Measuring Inventory - the details

Someone on the forum asked me about the valuation of inventory, so I thought I'd write a whole blog about it.  I know, it's a heavy subject for a Saturday!

Let's recap on what inventory is:  inventory is a type of an asset that is held for sale as part of the normal course of business.  It can be a finished product, or partially finished.

Inventories are measured at the lowest of

1. cost, and 
2. net realizable value

What is cost?

Cost includes the following:

• Purchase price of the inventory
• Any direct labour that was used on the inventory
• An allocation of any fixed/variable costs
• Import duties/taxes
• Transportation and handling costs
• Interest costs are included only when it takes a long time for the inventory to be finished and there's a policy to capitalize interest costs

What is net realizable value?

Net realizable value includes the following:

• Selling price
• Less: any costs to complete the product (estimate)
• Less: any selling costs

It's important not to confuse net realizable value with fair market value!

Fair market value (FMV) is the actual selling price on the market.  It doesn't include the costs to complete the product or any selling costs.  FMV is therefore usually larger than net realizable value.

Hilarious Video about Accounting

Must. Watch. Now.

Great Link! Cool career paths in accounting.

http://www.thedailymuse.com/paths/7-cool-career-paths-in-accounting/

How to get your CGA

This is a GREAT video that explains the process:

http://cga-domore.org/articles/how-to-get-video

Corporations

Corporations are one type of a business, with other types being Sole Proprietorship or Partnership.  They generally have the following characteristics:

• The Shareholders are the owners of the corporation.  There can be one shareholder or a million.
• Common shareholders have voting rights.
• Corporations can either be public or private.
• The Corporation is its own legal entity.
• Corporations have limited liability, which means that the shareholders cannot be sued personally.
• The Board of Directors, which are elected by the shareholders, are in charge of governance and setting various corporate policies.
• It is the most complicated business structure.

Depending on the type of business one has, he/she may or may not want to incorporate.  Here are some things to think about:

Advantages	Disadvantages
Limited liability	Government regulations
Easy to raise capital	Organizational costs
Continuous life	Lack of direct influence
Ease of transferring ownership	Tax Considerations
Tax considerations

Need a Mentor?

I've just received an email last night asking whether I can someone with a mentor.  Just someone who chose accounting as a career and would like to chat about their experience.  Since I know a lot of accomplished accountants who already got their designations, I thought I'd put it out there that if you're interested in a mentor/"buddy", I can help you with that!

Send me a line at yourjournalentry@gmail.com and describe to me the type of mentor that you're looking for (i.e. a CA, CMA, etc.).

Inventory - Overview

A whole book can probably be written on inventory, so I thought that for starters, I'll give a high-level overview.

I'm sure most of you can guess what inventory actually is: these are products that are sold by the company.  They are the "blood" of the organization - by selling these items, a company makes money.

Don't confuse inventory with fixed assets though - bought are tangible, but they're not the same at all.  Inventory is sold to make money, while fixed assets are held by the company for more than one year (usually) and help with the operations.  For example, a sowing machine could be considered inventory in a company that sells sowing machine, while it could be considered an asset in a company that sells t-shirts. 

Inventory can be found on a balance sheet, under "Current Assets".

An account called Cost of Goods Sold can be found on the income statement.

An important formula to remember (and of course, understand!) is as follows:

Beginning Inventory

+

Purchases of Inventory

- 

Cost of Goods Sold (I/S)

=

Ending Inventory (B/S)

By knowing 3 out of the 4 figures above, we can figure out the 4th number.  For example, if we know how much inventory we had at the beginning, how much inventory we purchased during the year, and what our ending inventory is, we can derive our cost of goods sold.

Types of Businesses

Before starting any accounting problem, it's always a good idea to understand the type of business at question, and the environment in which it operates in.  Every business is unique, and has its own characteristics.  Some common question to ask yourself include:

• Is this business a sole proprietorship? corporation? partnership?
• Is the company public or private?
• What is the industry in which the business operates in?  Is it competitive?  
• Is the business selling goods or providing services?
• Is the company a retailer? wholesaler? manufacturer?
• Who are the primary customers?  
• What are the company's biggest assets?  Are they tangible?  Intangible?

