ACCOUNTING FOR INVENTORY

Inventory Count, Cost of Goods Sold,

Consigned Goods, Freight Charges
 INVENTORY
Inventories are assets held for sale in the
ordinary course of business, in the process of
production for such sale or in the form of
materials or supplies to be consumed in the
production process or in the rendering of
services
 INVENTORY
Merchandising/Servicing Manufacturing

Inventory = Finished Inventory

goods only a. Raw Materials
b. Work in
process/progress (WIP)
c. Finished goods
 Goods in Transit
The passage of ownership shall depend if the
purchase is made on terms Free on Board
Destination (FOB Destination) or Free on Board
Shipping Point ( FOB Shipping Point)
 Goods in Transit
If the Inventory is made FOB Shipping point,
ownership is transferred upon shipment of the
goods, and therefor, the goods in transit are the
property of the buyer.

If the Inventory is made FOB Destination, the

goods in transit are still the property of the
seller.
Freight Prepaid and Freight Collect
Freight Collect means that the freight charge on
the goods shipped is not yet paid. The common
carrier shall collect the same from the buyer.

Freight prepaid means that freight charge on

goods shipped is already paid by the seller.
 Destination, Shipping point, Collect and
Prepaid
FOB Destination and FOB Shipping point are the
terms determining ownership of goods in
transit.

Collect and Prepaid are the terms determining

who actually paid the freight charge.
 Consigned Goods
Consignment is a method of marketing goods in
which owner called the consignor transfers
physical possession of certain goods to an agent
called the consignee who sells them on the
owner’s behalf.
Consigned Goods
 Periodic Vs. Perpetual Inventory Method
Periodic
Physical count of goods on hand at the end of
the accounting period
Quantities are multiplied by the
corresponding unit cost to get the inventory
value for the balance sheet purposes.
Inventory counts in this method gives actual
or physical inventories
This system is used when the individual
inventory items have small peso investment
EX. Groceries, hardware, auto parts
Perpetual
Maintenance of records called stock cards that
usually offer a running summary of the
inventory flows
Inventory increases and decreases are
reflected in stock cards.
Inventory monitoring in this approach gives
book or perpetual inventories
This system is used where the inventory items
treated individually represents a relatively
large peso investment
EX. Jewelry, Cars, Yachts
PERIODIC VS. PERPETUAL INVENTORY
METHODS
 COST OF GOODS SOLD

Beginning Inventory X
Add: Purchases (net) X
Total Goods Available for Sale X
Less: Ending Inventory X
Cost of Goods Sold X
(NOTE: THIS FORMAT IS FOR MERCHANDISING
FIRMS)
COST OF GOODS SOLD - MANUFACTURING
Raw Materials, beginning X
Add: Purchases (net) X
Raw Materials Available for Use X
Less: Raw Materials, ending X
Raw Materials Used (Direct Materials) X
Direct Labor X
Factory Overhead X
Total Manufacturing Cost X
Add: Work in Process, Beginning X
Less: Work in Process, Ending X
Cost of Goods Manufactured X
Add: Finished Goods, Beginning X
Cost of Goods Available for Sale X
Less: Finished Goods, Ending X
Cost of Goods Sold X
 Recording Purchases
1. Gross Method – Purchases and accounts payable
are recorded at gross.

Purchases 200,000
Accounts Payable 200,000
Accounts Payable 200,000
Cash 196,000
Purchase discount 4,000
Accounts Payable 200,000
Cash 200,000
 Recording Purchases
1. Net Method – Purchases and accounts payable are
recorded at gross.

Purchases 196,000
Accounts Payable 196,000
Accounts Payable 196,000
Cash 196,000
Accounts Payable 196,000
Purchase discount lost(expense) 4,000
Cash 200,000
Inventory Valuation Methods
REVIEW:

WHAT ARE THE DIFFERENT FINANCIAL

STATEMENTS?
 NOTE

Inventory appears in two principal financial

statements.

