Inventories are assets:

- Binebenta mo para magkaron ng income HELD FOR SALE (finished goods)

- Ket di mo binebenta yung asset pero yung asset ay ginagamit to PRODUCE
those assets to be HELD FOR SALE (goods in process)
- Kung ito yung mga materials na ginagamit para sa pagproduce ng ibebenta
or gamit mo para sa pagrender ng services (raw materials)

● Pwede rin maging inventory ang land and other property HELD FOR SALE by
real estate companies kasi kahit considered silang equipment pero KUNG
ginagamit ito ng isang company kasi yun yung BUSINESS NILA or ginagamit
nila para KUMITA ito ay matatawag na inventory

Classes of inventories:
Type ng Business:
Merchandiser or Retailer - buy and sell the goods as is, kung ano binili nilang
inventory yun na ibebenta nila parang reseller ganun
- Merchandise Inventory ang tawag dito - purchased with the intention of
SELLING to third parties such as items sold sa convenience store
Manufacturer or Manufacturing Business
- Direct materials - goods to be used in producing finished products (traceable)
- Manufacturing supplies - mga ingredients para mabuo ang product, raw
materials that are not traceable
- Goods in process - goods UNDERGOING manufacturing process
● Work in process - “goods in process includes raw materials, and direct labor,
and overheads”
- Raw materials - gamit to produce things
- Direct labor - cost paid to employees directly involved in
MANUFACTURING process (yung sahod ng gumawa ng inventory)
- Overheads
➢ Fixed overhead - indirect costs of production that does not
change according to the volume of production (cost na naiincur
sa production ng inventory) pero DI NAGBABAGO kahit gano
karami inventory na gawin
➢ Variable overhead - indirect costs of that varies directly with the
volume of production
- Finished good - goods AVAILABLE FOR SALE
● EXAMPLE OF WORK IN PROCESS WHEN MAKING WOODEN CARTS
- DIRECT MATERIALS - yung kahoy at yung gulong (NAKIKITA AGAD)
- Manufacturing supplies - pintura, grease, pako at screws (DI MADALING
MATRACE)
- Direct labor - sweldo ng carpintero
 - Fixed overhead - rent ng manufacturing space and depreciation of
production equipment
- Variable overhead - manufacturing supplies, water and electricity, and
salary of supervisor
- Finished goods - the cart
Service provider or Service Business
- Materials and supplies like pag salon ang inventories nila ay yung mga
pangkulay chuchu
Mga di kasali sa standard measurement ng measurement:
Agricultural activity
- Agricultural produce after harvest (mga bunga nila) (at the date of harvest di
pa siya measured)
- Measured at LCNRB pa rin pag di assured yung sale
- Measured at Net Realizable Value if sale is assured (like pag may readily
available market or may isusupplyan ka na)
Commodity Broker-Trader - mga nageexchange na bukibili ng commodity tas
ibebenta pag tumaas ang price
- Commodities
- Measured at fair value less cost to sell

What goods shall be included in inventory?

