FINANCIAL ACCOUNTING AND REPORTING
TOPIC 5: INVENTORIES
Held for OCB
In the process of production for such sale
BASIC CONCEPTS
Assets in the form of materials/supplies to
be consumed in the process/ rendering
services
SCOPE
RECOGNITION
INVENTORIES
INITIAL MEASUREMENT COST
MEASUREMENT
SUBSEQUENT MEASUREMENT LCNRV
PERIODIC (Weighted)
ACCOUNTING FOR
INVENTORIES
PERPETUAL (Moving)
PURCHASE COMMITMMENTS
OTHER TOPICS
INVENTORY ESTIMATION
BASIC CONCEPTS
Definition Classess of Inventories
a. Held for sale in the ordinary course of business 1. Merchandising – Merch. Inv (a)
b. In the process of production for such sale 2. Manufacturing – FG Inv. (a), WIP (b), RM & FS (c)
c. In the form of materials/supplies to be consumed in the 3. Service Business – WIP (b)
production process or in the rendering services
SCOPE
PAS 2 applies to all inventories EXCEPT for the following:
1) As to RECOGNITION
STANDARD
a) Financial Instruments PAS 32, PFRS 9
b) Biological Assets and Agricultural Produce at the point of harvest PAS 41
2) As to MEASUREMENT
MEASUREMENT
a) Inventories of producers of agricultural, forest and mineral products Net Realizable Value (NRV)
b) Inventories of commodity broker-traders Fair Value less Cost to Sell (FV – CTS)
RECOGNITION
LEGAL TITLE INVENTORIES
GENERAL RULE: POSSESSION = LEGAL TITLE
EXCEPTIONS:
1) GOODS IN TRANSIT
Shipping Terms Point of Transfer of Ownership Owner
a) FOB Shipping Point Shipper’s Point Buyer
b) FOB Destination Buyer’s Location Seller
c) Free Alongside (FAS) Upon the delivering the goods up to the dock next to or alongside the Buyer
vessel on which the goods are to be shipped
d) Cost, Insurance, Freight (CIF) Upon loading of the goods to the vessel Buyer
e) Ex-ship The goods are unloaded at the other side Seller
1
2) CONSIGNMENT GOODS
Cost X Cost
Freight Out Cost Freight Cost of Return Goods
Original Freight Cost
Commission and Other Charge
Freight Cost to Final Customer
3) INVENTORY FINANCIAL MANAGEMENT
a) Sales with a Repurchase Agreement Seller
b) Pledge of Inventories Pledger or Borrower
c) Loan of Inventory Borrower
4) SALE OR RETURN Buyer
5) SALE ON TRIAL/APPROVAL Seller
6) INSTALLMENT SALE Buyer
7) BILL AND HOLD SALE Buyer
8) LAY – AWAY SALE Seller
9) SPECIAL ORDER SALE Buyer upon completion
MEASUREMENT
COST OF PURCHASE
INITIAL MEASUREMENT COST OF CONVERSION
(COST) OTHER COSTS
EXCLUSIONS FROM COSTS
COST OF PURCHASE
Inclusions Exclusions
1) Purchase Price 1) Trade Discount, Rebates
Means of Acquisition Purchase Price and other similar items
Regular Purchase Invoice Price
Deferred Agreement Cash Price Equivalents
Lump-sum Purchase Allocated Purchase Price
using Relative FV
2) Import Duties 2) Foreign exchange
differences
3) Irrecoverable Taxes 3) Interest expense
4) Freight and Handling Costs
5) Insurance while inventories are in transit
6) Broker’s Commission
COST OF CONVERSION
1) Direct Labor
2) Factory Overhead
Allocation Basis
Variable FOH Actual Capacity
Fixed FOH Normal Capacity
EXCLUSION FROM COSTS
Capitalized if
1) Abnormal Losses Normal Losses
2) Administratiive Expenses Traceable
3) Storage Costs of Finished Goods Related to Raw Materials or WIP
4) Selling Costs Always Expensed
2
ACCOUNTING FOR INVENTORIES
Points of Comparison Periodic Perpetual
1) When to update inventories? Upon physical count Each movement through stock cards
2) Treatment on inventory counts Necessary procedure For records accuracy
3) With running balance of COGS? NO YES
4) Inventory account treatment Residual account Maintained account
5) When to use? When inventories are HIGH VOLUME When inventories are LOW VOLUME
but LOW VALUE but HIGH VALUE
SUMMARY OF JOURNAL ENTRIES
PERIODIC PERPETUAL
PURCHASE OF Purchases XX Inventory XX
INVENTORIES AP XX AP XX
PAYMENT OF Freight – In XX Inventory XX
FREIGHT COST Cash XX Cash XX
RETURNED AP XX AP XX
PURCHASED GOODS Purchase Returns XX Inventory XX
AR XX AR XX
SOLD GOODS ON Sales Returns XX Sales XX
ACCOUNT COGS XX
NO ENTRY Inventory XX
Sales Returns XX Sales Returns XX
AR XX AR XX
SALES RETURNS
Inventory XX
NO ENTRY COGS XX
FIFO METHOD
AVERAGE METHOD
NET REALIZABLE VALUE (NRV)
COST FORMULAS
SUBSEQUENT SPECIFIC IDENTIFICATION
MEASUREMENT
(YEAR – END REPORTING) CONCEPT OF NRV
NET REALIZABLE
VALUE (NRV) DETERMINATION OF NRV
ACCOUNTING
DIRECT METHOD
FOR INVENTORY
ALLOWANCE METHOD
WRITE - DOWN
COST FORMULAS
1) FIFO METHOD – items which are purchased FIRST are SOLD first and the ending are represented by the most
recent purchases.
