FAR 06-04: Inventories (IAS 2)

Assets included as Inventories:

1.) Finished Goods (Manufacturers) or Merchandise Inventory (Retailers)
2.) Work in Process Inventory
3.) Raw Materials and Supplies

Cost of Inventories: Net Selling Price = Invoice Price

Cost of Purchase
Cost of Conversion
Invoice Price = List Price less Trade Discount and
Non manufacturing Overhead (Catch all) (i.e., Freight on Rebates (not recorded)
Consigned Goods)

X Sale
Buyback Agreement Direct Labor
✓ Loan

Finished and Segregated Cost of Conversion Fixed

- Excluded Overhead
Special Order
Can’t be revert back to Variable
Inventory
Scenario: Merchandise sold; billed but not yet IAS 2
shipped
Inventories should be measured at Lower of Cost, and
Merchandise sold; Shipping Terms: FOB Shipping Point Net Realizable Value (LCNRV)
- Applied item by item approach
Cut off: December 31, 2023 - Benchmark: Loss or Allowance Method
Billed: December 30, 2023
If specific cost is not determinable, the benchmark
Shipped: January 5, 2024 treatment is to use either the FIFO or weighted average
cost formulas.
Physical Count: Included
Proper Treatment: Include! Net Realizable Value (NRV)
Why? It is not yet shipped even tho billed on an earlier Est. Selling Price XXX
date.
Less: Cost to Complete XXX
Cost to Sell XXX XXX
NRV XXX
BS Presentation
Inventory XXX
Less: Allowance on Inventory Write-down XXX
Inventory - NRV XXX
COGS (Indirect Method Formula): COGS (Direct Method Formula):
TGAS XXX TGAS (BI @ LCNRV + Purchases) XXX
Less: Ending Inventory @ Cost XXX Less: Ending Inventory @ LCNRV XXX
COGS before Adjustment XXX COGS XXX
+ Loss / - Gain on Reversal XXX Purchase Commitment (Problem Example)
COGS after Adjustment XXX Data provided:
• PC Contract Date: November 15, 2022
Gain from Recovery (Succeeding Year) Journal Entry • PC: 100,000 barrels for P55.00 on March 31, 2023
• PC: P53.00 per barrel
Allowance on Inventory Write-down XXX • December 31, 2022 (BS Date): P51.00
Gain on Reversal XXX • March 31, 2023 (Date of Delivery): P57.00

November 15, 2022 (@55) December 31, 2022 (@51) March 31, 2023 (@57)

Contract Date – no entry Purchases (cannot exceed PC) 5,500,000

Legal Transaction only Est. Liability on PC 400,000
Cash (100,000 x P55) 5,500,000
Gain on Recovery 400,000
Loss 400,000
Estimated Liability on PC 400,000
[(55-51) x 100,000]
 Estimated Inventory under GP Method
Goods Available for Sale XXX
Less: Estimated Cost of Goods Sold:
Net Sales* XXX
Less: Gross Profit XXX XXX
Estimated Ending Inventory XXX

Or Estimated COGS = Net Sales x Cost Ratio

*if the problem is silent, based on sales
If the GP rate is based on cost, cost is equal to 100% and the SP% is GP% + 100%.
Based on Sales Based on Cost Net sales based on…
Sales 100% XXX% Regular Sales For Estimation
Cost (XXX%) (100%) Gross Sales Gross Sales
Gross Profit XXX XXX Less: Sales Returns and Less: Sales Returns and
Allowances Allowances
Sales Returns Sales Returns
(if presented separately)
Sales Allowance (if presented separately)
Sales Discount

Note: If Historical Data are given and no explicit GP NET SALES NET SALES
rate is present – compute the AVERAGE GP. Sales Discounts and Sales Allowances – IGNORED
Retail Method of Determining Estimated Ending Inventory (Cost Ratio)
1.) Conservative Approach Lowest
2.) Average Approach Silent
3.) FIFO Approach Beginning Inventory is excluded

