Acctg

Intermediate
Accounting 1
Acctg.

Inventories
by: Prof. Ernie D. Tano, CPA, MBA
Acctg
Nature of Account

PAS 2 – Inventories; and

PIC Q&A 2018 – Scope of disclosure of
inventory write-downs.
Acctg
Nature of Account

Inventories are assets held for sale in the

ordinary course of business, in the process of
production for such sales or in the form of
materials or supplies to be consumed in the
production process or in the rendering of
services.
Acctg
Nature of Account

Example of goods purchased & held for

resale:
a. Merchandise purchased by a retailer and
held for resale
b. Land and other property held for resale
by subdivision
Acctg
Nature of Account

Inventories are also:

a. Finished goods
b. Goods in process
c. Materials & supplies for use in
production
Acctg
Recognition

Goods includible in the inventory

As a rule, all goods to which the entity has

title shall be included in the inventory,
regardless of location.
Acctg.
Acctg
Recognition

Legal test
The following items are includible in inventory:
1. Goods owned and on hand
2. Goods in transit and sold FOB destination (FOB buyer)
3. Goods in transit and purchased FOB shipping point ( FOB
seller/Origin)
4. Goods out on consignment
5. Goods in the hand of salesmen or agents
6. Goods held by customers on approval or on trial
Acctg.
Acctg
Recognition

Legal test
Exception to the legal test
Installment contracts may provide for retention of
title by the seller until the selling price is fully
collected.
Economic substance prevailing over legal form
Acctg
Recognition

Goods in transit
FOB Owner of Goods Who shoulder Freight charges
FOB Shipping point (FOB origin BUYER BUYER
or FOB seller)
FOB Point of Destination (FOB SELLER SELLER
buyer)

Freight Terms Who paid the freight Charges

Freight Collect BUYER

Freight Prepaid SELLER
Acctg.
Acctg
Recognition

Consigned goods
A consignment is a method of marketing goods in which the owner
(consignor) transfer physical possession of certain goods to an agent
(consignee) who sells them on the owner’s behalf
Consigned goods shall be included in the consignor’s inventory and excluded
from the consignee’s inventory
Freight and other handling charges on goods out on consignment are part of
the cost of goods consigned
Acctg.
Acctg
Recognition

Goods Used as Collateral

Owned by borrower not the lender. The carrying amount of goods used as
collateral should be disclosed.
Acctg.
Acctg
Recognition/Derecognition

Goods Sold
Goods are excluded in the seller’s inventory if the transaction
qualifies for recognition as revenue.
Acctg.
Acctg

Illustration: Total inventory

ABC Co. provided you the following information for the purpose of determining the amount of its
inventory as of December 31, 20x1
Goods located at the warehouse (physical count) 3,800,000
Goods located at the sales department (at cost) 13,600,000
Goods in-transit purchased FOB Destination 1,600,000
Goods in-transit purchased FOB Shipping Point 2,100,000
Freight incurred under “freight prepaid” for the goods 60,000
purchased under FOB Shipping Point
Goods held on consignment from XYZ, Inc. 1,800,000
Total

Requirement: How much is the total inventory on December 31, 20x1?

Acctg.
Acctg

Illustration: Total inventory

ABC Co. provided you the following information for the purpose of determining the amount of its
inventory as of December 31, 20x1
Goods located at the warehouse (physical count) 3,800,000 3,800,000
Goods located at the sales department (at cost) 13,600,000 13,600,000
Goods in-transit purchased FOB Destination 1,600,000 -
Goods in-transit purchased FOB Shipping Point 2,100,000 2,100,000
Freight incurred under “freight prepaid” for the goods 60,000 60,000
purchased under FOB Shipping Point
Goods held on consignment from XYZ, Inc. 1,800,000 -
Total 19,560,000

Requirement: How much is the total inventory on December 31, 20x1?

