost of production with fixed and variable costs

2. Overheads with fixed and variable costs Consider that some cost are excluded such as:

1. Abnormal waste 2. Storage costs 3. Administration overheads 4. Selling costs 5. Finance costs (if applicable)

Slide 4: calculating cost of

inventories

1 minute

2 techniques may be used for an approximate cost: Standard cost method which “takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation” (accounting handbook, p.286) Retail cost method with a cost of ending inventory estimated and with an annual physical stocktake to make sure the cost of sale is accurate.

Slide 5: calculating cost of

inventories

1.5 minutes

3 major cost formulas: Specific Identification: the cost of a specific item sold can be separately identified from the cost of other units from the inventory. FIFO: First In, First Out, so the first unit purchased will be the first sold which generate a cost of ending inventory to be the cost of the last unit purchased. Weighted average: translate to the average cost per unit, calculated by dividing the total cost of unit available by the total number of units available.

Slide 6: calculating cost of

inventories

3

Time Main Content: Slide

1 minute

1. Estimates based on the most reliable

evidence (asset should not be carried in excess of amounts expected to be realised from their sale or use)

2. Usually written-down (to NRV) on an item by item basis (can be grouped for items relating to similar purpose)

3. Entity-specific value (expected to be realise) against fair value, being a market value.

4. Re-assessment made at the end of each reporting period (If NRV increases, previous write-down will be reversed to the amount equal to the increase….lower cost and NRV are respected)

Slide 7: net realisable value

(NRV)

1 minute

Figure from CPA Australia fact sheet sum up well how to account for inventory

Slide 8: measurement process

1 minute

1. Carrying amount of inventory sold

recognised in the same period of the related revenue.

2. Write-down and loss of inventories to be recognised, again in the same period of the write-down or loss.

3. Reversal of write downs to be recognised as a reduction of inventory as an expense in the period of reversal.

Slide 9: recognition as an

expense

2 minutes

8 key points have to be stated in the financial report:

1. The accounting policies and cost formulas used

2. The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity

3. The carrying amount of inventories carried at fair value less cost of sell

4. The amount of inventories recognised as an expense in the period

5. The amount of any write-down of inventories recognised as an expense during the period

6. The amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as an expense in the period.

7. The circumstances or events that led to the reversal of a write-down of inventories

8. The carrying amount of inventories pledged as security for liabilities.

Slide 10: disclosure on financial

report

4

Time Conclusion: Slide

2 minutes

a. How does this standard assist users and

preparers?

They have a proper scope on how to report for inventories for a financial report.

b. How does it help meeting objectives of

financial reports?

It relates to the net realisable value of the inventory, so it gives a value of the stocktake as close as possible to what it is worth.

Excellent control and knowledge to have for any entity regarding overstock or understock.

c. What did they learn about this presentation?

ASSB 102 superseded the former standard. Users have to follow and respect the guide to

report on inventories

d. What if there was no standard?

Financial report would not be accurate. Inventories figures could be manipulated to

suit the entity or management.

e. Questions time?

Slide 11: conclusion

REFERENCES: AASB 2009, ‘AASB 102 – Compiled’, Australian Accounting Standards Board, Melbourne, Vic.

CPA 2009, ‘AASB 102 Inventories Factsheet’ CPA Australia, Melbourne , Vic.

Chartered Accountants 2008, ‘AASB 102 – Inventories’, Chartered Accountants, viewed 21 December, 2009 <http://www.charteredaccountants.com.au/A121996945>

Hoggett, J. Et al., 2009. Accounting, 7th edn. Milton: John Wiley & Sons Australia, Ltd.

Leo, K. Et al., 2009. Company Accounting, 8th edn. Milton: John Wiley & Sons Australia, Ltd.

Andrew Cole   110020071   ●   Mickael Renou   110019465   ●   Patricia Paterson   110021755 

Audience Handout 

AASB 102 ‐ Inventories 

Measurement of Inventories AASB 102  states  “Inventories  shall  be  measured  at  the  lower  of  cost  and  net  realisable  value.” 

(AASB 102, para. 9). The following examples show how to calculate the costs of inventories, and compare it to 

the Net Realisable Value (NRV), using the example of a fictional mobile phone manufacturing company. 

Calculating Costs of Inventories 

Inventory  cost  is  the  combination  of  Costs  of 

Purchase  and Costs of Conversion.  Purchase  costs 

for  a  mobile  phone  company  would  include  the 

costs  of  plastics,  electronic  components,  and 

packaging. Costs of conversion are costs associated 

with  manufacturing  the  mobile  phones  from  the 

various  components,  and  would  include  labour 

costs  and  the  cost  of  electricity  and maintenance 

for manufacturing machinery. Conversion costs also 

include a portion of overheads  incurred during the 

manufacturing  process  that  are  not  directly 

attributable  to  one  product,  such  as  facility  rent. 

These  costs  are  allocated  to  each product using  a 

costing method, such as Activity Based Costing. 

Cost Formulas 

The standard required that specific identification of 

costs  be  used when  products  are  not  considered 

interchangeable;  that  is, when each unit produced 

or  purchased  is  unique  in  some  way.  Specific 

identification  requires  that  all  costs  be  directly 

attributed to an item. 

The cost  for  inventories  that are not calculated by 

specific identification are calculated by using either 

the  First‐In  First‐Out  (FIFO)  or Weighted  Average 

methods.  Take  the  example  of  a  mobile  phone 

production line, which over the last month has seen 

a  reduction  in  conversion  costs  due  to  improved 

efficiency.  During  the  period  200  phones  were 

made, 100 at $500 each, and 100 at $400 each. 150 

units were sold. The FIFO and the Average methods 

give the following costs of goods sold (COGS): 

FIFO:  The  150  units  sold would  consume  the  100 

units produced at $500 each,  then 50 of  the $400 

units, so COGS is $75 000 (100 x $500 + 50 x $500). 

Weighted  Average:  Average  cost  of  the  units  is 

$450  (100 x $500 + 100 x $400 / 200), so COGS  is 

$67 500 ($450 x 150). 

FIFO is said to consume older stock first, resulting in 

a  higher  COGS  figure  if  inventory  cost  has  been 

reducing.  The  weighted  average  method  spreads 

any changes in costs over time. 

Net Realisable Value 

The NRV of an inventory item is the price which the 

item can reasonably be estimated to be sold at. For 

example, if the above mobile phones could only be 

sold  for $400 a unit,  the NRV would be $400. The 

phones  in  inventory  would  be  written  down  to 

$400  a  unit,  as  the  NRV  is  lower  than  the  cost. 

Disclosure RequirementsThe standard outlines several pieces of information 

that  are  required  to  be  disclosed  in  financial 

statements,  including  policies  and  formulas  used, 

carrying amounts of inventory in categories as used 

by the company, and any write‐downs or reversals 

of  write  downs  completed  during  the  period. 

AASB102  Paragraphs  36‐39  should  be  checked 

during the production of financial statements. 

Bibliography AASB 2009, ‘AASB 102 – Compiled’, Australian Accounting Standards Board, Melbourne, Vic. 

CPA 2009, ‘AASB 102 Inventories Factsheet’ CPA Australia, Melbourne , Vic. 

Chartered Accountants 2008,  ‘AASB 102 – Inventories’, Chartered Accountants, viewed 21 December, 2009 

<http://www.charteredaccountants.com.au/A121996945> 

Hoggett, J. Et al., 2009. Accounting, 7th edn. Milton: John Wiley & Sons Australia, Ltd. 

Leo, K. Et al., 2009. Company Accounting, 8th edn. Milton: John Wiley & Sons Australia, Ltd.