Income Statement

Balance Sheet
 NOTE
Inventory appears in two principal financial
statements.
► Income Statement

(As an expense)

► Balance Sheet

(As a current asset)

 Specific Identification
It requires companies to keep records of the
original cost of each individual inventory item.
Historically, specific identification was possible
only when a company sold a limited variety of
high unit cost items that could be identified
clearly from time of purchase through the time of
sale.

EX. Cars, pianos, antiques

Inventory Valuation Methods

Methods using cost flow assumptions

 Cost Flow Assumptions
Specific Identification is often impractical, other
cost flow methods are permitted. These differ
from specific identification in that they assume
flows of costs that may be unrelated to the
physical flow of goods.
 Cost Flow Assumptions
There are three assumed cost flow methods:

a. FIFO
b. LIFO
c. AVERAGE COST

NOTE: for these methods, Periodic Inventory is used.

Majority of firms use the periodic inventory method
 First In First Out (FIFO)
The FIFO method assumes that the goods first
purchased are first sold and consequently the
goods remaining in the inventory at the end of
the period are those mode recently purchased or
produced.

The inventory is thus expressed in terms of recent

or new prices while the cost of goods sold is
representative of earlier or old prices.
 First In First Out (FIFO)
FIFO often parallels the actual physical flow of
merchandise. That is, it generally is good
business practice to sell the oldest units first.

Under the FIFO method, therefore, costs of the

earliest goods purchased are the first to be
recognized in determining cost of goods sold.
 SAMPLE PROBLEM
Houston Electronics
Date Particulars Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 P 10 P 1,000
Apr 15 Purchase 200 11 2,200
Aug 25 Purchase 300 12 3,600
Nov 27 Purchase 400 13 5,200
TGAFS 1,000 12,000
Ending Inventory 450
COGS 550
 Weighted Average-Periodic
The cost of the beginning inventory plus the
total purchases during the period is divided by
the total units purchased plus those in the
beginning inventory to get a weighted average
unit cost, which is multiplied by the units on
hand to derive the inventory value.
 Weighted Average-Periodic

Ending Inventory X
Mult. By weighted average cost * X
Inventory Cost X

*Total cost/total goods available for sale

 Weighted Average-Perpetual
Date Units Unit Cost Total Cost
Jan 1 Beginning Balance 800 200 160,000.00
18 Purchases 700 210 147,000.00
31 Purchases 500 220 110,000.00
TOTAL 2,000 417,000.00
Supposing, at the end of the period, 700 units remain unsold
Weighted Average Unit Cost (417,000 / 2,000) 208.59
Inventory cost (700 * 208.59) 145, 950.00
The computation of COGS is as follows
Inventory, beg 160,000.00
Purchases 257,000.00
Goods Available for Sale 417,000.00
Inventory, end 145,950.00
COGS 271,050.00
 LIFO
Houston Electronics
Date Particulars Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 P 10 P 1,000
Apr 15 Purchase 200 11 2,200
Aug 25 Purchase 300 12 3,600
Nov 27 Purchase 400 13 5,200
TGAS 1,000 12,000
Ending Inventory 450
COGS 550
Income Statement Effects
Computation of Gross Income
Sales/Revenue X
Less: Cost of Goods Sold X
Beginning Inventory X
Add: Purchases X
Less: Ending Inventory X
Gross Profit X
Less: Expenses X
Net income before tax X
Less: Income Tax X
Net Income X
 Income Statement Effects

When inventory is Cost of Goods Sold is Net income is

BI is Understated Understated Overstated
BI is overstated Overstated Understated
EI is understated Overstated Understated
EI is overstated Understated Overstated
 Balance Sheet Effects

Ending Inventory Effect on Assets Effect on Liabilities Effect on Capital

Error
Overstated Overstated No Effect Overstated

Understated Understated No Effect Understated