Acctg.
Acctg
Measurement

In accordance with PAS 2. inventories are required to be

measured at the lower of cost and net realizable value (NRV)
Acctg.
Acctg
Measurement

Items Included in Cost

The cost of inventories comprises all:
1. costs of purchase,
2. cost of conversion and
3. other costs incurred.
Acctg.
Acctg
Measurement

Costs of Purchase

1. Purchase price;
2. Import duties & non-refundable purchase taxes; and
3. Transport, handling and other costs directly attributable
to the acquisition of finished goods, materials and
services.
Acctg.
Acctg
Measurement

Costs of Conversion
Costs of conversion are costs incurred to convert materials
into finished goods.
Acctg.
Acctg
Measurement

Items not included in Cost

1. Unallocated overheads
2. Abnormal amount of wasted materials, labor
3. Storage costs, unless necessary in production
4. Administrative overheads
5. Selling costs
6. Foreign exchanges differences
Acctg.
Acctg
Measurement

Recognition as Expense

1. The carrying amount when inventories are sold

2. The amount of write-down of inventories to NRV
3. All losses of inventories
Acctg.
Acctg

Illustration: Cost of Purchase

ABC Co., a VAT payer, imported goods from a foreign supplier and incurred the following costs:
Purchase price 100,000
Import duties 10,000
Value added tax 13,000
Transportation and handling costs 5,000
Commission to broker 2,000
Total 130,000

Requirement: How much is the cost of purchase of the imported goods?

Acctg.
Acctg

Illustration: Cost of Purchase

ABC Co., a VAT payer, imported goods from a foreign supplier and incurred the following costs:
Purchase price 100,000 100,000
Import duties 10,000 10,000
Value added tax 13,000 -
Transportation and handling costs 5,000 5,000
Commission to broker 2,000 2,000
Total 130,000 117,000

Requirement: How much is the cost of purchase of the imported goods?

Acctg.
Acctg

Illustration: Cost of Purchase

ABC Co., a VAT payer, imported goods from a foreign supplier and incurred the following costs:
Purchase price 100,000 100,000
Import duties 10,000 10,000
Value added tax 13,000 -
Transportation and handling costs 5,000 5,000
Commission to broker 2,000 2,000
Total 130,000 117,000

Requirement: How much is the cost of purchase of the imported goods?

Inventory 117,000
Input VAT 13,000
Cash 130,000
Acctg.
Acctg
Measurement

Costs of Purchase

1. Purchase price;
2. Import duties & non-refundable purchase taxes; and
3. Transport, handling and other costs directly attributable
to the acquisition of finished goods, materials and
services.
Acctg.
Acctg
Measurement

Cost Formula

1. Specific Identification
2. FIFO
3. Weighted Average
Acctg.

Sample Problem
Illustration: Problem 11-1
Bronze Co. had the following transactions relating to inventory during Jan:

Unit Cost Unit

Jan. 1 Balance on hand 150 6,000
5 Purchase 200 2,000
10 Sale 4,000
15 Sale 1,000
20 Purchase 300 2,500
25 Purchase 400 2,000
31 Sales 3,000

Determine the ending inventory under FIFO and Weighted average - periodic
Acctg.

Sample Problem
Illustration: Problem 11-1
Bronze Co. had the following transactions relating to inventory during Jan:
Unit Cost Purchases Sales Balance
Jan. 1 Balance on hand 150 6,000
5 Purchase 200 2,000 8,000
10 Sale 4,000 4,000
15 Sale 1,000 3,000
20 Purchase 300 2,500 5,500
25 Purchase 400 2,000 7,500
31 Sales 3,000 4,500

Determine the ending inventory under FIFO and Weighted average - periodic
Acctg.

Sample Problem
Illustration: Problem 11-1

Determine the ending inventory under FIFO and Weighted average - periodic

Ending inventory under FIFO

Unit Unit Cost Amount

2,500 300 750,000
2,000 400 800,000
Ending inventory under FIFO 1,550,000
Acctg.

Sample Problem
Illustration: Problem 11-1

Determine the ending inventory under FIFO and Weighted average - periodic

Ending inventory under Weighted Ave. - periodic

Unit Unit Cost Total

Jan. 1 Balance on hand 6,000 150 900,000
5 Purchase 2,000 200 400,000
20 Purchase 2,500 300 750,000
25 Purchase 2,000 400 800,000
TGAS 12,500 228 2,850,000

Ending inventory 4,500 228 1,026,000

Acctg.
Acctg
Measurement

Net Realizable Value (NRV)

NRV 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
Acctg.

