Inventories

– are assets held for sale in the ordinary course of business, in the process of production for such
sale or in the form of materials or supplies to be consumed in the production process or in
rendering of services.

Trading  Merchandise Inventory

Manufacturing

a. Finished Goods
b. Goods in Process
c. Raw Materials
d. Factory or Manufacturing Supplies

Service

- Labor and other costs of personnel directly engaged in providing the service’

Goods includible in the inventory

a. Goods owned and on hand (nasa warehouse)

b. Goods in transit and sold FOB destination (nung nagttravel, ikaw pa rin ang may ari)
c. Goods in transit and purchased FOB shipping point (title of the goods passes at the point of
shipping; buyer owns the goods)
d. Goods out on consignment (patinda ng items, original na may ari pa rin ang owner; hindi mo
naman kasi binenta, wala lang sayo kasi pinatinda mo, hingi lang ng commission)
e. Goods in the hand of salesmen or agents (iba lang ang nagbebenta, agent is extension of
yourself)
f. Goods held by customers on approval or on trial (hindi pa naibenta kaya ikaw pa rin may ari as
your inventories)

*you have to pass the legal test; ikaw na ang may ari basta nasa iyo na ang title; included sa inventory
irrespective of the location

*EXCEPTION: may pagkakataong di na ittransfer ang title so ikaw pa rin may ari (example: on installment
basis, para maproktektahan ang sarili; irepossess mo. Mga motorsiklo na installment, makukuha mo
physically pero yung titulo nasa nagbebenta pa rin. Pag di nakabayad, kukunin ang motor)

*substance must be higher than the form, kahit walang transfer of title, ibigay mo na
Cost of Inventories

Measurement: Inventories

- Initial: at cost  Subsequent: LCNRV

Cost of Inventories

1. Cost of Purchase
2. Cost of Conversion
3. Other cost incurred in bringing the inventories to their present location and condition

Cost of Purchase

- Purchase Price
- Import duties
- Irrecoverable Taxes (ex. VAT registered)
- Freight Cost
- Handling Cost
- Other directly attributable cost (deducted)
 Trade discount
 Rebates
 Foreign exchange differences
 Interest expense over the financing period

Cost of Conversion

- Direct labor
- Overhead (factory expenses, indirect materials, indirect labor)
 Variable
 Fixed

Other Cost

- Sample: cost incurred due to customer’s specification

Excluded:

- Abnormal wastages
- Storage cost – Finished goods (pag di pa gawa ang product, capitalized pa rin)
- Administrative Expenses
- Distribution/Selling Expenses
Measurement: Inventories

- Initial: at cost  Subsequent: LCNRV on item by item basis

Lower of Cost and Net Realizable Value (LCNRV)

- Whichever is lower, yun ang gagamitin

Net Realizable Value

- Is the estimated selling price in the ordinary course of business less estimated cost of
completion and the estimated cost of disposal
- NRV = SP – cost to complete – cost to sell

NRV may be lower than the cost because:

1. Inventories are damaged

2. Inventories have become wholly or partially obsolete
3. The selling price have declined
4. Estimated cost of completion/cost of disposal has increased

Rule:

Cost > NRV  with inventory writedown

Cost < NRV  no inventory writedown

Accounting Method

- Direct (Cost of Goods Sold)

Inventory, end XXX
Income Summary XXX

- Allowance Method
Loss on inventory writedown XXX
Allowance on inventory writedown XXX

Presentation

Inventory, beginning XXX

Net Purchases XXX
Total Goods Available for Sale
XXX Inventory, end
XXX Cost of Goods Sold
XXX Loss on Inv. Writedown
XXX COGS, after writedown
XXX
*magkakaroon ng reversal ng entry if nakabawi mula sa loss (DR allowance CR Gain)

Trade Discounts

- Are deductions from the list/catalog price in order to arrive at the invoice price which is the
price actually charged to the buyer. Its purpose is to encourage trading or increase sales.
- 20,10,10 = 1,000 x .20 = 800 x .10 = 720 x .10 = XXX (presented in the invoice)

Cash Discounts

- Are deductions from the invoice price when the payment is made within the discount period. Its
purpose is to encourage prompt payment.
- Sales discount or Purchase discount
- 2/10, n/30 (2 – discount rate, 10 – discount time, 30 – credit period)
- 2/10, 1/15, n/30
- Exclude the first day, include the last day. (ex. Jan 1 purchase date. Jan 11 last discount if 10
days)

Net Method

- Bawas na agad ang discount

- Aligned sa accounting principles

Gross Method

- Laborious ang net method, alternative ito

- Practical gamitin
- Hayaan mo marecord at gross
- Pag may discount, saka mo lang isulat.

