1

 
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
INVENTORIES  
 
•   Covered  by  PAS  2  
 
•   Assets  held  for  sale  
Ø   Merchandising  business  =  Merchandise  Inventory  
Ø   Manufacturing  business  =  Finished  goods  
•   Assets  in  the  process  of  production  or  awaiting  to  be  used  in  the  production  
Ø   Raw  materials  or  Direct  materials  
Ø   Goods  in  process  or  work  in  process  or  partially-­‐completed  goods  
Ø   Factory  supplies  or  Indirect  materials  
 
•   All  goods  to  which  the  entity  has  TITLE  to  these  are  included  in  the  inventory.    
•   Generally,  it  includes  Goods  ON  HAND.    It  also  includes:  
Ø   Goods  IN  TRANSIT  
ü   Sold  FOB  Destination  (SELLER)  
ü   Purchased  FOB  Shipping  point  (BUYER)  
 
ü   Additional  Freight  terms  (MARITIME  Shipping  terms)  
o   FAS  or  Free  Alongside  =  title  passes  to  the  BUYER  when  the  carrier  takes  
possession  of  the  goods.  The  cost  of  LOADING  and  SHIPMENT  is  absorbed  
by  the  buyer.  
o   CIF  or  Cost,  Insurance  and  Freight  =  title  and  risk  of  loss  shall  pass  to  the  
BUYER   upon   delivery   of   goods   to   the   carrier.     The   cost   of   LOADING   is  
absorbed  by  the  seller  
o   Ex-­‐ship  =  title  passes  to  the  BUYER  until  the  goods  are  UNLOADED  from  
the  carrier.  
 
Ø   Goods  OUT  On  Consignment  (Consignor)  
ü   Consignment   =   a   method   of   marketing   goods   in   which   the   owner   (Consignor)  
transfers   physical   possession   of   certain   goods   to   an   agent   (Consignee)   who   sells  
them  on  his  behalf.  
ü   Freight  and  other  handling  charges  on  goods  out  on  consignment  are  part  of  the  
COST  of  the  consigned  goods.  
ü   When  a  report  is  made  for  the  sale  of  consigned  goods,  the  cash  remittance  is  
equal  to  the  amount  of  sales  minus  commission  and  other  chargeable  expenses  
to  the  the  consignor.  The  entry  is:  
 
Cash  (remittance)   xx    
 
Commission  expense   xx    
 
Other  expense  (as  specified  in  the  problem)   xx    
 
  Sales  (  at  selling  price)     xx  
 
 
Ø   Goods  in  the  hands  of  salesmen  or  agents  
Ø   Goods  OUT  on  approval  or  trial  
Ø   Goods  sold  on  Installment  are  INCLUDED  in  the  inventory  of  the  BUYER.  

 
 2  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
•   Generally  classified  as  CURRENT  ASSETS  and  presented  as  a  one-­‐line  item  in  the  statement  of  
financial  position  but  the  details  shall  be  disclosed  in  the  notes  to  financial  statements.  
 
•   COST  of  the  inventory  includes:  
Ø   Cost  of  purchase  
Ø   Cost  of  conversion  =  direct  labor  plus  factory  overhead  
Ø   Other  costs  incurred  in  bringing  the  inventories  to  their  present  location  
 
ACCOUNTING  FOR  INVENTORIES  
•   Two  systems:    PERIODIC  and  PERPETUAL  
 
PERIODIC   PERPETUAL  
§   Physical  counting  of  goods  on  hand  to   §   Requires   the   maintenance   of   Stock  
determine  ending  inventory  quantity   Cards  
§   Generally   used   for   SMALL   peso   §   Generally   used   for   LARGE   peso  
investment  and     investment  and    
§   For  Fast-­‐moving  inventory   §   For  Slow-­‐moving  inventory  
§   A   physical   count   of   units   on   hand  
should  be  done  at  least  once  a  year  to  
confirm  balances  seen  in  stock  cards.  
 
