Inventories

✅ INCLUDED
●​ Goods displayed in store
INVENTORIES
●​ Goods stocked in the warehouse
●​ Goods purchased in transit, FOB
●​ Assets held for sale in the ordinary
Seller
course of business, in the process
●​ Freight in & goods unsold
of production, or in the form of
●​ Goods out on consignment
supplies to be consumed in the
●​ Goods out to customer’s approval
process.
●​ Goods in the hand of travelling
●​ Assets held for resale
salesman
○​ land and merchandise
●​ Goods sold with buyback
purchased for resale
arrangement
●​ All goods to which the entity has
●​ Unused factory supplies
title regardless of the location
●​ Goods in Process
●​ Goods at the port, purchased CIF

❌EXCLUDED
CLASSES OF INVENTORIES

TRADING CONCERN ●​ Goods purchased, FOB

(Merchandise Inventory) buys and sells Destination
goods in the same form they are ●​ Goods held on consignment
purchased ●​ Storage costs of finished goods
MANUFACTURING CONCERN ●​ Insurance premiums paid
Buys goods which are altered and ●​ Finished goods manufactured for
converted into another form before they customer’s specification
are made available for sale ●​ Freight out
●​ Unused administrative and store
supplies
PRESENTATION
●​ Goods sold with a right to return
granted to buyers
●​ Classified as Current Assets ●​ Goods sold on FAS, at the port
●​ Shall be presented in one line designated by the buyer
item but details of such inventory
shall be disclosed in the notes to
FOB (FREE ON BOARD)
financial statements.

FOB Destination (FOB buyer)

CONSIGNMENT
Transfer is upon receipt. Therefore, the
goods are still owned by the seller
Physical transfer of goods for sale
●​ Consignor (Owner) FOB Shipping (FOB Seller)
●​ Consignee (Agent) Transfer is upon shipment. Therefore,
goods in transit are owned by the buyer
already.
 ●​ The cost of goods sold is recorded
FREIGHT TERMS
immediately when a sale is made.

Freight Prepaid
PERIODIC
The freight charge is already paid by the
●​ Purchase
seller Purchases xx
Freight Collect Accounts Payable xx
The carrier will collect the freight charge ●​ Freight In
from the buyer Freight In xx
Cash xx
●​ Purchase Return
MARITIME SHIPPING TERMS A/P xx
Purchase ret. xx
●​ Sale
FAS or Free alongside
A/R xx
Seller must bear all expenses to the dock Sales xx
next or alongside the vessel ●​ Sales Return
Sales Return xx
CIF or Cost, Insurance, and Freight A/R xx
The title and risk shall be passed to the ●​ Adjustment of Ending Inventory
Merchandise Inv. xx
buyer upon delivery
Income Summary xx

Ex-Ship
Seller bears the expenses until the goods
are unloaded

PERPETUAL
ACCOUNTING FOR INVENTORY ●​ Purchase
Merchandise Inv. xx
Accounts Payable xx
Periodic System: ●​ Freight In
Merchandise Inv. xx
●​ physical count of goods Cash xx
●​ Cost of goods sold is computed ●​ Purchase Return
only at the end of accounting A/P xx
period Merchandise Inv. xx
●​ Sale
●​ Used for items with a small
A/R xx
per-unit cost, like groceries or
Sales xx
hardware.
COGS xx
Perpetual System Merchandise Inv. xx
●​ Sales Return
●​ Requires stock cards that track Sales Return xx
inventory inflow and outflow. A/R xx
●​ Allows a company to know its
Merchandise Inv. xx
inventory on hand and its cost at
COGS xx
any time.
●​ No Adjustment in Ending Inventory
●​ Used for items with large per-unit unless there is shortage
cost, such as jewelry and cars.
 - Purchase
iNVENTORY SHORTAGE/OVERAGE Purchase 360,000
Accounts Payable 360,000

-​ Usually closed to Cost of Goods - Payment within Discount Period

Sold (Normal) Accounts payable 360,000
-​ Abnormal and material shortage Cash 342,000
shall be considered as other Purchase Discount 15,000
expense
- If not Taken (Beyond Discount Period)
Accounts Payable 360,000
Merchandise Inventory has a debit balance Cash 360,000
of P65,000 but the physical count only
shows P55,000. Hence, there is a shortage

