Inventories 10

Friday, June 19, 2020 4:38 PM

Inventories Net Sales Formula

Assets held for sale in ordinary course of business Gross sales
Examples:
1. Merchandise purchased by retailer and held for resale
Less: Sales return & allowances
2. Land and other property held for resale by subdivision or real estate __ Sales Discounts_______
3. Finished goods Net Sales
4. Goods in process
5. Material and supplies waiting to be used production process
Net Cost of Purchases Formula
Classes of Inventories Purchases
A. Inventories of a Trading Concern Less: Purchases returns & allowances
Trading Concern - one who buys and sells goods in the same form Purchases discounts ____
purchased. Net Purchases
Merchandise Inventory -applied to goods held by a trading concern
B. Inventories of Manufacturing Concern Transportation In ____
Manufacturing Concern - one who buys goods which are altered into Net cost of Purchases
another form before sold
Inventories in manufacturing concern are:
1. Finished Goods
Cost of Sales/ Goods sold Formula
Completed products held for sale Beginning inventory
2. Goods in process Net cost of Purchases
Required further process before sold Goods available for sale
3. Raw materials
Goods to be used in production process
Less: Ending inventory
Covers all materials used in manufacturing Cost of Sales
Physically incorporated
Traced directly to end product
4. Factory or Manufacturing supplies
Similar to raw materials
Referred to as - Indirect materials
Not physically incorporated

Goods Includible in Inventories

All goods to which entity has title regardless of location.
"passing of title" - legal language - "the point of time at which ownership
changes."

Legal Test
Items includible in Inventory:
1. Goods owned on hand
2. Goods in transit and sold FOB destination
3. Goods in transit purchased FOB shipping point
4. Goods out on consignment
5. Goods in the hands of salesman or agents
6. Goods held by customers on approval or on trial

Exemption to legal test

Following legal test:
Goods sold on installment not fully paid - still property of seller
However it is accepted:
To record installment as regular sale - deferred income and as regular
purchase - goods is property of buyer

Owner of goods in Transit

FOB - free on board
Ownership and who is supposed to pay freight
a. FOB Destination

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 a. FOB Destination
Ownership of goods is transferred upon receipt of goods
Goods in transit are property of seller
Seller shall pay for freight and charges
b. FOB Shipping point/origin
Ownership is transferred upon shipment
Goods in transit are property of buyer
Buyer shall pay for freight and charges
• Record Purchases - when goods are received
• Record Sales - when goods are shipped

Freight Terms
Who actually paid freight, but not party that is supposed to legally pay
a. Freight Collect
Freight charge is not yet paid, actually paid by buyer
b. Freight Prepaid
Freight charge is already paid by seller

Maritime shipping terms

a. FAS/Free alongside
Seller bears expenses and risk in delivering goods to the dock
Buyer bears cost of loading and shipment
Title passes to the buyer as carrier takes possession of goods
b. CIF/Cost, insurance and freight
Buyer agrees to pay lump sum the cost of goods , insurance and freight
CF - buyers agree to pay lump sum the cost of goods and freight only
Either case seller pays for loading cost
Title and risk of loss shall pass to buyer upon delivery of goods to the
carrier
c. Ex-ship
Seller bears all expenses and risk of loss until goods are unloaded at
which time title and risk of loss shall pass to the buyer

Consigned Goods
Consignment- method of marketing goods
Owner is called consignor
Agent who sells on behalf of the owner - consignee
Consigned goods - included in consignor's inventory , excluded from
consignee's inventory
Freight and charges are part of cost of goods consigned
Journal Entry:
Cash xx
Commission xx
Advertising xx
Sales xx
• Incidentally, consigned goods are recorded by consignor by means of
memorandum entry

Statement Presentation
Inventories - current assets
Presented as one line item
Details is disclosed in Notes to FS

Accounting for inventories

a. Periodic system
Calls for physical count at the end of accounting period
Quantities are multiplied to unit cost - inventory value
Gives Actual or Physical inventories
Used for small peso investment
Example:
1. Groceries
2. Hardware

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 2. Hardware
3. Auto parts
b. Perpetual System
Requires maintenance of records - stock cards- summary of inventory
inflow and outflow - reflects units and costs
Gives Book or Perpetual inventories
Used in large peso investment
Know inventory on hand anytime
Physical count of units on hand should at least be made once a year to
confirm balances on stock cards
Example:
1. Jewelry
2. Cars

