mfrs and inventory cycle

7/27/2019 MFRS and Inventory Cycle

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Identifying relevant Malaysian Financial Reporting Standard with Inventory Cycle

Referring to have been stated above, the selected company was a small sized entity and

therefore, the processes under its inventory cycle was not complex like those in retailers as

well as manufacturers.

Figure 1.1 Inventory cycle with shaded area for activities related to MFRS

Principally, the fundamental issue in accounting for inventories is to define the amount to be

recognized as asset as well as amount to be charged as expenses in contrast to associated

revenue. Therefore, FRS 102 Inventories provide guidelines in determining the cost of

inventories, cost formulas used to assign costs of inventories, the amount recognized as

expenses and write down to net realisable value. Inventories comprises those:

Held for sale in the ordinary cost of business; In the process of production for such sale; or In the form of materials or supplies to be consumed in the production process or in the

rendering of services (Lazar & Choo, 2008).

Order goods(Purchasing

activity)

Receiveinventory

Inventorycataloguing(barcode)

Sellingactivity

Inventorybeingreduced

Reorder

Inventory

cycle

Measurement of cost of inventoryFRS 102

Measuring the NRVFRS 102

Cost FormulaFRS 102

Cost FormulaFRS 102

Revenue from sales of

oodsFRS 118


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Inventories also includes goods purchased and held for resale which encompasses buying

merchandise by a retailer.

Connecting to the selected business, the existence of the inventory of Waqec Stationary Sdn

Bhd, are essentially buying the merchandise and held them for sale in the ordinary cost of

business which is under the classification of inventories.

As we can see from the figure 1.1 above, FRS 102 Inventory in this case mainly

focuses on the shaded area, which are numerous accounting issues arise particularly in

determining the costs of inventories, Net Realizable Value.

Purchase Order Activity

When purchasing a certain commodity, Waqec Sdn Bhd will be issued invoices from various

suppliers. It contains the receipt of a purchase order which is also the agreed amount of cost

that will be borne by the buyer, which is the entity itself.

Cost

According to FRS 102 Inventories,cost of inventory contains all costs incurred to carry the

inventory to its present location and condition. This comprises all costs of purchase,

conversion costs and all other costs. The cost of purchase incurred by Waqec Sdn Bhd was

basically those costs attributable to the acquisition of finished goods (such as stationaries,

papers, etc) and these consist of the purchase price, related taxes as well as transport costs.

However, the transport costs was incurred only when Waqecs supplier was unable to deliver

the products in place. Moreover, Waqec does not incur specific costs that are excluded as

inventory costs such as abnormal amounts of wastage or storage costs (once the stocks

arrived, employees display them straight onto the shelves provided).


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Selling Activity

Among the selling activities, there are several consideration in terms of acquired

costs, selling price, selling costs as well as its way of disclosing the amount. Here, applying

the FRS 102, arising the issue of how an entity measures the inventories. Measurement of

inventories should be at lower of cost and net realisable value.

Net Realizable Value

FRS 102 determines net realizable value as the ordinary course of businesss

estimated selling price less estimated costs of completion and the estimated costs necessary to

make the sale. In this case, the company essentially purchased a certain units of products

from a certain supplier based on the preference of manager which usually favours lowest

price from them. The pricing usually were charge at a standard retail price, which are

recommended by the suppliers itself. Only then, the supplier will set the margin for the seller

to sell. Let say, 30% margin. Therefore, when a product was purchased at RM 1 for each

product, the seller will sell it at RM 1.30. However, some of the products do not have the

recommended price and hence, the manager set it at market price or even lesser.

Linking to the FRS 102, the company does not own the net realisable value. This is

because, net realisable value should be estimated selling price less estimated selling costs,

and what would be disclosed is that if the acquired cost is less than net realisable value, then

the acquired costs multiplied by number of units purchased would be stated, and vice versa

whichever is lower. However, in this situation by Waqec, the acquired cost is let say RM 1

for a pen, adding up a mark-up at 30%, resulting to RM 1.30. The acquired cost is RM 1 and

there is no specific allocation for the estimated selling costs amounting to no amount of net

realisable value and hence we cannot compare which price is lower.


