INVENTORY

CO T FLOW
PAS 2, paragraph 25 expressly provides that the cost of
inventories shall be determined by using either:
a.First in First out (FIFO)
b.Weighted average

NOTE: The standard does not permit anymore the use of the
Last in, First out (LIFO) as an alternative formula in measuring
cost of inventories.
FIFO METHOD
assumes that “ the goods first
purchased are first sold”
is in accordance with the ordinary
merchandising procedure that the
goods are sold in the order they are
purchased.
The rule is first come first sold
Inventory is expressed in terms old
recent or new prices while the cost
of good sold is representative of
earlier or old prices
Favors the statement of financial
position in that the inventory is
stated at current replacement cost.
However, there is an improper
matching of cost against revenue
because the goods sold are stated at
earlier or older prices resulting in
understatement of cost of sales.
In the period of inflation this method
would result to the highest net
income. However, in a period of
deflation it would result to the
lowest net income.
ILLUSTRATION
The following data pertain to an inventory item:

The ending inventory is 700 units.

FIFO- PERIODIC
FIFO- PERPETUAL
This requires the preparation of stock card.

Jan. 8 sale 100,000

22 sale (60T-105T) 165,000
Cost of Good sold 265,000
WEIGHTED AVERAGE- PERIODIC

Cost of the beginning + Total cost of purchases

Weighted Average inventory during the period
unit cost =

Total units purchased + Beginning inventory

OR
Total cost of goods available for sale
=

Total number of units available for sale

Inventory value = Weighted average unit cost x Units on hand
WEIGHTED AVERAGE- PERIODIC
Weighted average unit cost
= (417,000/2,000)
= 208.50
Inventory value
= (700x208.5)
= 145,950
WEIGHTED AVERAGE -PERPETUAL
Popularly known as the moving Under this method, a new weighted
average method average unit cost must be computed
every purchase and purchase return.
PAS2, paragraph 27, provides that
the weighted average may be Thus, to get a new weighted
calculated on a periodic basis or as average unit cost:
each additional shipment is received
depending upon the circumstances
of the entity. total cost of goods available after every
purchase and purchased return
This requires the keeping of inventory = the total units available

for sale
stock card in order to monitor the at this time
moving unit cost after every
purchase.
WEIGHTED AVERAGE -PERPETUAL

Jan. 8 sale 100,000

22 sale (60T-105T) 165,000
Cost of Good sold 265,000
WEIGHTED AVERAGE METHOD
It is relatively easy to apply, especially with
computers.
This method produces inventory valuation that
approximates current value if there is a rapid
turnover of inventory.
This method may be a considerable lag between
the current cost and inventory valuation since
the average unit cost involves early purchases.
LIFO METHOD
assumes that “the goods last
purchased are first sold” and the
goods remaining in the inventory at
the end of the period are those first
purchased or produced (LAST IN, FIRST
OUT)
inventory is thus expressed in terms
of earlier or old prices and the cost of
good sold is sold representative of
recent or new price.
favors the income statement
because there is matching of current
cost against current revenue.
there is a significant lag between
inventory valuation and current
replacement cost
permits income manipulation such
as by making year-end purchases
designed to preserve existing
inventor layers
in a period of rising prices this
method would result to the lowest
net income. In a period of declining
prices, it would result to the
highest net income.
LIFO- PERIODIC
Units Unit cost Total Cost
from January 1 balance 700 200 140,000
LIFO- PERPETUAL
NOW
LET'S
PRACTICE!
ILLUSTRATION

Determine the ending inventory and cost of ending inventory

under the following costing method.
1.FIFO
2.Weighted average- periodic
3. Moving Average-perpetual
FIFO- PERIODIC/PERPETUAL

Ending inventory = 18,000

Cost of ending inventory = 3,100,000
WEIGHTED AVERAGE- PERIODIC

Weighted average unit cost = 4,350T/24T units

= 181.25
Cost of ending inventory = 18,000 x 181.25
= 3,262,500
WEIGHTED AVERAGE- PERIODIC

Ending inventory = 18,000

Cost of ending inventory
= 3,000,000
SPECIFIC IDENTIFICATION
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
there is an actual determination of
cost of units sold and on hand
may be used in either periodic or
perpetual inventory system.
PAS 2, paragraph 23, provides that
this method is appropriate for
inventories that are segregated for a
specific project and inventories that
are not ordinarily interchangeable.
the flow of the inventory cost
corresponds with the actual physical
flow of goods.
this method is that it it very costly to
implement even with high speed
computers.
STANDARD COST
are predetermined product cost stablished on
the basis of normal levels of material and
supplies, labor, efficiency and capacity
utilization
once determined is applied to all inventory
movements and inventories goods available for
sale purchase and goods sold or places in
production
PAS 2, paragraph 21, states that the standard cost method may be used
for convenience if the result approximate cost.
However, the standards set should be realistically attainable and are
reviewed and revised regularly in the light of current conditions.
RELATIVE SALES PRICE METHOD
When different commodities are purchased at a lump sum, the single cost is
apportioned among the commodities based on their respective sales price.
This is based on the philosophy that cost is proportionate to selling price.
Example:
Products A, B & C are purchased at "basket price" of
P 3,000,000. Assume that the said products have
the following sales price: A P500,000,B
P1,500,000, and C P3,000,000.
Compute for the price of each product.
RELATIVE SALES PRICE METHOD

ANSWER:
PRODUCT A 500,000 5/50X3,000,000 300,000
PRODUCT B 1,500,000 15/50X3,000,000 900,000
PRODUCT C 3,000,000 30/50X3,000,000 1,800,000
5,000,000 3,000,000
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