Pas 2: inventories

Inventories
⊹ Measured at lower of Cost and Net
Realizable Value
⊹ Assets:
× Held for sale in the ordinary course of
the business (finished goods)
× In the process of production for sale
(work in process)
× In the form of materials or supplies to
be consumed in the production
process or in rendering of services
(raw materials and manufacturing
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supplies)
 Pas 2 applies to all inventories
except:
⊹ Assets accounted for under other standards
× Financial Instruments (PAS 32 and PFRS 9)
× Biological Assets and Agricultural Produce at the
time of harvest (PAS 41)
⊹ Assets not measured under lower of cost and Net
Realizable Value under PAS 2
× Inventories of producers of agricultural, forest and
mineral products measured at NRV in accordance
with well-established practices in those industries
× Inventories of commodity brokers-traders measured
at Fair Value less cost to sell 3
 Cost of inventories
Inclusions: Exclusions:
⊹ Abnormal amounts of wasted
⊹ Purchase Cost
materials, labor or other
⊹ Conversion Cost production costs
⊹ Other Costs ⊹ Storage costs, unless those costs
necessary in are necessary in the production
process before the next
bringing the
production stage
inventories to their ⊹ Administrative overheads that do
present location and not contribute directly to bringing
condition inventories to their present
location and condition
⊹ Selling costs 4
 Cost of inventories
ABC Corp. acquires inventories and incurs the
following costs:
Purchase Price P100,000
Trade Discount 10%, 5%
Non-refundable purchase tax, included in the
purchase price P5,000
Freight-in P15,000
Commission to trader P2,000
Disposal Costs P10,000
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 Cost of inventories
Purchase Price P100,000
Less: Trade Discount 14,500
Purchase Price, net P85,500
Freight-in 15,000
Commission to trader 2,000
Cost of Inventories P102,500

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“ Cost Formulas
⊹ Deals with the computation of inventories
that are charged to expense when the
related revenue is sold

× Cost of Goods Sold

⊹ Cost of unsold inventories at the end of the
period that will be recognized as an asset

× Ending Inventory

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 Specific identification
⊹ Used for inventories that are not easily
interchangeable and those that are segregated for a
specific purpose
⊹ Specific costs are attributed to identified items of
inventory
⊹ Records should be maintained to identify the cost
and the movement of each specific inventory
⊹ Example: Item #143 costs P143,000.
× Cost of Sales = P143,000 per unit
× Ending Inventory = P143,000 per unit 8
First in, first out (fifo)
× Inventories first purchased should be
the first to be issued to production
× Inventories on hand (ending
inventory) are based on the most
recent purchases and inventories sold
or issued to production are based on
the earliest prices
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 First in, first out (fifo)
The following are material transactions of PAD Corp. in the
month of January:
January 1 Beginning balance of materials is 200 units
at P100
5 Purchased 50 units at P120
7 Issued 80 units to production department
15 Purchased 500 units at P90
20 Issued 600 units to production department
22 Materials returned to storeroom 15 units.
These units had been issued in Jan 7
30 Purchased 300 units at P110
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 First in, first out (fifo)
Purchase Issuance Balance
Date
Units Unit Cost Total Units Unit Cost Total Units Unit Cost Total
Jan-01 200 P100 P20,000
200 P100 P20,000
Jan-05 50 P120 P6,000
50 P120 P6,000
120 P100 P12,000
Jan-07 80 P100 P8,000
50 P120 P6,000
120 P100 P12,000
Jan-15 500 P90 P45,000 50 P120 P6,000
500 P90 P45,000
120 P100 P12,000
Jan-20 50 P120 P6,000 70 P90 P6,300
430 P90 P38,700
15 100 P1,500
Jan-22 -15 100 P(1,500)
70 P90 P6,300
15 100 P1,500
Jan-30 300 110 P33,000 70 P90 P6,300
300 110 P33,000
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Total 385 P40,800
Average costing method
× Moving Average (Perpetual) – ending materials
units are valued at current average price. Also, a
new average unit cost is computed after each new
purchase and this unit cost will be used to determine
the costs of the materials issued until a new
purchase is made by the company
× Weighted Average (Periodic) – materials ending
inventory will be computed based on the materials
units on hand multiplied by the average unit cost.
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 Weighted Average costing
method
Average Unit Cost = Cost of Materials, beg + Cost of Purchases
Units in Materials, beg + Purchased Units

