AFM291 Chapter Notes - Chapter 6: Continuous Track, Consignor, Consignee

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lilacmouse857

18 May 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM291

Professor

Robert Ducharme

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Inventories

A. Information Systems for Inventory Control

- Perpetual inventory system: directly keeps track of additions to and withdrawals from

inventory

- Enterprise can determine inventory quantity on hand and COGS from the accounting

records at any point in time

- Produces more information for management of inventory levels on a timely basis

- Companies still need to conduct an inventory count even if they use the perpetual

method since the records may not correctly represent actual inventory quantities

- Has the ability to identify both the expected and actual amount of COGS

- E. a idetif shikage ieto losses fo theft o eakage → a help

decide whether it would be worthwhile to put in place additional inventory

management practices

- Periodic inventory system: does’t keep otiuous tak of ietoies ad COG“

- On the financial statement date, the enterprise conducts an inventory count to

determine the ending inventory quantity and applies product costs to these quantities

to determine the cost of ending inventory

- Uses a tepoa aout losed at the ed of the ea → puhases, so that the

company can distinguish changes in inventory arising from purchases rather than

adjustments to the inventory balance resulting from the inventory count.

- See exhibit 6-2 on page 243

- The inventory system chosen affects the implementation of different cost flow assumptions

B. Initial Recognition and Measurement

- IA“  → the ost of ietoies shall opise all osts of puhase, osts of oesio, ad

other costs incurred in bringing the inventories to their present location and condition

1. Purchased Goods

- Ieto ost fo goods puhased fo esale → puhase pie, a taes that ae’t

recoverable from the government, shipping and handling costs, and any other costs

incurred up to the point where the product is at the desired location for sale

- Important to determine whether goods in transit from a supplier or to a customer should be

included in inventory

- Free on board: point at which the buyer takes legal possession of the goods

- FOB origin/shipping point: buyer takes possession as soon as the goods leave the

supplie’s peises

- FOB destiatio: ue takes possessio he the goods eah the ue’s peises

- At the year end, an enterprise should include in inventories goods that are on its premises,

and inbound goods in transit that are FOB origin and outbound goods in transit that are FOB

destination

- Risks and rewards of ownership do not transfer from the consignor to the consignee, and

the latter should not include consigned goods in its inventories

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2. Manufactured Goods

- Product costs: all costs incurred in the acquisition of raw materials and the conversion

process

- Include: materials, production labor (including factory supervision), VOH (ex.

electricity), and FOH (ex. heating costs)

- Should be capitalized since they incurred as part of the production process

- Period costs: costs that should not be capitalized in inventory because they are not closely

related to the production process

- Ex. marketing, administration, accounting, and finance

- Expense period costs in the period incurred

- Two views to determine whether an expenditure on FOH is a product or period cost:

- Variable costing: considers fixed manufacturing OH to be a period cost because such

osts do’t a aodig to podutio leel

- Absorption costing: considers FOH as a product cost because production cannot take

place without these costs

- Managerial accounting and internal decision making favor the variable costing method

- IFRS and ASPE require the use of absorption costing for external financial reporting

- It’s osistet ith the Coeptual Faeok → etepises iu FOH costs to

produce goods that generate revenue in the future, so such costs meet the definition

of an asset

- The later expensing of these costs through COGS when the products are sold matches

costs to the revenue generated.

- The capitalization of FOH creates issues when production levels significantly deviate from

normal production levels

a. FOH capitalization when production is above normal

- See exhibit 6-4 on page 246

- Under absorption costing, an enterprise can lower COGS by increasing production volume

- Increases in production volume will result in decreases in the fixed cost per unit

- If a manager needed extra income, for example to meet an earnings target, then they

could raise production at the end of the year so the ending inventories absorbed more

