Chapter 7: Inventories

Learning Objectives:
❏ Account for inventories by a government entity.
❏ Describe the procedures in the receipt and disposition of inventories by a government
entity.

Inventories of a Government Entity:

A. Inventory held for Sale (e.g., medicines for sale in government pharmacies)
B. Inventory held for Distribution (e.g., rice and other welfare goods held for distribution)
C. Inventory held for Manufacturing (e.g., raw materials, work-in-process)
D. Inventory held for Consumption (e.g., office supplies inventory)
E. Semi-expendable Property -consist of machinery, equipment, furniture and fixture and
similar items that are not capitalized as PPE because their costs are below 15,000
capitalization threshold for PPE.

Measurement:
● Lower of Cost and Net realizable value- Goods held for Sale
● Lower of Cost and Current replacement cost- Goods held for Distribution

Measurement of Cost
Cost comprises the following:
★ Purchase cost, excluding trade discounts, rebates, and other similar deductions in
purchase price.
★ Direct cost incurred in bringing the asset to its intended location and condition.(e.g.,
freight cost, conversation costs - such as cost of labor and production overhead for
manufactured items.
Cost excludes the following:
★ Abnormal amounts of wasted materials, labor, and production overhead.
★ Selling cost; and
★ Administrative overheads

Measurement of NRV and CRC:

Net Realizable Value (NRV) -is estimated selling price less estimated costs of completion and
estimated selling/disposal costs.

Current Replacement Cost - is the cost the entity would incur to acquire the asset on the reporting
date.

Cost Formulas
Specific identification
➔ This shall be used for items that are not ordinarily interchangeable and those that are
segregated for specific projects.
➔ Under this formula, specific costs are attributed to identify items of inventory. Cost of
sales represents the actual cost of the specific items sold while ending inventory
 represents the actual costs of the specific items on hand.

Weighted average cost

➔ This shall be used for large numbers of items of inventory that are ordinarily
interchangeable.
➔ This shall be applied under Perpetual Inventory System.
Under this formula, a new weighted average unit cost is computed after every purchase. The
computed average costs are used in determining the cost of goods sold and inventory on hand.
Cost of sales and ending inventory are stated at average costs, rather than at the actual costs of
the inventories sold on hand. This method is referred to in traditional accounting business
entities as “moving average” cost formula.

Government entities shall use the perpetual inventory system. Under this system, purchases,
sales, and other transactions affecting inventory are recorded in the “inventory” and “cost of
sales” accounts. Moreover, stock cards and stock ledgers are maintained. These enable the
retrieval of information on costs and quantities of inventories sold on hand at any given point of
time. Purchases of supplies and materials out of the petty cash fund for immediate use or on
emergency cases are charged directly as expense.
The FIFO cost formula and that periodic inventory system are not used by government entities.

Recognition as an Expense
The carrying amount of an inventory is recognized as expense in the period it is:
● Sold -when inventory it is held for sale
● Distributed -when it is held for distribution
● Exchanged - when the entity wants to exchange an asset to asset to another entity, then there is an
exchange
● Consumed -when it is held for consumption
● The write-down of inventory to its NRV or Current replacement cost, as appropriate, is also
recognized as expense.
-it will be recognized as an expense when it is written down to NRV or CRC, if the cost is higher
than NRV or CRC of such inventory and in this case you will recognize it as an expense.
(Later I will show you how to record or what expense account will be used.)

ILLUSTRATION:
Entity A acquires inventory for P1000, on account.
Receipt and Disposition of Inventories

Receipt

1. End users prepare the Purchase Request (PR) form to request for the purchase of the items not
available on stock. Purchase Request (PR) is the basis in preparing the Purchase Order.

End Users refers to the individuals who actually are using the items. As an internal
control, only the appropriate end users are allowed to make purchase requests for the
items they need.

2. The authorized official prepares the Purchase Order (PO).

Purchase Order (PO) –it is a document issued to a supplier when making a purchase
that serves as the contract between the entity and the supplier. It indicates the
specifications, quantities, and agreed prices of the items being purchased.

Recall that a canvass from at least 3 suppliers is required for purchases amounting to P
1,000 and above.

3. When the purchase items are delivered, the Property/Supply Division signs the “received” portion
of the Delivery Receipt (DR) and prepares the Inspection and Acceptance Report (IAR). The
IAR will be used by the Property Inspector in inspecting and accepting delivered items.

The Property/Supply Division forwards the DR, IAR and PO to the Property
Inspector.

4. The property inspector inspects the conformance of the delivered items with the specifications in
both the PO and DR and indicates the result of the inspection (i.e., acceptance or rejection) in the
IAR. Rejected deliveries will be returned to the supplier.
 The property inspector forwards the copies of DR, IAR and PO to both the
Property/Supply Division and Accounting Division for recording.

5. The Property/Supply Division, through the Stock Card Keeper, records the accepted deliveries in
the Stock Card (SC). The SC shows the quantities of all receipts and issuances of inventory, as
well as the available balance at any given point of time.

6. The Accounting Division records the accepted deliveries in the books of accounts and in the
Supplies Ledger Card (SLC). The SLC shows both the quantities and monetary amounts of all
receipts and issuances of inventory, as well as the available balance at any given point of time.
As an internal control, the SC (maintained by the Property/Supply Division) and SLC
(maintained by the Accounting Division) are periodically reconciled.

7. The Property/Supply Division prepares the Disbursement Voucher (DV) then forwards it,
together with supporting documents, to the Accounting Division for processing of payment.

Disposition

8. End users prepare the Requisition and Issue Slip (RIS) to request for the issuance of items
available on stock. The Head of the requesting individual shall approve the RIS. The approved
RIS is then forwarded to the Property/Supply Division
9. The Property/Supply Division prepares the Report of Supplies and Materials Issued (RSMI). The
RSMI will be used by the Stock Card Keeper in updating the SC and the Accounting Division in
journalizing the items issued.
10. 10. The Accounting Division records the items issued in the books of accounts and updates
the SLC.

The following are other documents used in the disposition of inventories:

A. Waste Materials Report - prepared by the Property or Supply Custodian to report wasted
materials, such as destroyed spare parts and other spoilages.
B. Report on the Physical Count of Inventories - used in reporting the results of physical
counts. It shows the balance of inventory, as well as any shortages or overages.
C. Report of Accountability for Accountable Forms - used to report the movement and
status of accountable forms in the possession of an officer.
D. Inventory Custodian Slip - prepared when issuing semi expendable property.