FAR SUMMARY: 2.

Cost, Insurance and Freight (CIF) - the buyer

agrees in the shipping contract to pay the CIF in a lump
CHAPTER 16- Inventories sum. Seller pays for the cost of loading.
3. Ex-ship - Seller bears all risks and expenses until
the goods are unloaded and in which title & risks shall
Inventories
pass to the buyer.
- are current assets held for sale that can be
classified into two categories:
Consignment of Goods
I. Manufacturing Concern - is a marketing method of transferring the physical
1. Finished Goods Inventory- completed products possession of goods from consignor to the consignee
2. Work-In-Process Inventory- partially completed without transferring ownership.
products for further processing - Still included in the consignor’s (owner’s) inventory
3. Raw Materials–are to be used in the production until sold
process. -excluded from the consignee’s (agent’s) inventory.
4. Factory/Manufacturing Supplies- indirect materials
Cost of goods consigned = cost + freight and handling charges
that are assigned as manufacturing overhead.
Note: When goods are sold, the consignee makes a
II. Trading Concern report & remittance. Likewise, the consignor records the following
1. Inventory held for resale- buy and sell of goods in entry:
the same form purchased.
Cash xxx
Goods Includible in the Inventory Commission/advertising expense xxx
- Where the entity has a “title” regardless of its Sales xxx
location.
Statement Presentation and Line Item
-Inventories are classified as Current Assets and
are presented as one line item in the SFP where details
shall be disclosed in the notes to FS.
Supplier ABC Company Buyer
• Goods owned and • goods purchased & Accounting for Inventories
• goods sold
& shipped on-hand shipped FOB 2 Systems:
FOB • goods out on Destination
1. Periodic (Actual) Inventory System- calls for the
Shipping consignement • goods held by
Point • goods in the hands approval /on trial. physical counting of goods on hand at the end of
of agents accounting period to determine quantities. It is
useful when individual inventories have small peso
Fig.1 Goods to be included in ABC Company’s Inventory
investment (E.g groceries).

Ownership of Goods in Transit Quantity x Unit cost = inventory value

- The transfer of ownership depends on two
categories:
1. FOB Destination- seller owns and is
responsible up to the point of destination.
2. FOB Shipping Point- buyer owns and pays
upon shipment.
Freight Terms
1. Freight Collect- freight charge is paid by the
buyer.
2. Freight Prepaid- freight charge is paid by the
seller.
Maritime Shipping Terms
1. Free alongside (FAS) - seller bears all risks and
expenses upon delivery of goods to the dock/alongside
the vessel of shipment. Title passes to buyer when
carrier takes possession of the goods.
2. Perpetual (Book) Inventory System- requires
maintenance of records called stock cards which
reflect both units and costs.
- Every movement of inventory are reflected in the
stock cards and the resulting balance represents the
inventory.
- It is useful when individual inventories have
relatively large peso investment (E.g cars).
Inventory Shortage/Overage
- happens when the physical count at year end
indicates a different amount.
- It is usually closed to COGS as a result of normal
shrinkage and breakage or as other expense if due
to abnormal/material shortage.
Inventory Shortage xxx
Merchandise Inventory xxx
Note: Overage is likewise closed to other income.

By: wjmm
Trade Discounts and Cash Discounts Purchases based on vendor’s invoices P
- Trade discounts - amount deducted from list 512,678
price in order to arrive at the invoice price- it is not Trade discounts already deducted from 12,678
recorded. vendor’s invoices
After-sales warranty costs 25,786
Cash discounts - amount deducted from rom invoice Brokerage commission paid to agents for 42,890
price upon payment within the agreed discount period. It is arranging imports
used to encourage prompt payment. Import duties 12,675
Freight and Insurance 28,365
*BUYER *SELLER Salaries of Accounting department 76,900
Other handling costs relating to imports 49,870
Purchases Sales
What is the total cost of purchase?_________________
-Purchase discount -Sales discount

Net Purchases Net Sales

Cost of Conversion
1. Direct labor
2. Overhead - are indirect costs incurred in
conversion that demands for allocation, classified
Method of Recording Purchases into:
a. Fixed- that remains relatively constant
1. Gross method- purchases and A/P are recorded
regardless of the production volume.
at gross.
E.g depreciation and maintenance of factory
2. Net Method- purchases and A/P are recorded at
building and equipment
net wherein the discount is already deducted.
b. Variable- varies directly with the production
volume.
Note: The gross method is supported on practical grounds
due to its convenience and usually produces no material error in E.g indirect labor and materials
FS if consistently applied over time.
Allocation of Fixed Production Overhead
Problem 1 - Allocated based on normal capacity (expected
List price P200,000 production on average normal periods considering the loss
Trade discount 15% & 10% of capacity). Unallocated FOH is expensed in the period in
Cash discount terms 3/10, n/30 which it is incurred.

1. What is the journal entry to record the purchase?
A. using gross method
B. using net method
2. Entry to record the payment if:
a. paid within the discount period – gross method
b. not paid within discount period-gross method
c. paid within the discount period- net method
d. not paid within discount period- net method
Cost of Inventories
1. Cost of Purchase
Purchase price less trade discounts/rebates
+Import duties and irrevocable taxes
+Freight
+Handling & other direct cost
*exclude foreign exchange differences
*Purchase subject to deferred settlement terms:
Interest expense= amount paid- price for normal credit terms
Problem 2
KTL Company has incurred the following costs in the year
2019:
Allocation of Variable Production Overhead
- allocated to each unit based on actual use of
production facilities.
Other Cost
- included in inventory cost only to the extent that it
is incurred in bringing the inventories in its present location
and condition.
The following are expensed when incurred:
1. Abnormal wastes (materials/labor and other
production cost)
2. Storage costs on finished goods
3. Administrative overheads
4. Distribution or selling costs
Cost of Inventories of a Service Provider
- consists primarily of labor and other person el
cost directly engaged in providing service.
- Its inventory may simply be described as work in
progress.
- Labor and cost related to sales and admin
personnel are expensed as incurred.

By: wjmm
ANSWERS TO PROBLEMS:
Problem 1:
1.
A. Purchases *153,000
Accounts Payable *153,000
*P200,000 x 85% x 90%= P153,000

B. Purchases *148,410
Accounts Payable 148,410
* P153,000 x 97%= P148,410

2.
A. Accounts Payable 153,000
Cash 148,410
Purchase discount * 4,590

*cash discount (153,000 x 3%)

B. Accounts Payable 153,000

Cash 153,000

C. .Accounts Payable 148,410

Cash 148,410

D. Accounts Payable 148,410

Purchase discount lost 4,590
Cash 153,000

Problem 2

Purchases based on vendor’s invoices P 512,678

Brokerage commission paid to agents for 42,890

arranging imports
Import duties 12,675
Freight and Insurance 28,365
Other handling costs relating to imports 49,870

TOTAL P 646,478

By: wjmm