Professional Documents
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inventory
Inventories are assets: Following items should be included in inventory applying legal test:
a) Goods owned and on hand
(a) Held for sale in the ordinary course of business; b) Goods in transit and sold FOB Destination
c) Goods in transit and purchased FOB Shipping Point
(b) In the process of production for such sale; or
d) Goods out on consignment
(c) In the form of materials or supplies to be consumed in the e) Goods in the hands of salesmen and agents
production process or in the rendering of services. f) Goods held by customers on approval or on trial
EXCEPTION to Legal Test:
Net realizable value is the estimated selling price in the ordinary course of a) Goods sold on Installment Basis –ownership of buyer
business less the estimated costs of completion and the estimated costs b) Undelivered Customized Goods – ownership of buyer
necessary to make the sale.
Goods in Transit
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length F.O.B – Free On Board
transaction.
FOB Destination – ownership of goods is transferred only upon receipt of
goods by buyer at point of destination.
Classes of Inventories
a) Goods in Transit are property of seller.
Trading Concern (Merchandising Concern) is one that buys and sells goods in the b) Seller is legally responsible for freight charges.
same form purchased. FOB Shipping Point - ownership of goods is transferred upon shipment of
goods.
“Merchandise Inventory” is generally applied to goods held. a) Goods in Transit are property of buyer.
Manufacturing Concern is one that buys goods which are altered or converted into b) Buyer is legally responsible for freight charges.
another form before they are made available for sale. Freight Terms
Inventories in Manufacturing Concern Freight Collect – Freight charge is not yet paid by the seller. Thus, buyer
1. Finished Goods – completed products which are ready for sale. actually paid by the seller.
2. Goods in Process – partially completed products which require Freight Prepaid – Freight charge on goods shipped is already paid by the
further process of work before they can be sold. seller.
3. Raw Materials – goods that are to be used in the production process. NOTE: The terms FOB Destination and FOB Shipping Point determines the owner
4. Indirect Materials (Manufacturing Supplies) – supplies that are not and the party who is supposed to pay the freight charges while terms Freight
physically incorporate in products being manufactured. Collect and Freight Prepaid determines who actually paid the freight charges.
Goods includible in the inventory ACCOUNTING FOR INVENTORIES
“Passing of title” 1. Periodic System – relies upon an occasional physical count of the inventory
Legal Test to determine the ending inventory balance and the cost of goods sold.
2. Perpetual System – keeps continual track of inventory balances.
PERIODIC PERPETUAL GROSS METHOD NET METHOD
A. Purchase of merchandise on account, P300,000. Purchase of merchandise on account, P200,000. 2/10, n/30
Purchases 300,000 Inventory 300,000 Purchases 200,000 Purchases 196,000
Accounts Payable 300,000 Accounts Payable 300,000 Accounts Payable 200,000 Accounts Payable 196,000
B. Payment of Freight on Purchase, P20,000 CASE 1: Assume payment is made within discount period
Freight In 20,000 Inventory 20,000 Accounts Payable 200,0000 Accounts Payable 196,0000
Cash 20,000 Cash 20,000 Cash 196,000 Cash 196,000
C. Return of Merchandise Purchased to Supplier Purchase Discount 4,000
Accounts Payable 30,000 Accounts Payable 30,000 CASE 2: Assume payment is made beyond discount period
Purchase Return 30,000 Inventory 30,000 Accounts Payable 200,0000 Accounts Payable 196,000
D. Sale of Merchandise on account, P400,000, at 40% gross profit rate Cash 200,000 Purchase Discount Lost 4,000
Accounts Receivable 400,000 Accounts Receivable 400,000 Cash 200,000
Sales 400,000 Sales 400,000 CASE 3: Assume no payment is made within the year.
Cost of Goods Sold 240,000 NO ENTRY Purchase Discount Lost 4,000
Inventory 240,000 Cash 4,000
E. Return of Merchandise sold from customer, P25,000
Sales Return 25,000 Sales Return 25,000
Cost of Inventories
Accounts Receivable 25,000 Accounts Receivable 25,000
Inventory 15,000
Cost of Goods Sold 15,000
Costs of purchase
F. Adjustment of ending inventory Costs of conversion
Other costs incurred in bringing the inventories to their present location
Inventory, end 65,000 NO ENTRY
and condition.
Income Summary 65,000
Costs of Purchase
TRADE DISCOUNTS
The costs of purchase of inventories comprise the purchase price, import
Deductions from price in order to arrive at invoice price duties and other non recoverable taxes and transport, handling and other
Not recorded costs directly attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items are deducted in
CASH DISCOUNTS (PURCHASE DISCOUNTS) determining the costs of purchase.
Deductions from the invoice price when payment is made within discount
period.
Costs of Conversion
Recorded as sales discount by seller and purchase discount by buyer
Direct labor
Variable production overhead is allocated to each unit using the actual use
METHODS OF RECORDING PURCHASES of production facilities.
Fix production overhead allocated using the normal operating capacity of
1. GROSS METHOD – Purchases and accounts payable are recorded at gross.
production facilities.
2. NET METHOD - Purchases and accounts payable are recorded at net.
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. For example, it may be appropriate to include non-production
overheads or the costs of designing products for specific customers in the
cost of inventories.
Consigned Goods
Shall be excluded in the consignor’s inventory
Freight and other handling cost on goods out on consignment are part of cost of
goods consigned.