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Gam Inventories
Gam Inventories
INVENTORIES
Sec. 1. Scope. This Chapter covers the definition, recognition, measurement, cost
formulas to be used and related disclosure requirement in accordance with PPSAS 12 on
Inventories. It includes specific guidelines and procedures on acquisition, issue, disposal and
impairment of inventory and defines the benchmark for those tangible items not enough to be
considered as Property, Plant and Equipment (PPE).
Sec. 2. Definition of Terms. For the purpose of this Manual, the terms used as stated
below shall be construed to mean as follows: (Par. 9, PPSAS 12)
a. Current Replacement Cost – is the cost the entity would incur to acquire the asset on
the reporting date.
b. Fair Value – is the amount for which the same inventory could be exchanged
between knowledgeable and willing buyers and sellers in the marketplace.
d. Net Realizable Value – is the estimated selling price in the ordinary course of
operations, less the estimated costs of completion and the estimated costs necessary to
make the sale, exchange, or distribution. It is the net amount that an entity expects to
realize from the sale of inventory in the ordinary course of operations. (Pars. 9 & 10,
PPSAS 12)
e. Perpetual Inventory System – is a system that continually tracks all additions to and
deletions from inventory
Sec. 3. Cost of Inventories. The cost of inventories shall comprise all costs of purchase,
costs of conversion (materials, labor and overhead) and other costs incurred in bringing the
inventories to their present location and condition, excluding abnormal amounts of wasted
materials, labor, other production and selling costs, administrative overheads that do not
contribute to bringing inventories to their present location and condition. Trade discounts, rebates,
and other similar items are deducted in determining the costs of purchase. (Pars. 18, 19 & 25,
PPSAS 12)
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Sec. 4. Measurement. Inventories shall be measured as follows:
a. At the lower of cost and net realizable value. However, where inventories are
acquired through a non-exchange transaction, their costs shall be measured at their
fair value as at the date of acquisition; (Pars. 15-16, PPSAS 12)
b. At the lower of cost and current replacement cost where they are held for distribution
at no charge or for a nominal charge, or for consumption in the production process of
goods to be distributed at no charge or for a nominal charge; or (Par. 17, PPSAS 12)
Sec. 5. Cost Formulas. The cost of inventories of items that are not ordinarily
interchangeable, and goods or services produced and segregated for specific projects, shall be
assigned by using the specific identification of their individual costs. Specific identification of
costs means that specific costs are attributed to identified items of inventory. This is appropriate
treatment for items that are segregated for a specific project, regardless of whether they have been
bought or produced. However, specific identification of costs is inappropriate when there are
large numbers of items of inventory that are ordinarily interchangeable. In such circumstances,
the method of selecting those items that remain in inventories could be used to obtain
predetermined effects on the surplus or deficit for the period. (Par. 32-33, PPSAS 12)
For interchangeable items, cost is determined using the weighted average cost formula.
(PAG2 and Par. 35, PPSAS 12)
Sec. 6. Weighted Average Method. The weighted average method shall be used for
costing inventories. This method calls for the re-calculation of the average cost of all items in
stock after every purchase. Therefore, the weighted average cost is the total cost of all units
subsequent to the latest purchase, divided by their total number of units available. The
Accounting Division/Unit shall be responsible in computing the cost of inventory on a regular
basis as shown in the following sample Supplies Ledger Card (SLC) (Appendix 57).
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Sec. 7. Recognition as an Expense. When inventories are sold, exchanged, or
distributed, their carrying amount shall be recognized as an expense in the period in which the
related revenue is recognized. If there is no related revenue, the expense is recognized when the
goods are distributed or the related service is rendered.
The amount of any write-down to net realizable value and all losses of inventories shall
be recognized as an expense in the period the write-down or loss occurs. Reversal of any write-
down of inventories arising from increase in net realizable value shall be recognized as a
reduction in the amount of inventories recognized as an expense in the period in which the
reversal occurs. (Par. 44, PPSAS 12)
Sec. 8. Impairment. An asset is said to be impaired if the cost of inventories held for
sale is higher than the net realizable value or the cost of inventories held for distribution or
consumption is higher than the current replacement cost. The difference between the cost and net
realizable value/current replacement cost shall be recognized as an expense in the financial
statement.
Sec. 9. Perpetual Inventory Method. Supplies and materials purchased for inventory
purpose shall be recorded using the perpetual inventory system, resulting in a more accurate
inventory records and a running total for the cost of goods sold in each period. The system
requires accounting records to show the amount of inventory on hand at all times through the
maintenance of the SLC (Appendix 57) by the Accounting Division/Unit and Stock Card (SC)
(Appendix 58) by the Supply and/or Property Division/Unit for each item in stock. Regular
purchases shall be coursed through the inventory account and issues thereof shall be recorded as
they take place except for supplies and materials purchased out of PCF for immediate use or on
emergency cases which shall be charged directly to the appropriate expense accounts.