•   The  JOURNAL  ENTRIES  are:  
 
Ø   PURCHASE  of  goods  
PERIODIC   PERPETUAL  
Purchases   xx     Merchandise  Inventory   xx    
  Cash  or         Cash  or      
Accounts  or  Notes  payable   xx   Accounts  or  Notes  payable     xx  
 
Ø   FREIGHT  on  the  purchase  of  goods  
PERIODIC   PERPETUAL  
Freight  in   xx     Merchandise  Inventory   xx    
  Cash  or         Cash  or      
Accounts  payable   xx   Accounts  payable     xx  
 
Ø   RETURNS  &  ALLOWANCES  on  the  purchase  of  goods  
PERIODIC   PERPETUAL  
Cash  or  Accounts  or  Notes  payable   xx     Cash  or  Accounts  or  Notes  payable   xx    
  Purchase  returns  &  allowances     xx      Merchandise  Inventory     xx  
 
Ø   SALE  of  goods  
PERIODIC   PERPETUAL  
Cash  or   xx     Cash  or   xx    
Accounts  or  Notes  receivable   Accounts  or  Notes  receivable  
  Sales     xx      Sales     xx  

 
 3  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
No  entry       Cost  of  sales  or  cost  of  goods  sold   xx    
           Merchandise  Inventory     xx  
 
 
 
Ø   RETURN  of  sold  goods  
PERIODIC   PERPETUAL  
Sales  returns     xx     Sales  returns   xx    
  Cash  or     xx     Cash  or     xx  
Accounts  or  Notes  receivable   Accounts  or  Notes  receivable  
 
No  entry       Merchandise  Inventory   xx    
           Cost  of  sales  or  cost  of  goods     xx  
sold  
 
Ø   ADJUSTMENT  of  ending  inventory  (yearend)  
PERIODIC   PERPETUAL  
Merchandise  Inventory,  end     xx     No  entry    
  Income  summary     xx          
 
 
•   FINANCIAL  STATEMENT  Presentation  
 
Ø   INCOME  STATEMENT  
PERIODIC   PERPETUAL  
Net  Sales   xx     Net  Sales   xx    
Less:  Cost  of  sales*   xx      Less:  Cost  of  sales*   xx    
Gross  Profit   xx     Gross  profit   xx    
               
*   Beginning  inventory   xx     *   No  additional  breakdown      
  Add:    Net  purchases**   xx            
  Goods  available  for  sale   xx            
  Less:  Ending  Inventory   xx            
  Cost  of  sales   xx            
               
**   Purchases     xx          
  Add:  Freight  in     xx          
  Total  Purchases     xx          
  Less:    Purchase  ret  &  allow   xx            
                     Purchase  discounts   xx   xx          
  Net  purchases     xx          
               
 
 
 

 
 4  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
GROSS  METHOD  vs  NET  METHOD  
 
GROSS   NET  
§   More  convenient  than  net   §   Represents   the   cash   price   equivalent  
§   Purchase   discount   is   recorded   only   and  theoretically  correct  cost  
when   paid   in   FULL   within   the   §   Purchase   discount   is   deducted   from  
discount   period   based   on   net   of   invoice  price  at  the  date  of  purchase,  
returns   thus,   no   entry   is   recorded   for   such  
  discount  
 
•   The  JOURNAL  ENTRIES  are  (using  the  periodic  method):  
 
Ø   Purchased  goods  on  account,  ₱100,  5/10,  n/15  
GROSS   NET  
Purchases   100     Purchases   95    
  Accounts  or  Notes  payable     100     Accounts  or  Notes  payable       95  
 (₱100  x  95%)    
 
Ø   Returned  ₱20  worth  of  goods  due  to  some  defects  
GROSS   NET  
Accounts  or  Notes  payable   20     Accounts  or  Notes  payable   19    
  Purchase  returns  &  allowance     20     Purchase  returns  &  allowance     19  
 (₱20  x  95%)  
 
Ø   If  paid  in  FULL  within  the  discount  period    
GROSS   NET  
Accounts  or  Notes  payable   80     Accounts  or  Notes  payable   76    
  Purchase  discount     4      Cash     76  
   (₱80  x  5%)      
Cash     76   (₱95  –  19)  
 
