INVENTORIES

IAS 2 - Inventories
 IAS 2 (Inventories) contains the requirements on how to
account for most types of inventory.

 A revised version of IAS 2 was issued in December 2003 and

applies to annual periods beginning on or after 1 January
2005.

 The objective of IAS 2 is to prescribe the accounting

treatment for inventories. It provides guidance for
determining the cost of inventories and for subsequently
recognizing an expense, including any write-down to net
realizable value. It also provides guidance on the cost
formulas that are used to assign costs to inventories.
 IAS 2 - Inventories
 Inventories include:

 Assets held for sale in the ordinary course of business

(finished goods);

 Assets in the production process for sale in the ordinary

course of business (work in process); and

 Materials and supplies that are consumed in production

(raw materials). (IAS 2.6)
 IAS 2 - Inventories

Classes of
Inventories

Inventories of a Inventories of a
Trading Manufacturing
Concern Concern
 IAS 2 - Inventories
 However, IAS 2 excludes certain inventories from its scope:
[IAS 2.2]

 work in process arising under construction contracts

(see IAS 11 Construction Contracts)

 financial instruments (see IAS 39 Financial Instruments:

Recognition and Measurement)

 biological assets related to agricultural activity and

agricultural produce at the point of harvest (see IAS 41
Agriculture).
 IAS 2 - Inventories
 While the following are within the scope of the standard, IAS 2
does not apply to the measurement of inventories held by: [IAS 2.3]

 producers of agricultural and forest products, agricultural

produce after harvest, and minerals and mineral products, to
the extent that they are measured at net realizable value
(above or below cost) in accordance with well-established
practices in those industries. When such inventories are
measured at net realizable value, changes in that value are
recognized in profit or loss in the period of the change;

 commodity brokers and dealers who measure their inventories

at fair value less costs to sell. When such inventories are
measured at fair value less costs to sell, changes in fair value
less costs to sell are recognized in profit or loss in the period of
the change.
 IAS 2 - Inventories

 Goods includible in the inventory

 RULE:
“All goods to which the entity has
a title shall be included in the
inventory, regardless of the
location.”
 IAS 2 - Inventories

Who is the
owner of the
goods in transit?

FOB Shipping
FOB Destination
Point
 IAS 2 - Inventories

Freight
Terms

Freight Freight
Collect Prepaid
 IAS 2 - Inventories

Maritime
Shipping
Terms

CIF or Cost,
FAS or Free
Insurance, Ex-Ship
Alongside
and Freight
 IAS 2 - Inventories
 CONSIGNMENT SALE

 Consignment sales are a trade agreement in which one party

(the consignor) provides goods to another party (the
consignee) to sell.

 However, the consignee has the right to return unsold goods

back to the consigner.

 In other words, a consignment sale is an agreement in which a

third party is entrusted with selling goods on behalf of the
owner. Consignment sales are also called goods on
consignment.
 IAS 2 - Inventories
 CONSIGNMENT SALE
 IAS 2 - Inventories
 CONSIGNMENT SALE
 IAS 2 - Inventories
 CONSIGNMENT SALE
 IAS 2 - Inventories
 CONSIGNMENT SALE
 IAS 2 - Inventories
 CONSIGNMENT SALE
Exercise:
Included in
Particulars the
Inventory?
Merchandise purchased by a trading company and held for
resale.
Land acquired and sold by an entity that is not engaged in
the real estate business.
Sold goods in transit under FOB destination
Purchased goods still in transit under FOB shipping point
Purchased goods in transit under FOB destination
Goods out on consignment
Materials used in the production
Exercise:
Included in
Particulars the
Inventory?
Merchandise purchased by a trading company and held for
YES
resale.
Land acquired and sold by an entity that is not engaged in
NO
the real estate business.
Sold goods in transit under FOB destination YES
Purchased goods still in transit under FOB shipping point YES
Purchased goods in transit under FOB destination NO
Goods out on consignment YES
Materials used in the production YES
 STATEMENT
PRESENTATION
MEASUREMENT
 IAS 2 - Inventories
 MEASUREMENT

 Inventories are measured at the lower of cost and net

realizable value (NRV). (IAS 2.9)

 The cost of inventories comprises all costs of purchase, costs

of conversion, and other costs incurred in bringing the
inventories to their present location and condition.

 Net realizable value (NRV) is the estimated selling price in the

ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the
sale.
 IAS 2 - Inventories
 Inventory cost should not include: [IAS 2.16 and 2.18]

 Abnormal waste;

 Storage costs;

 Administrative overheads unrelated to production;

 Distribution or selling costs;

 Foreign exchange differences arising directly from the recent

acquisition of inventories invoiced in a foreign currency; and

 Interest cost when inventories are purchased with deferred

settlement terms.
 IAS 2 - Inventories
 NRV:
Exercise:
ACCOUNTING FOR
INVENTORIES
 IAS 2 - Inventories

