MALING, Elleine Rose Quadra Submission Date

BSA 2-A Intermediate Accounting 2

E-TIVITY 1

Instruction(s): Please answer the following questions and/or satisfy the given tasks. Please observe the
guidelines below.

● Just answer each question comprehensively.

● Minimum of 7 sentences and a maximum of 20 sentences will be strictly observed.
● Please cite your references using APA 7th edition1.
● References must be in the footnotes.
● Copy pasting as a practice is not accepted.
● Please do not alter this format.

Questions:

1. Differentiate the consignee and the consignor. Emphasize on the accounting aspect.

In a consignment type of arrangement, the person who sends the goods to the agent(consignee)
is called the consignor and the consignee sells the goods on behalf of the owner or simply put,
the sender is called the consignor and the receiver is the consignee. Ownership is not transferred
to the consignee in the case of consignment. Therefore, the consigned goods are owned and form
part of the inventory of the consignor. In addition, all expenses incurred before, during and after
the delivery of the consigned goods shall be borne by the consignor. Despite the transfer of
physical ownership, the risk in the products is not transferred to the consignee. The items are held
at the risk of the consignor by the consignee, thus any damage or loss is covered by the consignor.
In this type of arrangement, the consignor earns net sales while the consignee earns commission. 2

2. Using a Three-set Euler Diagram, differentiate the three inventory financing agreements, namely
product financing agreements, pledge of inventory and loan of inventory.

The seller
Inventory is offered
agrees to
Product Financing as collateral. Pledge of Inventory
repurchase
Agreements the item it has
just sold
The debtor/ seller
is the owner of
inventories.

Loan based on the

value of your
inventory
Loan of Inventory

1
Click on this link to know how to cite references using APA Style of referencing, 7 th edition. https://libguides.csudh.edu/citation/apa-7
2
Assignment Point. (2019). Difference between Consignment and Sales. Retrieved from
https://www.assignmentpoint.com/business/accounting/difference-between-consignment-and-sales.html
Shah, S. (2018). What’s the difference between a Consignor and a Consignee?. Retrieved from
https://babington.co.uk/blog/accounting/consignor-and-consignee-difference/
Accounting Tools. (2021). The difference between consignor and consignee. Retrieved from https://www.accountingtools.com/articles/the-
difference-between-consignor-and-consignee.html
 A product financing arrangement is a transaction in which a company sells inventory and then
promises to repurchase it at a price equal to the original sale price plus carrying and financing
charges. Product finance arrangement is accounted for as a borrowing arrangement rather than
a selling transaction. As a result, the seller continues to report ownership of the sold inventory.
Loan of inventory is a type of borrowing based on the entire worth of a company's inventory. The
lender gives the organization a certain amount of money, just like a traditional loan. The business
agrees to make monthly payments or pay off the loan in full once the merchandise is sold. A
pledged inventory is a valuable asset that is given to a lender to secure a debt or loan in the event
that the debtor is unable to repay the debt. A pledged inventory is a piece of collateral held by a
lender in exchange for a loan. The borrower will give the lender the pledged inventory, but he or
she will retain ownership of the valuable item.3
3. Fill in the table below.

Installment Sales on the POV of the Accounting Treatment

BUYER Increase in Inventory

SELLER Decrease in Inventory

Installment Sales is almost the same with Layaway just that for layaway, the goods and products
are kept by the seller until the full payment is settled while for Installment sales, the goods or
products purchased are immediately released to the buyer and just settle the balance on the
agreed payment dates for the installment. The ownership of the goods is transferred to the buyer
upon the date of purchase and not on the day the payment has been settled. Thus the increase
on the inventory of the buyer and decrease on the inventory of the seller. 4

