INVENTORY METHOD

Two systems are offered in accounting for inventories, namely periodic system and
perpetual system.

The periodic system calls for physical counting of goods on hand at the end of the
accounting period to determine quatities.
This procedure is generally used when the individual inventory items turn over rapidly
and have small peso investment such that it may prove impractical or inconvenient to
record inventory inflow and outflow, such as groceries, hardware and auto parts.
ILLUSTRATIONS
The following information belongs to Camille’s Corporation
Beginning inventory P2,400
Purchase on account P21,600
Return purchase to supplier, P12,000
Sales made on account P35,000
Return of merchandise sold to customer P6,000
Ending Inventory P9,600

1. Purchase of merchandise on account, P21,600

Purchase 21,600
Accounts Payable 21,600
2. Return of merchandise purchased to supplier, P12,000
Accounts Payable 12,000
Purchase Return 12,000
3. Sale of merchandise on account, P35,000
Accounts Receivable 35,000
Sales 35,000
4. Return of merchandise sold from customer, P6,000
Sales Return 6,000
Accounts Receivable 6,000
 5. Adjustment of ending inventory,
Merchandise inventory-end 24,000
Income Summary 24,000

The perpetual system requires the maintenance of records called stock cards that
usually offer a running summary of the inventory inflow and outflow. This procedure is
commonly used where the inventory items treated individually represent a relatively
large peso investment. This is designed for control purposes.
ILLUSTRATIONS:

1. Purchase of merchandise on account.

Merchandise Inventory 21,600
Accounts Payable 21,600
2. Return of merchandise purchased to supplier, P12,000
Accounts Payable 12,000
Merchandise Inventory 12,000
3. Sale of merchandise on account, P35,000
Accounts Receivable 35,000
Sales 35,000
4. Return of merchandise sold from customer, P6,000
Sales Return 6,000
Accounts Receivable 6,000
5. Adjustment of ending inventory,
The ending merchandise inventory is not adjusted. The balance of merchandise
inventory account represents the ending inventory.

Inventory Costing Methods

First in, First out (FIFO) Method
 Goods first purchased are first sold
 Inventory is stated at current replacement cost.
  In the period of inflation, FIFO method would result to the highest net income.
 In a period of deflation or declining prices, FIFO method would result to the
lowest net income.
Note: Under FIFO-periodic and FIFO-perpetual, the inventory costs are the same.
The following data pertain to an inventory item:
Units Unit Cost Total Cost Sales (in units)
JAN 1 Beginning balance 4,000 200 800,000
5 Purchase 4,000 230 920,000
8 Purchase 3,000 250 750,000
14 Sale (9, 000)
18 Sales return 1, 000
29 Purchase 14, 000 150 2, 100, 000
31 Purchase return (3, 000) 150 450, 000
Ending Balance 14,000

FIFO- (Periodic or Perpetual)

UNITS UNIT COST TOTAL COST
From Jan. 8 Purchase 3,000 250 750,000
From Jan. 31 Purchase 11,000 150 1,650,000
Inventory End 14, 000 2,400,000

The January 29 purchase of 14,000 units is reduced by the purchased return of 3,000
units or net purchase of 14,000 units. Note that under FIFO perpetual, the sale return of
1,000 units on January 18 would be coasted back to inventory at the latest purchase
unit cost of 250 before the sale.

Cost of Good Sold

Inventory- January 1 800,000
Purchases (920,000 + 750,000 + 2,100,000) 3,770,000
Goods Available for sale 4,570,000
Inventory- January 31 (2,850,000)
Cost of Goods sold 1,720,000
STOCKCARD
Date Purchase Sales Balance
Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost
JAN 1 4,000 200 800,000
5 4,000 230 920,000
8 3,000 250 750,000
11,000 224 2,470,000
14 (9, 000) 224 2,020,000
2,000 250 500,000
18 1, 000 250 250,000
3,000 250 750,000
29 14, 000 150 2,100,000 14,000 150 2,100,000
17,000 168 2,850,000
31 (3, 000) 150 450, 000 (3, 000) 150 450, 000
14,000 171.4 2,400,000
Weighted Average – Periodic
 The cost of beginning inventory plus the total costs of purchases during the
period is divided by the total number of units purchased plus those in the
beginning inventory to get the weighted average unit cost. Such weighted
average unit cost is then multiplied by the units on hand to derive the inventory
value.

