Physical Count Procedure of Closing Inventory – Definition and Explanation:
The inventory value shown in the balance sheet is usually calculated through a physical inventory count. Inventory count is a process of physically checking and counting the inventory.
This often believed that inventory is counted and valued on the last day of the accounting period. This might be true in a small business, but it is often impossible in a larger businesses. There may be a number of reasons; e.g., illness or absence of staff on the day of inventory counts or there may be too many items of inventory to do it so quickly. This means that inventory count may take palace over a number of days or weeks and even months.
Solved Examples – Inventory Count or Closing Inventory Figure:
John Smith’s financial year ends on 31 May. Due to staff illness, he could not do his inventory count until 6th June. He values the inventory at that date at a figure of $9400. In the first six days of June the following events had occurred:
What was his true closing inventory figure on 31 May?
Statement to calculate inventory on 31 May
(1) Since these items were not sold on 31 May, they would still have been in inventory at that date and must be added back, but this adding back must be at cost price, not selling price. This is also true for returns inwards.
To find out the cost price, we must multiply this with 75% as if profit margin is 25% of sales value then cost will be 75% of sales price.
(2) Purchases and returns inwards in the first six days of June were clearly not in inventory on 31 May and must be deducted from the inventory figure.
(3) Sales, returns outwards and drawings in first six days at cost price must be added in the inventory figure since they were in the inventory at 31 May.
Notice that if John Smith had valued his inventory on 27 May, the adjustments would have been made the opposite way. Sales, returns outwards and drawings in the last four days of May would have been deducted from the 27 May figure (since they were lost to inventory before the end of the year). Purchases and returns inwards would have been added in to give the true year end position.
Darrin Vardon Prepares his accounts on 31 December each year but unfortunately the inventory count could not take place until 5th January 2016 on which date inventory was valued at $53400.
Subsequent investigations showed that during the period from 1st January to 5th January 2016, the following transactions took place:
(i) Sales were $6200
(ii) Returns inwards $480
(iii) Purchases $3840
(iv) Returns outwards $350
(v) Drawings of goods by Darrin $200
It is Darrin’s policy to earn a uniform rate of gross profit of 25% on all his sales.
Calculate the closing inventory figure to be shown in the financial statements as at 31 December 2015.
Calculation of Inventory on 31 December 2015
The annual inventory count of John Winter’s business did not take place on the company’s year end on 30 September 2015 owing to staff illness. However, inventory was counted on 8 October 2015 which showed inventory value of $24600.
The following transactions took place during the period 1 to 8 October:
(i) Sales $4400
(ii) Returns inwards $230
(iii) Purchases $3200 at list price (trade discount is 10%)
(iv) Returns outwards at list price $220
(v) Goods withdrawn by John Winter amounting to $250
However, on checking the figures, the following additional facts also discovered:
(vi) Goods costing $240 sent on a sale or return basis to John Winter had been included in inventory. No decision to purchase these goods had been made.
(vii) On one of the inventory sheets, a sub total value of $8145 had been carried forward on to the next sheet as $8415
(viii) Some goods costing $200 had been damaged and were unsaleable in their present condition. They could, however, be sold for $110 after repairs estimated at $40 had been carried out.
(ix) Inventory did not include goods which were received on 28 September, which cost $380, but no invoice has been received.
Note: A gross profit of 25% is obtained by John Winter on the cost of all goods sold.
A computation of John Winter’s corrected inventory valuation at 30 September 2015.
Calculation of Inventory as at 30 September 2015