INVENTORIES - Variable – actual production

PAS 2 o Legal Test of Ownership in Transit

1. FOB Shipping Point – Buyer
Scope: 2. FOB Destination – Seller
1. Held for consumption 3. Freight Alongside (FAS) – Buyer
2. Held for sale – Merchandise inventory (merchandising) 4. Cost Insurance Freight (CIF) – Buyer
Finished goods inventory (manufacturing) 5. Ex-ship – Seller
3. Use in production – manufacturing o Special Sales
- Raw materials 1. Bill and hold – Buyer
- Work in process 2. Layaway Sales – Seller (ex: condominium – upon full payment – Buyer)
- Finished goods 3. Sale with a right of return – Seller
4. Sale on trial – Seller (ex: Spotify)
Outside the Scope: 5. Consigned Goods – Consignor
1. Commodity Brokers (IFRS 9) Subsequent Measurement:
2. Harvest Procedure (PAS 41) – Biological Procedure
o Cost – expressly provide that the cost of inventories shall be determined by
Recognition Principle: using either:
 First In, First Out (FIFO) – the Both
goodsarefirst purchased are first sold.
1. Satisfy the scope - Periodic the same - at end
2. Probable that future economic benefits will flow to the entity. - Perpetual - every movement
3. Measurable
 Inventories are assets held for sale in the ordinary course of business,  Weighted Average
in the process of production for such sale or in the form of materials or - Periodic -> at end
supplies to be consumed in the production process or in the rendering Average Unit Cost = total cost of goods available for sale / total
of services. number of units available for sale
- Perpetual -> every movement Purchase and
Measurement; -> Moving Average Purchase Return
New Weighted Average Unit Cost = total cost of goods available
Initial Measurement; after every purchase and purchase returns / total units available for sale
Inventory Cost = new weighted average unit cost × unit on hand
o Purchased
1. Purchase Price  Last In, First Out (LIFO) – the goods
Differ inlast purchased are first sold.
excluding: - Periodic inventory value - at end
- Interest – except if it classify under PAS 23 (Borrowing Cost) - Perpetual - every movement
- Recovery Tax (ex. VAT)
 Specific Identification – specific cost are attributed to identify items
- Trade Discount – direct deduction; not recorded
of inventory.
o Manufactured Cost of the Inventory = units on hand × actual unit cost
1. Raw materials - This method is appropriate for inventories that are
2. Direct labor segregated for a specific project and inventories that are
3. Factory overhead – Fixed – normal capacity – capitalized as inventory not ordinarily interchangeable.
- Excess – expense - May be used in either periodic and perpetual system
 - The flow of the inventory cost correspond with actual Gross Profit Rate = Gross Profit / Sales (Based on sales)
physical flow of goods. Gross Profit Rate = Gross Profit / Cost (Based on Cost)
 Standard Cost – predetermined products costs established on the * Excludes the sales discount and sales allowance.
basis of normal levels of materials and supplies, labor, efficiency  Retail Inventory Method – measuring inventory of large number of
and capacity utilization. Cost Retail
- Standard cost method may be used for convenience if the Beginning X X
result approximate cost. Purchases X X
 Relative Sales Price Method – cost is proportionate to selling price.
Freight-in X
o Net Realizable Value – estimated selling price in the ordinary course of Purchase returns (x) X
business less the estimated cost of completion and the estimated cost of Purchase allowance (x)
disposal. Transferred in X X
- Inventories shall be measured at the lower of cost and net
Transferred out (x) (x)
realizable value is now known as LCNRV.