Units Unit Cost Total Cost

January 1 Beginning Balance 4, 000 200 800,000
5 Purchase 4, 000 230 920,000
8 Purchase 3, 000 250 750,000
29 Purchase 14, 000 150 2,100,000
31 Purchase return (3, 000) 150 (450, 000)
 22, 000 4,120,000

Weighted average unit cost (4,120,000 / 22, 000 units) = 187.27

Cost of ending inventory (18, 000 x 181.25) 3, 2262, 500
Weighted Average – Perpetual (moving average method)
 A new weighted average unit cost must be computed every after purchase. Such
weighted average unit cost is then multiplied by the units on hand to get the
inventory cost.
Units Unit Cost Total Cost
January 1 Beginning balance 4, 000 200 800, 000
5 Purchase 4, 000 230 920, 000
8 Purchase 3, 000 250 750, 000
Balance 11, 000 225 2, 470, 000
14 Sale (9, 000) 225 (2, 025, 000)
18 Sales Return 1, 000 225 225, 000
Balance 3, 000 600 1, 800, 000
29 Purchase 14, 000 150 2, 100, 000
Balance 17, 000 230 3, 900, 000
31 Purchase return (3, 000) 150 (450, 000)
Balance 14, 000 246.42 3, 450, 000

A portion of the adjusted trial balance for the Angel’s Company is shown below.
Sales (net of 4,000 sales discounts and 24,500 sales returns and allowances)
Office equipment expense 5,000
Cost of goods sold 160,000
Salaries expense 19,000
Depreciation expense—building 35,000
Advertising expense 10,500
 Office supplies expense 4,000
Gain on disposal of store equipment 2,500
Interest expense 1,000
Angel’s Company
Income Statement
For the year ended December 31
Sales 350,000
Less: Sales discounts 4,000
Sales returns and allowances 24,500 28,500
Net sales 321,500
Cost of goods sold 160,000
Gross profit 161,500
Operating expenses
Office equipment expense 5,000
Salaries expense 19,000
Depreciation expense—building 35,000
Advertising expense 10,500
Office supplies expense 4,000
Office equipment expense 5,000
Total operating expenses 78,500
Income from operations 83,000
Other revenues and gains (expenses
and losses)
Gain on disposal of store equipment 2,500
Interest expense (1,000) 1,500
Net income P84,500
MATERIALS INVENTORY Work in Process
Bal. 1/1 34,600 Issued 75,300 Bal. 1/1 29,100 COGM 194,100
Purchase 63,200 Mat. Used
End 12/31 22,500 75,300
Material costing were issued to production.
Labor 59,700
Factory Overhead 45,000
WIP 12/3 15,000

Finished Goods Inventory COST OF GOODS SOLD

Bal 1/1 90,000
COGS 194,100 COGS 262,500 COGS 262,500
Finished Goods12/31
21,600
 ABC CORPORATION
Cost of Goods Sold Statement
For the year ended December 31,2018
Direct materials used
Materials Inventory, Jan 1 P34,600
Add: Purchases 63,200
Total Available for use 97,800
Less: Material Inventory, Dec 31 22,500 P75,300
Direct Labor 59,700
Factory Overhead 45,000
Total Manufacturing costs 180,000
Add: Work in process, Jan 1 29,100
Cost of goods put into process 209,100
Less: Work in process, Dec 31 15,000
Cost of Goods Manufactured 194,100
Add: Finished Goods, Jan 1 90,000
Total goods available for sale 284,100
Less: Finished goods, Dec 31 21,600
Cost of goods sold P262,500