Module 1: Inventory : J.G.

Marcial,CPA
• Philippine Accounting Standard no. 2
Learning outcomes..
• After studying this topic, you will be:

• > Articulate the nature, recognition and presentation of

Inventory .
• > Integrate the inventory cost system under perpetual and
periodic inventory method.

• > Able to solve the measurement technique of Inventory

costing.
• > Understand the role of inventory in financial transaction of
the business.
Inventory..

• PAS No. 2 Inventories are assets :

• Held for sale in the ordinary course of
business.
• In the process of production for such sale
• In the form of material or supplies to be
consumed in the production process
Inventory….
• Definitions:
• Inventory refers to all items, goods,
merchandise ,and materials held by a business
for selling in the market to earn a profit.

• Inventory means those current assets, which

have been or will be converted into the final
products of a company for sale in the near
future
Inventory…

• Inventory in Manufacturing set up:

Inventory…
• Raw Materials are the basic materials that a
manufacturing company buys from its suppliers, and
that is used by the former to convert them into the
final products.
• Work in progress can also be called semi-finished.
They are the raw materials that have been taken out of
the raw materials store and are now undergoing the
process
• Finished goods are indeed the final products obtained
after the application of the manufacturing processes on
the raw materials and the semi-finished goods
Inventory…
• Raw Materials Inventory ( STEEL
BILLETS )
Inventory…
• In progress Inventories:
Inventory…
• Finished Goods Inventory:
STEEL ASIA MANUFACTURING
CORP
Inventory..
• DIRECT CHARGES:
Inventory..
• What’s Goods to be included?

• On consignment with other retailer

• Title has transferred to the company
• Goods that are in transit:
• FOB shipping point
• FOB Destination
Inventory…
• FOB Shipping point vs. Destination:
Inventory…

• Illustrative Exercises:
Inventory…
• In the shipping room was a product costing P13,400 when the
physical count was taken. Because it was marked “ Hold for
shipping instructions” It was not included in the count. The
customer order was dated December 15, but the product was
shipped and the customer billed on January 4,2019.
• On December 27, 2018 merchandise costing P 11,648 was received
and recorded. The invoice accompanying the merchandise was
marked “on consignment.”
• The company received merchandise costing P4,625 on January 2,
2019. The invoice, which was recorded on January 3, 2019, showed
shipment was made under FOB shipping point on December
31,2018. the merchandise was not included in the inventory
because it was not on hand when the physical count was taken.
Inventory…
• A product, fabricated to order for a particular customer , was
completed and in the shipping room on December 31. Although
it was shipped on January 5, 2019, the customer was billed on
December 31,2018 and it was excluded from the inventory.
• Merchandise costing P 16,500 was received on January 5,2019,
and the related purchase invoice was recorded January 6. The
shipment of this merchandise was made on December 31,2018,
FOB destination.
• A product costing P 50,000 was sold on an installment basis on
Dec. 10,2018. It was delivered to the customer on that date. The
product was included in inventory because TIP company still
holds legal title. The company’s experience suggest that full
payment on installment sales is reasonably assured.
Inventory..
• Inventories in Service Business:
• Includes Direct Costs such as labor and other costs of
personnel directly engaged in providing the service.
Inventory ….
• Inventories in Merchandising:
Inventory transactions…
• Merchandise:
Inventory…
• Inventory in Financial Statement:

• ASSETS : Represent a company’s resources. Assets

can be in the form of cash or other, items that have
monetary value.
• LIABILITY : Represents amounts owed to creditor
( debt, accounts payable)
• EQUITY: Represents ownership or tight to the assets
of the company.
Inventory…
• Inventory System ( Perpetual vs. Periodic )

• Periodic – This system, inventories are

reported periodically through physical count.

• Perpetual – Under this system, all transactions

are recorded daily through stock cards or
Inventory software.
Inventory…
• Periodic Inventory system:
Inventory…
• Perpetual Inventory System:
Inventory…
• Journal entries : ( Periodic vs perpetual )
Inventory…
• Trade vs Cash Discount:
• Trade discounts
• These are deductions from the list or catalog price to arrive at the
invoice price. The invoice price is the purchase price of the
purchaser. Thus, trade discounts are not recorded.   
• Cash discounts
• These are a deduction from the invoice price when payment is
made within the discount period.
                                                           
• Example: 2/10 or read as a 2% discount if paid on the 10th
day.                                                                      
• It is recorded as a Purchase discount by the buyer/purchaser and
Sales Discount by the seller. 
Inventory…method
• Under PAS 2 Paragraph 25, Inventory cost shall be determined
using ;
• 1. First in, First out ( FIFO):
Inventory…
• FIFO: ( solution)
Inventory…

• Average Method:
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• Average Method ( solution )
Inventory…
• Inventory Valuation:

• > Net realizable value ( NRV) – the estimated selling price less
the estimated costs of completion and the estimated cost
necessary to make the sale.
• > Cost of Inventories – all costs incurred in bringing the
inventories to their present location and condition, including
the costs of purchase and conversion.
• >Fair Value- The price that would be reached to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
Inventory…
• Steps to calculate Net Realizable Value-
Inventory..
• Example Net Realizable Value ( NRV):

• > TIP company is trying to get rid of some of its

outdated phones, and it expects to sell them for
P5,000 to local buyer, but it must pay P240 to have
them shipped and insured and another P 40 to
complete the paperwork.

• NRV = 5,000-240-40 = 4,720

Inventory..
• Measurement :
• > Inventory shall be stated at the lower of cost and net
realizable value.
• > To the extent that services providers have inventories,
they measure them at the costs of their production. These costs
are primarily the costs of labor directly engaged in providing
the service.
• > The cost of inventories of items that are ordinarily
interchangeable and have not been produced and segregated for
specific projects is determined by using FIFO or weighted
average method
• > Inventories are usually written down to NRV on an item by
item basis, unless it is more appropriate to group similar or
related items.
Inventory…
• Recognition as an Expense:
• > When inventories are sold, carrying amount of those
inventories should be recognized as an expense in the period in
which the related revenue is recognized.

• >Any losses of inventories and the amount of any write-down

to net realizable value shall be recognized as expense in the
period in which the loss or write-down occurs.

• > Any reversal of any write-down of inventories that resulted

from an increase in the net realizable value shall be recognized
as a reduction in the inventory expense in the period in which
the reversal occurs.
Inventory…
• How to report inventory in the Balance sheet and income
statement?
Inventory…
• Gross Profit method:
• Under PAS No. 2 Paragraph 22, the use of en estimate in
inventory valuation is necessary:
• The approximation or estimate of inventory is made when:

• > The inventory is destroyed by fire and other catastrophes, or

theft of the merchandise has occurred and the amount of inventory
is required for insurance purposes.

• > A Physical count of goods on hand is made and reliability is

required insurance purposes.

• > Interim financial statements are prepared and a physical count is

impractical.
Inventory…
• Inventory base on SALE vs. Inventory base on COST:
Inventory…
• Illustrative case:
Inventory…
• Retail Inventory Method:
• > The Retail inventory method is an accounting technique that
lets you quickly estimate the value of your ending inventory
over a given time period.
Inventory…
Inventory…
Inventory..
• Illustrative problems:
End of Module 1

• NEXT TOPIC WILL BE:

• PROPERTY, PLANT AND

EQUIPMENT…..

• THANK YOU…SEE YOU NEXT TIME.