Mark up X
Merchandise Inventory Raw Materials Work in Process Finished Goods Mark up cancel (x) Cost Ratio:
Estimation selling price X / / Total Goods Available for Sale X / X = x (Conservative)
Estimation cost to complete X / X Mark down X
Estimation cost to sell X / / Mark down cancel (x)
Replacement Cost / x X Total Goods Available for Sale X / X = x (Average)
Beginning (x) (x)
- Item by item basis = x (FIFO)
Total Goods Available for Sale X / X
 Accounting for inventory writedown:
- Cost < NRV = Cost; No problem rapidly changing items with similar margin for which it is
Cost Ratio
impracticable to =use
TGAS
other@costing
Cost / TGAS
method. @ Retail (Selling Price)
- Cost > NRV = NRV; Impairment Loss, loss in inventory writedown. Conservative = Formula except writedowns/markdowns
Total Goods Available for Sale
Accounting for Impairment Loss: Average = Formula
- Reversal of impairment is up to the extent of loss. FIFO = Formula except beginning inventory
Direct Method Allowance Method Accounting Procedure:
- loss is buried in Cost of Goods Sold - loss is recognized Periodic System Perpetual System
- loss is presented as part of COGS Purchase of merchandise Purchases xx Inventory xx
* Gross Profit is the same in Direct and Allowance Method. on account Accounts Payable xx Accounts Payable xx
Payment of freight on the Freight In xx Inventory xx
 Purchase Commitment – to purchase at specific price at future purchase Cash xx Cash xx
time or date. Return of merchandise Accounts Payable xx Accounts Payable xx
Gain – fixed price < Market = No Entry purchased to supplier Purchase Return xx Inventory xx
- fixed price > Market = Loss (Recognized) Sale of Merchandise on Accounts Receivable xx Accounts Receivable xx
account Sales xx Sales xx
o Estimation of Inventory – approximate value of inventory when it is not COGS xx
possible to take a physical count. Inventory xx
* loss * interim reports Return of merchandise sold Sales Return xx Sales Return xx
from customer Accounts Receivable xx Accounts Receivable xx
 Gross Profit Method – ratio of cost of goods sold to net sales is Inventory xx
relatively constant from period to period. COGS xx
Adjustment of ending Inventory-end xx No Journal Entry
inventory Income Summary xx
  closed to cost of goods sold result of normal shrinkage and
breakage of inventory.
 abnormal and material shortage – other expense
o Trade discount
 arrive at invoice price; charged to the buyer
 not recorded
o Cash discount
 purchase discount – buyer
 sales discount – seller
o Methods of recording purchases
 Gross method – purchases and payable are recorded at gross.
 Net method – purchases and payable are recorded at net.
o Cost of inventories
 cost of purchase
- it shall not include foreign exchange differences involving
a foreign currency.
- recognized as interest expense over the period.
 cost of conversion
- cost directly related to the units of production.
- Fixed production overhead – indirect cost; remains
o Basic formula under the gross profit method constant regardless of the volume of production.
- Uncollected fixed overhead – expense when incurred.
Goods Available for Sale (GAS) xx
- Variable production overhead – indirect cost; varies
Less: Cost of Goods Sold xx
directly with the volume of production.
Ending Inventory xx
 other cost
o Goods Available for Sale - incurred in bringing the inventories to their present
Beginning Inventory xx location and condition.
Add: Purchases xx - excluded and recognized as expense when:
Freight in xx - abnormal amounts
Total xx - storage cost (finished goods)
Less: Purchase return xx - storage cost (goods in process) – capitalized
Purchase allowance xx - administrative overheads
Purchase discount xx xx - distribution or selling costs
Goods Available for Sale xx o Gain on purchase commitment
 classified as other income
Presentation and Disclosure: o Disclose to the financial statement
o Inventories  amount of inventories or any writedown of inventories – expense
 current assets  amount of reversal of writedown – income
 statement of financial position  carrying amount of inventories pledge as security – liabilities
o Inventory shortage or overage o Agricultural, forest and mineral products
 measured at net realizable value
  sale is assured under a forward contract or government guarantee.
 homogeneous market exist and negligible risk of failure to sell
o Commodities of broker-traders
 measured at fair-value less cost of disposal.
 Broker-traders – who buy and sell commodities for others or on
their own account.
o Cost of goods sold
 use of the gross profit rate
 Net sales multiplied by cost ratio – based on sales
 Net sales divided by sales ratio – based on cost
o Sales Allowance and sales discount
 not deducted from sales
 do not increase the physical inventory of goods