Sec. 10. Semi-expendable Property. Tangible items below the capitalization threshold
of P15,000 shall be accounted as semi-expendable property. The following policies apply as
follows:
b. These tangible items shall be recognized as expenses upon issue to the end-user.
Sec. 12. Disclosure and Presentation. The financial statements shall disclose:
a. The accounting policies adopted in measuring inventories, including the cost formula
used;
b. The total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity;
c. The carrying amount of inventories carried at fair value less costs to sell;
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d. The amount of inventories recognized as an expense during the period;
f. The amount of any reversal of any write-down that is recognized in the statement of
financial performance in the period;
g. The circumstances or events, such as changed economic circumstances, that led to the
reversal of a write-down of inventories; and
h. The carrying amount of inventories pledged as security for liabilities. (Par. 47,
PPSAS 12)
Sec. 13. Inventory Accounting System. The Inventory Accounting System consists of
the system of monitoring, controlling and recording of acquisition and disposal of inventory. The
system starts with the receipt of the purchased inventory items. The requesting office in need of
the inventory items, after the Property and Supply Division/Unit has determined that the items are
not available in stock, shall prepare and cause the approval of the Purchase Request (PR)
(Appendix 60). Based on the approved PR and after accomplishing all the required procedures
adopting a particular mode of procurement, the agency shall issue a duly approved Contract or
Purchase Order (PO) (Appendix 61).
Procedures relative to the obligation of allotment to cover the funding requirement of the
Contract/PO and payment of the inspected and accepted deliveries are discussed under
Chapter 3-Budget Execution, Monitoring and Reporting, and Chapter 6-Disbursements of this
Manual.
Sec. 14. Inventory Accounting Sub-Systems. The sub-systems for inventory accounting
are as follows:
Area of Seq.
Activity
Responsibility No.
Delivery of Inventory Items
Property and/or Supply
Division/Unit
Property and/or 1 Signs “Received” portion of the original and Copy 2 of
Supply Custodian the Delivery Receipt (DR). Files the original and returns
Copy 2 of the DR to the Supplier/Procurement Service.
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Area of Seq.
Activity
Responsibility No.
2 Prepares Inspection and Acceptance Report (IAR)
(Appendix 62) in four (4) copies. Forwards Copies 1-4 of
IAR, original of DR, and Copy 2 of approved PO to the
Property Inspector for inspection of deliveries.
Inspection Committee
Property Inspector 3 Inspects and verifies items as to quantity and conformity
to specifications based on the DR and approved PO. If
delivery is not in conformity to the specifications or
delivery is incomplete, indicates notation on the IAR that
the deliveries are not in conformity to specifications
and/or terms agreed under the approved PO and returns
the Copies 1-4 of IAR, original of DR, and Copy 2 of
approved PO to the Property and/or Supply Division/Unit.
If delivery is in order, indicates the date of inspection,
places “√” in the box for “Inspected, verified and found in
order as to quantity and specifications”, and signs the
“Inspection” portion of the IAR. Retains Copy 2 of IAR
and forwards Copies 1, 3 and 4 of IAR, original of DR
and Copy 2 of PO to the Property and/or Supply
Custodian for acceptance of goods delivered.
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Area of Seq.
Activity
Responsibility No.
Accounting
Division/Unit
Receiving/Releasing 6 Records in the logbook the receipt of Copy 3 of IAR and
Staff photocopy of PO and DR and forwards to the Accounting
Staff concerned for the preparation of JEV.
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Area of Seq.
Activity
Responsibility No.
Maintenance of SLC
Accounting
Division/Unit
SLC Keeper 10 Records receipt of delivered/accepted goods and posts
necessary information to the SLC based on the Copy 3 of
IAR, copy of PO and DR.
Area of Seq.
Activity
Responsibility No.
Requesting Office
Requesting Personnel 1 Prepares Requisition and Issue Slip (RIS) (Appendix 63)
in three (3) copies.
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Area of Seq.
Activity
Responsibility No.
Requesting Office
Requesting Personnel 7 Receives supplies requested and signs in the “Received
by” portion of the RIS.
Stock Card Keeper 11 Receives signed RSMI and forwards to the Accounting
Division/Unit the original copy of RSMI together with
original RIS. Files Copy 2 of RSMI.
Accounting Division/Unit
Accounting Staff 12 Receives the original copy of RSMI and original RIS.
Checks and verifies the completeness of information.
Retrieves SLC from file and fills up the “To be filled up
in the Accounting Division/Unit” portion of RSMI.