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Additionally, FRS 102 also give guidance in terms for obsolete or damaged stocks

that will eventually resulting lower net realisable value compared to its cost. The net

realisable value may have dropped when the costs to complete the product has increased.

Estimates of net realisable value are based on the most reliable evidence available at the time

the estimates are made. Where inventory is held to satisfy firm sales contract, the net

realisable value is based on contract price. However, Waqec Sdn Bhd is rarely to have

obsolete goods as most of the products are tangible.

Cost of Conversion

This is usually incurred by manufactures to convert the raw material into finished

goods. Conversion costs are production costs, such as labour and overhead that directly

related to the production of output. Waqec Sdn Bhd only sells finished goods which in turn,

does not incur any conversion costs. For some extend, it incurs several fixed costs such as

electricity bills, rental costs, however, the company did not absorb the costs to the each

product sold. Instead, it will deduct them as expenses from profits generated.

Cost Formulas

When the entity buys or sell products at times during a reporting period, the issue arise

on how to allocate the costs to the numerous products in order to determine cost of sale and

closing inventory. This is because, the profits computed and value of closing inventory is

affected by the cost formula used. There are several cost of formulas which can be used, such

as:-

Specific identification method, this is particularly for non-interchangeable productsand for specific projects whereby cost are assigned to the identified items in

inventory.


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First In First Out and Weighted Average Method. For products and services that areinterchangeable, FIFO or weighted average method is to be used. The entity should

use the same cost formula for all inventories that have similar nature.

There is not much relevancies between what the company applies and to what has been

demanded by FRS 102 which are to use either FIFO or Weighted Average Method. FIFO

method assumes that the items of inventory that were purchased are sold first, and

consequently items remaining in inventory at the end of the period are those recently

purchased. On the other hand, weighted average cost formula suggests that the cost of each

item is determined from the weighted average of the cost of similar items at the beginning of

a period and the cost of similar items purchased during the period. In fact, Waqec Sdn Bhd

used Just In Time systems which means that the entity will be able to minimize inventory by

obtaining goods only as when they are needed in the production process and consequently

reducing inventory costs. Their re-purchasing activity of inventory basically will be once the

amount of merchandise lessen up which is done by manual stock count and data derived from

the Point of Sales system.

Revenue FRS 118

FRS 118 basically addresses the issue of what point revenue is recognized and the amount

that can be recognized. The standard that deal with accounting for revenue results from

various area such as; the sale of goods, rendering of services and use of the entitys assets by

others yielding interest, royalties and dividends. Moreover, it also requires revenue to be

measured at the fair value of the consideration received. Referring to Waqec Sdn Bhd, the

company measures revenue whenever there is cash received. This is in compliance with the

guidelines itself, whereby typically the consideration received will be in cash or cash

equivalent, in which the revenue equals the consideration received or receivables. As the


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main consumer of the business is students, it engages its transaction in cash basis. Hence

circumstances where there is delay in the receipt of the consideration will be non-existence.

Additionally, according to FRS 118, revenue is recognized when it is:

Probable that the benefits of future economic will flow to the entity, and The benefits can be measured reliably

In terms of recognition criteria, it can be applied to each transaction separately or even to

each component of a transaction to reflect the substance of the transaction. FRS 118 has

determined three types of revenue such assale of goods, rendering or services and interest,

royalties and dividends. For Waqec Sdn Bhd, as its main activity is selling stationeries and

thus it is included in the sale of good category. Furthermore, the entity recognized the

revenue whenever the products have been sold whereby buyer pay the money for the products

purchased and the seller received cash, which is in other word, transferring to the buyer the

significant risk and rewards of ownership attached to the products and this is in compliance

with FRS 118.

Recommendation

1. It was noticeable that the company does not comply much with the requirement listedin FRS. The manager should be introduced on how a company should disclose their

amount of inventories by knowing the measurements, techniques of measuring, etc

2.

mfrs and inventory cycle

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