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Classroom Notes 6359
Classroom Notes 6359
Cost Formulas
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) 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.
If periodic FIFO is used, the ending inventory will be unit cost from the March 8
purchase and will be deducted from the accumulation of the beginning inventory and
net purchase, known as the total goods available for sale.
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Periodic Average
Measurement of Inventories
Inventories are required to be stated at the lower of cost and net realizable value (NRV).
Inventories are usually written down to net realizable value item by item. In some
circumstances, however, it may be appropriate to group similar or related items.
EXAMPLE:
Recognition as an Expense
When inventories are sold, the carrying amount of those inventories shall be recognized as
an expense in the period in which the related revenue is recognized.
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The amount of any write-down of inventories to net realizable value and all losses of
inventories shall be recognized as an expense in the period the write-down or loss occurs.
The amount of any reversal of any write-down of inventories, arising from an increase in net
realizable value, shall be recognized as a reduction in the amount of inventories recognized
as an expense in the period in which the reversal occurs.
Some inventories may be allocated to other asset accounts, for example, inventory used as
a component of self-constructed property, plant or equipment. Inventories allocated to
another asset in this way are recognized as an expense during the useful life of that asset.
Required disclosures:
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.
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 less sales returns and allowance or sales returns only 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.
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