Returns and Allowances

- Buyers may be dissatisfied with the merchandise received either because the goods are
damaged or defective, of inferior quality or not in accordance with their specifications.

Returns

- Decrease the amount and physical volume of the goods sold

Allowances

- Decrease the amount but not the physical volume of goods sold

Credit Memorandum
 - Formal acknowledgement that the seller has reduced the amount owed by the customer

Goods in Transit (who owns the goods shoulders the freight!!!!!!!!)

Free on Board (FOB)

 FOB Shipping Point – Ownership is transferred upon shipment of the goods

 FOB Destination – Ownership is transferred only upon the receipt of goods by the buyer
 Freight Prepaid – Freight is actually paid before shipment by seller
 Freight Collect – Freight charge on the goods shipped is not yet paid; to be paid by buyer
 Periodic: DR Freight-in (product cost) As a Seller: DR Freight-out (selling expense)
 Perpetual: DR Inventories

FAS / Free Alongside

- Transfers ownership when the goods are alongside the carrier

- Buyer owns the goods in transport
- Ownership of seller is from shop to carrier only

CIF / Cost, Insurance, Freight

- Buyer assumes CIF, included in the inventory

Ex-ship

- Seller transfers the title after goods are unloaded

- Freight out from the seller

Consignment

- Is a method of marketing goods in which the owner called the consignor transfers physical
possession of the goods to an agent called the consignee who sells them in the owner’s behalf.
- Consignment out (included in consignor’s inventory)
- Consignment in (not included in consignor’s inventory kasi ang ganap nito ikaw ang consignee)
 - Ang mga accumulated costs (freight handling) para mapunta ang goods kay consignee is
inventoriable (supplier – consignor – consignee)

Periodic/Perpetual Inventory System

Periodic System

- Calls for the physical counting of goods on hand at the end of accounting period to determine
quantities (low value, high volume, updated only when FS are prepared)

Perpetual System

- Requires the maintenance of records called stock cards that usually offer a running summary of
the inventory inflow and outflow (high value, low volume, w/stock card, always updated)

PERIODIC PERPETUAL
Purchase of Merchandise
Purchases XX Inventory XX
Accounts Payable XX Accounts Payable XX
Payment of Freight
Freight in XX Inventory XX
Cash XX Cash XX
Discount, Return and Allowances
Accounts Payable XX Accounts Payable XX
Purchase Discount/Ret & Allowances XX Inventory XX
Sale of Merchandise
Accounts Receivable XX Accounts Receivable XX
Sales XX Sales XX

Cost of Goods Sold XX

Inventory XX
Return of Merchandise Sold
Sales Return XX Sales Return XX
Accounts Receivable XX Accounts Receivable XX

Inventory XX
Cost of Goods Sold XX
Inventory at year end
Inventory, end XX No entry unless there is shortage/overage
Income Summary XX
FIFO Method – Inventory cost flow

FIFO (First In, First Out)

- This method assumes that “the goods first purchased are first sold” and consequently the goods
remaining in the inventory at the end of period are those most recently purchased or produced.

FIFO (Periodic)

Units Unit Cost Total Cost

Jan 29, purchase 200 10 2,000
Jan 31, purchase 100 15 1,500
Ending Inventory 300 3,500

FIFO (Perpetual)

Purchase Sales Balance

Unit Unit Unit
Units Total Units Total Units Total
Cost Cost Cost
Jan 28 100 5 500 100 5 500
Jan 29 350 10 3,500 100 5 500
350 10 3,500
Jan 30 100 5 500
150 10 1,500 200 10 2,000
Jan 31 100 15 1,500 200 10 2,000
100 15 1,500
Ending Inventory 300 3,500

Cost of Goods Sold

Inventory, beg XX
Net Purchases XX
Total Goods Available for Sale XX
Inventory, end
(XX) Cost of Goods Sold
XX

- Kapag nagmamahal ang price ng inventory, mataas and ending inventory, mababa ang COGS,
mataas ang net income kasi mababa ang unang inventories mo
- Kapag nagmumura ang price ng inventory, mababa ang ending inventory, mataas ang COGS,
mababa ang net income kasi mataas ang unang inventories mo
 - Navviolate ang matching principle kasi yung cost ng benta mo ay hindi yung cost nya sa
kasalukuyan, hindi naka align.

