INVENTORIES

What are included in inventory?

INCLUDED IN
TYPES OF GOODS INVENTORY?
Merchandise purchased and held for resale YES
Land and other property held for resale YES
Raw Materials YES
Goods in Process YES
Finished Goods YES
Factory or manufacturing supplies/ indirect materials YES
Goods owned and on hand YES
Goods in transit and sold FOB Destination YES
Goods in transit and sold FOB Shipping Point NO
Goods in transit and purchased FOB Destination NO
Goods in transit and purchased FOB Shipping Point YES
Goods out on consignment YES
Goods held on consignment NO
Goods in the hands of salesmen or agents YES
Goods held by customers on approval or on trial YES
Goods sold on installment NO
Goods bought on installment YES

What are the treatments of different costs?

COSTS TREATMENT
Purchase cost CAPITALIZED
Taxes CAPITALIZED
Import duties CAPITALIZED
Freight CAPITALIZED
Handling costs CAPITALIZED
Abnormal costs of wasted materials, labor and other production costs EXPENSED
Storage costs of Goods in Process CAPITALIZED
Storage costs of Finished Goods EXPENSED
Administrative overhead not directly attributable to inventory EXPENSED
Distribution/Selling costs EXPENSED

UNDERSTANDING FREIGHT

FOB Shipping Point FOB Destination Point

- Goods in transit are owned by the BUYER - Goods in transit are owned by the SELLER

- Buyer is responsible for freight charges and - Seller is responsible for freight charges and
other expenses up to the point of destination other expenses up to the point of destination
 Freight Collect Freight Prepaid
- Freight charge on goods is not yet paid - Freight charge is already paid by the seller
- Carrier shall collect payment from buyer

FOB Shipping Point FOB Destination Point

- Buyer should pay the freight - Seller should pay the freight
- Buyer paid the freight - Buyer paid the freight

Journal entries: (SELLER) Journal entries: (SELLER)

1. Initial Sale 1. Initial Sale
A/R xx A/R xx
Sales xx Sales xx’

2. Freight 2. Freight
Freight Collect No entry Freight out xx
A/R xx

Journal entries: (BUYER) Journal entries: (BUYER)

1. Initial Sale 1. Initial Sale
Purchases xx Purchases xx
A/P xx A/P xx

2. Freight 2. Freight
Freight in xx A/P xx
Cash or A/P xx Cash or A/P xx

- Buyer should pay the freight - Seller should pay the freight
- Seller paid the freight - Seller paid the freight

Journal entries: (SELLER) Journal entries: (SELLER)

1. Initial Sale 1. Initial Sale
A/R xx A/R xx
Sales xx’ Sales xx’

Freight Prepaid 2. Freight 2. Freight

A/R xx Freight out xx
Cash or A/P xx Cash or A/P xx

Journal entries: (BUYER) Journal entries: (BUYER)

1. Initial Sale 1. Initial Sale
Purchases xx Purchases xx
A/P xx A/P xx

2. Freight 2. Freight
Freight in xx No entry
A/P xx
Other Terms:
1. FAS or Free Alongside
a. SELLER – bears all expenses and risk in delivering goods to the dock next to or alongside
the vessel on which the goods are to be shipped
b. BUYER – bears the cost of loading and shipment.
 Title passes to buyer when carrier takes possession of the goods

2. CIF or Cost, Insurance and Freight

a. SELLER – pays for cost of loading
b. BUYER – pays for cost of goods, insurance and freight charge
 Title passes to buyer upon delivery of goods to carrier

3. Ex-ship
a. SELLER – bears all the expenses and risk until the goods are unloaded
b. BUYER – bears all the expenses and risk of delivering after the goods are unloaded in
the ship
 Title passes to buyer after unloading of goods

DISCOUNTS
1. Trade discounts
 Deductions from list price in order to arrive at the invoice price
 Invoice price – amount actually charged to buyer
 Given for bulk orders
 Not recorded
2. Cash discounts
 Deductions from invoice price when payment is made within the discount period
 Given to encourage prompt payment
 Recorded as either purchase discount or sales discount

Sample Problem:
List price of merchandise purchased is P500,000 less 20% and 10% with credit terms 5/10, n/30

 Trade discounts - 20% and 10%

 P500,000 less 20% less 10% = P360,000 (invoice price)
 Cash discount - 5/10, n/30 (meaning: cash discount of 5% if paid within 10 days from
date of purchase and no discount if beyond10 days until the 30th day)
 If paid within 10 days, discount will be P360,000 * 5% = P18,000

Accounts Payable 360,000

Cash 342,000
Purchase discount 18,000
Computation for Cost of Goods Sold
Beginning inventory xx
Add: Net purchases
Purchases xx
Freight in xx
Less: Purchase discounts (xx)
Purchase returns and allowances (xx) xx
Cost of Goods Available for Sale xx
Less: Ending inventory (xx)
Cost of Goods Sold xx