Chapter 7: Inventories

Inventories are as assets:

a. Held for sale in the ordinary course of business (Finished Goods).
b. In the process of production for such sale (Work in Progress).
c. In the form of material or supplies to be consumed in the production process
or in the rendering of services.
Recognition:
Inventories are recognized when they meet the definition of inventories and they
qualify for recognition of asset, such as when the entity obtains control over them. The
following circumstances determine the inventories in whom has control over them.
I. Goods in Transit – goods that the seller has already shipped but the buyer
has not yet received. The control over the inventories vary on the sale terms
like FOB Shipping Point and FOB Destination.
a. FOB Shipping Point – Ownership is transferred to the buyer upon
shipment
b. FOB Destination – Ownership is transferred when the inventories are
received by the buyer.
II. Consigned Goods – The entity (Consignor) delivers goods to another party
(Consignee) to undertake in selling the goods to end costumers.
The consigner remains control over the consigned goods until they are sold to
end costumers.
III. Inventory Financing Agreement – Inventories may be acquired or sold under
various forms of financing agreements such as:
a. Product Financing Agreement – seller sells inventory to buyer but
assumes an obligation to repurchase it. This then leads ownership of the
inventories to retain at the seller/
b. Pledge of Inventory – A borrower uses its inventory as a collateral for its
loan. The ownership of the inventories remains to the borrower.
c. Loan of Inventory – The entity borrows inventory from another inventory to
be replaced with the same inventory. The inventories that are borrowed
should be included in recognizing inventories.
IV. Sale on Trial – A seller allows a prospective buyer to use its goods for a
period. The ownership of the inventories remains to the seller’s inventory,
until the prospective buyer actually buys the good.
V. Installment Sale – An installment sale refers to the physical possession of the
inventory is passed over to the buyer, yet the legal title still remains to the
seller to protect the collectability until the last series of payments are made.
The title of inventories is transferred to the buyer at the point of sale.
 VI. Bill and Hold Arrangement – A sale which the seller bills a customer but
retains physical possession of the inventory due to request. The title of the
inventories is transferred to the buyer.
VII. Lay Away Sale – A type of sale which the buyer makes a series of payments
to the seller for the goods purchase. The title of the inventories will be
transferred as soon as the entity will be able to pay the final series of
payment.
Measurement:
Inventories are measured at lower of cost and net realizable value.
The lower of cost or net realizable value concept means that inventory should be
reported at the lower of its cost or the amount at which it can be sold. Net realizable
value is the expected selling price of something in the ordinary course of business, less
the costs of completion, selling, and transportation .

Takeaway on this topic:

Chapter : Inventory estimation
There are instances where inventory estimation takes place when it is not
practical to undertake a physical count. However according to PAS 2, estimates are
allowed only if the estimation is approximate to the cost.
The cost of inventories may be estimated using either of the following methods:
I. Gross Profit Method – Gross Profit is assumed to be relatively constant
from period to period. Thus, the Gross Profit Rate is used to determine the
cost ratio. The GPR can be found either through (a) based on sales or (b)
cost on cost of goods sold
a. GPR based on sales – computed by dividing gross profit by the net
sales.
b. GPR based on cost of goods sold – computed by dividing gross profit
by the cost of goods sold.
Moreover, the two gross profit methods can be translated from one method to another
and vice versa:
Cost Ratio from GPR based on sales: 100% Net sales – GPR based on sales.
Cost Ratio from GPR based on cost: 100% Cost of Goods Sold / Net Sales ( 100% /
GPR based on cost).