Ø   If  paid  in  full  AFTER  the  discount  period  
GROSS   NET  
Accounts  or  Notes  payable   80     Accounts  or  Notes  payable   76    
Purchase  discount  lost   4  
  Cash     80     Cash     80  
 
 
•   FINANCIAL  STATEMENT  Presentation  (based  on  the  given  entries  
 
Ø   INCOME  STATEMENT  (if  paid  within  the  discount  period)  
GROSS   NET  
**   Purchases     100     Purchases     95  
  Add:  Freight  in     -­‐     Add:  Freight  in     -­‐  

 
 5  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

  Total  Purchases     100     Total  Purchases     95  

  Less:    Purchase  ret  &  allow   20       Less:    Purchase  ret  &  allow   19    
                     Purchase  discounts   4   24     Net  purchases     76  
  Net  purchases     76          
               
 
 
Ø   INCOME  STATEMENT  (if  UNpaid  within  the  discount  period)  
GROSS   NET  
**   Purchases     100     Purchases     95  
  Add:  Freight  in     -­‐     Add:  Freight  in     -­‐  
  Total  Purchases     100     Total  Purchases     95  
  Less:    Purchase  ret  &  allow   20       Less:    Purchase  ret  &  allow   19    
                     Purchase  discounts   -­‐   20     Net  purchases     76  
  Net  purchases     80          
          Operating  expense:      
                   Purchase  discount  lost     4  
               
          Total  expenses     80  
               
 
 
VALUATION  
•   Lower  of  COST  or  LCNRV  (lower  of  cost  or  net  realizable  value)  
•   COST  
Ø   Cost  Formulas  or  Methods  
ü   FIFO  (First  in,  First  out)  
o   Goods  are  sold  in  the  order  these  are  purchased  
o   Inventory  is  expressed  in  terms  of  RECENT  or  CURRENT  PRICES  
o   Cost  of  Sales  is  expressed  of  OLD  PRICES  
o   It  favors  the  statement  of  financial  position  
o   Inventory  costs  are  the  same  under  the  FIFO-­‐periodic  and  FIFO-­‐perpetual  
 
ü   Weighted  Average  
o   Weighted  Average  –  Periodic  
Ending   inventory   Goods  available  for  sale  in  Pesos  
=   x   Ending  inventory  in  units  
in  Pesos   Goods  available  for  sale  in  units  
 
o   Moving  Average  –  Perpetual  
§   A   new   weighted   average   cost   must   be   computed   after   every  
purchase  and  purchase  return  and  then  multiplied  by  the  units  
on  hand  
§   It  requires  the  keeping  of  stock  cards  
 
o   It  produces  inventory  valuation  that  approximates  current  value  IF  there  
is  a  rapid  or  fast  turnover  of  inventory  

 
 6  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
ü   Other  COST  Valuation  
o   Specific  Identification  
§   Specific  costs  are  attributed  to  identified  items  of  inventory  
§   It   is   appropriate   for   inventories   segregated   for   a   specific   project  
and  those  are  not  ordinarily  interchangeable  
§   The  flow  of  the  inventory  cost  corresponds  the  physical  flow  of  
goods,  but  it  is  very  costly  to  implement.  
 
o   Standard  cost  
§   A   predetermined   product   cost,   established   on   the   basis   of  
normal   levels   of   materials,   labor,   supplies,   labor   efficiency   and  
capacity  utilization,  is  applied  to  all  inventory  movements  
§   Standard   costs   should   be   realistically   attainable   and   reviewed  
and  revised  regularly  in  light  of  current  conditions.  
 
o   Relative  sales  price  method  
§   It   is   applicable   to   commodities   purchased   at   a   lump   sum,   the  
single  cost  is  apportioned  among  the  commodities  based  on  their  
respective  sales  price.      
§   Also  known  as  “basket  price  allocation”  
 
•   LCNRV  
Ø   NRV  =  Net  realizable  value  
ü   It   is   the   estimated   selling   price   in   the   ordinary   course   of   business   less   the  
estimated  cost  of  completion  and  estimated  cost  of  disposal.  
 
