INVENTORIES, Part 1

RELATED STANDARD: IAS 2

SCOPE
Inclusions
 Assets held for sale in the ordinary course of business
 Assets in the production process for sale in the ordinary course of business
 Materials and supplies that are consumed in production.
 Purchased subcomponents
 Materials or supplies to be consumed in the rendering of services
 Goods held by a trader for resale
Exclusions:
 Work in process arising under construction contracts, including directly related service contracts
 Financial instruments
 Biological assets and agricultural produce at point of harvest

DEFINITION
Inventories are assets:
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Classes of inventories
Type of Inclusion Account used
business
Servicing inventories include the costs of the service, for which the  Work in progress
entity has not yet recognized the related revenue
Merchandising or inventories include goods purchased and held for resale  Merchandise inventory
trading
Manufacturing inventories include the following:  Finished goods
a. finished goods produced;  Goods in process/Work in
b. work in progress being produced; and process
c. materials and supplies awaiting use in the production  Raw materials
process.  Factory or manufacturing
supplies

RECOGNITION
Inventories are recognized when it satisfies the requirements of PAS 2 and/or the general criteria of asset
recognition. As a rule, goods included as part of inventory are items to which the entity has title, regardless of
location.
Recognition of sales (seller) and inventory (buyer) normally takes place when title to the goods passes from the
former to the latter. This is normally evidenced by transfer of possession over the goods. In addition, it must be
observed that the related risks and rewards associated to the ownership of the goods should also be transferred.
With this, inventory recognized by the entity includes;
a. Goods owned and on hand
b. Goods owned and on hand of salesmen, distributing agents, dealers, or others for resale
c. Goods in transit and sold FOB Destination
d. Goods in transit and purchased FOB Shipping point
Special cases for sale of goods (Lifted from PAS 18)
The following list illustrates some cases for sale of goods that deviate from the normal timing of recognition of sale
(seller) or inventory (buyer).
1. ‘Bill and hold’ sales in which delivery is delayed at the buyer’s request but the buyer takes title and accepts
billing.
Revenue is recognized when the buyer takes title, provided:
a. it is probable that delivery will be made;
b. the item is on hand, identified and ready for delivery to the buyer at the time the sale is
recognized;
c. the buyer specifically acknowledges the deferred delivery instructions; and
d. the 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.
2. Goods shipped subject to conditions.
a. Installation and inspection.
Revenue is normally recognized when the buyer accepts delivery, and installation and inspection are
complete.
However, revenue is recognized immediately upon the buyer’s 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 inspection is performed only for purposes of final determination of contract prices, for example,
shipments of iron ore, sugar or soya beans
b. 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.
 c. 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.
d. Cash on delivery sales.
Revenue is recognized when delivery is made and cash is received by the seller or its agent.
3. Installment sales, under which the consideration is receivable in installments.
Revenue attributable to the sales price, exclusive of interest, is recognized at the date of sale.
The sale price is the present value of the consideration, determined by discounting the installments receivable at
the imputed rate of interest. The interest element is recognized as revenue as it is earned, using the effective
interest method.
4. Lay away sales under which the 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 sales 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.
5. Orders when payment (or partial payment) is received in advance of delivery for goods not presently held in
inventory, for example, 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.
6. Sale and repurchase agreements (other than swap transactions) under which the 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.
For a sale and repurchase agreement on an asset other than a financial asset, the terms of the agreement
need to be analyzed to ascertain whether, in substance, the seller has transferred the risks and rewards of
ownership to the buyer and hence revenue is recognized. 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.
For a sale and repurchase agreement on a financial asset, IAS 39 Financial Instruments: Recognition and
Measurement applies.
7. 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
1. Damaged and unsalable goods
2. Inventories held and currently being used for window display
3. Inventories held or sold with right of return
4. Segregated goods in the warehouse
a. Special order goods
b. Goods held awaiting shipping instructions
ILLUSTRATIVE PROBLEMS
PROBLEM 1
The merchandise inventory account of AAA Company for the year ended December 31, 2022 included the following
items:
Items counted in the warehouse (including P32,000 damaged and unsalable goods) 4,000,000
Items included in the count specifically segregated per sales contract 80,000
Goods held on consignment, at sales price, cost P125,000 250,000
Items in receiving department, returned by customer, in good condition 60,000
Goods out on consignment, at sales price, cost P150,000 200,000
Items ordered and in the receiving department, invoice not received 30,000
Items ordered, invoice received but goods not received. Freight is paid by buyer 100,000
Items on counter for sale 150,000
Items in receiving department, refused by us because of damage 200,000
Items in shipping department 220,000
Items shipped today, invoice mailed, FOB shipping point 35,000
Items shipped today, invoice mailed, FOB destination 25,000
Items currently being used for window display 13,000
Total 5,363,000
Required: Compute for the correct amount of inventory
PROBLEM 2
The merchandise inventory account of AAA Company for the year ended December 31, 2022 included the following
items:
Finished goods in factory 1,900,000
Finished goods in company-owned retail store, including a 50% profit on cost 375,000
Finished goods in hands of consignees including 40% profit on sales 200,000
Finished goods in transit to customers, shipped FOB point of shipment 130,000
Finished goods in transit to customers, shipped FOB destination 150,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 40,000
Goods in process 1,100,000
 Unexpired insurance on inventories 24,000
Advertising catalogs and shipping cartons 120,000
Office supplies 12,000
Shipping supplies 9,000
Gasoline and oil for testing finished goods 89,000
Materials in transit shipped FOB shipping point, excluding freight of P20,000 220,000
Defective materials returned to suppliers for replacement 99,000
Materials 2,000,000
Advance for materials ordered 100,000
Total 6,668,000
Required: Compute for the correct amount of inventory

