E-Portfolio

CHAPTER 6

PAS 2 – Inventories

Assets held for sale in the ordinary course of business, in the process
of production for such sale or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

Goods includible in the inventory

 As a rule, all goods to which the entity has title shall be included in
the inventory regardless of location.
 Passing of title- legal language which means “point of time at which
ownership changes”

Provides guidance on the

Prescribes the
determination of cost and its
accounting
Objective treatment for
subsequent recognition as an expense,
including any write-down to net
inventories.
realizable value.

PAS 2 applies to all inventories, except:

Scope  Work in progress arising under construction contracts

including directly related service contracts
( PAS 11 Construction Contracts)
 Financial Instruments
 Biological assets related to agricultural activities and
agricultural produce at the point of harvest
( PAS 41 Agriculture)

Kinds of Inventories

In merchandising, In manufacturing, In service provider,

 Goods  Raw Materials and  The cost of service
purchased supplies for which related
and held for  Goods in process revenue is not yet
resale  Finished goods recognized
 Who is the owner of goods
in transit?

Free on Board (FOB)

 FOB destination – goods purchased
is transferred only upon receipt
 FOB shipping point – ownership is
transferred upon shipment

Who is the owner of

consigned goods?

Consignment
 A method of marketing goods
in which the owner called
consignor transfer physical
possession if certain goods to
an agent called the consignee
who sells them on the owner’s
behalf

PAS 2 requires inventories to be

measured at the lower of cost and
Recognition and measurement
net realizable value on an item by
item basis.

 Upon the sale of inventories, the carrying amount

of those inventories is to be recognized as an
expense in the statement of comprehensive
income in the period in which the related revenue
is recognized.
 If net realizable value falls below the cost of
Expense recognition inventories the write-down is expensed in the
statement of comprehensive income in the period
in which the write-down occurs. An increase in net
realizable value that reverses a previous write-
down is to be recognized as a reduction in the
amount of inventories recognized as an expense in
the period the reversal occurs.
 Accounting for inventories

Periodic System Perpetual System

Calls for the Requires the
physical counting of maintenance of records called
goods on hand at the stock cards that usually offer
end of the accounting running summary of the
period. inventory inflow and outflow.

 Lower of Cost or Net Realizable Value

(LCNRV)
Measurement of inventory  Either First In or First Out (FIFO) or
weighted average method
 Specific Identification Method

The aggregation of the:

 Cost of purchase net of trade discounts and
rebates
 The costs of conversion into finished products
Cost of inventory
 Other costs in bringing the inventories to their
present location and condition excluding the
cost of abnormal wastage, storage,
administration and selling.

 Comprises the purchase price, import duties and

irrecoverable taxes, freight, handling and other
costs directly attributable to the acquisition.
Cost of purchase  Trade discounts, rebates and other similar items
are deducted from the cost of purchase.
 Shall not include foreign exchange differences,

Discounts

Trade Discount
Cash Discount
Deductions from the list or
Deductions from invoice
catalog price in order to arrive at
price when payment is made within
the invoice price which is actually
the discount period.
charged to the buyer.
 Methods of recording purchases

Gross Method Net Method

Purchases and Purchases and
accounts payable are accounts payable are
recorded at gross recorded at net

 Cost directly related to the units of production

such as direct labor.
Cost of conversion  Includes a systematic allocation of fixed and
variable production overhead.

Fixed production overhead

 Indirect cost of production that remains relatively
constant regardless of the volume of production.
Variable production overhead
 Indirect cost of production that varies directly
with the volume of production.

 Cost of inventories only to the extent that it is incurred in

bringing the inventories to their present location and
condition.
 Exclude the following from cost of inventory and recognize
as expense:
Other cost - Abnormal amounts of wasted materials, labor and other
production costs
- Storage cost, unless necessary for production
- Administrative overheads
- Distribution or selling costs

Net Realizable Value

 Estimated selling price in the ordinary course of business less the

estimated cost of completion and the estimated cost necessary to
make the sale.
 The cost may not be recoverable,
- If inventories are damaged, wholly or partially obsolete or if
there selling prices have declined
- If the estimated cost of completion or the estimated cost to
sell has increased.
 The practice of writing inventories down below cost to net realizable
value is consistent with that assets shall not be carried in excess of
amounts expected to be realized from their sale or use.
 Inventories are usually written down to net realizable value on an item
or individual basis.
 But if not appropriate, based on a classification.
 If cost > NRV
If cost < NRV Inventory is
Inventory is stated at LCNRV measured at net realizable
cost. Increase in value is not value. Write-down
recognized. inventory to net realizable
value.

Accounting for inventory write-down

Direct Method
Allowance Method
Inventory is recorded at
Inventory is recorded at
LCNRV. Any loss on inventory
cost and any loss on inventory
write-down is not accounted for
write-down is accounted for
separately but “buried” in the cost
separately.
of goods sold.

Methods of valuation

First In, First Out (FIFO)

Goods first purchased are
Weighted Average
first sold.
Cost of beginning inventory
The inventory is thus
plus cost of purchases divided by
expressed in terms of recent or
the total number of units.
new prices and COGS are in terms
of old or earlier prices.

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