INVENTORIES  Finished goods – completed goods ready

for sale.
Inventories
 Work in process – partially completed
 Held for resale In the ordinary course of
goods which required further or additional
business (finished goods).
processing before they can be sold.
 In the process of production for such sale
 Raw materials – goods to be used in
(work in process).
production.
 In the form of materials or supplies to be
Types of inventories
consumed in the production process or in
 Direct materials – goods that are already
rendering of services (raw materials and
issued in production.
manufacturing supplies).
 Factory or manufacturing supplies – are
Examples of inventories
raw materials issued to production:
 Merchandise purchased by a trading entity
 Do not form part of the finished product.
and held for resale.
 If they form part of the finished product,
 Land and other property held for sale in
they cannot be economically, directly
the ordinary course of business.
or easily identifiable or that they cost is
 Finished goods, goods undergoing
insignificant.
production, and raw materials and
Goods includible in inventory
supplies of waiting used in the production
 Installment contracts
process by a manufacturing entity.
 Retention of the title by the seller until
Classes of inventories
the selling price is fully collected –
 Inventories of trading or merchandising
included in the seller.
concern
 Treated as a regular sale where income
 An entity buys and sells the goods
is deferred on the part of the seller –
purchased in the same form.
excluded from the seller.
 Merchandise inventory.
Goods includible in inventory
 Inventories of manufacturing concern
 Goods in transit
 An entity buys goods and alter
 FOB destination where goods sold is
(converts) them into another form
transferred only upon receipt of goods –
before they are made available for sale.
included in the seller.
 Raw or direct materials, work in
 FOB shipping point where goods sold is
process, finished goods.
transferred upon shipment – excluded
from the seller.
Types of inventories
Goods includible in inventory running balance of the inventory including
 Others its movements.
 Goods out on consignment – included  An inventory count is conducted at the
in the seller. end of the period to verify quantities
 Goods consigned in – excluded from reflected in the records.
the seller.  It is used for inventory items with a
 Goods held by costumers on approval relatively large peso investment.
or trial – included in the seller.  The inventory quantity and value is
known at any time.
Freight terms
Inventory shortage / overage
 The difference between the physical
inventory and amount recorded in the
stock records is accounted for as
inventory short or over which requires an
Presentation
adjustment to the inventory account.
 Inventories are classified as current
 Inventory shortage – physical inventory
assets.
is less than the amount recorded in the
 It shall be presented as one-line item with
books.
the details disclosed in the notes to the
 Inventory overage – physical inventory
financial statements.
is greater than the amount recorded in
Accounting for inventories
the books.
 Periodic system – calls for the physical
Inventory discounts
counting of goods on hand at the end of
 Trade discounts – deductions from the list
the accounting period to determine
or catalog price in order to arrive at the
quantities.
invoice price which is the amount
 The quantities at the end of the period
chargeable to the buyer.
are multiplied by its unit cost to
 Trade discounts are not recorded.
determine the inventory value of
 Its purpose is to encourage trading or
financial statement purposes.
increase sales.
 Used when inventory have small peso
 It suggest the price at which the goods
investment and are fast moving.
may be resold.
Accounting for inventories
Inventory discounts
 Perpetual system – requires the
maintenance of stock cards that shows the
  Cash discounts – deductions from the Cost of inventory
invoice price when payment is made  Conversion cost refers to the costs
within the discount period. necessary in converting raw materials into
 Its purpose is to encourage prompt finished goods which includes direct labor
payment or early payment of account. and production overhead.
 Purchase discount / sales discount.  Other costs are necessary in bringing the
inventories to their present location and
Methods of recording purchases
condition.
 Gross method – both the purchases and
accounts payable are recorded at gross Exclusion from inventory costs
(100%).  Abnormal amounts of wasted materials,
 Net method – both the purchases and labor or other production costs.
accounts payable are recorded at net of  Storage cost unless this costs are
discount. necessary in the production process
before a further production stage.
Methods of recording purchases
 Administrative overhead that do not
contribute to bringing inventory so their
present location and condition.
 Selling costs.

