INVENTORIES

Non financial assets

Capitalist - nirecord as assets

a. Held for sale in the ordinary course of business;

b. In the process of production for such sale; or (kahit raw material palang)
c. In the form of materials or supplies to be consumed in the production process or in the rendering of
services.

Classes of Inventories:
• Merchandise Inventory
• Raw Materials Inventory
• Work in Process Inventory (Production na siya + direct labor [ilang hrs tinrabaho] +overhead [indirect
materials] )
• Finished Goods Inventory
• Supplies Inventory

Ex. entry

Work in process
Accumulated

hindi muna siya expense (pag nabenta nalang)

INITIAL MEASUREMENTS

Cost of inventory includes:

A.Costs of purchase (papasok ung inv.)

•Purchase price
 If several different inventories are acquired at a lump-sum price, the cost is allocated using their relative
sales value
Magkakaiba ng items
 Relative sales value

1,000
1- 200 / 1,100
2- 500 / 1,100
3- 400 / 1,100
= 1,100

IF HINDI AVAILABLE

1,000
1-
2- 500
3- 400

900 = 1-100

 Trade discount
 Cash discount (sales discount) net of cash discounts
 Gross discount
Example entry
Purchases
Payable
 Periodic- naghihintay (end of the month) immaterial
low cost but high volume
Perpetual- updated from time to time, isa isa nire-record (jewelry, cars)
high cost but low volume

•Import duties and other non recoverable taxes

>eto lang ang pwedeng capitalist

>input VAT = output VAT

Nag-advance ng bayad = marerecover natin

•Cost of transport (i.e. freight-in)

fob destination = seller
fob shipping point = buyer

Freight out (benta palabas)

 Expense

freight prepaid
 Nauna ng nagbayad si seller
 Nagkautang si buyer sa seller

Freight collect

•Handling and other costs directly attributable to the acquisition of finished goods, materials and services.

Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

Cost of inventory includes:

B.Costs of conversion
1.Direct labor - sweldo
2.Variable production overhead
 Kasabay yung behavior
3.Fix production overhead allocated using the normal operating capacity of production facilities.
-necessary for the production

10K - 1K units = 10 pesos

10K - 1 unit = 10,000 pesos bawal
9,900 = expense

C. Other costs incurred in bringing the inventories to their present location and condition:
  Other costs are included in the cost of inventories only to the extent that they are incurred in bringing
the inventories to their present location and condition.

 Borrowing costs for qualifying assets PAS 23

> matagal i construct requires significant amount
> capitalize ung interest expense
> mag finance ka para macover ung need mo

Cost of inventory should EXCLUDE

1. Abnormal waste
2. Storage costs (Finished good Inventory)
 But if for WIP = capitalize
3. Administrative overheads unrelated to production
4. Selling costs (distribution to customers) pag palabas na
5. Interest cost when inventories are purchased with deferred settlement terms.
 Promissory note interest exp. In 5 yrs.
 Ready made

TERMS OF SHIPMENT

Ownership is transferred

Freight Prepaid
Freight Collect

•FOB Shipping point – ownership of goods vested on buyer upon shipment thereof

Buyer owner = magrerecord ng freight in (Capitalize)

•FOB Destination - ownership of goods vested on buyer upon receipt thereof

Seller owner = magrerecord ng freight out

•CIF or Cost, insurance and Freight – implies that the cost, insurance and freight of the goods is to be paid/
is the burden of the buyer

•FAS or Free Alongside – the ownership is transferred when the seller has brought the goods alongside the
boarding area next to the vessel/ship.

The concept we discussed in recording receivables is the same in here, only that in this point of view, we are
the buyer rather than the seller.

TRADE DISCOUNT VS. CASH DISCOUNT

•Trade discount – also volume or quantity discount; granted for bulk sales (not reflected; automatically
deducted)

•Cash discount – granted for prompt payment (Accounted for at either gross or net method)

List Price P X

Trade discount (X)

Invoice Price X

Cash discount (X) 3/5 , 2/10 , n/30

Net Cash Price PX

 Exclude the 1st day Include the last day

The concept we discussed in recording receivables is the same in here, only that in this point of view, we are
the buyer rather than the seller.