Records the RSMI in the SLC and signs in the “Posted
by/date” portion.
Accounting Staff 17 Receives JEV and SDs for the correction of accounting
entry. Returns the JEV and SDs to the Chief
Accountant/Head of the Accounting Division/Unit for
approval.
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Area of Seq.
Activity
Responsibility No.
Bookkeeper 16 Receives signed JEV supported with the RSMI and RIS
and records JEV in the GJ. Files copy 2 of JEV.
Sec. 17. Records, Forms and Reports to be prepared and/or maintained. The
following records, forms and reports are prescribed for use:
b. Stock Card (SC) (Appendix 58) – shall be used to record all receipts and issues of
supplies and the balance in quantity at any time. It shall be maintained by the
Property and/or Supply Division/Unit for each item in stock. The IAR, RIS, PO and
DR serve as the original sources of information for making entries on the card.
c. Supplies Ledger Card (SLC) (Appendix 57) – shall be used to record materials
received, issued and the balance both in quantity and amount at any time. It shall be
maintained by the Accounting Division/Unit for each kind of supplies and materials.
The IAR, RIS, RSMI, PO and DR serve as the original sources of information for
making entries on the card.
d. Requisition and Issue Slip (RIS) (Appendix 63) – shall be used by the end-user to
request issue of supplies and materials that are carried on stock. It is also used by the
Property and/or Supply Division/Unit to indicate availability or non-availability of
items requisitioned and/or to record issues of item/s requisitioned.
e. Purchase Request (PR) (Appendix 60) – shall be used by the end-user to request for
the purchase of inventory or item/s not available on stock. It shall be the basis of
preparing the PO.
f. Purchase Order (PO) (Appendix 61) – shall be used by the Property and/or Supply
Custodian to support the purchase of property, supplies and materials, etc. It shall be
issued to the selected supplier indicating, among other information, the specifications,
quantities, and agreed prices of property, supplies and materials to be purchased.
g. Report of Supplies and Materials Issued (RSMI) (Appendix 64) – shall be prepared by
the Property and/or Supply Custodian based on the RIS and shall be used by the
Accounting Division/Unit as basis in preparing the JEV to record the supplies and
materials issued.
h. Waste Materials Report (WMR) (Appendix 65) – shall be used by the Property and/or
Supply Custodian to report all waste materials such as destroyed spare parts and other
materials considered scrap due to replacement.
i. Report on the Physical Count of Inventories (RPCI) (Appendix 66) – shall be used to
report the physical count of supplies by type of inventory as at a given date. It shows
the balance of inventory items per card and per count and shortage/overage, if any.
These include the semi-expendable property wherein the issue is covered by ICS.
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j. Inspection and Acceptance Report (IAR) (Appendix 62) – shall be used for inspection
and acceptance of purchased and delivered property, supplies and materials.
l. Inventory Custodian Slip (ICS) (Appendix 59) – shall be prepared upon issue of semi-
expendable property covered by approved RIS.
Sec. 18. Illustrative Accounting Entries. The following are the illustrative accounting
entries for transactions involving inventories:
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Account Title Account Code Debit Credit
Accounts Payable 20101010 P 2,000
Cash-Modified Disbursement
Systems (MDS), Regular 10104040 P 2,000
To recognize payment of welfare goods purchased
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Account Title Account Code Debit Credit
Cost of Sales 50402010 P 1,800
Finished Goods Inventory 10403030 P 1,800
To recognize cost of sales of finished goods inventory worth P1,800
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Account Title Account Code Debit Credit
Semi-Expendable Office
Equipment 10405020 P 14,500
Cash-Modified Disbursement
System (MDS), Regular 10401010 P 14,500
To recognize purchase of printer amounting to P 14,500
Semi-Expendable Furniture,
Fixtures and Books Expenses 50203220 P 22,500
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Account Title Account Code Debit Credit
Semi-Expendable Furniture
and Fixtures 10406010 P 10,000
Semi-Expendable Books 10406020 P 12,500
To recognize the issue of semi-expendable furniture, fixtures and books to
end-users
Assume:
Cost P4,000,000
Net Realizable Value* 3,880,000
Impairment Loss P 120,000
Assume:
Current
Impairment
Inventories Cost Replacement
Loss
Cost
Office Supplies Inventory P2,000,000 P1,750,000 P250,000
Welfare Goods for Distribution 1,000,000 850,000 150,000
Total P3,000,000 P2,600,000 P 400,000
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Account Title Account Code Debit Credit
Impairment Loss-Inventories 50503070 P400,000
Office Supplies Inventory 10404010 P250,000
Welfare Goods for
Distribution 10402020 150,000
To recognize impairment loss of Office Supplies Inventory and
Welfare Goods for Distribution
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