Cost of inventories of a service provider

Cost of inventory
 Purchase cost purchase price, import
duties, non-refundable or non-recoverable
purchase taxes and transport, handling
and other costs directly attributable to the
acquisition of the inventory.
 Trade discounts are directly deducted.
 Foreign exchange gains or loss are
Cost formulas
excluded.
 The difference between the purchase
price for normal credit terms and the
amount paid is recognized as interest
expense.
 Includes primarily of the labor and other
costs of personnel directly engaged in
providing the service (supervisory
personnel and overhead).
 Generally, they are classified as work in
progress.
 Labor and other costs relating to sales and
general administrative personnel are
excluded – classified as expense.
 Cost formulas deal with the computation of
cost of inventories that are charged as
expense and when the related revenue is
recognized as well as the cost of unsold
 inventories at the end of the period that
are recognized as an asset.
 Specific identification
 First-In, First-Out
 Weighted average
Cost formulas
 Specific identification – specific costs are
attributed to identified items of inventory.
Characteristics of specific identification
 The cost of inventory is determined by
multiplying the units on hand by their
actual unit cost.
 This should be used for inventories that
are not ordinarily interchangeable and
those that are segregated for specific
projects.
 The flow of inventory corresponds with the
actual physical flow.
 It is very costly to implement.
Cost formulas
 First-In, First-Out – it is assumed that
inventories that were purchased
produced first are sold first or issued to
production.
Characteristics of FIFO
 The cost of sales represents costs from
earlier purchases.
 The cost of ending inventory represents
costs from the most recent purchases.
 It favors balance sheet presentation.
 There is improper matching of cost against
revenue because the COGS is stated as
an earlier purchase price.
 In rising prices, FIFO produces the highest
net income.
Cost formulas
 Weighted average – the cost of sales and
ending inventory are determined based on
the weighted average cost of beginning
inventory and all inventories purchased or
produced during the period.
Characteristics of weighted average
 The weighted average unit cost is
computed by dividing the total cost
available for sale by the total number of
units available for sale.
 The weighted average unit cost is
multiplied with the inventory quantity on
hand to arrive at the cost of the ending
inventory.
Characteristics of weighted average
 It is relatively easy to apply, especially
with the use of computers.
 It produces inventory valuation that
or approximates current value if there is a
rapid turnover of inventory.
 There may be considerable lag between
current cost and inventory valuation since
it includes early purchases.
 In rising prices, inventory valuation will be
less than current cost.
Weighted average – Perpetual
 Moving average – the terms used in
computing the weighted average unit cost
of inventory under the perpetual method.
  A new weighted average cost per unit is  Allowance method – the inventory is
computed after every purchase or recorded at cost and any loss on inventory
purchase return. writedown is accounted for separately.
 Gain or loss on inventory writedown is
Net realizable value
recorded as an adjustment to the
 Inventories shall be measured at lower or
COGS.
cost and net realizable value.
 Allowance for inventory writedown is a
 Net realizable value refers to the
reduction in the cost of the inventory.
estimated selling price in the ordinary
course of business less the estimated cost
of completion and the estimated costs
Purchase commitments
necessary to make the sale.
 Purchase commitments – obligations of
 Assets shall not be carried in excess of
the entity to acquire certain goods
amounts expected to realized from their
sometime in the future at a fixed price and
sale or use.
fixed quantity.
Accounting for inventory write-down
 When purchase commitments are
 If the cost is lower than NRV – no
significant or unusual – disclosure is
adjustment
required.
 If the NRV is lower than cost – inventory is
 Losses from firm and noncancellable
measured at NRV.
commitments shall be recognized.
 Direct method or the COGS method.
Purchase commitments
 Allowance method or the loss method.
 Decline in the purchase price after a
Accounting for inventory write-down
noncancelable purchase commitment has
 Direct method – the inventory is recorded
been made – loss (other expense) is
at lower of cost or NRV.
recorded in the period of the price decline.
 Any loss on inventory write-down is not
accounted for separately buy absorbed Loss on purchase commitment
or buried in the COGS. Estimated liability for purchase
 Ending inventory is recorded opposite commitment
the income and expense summary Purchase commitments
account at the lower of cost or NRV.  If the market price rises at the time of
Accounting for inventory write-down the purchase – gain on purchase
commitment is recorded that is limited to
the loss on the purchase commitment
previously recorded.