ACC00712 Reflective Journal: Inventory Valuation, Standards & Methods

This reflective journal delves into the intricacies of inventory valuation, focusing on the Australian Accounting Standards Board's AASB 102 and its practical application, particularly within the context of Wesfarmers. It explores the perpetual inventory method and the weighted average costing method, highlighting their advantages in maintaining efficient records, reducing storage expenses, and ensuring consistency in valuation. The journal also contrasts these methods with FIFO and LIFO, discussing their potential drawbacks and implications for financial reporting, including the risk of understated inventory and data manipulation. Ultimately, the journal reflects on the importance of accurate and transparent inventory management in maintaining financial stability and informing strategic decision-making.

Running Head: INVENTORY 0
Inventory

INVENTORY 1
Contents
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................3
Question 4....................................................................................................................................4
References........................................................................................................................................6

INVENTORY 2
Question 1
The Australian Accounting Board of Standards issues the standards on accounting which are to
be complied by the organization according to the applicability of the standards on them. One
such standard issued by the board is the standard on inventory as AASB 102. According to the
AASB 102 the inventory of the company shall be valued at the cost or the market value
whichever is lower. This standard basically focuses on the inventory into its usable condition. As
it can be observed form the annual report of the Wesfarmers that the inventory is measured at the
cost or the net realizable value whichever is lower. This standard is required to be followed by
the company as it directs the company in determination of the cost and its subsequent recognition
as an expense. It also showcases the formulas that are assigned to manage the valuation of the
cost of the inventory (AASB, 2018).
Question 2
Basically the company uses the perpetual method of the inventory and this can happen because
under the perpetual method if the inventory the sale or purchase of the inventory is recorded as
and when they occur. The real reason behind choosing this method by the Wesfarmers is it
recognizes the expenses and the income as and when they occur. With the assistance of the
perpetual inventory system the company can gain the enormous benefits and this will eventually
turn out to be the positive situation in terms of the increased production. The perpetual assists
the Wesfarmers in maintain the efficient record of the inventory and the quick evaluation of the
inventory can be done using such method (Mellado-Cid, Jory and Ngo, 2018). This method
considerably reduces the extra investment in the materials and the storage expenses that were
considered as the irrelevant costs. Further the perpetual method also helps the firm in detecting
the possible errors while recording the inventory and also catches the theft if any happening. The

INVENTORY 3
proper availability and the allocation of the working capital within the Wesfarmers is what this
method suggests to do so. This method is the real driver in driving the potential funds into the
potential areas and also reduces the making of the clogged capital all over the world. The
constant supervision and the review of the inventory of the Wesfarmers will not only help the
management but also help in catering the customers (Wesfarmers, 2018).
Question 3
The Wesfarmers is known for applying the weighted average costing method for the valuation of
the inventory. Basically this method helps in valuation of the stock at cost or net realizable value
whichever is lower of two. This approach is followed by the Wesfarmers as it would take into the
account all of the costs and then distributes it to the respective individual costs. Not only the
purchases the inventory at the beginning as well as the end has been included in this method and
therefore this method is used by the Wesfarmers as it displays the transparent approach. Also
there are certain advantages of the other methods due to which the company is attracted towards
the use of this method (Sharma, Sharma and Litt, 2017).
Consistency
The first and the foremost option for the company is the consistency in the method of the
weighted average cost of capital. This includes the inventory as well as the cost of goods sold
whereas in the other methods there are wide varieties of the costs which are to be included by the
accountant and this not only becomes the time consuming therefore the Weighted Average
costing method is used so that it gives the better quality and consistency in the valuation of the
inventory (Chouhan, Soral and Chandra, 2017).
Improvement in case of the manual work

INVENTORY 4
Due to the adoption of the weighted average costing method for the valuation of the inventory
there is a slight improvement on account of managing the less paper work unlike in the other
methods of the valuation of the inventory. Only the few papers are required to be maintained by
the accountants of the firm or the organization and hence this is the beneficial on account of the
Wesfarmers s the time can be devoted to more potential areas (Wu, Ji and Zhu, 2017).
Simplified transactions
The valuation of the cost of the inventory is the difficult part and a bit cumbersome for the
accountants in case of the FIFO and the LIFO methods, whereas under the weighted average
costing method the inventory can be easily calculated and the accountants does not require much
efforts to be made except for the review of the costs. This also saves time and energy of the
company and hence, the methods tend to be the cost effective one (Wild, 2017).
Question 4
There are different methods like FIFO and LIFO method to value the inventory and its
management. The major implication of the other methods on the valuation of the inventory by
the Wesfarmers is outlined below. Due to certain demerits of both the methods they can cause a
greater and the drastic change on the valuation of the inventory. The major drawback of the
FIFO method is that the cost of goods sold which are yet pending from the side of the company
and are not yet sold are compared against the revenue and therefore this creates a huge amount of
the difference between the sales which needs to be booked accordingly. Furthermore there are
certain profits which have been recognized on the paper and they are also recognized while
making the profit and the loss account (Bryan, 2018).

INVENTORY 5
The accountants treat these methods to be the time consuming and the less cost effective
methods (Wesfarmers, 2018). Not only this inventory is understated in case of the LIFO methods
and this results in the distortion of the figures. By displaying the amount of the purchase at the
higher prices more than the normal ones the errors can be committed easily to show the
profitable position of the company. With the help of this method the accountants can easily
manipulate the data and hence this method is not preferred by the Wesfarmers as this creates a
negative impact on the performance of the company (Wesfarmers, 2018).

INVENTORY 6
References
AASB, (2018) Accounting Standard AASB 102 [Online] Available from
https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf [Accessed on 2nd
February 2019].
Bryan, G.A., Brooks, C.C., Brightwell, D.B. and Enssle, B.D., Walmart Apollo LLC,
2018. System and method for management of perpetual inventory values based upon confidence
level. U.S. Patent Application 15/975,233.
Chouhan, V., Soral, G. and Chandra, B., 2017. Activity based costing model for inventory
valuation. Management Science Letters, 7(3), pp.135-144.
Mellado-Cid, C., Jory, S.R. and Ngo, T.N., 2018. Real activities manipulation and firm
valuation. Review of Quantitative Finance and Accounting, 50(4), pp.1201-1226.
Sharma, D.S., Sharma, V.D. and Litt, B.A., 2017. Environmental Responsibility, External
Assurance, and Firm Valuation. Auditing: A Journal of Practice & Theory, 37(4), pp.207-233.
Wesfarmers, (2018) Annual Report [Online] Available from
https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?
sfvrsn=4 [Accessed on 2nd February 2019].
Wild, T., 2017. Best practice in inventory management. Routledge.
Wu, C., Ji, C. and Zhu, M., 2017. Analysis of the Thermal Contraction of Wide‐Thick
Continuously Cast Slab and the Weighted Average Method to Design a Roll Gap. steel research
international, 88(9), p.1600514.