Inventory Shortage 10,000

Merchandise Inventory 10,000 METHODS OF RECORDING
PURCHASES

DISCOUNTS Gross Method

●​ gross amount
Trade Discounts
●​ Cash discounts are recorded only
●​ Deductions from the list or when they are taken.
catalog price to arrive at the ●​ Considered more convenient than
invoice price. the net method from a
●​ They are not recorded in the bookkeeping standpoint.
accounting system.
●​ They are used to encourage Net Method
trading or increase sales.
●​ net amount (the amount after
Cash Discounts deducting the discount).
●​ Cash Discounts are recorded
●​ Deductions from the invoice whether taken of not
price (Theoretically Correct)
●​ Recorded ●​ Discounts not taken are recorded
●​ Used to encourage early payment as lost

ILLUSTRATION
List Price 500,000 COST OF INVENTORY
Trade Discount 20% 10%
Terms 5/10 n/30 (Cash Discount) ●​ Purchases
●​ Cost of Conversion
Invoice Price 360,000
(500,000 X 80% X 90%) ●​ Directly Attributable Cost
Cash Discount (18,000)
(5% x 360,000)

Payment within discount period 342,000

 NOTE: Under FIFO periodic and perpetual,
COST OF INVENTORY
the cost of inventory is the same

●​ Purchase price, import duty,

Irrecoverable tax, and Freight WEIGHTED AVERAGE

●​ calculates a single average cost

COST OF CONVERSION
for the entire period

●​ Direct Labor + Manufacturing 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

Overhead 𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑
× 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

DIRECTLY ATTRIBUTABLE COST SIMPLE AVERAGE

●​ Inventory > present location 𝑠𝑢𝑚 𝑜𝑓 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

●​ Designing product for specific 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐼𝑡𝑒𝑚𝑠
× 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
customers
●​ Storage cost of unfinished goods MOVING AVERAGE

INVENTORY COST FLOW ●​ New weighted average unit cost is

computed every purchase and
●​ The cost of inventory shall be purchase return
determined by using either ●​ Requires a stockcard
a.​ First In, First Out ●​ Easy to apply
b.​ Weighted Average ●​ Approximates current value
●​ Note: The standard does not ○​ There may be considerable
permit LIFO anymore. lag between current cost
and inventory valuation
FIFO (First In, First Out)
LIFO (Last In, First Out)
●​ The goods are sold in order they
are purchased ●​ The ending inventory is the oldest
●​ The ending inventory is the latest purchase
or newest purchase ●​ Inventory is expressed in oldest
●​ Favors the Statement of Financial prices while Cost of Goods Sold is
Position expressed in new prices
●​ Inventory is expressed in new ●​ Favors Income Statement
prices while Cost of Goods Sold is ○​ There may be income
expressed in old prices manipulation and lag
○​ There is an improper between inventory
matching of cost against valuation and current
revenue replacement cost

↑ inflation = Highest income ↑ inflation = Lowest Income

↓ deflation = Lowest income ↓ deflation = Highest income
NOTE: Under LIFO periodic and perpetual,
COST OF INVENTORIES MAY NOT BE
the cost of inventory is different RECOVERABLE WHEN

SPECIFIC IDENTIFICATION ●​ Inventories are damaged / obsolete

●​ Selling prices decreased
●​ Specific costs are attributed to ●​ Cost of completion and disposal
identified items increased
●​ appropriate for inventories that
are segregated for a specific Notes:
project and inventories that are
not ordinarily interchangeable. ●​ This practice is consistent with the
●​ Cost flow corresponds with view that “assets shall not be
physical flow carried in excess of amounts
○​ Very costly to implement expected to be realized from their
sale or use”
𝑈𝑛𝑖𝑡𝑠 𝑜𝑛 𝐻𝑎𝑛𝑑 × 𝑎𝑐𝑡𝑢𝑎𝑙 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 ●​ Materials held for use in
production are not written down
below cost if the finished products
STANDARD COSTS
in which the materials will be
incorporated are expected to be
●​ Predetermined product costs
sold at or above cost.
established applied to all inventory
●​ Inventories are written down to
movements
NRV on an “Item by Item” or
○​ May be used for
Individual basis
convenience if the results
approximate cost.
ACCOUNTING FOR INVENTORY
WRITEDOWN
RELATIVE SALES PRICE METHOD

