LESSON I.

INVENTORIES – PAS 2 states that Inventories are assets held for sale in the ordinary course
of business, in the process of production for such sale or in the form of materials or supplies to be consumed
in the production process or in the rendering of services.

As a rule, all goods to which the entity has TITLE (ownership) shall be INCLUDED in the INVENTORY,
regardless of location.

Goods to be included as INVENTORY:

a. Goods owned and on hand
b. Goods in transit and sold FOB DESTINATION (FOB Buyer)
c. Goods in transit and purchased FOB SHIPPING PINT (FOB Seller)
d. Goods out on consignment
e. Goods in the hands of salesmen or agents
f. Goods held by customers on approval or on trial
g. Goods PURCHASED on INSTALLMENT.

Freight Terms
1. FOB Destination – Seller should pay the freight. The title of the goods is transferred upon receipt
of the goods by the buyer at the point of destination.
2. FOB Shipping Point – Buyer should pay the freight. The title of the goods is transferred upon
shipment of the goods.
3. Freight Collect – Freight charge is actually paid by the buyer.
4. Freight Prepaid – Freight charge is actually paid by the seller.
5. FAS (Free Alongside) – Seller Dock Carrier
Seller Buyer
6. CIF (Cost, Insurance & Freight) – Title is transferred upon delivery of the goods to the carrier.
7. Ex -Ship – Title is transferred when the goods are unloaded.

Freight Terms Seller’s Point of View Buyer’s Point of View

FOB Destination, Freight Freight out xx
Prepaid Cash xx No entry
FOB Destination, Freight Freight out xx Accounts Payable xx
Collect Accounts Receivable xx Cash xx
FOB Shipping Point, Freight Freight – in xx
Collect No entry Cash xx
FOB Shipping Point, Freight Accounts Receivable xx Freight- in xx
Prepaid Cash xx Accounts Payable xx

Accounting of Inventories:

a. Periodic Inventory System

Beginning Inventory xx
Net Purchases:
Purchases xx
Purchase returns, discounts & Allowances (xx)
Freight – In xx xx
Goods Available for sale xx
Ending Inventory (xx)
Cost of sales xx
 b. Perpetual Inventory System – cost of sale can be computed immediately base on the entries

Formulas:
List Price xx
Trade discount (xx)
Invoice Price xx
Cash discount (xx)
Net Amount xx

Cost of Inventory:
*Cost of Purchase xx
Cost of conversion xx
** Other costs incurred that are necessary xx
Cost of Inventory xx

* Cost of purchase:
Purchase price xx
Import duties xx
Irrecoverable taxes xx
Freight xx
Handling xx
Directly attributable cost xx
Trade discount (xx)
Rebates (xx)
Cost of purchase xx

** Other costs – Incurred in bringing the inventories to their present condition. Example is storage of cost
on goods in process.

The following are cost/items that are expensed outright:

a. Abnormal cost c. Administrative overhead
b. Storage cost on Finished goods d. Distribution or selling costs