Measurement of inventory

PAS 2, par 9, provides that inventories

shall be measured at lower of cost and net
realizable value (LCNRV).
Acctg

Cost of inventories may not be recoverable under the following

circumstances:

a. The inventories are damaged.

b. The inventories have become wholly or partially
obsolete.
c. The selling prices have declined.
d. The estimated cost of completion or the estimated
cost of disposal has increased.
Acctg.

Accounting for inventory writedown

To recognize or not

Cost < NRV Not Recognize

> Recognize

The practice of writing inventories down below cost to net

realizable value is consistent with the view that assets shall
not be carried in excess of amounts expected to be realized
from their sale or use
Acctg.

Accounting for inventory writedown

Methods

a. Direct Method or Cost of Goods sold method

b. Allowance method or loss method

Acctg.

Accounting for inventory writedown

Problems 12-1

The inventory of Horny Company at the end of the current year is to be recorded at the lower of
cost and net realizable value.
Item Units Cost Estimated Cost of
sales price sell
A 1,000 120 180 30
B 1,500 110 140 20
C 1,200 150 170 30
D 1,800 140 190 30
E 1,700 130 200 40

Determine the inventory value applying the lower of cost and net realizable value
Acctg.

Accounting for inventory writedown

Problems 12-1

The inventory of Horny Company at the end of the current year is to be recorded at the lower of
cost and net realizable value.
Item Units Cost Estimated Cost of NRV
sales price sell
A 1,000 120 180 30 150
B 1,500 110 140 20 120
C 1,200 150 170 30 140
D 1,800 140 190 30 160
E 1,700 130 200 40 160

Determine the inventory value applying the lower of cost and net realizable value
Acctg.

Accounting for inventory writedown

Problems 12-1

The inventory of Horny Company at the end of the current year is to be recorded at the lower of
cost and net realizable value.
Item Units Cost Estimated Cost of NRV
sales price sell
A 1,000 120 180 30 150
B 1,500 110 140 20 120
C 1,200 150 170 30 140
D 1,800 140 190 30 160
E 1,700 130 200 40 160

Determine the inventory value applying the lower of cost and net realizable value
Acctg.

Accounting for inventory writedown

Problems 12-1

The inventory of Horny Company at the end of the current year is to be recorded at the lower of
cost and net realizable value.
Item Units Cost Estimated Cost of NRV LCNRV
sales price sell
A 1,000 120 180 30 150 120,000
B 1,500 110 140 20 120 165,000
C 1,200 150 170 30 140 168,000
D 1,800 140 190 30 160 252,000
E 1,700 130 200 40 160 221,000
926,000

Determine the inventory value applying the lower of cost and net realizable value
Acctg.

Accounting for inventory writedown

Problems 12-1

The inventory of Horny Company at the end of the current year is to be recorded at the lower of
cost and net realizable value.
Item Units Cost Total Cost Estimated Cost of NRV LCNRV
sales price sell
A 1,000 120 120,000 180 30 150 120,000
B 1,500 110 165,000 140 20 120 165,000
C 1,200 150 180,000 170 30 140 168,000
D 1,800 140 252,000 190 30 160 252,000
E 1,700 130 221,000 200 40 160 221,000
938,000 926,000

Determine the inventory value applying the lower of cost and net realizable value
Acctg.

Accounting for inventory writedown

Problems 12-1

The inventory of Horny Company at the end of the current year is to be recorded at the lower of
cost and net realizable value.
Item Units Cost Total Cost Estimated Cost of NRV LCNRV
sales price sell
A 1,000 120 120,000 180 30 150 120,000
B 1,500 110 165,000 140 20 120 165,000
C 1,200 150 180,000 170 30 140 168,000
D 1,800 140 252,000 190 30 160 252,000
E 1,700 130 221,000 200 40 160 221,000
938,000 926,000

Determine the inventory value applying the lower of cost and net realizable value
Acctg.