Ø   Most  likely  circumstances  of  using  NRV:  
ü   Damaged  inventories  
ü   Wholly  or  partially  obsolete  
ü   Selling  prices  have  declined  
ü   Estimated  cost  to  complete  or  to  dispose  increased  
 
Ø   Inventories  are  usually  written  down  to  NRV  on  an  item  per  item  or  individual  basis  
 
Ø   STEPS  to  follow  prior  to  write-­‐down:  
1.   Compute  for  Cost  =  quantity  (in  units)  x  Cost/unit  
2.   Compute  for  NRV  =  quantity  (in  units)  x  NRV  Cost/unit  
3.   Compare  #1  to  #2  individually  or  item  per  item  and  extend  to  a  separate  column  
the  lower  of  cost  or  NRV.  
4.   Get  the  TOTAL  cost  (sum  of  all  items  using  #1)  
5.   Get  the  TOTAL  LCNRV  (sum  of  all  items  using  #3)  
6.   IF:  #4  <  #5,  then  no  accounting  problem  arises,  thus,  no  need  for  AJE  
IF:   #4   >   #5,   the   decrease   in   value   is   recognized   by   an   AJE   depending   on   the  
method  employed  whether  the  Direct  method  or  cost  of  goods  sold  method  OR    
the  Allowance  method  or  loss  method  
 
 

 
 7  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
DIRECT  METHOD   ALLOWANCE  METHOD  
(Cost  of  Goods  Sold  Method)   (Loss  Method)  
§   Inventory  is  recorded  at  LCNRV   §   Inventory  is  recorded  at  COST  
§   The   loss   on   inventory   write-­‐down   is   §   The   loss   on   inventory   write-­‐down   is  
NOT  ACCOUNTED  separately,  thus,  no   accounted  for  separately,  thus,  there  
entry  is  made   is  an  entry  
 
 
•   The  JOURNAL  ENTRIES  are  (using  the  periodic  method):  
 
Ø   To  record  Ending  inventory  
DIRECT   ALLOWANCE  
Merchandise  inventory,  end  (@lcnrv)   42     Merchandise  inventory,  end  (@cost)   50    
  Income  summary     42     Income  summary     50  
 
Ø   To  record  Loss  on  inventory  write-­‐down  
DIRECT   ALLOWANCE  
No  entry       Loss  on  inventory  write-­‐down   8    
          Allowance  for  inventory  w/d     8  
 
Ø   To  record  Gain  on  reversal  of  inventory  write-­‐down.  This  happens  when  the  required  
allowance  decreases.    But  the  gain  on  reversal  is  limited  only  to  the  extent  of  the  balance  
of  the  allowance.  
DIRECT   ALLOWANCE  
No  entry       Allowance  for  inventory  write-­‐down   xx    
          Gain  on  reversal  of  invty  w/d     xx  
 
•   INCOME   STATEMENT   Presentation.   Example:   Beginning   inventory,   ₱20;   Net   purchases,   ₱110;  
Ending  Inventory  @  Cost,  ₱  50;  Ending  inventory  @LCNRV,  ₱42,  thus,  loss  is  ₱8  
DIRECT   ALLOWANCE  
  Beginning  inventory     20     Beginning  inventory     20  
  Add:  Net  purchases     110     Add:  Net  purchases     110  
  Goods  available  for  sale     130     Goods  available  for  sale     130  
  Less:  Ending  inventory     42     Less:  Ending  inventory     50  
  Cost  of  goods  sold               88     Cost  of  goods  sold  before  w/d           80  
          Add:  Loss  on  invty  write-­‐down     8  
          Cost  of  goods  sold     88  
                         
               
               
               
 
•   PAS  2  requires  the  DISCLOSURE  of  any  inventory  write-­‐down  and  any  reversal  of  inventory  write-­‐
down.  
 

 
 8  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
PURCHASE  COMMITMENTS  
•   Obligations   of   the   entity   to   acquire   certain   goods   in   the   FUTURE   at   a   FIXED   PRICE   and   FIXED  
QUANTITY  
•   It  is  a  non-­‐cancelable  order,  thus  any  losses  which  may  be  expected  to  arise  should  be  recognized  
and  an  entry  is  prepared.  
•   EXAMPLE:    On  April  24,  2020,  Ox  Company  entered  into  a  contract  with  Rabbit  to  purchase  5  units  
of  carrots  at  a  fixed  price  of  ₱10  to  be  delivered  on  January  11,  2021.    
 
