Goode, with an invoice cost of P80,000, received from + Gonds with tan December Sk 2049, were recorded tava ressving report dated January 2, 2020. ‘The goods were nat included inthe physical count but ‘Bes rds attain count pale on Beceser 51,2018, Goods received from a vendor on December 26, 2019 were {included in the physical count However, the related P60,000 vendor invoice was not included in accounts payable on December 31, 2019 ‘Because the accounts payable copy of the receiving report ‘was lost On January 10, 2020, « monthly freight bill n the amount ‘of P20,000 was received. The bill specifically related to Imerchandiee purchased in December 2019, one-half of ‘Which was still in the inventory on Devember $1, 2019. ‘The freight charge was not included in either the inventory or in accounts payable on December 31, 2019. |. What is the eorzest amount of inventory? 1,888,000 1111,000 17886,000 1,925,000 eege What is the correct amount of accounts payable? a. 1,890,000 1,280,000 © 1,280,000 4. 11270,000 ‘What is the correct amount of net sales? a. 8,460,000 . 8.500.000 ©. 8.465.000 8,425,000, 280 CHAPTER 11 INVENTORY COST FLOW ‘TECHNICAL KNOWLEDGE ‘Toidentfy the cost formulas required by IFRS. ‘Toopply the FIFO cost formula. Toapply the weighted average cost formula. To apply the moving average cost formula. ‘To.apply the specific identification method. 281Miusteation ~ FIFO Cost formulas ‘ollowing date pertain to an inventory item: PAS 2, paragraph 25, expressly provides that the cost of ol es Srey inventories shall be determined by Using ether: Unie Sales Units Gort Total cost (uns) ‘a. Firtin, First out Jan | Reponingbalance 860 200160000 . avers é fa 1b Weighted average 1 Racha mo 210 147,000 ‘The standard does not permit anymore the use ofthe last 4 Patehase so 229 110.000 in first out (LIFO) as an alternative formule in measuring ‘The ending inventory is 700 unit, coat of inventories First in, First out (FIFO) FIFO - Periodic Tyee tant Toes The FIFO method aounes tha “the grt tt puchaed | fendaniepuce Ua Unset Totals Naeatin gamete | eintkas B B Fae eran = mi, ase Coat of goods sold In other words, the FIFO is in accordance with the ordinary « Ree eee | eee Re aeheea BOR SE cone ‘he lan“ cme, Bs wi rear ae The nuts thus expensed in terms of eon or new prices eet of goods ie ttt pe eo ro. eaeat ‘This method favors the statement of financial postion in that ‘This requires the preperation of stock card the inventory is stated at current replacement cost ‘The objection to the method is that there is improper me Unite cont Toott matching of cost against revenue because the goods sod are 7 stated at earlier or older prices resulting in understatement cot 0200 ens00 of cost of sales, ® 00 m0 100.000 300 200,000 ‘Accordingly, in a period of inflation or rising prioes, the FIFO ee mo cong HE 3 ean 229 19000 Ho 2000 ‘method would result to the highest net income. However, in a period of deflation or declining price, tbe FIFO method would result the lowest net income 282 nsNOTA BENE [Note well that under FIFO-periodic and FIFO-perpetual, the Inventory coote are the same, Ta both eases, the January 31 ventory is PI52,000. "The cast of goods cold is determined from the stock card ay follows January 8 cle 100000 "2 tale (60,000 + 105,000) 13.00) Contet gods old 286.000 Weighted average - Periodic ‘The ont ofthe beginning inventary plus the total cst of purchases dling the period i divided bythe total units purchased ps those in the beginning inventory to gota weighed average wt cost. ‘Such weighted average unit otis then multiplied by the units on ‘Rand to derive the snventory value. In other words, the average unit cost is computed by dividing the total cost of goods available forsale by the total number of unite avoidable for sale. The precoding illustrative data are used. Unite Unit cost Total cost Jian, 1 Bosinninghalance 800200, 18 Purchase mm = 20 1 Purchase pn) Total goods valable forsale 2,000 Weighted average anit cost (417,000/2,000) Inventory cost (700 5208.50), Cost of goods sold Investory-Jenuary 1 reno Purchasee 257,000 onda avaiable forsale 437,00 Inventory- January 31 5350) Coat goed ald 271.050 ‘Weighted average - Perpetual When used in conunction with the perpetual system, the