UnitPrice Total
Beginning Balance 200 P100 P20,000
Purchases 50 120 P6,000
500 90 45,000 300 110 P33,000
Total Materials Available 1,050 P104,000

Average Unit Cost = P104,000/1,050 = P99.05

Materials Ending Balance = P99.05 x 385 units = P38,134.25
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 moving Average costing
method Purchase Issuance Balance
Date
Units Unit Cost Total Units Unit Cost Total Units Unit Cost Total
Jan-01 200 P100 P20,000
Jan-05 50 P120 P6,000 250 P104 P26,000

Jan-07 80 P104 P8,320 170 P104 P17,680

Jan-15 500 P90 P45,000 670 P93.55 P62,680

Jan-20 600 P93.55 P56,130 70 P93.55 P6.549

Jan-22 -15 P104 P(1,560) 85 P95.39

P95.40 P8,109

Jan-30 300 110 P33,000 385 P106.78

P106.77 P41,109

Total 385 P41,109 14

 Net realizable value
⊹ Estimated selling price in the ordinary course of the
business less the estimated costs of completion and the
estimated costs necessary to make the sale
⊹ Entity-specific value
⊹ If Costs > Recoverable Amount, write-down inventory
to NRV and recognize the write-down as expense
⊹ If NRV subsequently increases, the previous write-
down is reversed in which the amount of reversal shall
not exceed the original write-down.
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 Net realizable value
Information on ABCD Company’s inventories are as
follows:
A B
Cost P100,000 P200,000
Estimated Selling Price 140,000 220,000
Estimated Costs to Sell 20,000 30,000

Compute for the value of Products A and B.

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 Net realizable value
A B
Cost P100,000 P200,000

Estimated Selling Price P140,000 P220,000

Less: Estimated Costs to Sell 20,000 30,000
Net Realizable Value P120,000 P190,000

Lower of Cost and NRV P100,000 P190,000

Amount of Write-down P10,000

If in a subsequent period, Product B has a Cost of 80,000 and NRV of

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P100,000. Inventories will be P80,000 + P10,000 reversal = P90,000
 Net realizable value
Information on ABCD Company’s inventories are as follows:

Materials Finished Goods

Cost P60,000 P100,000
NRV 50,000 120,000

Compute for the value of Products Materials and Finished Goods.

Materials Finished Goods
Valuation P60,000 P100,000

Materials won’t be written down because NRV of the finished

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goods > Cost
 Recognition as an expense
⊹ Write-down of inventories to NRV and all losses
of inventories are recognized as an expense in the
period the write-down or losses occurs
⊹ Amount of any reversal arising from an increase in
NRV shall be recognized as a reduction in the
amount of inventories recognized as an expense in
the period the reversal occurs
⊹ Inventories that are used in the construction of
another asset is not expensed but rather capitalized
as part of the cost of constructed asset 19
 disclosures
a) Accounting policies adopted in measuring inventories, including the
cost formula used
b) Total carrying amount of inventories and the carrying amount in
classifications appropriate in the entity
c) Carrying amount of inventories carried at FV less cost to sell
d) Amount of inventories recognized as an expense during the period
e) Amount of any write-down of inventories recognized as an expense
in the period
f) Amount of any reversal of write-down that is recognized as a
reduction in the amount of inventories recognized as expense in the
period
g) Circumstances or events that led to the reversal of a write-down of
inventories; and
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h) Carrying amount of inventories pledged as security for liabilities
Thank
you!
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