INVENTORIES FAS or free alongside-the seller who ships FAS

bears all expenses and risk involved in delivering

-assets held for sale in the ordinary course of the goods to the dock next to or alongside the
business in the process of production for such sale vessel on which goods are to be shipped.
or in the form of materials or supplies to be Buyer bears the cost of loading and shipment, title
consumed in the production process passes to buyer when the carrier takes possession
-encompasses good purchased and held for resale: of the goods.
a) Merchandise purchased by a retailer and held for CIF or Cost, insurance and freight-buyer agrees to
resale pay in a lump sum the cost of the goods, insurance
b) Land and other property held for resale by a cost and freight in charge.
subdivision entity and real estate developer. Seller must pay for the cost of loading.
- encompass finished goods produced, goods in The title and risk of loss shall pass to the buyer upon
process and materials and supplies awaiting use in delivery of the goods to the carrier.
the production process. Ex-ship-a seller who delivers the goods ex-ship
bears all expenses and risk of loss until the goods
Classes are unloaded at which time and risk of loss shall
Inventories of a trading concern- one that buys and pass to the buyer.
sells goods in the same form purchased
Manufacturing concern is one that buys goods Consignor- owner who transfers physical possession
which are altered and converted into another form of certain goods to an agent called consignee who
before they are made available for sale. sells them on owner’s behalf.
a) Finished goods Such inventory is excluded in consignee’s inventory.
b) Goods in process Consigned goods are recorded by the consignor by
c) Raw materials means of memo entry.
d) Factory or manufacturing supplies Statement presentation
Applying the legal test Goods includible to -Current assets
inventory: -presented as one line item in the SFP but the
a) Goods owned and on hand details of the inventories shall be disclosed in the
b) Goods in transit and sold FB destination notes of financial statements.
c) Goods in transit and purchased FOB
shipping point Accounting for inventories
d) Goods out on consignment PERIODIC SYSTEM- physical counting of goods on
e) Goods in hands of salesmen or agents hand at the end of the accounting period determine
f) Goods held by customers on approval or on quantities; generally used when items have small
trial peso investment
Exceptions to the legal test
a) Goods sold on installment basis are PERPETUAL SYSTEM- requires the maintenance of
included in the inventory of the buyer records called stock cards that usually offer a
running summary of the inventory inflow and
FOB destination-ownership of goods purchased is outflow, commonly used to treat individually
transferred only upon the receipt of the goods by inventory items with relative large peso investment.
the buyer at the point of destination -physical count of units on hand should be at least
-goods in transit are still property of the seller be made once a year to confirm the balances
FOB shipping point- ownership is transferred upon appearing on the stock cards.
shipment of the goods and the goods in transit are Purchase of merch on account, 500K
property of the buyer Merchandise Inventory 500k
AP 500k
2) Payment of freight, 20K attributable to the acquisition of finished
Merchandise inventory 20K goods, materials and services.
Cash 20k Trade discount, rebates and other similar
3) Return of merch purchased to supplier, 30k items are deducted in determining the cost
AP 30K of purchase.
M.I 30k -shall not include foreign exchange
4) Sale of merchandise on account, 600k at gross differences which arise directly from the
profit of 40%. The cost of merchandise sold is 60% recent acquisition of inventories involving
or 360k. foreign currency.
AR 600k -difference between purchase price for
Sales 600k normal credit terms and the amount paid is
COGS 360k recognized as interest expense over the
M.I 360k period of financing.
5) Return of merch sold, 25K. The cost of the
merchandise returned is 15K. b) Cost of conversion
Sales return 25K -includes cost directly to the units of
AR 25K production such as direct labor
M.I 15K -includes systematic allocation of fixed and
COGS 15k variable production overhead that is
6) Adjustment of end.inventory incurred in converting materials into
The balance of the M.I inventory account represents finished goods.
the end.inventory
Allocation of fixed production overhead- based on
the normal capacity of the production- the
Inventory shortage or overage production expected to be achieved on average
Inventory shortage- closed to COGS because this is over a number of periods or seasons under normal
the result often of normal shrinkage and breakage circumstances taking into accounts the loss of
in inventory capacity resulting from planned maintenance.