COST OF ENDING INVENTORY (# OF UNITS X COST OF LATEST PURCHASES
COGS (# OF UNITS X COST OF OLDEST PURCHASES)
2) AVERAGE METHOD
E. I. (# of units x Weighted Ave. Unit Costs)
WEIGHTED AVERAGE (PERIODIC SYSTEM)
COGS (# of units x Weighted Ave. Unit Costs)
E. I. (# of units x Moving Ave. Unit Costs)
MOVING AVERAGE (PERPETUAL SYSTEM)
COGS (# of units x Moving Ave. Unit Costs)
NET REALIZABLE VALUE
Cost > NRV Writedown
Cost < NRV No. inventory writedown but possible reveral writedown if there is a previous writedown
Net Realizable Value (NRV)
Finished Goods / Merchandise Inventories ESP – ECTS
Work – in – Process Inventories ESP – ECTS – ECTC
Raw Materials and Factory Supplies Current Replacement Cost
AUTOMATIC WRITEDOWN
1) Direct Method (COGS Method) @ LCNRV
2) Allowance Method (LOSS Method) @ COST
3
OTHER TOPICS
PURCHASE COMMITMENTS JOURNAL ENTRY
Noncancellable Contracts Loss on Purchase Commitments XX
Prices Estimated Liability on Purchase Commitments XX
o Loss should be recognized
o Gain should be recognized up to the loss previously recognized
INVENTORY ESTIMATION
Why is there a need for a inventory estimation?
Impossibility of physical count
Cost – benefit
Proof of the reasonable accuracy of a physical count
METHODS USED IN INVENTORY ESTIMATION
GROSS METHOD – based on major assumption that the rate of gross profit remains approximately the same from period to
period.
Cost of Goods Available for Sale XX COGS IS COMPUTED AS
Less: Ending Inventory (SQUEEZE) XX Net Sales x Cost Ratio (If GP is based on SALES)
Cost of Goods Sold XX Net Sales / Sales Ratio (If GP is based on COST)
RETAIL METHOD – the selling price or retail price is tagged to each item and therefore the ending inventory is stated at selling
price.
COST RETAIL
Beginning Inventory XX XX
AVAILABLE FOR SALE
Purchases XX XX
AVAILABLE FOR
CONSERVATIVE
TOTAL GOODS
Freight In XX
TOTAL GOODS
@ AVERAGE
SALE @
Purchase Discount (XX)
Purchase Returns and Allowances (XX) (XX)
Departmental Transfer – In (Debit) XX XX
Departmental Transfer – Out (Credit) (XX) (XX)
Abnormal Losses (XX) (XX)
Net Mark – Ups XX
Net Mark – Downs (XX)
TOTAL GOODS AVAILABLE FOR SALE (TGAS) XX XX
ENDING INVENTORY (SQUEEZE) XX XX
COST OF GOODS SOLD XX XX
NOTES:
Gross Sales XX TGAS XX E.I. @ Retail XX
Sales Returns (XX) E.I. @ Cost (XX) Multiply by: Cost Ratio XX
Employee Benefits XX COGS AT COST XX ESTIMATED E.I AT COST XX
Normal Losses XX
COGS AT RETAIL XX
COST RATIOS RETAIL INVENTORY METHOD
𝐓𝐆𝐀𝐒 @ 𝐂𝐎𝐒𝐓
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑴𝒆𝒕𝒉𝒐𝒅 = may be used to estimate
𝐓𝐆𝐀𝐒 @ 𝐑𝐄𝐓𝐀𝐈𝐋 inventories for INTERIM
REPORTING purposes and
𝐓𝐆𝐀𝐒 @ 𝐂𝐎𝐒𝐓 − 𝐁𝐄𝐆𝐈𝐍𝐍𝐈𝐍𝐆 𝐈𝐍𝐕𝐄𝐍𝐓𝐎𝐑𝐘 @ 𝐂𝐎𝐒𝐓
𝑭𝑰𝑭𝑶 𝑴𝒆𝒕𝒉𝒐𝒅 = ACCEPTABLE for ANNUAL
𝐓𝐆𝐀𝐒 @ 𝐑𝐄𝐓𝐀𝐈𝐋 − 𝐁𝐄𝐆𝐈𝐍𝐍𝐈𝐍𝐆 𝐈𝐍𝐕𝐄𝐍𝐓𝐎𝐑𝐘 @ 𝐑𝐄𝐓𝐀𝐈𝐋
REPORTING.
𝐓𝐆𝐀𝐒 @ 𝐂𝐎𝐒𝐓
𝑪𝒐𝒏𝒔𝒆𝒓𝒗𝒂𝒕𝒊𝒗𝒆 𝑴𝒆𝒕𝒉𝒐𝒅 =
𝐓𝐆𝐀𝐒 @ 𝐑𝐄𝐓𝐀𝐈𝐋 + 𝐍𝐄𝐓 𝐌𝐀𝐑𝐊𝐃𝐎𝐖𝐍𝐒
FS PRESENTATION AND DISCLOSURE
Inventories are reported in the Statement of Financial Position under CURRENT ASSETS section.