PROBLEM 3
On December 31, 2022, AAA Co. reported inventory and accounts payable amounting to P2,500,000 and P4,000,000,
respectively, before possible adjustment for the following:
a. Goods in transit from a vendor to AAA on December 31, 2022 with an invoice cost of P200,000 purchased FOB
shipping point was not yet recorded.
b. Goods shipped FOB shipping point from a vendor to AAA was lost in transit. The invoice cost of P80,000 was not
yet recorded.
c. Goods shipped FOB shipping point from a vendor to AAA on December 31, 2022 amounting to P32,000 was
recorded and included in the year-end physical count as “goods in transit.”
d. Goods in transit from a vendor to AAA on December 31, 2022 with an invoice cost of P40,000 purchased FOB
destination was not yet recorded. The goods were received in January 2023.
e. Goods with invoice cost of P60,000 was recorded and included in the year-end physical count as “goods in
transit.” It was found out that the goods were shipped from a vendor under FOB destination.
Required: Compute for the adjusted accounts payable on December 31, 2022.

PROBLEM 4
AAA Co., a manufacturer of rubber wrappers, provided the following information from its accounting records for the
year ended December 31, 2022:
Inventory, end (based on physical count on December 31, 2022 P 1,935,000
Accounts payable 1,314,000
Additional information follows:
a. Parts held on consignment from BBB to AAA amounting to P13,500, were included in the physical count of goods
in AAA’s warehouse on December 31, 2022, and in accounts payable in December 31, 2022.
b. Goods, with an invoice cost of P40,500, received from a vendor at 5:00 p.m. on December 31, 2022, were
recorded on a receiving report dated January 2, 2023. The goods were not included in the physical count, but the
invoice was included in accounts payable at December 31, 2022.
c. On January 3, 2023, a monthly freight bill in the amount of P9,000 was received. The bill specifically related to
merchandise purchased in December 2022, one-half of which was still in the inventory at December 31, 2022. The
freight charges were not included in either the inventory or accounts payable at December 31, 2022.
d. Goods were in transit from a vendor to AAA on December 31, 2022. The invoice cost was P106,500, and the
goods were shipped FOB shipping point on December 29, 2022.
e. Goods received from a vendor on December 26, 2022, were included in the physical count. However, the related
P42,000 vendor invoice was not included in accounts payable at December 31, 2022, because the accounts
payable copy of the receiving report was lost.
Required: Determine the amount to be reported as Inventory and Accounts Payable on December 31, 2022.