weighted average method is popuanly known as the roving average method. PAS 2, paragraph 27, provides that the weighted average may be calculated ona peri basis or as ench additonal shipment BF revived depending upon the Greamstances ofthe entry. ‘Under this method. «new weighted average unit cost must be computed ofter every purchase and purchase Peturm. ‘Thus, the total cot of good available after every purchase and purchase return is divided by the total units svalable for sale Et this time to get a pew weighted average unit cost Such nese weighted average uit cost i then multiplied by the fants on hand to get the inventory ost ‘This method requires the Keeping of inventory stock card in frder to monitor the "moving unt est afer every purchase Unit cost Total cost 200 fee x aot) 20 Bo a a = zo new weighted average unit cost is computed Observe that aftr every purchase “Thus, after the Janvary 18 purchase, the total cost of P207,000 Bdided by LOO units to get a weighted average unit cost of Paz “Aker the January 31 purchase. the total cost of P151.400 is divided by 700 units to get a new weighted average unit cost of P2I6. 28Cost of goods sold from the stock card daausry 8 Se 100,000, ‘2 Sale 365.60 (ox of gpl ‘The argument forthe weighted average method is that it io relatively easy t apply, especially with computers. Moreover, the weighted average method produces inventory valuation ‘hat approximates current valu if there is a rapid turnover of inventory. ‘The argument against the weightod average method is thet there may be considerable lag between the current cost and inventory valuston singe the average unit cost involves early purchases. Last in, First out (LIFO) ‘The LIFO method assumes that "th goods last purchased are first sold” and consequently the goods remaining in the inventory atthe end ofthe period are thoe fist purchased oF produced, ‘The inventory is thus expresed in terms of earlier or old pices ‘and the cos of goods sold is representative of recent or new pres. ‘The LIFOfavorathe income statement because thereis matching of current cost aginst current revenue, the cost of goods Sold ‘being expressed in terms of eurrent or recent exo ‘The objection ofthe IFO is that the inventory i lated ateariae oF older prices and therefore there may be a significant 186 between inventory valuation and current replacement cos Moreover, the use of LIFO permits income manipulation, such sr ose mt ero atte aaeconarenn ‘the best interest of i the ent. eee Actually, in a period of rising prices, the would SRE ete orn EAGSoL es oacighe er 16 LIFO - Periodic In the preceding illustration, the cost of 700 units under the LIFO is computed as follows + Unita Unit cost Total cost ‘Prom January Lbalance” — 700200 1404 cost of goods sold under LIFO ~ periodic Iaventry January 1 LIFO - Perpetual ‘This requires the preparation of stock card. Note well that LIPO-periodic and LIFO-perpetual differ in inventory value. Under LIFO periodic, the January 31 inventory is P140,000 dal ander LIFO perpetual, the January 31 inventory is 150,000, 287Another illustration Unite Unit cost Total cout Jan 1 Betlaningtalance 9000 01,000.00 10 Purchase Soo 250250000 1S Se 3000) 1G Salerotura ooo. 50 Purchase rée00 "160 24000000 BI Purchase retarn (2000 180300000 Bring alone 18600 FIFO - whether periodic or perpetual Units Unit cost Total cost Jian, 10 Purchase ‘4000 250 1.000000 SD Purchase 14000 5021000000 ‘The Janvary 90 purchase of 16,000 units i reduced by the purchase run f 2 unt ont purchase of 100 nt Neth nde 1 petal tn ern of 100 a on danary 16 would te cote back to inventory atthe purchase unit cost of P250 before the sale. SS Moving average - Perpetual alte 500 7 Unit cost Total cost jan. 1 Betioninghalance 10 Purchase “acon Balenoe a Se Balan 16. Saleretarn Balance 0 Purchase Balance 31 Purchase return lesley lgeles s 1 150 28 Weighted average - Periodic Units Unit cost Total cost Jan 1 Beginningbalance — 5000 200—_1,000,000 10 Purchase 000 80 1.280.000 20 Purchase seo 1502400000 SI Purchase eture (2000 150 (_ 300,000) 24000 “380.000 Weighted everage uit cost (P4950,000/24.000 unit) 18128 ‘conf ending inventor (1,000 x 181.25) Specific identification ‘Specific identification means that specific costs