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Hi,
Do i need to take into account of purchase discount in the valuing of inventory?
For example, during the year i made a purchase of 100000 and i make an early payment granting me a discount of 20000, assuming no sales made during the year and on a periodic basis.
How should i then value my inventory? Should it be 80000 or 100000?
Early payment discounts are not taken into account when valuing inventory.
Trade discounts are taken into account – they reduce the purchase cost itself.
Hi,
According to book: Basic Accounting Concepts by Gregory R Morstyn
Perpetual method:
Company purchase 1500 of inventory:
Inventory 1500
AP 1500Company paid within discount period and receives 2% discount:
AP 1500
Inventory 30
Cash 1470Based on the above, i believed that cash discount is included in the valuing of inventory for perpetual method, please do correct me if i am wrong.
If so, the reason why cash discount is not included for periodic method, i would assumed is that the cash discount (a from of contra revenue account) in previous period has already been recognized as an asset.
Really appreciate your answer that clears my doubts.
You are wrong (and if this is really what this book says, then the book is wrong as well – in fact it is complete nonsense!! 🙂 ).
Maybe it is because your Gregory R Mostyn is in the USA. What they may or may not do in the USA is of no relevance to the ACCA exams 🙂A cash discount is for paying quickly and has nothing to do with the value of the purchase – it is recorded as income separately and has nothing to do with perpetual (or any other method) of valuing inventory.
I explain the entries for this (and for trade discounts, which are treated differently), in my free lectures. (I explain it in the lectures on control accounts).
I do suggest that you watch my free lectures – they are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
If you are not watching the lectures for any reason then you should not be using your book. You should be studying from a Study Text published by one of the ACCA approved publishers (Becker, BPP, and Kaplan).
Whether you choose to study from one of these books or instead by watching my lectures, you should certainly buy a Revision Kit from one of the ACCA approved publishers. They contain lots of exam standard questions to practice, and practice is vital for passing the exam.
Hi,
Thanks alot for your help. The reason why i asked this particular reason is that i am not sure what goes into the cost of inventories.
The standard formula is always: Open Inv + Net Purchase – Ending Inv = CoGS with FIFO and etc as a means of recording purchases and cost of goods sold.
They do not mentioned about how to value the cost of good sold with reference to these contra accounts like cash discount and purchase returns/allowance, the BPP book that i have also did not mention anything on how to deal with these contra accounts with regards to costing of inventories
The confusion is the ‘Net Purchase’ in the formula above which is equal to Purchase – cash discount – Purchase return/allowance, hence the though that these contra accounts should be included in the valuing of inventories.
Very grateful to your quick answer, will be looking into chapter 9 and chapter 16 of yours.
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