●​ If the Cost is lower than NRV, the

●​ When different products are gain is not recognized
purchased at a lump sum, the ●​ If NRV is lower than Cost, the
single cost is apportioned among decrease in value is recognized
the commodities based on their
respective sales price. DIRECT METHOD
●​ cost is proportionate to selling ●​ The inventory is recorded at Lower
price of Cost or NRV
●​ Also known as “Cost of Goods
Sold” method
LOWER OF COST / NET REALIZABLE ●​ Writedown is not accounted for
VALUE separately
ALLOWANCE METHOD
●​ Under IFRS, inventories are ●​ Inventory is recorded at cost
measured at the lower of cost and ●​ Writedown is accounted for
separately
net realizable value (LCNRV)
●​ Also known as the “Loss” method
●​ NRV = Selling Price - Estimated ●​ Effects of writedown and reversal is
cost of completion & disposal recognized clearly
 PURCHASE COMMITMENTS GROSS PROFIT METHOD

●​ Obligations to acquire certain ●​ Based on the assumption that the

goods with fixed quantities and rate of gross profit remains
fixed price approximately the same from
○​ A purchase contract has period to period
already been made ●​ Sales discounts and allowances
●​ Losses are non cancelable are ignored
○​ (other expense) ○​ Deducting them would
●​ If market price rises, such gain is result in overstatement of
recognized limited to the loss on inventory, understatement
purchase commitment recently of cost of goods sold, and
recorded overstatement of gross
○​ (other income) profit

AGRICULTURAL, FOREST, AND RETAIL METHOD

MINERAL PRODUCTS
●​ Usually for large number of rapidly
●​ Measured at NRV (when harvested changing items (Department
or extracted) stores, supermarkets)
○​ This is allowed when there ●​ COGS should be determined both
is a guaranteed buyer and by retail and cost
there is an active market
●​ Purchase discount and
allowances
COMMODITIES OF BROKE-TRADERS ○​ deducted from cost only
●​ Purchase return
○​ deducted from cost and
●​ Broke traders
retail
○​ the ones who buy and sell ●​ Freight In
commodities either for ○​ added to cost only
themselves or others ●​ Departmental transfer In
●​ Here, inventories are measured at ○​ added to cost and retail
fair value less costs of disposal ●​ Departmental transfer out
○​ is deducted from cost and
retail
ESTIMATE IN INVENTORY VALUATION ●​ Sales discount and allowances
○​ ignored
a.​ Gross Profit Method ●​ Sales return
○​ deducted from sales
b.​ Retail Inventory Method
●​ Employee discounts are added
●​ The inventories are damaged and back to sales
is required for insurance purposes ●​ Normal shortage and shrinkage
●​ To prove correctness (Physical ○​ deducted from retail
count is known as “Gross Profit ●​ Abnormal shortage and
Count”) shrinkage
●​ Interim financial statements are ○​ deducted from cost and
retail
prepared
ITEMS RELATED TO RETAIL METHOD
●​ iNITIAL MARKUP
○​ original markup
●​ ORIGINAL RETAIL
○​ first offered sales price
●​ ADDITIONAL MARKUP
○​ Increase in sales price
above the original price
●​ MARKUP CANCELLATION
○​ decrease in sales but still
above the original sales
price
●​ MARKDOWN
○​ decrease in sales below
the original sales price
●​ MARKDOWN CANCELLATION
○​ increase in sales price but
still below the original
sales price
●​ MAINTAINED MARKUP
○​ Difference between cost
and sales price after
adjustment of all above
items “Mark on”

APPROACHES IN RETAIL METHOD

●​ Conservative or Conventional
○​ Markdowns are ignored
●​ Average Cost
●​ FIFO Approach
●​ LIFO Approach
○​ FIFO and LIFO is based on
the assumption that
markup and markdown
apply to goods purchased
during the current year
and not to the beginning
inventory