4. Fill in the table below and explain your answers.

Type of Arrangement Included in the Inventory of

FOB Shipping Point Buyer

FOB Destination Seller

Consignment Consignor

Inventory Financing Debtor

Sale with unusual right of return Buyer

Sale on trial (or approval) Seller

Bill and Hold Buyer

Lay Away Seller

3
Putra, L. (2019). Accounting for Product Financing Arrangements. Retrieved from http://accounting-financial-tax.com/2011/07/accounting-
for-product-financing-arrangements/
Credibly. (2018). What is inventory financing?. Retrieved from https://www.credibly.com/guides/inventory-financing/
Benge, V. (2020). What is pledged inventory?. Retrieved from https://smallbusiness.chron.com/pledged-inventory-15402.html
4
Fresh Books. (2018). What is the Installment Method?. Retrieved from https://www.freshbooks.com/hub/accounting/instalment-sales-
accounting-problems-and-solutions
CFI. (2019). What is an Installment Sale?. Retrieved from https://corporatefinanceinstitute-
com.translate.goog/resources/knowledge/accounting/installment-ale/?_x_tr_sl=en&_x_tr_tl=ceb&_x_tr_hl=fil&_x_tr_pto=nui,op,sc
Accounting Tools. (2021). Installment method definition. Retrieved from https://www.accountingtools.com/articles/2017/5/5/installment-
method
 For FOB Shipping POINT, the buyer pays for transportation, and title passes to the buyer when
the carrier takes possession, hence, these goods form part of the buyer's inventory while in transit
while for FOB Destination, the seller bears the expense of transportation, and title does not pass
until the buyers receives the goods, hence, these items remain in the seller's inventory while in
transit. For consignment, the goods are included in the inventory of the consignor because under
this arrangement, there is only a transfer of physical possession but now on ownership. Goods
sold by an entity under a sale with unusual right of return and future returns can be reliably
estimated are considered part of the buyer’s inventory. Under sale on trial, the goods are still in
the process of offering to prospective buyer or customers and the title of goods remain with the
entity. Therefore, it is included in the inventory of the seller. Bill and hold is a type of sale in which
the buyer takes title and accepts billing but delivery of the goods is delayed at the buyer’s request
that is why the goods sold are part of the buyer’s inventory. Lay away is a type of sale in which
goods are delivered only when the buyer makes the final payment in a series of installments. Prior
to delivery, the goods sold on a “lay away” sale is included in the inventory of the seller. 5

5. Explain the image below comparing and contrasting the two systems of inventory accounting.
Emphasize on the accounting aspect.

When individual inventory items have a small peso value or the inventory items are
numerous, periodic inventory system is utilized. When individual inventory items have a large
peso value or the inventory items are not very numerous, perpetual inventory system is used. For
periodic inventory system, inventory count, records and updates are done manually by physical
counting of goods on hand occasionally or at the end of accounting period while for perpetual
inventory system, inventory is updated continuously because it requires the maintenance of
records or stock cards and records inflow and outflow of inventories.

5
Valix, C., et al. (2020). Intermediate Accounting 2020 Edition. GIC Enterprise & Co., Inc.
Jiang, H. & Ford, J. (2020). Bill-and-Hold Arrangements in ASC 606. Retrieved from https://www.revenuehub.org/bill-and-hold-arrangements/
Shah, S. (2018). What’s the difference between a Consignor and a Consignee?. Retrieved from
https://babington.co.uk/blog/accounting/consignor-and-consignee-difference/
Putra, L. (2019). Four Accounting Issues Related to Inventory Ownerships. Retrieved from http://accounting-financial-tax.com/2012/09/four-
accounting-issues-related-to-inventory-ownerships/
 6. Explain lower of cost and net realizable value and the writing down of inventory. Make your own
example or illustration.

Inventory must be valued at the lower of cost and net realizable value, according to PAS 2.
LCNRV refers to the measurement of inventory at the lower of cost and net realizable value.
Inventory should be recorded at the lower of its cost or the amount at which it can be sold
under the lower of cost or net realizable value concept. The estimated selling price of something
in the ordinary course of business, less the costs of completion, selling, and transportation, is
known as net realizable value. If the cost is lower than net realizable value, the inventory is
measured at cost and if inventory is stated in the accounting records at an amount higher than
its net realizable value, it should be written down to its net realizable value. 6

For example, on December 31,2021, the total cost of the inventory is P7,350,000 and the net
realizable value is P 7,600,000. The inventory will be recorded at cost- P7,350,000. But if the
total cost of inventory is P7,600,000 and the net realizable value is P7,350,000, inventory will be
written down.

Cost – December 31,2021 P 7,600,000

Net Realizable Value 7,350,000

Inventory writedown 250,000

Under Direct method the entry will be:

Inventory – December 31,2021 P7,350,000
Income Summary P7,350,000

Under Allowance method the entry will be:

