In this assignment let us more understanding the topic of accounting for inventories .We know got two of inventory valuation methods and two of inventory system .We also know the meaning of cost and lower of cost or market (LCM) and Net realizable value (NRV).Then ,we know real business how to use this all method in business .
Inventories are assets of : To held for sale in not unusual course of the business ,also called in “finished goods” . In work that have not been completed but incurred in capital investment in company ,also called in “work in progress”. And a material or substance that purchase required to use in production of goods or service for the sale ,also called in “raw material” . Goods that purchases for resale and consumable stores .
First in first out (FIFO) method is meaning the first goods or first assets that received or produced are the first goods to issued .During economic inflation ,the closing inventory and profit is higher and cost of goods sold is lower. Because older inventory from the earlier lower price purchases will be issue out for sales first in lower cost of goods sold out . FIFO may be used by aA individualA or a corporation. Weight Average Cost (WAC) method is meaning use the cost of goods available for Sale then divided it by use the sum amount of goods from the purchases and beginning inventory. Then this will give us Weighted Average Cost per unit. The physical count is to performed in the ending inventory to decide the amount of goods left in company. Lastly , the amount are multiply of the Weighted Average Cost per Unit after that to get the estimate the ending inventory cost.
The Perpetual inventory system is can also call continuous system .Its system means of inventory on hand can determined at any time so that the profit can calculated as frequently as management requires in monthly or any time. The Periodic inventory system is usually only count all inventory items on business at the end of the accounting period .It process of count inventory causes disruption to the normal routine of business.
Cost is the value of money of the product, items, services and also other items that buy for using of business. Cost also can given up to make decision of decide the price of the product. Product will depend on cost to decide whether the price should high or low. Lower of Cost or Market (LCM) is a way to report inventory. When the lower of cost or market is applied to inventory, the accountant will list the item at the lower of the cost. If the inventory has decreased below historical cost then the value will reduced and also report on balance sheet Net realizable value (NRV) is value of an asset that can be realized by a company, less a reasonable prediction of the costs associated. Net realisable value is generate equal to selling price of the inventory goods less than selling costs. Then to get the net realizable value is use the estimated selling price or current market price minus all the expenditure to incurred and before complete the sales that call selling cost. In prudence concept ,cost more than NRV ,the company required use NRV to value its inventory. Cost less than NRV ,the company required use cost to value its inventory
In illustrations we were give five example of real business .We will explain each real business use which inventories method, inventory system and choose lower of cost or market (LCM) or Net realizable value (NRV). First ,Macdonald company is an international company that provides people a source of fast food in now a busy world. Macdonald’s practiced FIFO method in their stocks because they are in food industry and the freshness of their serving is important, therefore Macdonald will clear out their earlier stock faster to prevent the loss in their freshness of food. This means the raw materials are used in order they are receive. So that, stock in Macdonald is always good quality to sold to customers because their products are sold in the order they are made. When they use First In, Last Out (FILO)method , then their finished product (food) will be smelly not good and not fresh or mildew because the first product that prepared is most last to sold out to customers. Macdonald’s is use the amount that lowers of cost or market as of the balance sheet date of inventories minus all valuation and other allowances. It did not include the non-current inventory in their balance sheet. The company uses the lower of cost or market to ensure that their company valuation is fair. Macdonald uses the perpetual inventory system, this is because they business operate in large number of stock in stock out, therefore they have to have instance visual on their preparation of raw material, enough supply of foods, drinks and else. Second,TOMEI company sell luxury goods, they have various type of accessory in gold, silver. TOMEI handle their raw material inventory by using WAC method. There is because the raw material such as gold and silver conservation period is long. They handle their raw material using WAC because when TOMEI process the raw material, what they needed is not only simple gold as an accessory, it might add with silver or else. Therefore the use of WAC is reasonable from TOMEI to manage their inventory. TOMEI value their inventory using NRV, as we know that the inventory of TOMEI is raw material in gold or silver, as this will be material in their reporting of their financial position. TOMEI’s valued the inventory by NRV or selling price, to ensure that the shareholder’s benefit and to build a good position to the public acknowledgement. The refreshment of their inventory will be in periodic system. The raw material of the luxury goods will take time for the miner to mine. Therefore TOMEI buy in large quantity if they needed or they will have to mine themselves for raw gold and silver. Third ,The Coffee Bean and Tea Leaf or more well known as coffee bean, besides franchising their business, they are actually in food industry that provides high quality of coffee, serving of delights. Coffee Bean they have their own stock kept. In terms of valuating their stock they practice FIFO methods. Where this method is recognize by IFRS, and also practice parallel with their business activities. FIFO methods is main used to clear off the stock which came in first where most company will use to ensure that there is no loss of inventory due to expiry. Coffee Bean uses NRV method to value their stock kept. They have many branch to take care as the branch have different management system, therefore they try to make it equal and same for all. As Coffee Bean mostly will be in franchised, their stock will be in perpetual system, they will always keep all their records, books. To guarantee there what menu stated will be provided. Third , Dell have been operating for more than 26 years, Dell has branches over the world, communities, customers to use technology to realize their dreams. Dell product is more towards technology and software. Dell manage their hardware inventory by WAC method, as we know that dell is producing a complete set of technology product, for example a desktop, it is not important where the hardware use is first in or last in. The finished goods will be run on a test, the parts that malfunctions will be replaced. Dell is an international company that operates to handle thousand of customer a day. Their value of stock will be valued according to NRV, the NRV will directly influence the securities of Dell, it is due to the inventory will be a major asset of them. Dell companies practice perpetual system for their inventory maintenance, with the system Dell companies will have their real time records on their inventory. It will help them to secure for the production and also to keep up with the order from their customer. Finally, Intel is a global brand with offices in more than 25 countries, major of production of Intel will be chipset and computer’s processor. As Intel is a huge company that has strict inventory management, FIFO method is used to monitor the activities of the inventory. The main reason for this method is used is because it can help to clear out the stock that eventually coming in for quiet a moment. For most of the international company, NRV will be use to value their stock inventory as this will affect in the balance sheet and also will have an effect on the security of the company. Intel practices a periodic system on their inventory checking. In order to keep up to the speed of the production Intel have to purchase raw material frequently, therefore a periodic supply of the material in an important fact to Intel.
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