Inventory Count Slides

HM UMAR FAROOQ RANA
CERTIFIED CHARTERED ACCOUNTANT (UK), CA-ICAP (FINAL), MCOM
1
Why is Inventory Control Important?
 Inventory is a significant asset and for many
companies the largest asset.
 Inventory is central to the main activity of
merchandising and manufacturing
companies.
 Mistakes in determining inventory cost can
cause critical errors in financial statements.
 Inventory must be protected from external
risks ( such as fire and theft) and internal
fraud by employees.
Recording and Measuring
Inventory
Types of Inventory
Merchandise Manufacturing
Inventory Inventory
Goods acquired for •Raw Materials
resale •Work-in-Process
•Finished Goods
Margin and Markup
Gross Profit %age is 20%
• Margin based on sale price so sales are taken
100% and equation will be
Sales = CGS+ GP
100%= 80% + 20%
• Markup based on cost so costs are taken 100%
and equation will be
Sales = CGS+ GP
120% = 100% + 20%
4
Sales 300,000 Cost of sales 300,000
Gross Profit Margin 30% Gross Profit Markup 30%
Required: calculate Required: calculate
•Cost of goods sold •Sales
•Gross profit •Gross profit
Sales 300,000 Cost of sales 300,000

Gross Profit Markup 30% Gross Profit Margin 30%
•Cost of goods sold •Sales
5
REQUIRED AMOUNT=
GIVEN AMOUNT
%AGE OF REQUIRED
AMOUNT
%AGE OF GIVEN AMOUNT
6
Jan 1st to Dec 31, 20x1
Jan 1st to Dec 31, 20x1 Opening inventory 15,000
Sales made to
Bashir Rs. 20,000
Sales made to Nazir Rs. 80,000
Bashir Rs. 20,000 Allah Ditta Rs. 120,000
Nazir Rs. 80,000 Gross Profit Markup 30%
Allah Ditta Rs. 120,000 Purchases during the
Gross Profit Margin 30% period Rs. 280,000
•Cost of goods sold •Cost of goods sold
•Closing Inventory
7
• Opening inventory 15,000
• Gross Profit Margin 30%
Sales made to
Bashir Rs. 20,000
Nazir Rs. 80,000
Allah Ditta Rs. 120,000
To a relative Rs. 12,000 at gross profit margin of 15%
• Purchases during the period Rs. 280,000
Required: calculate
• Cost of goods sold
• Gross profit
• Closing Inventory
8
• Closing inventory 15,000
• Gross Profit Margin 30%
Sales made to
• Bashir Rs. 20,000
• Nazir Rs. 80,000
• Allah Ditta Rs. 120,000
• Sales to a relative Rs. 12,000 at gross profit margin of 15%
• To an non-profit organization Rs. 15,000 at cost
• Purchases during the period Rs. 180,000
Required: calculate
• Cost of goods sold
• Gross profit
• Opening Inventory
9
Valuation of inventory
Inventory must be measured in the

financial statements at the lower of:
• cost, or
• net realisable value (NRV).
10
IAS 2 states that ‘the cost of
inventories shall comprise
The purchase cost of inventory will consist of the following:
• the purchase price
• plus import duties and other non-recoverable taxes (but excluding recoverable
sales tax)
• plus transport, handling and other costs directly attributable to the purchase
(carriage inwards), if these costs are additional to the purchase price.
• The purchase price excludes any settlement discounts, and is the cost after
deduction of trade discount.
Conversion costs
Conversion costs consist of:
• costs directly related to units of production, such as costs of direct labour (i.e. the
cost of the labour employed to perform the conversion work)
• fixed and variable production overheads, which must be allocated to costs of
items produced and closing inventories. (Fixed production overheads must be
allocated to costs of finished output and closing inventories on the basis of the normal
production capacity in the period)
11
Manufacturing Inventories
Raw Work in Finished
Materials Process Goods
(1) $XX $XX (4) $XX $XX (7) $XX $XX (8)
Direct
Labor
(2) $XX $XX (5) Cost of Goods
Sold
Manufacturing
Overhead $XX
(3) $XX $XX (6)
(1) Raw materials purchased