PROBLEM 5
AAA Trading’s inventory at the end of 2022 is P9,500,000, before considering the following information.
Included in the amount are the following items:
Merchandise in transit, purchased FOB shipping point P 680,000
Merchandise in transit, purchased FOB destination 420,000
Goods held on consignment 500,000
Goods out on consignment, at cost plus 50% mark up on cost and P10,000 freight 610,000
Excluded in the amount are the following items:
 Merchandise in transit to customers, FOB shipping point, at selling price of P540,000, which includes a 40%
mark up on selling price.
 Merchandise in transit to customers, FOB destination at selling price of P400,000, which includes a 40%
markup on selling price.
 Merchandise sold, in transit, “cost, insurance, freight” charged to the buyer, with selling price of P180,000 and
cost of P120,000.
Required: Determine the amount to be reported as Inventory on December 31, 2022.

PROBLEM 6
AAA Company has the following information pertaining to its merchandise inventory as of December 31, 2022
Inventory on hand (including merchandise received on consignment of P10,000) P 400,000
Inventory purchased with a buyback agreement 50,000
Goods in transit, FOB Destination, including freight charges of P6,500 31,500
Goods in transit, FOB Shipping point, excluding freight charges of P2,500 65,000
Goods in transit, FAS, including delivery cost alongside the vessel of P2,000 32,000
Goods in transit, FAS, excluding cost of shipment of P3,000 30,000
Goods in transit, Ex-ship, including cost of shipment of P5,000 28,000
Goods in transit, CIF, excluding insurance costs and freight charges of P1,000 25,000
Required: Determine the amount to be reported as Inventory and Accounts Payable on December 31, 2022.
MEASUREMENT
I. Initial – Inventories is measured at cost.
II. Subsequent – Inventories shall be measured at the lower of cost and net realizable value.
 The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
 Net realizable value refers to the net amount that an entity 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
costs of completion and the estimated costs necessary to make the sale.
 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
INITIAL MEASUREMENT
Cost of Inventories
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
A. Costs of Purchase
The costs of purchase of inventories comprise the
 Purchase price
 Import duties and other taxes (other than those subsequently recoverable by the entity from the taxing
authorities)
 Transport, handling and other costs directly attributable to the acquisition of finished goods, materials and
services.
 Any trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
B. Costs of Conversion
C. Other Costs
Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the
inventories to their present location and condition. Examples of other costs are as follows:
a) Borrowing costs – PAS 23 requires capitalizing interest on inventories which take a substantial amount of
time to create. However, an entity is not required to capitalize borrowing costs for inventories that are
manufactured in large quantities on a repetitive basis.
b) Storage costs – this can be included for products that require a maturation process or substantial amount of
time to create.
c) Non-production overheads or costs of designing products for specific customer– this can be included
in cost if they contribute in bringing the inventories to their present condition and location.
Inventory cost should exclude:
 Abnormal amounts of wasted materials, labor, or other production costs
 Storage costs (unless essential to the production process)
 Administrative overheads unrelated to production
 Selling costs
 Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign
currency
 Interest cost when inventories are purchased with deferred settlement terms.
PROBLEM 7
On January 2, 2022, AAA Company purchased goods from BBB Company for an invoice amount of P100,000 if paid
within the normal credit period of 10 days. However, payment maybe deferred up to 3 months subject to revised
invoice in the amount of P102,000. Import duties and transport charges amounted to P5,000 and P3,000,
respectively. AAA Company paid the invoiced amount on April 1, 2022.
Required: Determine the appropriate initial measurement of the goods
PROBLEM 8
The costs set out below are those typically incurred by manufacturing businesses. Identify the cost as either
inventoriable or not. If the item is not inventoriable, identify the appropriate treatment for the such item.
Costs incurred Inventoriable?
Supplier’s gross price for raw materials
Quantity discounts allowed by supplier (deduct from cost)
Costs of transporting materials to the business premises
Labor costs directly incurred in the processing of raw materials
Variable costs, such as power, incurred in the processing of raw materials
Fixed production costs/overheads, such as rent for the processing factory
Depreciation charges on the plant used in the processing
Costs of transporting goods to customers on sale
Non-recoverable purchase taxes charged to customers on sale
Non-recoverable sales taxes
Commission payable to salesmen on the sale of the goods
Provisions for bad and doubtful debts in relation to trade receivables
Costs of the accounts department
Head office costs relating to the overall management of the business
Purchase taxes and duties charged by the supplier and recoverable from the taxing authorities.
Borrowing cost
Storage cost for a maturing product
Selling costs
Abnormal amounts of wasted labor
Interest over the period of financing as inventory purchase
 Non-production overheads or cost of designing products for specific customers
Storage cost of finished goods
Fixed administration costs/overheads, such as rent for office
Non-recoverable purchase taxes charged by supplier