It is important to be able to answer these questions because different types of companies can have different accounting implications.  For example, a large corporation that manufactures cars will have very different accounting than a sole-proprietor doing event planning.

I promise to write more about each of the points mentioned above.  Each question is a separate blog in itself!

The Links Page is Updated

Let me know if you would like to see more on a particular subject!

CheckMark

Every season, the Institute of Chartered Accountants of Ontario (ICAO) issues a magazine called CheckMark.  It usually has a bunch of articles on the CA profession and any important news that can be relevant to CAs.  

The Summer 2013 issue just came out, and so I encourage you to flip through the pages and see whether you find anything interesting there.

Here's the link to the online version: CheckMark

Happy reading! 

CMA's Site for High School Students

There's a really good site that you should check out: http://mih.cma-ontario.org/Home.aspx

Spend some time exploring it and viewing the videos - it's worth your time.  

The Income Summary Account

Someone posted a question about the Income Summary Account and so I've decided to do a whole blog post about it.

First of all, what is the Income Summary Account?  This is a temporary account where we put all of the revenue and expense accounts.  At the end of the period, this account is emptied into the Retained earnings account.

The best way to understand how the account works is to look at an example.

Assume you have $100 in revenues (a credit balance) and $80 in expenses (a debit balance).  We would first need to move these values into the Income Summary account as follows:

DR Revenues               100

     CR Income Summary              100

DR Income Summary    80

     CR Expenses                            80

After the above entries, our revenue and expense accounts are now zero, while our Income Summary account is now a credit of 20 (think: 100 credit and 80 debit nets to a 20 credit).  We would then "empty out" our Income Summary account into the Retained Earnings account that sits within the Shareholders' Equity.

DR Income Summary    20

     CR Retained Earnings               20

Now what would happen if revenues would be less than expenses?  

Thinking about University? Consider University of Waterloo

University of Waterloo has one of the best accounting programs out there.  I promise you that I'm not biased towards the place, as I did not even attend it myself.  But I've seen students coming out of that school who are very knowledgeable, pass their professional exams easily, and have a very good work ethic.  They also have an amazing co-op program. 

Waterloo has 4 types of accounting programs:

• Bachelor of Accounting and Financial Management
• Bachelor of Computing and Financial Management
• Bachelor of Science in Biotechnology & Chartered Accountancy
• Bachelor of Mathematics in Chartered Accountancy

The most popular program is the very first one on the list above, but they're all equally good.

I encourage you to get a head start and check out their web site to familiarize yourself with UW.

http://accounting.uwaterloo.ca/

Depreciation - Overview

You've probably heard the term depreciation before and you may even have already covered it your accounting class.  It's very important, however, to really understand the concept as opposed to simply crunch some numbers and calculate what depreciation is.

In order to truly understand something, the best way to approach it is to visualize it with the help of an example.  

Here goes: Assume you bought a brand new laptop (say... the newest MacBook Air!) and you paid $1500 for it.  You estimate that you will use this computer for 5 years.  Every year subsequent the purchase, the laptop will be worth much less than $1500 because it will be used by you and it won't be new anymore.  If, for example, a year after you bought it the laptop is worth $1200, you can easily say that it lost $300 in value.  This $300 can then be classified as "depreciation".

There are many ways to calculate depreciation, and that's a topic for a separate blog entry.  For now, make sure you understand the concept itself - it's going to come up in your classes and in "real life" after you graduate :)

Private or Public?

Have you ever heard of people referring to private and public companies, and you wondered what it really meant?  Does a private company 'hide' from others?  What does that really mean?

Public companies are organizations that have their shares listed on the stock exchange.  Anyone can purchase this company's shares, and that's why the company is called "Public".  

Private companies do not have their shares on a stock exchange.  The owner(s) hold their shares in the company and do not offer them to the general public for sale.

As an accountant (or accountant to be!), you're probably wondering whether there are any implications to this.  In Canada, different rules apply to different types of companies.  If a company is public, it must adhere to something called IFRS which stands for International Financial Reporting Standards.  If a company is public, it can also use IFRS, or stick with ASPE, which stands for Accounting Standards for Public Enterprises.