(2) Direct labor incurred
(3) Manufacturing overhead incurred
(4) Raw materials used
(5) Direct labor applied
(6) Manufacturing overhead applied
(7) Work in process transferred to finished goods
(8) Finished goods sold
Net realizable value
Net realizable value is a derivation of the estimated selling price of
goods, minus some deductions.
NRV might be lower than cost so that the cost of

inventories may not be recoverable in the following
circumstances:
• inventories are damaged;
• inventories have become wholly or partially
obsolete; or,
• Selling prices have declined.
13
14
15
16
Calculate the value of inventories that should be reported in
the financial statements of MTC as at 31 December 2015.
17
Inventory counts (stock takes)
• A stock take is a physical verification of the
amount of inventory that a business has.
• Each item of inventory is counted and entered
onto inventory sheets. The inventory counted can
then be valued.
Periodic inventory systems
• Inventory counts are vital for the operation of the
periodic inventory system as it depends on the
closing inventory at the end of each period being
recognised in the system of accounts.
18
Perpetual inventory systems
• Inventory counts are also important to the operation of
perpetual inventory systems as the identify differences
between the balance on the inventory account (the
inventory that should be there) and the actual physical
quantity of inventory.
• The inventory account must be adjusted for any material
difference.
• Any difference should be investigated. Possible causes of
difference between the balance on the inventory account
and the physical inventory counted include the following.
a) Theft of inventory.
b) Damage to inventory with failure to record that damage.
c) Mis-posting of inventory receipts or issues (for example
posting component A as component B).
d) Failure to record a receipt.
e) Failure to record an issue.
19
Timing of inventory counts
• Ideally the inventory count takes place on the last
day of an accounting period (the reporting date).
However, this is not always possible due to the
day on which the last day of the accounting
period falls or perhaps, not having enough
employees to count the inventory at all sites at
the same time.
• If the inventory is counted at a date that differs
from the reporting date the balance must be
adjusted for transactions between the two dates.
20
The cost of inventory of Imran Trading Corporation (MTC)
based on inventory count carried out on 17 January 2016 was
Rs. 675,000. These included goods costing Rs. 15,000 which
were purchased in December 2015 and have a net realisable
value of Rs. 12,000.
Calculate the value of inventories that should be reported in the

financial statements of MTC as at 31 December 2015.
21
.

financial statements of Sukkur trading as at 31 December
2015.
22
Fazlurehman Limited closes its accounts on June 30 each year. The
company was unable to take inventory of physical inventory until July 14,
2015 on which date the physical inventory was valued at Rs. 185,000. The
following details are available in respect of the period July 1 to July 14,
2015:
Payments against purchases amounted to Rs. 48,000 and
included:
• Rs. 5,000 in respect of goods received on June 28, 2015;
• Rs. 6,000 in respect of goods received on July 18, 2015;
• Rs. 2,000 in respect of goods received and returned to
supplier on the same date i.e. July 7, 2015.
Required:
Determine the amount of inventory required to be disclosed in the financial statements
as at June 30, 2015. The rate of gross profit is 25% of selling price.
23
Raheel Limited closes its accounts on June 30 each year. The
company was unable to take inventory of physical inventory
until July 14, 2015 on which date the physical inventory was
valued at Rs. 185,000. The following details are available in
respect of the period July 1 to July 14, 2015:
• An inspection of the inventory count sheets prepared

on July 14, 2015 showed that a page total of Rs.
5,000 had been carried to the summary as Rs. 6,000.
In addition, the total of another page had been
undercasted by Rs. 200.
• Included in the physical count were goods costing Rs.
2,200 which were held on behalf of a supplier.
Required:
Determine the amount of inventory required to be disclosed in the
financial statements as at June 30, 2015. The rate of gross profit is 25%
of selling price. 24
The cost of inventory of Imran Trading Corporation (MTC) based
on inventory count carried out on 17 January 2016 was Rs.
675,000. These included goods costing Rs. 10,000 which were
purchased in December 2015 and have a net realisable value of
Rs. 8,000.
During the period between 31 December 2015 and 17 January
2016, following transactions took place:
• Sale of goods amounted to Rs. 250,000. MTC normally sells

goods at a mark-up of 25% of cost. However, 20% of the sales
were made at a discount of 8% of the normal selling price.

