INVENTORIE

S PAS 2
PAS 2 Inventories
Learning Objectives
Define inventories.
Measure inventories and apply the cost
formulas.
State the accounting for inventory write-down
and the reversal thereof.
Inventories

Inventories are assets:

a. Held for sale in the ordinary course of business (Finished
Goods);
b. In the process of production for such sale (Work In Process);
or
c. In the form of materials or supplies to be consumed in the
production process or in the rendering of services (Raw
materials and manufacturing supplies).
Financial statement
presentation
All items that meet the definition of inventory are presented on
the statement of financial position as one line item under the
caption “Inventories.” The breakdown of this line item (as
finished goods, WIP and Raw materials) is disclosed in the
notes.
Inventories are normally presented in a classified statement of
financial position as current assets.
Measurement
Inventories are measured at the lower of cost and net realizable
value (NRV).

The cost of inventories comprise 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.
Costs that are EXPENSED
when incurred
1. Abnormal amounts of wasted materials, labor or other
production costs.
2. Selling costs, for example, advertising and promotion costs and
delivery expense or freight out.
3. Administrative overheads that do not contribute to bringing
inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the production
process before a further production stage, (e.g., the storage costs
of partly finished goods may be capitalized as cost of inventory,
but the storage costs of completed finished goods are expensed).
Cost Formulas
1. Specific identification - shall be used for inventories that are
not ordinarily interchangeable (i.e., used for inventories that
are unique). Cost of sales is the cost of the specific inventory
that was sold.
2. FIFO – cost of sales is based on the cost of inventories that
were purchased first. Consequently, ending inventory
represents the cost of the latest purchases.
3. Weighted Average Cost – cost of sales is based on the
average cost of all inventories purchased during the period.
 Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)
Write down of inventories
Inventories are usually written down to net realizable value on
an item by item basis.
If the cost of an inventory exceeds its NRV, the inventory is
written down to NRV, the lower amount. The excess of cost
over NRV represents the amount of write-down.
Reversal of write-downs
The amount of reversal to be recognized should not exceed the
amount of the original write-down previously recognized.
Recognition as an expense
The carrying amount of an inventory that is sold is charged as
expense (i.e., cost of sales) in the period in which the related
revenue is recognized. Likewise, the write-down of inventories
to NRV and all losses of inventories are recognized as expense
in the period the write-down or loss occurs.