Formula:
Goods Available for Sale @ Retail XXX
Less: Net Sales* Same with GP Method XXX
Employee Discount XXX
Normal Losses XXX XXX
Estimated Ending Inventory @ Retail XXX
Multiply by: Cost Ratio XXX
Estimated Ending Inventory @ Cost XXX

TGAS @ Cost XXX GAS after Net Mark-down

Ending Inventory @ Cost (XXX)
Cost of Goods Sold XXX
Formula for Cost Ratio:
Cost Retail
Beginning Inventory XXX XXX Note:
Purchases XXX XXX Abnormal Losses are
deducted
Freight-In XXX
Purchase Discount (XXX)
Purchase Returns and Allowances (XXX) (XXX)
Departmental Transfer-In XXX XXX
Departmental Transfer-Out (XXX) (XXX)
Additional Mark-up XXX
Mark-up Cancellation (XXX)
Cost Ratio
GAS after Net Mark-up XXX XXX (Conservative Method)
Mark-down (XXX)
Mark-down Cancellation XXX
Cost Ratio
GAS after Net Mark-down XXX XXX
(Average Method)
Less: Beginning Inventory (XXX) (XXX)
GAS for FIFO Computation XXX XXX Cost Ratio
(FIFO Method)
BIOLOGICAL ASSETS (IAS 41)
Definition of Terms
Agricultural Activity Is the management by an entity of the biological transformation of biological assets for
sale, into agricultural produce, or into additional biological assets.
Agricultural Produce Is the harvested product of the entity’s biological assets
Biological Asset Is a living animal or plant
Biological Comprises the processes of growth, degeneration, production, and procreation that
Transformation cause qualitative or quantitative changes in a biological asset
Harvest Is the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes
Bearer Plant A living plant that:
a. Is used in the production process of agricultural produce
b. Is expected to bear produce for more than one period
c. Has a remote likelihood of being sold (except as part of incidental scrap sales)

*Dual Purpose Plant (i.e., Rubber Plant) – not a bearer plant

Due to difficulty of measuring BP at FV – C2S, BP is now classified as PPE and

measured at either cost model or revaluation model.
Initial Recognition
An enterprise should recognize a biological asset or agricultural produce only when:
a. The enterprise controls the assets as a result of past events,
b. It is probable that future economic benefits will flow to the enterprise, and
c. The fair value or cost of the asset can be measured reliably.
The gain on initial recognition of biological assets at FV, and the changes in FV of BA during a period are
reported in net P/L.
The gain on initial recognition of agricultural produce at FV should be included in net P/L for the period which it
arises.
All costs related to bio assets that are measured at FV are recognized as expense when incurred, other than costs
to purchase bio assets.
Measurement Principles
Biological Assets Should be measured on initial recognition and at subsequent reporting dates at fair value
less cost to disposal, unless fair value cannot be reliably measured (Cost Model).
Agricultural Produce Should be measured at fair value less cost to disposal at the point of harvest

Measurement of Biological Assets at BS Date

Measured at fair value less cost to disposal
The adjustment of fair value less cost to disposal is recognized in Profit or Loss
This shall not apply to Agricultural Produce since they are Inventory (IAS 2)
Step 1: Compute the Carrying Amount
Units x Age at the BS Date x FVLCTS at BS Date
Step 2: Compute the Carrying Amount before FV Adjustment
Units x Age at the Beginning x FVLCTS at the Beg or Purchase or New Born
Step 3: Compute Gain on FV
[Carrying Amount (Step 1) – Carrying Amount before FV Adjustment (Step 2)] + Gain on New Born
Step 4: FV w/o Physical Improvements
Units x Age at the Beginning x FVLCTS at BS Date
Step 5: Compute for Price Change
FV w/o Physical Adjustment (Step 4) – CA before FV Adjustment (Step 2)
Step 6: Compute for Physical Change (Residual Approach)
Gain on FV (Step 3) – Price Change (Step 5)