ACCOUNTING FOR SALES (CASH) DISCOUNT

A.Gross Method - It records the purchase at the gross invoice price and adjusts for the cash discount (records
Purchase Discount) later if the discount was taken.

Gross Sales Gross Purchase

Sales Disc. Freight in
Sales Return Purchases
Purchase Return

PURCHASES / MERCHANDISE INVENTORY 1000

ACCOUNTS PAYABLE 1000

ACCOUNTS PAYABLE 1000

CASH 900
PURCHASE DISCOUNT 100

B.Net Method - records the purchase at the discounted price. If the buyer wasn’t able to take advantage of the
discounted price, the discount is forfeited and an entry is made to record Purchase Discount Forfeited. =
other expenses

PURCHASES / MERCHANDISE INVENTORY 900

ACCOUNTS PAYABLE 900

ACCOUNTS PAYABLE 900

CASH 900

Beyond

PURCHASES / MERCHANDISE INVENTORY 900

ACCOUNTS PAYABLE 900

ACCOUNTS PAYABLE 900

PURCHASE DISCOUNT FORFEITED 100
CASH 1000

The concept we discussed in recording receivables is the same in here, only that in this point of view, we are
the buyer rather than the seller.

INVENTORY ACCOUNTING SYSTEM:

Periodic VS Perpetual

Periodic
August 1, Beg. Inv 1000

8/1 Purchases 2500

 Cash 2500

8/2 Cash 200

Purch Return 200
8/3 Cash 2000
Sales 2000
__________________________________
Inventory Count :
Ending Inventory 2300

Beg. Inv. 1000

Purch 2500
Purch Return (200)
Net Purchase 2300
GAS 3300
EI (2300)
COS 1000

Perpetual
August 1, Beg. Inv 1000

8/1 Merchandise Inventory 2500

Cash 2500

8/2 Cash 200

Merchandise Inventory 200
8/3 Cash 2000
Sales 2000
COS 1000
Merchandise Inventory 1000

Merchandise Inventory
1000 200
2500 1000
2300

COS
1000

Tips
 Good in transit
 Buyer/ seller
 Terms of shipment

Consignor - Goods out on consignment (palabas )

Consignee - Goods Held

Gross Profit Percentage

SP 150% 100% 150 150
Cost 100% 50% (100) (75)
50% 50% 50 75
150 150

30% Based on Cost 30% Based on Selling Price (Default)

SP 130% SP 100% 100
COST (100%) COST (70%) (70)
GP 30% GP 30% 30

Inventory Balance 9,500,000

a.) FOB destination (420,000)
b.) Goods held (500,000)
c.) Mark up (200,000)
d.) Mark up 240,000
e.) Free alongside 150,000
8,770,000

610K
- 10,000 okay
- 600,000 (400,000) lang

S 600,000 150%
COS (400,000) (100%)
Mark Up 200,000 50%

SP 400,000 100%
COST 240,000 60%
Mark Up 160,000 40%

•Consigned goods are products not owned by the party in physical possession of them.

•The party holding the goods (the consignee) has typically been authorized by the owner of the goods (the
consignor) to sell the goods.

•Consigned goods are part of the consignor’s inventory, and excluded from the consignee’s inventory.

Consignor — consignee CAPITALIZE

SEGREGATED GOODS

•Special order goods manufactured according to customer’s specifications are considered sold once
completed, even if the item is still in the seller’s possession.

 Customized siya

•Thus, goods that are ordinarily or customarily manufactured by the entity is still the seller’s inventory, even if
the said goods are segregated from other inventories.

INSTALLMENT SALES
•Treated as a regular sale as it is anticipated that contract would be completed and there’d be transfer of
ownership. Thus, goods are recorded as sold once delivered and are excluded from the inventory of the
seller.