FOH

- It’s ipotat to distiguish ieasig goss agis that ae due to ipoed ost

management from the portion due to changes in production levels

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Document Summary

Perpetual inventory system: directly keeps track of additions to and withdrawals from inventory. Enterprise can determine inventory quantity on hand and cogs from the accounting records at any point in time. Produces more information for management of inventory levels on a timely basis. Companies still need to conduct an inventory count even if they use the perpetual method since the records may not correctly represent actual inventory quantities. Has the ability to identify both the expected and actual amount of cogs. E(cid:454). (cid:272)a(cid:374) ide(cid:374)tif(cid:455) (cid:862)sh(cid:396)i(cid:374)kage(cid:863) (cid:894)i(cid:374)(cid:448)e(cid:374)to(cid:396)(cid:455) losses f(cid:396)o(cid:373) theft o(cid:396) (cid:271)(cid:396)eakage(cid:895) (cid:272)a(cid:374) help decide whether it would be worthwhile to put in place additional inventory management practices. Periodic inventory system: does(cid:374)"t keep (cid:272)o(cid:374)ti(cid:374)uous t(cid:396)a(cid:272)k of i(cid:374)(cid:448)e(cid:374)to(cid:396)ies a(cid:374)d cog . On the financial statement date, the enterprise conducts an inventory count to determine the ending inventory quantity and applies product costs to these quantities to determine the cost of ending inventory.

Related Questions

QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK AND INVENTORY MANAGEMENT SYSTEM OF RUSSELL LTD.

Russell Ltd carries four types raw-chemicals under both product Line A and product Line B as shown in the table below. The company uses perpetual inventory system and adopts FIFO (first in and first out) method to estimate the inventory cost. Inventory level is managed and monitored by APEX, an inventory management system. There are two central warehouses. One is located in Auckland, New Zealand and the other is in Adelaide, Australia. The warehouses dispatch clothes to all retailing stores within the country. In addition, the Australia warehouse dispatches stock to stores in Indonesia. On the balance date, the two central warehouses hold 20% of total inventory and all retailing stores hold 80% of total inventory.

Location | Number of stores

Auckland 5

Wellington 4

Christchurch 3

Perth 6

Adelaide 6

Total 24

INVENTORY AT YEAR END RETAIL STORES

Nature of the range | Label | Value $000

Product Line A Chemicals-P2P 173000

Chemical-T2P 100000

Product Line B Chemicals-Paints 89000

Chemicals-cosmetics 100000

Total Closing balance of inventory 462000

APEX - INVENTORY MANAGEMENT SYSTEM

APEX, the companyâs inventory management system has a central server. It records information on inventory item code, item description, cost price per item, selling price per item, and the available quantities. It also tracks the available quantities of inventory in each warehouse and store. Reorder point was not set up in APEX. Instead, the order quantities are based on anticipated sales level. Since some raw materials sell quicker than others, Russell has a policy of providing 30% discounts for inventories (raw materials) that have been on the shop floor for more than 4 weeks and 50% discount after 7 weeks. New inventory normally arrives in the store every 4 weeks. The discounts are automatically applied to the inventories based on their arrival dates in the stores, by using a Sales Register System â SALENET.

SALENET â THE SALES REGISTER SYSTEM

SALENET links to APEX (the companyâs inventory management system); and the terminals for the sales system are located in each store. SALENET records cash and credit card sales, calculate discounts, sales tax and produces Daily Sales Report (DSR) for each store. The DSR records all raw types of raw materials under both product lines and quantities sold on that day, and the sales and cost prices of those raw materials. The SALENET system automatically updates inventory levels in APEX at midnight daily, after which it also exports information on the DSR to the general accounting system (a separate software) for the recording of sales.

SUPPLIERS

In Russell Ltd, inventory (raw materials) code, description, and quantities ordered are assigned with a pre-numbered Purchase Order (PO). The Malaysian suppliers source the different inputs-raw materials used for producing chemicals from their local markets. The payment arrangement agreed between Russell and the Malaysian suppliers is as follows: (1) 40% of total costs as a deposit at the time when the completed negotiation and the PO are sent to the suppliers. (2) Once the raw materials are ready and shipped, Russell has 30 days to pay the remaining balance 60%. The suppliers provide a Bill of Lading as proof that the garments are shipped, its ownership transfers to Russell at the time of shipment. When the inventory are shipped (Russell receives a copy of the Bill of Lading via email), the accounting department records a journal entry to recognise both inventory-in-transit and account payable, but the actual inventory level in APEX is not updated until the inventory arrived at the warehouse.