Inventory – December 31,2021 P7,650,000

Income Summary P7,650,000

Loss on inventory writedown P250,000

Allowance of writedown P250,000

Inventory – December 31,2021,at cost P7,650,000

Allowance for inventory writedown ( 250,000 )
Net realizable value P7,350,000

6
Accounting Tools. (2021). Lower of cost or net realizable value. Retrieved from https://www.accountingtools.com/articles/2020/9/18/lower-
of-cost-or-net-realizable-value
Open Textbooks. (2016). Lower of Cost and Net Realizable Value (LCNRV). Retrieved from https://www.opentextbooks.org.hk/ditatopic/23171
Valix, C., et al. (2020). Intermediate Accounting 2020 Edition. GIC Enterprise & Co., Inc.
 7. Define and explain the composition of the cost of inventories

a. Purchase cost

The purchase price, import tariffs, and other taxes, as well as transportation, handling, and
other costs directly related to the purchase of finished goods, materials, and services, are all
included in the cost of purchasing inventories. When calculating the purchase expenses, trade
discounts, rebates, and other comparable items are excluded. Foreign exchange disparities
arising directly from the acquisition of inventory in a foreign currency are not included in the
cost of purchase. The difference between the purchase price for regular credit terms and the
amount paid is recognized as interest expense when inventories are purchased with deferred
settlement terms.

b. Conversion cost

Costs directly tied to the unit of production, such as direct labor, are included in the cost
of conversion. They also comprise the systematic allocation of fixed and variable
manufacturing overheads incurred in the process of transforming raw materials into final
goods. Fixed production overheads are the indirect expenses of manufacturing that remain
constant independent of output level, such as depreciation and factory facility maintenance,
whereas variable production overheads vary directly with production volume.

c. Other costs

Other costs are included in inventory costs only to the degree that they are expended in
bringing the inventories to their current location and condition. The expense of
designing/developing a product for a specific customer is one example. However, there are
costs that are not included in the cost of inventory, such as excessive waste of resources, labor
and other manufacturing costs, storage costs, administrative overheads, and selling prices. 7

8. Discuss the following outright costs relative to inventories

a. Abnormal amounts of wasted materials, labor and other production costs

These are the amount of inventory waste or destruction that a company experiences over and
above what is expected in typical business operations or production procedures. Abnormal
waste can be caused by faulty machinery or inefficient activities, and it is thought to be at
least somewhat avoidable. These are charges incurred by enterprises as a result of excess
waste or useless items that surpass the regular levels of expected deterioration.

b. Selling costs

Selling expenses comprise all costs associated with securing customer orders and delivering
the finished product or service to the customer. It can also include distribution costs like
logistics, shipping, and insurance, marketing costs like advertising, website upkeep, and social
media spending, and selling costs like labor, commissions, and out-of-pocket expenses.

7
Valix, C., et al. (2020). Intermediate Accounting 2020 Edition. GIC Enterprise & Co., Inc.
Viljoen, M. (2014). IAS 2 Inventories. Retrieved from https://www.pkf.com/media/8d891e8144729e5/ias-2-inventories.pdf
Jeacock, J. (2018). International Accounting Standards 2 Inventories. Retrieved from https://bit.ly/3BDGT5G
 c. Administrative costs

Administrative expenses are those incurred by an organization that are not directly related to
a single core function, such as manufacturing, production, or sales. These overhead costs are
incurred by the organization as a whole, rather than by specific departments or business
divisions. Executive salaries, general accounting, secretarial services, public relations, and
other such expenses are examples.

d. Storage costs

In layman's terms, storage cost is the amount spent on inventory storage or keeping.
Storage expenses are a subset of inventory carrying costs that include warehouse utilities,
material handling workers, equipment maintenance, building upkeep, and security
personnel. A business must keep a variety of resources, including raw materials, finished
goods, machine parts, and so on. It must also spend money on the storage of these things,
security employees, rent for owning storage space, and so on. 8

9. Compare and contrast Trade Discounts and Cash Discounts using a Venn Diagram.

Cash Discount Trade Discount

 It is done to
 It is done to encourage Both are encourage buyers to
the buyers to make D buy goods in larger
payment at an I quantities.
early date. S
C  It is not recorded
 It is recorded in the O in the books of
books of account. U account. No
N journal entry is
 Cash discounts are T made for such
allowed by the seller S discount.
at the time of making given to customers
payment  Trade discount is
Allowed at the time
when goods are
sold.

8
Valix, C., et al. (2020). Intermediate Accounting 2020 Edition. GIC Enterprise & Co., Inc.
De Leon, G. & De Leon, N. (2012). Cost Accounting 2012 Edition. GIC Enterprise & Co., Inc
Accounting Tools. (2021). The cost to store inventory. Retrieved from https://www.erp-information.com/storage-costs.html
9
Vaidya, D. (2018). Difference Between Trade Discount and Cash Discount. Retrieved from https://www.wallstreetmojo.com/trade-discount-vs-
cash-discount/
Melanie. (2017). Contrasting Trade and Cash Discounts. Retrieved from https://www.unleashedsoftware.com/blog/contrasting-trade-cash-
discounts
Thakur, M. (2020). Trade Discount Vs Cash Discount. Retrieved from https://www.educba.com/trade-discount-vs-cash-discount/
 10. Enumerate the differences of the two accounting methods for cash discounts.