25
Bogambo Limited closes its accounts on June 30 each year.
The company was unable to take inventory of physical
inventory until July 14, 2015 on which date the physical
inventory was valued at Rs. 185,000. The following details are
available in respect of the period July 1 to July 14, 2015:
Collection against sales amounted to Rs. 60,000 and included:

• Rs. 1,500 in respect of goods which left the warehouse on June 29, 2015;
• Rs. 2,800 in respect of goods which were not dispatched until July 15,
2015;
• Rs. 760 in respect of goods invoiced and dispatched on July 10, 2015 but
returned by the customers on July 12. These were included in the
inventory taken on July 14, 2015.
Required:
Determine the amount of inventory required to be disclosed in the
financial statements as at June 30, 2015. The rate of gross profit is 25% of
selling price.
26
The cost of inventory of Heeran Trading Corporation (MTC)
based on inventory count carried out on 17 January 2016 was
Rs. 675,000. These included goods costing Rs. 10,000 which
were purchased in December 2015 and have a net realisable
value of Rs. 8,000.
During the period between 31 December 2015 and 17 January 2016,
following transactions took place:
• Sale of goods amounted to Rs. 250,000. MTC normally sells goods
at a margin of 25% of sales. However, 30% of the sales were made
at a discount of 20% of the normal selling price.
• Goods costing Rs. 1990 were returned to a supplier
• Goods sold to a customer on 4 January 2016 were returned on 15
January 2016.

27
Afridi 1 does not keep perpetual records of inventory. At
the end of each quarter, the value of inventory is
determined through physical inventory. However, the
record of inventory taken on 31 March 2015 was destroyed
in an accident and Afridi has extracted the following
information for the purpose of inventory valuation:
• Invoices entered in the purchase day book, during the
quarter, totalled Rs. 138,560 of which Rs. 28,000 related to
the goods received on or before 31 December 2014.
Invoices entered in April 2015 relating to goods received in
March 2015 amount to Rs. 37,000.
• On 31 December 2014, the inventory was valued at Rs.
140,525.
Required:
• Calculate the amount of inventory in hand as on 31 March
2015.
28
Afridi 2 does not keep perpetual records of inventory.
At the end of each quarter, the value of inventory is
record of inventory taken on 31 March 2015 was
destroyed in an accident and Afridi has extracted the
following information for the purpose of inventory
valuation:
• Invoices entered in the purchase day book, during the
quarter, totalled Rs. 140,560 of which Rs. 28,000
related to the goods received on or before 31
December 2014. Invoices entered in April 2015 relating
to goods received in March 2015 amount to Rs. 37,000.
• On 31 December 2014, the inventory was valued at Rs. 142,525.
Required:
• Calculate the amount of inventory in hand as on 31
March 2015.
29
Afridi 3 does not keep perpetual records of inventory. At the end of
each quarter, the value of inventory is determined through physical
inventory. However, the record of inventory taken on 31 March
2015 was destroyed in an accident and Afridi has extracted the
following information for the purpose of inventory valuation:
• Sales invoiced to customers amounted to Rs. 151,073 of which Rs.

38,240 related to goods dispatched on or before 31 December
2014. Goods dispatched to customers before 31 March 2015 but
invoiced in April 2015 amounted to Rs. 25,421.
• Afridi normally sells goods at a margin of 20% on cost. However, he

had allowed a special discount of 10% on goods costing Rs. 6,000
which were sold on 15 February 2015.
Required:
• Calculate the amount of inventory in hand as on 31 March 2015.
30
Afridi 4 does not keep perpetual records of inventory. At
the end of each quarter, the value of inventory is
record of inventory taken on 31 March 2015 was destroyed
in an accident and Afridi has extracted the following
• On 31 December 2014, the inventory was valued at Rs.
140,525. However, while reviewing these inventory sheets
on 31 March 2015 the following discrepancies were found:
• A page total of Rs. 15,059 had been carried to the summary
as Rs. 25,059.
• 1,000 items costing Rs. 10 each had been valued at Rs. 0.50
each.
Required:
• Calculate the amount of inventory in hand as on 31 March
2015.
31
Afridi 5 does not keep perpetual records of inventory. At the end of
each quarter, the value of inventory is determined through physical
inventory. However, the record of inventory taken on 31 March 2015
was destroyed in an accident and Afridi has extracted the following
• Purchases included Rs. 2,200 spent on acquisition of a ceiling fan for