- All goods to which the entity HAS TITLE shall be included in inventory,
regardles of location (kailangan may title ang entity para maging inventory)
GENERAL RULE: The one who has POSSESSION has LEGAL TITLE (so pag hawak mo,
sayo yun)
EXCEPTIONS:
1. Goods in transit - kasi nasa gitna pa so di pa alam sino ba talaga mayari
Shipping Term:
Illustration: so nagorder siyempre si buyer kay seller, so from seller’s
place mapupunta sa port ni seller, so ilalagay sa barko, aalis ang barko,
makakarating sa port ni buyer, gang sa buyer’s place na. (seller’s port ->
loading -> otw na barko -> buyer’s port -> buyer’s place)
a. FOB shipping point - (free on board - libre ni seller gang shipping point)
pag naship na, kay BUYER na. (shipping point na basta pag otw na yung
barko)
b. FOB destination - libre ni seller hanggang makarating kay buyer
(buyer’s location)
c. Free Alongside - transfer ng ownership ay pag alongside na siya dun sa
port na ishiship yung inventory (pinakamalapit itong transfer; basta
nasa seller’s port na yung goods, may point of transfer na, so yung
loading sa barko, si buyer na sasagot)
 d. Cost, Insurance, Freight - transfer ng ownership ay UPON LOADING of
the goods to the vessel; magsastart na sasagutin ni buyer pag otw na
barko bale gang loading lang sagot ni seller (seller’s port -> loading ->
otw na barko -> buyer’s port -> buyer’s place)
e. Ex-ship - transfer ng ownership when the goods ARE UNLOADED at the
other side (pag nasa buyer’s port na, saka lang kay buyer na yun)
2. Consigned goods - mga pinadala natin sa other party; hawak ng ibang tao
- Pinapabenta lang ang inventory sa ibang party
- The owner ng consigned goods is the CONSIGNOR (shipper) kasi
tigabenta ka lang na consignee
- Held on consignment - ikaw si consignee
- Shipped out under consignment - ikaw si consignor
- Inventoriable costs: (icacapitalize na cost ng inventories) freight cost
and other handling costs of goods out on consignment
- Noninventoriable costs: freight costs if the consigned goods are
returned to the consignor; the original freight cost of returned consigned
goods [illustration: pag nagpadala ka kunwari sa consignee, tapos
binalik niya sayo, di macacapitalize yung freight cost ng pagbalik sayo
at yung unang freight]; storage cost and other reimbursable costs
charged to consignor; freight cost to final customer (delivery cost na to)
3. Inventory financing agreements - mga sinangla mo
a. Sales with a repurchase agreement - SELLER owner (sale agreement
talaga kasi nagbenta ka ng inventory sa pagsangla pero yung nakuha
mong pera, di yan selling price, utang yan, so ikaw na nagsangla ang
owner pa rin dahil ikaw ang borrower as nangutang)
b. Pledge of inventories - PLEDGOR or BORROWER owner (dito ang
inutang mo ay pera, pero nagsangla ka ng inventory)
c. Loan of inventory - BORROWER owner (dito ang inutang mo ay
inventory din as kapalit ng binigay mong inventory)
4. Sale or return - binenta mo siya pero may option si buyer na ibalik pero ang
mayari nan is si BUYER
5. Sale on trial or approval - SELLER ang owner kasi dito hawak mo inventory, at
hinihintay mo lang approval nila para maging sale transaction
6. Installment sale - BUYER owner (ang possession nakay buyer, ang legal title ay
kay seller until mabayaran ni buyer pero dahil ang may hawak ay si buyer, so
owner siya)
7. Bill and hold sale - BUYER owner (generally sale transaction to, pero ang case
neto, si buyer binili na pero di pa pinapaship ni buyer, so si buyer na owner)
8. Lay-away sale - SELLER owner (utang din to, dahil ibibigay lang sayo ni seller
ang product pag fully paid na so ang legal title ay kay seller)
 9. Special order sale - BUYER owner UPON COMPLETION (ito mga custom made
na product, so basta nagawa na ang inventory, sa buyer na to)

Inventory balance: 240,000

(20,000) - binenta mo as BILL AND HOLD so si buyer may-ari pero naisama mo sa
bilang SO MINUS SIYA
50,000 - di nabilang sa inventory, so CONSIGMENT to so si consignor owner, dito sa
transaction, IKAW si consignor (was sent meaning ikaw nagpadala) so ADD
40,000 - invoice price ito or selling price pero ang inventory ay MINEMEASURE AT
COST; SALE ON TRIAL type so seller ang owner, at di niya nainclude so ADD pero
icoconvert mo pa as COST tong selling price; so may given na 30% gross profit rate;
kaya 40,000 x 70% kasi matic pag sinabing 30% gross profit rate, 70% ang cost rate
30,000 - FOB shipping so buyer ang owner SO from the word PURCHASED, ikaw ang
buyer, walang sinabi if nainclude or naexclude pero sinabing GOODS IN TRANSIT so
matic di nabilang yan sa inventory kasi nasa dagat pa so ADD
Solution:
240000
(20000)
50000
28000
30000
Adjusted balance = 328,000

