NORTHEASTERN COLLEGE
COLLEGE OF ACCOUNTANCY & BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING I
INVENTORY VALUATION
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Inventory Valuation
- PAS 2 provides the following clear cut principles
concerning measurement of inventory:
a. Paragraph 9 provides that inventories shall be
measured at lower of cost and net realizable value or
now known as LCNRV.
b. Paragraph 25 provides that the cost of inventories
shall be determined by using either the FIFO method
or weighted average method. PAS 2 prohibits the use
of LIFO costing.
c. Paragraph 23 provides that the cost of inventories
that are not ordinarily interchangeable and
inventories that are segregated for specific projects
shall be determined by using specific identification
method.
FIFO Method
– “First in, first out”, the goods first purchased are
first to be sold and consequently the goods
remaining in the inventory at the end of the period
are those most recently purchased or produced.
Note: Under this method, the cost of inventories for
both periodic and perpetual will be the same.
WEIGHTED AVERAGE Method
- Periodic weighted average method means that cost
of the beginning inventory plus total cost of
purchases during the period is divided by the total
units purchased plus those in the beginning
inventory to get a weighted average unit cost. Such
unit cost is then multiplied by the units on hand to
derive the inventory value.
- Under Perpetual moving average method, a new
weighted average unit cost must be computed after
every purchase and purchase return. Thus, the total
cost of goods available after every purchase and
purchase return is divided by the total units available
for sale at this time to get a new weighted average
unit cost.
SPECIFIC IDENTIFICATION Method
- means that specific costs are attributed to
identified items of inventory. The cost of the
inventory is determined by simply multiplying the
units on hand by their actual unit cost. This method
may be used in either periodic or perpetual inventory
system.
Net Realizable Value
– is the estimated selling price in the ordinary course
of business less the estimated cost of completion and
the estimated cost necessary to make the sale.
The cost of inventories may not be recoverable if
those inventories are damaged and estimated cost of
completion or the estimated cost to sell has
increased.
Lower of Cost and Net Realizable Value
- Inventories are usually written down to net
realizable value on an item by item or individual
basis.
VJ De Leon
** If the cost is lower than net realizable value, the
inventory is stated at cost and the increase in value
is not recognized.
** if the net realizable value is lower than cost, the
inventory is measured at net realizable value and the
decreased in value is recognized as expense.
Two methods of accounting for inventory write
down to net realizable value.
Direct Method – any loss on inventory write down is
not accounted for separately but “buried” in the cost
of goods sold.
Appropriate Journal Entry:
Allowance Method – any loss on inventory write
down is accounted for separately.
Appropriate Journal Entry:
The loss on inventory write down is included in the
computation of cost of goods sold.
In subsequent years, this allowance account is
adjusted upward or downward depending on the
difference between the cost and net realizable value
of the inventory at year-end.
If the required allowance increases, an additional
loss is recognized.
If the required allowance decreases, a gain on
reversal of inventory write down is recorded.
However, the gain is limited only to the extent of the
allowance balance.
The gain on reversal of inventory write down is also
included in the computation of goods sold as a
deduction.
Illustration: Manda Company began operations on
January 1 with 10,000 units of merchandise with unit
cost of P 80. Purchases for the year follow:
LOT No. Units Unit Cost Total
1 2,000 100
2 8,000 110
3 6,000 120
4 9,500 100
5 14,500 90
The physical inventory reveals 15,000 units on hand
on December 31.
Required: Compute inventory cost on December 31
and cost of good sold following each method listed
below:
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 1. FIFO – periodic
2. Weighted average – periodic
3. Specific Identification (assuming inventory
comes from Lot 3, 6,000 units, and Lot 4, 9,000
units)

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