the shop.
• A sale invoice of Rs. 5,760 had been recorded twice in the sales day
book.
• Goods having sale value of Rs. 2,100 were given by way of charity.
• Afridi normally sells goods at a margin of 20% on cost. However, he had
allowed a special discount of 10% on goods costing Rs. 6,000 which
were sold on 15 February 2015.
Required:
• Calculate the amount of inventory in hand as on 31 March 2015.
32
Bashir 1 inventory ledger account balance at December 31, 2015 under
the perpetual inventory system, was Rs. 73,410,000. The physical count
revealed that the cost of inventory on hand was Rs. 71,400,000 only. Its
owner Mr. Kaizer expected a small inventory shortfall due to damage
and petty theft, but considered this shortfall to be excessive.
On January 5, 2016, Kaizer carried out an investigation and discovered
the following:
Goods costing Rs. 300,000 were invoiced to Ebrahim

Limited for Rs. 425,000 on December 29, 2015 on
FOB basis. The goods were actually dispatched to
the customer on January 2, 2016.
Required:
Decide whether it will be adjusted to recorded
balance or physically counted balance?
33
Bashir 2 inventory ledger account balance at December 31, 2015
under the perpetual inventory system, was Rs. 73,410,000. The
physical count revealed that the cost of inventory on hand was Rs.
71,400,000 only. Its owner Mr. Kaizer expected a small inventory
shortfall due to damage and petty theft, but considered this
shortfall to be excessive.
On January 5, 2016, Kaizer carried out an investigation and
discovered the following:
• Included in the physical count were goods worth
Rs. 200,000 which were held on behalf of a third
party.
Required:
• Decide whether it will be adjusted to recorded
34
the following:
• Goods costing Rs. 410,000 purchased on credit from

Mustafa & Co. were received on December 28, 2015
and included in the physical count. However, the
purchase had not been recorded.
Required:
35
Bashir 4 inventory ledger account balance at December 31, 2015 under the
perpetual inventory system, was Rs. 73,410,000. The physical count revealed that
the cost of inventory on hand was Rs. 71,400,000 only. Its owner Mr. Kaizer
expected a small inventory shortfall due to damage and petty theft, but considered
this shortfall to be excessive.
On January 5, 2016, Kaizer carried out an investigation and discovered the
following:
On December 23, 2015 goods costing Rs. 400,000 were

purchased on credit from Mubina Supplies, Faisalabad. The
purchase was recorded on December 27, 2015 i.e. when the
goods were lifted by the transport company appointed by Mr.
Kaizar, from the warehouse of Mubina Supplies. The goods
arrived on January 3, 2016.
Required:
• Decide whether it will be adjusted to recorded balance or
physically counted balance?
36
Bashir 5 inventory ledger account balance at December 31, 2015
under the perpetual inventory system, was Rs. 73,410,000. The
physical count revealed that the cost of inventory on hand was Rs.
71,400,000 only. Its owner Mr. Kaizer expected a small inventory
shortfall due to damage and petty theft, but considered this
shortfall to be excessive.
On January 5, 2016, Kaizer carried out an investigation and
discovered the following:
• List of inventory at a shop situated in Sialkot had
been under cast by Rs. 90,000.
Required:
37
the following:
On December 25, 2015 goods costing Rs. 310,000