MEASUREMENT:
Initial Measurement - yun yung measurement after initial recognition
- Measured at COST ang inventory
Elements of cost: (generally: cost is mga ginastos mo para mapunta sa ganong
condition or place ang product) pag merchandising, CP, pag manufacturing, yang
tatlo complete
a. cost of purchase - components:
1. Purchase price
Purchase ito depende sa means ng acquisition so pag:
a. Regular purchase - invoice price = list price less trade discount
(mga pagbili on account or cash) trade discounts are not
recorded PAG regular purchase
b. Deferred settlement - (on account, nangutang ka tas lumagpas ka
sa required timeline ng pagbayad) Cash Price Equivalent =
presyo niya pag cash basis ginamit; diff ng total price at CPE ay
implied interest; interest expense is not inventoriable cost.
c. Lump-sum purchase - (marami kang biniling inventory for a
single price) Allocated purchase price using Relative Fair Value
(since pag magkakaiba nature ng product na binili so iaallocate
mo sila based sa costing)
2. Import duties - pag di mo binayaran yan, di makakapasok inventory sa
pilipinas
3. Irrecoverable taxes - NOTE: VAT, being recoverable, is generally NOT
CAPITALIZED as cost of inventories UNLESS the entity is NON-VAT
REGISTERED
4. Freight and handling costs
5. Insurance while the inventories are IN TRANSIT (ang insurance cost,
pag hawak mo, HINDI capitalizable, pag otw lang capitalizable)
6. Broker’s commission
b. cost of conversion (pag manufacturing)
1. Direct labor
2. Factory overhead
a. Variable FOH - inaallocate based on actual capacity
b. Fixed FOH - inaallocate based on normal capacity
Note: unallocated fixed FOH are expensed and not capitalized
c. other necessary costs in bringing inventories to their present location and
condition

EXCLUSIONS FROM COSTS

Sa inventories, hanggat di nagiging ready sa intended purpose which is pagbenta,
hindi magsstop ang capitalization, cutoff ng capitalization is gang ready ang
inventory
1. Abnormal losses - always expensed pag abnormal losses; capitalized pag
normal losses or mga ineexpect nating losses
 2. Administrative expenses - capitalized pag traceable
3. Storage costs of finished goods - hanggat di siya finished goods or raw
material, capitalized pa siya
4. Selling costs

Total Inventory Costs:

NONVAT REGISTERED COMPANY
80,000 - List price so icoconvert INTO invoice price. Para maibawas trade discount
na 10% at 20% so multiply mo sa 90% at 80% so:
Invoice price of goods purchased (80,000 x 90% x 80%) 57,600
112000 - inventories bought kasama VAT pero since NONVAT REGISTERED, kasama
pa rin vat, di mo na need ihiwalay so ADD 112,000
Freight in 5,000 ito kasama
Freight out 8,000 so di kasama to kasi selling expense to
Storage cost ng finished product 8,000 - excluded to
Abnormal amounts of wasted materials is 15000 (150% normal) so hahanapin mo
normal o 15000/150% = 10,000
So total is 184,600

Subsequent Measurement - measurement by the time na gagawa ka na ng financial

statements; year-end measure
- Lower of cost or net realizable value (LCNRV) - we need to determine the cost
of inventories and NRV tas pipiliin mo alin man lower and ipepresent mo yon
sa balance sheet as of the current year-end
Cost Formulas (ginagamit kasi to pag marami ka binibili na inventory na
magkakaiba cost, so ano yung cost na iaassign mo sa ending inventory)
 a. Specific Identification - for jewelries, di porket same na diamond ring, same
na cost pwede kasing iba iba yung diamond na ginamit etc. so you need to
assign cost
b. FIFO Method - pag same itsura ng inventories or homogenous, you may either
use FIFO or Average method.
- This method assumes that the items of inventory purchased FIRST are
SOLD first and the ending inventory is represented by the most recent
purchases (pero pano mo malalaman alin naunang napurchase kung
same itsura ng inventories, so cost ang focus neto, not the inventories)
SOLUTION GUIDE: ending inventory - (inventory, end quantity x cost of latest purch)
Cost of goods sold - (inventory sold in quantity x cost of oldest purchases)