are attributed, te identified items of inventory “The cost of the inventory ie determined by simply multiplying the unite on hand by their actual anit ost, ‘This requires records which will clearly determine the actual cote of goods on hand. ‘PAS 2, paragraph 28, provides tht this method i appropriats for inventories that are eegregoted for @ specific project and inventories that are not ordinarily interchangeable, "The specific identificetion method may te used in either periodic cor perpetual inventory estem. this method is that the low of the ‘Tho major axpuent fr is with the actual physical flow of inventory cost corresponds goods, ‘With specific identification, there is an actual determination of cost of unit sld and on hand ‘The mojor anrument agains tia method is thet ii very costly to implement even with high-speed computersStandard costs Standard costs are predetermined product costs established ‘on the basis of normal levels of materials and supplies, labor, ficiency and capacity utilization, Observe that a standard cost ia predetermined and, once determined, is applied to all inventory movements ~ inventories, goods available forsale, purchases and goods sold ‘oF placed in production. PAS 2, paragraph 21, states that the standard cost method may be used for convenience if the results approximate cot However, the standards sot shouldbe realistically attainable ‘and are reviewed and revised regularly in the light of current conditions, Standard costing is taken upin «higher seeounting course and fs not discussed further in this book. Rel sales price method ‘When diferent commodities are purchased ata lump sum, the single cost is apportioned among the commodities based on their respective sales price. This i baaed on the philosophy ‘that cost is proportionate to selling price For example, products A, B, and C are purchased at “basket price” of P3,000,000. Assume that the said products have the following sales price: A P500,000, B P 1,600,000, and C'P2,000,000. Computation of cost of each product Product A. 500,000 15/50. 3,000,000 300,000 Product B 1,800,000 18/50x 3,000,000 200,000 Product 3,000,000 30/50 3,000,000 _1,800.000 _Sooosta QUESTIONS 1. What ae the cost formas in meaning the cot inentny? 2. Explain FIFO. 4. Baplain weighted everage method. 4 Bolain moving werage method 4. Explain specific identification 6. When is specific identification method appropriate in determining cost of inventory? 1. Explain LIFO. {Is LIFO allowed in aieesuring the cost of inventory, 9, Explain standard costs 10. Explain the relative aales price method of allocating inventory cost 291PROBLEMS Problem 11-1 (IAA) ‘Bronce Company had the following transactions relating to ventory during Janvaly: Unite Unit Cout aren seco son) eo 20 io ge ite 3 Rica ise wo 8 Reda Bio kn aS seco Determine the ending inventory under each ofthe following coating methods 1. FIFO 2, Weighted average method ~ periodic Problem 11-2 (ACP) Farlough Company began operations at the beginning of Fare yeat with 10.008 une of merchandise with uni cost P80. Burchases forthe current year follow: LotNo. Units Unit cost 1 2000 100 2 000 110 5 8.000 120 4 9.500, 100 3 14500 90 The phy inventory revealed 15,000 unit on hand at yearn Required: Compute iventory cost at yearend and cost of goods eold for the year flowing each Sethod listed below. 1. FIFO - periodic 2 Weighted average - periodic 2. Spiisienenon (nung verry com Pascoe vic a Problem 11-3 (IAA) ‘Emece Company provided the following information relating to inventory for the month of December: Unite Unit cost Unit selling price Dec 1 Beginning «1000082 1 Purchase 3000 2 Sie 20000 » 11 Pochae O00 22 Parca 9000 8 Se T9000 * Required: Assuming the entity used the period system, compute the December 31 inventory and cost of goods sold under: 1, FIFO 2. Weighted average Problem 11-4 (LAA) Grose Company provided the following purchases and sales forthe month af March: Units Unit cost March 1 Beginning 1.000 0 6 Purchase coo 230 1 Purchase 000 2 2% Purchase ‘000 210 March 9 Sle 2000 ‘1 Sale 8.000 Required: Assuming the entity used perpetual system, compute ending inventory and cost of ales under: 293Problem 11-5 GAA) ‘Teagie Company provided the following data for purchasey and vale