Periodic System Perpetual System

a. Purchase on account a. Purchase on account
Purchases Merchandise Inventory
Accounts payable Accounts payable
b. Payment on freight b. Payment on freight
Freight in Merchandise inventory
Cash Cash
c. Return of merchandise c. Return of merchandise
Accounts payable Accounts payable
Purchase return Merchandise inventory
d. Purchase Discount d. Purchase Discount
Accounts payable Accounts payable
Purchase discount Inventory
e. Sale of merchandise on account e. Sale of merchandise on account
Accounts receivable Accounts receivable
Sales Sales
f. Return of merchandise Cost of goods sold
Sales return Merchandise inventory
Accounts receivable f. Return of merchandise
g. Sales Discount Sales return
Sales discount Accounts receivable
Accounts receivable
h. Adjustment of ending inventory Merchandise inventory
Merchandise inventory - end Cost of goods sold
Income summary g. Sales Discount
Sales discount
Accounts receivable
h. Adjustment of ending inventory
No entry - balance of inventory represents
ending balance

Inventory Shortage
Difference between book balance and physical count
Journal Entry:
Inventory shortage
Merchandise inventory
• Inventory shortage is closed to cost of goods sold - result of normal
shrinkage and breakage in inventory
• Abnormal and material shortage are classified as - other expense

Trade Discounts and Cash Discounts

a. Trade discounts
Deduction from list price to arrive at - invoice price - charged to buyer
Not recorded
Encourage increase sales
b. Cash discount
Deduction from invoice price when payment is made w/in discount
period

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 period
Encourage prompt payment
Recorded as sales discount - seller, purchase discount - buyer
Deducted from purchases - net purchases
Deducted from sale - net sales revenue

Methods of recording purchases

a. Gross method
Violates matching principle
Discounts are recorded at payment rather than at purchase
Does not allocate discount between goods sold and on hand
Journal entry:
1. Purchase on account P200,000, 2/10, n/30.
Purchases 200,000
Accounts payable 200,000
2. Payment within discount period
Accounts payable 200,000
Cash 196,000
Purchase discount 4,000
3. Payment beyond discount period
Accounts payable 200,000
Cash 200,000
b. Net Method
Cash equivalent price on date of payment
Theoretically correct historical cost
Journal entry:
1. Purchase on account P200,000, 2/10, n/30.
Purchases 196,000
Accounts payable 196,000
2. Payment within discount period
Accounts payable 196,000
Cash 196,000
3. Payment beyond discount period
Accounts payable 196,000
Purchase disc. lost (other exp) 4,000
Cash 200,000
4. No payment at end of accounting period - discount expired
Purchase discount lost 4,000
Accounts payable 4,000

Cost of Inventories
a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventories to their present location
and condition

Cost of Purchase
Includes:
1. Purchase price
2. Import duties
3. Irrecoverable taxes
4. freight
5. handling and other cost attributed to acquisition of finished goods,
materials and services
Deduct:
1. Rebates
2. Discounts
Shall not include:
1. Foreign exchange difference
• When inventories are purchased at deferred settlement term difference
between purchase price for normal credit term and amount paid -
Interest expense

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 Interest expense

Cost of conversion
Cost directly related to units of production such as direct labor
Includes allocation of fixed and variable production overhead
1. Fixed production overhead
Indirect cost of production
Remains constant regardless of volume of production
Examples:
• Depreciation
• Maintenance of factory building and equipment
• Cost of factory management and administration
2. Variable production overhead
Indirect cost of production
Varies directly with volume of production
Examples:
• Indirect labor
• Indirect materials

Allocation of Fixed variable overhead

• Based on normal capacity - production expected to be achieved on
average number of periods under normal circumstance taking into
consideration loss of capacity resulting from planned maintenance
• Amount of fixed overhead allocated to each unit is not increased with
low production
• Unallocated fixed overhead - expensed

Allocation of Variable Production overhead

• Allocated to each unit on basis of actual use of production facilities
• May result to more than one product produced simultaneously - joint -
main and by product
• When cost are not separately identifiable, it is allocated on rational and
consistent basis ((ex. Relative sales)
• By products measured at net realizable value - deducted from cost of
main product

Other cost
Cost of inventories only to extent in bringing inventories to their present
location or condition
Example:
Cost of designing specific product for specific customers in cost of
inventories
Excluded from cost of inventories and are Expensed:
a. Abnormal amounts of wasted materials, labor and other production
costs
b. Storage costs, unless necessary in production prior to further production
stage
• Storage cost on goods in process - capitalized
• Storage cost on finished goods - expensed
c. Administrative overheads that do not contribute to bringing inventories
to their present location and condition
d. Distribution or selling costs

Cost of inventories of service provider

Consists:
a. labor
b. cost of personnel directly engaged in providing service - supervisory
personnel and attributable overhead
• Labor and cost in sales and general administrative are not included -
expensed

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