INVENTORY

Jemsdey Dales, CPA, MBA

Nature
Per Philippine Accounting Standards (PAS) No.
2, 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

the production (raw materials).

Inventory Costing Methods
1. Specific Identification

2. First-In, First-Out (FIFO)

3. Weighted-Average Cost
1. Specific Identification
 Means that specific cost are attributed to
identified items of inventory.
Example
 Nissan North Edsa has two Frontier pick-ups
in its showroom – a 2x2 standard model that
cost P950,000 and a 2x4 unit that cost
P1,150,000. Mr. Miguel Coyiuto, the
president, sold the 2x4 model for P1,200,000
on Dec. 31, 2022.
 The cost of goods sold is P1,150,000, the
cost of the specific unit sold. The Frontier
ending inventory is P950,000, the cost of the
standard model unsold.
2. First-In, First-Out (FIFO)
 This cost flow assumption presumes that the
first items into the stockroom/warehouse are
the first out.
 This assumption corresponds to the way

most entities actually try to flow goods out of

the stockroom/warehouse.
Illustration
Sky Mall in Dumaguete City sells kid’s toys
including balls. At the beginning of the year,
Sky Mall has 1,000 balls. During 2022, a total
of 8,000 balls were purchased. At the end of
2022, there are 3,500 balls left in the
stockroom.
A summary of the inventory activities follows:
Units Cost Total
Beginning Inventory 1000 10.00 10,000.00
Purchase #1 3000 14.00 42,000.00
Purchase #2 2000 16.00 32,000.00
Purchase #3 3000 18.00 54,000.00
Cost of Good Available for Sales 9000 138,000.00
Ending Inventory 3500
Units Sold 5500

There are 3,500 units of ending inventory. The

inventory-costing basis of Sky Mall can either be P10,
P14, P16, P18 or some combination. There are also
questions on which units remained as inventory and
which units were sold.
The Value of Cost Goods Sold is computed as
follow: Cost of Goods Available For Sale minus
Ending Inventory. The oldest 5,500 units were
sold.

Beg. Inventory 1000 @ P10 = P10,000

Purchase #1 3000 @ P14 = 42,000
Purchase #2 1500 @ P16 = 24,000
P76,000
The Value of Ending Inventory is computed as
follow: The ending inventory consists of the
newest 3,500 units –

Purchase #2 500 @ P16 = P54,000

Purchase #3 3000 @ P18 = 8,000
P62,000
3. Weighted-Average Cost
 This implies that the items in an inventory are
sold at random.

The formula to be used to compute for weighted-

average unit cost is as follows:

Weighted-Ave. Unit Cost = Cost of Goods Available for Sale

Units Available for Sale

Weighted-Ave. Unit Cost = P138,000 = P15.333

9000
Value of Cost of Goods Sold:

Cost of Goods Sold =Goods Sold x Weighted Average Unit Cost

= 5500 x P15.333
Cost of Goods Sold = P84,331.50

Value of Inventory:

Ending Inventory (cost) = Ending Inventory (units) x

Weighted Average Unit Cost
= 3500 x P15.333
Ending Inventory (cost) = P53,665.50
Comparison of FIFO and Weighted Average
Cost Method
Units FIFO Weighted Average
Cost
Cost of Goods Sold 5,500 P76,000.00 P84,331.50
Ending Inventory 3,500 62,000.00 53,665.50