RECEIVING INVENTORY

The shipment of raw-inputs arrives at the central warehouses. The barcodes and the quantities of inventory items shipped are printed on the outside of the cartons. A Packing Slip is attached to each shipment. Each barcode printed on the carton contains information on the inventory item code and raw materials description. For each shipment that arrives, the warehouse assistant prints off the relevant pre-numbered PO. The warehouse assistant using a scanning device reads each barcode printed on the outside the cartons and compares it with the information on the PO. When the information agrees, the warehouse assistant ticks and signs the PO. He then logs into the APEX system to click on the âreceivedâ box on the PO filed in the system, after which the APEX system updates the inventory levels and also prints out a Receiving Report (RR). At this point, APEX also sends a copy of Receiving Report to the accounting department regarding the arrival of the inventory. The accounting department then initiates a journal entry to reverse inventory-in-transit and to increase inventory. The warehouse assistant is authorised to alter the quantities received in APEX to reflect the actual received quantities when there is a discrepancy in the information between the PO and the barcodes printed on the cartons. The Receiving Report and supplierâs Packing Slip are filed in the warehouse. The signed PO and a copy of Receiving Report are handed to the inventory manager for inventory distribution.

DISTRIBUTING INVENTORY TO RETAIL STORES

The inventory (chemicals) manager is responsible for distributing inventory to the retail stores. The inventory distribution is usually based on the size and turnover of the retail store. When the new inventories arrive, the inventory manager uses APEX to allocate inventory to each retail store. APEX generates and prints a pre-numbered Distribution Report which displays the inventory item code, item description and quantities and the location of the store. Two copies of the Distribution Report go to the warehouse for packing and then shipping via an external carrier. The warehouse files one copy of the Distribution Report and the other copy goes with the inventory to a retail store. When the inventories arrive at the retail store, the shop manager logs into the APEX system. She identifies the relevant shipment by checking its reference number on the Distribution Report and then confirms receipt of the inventories by clicking the âarrived in storeâ box, after which the shop manager and/or assistants unpack the inventory. Russell carried out an annual inventory count on the 30 June 2016 at 6pm local time. During the inventory counts, the stores were shut. Each store manager has access to APEX. They can read and print out inventory reports, but they cannot edit the inventory levels in APEX. For the inventory counts, the store manager prints out a list of inventories held in the store, which shows the item code, description and quantities. Two staff members and the manager count the stock and write down the numbers counted next to each inventory item on the list. They take note of any differences. At end of the inventory count, the store manager prepares an Inventory level Report which notes the differences using SALENET. SALENET adjusts the inventory level in APEX at midnight to reflect the results from the inventory count. A copy of the Inventory Count Report from each individual store are sent to the accounting department, at where all reports are aggregated based on item codes. The accounting department then adjust the inventory level accordingly in the accounting system.

QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK, AUDIT PROCEDURE FOR INVENTORIES

Identify four control weaknesses in the inventory system of Russell Ltd. Explain how each weakness may affect the financial statements and identify the audit procedures to address the control weakness. [15 marks]

a. You are required to present your answers according to this format:

Identify a control weakness :

How the weakness may affect financial statements:

Audit procedures to address the control weakness:

b. Identify three control strengths in the inventory system of Russell Ltd and explain why each control is a strength. For each control strength, identify audit procedures to test the effectiveness of control. Use the format to present your answers. [5 marks] You are required to present your answers according to this format:

Identify a control strength:

Why it is a strength :

Audit Procedures to test the control:

c. Assuming the control risk is medium, explain substantive audit procedures for verifying inventory at year end. The substantive procedures should address the following assertions, and explanation should be given for the procedures. [25 marks] You are required to present your answers according to this format:

Assertions | Audit procedures | Details and rationale of each procedure |

Existence & Occurrence

Completeness

Accuracy & Valuation

greygiraffe335

QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK AND INVENTORY MANAGEMENT SYSTEM OF RUSSELL LTD.

There are two central warehouses. One is located in Auckland, New Zealand and the other is in Adelaide, Australia. The warehouses dispatch clothes to all retailing stores within the country. In addition, the Australia warehouse dispatches stock to stores in Indonesia. On the balance date, the two central warehouses hold 20% of total inventory and all retailing stores hold 80% of total inventory.