Accounting for
Inventories

Periodic Perpetual
System System
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERIODIC SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
 IAS 2 - Inventories
 PERPETUAL SYSTEM
DISCOUNTS
 BASIS TRADE DISCOUNT
Meaning A trade discount is an incentive
given to the buyers in the form of a
concession, usually in case of bulk
orders.
Recording No entry is made in the books of
accounts, in respect of trade
discount.
Objective The evident objective of trade
discount is to boost bulk sales.
CASH DISCOUNT
A cash discount is an incentive given
by the sellers to prompt quick / cash
payments.
Cash discount provided is recorded
as an expense, while cash discount
received is treated as an income.
The objective of cash discount is
quick realization of payments.
 BASIS TRADE DISCOUNT
Time It is allowed at the time of purchase.
Invoice A trade discount is visible in the
invoice as a deduction from the
total sale price of the goods.
Beneficiaries The benefit of a trade discount is
given to all customers.
Calculation Trade discount is calculated on the
sale price of the goods.
CASH DISCOUNT
It is allowed at the time of payment.
The amount of cash discount is not
shown in the invoice, but mentioned
at the top sometimes.
The benefit of cash discount is for
those customers only who make
prompt payment.
Cash discount is calculated on the
amount remaining after deducting
the trade discount.
METHODS OF
RECORDING
PURCHASES
 IAS 2 - Inventories

Methods of Recording
Purchases

Gross Method Net Method

Purchases and Purchases and

accounts payable are accounts payable are
recorded at gross recorded at net amount
amount of invoice. of the invoice.
 Gross Method
 Purchases on account, 9.09% trade discount, and cash discount of
2/10, n/15:

Purchases 1,000,000
Accounts Payable 1,000,000

 Assuming the payment is made within the discount period:

Accounts Payable 1,000,000

Cash 980,000
Purchase Discount 20,000

 Assuming payment is made beyond the discount period:

Accounts Payable 1,000,000

Cash 1,000,000
 Net Method
 Purchases on account, 9.09% trade discount, and cash discount of
2/10, n/15:

Purchases 980,000
Accounts Payable 980,000

 Assuming the payment is made within the discount period:

Accounts Payable 980,000

Cash 980,000

 Assuming payment is made beyond the discount period:

Accounts Payable 980,000

Purchase Discount Loss 20,000
Cash 1,000,000
Thanks!
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ASSIGNMENT
Item No. 1:
Rosalyn Company on December 31, 2006, reported an inventory balance of P2,575,000 which was
based on a physical count conducted as of December 29, 2006. An analysis of the purchase
records of Rosalyn Company revealed the following information:

 Goods costing P120,000 purchased fob shipping point were sent by the seller on December
30, 2006 and was received by Rosalyn Company on January 5, 2007.
 Goods costing P150,000 purchased fob destination were sent by the seller on December 27,
2006 and was received by Rosalyn Company on January 2, 2007.
 Goods costing P175,000 shipped to Rosalyn Company fob destination on December 28, 2007
and was received on December 31, 2006.
 Goods costing P125,000 received on December 30, 2006 from Milady Company on
consignment. Rosalyn was to sell the goods at a mark-up of 25% of cost. 80% of the goods
remained unsold at December 31, 2006.
 Goods costing P130,000 and P125,000 were sent out on consignment to Mac Company on
December 28, 2006 and Myles Company on December 31, 2006 respectively. The goods
remained unsold at December 31, 2006.

The correct amount of inventory to be reported as of December 31, 2006 by Rosalyn Company is:

a. P3,000,000
b. P2,875,000
c. P3,125,000
d. P2,825,000
Item No. 2:
On December 19, 2022, A Corporation purchased P100,000 goods from Supplier B under the terms
3/10, 2/15, n/30. Supplier B paid the freight of P500. A Corporation paid the account in full on
January 4, 2023.

Using the gross method, at what amount should A Corporation show as accounts payable on
December 31, 2022 statement of financial position?

a. P98,000
b. P98,500
c. P100,000
d. P100,500
Item No. 3:
On December 19, 2022, A Corporation purchased P100,000 goods from Supplier B under the terms
3/10, 2/15, n/30. Supplier B paid the freight of P500. A Corporation paid the account in full on
January 4, 2023.

Using the net method, at what amount should A Corporation show as accounts payable on
December 31, 2022 statement of financial position?

a. P98,000
b. P98,500
c. P100,000
d. P100,500
Item No. 4:
Uno Company is a wholesaler of car seatcovers. At the beginning of the current year, the entity’s
inventory consisted of 90 car seatcovers priced at P1,000 each. During the current year, the
following events occurred:

1. Purchased 800 car seatcovers on account at P1,000 each.

2. Returned 50 defective car seatcovers to supplier and received credit.
3. Paid 600 of the car seatcovers purchased.
4. Sold 790 car seatcovers at P2,000 each.
5. Received 20 car seatcovers returned by a customer and gave credit. The goods were in
excellent condition.
6. Received cash for 680 of the car seatcovers sold.
7. Physical count at year-end revealed 60 units on hand.

Required:

a. Prepare the related journal entries, including adjustments to record the above transactions
assuming the company uses periodic system and perpetual system.
b. Determine the cost of sales under each inventory system.
Item No. 5:
Woo-Young-Woo Company provided the following transactions for the current year, the first year
of operations:

1. Purchase of merchandise at an invoice price of P4,750,000 excluding freight. Terms are

2/10, n/30.
2. Freight paid, P250,000. The freight is allocated to each purchase.
3. Cash payments on purchases, P3,717,000, of which P1,617,000 was paid within the discount
period.
4. It is expected that all discounts on unpaid accounts payable will be lost.
5. On December 31, one-fifth of the merchandise remains on hand/

Required:

a. Prepare the related journal entries to record the transactions using the gross method and net
method.
b. Compute inventory and cost of sales under each method.