were sold on credit to Skims Industries for Rs.
500,000. The goods were shipped on December 28,
2015 and were received by the customer on January
2, 2016.
Required:
Decide whether it will be adjusted to recorded
38
the following:
Goods costing Rs. 2,500,000 had been returned to
Ali Garments on December 30, 2015. A credit note
was received from the supplier on January 5, 2016
and entered in the books in January 2016. No
payment had been made for the goods prior to their
return.
Required:
39
the following:
• Goods sold to a customer Mr. Saleem were recorded
in inventory ledger account at the sale price of Rs.
780,000. The goods were sold at cost plus 30%.
Required:
40
The cost of inventory of Mughal Trading Corporation (MTC) based on
inventory count carried out on 17 January 2016 was Rs. 675,000. These
included goods costing Rs. 15,000 which were purchased in December 2015
and have a net realisable value of Rs. 12,000.
• During the period between 31 December 2015 and 17 January 2016, following
transactions took place:
• Value of goods purchased amounted to Rs. 155,710.
• Sale of goods amounted to Rs. 250,000. MTC normally sells goods at a mark-up
of 25% of cost. However, 20% of the sales were made at a discount of 8% of
the normal selling price.
• Goods costing Rs. 1990 were returned to a supplier
• Goods sold to a customer on 4 January 2016 were returned on 15 January
2016.
Required:
• Calculate the value of inventories that should be reported in the financial
statements of MTC as at 31 December 2015.
41
Salman 1 Limited (SL) closes its books on 30th June each year.
Due to an administrative problem, SL carried out the stock-
taking on 10 July 2016. The cost of stock as verified on 10 July
2016 was Rs. 812,500.
Details of transactions from 1 July to 10 July are given
below:
Total sales amounted to Rs. 326,000. The goods were sold in
the normal course of business at cost plus 25% except the
following:
• a sale of Rs. 25,000 was made at 40% of normal selling price.
• a sale of Rs. 60,000 was made at normal selling price but the
goods were slightly damaged and an expenditure of Rs.
15,000 was incurred on these goods to bring them to saleable
condition.
Required:
• Calculate the value of stock as at 30 June 2016.
42
Salman 2 Limited (SL) closes its books on 30th June
each year. Due to an administrative problem, SL
carried out the stock-taking on 10 July 2016. The
cost of stock as verified on 10 July 2016 was Rs.
812,500.
Details of transactions from 1 July to 10 July are
given below:
The goods were sold in the normal course of
business at cost plus 25%.
Sales returns and purchase returns amounted to Rs.
11,000 and Rs. 6,000 respectively.
• Required:
43
Salman 3 Limited (SL) closes its books on 30th June each
year. Due to an administrative problem, SL carried out
the stock-taking on 10 July 2016. The cost of stock as
verified on 10 July 2016 was Rs. 812,500.
Details of transactions from 1 July to 10 July are given
below:
• Total sales amounted to Rs. 326,000. The goods were
sold in the normal course of business at cost plus 25%.
• Goods with customers on sale or return basis were Rs.
50,000 (at invoice value). The goods had been sent to the
customers on 15 June 2016. The customers have the right
to return the goods within four weeks. One of the
customers informed SL on 29 June 2016 that goods worth
Rs. 20,000 had been destroyed in fire.
• Required:
44
Salman Limited (SL) closes its books on 30th June each year. Due to an
administrative problem, SL carried out the stock-taking on 10 July
2016. The cost of stock as verified on 10 July 2016 was Rs. 812,500.
Details of transactions from 1 July to 10 July are given below:
a) Total sales amounted to Rs. 326,000. The goods were sold in the
normal course of business at cost plus 25% except the following:
 a sale of Rs. 25,000 was made at 40% of normal selling price.
 a sale of Rs. 60,000 was made at normal selling price but the goods
were slightly damaged and an expenditure of Rs. 15,000 was incurred
on these goods to bring them to saleable condition.
a) Purchases amounted to Rs. 246,000. All such purchases were
included in stock as on 10 July 2016.
b) Sales returns and purchase returns amounted to Rs. 11,000 and Rs.
6,000 respectively.
Required:
45
Calculate the value of closing inventory on 30th
June, 2016.
46
47

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HM UMAR FAROOQ RANA

CERTIFIED CHARTERED ACCOUNTANT (UK), CA-ICAP (FINAL), MCOM

Sales 300,000 Cost of sales 300,000

Inventory must be measured in the

(1) Raw materials purchased

NRV might be lower than cost so that the cost of

Calculate the value of inventories that should be reported in the

Calculate the value of inventories that should be reported in the

• An inspection of the inventory count sheets prepared

• Sale of goods amounted to Rs. 250,000. MTC normally sells

Calculate the value of inventories that should be reported in the

Collection against sales amounted to Rs. 60,000 and included:

Calculate the value of inventories that should be reported in the

• Sales invoiced to customers amounted to Rs. 151,073 of which Rs.

• Afridi normally sells goods at a margin of 20% on cost. However, he

• Purchases included Rs. 2,200 spent on acquisition of a ceiling fan for

Goods costing Rs. 300,000 were invoiced to Ebrahim

• Goods costing Rs. 410,000 purchased on credit from

On December 23, 2015 goods costing Rs. 400,000 were

On December 25, 2015 goods costing Rs. 310,000

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