Location	Number of stores
Auckland	5
Wellington	4
Christchurch,	3
Perth	6
Adelaide	6
Total	24

INVENTORY AT YEAR END RETAIL STORES

Nature of the range	Label	Value $000
Product Line A	Chemicals-P2P	173000
Product Line A	Chemical-T2P	100000
Product Line B	Chemicals-Paints	89000
Product Line B	Chemicals-cosmetics	100000
Total Closing balance of inventory		462000

APEX - INVENTORY MANAGEMENT SYSTEM

Since some raw materials sell quicker than others, Russell has a policy of providing 30% discounts for inventories (raw materials) that have been on the shop floor for more than 4 weeks and 50% discount after 7 weeks. New inventory normally arrives in the store every 4 weeks. The discounts are automatically applied to the inventories based on their arrival dates in the stores, by using a Sales Register System â SALENET.

SALENET â THE SALES REGISTER SYSTEM

SUPPLIERS

RECEIVING INVENTORY

For each shipment that arrives, the warehouse assistant prints off the relevant pre-numbered PO. The warehouse assistant using a scanning device reads each barcode printed on the outside the cartons and compares it with the information on the PO. When the information agrees, the warehouse assistant ticks and signs the PO. He then logs into the APEX system to click on the âreceivedâ box on the PO filed in the system, after which the APEX system updates the inventory levels and also prints out a Receiving Report (RR). At this point, APEX also sends a copy of Receiving Report to the accounting department regarding the arrival of the inventory. The accounting department then initiates a journal entry to reverse inventory-in-transit and to increase inventory. The warehouse assistant is authorised to alter the quantities received in APEX to reflect the actual received quantities when there is a discrepancy in the information between the PO and the barcodes printed on the cartons. The Receiving Report and supplierâs Packing Slip are filed in the warehouse. The signed PO and a copy of Receiving Report are handed to the inventory manager for inventory distribution.

DISTRIBUTING INVENTORY TO RETAIL STORES

Russell carried out an annual inventory count on the 30 June 2016 at 6pm local time. During the inventory counts, the stores were shut. Each store manager has access to APEX. They can read and print out inventory reports, but they cannot edit the inventory levels in APEX. For the inventory counts, the store manager prints out a list of inventories held in the store, which shows the item code, description and quantities. Two staff members and the manager count the stock and write down the numbers counted next to each inventory item on the list. They take note of any differences. At end of the inventory count, the store manager prepares an Inventory level Report which notes the differences using SALENET. SALENET adjusts the inventory level in APEX at midnight to reflect the results from the inventory count. A copy of the Inventory Count Report from each individual store are sent to the accounting department, at where all reports are aggregated based on item codes. The accounting department then adjust the inventory level accordingly in the accounting system.

QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK, AUDIT PROCEDURE FOR INVENTORIES

Identify three control strengths in the inventory system of Russell Ltd and explain why each control is a strength. For each control strength, identify audit procedures to test the effectiveness of control. Use the format to present your answers.

You are required to present your answers according to this format:

Identify a control strength	Why it is a strength	Audit Procedures to test the control

byzantiumwildebeest582

QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK AND INVENTORY MANAGEMENT SYSTEM OF RUSSELL LTD.

Location	Number of stores
Auckland	5
Wellington	4
Christchurch,	3
Perth	6
Adelaide	6
Total	24

INVENTORY AT YEAR END RETAIL STORES

Nature of the range	Label	Value $000
Product Line A	Chemicals-P2P	173000
Product Line A	Chemical-T2P	100000
Product Line B	Chemicals-Paints	89000
Product Line B	Chemicals-cosmetics	100000
Total Closing balance of inventory		462000

APEX - INVENTORY MANAGEMENT SYSTEM

SALENET â THE SALES REGISTER SYSTEM

SUPPLIERS

RECEIVING INVENTORY

DISTRIBUTING INVENTORY TO RETAIL STORES

QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK, AUDIT PROCEDURE FOR INVENTORIES

You are required to present your answers according to this format:

Identify a control weakness

How the weakness may affect financial statements

Audit procedures to address the control weakness

salmondeer23

AFM291 Chapter Notes - Chapter 6: Continuous Track, Consignor, Consignee

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