INVENTORIES

1. Define inventories 5. Who is the owner of goods in transit?

 Assets held for sale in the ordinary  FOB DESTINATION (COD)
course of business.
Who is the Responsibl
 In the process of production for such
owner? e of freight
sale or in the form of materials or
charge?
supplies.
Upon Buyer Seller
 To be consumed in the production receipt of
process or in the rending of service. the goods
2. Explain the TWO classes of Inventory Goods in Seller Seller
a. TRADING CONCERN (TC) transit
 one that buys and sells goods in the  FOB SHIPPING POINT
same form purchased
 the term “MERCHANDISE INVENTORY” Who is the Responsibl
owner? e of freight
generally applied to goods held by a TC.
charge?
b. MANUFACTURING CONCERN (MC)
Upon Buyer Buyer
 one that buys goods which are altered shipment/good
or converted into another form before s in transit
they are made available for sale. 6. Explain Freight Prepaid & Freight
 inventories of MC are: Collect
1. Finished goods - completed  FREIGHT PREPAID
products. - Freight charge PAID BY SELLER
2. Goods in process – work in process.  FREIGHT COLLECT
3. Raw materials – to be used in - Freight charge NOT YET PAID.
production.
4. Factory or manufacturing supplies – SUMMARY
referred to indirect materials ”FOB DESTINATION” and “FOB
(paints, nails) SHIPPING POINT”
3. What goods are includible in - OWNERSHIP of goods in transit and
inventory? WHO SHOULD PAY THE FREIGHT
 all goods to w/ch entity has TITLE shall CHARGE
be included in the inventory, regardless “FREIGHT COLLECT” and “FREIGHT
of location. PREPAID”
4. What is the Legal Test of determining - WHO ACTUALLY PAID THE FREIGHT
inventory inclusion? CHARGE.
LEGAL TEST 7. What is consignment?
- method of marketing goods in w/ch
 Negative (excluded) the owner called the CONSIGNOR
 Affirmative (included) transfers physical possession of
i. Goods owned and on hand certain goods to an agent called
ii. Goods in transit and sold FOB CONSIGNEE who sells the on the
destination owner’s behalf.
iii. Goods in transit and purchased 8. Who is the owner of goods on
FOB shipping point consignment?
iv. Goods out on consignment - CONSIGNOR
v. Goods in the hands of salesmen 9. Explain the statement presentation of
or agents inventories.
vi. Goods held by customers on - INVENTORIES classified as CURRENT
approval or on trial ASSETS
 INVENTORIES
- shall be presented as ONE LINE
ITEM in SFP
- shall DISCLOSE in the NOTES of FS
 1. Finished goods 4. - Represents the cash equivalent
Manufacturing price on the date of payment
2. Goods in process Supplies - Theoretically correct HISTORICAL
3. Raw materials COST
10. Explain the Two Systems of Accounting
for Inventories.  GROSS METHOD
 PERIODIC SYSTEM - Violates the matching principles
- Calls for PHYSICAL COUNTING of - Discounts are RECORDED ONLY
goods on hand at the end if when TAKEN
accounting period to determine - Supported on PRACTICAL GROUNDS
QUANTITIES 13. What are the components of the cost
- Quantities are multiplied by of inventories?
corresponding costs to get the a. Cost of Purchases
inventory value for BALANCE SHEET - Purchase price
purpose - Import duties & irrecoverable taxes
- Gives ACTUAL OR PHYSICAL - Freight
INVETORIES - Handling
- Used when items have SMALL PESO - Other direct costs attributable to
INVESTMENT (groceries, hardware the acquisitions of finished goods,
and auto parts) materials, and services.
 PERPETUAL SYSTEM Not include:
- Requires MAINTAINANCE OF - Foreign exchange differences
RECORDS called STOCK CARDS
Note: the AMOUNT PAID is recognized as
- STOCK CARDS reflected the
INTEREST EXPENSE
increases and decreases of
inventory (book/perpetual b. Cost of Conversion
inventories). - Cost directly related to the units of
- STOCK CARDS kept to reflect and production such as DIRECT LABOR.
control both units and costs - Allocation of fixed and variable
- Inventory items treated production overhead
INDIVIDUALLY represent a relatively  FIXED PRODUCTION OH
LARGE PESO INVESTMENT (jewelry - Indirect cost of production
and cars) - Relatively constant
11. Distinguish Trade Discounts and Cash - Exp: Depreciation and maintenance
Discounts. of factory building & equipment
 VARIABLE PRODUCTION OH
Trade Discounts Cash Discounts
- Indirect cost of production
> Deductions from >Deductions from
- Varies directly with the volume of
the list or catalog the INVOICE PRICE
price to give when payment is production
invoice price made w/in - Exp: Indirectly labor & indirect
charged to the discount period. materials
buyer >Encourage 14. Cost of inventory of service provider.
> not recorded prompt payment - LABOR & OTHER COSTS OF
>Encourage >are recorded as PERSONNEL – directly engaged in
trading or increase purchase discount providing the service
sales by the BUYER and - LABOR & OTHER COSTS RELATING
SALES DISCOUNT TO SALES & GENERAL
by the SELLER ADMINISTRATIVE PERSONNEL ---
not included but recognized as
expense (w/ch incurred)
12. Explain the TWO METHODS OF
ACCOUNTING FOR PURCHASED.
 NET METHOD