INVENTORIES

(PAS 2)
Definition
Inventories are assets:
■ Held for sale in the ordinary course of business
■ In the process of production for such sale
■ In the form of materials or supplies to be consumed in the
production process or in rendering of services.
Recognition
■ Inventories are recognized when it satisfies the requirements of PAS 2 and/or the
general criteria for asset recognition ( measurable & probable)
■ As a rule, goods included as part of inventory items to which the entity has title,
regardless of location.
Recognition
With this, inventory recognized by the entity includes:
Ø Goods owned and on hand
Ø Goods owned and on hand of salesmen for resale
Ø Goods in transit and sold FOB Destination
Ø Goods in transit and purchased FOB Shipping Point
Special cases for sale of goods (lifted
from PAS 18)
■ Bill & hold sales
■ Good shipped subject to conditions
■ Installment sales
■ Lay away sales
■ Orders when payment (partial payment) is received in advance of delivery for goods
not presently held in inventory
■ Sale and repurchase agreements ( other than swap transactions)
■ Subscription to publications & similar items
Bill & Hold Sales
■ Delivery is delayed at the buyers request but the buyer takes title and accepts billing

§ Revenue is recognized when buyer takes title, provided:

Ø It is probable that delivery will be made;
Ø Item is on hand, identified and ready for delivery to buyer at the time the sale is
recognized
Ø Buyer specifically acknowledges the deferred delivery instructions
Ø Usual payment terms apply
§ Note: revenue is not recognized when there is simply an intention to acquire or
manufacture the goods in time for delivery
Goods shipped subject to conditions
■ Installation & inspection
■ Revenue is normally recognized when the buyer accepts delivery, and installation
and inspection are complete.
■ However revenue is recognized immediately upon the buyers acceptance of delivery
when:
– The installation process is simple in nature, for example the installation of a
factory tested television receiver which only requires unpacking and
connection of power and antennae; or
– The inspections is performed only for purposes of final determination of
contract prices, for example, shipments of iron ore, sugar or soya beans
Goods shipped subject to conditions
■ Out on approval when the buyer has negotiated a limited right of return
– If there is uncertainty about the possibility of return, revenue is recognized when
the shipment has been formally accepted by the buyer or the goods have been
delivered and the time period for rejection has elapsed
■ Consignment sales under which the recipient (buyer) undertakes to sell the goods on
behalf of the shipper (seller)
– Revenue is recognized by the shipper when the goods are sold by the recipient to a
third party.
■ Cash on delivery sales
– Revenue is recognized when delivery is made and cash is received by the seller or
agent
Installment sales
■ Consideration is receivable in installments
– revenue attributable to the sale price, exclusive of interest, is recognized at the
date of sale
– The sale price is the present value of the consideration is determined by
discounting the installments receivable at the imputed rate of interest
– The interest element is recognized as revenue as it is earned using effective
interest method
Lay Away Sales
■ Goods are delivered only when the buyer makes the final payment in a series of
installments
– Revenue from such sales is recognized when the goods are delivered
– However when experience indicates that most such sale are consummated,
revenue may be recognized when a significant deposit is received provided the
goods are on hand, identified and ready for delivery to the buyer
■ Orders when payment (or partial payment) is received in advance of delivery for
goods not presently held in inventory
■ The goods are still to be manufactured or will be delivered directly to the customer
from a third party.
■ Revenue is recognized when the goods are delivered to the buyer
■ Sale and repurchase agreements
■ (other than swap transactions)
■ Seller concurrently agrees to repurchase the same goods at a later date, or when
the seller has a call option to repurchase, or the buyer has a put option to require
the repurchase, by the seller, of the goods.
■ When the seller has retained the risks and rewards of ownership, even though legal
title has been transferred, the transaction is a financing arrangement and does not
give rise to revenue.
Subscriptions to publications and
similar items
■ When the items involved are of similar value in each time period, revenue is
recognized on a straight-line basis over the period in which the items are
dispatched.
■ When the items vary in value from period to period, revenue is recognized on the
basis of the sales value of the item dispatched in relation to the total estimated
sales value of all items covered by the subscription.
Other possible items that may raise issue in recognition of
inventories
•Damaged and unsalable goods
•Inventories held and currently being used for window display
•Inventories held or sold with right of return
•Segregated goods in the warehouse
A)Special order goods
b)Goods held awaiting shipping instructions
MEASUREMENT

