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    Cost Formula Cost of Goods Sold Ending Inventory: Handout: Inventories - Costflow - LCNRV Far0 - 1 Sem - Ay2019-20

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    Al Francis Guillermo
    The document discusses inventory costing and measurement under Philippine Accounting Standards. It states that inventories must be measured at the lower of cost and net realizable value. Net realizable value is estimated selling price less estimated costs of completion and disposal. Cost of inventories can be determined using first-in, first-out or weighted average methods. Inventories must be written down to net realizable value if cost exceeds it. Writedowns can be accounted for directly through cost of sales or using an allowance method with a separate valuation account. Purchase commitments also require recognition of losses if committed prices exceed current replacement prices at the financial reporting date.

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    Cost Formula Cost of Goods Sold Ending Inventory: Handout: Inventories - Costflow - LCNRV Far0 - 1 Sem - Ay2019-20

    Uploaded by

    Al Francis Guillermo
    42 views1 page
    The document discusses inventory costing and measurement under Philippine Accounting Standards. It states that inventories must be measured at the lower of cost and net realizable value. Net realizable value is estimated selling price less estimated costs of completion and disposal. Cost of inventories can be determined using first-in, first-out or weighted average methods. Inventories must be written down to net realizable value if cost exceeds it. Writedowns can be accounted for directly through cost of sales or using an allowance method with a separate valuation account. Purchase commitments also require recognition of losses if committed prices exceed current replacement prices at the financial reporting date.

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    HO_Inventories_CostFlow_LCNRV

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    The document discusses inventory costing and measurement under Philippine Accounting Standards. It states that inventories must be measured at the lower of cost and net realizable value. Net realizable value is estimated selling price less estimated costs of completion and disposal. Cost of inventories can be determined using first-in, first-out or weighted average methods. Inventories must be written down to net realizable value if cost exceeds it. Writedowns can be accounted for directly through cost of sales or using an allowance method with a separate valuation account. Purchase commitments also require recognition of losses if committed prices exceed current replacement prices at the financial reporting date.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views1 page

    Cost Formula Cost of Goods Sold Ending Inventory: Handout: Inventories - Costflow - LCNRV Far0 - 1 Sem - Ay2019-20

    Uploaded by

    Al Francis Guillermo
    The document discusses inventory costing and measurement under Philippine Accounting Standards. It states that inventories must be measured at the lower of cost and net realizable value. Net realizable value is estimated selling price less estimated costs of completion and disposal. Cost of inventories can be determined using first-in, first-out or weighted average methods. Inventories must be written down to net realizable value if cost exceeds it. Writedowns can be accounted for directly through cost of sales or using an allowance method with a separate valuation account. Purchase commitments also require recognition of losses if committed prices exceed current replacement prices at the financial reporting date.

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    Handout: Inventories_CostFlow_LCNRV FAR0_1st Sem_AY2019-20

    PAS 2, paragraph 9, provides that inventories shall be measured at the lower of cost and net realizable value (LCNRV).

    Net realizable value or NRV is the estimated selling price in the ordinary course of business less the estimated cost of
    completion and the estimated cost of disposal of inventories.
    PAS 2, paragraph 25, further provides that the cost of inventories shall be determined by using either: [1] First in, First out
    (FIFO) or [2] Weighted average

    COST FORMULA MATRIX


    Cost Formula Cost of goods sold Ending Inventory
    1. First in, First out* Expressed in terms of earlier or old prices Expressed in terms of current or recent prices
    2. Last in, First out** Expressed in terms of current or recent prices Expressed in terms of earlier or old prices
    3. Weighted average* Expressed in terms of the average price Expressed in terms of the average price during the
    during the period period
    4. Specific Expressed in terms of specific costs Expressed in terms of specific costs attributed to
    identification*** attributed to identified items of inventory identified items of inventory
    5. Standard costs*** Expressed in terms of predetermined costs on Expressed in terms of predetermined costs on the
    the basis of normal production levels basis of normal production levels
    6. Relative sales price
    method***
    * GAAP ** Not generally accepted *** Accepted as an alternative costing method

    Computational Guidelines
    1. FIFO, whether applied on a periodic or perpetual method of accounting, yields the same amount of Cost of Sales (COS)
    and Ending Inventory (EI).
    2. LIFO periodic and LIFO perpetual result in different amounts of COS and EI.
    3. A common average unit cost is applied to both sold and unsold units under the Weighted Average – Periodic costing
    method in determining the amount of COS and EI. The average unit cost is computed by dividing the Total Cost of
    Goods Available for Sale (in Php) during the period by the Total Units Available for Sale.
    4. A new weighted average unit cost is computed after every purchase under the Weighted Average – Perpetual costing
    method.
    5. In a period of rising prices, FIFO yields the highest EI, lowest COS and highest Net Income (NI)
    6. In a period of declining prices, FIFO yields the lowest EI, highest COS and lowest NI
    7. In a period of rising prices, LIFO yields the lowest EI, highest COS and lowest NI
    8. In a period of declining prices, LIFO yields the highest EI, lowest COS and highest Net Income (NI)

    MEASUREMENT OF INVENTORIES – inventories shall be measured at LCNRV (PAS 2, par 9)


    Accounting for Inventory Writedown
    1. Inventories are usually written down to NRV on an item by item or individual basis.
    2. A writedown is required if the NRV is lower than the cost of the inventory. Accordingly, the inventory is measured at
    NRV and the decrease in value is appropriately recognized.
    3. No writedown is recorded if the NRV of the inventory is greater than its cost.

    Methods of Accounting for Inventory Writedown


    1. Direct Method or Cost of Sales Method
    a. The Inventory is measured at the LCNRV
    b. Any loss on writedown or gain on subsequent reversal of the same is buried in the Cost of Sales; no separate
    accounting for the loss is made

    2. Allowance Method or Loss Method


    a. The Inventory is measured at COST
    b. Any loss on writedown or gain on subsequent reversal of the same is accounted for separately.
    c. A valuation account, “Allowance for Inventory Writedown” is maintained
    d. “Loss on Inventory Writedown” increases Cost of Sales while “Gain on Reversal of Inventory Writedown” decreases
    Cost of Sales
    e. The amount of gain on reversal of writedown cannot exceed the cumulative amount of losses on inventory writedown
    previously recognized.

    Accounting for Purchase Commitments


    1. Purchase commitments are obligations of the entity to acquire certain goods sometime in the future at a fixed price and
    fixed quantity.
    2. No formal accounting entry is made upon signing of the purchase commitment. However, a note disclosure is required in
    the notes to FS.
    3. At year-end (FS preparation date), a Loss on Purchase Commitment and an Estimated Liability for Purchase Commitment
    are recognized if the current price is lower than the committed price. No entry is recognized if it is otherwise.
    4. At the time of actual delivery:
    a. The “Purchases” account is debited at the lower of the committed price and the current price
    b. The “Accounts Payable” account is credited always at the committed price
    c. Additional “Loss on Purchase Commitment” is to be recognized if the current price at the time of delivery is lower
    than the current price at year-end.
    d. “Gain on Purchase Commitment” shall be recognized if the current price at the time of delivery is higher than the
    current price at year-end. However, the amount of gain to be recognized should not exceed the losses previously
    recognized.

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