ACCOUNTING FOR TRADE AND CASH DISCOUNTS

Transactions Gross method Net method
Purchases on Purchases (Gross*) xx Purchases (Net**) xx
account Accounts payable (Gross) xx Accounts payable (Net) xx
Payment within Accounts payable (Gross) xx Accounts payable (Net) xx
the discount Cash (Net) xx Cash (Net) xx
period Purchase discount xx
Payment beyond Accounts payable (Gross) xx Accounts payable (Net) xx
the discount Cash (Gross) xx Purchase discount lost xx
period Cash (Gross)
*Invoice price
**Invoice price, net of discount whether taken or not
PROBLEM 9
AAA Company entered into the following transactions during the month of September:
1. On September 2, purchased inventory amounting to P86,000 with terms of 3/10, n/30 from Elisha Company.
2. On September 4, purchased inventory with a list price of P100,000 with terms of 20, 2/10, n/30 from Gabrielle
Company.
3. On September 6, Returned merchandise costing P10,000 to Elisha Company.
4. On September 12, Paid the accounts to Elisha Company.
5. On September 22, Paid the accounts to Gabrielle Company.
Required: Prepare all the necessary entries assuming the entity is using:
a. Gross method b. Net method

INVENTORIES OF MERCHANDISING AND MANUFACTURING BUSINESSES

Statement of cost of goods sold - Merchandising Purchase discounts XX XX
Inventory, beginning XX Raw materials available for use XX
Add Net Purchases Less Raw materials end XX
Purchases XX Raw materials used XX
Add Freight-in XX Add Direct labor XX
Gross Purchases XX Factory overhead XX
Less: Purchase returns and allowances XX Total manufacturing cost XX
Purchase discounts XX XX Add Work in process, beginning XX
Total goods available for sale XX Total cost of goods placed into XX
Less Inventory, end XX process
Cost of goods sold XX Less work in process, end XX
Cost of goods manufactured XX
Statement of cost of goods sold - Manufacturing Add Finished goods, beginning XX
Raw materials inventory, beginning XX Total cost of goods available for sale XX
Add Net Purchases Less Finished goods, end XX
Purchases XX Cost of goods sold XX
Add Freight-in XX
Gross Purchases XX
Less: Purchase returns and allowances XX
PROBLEM 10
AAA Company is engaged in buying and selling of grizzly bears. The following transactions and other
information are available for the year ended December 31, 2022:
Inventory, January 1, 2022, Php200,000
Gross purchases, all under the credit terms, 2/10, n/30, Php5,000,000
Purchase returns made by the company, all made before payment of accounts, Php80,000
Gross sales, Php7,380,000
Sales allowances granted, Php30,000
Sales returns, Php180,000
Additional information:
 80% of purchases made were settled within the discount period.
 AAA maintains sells its products allowing a 40% gross profit on sales.
Required: Determine the cost of inventory at December 31, 2022.

PROBLEM 11
The accounting records of Omar Company contained the following information for last year:
Beginning Ending
Direct materials inventory P 90,000 P 65,000
Work in process inventory 200,000 100,000
Finished goods inventory 190,000 150,000
Additional information:
Manufacturing costs incurred Selling and administrative costs incurred:
Indirect materials P 300,000 Advertising P 35,000
Direct labor costs 160,000 Rent 20,000
Depreciation on factory machinery 10,000 Clerical 25,000
Factory rent 12,000
Indirect labor 70,000
Taxes 8,000
Purchases 500,000
Freight-in 20,000

Required: Compute for (1) Direct materials used; (2) Total Manufacturing Cost; and (3) Cost of Goods
Sold.