Accounting for inventory writedown

Problems 12-1

Direct Method

Inventory, end 926,000

Income Summary 926,000

Allowance Method

Inventory, end 938,000

Income Summary 938,000

Loss on inventory writedown 12,000

Allowance for invty. writedown 12,000
Acctg.
Acctg
Transactions

Transactions Affecting Inventories

Increase Decrease No Effect
Purchases
Purchase Returns
Received from consignors
Transferred to consignees
Sales
Sales – received from consignors
Sales - consignees
Sales returns – in good condition
Sales returns – unsalable
Acctg.
Acctg
Transactions

Transactions Affecting Inventories

Increase Decrease No Effect
Purchases X
Purchase Returns X
Received from consignors X
Transferred to consignees X
Sales X
Sales – received from consignors X
Sales - consignees X
Sales returns – in good condition X
Sales returns – unsalable X
Acctg.

Statement Presentation

Inventories are classified as current assets

The inventories shall be presented as one line item in the statement

of financial position

Disclosure
Details of the inventories shall be disclosed in the notes to
financial statements.
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

Requirement: Determine the adjusted balances of (1) inventory and (2) accounts payable as of
December 31, 20x1.
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

a. Merchandise costing P10,000, shipped FOB shipping point from a vendor on December 30,
20x1, was received and recorded on January 5, 20x2.
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

a. Merchandise costing P10,000, shipped FOB shipping point from a vendor on December 30,
20x1, was received and recorded on January 5, 20x2.

Inventory Accounts Payable

Unadjusted balances 160,000 100,000
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

a. Merchandise costing P10,000, shipped FOB shipping point from a vendor on December 30,
20x1, was received and recorded on January 5, 20x2.

Inventory Accounts Payable

Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

b. A package containing a product costing P50,000 was standing in the shipping area when the physical
inventory was conducted. This was not included in the inventory because it was marked “Hold for
shipping instructions.” The sale order was dated Dec. 17 but the package was shipped & the customer
was billed on Jan. 3, 20x2
Inventory Accounts Payable
Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

b. A package containing a product costing P50,000 was standing in the shipping area when the physical
inventory was conducted. This was not included in the inventory because it was marked “Hold for
shipping instructions.” The sale order was dated Dec. 17 but the package was shipped & the customer
was billed on Jan. 3, 20x2
Inventory Accounts Payable
Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
b. Unshipped goods not counted 50,000 -
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

c. Goods in the shipping area were included in inventory because shipment was not made until January
4, 20x2. The goods, billed to the customer FOB shipping point on December 30, 20x1, had a cost of
P20,000.

Inventory Accounts Payable

Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
b. Unshipped goods not counted 50,000 -
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

c. Goods in the shipping area were included in inventory because shipment was not made until January
4, 20x2. The goods, billed to the customer FOB shipping point on December 30, 20x1, had a cost of
P20,000.

Inventory Accounts Payable

Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
b. Unshipped goods not counted 50,000 -
c. Unshipped goods counted - -
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

d. Goods shipped F.O.B. destination on December 27, 20x1, from a vendor to ABC Co. were received
on January 6, 20x2. The invoice cost of P30,000 was recorded on December 31, 20x1 and included in
the count as “goods in-transit.”

Inventory Accounts Payable

Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
b. Unshipped goods not counted 50,000 -
c. Unshipped goods counted - -
Acctg.

Illustration: Correct inventory & accounts payable

On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account determined
through physical count and a balance of P100,000 in its accounts payable account. The balances
were determined before any necessary adjustment:

d. Goods shipped F.O.B. destination on December 27, 20x1, from a vendor to ABC Co. were received
on January 6, 20x2. The invoice cost of P30,000 was recorded on December 31, 20x1 and included in
the count as “goods in-transit.”

Inventory Accounts Payable

Unadjusted balances 160,000 100,000
a. Purchase on FOB shipping pt. 10,000 10,000
b. Unshipped goods not counted 50,000 -
c. Unshipped goods counted - -
d. FOB destination improperly included (30,000) (30,000)
Adjusted balances 190,000 80,000
Acctg.

End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition by: Zeus
Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:

Conrado T. Valix, et.al

Intermediate Accounting 1, 2022 Edition by:

Reynaldo Ocampo