1. FIFO - binubuo mo lang amounts dito

Beginning inventory 2,000 units P72,000
Purchases 9,400 units 355,760
TGAS 11,400 427,760 - total cogs, EI
Ending inventory (4,000)
COGS (units sold) 7,400 (galing sa total sales na units)
a. Cost of ending inventory
[(1,600-1900-300 units x 38.6 - pinakahuling binili)+(2,400units
-4000-1600-x 38-sunod na pinakahuling binili)] 152,960
b. COGS
[(2000-beginning inventory x 36} + (3000 - pinakaunang binili x 37.2) +
(2400 - 4800 kalahati x 38) 274,800
c. Gross profit
Sales [(3600 - 4200-600 x 45) + (3800x50) = 352,000
Cogs = (274800)
Gross profit = 77200
c. Average Method - under this method, the cost of each item is determined from
the average of the cost of similar items at the beginning of a period and the
cost of similar items purchased or produced during the period.
-may be applied to:
- Periodic System - Weighted Average Method
Solution: ending inventory = inventory, end quantity x weighted average
unit cost
Cogs = inv sold in quantity x weighted average unit cost
Note: Weighted Ave cost is recomputed once every year and computed
as TGAS in total/ TGAS in units
Exercise 3:
Weighted average unit cost (427,760 tgas/11,400 units) 37.52
Cost of ending (4000 x 37.52) = 150,080
Cogs (7400 x 37.52) = 277,648
Sales 352000 (same kasi sa FIFO) - COGS = gross profit 74,352
- Perpetual System - Moving Average Method
Solution: ending inventory = inventory, end quantity x latest average
unit cost
Cogs = inv sold in quantity x latest moving average unit cost
Note: Under this costing method, the average unit cost is recomputed
after every purchase transaction
Exercise 3:
Date units unit cost total
9-1 beg 2000 36.00 72000
9-3 purch 3000 37.2 111600
Balance 5000 36.72 183600
9-6 sales (4200) 36.72 (154224)
Balance 800 36.72 29376
9-7 sals ret 600 36.72 22032
Balance 1400 36.72 51408
9-15 4800 38.00 182400
Balance 6200 37.71 233308
9-16 sale (3800) 37.71 (143298)
Balance 2400 37.71 90510
9-20 purch 1900 38.60 73340
Balance 4300 38.10 163850
9-23 pr (300) 38.6 11580
Ending 4000 38.07 152270

COGS = 154224 - 222032 + 143298 = 275,490

 Sales 352000 (same kasi sa FIFO) - COGS = gross profit 76510
Concept of NRV:
- Measuring inventories at the LCNRC is in line with basic acco concept that an
asset shall not be carried at an amount in excess of amounts it is expected to
be realized (recoverable amount) [wala dapat asset na icacarry over mo siya
sa isang amount na mas mataas na amount na marerecover mo lang sakanya]
ex: inventory mo na irerecord mong 100,000 tas 80k lang marerecover mo,
dapat 80k na imemeasure mo sakanya
So if:
Cost>NRV = need ng write-down or ibaba ang amount
Cost < NRV = wala ka na gagawin pero kung may previous write-down ka, need mo
iwriteup or ireverse and write-down

How to compute NRV?

- Computed depende sa inventory na pinagcocomputan mo
a. Finished goods/merchan inven: Estimated Selling Price - Estimated CTS
Note: magkaka ECTC lang ang finished goods, pag defective.
b. Work-in-process inve: ESP - ECTS - ECost to Complete
c. Raw materials&factory supp: current replacement cost

How do we determine LCNRV?

LCNRV is applied on an ITEM BY ITEM BASIS. This is applied to all types of
inventories except for RAW MATERIALS AND FACTORY SUPPLIES.
These items of inventories are tested for possible write-down only if the related
finished goods are to be written down.
Finished goods and work in process pag nakitang mas mababa ang cost sa NRV,
automatic write down; pag raw materials ang need iwrite-down, tignan mo muna
related finished goods kung may write-down saka mo iwrite down pero pag raw
materials ay need iwrite down pero di nakawrite down finished, di mo iwritedown