The gross method of cash discount accounting is one in which sales are accounted for at invoice
price and cash discount is accounted for separately when the client takes advantage of it. The
vendor does not assume that the client will prepay and take advantage of the cash discount in
this approach. To account for sales and cash discounts received by the consumer, multiple entries
are created at various points in the transaction flow. The net method of cash discount is an
accounting approach that accounts for sales assuming the consumer would take advantage of the
cash discount. As a result, sales under this technique are not recorded at the full invoice value,
but rather at the reduced value after the effect of cash discount is taken into account. In this
strategy, the vendor assumes that the consumer will make a prepayment and thus benefit from
the cash discount at the time of sale. 10

11. Refer to this link: https://courses.lumenlearning.com/finaccounting/chapter/effects-of-

inventory-method-on-the-financial-statement/. Enumerate in bullet form the advantages and
disadvantages of each inventory cost flow methods. Present it in table format.

Advantages Disadvantages
 Easy to apply  Recognition of paper
 Assumed flow of costs profits
corresponds with the normal  Heavier tax burden if used
physical flow of goods for tax purposes in periods
 No manipulation of income is of inflation
FIFO
possible
 Balance sheet amount for
inventory is most likely to
approximate the current
market value
 Tax advantage  Lower net income
 Allows the business to have  Grossly understates
LIFO more cash-in-hand to use for inventory
investment opportunities or  Permits income
to purchase more inventory manipulation
 Inventory is not as badly  Permits income
Weighted Average
understated as under LIFO manipulation
 COGS and ending inventory  Permits income
Specific Identification
are stated at actual cost manipulation

When a corporation sells using the FIFO technique, the oldest inventory or stock is used or sold
first, followed by the second last, and so on. As a result, the cheapest inventory gets consumed
first, and the most expensive recent stock becomes the ending inventory. It will be reflected on
the company's balance sheet. In other words, FIFO will boost net income because cheap old stock
will be used to determine the current cost of goods sold. However, additional taxes will be charged
on the corporation in exchange for higher net income. It makes manipulating figures and income
difficult because the cost associated to the unit sold is always the oldest cost. It synchronizes the

10
Terms Comapared. (2020). Gross method vs net method of cash discount. Retrieved from https://www.termscompared.com/gross-method-vs-
net-method-of-cash-discount/
Xplaind. (2018). Accounting for Cash Discount on Sales. Retrieved from https://xplaind.com/146208/cash-discount-on-sales
Accounting Hub. (2019). Accounting for Purchase Discounts: Net Method Vs. Gross Method. Retrieved https://www.accountinghub-
online.com/accounting-for-purchase-discounts/
 predicted cost flow with the logical, physical flow of items, providing organizations with a more
accurate picture of inventory costs. The LIFO method assumes that the goods created or
purchased most recently within a period are the first to be sold. As a result, under LIFO, the most
recent products are the first to be expensed as cost of goods sold (COGS), resulting in the lower
cost of earlier products being reported as ending inventory. And since the COGS is high, the net
income and tax will be lower which results to more cash-in-hand. When a corporation utilizes the
weighted-average approach and prices rise, its cost of goods sold is lower than when using LIFO
but higher than when using FIFO. Inventory is not as grossly overstated as it would be under LIFO,
but it is also not as up to date as it would be under FIFO. Under the weighted-average costing
method, a corporation can manipulate income by purchasing or omitting to purchase products
near the end of the fiscal year. The main benefit of specific identification is that the cost flow
matches to the physical flow of inventory. In other words, actual costs are matched to revenues.
The biggest disadvantage of utilizing a specific identification method is that the net income can
be effortlessly manipulated. For example, if an identical item is acquired at different prices early
in the year, the goods from the highest or lowest priced lot can be chosen to be delivered to clients
with the goal of manipulating income.

12. If the beginning balance of inventory is P50 while net purchases totaled P100 and cost of goods
sold was P30, the ending inventory must be P120.

The statement is TRUE. Goods costing P30 were sold

Merchandise Inventory Cost of Goods Sold

Beginning Balance P50 Sold P30 Sold P30

Net Purchases P100
Balance P120 11

11
De Leon, G. & De Leon, N. (2012). Cost Accounting 2012 Edition. GIC Enterprise & Co., Inc