Weighted Average

- This method allows the company to mingle the cost of similar items purchased and use
weighted averages to measure inventories held, either on a periodic basis or as each the
shipment is received.

Weighted Average (Periodic)

Units Unit Cost Total Cost

Jan 28 100 5 500
Jan 29 350 10 3,500
Jan 31 100 15 1,500
TGAS 550 5,500

Formula: Weighted Average Unit Cost = TGAS / Unit Available for Sale

Weighted Average Unit Cost = 5,500 / 550 = 10

Inventory, end = 300 x 10 = 300

Moving Average (Perpetual)

Purchase Sales Balance

Unit Unit Unit
Units Total Units Total Units Total
Cost Cost Cost
Jan 28 100 5 500 100 5 500
Jan 29 350 10 3,500 450 8.8889 4,000
Jan 30 250 8.8889 2222.22 200 8.8889 1777.78
Jan 31 100 15 1,500 300 10.9259 3277.78

- Wala masyadong issue kasi naghahalo yung old and new price
Inventory Estimation

1. The inventory is destroyed by fire and other catastrophe, or theft of the merchandise has
occurred and the amount of inventory is required for insurance purposes.
2. A physical count of goods on hand is made and it is necessary to prove the correctness or
reasonableness of the count by making an estimate.
3. Interim financial statements are prepared and a physical count of the goods on hand is not
necessary either because it may take time to do the same or because only an estimate thereof is
required to fairly present the financial position and performance of the entity.

Cost of Goods Sold Statement

Inventory, beg XX
Purchases XX
Purchase Disc (XX)
Purchase Return (XX)
Purchase Allowance
(XX) Freight in
XX Net Purchases
XX Total Goods Available for Sale
XX Inventory, end
(XX) ? Cost of Goods
Sold XX

TGAS XX
COGS (need to be determined to know End Inv.) (XX)
Ending Inventory, est XX
(1) Less: Salvage
(XX) Consignment Out
(XX) Goods In Transit
(XX) Other
(XX) Fire Loss/Theft
XX

TGAS XX
COGS (need to be determined to know End Inv.) (XX)
Ending Inventory, est XX
(2) Ending Inventory, act
 (XX) Variance
XX

Two Approaches

1. Gross Profit Method

2. Retail Inventory Method

Gross Profit Method

- Based on the assumption that the rate of gross profit remains approximately the same from
period to period therefore the ratio of cost of goods sold to net sales is relatively constant from
period to period.

Formula: Based on Sales Based on Cost

Net Sales 100% 140%

Cost of Goods Sold 60% 100%
Gross Profit 40% 40%

Retail also means Selling Price (madalas gamitin sa dept, store, grocery)

Gross Profit Method Retail Inventory Method

TGAS @ cost XX TGAS @ retail XX
COGS Net Sales
(XX) (XX)
Inventory, end @ cost XX Inventory, end @ retail XX
Cost Ratio
Inventory, end @ cost XX

Methods in Computing the Cost Ratio

Beginning Inventory Markups Markdown

FIFO x / /
Average / / /
Conservative / / x

Cost Ratio = TGAS @ cost / TGAS @ retail

Cost Retail
Beginning Inventory XX XX
Purchases XX XX
Purchase Return (XX) (XX)
Purchase Allowance (XX)
Purchase Discount (XX)
Freight In XX
Departmental Transfer In/Debit XX XX
Departmental Transfer Out/Credit (XX) (XX)
Abnormal Losses (XX) (XX)
Markup (additional) XX
Markup Cancellation (XX)
Markdown (XX)
Markdown Cancellation XX
TGAS XX XX