IFRS and ASPE are both types of "rules" that accountants must follow.  I promise to write a separate blog about these guys in the future.

Hope this isn't too confusing.  Let me know if you have any questions!

Not from Canada?

I've noticed that some of our blog visitors are not from Canada.  Students from all over the world seem to be visiting our page - even as far as from Russian and India! 

So... welcome to everyone!  Although some of my posts may relate specifically to Ontario, Canada, a lot of the tutorials, test prep info, and general career advice can be relevant to any student.

Also, regardless of where you're from, feel free to leave a comment and visit our forum.

Prepaid...what?

Since it is summer, I thought I'd tackle a simpler subject: prepaid expenses.

You're probably thinking... prepaid what? 

Prepaid expenses are a special type of expenses that are actually considered asset at the end of the day.  Let me explain:

Assume that today you've paid $1000 of rent for the month of September.  Since today is August 14th, you've actually paid the rent in advance.  Although you've already paid the cash, you haven't actually "used up" this rent expense since it relates to the month of September.

How would we record this?
Think about it this way:  we paid $1000, so cash has decreased.  At the same time, we have prepaid the rent for next month.  Therefore, we now have an asset - prepaid rent!  

The entry would then be as follows:
DR Prepaid Rent (+ Asset)         1000
     CR Cash (- Asset)                      1000

Come September, our Prepaid Rent account would then be drawn down since we actually "used up" this expense.  

Our journal entry at the end of September would then be:
DR Rent Expense (+ Expense)     1000
     CR Prepaid Rent (- Asset)            1000

What do we have left in our prepaid account?
Our prepaid account is now zero (1000 - 1000 = 0)

As time passes, our prepaid expense moved from an asset account on the balance sheet, to an expense account on the income statement.

High School Ambassador Program

If you want to learn more about the CA profession, a good step to take is to become a High School Ambassador.  

Check it out!

Once you become an Ambassador, you will get the inside scoop on special events like the annual COIN competition, resume and cover letter tips, Check Mark magazine, and a bunch of other perks.  You have nothing to lose.... so sign up!

The Tutorials Page is Up

I added a few very basic topics in the Tutorials page.  I will try to keep updating it with more content over the next little while.  Please note that if there is a specific subject which you would like get some additional information on, please let me know!  

Also, if you have any questions on the content that I posted, you're always welcome to post a question. 

Accounting Designations Page is Up

I finished updating the 'Accounting Designations' page of this site.  I tried to give a personal perspective on the three types of designations that are out there for you.

I have to point out though that there are a lot of changes happening these days.  Let me repeat that: there are a lot of changes happening these days! 

Prior to 2012, there were three distinct accounting bodies: CAs, CMAs, and CGAs.  CPAs did not exist.  However, a process called 'unification' started to take place with the goal of merging these three accounting bodies.  The goal of this merge was to have only one accounting body in Canada, rather than the current three.  All accountants would then be called Certified Professional Accountants.

This so called 'unification' was in fact successful in some provinces, where the bodies were merged to become one.  However, in Ontario, only the CA body decided to go ahead with the merge and therefore all CAs started to be called CPAs.  CMAs and CGAs, on the other hand, decided not to go ahead with this merge and that is why we still have three accounting bodies here in Canada.

Hopefully this clarified things a bit.  Just remember - things in the profession always change, and that's not necessarily a bad thing!

Summer Vacation

Students often ask me on how they can prepare for the new school year during the summer?  Although I'm always tempted to provide them a list of subjects to go over during July and August, the reality is that it's important to be relaxed and refreshed before classes begin in the fall.  You want to make sure that you have a fresh head and aren't overworked before the real work comes in. 

So.... enjoy the pools, beach, camping, and anything else that you love to do!  Get your mind off from studying and you'll see how much better you'll do in school come September.

BUT, if you are really antsy, and would like to go over some topics to be extra prepared (maybe while sitting by the pool?), I suggest the following:

• Get a good grasp of how basic debits and credits work.  Which accounts increase?  Which accounts decrease? 
• Journal Entries.  Yes, you can't escape those in accounting.  
• Balance Sheets and Income Statements.  What do they mean?  How do journal entries affect them?
• Ratios.  Okay, look at this one only if you're very keen!