Ø   Case  1:  Assume  the  price  of  carrots  at  December  31  (end  of  reporting  period)  is  ₱7.    The  
price  of  carrots  on  January  11  is  ₱6  
Ø   Case  2:  Assume  the  price  of  carrots  at  December  31  (end  of  reporting  period)  is  ₱11.    The  
price  of  carrots  on  January  11  is  ₱6  
Ø   Case  3:  Assume  the  price  of  carrots  at  December  31  (end  of  reporting  period)  is  ₱11.    The  
price  of  carrots  on  January  11  is  ₱15  
Ø   Case  4:  Assume  the  price  of  carrots  at  December  31  (end  of  reporting  period)  is  ₱7.    The  
price  of  carrots  on  January  11  is  ₱12  
 
•   The  JOURNAL  ENTRIES  are:  
 
APRIL  24,  2020  (  date  of  purchase  commitment)  
 
No  entry  in  any  of  the  cases      
       
 
 
DECEMBER  31,  2020  (  end  of  reporting  period)  
Ø   CASE  1  
Loss  on  purchase  commitment   15    
  Estimated  liability  for  purchase  commitment     15  
  [  (₱10-­‐7)  x  5  units]      
 
Ø   CASE  2  
No  entry        
       
 
Ø   CASE  3  
No  entry        
       
 
Ø   CASE  4  
Loss  on  purchase  commitment   15    
  Estimated  liability  for  purchase  commitment     15  
  [  (₱10-­‐7)  x  5  units]      
 
 
 

 
 9  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
JANUARY  11,  2021  (date  of  actual  purchase)  
Ø   CASE  1  
Purchases  (₱6  x  5)   30    
Loss  on  purchase  commitment  [  (₱7-­‐6)  x  5  units]   5    
Estimated  liability  for  purchase  commitment   15    
  Accounts  payable  or  Cash     50  
  (₱10  x  5  units)      
 
Ø   CASE  2  
Purchases  (₱6  x  5)   30    
Loss  on  purchase  commitment  [  (₱10-­‐6)  x  5  units]   20    
  Accounts  payable  or  Cash     50  
  (₱10  x  5  units)      
 
Ø   CASE  3  
Purchases  (₱10  x  5)     50    
  Accounts  payable  or  Cash     50  
       
 
Ø   CASE  4  
Purchases  (₱10  x  5)   50    
Estimated  liability  for  purchase  commitment   15    
  Accounts  payable  or  Cash    (₱10  x  5  units)     50  
  Gain  on  purchase  commitment**     15  
       
**  gain  is  only  up  to  the  extent  of  the  previously  recorded  loss.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 10  
FINANCIAL  ACCOUNTING  AND  REPORTING      
Prepared by: Bernadette Adelaida M. Cope Inventories

 
§   BASIC  INVENTORY  SUPPORTING  COMPUTATIONS  FOR  A  MANUFACTURING  CONCERN  
 
Raw  materials,  beginning     xx  
Add:  Net  Purchases     xx  
Raw  materials  available  for  use     xx  
Less:  Raw  materials,  end     xx  
Raw  materials  used     xx  
Add:  Direct  labor   xx    
                 Factory  overhead   xx   xx  
Total  manufacturing  cost     xx  
Add:  Work  in  process,  beginning     xx  
Total  Cost  of  goods  placed  in  process     xx  
Less:  Work  in  process,  end     xx  
Cost  of  goods  manufactured     xx  
     
Finished  goods,  beginning     xx  
Add:  Cost  of  goods  manufactured     xx  
Goods  available  for  sale     xx  
Less:  Finished  goods,  end     xx  
Cost  of  goods  sold  or  cost  of  sales     xx  
     
     
**Raw  materials  used   xx    
       Direct  labor   xx    
       Prime  costs   xx    
     
**Direct  labor   xx    
       Factory  overhead   xx    
       Conversion  cost   xx