Parchaser Seles Units Unit cot Coat Unite Reverse so = a000 4000 s0aE0 am $1000 30.000 15000 0m 20.000 Required: Compute the gross income for 2019 assuming a FIFO coet formula. Problem 11-6 (IAA) Extreme Company showed the following information: Unite Unit cort Total cost, Anatry 1 Begining 100000 40,000 at Se ‘3000 1 Purchawe 150080 730,000 Sat Soe 1800 ‘etter "1 Purchawe 25000 1.50000 Deter at Sale ooo Required: Compute the cot of the ending inventory and cost of sales sing a. FIFO - periodic b. Weighted average © Moving average yy Problem 11-7 ((AA) Slack Company provided the flowing inventory information ‘Rintng to television ses forthe rect year: Unite Unit cost January 1 Inventory on band 0 2300 feat 5 Purchase = Sc 1 Purchase E} ooo ‘The entity sold 700 TV sets during the year A physical count TeDecearber 31 indicated that 300 TV aes are oa hand. Required: Assuming thatthe entity used the periodic inventory systom, ‘Sompute the ens ofthe ending inventory andthe cost of goods Said using FIFO and weighted average Problem 11-8 (IAA) Harbinger Company aells¢ new product. During a move to 8 few location, the inventory records forthe product were rmisplaced. ‘The bookkeeper has been able to gather some information {fom the purchases and sales records. The July purchases sre as follows: Quantity Unit cont Total cont ‘On July 81, 15.000 units were on hand, The sales for July oun io Be ana oH tom ua FLOOR wt lion Company has alway used «periodic FIFO inventory costing fyuten Grose profit on sala for July wes P2400, 000. Required: Compute the coat ofthe inventory on July 1 295Problem 11-9 (AICPA Adapted) Narra Company used the FIFO cost flow method in ‘measuring raw material inventory However, weighted average costs are used in valuing annual ‘incremental layers. Composition ofthe December $1, 2018 inventory: Weighted vera Unite unit cost Total cost Beseyearinventry 201 900010000000 Rireoenalloyer” 2017 300) 100.000 incemeualloyer 2018 2000S _ 250.000 Ivetay, December 81,2018 14000, 1.480.000 2019 Mar. 1 4,800 unite were purchased at a unit cost of P15 for P548,000. Sept. 1 1,200 units were purchased at a unit cost of P140 for P1008,000. A total of 15,000 units were used for production in 2018. 2020 Jen, 10 7500 units were purchased at a unit cost of P14 for P1,087,500. May 10, 5,500 units were purchased at a unit cost of PISS for P852,500, Dec. 29 7,000 units were purchased at a unit cost of P160 {for P1,120000. A total 16,000 unite were used for production during 2020. Required: 1. Inventory « December 31, 2019 2 Raw materials used for preduction during 2019 3. Inventory - December 31, 2020, 4 Raw materials used for production during 2020 Problem 11-10 (LAA) ‘Apitong Company made two different schedules of gross {neome forthe quarter ended September 30° Schedule Schedule ‘aes P10 per uit) 200.000 2.800.000 Cosofgnade aa 168.000 00 (Gross income 1,64,500 "The computation of cot of gods sold in euch schedule is based on the following date: Beginning inventory-July 1 400.00 Purchase: July 25, ‘6000 Purenare August 25 Soe s00 Purchase September a0 Purchase September 25, S000 Avlable forsale Required: [entity the inventory cost method used in preparing the two sehedules of gross income, Problem 11-11 (IAA) Creature Company which used the periodic inventory system provided the following transsetions for June: Purchases Seles June 1 $000 at 900 June 32900 at 500 47500 a sou 9 6500 st 500 3 = S000 at 5s 8 = 2% Goo st 550 a 0 Bm 4500 st eo SO 2500 ae 318 Required: Compute the cost of ending inventory under FIFO and average method, 297Problem 11-12 0A) Harlot Company began operations on January 1, 2018 and ranted the weighted average method of inventory pricing sm am Sie ‘300,000 4210000 ono 1300000 20000 Groaincowe 1.500.000 2.400.000, Expres 0.00 4.000660 Netincome 700.000 s.a00.000 Comparative inventory amount Welghtadaverage FIFO December 31,2019 70,000 20000 Deowsber 1, 2020, 5.000 s.000 December 31,2021 0.000 00 Required: Revise the condensed comparative income statement, touring the entity weed the FIFO method. Problem 11-13 (IAA) Rocky Company provided the following inventory data for Samuaey: Unite Unit cort January 1 Balas co 0 9 Pascave 1800 Bo 2B Purchase ‘so ao ‘The entity used the