BILL AND HOLD SALES; LAY AWAY PLANS

•Bill and hold is a sales arrangement in which a seller of a product bills a customer for the product upfront but
does not ship the product until a later date.

•Layaway is a purchasing method in which a consumer places a deposit on an item to "lay it away" for later
pick-up when they are financially positioned to pay off the balance.

•According to the IFRS 15 (Revenue from Contracts with Customers), the following conditions must be met for
a seller to recognize revenue under a bill-and-hold arrangement:
•The reason should be substantive.
•The goods must be separately identified as belonging to the buyer
•The goods must be ready for delivery to the buyer
•The seller should not transfer the goods to another customer or for other uses.

INVENTORIES IN POSSESSION OF 3rd PARTY

•The following items are still in the control of the entity, and thus, must still be reported as part of inventory:
•Goods in the hands of agents and salespersons
•Goods held by customer on approval
•Goods held by others for storage, processing or shipment

GOODS SOLD WITH BUYBACK AGREEMENT

•Repurchase agreements are agreements in which an entity will sell a good to a customer and agrees to then
repurchase the goods at a specified price, which if includes all costs of inventory plus holding costs, will be
considered a financing agreement.

•If considered as a financing agreement, then seller still owns the asset (only considered as a collateral) then
records a financial liability.

Unadjusted Balance 562,500

a.) 110,000
b.) 27,000
c.) (85,000)
d.) 26,000
e.) 37,000
677,500

COST FORMULA
 The cost of inventories of items that are not ordinarily interchangeable and goods or services produced
and segregated for specific projects shall be assigned by using specific identification of their
individual costs.

 The cost of inventories, other than those that are not ordinarily interchangeable, shall be assigned by
using the first-in, first-out (FIFO) first-in, first-out (FIFO) or weighted average cost formula. An entity
 shall use the same cost formula for all inventories having a similar nature and use to the entity. For
inventories with a different nature or use, different cost formulas may be justified.

MEASUREMENT
 Inventories are required to be stated at the lower of cost and net
realizable value (NRV).

• The cost of inventory may not be

recoverable due to:
 Inventories are damaged
 Inventories have become obsolete
 Selling prices declined
 Estimated cost to complete and/or cost to sell increased

Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs
of completion and the estimated costs necessary to make the sale.

*Assets should not be carried in excess of the amounts expected to be realized from its sale or use.

 If the ending inventory is recorded outright at 530,000, the writedown shall

be immediately recognized in cost of goods sold. This is the direct/cost of sales method.
 If the ending inventory is recorded first at the cost of 600,000, a loss of
70,000 with a corresponding credit to an allowance account shall be
recognized. This is the loss/allowance method.
 Any write-down to NRV should be recognized as an expense in the period
in which the write-down occurs.
 Any reversal should be recognized in the income statement in the period in
which the reversal occurs.

INVENTORY ESTIMATION TECHNIQUES:

Gross Profit Method
– Based on the assumption that the gross profit applied by an entity
to its products remains approximately the same from period to period and therefore the
relationship between cost of goods sold and sales is constant.
 Based on Sale or Based on Cost
Notes:
The cost of goods sold can also be computed if the net sale is multiplied by 1 less the GP rate if the gross profit

Rate based on sales or net sales divided by 1 plus the gross profit rate if the gross profit rate is
based on cost

*Net sales shall be gross sales minus “sales returns and allowance” or “sales returns”
Only (excluding sales discount) in order for the estimate in ending inventory not to be overstated
Retail Method
– Employed by retailers dealing with numerous different items for sale with varying mark up percentages to keep track
unit cost.

Conservative Cost Ratio = GAS at cost divided by GAS at retail before net markdown
Average Cost Ratio = GAS at cost divided by GAS at retail (after net markdown)
FIFO Cost Ratio = Purchases at cost divided by Purchases at retail after net markdown

Net sales
similar to the “gross profit method” of estimation is computed by ignoring the sales discount and sales allowance if it is separated from sales returns