• Profile photo of John Moffat says

      As you will have seen in the lecture, the inventory figure in the statement is the amount actually counted at the end of the financial period. The owner is not going to have waited until it was counted and then decided to take some.
      So we do not change the final inventory figure but instead we remove it from the purchases figure. Every time the business buys any it will have been debited to purchases. If some of them are taken by the owner, we credit purchases (only the balance was actually used by the business) and debit drawings (to ‘charge’ the owner).

      • avatar says

        Thank very much, Ive reviewed the lecture and now understand the inventory is counted at the end of each period.

  1. avatar says

    please can you explain about first part of this vdieo ,talking about FIFO method or LIFO Method? why you use $15 first and second $14??? for FIFO METHOD

    [On 1 November 2002 a company held 300 units of finished goods valued at $12 each.
    During November the following purchases took place:
    Date Units purchased
    Cost per
    10 November 400 $12.50
    20 November 400 $14
    25 November 400 $15
    Goods sold during November were as follows:
    Date Units sold Sales price
    per unit
    14 November 500 $20
    21 November 400 $20
    28 November 100 $20]

  2. avatar says

    Hi John,

    Test question 2. Please could you explain why the depreciation is included is valuing in inventory when the depreciation will then be taken off the profit in the profit and loss account?

    Thanks Rich

    • Profile photo of John Moffat says

      It is for the same reason that materials and labour are included (even though they are expenses in the Statement of profit or loss).
      They are part of the costs of production. However, to calculate the profit we need the cost of the goods actually sold. So we subtract from the cost of production the cost of the goods that are not sold i.e. the closing inventory.

  3. avatar says

    Please can you explain how 2950 is the right answer for this question?

    An inventory record shows the following details for the month of February;

    Feb 1: 50 units in stock at a cost of $40 per unit.
    Feb 7: 100 units purchased at a cost of $45 per unit
    Feb 14: 80 units sold
    Feb 21: 50 units purchased at a cost of $50 dollars per unit
    Feb 28: 60 units sold.

    what is the value of closing inventory at 28 feb using the fifo method?

    • Profile photo of John Moffat says

      dreamer: you misread the question. 2950 was not given and you were not asked for cost of sales!

      Jide: if you count the units, there are 60 units left at the end (50 + 100 – 80 + 50 – 60)
      With FIFO these must be the most recent purchases, so 50 of them were bought on Feb 21 at $50 each, and the other 10 were bought on Feb 7 at $45 each. (50 x $50) + (10 x $45) = 2950.

      • Profile photo of John Moffat says

        It is applicable to question 3, and the answer is correct.

        There were 700 units at the start of the month. They bought 800 and sold 650, so at the end of the month there were 850 units.

        Using FIFO, 300 were bought on 1 Feb; 500 were bought on 1 July, and the remaining 50 must have been part of the inventory on 1 May.

      • avatar says

        Mr. John, your analysis above does note equal to 188,500. Besides, using Fifo, We have 700 engines in May 2007 @190 = 133,000, then 150 engines out of 500 in July 2007 I.e 150 * 220=33000, so total value of closing inventory is 166,000. Pls correct me

      • Profile photo of John Moffat says

        Of course it equals 188,500 – you have not costed out what I wrote!!!

        300 bought on 1 Feb at 230 = 69,000

        500 bought on 1 July at 220 = 110,000

        50 still there from 1 May at 190 = 9,500

        69,000 + 110,000 + 9,500 = 188,500.

        (Maybe you have not checked the dates properly – the year ends on 30 April 2008)

    • Profile photo of John Moffat says

      LIFO is not allowed (IAS 2)

      In example 5, I have calculated it using FIFO (first-in-first-out) and using average cost.
      Both methods are allowed by IAS 2, and in the exam you can be asked for calculations using either of the two ways.

      Have you downloaded the Course Notes that go with the lectures? There you will find headings for FIFO and for Average methods (and as well as going through them in the lecture, the answers are at the back of the Course Notes).

  4. avatar says

    I have a question plz.

    — if the closing inventory have been understated in the year by 22500, what will be the effect on the profit this year and next year ?

    a) the current year’s profit will be OVERSTATED and next years’ profit will be understated
    b) the current year’s profit will be UNDERSTATED and next years’s profit will be overstated

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