Hand Outs for Intermediate Accounting I

Module 1

Inventories
1. Inventories are assets which are held for sale in the ordinary course of business,
in the process of production for such a sale or in the form of materials or supplies
to be consumed in the production process or in the rendering of services
2. FOB destination and shipping point determine ownership of goods and the party
who is supposed to pay the freight charge
3. freight collect and freight prepaid determine the party who actually paid the
freight charge.
4. FAS- free alongside. Seller bears all expenses and risk in delivering the goods to
the dock. The nuyer bears the cost of loading and shipment and thus, title passes
to the buyer when the carrier takes possession of the goods.
5. Consigned goods are recorded by the consignor by means of memorandum entry
6. Inventories shall be presented as one line item but the details of the inventories
shall be disclosed in the notes to FS—finished goods, goods in process, raw
materials, and manufacturing supplies.
7. Inventory shortage is usually closed to cost of goods sold because this often the
result of normal shrinkage. If abnormal and material, shortage shall be separately
classified and presented as other expense.
8. Net method( if the discount period has expired):
Purchase discount lost
AP
9. gross method is more practical than net method. Net method has theoreticall
correct historical cost
10. Cost if inventories:
a. cost of purchase
b. cost of conversion
c. other cost in bring the inventories to their present location and condition.
11. Cost of purchase includes purchase price, import duties, irrecoverable taxes,
freight, handling and other costs directly attributable to the acquisition of finished
goods, materials and services.
12. Trade discounts, rebates and other similar items are deducted in determining the
cost of purchase
13. When inventories are purchased with deferred settlement terms, the difference
between the purchase price for normal credit terms and the amount paid is
recognized as interest expense over the period of financing.
14. Storage costs on goods in process are capitalized but storage costs on finished
goods are expensed.
15. Abnormal amounts are expensed.
16. Cost of inventories of a service provider consists primarily of the labor and other
costs of personnel directly engaged in providing the service, including
supervisory personnel and attributable overhead

Inventory valuation
 1. Weighted average perpetual or moving average method- new weighted average
unit cost must be computed after every purchase.
2. Inventory valuation in moving average involves early purchases
3. LIFO perpetual and periodic differ in inventory value
4. Moving average unit cost changes every time there is a new purchase or a
purchase return. It is not affected by a sale or a sale return
5. Net realizable value is the estimated selling price in the ordinary course of the
business less estimated cost of completion and the estimated cost necessary to
make the sale.
6. Inventories are usually written down to NRV on an item by item or individual
basis. It is not appropriate to write down inventories based on a classification of
inventory
7. Direct method- inventory is recorded at the lower of cost or NRV. Any loss on
inventory writedown is not accounted for separately but buried in the cost of
goods sold
Inventory-NRV 785,000
Income summary 785,000
* it has the effect of increasing the cost of goods sold due to lower inventory cost
8. Allowance method:
Inventory-cost 800,000
Income summary 800,000

Loss on inventory writedown 15,000

Allowance for inventory writedown 15,000
*the allowance is presented as a deduction from the inventory
Inventory, at cost 800,000
Allow. For inventory writedown (15,000)
NRV 785,000

Cost 1,000,000
NRV 900,000
Required allowance 10,000
Less: allowance balance 15,000
Decrease 5,000

Allowance for inventory writedown 5,000

Gain on reversal 5,000

*gain on reversal is presented as a deduction from COS

8. Standard costs are predetermined product costs established on the basis of normal
levels of materials and supplies, labor, efficiency and capacity utilization. It may
be used for convenience if the results approximates cost.
 9. When different commodities are purchased at a lumpsum, the single cost is
apportioned among the commodities based on their relative sales price. Cost is
proportionate to selling price.

10. Purchase commitments are obligations of the entity to acquire certain goods
sometime in the future at a fixed price and fixed quantity. Purchase contract has
already been made for future delivery of goods fixed in price and in quantity.

11. Recognition of loss on purchase commitment is an adaptation of the measurement

at the lower of cost or NRV
Contract purchase price of 500,000 and replacement cost at year-end of
450,000
Loss on purchase commitment 50,000
Estimated liability for purchase commitment 50,000

Purchase 420,000
Loss on purchase commitment 30,000
Estimated liability for purchase commitment 50,000
Accounts payable 500,000
If replacement cost is 600,000:
Purchases 500,000
Estimated liability 50,000
Accounts payable 500,000
Gain on PC 50,000
• Gain on PC was recognized to offset the previously recorded loss.
If replacement cost is 480,000:
Purchases 480,000 *loss is only 20,000
EPL 50,000
Accounts payable 500,000
Gain on purchase commitment 30,000

12. Agricultural, forest and mineral products are measured at NRV at certain stages of
production. This occurs when agricultural crops have been harvested and a sale is
assured under a forward contract or a government guarantee, or when a
homogeneous market exists and there is a negligible risk of failure to sell.
13. Commodities of broker-traders are measured at fair value less cost to sell.
14. Inventories of broker-traders are principally acquired with the purpose of selling
them in the near future and generating a profit from fluctuations in price.
15. The amount of inventories recognized as an expense during the period is
disclosed.