PAS 2 Inventories

Inventories

1. Inventories are assets which are held for sale in the ordinary course of business, in the process of production for such
a sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services
2. FOB destination and shipping point determine ownership of goods and the party who is supposed to pay the freight
charge (Destination – seller ; Shipping point – buyer)
3. Freight collect and freight prepaid determine the party who actually paid the freight charge. (Collect – Buyer ; Prepaid
– seller)
4. FAS- free alongside. Seller bears all expenses and risk in delivering the goods to the dock. The buyer bears the cost of
loading and shipment and thus, title passes to the buyer when the carrier takes possession of the goods.
5. Consigned goods are recorded by the consignor by means of memorandum entry
6. Inventories shall be presented as one line item but the details of the inventories shall be disclosed in the notes to FS—
finished goods, goods in process, raw materials, and manufacturing supplies.
7. Inventory shortage is usually closed to cost of goods sold because this often the result of normal shrinkage. If
abnormal and material, shortage shall be separately classified and presented as other expense.
8. Net method( if the discount period has expired):
Purchase discount lost

AP

9. Gross method is more practical than net method. Net method has theoretical correct historical cost
10. Cost of inventories :
a. cost of purchase – includes purchase price, import duties, irrecoverable taxes, freight, handling and other
costs directly attributable to the acquisition of finished goods, materials and services
b. cost of conversion – refer to the costs necessary in converting raw materials into finished goods.
c. other cost in bring the inventories to their present location and condition.
11. Trade discounts, rebates and other similar items are deducted in determining the cost of purchase
12. When inventories are purchased with deferred settlement terms , the difference between the purchase price for
normal credit terms and the amount paid is recognized as interest expense over the period of financing.
13. Storage costs on goods in process are capitalized but storage costs on finished goods are expensed.
14. Abnormal amounts are expensed.
15. Cost of inventories of a service provider consists primarily of the labor and other costs of personnel directly engaged
in providing the service, including supervisory personnel and attributable overhead
16. Inventories are measured at the lower cost and net realizable value.

Cost Formulas – deal with the computation of cost of inventories that are charged as expense when the related revenue is
recognized. PAS 2 provides the following formulas:

1. Specific Identification – used for inventories that are not ordinarily interchangeable and those that are segregated for
specific projects.
2. First In First Out (FIFO) – under this formula, it is assumed that inventories that were purchased first are sold first.
3. Weighted Average – under this formula, cost of sales and ending inventory are determined based on the weighted
average cost of beginning inventory and all purchased inventories during the period.
A. Periodic Basis
B. Moving Average
Illustration 1.

Date Units Price per Unit Total Cost

Beginning Jan 1 4000 200 800, 000
Purchase Jan 4 3000 210 630, 000
P. Return Jan 6 (200) 210* 42, 000
Sales Jan 7 (3500)
S. Return Jan 8 500
Purchase Jan 28 2000 205 410, 000
*Purchase return = from latest purchase

Cost of Good Available for Sale (COGAS) = 800k + 630k + 410K – 42k
= 1, 798, 000

A. Specific Identification (*=should be given)

*Jan 7 Sales – 2000 (Jan 1)
– 1500 (Jan 4)

Solution: Jan 7 – 2000 x 200 = 400, 000

– 1500 x 210 = 315, 000
715, 000 – (500 x 210*) = 610, 000 – COGS (Cost of Goods Sold)
1, 798, 000 – 610, 000 = 1, 188, 000 – Ending Inventory

B. FIFO
Solution: Jan 7 Sales – 3500 x 200 = 700, 000
Sales Return – 500 x 200 = (100, 000)
600, 000 – COGS (Cost of Goods Sold)

1, 798, 000 – 600, 000 = 1, 198, 000 – Ending Inventory

C. Periodic Basis
Solution: 1, 798, 000 / 8800 (Units Available for Sale)
= 204. 32 – Weighted Average

3000 (3500 Sales – 500 S. Return) x 204.3182 = 612, 954.6 – COGS

1, 798, 000 – 612, 954.6 = 1, 185, 045.4 – Ending Inventory or
5800 (8800 – 3000) x 204.3182 = 1, 185, 045.56

D. Moving Average
Solution:
Date Units Cost per Unit Total Cost
Beg. Jan 1 4000 200 800, 000
P Jan 4 3000 210 630, 000
Jan 4 7000 204.2857* 1, 430, 000
PR Jan 6 (200) 210 (42, 000)
Jan 6 6800 204.1176 1, 388, 000
S Jan 7 (3500) 204.1176 (714, 411.6)
Jan 7 3300 204.1176 673, 588.4
SR Jan 8 500 204.1176 102, 058.8
Jan 8 3800 204.1176 775. 647.2
P Jan 28 2000 205 410, 000
5800 – E.I in 1, 185, 647.2 –
Jan 28 204.4219
Unit Ending Inventory

*Total Cost / Units = Cost per Unit (when you purchase or return a purchase)
COGS = 714, 411.6 – 102, 058.8
= 612, 352.8
Net Realizable Value (NRV) is the estimated selling price in the ordinary course of business, less the estimated cost of
completion and the estimated costs necessary to make the sale. [PAS 2.6] Any write-down to NRV should be recognized as
an expense in the period in which the write-down occurs. Any reversal should be recognized in the income statement in
the period in which the reversal occurs. [PAS 2.34]
 NRV is different from fair value. NRV refers to the net amount that an entity expects to realize from the sale of
inventory in the ordinary course of the business. NRV for inventories may not equal fair value less costs to sell
[PAS 2.7].

Expense recognition

PAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognized,
the carrying amount of those inventories is recognized as an expense (often called cost-of-goods-sold). Any write-down to
NRV and any inventory losses are also recognized as an expense when they occur. [PAS 2.34]

Disclosure
Required disclosures: [PAS 2.36]
 accounting policy for inventories
 carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods.
The classifications depend on what is appropriate for the entity
 carrying amount of any inventories carried at fair value less costs to sell
 amount of any write-down of inventories recognised as an expense in the period
 amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
 carrying amount of inventories pledged as security for liabilities
 cost of inventories recognised as expense (cost of goods sold).