INVENTORIES NOTES

Meaning of Inventories
- are assets held for sale in the ordinary course of business. LEGAL TEST: Is the entity the owner of the goods to be inventoried?
- encompass goods purchased and held for resale
- also encompass finished goods produced, goods in process and Items INCLUDED in Inventory
materials and supplies awaiting use in the production process. a. Goods owned and on hand
- current assets, b. Goods in transit and sold FOB destination
c. Goods in transit and purchased FOB shipping point
Major Classes of Inventory d. Goods out on consignment (we are the consignor)
1. Inventories of a trading concern – buys and sells goods, merchandise e. Goods in hands of salesmen or agents
inventory f. Goods held by customers on approval or on trial

2. Inventories of manufacturing concern - buys goods which are Items EXCLUDED in Inventory
converted into another form a. Goods sold on installment
b. Consigned goods if we are the consignee
a. Finished goods
– completed products, ready for sale, have been assigned their Accounting for Inventory Transactions using
full share of manufacturing costs
Periodic Inventory System
b. Goods in process or work in process - calls for the physical counting of goods on hand at the end of the
– partially completed products, require further process or work accounting period
- quantities are then multiplied by the corresponding unit cost to get
c. Raw materials the inventory value
– goods that are to be used in the production process, no work or - this approach gives actual or physical inventories
process has been done on them yet - generally, inventory items have small peso investments
- cover all materials used in the manufacturing operations
- frequently, restricted to materials physically incorporated in the Perpetual Inventory System
production of other goods, traced directly to the end product - requires maintenance of records called stock cards (usually offer a
running summary of the inventory inflow and outflow, kept to reflect
d. Factory or manufacturing supplies and control both units and costs)
- referred to as indirect materials, relationship to the end product - resulting balance in the stock cards represents the inventory
is indirect, not physically incorporated in the products - this approach gives book or perpetual inventories
– included in product cost as part of the manufacturing overhead - inventory items treated individually represent a relatively large peso
investment
- a physical count of the units on hand should be made once a year to
confirm the balances appearing on the stock cards
Periodic Inventory System
RULE: All goods to which the entity has title/ownership shall be included in
the inventory, regardless of location 1. Purchase of merchandise on account
 Purchases Accounts Payable
Accounts Payable
2. Payment of freight on the purchase
2. Payment of freight on the purchase Merchandise Inventory
Freight in Cash
Cash
3. Return of merchandise purchased to supplier
3. Return of merchandise purchased to supplier Accounts Payable
Accounts Payable Merchandise Inventory
Purchase return
4. Sale of merchandise on account P400,000 at 40% gross profit
4. Sale of merchandise on account P400,000 at 40% gross profit Accounts Receivable 400,000
Accounts Receivable 400,000 Sales 400,000
Sales 400,000
Cost of Goods Sold 240,000
5. Return of merchandise sold from customer Merchandise Inventory 240,000
Sales return
Accounts Receivable 5. Return of merchandise sold from customer, 25,000. The cost of
merchandise returned is 60% or P15,000
6. Adjustment of ending inventory 65,000 Sales return 25,000
Merchandise inventory-end Accounts Receivable 25,000
Income summary
Merchandise Inventory 15,000
Cost of Goods Sold 15,000

6. Adjustment of ending inventory 65,000

7. Inventory shortage or overage

 Trade discounts
Perpetual Inventory System – deductions from the list or catalog price in order to arrive at the
invoice price, not recorded
1. Purchase of merchandise on account – purpose: to encourage trading or increase sales
Merchandise Inventory
  Invoice price – the amount actually charged to the buyer

 Cash discounts
– deductions from invoice price when payment is made within the
discount period.
– purpose: to encourage prompt payment
- recorded as: Purchase discount (buyer), Sales discount (seller)

Gross Method of Recording Purchases

Net Method of Recording Purchases