periodic aystem and determined the inventory on January 81 at 760 units. Required: Compute the cost of ending inventory under FIFO and Aetermine the cont of goode elds under average method. Problem 11-14 (AICPA Adapted) Landmark Company purchased a tract of unimproved land for P26/850,00. The land was improved and subdivided into fesidontal lee at a coet of Pa3.600,000. “These lots were all ofthe same size but owing to diflerences in location were offered for sale at different prices a8 follows Group Noveflots Sales price per lot 1 » 3,000,000, 2 0 200.000 3 0 3.000,000 Lots unsold at the end of the year are Group 2 ‘Ste Group 2 4 ote Group 9 Bote Required: Compute the cot of unteld lots atthe end ofthe year. Problem 11-16 (IAA) ‘Solid Company purchased a plot of ground for P18,000,000. ‘The entity also paid an independent appraiser for the land the amount of P500,000. The lend was developed as residential Tota ata total ene of P&i,500,000. The lots were aesifed as follows Number of lots Sales price per lot Highland 2 1,000,000 0 "750,000, 100 500,000 Required: . Compute the total cost of each lt clasiication,Problem 11-16 AA) Massive Company provided the flowing information for thy current year Unite Unit cost Total cost mo 1.500 stan fo 1750 Bom mo 2000 1000009 nancy 1 Tventry on an ped” 3 Purhone (CEoter 1 Purchase ‘The entity sold 400 units on June 28 and 400 on December I What is the weighted average cost of the inventory sat year-end? 1. 350,000, 00,000 730,000 4. 365,000, Problem 11-17 (IAA) Jaifbird Company provided the fllowing data about the inveotory for the month of January: Unit cost Total coxt Oi Ji, 1 Bosnming 16000 4O_—_2.240000 5 Parca ‘sm 180 ‘io00 0 Sao 1500 15: areas 2a 1g 8.200000 18 Purtaseretura “too 160 ea000 2 se 000 28 Silertum 4000, St Parcs ahico so 4500000 What ie the moving average cost of the inventory on January 31? a 7625.00 7500000 ©. 7690000: 7.330.000 300 Problem 11-18 (AA) ‘Yakal Company reported that « Dood recently destroyed pany ofthe Gnancal corde The entity used an average ost inventory valuation. ‘The entity made a physical count atthe end ofeach month in Grier to determine monthly ending inventory value. By exemining various documents, the following data are gathered: 60.000 units nding inventory at July 31 ‘otal coo nse avaable erase in duly 1482100 (ostof good sold during July Tet 100 (Cost of Beginning ventory, July 1 00 per nit (Grows pofit on aales or July ‘35.000, Unite Unit cost Total co fly 5 510 280.00 ” 500 265.000 6 830 16 530 ‘otal purchases 20,000 1, What isthe numberof units on July 1? a 102,500 b 140,000, 76500 60,000 2, How many units were sold during the month of July? a. 242,500 140,000 «302500, 250,000 18, What ie the cot of th inventory on July 31? 8. 288,000 &. 410000, «312600 @. 240,000 301Problem 11-19 (AICPA Adapted) [At the beginning of the evrrent year, Diamond Company Purchased tractofland for P12.000,000, The entity inured i Sot of £000,000 during the remainder ofthe dividing the land for vale Of the tract acreage, 70% was subdivided into residential [Btatnd 90% wee conveyed 0 the ety for roade and’ park ot clas Number oflote Sele price per lot a‘ 109 240.000 3 cy 1.000 e E 100.000 Using the relative eale value method, what amount of coat shouldbe alleated to Class A lta? 3.000.000 & 3750.00 © 8000.00 7,200,000, Problem 11-20 (PHILCPA Adapted) Elixir Company bought a 10-hoctare land in Novaiches to be improved, eubdivided ino lote and eventually aold. The purchase price ofthe land was PS, 800,000. ‘Taxes and documentation expenses on the transfer of the property amounted to-P0,000. Lotelas Number oflote Selngpriceperlot Totalcleering cost 4 0 100,000 No 8 2 1.00 1eaa00 ¢ o so000 300.000 D oo 0.000 ‘00,000 Wat amount shoud beast a tol et of Cat under the relative sales price method? Buse 1176000 & Lamm © ew & roo 30 CHAPTER 12 LOWER OF COST AND NET REALIZABLE VALUE, ‘TECHNICAL KNOWLEDGE ‘Tohnow the measurement of inventory inthe statement of financial position. ‘To explain the lower of cost and net realizable value basis of measurement To account for inventory writedoun using allowance ‘method and direct method. of purchase commitments in now the treatment » sf cost and net realizable relation to lower o ‘measurement.