OWNERSHIP OF INVENTORY
“Ownership changes when the title is passed”
Shipping terms: ownership and freight liability (sino ang DAPAT magbayad)
● FOB or free on board shipping point - the ownership changes when in transit
(pag nasa daan na yung saka lang mababago
Ex: city 1 - (seller, city 2 - buyer) pag napickup na ng delivery ang inventory,
pagmamay-ari na siya ni buyer or basta otw na wala na right si seller dyan so
dapat si BUYER ANG SASAGOT ng DELIVERY
● FOB Destination - the ownership changes upon receipt of the buyer of the
inventories
 Ex: HABANG NASA DAAN PA ANG INVENTORY, KAY SELLER PA. PERO PAG
NAKARATING NA, SAKA PA LANG KAY BUYER. So si SELLER ang
MAGBABAYAD ng delivery charges
Maritime shipping
● Free Along Sight - ownership changes when delivered to the dock
Ex: (Kunwari nasa Japan si seller, and Philippines si buyer and dadaan sa
daungan) magiging pagmamay-ari na ni BUYER ang inventory pag
DUMATING na sa DAUNGAN, pero kung nasa daan si Seller pa lang. So ang
delivery charges, si BUYER ang bayad
● Ex-ship - ownership changes when unloaded from the ship
Ex: magiging pagmamay-ari ni buyer pag BINABA na ng barko yung
INVENTORY. So si seller may-ari habang otw so si SELLER ang magbabayad.
● Cost Insurance Freight - ownership changes upon receipt
Ex: yung binayaran ni BUYER kay seller ay COVERED LAHAT. Magiging
pagmamay-ari lang ni BUYER pag NATANGGAP ang RECEIPT

PAYMENT TO COURIER (sino ang NAGBAYAD talaga)

● Freight collect - shipping fee is paid by the BUYER
● Freight prepaid - shipping fee is paid by the SELLER, before pa umalis bayad
na ni seller pero di dapat siya ang magbayad kung FOB diba so si Seller
madadagdagan ang ACCOUNTS RECEIVABLE
Ex: so pag kunwari FOB pero FC, tama lang since ayun ang dapat pero pag FOB pero
FP may utang si buyer kay seller

Other terms
● Bill and hold - ownership is transferred but remains on hand (pagmamayari na
ni buyer pero hawak pa rin ni seller yung inventory like pag babalikan lang ni
buyer pero nabili na niya)
● Layaway - ownership is transferred upon full payment (hawak na ni buyer pero
pagmamayari pa ni seller like pag bibili ka inventory pero kinuha mo na tapos
hulugan) so pag kumpleto lang bayad saka magiging pagmamayari ni buyer
● Installment - legal title is retained but economically transferred (pag
installment, ang owner is si seller pa rin; pero economically, ang ginagamit sa
accounting ay economic substance over legal terms so cinocnsider na sales na
agad so sa mata ng batas kay seller pa ang pagmamayari pero sa accounting,
na kay buyer na)
● Sale on trial - ownership is retained but not in possession (like pag nga may
binigay sayong product tas ipapatry palang, pag nagustuhan bibbilhin pag
hindi ibabalik) bibgay sa potential buyer
● Consignment - ownership is retained but not in possession (bibigay mo sa
pwede magresell nung product)
SUMMARY OWNERSHIP
In transit, FOB shipping point - owned by buyer
In transit, FOB destination - seller
Bill and Hold Sales - buyer
Layaway Sales - seller
Sale on Trial - Seller

Consignment (laging si consignor ang mayari ng inventory pero kailan ba malalaman

if ikaw si consignor) so pag:
Out on consignment (di mo hawak ang inventory) - ikaw si consignor
Held on consignment (hawak mo yung inventory) - ikaw si consignee