Initial Subsequent
•Inventories shall be measured at
•Inventories is measured at
the lower of cost and net
cost.
realizable value
The cost of inventories shall comprise all
costs of purchase, costs of conversion and •Net realizable value – refers to
other costs incurred in bringing the inventories the net amount that an entity
to their present location and condition. expects to realize from the sale of
inventory in the ordinary course of
business. It is the estimated
selling price in the ordinary course
of business less the estimated
cost of completion and estimated
costs necessary to make the sale.
Cost
■ Purchase Cost :
– Purchase price (net of trade discount & rebates)
– Import duties
– Non-refundable tax
– Transport & handling
– Other directly attributable cost
■ Conversion Cost:
– Direct Labor
– Overhead
■ Other cost necessary in bringing the inventory to its present condition & location
Exclusions:

■ Abnormal waste/spoilage
■ Selling cost
■ Administrative costs
■ Storage cost:
– Storage cost of partly finishes good = capitalized
– Storage cost of finished good = expensed
Cost of purchase
■ X Co, imported goods and incurred the following:
– List price gross of 5% trade discount P100,000
– Import duties 10,000
– Value added tax 13,000
– Transportation & handling 5,000
– Commissions to broker 2,000

1.How much is the cost of purchase of goods if X is a VAT payer?

2. How much is the cost of purchase of goods if X is a non-VAT payer?
Inventories are accounted for through:

Perpetual Inventory system Periodic Inventory System

Inventory account is updated each time a Inventory account is updated only when
purchase/sale is made. physical count is performed.

Use of “Inventory & Cost of Sales account” Use of ”Purchases” account

An entity reported inventory on December 31, 2021 at P6,000,000 based on a
physical count of goods priced at cost and before any necessary year-end
adjustments relating to the following:

• excluded in the physical count were goods billed to a customer FOB

shipping point on December 30, 2021. These goods had a cost of
P200,000 and were picked up by the carrier on January 15, 2022.
• Goods shipped to a customer FOB shipping point on December 31, 2021
which are being held for the customer to call at the customer’s convenience
with a cost of P300,000 were included in the count.
• Goods with invoice cost of P400,000 gross of 12% VAT shipped FOB
shipping point on December 31, 2021 from a vendor were received on
January 15, 2022.

What amount should be reported as inventory on December 31, 2021?

■ A VAT entity reported inventory on December 31, 2021 at P6,000,000 based on a physical count of
goods priced at cost and before any necessary year-end adjustments relating to the following:

– included in the physical count were goods billed to a customer FOB shipping point on
December 30, 2021. These goods had a cost of P200,000 and were picked up by the carrier
on January 15, 2022.
– Goods shipped to a customer FOB shipping point on December 31, 2021 which are being
held for the customer to call at the customer’s convenience with a cost of P300,000 were
included in the count.
– Goods with invoice cost of P400,000 gross of 12% VAT shipped FOB shipping point on
December 31, 2021 from a vendor were received on January 15, 2022.

What amount should be reported as inventory on December 31, 2021?

■ An entity reported the December 31, 2021 inventory at P2,500,000. The entity revealed
the following transactions:
– Goods shipped to the entity FOB destination on December 26, 2021 were received
on January 2, 2022. The invoice cost of P300,000 is included in inventory balance.
– At the year-end, the entity held P250,000 of merchandise on consignment from
another entity. This merchandise is included in the inventory balance.
– On December 29,2021, merchandise costing P100,000 was shipped to a customer
FOB shipping point and arrived at the customer location on January 15, 2022. The
merchandise is not included in the inventory balance.
– At year-end, the entity had merchandise costing P150,000 out on consignment
with the another entity. The merchandise is not included in the inventory balance.
– What amount should be reported as inventory on December 31,2021?