Abnormal and material shortage shall be separately Unallocated fixed overhead expensed in the period
classified and presented ass other expense. in which it is incurred.
Trade discounts are not recoreded Allocation of variable production overhead-
Cash discounts are deductions from the invoice Allocated to each unit of production in the basis of
price when payment is made within discount the actual use of the production facilities
period.
METHODS OF RECORDING PURCHASES When cost of conversion are not separately
1. Gross method- purchases and AP are identifiable, they are allocated between the
recorded at gross products on a rational and consistent basis, for
2. Net method -purchases and AP are example, on the basis of the relative sales value of
recorded at net each product.
-represents the cash equivalent price on the By-products are measured at net realizable value
date of payment and therefore the and this value is deducted from the cost of the main
theoretically correct historical cost. product.
COST of inventories
a) Cost of purchase- comprises purchase price, c) Other costs
import duties and irrevocable taxes, freight, -included in the cost of inventories only to
handling and other costs directly the extent that is incurred in bringing the
 inventories to their present location and beg.inventory = weighted average unit
condition. cost.
-i.e designing cost for specific customers in - Perpetual
the cost of inventories. Aka moving average method
-the following are excluded in the cost of Calculated on a periodic basis or as each
inventories and recognized as expenses in additional shipment is received
the period when included: depending upon the circumstances of
a) Abnormal amounts of wasted the entity.
materials, labor and other production costs. A new weighted average unit cost must
b) Storage costs, unless these costs are be computed after every purchase and
necessary in the production process prior to purchase return
a further production stage
storage costs on goods in Total cost of goods available after every
processcapitalized purchase and purchase return
storage costs on finished goodsexpensed Total units available for sale
c) Administrative overheads that do not
contribute to bringing inventories to their Weighted average unit cost x units on
present location and condition. hand= inventory cost
d) Distribution or selling costs. -such method produces inventory valuation
that approximates current value if there is a
Cost inventories of a service provider rapid turnover of inventory.
-consists primarily of the labor and other costs - moving average unit cost is not affected by
of personnel directly engaged in providing the a sale or sales return
service, including supervisory personnel and
attributable overhead. SPECIFIC IDENTIFICATION
-Labor and other costs relating to sales and -specific costs are attributed to identified
general administrative personnelexpenses in items of inventory
the period in w/c they are incurred - cost of inventory= units on hand x unit
cost
Cost formula - appropriate for inventories that are
a) First in first out- segregated for a specific project and
Inventory is thus expressed in terms of inventories that are not ordinarily
recent or new prices while the cost of goods interchangeable
is representative of earlier or old prices - may be used in either periodic or
- Favors the statement of financial perpetual system
position in the inventory is stated at - there is an actual determination of costs of
current replacement cost. units sold and on hand
- During inflation or rising prices FIFO - very costly to implement even with high-
results to highest net income. speed computers
- During deflation, it results to lowest net STANDARD COSTS
income. -predetermined product costs established
b) Weighted average on the basis of normal levels of materials
- Periodic and supplies, labor, efficiency, and capacity
Cost of beg.inventory utilization
+ total cost of purchases during the - may be used for convenience if the results
period/ total units purchased plus approximate costs.
RELATIVE SALES PRICE METHOD
A single cost from Different commodities
purchased at a lump sum is apportioned
among the commodities based on their
respective sales price.
Illustration
A= sales price is 1M
B= sales price is 2 M
C= sales price is 3M
A, B, C purchased at 4.5 M at basket price
A 1M 1/6x4.5 750k
B 2M 2/6x4.5 1.5M
C 3M 3/6x4.5 2.25M
6M 4.5M