MEASUREMENT
Inventories shall be measured at LOWER OF COST and NET REALIZABLE VALUE -
LCNRV
a. Cost ng inventory
➢ costs of purchase
○ purchase price
○ non-refundable import duties and other taxes (pag
nonrefundable lang ha magiging part sila ni inventory)
○ Transport (freight in) pag FOB shipping point dun lang kasama si
inventory kasi ikaw ang magbabayad as a buyer
○ Handling other costs directly attributable to the acquisition
○ Trade discounts (bawas sa inventory ang discount kasi pag
marami ka binili tas binawasan selling price), rebates (pag
marami ka rin binili or paonti onti tas nagiging mura ang vinili so
babawas yon) and other similar items are deducted
➢ costs of conversion (pag manufacturer since prinocess mo raw goods)
○ Direct labor
○ Fixed and variable production overhead
➢ and other costs incurred in bringing the inventories to their present
location and condition (mga cost na kailangan para madala ang asset
sa naging condition)
○ Necessary to bring the asset to its intended use
○ Normal loss
○ Storage costs of work in process, if necessary for production (like
pag wine since necessary siya sa pagbenta ng wine, so kasama
siya sa inventory)
○ Cost of customization specified by customers
➢ Non-inventoriable cost
 ○ Abnormal loss, storage costs, administrative overheads, selling
cost (including freight out) so expense yan, borrowing cost
(generally)
Cost of merchandise inventory example:
Haruka purchased 10 units of merchandise inventory for the P20,000 FOB shipping
point. He also incurred the following costs: non-refundable tax P1,000; insurance
during transit P200; freight P300; and repair expense for damages during transit
P500. (dahil may insurance kaya sisingilin mo si insurer, pero pag wala ka insurance
EXPENSE YAN)

The entry for this transaction is

Merchandise Inventory 21,500 (20k, 1k, 200, 300)
Claims against Insurer 500
Cash 22,000

Cost of manufactured inventory example:

TIanyu Empire showed the following information regarding its production of
inventory; raw materials, beginning P10,000; raw materials purchased P50,000; raw
materials used P45,000; direct labor P55,000; production overhead P30,000;
administrative overhead P20,000; goods in process, beginning P20,000; goods in
process, ending P15,000; finished goods, beginning P5,000; finished goods, ending
P2,000. How are these costs accounted for?

Raw materials Goods in process Finished goods

Dr Cr Dr Cr Dr Cr
10k 45k 20k 135k CGoodManu 5k 138k CostGoodSold
50k 45k 135k (napunta rito kasi tapos n)
Total 15k 55k Total 32k
30k
Total 15k

b. Net Realizable Value - estimated selling price less estimated cost to complete
less estimated cost to sell (matatanggap pag binenta na natin yung inventory)
(concept of conservatism - dapat di naooverestimate ang asset. LCNRV - pag
mas mababa cost, cost ang record. Pag NRV malulugi ka kasi mas mababa
ang benta more than cost)
Bakit nga ba minsan mas mababa benta natin kesa sa cost ng product:
- Damaged
- Wholly or partially obsolete
- Selling prices have declined
- Cost of completion or cost of disposal increased
INVENTORY WRITE-DOWN
● When NRV ay mas mababa sa cost, inventory write-off must be recognized cuz
may loss
● Write-down (sabi ng FAS 2 pag tayo ay nagapply ng LCNRV:
- Usually on an individual or item by item basis (ginagawa ang LCNRV
pag iisaisahin mo pa yung product like hiwahiwalay pa shoes, shirt,
pants)
- Sometimes on group basis such as inventories in the SAME PRODUCT
LINE or GEOGRAPHICAL (like yang shoes pants shirt ay iisang apparel)
- INAPPROPRIATE on the basis of classification such as finished goods (di
pwedeng determine ang LCNRV na di kasali yung mga work in process
chuchu) or all inventories in a particular operating segment

INDIVIDUAL BASIS - isa isahin

Journal Entry:
DIRECT METHOD
Cost of Goods Sold 30k
Merchandise Inventory 30k

ALLOWANCE METHOD
Loss on Inventory Write-down 30k
Allowance for Inventory Write-down 30k

Next year
Cost of inventory - 500k
NRV of inventory - 480k
Write down 20k
Direct
Cogs 20k
Merch 20k

Allowance (allowance kasi dapat ay kung ano diff ng cost and nrv)
Allowance for inventory write-down 10k (dapat kasi magiging 20k nalang
allowance mo so babawasan nating 10k yung 30k last year para maging 20 this year)
Gain on reversal of write down 10k

Group basis - per product line like high qua muna total then total ng low
Total basis - total mo lang lahat ng cost, total lahat ng nrv
Laging mas mababa pipiliin

CONSIGNMENT
Agreement between a consignor (owner of goods) and consignee (custodian of
goods) for the consignee to sell the consigned goods and receive a commission
- Shipment of goods from the consignor to the consignee is NOT a SALE